Q2 2021 Wendys Co Earnings Call
Okay.
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'll be a question and answer session I would like to ask a question. During this time some of the press star followed by the number one on your telephone keypad. If you like to withdraw your question press the pound key thank you Greg Levin check.
Director of Investor Relations and corporate SG&A, you may begin your conference.
Thank you and good morning, everyone.
And this conference call and webcast includes a powerpoint presentation, which is available on our Investor Relations website IR of when these dot com.
Before we begin please take note of the Safe Harbor statements at appears at the end of our earnings release. This disclosure of reminds investors at certain information we may discuss today is far and lucky.
Various factors could affect our results and cause those results to differ materially from the projections set forth and are forward looking statements.
And also some of today's comments will reference non-GAAP financial measures.
And that's where 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 are president and Chief Executive Officer, Todd Pentagon, and our Chief Financial Officer, Gunther Plush will give a business update and review our 2021 second quarter results share our revised financial outlook and provide a franchise health update from there we will open up the line for questions and with that I will hand things over to Todd.
Thanks, Greg and good morning, everyone.
Our transformative growth continued in the second quarter as we had one of our best quarters ever and it's the Wendy's brand sales once again significantly exceeded our expectations, leading to record profits and fueling our restaurant economic model.
We delivered a second consecutive double digit two year accelerating same restaurant sales result, after accounting for the 50 <unk> week shift on the strength of our rest of the day business growing breakfast day, part digital business and a step change and our international performance.
Our breakthrough sales led to a restaurant margin of more than 20% and almost 600 basis point expansion year over year.
Our focus remains on ensuring that we have a robust restaurant economic model across our system and we are executing.
We successfully entered the European market with our first restaurant and the U K and are very encouraged by the early results and excitement we've seen so far and that market.
We also have a strong pipeline of company restaurants with several more planned for this year and half of our first franchisee and reef kitchens that is planning to open a handful of delivery kitchens as well this year.
I'm extremely proud to share that we are increasing our 2025 global restaurant target to 8500 to 9000 restaurants and so the team has been very successful and securing new commitments.
This increase was driven by an expanded relationship with reef kitchens, and a newly created build to suit development fund.
In addition, we finalized approximately 240 incremental new restaurant commitments through our groundbreaker incentive program.
We also recently finished collecting our 2020 U S franchise financials, and we saw a significant increase and overall financial health of.
Our franchise system grew EBITDA dollars by almost 20% and 2022, what we believe our record profits.
As a result of our incredibly strong start to the year and the momentum we are seeing and our business. We are increasing our dividend by 20% to <unk> 12 per share, which is back to a pre COVID-19 level.
We are also meaningfully increasing our 2021 and outlook on all our key financial metrics, which GP will talk to later in the presentation.
Our goal remains the same which is to invest and driving efficient accelerated growth and we are delivering on that commitment and a big way.
Our momentum carried into the second quarter with global same restaurant sales growth of 17, 4%.
This came in well ahead of our internal expectations driven by continued strength across our U S and international businesses.
This translated to 11, 6% on a two year basis, reaching double digits for a second consecutive quarter and we accelerated on a two year basis to approximately 14, 1% when accounting for the 50 <unk> week shift.
And the U S. We achieved double digit one and two year same restaurant sales again, this quarter, reaching 16, 1% and 11, 7%, respectively and record vs. On a trailing 12 month basis of almost $1.9 million.
These strong results were driven by continued growth and our rest of the day business alongside our growing breakfast and digital businesses.
This was our fourth consecutive quarter of double digit two year same restaurant sales growth, which showcases the power of our business and our execution against our strategic initiatives.
Our international business saw a significant increase in same restaurant sales this quarter accelerating to 31, 4% on a one year basis and 13% on a two year basis.
This growth is attributed to the strength and recovery across many of our markets with our Canadian restaurants, reaching all time high au vs. On a trailing 12 month basis of almost $2.4 million Canadian dollars.
The continued strength and momentum we've seen and our global same restaurant sales through the second quarter has once again, giving us the confidence to take up our system wide sales outlook for 2021% to 11% to 13%.
Our global franchise system is engaged and we are confident and the plans that we have in place for the remainder of 2021.
Let's spend a few moments talking about our incredible U S same restaurant sales, which continued to accelerate and the second quarter driven by a significant improvement and customer accounts and continued strong average checks.
We continued to innovate with our successful made to crave platform. This quarter launching the Bourbon Bacon cheeseburger, which led to record results within this platform for the quarter.
We also relaunched the fan favorite summer Strawberry salad, which drove substantial year over year growth and our salad business.
These programs continue to boost our average checks by trading of our customers into our most craveable and highest quality products.
We also executed against our high low strategy by continuing the five dollar biggie bag promotion, which drove traffic into our restaurants throughout the second quarter.
We will continue to strike a balance between our core menu items, and new product offerings with exciting and <unk> new products.
On the innovation front, we continue to lead and the area of spicy with the recent launch of our Ghost Pepper Ranch dipping sauce. We also have a new addition, coming to the made to crave lineup launching at the end of August, which we're really excited about.
We expect to continue to drive outsized results and our U S business as a result of our planned programming and high level of execution.
Breakfast continues to be a profitable sales layer for us and the second quarter and our average weekly sales dollars delivered versus our breakfast plan, we could not be more excited about the upside that is still in front of us at breakfast and the incremental investment that we announced this morning gives us even more confidence.
And the second quarter, our breakfast sales accelerated as expected growing 10% over the first quarter.
This growth was driven by the successful $1.99, honey butter chicken biscuit and two from four trial driving promotions during the quarter.
These promotions have been critical to our success as we continue to see very strong customer repeat and high customer satisfaction. After people try and breakfast. We continue to expect outsized growth during the breakfast day part and the second half of 2021, driven by continued trial driving programs and an expected return to routines.
In the fall.
This is being fueled by our incremental company breakfast advertising investment that we just increased by $10 million to $25 million and 2021, we.
We believe this incremental investment will continue to drive trial and acceleration of the Companys breakfast offering and a meaningful way.
We remain confident and our plan to grow our breakfast sales by 30% and 2021 and reach our goal of 10% of sales coming from breakfast by the end of 2022.
We continue to be very pleased with our digital business, which grew across the globe and the second quarter.
Our international business continued to deliver double digit digital sales mix and the second quarter as we've seen our digital gains during COVID-19 remained strong.
And the U S digital sales dollars grew over 10% and outpaced our plan for the quarter.
This was driven by gains on both delivery and mobile ordering sales delivery.
Delivery sales were bolstered by several successful promotions and we're encouraged by the growth we've seen in this channel even as mobility continues to increase.
Our mobile ordering gains were driven by several impactful acquisition campaigns, which increased our total loyalty program members by 25% compared to the first quarter to $17 million.
We saw significant growth and both digital and overall sales during the second quarter, resulting in our digital sales mix holding steady at approximately seven 5%.
We remain fully committed to our digital journey and I know that's of technology investments, we're making alongside our franchisees will set us up for continued growth into the future.
As I shared earlier I am extremely excited to announce that we are increasing our 2025 global restaurant target to 8500 to 9000 restaurants, which is a meaningful 500 to 1000 increase versus our previous target.
This increase is being driven by a development commitment by reef kitchens for 700 delivery kitchens over the next five years and the U S, Canada and the U K.
This commitment and builds on the successful test that we completed and Canada and will allow us to further develop urban markets, where we are currently underpenetrated.
We are still very early and our non traditional development journey, but we are encouraged by the results that we've seen with <unk> and will continue learning alongside them throughout this partnership as we grow our brand.
Our increased global restaurant and target is also being supported by the creation of 100 million dollar of build to suit development fund that we expect will drive approximately 80 to 90, new franchise restaurants from 2022 through 2025.
This initiative will be funded by the additional cash that we have obtained as part of our successful debt refinancing that we completed and the second quarter.
This program along with newly implemented lower liquidity and net worth requirements for our new franchisees will transform how we recruit and engaged diverse franchisees into the brand.
Our real estate and construction teams will be on point to secure and build the locations, making it a turnkey solution for a franchisee to opened a new restaurant.
I also wanted to provide and exciting update on our groundbreaker incentive program as we were able to secure approximately 240 incremental commitments in Canada and the U S that will further solidify our restaurant development pipeline over the next several years.
With the incremental commitments from the groundbreaker and the incremental reef units. We now have about 70% of our global New restaurant pipeline through 2025 committed under a development agreement, which is our highest level that we've ever seen.
We remain on track to reach approximately 7000 restaurants by the end of 2021 and this is supported by a strong global pipeline of restaurants, where we currently have almost 70% of our planned restaurants opened or under construction through the first week of August or.
Our development Foundation is extremely strong and we are confident that we will reach our increased goal of 8500 to 9000 global restaurants by the end of 2025.
Our playbook of investing to drive accelerated growth behind our three long term pillars to meaningfully build our breakfast day part drive our digital business and expand our footprint across the globe remains the same.
We continue to make tremendous progress against these goals, while making investments and strategic partnerships to set ourselves up for today and the future. These.
These initiatives remain deeply rooted in the foundation of the restaurant economic model and we are delivering on that promise as we showed and the second quarter with our accelerating margin performance.
Our business momentum strong partnership and health of our franchisees and the dedication of our restaurant crew and support center teams reaffirms our confidence that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand.
And we know that our best days are ahead of US and we are excited to deliver I will now hand things over to GP to talk through our second quarter financial results. Thanks, Todd we could not be more proud of our second quarter results as our business continued to accelerate to a record level of showcasing same restaurant sales and earnings growth that were once again.
Again, well ahead of our expectations.
Our global system wide sales grew an incredible 22, 9% and on a same restaurant sales increased to 17, 4% and quarter two on the strength of both our U S and international businesses.
Year over year company restaurant margin increased almost 600 basis points to over 20% driven by sales leveraging from our 23, 9% company operated Sos growth and lapping recognition pay in the prior year.
These benefits, partially offset by having to absorb higher than expected labor rates and commodities of almost 6% and three and 5% respectively.
The increase in G&A was driven by higher incentive and stock compensation accruals as a result of our improved outlook and higher technology costs, primarily related to our ERP implementation.
Adjusted EBITDA increased approximately 35% to $131 million.
It was primarily driven by higher franchise royalty revenue as a result of increased same restaurant sales and increase in company operated restaurant margin and.
And and increasing net franchise fees at <unk>.
Result of the Companys, new technology fee implemented in 2021 of these benefits were partially offset by higher general and administrative expense.
Adjusted earnings per share increased 125% to 27%.
Driven primarily by a higher adjusted EBITDA.
Finally, our free cash flow increased significantly to approximately $186 million the.
The increase resulted primarily from higher net income higher royalties collected at the result of lapping the three month extension of royalty payment terms that was provided to franchise fees in 2020, the timing of rental payments and the timing of accrued compensation payments.
Our strong quarter, two results and continuing momentum and the business are driving of high quality of earnings that resulted in a meaningful increase to our 2021 outlook for a second straight quarter vs.
We are raising our global system wide sales growth outlook to 11% to 13% based on our outperformance and quarter, two and and improved full year sales outlook due to the strength of our business. This improved sales outlook is the major driver in our adjusted EBITDA outlook, which is up $10 million.
To approximately $465 million to $475 million.
We are now expecting an increase and our company operated restaurant margin to 17% to 18% in 2021, which is being driven by the improved sales outlook.
Our margin outlook is also inclusive of increases to both commodities and labor rates, which we are now expecting to be inflationary approximately two 3% and five 6% respectively.
We are also expecting an increase of net franchise revenues related to franchise transactions that are expected to close and the back half of the year.
These increases are being partially offset by an increase in G&A to approximately $240 million to $250 million.
And which is driven by high incentive compensation accrual because of our improved outlook.
These increases are also being offset by the incremental $10 million company breakfast advertising investment we are making.
Our higher adjusted EBITDA, and slightly lower expected tax rate and interest savings from our successful debt refinance are resulting in a 7% increase to our EPS outlook to <unk> 79 to 81.
Finally, we are raising our free cash flow outlook by $20 million.
To approximately $270 million to $280 million.
Likely do as part of our quarter two earnings release, each year I wanted to take the opportunity to give you an update on our U S franchise financial health.
We recently finished collecting and reviewing our finance for 2020.
The outstanding results, we are seeing as a company are also being experienced by our franchise system.
Our franchise sales in the U S grew approximately 2% compared to the prior year.
These sales along with significantly improving restaurant margins.
Were positively impacted by higher average checks and so it was how big of the pandemic allowed us system to grow EBITDA dollars.
By almost 20% in 2020.
We believe that these results represent record profits for our franchisees and at the strong performance has continued in 2021 with the momentum that we've seen of business.
Our franchise system also has very healthy balance sheets as their lease adjusted leverage ratio decline in 2020 and have decreased by more than half a turn since 2018.
We know that ensuring franchisee health will ultimately lead us to achieving our long term growth goals. So we are thrilled with these results.
This all of that is up to a very strong partnership with our franchise system that allows us to focus on great execution at one system behind the alignment of our strategic growth initiatives.
To close I would like to highlight of our capital allocation policy, which remains unchanged.
Our first priority remains investing in profitable growth and we are showcasing this from the investments we are making across our three strategic growth pillars, and our increased breakfast and investment and build to suits development funds are prime examples of us leaning into drive transformative growth.
We expect that the restaurants from the development fund will deliver strong returns and for us and our franchisees who will operate them on.
Moving forward and we anticipate that we will have a separate line within the investing section of our cash flow statement to report this and that the cash outflow related to the fund will therefore, not impact our free cash flow definition.
Today, we announced at the acceleration of our third quarter dividend and debt via increasing it by 20% to 12% per share.
Our strong liquidity position along with the momentum we are seeing and our business support this increase while still leaving flexibility to invest and growth.
Lastly, we plan to utilize excess cash to repurchase shares and reduce debt, we announced today that we have added an additional $70 million.
To our existing share repurchase authorization to a total of two and the $28 million and.
As a result, we of approximately $100 million remaining on our authorization that expires in February of 2022.
We are fully committed to continue delivering a simple yet powerful formula will be on <unk>.
<unk> efficient growth company that is investing and our strategic pillars and to <unk>.
Driving strong system wide sales growth on the backdrop of positive same restaurant sales and expanding on our global footprint, which is translating into significant free cash flows with that I will hand things back over to Greg.
Thanks GP.
Start things off we will be doing of virtual and Dr with Todd and GP.
First leg will be focused on the Boston market with Oppenheimer on August 17th and the second on New York with Barclays. On August 18th we will follow this up with of virtual <unk> focused on the Canadian market with RBC on September one.
And these <unk>, we will be attending the Wells Fargo conference in person on September 22nd and California.
We will also be hosting an investor call on September 9th with BTG and doing a virtual headquarter visit with Keybank on September 30th.
If you're interested in joining us at any of these events. Please contact the respective sell side analyst or equity sales contact at the host firm.
Lastly, we plan to report our third quarter earnings and host a conference call at that same day on November 11 as.
As we transition into our Q&A section I wanted to remind everyone on the call at that due to the high number of covering analysts will once again be limiting everyone to one question only and with that we're ready to take your questions.
At this time, if you would like to ask a question press star one on your telephone keypad again that of star and the number one the first question comes from Brian Mullan with Deutsche Bank.
Hey, Thank you and congrats on Great result, just a question on the on the U S development pipeline you have a lot of positive announcements today between re kitchen, and groundbreaking groundbreaker incentive and the build to suit.
With these now can you just update us on how youre thinking about U S. Net unit growth and 2022 and related to that maybe offer some thoughts on how.
And how you expect the shape of debt net unit growth and the us over and over that 22% to 25 time period on the path of those new updated targets.
Good morning, Brian, Yes, Hello for 2021 of your expecting of global unit growth of 2% plus and obviously, it's going to accelerate between 2022 and 2025% to about 6%.
You've said previously and spacings of aboard and what happens is both international growth and international and U S growth is going to lease it up.
And the starting point is at 10% plus growth rate and international from 2021, and about a 1% growth within the U S.
Yes.
Going to lift up from an acceleration point of view since all of that and new incentive agreements of basically all global scope and nature.
Your next question is from the line of Brian Bittner with Oppenheimer.
Thanks, Good morning, and I Echo the congratulations on great results and the momentum and the business.
Can you talk a little bit more about the difference between breakfast growth and rest of day and the quarter and a follow up is just as far as breakfast awareness goes can you update us where we are now and what do you believe is the biggest catalyst to really break through and unlock on the awareness.
And as it relates to breakfast is at.
Continued investments like you've announced today or is there anything else. You believe you can do to really catapult those awareness levels across the U S.
Yes, Brian Thanks for the question. If you think about our same restaurant sales growth in the use of 16, 1% and we had really strong growth across the rest of the day lunch was heavily impacted last year. During COVID-19 late night was heavily impacted and we have a nice rebound and both of those day parts.
And breakfast continues to grow at was up 10% versus Q1. When you look at overall sales dollars. So we got nice healthy builds happening there and we're also seeing our digital business grow up 10%.
Versus the first quarter. So we're continuing to see nice dollar sales build on that front and so it's a nice healthy mix across all elements of our same restaurant sales growth I think the key unlock on the breakfast front really is continuing to drive trial and our awareness levels are quite healthy at just north of 50%.
We're in there and that same range with where Burger King is around awareness and they've been there for quite some time and what we need to do is continue to create news have trial driving events get folks to try on food and importantly, a part of the return of routines that we expect to happen as we get into later this month with schools Rita.
Turning.
Later this this quarter with folks returning back to work and.
Whatever that routine is we need to be part of it and Thats why we put the additional $10 million of advertising to work to make sure that that message is loud and clear.
Thank you.
And your next question is from the line of John Glass with Morgan Stanley.
Good morning.
Net related questions first just on the week kitchens and any early understanding of at the unit economics look like so and you don't put the capital and that just clarify and if we should expect lower volume just because of those kitchen or adding about that and.
And as it relates to $100 million given the franchise economics that you already have ground bankers and why do you feel like you needed and additional incentive for development or was that targeted differently to different types of franchisees, maybe just explain.
And the rationale behind putting your capital behind that.
Yes, John two quick things on reef.
One we and so we said and the release, we do expect about 50 to be opened this year and then the rest spread evenly over 2022 through 2025, and we had a very successful test with a bunch of units up and Canada really allows us to get into urban locations, where we are dramatically underpenetrated. If you look at the economics early to tell.
We can do from a sales out of each of those vessels, but we're expecting and sales in the range of $500 and $12 million per unit.
And the good news is we've got a higher royalty rate and the U S almost 6%.
And five 5% in the UK, so even though there's a little bit lower sales dollars coming out of those vessels, we got a nice healthy economic return from an investment perspective reach of splitting up all of the dollars to get the vessels to train the people hire folks we're going to support them on training and make sure that they holds a great standards on the build of.
Suite fine it's just another.
On the stool, we've got a lot of great things happening between reef the development agreements in place with ground breaker the pipeline that's already in place and what we really wanted to do is make sure that we were able to bring new franchisees into the system.
And allow them to build their way into the system and we think this programs of great program to allow folks to build their way into the system. We also think it's of great program for smaller franchisees to leverage two hotel allowed them to scale up along the way the economics are compelling for the company and for the franchisees as they come in this all coupled with the lower liquidity.
<unk> that we talked about to become more competitive really makes this program compelling four for new folks to come in and it'll help us on on the diverse recruiting front too.
Your next question is from the line of David Palmer with Evercore.
Thanks, Good morning.
Great job on the company restaurant.
Margin expansion at <unk>.
<unk> I think you mentioned in the prepared remarks at the system.
Had a 20% EBITDA growth and 2020.
And I'm wondering if maybe you could dissect that.
Net and thank you help us think through how the company restaurants.
And what they are lapping this year versus what the system's lapping for example, you had the onetime bonuses last year.
And then and then there is the stores that you are going to be refranchising out of out of.
New York I believe that we're presumably of drag and I mentioned all of this because it doesn't look like your company restaurant profit did as well as the system in 2020. Thanks.
Good morning, David Yes, we are really happy with our company restaurant performance in the second quarter, despite actually having to absorb more inflation and what are you hit at originally anticipated, but we had to absorb about three and a 5% commodity inflation and almost 6% labor inflation of franchisees.
Just to address your question there, yes, the increased EBITDA by about 18% versus price, yes at this sort of profitability number.
And EBITDA gross number so obviously the profit growth rate was much higher and the sales growth rate and franchisees really ran great restaurant and benefited clearly from.
From from higher average checks and just to make absolutely sure of raise debt.
EBITDA growth of 18% does not include any potential income of franchise season, but has gotten out of PPP funds in terms of outlook for our company restaurants, right. We have increased the outlook again for this year to about 17% to 18% despite.
<unk>, <unk> and snow and absorb inflation right. We had previously thought commodity inflation would be flat vs.
And now 2% to 3% really driven by beef and pork and.
On the labor inflation and.
And the Swift half of the absorbed about 5% labor inflation on the year expecting about 5% to 6%. So we have a strong performance.
Thank you.
Your next question is from the line of Eric Gonzalez with Keybanc capital.
Hey, Thanks for the question and congrats on all of the development progress and just another question about debt development Fund and I was wondering the mechanics of that lending money to franchisees for construction and return we see at an elevated rental payment is that typically how that works and then as a follow up to the earlier.
Question on the build to suit on I'm, just wondering how much of incremental risk as being introduced by lowering the thresholds on network network and liquidity and what you may be doing to prevent and uptick in store closes down of lines, particularly where you might be on the book given your position at the build to suit blender.
Good morning, Eric Yeah of the build to suit program and it's kind of a classic build to suit program that we had almost more of a scale up in Canada. So we actually of providing day of building the same.
And to achieve we will have to invest and signage and equipment. So think of roughly 70% of the capital and as I was 30% as kind of the franchisees and and in return for us to make a return on capital at VA investing.
We are getting slightly elevated royalty rates and rental rate income. So it creates really of high quality income stream and future years for us.
In terms of your question around risk exposure by lowering their requirements.
And liquidity requirement and previously it was about $2 million, we lowered it to half a million net.
Gross requirement was 5 million lots of good about what it's two 1 million at.
First plagued us flush and it looks like we are taking on a lot of risk.
To say the start it's competition actually were too conservative and not competitive they've kind of requirements that we have very much in line with.
Our book divest of competition is doing.
Sure.
Thanks.
Yes.
And last question is from the line of Jeffrey Bernstein with Barclays.
Great. Thank you very much just wanted to follow up on the franchise health that 18% increase in EBITDA and I'm. Just wondering if you can give any kind of dollar context, and maybe where it was or where it is today.
And then on that front as you've talked about the elevated commodity and labor costs, especially through the back half of this year, just wondering what the feedback or discussion is with franchisees on that.
And maybe if you can share what the current menu pricing is for company or system wide and your estimation to help mitigate that to drive such strong profitability. Thank you.
Yes, I think Jeff you snuck in three questions, one and I'll try to remember and more.
So on the on on the 18% increase really.
We didn't quote absolute dollars per that'd be sit on the call in absolute dollar terms. This is the highest absolute profit per restaurant and we have seen in the franchise system and its remarkable of right of.
Sales growth of those hills bank with only 2% growth, which is in line with would be hefty of reported previously so we can actually expand profit by 18% of strong actually Canada perform even stronger Canada EBITDA was kind of a little bit north of 20% growth. So that's kind of I don't think of that.
I can give you and.
Oh on the Liza adjusted leverage ratio again, it's remarkable that would be of down half at two and versus 2018, given all the capital requirements franchisees have either need to invest and technology, we obviously accelerating and efficacy of elevated our new build of capital and VX elevating of image activation, so with all of that that at least.
Adjusted leverage ratio goes down is good by the way of you're calculating fees on an eight times of weighted basis.
And what's the first question the second question was.
And the commodity and labor inflation, the absolutes theories, we need to drive as really de and labor shortage tend to be have started relatively quickly and in the second quarter. So that's why we took on more labor inflation and the second quarter and we expect it to stay elevated to compete effectively in the marketplace.
It has not labor shortage.
And really significantly impacted our sales performance.
We are seeing however, a little bit more over time that we end with debt, we do need to they chased.
And our profitability and have begun to see a second question and then the last one would've been on on pricing, So where we have gone on company pricing is.
Company has been on par with what food away from home inflation, we've had a little more opportunity than our franchisees as we've been a little more conservative over the last few years on pricing. So we had a little bit more opportunity than them. The system was was slightly below food away from home inflation, but with the healthy consumer with the wage and commodity inflation of <unk>.
<unk> talked about we believe we have pricing power.
Offset.
Portion of these headwinds and that's the focus and built into the guidance for the year.
And.
Your next question is from Chris <unk> with RBC capital markets.
Hi, good morning, so on.
And on the incremental advertising spend of $10 million to support breakfast can you provide any more detail around that decision and what drove it.
Are you seeing anything from your peers suggest competition in the morning day parts of ramping up or are you just simply seeing more of an opportunity to drive trial as mobility continues to improve as you had discussed earlier.
Hey, Chris it's really the latter I mean, we're really playing our own game and like we've always said and <unk>.
And the breakfast habit of several year journey, a little different as his habits are changing on the morning routines and we really want to be there is and this morning routine and start to get reestablished as we get into the fall. So we thought it was a wise decision to continue to keep the pressure on continue to invest and awareness continue to invest and trial.
And really and grain that habit to make sure that at the gift that keeps giving so we can continue to drive our sales towards that 10% of sales mix by the end of 2022.
And so that was really our thinking around that decision our opportunities to continue to have.
One trial driving events to get our food and our consumer smiles and you'll get to see on this weekend, if you want and you'll get a free croissant and any wendy's restaurant on Saturday and Sunday, a great trial driving event, leading into some other support that we'll have around breakfast. So it's come and quickly.
Your next question is from the line of Andrew Charles with Cowen.
Great. Thanks, GP I wanted to come back on the restaurant level margin guidance for 2017 to April 18% implies a step down from the $18.7 million year to date and I think you said guidance for 5% labor inflation, and 2% to 3% commodity inflation, which is a bit of of deceleration versus what you saw on <unk>. So can you talk a little about what's driving that deceleration.
And we anticipate of restaurant margins you guys are about 95% reopened on di rooms, I think I saw on the queue. So I don't think that its incremental diamonds coming on board just any more color on kind of help flesh that out would be helpful. Thanks.
Good morning, Andrew.
Correct observation of year to date of restaurant margin, you're sitting at 18, 7%. So obviously the guidance of 17% to 18% decelerating slightly.
Couple of things the comparisons are getting a little bit more difficult. So we are going to get a little bit less sales leverage on a one year basis into our restaurant P&L you spoke to some of Sweden and second one is we still have sequentially inflation stepping up on the.
Year to date basis.
We absorbed commodity inflation of about 1% on the year of Youre getting to two 3% and it's basically driven by the Bacon and beef so that puts pressure on it and.
Second one is and labor inflation, a little bit of of the uptake of I think year to date.
5% labor inflation, you're expecting on the year about five 6% lastly, as we get towards the end of the year. We do expect at the check sizes of going to come down a little bit and obviously, it's also going to put a little bit of pressure on it again, if you step back from at <unk>.
<unk> to 18% margin and ease of Super strong results for us compared at two day, 15% posted last year.
Thank you.
Your next question is from Dennis Geiger with UBS.
Great. Thanks for the question J P or Todd wondering if you could talk a little bit more about the other core lunch and dinner day part and how you think about some of the drivers going forward, maybe if you could touch a bit on on menu innovation and I know you've talked about some items of I believe and test there and thinking about the digital loyalty piece of contribution from the.
Reopened dining rooms, and if theres anything and kind of on on throughput and service speed that youre thinking about for for the rest of the year and just kind of going forward over the coming quarters and any other kind of key contributors to continue to drive those day parts would be great. Thank you.
Yes, I think first and foremost it starts with what speed, we need to continue to get folks through through our drive throughs, even quicker. That's why we're doing all of the work on mobile grab and go and that's why we're doing the work on getting folks to do more mobile ordering.
And that's why we continue to rollout curbside across all of our restaurants folks are looking for speed and to support their need and.
We want to be there to continue to support that our opportunity is to continue to make sure. Our restaurants are fully staffed to truly complement of great experience and that speed along the way and then as you think about the rest of the calendar beyond just great operational execution.
And do have a lot of nice things planned for the rest of the year there would be a nice balance between core messaging to continue to drive on the equities that we have and we've seen a lot of success on our premium core you will see news on the made to crave lineup I'm very pleased at the major great lineup continues to trade customers up and go and exciting promotion come in.
Early soon on on that front and and.
And then lastly.
And we will continue to stay focused on on.
On our food and upgrading the quality of of the food across side and chicken hamburgers and French fries, and I think all of those things as our brand continues to be more relevant to the consumer just creates better experiences of creates more value for the money and keeps those customers coming back a little more often.
Thank you.
Your next question is from John <unk> with JP Morgan.
Hi, Thank you I was hoping we could talk about the average ticket.
<unk>, one versus <unk> 19, and other words and what im assuming how much.
Much transactions might actually be down I mean, if you have and intention of.
Regaining the total transaction count that you have you had in 2019 at Thats, even important to you.
Certainly you make more money selling.
Our higher margin products and higher prices to fewer customers and Thats just <unk>.
How the math works and if.
And you don't mind can you talk about that.
As ticket in the context of commodities not just beef, but also chicken at least it looks like right now as those contracts may potentially rollover.
And we've been very pleased if you look at average ticket versus 19 and it ends up significantly we haven't given out the specifics on that but you've got a combination of things happening at average items per transaction of bond with consumer bringing things home more often.
Got.
A nice digital mix happening, both with mobile ordering with 15% to 20% higher average checks delivery with 40% to 50% higher average checks and then we're seeing some great mix trading folks up from the value side of our menu into our core premium and all the way up into our made to crave lineup, which at all.
And I am record sales mix and and the second quarter I think all of those dynamics can continue as we deliver high quality craveable products time, and again customer counts would still be down relative to 2019.
And are important and we want to continue to make sure. We got a balanced high low calendar for before we'll continue to have a role five dollar biggie bag has a role, but we need to have that balance on the high and the low to continue to bring those customers back as mobility continues to increase more around a routine basis because of mobility is coming back book.
Don't have that routine down yet and.
Thinking about getting lunch at at work or breakfast on the way to work dinner on the way home from the office those things are still all opportunities out in front of us to bring more customers into our restaurants.
And if possible can you kind of talk about just your overall outlook at on average ticket.
Especially in the context of commodities, which may be even more significant and 22 than they were at 21.
And the way we built our guidance John is we will see and the average check be elevated through the fall timeframe and then we think and it will start to moderate late in the year is as customer traffic starts to pick up but still higher than pre COVID-19 levels.
Okay. Thank you.
Your next question is from Gregory <unk> with Guggenheim Securities.
Okay, Thanks, and maybe just following up on that.
I don't know if you guys are willing to breakout what actual pricing is that maybe that would be helpful. And then my question was.
On the on the war for talent that's out there can you talk where staffing is for your restaurant and how wendy's is managing that better than peers and what you guys are doing differently.
First on the on the Labor front and what we're doing I can of GP can talk a little bit about price mix and give you a little bit of flavor on that but.
At the whole industry and Q2, we did see some staffing challenges during the quarter like the rest of the industry.
The good news was at the federal benefits rolled off we did see some improvement in and applicant flow and staffing and we also saw improvements going into the summer with kids out of school, which certainly helped our restaurant, but we also start from a very good spot.
Good news is our overall employee engagement scores are meaningfully better than the industry average, which really helps on the retention front you are seeing that and the numbers, we have lower than industry on turnover in our restaurants, and we're really working to make sure that our restaurants are fun and energizing and on the short term as GP said earlier and we've got to run a little bit over time too.
Make sure we're staffed appropriately.
You do see a few pockets.
Outside of kind of core day parts, where the dining room may be closed a little bit just to manage some of the staffing challenges, but it wasn't a material impact on our business during the quarter.
And last but not at least we've been spent a lot of time energy and effort on focusing on our online digital recruiting campaign that we leveraged during the higher ups strategy for breakfast and we continue to do that to really make sure that we're staffed appropriately to drive the business Thats out there today.
On price mix on price mix I think.
And we really need of great job on this you probably can see the detail yet, but on the food and paper line and the second quarter on the face of the P&L will be 110 basis points favorable and again keep in mind, we had a 3.3 and 5% inflation, so actually 100 basis points of headwind and so what that tells you a mixed management and pricing.
Allowed us to expand.
And and improve food and paper costs by about 210 basis points. So it's really programming right. Tom High sales were made to crave behind Bourbon Bacon cheeseburger, and definitely helped promote and sell its pretty well and obviously helps with the sales mix as well and.
And the company behalf pricing extra and year over year positive.
And he has also helped us.
<unk> basically.
Margin performance up on the food and paper line.
Thanks.
And I ask the question is from the line of Peter <unk> with BTG.
Great Thanks, and congrats on a great quarter.
And I just wanted to ask about the development with reef.
<unk>.
Is this and any way and exclusive agreement with them for those kitchens or can we see.
Potential future partnerships with other operators and just secondly on geographies and the U S. Any particular geographies. You you are re of kitchens plans to target with these ghost kitchens.
<unk>.
Yes, Peter it's not exclusive rights out there with with many other brands on the Great News is the dedicated vessel that they put in place to support our products to our standards and Canada has been a big success and Thats, what theyre going to replicate and.
And in the U S, Canada and in the U K moving forward and our opportunity really is in urban locations. We are dramatically underpenetrated and if you look at our footprint across all of urban locations, whether that east West North South.
And you think about where their opportunity is on delivery only provide more access to our brand urban locations will be job, one and we're excited to get them roll and quickly.
And as we said 50.
<unk> kitchens out of the gate to finish this year is a strong fast start so we'll get a lot of learnings in a hurry.
Thank you.
Your next question is from Jared of Barbara with Goldman Sachs.
Hi, Thanks for the question and like.
Congrats on a on a strong quarter I wanted to circle up on the on the digital side of the business I think that that penetration of seven 5% has been relatively stable over the last couple of quarters, obviously and while the dollar basis grown just wanted to see what your what you guys are seeing on the digital side and how consumers are interacting with the brand obviously with the launch of the loyalty program last year.
And would expect that youre seeing from some increased levels of engagement. There and then if you could also update us on the active members on that program that would be helpful too. Thanks.
And so a few thoughts right as we said on the prepared remarks digital sales grew 10% versus Q1 that does result, and mixed being flat as a result of the strong total sales that we had at seven 5% and the Great News is 17 million loyalty members up 25% over the $13 million that we had as of Q1.
Active users are up slightly so we're now north of $3 million and the great News is those active users are more active than last quarter, So theyre and theyre in more often.
And at higher average checks, we're seeing increased frequency for those folks and our opportunity ahead is still to continue to leverage all of this data to really truly at one to one customer interaction and.
There are opportunities that.
Our yet to be fully unlocked and we're working hard on those things.
Do you think about where we are across the key elements and we're seeing a nice uptick on on on mobile ordering and clearly the.
And the ability to do mobile grab and go and curbside helps at deliveries hanging in there nicely at the mix. So we do feel that it is a healthy.
Mix for Us, we're seeing higher average checks and we're seeing loyalty and and.
And we will continue to help us drive against our frequency goals moving forward.
Thanks, and just a follow up there are you seeing anything that maybe.
Just thinking through the breakfast versus the the rest of day.
Any difference and usage among the app or the loyalty program frequency cost of frequency of customers based on based on day part breakouts.
Yes, we're still seeing.
More active use on.
Around the digital tools at lunch and dinner breakfast is starting to pick up a little bit, but but still less than than that of that I think one important and I'll get interesting nuggets that we probably would want to get out. There is if you look at frequency and the number of visits to Wendy's restaurant on an annual basis. If you look back over the last 12 months.
We're up about 20% from of $5 five visits of six five visits we're very proud of that breakfast driving some of that digital certainly helping that youll look at all of the <unk> Burger frequency over that same period. They saw declines of 5% to 10%. So we always get the question is breakfast senior mental that helps prove it out and digital are helping drive the business.
Clearly as for US So we're seeing folks engaged and we're seeing our frequency and the right direction and that's at a time where traffic is still.
The impact of Covid challenges.
Great. Thanks, so much.
Your next question is from Lauren Silberman with credit Suisse.
Thanks.
My question just on the gross kitchen and strategy.
Talks at the opportunity for greater penetration and urban market. How are you thinking about leveraging and ghost kitchens to test new markets is that contemplated at all and with.
That in mind, how do we think about the breakout of these units and the U S versus international market.
And then just one last if I kind of related if I heard it correctly I believe you mentioned and this script that of franchisees opening with leaf so how does that arrangement work.
Good morning, Laura and so again that the big strategy around the ghost kitchens is really and it's.
Great Underpenetrated areas for domain. This company since really urban debt is our big plant.
And nobody is really to give the breakout between the U S, Canada and the U K.
Once we get a little bit more experience under their belt, and we'll probably and maybe talk about debt.
In terms of use of one other question of me and at the end of the day reef will be our franchisee so think about them being at the franchisee of the comment that you heard in the prepared remarks is they will become our first franchisee and the U K. So we're kind of building out outside of the urban location and the suburban locations with the company footprint they will come.
And and and support that urban footprint, just as GP articulated theyre going to do on the U S.
Technically and three different contracts with the U K, Canada, and the U S sort of technically there's kind of three different franchise fees to the interacting with us and they are obviously held to the same standards.
And the other franchisee.
Understood. Thank you guys.
Your next question is from James Rutherford with Stephens, Inc.
Thanks, and congrats on the quarter I just wanted to follow up on the breakfast marketing investment sorry, if I missed this but did you share the breakfast mix and the quarter, but the core question here is just given the opportunity and the day part and how large it is and the strength of your cash flows.
Did you settle on that $25 million number and is there potential for further acceleration and investments.
To build trial are on that day part thank you.
And you see when you get a chance to get into the queue breakfast mix ticked up to seven 2%. So it's up slightly from last quarter.
The dollars are up as we said earlier, 10% versus first quarter. We got the rest of the day business being really strong which has impacted the.
And the mixed number a little bit now as we look at the pressure that we need to really drive and ingrain, the habit and between the company incremental investment of $25 million. The AD funds that we're getting from the breakfast sales are.
Our full year pressure on breakfast is up about 20% on advertising versus last year in our launch here. Obviously, the launcher was impacted a bit by COVID-19 and the challenges there, but we do think thats, a good way and and one that we can manage too for the rest of this year and as we look at 2022, we're still committed.
And to.
Having about $15 million of of support which we've talked about previously from a company perspective, we think that's a nice progression to continue to drive enough support and awareness, especially as our overall business sales continued to grow at breakfast and create more AD contributions along the way.
Thank you.
And last question is from Brett Levy with <unk> and partners.
Great. Thanks for taking the question.
Can you I know in the.
The prepared comments you talked about the strength of your sales and improving throughout the quarter did you care to give any more quantification in terms of how it ended or any color into.
Quarter to date and also what are you seeing from the consumers and reach analogy.
Have you seen any any changes and just how the consumer is using it and the makeup of them. Thanks.
Yes, Brian we're not providing any specific commentary on our Q3 start but let me give you a little bit of flavor, one very pleased with our momentum and the first half of the year really resulted and the confidence to call up our global systemwide sales to 11 to 13 percentage as we said and in our remarks, our two year stack adjusted for the 50 <unk> week built.
In Q2, so if you do the math and kind of back end of things. If you look at the outlook for the back half of the year, we will really be at low double digit two year comps throughout that back half of the year. So that shows that we've got really nice momentum continuing and that assumes checks remain elevated at least into the fall, but as we.
Said earlier, we don't see those returning to pre COVID-19 levels.
So we feel like.
Our business is really connecting with the consumer and that frequency metric that I talked about a little bit earliest and important one as we continue to bring folks back into a restaurant a little more often.
Your next question is from Nicole Miller with Piper Sandler.
Thank you good morning.
On the labor inflation could you talk a little bit through staffing challenges and.
Or were they in place and lives I'm thinking about back of house versus front of house and also about stores that are up and running versus new stores that need to open is it any more challenging to get those stores opened right.
Yes, clearly with 70% of our restaurants opened or under construction against our development goals. This year labor has and impacted the ability to get new restaurants open and we feel good that we can continue to support those restaurants and those markets.
If you look at the overall labor pool, clearly rates have come up as GP had guided down and.
His comments around inflation on labor rates.
We've had to do some things on sign on bonuses retention bonuses free meals were doing what it takes to make sure that we got those restaurants fully staffed even leveraging a little more over time, because there is sales and transactions to be gained.
And Theres a lot of leverage to continue to keep those customers coming through the doors, even with with a little higher wage rates along the way.
And so we're working hard to make sure that the restaurants are fully staffed.
I think some of our franchisees are being very conscious around their trade area and when should the dining room and be fully opened one shouldn't be closed. So there will be times potentially after the dinner day part where the dining room might close a little bit earlier, and then and historical and we go full.
We will drive through only but those are just smart moves based on the amount of traffic is coming through the restaurant and I think we've got really good and flexible to be able to manage to the labor situation based on what we know and the co.
<unk> that we serve.
And how is turnover trending thank you.
Yes, our turnover continues to be better than than industry average so.
And you go historically, we're better than industry average, we continue to be better than industry average and just completed a big voice of Wendy survey and the great news is against competitive benchmarks. Our overall engagement stores all of our employees at the restaurant level and significantly better than the rest of the of the industry. So our work to make sure of these restaurants are fun and energizing is paying.
<unk>.
And it helps it helps retention and and also helps folks.
To show up day in and day out to continue to serve our customer.
Thanks again.
And your final question comes from the line of Jim Sanderson with Northcoast research.
Hey, Thanks for the question and congratulations on a great quarter I just wanted to ask one last.
Follow up question on Reef technologies, I think you mentioned that your franchise rate would be slightly higher than peers and markets, where they operate is of the contribution to advertising going to be comparable to the franchise peers and if you could provide a little bit more detail about weather. One of these will make any type of equity investment and <unk> technologies to ensure the.
On the 700 plus of unit growth over the next couple of years. Thank you.
Yes, so on and on the reef equation, the royalty will be a little bit higher.
You said, a little bit earlier about 6% and the U S at about five 5% and the U K.
And contribution will be a little bit lower so really the focus on of <unk> kitchen as local advertising. So that's about 2% contributions to local advertising for reef to really make sure and those urban locations, where they are built and they.
Sure there is awareness so they can drive at the delivery business on the.
The investment side, we will have to see where that goes over time would we wanted to make an investment and reef or not.
And and we will see how that plays out.
Alright, thank you.
Thank you Jim that was our last question of the call. Thank you Todd and GP and thank you for everyone for participating. This morning, we look forward to speaking with you again on our third quarter conference call in November of <unk>.
Right day, you may now disconnect.
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