Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the third quarter ended October 1, 2017. «We have now recorded 19 consecutive quarters of positive same-restaurant sales, a streak that is unmatched in the current QSR hamburger category and speaks to the strength and relevance of our brand», President and Chief Executive Officer Todd Penegor said. «We also remain encouraged by the progress being made on our global footprint expansion with 110 year-to-date openings, which is almost 30 restaurants ahead of our pace at this point in 2016. As we lap the effects from system optimization, our improved quality of earnings continues to provide positive benefits through significantly increased cash flows and resiliency in our bottom line. Our relentless focus on executing every element of The Wendy’s Way by providing food our customers love, friendly service, value, and an inviting atmosphere will continue to drive growth in the future».
Third Quarter 2017 Summary
| Operational Highlights | Three Months Ended | Nine Months Ended | |||||
| 2017-10-01 | 2016-10-02 | 2017-10-01 | 2016-10-02 | ||||
| (Unaudited) | (Unaudited) | ||||||
| North America Same-Restaurant Sales Growth(1) | 2.0% | 1.4% | 2.3% | 1.8% | |||
| Global Restaurant Openings (Total / Net) | |||||||
| North America | 29 / 12 | 28 / 13 | 57 / 7 | 65 / 19 | |||
| International | 13 / 10 | 5 / 0 | 53 / 42 | 17 / 5 | |||
| Global Restaurant Openings | 42 / 22 | 33 / 13 | 110 / 49 | 82 / 24 | |||
| Global Systemwide Sales (In US USD Millions)(2) | |||||||
| North America | USD 2’506.0 | USD 2’426.8 | USD 7’365.3 | USD 7’129.0 | |||
| International(3) | USD 119.4 | USD 106.9 | USD 351.6 | USD 309.6 | |||
| Global Systemwide Sales | USD 2’625.4 | USD 2’533.7 | USD 7’716.9 | USD 7’438.6 | |||
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| Operational Highlights (Continued) | Three Months Ended | Nine Months Ended | |||||
| 2017-10-01 | 2016-10-02 | 2017-10-01 | 2016-10-02 | ||||
| (Unaudited) | (Unaudited) | ||||||
| Global Systemwide Sales Growth(1) | |||||||
| North America | 3.0% | 1.8% | 3.2% | 2.9% | |||
| International(3) | 13.4% | 9.0% | 15.0% | 4.1% | |||
| Global Systemwide Sales Growth | 3.4% | 2.1% | 3.7% | 3.0% | |||
(1) Same-restaurant sales growth and systemwide sales growth are calculated on a constant currency basis and include sales by both Company-operated and franchise restaurants.
(2) Systemwide sales include sales at both Company-operated and franchise restaurants. Sales by franchise restaurants are not recorded as Company revenues. However, the Company’s royalty revenues are computed as percentages of sales made by franchisees and, as a result, sales by franchisees have a direct effect on the Company’s royalty revenues and therefore on the Company’s profitability.
(3) Excludes Venezuela.
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The Company estimates that the hurricanes in the U.S. negatively impacted North America system same-restaurant sales by approximately 30 to 40 basis-points in the third quarter.
Financial Highlights
- Total revenues were USD 308.0 million in the third quarter of 2017, compared to USD 364.0 million in the third quarter of 2016. The 15.4 percent decrease resulted primarily from the ownership of 249 fewer Company-operated restaurants at the end of the third quarter 2017 compared to the beginning of the third quarter 2016, which resulted in fewer sales at Company-operated restaurants and a year-over-year decrease in franchise fees, partly offset by higher franchise royalty revenue and franchise rental income. The year-over-year decrease in franchise fees resulted primarily from prior year system optimization activity, including the sale of 156 Company-operated restaurants and 18 Buy and Flips, with no similar activity occurring in the third quarter of 2017.
- Company-operated restaurant margin was 16.7 percent in the third quarter of 2017, compared to 18.4 percent in the third quarter of 2016. The 170 basis-point decrease was primarily the result of higher commodity costs.
- General and administrative expense was USD 53.0 million in the third quarter of 2017, compared to USD 58.9 million in the third quarter of 2016. The 10.1 percent decrease resulted primarily from lower professional fees and cost savings related to the Company’s system optimization initiative.
- Operating profit was USD 61.7 million in the third quarter of 2017, compared to USD 106.1 million in the third quarter of 2016. The 41.9 percent decrease resulted primarily from a year-over-year decrease in gains from the Company’s system optimization initiative, in addition to the items discussed above.
- Net income was USD 14.3 million in the third quarter of 2017, compared to net income of USD 48.9 million in the third quarter of 2016. The year-over-year decrease of 70.8 percent resulted primarily from the items discussed above, in addition to an increase in the effective tax rate.
- Adjusted Ebitda was USD 96.9 million in the third quarter of 2017, compared to USD 100.2 million in the third quarter of 2016. The 3.3 percent decrease resulted primarily from lower franchise fees due to the significant amount of system optimization and Buy and Flip transactions that occurred in the prior year and a year-over-year decrease in Company-operated restaurant margin, partially offset by general and administrative expense savings.
- Adjusted Ebitda margin (adjusted Ebitda divided by total revenues) was 31.5 percent in the third quarter of 2017, compared to 27.5 percent in the third quarter of 2016. The 400 basis-point improvement reflects the positive impact of the Company’s system optimization initiative.
- Reported diluted earnings per share were USD 0.06 in the third quarter of 2017, compared to USD 0.18 in the third quarter of 2016.
- Adjusted earnings per share were USD 0.09 in the third quarter of 2017, compared to USD 0.11 in the third quarter of 2016. The 18.2 percent decrease resulted primarily from the items discussed above and reflects a 4.9 percent year-over-year reduction in the weighted average diluted shares outstanding.
- Year-to-date cash flows from operations through the third quarter of 2017 were USD 176.7 million, compared to USD 137.3 million through the third quarter of 2016. The 28.7 percent increase was the result of an increase in net income adjusted for non-cash expenses and a favorable change in working capital.
- Year-to-date capital expenditures through the third quarter of 2017 were USD 53.7 million, compared to USD 108.7 millionthrough the third quarter of 2016.
- Year-to-date free cash flow (cash flows from operations minus capital expenditures) through the third quarter of 2017 was USD 123.0 million, compared to USD 28.6 million through the third quarter of 2016. The 330.6 percent increase resulted primarily from a year-over-year decrease in capital expenditures, in addition to the items discussed above.
Image Activation
Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. With 39 percent of the global system featuring the new image, the Company continues to expect that approximately 42 percent of the global system will be image activated by the end of 2017. The Company is now expecting 2017 net new unit growth of approximately 0.5 percent to 1 percent in North America and approximately 14 percent internationally.
Franchisee-to-franchisee restaurant transfers
The Company continues to facilitate franchisee-to-franchisee restaurant transfers («Buy and Flips») to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth. During the third quarter, the Company did not facilitate any Buy and Flips but has facilitated 410 year-to-date and now expects to complete approximately 500 to 550 in 2017, which is an increase from the previous outlook of approximately 475.
Share repurchases in third quarter
The Company repurchased 2.5 million shares for USD 38.4 million in the third quarter at an average price of USD 15.25 per share. As of the end of the quarter, the Company had approximately USD 59 million remaining on its existing USD 150 million share repurchase authorization, which expires March 4, 2018.
2017 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 those expenses and benefits, 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. During 2017, the Company now expects:
- Same-restaurant sales growth of approximately 2.0 to 2.5 percent for the North America system.
- Company-operated restaurant margin of approximately 17.5 to 18.0 percent.
- An adjusted tax rate of approximately 34 to 36 percent.
- Adjusted earnings per share of approximately USD 0.43 to USD 0.45, an increase of approximately 7.5 to 12.5 percent compared to 2016.
- Cash flows from operations of approximately USD 250 to USD 265 million.
- Capital expenditures of approximately USD 80 to USD 85 million.
- Free cash flow of approximately USD 170 to USD 180 million, an increase of greater than 400 percent compared to 2016.
In addition, the Company continues to expect:
- Commodity cost inflation of approximately 3 to 4 percent compared to 2016.
- Labor inflation of approximately 4 percent.
- General and administrative expense at the low end of its previously issued range of approximately USD 210 to USD 220 million.
- Net franchise rental income of approximately USD 100 to USD 105 million (gross rental income of approximately USD 190 to USD 195 million).
- Adjusted Ebitda of approximately USD 404 to USD 410 million, an increase of approximately 3 to 5 percent compared to 2016.
- Adjusted Ebitda margin of approximately 32 to 34 percent.
- Interest expense of approximately USD 115 to USD 120 million.
- Depreciation and amortization expense of approximately USD 120 to USD 125 million, including accelerated depreciation of approximately USD 1 million.
Company on track to achieve 2020 goals
The Company continues to expect to achieve the following goals by the end of 2020:
- Global systemwide sales (in constant currency and excluding Venezuela) of ~ USD 12 billion.
- Global restaurant count of ~7’500.
- Global Image Activation of at least 70 percent.
- Adjusted Ebitda margin of 38 to 40 percent.
- Free cash flow of ~ USD 275 million (capital expenditures of ~ USD 65 million).
