The Wendy’s Company (NASDAQ:WEN) Q1 2024 Earnings Call Transcript

The Wendy’s Company (NASDAQ:WEN) Q1 2024 Earnings Call Transcript May 2, 2024

The Wendy’s Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

The Wendy’s Company reports earnings inline with expectations. Reported EPS is $0.21 EPS, expectations were $0.21.

Operator: Good morning. Welcome to The Wendy’s Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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, Kirk Tanner will give a business update and our Chief Financial Officer, Gunther Plosch will provide a franchise health update, review our first quarter results and share our reaffirmed outlook. From there, we will open up the line for questions. And with that, I’ll hand things over to Kirk.

Kirk Tanner: Thanks, Kelsey, and good morning, everyone. The momentum we built across our business in the first quarter puts us on track to achieve our 2024 commitments and on path towards unlocking our full potential. But before we dive into the results, I wanted to share some of my thoughts on the business now that I’m almost three months in. The things that brought me to Wendy’s still ring true. We have an amazing brand, the highest quality food in QSR and a great foundation for growth. And after spending time learning from our restaurant support team, listening to our franchisees and customers and working alongside our crew members, I’m even more fired up about the momentum we’re building here at Wendy’s. As I continue to immerse myself in the business, there’s one thing I know for certain.

The experience we deliver to our customers is the most impactful driver of our business. I’ve now had a chance to see that firsthand in so many ways, from working in our restaurants to our incredible activation at the Final Four. You can expect to see us always put the customer first, with the goal of exceeding their expectations in everything we do. We are committed to ensuring each interaction our customers have with us is brand building. As part of this commitment, we are reviewing every aspect of our business and we’ll come back to you later this year with our plans to deliver profitable growth over the short and long-term. Those plans will be centered on three things. Number 1, driving strong same restaurant sales growth in all our restaurants, including continued momentum in our digital channel.

Number 2, a significant acceleration in global net unit growth and Number 3, unlocking meaningful improvements in restaurant level profitability. Progress against these focus areas will provide the oxygen we need to build The Wendy’s flywheel, enabling us to bring our ownable propositions of fresh high quality favorites at affordable prices to more people and more places. Turning now to our first quarter highlights. Global same restaurant sales grew 90 basis points during the quarter. This laddered to 8.9% on a two year basis as we lapped our highest quarter in the prior year representing an acceleration of 120 basis points versus Q4. Our international business achieved 3.2% same restaurant sales growth and 17.1% on a two year basis. This marks a 12th consecutive quarter of double-digit two year same restaurant sales growth for our International segment and continued QSR Burger category dollar and traffic share gains in Canada, our largest international market.

In the U.S, we delivered 60 basis points of same restaurant sales growth and 7.8% on a two year basis, holding our dollar and traffic share position within the QSR burger category. Our Q1 performance was driven by carryover pricing that continued to support average check growth, partially offset by customer count declines. We exited the quarter with momentum as year-over-year customer count improved each month of Q1. Our breakfast strategy began to reaccelerate the day park, driving high-single-digit year-over-year growth in U.S. breakfast sales. This success was a result of delighting our customers through purpose driven innovation with our breakfast burrito and Cinnabon Pull-Apart. Consistent quality and compelling value with our 2 for $3 Biggie Bundles and increased media support as we began spending incremental media dollars from our company investments.

On the digital front, we continued to gain significant momentum reaching nearly 17% global digital sales mix and over 30% year-over-year increases in digital sales. Our International segment grew to over 20% digital sales mix, with strong digital adoption continuing in the U.K., Canada and much of our APMEA region. In the U.S., we drove meaningful increases in our mobile order and delivery channels, growing total digital sales by over 15% versus the prior quarter and 35% year-over-year. This supported an acceleration in U.S. digital sales mix each month of the quarter for an average of over 16%. Our digital momentum resulted from the success of our March Madness programming, which highlighted our fresh never frozen beef that our customers know and love alongside compelling offers within our mobile app.

This led to an increase in our monthly active users to over 6 million at quarter end, up over 40% versus Q4. Our total rewards members also increased to over 40 million illustrating that our digital efforts are resonating with our customers. This growth drives the restaurant economic model and our progress across breakfast and digital supported a 60 basis point year-over-year increase in U.S. company operated restaurant margin to 15.3%. Finally, our Q1 development progress achieved our expectations as we opened 35 new restaurants across the globe. Looking ahead, we remain focused on executing against our plan and investments through a customer centric approach, supporting profitable growth across our system. As we shared during our Q4 earnings call, our growth plans are supported by our breakfast and digital investment alongside our strong development pipeline, all of which support our restaurant economic model.

In 2024, we continue to expect global same restaurant sales growth of 3% to 4%. As we look towards the rest of the year, this expectation implies that our two year growth for the remainder of the year will be roughly in line with what we delivered in Q1, driven by our company investment in Breakfast Advertising, which is already driving a meaningful increase in U.S. Breakfast sales, continued ownership of our biggest quality differentiators through our core menu, craveable innovation that excites our customers and inspires more visits and compelling value that drives customer satisfaction and supports restaurant margin. We also remain on track to reach over $2 billion in global digital sales this year, supported by our digital investments, continued improvement of our digital customer experience in our app and our restaurants, and our increased ability to build personalized relationships with our growing base of loyalty members.

Finally, our progress through Q1 supports our goal of 2 plus percent net unit growth in 2024, which includes approximately 250 to 300 new restaurant openings. This next phase of our profitable growth journey is just beginning. The progress we made in the first quarter highlights that we have the right investments and plans in place to begin our next chapter. With that, I’ll hand it over to GP to walk through our first quarter financial results.

Gunther Plosch: Thanks, Kirk. Our first quarter results highlight the momentum we are building across our business. Our global system wide sales grew 2.6%, contributing to year-over-year growth across our financials. Our U.S. Company restaurant margin reached 15.3%, increasing 60 basis points year-over-year primarily due to the benefit of a high average check driven by carryover pricing of over 3%, partially offset by customer count declines and an increase in labor cost driven by rate inflation of approximately 3.5%. The increase in G&A was primarily driven by an increase in stock compensation and an increase in employee compensation and benefits. These were partially offset by lower outside professional services driven by lapping implementation costs for the company’s Human Capital Management System in the prior year.

Adjusted EBITDA increased 1.8% to approximately $128 million resulting primarily from higher franchise royalty revenue and an increase in U.S. Company operated restaurant margin. These were partially offset by an increase in the company’s incremental investment in breakfast advertising and higher G&A. The almost 10% increase in adjusted earnings per share was driven by fewer shares outstanding from our share repurchase program, an increase in adjusted EBITDA and lapping a decrease in investment income in the prior year. These were partially offset by higher depreciation and higher amortization of cloud computing arrangement costs. Finally, the decrease in free cash flow resulted primarily from the company’s incremental investment in Breakfast Advertising, partially offset by the timing of receipt of vendor incentives.

Now let’s turn to our expectations for 2024. Our financial outlook for 2024 remains unchanged as our first quarter performance and plans across the year keep us on track to deliver on all our financial targets. We continue to expect strong global system wide sales growth of 5% to 6%, U.S. company operated restaurant margin of 16% to 17%, and G&A of $265 million to $275 million resulting in our adjusted EBITDA outlook of approximately $535 million to $545 million. Our capital expenditure outlook for the year remains unchanged at $90 million to $100 million. Lastly, we continue to expect free cash flow to grow to approximately $280 million to $290 million and are also reaffirming our adjusted EPS outlook of $0.98 to $1.02. Our focus on profitable growth is foundational to Wendy’s and our reaffirmed outlook underscores this commitment.

Now I’d like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth, and our recent investments across our growth pillars showcase exactly that. Secondly, we are committed to sustaining an attractive dividend. We announced today the declaration of our second quarter dividend of $0.25 per share and continue to expect a full-year dividend of $1 per share in 2024. Lastly, our capital allocation policy gives us the flexibility to utilize excess cash to repurchase shares and reduce debt. Due to date through April 25th, we have repurchased approximately 0.6 million shares and have approximately $298 million remaining on our $500 million share repurchase authorization expiring in February of 2027.

We are fully committed to delivering our simple yet powerful formula. We are a predictable efficient growth company that is driving strong system wide sales growth on the backdrop of positive same-restaurant sales and expanding our global footprint. This translates into significant free cash flows, which supports meaningful return of cash to shareholders through an attractive dividend and share repurchases. Lastly, let’s turn to our 2023 franchise financial results. Franchisee profitability remains a key focus area of ours that we are committed to providing visibility to. We are pleased that the strong 2023 performance we saw in our company operated restaurants was also experienced by our U.S. and Canadian franchise systems. This growth is driven in part by the strong and productive partnership we continue to have with our franchisees.

Our U.S. and Canadian franchisees achieved 4% and 6% year-over-year sales growth respectively. This momentum contributed to strong EBITDA dollar growth year-over-year of approximately 9% in the U.S. and 25% in Canada. Franchisees strong restaurant EBITDA performance in 2023 supported an improvement in balance sheet health with lease adjusted leverage ratios improving year-over-year. We expect the sales and profit momentum to carry into this year just as we expect sales and margin expansion in our company operated restaurants. This growth directly supports our new restaurant acceleration plans by putting our current franchisees in an even stronger position to build more restaurants and by continuing to attract new franchisees into the Wendy system.

We look forward to achieving continued profitable growth together with our franchisees for years to come. With that, I will hand things over to Kelsey to share our upcoming IR calendar.

Kelsey Freed: Thanks, GP. This quarter we will attend the Oppenheimer Conference on June 11th followed by the Evercore Conference on June 12th. We’ll then hold an Investor Call hosted by Guggenheim on June 18th. Lastly, we plan to record our second quarter earnings and host a conference call that same day on August 1st. As we transition into our Q&A section, I wanted to remind everyone that due to the high number of covering analysts, we will be limiting everyone to one question only. With that, we’re ready to take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from Brian Bittner from Oppenheimer. Brian, please go ahead.

Brian Bittner: Thanks. Good morning. It seems like the base case assumption from an industry perspective is that many feel that need to get more aggressive on value, which historically has caused more of a street fight dynamic within the quick service industry. And how do you feel that Wendy’s is positioned if this is an environment that unfolds with intensity? And what weapons can you use to compete in a more value focused environment? Because historically, you’ve actually competed pretty well when the industry resorts more to value.

Kirk Tanner: Brian — good morning, Brian. I think that’s a good question and a topic that a lot of folks are talking about. Let me give you my perspective for where Wendy’s is. First on a value standpoint, we have a platform that delivers everyday value. It’s our Biggie platform. Consumers love that platform. That’s an important part of the menu. And then separately, we’re leveraging our digital communication to drive value, and it has a double benefit. One, it allows us to build loyalty. It allows us to add customers to our platform. It’s an exciting way to engage, drives personalization. So value at Wendy’s is going to be done with everyday value like our platform in Biggie, and we’ll continue to use digital value to drive loyalty and build our customers on our platform.

I think we’re well positioned to deliver on value, but I would say it’s a balance for us as well. If you look across our menu, go from premium fresh all the way to the value propositions. And I think that the structure of our menu and how we address customers allows us to win across consumer segments.

Operator: Thank you. Our next question comes from Jeffrey Bernstein from Barclays. Jeffrey, please go ahead.

Jeffrey Bernstein: Great. Thank you very much. I have a question on the unit growth outlook, which for years has been a big priority to accelerate. I think you mentioned the 250 to 300 units this year. Kirk, I’m just wondering if you could talk a little bit about your early conversations with franchisees both U.S. and international, maybe the timeframe you think to accelerate that unit growth. Obviously, it is a more challenged macro and somewhat believe that franchisees might be a little bit more hesitant to put up more capital and accelerate growth. So your early thoughts on the unit growth outlook and the ability to accelerate in terms of franchisee demand would be great? Thanks so much.

Kirk Tanner: Jeffrey, thanks for the question, and good morning. Yes, I’ve had a lot of opportunities to talk to franchisees about this very topic. We talked a little bit about creating that flywheel and that’s why we share profitability for franchisees and GP walked through that in the opening comments. The ability to move faster let me give you just a little background. This year, we’re talking about unit growth north of 2%, and then in ’25 we’re talking about 3% to 4% unit growth. And that’s by looking at our development agreements where we have 90% confirmed right now. So you can see the short term. The long-term for us has the ability to build this profitability. There’s still a lot of runway both here in the U.S., and of course internationally, and we see that as a 30-70 split.

30% of our unit growth is going to come from the U.S., so still tons of potential. And 70% of that unit growth is going to come from outside the U.S. And speaking to the franchisees, opening new restaurants really pay a dividend and they can see it themselves. The AUVs on new restaurant outperform older legacy restaurants, and that’s a — it’s a big deal. So you’ll see us continue to invest in platforms with our franchise to accelerate that. And there’s a really good return when it comes to building new restaurants. There’s an ability for us to continue to partner, but I would tell you our outlook is on — it’s on track.

Operator: Thank you. Our next question comes from Brian Harbour from Morgan Stanley. Please go ahead.

Brian Harbour: Maybe just continuing that topic. Could you comment on sort of there were some unit closures in the first quarter. Do you think that that sort of subsides through this year? Or should we expect some of those to continue and just comment on how that factors into your outlook?

Kirk Tanner: Good morning, Brian. Yes, our unit performance was in line with our expectations. We opened 35 restaurants. We had closures. That’s all with our rhythm in our business. We’re expecting as we said 250 to 300 restaurants to open this year. We’re expecting a little bit more than 100 closures for the year. So that then if you do the math, gets you to the 2% plus guidance range that we have. Nothing unusual is happening here. Everything went to plan.

Operator: Thank you. Our next question comes from David Palmer from Evercore ISI. David, please go ahead.

David Palmer: Thanks. Just want to follow-up on the topic of franchisee cash flow, new unit returns in the U.S., what is the franchisee cash flow per restaurant? I think it’s north of $200,000 for ’23, but maybe you can give exact number there. And how does that compare to pre-COVID levels? And separately, relatedly, what’s the return on new units before considering any incentives? We’ve heard that the building costs have gone up a lot during COVID, and 30% plus. And so the returns before incentives have gotten quite low out there, at least that’s what they’re talking about in the lending community. So any visibility on that on those two things would be super helpful. Thank you.

Gunther Plosch: Good morning, David. So on franchise profitability, we haven’t given cash flow per restaurant out. What we are watching is definitely the adjusted leverage ratios. Last year that was about a little bit north of 5.5x. By the way for the calculation we’re using 8x rent. This time around it is hovering at a little bit more than 5x. So we made significant progress. Our system got much, much healthier. We’d also expect that the EBITDA performance in the franchise system in 2024 will follow the performance of the company restaurants. As you know, we are guiding for the U.S. 100 basis point expansion, so that obviously translates into EBITDA growth and should improve lease adjusted leverage ratios further and obviously helps us on our journey of accelerating unit growth.

In terms of returns, we’ve done a good job I think to contain building costs, if I remember eight years ago, freestanding building would cost about $1.9 million. Our Next Gen restaurant that’s now the global building standard is also costing $1.9 million eight years later. So we’ve contained inflation as best as we could. From a return point of view on a levered basis, the most attractive incentive program is a build-to-suit, where you’re getting a levered return in about 3.5 years. And if you have no incentives whatsoever, so that’s the other bookend, you’re getting to about six years return. So relatively competitive. We have a lot of interest from franchisees to pick to join the system. And that’s obviously a great foundation to accelerate our growth.