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Wednesday, 23 July 2014 00:00

Wendy's to Sell Bakery Business, 640 Restaurants

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The FINANCIAL -- The Wendy's Company on May 6 reported unaudited results for the first quarter ended March 29, 2015.

"Our first-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 2.6 percent at Company-operated restaurants and a 160-basis-point year-over-year improvement in restaurant operating margin. Our Image Activation initiative continues to produce solid results, as reimaged restaurants made a strong contribution to Company-operated same-restaurant sales, primarily as a result of increased customer counts.

"In addition to the increase in restaurant operating margin, we achieved a significant 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, which includes increased royalties and rental income, along with a reduction in G&A expense.

"Our previously announced plan to reduce our ownership of Company-operated restaurants also remains on schedule," Brolick said. "Given the success of the first phase of our system optimization initiative, we have re-engaged The Cypress Group to assist with the divestiture of the 540 remaining domestic restaurants targeted for sale to franchisees.

"We also plan to divest our bakery operations, a non-core asset," Brolick said. "We believe this divestiture will provide us with greater sourcing flexibility, focus resources on our core restaurant business and eliminate future bakery capital expenditures. We expect the transaction to close in the second quarter of 2015.

"Our balance sheet recapitalization remains on schedule, and we intend to return the net proceeds from our debt refinancing to shareholders via a share repurchase program.

"Based on our operating results through early May, we are reaffirming our 2015 Adjusted EBITDA and Adjusted Earnings Per Share outlook," Brolick said. "We plan to update our outlook on June 3, to reflect the expected impact of our debt refinancing and anticipated share repurchase program, along with the planned sale of our bakery operations."

First-quarter 2015 summary

Same-restaurant sales increased 2.6 percent at North America Company-operated restaurants in the first quarter of 2015, while same-restaurant sales increased 3.4 percent at North America franchise-operated restaurants. Systemwide same-restaurant sales increased 3.2 percent during the first quarter of 2015. Higher sales at reimaged Image Activation restaurants contributed approximately 150 basis points to Company-operated same-restaurant sales results, primarily from increased customer counts.

Consolidated revenues were $466.2 million in the first quarter of 2015, compared to $523.2 million in the first quarter of 2014. The 10.9 percent decrease resulted from the ownership of 240 fewer Company-operated restaurants at the end of the 2015 first quarter compared to the end of the 2013 fourth quarter, along with lower technical assistance fees attributable to a year-over-year reduction in the number of Company-operated restaurants sold. Partly offsetting this decrease were higher same-restaurant sales and increased rent and royalty revenue, according to the Wendy's Company.

North America Company-operated restaurant margin was 14.7 percent in the first quarter of 2015, compared to 13.1 percent in the first quarter of 2014.

General and administrative expense was $60.3 million in the first quarter of 2015, compared to $70.4 million in the first quarter of 2014. The 14.3 percent decrease resulted primarily from cost savings related to the Company's system optimization initiative and 2014 resource realignment, along with lower equity compensation expense.

Adjusted EBITDA was $84.0 million in the first quarter of 2015, an 11.6 percent increase compared to first-quarter 2014 Adjusted EBITDA of $75.3 million. The 2014 results exclude $12.0 million in pretax gains, primarily from the sale of restaurants previously not included in the Company's system optimization initiative.

Adjusted EBITDA margin was 18.0 percent in the first quarter of 2015 compared to 14.4 percent in the first quarter of 2014. The 360-basis-point improvement reflects the positive impact of the first phase of the Company's system optimization initiative, including increased royalties and rental income, along with a reduction in G&A expense.

Operating profit was $52.3 million in the first quarter of 2015, compared to $89.0 million in the first quarter of 2014. The 41.2 percent decrease resulted primarily from year-over year reductions in gains on the sale of Company-operated restaurants, partly offset by a reduction in costs related to the Company's system optimization initiative and a reduction to cost of sales of $12.5 million as a result of the reversal of a liability associated with the bakery's withdrawal from a multi-employer pension plan related to the Company's planned sale of its bakery operations. Also offsetting the decrease in operating profit was a reduction in G&A expense.

Operating profit margin was 11.2 percent in the first quarter of 2015 compared to 17.0 percent in the first quarter of 2014. The 580 basis-point decrease resulted primarily from year-over year reductions in gains on the sale of Company-operated restaurants, partly offset by the items described above in "operating profit."

Net income was $27.5 million in the first quarter of 2015, compared to $46.3 million in the first quarter of 2014. The 40.6 percent decrease resulted primarily from year-over year reductions in gains on the sale of Company-operated restaurants, partly offset by the items described above in "operating profit," as well as an 870-basis-point year-over-year decrease in the Company's effective tax rate.

Adjusted Earnings Per Share were $0.06 in the first quarter of 2015, compared to $0.05 in the first quarter of 2014. The 2014 results exclude certain gains, primarily from the sale of restaurants previously not included in the Company's system optimization initiative, the Wendy's Company reported.

Reported diluted earnings per share were $0.07 in the first quarter of 2015, compared to $0.12 in the first quarter of 2014. The decrease resulted primarily from year-over year reductions in gains on the sale of Company-operated restaurants.

System optimization initiative momentum continues

As previously announced, the Company plans to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system by the middle of 2016.

Based on an analysis of its North America restaurant base, the Company now intends to sell a total of approximately 380 restaurants in 2015 (including the previously announced sale of 100 Canadian restaurants) and approximately 260 restaurants in 2016, for a total of approximately 640 restaurants. The Company expects to sell a total of 100 Canadian restaurants before the end of June 2015. To assist with the sale of its 540 domestic restaurants, the Company has re-engaged The Cypress Group, which managed the Company's first phase of its 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. "We believe the sale of our domestic restaurants will result in pretax cash proceeds of approximately $400 to $475 million and significantly reduce future capital expenditure requirements, as reflected in our long-term free cash flow outlook.

"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.

Company announces plans to sell bakery operations

The Company announced its intent to sell its bakery operations in Zanesville, Ohio. The Company expects the transaction to close in May 2015. The Company plans to update its outlook on June 3 to reflect the expected impact of its debt refinancing and anticipated share repurchase program, along with the planned sale of its bakery operations.

Image Activation continues to accelerate

"Our Image Activation program continues to accelerate," Brolick said. "Along with our ultra-modern standard design with customizable upgrades, we have recently developed a lower-cost refresh option to provide investment flexibility for our diverse system of restaurants."

The Company and its franchisees plan to reimage approximately 450 total Systemwide restaurants and build 80 new restaurants in 2015. This is in addition to the 486 total Systemwide reimages and new restaurants completed or under construction in 2014. The Company plans to reimage at least 60 percent of Wendy's North America Systemwide restaurants by the end of 2020.

Company on schedule to complete debt refinancing on June 1

As previously announced, the Company plans to recapitalize its balance sheet, targeting a leverage ratio of five to six times net debt to 2014 Adjusted EBITDA. The Company expects the transaction to close on June 1, 2015, and intends to return the net proceeds to shareholders via a share repurchase program.

Company continues to repurchase shares under existing authorization

During the third quarter of 2014, the Company's Board of Directors authorized a share repurchase program for up to $100 million of the Company's common stock through the end of 2015. Through April 30, 2015, the Company had repurchased 8.6 million shares for $85.5 million at an average price of $9.90 per share. As of April 30, 2015, approximately $14.5 million remains under the current share repurchase authorization.

"We continue to prioritize the deployment of capital to drive the organic growth of our restaurant business through our consumer-facing technology and Image Activation initiatives, in addition to returning excess cash to shareholders via dividends and share repurchases," Chief Financial Officer Todd Penegor said.

Company reaffirms 2015 Adjusted EBITDA and Adjusted EPS outlook; plans to provide updated guidance on June 3

The Company reaffirmed its outlook for 2015 Adjusted EBITDA of approximately $390 million to $400 million. This represents an increase of 5 to 8 percent compared to the Company's 2014 Adjusted EBITDA results of $370.8 million, which excludes $21.9 million in certain pretax gains, primarily from the sale of restaurants previously not included in its system optimization initiative. As previously announced, due to the expected impact on comparability of such gains going forward, the Company intends to exclude these amounts from its Adjusted EBITDA and Adjusted Earnings Per Share results and guidance.

The Company continues to expect 2015 Adjusted Earnings Per Share of approximately $0.33 to $0.35. This represents an increase of 10 to 17 percent compared to the Company's 2014 Adjusted EPS results of $0.30, which excludes certain gains, primarily from the sale of restaurants previously not included in its system optimization initiative.

The Company remains on target for general and administrative expense of approximately $250 million in 2015.

Based on its results and current trends in the year to date, the Company now expects:

Same-restaurant sales growth of 2.5 to 3.0 percent at Company-operated restaurants.

Company-operated restaurant margin of 16.5 to 17.0 percent, an improvement of approximately 70 to 120 basis points compared to 15.8 percent in 2014. This estimate includes the benefit of same-restaurant sales increases, partly offset by an increase in commodity costs of approximately 1.5 percent (or 40 basis points), driven primarily by higher costs for fresh beef.

A reported tax rate of approximately 41 to 42 percent. The increase compared to the 2014 reported tax rate of 39.7 percent is primarily due to goodwill disposed of in connection with the sale of Company-operated restaurants which is non-deductible for income tax purposes.

Due to the expected sale of certain Company-operated restaurants identified for reimaging in 2015, the Company now expects capital expenditures of approximately $250 to $260 million. This includes approximately $120 million for Company-operated restaurant reimaging, approximately $45 million for 20 new Company-operated restaurants, approximately $40 million for technology-related initiatives and approximately $25 million for restaurant maintenance.

Estimated 2015 Adjusted Earnings Per Share excludes anticipated pretax depreciation for existing assets that the Company expects to replace as part of its Image Activation initiative. The Company now expects approximately $10 million of accelerated depreciation associated with Image Activation and now expects its total 2015 depreciation and amortization expense to approximate its 2014 levels, including the impact of accelerated depreciation in both years. 

The Company's 2015 outlook includes the benefit of a 53rd operating week. The Company expects that the impact of the Affordable Care Act will partly offset this benefit.

The Company's 2015 outlook also assumes the ownership of approximately 380 fewer restaurants at year end 2015 compared to 957 Company-operated restaurants at year-end 2014. The Company's expected year-end restaurant count contemplates the anticipated sale of approximately 100 restaurants from its Canadian system optimization initiative, in addition to the planned sale of approximately 280 of the 540 additional domestic restaurants that the Company intends to sell by the middle of 2016. 

Company reaffirms long-term outlook; plans to provide updated guidance on June 3

The Company's expected restaurant count for its long-term outlook contemplates the anticipated sale of approximately 100 restaurants from its Canadian system optimization initiative, in addition to the planned sale of approximately 540 additional domestic restaurants that the Company intends to sell by the middle of 2016 as part of its system optimization initiative.

Due to the sale of 640 Company-operated restaurants, the Company expects:

High single-digit Adjusted Earnings Per Share growth in 2016 and 2017, followed by Adjusted Earnings Per Share growth in the mid-to-high teens in 2018.

Flattish Adjusted EBITDA in 2016, followed by low-single digit Adjusted EBITDA growth in 2017 and high single-digit Adjusted EBITDA growth in 2018.

Significantly lower annual capital expenditure requirements, beginning in 2016. The Company expects capital expenditures of approximately $135 to $145 million in 2016, followed by approximately $80 to $90 million in 2017 and approximately $75 million in 2018.

The Company's long-term outlook includes the expectation for average annual Systemwide same-restaurant sales growth of approximately 2.25 to 3.0 percent beginning in 2016.

In addition, the Company expects Adjusted EBITDA margins as follows:

In 2015: 20 to 22 percent

In 2016: 28 to 30 percent

In 2017: 32 to 34 percent

In 2018: approximately 35 percent

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

Average unit sales volumes of $2.0 million

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 Systemwide restaurants

The Company's current 2015 and long-term outlooks do not include any potential impact of the Company's debt refinancing, anticipated share repurchase program or planned sale of its bakery operations. After the expected completion of its debt refinancing on June 1, 2015, the Company plans to update its forecast. As previously announced, the Company expects its long-term (2016 and beyond) Adjusted Earnings Per Share growth to improve to approximately 20 percent.

Read 2639 times Last modified on Friday, 08 May 2015 08:40

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