The Wendy's Company Bottom Line Declines 24% In Q3

The Wendy's Company Bottom Line Declines 24% In Q3

The Wendy's Company Bottom Line Declines 24% In Q3

The FINANCIAL -- The Wendy's Company on November 8 reported unaudited results for the third quarter ended October 1, 2017.

"We have now recorded 19 consecutive quarters of positive same-restaurant sales, a streak that is unmatched in the current QSR hamburger category and speaks to the strength and relevance of our brand," President and Chief Executive Officer Todd Penegor said. "We also remain encouraged by the progress being made on our global footprint expansion with 110 year-to-date openings, which is almost 30 restaurants ahead of our pace at this point in 2016. As we lap the effects from system optimization, our improved quality of earnings continues to provide positive benefits through significantly increased cash flows and resiliency in our bottom line. 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."

The Company estimates that the hurricanes in the U.S. negatively impacted North America system same-restaurant sales by approximately 30 to 40 basis-points in the third quarter.

Financial Highlights

Total revenues were $308.0 million in the third quarter of 2017, compared to $364.0 million in the third quarter of 2016. The 15.4 percent decrease resulted primarily from the ownership of 249 fewer Company-operated restaurants at the end of the third quarter 2017 compared to the beginning of the third quarter 2016, which resulted in fewer sales at Company-operated restaurants and a year-over-year decrease in franchise fees, partly offset by higher franchise royalty revenue and franchise rental income. The year-over-year decrease in franchise fees resulted primarily from prior year system optimization activity, including the sale of 156 Company-operated restaurants and 18 Buy and Flips, with no similar activity occurring in the third quarter of 2017.

Company-operated restaurant margin was 16.7 percent in the third quarter of 2017, compared to 18.4 percent in the third quarter of 2016. The 170 basis-point decrease was primarily the result of higher commodity costs.

General and administrative expense was $53.0 million in the third quarter of 2017, compared to $58.9 million in the third quarter of 2016. The 10.1 percent decrease resulted primarily from lower professional fees and cost savings related to the Company's system optimization initiative.

Operating profit was $61.7 million in the third quarter of 2017, compared to $106.1 million in the third quarter of 2016. The 41.9 percent decrease resulted primarily from a year-over-year decrease in gains from the Company's system optimization initiative, in addition to the items discussed above.

Net income was $14.3 million in the third quarter of 2017, compared to net income of $48.9 million in the third quarter of 2016. The year-over-year decrease of 70.8 percent resulted primarily from the items discussed above, in addition to an increase in the effective tax rate.

Adjusted EBITDA was $96.9 million in the third quarter of 2017, compared to $100.2 million in the third quarter of 2016. The 3.3 percent decrease resulted primarily from lower franchise fees due to the significant amount of system optimization and Buy and Flip transactions that occurred in the prior year and a year-over-year decrease in Company-operated restaurant margin, partially offset by general and administrative expense savings, according to the Wendy's Company.

Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 31.5 percent in the third quarter of 2017, compared to 27.5 percent in the third quarter of 2016. The 400 basis-point improvement reflects the positive impact of the Company's system optimization initiative.

Reported diluted earnings per share were $0.06 in the third quarter of 2017, compared to $0.18 in the third quarter of 2016.

Adjusted earnings per share were $0.09 in the third quarter of 2017, compared to $0.11 in the third quarter of 2016. The 18.2 percent decrease resulted primarily from the items discussed above and reflects a 4.9 percent year-over-year reduction in the weighted average diluted shares outstanding.

Year-to-date cash flows from operations through the third quarter of 2017 were $176.7 million, compared to $137.3 million through the third quarter of 2016. The 28.7 percent increase was the result of an increase in net income adjusted for non-cash expenses and a favorable change in working capital.

Year-to-date capital expenditures through the third quarter of 2017 were $53.7 million, compared to $108.7 million through the third quarter of 2016.

Year-to-date free cash flow (cash flows from operations minus capital expenditures) through the third quarter of 2017 was $123.0 million, compared to $28.6 million through the third quarter of 2016. The 330.6 percent increase resulted primarily from a year-over-year decrease in capital expenditures, in addition to the items discussed above.

Image Activation

Image Activation, which includes reimaging existing restaurants and building new restaurants, remains an integral part of our global growth strategy. With 39 percent of the global system featuring the new image, the Company continues to expect that approximately 42 percent of the global system will be image activated by the end of 2017. The Company is now expecting 2017 net new unit growth of approximately 0.5 percent to 1 percent in North America and approximately 14 percent internationally.

Franchisee-to-franchisee restaurant transfers

The Company continues to facilitate franchisee-to-franchisee restaurant transfers ("Buy and Flips") to ensure that restaurants are operated by well-capitalized franchisees that are committed to long-term growth. During the third quarter, the Company did not facilitate any Buy and Flips but has facilitated 410 year-to-date and now expects to complete approximately 500 to 550 in 2017, which is an increase from the previous outlook of approximately 475.

Company repurchases 2.5 million shares for $38.4 million in third quarter

The Company repurchased 2.5 million shares for $38.4 million in the third quarter at an average price of $15.25 per share. As of the end of the quarter, the Company had approximately $59 million remaining on its existing $150 million share repurchase authorization, which expires March 4, 2018.

During 2017, the Company now expects:

Same-restaurant sales growth of approximately 2.0 to 2.5 percent for the North America system.
Company-operated restaurant margin of approximately 17.5 to 18.0 percent.
An adjusted tax rate of approximately 34 to 36 percent.
Adjusted earnings per share of approximately $0.43 to $0.45, an increase of approximately 7.5 to 12.5 percent compared to 2016.
Cash flows from operations of approximately $250 to $265 million.
Capital expenditures of approximately $80 to $85 million.
Free cash flow of approximately $170 to $180 million, an increase of greater than 400 percent compared to 2016.

In addition, the Company continues to expect:

Commodity cost inflation of approximately 3 to 4 percent compared to 2016.
Labor inflation of approximately 4 percent.
General and administrative expense at the low end of its previously issued range of approximately $210 to $220 million.
Net franchise rental income of approximately $100 to $105 million (gross rental income of approximately $190 to $195 million).
Adjusted EBITDA of approximately $404 to $410 million, an increase of approximately 3 to 5 percent compared to 2016.
Adjusted EBITDA margin of approximately 32 to 34 percent.
Interest expense of approximately $115 to $120 million.
Depreciation and amortization expense of approximately $120 to $125 million, including accelerated depreciation of approximately $1 million.

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 ~$12 billion.
Global restaurant count of ~7,500.
Global Image Activation of at least 70 percent.
Adjusted EBITDA margin of 38 to 40 percent.
Free cash flow of ~$275 million (capital expenditures of ~$65 million).