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Ladies and gentlemen, thank you for standing by. Welcome to the Wendy's Company Earnings Results Conference Call. I will now turn the conference over to Greg Lemenchick, Director, Investor Relations. Please go ahead, sir.
Thank you and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website irwendys.com. Before we begin, please take note of the Safe Harbor statement that appears at the end of our earnings release.
This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures such as adjusted revenue, adjusted EBITDA, adjusted earnings per share, adjusted tax rate, free cash flow, and system-wide sales. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure.
On our conference call today, our President and Chief Executive Officer, Todd Penegor; will provide an update on key initiatives, and our Chief Financial Officer, Gunther Plosch; will review our first quarter results and full year outlook. After that, we will open up the line for questions.
With that, I will hand things over to Todd.
Thanks, Greg, and good morning, everyone. I'd like to open today's remarks with the Wendy's vision as it is important to remember that our goal is to become the world's most thriving and beloved restaurant brand. Everything we do at Wendy's is focused on bringing this vision to life, as we work to build an even stronger brand. Our vision is powerful and you will see throughout our remarks today that we are executing on our plan for sustained long-term growth that will help us achieve our vision.
Let's begin with a few highlights from the first quarter. We continued 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 significant free cash flow generation. We opened 43 restaurants globally, which is an acceleration over the 33 that we built in the first quarter of last year. We grew our company restaurant margin by 110 basis points as our one more visit, one more dollar strategy drove a positive sales mix in the quarter. We are off to a strong start in 2019 as we achieved 12% adjusted EBITDA growth, 27% adjusted EPS growth, and a 17% increase in our free cash flow, which gives us confidence in our outlook for the year.
Our formula is very simple; accelerate same-restaurant sales in North America and drive global restaurant expansion with a strong restaurant economic model to fuel this growth. With organic same-restaurant sales at the forefront to drive a healthy restaurant economic model, which is job one, we evolved our marketing tactics to drive better mix results. We are also driving operational excellence and are making great progress to enhance our digital capabilities. Accelerating the pace at which we open restaurants around the globe to give customers more access to our brand is vital to our growth story, and we are on-track to deliver our commitments in 2019 with a solid pipeline providing us confidence.
Before I jump into how we are progressing against our growth formula, I want to take a moment to share some news about changes we are making to evolve our organizational structure to accelerate growth even further. As we continue to grow, we see an opportunity to increase our effectiveness by driving clear accountabilities for our growth across the organization. We announced earlier this morning that we are moving to a new structure that will focus on this, creating lead owners, and decision-makers for our U.S. and international businesses. International will also now include Canada. As a result of these changes, Kurt Kane will be promoted to President, U.S. and Chief Commercial Officer. He will assume full responsibility for the U.S. business, which will include operations, marketing and R&D. In addition, Kurt will continue to lead our Digital Experience organization.
Abigail Pringle will be promoted to President, International and Chief Development Officer. She will assume full responsibility for our international business, including Canada, which will include operations, marketing, R&D and supply chain. In addition, Abigail will continue to lead our Global Development organization. As a result of these changes, Bob Wright, Executive Vice President, Chief Operations Officer; will depart the organization after transitioning through May. I would like to thank Bob for his support and everything he has contributed to Wendy's, our restaurants and our franchisees over his time with the company. With Bob's leadership, we've been able to build a stronger Wendy's brand over the past five years. I am excited to announce the evolution of the organizational structure as it will continue to move us towards our vision of becoming the world's most thriving and beloved restaurant brand.
I will walk you through the progress we made in Q1 to accelerate North America same-restaurant sales which grew on a one-year and a two-year basis. In the first quarter, our marketing calendar was grounded in our strategy of one more visit, one more dollar. This strategy creates a platform to capitalize on our mix opportunity, which drove an acceleration of same-restaurant sales, as well as an increase in company-operated restaurant margin. We began the quarter with our $5 Giant JBC in January, introduced our new Made to Crave Hamburger line in February, and finished the quarter with the launch of our Biggie Bag. All three of these promotions met or exceeded our expectations, despite the severe weather that we endured during the quarter.
Our Made to Crave Hamburger innovation featuring three new-to-the-menu sandwiches is resonating with customers, and Biggie Bag has not only been a nice check builder, but it is also driving incremental traffic. Made to Crave Hamburger, Biggie Bag, and our recently-launched Made to Crave Chicken, are all platforms that customers can associate with the Wendy's brand, and we have already seen that awareness building. These platforms will also allow us to continue to bring new news in the future. We have momentum and we are very excited about the plans we have in place for remainder of the year to drive one more visit and one more dollar.
We continue to make progress in taking our operational excellence across the system to another level to drive a more consistent customer experience that will allow our brand to standout versus our peers. In the first quarter, we focused on driving speed and throughput. We provided the system with a robust set of training tools to address this and invested in the appropriate support to ensure that this was executed across both company and franchise restaurants. We believe that scale matters in the restaurant industry because it allows you to make investments in such things as enhanced training and tools, and that those with scale will ultimately win.
We have also said that we like having skin in the game, so our company portfolio can be the brand steward for our franchise system and are placing a keen focus on this in 2019. In the first quarter, our company restaurants assumed that leadership position as we outpaced the franchise system in consistency, speed and overall satisfaction. Our goal is simple; delight every customer, period. Consistency, speed and throughput are critical for us to win. We are focused in 2019 to have a more consistent experience for our customers, so they will want to keep coming back and we are providing the system, the training and the tools to bring this to life.
We continue to make meaningful progress with our consumer-facing digital capabilities. We believe that our operating model is a perfect complement to the technology journey we are on. At the end of the first quarter, about 75% of our North American restaurants were on a delivery platform, which is an increase of approximately 15 percentage points since the end of 2018. The growth of our delivery footprint continues to pace ahead of expectations as we remain on-track to have 80% of the North America system covered by the end of 2019. We also continue to work on the integration of delivery into our mobile app, which we expect to have completed by the end of the year; this integration will allow for a more seamless user experience and will also provide us with more insights to enhance our relationship with our customers, as well as improve our overall delivery times.
The key to increased sales and success with delivery lies in customer awareness. We ran targeted promotions in the quarter that drove increases in delivery orders by giving customers a free Baconator and Biggie Bag with a delivery order. On the mobile ordering front, we are now activated in about 75% of the U.S. system and remain on-track to be activated across our North America restaurants by the end of 2019. It is critical to have scale in order to create awareness and we plan to start doing that later this year.
We also continue to make strides in our roll-out of digital scanners across the North America system as we have now selected a vendor and our goal remains to have these in our restaurants by the end of 2019. This technology will provide many benefits such as enhancing the overall digital experience, and better access to consumer insights to support our digital initiatives. We believe that being successful in digital will be a competitive advantage for us as consumers are craving customization, speed and convenience, all of which can be enhanced through our platforms.
Now, let's go a little deeper into our focus on accelerating our global restaurant footprint. As I mentioned previously, we opened 43 new restaurants globally with 29 coming from North America, and 14 in our international markets. We remain on-track to reaccelerate net new unit growth in 2019 to approximately 1.5% with about a third coming from international and two-thirds from North America. In the first quarter, international was slightly negative on net new development due to the planned closure of our Malaysian market, which had 14 restaurants. We continued to make great progress on building our foundation to drive long-term growth as we grew our international system-wide sales by 10% in the first quarter. We look forward to sharing more with you on our international plans at our Investor Day later this year.
In North America, we continued to utilize the tools we have put in place, which are foundational for strong growth as we significantly outpaced our net new restaurant results from the first quarter of 2018. Our partnerships with franchisees through join capital planning, development commitments, a compelling incentive program, and strong economics are driving confidence across North America. We also have our Smart Family of Designs that caters to different trade area needs and delivers optimal financial returns. All of these are reasons to believe and why we continue to be confident in our global footprint expansion in 2019 and beyond.
As I close out, I want to bring us back to The Wendy's Way. We remained focused on delivering our brand promise of delighting every customer, period. In order to bring The Wendy's Way to life, just like Dave did when he opened his first restaurant almost 50 years ago, we must remain focused on investing in the quality of our food, providing great value, delivering exceptional service and elevating our restaurants. We are bringing this to life through our focus on enhancing the customer experience through our digital platforms and driving operational excellence to ensure customers have a great experience at all of our restaurants. We will continue to provide more access to the brand around the world through our global development plans and create a place customers love to go through our re-imaging program. It is important to remember that our system is one family, and we won't be able to do any of this without the partnership, support and dedication of our franchisees. With the passion they bring to the Wendy's brand every day, we are confident that we will become the world's most thriving and beloved restaurant brand.
I will now hand things over to GP to go over our first quarter financial results and 2019 outlook.
Thanks, Todd. We are pleased with our start to 2019 on the backdrop of improving same-restaurant sales and global restaurant expansion, which is translating into significant free cash flow generation. Let's dive into the results.
The increase in the adjusted revenues was primarily due to an increase in company-operated restaurant sales from the acquisition of restaurants as part of our ongoing systems optimization strategy and Company same-restaurant sales increasing by 2.1%. Adjusted revenues were also driven by $9.5 million of pass-through payments related to subleases as part of the new lease accounting standards. Year-over-year company restaurant margin increased by 110 basis points to 15% driven by strong mix management and pricing actions, partially offset by labor rate inflation and customer count declines. The customer count declines were expected as we shifted our marketing calendar to focus more on mix and as we rolled over the successful $1 Double Stack promotion from quarter one of '18 that drove a significant amount of traffic.
G&A decreased to $49 million compared to $50 million in 2018, this decrease was primarily driven by lower salaries and benefits as a result of the Company's G&A savings initiatives, partially offset by investments in building our digital experience and international organizations. Adjusted EBITDA grew by 12% to $102 million on the backdrop of strong core earnings growth, this was driven by franchise royalty revenues and fees, and the company restaurant margin expansion. Adjusted earnings per share increased by 27% to $0.14 in quarter one versus the prior year of $0.11, due to adjusted EBITDA growth and fewer shares outstanding. This was partially offset by an increase in income taxes due to a higher tax rate as the company received a large benefit in the first quarter of '18 from stock option exercises.
Free cash flow increased 17% to $48 million, driven primarily by our strong core earnings growth. One of the keys to our ability to invest back into our business and return cash to shareholders is our flexible capital structure. Our maturities are lined up nicely with our next tranche of debt callable at par, this June, but not coming due until 2022, which gives us a lot of flexibility. All of our currently-funded debt has been issued with attractive fixed rates which protects us against interest fluctuations. Our pro forma leverage ratio at the end of the quarter was 4.9 times, down slightly from 5 times in quarter four on the backdrop of strong EBITDA growth. We continue to expect a leverage ratio in the range of 4.5 to 5.5 times in 2019 and beyond.
Our capital allocation strategy remains unchanged, which is investing in growth of the Wendy's brand is our number one priority, followed by sustaining an attractive dividend and utilizing excess cash to repurchase shares. We announced today, the declaration of our regular quarterly cash dividend of $0.10 per share payable in June. As a reminder, in February of 2019, we raised our quarterly dividend by 18%. We continue to return cash to shareholders via share repurchases and have repurchased a total of 2.1 million shares for $35 million so far in 2019. As a result of these repurchases, we currently have $211 million remaining on our $225 million authorization that expires in March of 2020.
As I close today, I want to review our 2019 outlook as we remain on-track to deliver all of our financial targets. Global system-wide sales grew by 3.3% in the first quarter and we are confident that our marketing calendar and global development plans will continue to drive strong system-wide sales and profitable growth. We expect that our adjusted EBITDA growth will continue to be driven by increased royalty revenue, as well as company restaurant margin expansion. We remain on-track to accelerate our restaurant profits in 2019. We are focused on driving same-restaurant sales growth and productivity initiatives which will be partially offset by expected headwinds in labor rate inflation of 3% to 4%, and commodity inflation which is now expected to be approximately 2%.
As Todd mentioned earlier in the presentation, we are pleased with our start to 2019 across all of our financial metrics. As we move through 2019, our roadmap remains unchanged, being an efficient growth company that is showcasing strong system-wide sales growth on the backdrop of same-restaurant sales and global restaurant expansion, which is translating into significant free cash flow generation.
And with that, I will hand things back over to Greg to walk through our upcoming Investor Relations calendar.
Thanks, GP. First up, GP, Abi and I will be doing a roadshow with SunTrust in Chicago on Tuesday, May 14. That same week on Thursday, May 16, we will travel to New York City for the BMO Conference. On May 23, GP, Abi and I will be doing a roadshow with UBS in Toronto. And on June 13, our senior management team will host a market visit here at Dublin, sponsored by Eric Gonzalez of KeyBanc.
If you're interested in meeting with us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. On Wednesday, August 7, we plan to release our second quarter earnings before market opens and host a conference call that same morning. And finally, as previously announced, we plan to host an Investor Day on Thursday October 10th, at our headquarters in Dublin, Ohio, where we will discuss our long-term strategic vision and issue additional long-term guidance.
With that, we are now ready to take your questions.
[Operator Instructions] Your first question comes from the line of Gregory Francfort with Bank Of America.
Thanks for taking the question. The first one is just on flow through. You guys had a great quarter on margins and I guess I'm curious how much of that you think was maybe one time or how much is sustainable. And then the second question is a longer-term question on delivery. I guess how do you envision delivery playing a role in the Wendy's brand and how it's going to work operationally? Is this going to be something you do through the Wendy's App and then it gets executed by third parties? And are you exclusive on DoorDash right now and is it going to remain that way for the long term? Thank you very much.
Good morning, Greg. From a margin point of view, yes, we are happy with our results. Adjusted EBITDA was up 12%. It's all really sustaining. A lot of it is driven by our focus on margin and working in our company restaurant margin expansion. This was up 110 basis points. There was nothing of one-time nature in there. The only one-time thing you could point out is in operating net income other. But we have about $2 million of income in there, that's not typical. We had a sales type lease assignment where changes were made. We had them in the past, now with the new lease accounting standard, these gains are not getting amortized anymore with the remaining life of the lease but they're recognized upfront. So, there is $1.9 million sitting in the quarter one result that is not repeatable. The rest of it is all organic strong underlying growth.
And Greg, on delivery, as you know, our biggest competitor is food at home, and convenience continues to get redefined. So, we'll continue to look at this as an opportunity for growing our business into the future. We're in the early innings. We got DoorDash really being a great partner here in the U.S. We have now got 75% of our restaurants covered by DoorDash. SkipTheDishes has been a great partner in Canada. We continue to work to make the whole experience more seamless, not only for our operators, but for our DoorDash-ers and ultimately for the customers. So we do expect, during the course of this year to get DoorDash integrated into our app. It means other delivery providers could also be integrated over time. So, we're exclusive with DoorDash today, but we'll have opportunities to play that game different as things change into the future. But we're really feeling good that, over time, this is another opportunity for another growth leg on our business. And our big opportunity still is awareness. Awareness is really quite low on the delivery front and we're in those early innings, as I said earlier, and we'll continue to drive awareness throughout the year.
Can I ask you how long that exclusivity will last? Is that a year or multi-year agreement?
We go into annual contracts with our partners. So, we're providing for a lot of flexibility, but we've got great relationships with both of those providers. So, we feel good that we're positioned for change if we need to make it, but continue the status quo if that's the best thing for the business.
Your next question comes from the line of Matt Difrisco with Guggenheim Securities.
Thank you. I have a follow-up on that with the delivery side. I guess it sounds like then the awareness -- I guess it's not been that high of a share as far as overall delivery accounting for overall sales. Otherwise, I was just wondering, is the incrementality perhaps not as much -- I'm trying to read through and reconcile the 75% coverage with delivery, yet traffic being down. If delivery would be incremental, I would think traffic would start to see a reflection of that maybe a little bit of a lift?
Hey, Matt, it's -- delivery is still a very small percentage of our business. If you look at all of our transactions, it's really small. And we're still seeing that be incremental, we're still seeing it drive sales in the dinner and late-night day parts. We still see really high customer satisfaction scores within the app through DoorDash, and still really outpace the overall satisfaction scores for a delivered order relative to our total overall satisfaction. So, we feel good and encouraged that this can be a growth driver. But we're still early in this game, and the key to it is driving awareness because what we're seeing is, when people are aware, we're seeing nice repeat and folks start to come back. So, we'll continue to make sure, both from our perspective that we're driving awareness as we're advertising. We'll continue to create offers in the app for delivery to drive folks into getting the experience that they want to have, and our partners continue to drive awareness of our brand within their app too. So, it's a combination of all those things that would be a tailwind into the future.
Understood. Makes sense. I guess then could you also just comment on, as far as the promotional schedule and the impact that it had in the quarter on traffic? Do you expect that to continue then for the next three quarters? It sounds like as far as on a year-over-year basis, less traffic-driving type of promotion is similar to what you had this quarter and lapping the Double Stack. So, will the traffic counts be somewhat of a flat to down of a headwind to your comp?
If you look at where we need to go on our business, we need to keep balance, right? We need to have a balanced high-low strategy. And what we said in the first quarter is we knew we're going to be lapping over the $1 Double Stack from a year ago. Clearly weather didn't help us in the first quarter, and we knew that we were actually going to have a little bit of a headwind on traffic, and the first quarter would be a little more driven on price mix. And that's the way that calendar laid out. But as you go to the rest of the year, we feel good that we'll start to get a nice balance. And what we said, as part of our guidance to be in the year, we would expect to see traffic on a full-year basis flat to slightly down with more benefit from price and mix, but that's coming off of 13 consecutive quarters of holding or growing category traffic share. So, we brought a lot of folks in, now we got to continue to trades folks up and that's healthy for our margin and it trades folks up into some of our best offerings on our menu.
Your next question is from the line of Brian Bittner with Oppenheimer.
Thank you, good morning. Again, great job in accelerating your same-restaurant sales from what we saw in the second half of '18. Do you feel like -- Todd, do you feel like the average check issue is fixed now as you move throughout the rest of the year? And just to clarify, did these strategies have any weakness in traffic relative to your recent trends? Thanks.
We feel good about where the calendar has evolved to. If you think about what we had out there in the first quarter, we still had messaging around 4 for $4. So, if you think about the laddering then we also then had an opportunity to move folks up to $5. So, we had the $5 Giant JBC earlier in the quarter. And then, for the last two weeks of the quarter, it didn't have a huge impact in the quarter, but we had a Biggie Bag offering. So, opportunities to not only trade folks up 4 for $4 but into a great full-meal $5 offer and we're seeing trade up and a lot of incrementality, but it is balanced then with the high-end of our calendar. So, we've got our "Made to Crave" Hamburger lineup, which is bringing variety which can help drive frequency over time, it gets to feature some of our best tasting hamburgers, when we get into the premium lineup. And then to keep things operationally simple, we then just launched here into the second quarter Made to Crave Chicken and that only brought one new SKU in, so we'll be able to continue to trade folks up on the top on that, but we're keeping the balance.
We just announced earlier this week that we've got the 50-cent Frosty coming back. That is a nice traffic driver, but it'll get folks to the restaurant to trade into and up to whether it be for 4 for $4, $5 or Made to Crave. But even on the 50-cent Frosty, we now have the Frosty Cookie Sundae in our restaurants. We got a great trade up opportunity to move from a 50-cent Frosty when you show up to a more indulgent dessert. So, we feel good that that kind of calendar continue to pace throughout the year and really balance out some drivers on mix, some drivers on sale and some good margin enhancement for the business but still balance the traffic that we need to have to come into our restaurant every day.
Thanks for that. And just, GP, a follow-up. Was there any other idiosyncrasies to first quarter incurred because when you exclude that benefit on the other line, EBITDA and EPS still trended well above the growth trend you're estimating for the full year. So, any color on whether we should be expecting that to slow moving forward or if there is any other interesting things in the first quarter? Thanks.
Yes, so, Brian, a couple of interesting things, but a remind, as we adopted the lease accounting standard, as I said in the prepared remarks, there is now on the year, about $40 million of incremental revenue -- rental revenue and incremental rental cost that is going through our P&L. So, you saw the first $9.5 million or so are flowing through in the first quarter. So as you re-do your models, focus on that. Secondly, I would say, on the earnings per share metric, we actually had really strong underlying results. Majority of it was really driven by strong EBITDA growth, which is all really organic, with the exception of the $1.9 million as pointed out. We benefited obviously from lower share count, which is going to continue since we still have $211 million of the share repurchase authorization outstanding and we actually had a headwind on taxes, which was quite significant. In the base period we had about 6% tax rate. This year, in this quarter, we have about 20% tax rate. So that's a headwind that's not going to be down the tax rate side for the remainder of the year. So overall, maybe that color helps.
Your next question comes from the line of Dennis Geiger with UBS.
Thanks for the question. Wondering if you could talk a bit more about unit growth in the quarter and the outlook for unit growth. I guess for the quarter, you called out the Malaysia closures and referenced the impact from timing. I think in the release. So, does that imply that international closures begin to abate some from here? And then I guess just looking ahead, any comments on what that pipeline looks like in North America and globally I guess, including development agreements where you are exactly on the commitment levels? And just the last piece to that, I guess just all the incentives, Todd, I think that you had mentioned as far as incentives for franchisees as well as tools and other factors supporting franchisee development, just what the response from the North America franchisees has been to that. Thanks.
Yes, Dennis, so, couple of things. So yes, international, as we said on the prepared remarks, we had 14 restaurants that we closed in the Malaysian market. That was all part of our plan for the year. Unfortunately, the economic model was not sustainable, as it was currently designed and with our new strategy on prioritizing markets we shifted some of our resources elsewhere. It doesn't have a huge impact on our business. The AUVs on Malaysia were $300,000 to $400,000, so $5 million of system sales. Just to give you a dimension on that. If you think about the pipeline, we're off to a really nice start in in North America pacing ahead of where we were last year and new builds. We do have a good pipeline for this year and into end of 2020. And there's been a lot of excitement and acceptance around the groundbreaker incentive. But as you think about the groundbreaker incentives, there's more into 2020, 2021 and beyond as we've really build a strong pipeline into the future. But the good news is we've got a great combination of existing builders and new builders that are coming into that groundbreaker incentive.
On international, we feel confident, we've got a good pipeline, we've got a lot of good development commitments, really working to scale up the existing markets that we're in with some great franchise partners, we've got good visibility for this year and into 2020, and we're continuing to work on, is there another market or two that we should be entering overtime. And we'll talk a lot more about all of those details as we give you guidance even beyond 2020 as part of Investor Day later this fall on the international business. But I'm very encouraged by the work that Abigail and her team are doing think differently to continue unlock growth on the international front, really leveraging a lot of the best practices in North America and also thinking differently and being open to different avenues of growth across the globe.
Your next question comes from the line of Jeffrey Bernstein with Barclays.
Two questions, the first one just on the broader QSR category, Todd. As we think about traffic, it seems like you and your peers are still struggling on the negative side, which was addressed earlier. But that's despite I guess seems like everybody now putting their premium products on discounts, whether it be your side or Biggie or some of your largest peers doing significant discounting on their very premium end products, which seems to be that would be concerning that on that front. We're still unable to turn the traffic positive, obviously you have the average check working for you, but how do you think about that in terms of concerns that we've gone as far as you can now in terms of putting your biggest and best on discount? And any color on just the sequential trends through the quarter into April, and then you mentioned you had momentum? Just trying to size that up for that. And I have one follow-up.
Yes, Jeff, if you think about the category, there is some signs of life in QSR. We're actually starting to see traffic move from flat to up half a point to even a point, depending on the month, so it is a bid encouraging. But as you know, we still have headwinds for many Americans, income growth is not equally distributed, healthcare and housing and rent costs continue to increase and wage growth has not quite kept up with inflation. But the good news is consumer confidence is trending favorable disposable, income which is great correlator to our business is moving in the right direction and we got continued low what low employment and steady wage growth. So, those should all be good trends for the business.
For our business, I don't see us doing heavy discounting on the premium. We're actually trading folks up, we've got our core business that was at everyday prices. We got coupons and do things that -- and mobile offers that others do, but we've been really trading folks up in some of our great tasting products, Made to Crave Hamburgers, Made to Crave Chicken. So, I do see the category picking up a little bit, but as you go a little deeper, QSR is the place to be and share of all restaurant meals continues to grow in QSR. But we got to continue to make sure that we look at all the new competitors. Right? The hamburger category, which is still by far the biggest with a ton of opportunity for visits, it's come a little bit under pressure with some of the competition that comes from a big chicken competitor and some of the Mexican players, and we've said that in the past.
And what we need to do is just continue to deliver on great tasting food and a great looking restaurant with a great service experience and play to our strengths around quality and fresh and customization really leveraging the digital platforms going forward to continue to bring more customers into our restaurant more often. So, we feel like we're well positioned to compete.
And in terms of the traffic or the category trends through the quarter and into April whether for yourself or for the broader quick service category, any color on that?
Not a whole. I mean, as you know, February, this year was the second really tough winter. So, we had two winters that were tough on the category. At some point, we're going to get a mild winter, so it would be a tailwind. As you think about category trends through the quarter coming out of the tough February, saw the category pick up a little bit in March and continued into April. We're still getting early reads in the categories, that's about all I would say on that.
And just lastly, is it possible to make a lateral implication to the franchisees profitability when we look at your restaurant margins? Obviously, they were impressive expansion in the first quarter. It seems like you're expecting it to sustain in '19. I just want to make sure that's fair to compare to franchisee profitability where presumably they're seeing trends up year-on-year.
Hi, Jeff, this is Gunther. Yes, we always said the Company restaurant margin should be approximately what the system is seeing since we really didn't have any one-time things hitting our P&L in the first quarter, I would expect that the franchisees are going to see a similar picture.
Your next question is from the line of Jeff Farmer with Gordon Haskett.
You did touch on it, but are there any new learning's or anything that has surprised you with how consumers are responding to that $5 value price point as opposed to the $4 price point? And I guess what I'm getting at is, does that $1 increase have a meaningful impact on traffic?
Yes, Jeff, great question. It was interesting to see as we had the $5 Giant JBC, we did see some nice trade up along the way, from 4 for $4. But as we've come back to our roots with the Biggie Bag offering, not only have we seen nice trade up, we've actually seen a lot incrementality. So, we brought a lot of new customers in and the penny profit is significantly higher when you start to move from that 4 for $4 offering to $5. So, that played well into our margin, and remember, we only had Biggie Bag out there for a couple of weeks to end the first quarter. So, that's really rolling here now into end of the second quarter. And what I really like about the evolution of our marketing calendar is we've got three great platforms, we're known for 4 for $4. We can continue to bring news, keeps it fresh and ownable. We've now got a Biggie Bag platform, whether it's at a $5 price point or something else is called Biggie Bag, we can innovate into that platform to continue to trade folks up.
And then to move folks up on to what our core strength is innovation and premium, we got Made to Crave lineup on both hamburger and chicken that creates a variety that can allow us to really cater to the needs of our customer to make sure that they've got the variety they need to drive frequency to come in a little more often into our restaurants. So, we feel good about the laddering our menu price architecture at the moment.
And just one more on free cash flow. So, just a little bit more detail on the expected working capital contribution. So, the working capital side of this equation, the contribution to your $275 million free cash flow target, what opportunities do you have and what gives you confidence that you can deliver on those -- again, I'm focused on the working capital opportunities to improve free cash flow out to 2020.
Yes, so, we have high visibility to our free cash flow target of $275 million. There are several drivers to it. It is obviously high single-digit core profit growth, excluding the 53rd week that sits in 2020. And it is our payables initiative. Again, we didn't go out publicly yet in terms of how big the opportunity is. It is a little bit smaller than what we had seen on the receivable side and seamless in the receivable side, it's going to spend over two years. So, we're going to start to make progress on this in '19 and then finish that program up in 2020. So, the combination of all these factors plus the anticipated reduction in our capital expenditures down to $65 million, are all the four drivers to give us confidence to reach $275 million.
Your next question comes from the line of Peter Saleh with BTIG.
Todd, I think you mentioned speed of service was a focus in the first quarter. Could you provide a little bit more color on that? Was that more of an initiative for Company stores or the system as a whole? And how do you stand in terms of the speed of service through the drive-through today?
Yes. Peter, thanks for the question. The speed of service is a big focus for our business and in fact, we spent a lot of the first quarter out in the field training on speed tips, on making sure that we're rush-ready and making sure that we're positioned well in the restaurant to deliver on that speed and then reward and recognize folks for the speed. And we want the Company restaurants to continue to be the bellwether for that and if you think about our first quarter, we really took a leadership position around consistency, speed and overall satisfaction to be a good brand steward and a shadow of a leader from the Company restaurants. Sequentially, from the fourth quarter into the first quarter, we did see speed improve and our drive-through, but we still got a lot of opportunities as we go through the year. And the training happened in Q1 and I think as we get the leveraging all of that training, that benefit continues to play throughout the rest of the year.
And as we continue to push the world of digital, our slowest spot, especially during the peak dayparts, is on the ordering side. And as we continue to drive things like mobile ordering, that can unlock more throughput, more speed and a better overall customer satisfaction experience for all.
Just staying on the theme, are there any plans to slim down or change anything in the menu to try drive the speed of service or is this more on the tech side that you will work and on the training side?
Yes, Peter. It'll be both, right. We got to continue to look at operations, simplification in our restaurant and all we do, and every product on our menu has to earn the right to stay on the menu. For those that have been following along, Chicken Tenders has been discontinued as we brought in Made to Crave. It just weren't selling enough for the return on that time that it took and it was slowing down the drive-through a little bit. That's just one small example, but we'll keep looking at that. But we'll continue to look at all of the things across our restaurant, how do we make sure that credit card processing continues to improve and we've made some progress on that, on the speed of all of that, and we have opportunities to continue to do that. Mobile ordering clearly will play a role, Kiosk will play a role in the restaurant. So it is that collective good of all of that because we know in the world of QSR, speed, convenience and affordability -- are the three big drivers and we will continue to be focused on those three as basic core foundational elements of our business and then really work like crazy to differentiate on quality and freshness of our food.
Your next question comes from the line of Sara Senatore with Bernstein.
I had a two follow-up questions if I may. One is just on delivery. And you talked about sort of promotions to drive awareness, I guess there's a sense among some industry players that right now we're seeing a lot of promotions to drive awareness across different brands and that perhaps are unsustainable. I guess I'm just trying to understand how you think ultimately this plays out. Does everybody get to pull back on promotions once kind of industry-wide awareness increases or is this just a very competitive market and it's unlikely that we would expect to see the sort of effort, whether it's price or free delivery really ratchet back. And then I have another question too.
Yes, Sara. I think upfront, you'll see a little more on the offer front to really drive folks into the app because you want to drive app acquisition, and early on, you got some offers to make sure that they continue to come back to create a little bit of loyalty. I do think once you create a more loyal customer, over time, you'll be able to balance out what those promotional offers are. The good news is we fund some of those and our partners fund some of those, because we are both trying to grow together to drive this awareness. So it's a nice balance and works on -- their economic model works on our economic model. But I think going forward, as we think about all avenues of growth and you think about our marketing mix, we'll have to continue to look where our dollars are best spent. Is it mainstream media? Is it digital media? Is it digital coupons? Is it delivery offers? I think you'll see over time that there is a remix and a re-blending, so it doesn't have to be all incremental. It will be what's more effective and efficient, especially as we get more data and we start to move to the one-to-one communication because it becomes more effective and your dollars can work harder.
And then you mentioned digital scanners. I was trying to sort of fit those into the context of franchisee investments and Kiosks. And sort of a sense, it feels like it was a little bit in like with tech arms race. Can you just let me know how our franchisees are responding to these kinds of what appear to be incremental investments? I know for example, with the Kiosks uptake by franchisees, initially was a little bit slower than what you might have expected. So franchisees are kind of more on board now and we're seeing benefit or is it still a kind of a work in progress?
Hi Sara, our franchisees are actually very delighted about our stance on digital scanners. And the reason why they are delighted about is the Company is paying for it. But is still to know the earnings forecast for the second half. So they can't wait to actually get them quickly enough. We made progress, we selected a vendor and we're in the process to roll this out in the second half. To your point, on the Kiosk investment, franchisees are still fairly slow. They have a lot of capital requirements. We have kiosks in about two-thirds of our Company restaurants, we are seeing benefits and we are trying to convince the rest of the system to actually make the capital investment because we think it has a return. But as you point out, that remains a fairly slow activity for us.
And I'm sorry, one last question. I guess -- I'm trying to figure out, if you could just kind of one sort of conclusion. Is the environment getting more value-focused, less value-focused or should we just think about this really as a barbell where you have to be very sharp on price points on the one end but you have some customers that are willing to pay up for premium? It's just very, very hard to sort of detect real strong trend in one direction or another.
Yes, Sara. It's still a share of stomach battle when you get traffic flat to 1%. And you do have to play the barbell because there is this bifurcation of the consumer health and you need to have some good offers on the low side, you got to have good menu architecture to move folks from low to high and continue to trade folks up and provide opportunities on that premium side. The deep, deep discounting that we saw in the back half of last year has subsided to some extent, but it's still very competitive out there and it always will be. And that's why we got to continue to not only figure out ways to drive and grow our business faster by connecting to the consumer better, but we got to continue to drive the productivity initiatives and the margin enhancement initiatives, which we're proud of because we're seeing that translate into some nice margin expansion year-on-year, but ultimately it's driving some loyalties, driving some frequency in getting customers to come to our restaurant a little more often. It's really going to drive the economic model and allow us to continue to compete with great service.
Your next question comes from the line of Andrew Charles with Cowen & Company.
Todd, on mobile ordering, what is your vision for how you can enhance convenience and improve speed of service by allowing the guest or delivery carrier to skip the line for the pickup window? Perhaps you can talk about early learning's from some of the operational tests you have out there as well as the fresh perspective Kurt can provide around this.
Yes. Our quest is how do you actually create a benefit for the consumer. If they're going to go through the work to actually get all their information and make an order through mobile ordering, how do they ensure that they don't have to sit in that same line? Obviously, if everybody starts mobile ordering, that line will move a lot faster. So we'll continue to test and look at things like others have, like curbside pickup. We're going to have to look at the flow in our restaurant, is there such things as fast-cast lanes, it's going to take some while to figure that out operationally. But we're going to have to think about the flow through the parking lot and ultimately, the flow of the restaurant and the restaurant design to really support where we think folks want to go. And that's really around speed and convenience through digital and then making sure that we provide that consumer benefit for them. So that's going to take some time. There are some short-term stopgap things, like I said on curbside delivery, but how it actually flows through the restaurant we're going to have to continue to put some mind-time against that and we are. And we've got some external help and it will take some time to get there.
And then my other question was, with the recent extension of Made to Crave into chicken, do you worry that puts you in closer competitive quarters versus the quick service chicken concepts as opposed to 1Q's promotions that focused on premium burgers and salads?
I think it's a nice complement to our menu. As you think about our core items, we had a very plain menu. Think about the old days and hamburgers. One was a single, two was a double, three was a triple. While now number one is a date hamburger and the good news is we suggest to sell. Do you want that in single, double or triple, and just by asking that question, it's amazing how many folks move into a double. But it does give us an opportunity to actually have a platform to innovate again. So we can continue to figure out what the core items need to fit on those Made to Crave menus, we can continue to bring news to it. But when you think about things that ladder up and the brand is known for the long time, if we're known for 4 for $4 and a Biggie Bag and Made to Crave, and we keep them fresh and ownable by bringing news in and that's our heritage, driving innovation. We feel like that's a great winning proposition for the long term and really help set ourselves apart from a lot of the traditional QSR players.
Your next question is from the line of Will Slabaugh with Stephens Incorporated.
Yes, thanks guys. Todd, I want to follow-up on a comment that you made around needing scale and just clarify what you meant by that. Can you accomplish that? I guess through several investments in the Wendy's brand, is it about more sort of broadening out your human capital to be able to reach the goals that you want to reach? Or is this -- was that a comment saying that we might be open to additional concepts sort of broadening that scale up more quickly?
Yes, I think scale is really about the resources that we bring to bear, to support the franchise system. We got skin in the game with 358 Company restaurants. We got a dedicated Company restaurant leader. We continue to invest model and enroll model. Great opportunities that we can then push out across the system to be even better and things like the training that we're doing and doing the live training and the initiatives we talked a lot about in the past around the management staffing model that we've tested in Company restaurants rolling out across the system. The work we've done on our labor guide 4.0 and 4.1, really looking at all the positioning and leveraging our industrial engineers, those are all the things that really drive scale. We have a ton of opportunities to continue to grow this brand as being the best venues that we can be.
As you think about what's out in front of us, we'll talk a lot more about our international story later this year. The digital journey in its early innings, deliveries in its early innings. When you continue to think about our mixed opportunity through strong calendar, that's just starting. And we still have a lot of opportunity to be the best operators in the business and ensure that we've got a consistent experience in every restaurant. We've done a lot of training on that front, we continue to focus on the quality and all those together, give us the tailwinds that we feel confident that we can continue to be an efficient growth company moving forward.
Just a follow-up on the commodity inflation comment that you guys made earlier. And what you're seeing and hearing out there from your suppliers or elsewhere regarding ASF or whatever else may be impacting beef and chicken costs, as you see for 2019.
Hi Will. We shifted the guidance up a little bit, right. Going into the year, range was 1% to 2%. We are now guiding 2% and we added basically pork into the mix now, baking into the mix. Previously, we only said inflation drivers would be fries and beef. We are little bit concerned about this. So therefore we raised the guidance a little bit and we think 2% is a realistic estimate for us.
Your next question is from the line of John Ivankoe with JPMorgan.
There's obviously been so much conversation in terms of what sounds to be negative traffic this year versus negative traffic last year. Obviously I know you guys kind of stay away from the specific discussion of details, but looking at it on a two-year perspective, because I think that would be important to get a sense of the underlying trend, can you talk us at least directionally how 2018 and 2019 kind of add up relative to each other, because obviously the very different promotions make it hard to read.
Hi John, it's a good question. A two-year basis, right. We absolutely expected the traffic would be down in 2019 versus 2018 because we lapped Double Stack. If you actually look at the traffic picture on a two-year basis, actually we are flat. So that's kind of the picture I'm able to share. So really the rest of the growth, 2.9%, is then net-net slightly positive mix on the two-year stack, and then the rest is price.
Very helpful, thank you. And then secondly, we obviously saw the senior executive changes and there looks to be some at least -- some partial consolidation in roles between the two. Is there anything more to kind of tell organizationally in terms of how kind of the work chart may fall beneath them? And I guess to ask, the question is, is this particularly new news as it related to your previously updated G&A guidance and are there more organizational opportunities yet to come, maybe over the next year or so?
Yes. From an organizational design perspective as it comes to G&A, this was not a G&A play. Our G&A guidance hasn't changed. What we're really looking at is how do we become more nimble, more effective and efficient. Now we do with one P&L owner that's working cross-functionally to bring all of our initiatives to life. We've got 50 years of history of being a marketing company, an operations company or development company. And as you know, the world we live in today is cross-functional in everything we do. And this just really enhances the accountability with Kurt running the U.S. business and specific to the U.S., and Abigail running the international business with Canada now part of that. It becomes very clean to make sure that they can manage all the drivers and their respective businesses partnering with our franchise community to bring our growth to life.
One thing to add, John, is we've disclosed this in the queue. We're expecting our realignment cost of the plan to increase slightly by about $2.5 million. So that's reflected in the queue.
Your next question is from the line of Andrew Strelzik with BMO Capital Markets.
Two questions from me. The gross openings were up nicely on a year-over-year basis for the first time and about a year and a half, the last couple of quarters, you've been talking about some timing impacts and delays of openings. And so I'm wondering if some of that tick up on a gross basis is benefiting from some of those delays or if you think this is a more kind of representative and sustainable type of lift on a year-over-year? And then my second question, can you give us an update on where you are with the digital partnerships and when some of those efforts might come to bear and impact the business at some point this year?
On the unit growth, right, it's a tale of two stories. If you think about North America, really rapid acceleration, right. In the first quarter of last year, we were down nine units in North America, we are now positive five. So really acceleration, as we expected. What do you see actual international, if you actually take out the market exit in Malaysia, underlying actually again positive, right. So it all holds true in what we have always said, 2019 is the year of unit acceleration to about 1.5% from the 1.2% unit growth we had last year with again two-thirds of that coming out of North America and the rest coming off international. So overall, positive momentum.
We have strong visibility into our pipeline and as we've talked previously, the groundbreak and everything around it, is helping us to build out our pipelines for that. In terms of digital partnership, again, a couple of things. Our partnership with Accenture is going well. Teams are working well together. We have already improved actually our mobile apps so customer ratings on these apps have actually increased. So we're seeing the first green shoots of that the partnership is working for us. And as we have disclosed on the call, we have now mobile ordering activated in about 75% of all of North America with a good visibility to finish all of these off and can really behind it in the latter part of the year.
And our final question will come from the line of Jeremy Scott with Mizuho.
Just -- I don't mean to jump the gun on the Investor Day, and some of your commentary there, but just to get a glimpse of how your thinking is changing on international. Wonder if you can give a postmortem on the Malaysia business, I appreciate it. It wasn't a major contributor to your numbers, but it's one of those fast-growing fast food markets that you would think would absorb a lot of players. And so it will be helpful to hear your thoughts on how the market didn't develop to your target and how the team under Abigail might approach market entry differently?
I think the challenge in Malaysia comes down to two things. We never really got the economic model right and it put pressure on the reinvestment for the franchisee in that market, which then didn't allow them to scale up as evidenced by only having 14 restaurants after we've been there for a long time. I think as you think about Abigail, her team is really pivoting. As we focus on the markets where we think we've got great growth potential, we really got a partner first and foremost to ensure we've got a strong restaurant economic model and then we create the awareness and have the supply chain to support that and really stay focused and dedicated on scaling it up behind those economics. And I think that's an important one. You can't just continue to put restaurants out and think you're going to grow without a strong economic model and we're spending a lot more time as Abigail gets into the detail, really understanding what is going to take to make sure that we've got an economic model that will fuel future growth in the markets that we want to scale up. And you'll hear a lot more about that. I know you keep hating hearing that, but you'll hear a lot more about that when we get Abigail her time in October when you're all in.
And just maybe a follow-up on your comments around commodities. Maybe not so much for fiscal 2019 or even though you took up your inflation guide. I presume you have a good amount locked for the remainder of the year, but just looking out into 2020, how confident are you that you could hold these mid-teens margins on the company side, given that both of your components of your prime costs are set to escalate? And just what are some of the strategies whether it's in supply chain or through menu shifts that you can deploy to mitigate some of the pressure on the commodity side?
We believe that beyond 2019, we can further expand restaurant margin in the context of moderating low commodity inflation and labor inflation, similar to what we see in 2019. But why do we believe that, we think we have compelling programs in place to actually leverage our sales, we talked about this, we anticipate acceleration of SRS behind digital, behind better operational excellence and behind our shift towards mix management. So growth is the biggest defense against inflationary headwinds. And we keep improving in our QSCC operation. So really procuring our goods and services at the lowest landed cost possible and obviously, initiatives around design and value, labor optimization and automation. So it's not one silver bullet, but a lot of different things we're doing to make sure we are staying ahead of the game.
Thank you, Jeremy. That was our last question of the call. Thank you, Todd and GP, and thank you everyone for participating this morning. We look forward to speaking with you again next quarter when we report on our second quarter results. Have a great day. You may now disconnect.