Wendy’s Company: Reports Third Quarter 2016 Results

Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the third quarter ended October 02, 2016. «Our solid third-quarter results demonstrate the positive benefits of our brand transformation efforts», President and Chief Executive Officer Todd Penegor said. «Despite the ownership of 433 fewer Company-operated restaurants relative to last year, we were able to deliver high quality earnings, with franchise revenues contributing a higher amount to the bottom line. Driven by our balanced marketing approach and a continued focus on profitable customer count growth, the North America system accelerated same-restaurant sales in the third quarter. We have now recorded 15 consecutive quarters of positive same-restaurant sales».

«As part of our previously announced share repurchase authorization, we intend to enter into an accelerated share repurchase transaction for 150 million USD», Chief Financial Officer Gunther Plosch said. «This is in addition to the approximately 185 million USD we have already returned to shareholders this year through share repurchases. We expect to announce the execution of an accelerated share repurchase agreement in the near future. In addition, our Board of Directors has authorized an 8-percent increase in our quarterly dividend rate, from 6 cents per share to 6.5 cents per share».

Third-quarter 2016 summary

A summary of the Company’s third-quarter results is provided below. Due to the May 2015 sale of its bakery business, the Company has presented its bakery results as discontinued operations for all periods presented in its consolidated financial statements. See «Disclosure Regarding Non-GAAP Financial Measures» and the reconciliation tables that accompany this release for a discussion and reconciliation of certain non-GAAP financial measures included in this release on the Company’s server (adjusted Ebitda, adjusted Ebitda margin, adjusted earnings per share, adjusted tax rate and free cash flow …). As used in this release, the terms adjusted Ebitda and adjusted earnings per share refer to adjusted Ebitda from continuing operations and adjusted earnings per share from continuing operations, respectively.

• Same-restaurant sales increased 1.4 percent at North America system restaurants in the third quarter of 2016. On a two-year basis, third-quarter 2016 same-restaurant sales increased 4.5 percent for the North America system.
• Revenues were 364.0 million USD in the third quarter of 2016, compared to 464.6 million USD in the third quarter of 2015. The 21.7 percent decrease resulted primarily from the ownership of 433 fewer Company-operated restaurants at the end of the 2016 third quarter compared to the beginning of the 2015 third quarter.
• Franchise revenues were 135.4 million USD in the third quarter of 2016, compared to 105.6 million USD in the third quarter of 2015. The 28.2 percent increase resulted from higher rental income, franchise fees and royalty revenue primarily as a result of the Company’s system optimization initiative, in addition to an increase in same-restaurant sales.
• North America Company-operated restaurant margin was 18.4 percent in the third quarter of 2016, compared to 18.8 percent in the third quarter of 2015. The 40 basis-point decrease was primarily the result of higher other operating costs and increased labor rates, partly offset by lower commodity costs and the favorable impact from the Company’s Image Activation program.
• General and administrative expense was 58.9 million USD in the third quarter of 2016, compared to 63.7 million USD in the third quarter of 2015. The 7.5 percent decrease resulted primarily from cost savings related to the Company’s system optimization initiative, as well as lower share-based compensation and incentive compensation, partly offset by higher professional fees and legal fees related to the unusual payment card activity.
• Operating profit was 106.1 million USD in the third quarter of 2016, compared to 55.9 million USD in the third quarter of 2015. The 89.8 percent increase resulted primarily from a year-over-year increase in System optimization gains, net and higher Franchise revenues, partly offset by a year-over-year increase in Other operating expense, net.
• Interest expense was 28.7 million USD in the third quarter of 2016, compared to 27.9 million USD in the third quarter of 2015.
• Income from continuing operations was 48.9 million USD in the third quarter of 2016, compared to 8.3 million USD in the third quarter of 2015. The increase resulted from the year-over-year increase in Operating profit, partly offset by a year-over-year increase in income taxes.
• Net income was 48.9 million USD in the third quarter of 2016, compared to 7.6 million USD in the third quarter of 2015.
• Adjusted Ebitda from continuing operations was 100.2 million USD in the third quarter of 2016, compared to 99.7 million USD in the third quarter of 2015, despite the ownership of 433 fewer Company-operated restaurants at the end of the 2016 third quarter compared to the beginning of the 2015 third quarter.
• Adjusted Ebitda margin (adjusted Ebitda divided by total revenues) was 27.5 percent in the third quarter of 2016, compared to 21.5 percent in the third quarter of 2015. The 600 basis-point improvement reflects the positive impact of the Company’s system optimization initiative.
• Reported diluted earnings per share from continuing operations were 0.18 USD in the third quarter of 2016, compared to 0.03 USD in the third quarter of 2015. The increase reflects a 10.8 percent year-over-year reduction in the weighted average diluted shares outstanding.
• Reported diluted earnings per share were 0.18 USD in the third quarter of 2016, compared to 0.03 USD in the third quarter of 2015.
• Adjusted earnings per share from continuing operations were 0.11 USD in the third quarter of 2016, compared to 0.09 USD in the third quarter of 2015.

Third phase of system optimization nearing completion

The Company remains on track with its plan to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system by the end of 2016. As part of this plan, the Company intends to sell a total of approximately 315 restaurants to franchisees during 2016, which is in addition to the 227 restaurants that were sold in the second half of 2015. The Company continues to expect the third phase of system optimization to generate pretax proceeds of approximately 435 million USD.

«We have now completed approximately 85 percent of our 2016 system optimization sales and are confident that the remaining transactions will close before the end of the year», Penegor said. «The remaining markets have been awarded to strong operators who have demonstrated a commitment to restaurant re-imaging and opening new restaurants. We are confident we will strengthen the Wendy’s brand as a result of these transactions».

«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 facilitating franchisee-to-franchisee restaurant transfers to ensure that we are putting restaurants in the hands of well capitalized franchisees that are committed to long-term growth».

Image Activation momentum accelerates

The Company and its franchisees now plan to reimage approximately 500 North America system restaurants and build approximately 100 new North America restaurants in 2016.

«Our franchisees continue to see the benefits of Image Activation and are re-imaging restaurants faster than we anticipated. As a result, we are now on pace to image activate approximately 600 restaurants in 2016, which exceeds our original target by approximately 60 restaurants», Penegor said. «In addition, the North America system opened 28 new restaurants during the third quarter and we expect to deliver the first year of net new restaurant openings since 2010. With more than 28 percent of the North America system now featuring our new image, we are on track to achieve our goal of image activating at least 60 percent of our North America restaurants by the end of 2020».

Company announces intent to enter into accelerated share repurchase transaction; Board authorizes increase in quarterly dividend rate

As part of its previously authorized 1.4 billion USD share repurchase program, the Company announced its intent to repurchase 150 million USD of its common stock in an accelerated share repurchase transaction in the near future. After completion of the anticipated transaction, the Company will have utilized substantially all of its 1.4 billion USD share repurchase authorization that was approved by the Board of Directors in June 2015.

The Company repurchased 5.3 million shares for 53.1 million USD in the third quarter at an average price of 10.07 USD per share. The number of shares outstanding at the end of the third quarter was approximately 258.9 million.

The Company 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 6.5 cents per share will be effective with its next dividend payment on December 15, 2016 to shareholders of record as of December 1, 2016.

The Company plans to announce its future capital allocation plans early next year in conjunction with issuing updated guidance.

Company issues updated 2016 outlook

This release includes forward-looking guidance for certain non-GAAP financial measures, including adjusted Ebitda, adjusted earnings per share and adjusted tax rate. The Company excludes certain expenses and benefits from adjusted Ebitda, adjusted earnings per share and adjusted tax rate, such as impairment of long-lived assets, reorganization and realignment costs and system optimization gains, net. Due to the uncertainty and variability of the nature and amount of certain future expenses and benefits related to our system optimization initiative, the Company is unable without unreasonable effort to provide projections of net income, earnings per share or reported tax rate or a reconciliation of projected adjusted Ebitda, adjusted earnings per share or adjusted tax rate to projected net income, earnings per share or reported tax rate.

The Company is increasing its outlook for 2016 adjusted earnings per share to 0.40 USD to 0.41 USD from its previous guidance of 0.39 USD to 0.40 USD. This represents an increase of approximately 23 percent compared to the Company’s 2015 adjusted earnings per share results.

The Company now expects 2016 adjusted Ebitda at the high end of its previously issued range of flat to up 1 percent compared to 2015. The Company now expects:

• Same-restaurant sales growth of approximately 1.5 percent for the North America system.
• Interest expense of approximately 115 million USD.
• Depreciation and amortization expense of approximately 125 million USD, including accelerated depreciation of approximately 4 million USD.
• Cash flows from operations of approximately 180 to 200 million USD.
• Capital expenditures of approximately 145 million USD.
• Free cash flow (cash flows from operations minus capital expenditures) of approximately 35 to 55 million USD.

In addition, the Company continues to expect:

• Restaurant margin of approximately 19.0 percent at North America Company-operated restaurants.
• Commodity costs to decrease approximately 5 to 6 percent compared to 2015.
• General and administrative expense of approximately 245 to 250 million USD.
• An adjusted tax rate of approximately 32 to 34 percent.

The Company’s 2016 outlook includes the impact of overlapping a 53rd operating week in 2015.

Company on track to achieve 2020 goals

The Company continues to expect to achieve the following North America 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 at least 1.3 times for new restaurants.
• Restaurant development growth of 1’000 new restaurants (approximately 500 net).
• The re-imaging of at least 60 percent of North America total system restaurants.

The Company continues to expect to achieve adjusted Ebitda margin of 38 to 40 percent by the end of 2020.