Wendy's Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 13 speakers on the call.

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 Thank you. Kelsey Fried, Director of Investor Relations, you may begin your conference.

Speaker 1

Thank you, and good morning, everyone. Today's conference call and webcast includes a power and lines are 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.

Speaker 1

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 and our Chief Financial Officer, Gunther Plush, will give a business update, review our Q4 and full year 2023 results and share our 2024 financial outlook. From there, we will open up the line for questions. And with that, I'll hand things over to Kirk.

Speaker 2

Thanks, Kelsey, and good morning, everyone. Before we get started today, I wanted to share how fired up I am about the opportunity to join The Wendy's team and lead this iconic brand. I've been a Wendy's fan my are whole life and what drove me to make this move was not just the amazing brand heritage, but the incredible potential I see in this business. I am confident that you will be just as energized about our future as I am after hearing our plans to drive profitable growth. Throughout my career, I have taken a customer centric mindset coupled with strong operational execution to guide growth and deliver on strategic objectives.

Speaker 2

I feel strongly that my experience and leadership philosophy will support our success and I am excited to bring this perspective to Wendy's at such a pivotal time for the brand and industry. In my 1st 9 days, I've had the opportunity to meet with many members of the team and some of our passionate franchisees. I look forward to spending more time with others across The Wendy's system and our investment community in the coming weeks. When I look at Wendy's, I see the highest quality food in the QSR are industry which has built a very strong foundation of sales and profit alongside a very healthy balance sheet. This foundation will serve as a springboard to drive what matters most, accelerated sales and unit growth so the brand can reach its full have a great day.

Speaker 2

Our commitment to growth has never been stronger and I believe that our strategic focus on driving global same restaurant sales momentum, Today, you'll hear our plans to invest behind these pillars to build a growth engine that drives an acceleration in sales growth, footprint expansion and margin enhancement to level up The Wendy's brand for years to come. Before we dive into our profitable growth strategies, I'd like to take a moment to recognize the team's accomplishments last year. We delivered strong 2023 results driving sales and profit growth as we made continued progress on our strategic growth pillars. Assist in execution and dedication to growing The Wendy's brand. Our international business achieved 8.1% same restaurant sales growth in 2023 laddering up to 20.5 percent on a 2 year basis and extending recorded a record number of international new restaurants opening in 2023 and is a key enabler of our international expansion in the coming years.

Speaker 2

Our U. S. Business reached 3.7 percent same restaurant sales growth in 2023, resulting in 7.6% on a 2 year basis. This growth allowed us to maintain our dollar and traffic share within the QSR burger category each quarter of 2023. We delivered meaningful year over year digital sales growth every quarter, growing nearly 30% across the full year to almost $2,000,000,000 which was well ahead of our original expectations.

Speaker 2

We reached a record high 14.5 percent global digital sales mix in the 4th quarter supported by strength across all channels as we built more personalized relationships with our loyalty members and continue to provide great in restaurant experiences. Our sales expansion and lower commodity inflation supported 100 basis point year over year increase in U. S. Company operated restaurant margin to 15.3%. This return to pre COVID margin sets the stage for even further improvement and profitability moving forward.

Speaker 2

We closed the year strong from a restaurant development perspective, bringing our full year openings are 248. On a net basis, we achieved our goal of 2% net unit growth with 75% of that growth in international markets. Finally, we remain disciplined in our capital allocation policy, including 100% increase in our dividend rate and returned nearly $400,000,000 to shareholders in 2023. All of this momentum sets a strong foundation for our growth in the coming years. I will now turn it over to GP to share our Q4 and full year financial results.

Speaker 2

Thanks, Kirk.

Speaker 3

We are pleased to deliver another quarter of Sales and adjusted EBITDA growth to close 2023. In the Q4, our global system wide sales grew over 3%, supported by continued global same restaurant sales growth and the benefit of our global net unit growth. Our U. S. Company operated restaurant margin of 13.5 contracted versus the prior year, primarily due to a quarter over quarter acceleration in commodity inflation to mid single digits, Customer count declines and labor inflation of almost 4%.

Speaker 3

These were partially offset by the benefit of a higher average check driven by cumulative pricing of approximately 4.5%. G and A decreased approximately 4%, are now open to the line of Edward. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 3

Thank you, $27,000,000 resulting primarily from higher franchise royalty revenue, a decrease in the company's incremental investment in breakfast advertising and lower G and A expense. These were partially offset by a decrease in U. S. Company operated restaurant margin and higher franchise support and other costs. Adjusted EPS came in at $0.21 with the decrease versus prior year driven by higher monetization of cloud computing arrangement cost and a higher tax rate.

Speaker 3

These were partially offset by an increase in adjusted EBITDA. Across full year of 2023, Our strategic plans and strong execution drove compelling financial performance. Our global system wide sales grew 6.1%, supported by the mid single digit global same restaurant sales growth alongside our 2% global net unit growth. Our U. S.

Speaker 3

Company operated restaurant margin of 15.3 and results returned to pre COVID levels despite ongoing inflationary pressures. Adjusted EBITDA increased over 7.5% to approximately $536,000,000 while adjusted EPS increased almost 13% to $0.97 Finally, Free cash flow increased 29% to approximately $274,000,000 further demonstrating with the high cash flow generating abilities of our business. With that, I'll now turn it back over to Kirk to talk about our plans to drive growth in 2024.

Speaker 2

Thanks, GP. As I said earlier, I am excited to begin this chapter for The Wendy's brand with focus on accelerating our global growth, delivering significant restaurant margin expansion and driving long term shareholder value. Now let's turn to our growth plans across each strategic pillar. The breakfast daypart is one of the most are now in line with our expectations. We can grow our breakfast business significantly without adding incremental labor, which drives meaningful improvement of our restaurant economic model.

Speaker 2

To fuel the acceleration of this daypart to new heights, we are planning to invest are in line with approximately $55,000,000 of incremental company advertising in the U. S. And Canada, split evenly over the next 2 years. This investment will further amplify our plans and support an always on approach across media, partnerships and activations as we tell our breakfast story. We are on a mission to ensure everyone has tried breakfast at Wendy's because we know from experience that once customers try our fresh cracked eggs and crispy bacon, they will be back again and again.

Speaker 2

The level of quality we provide on our breakfast menu supports our highest customer satisfaction scores and we are now driving further growth at today are by providing our amazing food at a great everyday price alongside craveable innovation throughout the year. I've had the privilege of meeting with some of our growth minded franchisees and I can tell you they are all in on breakfast and are committed to further supporting our investments by doing everything they can to execute at the highest level in the morning. We expect our investment and plans will drive a 50% increase in weekly U. S. Breakfast sales per restaurant over the next 2 years as we charge forward on our journey towards are earning our breakfast daypart fair share of approximately $6,000 weekly per restaurant.

Speaker 2

We also have plans in place to double down on what make Wendy's brand iconic. First, one of our biggest competitive advantages is our fresh never frozen beef that we use on every hamburger every day. Nobody delivers this level of quality at the scale that we do and we will once again utilize March Madness as a high impact platform to remind fans of this key Wendy's difference. 2nd, we will continue to lead the category in ownable and innovative programs that drive both traffic and check. In 2024, that means new premium flavors and it means game changing innovation on our chicken lineup.

Speaker 2

Finally, we will continue to leverage our very ownable Biggie Bag platform to offer are compelling everyday value. Importantly, we will always do this the Wendy's way, which means never compromising on quality. This platform drove success in 2023 with our customer ratings on value and quality trending better than competitors, positioning us to win visits in 2024. Critically important, we will execute with excellence in our more than 7,000 global restaurants. In 2023, we made great progress on customer satisfaction, will be available for the Q1 of 2019.

Speaker 2

We will continue to elevate our in restaurant experience to delight every customer every day. In total, we now expect our plans and investments will drive global same restaurant sales growth of are 3% to 4% in 2024, an increase versus our previous long term expectation of low single digits, and we expect to build on this momentum moving forward. Now let's turn to our plans to accelerate our digital business. We've made a ton of progress on our digital journey as we've grown digital sales from under $250,000,000 in 2019 to almost $2,000,000,000 in 2023. We are clearly seeing the benefits of the higher frequency and checks that digital drives.

Speaker 2

We also know there's a massive opportunity to further unlock digital sales growth and benefit even more from the margin expansion these channels can generate. To drive digital's new phase of growth, we are planning to invest approximately $50,000,000 primarily in 2024 consistently deliver seamless experience for our customers, enabling them to access Wendy's anytime, anywhere. We also implemented a new customer data platform in Q4 and are evolving our loyalty platform alongside best in class third party partners. These initiatives will unlock our ability to act on customer data through segmentation and machine learning, driving a meaningful increase in personalization and for our loyalty members. I am excited about our new capabilities in our digital toolbox, but what really drives our confidence in accelerating digital is the way we're bringing the entire experience together in a uniquely Wendy's way.

Speaker 2

We started our journey by forging a data centric infrastructure and building out a top talent team. That foundation allows us to gain the maximum benefit from these new platforms, including increased digital engagement, frequency and lifetime spend. We have the right people, systems and plans in place to fuel the next phase of digital growth and now expect global digital sales will reach over $2,000,000,000 2024, a full year earlier than planned. We are always focused on improving the customer and crew experience And in that spirit, we are leveraging technology in our restaurants even more. We are planning to invest approximately $20,000,000 to roll out digital menu boards to all U.

Speaker 2

S. Company operated restaurants by the end of 2025 and approximately $10,000,000 over the next 2 years to support digital menu board and enhancements for the global system. We expect our digital menu boards will drive immediate benefits to order accuracy, improved crew experience and sales growth from up are selling and consistent merchandising execution. Beginning as early as 2025, we will begin testing more enhanced features like dynamic pricing and daypart offerings along with AI enabled menu changes and suggestive selling. As we continue to show the benefit of this technology in our company and restaurants franchisee interest in digital menu boards should increase further supporting sales and profit growth across the system.

Speaker 2

We will continue setting the pace in generative AI and now have rolled out Wendy's fresh AI in several restaurants where we see ongoing improvement are in speed and accuracy. This technology also plays a key role on our restaurant team enabling the crew to focus on what matters, preparing fresh high quality Wendy's favorites and building customer relationships to bring them back time and again. We will do everything we can to ensure this new technology is delighting our customers and crew while enhancing our restaurant economic model along the way. The incremental sales growth we expect to deliver behind our investment in breakfast, digital and technology will drive meaningful sales leverage in our restaurants. These initiatives are highly incremental and margin accretive to the overall business, driving further benefit to restaurant margin.

Speaker 2

These growth drivers alongside our continued focus on supporting the restaurant economic model through cost management and and strategic pricing are driving acceleration in our U. S. Company operated restaurant margin outlook to 16% to 17% in 2024, and our plans perfectly position us to continue driving meaningful margin expansion into the future. The top 25% of our company operated footprint already achieved over 20% restaurant margin, so we know significant growth is achievable. We are now creating the foundation for all restaurants to reach towards the top performance tier.

Speaker 2

We are committed to working with our franchisees to support margin expansion across our system. This drives both incremental profit for our current footprint and improvement in new unit economics, which further Increasing development appetite from new and existing franchisees over time. But we aren't waiting to accelerate our unit growth. We are fueling growth now with continue to support of our global expansion plans. Our popular build to suit funds continue to drive unit growth and we expect to add incremental funding to the program over time to drive even more new restaurants.

Speaker 2

Additionally, as our restaurant economic model becomes even more compelling, we will lead by example and continue to expand our company operated footprint in the U. S. And U. K. These initiatives build on our groundbreaker and Tacesetter development incentive programs and our increased franchise recruiting efforts, which have resulted in hundreds of new restaurant commitments and 70 approved new franchisees across the last 2 years.

Speaker 2

These plans support our goal of driving global net unit growth of north of 2% 2024 and further acceleration to 3% to 4% in 2025. As of today, We have over 90% of our new restaurant pipeline through 2025 committed under a development agreement. This represents a are in line with our expectations and our position in the previous quarter, further solidifying our confidence in achieving our development goals. Now I'll turn it back to GP to walk through

Speaker 3

our financial outlook. Thanks, Kirk. Our 2024 financial outlook, which replaces our previous long term outlook, reflect the strong foundation we are building as we enter our next chapter. We expect to deliver significant sales growth of 5% to 6% this year, Driven by global same restaurant sales growth of 3% to 4% and global net unit growth north of 2%. This sales growth flows through the P and L benefiting royalties and our company operated restaurant EBITDA And driving our 2024 trusted EBITDA outlook of approximately $535,000,000 to $545,000,000 are flat to slightly up versus the prior year as we are making significant incremental investments across the business.

Speaker 3

We are expecting U. S. Company operated restaurant margin expansion of approximately 100 basis points to 16% to 17%. This is supported by our sales growth, including cumulative pricing in the low single digits and flat commodity inflation. We expect labor inflation will hold relatively steady versus the prior year at 3% to 5%.

Speaker 3

Please note that we expect our start up investments and ongoing inflationary pressures in the UK market will represent a headwind of approximately 50 basis points to global company operated restaurant margin. We anticipate that the increases in royalty and restaurant EBITDA will be partially offset by our investment in U. S. And Canadian breakfast advertising, an increase in G and A to 265 to $275,000,000 and a decrease in net franchise fees to $15,000,000 to $20,000,000 The expected G and A increase is driven by investments to high end support top talent to drive our growth plans. These increases are partially offset by lower expected professional fees.

Speaker 3

We expect free cash flow to grow to approximately 280 to $219,000,000 this year. We expect this will be driven by lower cloud computing arrangement cash outlays of approximately $25,000,000 as both phases of our ERP implementation have now been completed. An increase in our core earnings and cash received for development activities and services provided to franchisees. We anticipate these benefits will be partially offset by an increase in CapEx to $90,000,000 to $100,000,000 are driven by the rollout of digital menu boards to our U. S.

Speaker 3

Company operated restaurants, investments in our mobile app and an increase in company new builds. To close our 2024 outlook discussion, we expect an increase in our adjusted EPS in 2024 are now open to $0.98 to $1.02 primarily driven by an increase in adjusted EBITDA and letting a decrease in investment income in the prior year. These are partially offset by lower interest income driven by an expected decrease in our cash balance as we invest in the business for growth and an increase in amortization of cloud computing arrangements. We're building a profitable growth engine behind our investments to drive continued sales and margin expansion, supporting earnings and cash flow growth for years to come. Finally, I'd like to highlight our capital allocation policy, which remains unchanged.

Speaker 3

Investing in growth remains our number one priority and that is clear through the investments we are making to fuel our strategic growth pillars. Secondly, we are committed to sustaining an attractive dividend. We announced today the declaration of our Q1 dividend of $0.25 per share and expect a full year dividend of $1 per share in 2024. As we turn our focus to growth investments and maintaining an industry leading dividend yield, we plan to allocate less cash over the next year authorization expiring in February of 2027 and approximately $20,000,000 remaining on our debt repurchase authorization expiring this month. We remain fully committed to delivering our simple yet powerful formula.

Speaker 3

We are 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 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 Kirk.

Speaker 2

Thanks, GP. I couldn't be more excited for what's ahead of us at Wendy's as the investments and plans we announced today position us to drive growth across our strategic pillars. These plans are specifically designed to complement each other in ways that build Wendy's fandom and bring more customers into our restaurants more often. Our plans and investment enable us to delight our customers with high quality menu items, exciting innovation and compelling value across our dayparts, fueling an increase in our 2024 global same restaurant sales expectations to 3% to 4%. They allow us to build personalized relationships with our fans and make it easier for them to access the brand Anytime, anywhere, enabling us to reach our global digital sales goal of over $2,000,000,000 a year earlier than planned.

Speaker 2

And they drive our global footprint expansion, bringing more Wendy's Restaurants to the world and empowering our net unit growth are in line with the acceleration to 3% to 4% in 2025. Wendy's already has a strong track record of growth and now we are solidifying that foundation with the right investments at the right time to drive us to the next level. In the coming months, I am committed to working alongside The Wendy's system to build a robust profitable growth plan that will unlock the full potential of this iconic brand. With that, I will hand things over to Kelsey to share our upcoming IR calendar.

Speaker 1

Thanks, Kirk. We're excited to get on the road and introduce many of you to Kirk, who will be attending all our investor events this quarter. To start things off, we have an NDR in Boston with Piper Sandler on March 7. Will then attend the UBS Conference in New York on March 13, followed by the Citi Conference in Orlando on March 21. Lastly, we plan to report our Q1 earnings will be limiting everyone to one question only.

Speaker 1

With that, we are ready to take your questions.

Speaker 4

We do have our first question comes from Danilo Gargiulo from

Speaker 5

Quick question on the unit growth expectations for 2024. You've just recently been into the business. Can you help us understand, In your view, what has prevented Wendy's from potentially accelerating the unit growth development in 2024? And why are you excited about the growth development potential in 2025 and beyond?

Speaker 2

Danilo, nice to meet you.

Speaker 4

Thanks for

Speaker 2

the welcome. Yes, in 2024, we're excited about our expansion. I think the first thing to think about is between 2024 and 2025, we have 90% commitments through our development plan. So that gives me a lot of confidence. In 2024, we see north of 2%, Which is an acceleration on 2023.

Speaker 2

I feel really good about that and I feel really good about 'twenty five and beyond Because we've got that momentum and we can see that momentum moving into the future. That gives me a great deal of confidence.

Speaker 4

Our next question comes from Joshua Long from are

Speaker 6

open. Curious if you could talk a little bit about the Brexit sales trends to date and interested to hear about the incremental marketing that you're going to be focused on to drive that awareness in are in 2020 4 and beyond. Curious kind of maybe with the 2nd round of investment, what we've learned or what you all have learned from the 1st round and maybe how it might differ as you seek to drive the overall awareness of the category.

Speaker 3

Good morning, Josh. On breakfast, we're really happy with our breakfast Business, as you know, we are in it for since 4 years. We have now created the number 3 market position in the United States. And there's a lot of opportunity, right. As you have heard on the prepared remarks, our fair share on this business is $6,000 per restaurant per week.

Speaker 3

We are definitely with that investment growing sales by about 50% in the next 2 years and how do we do that, right? We definitely are are doing more innovation. You have seen us launch a breakfast burrito that will resonate well with consumers. We are also leveraging the Cinnabon brand to launch Cinnabon pull apart to again fulfill an unmet need. That will drive trial and repeat and will drive the breakfast business further.

Speaker 3

Secondly, I would say is we have definitely learned That kind of EBITDA value is really important. So you have seen us in the second half of last year Do 2 for $3 meal bundle on breakfast. The consumer has learned now that that's they are here to stay. So whenever they choose us in the morning daypart, they will find great value and obviously they find the best breakfast food in the category. I would also say is, our franchise community is super excited about the breakfast investments that we are making.

Speaker 3

So they are all in. As you have heard, we've talked to a lot of franchisees and they are excited to support The investment and continue to support and drive the breakfast business for us.

Speaker 2

Yes, just let me add a few things. Look, this is the most compelling growth opportunity are open for Wendy's and with the investment, the innovation and the excitement from the franchise community, this is a real opportunity for 2024 And 2025, so you think about our SRS growth, this represents about a third of the growth just in breakfast. So it's certainly a big bet for us, A lot of upside for us and we really have system excitement. So I'm really excited about this opportunity.

Speaker 4

Our next question comes from Jon Tower from Citi. Jon, your line is now open.

Speaker 7

Great, thanks. Maybe just following up on the breakfast Why just curious why breakfast and what's going to what do you think about the rest of the dayparts? Are there any Shifts in incremental spending regarding lunch and dinner. And can you give us maybe some context on how breakfast performed In 3rd Q4 of 'twenty four and maybe just reiterating Josh's question, how it looks quarter to date?

Speaker 3

Yes, John, on the breakfast side, I think we spent enough time answering And again, we are liking it because it's obviously super incremental from a profitability point of view for the franchisees and for us. We can add 50% of sales without really adding any additional labor. So it's a great driver for restaurant economic model. I would say, rest of day, obviously, super important for us. We are definitely going to double down on everything that makes brand iconic, right, fresh never frozen beef every day, the whole lineup, nobody can do that on the same scale as we.

Speaker 3

We're going to drive innovation. You're going to see news on Made to Crave. You will see news on Frosty Flavors And you will see innovation on the chicken lineup. Also would say value important, right, the Consumer is under pressure and our very ownable biggie bag is driving rest of economic model for us and is meeting the needs of those consumers that are looking for a deal. And last but not least, execution, execution, execution in their restaurants.

Speaker 3

We've made great progress in quarter 4. We got faster, customer satisfaction, accuracy all went better. That's obviously are a huge focus for us. Kirk, anything else you want to add?

Speaker 2

Yes. I think we've talked about the upside potential and the profitability upside for breakfast I would just add, we'll use some of our platforms like March Madness to talk about our fresh never frozen hamburgers, which are truly, I think, the best in the industry at the scale that we can provide. So we will certainly celebrate what we're famous for. But again, very excited about breakfast. Again, that's not the only thing we'll be talking about, but that's certainly one of the most important growth drivers for 2024 and 2025.

Speaker 3

Yes, John, I just realized I didn't answer your question in terms of sales trends beginning of the Q1. As you know, we don't give this out, but I can give you a little bit of color. As you have heard, we are increasing the SRS guidance with this outlook to 3% to 4%. The previous guidance was low single digit. So there's definitely an acceleration behind the investments.

Speaker 3

I can definitely say from a shake point of view, I can say quarter 1 will be slightly lower and then the quarter 2 and quarter 3 will be kind of steady and a little bit higher than the fiscal year guidance. You might ask then the question, so why are we saying quarter 1 is a little bit lower? Couple of things. First of all, definitely difficult comparisons. In the first Quarter of last year, our global SRS growth was 8%, and clearly, weather conditions in United States didn't help.

Speaker 3

Can also offer that we have seen the sales momentum accelerate in recent weeks and with all of that, We are confident with the sales guidance we have given up.

Speaker 4

Our next question comes from Brian Bittner from Oppenheimer. Brian, your line is now open.

Speaker 8

Thanks. Good morning. GP, I just want to follow-up on that. The system sales guidance for 2024 does assume the 3% to 4% comps. And I do just want to understand The confidence in setting what does seem to be a high bar.

Speaker 8

I understand there's investments coming to drive growth, but you guys just did 1% comps in 4Q, 2% comps on average the last couple of quarters, pricing is rolling off. So maybe help us understand why The same store sales assumption for 2024 is not a range that maybe reflects a bit more conservatism and maybe gives you a chance To maybe under promise and over deliver on the same store sales and why come out of the gate with what seems to be a pretty bold

Speaker 3

The guidance is we've put more money behind to drive that growth. That was not contemplated obviously in the previous guidance. So it's kind of the main reason as we obviously thought about this guidance and looked at our plans, we feel really good about them. What are the underlying assumptions to break it down a little bit? We definitely expect that the hamburger category will be slightly positive in traffic next That's our assessment.

Speaker 3

That's also the assessment of market research company that we are looking advice for. And if you look at And on U. S. SRS, we are definitely expecting low single digit traffic growth. Again, we are building frequency, right.

Speaker 3

We're building frequency in breakfast. We're building frequency in digital to drive traffic for us. We expect low single digit prices. Your observation is correct. We have a carryover price of about 2%.

Speaker 3

We have a small price increase set up for the middle of the year. So that makes it about low single digit and we expect the mix to be about flat. So that's the story. We obviously haven't given you All the details on all our commercial plans, we are highlighting breakfast, but again rest of day with obviously a huge portion. We have a lot of exciting news and approaches for our consumer that makes us confident that the guidance is very realistic.

Speaker 4

Our next question comes from Dennis Geiger from UBS. Dennis,

Speaker 9

Wondering if you guys could talk

Speaker 10

a little bit more about your customer, whether you're seeing anything as far as customer behaviors or spending patterns changing. I think, GP, you just mentioned a little bit around the consumer pressure, and I think you talked about value are within that context. So curious if anything more to expand also on the brand's value offering, anything on maybe value perception scores and maybe at a high level just value plans for the year if there's a way to kind of frame that up for us. Thank you.

Speaker 3

Good morning, Dennis. Let me start with the answer and And we'll have Kirk chip in if I forget anything. So you're right, right, the consumer is definitely under pressure, continues to be under pressure. The trends that the lower income consumer which we define as somebody with a household income of less than $75,000 Traffic is down with them. Our share is unchanged.

Speaker 3

So we are not losing there. Same thing on the higher household income consumer. Traffic there is up and again our share is unchanged. That's my overall in the quarter, Our dollar and traffic share was unchanged. So value is going to be important.

Speaker 3

I think our barbell strategy of offering a piggy bag up to what I would call super premium with Made to Crave, I think is definitely helping all our consumer basis. The high income consumer is probably tending more to the Higher priced items in the menu and vice versa. So that's kind of the consumer dynamics. If you look at the history of the category, you definitely find that net disposable income and mass driven are are pretty big correlators and expectation is clearly that net disposable income should go slightly up sequentially, right? Why do we believe this?

Speaker 3

Economy is doing pretty well. We are basically in full employment. Gross inflation is coming down, so quarter versus quarter that the consumer should start to see net disposable income coming up slightly, feel a little bit richer and feel a little bit like, yes, you know what, I can treat myself and come a little bit more often Into the restaurant. Fuel costs came down a little bit, so driving around mobility has come a little bit better. So all of that explains a little bit our position on the category should do a little bit better and we would absolutely expect that we would perform at least in line with the category.

Speaker 2

Yes. Look, I would just add, in my early days here, I'm seeing the Biggie Bag, looking at consumer trends and consumer and feedback, consumers love Biggie, and that is a real platform we'll continue to build on. Value is going to be incredibly important. It also gives me the confidence of why we're building this digital capability so that we can give personalized value. We can also create have loyalty and have momentum in loyalty.

Speaker 2

So digital is another avenue for us to drive value and the quality that we have at Wendy's.

Speaker 4

Our next question comes from Chris O'Cull from Stifel. Chris, your line is now open.

Speaker 9

Thanks. Hi, Kirk. Welcome to the call. Thanks for the information about the plans for 2024. But I would like to hear your thoughts about the company's longer term strategic priorities or at least if the company is going through a process to kind of evaluate whether the right long term growth and lines of business are in place.

Speaker 9

And what I mean by this, for example, are things like whether the company should be focused on international development outside of North America Is the right strategy or whether it should maybe consider franchising multiple domestic brands? I'd love your thoughts on that.

Speaker 2

Chris, yes, good to meet you. Yes, one of the things that attracted me to Wendy's was certainly the potential for profitable growth And the expansion opportunities that we have, I mentioned earlier that 90% of our development we can see Full line of sight up through 2025. One of the big growth opportunities certainly is both domestic and international expansion. We have a brand that certainly travels outside the U. S.

Speaker 2

And has the capability to provide great value and profitability and returns to franchisees. So we've recently brought on another 70 franchisees and approved another A group of franchisees to drive that development. We're looking at international development as a real opportunity. We will build, we'll put a flag in several different countries that we can build brand awareness, drive profitable growth. Yes, that is I got to tell you that is one of the things that excited me the most about joining Wendy's.

Speaker 2

That is in addition to driving SRS growth in our digital platform, unit growth both domestically and internationally is the clear priority for us.

Speaker 4

Our next question comes from Eric Gonzalez from KeyBanc. Eric, your line is now open.

Speaker 11

Hey, thanks for the question and welcome, Kirk. My question is at the late night daypart. I I don't think we really talked about it that much on the prepared remarks. So maybe you can discuss how that performed during the Q4 and whether you continue to view that as a growth driver in 'twenty four?

Speaker 3

Good morning, Eric. Yes, really happy with the late night day part in the We grew in this in the Q4 about mid teens year over year. So that was really a nice sales time for us in 2023. As you know, right, we've managed now to get really good support from franchisees on that initiative. About 90% of our restaurants are open to midnight or even a little bit later.

Speaker 3

We love the business. It has higher average check. It's really good for the delivery business. So we like all of that. I would however say is that in the base, I think it's going to be a valuable sales layer going forward, but I would not expect the outsized high teen growth rate that we have seen in 2023 to repeat itself in 2024.

Speaker 4

Our next question comes from John Ivankoe from JPMorgan. John, your line is now open.

Speaker 2

Yes. Hi. Thank you. Hi, Kirk. How are So the question and I have 2 if you don't mind.

Speaker 2

The question on international and especially the idea of are putting a flag in certain international markets to drive opportunity. In some cases, U. K. Specifically, it's a mature market. There's a number of competitors that have a lot of scale in that market.

Speaker 2

You are are very new relatively new and very subscale in that market. So maybe applying some of your PepsiCo type of experience, How can Wendy's come in and break in a mature market where scale has already been established by some very long term competitors? Just kind of give us that practice Seth, if you don't mind. Yes. Well, that's exactly I think You're onto something here, especially with the U.

Speaker 2

K. One thing that I love about what we have is we have this Quality differentiation that really plays in that market. We've seen real momentum in the U. K. And that's enough We have enough evidence with winning over customers with our quality, that which is very differentiated, which is meaningful for the U.

Speaker 2

K. Consumer. We've seen the growth and we will continue to build in that market along with other markets. But in that example, We have enough momentum, enough evidence, where we have brand love, brand awareness. And those are the things you think about when you're building a market is, Wow, the awareness, what you're famous for, differentiation, and we have momentum.

Speaker 2

So I feel really good about where we're going Internationally and to your example, the UK is a very strong market and has tons of potential

Speaker 3

for the future. And John, I also wanted To add that also our franchisees are super excited, right. We have 10 franchise restaurants in the United Kingdom, plus 14 reef units and 12 company units. And the initial results that our UK franchisees saw excited them so much that actually Early in, they increased the development commitments and say like, look, there's something there that resonates with the UK consumers. We are so confident We want to sign additional commitments to help you grow the market.

Speaker 3

So I think it's another good data point to think about that we probably got the entry into the UK right. It's a springboard for us into Europe and we think the investment is going to pay off nicely for us and for our shareholders.

Speaker 4

Our next question comes from Andrew Strelzik from BMO. Andrew, your line is now open.

Speaker 6

Great. Thank you and good morning. My question is on the restaurant margin outlook you provided for the U. S. Business, obviously expecting Some nice margin expansion there.

Speaker 6

So I guess I was just hoping you could break that down a little bit. How much are you expecting that breakfast is going to contribute in 'twenty four, how much visibility do you have on the commodity inflation side, the flat that you mentioned? And as you think about balancing value and are in the range of premium. I don't know if you're expecting mix to be a positive contributor or negative. I'm just curious for a little more texture on the margin

Speaker 7

outlook. Thanks.

Speaker 3

Good morning, Andrew. Yes, we feel really confident about the guidance of 100 basis points up to 16% to 17%. It's definitely sales leverage, right, so the 50% growth of breakfast over the next 2 years drive some of the profitability, same with digital, right, as you know. Check remains elevated versus the non digital check that drives We have a couple of projects out there on kind of pure cost management to help get Margin expansion going for us. Pricing, right, I talked about low single digit pricing In the context of an expectation that commodities is going to be flat for us in 2024 And labor inflation in line with history about 3% to 5%.

Speaker 3

A little bit of Color on the commodity front. We definitely expect chicken to be deflationary for us, Beef and fries, inflationary, all of that balances out to flat. From a visibility point of view, About 75% of our commodity pricing is locked down. The remaining 25% as you know, A decent amount of that is beef. As you know, we cannot lock that down throughout the year.

Speaker 3

So it's kind of the color on restaurant margin for you.

Speaker 4

Our next question comes from Chris Carroll from RBC Capital Markets. Chris, your line is now open.

Speaker 3

Are open.

Speaker 8

Hi, thanks. Good morning. So, GT, I believe you mentioned an increase in company new builds. So can you expand maybe a bit more on that, what the plan is there both near term and long term? Just maybe touching on the impact of franchise mix, Whether you plan to refranchise those new builds over time, just any further detail on the company owned strategy?

Speaker 8

Thank you.

Speaker 3

Yes, good morning. So overall, it's not a departure of our strategy. It's a little bit of leaning in, putting our money where our mouth is. We're going to stay asset light. As you know, our company restaurant ownership is about 5.7% at the end of this last year.

Speaker 3

It will hover around with the growth of the rest of the system to about the same level. You can definitely expect that we are going to continue to build out The U. K. Footprint, so that's about we're sitting at 12 restaurants currently. In the next couple of years, you can expect Growth to about 20 restaurants.

Speaker 3

We're also going to build out some of our existing markets in the U. S. A little bit further. So that's kind of the color on us leading in. It is not a departure from an asset light structure.

Speaker 3

We are just demonstrating to and franchises that there's money to be made, there's a great financial return to be had when you build restaurants these days with the margin structures that we have and the AOVs that we have and the margin outlook that we have.

Speaker 4

Our next question comes from Sara Senatore from Bank of America. Sarah, your line is now open.

Speaker 12

Great. Thank you very much. Just wanted a follow-up question on The competitive environment. I know, 3rd quarter you exited, I think, with positive traffic. You talked about Q4, you kind of maintained your share and but traffic I think dipped negative.

Speaker 12

So could you just maybe talk about How much of that was the market versus maybe your menu news or marketing? And as you think about getting the positive traffic in the year ahead, Not to belabor this, but maybe if you could press on some of the levers. Is it just the marketing dollars or You're expecting perhaps some improvement in the operating or competitive environment too?

Speaker 3

Good morning, Sarah. Yes, it's a comment on the quarter 4, I would say, is really the category. The It was relatively soft. We performed in line with the category. I think we had a pretty decent program out there in quarter 4.

Speaker 3

We pushed breakfast a little bit with the English muffin and obviously starting to instill the expectation with consumers On a $2 for $3 meal deal that is representing great value. So I would say the category in the Q4 was probably a little bit softer than we thought. We stayed obviously within the sales guidance that we had given are off of 6% to 7%, but we ended on the slightly lower side, but didn't obviously miss it. And again, be encouraged about The programming for next year, breakfast is important, and that's not the only thing we are doing. There is a decent amount Of innovation across all our main product lines on the rest of day that are going to fuel the business on the digital side And together with the breakfast business.

Speaker 3

That's kind of enough color I can give on that one.

Speaker 1

All right. Thank you, Sarah. That was our last question of the call. Thank you, Kirk and GP, and thank you everyone for participating this morning. We look forward to

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Earnings Conference Call
Wendy's Q4 2023
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