Wendy's Company (The)

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'll be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Greg Lemenchek, Senior Director, Investor Relations and Corporate FP&A. You may begin your conference.

Thank you and good morning, everyone. Today's conference call and webcast PowerPoint presentation, which is available on our investor relations website, irwendies.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Pettigore, and our Chief Financial Officer, Gunter Plush, will give a business update, review our 2021 second quarter results, share our revised financial outlook, and provide a franchise health update. From there, we will open up the line for questions. With that, I will hand things over to Todd. Thanks, Greg.

And good morning, everyone. Our transformative growth continued in the second quarter as we had one of our best quarters ever as the Wendy's brand. Sales once again significantly exceeded our expectations, leading to record profits and fueling our restaurant economic model. We delivered a second consecutive double digit two year accelerating same restaurant sales result after accounting for the 53rd week shift on the strength of our rest of day business, growing breakfast day part, digital business and a step change in our international performance. Our breakthrough sales led to a restaurant margin of more than 20% and almost 600 basis point expansion year over year. Our focus remains on ensuring that we have a robust restaurant economic model across our system and we are executing. We successfully entered the European market with our first restaurant in the UK and are very encouraged by the early results and excitement we've seen so far in that market. We also have a strong pipeline of company restaurants with several more planned for this year and have our first franchisee in Reef Kitchens that is planning to open a handful of delivery kitchens as well this year. I'm extremely proud to share that we are increasing our 2025 global restaurant target to 8,500 to 9,000 restaurants as a team has been very successful in securing new commitments. This increase is driven by an expanded relationship with Reef Kitchens and a newly created Build the Suit development fund. In addition, we finalized approximately 240 incremental new restaurant commitments through our Groundbreaker Incentive Program. We also recently finished collecting our 2020 U.S. franchise financials, and we saw a significant increase in overall financial health. Our franchise system grew EBITDA dollars by almost 20% in 2020 to what we believe are record profits. As a result of our incredibly strong start to the year and the momentum we are seeing in our business, We are increasing our dividend by 20% to 12 cents per share, which is back to our pre-COVID level. We are also meaningfully increasing our 2021 outlook on all our key financial metrics, which GP will talk to later in the presentation. Our goal remains the same, which is to invest in driving efficient, accelerated growth, and we are delivering on that commitment in a big way. Our momentum carried into the second quarter with global same restaurant sales growth of 17.4%. This came in well ahead of our internal expectations, driven by continued strength across our U.S. and international businesses. This translated to 11.6% on a two-year basis, reaching double digits for a second consecutive quarter. And we accelerated on a two-year basis to approximately 14.1% when accounting for the 53rd week shift. In the U.S., we achieved double-digit one- and two-year same-restaurant sales again this quarter, reaching 16.1% and 11.7% respectively, and record AUVs on a trailing 12-month basis of almost 1.9 million. These strong results were driven by continued growth in our rest-of-day business alongside our growing breakfast and digital businesses. This is our fourth consecutive quarter, a double-digit two-year same-restaurant sales growth, which showcases the power of our business and our execution against our strategic initiatives. Our international business saw a significant increase in same-restaurant sales this quarter, accelerating to 31.4% on a one-year basis and 13% on a two-year basis. This growth is attributed to the strength and recovery across many of our markets, with our Canadian restaurants reaching all-time high AUVs on a trailing 12 month basis of almost 2.4 million Canadian dollars. The continued strength and momentum we've seen in our global same restaurant sales through the second quarter has once again given us the confidence to take up our system-wide sales outlook for 2021 to 11 to 13%. Our global franchise system is engaged and we are confident in the plans that we have in place for the remainder of 2021. Let's spend a few moments talking about our incredible USA restaurant sales, which continued to accelerate in the second quarter, driven by a significant improvement in customer accounts and continued strong average checks. We continued to innovate with our successful made to crave platform this quarter, launching the bourbon bacon cheeseburger, which led to record results within this platform for the quarter. We also relaunched the fan favorite summer strawberry salad, which drove substantial year over year growth in our salad business. These programs continue to boost our average checks by trading our customers into our most craveable and highest quality products. We also executed against our high-low strategy by continuing the $5 Biggie Bank promotion, which drove traffic into our restaurants throughout the second quarter. We will continue to strike a balance between our core menu items and new product offerings with exciting and ownable new products. On the innovation front, we continue to lead in the area of spicy with the recent launch of our ghost pepper ranch dipping sauce. We also have a new addition coming to the Made to Crave lineup launching at the end of August, which we are really excited about. We expect to continue to drive outsized results in our U.S. business as a result of our planned programming and high level of execution. Breakfast continued to be a profitable sales layer for us in the second quarter, and our average weekly sales dollars delivered versus our breakfast plan. We could not be more excited about the upside that is still in front of us at breakfast, and the incremental investment that we announced this morning gives us even more confidence. In the second quarter, our breakfast sales accelerated as expected, growing 10% over the first quarter. This growth was driven by the successful $1.99 honey butter chicken biscuit and two for four trial driving promotions during the quarter. These promotions have been critical to our success as we continue to see very strong customer repeat and high customer satisfaction after people try our breakfast. We continue to expect outsized growth during the breakfast day part in the second half of 2021, driven by continued trial driving programs and an expected return to routines in the fall. This is being fueled by our incremental company breakfast advertising investment that we just increased by $10 million to $25 million in 2021. We believe this incremental investment will continue to drive trial and acceleration of the company's breakfast offering in a meaningful way. We remain confident in our plan to grow our breakfast sales by 30% in 2021 and reach our goal of 10% of sales coming from breakfast by the end of 2022. We continue to be very pleased with our digital business, which grew across the globe in the second quarter. Our international business continued to deliver double-digit digital sales mix in the second quarter, as we've seen our digital gains during COVID remain strong. In the US, digital sales dollars grew over 10% and outpaced our plan for the quarter. This was driven by gains in both delivery and mobile ordering sales. Delivery sales were bolstered by several successful promotions and we're encouraged by the growth we've seen in this channel, even as mobility continues to increase. Our mobile ordering gains were driven by several impactful acquisition campaigns, which increased our total loyalty program members by 25% compared to the first quarter to 17 million. We saw significant growth in both digital and overall sales during the second quarter, resulting in our digital sales mix holding steady at approximately 7.5%. We remain fully committed to our digital journey, and I know that the technology investments we're making alongside our franchisees will set us up for continued growth into the future. As I shared earlier, I am extremely excited to announce that we are increasing our 2025 global restaurant target to 8,500 to 9,000 restaurants, which is a meaningful 500 to 1,000 increase versus our previous target. This increase is being driven by a development commitment by reef kitchens for 700 delivery kitchens over the next five years in the US, Canada and the UK. This commitment builds on the successful test that we completed in Canada and will allow us to further develop urban markets, where we are currently under penetrated. We are still very early in our non-traditional development journey, but we are encouraged by the results that we've seen with Reef and we'll continue learning alongside them throughout this partnership as we grow our brand. Our increased global restaurant target is also being supported by the creation of a $100 million build-to-suit development fund that we expect will drive approximately 80 to 90 new franchise restaurants from 2022 through 2025. This initiative will be funded by the additional cash that we have obtained as part of our successful debt refinancing that we completed in the second quarter. This program, along with newly implemented lower liquidity and net worth requirements for our new franchisees, will transform how we recruit and engage diverse franchisees into the brand. Our real estate and construction teams will be on point to secure and build the locations, making it a turnkey solution for a franchisee to open a new restaurant. I also wanted to provide an exciting update on our Groundbreaker Incentive Program as we were able to secure approximately 240 incremental commitments in Canada and the U.S. that will further solidify our restaurant development pipeline over the next several years. With the incremental commitments from the Groundbreaker and the incremental reef units, we now have about 70% of our global new restaurant pipeline through 2025 committed under a development agreement, which is our highest level that we've ever seen. We remain on track to reach approximately 7,000 restaurants by the end of 2021. And this is supported by a strong global pipeline of restaurants where we currently have almost 70% of our planned restaurants open or under construction through the first week of August. Our development foundation is extremely strong and we are confident that we will reach our increased goal of 8,500 to 9,000 global restaurants by the end of 2025. Our playbook of investing to drive accelerated growth behind our three long-term pillars to meaningfully build our breakfast day part, drive our digital business, and expand our footprint across the globe remains the same. We continue to make tremendous progress against these goals while making investments and strategic partnerships to set ourselves up for today and the future. These initiatives remain deeply rooted in the foundation of the restaurant economic model, and we are delivering on that promise as we showed in the second quarter with our accelerating margin performance. Our business momentum, strong partnership, and health of our franchisees, and the dedication of our restaurant crew and support center teams reaffirms our confidence that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand. We know that our best days are ahead of us, and we are excited to deliver. I will now hand things over to GP to talk through our second quarter financial results.

Thanks, Todd. We could not be more proud of our second quarter results as our business continued to accelerate to record levels, showcasing same-restaurant sales and earnings growth that were once again well ahead of our expectations. Our global system-wide sales grew an incredible 22.9%, and our same-restaurant sales increased to 17.4% in quarter two on the strength of both our U.S. and international businesses. Year-over-year company-restaurant margin increased almost 600 basis points to over 20%, driven by sales leveraging from our 23.9% company-operated SRS growth and lapping recognition pay in the prior year. These benefits were partially offset by having to absorb higher than expected labor rates and commodities of almost 6% and 3.5% respectively. The increase in G&A was driven by higher incentive and stock compensation accruals as a result of our improved outlook and higher technology costs, primarily related to our ERP implementation. Adjusted EBITDA increased approximately 35% to $131 million. This was primarily driven by higher franchise royalty revenue as a result of increased seamless run sales, an increase in company-operated restaurant margin, and an increase in net franchise fees as a result of the company's new technology fee implemented in 2021. These benefits were partially offset by higher general and administrative expense. Adjusted earnings per share increased 125% to 27 cents, driven primarily by our higher adjusted EBITDA. Finally, our free cash flow increased significantly to approximately $186 million. The increase resulted primarily from higher net income, higher royalties collected as the result of lapping the three-month extension of royalty payment terms that was provided to franchisees in 2020, the timing of rental payments, and the timing of accrued compensation payments. Our strong quarter two results and continuing momentum in the business are driving a high quality of earnings that resulted in a meaningful increase to our 2021 outlook for a second straight quarter. We are raising our global system-wide sales growth outlook to 11 to 13% based on our outperformance in quarter two and an improved full-year sales outlook due to the strength of our business. This improved sales outlook is the major driver in our adjusted EBITDA outlook, which is up $10 million to approximately $465 to $475 million. We are now expecting an increase in our company operated restaurant margin to 17 to 18% in 2021, which is being driven by the improved sales outlook. Our margin outlook is also inclusive. of increases to both commodities and labor rates, which we are now expecting to be inflationary approximately 2-3% and 5-6% respectively. We are also expecting an increase in net franchise revenues related to franchise transactions that are expected to close in the back half of the year. These increases are being partially offset by an increase in G&A to approximately $240 to $250 million, which is driven by higher incentive compensation accrual because of our improved outlook. These increases are also being offset by the incremental $10 million company breakfast advertising investment we are making. Our higher adjusted EBITDA, a slightly lower expected tax rate, and interest savings from our successful debt refinance are resulting in a $0.07 increase to our EPS outlook to $0.79 to $0.81. Finally, we are raising our free cash flow outlook by $20 million to approximately $270 to $280 million. Like we do as part of our quarter two earnings release each year, I wanted to take the opportunity to give you an update on our U.S. franchise financial health as we recently finished collecting and reviewing our financials for 2020. The outstanding results we are seeing as a company are also being experienced by our franchise system. Our franchisee sales in the U.S. grew approximately 2% compared to the prior year. These sales, along with significantly improving restaurant margins, that were positively impacted by higher average checks as a result of the pandemic, allowed our system to grow EBITDA dollars by almost 20% in 2020. We believe that these results represent record profits for our franchisees and that the strong performance has continued in 2021 with the momentum that we have seen in our business. Our franchise system also has very healthy balance sheets, as their least-adjusted leverage ratios declined in 2020 and have decreased by more than half a turn since 2018. We know that ensuring franchisee health will ultimately lead us to achieving our long-term growth goals, so we are thrilled with these results. This all led us up to a very strong partnership with our franchise system that allows us to focus on great execution as one system behind the alignment of our strategic growth initiatives. To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth, and we are showcasing this for the investments we are making across our three strategic growth pillars. Our increased breakfast investment and our built-in huge development fund are prime examples of us leaning in to drive transformative growth. We expect that the restaurants from the development fund will deliver a strong return for us and our franchisees who will operate them. Moving forward, we anticipate that we will have a separate line within the investing section of our cash flow statement to report this and that the cash outflow related to the fund will therefore not impact our free cash flow definition. Today, we announced the declaration of our third quarter dividend and that we are increasing it by 20% to 12 cents per share. Our strong liquidity position, along with the momentum we are seeing in our business, support this increase while still leaving flexibility to invest in growth. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. We announced today that we have added an additional $70 million to our existing share repurchase authorization to a total of $220 million. As a result, We have approximately $100 million remaining on our authorization that expires in February of 2022. We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated, efficient growth company that is investing in our strategic pillars and driving strong system-wide sales growth on the backdrop of positive same-world turn sales and expanding our global footprint. which is translating into significant free cash flows. With that, I will hand things back over to Greg.

Thanks, GP. To start things off, we'll be doing a virtual NDR with Todd and GP. The first leg will be focused on the Boston market with Oppenheimer on August 17th, and the second on New York with Barclays on August 18th. We'll follow this up with a virtual NDR focused on the Canadian market with RBC on September 1st. Following these NDRs, we will be attending the Wells Fargo Conference in person on September 22nd in California. We will also be hosting an investor call on September 9th with BTIG and doing a virtual headquarter visit with KeyBank on September 30th. If you are interested in joining us at any of these events, please contact your respective sell-side analyst or equity sales contact at the host firm. Lastly, we plan to report our third quarter earnings and host a conference call that same day on November 11th. As we transition into our Q&A section, I wanted to remind everyone on the call that due to the high number of covering analysts, we will once again be limiting everyone to one question only. And with that, we're ready to take your questions.

At this time, if you would like to ask a question, press star 1 on your telephone keypad. Again, that is star and the number 1. The first question comes from Brian Mullen with Georgia Bank.

Hey, thank you. And congrats on great results. Just question on the, on the U S development pipeline. You had a lot of positive announcements today between reef kitchen, the groundbreaking, uh, groundbreaker incentive and the built seafood with these nuts. Can you just update us on how you're thinking about us net unit growth in 2022 and related to that, maybe offer some thoughts on how you expect the shape of that net unit growth in the U S over, over that 22 to 25 time period on the path to those new updated targets.

Good morning, Brian. Yeah, for 2021, we're expecting a global unit growth of 2% plus, and obviously it's going to accelerate between 2022 and 2025 to about 6%. We have said previously, and basically what happens is both international growth and U.S. growth is going to lift up. And the starting point is a 10% plus growth rate in international for 2021 both areas are going to lift up from an acceleration point of view since all the new incentive agreements are basically of global nature.

Your next question is from the line of Brian Bittner with Oppenheimer.

Thanks. Good morning. And I echo the congratulations on great results and the momentum in the business. Can you talk a little bit more about the difference between breakfast growth and rest of day in the quarter? And a follow-up is just as far as breakfast awareness goes, can you update us where we are now? And what do you believe is the biggest catalyst to really break through and unlock on the awareness front as it relates to breakfast? Is it continued investments like you've announced today? Or is there anything else you believe you can do to really catapult those awareness levels across the U.S.?

Yeah, Brian, thanks for the question. If you think about our same restaurant sales growth in the U.S. is 16.1%. And we had really strong growth across the rest of the day. Lunch was heavily impacted last year during COVID. Late night was heavily impacted. And we had nice rebounds in both of those day parts. You know, breakfast continues to grow. It was up 10% versus Q1 when you look at overall sales dollars. So we got nice, healthy builds happening there. We're also seeing our digital business grow up 10%, you know, versus the first quarter. So we're continuing to see nice dollar sales build on that front. So it's a nice, healthy mix across all elements of same restaurant sales growth. You know, I think the key unlock on the breakfast front really is continuing to drive trial. Our awareness levels are quite healthy at just north of 50%. We're in there in that same range with where Burger King is around awareness, and they've been there for quite some time. And what we need to do is continue to create news, have trial-driving events, get folks to try our food, and importantly, be part of the return to routines that we expect to happen as we get into later this month with schools returning, later this quarter with folks returning back to work. And whatever that routine is, we need to be part of it, and that's why we're putting additional $10 million of advertising to work to make sure that that message is loud and clear. Thank you.

And your next question is from the line of John Glass with Morgan Stanley.

Thanks. Good morning. I have two development-related questions. First, just on the reef kitchens, any early understandings of what the economics look like? I'm assuming you don't put the capital into that, but just clarify if we should expect lower volumes just because it's a ghost kitchen or what do you think about that? And at least $100 million, given the franchise economics are good, and you already have groundbreakers, why did you feel like you needed an additional incentive for development? Or was that targeted differently to different types of franchisees? Maybe just explain what the rationale behind putting your capital behind that is.

Yeah, John, two quick things. Reef, you know, one, as we said in the release, we do expect about 50 to be open this year and then the rest spread evenly over 2022 through 2025. And we had a very successful test with about eight units up in Canada. It really allows us to get into urban locations where we're dramatically underpenetrated. If you look at the economics, Early to tell what we can do from the sales out of each of those vessels, but we're expecting the sales in the range of $500,000 to $1 million per unit. And the good news is we've got a higher royalty rate in the U.S., almost 6%, you know, 5.5% in the U.K., So even though there's a little bit lower sales dollars coming out of those vessels, we've got a nice, healthy economic return. From an investment perspective, REAP is putting up all the dollars to get the vessels to train the people, hire folks. We're going to support them on training and make sure that they hold the great standards. On the Build-A-Suit Fund, it's just another leg on the stool. We've got a lot of great things happening between Reef, the development agreements in place with Groundbreaker, the pipeline that's already in place. And what we really wanted to do is make sure that we were able to bring new franchisees into the system and allow them to build their way into the system. And we think this program is a great program to allow folks to build their way into the system. We also think it's a great program for smaller franchisees to leverage to allow them to scale up along the way. The economics are compelling for the company and for the franchisees as they come in. This all coupled with the lower liquidity requirements that we talked about to become more competitive really makes this program compelling for new folks to come in. And it will help us on the diverse recruiting front, too.

Your next question is from the line of David Palmer with Evercore.

Thanks. Good morning. Great job on the company restaurant margin expansion. GP, I think you mentioned in the prepared remarks that the system had a 20% EBITDA growth in 2020. I'm wondering if Maybe you could dissect that and help us think through how the company restaurants, what they're lapping this year versus what the system's lapping. For example, you had the one-time bonuses last year, and then there's the stores that you're going to be re-franchising out of New York, I believe, that were presumably a drag. And I mention all this because it doesn't look like your company restaurant profit did as well as the system in 2020. Thanks. Thanks.

Good morning, David. Yeah, we are really happy with our company restaurant performance in the second quarter, despite actually having to absorb more inflation than what we had originally anticipated. We had to absorb about 3.5% commodity inflation and almost 6% labor inflation. Franchisees, to address your question there, yes, they increased EBITDA by about 18% versus price. It's not a profitability number. It's an EBITDA growth number. So obviously the profit growth rate was much higher than the sales growth rate. And franchisees really went great restaurants and benefited clearly from higher average checks. Just to make absolutely sure is that EBITDA growth of 18% does not include any potential income a franchisee might have gotten out of PPP funds. In terms of outlook for our company restaurants, we have increased the outlook again for this year to about 17% to 18%, despite having to experience now an absorbed inflation. We had previously thought commodity inflation would be flat. We are now 2% to 3%. We've been driven by beef and pork. And on the labor inflation, in the first half, we absorbed about 5% labor inflation. On the year, we're expecting about 5% to 6%, so really strong performance.

Thank you.

Your next question is from the line of Eric Gonzalez with KeyBank Capital.

Hey, thanks for the question, and congrats on all the development progress. I just have a question about that development fund. I was wondering the mechanics of that. Will you be lending money to franchisees for construction return, receive an elevated rental payment? Is that typically how that works? And then as a follow-up to the earlier question on the Build the Suit Fund, I'm just wondering how much incremental risk is being introduced by lowering the threshold around network and liquidity and what you may be doing to prevent an uptick in store closures down the line, particularly where you might be on the hook, given your position as a building suit lender?

Good morning, Eric. Yeah, the Build to Shoot program is kind of a classic Build to Shoot program that we had on a smaller scale up in Canada. So we actually are providing that building. The franchisee will have to invest in signage and equipment. So I think roughly 70% of the capital is ours, 30% is kind of the franchisee's. And in return for us to make a return on the capital that we are investing, we are getting slightly elevated royalty rates and rental rate income, so it creates really a high-quality income stream in future years for us. In terms of your question around risk exposure by lowering the requirements, You know, liquidity requirement previously was about $2 million. We lowered it to half a million. The net worth requirement was $5 million. We lowered it to a million. It looks like we're taking on a lot of risk. But I have to say we studied competition. We actually were too conservative and not competitive. The kind of requirements that we have are very much in line with what the rest of competition is doing.

Thanks.

We're going to ask questions from the line of Jeffrey Bernstein with Barclays.

Great. Thank you very much. Just wanted to follow up on the franchise health That 18% increase in EBITDA, I'm just wondering if you can give any kind of dollar context into maybe where it was or where it is today. And then on that front, as you talk about the elevated commodity and labor costs, especially through the back half of this year, just wondering what the feedback or discussion is with franchisees on that. And maybe if you can share what the current menu pricing is for company or system-wide in your estimation to help mitigate that to drive such strong profitability. Thank you.

Yeah, I think, Jeff, you snuck in there three questions. There was one. I'll try to remember them all. So on the 18% increase, really, we didn't quote absolute dollars, but as we said on the call, in absolute dollar terms, this is the highest absolute profit per restaurant that we have seen in the franchise. system is remarkable right the sales growth was held back with only two percent growth which is in line with what we have reported previously to then actually expand profits by 18 percent is strong actually canada performed even stronger uh canada's ebitda was kind of a little bit north of 20 growth so that's kind of the other number that i can give you and um on the least adjusted leverage ratio again it's remarkable that we are down half a turn franchisees have, right? They need to invest in technology. We're obviously accelerating and have accelerated our new build capital and we are accelerating our image activation. So with all of that, the lease adjusted leverage ratio goes down is good. By the way, we are calculating this on an eight times rent basis. That was the first question. The second question was commodity and labor inflation. The upshot there is really the driver is really the labor shortage that we have that started relatively quickly then in the second quarter. So that's why we took on more labor inflation in the second quarter, and we expect that to stay elevated to compete effectively in the marketplace. The labor shortage has not really significantly impacted our sales performance. We are seeing, however, a little bit more overtime that we do need to digest in our profitability. That, I think, answers your second question.

And then the last one would have been on pricing.

So where we've gone on company pricing is company has been on par with food away from home inflation. We've had a little more opportunity than our franchisees. We've been a little more conservative over the last few years on pricing, so we had a little bit more opportunity than them. The system was slightly below food away from home inflation. But with the healthy consumer, you know, with the wage and commodity inflation that GP just talked about, we believe we have pricing power to offset a portion of these headwinds. And that's the focus and built into the guidance for the year.

Your next question is from Chris Carroll with RBC Capital Markets.

Hi, good morning. So on the incremental advertising spend of $10 million to support breakfast, can you provide any more detail around that decision? What drove it? Are you seeing anything from your peers to suggest competition in the morning day parts ramping up? Or are you just simply seeing more of an opportunity to drive trial as mobility continues to improve as you had discussed earlier? Thanks. It's really the latter.

I mean, we're really playing our own game. And like we've always said, ingraining the breakfast habit is a several-year journey, a little different as habits are changing in the morning routine. And we really want to be there as morning routines start to get reestablished. as we get into the fall. So we thought it was a wise decision to continue to keep the pressure on, continue to invest in awareness, continue to invest in trial, and really ingrain that habit to make sure that it's the gift that keeps giving so we can continue to drive our sales towards that 10% of sales mix by the end of 2022. So that was really our thinking around that decision, our opportunities to continue to have, you know, fun trial driving events to get our food in our consumers' mouths. And they'll get to see on this weekend, if you want, you can go get a free croissant in any Wendy's restaurant on Saturday and Sunday, a great trial driving event leading into some other support that we'll have around breakfast. So it's coming quickly.

Your next question is from the line of Andrew Charles with Cowan.

Great, thanks. GP, I want to come back on the restaurant-level margins. Guidance for 17% to 18% implies a step down from the 18.7% year-to-date. I think you said guidance for 5% labor inflation and 2% to 3% commodity inflation, which is a bit of a deceleration versus what you saw in 2Q. Can you talk a little bit about what's driving the deceleration in the anticipated restaurant-level margins? You know, you guys are about 95% reopened on dining rooms, I think I saw in the queue, so I don't think that it's incremental dining rooms coming on board. Just any more color to kind of help flesh that out would be helpful. Thanks.

Good morning, Andrew. Yeah, this is a correct observation. Our year-to-date restaurant margin is sitting at 18.7%, so obviously the guidance of 17% to 18% will be accelerating slightly. A couple of things. The comparisons are getting a little bit more difficult, so we're going to get a little bit less. sales leverage on a one-year basis into our restaurant P&L. It's probably the first reason. Second one is we still have sequentially inflation stepping up. On a year-to-date basis, we absorbed commodity inflation of about a percent. On the year, we are getting to 2% to 3%, and it's basically driven by bacon and beef, so that puts pressure on it. The second one is labor inflation, a little bit of an uptick. Year-to-date, about 5% labor inflation. We're expecting on the year about 5% to 6%. Lastly, as we get towards the end of the year, we do expect that check sizes are going to come down a little bit, and obviously it's also going to put a little bit of pressure on it. Again, if you step back from it, 17% to 18% margin is a super strong result for us compared to the 15% we posted last year. Thank you.

Your next question is from Dennis Geiger with UBS.

Great. Thanks for the question. GP or Todd, wondering if you could talk a little bit more about the core lunch and dinner day part how you think about some of the drivers going forward. Maybe if you could touch a bit on menu innovation. I know you've talked about some items, I believe, in test there, thinking about the digital loyalty piece, the contribution from the reopened dining rooms, and if there's anything kind of on throughput and service speed that you're thinking about for the rest of the year and just kind of going forward over the coming quarters. Any other kind of key contributors to continue to drive those day parts would be great. Thank you.

I think first and foremost, it starts with speed. We need to continue to get folks through our drive-thrus even quicker. That's why we're doing all the work on mobile grab-and-go. That's why we're doing the work on getting folks to do more mobile ordering. And that's why we continue to roll out curbside across all of our restaurants. Folks are looking for speed to support their need, and we want to be there to continue to support that. Our opportunity is to continue to make sure our restaurants are fully staffed to truly complement a great experience and that speed along the way. And then as you think about the rest of the calendar, beyond just great operational execution, we do have a lot of nice things planned for the rest of the year. There will be a nice balance between core messaging to continue to drive the equities that we have, and we've seen a lot of success on our premium core. You will see news on the Made to Crate lineup. I'm very pleased that, you know, the Made to Crate lineup continues to trade customers up and an exciting promotion coming fairly soon on that front. And then lastly, you know, we'll continue to stay focused on our food and upgrading the quality of the food across chicken hamburgers and frankfurters. I think all of those things, as our brand continues to be more relevant to the consumer, just creates better experiences, creates more value for the money, and keeps those customers coming back a little more often. Thank you.

The next question is from John Ivanko with J.P. Morgan.

Hi, thank you. I was hoping we could talk about, you know, the average ticket, you know, 21 versus 19. You know, in other words, and what I'm assuming, you know, how much transactions might actually be down. I mean, if you have an intention, you know, of regaining, you know, the total transaction count that you have in 2019, if that's even important to you, you know, certainly you make, you know, more money selling, you know, higher margin products at higher prices to fewer customers. I mean, that's just you know, how the math works. And, you know, if you don't mind, you know, can you talk about that, you know, average ticket, you know, in the context of commodities, not just beef, but also chicken, at least it looks like, you know, right now as those contracts may potentially roll over.

We've been very pleased. If you look at average ticket versus 19, it is up significantly. We haven't given out the specifics on that, but you've got a combination of things happening. You've got average items per transaction up with the consumer bringing things home more often. You've got a nice digital mix happening both with mobile ordering with 15% to 20% higher average checks, delivery with 40% to 50%.