Q3 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 answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star followed by the number two thank you Chelsea.
Chelsea freed 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 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 <unk> will give a business update and our Chief Financial Officer, Gunther Plush will review, our 2022 third 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 I am proud of the <unk> system for delivering a significant same restaurant sales acceleration on a one year basis are consistent sales growth underscores our brand's ability to resonate with our customers and resulted in our fourth consecutive quarter of double digit global same restaurant sales on a two year basis.
These results highlight how our high quality food compelling value and convenience continue to deliver against their fans' expectations, making the wendy's brand more relevant than ever.
During the third quarter, our dollar and traffic growth ranked amongst the top performers in our competitive set and we maintained our total day dollar and traffic share of the <unk> Burger category in the U S. On the breakfast front, we launched French toast sticks, our first major menu innovation in the U S, which drove a meaningful acceleration in the U S breakfast sales over.
The course of the quarter.
We have received an overwhelmingly positive reception from our customers proving just how much growth is ahead of us at the breakfast day part.
Our digital business momentum held strong as we delivered global digital sales mix of approximately 10%.
And we expect to grow this even further with a heightened focus on digital and delivery marketing to close out the year.
We remain fully committed to driving the restaurant economic model through our three long term growth initiatives to build our breakfast day part accelerate our digital business and expand our global footprint, we are United with our franchisees as one system to continue delivering growth for years to come.
We delivered significant global same restaurant sales acceleration on a one year basis in the third quarter as both our international and U S business continued to compete well.
Our international business achieved another outstanding quarter with widespread success, marking a sixth consecutive quarter of double digit one and two year same restaurant sales growth with two year growth reaching over 25%.
We continue to see strong results across our Latin America, and Caribbean region with markets like the Bahamas in the Dominican Republic, showcasing remarkable year over year acceleration.
This growth was compounded by ongoing strength in Canada, where we are growing dollar and traffic share faster than any of our <unk> Burger competitors due in part to our breakfast launch.
Our U S business delivered same restaurant sales of six 4% on a one year basis accelerating over four percentage points versus the prior quarter as we held our strong dollar and traffic share position within the <unk> Burger category.
Our consistent track record of strong results is a testament to our balanced marketing calendar, which drove a sequential improvement in customer counts in Q2 and Q3. In addition to a strong average check supported by our systems strategic pricing actions.
Throughout the quarter, we continued to promote craveable products across a variety of price points and occasions, including the continuation of Strawberry frosty are compelling and honorable five dollar biggie bag and the relaunch of the much loved pretzel Bacon pub delighting, our customers with a fan favorite for fall.
We plan to further build on the sales momentum with the launch of our fresh Italian mozzarella sandwiches, and Pepperman frosty positioning us for a strong close to the year.
Now, let's turn to our breakfast business.
We continue to be pleased with our breakfast performance in Canada and are working hard to ingrain, the breakfast habit and give our Canadian customers the high quality offering they deserve.
Early in our breakfast journey, but we remain confident that the addition of this day part we will drive significant sales and profits for our Canadian franchisees.
Turning to the U S. We are incredibly proud of the success of our French toast sticks launch. This suite craveable morning tree has quickly become our number one selling breakfast item.
<unk> helped us maintain our morning meal dollar share in the <unk> Burger category and drove a meaningful acceleration in U S. Breakfast sales over the course of the quarter with average weekly sales approaching $3000 as we exited Q3 this.
This success alongside our recently launched $3 croissant promotion gives us confidence in reaching our goal of 3000 dollar average weekly breakfast sales by year end.
We remain committed to our $16 million global investment in breakfast advertising. This year, just as we remain committed to fighting for our fair share of the Kiwis our breakfast business.
We held our digital momentum in the third quarter with global digital sales mix holding strong at approximately 10%.
Our international digital sales mix was approximately 15% bolstered by exceptional results across all of our regions. We expect these results to accelerate even further in the coming quarters as we launched our loyalty program in Canada, just days ago, which we are incredibly excited about.
In the U S digital sales mix accelerated throughout the quarter exiting at almost nine 5% of our overall sales our momentum.
<unk> was driven by several successful delivery promotions, which we are continuing to lean into throughout the fourth quarter when delivery demand seasonality typically peaks.
We also drove a sequential increase in total rewards members of approximately 10% to a new record high.
We are committed to expanding delivery and mobile order access and efficiency fine tuning our user experience and further developing our one to one marketing program to accelerate our digital business, even further across the globe.
We continue to make progress against our global unit expansion in the third quarter, having now opened approximately 200, new restaurants during the year.
I couldnt be prouder of the team and our franchisees for once again achieving growth in this difficult environment.
As we approach year end, we have increased visibility into a few factors that are impacting our plans for the fourth quarter. We now expect a shift of approximately 30, new dark kitchens in India into 2023.
This timing adjustment was agreed upon with rebel foods, one of our franchisees in the India market, who successfully operates approximately 90 dark kitchens to date.
We're leaning into an omni channel strategy by developing more traditional restaurants near term, which will then be supplemented with additional dark kitchens.
Additionally, we continue to experience development delays that are impacting the entire industry contributing to a slight reduction in reef delivery kitchen openings and in the U S. Traditional development in 2022 due.
Due to these changes we now expect 2022 unit growth of 2% to 2.5% primarily stemming from the reduction in non traditional restaurants.
We still believe that non traditional concepts will be part of our growth story moving forward and we will continue to be targeted and strategic in how we bring these concepts to life. Our 2022 unit outlook continues to represent an increase in our net unit growth versus our historical rate of 1% to 2%.
We expect our net new growth will continue to accelerate through 2025, and our team continued to make progress against fortifying our long term development pipeline throughout the third quarter.
We continued our U K expansion with nine traditional company operated restaurants, and a total of 25 restaurants in the market at quarter end.
Additionally, we expect our first traditional franchisees will begin opening restaurants, including our first drive thru location in the coming months.
We are garnering excitement from the system on a global Nextgen restaurant design, which we believe will improve unit economics and increase returns.
Our potential franchisee pipeline remained strong at over 250 candidates and we expect this to continue to increase with ever expanding response to our own your opportunity campaign we.
We have seen an uptick in our build to suit pipeline and are actively recruiting more franchisees into the program and finally the percentage of our long term goal that is Andre development commitment remains at approximately 65%, giving us confidence in our expansion plans.
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. We recently received the results of the 2022 franchise business review survey, reflecting another year of wendy's exceeding industry benchmarks.
I'm, particularly pleased with our rating on overall satisfaction, which pieces more than 10 percentage points ahead of the industry in both the U S and internationally.
These results once again highlight how our strong franchise relationships had been a differentiator for the Wendy's brand.
I had the opportunity to experience firsthand at our annual franchise convention in September where the system was able to come together in person to celebrate our wins over the year and look forward towards all the growth that's still ahead.
Through this partnership and the dedication of our restaurant crews and support center teams. We will continue to March towards achieving our vision of becoming the world's most striving and beloved restaurant brand and I will now hand things over to G. P to talk through our third quarter financial results. Thanks, Todd our third quarter results highlight the consistency of our financial Formula as we achieve.
Significant quarter over quarter acceleration in global same restaurant sales and maintained year over year company operated restaurant margin.
Our global system wide sales grew almost 9% supported by strong global same restaurant sales growth across both our U S and international segments and continued net unit growth. Our total company restaurant margin held flat year over year, despite the persistent commodity and labor inflation of almost 15.
Per cent and over 6%, respectively customer count declines and ongoing investments to support our U K expansion.
These decreases were almost entirely offset by the benefit of a higher average check driven by cumulative pricing of almost 10% in.
In the U S company restaurant margin approached pre COVID-19 levels in the quarter, reaching 14, 8%.
The slight 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 increased travel.
Expenses and technology costs, primarily related to our ERP implementation.
Adjusted EBITDA increased almost 20% to approximately $135 million, primarily driven by higher operating income due to a gain from insurance recoveries.
Franchise royalty revenue and the favorable impact of our acquisition of 93 restaurants in Florida in the prior year. These increases were partially offset by lower franchise fees due to decreased franchise transaction activity. Please note that beginning with our third quarter results, we are breaking out the <unk>.
Session of cloud computing arrangements separately from G&A expense to improve clarity of disclosure in this area and subsequently backing it out of adjusted EBITDA. This change is immaterial to our third quarter results.
The increase in the trusted earnings per share was driven by an increase in the adjusted EBITDA fewer shares outstanding from our share repurchase program and higher interest income. This was partially offset by higher interest expense as a result of our debt raise transaction in the first quarter of 2022, and a higher tax rate.
The decrease in free cash flow resulted primarily from an increase in payments for incentive compensation for the <unk> 2021 fiscal year paid in 2022, the timing of receipt of franchise the rental the royalty and other payments cash paid for our cloud computing arrangements primarily related to the company's <unk>.
ERP implementation and an increase in capital expenditures.
We expect that all timing related impacts will be.
We sold in the fourth quarter and have no impact to the full year.
Now, let's turn to our outlook for 2022.
As we close in on the year, we are tightening several of our outlook ranges. We now expect global system sales growth of 6% to 7% with approximately 75% driven by same restaurant sales and the remainder driven by our 2% to 2.5% unit growth.
We do not expect the change in our unit outlook to drive a material impact to our 2022 financial results due to the lower expectations for non traditional restaurants and timing in the year.
Our updated sales expectations flows into adjusted EBITDA outlook range, which was narrowed to 492 $500 million.
Our adjusted EBITDA outlook is also impacted by a company operated restaurant margin, which we now expect to be approximately <unk> 10 in the half to 14%.
The impact from our revised margin outlook is largely offset by higher other operating income is the result of the gain from insurance recoveries recognized in the third quarter.
Our adjusted EPS outlook of 84 to 88 cents remains unchanged as our narrowed the adjusted EBITDA outlook is offset by higher interest income earned in our elevated cash balance.
Finally, our free cash flow outlook of $215 million to $225 million remains unchanged as the impact of our tied to adjusted EBITDA outlook is offset by a reduction in our capex outlook to $90 million to $95 million.
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.
Today, we announced the declaration of our fourth quarter dividend of <unk> 12 in the half cents 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.
Continued to pause our share repurchases during the third quarter and have approximately $198 million remaining of our $250 million share repurchase authorization that expires in February of 2023.
At the end of the third quarter, we had a cash balance of over $750 million, which provides us with flexibility to manage through headwinds in the broader environment and drive shareholder returns in accordance with our capital allocation policy.
We are fully committed to continue delivering a 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 translate.
<unk> into significant free cash flows with that I will hand things back over to kelcey to walk through our upcoming IR calendar.
Thanks, GP to start things off in November we have a virtual endear are focused on the Chicago region with Cowen on the 14th followed by the Northcoast Virtual conference on the 15th and a virtual headquarter visit with Wedbush on the 16th.
We will attend the Barclays Conference in New York, followed by an MTR in Boston with Evercore on December 1st across the rest of the December we'll have an investor call with Gordon Haskett on the fixed before returning to New York on the 17th for the Morgan Stanley Conference.
Our final event of the quarter will be a virtual Andy are focused on the west coast with BMO on the 15th.
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 fourth quarter and full year earnings and host a conference call that same day on March 1st.
As we transition into the Q&A section. 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 focused on our quarterly results due to the high number of covering analysts we will be eliminating everyone to one question only with that.
Ready to take your questions.
Thank you Kelsey we will now begin the Q&A session, if you'd like to ask a question. It is star one on your telephone keypad and if you'd like to remove your name from the queue. Please press star two as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Our first question today comes from the line of Dennis Geiger with UBS Dennis Your line is now open.
Great. Thanks for the question I appreciate all the color on the on the development side of things, Todd and GP and wondering if you could speak.
A little bit more to the current.
Sentiment among the operators the franchisees right now.
Given cost pressures rising rates and if theres any additional thought from their and impacting the demand side of things. It sounds largely like the changes to guidance for the year are sort of timing related just wondering if you could speak at all to kind of demand and.
In the current environment and kind of where we're heads are at from that perspective. Thank you.
Yes, Dennis Thanks for the question as you think about the development outlook for the brand and the confidence and the positioning of our franchise community to continue to be able to invest to grow.
They are cautiously optimistic as I think about the future clearly we've seen headwinds out there with rates moving up.
We've seen trailing 12 months EBITDA little more challenged in a lot of cases with all the headwinds that we faced on the commodities and labor front, but the good news is we continue to innovate with our Nextgen Global design, we continue to partner with the franchise community to make sure that they're pacing and sequencing all of their investments not just new.
Element, but the re imaging that they need to do continue to investment in technology and in our double sided grills.
Ill put us in a pretty good spot, where we feel confident that we're going to position with a strong financial position that we generated for our franchise community over the last couple of years.
We're in a healthier position than most in the industry. So we will continue to lean into investment, yes supply chain challenges. There are some shifts from this year into next year, but the biggest impact on our development front has really been on the non traditional.
To continue to lean into test and learn dark kitchens.
Yes.
Delivery kitchens with read some of the things will work some won't.
We will continue to lean in and learn on that but our traditional development pipeline is pretty strong with 65% of our.
Commitments or from development into 2023 under development agreement for new builds.
Thank you Mr Geiger.
The next question is from the line of David Palmer with Evercore ISI, David Your line is now open.
Thanks.
Follow up to that if you could make a comment about unit growth into 'twenty. Three I think you have targets that imply your unit.
Unit growth will be 4% to 5% after this year to get to your 25%.
That targets so.
I wonder how youre thinking about the step in 'twenty three in that direction and separately.
I'm wondering if you could speak for the industry to some degree on traffic it's been.
Somewhat strangely negative in spite of the fact that you would think that mobility would be increasing.
What do you attribute that if you had to step back and think about the forces at work here that are making a negative traffic more than norm in fast food. Thank you.
Good morning, David This is Scott.
Ready to give guidance for 2023, but you are right. Obviously unit growth is accelerating into 2025 S. We are obviously, maintaining O 8000 to 805000 restaurant goal and several affect us where we are really confident.
We're making great progress in the UK, we have 25 restaurants there.
Many of which are.
Company restaurants, really high hopes on Nextgen restaurants decide right.
Previously you would get a cash on cash return.
10% to 15% within U nextgen.
Design, you're actually getting a step up of 15% to 20% cash on cash return. So that's positive we have a lot of interest from franchisees that want to become franchisees. The pipeline is 250 franchise globally. They will all come with development movement only opportunity campaign is very positive.
Lots of interest to also enable.
Restaurant growth with a smaller.
Outfits.
Build to suit program Fund program as you know we have not spent a lot of money on this year to date. So there's a lot of restaurant growth to be had 80 to 90 for the years to come and the overall development pipeline via about committed about 65% out into 2025, I think thats the answer to your first.
<unk> told you I think you can take the second yes, no. So David on the industry traffic question in a way it seems to be a little bit sticky on the on the negative side over the last several quarters I think it really has to do with the state of the consumer we've seen the consumer being a little more strapped.
You start to continue to see food at home meals.
85% of the consumer's basket when it comes to meals, that's up from 82% pre pandemic.
It shifted to more meals at home during the pandemic has kind of stuck there is the consumers spent a little bit more more strapped. So what youre seeing is a little less frequency across the industry.
The moment, which is putting a little bit of pressure on traffic for us. We're proud we've seen some nice sequential increases in customer traffic quarter to quarter as we commented in our prepared remarks.
And importantly, the under 75000, consumer which is more than 50% of our business.
And it's a little more strapped.
It is an important customer for us we continue to win with that consumer.
So that those are probably some of the big highlights you also see it on the positive front. There was some trade down. So you only get total industry seeing some trade down from mid scale casual fast casual into into <unk>, which is a positive.
One small correction.
Towards slightly misspoke, our customer count at low traffic did not increase.
<unk> improved versus prior quarters, we are still slightly down just want to make sure it's understood.
Thank you Mr Palmer.
The next question is from John Glass with Morgan Stanley .
John Your line is open.
Good morning, and thank you.
On capital allocation and I understand there are some things you can't comment about but when you think about the alternatives between bank, but given your cash balance buying back stock and Delevering have you have you changed your view on that just given the rate scenario. It looks like your debts termed out well, but at the same time, maybe theres no view that rates in the future won't be as advantageous as they once.
Work to do.
Do you think differently about conceptually about buybacks versus reducing debt leverage.
Toni interesting question no not really I think at large our capital allocation policy, we are happy with invest in growth through an attractive dividend and do share repurchases.
At the moment, our our debt levels are extremely favorable.
Which cost of servicing our debt is 353, 6%. The first time you have to refinance again. It is in 2026, so we'll see how rates are.
Developing from there so at the moment with the fixed rate nature of our debt. We are not in the rush to actually really think about that.
Thank you Mr. Glass. The next question is from Jon Tower with City John Your line is open.
Great. Thanks for taking the question just curious if you could give us your.
Your expectations for some of the inflationary measures in the fourth quarter and perhaps into early 2023 on the food cost side in particular, but also what you're thinking on the labor.
Piece of the equation and then how this all kind of factors into your pricing plans for the year ahead.
Good morning, John Yes, we definitely are expecting inflation to slightly come down in the fourth quarter right. We started to see that trend in the third quarter already right. We had 15% commodity inflation that was falling about a 19% commodity inflation in quarter two.
Labour side, we also got a slight improvement we were labor inflation was a little bit north of 6% last quarter, we were sitting in the 11% to 12% range for the year.
We are kind of guiding 15% to 16% in commodities.
8% to 9% on labor so it is going to come down slightly.
It's too early to make specific comments on 2023, we definitely expect that commodity inflation will be less than what we would see what we have experienced in 2022 as a result of it we would also expect that.
Our pricing.
<unk> going to peak in 2023 will be less than what we have done. This year. Obviously the objective is to strive for our profitability and our company restaurants.
Doug marching towards pre Covid levels.
Yes.
Thank you Mr Tower.
The next question is from Chris <unk> with Stifel. Chris Your line is open.
Thanks, Good morning, guys.
How do I believe you indicated that weekly breakfast sales accelerated in the quarter with the launch of the French toast sticks do you think product innovation is going to be necessary to build breakfast sales going forward and if so does that change your thinking in terms of the need for additional breakfast advertising investment in the U S next year.
I'll start with the second part of the question, Chris I do believe that we've now built our breakfast business up to a significant size, where it can sustain its own advertising investment moving forward. We can always made choices across the portfolio rest of the day and breakfast, but I do think we're in a good spot and having enough dollars to compete.
Across all day parts moving forward as you think about the role of innovation I do think it has an important role.
We started with.
Our calendar that it was really around driving awareness driving frequency and granting the habit and it was driven more by promotional offers and this is the first time, we brought some innovation news clearly French toast sticks has resonated with the consumer as we said on the prepared remarks.
Our highest performing skewing in the restaurant at the breakfast day part right now.
And the good news is we saw that significant uptick towards $3000 by the end of the quarter. So some nice growth on on that front.
And we're happy that that momentum will continue into Q3, we've got the $3 per tonne deal out into the marketplace that news continues to to bring in more customers more often as we move forward we've talked about this on prior calls.
More innovation could it could be an important play within.
And the category in the breakfast day part for our brand and we talked about the opportunity to innovate into the morning beverage area. We think that's an opportunity for some growth into the future.
Chris I wanted to add.
Everything good towards the mix, obviously, Chris and I want to point out we will continue to invest in Canada right fits into you have the growth. So the $11 million investment would be having debase will go to zero in 2000 $23 million to $5 million maybe in 2022.
Currently making investments in 2023 as well.
Thank you Mr <unk>.
The next question is from the line of Lauren Silberman with credit Suisse or in your line is open.
Thanks for the question can you talk about changes that you're seeing or if there are any with respect to consumer behavior. So trade down Tech management and then what are you seeing across different cohort relative share among the higher and lower income go work. Thank you.
Yes.
General trade down question in the industry, we are seeing some trade down from mid scale casual fast casual Linda <unk>, So thats a good benefit.
When you think about income cohorts you are seeing the under 75000 consumer which is over 50% of our business a little more strapped.
Seeing them impacted in the industry on the frequency front, but the good news is we continue to gain traffic share with that under 75000 income cohort that means over 75000, we're losing a little bit but that over 75000 consumers got a lot of other choices across all restaurant businesses. So we continue to compete well although down a.
Little bit with with that consumer.
We have a calendar that fits really well and can compete really well with where we stand today, we still have four for four on the menu they get a $5 biggie bag, that's super compelling, perhaps some cool things like Strawberry frosty at a great price point to the calendar we've got $3.
Croissant meal out there for breakfast right now and we continue to leverage our digital presence with.
Continued gains in our loyalty program and and Great offers to make sure that we connect with a good balanced high low calendar.
But the key for US is the ultimately and for everybody in the industry is get some folks from.
Eating all of those meals at home to start coming back out to the restaurant, a little more often to drive frequency.
Thank you Mitch Silberman.
Our next question is from Brian Bittner with Oppenheimer.
Your line is open.
Thanks. Good morning, just wanted to go back to breakfast a little bit you know as we dive into the accelerating sales results in the third quarter.
Just hoping you can talk a little bit more about the breakfast drink maybe you can unpack.
What the breakfast comp was versus the rest of the day just so we can better understand that day parts momentum you seem very committed to accelerating that day part and can you also help us understand where your national awareness is on breakfast now relative to maybe what it was a year ago and what can you really do to elevate it from here.
<unk>.
If you look at where our breakfast business has been performing the last couple of quarters, we've been approximately $2700 per week.
In Q2 and Q3, the Great news is it really accelerated nicely as the back half of Q3 with the innovation of French toast sticks, and we're confident that momentum will continue with the great success on French toast sticks and that was the $3 per song offer that's out there in the.
And the restaurants from an awareness, we're still north of that 50 on par with our competitors Hasnt moved a whole lot, but I think it's in a really healthy spot from us from an awareness perspective, so it's really about ingrain the habit, bringing some news ensuring that our customers come in.
More often along the way innovation.
Innovation will play a role promotional price points to play a role.
And executing great at the restaurant day in and day out with fast accurate services.
Critical to success and will continue to drive all of those things moving forward. It's also worth noting that our legacy breakfast restaurants actually improve performance, they're now actually posted in the third quarter, but for the half thousand dollars, it's well north of 10% mix. So again, it's a great sign that the.
Growth potential for this business.
Great. It's just a matter of time to get to it.
Thank you Mr Bittner.
The next question is from the line of Jeffrey Bernstein with Barclays. Jeffrey Your line is open.
Great. Thank you very much a question on the U S sales front.
Well two parts, maybe if you could just clarify the components within that six 4% comp I think you said you are running roughly 10% price, but some negative traffic any color you can give in terms of the <unk>.
Sequential through the quarter and maybe what the specific components were.
As you think about that has there been any change from a competitive landscape perspective.
There are thoughts that you might see an uptick in discounting as maybe inflation starts to rollover and some competitors are less rational than others. So any thoughts in terms of the broader competitive landscape as we closed 22 and 23 would be great. Thank you.
Good morning, Jeff So the six 4% growth in the U S system and their system priced a little bit less than 10% about think about 9% that means basically that traffic was slightly negative about 2% mix was roughly unchanged. So thats the component of it.
We had steady growth within the third quarter. The only call out that we are making is that our bread.
Breakfast business accelerated towards the end of the quarter as we launched our innovation as far as competitive pressure is concerned.
As I look at NPD crest data.
David D levels that are happening in the category.
Weighted versus what we have seen previously so we don't see any strong signs that kind of peak value awards to come would be my perspective, or do you want to add anything on top of I think you said it all our GP I think the only pieces as we roll into the fourth quarter, but clearly we've got some momentum on the breakfast business as we as we talked about.
And with the guidance that we provided.
And the strong promotional calendar that we have in the fourth quarter, you think about biggie bag continue to be on a bold and compelling you think about the launch of fresh Italian mozzarella sandwiches coming ever made for IC to continue to bring news.
And the ongoing focus on digital and delivery.
Those are all important elements to keep the momentum and we expect to have.
Across the U S. International ended total double digit same restaurant sales growth again in the fourth quarter.
Thank you Mr Bernstein.
The next question is from Gregory Frankfurt with Guggenheim Securities Gregory Your line is now open.
Hey, thanks, Thanks for the question.
GPS in response to the earlier question you made a comment about getting store level margins ahead of pre cohort back to pre COVID-19 levels.
I guess as you look out to 'twenty, three and 'twenty four 'twenty, but does pricing need to run ahead of cost inflation at some point I mean this year clearly there were just a big delay in terms of when the industry took pricing versus when inflationary pressures pressured.
The cost environment I'm curious are there things you can do on the P&L outside of pricing that kind of move the needle in a big way or does pricing need to step ahead of cost inflation at some point. Thanks.
Good morning, Greg Yeah, we definitely are very focused to get back to pre COVID-19 levels. Since at the end of today from a margin point of view can you just gives us better financial returns for new builds and better confidence within the franchise system with the rest of with the company restaurants in the U S are posting 40.
<unk>, 8% in the quarter Theyre getting their right to pre Covid, we are hovering between 15 and 15 in the half percent.
Depending on what the year Youll peak, so we are not far off.
I would say.
Pricing is an important labor inflation is here to stay, especially on the labor front commodity we'll have to see how that plays out.
Pricing is not the only lever be played is obviously more sophistication to be deploy now with a third party pricing specialists to be higher and we think with improved analytics and better reach into the system that should improve could improve flow through rates of price increases and we as a brand.
A lot of stuff from a marketing point of view to.
To drive actually positive sales mix benefits like.
But five dollar biggie bag it entice consumers to trade up from the four for four into debt offering as an example, and we are working very closely with our supply chain and supply partners to take unnecessary costs out of our supply chain.
Impacting consumer perceptions are Great example, is our nuclear comps have been rolling out that's the triple benefit, but as an ESG benefits.
Consumer perception value benefit and these cups are.
Less costly than the previous one. So these are the kind of thing in concert and we are deploying against our restaurant margin to make sure we stay highly profitable.
Yeah.
Thank you Mr Frankfurt.
The next question is from John <unk> with Jpmorgan, John Your line is now.
Hi, Thank you very much the question is on the $750 million of cash.
Some years ago. When you re franchise sold units the franchisees and kept the land and the building and have them pay rent for you part of that agreement is that they would be responsible for basically 100% or at least from what I remember, 100% of the repair and maintenance on that building.
Wanted to see if there is any.
Kind of shift that youre thinking about especially as it relates around accelerating a variety of initiatives that you may want to get done on a system wide basis, where some.
Some of that company's capital some of Wendy's capital could potentially be.
Reinvested are used in the franchise community to strengthen the brand overall or if we should expect the previous franchisees invest on their own to largely.
Remain the case thank you.
Good morning, John .
Going to stay in line with our capital allocation strategy. So if we're going to continue to invest in growth. So we are making investments examples for us our ROI.
Royalty abatements advertising fund abatements to stimulate new growth, we have set aside $100 million build to suit program to help actually unit development and we are taking some of the capital burden specifically on the lease hold and then stepping India and putting our balance sheet and help being franchise. He is out on that.
Of the business there is no plans and no intention to do so.
Thank you Mr. Ivan <unk>.
Questions from Brian Mullan with Deutsche Bank.
Brian .
Yeah.
Thank you just a question on development specific to international after the U K I think Spain is a market you're focused on for further expansion in Western Europe , maybe could you update us on your efforts, where they stand in that market or any other market you want to call attention to and related as 2023, a year in which you would expect meaningful new development agreements to be signed in <unk>.
Western Europe or could it take a bit longer than that just given the macro backdrop over there. Thank you.
Yeah, clearly in the U K the macro backdrop is a little bit more challenged but we're still committed to building out that market. We've got now nine company restaurants open and continue to invest in company restaurants, We got reef units open we've got six new franchisees signed up and would expect those.
Those franchisees start opening restaurants in the coming months, so our big opportunity in Europe is to build out the U K first.
We continue then think about how do we get into Ireland, leveraging the supply chain that we have into.
I'll jump in the UK and then overtime into Spain, we continue to to prospect for good partners in all of those markets to continue to grow it alongside of us, but it's one we're going to have to watch and see what the consumer economic backdrop and the macroeconomic backdrop.
Does that take a little bit longer.
Then than what we had originally thought time will tell and we'll provide more updates as we get into longer term guidance in the future.
Thank you Mr. Mullen next.
The next question is from Jared Garber with Goldman Sachs.
Good.
Great. Thanks actually wanted to follow up on the previous question related to the UK market. It seems like the stores there continue to be quite a bit of a drag on profitability related to some of the commentary you made on the U S margins can you talk about what youre seeing in that market as it relates to cost pressures.
As we head into 'twenty three.
And how we should be thinking about maybe the impact of increasing the number of stores, where the penetration in that market and then relatedly getting back towards pre COVID-19 margin levels in the company restaurants side given that dynamic. Thanks.
Good morning, Joe.
Several cost pressure in the UK some of them are unique to Europe , but we have definitely seen a pretty hefty headwind on energy cost and then she cost are up 50%, 60% that obviously puts margin under pressure would also say that sales are slightly lower than it would have expected.
As a result of it obviously, you're not getting as much leverage into the P&L as we thought so overall that is translating into about a 50 basis points of headwind into our margin as we are consolidating up having said all of that I think we think this is this is temporary the growth potential for the U K market.
Structurally Columbia around this.
Our compelling evidenced by U K entrepreneurs, signing up franchisees since they believe in the potential most of those markets. So.
It's a speed bump and not more I.
I think Thats key GP, we're playing a long term game, we do have startup costs that go with opening the restaurants, but it's a key pillar to really driving the growth across the region.
Thank you Mr Harbor.
The next question's from the line of Wendy Miller with Piper Sandler.
Wendy.
Hi, it's Nicole good morning, when does the new one.
Can you hear me okay.
Yes.
Okay, Great. It's Nicola paper good morning, I wanted to ask about the supply chain just two parts.
One on the tactical side.
Our items getting out to your partners like are they getting everything they need.
Is it on time and then second just in terms of higher level strategy like how are they aiding in.
He cuisine culinary inspirations innovations, where does that kind of all housed.
At your brand level. Thank you.
Good morning, Nicole a couple of things from a supply chain point of view on the food and paper side. It is tied to be if no noticeable out of stocks. So we're really proud about.
The supply chain related to new builds I would say, it's extra tight and I would definitely say the lead time for specific items definitely much longer and more uncertainty than what we had seen in the past.
Probably the picture on that in terms of our vendor partners, helping us with food innovation and so on.
First of all we are proud of our old R&D organization.
In Columbus, Ohio, joining up with a lot of good food and we are constantly working with third party providers on potentially new food items.
Actually are having a supplier summit in the second quarter of next year to actually talk strategy, how can we work better together and to drive even more acceleration in our business and at the end of the Dana We do look at our suppliers as key partners. We just had them at our National Convention out in Las Vegas, They see our planned state Park.
With us.
Both teams are R&D team their R&D team since we really tried to leverage the collective expertise on both fronts really lean in together to think about what the opportunities could be ahead.
Thank you Nicole.
Question is from the line of Daniel than usual Gargiulo with Bernstein.
Your line is now open.
Thank you and good morning.
I was wondering if you can provide your early expectations for the next Gen mobile design store.
I know you mentioned they have higher cash on cash returns compared to the traditional stores, but can you provide more details on the comp lift and even more on the digital mix that these stores can generate and then what proportion are you all new stores that you're expecting to come in the form of the new Nextgen Global design.
And if I may locked in one more on that.
What's your development, what's your progress on the on your opportunity initiative to what extent have you been able to attract new franchisees into the system.
Okay. There's a lot of questions in one question, let me see what I can answer them. All so in terms of really excited on Nextgen right. It actually reduces our our build cost by about 10%.
What it also does is.
The more complex building still offers a good sized dining rooms.
<unk> is more friendly for delivery drivers and our digital business, that's drives actually operational effectiveness, we need less labor to staff these restaurants and.
You also have less energy cost as a result of it.
You can maintain the same the same business. So there is no like.
Our constrained in the kitchen that because the building is smaller you can never get too compelling and youll be levels and then as a result of a combination of capital down operating costs down due to labor and energy we are getting a cash on cash return of 15% to 20%, which is a decent lift versus what we have.
<unk> seen previously it also reduces our payout from seven years plus to about six years, how fast is it going to spread I can tell you only one thing our franchisees are super excited about that footprint, because it's just a great restaurant to operate and better financial returns. The first one will open in the early parts of.
2023 at East and New Global standards on a go forward basis. So in the future all the new restaurants will be built on that stat that I think that was the key point that is the new global standard for all new restaurants anything thats out there in flight.
Working through.
The in process of new development, probably won't be able to flip to that but anything new that's getting built out into the future will be that global next Gen design and we're really excited about it as the franchise community.
Thank you Mr Guardiola.
The next question is from Eric Gonzalez with Keybanc capital markets Eric.
Hey, Thanks, and good morning, Thanks for the comments about the U K clearly outside that market you have some very strong one year and multiyear trends. So with regards to the international business I'm wondering if there any other regional differences worth calling out and you mentioned the strength in the Latin America and Caribbean markets.
Were there other wide variation in performance across the business segment, and perhaps even call. It a few markets, where it might make sense to accelerate development given those strong trends. Thanks.
No I'd just say.
You heard the prepared remarks, Latin America Caribbean continued to perform very nicely for us, but importantly, Canadian Canada is our biggest international market and you start to look at how it has performed on a one and a three year basis on traffic and dollar a share.
<unk> faster than any other current <unk> Burger category. So those are opportunities to continue to grow.
Think about international fronts, where we have a big development agreements in place, we talked a little bit about the shifts on the dark kitchens with rebel and India, but they're also building out traditional freestanding restaurants now to moving forward to make sure. We got a complete omni channel strategy in the Philippines is another market. That's got a lot of momentum with the big developed.
<unk> agreement that we feel really confident in.
Thank you Mr. Gonzalez.
The next question is from the line of Nick <unk> with Wedbush Securities Nick.
Okay.
Thank you.
Not from the UK drag on company margins.
Relative to your guidance last quarter still seems like there are some incremental headwinds.
The company owned comp.
Pretty strong.
It sounds like inflationary headwinds ease so.
Is it mix I mean, what else is there that's going on that that resulted in that.
Incremental headline growth of pure.
Expectations three months ago.
Good morning, Nick.
Forced us to take the guidance down a little bit was basically two factors first of all we are growing a little bit less and are confident in the investments and what we expected.
Hurricanes like E M didn't help in the third quarter. It actually was an impact on our company sales of about 70 basis points will be lost leverage there.
The first reason and second one is labor market is tough so it will be having to spend a little bit more money on overtime to keep their restaurants fully staffed CFO of consumers as well as we can so these are the two factors might be slightly reduced guidance.
Thank you Nick.
The next question is from the line of Jeff Farmer with Gordon Haskett, Jeff.
Great. Thank you just following up quickly on labor inflation.
I appreciate that inflation jumped less some are pretty meaningfully and you're lapping that but.
Question is what drove the big quarter over quarter deceleration that you saw in the Q3 on labor inflation I think it fell from 12% in Q2 to something like 6% in Q3, what's driving that.
Yes, it's a function of the comparison base right. So.
If you look back in labor labor inflation in 2021 was about 6%.
And then stepped up to about 12% in 2022, and then in 2021 third quarter labor inflation started to get more difficult right. So we had kind of nine.
9% inflation in the third quarter of 2021 stepped up to slightly north of 6%. So if you if you actually look at inflation on.
On a two year basis, it's kind of sequentially slightly down.
Thank you Mr Farmer.
The next question is from Jim Sanderson with Northcoast Research Jim.
Hey, Thanks for the question just wanted to ask a general question about pricing do you believe you have pricing power.
On a net realized basis a flow through basis in the U S to keep pace with constant inflation without having to rely more on discounting.
Here in the United States.
Hi, Tim Yes, we definitely believe we have pricing power would be of note.
Taken significant.
Our pricing the last the last couple of quarters will be up to 10% in the company.
Strengths.
As we said in the prepared remarks, well I think what's even in Q&A our traffic.
Is sequentially, improving it's still slightly down so we don't see kind of.
Less flow through are we still seeing a slow flow through of about 80%. So.
We have not yet reached a breaking point and we think there is therefore more pricing power there.
Also said, we're getting even more sophisticated and where to take price with a third party consultant that we have hired not just for the company, but also for our franchisees and at the end of the day. The proof is in the pudding right to be heavy yet again in this quarter.
Our dollar and traffic share in the category. So we are competing well with the pricing levels. We're at I think the optimistic side of the consumer moving forward is wage rates are up as we just talked about but inflation is still strong so as inflation starts to subside on the commodity front and theres more disposable personal income for the consumer.
What bodes well for the industry.
As you start to fast forward into the future at healthier consumer will continue to come out we'll start to see those frequency gains and get folks from food at home to food away from home. So.
So the future is very bright.
Yeah.
Thank you Mr Sanderson.
Our last question today comes from the line of Sara Senatore with Bank of America Sir.
Great. Thank you for.
For fitting me in I just have two questions that are sort of follow up on what we heard.
The first is on breakfast.
I know you said sort of running had been running 2700, a week previous quarters I think the key said 2600 year to date. So it sounds like you had a nice lift in the second half of the acquirer, but mainly.
The softer in the first half I'm just trying to understand you know how sticky you think the business is the person.
Getting a lift when you when you do have a really appealing launch and then maybe it settles back in so that's the first follow up and then the second one is can you talk about whether youre seeing any changes in order sizes.
You mentioned chicken or we'll make sure what we have been seeing customer accounts seem to be improving sequentially, but it's been a little bit in terms of mix because youre seeing mostly just the effect of order disaggregation. So is there anything going on there as you see more normalization letter lift through the drive thru delivery anything you can.
Speak to you on that brand. Thank you.
Yes, Sir on the breakfast Brian .
You are right it did.
Sequentially increase throughout the quarter with the launch of French toast sticks, but you also have to remember we are lapping a very strong dollars 99, Chris.
Chris on promotion a year ago. So we're happy that we were able to build growth on top of growth and.
Anytime youre, putting news out there anytime you've got a promotion anytime you're advertising you start to build some more awareness, but more importantly build trial and we continue to see our breakfast day part is our highest overall satisfaction day part so our opportunity is to get folks to continue to get and try us get us into the routine and then earn their frequency over time.
On order size when you look at.
Average items per transaction it has come down a little bit over time as some of those great Big orders that we were seeing back in the height of Covid has shifted down a little bit.
But when you look at overall mix as GP said earlier, we've been hanging in there pretty well on an overall mix. This has been interesting to see is delivery continues to hang in there quite well even with all the pressures. So we will continue to lean in as we go into the fourth quarter with messaging around delivery and one thing that you tried to create some value within <unk>.
Livery and we've now got the five dollar biggie bag with door dash and that promotion that started in Q4 is resonating very well with the consumer so we feel good about that too.
That was our last question of the call. Thank you Todd and GP and thank you everyone participating this morning.
I was speaking with you again on our fourth quarter call in March have a great day, you may now disconnect.
Yes.