The Wendy's Company (WEN) Q3 2021 Earnings Report, Transcript and Summary

Good morning. Welcome to The Wendy's Company Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Greg Lemenchick, Senior Director, Investor Relations and Corporate FP&A, you may begin your conference.

Thank you, and good morning, everyone. Today's conference call and webcast includes a PowerPoint presentation, which is available on our Investor 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, review our 2021 third-quarter results, and share our revised financial outlook. From there, we will open up the line for questions. And with that, I will hand things over to Todd.

Thanks, Greg. And good morning, everyone. We are extremely proud of the meaningful progress we made in the Third Quarter against our three strategic growth pillars. We continue to grow our breakfast business. Digital sales accelerated and we expanded our global footprint in a challenging environment. We achieved a strong two-year global same-restaurant sales result of 9.4% driven by growth across the globe, which included an acceleration in our breakfast and digital sales mix throughout the quarter. Our strong performance helped us lengthen our streak of growing or maintaining our QSR burger dollars share to an outstanding nine consecutive quarters and further strengthen our position as the number 2 hamburger chain in the U.S. Our expansion into Europe through the UK continue to accelerate as we've opened several restaurants since the second quarter. We're seeing extremely strong sales across all of our UK restaurants as customers are thrilled to have Wendy's in the market, making us even more excited about our growth opportunity. We also announced a new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology Company to drive growth for us now and into the future. I will also share some results from a recent franchisee survey that highlights the strength of our relationship with our franchisees, which we continue to believe is a differentiator for us as a brand. We remain fully committed to our 3 long-term growth initiatives to build our breakfast day-part, accelerate our digital sales, and expand our global footprint. Our goal remains the same, which is to invest in driving efficient accelerated growth. We are delivering on that commitment with strong year-to-date adjusted EBITDA and free cash flow growth and overall results that are pacing well ahead of our initial 2021 plan. Let's now turn to our U.S. same-restaurant sales. Our strong programming and continued execution by our restaurant teams drove another impressive two-year same-restaurant sales result as we lapped our best quarter of 2020. Our average check saw continued growth, bolstered by crave-able products like the Big Bacon Cheddar Cheeseburger that was launched during the quarter. We achieved strong results this quarter, but we know that several macroeconomic factors that others across the industry experienced related to staffing and shifting mobility, due to the Delta variant, impacted results across our entire business. Both the Company and our franchisees are committed to making each Wendy's restaurant a great place to work, which will help attract and retain talent in our restaurants to help mitigate some of these impacts moving forward and we are making progress. We're very excited about the plans we have in place for the rest of the year, including the recent launch of our new game changing fry innovation. We believe we have a winner with this product. These fries remain hotter and crispier for longer and our consumer preferred nearly 2 to 1 to McDonald’s. This is yet another example of us elevating our core menu, which we expect to help us continue delivering growth on top of growth. I could not be more proud of our international business, which delivered a second consecutive quarter of double-digit 1 and 2 year same-restaurant sales growth. These results were driven by an improvement across the globe, both in our larger international markets such as Canada and Puerto Rico, where we continue to take market share, and also across the rest of the world as those areas continued to recover. Canada continued to post impressive growth, partially driven by their growing delivery business, which recently added Uber Eats, as well as by engaging customers through a Wendy's phone contest that really resonated with our fans there. We're also seeing strong results in our Latin America and Caribbean region. In Mexico, one of our significant growth market sales have not only recovered from COVID impacts, but have far surpassed 2019 sales levels, and we believe there is still huge potential for further growth in this market. The strength in recovery of our international business continues to be a catalyst for growth. As of the end of the Third quarter, almost 2/3 of our international markets have seen sales recover to at least pre-COVID levels. And we haven't seen a single permanent COVID -related market closure. We are extremely thankful for our team and our international franchisees for their commitment to growing the Wendy's brand across the globe alongside us. We continue to be very pleased with our breakfast business, which grew throughout the Third Quarter, exiting at our highest monthly mix of 2021 at 7.5% of sales. Our strong performance led to morning meal traffic share gains within the QSR burger category. This growth was driven by the successful 2 for 4 and $1.99 croissant trial driving promotions. We believe this momentum will continue as we close out the year with our recently launched dollar biscuit offering. We continue to see high customer repeat, showcasing that these offers are paying off. Incredibly, in a little over a year-and-a-half, we have now moved into the number 3 spot in terms of overall morning meal share in QSR burger. While we saw growth on our breakfast business, mobility continues to shift and be depressed during this day part. As a result, we now expect our year-over-year breakfast sales to grow approximately 20% to 30% in 2021. We remain confident in our ability to reach our breakfast goals and remain committed to invest $25 million in breakfast advertising this year to drive trial and awareness, which we believe will set us up for further growth in 2022 and beyond. We continue to see strength in our digital business across the globe in the third quarter, reaching approximately 8.5% mix globally. Our international digital sales were approximately 13% as we saw strong results across several of our markets. We expect growth to continue moving forward as we integrate new delivery partners and roll out mobile ordering across our markets. Our U.S. digital business accelerated throughout the third quarter, exiting with a digital sales mix north of 8%. This was once again driven by gains in mobile ordering and our strong delivery business. The growth in our mobile ordering business was supported by successful acquisition campaigns, which increased our total loyalty program members by approximately 10% compared to the second quarter, reaching almost 19 million. We have now increased our total members by an impressive 7 million since the start of the year. We have also been hard at work at an exciting new strategic partnership with Google, which we believe will allow us to tap into the capabilities of a world-class technology Company to drive growth. We expect this engagement will drive innovation around our one-to-one activation with customers and deliver better business analytics to drive enhanced insights. We'll also be focused on improving our in-restaurant environment by finding ways to remove friction from our customer and crew experiences. This type of innovated growth driving partnership is exactly what the technology fee was designed to enable. We remain fully committed to our digital journey and expect continued growth in 2021 and for years to come. Our development momentum continued as we delivered significant growth across the globe, reaching almost 50 new restaurant openings in the quarter. I am also pleased to share that our development agreement with REEF is off to a great start with locations now open across the U.S., Canada, and the UK. As I shared earlier, we are extremely excited about the consumer response to our expansion into the United Kingdom, which drove better than expected sales in these new restaurants during the third quarter. We've now opened several restaurants in the UK since the second quarter, and we are in the process of bringing additional franchise partners into the family in the near future, which we are extremely excited about. We anticipate having 10 restaurants opened by the end of the year, which is incredible given that we just opened our first location in June. We have also added to our new restaurant commitments with several ground breaker development agreements in some of our international markets, further solidifying our path towards our long-term unit growth goal. We remain on track to reach approximately 7,000 restaurants by the end of 2021, as we continue to navigate through a challenging supply chain environment. Our development foundation is extremely strong and we have a robust pipeline of almost 200 potential franchisees, which gives us confidence that we'll reach our goal of $8,500 to $9,000 global restaurants by the end of 2025. Our playbook of investing to drive accelerated growth behind our 3 long-term pillars, to build our breakfast stay part, driver digital business, and expand our footprint across the globe remains the same, and we continue to make meaningful progress. Our continued growth and success would not be possible without the partnership we have with our franchisees, who we believe are the best in the business. We recently received the 2021 Franchise Business Review survey, resulting in another year of Wendy's exceeding industry benchmarks and also paced ahead of our results from 2019. I am particularly pleased with our ratings on overall satisfaction and financial opportunity, which were more than 5 percentage points ahead of the industry benchmark. We also achieved strong scores on our clear vision and ability to drive the system forward, highlighting our ongoing alignment behind our strategic priorities. Despite the challenges of a global pandemic, over 90% of our franchisees would make the decision to invest in Wendy's again, an increase versus our 2019 results, which we are very proud of. These results highlight how our strong franchise relationships have been a differentiator for the Wendy's brand. Through this partnership and the dedication of our restaurant crews and support center teams, we will continue our march towards achieving our vision of becoming the world's most striving and beloved restaurant brand. I will now hand things over to GP to talk through our third quarter financial results. Thanks, Todd. We are pleased with our third quarter results, which delivered against our financial formula as an accelerated efficient growth Company by growing same-restaurant sales and expanding our global footprint, which translated into significant free cash flows. Our global system-wide sales grew 5.3% and our same-restaurant sales growth

was a very strong 9.4% on a two-year basis. These was driven by the outstanding results in our international business and continued growth in our U.S. business. As Todd mentioned earlier on the call, our U.S. same-restaurant sales in quarter 3 were impacted by macroeconomic challenges. Without these impacts, we believe our U.S. same-restaurant sales results would have been generally in line with our expectations for the quarter. Year-over-year, Company restaurant margin decreased 250 basis points driven by higher-than-expected labor rate inflation of almost 9.5%, commodity inflation of almost 3%, lower local advertising spend in the prior year, and customer count declines. These were partially offset by the benefits of a higher average check. The increase in G&A was driven by higher incentive and stock compensation expense as a result of our strong financial performance in 2021 that continues to pace well ahead of our initial plan, higher technology costs, primarily related to our ERP implementation and increased travel expenses. Adjusted EBITDA decreased approximately 5.5% to $112 million primarily as a result of higher general and administrative expense, and a decrease in Company operated restaurant margin. These decreases were partially offset by higher franchise throughout the revenue and an increase in net franchise fees. Adjusted earnings per share was flat to the prior year, driven by a lower adjusted EBITDA offset by a decrease in interest and depreciation expense. Finally, our free cash flow increased significantly to approximately $274 million year-to-date. The increase resulted primarily from higher net income, the timing of receipt of franchisee rental payments, and the timing of accrued compensation payments. Before we turn to our outlook, I want to quickly highlight our strong year-to-date results through the third quarter, which continue to pace well ahead of our initial plan for 2021. Our year-to-date global system-wide sales grew 13.2% and we achieved an impressive 2 year global same-restaurant sales growth of approximately 11%. Our year-to-date Company operated restaurant margin, has reached almost 17.5%, 350 basis points higher than 2020, driven by sales leverage, which has more than offset headwinds from higher labor and commodity costs. Finally, year-to-date adjusted EBITDA is up approximately 19% versus 2020, primarily driven by our strong sales and Company operated restaurant margin expansion. We continue to expect very strong results in 2021. However, due to the previously mentioned impact we are facing, in addition to being late in the year, we are tightening our outlook ranges across some of our metrics. We now expect full-year system wide sales growth of 11% to 12%. This, in turn, flows through and tightens our expected ranges for adjusted EBITDA and adjusted EPS to $465 million to $470 million and $0.79 to $0.80, respectively. Our adjusted EBITDA outlook is also impacted by our Company - operated restaurant margin, which we now expect to be approximately 16% to 16.5%. This change in restaurant margin is being driven by the tightening of our sales outlook range and an increase in commodity and labor rates, which we're not expecting to be inflationary, approximately 4%, and 7 to 8%, respectively. This is being offset by a decrease in G&A to approximately $235 to $240 million and higher net franchise fees as a result of additional franchise transactions that are expected to close in the fourth quarter. Finally, we're holding our free cash flow and $270 to $280 million as a reduction in our capital expenditure [Indiscernible] outlook is offsetting our up stated adjusted EBITDA outlook range. The favorability in capital expenditures is being driven by supply chain challenges, which we believe to be transitory in nature. To close, I would like to highlight our capital allocation policy, which remains unchanged. Our first priority remains investing in profitable growth. We are continuing to showcase this through the investments we are making across our 3 strategic growth pillars. Today, we announced the declaration of our fourth quarter dividend of $0.12 per share, which aligns with our capital allocation policy to sustain an attractive dividend payout ratio of more than 50%. Lastly, we plan to utilize excess cash to repurchase shares and reduce debt. We announced today that we have added $80 million to our existing share repurchase authorization to a total of $300 million. With this increased authorization via planning to launch $125 million accelerated share repurchase program in the fourth quarter. As a result of the above actions, we now expect to return approximately $350 million to shareholders by year-end through a combination of dividends and share repurchases. 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.

Thanks, GP. We're excited to announce that we'll be hosting a Virtual Investor Day on March 10, 2022. During the event, we are planning to provide an update on our long-term strategic vision, reintroduce our long-term outlook, and issue our outlook for 2022. The event will be available to all interested parties via webcast from our Investor Relations website at irwendys.com. In advance of the event, we plan to pre -release our fourth quarter and full-year earnings on February 10, 2022. We will also host a conference call that same day to review those results. Now, turning to our fourth quarter investor outreach event. To start things off, we'll be hosting an investor call on November 12th with Truist. This will be followed by a two-day NDR with the first leg in Chicago with Credit Suisse on November 16th, and the second in Boston with BMO on November 17th. we will follow this up with an NDR in New York with Cowen on November 30th and then head to Nashville on December 1st for the Stephens Conference. We'll then hold a virtual NDR focused on the West coast, hosted by Goldman Sachs on December 9th, and we'll round things out with a virtual headquarter visit with Deutsche Bank on December 14th. If you're interested in joining us at any of these events, please contact the respective sell-side analyst or equity sales contact at the host firm. As we transition into our Q&A section, I wanted to remind everyone on the call that do due to the high number of covering analysts, we'll once again be limiting everyone to 1 question only. And with that, we're ready to take your questions.

Thank you. As a reminder to ask a question, [Operator Instructions] And your first question will come from Brian Bittner with Oppenheimer. Your line is open.

Thank you. Good morning, everybody. My question is on store level profitability, both for the franchise and the Company-owned footprint. Todd, on the last call, you suggested that the Company has been a little more conservative over the last several years on pricing, particularly in your Company operated footprint. So, the question is, does this allow you to be more aggressive to protect store level profitability across the system. as we move into '22 or anything else that you can talk about as related to profit protection strategies for the system would be helpful? Thanks.

Brian. Thanks for the question. You are right. We had been more conservative on pricing historically relative to the system which puts us in a better spot to take some pricing and we have started to take some of that pricing. And in fact, as we roll through the third quarter into the fourth quarter. Our pricing is probably a little bit ahead of where the franchise system is today, which is a good thing to manage and -- and offset some of the headwinds. But pricing is just one lever that will pull. We'll will continue to drive our mix hard, our made to crave lineup on the premium side continues to do very well and will continue to bring news and support trading consumers up across our menu. You think about 4 for $4 plays a role, but $5 Biggie Bag, a nice trade-up to continue to drive margin and really pushing our digital strategy hard with the delivery business continuing to be strong, even with mobility coming back. Now those average checks up 40% to 50%. Mobile ordering, picking up, those checks up 15% to 20%. All of those things help us to manage the margin, especially with the consumer being a little more healthy today.

Thanks.

Your next question will come from Andrew Charles with Cowen. Your line is open.

Great. Thanks. Want to talk a little about 2-year performance from 2Q to 3Q, you called out some macro headwinds and I'm just curious within that. How much did staffing challenges weigh on your quarter whether you look at it from the perspective of slowing service times that we're seeing across the industry or impacting operating hours. And maybe just more within your control, do you think you need more balanced level of advertising across day-parts that currently skews perhaps a little heavier on breakfast to help accelerate sales at lunch and dinner? Thanks.

Let me start with staffing. When you think about the staffing challenges that we all experienced in the industry in the third quarter, it did create inconsistency on ours. We had more dining rooms closed during the third quarter on average than we did during the second quarter. Second quarter, we had 95% of our dining rooms are open, where only 85% in the third quarter. That does put pressure on our digital business when you think about Mobile Grab & Go, you think about delivery folks coming into the restaurants, you think about throughput that happens in the drive-thru. And you do see throughput challenges with staffing tighter. And along the way, if you'd see newer folks coming into the restaurant getting trained up, those do impact throughput. The great news is we're starting to see the applicant flow, pick up a little bit going into the fourth quarter. And we're starting to improve staffing a bit, but not enough to get ahead and truly where we need to be, because it is tight out there. But we're working through all those. And one of the big keys for us is to get our dining rooms open to really support taking pressure off of the drive-through and support our digital business moving forward. On the breakfast, rest of the day, advertising mix, we feel really good that we've got a good balance, as we've said before, our breakfast advertising is up about 20% year-over-year. We've got the extra money that we're supporting from a Company's perspective, $25 million in total. The advertising that we do on the Breakfast Daypart really does halo back to the rest of the day with a strong quality message. And the folks that are trying on our breakfast are getting some very high-quality food that gets them confident in the rest of the day. So, we feel like we got that balance right between what we're doing on the breakfast side and a nice split between value and premium on the rest of day business.

Thank you.

Our next question will come from Jeffrey Bernstein with Barclays. Your line is open.

Great. Thank you very much. I'm just wondering if you could talk more broadly on 2 fronts. One just on the competition across quick-service. I'm just wondering if you'd share any incremental thoughts in terms of the most recent activity by your competitive set, primarily in the burger category. And then, more broadly whether franchisees and those discussions with franchisees, it sounds like the survey has been quite encouraging. But you mentioned the Company operated has now passed franchisees from a pricing standpoint, just wondering, franchisees desire to re-accelerate pricing or was this concern of price no matter the category? Thank you.

From a competitive perspective, it's always competitive and it's probably no more, no less competitive than it has been historically. We do see a lot of, a lot of things happening across our category to continue to drive customers in and get folks out as routines are not what they used to be. Mobility is back, but the routines are just a little bit different and we expect that will continue for quite some time as we worked for share of stomach across our category. No. On our Franchise front. We will continue to partner with them to be smart on pricing. We've got a pricing analytics team that works well with our system to make sure that where we need to take pricing, we take smart pricing. And our biggest opportunities to continue to drive throughput and drive our digital business hard moving into the future, do you have any other thoughts on that.

I think you said it well, I would also add our real performance metrics that we are watching closely are very good. Right, we gained dollar share in the burger categories with tells us we are competing with our programs. And as we also said in the prepared remarks, we are winning in breakfast, we are now the number three player and we gained traffic share again in the morning meal burger category. So overall, we're happy with how we are competing and the marketing mix that we're putting out there.

Thank you.

Our next question will come from John Ivankoe with JPMorgan.

Hi, thank you. I wanted to talk about the Google partnership, and I guess I'll ask the question directly. What makes it, I guess, a partnership versus you being a customer of Google? And I just wanted to understand what maybe exclusive to Wendy's that you might get from them relative to the industry? Obviously, it's the ultimate data provider. But where do you see the Wendy's brand taking advantage, at least in the near-term, where others cannot based on that relationship?

Good morning, John. Great, great question, right? I mean, it's really a strategic partnership. We're really very happy that such a heavyweight in the technology world is willing to partner with us. To be clear we have a lot of other partners. They are more as a vendor relationship. This is really a strategic partnership. They're putting the best foot forward to help us in various areas. It's definitely on the digital side and really helping us with the one-to-one customer activation that they have several very proprietary products, it will help us on that front. They have very strong business analytics. So, we're definitely going to use their platforms on it. And we really think they can help us on the restaurant tech, and help us really remove frictions for us with our crew members and our customers. So, it's a level up for channel vendor relationship, it's really strategic. It's a multi-year commitment that we have made and they have made, and as a result of it, we think it's a win-win situation. We will get a great return out of the partnership and they will as well.

Thank you.

And your next question will come from Chris Carril with RBC Capital Markets. Your line is open.

Hi, good morning. So, you noted some encouraging data points around breakfast, including category breakfast share. You did note that you expect breakfast growth of 20% to 30%, I think, versus the prior expectation of 30% for this year. So, in the context of that, can you talk a little bit more about your investment behind breakfast? I think you said you remain committed to the investment of $25 million in advertising this year, but did note that mobility does remain impacted. So curious if you can just reconcile these two factors and how you're thinking about breakfast support for the remainder of this year and then into next year. Thanks.

Yeah, it's been nice to see the momentum as our mix continues to pick up and exiting at the end of the third quarter to 7.5% breakfast mix is very encouraging. Very committed to continue to keep our awareness levels high with the incremental advertising spend that we had into this year. And we've always said it was a 3-year journey to really drive awareness and agree in the habit. And we're working through that in a more challenging environment because the breakfast daypart has been the slowest to recover back to 2019 levels. But it is coming back, and we want to stay ahead of that curve. What we're really excited about on breakfast is our awareness is high. Our awareness is at the levels of where Burger King has had and they. They've been in the breakfast business for a long time. And our repeat is really strong, so we can get trial to happen, we can help to get a lot of repeat, which will help in growing the habit moving forward, and you saw that through the course of the third quarter with $1.99 croissants, 2 for 4 croissants, and you're seeing that with the support that we have out there with a dollars breakfast biscuit right now, which is driving a lot of trial into our restaurant, because we really feel confident that the lead people will be there. That's all support with what we have in the restaurant today. We're trying to be fast; we're trying to be accurate. We're creating the highest customer satisfaction during that Daypart in our restaurants today. And as we look forward to next year, it will give us an opportunity to finally start to innovate, to bring some news to the category with the support and success we've had to bring our franchise system along for that journey.

Your next question will come from Jeff Farmer with Gordon Haskett. Your line is open.

Thanks, and good morning. I just wanted to follow up on pricing, I believe on the last call you mentioned that your menu pricing, at least for the Company restaurants, was roughly in line with food - away-from-home inflation. I think on the limited-service side food-away-from-home inflation was pushed at almost 7% in the Q3. So, is that a fairway to think about the menu pricing level that you have with the Company-owned restaurants right now, something close to 6 to 7%?

Good morning, Jeff. The numbers we're tracking is the food-away-from-home inflation attracts around 4.5-4.7% and we are about in line with that -- with those kind of pricing levels. As Todd mentioned in the and A, is we're obviously watching the rest of the economic model very strongly, pricing is a lever we'd pull. We have pulled the pricing lever in our Company restaurants in the fourth quarter already.

Thank you.

Your next question will come from Alton Stump with Luke Capital.

Great. Thank you, and good morning. I just wanted to ask about the Bacon Cheddar Cheeseburger launch. Certainly, it seems to be, if not the most differentiated, is one of the more differentiated products that you've done by [Indiscernible] so far. Just what the feedback was and how it's fair [Indiscernible] to other offerings that you've been introduced and you create in the past?

Yeah, we brought some really unique and freight of news to the category in our premium side to really drive ownership in that Made to Crave arena. And consumer start to expect when you won a high-quality, premium differentiated hamburger at an affordable price, you can come to Wendy's. And we're very pleased with the performance of that particular offering during the third quarter and in fact, it really help lever and drive our mix to its highest levels that we've seen across our total made to crave lineup, which includes both hamburgers and chicken. We feel good about that and we will continue to play that game as it's a nice mix lever and a nice high level of customer satisfaction lever with a high-quality food to allow folks to get something they can only get at a Wendy's.

Your next question will come from Jared Garber with Goldman Sachs. Your line is open.

Hi, thank you for the question. I wanted to circle back on the breakfast business and certainly encouraging that you're taking some share there, but I wanted to get a sense for why you think maybe the trial is such a, maybe more of a challenge. Obviously, it sounds like the repeat businesses is pretty good, but wanted to get a sense of why you think trial might still be a little bit more challenging here given the level of promotions that we've seen and that incremental advertising spend. And I guess how you square that up with -- is it just improving mobility patterns that need to play out for you to ratchet that number up or is there something maybe that we're missing under the hood that is driving that trial challenge. Thanks.

Yeah, I really think it's the latter that you just said Jared, that we need to continue to get mobility back in the morning daypart and get folks into what they're more normal routines will be. As we said in the past and we're still seeing that we're starting to see a little more mix in the breakfast daypart between that 7 to 9 o'clock window, but our two biggest half-hours are still the last 2.5 hours on 9:30 to 10:00, and 10:00 to 10:30. So folks are using breakfast [Indiscernible] for late morning Zoom snack, and starting to slowly shift into an earlier morning routine. And that's why the breakfast day part has been a little slower to recover relative to rest of the day, but we're really optimistic that that will continue to come back. And as we've got news out there around good promoted price points on offers, the dollar of buck biscuits, clearly a reason to create a routine to get out of the house early in the morning on the way to try all the food. We're confident that that will help us continue to build our breakfast dayparts moving forward for this year. And then we'll start to look at what news. And we bring the continued to keep excitement against the category for Wendy's to make sure that we are top of mind. And in people's routines moving forward.

Great, thanks, that's helpful. And could you just update us on the active loyalty membership? It sounds like the overall loyalty program growth, but just want to get a sense of what there's active loyalty members, has that level grown over the last quarter or so. I think those levels have remained generally flat, but just want to get a sense of where that's tracking. And particularly as it relates to one of your large competitors launching a loyalty program a couple of months ago. Thanks.

Good follow-up question. We've little bit north of 3 million active users. We like what we see in our loyalty program, we are seeing high average check, we're seeing higher frequency and obviously, the key job for us is to actually make that pool of people better by making up a good job in terms of having now 19 million users in the database. How do we get them more active? We're definitely excited about our Google partnership. They're definitely trying to drive innovation for us around one-to-one activation which is one of the reasons why we signed the agreement for them. So, I think the future is bright for our loyalty program.

Great. Thank you.

Your next question will come from Dennis Geiger with UBS.

Great. Thank you. I just wondering if you could come back to the core lunch and dinner day part and just talking a little bit more about the drivers from here. Todd, maybe if you could touch a bit more on some of those biggest contributors looking ahead, if it's the menu innovation or the renovation with the fries, if it's digital loyalty, maybe the dining rooms reopening, the staffing improving. Again, going forward, I don't know how big the opportunity from here is on throughput and service speed, but just speaking a little bit high level, a bit more to some of those key contributors to lunch and dinner from here will be great. Thank you.

I think there's several drivers, I think first and foremost, it does start with speed. As we get stepped up a little bit better and continue to drive throughput and really lean into getting all those dining rooms open, really leverage mobile grab and go, really leveraged curbside, allow us to take some pressure off of those being drive-through lines. I think all of those things will help drive our business moving forward just on a core operational metric perspective. And I think that's where the consumer wants to go. They expect speed, convenience, and affordability from Wendy's and we want to continue to deliver that on that and differentiate with quality. Now, if you think about the drivers moving forward, clearly, a lot of opportunity ahead of us on the Breakfast Day part, and that's why we're driving so hard on trial. But we're also not forgetting about the quality messaging on the rest of the day business that we have out there, and that's why you see us continue to innovate and Made to Crave. You see the innovation on French fries. They are hotter and crispier and preferred two-to-one to our lead competitor. And in fact, we're very excited about those plans in place for the rest of the year. Behind the success of the fry innovation and all the trial behind the dollar breakfast biscuits, we are presently pacing ahead of our internal expectations at start the quarter. So, we're feeling good that these things are resonating for the consumer. And as we have applicant pool picking up, staffing getting better, those are things that can continue to help drive our business for the rest of the year. On the staffing front, the one last comment I'll make is our late-night business has been very good, but it's a big opportunity to be even better. Because we do have inconsistency of hours with labor today at that daypart. And that's a big growing area where we think there's a lot of opportunity when get ourselves staffed in those -- those hours open.

Thank you.

For next question will come Brett Levy with MKM Partners. Your line is open.

Great. Thanks for taking the call. And just following up on your last comment on the inconsistent hours and labor issues, How would you say you are positioned right now? I know you said 95% went to 85% in dining rooms. If you look around the country, how are you seeing pockets of improvement? What do you think you -- where do you think you're still the most deficient in terms of labor and how should we think about your commodity position right now in terms of what's locked as we move into '22, how you're thinking about the basket for next year, and what that might do to your menu plans. Thanks.

Start on the labor front and turn it over to commodities for GP. As we look at staffing Company restaurants, franchise restaurants, there's no clear pattern where your understaffed, overstaffed. When you look at the regionality across the country, you've got good pockets, bad pockets, but not a particular area of the country that's in different perspective than the rest of the country. And the focus is really on how do we continue to invest in those people, pay benefits, and really set them up for success with some quality training as we bring new folks on. How do we continue to recognize and reward the folks for the great job that they're doing in our restaurants day in and day out, and how do we stay focused on making more fun and energizing to work. So, there is the word of mouth that this is a great place to work and we can bring folks in and there's opportunity to grow in our restaurant business. And the trend is our friend. We're starting to see staffing improve, but still not to the level that we needed to be to really drive all the opportunity that's out there in front of us, and that's going to take a little bit of time because that labor market is not going to snap back overnight. We'll see pockets of pressure, but we'll continue to push to do the right things to make sure that our restaurants are appropriately staffed. And you're seeing that in some of the labor inflation that GP commented on earlier, it just cost them a little bit more, but there's a good return on that investment in our people because we can drive a great customer experience and drive a lot more business because there are a lot more business to be had. On the commodity front, GP, I'll let you comment.

Good morning Brett. So, on your question on there, as you know, [Indiscernible] our restaurant margin for this year down to about 16% to 6.5%. It's really on the heels of inflation. We had previously thought that our commodity inflation would be 2% to 3%. We're ending up dealing with 4%, which mainly was beef and some distribution cost. On the labor front, we thought it would be 5% to 6% inflation, we're actually dealing now with about 7% to 8% inflation. Overall, we are super proud of our restaurant teams, 16% to 6.5% is significantly up in profitability versus prior year. And actually, even after grosses versus pre -COVID levels. And I'm sure your next question is going to be so what is the margin outlook for next year? I'm going all get quite ready to give that outlook. We're definitely can leave you with the following picture fiscal for we definitely expecting elevated labor inflation and commodity inflation for next year, so we're planning for that. We're going to outgrow any inflation combined with pricing and cost containment actions like designed to value. We see no reason why our margin for 2022 shouldn't be in line and back to pre -COVID levels that we had in 2019.

Thank you.

Your next question will come from Nicole Miller with Piper Sandler. Your line is open.

Good morning. Thank you. I wanted to ask about price and store level margin. And the question is not that you would take as much price as might be needed, but how much price is needed in the current environment to hold margin as a steady-state? And what is the underlying ideal steady-state store level margin?

Good morning, Nicole. Yeah, from a pricing point of view, we believe that pricing in line with food away from home inflation is probably the right spot for us. We're definitely watching competitive actions in the respective trade areas and our pricing is pretty sophisticated. When we talk about the price increases these are not broad pricing changes across the whole menu, we have priced elastic items and price inelastic items, and we are kind of operating in that environment, and as I just said in the answer to the previous question, even if it elevated inflation levels, that we are expecting in next year, we see no reason why we shouldn't be hovering around the same margin levels we had [Indiscernible] in the pre-COVID world.

Your next question will come from Brian Mullan with Deutsche Bank. Your line is open.

Hey, thank you. Just question on development. I'm wondering if you could discuss your current expectations for the components of net unit growth next year. In commentary, you've been in the past suggested 3% global net unit growth that was prior to the recent announcements. So please give us your current thinking, possibly split out between traditional U.S. international and then just expectations for REEF next year. That will be great.

Good morning, Brian. Just to ground us in 2021, we're expecting 2% plus growth and achieving about 7,000 restaurant -- year-end restaurant count, about 1% growth in the U.S. and 10% plus in international. Because of the new agreement we made with REEF, that adds 700 units over the next five years, plus a very successful Groundbreaker 2.0 initiative. It had us [Indiscernible] 240 plus incremental development agreement. And the launch of a build-to-suit fund base about 80 to 90 units, all of that had us increased our unit growth outlook by about 500 to 1,000 units to 8 and 1/2 to 9,000 units. From a CAGR point of view, that is about a 5.5-6% growth rate. You can expect for 2022 what I would call a vertical start-up in growth. So, you would expect a 5% to 6% growth rate in next year. And the majority of that is driven by REEF. Since the 700 units are pretty evenly split across all year. As we said in the prepared remarks, the start with our relationship with REEF is positive. We have refueling in place now in the older three countries that we have signed agreements for.

Thank you.

Your next question will come from John Tower with Wells Fargo.

Great. Thanks for taking the question. Many have already been answered. But I was curious, just going back to the pricing and pricing environment, and frankly, the inflation that's driving or running across the industry. How do you plan on keeping the value message front and center for the consumer next year? I mean, are we thinking about using digital channels, specifically, the loyalty platform as an effective discounting mechanism relative to the past? And in that context, it sounds like the loyalty active membership remained kind of flattish quarter-over-quarter. So how do you plan on driving greater frequency within that Cohort going forward?

There's a couple of things. 1. we do have a really strong value proposition on the menu today with 4 for $4 and with $5 Biggie Bags. So, we do have an opportunity to really play hard on the value side with a proposition that works for the consumer, but also works for the restaurant economic model. On the other side of the equation, I do think as we continue to bring more folks into our loyalty program, as we continue to do more data analytic work, a little more one-to-one communication, the opportunity to better connect and drive some deals and drive more active users into the mobile space is a big opportunity moving forward, as well as the offers that we'll continue to do within the app to drive more folks into the loyalty program, and to drive them to become more active into the future. So, I think those are the 2 big levers that we have to continue to drive. a lot of value across our menu. And you did see us do things like buy one, get one for a dollar, which also drives some value in the minds of the consumer during the third quarter. So those are all tools that are out there in the tool box.

Your next question will come from Jim Sanderson with Northcoast. Your line is open.

Thanks for the question. I wanted to dig into the Breakfast Daypart a little bit more. I think in the past, you had mentioned that some more mature markets had already achieved 10% or more of daypart sales mix. Have those markets maintained or grew their share with the increased promotional activity you have in the marketplace and have we seen any pick up in the average visits per year in the Daypart? Thank you.

Hi, James. Great question. And for our legacy restaurants, those that had breakfast free, the new menu that we've created across breakfast, they continue to do quite well; they're mixing 10% plus. They continue to grow the mix in that Breakfast Day part. Their average weekly volumes continue to grow nicely. And because they already have high awareness and a lot of folks in the routine, those folks start to become a little more frequent and it's fair to acquire new users. So, it's very encouraging when we start to see how those businesses perform. And that's why always we said it's a several year journey to ingrain the habit and really get folks to become breakfast loyalists along the way. But we do see that as a very encouraging sign for the rest of the system and with success like we have in those legacy restaurants, those folks are always looking for what's the next level of growth and that's where we get pushed on how do you innovate? What do you innovate on food? Do you innovate into the beverage space? The great news is we're actually getting that pool [Indiscernible] from consumers or from franchisees to start to invest more, to drive even more growth in the Breakfast Daypart. And if you recall, we had to start, make it very simple, make it very fast, low labor model, low investment model to prove the success. And now that we've proven, we can be successful in breakfast as we move forward into 2022-2023, we can start to invest in more growth driving opportunities into the future.

Thank you. A quick follow-up is, are the average visits up as well from the 6.5 [Indiscernible]? Are they starting to pick up?

We haven't updated the frequency data. So, what we've talked about, we're at about 5 and 1/2 visits per year to a Wendy's. Prior, we were a little over of 6.5 now, so a nice 20% increase. That was through mid-year. We'll update them more on an annual basis. I'm sure lots of more insight on that as we go into Investor Day early next year, but that trend is nice. And that trend is certainly helping us, not just with breakfast helping to drive more frequency, but all the work we're doing on rest of the day and digital too. So, they're all playing a role.

Thank you very much.

Your next question will come from Chris O'Cull with Stifel. Your line is open. Chris O’Cull : Thanks. Good morning, guys. This is Alex on for Chris. I just wanted to follow up on development. Getting to 7,000 units by year-end implies a pretty strong fourth-quarter. I was hoping you could provide some additional color around what's driving that expected strength. Is it just a timing shift from this quarter? And then how is the system balancing that with maybe some difficulties in either equipment sourcing or construction labor availability. Thanks.

Good morning. Yeah, we are very proud of our development progress in the third quarter. We opened 50 restaurants, and you're right, there are a good amount of restaurants still to come to reach to 7,000 number. The only thing I can tell you our confidence is high. 90% or so of all these restaurants that need to be built to get to the 7,000 numbers are under construction. Are we managing these tightly? Absolutely. We're hearing about labor shortages and supply chain challenges in the construction industry as well. Could things shift around a little bit? Maybe, but again, 90% of the restaurants are under construction. You might be wondering what's the remaining 10%, while the remaining 10% is non-traditional units, [Indiscernible] and others that obviously have super-fast construction types.

And our last question will come from James Ratherford with Stephens Inc. Your line is open

Thanks for getting me in. I just wanted to come back to the breakfast discussion. Todd, I thought it was interesting you mentioning earlier in the Q&A that customers are tending to use the breakfast business a little bit more of as a late morning snack as opposed to that early morning kind of on-the-way to work routine. I was curious -- and I know that coffee is the key element to driving that early morning routine, your food quality differentiation is very clear with breakfast, but I haven't heard as much discussion on the performance within the beverage side of the menu. [Indiscernible] if you could comment on the feedback you've heard from consumers on your breakfast beverage lineup and how important that piece of the menu is in terms of future innovation and the overall importance at driving those early morning routines to Wendy's.

Great question. As we start to look at opportunity, we do think there's an opportunity to drive the beverage strategy even harder, especially as folks get into the morning routine and really think about using the restaurant on the way to work in the morning. We have a very good coffee in the restaurant. And did a lot of work on it before the launch. It's like anything. You need to have coffee prepared fresh, and you got to have it ready when the consumer is coming. And getting more and more business earlier in the day will certainly help reinforce the quality of the coffee offering we have. We've got some great unique items that are good price value when you think about the ice side with Frosty-ccino, so we will continue to drive awareness in trial on that. And the CSG -- CSD business, when you think about how many folks are having a soda in the morning, us having the variety with Coke Freestyles in our restaurants certainly helps too. All that said, as we continue to ingrain the habit drive the business, we did do things simple, [Indiscernible] down the middle to really drive the economics and adoption early. We do think that's an area where we can continue to lean in and innovate for many years to come, and that's not going to happen overnight. But we're going to do it smartly. We'll do it along the way and really complement the reasons why you want to come to Wendy's on the way to your morning destination day in and day out.

Thanks very much.

Thanks, James. 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 in our fourth-quarter and full-year earnings call in February ahead of our Investor Day. Have a great day. You may now disconnect.

This concludes today's conference call. Thank you for participating. You may now disconnect.