Wendy's Co (WEN) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to The Wendy's Company Earnings Results Conference Call.

I will now turn the conference over to 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 our Investor Relations website, irwendys.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 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.

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 first 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.

I'd like to open today's remarks with the Wendy's vision as it is important to remember that our goal is to become the world's most thriving and beloved restaurant brand.

Everything we do at Wendy's is focused on bringing this vision to life as we work to build an even stronger brand.

Our vision is powerful, and you will see throughout our remarks today that we are executing on our plan for sustained long-term growth that will help us achieve our vision.

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

We continue to demonstrate that we are an efficient growth company, showcasing solid systemwide sales growth of 3.3% on the backdrop of improving same-restaurant sales and global restaurant expansion, which is translating into significant free cash flow generation.

We opened 43 restaurants globally, which is an acceleration over the 33 that we built in the first quarter of last year.

We grew our company restaurant margin by 110 basis points as our 1 more visit, 1 more dollar strategy drove a positive sales mix in the quarter.

We are off to a strong start in 2019 as we achieved 12% adjusted EBITDA growth, 27% adjusted EPS growth and a 17% increase in our free cash flow, which gives us confidence in our outlook for the year.

Our formula is very simple: accelerate same-restaurant sales in North America and drive global restaurant expansion, with a strong restaurant economic model to fuel this growth.

With organic same-restaurant sales at the forefront to drive a healthy restaurant economic model, which is job 1, we evolved our marketing tactics to drive better mix results.

We are also driving operational excellence and are making great progress to enhance our digital capabilities.

Accelerating the pace at which we open restaurants around the globe to give customers more access to our brand is vital to our growth story, and we are on track to deliver our commitments in 2019, with a solid pipeline providing us confidence.

Before I jump into how we are progressing against our growth formula, I want to take a moment to share some news about changes we are making to evolve our organizational structure to accelerate growth even further.

As we continue to grow, we see an opportunity to increase our effectiveness by driving clear accountabilities for our growth across the organization.

We announced earlier this morning that we are moving to a new structure that will focus on this: creating lead owners and decision makers for our U.S. and international businesses.

International will also now include Canada.

As a result of these changes, Kurt Kane will be promoted to President, U.S. and Chief Commercial Officer.

He will assume full responsibility for the U.S. business, which will include operations, marketing and R&D.

In addition, Kurt will continue to lead our Digital Experience organization.

Abigail Pringle will be promoted to President, International and Chief Development Officer.

She will assume full responsibility for our international business, including Canada, which will include operations, marketing, R&D and supply chain.

In addition, Abigail will continue to lead our Global Development organization.

As a result of these changes, Bob Wright, Executive Vice President, Chief Operations Officer, will depart the organization after transitioning through May.

I would like to thank Bob for his support and everything he has contributed to Wendy's, our restaurants and our franchisees, over his time with the company.

With Bob's leadership, we've been able to build a stronger Wendy's brand over the past 5 years.

I am excited to announce the evolution of the organizational structure as it will continue to move us towards our vision of becoming the world's most thriving and beloved restaurant brand.

I will walk you through the progress we made in Q1 to accelerate North America same-restaurant sales, which grew on a 1- and a 2-year basis.

In the first quarter, our marketing calendar was grounded in our strategy of 1 more visit, 1 more dollar.

This strategy creates a platform to capitalize on our mix opportunity, which drove an acceleration of same-restaurant sales as well as an increase in company-operated restaurant margin.

We began the quarter with our $5 Giant JBC in January, introduced our new Made to Crave hamburger line in February and finished the quarter with the launch of our Biggie Bag.

All 3 of these promotions met or exceeded our expectations despite the severe weather that we entered during the quarter.

Our Made to Crave hamburger innovation, featuring 3 new-to-the-menu sandwiches is resonating with customers, and Biggie Bag has not only been a nice check builder but it is also driving incremental traffic.

Made to Crave hamburger, Biggie Bag and our recently launched Made to Crave Chicken are all platforms that customers can associate with the Wendy's brand, and we have already seen that awareness building.

These platforms will also allow us to continue to bring new news in the future.

We have momentum, and we are very excited about the plans we have in place for the remainder of the year to drive 1 more visit and 1 more dollar.

We continue to make progress in taking our operational excellence across the system to another level to drive a more consistent customer experience that will allow our brand to stand out versus our peers.

In the first quarter, we focused on driving speed and throughput.

We provided the system with a robust set of training tools to address this and invested in the appropriate support to ensure that this was executed across both company and franchised restaurants.

We believe that scale matters in the restaurant industry because it allows you to make investments in such things as enhanced training and tools and that those with scale will ultimately win.

We have also said that we like having skin in the game so our company portfolio can be the brand steward for our franchise system and are placing a keen focus on this in 2019.

In the first quarter, our company restaurants assumed that leadership position as we outpaced the franchise system in consistency, speed and overall satisfaction.

Our goal is simple: delight every customer, period.

Consistency, speed and throughput are critical for us to win.

We are focused in 2019 to have a more consistent experience for our customers so they will want to keep coming back, and we are providing the system, the training and the tools to bring this to life.

We continue to make meaningful progress with our consumer-facing digital capabilities.

We believe that our operating model is a perfect complement to the technology journey we are on.

At the end of the first quarter, about 75% of our North American restaurants were on a delivery platform, which is an increase of approximately 15 percentage points since the end of 2018.

The growth of our delivery footprint continues to pace ahead of expectations as we remain on track to have 80% of the North America system covered by the end of 2019.

We also continue to work on the integration of delivery into our mobile app, which we expect to have completed by the end of the year.

This integration will allow for a more seamless user experience and will also provide us with more insights to enhance our relationship with our customers as well as improve our overall delivery times.

The key to increase sales and success with delivery lies in customer awareness.

We ran targeted promotions in the quarter that drove increases in delivery orders by giving customers a free Baconator and Biggie Bag with a delivery order.

On the mobile ordering front, we are now activated in about 75% of the U.S. system, and remain on track to be activated across our North America restaurants by the end of 2019.

It is critical to have scale in order to create awareness, and we plan to start doing that later this year.

We also continue to make strides in our rollout of digital scanners across the North America system, as we have now selected a vendor, and our goal remains to have these in our restaurants by the end of 2019.

This technology will provide many benefits, such as enhancing the overall digital experience and better access to consumer insights to support our digital initiatives.

We believe that being successful in digital will be a competitive advantage for us as consumers are creating customization, speed and convenience, all of which can be enhanced through our platforms.

Now let's go a little deeper into our focus on accelerating our global restaurant footprint.

As I mentioned previously, we opened 43 new restaurants globally, with 29 coming from North America and 14 in our international markets.

We remain on track to reaccelerate net new unit growth in 2019 to approximately 1.5%, with about 1/3 coming from international and 2/3 from North America.

In the first quarter, international was slightly negative on net new development due to the planned closure of our Malaysia market, which had 14 restaurants.

We continue to make great progress on building our foundation to drive long-term growth as we grew our international systemwide sales by 10% in the first quarter.

We look forward to sharing more with you on our international plans at our Investor Day later this year.

In North America, we continue to utilize the tools we have put in place which are foundational for strong growth as we significantly outpaced our net new restaurant results from the first quarter of 2018.

Our partnerships with franchisees through joint capital planning, development commitments, a compelling incentive program and strong economics are driving confidence across North America.

We also have our Smart family of designs that caters to different trade area needs and delivers optimal financial returns.

All of these are reasons to believe and why we continue to be confident in our global footprint expansion in 2019 and beyond.

As I close out, I want to bring us back to The Wendy's Way.

We remain focused on delivering our brand promise of delighting every customer, period.

In order to bring The Wendy's Way to life, just like Dave did when he opened his first restaurant almost 50 years ago, we must remain focused on investing in the quality of our food, providing great value, delivering exceptional service and elevating our restaurants.

We are bringing this to life through our focus on enhancing the customer experience through our digital platforms and driving operational excellence to ensure customers have a great experience at all of our restaurants.

We will continue to provide more access to the brand around the world through our global development plans and create a place customers love to go through our reimaging program.

It is important to remember that our system is one family, and we wouldn't be able to do any of this without the partnership, support and dedication of our franchisees.

With the passion they bring to The Wendy's brand every day, we are confident that we will become the world's most thriving and beloved restaurant brand.

I will now hand things over to GP to go over our first quarter financial results and 2019 outlook.

Thanks, Todd.

We are pleased with our start to 2019 on the backdrop of improving same-restaurant sales and global restaurant expansion, which is translating into significant free cash flow generation.

Let's dive into the results.

The increase in adjusted revenues was primarily due to an increase in company-operated restaurant sales from the acquisition of restaurants as part of our ongoing systems optimization strategy and company same-restaurant sales increasing by 2.1%.

Adjusted revenues were also driven by $9.5 million of pass-through payments related to subleases as part of the new lease accounting standard.

Year-over-year, company restaurant margin increased by 110 basis points to 15%, driven by strong mix management and pricing actions, partially offset by labor rate inflation and customer accounts decline.

The customer account declines were expected as we shifted our marketing calendar to focus more on mix and as we rolled over the successful $1 Double Stack promotion from quarter 1 of '18 that drove significant amount of traffic.

G&A decreased to $49 million compared to $50 million in 2018.

This decrease was primarily driven by lower salaries and benefits as a result of the company's G&A savings initiative, partially offset by investment in building our Digital Experience and international organizations.

Adjusted EBITDA grew by 12% to $102 million on the backdrop of strong core earnings growth.

This was driven by franchise royalty revenues and fees and the company restaurant margin expansion.

Adjusted earnings per share increased by 27% to $0.14 in quarter 1 versus the prior year of $0.11 due to adjusted EBITDA growth and fewer shares outstanding.

This was partially offset by an increase in income taxes due to a higher tax rate as the company received a large benefit in the first quarter of '18 from stock option exercises.

Free cash flow increased 17% to $48 million, driven primarily by our strong core earnings growth.

One of the keys to our ability to invest back into our business and return cash to shareholders is our flexible capital structure.

Our maturities are laddered nicely, with our next tranche of debt callable at par this June, but not coming due until 2022, which gives us a lot of flexibility.

All of our currently funded debt has been issued with attractive fixed rates, which protects us against interest fluctuations.

Our pro forma leverage ratio at the end of the quarter was 4.9x, down slightly from 5x in quarter 4 on the backdrop of strong EBITDA growth.

We continue to expect a leverage ratio in the range of 4.5 to 5.5x in 2019 and beyond.

Our capital allocation strategy remains unchanged, which is 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 announced today the declaration of our regular quarterly cash dividend of $0.10 per share payable in June.

As a reminder, in February of 2019, we raised our quarterly dividend by 18%.

We continue to return cash to shareholders via share repurchase and have repurchased a total of 2.1 million shares for $35 million so far in 2019.

As a result of these repurchases, we currently have $211 million remaining on our $225 million authorization that expires in March of 2020.

As I close today, I want to review our 2019 outlook as we remain on track to deliver all of our financial targets.

Global systemwide sales grew by 3.3% in the first quarter, and we are confident that our marketing calendar and global development plan will continue to drive strong systemwide sales and profitable growth.

We expect that our adjusted EBITDA growth will continue to be driven by increased royalty revenue as well as company restaurant margin expansion.

We remain on track to accelerate our restaurant profit in 2019.

We are focused on driving same-restaurant sales growth and productivity initiatives, which will be partially offset by expected headwinds in labor rate inflation of 3% to 4% and commodity inflation, which is now expected to be approximately 2%.

As Todd mentioned earlier in the presentation, we are pleased with our start to 2019 across all of our financial metrics.

As we move to 2019, our road map remains unchanged.

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

And with that, I will hand things back over to Greg to walk through our upcoming Investor Relations calendar.

Thanks, GP.

First up, GP, Abby and I will be doing a roadshow with SunTrust in Chicago on Tuesday, May 14.

That same week, on Thursday, May 16, we'll travel to New York City for the BMO Conference.

On May 23, GP, Abby and I will be doing a roadshow with UBS in Toronto.

And on June 13, our senior management team will host a market visit here in Dublin sponsored by Eric Gonzalez of KeyBanc.

If you're 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.

On Wednesday, August 7, we plan to release our second quarter earnings before market opens and host a conference call that same morning.

And finally, as previously announced, we plan to host an Investor Day on Thursday, October 10, at our headquarters in Dublin, Ohio, where we will discuss our long-term strategic vision and issue additional long-term guidance.

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

(Operator Instructions) Your first question comes from the line of Gregory Francfort with Bank of America.

The first one is just on flow through.

You guys had a great quarter on margins, and I guess I'm curious how much of that you think was maybe onetime or how much is sustainable?

And then the second question is a longer-term question on delivery.

I guess how do you envision delivery playing a role in the Wendy's brand, and how it's going to work operationally?

Is this going to be something you do through the Wendy's app, and then it gets executed by third parties?

And are you exclusive on DoorDash right now and is it going to remain that way for the long term?

Greg, from a margin point of view, yes, we are happy with our results.

Adjusted EBITDA was up 12%.

It's all really sustaining.

A lot of it is driven by our focus on margin and working on our company restaurant margin expansion, which was up 110 basis points.

There was nothing of onetime nature in there.

The only onetime thing you could point out is in operating net income other, where we have about $2 million of income in there that's not typical.

We had a sales-type lease assignment where changes were made.

We had them in the past, now with the new lease accounting standard, these gains are not getting amortized anymore over the remaining life of the lease, but they are recognized upfront.

So there is $1.9 million sitting in the quarter 1 results that is not repeatable.

The rest of it is all organic strong underlying growth.

And Greg, on delivery, as you know, our biggest competitor is food at home, and convenience continues to get redefined.

So we'll continue to look at this as an opportunity for growing our business into the future.

And we're in the early innings.

We've got DoorDash really being a great partner here in the U.S. We've now got 75% of our restaurants covered by DoorDash.

Skip The Dishes has been a great partner in Canada.

We continue to work to make the whole experience more seamless, not only for our operators, but for our DoorDashers and ultimately for the customer.

So we do expect during the course of this year to get DoorDash integrated into our app.

It means other delivery providers could also be integrated over time.

So we're exclusive with DoorDash today, but we will have opportunities to play that game different as things change into the future.

But we're really feeling good that, over time, this is another opportunity for another growth leg on our business.

And our big opportunity still is awareness.

Awareness is really quite low on the delivery front, and we're in those early innings, as I said earlier, and we'll continue to drive awareness throughout the year.

Can I ask you how long that exclusivity lasts?

Is that a year or a multiyear agreement?

We go into annual contracts with our partners, so we're providing for a lot of flexibility, but we got great relationships with both of those providers.

So we feel good that we're positioned for change if we need to make it, but continue the status quo if that's the best thing for the business.

Your next question comes from the line of Matt DiFrisco with Guggenheim Securities.

I have a follow-up on that with the delivery side.

I guess it sounds like then the awareness was -- I guess it's not been that high of a share as far as overall delivery accounting for overall sales.

Otherwise, I was just wondering if the incrementality perhaps not as much.

I'm trying to read through and reconcile the 75% coverage with delivery yet traffic being down.

If delivery would be incremental, I would think traffic would start to see a reflection of that, to be a little bit of a lift.

Matt, it's -- delivery is still a very small percentage of our business.

If you look at all of our transactions, it is really small.

And we're still seeing it be incremental.

We're still seeing it drive sales in the dinner and late-night dayparts.

We still see really high customer satisfaction scores within the app through DoorDash and still really outpace the overall satisfaction scores for a delivered order relative to our total overall satisfaction.

So we feel good and encouraged that this can be a growth driver, but we're still early in this game.

And the key to it is driving awareness.

Because what we're seeing is when people are aware, we're seeing nice repeat and folks start to come back.

So we'll continue to make sure, both from our perspective that we're driving awareness, as we're advertising, we'll continue to create offers on -- in the app for delivery to drive folks into getting the experience that they want to have.

And our partners continue to drive awareness of our brand within their app, too.

So it's a combination of all those things that will be a tailwind into the future.

Understood.

Makes sense.

I guess then could you also just comment on as far as the promotional schedule and the impact that it had in the quarter on traffic, do you expect that to continue then for the next 3 quarters?

Sounds like, as far as on a year-over-year basis, less traffic driving type of promotions similar to what you had this quarter and lapping the Double Stack.

So will the traffic counts be somewhat of a flat to down, of a headwind, to your comp?

If you look at where we need to go on our business plan, we need to keep balance, right?

We need to have a balanced high-low strategy.

And what we said in the first quarter is we knew we were going to be lapping over the $1 Double Stack from a year ago.

Clearly, weather didn't help us in the first quarter.

And we knew that we were actually going to have a little bit of a headwind on traffic, and the first quarter would be a little more driven on price mix.

And that's the way that calendar laid out.

But if you go to the rest of the year, we feel good that we'll start to get a nice balance.

And what we said as part of our guidance in the year, we would expect to see traffic on a full year basis flat to slightly down, with more benefit from price and mix, but that's coming off of 13 consecutive quarters of holding or growing category traffic shares.

So we've brought a lot of folks in, now we've got to continue to trade folks up and that's healthy for our margin.

And it trades folks up into some of our best offerings on our menu.

Your next question is from the line of Brian Bittner with Oppenheimer.

Again, great job in accelerating your same-restaurant sales from what we saw in the second half of '18.

Do you feel like -- Todd, do you feel like the average check issue is fixed now as you move throughout the rest of the year?

And just to clarify, do these strategies have any weakness in traffic relative to your recent trends?

No, we feel good about where the calendar's evolved to.

If you think about what we had out there in the first quarter, we still had messaging around 4 for $4.

So if you think about the laddering then, we also then had an opportunity to move folks up to $5.

So we had the $5 Giant JBC early in the quarter.

And then for the last 2 weeks of the quarter, so it didn't have a huge impact in the quarter, but we had a Biggie Bag offering.

So opportunity to not only trade folks up from 4 for $4, but into a great full meal $5 offer.

And we're seeing trade up and a lot of incrementality.

But it is a balance then with the high end of our calendar.

So we've got our Made to Crave hamburger lineup, which is bringing variety, which can help drive frequency over time.

It gets to feature some of our best-tasting hamburgers when we get into the premium lineup.

And then to keep things operationally simple, we then just launched here in the second quarter, Made to Crave Chicken and that only brought 1 new SKU in, so we'll be able to continue to trade folks up on the top on that, but we're keeping the balance.

We just announced earlier this week that we've got $0.50 Frosty coming back.

That is a nice traffic driver, but it'll get folks to the restaurant to trade into and up to, whether it'd be 4 for $4, $5 or Made to Crave.

But even on the $0.50 Frosty, we now have the Frosty Cookie Sundae in our restaurants.

So we've got a great trade up opportunity to move from a $0.50 Frosty when you show up to a more indulgent dessert.

So we feel good that, that kind of calendar continue to pace throughout the year and really balance out some drivers on mix, some drivers on sale and some good margin enhancement for the business but still balance the traffic that we need to have to come into our restaurant every day.

And just, GP, a follow-up.

Was there any other idiosyncrasies to first quarter earnings growth?

Because even when you exclude that benefit on that other line, EBITDA and EPS still trended well above the growth trend you're assuming for the full year.

So any color on whether we should be expecting that to slow moving forward?

Or if there is any other interesting things in the first quarter?

Yes.

So Brian, a couple of interesting things.

But a reminder, as we adopted the lease accounting standard, as I said on the prepared remarks, there is now, on the year, about $40 million of incremental revenue -- rental revenue and incremental rental cost that is going through our P&L.

So you saw the first $9.5 million or so flowing through in the first quarter.

So as you redo your models, focus on that.

Secondly, I would say on the earnings per share metric, we actually had really strong underlying results.

Majority of it was really driven by strong EBITDA growth, which is all really organic with the exception of the $1.9 million I pointed out.

We benefited obviously from lower share count, which is going to continue since we still have $211 million of the share repurchase authorization outstanding.

And we actually had a headwind on taxes, which was quite significant.

In the base period, we had about 6% tax rate.

This year, in this quarter, we have about 20% tax rate.

So that's a headwind that's not going to be there on the tax rate side for the remainder of the year.

So overall, maybe that color helps.

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

I'm wondering if you could talk a bit more about unit growth in the quarter and the outlook for unit growth.

I guess for the quarter, you called out the Malaysia closures and referenced the impact from timing, I think, in the release.

So does that imply that international closures begin to abate some from here?

And then I guess just looking ahead, any comments on what that pipeline looks like in North America and globally, I guess including development agreements, where you are exactly on the commitment levels?

And just the last piece to that, I guess just all the incentives, Todd, I think that you had mentioned as far as incentives for franchisees as well as tools and other factors supporting franchisee development, just what the response from the North America franchisees has been to that?

Yes.

Dennis, so a couple of things.

So, yes, international, as we said on the prepared remarks, we had 14 restaurants that we closed in the Malaysia market.

That was all part of our plan for the year.

Unfortunately, the economic model was not sustainable as it was currently designed.

And with our new strategy on prioritizing markets, we shifted some of our resources elsewhere.

It doesn't have a huge impact on our business.

The AUVs on Malaysia were $300,000 to $400,000.

So $5 million of system sales, just to give you a dimension on that.

If you think about the pipeline, we're off to a really nice start in North America.

We're pacing ahead of where we were last year on new builds.

We do have a good pipeline for this year and into 2020.

And there's been a lot of excitement and acceptance around the groundbreaker incentive.

But as you think about the groundbreaker incentives, goes more into 2020, 2021 and beyond as we really build a strong pipeline into the future.

But the good news is we've got a great combination of existing builders and new builders that are coming into that groundbreaker incentive.

On international, we feel confident.

We've got a good pipeline.

We've got a lot of good development commitments.

Really working to scale up the existing markets that we're in with some great franchise partners.

We've got good visibility for this year and into 2020.

And we're continuing to work is there another market or 2 that we should be entering over time, and we'll talk a lot more about all of those details as we give you guidance even beyond 2020 as part of Investor Day later this fall on the international business.

But very encouraged by the work that Abigail and her team are doing things differently to continue to unlock growth on the international front, really leveraging a lot of the best practices in North America and also thinking differently and being open to the different avenues of growth across the globe.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Two questions.

The first one just on the broader QSR category.

Todd, I'm just -- as we think about traffic, it seems like you and your peers are still struggling on the negative side, which was addressed earlier.

But that's despite, I guess, seems like everybody now putting their premium products on discounts, whether it be your $5 Biggie, your -- some of your largest peers doing significant discounting on their very premium-end products, would seem to be that will be concerning on that front, we're still unable to turn the traffic positive.

Obviously, you have the average check working for you, but how do you think about that in terms of concerns that we've gone as far as you can now in terms of putting your biggest and best on discount?

And any color on just the sequential trends through the quarter into April?

I know you mentioned you had momentum, I'm just trying to size that up.

Then I have one follow-up.

Yes.

Jeff, if you think about the category, there are some signs of life in QSR, where it's actually starting to see traffic move from flat to up 0.5 point to even 1 point, depending on the month.

So it is a bit encouraging.

But as you know, we still have headwinds for many Americans.

Income growth is not equally distributed.

Health care and housing and rent cost continue to increase.

And wage growth has not quite kept up with inflation.

But the good news is consumer confidence is trending favorable.

Disposable income, which is a great correlator to our business, is moving in the right direction.

And we've got continued low employment and steady wage growth.

So those should all be good trends for the business.

For our business, I don't see us doing heavy discounting on the premium.

We're actually trading folks up.

We've got our core business that is at everyday prices.

We've got coupons and do things that -- and mobile offers that others do, but we've been really trading folks up in some of our great-tasting products: Made to Crave hamburgers, Made to Crave Chicken.

So I do see the category picking up a little bit.

But if you go a little deeper, QSR is the place to be.

Share of all restaurant meals continues to grow in QSR, but we got to continue to make sure that we look at all the new competitors, right?

The hamburger category, which is still, by far, the biggest, with a ton of opportunity for visits, has come a little bit under pressure with some of the competition that comes from a big chicken competitor and some of the Mexican players.

And we've said that in the past, and what we need to do is just continue to deliver on great-tasting food in a great-looking restaurant with a greater service experience and play to our strengths around quality and fresh and customization, really leveraging the digital platforms going forward to continue to bring more customers into our restaurant more often.

So we feel like we're well positioned to compete.

And in terms of the traffic or the category trends through the quarter end to April, whether for yourself or for the broader quick-service category, any color on that?

Yes, not a whole -- I mean as you know, February this year was the second really tough winter.

So we had 2 winters that were tough on the category.

At some point, we're going to get a mild winter, so it'll be a tailwind.

As you think about category trends to the quarter, coming out of the tough February, saw the category pick up a little bit in March and continued into April.

We're still getting early reads on the category, so that's about all I would say on that.

And just lastly, is it possible to make a [ladder implication] to franchisees' profitability when we look at your restaurant margins?

Obviously, they were impressive expansion in the first quarter, seems like you're expecting it to sustain in '19.

I just want to make sure that's fair to compare to franchisee profitability, where presumably, they're seeing trends up year-on-year?

Jeff, this is Gunther.

Yes, we always said the company restaurant margin should be a proxy of what the system is seeing.

Since we really didn't have any onetime things hitting our P&L in the first quarter, I would expect that the franchisees are going to see a similar picture.

Your next question is from the line of Jeff Farmer with Gordon Haskett.

You did touch on it, but are there any new learnings or anything that has surprised you with how consumers are responding to that $5 value price point as supposed to the $4 price point?

And I guess what I'm getting at is, does that $1 increase have a meaningful impact on traffic?

Yes.

Jeff, great question.

And it was interesting to see, as we had the $5 Giant JBC, we did see some nice trade up along the way from a 4 for $4.

But as we've come back to our roots with the Biggie Bag offering, not only have we seen nice trade up, we've actually seen a lot of incrementality.

So it brought a lot of new customers in, and the penny profit is significantly higher when you start to move from that 4 for $4 offering to a $5.

So that played well as -- into our margin.

And remember, we only had Biggie Bag out there for a couple of weeks to end the first quarter.

So that's really rolling here now into the second quarter.

And what I really like about the evolution of our marketing calendar is we've got 3 great platforms, right?

We're known for 4 for $4.

We can continue to bring news, keep it fresh and ownable.

We've now got a Biggie Bag platform, whether it's at a $5 price point or something else, it's called Biggie Bag.

We can innovate into that platform to continue to trade folks up.

And then to move folks up on to what our core strength is, innovation and premium, we've got a Made to Crave lineup on both hamburger and chicken that creates variety that can allow us to really cater to the needs of that customer, to make sure that they've got the variety they need to drive frequency to come in a little more often into our restaurant.

So we feel good about the laddering on our menu price architecture at the moment.

That's helpful.

And just one more on free cash flow.

So just a little bit more detail on the expected working capital contributions.

So the working capital side of the equation, the contribution to your $275 million free cash flow target, what opportunities do you have?

And what gives you confidence that you can deliver on those?

Again, I'm focused on the working capital opportunities to improve free cash flow out to 2020?

Yes.

So we have high visibility to our free cash flow target of $275 million.

There are several drivers to it.

It's obviously high single-digit core profit growth.

It's still in the 53rd week that sits in 2020.

And it is our payables initiative.

Again, we didn't go out publicly yet in terms of how big the opportunity is.

It is a little bit smaller than what we had seen in -- on the receivables side.

And same also on the receivable side, it's going to span over 2 years.

So we're going to start to make progress on this in '19 and then finish the program up in 2020.

So the combination of all these factors, plus the anticipated reduction in our capital expenditures down to $65 million, are all the 4 drivers to give us confidence to reach $275 million.

Your next question comes from the line of Peter Saleh with BTIG.

Todd, I think you mentioned speed of service was a focus in the first quarter.

Can you provide a little bit more color on that?

And was that more of an initiative for company stores or the system as a whole?

And where do you stand in terms of the speed of service in the drive-thru today?

Yes.

Peter, thanks for the question.

Speed of service is a big focus for our business.

And in fact, we spent a lot of the first quarter out in the field training on speed tips, on making sure that we're rush-ready, making sure that we're positioned well in the restaurant to deliver on that speed and then reward and recognize folks for the speed.

And we want to -- I want the company restaurants to continue to be the bellwether for that.

And if you think about our first quarter, we really took a leadership position around consistency, speed and overall satisfaction to be a good brand steward and a shadow of a leader from the company restaurants.

Sequentially, from the fourth quarter into the first quarter, we did see speed improve in our drive-thru, but we still got a lot of opportunities as we go through the year.

And the training happened in Q1.

And I think as we get leveraging all of that training, that benefit continues to play throughout the rest of the year.

And as we continue to push the world of digital, our slowest spot, especially during the peak day parts, is on the ordering side.

And as we continue to drive things like mobile ordering, that can unlock more throughput, more speed and a better overall customer satisfaction experience for all.

Just staying on that theme.

Are there any plans to slim down or change anything in the menu to try and drive the speed of service?

Or is this more on the tech side that you will work and on the training side?

Yes.

Peter, it's -- it'll be both, right?

We got to continue to look at operation simplification in a restaurant in all we do.

And every product on our menu has to earn the right to stay on the menu.

For those that have been following along, chicken tenders has been discontinued as we brought in Made to Crave.

Just weren't selling enough for the return on that time that it took.

And it was slowing down the drive-thru a little bit.

That's just one small example, but we'll keep looking at that.

But we'll continue to look at all of the things across our restaurant, how do we make sure that credit card processing continues to improve, and we've made some progress on that, on the speed of all of that and have opportunities to continue to do that.

Mobile ordering, clearly, will play a role; kiosk can play a role in the restaurant.

So it is that collective good of all of that, because we know in the world of QSR, speed, convenience and affordability are the 3 big drivers.

And we'll continue to be focused on those 3 as basic core foundational elements of our business and then really work like crazy to differentiate on quality and freshness of our food.

Your next question comes from the line of Sara Senatore with Bernstein.

I have 2 follow-up questions, if I may.

One is just on delivery, and you talked about sort of promotions to drive awareness.

I guess there is a sense among some industry players that right now, we're seeing a lot of promotions to drive awareness across different brands and that perhaps that are unsustainable.

I guess I'm just trying to understand how you think ultimately this plays out.

Does everybody get to pull back on promotions once kind of industry-wide awareness increases?

Or is this just a very competitive market and it's unlikely that we would expect to see the sort of efforts, whether it's price or free delivery, really ratchet back?

And then I have another question for you.

Yes.

Sara, I think upfront, you'll see a little more on the offer front to really drive folks into the app, because you want to drive app acquisition.

And early on, you've got some offers to make sure that they continue to come back, to create a little bit of loyalty.

I do think once you create a more loyal customer over time, you'll be able to balance out what those promotional offers are.

The good news is we fund some of those, and our partners some -- fund some of those, because we're both trying to grow together to drive this awareness, so it's a nice balance.

And it works on their economic model, works on our economic model.

But I think going forward, as we think about all avenues of growth and you think about our marketing mix, we'll have to continue to look where our dollars are best spent.

Is it mainstream media, is it digital media, is it digital coupons, is it delivery offers?

I think you'll see over time that there is a remix and a reblending, so it doesn't have to be all incremental.

It'll be what's more effective and efficient, especially as we get more data and we start to move to the one-to-one communication, because it becomes more effective and your dollars can work harder.

Okay.

That's helpful.

And then you mentioned digital scanners.

I was trying to sort of fit those into the context of franchisee investment in kiosk and sort of a sense it feels like we're a little bit in a tech arms race.

Can you just let me know how are franchisees responding to these kinds of what appear to be incremental investments?

I know, for example, with the kiosks, the uptake by franchises initially was a little bit slower than you might have expected.

So are franchisees kind of more onboard now and we're seeing the benefits?

Or is it still a kind of a work in progress?

Sara, our franchisees are actually very delighted about our stance on digital scanners.

And the reason why they are delighted about it, the company is paying for it.

But it's built in our earnings forecast for the second half, so they can't wait to actually get them quickly enough.

We made progress.

We selected a vendor, and we're in the process to roll this out in the second half.

To your point on kiosk investment, franchisees are still fairly slow, right?

They have a lot of capital requirement.

We have kiosks in about 2/3 of our company restaurants.

We have seen benefits, and we are trying to convince the rest of the system to actually make the capital investment because we think it has a return.

But as you point out, that remains a fairly slow activity for us.

Okay.

Great.

And then I'm sorry, one last question.

I guess I'm -- we're trying figure out if you could just come to one sort of conclusion, is the environment getting more value-focused, less value-focused or should we just think about this really as a barbell where you have to be very sharp on price points on the one end, but you kind of have some customers who are willing to pay up for premium, it's just -- I mean, very hard to sort of detect a real strong trend in one direction or another.

Yes.

Sara, it's still a share of stomach battle when you get traffic flat to 1%.

And you do have to play the barbell, because there is this bifurcation of the consumer health.

And you need to have some good offers on the low side.

You got to have good menu architecture to move folks from low to high and continue to trade folks up and provide opportunities on that premium side.

The deep discounting that we saw in the back half of last year has subsided to some extent, but it's still very competitive out there.

And it always will be and that's why we got to continue to not only figure out ways to drive and grow our business faster by connecting to the consumer better, but we got to continue to drive the productivity initiatives and the margin enhancement initiatives, which we're proud of, because we're seeing that translate into some nice margin expansion year-on-year.

But ultimately, it's driving some loyalty, it's driving some frequency and getting customers to come to our restaurant a little more often that's really going to drive the economic model and allow us to continue to compete with great service.

Your next question comes from the line of Andrew Charles with Cowen and Company.

Todd, on mobile ordering, what is your vision for how you can enhance convenience and improve speed of service by allowing the guest or delivery courier to skip the line for the pickup window?

Perhaps you can talk about early learnings from some of the operational tests you have out there as well as the fresh perspective Kurt can provide around this?

Yes.

No, our quest is how do you actually create a benefit for the consumer.

If they're going to go through the work to actually get all their information in, make an order through mobile ordering, how do they ensure that they don't have to sit in that same line?

Obviously, if everybody starts mobile ordering, that line will move a lot faster.

So we'll continue to test and look at things like others have, like curbside pickup.

We're going to have to look at the flow in our restaurant.

Is there such things as fast-pass lanes?

It's going to take some while to figure that out operationally.

But we're going to have to think about the flow through the parking lot and ultimately, the flow of the restaurant and the restaurant design to really support where we think folks want to go.

And that's really around speed and convenience through digital and then making sure that we provide that consumer benefit for them.

So that's going to take some time.

There are some short-term stop-gap things, like I said on curbside delivery.

But how it actually flows through restaurant, we're going to have to continue to put some line time against that and we are, and we've gotten some external help, and it'll take some time to get there.

And then my other question was, with the recent extension of Made to Crave into chicken, do you worry that puts you in closer competitive quarters versus the quick service chicken concepts as opposed to 1Q's promotions that focused on premium burgers and salads?

No.

I think it's a nice complement to our menu.

As you think about our core items, we had a very plain menu.

I mean think about the old days on hamburgers: 1 was a single, 2 was a double, 3 was a triple.

Well, now #1 is a Dave's hamburger, and the good news is, we suggest a sale: Do you want that in a single, double or triple?

And just by asking that question, it's amazing how many folks move into a double.

But it does give us an opportunity to actually have a platform to innovate again.

So we can continue to figure out what core items need to fit on those Made to Crave menus.

We can continue to bring news to it.

But when you think about things that ladder up and the brand is known for, for the long time, we're known for 4 for $4 and a Biggie Bag and Made to Crave and we keep them fresh and ownable by bringing news in, and that's our heritage, driving innovation, we feel like that's a great winning proposition for the long term and really helps set ourselves apart from a lot of the traditional QSR players.

Your next question is from the line of Will Slabaugh with Stephens Inc.

Todd, I want to follow up on a comment that you made around needing scale and just I guess clarify what you meant by that.

Can you accomplish that, I guess, through simple investments in the Wendy's brand?

Is this about more sort of broadening out your human capital to be able to reach the goals that you want to reach?

Or is this -- was that a comment saying that we might be open to additional concepts, sort of broadening that scale out more quickly?

Yes.

No, I think scale is really about the resources that we bring to bear to support the franchise system.

We've got skin in the game with 358 company restaurants.

We've got a dedicated company restaurant leader.

We continue to invest, model and role model great opportunities that we can then push out across the system to be even better and things like the training that we're doing and doing the live training and the initiatives.

We talked a lot about in the past around the management staffing model that we've tested in company restaurants rolling out across the system.

The work we've done on our labor guide, 4.0 and 4.1, really looking at all of the positioning and leveraging our industrial engineers.

Those are all the things that really drive scale well.

We have a ton of opportunities to continue to grow this brand as being the best Wendy's that we can be.

Well, as you think about what's out in front of us, we'll talk a lot more about our international story later this year, the digital journey is in its early innings, delivery is in its early innings.

And we continue to think about our mix opportunity through a strong calendar, that's just starting.

And we still have a lot of opportunity to be the best operators in the business and ensure that we've got a consistent experience in every restaurant.

We've done a lot of training on that front.

We continue to focus on the quality.

And all those together give us tailwinds that we feel confident that we can continue to be an efficient growth company moving forward.

Makes sense.

Just a follow-up on the commodity inflation comment that you guys made earlier.

And what you're seeing and hearing out there from your suppliers or elsewhere regarding ASF or whatever else may be impacting beef and chicken cost that you see for 2019?

Will, we shifted the guidance up a little bit, right?

Going into the year, range was 1% to 2%.

We are now guiding 2%, and we added basically pork into the mix now -- or bacon into the mix.

Previously, we only said inflation drivers would be fryers and beef.

We are a little bit concerned about this.

So therefore, we raised the guidance a little bit and we think 2% is a realistic estimate for us.

Your next question is from the line of John Ivankoe with JPMorgan.

There's obviously been so much conversation in terms of what sounds to be negative traffic this year versus negative traffic last year.

And I mean obviously, I know you guys kind of stay away from the specific discussion of details.

But looking at it on a 2-year perspective, because I think that would be important to get a sense of the underlying trend, I mean can you talk us at least directionally how '18 and '19 kind of add up relative to each other?

Because obviously, the very different promotions make it hard to read.

John, it's a good question, the 2-year basis, right?

We absolutely expected the traffic would be down in '19 versus '18 because we lapped Double Stack.

If you actually look at the traffic picture on a 2-year basis, actually we're flat.

And so that kind of a picture I'm able to share.

So really -- the rest of the growth, the 2.9%, is then net-net, slightly positive mix on the 2-year stack and then the rest is price.

Very helpful.

And then secondly, we obviously saw the senior executive changes, and there looks to be some at least -- some partial consolidation in roles between the 2. Is there anything more to kind of tell organizationally in terms of how kind of the org chart may fall beneath them?

And I guess to ask the question is, is this particularly new news as it related to your previously updated G&A guidance?

And is there -- are there more organizational opportunities yet to come maybe over the next year or so?

Yes.

From an organizational design perspective, as it comes to G&A, this was not a G&A play.

Our G&A guidance hasn't changed.

What we're really looking at is how do we become more nimble, more effective and efficient in all we do with 1 P&L owner that's working cross-functionally to bring all of our initiatives to life?

We've got 50 years of history of being a marketing company, an operations company or development company.

And as you know, the world we live in today, it's cross-functional in everything we do, and this just really enhances the accountability, with Kurt running the U.S. business and specific to the U.S., and Abigail running the international business with Canada now part of that, it becomes very clean, to make sure that they can manage all the drivers in their respective businesses, partnering with our franchise community to bring our growth to life.

Yes.

One thing to add, John, is you have -- we have disclosed this in the Q. We are expecting our realignment cost of the plan to increase slightly by about $2.5 million.

So that's reflected in the Q.

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

Two questions from me.

The gross openings were up nicely on a year-over-year basis for the first time in about 1.5 years.

The last couple of quarters, you've been talking about some timing impacts and delays of openings.

And so I'm wondering if some of that tick up on a gross basis is benefiting from some of those delays?

Or if you think this is a more kind of representative and sustainable type of lift on a year-over-year?

And then my second question, can you give us an update on where you are with the digital partnerships?

And when some of those efforts might come to bear and impact the business at -- at some point this year?

Okay.

On unit growth, right, it's a tale of 2 stories.

If you think about North America, really rapid acceleration, right?

In the first quarter of last year, we were down 9 units in North America, we are now positive 5. So really acceleration as we expected.

What do you see actually in international?

If you actually take out the market exit in Malaysia, underlying actually again positive, right?

So it all holds true in what we have always said, 2019 is the year of unit acceleration to about 1.5% from the 1.2% unit growth we had last year with again, 2/3 of that coming out of the -- out of North America and the rest coming out of international.

So overall positive momentum.

We have strong visibility into our pipeline.

And as we talked previously, the groundbreaker and everything around it is helping us to build out our pipeline further.

In terms of digital partnership, again, a couple of things.

We -- our partnership with Accenture is going well.

Teams are working well together.

We have already improved, actually, our mobile apps, so customer ratings on these apps have actually increased.

So we're seeing the first green shoots of that the partnership is working for us.

And as we have disclosed on the call, we have now mobile ordering activated in about 75% of all of North America, with good visibility to finish all of these off and get really behind it in the latter part of the year.

And our final question will come from the line of Jeremy Scott with Mizuho.

Just I don't mean to jump the gun on the Investor Day and some of your commentary there, but just to get a glimpse of how your thinking is changing on international, I wonder if you can give a postmortem on the Malaysia business.

I appreciate it wasn't a major contributor to your numbers, but it's one of those fast-growing fast food markets that you would think would absorb a lot of players.

And so it would be helpful to hear your thoughts on how the market didn't develop to your target, and how the team under Abigail might approach market entry differently?

I think the challenge in Malaysia comes down to 2 things: we never really got the economic model right; and it put pressure on the reinvestment for the franchisee in that market, which then didn't allow them to scale up, as evidenced by only having 14 restaurants after we've been there for a long time.

I think as you think about Abigail and her team is really pivoting.

As we focus in the markets where we think we've got great growth potential, we've really got to partner, first and foremost, to ensure we have got a strong restaurant economic model and then we create the awareness and have the supply chain to support that and really stay focused and dedicated on scaling it up behind those economics.

And I think that's an important one.

You can't just continue to put restaurants out and think you're going to grow without a strong economic model.

And we're spending a lot more time, as Abigail gets into the detail, really understanding what it's going to take to make sure that we've got an economic model that will fuel future growth in the markets that we want to scale up.

And you'll hear a lot more about that.

I know you keep hating hearing that, but you'll hear a lot more about that when we give Abigail her time in October when you're all in.

And just maybe a follow-up on your comments around commodities, maybe not so much for fiscal '19 or even though you took up your inflation guide, I presume you have a good amount locked for the remainder of the year.

But just looking out into 2020, how confident are you that you're -- you could hold these mid-teens margins on the company side, given that both of your components of your prime costs are set to escalate?

And just what are some of the strategies, whether it's in supply chain or through menu shifts that you can deploy to mitigate some of the pressure on the commodity side?

Jeremy, we believe that beyond '19, we can further expand restaurant margin in the context of moderate and low-commodity inflation and labor inflation similar to what we see in '19.

But why do we believe that?

We think we have compelling programs in place to actually leverage our sales.

We talked about this.

We anticipate acceleration of SRS behind digital, behind better operational excellence and behind our shift towards mix management.

So growth is the biggest defense against inflationary headwinds.

And then we keep improving QSCC operations.

So really procuring our goods and services at the lowest landed cost possible and obviously, initiatives around design to value, labor optimization and automation.

So it's not one silver bullet, but a lot of different things we are doing to make sure we're staying ahead of the game.

Thank you, Jeremy.

That was our last question of the call.

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 second quarter results.

Have a great day.

You may now disconnect.