Wendy’s Company: Reports Preliminary 2015 Results – Announces 2016 And Long-term Outlook

Dublin / OH. (twc) The Wendy’s Company reported preliminary unaudited results for the fourth quarter and full year ended January 03, 2016. Wendy’s plans to file its audited financial results on or before March 03, 2016, the Company said in its statement.

«Our strong 2015 results demonstrate the strength of our core business, as well as the positive impact of our transition to a predominantly franchised model, with royalties and rental income contributing a higher amount of earnings», Chief Executive Officer Emil Brolick said. «Due to the impact of Image Activation and our strong 2015 same-restaurant sales performance, our Company-operated restaurant average unit volumes increased 3 percent to an all-time high of 1.64 million USD, and North America system AUVs increased 3 percent to an all-time high of 1.54 million USD», Brolick said. «Our year-over-year Company-operated restaurant margin increased 190-basis points to 17.7 percent, which is indicative of the improvements in our restaurant-level economic model».

«Confidence in our improving free-cash flow profile allowed us to repurchase 99.9 million shares for 1.1 billion USD during 2015», Brolick said. «With this year’s repurchase activity, we have now reduced our total share count by approximately 35 percent since the beginning of 2011».

«As we look to 2016, we expect the sequentially strengthening two-year annual same-restaurant sales trends we saw in 2015 to continue, with sales off to a strong start this year», Brolick said. «With the success of our ‘high-low’ marketing messaging, which is driving both traffic and check growth, we are confident setting our 2016 same-restaurant sales growth target for the North America system at approximately 3 percent, which is at the high end of our previous range».

Preliminary fourth-quarter and full-year 2015 results

A summary of the Company’s preliminary fourth-quarter and full-year 2015 results is below. The fourth-quarter and full-year results include the favorable impact of a 53rd operating week, which resulted in 19.2 million USD in incremental sales, approximately 6.0 million USD in incremental franchise royalty revenue, and approximately 7.0 million USD in incremental operating profit in 2015. This variance affects all comparisons to 2014.

Preliminary fourth-quarter 2015 summary

• Same-restaurant sales increased 4.8 percent at North America system restaurants in the fourth quarter of 2015. Same-restaurant sales increased 4.9 percent at North America franchise-operated restaurants. Same-restaurant sales increased 3.7 percent at North America Company-operated restaurants.
• On a two-year basis, fourth-quarter 2015 same-restaurant sales increased 6.4 percent for the North America system, 6.5 percent at North America franchise-operated restaurants and 5.6 percent at North America Company-operated restaurants.
• Revenues were 464.4 million USD in the fourth quarter of 2015, compared to 487.3 million USD in the fourth quarter of 2014. The 4.7 percent decrease resulted primarily from the ownership of 363 fewer Company-operated restaurants at the end of the 2015 fourth quarter compared to the beginning of the 2014 fourth quarter. Franchise revenues were 127.2 million USD in the fourth quarter of 2015 compared to 98.0 million USD in the fourth quarter of 2014. The 29.8 percent increase resulted from higher royalty revenue, franchise fees and rental income primarily as a result of the Company’s system optimization initiative and the 4.9 percent same-restaurant sales increase at franchise-operated restaurants.
• North America Company-operated restaurant margin was 19.2 percent in the fourth quarter of 2015, compared to 16.8 percent in the fourth quarter of 2014. The 240 basis-point increase was primarily the result of higher same-restaurant sales, the positive impact from the Company’s Image Activation reimaging program and the impact of the Company’s system optimization initiative, partly offset by higher labor rates.
• General and administrative expense was 72.4 million USD in the fourth quarter of 2015, compared to 59.5 million USD in the fourth quarter of 2014. The increase resulted primarily from higher incentive compensation due to the Company’s year-over-year outperformance relative to its targets, along with the impact of the 53^rd operating week.
• Adjusted Ebitda from continuing operations was 107.6 million USD in the fourth quarter of 2015, a 12.3 percent increase compared to 95.8 million USD in the fourth quarter of 2014, despite the ownership of 363 fewer Company-operated restaurants at the end of the 2015 fourth quarter compared to the beginning of the 2014 fourth quarter.
• Adjusted Ebitda margin was 23.2 percent in the fourth quarter of 2015 compared to 19.7 percent in the fourth quarter of 2014. The 350-basis-point improvement reflects the positive impact of the second phase of the Company’s system optimization initiative.
• Operating profit was 116.3 million USD in the fourth quarter of 2015, compared to 49.9 million USD in the fourth quarter of 2014. The 133 percent increase resulted primarily from a year-over-year increase in net gains from the Company’s system optimization initiative.
• Operating profit margin was 25.0 percent in the fourth quarter of 2015 compared to 10.2 percent in the fourth quarter of 2014, an improvement of 1’480 basis points.
• Interest expense was 28.2 million USD in the fourth quarter of 2015, compared to 12.8 million USD in the fourth quarter of 2014. The increase resulted primarily from higher total debt levels related to the Company’s debt restructuring during 2015.
• Income from continuing operations was 88.7 million USD in the fourth quarter of 2015 compared to 23.0 million USD in the fourth quarter of 2014. The increase was primarily due to a year-over-year increase in investment income as a result of a 54.9 million USD (38.6 million USD after-tax) distribution the Company received from its 18.5 percent indirect ownership interest in Arby’s Restaurant Group Inc. The Company has excluded this distribution from its Adjusted Ebitda and Adjusted Earnings per Share results for the fourth quarter and full year. Also affecting income from continuing operations was an effective tax rate of 36.8 percent in the fourth quarter of 2015 compared to 38.4 percent in the fourth quarter of 2014.
• Net income was 85.9 million USD in the fourth quarter of 2015, compared to 23.3 million USD in the fourth quarter of 2014. These results include the impact of discontinued operations.
• Reported diluted earnings per share from continuing operations were 0.32 USD in the fourth quarter of 2015 compared to 0.06 USD in the fourth quarter of 2014. The increase reflects a 25.1 percent year-over-year reduction in the weighted average diluted shares outstanding.
• Reported diluted earnings per share were 0.31 USD in the fourth quarter of 2015, compared to 0.06 USD in the fourth quarter of 2014.
• Adjusted Earnings per Share from continuing operations were 0.12 USD in the fourth quarter of 2015, compared to 0.08 USD in the fourth quarter of 2014. These results exclude the impact of certain items, including system optimization gains and the Arby’s distribution

Preliminary full-year 2015 summary

• Same-restaurant sales increased 3.3 percent at North America system restaurants in 2015. Same-restaurant sales increased 3.4 percent at North America franchise-operated restaurants. Same-restaurant sales increased 2.6 percent at North America Company-operated restaurants.
• On a two-year basis, 2015 same-restaurant sales increased 4.9 percent for the North America system, 4.9 percent at North America franchise-operated restaurants and 4.9 percent at North America Company-operated restaurants.
• Revenues were 1.9 billion USD in 2015, compared to 2.0 billion USD in 2014. The 6.4 percent decrease resulted primarily from the ownership of fewer Company-operated restaurants. Franchise revenues were 431.5 million USD in 2015 compared to 390.0 million USD in 2014. The 10.6 percent increase resulted from higher royalty revenue, franchise fees and rental income primarily as a result of the Company’s system optimization initiative and the 3.4 percent same-restaurant sales increase at franchise-operated restaurants.
• North America Company-operated restaurant margin was 17.7 percent in 2015, compared to 15.8 percent in 2014. The 190 basis-point increase was the result of higher same-restaurant sales and the positive impact from the Company’s Image Activation reimaging program.
• General and administrative expense was 256.6 million USD in 2015, compared to 260.7 million USD in 2014. The 1.6 percent decrease resulted primarily from lower share-based compensation expense, a decrease in cash franchise incentives related to the Company’s Image Activation incentive programs and the positive impact of the Company’s system optimization initiative and resource realignment plan announced in 2014. Partly offsetting these decreases was an increase in incentive compensation.
• Adjusted Ebitda from continuing operations was 392.4 million USD in 2015, a 10.1 percent increase compared to 356.5 million USD in 2014, despite a significant reduction in ownership of Company-operated restaurants.
• Adjusted Ebitda margin was 21.0 percent in 2015 compared to 17.8 percent in 2014. The 320-basis-point improvement reflects the positive impact of the second phase of the Company’s system optimization initiative.
• Operating profit was 274.5 million USD in 2015, compared to 242.6 million USD in 2014. The 13.1 percent increase resulted primarily from the increase in franchise revenues, in addition to lower depreciation and amortization, partly offset by a decrease in net gains from the Company’s system optimization initiative.
• Operating profit margin was 14.7 percent in 2015 compared to 12.1 percent in 2014, an improvement of 260 basis points.
• Interest expense was 86.1 million USD in 2015, compared to 52.0 million USD in 2014. The increase resulted primarily from higher total debt levels related to the Company’s debt restructuring during 2015.
• Income from continuing operations was 140.0 million USD in 2015 compared to 116.4 million USD in 2014. The increase was primarily due to a year-over-year increase in investment income as a result of a 54.9 million USD (38.6 million USD after-tax) distribution the Company received from its 18.5 percent indirect ownership interest in Arby’s Restaurant Group Inc. The Company has excluded this distribution from its Adjusted Ebitda and Adjusted Earnings per Share results for the fourth quarter and full year. Also affecting income from continuing operations was an effective tax rate of 40.2 percent in 2015 compared to 39.5 percent in 2014.
• Net income was 161.1 million USD in 2015, compared to 121.4 million USD in 2014. These results include the impact of discontinued operations.
• Reported diluted earnings per share from continuing operations were 0.43 USD in 2015 compared to 0.31 USD in 2014. The increase reflects a 12.6 percent year-over-year reduction in the weighted average diluted shares outstanding.
• Reported diluted earnings per share were 0.49 USD in 2015, compared to 0.32 USD in 2014.
• Adjusted Earnings per Share from continuing operations were 0.33 USD in 2015, compared to 0.29 USD in 2014. These results exclude the impact of certain items, including system optimization gains and the Arby’s distribution.

Leadership succession proceeding as planned

The Company announced in October that Chief Executive Officer Emil Brolick plans to retire from management duties with the Company in May 2016. Chief Financial Officer Todd Penegor assumed the additional title of President in January and will succeed Brolick in the CEO role after a transition period beginning in the first quarter of 2016. The Company expects that Brolick will continue to serve on the Company’s Board of Directors upon his retirement to ensure continuity of leadership and strategic focus for the Company. The Company is currently conducting an external search for a new CFO.

System optimization continues to yield positive results

As previously announced, the Company plans to reduce its Company-operated restaurant ownership to approximately 5 percent of the total system. As part of this plan, the Company intends to sell approximately 315 restaurants during 2016. The planned sale of these restaurants follows the sale of 826 restaurants in 2013, 2014 and 2015 as part of the Company’s 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», Penegor said. «Interest in the remaining markets that we intend to sell during 2016 remains high from existing and prospective franchisees, and we are confident we will strengthen the Wendy’s brand as a result of these transactions».

«Going forward, we intend to buy and sell restaurants to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development and accelerating Image Activation adoption», Penegor said. «We are also helping to facilitate franchisee-to-franchisee restaurant transfers to get restaurants into the hands of strong operators».

Momentum of Image Activation reimaging program continues

The Company and its franchisees reimaged 450 total system restaurants and built 70 new restaurants in 2015, which has resulted in the reimaging of approximately 22 percent of the Wendy’s North America system restaurants as of the end of 2015. The Wendy’s system remains on schedule to reimage at least 60 percent of its North America restaurants by the end of 2020.

Company issues 2016 outlook

During 2016, the Company expects:

• Adjusted Earnings per Share of 0.35 USD to 0.37 USD, an increase of approximately 6 to 12 percent compared to 2015, with Adjusted Ebitda down 2 percent to flat, due primarily to the timing of the 327 Company-operated restaurants sold during 2015. The Company expects Adjusted Ebitda margins of 28 to 30 percent in 2016.
• Same-restaurant sales growth of approximately 3 percent for the North America system
• Restaurant margin of 18.5 to 19.0 percent at North America Company-operated restaurants, an improvement of approximately 80 to 130 basis points compared to 17.7 percent in 2015.
• Commodity costs decreasing approximately 2 to 3 percent compared to 2015.
• Interest expense of approximately 110 million USD, compared to 86 million USD in 2015.
• A reported tax rate of approximately 41 to 43 percent and an adjusted tax rate of approximately 35 to 37 percent.
• Depreciation and amortization expense of 130 to 135 million USD, including accelerated depreciation of approximately 5 million USD.
• Capital expenditures of approximately 135 to 145 million USD in 2016, compared to 252 million USD in 2015.
• Free cash flow (cash flow from operations minus capital expenditures) of approximately 50 to 75 million USD in 2016.
• General and administrative expense of approximately 235 million USD.

The Company expects to maintain a long-term leverage ratio of approximately five to six times net debt to trailing twelve-month Adjusted Ebitda from continuing operations.