Q4 2022 The Wendy's Company Earnings Earnings Call
Speaker 2: 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 speaker's remarks, there will be a question and answer session.
Speaker 3: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star followed by the number 2. Thank you. Kelsey Fried, 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, IRWENDYS.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.
Speaker 3: or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Penagore, will give a business update and provide details on our plans to deliver accelerated growth behind our strategic initiatives. And our Chief Financial Officer, Gunter Plush, will review our 2022 fourth quarter and full year results, as well as our 2023 and long-term outlook. From there, we will open up the line for questions. With that, I will hand things over to Todd. Thanks, Kelsey, and good morning, everyone. I'm excited to speak to you all again this quarter to share more detail on our strong close to 2022 and how we expect our continued momentum will drive accelerated growth in 2023 and beyond. As we shared in January , we are incredibly proud that last year marked our 12th consecutive year of global same restaurant sales growth. We continue to drive momentum in our U.S. breakfast business, which grew versus the third quarter and peaked at over $3,000 per restaurant per week in Q4. This growth was driven by the continued success of our first major breakfast menu innovation, French toast sticks, and our traffic driving $3 croissant promotion. Our global digital business averaged over 10% sales mix in the fourth quarter, and now represent.
Speaker 3: Our mix of convenience, affordability, and speed put us in a position to win with our customers and drive further expansion. The momentum we have built and our focus on execution are evident in the step-up in our financial outlook that GP will talk through later. 2022 marks our second consecutive year of double-digit global same restaurant sales growth on a two-year basis. As we shared previously, this growth was driven by widespread strength across our U.S. international segments.
Speaker 3: In the U.S., we have now grown or maintained dollar and traffic share of the QSR Burger category every quarter for the last seven and five years, respectively. This momentum was driven by our strong and balanced marketing calendar and supported by strategic pricing actions. And in Canada, our largest international market, we grew both dollar and traffic share in the fourth quarter and the last three years faster than all QSR Burger competitors. This outstanding performance was driven by our compelling marketing calendar, our focus on accelerating digital and our breakfast launch. Before sharing our plans for 2023 and beyond, I'll hand things over to GP to talk through our fourth quarter and full year financial results. Thanks, Todd. We are very proud of our fourth quarter and full year results, which highlight the strength and resiliency of the Wendy's brand. In the fourth quarter, our global system wide sales grew over 80%, supported by double digit two year same-listen sales growth across both our U.S. and international segments.
Speaker 4: and continued global med unit growth. Our global company restaurant margin held flat year over year primarily due to the benefit of a high average check driven by cumulative pricing of almost 10 percent. This was offset by persistent commodity and labor inflation of approximately 9 percent and 5 percent respectively, customer account declines and ongoing investments to support our UK expansion. We are very pleased that in the US company restaurant margin reached 15.1 percent in the fourth quarter, bringing us closer to our goal of returning to pre-COVID margins in 2023. The increase in G&A was primarily driven by higher salaries and benefits as a result of investment in resources to support our development and digital organizations, technology costs primarily related to our ERP implementation and increased travel expenses. These increases were partially offset by a lower compensation accrual as a result of our over-delivery versus plan in the prior year.
Speaker 4: higher tax rate. As we shared in January , we were able to deliver compelling sales and profit growth across 2022. For the full year, our global system-wide sales grew 6.8%, supported by strong, seamless-to-unsales growth and continued net unit development.
Speaker 4: Company restaurant margin expanded almost 300 paces points over the course of 2022, averaging 13.8% globally and 14.3% in the US for the full year. A trusted EBITDA increased 6.6% to approximately $498 million, which supported an almost 5% increase in the trusted earnings per share to 86%. Finally, we delivered free cash flow of $213 million.
Speaker 3: as our core earnings growth was more than offset by incentive compensation payments for the 2021 fiscal year paid in 2022, cash paid for our ERP implementation and higher capex. With that, I will pass things back over to Todd to talk about our plans to deliver a new gear of growth. Thanks, GP. Everything we do could not be possible without our incredible employees, franchisees, restaurant crew members, and supply partners. Before diving into our growth plans, I want to take a moment to highlight the global leadership team that will drive our growth strategies forward. I feel so fortunate to be surrounded by one of the best senior leadership teams in the business as we charge onward into the next phase of the Wendy's brand. This is a team with diverse backgrounds and perspectives and has an incredibly strong track record of delivering results across the business. Their passion and commitment, together with the structure we have designed to support a truly global focus, give me confidence that we will meaningfully accelerate our results for years to come.
Speaker 3: As we turn to 2023, our plans are deeply rooted in the foundation of the restaurant economic model, and we remain focused on delivering accelerated global growth behind the most impactful drivers of our business. Two of these growth pillars are unchanged. We plan to continue driving digital acceleration and delivering meaningful expansion of our global restaurant footprint over the next several years. As we move into our next phase of growth, we are broadening the focus of our remaining growth pillar to driving strong global same restaurant sales momentum across all day parts through our ownable core products, exciting menu innovation, compelling value offerings, and improvements in speed and consistency in our restaurants. We are extremely proud of the profitable sales layer our U.S. breakfast business has become over the last three years. Continuing to grow our breakfast day part will remain an area of focus for us as we move forward and will be one of the many levers we will utilize to deliver global growth. Thank you.
Speaker 3: The organizational redesign that we have embarked on is all in service of better supporting our long-term growth pillars, while holding GNA relatively flat over the next two years. It is our goal to operate as a truly global brand, which will maximize organizational efficiency and streamline decision-making. We plan to take a global approach across marketing and digital in order to more seamlessly share best practices and successful programs and provide even more support to our growing international business. We also plan to align resources to further support development acceleration across the US and international segments. We believe these changes position us to deliver a new gear of efficient accelerated global growth. We have an incredibly strong track record of delivering same-restrawn sales growth and believe that we have the plans in place to continue our momentum.
Speaker 3: This will be supported in part by our commitment to delivering craveable products across a variety of price points and occasions. We will remain true to our barbell approach, promoting both check building premium products through our ownable made-to-crave platform and traffic driving value options that appeal to our customers while still supporting the restaurant economic model. We'll also continue to showcase our great brand on some of the biggest stages, like the upcoming March Madness Tournament. At the breakfast day part, we are leaning into our playbook to drive awareness, trial and repeat through compelling price promotions alongside strategic menu innovation in both the US and Canada. We are excited to hit the one-year anniversary of our Canadian breakfast launch in May and will continue to support the market with an approximately $2 million company investment in breakfast advertising this year. We expect continued growth at this day part in both the US and Canada over the next several years as we work to ultimately capture our fair share. Finally, we believe that we can unlock even more sales growth by diligently working to improve our speed of service and accuracy for every order, every day at our restaurants. We made great progress in these areas in 2022 and expect further improvements will drive continued tailwinds to the business.
Speaker 3: vision AI to reduce friction throughout the ordering experience.
Speaker 3: We expect our momentum will continue with high single digit global digital sales growth, reaching approximately $1.5 billion of digital sales in 2023. As we continue to further refine our tools and customer and crew experiences, we expect our digital business to grow to over $2 billion in 2025, representing global digital sales mix in the mid teens.
Speaker 3: We expect this growth will have compounding effects on the restaurant economic model, as increased digital sales will drive efficiency in the restaurant and lower labor costs over time, adding another layer of profitability to support our footprint expansion.
Speaker 3: We firmly believe that global unit expansion is the key unlock for accelerating our growth. As we turn towards the future, we'll have a disciplined approach on driving traditional restaurant growth across the U.S. and our key established international markets, alongside continued expansion in the U.K. and broader Europe .
Speaker 3: We have tested and learned across several non-traditional formats and locations. And while we continue to be very successful with many of these formats, we do not envision that delivery kitchens will be a large element of our growth trajectory moving forward. We believe our efforts are better spent driving more access to the Wendy's brand through our global next-gen design. We already have a strong foundation due in part to the strategic investments we've made over the last few years. Coming into 2023, we have a significant portion of our development pipeline locked in under our ground-breaker development incentive. Over 300 potential franchise candidates in our recruiting pipeline. Strong interest in our Build the Soup program with an increase in activity expected to begin in 2024. We have operating efficiency, all, while building a digital first mindset into everything we do in our restaurants. This year we are building upon this foundation with the launch of our new Pay Setter Development incentive program in the US and Canada. Pay Setter will approximately double the incentive offered in our previous program while increasing the royalty rate for new restaurants built under these development agreements to 5%. All in, we expect the incentive will cut the average levered payback for a new build by 35% versus our previous program.
Speaker 3: to just over two years. We believe that these strategies, alongside continued strengthening of the restaurant economic model through strong same restaurant sales momentum and digital acceleration, will drive increased interest in the investment opportunity of the brand and ladder up to significant increase in net new unit growth over the next several years. We expect an initial step up in 2023 and 2024 with an anticipated annual net unit growth rate of 2 to 3 percent, ramping towards the high end of the range in 2024. We expect growth will increase even further over the longer term as we bring in even more growth-minded franchisees into the system and are anticipating annual net unit growth of 3 to 4 percent in 2025. We expect this growth will be spread across the globe. With international markets driving about 70 percent of the net units.
Speaker 3: in entering Ireland and Spain with experienced master franchisees beginning in 2024. Our results have never been stronger across many markets in our Latin American region, and we plan to leverage this momentum to accelerate unit development over the coming years.
Speaker 3: We are particularly focused on growing our footprint in Mexico where we have a strong track record of sales growth and an outstanding brand reputation for quality. Finally, in our AP MEA region, we have large development agreements that will drive meaningful unit growth over the next several years. This includes a commitment for 200 restaurants in the Philippines and a commitment for approximately 400 restaurants in India with Rebel Foods.
Speaker 3: our recently named master franchisee in the country. Additionally, we have begun the franchise recruiting process in Australia, which we plan to enter and expand through a franchise-only model in the coming years.
Speaker 3: We know that the world deserves more Wendy's and the plans, structure and focus we have in place to support this growth pillar give me confidence that we will deliver record-setting unit growth and delight even more customers around the globe. Everything we do at Wendy's is focused on bringing to life our vision of becoming the world's most striving and beloved restaurant brand. I am confident.
Speaker 3: that the significant momentum in our business and the sound execution of our key priorities laid out today will deliver a new gear of efficient accelerated growth. I'll now turn it over to GP to share our 2023 financial outlook and our long-term financial algorithm. Thanks, Todd. Our financial outlook reflects our continued sales momentum and compelling profit growth supported by the foundational strengths.
Speaker 4: fortified in 2022 and the plans we have in place for 2023 and beyond. Now let's take a deeper look into our key financial metrics starting with global system wide sales.
Speaker 4: They expect to deliver significant sales growth of 6 to 8 percent this year, driven by mid-single-digit global same-worth-turn sales and our sequentially increasing global net unit growth of 2 to 3 percent.
Speaker 4: We expect mid-single digit annual system wide sales growth in 2024 and 2025. We anticipate a slight acceleration in 2025 as unit growth picks up to 3 to 4 percent and global same-rest-to-one sales continue to grow in the low single digits.
Speaker 4: Now onto a trusted EBITDA, which we expect to grow to approximately $530 to $540 million this year. We expect our strong top line to be our biggest driver of growth, benefiting both royalties and our company-operated restaurant EBITDA. We are expecting US company-operated restaurant margin will return to pre-COVID levels, averaging approximately 15-16%.
Speaker 4: As we anticipate that the benefit of our sales growth, including cumulative pricing of approximately 6 percent, as well as easing commodity and labor inflation in the mid-single digits, will drive year-over-year margin expansion. Please note that on a global basis, we continue to expect that our startup investment and ongoing inflationary pressures in the UK market will represent the headwind slightly north of 50 basis points to global company-operated restaurant margin. We also expect a tailwind as our incremental investment in Brexit advertising.
Speaker 4: will step down to approximately $2 million this year as our investment in US breakfast business has ended as planned. We anticipate that these increases will be partially offset by slightly lower net franchise fees and net rental income in addition to lower auto operating income as we lap again from insurance recoveries.
Speaker 4: We expect free cash flow to grow to approximately 265 to $275 million this year, primarily driven by an increase in our earnings.
Speaker 4: We also expect to benefit from lower capex of approximately 75 to 85 million dollars as we let the initial ramp up in the rollout of new DSGs in our company-operated restaurants and expect fewer company new builds, partially offset by technology investments to support digital acceleration in our company-operated restaurants.
Speaker 4: Additionally, we expect lower cloud computing arrangement cash outlays as we completed the first phase of our EAP implementation in 2022. Finally, our free cash fruitful benefit from lapping an increase in payments for incentive compensation for the 2021 fiscal year paid in 2022.
Speaker 4: Re-anticipates that these increases will be partially offset by higher cash taxes as a result of our expected increased earnings and timing impacts and approximately $6 million in reorganization and realignment costs related to the organizational redesign we are undertaking.
Speaker 4: Turning to the long term, we expect high single digit to low double digit annual free cash flow growth in 2024 and 2025. Bebun by increased system by sales, continued company operating rest on margin expansion, efficient GNA and the step down in cash outlies related to cloud computing arrangements as our EAP implementation is completed in 2023.
Speaker 4: To close out our outlook discussion, we expect an increase in our trusted EPS in 2023 to 95 cents to $1 primarily driven by the anticipated increase in our trusted EBITDA. We also expect to benefit from high interest income as a result of a higher cash balance. The expected increases will be partially offset by higher modization of cloud computing arrangement costs, a higher tax rate, and an increase in interest expense. Our accelerated financial outlook over the short and long term represents the new give of growth, our discipline focus, and sound execution against our strategic priorities can deliver. Finally, as we shared in January , our cap location policy is unchanged.
Speaker 4: And our first priority remains investing in the business for growth, which we will continue to do while remaining true to our asset life model. Second, we are committed to maintaining an attractive dividend. As previously announced, we are doubling our quarterly dividend to 25 cents per share beginning in the first quarter and expect a full year dividend of a dollar per share in 2023, representing an over 100% dividend payout ratio. We expect to maintain similarly strong dividends per share moving forward as supported by our anticipated strong free cash flow growth and other factors, subject to the discretion of our board of directors. Lastly, we will utilize excess cash to repurchase shares and reduce debt.
Speaker 4: We have resumed share repurchases under our previously announced $500 million authorization expiring in February of 2027. A board of directors also approved an additional opportunistic debt repurchase authorization of $50 million expiring in February of 2024, resulting in total expected debt repurchases of up to $75 million this year.
Speaker 4: Our balance sheet is strong and flexible, with an elevated cash balance and a securitized debt structure with fixed rates and no need to refinance until 2026. We have positioned ourselves to weather any macroeconomic headwinds that may arise while driving continued growth.
Speaker 4: We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated, efficient growth company that is investing in our growth pillars and driving strong system-wide sales growth on the backdrop of positive, same-west-run sales and expanding our global footprint. This is translating into significant free cash flows.
Speaker 4: which supports meaningful return of cash to shareholders through an attractive dividend and share purchases. With that, I will hand things over to Kelsey to walk through our upcoming IR calendar.
Speaker 5: Thanks GP. To start things off, we have an NDR in Boston with credit suites on March 8th, followed by a virtual NDR focused on the West Coast with Morgan Stanley on March 13th.
Speaker 5: On March 15th, we will attend the UBS conference in New York, followed by the City Conference in Miami on March 16th. If you are interested in joining us at any of these events, please contact the respective self-ide analysts or equity sales contact at the host firm.
Speaker 5: Lastly, we plan to report our first quarter earnings and host a conference call that same day on May 10th. As we transition into our Q&A section, I wanted to remind everyone that due to the high number of covering analysts, we will be limiting everyone to one question only. With that, we are ready to take your questions. Thank you. And in order to ask a question, it is star followed by one on your telephone keypad.
Speaker 3: The first question comes from the line of Dennis Geiger of UVS. Please proceed. Great. Thank you and Todd. Thanks for all the color on the the Unicroath commentary. Extremely helpful. I was wondering if you could talk a little bit more about the development outlook. Maybe specific to to French as the demand in the current environment as it relates to some of the macro headwinds.
Speaker 3: but then offset by a lot of the brand-specific drivers that you mentioned. And just as you answered that, if there's any additional commentary on the U.S. pipeline, you mentioned 300 potential candidates, any way to kind of frame that up relative to history would be helpful. Thank you very much. Yeah, Dennis, thanks for the question. You know, we are in constant contact with the franchise community and really look and partner with them to understand the financial demands that they're under with a lot of the investment choices that they need to make. You know, we've got continued work to do on re-imaging, got a lot of work that we want to do on new unit builds, we've got some investments that we want to continue to make in technology as well as the new DSG 2.0.
Speaker 3: And we're partnering with the system to make sure that they continue to see strong economic returns for new investments into into new builds. And as we mentioned today on the prepared remarks, we just announced another incentive program, the new pay setter program, which basically doubles the incentive. A full suite of tools that we now have. We've got base incentives in our business. We've got the ground breaker program. We've got the pay setter program. We've got to build a suit program. And those are all tools that can help large franchisees, can help small franchisees really customize to their balance sheet, the investments that they need to make to continue to grow our business. And as you think about the momentum that we had during the course of last year, the improvements that GP talked about in the prepared remarks on margins throughout the year.
Speaker 3: You know, we've got a couple of quarters that were a little more challenged over at the beginning of last year that will start to drop off from a franchise health perspective as they look at their debt covenants and their outlook, which will put them in an even better position to continue to invest in growth moving forward. So we feel good that, you know, the pipelines in place. We've got programs in place to deliver that two to 3% net unit growth this year. That will be a step up from the net 2.1 that we had in 2022, and we'll continue to work with them to work through all the challenges on the construction delays that they've continued to see the last couple of years to make sure that we get those open this year. So, as we said on the prepared remarks, groundbreaker in the US is a big portion. We've got a significant portion of our.
Speaker 2: Brian Vittner of Oppenheimer. Please proceed. Thank you. Good morning, Todd and GP. Thanks for all the color this morning. In your long-term outlook, when you look past 2023, you now expect to generate 150%, and you are at a solve effect of.3 Einstein.
Speaker 2: high single to low double digit free cashflow growth, which represents very strong conversion from the system-wide sales outlook of mid single digits. So the question is just generally speaking, should we think about EBITDA growth tracking similarly to free cashflow in the long-term model, or should we be thinking about EBITDA growth differently? I know that there's cash computing outlays that end in 2023, so perhaps that's helping free cashflow growth a little bit, but if you could impact that dynamic, that would be helpful.
Speaker 4: Good morning Brian . We are very confident with our high single to low double digit free cash flow growth for the outlook period. Really key driver is the high confidence of mid single digit revenue growth that translates into profit and it's sort of helped by a continued margin expansion in our company restaurant footprint. We do think that it provides sort of cash. Definitely efficient Q&A. We are saying we are staying relatively flat in 23 and 24 for 25 percent of global systems sales is about in line with 2024.
Speaker 4: And then what we have is we definitely have a step down in cloud computing arrangements to about 10 million dollars. So that's a pretty big tailwind. Remember cloud computing cost in 2022, we're about 30 million dollars. They're stepping down to about 25 million dollars in 2023. And then once we are finished with all our ERP staff in 2023, that steps down further to about 10 million dollars. And then we are done with all our ERP staff in 2020.
Speaker 6: Thank you. The next question comes from David Palmer of Evercore. Please proceed. The next question comes from Kristin
Speaker 2: I wanted to circle back on the unit growth. You mentioned some interesting statistics, the 300 newly approved franchisees in the pipeline and with those incentives that you mentioned, the two-year payback, those are pretty compelling statistics.
Speaker 2: If you were to have 300 franchisees each open one unit, that would mean 5% unit growth in the US or 4%. Globally, so I'm wondering, how does that pipeline play into unit growth? And do they get onboarded and do they start opening up right away? Or is that something you imagine over many years? And then I just also, we get a lot of questions about just the nature or the reasons for the management,
Speaker 3: structure reorganization if you could just give a bit of colors to why that happened and what it means that would be helpful. Thanks so much. David, when you think about the development pipeline, bringing in and approving new franchisees, getting them trained, getting them set up to be ready to be great operators in the system takes a little bit of time. And then getting those new restaurants set takes a bit of time. When you think about total process, you probably got a couple of years from the time you think about trying to build the restaurant to the time you get a restaurant open. The construction piece, which is in the middle of all of that, is about six months. So this is a pipeline as we onboard these folks that continues to build. And that's why you see the two to three percent this year, which is a step up from last. You see the two to three percent net unit growth that we're talking about next year, airing towards the high end. So we start to build some momentum and then even more growth into 2025 with the three to four percent growth. The tools are out there. So we got a full suite. And it really is what does...
Speaker 3: investments in the tech team, investments in the development team, and R&G and A increased from about 200 million to about 255 million. And what we're saying is, now we're going to hold that relatively flatish. We're going to make sure that, you know, reprioritizing, you know, the time and effort of our teams, trying to make sure that we get the focus against our strategic growth billers, driving digital, getting new restaurants open, ultimately driving our same restaurants sales growth. And the moves that we made in the organizational structure support that, and we're very much focused on making sure we could bring that to life in an even bigger way moving forward.
Speaker 7: Thank you. The next question comes from Brian Harbor of Morgan Stanley . Maybe just on some of the comments you made on your same store sales outlook. Can you talk directly about kind of the different drivers of that? I think there was a 6% pricing comment. I didn't know if that was for the full year 23 year. If that was just to start the year, how do you expect traffic to trend within that? How do you expect kind of mix to trend? Do you think that breakfast will still be more of the traffic driver versus other day parts? I wonder if you can just provide some more detail about that. Good morning, Brian . Yeah, so a little bit more color commentary on the 2023 outlook. Right as we said, global system might sales growth is 6 to 8%. And we're expecting mid single digits. Global shameless to on sales. A little bit more color. We do expect clearly in the first quarter.
Speaker 4: mid-single digits to high single digit growth, since we are lapping some of the omicron weakness and bad weather in the first quarter and then we expect for the rest of the year mid-single digit go forward. In terms of kind of custom account, definitely our assessment continues to be that the customer is under pressure. We would expect that our custom accounts are about going to be flat or slightly down, which is actually a very strong sequential improvement versus prior year. Just to comment a little bit on pricing, so the 6% pricing that we talked about in the prepared remarks was related to our company restaurants and it's basically about 5% carry over pricing. Remember we took several price increases through the last year that they are analyzing and we have only
Speaker 3: a small price increase during the year to make our PNL work. That's the positive thing about all of that. We expect the mid-single digit labor and commodity inflation, and we can get away with a very small new price increase to get us actually into pre-COVID margin levels for the US in the 15 to 16 percent range. That's all I had to get any more colour from Utah. In just a few comments, as you think about our energy managing the calendar during the year, a real focus on our ownable core products. You'll see us to continue to talk about the messaging of our unique differences around fresh and what fresh never frozen beef stands for. We got to line up with some exciting new innovations throughout the year. We'll continue to make sure we got compelling value offers so we can play on both sides of the barbell to continue to bring traffic in the door. We'll have opportunities as we start to get staffing in a better position to drive speed and consistency in our restaurant. So those will all be fuel items.
Speaker 4: on sales to step down a little bit to low single digits. And it's really an expectation that the trading environment will normalize. Right? We have enjoyed elevated pricing levels. Those are going to come down. As a result of it, we would also expect that traffic levels will normalize. And that's going to be the focus why we actually can maintain.
Speaker 4: on a long-term basis beyond 2023, a mid-single digit guidance from a sales point of view is we are expecting the unit growth to grow up, to go up and as you have probably realized this, a big portion of our unit growth, about 90% is additional growth. So more sales due to higher EUVs are sticking into our sales numbers and it drives basically the combined outlook there. From a competitive point of view, I would say the QSR category is definitely always competitive. We are definitely seeing as a flate trading down from mid-single cash well into QSR that helps. I would also say whilst I'm saying it's competitive.
Speaker 4: We don't expect the value worth of 2018. And, you know, we have our products that we only can own with our four for four, with our big feedback. Sometimes we have time-bound promotions like the two for six, and you can absolutely expect us to continue to innovate in this space, to stay competitive with one of our consumers that love our products. Thank you. The next question comes from Jeffrey Bernstein of Barclays. Please proceed. Great. Thank you very much.
Speaker 2: Looking at the unit growth outlook for the next few years, the 2-3, ultimately wrapping up to 3-4, I think you mentioned that 70% of that net growth over the next few years is coming from international. Which has been an area that I guess has been more challenged to grow in the past. So I'm wondering if you can maybe address maybe what you think the lead markets would be.
Speaker 3: your confidence and success versus maybe a past attempts. And then the AUV and the royalties versus the US just trying to size up the value of an international unit versus a domestic unit. Any kind of incremental call you could provide on the confidence to be able to sustain that level of growth this time around. It will be great. Thank you. Yeah, thanks, Chef, for the question. And the great news is you look at the last several years on our international business. We've had a lot of momentum around same restaurant sales and a lot of momentum around profit, which gives folks confidence to continue to grow around the globe. Now, there's a couple of areas where we've made some bets. Clearly, you know, going with company restaurants into the UK.
Speaker 3: We've had the end of 2022. We had 12 company restaurants. We had 29 restaurants in total, which included 16 reef and one traditional franchise. E, we do think by the end of 2023 we'll be 45 restaurants strong across that portfolio. That will give us kind of that home base to continue to drive growth in Spain and in Ireland. We got the supply chain in place. We're working on partners. We've got master franchise arrangements. We're trying to get in place to really accelerate that growth in 2024 and beyond as we said in the prepared remarks. We also got some big development agreements in place in the Philippines. We got a 200 restaurant development commitment by 2030 60 R already opened. The great news is a lot of success in that market with a focus now on higher AUV drive through restaurants. In India, we got a 400 restaurant commitment over the next 10 years with rebel foods being our master franchisee and they got 90 dark touches today.
Speaker 3: The focus in 2023 is going to be on traditional free standing restaurants to drive brand presence and really have a great hub and spoke design in that market moving forward. And then longer term out, we're starting to prospect for Australia right now. And you saw some of that news get popped out there today. In nearer end, we still think there's a lot of growth in the US. Canada, we've got a lot of momentum in that business as we talked about in the remarks. We've been growing share and have a really strong and healthy model up there and bringing new franchisees on board. So we think we can continue to build out that market. And then Mexico is the last that I would talk about that we've had a lot of success, a lot of strong growth. And you know, we've got momentum and new partners coming in to help grow out that market. So that gives us the confidence, strong, strong franchise partners and a lot of momentum in the business. Keep you on a comment a little bit about AUVs and contribution on the international markets. Yeah, I'm giving a little bit more confidence. I don't know, I didn't use you from the from a comment from Todd.
Speaker 4: Europe in general is a higher EUV market as a result of its good focus for us. Same thing in Asia, right? The shift to more traditional restaurants, the drive-thru restaurants. Again, we are shifting to higher EUV numbers. Looking at in America, same thing. Mexico has higher EUVs, very profitable for franchisees. Guess what? That's why they are focused. Canada, you know, a lot of un-tapped potential, especially in Quebec. We have a lot of new franchisees signed up and we get going in that market with high EUVs. And then last but not least, obviously, our biggest market with the US, very high EUVs with lots growth to be had. Thank you. The next question comes from Andrew Charles of TD Cowan. Please proceed.
Speaker 4: Great, thank you. I had two questions on US Franchise E profitability. First, key to squit the level of store-able cash flow in the US in 2022 versus 2021. And then, what would you be talking about the willingness and ability of Franchise E to take on more debt in order to execute against development remodels? You know, I know you guys have obviously got a lot of work to help value engineer the box and obviously help on the incentive side, but you know, it's talking a little bit just more about the access to capital and the willingness of Franchise E to execute against this. Good morning, Andrew. Yeah, in terms of Franchise E's profitability and cash per restaurant for 2022, we don't have those numbers yet. If you know, in 2021, our system in the US and Canada posted record profits.
Speaker 4: record cash flows per restaurant and managed to actually take their leverage ratios down below 2019. You've seen our company restaurants, they're definitely a proxy of what happens in the French Red System, would definitely expect that results in 22 when we go, less profit, less cash flows, and higher leverage ratio compared to 2021. We will report it out where we have that data collected. We are working closely with the lending community. They definitely love lending to the Wendy's brand since they are seeing that we have been on trend for the last 12 years. We as French as well have continuously tried to actually take risk of the table as French as he's built new restaurants, improve financial returns, right? The thought went through a lot of those examples of what we are doing.
Speaker 2: So we do think as a result of this, our unit outlook of 2-3 percent over the next two years and then step up in 2025 to 3-4 percent is I think a prudent estimate, a pragmatic estimate that takes into account our current situations and from an economic point of view and franchise health. Thank you. The next question comes from Chris Carroll of RBC Capital Markets. Please proceed. Hi, good morning and appreciate all the detail so far this morning. So I wanted to ask, can you expand a bit more on your capital allocation, strategy and priorities? I'm curious if you could expand any more on that significant amount of cash that's currently on your balance sheet, even when you're considering potential greater share repurchases or debt reduction. I mean, are there any other additional opportunities to see this?
Speaker 4: We see that we must be made massive investments on GNA to set us up for the future. Remember between 2019 and 2022, our GNA went up from $200 million to $255 million. We are not this investing, we are slowing it down and be very, very focused in terms of where we are putting our GNA resources.
Speaker 4: to further stimulate growth along the lines that Todd has talked about. So that's kind of a couple of examples on how we are going through our cache. I think your observation is right. Our cache balance will stay elevated. We think that's appropriate. Given the volatility we have in the markets globally.
And thirdly, I think the one small change that we made is we are a little bit more active on the debt front. We have authorization by the board of an additional $50 million of debt reduction. So if you know the financial return criteria can be met, we are strangeness on that to make sure we maximizing the return for our shareholders. Then we will have reduced debt by about $75 million over in the bath, the 1% mandatory authorization that we have in our debt structure.
Thank you. The next question comes from Alex Slagel of Jeffries. Please proceed. Thanks. Good morning. Question on breakfast and any evolution in how this is being executed as you look ahead to 2023 and thoughts on expanding number of skills or how you're thinking about service levels or equipment needs or hours or anything different for evolving on that front. Thanks, Alex. It's hard to believe we're starting year four in our breakfast program. I mean, how time flies.
We've got some evolution of the products on the core menu with the types of button carriers that will be out on that product. So you'll see that coming during the course of the year. And importantly, to get that repeat and drive the morning routine, you're going to see some things around everyday affordability coming from a promotional perspective. So we've got all the tools to continue to drive it. We're very pleased with the French Toastic Innovation in the fourth quarter that we have picked over 3,000 per week per restaurant.
And we expect to continue to build on that momentum this year and into the future. Thank you. The next question comes from Jeff Farmer of Gordon Haskett. Please proceed. Thank you. On the Q3 call, you noted that Wendy's was gaining share, I believe, in the under $75,000 income consumer cohort. I think you said that you were potentially losing share with the over $75,000 cohort. So I'm just curious what the trends were as you moved into Q4 and into early 2023 with these two cohorts. On the income cohorts, as you think about Q4, it actually flipped.
So, you know, in the over 75,000 income cohort, we started to grow traffic. And in the under 75,000, we decreased on the traffic front. But when you look at in those cohorts where we fit from a share perspective, we held our share on both the over 75 and the under 75. So, that's a little different than the last few quarters where we were when we were actually winning with that lower income cohort. Just to testament to how strapped that consumer truly is. And, you know, the opportunity is really to get them a little healthier to drive frequency back into our business again. But in the over 75, you know, we're gaining like the rest of the industry and that some of the trade down we're seeing from mid scale casual into QSR. Thank you. The next question comes from Brian Nolan of Deutsche Bank. Please proceed. Thank you. Question on international development. As it pertains to other markets in Europe outside of the UK, we want whatever dollars or just drive olives for now.
Is there any willingness to continue to use the balance sheet to aid in the entrance of additional markets? I know in the past, it's not something you've spoken about doing, but given that you've taken the time to refresh your unicrow full-casts out through 25, to be helpful to hear your thinking if that strategy could make sense for Wendy's or to be helpful or necessary. Good morning, Brian . Yeah, in terms of Europe , as we said in the prepared remarks, the next target is Ireland and Spain. We are going to stay as a light, so we are going to build out our company restaurant, food put in the UK, but probably not on the continent. We are interested on the continent clearly for master franchise agreements. If a joint venture, where we can put a little bit of equity in, can make sense of it would potentially do that. Thank you. The next question comes from the line of Andrew Strzysik of BMO. Please proceed. Good morning. Thanks for taking the question. I guess I was a little surprised that you didn't provide any real targets around breakfast moving forward.
now that we're, especially in the US, starting that year four. It is just another subset of our overall same restaurant sales growth algorithm, but an important one. Thank you. The next question comes from Gregory Frankfort of Guggenheim Securities. Please proceed. Hey, thanks. Thanks for the question. I guess it's for GP, but can you talk a little bit about
your expectations on commodity inflation, labor inflation, and for this year, how maybe a trend, kind of first half, second half, or anything on that one, what your expectations are. Thanks. Good morning, Greg. Yeah, on the fiscal year, we definitely expect mid-single digit commodity inflation and mid-single digit labor inflation. From a bookend point, you'll see I would say the high inflationary items of rise. Beef is slightly deflationary and then we have everything else in between. From a pacing pointer fuel, we definitely still are dealing with high single digit commodity inflation in the first quarter, and it will step down to mid-single digit. Thank you. The next question.
with the health of that consumer. But we don't expect to see price wars from the past happening during the course of this year. We think folks will be very balanced. Good value proposition to bring traffic in, as well as having a message on the core and the premium to help folks trade down from mid-scale casual into the QSR burger category. So we think we're really well positioned.
Not just as a brand, but as an industry to compete well in that segment. Q. What sort continues to be the place to be? Thank you. The next question comes from Peter. Sally of BTIG. Please proceed. Great. Thanks for taking the question. I want to ask about some of the initiatives that you guys are doing within the four walls of the restaurants. I think several quarters ago you were talking about the implementation of double-sided grills. I was hoping you guys would give us an update on that. And then also, Todd, I think you mentioned your testing voice and vision AI. Any further elaboration comments on that and what were the benefits of that?
us. And with our partnership on Google, you know, we are doing a lot of testing on both voice and vision AI. We have some live testing in a restaurant here in the Columbus Grader area that we're taking a lot of learnings from. And we're very encouraged by the really work that we're seeing on that. So a lot more to come. Thank you.
The next question comes from John Ivongo of J.T. Morgan. Please proceed. Hi, thank you. The question mark cap act 75, you know, to 85 million actually a little bit less than what we thought. You know, were there any projects that were delayed in 23 that might be caught up in 24? Is that, you know, relatively speaking a good run rate as we think about the next couple of years of the first question. And secondly, you know, the Florida acquisition was big enough that, you know, kind of improvement their relative to the company average, you know, potentially being.
We are building a little bit fewer restaurants, so that helps a little bit more over a year. And that's partially offset by some higher technology investments in our company restaurants. To complete the cash flow picture there, I want to repeat as well that our cloud completing a range man, that's a cash out in our cash flow statement.
that's that sound from about 30 million to about 25 million dollars. And then you had a second question on CAE and the acquisition in Florida. So we're happy with the acquisition and I would say as we're the acquisition, there's a little bit more work to be done. We have dedicated resources behind it to make sure we are reaching the full potential of the acquisition. Thank you. The next question comes from Joshua Long of Stevens.
Please proceed. Great. Thanks for doing my question. Let's hope that we can talk about some of the strategies you've had in place in terms of increasing frequency, whether it's one more visit, one more dollar. Obviously, the digital sales mix continues to take higher as well. Just curious what you're seeing there in terms of being able to execute against increasing frequency and what's still a somewhat challenging operating environment.
Yeah, I think there's an ongoing focus on increasing frequency, providing more access to our brand through the breakfast day part clearly is one of those levers. Continuing to make sure that we have a compelling calendar, news on the premium front with ongoing news against need to crave, continued messaging around our key points of difference on our everyday core menu, and really have any healthy value menu with things like 2 for 6 that's out the market today.
$4 for $4 for $5 biggie bag. And as GPs said a little bit earlier, we'll continue to evolve to make sure that we've got the right value propositions that work for the consumer, but also work for the restaurant economic model. So we feel good that we've got that balance. It's in place. The biggest opportunity is for the consumer to get a little healthier. So there's been a lot of wage growth that's out in the market, but real income growth has been a little stagnated with all the commodity inflation that everybody's been faced. And as commodity inflation slows and that real disposable income starts to increase, we think we're well positioned to start capture a lot of that frequency that comes back into the restaurant. Thank you. The next question comes from Sarah Senator.
of Bank of America, please proceed. Oh, thank you. Just actually two quick separate follow-ups. The first is on the incentives. You talked about, I guess, getting from a three-year to two-year payback. That three-year actually strikes me as pretty attractive relative to other options franchise out there. So I guess what's the...
What's the need to sort of create this incentive since the underlying economic seemed pretty good? And I guess as you think about this sort of accelerated unit growth over time, is there a point at which you think you won't need to offer incentives or is this sort of, you know, the calculation is you'll continue to have maybe more upfront incentives, but over time the higher unit growth pays for that. And then my second follow-up is just on pricing. I think it sounds like maybe your pricing will be a little bit ahead of inflation.
in 2023 and perhaps a little bit behind in 2022. Is there, you know, are you have any thoughts about sort of that relative value proposition? I know you've said a couple times, no burger wars, but just trying to understand the dynamic visa v last year. Good morning, Sarah. So on the pacemaker incentive, just to make sure we are clear that's a lever to return to basically get to return of turn payback trust over two years.
So we think it is attractive and as Todd said, it's better than the previous groundbreaker. We have another incentive system out there with Bill to suit and depending on the situation the franchise is in, we do believe that that makes sense to make sure we can accelerate our unit growth. That's something that is a top priority for us and we are willing to make the respective growth investment, it creates a very good return for franchisees and to be clear, it also creates good financial returns for us.
and end-fire shareholder. So will we be creative on incentives on the co-forward basis most likely? But that's what we are rolling out currently. Also want to point out the lead times. The first restaurant will be opened under the pace at the incentives, probably in 2025. A really meaningful impact on this program is going to happen in 2026 and going forward. Your question on pricing, the way we look at this one is...
last but not least we don't see any pushback, any visible pushback from consumers on the pricing that we have taken so far, evidenced by the fact that we were holding or growing dollar and traffic shares in the category over many many quarters now and especially obviously also.
And so we worked out through 2022 where we take two obviously very elevated pricing actions. The only piece I would add, GP, is you know, you think about QSR and we talk a lot about it being the place to be our relative value proposition with the way that the menu is constructed. It's quite good relative to a lot of food away from home choices that are out there today.
Thank you. Our next question comes from Jim Sanderson of North Coast Research. Please proceed.
Thanks for the question. I wanted to follow up on the pricing discussion and earlier questions about the outlook beyond 2023. When I look at the same store sales component of system sales growth, I keep coming up with continued pricing to offset inflation, low single digits, which would yield slightly negative traffic. Is that the right way to look at that? Is the next expectation that traffic?
going to evolve, but I would say if we normalize we would have low single single-digit pricing, that we would definitely result in flat-ish traffic.
And what I would say, Jim, is it's a prudent planning assumption. We'll have to see where the health of the consumer is, where long-term trends go between food at home, food away from home with hybrid work arrangements. So when you think about what we plan for, we want to be realistic, pragmatic, and hopefully we get some upside from there into the future.
Thank you. And our final question comes from Jake Bartlett of Truist. Please proceed. Great. Thanks for taking the question, Squeez and Ian here. Mine was just on the long term unit growth outlook. And if I do the math and kind of take the midpoints for your annual growth guidance, I get about 750 stores less than the midpoint of your prior gains that you talked about. Sounds like maybe there's 100 to 50 to 100 less reefs.
that you are contemplating as you move away from the ghost kitchen. But I just want to understand better what is driving the reduction. Is it more of the focus to the traditional box? Is that kind of what's driving it, even beyond the ghost kitchen aspect? But just what's the drivers? It feels like I'm just trying to understand what changed on the development side versus three months ago. Good morning, Jeff. Your math is not wrong. I'm not sure if you're calculating the algorithm out.
You're going to find it by 2025 we're going to have between seven thousand six hundred and seven thousand eight hundred restaurants It's really less than what we have said previously and it's really Less refuents than even previously contemplated as we reduced our outlook with reef and secondly clearly the focus on traditional development and fewer low AOB items
is the other reconciling item that we have. And then really don't forget, right, our starting point, how we finish 2022, is much lower than what we had originally contemplated. Remember, our ongoing guidance for 2022 was a 5% to 6% unit growth. That was lowered, as we then relooked.
and our pipelines, we feel it's a very pragmatic, very achievable guideline that we have put forward. That is, I think having the right focus and balance between international growth and U.S. growth, international representing about 70% of the growth. I think Jake won last comment. I know D.P. talked a lot about the refocus on traditional and that's where we want to focus our resources.
There are still tools that are out there in our portfolio, but our focus is really shifting to that traditional freestanding restaurant moving forward. Thanks, Jay. That was our last question of the call. Thank you, Todd and GV, and thank you everyone for participating this morning. We look forward to speaking with you again on our first quarter call in May. Have a great day.
that are out there in our portfolio, but our focus is really shifting to that traditional freestanding restaurant moving forward. Thanks, Jay. That was our last question of the call. Thank you, Todd and G.P. and thank you, everyone, for participating this morning. We look forward to speaking with you again on our first quarter call in May. Have a great day. You may now disconnect.