The Wendy’s Company (NASDAQ:WEN) Q1 2023 Earnings Call Transcript May 10, 2023

The Wendy’s Company beats earnings expectations. Reported EPS is $0.21, expectations were $0.2.

Operator: Good morning. Welcome to the Wendy’s Company Earnings Results Conference Call. [Operator Instructions] Kelsey Freed, Director of Investor Relations, you may begin your conference.

Kelsey Freed: 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 Penegor, will give a business update and highlight progress against our Good Done Right initiatives. From there, our Chief Financial Officer, Gunther Plosch, will provide a franchise health update, review our 2023 first quarter results and share our reaffirmed outlook. From there, we will open up the line for questions. With that, I will hand things over to Todd.

Todd Penegor: Thanks, Kelsey, and good morning, everyone. I am proud of the Wendy’s system for building on the momentum we created in 2022 to deliver an outstanding start to the year. Our high-quality food, strong marketing programs and focus on great restaurant experiences continue to resonate with our customers and resulted in our sixth consecutive quarter of double-digit global same-restaurant sales growth on a 2-year basis. During the first quarter, we drove a significant acceleration in our global digital business, reaching over 12% digital sales mix. This growth was supported by our very successful March Madness messaging in the U.S. and continued growth across many of our international markets. Our top line growth contributed to an over 250 basis point year-over-year expansion in the U.S. company-operated restaurant margin, which is remarkable as commodity inflation remained highly elevated throughout the first quarter.

We also opened 39 new restaurants across the globe, and we remain on track to achieve our development goal for the year. And our long-term development confidence continues to be bolstered by new and existing franchisee interest in our suite of development programs. We remain fully committed to driving the restaurant economic model through our three long-term growth pillars: driving sales momentum, accelerating our digital business and expanding our global footprint. This commitment and our successful start to the year give us confidence that we will deliver meaningful global growth for the remainder of 2023 and beyond. We delivered against our strong global same-restaurant sales expectations in the first quarter, achieving 8% growth on a 1-year basis and 10.4% growth on a 2-year basis.

Our International business achieved another outstanding quarter with same-restaurant sales growth of 13.9% and an eighth consecutive quarter of double-digit same-restaurant sales growth on a 2-year basis. We continue to see strong results across all of our regions with Canada, our largest international market, delivering double-digit same-restaurant sales and customer count increases. Our Canadian breakfast business accelerated versus the prior quarter, supported by the launch of French Toastix and our croissant promotion. Our growth at the breakfast daypart, along with continued rest of day strength, led to another quarter of gaining dollar and traffic share in the Canadian market faster than all QSR burger competitors. Our U.S. business delivered same-restaurant sales growth of 7.2%, holding our strong dollar and traffic share within the QSR burger category and widening our share gap to several competitors.

These results were underpinned by the continued benefit of our strategic pricing actions alongside year-over-year customer count growth each month of the quarter. Our Q1 marketing programs makes compelling value offerings like our successful $2 for $6 promotion with messaging behind our iconic fresh beef and hot and crispy french fries. We leveraged March Madness to reach millions of fans as the official hamburger of the NCAA, driving our premium hamburger business to its highest point in the last several years. On the breakfast front, we continue to lean into the strength of French Toastix and closed the quarter with the start of our croissant promotion, entering Q2 with an uptick in momentum. As our strong programs drive more customers to our restaurants, we are committed to delivering an experience that brings them back more often.

Our first quarter customer satisfaction scores and speed of service improved markedly versus the prior year and prior quarter as restaurants were better staffed, turnover improved and our systems focused on operational excellence sharpened even further. As we turn to the second quarter, we will promote products across a variety of price points and occasions with dedicated messaging behind our ownable Biggie Bag platform, the return of the fan favorite Strawberry Frosty and bringing the heat like only Wendy’s can with the addition of the Ghost Pepper Ranch Chicken Sandwich to our Made to Crave lineup. We also have plans in place to accelerate our momentum at the bookends of the day, breakfast and late night. We have plans for increased activity to drive the breakfast business in the U.S. and Canada for the remainder of the year and will lean into our playbook of building awareness around our craveable products, launching exciting menu innovation and promoting targeted trial-driving offers.

Furthermore, after diligent preparations to ensure our customers will have a great experience, we plan to promote Wendy’s late night business this summer. During the first quarter, we already saw an uptick in sales at the daypart, driven by a return to more normalized late-night hours, local advertising and our growing late-night delivery business. We are excited to offer our customers the high-quality late night experience they deserve and believe there’s a ton of opportunity ahead of us during this daypart. We continue to expect that executing against our strong and balanced marketing calendar, leaning into underpenetrated dayparts and continued operational improvements will ladder up to mid-single-digit global same-restaurant sales growth in 2023.

Our Global digital business continued to accelerate to new heights this quarter as digital sales grew over 25% year-over-year and reached over 12% sales mix. On the International side, our customers are increasingly embracing our many digital options leading to an all-time high digital sales mix of nearly 19%. In the US, our digital business accelerated every month throughout the quarter as we achieved our highest ever US digital sales mix of over 11%. This growth was driven by continued gains in delivery and mobile order sales as we offered compelling value alongside our third-party delivery partners and once again successfully advertised our digital options across the March Madness tournament. This programming drove a 5% increase in our total loyalty members and a nearly 10% increase in monthly active users versus the prior quarter.

As we drive more fans into our restaurants through digital ordering, we are also delivering on a seamless operational experience that keeps customers coming back. During the first quarter, our digital customer satisfaction scores significantly increased versus prior year, and our delivery wait time and order accuracy sequentially improved. As we look ahead, we are excited to have the infrastructure in place and momentum behind us to shift into a new phase of meaningful digital growth. We made significant strides in our one-to-one marketing programs last quarter, enabling more personalized user experiences to influence key behaviors. This allows our team to quickly check and adjust against a set of established benchmarks all in service of driving increased frequency.

Lastly, I’m excited to share that we have partnered with Google to pilot Wendy’s Fresh AI, a voice AI solution for drive-through ordering that utilizes Google Cloud’s generative AI and large language models technology. We believe this solution creates a huge opportunity for us to deliver a truly differentiated, faster and frictionless experience for our customers and allows our crew members to continue focusing on making great food and providing exceptional service. We plan to launch this pilot in June and are incredibly excited about the potential unlocks to speed of service, customer satisfaction and profitability that this technology could drive over time. You can expect us to continue pushing into new and promising technology alongside our partners as we look to maximize the restaurant economic model and grow our digital sales to approximately $1.5 billion this year.

We are pleased to have opened 39 new restaurants in the first quarter and remain on track to reach our global development goal for the year. We are well underway on our development journey with approximately 45% of our 2023 pipeline open or under construction through the end of Q1. In the U.K., we closed the quarter with 29 restaurants, including our first drive-thru format in the market, which is performing ahead of expectations so far. We look forward to building on that success with our second drive-thru restaurant planned to open in the second quarter. We are seeing increased excitement around our suite of development programs from both new and existing franchisees. We expect an increased appetite for growth across our system throughout 2023 and beyond as we continue to market these programs, sales momentum continues and inflationary pressures begin to subside.

We continue to believe we have the plans in place to support our goal of 2% to 3% global net unit growth in 2023. We expect all of our net unit growth will be delivered in the second half of the year, primarily driven by longer restaurant development time lines as the construction and permitting environment remains challenging, in addition to the planned permanent closure of our U.S. REEF restaurants in the second quarter. We also remain on track to achieve our longer-term global net unit growth targets of 2% to 3% and 3% to 4% in 2024 and 2025, respectively. We are excited about all of the growth that’s ahead of us and the opportunities to delight even more customers around the globe. Before turning it over to GP to cover our financial results, I wanted to share an update on our progress against our food, people and footprint goals within our Good Done Right framework.

I am proud of the work our team has done over the last year to advance these goals and continue building ESG into the foundation of our business. Within our food pillar, we developed responsible sourcing criteria and began to collect sustainability information from our supply partners in addition to expanding our animal welfare standards program. Within our people pillar, we advanced our key diversity, equity and inclusion focus areas and launched the Own Your Opportunity campaign to increase both accessibility and diversity across franchisee candidates. And finally, within our Footprint pillar, we transitioned more than 50% of our customer-facing packaging to be sustainably sourced and received validation of our Science-Based Target nearly a year ahead of schedule.

This is just a sample of all the progress we’ve made over the past year, and I encourage you to read our recently released 2022 corporate responsibility report on our Investor Relations website for more information. Our strategic growth pillars remain deeply rooted in the foundation of the restaurant economic model and our Good Done Right framework. Looking ahead, we remain focused on delivering accelerated global growth behind the most impactful drivers of our business: driving same-restaurant sales momentum, accelerating our digital business and expanding our global footprint. Everything we do at Wendy’s is focused on bringing to life our vision to become the world’s most thriving and beloved restaurant brand. And with the momentum that we have in our business, we are well on our way.

I will now hand things over to GP.

Gunther Plosch: Thanks, Todd. I wanted to take this time to share an update on franchise health as we recently collected 2022 financials from our US and Canadian franchisees. As a reminder, our focus on driving the restaurant economic model led to record franchisee sales and profits in 2020 and 2021 in both the U.S. and Canada. Turning to 2022. Our U.S. and Canadian franchisees achieved another year of record sales with 7% and 13% year-over-year growth, respectively. This contributed to incredible 3-year sales growth of over 18% in the U.S. and over 24% in Canada. And despite unprecedented inflationary headwinds in 2022, which pressured year-over-year comparisons, franchisee EBITDA dollars remained approximately 2% and 11% higher versus 2019 in the U.S. and Canada, respectively.

Just as we expect EBITDA expansion in our company-operated restaurants, we expect franchisees will return to EBITDA dollar growth in 2023 as inflation eases, and we continue to drive same-restaurant sales momentum and digital acceleration on supporting our global footprint expansion. Now let’s turn to our first quarter financial results, which showcase the improved profitability we expect this year. We are incredibly proud of our first quarter results, which highlight the strength of our growth initiatives and the sound execution of our financial formula. Our global systemwide sales grew 10%, contributing to year-over-year growth across our financials. Our U.S. company restaurant margin reached 14.7%, increasing over 250 basis points year-over-year despite inflationary pressures remaining elevated.

This expansion was primarily due to the benefit of a higher average check driven by cumulative pricing of 9.5%, partially offset by commodity and labor inflation of approximately 7% and 5%, respectively, and customer count decline. G&A held flat versus the prior year, primarily due to a decrease in stock compensation offset by higher information technology costs and a higher incentive compensation accrual. Adjusted EBITDA increased almost 18% to approximately $126 million, primarily driven by higher franchise royalty revenue and the increase in U.S. company-operated restaurant margin. The over 20% increase in adjusted earnings per share was driven by the increase in adjusted EBITDA and higher interest income. These increases were partially offset by higher interest expense, a decrease in investment income and higher amortization of cloud computing arrangement costs.

Finally, our free cash flow in the first quarter increased over 40% to approximately $63 million, resulting primarily from a decrease in payments for incentive compensation and higher net income adjusted for noncash expenses. These increases were partially offset by the timing of receipt of franchisee rental payments in the first quarter of 2022. Our 2023 and long-term financial outlook remain unchanged. We continue to expect significant global system-wide sales growth of 6% to 8% this year, driven by mid-single-digit global same-restaurant sales and global net unit growth of 2% to 3%. Our 2023 adjusted EBITDA outlook of $530 million to $540 million remains unchanged as we continue to expect strong top line sales, US company-operated restaurant margin of approximately 15% to 16% and mid-single-digit commodity and labor inflation.

Additionally, we continue to expect net franchise fees of less than $20 million and net rental income of approximately $105 million for the full year. We are also reaffirming our 2023 outlook for adjusted EPS of $0.95 to $1, capital expenditures of $75 million to $85 million and free cash flow of $265 million to $275 million. Looking further out, we are reaffirming our long-term outlook of mid-single-digit annual system-wide sales growth and high single-digit to low double-digit annual free cash flow growth in 2024 and 2025. Our reaffirmed financial outlook over the short and long term is a result of the momentum of our business and our dedication to driving the restaurant economic model behind our strategic growth pillars. To close, I’d like to highlight our capital allocation policy, which remains unchanged.

Investing in our business for growth while holding true to our asset-light model continues to be our first priority. Secondly, we announced today the declaration of our second quarter dividend of $0.25 per share, which aligns with our commitment to sustain an attractive dividend. We continue to expect a full year dividend of $1 per share in 2023, which represents an over 100% dividend payout ratio. Lastly, we will utilize excess cash to repurchase shares and reduce debt. As of May 3, we have repurchased approximately 2.9 million shares and have approximately $438 million left on our $500 million share repurchase authorization expiring in February of 2027. Additionally, we repurchased approximately $32 million of our debentures through May 3, leaving approximately $43 million remaining on our debt repurchase authorization expiring in February of 2024.

Our elevated cash balance and strong and flexible balance sheet leave us well positioned to withstand any macroeconomic headwinds as we continue to deliver meaningful global growth. We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated, efficient growth company that is investing in our growth pillars and driving strong system-wide sales growth on the backdrop of positive same-restaurant sales and expanding our global footprint. This is translating into significant free cash flows, which supports meaningful return of cash to shareholders through an attractive dividend and share repurchases. With that, I will hand things over to Kelsey to share our upcoming IR calendar.

Kelsey Freed: Thanks, GP. To start things off, we have an NDR in Boston with Guggenheim on May 23, followed by an NDR in New York with JPMorgan on May 24. On June 13, we will attend the Virtual Oppenheimer Conference followed, by the Virtual Evercore Conference on June 14. We will also host investor calls on June 20 and 21 with RBC and BTIG, respectively. If you are interested in joining us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. Lastly, we plan to report our second quarter earnings and host a conference call that same day on August 9. As we transition into our Q&A section, I wanted to remind everyone that due to a high number of covering analysts, we will be limiting everyone to one question only. With that, we are ready to take your questions.

Q&A Session

Operator: [Operator Instructions] First question today comes from David Palmer with Evercore ISI.

Operator: Our next question comes from Brian Harbour with Morgan Stanley.

Operator: We now turn to Brian Bittner with Oppenheimer.

Operator: Our next question comes from Dennis Geiger with UBS.

Operator: Our next question comes from Joshua Long with Stephens.

Operator: We now turn to Lauren Silberman with Credit Suisse.

Operator: Our next question comes from Andrew Charles with TD Cowen.

Operator: Our next question comes from Jeffrey Bernstein with Barclays.

Operator: We now turn to Jon Tower with Citi.

Operator: Our next question comes from Chris O’Cull with Stifel.

Operator: Our next question comes from Chris Carril with RBC Capital Markets.

Operator: Our next question comes from Eric Gonzalez with KeyBanc Capital Markets.

Operator: Our next question comes from John Ivankoe with JPMorgan.

Operator: We now turn to Gregory Francfort for Guggenheim.

Operator: Our next question comes from Sara Senator with Bank of America.

Operator: Our next question comes from Jim Sanderson with Northcoast Research.

Operator: We now turn to Jake Bartlett with Truist.

Operator: Our next question comes from Fred Wightman with Wolf Research.

Operator: Our final question today comes from Peter Saleh with BTIG.

Kelsey Freed: Thanks, Peter. That was the last question of the call. Thank you, Todd and GP, and thank you, everyone, for participating this morning. We look forward to speaking with you again on our second quarter call in August. Have a great day. You may now disconnect.