Wendy's Co (WEN) 2018 Q3 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 Greg Lemenchick, 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.wendys.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 revenue, 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.

On our conference call today, our President and Chief Executive Officer, Todd Penegor, will provide an update on key initiatives; and our Chief Financial Officer, Gunther Plosch, will review our third quarter results and full year outlook.

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

With that, I will hand things over to Todd.

Thanks, Greg, and good morning, everyone.

Let's begin with a few highlights from the quarter.

We have delivered another quarter of global systemwide sales growth on the heels of continued new-restaurant development.

We achieved 2% growth with international contributing another impressive quarter of double-digit growth at 13% and North America growing at 1%.

We continue growing the number of Wendy's restaurants in operation around the globe as we opened 37 new restaurants and have opened 106 year-to-date.

At the same time, we continue to reimage our restaurants and now have 48% of the global system on the new image.

Our North American same-restaurant sales were flat in the third quarter or grew 2% on a 2-year basis.

We continue to believe that our balanced approach is the right strategy for the long term.

Through our delivery partnerships, we have outpaced our rollout expectations and are now covering approximately 50% of the North American system at the end of the third quarter, which is an additional 10% compared to the prior quarter.

We contributed strong financial results by achieving 10% adjusted EBITDA growth and a 50% increase in year-over-year free cash flow growth, which is a testament to our resilient business model.

And finally, as you know, we monetized our Inspire Brands stake in August for $450 million before tax and approximately $355 million after-tax.

We've been working through our strategy on how to best utilize this cash considering our capital allocation policy.

We are pleased to announce that the Board of Directors has approved an incremental $120 million share repurchase authorization, increasing our prior $100 million authorization from August to $220 million.

We now have approximately $250 million available for share repurchases.

With that, I want to now provide some context around our third quarter same-restaurant sales.

In the third quarter, we continued to stick to our playbook of utilizing a balanced marketing approach by kicking off with a high message on chicken tenders and on the low-end with the $1 Buffalo Ranch Crispy Chicken Sandwich.

We followed this up with continued messaging around our 4 for $4 offering and a focus on our core with the Dave's Double, featuring fresh, never-frozen North American beef.

We rounded out the quarter with a balance between our new Harvest Chicken salad and brought back the $0.50 Frosty to close out the summer.

Our high-low offerings in the third quarter did not create sales growth as planned in the context of a heightened competitive environment.

As we finish out the year and plan for 2019, we are partnering with our franchisees to ensure we are providing consumers with promotions that bring them into our restaurants more often, that are operationally sound and are profitable.

We believe that QSR is the place to be with more than 80% of all restaurant visits and that we are well-positioned to win over the long-term as we can deliver on the consumer need of speed, convenience and affordability.

Moving to another key growth driver, new restaurant development.

We continue to make progress on opening new restaurants around the globe and achieving our 2018 outlook.

We opened 37 new restaurants in the third quarter with 23 coming from North America and 14 internationally.

Net of closures, our footprint grew by 13 restaurants with a net positive of 35 restaurants year-to-date.

With the majority of the closures behind us and a strong pipeline of restaurants in the fourth quarter, we are maintaining our net new unit growth outlook of approximately 1% in North America and 10% internationally, leading to 1.5% global unit growth in 2018.

I also wanted to take a moment to share some of the great work we have been doing on the development front to continue to stimulate franchisee demand for new restaurants.

We recently launched a groundbreaking incentive that provides franchisees 11.5% of royalty and advertising abatements over 2 years if they sign a development agreement to build incremental new restaurants.

This new incentive, coupled with our design-to-value initiative to reduce investment cost, will drive the return on investment for new restaurants higher and thus generate more interest from franchisees going forward, helping us to continue to provide more access to the brand.

As part of the new incentive, franchisees are also eligible to use the Refresh Lite model for any future reimaging projects.

As a reminder, this option was only available for restaurants with AUVs of $1.3 million or less, and this incentive program removes that cap.

While it is still early, we have been seeing low to mid-single digit lift on Refresh Lites and we have exceeded our internal expectations.

These are great examples of how we find solutions to create better financial returns for our franchisees as we continue to invest in growth.

In the spirit of our vision to be a thriving and beloved global brand, I would like to provide an international update.

We continue to gain momentum as we delivered another quarter of double-digit systemwide sales growth.

We are expanding net unit growth as we delivered 15% in 2017 and are expecting another year of 10% growth in 2018.

In addition, we are investing in a new international structure that is poised to deliver, which is being led by Abigail Pringle.

With this change, we are reevaluating our approach to international market entry, market prioritization and exploring alternative methods to stimulate growth.

As a result, we are reexamining our long-term restaurant targets.

We need to focus our resources on the markets that give us the strongest growth prospects to ensure our success and that of our international franchisees and increase our brand access around the globe.

We will provide more details during 2019 as the plan comes to life and Abigail builds out the strategy and her new team.

Expansion of our delivery footprint with DoorDash and Skip The Dishes is pacing ahead of our expectations.

We are now at approximately 50% coverage, and targeting approximately 60% of the North America system by the end of 2018.

Our partnership with DoorDash in the U.S. remain strong as we both continue to make investments in raising awareness, which is leading to increased transactions and sales through delivery.

In the third quarter, we take national TV ads and DoorDash offered various free-delivery promotions.

We have seen a significant increase in weekly delivery sales compared to the second quarter driven by the free delivery offers with the purchase of a Dave's Single and the NCAA promotional offer.

We are encouraged that delivery sales are sustaining at the higher levels post promotion, which continues to increase the overall watermark on delivery.

Lastly, we continue to work with DoorDash on integrating delivery into our mobile app to provide another point of access to all of our customers.

The consumer continues to have an appetite for convenience and we have seen this through our delivery economics.

Average check sizes have been 1.5x to 2x higher on delivery orders, and we continue to see solid customer repeat.

In addition, our strongest customer satisfaction scores are coming from delivery, which is encouraging.

We look forward to leveraging our partnerships to roll out delivery to even more markets, as franchisee demand remains extremely high for this offering.

We are pleased with the progress we are making on the mobile front as we continue taking steps to bring our technology programs to life.

In an effort to drive more active users into our app in the third quarter, we focused on an acquisition strategy to entice customers to download and use the Wendy's app with a free Dave's Single offer.

This deal resulted in us doubling the number of active users compared to the second quarter, which was a huge success.

Our mobile offers, which are available for use in all of our U.S. restaurants will continue to drive mobile app usage and will set us up for a successful rollout of mobile ordering, which has now begun across North America.

To go along with the rollout of mobile ordering, we have been making a lot of improvements to our mobile app, which customers are giving us great feedback on, this coupled with increased downloads from our mobile offer strategy is providing more access to the brand.

And more importantly, one that is seamless and easy to navigate.

I now want to take a moment to give you an update on some positive feedback we received from our franchise system.

Wendy's would not be where it is today without the support and alignment of our franchisees.

Without a strong and dedicated system, we would not have been able to sustain consistent sales growth, reimage nearly half of our restaurants and achieve our highest rate of new restaurant growth in more than a decade.

We are very happy to see that the 2018 franchise business review survey resulted in another year of Wendy's exceeding industry benchmarks.

It's pretty powerful to see that 90% of our system would invest in Wendy's all over again, and over 80% would also recommend Wendy's to another franchisee.

These results led us to being named one of FBR's Top Food and Beverage Franchise Brands again in 2018.

Just as powerful, we received some feedback coming out of our annual convention, which was held in late September.

Survey results show that franchisees' attitude and optimism regarding the future of Wendy's business is up from what it was a year earlier.

Before I pass things on to GP, I wanted to bring us back to The Wendy's Way as everything at Wendy's centers around our brand promise of delighting every customer, period.

When a Wendy's customer visits, they need to know that they will get the same great service and great food no matter which restaurant they visit.

Overall customer satisfaction has improved again this quarter and continues to grow at rates faster than our competition.

We know that we can improve our consistency restaurant-to-restaurant and are laser focused on this.

At the end of the day, in the restaurant business, it's all about the food and we have a differentiated quality advantage.

Quality Is Our Recipe, is a cornerstone of our brand and reflects our commitment to serve great-tasting food every day across the globe.

Consumers recognize this difference between Wendy's and our leading competitors as we have nearly a 2x advantage on food quality.

Consumers also recognize our differentiation on fresh never-frozen beef and we continue to hold a strong leadership position in the eyes of the consumer as our connection with fresh beef is significantly higher than that of our closest competitors.

In order to bring our brand promise to life, we must remain focused on investing in the quality of our food, providing great value, delivering exceptional service and elevating our restaurants.

This is, and will continue to be our road map for growth into the future.

And with that, I'll hand things over to GP to take you through our third quarter financial highlights and outlook for the year.

Thanks, Todd.

As a reminder, we will be discussing all results versus the prior year on a recast basis, which is inclusive of the impact of revenue recognition and other P&L reclassifications.

Please refer to the tables in the back of our earnings release for a reconciliation of these recast financial statements.

Adjusted revenues increased by 3.3%.

This was primarily driven by an increase in company restaurant sales, due to the company acquiring 16 restaurants in the Columbus market as part of our ongoing system optimization strategy and the 1.2% increase in same-restaurant sales.

Also contributing to the growth was increased royalties and franchise fees.

Year-over-year, company-operated restaurant margin decreased 20 basis points to 15.7%, driven primarily by labor rate inflation and high insurance cost, partially offset by pricing actions and lower commodity cost.

G&A expense was $46.5 million compared to $51.7 million in 2017.

This 10% decrease was primarily the result of lower incentive compensation and lower salaries and benefits, as a result of the company's G&A-savings initiative.

Adjusted EBITDA grew by 10% to $107 million and adjusted EBITDA margin expanded by 200 basis points, which demonstrates our resilient business model.

Adjusted earnings per share increased by 89% to $0.17 in quarter 3 versus the prior year of $0.09.

Free cash flow increased 48% to $181 million, driven by favorable timing in capital and an increase in cash flows from operations as a result of our core working capital initiatives.

We achieved meaningful adjusted EBITDA growth of 10% in the quarter.

We benefited from increased royalties and company restaurant EBITDA, in addition to G&A reductions from our G&A-savings initiatives and the decrease in our incentive compensation accrual.

Moving on to adjusted EPS results.

The year-over-year increase of $0.08 was partially driven by the tax rate as a result of the favorable changes in the U.S. tax law and a benefit from increased option activity.

Also contributing to our EPS growth was adjusted EBITDA growth in the third quarter.

Our third quarter 2018 adjusted effective income tax rate was lower than what we had expected due to stock option exercises.

It is important to remember that the timing and the amount of stock option exercises can change materially quarter-to-quarter.

Our capital allocation strategy remains unchanged as we continue with our playbook of investing in growth of the Wendy's brand as our #1 priority, followed by sustaining an attractive dividend and utilizing excess cash to repurchase shares.

We've worked through our capital allocation strategy with the after-tax Inspire Brands proceeds of approximately $355 million.

As a result, we have increased our share repurchase authorization of $100 million from August when we announced the Inspire Brands sale to $220 million by the end of fiscal 2019, an increase of $120 million.

This brings our total amount available for share repurchases to approximately $250 million.

Now let's take a look at updates to our 2018 outlook.

After flowing through our year-to-date results and refining our forecast for the remainder of the year, we have lowered our North America same-restaurant sales to approximately 1% and company restaurant margins to approximately 16% to 16.5%.

G&A expense has come down slightly to $190 million to $195 million versus prior expectations of approximately $195 million, primarily as a result of lowered incentive compensation accruals.

With lowered same-restaurant sales growth and restaurant margin expectations for 2018, partially offset by lower G&A, we now expect adjusted EBITDA of $415 million to $420 million.

We have increased our adjusted earnings per share guidance from $0.55 to $0.57, to $0.56 to $0.58, as a result of the lower tax rate in the third quarter and favorability in our depreciation outlook, partially offset by the reduction in adjusted EBITDA.

And finally, we are tightening free cash flow to approximately $225 million to $235 million, which is in the middle of our original guidance range, which was $220 million to $240 million.

As you may have noticed in the earnings release that went out last night, we did not reaffirm our 2020 goals.

As Todd mentioned earlier in the presentation, we are continuing to review our international growth plans under Abigail Pringle's leadership and we've also updated our 2018 outlook.

As a result of these moving pieces, this has caused us to pause and take a look at these targets.

Our roadmap for growth remains unchanged.

Wendy's is an efficient growth company that is showcasing meaningful systemwide sales growth on the backdrop of continued global restaurant expansion and same-restaurant sales growth, which is translating into significant free cash flow generation.

We have also rewarded our shareholders by returning approximately $2.5 billion in share repurchases and dividends over the last 5 years.

With that, I'll hand the presentation back over to Greg, before we open up for Q&A.

Thanks, GP.

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

On Tuesday November 27, our senior management team will host a market visit here in Dublin sponsored by Will Slabaugh of Stephens.

And on Wednesday, December 5, Todd, GP, Lauren Cutright and I will be in New York for the Barclay's Eat, Sleep & Play Conference.

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

And finally, on Wednesday, February 20, we plan to release our preliminary 2018 earnings along with our 2019 outlook and host the conference call the following morning on February 21.

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

(Operator Instructions) Your first question comes from Michael Gallo from CL King.

Todd, GP, when I look at the promotions you ran in the third quarter it would seem that they were kind of less bundle-oriented and more individual price-point value-oriented.

I was wondering, if you saw kind of a negative impact on mix, kind of greater than what you expected?

And how you think about rebalancing that as you go forward?

And then also you drove -- you ran a lot of promotions, which obviously drove a lot of new sign-ups to your app somewhat of an investment.

Is that something we should expect to continue going forward?

Or do you kind of reach a point where obviously we are probably giving away some ticket in exchange with those promotions and then perhaps you can start to mine that going forward?

Mike, on the first part of your question, in regards to the promotional calendar, as we set ourselves up for the quarter, we felt good about the plans we've put in place and we are continuing to play our game with the strong high-and-low message.

And that messaging continues to actually drive traffic into our restaurants.

But as you pointed out, our opportunity continues to be how do we not only drive them into the restaurant, how do we mix them up in to our core items and into our premium items.

And we are reflecting on that and as we look at our calendar into the fourth quarter and set up our plans into early next year, we need to have that right balance between driving them in and trading them up to continue to drive more mix realization and we are going to have the plans in place to accomplish that.

From an app acquisition, it's a big driver for us, to actually get folks into our app, right, helps us when we start to think about our mobile offers, helps us when we start to think about mobile ordering.

Ultimately, it really helps us though in having all of that great information.

So we are going to continue to find ways to get folks into our app and continue to engage with them to create a little more frequency into the Wendy's restaurants.

The next question comes from Eric Gonzalez from KeyBanc.

Regarding the comments you made on international development, as you reevaluate your international presence, are you considering taking a more aggressive stance to development, perhaps through master franchise agreements in new markets?

Yes, Eric, I think as Abigail gets acclimated to the international business and works with their team, as we said in the prepared remarks, we really want to take another look at how we reevaluate our approach to new market entry.

We've got a lot of cash, we've got a lot of opportunities to play a different game and as we've talked in the past, we've always been counting on entering 1 or 2 new markets over the next couple of years.

So all of those things will have to play into that and as we explore those alternative ways to stimulate growth, we still feel good that we can drive meaningful growth in the long run on the international business, but we really want to give Abigail a little bit of time to look at how that plan unfolds and I'm sure we'll talk a lot more about pacing the sequencing and the mix of where we are focusing our resources on which market across the globe as we get together in February.

The next question will come from Jeffrey Bernstein from Barclays.

Two questions.

One just on the QSR category.

You mentioned the challenging sales environment, it does seem like maybe your burger peers outpaced you by a widening margin.

Just wondering as you think about that balance of value and premium, where do you think you underperformed, more on the premium, more on the value side?

And what would be -- or how would you assess a short-term response to something like that?

And then I had one follow-up.

If you look at the QSR category, Jeff, it's still the place to be.

We are starting to see some real traffic growth on that flat to up 1% over the last couple of quarters.

And scale does continue to matter.

So if you look at the category, the dynamics are well.

We play in the biggest subsegment of the QSR category with the hamburger category.

And we've done well in the quarter, continuing to drive traffic and managed traffic share in that hamburger category.

As I said earlier, the opportunity is how do we trade them up, how do we continue to move folks from the 4 for $4 offering into a higher price point offering, like a $5 bundled meal.

How do we continue to have exciting offerings on our core and premium menu, so once we get them to the restaurant with the appropriate upselling and the appropriate messaging, trade them into those more premium offerings, those are all opportunities that are in front of us and the good news is, it plays off of our strengths, right?

High-quality food at a very affordable price and we'll continue to work to make sure that we have a great experience in all those restaurants so they continue to come back.

Got it.

And my follow-up was just on the heels of that franchise convention, I guess, in the back half of September.

As you talked to franchisees, and talk about the profitability on their side, how do they think about menu pricing?

Or what are the suggestions you are making?

Obviously, there's been some margin compression with labor inflation, and seemingly easing of food deflation or turn to inflation.

So I'm just wondering, how they are thinking about the pricing outlook to protect their margins, maybe technology to be the biggest driver of help there?

Jeff, I think the first piece is, we want to take a very reasonable approach to pricing, because we got to be focused on that food-at-home versus food-away-from-home gap.

And the grocery business continues to be competitive and there's a lot of discounting there so we've got to be smart on the pricing front.

But we also have to be realistic around what pricing needs to be passed on with the environment that we have.

And we have a lot of discussion around pricing.

Ultimately, that's in full control of the franchise community.

But the balance needs to be around realistic pricing.

It needs to be about driving mix up across our menu.

But ultimately, what we need to do is continue to bring more people into our doors more often.

And if you think about the things we are working on to do that, it really comes down to how do we create a more consistent experience across all of the system.

How do we continue to invest in technology to connect to the consumer a little bit more often?

How do we continue to reimage our restaurants at a nice pace to create an experience to bring in those new and lapsed customers?

All of those things will play into those growth prospects in the future.

And there are still big opportunities in front of us.

And Jeff, the other think I would add is, we also showcased at the convention our commitment to restaurant-economic model, like all the stuff we do on really design-to-value, all the stuff we do on labor management, labor guides and really following compliance and the suggestions from the franchisor to help them not just on the pricing side, but also on the cost structure side with the restaurant-economic model.

Your next question will come from Brian Bittner from Oppenheimer.

I also -- I have 2 questions.

First, just how do you want us all thinking about the 2020 targets now, just in the sense that there's a lot of moving pieces here?

Correct me if I'm wrong, but I would imagine the G&A and the CapEx expectations probably have not changed.

So should we take this conversation today to suggest that the $12 billion system sales target is what likely needs to be reset?

And any other color on that would be helpful.

And then I have a follow-up.

Hey, Brian, as I said on the call, right, we have a couple of moving pieces at the moment.

We've updated to adjust our 2018 outlook and we're obviously reviewing, under Abigail's leadership, our international plans.

But there is moving pieces there.

So because of that, we are basically not reaffirming our 2020 goals, but to be clear, this doesn't mean that we have given up on them.

We just need to make -- have a little bit of time to actually work through this.

And again as I said on the call, we are an efficient growth company that generates a lot of free cash flow.

And really I think the best example is actually what just happened, right?

We lowered our fiscal year same-restaurant sales guidance by a point, without changing really our free cash flow outlook.

And it's not wishful thinking.

You know on the quarter -- on a year-to-date basis, we are totally on track with our free cash flow delivery.

And then final reminder is also, think through the resilience of our model, right?

You know that the annual impact of 1% SRS is creating a free cash flow impact of about $5 million.

Same thing is about -- on the restaurant-count basis, 100 restaurants are about worth $5 million in free cash flow.

If it were to happen in international, probably somewhat lower.

So it's a pragmatic position that we took to kind of digest what just happened.

And Brian, we've got a lot of elements, as you know, on our long-term growth targets and when you really think about what drives success for us, really comes down to total systemwide sales and we got to be focused on driving to those sales numbers through a combination of all the tools that we have been talking about, that ultimately then drives the free cash flow that GP just talked about.

So those are the real bookends that matter the most to us and that's where the focus is.

Everything else that we talk about helps supplement and support all of that and you can get there in a variety of different ways.

Okay, that actually is very helpful, thanks Todd and GP.

And just the second follow-up question is on the capital situation.

It seems like you have a lot of leftover capital from the Inspire Brands sale even after upping the buyback and I was just wondering if there is any plans for -- any reinvestment plans or any other plans for this leftover capital?

Thanks, Brian.

I mean, we have invested now a big portion of Inspire proceeds, 2/3 and a bit.

So we left a little bit cash on the side to provide flexibility.

We talked about incremental investments today, right?

We talked about increasing our royalty abatements to further accelerate our new build growth.

You have seen today that in order to optimize our company's footprint, we spent $21 million to kind of consolidate up the Columbus market.

So we want to have a little bit more flexibility and don't want to run from hand-to-mouth on our cash.

Have a little bit of visibility to that and with the share repurchase that we have just authorized, we really have demonstrated that we are giving back the majority of all the cash to our shareholders.

Your next question will come from John Glass from Morgan Stanley.

I just want to go back to the North American same-store sales, because I just want to make sure I understand the -- what happened since last quarter.

It sounded to me like your commentary was that traffic was still positive or at least it wasn't a drag.

So is this all a mix decline?

And is that because you just sold more -- the bundled 4 for $4 offer, you didn't see as much of the premium?

What is the dynamic that's going on there?

Because I'm still trying to understand that.

And how quickly does that get resolved in the fourth quarter?

Are the plans already there to change that?

Or is this something that you're working through now and you hope to get to a better place by the end of the fourth quarter?

Yes, John, just a couple of questions, so -- or a couple of thoughts.

If you think about the QSR hamburger category, we did gain share within the U.S. QSR hamburger category in the third quarter.

But we did lose some share on the dollar front, which says that we didn't do as good a job as others on driving them in and actually trading them up.

What we need to do is have promotions that add another $1 that are good add-ons.

We had a calendar that had some core entrees at a $1 with the Buffalo Ranch Crispy Chicken, we had others that were nice add-on with the $0.50 Frosty, and we really got to look at do we have that right balance on the value promotional items to make sure that they are good add-ons, as we bring folks into the restaurants rather than just individual purchases.

So you did see a lot of pressure on mix relative to the competitive set in the quarter.

Yes, the other thing to think through, right, is the year-over-year lapping.

Last year we had a slightly different high-and-low program, last year we had a trade-up program down to a $5 JBC, that obviously drove mix, as we designed the programs for this quarter, obviously, we had 3 greens operationally, financially and consumer-wise, all these promotions tested well.

Just in the environment we are in.

It didn't get us to the check accretion that we have seen in past.

And just your 2020 comments, I understand you're still working through plans, but you've been anchoring people to a lower CapEx number in 2020 for a long time.

Is that part of a -- is that in play now?

I understand system sales may change as you think about international unit growth?

But is the CapEx piece likely in your view or possibly going to meaningfully change as you think about investment differently in international markets?

And again, right, we made the decision to not reaffirm any 2020 goals.

The trajectory is obviously a little bit more favorable, right?

We have just taken the capital guidance down for this year.

But I wouldn't read anything more than that into it.

Your next question will come from Jake Bartlett from SunTrust.

First, Todd, if you can just clarify again, maybe the commentary on traffic.

I wasn't sure whether you were confirming that the traffic was slightly positive in the quarter?

If you can confirm that?

And then looking at the annual guidance, I believe that implies an improvement in the fourth quarter and I'm wondering whether that's due to maybe some success from the new S’Awesome premium promotion that you've launched?

Yes, so on the comments -- start with this.

Our traffic was actually down in the third quarter slightly.

But when you look at where we were within the hamburger category, we gained hamburger category traffic share, we were up 1/10.

So those are the 2 bookends, which then says, well, how do you continue to make sure that the hamburger category continues to grow within QSR?

And that comes back to, how do you continue to leverage technology, how do we continue to improve speed of service, et cetera, et cetera.

So we are still very bullish on our opportunity behind all of the elements of The Wendy's Way to continue to drive growth, especially as we work on the customer experience, we work on the food, we continue to reimage restaurants.

I don't really want to comment about inter-quarter performance, but as you think about the challenges we just talked about in the third quarter, you think about what we have running as a promotion today, right?

We got a nice high message on the Bacon S’Awesome Cheeseburger.

We've got a strong low message on $1 any size fries and when you think about driving folks in, trading them up and then making sure that we are driving add-on purchases to drive favorable mix, you would say that, that is a subtle adjustment to where we were relative to where we performed with our promotional calendar in the third quarter.

Got it.

And then I had a follow up question on international.

You had been accelerating unit growth pretty sharply.

What is the reason for the pause or for the reassessing of the approach there?

I guess, the implication is that something that was going wrong, or wasn't working.

Maybe your pipeline was drying up?

Just help us understand why the reevaluation of the approach, internationally?

Yes, I think there's a couple of things.

One, every market isn't created equal.

We've got some lower AUV markets and we've got some much higher AUV markets.

And we got to make sure our resources are focused appropriately around the globe as we really focus on driving systemwide sales growth.

So that's probably the first thing that I would put out there.

Second thing is, we still have work to do and we've talked about this for a while to enter 1 or 2 new markets and we really need to think about, what that approach is to those new markets, do we have the right partners, and do we really set ourselves up for accelerated growth.

And to the earlier questions, question is, how do you do that?

And that's why we are really looking at all the different ways that we could kind of work through bringing that to life and bringing that to life in short order.

So that's the bit of the pause and with new leadership, we are taking a fresh look and very confident as Abigail takes on international.

And with all the success we've had on North American development around franchise recruiting, around incenting new development, around design, around construction that we can apply a lot of those best practices to the international front.

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

I have two questions.

Just the first one's on the incentive program.

Again, can you remind me -- I think it was a couple of years ago, you guys were doing basically 6% and then your investor rate 2 years ago was like 9.5%.

Why the step up?

And is it going to be more royalty or advertising weighted?

Greg, thanks for the question.

Your recollection was right.

We had previously 6% cumulative over 3-year period.

We then kind of accelerated this to a 9.5% program over a 2-year period.

So where we are now stepping up another 2 points is a really on the royalty side.

So in year 1, we are adding another point on royalty relief.

In year two, again, another point on royalty relief.

So it creates, obviously, a little bit of headwind in our company P&L.

But in return, we are hoping, obviously, that the new builds are accelerating.

So overall, that investment should create a very good financial return for us.

And then even more importantly, also a very good financial return for our franchisees.

As you know, with design-to-value, we are now starting to build actually new restaurants at investment levels of about $1.4 million.

That combined with an 11.5% abatement is really driving even better returns for our franchise community and should further accelerate our new build pipeline.

Understood.

And then my other question is just on international.

I guess, it sounds to me like what you're considering is building out more of a team on the international side to kind of address some of the markets around the world.

Is there a potential G&A investment that you are evaluating?

Is that how we should take it or is this more a reevaluation of the pacing and timing of openings?

Well, what we first really start with is really looking at the talent, do we have our best talent really to help support a big opportunity for us on growth and that doesn't necessarily mean more G&A, it's strategic choices across our whole portfolio, where do we want to put our resources to drive the most growth into the future?

And that's the work that we are doing internally as a team.

But importantly, what we are really trying to do is create some synergies, right?

We ran our international business completely separate from our North American business for many years.

And there's a lot of common and best practices that can be gathered, especially in the world of franchise recruitment, new restaurant development and design and we do think there's a lot of synergies as we bring Abigail's development group together with her running the international business.

So that doesn't necessarily mean there's more G&A.

It could be a shift of some resources across our portfolio as well as then offsetting it with some of the delivery of the synergies that we have in bringing those groups together.

Your next question comes from Dennis Geiger, UBS.

Maybe if I could just sneak 2 in.

Just the first, you mentioned a gain in hamburger traffic share for the quarter.

Wondering if you could address more broadly, QSR, thinking about other categories, chicken, et cetera, if you have the data, how you performed relative to those categories just as we think about competition from outside the category over the last few months?

And then, just the second question, Todd, you gave some good color on the balanced high-low strategy, some detail on what's going on with the calendar currently.

But just wondering if you can comment a bit more on key drivers improving same-store sales into 4Q and then '19.

Whether it's IA, value, digital delivery, daypart opportunities, perhaps -- just what perhaps you are most excited about there over the next few quarters?

Yes, Dennis.

If you look at the hamburger category, it's still by far the biggest, right?

Almost 30% of all QSR business is in the hamburger category.

But if you look at where some of the pressure points have been, you see it in other people's results, right?

The Mexican category has been growing, so we've got competition set there and some of the folks in the Mexican play a good value game along the way.

And then you got a big chicken player that continues to expand and grow.

The good news is we have a portfolio from high-to-low across our menu and a variety of product with great-tasting fresh, never-frozen North America beef hamburgers, great-tasting chicken sandwiches and a nice strong lineup of salads that we can continue to compete against these other growing entrants along the way.

Second part of your question is what gets us excited about the future?

We talk a lot about the investments that we are making in technology and when you think about what it's going to take to really win in the long run, technology is going to have to be one of those things that connect to the next generation of consumers, a big enabler.

We are going to have to continue to be competitive on price, but we are going to have to be really focused on how we trade folks up with mixes and opportunity.

We need to drive a more consistent experience across all of our restaurant, including our speed of service, which is a big initiative for us and technology can play a role in that.

And then we just got to continue to drive our brand differentiation between -- behind the quality of our food.

So those are the things that really get us excited that we can continue to drive our business.

And when you think about it, we had 22 consecutive quarters of same-restaurant sales growth until a flat quarter.

So we've had a lot of momentum for a long time and that's with a lot of opportunities to be even better in the future.

The next question comes from Jeff Farmer from Gordon Haskett.

You guys touched on it, but it sounds like you were surprised by the sales mix on value.

I guess, I'm just curious, and again, I acknowledge that you touched on it a little bit.

Was this is driven by a single item, meaning 4 for $4 collection of promotions?

What drove that greater-than-expected sales mix for the value items in the quarter in your mind?

Yes, really you wouldn't pinpoint it to any one particular value promotion or any one particular premium promotion.

It was a combination of how they worked together as we brought the customers into the restaurant and how they actually worked their eater check, once they got there.

So it was a combination of those items.

The good news is, we understand what had happened and we know what we are going to do about it going forward in great partnership with our franchise community.

And then just a follow-up to your response there, so again you touched on this.

But the strategic promotional response, to this in coming quarters, what can you share with us as you move forward?

Yes, it's really being focused on a balanced calendar as we've been looking at.

But making sure that we've got not only traffic drivers, but we've got mix drivers.

So we want to get them into the restaurant, we want to be able to trade them up and we want to be able to make sure that we can continue to bring them back and that's where the service and consistency of service experience comes to life.

And that's why we have to continue to engage and connect with the consumer on technology to create a little more frequency and a little more loyalty to our brand as we go forward.

All things that, we are well on our way and feel like those will be a nice tailwinds to us in the future.

Your next question comes from Matt McGinley from Evercore.

I had one more on the 2020 guidance.

Just want to make sure I'm clear on the moving pieces there.

I understand that the royalty and the AUV in international is pretty small to begin with.

So it would probably have pretty minimal bearing on free cash flow.

Abigail's investment and the structure aside, but GP, want to make sure I understand the comp and units sensitivity.

So if you missed comp by a full point as you did this year, and then again in '19, below the 2 to 3 range by a full point.

And then another full point in '20, that would cumulatively only be $15 million and the units at a 100 are only about $5 million in free cash flow?

Matthew, your math is right.

The cumulative effect if it happens to us 3 years in a row, the cumulative effect of an annual 1% SRS shortfall is roughly $15 million in free cash flow.

So yes, your math is right.

And on the Image Activation side, what's the challenge with getting these units Image Activated this year?

Is that the construction cost have gone up?

And why was it -- why did you revise that by so much this year?

I think it was before you thought you get about 10 and if you look at the around 50, it's more like 7. But what's been the challenge this year?

And does that create an embedded headwind to comp next year because you're not going to have the lift because the same number of projects didn't get done as you had assumed?

No, we still feel really good and our franchise community feels really good about reimaging restaurants and if you think about where their commitment is, per our agreement with them, they should have been at 40% reimaged by the end of this year, and we are going to be at 50%.

So we are well ahead of that.

But when they look at their portfolio, we made a very conscious effort, we talked about the groundbreaking incentive and part of reimaging and providing more access to the brand is really making sure that we drive new restaurant, new unit development.

So we've got to make sure that we got that balance right with our franchise community between new restaurant building and reimaging, but what we feel really good about is the reimaging still has a strong return.

We are seeing nice lifts, we are seeing nice sales, we are seeing the nice return.

The other thing I would add is, as per franchise agreement really the minimum we have to be from a conversion point of view is 40% reimaged and we are basically ahead of that curve.

That is the other point.

Your next question comes from Will Slabaugh from Stephens.

This is Hugh on for Will this morning.

I wanted to start with the third-party delivery piece, just to see where these orders are mixing as a percentage of total sales and I was also curious to see -- are these delivery customers more likely to visit a Wendy's store in the future after ordering delivery?

Or these may be a more fickle guest, and then as just a quick follow-up, I wanted to see if there were any geographical strengths or weaknesses that you would call out during the quarter, any impacts from the hurricane?

Hi, Hugh.

On delivery we are making great progress, right?

And we are now at 50% and we are forecasting by the end of the year to achieve about 60% penetration.

So that clearly is going a little bit faster than we thought.

Second point -- data point I have for you is check size is good.

It's 1.5x to 2x what we see on the regular check.

We see very high customer satisfaction that comes with this delivery visit.

We also see repeat business and we believe there is clearly incrementality on the business especially in the evening daypart.

So overall, we feel really good about the delivery business.

It's driven jointly between us and DoorDash.

DoorDash is making investments on their side as they offer free deliveries and the likes.

We are making investments on our side as we are offering our airtime to talk about delivery with DoorDash.

And we continue to see nice builds on delivery every time we create a little more awareness, whether that's DoorDash support or the brand talking about DoorDash delivery.

And so we don't feel like it's a fickle customer.

We feel like we can get people into the routine and we are seeing customers come in on delivery across all dayparts, but a little more skewed to dinner and late night.

The next question will come from Andrew Strelzik from BMO Capital Markets.

Two questions for me.

The first one on lowering the number of franchise flips for this year.

Is that entirely timing?

Or are you seeing anything, any dynamics in the market that maybe are holding people back, whether it's concerns around interest rates or leverage or anything like that?

And my second question is just on the low-end consumer.

We've heard some conflicting commentary from different companies.

I think you've been out there talking about kind of not seeing the improvement in the low-end consumer.

So is that still what you're seeing?

And what are you seeing that justifies kind of that perspective?

Yes, so on the first part, franchise flip, it's just really the demand and the folks that want to leverage the company resources to do a franchise flip.

So we are still thinking this is roughly 200 franchise flips into the future.

But if you think about this year, there is still a lot of turnover that we have going on in the system, right, and we bought some restaurants back, we sold some restaurants along the way, there is a lot of franchise transfers that we get into the middle of.

And there is other circumstances where we have to help the franchisee work through an exchange as they're trying to get out of the business where we may not get the fees.

So, we'll see north of 400 restaurants change hands during the course of this year.

And I misstated a little bit earlier, as we go forward our franchise flips is a little bit lower than that 200 number right?

Going forward, guys, 200 is the number?

Yes, 200 is the number, sorry for that.

On the low end of consumer front, if you look at the economy in total, there is a lot of great tailwinds, right?

We are seeing almost 10 years of economic recovery, we are seeing lowest unemployment levels in a long time, high consumer confidence and median households finally at record levels.

But as you look at that income growth, it skewed significantly to higher-income households.

You do have workforce participation remaining well below prerecession levels and real wage growth is still not accelerating to the extent that we had all hoped for.

And on the low end, you start looking at folks with rent and healthcare cost starting to rise that are really eating into some of the headway that they are making.

And remember, in QSR, we got about 40% of our customer base that makes $45,000 or less.

So that's why it is so important for all of us in the QSR space to have a really solid high-low calendar to bring folks in and allow them to mix across the calendar depending on time of the month.

Your next question comes from John Ivankoe from JPMorgan.

This is Brandon Sonnemaker on for John.

I guess starting off, you mentioned in the prepared remarks that guest sat scores improved in the quarter and notably faster than competition, I guess, when did that trend begin exactly?

And are these improvements purely on food quality?

Or perhaps other metrics such as cleanliness, on-premise experience, et cetera.

Yes, no, our improvement in overall satisfaction have been pretty steady for the last couple of years and it's been really across all of the metrics that we track.

Our opportunity is we continue to improve on the top end of our best performing restaurants with our overall satisfaction.

The opportunity really is how do we continue to raise the floor on some of the low end.

So we have a fairly wide consistency gap.

And what we want to make sure is you have the same great experience no matter which Wendy's you go to.

To give you a little bit of flavor the external QSR study that just happened on the speed of service as a subset of some of that work.

They talk within that study around what things have you improved in the customer experience, and saying please, saying thank you, smiling and having a pleasant demeanor have all improved.

So there's a third party validation that we are starting to make some progress along the way.

Okay, great.

And then sorry if I missed this, but it looks like D&A in the quarter was pretty low relative to our model.

Guidance implies pretty normalized spend in the fourth quarter, was there anything onetime in that number this quarter -- and any commentary on '19 or '20 D&A, whether that's a similar number?

That would be helpful.

Your question on the D&A, we clearly have so far in the first 3 quarters relatively little capital spend so that obviously has downward pressure on the D&A expense.

Secondly, we reassigned some leases as part of this new lease assignments that was a true-up on the D&A line that was kind of booked in the third quarter.

Okay, and then any commentary on '19 or '20 D&A, whether $128 million is a good number in '19, '20?

We are going to guide whenever it is the right time to guide, which is part of quarter 4 earnings.

Thank you, Todd and GP.

And thank you, everyone, for participating this morning.

We look forward to speaking with you again next quarter when we report on our full year results.

Our call has now concluded.

Thank you, everyone.