Wendy’s: Reports Second Quarter 2018 Results

Dublin / OH. (twc) The Wendy’s Company reported unaudited results for the second quarter ended July 1, 2018. «We have now recorded 22 consecutive quarters of positive same-restaurant sales, a streak that continues to be unmatched in the QSR hamburger category», President and Chief Executive Officer Todd Penegor said. «On the strength of our balanced marketing approach and focus to profitably grow our restaurants we delivered a strong, sequentially improving second quarter restaurant margin. Our resilient business model continues to deliver consistent growth and we remain on track to achieve our 2018 financial guidance targets. 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».

Second Quarter 2018 Summary

Operational Highlights	Second Quarter				Year-to-Date
	2018		2017		2018		2017
	(Unaudited)				(Unaudited)
North America Same-Restaurant Sales Growth(1)	1.9%		3.2%		1.8%		2.4%
Global Restaurant Openings
North America – Total / Net	25 / 13		10 / -11		41 / 4		28 / -5
International – Total / Net	11 / 10		25 / 24		28 / 18		40 / 32
Global – Total / Net	36 / 23		35 / 13		69 / 22		68 / 27
Global Systemwide Sales (In US$ Millions)(2)
North America	USD 2,602		USD 2,521		USD 5,006		USD 4,859
International(3)	USD 132		USD 119		USD 259		USD 231
Global	USD 2,734		USD 2,640		USD 5,265		USD 5,090

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Operational Highlights (Continued)	Second Quarter				Year-to-Date
	2018		2017		2018		2017
	(Unaudited)				(Unaudited)
Global Systemwide Sales Growth(1)
North America	2.7%		4.1%		2.7%		3.4%
International(3)	12.8%		16.4%		13.2%		15.2%
Global Systemwide Sales Growth	3.1%		4.6%		3.2%		3.9%
(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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Financial Highlights	Second Quarter											Year-to-Date
	2018				2017(1)				B / (W)			2018				2017(1)				B / (W)
(In Millions Except Per Share Amounts)	(Unaudited)											(Unaudited)
Total Revenues	USD	411.0			USD	395.4			3.9	%		USD	791.6			USD	756.4			4.6	%
Adjusted Revenues(2)	USD	326.4			USD	312.2			4.6	%		USD	628.1			USD	595.0			5.6	%
Company Operated Restaurant Margin	17.4		%		18.8		%		(1.4)	%		15.8		%		17.5		%		(1.7)	%
General and Administrative Expense	USD	49.2			USD	50.1			1.8	%		USD	99.5			USD	101.4			1.8	%
Operating Profit	USD	71.5			USD	17.6			305.3	%		USD	126.7			USD	75.4			68.2	%
Net Income	USD	29.9			USD	(5.9)			606.1	%		USD	50.0			USD	14.6			243.1	%
Adjusted Ebitda	USD	109.5			USD	107.9			1.5	%		USD	200.4			USD	194.1			3.2	%
Adjusted Ebitda Margin(3)	33.6		%		34.6		%		(1.0)	%		31.9		%		32.6		%		(0.7)	%
Reported Diluted Earnings Per Share	USD	0.12			USD	(0.02)			700.0	%		USD	0.20			USD	0.06			233.3	%
Adjusted Earnings Per Share	USD	0.14			USD	0.13			7.7	%		USD	0.25			USD	0.21			19.0	%
Cash Flows from Operations												USD	148.4			USD	105.8			40.3	%
Capital Expenditures												USD	(23.9)			USD	(32.1)			25.6	%
Year-to-Date Free Cash Flow(4)												USD	117.8			USD	88.2			33.6	%
(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.

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Second Quarter Financial Highlights

Adjusted Revenues: The increase in adjusted revenues resulted primarily from positive same-restaurant sales at Company-operated and Franchise-operated restaurants which led to increased sales and franchise royalties, respectively, and increased rental revenue related to Franchise Flips completed in 2017.

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

General + Administrative Expense: The decrease in general and administrative expense was primarily the result of lower professional fees and lower employee compensation and related expenses as a result of the Company’s G+A savings initiative.

Operating Profit: The increase in operating profit resulted primarily from the system optimization pre-tax losses of USD 43.1 million dollarsrelated to the DavCo-NPC transaction in the second quarter of 2017 and prior year reorganization and realignment costs related to the Company’s G+A savings initiative.

Net Income: The increase in net income resulted primarily from the system optimization losses related to the DavCo-NPC transaction in the second quarter of 2017 and prior year reorganization and realignment costs related to the Company’s G+A savings initiative.

Adjusted Ebitda: The increase in adjusted Ebitda resulted primarily from revenue growth, including net rental income, partially offset by a decrease in Company-operated restaurant margin.

Adjusted Earnings Per Share: The increase in adjusted earnings per share resulted primarily from the positive impact of a lower tax rate from the Tax Cuts and Jobs Act of 2017, partially offset by higher depreciation and amortization expense.

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.

New Restaurant Development

In the second quarter of 2018 the Company had 36 global restaurant openings, and an increase of 23 net new units. The Company now expects 2018 global net new unit growth of approximately 1.5 percent. We continue to expect approximately 1 percent growth in North America but now expect 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 second quarter, 46 percent of the global system was image activated. This compares to 43 percent image activated at the end of 2017. The Company continues to expect approximately 10 percent of the global system to be image activated on an annual basis through 2020.

Franchise Flips

In the second quarter of 2018, the Company facilitated 64 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 continues to expect that approximately 200 Franchise Flips will be completed in 2018.

Company repurchases 2.7 million shares

The Company repurchased 2.7 million shares for USD 45.7 million in the second quarter at an average price of USD 17.03 per share. As of the end of the quarter, the Company had approximately USD 112.5 million remaining on its existing share repurchase authorization of USD 175 million, which expires on March 3, 2019.

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. The Company continues to expect aspects of the Tax Cuts and Jobs Act of 2017 to be clarified in the future, which could affect elements of the 2018 outlook. The Company continues to expect:

• North America same-restaurant sales growth of approximately 2.0 to 2.5 percent.
• Commodity inflation of approximately 1 to 2 percent.
• Labor inflation of approximately 3 to 4 percent.
• Company-operated restaurant margin of approximately 17 to 18 percent.
• General and administrative expense of approximately USD 195 million.
• Adjusted Ebitda of approximately USD 420 to USD 430 million, an increase of approximately 8 to 10 percent compared to recast 2017 results.
• Adjusted Ebitda margin of approximately 33 to 34 percent.
• Interest expense of approximately USD 120 million.
• Depreciation and amortization expense of approximately USD 130 million.
• Adjusted tax rate of approximately 21 to 23 percent.
• Adjusted earnings per share of approximately USD 0.55 to USD 0.57, an increase of approximately 41 to 46 percent compared to recast 2017 results.
• Cash flows from operations of approximately USD 295 to USD 320 million.
• Capital expenditures of approximately USD 75 to USD 80 million.
• Free cash flow of approximately USD 220 to USD 240 million, an increase of approximately 29 to 41 percent compared to 2017.

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 approximately USD 12 billion.
• Global restaurant count of approximately 7,250.
• Global Image Activation of at least 70 percent.
• Adjusted Ebitda margin of 37 to 39 percent.
• Free cash flow of approximately USD 300 million (capital expenditures of approximately USD 65 million).