Wendy’s Company: Reports Second-Quarter 2015 Results

Dublin / OH. (twc) The Wendy´s Company reported unaudited results for the second quarter ended June 28, 2015. Overview: North America Systemwide same-restaurant sales increase 2.2 percent (plus 5.4 percent on a two-year basis); N.A. same-restaurant sales increase 2.4 percent (plus 6.3 percent on a two-year basis) at Company-operated restaurants and 2.2 percent (plus 5.3 percent on a two-year basis) at franchise restaurants. Company-operated restaurant margin increases 40 bps to 18.2 percent. Planned sale of 540 domestic Company-operated restaurants on schedule; high level of interest from existing and prospective franchisees in all markets. Company announces intent to enter into accelerated share repurchase transaction for approximately 165 million USD as part of previously approved share repurchase authorizations. Company increases outlook for 2015 Adjusted Ebitda to 385 to 390 million USD from previous range of 375 to 385 million USD.

«Our second-quarter results demonstrate continued progress with Wendy’s brand transformation». President and Chief Executive Officer Emil Brolick said. «We generated an increase in same-restaurant sales of 2.4 percent – or 6.3 percent on a two-year basis – at Company-operated restaurants. We also realized a 40-basis-point year-over-year improvement in restaurant operating margin to 18.2 percent. Our Image Activation initiative continues to produce solid results, as re-imaged restaurants contributed 170 basis points to Company-operated same-restaurant sales, primarily as a result of increased customer counts in those restaurants.

«In addition to the increase in restaurant operating margin, we achieved a 170 basis-point improvement in Adjusted Ebitda margin». Brolick said. «This demonstrates the higher quality of earnings that we are generating as a result of our system optimization initiative.

«Our previously announced plan to reduce our ownership of Company-operated restaurants to approximately five percent of the total system remains on schedule». Brolick said. «We completed the sale of our Company-operated restaurants in Canada during the second quarter and are moving ahead as planned with the sale of the remaining 540 domestic restaurants targeted for sale to franchisees. New and prospective franchisees are expressing strong interest in all of the markets, and we expect to sell approximately 280 of these restaurants during the second half of 2015.

«As part of our previously announced share repurchase authorizations, we intend to enter into an accelerated share repurchase transaction for approximately 165 million USD». Brolick said. «This is in addition to the 850 million USD share repurchase program that we recently completed. We expect to announce the execution of an accelerated share repurchase agreement in the near future.

«Based on our operating results through early August, we are increasing our 2015 Adjusted Ebitda outlook to 385 to 390 million USD and increasing our outlook for 2015 restaurant operating margins to 17.0 to 17.5 percent». Brolick said. «With second-quarter same-restaurant sales somewhat below our expectations, we are adjusting our 2015 same-restaurant sales outlook at Company-operated restaurants to 2.0 to 2.5 percent.

Second-quarter 2015 summary

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

  • Same-restaurant sales increased 2.4 percent at North America Company-operated restaurants in the second quarter of 2015, while same-restaurant sales increased 2.2 percent at North America franchise-operated restaurants. Systemwide same-restaurant sales increased 2.2 percent during the second quarter of 2015. Higher sales at re-imaged Image Activation restaurants contributed approximately 170 basis points to Company-operated same-restaurant sales results, primarily from increased customer counts.
  • On a two-year basis, second-quarter 2015 same-restaurant sales increased 6.3 percent at North America Company-operated restaurants, 5.3 percent at North America franchise-operated restaurants and 5.4 percent for the Wendy’s system.
  • Revenues were 489.5 million USD in the second quarter of 2015, compared to 506.1 million USD in the second quarter of 2014. The 3.3 percent decrease resulted primarily from the ownership of 141 fewer Company-operated restaurants at the end of the 2015 second quarter compared to the beginning of the 2014 second quarter. Franchise revenues were 104.5 million USD in the second quarter of 2015 compared to 98.4 million USD in the second quarter of 2014. The 6.2 percent increase resulted from higher rent revenue and higher technical assistance fees attributable to a year-over-year increase in the number of Company-operated restaurants sold.
  • North America Company-operated restaurant margin was 18.2 percent in the second quarter of 2015, compared to 17.8 percent in the second quarter of 2014. The 40 basis-point increase was the result of higher same-restaurant sales, favorable product mix and the positive impact from the Company’s Image Activation re-imaging program.
  • General and administrative expense was 60.8 million USD in the second quarter of 2015, compared to 66.4 million USD in the second quarter of 2014. The 8.4 percent decrease resulted primarily from cost savings related to the Company’s system optimization initiative and resource realignment announced in 2014.
  • Adjusted Ebitda from continuing operations was 104.3 million USD in the second quarter of 2015, a 5.2 percent increase compared to second-quarter 2014 Adjusted Ebitda from continuing operations of 99.1 million USD, despite the ownership of 141 fewer Company-operated restaurants at the end of the 2015 second quarter compared to the beginning of the 2014 second quarter. The 2015 and 2014 results exclude 15.7 million USD and 1.4 million USD, respectively, in pre-tax gains, primarily from the sale of Company-operated restaurants.
  • Adjusted Ebitda margin was 21.3 percent in the second quarter of 2015 compared to 19.6 percent in the second quarter of 2014. The 170-basis-point improvement reflects the positive impact of the second phase of the Company’s system optimization initiative, including increased rental income, along with a reduction in G+A expense, partly offset by impairment charges primarily related to the Company’s system optimization initiative.
  • Operating profit was 64.3 million USD in the second quarter of 2015, compared to 61.2 million USD in the second quarter of 2014. The 5.1 percent increase resulted primarily from year-over year increases in gains on the sale of Company-operated restaurants, in addition to a reduction in G+A expense, partly offset by impairment charges primarily related to the Company’s system optimization initiative.
  • Operating profit margin was 13.1 percent in the second quarter of 2015 compared to 12.1 percent in the second quarter of 2014, an improvement of 100 basis-points.
  • Interest expense was 17.2 million USD in the second quarter of 2015, compared to 13.1 million USD in the second quarter of 2014. The 31-percent increase resulted primarily from higher total debt levels related to the Company’s recent debt refinancing.
  • Income from continuing operations was 24.8 million USD in the second quarter of 2015 compared to 27.3 million USD in the second quarter of 2014. The 2015 results include debt extinguishment costs of 7.3 million USD related to the Company’s recent debt refinancing.
  • Net income was 40.2 million USD in the second quarter of 2015, compared to 29.0 million USD in the second quarter of 2014. These results include the impact of discontinued operations.
  • Adjusted Earnings Per Share from continuing operations were 0.08 USD in the second quarter of 2015, compared to 0.09 USD in the second quarter of 2014. The 2015 results include 4.1 million USD in tax expense related to the Company’s recent debt refinancing. The 2015 and 2014 results exclude gains from the sale of Company-operated restaurants and other items affecting comparability
  • Reported diluted earnings per share from continuing operations were 0.07 USD in both the second quarter of 2015 and the second quarter of 2014.
  • Reported diluted earnings per share were 0.11 USD in the second quarter of 2015, compared to 0.08 USD in the second quarter of 2014.

Planned sale of 540 domestic Company-operated restaurants on schedule; high level of interest from existing and prospective franchisees in all markets

As previously announced, the Company plans to reduce its Company-operated restaurant ownership to approximately five percent of the total system by the middle of 2016. As part of this plan, the Company intends to sell approximately 280 restaurants in the second half of 2015 and approximately 260 restaurants in 2016, for a total of approximately 540 restaurants. To assist with the sale of these restaurants, the Company has re-engaged The Cypress Group, which managed the first phase 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». Brolick said. «Interest in the domestic restaurants that we intend to sell is extremely strong from existing and prospective franchisees, and we are confident that we will strengthen our system as a result of these transactions.

«We expect that the sale of our 540 domestic restaurants will result in pre-tax cash proceeds of approximately 400 to 475 million USD and reduce future capital expenditure requirements, as reflected in our long-term free cash flow outlook». Brolick said.

«Going forward, we intend to buy and sell restaurants opportunistically to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption». Brolick said.

The Company completed the sale of its remaining Canadian restaurants during the second quarter. In total, the Company sold 129 Canadian restaurants to franchisees during the second phase of its system optimization initiative. These transactions generated additional restaurant re-imaging commitments, as well as commitments for the development of more than 60 new restaurants.

Company announces intent to enter into accelerated share repurchase transaction

As part of its previously authorized 1.4 billion USD share repurchase program, the Company today announced its intent to repurchase approximately 165 million USD of its common stock in an accelerated share repurchase transaction in the near future. After the completion of the anticipated transaction, the Company expects to have approximately 400 million USD remaining under its share repurchase authorization. The Company plans to use the remaining authorization before the end of 2016, as funds become available from the sale of Company-operated restaurants.

Momentum of Image Activation re-imaging program continues; Wendy’s system opens 1’000th Image Activation restaurant

The Company and its franchisees plan to re-image approximately 450 total systemwide restaurants and build 80 new restaurants in 2015. The Wendy’s system remains on track to re-image at least 60 percent of its North America restaurants by the end of 2020. The Wendy’s system opened its 1’000th Image Activation restaurant during August.

The Company expects a number of factors to affect the comparable sales contribution from Company-operated Image Activation restaurants in the second half of 2015, including the timing and composition of re-imaged restaurants in the comparable sales base and the impact of restaurants that the Company expects to sell during its system optimization initiative. As a result, the Company expects the Image Activation contribution to decrease from 170 basis points in the second quarter of 2015 to approximately 50 basis points in both the third and fourth quarters of 2015.

Image Activation continues to perform within the Company’s expectations, with system re-imaged restaurants generating average sales lifts of ten to 15 percent and Company re-imaged restaurants producing an average flow-through of more than 40 percent on incremental sales.

Company issues updated 2015 outlook

Based on its operating results through early August, the Company is increasing its outlook for 2015 Adjusted Ebitda from continuing operations to 385 to 390 million USD from its prior guidance of 375 million USD to 385 million USD. This represents an increase of eight to nine percent compared to the Company’s 2014 Adjusted Ebitda results, which exclude the Ebitda contribution attributable to the Company’s bakery operations.

  • The Company is also increasing its 2015 outlook for restaurant operating margins by 50 basis points to 17.0 to 17.5 percent, an improvement of approximately 120 to 170 basis points compared to 15.8 percent in 2014. This estimate includes an improved outlook for commodity costs. The Company now expects its commodity costs to be approximately flat compared to 2014.
  • The Company continues to expect 2015 Adjusted Earnings Per Share from continuing operations of 0.31 USD to 0.33 USD.
  • The Company is adjusting its 2015 same-restaurant sales outlook at Company-operated restaurants to 2.0 to 2.5 percent.
  • The Company expects its 2015 interest expense to be approximately 80 to 85 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 38 to 40 percent, primarily due to the expected impact of its system optimization initiative. The Company expects its 2015 adjusted tax rate to approximate its 2015 reported tax rate.
  • The Company remains on target for general and administrative expense of approximately 250 million USD in 2015.

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 continues to expect 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.
  • The Company’s long-term outlook includes the expectation for average annual same-restaurant sales growth of approximately 2.25 to 3.0 percent for the Wendy’s 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 by the middle of 2016 as part of its system optimization initiative.