Wendy's Company (The)

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 you may begin your conference good morning and thank you for joining our fiscal 2025 second quarter earnings conference call after this brief introduction ken cook interim chief executive officer will provide a business update and then susie turk chief accounting officer and global head of fpna We'll review our second quarter results, share capital allocation priorities, and our updated 2025 outlook. From there, we will open up the line for questions. Today's conference call and webcast includes a presentation, which is available on our investor relations website, ir.wendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of today's earnings release. This disclosure reminds investors that certain information we discussed today is forward-looking and reflects our current expectations about future plans and performance. 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 today's earnings release. If you have questions following today's conference call, please contact me. I will now hand the call over to Ken.

Good morning. We appreciate you joining us today for our second quarter 2025 earnings call. Before we dive in, I want to say how honored I am to lead this great company. Wendy's has a powerful brand, a strong foundation, and significant opportunity ahead. I want to start by thanking our franchisees and employees for their commitment to our customers and the progress we have made on our strategic initiatives. Our US top line results and rest of your outlook are below the expectations we set at the beginning of the year, as the consumer and competitive environment looks much different today than we anticipated. While our long term strategy remains unchanged, we are increasing our focus to improve both execution and performance. I'll walk through the lessons we have learned and the actions we're taking as a result shortly. But first, I want to share why I'm so excited about the future and the opportunities we have to create value for our franchisees, employees, and shareholders. Wendy's is an iconic brand loved by generations around the world, built on having the highest quality food in QSR, made from the best ingredients like fresh, never frozen beef, and has a track record of successful innovation for more than 55 years. We have over 7,300 restaurants across 35 countries and territories with significant white space opportunities to expand our global footprint. Our franchisees and employees are deeply committed and passionate about the long-term success of the business. And we have a solid financial foundation with over $315 million of cash on our balance sheet, over half a billion dollars in annual adjusted EBITDA, and significant free cash flow generation to continue investing in long-term growth and returning cash to our shareholders. When I took on this role in July, the first thing I did was speak with our franchisees, reinforcing that our primary focus is enabling their success while accelerating long-term growth for the system. I firmly believe in the importance of a strong partnership between the company and our franchisees, part of a concept you will hear me refer to as One Wendy's. The next thing I did was spend time in our restaurants, and I saw firsthand the passion and enthusiasm our teams have for the brand and the quality of our food. These visits have provided me with valuable insights on areas for improvement that we will put into action. With that context in mind, I'd like to take a few minutes to share what's working, what's not, and where we are taking immediate action to improve the business and strengthen our foundation. Let's start with what's going well. First is net unit growth. We have opened 118 new restaurants in the first half of the year, and we remain on track to deliver between 2% to 3% net new unit growth for the full year. Next, our international business continued its strong growth trajectory. In the second quarter, the international segment delivered system-wide sales growth of 8.7% and grew adjusted EBITDA by 23.9%. while continuing to make investments that enhance our global capabilities. Third, we are seeing early progress that our investment in operational excellence is paying off. In the US, we have improved both our traditional and our digital customer satisfaction scores. We know there is a high correlation between customer satisfaction and sales growth and are confident that the continued improvements here will result in increased frequency by our customers. Turning to our US business, we are not happy with our sales performance. Our recent results are driven by a combination of dynamic consumer behavior and a more challenging competitive environment. This highlights the need to sharpen our focus and execution. Let me share the three key actions we are taking to drive improvement. The first is knowing our customers better and reaching them more effectively. You will see Wendy's be more agile in addressing changing consumer taste and the competitive environment. We are leveraging new data analytics capabilities to enhance our understanding of how consumers are behaving both inside the windy system and at our competition all in close to real time. While we have historically done this through leveraging our loyalty program and third party data, we now have the capability to analyze the large majority of our transactions. This provides us with better and more comprehensive insights and enables us to tailor both our marketing and menu innovations directly to customer preferences. We've also initiated a review of our media effectiveness to ensure our advertising dollars are working as hard as possible in the areas that will have the greatest impact for our brand. We must be more precise and efficient in how we support key product activations and will continue to evaluate and maximize our capabilities in this area. The second is reducing programming complexity and increasing focus. This summer, we learned that when we have too many priorities, we have none. Our 100 days of summer programming included promotions on beverages, breakfast, meal deals, digital exclusives, our Takis collaboration, and more. This looks great on paper as it had something for everyone, however, the volume of initiatives made it challenging for our restaurant teams to execute effectively and sent too many different messages to our customers based on this experience we have simplified our calendar for the back half of the year. Lastly, and most importantly, is strengthening the partnership with our franchisees our franchisees play a critical role in our success. We recently brought us franchisees together to align on upcoming menu innovations and they left excited about the new products and our strategy to drive growth. In recent weeks they provided feedback on the volume of change in the second half of the year, which helped shape our decision to retime some of our plan programming and innovation, so we can execute them with excellence and continue elevating the customer experience across our system. By continuing to strengthen our franchise relationships, we will drive improved results and ultimately reach our full potential together as one Wendy's. Additionally, we are thrilled to have Pete Serkin leading our U.S. business. Pete has earned the trust of franchisees over his five years leading our purchasing co-op. He has a bias for action and is already working to better integrate franchisee perspectives into our plans. Now, turning to our second quarter results. global system-wide sales declined 1.8%, driven by a decrease in U.S. same restaurant sales. In the U.S., April results were soft. And while we did see improvement in the last two months of the quarter, driven by the launch of new additions to our Frosty platform, overall demand recovered more slowly than we expected. Moving to our international business, we continued to see strong performance with system-wide sales growth of 8.7%, including growth across all regions. For the total company, we delivered adjusted EBITDA of $146.6 million and earnings per share of 29 cents. Both were above the second quarter last year as we increased productivity in our restaurants and continued to manage costs prudently. We also returned over $88 million to shareholders through dividends and share repurchases in the second quarter for a total of over $262 million returned to shareholders through the first half of the year. Now, let me provide an update on our three strategic priorities that will fuel long-term profitable growth. Starting with fresh famous food. Following the success of our Girl Scouts Thin Mints Frosty collaboration in the first quarter, we launched Frosty Swirls and Frosty Fusions in mid-May. These new launches performed well, with Frosty sales up over 30% year over year in the second quarter. Looking ahead, based on the lessons from the first half of the year and feedback from our franchisees, we have simplified our programming calendar in the second half of the year to ensure that we can execute with excellence, and effectively reach our customers. During the second half of the year, we're focused on two things, chicken innovation and the launch of our new beverage lineup. Starting with chicken, we launched a collaboration with Netflix for Wednesday, one of the streamer's most popular series. This coincided with the much anticipated season two premiere this week. We are featuring A Meal of Misfortune, including chicken nuggets, a new lineup of four mystery sauces, hot and crispy fries, and a Raven's Blood dark cherry frosty swirl, all with Wednesday-themed packaging. In the fourth quarter, we'll be extending our chicken lineup by launching new chicken tenders. Our chicken tenders are crafted using the highest quality ingredients, including 100% white meat coated in light, crispy, and flavorful breading. Through testing, it was clear that consumers could taste the difference. I believe we are delivering exactly what customers want, a craveable, juicy, and all-around delicious product in a fast-growing part of the protein market. We're also rolling out a modernized and improved sauce lineup with the launch of our chicken tenders with six new varieties of sauces, including my personal favorite, sweet chili, and a new Wendy's signature sauce with a tangy kick. I think our tenders and sauces are fantastic and I'm confident our customers will love them too. Now turning to beverages. Beverage innovation will be a key enabler of growth across multiple day parts, especially breakfast and snacking occasions. Customers are deeply habitual in the morning and behaviors often center around beverages. We're thrilled with our new beverage innovation. Our new lineup that launched this week includes a cold brew formulation and indulgent offerings with cold foam, each crafted to elevate our breakfast and beverage experience. Over the past several years, coffee preferences have shifted towards cold brew as approximately 40% of QSR coffee servings are now cold. This new cold brew lineup allows us to better serve our existing customers and attract new ones. And we aren't stopping there. For our customers who like their coffee hot, in September, we're transitioning to a new hot coffee blend crafted for a lighter roast and made from 100% Arabica beans. This week, we also extended our caffeinated offerings to include refreshing, sparkling energy drinks, the fastest growing beverage category in QSR, with servings growing approximately 50% over the past year. Our delicious new cherry limeade, and pineapple citrus energy drinks are enabled by the customization available through our Coca-Cola freestyle machines. We have the highest quality food in QSR, and we now have a beverage lineup that is just as compelling. Moving on to our next strategic pillar, we are focused on delivering an exceptional customer experience, which is a critical step to increasing customer frequency. We recently completed the staffing of our expanded U.S. field teams and are making progress on restaurant assessments and training. These investments are already showing positive results. Our teams are gaining valuable insights to drive greater accuracy, productivity, and hospitality. In addition to the in-restaurant experience, we are also improving the digital customer experience. Our US loyalty sales grew 25% in the second quarter, driven by strong digital conversion that reached another all-time high. This drove global digital mix to 20.5% of total sales. Additionally, our Fresh AI platform is getting smarter and continues improving the drive-through experience. With unique menu recommendations for each order, taking into account factors such as seasonality and popular items in the area, Fresh AI is driving stronger sales. We are pleased with how Fresh AI is enhancing the customer experience and is one of the reasons same restaurant sales at U.S. company-operated restaurants outperformed the U.S. system in the second quarter. While we are in the early innings of our customer experience journey, we are pleased with the initial results that our investments are generating. Moving to our third strategic pillar, accelerating net unit growth. Global expansion continues to be a powerful growth engine for us. In the second quarter, we opened 44 new restaurants across the globe, 21 in the United States and 23 internationally, reaching a total of 118 new restaurant opens year to date. In addition to these openings i'm excited that ej and his team have strengthened our development pipeline this quarter with new agreements to build 190 restaurants outside the US. This includes 170 restaurants in Italy over the next 10 years and 20 restaurants in Armenia over the next five. Our expansion into these European markets was enabled by the strategic investments, we have made to enhance local resources. including a regional headquarters in London and the development of an integrated European supply chain. These new agreements are in addition to commitments we shared last quarter for 25 new restaurants in Mexico and 30 in Chile over the next five years and are proof points that the Wendy's brand continues to resonate around the world. These represent important steps that will help us reach our 2028 targets. And for 2025 we remain on track to grow net units between two and 3%. Turning to our outlook, the environment today is very different than we anticipated at the beginning of the year, driven by dynamic consumer behavior and a more challenging competitive environment. Our updated outlook includes these factors, as well as the changes we made to our programming plans in the second half of the year. We now anticipate full year global system-wide sales to decline between three and 5%. We expect adjusted EBITDA to range between $505 million and $525 million and adjusted EPS of 82 cents to 89 cents. Importantly, we are maintaining our guidance for net unit development and are well on our way to achieving our full year net unit growth target of two to 3%. Before I close, I will turn it over to Suzy Turk to provide more details on our second quarter results and our outlook. Suzy is our Chief Accounting Officer and Global Head of FP&A. She has been with Wendy's for over 11 years, serving in finance roles of increasing responsibility. Suzy, over to you.

Thank you, Ken, and good morning, everyone. I'm excited to join today's call and continue supporting the teams as we execute against our shared strategic priorities. Together as One Wendy's, we are focused on driving long-term value for our franchisees and shareholders. I will start with our second quarter results, including an update on our operational initiatives and capital allocation during the quarter, followed by an update on franchisee financial performance. And last, I will share more details around our outlook for the remainder of 2025. In the second quarter, global system-wide sales declined 1.8% on a constant currency basis, This was driven by a decline in the U.S., where same restaurant sales were down 3.6%. This was partially offset by higher system-wide sales in our international business. The decline in U.S. same restaurant sales was driven by a decrease in traffic, partially offset by a higher average check. Same restaurant sales at our U.S. company-owned restaurants outperformed the U.S. system by almost 300 basis points, declining 0.7%. was driven by a strong third-party delivery growth and the implementation of our digital menu boards and fresh AI automated ordering technology. We are encouraged by this performance because it demonstrates that the changes we're implementing in our company-owned restaurants are working and can be scaled across the system. Shifting to our international segment, the Wendy's brand continued its strong momentum across the globe, delivering growth of 8.7% in system-wide sales, and 1.8% in same restaurant sales in the second quarter. We achieved system-wide sales growth across all regions, with some of the fastest-growing markets, including Japan, where we have brought to life local partnerships, driving a 27% increase in system-wide sales, and in Mexico, where we saw a 16% increase in system-wide sales and continue to bring innovation and value to our local customer. This underscores the strength of our global brand and the investments we are making in regional capabilities. Moving to the P&L. Total adjusted revenue was $449.6 million, a decrease of $6.1 million due to lower U.S. system-wide sales. Company advertising spend decreased by $5.5 million, and G&A expenses decreased by $2 million. These items were partially offset by a modest decline in U.S. company-operated restaurant margin. This resulted in adjusted EBITDA of $146.6 million, an increase of 2.5%. Shifting to margins, global company-operated restaurant margin was 15.6% for the second quarter, and U.S. company-operated restaurant margin was 16.2%, a contraction of 30 basis points year over year. The change in U.S. company-operated restaurant margin was driven by higher commodity costs, wage rate inflation, and a decline in traffic. These were partially offset by higher labor productivity, supported by lower turnover and improved training, which are a result of executing on our operational improvements in the restaurant, as well as higher average check compared to the prior year. Adjusted earnings per share was 29 cents, An increase of 7.4% to the prior year, driven by 13.5 million fewer shares outstanding and the increase in adjusted EBITDA. Turning to free cash flow. A hallmark of Wendy's is strong free cash flow generation and we continue to do that, generating $109.5 million of free cash flow in the first half of the year. As we shared last quarter, our definition of free cash flow now reflects investments in our Build to Suit program to accelerate global net unit growth. Our new definition of free cash flow is net cash provided by operating activities, less capital expenditures, less Build to Suit franchise development fund investments. Moving on to capital allocation. Our first priority is investing in the business, and we are optimizing spend to areas with the greatest growth potential. During the second quarter, we invested a total of $32.1 million into the business, including capital expenditures and our build to suit development program. Capital expenditures included $10 million in technology initiatives, like our digital menu board and fresh AI rollout. We also invested $16.9 million in restaurant development for both company owned restaurants and for our build to suit franchise development program. Through the Build to Sue program, we opened six new restaurants, one in the U.S. and five in the U.K. and Canada in the second quarter. Our second priority is paying an attractive dividend, and today we announced our third quarter dividend payment of 14 cents per share. Our next priority is maintaining a strong balance sheet. We ended the second quarter with over $315 million of cash on the balance sheet and a net leverage ratio of 4.5 times, which is in line with prior quarter. Year to date, we have paid down $14.6 million of our whole business securitization debt principle. Finally, we believe cash belongs to our shareholders and have continued to use share repurchases to return cash to shareholders. During the second quarter, we repurchased 4.8 million shares for approximately $62 million. And year to date, through August 1st, we have repurchased 13.8 million shares for approximately $195 million. Through the first half of the year, we have returned $262.2 million of cash to our shareholders. This includes $76.2 million in dividends and $186 million through share repurchases. We are on track to return approximately $325 million of cash to our shareholders in 2025. This is an increase of $40 million compared to 2024. This return to shareholders highlights our focus on responsible and disciplined capital allocation that supports our long-term strategy. Before I turn to outlook, I would like to provide an update on our franchisee financial performance. We recently completed the annual collection and analysis of financials across the system for 2024. In 2024, our U.S. franchisees achieved average year-over-year sales growth of 1% and average EBITDA growth of 2%. And in Canada, 2024 average franchisee sales growth was 4%, with average EBITDA growth of 12%. This represents a healthy growth rate across a five-year period, and our initiatives are squarely focused on continuing to strengthen the profitability of the system. As a reminder, we implemented a new system to collect and analyze franchisee data at the restaurant level rather than collecting information at the franchisee level. This granularity is more useful to our franchisees as it enables them to benchmark performance against restaurants with similar characteristics. It also enables our field teams to have more meaningful conversations with our franchisees. And now that we have the data, we're turning to the analysis and the insights to help both our franchisees and our company-operated restaurants improve profitability. Now let's turn to our financial outlook. We continue to anticipate net unit growth between 2% to 3% for 2025. We also continue to expect strong sales and profit growth in our international business. However, based on our U.S. business's second quarter performance, what we have seen so far in the third quarter, and the shift of certain programming initiatives from 2025 into 2026, we have updated our outlook for the full year 2025 accordingly. Our updated outlook assumes the dynamic consumer behavior and challenging competitive environment persists throughout the remainder of the year. For the full year 2025, we now expect global system-wide sales to range from down 3% to 5% year-over-year. U.S. company-operated restaurant margin is expected to be 14%, plus or minus 50 basis points. This includes an updated commodity inflation outlook for the year of approximately 4%, primarily reflecting continued inflation in beef prices. We expect G&A to be between $260 and $270 million. and continue to represent approximately 1.9% of system-wide sales for the full year. We will continue to invest in the resources and technology needed to deliver on our strategic priorities, while tightly managing discretionary spending, and we expect incentive compensation to be lower than our initial outlook. As a result, we expect adjusted EBITDA to be between $505 and $525 million. Interest expense will be approximately $130 million as we continue to expect to issue $400 million of whole business securitization notes late in 2025. We will use these proceeds to pay off $400 million of debt, which includes $50 million that matures in December 2025 and $350 million in September 2026. Taking all of these items into account, we now expect adjusted EPS to range from 82 cents to 89 cents per share. We continue to expect investments between $165 and $175 million across capital expenditures and our bill to suit program, resulting in free cash flow under our new definition to be between $160 and $175 million. In looking at the shape of the second half of the year, we expect the third and fourth quarter to be uneven. with a significantly larger decline in the fourth quarter due to prior year comparison. In closing, we are focused on disciplined execution, and as one Wendy's, we are taking deliberate actions to better position our business for long-term growth. And with that, let me now hand it back to Ken.