Q3 2021 Wendys Co Earnings Call

November 10, 2021

Good morning, welcome to the Wendys 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. If you would like to ask a question during this time simply 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 Lemenchick, Director of Investor Relations and corporate SG&A, you may begin your conference.

Director of Investor Relations and corporate SG&A, you may begin your conference.

Thank you and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website, IR Wendy's Dot com.

Before we begin please take note of the Safe Harbour 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.

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.

Mr 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 Penegor, and our Chief Financial Officer, Gunther Blush will give a business update and review our 2021 third quarter results and share our revised financial outlook. 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. We are extremely proud of the meaningful progress we made in the third quarter against our three strategic growth pillars. We continued to grow our breakfast business. Digital sales accelerated and we expanded our global footprint and a challenging environment.

We achieved a strong two year global same restaurant sales result of 9.4% driven by growth across the globe, which included an acceleration in our breakfast and digital sales mix throughout the quarter.

Our strong performance helped us lengthen our streak of growing or maintaining our QSR Burger dollar share to an outstanding nine consecutive quarters and further strengthen our position as the number two hamburger chain in the US.

Our expansion into Europe through the UK continued to accelerate as we've opened several restaurants since the second quarter. We're seeing extremely strong sales across all of our UK restaurants as customers are thrilled to have Wendys in the market, making us even more excited about our growth opportunity.

We also announced a new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a World Class Technology company to drive growth for us now and into the future.

I will also share some results from a recent franchisee survey that highlights the strength of our relationship with our franchisees, which we continue to believe is a differentiator for us as a brand.

We remain fully committed to our three long-term growth initiatives to build our breakfast day part, accelerate our digital sales and expand our global footprint.

Our goal remains the same which is to invest in driving efficient accelerated growth. We are delivering on that commitment with strong year to date adjusted EBITDA and free cash flow growth and overall results that are pacing well ahead of our initial 2021 plan.

We are delivering on that commitment with strong year to date, adjusted EBITDA and free cash flow growth and overall results that are pacing well ahead of our initial 2021 plan.

Let's now turn to our US same restaurant sales. Our strong programming and continued execution by our restaurant teams drove another impressive two year same restaurant sales result, as we lapped our best quarter of 2020.

Our average check saw continued growth bolstered by craveable products like the big bacon cheddar cheese burger that was launched during the quarter.

We achieved strong results this quarter, but we know that several macroeconomic factors that others across the industry experienced related to staffing and shifting mobility due to the delta variant impacted results across our entire business.

Both the company and our franchisees are committed to making each wendy's restaurant, a great place to work, which will help attract and retain talent in our restaurants to help mitigate some of these impacts moving forward and we are making progress.

We are very excited about the plans we have in place for the rest of the year, including the recent launch of our new game changing [fry] innovation. We believe we have a winner with this product. These fries remain hotter and crisp here for longer and our consumer preferred nearly two to one to McDonald's. This is yet another example of us elevating our core menu. Which we expect to help us continue delivering growth on top of growth.

Which we expect to help us continue delivering growth on top of growth.

I could not be more proud of our international business, which delivered a second consecutive quarter of double digit one and two year same restaurant sales growth.

These results were driven by an improvement across the globe both in our larger international markets, such as Canada, and Puerto Rico, where we continued to take market share and also across the rest of the world as those areas continued to recover.

Canada continued to post impressive growth, partially driven by their growing delivery business, which recently added Uber eats as well as by engaging customers through a Wendys phone contest that really resonated with our fans there.

We're also seeing strong results in our Latin America, and Caribbean region. In Mexico, one of our significant growth markets sales have not only recovered from COVID-19 impacts, but have far surpassed 2019 sales levels and we believe there is still huge potential for further growth in this market.

The strength and recovery of our international business continues to be a catalyst for growth as of the end of the third quarter almost two thirds of our international markets have seen sales recover to at least pre COVID-19 levels. And we haven't seen a single permanent COVID-19 related market closure.

We are extremely thankful for our team and our international franchisees for their commitment to growing the Wendys brand across the globe alongside us.

We continue to be very pleased with our breakfast business, which grew throughout the third quarter exiting at our highest monthly mix of 2021 at 7.5% of sales. Our strong performance led to morning meal traffic share gains within the QSR Burger category.

Our strong performance led to morning meal traffic share gains within the <unk> Burger category.

This growth was driven by the successful two for four and $1.99, croissant trial driving promotions. We believe this momentum will continue as we close out the year with our recently launched dollar biscuit offering.

We continue to see high customer repeat showcasing that these offers are paying off. Incredibly, in a little over a year and a half we have now moved into the number three spot in terms of overall morning meal share in QSR Burger.

Well, we saw growth in our breakfast business. Mobility continues to shift and be depressed during this day part. As a result, we now expect our year over year breakfast sales to grow approximately 20% to 30% in 2021.

As a result, we now expect our year over year breakfast sales to grow approximately 20% to 30% in 2021.

We remain confident in our ability to reach our breakfast goals and remain committed to invest $25 million in breakfast advertising this year to drive trial and awareness, which we believe will set us up for further growth in 2022 and beyond.

We continue to see strength in our digital business across the globe in the third quarter, reaching approximately 8.5% mix globally. Our international digital sales were approximately 13% as we saw strong results across several of our markets.

We expect growth to continue moving forward as we integrate new delivery partners and roll out mobile ordering across our markets. Our US digital business accelerated throughout the third quarter exiting with a digital sales mix north of 8%.

Our U S digital business accelerated throughout the third quarter exiting with a digital sales mix north of 8%.

This was once again driven by gains in mobile ordering and our strong delivery business. The growth in our mobile ordering business was supported by successful acquisition campaigns, which increased our total loyalty program members by approximately 10% compared to the second quarter, reaching almost $19 million. We have now increased our total members by an impressive 7 million since the start of the year.

The growth in our mobile ordering business was supported by successful acquisition campaigns, which increased our total loyalty program members by approximately 10% compared to the second quarter, reaching almost $19 million.

We have now increased our total members by an impressive 7 million since the start of the year.

We have also been hard at work at an exciting new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a World Class Technology company to drive growth. We expect this engagement will drive innovation around our one to one activation with customers and deliver better business analytics to drive enhanced insights.

We will also be focused on improving our in restaurant environment by finding ways to remove friction from our customer and crew experiences.

This type of innovated growth driving partnership is exactly what the technology fee was designed to enable. We remain fully committed to our digital journey and expect continued growth in 2021 and for years to come.

Our development momentum continued as we delivered significant growth across the globe, reaching almost 50 new restaurant openings in the quarter.

I'm also pleased to share that our development agreement with reef is off to a great start with locations now open across the US, Canada and the UK. As I shared earlier, we are extremely excited about the consumer response to our expansion into the United Kingdom, which drove better than expected sales in these new restaurants during the third quarter.

We've now opened several restaurants in the UK since the second quarter and we are in the process of bringing additional franchise partners into the family in the near future, which we are extremely excited about.

We anticipate having 10 restaurants opened by the end of the year, which is incredible given that we just opened our first location in June. We have also added to our new restaurant commitments with several ground breaker development agreements in some of our international markets further solidifying our path towards our long term unit growth goal.

We have also added to our new restaurant commitments with several groundbreaker development agreements and some of our international markets further solidifying our path towards our long term unit growth goal.

We remain on track to reach approximately 7000 restaurants by the end of 2021, as we continue to navigate through a challenging supply chain environment. Our development foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisees, which gives us confidence that we'll reach our goal of 8500 to 9000 global restaurants by the end of 2025.

Our development Foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisees, which gives us confidence that we'll reach our 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 build our breakfast day part, drive our digital business and expand our footprint across the globe remains the same and we continue to make meaningful progress.

Our continued growth and success would not be possible without the partnership we have with our franchisees who we believe are the best in the business. We recently received the 2021 franchise business Review survey, resulting in another year of Wendys exceeding industry benchmarks and also paced ahead of our results from 2019.

I am particularly pleased with our ratings on overall satisfaction and financial opportunity, which were more than five percentage points ahead of the industry benchmark.

We also achieved strong scores on our clear vision and ability to drive the system forward, highlighting our ongoing alignment behind our strategic priorities.

Despite the challenges of a global pandemic, over 90% of our franchisees would make the decision to invest in Wendys again, an increase versus our 2019 results, which we are very proud of.

These results highlight how our strong franchise relationships have been a differentiator for the Wendys brand through this partnership and the dedication of our restaurant crews and support center teams. We will continue our march towards achieving our vision of becoming the world's most thriving and beloved restaurant brand. I'll now hand things over to GP to talk through our third quarter financial results.

I'll now hand things over to GP to talk through our third quarter financial results.

Thanks, Todd. We are pleased with our third quarter results, which delivered against our financial formula as an accelerated efficient growth company by growing same restaurant sales and expanding our global footprint, which translated into significant free cash flows.

Our global system wide sales grew 5.3% and our same restaurant sales growth was a very strong 9.4% on a two year basis. This was driven by the outstanding results in our international business and continued growth in our US business.

This was driven by the outstanding results in our international business and continued growth in our U S business.

As Todd mentioned earlier on the call, our US same restaurant sales in quarter three were impacted by macroeconomic challenges. Without these impacts we believe our US same restaurant sales results would have been generally in line with our expectations for the quarter.

Year over year company restaurant margin decreased 250 basis points, driven by higher than expected labor rate inflation of almost 9.5%, commodity inflation of almost 3%, lower local advertising spend in the prior year and customer count declines.

These were partially offset by the benefits of a higher average check. The increase in G&A was driven by higher incentive and stock compensation expense. As a result of our strong financial performance in 2021 that continues to pace well ahead of our initial plan higher technology costs, primarily related to our ERP implementation and increased travel expenses.

The increase in G&A was driven by higher incentive and stock compensation expense.

Result of our strong financial performance in 2021 that continues to pace well ahead of our initial plan higher technology costs, primarily related to our ERP implementation.

And increased travel expenses.

Adjusted EBITDA decreased approximately 5.5% to $112 million, primarily as a result of higher [channel] and administrative expense and a decrease in company operated restaurant margin.

These decreases were partially offset by higher franchise royalty revenue and an increase in that franchise fees. Adjusted earnings per share was flat to the prior year driven by a lower adjusted EBITDA offset by a decrease in interest and depreciation expense.

Adjusted earnings per share was flat to the prior year driven by a lower adjusted EBITDA offset by a decrease in interest and depreciation expense.

Finally, our free cash flow increased significantly to approximately $274 million year to date. The increase resulted primarily from higher net income, the timing of receipt of franchise rental payments and the timing of accrued compensation payments.

The increase resulted primarily from higher net income the timing of receipt of franchise rental payments and the timing of accrued compensation payments.

Before we turn to our outlook, I want to quickly highlight our strong year to date results for the third quarter which continue to pace well ahead of our initial plan for 2021. Our year to date global system wide sales grew 13.2% and we achieved an impressive two year global same restaurant sales growth of approximately 11%.

Continue to pace well ahead of our initial plan for 2021, our year to date global system wide sales grew 13, 2% and we achieved an impressive two year global same restaurant sales growth of approximately 11%.

Our year to date company operated restaurant margin has reached almost 17.5%, 350 basis points higher than 2020, driven by sales leverage which has more than offset headwinds from higher labor and commodity cost.

350 basis points higher than 2020, driven by sales leverage which has more than offset headwinds from higher labor and commodity cost <unk>.

Finally year to date adjusted EBITDA is up approximately 19% versus 2020, primarily driven by our strong sales and company operated restaurant margin expansion.

We continue to expect very strong results in 2021, however, due to the previously mentioned impacts we are facing in addition to being late in the year, we are tightening our outlook ranges across some of our metrics.

We now expect full year system wide sales growth of 11% to 12%. This in turn flows through and tightened our expected ranges for adjusted EBITDA, and adjusted EPS to $465 million to $470 million and 79 to 80, respectively.

This in turn flows through and tightened our expected ranges for adjusted EBITDA, and adjusted EPS to $465 million to $470 million and 79 to 80, respectively.

Our adjusted EBITDA outlook is also impacted by our company operated restaurant margin, which we now expect to be approximately 16% to 16.5%.

This change in restaurant margin is being driven by the tightening of our sales outlook range and an increase in commodity and labor rates, which we are not expecting to be inflationary approximately 4% and 7% to 8% respectively.

This is being offset by a decrease in G&A to approximately $235 million to $240 million and high on that franchise fees as a result of additional franchise transactions that I expect it to close in the fourth quarter.

Finally, we are holding our free cash flow at $270 million to $280 million. As a reduction in our capital expenditure outlook is offsetting our updated adjusted EBITDA outlook range.

Reduction in our capital expenditure outlook is offsetting our updated adjusted EBITDA outlook range there.

The favorability in capital expenditures is being driven by supply chain challenges, which we believe to be transitory in nature.

To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth. We are continuing to showcase this through the investments we are making across our three strategic growth pillars.

Today, we announced that declaration of our fourth quarter dividend of 12 cents per share, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt.

Lastly, we plan to utilize excess cash to repurchase shares and reduce debt.

We announced today that we have added $80 million to our existing share repurchase authorization to a total of $300 million. With this increased authorization we are planning to launch $125 million accelerated share repurchase program in the fourth quarter.

Yeah.

As a result of the above actions, we now expect to return approximately $350 million to shareholders by year end through a combination of dividends and share repurchases.

We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated efficient growth company that is investing in our strategic pillars and driving strong system wide sales growth on the backdrop of positive same restaurant sales and expanding our global footprint. Which is translating into significant free cash flows. With that, I will hand things back over to Greg.

Which is translating into significant free cash flows with that I will hand things back over to Greg. Thanks.

Thanks, GP, we're excited to announce that we'll be hosting a virtual investor day on March 10th 2022. During the event we are planning to provide an update on our long term strategic vision, reintroduce our long term outlook and issue our outlook for 2022. The event will be available to all interested parties via webcast from our Investor Relations website at IR Wendy's Dot com.

The event will be available to all interested parties via webcast from our Investor Relations website at IR Wendy's Dot com.

In advance of the event, we plan to pre-release our fourth quarter and full year earnings on February 10th 2022. We will also host a conference call that same day to review those results. Now turning to our fourth quarter investor outreach events. To start things off, we will be hosting an investor call on November 12th with [Truest].

This will be followed by a two day NDR with the first leg in Chicago with Credit Suisse on November 16th, and the second in Boston with BMO on November 17th.

We will follow this up with an NDR in New York with Cowen on November 30th and then had to Nashville on December 1st for the Stephens Conference.

We will then hold a virtual [NRD] focused on the west coast hosted by Goldman Sachs on December 9th. And will round things out with a virtual headquarter visit with Deutsche Bank on December 14th.

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.

As we transition into our Q&A section, I wanted to remind everyone on the call that due to the high number of covering analysts will once again be limiting everyone to one question only. Would that, we're ready to take your questions.

Would that be ready to take your questions.

Thank you. As a reminder to ask a question you will need to press star one on your telephone. Again, that is star then the number one. To withdraw your question press the pound key. Please stand by while we compile the Q&A roster. And your first question will come from Brian Bittner with Oppenheimer. Your line is open.

Again that is star then the number one.

The withdraw your question press the pound key.

Please stand by while we compile the Q&A roster.

And your first question will come from Brian Bittner with Oppenheimer. Your line is open.

Thank you and good morning, everybody. My question is on store level profitability, both for the franchise in the company owned footprint. Todd, on the last call you suggested that the company has been a little more conservative over the last several years on pricing, particularly in your company operated footprint. So the question is does this allow you to be more aggressive to protect store level profitability across the system as we move into '22? Or anything else that you can talk about as it relates to profit protection strategies for this system would be helpful. Thanks.

My question is on store level profitability, both for the franchise in the company owned footprint Todd on the last call. You suggested that the company has been a little more conservative over the last several years on pricing, particularly in your in your company operated footprint. So the question is does this allow you to.

More aggressive.

Protect store level profitability across the system as we move into 'twenty, two or anything else that you can talk about as it relates to profit protection strategies for this system would be helpful. Thanks.

Yes, Brian. Thanks for the question you are right, we had been more conservative on pricing historically relative to the system, which puts us in a better spot to take some pricing and we have started to take some of that pricing. And in fact as we roll through the third quarter into the fourth quarter, our pricing is probably a little bit ahead of where the franchise system is today, which is a good thing to manage and offset some of the headwinds. But pricing is just one lever that will pool and we will continue to drive our mix hard, our made to crave lineup on the premium side continues to do very well and will continue to bring news.

Roll through the third quarter into the fourth quarter, our pricing is probably a little bit ahead of where the franchise system is today, which is a good thing to manage and offset some of the headwinds but pricing is just one lever that will pool and we will continue to drive our mix hard our made to crave lineup on the premium side continues to do very well and will continue to bring news.

And support trading consumers up across our menu. If you think about four for four plays a role, but five dollar biggie bag is a nice trade up to continue to drive margin and really pushing our digital strategy hard.

Across our menu.

About four for four plays a role, but five dollar biggie bag, a nice trade up to continue to drive margin and really pushing our digital strategy hard with that.

The delivery business continuing to be strong even with mobility coming back. This average checks up 40% to 50% mobile ordering, picking up those checks up 15% to 20%. All of those things help us to manage the margin, especially with the consumer being a little more healthy today.

Especially with the consumer being a little more healthy today.

Thanks. Your next question will come from Andrew Charles with Cowen Your line is open.

Yeah.

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

Great. Thanks, I wanted to talk a lot about the two year performance from 2Q to 3Q, you called out some macro headwinds and I'm just curious within that how much did staffing challenges way on your quarter? Whether you look at it from the perspective of slowing service times that we're seeing across the industry or impacting operating hours. And maybe just more within your control do you think you need more balanced level of advertising across day parts that currently SKUs, perhaps a little heavier on breakfast to help accelerate sales at lunch and dinner?

Our balanced level of advertising across day parts that currently skus, perhaps a little heavier on breakfast to help accelerate sales at lunch and dinner.

Now, let me start with staffing so when you think about the staffing challenges that we all experienced in the industry in the third quarter. It did create inconsistency on hours, we had more dining rooms closed during the third quarter on average than we did during the second quarter.

Second quarter, we had 95% of our dining rooms are open. We're only 85% in the third quarter. That does put pressure on on our digital business. When you think about mobile grab and go. You think about delivery folks coming into the restaurant and you think about throughput that happens on the drive thru.

And you do see throughput challenges with staffing tighter. And along the way if you see newer folks coming into the restaurant and getting trained up those do impact throughput. The great news is we're starting to see the applicant flow pick up a little bit going into the fourth quarter and were starting to improve staffing a bit. But not enough to get ahead and truly where we need to be because it is tight out there.

And.

And along the way if you see newer folks coming into the restaurant and getting trained up those do impact throughput. The great News is we're starting to see.

The applicant flow.

Up a little bit going into the fourth quarter and were starting to improve staffing a bit but not enough to get ahead and truly where we need to be because it is tight out there but.

But we're working through all of those and one of the big keys for us is to get our dining rooms open too to really support taking pressure off of the drive through and support our digital business moving forward. On the breakfast the rest of the day advertising mix, we feel really good that we've got a good balance as we've said before our breakfast advertising is up about 20% year over year.

We've got the extra money that we're supporting from a company's perspective $25 million in total.

The advertising that we do on the breakfast day part really does halo back to the rest of the day with a strong quality message and the folks that are trialling our breakfast are getting some very high quality food that gives some confidence in the rest of the day. So we feel like we got that balance right between what we're doing on the breakfast side and a nice split between value and premium on the rest of the day business.

getting some very high quality food that gives some confidence in the rest of the day. So we feel like we got that balance right between what we're doing on the breakfast side and a nice split between value and premium on the rest of the day business.

Thank you. Your next question will come from Jeffrey Bernstein with Barclays. Your line is open.

Your next question will come from Jeffrey Bernstein with Barclays. Your line is open.

Great. Thank you very much. I'm just wondering if you could talk more broadly on two fronts. One, just on the competition across quick service I'm. Just wondering if you share any incremental thoughts in terms of the most recent activity by your competitive set. Primarily in the Burger category. And then more broadly whether franchisees in those discussions with franchisees it sounds like the survey has been quite encouraging but you mentioned the company operated is now past franchisees from a pricing standpoint, just wondering franchisees' desire to reaccelerate pricing. Or this concern of price and the amount of the category. Thank you.

Primarily in the Burger category.

And then more broadly whether.

Franchisees in those discussions with franchisees it sounds like the survey has been quite encouraging but you mentioned the company operated is now past franchisees from a pricing standpoint, just wondering franchisees' desire to reaccelerate pricing or.

This concern of price and the amount of the category. Thank you.

Yeah, from a competitive perspective, it's always competitive. Probably no more no less competitive than it has been historically, we do see a lot of things happening across our category to continue to drive customers in and get folks out as routines are not what they used to be. Mobility is bad but the routines are just a little bit different and we expect that will continue for quite some time as we work for for share of stomach across our across our category. On our franchise front, we will continue to partner with them to be smart on pricing, we've got our pricing analytics team that works well with our system to make sure that where we need to take pricing, we take smart pricing.

Yeah from a competitive perspective, it's always competitive.

Probably no more no less competitive than it has been historically, we do see a lot of a lot of things happening across our category to continue to drive customers in and get folks out as routines are not what they used to be mobility is bad but the routines are just a little bit different and we expect that will continue for quite some time as we.

work for for share of stomach across our across our category. On our franchise front, we will continue to partner with them to be smart on pricing, we've got our pricing analytics team that works well with our system to make sure that where we need to take pricing, we take smart pricing.

And our biggest opportunity is to continue to drive throughput. And drive our digital business higher moving into into the future. GP, any other thoughts on that?

And drive our digital business higher moving into into the future GP any other thoughts on that.

You said it well. I would also add a real performance metrics that we are watching closely are very good, right, we gained dollar share in the bigger categories tells us we are competing with our programs and as we also said in the prepared remarks, we are winning in breakfast. We're now the number three player and the gains traffic share again in the morning meal burger category. So overall, we are happy with how we are competing in the marketing mix that we're putting out there.

So overall, we are happy with how we are competing in the marketing mix that we're putting out there.

Thank you. Your next question will come from John Ivanko with JP Morgan.

Your next question will come from John <unk> with JP Morgan.

Hi. Thank you. I wanted to talk about the the Google partnership and I guess I'll ask the question directly I mean, what makes it I guess a partnership versus you being a customer of Google? And I just wanted to understand what may be exclusive to Wendys that you might get from them relative to the industry. Obviously it's the ultimate kind of data provider, but where do you see the Wendys brand taking advantage at least in the near term where others cannot be based on that relationship.

The ultimate kind of data provider, but where do you see the Wendy's brand taking advantage at least in the near term where others cannot based on that relationship.

Good morning, John Great. Great question, right I mean, it's really a strategic partnership. We are really very happy that such a heavy weight in the technology world is willing to partner with us. To be clear, we have a lot of other partners. They are more the vendor relationship. This is really a strategic partnership.

They are putting the best foot forward to help us in various areas right. It is definitely on the digital side, and really helping us with the one to one customer activation that they have several very proprietary products. If you can help us on that front.

On the digital side, and really helping us with the one to one customer activation that <unk> proprietary products. If you can help us on that front.

They are very strong in business analytics, so we're definitely going to use their platforms on it. And we really think that can help us on restaurants tech. And help us really remove friction for us with our crew members and our customers. So it's a level up over four channel vendor relationship, it's really strategic.

It's about the commitment that we have made and they have made. And as a result of it we think we're getting a good it's a win win situation. We will get a great return out of the partnership and them as well.

Thank you. And your next question will come from Chris Carroll with RBC capital markets. Your line is open.

And your next question will come from Chris Carroll with RBC capital markets. Your line is open.

Hi, good morning. You noted some encouraging data points around breakfast, including category breakfast share. You did note that you expect breakfast growth of 20% to 30% I think versus the prior expectation of 30% for this year. So in the context of that, can you talk a little bit more about your investment behind breakfast? I think you said you remain committed to the investment of $25 million in advertising this year, but did note that mobility does remain impacted. So curious if you can just kind of reconcile these two factors and how you're thinking about breakfast support for the remainder of this year and then into next year. Thanks.

You noted some encouraging data points around breakfast, including category breakfast share.

You did note that you expect breakfast growth of 20% to 30% I think versus the prior expectation of 30% for this year. So in the context of that can you talk a little bit more about your investment behind breakfast. I think you said you remain committed to the investment of $25 million in advertising this year, but did note that mobility does.

Main impacted so curious if you can just kind of reconcile these two.

Factors and how youre thinking about breakfast support for the remainder of this year and then into next year. Thanks.

Yes, it's been nice to see the momentum as our mix continues to pick up and exiting at the end of the third quarter to 7.5% breakfast mix. It is very encouraging. Very committed to continuing to keep our awareness levels high with the incremental advertising spend that we head into this year and we've always said it was a three year journey to really drive awareness and ingrain the habit. And we're working through that. In a more challenging environment, because the breakfast day part has been the slowest to recover back to 2019 levels, but it is coming back and we want to stay ahead of that curve.

And we're working through that.

In a more challenging environment, because the breakfast day part has been the slowest to recover back to 2019 levels, but it is coming back and we want to stay ahead of that curve.

What we're really excited about on breakfast is, our awareness is high. Awareness is at the levels of our Burger King is that and they've been in the breakfast business for a long time. And our repeat is really strong. So if we can get trial to happen, we can help to get a lot of repeat which will help ingrain the habit moving forward. And you saw that through the course of the third quarter with $1.99 croissants two for four croissants. And you're seeing that with the support that we have out there with a $1 breakfast biscuits, right now, which is driving a lot of trial into our restaurant. Because we really feel confident that <unk> will be there.

Our awareness is high.

Awareness is at the levels of our Burger King is that and they've been in the breakfast business for a long time and our repeat is really strong. So if we can get trial to happen. We can help to get a lot of repeat which will help ingrain. The habit moving forward and you saw that through the course of the third quarter with $1 99, croissants too for <unk> and you're seeing that with the support that we.

there with a $1 breakfast biscuits, right now, which is driving a lot of trial into our restaurant.

Because we really feel confident that <unk> will be there.

That's all support with what we have in the restaurant today. I'm trying to be fast or trying to be accurate, we're creating the highest customer satisfaction during that day part in our restaurants today. And as we look forward to next year. It will give us an opportunity to finally start to innovate to bring some news to the category with the support and success we've had to bring our franchise system alone for that journey.

I'm trying to be fast or trying to be accurate, we're creating the highest customer satisfaction during that day part in our restaurants today and as we look forward to next year. It will give us an opportunity to finally start to innovate to bring some news to the category with the support and success, we've had to bring our franchise system alone for that journey.

Your next question will come from Jeff Farmer with Gordon Haskett. Your line is open.

<unk> will come from Jeff Farmer with Gordon Haskett. Your line is open.

Thanks, and good morning, I just wanted to follow up on pricing. I believe on the last call you mentioned that your menu pricing, at least for the company restaurants, was roughly in line with food away from home inflation. I think on the limited service side food away from home inflation was pushing almost 7% in Q3 so. Is that a fair way to think about the menu pricing level that you have with the company owned restaurants, right now something close to 6% to 7%?

Is that a fair way to think about the menu pricing level that you have with the company owned restaurants, right now something close to 6% to 7%.

Good morning, Jeff. The numbers we are tracking is food away from home inflation effects around 4.5%, 4.7% and we are about in line with those kind of pricing levels. As Todd mentioned and I think the Q&A is to be obviously watching the rest of the economic model very strongly. Pricing is a lever we pull. And then we have pulled the pricing level in our company restaurants in the fourth quarter already.

The numbers, we are tracking is food away from home inflation effects around 454, 7% and we are about in line with those kind of pricing levels.

<unk> mentioned and I think the Q&A is to be obviously watching the rest of the economic model very strongly pricing is a lever we pull.

And then we have pulled the pricing level in our company restaurants in the fourth quarter already.

Thank you. Your next question will come from Alton Stump with Luke capital.

Your next question will come from Alton Stump with Luke capital.

Great. Thanks. Good morning. Just wanted to ask about the big consider cheeseburger launch certainly seems to be if not the most differentiated, one of the more differentiated products that dawn by made to crave so far. Just what kind of feedback was on that and how is there. In comparison to other offerings that you've introduced [I haven't made the created in the past]?

Wanted to ask about the big consider cheeseburger launch certainly seems to be if not the most differentiated.

One of the more differentiated products that dawn by made to crave, so far just yet.

Feedback was on that and how is there.

In comparison to other offerings that you've introduced.

I haven't made the created in the past.

Yes, we brought some really unique and creative news to the category and our premium side to really drive ownership in the made to crave arena and consumers start to expect when you won a high-quality premium differentiated hamburger at affordable pricing can come to Wendys and we are very pleased with the performance of that particular offering during the third quarter. And in fact that really help lever and drive our mix to its highest levels that we've seen across our total made to crave lineup, which includes both hamburgers and chicken. So we feel good about that.

Our high quality premium differentiated hamburger at affordable pricing can come to Wendy's and we are very pleased with the performance of.

of that particular offering during the third quarter. And in fact that really help lever and drive our mix to its highest levels that we've seen across our total made to crave lineup, which includes both hamburgers and chicken. So we feel good about that.

And we will continue to play that game, is its a nice mix lever and a nice high level customer satisfaction lever with the high quality food to allow folks to get something they can only get at a Wendys.

Your next question will come from Jared Garber with Goldman Sachs. Your line is open.

Hi. Thank you for the question I wanted to circle back on the on the breakfast business and certainly encouraging that you're taking some share there. But wanted to get a sense for why you think maybe the trial. Maybe more of a challenge obviously it sounds like the repeat businesses is pretty good but wanted to get a sense of why you think trial might still be a little bit more challenging here given the level of promotions that we've seen and that incremental advertising spend and. I guess how you kind of square that up with, is it just improving mobility patterns that need to kind of play out for you to kind of ratchet that number up? Or is there something maybe that were that were missing sort of under the hood that is driving that that trial challenge? Thanks.

Maybe more of a challenge obviously it sounds like the repeat businesses.

Pretty good but wanted to get a sense of why you think trial might still be a little bit more challenging here given the level of promotions that we've seen and that incremental advertising spend and.

I guess, how you kind of square that up with is it just improving mobility patterns that need to kind of play out for you to kind of ratchet that number up.

Or is there something.

Maybe that were that were missing sort of under the hood that is driving that that trial.

Challenge Thanks.

Yes, I really think it's the latter that you just said Jared that we need to continue to get mobility back in the morning day part and get folks into what their more normal routines will be.

As we've said in the past and we're still seeing that we're starting to see a little more mixed in the breakfast day part between that 7 to 9 o'clock window, but our two biggest half hours are still the last two half hours 9:30 to 10 and 10 to 10:30, so folks are using breakfast slot as of late morning zoom snack and starting to slowly shift into an earlier morning routine.

And that's why the breakfast day part has been a little slower to recover relative to the rest of the day, but we're really optimistic that that will continue to come back.

And as we've got news out there around good promoted price points on offers. The dollar but biscuits are clearly a reason to create a routine to get out of the house early in the morning on the way to trial with food.

Good promoted price points on offers the dollar but biscuits clearly a reason to create a routine to get out of the house early in the morning on the way to trial with food.

We're confident that that will help us continue to build our breakfast day part moving forward for this year. And then we'll start to look at what news can we bring to continue to keep excitement against the category for Wendys to make sure that we're top of mind and in people's routines moving forward.

Great. Thanks, that's helpful and could you just update us on the active loyalty membership? It sounds like the overall loyalty program grows but. Just want to get a sense of whether it's active loyalty members. Is that level grown over the last quarter or so? I think those levels have remained generally flat, I just wanted to get a sense of where that is tracking and particularly as it relates to one of your large competitor is launching a loyalty program a couple of months ago. Thanks.

Just want to get a sense of whether it's active loyalty members.

Is that level grown over the last quarter or so I think those levels have remained generally flat I just wanted to get a sense of where that is tracking and particularly as it relates to one of your large competitor is launching a loyalty program a couple of months ago. Thanks.

Yes, sure. Good question, we are a little bit north of $3 million extra for users. We like what we see in our loyalty program, we are seeing higher average checks, we are seeing higher frequency and obviously the key job for us is to actually make that pool of people better right, we're making a good job in terms of having now 19 million users in the database, how do we get them more active.

Question, we are a little bit north of $3 million extra for users.

What we see in our loyalty program, Yes, we are seeing higher average checks, we are seeing higher frequency and obviously the key trigger for us is to actually make that pool of people better right, we're making a good job in terms of having now 19 million users in the database, how do we get them more active.

We're definitely excited about our Google partnership. They are definitely trying to drive innovation for us around one to one activation. It is one of the reasons why we signed the agreement for them. So I think the future is bright for our loyalty program.

Definitely trying to drive innovation for us around one to one activation is one of the reasons why we signed the agreement for them. So I think the future is bright for our loyalty program.

Great. Thank you. Your next question will come from Dennis Geiger with UBS.

Your next question will come from Dennis Geiger with UBS.

Great. Thank you just wondering if you could come back to the court in lunch and dinner day part and just talking a little bit more about the drivers from here Todd maybe if you could touch a bit more on sort of some of those biggest contributors looking ahead, if its the menu innovation or the renovation with the fries.

If it's digital loyalty, maybe the dining rooms reopening the staffing improving again going forward I don't know how big the opportunity from here is on throughput and service fees, but just kind of speaking a little bit high level a bit more to some of those.

Key contributors to lunch and dinner from here would be great. Thank you.

I think there are several drivers I think first and foremost it does start with speed as we get stepped up a little bit better and continue to drive throughput.

Really lean into getting all those dining rooms open really leverage mobile grab and go really leverage curbside allow us to take some pressure off of those big drive thru lines I think all of those things will help drive our business moving forward just on a core operational metric perspective.

I think that's where the consumer wants to go they expect speed convenience and affordability from from from Wendy's and we want to continue to deliver that on that and differentiate with quality now if you think about the drivers moving forward clearly a lot of opportunity ahead of us on the breakfast day part and that's why we're driving so hard on trial.

But we're also not forgetting about the quality messaging on the rest of the day business that we have out there and that's why you see us continue to innovate in made to crave you see the innovation on French fries, they are hotter and Chris beer and preferred two to one to our lead competitor and in fact, we're very excited about those plans in place for the rest of the year.

Behind the success of the Fry innovation and all the trial behind the dollar breakfast biscuits. We are presently pacing ahead of our internal expectations to start the quarter. So we're feeling good that these things are resonating with the consumer and as we have applicant pool picking up staffing getting better those are things that can continue to help drive our business for.

The rest of the year on the staffing front. The one last comment I'll make is our late night business has been very good, but it's a big opportunity to be even better because we do have inconsistency of ours with with labor today at that day part and that's a big growing area, where we think theres a lot of opportunity when we can get ourselves staffed in those those hours open.

Thank you.

Your next question will come from Brett Levy with MTM partners. Your line is open.

Great. Thanks for taking my call and just following up on your last comment on the inconsistent hours and labor issues. How would you. How would you say you are positioned right now I know, you said, 95% to 85% and dining rooms.

If you look around the country. How are you seeing pockets of improvement? What do you think where do you think you are still the most efficient in terms of labor? And how should we think about your commodity position right now in terms of what's locked as we move into '22, how you're thinking about the basket for next year, and what that might do to your menu plans. Thanks.

How are you seeing pockets of improvement what do you think where do you think you are still the most efficient in terms of labor and how should we think about your commodity position right now in terms of what's locked as we move into 'twenty, two how youre thinking about.

The basket for next year, and what that might do to Europe.

Menu plans thanks.

And on the Labor front turn it over to commodities for GP as we look at staffing company restaurants franchise restaurants.

There is no clear pattern, where youre understaffed overstaffed when.

When you look at the <unk> across the country.

Good pockets bad pockets, but but not a particular area of the country. That's that's in a different perspective than than the rest of the country.

The focus is really on how do we continue to invest in those people pay benefits and really set them up for success with some quality training as we bring new folks on.

How do we continue to recognize and reward the folks for the great job that they're doing in our restaurants day in and day out and how do we stay focused on making more fun and energizing to work. So there is the word of mouth that this is a great place to work and we can bring folks in and theres opportunity to grow in our restaurant business in.

The trend is our friend, we're starting to see staffing improve.

But still not to the level that we needed to be.

Really drive all of the opportunities Thats out there in front of us and Thats going to take a little bit of time, because that labor market is not going to snapback overnight, we will see pockets of pressure.

We'll continue to push to do the right things to make sure that our restaurants are appropriately staffed and youre seeing that in some of the labor inflation that GP comment on commented on earlier I will discuss in a little bit more but there's a good return on that investment in our people because we can drive a great customer experience and drive a lot more business because there are a lot more business to be had on the commodity front GPL, let you comment.

Hey, good morning, Brett So on your question on there as you know we have adjusted our restaurant margin for this year down to about 16% to 6%. It's really on the heels of inflation right. We had previously thought.

Commodity inflation would be 2% to 3%.

<unk>, 4%, which mainly both was beef and some distribution cost on the labor front to be thought it would be 5% to 6% inflation VIX dealing now with about 7% to 8% inflation overall view of Super proud of our restaurant teams 16.

<unk> to 6% is significantly up in profitability versus prior year and actually even.

This was pre Covid levels I'm sure. Your next question is going to be so what is the margin outlook for next year.

Quite ready to give that outlook definitely can leave you with the following picture first before we definitely expect an elevated labor inflation and commodity inflation for next year. So we are planning for that.

Onto outgrown and inflation combined with pricing and cost containment actions like design to value. We see no reason why our margin for 2022 shouldnt be in line and baked to pre COVID-19 levels, we had in 2019.

Yeah.

Thank you.

Your next question will come from Nicole Miller with Piper Sandler Your line is open.

Good morning. Thank you I wanted to ask about price and store level margin and the question is not that you would take.

As much prices might be needed how much price is needed in the current environment to hold margin as a steady state and what is the underlying ideal steady state store level margin.

Good morning, Nicole, yes from a pricing point of view.

Belief that.

Pricing in line with food away from home inflation is probably the right spot for us.

But definitely watching compared to competitive actions in the respective.

Made areas and our.

Pricing is pretty sophisticated when we talk about the price increases these are north broadbrush pricing changes across the whole menu price elastic items and price inelastic items and via kind of operating in that environment and as I just said in the answer to the previous question.

Even with the elevated inflation levels that you're expecting in next year. We see no reason why we shouldnt be hovering around the same margin levels, we had in a pre COVID-19 world.

Okay.

Your next question will come from Brian Mullan with Deutsche Bank. Your line is open.

Hey, Thank you just a question on development I was wondering if you could discuss your current expectations for the components of net unit growth next year and commentary you've made in the past suggested 3% global net unit growth that was prior to the the reef announcements. So can you just give us your current thinking possibly split out between traditional.

The us International and then just expectations for <unk> next year that'd be great.

Good morning, Brian just to ground us in 2021, we are expecting 2% plus growth and achieving about 7000 vessels.

Restaurant count about 1% growth in the U S and 10% plus and international.

Because of <unk>.

The new agreement, we made with reef that Ed.

700 units over the next five years, plus a very successful ground breaker to point or initiatives that hit us.

240, plus incremental development agreements and the launch of our build to suit. It built to suit fund fees about 80% to 90 units all of that he does increase our unit growth outlook by about 500 to 1000 units to aid in the half to 9000 units from a <unk> point of view.

That is about a 505, 6% growth rate you can expect for 2022, what I would call it a vertical start up and growth.

So you would expect a 5% to 6% growth rate next year and the majority of that is driven by reef. Since the 700 units are pretty evenly split across all years it should be.

We said in the prepared remarks to start with our relationship with reef is positive we have reef units in place now in all the three countries that we have signed agreements for.

Thank you.

Your next question will come from Jon Tower with Wells Fargo.

Great. Thanks for taking the question many have already been answered, but I was curious just kind of going back to the pricing.

Pricing environment.

And frankly, the inflation, that's driving our running across the industry. How do you plan on keeping the value message front and center for the consumer next year.

Are we thinking about.

Using digital channels, specifically the loyalty platform.

Effective discounting mechanism relative to the past and in that context. It sounds like the loyalty active membership remained kind of flattish quarter over quarter. So so how do you plan on driving greater frequency within that cohort going forward.

I think theres a couple of things.

One we do have made really strong value proposition on the menu today with with four for four and with $5 Biggie bag. So we do have an opportunity to really play hard on the value side with.

Proposition that works for the consumer but also works for the restaurant economic model.

On the other side of the equation I do think as we continue to bring more folks into our loyalty program. As we continue to do more data analytic work a little more one to one communication the opportunity to better connect and drive some deals and drive more active users into the mobile space as a big opportunity moving forward as well as the offers.

That will continue to do within the App to drive more folks into the loyalty program and to drive them to become more active into the future. So I think those are the two big levers that we have to continue to drive a lot of value.

Cross across our menu.

And you did see us do things like buy one get one for a dollar which also drive some value in the minds of the consumer during the third quarter. So those are all tools that are out there in the toolbox.

Your next question will come from Jim Sanderson with Northcoast. Your line is open.

Thanks for the question I wanted to dig into the breakfast day part a little bit more I think in the past you had mentioned that some more mature markets had already achieved 10% or more of a day part sales mix have those markets maintained or grew their share with increased promotional activity you have in the marketplace and have we seen any.

Pick up in the average visits per year on the day part.

Thank you.

Yes, James Great question in for our legacy restaurants, those that had breakfast pre.

The new menu.

That we've created across breakfast they continue to do quite well, they're mixing 10% plus they continue to grow the mix in that breakfast day part.

Their average weekly volumes continue to grow nicely.

And.

They already have high awareness and a lot of folks in the routine those folks start to become a little more frequent and you start to acquire new users. So it's very encouraging when we start to see how those businesses perform and that's why we've always said, it's a several year journey to ingrain, the habit and and really get folks to become breakfast loyalists, along the way we do.

See that as is.

A very encouraging sign for the rest of the system with.

With success like we have in those legacy restaurants, those folks are always looking for what's the next level of growth and that's where we get some push on how do you innovate.

The innovate on food you innovate into the into the beverage.

Space. The Great News is we're actually getting that pool now from consumers and from our franchisees to start to invest more to drive even more growth in the breakfast day part and if you recall, we had a start make it very simple make it very fast low labor model low investment model to prove the success and now that we've proven we can be successful in breakfast as we move forward.

Into 2022, 2023, we can start to invest in more growth driving opportunities into the future.

Thank you a quick follow up is are the average visits up as well from the $6 five.

Starting to pick up.

We haven't updated the frequency data so what we've talked about we were at about $5 five visits per.

For year two of Wendy's prior were little over $6 five now so a nice 20% increase that was through mid year, we will update that more on an annual basis I'm sure. We'll have some more insight on that as we as we go into Investor day early next year, but that trend is nice and that trend is certainly helping us not just with breakfast helping to drive more frequency.

But all the work we're doing on rest of the day and digital too. So they are all playing a role.

You very much.

Your next question will come from Chris <unk> with Stifel. Your line is open.

Thanks. Good morning, guys. This is Alex <unk> on for Chris I, just wanted to follow up on development getting to 7000 units by year end implies a pretty strong fourth quarter I was hoping you could provide some additional color around what's driving that expected strength in it.

A timing shift in this quarter and then how is the system balancing that with maybe some difficulties in either equipment sourcing or construction labor availability.

Good morning, Yes, that'd be very proud of our development progress in the third quarter.

We opened 50 restaurants and Youre right.

So a good amount of restaurants still to come to reach to 7000 number.

The only thing I can tell you our confidence is high 90% or so of all of these restaurants that need to be built to get to the 7000 numbers are under construction.

I'll be managing these tightly absolutely we are hearing about labor shortages and and.

Supply chain challenges in the construction industry as well quick things shift around a little bit maybe but again, 90% of the restaurants under construction you might be wondering what's the remaining 10% while the remaining 10% is non traditional units.

<unk>.

And others that obviously have superfast construction times.

And our last question will come from James Rutherford with Stephens, Inc. Your line is open.

Hey, Thanks for getting me in I, just wanted to come back to the breakfast discussion Todd I thought it was interesting you mentioning earlier in the Q&A that customers are tending to use the breakfast business, a little bit more of a lag.

Good morning snack.

As opposed to that early morning kind of on the way to work routine.

I'm just curious.

I know that coffee is a key element to driving that early morning routine your food quality differentiation is very clear with breakfast, but I haven't heard as.

As much discussion on the performance within the beverage side of the menu just curious if you could comment on what feedback you've heard from consumers on your breakfast beverage lineup and how important that piece of the menu in terms of future innovation and the overall importance at driving those early morning routines to Wendy's.

Yes, great question as we start to look at opportunity. We do think there is an opportunity to drive the beverage strategy, even harder, especially as folks get into the morning routine and really think about use them.

The restaurant on the way to work in the morning, we have a very good coffee in the restaurant and did a lot of work on it before the launches like anything you need to have coffee prepared fresh and you've got to have it ready when the consumers coming in.

And getting more and more business earlier in the day, we will certainly help reinforce the quality of the coffee offering we have got some great unique items that are good price value. When you think about the ice side with fresh Gino. So we will continue to drive awareness and trial on that and the ESG CSD business. When you think about how many folks are having a soda.

In the morning.

Having the variety with with with.

Hopefully styles in our restaurant and certainly helps to all that said.

We continue to ingrain, the habit drive the business.

We did do things simple fastball down the middle to really drive the economics and adoption early we do think that's an area, where we can continue to lean in and innovate for many years to come and that's not going to happen overnight.

We're going to do it smartly, we'll do it along the way and it will really complement the reasons why you want to come to Wendy's on the way to your <unk>.

Destination day in and day out.

Thanks very much.

Thank you Jim 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 in our fourth quarter and full year earnings call. In February ahead of our Investor Day have a great day you may now disconnect.

This concludes today's conference call. Thank you for participating you may now disconnect.

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Q3 2021 Wendys Co Earnings Call

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