Wendy´s: Announces Plan to Sell About 425 Restaurants

Dublin / OH. (twc) The Wendy´s Company announced a system optimization initiative, as part of its brand transformation, designed to further enhance earnings quality, help optimize its restaurant portfolio and increase shareholder returns. The Company also reported preliminary, unaudited results for the second quarter ended June 30, 2013, including an Adjusted Earnings Per Share increase of 60 percent and an Adjusted Ebitda increase of 15 percent.

Company to Optimize Portfolio by Selling About 425 Restaurants

The Company plans to help optimize its restaurant portfolio by concentrating its ownership geographically and reducing total system ownership from 22 percent to approximately 15 percent with the sale of about 425 Company-operated restaurants to franchise operators. The Company is targeting the end of the second quarter of 2014 for the completion of these transactions.

Wendy´s President and Chief Executive Officer Emil Brolick said the system optimization initiative is an important part of the Company´s brand transformation – which includes re-imaging and developing new restaurants, the new Wendy´s logo, updated menu boards, innovative products and bold new packaging.

«The system optimization initiative will create a growth opportunity for both the Company and strong franchise operators by expanding participation in our Image Activation program to a larger base of franchisees», Brolick said. «We expect to generate a higher operating margin and stronger free cash flow, along with further enhancing the quality of our earnings with a more predictable revenue stream from a higher percentage of royalty and rent income. We believe system optimization will also enable us to increase our long-term earnings per share growth rate and return incremental cash to shareholders in the form of dividends and share repurchases, beginning with a 25-percent increase in our third-quarter dividend».

The Company intends to prioritize the sale of restaurants to successful, well-capitalized franchisees with a demonstrated history of operational excellence and a stated commitment to implement the Company´s Image Activation restaurant development and re-imaging strategy.

As part of the system optimization initiative, the Company yesterday completed the sale of 24 Wendy´s restaurants in the Kansas City market to a subsidiary of NPC International, Inc., the largest franchisee in the Pizza Hut system and eighth-largest restaurant operator in the United States with more than 1’200 restaurants. NPC recently signed an agreement to acquire an additional 13 Wendy´s restaurants in the Kansas City market from another franchisee. The Company has also sold five restaurants in the Kansas City market to long-time Wendy´s franchisee Kirk Williams of Legacy Restaurant Group.

Company Expects System Optimization to Improve Financial Performance

The Company expects to improve its financial performance as a result of the system optimization initiative. Specifically, the Company expects the following benefits to offset the annualized decreases in sales resulting from the sale of restaurants:

• Reduced annualized general and administrative expense of approximately 30 million USD compared to 2012 by the end of the second quarter of 2014. The Company expects to realize approximately 20 million USD in efficiencies from the consolidation of regional and divisional operations, along with savings of approximately 10 million USD at its Restaurant Support Center in Dublin, Ohio.
• Improved Company-operated restaurant operating margin of 50 basis points or more, due to a focused concentration of more profitable restaurants upon completion of the system optimization transactions.
• Higher cash flow, due to the expected increase in rent and royalty revenue, lower ongoing capital expenditures and proceeds from the sale of Company-operated restaurants.
• Lower annualized depreciation expense of approximately 30 million USD, due primarily to the expected reduction in Company-operated restaurants by the end of the second quarter of 2014.

Due to the expected benefits from its system optimization initiative, the Company now believes it will generate a long-term Adjusted Earnings Per Share growth rate in the mid-teens, beginning in 2014, compared to its previous guidance of high single-digit to low double-digit growth. The Company also reaffirmed its long-term Adjusted Ebitda outlook of high single-digit to low double-digit growth.

Company to Enhance Shareholder Returns with 25 Percent Dividend Increase

In connection with the announcement of the system optimization initiative, the Company´s Board of Directors authorized a 25 percent increase in the quarterly cash dividend rate from 0,04 USD to 0,05 USD per share.

The increase will be effective with the next quarterly cash dividend, which is payable Sept. 17, 2013, to shareholders of record as of Sept. 3, 2013. During the fourth quarter of 2012, the Company´s Board of Directors authorized a 100 percent increase in the quarterly cash dividend rate from 0,02 USD to 0,04 USD per share.

During the fourth quarter of 2012, the Company´s Board of Directors also authorized a share repurchase program for up to 100 million USD of the Company´s common stock through December 29, 2013. The common stock repurchase program allows the Company to make repurchases as market conditions warrant and to the extent legally permissible.

The Company did not repurchase any shares during 2012 or the first half of 2013, but intends to begin repurchasing shares in the third quarter.

«The dividend increase and share repurchases are important elements of our financial management strategy», Chief Financial Officer Steve Hare said. «We are committed to continuing to deploy capital to drive the organic growth of our restaurant business, in addition to returning cash to shareholders».

Preliminary Second-Quarter 2013 Summary

The Company today reported its preliminary, unaudited results for the second quarter ended June 30, 2013. The Company plans to file its Form 10-Q, including its final financial statements for the second quarter on Aug. 7, 2013. Highlights from the second quarter include:

• Consolidated revenues were 650,5 million USD in the second quarter of 2013, compared to 645,9 million USD in the second quarter of 2012.
• Wendy´s North America Company-operated restaurants generated a same-store sales increase of 0,4 percent in the second quarter of 2013. Franchise same-store sales in North America increased 0,3 percent during the quarter.
• Company-operated North America restaurant margin was 16,7 percent in the second quarter of 2013, compared to 14,1 percent in the second quarter of 2012. The margin improvement was due to a favourable sales mix, improved management of labor and reductions in breakfast advertising, as well as lower paper and beverage costs. Partly offsetting these benefits was an increase in commodity costs of 80 basis points.
• Adjusted Ebitda was 102,1 million USD in the second quarter of 2013, up 15 percent compared to second-quarter 2012 Adjusted Ebitda of 89,1 million USD.
• Net income attributable to The Wendy´s Company was 12,2 million USD in the second quarter of 2013, compared to a net loss of 5,5 million USD in the second quarter of 2012. The 2013 results include a 21,0 million USD pretax charge from the early extinguishment of debt. The 2012 results included a 25,2 million USD pretax charge from the early extinguishment of debt.
• Adjusted Earnings Per Share were 0,08 USD in the second quarter of 2013, compared to 0,05 USD in the second quarter of 2012.
• Earnings per share were 0,03 USD in the second quarter of 2013, compared to a loss per share of 0,01 USD in the second quarter of 2012.

2013 Outlook

For 2013, the Company reiterated its outlook for Adjusted Ebitda of 350 million USD to 360 million USD and Adjusted Earnings Per Share of 0,20 USD to 0,22 USD. The Company is currently trending toward the high end of both ranges due to its strong first-half 2013 Adjusted Ebitda performance of 179,4 million USD and Adjusted EPS of 0,11 USD, along with the expected benefit from many of the initiatives implemented in 2012, including the expansion of its Image Activation reimaging program, the implementation of its Right Price Right Size Menu™, the reduction in the number of restaurants serving breakfast, labor efficiencies and multiple cost-reduction initiatives. The outlook for 2013 also reflects:

• Higher year-over-year profitability in each of the first three quarters, with lower growth rates in the second and third quarter of 2013 relative to the first quarter.
• Lower year-over-year profitability in the fourth quarter, due primarily to the anticipated expense of about 10 million USD from the Company´s Image Activation franchisee incentive program. The Company projects its fourth-quarter Adjusted Ebitda could decline by more than ten percent.

Estimated 2013 Adjusted Earnings Per Share excludes 20 to 25 million USD of anticipated pre-tax depreciation for existing assets that will be replaced as part of the Company´s Image Activation initiative. The Company expects its total 2013 depreciation and amortization expense to increase 15 to 20 percent compared to 2012.

The Company is also currently trending toward the high end of its outlook for Company-operated restaurant margin of 14,2 to 14,5 percent, compared to 14,0 percent in 2012, due to ongoing cost control initiatives and potential favourability in its commodities forecast. Also included in the Company´s 2013 outlook is:

• Average same-store sales growth of 2,0 to 3,0 percent at Wendy´s North America Company-operated restaurants, based on year-to-date same-store sales of 0,7 percent, along with the expectation of stronger same-store sales in the third and fourth quarter.
• New restaurant development and restaurant closures as follows:
  • North America Company-operated: 25 Image Activation openings with 20 to 30 closures
  • North America franchise: 40 openings with 90 to 100 closures
  • International: 60 openings with 15 to 20 closures
• The re-imaging of 100 Company-operated restaurants.
• Approximately 10 million USD in incremental year-over-year G+A expense associated with the Image Activation franchisee incentive program. Franchisees have applied to re-image nearly 150 restaurants under this program. Approximately 100 of these restaurants are currently in various stages of active process and the Company believes most of the 100 restaurants now in process will be open or under construction by the end of 2013.
• Capital expenditures of approximately 245 million USD, compared to 198 million USD in 2012. This estimate includes 145 million USD for Image Activation designs, with 25 new and 100 re-imaged Company-operated restaurants in North America.