Wendy's Co (WEN) 2021 Q4 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 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. We will give a business update, review our fourth quarter and full year 2021 results as well as our 2022 outlook. From there, we will open up the line for questions.

With that, I will hand things over to Todd.

Thanks, Greg, and good morning, everyone. We had a breakthrough year in 2021 as evidenced by significant growth in our business, and we did so in partnership with our franchisees, restaurant crews and suppliers.

I'm incredibly proud of our consistent growth each and every year. We delivered on this again with an incredible 11th consecutive year of global same-restaurant sales growth and accelerated to double digits on a 1- and 2-year basis. This was driven in part by growth in our breakfast business, which reached 8.5% of U.S. sales at the peak of our very successful Buck Biscuit promotion and global digital acceleration, which grew to approximately 10% of sales by year-end.

Our strong sales performance and commitment to the restaurant economic model led to company-operated restaurant margin expansion of almost 200 basis points in the face of historic inflationary pressures. We also made meaningful progress on expanding our footprint, opening more than 200 new restaurants across the globe in 2021 despite a very challenging supply chain environment. Our success is further evidenced by the continued return of cash to our shareholders in accordance with our capital allocation policy, where in 2021, we returned approximately $360 million through dividends and share repurchases.

As we turn to 2022, we remain focused on our 3 long-term growth pillars: to build our breakfast daypart, accelerate digital and expand our global footprint. We believe that now more than ever, QSR is the place to be. And our mix of convenience, affordability and speed position us to deliver against customers' evolving expectations.

The momentum we have built and our focus on execution are evident in the step-up in growth in our 2022 outlook that GP will talk through later. Our goal remains the same, which is to invest in driving efficient accelerated growth and we are delivering on that commitment.

We have achieved our 11th consecutive year of global same-restaurant sales growth, which is a streak we plan to keep alive in 2022 and beyond. This growth extended across the globe with double-digit 2-year same-restaurant sales in The U.S. and incredible double-digit 1- and 2-year same-restaurant sales internationally.

In The U.S., these strong results led to dollar and traffic share growth, marking our sixth consecutive year of gaining or holding both dollar and traffic share in the QSR burger category. With the momentum that we have, we expect to continue delivering growth on top of growth across the globe in 2022 and beyond.

Before I share more on our growth strategies for this year, I'll turn it over to GP to provide a few more details on our 2021 results.

Thanks, Todd. We are very proud of our 2021 results, which far exceeded our initial outlook for the year and showcased the power of our business model. Global systemwide sales grew almost 12%, adjusted for the 53rd operating week in 2020. This was driven by our same-restaurant sales growth of 10% and approximately 2% net new restaurant growth. We have also now reimaged 72% of all our restaurants ahead of our 70% goal for 2021.

Company-operated restaurant margin expanded by almost 200 basis points to 16.7%, driven by our sales growth through a higher average check and an increase in customer counts. We also benefited from letting restaurant recognition pay in the second quarter. These increases were partially offset by an unprecedented increase in commodity and labor inflationary pressures.

After adjusting for the 53rd week, adjusted EBITDA increased over 13% to $467 million. This was supported by our significant sales growth, an increase in net franchise fees and company-operated restaurant margin expansion. These increases were partially offset by higher G&A expense and our incremental investment in breakfast advertising.

Adjusted earnings per share increased almost 45% to $0.82. This was driven by the increase in adjusted EBITDA and lower tax rate, lower interest as a result of our debt refinancing that we completed in 2021, lower D&A expense and fewer shares outstanding as a result of our share repurchase program.

Free cash flow increased significantly to $263 million. The increase resulted primarily from higher net income, the timing of accrued compensation payments, the impact from the cash payment related to the settlement of the financial institution case in 2020 and the timing of collection of royalty receivables. These increases were partially offset by an increase in cash paid for income taxes and cash paid for cloud computing arrangements, primarily related to the company's ERP implementation.

Now let's turn to our fourth quarter results. Global same-restaurant sales growth reaccelerated to double digits on a 2-year basis, coming in ahead of our expectations for the quarter at approximately 12%. U.S. same-restaurant sales accelerated to 11.6% on a 2-year basis, driven by growth across our core business, breakfast and digital. Our game-changing fry innovation and compelling Buck Biscuit promotion resonated with our customers, helping us grow customer counts year-over-year, while also maintaining year-over-year check growth in the fourth quarter.

Internationally, we delivered a third consecutive quarter of double-digit 1- and 2-year same-restaurant sales growth. This was driven by our largest markets, with 2-year same-restaurant sales outperformance in Canada and in our Latin America and Caribbean region, which was driven by strong results in Puerto Rico and Mexico, one of our strategic growth markets.

Our strong sales results also drove company restaurant margin to exceed our expectation for the quarter at 14.5%. Year-over-year, company restaurant margin decreased 300 basis points driven by record levels of commodity and labor rate inflation of almost 13% and 12%, respectively, and higher insurance costs. These decreases were partially offset by the benefits of sales leveraging, driven by the strength of our fourth quarter promotions.

Our increase in G&A was primarily driven by higher incentive and stock compensation expense, as a result of our strong financial performance in 2021. Adjusted EBITDA decreased to $103 million, primarily due to the $8 million impact of rolling over the 53rd week in 2020. In addition, there was a decrease in company-operated restaurant margin, higher G&A expense and a decrease in franchise rental income. These decreases were partially offset by an increase in net franchise fees and higher franchise royalty revenue.

The decrease in adjusted earnings per share was driven by lower adjusted EBITDA. This was partially offset by a decrease in interest and depreciation expense and fewer shares outstanding.

With that, I will pass things back over to Todd to talk about our plans to accelerate our growth even further.

Thanks, GP. Our playbook of investing to drive accelerated growth behind our 3 long-term pillars remains the same, and we believe we have the strategy in place to deliver in 2022. As we look forward, we still have many foundational growth opportunities on the horizon, like reopening all of our dining rooms, continued improvements in staffing and fine-tuning our digital experience, all of which will set the base to drive our growth even further.

Our plans are built on our foundational items of fast food done right, operational excellence and good done right. Everything we do remains deeply rooted in the foundation of the restaurant economic model. We believe that our franchisees have never been healthier, and like us, continue to experience significant sales growth in 2021, putting us in a strong position to [wither] the near-term pressures facing in the industry. The combination of strong sales and margins fuels reinvestments into people, technology, reimaging and new development, which drives our confidence in growth for the future.

Now let's walk through our strategies to continue to drive growth. We continue to be extremely pleased with our breakfast business, which saw strong growth in the fourth quarter, peaking at more than 8.5% of sales in The U.S. and averaging approximately 8% during the quarter. This growth was primarily driven by successful promotions, which not only drove significant trial of our breakfast daypart, as evidenced by a meaningful increase in buyer penetration in the quarter, but also increased overall breakfast awareness to record levels. This culminated in another quarter of morning meal traffic share growth in the QSR burger category.

As we look back at the full year, we have made significant progress growing breakfast sales by approximately 25%. We achieved this through several successful trial-driving campaigns, continued increases in customer repeat, 2 additional months of the daypart and the support of our $25 million incremental investment in breakfast advertising.

In 2022, we will add to our playbook to build the breakfast business as we support growth through menu innovation, such as our new craveable Hot Honey Chicken Biscuit alongside compelling trial driving offers to further ingrain the habit. We believe our breakfast business in The U.S. will accelerate in 2022 by approximately 10% to 20%, taking average weekly U.S. breakfast sales to approximately $3,000 to $3,500 per restaurant by year-end.

We are shifting our targets to a dollars per week metric as this is how we track the success of the daypart. We plan to launch breakfast in Canada, our largest international market in the second quarter, which we'll expect will build on the outstanding momentum and share gains we've seen in the market over the last few years.

This will bring our percentage of the global system serving breakfast to approximately 95%. We will tailor our breakfast program to the Canadian market, but we will leverage our successful U.S. launch playbook, which will include a similar menu, minimal franchisee investments and additional company advertising support.

In fact, we already invested over $1 million in the fourth quarter to ensure our launch gets off to a strong start. We are expecting similar results to what we have seen in The U.S. and anticipate that the Canadian breakfast launch will provide an approximately 3% to 4% lift to international same-restaurant sales in 2022.

Finally, we plan to continue supporting our breakfast business with an approximately $16 million incremental investment in breakfast advertising in 2022. Approximately $5 million of the investment will support the Canadian launch, which represents a meaningful increase in the Canadian advertising budget.

We will continue to invest above and beyond in The U.S. with approximately $11 million to continue driving trial, repeat and awareness to set us up for even more growth. We saw significant growth in our digital business across the globe in the fourth quarter, reaching approximately 10% of sales globally and exiting the year with a ton of momentum.

Our international digital sales mix exceeded 15%, up versus the third quarter as Canada saw significant gains from the addition of Uber Eats as a delivery provider. Our U.S. digital business also accelerated during the fourth quarter, exiting with digital sales mix of more than 9% in December. This growth was driven by gains across both mobile ordering and delivery.

We also saw meaningful increases to our loyalty program, growing total members by approximately 75% over the course of the year and growing monthly active users by approximately 25%. In fact, our rewards program was recently recognized as one of America's best loyalty programs by Newsweek, rating factors like overall satisfaction and ease and enjoyment.

For the full year, we achieved explosive digital sales growth of 75% versus the prior year, which contributed to our strong sales result through higher frequency of our active users and higher average checks across our digital platforms. We expect meaningful growth in our digital channels to continue across the globe in 2022 as we drive more people into our app with compelling offers through the strength of our growing loyalty program and innovation as part of our strategic partnership with Google to create best-in-class, frictionless experiences in Wendy's restaurants around the world.

Our development momentum accelerated as we delivered 121 net new restaurants, marking our sixth consecutive year of net new restaurant growth and our highest net new growth in almost 20 years. This growth includes successes across the globe with exciting milestones along the way, such as the opening of our first restaurants in the U.K., the opening of our 1,000th international location and the opening of 30 Wendy's delivery kitchens with REEF across The U.S., Canada and the U.K.

We are still early in our journey with REEF, but we are pleased with the operation and performance of The Wendy's branded delivery kitchens. These kitchens are designed and operated solely as Wendy's locations and are operated the Wendy's way. We continue to expect REEF delivery kitchens to help us address underpenetrated urban markets and are excited about the partnership and all the growth that lies ahead.

I'm extremely pleased with the results the team was able to deliver, growing net new restaurants by approximately 2%. While we achieved significant growth, we did experience supply chain impacts causing some delays in openings. However, we have now opened all the restaurants that were impacted by supply chain delays last year.

As we look ahead, we expect a meaningful step change in growth for 2022 as we continue to build on our strong foundation. We are already off to a strong start, tracking right on plan through the end of February and expect full year net new growth of 5% to 6%.

This is backed by a very strong pipeline and further supported by our significant development agreements across the globe. I also wanted to highlight our recently launched Own Your Opportunity campaign, which seeks to further unlock our growth potential by increasing the diversity of our franchise system. We have introduced new strategies and tools to drive this effort through our previously announced build-to-suit program and more competitive financial requirements.

In addition, we are also adding resources with a focus on recruiting, and we have developed innovative financial programs and partnerships with banks who share our vision for Wendy's owners who reflect the diversity of our customers. We believe this program will enhance our development pipeline and further solidifies our confidence in the plans we have in place to reach 8,500 to 9,000 global restaurants by the end of 2025.

Everything we do at Wendy's is focused on bringing our vision of becoming the world's most thriving and beloved restaurant brand to life, and we believe we have the right plans in place to accelerate our growth even further.

I will now pass it back to GP to share how our growth strategies ladder up to our 2022 financial outlook.

Thanks, Todd. As we move into 2022, our playbook remains the same, we are poised to deliver another year of accelerating growth. Now let's take a deeper look into our key financial metrics, starting with global system-wide sales. We're expecting significant top line growth in 2022 of almost $1 billion, with global system-wide sales growth of 6% to 8%. We expect that same restaurant sales will drive more than half of our system-wide sales growth in 2022, driven by growth in our core business, breakfast growth in The U.S., the launch of breakfast in Canada and continued digital acceleration.

We also expect a significant increase in net restaurant development to drive the remainder of our system-wide sales growth as we plan to grow our net new restaurant count by 5% to 6%. We are expecting that roughly half of our new unit growth will come from nontraditional delivery locations.

Now on to adjusted EBITDA, which we expect to grow to approximately $490 million to $505 million. We expect our strong top line to be our biggest driver of growth, benefiting both royalties and our core company operating restaurant EBITDA.

Overall, we're expecting a company restaurant margin of 15% to 16.5% as the benefit from our anticipated sales growth, inclusive of over 5% of pricing, are being offset by high single-digit commodity and labor inflation pressure and a 50 basis points headwind from investments in the U.K. to support our continued launch in that market. We are also expecting a benefit to restaurant margin and EBITDA from our acquisition of restaurants in the Florida market, net of the sale of our New York market.

Finally, we're expecting a tailwind as our incremental investment in breakfast advertising will step down to approximately $16 million from $25 million in 2021. These increases are being partially offset by lower net franchise fees as a result of an expected return to normalized franchise transaction activity.

We also expect G&A to increase to approximately $250 million to $260 million. We are further investing in our development and digital teams to support the increased growth we expect to deliver in 2022 and beyond. We are also expecting an increase in technology cost related to the company's ERP implementation, increased costs related to annual merit increases, increased travel as we are lapping low travel activities due to COVID and additional cost to support the acquisition of franchise-operated restaurants. These increases are partially offset by a decrease in incentive compensation as our plan resets each year.

The investments in growth we are making in G&A are being done in an effort to create a more efficient Wendy's moving forward. We anticipate that our G&A as a percentage of our global system sales will remain flat to 2021 and then start to come down as we move into the outyears. We expect free cash flow from our base business to grow roughly in line with adjusted EBITDA driven by core earnings coming primarily from our strong adjusted EBITDA growth. These increases are more than offset by higher incentive compensation payment due to our outperformance in 2021, an increase in CapEx to approximately $90 million to $100 million and an increase in cloud computing arrangement cost of approximately $15 million.

We believe our investments in CapEx will set us up for even more growth in the future. This is being driven by an increase in company development, including the opening of additional restaurants in the U.K. and cost associated with the restaurants acquired in Florida and [a roller] was new double-sided grills in our company-operated restaurants, which we expect to more efficiently produce a higher-quality hamburger.

The increase in cloud computing costs is primarily driven by investments being made to drive our digital business, being funded by our technology fee and the company's ERP implementation, which will drive efficiencies across our organization.

Moving forward, we expect these costs to moderate significantly as the company's ERP implementation will be completed in 2023. These headwinds will be partially offset by lapping reorganization realignment payments related to a prior reorg of our field team. All in, we expect 2022 free cash flow to land at approximately $230 million to $240 million.

To close out our outlook discussion, I wanted to hit on EPS. The increase in adjusted EBITDA is the main driver in increase in our adjusted EPS outlook to $0.87 to $0.91. And we also expect to benefit from fewer shares outstanding as a result of our share repurchase programs. These are partially offset by a higher tax rate as we lap over stock (inaudible) and an increase in depreciation, primarily related to the acquisition of the Florida restaurants. The step-up in our 2022 outlook highlights the strong foundation and momentum we have built and the continued growth across our strategic pillars.

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 continuing to showcase this through the investments we are making. In the fourth quarter, we acquired 93 franchise-operated restaurants for $128 million as part of our ongoing system optimization initiatives.

We remain committed to maintaining approximately 5% ownership and will buy and sell restaurants strategically from time to time as we seek to continually optimize The Wendy's system. We previously announced the declaration of our first quarter dividend of $0.125 per share, an increase of approximately 4%, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. We plan to utilize excess cash to repurchase shares and reduce debt. We announced today a new $100 million share repurchase authorization expiring in February of 2023.

Finally, we're in the process of evaluating a potential (inaudible) transaction within our securitized debt facility. If we decide to proceed with this transaction, we would expect to use the net proceeds in line with our capital allocation policy.

We are fully committed to continue delivering our simple, yet powerful formula. We are an accelerated, efficient growth company that is investing in our strategic pillars and driving strong system-wide 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. As we previously announced, we will be hosting a virtual Investor Day on Thursday, June 9, which we shifted due to the evaluation of our potential debt raise. During this event, we are planning to provide an update on our long-term strategic vision and reintroduce our long-term outlook, including updates on how we believe our U.S. and international businesses will deliver a new year of growth across our 3 strategic growth pillars.

Now turning to our first quarter investor outreach events. To start things off, we will attend the JPMorgan Conference in Las Vegas on March 8, followed by the UBS Conference in Boston on March 9. We will follow this up with a virtual headquarter visit with Deutsche Bank on March 11 and a virtual NDR, focused on the New York market with Guggenheim on March 14.

If you're interested in joining us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. Lastly, we plan to report our first quarter earnings and host a conference call that same day on May 11.

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

With that, we are ready to take your questions.

(Operator Instructions) Your first question comes from Dennis Geiger from UBS.

Wondering if you could talk a little bit more about the operating environment as it relates to staffing, the dining rooms, et cetera, how that impacted the quarter? And then, I think, Todd, you spoke to the opportunity for improvement through the year as it relates to staffing, as it relates to the dining rooms reopening. So just curious if you could provide kind of any more commentary around that opportunity and how you see that playing out?

Yes. Thanks for the question, Dennis. Yes, in the fourth quarter, we had about 85% at any point in time of our dining rooms open. That was about the same as we saw in the third quarter. So we didn't see a market change quarter-to-quarter on number of dining rooms open.

If you look at our progression of sales throughout the quarter, we really didn't see an impact from Omicron during the course of Q4. Staffing was a little tighter throughout the quarter. Clearly, Omicron played a role in impacting staffing at the restaurant level. But we've been very encouraged recently as we're starting to see applicant flow pick back up. We're seeing staffing starting to improve.

And as we focus on our growth initiatives and really creating great restaurant experiences through digital as we move into 2022, a big focus on working with our system will be to ensure that our dining rooms are open, so we can actually have folks come in and do mobile grab-and-go on a more regular basis, get our delivery drivers in and out. So we're encouraged about the trends that we're seeing right now.

Your next question comes from Brian Bittner from Oppenheimer.

My question is on the 2022 top line outlook. The same-restaurant sales -- the implied same-restaurant sales outlook for more than half to the system sales growth, which suggests an above-average pace of comp growth in '22. So is that primarily related to elevated pricing and additional breakfast gains or anything else you can flush out on the same-restaurant sales guidance to the global system sales guidance?

And on the unit growth, I realized its contribution to system sales is going to be relatively low this year, particularly because it steps up throughout the year. But will the contribution from unit growth to system sales step up following '22 as this timing issue kind of dissipates?

To your question on color on SRS, a couple of drivers. We clearly are driving core SRS growth in rest of day. As you've heard on the call, breakfast in The U.S. is going to accelerate further our overall growth with 10% to 20% growth there. So that is lifting our SRS expectations with what you have seen potentially in the past.

Also, our Canadian breakfast launch is not unimportant. It's going to lift our international SRS by about 3% to 4%. So that's a little bit of color on the SRS. And yes, we are pricing over 5% in 2022. That gets us to double-digit pricing on a 2-year basis, and it's clearly providing a tailwind for us on the SRS number.

As far as your question is concerned on unit growth, your observation is correct. About 50% of our unit growth is in nontraditional. Nontraditional is, as such, had lower AUVs. And as you also might remember, a big portion and a big step-up of our nontraditional growth is driven through the launch of REEF kitchens. REEF kitchens, they have an AUV of around $0.5 million to $1 million. From a P&L point of view, however, it is accretive to our royalty rate since we are collecting about a 6% royalty rate income on that compared to our regular collection of about 4%.

On a go-forward basis, I would expect that our nontraditional development stays in the 40% to 50% range. So that the similar impact of unit growth is outperforming the impact on sales. I expect that to stay for the future.

Your next question comes from Eric Gonzalez from KeyBanc.

Just a quick one on breakfast. I'm wondering to what extent the Omicron variant may have set you back in terms of establishing those consumer habits? And do you expect that, that $11 million that you're spending -- an incremental $11 million, is that relating to reestablishing those habits? Or anything you can -- any color you can give us on what you're seeing on the breakfast mix at the start of the year.

Eric, we've been very pleased with our breakfast performance. And as you think about our guidance for this year, $3,000 to $3,500 per restaurant. That's a nice step-up. As GP just said, 10% to 20% growth year-on-year.

What we're really encouraged is traffic is now back in the fourth quarter to pre-pandemic levels on the breakfast daypart. Teams are starting to come back. They're different. They're skewed a little bit later in the morning. We're seeing our peak half hours, the last 2 half hours of the morning.

But we've been very encouraged over the last couple of quarters that we're starting to shift to see our mix shift back to that 7:00 to 9:00. So patterns are starting to come back. People are starting to return to work. Some of the changes in CDC guidance and the requirements around masks and comfort levels for folks getting back in the office will certainly help set us up for success into this year.

So we're feeling really good about the momentum that we have in the business. The incremental spend that we'll have this year is a nice complement to continue to put our message out there and ensure that we can continue to drive trial, continue to drive awareness. And what we're really seeing is that continued nice repeat in the business. So we're really encouraged about our breakfast daypart right now.

Your next question comes from David Balmer from Evercore ISI.

A question on price and also on mix. I think you said that you're anticipating 5% price in 2022? And what was the price in 2021? And how is it now year-over-year in the first quarter? And also and relatedly, the mix impact, if you were to separate that impact to check from pricing, how is that in '21? And how do you generally view mix playing out in 2022?

David, so on pricing. So on the systems side in quarter 4, the system price is slightly below food-away-from-home inflation. The company priced about 6% in the fourth quarter, and that was about in line with the food-away-from-home inflation we saw in the fourth quarter.

If we step back on company on the year in 2021, we priced slightly below food-away-from-home inflation in 2021. So we've preserved our pricing power, and we definitely expect to price north of 5% in 2022.

We're going to watch value and value perception. You know about 30%, 35% of our consumers are making less than $45,000 a year. So we need to make sure that we are striking the right balance and maintaining value perception.

Mix and mix management was clearly a nice tailwind for us in 2021. We are managing that. We are innovating behind Made to Crave. We are marketing in that area relatively strongly. And as an outcome, we are getting positive mix messages. We are going to continue to do the same thing in 2022. We've just launched Hot Honey Chicken sandwiches for Made to Crave. Again, news to drive the platform and drive news on a go-forward basis.

Your next question comes from Gregory Francfort from Guggenheim.

Maybe just one quick one. Does the guidance assuming the leveraging event happens, is that embedded in the guidance? And then my question is on the international side, that's a pretty big pickup in the performance. I think we've seen from some of your peers, strong improvement in Latin America. Was that the big driver? Anything just regionally on the international side of things?

So on the potential debt raise, no, none of that is contemplated. So if you go to raise debt, the impact on interest expense and therefore, the impact on free cash flow and EPS is not yet contemplated in the guidance. And I think, Greg, Todd is going to talk a little bit about international.

In the international, our recovery has been widespread, Greg. We see a lot of momentum continuing in the Canadian market. Our average AUVs in Canada plus up over $200,000 during the course of the last year. We continue to have momentum in app market. That is our largest international market.

Puerto Rico, we continue to see significant gains. That business has been on absolute fire. And in fact, picked up about $500,000 to our AUVs year-over-year in the Puerto Rican market. That's fueled a lot of growth. And we've seen a nice recovery also, as you mentioned, in Latin America, with Mexico performing quite nicely.

So we are seeing widespread growth across the international business within the SRS numbers. And then very pleased with the launch of the U.K. business as we get up and running, which is in SRS, but driving some nice sales growth.

Your next question comes from Jared Garber from Goldman Sachs.

I wanted to switch back to the franchise recruitment initiative that you announced yesterday. I know you've heard a little bit about that maybe on the third quarter, but we got some incremental color yesterday. Can you just talk about how you think that will help us to drive some of the longer-term unit growth for the brand?

Yes. No, we're really pleased to announce the Own Your Opportunity campaign that you saw come out yesterday. And it's been a culmination of a few things that we've been working on for a while. Building some new relationships with various banks to ensure that we can provide more access to capital to smaller franchisees entering the system. The build-to-suit program that we brought in place really complements this program well, gives folks an opportunity to come in with a little less capital outlay as we support getting that restaurant ready up and running for them.

And we took down some of the financial requirements, as you know, a few quarters ago, to really make sure that we are competitive with the rest of the industry. We think all of that will significantly drive opportunities to bring more diverse franchisees into our system, allow us to get into some of our underpenetrated markets and continue to accelerate our growth not just this year, but as we build the pipeline into 2023 and beyond.

That's helpful color. And then just one quick follow-up, sort of on the comments that you just made was one of the things that I was thinking about in terms of the underpenetrated markets. Can you help highlight what type of markets those might be? Are they more urban, more suburban or rural? Are there different pockets of the country that this program might help you penetrate as well? Any incremental color there would be helpful.

Yes. We've always talked, we're clearly underpenetrated in major urban markets. REEF is playing a big role on that with the delivery kitchens. It would be great to have even more hard assets into some of those markets and franchisees that represent the communities that those restaurants would be in.

But we also know we've got a lot of opportunity across the country in many of the smaller communities. And Wendy's is a great brand, great opportunity for folks to support the local community with access to Wendy's. And we're dramatically underpenetrated still relative to our peer group across the country. And we think this can stimulate some nice growth.

Your next question comes from Jeffrey Bernstein from Barclays.

Great. I just wanted to follow up on the pricing as it relates to franchisee profitability. I think you mentioned franchisees were doing quite well. It seems like sales were strong, but as you acknowledge, inflation was outsized. So I'm just wondering whether the 5% or so pricing you took in '21 was enough to protect margins and profits?

I don't know if you have any color on the range of pricing that we've taken, and maybe what you saw in terms of elasticity from a consumer demand perspective? Because it does seem like you mentioned, the lower income consumer is vulnerable. Just wondering whether that is expected to be enough? Or if there's any risk in your mind to that elasticity based on that, I think you said high single-digit labor and commodity inflation? So just trying to get a sense of your confidence from that perspective.

Jeff, as far as franchise profitability is concerned, we have not yet collected the 2021 financials. My hypothesis would be that we have done well. Your recollection is correct. Back in 2020, U.S. EBITDA in frame of the U.S. franchise system was increasing by about 18%. You have seen our margin performance. Our margin was up almost 20 basis points. We had obviously the same inflation as they had to deal with. So I would have expected that they would have performed similarly in 2021. And therefore, I would expect they start in 2022 in a very healthy financial position.

As far as impact on pricing, in terms of shock to the consumer, as I said in my previous answer, we stepped up our pricing in the company restaurants to about 6%. That was about in line with the food-away-from-home inflation. And we reaccelerated the SRS in The U.S. to 11.6%.

So from what we are seeing now is we have not seen really any impact on the price increases. From a market share point of view, we gained traffic and dollar share in the QSR burger category in the fourth quarter. And that now marks the sixth consecutive year of either holding or growing dollar and traffic share in the burger category.

Your next question comes from John Ivankoe from JPMorgan.

I was hoping if you could go through some of the buckets of CapEx in that $90 million to $100 million guidance for fiscal '22? And maybe obviously, what I'm trying to get to is, is that the new level going forward? Does that have an opportunity to go down? Does it make sense that it would go up? And just the overall umbrella question is, do you think about CapEx as a percentage of EBITDA longer term for us to overall judge the capital efficiency or cash efficiency of the business?

John, I would have been disappointed if you wouldn't have asked the question on capital. So the capital is definitely up on prior year. We are stepping up, for the time being, our development capital. It's driven definitely a little bit by the acquisition, but more importantly, by building out our footprint in the U.K.

We're going to build about 10 restaurants in the U.K. in 2022. We also have something new, and I don't know whether you picked this up in our prepared remarks. We are also investing in a double-sided grill. So the way to think about this it's a faster grill that produces a choosier burger. We are going to transform about 40% of our grill footprint in our company restaurants this year and finish this up in 2023.

Our system is going to about 1/3 converted to the new grill. It should lead to increased sales since consumer satisfaction should be increasing. It also will drive some labor efficiencies. So these investments that we are making here are really driving growth and therefore drive a financial return out of those capital investments.

What we have also seen probably is that we have a headwind in our free cash flow on cloud computing arrangement. So that's technical -- just to be clear, that's not part of the CapEx line. That actually sits on prepaid assets for -- but mainly for the ERP implementation and it gets amortized into the G&A line.

So in terms of -- on a go-forward basis, we're going to stay elevated on the capital side in 2023, since we are going to continue to build out our U.K. footprint to about 35 restaurants. And as I mentioned, the double-sided grills, we do about 40% this year, the remainder in 2023. Anything beyond 2023, we'll give a little bit more color when we're all together for Investor Day beginning of June.

Your next question comes from Chris Carril from RBC Capital Markets.

I think you mentioned breakfast awareness levels continue to grow in the 4Q. So can you provide any more detail on awareness? And I believe your expected support of breakfast of $16 million in '22 is only slightly higher than your previous guidance. Do you see potential for that support level to shift at all depending on breakfast performance either in The U.S. or Canada?

Yes. No, on the breakfast side of the business, we've been quite pleased with what we've been seeing along the way. Our repeat continues to be very strong. Awareness would rage record levels for us. We're basically on par with Burger King, which has been in the business for a long, long time.

And what we're really pleased is with a lot of the trial driving promotions that we had out there, Buck Biscuit $1.99 croissant, we're bringing a lot of new users into the category and into the Wendy's breakfast arena. And we know that once we get great trial on our food, we do see really strong repeat. And that's why we're really confident the step-up that we're seeing as patterns start to come back in the morning routines to get to that $3,000 to $3,500 per restaurant.

And what we're really encouraged is, is our legacy restaurants that had this before or launched 2 years ago are now running north of $4,500 per week. And those are the restaurants that had a little more reps on how you manage breakfast operationally, put a lot more time to ingrain that habit and the communities that they serve, which gets us really excited about where the growth can continue to go.

As we roll into March Madness, we are the official breakfast of the NCAA, official breakfast to March Madness. We're also the official hamburger of the NCAA. So you'll see a lot of messaging to continue to drive awareness as we move forward into the future.

Your next question comes from Lauren Silberman from Credit Suisse.

I just have another follow-up with breakfast. Obviously, a very good job mix nearly 8% in the fourth quarter. With the goal to grow 10% to 20%, get to a 10% mix this year, I mean, is there anything you need to see in the macro environment? And then from a company-specific perspective, can you expand on how you're driving more trial?

Yes. If you do the math and you start to think about $3,000 to $4,500 per restaurant, and that's the way we look at it with our system as we look at that being significantly above breakeven profitability. If you work with rolls forward, we're probably slightly short of that 10%. But that 10% mix goal was just a step on the way of a journey to be a much higher percentage of our business over the long run.

We think there's a lot of leg room, a lot of opportunity to grow the breakfast in the future. As morning routines come back, as folks start to routine, move back into the office a little more, kids all getting back into school, all of those things play to continue to drive our business quite hard. And the disruptive promotions do get folks' attention. It allows us to talk about The Wendy's brand, to talk about the quality at a very great price point, and it does drive a lot of people in for trial.

And Lauren, the other thing I want to add is we have just talked about our legacy breakfast restaurants already. They have been really performing very, very well in 2021, well north of 10%. It has been longer added. And to translate that, it's about $4,500 per restaurant per week. Contrast that to the $3,000 to $3,500 we are setting ourselves as rest of the system. So we have a lot of upside on the breakfast business here.

Your next question comes from John Glass from Morgan Stanley.

Can you just help -- going back to The U.S. comps, can you just put the fourth quarter in context of third quarter when you saw some impact? And I noticed some staffing issues, you said it's a some macroeconomic impact. So what were the big change factors that drove the sequential improvement on a 1- and 2-year basis on same-store sales in The U.S.?

There was a line in the release that talked about increased customer counts. Was traffic impact therefore positive in the fourth quarter? Maybe just remind us where it's been? And if that -- if this quarter represented an inflection or maybe that had happened earlier on a customer count basis?

On customer count basis, we are up on a full year basis. And we were up nicely into the fourth quarter. We did have only -- we still had about 15% of our dining rooms closed at any point in time in Q4 as we did in Q3, as I said earlier. But we had a really strong calendar across all the dayparts.

If you think about what we did on our hot and crispy fries, meaningful increases in fry attachment incidence rates in the fourth quarter, it's really helped us drive our customer count, while maintaining the check. And we saw really meaningful increases in our overall liking and repurchase intent on the fry business, and that's a gift that can keep giving.

The Buck Biscuit promotion really drove a lot of new users into our breakfast category. So we were able to get a lot of trial, and we know we'll get a lot of repeat behind that. So when you think about the strength of that calendar, along with some news around Made to Crave with big bacon cheddar, we felt good that we had a really good calendar to finish out the year. And we feel really good that we have an aligned calendar going into 2022 with the franchise community locked and loaded to continue the momentum.

Your next question comes from Sara Senatore from Bank of America.

Great. I'm sorry to belabor this question, but I'm trying to piece all the commentary together. But the first question actually is just -- you're still evaluating a potential debt raise. Could you just talk about kind of what the considerations are? I think you said by the close of the first of this quarter, and we're 2/3 of the way through.

So just kind of trying to understand how you think about that and how you would use it beyond obviously your standard capital allocation priorities. But just a clarification on the comp. You said customer counts are up. Is that different from what I would consider traffic or transaction counts? Because my understanding is in the fourth quarter, you had about 6 points of price and you still had some tailwind on mix from higher attach rates. So that's just more of a clarification question than anything else.

So Sara on the debt raise. So just to set the scene here, at the end of the year, our leverage ratio was about 5.2x. Our cash obviously went down in the fourth quarter compared to the third quarter, down to about $277 million as we finished our ASR and executed against debt one. And we paid for the acquisition, about $128 million.

So we are actually back to normal cash levels. In the context of anything going on, I think as long as interest rates are still staying relatively attractive, we are continuing to evaluate that. And we will -- if we go ahead and make the transaction, we would probably do this by the end of the first quarter. And proceeds will go towards whatever we always do in our capital allocation policy, either invest in growth of The Wendy's brand, dividends and/or share repurchases. That I think answers your debt question. Todd, do you want to take on the...

Yes. Now, in the fourth quarter, just for complete clarity, Sara, our customer counts were up as well as our average check. So we had some pricing mix hung in there pretty darn well, but we're actually bringing more customers in through the door quarter-over-quarter and year-over-year.

And it's also worth pointing out it got 6% if you remember, it was for the company. The system has priced below food-away-from-home inflation. That's about a math on traffic growth plus pricing below food-away-from home inflation, adds up to the overall 6% comp growth.

Your next question comes from Chris O'Cull from Stifel.

GP, the domestic comps were well above estimates, but EBITDA was roughly in line, I think, with those estimates. And it looks like franchise rental income, franchise support costs were the primary reasons.

Hoping you could provide some more color on whether you were surprised by the performance of these lines and whether you think that will continue? And then also, if you could just tell us what you expect the 93 franchise stores the company acquired in the fourth to contribute to EBITDA this year. That would be helpful.

Chris, you spotted it right, but what held us back a little bit on the EBITDA side, right? We came in on the top end of our sales guidance and came in kind of in the middle of our EBITDA guidance, and the answer is you spotted it on the rental expense line. As we acquired those restaurants, we had to take a onetime rental expense since we were less [sore] on some of those leases. And we had to adjust those leases and write them off, and that created a headwind for us from an EBITDA point of view.

In terms of contribution of the 93 restaurants, we're expecting -- we are expecting in 2022, as part of our guidance, a tailwind of about $10 million to $15 million. And we expect -- basically, they also contributed a small accretion to our restaurant margin.

The acquisition of the Florida restaurants, and we also had the disposition of the New York restaurants earlier this year. So you had some ins and some outs during the course of company ownership during the year.

Your next question comes from Jeff Farmer from Gordon Haskett.

You guys had mentioned that staffing is improving, but just looking for a little bit more color there. So are you guys actively pursuing staffing strategies with your franchisees? And then what percent of the system restaurants do you consider fully staffed at this point?

We've been given out fully staffed. But if you look at company restaurants, we're probably staffed a little bit better than the system. And we're not quite to 100% staffing, but we're trending in that direction.

We'll have pockets that are better than 100%, pockets that are a little bit less than 100%. Across the system, they're slightly less, but ebb and flow is picking up. And we're doing all the right things that we need to do. We're really making sure that we got the right compensation structure. We're ensuring that we've got the benefits in place. We're really trying to lean in on a digital experience for the customers so we can actually curate a better crew experience.

And The U.S. team has been very focused on creating great places to work, fund energizing, which really keeps folks engaged at the restaurant level. And we've been really pleased that, as we look at our Voice of Wendy's feedback, we've seen our employee engagement continue to increase, not just in company restaurants, but across the system over the last couple of years.

Your next question comes from Brian Mullan from Deutsche Bank.

Just a question on the REEF partnership. I think you referenced there's 30 units open today in the prepared remarks. Can you just speak to how you're feeling about the performance versus your expectation? And then are you equally as encouraged across all 3 of the different markets that you have? And then finally, related on your current planning, do those REEF kitchen openings, do they accelerate in 2023 on the path through 2025 targets? Is that the current thing?

I'll give you a little bit of color. So we opened 30 REEFs across The U.S., Canada, U.K. last year. Feeling very good about the performance in every market. Out of the gate, we're happy with it. REEF is happy with it.

As you know, we've got a development commitment to do up in 700 restaurants. That was part of why we increased our 2025 targets. In 2022, we just give you a little color, we're expecting to open about 150 to 200 REEF kitchens across the globe. About 65% of those will be in The U.S., about 10% of those would be in Canada and about 25% in the U.K.

And as we've always talked about, the range would be $500,000 to $1 million. And we're on track with our expectations. So you'll still continue to see that nice ramp up in the future years, and we'll give a little more guidance and color on how that continues -- how that momentum continues at Investor Day in June.

Your next question comes from Andrew Strelzik from BMO Capital Markets.

I was just hoping that you could break out within the high single-digit kind of inflation guidance you gave, breakout between to cost and labor and talk about the cadence throughout the year? And I apologize if I missed this, but how much visibility on the food cost side do you have?

So we said like labor and commodities is high single digits. Think about 80% on each side. The main drivers on the commodity front is for our beef and chicken. I would also point out that commodity inflation and labor inflation are actually front-end loaded in the first half. We also expect that sales on a 1-year basis, it's a little bit lower in the first half compared to the second half. So as a result of it, we are expecting restaurant margin in the first half to be a little bit lower compared to the second half.

So I hope that gives you a little bit of color on that.

Your next question comes from James Rutherford from Stephens.

GP, thinking about the fourth quarter performance, are you able to share what the rest of day kind of 2-year comps were all in? And maybe just stepping back a little bit, what are your main tactics and strategies for driving rest of day traffic through 2022?

Yes. If you look at our mix across all of our dayparts, breakfast, lunch, dinner and late night, our mix held pretty consistent in the fourth quarter with what we've seen in the third quarter. So we're seeing a nice balance, not just growing the breakfast daypart, but continuing to grow our rest of day business.

And you see it. We've got a lot of strong messaging on breakfast that halos back to rest of the day with the high-quality messaging. We continue to have a nice steady dose of news around Made to Crave. We've had activity around 4 for $4 and $5 Biggie Bags. So we do have a lot to offer in the spirit of high quality and affordable price relative to not just the QSR competitive set, but all the restaurant competitive set.

And we'll continue to keep that pressure on. We've seen some innovation this year with the Hot Honey Chicken and the Hot Honey Chicken Biscuit Sandwich, breakfast and dinner. And you'll continue to see a nice dose of innovation, both rest of day and breakfast as we go out throughout the year. So we feel really good that we've got a calendar in place that will resonate with the consumer throughout the year.

Your next question comes from Nick Setyan from Wedbush Securities.

Just a question on free cash flow. Just given the guidance in '22 and the CapEx commentary on '23, how should we think about that pre-COVID $350 million long-term target?

Nick. Yes, you should really feel good about free cash flow here, right? We achieved record cash flows in 2021 for about $100 million versus prior year. Our ability to convert profit into cash flow is very, very strong. As our EBITDA -- as our core free cash flow growth is in line with our EBITDA growth, yes, we have a little bit of a setback because we have the compensation payouts that we earned in 2021 that happens in 2022. So that's more of a onetime nature that is holding us back a little bit in our cash flow delivery.

And yes, capital is clearly elevated this year. It will stay elevated next year. It will fall off in 2023 as we are done with our ERP implementation. So the headwinds that we have on cloud computing arrangements is going to fall off and will further accelerate, combined with obviously expected continued strong growth on sales and profits.

Your last question comes from Joshua Long from Piper Sandler.

I was hoping you might be able to talk about how you're thinking about store level operations as we eventually look to the dining rooms reopening and then also layering in some incremental menu innovation on the breakfast daypart. Just how you're thinking about that in the context of the operating environment with labor and then just going forward as well?

We've been focused over the last couple of years on a lot of things to really continue to drive op simplification. We fit some lower-performing items off the menu. We're really making sure that we've got a nice pace of innovation, where we're not overwhelming the restaurants. So we bring things in when the consumer and when the employee is ready for that.

The Made to Crave lineup plays really well into that innovation play because it's not just a 6-week LTO. It's an item that we train out for, and we have on the menu for quite some time. So we're really feeling good about how we have the pace of innovation against the labor market that we have.

We are making some adjustments. We've tested and tried curbside. Curbside will continue to exist, but that's another labor strain on the digital experience. And we're really trying to get folks to move to mobile grab-and-go and putting some racks in the restaurants to make it a little bit easier operationally for our teams in the restaurant.

We've got operations tablets continuing to roll out that help us automate some of the menial tasks around scheduling and temperature checking and inventory management ordering in the back of the house. And we're really focused on getting more and more folks into mobile ordering, which really takes the pressure off of the order point and speeds up payment through the whole process.

So all of those things are all little things that add up to make the restaurant more operationally efficient. And we'll continue to lean into what the flow of the restaurant looks like, not only for today but into the future as we drive more and more folks into digital.

Thank you, Josh. That was the last question of the call. Thank you, Todd and GP, and thank you, everyone, for participating this morning. We look forward to speaking with you again on our first quarter earnings call in May. Have a great day. You may now disconnect.

Thank you. This concludes today's conference call. Thank you all for joining. You may now disconnect.