Q4 2021 Wendys Co Earnings Call
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'd 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 Levin check senior director 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 Harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward looking.
Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward looking statements.
Also some of today's comments will reference non-GAAP financial measures investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.
On our conference call today are president and Chief Executive Officer, Todd Pentagon, and our Chief Financial Officer, Gunther Plush will give a business update and review our fourth quarter and full year 2021 results as well as our 2022 outlook from there we will open up the line for questions with that I will hand things over to Todd Thanks, Greg and good morning, everyone.
We had a breakthrough year in 2021 as evidenced by significant growth in our business and we did so in partnership with our franchisees restaurant crews and suppliers.
I'm incredibly proud of our consistent growth each and every year.
We delivered on this again with an incredible 11th consecutive year of global same restaurant sales growth and accelerated to double digits on a one and two year basis.
This was driven in part by growth in our breakfast business, which reached eight 5% of U S sales at the peak of our very successful Buck biscuit promotion and global digital acceleration, which grew to approximately 10% of sales by year end.
Our strong sales performance and commitment to the restaurant economic model led to company operated restaurant margin expansion of almost 200 basis points in the face of historic inflationary pressures.
We also made meaningful progress on expanding our footprint opening more than 200, new restaurants across the globe in 2021, despite a very challenging supply chain environment.
Our success is further evidenced by the continued return of cash to our shareholders in accordance with our capital allocation policy, where in 2021, we returned approximately $360 million through dividends and share repurchases.
As we turn to 2022, we remain focused on our three long term growth pillars to build our breakfast day part accelerate digital and expand our global footprint.
We believe that now more than ever <unk> is the place to be and our mix of convenience affordability and speed position us to deliver against customers evolving expectations. The.
The momentum we have built and our focus on execution are evident and the step up in growth in our 2022 outlook that G. P will talk through later.
Our goal remains the same which is to invest in driving efficient accelerated growth and we are delivering on that commitment.
We have achieved our 11th consecutive year of global same restaurant sales growth, which is a streak we plan to keep alive in 2022 and beyond this growth extended across the globe with double digit two year same restaurant sales in the U S and incredible double digit one and two year same restaurant sales internationally.
In the U S. These strong results led to dollar and traffic share growth, marking our sixth consecutive year of gaining or holding both dollar and traffic share in the <unk> Burger category.
With the momentum that we have we expect to continue delivering growth on top of growth across the globe in 2022 and beyond before I share more on our growth strategies for this year I will turn it over to GP to provide a few more details on our 2021 results.
Todd we are very proud of our 2021 results, which far exceeded our initial outlook for the year and showcase the power of our business model Global system wide sales grew almost 12% adjusted for the 50 <unk> operating week in 2020.
This was driven by our same restaurant sales growth of 10% and approximately 2% net new restaurant growth. We have also now re imaged 72% of all our restaurants ahead of our 70% goal for 2021 company.
Company operated restaurant margin expanded by almost 200 basis points to 16, 7% driven by our sales growth through a higher average check and an increase in customer accounts. We also benefited from lapping restaurant recognition pay in the second quarter. These increases were partially offset.
By an unprecedented increase in commodity and labor inflationary pressures.
After adjusting for the 50 <unk> week, our adjusted EBITDA increased over 13% to $467 million.
This was supported by our significant sales growth and increase in net franchise fees and company operated restaurant margin expansion. These.
These increases were partially offset by higher G&A expense and our incremental investment in breakfast advertising.
Our adjusted earnings per share increased almost 45% to 82%. This was driven by the increase in adjusted EBITDA and lower tax rate lower interest as a result of our debt refinancing that we completed in 2021, lower D&A expense and fewer shares outstanding as a result of our share repo.
This program.
Free cash flow increased significantly to $263 million. The increase resulted primarily from higher net income the timing of accrued compensation payments the impact from the cash payment related to the settlement of the financial institution case in 2020, and the timing of collection of royalty receivables.
Increases were partially offset by an increase in cash paid for income taxes and cash paid for cloud computing arrangements, primarily related to the company's ERP implementation.
Now, let's turn to our fourth quarter results global same restaurant sales growth re accelerated to double digits on a two year basis coming in ahead of our expectations for the quarter at approximately 12%.
U S same restaurant sales accelerated to 11, 6% on a two year basis.
Driven by growth across our core business breakfast in digital.
Our game changing <unk> innovation and compelling geographies could promotion resonated with our customers, helping us grow customer accounts year over year, while also maintaining year over year check growth in the fourth quarter.
Internationally, we delivered a third consecutive quarter of double digit one and two year same restaurant sales growth. This was driven by our largest markets with two year same restaurant sales outperformance in Canada, and Latin America, and Caribbean region, which was driven by strong results in Puerto Rico and <unk>.
CECO one of our strategic growth markets.
Our strong sales result, also drove company restaurant margin to exceed our expectations for the quarter at 14, 5% year over year company restaurant margin decreased 300 basis points, driven by record levels of commodity and labor rate inflation of almost <unk>.
<unk> and 12%, respectively and higher insurance cost. These decreases were partially offset by the benefits of sales leveraging driven by the strength of our fourth quarter promotions.
Our increase in G&A was primarily driven by higher incentive and stock compensation expense as a result of our strong financial performance in 2021.
Our adjusted EBITDA decreased to $103 million, primarily due to the $8 million impact of rolling over the 50 <unk> week in 2020. In addition, there was a decrease in company operated restaurant margin higher G&A expense and the decrease in franchise rental income.
These decreases were partially offset by an increase in net franchise fees and higher franchise royalty revenue.
The decrease in the adjusted earnings per share was driven by lower adjusted EBITDA. This was partially offset by a decrease in interest and depreciation expense and fewer shares outstanding.
With that I will pass things back over to Todd to talk about our plans to accelerate our growth even further.
Thanks GP.
Our playbook of investing to drive accelerated growth behind our three long term pillars remains the same and we believe we have the strategies in place to deliver in 2022.
As we look forward, we still have many foundational growth opportunities on the horizon like reopening all of our dining rooms continued improvements in staffing and fine tuning our digital experience all of which will set the base to drive our growth even further.
Our plans are built on our foundational items of fast food done right operational excellence and good done right.
The thing we do remains deeply rooted in the foundation of the restaurant economic model we.
We believe that our franchisees have never been healthier and like US continue to experience significant sales growth in 2021, putting us in a strong position to weather the near term pressures facing the industry.
The combination of strong sales and margins fuels reinvestments into people technology re imaging and new development, which drives our confidence in growth for the future.
Now, let's walk through our strategies to continue to drive growth.
We continue to be extremely pleased with our breakfast business, which saw strong growth in the fourth quarter, peaking at more than eight 5% of sales in the U S and averaging approximately 8% during the quarter.
This growth was primarily driven by successful promotions, which not only drove significant trial of our breakfast day part as evidenced by a meaningful increase in buyer penetration in the quarter, but also increased overall breakfast awareness to record levels.
This culminated in another quarter of morning, Neil traffic share growth in the <unk> Burger category is.
We look back at the full year, we have made significant progress growing breakfast sales by approximately 25%.
We achieved this through several successful trial driving campaigns continued increases in customer repeat two additional months of the day part and the support of our $25 million incremental investment in breakfast advertising.
In 2022, we will add toward playbook to build the breakfast business as we support growth through menu innovation, such as our new Craveable Hot Honey chicken biscuit alongside compelling trial driving offers to further ingrain the habit.
We believe our breakfast business in the U S will accelerate in 2022 by approximately 10% to 20% taking average weekly U S breakfast sales to approximately 3000 to $3500 per restaurant by year end.
We are shifting our targets to a dollars per week metric as this is how we track the success of the day part.
We plan to launch breakfast in Canada, our largest international market in the second quarter, which we will expect will build on the outstanding momentum and share gains we've seen in the market over the last few years.
This will bring our percentage of the global systems, serving breakfast to approximately 95%.
We will tailor our breakfast program to the Canadian market, but we will leverage our successful U S launch playbook, which will include a similar menu minimal franchisee investments and additional company advertising support.
In fact, we already invested over a $1 million in the fourth quarter to ensure our launch gets off to a strong start.
We are expecting similar results to what we have seen in the U S and anticipate that the Canadian breakfast launch will provide an approximately 3% to 4% lift to international same restaurant sales in 2022.
Finally, we plan to continue supporting our breakfast business within approximately $16 million incremental investment in breakfast advertising in 2022, approximately $5 million of the investment will support the Canadian launch, which represents a meaningful increase in the Canadian advertising budget we.
We will continue to invest above and beyond in the U S with approximately $11 million to continue driving trial repeat and awareness to set us up for even more growth.
Significant growth in our digital business across the globe in the fourth quarter, reaching approximately 10% of sales globally and exiting the year with a ton of momentum our international digital sales mix exceeded 15% up versus the third quarter as Canada saw significant gains from the addition of Uber eats as a delivery provider.
Our U S digital business also accelerated during the fourth quarter exiting with digital sales mix of more than 9% in December .
This growth was driven by gains across both mobile ordering and delivery.
We also saw meaningful increases to our loyalty program growing total members by approximately 75% over the course of the year and growing monthly active users by approximately 25%.
In fact, our rewards program was recently recognized as one of America's best loyalty programs by Newsweek rating factors like overall satisfaction and ease and enjoyment.
For the full year, we achieved explosive digital sales growth of 75% versus the prior year, which contributed to our strong sales results through higher frequency of our active users and higher average checks across our digital platforms.
We expect meaningful growth in our digital channels to continue across the globe in 2022, as we drive more people into our App with compelling offers through the strength of our growing loyalty program and innovation as part of our strategic partnership with Google to create best in class frictionless experiences in Wendy's restaurants around the world.
Our development momentum accelerated as we delivered 121 net new restaurants, marking our sixth consecutive year of net new restaurant growth and our highest net new growth and almost 20 years.
This growth includes successes across the globe with exciting milestones along the way such as the opening of our first restaurants in the U K the opening of our 1000th international location and the opening of 30, Wendy's delivery kitchens with reef across the U S, Canada and the U K.
We are still early in our journey with reef, but we're pleased with the operation and performance of the Wendy's branded delivery kitchens.
These kitchens are designed and operated solely as wendy's locations and our operated the Wendy's way. We continue to expect reef delivery kitchens to help us address underpenetrated urban markets and are excited about the partnership and all the growth that lies ahead.
I am extremely pleased with the results the team was able to deliver growing net new restaurants by approximately 2%.
Well, we have achieved significant growth, we did experienced supply chain impacts, causing some delays in openings. However, we have now open all the restaurants that were impacted by supply chain delays last year.
As we look ahead, we expect a meaningful step change in growth for 2022, as we continue to build on our strong foundation.
We are already off to a strong start tracking right on plan through the end of February and expect full year net new growth of 5% to 6%.
This is backed by a very strong pipeline and further supported by our significant development agreements across the globe.
I also wanted to highlight our recently launched one year opportunity campaign, which seeks to further unlock our growth potential by increasing the diversity of our franchise system.
We have introduced new strategies and tools to drive this effort through our previously announced build to suit program and more competitive financial requirements in.
In addition, we are also adding resources with a focus on recruiting and we have developed innovative financial programs and partnerships with banks, who share our vision for Wendy's owners, who reflect the diversity of our customers.
We believe this program will enhance our development pipeline and further solidifies our confidence in the plans we have in place to reach 8500 to 9000 global restaurants by the end of 2025.
Everything we do at Wendy's is focused on bringing our vision of becoming the world's most thriving and beloved restaurant brand to life and we believe we have the right plans in place to accelerate our growth. Even further I will now pass it back to G. P to share how our growth strategies ladder up to our 2022 financial outlook.
Thanks, Todd as we move into 2022, our playbook remains the same we are poised to deliver another year of accelerating growth now lets take a deeper look into our key financial metrics, starting with global system wide sales.
We are expecting significant topline growth in 2022 of almost $1 billion with global system wide sales growth of 628%.
Expect that same restaurant sales will drive more than half of our system wide sales growth in 2022, driven by growth in our core business breakfast growth in the U S. The launch of breakfast in Canada and continued digital acceleration.
We also expect a significant increase in net restaurants development to drive the remainder of our system wide sales growth as we plan to grow our net new restaurant count by 5% to 6%.
We are expecting that roughly half of our new unit growth will come from non traditional delivery locations.
Now onto adjusted EBITDA, which we expect to grow to approximately 492 $505 million if.
We expect our strong top line to be our biggest driver of growth benefiting both royalties and co company operating restaurant EBITDA overall, if you're expecting a company restaurant margin of 15 to 16 under 5% as the benefit from our anticipated sales growth inclusive of over 5%.
Pricing up being offset by high single digit commodity and labor inflation pressures and a 50 basis points headwind from investments in the UK to support our continued launch in that market.
We are also expecting a benefit to restaurant margin in EBITDA from our acquisition of restaurants in the Florida market net of the sale of our New York market.
Finally, we are expecting a tailwind as our incremental investment in breakfast advertising will step down to approximately $16 million from $25 million in 2021.
These increases are being partially offset by lower net franchise fees as a result of an expected return to a normalized franchise transaction activity.
We also expect G&A to increase to approximately 250 to 260 million via a further investing in our development and digital teams to support the increased growth, we expect to deliver in 2022 and beyond.
We are also expecting an increase in technology cost related to the company's ERP implementation increased cost related to annual merit increases increased travel as we are lapping low travel activities due to COVID-19 and additional cost to support the acquisition of franchise operated restaurants.
These increases are partially offset by a decrease in incentive compensation as our planned resets each year.
The investments in growth, we are making in G&A are being done in an effort to create a more efficient when this moving forward.
Anticipate that with G&A as a percent.
<unk> of our global system sales will remain flat to 2021, and then start to come down as we move into the out years.
We expect free cash flow from our base business to grow roughly in line with adjusted EBITDA driven by core earnings coming primarily from our strong adjusted EBITDA growth.
These increases more than offset by higher incentive compensation payment due to our outperformance in 2021, an increase in capex to approximately $90 million to $100 million.
And an increase in cloud computing arrangement cost of approximately $15 million.
We believe our investments in Capex will set us up for even more growth in the future. This is being driven by an increase in company development, including the opening of additional restaurants in the U K and cost associated with the restaurants acquired in Florida.
And the rollout of our new double sided grills in our company operated restaurants, which we expect to more efficiently produce higher quality hamburger.
The increase in cloud computing costs is primarily driven by investments being made to drive our digital business being funded by our technology fee and the company's ERP implementation, which will drive efficiencies across our organization moving forward. We expect these costs to moderate significantly.
<unk> is the company's ERP implementation will be completed in 2023.
Headwinds will be partially offset by lapping reorganization and realignment payments related to a prior rework of our field team. All in we expect 2022 free cash flow to land at approximately $230 million to $248 million.
To close out our outlook discussion I wanted to hit on EPS the increases adjusted EBITDA as the main driver in increase in our adjusted EPS outlook to <unk>, 87% to 91%.
We also expect to benefit from fewer shares outstanding as a result of our share repurchase programs.
These are partially offset by a higher tax rate as we lap over stock comp windfalls and an increase in depreciation primarily related to the acquisition of the Florida restaurants.
The step up in 2020 to outlook highlights the strong foundation and momentum we have built and to continued growth across our strategic pillars.
To close I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth and we are continuing to showcase this through the investments we are making.
In the fourth quarter, we acquired 93 franchise operated restaurants for $128 million.
As part of our ongoing system optimization initiative, we remain committed to maintaining approximately 5% ownership and will buy and sell restaurants strategically from time to time <unk> seek to continually optimize the Wendy system.
We previously announced the declaration of our first quarter dividend of 12, and a half cent per share an increase of approximately 4%, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%.
We plan to utilize excess cash to repurchase shares and reduce debt, we announced today, a new $100 million share repurchase authorization expiring in February of 2023.
Finally, we are in the process of evaluating a potential debt raise transaction within our securitized debt facility.
If we decide to proceed with this transaction, we would expect to use the net proceeds in line with our capital allocation policy.
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 Thanks, Steve as.
As we previously announced we will be hosting a virtual investor day on Thursday June 9th, which we shifted due to the evaluation of our potential debt raise.
During this event, we're planning to provide an update on our long term strategic vision and reintroduce our long term outlook, including updates on how we believe our U S and international businesses will deliver a new gear of growth across our three strategic growth pillars.
Now turning to our first quarter investor outreach events to start things off we will attend the Jpmorgan conference in Las Vegas on March eight followed by the UBS Conference in Boston on March Tonight.
We will follow this up with a virtual headquarter visit with Deutsche Bank on March 11th at a virtual <unk> focused on the New York market with Guggenheim on March the 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.
Lastly, we plan to report our first quarter earnings and host a conference call that same day on may 11th.
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 with that we're ready to take your questions.
Thank you and as a reminder, you'll ask a question please spread star one on your telephone keypad.
A question press the pound key.
Please standby, while we compile the <unk> roster.
Your first question comes from Dennis Geiger from UBS.
Great. Thanks for the question wondering if you could talk a little bit more about the.
The operating environment as it relates to staffing the dining rooms et cetera, how that impacted the quarter and then I think Todd you spoke to the the opportunity for improvement through the year as it relates to staffing as it relates to the dining rooms reopening. So just curious if you could provide kind of any.
Any more commentary around around that opportunity and how you see that playing out thank you.
Yeah. Thanks for the question Dennis Yes in the fourth quarter, we had about 85% at any point in time of our dining rooms open that was about the same as we saw in the third quarter. So we didn't see a market change quarter to quarter on number of dining rooms open. If you look at our progression of sales throughout the quarter, we really didn't see an impact from <unk>.
During the course of Q4.
Staffing was a little tighter throughout the quarter clearly omni kron played a role in impacting staffing at the restaurant level.
We've been very encouraged recently as we're starting to see applicant flow pick back up we're seeing staffing is starting to improve and as we focus on our growth initiatives and really creating great restaurant experiences through digital as we move into 2022, a big focus of working with our system will be to ensure that our dining rooms are open. So we can actually.
We have folks come in and do mobile grab and go on a more regular basis get our delivery drivers in and out. So we're encouraged about the trends that we're seeing right now.
Thanks, Tom appreciate it.
Your next question comes from Brian Bittner from Oppenheimer.
Thanks. Good morning. My question is on the 2022 top line outlook.
The same restaurant sales the implied same restaurant sales outlook for more than half.
Two the system sales growth, which suggests an above average pace of comp growth in 'twenty. Two so is that primarily related to elevated pricing and additional breakfast gains or anything else you can flush out on the same restaurant sales guidance to the global system sales guidance and on the unit growth.
Its contribution to system sales is going to be relatively low this year, particularly because it steps up throughout the year, but while the contribution from unit growth to system sales step up following 22 as this timing issue kind of dissipates.
Yeah.
Yeah.
Yeah.
To your question on color on Srs couple of drive us to be clearly.
Driving core SaaS growth in rest of day as you've heard on the KOL breakfast in the U S is going to accelerate our overall growth with 10% to 20% growth. There today is lifting our srs expectations with Brussels <unk> potentially in the past.
Also our Canadian breakfast launch.
It's not unimportant.
Going to lift our international Sos by about 3% to 4%. So that's a little bit of color on the Srs and yes. We are we are pricing.
Above 5% in 2022, it gets us to double digit pricing on a two year basis, and it's clearly providing a tailwind for us on the Sos number.
As far as your question is concerned on unit growth to your observation is correct about 50% of our unit growth in non traditional non traditional ease at such.
As lower <unk> and as you also might remember.
Portion and the big step up of our nontraditional growth is driven through the launch of reef kitchens <unk> kitchens. They have an <unk> of around half a million to a $1 million from a P&L point of view. However, it is accretive to our royalty rates since we are collecting.
A 6% royalty rate income on that compared to a regular collection of about 4% on a go forward basis I would expect that our non traditional development stays in the 40% to 50% range. So that the similar impact off.
The unit growth is outperforming the impact on sales I expect that to stay for the future.
Thanks.
Your next question comes from.
Erik <unk> from <unk>.
Keybanc Your line is open.
Hey, Thanks for the question just a quick one on breakfast I'm wondering to what extent the Alcon variant may have set you back in terms of establishing those consumer habits.
Do you expect that that $11 million that you're spending that incremental $11 million is that really aimed to reestablishing those habits or anything you can any color you can give us on what youre seeing on the breakfast mix to start the year.
Eric we've been very pleased with our breakfast performance and as you think about our guidance for this year 3000 to 3500 per restaurant.
Nice step up as GP, just said, 10% to 20% growth year on year, what we're really encouraged as traffic is now back in the fourth quarter to pre pandemic levels on the breakfast day part routines are starting to come back. They are different they are skewed a little bit later in the morning, We're seeing our peak half hours the last two half hours of the morning.
But we've been very encouraged over the last couple of quarters that we're starting to shift to see our mix shift back to that 7% to nine o'clock. So patterns are starting to come back people are starting to return to work some of the changes and CDC guidance and the requirements around masks.
And comfort levels for folks getting back in the office will certainly outside us up for success into this year. So we're feeling really good about the momentum that we have in the business the incremental spend that we'll have this year is a nice complement to continue to put our message out there.
Ensure that we can continue to drive trial continue to drive awareness.
And what we're really seeing is that continued nice repeat and the business. So we're really encouraged about our breakfast day part right now.
Thanks.
Your next question comes from David Palmer from Evercore ISI.
Thank you question on price and also on mix I think you said that you.
We're anticipating 5% price in 2022, and what was the price in 2021.
And how is it now year over year in the first quarter and also related to the mix impact. If you were to separate that impact to check from pricing.
How was that in 'twenty, one and how do you generally view mix playing out in 2022.
Good morning, David So on pricing so on the system side in <unk> in quarter four.
System price slightly below food away from home inflation.
<unk> priced about 6% in the fourth quarter and then it was about in line with the food away from home inflation, we saw in the fourth quarter two steps back on company of the year in 2021 be priced slightly below food away from home inflation in 2021.
Persist our pricing power and we definitely expect to price north of 5%.
In 2022, we're going to watch value and value perception, you know about.
30%, 35% of our consumers are making less than $45000 a year. So we need to make sure that we are striking the right balance and maintaining value perception.
Mix and mix management was clearly a nice tailwind for us in 2021.
We are managing that to be in a waiting behind made to crave via marketing in that in that area relatively strongly and as an outcome we are getting positive.
Mixed messages.
We are going to continue to do the same thing in 2022, If trust launched hot Honey chicken sandwiches for made to Crave again news to drive the platform and tries to add drive news on a go forward basis.
Your next question comes from Gregory Frankfurt Debbie Your line is open.
Hey, thanks.
Maybe just one quick one does the guidance assuming a leveraging event happens is that embedded in the guidance and then my question is on the international side.
A pretty big pick up in the performance.
I think we've seen from some of your peers strong improvement in Latin America.
That's a big driver than anything just regionally on the international international side of things.
Good morning, Greg So on the on the potential debt raise no. None of that is contemplated. So if you go to raise debt.
The impact on interest expense and therefore, the impact on free cash flow and EPS.
There is nothing contemplated in the guidance and I think Greg Todd is going to talk a little bit about international the international our recovery has been widespread Greg we see a lot of momentum continuing in the Canadian market.
Average <unk> and Canada, plus up over $200000. During the course of the last year. We continue to have momentum in that market that is our largest international market. Puerto Rico. We continue to see significant gains that business has been an absolute fire and in fact <unk>.
Up about $500000, two or <unk> year over year in the Puerto Rican market, that's fueled a lot of growth and we've seen a nice recovery also as you mentioned in Latin America, with Mexico performing quite nicely.
So we are seeing widespread growth across the international business within within the Srs numbers and then very pleased with the launch of the UK business as we get up and running which isn't NSS, but driving some nice sales growth.
Your next question comes from Jared Garber from Goldman Sachs. Your line is open.
Hi, Thanks for the question today I wanted to switch back to the franchise recruitment initiative that you announced yesterday I know, we've heard a little bit about that maybe on the third quarter, but we've got some incremental color yesterday can you just talk about how you think that will help us to drive some of the longer term unit growth for the brand.
Yeah, No we're really pleased to announce the.
Your own opportunity campaign that you saw come out yesterday, and it's been a culmination of a few things that we've been working on for a while.
Building, some new relationships with with various banks to ensure that we can provide more access to capital smaller franchisees entering the system and the build to suit program that we put in place really complements this program well gives folks an opportunity to come in.
With a little less capital outlay, as we support getting that restaurant ready up and running for them.
And we took down some of the financial requirements as you know a few quarters ago to really make sure. We are competitive with the rest of the industry. We think all of that will significantly drive opportunities to bring more diverse franchisees into our system allow us to get into some of our underpenetrated markets and continue to exit markets and continued.
Accelerate our growth.
This year, but as we build the pipeline into 2023 and beyond.
Thanks, that's helpful color and then just one quick follow up on the comments that you. Just made was one of the things that I was thinking about in terms of the Underpenetrated market can you help highlight what type of markets those those might be or are they more urban more suburban or rural.
Other different pockets of the country.
This program might help you penetrate as well any incremental color there would be helpful. Thanks, so much.
Yes, we've always talked we're clearly underpenetrated in major urban markets <unk>, playing a big role on that with with the delivery kitchens.
Great to have even more hard assets into some of those markets and have franchisees that represent the communities that those restaurants would be and but we also know we've got a lot of opportunity across the country.
And many of the smaller communities and when he is a great brand great opportunity for folks to.
Port their local community with with access to Wendy's.
We are dramatically underpenetrated still relative to our peer group across the country and we think this can stimulate some nice growth.
Thanks for that.
Your next question comes from Jeffrey Bernstein from Barclays.
Yes.
Great. Thank you.
Just wanted to follow up on the pricing as it relates to franchisee profitability.
You mentioned the franchisees were doing quite well it seems like sales are strong, but as you acknowledged inflation was outside so I'm just wondering whether the 5% or so pricing you took in 'twenty one was enough to protect.
Margins and profits if you have any color on the range of pricing that was taken and maybe what you saw in terms of elasticity from a consumer demand perspective, because it does seem like like you mentioned the lower income consumers vulnerable just wondering whether that is expected to be enough or there is any risk in your mind to that elasticity based on that.
I think you said high single digit labor and commodity inflation. So just trying to get a sense of your.
Confidence from that perspective, thank you.
Thanks, Jeff as five franchise profitability is concerned we have not yet collected the 2021 financial my hypothesis would be that we will have done well.
Your recollection is correct back in 2020 U S EBITDA.
You can find it for U S franchise system was.
Was increasing by about 18% you have seen our margin performance. Our margin was up almost 20 basis points. We had obviously the same inflation as they had to deal with so I would have expected.
They would have performed similarly.
In 2021, and so I would expect that they started to 2022.
Very healthy financial position.
As far as impact on pricing.
Terms of shocks to the consumer as I said in my in my previous answer we stepped up our pricing in the company restaurants to about 6% that was it was about in line with the food away from home inflation and we re accelerated.
The Srs in the U S.
<unk>.
11, 6%.
So some of what we are seeing.
We have not seen really any impact on the price increases from a market share point of view.
We gained traffic installer and acuity a bigger category in the fourth quarter and then now marks the sixth consecutive year of either holding or growing dollar and traffic.
The other category.
Thank you.
Your next question comes from John <unk> from Jpmorgan.
Hi, Thank you I was hoping if you could go through some of the buckets of capex in that $90 million to $100 million Guy.
Guidance for fiscal 'twenty, two and maybe obviously, what I'm trying to get to is is that the new level going forward does that have an opportunity to go down does it makes sense that it would go up and just the overall umbrella question is do you think about capex as a percentage of EBITDA.
Longer term process the overall judged.
Capital efficiency your cash efficiency of the business.
Good morning, John I would have been disappointed if you wouldn't have asked the question on capital. So the capital is definitely up on prior year, just stepping up for the time being our development capital, that's driven definitely a little bit by the acquisition, but more importantly by building out our footprint in the U.
Okay, we're going to build about 10.
The restaurants in the U K in 2022, we also have something new and I don't know whether you pick these up in our prepared remarks.
Also investing in the double sided grill. So the way to think about it is a faster grill that produces.
<unk>.
We are going to transform about 40% of our grille footprint in our company restaurants. This year and finished is up in <unk>.
2023, our system is going to about a third converted to the new grill. It should lead to increased sales since consumer satisfaction should be increasing it also will drive some labor efficiencies. So so these investments that we're making here really drive.
<unk> growth and therefore drives our financial return out of those capital investments.
Would you have also seen probably is that we have a headwind in our free cash flow on cloud computing arrangement. So that's technically just to be clear that's not part of the Capex line. That's actually sits on prepaid assets four but mainly for the ERP implementation.
And it gets amortized into the G&A line so.
And in terms of on a go forward basis.
You're going to stay elevated on the capital side in 2023 seems to be are going to continue to build out our UK footprint to about 35 restaurants and as I mentioned the double sided drills, we do about 40% this year the remainder in 2023.
Beyond 2023, we'll give a little bit more color when we altogether for Investor day beginning of June .
Okay fair enough. Thank you.
Your next question comes from Greg Carroll RBC capital markets.
Thanks. Good morning, I think you mentioned breakfast awareness levels continued to grow in the <unk>. So can you provide any more detail on awareness and I believe you're expected support a breakfast of $16 million in 'twenty. Two is only slightly higher than your previous guidance do you see potential for that support level the ship.
It all depending on breakfast performance either in the U S or Canada.
Yes no.
On the breakfast side of the business.
Been quite pleased with what we've been seeing along the way.
Our repeat continues to be very strong awareness of rates record levels for us are basically on par with Burger King which has been in the business for a long long time.
What we're really pleased is with a lot of the trial driving promotions that we had out there.
<unk> dollars 99 per science, we're bringing a lot of new users into the category and into the Wendy's breakfast arena.
And we know that once we get great trial on our food, we do see really strong repeat and Thats why were really confident in the step up that we're seeing as patterns start to come back in the morning routines to get to that 3000 to $3500 per restaurant.
We're really encouraged as our legacy restaurants that had breakfast before our launch two years ago are now running north of $4500 per week and those are the restaurants that had a little more reps on.
How you manage breakfast operationally, but a lot more time to ingrain, the habit and the communities that they serve which gets us really excited about where the growth can continue to go.
As we roll into March Madness, we are the official breakfast of the <unk> official breakfast to March madness.
So the official Hamburger of.
The NCWA, so youll see a lot of messaging to continue to drive awareness as we move forward into the future.
Our next question comes from Lauren Silberman Credit Suisse.
Thank you I just have another follow up with breakfast, obviously, a very good job mix nearly 8% in the fourth quarter with the goal to grow 10% to 20% get to a 10% mix. This year. I mean is there anything you need to see in the macro environment and then from a company specific perspective can you expand on how you are driving more trial.
<unk>.
Yes, if you do the math and you start to think about $3500 per restaurant and Thats. The way, we look at it with our system as we look at that being significantly above breakeven profitability if.
If you if you work with rolls forward, probably slightly short of that 10%, but that 10% mixed goal was just to step on the way of a journey to be a much higher performing a percentage of our business over the long run.
There's a lot of leg room, a lot of opportunity to grow the breakfast in the future.
Routines comeback as folks start to routine move back into the office a little more kids all getting back into school all of those things play to continue to drive our business quite hard and the disruptive promotions do get folks attention and allows us to talk about the Wendy's brand and talk about the quality at a very great price point and it does drive.
Lot of people in for trial.
And the other thing I wanted to add is we have this.
Talk about our legacy breakfast restaurants already it's been really performing very very well in 2021, well north of 10% has been lower edit and to translate that is about $405000 per restaurant per week.
<unk> debt to the 3% to $3 $5000, we are setting ourselves as rest of the system. So we have a lot of upside on the breakfast business here.
Great. Thanks, so much.
Your next question comes from John Glass from Morgan Stanley .
Yeah, Hey, good morning.
Can you just help but going back to the U S comps can you just put the fourth quarter in context of the third quarter. When you saw some impact and I noticed some staffing issues you said, it's a macroeconomic impact so what what were the big change factors that drove the sequential improvement on a one and two year basis on same store sales in the U.
There was a line in the release that talked about increased customer counts.
Was traffic impact there for positive in the fourth quarter, and maybe just remind us where it's been in that this quarter represented an inflection or if maybe that had happened earlier on it on a customer count basis.
The customer count basis, we are up on a full year basis and were up nicely into into the fourth quarter. We did have only we still had about 15% of our dining rooms closed at any point in time in Q4 as we did in Q3 as I said earlier, but we had a really strong calendar across all the day parts do you think about what we did on our hot crispy fries.
Meaningful increases in Fry attachment and incidence rates in the fourth quarter, It's really helped us drive our customer count while maintaining the check and we saw really meaningful increases in our overall liking and repurchase intent on the fried business and that's a gift that can keep giving.
The biscuit promotion really drove a lot of new users into our breakfast category. So we were able to get a lot of trial and we know we'll get a lot of repeat behind that so when you think about the strength of that calendar along with some news around made to crave with the big Bacon Cheddar, we felt good that we had a really good calendar to finish out the year.
And we feel really good that we have an aligned calendar going into 2022 with the franchise community locked and loaded to continue the momentum.
Okay, great. Thank you.
Your next question comes from Sara Senatore.
Bank of America.
Oh, great. Thank you I'm, sorry to belabor this question, but I'm trying to piece all that.
Commentary together.
But the first question actually is just.
You're still evaluating a potential that range could you just talk about kind of what the considerations are you know I think you said by the close of the first.
This quarter and were two thirds of the way through so just kind of trying to understand.
How do you think about that and how you would use it beyond obviously here.
Standard <unk>.
Capital allocation priorities.
But just a clarification on the comp you said customer counts are up is that different from what I would consider traffic or transaction counts because.
My understanding is in the fourth quarter, you had about six points of price.
And you still have some tailwind on mix from higher attach rates. So that's just more of a clarification question than anything else. Thank you.
So Sara on the on the debt raise so.
To set the scene here at the end of the year, our leverage ratio was about five two times.
Our cash obviously went down in the fourth quarter compared to the third quarter down to about $277 million as we finished our ASR and executed against that one and be paid for the acquisition about $128 million. So I actually think the normal cash levels in.
In the context of.
Everything going on I.
I think as long as interest rates are still staying relatively attractive.
We are continuing to evaluate that and we will.
If we go ahead and make the transaction it would probably do this by the end of the first quarter.
And proceeds will go towards whatever we always do when the mill capital allocation policy you to invest in growth of the Wendy's brand.
Dividends and share repurchases.
That I think anzus your debt question, Todd do you want to take on the yes.
Fourth quarter, just for complete clarity, Sarah where our customer counts were up as well as our average check so we had some pricing.
Mixed hung in there pretty darn, well, but we're actually bringing more customers in through the door quarter over quarter and year over year.
Yeah.
Thanks.
Worth pointing out to the 6% did you remember was for the company.
System test has priced below food away from home food away from home inflation Thats why the math on.
<unk>.
Traffic growth plus pricing below food away from home.
Inflation, and it's up to the overall, 6% comp growth.
Got it thank you.
Your next question comes from Chris <unk> from Stifel.
Thanks, Good morning, guys.
The domestic comps were well above estimates, but EBITDA was roughly in line I think with most estimates and it looks like franchise rental income franchise support costs were the primary reasons, hoping you could provide some more color on whether you were surprised by the performance of these lines and whether you think that will continue and then also if you could just.
Tell us what you expect the 93 franchise stores the company acquired in the fourth to contribute to EBITDA. This year that'd be helpful. Thanks.
Good morning, Chris.
It's what from what held us back a little bit.
On the EBIT side, while we came in on the top end of our sales guidance and came in kind of in the middle of our EBITDA guidance and beyond you spotted it on the rental expense line.
We acquired those restaurants, we had.
To take a onetime rental expense.
Les sore on some of those leases and we hit to watch hospitals leases and wipes them off and then created.
A headwind for us from an EBITDA point of view.
In terms of contribution of the <unk> 93 restaurants.
<unk> and <unk>.
Two is out of our guidance a tailwind of about $10 million to $15 million and we expect.
And basically it also contributed as more accretion to our restaurant margin.
Sorry.
The acquisition of the Florida restaurants, and we also had the disposition of the New York restaurants earlier. This year. So you had some ins and some outs during the course of company ownership during the year.
Good point, thanks, guys.
Your next question comes from Jeff Farmer from Gordon Haskett.
Hi, good morning, Thank you.
You had mentioned that staffing is improving but just looking for a little bit more color. There. So are you guys actively pursuing staffing strategies with.
Your franchisees and then what percent of the system restaurants do you consider fully staffed at this point.
And we haven't given a fully staffed but if you look at company restaurants were probably staffed a little bit better than the system in.
We're not quite to 100% staffing, but we're trending in that direction, we'll have pockets that are better than 100% pockets that are a little bit less than 100.
The system.
They are slightly less but African flow is picking up and we're doing all the right things that we need to do.
Really making sure that we've got the right compensation structure or ensuring that we've got the benefits in place, we're really trying to lean in on a digital experience for the customers. So we can actually generate a better crew experience and the U S. Team has been very focused on creating great places to work fun, energizing, which really keeps folks engaged at the restaurant level.
And we've been really pleased that as we look at our voice of Wendy's feedback we've seen our employee engagement continued to increase not just in company restaurants, but across the system over the last couple of years.
Thank you.
Your next question comes from Brian .
From Deutsche Bank.
Hi, Thank you just a question on the <unk> partnership I think you referenced there's 30 units open today in the prepared remarks, but could you just speak to.
How are you feeling about the performance versus your expectation and then are you equally as encouraged across all three of the different markets that you have.
And then finally related in your current planning those reef kitchen openings do they accelerate in 2023 on the path.
Through 2025 targets is that the current thinking.
Give me a little bit of color. So we opened 30 reefs across the U S. Canada UK last year feeling very good about the performance in every market out of the gate.
We're happy with it reap as happy with it.
We've got a development commitment to do up to 700 restaurants that was part of why we increased our 2025 targets.
2022, just to give you a little color we are expecting to open about 150 to 200 <unk> kitchens across the globe about 65% of those will be in the U S about 10% of those would be in Canada and about 25% in the UK and as we've always talked about the range of <unk> 500000 to $1 million.
And we're on track with our expectations. So youll still continue to see that nice ramp up into future years, and will give a little more guidance and color on how that continues that momentum continues at investor day in June .
Thank you.
Your next question comes from Andrew <unk> from BMO capital markets.
Hey, good morning, Thanks for taking the question.
Just hoping that you could break out within that high single digit kind of inflation guidance, you gave breakout between food costs and labor and talk about the cadence throughout the year and I apologize I apologize if I missed this but how much visibility on the food cost side you have thank you.
Good morning, Andrew So maybe you said like labor and commodities is high single digits think about 80% on each side.
The main drivers on the commodity front. This is for us beef and chicken would also point out that.
Commodity inflation and labor inflation, I actually front end loaded in the first half.
We also expect that the <unk>.
Sales on a one year basis is a little bit lower in the first half compared to the second half as a result of it we are expecting restaurant margin in the first half to be a little bit lower compared to the second half. So I hope that gives you a little bit of color on that.
Great. Thank you.
Your next question comes from James Rutherford from Stephens. Your line is open.
Good morning, Thanks for taking the question GP thinking about the fourth quarter performance are you able to share what the rest of day kind of two year comps were all in and maybe just stepping back a little bit what are your main tactics and strategies for driving rest of day traffic through 2022.
Yes, if you look at our mix across all of our day parts breakfast.
Lunch dinner and late night, our midst held pretty consistent in the fourth quarter with what we've seen in the third quarter. So we're seeing a nice balance not just the growing the breakfast day part, but continuing to grow our rest of the day business.
We've got a lot of strong messaging on breakfast and halos back to the rest of the day with the high quality messaging. We continue to have a nice steady dose of news around made to crave. We've had activity around four for four and five dollar biggie bags. So we do have a lot to offer in the spirit of <unk>.
High quality at an affordable price relative to not just the U S. Our competitive set but all the restaurant competitive set and we will continue to keep that pressure on you've seen some innovation this year with the Antoni chicken and hot Honey chicken biscuit sandwich breakfast and dinner.
And Youll continue to see a nice dose of innovation both.
The rest of the day and breakfast as we go throughout the year. So we feel really good that we've got a calendar in place that will resonate with the consumer throughout the year.
Thanks very much.
Your next question comes from Nick <unk> Wedbush. Thank you Vickie.
Hey, good morning, Thank you.
Just a question on free cash flow.
Just given the guidance in 'twenty two.
The Capex commentary on 23, how should we think about that.
Pre COVID-19 $250 million long term target.
Good morning, Nick you should really feel good about free cash flow here at Veeva achieved record cash flows in 2021 of about $100 million up versus prior year.
Our ability to convert profits into cash flows is very very strong.
<unk> is our EBIT.
Core free cash flow growth is in line with our EBITDA growth, yes, we have.
And a little bit of.
Okay.
<unk> because we have.
The compensation payouts earned in 2021, what happens in 2022 also that's more of a onetime nature that is holding us back a little bit in our cash flow delivery and yes capital is.
Is clearly elevated this year.
It will stay elevated next year.
Real fall off in 2023, as we have done with.
Our ERP implementation.
The headwinds that we have on cloud computing arrangement.
It's going to fall off and Bousada accelerated combined with obviously expected continued strong growth in sales and profits.
Thank you.
Your last question comes from Joshua long from Piper Sandler.
Great. Thank you for taking the question I was hoping you might be able to talk about how youre thinking about store level operations as we eventually look to the dining rooms reopening and then also layering in some incremental menu innovation on the breakfast day part just how youre thinking about that in the call.
Text of the operating environment with Labor and then just.
Yes.
Well thank you.
We've been focused over the last couple of years on a lot of things to really continue to drive op simplification, we've took some lower performing items off the menu.
But really making sure that we've got a nice pace of innovation, where we're not overwhelming the restaurants that we bring things in when the consumer and when the the employees ready for that the made to crave lineup plays really well into that innovation play because it's not just a six week <unk> item that we train up for and we have on the menu for quite some time.
<unk>.
So we're really feeling good about how we have the pace of innovation against the labor market that we have where we are making some adjustments we've tested and tried curbside curbside will continue to exist, but that's another labour strain on the digital experience.
We're really trying to get folks to move to mobile grab and go and putting some racks in the restaurants to make it a little bit easier operationally for our teams in the restaurant.
Got operations tablets, continuing to rollout that help us automate some of the menial tasks around scheduling and temperature checking and inventory management ordering in the back of the house and we're really focused on getting more and more folks into mobile ordering which really takes the pressure off of the order point and speeds up payment through the whole process. So all of them.
Those things are all little things that add up to make the restaurant more operationally efficient and we will continue to lean into what the flow of the restaurant looks like not only for today, but into the future as we drive more folks into digital.
Thank you.
Thank you Josh that was our last question of the call. Thank you Todd and GP and thank you everyone for participating. This morning, we look forward to speaking with you again on our first quarter earnings call in May have a great day you may now disconnect.
Sure.
Thank you.
This concludes today's conference call. Thank you all for joining you may now disconnect.
Okay.
[music].
Okay.