Earnings Call Transcript - WEN Q1 2021

Operator, Operator

Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. Thank you. Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A

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 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; and our Chief Financial Officer, Gunther Plosch, will give a business update, including some highlights from our corporate responsibility report, share our 2021 first quarter results and provide an update on our financial outlook. From there, we will open up the line for questions. And with that, I will hand things over to Todd.

Todd Penegor, President and CEO

Thanks, Greg, and good morning, everyone. We could not be more pleased with the momentum in our business that continued in the first quarter of 2021 as sales significantly exceeded our expectations and fueled our restaurant economic model, leading to outsized profits. We delivered another double-digit 2-year same-restaurant sales growth result on the strength of our rest-of-day business, our breakfast daypart and our growing digital business. Our digital business grew to approximately 7.5% of sales in the quarter, and our breakfast business showed growth that was ahead of plan. This sales momentum led to significant year-over-year restaurant margin expansion of almost 700 basis points to 17%. Our focus remains on ensuring we have a strong restaurant economic model across our system, and we are executing. We also continue to make great progress in the area of development as we are seeing strong interest in our new incentive program that we launched earlier this year. And we remain on track to deliver on all of our long-term development targets. As a result of our strong top-line performance, we are meaningfully increasing our outlook for 2021 on all of our key financial metrics, which GP will talk to later in the presentation. Lastly, we remain fully committed to our long-term growth initiatives, and we continue to make great progress against these. We are confident that we have a lot of growth ahead of us behind these initiatives. Our goal remains the same, which is to invest in driving efficient, accelerated growth, and we are delivering on that commitment. Our global same-restaurant sales growth of 13% that we delivered in the first quarter exceeded our expectations and highlights the strength and momentum of both our U.S. and international businesses. In the U.S., we once again posted one of our best 1- and 2-year same-restaurant sales numbers as we were up 13.5% on both metrics. The strength of our rest-of-day business, breakfast, digital and stimulus payments boosted the results that were slightly offset by inclement weather in the quarter. This was our third consecutive quarter of double-digit 2-year same-restaurant sales growth, which showcases the underlying strength in our business. Internationally, we saw same-restaurant sales growth turn positive at 7.9%. We attribute this to the strength of our Canadian business, which continues to see digital acceleration and to the business in Puerto Rico, which is firing on all cylinders. And they've added many of our U.S. breakfast items to their menu. This translated into 6.3% international growth on a two-year basis and a significant increase from our fourth quarter results, as our international markets are continuing to emerge from severe COVID restrictions to pace ahead of plan in 2021. The strong start to the year and the momentum we are seeing in our global same-restaurant sales has given us the confidence to take up our system-wide sales guidance for 2021 to 8% to 10%. Our franchise system is engaged across the globe, and we are excited about the plans we have in place for the remainder of 2021. Let's spend a few moments talking about our U.S. same-restaurant sales, which accelerated nicely in the first quarter on the strength of our rest-of-day business. We launched two new products within the quarter in the Jalapeno Popper Chicken Sandwich and Salad, which were extremely successful. Our salad business saw a substantial improvement as a result of this launch, which we are very pleased with. Our recently renovated Classic Chicken, which was a key component of our 2 for $5 promotion within the quarter is selling more than twice as much as our previous version and continues to drive very strong large sandwich sales mix and higher average checks alongside the continued strength of our Made to Crave platform. The strength of the Classic Chicken, along with the success of the Jalapeno Popper, has allowed us to compete very well in the chicken sandwich category. In fact, our share of breaded chicken sandwiches within QSR grew in the month of March, despite significant competitive activity. We wrapped up the quarter with a fan favorite in the $5 Biggie Bag, which drove very strong results to close things out. As we look forward to the rest of 2021, we are very excited about our marketing calendar, which will continue to include a nice balance between our core items and some new product offerings to ensure that we continue to drive customers into our most craveable products. We have now officially entered our second year of breakfast, and we could not be more excited. And the same sentiment is echoed by our franchisees as their energy and excitement is at an all-time high. In the first quarter, all our key breakfast metrics improved. Breakfast sales dollars grew, awareness increased, and we continue to see higher customer repeat. Breakfast was fueled by our continued marketing pressure, most notably with our presence as the official breakfast of March Madness, which drove a ton of awareness around our business. And our successful 2 for $4 promotion, which drove a significant amount of trial. We also continue to see our customer satisfaction scores be our highest at the breakfast daypart as customers are loving the offering that we have. Lastly, we are seeing some great results out of our legacy breakfast restaurants that had the daypart before the national launch. They have already grown their breakfast businesses to over 10% of sales, giving us confidence in our long-term targets. Our results in the quarter were ahead of our expectations. And we remain fully committed to our breakfast advertising investment, putting us in a great position 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. Our digital business once again saw acceleration across the globe in the first quarter. Internationally, digital grew again this quarter to more than 10% of sales on the strength of our Canadian delivery business, which continues to grow rapidly. In the U.S., we exited the quarter at approximately 8% of our sales, up from just over 6% in the fourth quarter. This growth has been driven by increases in both delivery and mobile ordering. On the delivery front, we ran several successful promotions in the first quarter to continue to drive awareness and trial. Delivery has remained strong in markets that have reopened, which is very promising. Our mobile ordering business, which is powered by our loyalty program, continues to grow, as we now have 13 million total members enrolled in the program. We continue to see positive benefits from our loyalty program in terms of higher frequency. And we are seeing more and more people take advantage of this program. In addition, we are starting to leverage the consumer data that we are seeing and have begun to engage with customers on a more one-to-one basis, which we believe will play a major part in us reaching our digital goals. As consumer behaviors continue to change, along with the technology investments we are making as a brand, we are well on our way to achieving our goal of reaching 10% of U.S. sales coming through digital channels by the end of this year. Our third strategic growth pillar is expanding our footprint. And just like the other two pillars, we continue to make great progress. As announced earlier this year, we launched a new incentive program, and we are seeing substantial interest in it. As a reminder, our new incentives reward franchisees for new restaurant growth, accelerated timing and making multi-year commitments to grow their operations. Franchisees have until the end of June to sign up, and we are confident that we will see a meaningful uptick in commitments. We are also seeing some new franchisees build their way into the system through this program, behind the strong economics, which is exciting to see. Speaking of new franchisees, we continue to see our franchise recruiting pipeline grow significantly on the heels of the investments we made last year to drive our recruitment efforts. We currently have about 150 new potential franchisees globally at different stages of our process, including over 20 that we are evaluating in the UK. On that note, we remain on track to open our first UK restaurant on June the 2, which will be operated by the company. We also recently signed new development agreements with franchisees in Central Asia to open over 50 new Wendy's restaurants by 2030 and in Québec, Canada, which we expect will double our footprint in the province. These are more examples of where we continue to sign large development agreements to significantly grow our international footprint. The solid development foundation that we have built, the strong pipeline we have in place and the progress we have made thus far in 2021, gives us confidence that we will deliver on our goal of reaching about 7,000 restaurants globally by the end of 2021 and accelerating to approximately 8,000 by the end of 2025. Our playbook of investing to drive accelerated growth behind our three long-term pillars to meaningfully build our breakfast daypart, drive our digital business and expand our footprint across the globe remains the same. And we are making great progress. These initiatives remain deeply rooted in the foundation of the restaurant economic model. The combination of strong sales and restaurant margins that we displayed in the first quarter will fuel reinvestments into people, technology, reimaging and new development, which drives our confidence in growth for the future. One of our three foundational items is Good Done Right, which is our commitment to do the right thing in the area of environment, social and governance. We recently launched our 2020 Corporate Responsibility Report, and I wanted to cover a few of those highlights. Good Done Right is the simple phrase that grounds Wendy's approach to three critical areas of our business: food, people and footprint. We made tremendous strides in 2020, in part because we completed our first-ever comprehensive ESG materiality assessment to inform our overall strategy. We engaged nearly 1,000 diverse stakeholders to identify Wendy's most material topics that provide the greatest opportunity to make a positive impact. These findings informed existing goals and helped us to create new ones. We recently released new ESG specific goals. And alongside these, we are sharing a new set of metrics based on established reporting frameworks to track and report our progress. We're committed to transparency through our corporate responsibility journey, and we will continue to benchmark our progress against globally recognized frameworks such as SASB and GRI. For further information, please go to the What We Value section of wendys.com or the ESG section of our IR website. Everything we do at Wendy's is focused on bringing our vision to life, which is to become the world's most thriving and beloved restaurant brand. With the momentum that we have in our business and the partnership we have with our franchisees that has never been stronger, we are well on our way. I will now hand things over to GP to talk through our first quarter financial results.

Gunther Plosch, Chief Financial Officer

Thanks, Todd. We are very proud of our first quarter results as our business continues to accelerate to start the year, showcasing same-restaurant sales and core earnings growth that were well ahead of our expectations. Our global systemwide sales grew 12.5%, and our same-restaurant sales reached 13% in quarter one, well ahead of our initial expectations. The sales momentum has continued into the second quarter, where we are expecting our same-restaurant sales in the U.S. to grow 12% to 14%. Please note that our U.S. same-restaurant sales in the second quarter will be negatively impacted by a shift related to the 53rd week that we had in 2020. After accounting for this shift, we are expecting our strong sales results to continue in quarter 2. With another quarter of 2-year double-digit SRS growth, year-over-year company restaurant margin increased almost 700 basis points to 17%, driven by sales leveraging from our 13% company-operated SRS growth and lower commodity cost. These benefits were partially offset by higher labor rates. The increase in G&A was primarily driven by a higher incentive compensation accrual as a result of our improved outlook for 2021 that was partially offset by reduced travel expenses. Adjusted EBITDA increased approximately 35% to $121 million. This was primarily driven by higher franchise royalty revenues and fees as a result of increased same-restaurant sales, the company's new technology fee implemented in 2021 and an increase in company-operated restaurant margin. These benefits were partially offset by the company's incremental investment in breakfast advertising. Adjusted earnings per share increased over 120% to $0.20, driven primarily by our higher adjusted EBITDA. Finally, our free cash flow in the first quarter increased significantly to approximately $98 million. The year-over-year increase was primarily related to higher net income, a decrease in accrued compensation-related items, the timing of receipts of franchisee rental payments and the timing of vendor incentives. All timing effects had already been contemplated in our original guidance for the year. Our strong quarter one results and continuing momentum in the business have resulted in a meaningful increase to our 2021 outlook. We are raising our global systemwide sales growth outlook to 8% to 10% based on our outperformance in quarter one and an improved full-year sales outlook. We continue to expect that the majority of our sales growth will come through core growth with the remainder coming from our anticipated increase in our breakfast business and net global unit growth. This improved sales outlook is a major driver in an increase to our adjusted EBITDA outlook by $10 million to approximately $455 million to $465 million. We are also now expecting our company-operated restaurant margin to be 16% to 17% in 2021, which is being driven by the improved sales outlook and a benefit from average checks remaining elevated longer than we had originally anticipated. These increases are being partially offset by an increase in G&A to approximately $235 million, which is driven by high incentive compensation accrual as a result of our improved outlook. Finally, as a result of our higher adjusted EBITDA expectations, we are raising our free cash flow outlook to approximately $250 million to $260 million. 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 through the investments we are making across our three strategic growth pillars. Today, we announced a declaration of our second quarter cash dividend and that we are increasing it by 11% to $0.10 per share. This is on the heels of a 30% increase we announced in the first quarter. Our strong liquidity position, along with the momentum we are seeing in our business, supports this increase while still leaving flexibility to invest in growth. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. On the share repurchase front, we have added an additional $50 million to our existing share repurchase authorization, increasing the total to $150 million after exhausting our authorization due to favorable market conditions. We are fully committed to continue delivering our simple yet powerful formula. We are an accelerated, efficient growth company that is investing in our strategic pillars and driving strong system-wide sales growth on the backdrop of positive same-restaurant sales and expanding our global footprint, which is translating into significant free cash flows. With that, I will hand things back over to Greg.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A

Thanks, GP. Due to the ongoing travel restriction, all our investor meetings will once again be virtual events this quarter. To start things off, we will be doing an NDR focused on the West Coast with Morgan Stanley on May 26. Following the NDR, we will be attending two conferences, which will be at the Stifel conference on June 8 and the Evercore conference on June 16. We'll also be hosting an investor call on May 19 with MKM Partners and doing a virtual headquarter visit with Longbow on June 23. If you are interested in joining us in any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. Lastly, we plan to report our second quarter earnings and host a conference call that same day on August 11. As we transition into our Q&A section, I wanted to remind everyone on the call that due to the high number of covering analysts, we will once again be limiting everyone to one question only. And with that, we are ready to take your questions.

Operator, Operator

And your first question comes from John Ivankoe with JPMorgan.

John Ivankoe, Analyst

Hi, Greg. Thank you. I have a follow-up and a question. First, regarding the increase in franchise fees year-over-year, can you provide insight into how much of that will be recurring, perhaps as a percentage of franchise sales linked to the technology fee? Secondly, concerning the accelerated franchise fee recognitions related to NPC, when is that expected to conclude? That's the first clarification. Now, the main question is about comparing the average ticket gains that significantly influenced quick service spending in 2020. How is that comparison progressing as we move forward, and are you able to assess that from an average ticket standpoint? Additionally, how do you anticipate average ticket trends will develop throughout the year in relation to traffic? Thanks.

Gunther Plosch, Chief Financial Officer

Good morning, John. Yes, the net franchise fee was up about $8 million versus prior year. The majority of that is definitely driven by the implementation of the new tax fee that we have implemented successfully together with our franchisees. A couple of other things that drove the increase year-over-year in the quarter. First, we also had an acceleration of development funds that got canceled with NPC, and it drove a little bit of favorability. And the third level of favorability is we had breakfast investment in the base that we obviously didn't have this year around. As a result of it, right, we had a lot of discussion in the fourth quarter about the acquisition. We said the fee would be a net increase of 10% to 15%. We have lifted this by about $5 million in our range. So that, kind of, hopefully, explains what's going on in net franchise fees.

Todd Penegor, President and CEO

Yes, John. We now expect average ticket to remain high through much of the summer and into the fall before mobility fully returns. Our average ticket has stayed consistent with Q4, which is positive. The average party size has increased by about 10%, and items per transaction are also up by approximately 10% this quarter. We are not only seeing growth in party size and transaction items, but also a favorable mix. Promotions like 2 for $5 and the $5 Biggie Bag are contributing to this mix. Our popular items from the Made to Crave lineup continue to encourage customers to choose our best tasting and highest quality sandwiches, which is beneficial for the business. We are optimistic that this trend can persist throughout the year. Additionally, we are planning a strong calendar to introduce new offerings, unlike last year when we primarily focused on our core products, and we will have more updates as the year progresses.

Operator, Operator

And your next question comes from the line of David Palmer with Evercore ISI.

David Palmer, Analyst

Thanks. I'm just going to squeeze in two quick ones. With regard to technology, what are you saying to your franchisees that they will be getting from tech investments? And what are you thinking more broadly? I struggle with that myself about how tech really marries with the drive-thru. And then separately, do you see your breakfast order incidence building? Is that really even going to end up being the story of 2021, or is there something else that you think we'll remember the strength being driven by this year? Thanks so much.

Todd Penegor, President and CEO

Yes, starting on technology, I think there's a couple of things, David. I think as you think about people going into mobile ordering, we're seeing folks with higher average checks 15% to 20%, it's a strong economic motivation to get folks into mobile ordering. We're creating better experiences in our restaurant. When you think about mobile grab and go, you think about curbside, those all help with speed and getting folks through the line much more conveniently along the way. And then delivery, as we continue to drive that side of the business, we're seeing average checks of up 40% to 50%. So a lot as we work to turn our parking lots into frictionless transaction centers to continue to drive throughput, but more importantly, to create nice average checks and nice flow-through for our business, creating better customer experiences and creating better employee experiences in those restaurants. So a lot to like and a lot more we can continue to do to make that experience even more frictionless in our restaurants for both the consumer and our employee. So, if you think about breakfast, we're really excited about how breakfast has been performing. When you think about dollar sales continuing to grow, you think about our system being all in on breakfast, you think about awareness continuing to increase even if it's just slightly with very high customer satisfaction, which is driving strong customer repeat, the name of the game is trial. We got to get this great food in consumers' mouths. And we know we can continue to build this business throughout the year between the quality of the food offering that we have. And we look at all of our growth legs as part of our big story this year. When you think about the business that we have, bringing breakfast to life and how that can continue to grow for years, the digital journey that I just highlighted and what we are doing to provide more access to our brand, not just in North America but across the globe, there's a lot of growth still out there in front of us with the momentum we have.

Operator, Operator

And your next question comes from the line of Andrew Charles with Cowen.

Andrew Charles, Analyst

Great. GP, I wanted to inquire about the second quarter guidance of 12% to 14%, which indicates continued strength in the overall business. However, compared to the first quarter, it seems to represent a slight deceleration. Could you explain what the impact of the one-week shift might be? Additionally, could you elaborate on the philosophy behind the guidance? It suggests some deceleration, and March appeared to be strong in the first quarter. Are there any other observations from April, such as the effects of stimulus rolling off, that we should consider?

Gunther Plosch, Chief Financial Officer

Andrew, I mentioned this a little bit in my prepared remarks that the shifting of the 53rd week is going on. So, what does actually mean, right? Realignment of weeks always happens when you deal with the 53rd week. And normally, you don't notice this. This time around, obviously, we had COVID. And what we are seeing now is that the most negatively impacted week that we had in COVID last year shifted from the second quarter into the first quarter. As a result of it, there is actually more headwind than we would expect. So, when you adjust for that shifting, you're actually coming out with a 2-year double-digit SRS number.

Operator, Operator

And your next question comes from the line of Brian Bittner with Oppenheimer & Company.

Brian Bittner, Analyst

Thanks, good morning. As you look at your stores that are in markets that have fully reopened or where consumer habits have indeed become more normalized, what are you seeing from both an average check perspective and a breakfast perspective that can help shape how we should think about how the system performs when we're fully reopened? Is the average check staying really elevated in these reopened markets? And is that shaping how you're thinking about average check throughout the year? And just talk about breakfast is outperforming the system in reopened markets?

Todd Penegor, President and CEO

Yes, if you look at across breakfast and rest of day, as markets continue to reopen and the ones that have reopened versus the ones that are a little slower to reopen, we haven't seen a discernible difference across all of those markets. We're seeing very similar behavior on how customers are reacting. We're seeing very similar behavior on average checks. The only exception to that would be on the breakfast daypart, where you've got some pockets that have been slower to recover with 50% of the folks still working from home and a little less mobility in the morning. And as mobility picks up, it's more of a point-to-point mobility rather than a couple of stops along the way. So we're seeing that be a little bit slower in some respects, which gives us a lot of confidence that there could be even more opportunity as that mobility starts to come back in the morning daypart for the rest of the year. But feeling very confident with the outlook that we laid out there across breakfast and rest of day and how we're looking at the average check dynamics, at least through the fall.

Operator, Operator

And your next question comes from the line of Eric Gonzalez with KeyBanc Capital Markets.

Eric Gonzalez, Analyst

Hey, thanks. Just another one on breakfast. I think I recall your breakfast mix being in the mid-six range as you exited the fourth quarter and accelerated in the first quarter. And then I look at – your filing, it says that your breakfast was a 3.7 point lift to same-store sales growth. Can we help fill in the blank in terms of how the breakfast mix trended in the quarter and into the first part of the second quarter? I know you said the dollar contribution did increase, but just maybe if you could talk about how that mix trended and the comp trend in breakfast?

Todd Penegor, President and CEO

Yes. If you look at our breakfast mix, it remained pretty steady in the first quarter at around that 7%. We feel good about that because the rest-of-the-day business grew very, very strongly, as you noted in the release. But what we're most proud of is the average weekly dollars across our breakfast business continued to build throughout the first quarter. And you look at the guidance that we had in the second quarter, we're seeing a nice build between breakfast and rest of day. So we're seeing strong growth across the board on the elements contributing to that growth.

Operator, Operator

And your next question comes from the line of Jeffrey Bernstein with Barclays.

Jeffrey Bernstein, Analyst

Great. Thank you very much. Just broader question on franchise, profitability and discussions with franchisees. Obviously, as a 95% franchise system, they're critical. It seems like the sales are strong, but the cost pressure seem to be ramping up, despite what your restaurant margins showcase. I'm just wondering what are your discussions like in terms of profitability, whether it's perhaps pricing optionality or other initiatives to mitigate cost pressures? You didn't really discuss it, but any color in terms of commodity outlook for the rest of the year based on what we've seen thus far this year or labor inflation relative to the shortages everyone is talking about. Any thoughts around those inflationary pressures that your franchisees are seeing? And how you might help mitigate that whether on the franchise side or even in your own restaurant margin? Thank you.

Todd Penegor, President and CEO

Yes. I'll start with the franchise sentiment and turn it over to GP on some of the elements of the restaurant economic model. But you look at how we performed during the course of 2020, we have strong brand alignment with the franchise community, a lot of confidence in our growth initiatives moving into the future. They ended the year with stronger balance sheets. They had very strong profitability to finish 2020. And with the fast start this year, we're seeing strong profitability across the system, which really allows us to continue to reinvest, as we said in the prepared remarks, into our people, into technology, into the reimaging and to new development. And we have momentum on all of those items. Yes, there are headwinds out there. Labor is a little more challenged at the moment. We're blessed with better turnover across our system as we work to continue to make sure our restaurants are fun and energizing to work in. But we got to continue to work hard to get those restaurants fully staffed as we work into the summer season, and we're focused on that as a system. But the good news is with the strong start and the health that we have, it gives us some time to continue to work against the outlook for the year as we think about where labor may be going, which could be a little inflationary, but where commodities are, which we're not seeing a lot of inflation on commodity, but I'll let GP talk about that in a little more detail.

Gunther Plosch, Chief Financial Officer

Yes. On the labor inflation front, we are forecasting 2% to 3% is unchanged versus what we said a quarter ago. Also, our commodity outlook is actually unchanged. We're expecting about flat. Just to point out, we were actually deflationary on the commodities front in the first quarter. It was worth about 60 basis points. So for the rest of the year, we expect slight inflation. It will be a little bit choppy. We are expecting inflation in quarter two and in quarter four. But within quarter three, we had a domestic spike on beef inflation last year, that one we expect to be deflationary.

Operator, Operator

And your next question comes from the line of John Glass with Morgan Stanley.

John Glass, Analyst

Thank you and good morning everyone. It has been a while since we discussed the image activation. Currently, about two-thirds of the fleet has been remodeled. How are these stores performing compared to the previous ones? Although the base is smaller now, could you share some insights on that? What is the status of the digital mix? Are you beginning to adapt that aspect, considering that digital has grown to be a larger part of your business since you first started this initiative? How are you approaching the addition of new features to those AI remodels that you may not have considered initially? Thank you.

Todd Penegor, President and CEO

Good morning. Yes, we are making good progress on image activation. As we reach the end of the quarter, approximately 66% of our images are activated. This is providing a boost, with an SRS increase of about 30 basis points, which translates to a mid to high single-digit improvement based on the level of investment from franchisees in the image activation project, especially when multiple locations activate simultaneously. We continue to observe this trend. We anticipate completing this program by 2024, and this outlook remains consistent, which is impressive considering that during COVID, we allowed franchisees to slow down their efforts. Now, they are ramping up again. From a design perspective, we are incorporating new design elements and digital options. As you know, we have separated ordering from pickup, which is crucial for this process. When we execute this in our designs, we are noticing an enhanced experience for our customers and delivery drivers.

Operator, Operator

And your next question comes from the line of Chris Carril with RBC Capital Markets.

Chris Carril, Analyst

Hi. Good morning. Thanks for the question. So I wanted to ask about the dining room reopenings. In the Q, you noted that I think 85% of dining rooms are now open across the system with some offering dine-in services. So I'm curious as to what you're seeing in terms of dining room utilization by guests? To what extent you're seeing drive-thru transactions shift to walk in? And how are you thinking about those changes in guest behavior in relation to the margin impact from dining room reopenings?

Todd Penegor, President and CEO

Yes, Chris. We've been pleased that we've been able to tick up our dining room reopenings through the first quarter. We've now got 85% of our dining rooms open. For the folks that are actually coming into the dining room, we're at about a 10% mix between dine-in versus drive-thru. A long way away from where we were pre-COVID at about a third of our mix being in the dining room. And even in the dining room, we're seeing a split between about 50% of those customers coming into the dining room are for takeaway, and about 50% are dining in at this stage. We would expect that to continue to build as more folks get vaccinated, and we start to get to the other side of the pandemic. But it will take a while to get back to that one-third dining room mix over time. And that's why we continue to really focus on how do we make our parking lots frictionless transaction centers and continue to drive speed at the drive-thru, get more folks into mobile ordering so they can get through that line faster, complement that with mobile grab-and-go and curbside. And all of those initiatives are underway to continue to make sure that we're driving speed at the drive-thru. And we're very pleased in the first quarter that the perception of speed from our consumer feedback has improved. Our overall speed has stayed relatively flat, but that's with 10% more items per transaction that we're managing per customer at this stage. So, we feel good about that. GP, I think you had a couple of other thoughts.

Gunther Plosch, Chief Financial Officer

Yes. From a profitability standpoint, we have consistently communicated with our franchisees, and we prioritize protecting the broader economic model. Franchisees have adhered to this as well. We are seeing profit growth as dining rooms reopen. However, if we compare our current profitability as a percentage of sales to pre-COVID levels, it appears slightly lower because we are not generating the same volume of sales as before. As the economy recovers, we will assess whether we can return to the full utilization levels we previously experienced.

Operator, Operator

And your next question comes from the line of Lauren Silberman with Crédit Suisse.

Lauren Silberman, Analyst

Thank you. So just on digital. At your Investor Day, you targeted the digital business at 10% by 2024. You've accelerated that and on path to get to 10% by the end of '21. So sitting here today, where do you think that digital mix can grow to by 2024? And then can we assume the majority of the 7.5% of digital sales is delivery? And how do you see that evolving?

Todd Penegor, President and CEO

As you think of where we ended the quarter, exiting at an 8% digital mix, we're very pleased with the momentum we're building. Gives us a lot of confidence that we'll get to 10% digital mix by the end of this year. Historically, it's been really driven by delivery. But we're starting to see it now being delivered and driven even more by mobile ordering, especially as we have the loyalty program in there to complement that. So we're seeing nice growth between mobile ordering and delivery here in Q1. We've had a lot of awareness programs out there. Awareness is still a big opportunity for both delivery and mobile ordering and our loyalty program, quite honestly. But we do see 12 million users in the loyalty program, 3 million active users in there every single day. We're starting to see that continue to build, which is driving frequency for our business, which was the key for that. So I think we're starting to see a nice balance between both of those elements to continue to grow our business. We'll have to see how high digital can go over time. We do think it will continue to be a nice tailwind to our business into the foreseeable future.

Operator, Operator

And your next question comes from the line of Dennis Geiger with UBS.

Dennis Geiger, Analyst

Great. Thanks for the question. And Todd and GP, thanks for the latest update on the international performance and the growth outlook. Just wondering if you could talk a bit more about the international development opportunity. I think certainly, a big number announced this week for the UK, and you highlighted Canada and some of the agreements in Central Asia just now. But just wondering if anything more to add on sort of the discussions with existing international franchisees, how they're thinking about the growth as well as those new partner discussions that you mentioned? I'm curious if the COVID challenges at all have impacted those discussions or the pace of opens and any other kind of guideposts that we should be looking out for? Thank you.

Gunther Plosch, Chief Financial Officer

Yes, Dennis. Good morning. We're making steady progress on our development. As you know, it's one of our – the three strategic growth pillars. And we talked to you last time, eight weeks ago. Since then, we actually signed a new development agreement in Central Asia with about 50 restaurants. So we also enabled a franchise flipping in Québec, Canada. That actually allows us to unlock that part of Canada, which is totally underpenetrated for us. So it creates growth for us. And we're getting more and more excited about the UK, right? The UK consumer seems to be ready for us. We have built a robust franchise pipeline. We said it in the prepared remarks about 20 franchisees put up their hands. So like I want to help you Wendy's grow in the UK and with that, a Chief Development Officer said in one of the interviews in the UK, that there is no reason to believe why the long-term potential of the UK for us shouldn't be 400 restaurants. Just to be clear, there's no development agreement signed for the UK. It's a belief that we have, and that we'll be going after, and that's where we're going to make our investment.

Operator, Operator

And your next question comes from the line of Jeff Farmer with Gordon Haskett.

Jeff Farmer, Analyst

Thank you. You briefly touched on it, but what your current staffing levels look like across the system? And what are some of the common themes of those franchisees that have had the most success with staffing in the current environment?

Todd Penegor, President and CEO

Yes. As I mentioned a little bit earlier, staffing has gotten a little bit tighter out in our restaurants. We are really focused on ensuring that we're creating restaurants that are fun and energizing, leveraging technology to make them simpler to operate to make sure that our employees have a great experience. So in turn, our customers can have a great experience. So the focus is really on retention of the employees we have. We have seen folks paying a little bit more. We have seen folks doing things like paid time off. We're seeing folks do things like free lunches, and we're really trying to make sure that we're taking care of our existing employees. We're leveraging a lot of technology and tools that go out there and recruit even more folks to come into what we believe is a very great culture at Wendy's to work in our restaurants. And reimaging certainly helped to recruit employees into new restaurants, whether that's a new developed restaurant or reimaged restaurant, certainly helps along the way. But it will be tight for a little bit for a variety of reasons, and we're managing through that as we look at where we're staffing folks in the restaurant and how we're positioning folks to drive the most throughput with how we're staffed.

Operator, Operator

And your next question comes from the line of Brian Mullan with Deutsche Bank.

Brian Mullan, Analyst

Hey, thank you. Just another question on development. When you think about achieving 3% net unit growth next year, if you could just comment on the U.S. piece of that. Sitting here in May, are franchisees responding how you'd hoped to the incentives? And do you have a good sense already today, or do you need to wait until the end of June, which was a deadline I think you cited in the prepared remarks? And are you seeing good response to the conversion piece of those incentives, in particular? Really, I'm just asking if you still feel confident about domestic net unit growth acceleration next year.

Gunther Plosch, Chief Financial Officer

Yes, good morning, Brian. Yes, we feel very confident about our development pipeline. The step up to 3% is really broad based is on international, north of 10%. We also expect that U.S. is going to step up slightly from the 1% net growth that we're expecting this year. Really encouraging signs on the new incentive program in the U.S. I can give you a couple of nuggets. The first nugget is that definitely, we have now several franchisees that have never built before starting to show interest. And I think it's because it's a compelling incentive, and they probably have a little bit more confidence, especially, that we've built now a very viable breakfast business that is clearly improving returns. So we have not completed yet the process. We will give ourselves till the end of June to take stock. And I'm sure we're going to report out as part of second quarter earnings how we have done on that.

Operator, Operator

And your next question comes from the line of Nicole Miller with Piper Sandler.

Nicole Miller, Analyst

Thank you. Good morning. On the labor inflation, could you maybe talk a little bit about what is structural or mandated elements versus optional or proactive measures? And then, when you just think about your company-operated stores in the labor line, what percentage of that is related to hourly employees? Thank you.

Gunther Plosch, Chief Financial Officer

Good morning, Nicole. So if you step back, right, when we operate our company restaurants, we always want to be competitive in the marketplace. Otherwise, you cannot address talent. So the average labor rates that we have is a function of either minimum wage. And in several states, we are clearly above minimum wage to actually be competitive and attract the talent that you need. In terms of the labor line itself, the majority of the cost is clearly sitting on crew. That's the majority of the people. It's clearly general managers, shift managers and assistant channel managers are higher portion of it, like the lion share is our crew.

Operator, Operator

And your next question comes from the line of Chris O'Cull with Stifel.

Patrick Johnson, Analyst

Thanks, everyone. This is Patrick filling in for Chris. I wanted to explore the loyalty program further, particularly regarding the 13 million members. You mentioned one-on-one marketing opportunities in your prepared remarks. Can you elaborate on what strategies have been effective in encouraging more frequent visits or what future opportunities you see? Additionally, could you provide some insight into how much this has reduced the visitation gap with key competitors on an annual basis and what that suggests about the potential impact as the number of customers in that program increases? Thank you.

Todd Penegor, President and CEO

Yeah. It's still early in the program. When you think about having 3 million active users fully engaged in the app day in and day out, we are seeing redemption start to increase. We're seeing those be scanned, so that's a digitally enabled order when folks come in for that redemption. And we are seeing frequency uptick among our loyal consumers. So our opportunity is to continue to drive awareness, get more folks into the app, get more folks to actively be using and earning points along the way to give them another reason to want to be digitally engaged with The Wendy's Company. We've been relatively flat on our awareness around digital activity, whether that be delivery or mobile ordering. Those are opportunities ahead of us, to continue to get more customers aware that you can have a digitally enabled order from The Wendy's Company, which gives us a lot of confidence that we can continue to build on the program. The customer satisfaction for the folks that are in the loyalty program is quite high. They like the program. They like the ease of use of it at the restaurant level. And our opportunity is to have our crew even engage more to drive awareness even at point of sale.

Operator, Operator

And your next question comes from the line of James Rutherford with Stephens Inc.

James Rutherford, Analyst

Good morning and thank you. I wanted to follow up on breakfast. I believe the mix has remained steady even as mobility has increased nationally, helped by the March Madness promotion and the $2 for $4 deal. Todd, what strategies do you intend to implement to achieve the breakfast mix growth of up to 10% by the end of 2022? Is it more about increasing frequency among existing customers or attracting new ones? Additionally, do you expect breakfast innovation to play a role in that growth between now and the end of 2022? Thank you.

Todd Penegor, President and CEO

Yes. I'll start with innovation. I mean, right now, we have such an opportunity to drive awareness, drive trial of existing offerings. We don't need to bring a lot of new news because we want to continue to introduce the great offerings that we have today. That said, we have a strong pipeline. And when we need to bring innovation, we will. Our biggest opportunity, and we're starting to see this start to play out is really getting our existing rest-of-day Wendy's customers to try our breakfast business. Those that have, have become our most loyal and most frequent consumer, if there's still a high percentage of the existing Wendy's consumers that have not yet tried our food. And then our opportunity beyond that is just bringing in new users into the portfolio. But it really is a trial game. We are getting awareness to tick up a little bit within the quarter. But what we need to do is continue to get folks to come in and try our food. And we're confident as mobility, especially in the morning, comes back even more and more. And we start to get into those morning routines again later this year and into 2022, that can really help people to habit of Wendy's for breakfast in the morning.

Operator, Operator

And your next question comes from the line of Jared Garber with Goldman Sachs.

Jared Garber, Analyst

Thanks for the question. I wanted to circle back on the loyalty program. I think this is the first quarter that you guys have given us the actual rewards numbers that, I think in the presentation, it shows 13 million and 3 million active. Can you give us some color on what those 3 million active members, like what the frequency looks like? Are those customers? Are you seeing people transition more from that 13 million into the kind of the 3 million active loyalty members as reopening plays out? Thanks.

Gunther Plosch, Chief Financial Officer

Thank you, Jared. Yes, we have 13 million members, which is an increase from the previous quarter. The number of active users has remained relatively stable, and we are still working on gathering more details. I want to emphasize the points Todd made. We are witnessing trends similar to what we've experienced before, with increased frequency and larger order sizes. This aligns with our strategy, as our primary opportunity lies in getting consumers to visit our restaurants more often. We are focused on this goal, which will be crucial in achieving our aim of 10% in overall digital sales and beyond.

Operator, Operator

And your next question comes from the line of Andrew Strelzik with BMO.

Andrew Strelzik, Analyst

Hey good morning. I just wanted to follow-up on the commodity outlook you provided. I guess, I was a little bit surprised in a good way. Maintaining the guidance, understanding it's supposed to get a little bit worse as the year progresses. But given what we've seen in kind of the pacing markets, etcetera, I guess I would have thought that maybe it was going to be a little bit worse going forward. So I'm just trying to understand, is that a function of your contracting? Is there something that you're planning to do around mix that's kind of moderating that kind of inflationary outlook? I'm just trying to understand kind of what the visibility or the risk is as the year progresses. Thanks.

Gunther Plosch, Chief Financial Officer

Good morning, Andrew. Yes, we have very good visibility into commodities. The majority of our positions for the year are locked. From a protein point of view, there's obviously a lot of chatter at the moment about chicken. Our chicken contracts are actually fixed for the year. So we have price certainty there. What actually creates a little bit of an open position for us is fresh beef, since there's not a long market for that. We are now securing supply and pricing. We're in the middle of the third quarter now in terms of visibility. And so far, the trends are supporting the actual trend reporting our guidance that we have given.

Todd Penegor, President and CEO

And then in addition, I'm very pleased with our partnership with QSCC, which is our purchasing co-op. They're working hard to make sure that we've got supply continuity and protecting the brand in conjunction with our long-standing supplier partners, who have been great to work with us to make sure that we can continue to support and fuel the growth that we're seeing at the restaurant level.

Operator, Operator

And your next question comes from the line of Peter Saleh with BTIG.

Peter Saleh, Analyst

Great. Thanks for taking the question. I just want to come back to the conversation around development. I guess, primarily in the US, but maybe international as well. When – there's been a lot of conversations around a shortage of labor, obviously, rising construction costs, and now there's a lot of conversation around rising commodity costs. Is that having any impact on the franchisee, psyche and willingness to grow and invest, either here in the US or internationally?

Todd Penegor, President and CEO

Yes, Peter, those headwinds are out there. But with the momentum that we have in the brand and the fundamentally strong restaurant economic model that we're delivering along with the development incentives, the returns are still compelling. And our opportunity is to continue to grow and build this business right now as we want to provide more access to fast, convenient, high-quality food. So we're leaning in. We've got more franchisees that are coming into the pipeline that even want to build their way into the system. So we're feeling good that despite those headwinds, with all of the tools that we have, both from the restaurant economic model to hiring, to driving digital to truly engaging our employees and customers that we're well positioned to start growth. GP, any other thoughts?

Gunther Plosch, Chief Financial Officer

Yes. And one of the tools we have is design to value. We have first talk about it. We're constantly working in terms of how can we actually get the better for stunning design to the functional, and it's trying to offset inflation to keep the returns from new build and related.

Operator, Operator

And your next question comes from the line of Jon Tower with Wells Fargo.

Jon Tower, Analyst

Great. Thanks for taking the question. Just I wanted to follow-up on a comment, Todd, you've made earlier. I think you had suggested that the greatest opportunity for your breakfast business is drawing in customers that are already using the rest-of-day business to try breakfast. So I'm just curious, do you know if there – these customers are already doing and eating breakfast away from home and where they might be going today? Essentially, I'm just trying to figure out, do you need to build a new habit with this customer or are you just moving them from a competitor's sale?

Todd Penegor, President and CEO

Like, as you know, Jon, breakfast is very habitual. So we got to continue to be able to build the habit to use the brand for breakfast rather than just dinner, but they already know that they've got high-quality offering during the rest of the day. And when they get introduced to the even higher quality or as high-quality offering that we have at that breakfast daypart, they quickly become very loyal, very frequent. And it becomes a new habit quickly. So we got to continue to create awareness to bounce those folks back from lunch and dinner into breakfast, which then drives incrementality to our business, because it’s another visit, another frequency that gets picked up along the way.

Operator, Operator

And your final question comes from the line of Brett Levy with MKM Partners.

Brett Levy, Analyst

Great. Thanks for taking the call. On the G&A front, you obviously have talked about just the addition of some stock-based comp and also some costs that have stayed off the books. How should we think about your G&A, not just as it flows through this year, but where do you think you can be more aggressive and more conservative in the back half of the year and into 2022, either greater investments or greater leverage opportunities?

Gunther Plosch, Chief Financial Officer

Good morning, Brett. Yes, as part of this outlook revision, right, we significantly increased our EBITDA range, basically underlying between restaurant margin and sales by about $25 million. That was offset by about a $15 million increase in G&A. The majority of that is incentive comp, as our financial outlook is going. Our performance grids that are obviously benchmarked with the industry are kicking in, and we are needing to protect the P&L for that. The way to think about it is, we have always said that, that ultimate goal is 1.5% of sales. It's all predicated on continue to accelerate our sales performance. The other nugget I would give you is, obviously, it creates an earnings tailwind next year, as we are resetting the incentive comp payout back to 100%.

Operator, Operator

And your final question comes from the line of Jim Sanderson with Northcoast Research.

Jim Sanderson, Analyst

Thank you for the question. I wanted to follow up on breakfast. You mentioned earlier that in legacy stores where breakfast is offered, there is about a 10% sales mix. Can you remind us of the locations of these stores and if there is a regional issue? Additionally, what percentage of total company stores do they represent? Lastly, is breakfast currently contributing to or hindering your strong store margins? Thank you.

Gunther Plosch, Chief Financial Officer

Good morning, Jim. Yes, the legacy restaurants are those from past experiments that have already established a breakfast habit. There are about 300 of these restaurants located nationwide. They have successfully transitioned to the new breakfast menu, which has delighted customers and resulted in sales exceeding 10%. This gives us confidence that we can reach our sales target of 10% by 2022, as this aligns with our expectations. Changing consumer habits requires investment, which is why we are allocating approximately $15 million this year to ensure we raise awareness. Increased awareness leads to product trials, repeated trials, and ultimately growth. I'm pleased to report that profitability for breakfast is developing as planned, which is comparable to our performance during other parts of the day. This segment is continuing to expand and positively impacts the restaurant margins for both our franchisees and our own locations.

Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A

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