The Wendy’s Company (NASDAQ:WEN) Q4 2022 Earnings Call Transcript

The Wendy’s Company (NASDAQ:WEN) Q4 2022 Earnings Call Transcript January 13, 2023

Operator: Good morning. Welcome to the Wendy’s Company Preliminary 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. Kelsey Freed, Director of Investor Relations, you may begin your conference.

Kelsey Freed: Thank you, and good morning, everyone. Today’s conference call and webcast includes a PowerPoint presentation, which is available on our Investor Relations website, irwendys.com. Before we begin, please take note of the safe harbor statement that appears at the end of our earnings release. This disclosure reminds investors that certain information we may discuss today is forward-looking. Various factors could affect our results and cause those results to differ materially from the projections set forth in our forward-looking statements. Also, some of today’s comments will reference non-GAAP financial measures. Investors should refer to a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures at the end of this presentation or in our earnings release.

On our conference call today, our President and Chief Executive Officer, Todd Penegor; and our Chief Financial Officer, Gunther Plosch, will briefly review our preliminary Q4 and full-year 2022 results and provide an update on our capital allocation actions. From there, we will open up the line for questions. With that, I will hand things over to Todd.

Todd Penegor: Thanks, Kelsey, and good morning, everyone. I’m pleased to speak with all of you a bit earlier this quarter to announce our preliminary fourth quarter financial performance and revisit our capital allocation policy. Before diving into our strong results, I did want to take a moment to comment on Trian Partners amended 13D that was filed this morning. We look forward to continuing our partnership with Trian Partners with a shared goal of delivering value for all shareholders. Wendy’s continues to make meaningful progress against our three strategic growth pillars, and we are pleased with Trian Partners confidence in our growth strategy. Today’s call will be focused on our preliminary fourth quarter and full-year 2022 results and the capital allocation actions we announced earlier this morning.

I look forward to sharing the detailed drivers of our 2022 results and providing our 2023 and long-term financial outlook as part of our full earnings release on March 1. Now let’s turn to our preliminary fourth quarter and full-year 2022 results, which highlight the strength and resiliency of the Wendy’s brand as we continue to deliver compelling growth. 2022 global system-wide sales grew 6.8%, supported by a second consecutive year of double-digit two-year global same-restaurant sales as well as over 275 new restaurants we opened across the globe. This sales strength, along with the step-down in inflationary pressures, underpinned the almost 300 basis point improvement in company-operated restaurant margin over the course of the year. This momentum alongside the hard work and dedication of our restaurant crews, franchisees and support center staff drove our full-year adjusted EBITDA of approximately $498 million, a 6.6% improvement versus the prior year.

The strength we are driving in the business alongside our robust liquidity position supports the capital allocation actions we announced this morning. We have achieved our 12th consecutive year of global same-restaurant sales growth, which is a streak we plan to keep alive in 2023 and beyond. 2022 also marked our second consecutive year of double-digit global same-restaurant sales on a two-year basis, which is truly remarkable. This growth extended across the globe with double-digit two-year same-restaurant sales in both our U.S. and International segments. Our sales results have enabled the Wendy’s system to weather the unprecedented headwinds over the last few years and set us up for further growth next year. Our sales momentum picked up even further to close the year as our two-year same-restaurant sales results accelerated in Q4 versus the prior quarter.

Our international business continued to achieve outstanding results supported by growth across all our regions. This sales strength further bolsters our confidence in accelerated international expansion in the coming years. The acceleration in our U.S. business, same-restaurant sales was supported by our strategic mix of craveable innovation and compelling price points across a variety of occasions. We launched the decadent Italian Mozzarella sandwiches and garlic fries, delivered another exciting extension of an iconic product with the Peppermint Frosty and continue to promote our ownable $5 Biggie Bag. At the breakfast daypart, we enticed trial with our $3 croissant promotion and continue to see our French Toast Sticks resonate with customers.

I’m excited to share more about our strong sales results, including updates on our breakfast and digital billers at our full earnings call in March. I am proud of the new net unit growth our team was able to deliver in 2022 despite ongoing development challenges across the industry. We opened over 275 new restaurants globally, reaching 2.1% net unit growth and marking a second consecutive year of net unit growth acceleration. This growth was spread across the globe with the U.S. and International segments making up approximately 40% and 60% of our net unit growth, respectively. Turning to the UK. We have grown the market to a footprint of almost 30 restaurants and well under two years. As of year-end, this includes 12 company-operated restaurants as well as our first traditional franchise-operated restaurant.

We are excited for all the growth that’s ahead for this market in 2023 and beyond, including our first drive-thru restaurant expected to open in the coming weeks. Finally, our focus on franchise recruiting has paid off with nearly 40 new franchisees joining the Wendy’s family across the globe in 2022. This signals just how much excitement there is in the investment opportunity of the Wendy’s brand. In addition to the new development commitments that come along with these new franchisees, we are excited by the wealth of experience and growth mindset that they bring to the system. We are committed to bringing Wendy’s to more of our fans and are excited about the strong foundation we set for further growth ahead. We remain committed to driving accelerated growth across our three strategic pillars, building our breakfast daypart, accelerating our digital business and growing our global footprint.

Before turning it over to GP to walk through our capital allocation updates, I want to take a moment to comment on the redesign of the company’s organizational structure that we communicated this morning. The redesign is being made in an effort to better support the execution of our long-term growth strategy by maximizing organizational efficiency and streamlining decision-making. Following this change, we intend to embark on a broader redesign of our organizational structure as we see an opportunity to operate as a fully global brand with a unified voice, approach and operating model. We anticipate that our 2023 and 2024 G&A will be relatively flat versus 2022 despite elevated inflationary pressures as a result of the redesign, we are now beginning in service of accelerating our growth even further.

With that, I’ll turn it over to GP to walk through our capital allocation actions.

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Gunther Plosch: Thanks, Todd. As Todd mentioned in his opening remarks, our Board of Directors recently had the opportunity to revisit our capital allocation plans in order to address our cash balance, which remained elevated at approximately $780 million as of year-end 2022. Our capital allocation policy is unchanged and our first priority remains investing in the business for growth, which we will continue to do while remaining true to our asset-light model. Second, we are committed to maintaining an attractive dividend. Our continued business momentum, supported by the large investments in our strategic growth pillars over the last several years, and our strong liquidity position support a 100% increase in our quarterly dividend to $0.25 per share.

We expect the full-year dividend to reach $1 per share and anticipate similar strong dividends moving forward as supported by our expected strong free cash flow growth and other factors subject to the discretion of our Board of Directors. Lastly, we will utilize excess cash to repurchase shares and reduce debt. We announced today a new $500 million share repurchase authorization expiring in February of 2027. This replaces the previously approved $250 million share repurchase authorization, which was set to expire in February of 2023. Additionally, we repurchased $20 million of our debentures so far in the first quarter under an existing Board authorization. We will continue to assess opportunities to reduce our debt in alignment with our capital allocation policy.

We continue to deliver on our simple, yet powerful formula via an accelerated, efficient growth company, and we are committed to returning cash to shareholders as the momentum in our business continues to grow. With that, I will hand things back over to Kelsey.

Kelsey Freed: Thanks, GP. Please note that we plan to report our audited fourth quarter and full-year earnings on March 1 and host a conference call that same day. At that time, we will answer questions regarding our 2022 results and share our 2023 and long-term outlook. As we transition into our Q&A section, please keep questions focused on the capital allocation actions that were announced this morning. Additionally, due to the high number of covering analysts, we will once again be limiting everyone to one question only. With that, we are ready to take your questions.

Q&A Session

Operator: Certainly. Our first question comes from the line of Brian Bittner with Oppenheimer. Brian, your line is now open.

Brian Bittner: Thank you. Good morning. Good morning and thanks for the question. So as we focus on the capital allocation strategy and clearly, the significant increase in your capital returns to shareholders that you’ve announced this morning. It seems like a pivot from the last couple of calls, GP when it sounded like you were pretty focused on putting capital towards deleveraging the balance sheet. So could you just talk about how the Board came up with this balance and to increase the dividend so dramatically? And on the buybacks, it’s a long tail on the buybacks going out to 2027. But can you talk about maybe the near-term buyback strategy? Are you looking at doing some sort of ASR, particularly with that cash balance being so heavy still? Thank you.

Gunther Plosch: Good morning, Brian. There were a lot of questions in there. So again, the first and most important point is our capital allocation policy is unchanged. Yes, what we have definitely decided with the elevated cash balance we had of around $780 million. It’s obviously time now to put this cash to work and return it back to shareholders. Our second most important priority was always to issue attractive dividends. So we felt with the high cash balance we have, the high visibility we have in growth, the high visibility we have in future strong cash flow growth, but it is the right action to actually be a little bit more attractive on the dividend side. We are balancing that with our third priority, which is returning cash to shareholders through share repurchases and to debt reduction.

On the share repurchase side, the $500 million, you’re right, it goes out for four years. We’re not going to comment how that is going to phase out annually. You can expect for us that we’re at least going to spend about $70 million a year to manage our dilution. The rest is going to be on our discretion. We will see how things develop over the next couple of years.

Operator: Our next question comes from the line of Andrew Charles with Cowen. Andrew, your line is now open.

Andrew Charles: Great. Thanks. I know the lines of questions you want to be capital allocation related. But Todd, I was wondering if you could help contextualize your strong 4Q U.S. sales results relative to QSR for category dollar share you typically do that with earnings calls and just given your released 4Q comps, I think that would be helpful. My other question, though, just on capital allocation was for GP. And could you just speak to your ability in meeting your growth priorities while reducing or limiting G&A, keeping those dollars flat from 2023 and 2024 and just your confidence and your ability to really reach €“ achieve your priorities, while keeping those dollars flat.

Todd Penegor: Andrew, on the sales front, I’m a little too early to have all of the fourth quarter share data. So we’ll share a lot of our share performance as we get together on March 1 with our full earnings release. But when you look at the momentum that we had in the third quarter and the step-up in momentum that we had on a two-year basis into the fourth quarter, both U.S. and international, my sense is we performed very well relative to competitors within our space. I mean we had a strong calendar. As I said on the prepared remarks, our breakfast business behind the continued momentum on French Toast Sticks, the $3 breakfast deal to drive trial. We did all of that lapping the basket promotion from a year ago to put those strong numbers in place.

And then you look at the rest of our day calendar, very balanced with the $5 Biggie Bag on the value side, iconic Peppermint Frosty out there, and the continued success of Made to Crave with the Pretzel Bacon Cheeseburger and Italian mozz have done a nice job balancing that calendar and QSR continues to be placed €“ place to be, and we’re performing well within that segment. GP?

Gunther Plosch: Yes. So on your G&A question, yes, we are confident that we can keep G&A relatively flat versus 2022 in both 2023 and 2024. I mean there will be some inflationary pressures. As you know, we are an efficient company. We ended 2022 with about 1.9% of global sales. And I think with the redesign actions to streamline our decision-making, I will give us enough tailwinds in our G&A to offset our inflationary pressures and keep as a result of it, G&A relatively flat over the next two years.

Operator: Our next question comes from the line of Dennis Geiger with UBS. Dennis, your line is now open.