Wendy's Co (WEN) 2020 Q3 法說會逐字稿

Good morning.

Welcome to The Wendy's Company earnings results conference call.

(Operator Instructions)

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.

Thank you, and good morning, everyone.

Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website ir.wendys.com.

Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release.

This disclosure reminds investors that certain information we may discuss today is forward-looking.

Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements.

Also, some of today's comments will have 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; and our Chief Financial Officer; Gunther Plosch, will provide a business update and share our 2020 3rd quarter results.

From there, we will open up the line for questions.

And with that, I will hand things over to Todd.

Thank you, Greg, and good morning, everyone.

As we jump into our third quarter results, I want to start off by saying that we are incredibly proud of the results we've posted against the backdrop of the global pandemic.

I want to send a huge heartfelt thank you to all our employees and franchisees for the ongoing partnership as we are navigating to the challenges that we have faced, and in turn, delivering these very strong results while building an even stronger Wendy's.

In the third quarter, we delivered our highest global same-restaurant sales growth number in over 15 years on the strength of our breakfast daypart, our growing digital business and increased mobility.

This momentum continued into October, where we saw U.S. same-restaurant sales of 6.6% on a 1-year basis and in the low teens on a 2-year basis.

On top of the sales momentum we have built in the third quarter, we also grew our restaurant margin to approximately 17%, and we did this despite significant commodity headwinds.

Our focus remains on ensuring that we have a strong restaurant economic model across our system, and we are doing just that.

Our cash balance continues to grow, coming in at over $350 million at the end of the quarter, up from $275 million at the end of July, driven by our strong third quarter results.

We also benefited from the collection of 2 additional royalty payments as our franchisees paid back the amounts that have been deferred in the second quarter as part of our COVID relief package, a testament to the health of our franchise system.

We announced this morning that our Board has approved a quarterly dividend of $0.07, which is an increase of 40%.

Our strengthening liquidity position, along with the momentum we are seeing in our business, supports this increase, while still having plenty of flexibility to invest in growth, which is priority #1 in our capital allocation policy.

As we look to the future, we remain committed to our long-term growth initiatives, which are to build our breakfast daypart, grow our digital business and accelerate growth internationally.

Our goal remains the same, which is to drive efficient, accelerated growth, and we continue to deliver on that commitment.

Moving on to provide more detail on our recent U.S. sales performance.

We have momentum, and our 2-year same-restaurant sales accelerated meaningfully in Q3.

Our same-restaurant sales in the third quarter significantly improved to 7% on a 1-year and 11.5% on a 2-year basis as we saw customer counts continue to improve as mobility increased.

We launched 2 new products within the quarter and the Spicy Crispy Chicken Sandwich, featured in our 4 for $4 platform, as well as the Pretzel Pub Cheeseburger and Chicken Sandwich, which we added to the Made to Crave lineup, both which helped us lap our Spicy Nuggets relaunch from the prior year.

On a 2-year basis, our same-restaurant sales improved each month throughout the quarter to 14.4% in September, underpinning the strength we are seeing in our business.

We have added another layer of growth in breakfast, and it continues to perform well.

We have also seen our rest of day business grow, which is very promising.

In fact, our rest of day business was up over 5% on a 2-year basis, which shows the strength of our underlying business.

We continue to see very strong average checks as ordering sizes have remained elevated, which is helping to drive restaurant margins across the system.

Another key indicator of success for us is how we compare against our QSR burger peers within NPD CREST.

And year-to-date, Wendy's traffic trends have outperformed QSR burger chain leaders versus the same period a year ago.

As we look to the fourth quarter, we are excited about the marketing and promotional plans we have in place.

We will continue to drive awareness across our breakfast business as well as launch our new Classic Chicken Sandwich that has been renovated and will allow us to compete with anyone.

Sales growth, share growth and profit growth are a winning formula that we plan to continue to execute on moving forward.

We could not be more pleased with our breakfast daypart as average weekly sales continue to grow in the third quarter.

And on a percentage of sales basis, it remains strong at over 7%, even as our rest of day business continued to strengthen.

We have been seeing some very positive trends on top of the fact that breakfast is providing a sales and profit layer that we did not have previously.

We have now been able to get data on customer repeat, and we are seeing this to be very strong.

We are also seeing our customer satisfaction scores be our highest at the breakfast daypart as customers are loving the offering that we have.

Our breakfast daypart has proven to be easy to staff, operationally simple and profit-accretive to our restaurant economic model, and we will continue to build on this success.

Our breakfast awareness levels have remained consistent at approximately 50%.

We plan to continue to support breakfast with our incremental company advertising spending to drive trial and frequency as we ingrain Wendy's into consumers' morning routines.

We are confident that we can continue to grow this business into the future as more and more people fall back into their daily routines.

The great news is the messaging around the quality food we deliver at breakfast halos back to support our rest of day business.

We said that we are going to bring America the breakfast they deserve, and we are delivering on that promise.

The key unlock for this business moving forward will be mobility.

As this improves, coupled with our incremental investment in marketing, we believe that this business has a ton of upside.

Now jumping into digital.

Our digital business continued to grow each month in the third quarter, coming in at 5.5% of sales in the U.S., which is more than double the amount we had in 2019.

We exited the quarter in September with digital sales at over 6%, and we are outpacing our peers in digital traffic share growth.

We are very pleased with the launch of our new Wendy's Rewards program, and the early results are in line with our expectations.

We have seen a significant jump in app downloads as those have increased over 15% since we launched Rewards.

We have also seen higher average checks and higher frequency, both of which were expected benefits of the program.

We are excited about this program, and we'll continue to drive awareness through compelling offers and within our marketing messaging to grow this program in the coming months.

Digital is one of our key growth pillars, and we continue to pace ahead of our expectations.

We expect this business to build even more as we continue to make significant investments in this area.

Our restaurants are essential to feeding our communities, and we could not do this without great leadership and support from our dedicated restaurant teams who are on the front lines every day.

We have now opened dining rooms in many of our restaurants.

And as of the end of September, approximately 75% of the dining rooms were open for carryout, and in some cases, dine-in services.

As we have opened dining rooms, we have seen about 10% to 15% of our sales coming through either carry-out or dine-in.

We will continue to reopen in a thoughtful phased approach to ensure the safety of our crews and customers as well as making sure that it makes sense economically.

Our staffing levels remain strong in our company restaurants with the lowest turnover rates that we have seen in over a decade.

We know that when staffing levels are good and turnover is low, that we can drive an exceptional customer experience, and we are doing just that.

Customers are noticing these operational improvements as overall satisfaction scores, including speed, taste and order accuracy have seen significant improvements.

An outcome of all of these things has been an accelerating restaurant margin in our company restaurants, which increased 70 basis points from the prior year despite a challenging commodity environment.

We believe that we have found operating model efficiencies which should result in strong restaurant margins on a go-forward basis.

Our international business also improved significantly in the third quarter.

We now have approximately 95% of our restaurants operating and saw our sales turn positive in Canada and Puerto Rico, which comprised about 75% of our international sales.

In Canada, our digital sales penetration has doubled from last year, reaching almost 10%, and we continue to outperform our QSR burger competitors in both dollar and traffic share gains.

In Puerto Rico, our same-restaurant sales grew to almost 20% as we've leaned in on our local fresh beef differentiation.

On the other hand, we have some high potential emerging markets where the recovery period has taken a bit longer.

But they are showing improvement, and our franchise partners remain excited about the future.

We also continue to make progress towards our plan to expand into Europe and remain on track to open restaurants in the U.K. in the first half of 2021.

We have been building a top talent team on the ground, have a strong pipeline of locations, including some with drive-thrus and are engaging with potential franchise candidates to build out the market with us.

International expansion remains 1 of our 3 growth pillars, and we are excited to continue to grow our Wendy's footprint around the world.

I wanted to provide an update on some enhancements that we have made as an organization to continue to drive growth.

As we previously announced, we are very excited to welcome Kevin Vasconi to the Wendy's family as our Chief Information Officer.

Technology is a critical growth driver for our brand, and Kevin is the ideal leader to join a talented team and help take us to the next level.

We are confident that his industry-leading experience will help us to accelerate the growth we've already seen across our technology channels in 2020.

We have recently taken the opportunity to look at the way we work, and we believe there is a better way to utilize our resources to drive the business.

We've made the decision to reorganize our operations team in the U.S. under 1 leader responsible for company and franchise restaurants, and Deepak Ajmani has assumed this position.

He has over 30 years of Wendy's experience, and we are confident he will help us create even better and more consistent experiences across all our restaurants.

We are also optimizing our field structure to ensure that our restaurants are set up for success moving forward.

Lastly, we also expect to incur contract termination charges, including the planned closure of certain field offices as we have found that people can be just as effective working remotely.

As a result of these changes, we implemented a restructuring plan with expected total cost of approximately $7 million to $9 million.

Investing in growth is our top priority, and we will be taking the savings from these changes and putting them right back into the business to fuel growth.

We have made the decision to create a diversity, equity and inclusion office and are currently in the process of hiring someone to lead that team.

We are also reinvesting back into our technology organization to continue to drive that business.

Lastly, we are adding resources to our international franchise recruiting team to support our international expansion plans.

Our company-wide response to the pandemic reinforces the values that Dave Thomas instilled over 50 years ago when he founded this great brand, the values that continue to guide us today.

The health, safety and well-being of our teams and customers has always been and will continue to be our top priority.

Our system will remain focused on continuing to provide essential access to high-quality, affordable food to all our communities around the world.

A differentiator for us continues to be the relationship that we have with our franchisees.

The partnership across our system this year as we have navigated these unprecedented times, has been nothing short of incredible.

We recently hosted our annual convention virtually, and it was great to get our system together to highlight all our accomplishments over the last year, while aligning everyone behind the plans to finish the year strong and continue the momentum into 2021.

We have successfully partnered with our franchisees to navigate through a global pandemic and launched our breakfast daypart, and along the way, built an even stronger culture in support of the special brand.

Everything we do at Wendy's is focused on bringing our vision to life, which is to become the the world's most thriving and beloved restaurant brand.

With the momentum that we have in our business on the top and bottom line as we continue to execute against our strategic growth initiatives, we are well on our way.

I will now hand things over to GP to talk through our third quarter results.

Thanks, Todd.

We are very proud of our 3rd quarter results in the current environment, which showcased very strong same-restaurant sales and core earnings growth.

Our global same-restaurant sales accelerated in quarter 3 on the strength of our breakfast daypart, which contributed approximately 6.5% to our U.S. same-restaurant sales, a growing digital business and increased mobility.

The momentum that we were able to build in our business helped us to successfully lap the strong Spicy Chicken Nuggets results from the prior year, and on top of that, achieve our highest global SRS in over 15 years.

Year-over-year company restaurant margin increased by 70 basis points to approximately 17%, primarily driven by higher average check and lower-than-expected local advertising spend.

These benefits were partially offset by customer count declines as a result of the pandemic, higher commodity cost of approximately 5% and labor rate increases.

The increase in G&A was primarily driven by lapping a reduction in the legal reserve related to the financial institution case in the prior year.

Excluding this, G&A would have decreased by approximately 3%.

This was due to a lower incentive compensation accrual and reduced travel, partially offset by an increase in professional fees, which was mainly driven by higher IT related costs.

Adjusted EBITDA increased by about 8% to $119 million.

This was primarily driven by higher franchise royalty revenues and fees, lower franchise support and other costs as we left part of the company's investment in digital scanners and an increase in company-operated restaurant margin.

These benefits were partially offset by our investment in incremental breakfast advertising of $6.2 million in the quarter.

Adjusted earnings per share was flat to prior year at $0.19.

The increase in adjusted EBITDA we benefited from was offset by a higher year-over-year tax rate, primarily due to a tax reserve release the company recognized in quarter 3 of 2019.

Our free cash flow in the third quarter increased significantly to approximately $120 million as we benefited from 2 additional royalty payments.

These additional payments were due to the repayment timing of the deferrals that we allowed under our COVID relief package to franchisees.

We did not experience any material collection issues related to these repayments, which demonstrates the financial strength of our franchise system.

Year-to-date, excluding the $24.7 million payment related to the settlement of the financial institution case, our cash flow was approximately $158 million.

We're confident in the momentum we have in our business on the top and bottom line as we head into the fourth quarter and as we look ahead to 2021.

Given the continued volatility and uncertainties surrounding the future impact of COVID-19 on the global economy and its impacts to our company, we are still unable to provide a 2020 and long-term outlook.

We are planning to reintroduce guidance as part of our fourth quarter earnings release in early March.

We did, however, want to provide an update on a few underlying aspects of our financial outlook.

We are now estimating commodity inflation for 2020 to be approximately 2%, which is locked in for the remainder of the year.

This is a decrease from our prior expectation of 3%, driven primarily by lower-than-projected beef prices in quarter 4.

We are now expecting G&A of approximately $205 million as we continue to manage our G&A spending tightly.

Our annual tax rate is expected to be approximately 25%, which is at the low end of our previously provided range.

Finally, we expect capital expenditures to be approximately $70 million, which is an increase of about $15 million versus what we had previously communicated.

As our business has improved over the last few months, we made the decision to ramp up capital spending in development and technology to set us up to drive growth in the future.

Lastly, let's talk about our capital allocation policy, which remains unchanged.

Our #1 priority remains investing in profitable growth.

We are disciplined in our investment choices and always focused on ensuring a strong financial return for our franchisees and for us as the franchisor.

We have done so with our $15 million incremental advertising investment for breakfast in 2020, and we plan to continue our incremental spending in 2021.

As previously disclosed, our largest franchisee, NPC filed for Chapter 11 bankruptcy and is seeking to sell its Wendy's restaurants through a court-approved auction process.

We are actively participating in the proceedings and continue to evaluate our strategic alternatives.

This includes assuring our content rights of franchisor as well as the possibility of acquiring 1 or 2 markets as part of a consortium bid with a group of prequalified franchisees who would purchase the other markets.

As we have said previously, we may buy and sell company-operated restaurants to enhance our restaurant footprint.

It is our intention to maintain our approximately 5% ownership.

We announced today the declaration of our quarterly cash dividend, and we are increasing it by 40% to $0.07 per share, payable in December.

Our strengthening liquidity position, along with the momentum we are seeing in our business, support this increase while still allowing us to invest in growth.

Lastly, we plan to utilize excess cash to reduce debt and repurchase shares.

We began repurchasing shares again in the third quarter, and since that resumption, have bought back about $4 million worth.

We currently have $81.7 million remaining in our existing $100 million share repurchase authorization.

We are well on our way to returning to our powerful financial formula.

We are an accelerated, 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 close it out.

Thanks, GP.

As a reminder, due to the ongoing travel restrictions, all our investor meetings for the remainder of 2020 will be virtual events.

First off, we'll be doing an NDR in Boston next Wednesday on November 11 with Wells Fargo.

We will be attending 2 conferences, which will be the Deutsche Bank Conference on November 19 and the Morgan Stanley Conference on December 2.

Lastly, we will be hosting 2 investor calls, 1 with Kalinowski Research on November 16 and 1 with MKM Partners on November 18.

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

As we transition into our Q&A section, we will be doing this slightly different this quarter.

Due to the high number of covering analysts, we'll be limiting everyone to 1 question only.

With that, we are ready to take your questions.

Your first question comes from David Palmer of Evercore ISI.

Gosh, 1 question here.

I guess the question would have to be about breakfast.

And if you could just make a statement.

I think people can see that the breakfast mix has been strong, around 7%.

That looks to be more or less what your comps are.

How are you thinking about the breakfast learnings from this year?

What's gone better or worse than expectation?

And then how should we be thinking about the potential for Wendy's making an extra marketing contribution for breakfast in '21?

Yes.

David, great question.

I mean, in the face of the pandemic, with mobility being down, morning routines completely disrupted, we're very happy with how our breakfast business has been performing.

And we still have a lot of opportunity to continue to drive awareness.

We're at that 50% level.

Have a lot of opportunity to continue to drive trial.

We're seeing great repeat with some of our heavier users.

So we know there's a great opportunity to get our breakfast offerings into more consumers.

And in fact, a high percentage of our existing Wendy's customers haven't even tried our breakfast offering as of yet.

So we're feeling very bullish about the future on where breakfast can go as routines come back, as mobility continues to increase.

We will continue to provide appropriate support on our breakfast daypart.

But it is a nice mix between what we do rest of day, what we do in breakfast as it all halos back to both dayparts, really separating ourselves on quality.

Your next question comes from John Ivankoe of JP Morgan.

The question is on the high-profile hiring of Kevin Vasconi as your Chief Technology Officer.

Obviously, coming from Domino's, a great technology company, great user of data, what have you.

I don't want you to necessarily comment on what Domino's has done or what parts of their strategy have been successful.

But I would like to know what; kind of core attributes or change that you think Kevin could bring to the organization as it relates to things like loyalty, use of specific customized consumer data, potentially delivery, if that was something that you've talked to him about.

Or maybe using technology and data for store locations.

So am I kind of thinking about that higher in the right way of kind of driving those functionalities?

Or what specifically do you think you can -- or functional attributes that you think Kevin could add to Wendy's in the, I guess, a short to longer term?

Thanks, John.

Very pleased to have Kevin join our organization.

Not only does he bring a great track record to the table to help Wendy's, take our technology journey to the next level, he's a great cultural fit for our organization.

And as you think about the progress we've made, digital mix being at 5.5%, actually exiting the third quarter at over 6%, we do have a strong foundation.

And we're pleased to have Kevin here working with a really strong technology team underneath him to continue to raise the bar and ingrain more of this into our restaurant operating model.

We've seen a lot of app downloads with loyalty, and we're seeing increased frequency.

We're seeing a nice average check.

How do we continue to drive that even further?

How do we let technology around mobile ordering get really complemented with mobile grab-and-go and curbside delivery into our restaurants to create an even more seamless experience?

And ultimately, how do we capture and leverage all of this data to really have more personalized communication, one-to-one communication?

And those are all things that Kevin has had in this past that we've been working on, that with his leadership, we're confident that can continue to accelerate into the future.

Your next question comes from Andrew Charles of Cowen.

Given the sales strength, the domestic system is seeing, along with the strong flows that you have been observing so far in 2020 as well, while you're doing work before the pandemic to help shrink the size of the restaurant prototype, at least in the dine-in and perhaps the elimination of dine-in altogether to help maximize ROI, can you talk about your confidence that this will manifest in a development uptick in 2021 domestically?

It's a great question.

And as you know, we've had a variety of footprint.

So we've been well ahead of the curve on different sizes.

We have traditional freestanding restaurants at 65-plus seats all the way down to smart 2.0 designs with 30 seats.

We also have a new appetite to look at drive-thru-only restaurants, and we've got some prototypes that are going out in place to continue to test and learn on that front.

And I think it's important to have a portfolio of restaurants in different sizes to really make sure that we've got solutions for any trade area that's out there.

And if you think about the access to real estate, you think about the access for conversions, and we've got a conversion task force in place and really comfortable converting any type restaurant into a Wendy's restaurant, I think all of those play into an opportunity to accelerate development into the future.

But most importantly, the confidence in the health of our franchise system.

With the franchisees completely repaid all of the deferrals, their confidence in where breakfast can go post pandemic, their confidence on where we're going on the digital front, moving into the future and the work that we've been doing to create even better restaurants with the margin profile, that's going to lend into a ton of confidence to continue to rebuild that pipeline across the U.S.

Your next question comes from Eric Gonzalez of KeyBanc Capital.

Just want to ask you about October.

Obviously, really strong momentum in the month.

And I'm just curious, you launched this new Classic Chicken Sandwich.

I'm wondering how that might have factored into those results and whether you're getting good trial versus expectations?

And then on that sandwich, do you think you're getting credit from the consumer for the quality improvement and whether that consumer is willing to sort of pay up to the $4.99 price point, which is a little bit higher than some of your competitors.

Yes.

If you look at our October results, Classic Chicken hasn't even really been launched.

We've had some PR, started to roll into the restaurants late in October.

But we're really scheduled to launch this in a big way starting next week.

We're going to include it in a 2 for $5 promotion to ensure we drive a lot of trial.

The work that the team did to create a new, crispy and juicier fillet, we're quite proud of.

New build with the pickle on it.

We think this has got a great opportunity to continue to drive a lot of business on the chicken side of the equation and a nice complement to our lineup as we continue to upgrade the quality of our food on our premium items on the chicken side as well as the performance you've seen on things like the Pretzel Pub Cheeseburger and Chicken Sandwiches that really got our Made to Crave units the highest that we've ever seen.

So really trading folks up into our premium items, it's driving some nice mix.

And importantly, getting folks into our highest quality food items.

Your next question comes from Jeffrey Bernstein of Barclays.

Just a follow-up.

Seem to be short-term focused, but it just seems like in the recovery phase, it's kind of required here.

So in October, you mentioned that the comps were up 6.6%, and I think you said the 2-year stack was in the low teens.

I know in the slide deck, you talked about, you were running a 14.4% in September.

So I'm just wondering that low teens, is that comparable to that 14.4%, implying that in a very difficult month of October, you've held steady.

Just trying to assess whether you're seeing anything with COVID spike or dine-in restrictions increasing or maybe colder weather kicking in?

I think some have actually said that on no one wants any of these factors, many of them can actually help quick service rather than hurt them in terms of some of those factors at play.

So just trying to get a better sense for October relative to September and the recent factors that have perhaps pressured some of the restaurant industry.

Jeff, this is Gunther.

Yes, you got the numbers right.

It was 6.6% in October and low teens on a 2-year basis.

We're happy with the results, so we continue to have momentum, and it's really in line with our financial plan that we have in the fourth quarter.

So we're happy about it.

There are a lot of factors that could be playing in.

We don't want to go into the details of this on the call, but our takeaway is we are on plan with how we performed in October.

Your next question comes from Nicole Miller of Piper Sandler.

Since there's a little bit of question around 5% of the enterprise, could you just talk about the health of the franchise system overall and be a little bit more detailed?

If you think about your top volume performers, for example, what are the common traits?

Are they spread among vintage and geography?

If you think about your top cash flow performers, perhaps, what are some standard best practices?

Yes.

If you look at the health of the franchise system, by and large, it's very strong.

I mean I think the real testament is all the deferrals that we put in place through the early days with the COVID relief package, getting all of that repaid, the momentum that we're having in our business, the margin health that we're seeing right now, the prospect of margins continuing to be strong as commodities turn a little more favorable into the fourth quarter, those are all positives for the system.

And we're very proud of where the system sits from a profitability perspective.

In fact, coming out of our virtual family update, our virtual convention, if you will, we've got 85% of our franchise community saying that their financial health is in a better position this year than it was last year.

So that's a good testament to how we're performing, and we'll continue to build on that momentum and leverage that into the future.

Your next question comes from Chris O'Cull of Stifel.

Todd, it's encouraging to see the breakfast sales mix, a relatively stable sales recover for the remaining dayparts.

But with the comp heavily skewed by check average changes, it's hard to know whether breakfast is generating the number of transactions that you guys initially expected to justify continuing to move into that business.

So can you shed some little more light into the breakfast economics or franchisees compared to where you expected it initially?

Yes.

Chris, clearly with mobility down and the morning routine disrupted we've been hoping for even more on the breakfast front, but we're still at the low end of what we had guided to a year ago, which was pre pandemic.

So with all of those headwinds to still be within that guidance range, we feel very proud.

You're seeing average check to be a little bit higher as folks are utilizing breakfast a little bit differently as items per for half hours seem to skew a little bit later in the morning rather than early in the morning.

You do see some of those breakfast items being brought back home.

But when you look at where we stand with the performance in our business, knowing that we've only got 50% awareness today, knowing that we have so many opportunities on trial, I think we stood in a very good position today to continue to drive growth and ingrain the habit and drive a nice tailwind for our business for years to come.

Your next question comes from Jeff Farmer of Gordon Haskett.

Just keeping in with breakfast here, I'm curious if the competitive response to your entry to breakfast has surprised you guys in any way?

Was it more aggressive, less aggressive?

Do you think there's more to come in terms of sort of competitive response as we get deeper into the fourth quarter?

Any color there would be helpful.

Jeff.

Yes, we're happy with our breakfast performance.

And as we said repeatedly in the past, whenever we launched breakfast, we knew it would be competitive.

I would say, early part of the year, it was probably less competitive than we thought.

It has stepped up a little bit and we are prepared for it.

And we continue to be pleased with our breakfast results, right?

Our sales have grown in the third quarter versus the second quarter.

We had great sales levels.

And as Todd said, a lot of tailwinds to be had.

There's one interesting factor that I want to point out, we always said it's going to take a fair amount of time to ingrain this habit.

And as you know, we had breakfast in about 350 of our restaurants, the old version of it.

We converted this.

And then what's really encouraging, there was a habit ingrained.

With advertising and all the stuff we have done on the promotional front, the sales on those, what we call legacy restaurants are up year-to-date, on a 40% versus prior year.

So it goes to show this breakfast is well-liked.

And as we keep getting added and building the habit, keep making investments this year and next year over and above what we collect from our franchisees.

But we think we have created a very, very solid breakfast business.

Your next question comes from Alton Stump of Longbow Research.

I just wanted to ask kind of -- back to point about your average ticket being up so meaningfully.

Just kind of ballpark as to how big that impact is by daypart.

I presume that kind of lunch preference might be bigger than dinner.

But any kind of color you can give us as to how the average ticket trends over the course of this daypart?

If you look at average tickets, it is up double-digit year-on-year.

And it's really primarily driven by items per transaction.

So items per transaction for -- within the restaurant are over 10% today.

And you're seeing some of that driven by the dinner occasion.

You got full family dinners being brought home.

You're seeing some of that being driven by digital, as digital checks are a little bit higher.

And we're also seeing to complement that dinner comment, larger family meals being taken back to the house.

So you're really seeing the dinner daypart help drive some of that average check with the resiliency of that daypart.

But you're also seeing it across the rest of the day with a lot of schools at home or hybrid.

There's a lot of meals that are being bought back to the house, which is contributing to the higher average check.

We're seeing a little bit of mix, which is great as we trade folks up into our premium items between 2 for $5 and Pretzel Pub.

And we have a little bit of pricing, but a lot of it is this average items per transaction.

Your next question comes from Dennis Geiger of UBS.

Just wondering if we could talk a little bit more about the breakfast awareness levels.

I think it's at the 50% level.

Are you surprised that's where our awareness is, that it hasn't moved up some?

Is that generally the expectation?

And just kind of going back to the drivers of the awareness from here, is it increased marketing?

Is it increased mobility?

Is it utilization of digital and loyalty efforts more?

Or GP, I think you talked about just time for the breakfast business in general.

Is it just time to build that awareness?

Just curious on the biggest drivers of growing that metric.

We are happy with our awareness levels.

We came out of the gate screaming, definitely beating our expectations.

And yes, in the environment we are in, where the morning daypart is still heavily affected, and it's been really below our prior year as a category, we are happy that actually in the context of our all the competitive activity that goes on, that we actually are maintaining our awareness levels.

What's the tailwinds we are believing in?

It's clearly trial, trial trial, right?

We have strong repeat numbers.

But we have still a fairly large percentage of even our own existing customers that haven't tried our own breakfast yet.

And there's obviously still a lot of other customers that have not yet tried us, but they're enjoying breakfast from other competitors.

The marketing investment behind it, the building of our loyalty base, all of those pushes are going to make sure that we are penetrating the market.

As we said, it's a longer-term play.

We are willing to invest over and above for a 3-year period.

We're doing this, this year.

We are definitely doing it next year as well.

And that money and that focus is going to drive trial and repeat and driving business for us.

Your next question comes from Brett Levy of MKM Partners.

Obviously, we've seen a lot more of incremental costs out there.

And now that you have a new dedicated Chief Operating Officer in place, how are you thinking about the way you're going to approach the inbox operations, whether it's from menu or from pricing, these additional tech investments, especially as we're in an environment where there are incremental costs related to the crisis as well as we just saw referendum with increased minimum wage?

And once they -- so just how should we think about that for the intermediate and the near-term and the intermediate term?

Yes.

A couple of things for you, Brett.

So first of all, on restaurant margin, right?

We are very happy with our restaurant margin performance in the third quarter at 17%.

And keep in mind, there was 5% commodity inflation, 4% labor inflation.

So that combined is actually creating a 270 basis points headwind for us.

And despite that headwind, we were able to actually expand profitability by about 70 basis points.

And we have, obviously, the additional run cost on the PPE and what have you, that's obviously digested in our financials.

As we fast forward into quarter 4, definitely, commodities are going to be slightly deflationary.

Labor inflation is going to be still in the 4% range.

We're, therefore, expecting with the continued sales growth that, our margin in the fourth quarter is sequentially going to improve versus the third quarter.

And without giving real guidance for 2021, I would also say that we would expect that our restaurant margin in 2021 is going to be up versus 2020.

That's kind of on the restaurant margin side.

On the G&A side, we're going to stay disciplined, right?

We are definitely wanting to get to 1.5% of sales level.

It will take a little bit of time.

We've first talk talked about an innovational restructuring that was really in the spirit of accelerating growth.

So the savings that we generated out of those actions that led to the restructuring plan, they were basically redeployed into a couple of things, right?

They were redeployed into a diversity, equity and inclusion office, into a little bit more technology investments because we think that's the place to make investments, and last but not least, also international franchise recruiting.

So we're trying to manage it carefully and start trying to stay an efficient company.

Your next question comes from Andrew Strelzik of BMO.

I'm curious what you're learning about the Rewards program and the Rewards guest customer, I guess, and how to best connect with that member through that channel?

And through the drive-thru, I'm just curious operationally, are you happy with how that's going?

Is there any impact to speed?

Are there any operational kind of tweaks that you're considering?

Yes, no, the great news is everybody that had a Wendy's app was immediately a Wendy's Rewards user.

So we were able to start from a strong base.

And as Rewards started to get rolled out and we started to create awareness, we saw active app downloads increase over 15% since the program has been out there.

It's still early, right, in the Rewards phase.

We're seeing actually scans on rewards today.

But what we do know is that it is driving frequency like we had thought it would.

It is driving a higher average check that we thought.

And then operationally, it's most seamless and frictionless, if you go in with a mobile order.

So it won't even impact the restaurant at that stage because you automatically get your rewards points.

But if you decide to scan at the restaurant, you pull up a code and it gets scanned in quickly.

We haven't seen any impacts on our speed of service or the operational complexity in the restaurant.

So we feel good about how that's working at this stage even at the restaurant level.

Your next question comes from Greg Francfort of BofA.

I just had a follow-up to John Ivankoe's question on some of the technology initiatives.

Can you maybe talk about, I think, the way you guys have structured it so far is a large portion of the tech stack, or at least a piece of it is outsourced to Accenture.

And I guess, does this change how you're thinking about how much of the technology is outsourced versus in-sourced with Mr. Vasconi's hiring?

Greg, yes, again, we made -- you're absolutely right.

We made an outsourcing move for both digital technology and run services.

So far, the transition is actually going very well.

We are happy with the results we're getting.

And then we're really having our technology organization focused on more strategic initiatives and not being sidetracked with kind of run issues that can come up every single day.

Obviously, Kevin is going to look at this operation and look at the level of talent.

We can -- we think we have a very talented technology organization out there that is going to be able to accelerate since we have kind of removed the shackles around keep doing firefighting, how best tickets and the like.

So we think it will accelerate under his leadership.

And as we pointed out, some of the savings out of the restructuring were reinvested back into the technology organization to strengthen that further.

Your next question comes from James Sanderson of Northcoast Research.

I wanted to briefly follow-up on your expansion into the U.K. You mentioned that you still intend to open up a store, I think, in first half of 2021.

I was wondering whether you've revisited the store design, potentially pulling back on dine-in and potentially focusing more on off-premises business on delivery third-party.

Just more or less, any change in the way you're looking at expansion into Europe post-COVID?

Thanks for the question, Jamie.

I was still committed to open restaurants in the U.K. in the first half of next year, although there are more restrictions going on in that market today.

Construction is exempted, so we'll have the opportunity to continue to build for the future.

As we've looked at the site, we do have a combination of traditional in line, but we also have some drive-thru sites.

But as we look at the design of that restaurant, it really is technology-enabled.

It does allow for a mobile experience to get easy in and out.

It does get set up quite nicely for delivery experiences.

So all of those things have already been contemplated in the design, and we feel good that we'll have a good mix of locations, both traditional free standing with drive-thrus as well as in line that are technology-enabled and operationally efficient to support the consumer and the drivers.

Your next question comes from James Rutherford of Stephens.

It seems like most of your promotions have centered around chicken in the third quarter and so far into the fourth quarter here.

I was just curious, with beef prices having really moved into your favor here in the fourth quarter, is there a potential you would shift some of those promotions more to core beef, which perhaps, would bring a higher check?

It's a great question.

If you think about the third quarter, yes, we did have the Spicy Crispy Chicken Sandwich that we put into the 4 for $4, which drove some news around 4 for $4, which was good to keep the awareness high.

But if you think about the third quarter, the Pretzel Pub Cheeseburger was a big play on the hamburger.

And that was featured more than the chicken sandwich.

So we did have a nice balance on chicken and hamburger in Q3.

And thinking about Q4, we're talking about the Classic Chicken Sandwich coming back.

But we also said it was in the 2 for $5 promotion, which will allow us to feature a lot of our premium items, not just chicken necessarily.

Your next question comes from Jared Garber of Goldman Sachs.

Can you just give us a little color on the increase to the CapEx guidance and how you're trying to kind of split that between, I guess, unit development and continued spending on technology?

Jared.

Yes.

We're doing better, right?

We have momentum in the business.

We have good outlook on our liquidity position and we literally went back to the original plan.

Considering, again, once the pandemic hit, we slowed down some development capital and some IT capital.

And as we then having more confidence, we're basically restarting those plans on both the development side and the technology side.

So back to original plan and back to thereabouts capital levels that we have talked about pre pandemic.

Your next question comes from Jon Tower of Wells Fargo.

Just curious, what -- your largest competitor in the U.S. moved to a different marketing tax in September.

And clearly, your results held up very well in the face of that what seemingly was a very strong promotion by that brand.

But I'm curious to get your point of view on how perhaps that may have shifted your own thinking around marketing going forward in the U.S., whether that be through different channels than what you've done in the past, either social or digital media or use of television media or perhaps even bringing other people as celebrity spokesman for the brand itself.

Jon, great question.

I mean we're focused on our playbook.

I mean we feel good about what we're doing around 1 more visit, 1 more dollar, what we're doing on the value side to keep news around 4 for $4, what we're doing to renovate and innovate into our premium items.

And our focus is really on quality as a differentiator and quality for the long term, making sure that folks understand our 4 for $4 platform is something that only Wendy's provides, making sure that our Made to Crave platform is something that only Wendy's provides.

We'll sprinkle that in with some price-pointed promotions as appropriate.

But we do think we got a nice playbook that really focuses all day around quality initiatives at breakfast and at dinner.

And it gets all complemented by the work that we're doing to continue to up our game operationally, to create more consistent experiences, to continue to drive speed at the drive-thru, to make our digital initiatives even more frictionless.

So we feel good about our game.

Others can play their game, but ours is really around building our brand for the long run.

Thank you, Jon.

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 on our fourth quarter call in early March.

Have a great day, everyone.

You may now disconnect.