Wendy’s: Company Reports Preliminary 2013 Results

Dublin / OH. (twc) The Wendy´s Company reported preliminary unaudited results for the fourth quarter and full year ended Dec. 29, 2013. «Wendy´s or made tremendous strategic and financial progress in 2013», President and Chief Executive Officer Emil Brolick said. «We gained significant traction with consumers through ‘A Cut Above´ brand positioning, accelerated Wendy´s brand transformation with Image Activation and refined our Company-operated restaurant portfolio through System Optimization. These efforts contributed to improving metrics and solid financial performance, highlighted by 2013 North America Company-operated same-restaurant sales growth of 1,9 percent, record average annual sales of 1,51 million USD at North America Company-operated restaurants and overall Adjusted Ebitda and Adjusted Earnings Per Share performance well ahead of original expectations».

«As we look to 2014, we expect to deliver 6 to 9 percent Adjusted Ebitda growth, despite the sale of approximately 415 Company-operated restaurants through our System Optimization initiative. We are excited about our product pipeline and marketing plans and we are optimistic about our ability to execute a more aggressive Image Activation schedule. We expect to more than double the number of system Image Activation restaurants from a total of 300 at the end of 2013, to approximately 700 to 750 or approximately 12 percent of the North America system by the end of 2014», Brolick said. «Our Brand Transformation and Image Activation strategies continue to enhance our brand in the eyes of consumers by contemporizing the Wendy´s restaurant experience. We expect our strengthening customer connection to support and energize our longterm performance».

Board Authorizes a 275 Million USD Share Repurchase Program

The Company´s Board of Directors authorized a new share repurchase program for up to 275 million USD of the Company´s common stock in 2014 or approximately 8 percent of the Company´s market capitalization as of Jan. 10, 2014. The Company intends to repurchase shares with cash on its balance sheet, which at Dec. 29, 2013, was approximately 580 million USD. This includes a 40 million USD cash distribution received in the fourth quarter of 2013 from Arby´s Restaurant Group, Inc., as a result of the Company´s 18,5 percent ownership interest in Arby´s.

As part of the 2014 share repurchase program, the Company expects to commence a «Dutch Auction» tender offer on Jan. 14, 2014, to repurchase up to 275 million USD of its common stock at a price range between 8,50 USD and 9,25 USD per share. The terms and conditions of the anticipated tender offer will be described in an Offer to Purchase and the related Letter of Transmittal that will be distributed to shareholders upon commencement of the tender offer».

«Our recent dividend increases and share repurchases, together with our new share repurchase program, are important elements of our financial management strategy», Chief Financial Officer Todd Penegor said. «We are confident that our strong balance sheet, financial flexibility and excellent cash flow will enable us to comfortably fund our strong organic growth initiatives, while returning significant capital to shareholders».

Preliminary Fourth-Quarter 2013 Summary

  • North America Company-operated restaurants generated a same-restaurant sales increase of 3,1 percent, compared to a decrease of 0,2 percent last year. Franchise same-restaurant sales in North America increased 2,8 percent, compared to a decrease of 0,6 percent last year. The strong fourth-quarter same-restaurant sales resulted primarily from the highly successful Pretzel Pub Chicken sandwich and Bacon Portabella Melt on Brioche promotions.
  • Consolidated revenues were 592,4 million USD compared to 629,9 million USD last year. The decrease resulted primarily from a reduction in the number of Company-operated restaurants due to the Company´s System Optimization initiative, partially offset by the same-restaurant sales growth, as well as increases in franchise royalties, technical assistance fees and rental income.
  • North America Company-operated restaurant margin was 16,3 percent, an increase of 40 bps compared to 15,9 percent last year. The margin increase was due to same-restaurant sales growth, lower paper and beverage costs, lower labor and a reduction in breakfast advertising, partially offset by higher commodity costs and higher repair and maintenance expense.
  • Adjusted Ebitda was 89,0 million USD, a decrease, as expected, of 7,2 percent compared to 95,9 million USD last year. Significant items impacting 2013 Adjusted Ebitda include higher incentive compensation, professional services and franchise incentives, partially offset by higher franchise revenues as a result of the Company´s System Optimization initiative.
  • Operating profit was 24,1 million USD compared to 32,3 million USD last year. Significant items impacting 2013 operating profit include the items mentioned above, in addition to a 16,0 million USD net gain from facilities actions (primarily from our System Optimization initiative), a 15,9 million USD impairment of long-lived assets, a 10,7 million USD increase in depreciation and amortization and a 9,4 million USD International goodwill impairment charge. Significant items affecting 2012 operating profit include a 21 million USD impairment of long-lived assets and 13,5 million USD in facilities action charges related primarily to facilities relocation, as well as the discontinuation of breakfast at certain restaurants.
  • Net income was 25,2 million USD to 28,7 million USD, compared to net income of 26,4 million USD last year. The Company has not yet completed its tax closing procedures for 2013. As a result, the Company is reporting 2013 net income, Adjusted Earnings Per Share and earnings per share as ranges.
  • Adjusted Earnings Per Share were 0,10 USD to 0,11 USD, compared to 0,09 USD last year.
  • Earnings per share were 0,06 USD to 0,07 USD, compared to 0,07 USD last year.

Preliminary Full-Year 2013 Summary

  • North America Company-operated restaurants generated a same-restaurant sales increase of 1,9 percent, compared to an increase of 1,6 percent in 2012. Franchise same-restaurant sales in North America increased 1,7 percent, compared to an increase of 1,6 percent in 2012. Same-restaurant sales accelerated in the second half of the year compared to the first half. Driving the positive same-restaurant sales growth was the strong consumer reaction to the Company´s successful 2013 promotions, most notably, the Pretzel Bacon Cheeseburger, Pretzel Pub Chicken sandwich and Bacon Portabella Melt on Brioche.
  • Consolidated revenues were 2,487 billion USD, compared to 2,505 billion USD in 2012. The decrease resulted primarily from a reduction in the number of Company-operated restaurants due to the Company´s System Optimization initiative, partially offset by the same-restaurant sales growth, as well as increased franchise royalties, technical assistance fees and rental income.
  • North America Company-operated restaurant margin was 15,4 percent, an increase of 140 basis points compared to 14,0 percent in 2012. The increase was primarily the result of improved same-restaurant sales, lower paper and beverage costs, lower labor and a reduction in breakfast advertising expense, partially offset by an increase in commodity costs.
  • Adjusted Ebitda was 367,1 million USD, an increase of 10,1 percent, compared to 333,3 million USD in 2012.
  • Operating profit was 130,3 million USD compared to 122,7 million USD last year. Significant items affecting this year´s reported operating profit include the items mentioned above, in addition to 38,2 million USD in depreciation for existing assets replaced as part of the Image Activation initiative, 15,7 million USD in facilities action charges (primarily from our System Optimization initiative) and a 9,4 million USD International goodwill charge. Among the significant items affecting 2012 reported operating profit were facilities action charges of 41,0 million USD, which includes the discontinuance of breakfast at certain restaurants, among other items.
  • Net income was 37,6 million USD to 41,1 million USD, compared to 7,1 million USD last year. The Company has not yet completed its tax closing procedures for 2013. As a result, the Company is reporting 2013 net income, Adjusted Earnings Per Share and earnings per share as ranges.
  • Adjusted Earnings Per Share were 0,29 USD to 0,30 USD in 2013, compared to 0,17 USD in 2012.
  • Earnings per share were 0,09 USD to 0,10 USD in 2013 compared to 0,02 USD in 2012.

System Optimization Initiative on Schedule

The Company has announced that it plans to further optimize its restaurant ownership by selling certain Company-operated restaurants to franchisees. The Company is targeting the second quarter of 2014 for the completion of the sale of about 415 restaurants and anticipates total proceeds of approximately 235 million USD, including 138 million USD in 2013. As part of its System Optimization initiative, the Company has sold or has signed purchase agreements or letters of intent to sell, a total of 384 restaurants as of the end of 2013.

«We are pleased with the strong interest in our System Optimization strategy from new and existing franchisees, which is an affirmation of Wendy´s growth opportunities and brand transformation», Brolick said. «Furthermore, we view this as an excellent opportunity to recognize franchisees that have demonstrated leadership in operational excellence, maintained strong balance sheets and have an expressed commitment to growth through our Image Activation strategy».

«We expect System Optimization to generate a higher operating margin and stronger free cash flow, while enhancing earnings quality through a more predictable revenue mix», Brolick said. «We expect System Optimization to be Ebitda neutral on an annualized basis due to lower G+A expense, as well as increased royalties and real estate rental income».

Image Activation Continues to Drive Compelling Sales Growth

«Our Image Activation program, which started in 2011, has accelerated over the past two years, producing increased traffic and higher sales», Brolick said. «We have developed a standard, ultra-modern design, with customizable upgrades that provide investment flexibility to meet the needs of our diverse system and provide significant sales and earnings potential. We are confident these design solutions will accommodate 85 to 90 percent of our system».

The Company is offering a 2014 incentive program to qualified franchisees commencing Image Activation reimages during the year. The estimated 2014 impact of this program is approximately 8 million USD and includes cash incentives, royalty reductions and other costs for franchisee planning services and construction support. This compares to 2013 Image Activation cash incentive expense of 9,2 million USD.

The strong consumer response and solid financials of the Image Activation initiative support the Company´s plans to nearly double the pace in 2014, with the reimaging of 200 Company-operated restaurants, including 35 scrape and rebuilds, as well as the reimaging of 150 to 200 franchise-operated restaurants. This is in addition to the more than 200 Image Activation reimages completed or under construction in 2013.

In addition, the Company also expects to build 15 new Company-operated Image Activation restaurants and expects 45 new franchise-operated Image Activation restaurants to be built in 2014. This is in addition to 26 Company-operated and 11 franchise-operated new builds in 2013.

The Company expects 85 percent of its Company-operated restaurants and 35 percent of the Wendy´s North America system to be reimaged in its Image Activation format by the end of 2017.

Company Issues 2014 Outlook and Reaffirms Long-Term Outlook

For 2014, the Company expects Adjusted Ebitda of approximately 390 million USD to 400 million USD, an increase of 6 percent to 9 percent. The Company also expects Adjusted Earnings Per Share of approximately 0,34 USD to 0,36 USD.

Estimated 2014 Adjusted Earnings Per Share excludes approximately 40 million USD of anticipated pretax depreciation for existing assets that the Company expects to replace as part of the Image Activation initiative. The Company expects its total 2014 depreciation and amortization expense to decrease approximately 10 percent compared to 2013, including the impact of accelerated depreciation in both years, primarily as a result of the Company´s System Optimization initiative. Also included in the Company´s 2014 outlook:

  • Average same-restaurant sales growth of approximately 2,5 to 3,5 percent at Company-operated restaurants.
  • Company-operated restaurant margin improvement of approximately 140 to 160 basis points. This estimate includes the benefit of same-restaurant sales increases and cost-savings initiatives. It also assumes flat commodity costs, with higher beef costs offset by lower chicken costs.
  • A reduction in interest expense of approximately 15 million USD, resulting from the Company´s 2013 debt restructuring.
  • Capital expenditures of approximately 280 to 290 million USD, including approximately 215 million USD for Company-operated Image Activation restaurants.

The Company reaffirms its previous long-term outlook of high-single-digit to low-double-digit Adjusted Ebitda growth, as well as mid-teens Adjusted Earnings Per Share growth. This guidance includes the following assumptions:

  • Annual same-restaurant sales growth of at least 3 percent beginning in 2015.
  • Adjusted Ebitda growth at the lower end of this range in 2014 through 2016, when the Company-operated Image Activation program peaks, requiring a temporary increase in growth-oriented capital. Due to the greater number of reimaged restaurants in 2014 and 2015, the Company anticipates an increase in lost operating weeks.
  • Adjusted Ebitda growth at the higher end of this range beginning in 2017, when the number of Company-operated Image Activation restaurants exceeds the number under construction.

«The past three years represented the first phase of our Image Activation strategy and centered on proving our concept, while the second phase accelerates Company-operated restaurant reimaging, which we expect to drive sustained top-line growth and expanded restaurant margin through 2017», Brolick said. «The third and largest, phase is the growing franchisee Image Activation, which we expect will provide an even stronger foundation for long-term shareholder returns».

Domestic and International Restaurant Portfolio

As of Dec. 29, 2013, the Company´s total number of worldwide restaurants was 6’558, including 6’158 in North America and 400 outside of North America.

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