Wendy’s Company: Reports Q3/2015 Results

Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the third quarter ended September 27, 2015. «Our strong third-quarter results demonstrate the positive impact of our transition to a predominantly franchised model, with royalties and rental income contributing a higher amount of earnings», President and Chief Executive Officer Emil Brolick said.

«Our year-over-year restaurant operating margin increased 330-basis points from 15.5 to 18.8 percent, which is indicative of the improvements we have made in our restaurant-level economic model», Brolick said. «We have been able to increase the year-over-year earnings contribution from Company-operated restaurants by 11 percent, even with the ownership of 153 fewer restaurants relative to last year. Our average unit volumes also increased more than our same-restaurant sales growth would indicate, due to the number of reimaged restaurants that were out of our comparable sales base during the quarter».

«Confidence in our improving free-cash flow profile has allowed us to return more than 1.1 billion USD to shareholders during 2015 in the form of dividends and repurchases», Brolick said. «In addition, our Board has recently authorized a 9-percent increase in our quarterly dividend rate, from 5.5 cents per share to 6 cents per share».

«Based on our strong year-to-date operating results, including the momentum of sequentially strengthening two-year same-restaurant sales trends during the third quarter, along with the solid early results from our «4 to 4 USD» promotion, we now expect our 2015 same-restaurant sales, Adjusted Ebitda and Adjusted EPS at the high end of our previously issued ranges», Brolick said.

Third-quarter 2015 summary

Due to the recent sale of its bakery business, the Company has presented its bakery results as discontinued operations for all periods presented in its consolidated financial statements.

  • Same-restaurant sales increased 3.1 percent at North America system restaurants in the third quarter of 2015. Same-restaurant sales increased 3.3 percent at North America franchise-operated restaurants. Same-restaurant sales increased 1.7 percent at North America Company-operated restaurants.
  • On a two-year basis, third-quarter 2015 same-restaurant sales increased 3.8 percent for the North America system, 3.8 percent at North America franchise-operated restaurants and 3.7 percent at North America Company-operated restaurants.
  • Revenues were 464.6 million USD in the third quarter of 2015, compared to 496.7 million USD in the third quarter of 2014. The 6.5 percent decrease resulted primarily from the ownership of 153 fewer Company-operated restaurants at the end of the 2015 third quarter compared to the beginning of the 2014 third quarter. Franchise revenues were 105.6 million USD in the third quarter of 2015 compared to 103.2 million USD in the third quarter of 2014. The 2.3 percent increase resulted from higher royalty revenue, franchise fees and rent income primarily as a result of the Company’s system optimization initiative.
  • North America Company-operated restaurant margin was 18.8 percent in the third quarter of 2015, compared to 15.5 percent in the third quarter of 2014. The 330 basis-point increase was the result of higher same-restaurant sales, the positive impact from the Company’s Image Activation reimaging program and lower commodity costs.
  • General and administrative expense was 63.7 million USD in the third quarter of 2015, compared to 65.2 million USD in the third quarter of 2014. The 2.3 percent decrease resulted primarily from lower share-based compensation expense partly offset by higher incentive compensation. The decrease also reflects the positive impact of the Company’s system optimization initiative and resource realignment plan announced in 2014.
  • Adjusted Ebitda from continuing operations was 99.7 million USD in the third quarter of 2015, an 11.4 percent increase compared to 89.5 million USD in the third quarter of 2014, despite the ownership of 153 fewer Company-operated restaurants at the end of the 2015 third quarter compared to the beginning of the 2014 third quarter.
  • Adjusted Ebitda margin was 21.5 percent in the third quarter of 2015 compared to 18.0 percent in the third quarter of 2014. The 350-basis-point improvement reflects the positive impact of the second phase of the Company’s system optimization initiative.
  • Operating profit was 55.9 million USD in the third quarter of 2015, compared to 44.2 million USD in the third quarter of 2014. The 26.5 percent increase resulted primarily from a year-over-year reduction in impairment charges and the significant increase in restaurant operating margin.
  • Operating profit margin was 12.0 percent in the third quarter of 2015 compared to 8.9 percent in the third quarter of 2014, an improvement of 310 basis-points.
  • Interest expense was 27.9 million USD in the third quarter of 2015, compared to 13.1 million USD in the third quarter of 2014. The increase resulted primarily from higher total debt levels related to the Company’s recent debt refinancing.
  • Income from continuing operations was 8.3 million USD in the third quarter of 2015 compared to 21.1 million USD in the third quarter of 2014. The reduction is primarily the result of higher interest expense, along with a higher effective tax rate of 70.5 percent in the third quarter of 2015, compared to 32.8 percent in the third quarter of 2014. The higher tax rate is primarily the result of the effect of changes to valuation allowances on state net operating loss carryforwards related to the Company’s system optimization initiative.
  • Net income was 7.6 million USD in the third quarter of 2015, compared to 22.8 million USD in the third quarter of 2014. These results include the impact of discontinued operations.
  • Reported diluted earnings per share from continuing operations were 0.03 USD in the third quarter of 2015 compared to 0.06 USD the third quarter of 2014.
  • Reported diluted earnings per share were 0.03 USD in the third quarter of 2015, compared to 0.06 USD in the third quarter of 2014.
  • Adjusted Earnings per Share from continuing operations were 0.09 USD in the third quarter of 2015, compared to 0.07 USD in the third quarter of 2014.

System optimization yielding positive results

As previously announced, the Company plans to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system. As part of this plan, the Company now intends to sell approximately 225 restaurants during 2015 and approximately 315 restaurants during 2016, for a total of approximately 540 restaurants.

The planned sale of these 540 restaurants follows the sale of approximately 600 restaurants in 2013, 2014 and 2015 as part of the Company’s system optimization initiative.

«We believe our system optimization initiative will drive future growth by providing opportunities for expanded restaurant ownership to strong operators who have demonstrated a commitment to Image Activation and opening new restaurants», Chief Financial Officer Todd Penegor said. «Interest in the domestic restaurants that we intend to sell is high from existing and prospective franchisees, and we are confident that we will strengthen the Wendy’s brand as a result of these transactions by improving the efficiency and effectiveness of our total system».

«Going forward, we intend to buy and sell restaurants to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption», Penegor said. «We are also helping to facilitate franchisee-to-franchisee restaurant transfers to get restaurants into the hands of strong operators who have demonstrated a commitment to growth».

The Company continues to expect pretax cash proceeds of approximately 400 to 475 million USD from the sale of these 540 restaurants.

Leadership succession plan under way

The Company in October announced that current President and CEO Emil Brolick plans to retire from management duties with the Company in May 2016. The Company expects that current Executive Vice President and Chief Financial Officer Todd Penegor will succeed Brolick in the President and CEO role after a transition period beginning in the first quarter of 2016. The Company expects that Brolick will continue to serve on the Company’s Board of Directors upon his retirement to ensure continuity of leadership and strategic focus for the Company. The Company is currently conducting an external search for a new CFO.

Company completes ASR transaction; Board authorizes increase in dividend rate

During the third quarter, the Company completed an accelerated share repurchase (ASR) transaction for approximately 165 million USD. The Company has approximately 400 million USD remaining under its existing share repurchase authorization and plans to use the remaining authorization before the end of 2016, as funds become available from the sale of Company-operated restaurants. Since the beginning of 2014, the Company has repurchased approximately 130 million shares of its common stock for approximately 1.4 billion USD.

The Company on October 28, 2015 announced that its Board of Directors has authorized an increase of 0.5 cents per share in its quarterly dividend rate. The Company’s new quarterly dividend rate of 6 cents per share will be effective with its next dividend payment on December 15, 2015 to shareholders of record as of December 01, 2015.

Momentum of Image Activation reimaging program continues

The Company and its franchisees are on track to reimage approximately 450 total system restaurants and build 80 new restaurants in 2015, which would result in the reimaging of approximately 22 percent of the Wendy’s North America system restaurants by the end of 2015. The Wendy’s system remains on schedule to reimage at least 60 percent of its North America restaurants by the end of 2020.

Company now expects 2015 SRS,
Adjusted Ebitda + Adjusted EPS at high end of range

The Company now expects 2015 Adjusted Ebitda from continuing operations at the high end of its previously issued range of 385 to 390 million USD. This represents an increase of approximately 9 percent compared to the Company’s 2014 Adjusted Ebitda results, which exclude the Ebitda contribution attributable to the Company’s bakery operations.

The Company now expects 2015 Adjusted Earnings per Share from continuing operations at the high end of its previously issued range of 0.31 USD to 0.33 USD.

The Company now expects 2015 same-restaurant sales increases at Company-operated restaurants at the high end of its previously issued range of approximately 2.0 to 2.5 percent.

The Company expects its 2015 restaurant operating margin to be 17.0 to 17.5 percent, an improvement of approximately 120 to 170 basis points compared to 15.8 percent in 2014.

The Company expects its commodity costs to be approximately flat compared to 2014.

The Company now expects its 2015 interest expense to be approximately 85 to 90 million USD, compared to 52 million USD in 2014. The increase is due to the Company’s recent debt refinancing.

The Company now expects a 2015 reported tax rate of approximately 41 to 43 percent, primarily due to the expected impact of its system optimization initiative. The Company expects a 2015 adjusted tax rate of approximately 36 to 38 percent.

The Company now expects total 2015 depreciation and amortization expense, including the impact of accelerated depreciation, of approximately 145 to 150 million USD.

The Company now expects capital expenditures of approximately 235 to 245 million USD in 2015.

In addition, the Company continues to expect general and administrative expense of approximately 250 million USD and Adjusted Ebitda margins of 20 to 22 percent in 2015.

The Company’s 2015 outlook includes the following assumptions: A year-over-year reduction of about 325 Company-operated restaurants at year end 2015. The benefit of a 53rd operating week. The Company expects that the impact of the Affordable Care Act will partly offset this benefit.

Company reaffirms long-term outlook

The Company reaffirmed its long-term outlook issued on June 03, 2015. The Company expects high single-digit Adjusted Earnings per Share growth in 2016 and Adjusted Earnings per Share growth in the high teens in 2017. The Company expects Adjusted Earnings per Share growth of greater than 20 percent beginning in 2018. The Company expects flattish Adjusted Ebitda in 2016, followed by low-single digit Adjusted Ebitda growth in 2017 and high single-digit Adjusted Ebitda growth in 2018. The Company continues to expect significantly lower annual capital expenditure requirements, beginning in 2016, primarily as a result of the Company’s system optimization initiative. The Company expects capital expenditures of approximately 130 to 140 million USD in 2016, followed by approximately 75 to 85 million USD in 2017 and approximately 70 million USD in 2018, with free cash flow (cash flow from operations minus capital expenditures) of 200 to 250 million USD in 2018. The Company’s long-term outlook includes average annual same-restaurant sales growth of approximately 2.25 to 3.0 percent for the Wendy’s North America system, beginning in 2016. The Company’s expected restaurant count for its long-term outlook contemplates the planned divestiture of approximately 540 domestic restaurants that the Company intends to sell as part of its system optimization initiative.

The Company continues to expect long-term Adjusted Ebitda margins as follows:

  • In 2016: 28 to 30 percent
  • In 2017: 32 to 34 percent
  • In 2018: approximately 35 percent

The Company also continues to expect to achieve the following system goals by the end of 2020:

  • Average unit sales volumes of 2.0 million USD
  • Restaurant margins of 20 percent
  • A sales-to-investment ratio of 1.3 times for new restaurants
  • Restaurant development growth of 1’000 new restaurants (excluding closures)
  • The reimaging of 60 percent of Wendy’s North America total system restaurants

The Company expects to maintain a long-term leverage ratio of approximately five to six times net debt to trailing twelve-month Adjusted Ebitda from continuing operations (Image: Wendy’s Company).

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