Q1 2023 The Wendy's Company Earnings Call
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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 Gil.
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 <unk>.
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 highlight progress against our good downright initiatives from there our chief Financial Officer, Gunther Plush will provide a franchise health update review, our 2023 first quarter results and share our reaffirmed outlook from there.
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 building on the momentum we created in 2022 to deliver an outstanding start to the year.
Our high quality food strong marketing programs and focus on great restaurant experiences continue to resonate with our customers and resulted in our sixth consecutive quarter of double digit global same restaurant sales growth on a two year basis.
During the first quarter, we drove a significant acceleration in our global digital business, reaching over 12% digital sales mix.
This growth was supported by our very successful March madness messaging in the U S and continued growth across many of our international markets.
Our topline growth contributed to an over 250 basis point year over year expansion in the U S company operated restaurant margin.
Which is remarkable as commodity inflation remain highly elevated throughout the first quarter.
We also opened 39, new restaurants across the globe and we remain on track to achieve our development goal for the year.
And our long term development confidence continues to be bolstered by new and existing franchisee interest in our suite of development programs.
We remain fully committed to driving the restaurant economic model through our three long term growth pillars, driving sales momentum accelerating our digital business and expanding our global footprint.
This commitment and our successful start to the year give us confidence that we will deliver meaningful global growth for the remainder of 2023 and beyond.
We delivered against our strong global same restaurant sales expectations in the first quarter, achieving 8% growth on a one year basis, and 10, 4% growth on a two year basis.
Our international business achieved another outstanding quarter with same restaurant sales growth of 13, 9% and an eighth consecutive quarter of double digit same restaurant sales growth on a two year basis.
We continue to see strong results across all of our regions with Canada, our largest international market delivering double digit same restaurant sales and customer count increases.
Our Canadian breakfast business accelerated versus the prior quarter supported by the launch of French toast sticks, and our croissant promotion.
Our growth at the breakfast day part along with continued rest of the day strength led to another quarter of gaining dollar and traffic share in the Canadian market faster than all of <unk> Burger competitors.
Our U S business delivered same restaurant sales growth of seven 2% holding our strong dollar and traffic share within the <unk> Burger category and widening our share gap to several competitors.
These results were underpinned by the continued benefit of our strategic pricing actions alongside year over year customer count growth each month of the quarter.
Our Q1 marketing programs mixed compelling value offerings like our successful two for six promotion with messaging behind our iconic fresh beef and hot and crispy French fries, we leveraged March madness to reach millions of fans as the official hamburger of Enc double a driving our premium hamburger business to its highest point in the last several.
<unk> years on the breakfast front, we continue to lean into the strength of French toast sticks and closed the quarter with the startup of our croissant promotion entering Q2 with an uptick in momentum.
Is there a strong programs drive more customers to our restaurants, we are committed to delivering an experience that brings them back more often our first quarter customer satisfaction scores and speed of service improved markedly versus the prior year and prior quarter as restaurants, we're better staffed turnover improved and our systems focus on operational excellence.
<unk> even further.
As we turn to the second quarter, we will promote products across a variety of price points and occasions with dedicated messaging behind our <unk> Biggie bag platform. The return to the fan favorite Strawberry frosty and bringing the heat like only Wendy's can with the addition of the Ghost Pepper Ranch chicken sandwich to our made to crave lineup.
We also have plans in place to accelerate our momentum at the bookends of the day breakfast and late night we.
We have plans for increased activity to drive the breakfast business in the U S and Canada for the remainder of the year. It will lean into our playbook of building awareness around our craveable products launching exciting menu innovation and promoting targeted trial driving offers Furthermore, after diligent preparations to ensure our customers will have a great experience with.
Planned to promote Wendy's late night business. This summer during the first quarter, we already saw an uptick in sales at this day part driven by a return to more normalized late night hours local advertising and our growing late night delivery business we.
We are excited to offer our customers the high quality late I had experienced they deserve and believe there is a ton of opportunity ahead of us during this day part.
We continue to expect that executing against our strong and balanced marketing calendar leaning into Underpenetrated day parts and continued operational improvements will ladder up to mid single digit global same restaurant sales growth in 2023.
Our global digital business continued to accelerate to new Heights this quarter as digital sales grew over 25% year over year and reached over 12% sales mix on the international side, our customers are increasingly embracing our many digital options leading to an all time high digital sales mix of nearly 19%.
In the U S. Our digital business accelerated every month throughout the quarter as we achieved our highest ever U S digital sales mix of over 11%.
This growth was driven by continued gains in delivery and mobile order sales as we offered compelling value alongside our third party delivery partners and once again successfully advertise our digital options across the March Madness tournament.
This programming drove a 5% increase in our total loyalty members and a nearly 10% increase in monthly active users versus the prior quarter.
As we drive more fans into our restaurants through digital ordering we are also delivering on a seamless operational experience that keeps customers coming back during the first quarter, our digital customer satisfaction scores significantly increase versus prior year, and our delivery wait time and order accuracy sequentially improved.
As we look ahead, we are excited to have the infrastructure in place and momentum behind us to shift into a new phase of meaningful digital growth we.
We made significant strides in our one to one marketing programs last quarter, enabling more personalized user experiences to influence key behaviors. This allows our team to quickly check and adjust against a set of established benchmarks all in service of driving increased frequency.
Lastly, I'm excited to share that we have partnered with Google to pilot Wendy's fresh AI, a voice AI solution for drive thru ordering that utilizes Google clouds generative AI and large language models technology.
We believe this solution creates a huge opportunity for us to deliver a truly differentiated faster and frictionless experience for our customers and allows our crew members to continue focusing on making great food and providing exceptional service.
We plan to launch this pilot in June and are incredibly excited about the potential unlocked to speed of service customer satisfaction and profitability that this technology could drive over time.
You can expect us to continue pushing into new and promising technology alongside our partners as we look to maximize the restaurant economic model and grow our digital sales to approximately $1 5 billion. This year.
We are pleased to have opened 39, new restaurants in the first quarter and remain on track to reach our global development goal for the year.
We are well underway on our development journey with approximately 45% of our 2023 pipeline open or under construction through the end of Q1.
In the U K, we closed the quarter with 29 restaurants, including our first drive thru format in the market, which is performing ahead of expectations. So far.
We look forward to building on that success with our second drive through restaurant planned to open in the second quarter.
We are seeing increased excitement around our suite of development programs from both new and existing franchisees. We expect an increased appetite for growth across our system throughout 2023 and beyond as we continue to market. These programs sales momentum continues and inflationary pressures begin to subside.
We continue to believe we have the plans in place to support our goal of 2% to 3% Global net unit growth in 2023.
We expect all of our net unit growth will be delivered in the second half of the year, primarily driven by longer restaurant development timelines as the construction and permitting environment remains challenging in addition to the planned permanent closure of our U S reef restaurants in the second quarter.
We also remain on track to achieve our longer term global net unit growth targets of 2% to 3% and 3% to 4% in 2024 and 2025, respectively.
We're excited about all of the growth that's ahead of us and the opportunities to delight, even more customers around the globe.
Before turning it over to GP to cover our financial results I wanted to share an update on our progress against our food people and footprint goals within our good done rate framework.
I am proud of the work our team has done over the last year to advance these goals and continue building ESG into the foundation of our business.
Within our food pillar, we develop responsible sourcing criteria and began to collect sustainability information from our supply partners. In addition to expanding our animal welfare standards program with.
Within our people pillar, we advanced our key diversity equity and inclusion focused areas and launched the own your opportunity campaign to increase both accessibility and diversity across franchisee candidates and finally within our footprint pillar, we transitioned more than 50% of our customer facing packaging to be sustainably sourced and received validation.
<unk> of our science based target nearly a year ahead of schedule.
This is just a sample of all the progress we've made over the past year and I encourage you to read our recently released 2022 corporate responsibility report on our Investor Relations website for more information.
Our strategic growth pillars remain deeply rooted in the foundation of the restaurant economic model and our good done rate framework. Looking ahead, we remain focused on delivering accelerated global growth behind the most impactful drivers of our business driving same restaurant sales momentum accelerating our digital business and expanding our global footprint.
Everything we do at Wendy's is focused on bringing to life, our vision to become the world's most driving and beloved restaurant brand and with the momentum that we have in our business, we are well on our way.
I will now hand things over to GP.
Thanks, Todd I wanted to take this time to share an update on franchise health.
Recently collected data 2022 financials from our U S and Canadian franchisees.
As a reminder, our focus on driving the restaurant economic model led to a record franchisee sales and profits in 2020 and 2021 in both the U S and Canada.
Turning to 2022, our U S and Canadian franchisees achieved another year of record sales with 7% and 13% year over year growth respectively.
This contributed to incredible three year sales growth of over 18% in the U S and over 24% in Canada.
And despite unprecedented inflationary headwinds in 2022, which pressured year over year comparisons franchisee EBITDA dollars remained approximately 2% and 11% higher versus 2019 in the U S and Canada, respectively.
<unk>, we expect EBITDA expansion in our company operated restaurants, we expect franchisees, we will return to EBIT dollar growth in 2023 is inflation eases and we continue to drive same restaurant sales momentum and digital acceleration all supporting our global footprint expansion.
Now, let's turn to our first quarter financial results, which showcased the improved profitability. We expect this year.
We are incredibly proud of our first quarter results, which highlight the strength of our growth initiatives and the sound execution of our financial Formula.
Our global system wide sales grew 10% contributing to year over year growth across our financials.
Our U S company restaurant margin reached 14, 7%, increasing over 250 basis points year over year. Despite inflationary pressures remaining elevated this expansion was primarily due to the benefit of a higher average check driven by cumulative pricing of 95%.
Actually offset by commodity and labor inflation of approximately 7% and 5%, respectively and customer count declines.
G&A held flat versus the prior year, primarily due to a decrease in stock compensation offset by higher information technology costs, and the higher incentive compensation accrual.
Adjusted EBITDA increased almost 18% to approximately $126 million.
Primarily driven by higher franchise royalty revenue and the increase in U S company operated restaurant margin.
Do you over 20% increase in the adjusted earnings per share was driven by the increase in adjusted EBITDA and higher interest income. These increases were partially offset by higher interest expense a decrease in investment income and higher amortization of cloud computing arrangement cost.
Finally, our free cash flow in the first quarter increased over 40% to approximately $63 million, resulting primarily from a decrease in payments for incentive compensation and higher net income adjusted for noncash expenses.
These increases were partially offset by the timing of receipt of franchisee rental payments in the first quarter of 2022.
Our 2023 and long term financial outlook remain unchanged.
We continue to expect significant global system wide sales growth of 6% to 8%. This year driven by mid single digit global seamless to them sales and global net unit growth of two 3%.
Our 2023 adjusted EBITDA outlook of 532 $540 million remains unchanged as we continue to expect strong top line sales U S company operated restaurant margin of approximately 15% to 16% and mid single digit commodity and labor inflation.
Additionally, we continue to expect net franchise fees of less than $20 million and net rental income of approximately $105 million for the full year.
We are also reaffirming our 'twenty to 'twenty three outlook for adjusted EPS of <unk> 95 to a dollar capital expenditures of $75 million to $85 million and free cash flow of $265 million to $275 million.
Looking further out we are reaffirming our long term outlook of mid single digit annual system wide sales growth and high single digit to low double digit annual free cash flow growth in 2024 and 2025.
Our reaffirmed financial outlook over the short and long term as a result of the momentum of our business and our dedication to driving the restaurant economic model behind our strategic growth pillars.
To close I'd like to highlight our capital allocation policy, which remains unchanged investing in our business for growth, while holding true to our asset light model continues to be our first priority.
Lee we announced today the declaration of a second quarter dividend of <unk> 25 per share, which aligns with our commitment to sustain an attractive dividend.
Continue to expect our full year dividend of $1 per share in 2023, which represents an over 100% dividend payout ratio.
Lastly, we will utilize excess cash to repurchase shares and reduce debt as of May 3rd we have repurchased approximately two 9 million shares and have approximately $438 million left.
$500 million share repurchase authorization expiring in February of 2027. Additionally, we repurchased approximately $32 million.
Of our debentures through May 3rd, leaving approximately $43 million remaining.
That repurchase authorization expiring in February of 2024.
Our elevated cash balance and strong and flexible balance sheet leave us well positioned to withstand any macroeconomic headwinds as we continue to deliver meaningful global growth.
We are fully committed to continue delivering a 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 restaurant sales and expanding our global footprint.
Is translating into significant free cash flows, which supports meaningful return of cash to shareholders through an attractive dividend and share repurchases with that I will hand things over to kelcey to share our upcoming IR calendar.
Thanks, GP to start things off with an MBR in Boston with Guggenheim on May 23rd followed by an MTR in New York with J P. Morgan on May 24 at June .
June 13th we will attend the virtual Oppenheimer conference followed by the virtual Evercore Conference on June 2014, we will also host Investor calls on June 20th in 'twenty, one with RBC and <unk> respectively.
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 second quarter earnings and host a conference call that same day on August nine.
As we transition into our Q&A section I wanted to remind everyone that due to the high number of covering analysts.
The limiting everyone to one question only with that we're ready to take your questions.
Thank you if you would like to ask a question. Please crushed thoughtful about wondering your telephone keypad. If you would like to withdraw your question. Please press star followed by two.
When preparing to ask your questions. Please ensure your device is on mute.
First question today comes from David Palmer with Evercore ISI. Your line is open.
Thank you.
<unk> talked about a lot on that.
In your prepared remarks, I'm, just wondering if you could sort.
Sort of rank what were your energies are going to be applied in terms of driving sales and traffic.
Call it market share between the marketing the innovation.
The renovation and then you mentioned some digital initiatives.
Where do you think the biggest synergy is going to be applied and what do you think is going to give you. The the best Bang for your Buck. Thanks.
Yes, David Thanks for the question I think it's balanced across several things I think the opportunity to continue to raise our game on operational excellence.
So we're staffed better today, we've got opportunities to continue to drive some more business into our late night as we talked about in the prepared remarks, we know we have opportunity to continue to grow on the breakfast day part because we've got some nice news coming the rest of this year and we feel really good around the balance of our calendar for the remainder of the year, some great new innovation coming throughout the year.
Our commitment to value with four for four and five and $6 Piggy bags. So I do think we got a nice balanced calendar that will continue to drive our business and we'll continue to lean in on digital our digital mix continues to grow each period within in Q1, we feel like we've got some momentum the tools are coming to life to better connect with the consumers.
Even better experiences so hard to rank them, because I think they all need to come together to continue to drive great experiences for the crew and our customers, but that will allow us to continue to drive mid single digit growth.
Quarter over quarter over quarter throughout the rest of this year and we've got a lot of confidence confidence from that visibility.
Our next question comes comes from Brian <unk> with Morgan Stanley . Your line is open.
Yes. Thank you good morning, I just wanted to ask you about development could you comment on.
Where the closures in <unk> more reef related and how how many more of those do we kind of expect I guess I'm just trying to think about kind of the pace of development through the year as you get to the 2% to 3% target for the full year.
Yes, so on <unk> specific we only had a couple of reef closures in the first quarter we had.
Several U S restaurants temporary closed so in the second quarter Youll see 15 U S reef closures.
And that number the way the calendar is lined up for this year, we're on track with our internal expectations. The 39, new restaurants, you look at our historical averages in the first quarter. We've typically other than maybe the first quarter of last year always opened 30% to 40 restaurants. It is back end loaded on the openings. It is front end loaded on the closures.
But we've got good line of sight with 45% of those restaurants, now open or under construction and as we get to the end of the second quarter and we're going to have to have the vast preponderance of those open or under construction. So we will be able to report back to you on that.
Well, we got visibility too.
So the work that's underway and the plans to deliver our 2% to 3% net unit growth. This year. So we're feeling good about that.
Yeah.
We now come to Brian Bittner with Oppenheimer. Your line is open.
Okay.
Thanks, Good morning.
I'm actually really interested in the comments that you made in the prepared remarks on <unk>.
A much heavier focus on driving the late night business as the year unfolds can you just talk about the drivers that made you come to the conclusion that this is the right targeted strategy.
If successful could you frame up what type of impact.
Late night could have on sales maybe you can.
The upside or help us understand what that size the size of the business is today and where you think it could go thank you.
Yes, well it gives us confidence so we've leaned in on late night for a while in the company restaurants, and we've seen some great success. We know when we look at the rest of the system relative to where we are in the company restaurants. There is an opportunity as some of that comes with hours operation some of that as a result of that.
The staffing we need but now that we've got ourselves a staffed appropriately as we look at where that late night business is not only what we can do through the drive thru with with traditional drive up customers, but what we know we can continue to do with the momentum that we have on the delivery business in our delivery business continue to grow period month over month over month in the first.
<unk> those all give us a lot of confidence that we're in a position to really drive significant growth.
And in that day part.
The size of the prize hard to quantify but when I start to look at where we have some big growth drivers in late night is going to be one of those and breakfast will continue to be one and we will continue to work hard to continue to win like we have been at lunch and dinner and you've seen some nice growth in those day parts too for us.
Our next question comes from Dennis Geiger with UBS. Your line is open.
Yeah.
Great. Thank you another one on development, if I could and the commentary on on franchisee profitability is certainly helpful. Just wondering on the development side of things specific to franchisee demand in the current environment. Just if you could size up a bit more those macro headwinds offset by some of the specific drivers you mentioned, particularly.
As it relates to feedback on the development incentive programs, Todd if theres anything more that you could share on what kind of franchisee feedback youre getting there. Thank you.
Yeah on the development incentive program is still early so a lot of education going on on Groundbreaker three point, all we have on pay center.
<unk>.
The opportunity to take advantage of our build to suit program. So we'll have a lot more visibility into that in Q2, clearly incentives are attractive and they help the restaurant economic model with the momentum that we continue to see with improvement quarter over quarter in our <unk>.
Restaurant margins that certainly helps create some excitement into the future.
We've got our global Nextgen 2.0 design and Thats digital forward restaurant costs down about 10%. So when you factor all of those versus the prior model. When you factor all of those together and you think about where we can see the strength of the consumer on the other side of all the inflationary pressure they are facing with a lot of nominal wage growth.
I think youre going to start to see a lot of our franchisees want to continue to lean in to take advantage of those opportunities and that next Gen design restaurant with digital forward view.
All the things that we're working on when it comes to voice AI and digital menu boards and other technological advancements into that restaurant. Those can continue to better connect to the consumer health of our employees and drive the restaurant economic model.
Our next question comes from Joshua long with Stephens. Your line is open.
Great. Thank you for taking my question I was curious if you could walk through the pricing mix traffic components of the quarter then.
During the prepared comments, you talked about traffic being down a little bit, but hopefully, hoping we can get additional context, there within that same vein how are you thinking about.
Pricing on your side of the business as we think forward to the year with inflation moderating labor pressure is still there but.
Consumer overall being relatively strong for your prepared comments.
Good morning, Josh So as you've heard in the prepared remark.
<unk> was up seven 2% pricing was about 7% for the system a little bit below food away from home inflation. We are told a little bit in rounding if you actually look at the exact numbers. What you will find is traffic was up a little bit less than 1% mix was slightly negative and pricing was a little bit below 7% at when they added.
It reconciles to seven 2% we have reported it is important to note that the traffic growth was really happening every single months remember January was the easiest comparison on me for all had really bad weather.
We grew traffic data there was kind of expected, but we also grew traffic in February and in March.
As far as the company is concerned we obviously live in pricing a little bit more with 95% in the first quarter, we kind of caught up on our pricing position versus others.
As franchisees.
If you looked at the year.
Total total pricing for the year is about 7%, it's a little bit higher than what we talked about last quarter and last quarter, we talked about 6%.
<unk> be accelerating pricing, a little bit to put us even in even better position remember.
Pricing carryover is about 5% to the pricing the new pricing actions is not a lot.
Again, I think the proof is in the pudding here, we have not seen major resistance from customers on the pricing actions, we have taken as evidenced by the traffic growth that we've seen in the first quarter and maintaining and holding our dollar and traffic share in the category.
Thank you Lauren Silberman with credit Suisse. Your line is open.
Thank you for the question I wanted to ask if you can expand on what Youre seeing with your behavior sign the check management I think you mentioned excellent negative and then if you can just talk about what youre seeing across different consumer cohorts that under 75000 and over 75000 consumer. Thank you very much.
Good morning Lauren.
Yes, as I said, the consumer is reacting well to our programs. That's why we have high single digit growth in the quarter from a customer satisfaction point to a few value perception, we have not gone backwards in contrary actually owe us our scores has improved quarter over quarter.
The year over year.
From an income level point of view.
Below and above $75000 income cohort, we maintained share in the category of both.
In both in cold cohorts.
Interesting on the income cohorts, if you think about the under 75 consumer.
We've maintained our share but traffic is relatively flattish there. The good news is we're seeing nice growth with the over 75000 cohort and we continue to hold nicely share there so participating in that growth.
Our next question comes from Andrew Charles with TD Cowen Your line is open.
Great. Thanks, GP can you comment on your beef inflation expectation for 2023 versus what you laid out in the last call in Hollywood I guess Im looking to better understand is how this impacts your promotional strategy, particularly for the biggie bag to help mitigate potential cost volatility as potential inflation might weigh on value efforts. Thanks.
Good morning, Andrew So commodity outlook is unchanged versus the previous position we have taken so its mid single digits.
Within the commodity basket, we saw a little bit of movement.
We've got a little bit more expensive for us.
Still slightly deflationary versus prior year that was offset by favorability in other food categories.
I would also point out that beef is about 15% to 20% of our commodity basket, we have no price visibility up an inclusive first eight weeks after third quarter. So there is not a lot open <unk>.
<unk> be a little bit more headwinds, maybe we do expect that as offsets elsewhere and very confident with the mid single digit commodity inflation guidance, we have reaffirmed and as far as the promotional calendar. We don't think that impacts our plans at all I mean, we've got good visibility into what we've aligned to with the system around where we want to continue to support the 5% to <unk>.
$6 Biggie bag and we'll continue to lean in there we've got some really nice news on the premium Hamburger side of the business and in the Q in Q1, we were able to really focus a lot on our core items. When you think about our hot crispy fries. The work that we did around hamburger equity and squares, the beef and we'll continue to lean in on those equity.
Drivers of this unique points of difference with the calendar that we have and will continue to play our game.
Our next question comes from Jeffrey Bernstein with Barclays. Your line is open.
Great. Thank you very much I just wanted to ask about the franchise sentiment or a franchisee sentiment.
Post COVID-19, but Pete pre potential recession I'm, just wondering what the primary topics of discussion of greatest friction points.
Obviously, it's encouraging to see that the sales and profits are up versus pre COVID-19 levels, but.
What's the primary pushback there.
If you could just compare your leverage position and outlook relative to franchisees, we get a lot of questions on franchisees liquidity and ability to borrow in this environment to to support that unit growth. Thank you.
Hey, Jeff the Great News is we've got a strong working relationship with our franchise community both through our advertising trustees here in the U S and in Canada. We continue to stay linked in the hip on what we're trying to accomplish and that focus is continuing to drive the restaurant economic model. That's the area of discussion all the time.
Do we continue to enhance margin too to make sure we can invest back into our people back into technology into re imaging and new builds and that's what we'll continue to work on together, we are making progress youre seeing that quarter over quarter and a highly inflationary environment that were continued to breakthrough and do that and find that right balance between one more visit one more.
Dollar with a really balanced high low calendar <unk>.
Sprinkling of value some price pointed promotions as well as a lot of focus on the core as I just mentioned.
So we feel like we've got a good partnership but it is about driving that restaurant economic model around lease adjusted leverage ratios and our ratios versus theirs on the debt side <unk> I'll turn it over to you.
The company has had.
As a leverage ratio of about four seven times or below five.
Stem is north of that definitely increased slightly versus 2019 as debt levels have slightly increased with all the acquisitions that have happened.
I would say on the leverage ratio the system will make rapid progress to take the leverage down you can see this from our company restaurant outlook right to be a forecasting mid single digit sales growth. If you take the midpoint of our U S margin guidance Thats an expansion versus prior year.
North of 100 basis points, you can do the math is double digit profit growth. So that will go a long way to top left to take leverage down into the system as well.
We now turn to John Tower with Citi. Your line is open.
Great. Thanks, I appreciate it.
Can you give us an idea of where breakfast average weekly sales settled out in the quarter and more specifically I think you've talked in the past about your awareness of breakfast being relatively high.
For your core customers, but I'm curious what are you hearing from those customers as to why.
<unk>.
Aren't coming as frequently or what would drive them to come more frequently than they are today is it something on the product side is it speed of service is at price points that Theyre looking forward, just curious to kind of get some color around that.
Yes, John on breakfast as you did mention our awareness continues to be quite high I think that as a consumer is looking for a couple of things from us. So we got to continue to drive speed of service, which we're doing quite nicely. We've got to continue to drive overall satisfaction and it is still our highest overall satisfaction day part, but I do think we got to sprinkle in a little more.
<unk>, having an opportunity to play on things like $3 croissant on a more regular basis are certainly helpful. There is a core consumer that's only going to come to breakfast and <unk>. If there isn't a product on deals. So we're going to have to continue to make sure we're competitive on that front.
We got to continue to make sure that we got a more complete beverage business you look at a lot of the growth in the breakfast day part over the last several quarters, it's those with heavy beverage businesses, whether that's in <unk> Burger or elsewhere. We will continue to lean in we've got some some news coming around our frosty cold brew, which we've talked about in the past. So I think we've got those <unk>.
<unk> in place to continue to lean in on the breakfast side, we are no longer giving those those weekly sales.
Number is around that breakfast day part, but as I look at the calendar for the rest of the year. We are on value what we're doing on.
On the frosty cold brews, what we're doing on some innovation.
The pressure that we have to support our business the rest of the year Im feeling really confident that we're going to continue to compete well.
Our next question comes from Chris <unk> with Stifel. Your line is open.
Yes, thanks, good morning.
Could you speak a little bit more about wendy's thinking regarding pricing later this year and whether you think customer count growth is going to be needed to achieve positive comp growth. Later this year and then when does the system starts to roll off some of the larger price increases.
Good morning, Chris.
As we said, we don't need a lot of pricing to get into attractive margin structure.
We have not yet taken the new pricing this year. It comes a little bit later and as I said the gaps between the carryover pricing.
And the new pricing is above 2% on the year, so it's not nor the massive action.
If you fast forward to add if you look at our long term sales guidance for 2425, we are basically saying it.
Low single digit SaaS growth, we do think the pricing levels will come down as a result, the phase two we are expecting.
Flattish traffic into outer years.
So I think it's going to be healthy.
With all the.
Focus that we have on the estimate economic model, we see no reason to buy our profitability of our company restaurant Shouldnt expand further in the outer years.
With that construct and thrive and obviously.
Hiseq that they choose to low double digit free cash flow.
Sure.
Our next question comes from Chris Carroll with RBC capital markets. Your line is open.
Hi, good morning, So can you expand maybe a bit more on the pace of the remaining re imaging.
20% of the global system, and maybe to what extent you think that could provide a tailwind to new unit development.
The program like that thanks.
Yes, so we exited the quarter with 80% of our system Global image activated which is great progress and originally remember our full goal was to have the system, 100% re imaged by 2024 that could slip a little bit into 2025. So if you take advantage of the pacesetter incentives you can actually get an extra year to rework your re image.
<unk>, which is a choice we wanted.
Franchisees to made to focus and lean in on new development.
And then continue to work hard to get all of their restaurants re image.
Do think that that does free up capital as we get over the hump on the re imaging. It does create opportunities for capital will be focused not just on new development, but also do invest back into those restaurant economic model driving things around technology and the people. So those things then fuel even more top spin into development is that restaurant economic model.
It's even stronger and stronger in the future.
Yeah.
Our next question comes from Eric Gonzalez with Keybanc capital markets. Your line is open.
Okay.
Great. Thanks for the question maybe another one on the late night opportunity can you talk about where we are in terms of traffic or sales versus pre pandemic levels. I think you mentioned that you are fully staffed I was wondering is the day part currently profitable here franchisees as maybe they are an opportunity to value engineer the.
Menu or to make the day part more efficiency, we've done at breakfast.
Yes.
Pre pandemic when you look at it overall traffic at late night. It is back to pre pandemic levels. Our opportunity is to make sure that we're getting our fair share of that at at the late night day part we will continue to lean in to take a look at what that menu construct should look like to be really efficient and effective to to drive throughput.
Throughput and great food at that late night day part so opportunity to come as we continue to lean in to think about what that menu should look like and how we should support that business. When you look at the profitability. When you start to think about where we traditionally go and shut down the dining room after 10 and get into a late night staffing model. There is a lot of profit to be had so when you look at the law.
<unk> model against the existing menu with the sales and transactions. It takes it can be a nice contribution to the restaurant economic model.
And we'll continue to look to make sure that we make it even more efficient around the menu construct how do you make it easier close at night to provide a better opening in the morning. So you can really then continue to support your breakfast business to to make it the virtuous circle.
Our next question comes from John <unk> with Jpmorgan. Your line is open.
Hi, Thank you I know, we've spoken before about grocery maybe being the biggest competitor to the <unk> category in general may be used specifically can you just in terms of total mill share yes.
Can we talk about that category of being which is obviously shifting from pricing, which is well in excess of restaurants to in the relatively near term to pricing that will be below restaurants. If you do think there is any real risk.
I've kind of share shift into grocery or maybe other factors like employment gas prices.
Might might lead to a slightly different outcome. This time and I guess, how you would like to be best positioned to keep the share for yourself and away from potentially back to the grocery category.
Yes, it will be interesting to see John I think youre pre pandemic.
Food consumed at home was running at 80, 182% range. During the pandemic you got to $85 86 is kind of settled in today at 85%. So it's not like we've taken advantage of a lot of folk shifting back into the restaurants at this stage. There is still a lot of folks eating meals at home and you look at the convenience you look at the overall <unk>.
<unk> points still theres been a lot of inflation over the last several years in the grocery day part and you think about constructs like a five dollar biggie bag of $6 Biggie bag. The value we can create on a freshly prepared mail on a single our made to crave item, we still have a lot of relative value against grocery and we drive a lot of convenience. So I think we're well positioned to <unk>.
To compete and as folks start to get out and think about what.
There are patterns are and what.
What their hybrid work environments are getting back to work those things will continue to give dry dry pushed miles.
Driven and continue to help the restaurant business overall, whether thats breakfast or lunch anything else GP I would also say that disposable income is a big correlate and I would expect with inflation coming down in grocery net disposable income will come up right because wage inflation is still relatively high so as to consumers.
Looking quarter over quarter, they should be left with a little bit more less disposable income should encourage them to go to the restaurants were open more often and spend some more money and then hopefully with us.
<unk> are compelling.
They're really.
So all consumers and that should be good for our business.
Yeah.
We know century correct Greg.
Guggenheim Your line is open.
Hey, thanks, Thanks for the question.
GP I think you made a comment about staffing being in a much better spot can you maybe update us on what youre seeing on turnover levels of staffing.
Youre starting to see any maybe early break on entry level wage rate at all just as the labor market starts to free up.
Good morning, Greg So staffing levels definitely have improved what's the metrics we're looking at.
The 90 day turnover rate has definitely improved year over year and quarter over quarter you heard in the prepared remarks, we are going to advertise late night, that's an indication that we feel really good about staffing levels, even in difficult to staff time periods like late night.
It's definitely a confidence there we have not seen really a deflationary environment and labor if that's what you were asking.
Our labor inflation in the first quarter was mid single digits or about 5%.
Debt on a stacked basis thats, a massive increase if you might remember the first quarter of last year wage inflation was about 15%. So that's the environment that we have and obviously.
We are trying to remove our reliance on labor how do you do this obviously drive retention as fastest.
As you can from a competitive benchmark point of view.
Our turnover rates are better than the industry. So that helps restaurant economic model and then obviously the push towards digital digital ordering voice AI is also helping with productivity in the restaurants, Todd anything else Youre seeing all the benefits of all of that GP. I mean, you look at where our overall satisfaction is as we've been better staffed.
That has improved significantly.
Quarter over quarter, we're seeing it across taste, we're seeing it across accuracy, we're seeing it across our speed perception and importantly, we are seeing our actual speed improve so we're making improvements on that front.
Speed convenience affordability, what's our game is all about us differentiating on quality as is the game, we will continue to play.
Being in a much better position with labor is certainly going to help us lean into all of that with better trained crews and better staffing across all day parts.
Our next question comes from Sara Senatore with Bank of America. Your line is open.
Hi, This is Katherine Griffin on for Sarah Todd I wanted to ask a couple of questions about the AI investments on firstly why is now the right time do you mean, making this investment and secondly, do you. When you spoke about the Mark do you expect that to be more on the throughput side or on the.
Labor cost.
Operational side. Thank you.
Yes, I think now is the right time, we've done a lot of work on our tech stack and our restaurants.
Kevin <unk>, who joined US several years ago now from from Domino's and his team have done a nice job really setting ourselves up to lean in even more on technology clearly it starts with the global Nextgen design. That's all digital forward. We've got work that we can continue to do even on the digital menu board. So thats still growth in front of us.
But when you look at why now.
As a great partner that we have in Google cloud.
Believe in.
Theyre generative AI and large language models technology, we've been testing it will have it live in a couple of restaurants as pilots here in June in the Columbus area, and we really look at this as a speed and throughput opportunity for us its lowest point in the whole drive thru is that order station trying to make our lives a little bit better for our employees.
And heck of a lot better for our customers as we really get them focused on making great food and expediting and note that windows Superfast, So thats, where the opportunity really lies to elevate the experience for both employees and customers moving forward.
Our next question comes from Jim Sanderson with North Coast Research. Your line is open.
Hey, Thanks for the question I just wanted to follow up on your commentary regarding late night and I just wanted to make sure I understood. Our franchise stores in the U S operating to expected operating hours and breakfast and late night or Theres still.
<unk> or where areas where stores cannot fully operate as expected.
Check on capacity.
Yes still opportunities I mean, if you go back over the last 12 months.
When you think about late night hours, having your dining room for Japan.
Restaurant open until midnight or later.
We werent all the way there and we've done a lot of work as you heard in the prepared remarks to get ourselves set up to actually nationally advertise now open for late night business midnight or later, so we will have the vast preponderance of the system in a position to do that as we roll into the summer.
And now I'll turn to Jake Bartlett with <unk>. Your line is open.
Great. Thanks for taking the question minus on the value offering you mentioned portal for you mentioned, the biggie bag at five or $6.
I just wanted to confirm are you keeping the floor before my understanding is that it was kind of going away at some point.
I think I caught soon.
Then.
What kind of feedback that I hear from franchisees.
The view is that the VAT.
Value offering is actually two attractive it kind of.
Versus the core menu, there's too large a difference.
Is that something that you think is a problem and is that something that.
Youre kind of looking to address.
Yes. So if you think about where we are we've been trying to move folks from four for $4 to $5 <unk> to $6 Biggie bag. So we've been able to drive some nice mix gains as we've shifted folks up in across those offerings over the course of the last several months four for four and really is a local decision is it going to stay on the menu board is it off the menu board still be.
Honored if you come through the restaurant you can still manage it within the within the App.
The focus has been on five and six dollar biggie bags with the offerings that we have there, but if you look at our overall mix around value when it comes to four for $4 five and $6.
Relatively stable. So we haven't seen a lot of trade down we are watching that gap between value and premium.
An age old discussion that is not just happening today, but it's probably the same discussion we had five years ago and how do you actually sprinkle in value in between with other offers like <unk> and things like that but we're really trying to make sure. We got the right balance between value and premium, but I'll tell you what in the first quarter with all of the Hamburger equity Advertiser.
<unk> the news that we have around made to crave in our quarter, we had our best core large hamburger volumes in the last six years. So we're really feeling good about that on the premium side.
Our next question comes from Fred Wightman with more research your line is open.
Hey, guys. Thanks, there was a comment earlier that traffic was positive on a year over year basis, each month, but I'm wondering if you could give a little bit of color. It sounded like there was some weather in January but maybe just how that year over year trend throughout the quarter.
Good morning, Fred So as I said the traffic for the quarter.
A little bit less than a percent.
In the month of January little bit north of 1% globally for the remaining on the quarter a little bit below.
Our final question Tonight comes from Peter Saleh with <unk>. Your line is open.
Sure.
Great. Thanks for taking my question.
It sounds like the industry is seeing improvements on the labor side really across the board and you guys are seeing in as well.
Yes.
Your commentary on breakfast you indicated the need to drive faster speed of service I think that was one of the first comments. So just curious are you seeing improvements in speed of service across all day parts breakfast. The slowing is just trying to understand.
They are the improvement that youre seeing on the labor side is really helping to drive the speed of service or if theres something else you need to do there. Thanks.
Yes from a speed of service perspective, our breakfast day part is our fastest speed of service and continues to be but we got to continue to do that.
<unk> and make sure that we're prepared for the the breakfast <unk>.
Just as we are for lunch and dinner to be rush ready. So that's where that comment is it just one of those things to continue to deliver a consistent experience I do think the other factors around how do we continue to bring some news into our breakfast business around food what do we do to continue to expand our our beverage offerings. Those are things that will play even more into our growth into the <unk>.
And we've got those things planned in the pipeline right now.
Thanks Peter.
Thank you Todd and GP and thank you everyone for participating this morning, we look forward to speaking with you again.
Our second quarter call have a great day, you may now disconnect.
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