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Good morning. Welcome to The Wendy’s Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
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, irwendys.com.
Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements.
Also some of today’s comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our 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 fourth quarter results and full year 2019 results as well as our 2020 outlook. From there, we will open up the line for questions.
With that, I’ll 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 letters up to this vision to build an even stronger brand. Our vision is powerful, and you will see throughout our remarks today that we have momentum, have become more focused and are setup for accelerated long-term growth that will help us achieve this vision.
Before we dive into 2020, let’s begin with a few highlights from 2019 which demonstrates momentum we have in our business heading into an exciting year for The Wendy’s brand. We finished the year with a strong system-wide sales increase of 4.4% that exceeded our expectations on the backdrop of robust North America same-restaurant sales of 2.8% and continued restaurant expansion as we opened 182 new restaurants across the globe.
2019 was an investment year, helping to lay the foundation for accelerated growth in the years to come. We invested approximately $17 million to support our launch of breakfast and another $5 million to roll out scanners to our North America system to help with the integration across all our digital platforms. As expected, we finished the year with approximately flat adjusted EBITDA and EPS versus the prior year. We had another strong year of free cash flow as we generated $221 million. This allowed us to return approximately $314 million to shareholders in the way of share repurchases and dividends.
Lastly, we could not be more excited about our upcoming breakfast launch. A lot of work has been completed and our system is fully staffed and trained. We are ready to launch what we believe will be America’s favorite breakfast nationally across the U.S. on March the second. I could not be more proud to say that we have achieved our ninth consecutive year in North America same-restaurant sales growth, which is a streak we plan on keeping alive in 2020 and beyond.
Throughout 2019, we focused on enticing customers to visit one more time and to spend one more dollar and this strategy was successful as we achieved one of our strongest same-restaurant sales performances over this nine-year stretch. The strong performance in 2019 was driven by accelerating same-restaurant sales growth in the back half of the year, which sets us up extremely well heading into the current year.
We are approaching 2020 from a position of strength and momentum with the full support of the franchise system behind us. We will continue to partner with our franchisees to ensure we are providing customers with promotions that bring them into our restaurants more frequently that are operationally sound with the restaurant economic model at the core of it all. We believe that scale matters and that we are well positioned to win now and over the long term as we can deliver on the consumer need for speed, convenience and affordability while separating ourselves with quality. Our system is engaged and we are excited about our plans for 2020.
With that, I will now hand things over to GP, who will provide more details on our 2019 results.
Thanks. Todd. As Todd mentioned, 2019 was an investment year for us, helping to lay the foundation for accelerated growth in the years to come. Let’s jump in our full year financial results.
The increase in adjusted revenues was due to positive same-restaurant sales at franchise and company restaurants, as well as an increase in company-operated restaurant sales from the acquisition of restaurants as part of our ongoing system optimization strategy.
Revenues were also driven by approximately $38 million of pass-through payments related to subleases as part of the new lease accounting standard.
Company restaurant margin decreased by 30 basis points to 15.5% primarily driven by labor rate inflation and higher commodity costs, partially offset by the positive sales mix from company same-restaurant sales growth of 3.1%.
Adjusted EBITDA met our expectations coming in flat at $413 million even with approximately $22 million in investments for growth. Adjusted EBITDA was impacted by our previously mentioned $17 million investment to support our launch of breakfast and another $5 million to roll out scanners to our North America system as well as an increase in G&A. This was offset by an increase in franchise royalty revenue and an increase in restaurant margin dollars due to increase sales at our company restaurants.
Adjusted earnings per share was flat for the full year at $0.59. This was driven from fewer shares outstanding as a result of our share repurchase programs offset by an increase in income taxes. To round things out, free cash flow came in at $221 million, down about $10 million year-over-year. The decrease resulted primarily from an increase in capital expenditures.
Now, let’s turn to quarter four. We were very pleased with our results as we closed out the year with very strong same-restaurant sales growth. Let’s dive into the numbers. The increase in adjusted revenues was due primarily to positive same-restaurant sales of 4.3% in North America.
Adjusted revenues were also driven by approximately $9 million of pass-through payments related to subleases as part of the new lease accounting standard.
Year-over-year company restaurant margins decreased by 170 basis points to 14.3% primarily driven by labor rate inflation, higher insurance costs, and higher commodity costs. This was partially offset by sales leverage from company same-restaurant sales growth.
Excluding the legal reserve for the financial institutions case that was recorded in the fourth quarter of 2018, G&A increased by approximately 23% primarily as a result of higher incentive compensation. As expected, adjusted EBITDA decreased by about 23% to $83 million. This was primarily driven by investments to support the U.S. systems in advance of our breakfast launch in Q1.
An increase in G&A and the decrease in net rental income also drove unfavorability. This was partially offset by an increase in franchise royalty revenues and fees on the backdrop of strong system sales growth.
Lastly, adjusted earnings per share decreased by approximately 50% in the fourth quarter to $0.08 driven by a decrease in adjusted EBITDA.
With that, I will pass things over to Todd to talk about our 2020 plans.
Thanks, GP. Our formula is simple, yet powerful, accelerate same-restaurant sales and drive global restaurant expansion with a strong restaurant economic model to fuel this growth. I’d like to provide a brief update on our 2020 strategy for each of our growth initiatives starting with our One More Visit, One More Dollar strategy that is gaining momentum. Our marketing strategy contributed to strong North America same-restaurant sales growth of 4.3% in Q4 and led us to finish the full year at 2.8% one of our best results over the last decade.
Same-restaurant sales grew over 4% in the back half of 2019 driving significant momentum into our core business as we head into our launch of breakfast. Spicy Nuggets were once again a powerful promotion in the fourth quarter as customers continued to show up for this offering. This was followed by the two for five meal deal which showcases some of our top premium menu items in the Dave’s Single and Spicy Chicken Sandwich as well as our Chicken Nuggets, including spicy.
This promotion drove a strong average check in the fourth quarter as customers regularly added fries and a drink to this offering. We plan to accelerate and drive further flavor and innovation through our Made to Crave platform in 2020. We recently brought back the iconic Big Bacon Classic and added it to this lineup highlighting our freshly prepared bacon and our fresh never frozen beef and a delicious sandwich.
We will continue to utilize our Made to Crave platform by leveraging news to keep the platform fresh and ownable. The continued strong performance of our core business is critical to our success as we embark on a year of transformational growth with our launch of breakfast and we believe that we have a plan that sets us up for success.
After over two years of preparation, we are ready to launch what we believe will be America’s favorite breakfast across the U.S. system on March the second. There is strong customer demand for breakfast at Wendy’s and our franchise system is fully aligned to this launch as we have designed a program that we expect to benefit the overall restaurant economic model. Our system has been very busy recruiting for the breakfast day part and we are excited to report that we are fully staffed and ready for launch. We have also spent the last few weeks training our crews. As expected, training has gone very smoothly as the menu was designed to be simple and easy to execute.
Our system is energized and excited to bring the breakfast offering to life for our customers. We have created a differentiated menu with mass customer appeal that capitalizes on our quality heritage, featuring the breakfast Baconator, Frosty-ccino and Honey Butter Chicken Biscuit. We are excited to deliver America the breakfast it deserves and we will be driving awareness in a big way.
Our digital business experienced strong growth in 2019 and we laid the foundation for future success. We expanded our delivery and mobile ordering businesses and technology capabilities in the restaurant with our installation of scanners across the North America system.
In 2019, we had approximately 2.5% of our U.S. sales coming through digital channels which doubled from the end of 2018. We are energized by the work occurring in the digital space to improve access to The Wendy’s brand.
In 2020, we are expanding our delivery business with additional partners in Grubhub and Uber Eats continuing to bring convenience into the hands of our customers by working to improve our mobile ordering capabilities and lastly to launch our loyalty program. Awareness will remain a key focus in 2020 as we ramp up the integration of our digital initiatives into our advertising.
With the plans we have in place, we are well on our way to achieving our goal of 10% of our sales coming through digital channels by 2024. At the end of the day, we will not be successful if we can’t deliver a great experience when customers visit our restaurants. Our team is highly focused on two areas, speed and great-tasting food. Improving speed of service to increase throughput is key to driving increased sales and higher customer satisfaction in our restaurants as well as to ensure that our breakfast launch reaches its full potential.
We have implemented several new training procedures that we expect will have outsized benefits in this area. On delivering great-tasting food, we will continue to enhance our operational procedures to ensure that our products are being delivered to customers at the highest quality possible and we will continue to do more throughout the year. This will all be brought to life by having our restaurants fully staffed and trained.
As previously mentioned, we have been successful hiring for the breakfast daypart in a very challenging labor market and I could not be more proud of the team. In addition to showcasing why Wendy’s is a great place to work, we have also launched a new central hiring website that has helped the overall hiring process. This has been a huge win and we expect continued benefits in the future.
Operational excellence is paramount in our journey to become the best Wendy’s we can be and we know that we have more opportunities ahead to be even better. We are pleased with our U.S. development results for 2019 as we met our expected growth goal of about 1%. Our re-imaging program also remains on track, as franchisees continue to see the benefits from this program with higher sales and customer accounts.
We now have 58% of our global restaurants in the new image. As we move into 2020, we are expecting our U.S. footprint to continue to expand based on the tailwinds that we have created with our groundbreaker incentive program and our Smart family of designs which has significantly lowered the cost to build The Wendy’s restaurant. In addition, we are also continuing to focus on nontraditional channels which will also provide a tailwind in 2020 and beyond to our U.S. pipeline.
Lastly, we are expecting 2020 to be a busy year from a system optimization perspective as we are planning to re-franchise our company-operated New York market. We believe that getting these restaurants into the hands of franchisees will help unlock significant growth in this market.
As a reminder, we will be retaining our Manhattan restaurants. We are also planning to complete approximately a 100 Franchise Flips in 2020, which will further strengthen our franchise base.
2019 was an exciting year for our international business and one where we laid the foundation for the future. As discussed at our Investor Day, the team was very busy working through our long-term international strategy in 2019. As part of this, we have developed a global leadership team that is focused and disciplined with a relentless commitment to economics and growth.
With the economic model as a key focus, we did a full assessment of our current footprint and franchisees. One such decision as previously announced was to expand into the UK market and to do so by opening company restaurants to kick-start development.
On the Flip Side, we have had to make some tough decisions as we prioritize our growth markets and resources. We closed our Malaysian market in the first quarter of 2019 and also made the decision to exit Brazil in the fourth quarter.
We had five restaurants in Brazil which were part of a joint venture. As a result of this market closure, it created a profit headwind of approximately $2 million in 2019. This groundwork has strengthened our foundation and feel great momentum as we finish 2019 with approximately 7% system sales growth internationally. We also had some big wins where we signed large development agreements in Canada and the Philippines, which will set us up for the future.
As we look forward to 2020, it is all about accelerated growth. We will continue to grow our existing markets to scale and are very excited to enter a new market in the United Kingdom. We are expecting that we will more than double our net new restaurant openings internationally in 2020 as we embark on our plan to double our system sales to $2 billion by 2024. We know that international is a huge opportunity for The Wendy’s brand and we are excited to grow this business with our great franchise partners.
In order to bring The Wendy’s Way to life, we must remain focused on investing in the quality of our food, providing great value, delivering exceptional service, and elevating our restaurants. We will bring this to life through our focus in 2020 by continuing the strong momentum within our core business, launching into the breakfast daypart and enhancing our digital platforms to create even more touch points with our consumers. We will have a focus on speed and great tasting food to create an experience that brings people into our Wendy’s more frequently.
Lastly, we will continue to provide more access to the brand around the world through our global development plans and continue to 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 wouldn’t be able to do any of this without the support and dedication of our franchisees with the passion they bring to the brand day in and day out. I know that we will become the world’s most thriving and beloved restaurant brand.
I will now hand things back over to GP.
Thanks, Todd. I would now like to walk you through our 2020 outlook, which is very consistent with what we have shared previously. As we move into 2020, our roadmap remains unchanged. We are striving to become an accelerated efficient growth company that is showcasing meaningful system by sales growth on the backdrop of accelerating same-restaurant sales and global restaurant expansion, which is translating into significant free cash flows.
Now, let’s take a deeper look into our key financial metrics, starting with global systemwide sales. Strong systemwide sales growth of 4.4% in 2019 pushed us to the high end of our global systemwide sales range as we ended the year at $10.9 billion. We expect our 2020 systemwide sales to grow approximately 10% to 15% which equates to $12 billion to $12.5 billion. We expect this growth to come through core growth of 4% to 5% comprised of same-restaurant sales in existing daypart, digital acceleration and global restaurant development.
We expect an additional 6% to 8% of growth from our breakfast launch and finally the 53rd week will add about 2% of growth.
Moving on to adjusted EBITDA which we expect to grow mid-single digits to $425 million to $435 million. Core growth, breakfast and the 53rd week are all EBITDA tailwinds offset by the New York disposition where we expect to sell about 40 restaurants by mid-year.
As a reminder on the breakfast investments, we are still anticipating that we will have a loss on our breakfast business in 2020 due to the marketing investments we are making. Now that our breakfast plans are set, we wanted to provide some details on our expected advertising investment in 2020 on how you can expect this to flow on our financial statements.
Over the course of 2020, we plan to spend approximately $70 million to $80 million of advertising to promote awareness and frequency within the breakfast daypart. This will drive our working media weights up about 30% higher than they are today. And it’s important to remember that we will not be reducing our lunch and dinner spending as a result of our breakfast launch.
In accordance with revenue recognition standards, the advertising expense related to breakfast will be smooth evenly across the quarters starting on a prorated basis beginning in quarter one. We expect adjusted earnings per share to grow to $0.60 to $0.62 in 2020 on the backdrop of adjusted EBITDA growth and continued benefits from our share repurchase programs, partially offset by higher tax rate in 2020 as we lap the one-time benefits we had from a tax reserve release in 2019.
Finally, we expect our free cash flow to grow to $230 million to $240 million fueled by strong core earnings growth.
Lastly, we expect capital expenditures to be approximately $75 million, which is our expected run rate moving forward as we balance our investments in development, technology and maintenance capital.
As I close, I would like to highlight our capital allocation policy which remains unchanged. Our first priority remains investing in profitable growth. We are disciplined in our investment choices and we are always focused on ensuring a strong financial return for our franchisees and for us, as the franchisor. We remain committed to maintaining an attractive dividend with a payout ratio north of 50%, and will utilize excess cash to repurchase shares and or reduce debt.
As a reminder, we increased our dividend twice in 2019 to a quarterly amount of $0.12 per share. This is an increase of over 40%. On the share repurchase front, we recently completed our previous $225 million share repurchase authorization and our Board has authorized in new $100 million program expiring in February of 2021. We also executed the repurchase of approximately $10 million of our debentures in the fourth quarter. Our formula is simple, yet powerful. We are an accelerated efficient growth company that is showcasing strong systemwide 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 us up.
Thanks, GP. I wanted to quickly take a moment to provide an update on our segment reporting structure. In May 2019, we announced the realignment of our business as we saw an opportunity to increase our effectiveness by driving clear accountabilities for growth across the organization. In order to better align our reporting with the organizational structure, we have changed our previous North America and international segments by combining our Canadian business with the international segment and separating our real estate and development operations into its own segment.
Our future reporting will reflect our results in the following three segments: U.S., international and global real estate and development. For more information regarding the changes related to our new segment reporting structure and for our 2017 through 2019 results as reported under this new structure, please reference the segment reporting update presentation that is publicly available in the supplemental financial information section of our Investor Relations website at irwendys.com.
Now, let’s turn to our upcoming IR calendar. We will head to New York City on Tuesday, March 3 for a road show with Bank of America, then on to the UBS Conference the following day in Boston. The following week, on March 12, we will attend the JPMorgan Conference in Las Vegas. If you are interested in meeting with us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. And finally, on Wednesday, May 6, we plan to release our first quarter earnings and host a conference call that same morning.
With that, we are now ready to take your questions.
Thank you. [Operator Instructions] Your first question comes from Chris O’Cull of Stifel. Your line is open. Chris O’Cull, your line is open. You may begin.
Sorry about that. Can you hear me?
We can. Good morning.
We can.
Okay, great. Good morning. It looks like your guidance calls for 6% to 8% breakfast sales mix for 2010 or roughly that amount. I guess you’re probably assuming some cannibalization, but how quickly do you expect to be within that range?
Hey, Chris. The way we talked about it at Investor Day and the way we’re thinking about it is we’ll drive a lot of awareness with advertising as we start our national launch here on March 2. Our hope is, and our desire is, to drive a lot of trial early during the course of the year. But we do believe it will be a build throughout the year, and really talked about how we will exit the year at that kind of mix as we really work to ingrain the habit with consumers to come to Wendy’s more often into the future.
And then, Todd, outside of sales performance, what other consumer metrics will you be evaluating to determine if the breakfast rollout is meeting your goals?
Yes, I think there’s a few things, right? We know we need to be breakfast fast in the morning. So speed of service is critical. As the consumer comes into the restaurant for the breakfast daypart, we want to make sure that we are delivering high-quality, great-tasting food, day in and day out, to make sure that they are wowed so we can ingrain the habit and they want to get us into their morning routine. And we’ll continue to monitor sales in a relative sales performance to the competition moving forward, but making sure that we’re doing it in a very profitable fashion for our franchise community.
Great. Thanks, guys.
Your next question comes from Jeffrey Bernstein of Barclays. Your line is open.
Great. Thank you. Two questions. First, on the comps that you talked about, sequentially improving in the fourth quarter. And it seems like on a two-year basis, it improved every quarter of 2019. With that as a backdrop, it does seem like the check was the driver with traffic still negative. So I’m just wondering whether you’re comfortable with that imbalance, or how you plan to maybe better balance that. And is there anything in particular that you’d attribute that accelerating momentum, whether it’s a specific new product or daypart or anything like that? Any color you could add? And I think you made mention of momentum continued into 2020, so I don’t know whether you’d offer any color on the quarter-to-date first quarter.
Yes, Jeff, we’re very proud of the momentum that we built in the back half of the year in our business. With the new segment reporting, you can actually see the U.S. same-restaurant sales, 4.5% in Q3. Again, 4.5% in Q4. As we talked about last year or I guess in the end of 2018, we really wanted to get a better balance between traffic and mix. And as you think about where we went during the course of 2019 and how we went – worked through the fourth quarter, we did see strong check growth as we did expect. A lot of it in the fourth quarter was relapping over that $1 Any Size Fry promotion from a year ago. But we’re really starting to see the benefits of that one more visit, one more dollar promotional calendar that we set up during the course of 2019.
If you think about our check growth, it’s been approximately half price, half mix, so we feel comfortable with that balance. And customer counts were down slightly as we lapped over some of the promotional activities that we had in the prior year, especially in the fourth quarter as we lapped over the $1 Any Size Fry promotion. But we feel good that we’ve got the right balance. And the traffic function is more getting the rate balance between our promotional high-low one more visit, one more dollar calendar than anything else.
So we feel good about where we stand and really started to build momentum with the reintroduction of Spicy Chicken Nuggets. It allowed us to hit all of our digital platforms, hit our social media platform, advertise that, get more folks into our restaurants and then really wow them with some great experiences day in and day out in the restaurant.
And my other question was on profitability. You mentioned in the release that you dealt with labor inflation, commodity inflation and down traffic, so those are kind of the big three components, and all of them being headwinds. Your restaurant margins were down significantly. I’m just wondering whether you could talk about sentiment from franchisees on their profitability? And looking ahead, maybe what your expectation is for labor commodity and traffic and I guess, pricing to offset that in 2020? Thank you.
Good morning, Jeff. Yes, on the company side, the fourth quarter, I would say, most items definitely went to plan. There was one exception on about 110 basis points of headwinds due to a true-up in our insurance reserves. Also, I would say commodity inflation was pretty strong in the fourth quarter, about 3.2%. That’s up versus about 2% in the third quarter and the 2% commodity inflation we experienced on the year. I would also say labor inflation ticked up a little bit at about 4.5%, where we ended on the year with about 4% inflation. As to your question in terms of how our franchisees are tracking, they’re probably – in general, we always say they are tracking closely to our performance. Since we had this onetime insurance true-up effect in the fourth quarter, some of our franchise community might not have experienced that.
As far as outlook for 2020, our expectation is that our restaurant margin, the company restaurant is going to expand slightly, definitely driven by a little bit of profitability on breakfast. We have sales growth that we are banking on, but we do expect inflation. And we do expect inflation on the labor side of about 4% and on the commodity side, north of 2%.
Great. Thank you.
Your next question comes from Eric Gonzalez of KeyBanc Capital Markets. Your line is open.
Hey, thanks. Good morning. So I appreciate the range on the breakfast advertising spend. Is that range dependent on the sales mix achieved? And how does that range change if you don’t achieve the targeted mix or you exceed the targeted mix?
Hey, Eric. As we talked about, we’re committed to breakfast, and we’re going to ingrain the habit and said that we will have commitments to support the system, ingrain the habit of breakfast over the next three years. So we are committed to the range that we had laid out in that $70 million to $80 million. The great news is it’s all incremental dollars that we’re bringing to the party. We’re going to have more media pressure out there. We’re not stealing from lunch or dinner. So we’ll not only be able to showcase breakfast. We’ll continue to be able to keep our nice support on lunch and dinner in all of our messaging. We’ll have a great halo to fresh, high-quality food that Wendy’s continues to deliver. If sales came in a little bit softer, we’re not going to flinch. We’re absolutely committed to this daypart, so we’re very much committed to spend those kind of dollars during the course of this year.
And Eric, this is Gunther. Just to point out, it’s not just a one-year investment, it’s a multiyear investment, so we definitely expect to put our money into this daypart for the next three years to be really unlock full, full profitability of breakfast come 2020.
And then just as a follow-up. Based on what you’ve seen thus far, I know you’re a week away from launching, but have you seen the competitive response? Would you say it’s more or less intense than what you previously expected?
Yes. Specifically, in regards to breakfast. Since everybody knows there’s a new entrant coming into the breakfast daypart, we would have expected it to be highly competitive, and that’s what we’re seeing. There is a lot of competitive messaging out there, but we know that we’ll have our messaging. We started in social. We’ll have more coming on mainstream media where we started this week with Chef Mike. You’ll see a lot more next week as we really roll out the full national campaign. We’ve got everything in the restaurants.
The great news, as we said in the prepared remarks, is we’re fully hired, which has been great. A lot of folks didn’t think we could hire the staffing for that breakfast daypart and fully trained. And our teams are energized and excited and our systems all in behind breakfast to drive great execution, so we will make sure that we create a great first impression with all the trial that we have as we launch into the breakfast daypart.
Thanks. Good luck.
Your next question comes from Matthew DiFrisco of Guggenheim. Your line is open.
Thank you. G.P., I think, in the release you mentioned that net rental income was down. I don’t believe that number has ever been really meaningful as far as down, it’s been directionally up sequentially or even up year-over-year for most quarters. How should we think about that going forward? And how is that sort of embedded in your guidance? Or could you give us some color on why that was down year-over-year, almost $5 million or so it looks like?
Yes good morning Matt. Yes, what we have seen is a comparison base, right. We had a couple of one-time lease buyouts that pushed our rental income stream last year. We didn’t repeat this in the fourth quarter of this year. That’s a negative comparison. I would say on a go forward basis the net rental incomes that you are seeing for this year are probably quite representative of what you expect going forward.
So pretty much flat on a net income contribution basis, year-over-year, so not really growing the EBITDA?
Yes, it would be a good estimate.
Okay, thank you.
Your next question comes from David Palmer of Evercore ISI. Your line is open.
Thanks. And congrats on comps in recent quarters in 2019 in particular. Question on chicken, we’re seeing big growth from chicken sandwich players out there, Popeyes, Chick-Fil-A, those guys operate in your regions or some of your key regions. Wendy’s obviously has a phenomenal history with chicken sandwiches going back long ways. Yourself had some really good growth with the Spicy Chicken Nuggets in the second half. So I wonder about the gives and takes on that platform you’re going to have to lap your Spicy Chicken Nuggets, you’re going to see some competitors launched their own renovated chicken sandwich offerings, but you yourself might see upside from that platform if not 2019, but in the future. So what are your thoughts about that on chicken? And I have a similar one on plant-based.
Yes David, on the chicken business, we’ve been very proud of our performance not only has the return of Spicy Chicken Nuggets has been nice and healthy, it’s actually been a nice mixed driver for us. As we’ve traded folks up from four-piece and to a six, ten and even fifty pieces along the way. And with all the chicken wars going on we were able to really engage with our social media team, and create a lot of news around our own product, and drive a lot of folks into our premium chicken sandwiches. And everything lined up nicely with our 2 for $5 promotion, where we had our premium sandwiches both our chicken sandwich, as well as the Dave’s Single, as well as nuggets in that promotion where we’ve seen nice drive into our premium products, which is our best tasting food, as well as a nice add-ons to the check, which I’ll drive mix along the way.
We’re absolutely focused to continue to renovate and improve the quality, which we’re already very proud of our chicken sandwich. We’ll continue to do that through the course of this year. We’ll continue to upgrade and enhance the operational procedures in the restaurants to make sure that we have the most tender, juicy chicken in the business. So we are focused on that. But we are in a good position to continue to compete.
And then on plant-based, there seems to be a ton of hype right now around plant-based products or meatless burgers. Burger King has been underperforming you guys on comps lately. They have a product, but in other words, it’s not driving the monster comps that we’re seeing from a Popeyes, for instance, with a better chicken sandwich. You tested a Black Bean Burger in the past. I don’t know how you’re thinking about this in the future. What are your early thoughts about testing or going into meatless? Do you think that’s a potential big idea for Wendy’s? Thanks.
Yes, we’ll have to see how the consumer votes with their stomach and whether it’s a big idea. But we do think that plant-based is here to stay. Consumers looking for more protein in their diet. And we’ve always said we’d do it The Wendy’s way with high quality product if we entered into that space and would do it in an operationally effective way within our restaurants. We’ve tested several things. We’ve got a great plentiful burger in Canada that’s tested quite well and I’m sure you’ll see that launch soon in that market.
We’ve tested the Black Bean Burger where we simplified the operational procedures. In the U.S. we’ve just tested a plant-based chicken sandwich. So we’ve got an arsenal of plant-based products that we could sprinkle into our calendar as appropriate through the year. And it really allows for news, which I think is the biggest driver on a lot of this plant-based as you bring us some news to the category. And provide some variety for those protein takers to rotate around from a traditional protein. So you will see us play in that space during the course of this year.
Thank you.
Your next question comes from John Ivankoe of JPMorgan. Your line is open.
Thank you. I was wondering if there was any decision in terms of using some national, promotional pricing to really drive a lot of interest and initial trial and breakfast. And I have a few quick ones after that.
Well John, I wouldn’t want to give the competitors our full promotional calendar and where we’re managing our business. But we are locked and loaded. We built the economics in a fashion where we are committed to compete. We have our base plan as we get into our launch calendar next year or next week, rather. We’ve got our contingency plans in place if we needed to do other things. But we’re really proud that we’ve got value built in across the entire menu. So we start there, we’ve got high quality product, we’ve got competitive price points. And we know that we’re going to drive a lot of trial and we’re going to be really proud to get our great tasting food and beverage offerings into the consumer’s mouth.
Sounds good. And understood, I think, on the answer. And then secondly, as the intelligence in the market grows and franchisees have kind of have more time to think about it. The eventuality of breakfast kind of making profit at a store level on a couple of years basis, have you been able to hone in that number? I assume it’s something south of a 100, but I just wanted to get a sense at this point as we talk in February 2020, like how high that number might be? And then secondly, is there a push from the franchise community kind of from the ground up to take certain stores or perhaps even certain markets, a full 24 hours?
Yes, from a full 24-hour perspective not that push today. Those are always growth opportunities in the future for the right trade areas. From a breakfast perspective, we’ve really set it up for our franchisee to make money from day one, right. We’ve managed the upfront cost, we paid for the small areas [ph], we’ve paid for some of the support on hiring and training, we’ve paid for the menu board work and a lot of that we got into last year’s expenses. So they should be in a great spot to make money from day one. And the work they had to do was hire and train and we’ve got that now behind us. So we’re ready to execute going forward. GP any thoughts?
Yes as Todd said we have taken away the need for them making any onetime investments, so there’s immediate return. And we have obviously worked really hard on the breakeven points for the breakfast business, was obviously a key hurdle that will be had to overcome with franchises. And the combination of simple menu only three crew members you need to run the daypart, gives us basically that financial flexibility. And then we got franchises comfortable with those breakeven levels.
As you know we have introduced that new breakfast in about 300 restaurants beginning of last year and we are seeing profitability levels as we expected in our modeling. So, so far so good.
And John, one last thing. I think you were asking about participation, right? So we’ve got roughly 5,850 restaurants in the U.S. business. We gave folks an opportunity if they were in a unique location to opt out, we only had about 80 restaurants that have opted out of breakfast. So we’ve got the whole system all in to get ready to support the launch next week.
And in terms of – like if a franchisee, for example, has 10 stores and nine of them make money and one of them doesn’t, for whatever reason, it’s outside of the original 80 that didn’t opt in. Is there something in the agreement that kind of requires all those stores? I mean, the franchise group stores to stay open? Or do you allow, I guess, some flexibility on a case-by-case basis? Just, trying to get a sense of overall system penetration, not just in 2020 but over the next couple of years.
Hey John we are very confident with our breakfast offering with the financials. But you’re right, there is something in the agreement that on a case-by-case basis on a very exceptional basis, we are willing to entertain the thought that franchisees can opt out after we have really aligned both franchisor to one franchisee that they have done everything they could to make the breakfast launch successful. And we might help them out with a couple of actions.
And John that would be on a restaurant by restaurant basis, not on a franchise basis.
Yes.
Excellent, understood. Thank you.
Your next question comes from Andrew Strelzik of BMO Capital Markets. Your line is open.
Hey, good morning. Excuse me. A couple of questions from me. First, just if you could give some color on the $5 million reduction on the cash flow guidance for 2020 that would be great. And then my other question is just on the digital side, you have a number of things that you’re working on there and seem pretty excited about the potential for digital mix to go higher over time. So I guess in terms of 2020, what are you thinking to be kind of the key driver behind that to get that higher? And do we think about that starting early this year is that more of a back half type of inflection? Thanks.
So Andrew on cash flow guidance, you’re right, at Investor Day we said cash flow would be $235 million to $245 million. You might remember beginning of December, we then filed the restructuring plan on our IT side of things that creates between $13 million and $15 million of onetime costs. That is hitting our after tax, our cash flow statement by about $10 million as a result beginning of December we revised the cash flow outlook to $230 million to $240 million. So in other words half of the headwind we covered internally, the other half below the guidance ever slightly. So in my book, we did not change our free cash for guidance for next year.
And on the digital front we’re excited about three things. One, we’ve got more and more offering out there and we started to drive a lot of awareness in the back half of last year in our advertising campaigns. We’ll continue to do that throughout the year. So I think you’ll see a steady build on mobile ordering throughout the year.
Delivery, I think, you’ll continue to see a build on that front. We’re introducing new delivery partners with GrubHub and Uber Eats joining DoorDash, working by the middle of the year to have fully integrated into our POS to make for a more seamless experience at the restaurant and for the delivery drivers. So that will build as you get throughout the year.
And then during the course of this year, we will introduce a loyalty program to really complete the ecosystem around our whole digital experience at the restaurants. So I think you’ll see all of those things really contribute to adoption and retaining digital consumers. And we like the digital consumer, right. They’re much more frequent with a higher average check. But I think you’ll see that as a steady build throughout the year.
Great. Thank you very much.
Your next question comes from Andrew Charles of Cowen and Company. Your line is open.
Great, thank you. Your largest franchisee in the U.S. experienced some challenges from other brands in their portfolio that very clearly do not stem from The Wendy’s brand. And I have two questions about this. First I was hoping you could talk about the contingency plan in place to avoid any disruption in store operations during this period of turbulence for them.
And then secondly, if The Wendy’s locations are sold to another franchisee, either in parts or in the entirety, is there any reason to think you wouldn’t be eligible to collect a franchise flip fee? Basically, does the guidance for a 100 franchise flips embed any locations from your largest franchisee? Thanks.
Yes, thanks for the question Andrew. And I know there’s been a lot of press. So NPC is the largest franchise that you’re referring to. They have about 400 Wendy’s restaurants. And as of today NPC is fully committed to growing their Wendy’s business through operational excellence, re-imaging, new development they’re a big supporters of the breakfast launch and they’re all in on breakfast to grow the business. And their Wendy’s business is performing quite well and they have momentum in their business. We’ll continue to stay close to them as they manage through their overall capital structure and their opportunities for the future.
If they did want to do some things and wanted to partner with us on potentially selling some Wendy’s restaurants, obviously we’d be there to help and we could manage those through a franchise flip. But their business is quite good on The Wendy’s side and they’re fully committed to driving that into the future.
Thank you.
Your next question comes from John Glass of Morgan Stanley. Your line is open.
Thanks very much. Just going back to breakfast for a moment, one is how does breakfast interact or how does it change your average check are we going to be talking about in 2020 sort of higher transaction counts but pressure on check and by what degree of magnitude do you think? And just going back to the question about value and competitive response, I understand you say there’s value across that menu but you are also eager to show the franchisees this is profitable. So does that in any way limit or limit your ability to offer value, real competitive value? If competitive set really goes there, do you feel like you’ve pre negotiated everything and even in the worst circumstances of competitive pressure, you’ve got the answer that you need?
Good morning John. So on check related to breakfast. So we definitely expect in our core business. So rest of day, definitely check to increase behind pricing and continued positive mix behind one more visit, one more dollar. Breakfast daypart is definitely a daypart that has above-average profitability but below average check. So obviously, we are adding 6% to 8% of sales that will mean that on the surface the good work we are doing on check expansion on the core business will be kind of offset partially by the lower average check we have on breakfast. But that downward pressure on average check will obviously be more than outweighed by very, very positive traffic growth that we are expecting. So that’s kind of the check dynamics you should be expecting for 2020.
And on a value within the breakfast segment, clearly we do believe we got value across the menu. But we have built the economic model with a strong promotional calendar to drive trial and ingrain the habit with consumer. And you will see this week we had a national coupon drop that you probably picked up in your mail just today or yesterday. We’ll continue to monitor the competitive situation and make sure that we’re competitive and we’ve got those plans in place. And the great news is in spirit of the partnership and alignment with the system those plans have been pre aligned so we know where we need to go to compete and how we’ll promote to compete if we need to go there.
Okay. Thank you. And then just a follow-up modeling question. Is the sale – how much does the sale of the New York market ex-Manhattan help store margins in the back half? I would think it would be a pretty significant benefit or could be a significant benefit. Do you anticipate that in the back half?
That’s a great question actually impact on profitability is actually minor, right. We have actually very sizable restaurants there that have good profitability. So there’s no material impact on restaurant margin.
Okay. Thank you.
Your next question comes from Jeff Farmer of Gordon Haskett. Your line is open.
Thanks. I have a follow-up question on these $70 million to $80 million in breakfast advertising in 2020. I’m just curious what that implies about Wendy’s corporate advertising contribution that goes above and beyond. I think it would be the royalty reallocation on those breakfast sale dollars. So I’m just curious what Wendy’s corporate contribution to that $70 million to $80 million in breakfast advertising spending would be in 2020.
Yes Jeff, good morning. You’re thinking about this correctly. The contribution that we are going to make is between $40 million and $50 million. So as you work through the P&L for breakfast, you will then come to the conclusion that we are making still a loss in breakfast in 2020, less of a loss than we obviously had in 2019 as we did our initial investments. And again we would expect as the breakfast daypart grow that we are starting to make profit on the breakfast daypart as a company 2021 while still actually contributing cash in 2021 and 2022 to make sure that habit gets ingrained with our consumers.
Thank you. And just one other follow-up, little bit more challenging, but what is the implied 2020 same-store sales guidance range that’s captured in that $12 billion to $12.5 billion system sales guidance numbers? Guidance number obviously there’s a lot of moving pieces to that. So any color you can provide on that would be helpful.
Yes, as you have seen in the prepared remarks, our total global system sales growth is between 10% and 15%. We said unit growth is about 1.5% to 2% growth. So on a global basis, system sales growth is slightly north of 10%.
Alright, thank you.
Your next question comes from Gregory Francfort of Bank of America. Your line is open.
Hey guys, I just had two questions. And I’m a big fan of the Black Bean Burger, so I’m going to make unsolicited plug for that. But I had two questions. The first is just on NPC. Are they paying you today? I think there has been some comments that they might not be paying Yum! and so I just wanted to kind of clear up are they paying you today and if they would pay you through a bankruptcy?
And then the other question I had was just on breakeven mixes. You sort of commented on kind of getting the breakeven mix down for The Wendy’s system was a key priority around breakfast. Any sense or sort of clarifying what number that is either in 2020 on a run rate basis in terms of where franchisees make money at breakfast? Thanks.
Good morning Greg. Yes, so NPC is fully current with their receivables and the rent payments they owe to us. So we see no problem. We have a great working relationship with them and obviously are in regular contact with them. So no concerns on that side.
The second question was…
The second question was just on breakeven mix rates for breakfast.
Yes, I don’t want to comment on it, right. I mean it was obviously compelling enough for franchisees to get over the hurdle and on, yes 99% of our restaurants are going to participate in breakfast because they felt this compelling. I give all these financial information now today on media weight, so I am not going to give any more.
Understood, thank you.
Your next question comes from Sara Senatore of Bernstein. Your line is open.
Thank you. I have a question on international development, and then another follow-up question on breakfast. On the international growth, I know you mentioned leaving a couple of small markets. When I think about the track record of your expansion, I think there have been a little – a bit more in the way of fits and starts, and we’ve seen with some other companies in terms of entering and exiting markets. Could you just talk a little bit about if there are any commonalities among the markets you’ve exited? Is it about the partners that you’ve had versus the end market and consumer demand? Just trying to understand kind of the – what feels a little, like you said, a bit more choppy in terms of that growth?
And then on breakfast, could you just talk little bit about the product line? Are there significant differences between this launch and the last one, besides just you mentioned simplicity, but things that maybe are more compelling in terms of menu news this time around?
Yes, on the international, I think if you really want to come down to what the comment thread is really the economic model, right? We haven’t been able to deliver a strong economic model in the markets that we had exited. And it was taken a disproportionate amount of time between the local franchise partner and us to really bring those opportunities to life. So we did exit Malaysia early in the year. We did exit Brazil, which was five restaurants. It was complicated. We had a three-way joint venture, so some good learnings from that.
But what we really wanted to do is pave the way for the team to really be focused around scaling up the existing markets that we have, as Abigail talked about at our Investor Day. And then get ready for our launch into the UK, which is all on track to really support some growth not just into the UK but into Europe over time.
On the breakfast side of the business, we do have a simple yet profitable menu that we’ve really set up with some very craveable food items. So if you think about taking some of our signature products and turning them into great craveable items in the morning daypart, The Breakfast Baconator is to die for, a great opportunity for folks to come in and experience our food on that front. Honey Butter Chicken Biscuit is another truly differentiated food item that is favorable. You got seasoned potatoes in the restaurants, which is a nice differentiator. You got Frosty-ccino with cold brew coffee with our Frosty mix, half the fat, half the calories of a frappucino, which is another great one. And then we’ve got all the other lineups, products lined up against the competitive set.
So fastball down the middle, all SKUs that will move nice and strong, and importantly, high-quality. Fresh cracked eggs on all of our sandwiches every single day. Our fresh, never frozen oven-baked Smoked Applewood Bacon [ph]. I’m getting hungry just thinking about it right now.
Sounds great. Thank you very much.
Katherine Fogertey with Goldman Sachs, your line is open.
Great, thank you. I have a few questions here. So first of all, as we think about the cadence throughout the year, kind of taking breakfast aside and looking at the stand-alone rest of daypart businesses, is there anything we should be keeping in mind as far as periods in a year where maybe you had maybe some benefit promotional activity from third-party delivery? Anything that we should have on our radar? Thank you.
Good morning. No big kind of ups and downs. You obviously – we had momentum in the second half. We had lower growth in the first half. That probably will be a little bit more evenly distributed as we go on the core growth side of things. As you know, breakfast is going to build. We only have four weeks of breakfast business in the first quarter. So that’s obviously going to be a relatively small contribution. And that’s going to build, obviously, for the remaining three quarters.
Great, thank you. And you’ve made some comments in the press release about taking price in 4Q with some other drivers in there. How are you guys thinking about price this year with the consumer a little bit pretty strong? Do you see a stronger opportunity to take price, or is this something that you’re a little bit more mindful of? Thank you.
Yes, we’re going to stay careful on pricing and watch the situation carefully, especially in the context, obviously, of commodity inflation of north of 2%. If we price, we will not go ahead of food away-from-home inflation. If we price, we’ll probably stay at the end or thereabouts, within that range.
All right thank you.
Your next question comes from Dennis Geiger of UBS. Your line is open.
Thanks for the question. You commented earlier some on the profitability of the 300-or-so stores that already are running breakfast. But is there anything more that you can say with respect to what you’ve seen in those test stores over – in recent months? Anything where it’s added to your confidence around your plans? Or if you’ve made any tweaks over the last few months, even at a high level, if that’s with respect to cannibalization that you’ve seen, the operations and the drive-through efficiency? Any kind of additional franchisee response? Anything new that you’ve seen over the last several months would be helpful. Thank you.
Good morning Dennis. Yes, so what we’ve seen in those restaurants, literally, a confirmation of what we thought would happen. We saw when we switched out in these restaurants, the old breakfast to the new one, we saw a couple of things. We saw happier crews because the breakfast is just much simpler to work. We definitely saw the breakfast business building slightly versus what we had previously. So it seemed to go a little bit of word-of-mouth there since we didn’t have advertising on it to drive this business a little bit better.
And thirdly, I would say is we got comfortable that the financials that we modeled and the profitability we would be getting, we are seeing those levels.
And last but not least, as we explained in Investor Day, right, we used volumetrics modeling to actually size the price here. And then as we switched models, and especially as we introduced the breakfast into our 40 company restaurants, the sales levels without advertising were exactly in line with the model was predicting. So that obviously increases our confidence as we turn on national media and launch support that then the daypart is going to behave as modeled.
Thank you.
Your next question comes from Nick Setyan of Wedbush Securities. Your line is open.
All right thank you. Obviously, menu innovation plays a big part in your business. How are you thinking about menu innovation when it comes to the breakfast daypart? Is that something that’s going to be relevant in 2020, or is that more down the road? And then the second question is on the incremental $70 million, $80 million advertising spend, are there any other expenses related to the breakfast rollout on top of the marketing spend that we should be aware of?
Yes, Nick, as we think about innovation, we are clearly focused to make sure that we have the appropriate level of innovation across our lunch and dinner daypart not lose focus on that strong business. And we’ve got some great platforms that we can continue to innovate into, as we said on the prepared remarks. On breakfast, we really want to make sure that we ingrain the habit, and we’re great executionally. So we know what our breakfast lineup looks like today and for the foreseeable future. But again, it’s an opportunity for us in the future as we ingrain the habit to continue to innovate and provide news into that space as we learn more on how the consumer is interacting with us.
On the breakfast investments, I’ll turn it over to G.P.
Yes, good morning Nick. So as you know, we made a onetime investment in quarter four of about $17 million. We said previously we’re going to spend $20 million, so the remaining $3 million are going to be spent actually in 2020. It’s really related for the recruiting campaigns that we also run in the early part of 2020 to make sure we get the hiring done. And we also have a little bit of a G&A investment that we are making to make sure that we have enough people in our business that look after this new daypart. So there’s a little bit of additional investment over and above the $70 million to $80 million that we talked about.
Thank you.
And obviously, just to be clear, all of that has been contemplated in our guidance.
Your next question comes from Joshua Long of Piper Sandler. Your line is open.
Great, thank you for taking my question. Wanted to switch gears to the International segment and as we now approach the launch here in the U.S. of breakfast, and you mentioned several times that the staffing went well, and that was a key part to getting the breakfast piece launch. Thinking about how you’re going to be opening up some of these stores in the UK if you could talk about your efforts there to build the team and get the infrastructure set up to allow for a successful launch there as we go forward.
Yes, Josh. So we’re in the early innings, as you know, in the UK, but we have hired our first employees. So we’ve already set ourselves on that journey. We’ve identified several sites, so we’re feeling good about preparing for our first restaurant openings. We’re finalizing the menu, we’ve locked down our brand positioning, working through the restaurant designs and our technology. So all is on track. And we’re bringing a new concept, a new restaurant to the UK with new facilities. And I think folks are really excited about having Wendy’s enter that market. And when you have that kind of excitement, it certainly helps on your recruiting efforts. And we’ll leverage a lot of the things that we’ve done here in the U.S. and the learnings to really ramp up for hiring. So we don’t see any challenges on that front.
Great, thank you.
Today’s final question comes from Jon Tower of Wells Fargo
Great, thanks for sticking me in. Just a quick couple of ones. First, can you discuss the rationale behind outsource in the IT function to Accenture? And then second, in looking at the initial coupons for the breakfast push, I see there’s a promotion featuring free coffee with the purchase. But has the idea of offering just free coffee without any purchase been considered at the stores? And I know that in Canada, one of your larger competitors, that seem to have worked well for them to break into the market and actually be fairly successful at expanding that daypart. So was hoping you could maybe discuss that.
Good morning Jon. So on the technology side of things, so we definitely came to the conclusion that it’s important that we are competitive on the technology front. Our thought process was around we wanted to have flexibility and access to capabilities of a global technology leader that we think couldn’t potentially be done internally. So that was one of the reasons why we made the decision. It actually also helps us to create a service model that is slightly cost advantaged, and so we are committed to actually not flow that cost advantage to the bottom line but actually reinvest that back into our technology to make sure that we staying on the forefront.
Yes Jon, on the promotional count, I’m not going to give out any of the specifics. We’ve got a lot of tools in the toolbox to make sure that we continue to be competitive. And our real focus is ingrain the habit. How do we get folks to show up at our restaurants, how do we have them trial our food and then how do we create great experiences to bring them back. So we’ve designed the economic model with a promotional cadence that we feel good about. That’s been locked and loaded with the franchise community. Thanks for the question.
Thank you.
Thank you, Jon. That was our 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 first quarter conference call in May. Have a great day. You may now disconnect.