Anthony Lebidzinski, and I will be the host for today's presentation for Meritage Hospitality, ticker symbol MHGU. We are certainly very happy to have Meritage Hospitality present at our conference once again. It is my pleasure to introduce CEO of the company, Bob Schermer. The format for today will be a management presentation for the first 20 or so minutes, followed by Q&A. For those in the audience, if you have a question, please type the question into the Q&A box at the bottom of the Zoom screen, and I'll read the question out loud. So, with no further delay, Bob, the floor is yours.
Thank you, Anthony. Appreciate it. And thank you for your interest in joining us today to hear about Meritage Hospitality Group. For those of you that are not familiar with us, we are a 359-store Wendy's franchisee, currently operating in 15 states with approximately 11,000 employees. No conversation about the franchisee business would be fulfilled without first discussing the brand and where the brand is. In the case of Wendy's, it is traded publicly on NASDAQ. And I just wanted to hit kind of the first bullet point here of the bull case and the bear case. Beginning with the bear case, Wendy's is currently looking for its fourth CEO in the past 18 months. One CEO was terminated. The second CEO quit. They have an interim CEO currently and are looking for number four.
The board of directors of Wendy's today is holding a two o'clock meeting globally for all franchisees to get an update on that. We have been without a CEO coming up on six months in the Wendy's system, so that's quite unusual. Kind of on the bull case of it, you know, a lot of analysts are looking for the brand to reinvest in product development, product innovation, and marketing, and less on the CEO, although we all know we need a CEO for the leadership within the brand, but we're really out of sync, out of phase with product innovation and marketing, and then, you know, if you look at the slide I had up first, we talk about being in a special situation, and we are in the sense that we are in a loan forbearance with our primary lenders. It's a syndicate of banks.
I want to kind of walk you through how we got to where we are and what we plan to do going forward. So in 2025, I like to joke, although it's not very funny, everything that could go wrong did go wrong in this business. And it really started in the first quarter of 2025 for Meritage. We have a lot of markets in the Southern U.S. We got hit by a wave in the first quarter of severe winter weather down there. It was snowstorms in Florida, ice storms, et cetera. It ended up costing Meritage about $10 million of cash. And the way that franchisees are set up, if there's three days of business interruption, typically our insurance will kick in. But in a lot of cases, these storms didn't quite meet that threshold. So it was really on us to just fund out of pocket.
We like to begin every year with $20 million of working capital. So in the beginning of 2025, we were right there, right around $20 million in working capital. We used 10 of it in the first quarter. So our plan was, okay, that's not great, but it's not the end of the world. First quarter is usually our seasonal down. And then really our money-making periods in this business are the second, third, and the fourth quarter. Well, unbeknownst to us, in the second quarter, the new CEO at Wendy's and his new President and Chief Operating Officer at the time had no new products. We knew that, had no new marketing. So they resorted to discounting through the mobile app. And it is not something that the franchisees see. It is something that is controlled 100% by Wendy's IT departments.
They took the discounting from normal 2.5% of sales to 6.5%, a high of 6.5% of our sales. That ended up literally wiping out our profit margin in the business. And then when all of this kind of came to light, the CEO quit. And that was in the beginning of July. And just within three or four weeks following that, the board of directors terminated the President and Chief Operating Officer. So there was a lot of turnover in the C-suite down there in Wendy's. Fortunately, they did bring in a new President and Chief Operating Officer, who is someone we have a lot of respect for. Pete Suerken is his name. He'd been in the supply chain, leading the supply chain in Wendy's for five years. Before that, he was in the Taco Bell system for many years.
So he certainly has a great appreciation for the importance of the franchisee financial health and how important that is to the system overall. Getting back to 2025, then in August of 2025, the president imposed a 40% tariff on the import of beef. And the result of that was a lot of our large competitors, McDonald's and Burger King, buy product from South America, frozen and warehoused in the United States. But with a 40% tariff imposed, everyone turned to the domestic market, and the domestic cost of beef went rather parabolic on us. It went from $2.50 a case to over $6. The president has since reversed that tariff. There was a lot of pushback from consumers. And late November, early December, they reversed that. For Meritage and Wendy's, we buy only domestic beef, and we buy into the future.
We really won't get the benefit of the beef tariffs or the beef prices coming down until 2027. So we expect to get a pretty significant benefit in 2027. But sitting here today, the real important issue for us and for everyone to know is this is for us about risk management. So we entered 2026 with $11 million of cash on our balance sheet. And again, we really ideally would like to be at $20 million. And then in addition to that, the CEO that departed last summer changed the contract that Wendy's system had with Coca-Cola. And the financial implications of that are pretty significant in 2026 to Meritage. So in a normal year, we would get an $11.1 million cash advance from Coca-Cola for marketing in the first quarter of each year. We have for many years.
However, in this year, it's a transitional year for this new contract. We will receive $2 million in August, approximately. So we are short $9.1 million of cash in 2026. The contract, instead of looking forward, is looking in arrears and paying on actual gallonage. So without getting too deep into the weeds, that's in essence the impact of Meritage. It's a $9.1 million delta for the year. And then in 2027, we go back to a new normal with Coca-Cola. So we would expect a $10.4 million marketing allowance. And it would be paid partially in the first quarter and partially in the second. So again, just a huge valley that we're crossing here in 2026. And if we look at the impact caused by, excuse me, one sec while I change the slide here.
The impact caused by the impacts in 2025, our EBITDA, this was literally a black swan event for us. We hadn't seen this in 25 years in the business. Our normal run rate EBITDA is right around $42 million. And you can see here the history. We were negative $6.8 million in EBITDA in 2025. So again, whatever could happen did happen in 2025. And going forward, as we look at 2026, we do expect a new CEO in Wendy's. We don't know when. Hopefully, we'll hear some information today. We're not planning on any major recoveries or any movement on that. That typically, in my experience, I've had nine CEOs at Wendy's. That typically will take anywhere from 12-18 months to materialize to the franchisee side of the ledger. However, Wendy's, with its new president, Pete Suerken, has made some major changes to policies in the system.
A lot of that is indicated here in our bridge back to $19 million of EBITDA for 2026. Two of the policies worth noting, Wendy's for the last 15 years has had a policy in place where a franchisee could not close a money-losing store unless they built a new store. It was a one-for-one policy. Very few other franchise brands out there have such a policy. The reason is, you don't want these older 30, 40-year-old buildings in your system. It's not good for employees. It's not good for guests. It's certainly, if they're losing money, it's not good for the franchisee. It's not good for the health of the system. One of the things that Pete Suerken and the team at Wendy's did was in the fourth quarter of last year, they changed the policy.
The media reports it as it's not a good thing, but in reality, economically, it's a very, very good thing. It's good for the system health. It's good for the guest experience. And it's really good for the employee experience and the employee morale in the business. And the other issue, major change policy change at Wendy's last in the fourth quarter was regarding breakfast. Breakfast was sold to the system five years ago. This was Wendy's third attempt at breakfast over the last 50 years. But the pitch was from two CEOs back now. The pitch was, "Look, if you don't like breakfast after 12 months, you can opt out." And then a lot of franchisees, such as Meritage, after 12 months, we were losing money. We'd lost about $7 million in the first year of breakfast. We elected to opt out.
We were told that there was a policy change and that we were no longer allowed to opt out. Fast forward over the last five years, we have lost $35 million in breakfast. It's been a very expensive proposition for us. This new team at Wendy's certainly realizes that and appreciates that. They set the first benchmark of opting out of breakfast at a sales volume of $1,200 per week per store. We have 51 stores that fit that criteria. We are no longer serving breakfast in 51 stores. We expect additional steps as we go forward into the year as we work our way methodically out of breakfast. In the case of Meritage, every market's unique. We have 26 different DMAs that we operate in. We have one DMA that breaks even in breakfast. All others lose money in breakfast.
Again, it's a very expensive proposition. But the Wendy's team is making the right move to help fortify the unit-level economics for the franchisees in the system. Additionally to that, Meritage has cut about $7.5 million of G&A out of its business. So we've really rationalized corporate and field expenses to where the business is today. We expect additional store closures this year. In our business, we've closed 20 stores in the fourth quarter of last year. Several are bleeding into 2026. That'll save the company on a run rate of roughly $4.5 million a year, $4.4 million a year. Pete Suerken, the president and CEO, excuse me, the President and Chief Operating Officer of Wendy's, has reversed the digital discounting and has brought that back to normal within the system on the Wendy's app.
So we think a lot of the pain that we experienced last year with this 6.5% up to 6.5% digital discounting is gone and eliminated from the system. So we expect in our outlook for the year, sales to be between $610 and $620 million. We expect earnings from operation to return to positive between $6 and $7 million. And our EBITDA to return from -$6.8 million last year to between $18 and $20 million this year on a base of 355 restaurants. So we're getting about halfway back to what we would consider a normalized EBITDA run rate in 2026. We finished the year with a book value on our stock of roughly $11.64 a share. And you can see here, we just have some estimates as we think about it going forward. So to summarize, we have a very long history of profitability with Wendy's.
I mean, going back 25 years, I really do feel that we went through a black swan event in 2025. You know, whatever could go wrong did go wrong in the system. We are currently under bank forbearance. So that certainly puts us in that special situations category. That is extremely abnormal. And there are a lot of other franchisees that are offsides on loan covenants, etc. This is certainly not unique to Meritage. But obviously, Meritage is what we're focused on and what we focus on every single day within the Wendy's system. Our hope is that with the bank's cooperation through the first quarter, that we will get through this deep valley of cash, again, starting the year with less and not getting this Coke rebate in the first quarter of this year. The banks have agreed to an interest reduction in Q1.
Then we expect to be in a full interest payment in Q2 and hopefully then a full interest and principal payment going forward. That is Meritage's hopes and dreams of getting through this cycle. But you know, it's dependent on a lot of outside influences, one of which is Wendy's. And we do have new chicken products and new promotions coming to market. We have new products February 16th, which we'll be introducing. And then we have a new chicken lineup coming, which is really encouraging as a franchisee at the end of the first quarter, beginning of the second quarter. So there is some directional movement in terms of product innovation and marketing coming forward. And again, we're just looking forward to getting the full team deployed down in Dublin, Ohio, with the new CEO and then a story that we can all really coalesce around.
So with that, I will turn it over to questions.
Thank you very much, Bob, for sharing the story here on Meritage, which seems like it was a perfect storm of events that happened last year. So as a quick reminder for those in the audience, if you have a question, please type it into the Q&A box, and I'll get to as many questions as time permits. So I guess, you know, first question for me, actually, just curious. So as you've closed down some stores, I believe you said 20 store closings in the fourth quarter. What have you seen from the remaining stores? Have you seen any, I guess you could say, have you seen any reverse cannibalization? You know, has there been a positive impact on the remaining stores? Can you talk about that? Sure.
We call it sales transfers in the Wendy's system in the industry. And what happens is when we close an underperforming restaurant, and this depends on geography, as you can appreciate, but typically, if there are stores within a three-mile radius, we'll see a 10%-15% lift in those peripheral stores. And so the way we think of it, we're getting out of a money-losing store, and we're improving the sales and the flow-through in the surrounding stores. So the good stores get better, and the bad store goes away. So we think that is a real win for the guest and a real win for employees and obviously a financial win for the franchisee. So that's why we think it's so healthy for the system. And this is why most other franchise systems do not have a one-for-one policy.
And we think it's a really, really good development within Wendy's that they've changed that policy.
Okay. Sounds good.
Okay.
And then you also just mentioned that there are some new products coming February 16th, I believe. Can you just talk about that? Can you give us a sneak preview as to what's coming?
Well, actually, we're asked not to. That's Wendy's marketing space. So just stay tuned for marketing, right? We'll see it in the. It's their chicken products and a fish product coming out.
Gotcha. Got it. Got it. Okay. So sounds good. So we'll certainly stay tuned. I believe that's on Presidents' Day, so February 16th. Now, you know, so a couple of questions here from the audience. So how do you think about balancing capital allocation between new franchise acquisitions versus investing in your own brands?
Well, that's a great question.
So, you know, right now, we're heavily concentrated in Wendy's, obviously. We're 359 Wendy's restaurants. We do have six Morning Belle restaurants, which is a concept that we've developed internally. We think it's kind of the breakout year for Morning Belle. We'd love to be building more, but, you know, we're completely capital constrained at this point with what's going on in Wendy's. And we really need to see Wendy's margins return to some semblance of normal before we do any additional growth capital allocations. So right now, it's really get the ship back sailing properly before we do anything, whether it's Wendy's, whether it's Morning Belle or anything else. We do have one new brand opening, and that is in the Bojangles system. We had six stores that were part of a Taco John's franchise business that was developed in 2024. And in 2025, we exited the system.
We're replacing that with Bojangles. We're actually very excited about it. I wish we could grow conceivably more, but again, we're really capital constrained at this point until we get our Wendy's business in ship shape.
Okay. Understood.
Okay.
Then, you know, so obviously, as you're so tied into Wendy's, so with, you know, the big footprint that you have with Wendy's, you know, so how do, you know, changes in franchise or pricing and the marketing programs and national promotions, you know, as far as, you know, thinking about margins? I mean, can you also talk about what control does Meritage have over local pricing and operations, or is that all kind of dictated by Wendy's?
Yeah. In the Wendy's system, in franchise, the franchise or franchisee relationship is there's always a little nuance. Every brand's a little different.
In the case of Wendy's, they 100% control as a brand. They control product innovation, and they control marketing. And oftentimes, they'll have a national price point in the marketing. So as a franchisee, we have the right to price the products as we see fit. However, it becomes very inconvenient for folks working in the restaurant if there's a national price point in advertising and we are selling it locally at a different price. So from a practical perspective, you're always going to follow the national price point, which can mean there can be some pain points in that because if the price is not being promoted at a point that is a good return on investment for the franchisees, then sometimes you can be forced into money-losing propositions. And obviously, that's not what anybody wants.
And anyone who's interested in the industry, McDonald's franchisees just put out a bill of rights, I believe, last week. And it's fascinating to read. And all of these subjects are part of it. You know, it's pricing for profitability. It's all this. I find it very interesting. And I think it'll be a movement within the industry because I do think there's so many relevant points. And, you know, McDonald's is 10 times the size of our system, if not greater. So very much an industry leader, but it speaks to that, Anthony. It speaks to, you know, pricing and who should price and how it should be priced and, you know, make it fairly priced for the economics of the franchisee. And believe me, Wendy's tries, but it doesn't always happen. There's different costs in different parts of the country.
With one price point across the United States, that doesn't always work.
Understood. Okay. As we think about Wendy's and the challenges there, I mean, from your perspective, I mean, how much has this been tied to, you know, macro factors versus controllables, or execution on their part, you know? We'd love to hear your perspective on this.
There's always a lot of blame to go around, right? I mean, and it's never one thing usually because if it's one thing, we can address it. I mean, the industry has been in a really turbulent spot for the last 24 months. I think the lower-end consumer has been under a lot of stress, that demographic. I mean, we've seen 35%-40% inflation since COVID. I don't think that wage inflation has even remotely kept up with that. I think there's pressure there.
Although I think this year there will be a tailwind with tax refunds. I think that's what the industry is expecting and us as well. I mean, we will typically get our fair share. We certainly did when there were government distributions made during COVID. There was a couple of different distributions. And under the new tax policy, there's going to be, you know, particularly that lower cohort will be receiving tax benefits this year that they haven't received in the past. So, you know, that could certainly be a tailwind for the business. Wendy's has had a leadership issue. It's not a secret. All the analysts report on it. There's been, you know, a huge turnover there at the top. And certainly for the last 36 months, that's impacted their ability to draw outside talent in.
You know, we're hopeful that today we're going to learn some more about the succession plan at Wendy's. And that Wendy's, well, you know, these brands historically, they all go through five- to six-year cycles. You know, hence the term consumer cyclical, right? And I think right now, Wendy's is at the bottom of that cycle, and some of our competitors are at the top. And I think as Wendy's, you know, gets a new team in place, gets new resources dedicated, new innovation and marketing going, you know, that tide will turn as well. We've seen that over and over and over in the consumer space. You know, I don't see why this would be any different.
Right. And you also mentioned the lack of new product innovation is also being a headwind for Wendy's.
I think you've also said that you're predominantly tied to beef. Can you just remind us as to like what your beef versus chicken exposure is? And if there is a new chicken product, how that could help?
Yeah. Wendy's basically set the chicken line aside about five years ago when they started to focus on breakfast. Sitting here today, Wendy's protein sales are 80% beef, 20% chicken versus our competitors. McDonald's is 50% beef, 50% chicken. Kind of the so what of that is when we see the beef go parabolic in price like we did last year, McDonald's has the flexibility to go out and market chicken. That's exactly what they did. That's what Burger King did. That's what anyone would do because that protein price was low and the beef price was extremely high.
Wendy's sitting here today with an 80-20, you know, 80% beef, 20% chicken. It doesn't have the same flexibility that its competitors have. So there's a big emphasis on just getting back to an even blend between chicken and beef in the system, and also the demand for chicken has just been so strong for the last decade and continues to grow. I mean, if you look at it, it's about a 45-degree angle. The demand for chicken, young people view chicken as healthier. It's a healthier alternative, white meat. They view it as better for the environment than beef, and they view it as less expensive. So those are kind of the big three with the next generation. You know, you need to be in front of that, not behind it.
Right, right. Yeah. Yeah. Certainly sounds like there needs to be a pivot there.
And yeah, hopefully the new CEO, whoever that is, you know, will certainly be able to do that. So also in your last earnings release, you talked about, you know, the Wendy's Project Fresh, how that's intended to improve, you know, the sales and profitability. Can you speak to that as well as to what you think will happen here?
Well, and obviously that's something that I think this new CEO is going to pick up and run with. The team in place, put that in place, you know, and I give them a lot of credit for it. And I think it's going to be beneficial. They're trying to address a number of different things at the same time. Number one, the customer experience within the four walls of the store and the drive-throughs.
It's a real focus on a pattern of management that they would like to see in the restaurants. And we've embraced it and really put it into effect in August, September of last year. Our teams really like it. And it's just bringing a more disciplined daily routine to the business where Wendy's four or five years ago took a lot of folks out of the field as part of the G&A cutting that was going on. And those were folks that trained our general managers and our stores. And, you know, we miss that. And what happens is you get a little diluted on your focus and your routines, and they become different for different regions of the country. Everybody's kind of got their own way of doing it. And it was, you lost a little of the standardization with that.
And that is all being brought back and is very well received by general managers and district managers in the system. And the other piece of it is the economics, the four-wall economics for the franchisees. And again, I spoke to Pete Suerken's focus and his empathy on how important it is for the franchisees to have profitable businesses. Because a strong system is a system that is on its front foot and able to do a lot of things in the future, invest in new, invest for new product development within, you know, new equipment for new products, as well as build new locations, right? It grows and strengthens the system. So those are two of the really big important pieces that we're looking forward to.
And I think it'll be even more of an emphasis, again, once, you know, they land on a CEO and the whole team kind of coalesce. And then you'll see the franchisee system really, really rally around that.
Gotcha. All right. And then lastly, you know, given the time constraints that we have here, so just to kind of close it out, so, you know, what are the key operational or financial milestones that you believe investors underestimate and should be looking out for as hopefully there will be a positive re-rating of the stock? Well, in the case of Meritage, I think there's a lot of liquidity fear, and it's very warranted. That's why we consider ourselves in a special situation. I do think it is masking a fundamentally very recoverable Wendy's brand. Wendy's is a good legacy brand, and I think it will recover.
It is going to take some time, and, you know, we could get some tailwinds if the Mexico border opens back up for the importation of beef, which has been closed. That could also be another tailwind to the cost of beef over 2026 and 2027, so there are some potential tailwinds here, but, you know, we're trying to be conservative on that, and, you know, first things first, let's make it through Q1 and into our money-making quarters for the balance of the year, and, you know, we'll keep our fingers crossed for the meeting this afternoon with the Wendy's board of directors that we have an update on the CEO's succession.
Gotcha. All right, well, thank you very much, Bob, for sharing the Meritage Hospitality story. Also, thank you everyone for listening in and asking thoughtful questions as well.
So with that, we'll wrap it up and hope everyone has a productive day at the conference. Thank you again. All right. Take care. Thanks.