The Wendy’s Company (NASDAQ:WEN) Q3 2023 Earnings Call Transcript

The Wendy’s Company (NASDAQ:WEN) Q3 2023 Earnings Call Transcript November 2, 2023

The Wendy’s Company beats earnings expectations. Reported EPS is $0.27, expectations were $0.26.

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, Todd Penegor, will give a business update; and our Chief Financial Officer, Gunther Plosch, will review our 2023 third quarter results and provide an update on our outlook for the year. From there, we will open up the line for questions. And with that, I will hand things over to Todd.

Todd Penegor: Thanks Kelsey and good morning, everyone. We continued to make meaningful progress across our strategic growth pillars during the third quarter, which drove continued sales and profit growth. Our global same-restaurant sales grew 2.8% on a one-year basis, and our two-year result of 9.7% represents an acceleration of almost 100 basis points versus the third quarter. Our international business delivered same-restaurant sales growth of 7.8% and achieved an incredible 10th consecutive quarter of double-digit same-restaurant sales growth on a two-year basis, reaching 18.6%. We continue to see strong results across our key international growth markets with many achieving double-digit one-year same-restaurant sales growth during the quarter.

The ongoing success of our international segment is driven by strong execution and momentum across our global growth pillars. Our US business achieved same-restaurant sales growth of 2.2% and a two-year result of 8.5%, which represents an acceleration versus the second quarter. During the quarter, we benefited from our strategic pricing actions, partially offset by an expected decline in year-over-year customer counts and a slight decline in mix. However, beginning in mid-August, we drove year-over-year customer count growth through quarter end. Our digital business accelerated in the third quarter, with global digital sales mix reaching 13% and total digital sales growing 30% year-over-year as our loyalty program continued to gain momentum.

These successes supported yet another quarter of profit expansion, resulting in an 80 basis point year-over-year increase in US company-operated restaurant margin to 15.6% as sales growth drove P&L leverage and commodity inflation ease further. We also continue to make progress against our development goal, opening 72 new restaurants across the globe, totaling 152 openings year-to-date date through the third quarter. We continue to expect to reach our 2023 development target as we now have 100% of our current year pipeline open or under construction. The success we’ve driven over the years supports our best-in-class franchisee satisfaction and alignment. Looking forward, we remain relentlessly focused on delivering meaningful global growth, supported by compelling restaurant economic model improvement, and acceleration across our strategic pillars.

Our focused approach to driving same-restaurant sales momentum delivered an acceleration in two-year same-restaurant sales growth and supported our strong performance in the context of the QSR Burger category, within which we maintained our dollar and traffic share. Category traffic was challenged throughout the quarter and this impacted our early results. But following the mid-August launch of several successful innovations and promotions, we deviated from the category trend and achieved positive customer counts in the latter half of the quarter. This led to an acceleration in one and two-year same-restaurant sales growth each month of Q3. Now, let’s turn to some of our specific sales drivers. We continue to make meaningful progress in our pursuit of operational excellence and posted another quarter of year-over-year improvements in customer satisfaction and speed of service.

I am very proud that our efforts in this area have been recognized in the latest QSR Magazine Drive-Thru Report where Wendy’s ranked in the Top 5 Brands across service time, order accuracy, and satisfaction. We once again leaned into our ownable platforms, new products, and partnerships during the third quarter. The launch of our Loaded Nacho Cheeseburger and Fries, continued innovation on the Frosty line with strawberry and pumpkin spice flavor, our BOGO for $1 promotion, and our ongoing partnership with college football, all supported our progress. Looking ahead to the rest of the year, you can expect more craveable innovation alongside value that supports the restaurant economic model as we run our high-low strategy. At the breakfast daypart, we continue to execute against our playbook of driving sales through innovation and promotions.

We once again expanded our menu with the launch of our new Frosty cream Cold Brew and English Muffin Sandwiches. We also launched a new value offering, our 2 for 3 Biggie Bundles, which drove a meaningful sequential sales increase following its introduction and contributed to an acceleration in breakfast sales in the back half of the quarter. We know that value remains very important to the breakfast consumer and we plan to more consistently offer compelling value promotions to drive trial and repeat at this highly profitable daypart through year end and beyond. Finally, our late-night efforts accelerated versus the second quarter and drove a mid-teens year-over-year sales increase for the daypart. Our sales performance at late night has far surpassed our pre-pandemic average, and we expect to continue benefiting from outsized growth at the daypart through the end of 2023.

We continue to expect mid-single-digit global same-restaurant sales growth for full year 2023 and now expect our fourth quarter same-restaurant sales will land in the low single-digit range. We are confident in our ability to break through with consumers and are committed to driving profitable sales growth. Our digital business accelerated in the third quarter, with global sales mix reaching 13% and total sales growing 30% year-over-year. Internationally, we continue to see strong adoption of digital channels, leading to a sales mix of over 18%. We continue to significantly grow our Canadian digital business, and we now hold the number two position in digital traffic share across the QSR burger segment in that market. We also achieved another quarter of outstanding digital mix in the UK, now reaching over 90%.

Our US digital sales mix grew to over 12%, with growth versus the prior quarter, driven by a meaningful uptick in our loyalty program. Total US loyalty members reached over 35 million and monthly active users grew almost 40% quarter-over-quarter to over 5 million as we exited the third quarter. This growth was driven by offers that are truly resonating with our customers, like our $0.01 JBC promotion celebrating National Cheeseburger Day and allowing for in-store offer redemptions, which has expanded our loyalty reach. We will continue to lean into impactful offers to drive further loyalty program growth moving forward. On a year-over-year basis, our almost 30% US digital sales growth was driven by strength across all digital channels, including delivery.

Our strong partnerships with third-party delivery providers continue to benefit us as we activated compelling ads and exclusive offers that tied into our college football messaging and new product launches. I am proud of the ongoing digital growth we have achieved over the last few years. Our successes to-date support an increase in our global digital sales expectation to approximately $1.8 billion this year, which represents over 20% growth year-over-year. Looking ahead, there is still significant digital growth to be captured. The large uptick in monthly active users last quarter and the increase in our digital sales expectation is just the taste of what’s in front of us. I am confident that continued execution of our plans alongside our key partners will drive our digital business in the years to come.

Our development pace accelerated in the third quarter as we opened 72 new restaurants, and we are tracking towards our 2023 global net unit growth target of approximately 2%, with 100% of our current year pipeline open or under construction. Looking towards the future, we made meaningful progress towards further solidifying our long-term development pipeline by securing incremental commitments with new and existing franchisees across every region in which we operate with international markets leading the way. In the UK, we recently added a new franchisee to the market, and our three existing traditional franchisees have increased their development agreements, highlighting their confidence in the long-term trajectory of the brand. Additionally, our existing franchisee in Japan has significantly accelerated their agreement as operations normalize, following the pandemic and sales continue to improve.

We also added an incremental development agreement in Mexico, a key growth market that continues to gain sales momentum and new franchisee interest. Across the US and Canada, we experienced a significant uptick in agreements across our suite of development programs with new sign-ups for the Pacesetter and Groundbreaker incentives, and growing commitments through our Build-to-Suit fund, which is now 70% committed. Our efforts drove a substantial increase in the share of our long-term development pipeline under an agreement to approximately 70%. This is higher than historical norms and builds an additional layer of certainty into our development outlook. All of this progress is in addition to our previously announced master franchise agreement with Flint Group to develop 200 Wendy’s restaurants in Australia, which bolsters our development plans past 2025.

Finally, we remain very active on the franchise recruiting front and our team is continually adding franchise candidates to the pipeline and new franchisees to the system. We look forward to sharing more news in the coming months as we continue to progress towards our long-term global net unit growth targets of 2% to 3% in 2024 and 3% to 4% in 2025. Our playbook of driving meaningful global growth behind our three long-term strategic pillars remains the same. Our ongoing success would not be possible without the partnership we have with our franchisees. We recently received the results of the 2023 Franchise Business Review Survey, reflecting another year of Wendy’s far exceeding industry benchmarks. I am especially pleased with our rating on overall satisfaction, which paces more than 10 percentage points ahead of the industry in both the US and internationally.

We also continued to outpace the industry on financial opportunity and leadership scores further highlighting our system alignment. We recently held our annual Franchise Convention, and I could not be more pleased with the excitement we built across the system. We look forward to sharing more details on our plans to drive compelling restaurant economic model improvement on the back of acceleration across our growth pillars and providing our outlook when we release our fourth quarter earnings on February 15th. Through the partnerships with our franchisees and the dedication of our restaurant crews and support center teams, we will continue our march towards achieving our vision of becoming the world’s most striving and beloved restaurant brand.

I will now hand it over to GP to share our third quarter financial performance.

Gunther Plosch: Thanks Todd. Our third quarter results continued to highlight the consistency of our financial formula as progress against our strategic growth initiatives once again drove sales and profit growth. Our global system-wide sales grew 4.8%, achieving 13.7% growth on a two-year basis, supported by global same-store sales growth across both our US and international segments and continued global net unit growth. Our US company restaurant margin reached 15.6%, increasing 80 basis points year-over-year. This expansion was primarily due to the benefit of a higher average check, driven by cumulative pricing of 6%, partially offset by customer count declines and labor, and commodity inflation of approximately 4% and 2%, respectively.

G&A decreased approximately 5%, primarily driven by lower professional fees, resulting primarily from the completion of the company’s ERP implementation. Adjusted EBITDA increased 3.5% to approximately $139 million, resulting primarily from higher franchise royalty revenue, lower G&A expense, a decrease in the company’s incremental investment in breakfast advertising, and an increase in US company-operated restaurant margin. These were partially offset by lower other operating income due to lapping a significant gain from insurance recoveries in the prior year, which represents a year-over-year EBITDA headwind of approximately 6% during the third quarter. The over 12% increase in adjusted earnings per share was driven by an increase in adjusted EBITDA and higher interest income.

These increases were partially offset by higher amortization of cloud computing arrangement costs. Year-to-date free cash flow increased over 35% to approximately $226 million, resulting primarily from higher net income, adjusted for non-cash expenses and a decrease in payments for incentive compensation. These were partially offset by higher capital expenditures. Our strong results through the third quarter and the plans we have in place to end the year support our confidence in our 2023 and long-term financial outlook, which we are largely reaffirming today. We are tightening our full year global system by sales growth range to 6% to 7%, driven by our expectation for low single-digit global same-restaurant sales growth in the fourth quarter.

We continue to expect mid-single-digit global same-restaurant sales growth for full year 2023 and global net unit growth of approximately 2%. Our 2023 adjusted EBITDA outlook of $530 million to $540 million remains unchanged. Our tightened global systemwide sales outlook is offset by a lower G&A expectation of approximately $250 million, primarily driven by a lower expected incentive compensation accrual. We continue to expect US company-operated restaurant margin of 15% to 16%. We are also reaffirming our 2023 outlook for adjusted EPS of $0.95 to $1. Our capital expenditure outlook for the year is tightening to $80 million to $85 million as we have better visibility as we close in on year-end. Finally, we continue to expect 2023 free cash flow of $265 million to $275 million as our tightened capital expenditure outlook is offset by higher interest income.

Turning to our long-term outlook, we continue to expect 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. To close, I’d like to highlight our capital allocation policy, which remains unchanged. Our cash balance remained elevated at more than $600 million at the end of the third quarter, giving us flexibility to invest in the business to deliver meaningful global growth and return cash to shareholders. Our first priority continues to be investing in our business for growth, which we will continue to do, while holding true to our asset-light model. Secondly, we announced today the declaration of our fourth quarter dividend of $0.25 per share, delivering a full year dividend of $1 per share in 2023.

This represents an over 100% dividend payout ratio and aligns with our commitment to sustain an attractive dividend. Lastly, our capital allocation policy gives us the flexibility to utilize excess cash, to repurchase shares, and reduce debt. Year-to-date, through October 26th, we have repurchased approximately 8 million shares and have approximately $332 million remaining on our $500 million share repurchase authorization expiring in February of 2027. We expect to continue to lean in on share repurchases this year in light of our current share price and cash balance. Additionally, we repurchased approximately $70 million of debt for approximately $65 million, including both debentures and securitized debt, year-to-date through October 26. Our Board of Directors recently increased our debt repurchase authorization by $10 million leaving approximately $20 million remaining on the authorization expiring in February of 2024.

We are fully committed to continuing delivering our simple yet powerful formula. We are predictable, efficient growth company that investing our growth pillars and striving 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 New York with Barclays on November 15, after which we’ll attend the Stephens conference in Nashville on November 16. On November 27, we have an Investor Call with KeyBank and finally, we have a virtual NDR with TD Cowen on December 11. If you’re 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 fourth quarter and full year earnings and host a conference call that same day on February 15. As we transition to our Q&A section, I wanted to remind everyone that due to the high number of covering analysts, we’ll 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 today comes from David Palmer of Evercore ISI. David, your line is now open. Please go ahead.

David Palmer: Thanks. I wanted to ask you about unit growth and particularly the return on investment for franchisees. I know you’ve been working on new formats. And you touched on this last conference call, but I think it’s worth going over because I think people are concerned about the higher building costs, the higher land costs and the margin compression that’s naturally happened because of labor. So — could you just kind of go through what you see as the return on investment for new units these days? And where you see that pipeline developing? Thank you.

Todd Penegor: Good morning, David. Yes, great question. We made great progress on new build designs. As you know, with Next Gen, our building costs, we took about 10% cost out, and we are also operating it more efficiently. As you go through this, if you were to have no incentives, the levered payback of a Next Gen design is about six years. So it’s the one bookend. If you sign up our Build-to-Suit program, which is the most attractive program for franchisees, you get a levered return of about 3.5 years. And then obviously, we have other incentive programs like the Pacesetter that gets you to a return of about four years. And if you choose to do a Groundbreaker, it’s about 5.5 years of levered return. So that’s kind of what we have. It assumes the elevated – from a leverage point of view, it assumes the elevated interest rate that we are seeing in the marketplace.

Gunther Plosch: And I think, David, the confidence in the future is really in the proof that we talked about on the call, right? We’ve got 2% net unit growth approximately that will hit this year with all of those open or under construction. We’ve now got 70% of our restaurants under development agreement through 2025. So we are building confidence, and we know we need to continue to work to take a little bit of cost out of the building and continue to drive our margins up. And we’ve been seeing nice healthy margins on company new restaurant openings, which been opening north of $2 million with margins above the average margins that you see for the company. So those are encouraging signs too.

Operator: Our next question comes from Tyler Pros [ph] from Stephens Inc. Tyler your line is now. Please go ahead. Tyler, your line is now open. Please un-mute locally and proceed with your question.

Unidentified Analyst : Sorry, I was muted. Thanks for taking the question here. Can you talk a little more about the consumer and what you’re seeing as far as trade down or check management? Additionally, what are you seeing in the competitive environment as far as discounting among peers?

Todd Penegor: Yes, if you look at the consumer, it’s really the tale of two sides. The over 75,000 consumer continues to be healthy. We continue to see traffic growth in that segment. We’re holding our share in that segment. Under 75,000 consumers a little more stressed, especially as you go down the income core, it gets even more stressed. But again, we’ve lost a little bit of traffic there, but still holding our share with that consumer. From a trade down perspective, we are seeing some trade down from mid-scale casual and sit down into QSR. But we’re also seeing some trade out of the category from the lower-income consumer out of QSR and into food at home. So it was kind of wash each other out along the way. We do feel like we’ve got a calendar that’s very balanced with high and low to support both income cohorts.

And our job is to continue to make sure that we create great experiences as we have those folks trade into our brand and have compelling offers to make sure as folks get a little healthier from an economic standpoint, they continue to come back into the Wendy’s brand with our great promotions moving forward.

Operator: Our next question comes from Jeffrey Bernstein of Barclays. Jeffery your line is now open. Please go ahead.

Jeffrey Bernstein: Great. Thank you very much. Just wondering if you could talk a little bit about — I think you mentioned the comps start to improve in mid-August. In fact, traffic was positive. I’m just wondering if you could talk a little bit about what you think was the driver of the uptick I know of the big burger players, it seems like optically, you’re perhaps lagging your two biggest burger players. I know you mentioned holding your dollar and percent market share. So I’m just wondering, if you can connect the dots with a little bit more detail in terms of the competitive marketplace and your positioning relative to those largest peers. And again, the improvement that you saw in mid-August, what you think the drivers of that were?

Todd Penegor: Thanks for the question, Jeffrey. As you think about the start to the quarter, we were up against some really strong comps from a year ago. with the success of Strawberry Frosty. We thought we had a strong promotion with the BOGO for $1. It didn’t bring in as many add-ons early in the quarter as we had anticipated. But we also didn’t have any media support or promotional support on the breakfast business at the start of the quarter. We are rolling off of the $3 Cresson deal and really did set ourselves up with a lot of support or news to compete in the first half of the quarter but as the quarter evolved, we made some several challenges. We launched on the premium side in the middle of the quarter with the Loaded Nacho Cheeseburger and Kcell fries.

We brought news to breakfast with the English Muffin. We started our NCAA cup promotion and we launched a very compelling 2 for 3 breakfast Biggie Bag bundles. We started to see our business immediately shift and bring more customers in as we put those news and promotions out and then soon after that, the Pumpkin Spice Frosty launched, which created some additional support. And with all of that, we saw our one and two-year same-restaurant sales accelerate each month within the quarter. And importantly, we started to deviate from category trends with us starting to grow customer counts as we exited the quarter versus the category, QSR burger category being a little more challenged.

Operator: And our next question comes from Danilo Gargiulo of Bernstein. Danilo, your line is open. Please go ahead.

DaniloGargiulo: Thank you. In your opening remarks, you mentioned offering more consistent value promotion. So can you elaborate on that point? And what are you planning to maintain strong restaurant level margins for the next few quarters as a result of your strategy?

GuntherPlosch: Good morning, Danilo. Yeah. I mean value is important for our consumers. As Todd answered the previous question, right the income cohort that is earning less than $75,000 a year. They are having less frequency in opting out of the category. So as a result of this value bundles are important. I would say we’ve done a great job to move away from 4 for 4 and really upgrade the consumer to 4, 5 and 6 big bags. We have done a similar thing now instead of doing like a $1 across our promotion. We are moving to 243, which, again, is creating overall better economics. When you see it in our company restaurant P&L, our margin in the quarter was up 80 basis points despite still 2% commodity inflation and 4% labor inflation.

If you take the whole year, the whole year, our company restaurant margin sits at 15.9%. It’s actually above cobidlevals and we expanded profitability by about 190 basis points. So it’s a good balancing act that is driving good consumer engagement without actually giving up on restaurant economic model and other way around, we’re actually expanding profitability.