Wendy's Co (WEN) 2021 Q2 法說會逐字稿

Good morning.

Welcome to the Wendy's Company Earnings Results Conference Call.

(Operator Instructions).

Thank you.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.

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 are President and Chief Executive Officer, Todd Penegor; and our Chief Financial Officer, Gunther Plosch, will give a business update, review our 2021 second quarter results, share our revised financial outlook and provide a franchise health update.

From there, we will open up the line for questions.

And with that, I will hand things over to Todd.

Thanks, Greg, and good morning, everyone.

Our transformative growth continued in the second quarter as we had one of our best quarters ever as the Wendy's brand.

Sales once again significantly exceeded our expectations, leading to record profits and fueling our restaurant economic model.

We delivered a second consecutive double-digit 2-year accelerating same-restaurant sales results after accounting for the 53rd week shift on the strength of our rest-of-day business, growing breakfast daypart, digital business and a step change in our International performance.

Our breakthrough sales led to a restaurant margin of more than 20%, an almost 600 basis point expansion year-over-year.

Our focus remains on ensuring that we have a robust restaurant economic model across our system, and we are executing.

We successfully entered the European market with our first restaurant in the U.K. and are very encouraged by the early results and excitement we've seen so far in that market.

We also have a strong pipeline of company restaurants, with several more planned for this year, and have our first franchisee in REEF Kitchens that is planning to open a handful of delivery kitchens as well this year.

I'm extremely proud to share that we are increasing our 2025 global restaurant target to 8,500 to 9,000 restaurants as the team has been very successful in securing new commitments.

This increase is driven by an expanded relationship with REEF Kitchens and a newly created build-to-suit development fund.

In addition, we finalized approximately 240 incremental new restaurant commitments through our Groundbreaker incentive program.

We also recently finished collecting our 2020 U.S. franchise financials, and we saw a significant increase in overall financial health.

Our franchise system grew EBITDA dollars by almost 20% in 2020 to what we believe are record profits.

As a result of our incredibly strong start to the year and the momentum we are seeing in our business, we are increasing our dividend by 20% to $0.12 per share, which is back to our pre-COVID level.

We are also meaningfully increasing our 2021 outlook on all our key financial metrics, which GP will talk to later in the presentation.

Our goal remains the same, which is to invest in driving efficient accelerated growth, and we are delivering on that commitment in a big way.

Our momentum carried into the second quarter, with Global same-restaurant sales growth of 17.4%.

This came in well ahead of our internal expectations, driven by continued strength across our U.S. and International businesses.

This translated to 11.6% on a 2-year basis, reaching double digits for a second consecutive quarter.

And we accelerated on a 2-year basis to approximately 14.1% when accounting for the 53rd week shift.

In the U.S., we achieved double-digit 1- and 2-year same-restaurant sales again this quarter, reaching 16.1% and 11.7%, respectively, and record AUVs on a trailing 12-month basis of almost $1.9 million.

These strong results were driven by continued growth in our rest-of-day business, alongside our growing breakfast and digital businesses.

This is our fourth consecutive quarter of double-digit 2-year same-restaurant sales growth, which showcases the power of our business and our execution against our strategic initiatives.

Our International business saw a significant increase in same-restaurant sales this quarter, accelerating to 31.4% on a 1-year basis and 13% on a 2-year basis.

This growth is attributed to the strength and recovery across many of our markets, with our Canadian restaurants reaching all-time high AUVs on a trailing 12-month basis of almost CAD 2.4 million.

The continued strength and momentum we've seen in our Global same-restaurant sales through the second quarter has once again given us the confidence to take up our systemwide sales outlook for 2021 to 11% to 13%.

Our Global franchise system is engaged, and we are confident in the plans that we have in place for the remainder of 2021.

Let's spend a few moments talking about our incredible U.S. same-restaurant sales, which continued to accelerate in the second quarter, driven by a significant improvement in customer accounts and continued strong average checks.

We continued to innovate with our successful Made to Crave platform this quarter, launching the Bourbon Bacon Cheeseburger, which led to record results within this platform for the quarter.

We also relaunched the fan favorite Summer Strawberry Salad, which drove substantial year-over-year growth in our salad business.

These programs continue to boost our average checks by trading our customers into our most craveable and highest-quality products.

We also executed against our high-low strategy by continuing the $5 Biggie Bag promotion, which drove traffic into our restaurants throughout the second quarter.

We will continue to strike a balance between our core menu items and new product offerings, with exciting and ownable new products.

On the innovation front, we continue to lead in the area of spicy with the recent launch of our Ghost Pepper Ranch dipping sauce.

We also have a new addition coming to the Made to Crave lineup launching at the end of August, which we are really excited about.

We expect to continue to drive outsized results in our U.S. business as a result of our planned programming and high level of execution.

Breakfast continued to be a profitable sales layer for us in the second quarter, and our average weekly sales dollars delivered versus our breakfast plan.

We could not be more excited about the upside that is still in front of us at breakfast.

And the incremental investment that we announced this morning gives us even more confidence.

In the second quarter, our breakfast sales accelerated as expected, growing 10% over the first quarter.

This growth was driven by the successful $1.99 Honey Butter Chicken Biscuit and 2 for $4 trial-driving promotions during the quarter.

These promotions have been critical to our success as we continue to see very strong customer repeat and high customer satisfaction after people try or breakfast.

We continue to expect outsized growth during the breakfast daypart in the second half of 2021, driven by continued trial-driving programs and an expected return to routine in the fall.

This is being fueled by our incremental company breakfast advertising investment that we just increased by $10 million to $25 million in 2021.

We believe this incremental investment will continue to drive trial and acceleration of the company's breakfast offering in a meaningful way.

We remain confident in our plan to grow our breakfast sales by 30% in 2021 and reach our goal of 10% of sales coming from breakfast by the end of 2022.

We continue to be very pleased with our digital business, which grew across the globe in the second quarter.

Our International business continued to deliver double-digit digital sales mix in the second quarter, as we've seen our digital gains during COVID remain strong.

In the U.S., digital sales dollars grew over 10% and outpaced our plan for the quarter.

This was driven by gains in both delivery and mobile ordering sales.

Delivery sales were bolstered by several successful promotions, and we're encouraged by the growth we've seen in this channel even as mobility continues to increase.

Our mobile ordering gains were driven by several impactful acquisition campaigns, which increased our total loyalty program members by 25% compared to the first quarter to 17 million.

We saw significant growth in both digital and overall sales during the second quarter, resulting in our digital sales mix holding steady at approximately 7.5%.

We remain fully committed to our digital journey, and I know that the technology investments we're making alongside our franchisees will set us up for continued growth into the future.

As I shared earlier, I am extremely excited to announce that we are increasing our 2025 Global restaurant target to 8,500 to 9,000 restaurants, which is a meaningful 500 to 1,000 increase versus our previous target.

This increase is being driven by a development commitment by REEF Kitchens for 700 delivery kitchens over the next 5 years in the U.S., Canada and the U.K.

This commitment builds on the successful test that we completed in Canada and will allow us to further develop urban markets where we are currently underpenetrated.

We are still very early in our nontraditional development journey, but we are encouraged by the results that we've seen with REEF, and we'll continue learning alongside them throughout this partnership as we grow our brand.

Our increased global restaurant target is also being supported by the creation of a $100 million build-to-suit development fund that we expect will drive approximately 80 to 90 new franchise restaurants from 2022 through 2025.

This initiative will be funded by the additional cash that we have obtained as part of our successful debt refinancing that we completed in the second quarter.

This program, along with newly implemented lower liquidity and net worth requirements for our new franchisees, will transform how we recruit and engage diverse franchisees into the brand.

Our real estate and construction teams will be on point to secure and build the locations, making it a turnkey solution for a franchisee to open a new restaurant.

I also wanted to provide an exciting update on our Groundbreaker Incentive Program as we were able to secure approximately 240 incremental commitments in Canada and the U.S. that will further solidify our restaurant development pipeline over the next several years.

With the incremental commitments from the Groundbreaker and the incremental REEF units, we now have about 70% of our global new restaurant pipeline through 2025 committed under a development agreement, which is our highest level that we've ever seen.

We remain on track to reach approximately 7,000 restaurants by the end of 2021, and this is supported by a strong global pipeline of restaurants, where we currently have almost 70% of our planned restaurants open or under construction through the first week of August.

Our development foundation is extremely strong, and we are confident that we will reach our increased goal of 8,500 to 9,000 global restaurants by the end of 2025.

Our playbook of investing to drive accelerated growth behind our 3 long-term pillars to meaningfully build our breakfast daypart, drive our digital business and expand our footprint across the globe remains the same.

We continue to make tremendous progress against these goals while making investments in strategic partnerships to set ourselves up for today and the future.

These initiatives remain deeply rooted in the foundation of the restaurant economic model, and we are delivering on that promise, as we showed in the second quarter with our accelerating margin performance.

Our business momentum, strong partnership and health of our franchisees and the dedication of our restaurant crew and support center teams reaffirms our confidence that we will achieve our vision of becoming the world's most thriving and beloved restaurant brand.

We know that our best days are ahead of us, and we are excited to deliver.

I will now hand things over to GP to talk through our second quarter financial results.

Thanks, Todd.

We could not be more proud of our second quarter results as our business continued to accelerate to record levels, showcasing same-restaurant sales and core earnings growth that were once again well ahead of our expectations.

Our Global systemwide sales grew an incredible 22.9%, and our same-restaurant sales increased to 17.4% in quarter 2 on the strength of both our U.S. and International businesses.

Year-over-year company restaurant margin increased almost 600 basis points to over 20%, driven by sales leveraging from our 23.9% company-operated SRS growth and lapping recognition pay in the prior year.

These benefits were partially offset by having to absorb higher-than-expected labor rates and commodities of almost 6% and 3.5%, respectively.

The increase in G&A was driven by higher incentive and stock compensation accruals as a result of our improved outlook and higher technology costs, primarily related to our ERP implementation.

Adjusted EBITDA increased approximately 35% to $131 million.

This was primarily driven by higher franchise royalty revenue as a result of increased same-restaurant sales, an increase in company-operated restaurant margin and an increase in net franchise fees as a result of the company's new technology fee implemented in 2021.

These benefits were partially offset by higher general and administrative expense.

Adjusted earnings per share increased 125% to $0.27, driven primarily by our higher adjusted EBITDA.

Finally, our free cash flow increased significantly to approximately $186 million.

The increase resulted primarily from higher net income, higher royalties collected as the result of lapping the 3-month extension of royalty payment terms that was provided to franchisees in 2020, the timing of rental payments and the timing of accrued compensation payments.

Our strong quarter 2 results and continuing momentum in the business are driving a high quality of earnings that resulted in a meaningful increase to our 2021 outlook for a second straight quarter.

We are raising our Global systemwide sales growth outlook to 11% to 13% based on our outperformance in quarter 2 and an improved full year sales outlook due to the strength of our business.

This improved sales outlook is the major driver in our adjusted EBITDA outlook, which is up $10 million, to approximately $465 million to $475 million.

We are now expecting an increase in our company-operated restaurant margin to 17% to 18% in 2021, which is being driven by the improved sales outlook.

Our margin outlook is also inclusive of increases to both commodities and labor rates, which we are now expecting to be inflationary, approximately 2% to 3% and 5% to 6%, respectively.

We are also expecting an increase in net franchise revenues related to franchise transactions that are expected to close in the back half of the year.

These increases are being partially offset by an increase in G&A to approximately $240 million to $250 million, which is driven by higher incentive compensation accrual because of our improved outlook.

These increases are also being offset by the incremental $10 million company breakfast advertising investment we are making.

Our higher adjusted EBITDA, a slightly lower expected tax rate and interest savings from our successful debt refinance are resulting in a $0.07 increase to our EPS outlook to $0.79 to $0.81.

Finally, we are raising our free cash flow outlook by $20 million to approximately $270 million to $280 million.

Like we do as part of our quarter 2 earnings release each year, I wanted to take the opportunity to give you an update on our U.S. franchise financial health as we recently finished collecting and reviewing our financials for 2020.

The outstanding results we are seeing as a company are also being experienced by our franchise system.

Our franchisee sales in the U.S. grew approximately 2% compared to the prior year.

These sales, along with significantly improving restaurant margins that were positively impacted by higher average checks as a result of the pandemic, allowed our system to grow EBITDA dollars by almost 20% in 2020.

We believe that these results represent record profits for our franchisees, and that this strong performance has continued in 2021 with the momentum that we have seen in our business.

Our franchise system also has very healthy balance sheet as their lease-adjusted leverage ratios declined in 2020 and has decreased by more than 0.5 a turn since 2018.

We know that ensuring franchisee health will ultimately lead us to achieving our long-term growth goals.

So we are thrilled with these results.

This all led us up to a very strong partnership with our franchise system that allows us to focus on great execution as one system behind the alignment of our strategic growth initiatives.

To close, I would like to highlight our capital allocation policy, which remains unchanged.

Our first priority remains investing in profitable growth, and we are showcasing this for the investments we are making across our 3 strategic growth pillars.

Our increased breakfast investment and our build-to-suit development fund are prime examples of us leaning in to drive transformative growth.

We expect that the restaurants from the development fund will deliver a strong return for us and our franchisees, who will operate them.

Moving forward, we anticipate we will have a separate line within the investing section of our cash flow statement to report this, and that the cash outflow related to the fund will therefore not impact our free cash flow definition.

Today, we announced the declaration of our third quarter dividend, and that we are increasing it by 20% to $0.12 per share.

Our strong liquidity position, along with the momentum we are seeing in our business, support this increase while still leaving flexibility to invest in growth.

Lastly, we plan to utilize excess cash to repurchase shares and reduce debt.

We announced today that we have added an additional $70 million to our existing share repurchase authorization to a total of $220 million.

As a result, we have approximately $100 million remaining on our authorization that expires in February of 2022.

We are fully committed to continue delivering our simple, yet powerful formula.

We're an accelerated, efficient growth company that is investing in our strategic pillars and driving strong systemwide sales growth on the backdrop of positive same-restaurant sales and expanding our global footprint, which is translating into significant free cash flows.

With that, I will hand things back over to Greg.

Thanks, GP.

To start things off, we'll be doing a virtual NDR with Todd and GP.

The first leg will be focused on the Boston market with Oppenheimer on August 17, and the second on New York with Barclays on August 18.

We will follow this up with a virtual NDR focused on the Canadian market with RBC on September 1.

Following these NDRs, we will be attending the Wells Fargo conference in person on September 22 in California.

We will also be hosting an investor call on September 9 with BTIG, and doing a virtual headquarter visit with KeyBanc on September 30.

If you're interested in joining us at any of these events, please contact your respective sell-side analysts or equity sales contact at the host firm.

Lastly, we plan to report our third quarter earnings and host a conference call that same day on November 11.

As we transition into our Q&A section, I want to remind everyone on the call that due to the high number of covering analysts, we will once again be limiting everyone to 1 question only.

And with that, we are ready to take your questions.

(Operator Instructions) The first question comes from Brian Mullan with Deutsche Bank.

Congrats on great results.

Just a question on the U.S. development pipeline.

You had a lot of positive announcements today between REEF Kitchens, the Groundbreaker incentive and the build-to-suit fund.

But within these, can you just update us on how you're thinking about U.S. net unit growth in 2022?

And related to that, maybe offer some thoughts on how you expect the shape of that net unit growth in the U.S. over that '22 to '25 time period on the path to those new updated targets?

Brian, yes.

For 2021, we're expecting a Global unit growth of 2% plus.

And obviously, it's going to accelerate between 2022 and 2025 to about 6%.

We have said previously -- and basically, what happened is both International growth and International and U.S. growth is going to lift up.

And the starting point is a 10%-plus growth rate in International for 2021 and about a 1% growth within the U.S., both areas are going to lift up from an acceleration point of view since all the new incentive agreements are basically of global nature.

Your next question is from the line of Brian Bittner with Oppenheimer.

I echo the congratulations on great results and the momentum in the business.

Can you talk a little bit more about the difference between breakfast growth and rest of day in the quarter?

And a follow-up is just as far as breakfast awareness goes, can you update us where we are now?

And what do you believe is the biggest catalyst to really break through and unlock on the awareness front as it relates to breakfast?

Is it continued investments like you've announced today?

Or is there anything else you believe you can do to really catapult those awareness levels across the U.S.?

Brian, thanks for the question.

If you think about our same-restaurant sales growth in the U.S. of 16.1%, and we had really strong growth across the rest of the day.

Lunch was heavily impacted last year during COVID.

Late night was heavily impacted, and we had a nice rebound in both of those dayparts.

Breakfast continues to grow.

It was up 10% versus Q1 when you look at overall sales dollars.

So we got nice healthy builds happening there.

We're also seeing our digital business grow, up 10% versus the first quarter.

So we're continuing to see nice dollar sales build on that front.

So it's a nice healthy mix across all elements of same-restaurant sales growth.

I think the key unlock on the breakfast front really is continuing to drive trial.

Our awareness levels are quite healthy as it's north of 50%.

We're in there in that same range with where Burger King is around awareness, and they've been there for quite some time.

And what we need to do is continue to create news, have trial-driving events, get folks to try our food.

And importantly, be part of the return to routines that we expect to happen as we get into later this month, with schools returning later this quarter, with folks returning back to work.

And whatever that routine is, we need to be part of it, and that's why we're putting additional $10 million of advertising to work to make sure that, that message is loud and clear.

Your next question is from the line of John Glass with Morgan Stanley.

I have 2 development-related questions.

First, just on the retentions.

Any early understandings of what the economics look like?

I assume you built with the capital in just clarify if we should expect lower volumes just because of REEF Kitchens or -- and how do you think about that?

And as it relates to the $100 million, given the franchise economics are good, and you already have Groundbreakers, why did you feel like you needed an additional incentive for development?

Or is that targeted differently to different types of franchisees?

Maybe just explain what the rationale behind it or your capital behind that.

Yes, John, 2 quick things on REEF.

One, we -- as we said in the release, we do expect about 50 to be open this year and then the rest spread evenly over 2022 through 2025.

And we had a very successful test with about 8 units up in Canada, really allows us to get into urban locations where we're dramatically underpenetrated.

If you look at the economics, early to tell what we can do from a sales out of each of those vessels, but we're expecting sales in the range of $500,000 to $1 million per unit.

And the good news is we've got a higher royalty rate: in the U.S., almost 6%; 5.5% in the U.K. So even though there's a little bit lower sales dollars coming out of those vessels, we got a nice healthy economic return.

From an investment perspective, REEF is putting up all the dollars to get the vessels, to train the people, hire folks.

We're going to support them on training to make sure that they hold the great standards.

On the build-to-suit fund, it's just another leg on the stool.

We've got a lot of great things happening between REEF, the development agreements in place with Groundbreaker, the pipeline that's already in place.

And what we really wanted to do is make sure that we were able to bring new franchisees into the system and allow them to build their way into the system.

And we think this program is a great program to allow folks to build their way into the system.

We also think it's a great program for smaller franchisees to leverage, to allow them to scale up along the way.

The economics are compelling for the company and for the franchisees as they come in.

These, all coupled with the lower liquidity requirements that we talked about to become more competitive, really makes this program compelling for new folks to come in, and it will help us on the diverse recruiting front, too.

Your next question is from the line of David Palmer with Evercore.

Great job on the company restaurant margin expansion.

GP, I think you mentioned in the prepared remarks that the system had a 20% EBITDA growth in 2020.

I'm wondering if maybe you could dissect that and think -- help us think through how the company restaurants, what they're lapping this year versus what the system is lapping?

For example, you had the onetime bonuses last year, and then there's the stores that you're going to be refranchising out of New York, I believe, that were presumably a drag.

And I mentioned all this because it doesn't look like your company restaurant profit did as well as the system in 2020.

Thank you, David.

Yes, we are really happy with our company restaurant performance in the second quarter, despite actually having to absorb more inflation than what we had originally anticipated, right?

We had to absorb about 3.5% commodity inflation and almost 6% labor inflation.

Franchisees, just to address your question there, yes, they increased EBITDA by about 18% versus prior year.

So it's not a profitability number, that's an EBITDA growth number.

So obviously, the profit growth rate was much higher than the sales growth rate.

And franchisees, really, want great restaurants and benefited clearly from higher average checks.

Just to make absolutely sure is that EBITDA growth of 18% does not include any potential income franchisees might have gotten out of PPP funds.

In terms of outlook for our company restaurants, right, we have increased the outlook again for this year to about 17% to 18% despite having had to experience now and absorb inflation, right?

We had previously thought commodity inflation would be flat.

We are now 2% to 3%, really driven by beef and pork.

And on the labor inflation, in the first half, we absorbed about 5% labor inflation.

On the year, we're expecting about 5% to 6%, so really strong performance.

Your next question is from the line of Eric Gonzalez with KeyBanc Capital.

Congrats on all the development progress.

I just have a question about that -- the development fund.

I was wondering the mechanics of that.

Were you lending money to franchisees for construction return, received an elevated rental payment?

Is that typically how that works?

And then as a follow-up to the earlier question on the build-to-suit fund.

I'm just wondering how much incremental risk is being introduced by lowering the thresholds on network -- network and liquidity.

And what you may be doing to prevent an uptick in store closures down the line, particularly where you might be on the hook given your position as the build-to-suit lender?

Yes, the build-to-suit program is kind of a classic build-to-suit program that we had on a smaller scale up in Canada.

So we actually are providing their building.

The franchisee will have to invest in signage and equipment.

So I think roughly 70% of the capital is ours, 30% is kind of the franchisees.

And in return, for us to make a return on the capital that we are investing, we are getting slightly elevated royalty rates and rental rate income.

So it creates really a high-quality income stream in future years for us.

In terms of your question around risk exposure by lowering the requirements, liquidity requirement previously was about $2 million.

We lowered to $0.5 million.

the net worth requirement was $5 million, and we lowered it to $1 million.

At first blush, it looks like we're taking on a lot of risk.

I have to say we studied the competition.

We actually were too conservative and not competitive.

The kind of requirements that we have are very much in line with what the rest of competition is doing.

The next question is from the line of Jeffrey Bernstein with Barclays.

Great.

Just wanted to follow up on the franchise health.

That 18% increase in EBITDA, I'm just wondering if you can give any kind of dollar context into maybe where it was or where it is today.

And then on that front, as you talk about the elevated commodity and labor costs, especially through the back half of this year, just wondering what the feedback or discussion is with franchisees on that.

And maybe if you can share what the current menu pricing is for company or systemwide in your estimation to help mitigate that to drive such strong profitability.

Yes.

I think, Jeff, you snuck in there 3 questions into just 1. I'll try to remember them all.

So on the 18% increase, really, we didn't call the absolute dollars.

But as we said on the call, in absolute dollar terms, this is the highest absolute profit per restaurant that we have seen in the franchise system.

It's remarkable, right?

The sales growth was held back with only 2% growth, which is in line with what we have reported previously, to then actually extend profit by 18% is strong.

Actually, Canada performed even stronger.

Canada's EBITDA was kind of a little bit more of 20% growth.

So that's kind of the other number that I can give you.

And on the lease-adjusted leverage ratio, again, it's remarkable that we are down half a turn versus 2018, given all the capital requirements franchisees have, right?

They need to invest in technology.

We're obviously accelerating and have accelerated our new build capital, and we are accelerating our image activation.

So with all of that, the lease-adjusted leverage ratio goes down is good.

By the way, we are calculating this on an 8x rent basis.

That was the first question.

The second question was the commodity and labor inflation.

The actual experience, really, the driver is really the labor shortage that we have that started relatively quickly then in the second quarter.

So that's why we took on more labor inflation in the second quarter, and we expect that to stay elevated to compete effectively in the marketplace.

It has not -- labor shortage has not really significantly impacted our sales performance.

We are seeing, however, a little bit more over time that we do need to digest in our profitability.

But I think now this is your second question.

And the last one would have been that on pricing.

So where we've gone on company pricing is -- company has been on par with food-away-from-home inflation.

We've got a little more opportunity than our franchisees as we've been a little more conservative over the last few years on pricing.

So we had a little bit more opportunity than them.

The system was slightly below food-away-from-home inflation.

But with the healthy consumer, with the wage and commodity inflation that GP just talked about, we believe we have pricing power to offset a portion of these headwinds, and that's the focus and built into the guidance for the year.

Your next question is from Chris Carril with RBC Capital Markets.

So on the incremental advertising spend of $10 million to support breakfast, can you provide any more detail around that decision?

What drove it?

Are you seeing anything from your peers to suggest competition in the morning dayparts ramping up?

Or are you just simply seeing more of an opportunity to drive trial as mobility continues to improve as you had discussed earlier.

Yes.

It's really the latter.

I mean we're really playing our own game.

And like we've always said, ingraining the breakfast habit is a several year journey.

A little different as habits are changing in the morning routines.

And we really want to be there as morning routines start to get reestablished as we get into the fall.

So we thought it was a wise decision to continue to keep the pressure on, continue to invest in awareness, continue to invest in trial and really ingrain that habit to make sure that it's the gift that keeps giving.

So we can continue to drive our sales towards that 10% of sales mix by the end of 2022.

So that was really our thinking around that decision.

Our opportunities to continue to have fun trial-driving events to get our food in our consumers' mouths.

And you get to see on this weekend, if you want, you can go get a free croissant.

And then Wendy's restaurant on Saturday and Sunday, a great trial-driving event leading into some other support that we'll have our own breakfast.

So it's coming quickly.

Your next question is from the line of Andrew Charles with Cowen.

GP, I want to come back on the restaurant-level margins.

Guidance for 17% to 18% implies a step-down from the 18.7% year-to-date.

And I think you said guidance for 5% labor inflation and 2% to 3% commodity inflation, which is a bit of a deceleration versus what you saw in 2Q.

So can you talk a little bit about what's driving the deceleration of the anticipated restaurant-level margins?

You guys are about 95% reopened on dining rooms.

I think I saw in the Q, so I don't think that it's the incremental dining rooms coming on board.

Just any more color to kind of help flesh that out would be helpful.

Andrew, yes, this is the correct observation.

Our year-to-date restaurant margin is sitting at 18.7%.

So obviously, the guidance of 17% to 18%, we're decelerating slightly.

A couple of things.

The comparisons are getting a little bit more difficult.

So we're going to get a little bit less sales leverage on a 1-year basis into our restaurant P&L.

It's probably the first reason.

Second one is we still have sequentially inflation stepping up.

On a year-to-date basis, we absorbed commodity inflation of about 1%.

On the year, we are getting to 2% to 3%, and it's basically driven by bacon and beef.

So that puts pressure on it.

And the second one is labor inflation, a little bit of an uptick, right, year-to-date, about 5% labor inflation.

We're expecting in the year about 5% to 6%.

Lastly, as we get towards the end of the year, we do expect that the check sizes are going to come down a little bit.

But obviously, it's also going to put a little bit pressure on it.

Again, if you step back from it, 17% to 18% margin is a super strong result for us.

Compare that to the 15% we posted last year.

Your next question is from Dennis Geiger with UBS.

GP or Todd, wondering if you could talk a little bit more about the core lunch and dinner daypart, and how you think about some of the drivers going forward.

Maybe if you could touch a bit on menu innovation.

I know you've talked about some items, I believe, in test there, thinking about the digital loyalty piece, the contribution from the reopened dining rooms.

And if there's anything kind of on throughput and in service speed that you're thinking about for the rest of the year and just kind of going forward over the coming quarters.

And any other kind of key contributors to continue to drive those dayparts would be great.

Yes.

I think first and foremost, it starts with speed.

We need to continue to get folks through our drive-throughs even quicker.

That's why we're doing all the work on mobile grab-and-go.

That's why we're doing the work on getting folks to do more mobile ordering.

And that's why we continue to roll out curbside across all of our restaurants.

Folks are looking for speed to support their need, and we want to be there to continue to support that.

Our opportunity is to continue to make sure our restaurants are fully staffed to truly complement a great experience and that speed along the way.

And then as you think about the rest of the calendar, beyond just great operational execution, we do have a lot of nice things planned for the rest of the year.

They are a nice balance between core messaging to continue to drive the equities that we have and seen a lot of success on our premium core.

You will see news on the Made to Crave lineup.

I'm very pleased that the Made to Crave lineup continues to trade customers up, and got an exciting promotion coming fairly soon on that front.

And then lastly, we'll continue to stay focused on our food and upgrading the quality of the food across chicken hamburgers and french fries.

I think all of those things, as our brand continues to be more relevant to the consumer, just creates better experiences, creates more value for the money and keeps those customers coming back a little more often.

The next question is from John Ivankoe with JPMorgan.

I was hoping we could talk about the average ticket of '21 versus '19.

In other words -- and what I'm assuming, how much transactions might actually be down?

I mean if you have an intention of regaining the total transaction count that you have in 2019, if that's even important to you.

Certainly, you make more money-selling, higher-margin products and higher prices to fewer customers, and that's just how the math works.

And if you don't mind, can you talk about that average ticket in the context of commodities, not just beef, but also chicken, at least, it looks like right now as those contracts may potentially roll over.

We've been very pleased.

If you look at average ticket versus '19, it is up significantly.

We haven't given out the specifics on that.

But you've got a combination of things happening.

You got average items per transaction up with consumer bringing things home often.

You've got a nice digital mix happening, both with mobile ordering, with 15% to 20% higher average checks; delivery, with 40% to 50% higher average checks.

And then we're seeing some great mix, trading folks up from the value side of our menu into our core premium and all the way up into our Made to Crave lineup, which had all-time record sales mix in the second quarter.

I think all those dynamics can continue as we deliver high-quality craveable products, time and again.

Customer counts would still be down relative to 2019.

Very importantly, we want to continue to make sure we got a balanced high-low calendar.

4 for $4 will continue to have a role.

$5 Biggie Bag has a role.

But we need to have that balance on the high and the low to continue to bring those customers back as mobility continues to increase more around a routine basis.

Because mobility has come in back, but folks don't have that routine down yet.

Thinking about getting lunch at work or breakfast on the way to work, dinner on the way home from the office, those things are still all opportunities out in front of us to bring more customers into our restaurants.

And if possible, I mean, can you kind of talk about just your overall outlook on that average ticket, especially in the context of new commodities, which may be even more significant in '22 than they were in '21?

The way we built our guidance, John, is we will see the average check be elevated through the fall time frame.

And then we say it will start to moderate late in the year as customer traffic starts to pick up, but still higher than pre-COVID levels.

Your next question is from Greg Francfort with Guggenheim Securities.

And maybe just following up on that.

I don't know if you guys are willing to break out what actual pricing is, maybe that would be helpful.

And then my question was -- on the war for talent that's out there, can you talk where staffing is for your restaurants?

And how Wendy's is managing that better than peers and what you guys are doing differently?

First, on the labor front and what we're doing, I can have GP talk a little bit about price mix and give you a little bit of flavor on that.

But like the whole industry, in Q2, we did see some staffing challenges during the quarter like the rest of the industry.

The good news was as the federal benefits rolled off, we did see some improvement in applicant flow and staffing.

We also saw improvements going into the summer with kids out of school, which has certainly helped our restaurants.

But we also start from a very good spot.

The good news is our overall employee engagement scores are meaningfully better than the industry average, which really helps on the retention front.

You are seeing that in the numbers.

We have lower-than-industry turnover in our restaurants.

And we're really working to make sure that our restaurants are fun and energizing.

In the short term, as GP said earlier, we got to run a little bit over time to make sure we're staffed appropriately.

You do see a few pockets outside of kind of core dayparts, where the dining room may be closed a little bit just to manage some of the staffing challenges, but it wasn't a material impact on our business during the quarter.

And last but not least, we've been spending a lot of time, energy and effort on focusing on our online digital recruiting campaign that we've during the higher up-strategy for breakfast, and we continue to do that to really make sure that we're staffed appropriately to drive the business that's out there today.

GP, on price mix?

Yes.

On price mix, I think we really did a great job on this.

You probably don't see the detail yet, but on the food and paper line, in the second quarter, on the face of the P&L, we are 110 basis points favorable And again, keep in mind, we had a 3.35% inflation, so actually, 100 basis points of headwind.

So what that tells you is mix management and pricing allowed us to expand an improved food and paper cost to about 210 basis points.

So it's really programming, right, the all-time high sales in Made to Crave behind Bourbon Bacon Cheeseburger, and that definitely helped.

We promoted salads pretty well.

That obviously helped with the sales mix as well.

And in the company, we have pricing, actually, year-over-year positive.

That has also helped us get basically our margin performance on the food and paper line.

The next question is from the line of Peter Saleh with BTIG.

Great.

And congrats on a great quarter.

I just wanted to ask about the development with the REEF Kitchens.

Is this, in any way, an exclusive agreement with them for those kitchens?

Or can we see potential future partnerships with other operators?

And just secondly, on geographies in the U.S., any particular geographies you or REEF Kitchens plans to target with these ghost kitchens?

Yes, Peter, it's not exclusive REITs out there with many other brands.

The great news is the dedicated vessel that they put in place that support our products, our standards in Canada has been a big success, and that's what they're going to replicate in the U.S., Canada and in the U.K. moving forward.

And our opportunity, really, is in urban locations.

We are dramatically underpenetrated.

If you look at our footprint across all urban locations, whether that's east, west, north, south, and if you think about where there opportunity is, and delivery-only provide more access to our brand.

Urban locations will be job 1, and we're excited to get them rolling quickly.

And as we said, 50 REEF Kitchens out of the gate to finish this year is a strong fast start.

So we'll get a lot of learnings in a hurry.

Your next question is from Jared Garber with Goldman Sachs.

Likewise, congrats on a strong quarter.

I wanted to circle up on the digital side of the business.

I think that, that penetration of 7.5% has been relatively stable over the last couple of quarters.

Obviously, while the dollar base has grown.

Just wanted to see what you guys are seeing on the digital side and how consumers are interacting with the brand, obviously, with the launch of the loyalty program last year.

Would expect that you're seeing some increased levels of engagement there.

And then if you could also update us on the active members on that program, that would be helpful, too.

Yes.

So a few thoughts, right?

As we said on the prepared remarks, digital sales grew 10% versus Q1.

That does result in mix being flat as a result of strong total sales that we had at 7.5%.

No, the great news is 17 million loyalty members, up 25% over the 13 million that we have as of Q1.

The active users are up slightly, so we're now north of 3 million.

And the great news is those active users are more active than last quarter.

So they're in, they're in, more often, we're seeing higher average checks.

We're seeing increased frequency for those folks.

And our opportunity ahead is still to continue to leverage all of this data to really truly have one-to-one customer interaction.

And those are opportunities that are yet to be fully unlocked, and we're working hard on those things.

If you think about where we are across the key elements, we're seeing a nice uptick on mobile ordering.

Clearly, the ease, the ability to do mobile grab-and-go and curbside helps that.

Delivery is hanging in there nicely at the mix.

So we do feel that it is a healthy mix for us.

We're seeing higher average checks.

And we're seeing loyalty, and it will continue to help us drive against our frequency goals moving forward.

And just a follow-up there.

Are you seeing anything that maybe just thinking through the breakfast versus the rest of the day?

Any difference in usage among the app or the loyalty program, the frequency of customers based on daypart breakouts?

We're still seeing more active use around the digital tools at lunch and dinner.

Breakfast is starting to pick up a little bit, but still less than that.

I think one important -- nugget.

Interesting nuggets that we probably would want to get out there.

So if you look at frequency and the number of visits to Wendy's restaurant on an annual basis, if you look back over the last 12 months, we're up about 20% from a 5.5 visits to 6.5 visits.

We're very proud of that.

Breakfast is driving some of that.

Digital is certainly helping that.

If you look at all the QSR burger frequency over that same period, they saw declines of 5% to 10%.

So we always get the question, "Is breakfast incremental?" That helps prove it out.

This digital help can drive the business clearly, as it is for us.

So we're seeing folks engaged, and we're seeing our frequency heading in the right direction.

And that's at a time where traffic is still impacted to the COVID challenges.

Your next question is from Lauren Silberman with Crédit Suisse.

So my question is just on the dose kitchen strategy.

You talked about the opportunity for greater penetration in urban market.

How are you thinking about leveraging those kitchens to test new markets?

Is that contemplated at all?

And with that in mind, how do we think about the breakout of these units in the U.S. versus International markets?

And then just one last, if I could, related -- if I heard it correctly, I believe you've mentioned in the script that a franchisee is opening with REEF.

So how does that arrangement work?

Lauren, so I think the big strategy around the ghost kitchen is really underpenetrated areas for The Wendy's Company, so it's really urban.

That is our big plot.

It's better give the breakout between the U.S., Canada and the U.K. We'll -- once we get a little bit more experience under the belt, we will probably maybe talk about that.

In terms of -- if you want to throw a question at me.

At the end of the day, we will be our franchisee.

So think about them being the franchisee.

The comment that you heard in the prepared remarks is they will become our first franchisee in the U.K. So as we're kind of building out outside of the urban location in the suburban locations with the company footprint, they will come in and support that urban footprint.

And just as GP articulated, they're going to deal with the U.S.

Yes.

Technically, 3 different contracts, with the U.K., with Canada and the U.S. So technically, there's kind of 3 different franchise cities that are interacting with us.

And they obviously helped with the same standards as any other franchisee.

Your next question is from James Rutherford with Stephens Inc.

Congrats on the quarter.

I just wanted to follow up on the breakfast marketing investment.

Sorry if I missed this, but did you share the breakfast mix in the quarter?

But the core question here is, just given the opportunity in the daypart and how large it is with the strength of your cash flows, how did you settle on that $25 million number?

And is there a potential for further acceleration in investments to build trial around that daypart?

Yes.

When you get a chance to get into the queue, breakfast mix ticked up to 7.2%.

So it's up slightly from last quarter.

The dollars are up, as we said earlier, 10% versus first quarter.

We got the rest-of-the-day business being really strong, which has impacted the mix number a little bit.

As we look at the pressure that we need to really drive and ingrain the habit between the company incremental investment of $25 million, the ad funds that we're getting from the breakfast sales.

Our full year pressure on breakfast is up about 20% on advertising versus last year, in our launch here.

Obviously, the launch year was impacted a bit by COVID and the challenges there.

We do think that's takes good weight and one that we can manage to for the rest of this year.

And as we look at 2022, we're still committed to having about $15 million of support, which we've talked about previously.

From a company perspective, we think that's a nice progression to continue to drive enough support and awareness, especially as our overall business sales continue to grow at breakfast and create more ad contributions along the way.

Your next question is from Brett Levy with MKM Partners.

Can you -- I know you -- in the prepared comments, you talked about the strength of your sales improving throughout the quarter.

Would you care to give any more quantification in terms of how it ended or any color into the quarter-to-date?

And also, what are you seeing from the consumers and regionality?

Have you seen any changes in just how the consumer is using and the makeup of them?

Yes, Brett.

We're not providing any specific commentary on our Q3 start, but let me give you a little bit of flavor.

One, very pleased with our momentum in the first half of the year, really resulted in the confidence to call up our global systemwide sales to 11% to 13%, as we said in the remarks.

Our 2-year stack adjusted for the 53rd week built in Q2.

So if you do the math and kind of back into things, if you look at the outlook, for the back half of the year, we will really be at low double-digit 2-year comps throughout that back half of the year.

So that shows that we've got really nice momentum continuing.

That assumes the checks remain elevated at least into the fall.

But as we said earlier, we don't see those returning to pre-COVID levels.

So we feel like our business is really connecting to the consumer.

And that frequency metric that I talked about a little bit earlier is an important one as we continue to bring folks back into our restaurant a little more often.

Your next question is from Nicole Miller with Piper Sandler.

On the labor inflation, could you talk a little bit through stacking challenges and/or where the inflation lies?

I'm thinking about back of house versus front of house.

And also about stores that are up and running versus new stores that need to open, is it any more challenging to get those stores opened?

Yes, clearly, with 70% of our restaurants open or under construction against our development goals this year, labor hasn't impacted the ability to get new restaurants open.

We feel good that we can continue to support those restaurants in those markets.

If you look at the overall labor pool, clearly, rates have come up, as GP had guided in his comments, around inflation on labor rates.

We've had to do some things on sign-on bonuses, retention bonuses, free meals.

We're doing what it takes to make sure that we got those restaurants fully staffed, even leveraging a little more over time, because there is sales and transactions to be gained.

And there's a lot of leverage to continue to keep those customers coming through the doors even with a little higher wage rates along the way.

So we're working hard to make sure that the restaurants are fully staffed.

I think some of our franchisees are being very conscious around their trade area, and when should the dining room be fully opened, when should it be closed.

So there will be times, potentially, after the dinner daypart where the dining room might close a little bit earlier than historical, and we go full drive-thru only.

But those are just smart moves based on the amount of traffic that's coming through the restaurant.

And I think we've gotten really good and flexible to be able to manage through the labor situation based on what we know in the communities that we serve.

And how is turnover trending?

Yes, our turnover continues to be better than industry average.

So even though, historically, we're better than industry average.

We continue to be better than industry average.

And just completed the big Voice of Wendy's survey.

And the great news is, against competitive benchmarks, our overall engagement scores of our employees at the restaurant level is significantly better than the rest of the industry's.

So our work to make sure these restaurants are fun and energizing is paying off.

It helps with retention, and it also helps folks to show up day in and day out to continue to serve our customer.

And your final question comes from the line of Jim Sanderson with Northcoast Research.

Congratulations on a great quarter.

I just wanted to ask 1 last follow-up question on REEF Technology.

I think you mentioned that your franchise rate would be slightly higher than peers in markets where they operate.

Is it a contribution to advertising going to be comparable to franchise peers?

And if you could provide a little bit more detail about whether Wendy's will make any type of equity investment in REEF Technology to ensure the 700-plus unit growth over the next couple of years?

Yes.

So on the REEF equation, the royalty will be a little bit higher, as I said, a little bit earlier, about 6% in the U.S., about 5.5% in the U.K. And contribution will be a little bit lower.

So really, the focus on the REEF Kitchen is local advertising.

So it's about 2% contribution to local advertising for REEF to really make sure in those urban locations where they're building, they make sure there's awareness so they can drive the delivery business.

On the investment side, we'll have to see where that goes over time.

Would we want to make an investment in REEF or not?

And we'll see how that plays out.

Thank you, Jim.

That was our last question of the call.

Thank you, Todd and GP, and thank you for everyone for participating this morning.

We look forward to speaking with you again on our third quarter conference call in November.

Have a great day.

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