The Wendy’s Company - Q2 2023

Transcript

Operator (participant)

by the number one on your telephone keypad. If you would like to withdraw your question, press star, followed by the number two. Thank you. Kelsey Freed, Director of Investor Relations, you may begin your conference.

Kelsey Freed (Director of Investor Relations)

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. Some of today's comments will reference non-GAAP financial measures. Investors should refer to our reconciliations of non-GAAP financial measures to the most directly comparable GAAP measure at the end of this presentation or in our earnings release.

On our conference call today, our President and Chief Executive Officer, Todd Penegor, will give a business update, and our Chief Financial Officer, Gunther Plosch, will review our 2023 second quarter results and provide an update on our outlook for the year. From there, we will open up the line for questions. With that, I will hand things over to Todd.

Todd Penegor (President and CEO)

Thanks, Kelsey. Good morning, everyone. In the second quarter, we continued to deliver meaningful sales and profit growth alongside sustained progress against our strategic growth pillars. Our global same-restaurant sales grew 5.1% on a one-year basis and 8.8% on a two-year basis, in line with our strong expectations for the quarter. This was driven in part by our international business, which achieved another outstanding quarter with same-restaurant sales growth of 7.2% and two-year growth of 22.4%. This marks a ninth consecutive quarter of double-digit international same-restaurant sales growth on a two-year basis. We continue to see strong results across all our regions, including our key international growth markets, which have all achieved double-digit same-restaurant sales growth year to date through the second quarter.

The continued success of these markets is driving interest in development from both new and existing franchisees and bolsters our confidence in our international growth plans. Our U.S. business delivered same-restaurant sales growth of 4.9%, with strong two-year results of 7.2%. These results allowed us to hold our strong dollar and traffic share within the QSR burger category and once again widen our share gap to several competitors. During the quarter, we benefited from our strategic pricing actions and positive mix resulting from the evolution of our value platforms, partially offset by an expected decline in year-over-year customer counts. We carried forward our digital momentum as global digital sales mix held strong at over 12%, following the large acceleration we drove during the first quarter.

We once again drove significant profit expansion, resulting in an over 200 basis point year-over-year increase in U.S. company-operated restaurant margin to 17.3%, as sales growth drove P&L leverage and commodity inflation eased. We also continued to make progress against our development goal, opening 41 new restaurants across the globe, totaling 80 new restaurant openings year to date through the second quarter. We remain fully committed to driving the restaurant economic model and delivering global growth alongside our franchisees, crew members, and employees. I am confident that each of our growth pillars has significant runway ahead of us. Our plans remain deeply rooted in the foundation of the restaurant economic model. This is highlighted by our significant profit expansion year to date, which our franchisees are also experiencing.

Our growth and success would not be possible without the partnership we have with our franchisees. I am confident that our systems' continued alignment will allow us to achieve our near and long-term goals. Our focused approach to driving same-restaurant sales momentum powered our strong results in the second quarter and gives us confidence in extending our track record of sales growth. First, we are committed to delivering a restaurant experience that delights our customers and brings them back more often. In the second quarter, we once again drove improvement in our customer satisfaction scores and speed of service versus the prior year and prior quarter. This momentum was supported by both speed of service initiatives in our restaurants and continued improvements in the staffing environment.

Providing a great customer experience supports every other sales driver, and we will continue driving speed, consistency, and accuracy in our restaurants every day. Second, we continue to promote products across a variety of price points and occasions. The launch of the Ghost Pepper Ranch Chicken Sandwich and the return of Strawberry Frosty, alongside continued profitable value with our Biggie Bag lineup, contributed to our second quarter growth. We will continue utilizing our ownable platforms like Made to Crave, Biggie, and Frosty to break through with our customers in new ways across the rest of the year. Third, we know there's significant growth ahead of us at the breakfast day part. In the U.S., we achieved our highest quarterly breakfast sales volumes of all time, supported by our $3 croissant promotion, resulting in mid-single-digit sales growth versus the prior year.

We expect to continue building on this momentum with our recently launched Frosty Cream Cold Brew, additional menu innovation launching soon, and more consistent promotional activity to drive trial and repeat. All in, we continue to expect the breakfast day part will deliver outsized sales growth in 2023 and beyond. Finally, our recent push into the late night day part paid off with double-digit sales growth versus both the prior quarter and prior year. Up to 90% of our US restaurants are now open until midnight or later, and as expected, we're seeing higher average checks and a skew towards delivery, which further supports the restaurant economic model. We continue to see room to grow our share of this day part versus our QSR competitors and are excited to continue advertising late night during the third quarter.

We believe the day part will expand even further as customers come to know that Wendy's is reliably open for the high-quality, late-night experience they deserve. The success of the second quarter and our strong plans for the remainder of the year drive our continued confidence that these four initiatives will ladder up to mid-single-digit global same-restaurant sales growth in 2023. We held our strong digital momentum in the second quarter, achieving over 12% global digital sales mix, while digital sales dollars grew over 25% year-over-year. Starting this quarter, our digital sales definition includes in-restaurant mobile scans in order to more accurately reflect our full digital portfolio and align our reporting with others across the restaurant industry. Internationally, we continue to see strong adoption of digital channels, leading to a digital sales mix of over 17%.

In the U.S., we are pleased that the digital gains we drove with our March Madness programming proved sticky into the second quarter. Our U.S. digital sales mix held relatively steady versus the prior quarter at over 11%, while digital sales grew over 25% year-over-year. U.S. digital performance also benefited from our late-night advertising and expanded operational hours. Our U.S. loyalty monthly active users held strong at over 3.5 million, supported in part by continued strides in our one-to-one marketing program. We have now activated more personalized user experiences and expect our progress in this area will accelerate over time, ultimately driving frequency, check, and operational efficiencies. Additionally, we are proud to remain on the forefront of testing new technologies alongside our key partners. We are committed to staying nimble and finding innovative solutions to maximize the restaurant economic model.

Our strong year-over-year sales growth rate expectations for delivery, mobile order, and kiosk have not changed, but with our updated definition, we now expect our global digital sales will reach over $1.5 billion this year. We are pleased to have opened 41 new restaurants in the second quarter, including our first Global Next Gen restaurant, bringing our openings for the first half of 2023 to 80 restaurants. We continue to make headway in our key international growth markets this quarter, including net unit growth in Canada, the U.K., India, and the Philippines. We also further solidified our long-term international restaurant pipeline with new restaurant development commitments in Canada. Our significant sales growth across these key markets and continued improvements in our U.K. restaurant margin support our expectations for outsized growth of our international footprint over the short and long term.

Additionally, we are excited to share that we have entered into a new master franchise agreement with Flynn Restaurant Group to develop 200 Wendy's restaurants in the Australian market. Flynn Restaurant Group is the largest restaurant franchise operator in the world and operates nearly 200 Wendy's restaurants in the U.S. We are thrilled to expand our relationship with them in this key market. Our development pipeline continues to be supported by our suite of development programs, which provide compelling incentives and support to new and existing franchisees. In the event that restaurants under agreements are not open on time, the company receives a monthly fee, which builds an additional layer of certainty into our development pipeline.

We made progress during the quarter on converting franchisee interest in our suite of development incentives into new agreements with an uptick in commitments across the Pacesetter, Groundbreaker, and Build-to-Suit programs, and now have approximately 60% of our development pipeline through 2025 committed under a development agreement. We expect additional commitments across our system throughout 2023 and beyond as we continue to market these programs, sales momentum continues, and inflationary pressures subside. In addition, we continue to lean into the Build-to-Suit program to ensure that all the new franchisees entering the Wendy's system can be up and running with new restaurants as quickly as possible. We expect 2023 global net unit growth of approximately 2% as we continue to navigate substantial permitting delays in the U.S., which have intensified and are pressuring our new restaurant opening timelines.

All U.S. restaurants facing permitting delays in 2023 have fully secured sites, to the extent that restaurants cannot open in 2023 due to permitting, it will be a timing shift into 2024. Our 2023 outlook continues to include a significant step up in traditional net unit growth as we have transitioned our development focus into higher AUV formats. This shift substantially increases the long-term financial benefit of our 2023 unit growth versus the units we delivered in the prior year. It is also important to note that our new traditional units are opening with AUVs almost double that of our restaurant closures, which is driving sales growth and building an even stronger system.

Looking further out, our progress towards solidifying our restaurant pipeline keeps us on track to achieve our long-term global net unit targets of 2%-3% in 2024 and 3%-4% in 2025. We know there is substantial runway for the Wendy's brand to continue delivering meaningful global growth, and we believe our momentum and strategies across our three growth pillars will drive shareholder returns for years to come. I will now hand it over to GP to share our second quarter financial performance.

Gunther Plosch (CFO)

Thanks, Todd. Our second quarter results continued to highlight the strength of our financial formula as progress against our strategic growth initiatives once again drove sales and profit growth. Our global system-wide sales grew 6.9%, achieving 12.5% growth on a two-year basis, supported by strong global same-restaurant sales across both U.S. and international segments and net unit growth. Our U.S. company restaurant margin reached an impressive 17.3%, increasing 230 basis points year-over-year. This expansion was primarily due to the benefit of a higher average check, driven by cumulative pricing of 6%, partially offset by commodity and labor inflation of 2% and 4%, respectively, and customer count declines. G&A increased slightly, primarily due to a higher incentive compensation accrual.

Adjusted EBITDA increased almost 9% to approximately $145 million, resulting primarily from higher franchise royalty revenue and an increase in US company-operated restaurant margin. The almost 17% increase in adjusted earnings per share was driven by an increase in Adjusted EBITDA and a higher interest income. These increases were partially offset by a decrease in investment income. Year-to-date, free cash flow increased over 40% to approximately $134 million, resulting primarily from higher net income, adjusted for non-cash expenses, and a decrease in payments for incentive compensation. These increases were partially offset by an increase in cash paid for income taxes. Our strong results through the first half of the year and the plans we have in place for the second half, support our confidence in our 2023 and long-term financial outlook, which we are reaffirming today.

We continue to expect global system-wide sales growth of 6%-8% this year, driven by mid-single-digit global same-restaurant sales and global net unit growth of approximately 2%. Our 2023 Adjusted EBITDA outlook of $530 million-540 million remains unchanged, as we continue to expect strong topline sales, U.S. company-operated restaurant margin of approximately 15%-16%, and mid-single-digit commodity and labor inflation. Our restaurant margin expectation continues to include the benefit of approximately 7% pricing, which includes one new pricing action that was taken towards the end of May as planned. We are also reaffirming our 2023 outlook for adjusted EPS of $0.95-1.00, as the benefit of a lower expected tax rate and higher interest income are offset by a decrease in investment income and higher amortization of cloud computing arrangement cost.

Our capital expenditure outlook for the year remains unchanged at $75 million-85 million. Lastly, we continue to expect 2023 free cash flow of $265 million-275 million, as expected lower cash taxes and higher interest income are offset by higher expected cloud computing arrangement cost, which increased to $30 million from our initial expectation of $25 million. Turning to our long-term outlook, we continue to expect mid-single digit annual system-wide sales growth and high single digit to low double-digit annual free cash flow growth in 2024 and 2025. We have a strong history of delivering meaningful sales and Adjusted EBITDA growth. In the last three years alone, we have grown these metrics by over 20% during a period of unprecedented economic uncertainty.

By the end of 2022, our strong performance drove an increase of $2.4 billion in system-wide sales and $85 million in Adjusted EBITDA versus 2019. These results were delivered while investing behind our breakfast, digital, and development initiatives to set us up for continued growth, showcasing the resiliency and predictability of our financial model. Our plans are building on this momentum, with our 2023 outlook showcasing approximately 30% sales and Adjusted EBITDA growth versus 2019. I also wanted to take the opportunity to highlight how our asset-light financial model has continued to predictably and consistently generate a substantial amount of cash. We have continued to convert over 100% of our net income into free cash flow, significantly outperforming our key competitors in the QSR category.

As we look ahead to 2023 and beyond, we expect our free cash flow conversion will remain well above 100%. Our cash balance of over $650 million at the end of the second quarter, and strong and flexible balance sheet, leave us well positioned to withstand any macroeconomic headwinds as we continue to drive significant return of cash to shareholders. To close, I'd like to highlight our capital allocation policy, which remains unchanged. Our first priority is investing in our business for growth, which we will continue to do while holding true to our asset-light model. Secondly, today, we announced a declaration of our third quarter dividend of $0.25 per share, which aligns with our commitment to sustain an attractive dividend.

We continue to expect a full year dividend of $1 per share in 2023, which represents an over 100% dividend payout ratio. Lastly, we will utilize excess cash to repurchase shares and reduce debt. As of August 2, we have repurchased approximately 4.7 million shares and have approximately $397 million remaining on our $500 million share repurchase authorization, expiring in February of 2027. We expect to continue to lean in on share repurchases this year in light of our current share price and cash balance. We repurchased approximately $32 million of our debentures through August 2, leaving approximately $43 million remaining on our debt repurchase authorization, expiring in February of 2024. We are fully committed to continue delivering our simple, yet powerful formula.

We are a predictable, efficient growth company that is investing in our growth pillars and driving strong system-wide sales growth on the backdrop of positive same-store sales and expanding our global footprint. This is translating into significant free cash flows, which supports meaningful return of cash to shareholders through an attractive dividend and share repurchases. With that, I will hand things over to Kelsey to share our upcoming IR calendar.

Kelsey Freed (Director of Investor Relations)

Thanks, GP. Start things off, we have an investor call with Truist on August 15th. We'll head to Canada for an NDR with Stifel in Toronto and Montreal on August 22nd and 23rd, respectively. September 11th, we have an investor call with Wedbush. We have an NDR in Chicago with Bernstein on September 27th. You are interested in joining us at any of these events, please contact the respective sell side analyst or equity sales contact at the host firm. We plan to report our 3rd quarter earnings and host a conference call that same day on November 2nd. We transition into our Q&A section, I wanted to remind everyone that due to the high number of covering analysts, we will be limiting everyone to 1 question only. We are ready to take your questions.

Operator (participant)

As a reminder, if you'd like to register a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two, and please ensure you're unmuted when speaking. Our first question comes from Brian Bittner of Oppenheimer & Company. Brian, the line is yours.

Brian Bittner (Managing Director)

Thank you. Good morning. As it relates to late night, I'm just hoping maybe you can expand on the early learnings here, considering you just launched it this summer. Can you, or the focus this summer. Can you speak about the degree of incrementality that you're getting from the sales you're experiencing as you pour more, more focus into late night? Is the momentum you're starting to see at late night, something that you anticipate to continue to build over the next several quarters?

Todd Penegor (President and CEO)

Yeah, Brian. No, we're very pleased with the opportunity that we see at late night. You know, first and foremost, we wanted to make sure that we've got our restaurants open to midnight or later. You know, we now have 90% of our system open midnight or later, and it actually goes up a little bit even higher as we get into the weekend. What we really wanna do is make sure that there's awareness that we are open and we're consistently open, so we can build, you know, into customers' routines that we are there for them on the late night day part. It is highly incremental. It's business that we don't have today. It's a strong category that's been growing consistently for the last couple of years.

We're well-positioned to compete with made-to-order, great food that can deliver on the promise, each and every night. We're excited. The piece that we really like about it is we can continue to drive sales without adding any labor. It is really margin accretive to us to the bottom line.

Operator (participant)

Our next question comes from Joshua Long of Stephens, Inc. Joshua, please go ahead.

Joshua Long (Managing Director and Research Analyst)

Great, thank you for taking the question. Can we talk about the personalized user experiences that you mentioned on the digital? It seemed like you were making some early strides there. Curious what kind of learnings you've had to date and where you think this could go next? Thank you.

Andrew Charles (Managing Director)

Yeah, we've been working for a while, as you know, to really make sure we had a database to, to really better connect to our customers. It started with, you know, general customer journeys. It's now quickly becoming more personalized journeys. We feel like we are in a position now, after a lot of work, to really double down going forward, to lean in, to better connect, to make sure that we've got offers customized, you know, to those consumers that are our morning, afternoon, and late-night customers. We'll continue to learn and evolve into it to get it even more personalized, so it becomes one-to-one offers over time. We're in a position to really leverage that moving forward. We started to see some of that progress, in the first half of this year, and a lot more to come.

Operator (participant)

Our next question comes from Brian Harbour of Morgan Stanley.

Brian Harbour (Equity Research Analyst)

Yeah. Thank you. Good morning. Can I just ask about your kind of same-store sales outlook, and also just some of the pieces in 2Q? You know, is it your expectation that you'd continue to see positive mix, or is there anything that we should keep in mind with, with your expectations for mix? Also just traffic, how do you kind of see that evolving as you go through the rest of the year?

Gunther Plosch (CFO)

Good morning, Brian. Yeah, we, we definitely are confident with our top-line outlook we have for the year. We definitely started the third quarter well in July. We have definitely seen an acceleration on a two-year basis versus the second quarter from an SOS point of view. We have great programming in place for the second half. For the year to go. We think the mid-single digit guidance that we have is working for us from a marketing programming point of view. As we said in our prepared remarks, we do expect further growth on the breakfast side, further growth on the digital side, and all of that is going to fuel our top line and bottom line.

Operator (participant)

Our next question comes from Andrew Charles of TD Cowen.

Andrew Charles (Managing Director)

Great. Thank you. Can you expand on what you're observing with franchisee cash flow in the first half of 2023 when you compare it to the first half of 2022? It was encouraging to see an easing of inflation, but, but curious to trade that within the menu to value offerings, like the Biggie Bag, is offsetting some of the benefit as we're hearing about that elsewhere in quick service? Thanks.

Gunther Plosch (CFO)

Good morning. Yeah, a little bit on franchise health. Just to be clear, we are not kind of collecting franchise financials for 2023, but we always look at the company performance as a proxy. As you have seen, our second quarter results were very strong. Our EBITDA, four-wall EBITDA, was about 19% up versus prior year. I would fully expect that franchisees will have seen similar performance. I think some of the tightness that franchisees have experienced as we worked ourselves through 2022 is definitely disappearing very, very quickly. As far as mix is concerned, we are doing really well there, right?

If you look at our U.S. system sales growth of about 5%, we had about 5% price in the system, 1% positive mix, and it's driven by, the focus on big sandwiches and, kind of moving our value offerings up to higher price points. That was then is expected, slightly offset by about a 1% traffic decline in the quarter.

Todd Penegor (President and CEO)

The biggest opportunity that we continue to see on margin, as I just said, late night, we can add a lot of sales without adding any incremental labor. Breakfast is still a big opportunity for us as we continue to grow our breakfast day part. We know we can add a lot more sales with the existing labor in the restaurant. Both of those really lend to nice cash flow generation at the restaurant, in addition to everything that GP just said.

Operator (participant)

Our next question comes from Dennis Geiger of UBS.

Dennis Geiger (Executive Director)

Great. Thank you. Wondering if you could speak a little bit more to the traffic and dollar share comments, you made with respect to the QSR burger category. Not sure if you could speak to how that's trended at all, even if at a, at a high level, you know, through, through the quarter, or perhaps it was relatively consistent. Then just any comments with respect to share as it relates to the breakfast and the late night. You talked about the outsized growth from those two-day parts, but any comments there on sort of share within the category as you look to, to capture your fair share? Thank you.

Todd Penegor (President and CEO)

Yeah, you look at overall share, both traffic and dollar, again, within the quarter, we held our share within the QSR burger category on both fronts. If you look at the growth that we're seeing on income cohorts, you know, greater than $75,000, we're seeing some nice growth, held our share there. We're seeing some softness in the under $75,000 cohort with a little less traffic, but we held our share on that point. Clearly gained share at late night, that was incremental, and we continued to lean into that, and we're holding our share on the breakfast day part. You know, we're feeling good that we're competing well with the plans that we have in place.

You know, just a little more granularity, because I know there's a lot of channel checks on Q2. If you think about May, you know, we had really strong two years, and that was with the return of the Strawberry Frosty. We had a little mismatch in timing. Last year, we actually launched Strawberry Frosty and all its success in June. We had a lap over all of that. Between May and June, we were very consistent on our two-year growth rates within the quarter. As GP just said, we saw a nice acceleration on our two-year growth rates to start the 3rd quarter.

Operator (participant)

Our next question comes from Alex Slagle of Jefferies.

Andrew Charles (Managing Director)

Thanks. Good morning. wondered if you could discuss the international business a bit more. looked like the segment profit was down a little bit year-over-year. Just can you talk about franchise support actions and some of the inflationary pressures you're seeing in the U.K., and just how this impacts your stance on the game plan in this market?

Alex Slagle (SVP and Equity Research Analyst)

Yeah, so overall, really happy with the international business. As we said in the prepared remark, more than 22% growth on a two-year basis. That's really now the ninth consecutive quarter of double-digit growth in that market. We are proud on that. The second point, I would say, the growth is definitely broad-based. All our key markets have grown on a double-digit basis year to date. Canada, which is obviously our biggest market from a sales point of view, is north of 50% of our international sales. We've actually grown dollar and traffic share in the Canadian market. We definitely expect that international segment profits on the year are going to be up. If you've seen the segment reporting profits slightly down, it's timing of investments we are making first half versus second half.

Gunther Plosch (CFO)

A specific comment on the U.K., really happy with the progress we are making there. We are now trending towards an AUV of about $1.9 million. In the second quarter, we have improved our profitability by about 500 basis points. Unfortunately, we had catch-up accounting to do of expenses from prior year. That's depressed our profitability in consolidation a little bit. We do absolutely expect that we are sequentially improving. There's a good amount of interest of franchisees to further build out restaurants, and we expect to have 40 restaurants in the U.K. by the end of this year.

Operator (participant)

Our next question comes from Jeffrey Bernstein of Barclays.

Jeffrey Bernstein (Equity Research Analyst)

Great. Thank you very much. Just a question on unit growth. I think you said your guidance for net unit growth for this year is now 2%.

Gunther Plosch (CFO)

Wasing a little bit due to permitting delays, looks like still expect 2%-3% or even more, I guess, with some rollover in 2024 and then 3%-4% in 2025. Just wondering if you can talk about any puts or takes, whether there's any concern on the U.S. or the international front on that steady acceleration, or conversations with franchisees talking about a slowing macro and rising rates? Just trying to tease out the permitting issues in the short term versus any risk to or the visibility to the accelerating growth over the next few years. Thank you.

Todd Penegor (President and CEO)

Yeah, Jeff, in the short term, clearly a little bit of pressure on some of the permitting that's, you know, may, may create a little bit of slippage into next year, but that really solidifies next year's pipeline. You know, you look at where we stand today, both in the US and the international front, we do have good visibility with strong pipelines, not only into 2024, but into 2025. We said in the prepared remarks, we now got 60% of our restaurants under a development agreement. What you're really seeing is the steady improvement in the financials. In the US, we continue to create more headroom on their balance sheet. We've had a lot of momentum on margin improvement.

Some of that, you know, created when we had the pressure back in 2022, folks slowed a little bit, but now we're back into acceleration mode. As you know, as you start to accelerate in development, you got to restart that pipeline, and we've got some longer lead times. That's all been contemplated in the outlook, and we feel really good on the U.S. front. On international, as GP just said, I mean, we've had some tremendous growth that we've seen. U.K. business has been growing really nice in same-restaurant sales comps. You know, Canada continues to be really successful with growth on top of growth on top of growth. You know, India, Philippines, we've seen a lot of success on our same-restaurant sales.

Mexico, strong sales and profit, that gives us some really confidence to continue to build out that market. With the success in the U.K., we're confident we can get into Ireland and to other markets over time. A little bit longer term, you heard our announcement today on entering the Australia market with a great franchise partner in Flynn. We're feeling good that all of those things are lining us up. The economics make sense. We got a strong suite of tools leaning in to Build-to-Suit. We've got a Pacesetter, we've got Groundbreaker. You know, we're going to continue to utilize all of those, while at the same time, continue to enhance and improve our restaurant economic model so the returns are there for our franchise community.

Operator (participant)

Our next question comes from Peter Saleh of BTIG. Peter, your line is open. Our next question comes from Danilo Gargiulo of Bernstein. Danilo, please go ahead.

Todd Penegor (President and CEO)

Morning. Just a quick macro question. Where do you feel the consumer is healthier or weaker than the market is expecting today, especially as you have it all restaurant inflation is starting to outpace the grocery inflation? Can you also comment on your expectations of the impact of resuming student loan repayments and how that could be impacting, your fourth quarter, your same-store sales? Thank you.

You know, the consumers continue to face a lot of pressures as a result of the several macroeconomic factors. We believe we're really well positioned to compete in this environment. QSR continues to be the place to be. We've saw some trade down from mid-scale casual last year into our brand as customers have stuck with us. You're seeing higher income cohorts start to shift into QSR, which is good for our brand. We do know the lower income cohort, you know, as inflation starts to moderate in the back half with all the gross income improvements they had, real income will start to improve, which could be a nice tailwind for our business.

That said, you know, as student loan repayments start to come in and any other things that start to provide a little bit of pressure against personal disposable income, you know, there could be a little bit of impact there, but we've got some great offerings across our menu. When you think about where we play on the Biggie Bag offering, we have a lot of relative value to add. I think we're really well positioned, no matter where the consumer health plays, for the outlook of the year. Anything else, GP, to add?

Gunther Plosch (CFO)

Yeah, the only thing I would-- I'm seeing is definitely see that net disposable income is starting to improve a little bit with consumers, and as you know, there's a strong correlation of debt with the restaurant business. If that continues to hold, I think that's. But that's positive. I would also be saying in the name-- numbers I look at, I'm in the camp of that we'll have, at best, a mild recession, maybe no recession at all. If I'm right on that one, that should be good for the category.

Operator (participant)

Our next question comes from Chris O'Cull of Stifel.

Patrick Johnson (VP)

Thanks. Good morning, guys. This is Patrick on for Chris. I had a question on follow-up on the composition of the customer base and the breakfast day part. I know early on you provided, sort of what your penetration was with core customers. I'm curious if you've seen that deepen as you've grown the day part, or if you're reaching an incremental customer base. If that's the case, you know, what opportunities does that give you to sort of trade them into occasions in, in your other offerings?

Todd Penegor (President and CEO)

Yeah, still a big opportunity moving forward for us, Patrick. We, you know, we still got a majority of our customers that have tried us at lunch or dinner that have not yet tried us for breakfast. That's an opportunity at the restaurant level, as we continue to focus on breakfast, to let them know, "Why don't you try us for breakfast, tomorrow?" We'll continue to focus on that. You know, the way our calendar lines up in the breakfast day part year to go, I'm really excited. We've got, you know, Frosty Cream Cold Brew that's just been put into play. We've got some innovation that's going to be announced and launching soon. We've got more consistent promotional activity to drive trial and repeat.

We're really going to focus our operations teams on ensuring that we are breakfast ready, with lights on and where we want the dining rooms open and, and breakfast both legs out, and have a message around returning for breakfast in the future. We think that can continue to drive our business, you know, going forward, building on the momentum that we saw in the second quarter.

Operator (participant)

Our next question comes from Jeff Farmer of Gordon Haskett.

Jeff Farmer (Managing Director)

Yeah, good morning. Thank you. You guys have twice mentioned three-year same-store sales accelerating to begin the third quarter. I don't know that you guys mentioned this, but just trying to figure out the relationship between that acceleration in same-store sales to begin the third quarter versus the buy one, get one for a $1 promotion that you guys have been running for the better part of the last, the last month. Can you just share with us the decision to run that promotion and how it's been resonating for you?

Todd Penegor (President and CEO)

Yeah, we knew we had some big comps to lap over in kind of the June, July time frame, with all the success of the summer of strawberry last year. We brought strawberry back, and it was a nice add to the portfolio and the momentum through those periods, as you look at things on a two-year stack basis. We also know that we wanted to make sure that we had a steady dose of value out there, and the buy one, get one for $1 was that opportunity. It's performed as we have expected? That's been a good thing? Then as we think about where we move forward, you know, we've got the late night messaging continuing.

We got more news to come on the rest of the day menu. We've got some new innovation coming on Made to Crave. You know, we'll continue to lean in, as we talked about on the prepared remarks on Biggie. We'll continue to bring news on Frosty throughout the year, and that's core, 'cause that actually adds a halo to the entire brand to really drive awareness and affinity to the Wendy's brand.

Operator (participant)

Next question comes from Gregory Francfort of Guggenheim Securities.

Gregory Francfort (Senior Analyst)

Hey, thanks. Just it, it seems like through this earnings season, a bunch of the, the large QSRs have been, have been taking G&A guidance up a little bit. Can you just remind me what your thoughts are the next maybe 12 to 24 months on the cadence of that? Thanks.

Gunther Plosch (CFO)

Good morning, Greg. Yeah, our, our G&A guidance is unchanged. As you know, we made a pretty big investment between 2019 and 2022. Our G&A went up to $200 million-255 million. We then restructured the company slightly to set us up for future growth and stay efficient. As a result of it, we are absolutely continuing to expect that 2023 and 2024, we will be relatively flat in dollar terms versus 2022. I mean, if you look at our, if you look at our first half, G&A expense was about $123 million, so well on pace to be relatively flat versus 2022.

Operator (participant)

Our next question comes from Fred Wightman of Wolfe Research.

Fred Wightman (Director)

Hey, guys. Good morning. Is there anything you can share on the Wendy's FreshAI pilots that started back in June, either top line, possible labor savings, anything that you can share at this point?

Todd Penegor (President and CEO)

Yeah, it's still early days. We've got it functioning in one restaurant. We continue to, to test and learn, you know, get the confidence to move it to, to restaurant number two here shortly. We're making a lot of progress. We're seeing a lot of accuracy. Our crew loves it. They do see it as a supplement to helping them do their jobs even better. The customers that have utilized it feel very comfortable and feel like it's a great experience for them. You know, this isn't about labor savings for us. This is about how do we reposition the labor within the restaurant to drive more throughput, drive speed and accuracy, and a, and a better customer experience to drive frequency and repeat moving forward.

Still too early to tell if all that can play out, but we're seeing some nice progress in the work and our partnership with the Google team.

Operator (participant)

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

Sara Senatore (Senior Research Analyst)

Great. Thank you very much. A point of clarification and then a, a question, please. You know, the breakfast business, I know you said you maintained share and, and you had the highest volumes that you've seen, but it sounds like growth was pretty much in line with your broader business. You know, mix or percentage of sales maybe is, is roughly stable. I'm sort of curious, doing late night, does that help? Are there other initiatives, I guess, to the extent that, you know, your goal is to, to take share, more share, going forward and maybe mix higher with respect to breakfast, 'cause it, it does feel like, you know, that, that's a very sticky day part. And then the, the question is on pricing.

You know, your pricing is, is less than I think what a lot of your competitors have. Is this something that where you feel like you're seeing some real benefit there? I know, you know, there's some offsetting puts and takes in terms of your approach to value, but, you know, as, as I think through kind of the price elasticity, do you have any signs that maybe, you know, mid-single digit or, or now 7% pricing is helping you, versus, you know, high singles or low doubles that you might be seeing from competitors?

Todd Penegor (President and CEO)

Your fact checking, Sara, on breakfast, you know, it, it did grow mid-single digit, so in line with, with our total sales. You know, that's, some nice momentum for us, year-over-year. You know, we're still working to, to ingrain the habit, and, and really drive the frequency and the repeat on that breakfast day part. I think the way that our calendar lines up for the rest of the year, with some innovation news, as well as, you know, the promotional activity to drive that trial and repeat that we've got planned, I think lines up well for that. As well as the focus on getting our existing customers to come try us, you know, a little bit more often, or even try us for the first time at the breakfast day part.

We are focused, and we've got the staffing model set really well, so we can take on a lot more sales in the breakfast day part to drive a lot of profit with the existing labor model. Late night is a big opportunity for us. You know, we've leaned in for the first time in about 4 years on advertising. It is incremental. You know, we continue to see opportunities, you know, midnight or later. We do see a big opportunity to drive delivery business as well as folks coming to our restaurant. We do see that as highly incremental for our business.

The more that we drive awareness and the more that we get consumers to come to us and see that we're reliably open in the late night, late night day part, the more we become part of that routine. We see a lot of opportunity there, too.

Gunther Plosch (CFO)

Yeah, Sara, I wanted to answer your second question on pricing. We're happy with the pricing position we have taken. We are expecting 7% price this year in our company restaurants. 5% is carryover. We had actually always planned to do another pricing action end of May. We have executed that, as we step back and look at all of this, the flow-through from pricing is in the 70%-80% range, has not changed. We are competitive from a market share point of view, all of that worked actually to plan. We are going to be definitely careful on pricing on a go-forward basis. Obviously, not ruling out pricing in the future, restaurant economic model needs to progress.

Operator (participant)

Our next question comes from Brian Mullan of Piper Sandler.

Brian Mullan (Director and Senior Research Analyst)

Hey, thanks. Just a question on capital allocation. GP cash balance at $635 million, it still looks a bit elevated versus history. You know, I guess part one, do you still believe that the stock is undervalued, which I've heard you say in the past? Then part two, you know, assuming you do, can you just talk about how you balance that belief with where interest rates are and what you think the right target leverage range is for Wendy's in this environment? Just any color on how you're approaching share repurchase topic going forward would be helpful.

Gunther Plosch (CFO)

Yeah, Brian, that definitely continues to be belief that our shares are undervalued. You have seen so far year to date, we have leaned in. Remember, we have a share repurchase authorization of about $500 million that spans over four years on a prorated basis. That's $125 million a year. We have so far bought back about $103 million worth of shares, so we are going to continue to lean in for the rest of the year. From a leverage point of view, again, we actually are thinking in a great spot. If you look at our evolution at the end of 2021, our leverage ratio was 5.2 times. We're sitting currently at the end of the second quarter at about 4.7 times.

Would expect that throughout the year we are going to stay well below 5 times. We have an authorization out there to buy back some more debt, $43 million worth of it, on top of our mandatory authorization. Cash balance is going to stay elevated. It gives us flexibility to weather any economic uncertainties and gives us, obviously, enough ammunition to invest in growth if we see opportunities.

Todd Penegor (President and CEO)

In the spirit of investing in growth, remember, we still got, you know, a lot of opportunity against our $100 million Build-to-Suit program, so we're gonna continue to lean in on that. We've got a strong pipeline of franchisees, and what we're really trying to do is ensure that we're running things rather than sequential in parallel. As we're bringing in the new franchisees, are we already starting to leverage the Build-to-Suit program so we can get them into those restaurants sooner moving forward? We think that's an opportunity to deploy some of the cash on our balance sheet, to get some nice returns and get some new restaurants open.

Operator (participant)

Our next question comes from Jim Sanderson of Northcoast Research.

Jim Sanderson (Managing Director and Equity Research Analyst)

Hey, thanks for the question. I wanted to talk a little bit more about digital sales mix in the U.S. I think that growth, the sales mix rate held steady, but delivery is a bit stronger in late night. Were there other day parts where delivery slowed down?

Todd Penegor (President and CEO)

Our delivery business has been pretty consistent. I mean, we saw a nice uptick on delivery with the, the late night. You know, having those restaurants open a little bit later, there's a preponderance of consumers liking delivery at that late night day part. You look at kind of our rest of day, kind of lunch, dinner, our delivery business has hung in there pretty well. Still seeing some growth, hanging in there with what we're seeing in the industry. We're, we're feeling good about that. We're also seeing the consumer start to shift a little bit more to, you know, mobile grab and go, so folks ordering and then actually picking up in our restaurant. As you know, we've put the delivery racks into our restaurant late last year.

Those racks are now in the restaurant and that's actually improved our overall experience with our digital customers and helped us with speed and throughput at the restaurant. We continue to see speed of service improve. You know, that was one of the tools that has helped us to do that, to take some of those big delivery orders, lunch and dinner out of the line and get folks to grab their food and get out of the restaurant quickly.

Gunther Plosch (CFO)

The only other thing, Jim, I wanted to add is, yes, the mix went down a little bit versus quarter one, but that's kind of expected since we obviously had heavy programming with March Madness going on. A lot of that actually continued. I'm looking at absolute dollars, right? We are basically in, in, in absolute growth, we are not really slowing down. We are more than 25% up in the second quarter versus prior year, and we now expect that our overall digital sales are going to be north of $1.5 billion after the restatement that we made. On a comparative base, that's about $1.4 billion in 2022, so there is high single digit, low double-digit growth. We feel really good that the business is working well for us.

Operator (participant)

Our next question comes from Jake Bartlett of Truist Securities.

Jake Bartlett (Managing Director and Senior Equity Analyst)

Great. Thanks for taking the question. You know, mine is about the, the comments of speed of service and, you know, customer satisfaction measures improving year-over-year and quarter-to-quarter. My, my question is how that compares to pre-COVID. I imagine it's still lower. I, I'm wondering, you know, how much opportunity there is to, you know, to improve both speed of service and, and customer experience, and, and that could be a, a sales driver.

Todd Penegor (President and CEO)

Yeah, Jake, as you look at, you know, our overall satisfaction, you know, we are up, fairly dramatic year-over-year. Clearly, as you get better staffed, you know, you start to put yourself in a better position to create better experiences. You look at taste, you look at accuracy, you look at voice of the customer on their perception of speed, you look at our digital overall satisfaction, we've had very market increases versus year ago. I would say we're getting back to pre-COVID levels, but we knew even pre-COVID levels, we had a lot of opportunity to be even better. You know, we'll continue to, you know, improve as as turnover continues to improve, as staffing continues to get better.

Our, our new DSG rollout has been leading to hotter, juicier hamburgers, and it's reduced cook times. That's another opportunity on, on speed. You know, as I said, the rollout of the pickup order shelving to our entire US system in the back half of last year is helping speed into this year and a better experience for that digital consumer. And we continue to do things around op simplification, like our new Grilled Chicken Wraps that lower operational complexity and fills unique space on our menus. The operations team has been very focused on speed. We've been talking about Speed the Wendy's Way. We've been focused on it. We've been measuring it.

We've made market progress, and we know we've got even more progress ahead of us, so we do think that continued to be an unlock. The improvements in customer satisfaction, you know, don't only just help you today, but that actually drives frequency into the future, and that's the big unlock.

Operator (participant)

Our next question comes from Peter Saleh of BTIG.

Peter Saleh (Managing Director)

Hey, guys. Can you hear me now? Hello?

Todd Penegor (President and CEO)

Peter.

Peter Saleh (Managing Director)

Can you guys hear me?

Operator (participant)

Yep, we can hear you.

Todd Penegor (President and CEO)

Yep.

Peter Saleh (Managing Director)

Can you guys, can you guys hear me?

Todd Penegor (President and CEO)

Yes, we can, Peter.

Peter Saleh (Managing Director)

Oh, great. Thank you. Okay, so I, I just wanted to ask, maybe firstly on the pricing, for the year, 7% pricing, 5% carryover. Does that imply that you don't take anything else for the balance of the year? What, what may cause you guys to take additional price?

Gunther Plosch (CFO)

Good morning, Pete. Yeah, that's currently the implication. We have taken the last pricing so far, at the end of May. That was always in our plan. Now we are watching. We have seen no pushback from consumers. We'll have to see how inflation develops. We have to see what our competitors are doing. We'll check and adjust our pricing plan. To be clear, for the moment, there's no additional pricing baked in for the rest of the year.

Kelsey Freed (Director of Investor Relations)

Thank you, Peter. That was our last question of the call. Thanks, Todd and GP, and thanks everyone for participating this morning. We look forward to speaking with you again on our third quarter call in November. Have a great day. You may now disconnect.

Operator (participant)

Thank you. This concludes today's call. You may now disconnect your line.