Wendy's Co (WEN) 2019 Q2 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.

Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.

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 second 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 second quarter.

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

We opened 28 new restaurants across the globe in the second quarter and have opened 71 year-to-date.

This is slightly ahead of our pace of openings we had this time last year.

We also continue to reimage our restaurants and now have 53% of the global system on the new image.

Company restaurant margin came in at 16.5% for the quarter, down 90 basis points from the prior year and flat year-to-date.

We delivered another quarter of strong financial results as we achieved 8% adjusted EBITDA growth, 29% adjusted EPS growth and a 6% increase in our year-to-date free cash flow, which continues to give us confidence as we are reaffirming our outlook for the year.

Our formula remains 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 continue to focus on our one more visit, one more dollar strategy to drive mix.

We are also making progress on improving our operations and enhancing our digital capabilities and are confident this work will help us accelerate same-restaurant sales growth.

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.

I will walk you through the progress we made in Q2 to accelerate North America same-restaurant sales.

Our balanced marketing strategy contributed to accelerated same-restaurant sales on a 1- and a 2-year basis.

We began the quarter with the continuation of our Biggie Bag promotion and the launch of our Parmesan Caesar Salad.

We followed this up with our Made to Crave Chicken sandwiches paired with our $0.50 Frosty and Frosty Cookie Sundae promotion.

Our Made to Crave Chicken features 3 new-to-the-menu sandwiches, which drives flavor and innovation in our chicken business and builds on the equity we established in Q1 with the launch of our Made to Crave hamburger platform.

We closed out the quarter with the return of our Summer Berry Burst Salad.

Mix in the quarter was flat as we lapped over a strong Southwest avocado premium promotion from the prior year and encountered some softness in our salad business.

Our momentum carried over from Q1 into Q2, and we are very excited and confident in the plans we have in place for the back half of the year to drive one more visit, one more dollar.

We continue to make progress in elevating the level of operational excellence across the system, with our new U.S. leadership structure playing a major role.

Speed and consistency of experience matter most in delivering our brand promise, and they are getting our full attention in order to make significant strides.

On the speed front, a combination of training and credit card processing improvements is paying off, and the entire system has rallied around the benefits that increased throughput can provide.

Consistency is also gaining traction as a result of training investments around high-quality food and a relentless focus on staffing levels.

This increased focus is already starting to drive better experiences for our customers.

Our goal is simple: we need to consistently deliver great experiences in every restaurant every day.

Our restaurant general managers are the key to doing this successfully, and we will focus on 3 initiatives to help set them up for success: first, training, coaching and measuring what truly matters to customers; second, simplifying or eliminating non-value added tasks; and third, building a culture within our restaurants that make them fun and energizing places to work.

Through our continued focus on operational excellence, we believe that we can deliver a world-class Wendy's experience at each of our restaurants consistently.

We are confident that we have the right initiatives and team in place to achieve this.

We continue to make significant progress with our consumer-facing digital capabilities and are on track to deliver all of our goals for 2019.

At the end of the second quarter, over 80% of our North American restaurants were on a delivery platform, and our footprint will continue to expand, exceeding our goal for the year.

The integration of delivery into our mobile app is on track to be completed by the end of the year, which will improve our user experience and delivery times.

On the mobile ordering front, we are now activated in over 90% of the U.S. system and remain on track to be activated across our North American restaurants by the end of 2019.

The key to increase sales and success with delivery in mobile ordering lies in increasing customer awareness and driving trial.

We have a robust playbook of promotion slated for the remainder of 2019 to build our digital awareness and ultimately drive accelerated same-restaurant sales.

The rollout of digital scanners across North American system is on track, and our goal remains to have these up and running in our restaurants by the end of 2019.

We believe that being successful in digital will be a competitive advantage for us as consumers are craving customization, speed and convenience, all of which can be enhanced through our platforms, and our restaurant operating model complements this well.

Now let's review the progress we are making to accelerate our global restaurant footprint.

During the second quarter, we opened 28 new restaurants globally, with 20 coming from North America and 8 in our international markets, which was in line with our plan.

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

Our global footprint is expanding, and we continue to make great progress on building our foundation to support long-term growth as we grew our international system-wide sales again by 10% in the second 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.

We are very pleased with our groundbreaker incentive program that culminated in June.

We had very high franchisee enrollment with about 400 restaurants committed under the program and over 200 of these being incremental new restaurants.

This adds another wave of growth in 2019 and beyond to our already healthy development pipeline.

Our work with franchisees remains vital as we partner with them to ensure strong economics behind a line of joint capital plans.

We continue to be confident on our global footprint expansion in 2019 and beyond, and we will continue to ensure we have a Wendy's restaurant wherever our customers are looking for one.

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

We will 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 will stay laser-focused on investing in the quality of our food, providing great value, delivering exceptional service and elevating our restaurants.

We will accomplish this 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.

We are making progress against all elements of The Wendy's Way, and we look forward to sharing even more details on how we plan to play a different game into the future at our Investor Day in October.

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

Thanks, Todd.

We are pleased with our quarter 2 results on the backdrop of improving same-restaurant sales and global restaurant expansion, which is translating into strong 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, which were driven by the acquisition of restaurants as part of our ongoing system optimization strategy as well as positive same-restaurant sales.

Adjusted revenues were also driven by $10 million of pass-through payments related to subleases as part of the new lease accounting standard.

Year-over-year company restaurant margin decreased by 90 basis points to 16.5% primarily driven by lower-than-expected same-restaurant sales growth of 0.8%.

Our year-to-date restaurant margin through quarter 2 is flat to the prior year at the 15.8%, and we are now expecting company restaurant margin to decelerate slightly in 2019 versus the prior year.

G&A increased to approximately $51 million compared to $49 million in 2018.

This increase was primarily driven by the timing of employee compensation expenses and investment in building our digital experience and international organizations, partially offset by lower salaries and benefits as the result of our G&A savings initiatives.

Adjusted EBITDA grew by 8% to $118 million.

This was primarily driven by an increase in franchise royalties, from the strength of accelerating same-restaurant sales and new restaurant openings as well as net rental income.

Adjusted earnings per share increased by approximately 29% in the second quarter to $0.18 due to strong adjusted EBITDA growth, fewer shares outstanding as a result of our share repurchase programs and lower depreciation expense.

Year-to-date free cash flow increased 6% to $125 million driven primarily by our strong earnings growth.

I also wanted to take the opportunity today to give you an update on our franchisees' financial health as we recently finished collecting and reviewing their financials for 2018.

In 2018, our franchisees sales in North America grew by approximately 2% compared to the prior year.

This sales growth allows the system to overcome a margin rate decline as the EBITDA dollars came in flat compared to the prior year.

A strong restaurant economic model remains job #1, and we are actively working alongside our franchisees to drive this.

We remain confident that our franchisees will be able to deliver on their various commitments, which will ultimately lead us to achieving our long-term growth goals as a brand.

One of the keys to our ability to invest back into our business and return cash to shareholders is our flexible capital structure, and we recently improved this by refinancing a portion of our debt in the second quarter.

We refinanced approximately $850 million into 2 tranches: a 7- and a 10-year at a blended rate of approximately 3.94%, which was slightly lower than the existing 7-year notes of 4.08%.

As a result of this refinance, our securitized debt is levered nicely with attractive fixed rate below 4%, and we increased our weighted average life of debt to over 7 years.

Our pro forma leverage ratio at the end of quarter 2 was 4.7x, down slightly from 4.9x in quarter 1, primarily due to strong EBITDA growth.

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

As I close today, I want to review our 2019 outlook as we are reaffirming all our financial targets.

Global system-wide sales grew by 3.3% in the second quarter, and we are confident that our marketing calendar, digital initiatives and global development plans will continue to drive strong system-wide sales and profitable growth in the back half of the year.

As a result of our strong system-wide sales growth, we continue to expect that we will meet our adjusted EBITDA growth target for 2019.

Lastly, we remain on track to deliver free cash flow of approximately $230 million to $240 million.

Please note that we now expect the proposed settlement of the financial institution case to take place in early 2020 as opposed to late 2019.

As Todd mentioned earlier in the presentation, we are pleased with our quarter 2 results.

Our roadmap remains unchanged, be an efficient growth company that is showcasing strong system-wide sales growth on the backdrop of positive same-restaurant sales and global restaurant expansion, which is translating into significant free cash flows.

I will now hand things over to Greg to talk about our upcoming Investor Relations calendar.

Thanks, GP.

We would like to remind you that we will be holding an Investor Day at our Restaurant Support Center here in Dublin, Ohio on October 10, 2019.

We will be discussing our long-term strategic vision for growth as well as providing additional long-term guidance.

Due to limited capacity, attendance will be by invitation only.

Now let's turn to our upcoming IR calendar.

First up, GP, Abby and I will be doing a roadshow with Bank of America in Boston on Tuesday, August 13.

The next day, on Wednesday, August 14, we will travel to New York City for a roadshow with Oppenheimer.

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.

Finally, on Wednesday, November 6, we plan to release our third quarter earnings before market opens and host a conference call that same morning.

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

(Operator Instructions) And we do have a question from the line of Chris O'Cull with Stifel.

GP or Todd, I know the domestic system has been opening stores at a pretty healthy rate, but closures have also been a drag on that unit growth.

And I guess we're a little higher than we expected this -- or higher this quarter than last year.

Can you just remind us what percentage of the closures or openings or relocations and whether you expect closures to be greater this year than last year?

Yes.

Chris, thanks for the question.

On closures, from a full year pacing, we see it consistent with what we've seen the last couple of years.

It kind of steadied into that 60, 70 closure a year, which has been kind of a healthy number based on where some of our trade areas have evolved.

About a quarter of our restaurants are relocations as we work through those figures.

But remember, as we close restaurants, we're closing restaurants at about $1.1 million AUV, and the new openings are at about $1.8 million.

So really driving a much healthier mix and really trying to make sure that we got restaurants that are vibrant, so we can continue to invest in future growth.

That's helpful.

And then just, Todd, I'm surprised with the slower company-owned store comp performance.

And it sounds like you might expect this performance to improve given the margin outlook for the year.

So what are the issues causing the softer comp performance?

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

One, if you think about the wet cool spring, it did impact our company restaurants a little bit more with our footprint and where those restaurants are located versus the system.

And from a company perspective, since we're 81% reimaged already, we don't have that big tailwind from IA like the rest of the system does.

It's about 50 points -- or 50 basis points of tailwind from IA for the system.

So I think those are the 2 biggest deltas that you would really see.

On a full year basis, we would expect both company and the system to grow in line with one another, and we're really focused with a dedicated leader over the company restaurants to continue to up our game around all of our operational metrics, focus on speed, focus on consistency, being 2 of the biggest.

And I know Deepak and the team are going to continue to drive a lot of connection to the customer that way going forward.

And your next question comes from Will Slabaugh of Stephens Inc.

You went to lap over some of the softer months and quarters in the past few years.

I was wondering how you're thinking about the promotional cadence in the back half of the year.

And in reference to your comment around being confident to the plans for the second half, I was wondering if you could give any more additional color there.

Yes.

Well, I think, if you think about our calendar, you're right.

We are lapping over basically a flat back half of the year, which gives us confidence.

We're really looking at the start to this year, and if you look at the last 3 quarters, we've continued to accelerate our 2 years debt comp, so we've been encouraged about that.

And I think you'll really see us to continue to play our game on one more visit, one more dollar going forward.

You're seeing that out there right now with a great Baconfest promotion that's on air.

You're also seeing us trying to leverage some of our digital assets as we've now got mobile ordering in over 90% of the system.

We're now offering a free JBC with any -- with your first mobile order, so we're driving awareness on that front.

So I do think a lot of it is the -- just the natural programming that we have to talk about what's the best at Wendy's, right?

Bacon, all about fresh, oven-baked smoked apple with bacon.

We already talked about the Spicy Chicken Nuggets coming back, so we'll have a lot of fun with that.

So that's already a known item out there.

And we'll continue to make sure that we got the right balance between the one more dollar and the one more visit messaging in the back half of the year.

But it's really going to come down to creating consistent experiences, delivering great food and continuing to create more speed at the drive-thru, which we've trained on heavily in the first quarter and started to see some of those benefits into the second quarter, and we'll see that into the back half of the year.

Great.

And a quick follow-up, if I could, on the company operating margins.

They flipped a little bit for you this quarter.

And it looks like commodities provided most of that pressure, so if you could confirm that.

And if there's anything else that pressured you as it relates to either higher year-over-year discounting or higher-than-expected labor or anything else.

Will, yes, we had a commodity inflation of about 2% in the quarter and labor inflation of about 3.7% in the quarter.

So in the face of the P&L, that actually created a decent amount of pressure for us.

With our pricing action that we had, we were able to offset some of it.

And obviously, also, some of our cost mitigation action helped a little bit as well.

So again, as we said in the prepared remarks, on a year-to-date basis, we are flat on prior year.

And our next question is from Gregory Francfort of Bank of America.

Thanks for the franchisee cash flow data.

It was helpful.

Just a clarification.

Is that per franchisee or per store?

And then another question just on -- I think you touched on speed of service a little bit and how that's becoming a bigger initiative for you guys.

I can't tell if that's going forward or if it's been something that you've been ramping up focus on.

But given that McDonald's has kind of made a big push there, and it seems like it's maybe a bigger focus for the industry, are you gaining traction?

What have you been doing?

And kind of when do you expect to gain traction?

Greg, onto the franchise profitability question, yes, it's on a per-restaurant basis.

So with the picture that I wanted to paint for you is profitability was slightly down in franchisees' restaurants, a little bit less down than actually what we've seen in company restaurants combined with the 2% sales growth that we have seen in the system, it basically leads to a flat absolute profit.

The second part, I'll let Todd tell you what's going on.

Yes.

Greg, on the speed front, as we talked about in the past, we did a lot of training in the first quarter this year, really, around staffing, around positioning, about being ready for peak dayparts.

And a lot of that had started to pay off here into the second quarter.

We did see some improvements sequentially on our speed of service.

Our staffing levels have been as good as it have been in a long time in our restaurants, which certainly helps.

We continue to put more tools into the restaurants to make sure that we're measuring speed consistently across the restaurants, so we can coach and help.

But we don't want to sacrifice the great hospitality that we know needs to also happen with speed, so a nice progress trend on that front.

And then we were a little bit slower than a lot of the industry on credit card processing.

We've made some software changes during the second quarter.

We're actually seeing some improvement on credit card processing.

We know we still have more opportunity to be even faster on our processing.

The team is working through that.

So those are items that will continue to drive opportunities on speed of service into the back half of the year.

And any quantification on how much faster kind of speed of service times you're seeing and kind of when that's changed?

Yes.

I wouldn't want to get into the specifics, Greg, because then you'd be asking me every quarter how many seconds we peeled off and how much does it actually translate into sales.

But it was a nice improvement from the trends which we're going on the wrong direction throughout last year.

So we're going in the right direction.

We're getting faster.

And our customers expect speed and throughput to be part of a great experience in our restaurants.

And your next question is from Eric Gonzalez of KeyBanc.

In the past, you've said that the company margins are a good proxy for franchise margin.

So I was just wondering if there's any onetime issues that may have impacted the company margins versus the franchise margins.

Or is that delta purely related to the comp delta?

Eric, no, there was not any onetime effect that was sitting in our company margin.

The only burden that we had in the company restaurants, we grew less than the system.

And as a result of it, obviously, we had a little bit less leverage.

And talked about why the company restaurants grew a little bit less is a little bit more headwind on bad weather and, obviously, with the company restaurants are not benefiting from the tailwinds of image activation.

And if I could just slip in a quick model question.

On the franchise support and other costs, I think they were a little lower than expected.

Did the cost of the scanners not hit this quarter?

Or is that for the back half, I think the incremental $10 million you mentioned in the past?

Yes.

So the scanners have not hit in the first half.

It's going to hit in equal portions in the third and the fourth quarter.

The reason why you see favorability on this line was this prior year.

Remember, last year, in the first half, in the second quarter, we reinvested some of our tax savings in technology investment with franchisees.

There was a couple onetime investments we made that we are lapping this quarter.

And you have a question from Matt DiFrisco with Guggenheim Securities.

Just a quick follow-up on that and then a question.

I guess so was that then, the $10 million, will be evenly dispersed sort of in the third and fourth quarters?

Matt, that will be correct.

And then my question is with relation -- with -- as it relates to your chicken sales.

Have you seen over the years, or if you can compare sort of your mix now, if it's shifting more towards chicken?

Is that helping?

I'm just curious on what your mix looks like.

And given the promotional activity, it sounds like you called out a lot of the crave on the chicken side driving that, has your percentage of chicken gone up?

Over the years, we haven't seen a big mix shift between the amount of hamburgers that we sell in our restaurant.

The amount of chicken has stayed fairly consistent.

There has been some trends around chicken into handheld.

And we had tenders, and we've had discontinued tenders from our restaurant.

But we feel good about a healthy mix between the options that we have in the restaurants with our hamburger business and our chicken business.

And Made to Crave, certainly, is a opportunity to continue to create news for both to do it operationally simple using ingredients that can translate across both hamburgers and the chicken sandwiches to ensure that we can continue to have the speed, but also trade folks up into great tasting a variety.

And you see that those are platforms that we can keep alive.

If you think about the hamburger side of the business, we just discontinued the Peppercorn Mushroom Melt and brought in the Bacon Jalapeño, so we're able to keep that fresh and healthy.

And we'll continue to do that on the chicken side, too, throughout the year.

And then I guess, as far as how does that relate to the mix going forward, I know you said that salads were a little soft, which pulled down the mix a little bit.

Is that sort of corrected for the second half as you look ahead?

Yes.

We're not worried about our salad business.

We -- we've got some great salad news that we'll have in the back half of the year.

We struggled a little bit with the cold wet spring.

We had the Parm Caesar salad that was out there, which was a replacement salad, so it wasn't an incremental new for a Spicy Chicken Caesar Salad that was out there.

And Berry Burst, with the cold weather and being near, too, just didn't resonate as much as it had in the past.

And some of this is a function of what we're lapping.

Last year, we had a Southwest Avocado Salad and the sandwich that were -- chicken sandwich that were promoted together, and those performed quite well.

So we feel great about the quality.

We feel great about the news.

And we feel great about the variety.

So it'll continue to be an important part of our quality message in creating choices on our restaurants.

And your next question is from Brian Bittner of Oppenheimer.

I know restaurant margins are not a huge component of your EBITDA changes, but it is a component.

And did keep your EBITDA outlook in place, but tempered your restaurant margin guidance.

Can you point out anything that's offsetting this?

And how are you thinking about allowing to keep that EBITDA guidance in place despite the restaurant margin?

Yes, Brian.

On the reason why we are able to actually maintain our EBITDA outlook is, really, to your point, it's a fairly small portion of our earnings makeup.

And again, for clarity, right, what drives the EBITDA growth in our EBITDA guidance, it's really our royalty growth behind the 3% to 4% system sales growth.

And we do expect absolute restaurant profits to be up on prior year, so we have a little bit of headwind from a profitability point of view, but we have a tailwind because of having more restaurants, partially because we build restaurants and, obviously, the acquisition effect from last year and this year that drives earnings growth, so the combination of the both it has nicely within the guidance range.

Okay.

And a follow-up, your 2-year same-restaurant during -- in the first half is very healthy, 3% or a little bit above.

It's obviously hard not to notice that your comparison gets so much easier in the second half.

Can you just frame a little bit more how we should be thinking about the second half sales trends?

Maybe talk about how you expect this value environment in QSR to play out in the second half versus the first half and your confidence on being able to hold these efforts checked in as against last year second half or whenever it had struggled a little bit.

I think you'll see a natural step-up just on the 1-year comps as we lap over the easier last year's.

Year-to-date, we're at 1.4% same-restaurant sales growth.

Our guidance is 1.5% just to 2.5%.

Between the comp, the balance on one more visit, one more dollar, the news that we can continue to create around Made to Crave, the news that you're hearing out there as we talked earlier around Baconfest and Spicy Chicken Nuggets coming back, all lend to help us continue to compete for the battle for share of stomach.

The work that we're doing on our operational side of the business that continue to drive speed and more consistent experiences, those will continue to play.

And then the digital initiatives, we don't see a huge tailwind from that in the back half.

We think that's going to take a while to drive awareness and ingrain, but we will see some tailwinds.

So that gives us confidence that in a category, and we saw this in the second quarter.

The restaurant category was flat from a traffic perspective, that we can continue to compete to drive traffic and do our restaurants, but really have a balance between price/mix and traffic.

And if you think about where we try to balance things out, we talked about traffic being down significantly in Q1.

Sequentially, traffic got a lot better in Q2.

It was still down slightly.

I would expect traffic to be down on a full year basis.

And -- but I do think it's a nice balance and rhythm that we're getting into between the one more visit and the one more dollar.

And we feel good about it from the economics of our business and for the support we provide our customers with great offering.

And we do have a question from Andrew Charles of Cowen.

Todd, curious what your brand insight say about plant-based proteins given the impact it's having in the industry and how this fit into Wendy's higher-quality brand positioning.

And then I also have a follow-up.

Yes.

Clearly, there's growth out there in plant-based proteins.

And we believe it is a trend that will be here to stay.

Folks are looking for options.

And we had talked a lot about the flexitarian consumer today.

It's still a small portion of the overall servings in the restaurant space, but we know it is growing.

We're taking a hard look at what the options would be for us in the restaurant.

As you know, we had a great-tasting Black Bean Burger several years ago.

It did well in some markets.

It didn't perform so well on others, but it was operationally complex.

So we'd want to do it The Wendy's Way, something that's unique to Wendy's, something that's not overly complex in our restaurant, but something that really hits for the consumer with the appropriate nutritional profile and something that the consumer is delighted with, but are operators are equally as happy with.

So we'll continue to look, and our culinary team continues to look at various options and probably something that we'll need to look at and we'll look at into the future.

That's helpful.

And then GP, I wanted to ask about the dynamics of franchisee profitability in 2018.

You've got a flat EBITDA from 2% sales growth.

Company margins declined by about 100 basis points last year.

Can you talk through the dynamics and the offsets of how EBITDA was preserved?

Again, on the food line, about in line with us.

We have a national system.

Wage levels are about the same.

The franchisees have performed a little bit better in the company, most on the labor line and on the occupancy cost line ever so slightly.

Whether the variance between the margin decline of the system and of the company is not really big.

It's several basis points only.

Your next question is from John Glass of Morgan Stanley.

Can you just drill down a little bit more on the North America comp?

It sounds like traffic was slightly negative -- less negative than last quarter.

You said mix was flat.

And so I assume the comp was price.

So can you confirm that?

And do you think you did better than the industry and what -- on what metrics?

And then finally, on comp, I thought mix growth was going to be a big driver this year, and lot of other brands are getting a significant amount of mix growth.

Was it just the salads that maybe hurt the mix this quarter?

What's the dynamic?

Or what prevented you from growing mix further this quarter?

Maybe -- and maybe had -- did have a target of higher mix this quarter?

Yes, John.

So a few things to make sure you got the confirmation.

As you know, we don't give out the exact composition of our same-restaurant sales growth, but I can give you the -- some additional color.

So we did benefit from pricing actions that were about in line with the food away from home inflation.

And this was partially offset by some customer account declines, and our mix in the quarter was flat.

That was more of a function of lapping over some really solid mix last year with the strength of the Southwest Avocado Chicken Sandwich and Salad promotion and the Baconator promotion.

And then this year, the salad business had been a little bit softer.

We saw a nice mix in the first quarter.

With the one more visit, one more dollar focus in the back half of the year and things like Baconfest that are out there right now, we continue to see some healthy mix for the remainder of the year.

Sequentially, the traffic did improve, so the declines were a little steeper in Q1.

We saw them just being down slightly in Q2.

So we're really working to make sure we got the right balance between the high messaging and the low messaging.

Our expectation would have been probably to have a little more mix, quite honestly, here in Q2.

We didn't expect our salad business to be as soft as it was this time around.

We had 2 great offerings with the Parmesan Caesar Salad and the Summer Berry Burst.

Sometimes, the timing of the salads with the weather and the patterns just don't play into the strength.

But it does give us some good insights that we're going to have to continue to keep our salads fresh and bring news, to continue to create variety in the innovation platforms, moving forward to create excitement for the customers.

And then in the non-digital and specifically delivery, you talked about awareness is still the opportunity there.

Is it getting more challenging to get awareness in delivery given there's just been more brands using more delivery -- third-party delivery agent, so maybe they're spending more in advertising?

Can you talk about what the breakthrough strategy is there?

And I think the -- only one of the big 3 that is only using one delivery party right now.

Is that an option to increase awareness and reach by having a second or third party?

Yes.

So I think a couple of things, John.

We've probably haven't done as much consistently as we need to.

We've done it in spurts.

We've seen some great support from DoorDash with some free promotions driving awareness to Wendy's.

And we always get great placement in the app that continues to drive awareness with DoorDash.

We've talked a little bit about it with some of our national advertising, especially as we get into some of the big sporting events that you can have your food now delivered.

We just got to stay consistent with some of that messaging because awareness still is quite low that Wendy's actually delivers food.

It will be a combination of Wendy's messaging and DoorDash messaging.

We're very happy with DoorDash.

They've continued to build out their delivery footprint for us.

And we got over 80% of our restaurants now serviced by DoorDash.

We've got an annual contract with them.

We're working hard to get delivery fully integrated into our POS to make sure that we drive order accuracy, we drive a better experience for the drivers, a better experience for our employees and, ultimately, get the food to the customer faster and more accurate.

All of those things will keep driving experiences and will help complement the awareness strategy that we have.

So I think it's just a slow and steady build to continue to drive awareness that you can get delivered food from a Wendy's and stay true to having that messaging out there consistently.

And staying on one third-party delivery platform is the strategy for now.

For now, and we'll continue to look at options to best serve the customer base to make sure we've got the right coverage and, ultimately, make sure that the economics work well for all parties, both the consumer and the -- and our operators.

But what we've been very pleased with the partnership that we have with DoorDash.

And with our footprint being more suburban than urban, they've been great partners really growing out that support for us.

And your next question is from Sara Senatore of Bernstein.

Just a couple questions on digital initiatives.

First, on the delivery question, you mentioned awareness as the real headwind.

But do you see any evidence that may be the fact that you're passing through a bit more of the delivery cost to the consumer than some of your competitors might be inhibiting it?

Do you have any sense of, like, price sensitivity around the delivery fees and service fees versus just kind of the flat delivery fee?

And then on the G&A side, do you see any evidence that you have opportunities to invest more heavily in technology?

It just feels like the same message has been emerging across this earning season, people have kind of picked up the estimates for whether it's OpEx or CapEx.

So given that I think we've heard a little bit less from you about some of these investments, is there any reason to think that those might offset some of the G&A savings that you have in place?

Sara, so on delivery, you are absolutely right, right?

We have chosen to pass on the fees to our consumers.

We are obviously watching consumer satisfaction very, very closely.

And consumer satisfaction remains high.

So the consumer is happy with the experience and is happy with the paying metric that they're paying back to us, so, so far so good.

But you're absolutely right that something in the context of the consumer economic model that's out there is something that we are watching.

But for the time being, we see no need to make any change on our model.

As far G&A is concerned, I think the headline for you is to start with, we're still finalizing the G&A restructuring plan that we filed in May of 2017.

That goes to plan is probably the first headline.

The second headline, yes, we definitely said that at the beginning of the year, we made investments of about $5 million between international and the digital experience.

Those investments are rolling through the P&L.

So -- and by the way, as a reminder, it's not the only digital investment we are making.

We are making the onetime investment of about $10 million on scanner.

And then in our capital budget, we have about $15 million sitting as an investment with Accenture to help us ramp our digital capabilities and to make sure that we are competitive in this field.

Hope it answers the question.

And your next question is from David Palmer of Evercore ISI.

This last quarter, did you run that $0.50 Frosty promotion a couple weeks longer than you did?

And was that a drag to check?

Was that a contributor to the check, particularly given that the benefit on that due to traffic, perhaps, wasn't as much of a lift as you would have helped with that cold weather?

And then looking ahead to third quarter, I think you'll be lapping that app download incentive you did last year.

I think it was a free junior bacon cheese.

Is that -- did I have that right?

And how much of a drag the same-store sales and, perhaps, even your restaurant margins was that last year such that we can look forward to a positive comparison this year?

David, on the $0.50 Frosty, the timing was a little bit different within the quarter year-on-year, but the number of weeks was about the same.

And it was something that, as we've now done it several years in a row, it just didn't seem to resonate as much this time around with the consumers than it has in the past, whether that was weather, whether that was other competitive dynamics or whether there was just wear out.

It's something that we continue to look at.

So that was a little bit of a -- against our internal expectation, a little softer than we would have thought.

It did have a nice change in customer count trends, but we didn't see as much of a nice check add-in or as much of the incrementality as we would have hoped for this time around.

We

did have that free app download last year, but you'll still continue to see a lot of different things in the digital space that really drive folks into the app.

So right now, you've got the free bacon junior cheeseburger with any mobile order out there.

We're going to have to continue to drive app acquisition through offers.

We're going to have to drive app acquisition through offers to get them to mobile order.

It's going to be part of how we create a great consumer base.

It wasn't a material drag last year.

It won't be a material drag this year.

But it's going to be part of the toolbox of things that we're going to continue to do to get folks comfortable using our digital properties moving forward.

And just on the second quarter, the industry comp, I think it was a bit much better than the first quarter.

And you're fairly consistent in that 1% to 2% range.

Are you looking at that industry trend and thinking that some major adjustments or any sort of adjustments to your value strategy or innovation strategy?

You already talked about it through, but is there -- how much soul searching are you doing about that market share trend in the quarter?

I guess if you look at market shares within the hamburger category, our burger category from a traffic perspective, we have again held share.

So we -- but we continue to look at folks driving a lot more price/mix realization than we have.

So we continue to look at our calendar to make sure do we have the balance right.

We have the balance between premium with things like Made to Crave and Baconfest appropriately set with value.

We have some great value offers in the 4 for $4 bundled meal and the $5 Biggie Bag.

Do we have it exactly right on the under $4 a la carte?

We'll continue to look at all of those things.

We'll continue to test and learn, make sure that we have the balance right because we do see some additional growth out there.

And we want to make sure that we achieve some of that growth by doing a healthy fashion between a nice balance on check and mix and our price and mix to get good check as well as bringing in customers into our restaurants more often.

And don't forget, we still got a lot of reimaging to do in front of us.

So we're 53% reimaged.

So as we continue to reimage, that will continue to be a nice tailwind to bring back lots of consumers and bring in new consumers.

And our next question is from Nicole Miller of Piper Jaffray.

Just one question for me.

You were talking earlier today about speed and accuracy and some of the training initiatives to improve both metrics.

My question is, how are you aligning incentives in terms of the bonus structure?

And then once you have gotten this through the system, what's to like in improving same-store sales?

Or asked otherwise, how quickly can you get satisfaction scores rebound?

Yes.

Nicole, in terms of speed of service, we don't have a direct linkage, so we don't have a metric to say, like, if you speed up by x seconds, you will get a payout.

We are compensating on sales performance as the ultimate outcome of all our efforts, so that's how we are linking kind of business outcomes to performance and pay is kind of the answer to your first question.

And what was the second question you had?

When you think about the impact that this will have, how quickly might we see that in performance?

So as you've worked on this in the past, there's probably a lag, right, where you do this for 1, 2, 3 months, 6 months, 9 months.

At what point do you see the top line improvement that you're looking for?

Again, from a behavior point of view, it will take time.

It took us quite some time.

It got a little bit slower.

It will take us a little bit of time to get faster.

Or from a pure behavior point of view in the drive-thru, on things like technology, so when we said like we shaved off time on the payment process, that's obviously -- that -- those levels we can push actually much faster with much more direct impact.

So I think it's a mixed bag, but behavior is usually what's taking this long.

And your next question is from John Ivankoe of JPMorgan.

I wanted to get a sense in terms of capital deployment.

And obviously, I asked this question in terms of your cash that you currently have in the balance sheet, which, I think, is $426 million.

You have $187 million remaining on your authorization, which actually expires fairly soon on March 1, and you bought back that $20.4 million of stock in the most recent quarter.

So you obviously have a lot more capacity than you're currently using both on your authorization and your cash that's on the balance sheet.

The debt side of your balance sheet is in good shape.

I mean I think it will be pretty normal to try to look for some signaling indications in terms of why you haven't used more of that buyback faster.

And if I can, I do want to ask the question in terms of potential international investments.

Were there any potential international investments that would be included in that fiscal '20 free cash flow number that you've given or if any potential international investments would occur in '21 or later?

John, you've got all the key factor right.

You're right, we're sitting at about $426 million of cash.

We need on a daily basis about $200 million.

So we're sitting on more than we need.

And so the cash outflows to think about is -- from the current balance is about $45 million in dividends.

We do have to satisfy, beginning of 2020, the FI settlement with about $20 million of cash out after tax.

And we will continue our track record and finish our share repurchase authorization, which is making -- going to make a big dent into our cash balance with about $187 million to go.

So the plan is in place.

The cash balance is going to come down.

In terms of your specific question, international, please be patient with us.

We want to talk about the whole international plot as part of the Investor Day.

Well, I think even that point that you just made is important.

I mean should we expect that authorization to be fully utilized?

Obviously, given market conditions and other types of technical factors, we assume by March 1, that entire $187 million for the stocks has been bought.

Yes.

We have a solid track record on share repurchase authorization.

We've finished all of them in the past.

I see no reason why we shouldn't finish this one.

And your next question is from Jeffrey Bernstein of Barclays.

Two questions.

One, just following up on the comp discussion.

I think you acknowledged that the second quarter, too, your stack accelerated from first quarter, which accelerated from the fourth quarter.

Just wondering if can offer any color on trends you saw through the second quarter and maybe into July.

Clearly, it was brought up earlier, but there's a divergence versus your largest peer.

I know you were doing some looking, but I'm wondering what you think at this point is the biggest opportunity to close that gap.

What -- do you think it's more on the value front or premium?

Or maybe at a certain daypart, do you think you might be lagging?

And then I had one follow-up.

Jeff, I won't get into inter-quarter trends.

We haven't gotten into that in the past.

We talked about we've got a nice promotion out there right now, but that's all contemplated in our guidance with Baconfest and the free JBC offer with any mobile order purchase.

I think that what we need to continue to do is make sure we've got the premium and the value mix appropriately balanced.

We've talked about this a lot in the past.

And we've changed the word first from high-low to one more visit, one more dollar.

And do we got that right especially when it comes so a la carte value?

We've got work to continue to do on that front, but we feel great that we've got great value offers at 4 for $4 and $5 Biggie Bag.

It's a nice trade-up options with things like the Frosty Cookie Sundae and Made to Crave offerings across the restaurant.

Got it.

And then just in terms of the recent management changes.

I'm wondering whether there's any change in strategy or what you see as maybe has been the biggest benefit, whether it's better visibility or line of control or whatnot.

Just wondering how you think that's played out thus far in terms of big strategic benefits.

Yes.

Great question, Jeff.

I think some of the biggest things are just in the world of moving a little faster on everything we do.

I talk a lot about speed with discipline to make sure that we better connect to the system, we better connect to the franchise community and, ultimately, deliver better solutions to bring in more customers more often, making sure that you've got the cross functional alignment of a team unified across the U.S., the same on international.

It's allowing us to make decisions quicker and, ultimately, test things faster, which will ultimately allow us to bring it to market quicker.

We've also been out doing a lot of town hall meetings with the franchise community.

And it really gives us an opportunity to reflect on what's working and what's not.

And as we step back and really look at what do we need to do to drive speed, what do we need to do to drive consistency within our restaurants and how do we make sure it's fast and friendly, and we really have a great tasting food delivered every single time, we've got some great things to look at how do we do those things even better into the future.

And your next question is from Jeff Farmer of Gordon Haskett.

I'm just curious how has $5 Biggie Bag sales mix or transaction mix compared to what you're seeing with the 4 for $4.

Just again curious which has been more popular with the customers.

Yes.

The good news is when you think about those as star value, I would say both have been very popular.

4 for $4 continues to resonate with the consumer, and we continue to see steady mix trends on that front.

$5 Biggie Bag, when promoted, was a nice trade-up and an incremental opportunity.

So they both played a role on our value proposition and have connected to the consumer.

And like we said in the past, the $5 Biggie Bag is a nice penny profit trade-up from 4 for $4, so those worked well.

But it hasn't traded down significantly from the premium offerings.

And with the news that we continue to have around Made to Crave on hamburgers and chicken, I think we got that balance right.

We've got to make sure we've got the a la carte value also balanced appropriately, too, moving forward.

And just a follow-up and using that as a segue to this question.

Just can you share some customer response to the Made for Crave line, especially relative to your expectations?

Yes.

All performing in line with the expectation.

The consumer is trading up more often in bringing flavor, bringing variety and doing it in a fashion that creates easy builds for our restaurant operators, but creates great tasting food on our premium offerings is a good combination.

So the feedback has been good.

We'll continue to look at the number of which offerings are on the Made to Crave hamburger and the chicken lineup.

And we'll continue to bring news as appropriate to keep it fresh and to keep it ownable, and you've seen that here in the third quarter with the Bacon Jalapeño replacing the Peppercorn Mushroom Melt as we talked about earlier.

And you have a question from Peter Saleh of BTIG.

I just wanted to come back to the conversation around delivery.

What are you guys seeing in terms of your delivery times as more brands are adopting this capability?

Are delivery times improving?

Or are they getting worse?

Any sort of metrics would be helpful.

Yes.

I won't give you the specifics, as we haven't talked about specific times, but I'll give you some general comments.

We were running pretty fast in overall delivery times.

We know the critical numbers to be under 30 minutes, and we were probably running slightly north of that through the first part of the last 6 months.

We've made some improvements to trend closer to that 30-minute mark.

But remember, we still got a process where a DoorDash order has to come in, get in line, make the order and then ultimately get it to the consumer.

And as we get things integrated into our POS, we'll be able to shorten that ordering time, create more accuracy and ultimately get the food to the customer even faster.

So it's -- we're in the ballpark or the sweet spot of where we need to be on delivery times.

Great.

Then any update on the kiosk in the company stores?

Any change there in terms of the adoption from the franchisees?

Yes.

Peter, we have about 400 kiosks in the system, so we have built a little bit.

So the conclusion is kind of the penetration of kiosks in our system is still relatively slow and probably slightly below expectations.

So we're still confident that the 200 kiosks or so of the company restaurants can return the investments by slightly check increases and labor savings over time.

So that's what we're trying to do advertise to franchisees to improve penetration of that effort.

And our next question is from Andrew Strelzik of BMO Capital Markets.

You're clearly seem confident in the ability to hit the unit growth target for the year and excited about the pipeline.

Can you provide a little more color on that pipeline, where it sits today versus where it normally would this time of year?

And maybe what's driving some of that confidence in hitting the number for the year?

And related to that, I believe the expectation has been that the closure rate would come down.

And it doesn't really seem like we've seen that materialize, especially after a big number last quarter.

So when should we start to see some of that come to fruition?

Yes.

So if you think about the pipeline, we're very comfortable with the pipeline.

We think we've got a strong pipeline, and it's only getting stronger with a lot of the commitments we're getting from the groundbreaker incentive.

Those are a little further out.

But if you think about where we are at this stage of the year with either open or opened or under construction, we're probably a little bit of ahead of pace from where we were in prior years.

From a closure perspective, remember, we did close an international market, which had an impact on the closures in the first quarter, small AUVs and not much of an impact to our financials.

And as we talked about earlier, we've got some relocations that we'll continue to work through on the closure side.

So there will always be a healthy clip of closures, like we mentioned earlier on the call.

I think it's going to be fairly consistent into the out years.

What you'll see is the acceleration of the openings on traditional restaurants and nontraditional locations.

And your final question comes from Katherine Fogertey of Goldman Sachs.

I was wondering if you could give us a little bit of update or anything you're seeing that has changed in the quarter about the incrementality and ticket lift around delivery.

And then on that point, if you could give us any kind of context about how you see the economics of delivery playing out as you're going to be rolling out delivery in your app and what that would look like relative to directing customers to the DoorDash website.

I'm really kind of curious how you think that mix will look over time.

Okay, Katherine.

On delivery economics in itself, we see actually very steady trends.

We see higher check sizes than a regular non-delivered order.

And the uplift that we get out of it is consistent over previous quarters, right?

So the trick to build this delivery business is to improve frequency through awareness, driving strategy.

In terms of economics, again, the economics for the consumer are not going to change within app versus out of app.

We are continuing to actually pass on all the cost that we have to the consumer.

What you do have is the payment cost related to in-app is going to go down slightly because if all use credit cards the pedestrians are using are actually attracting a fairly high fee that needs to be paid for.

So economic model, overall, is slightly improving.

Overall, not a massive change, but the one reason why we are really investing in this is to really get to know the delivery customer much, much better since we are going to collect all its data and demographics.

I guess on that point, too.

That's very helpful.

Would you consider -- or do you have plans to charge a lower price through the app than you would if a customer would go through the DoorDash site itself?

Again, at the moment, we're not contemplating this.

We're working through the final details.

It's obviously an option.

Remember, right, the consumer is price insensitive, right?

We are -- they're not getting the sticker shock when they get the ticket because they are worth what our pay metric is.

It's very, very favorable on that type of order.

Okay.

Great.

And I just have one final question.

With McDonald's rolling out Dynamic Yield on drive-thrus -- more drive-thru this week, have you guys thought about potentially investing in technology that would integrate decision logic into the drive-thru process for you guys?

Or how do you view the potential opportunity there?

Again, you're putting the thing on a big opportunity, right?

The big opportunity in the digital age, how do you unlock the drive-thru, right?

They're obviously helping with mobile ordering, but what added tools you have to improve drive-thru speed and overall experience as 2/3 of our consumers go to the drive-thru.

That interactive menu boards that McDonald's is investing in is -- might be the unlock, but not necessarily the only option that you have to actually make the progress in there.

So there are couple of things that we, on our side, are starting to employ.

Thank you, Katie.

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 at our Investor Day in October.

Have a great day.

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