Wendy's Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this report and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (the “Form 10-K”). There have been no material changes as of April 2, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”). The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, LLC (formerly known as Wendy’s International, Inc). Wendy’s International, LLC is the indirect parent company of (1) Quality Is Our Recipe, LLC (“Quality”), which is the owner and franchisor of the Wendy’s restaurant system in the United States (the “U.S.”) and all international jurisdictions except for Canada, and (2) Wendy’s Restaurants of Canada Inc., which is the owner and franchisor of the Wendy’s restaurant system in Canada. As used herein, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries, and “Wendy’s” refers to Quality when the context relates to the ownership or franchising of the Wendy’s restaurant system and to Wendy’s International, LLC when the context refers to the Wendy’s brand. Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. Wendy’s opened its first restaurant in Columbus, Ohio in 1969. Today, Wendy’s is the second largest quick-service restaurant company in the hamburger sandwich segment in the U.S. based on traffic share, and the third largest globally with 7,095 restaurants in the U.S. and 31 foreign countries and U.S. territories as of April 2, 2023. Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of toppings and condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty ® desserts and kids’ meals. In addition, Wendy’s restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast across the U.S. system and in Canada. Wendy’s breakfast menu features a variety of breakfast sandwiches such as the Breakfast Baconator ® and sides such as seasoned potatoes. The Company is comprised of the following segments: (1) Wendy’s U.S., (2) Wendy’s International and (3) Global Real Estate & Development. Wendy’s U.S. includes the operation and franchising of Wendy’s restaurants in the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Wendy’s International includes the operation and franchising of Wendy’s restaurants in countries and territories other than the U.S. and derives its revenues from sales at Company-operated restaurants and royalties, fees and advertising fund collections from franchised restaurants. Global Real Estate & Development includes real estate activity for owned sites and sites leased from third parties, which are leased and/or subleased to franchisees, and also includes our share of the income of our TimWen real estate joint venture. In addition, Global Real Estate & Development earns fees from facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”) and providing other development-related services to franchisees. In this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company reports on the segment profit for each of the three segments described above. The Company measures segment profit using segment adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Segment adjusted EBITDA excludes certain unallocated general and administrative expenses and other items that vary from period to period without correlation to the Company’s core operating performance. See “Results of Operations” below and Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for segment financial information. The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31. All three-month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. 24 Executive Overview Our Business As of April 2, 2023, the Wendy’s restaurant system was comprised of 7,095 restaurants, with 5,989 Wendy’s restaurants in operation in the U.S. Of the U.S. restaurants, 403 were operated by the Company and 5,586 were operated by a total of 217 franchisees. In addition, at April 2, 2023, there were 1,106 Wendy’s restaurants in operation in 31 foreign countries and U.S. territories. Of the international restaurants, 1,095 were operated by a total of 106 franchisees and 11 were operated by the Company in the United Kingdom (the “U.K.”). The revenues from our restaurant business are derived from two principal sources: (1) sales at Company-operated restaurants and (2) franchise-related revenues, including royalties, national advertising funds contributions, rents and franchise fees received from Wendy’s franchised restaurants. Company-operated restaurants comprised approximately 5% of the total Wendy’s system as of April 2, 2023. Wendy’s operating results are impacted by a number of external factors, including commodity costs, labor costs, intense price competition, unemployment and consumer spending levels, general economic and market trends and weather. Wendy’s long-term growth opportunities include delivering accelerated global growth through (1) driving strong same-restaurant sales momentum across all dayparts, (2) accelerating our implementation of consumer-facing digital platforms and technologies and (3) expanding the Company’s footprint through global restaurant expansion. Key Business Measures We track our results of operations and manage our business using the following key business measures, which includes a non-GAAP financial measure: • Same-Restaurant Sales - We report same-restaurant sales commencing after new restaurants have been open for 15 continuous months and as soon as reimaged restaurants reopen. Restaurants temporarily closed for more than one week are excluded from same-restaurant sales. The table summarizing same-restaurant sales below in “Results of Operations” provides the same-restaurant sales percent changes. • Restaurant Margin - We define restaurant margin as sales from Company-operated restaurants less cost of sales divided by sales from Company-operated restaurants. Cost of sales includes food and paper, restaurant labor and occupancy, advertising and other operating costs. Cost of sales excludes certain costs that support restaurant operations that are not allocated to individual restaurants, which are included in “General and administrative.” Cost of sales also excludes depreciation and amortization expense and impairment of long-lived assets. Therefore, as restaurant margin as presented excludes certain costs as described above, its usefulness may be limited and may not be comparable to other similarly titled measures of other companies in our industry. Restaurant margin is influenced by factors such as price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, fluctuations in food and labor costs, restaurant openings, remodels and closures and the level of our fixed and semi-variable costs. • Systemwide Sales - Systemwide sales is a non-GAAP financial measure, which includes sales by both Company-operated restaurants and franchised restaurants. Franchised restaurants’ sales are reported by our franchisees and represent their revenues from sales at franchised Wendy’s restaurants. The Company’s consolidated financial statements do not include sales by franchised restaurants to their customers. The Company’s royalty and advertising funds revenues are computed as percentages of sales made by Wendy’s franchisees. As a result, sales by Wendy’s franchisees have a direct effect on the Company’s royalty and advertising funds revenues and profitability. The Company calculates same-restaurant sales and systemwide sales growth on a constant currency basis. Constant currency results exclude the impact of foreign currency translation and are derived by translating current year results at prior year average exchange rates. The Company believes excluding the impact of foreign currency translation provides better year over year comparability. 25 Same-restaurant sales and systemwide sales exclude sales from Argentina due to that country’s highly inflationary economy. The Company considers economies that have had cumulative inflation in excess of 100% over a three-year period as highly inflationary. The Company believes its presentation of same-restaurant sales, restaurant margin and systemwide sales provide a meaningful perspective of the underlying operating performance of the Company’s current business and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. The Company believes that these metrics are important supplemental measures of operating performance because they highlight trends in the Company’s business that may not otherwise be apparent when relying solely on GAAP financial measures. The Company believes investors, analysts and other interested parties use these metrics in evaluating issuers and that the presentation of these measures facilitates a comparative assessment of the Company’s operating performance. With respect to same-restaurant sales and systemwide sales, the Company also believes that the data is useful in assessing consumer demand for the Company’s products and the overall success of the Wendy’s brand. The non-GAAP financial measure discussed above does not replace the presentation of the Company’s financial results in accordance with GAAP. Because all companies do not calculate non-GAAP financial measures in the same way, this measure as used by other companies may not be consistent with the way the Company calculates such measure. First Quarter Financial Highlights • Revenue increased 8.2% to $528.8 million in the first quarter of 2023 compared with $488.6 million in the first quarter of 2022; • Global same-restaurant sales increased 8.0%, U.S. same-restaurant sales increased 7.2% and international same-restaurant sales increased 13.9% compared with the first quarter of 2022. On a two-year basis, global same-restaurant sales increased 10.4%; • Global Company-operated restaurant margin was 13.8% in the first quarter of 2023, an increase of 220 basis points compared with the first quarter of 2022; and • Net income increased 6.4% to $39.8 million in the first quarter of 2023 compared with $37.4 million in the first quarter of 2022. Global Same-Restaurant Sales Wendy’s long-term growth opportunities include driving strong same-restaurant sales momentum across all dayparts through our ownable core products, exciting menu innovation, compelling value offerings and improvements in speed and consistency in our restaurants. Global same-restaurant sales increased 8.0% in the first quarter of 2023 and increased 10.4% on a two-year basis. Digital Wendy’s long-term growth opportunities include accelerated implementation of consumer-facing digital platforms and technologies. The Company has invested significant resources to focus on consumer-facing technology, including activating mobile ordering via Wendy’s mobile app, launching the Wendy’s Rewards loyalty program in the U.S. and Canada and establishing delivery agreements with third-party vendors. The Company is also partnering with key technology providers to help execute our digital, restaurant technology and enterprise technology initiatives and support our technology innovation and growth. The Company’s digital business represented approximately 12.4% and 10.6% of global systemwide sales during the three months ended April 2, 2023 and April 3, 2022, respectively. New Restaurant Development Wendy’s long-term growth opportunities include expanding the Company’s footprint through global restaurant expansion. To promote new restaurant development, the Company has provided franchisees with certain incentive programs for qualifying new restaurants. In February 2023, the Company announced a new restaurant development incentive program in the U.S. and Canada that provides for waivers of royalty, national advertising and technical assistance fees for up to the first three years of operation for qualifying new restaurants. In addition, the Company has development agreements in place with a number of 26 franchisees that contractually obligate such franchisees to open additional Wendy’s restaurants over a specified timeframe. Global restaurant counts as of April 2, 2023 were flat compared with January 1, 2023. Organizational Redesign In February 2023, the Board of Directors approved a plan to redesign the Company’s organizational structure to better support the execution of the Company’s long-term growth strategy by maximizing organizational efficiency and streamlining decision making (the “Organizational Redesign Plan”). As a result of the Organizational Redesign Plan, the Company expects to hold its general and administrative expense in 2023 and 2024 relatively flat compared with 2022. The Company expects to incur total costs of approximately $11 million to $13 million related to the Organizational Redesign Plan, of which approximately $9 million to $11 million will be cash expenditures. The cash expenditures are expected to continue into 2025, with approximately two-thirds of the total cash expenditures occurring in 2023. Costs related to the Organizational Redesign Plan are recorded to “Reorganization and realignment costs.” During the three months ended April 2, 2023, the Company recognized costs totaling $6.7 million, which primarily included severance and related employee costs and share-based compensation. The Company expects to incur additional costs aggregating approximately $4 million to $6 million, comprised of (1) severance and related employee costs of approximately $2.5 million, (2) recruitment and relocation costs of approximately $0.9 million, (3) third-party and other costs of approximately $0.7 million and (4) share-based compensation of approximately $1.2 million. The Company expects costs related to the Organizational Redesign Plan to continue into 2026, with approximately three-fourths of the total costs to be recognized during 2023. 27 Results of Operations The tables included throughout this Results of Operations set forth in millions the Company’s condensed consolidated results of operations for the first quarter of 2023 and 2022. First Quarter 2023 2022 Change Revenues: Sales $ 227.9 $ 209.3 $ 18.6 Franchise royalty revenue and fees 141.7 128.9 12.8 Franchise rental income 57.8 57.9 (0.1) Advertising funds revenue 101.4 92.5 8.9 528.8 488.6 40.2 Costs and expenses: Cost of sales 196.5 185.1 11.4 Franchise support and other costs 13.3 11.8 1.5 Franchise rental expense 30.6 28.9 1.7 Advertising funds expense 101.7 97.8 3.9 General and administrative 62.3 62.3 — Depreciation and amortization (exclusive of amortization of cloud computing arrangements shown separately below) 33.5 33.2 0.3 Amortization of cloud computing arrangements 1.6 — 1.6 System optimization gains, net — (3.5) 3.5 Reorganization and realignment costs 6.8 0.5 6.3 Impairment of long-lived assets 0.4 0.6 (0.2) Other operating income, net (2.4) (3.0) 0.6 444.3 413.7 30.6 Operating profit 84.5 74.9 9.6 Interest expense, net (31.7) (26.4) (5.3) Loss on early extinguishment of debt (1.3) — (1.3) Investment (loss) income, net (3.6) 2.1 (5.7) Other income, net 7.4 0.2 7.2 Income before income taxes 55.3 50.8 4.5 Provision for income taxes (15.5) (13.4) (2.1) Net income $ 39.8 $ 37.4 $ 2.4 28 First Quarter 2023 % of Total Revenues 2022 % of Total Revenues Revenues: Sales $ 227.9 43.1 % $ 209.3 42.8 % Franchise royalty revenue and fees: Franchise royalty revenue 122.2 23.1 % 111.7 22.9 % Franchise fees 19.5 3.7 % 17.2 3.5 % Total franchise royalty revenue and fees 141.7 26.8 % 128.9 26.4 % Franchise rental income 57.8 10.9 % 57.9 11.9 % Advertising funds revenue 101.4 19.2 % 92.5 18.9 % Total revenues $ 528.8 100.0 % $ 488.6 100.0 % First Quarter 2023 % of Sales 2022 % of Sales Cost of sales: Food and paper $ 73.8 32.4 % $ 68.3 32.6 % Restaurant labor 73.6 32.3 % 70.5 33.7 % Occupancy, advertising and other operating costs 49.1 21.5 % 46.3 22.1 % Total cost of sales $ 196.5 86.2 % $ 185.1 88.4 % First Quarter 2023 % of Sales 2022 % of Sales Company-operated restaurant margin: U.S. $ 32.7 14.7 % $ 24.7 12.0 % Global 31.4 13.8 % 24.2 11.6 % 29 The table below presents certain of the Company’s key business measures, which are defined and further discussed in the “Executive Overview” section included herein. First Quarter 2023 2022 Key business measures: U.S. same-restaurant sales: Company-operated 7.4 % 2.9 % Franchised 7.2 % 1.0 % Systemwide 7.2 % 1.1 % International same-restaurant sales (a) 13.9 % 14.1 % Global same-restaurant sales: Company-operated 7.4 % 2.9 % Franchised (a) 8.0 % 2.4 % Systemwide (a) 8.0 % 2.4 % Systemwide sales (b): U.S. Company-operated $ 222.6 $ 206.5 U.S. franchised 2,722.2 2,505.8 U.S. systemwide 2,944.8 2,712.3 International Company-operated 5.3 2.8 International franchised (a) 413.2 356.7 International systemwide (a) 418.5 359.5 Global systemwide (a) $ 3,363.3 $ 3,071.8 _______________ (a) Excludes Argentina due to the impact of that country’s highly inflationary economy. (b) During the first quarter of 2023 and 2022, global systemwide sales increased 10.0% and 4.2%, respectively, U.S. systemwide sales increased 8.6% and 2.4%, respectively, and international systemwide sales increased 21.0% and 19.2%, respectively, on a constant currency basis. First Quarter U.S. Company-operated U.S. Franchised International Company-operated International Franchised Systemwide Restaurant count: Restaurant count at January 1, 2023 403 5,591 12 1,089 7,095 Opened 1 19 — 19 39 Closed (1) (24) (1) (13) (39) Restaurant count at April 2, 2023 403 5,586 11 1,095 7,095 Sales First Quarter 2023 2022 Change Sales $ 227.9 $ 209.3 $ 18.6 The increase in sales during the first quarter of 2023 was primarily due to (1) a 7.4% increase in Company-operated same-restaurant sales of $14.9 million and (2) net new restaurant development compared with the first quarter of 2022 of $4.2 million. Company-operated same-restaurant sales increased due to higher average check, partially offset by a decrease in customer count. 30 Franchise Royalty Revenue and Fees First Quarter 2023 2022 Change Franchise royalty revenue $ 122.2 $ 111.7 $ 10.5 Franchise fees 19.5 17.2 2.3 $ 141.7 $ 128.9 $ 12.8 Franchise royalty revenue during the first quarter of 2023 increased $10.5 million, of which (1) $8.8 million was due to an 8.0% increase in global franchise same-restaurant sales and (2) $2.0 million was due to net new restaurant development compared with the first quarter of 2022. Franchise same-restaurant sales during the first quarter of 2023 increased due to (1) higher average check and (2) an increase in customer count. The increase in franchise fees during the first quarter of 2023 was primarily due to (1) higher fees for providing information technology services to franchisees of $0.9 million and (2) higher other miscellaneous franchise fees of $0.9 million. Franchise Rental Income First Quarter 2023 2022 Change Franchise rental income $ 57.8 $ 57.9 $ (0.1) The decrease in franchise rental income during the first quarter of 2023 was primarily due to the impact of assigning fewer leases to franchisees during 2023 compared with 2022. Advertising Funds Revenue First Quarter 2023 2022 Change Advertising funds revenue $ 101.4 $ 92.5 $ 8.9 The increase in advertising funds revenue during the first quarter of 2023 was primarily due to an increase in franchise same-restaurant sales in the U.S. and Canada. Cost of Sales, as a Percent of Sales First Quarter 2023 2022 Change Food and paper 32.4 % 32.6 % (0.2) % Restaurant labor 32.3 % 33.7 % (1.4) % Occupancy, advertising and other operating costs 21.5 % 22.1 % (0.6) % 86.2 % 88.4 % (2.2) % The decrease in cost of sales, as a percent of sales, during the first quarter of 2023 was primarily due to higher average check. This impact was partially offset by (1) higher commodity costs, (2) an increase in restaurant labor rates, (3) a decrease in customer count and (4) the impact of the Company’s investments to support the entry into the U.K. market and additional inflationary pressures in the U.K. Franchise Support and Other Costs First Quarter 2023 2022 Change Franchise support and other costs $ 13.3 $ 11.8 $ 1.5 The increase in franchise support and other costs during the first quarter of 2023 was primarily due to an increase in costs incurred to provide information technology and other services to franchisees. 31 Franchise Rental Expense First Quarter 2023 2022 Change Franchise rental expense $ 30.6 $ 28.9 $ 1.7 The increase in franchise rental expense during the first quarter of 2023 was primarily due to the impact of assigning fewer leases to franchisees during 2023 compared with 2022. Advertising Funds Expense First Quarter 2023 2022 Change Advertising funds expense $ 101.7 $ 97.8 $ 3.9 On an interim basis, advertising funds expense is recognized in proportion to advertising funds revenue. The Company expects advertising funds expense to be lower than advertising funds revenue by approximately $3.0 million for 2023, which includes the amount by which advertising funds expense exceeded advertising funds revenue in prior years (excluding the Company’s funding of incremental advertising) of approximately $5.0 million, partially offset by the Company’s planned incremental funding of advertising in Canada of approximately $2.0 million. During the first quarter of 2023, advertising funds expense increased due to an increase in franchise same-restaurant sales in the U.S. and Canada, partially offset by a decrease in the Company’s funding of incremental advertising. General and Administrative First Quarter 2023 2022 (a) Change Share-based compensation $ 3.8 $ 6.3 $ (2.5) Professional fees 15.0 13.5 1.5 Incentive compensation 7.5 6.2 1.3 Other, net 36.0 36.3 (0.3) $ 62.3 $ 62.3 $ — _______________ (a) Certain reclassifications have been made to the prior year presentation to conform to the current year presentation. General and administrative expenses during the first quarter of 2023 were flat compared with the first quarter of 2022, primarily due to a decrease in share-based compensation, offset by (1) higher professional fees, reflecting higher information technology-related costs, and (2) an increase in incentive compensation accruals. Depreciation and Amortization (exclusive of amortization of cloud computing arrangements shown separately below) First Quarter 2023 2022 Change Restaurants $ 20.9 $ 21.8 $ (0.9) Technology support, corporate and other 12.6 11.4 1.2 $ 33.5 $ 33.2 $ 0.3 The increase in depreciation and amortization during the first quarter of 2023 was primarily due to depreciation and amortization for technology investments and new restaurant assets, partially offset by assets becoming fully depreciated. Amortization of Cloud Computing Arrangements First Quarter 2023 2022 Change Amortization of cloud computing arrangements $ 1.6 $ — $ 1.6 Amortization of cloud computing arrangements primarily represents amortization of assets associated with the Company’s enterprise resource planning (“ERP”) system implementation completed in the third quarter of 2022. 32 System Optimization Gains, Net First Quarter 2023 2022 Change System optimization gains, net $ — $ (3.5) $ 3.5 System optimization gains, net for the first quarter of 2022 were primarily comprised of post-closing adjustments on previous sales of restaurants. See Note 3 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. Reorganization and Realignment Costs First Quarter 2023 2022 Change Organizational redesign $ 6.7 $ — $ 6.7 Other reorganization and realignment plans 0.1 0.5 (0.4) $ 6.8 $ 0.5 $ 6.3 During the three months ended April 2, 2023, the Company recognized costs totaling $6.7 million under the Organizational Redesign Plan, which primarily included severance and related employee costs of $5.5 million and share-based compensation of $0.8 million. See Note 4 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information. Costs incurred under the Company’s other reorganization and realignment plans were not material during the first quarter of 2023 and 2022. The Company does not expect to incur any material additional costs under these plans. Impairment of Long-Lived Assets First Quarter 2023 2022 Change Impairment of long-lived assets $ 0.4 $ 0.6 $ (0.2) The decrease in impairment charges during the first quarter of 2023 was primarily driven by lease modifications associated with restaurants leased or subleased to franchisees in the prior year. Other Operating Income, Net First Quarter 2023 2022 Change Lease buyout $ (0.2) $ (0.8) $ 0.6 Gains on sales-type leases (0.1) (0.5) 0.4 Equity in earnings in joint ventures, net (2.1) (1.7) (0.4) $ (2.4) $ (3.0) $ 0.6 The decrease in other operating income, net during the first quarter of 2023 was primarily due to (1) lower lease buyout activity and (2) lower gains on sales-type leases. These decreases were partially offset by an increase in the equity in earnings from our TimWen joint venture. Interest Expense, Net First Quarter 2023 2022 Change Interest expense, net $ 31.7 $ 26.4 $ 5.3 The increase in interest expense, net during the first quarter of 2023 was primarily due to the impact of completing a debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022. 33 Loss on Early Extinguishment of Debt First Quarter 2023 2022 Change Loss on early extinguishment of debt $ 1.3 $ — $ 1.3 During the first quarter of 2023, the Company incurred a loss on early extinguishment of debt of $1.3 million due to the repurchase of $31.6 million in principal of the Company’s 7% debentures. Investment (Loss) Income, Net First Quarter 2023 2022 Change Investment (loss) income, net $ (3.6) $ 2.1 $ (5.7) During the first quarter of 2023, the Company recorded a loss of $3.6 million due to an impairment charge for the difference between the estimated fair value and the carrying value of an investment in equity securities. During the first quarter of 2022, the Company recognized a gain of $2.1 million on an investment in equity securities as a result of an observable price change. Other Income, Net First Quarter 2023 2022 Change Other income, net $ 7.4 $ 0.2 $ 7.2 The increase in other income, net during the first quarter of 2023 was primarily due to interest income earned on our cash equivalents, which increased as a result of cash received from our debt financing transaction under the Company’s securitized financing facility in the first quarter of 2022. Provision for Income Taxes First Quarter 2023 2022 Change Income before income taxes $ 55.3 $ 50.8 $ 4.5 Provision for income taxes (15.5) (13.4) (2.1) Effective tax rate on income 28.0 % 26.4 % 1.6 % Our effective tax rates for the first quarter of 2023 and 2022 were impacted by variations in income before income taxes, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. The increase in the effective tax rate for the first quarter of 2023 compared with the first quarter of 2022 was primarily due to a one-time adjustment to our foreign deferred income taxes related to prior periods. This unfavorable adjustment was partially offset by state income taxes, including discrete changes to state deferred income taxes. Segment Information See Note 17 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information regarding the Company’s segments. Wendy’s U.S. First Quarter 2023 2022 Change Sales $ 222.6 $ 206.5 $ 16.1 Franchise royalty revenue 106.4 97.9 8.5 Franchise fees 17.3 15.4 1.9 Advertising fund revenue 94.7 87.5 7.2 Total revenues $ 441.0 $ 407.3 $ 33.7 Segment profit $ 125.2 $ 104.8 $ 20.4 34 The increase in Wendy’s U.S. revenues during the first quarter of 2023 was primarily due to an increase in same-restaurant sales. Same-restaurant sales increased during the first quarter of 2023 primarily due to (1) higher average check and (2) an increase in customer count. The increase in Wendy’s U.S. segment profit during the first quarter of 2023 was primarily due to (1) higher revenues, (2) lower cost of sales, as a percent of sales for Company-operated restaurants driven by the same factors as described above for “Cost of Sales, as a Percent of Sales” (excluding the impact of the U.K. market) and (3) a decrease in the recognition of the Company’s funding of incremental advertising. Wendy’s International First Quarter 2023 2022 Change Sales $ 5.3 $ 2.8 $ 2.5 Franchise royalty revenue 15.8 13.8 2.0 Franchise fees 1.5 1.3 0.2 Advertising fund revenue 6.7 5.0 1.7 Total revenues $ 29.3 $ 22.9 $ 6.4 Segment profit $ 7.4 $ 5.5 $ 1.9 The increase in Wendy’s International revenues during the first quarter of 2023 was primarily due to (1) net new restaurant development in the U.K. and (2) an increase in same-restaurant sales. Same-restaurant sales increased during the first quarter of 2023 due to (1) an increase in customer count and (2) higher average check. The increase in Wendy’s International segment profit during the first quarter of 2023 was primarily due to higher revenues, partially offset by the Company’s investments to support the entry into the U.K. market and inflationary pressures in the U.K. Global Real Estate & Development First Quarter 2023 2022 Change Franchise fees $ 0.7 $ 0.5 $ 0.2 Franchise rental income 57.8 57.9 (0.1) Total revenues $ 58.5 $ 58.4 $ 0.1 Segment profit $ 25.1 $ 27.6 $ (2.5) The increase in Global Real Estate & Development revenues during the first quarter of 2023 was primarily due to higher franchise development-related fees. The decrease in Global Real Estate & Development segment profit during the first quarter of 2023 was primarily due to an increase in franchise rental expense. See “Franchise Rental Expense” above for further information. 35 Liquidity and Capital Resources Cash Flows Our primary sources of liquidity and capital resources are cash flows from operations and borrowings under our securitized financing facility. Our principal uses of cash are operating expenses, capital expenditures, repurchases of common stock, dividends to stockholders and repurchases of debt. Our anticipated cash requirements for the remainder of 2023, exclusive of operating cash flow requirements, consist principally of: • capital expenditures of approximately $63.0 million to $73.0 million, resulting in total anticipated cash capital expenditures for the year of approximately $75.0 million to $85.0 million; • cash dividends aggregating approximately $158.1 million as discussed below in “Dividends;” • stock repurchases under the Company’s January 2023 Authorization as discussed below in “Stock Repurchases;” and • debt repurchases of up to $43.4 million as discussed below in “Long-Term Debt, Including Current Portion.” Based on current levels of operations, the Company expects that available cash and cash flows from operations will provide sufficient liquidity to meet operating cash requirements for the next 12 months. We currently believe we have the ability to pursue additional sources of liquidity if needed or desired to fund operating cash requirements or for other purposes. However, there can be no assurance that additional liquidity will be readily available or available on terms acceptable to us. The table below summarizes our cash flows from operating, investing and financing activities for the first three months of 2023 and 2022: First Quarter 2023 2022 Change Net cash provided by (used in): Operating activities $ 53.0 $ 21.0 $ 32.0 Investing activities (12.1) (13.0) 0.9 Financing activities (132.3) 452.8 (585.1) Effect of exchange rate changes on cash 0.2 0.2 — Net (decrease) increase in cash, cash equivalents and restricted cash $ (91.2) $ 461.0 $ (552.2) Operating Activities Cash provided by operating activities consists primarily of net income, adjusted for non-cash expenses such as depreciation and amortization, deferred income tax and share-based compensation, and the net change in operating assets and liabilities. Cash provided by operating activities was $53.0 million and $21.0 million in the first quarter of 2023 and 2022, respectively. The change was primarily due to (1) a decrease in payments for incentive compensation, (2) higher net income, adjusted for non-cash expenses, and (3) the timing of payments for marketing expenses of the national advertising funds. These changes were partially offset by the timing of receipt of franchisee rental payments in the first quarter of 2022. Investing Activities Cash used in investing activities was $12.1 million and $13.0 million in the first quarter of 2023 and 2022, respectively. The change was primarily due to a decrease in expenditures associated with the Company’s franchise development fund of $0.7 million. 36 Financing Activities Cash (used in) provided by financing activities was $(132.3) million and $452.8 million in the first quarter of 2023 and 2022, respectively. The change was primarily due to (1) a net increase in cash used in long-term debt activities of $522.9 million, reflecting the respective impacts of the completion of the Company’s debt financing transaction during the first quarter of 2022 and repurchases of the Company’s 7% debentures during the first quarter of 2023, (2) an increase in the repurchases of common stock of $36.7 million and (3) an increase in dividends of $26.2 million. Long-Term Debt, Including Current Portion During the three months ended April 2, 2023, Wendy’s repurchased $31.6 million in principal of its 7% debentures at par value. We may from time to time seek to repurchase additional portions of our outstanding long-term debt, including our 7% debentures and/or our senior secured notes, through open market purchases, privately negotiated transactions or otherwise. In February 2023, our Board of Directors authorized additional debt repurchases through February 2024, resulting in total debt repurchases of up to $75.0 million in 2023. As of April 2, 2023, the Company had $43.4 million of additional debt repurchases remaining under the authorization. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Whether or not to repurchase any debt and the size and timing of any such repurchases will be determined at our discretion. Except as described above, there were no material changes to the Company’s debt obligations since January 1, 2023. The Company was in compliance with its debt covenants as of April 2, 2023. See Note 6 to the Condensed Consolidated Financial Statements contained in Item 1 herein for further information related to our long-term debt obligations. Dividends On March 15, 2023, the Company paid quarterly cash dividends per share of $.25, aggregating $53.1 million. On May 10, 2023, the Company announced a dividend of $.25 per share to be paid on June 15, 2023 to stockholders of record as of June 1, 2023. If the Company pays regular quarterly cash dividends for the remainder of 2023 at the same rate as declared in the second quarter of 2023, the Company’s total cash requirement for dividends for the remainder of 2023 will be approximately $158.1 million based on the number of shares of its common stock outstanding at May 3, 2023. The Company currently intends to continue to declare and pay quarterly cash dividends; however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any. Stock Repurchases In January 2023, our Board of Directors authorized a repurchase program for up to $500.0 million of our common stock through February 28, 2027, when and if market conditions warrant and to the extent legally permissible (the “January 2023 Authorization”). In connection with the January 2023 Authorization, the remaining portion of the previous February 2022 authorization for $250.0 million was canceled. During the three months ended April 2, 2023, the Company repurchased 1.8 million shares under the January 2023 Authorization with an aggregate purchase price of $38.8 million, of which $2.1 million was accrued as of April 2, 2023, and excluding commissions. As of April 2, 2023, the Company had $461.2 million of availability remaining under the January 2023 Authorization. Subsequent to April 2, 2023 through May 3, 2023, the Company repurchased 1.1 million shares under the January 2023 Authorization with an aggregate purchase price of $23.6 million, excluding commissions. Cloud Computing Arrangements In addition to the anticipated cash requirements for capital expenditures noted above in “Cash Flows,” the Company expects to spend approximately $25.0 million during 2023 on cloud computing arrangements (“CCA”), primarily related to the Company’s human capital management system implementation. The Company’s cash expenditures related to CCA amounted to $6.6 million during the three months ended April 2, 2023. General Inflation, Commodities and Changing Prices Inflationary pressures on labor and commodity price increases directly impacted our consolidated results of operations during the three months ended April 2, 2023, and we expect this to continue throughout the remainder of 2023. We attempt to 37 manage any inflationary costs and commodity price increases through selective menu price increases and product mix. Delays in implementing such menu price increases and competitive pressures may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets, such as those for beef, chicken, pork, cheese and grains, could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through product mix and selective menu price increases. Seasonality Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for a particular quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. Item 3. Quantitative and Qualitative Disclosures about Market Risk. As of April 2, 2023, there were no material changes from the information contained in the Company’s Form 10-K for the fiscal year ended January 1, 2023.