Earnings Call Transcript - WEN Q1 2020

Operator, Operator

Good morning. Welcome to the Wendy's Company Earnings Results Conference Call. Thank you. Greg Lemenchick, Senior Director of Investor Relations and Corporate FP&A, will now begin the conference.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A

Thank you, and good morning everyone. Today's conference call and webcast includes a PowerPoint presentation which is available on our Investor Relations website, irwendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Penegor; and our Chief Financial Officer, Gunther Plosch, will provide an update on COVID-19 and the impacts on our business and our first quarter 2020 results. From there, we will open up the line for questions. And with that, I will hand things over to Todd.

Todd Penegor, President and CEO

Thanks, Greg, and good morning everyone. As we issue our first quarter earnings, we are in the middle of a global pandemic and a challenging economic environment. The good news for us is that we are starting from a position of strength. We had significant momentum in our business coming into this, with strong global same-restaurant sales growth and a very strong launch of our breakfast daypart, in which we saw global same-restaurant sales up 15% in its launch week. We've had to be nimble and move quickly, which we have done successfully as a system in order to navigate these unprecedented times. We are starting to see improvements in our sales with global same-restaurant sales being down approximately 10% for the week ended April 26 from down approximately 30% the last week of March. We are also pleased to have seen significant growth in our digital business to 5.5% of sales, more than doubling from 2.5% of sales in 2019. This has been driven by a strong customer demand for this offering, along with the addition of new delivery partners. A differentiator for us as a brand is the relationship that we have with our franchisees and the partnership across our system shown through this pandemic has been nothing short of incredible. We are confident that we will emerge from this as a stronger Wendy's system. We have taken several actions to ensure financial flexibility and preserve cash as a company, as well as support our franchise community which GP will outline later on. As a result of these efforts, our cash balance remains strong at approximately $365 million as of May 3. We have announced today our quarterly dividend of $0.05. It is important to note that even with a reduction to our payout, we still have a very strong payout ratio and we'll revisit our dividend each quarter as the impacts from COVID-19 continue to evolve. Lastly, as we look to the future, we remain committed to our long-term growth initiatives. That said, the timeline of these strategies may take a different shape as we prioritize the immediate response to COVID-19, but our goal remains the same, to become the world's most thriving and beloved restaurant brand. Before we talk more about all the actions underway in our business, I'm going to turn it over to GP to walk you through our first quarter financial results.

Gunther Plosch, Chief Financial Officer

Thanks, Todd, and good morning everyone. I will cover our quarter one results before we turn to updates on our COVID-19 response and other key initiatives. We had significant momentum in our business in the back half of 2019, and this carried into 2020 with global same-restaurant sales up approximately 4% through February and 15% the first week of March with our successful launch of breakfast. We then began to feel the impact of COVID-19, which ultimately led to SRS and the adjusted revenues being approximately flat for the first quarter. Year-over-year company restaurant margin decreased by 490 basis points to 10.1%, primarily driven by labor rate inflation, higher commodity costs, breakfast training expenses and higher maintenance costs. Please note that we made some investments in the first quarter in breakfast training and maintenance that represented about 150 basis points headwind to our margin. Lastly, the rapid sales deceleration from COVID-19 in March created additional headwinds for us. G&A increased by approximately 5%, primarily as a result of higher salaries and benefits, severance and meeting cancellation expenses due to the COVID-19 pandemic. This was partially offset by lower incentive compensation accrual. Adjusted EBITDA decreased by about 12% to $89 million. This was primarily driven by a decrease in company-operated restaurant margin and a higher G&A expense. Adjusted earnings per share decreased by approximately 36% in the first quarter to $0.09, driven by a decrease in the adjusted EBITDA and a higher provision for income taxes. Excluding the $24.7 million payment related to the settlement of the financial institutions case, our free cash flow would have been approximately $4 million in the quarter. With that, I will pass things back over to Todd.

Todd Penegor, President and CEO

Thanks, GP. Delivering high-quality food at an affordable price is more important than ever, and I am humbled by the stories of how our system continues to support our communities. From delivering breakfast and hot meals to our much appreciated first responders and healthcare workers, to volunteering personal time to local causes and charitable organizations, I am very proud of how we collectively strive to do the right thing and give something back. Wendy's is a people business, and our restaurant teams are focused, motivated, and their spirits remain high as they work through these challenging times. Our restaurants are essential to feeding our communities and we could not do this without great leadership and support from our dedicated restaurant teams who are on the front lines. We have taken steps to help protect our team members and customers during these uncertain times, including no-contact and limited-contact ordering options and focusing on social distancing practices at our restaurants. We have also invested in additional training across our system to ensure employee and customer safety in areas such as handwashing and hygiene re-certifications, social distancing and proper mask utilization. Finally, we are working tirelessly with our franchise community, so they are set up in the best position possible to navigate through this disruption, both operationally and financially. On the operational front, we have worked to ensure that our teams are receiving the supplies they need, made changes to evolve and simplify our menu, and updated staffing and procedures to continue to run great restaurants through the drive-thru and with delivery. Financially, we have executed many levers to help franchisees preserve cash flow, which GP will discuss in greater detail shortly. All these initiatives have set us up to be an even stronger business on the other side of this crisis. Moving on to provide more detail on our recent U.S. sales performance. As we shared in our March press release, we successfully continued the momentum we had built in 2019 into the first two months of the quarter, supported by customer count growth in advance of our breakfast launch on March 2. Breakfast performed extremely well out of the gate, pushing U.S. same-restaurant sales to plus 16% in the first week. We then began to feel the impacts of COVID-19 in the second week of March and continue to see the impacts on our business in many of the communities we serve. On the positive side, we have begun to see improvements in April sales, with the most recent week improving to down approximately 2% versus the last week of March, which was down 29%. We are encouraged by these trends even in the face of stay-at-home orders that had resulted in average mobility in America dropping by about 70% to 80%. Despite the significant decline, our business has performed well and we would expect to see sales continue to trend upward as restrictions are lifted across the country, as we are starting from a stronger position than many others. We've also seen strong growth in our U.S. digital business, more than doubling to approximately 5.5% of sales compared to 2.5% in 2019, as we have shifted primarily into a drive-through and delivery-only business model. Finally, our closure rate has remained low, with approximately 99% of our U.S. system open and ready to serve our communities primarily through our drive-through and delivery options. We could not be more pleased with the launch of our breakfast daypart in March as it truly exceeded our expectations. Through our marketing efforts, both on social media and on air, we quickly achieved over 50% awareness, which is significant as people are recognizing that Wendy's now serves a great breakfast. Customer satisfaction has been overwhelmingly positive and our new daypart has been sustaining at approximately 8% of U.S. sales throughout the month of April. Franchisees have been very pleased with this daypart as it is providing a sales driver that they did not have previously. It has also proven to be profitable, even at lower sales levels than we had anticipated. As we noted in our release this morning, we will be abating marketing fund contributions for the breakfast daypart for the rest of 2020 to provide relief to our franchisees. We have also been able to work creatively with our labor model at breakfast to reduce staffing. As a result, the breakfast breakeven has been reduced, decreasing significantly by about 35% on average. While the environment we encountered as we started breakfast was not what anyone would have expected, the strength of our program makes this daypart a key bright spot for us. It has performed well despite significant headwinds, which reinforces how excited customers are about having a great new breakfast option. We continue to remain encouraged by the performance and are fully committed to continuing to bring America the breakfast it deserves during this difficult time, and then in full force on the other side of the pandemic as consumers return to their morning routines. We know that the current environment is difficult for many of our customers, but we will not compromise on offering great tasting, craveable food across all dayparts at an affordable price. The work being done by our marketing team to evolve our calendar in such a short period of time to continue to meet the needs of our customers has been incredible. We have launched some great programs and created some fun for our customers with GroupNug Day on April 24, which was a free 4-piece nugget for every car coming into Wendy's. We have also acted quickly in other ways to adjust our approach in this environment, such as taking all advertising with delivery, focused messaging on the fact that we are open for business, and implemented a free junior frosty with orders for a limited time to delight our customers, just to name a few. We believe that we have a strong marketing plan in place for the rest of 2020. We remain fully committed to breakfast, and as part of this plan, we will continue to apply media pressure in this area, which we have also found to help our lunch and dinner dayparts. We will also be streamlining our promotional calendar as we believe that customers are interested in their favorites more than ever. Lastly, you can count on us to continue to leverage our world-class social and digital communications to reach our customers in ways that only Wendy's knows how to do. Our customers count on us to deliver the quality they've come to associate with Wendy's brand, and we will continue to bring them craveable meals at an affordable price today and into the future. Our digital business has experienced strong growth in 2020 as we have been able to benefit from the foundation we laid in 2019. We have expanded both our delivery and mobile ordering businesses in the U.S., as safety and convenience are paramount concerns for consumers in this COVID-19 environment. We have seen significant increases in our app downloads and users within our app as both are up around 25% since March. The teamwork to increase access to the Wendy's brand rapidly through delivery, launching with Grubhub in February, Postmates in March, and we are in the process of rolling out Uber Eats as we continue to bring convenience to our customers. As we have stressed before, frequency remains an opportunity for us and it will be more important than ever as normal routines resume in the months to come. We will be looking to our loyalty program to help us solve for this and the team has been preparing diligently for a launch in the near future. We believe that we have built a loyalty program that people will love and we could not be more excited to get this into the hands of our customers. Lastly, awareness of all of our digital offerings is even more important as we focus on convenient safe experiences. We plan to feature our digital ecosystem prominently across our marketing platforms to create even more visibility and encourage consumers to integrate these new opportunities to interact with Wendy's into their new routines. This coupled with marketing dollars being spent by our delivery partners on Wendy's specific promotions will help to provide increased awareness on our delivery business. Our restaurants are essential to feeding our communities, and we could not do this without great leadership and support from our dedicated general managers and restaurant teams who are on the front lines. As I mentioned earlier, we have taken significant steps to help protect our team members and customers during these uncertain times. We have instituted an emergency paid sick leave policy for our company hourly employees to provide additional support for employees affected by COVID-19 that has been recently extended through the month of May. We have also implemented restaurant recognition pay in our company restaurants, where our hourly crew members, shift managers and assistant general managers will be receiving a 10% increase in hourly pay through the end of May. These actions have led to very low turnover in our restaurants, which is critical to delivering on high customer satisfaction. As the operations within our restaurants have shifted primarily to drive-through and delivery-only, our dedicated teams have used this time as an opportunity to focus on delivering an exceptional drive-through experience. This emphasis has resulted in overall speed of service improving across the system through the pickup window. We have also streamlined our menu with the removal of certain items such as side salads and wraps, which simplifies operations within the restaurant for our teams. Customers are noticing these operational improvements as overall customer satisfaction scores have seen significant improvements in both company and franchise restaurants. Before I close, I want to briefly address the reports out there around beef shortages in our U.S. restaurants. As you know, beef suppliers across North America are currently facing production challenges. Because of this, some of our menu items may be in short supply from time to time at some restaurants in this current environment. We continue to supply fresh hamburgers to all of our restaurants, with deliveries two or three times a week consistent with our normal delivery schedule. We have also shifted our marketing efforts in the short term to focus on our chicken products to alleviate pressure. We're working diligently to minimize the temporary impact to our customers and restaurants, and continue to work with our supplier partners to monitor this closely. Our focus, even in the face of this near-term headwind, is to continue to delight every customer. Our company-wide response to this pandemic reinforces the values that Dave Thomas instilled over 50 years ago when he founded this great brand. The values that continue to guide us today to health, safety and well-being of our teams and customers has always been and will continue to be our top priority. Our system will remain focused on continuing to provide essential access to quality, affordable food to all our communities around the world. We are uniquely positioned with drive-throughs, delivery, and digital to win the Wendy's way. I believe that we have put ourselves in a position to be fast out of the gate when customers return to some kind of new normal, and that we will be a stronger brand on the other side. I am more confident than ever that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand. As I close, I want to send a heartfelt thank you to the entire Wendy's system. After watching our company-wide response over the last couple of months, I could not be more proud to be part of the Wendy's family. I can never say it enough, but thank you for all you are doing. I will now hand things over to GP to talk through the actions we are taking financially to support our franchise system and on the liquidity front.

Gunther Plosch, Chief Financial Officer

Thanks Todd. One of the things that makes Wendy's so special is our relationship with our franchisees, and we have been partnering with them to ensure that we have set up in the best position possible to mitigate this crisis. The good news is that we had a lot of momentum coming into this year. As we disclosed previously, we have provided deferrals of royalty, advertising, and rent payments to our system to assist with cash preservation in the short-term. We have also abated the national marketing fund contributions from the breakfast daypart in 2020. This combined with labor model improvement has led to reduction of the breakfast breakeven point by approximately 35%. This continues to make breakfast an attractive daypart. Furthermore, we have extended reimaging and new build requirements by one year to provide additional cash flow relief for the system. In addition to partnering with franchisees to find solutions to alleviate cash flows, the team has been working with our primary franchisee lenders to encourage flexible payment terms in this environment. As a result of these efforts, we expect the majority of our franchisees will benefit from interest-only payments for the three month period, which will help the liquidity position. Lastly, we believe that our franchise system has been able to benefit from the key effect through the paycheck protection program. As a reminder, many of our franchisees are very small businesses with over 50% of our franchisee system owning five restaurants or less. We also believe that QIP which fixes the Qualified Improvement Property deductibility issue for interior upgrades, will provide a large benefit to our franchisees due to the significant amount of re-imaging we have done over the last two years. As we previously disclosed on March 26, given the level of volatility and uncertainty surrounding the future impact of COVID-19 on the global economy, and any specific impacts to our company, we have withdrawn our 2020 and long-term outlook. We intend to provide an updated financial outlook when we can reasonably estimate the impact of COVID-19 and changing market conditions. We can, however, give an update on our liquidity position and the actions we have taken over the last couple of months. Our cash balance as of May 3 remains healthy at $365 million, following the drawdown of our VFN facility, our cash balance has been very consistent at this level, despite the impact of COVID-19. In an effort to manage our cash burn, we have identified savings in capital expenditures of approximately $20 million, and in our G&A of approximately $10 million. This cash flow will help us to offset a portion of the deferrals that we are providing the franchisees in the short-term. We are confident that these reductions will allow us to continue to invest in our business for growth, while managing the dynamic environment we are operating in currently. There are also aspects of the CARES Act that we believe we will benefit from. We are planning to defer our share of Social Security payroll taxes as permitted under the CARES Act. We have the option to defer these payments through the end of 2020, and repay them in 2021 and 2022. This benefit could be upwards of $12 million to our 2020 cash flows. Like our franchise system, we also expect to benefit from QIP which fixes the Qualified Improvement Property deductibility issue for interior upgrades. 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 announced today the declaration of our quarterly cash dividend. We have reduced our second quarter dividend to $0.05 per share payable in June. It is important to note that even with this reduction, our dividend payout ratio on a trailing 12 month basis is still in line with our capital allocation policy. We will continue to evaluate our dividend payment on a quarterly basis as the business impact from COVID-19 continues to evolve. Lastly, we will utilize excess cash to repurchase shares and/or reduce debt. As previously disclosed, we're currently placing our share repurchases on hold to ensure a strong liquidity position during this time. We believe that we are taking the appropriate actions as a company to get us through this unprecedented time. Coming out the other side of this, we believe that we will return to being an accelerated efficient growth company that will showcase strong system-wide sales growth on the backdrop of positive same-restaurant sales and global restaurant expansion, which will translate into significant free cash flows. I will now hand things over to Greg to close it out.

Todd Penegor, President and CEO

Thanks, GP. Due to the uncertainty and travel restrictions being placed as a result of COVID-19, all our investor meetings over the next two months have now been shifted to virtual meetings. We will be attending two virtual conferences, which will be with Bernstein and Oppenheimer on May 28 and June 17 respectively. We will be doing two virtual NDRs, the first on May 13 with Evercore, that will be focused on the Canadian market, and on May 14 with Guggenheim, with a focus on the Midwest market. Lastly, on June 23, we will be converting a planned HQ visit with Piper Sandler to a virtual conference call. If you're interested in joining us at any of these events, please contact the respective sell-side analysts or equity sales contact at the host firm. With that, we're ready to take your questions.

Operator, Operator

And our first question comes from Brian Bittner with Oppenheimer & Co. Please go ahead, your line is open.

Brian Bittner, Analyst

I hope you and your families are doing well. You mentioned breakfast sales are mixing at 8% in April. How do you think you've been able to achieve that in this environment without the incremental marketing spend? It's just - it's no secret that breakfast is the most challenged daypart across the industry recently. So also wondering, what you think about the potential breakfast once America returns to some type of normalcy and the population does return to work?

Todd Penegor, President and CEO

Thanks, Brian. Hope you're doing well too, and thank you for those comments. As you know, with mobility down so much and people not having a morning routine, the breakfast daypart across the industry has been hit very hard. But we are very pleased with the advertising support that we've had out there, our strong social media presence that even with that headwind, we've been able to get folks to come out and continue to try our great breakfast offerings. Customer satisfaction has been very high, provide some comfort for folks at a time when they're looking for comfort and that really bodes well for the future as we're getting a lot of great trial, a lot of great word of mouth, which really sets the sales up when folks get back into a routine, into the future, to really continue the success that we saw right out of the gate. So we're really encouraged about what breakfast can play. And importantly, as we support our breakfast business, it does have a nice halo to our lunch and dinner business as we continue to create impressions around high quality, great tasting food at Wendy's.

Brian Bittner, Analyst

Thank you for that, Todd. And my follow up, GP, can you just talk about your updated plans to invest in breakfast from the corporate side incrementally after 2020? Are you still going to be making extra contributions in '21 and '22 or is everything sort of on pause right now?

Gunther Plosch, Chief Financial Officer

Yes, great follow-up question. As Todd said, we are extremely pleased in terms of how we got out of the gate with breakfast, with pretty minimal investment on our side that allowed us to really create 50% awareness levels with the channel population, which is actually astounding since we only have such a short period of time to achieve that number. So for the time being, it stands. We have withdrawn our investments - our company investments from breakfast and we're evaluating the situation on a go-forward basis. So far, no news versus what we communicated end of March.

Operator, Operator

Our next question comes from the line of Andrew Charles with Cowen & Company. Go ahead please. Your line is open.

Andrew Charles, Analyst

Just to echo what Brian said, I hope you and your families are well. Your nugget sales are steadily on the path back towards positive territory. How do you see value tactics evolving from the free frosty and nuggets promotions during April into something more enduring in the coming months? Would you consider your value playbook to be something that's more proactive, meaning that, you know what franchisees need to help profitably accelerate traffic or is it reactive-based on what's in the marketplace?

Todd Penegor, President and CEO

I think we're going to want to continue to play a proactive game, Andrew. It's - we've talked a lot about one more visit, one more dollar, and continue to have that balance on both sides of the menu. And we know that we need to continue to have our customers’ backs in this time of need. And you think about where the customer is today, unfortunately unemployment levels are high and folks are going to be looking for a great tasting affordable meal, but are also going to want to be able to trade up across the menu. So we will continue to make sure we've got that appropriate balance and continue to play offense to create a lot of loyalty and even more frequency into the future. So we'll continue to stick to our playbook which has been working quite nicely.

Andrew Charles, Analyst

And Todd, just following up on that. You talked about obviously balancing with some premium items as well. I know you're in different stages of the initiatives that you laid out at the investor meeting and how to roll those out. But just given the beef shortage that you're seeing in certain instances and the displacement of consumer habits amid COVID-19, are you still planning to launch a plant-based burger this quarter as the timeline on that been pushed out?

Todd Penegor, President and CEO

Yes. We look at our marketing calendar. As you know, we've got a lot of things in the plant-based arena that's in our pipeline that we will launch at the appropriate time and do it the Wendy's way as we've said in the past. But right now, the consumer is really looking for core offerings, and are more really focused on delivering them core. Our marketing calendar is focused on that and we want to make sure that we're delivering those products very high quality and very fast, especially as we're focused on drive-through and delivery that can create a lot of loyalty for the future with some great experiences, especially as we're bringing in a lot of laps, a lot of new customers through this time when their restaurant options are limited.

Operator, Operator

Our next question comes from the line of Sara Senatore with Bernstein. Go ahead please. Your line is open.

Sara Senatore, Analyst

A follow-up on breakfast, and your underlying comp trends. Obviously, beginning of this in March, kind of like it modestly positive same-store sales even ex breakfast. And you talked about how the breakfast marketing and supporting lunch and dinner to you. Can you just maybe identify, do you know anything about, are these new customers or existing customers extent to which there is any substitution going on between breakfast and other dayparts? And a related question, if you could just talk about the traffic versus ticket in your comp, the composition of anything to kind of delivery, drive-through, traffic, ticket, just trying to understand the breakfast impact specifically but some color on overall sales trends generally? Thank you.

Todd Penegor, President and CEO

Yes, a lot in there Sara. So let me start with - you know in the hamburger category, we grew both traffic share and dollar share in the first quarter. So we feel very good about that and we did feel, but a good start to the year. As you talked about in periods one and period two, and on the call in our prepared remarks, we talked about customer counts actually improving, as we employed our one more visit, one more dollar strategy with the 2 for $5 meal deal, as well as the Big Bacon classic in our Made to Crave lineup. We did experience significant traffic lift in - with the launch of breakfast in the first week of March. So we are feeling really good about bringing more folks into our restaurants more often. And then as the quarter ended with COVID-19 hitting, clearly our traffic fell dramatically, but - and we ended up with traffic down slightly in the total quarter. We had pricing in line with food away from home inflation, and we had a little bit of mixed benefit. But we do feel good that we got a nice balance on our marketing calendar and the pressure that we have out there across lunch and dinner and breakfast, and all of our messaging is really focused on quality food being available through our drive-throughs and with delivery, which is giving folks some positive impressions of the Wendy's brand.

Operator, Operator

Our next question comes from the line of Chris Carril with RBC Capital. Go ahead please. Your line is open.

Chris Carril, Analyst

So can you expand a bit more on breakfast profitability and the reduction of the breakeven point. So - and if there are any details you can share around what's driven the reduction and how much of that is sustainable as sales continue to improve?

Gunther Plosch, Chief Financial Officer

Yes, we have done a lot of work on breakeven point. Remember, in the run-up to breakfast and the breakfast launch, we worked really hard with the franchise community to make sure we have really a very profitable daypart, and we really optimized the whole model and really dramatically improved the economics versus previous attempts. Taken now that further since obviously there is a little bit less traffic running through there to actually create an even more profitable model for us, essence means, we can run the daypart instead of with three people, actually two in most of our restaurants, and that obviously improves financials quite dramatically, and then reduce our breakeven point by about 35%. We've never given the absolute breakeven point out, but obviously it improved dramatically. Combine that, with the marketing contribution abatement on breakfast sales, it is really creating a very profitable sales layer for our franchisees.

Todd Penegor, President and CEO

And what we really got to see is, you remember, we were going to start bringing labor in between 9 and 10:30. And with the dining rooms closed, we haven't had to do that. So that is another part where we could really optimize that labor model through the morning. And to Sara's question earlier, we are seeing breakfast being highly incremental. We are not seeing cannibalization at all. So it is a nice additional new layer of business that we've added for a different occasion during the course of a week or a month that is really driving frequency for our business.

Operator, Operator

Our next question comes from the line of Jeff Farmer with Gordon Haskett. Go ahead please. Your line is open.

Jeff Farmer, Analyst

You did touch on it in a couple of questions, but from a high level, what drove that dramatic improvement Wendy's U.S. same-store sales over the last three weeks, and specifically the most recent week? What are you guys seeing that's driving that increased demand?

Todd Penegor, President and CEO

I think there is a couple of things going along the way. We took the time when things were really dark out of the gate to really focus on running some great drive-through times. And we've seen nice improvements in our speed of service at the drive-through even with more items per order coming in as there is much more big orders happening as one person goes out to order food for everybody. We've been really focused on delivering great tasting, high-quality food, and we've seen that in our overall satisfaction at the restaurant level. So folks had a taste of a great experience. And as some of the stay-in-place restrictions are starting to get lifted, and the weather has gotten a little nicer, folks want to get out and they're looking for restaurants that are fast, that are affordable, and that are safe, and we're delivering on that promise time and again, and we continue to see all of that play into, you know the business trends in our business. And as these restrictions start to get lifted, we've clearly seen faster impacts on the recovery in areas like out west, and most recently, down in the Southeast, because folks know they can get an affordable, high-quality, safe meal from Wendy's. So all of that plays into our momentum and we're out there with some good impressions, right. We're supporting the breakfast business. We're supporting our lunch and dinner business. We've added new layer with delivery continuing to accelerate as we brought on new partners with Postmates and about to bring on Uber Eats. So all of those things play into our trends.

Jeff Farmer, Analyst

That's helpful. And just as a follow-up, again, acknowledging that the majority of these statewide closure mandates will expire over the next two weeks, I can see that - we'll see how that would be a tailwind, but in terms of Wendy's specific, are there management's - are there criteria that management has out there on the reopening front, so it's not as simple as a state saying you're back open for in-restaurant dining and is there something specifically about Wendy's needs to see in terms of some type of metric to give you comfort with or your franchisees reopening these restaurants to in-restaurant dining once that statewide closure mandate expires in any given state?

Todd Penegor, President and CEO

Yes. Clearly we're going to watch the national authorities, the CDC, and others who are talking about. We'll see what folks are talking about at the state level, but we're not going to rush to reopen our dining. We're going to be smart about it. The safety of our employees, the safety of our customers will be paramount through all of this. We'll continue to get our restaurants set up on the inside for social distancing and for safety, but I would expect us to start to open our restaurants in phases. The first phase would be to really start extending some of the hours again. When we got hit early on, we had pulled back on late-night hours where we've seen that business be impacted, we can start extending there. We can open the restaurants for carry-out as a phase two and we can do that very efficiently to take some pressure off the drive-through window. And then ultimately get those restaurant dining rooms opened with the appropriate social distancing set up in those restaurants. But we'll be smart about it, we will be safe about it, we'll look at the competitive landscape, but most importantly, we will focus on safety of consumers and employees.

Operator, Operator

Our next question comes from the line of Eric Gonzalez with KeyBanc. Go ahead please. Your line is open.

Eric Gonzalez, Analyst

On the company operating margins, it's hard to get a sense of what's happening by looking at the full quarter, particularly at the breakfast launch in there. So perhaps you can give us a bit more color on how the company operating margins looks through April and May, inclusive of any inflationary pressures on beef and whether it's still a good proxy for franchisee cash flow?

Gunther Plosch, Chief Financial Officer

Yes, there is a lot going on in our margin in the first quarter as you pointed out. Couple of facts for you. We had commodity inflation of about 3.9%, mainly driven by beef, that meant on the face of the P&L that the food costs were down about 40 basis points from prior year, so the underlying inflation was about 110 basis points of price mix that we played in actually helped to offset somewhat. On the labor side, we had labor inflation of about 5.5%. So that created a headwind for us of about 170 basis points. As we said on the prepared remarks, right, we were ready for double-digit growth. So we obviously staffed our restaurants well, and then we made investments, we made investments in training and all those investments created a headwind for us of about 150 basis points. As then March hit, right, we were fully staffed, ready for double-digit growth. We saw the rapid deceleration of labor, and literally we couldn't take labor out fast enough and it created additional headwinds for us in the quarter.

Eric Gonzalez, Analyst

Is there any comments on April and May that you could possibly make inline of the recent inflation?

Gunther Plosch, Chief Financial Officer

No. We've given very detailed information on sales. We're not going to go down the path of breaking out margin for the month.

Operator, Operator

And our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead please. Your line is open.

Jeffrey Bernstein, Analyst

Two questions. Just one, trying to parse through the strong improvement in same-store sales. I'm just wondering whether you can give any kind of metrics in terms of, presumably it's all to go at this point. So maybe mix of drive-through versus pick-up and maybe mix delivery, and your confidence that you can hold much all of that to go mix once the dining rooms reopen, whether they have any early evidence or any thoughts in terms of albeit to hold that. Any kind of color around, again, the mix or weekday, weekend? That would be great. Then I had one follow-up.

Todd Penegor, President and CEO

Yes, Jeff, I mean, right now where we sit here in the U.S. is - we're mainly a drive-through and delivery business. We've got a few dining rooms starting to open, but mainly just for takeaway business right now, and that's probably 5% to 10% of our restaurants, with some of the restrictions that have been lifted recently. So we've been really focused on having great drive-through times with the restaurant recognition pay and the work that we did with in fully sick leave. Our turnover has been very, very low in our restaurants, and has allowed our best positions that were - our best people to work in the best positions to really create some great experiences to drive our business. Delivery has ramped up. We talked about on the call that we're up to 5.5% digital mix and that's picked up rapidly in the last 30 days. Remember, when we pre-announced was around 4.3%. So in 30 days we picked up another 1.2% of mix delivering, really delivered by both delivery primarily, but also mobile ordering. And all of those things play into creating great experiences. And I really do think folks want to start to get out, but they want to do it smartly and safely, and we're a great option to provide high quality, affordable food, very quickly in a very safe environment. So I think that's really plan in. And certainly having a breakfast daypart as folks start to get into any kind of routine knowing that we hung in there really, really well on breakfast without a routine that really foreshadows some excitement for the future for us.

Jeffrey Bernstein, Analyst

And then my other question was just on the balance sheet, both of yourselves and franchisees, GP. I know you mentioned something about cash burn rate, but I don't think you provided specific. So any color you can give on that coupled with just - as the franchisees think about the same thing. I'm assuming they're pleased with the efforts you've provided for relief, but any color you can give in terms of their feedback or maybe their financial position and leverage at this point would be great? Thank you.

Gunther Plosch, Chief Financial Officer

Yes, we are happy on the company side, right. Last time we talked, we disclosed end of March, a cash balance of about $340 million, that's now up to $365 million in the context of, actually, our sales were down in the month of April. So that is good. We are getting rental income still. We are getting, obviously cash out of our company restaurant operations and that helps us. I would expect that with all the actions we have taken by deferring payments or abating marketing contributions, that's also helping our franchisees. And as we said, our expectation is that a lot of our franchisees will have gotten help through the PPP program. So I would expect that they're actually in pretty decent shape.

Operator, Operator

Our next question comes from the line of Andrew Strelzik with BMO. Go ahead please. Your line is open.

Andrew Strelzik, Analyst

Two questions from me. The first, I'm curious about, if you've been able to diagnose kind of behavior of the digital customer? At the Analyst Day, you talked about much higher frequency, and I'm curious if you're seeing any of that, and also if the demographics are any different from your core customer base? And then my second question is on the G&A savings. I'm curious where those are coming from and if that has changed at all your thinking about what G&A could look like over time? Thank you.

Gunther Plosch, Chief Financial Officer

Let's start with G&A. G&A savings really with the function of reductions in travel expenses, and then really reduction of our incentive payout was probably the two big drivers we had offset as well. There were tailwinds - there were headwinds as we are delaying the sale of our New York restaurants. We obviously versus original plan, have a little bit of headwind on that front. As far as delivery - and delivery adoption is occurring. It is definitely much faster than we anticipated, right. As we have talked at Investor Day, we said we're going to get to 10% of sales by 2024, we are now at 5.5%, literally five months after Investor Day. So adoption is rapid. Behaviors, and what we see out of this business are about the same. We still see elevated check sizes. We still see those customers visiting our stores more frequently than non-digital customers. So all the basic construct of it has not changed. And the profitability model for us hasn't changed, because with all partners, we have made sure that all the delivery-related charges are getting passed on to the consumer, and still it's an order type that has very high customer satisfaction.

Operator, Operator

Our next question comes from the line of Chris O'Cull with Stifel. Go ahead please. Your line is open.

Unidentified Analyst, Analyst

This is Patrick on for Chris, and good morning. I appreciate the color you guys provided on the beef shortage in some of the challenges there in the short run. But I was curious if you have any sales quantification or any visibility into sort of the duration or if we'll see sort of it get worse before it gets better from here? And then a follow-up.

Todd Penegor, President and CEO

No quantification. It would be hard to quantify what the impact is, because even where we might have spot outages, folks are still at the restaurant and they are buying other food items when we're there. So what we said on the main call is exactly what we're seeing, right. It is tight out there today. We're still delivering beef to every restaurant, with deliveries two or three times a week consistent with our normal delivery schedule. We have also shifted our marketing efforts in the short term to focus on our chicken products to alleviate pressure. We're working diligently to minimize the temporary impact to our customers and restaurants, and continue to work with our supplier partners to monitor this closely. Our focus, even in the face of this near-term headwind, is to continue to delight every customer. Our company-wide response to this pandemic reinforces the values that Dave Thomas instilled over 50 years ago when he founded this great brand. The values that continue to guide us today to health, safety and well-being of our teams and customers has always been and will continue to be our top priority. Our system will remain focused on continuing to provide essential access to quality, affordable food to all our communities around the world. We are uniquely positioned with drive-throughs, delivery, and digital to win the Wendy's way. I believe that we have put ourselves in a position to be fast out of the gate when customers return to some kind of new normal, and that we will be a stronger brand on the other side. I am more confident than ever that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand. As I close, I want to send a heartfelt thank you to the entire Wendy's system. After watching our company-wide response over the last couple of months, I could not be more proud to be part of the Wendy's family. I can never say it enough, but thank you for all you are doing. I will now hand things over to GP to talk through the actions we are taking financially to support our franchise system and on the liquidity front.

Gunther Plosch, Chief Financial Officer

Operator, Operator

And our next question comes from Andrew Charles with Cowen & Company. Please go ahead, your line is open.

Andrew Charles, Analyst

Thank you guy, and I hope you are well. You talked about your nugget sales are steadily on path back toward positive territory after their strong promotions in April. Do you see your value tactics evolving from offering free Frosties and nugget promotions into something more long-lasting that could benefit the brand? Do you treat your value playbook as more proactive, where you're helping franchisees to accelerate traffic, and play offense or are you being more reactive to conditions in the market?

Todd Penegor, President and CEO

I think we lean more toward being proactive in our value playbook. It's important to get our customers to return to their routine, and we are aware of the dynamics of the current market. We plan to ensure we are accessible to everyone looking for great pricing and delicious food while also allowing room for customers who wish to trade up. This is how we will continue to build loyalty and frequency in our customer base moving forward.

Operator, Operator

Thank you, Todd. And with that, we do have time for one last question. Our final question comes from the line of James Rutherford with Stephens, Inc. Go ahead please. Your line is open.

James Rutherford, Analyst

I just wanted to explore that comp improvement a little bit more. I know we've discussed it quite a bit on the call, but can you give any color on daypart performance? We know breakfast is mixing at 8%, but what trend are you seeing at lunch, dinner and late-night as consumer habits have shifted recently? Thank you.

Todd Penegor, President and CEO

Yes, James. Clearly, we've talked a lot about breakfast and breakfast had been from an industry trend the hardest hit daypart. So it's been really encouraging that we've hung in there well. Clearly, our breakfast business has been throttled in absolute dollars with mobility down and not having the morning routine. So we've seen that impacted. And we've seen the late-night business impacted. As folks are not out and about as much and as they hunker down later into the evening, we do see the impacts there. So, we'll be encouraged to see that to start to come back as restrictions get lifted. Early on, we did see some impacts during the dinner daypart, but that has started to come back nicely once folks got past the initial hunkering down and continue to see really strong lunch business. It’s a great solution for folks who want to get out and support their lunch daypart. So it's really breakfast and late-night where the headwinds have been, and everything else has been hanging in there pretty well over the last several weeks.

Operator, Operator

With that, it looks like we have time for one final question. Our final question comes from the line of John Ivankoe with JP Morgan. Go ahead please. Your line is open.

John Ivankoe, Analyst

Thank you very much. A follow-up if I may, some of the breathless press reports yesterday kind of remind me to ask a question about some of the mobile, excuse me, the digital kiosk that you have in the store, which isn't something I think we've talked about in a little while. So kind of comment on whether this is an opportunity and kind of alluding to your previous question, maybe where you can start to think about reducing the amount of seating in the store, putting in some more kiosk ordering and whether increasing some of the capacity for what probably is going to be a sustained to-go business is a possibility? In other words, kind of rethinking Image Activation a little bit to some extent, because I mean, I think it's pretty amazing that your business is down only 2% with our customers walking in the door.

Gunther Plosch, Chief Financial Officer

As Todd said already, previously, we think our design are pretty well laid out. We definitely going to take some lessons learned and say like where can we tweak. And obviously, kiosk positioning the role they can play in the future in the context of a dining room business that might look a little bit different in the future is definitely in our list to think through. I would say it's a little bit too early to come to solid conclusions on it.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A

Thank you, John. 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 second quarter call in August. Have a great day everyone. You may now disconnect.