Q2 2022 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 will be a question and <unk>.
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 would like to withdraw your question Press Star followed by the number two thank you Chelsea.
Chelsea Reed director of Investor Relations 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 them.
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 <unk> will give a business update and our chief Financial Officer, Gunther Plush will share of franchise Health update review, our 2022 second quarter results and provide an update on our outlook for the year from there we will open up the line for questions with that I will hand things over to Todd.
Thanks, Kelcey and good morning, everyone.
Incredibly proud of the entire Wendy system for driving a significant sequential acceleration in our results in the second quarter, which highlights the strength of our underlying business and brand as well as our commitment to the restaurant economic model.
Our global same restaurant sales significantly exceeded our expectations, marking a third consecutive quarter of double digit two year growth. We once again accelerated versus the prior quarter on a one and two year basis, which highlights the momentum that continues to build in our business across the globe.
This sales growth translated into an almost 300 basis points sequential expansion in our company operated restaurant margin, even as we faced incredible inflationary pressures during the quarter.
On the breakfast front, we are very excited to have officially launched breakfast in Canada, giving our fans in that market the craveable breakfast day deserves.
Meanwhile, our U S breakfast business outperformed the competition with another quarter of morning, Neil traffic share growth in the <unk> Burger category.
Our digital business continued to accelerate delivering global digital sales mix of approximately 10% and growing monthly active users in the U S by more than 5%.
Our franchisees are operating from a position of strength after achieving record setting profits across the U S and Canada in 2021.
These results are evidence of our strong system alignment consistent execution and unwavering focus on delivering profitable growth across our three strategic pillars.
As we look ahead, we remain committed to accelerating our business behind these pillars for years to come.
Our global same restaurant sales accelerated on both a one and two year basis in the second quarter with two year growth of over 21%.
We are entering the back half of the year with a ton of momentum following sequential global same restaurant sales acceleration each month of the second quarter we.
We continue to see widespread growth across our international business, achieving a fifth consecutive quarter of double digit one and two year same restaurant sales growth.
This was driven by another outstanding quarter in Canada due in part to our breakfast launch and outperformance across our Latin America, and Caribbean region in our largest markets in Asia Pacific.
During the second quarter, we also celebrated the one year anniversary of our first UK restaurant opening.
Only one year later, we have over 20 restaurants in the U K eight of which are company operated.
Sales in our company operated UK restaurants held steady quarter over quarter, despite macroeconomic headwinds that continue to weigh on the overall market.
Even in the face of these industry wide pressures our development plans are on track and the long term opportunity in the region remains vast.
We now have six traditional franchisees approved in the region. We expect will begin opening restaurants in early 2023.
In the U S are strong and balanced marketing calendar alongside the benefit of our strategic price increases drove our outperformance versus the competition and delivered our <unk> consecutive quarter of gaining or maintaining dollar share within the <unk> Burger category.
The relaunch of our fan favorite five dollar biggie bag delivered a compelling value meal that offers a trade up option from our other value platforms. We also pared the return of our summer salad with a new twist on one of our most iconic products Strawberry Frosty wasn't incident runaway success that drove year over year customer count growth as we.
Exited the quarter.
We believe our U S marketing calendar sets us up to continue delivering strong results in the back half of the year with the craveable innovation only wendy's can deliver the return of an old favorite and our <unk> and compelling value platforms. We also recently completed a pilot with a third party pricing specialists and plan to partner with them to support our.
U S system, and making strategic pricing decisions backed by rigorous data and analytics.
We expect this partnership will drive sales and profit growth, while protecting value perception.
We believe that our momentum and our strong plans we have in place make us uniquely positioned to compete in this environment and in the <unk> category now, let's turn to our breakfast business.
We are thrilled by the customer and franchisee excitement around our breakfast launch in Canada. The day part met our expectations for the quarter. Despite overall category pressures and increased competition we.
We are confident that the addition of this day part will drive Canadian franchise profitability to new Heights.
Turning to the U S. We are pleased with our breakfast performance in the context of the overall category, which continued to contract in the second quarter.
We were able to maintain breakfast sales volumes versus the prior year and grow morning, Neil traffic share in the <unk> Burger category.
Our performance was driven by another run of our successful Buck biscuit promotion and awareness messaging throughout the quarter.
Our sales volumes continued to reach well above our breakeven mark of just over $2000 per week driving profit for the company and our franchisees.
We continue to expect year over year U S breakfast sales growth of approximately 10% in 2022 and to reach average weekly sales of $3000 by year end.
This growth will be supported by the launch of our new French toast sticks. This month, which we expect to drive incremental visits and add ons. We will also continue to lean into profitable promotions throughout the back half of the year.
No theres a ton of upside ahead of us this year and over the long term as we look to capture our fair share of the massive <unk> breakfast business and we remain committed to our $16 million global investment in breakfast advertising this year.
Our global digital sales accelerated versus the first quarter with global digital sales mix holding strong at approximately 10%.
Our international digital sales mix was approximately 15% as we continue to achieve outstanding results across many of our markets, including Canada, which is seeing strong digital usage at breakfast and our UK restaurants, which reached digital mix of over 70%.
In the U S digital made up just over 9% of our overall sales and accelerated approximately two 5% versus the prior quarter.
This growth was driven by an uptick in mobile orders as we grew our total loyalty members and monthly active users by over 5% versus the first quarter exiting the second quarter at record highs.
We expect our focus on refining our one to one marketing capabilities, expanding delivery and mobile order access and efficiency and fine tuning our user experience will continue to grow our digital business across the globe.
We continue to make progress against our global unit expansion in the second quarter now opening of 140, new restaurants, and reaching a key milestone of 75% global image activation.
Clearly our franchisees are all in on investing in the Wendy's brand and I couldnt be prouder of the team for once again delivering growth in what continues to be a challenging environment.
As the second quarter progressed, we reevaluated our reef development commitments, we now anticipate that reef will open approximately 100 to 150 when do you still have re kitchen locations by the end of 2025 with the majority operating internationally in Canada, and the U K, where sales volumes have continued to meet our expectations.
<unk>.
This reduction in our anticipated redevelopment is due to a change in risk growth strategy, which includes a shift to operating multiple brands from its locations and some recent challenges with opening wendy's delivery kitchens in certain locations.
In the U S. We will continue to test and learn with reef with a focus on densely populated high potential markets. We remain committed to expanding access to our great brand and we will continue to be a leader in innovative non traditional concepts alongside many franchisees across the globe.
Primarily due to this change we now anticipate 2022 net unit growth of approximately 3% to 4% and expect to reach 8000 to 8500 global restaurants by year end 2025.
This continues to represent a significant step up versus our historical unit growth performance and we have made even further progress in solidifying our near and long term growth plans through the end of July we had over 70% of our 2022, new unit growth open or under construction.
We now have well over 200 potential franchise candidates in our pipeline and we expect our own your opportunity campaign to attract additional interest.
This recruiting focus is already paying off as we expect an approximately 10% increase in our global franchisee count in 2022.
Finally, we recently unveiled a new global restaurant design that we expect to improve operating efficiency and seamlessly integrate digital access while lowering build costs by almost 10% to improve overall returns. This new design is truly cutting edge and will focus on optimize layouts that deliver convenience speed.
And accuracy for our crew and our customers across all order and fulfillment channels.
All of these growth initiatives alongside our strong underlying performance make us confident in our accelerated unit growth in 2022 and beyond.
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.
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 the.
The entire <unk> system is laser focused on driving the restaurant economic model, which is highlighted by our ability to deliver strong results year. After year I will now hand things over to GP to share a record setting 2021 franchise financial results.
Thanks, Todd we recently finished collecting all U S and Canadian franchise financials for 2021, and the breakthrough performance. We saw as a company was also experienced spell franchise system.
Over the last two years, our U S and Canadian franchisees have had sales and profit records, achieving remarkable acceleration versus pre COVID-19 results, even in the face of an extremely volatile environment.
In 2021 franchisees achieved high single digit one year sales growth, which led up to approximately 10% on a two year basis.
Sales results were positively impacted by strong average check supported by pricing and elevated mix alongside gains in our digital business and our U S. Breakfast business. This momentum led to outstanding to your EBITDA dollar growth of approximately 20% in the U S and over 30% in Canada.
Additionally, our franchise system is very healthy balance sheets as their lease adjusted leverage ratios remain below 2019 levels.
This firm financial Foundation gives us confidence in our ability to weather the headwinds facing the industry today.
Results support our strong partnership with our franchise system that allows us to focus on great execution aligns to get up behind our strategic growth initiatives now.
Now turning to our second quarter financials.
Our second quarter results highlights the strength of our financial Formula as we achieved significant quarter over quarter acceleration in two year global same restaurant sales and company operated restaurant margin.
Our global system wide sales grew five 6% supported by strong global same restaurant sales growth across both our U S and international segments and continued net unit growth.
Despite the sequential increase in commodity pressure company restaurant margin expanded by almost 300 basis points versus the prior quarter driven by our pricing actions and strong marketing calendar in the US This has resulted in quarter two restaurant margin approaching pre COVID-19 levels.
In the face of significant macro headwinds.
The year over year company restaurant margin decrease was driven primarily by commodity and labor inflation of over 19% and almost 12%, respectively customer count declines and the impact of investments to support our entry into the UK market.
These decreases were partially offset by the benefit of a higher average check driven by cumulative pricing of approximately 8%.
The decrease in G&A was primarily driven by a lower compensation accrual as a result of our over delivery versus plan in the prior year.
This was partially offset by higher salaries and benefits as a result of investments in resources to support our development and digital organizations technology costs, primarily related to our ERP implementation and increased travel expenses.
Adjusted EBITDA increased to approximately $133 million, primarily driven by higher franchise royalty revenue and lower G&A expense. These increases were partially offset by a decrease in company operated restaurant margin.
The decrease in the talk to the earnings per share was driven by higher tax rate and higher interest expense as a result of our debt rates transaction in the first quarter of 2022.
It was partially offset by an increase in the adjusted EBITDA and by fewer shares outstanding from our share repurchase program.
The decrease in free cash flow resulted primarily from an increase in payments for incentive compensation for the 2021 fiscal year paid in 2022, the timing of receipt of final GSE rental payments cash paid for cloud computing arrangements, primarily related to the company's ERP implementation.
<unk>.
And an increase in capital expenditures.
Let's turn to our outlook for 2022.
We are entering the back half of the year with a great deal of momentum and believe we have the plans in place to achieve our 2022 financial outlook, which remains largely unchanged.
Continue to expect strong global system wide sales growth of 6% to 8% with approximately two thirds driven by same restaurant sales and the remainder driven by our 3% to 4% unit growth.
To achieve this growth we expect a significant step up in one year same restaurant sales in the back half of the year and our results through July are accelerating as planned.
Our adjusted EBITDA outlook of 492 $505 million remains unchanged the impact of the reduction of unit growth expectation is entirely offset by the expected increase in same restaurant sales and higher other income is the result of favorable lease updates.
We continue to expect company operated restaurant margin of 14 into half 215, and 5% for the full year.
Is supported by the expected acceleration in same restaurant sales, which is inclusive of an additional pricing action of approximately 2% in the third quarter and easing inflationary pressures, which we expect to drive significant margin expansion in the back half of the year.
Are increasing our outlook for adjusted EPS to <unk> 84 to 88.
Driven by higher expected interest income earned on our increased cash balance at the end of the second quarter with a cash balance of over $700 million.
Which provides us with flexibility to manage through headwinds in the broader environment.
Finally, we are reaffirming our capex outlook of $90 million to $100 million and free cash flow of $215 million to $225 million.
To close I would like to highlight our capital allocation policy, which remains unchanged.
First priority remains investing in profitable growth and we are continuing to showcase this.
Today, we announced the declaration of our third quarter dividend of $12.05 per share, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%.
Lastly, our capital allocation policy gives us the flexibility to utilize excess cash to repurchase shares and reduce debt.
We repurchased two 8 million shares in the second quarter and have approximately $198 million remaining of our $250 million share repurchase authorization that expires in February of 2023.
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 tax drop 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 kelcey to walk through our upcoming IR calendar.
Thanks GP.
Alright, Thank Bob we have two MBR next week. The first will be held virtually on August 16th with city focused on the New York market and the second will be held in Boston with credit Suisse. On August 17th we will be back in New York on September eight the Goldman Sachs Conference. After that we will have a virtual headquarter visit with RBC on September 15th followed.
On an investor call on September 22nd with Forest.
Our final event of the quarter will be an MTR with Stifel on September 29th in Toronto.
If you are interested in joining us at any of these events. Please contact the respective sell side analyst or equity sales contact at the host firm Lastly, we plan to report our third quarter earnings and host a conference call that same day on November 9th.
As we transition to our Q&A session. Please note that we have no further comment on Trian partners amended 13D filing and would refer you to the statement made at our May 24th press release. Please keep any questions focus on our quarterly results.
Due to the high number of covering analysts we will eliminate everyone to one question only with that we're ready to take your questions.
Thank you and as a reminder, if you would like to ask a question today. Please press star followed by one I know Jeanette. Thank you Pat.
Our first question today comes from John Glass of Morgan Stanley . Please go ahead. Your line is open.
Thanks, Good morning to everyone My question.
GP.
It is just around the comp guidance for the back half of the year would assume that you would essentially double the comp growth rate is this.
One can you just talk about kind of where April is to give you that context and can you maybe just talk through.
Kind of the dynamics between the international which has been very strong versus the U S. How do you sort of see those two that are planning to get to that.
The 4% to six comp if you will guidance four to five that you are guiding to implied in the 16% sales. Please.
Good morning, John Youre right. It is actually unchanged, we have always said that.
In the second half of the year, the expecting elevated one year Sos number basically have reconfirmed piece.
<unk> remarks.
I'll be confident about this will be a.
Confident about it first of all because of you.
<unk> seen that track record now in July .
Expect a step up in there.
This number for you to go we have seen that in July you have it.
Yes, good also in the prepared remarks.
We have new innovation of our breakfast is a strong marketing program in place for the U S. So the combination of these two and obviously the pricing actions that we have taken entity additional pricing action, we are going to take into third quarter.
Why the one year number is stepping up.
Thank you and our next question comes from Lauren Silberman of Credit Suisse. Please go ahead. Your line is open.
Thanks, So much I wanted to ask about breakfast, what youre seeing with the breakfast day part across the industry and as you built at 3000 and average weekly sales by the end of the year what are the most meaningful initiatives to drive that growth. This year and does the current environment and how youre thinking about making investments in the day part 23. Thank you.
As you look at the breakfast day part, we do see that as a category in traditional <unk> Burger has has softened a little bit, but we're very pleased with our performance within the category. We continue to gain share which is important to greatly loyalists to continue to drive our business into the future.
We did see in our business a nice step up so in the first quarter, we were running about little over $2500 per week per restaurant in the second quarter that jumped up to north of $2700. So the trend is our friend despite some of the category dynamics, you're seeing a few more folks.
Either work from home or have the food at the house and then grabbed the drink on the way to the restaurant or on the way to the office.
All that said, we're seeing some nice acceleration in our business, we continue to grab share and Thats part of making sure. We got loyalists that'll drive frequency into the future as far as our investment posture as we said the prepared remarks still committed to the <unk>.
$16 million of spend across U S and Canada in 2022.
We will continue to support the Canadian breakfast launch in 2023.
But we don't think we need additional support as we talked about in the past in the U S business into 2023.
Thank you and our next question guys, Hey, Dennis Geiger of UBS. Please go ahead. Your line is open.
Great. Thank you very much wondering if you could talk a little bit about.
GP or Todd that the back half comp acceleration and then I guess, maybe just starting from kind of what youre seeing.
In recent months in this past quarter, then into July I know you talked about the acceleration through the quarter on a global basis, presumably that was in the U S as well, but just curious as it relates to the low income consumer or any kind of macro headwinds that might be impacting the business.
And then just again the offsets to that I know you talked about kind of compelling value.
Coming in the back half, but just kind of maybe matching up some of the macro headwinds if youre seeing any.
And then again kind of the offsets the levers there and thinking about your value platform and how you remain resilient. Thank you.
Yes, a few thoughts and a little bit of this will be redundant and some of the thoughts that GP ahead, but as you think about this quarter. This was our third consecutive quarter of accelerating two year same restaurant sales growth.
We're really pleased as we've now grew our <unk> Burger category dollar share for 12 consecutive quarters. So we've got a lot of momentum overall in our business and importantly, we held overall overall total <unk> dollar share within the second quarter.
Given us the confidence has been the sequential global same restaurant sales acceleration that we saw each month in Q2 and as you just pointed out we exited June really strong had a lot of momentum with with five dollar Biggie bag had a lot of momentum with the launch of the summer of strawberries Strawberry frosty in the summer Strawberry salad.
And that momentum continued into July to start the third quarter. So we're starting from a position of strength. We continue to see strong check growth has been offset a little bit by a decline in customer counts in Q2, and we have seen a little bit of a decrease in mix driven by a reduction in items per transaction that's really.
Due to a decrease in party size and a few were a fewer and fewer attachments along the way, but when you look at our year to go calendar.
We said this on the prepared remarks, we've got some really good innovation, we've got a return of an old favorite French toast sticks in the breakfast day part we got more to come later in the year.
Our dining rooms continue to.
To have more customers come in to sit in them, which is always good for Jack we're now at about a 21% dining room mix.
We do expect a double digit two year same restaurant.
Sales comp each quarter of this year and the spirit of the state of the consumer value will continue to be important, but we're really well positioned with with a robust and honorable.
<unk> menu.
The work that we've done on five dollar biggie bag the trade up that we're seeing from four for four.
Not seeing trade down on our on our menu per se. So we're really seeing our premium and value hanging in there quite nicely.
And importantly, we held our traffic.
Sure with the under 75000 consumer in the second quarter. So our high low strategy compelling value news on the high end is really how load is to bring that consumer in and stay with us. The piece that we're all watching is we've seen some declines in frequency.
In the category, but.
Beyond that really.
Confident that we've got a lot of loyalty to our brand and when the consumer gets healthier will drive the business hard going forward.
But it was a long answer the only thing I want to reiterate again is pricing.
Pricing is another tailwind in the second quarter as we said we will price.
<unk>, 2% again in the third quarter. So all of that the cumulative pricing actions. We have taken is another reason why it's sort of asked in the second half is going to step up.
Flow through on pricing is good.
Around 80% flow through so we are losing a little bit of plastic on the pricing action, but obviously, a really positive move to oasis.
Numbers.
Thank you and the next question goes to Brian Bittner of Oppenheimer.
Please go ahead your line is open.
Thanks, Good morning, I, just wanted to switch gears to the unit growth you clearly talked about lowering your expectations for REIT.
Is impacting your original.
Unit targets in the 10-Q, it states that your new Goldberg system wide.
Restaurants is 8000 to 8500 by 2025, so 500 lower than than previously, which makes a lot of sense, but.
Some of this reduction as we move toward potentially be offset by stronger international growth than maybe you. Originally were embedding because we're seeing such strong comps internationally. You are clearly bullish on the U K based on your comments on this call. So I'm just curious if you can maybe talk about.
Where the international growth could go as we as we look towards 2025, and maybe if it represents potential upside.
So a fair comment.
The.
Real call down that we had in our long term.
Our development outlook was was the change in direction in reef and.
It was a big change and we really wanted to shift operating multiple brands from its locations and they've had some recent challenges.
Opening.
Some delivery kitchens in certain locations with.
With what it takes to work through the.
<unk>.
Permitting in those markets. So we thought it prudent to call down that number we did not want multiple brands out of our kitchens, we want to dedicate into when diesel will be slow and steady and we still think there is a great urban opportunities and continue to provide access to our brand with some kind of concept in those markets.
That's what the call Don was with the news that we had today around <unk>.
But on the international front, we do have a ton of momentum you look at our widespread growth across our products.
The globe Youll look at the momentum that we have bringing on franchisees to build alongside of us and the UK. The opportunity to then move over into Ireland, where looking at Spain as our next market to get into.
Got momentum in markets like Mexico that got momentum in markets like the Philippines, We do think that there's a lot of growth opportunities across the board there and delivery kitchens in India. So that could be an offset over time, it's just going to take some time to work that plan to have the confidence that we can put that commitment out there.
Thanks.
Thank you and the next question Jeffrey Bernstein of Barclays. Jeffrey. Please go ahead. Your line is open.
Great. Thank you very much I just wanted to ask about the inflation in response, I guess pricing outlook for inflation standpoint, I think you said commodities in the second quarter were up 19% and labor up 12. So I'm just wondering your thoughts we've heard from others that maybe.
The inflation is peaking.
On one and two year basis and that labor challenges are easing. So just trying to get your perspective on those into the back half.
And whether you think the incremental pricing is enough to.
To fully offset that it seems like you were running 8% second quarter Youre, taking another two.
I'm not sure if it's as easy as that is growing 10% of what you are lapping, but any color you can provide on the pricing and whether there's any concern of pricing at that lower income consumer in that effort to offset that inflation. Thank you.
Good morning, Jeff, Yes, So you are right.
Inflation in the second quarter was about 19% and our labor inflation was about 12%, we definitely expecting that numbers are peaking right. So on a year to date basis.
Our commodity inflation is about again, 19%.
Our labor inflation.
It is also above double digits.
Our guidance for the year on commodities is about a 15% commodity inflation. So.
Basically if you do the math on it you are going to find more.
He.
It's going to step down.
So you are basically anticipating the.
That's going to happen, but <unk> be confident with this you have about 90% 90 zero of our commodities now locked down could there be a little bit of volatility, yes, but again, 90% confirmed that's my.
We think the addition of <unk>.
<unk> pricing action, we are taking into third quarter will be.
Vision and appropriate.
Get into to make sure we are reaching our margin guidance for the year.
Thank you and the next question Daiichi Gerrick Gaba of Goldman Sachs. Jared. Please go ahead. Your line is open.
Great. Thank you for the question I actually just wanted to follow up on Jeff's question. So if we think about the incremental 2% flowing through.
The back half of the year does that get you to 10%.
Pricing or is there a dynamic where some things rolling off that we should be thinking about.
And then following that just kind of want to understand how you thought through the pricing cadence here with all the pressure on the consumer and some other of your peers, calling out some lower income.
Consumer pressure.
Their result.
Immediately continued inflation on the on the consumer wallet.
<unk>.
Declining traffic assuming in the Wendy's business just want to understand the dynamics underlying the.
The pricing actions.
Good morning, Joe that was a lot of questions in one question that would hopefully answer them.
And then more so from a mechanical point of view the pricing.
With roll off that are happening is slightly below 10%.
John Zone that one cannot just add 2% to.
<unk> two to the 8% is slightly below that again constantly watching.
Pricing action and we are not seeing any pushback from consumers.
I asked levels on the progress we are making in the marketplace.
We're gaining market share.
You have seen.
So that.
Totally monarch seems to be held twice each year for the income consumer earning less than $75000. So these are all positive indicators.
Commodity inflation versus the previous guidance.
So slightly up so in order to be really on the safety side to make sure our estimate economic model stays intact, we decided to move up one one additional price increase.
Third quarter to again make sure restaurant economic model is protected and as I said, we are not seeing evidence of that pushback from consumers on mill price increases.
Hey, Jared one other comment I think that gives us confidence as we talked about the sequential sales momentum in the second quarter into the third quarter. We're also seeing the traffic momentum behind that so when you think about the construct of our calendar with four for four and a five dollar biggie bag and some news on the top end.
Some great news around things like Strawberry frosty in French fries as attachments does give us confidence that we have a menu construct that can connect to that consumer and.
And we can continue to build on that momentum.
And we also are seeing improving labor market. So we do continue to see staffing improved 90 day turnover levels, improving we see turnover rates coming down all of those things will allow us to drive more throughput as we're focused on speed in our restaurants to make sure that we can serve more customers in this environment to continue to drive more traffic from an op.
Operational expense expectation.
<unk> experience with.
With that with better service times at the restaurant.
Thank you and our next question. Thank you Andrew Charles with Cowen. Please go ahead. Your line is open.
Great. Thanks, Todd.
To execute on targets for 10% breakfast growth and get to that $3000 in AWS by year end.
Critically drive the habitat that is needed here in what you call you'd see a challenge day part and GP just a quick follow up I know you guys called out AWS increase from $2500 <unk> around 2017, $2700 <unk>, but isn't that part of that just seasonality is my math suggests that both imply about 7% of sales in the quarter.
Quarters, so far this year.
Yes, so on the breakfast side, we've already got some of that nice momentum. So you think about the step up from the first quarter of a little over $2500 per week to little over north of about $2700 were well on our way already towards that $3000 by year end.
Nearly bringing news to the category.
Do you think about French toast sticks lines launch, having a sweet savory offering I think that's going to be a great add on we also think that actually brings in more multifamily and kid, which would have been had debates that news helps us continue to to bring folks in.
And then <unk>.
<unk> focus on speed how.
How do we continue.
To drive speed gets you too fast in the morning at that breakfast day part how do we get folks into digital so you can actually enhance your speed with digital how do you actually take advantage of trials with some of the offers that we have in mobile all of those things gives us a lot of confidence that we can continue to build the momentum in the breakfast day part break through the clutter.
We've got our system all in we still only have five restaurants that have actually opted out based on their trade area and thats only on a temporary basis. So the systems all in well above that breakeven mark of $2000 per week. So we will continue to lead in we've got the investment that we have on that $11 million incremental.
We continue to support on top of the contributions from from from the system. So we feel good that all of the tools are there to continue to breakthrough in a more challenged environment at the moment, but a category that will have a lot of upside over the long term.
Thank you and the next question guys, Hey, Chris I'll call of Stifel. Chris. Please go ahead. Your line is open.
Thanks, Good morning, guys.
Todd you mentioned breakfast sales in the industry are contracted and youre, taking share, but the industry leader indicated sales it increased in that day part so where do you believe you're taking share and I missed some of the initiatives planned for the second half of the year, but is it price point value expected to play a greater role in growing the breakfast day part.
Yes, Chris couple of things.
Price point value will play a role I think we've got some months. Some good promoted activity that will have on the breakfast day part that not only drives trial, but also drive some nice check and profit. So you will see that sprinkled in in the back half on top of all the other news that I just talked about if you look at the category, you're seeing more folks consume there.
Food at home and grabbed the drink underway, so youre seeing folks grabbed the C store beverage youre seeing folks go to the traditional coffee houses.
A lot of the function of the share growth is when you look at some of the year on year comparisons and Theres still a little bit of noise out there in the comparisons. So you haven't seen the overall <unk> Burger category at breakfast soften.
We actually held our growth year on year.
Others May have started from a lower base of the year before and growth based on their comments, but we feel good with the momentum that we have.
Relative to the industry context that we're competing in at the moment.
Thank you and the next question goes to you Eric Gonzales of Keybanc. Please go ahead. Your line is open.
Hey, Thanks for the question just regarding a month to month content. It seemed like the industry. Maybe you didn't see the same directional progress that you saw in the second quarter. So could you just trying to get closer to quarter, implying that you showed gains it's Tony and on that point could you see any impact from abnormal seasonality. Some of your peers cited heightened summer travel is a headwind that might roll off in the fall. So I'm just wondering if.
Thanks.
Thanks, a question just is around where is the industry.
You think about <unk> Burger.
We've continued to see really nice sales growth, but traffic has been down year over year within the U S. Our total industry and within the <unk> Burger, but but the trends have been improving as of recent across the category on traffic.
I'll get into some of the seasonality some of those could play into our favor you get into back to routine with back to school and folks are out and about that should certainly help on our breakfast business.
A lot more folks out traveling so I think there would be more benefit to some of the seasonality as folks get back into routines.
Later in the year.
That could potentially help support.
Our accelerated same restaurant sales growth rates on a one year basis.
Thank you and our next question guys GP to sell out of BC Pizza. Please go ahead. Your line is open.
Great. Thank you I wanted to come back to the conversation on the unit growth.
And the <unk> partnership.
Can you just talk about the performance of the reef units that you currently have and given the strategic shift over at <unk> are you still committed to just using refer or are you looking at other partners to help expand your unit growth I mean is it possible for you to come back to us on a couple of quarters with another partner that <unk>.
This development strategy.
Hey, Peter Great question.
So from a performance point of view a couple of data points in the UK and in Canada, <unk> tracking between $5 million in the millions are very consistent with the performance of Andas that we have.
Obviously communicated in the U S. We are not yet performing right to be VIP round.
$1 million and lift is one of the reasons why.
<unk>.
The shift on strategy to grow multi brand in the vessel, which simply more comfortable with it.
And so as a result of that.
We are working with <unk> to make this work.
<unk> said, we are trying to reposition these vessels into into better trade areas.
On the <unk>.
<unk> brand on the vessel, we can achieve similar trends as we are seeing in the U K and in <unk>.
Canada. So that's kind of the perspective that I have and I think that the.
The opportunity is still as large an urban location, so whether thats cracking the code with finding another partner thinking about other ways to traditionally grow into some of those markets that will continue to be our focus moving forward, but as GP said with those relocations.
Think about our closure outlook for the year it will be a little more elevated we're probably in that 100.
Restaurant closure area. This year, 35% to 40 of those would be Reece lots of those are relocations. During the course of the year. So a closure and a new opening to get to about 75 reached by the end of the year.
And as I said, a little bit earlier, we've got a few closures that have happened in earlier this year than in Mexico, and Indonesia post Covid that have us a little more elevated than in the past, but we still haven't really healthy less than 100 kind of run rate on closures and about $20 to 25% of that is always relocation.
Excluding the REIT comments.
So we feel good that we've got a healthy mix of opening and closures for the long run.
It's multiple excellent towards comment it.
At the end of the second quarter, we had about 70 units, we expect by the end of the year about 65 refueling. It. So we are actually in the second half more closures and openings.
Probably yes, just wanted to clarify that.
Thank you and the next question comes from Brian Mullan of Deutsche Bank. Please go ahead. Your line is open.
Thank you just a question on development I was hoping you could share your current thinking on a potential expansion into other markets in western Europe .
Would you need to build restaurants on balance sheet in new countries would you be willing to do that and the rate and the rate cases or do you think you can get this done entirely with franchisees.
Or would your degree of confidence be there just any thoughts on what this could look like over the next couple of years.
Yes, we got a lot of confidence we don't think we have to do it on our balance sheet. Our balance sheet is really focused on leading the way and in the UK as we've talked about previously we've already got a couple of franchisees approved that will be opening restaurants early next year alongside us and the UK.
And then we've got another handful beyond that have been approved they will start opening restaurants in the U K a little bit further down the road.
Got a lot of interest and then move over into the into Ireland really leveraging the expertise operationally that we have with company restaurants in the UK the supply chain that we're putting in place.
And we've got a lot of interest in moving.
Moving into the continent as you mentioned in our first opportunity there will be Spain, and and we're working with candidates at the moment.
And as we have in this context in Ireland and in Spain.
To have the opportunity to host them in England, we the company operations there.
Sufficient so they have to conduct a restaurant.
Slide.
And so with all of its dynamics, we have we don't see at all that we need to deploy our balance sheets to build a company restaurants outside of the U K.
Thank you and the next question. Thank you Andrew <unk> of BMO capital markets. Andrew. Please go ahead. Your line is open.
Great. Thanks for taking the question.
I'd love to hear a little bit more about the new prototypes that you mentioned, the new store prototype and how that plays into that lowered 2025 unit count target is there anything that you could share on on the cost of return profile and franchisee feedback as well would be great. Thank you.
Good morning, Andrew franchisees are Super excited about this we have a prototype this down the road I personally actually walked it.
It is a very different design.
What it does is it actually a sign of lead embracing digital design. It is a dedicated delivery pickup window. The kitchen is reconfigured. So literally you have to do whaler steps to get all your tasks done sort of drives also operating efficiencies.
And we also are embracing mobile orders with.
Shell seeing a dedicated sheltering youll need dedicated parking sort of friction for the consumer it's much.
More reduce the friction for the cruise is much more reduced and with the design which is.
I can tell.
State of the art here.
Well then to reduce.
Westman cost by 10% and as a result of it obviously the returns have improved as well lots of input from franchisees across the globe to get to that design. So a lot of buying and ownership already because we do think it will be super efficient cost effective restaurant and we'll have our first restaurant opening in early in next year in the Columbus market as <unk>.
To showcase that.
Thank you and the next question guys, Hey, John Ivan <unk> of J P. Morgan John . Please go ahead. Your line is open.
Hi, Thank you.
Your balance sheet really sticks out for $700 million of cash relative.
It's a $2 $8 billion of long term debt, which I don't think you have.
A principal due for some number of years.
$52 million of stock bought back in the second quarter, none in the third.
I guess, what kind of signaling are you doing with that cash I mean, there is conservatism and then there are $700 million of cash maybe if you could just.
Walk us through I guess, how youre thinking about.
Capital priorities and maybe how you can make that balance sheet work a little bit harder for you in some way, yes, thats something that youre considering over the next six months.
Two months.
That's a great great question Youre right to be honest with you and the elevated cash balances.
We have declared dividends that is very competitive it's in line with our.
Our capital allocation policy on share repurchases as you rightfully pointed out we have not been in the market.
And we are not announcing any specific share repurchase plans for the fall.
For the time being.
The only comment I want to make at that point in time.
Thank you and the next question guys can you John power of City. Jonathan. Please go ahead. Your line is open.
Great. Thanks for taking my question quick quick clarification on a question clarification on the break evens on breakfast that $2000 a week in average weekly sales is that for a fully open dining room or just the drive through that's the clarification on the question. It seems like the innovation of the core like the Strawberry Frosty is really resonating quite well with.
Customers and I'm, just curious how youre thinking about.
New products are perhaps back half.
Product news.
Balancing new product news versus say innovation around the core I know for example, there's been some press recently related to the pretzel bond, making its way back out of the menu.
How do you balance.
The new product like truly new products versus inhibition on the core.
The clarification question, so the breakeven on breakfast for $2000.
It's across all breakfast, so remember our model is too.
Open the restaurant at 630 dining rooms closed until nine then we open up the dining room for the rest of the day, we've got some franchisees based on trade area that might open a little bit earlier when on average for that whole breakfast construct it into $2000 as the breakeven point when you think about kind of the menu, there's nothing better than refreshing and <unk>.
<unk> and bringing news to the iconic brands that we have and when you think about something like a strawberry frosty really paired with some restructuring salad.
Not only do we get that food news, but we actually get to build on the equity that we have talking about frosty and people know wendy's for frosty. So we will continue to make sure that we got a good balance between.
Renovating doing some great things on the core bringing some new news.
Bringing back some fan favorites that we talked about and pace and sequence those who've worked operationally and remember we the made to crave lineup that allows us to bring things in and have them work hard on the menu until the consumer gets tired before we bring something else out. So I think we've got a good cadence and a good balance.
Thank you and the next question goes to Gregory Frankfurt Guggenheim Securities. Gregory. Please go ahead. Your line is open.
Hey, Thanks for the question Todd.
You talked about it a little bit earlier with the category as a whole, but I think traffic's been negative for most of the quick service Burger and actually most of <unk>.
The last couple of quarters, and I am curious, where you think that shares Delaware.
What dynamic you think is playing out.
<unk> is it going to food at home or casual binding I'm just I'm just curious your thoughts on that thanks.
It's pretty simple, it's clearly food at home I mean, if you think about pre pandemic about 82% of all meals were consumed at home.
During the pandemic it jumped up to about 85, and it's been fairly sticky at about that 85 million I think it is sticky because the consumer has been a little more stress. So theres a few more meals prepared.
At home, whether it's bringing your lunch to the office are having breakfast at home my sense is over time that will shift back.
Some of the near term pressures ease on the consumer there.
Overall wage rates have increased.
But inflation has been high so net disposable income has been a little bit interesting some of the cohorts across the income.
Ranges, but over time that will shift and that consumer that we will have more disposable income will be right in the wheelhouse of continuing to drive <unk> and driving Wendy's business, which will drive traffic into the future.
Thank you and the next question goes to Nicole Miller of Piper Sandler <unk> Co. Please go ahead. Your line is open.
Thank you good morning, I wanted to come back to Canada.
In this reporting period alone I think you might be the fourth concept, Matt mentioned strength. There is that just an ongoing recovery because the market otherwise lag or structurally have some challenges falling out and is there an ability to recalibrate your growth opportunities in Canada in terms of a comping units.
Thank the last number I found was a plus or minus 400 stores in Canada, you could validate that thank you.
And we have just over 400 restaurants in Canada, and we've had a lot of momentum in Canada going back probably four years now our average <unk> Canadian dollars are now at $2 $5 million Canadian clearly breakfast on plan with expectations in Canada, and performing quite nicely, which is put another lai.
Here of growth on top of our business, but we gained a lot of share over the last four years in the market and are now the number three.
Concept in the <unk> Burger category.
Canada. So there is overall strength in the category, but we're outperforming the category significantly and thats, creating a lot of momentum for us to not only of existing franchisees continue to build but to recruit a lot of new franchisees to build where we have a lot of open space across the market. So feeling good about the future of that business and the color.
We have also secured Theres no for me on the franchise finance fully translated right seems Colgate the last 10 years.
<unk> sales are kind of up.
And then profits really outsized growth.
30% growth that creates excitement within the Canadian franchise base, and there's obviously a decent amount of interest.
Bush development relatively hard.
In Canada, new franchise candidates.
A lot of open and the white space in Canada.
We can take over its domain displayed.
Thank you and the next question goes to Rick Smith of Smith Capital. Please go ahead. Your line is open.
Hey, good morning, I guess this is a bit of a clarification question, but we're halfway through the quarter why no share repurchases yet.
Yes.
Good morning, Rick.
Yes.
We're not doing any share repurchases, we are not announced anything it has to do with.
The <unk> process that we are going through.
Thank you and our next question comes from James Sanderson Northcoast Research James. Please go ahead. Your line is open.
Hey, Thanks for the question I just wanted to go back to the U K and get a little bit more detail on trends. There I think the revenue reported in the 10-Q relative to the number of stores in operation was down sequentially, but I think you mentioned steady so wanted to understand the FX dynamics and if you could maybe comment on traffic trend.
The consumer is.
Leasing frequency now that you've had or you're in the market. How we should look at that.
Yes, we definitely are happy with the UK business to be <unk> 22 restaurants at the moment sitting there eight company and interest is franchised units.
Units.
The comment that we made on the call.
Steady progress versus the first quarter was FX adjusted so if you could do that.
We'd see that comparison.
And I have to say the UK consumer is clearly under a decent amount of pressure.
Very very high inflation and that is definitely having an impact on the footfall is happening in the U K, having said all of that.
<unk>.
We remain very bullish on the U K market.
To have about 35 restaurants by the end of the year.
Pending on the company side, so that developments caito lease in place and the remaining are going to be reef units I agree with all of the Gp's comments. The other one I'd just put out there as we're continuing to be in startup mode in that market and opening new restaurants, and having preopening costs and you think about our overall margin construct there was about a 50 point.
Headwind on the UK as we ramp up into that market. So in the U S. Our margins are running at that 15, Mark, but we're absolutely confident that the <unk> overall that we're seeing in both the reef units and then the traditional units are in a good spot for the economic environment that we compete in with a lot of optimism in <unk>.
The opportunity to grow into the future.
Thank you and our final question today comes from Jake Bartlett of <unk> Securities. Please go ahead. Your line is open.
Great. Thanks for taking the question.
It is about the U S business and the momentum there.
Just looking back a little bit, but when I look at the three year pump in the U S.
I'm Matthew <unk>.
$14 70 in the first quarter so deceleration.
Your two largest competitors accelerated on a three year comp when he's also has breakfast and that kind of <unk> through your corpus as well. So if you could just maybe provide some context of why.
You do celebrate if you look back that far.
Any kind of anything.
Anything, particularly when you spend that we should think about that maybe is not continuing going forward and any driver to why that would have decelerated when we've seen general acceleration from competitors.
Yes, Jay.
I need to look at little bit at the U S. A three year comp basis, we didn't look at it on a global basis.
Three years.
Elevating U S. I think what's keeping us up is definitely to the 50 <unk> week shifting you might remember the data is creating a shift between the first quarter into second quarter. If you actually adjust for that you're actually going to find out.
That on a three year comp basis, most of the U S has accelerated and sugar and we have to call back a little bit later.
We'll compare notes on those numbers.
Yes.
<unk>.
That was the 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 third quarter call in November have a great day, you may now disconnect.
Okay.
Thank you. This concludes today's call. Thank you all for joining you may now disconnect your lines.