Earnings Call: Q2 2021

Aug 10, 2021

Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Greg Lemenchak, Senior Director, Investor Relations and Corporate FP and 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 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 On our conference call today, our President and Chief Executive Officer, Todd Penegor and our Chief Financial Officer, Gunther Plush, will give a business update, review our 2021 Q2 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 2nd 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% and almost 600 basis point 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 It is planning to open a handful of delivery kitchens as well this year. I'm extremely proud to show that we are increasing our 2025 global restaurant target to 8,500 The 9000 Restaurant is 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 We also recently finished collecting our 2020 U. S. Franchise financials, and we saw Take an increase in overall financial health. Our franchise system grew EBITDA dollars by almost 20% in 20 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 percent 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 through 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 2nd quarter with global same restaurant sales growth of 17.4%. This came in well ahead of our internal reaching double digits for a 2nd consecutive quarter, and we accelerated on a 2 year basis to approximately 14.1% when accounting for 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 $1,900,000 These strong results were driven by continued growth in our rest of the day business alongside our growing breakfast and digital businesses. This is our 4th 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 CAD2.4 million. The continued strength and momentum we've seen in our global same restaurant sales through the Q2 has once again given us the confidence to take up our system wide 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 USA Restaurant sales, which continued to accelerate in the 2nd 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 We also executed against our high low strategy by continuing the $5 Biggie promotion, which drove traffic into our restaurants throughout the Q2. 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 continues to be a profitable sales layer for us in the Q2, 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 Q2, our breakfast sales accelerated as expected, growing 10% over the Q1. This growth was driven by the successful $1.99 Honey Butter Chicken Biscuit and 2 for 4 trial 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 our breakfast. We continue to expect outsized growth during the breakfast daypart in the second half of twenty twenty one, driven by continued trial driving programs and an expected return to routines in the fall. This is being fueled by incremental company breakfast advertising investment that we just increased by $10,000,000 to $25,000,000 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 Q2 as we've seen our digital gains during COVID remain 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 and overall sales during the Q2, resulting in our digital sales mix holding steady at approximately 7 point 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 8,500 to 9,000 restaurants, which is a meaningful 500 to 1000 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. 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 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 $100,000,000 build to suit development fund that we Specht 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 Q2. This program, Along with newly implemented lower liquidity and net worth requirements for our new franchisees, we'll 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 1st 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 against these goals while making investments and 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 Q2 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 Q2 financial results. Thanks, Todd. We could not be more proud of our 2nd quarter results as our business continued to accelerate to record levels, showcasing same restaurant sales and earnings growth that were once again well ahead of our expectations. Our global system wide sales grew an incredible 22.9 percent 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 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 and A was This 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 $131,000,000 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 percent to $0.27 driven primarily by our higher $6,000,000 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 Our strong quarter two 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 system wide 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 $10,000,000 to approximately $465,000,000 to $475,000,000 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 transactions that are expected to close in the back half of the year. These increases are being partially offset By an increase in G and A to approximately $240,000,000 to $250,000,000 which is driven by high incentive compensation Advertising investment we are making. Our higher adjusted EBITDA, a slightly lower expected tax Interest savings from our successful debt refinance are resulting in a $0.07 increase to our EPS outlook to 0 point 7 €9 to 0.81 Finally, we are raising our free cash flow outlook by $20,000,000 to approximately 2 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 the strong performance has continued 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 This Huge Development Fund are prime examples of us leaning in to drive transformative growth. We expect that the from the Development Fund will deliver a strong return for us and our franchisees who will operate them. Moving Forward, we anticipate that 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 Q3 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, supported increase, while still leaving flexibility to invest in growth. Lastly, we plan to utilize excess cash to repurchase shares And with your set, we announced today that we have added an additional $70,000,000 to our existing share repurchase Station to a total of $220,000,000 As a result, we have approximately $100,000,000 remaining On our authorization that expires in February of 2022, 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 striving strong system wide sales growth on the back 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 analyst or equity sales Lastly, we plan to report our Q3 earnings and host a conference call that same day on November 11. As to one question only. And with that, we are ready to take your questions. The first question comes from Brian Mulan with Deutsche Bank. Thank you and congrats on great results. Just a question on the U. S. Development pipeline. You had a lot of positive announcements today between Reef, Kitchen, the Groundbreaker incentive and the build to 2 funds. With these announced, can you just update us on how you're thinking about U. S. Net unit growth in 2020 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. Good morning, Brian. Yes, for 2021, we're expecting a global unit growth of 2% -plus, Obviously, it's going to accelerate between 2022 2025 to about 6%. We have said I previously anticipated what happened is both international growth and international and U. S. Growth is going to lift up. The starting point is a 10% plus growth rate in international for 2021 and about a 1% growth within 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. Thanks. Good morning. And 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 Brexit? 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? Yes, 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 Q1. 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 Continue to drive trial. Our awareness levels are quite healthy as it's north of 50%. We're in there in that same range Where Burger King is around awareness and they've been there for quite some time. And what we need to do is continue to Great 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 $10,000,000 of advertising to work to make sure that that message is loud and clear. Thank you. And your next question is from the line of John Glass with Morgan Stanley. Thanks. Good morning. I have 2 development related questions. First, just on the REIT Kitchens. Any early understandings of what the unit economics look like? I assume you don't put the capital into that. Just to clarify, if we should expect lower volumes just because it's a ghost kitchen or how do you About that. And as it relates to the $100,000,000 rule, given the franchise economics you're good, given you already have bound bakers, 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 putting your capital behind Thanks. Yes, John. Two quick things. Reef, one, we as Cindy said in the release, we do expect about 50 to be open this year Then the rest spread evenly over 2022 through 2025. And we had a very successful test with the main units up in Canada. Willy allows us to get into urban locations where we're dramatically under penetrated. If you look at the economics, early to tell What we can do from the sales out of each of those vessels, but we're expecting the sales in the range of $500,000 to $1,000,000 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've got a nice healthy economic return. From an investment perspective, REIT is putting up all the dollars to get the vessels to train the people, hire folks. We're going to support them on training, make sure that they hold the great standards. On the Golden State 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 is 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 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. This all coupled with the lower liquidity requirements that we talked about to become more competitive really makes this program compelling for Your next question is from the line of David Palmer with Evercore. Thanks. Good morning. 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 help us think through how the company restaurants, what they're lapping this year versus what the system's lapping. For example, you had the one time 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 does look like your company restaurant profit did as well as the system in 2020. Thanks. Good morning, 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. It's an EBITDA growth number. So obviously, the profit growth rate was much higher than the sales growth rate. And franchisees really went great restaurants and benefited Clearly from higher average check, just to make absolutely sure is that EBITDA growth of 18% Does not include any potential income a 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 to experience now an 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 Your next question is from the line of Eric Gonzalez with KeyBanc Capital. Hey, thanks for the question and congrats on all the development I just have a question about that development fund. I was wondering the mechanics of that. Will you be 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 I'm just wondering how much incremental risk is being introduced by lowering the threshold of our network and liquidity and what you may be doing to Could we have an uptick in store closures down the line, particularly where you might be on the hook given your position as a build to suit lender? Good morning, Eric. 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 In that 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 then in return for us to make a return on the We are investing. We are getting slightly elevated royalty rate 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. Our liquidity requirement previously was about $2,000,000 We lowered it to 500,000 The net worth requirement was $5,000,000 We lowered it to $1,000,000 At Triste's production, It looks like we're taking on a lot of risk. But I have to say, we studied 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 the competition is doing. Thanks. The next question is from the line of Jeffrey Bernstein with Barclays. Great. Thank you very much. Just wanted to follow-up on the franchise health. That 18% increase And 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 system wide in your estimation to help mitigate that to drive such strong profitability? Thank you. Yes. I think, Jeff, you snuck in there 3 questions. There is one. I'll try to remember them all. So On the 18% increase, really, we didn't quote 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, so then actually expand profits by 18% is strong. Actually, Canada performed even stronger. Canada's EBITDA was kind of a little bit north of 20% growth. That's kind of clear. I don't know what I can give you. And on the lease adjusted leverage ratio, again, it's remarkable that we are down half at earn This is 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 up shop there is really the driver is really the labor shortage that we have that started relatively Quickly then in the Q2, so that's why we took on more labor inflation in the Q2, 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. Let me take on to your second question. And then the last one would have been on pricing. So where we've gone on company pricing is company has been on Thing is, company has been on par with food away from home inflation. We've had a little more opportunity than our franchisees as we've been a little more 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 Carroll with RBC Capital Markets. Hi, good morning. So on the incremental advertising spend of $10,000,000 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? Were you just simply seeing more of an opportunity to drive trial as mobility continues to improve as you had discussed earlier? Thanks. 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 Several year journey, a little different as habits are changing on the morning routines. And we really want to be there as morning routines start to get reestablished 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 opportunity is to continue to have fun trial driving events To get our food in our consumers' mouths and they get to see on this weekend, if you want, you can go get a free croissant in Annie Wendy's restaurant on Saturday 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. Great, thanks. GP, I want to come back on the restaurant level margins. You have guidance for 17% to 18% implies a step down from the 18.7 Year to date, 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 in the anticipated restaurant level margins? You guys are about 95% reopened dining rooms that you So on the queue, so I don't think it's incremental diners coming on board. Just any more color to kind of help flesh that out would be helpful. Thanks. Good morning, 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% will decelerating slightly. A couple of things. The comparisons are getting a little bit more Also, we're going to get a little bit less sales leverage on a 1 year basis into our restaurant P and L. It's probably the first reason. 2nd 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 the 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 above 5% to 6%. Lastly, as we get towards the end of the year, we do expect that Check sizes are going to come down a little bit. That obviously is 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 compared to the 15% we posted last year. Thank you. Your next question is from Dennis Greigher with UBS. Great. Thanks for the question. J. P. Or Todd, wondering if you could talk a little bit more about the core lunch and dinner day part 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 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 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 will be great. Thank you. I think 1st 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 Truly complement a great experience and that speed along the way. And then as you think about the rest of the calendar beyond its great operational execution, we do have A lot of nice things planned for the rest of the year. There will be a nice balance between core messaging to continue to drive the equities that we have and we've 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 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 if 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. Thank you. Your next question is from John Ivankoe with JPMorgan. Hi, thank you. I was hoping we could talk about the average ticket, 21 versus 2019. 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 You have in 2019, if that's even important to you. Certainly, you make more money selling higher margin products at 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 2019, it does up significantly. We haven't given out the specifics on that. But you got a combination of things happening. You got average items per transaction up with consumer bringing things home more 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 Q2. 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. They are important. We want to continue to make We got a balanced high low calendar, 4 for 4 will continue to have a roll, dollars 5 Biggie Bag has a roll, 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 'twenty two than they were in 'twenty one. Yes. The way we built our guidance, John, is we will see the average That could be elevated through the fall time frame and then we think it will start to moderate late in the year as customer traffic starts to pick up, But still higher than pre COVID levels. Okay. Thank you. Your next question is from Gregory Francfort with 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? Thanks. 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 We also saw improvements going into the summer with kids out of school, which 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 overtime 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 leveraged during the higher 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. Jig, on price mix? Yes. On price mix, I think we really did a great job on this. You probably didn't see the detail yet. But on the food and paper line, In the Q2, for the face of the P and L, we are 110 basis points favorable. And again, keep in mind, we had a 3 point 3.5% inflation, so actually 100 basis points on headwind. So what that tells you is mix management and pricing allowed us to expand And improved food and paper cost per box, 2 10 basis points. So it's really programming, Right. All time high sales on Made to Crave behind Burger and Bacon Cheeseburger definitely helped. We promoted salads pretty well. It obviously helps with sales mix as well. And the company, we have pricing action year over year positive That has also helped us get basically our margin performance up on the food and paper line. Thanks. The next question is from the line of Peter Saleh with BTIG. Great. Thanks 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 Ghost 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 Reece Kitchen's plans to target with these ghost kitchens? Thanks. Yes, Peter. It's not exclusive. Reece is out there with many other And the great news is the dedicated vessel that they put in place to support our products to our standards in Canada It's 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 under penetrated if you look at our footprint across all urban locations, whether that's east, west, north, south. And as you think about where their opportunity is on 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 So we'll get a lot of learnings in a hurry. Thank you. Your next question is from Jared Garber with Goldman Sachs. Hi, thanks for the question and likewise congrats on a strong quarter. I wanted to circle up on the digital side of the business. I think 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, we would expect that you're seeing some increased And then if you could also update us on the active members on that program, that would be helpful too. Thanks. So a few thoughts, right? As we said on the prepared remarks, digital sales 10% versus Q1. That does result in mix being flat as a result of the strong total sales that we had at 7.5%. And the great news is 17,000,000 loyalty members, up 25% over the 13,000,000 that we had as of Q1. The active users are up slightly, so we're now north of 3,000,000. And the great news is those active users are more active than last quarter. So they're in more 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 Data to really truly have 1 to 1 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 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. Deliveries 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. Thanks. And just a follow-up there. Are you seeing anything that maybe I'm just thinking through the breakfast versus the rest of day. Any difference in usage among the app or the loyalty program frequency, cost of 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 nugget that we probably would want to get out there is if you look at frequency and the number of visits to Wendy's Sure, on an annual basis, if you look back over the last 12 months, we're up about 20% from 5.5 visits to 6.5 visits. We're very proud of that. Breakfast driving some of that, digital 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, digital help and drive the business, clearly is for us. So we're seeing folks Engaged and we're seeing our frequency head in the right direction. And that's at a time where traffic is still impacted through the COVID challenges. Great. Thanks so much. Your next question is from Lauren Silverman with Credit Suisse. Thanks. So my question is just on the Ghost Kitchen strategy. You talked about the opportunity for greater penetration in urban markets. 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 mentioned In the script that a franchisee is opening with REEF. So how does that arrangement work? Lauren, So again, the big strategy around that, the ghost kitchen is really under penetrated areas for the Venice companies. It's really urban. That is Our big plot. We are not as ready to give the breakout between the U. S, Canada and the U. K. Once we get a little bit more experience under the belt, we will probably maybe talk about that. In terms of You fill out the question, Jeffery. At the end of the day, we will be our franchisee. So we think about them being the franchisee. The comment that you heard in the prepared remarks is They will become our 1st franchisee in the U. K. So as we're kind of building out outside of the urban location and the suburban locations with the company footprint, They will come in and support that urban footprint just as GP articulated they're going to do in the U. S. Yes. We see technically 2 different contracts with the UK, with Canada and the U. S. So technically, there Right. With the U. K, with Canada and the U. S. So technically, there's kind of 3 different franchisees that are interacting with us. And they obviously help with the same standards It's any other franchisee. Understood. Thank you, guys. Your next question is from James Sark with Stephens Inc. Thanks and 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 and the strength of your cash flows, How did you settle on that $25,000,000 number? And is there potential for further acceleration in investments to build trial around that daypart. Thank you. When you get a chance to get into the queue, breakfast mix ticked up to 7.2%, so Subslightly from last quarter, the dollars are up, as we said earlier, 10% versus Q1. We've got the rest of the day business being really strong, Just 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 The company incremental investment of $25,000,000 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 year. Obviously, the launch year was impacted a bit by COVID and the challenges there. But we do think that's a good way 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 $15,000,000 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. Thank you. Your next question is from Brett Levi with MKM Partners. Great. Thanks for taking the question. Can you I know you in the prepared comments, you talked about the strength of your sales Improvement throughout the quarter. Do 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 the originality? Have you seen any changes in just how the The consumer is using you and the makeup of them. Thanks. Yes, Brett. We're not providing any specific commentary on our Q3 start, but Let me give you a little bit of flavor. 1, very pleased with our momentum in the first half of the year, really resulted in the confidence to call up our global sales to 11% to 13%, as we said in the remarks. Our 2 year stack adjusted for the 53rd week built in Q2. So 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 checks remain elevated at least into the fall. 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 early is an important one as we continue to bring folks back into our restaurants a little more often. Your next question is from Nicole Miller with Piper Sandler. Thank you. Good morning. On the Labor inflation, could you talk a little bit through staffing challenges and or where the inflation lies? I'm thinking about back 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 Yes, clearly with 70% of our restaurants open or under construction against 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 got to do some things on sign on bonuses, retention bonuses, free meals. We're doing what it takes to make sure that we get those restaurants fully staffed, I'm fully staffed, even leveraging a little more over time because there is sales and transactions to be gained, and there's a 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 open, when should it be closed. So there will be times potentially after the dinner day part where The dining room might close a little bit earlier than historical and we go full drive through 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? Thank you. Yes, our turnover continues to be better than industry So, you know, historically, we're better than industry average. We continue to be better than industry average. And we just completed a big Boisso Lendi survey. And the great news is against competitive benchmarks. Our overall engagement stores of our employees at the restaurant level It's significantly better than the rest of the industry. So our work to make sure these restaurants are fun and energizing is paying off. It helps It helps retention and it also helps folks to show up day in and day out to continue to serve our customer. Thanks again. And your final question comes from the line of Jim Sanderson with Northcoast Research. Hey, thanks for the Congratulations on a great quarter. I just wanted to ask one last follow-up question on Reef Technologies. 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 when these will make any type of equity investment in Reef Technologies to ensure The 700 plus unit growth over the next couple of years? Thank you. Yes. So on the REIT equation, the royalty will be a little bit higher, as I said a little bit earlier, but We'll 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. Ad contribution will be a little bit lower. So really the focus on a Reef Kitchen is local advertising. So it's about 2% Contributions 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 REIT or not, and we'll see how that plays out. All right. Thank you. Thank you, Jim. That is 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 Q3 conference call in November. Have a great day. You may now disconnect.