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 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. Kelsey 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, irwendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release. On our conference call today, our President and Chief Executive Officer, Todd Pettigore, will give a business update, and our Chief Financial Officer, Gunter Plush, will share a franchise health update, review our 2022 second quarter results, and provide an update on our outlook for the year. From there, we will open up the line for questions. With that, I will hand things over to Todd.

Thanks, Kelsey, and good morning, everyone. I am incredibly proud of the entire Wendy system for driving a significant sequential acceleration in our results in the second quarter, which highlights the strength of our underlying business and brand, as well as our commitment to the restaurant economic model. Our global same restaurant sales significantly exceeded our expectations, marking a third consecutive quarter of double-digit two-year growth We once again accelerated versus the prior quarter on a one- and two-year basis, which highlights the momentum that continues to build in our business across the globe. This sales growth translated into an almost 300 basis point sequential expansion in our company-operated restaurant margin, even as we faced incredible inflationary pressures during the quarter. On the breakfast front, we are very excited to have officially launched Breakfast in Canada, giving our fans in that market the craveable breakfast they deserve. Meanwhile, our U.S. breakfast business outperformed the competition with another quarter of morning meal traffic share growth in the QSR burger category. Our digital business continued to accelerate delivering global digital sales mix of approximately 10% and growing monthly active users in the U.S. by more than 5%. Our franchisees are operating from a position of strength after achieving record setting profits across the U.S. and Canada in 2021. These results are evidence of our strong system alignment, consistent execution, and unwavering focus on delivering profitable growth across our three strategic pillars. As we look ahead, we remain committed to accelerating our business behind these pillars for years to come. Our global same restaurant sales accelerated on both a one- and two-year basis in the second quarter, with two-year growth of over 21%. We are entering the back half of the year with a ton of momentum following sequential global same restaurant sales acceleration each month of the second quarter. We continue to see widespread growth across our international business, achieving a fifth consecutive quarter of double digit one and two year same restaurant sales growth. This was driven by another outstanding quarter in Canada. due in part to our breakfast launch and outperformance across our Latin America and Caribbean region and our largest markets in Asia Pacific. During the second quarter, we also celebrated the one year anniversary of our first UK restaurant opening. Only one year later, we have over 20 restaurants in the UK, eight of which are company operated. Sales in our company operated UK restaurants held steady quarter over quarter, despite macroeconomic headwinds that continued away on the overall market. Even in the face of these industry wide pressures our development plans are on track and the long term opportunity in the region remains fast. We now have six traditional franchisees approved in the region, who we expect will begin opening restaurants in early 2023. In the U.S., our strong and balanced marketing calendar, alongside the benefit of our strategic price increases, drove our outperformance versus the competition and delivered our 12th consecutive quarter of gaining or maintaining dollar share within the QSR burger category. The relaunch of our fan favorite $5 Biggie bag delivered a compelling value meal that offers a trade-up option from our other value platforms. We also paired the return of our summer salad with a new twist on one of our most iconic products, Strawberry Frosty was an instant runaway success that drove year-over-year customer count growth as we exited the quarter. We believe our U.S. marketing calendar sets us up to continue delivering strong results in the back half of the year with the craveable innovation only Wendy's can deliver, the return of an old favorite, and our ownable and compelling value platforms. We also recently completed a pilot with a third-party pricing specialist and plan to partner with them to support our U.S. system in making strategic pricing decisions backed by rigorous data and analytics. We expect this partnership will drive sales and profit growth while protecting value perception. We believe that our momentum and the strong plans we have in place make us uniquely positioned to compete in this environment and in the QSR category. Now let's turn to our breakfast business. We are thrilled by the customer and franchisee excitement around our breakfast launch in Canada. The day part met our expectations for the quarter despite overall category pressures and increased competition. We are confident that the addition of this day part will drive Canadian franchise profitability to new heights. Turning to the U.S., we are pleased with our breakfast performance in the context of the overall category, which continued to contract in the second quarter. We were able to maintain breakfast sales volumes versus the prior year and grow morning meal traffic share in the QSR burger category. Our performance was driven by another run of our successful Buck Biscuit promotion and awareness messaging throughout the quarter. Our sales volumes continue to reach well above our breakeven mark of just over $2,000 per week, driving profit for the company and our franchisees. We continue to expect year-over-year U.S. breakfast sales growth of approximately 10% in 2022 and to reach average weekly sales of $3,000 by year-end. This growth will be supported by the launch of our new French toast sticks this month, which we expect to drive incremental visits and add-ons. We will also continue to lean into profitable promotions throughout the back half of the year. We know there's a ton of upside ahead of us this year and over the long term as we look to capture our fair share of the massive QSR breakfast business, and we remain committed to our $16 million global investment in breakfast advertising this year. Our global digital sales accelerated versus the first quarter, with global digital sales mix holding strong at approximately 10%. Our international digital sales mix was approximately 15% as we continue to achieve outstanding results across many of our markets, including Canada, which is seeing strong digital usage at breakfast, and our UK restaurants, which reached digital mix of over 70%. In the US, digital made up just over 9% of our overall sales and accelerated approximately 2.5% versus the prior quarter. This growth was driven by an uptick in mobile orders as we grew our total loyalty members and monthly active users by over 5% versus the first quarter, exiting the second quarter at record highs. We expect our focus on refining our one-to-one marketing capabilities, expanding delivery and mobile order access and efficiency, and fine tuning our user experience will continue to grow our digital business across the globe. We continue to make progress against our global unit expansion in the second quarter, now opening 140 new restaurants and reaching a key milestone of 75% global image activation. Clearly our franchisees are all in on investing in the Wendy's brand, and I couldn't be prouder of the team for once again delivering growth in what continues to be a challenging environment. As the second quarter progressed, we re-evaluated our reef development commitment. We now anticipate that reef will open approximately 100 to 150 Wendy's delivery kitchen locations by the end of 2025, with the majority operating internationally in Canada, and the UK, where sales volumes have continued to meet our expectations. This reduction in our anticipated reef development is due to a change in reef's growth strategy, which includes a shift to operating multiple brands from its locations, and some recent challenges with opening Wendy's delivery kitchens in certain locations. In the US, we will continue to test and learn with reef, with a focus on densely populated, high potential markets. We remain committed to expanding access to our great brand and will continue to be a leader in innovative non traditional concepts, alongside many franchisees across the globe. Primarily due to this change, we now anticipate 2022 net unit growth of approximately three to 4% and expect to reach 8000 to 8500 global restaurants by year end 2025. This continues to represent a significant step up versus our historical unit growth performance. And we have made even further progress and solidifying our near and long term growth plans through the end of July, we had over 70% of our 2022 new unit growth open or under construction. We now have well over 200 potential franchise candidates in our pipeline and we expect our own your opportunity campaign to attract additional interest. This recruiting focus is already paying off as we expect an approximately 10% increase in our global franchisee count in 2022. Finally, we recently unveiled a new global restaurant design that we expect to improve operating efficiency and seamlessly integrate digital access while lowering build costs by almost 10% to improve overall returns. This new design is truly cutting edge and will focus on optimized layouts that deliver convenience, speed, and accuracy for our crew and our customers across all order and fulfillment channels. All these growth initiatives, alongside our strong underlying performance, make us confident in our accelerated unit growth in 2022 and beyond. Our playbook of investing to drive accelerated growth behind our three long-term pillars to build our breakfast day part, drive our digital business, and expand our footprint across the globe remains the same. Our continued growth and success would not be possible without the partnership we have with our franchisees, who we believe are the best in the business. The entire Wendy's system is laser-focused on driving the restaurant economic model, which is highlighted by our ability to deliver strong results year after year. I will now hand things over to GP to share our record-setting 2021 franchise financial results.

Thanks, Todd. We recently finished collecting our U.S. and Canadian franchise financials for 2021, and the breakthrough performance we saw as a company was also experienced by our franchise system. Over the last two years, our U.S. and Canadian franchisees have set sales and profit records, achieving remarkable acceleration versus pre-COVID results, even in the face of an extremely volatile environment. In 2021, our franchisees achieved high single-digit one-year sales growth, which leathered up to approximately 10% on a two-year basis. Sales results were positively impacted by strong average check, supported by pricing and elevated mix alongside gains in our digital business and our U.S. breakfast business. This momentum led to outstanding two-year EBITDA dollar growth of approximately 20% in the U.S. and over 30% in Canada. Additionally, our franchise system has very healthy balance sheets as their lease-adjusted leverage ratios remain below 2019 levels. This firm financial foundation gives us confidence in our ability to weather the headwinds facing the industry today. These results support a strong partnership with our franchise system that allows us to focus on great execution aligned together behind our strategic growth initiatives. Now turning to our second quarter financials. Our second quarter results highlight the strength of our financial formula as we achieved significant quarter-over-quarter acceleration in two-year global same-restaurant sales and company-operated restaurant margin. Our global system-wide sales grew 5.6%, supported by strong global same-restaurant sales growth across both our U.S. and international segments and continued net unit growth. Despite a sequential increase in commodity pressure company restaurant margin expanded by almost 300 basis points versus the prior quarter driven by our pricing actions and strong marketing calendar. In the US, this has resulted in quarter two restaurant margin approaching pre-COVID levels in the face of significant macro headwinds. The year-over-year company restaurant margin decrease was driven primarily by commodity and labor inflation of over 19% and almost 12% respectively, customer count declines, and the impact of investments to support our entry into the UK market. These decreases were partially offset by the benefit of a higher average check driven by cumulative pricing of approximately 8%. The decrease in G&A was primarily driven by a lower compensation accrual as a result of our over-delivery versus plan in the prior year. This was partially offset by higher salaries and benefits as a result of investment in resources to support our development and digital organizations, technology costs primarily related to our ERP implementation, and increased travel expenses. Our trusted EBITDA increased to approximately $133 million, primarily driven by higher franchise royalty revenue and lower G&A expense. These increases were partially offset by a decrease in company-operated restaurant margin. The decrease in the trusted earnings per share was driven by higher tax rate and high interest expense as a result of our debt raise transaction in the first quarter of 2022. This was partially offset by an increase in the trusted EBITDA and by fewer shares outstanding from our share repurchase programs. The decrease in free cash flow resulted primarily from an increase in payments for incentive compensation for the 2021 fiscal year paid in 2022, the timing of receipt of franchisee rental payments, cash paid for cloud computing arrangements, primarily related to the company's ERP implementation, and an increase in capital expenditures. Let's turn to our outlook for 2022. We are entering the back half of the year with a great deal of momentum and believe we have the plans in place to achieve our 2022 financial outlook, which remains largely unchanged. We continue to expect strong global system-wide sales growth of 6% to 8%, with approximately two-thirds driven by same-restaurant sales and the remainder driven by our 3% to 4% unit growth. To achieve this growth, we expect a significant step up in one year same restaurant sales in the back half of the year, and our results through July are accelerating as planned. Our adjusted EBITDA outlook of $490 to $505 million remains unchanged. The impact of the reduction of unit growth expectation is entirely offset by the expected increase in same restaurant sales and higher other income as the result of favorable lease updates. We continue to expect company operated restaurant margin of 14.5% to 15.5% for the full year. This is supported by the expected acceleration in same restaurant sales, which is inclusive of an additional pricing action of approximately 2% in the third quarter and easing inflationary pressures which we expect to drive significant margin expansion in the back half of the year. We are increasing our outlook for adjusted EPS to 84 to 88 cents, driven by higher expected interest income earned on our increased cash balance. At the end of the second quarter, we had a cash balance of over $700 million, which provides us with flexibility to manage through headwinds in the broader environment. Finally, we are reaffirming our capex outlook of $90 to $100 million and free cash flow of $215 to $225 million. To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth, and we are continuing to showcase this. Today, we announced a declaration of our third quarter dividend of 12.5 cents per share, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. Lastly, our capital allocation policy gives us the flexibility to utilize excess cash to repurchase shares and reduce debt. We repurchased 2.8 million shares in the second quarter and have approximately $198 million remaining of our $250 million share repurchase authorization that expires in February of 2023. We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated, efficient growth company that is investing in our strategic pillars and driving strong system-wide sales growth on the backdrop of positive sales and expanding our global footprint which is translating into significant free cash flows. With that, I will hand things back over to Kelsey to walk through our upcoming IR calendar.

Thanks, GP. To start things off, we have two NDRs next week. The first will be held virtually on August 16th with Citi, focused on the New York market, and the second will be held in Boston with Credit Suisse on August 17th. We'll be back in New York on September 8th for the Goldman Sachs Conference. After that, we will have a virtual headquarter visit with RBC on September 15th, followed by an investor call on September 22nd with Truist. Our final event of the quarter will be an NDR with Stiefel on September 29th in Toronto. If you are interested in joining us at any of these events, please contact the respective sell-side analysts or equity sales contact at the host firm. Lastly, we plan to report our third quarter earnings and host a conference call that same day on November 9th. As we transition into our Q&A section, please note that we have no further comment on Tryon Partners' amended 13D filing and would refer you to the statement made in our May 24th press release. Please keep any questions focused on our quarterly results. Due to the high number of covering analysts, we will be limiting everyone to one question only. With that, we are ready to take your questions.

Thank you. And as a reminder, if you would like to ask a question today, please press star followed by 1 on your telephone keypad. And our first question today comes from John Glass of Morgan Stanley. John, please go ahead. Your line is open.

Thanks. Good morning to everyone. My question, GP, is just around the comp guidance for the back half of the year. We'd assume that you would essentially double the comp growth rate. Is this, one, can you just talk about kind of where April is to give you that context And can you maybe just sort through kind of the dynamics between the international, which has been very strong, versus the U.S.? How do you sort of see those two interplaying to get to the, you know, the four to six comp, if you will, guiding, four to five comp that you're guiding to implied in the six to eight percent system sales, please?

Good morning, John. You're right. Time is actually unchanged, right? We have always said that... In the second half of the year, we're expecting elevated one-year SOS number. We basically have reconfirmed this in our prepared remarks. Why are we confident about this? We were confident about it, first of all, because we have seen that track record now in July. We're expecting a step up in the one-year SOS number for a year to go. We have seen it in July. We have, as you have heard also in the prepared remarks, We have new innovation out on breakfast. We have a strong marketing program in place for the U.S. So the combination of these two and obviously the pricing actions that we have taken and the additional pricing action we are going to take in the third quarter are all reasons why the one-year SOS number is stepping up.

Thank you. And our next question comes from Lauren Silverman of Credit Suisse. Lauren, please go ahead. Your line is open.

Thanks so much. I wanted to ask about breakfast, what you're seeing with the breakfast day part across the industry. And as you build to 3,000 in average weekly sales by the end of the year, what are the most meaningful initiatives to drive that growth this year? And does the current environment change how you're thinking about making investments in the day part in 23? Thank you.

Yeah, Lauren, as you look at the breakfast day part, we do see that the category in traditional QSR burger has softened a little bit, but we're very pleased with our performance within the category. We continue to gain share, which is important to create loyalists to continue to drive our business into the future. And we did see in our business a nice step up. So in the first quarter, You know, we are running about a little over $2,500 per week per restaurant. In the second quarter, that jumped up to north of $2,700. So the trend is our friend despite some of the category dynamics. You're seeing a few more folks either work from home or have the food at the house and then grab the drink on the way to the restaurant or on the way to the office. All that said, you know, we're seeing some nice acceleration in our business. We continue to grab share. And that's part of making sure we got loyalists that will drive frequency into the future. As far as our investment posture, as we said, the prepared mark still committed to the $16 million to spend across U.S. and Canada in 2022. We'll continue to support the Canadian breakfast launch in 2023, but we don't think we need additional support as we talked about in the past on the U.S. business into 2023.

Thank you. And our next question goes to Dennis Giger of UBS. Dennis, please go ahead. Your line is open.

Great. Thank you very much. Wondering if you could talk a little bit about GP or Todd, the BACF comp acceleration. And I guess maybe just starting from kind of what you're seeing in recent months, you know, in this past quarter and then into July. I know you talked about the acceleration through the quarter on a global basis. Presumably that was in the U.S. as well. But just curious as it relates to the low-income consumer, or any kind of macro headwinds that might be impacting the business. And then just, again, the offsets to that. I know you talked about kind of compelling value coming in the back half, but just kind of maybe matching up some of the macro headwinds, if you're seeing any. And then, again, kind of the offsets, the levers there, and thinking about your value platform and how you remain resilient. Thank you.

Yeah, a few thoughts, and a little of this would be redundant, some of the thoughts that GP had. But, you know, as you think about This quarter, this was our third consecutive quarter of accelerating two-year same-restaurant sales growth. And what we're really pleased is we've now grew or held QSR burger category dollar share for 12 consecutive quarters. So we've got a lot of momentum overall in our business. And importantly, we held overall total QSR dollar share within the second quarter. What really given us the confidence has been the sequential global same-restaurant sales acceleration that we saw each month in Q2. And as GP just pointed out, we exited June really strong, had a lot of momentum with $5 Biggie Bag, had a lot of momentum with the launch of the Summer of Strawberry with the Strawberry Frosty and the Summer Strawberry Salad. And that momentum continued into July to start the third quarter. So we're starting from a position of strength. We continue to see strong check growth. It has been offset a little bit by a decline in customer counts in Q2. And we have seen a little bit of a decrease in mix driven by a reduction in items per transaction. That's really due to a decrease in party size and fewer attachments along the way. But when you look at our year-to-go calendar, you know, we said this on the prepared remarks, we've got some really good innovation. We've got a return of an old favorite. We've got French toast sticks in the breakfast day part. We've got more to come later in the year. Our dining rooms continue to... to have more customers come in to sit in them, which is always good for check. We're now at about a 21% dining room mix. And we do expect a double-digit two-year same-restaurant sales comp each quarter this year. In the spirit of the state of the consumer, value will continue to be important, but we're really well positioned with a robust and ownable value menu. The work that we've done on $5 Biggie Big, the trade-up that we're seeing from 4 for 4, we're not seeing trade down on our menu per se. So we're really seeing our premium and value hang in there quite nicely. And importantly, we held our traffic share with the under 75,000 consumer in the second quarter. So our high, low, strategy, compelling value, news on the high end has really allowed us to bring that consumer in and stay with us. The piece that we're all watching is we've seen some declines in frequency in the category, but beyond that, we're really confident that we've got a lot of loyalty to our brand, and when the consumer gets healthier, we'll drive the business hard going forward.

That was a long answer. The only thing I want to reiterate again is pricing. Pricing is another tailwind in the second quarter, as we said. We will price around 2% again in the third quarter. So all of that, the cumulative pricing actions we have taken, is another reason why SRS in the second half is going to step up. The flow-through on pricing is good. We're seeing around 80% flow-through, so we're losing a little bit of traffic on the pricing action. But net, obviously, a really positive lift to our SOS numbers.

Thank you. And the next question goes to Brian Bittner of Oppenheimer & Co. Brian, please go ahead. Your line is open.

Thanks. Good morning. I just want to switch gears to the unit growth. You clearly talked about lowering your expectations for Reef, which is impacting your original unit targets in the 10Q. It states that your new goal for system-wide restaurants is 8,000 to 8,500 by 2025, so 500 lower than previously, which makes a lot of sense. But could some of this reduction as we move forward potentially be offset by stronger international growth than maybe you originally were embedding? Because we're seeing just such strong comps internationally. You're clearly bullish internationally. on the UK based on your comments on this call. I'm just curious if you can maybe talk about where the international growth could go as we look towards 2025 and maybe if it represents potential upside.

Fair comment. The real call down that we had in our long-term development outlook was the change in direction at Reef. You know, it was a big change, and Reef really wanted to shift operating multiple brands from its locations, and they've had some recent challenges with opening some delivery kitchens in certain locations with what it takes to work through the permitting in those markets. So we thought it prudent to call down that number. We did not want multiple brands out of our kitchens. We want it dedicated to Wendy's, so it will be slow and steady, and we still think there's a – a great urban opportunity to continue to provide access to our brand with some kind of concept in those markets. So that's what the call down was with the news that we had today around Reef. But on the international front, we do have a ton of momentum. You look at our widespread growth across the globe. You look at the momentum that we have bringing on franchisees to build alongside of us in the UK, the opportunity to then move over into Ireland. We're looking at Spain as our next market to get into. We've got momentum in markets like Mexico. We've got momentum in markets like the Philippines. We do think that there's a lot of growth opportunities across the board there and delivery kitchens in India. So that could be an offset over time. It's just going to take some time to work that plan to have the confidence that we can put that commitment out there.

Thanks.

Thank you. And the next question goes to Jeffrey Bernstein of Barclays. Jeffrey, please go ahead. Your line is open.

Great. Thank you very much. I just wanted to ask about the inflation and response, I guess, pricing outlook. From an inflation standpoint, I think you said commodities in the second quarter were up 19% and labor up 12%. So I'm just wondering your thoughts. We've heard from others that maybe commodity inflation is peaking on a one- and two-year basis and that labor challenges are easing. So just trying to get your perspective on those into the back half and whether you think the – the incremental pricing is enough to fully offset that. It seems like you were running 8%. In the second quarter, you're taking another 2%. I'm not sure if it's as easy as that's running 10% or what you're lapping, but any color you can provide on the pricing and whether there's any concern of pricing out that lower-income consumer in that effort to offset that inflation. Thank you.

Good morning, Jeff.

Yeah, so you are right. Commodity inflation in the second quarter was about 19%. and our labor inflation was about 12%. We're definitely expecting that numbers are peaking. So on a year-to-date basis, our commodity inflation is about, again, 19%, and our labor inflation is also above double digits. Our guidance for the year on commodities is about a 15% commodity inflation. So basically, if you do the math on it, you're going to find that our commodity is going to step down. So we are basically anticipating that that's going to happen. Why are we confident with this? We have about 90% of our commodities now locked down. Could there be a little bit of volatility? Yes, but again, 90% confirmed. That's why we think The additional 2% pricing action we are taking in the third quarter will be sufficient and appropriate to make sure we are reaching our margin guidance for the year.

Thank you. And the next question goes to Jared Garber of Goldman Sachs. Jared, please go ahead. Your line is open.

Great. Thank you for that question. I actually just want to follow up on Jeff's question. So if we think about the incremental 2% flowing through in the back half of the year, does that get you to 10%? pricing or is there a dynamic or something's rolling off that we should be thinking about? And then following that, just kind of want to understand how you thought through the pricing cadence here with all the pressure on the consumer and some other of your peers calling out some lower income consumer pressure in their results and admittedly continued inflation on the consumer wallet with declining traffic seeming in the Wendy's business. I just want to understand the dynamics underlying the pricing actions.

Good morning, Jared. Oh, this was a lot of questions in one question. Hopefully I've answered them all. So from a mechanical point of view, the pricing with roll-offs that are happening is slightly below 10%. So that's the answer on that one. You cannot just add 2% to the 80%. It's slightly below that. Again, we constantly are watching our pricing action. We are not seeing any pushback from consumers. So it's evident at the highest levels on the progress we are making in the marketplace of holding or gaining market share. You have seen also that with Todd's remarks is we held traffic share for the income consumer that's earning less than $75,000. So these are all positive indicators. commodity inflation versus the previous guidance went ever so slightly up. So in order to be really on the safe side to make sure our restaurant economic model stays intact, we decided to move up one additional price increase here in the third quarter to again make sure restaurant economic model is protected. And as I said, we are not seeing evidence of a pushback from consumers on our price increases.

Hey, Jared, one other comment I think that gives us confidence is we talked about the sequential sales momentum in the second quarter into the third quarter. We're also seeing the traffic momentum behind that. So when you think about the construct of our calendar with four for four and a $5 Biggie bag and some news on the top end, some great news around things like strawberry, frosty, and French fries as attachments, those give us confidence that we have a menu construct that can connect to that consumer. And we can continue to build on that momentum. And we also are seeing an improving labor market. So, you know, we do continue to see staffing improve. We see 90-day turnover levels improving. We see turnover rates coming down. All of those things will allow us to drive more throughput as we're focused on speeding our restaurants to make sure that we can serve more customers in this environment to continue to drive more traffic from an operational expectation experience. with better service times at the restaurant.

Thank you. And our next question goes to Andrew Charles of Cohen. Andrew, please go ahead. Your line is open.

Great. Thanks. Todd, what is needed to execute on targets for 10% breakfast growth and get to that $3,000 in AWS by year end? And really critically drive the habit that, you know, that is needed here and in what you're calling to be a challenge day part. And, you know, GP, just a quick follow-up. I know you guys called out AWS increased from $2,500 in one queue to around $2,700 in two queue. But isn't that part of that just seasonality? My math suggests that both imply about 7% of sales in book quarters so far this year.

Yeah, so on the breakfast side, we've already got some of that nice momentum. So you think about the step up from the first quarter of a little over $2,500 per week to a little over north of $2,700. We're well on our way already towards that $3,000 by year end, clearly bringing news to the category. You know, you think about French Toast Sticks launch having a sweet, savory offering. I think that's going to be a great add-on. We also think that actually brings in more all family and kids. which we haven't had to date, so that news helps us continue to bring folks in. And then our operational focus on speed. How do we continue to drive speed, get you through fast in the morning on that breakfast day part? How do we get folks into digital so you can actually enhance your speed with digital? How do you actually take advantage of trial through some of the offers that we have in mobile? All of those things give us a lot of confidence that we can continue to build the momentum in the breakfast day part, break through the clutter. We've got our system all in. We still only have five restaurants that have actually opted out based on their trade area, and that's only on a temporary basis. So the system's all in, well above that break-even mark of $2,000 per week. So we'll continue to lean in. We've got the investment that we have on that $11 million incremental that we'll continue to support on top of the contributions from the system. So we feel good that all the tools are there to continue to break through in a more challenged environment at the moment, but a category that will have a lot of upside over the long term.

Thank you. And the next question goes to Chris Okal of Stiefel. Chris, please go ahead. Your line is open.

Thanks. Good morning, guys. Todd, you mentioned breakfast sales in the industry have contracted and you're taking share, but the industry leader indicated sales had increased in that day part. So where do you believe you're taking share? And I missed some of the initiatives planned for the second half of the year, but is price point value expected to play a greater role in growing the breakfast day part?

Chris, a couple of things.

Yeah, price point value will play a role. I think we've got some good promoted activity that we'll have on the breakfast day part that not only drives trial, but also drives some nice check and profit. So you will see that sprinkled in in the back half on top of all the other news that I just talked about. You know, if you look at the category, you're seeing more folks consume their food at home and grab the drink on the way. So you're seeing You know, folks grab the C-Store beverage. You're seeing folks go to the traditional coffee houses. A lot of the function of the share growth is, you know, when you look at some of the year-on-year comparisons. And there's still a little bit of noise out there in the comparisons. So you have seen the overall QSR burger category at breakfast soften. We actually held our growth year-on-year. Others may have started from a little lower base the year before and grown based on their comments, but we feel good with the momentum that we have relative to the industry context that we're competing in at the moment.

Thank you. And the next question goes to Eric Gonzalez of KeyBank. Eric, please go ahead. Your line is open.

Hey, thanks for the question. Just regarding the month-to-month comp trends, it seemed like the industry maybe didn't see the same directional progress that you saw in the second quarter. So could you just confirm if the industry did go through the quarter, implying that it showed gains accelerated? And on that point, did you see any impact from abnormal seasonality? Some of your peers cited heightened summer travel as a headwind that might roll off in the fall. So I'm just wondering if you experienced any of that. Thanks.

I think the question just is around where's the industry. If you think about QSR Burger, we continue to see really nice sales growth, but traffic has been down year over year within the QSR total industry and within QSR Burger. But the trends have been improving as of recent across the category on traffic. You know, if you get into some of the seasonality, some of those could play into our favor. You get into back to routine with back to school and folks are out and about, that should certainly help on our breakfast business. A lot more folks out traveling, so I think there would be more benefit to some of the seasonality as folks get back into routines later in the year that could potentially help support our accelerated same restaurant sales growth rates on a one-year basis.

Thank you. And our next question goes to Peter Seller of BTIG. Peter, please go ahead. Your line is open.

Great. Thank you. I want to come back to the conversation on the unit growth and reef partnership. Can you just talk about the performance of the reef units that you currently have? And given their strategic shift over at reef, are you still committed to just using reef or are you looking at other partners to help expand your unit growth? I mean, is it possible that you come back to us in a couple quarters with another partner that re-accelerates this development strategy?

Peter, great question. So from a performance point of view, a couple of data points in the UK and in Canada, the AUVs are tracking between half a million and a million, so very consistent with the performance ranges that we have. previously communicated. In the U.S., we are not yet performing. We are around half a million dollars and less. This is one of the reasons why there is this shift on strategy to go multi-brand in a vessel which we are simply not comfortable with. And so as a result of that, we are working with Reef to make this work. As Todd said, we are trying to reposition these vessels into better trade areas where on a single brand on a vessel, we can achieve similar AUV trends as we are seeing in the UK and in Canada. So that's kind of the perspective that I have on Reef.

Yeah, I think that the opportunity still is large in urban locations. So whether that's cracking the code with Reef, finding another partner, thinking about other ways to traditionally grow into some of those markets, That will continue to be our focus moving forward. But as GP said, with those relocations, as you think about our closure outlook for the year, it'll be a little more elevated. We're probably in that 140 restaurant closure area this year. 35 to 40 of those will be reefs. Lots of those are relocations during the course of the year. So a closure and a new opening to get to about 75 reefs by the end of the year. And as I said a little bit earlier, we've got a few closures that had happened in earlier this year than in Mexico and in Indonesia post-COVID that have us a little more elevated than in the past. But we still have a really healthy, you know, less than 100 kind of run rate on closures. And, you know, about 20 to 25% of that is always relocations, excluding the reef comments. So we feel good that we got a healthy mix of opening and closures for the long run.

Yeah, a small correction on Todd's comment. At the end of the second quarter, we had about 70 reef units. We expect by the end of the year, about 65 reef units. So we have actually, in the second half, more closures than openings. That's probably, yeah, just wanted to clarify that.

Thank you. And the next question comes from Brian Mullen of Deutsche Bank. Brian, please go ahead. Your line is open.

Thank you. Just a question on development. I was hoping you could share your current thinking on a potential expansion into other markets in Western Europe? Would you need to build restaurants on balance sheet in new countries? And are you would you be willing to do that in the right in the right cases? Or do you think you can get this done entirely with franchisees? What would your degree of confidence be there? Just any thoughts on what this could look like over the next couple of years?

Yeah, we've got a lot of confidence. We don't think we have to do it on our balance sheet. Our balance sheet is really focused on leading the way in the UK as we've talked about previously. We've already got a couple of franchisees approved that will be opening restaurants early next year alongside us in the UK. And then we've got another handful beyond that that have been approved that will start opening restaurants in the UK a little bit further down the road. We've got a lot of interest to then move over into Ireland, really leveraging the expertise operationally that we have with company restaurants in the UK, the supply chain that we're putting in place. And we've got a lot of interest in moving into the continent, as you mentioned, and our first opportunity there will be Spain, and we're working with candidates at the moment.

Yeah, and as we are having these contacts in Ireland and in Spain, for us to have the opportunity to host them in England with our company operations there, that's actually sufficient. So they have the Kentucky restaurant. It's an hour flight. And so with all of that dynamics we have, we don't see at all that we need to deploy our balance sheet to build company restaurants outside of the UK.

Thank you. And the next question goes to Andrew Strelzyk of BMO Capital Markets. Andrew, please go ahead. Your line is open.

Great. Thanks for taking the question. I'd love to hear a little bit more about the new prototype that you mentioned, the new store prototype, and how that plays into that lowered kind of 2025 unit count target. Is there anything that you could share on the cost of return profile and franchisee feedback as well would be great. Thank you.

Good morning, Andrew. Franchisees are super excited about this. We have a prototype on this down the road. I personally actually worked it. It is a very different design. What it does is it actually now has finally been embracing digital in our design. It has a dedicated delivery pickup window. The kitchen is reconfigured, so literally you have to do way less steps to get all your tasks done. So it drives also operating efficiencies. And we are also embracing whole mobile orders with all shelving and dedicated shelving units and dedicated parking so that the friction for the consumer is much more reduced and the friction for the cruise is much more reduced. And with the design, which is, as far as I can tell, state-of-the-art here, we were able then to reduce our investment cost by 10%. And as a result of it, obviously, the returns have improved as well.

Lots of input from franchisees across the globe to get to that design, so a lot of buy-in and ownership already. We do think it will be a super efficient, cost-effective restaurant. We'll have our first restaurant open early next year in the Columbus market, so we'll be able to showcase that.

Thank you. The next question goes to John Ivanko of J.P. Morgan. John, please go ahead. Your line is open.

Hi, thank you. Your balance sheet really sticks out for $700 million of cash relative to $2.8 billion of long-term debt, of which I don't think you have a principal due for some number of years. $52 million of stock bought back in the second quarter, none in the third. What kind of signaling are you doing with that cash? There's conservatism and then there's $700 million of cash. If you could just you know, walk us through, I guess, how you're thinking about, you know, capital priorities and maybe, you know, how you can make that balance sheet, you know, work a little bit harder for you in some way, you know, if that's something that you're considering over the next six to 18 months.

Yeah, Tom, great question. You're right. We are sitting on elevated cash balances. We have declared our dividends. That is very competitive. It's in line with our capital allocation policy. On share repurchases, as you rightfully pointed out, we have not been in the market and we are not announcing any specific share repurchase plans for the time being. It's the only comment I want to make at that point in time.

Thank you. And the next question goes to John Power of Citi. John, please go ahead. Your line is open.

Great. Thanks for taking the question. Quick clarification on a question. The clarification on the break-evens on breakfast, the $2,000 a week in average weekly sales, is that for a fully open dining room or just the drive-thru? That's the clarification on the question. It seems like the innovation on the core, like the strawberry frosty, is really resonating quite well with customers. And I'm just curious how you're thinking about new products or perhaps back-off product news balancing new product news versus say, innovation around the core. I know for example, there's been some press recently related to the pretzel bun making its way back onto the menu. How do you balance the new product, like truly new products versus innovation on the core?

The clarification question, so the break-even on breakfast of $2000 is across all breakfasts. So remember, our model is to open the restaurant at 6.30, dining rooms closed until 9, then we open up the dining room for the rest of the day. We've got some franchisees based on trade area that might open a little bit earlier. But on average for that whole breakfast construct, it is $2,000 as the break-even point. When you think about the menu, there's nothing better than refreshing and innovating and bringing news to the iconic brands that we have. When you think about something like a strawberry frosty really paired with a summer strawberry salad, You know, not only do we get to have food news, but we actually get to build on the equity that we have talking about Frosty and people know Wendy's for Frosty. So we will continue to make sure that we got a good balance between, you know, renovating, doing some great things on the core, bringing some new news, bringing back some fan favorites that we talked about, and pace and sequence those so it works operationally. And remember, we have the made-to-crave lineup that allows us to bring things in and have them work hard on the menu until the consumer gets tired before we bring something else out. So I think we've got a good cadence and a good balance.

Thank you. And the next question goes to Gregory Frankfurt of Guggenheim Securities. Gregory, please go ahead. Your line is open.

Hey, thanks for the question, Todd. My question, you talked about it a little bit earlier with just the category as a whole, but I mean, traffic's been negative for kind of most of quick service burger and actually most of QSR the last couple quarters. And I'm curious where you think that share is going. What dynamic do you think is playing out between QSR? And is it going to food at home or, you know, casual binding? I'm just curious your thoughts on that. Thanks.

It's pretty simple. It's clearly food at home. I mean, if you think about pre pandemic, about 82% of all meals were consumed at home during the pandemic. It jumped up to about 85 and it's been fairly sticky at about that 85 and I think it's sticky because the consumer has been a little more strapped, so there's a few more meals prepared at home. Whether it's bringing your lunch to the office or having breakfast at home, my sense is overtime that will shift back as some of the near term pressures ease on the consumer. You know, their overall wage rates have increased, but inflation has been high, so net disposable income has been a little bit pinched in some of the cohorts across the income ranges. But over time, that will shift, and that consumer that will have more disposable income will be right in the wheelhouse of continuing to drive QSR and driving Wendy's business, which will drive traffic into the future.

Thank you. And the next question goes to Nicole Miller of Piper Sandler. Nicole, please go ahead. Your line is open.

Thank you. Good morning. I want to come back to Canada. Just in this reporting period alone, I think you might be the fourth concept to mention strength there. Is that just an ongoing recovery because the market otherwise lagged? Or structurally have some challengers fallen out? And is there an ability to recalibrate your growth opportunities in Canada in terms of both comp and units? And I think, you know, the last number I found was like plus or minus 400 stores in Canada. If you could validate that. Thank you.

Yeah, just over 400 restaurants in, in Canada. And we've had a lot of momentum in Canada going back probably four years now, our, our average AUVs, um, Canadian dollars are now at two and a half million dollars, uh, Canadian, uh, clearly breakfast, um, on plan with expectations in Canada and performing quite nicely, which has put another layer of growth on, uh, on top of our business. But we've gained a lot of share over the last four years in the market and are now the number three concept in the QSR burger category in Canada. So there is overall strength in the category, but we're outperforming the category significantly, and that's creating a lot of momentum for us to not only have existing franchisees continue to build, but to recruit a lot of new franchisees to build where we have a lot of open space across the market. So feeling good about the future of that business.

And Nicole, right, you've also heard this now from me on the franchise financial. It translated, right? Since COVID, the last 10 years, you know, the Canadian sales are kind of up 10%, and then profits really outsized growth, 30% growth that creates excitement within the Canadian franchise base. And there's obviously a decent amount of interest to push development relatively hard. In Canada, new franchise candidates, and there's a lot of open and wide space in Canada that we can take over as the Wendy's brand.

Thank you. And the next question goes to Rick Smith of Smith Capital. Rick, please go ahead. Your line is open.

Hey, good morning. I guess this is a bit of a clarification question, but we're halfway through the quarter. Why no share repurchases yet? Thanks.

Good morning, Rick. Yeah, we are not doing any share purchases. We are not announced anything. It has to do with the triumph process that we are going through.

Thank you. And our next question comes from James Sanderson of North Coast Research. James, please go ahead. Your line is open.

Hey, thanks for the question. Just wanted to go back to the UK, get a little bit more detail on trend there. I think the Revenue reported in 10Q relative to the number of stores in operation was down sequentially, but I think you mentioned steady. So I wanted to understand the FX dynamics. And if you could maybe comment on traffic trend, if the consumer is increasing frequency now that you've had a year in the market, how we should look at that.

Yeah, we're definitely happy with the UK business, right? We have about 22 restaurants at the moment sitting there, eight companies. and the rest is franchised units. The comment that we made on the call that is steady progress versus the first quarter was FX adjusted. So if you would do that, you would see that comparison. And I have to say, the UK consumer is clearly under a decent amount of pressure. There is very, very high inflation, and that is definitely having an impact on the footfall that is happening in the UK. Having said all of that, We remain very bullish on the UK market. We expect to have about 35 restaurants by the end of the year, 10 on the company side, so that development schedule is in place, and the remaining are going to be refueled.

I agree with all of GP's comments. The other one I just put out there is, you know, we're continuing to be in startup mode in that market and opening new restaurants and having pre-opening costs and You know, you think about our overall margin construct, there was about a 50 point headwind on the UK as we ramp up into that market. So in the US, our margins were running at that 15 mark. But we're absolutely confident that the AUVs overall that we're seeing in both the reef units and in the traditional units are in a good spot for the economic environment that we compete in with a lot of optimism and a lot of opportunity to grow into the future.

Thank you. And our final question today comes from Jake Bartlett of Truist Securities. Jake, please go ahead. Your line is open.

Great. Thanks for taking the question. You know, mine is about the U.S. business and the momentum there. And this is looking back a little bit. But, you know, when I look at the three-year top in the U.S., my math is 13.5 down from 14.7 in the first quarter. So a deceleration there. um, you know, your two largest competitors accelerated on a three-year comp. Wendy's also has, has breakfast in that kind of two Q three-year comp as well. So if you could just maybe provide some context of why, you know, you decelerate, if you look back that far, um, any, any kind of, um, you know, any, anything particular to the Wendy's brand that we should think about that maybe, you know, is not continuing going forward in any driver to why that would have, decelerated when we've seen general acceleration from competitors.

Yeah, Jake, I need to look a little bit at the U.S. on a three-year comp basis. We didn't look at it on a global basis. The three years are accelerating. U.S., I think what's tripping us up is definitely the 53rd week shifting. You might remember this. That is creating a shift between the first quarter and the second quarter. If you actually adjust for that, you're actually going to find out that on a three-year comp basis, most of the U.S. has accelerated. I'm sure when we have the callback a little bit later, we'll compare notes on those numbers.

Thanks, Jake. That was the last question of the call. Thanks to Todd and GP, and thank you, everyone, for participating this morning. We look forward to speaking with you again on our third quarter call in November. Have a great day. You may now disconnect.

Thank you. This concludes today's call. Thank you all for joining. You may now disconnect your lines.