Wendy’s: Reports Third Quarter 2018 Results

Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the third quarter ended October 01, 2018. «We are proud of the progress we continue to make, ensuring more customers enjoy Wendy’s more often by expanding our number of restaurants, reimaging existing restaurants, and executing a well-balanced marketing approach that strengthens our brand,» President and Chief Executive Officer Todd Penegor said. «Our third quarter results demonstrate Wendy’s ability to maintain strong performance on the bottom line despite a challenging sales environment, and are a clear testament to our resilient business model. 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 position us to win and drive profitable growth in the future.»

Q3/2018 Operational Highlights (Unaudited)

Global Systemwide Sales Growth(1) Q3/2018 Q3/2017 YTD-2018 YTD-2017
North America 1.2% 3.0% 2.2% 3.2%
International(3) 13.2% 13.4% 13.2% 15.0%
Global Systemwide Sales Growth 1.7% 3.4% 2.7% 3.7%
North America Same-Restaurant Sales Growth(1) (0.2)% 2.0% 1.1% 2.3%
Global Restaurant Openings
North America – Total / Net 23 / 7 29 / 12 64 / 11 57 / 7
International – Total / Net 14 / 6 13 / 10 42 / 24 53 / 42
Global – Total / Net 37 / 13 42 / 22 106 / 35 110 / 49
Global Systemwide Sales (In USD Millions)(2)
North America USD 2,523 USD 2,506 USD 7,530 USD 7,365
International(3) USD 127 USD 119 USD 386 USD 352
Global USD 2,650 USD 2,625 USD 7,916 USD 7,717

(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 and Argentina (Beginning July 1, 2018).

Q3/2018 Financial Highlights (Unaudited)

(In Millions Except Per Share Amounts) Q3/2018 Q3/2017(1) B / (W) YTD-2018 YTD-2017(1) B / (W)
Total Revenues USD 400.6 USD 391.3 2.4 % USD 1,192.1 USD 1,147.7 3.9 %
Adjusted Revenues(2) USD 319.0 USD 308.7 3.3 % USD 947.1 USD 903.7 4.8 %
Company Operated Restaurant Margin 15.7 % 15.9 % (0.2) % 15.8 % 16.9 % (1.1) %
General and Administrative Expense USD 46.5 USD 51.7 10.1 % USD 146.1 USD 153.1 4.6 %
Operating Profit USD 77.3 USD 62.3 24.1 % USD 204.1 USD 137.7 48.2 %
Net Income USD 391.2 USD 13.7 2,755.5 % USD 441.3 USD 28.3 1,459.4 %
Adjusted Ebitda USD 107.2 USD 97.6 9.8 % USD 307.6 USD 291.7 5.5 %
Adjusted Ebitda Margin(3) 33.6 % 31.6 % 2.0 % 32.5 % 32.3 % 0.2 %
Reported Diluted Earnings Per Share USD 1.60 USD 0.05 3,100.0 % USD 1.79 USD 0.11 1,527.3 %
Adjusted Earnings Per Share USD 0.17 USD 0.09 88.9 % USD 0.42 USD 0.30 40.0 %
Cash Flows from Operations USD 229.7 USD 160.3 43.3 %
Capital Expenditures USD (39.7) USD (53.7) 26.1 %
Year-to-Date Free Cash Flow(4) USD 181.1 USD 122.4 48.0 %

(1) Income statement numbers are presented on a recast basis to account for the impact of the new revenue recognition accounting standard as if the full retrospective method of adoption had been used. Please refer to the income statement, adjusted Ebitda and adjusted EPS recast reconciliations that accompany this release for further details.
(2) Total revenues less advertising funds revenue.
(3) Adjusted Ebitda divided by adjusted revenues. The definition of adjusted Ebitda has changed in fiscal year 2018 to exclude revenues from our advertising funds that are now included in our total revenues under the new revenue recognition accounting standard.
(4) Cash flows from operations minus capital expenditures and the impact of the advertising funds.

Third Quarter Financial Highlights

Adjusted Revenues

The increase in adjusted revenues resulted primarily from an increase in sales at Company-operated restaurants which were driven by an increase in the number of restaurants in operation and positive same-restaurant sales.  Adjusted revenue also benefited from an increase in franchise royalty revenue and fees which were primarily driven by new restaurant development and lower franchise incentives.

Company-Operated Restaurant Margin

The decrease in Company-operated restaurant margin was primarily the result of labor rate inflation and higher insurance costs, partially offset by pricing actions and lower commodity costs.

General + Administrative Expense

The decrease in general and administrative expense was primarily the result of a lower incentive compensation accrual and lower employee compensation and related expenses as a result of the Company’s G+A savings initiative.

Net Income

The increase in net income resulted primarily from the sale of our stake in Inspire Brands for USD 450 million (~USD 353 million, net of tax).

Adjusted Ebitda

The increase in adjusted Ebitda resulted primarily from a decrease in general + administrative expenses and revenue growth, including net rental income.

Adjusted Earnings Per Share

The increase in adjusted earnings per share resulted primarily from the positive impact of a lower tax rate from net excess tax benefits related to share-based payments and the Tax Cuts and Jobs Act of 2017 as well as an increase in adjusted Ebitda.

Year-to-Date Free Cash Flow

The increase in free cash flow resulted from an increase in cash flows from operations and a decrease in capital expenditures.  The increase in cash flows from operations resulted primarily from a favorable change in working capital.

Board of Directors approves USD 120 million increase in share repurchase authorization; Company now has USD 249 millionremaining for share repurchases
The Board of Directors approved an increase of USD 120 million to the share repurchase authorization of USD 100 million from August 2018 when the Company announced the sale of its stake in Inspire Brands.  This authorization now totals USD 220 million and expires on December 27, 2019.

Through October 30, 2018, the Company repurchased 8.5 million shares for USD 146.2 million at an average price of USD 17.21per share under its February 2018 share repurchase authorization. With the increase, the Company now has approximately USD 249 million remaining on its share repurchase authorizations.  Please see below for a summary of our share repurchase authorizations.

Share Repurchase Authorization Summary (In Millions)

Announced Expiration Date Authorization Utilized Remaining
February 2018 March 3, 2019 USD 175.0 USD 146.2 USD 28.8
November 2018 December 27, 2019 220.0 0.0 220.0
Total USD 395.0 USD 146.2 USD 248.8


New Restaurant Development

In the third quarter of 2018, the Company had 37 global restaurant openings, and an increase of 13 net new units.  The Company continues to expect 2018 global net new unit growth of approximately 1.5 percent, comprised of approximately 1 percent growth in North America and approximately 10 percent growth in International.

Image Activation

Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. At the end of the third quarter, 48 percent of the global system was image activated.  This compares to 43 percent image activated at the end of 2017. The Company expects approximately 50 percent of the global system to be image activated by the end of 2018.

Company Restaurant Acquisition

In the third quarter of 2018, the Company acquired 16 restaurants in the Columbus, Ohio market for approximately USD 21.4 million as part of its ongoing system optimization strategy where it will buy and sell restaurants in an effort to optimize the system.  The Company continues to expect its Company-operated restaurant ownership to be approximately 5 percent of the total system.

Franchise Flips

In the third quarter of 2018, the Company facilitated 9 Franchise Flips. The Company will continue to facilitate Franchise Flips to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth.  The Company now expects that approximately 130 Franchise Flips will be completed in 2018.

2018 Outlook

This release includes forward-looking guidance for certain non-GAAP financial measures, including adjusted Ebitda, adjusted earnings per share, free cash flow and adjusted tax rate. The Company excludes certain expenses and benefits from adjusted Ebitda, adjusted earnings per share, free cash flow and adjusted tax rate, such as national advertising funds’ revenues and expenses, impairment of long-lived assets, reorganization and realignment costs, system optimization (gains) losses, net and timing and resolution of certain tax matters. 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, free cash flow or reported tax rate or a reconciliation of those projected measures.

The amounts shown below reflect the impact of the new revenue recognition accounting standard, certain other income statement reclassifications and the Tax Cuts and Jobs Act of 2017. Aspects of the Tax Cuts and Jobs Act of 2017 could be clarified in the future which could affect elements of the 2018 outlook. During 2018, the Company now expects:

  • North America same-restaurant sales growth of approximately 1.0 percent.
  • Company-operated restaurant margin of approximately 16.0 to 16.5 percent.
  • General and administrative expense of approximately USD 190 to USD 195 million.
  • Adjusted Ebitda of approximately USD 415 to USD 420 million, an increase of approximately 6 to 8 percent compared to recast 2017 results.
  • Adjusted Ebitda margin of approximately 33 percent.
  • Depreciation and amortization expense of approximately USD 128 million.
  • Adjusted tax rate of approximately 18 to 20 percent.
  • Adjusted earnings per share of approximately USD 0.56 to USD 0.58, an increase of approximately 44 to 49 percent compared to recast 2017 results.
  • Cash flows from operations of approximately USD 295 to USD 310 million.
  • Capital expenditures of approximately USD 70 to USD 75 million.
  • Free cash flow of approximately USD 225 to USD 235 million, an increase of approximately 34 to 38 percent compared to 2017.

In addition, the Company continues to expect:

  • Commodity inflation of approximately 1 to 2 percent.
  • Labor inflation of approximately 3 to 4 percent.
  • Interest expense of approximately USD 120 million.
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