The Wendy's Company (WEN) Q3 2019 Earnings Report, Transcript and Summary

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. Thank you. Greg Lemenchick, Director, Investor Relations and Corporate FD&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 the Investors section of our Web site, ir.wendys.com. Before we begin, please take note of the Safe Harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Penegor, will provide an update on key initiatives. And our Chief Financial Officer, Gunther Plosch, will review our third 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. Before we get into our third quarter results, I want to take a moment to thank all of you who attended or tuned in to the investor day a few weeks ago. As we shared, we are striving to become an accelerated efficient growth company by playing a different game to unlock growth. Let's dive into our third quarter results, which highlights the strong momentum we have in our business. As previously announced, we showcase our ability to be in an accelerated efficient growth company through a robust system wide sales increase of 5.7%. On the backdrop of strong North America same restaurant sales of 4.4% and continued global restaurant expansion which translated into strong earnings growth. We open 40 new restaurants across the globe in the third quarter and I've opened 111 year-to-date. This is pacing slightly ahead of the openings we had this time last year, and we remain on track to deliver our goal of 1.5%, net new unit growth in 2019. We also continue to re-image our restaurants and now have 56% of the global system on the new image. Company restaurant margin came in at 16.2% for the quarter, growing 50 basis points from the prior year as we leveraged our same restaurant sales growth. Our Q3 results exceeded our expectations as we achieved approximately 3% adjusted EBITDA growth, 12% adjusted EPS growth and a 6% increase in our year-to-date free cash flow. This strong result will flow through to our updated outlook for the year which GP will talk about in a moment. Our balance marketing strategy contributed to accelerated North America same restaurant sales growth of 4.4% in Q3. We began the quarter with our Baconfest promotion, highlighting the newest addition to our Made to Crave hamburger line-up, the Bacon Jalapeno Cheeseburger. We then turned up the heat with the re-launch of Spicy Nuggets and the customer response exceeded our expectations. Thanks to our powerful social media voice that had customers craving for this product. This promotion increased our average check and significantly changed our incoming customer count trends when we began this promotion. Supporting the launch of Spicy Nuggets for promotion through our mobile app. This led to an increased awareness of our digital platforms as we doubled our number of mobile ordering transactions during the promotion. The addition of the Bacon Jalapeno Chicken Sandwich to our Made to Crave chicken line-up as well as the Buffalo Chicken Salad added to the excitement around spicy during the quarter. We continue to build on the equity we established in the first half of the year around driving flavor and innovation with our menu. We have momentum in our business, and we are excited about the plans we have in place for the fourth quarter and into 2020 to continue to drive one more visit, one more dollar. As we shared at our Investor Day, 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. With organic same restaurant sales at the forefront to drive a healthy restaurant economic model, which is job number one, we continue to focus on our one more visit, one more dollar strategy to drive mix. This is working as evidenced by our strong third quarter results. As Kurt discussed at our Investor Day, we continue to make progress on improving our operations and have a comprehensive plan in place to ensure we succeed. We're also enhancing our digital capabilities as we continue to provide more access to the brand through expanded delivery partners and launching a loyalty program. We believe our strengthening business will set us up for a successful breakfast launch in the first quarter of 2020. Our franchise system is fully aligned to this launch on the backdrop of strong customer demand for Breakfast at Wendy's and since we have designed a program that we expect to benefit the overall restaurant economic model. These initiatives working in tandem give us confidence in our ability to accelerate same restaurant sales growth into the future. 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. As Abigail discussed at our Investor Day, we will begin pursuing accelerated international development on the backdrop of strong growth in our existing markets. We also announced that we will be entering Europe by opening company restaurants in the UK within the next 12 to 18 months. Our growth plans culminated with the announcement of our new compelling long-term guidance at Investor Day, which I'd like to take a moment to highlight. Our new long-term growth algorithms call for us to accelerate our system wide sales growth to 4% to 5% and grow adjusted EBITDA and free cash flow high single digits. There are three pillars that we expect to be the primary drivers of this acceleration of growth. The first is breakfast. We believe that we can grow this day part to at least 10% of our U.S. sales based on strong customer demand, and on the strong program that we plan to execute. The second is digital, and we believe that digital sales could contribute approximately 10% of total U.S. sales by 2024 versus the approximately 2% we sit at today as we plan to provide more access to our brand through our digital platforms. Lastly, we believe that internationally we can grow to 1500 restaurants and double our sales to approximately $2 billion by 2024, driven by growth in our existing markets, as well as expansion into Europe. We are excited about the growth plans that we have as we are investing in accelerated growth and playing a different game to achieve our goals. In closing, 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, dedication and partnership of our franchisees. We are totally aligned with our franchisees on the plans we have in place to grow. The system is all in to execute with excellence and has the passion and commitment to ensure we achieve our vision of becoming the world's most thriving and beloved restaurant brand. With that, I'll turn things over to GP.

Thanks, Todd. We are very pleased with our quarter three results on the strength of accelerating same restaurant sales and global restaurant expansion, which is translating into robust free cash flow generation. As Todd mentioned, due to our strong SOS in quarter three, we exceeded many of our financial targets. Let's dive into the result. The increase in attracted revenues was due to positive same restaurant sales, its franchise and company restaurants, as well as an increase in company operated restaurant sales, which were also driven by last year's acquisition of restaurants. Adjusted revenues were also driven by approximately $10 million of pass-through payments related to sub leases as part of the new lease accounting standard. Year-over-year, company restaurant margin increased by 50 basis points to 16.2% primarily driven by leveraging higher than expected same restaurant sales of 4.7%. The decrease in general and administrative expenses was primarily due to a $2.8 million reduction in our legal reserve as a result of an increase in anticipated insurance proceeds available for use related to the proposed settlement of the financial institution case. Please note that this adjustment will be excluded from our adjusted EBITDA calculation, which is consistent with how we treated the impact of the financial institution case in the fourth quarter of 2018. Excluding this, G&A would have increased by approximately $2.5 million or 5%. The increase was primarily the result of a higher incentive compensation accrual. Adjusted EBITDA grew by 2.5% to $110 million. This was driven by an increase in franchise royalties and company restaurant margin on the strength of accelerating same restaurant sales, partially offset by an increase in franchise support expense, due to our approximately $4 million investment in scanners for our North American restaurants in the quarter. We are now expecting our scanner investments to be about $6 million versus our previous estimate of $10 billion due to an efficient roll up. Adjusted earnings per share increased by approximately 12% in the second quarter to $0.19. This was driven by adjusted EBITDA growth, newer shares outstanding as result of our share repurchase programs and a lower tax rate as the result of an expected tax reserve release, this was partially offset by higher depreciation expense. To round things out, year-to-date free cash flow increased 6% to $192 million driven primarily by our strong core earnings growth. In light of our strong performance in quarter three, we have updated several of our guidance metrics for 2019. As announced our Investor Day, we expect global system wide sales to be at the high end of our previously announced guidance range, and we have now tightened that range. As a result of our strong sales performance, we are now expecting adjusted EBITDA to be at the high end of our guidance range as well. We're now expecting G&A to be approximately $195 million to $200 million due to an increase in our incentive compensation accrual and expect our attractive tax rate to be 21% to 22% for the year. Thus, in addition to attract the adjusted coming up to the high end of our range, as resulted in our trusted EPS guidance, being raised by about three pennies, taking our new range to $0.58 to $0.60. Lastly, we continue to expect capital expenditures and free cash flow to stay within our previously articulated guidance range. Lastly, I would like to highlight our capital allocation policy. As we discussed at our Investor Fay in early October, our policy is largely unchanged. Priority number one is investing in profitable growth, with discipline in our investment choices, and we are always focused on ensuring a strong financial return for our franchisees and for us at the franchise door. 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. We recently demonstrated our commitment to our policy, as we announced at Investor Day at 20% increase in our dividend beginning in the fourth quarter, and that we plan to launch $100 million accelerated share repurchase program in the fourth quarter of this year. Our formula is simple, yet powerful, behind accelerated efficient growth company that is showcasing strong system by sales growth on the backdrop of positive famous and sales and global restaurant expansion, which is translating into significant free cash flows. I will now hand things over to Greg to close this out.

Thanks, GP. I wanted to quickly take a moment to provide an update on how our new business unit structure is expected to impact our future 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. We have placed focused total P&L accountability under Kurt Kane for the U.S. business and Abigail Pringle for the international business. As a result of this, we are continuing to evaluate the impact these changes will have on our future segment reporting structure. Starting with the filing of our 10-K in February, we anticipate that we will report our results in three segments; US, international and global real estate and development. Now let's turn to our upcoming Investor Relations calendar. First up, TP, Abby King or manager of IR and I will head to the Stephens conference in Nashville on Thursday, November 14. The following week, Todd, GP, Abby King and I will embark on a weeklong investor roadshow with stops in LA, San Francisco, New York and Boston. On December 10th, we will host a headquarter visit here in Dublin, Ohio with Wells Fargo. If you're interested in meeting with us at any of these events, please contact the respective sell side analysts or equity sales contact at the host firm. And finally, on Wednesday, February 26th, we plan to release our 2019 earnings along with further details on our 2020 outlook and host the conference call that day morning. With that we're ready to take your questions.

[Operator instructions] First question comes from Brian Bittner of Oppenheimer and company. Your line is open.

Good morning. Thanks for taking the question and congratulations. I want to ask about sales expectations in 2020 that you laid out at Investor Day specific to 2020, you talked about breakfast adding 68% to your system sales on top of a core 4% to 5% growth in system sales outside of breakfast. So, before the 53rd week, you're basically talking about 10% to 13% system wide sales growth. Can you just talk about what the same store sales range is within that 10% to 13%? Is it 8% to 10? Is how we should be thinking about your actual same store sales expectations for 2020?

Morning, Brian, I think Thanks for the question. Yes, you recap on what we said an Investor Days is correct. The only color I can give you the 4% to 5% core growth is obviously driven by same restaurant sales growth and unit growth. Same restaurant sales closes about 2.5% to 3%. The remainder of that is unit growth. So that's the difference between total sales growth and then same restaurant sales.

Okay, and just follow-up and last question. When we take all your guidance for 2020. We come to the conclusion in our model you're spending close to 50 million of incremental spend on breakfast advertising. I'm not asking you to clarify that, I'm not sure if it's perfect or not. But that's where we get to - this will begin to subside as we move forward, which you talked about past 2020. How do you want us thinking about how this rolls off and becomes a tailwind to EBITDA? Is there going to be very pre-planned? How it rolls off over the next many years? Or is it going to be adjusted? How it rolls off based on how breakfast sales are doing?

Hey, Brian it looks like we have done a good amount of work on this. As I said at our Investor Day right, we are we are committed on a three year period to make sure that the company is providing funds, to make sure that in the first three years we have adequate national media waves on there to drive our breakfast business. In 2020, we're going to have still losses on the breakfast business. They're going to be less than the $20 million loss that we'll be making in 2019 and you can expect that we are going to be profitable on breakfast in 2021, even more profitable in 2022. And then once you come to 2023, our initial three investment commitment is disappearing and then we are reaching full profitability on the breakfast business. In terms of how steep or not steep the slope is, is a function on how fast the sales are going to expand as you know, what we have said in our Investor Day call, it's going to take a while to change the habit and we are confident that we are going to reach to at least 10% of our sales going to be the breakfast business. So, it's going to slide up consecutively as a result of it, our investment levels are going to go down and then disappear once we reach Q4.

Thank you, GP.

Your next question comes from Will Slabaugh of Stephens. Your line is open.

Yes, thanks, guys. I had a question on loyalty and digital as you get prepared to launch loyalty. Can you talk about ways you're going to incentivize the guests to sign up for that program? And I know kind of on the back of that question, a lot of your QS our peers have had trouble with digital engagement so far, just given so much of your transactions are through the drive through. So, can you talk about how you incorporate the drop through into getting the customer either to order ahead, or scan as they're as they're in that director?

Yes, well, a couple of things as you think about the journey, we said we will have a loyalty program in place early in 2020. I don't want to give out too many of the specifics, but we did talk about at Investor Day that it would be a point-based program. And then everything that we have on digital, our biggest opportunity is to continue to drive awareness. How do we get folks into mobile ordering, how do we continue to make sure that we got a complete universe of options when you get into our app loyalty be one of those things to make sure that folks not only come, but they stick with us to become more loyal? So, we will continue to drive awareness as we go into next year on all things mobile and will continue to incent folks to get into the mobile arena. And then we believe that the programs when they create seamless, more frictionless experience moving forward will allow the users to continue to come back to us scanners plays a big role in that, to really make sure that, the experience for not only our employees, but for the customers becomes seamless when they're utilizing all of the mobile tools that we're putting in place.

Got it. Thank you.

Your next question comes from Andrew Charles with Cowen. Your line is open.

Great, thank you. Looks like spicy chicken nuggets are still available. But we're not seeing the same level of promotion relative to 3Q. Is the plan on Spicy Nuggets to make these a permanent addition to menu or can we expect them to be posted now overtime to help generate buzz for the brand?

It's clearly Spicy Nuggets fan favorite. We had a lot of folks show up day one behind our strong social media presence even before national advertising turned on and like we always say, every item on the menu needs to earn its right to stay on the menu and we feel good that we continue to see nice velocity of Spicy Nuggets. We do have a 2 for 5 promotion going on right now in the market, really featuring, our premium sandwiches core hamburger, our spicy chicken sandwich, but we also have the 10-piece spicy chicken nugget offering featured in that. So, the momentum continues on that portion of the business and we'll let the consumer continue to vote with their stomach on how long that offering stays in our restaurants.

Gotcha and Todd just to expand on that you've done a nice job in 2019 branding new platforms like $5 Biggie Box and Made to Crave and I was wondering about the decision to promote to $5 which is more similar to other offerings that are already in the marketplace, is the rationale - this is more check and margin of creative relative to the Biggie Box?

Exactly. This would be one how do we trade consumers up into our highest quality best tasting products. How do we get them into premium, when you think about our base, hamburger business, core hamburger business, our core chicken business, we want to make sure we get that food into the consumers mouths to make sure they continue to come back again and drive frequency? This isn't a big traffic driver the way we look at is more of a check driver consistent with our strategy to make sure we got a nice balance between one more visit one more dollar.

That's helpful. And just my last question for GP as he talked about the step up that's implied and for 4Q G&A you have the habit $2.8 million reduction lee reserve, the right to tail and what should we be thinking about in the fourth quarter self-driving G&A higher?

Great question. Again, incentive payout approvals, right? If you remember, last year, the second half didn't go to plan for us, as a result of it be accrued incentive comp, below 100% and we ended up with really low G&A in the fourth quarter of last year, it was about $44 million. The implied guidance range for G&A for the fourth quarter is about $45 million to $50 million to take a midpoint of $48 million, which is roughly in line, what you actually have seen in prior quarters, so it's not really a massive step up on the face of the P&L there is, it was obviously the reserve adjustment has pushed on the face of the P&L, G&A down to $46 million. And again, to be clear, that need not help our EBITDA performance, it was adjusted out.

Very good. Thank you.

Your next question comes from David Palmer of Evercore ISI. Your line is open.

Thanks. Good morning, guys. A question about your underlying business which is, it's crazy. Because around midyear, it looks like you really needed the sales layer that was breakfast. But now, given the success of Spicy Nuggets, which has given you guys a real spark on your underlying comps really wonder how you think about that base business going forward, you're going to be laughing at this, this sort of momentum later in 2020. Earlier in the year, you seem to have some of this momentum, but I worry that you might lose it with breakfast. So, I really wonder about the underlying business as much as anything as you go for breakfast and I almost wonder if you look back with a little regret about having to go for this Hail Mary on breakfast given that you're underlying businesses has gotten such a spark. And I guess my other question is on the value side of things, you know, a lot of these value constructs seem like they're dated at this point, like you don't really need them, and maybe they're sacrificing margin for them. So, what is your future on value? Thanks.

Thanks for the question, David, we're excited about the play book that we're running. And we talked a lot early this year that in the back half of the year we were going to get a little more balanced between traffic and check, and really get focused on driving mix. And we've been able to do that with the balance we have bringing back spicy chicken nuggets, being focused on the Made to Crave platform, having a nice healthy balance on the high and the low and it has built some nice momentum in our business. And we expect to continue to drive the momentum in our core business into the future. And the great news is the stronger the core is, the more confident we get into the breakfast day part because we don't want breakfast to be a Hail Mary, we want breakfast to be an additional layer to growth in our business. That's why we're talking about being an accelerated efficient growth company. And remember the construct of how we're bringing this to life. We're bringing new advertising dollars for life to support breakfast, so we're not going to sacrifice our support against lunch and dinner. So, we will have additional dollars out there that should have a nice Halo across all of our day parts, not just breakfast as we have the impression, but across lunch and dinner. So, we do feel good that we've got tools both on our base core business to drive that growth and excitement and optimism around breakfast going forward. So, we do feel like we're living in the best of all worlds, comes down to great execution, right? We've got the plans in place. We laid them all out when you think about our growth initiatives at Investor Day, breakfast, digital and international. So, we know what we need to do. We got the hearts and the minds of the system to go execute. Now, we've got to go, execute.

Thank you.

Your question comes from Matthew Difrisco of Guggenheim Securities. Your line is open.

Thank you. Just have one little follow up and then also a broader question. The broader questions, I guess, with the State of the Union sort of for the franchise network in the wake of or in the front of the breakfast rollout. Is there potentially some greater consolidation among the franchisees? Is this something that I guess is fully digested where they're all on board? Or are there some that might be a little concerned that have lived through breakfast in the past that might - this might spur some greater consolidation or buying flips? And then, with respect to the digital, it sounds like you said 2% today is digital. Can you sort of put into context how delivery plays into that is delivery is that basically what you're expecting for delivery growth going from 2 to 10 on digital because that digital number sounds relatively still, even though it's 2024, pretty low 10% as a goal?

So, first off Matt on, on breakfast in consolidation, we expect folks to be really focused, we came out of our convention a couple of weeks back and the attitude and optimism about our business in the future or business has never been higher. In fact, it's at all-time highs. So, they're excited about where we're taking this business on all of our growth platforms, breakfast being one subset. So, I think we've got a system focus to grow. I don't think you'll see more consolidation in the short term. I think folks are excited that breakfast can add to profitability and can drive valuation in their business. So, they're going to give it a good goal. In fact, it may potentially even slow down some of the buy and flip activity that you might see in the in the first half of the year, is as they continue to execute against this new opportunity of growth going forward. When you think about digital, I am clearly going from 2 to 10 is a journey, a lot of our 2% is driven by delivery today as we move forward and to get more balanced when you start to think about what we're doing around delivery, what we're doing around mobile ordering, and even kiosk and select trade areas. So, you'll start to have all of those tools start to work against the delivery journey, which have moved to us to get to that 10% of our transactions coming through a digital channel.

Thank you so much.

Your next question comes from Gregory Francfort of Bank of America. Your line is open.

Hey guys, thanks for the question I have two. The first is can you talk about the incrementality assumption you're making in the in the 68% practice component of point 2020sales. I think one of your biggest competitors when they launched Brexit A few years ago, kind of got a similar mix. In a plus percent to 7% range, but the list of sales maybe wasn't as great. So just what the assumption is there. And the other piece is going back to mobile. I think you talked about in your prepared remarks, doubling the mobile mix during the promotion of Spicy Nuggets. You talked about how much maybe that stickiness, there has been in that and what the mobile mix was before you did that promotion and after and kind of how much you were able to drive on a consistent basis going forward? Thank you very much.

Yes, we look at breakfast, all the volume metrics, all the work that we've done in the restaurants that we have breakfast today. We don't see a lot of cannibalistic activity going on. We have modeled some of that into our outlook for the year to make sure that we have taken into account that, but our opportunity is to drive frequency, frequency of visit is an opportunity for us. You may not see someone come back for lunch at Wendy's if they had breakfast that day, but we have the opportunity for them to come to our restaurant a little more often. So, it's really a frequency play. So, we don't see a lot of shifting from lunch and dinner into breakfast. And in fact, the way we're setting up our promotional plan in our advertising, it's a lot of incremental support, as I just talked about earlier. As we get into the mobile piece, as we drive awareness, every time we drive awareness, whether that's mobile ordering, whether that's delivery, we move up to a new stair step plateau. So, it does spike during the activity, but then settles in at a new higher plateau. So, it continues to build, and we know that awareness is still our biggest opportunity. So, we're going to have to continue to build that to continue to ramp up the stickiness of all things in the mobile arena.

Your next question comes from Nicole Miller of Piper Jaffray. Your line is open. Thank you.

Good morning. I wanted to ask about international the 1500 store goal, how does that get split between company and franchise, how does it scale to the scale with a big bang or does it grow? And then how do you support those stores with marketing? Thank you.

Nicole, great questions. Majority of the growth in international is clearly through franchised restaurants. We have announced that we are going to enter the United Kingdom as a stronghold for Europe and we have announced that we're going to have restaurants there, but it's going to be the minority of the footprint. I would also say that they might show it to you of the growth is really coming from existing markets. I think we have demonstrated this during invest today by 2024. Only 5% of our restaurants are basically related to Europe, which basically means a new geography.

So, in essence, it's 50 to 60 stores currently a year internationally. And it's just it seems to be a modest step up. And then again, the second part, how do you have a marketing support internationally?

Yes, there is something that we're doing differently. So, a couple of things differently. The current franchises are obliged to spend a certain percent of their revenue on local marketing activities. As we are getting in the international markets, we are more open these days to potentially make investments on the on the marketing front, especially in Europe to help the establishment of the new brand-new chip geography so there's money set aside for that.

Okay and just to be clear, that fall within the confines that's into the larger plan that you've been talking about?

You were breaking up. Can you repeat the question?

I'm sorry about that. That vendor support would be within the confines of a larger strategy or guidance that you've, is that true?

Yes, that will be correct.

Thank you.

Your next question comes from Dennis Geiger of UBS. Your line is open.

Great, thanks. wondering if you could talk a bit more about anything you've seen with respect to the breakfast impacted test doors, perhaps since your last communicated about a month or so ago? I guess, Todd, you just gave some commentary around into the other day parts and sounds like you're seeing good things there. But just anything incremental with respect to customer feedback, operations, anything like that, at least at a high level? Thanks.

A couple of comments. So, one of the things that we had offered up for some unique locations, there were some restaurants that could have opted out of breakfast across the system. And that period of potentially opting out has passed and very few restaurants have decided to opt out. So, there's a lot of folks that as they look at the operational simplicity, they look at the menu They look at the investment they look at the return. They feel good about where we're going. We look at how it's performing and the rest of us we have not a lot of new news, right? We don't have any new incremental support out there. But what we're hearing operationally very efficient menu to operate. And we feel very comfortable that we can open the restaurant with two and run with three during the breakfast day part. And the model of opening the restaurant at 630 had driven through window only. And then opening up the 19 room at 9 o'clock has been received fine in the communities where we have the restaurant, so everything's on track. And now we really turn the page to what do we need to do to get our general managers excited. Our journey begins on hiring, and then eventually into training to prepare ourselves for launch.

The other thing to add then is we did a lot of volumetric modeling around the size of the business. And we have obviously also model so what would you expect if we don't do advertising and the good news. The model that we have is actually accurate to the sales levels to view seeing, actually the sales level that we expecting.

Thanks, guys.

Your next question comes from Chris O’Cull of Stifel, your line is open.

Thanks. Good morning guys. How it sounds like the system plans to spend about half of what maybe another large chain spends during their first year when they rolled out breakfast? Are there certain milestones you want to see to determine whether you should or whether the system needs to invest more to support the rollout?

We've laid out kind of the vision on where we think breakfast needs to go, we know it's going to take some work to ingrain the habit. We're in this to play the long term game and we know that changing people's behaviors takes a little bit of time, we do feel confident that over time we can get 10% of our business driven in the breakfast day part, but we don't have predetermined milestones and spend levels along the way. We know that we're playing a game to bring the system along and bring the consumer along over the next several years to really make sure that breakfast is a sustainable day part for us have a strong foundation that can lend lead into, consistent growth beyond all the support period.

Okay, fair enough. And then I apologize up if I missed it, but can you provide some more details around the pricing actions for the quarter and how mix changed and then what you expect to happen for mix and price heading into the fourth quarter?

Yes, so what we've seen in the third quarter, we have seen price and mix, both contributing about equal portions to our sales growth. And then we have seen negative traffic, negative traffic we have totally expected remember, you've changed our commercialization strategy to one more week to one more dollar. And we are lapping, obviously, the $0.50 frosty promotion, which was designed to create more and more visit. So, the hydraulics of the promotions are different. And that's why by the expected way. If you look on a fiscal year basis, we will definitely expect that pricing and mix are going to be positive and traffic is going to be slightly down because again, in the fourth quarter, the hydraulics again, the similar fashion, we are lapping the $1 any set aside for a promotion that, again was designed to drive traffic, we now have a more balanced calendar out there, so we will be much more positive on price and mix and obviously a little bit of headwind on traffic.

What is the promotions that are really driving the favorable mix shift?

This is a couple of things out there, Chris one, bringing back spicy chicken nuggets it's been nice play, it's an everyday favorite. That didn't require a lot of promotion and we did see a lot of trade up from 4 piece into 6 and 10 and even in some cases to 50 pieces. So that's been a play on mix we've talked about are Made to Crave platform, that continues to, drive folks up on the one more dollar as we trade folks up from our premium sandwiches. So those are probably two of the biggest drivers that have been driving the mix with us consistently throughout the year. We've had the also the $5 Biggie Bag earlier in the quarter against the four for promotion. So, all things that we planned on and things that we were delivering on and it's performing as we expected.

Great, thanks, guys.

Your next question comes from Katherine Fogertey with Goldman Sachs. Your line is open.

Thank you. Can you help us understand a little bit more about how the franchisee commitment plays out? Breakfast when they get the employees that you help them find, and they kind of roll it on the system. Are they committed to sticking with it for six months or one year? Or do they have the ability to kind of toggle off or on as they see fit? Thank you.

It's a great question. So, we've definitely committed to a national launch, they had a chance to opt out that that time that milestone has passed, and then you're obviously going to make sure that they're executing with excellence against the breakfast program. After a year, they have an opportunity to potentially raise concerns if the breakfast business is not creating enough financial returns for them, then we are willing to entertain a discussion to mutually agree that maybe they could be opting out later on. But again, right, they need to demonstrate on the side that the really put their best foot forward? Because again, you need to understand the passionately believe that we have designed a very, very compelling breakfast program that is profitable. And therefore, we really expect the cloud range to be very, very low.

And on that point would they be? Would they have to pay you guys a fee to opt out to reimburse you for some of the investments that you've made, or would they have the ability to just walk away from breakfast?

No, there's no fee involved. I also want to make sure it's not entire franchise organization. So that review of a potential opts out is really happening on an individual restaurant by restaurant basis.

Your next question comes from Andrew Strelzik of BMO Capital Markets. Your line is open.

Good morning. Two questions for me the first one at the investor day that you gave kind of some longer range targets for G&A. Can you help us kind of think about what that trajectory looks like to getting there over the next kind of two years?

Yeah, it's really very steady, right. As you - as said on the Investor Day we are committed to get down to about 1.5% of system sales. We expect to achieve that level in 2023. You can expect that every single year, we are stepping down to ever slightly remember currently we are sitting at about 1.8%. So, as we are adding a decent amount of sales that is the main driver by our G&A 8% of sales is going down.

Okay, great. And my other question is just the kind of the new product pipeline for 2020. There have been times over the last call it two years where you leaned into product innovation where you called back to focus on ops. Next year obviously Brexit is going to be a key focus and digital as well, so kind of where does product innovation fit within that? Is this going to be a year where that takes a bit of a backseat because of the other drivers or is your anticipate, maybe you can talk about it on a year-on-year basis, kind of think about how important that - of a role that plays outside of breakfast in the core day parts.

The news is important and continues to drive the quality in the premium messaging that that we like when we think about one more visit, one more dollar. So, as you think about 2020, will continue to bring news to the Made to Crave platform to keep it fresh and [indiscernible]. So, you'll see that sprinkling during the course of the year. As we talked about at Investor Day, we are testing a black bean burger in some markets today. So, if you think about plant-based protein alternatives, you could see some news along that way. But we'll continue to keep that focus and really make sure that we pace and sequence our calendar during the course of the year to, to really set ourselves up for success to make sure that we can run great restaurants day in and day out.

Great, thank you very much.

Your next question comes from the Patrice Chen of JP Morgan. Your line is open.

Hey, good morning, guys. And thanks for the question. I'm just wondering on the labor side, with your breakfast strategy together, how are you keeping manager and staffing levels at lunch and dinner and maybe avoiding that temptation to kind of ship those hours of breakfast, especially as the volumes and some stores may, open flow may not work in every single store and may not need the additional labor hours?

Yes, we actually very proud about the labor model that we have created for breakfast. It needs only three people. The other thing that we are doing is we investing so it's part of our $20 million investment. We are investing actually VNS generating advertising to make sure we can hire those 20,000 new employees for the system to make sure that they part can be staffed. We actually think it's a popular day part for people to work in, and it creates actually more flexibility during the morning and lunch day part, as you have already accrued in place. So, if you have cold call offs later on in the mid-morning, you can actually recover much better from that. So overall, we think we've sorted through pretty well and we are executing against it. But the point is, right, it is a type of a tight labor market, but before about all of that.

And if you really boil it down, it's really three to four people per restaurant that you really need to go higher. So if you get down to a location by location, it's not as daunting is hiring 20,000 people across the system, and everything that GP said, really getting into some of the block scheduling, we really think it can start to help us step the restaurant not just that breakfast, but through lunch.

Thanks.

Your final questions today come from Jake Bartlett of SunTrust. Your line is open.

Great, thanks for taking the question. My master's interest from your comments is that the traffic will be negative in 2019. And, it seems to be the case in other some of your competitors as well, is that what's really been the biggest driver to seem for sales has been checking mix. And the question is, is that a, I guess, an acceptable state of affairs as we go into 2020 from your perspective or from your franchisee’s perspective, or does something need to change to try to drive the traffic faster?

I think, Jake, this couple of things, we've been very proud over the last several years that we've been, growing or holding category traffic share. So, we've been doing a lot of work to bring more customers into our restaurants more often and hadn't participated in some of the check growth that others have seen. As we moved into the one more visit one more dollar strategy and our promotional calendar this year. We've rebalanced that a little bit and we think we've got that balance, right. But we do have to laugh over things like $0.50 frosty and dollar any size fries. So, I think you're going to see a more normalized basis, you go into 2020. Literally to be successful for the long run, you got to bring in more people more often. We got a lot of tools to continue to do that. Got another day part that we're entering, we got another, 40% to 45% of the system that still needs to be reimaged where we see, laughs the new consumers come back into our restaurants time and again, and we can continue to up our game on operational consistency across our restaurants and continue to drive speed. So, there are several tools in our toolbox ahead of us to keep bringing more customers in more often. And you're starting to see that across the whole QSR industry and in the last three, four quarters, traffic has turned positive. So, we plan to participate in that and that's what will drive a healthy business for the long run.

Got it. And then GP in the presentation at the Investor Day, there's a lot of compounded growth rates so CAGRs. Can you give us a sense as to how fast you think the business is going to be growing in 2024, for instance, kind of it feels like it would naturally be a ramp up to growth? So, you kind of end higher than, than some of the CAGRs, and I'm thinking specifically around unit growth. So, you've talked about a 3% CAGR in 2024. Seems like you'd end up, higher than that and just wanted to confirm how you think of the trajectory of the business.

Yes, we've definitely the total step change in growth from 19 to 20. Right, we're going from 10.9 million to about 12 million to 12.5 million. We do actually expect a steady ramp between 2020 and 2024 between 4.5, between 4% and 5%. So, there's not a lot of variation between the years.

But just in terms of the unit growth, I would assume that the International University much slower saying in 20 or 21, then it would be in 24. Is that how you're thinking about it?

That is correct. Right, but still have also be excited about the growth of international contribution and the impact to the overall sales is lower. And also, don't forget, but compounded unit growth is 3%. Our compounded sales growth related two days is actually 1.5% and a half to 2% and why is that because in international you have kind of a slightly negative make somebody an OV point of view going on there. So that's about overall it doesn't have a massive impact from a pacing point of view.

And beyond international as Abigail talked about, we really got this focus on some of the non-traditional units, we've got about 5% to 6% of our business to non-traditional today, we're open to be much higher than that 20 to 30 overtime, and some of those locations, the AEVs could be a little bit lower. So, those things all factor into that delta that GP just talked about.

Got it. And then in the last quick question, the $20 million investment that you're making in 2019, and I'm assuming that none of that was included in the third quarter and it was always going to be in the fourth.

That is correct.

Okay. Thank you very much.

Thank you, Jake. That was our last question of the call. Thank you, Todd and GP and thank you, everyone for participating this morning. We look forward to speaking with you again on our fourth quarter call in February. Have a great day. You may now disconnect.