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The Wendy's Company Reports Second Quarter 2017 Results

"After recording our 18th consecutive quarter of positive same-restaurant sales and as we continue to strengthen the Wendy's® brand through new restaurant development and Image Activation, we are pleased with our progress and remain confident in our long-term targets," President and Chief Executive Officer Todd Penegor said. "More than one-third of the global system is now Image Activated and we continue advancing towards our global expansion goals with 35 new restaurant openings during the second quarter and 68 openings year-to-date. We, along with our exceptional and dedicated franchisees across the globe, remain committed to delighting every customer and to our brand purpose of creating joy and opportunity through our food, family and community."

Second Quarter 2017 Summary
See "Disclosure Regarding Non-GAAP Financial Measures" and the reconciliation tables that accompany this release for a discussion and reconciliation of certain non-GAAP financial measures included in this release.

Operational Highlights


Three Months Ended








July 2, 2017


July 3, 2016








(Unaudited)






North America Same-Restaurant Sales Growth(1)


3.2%


0.4%






Global Restaurant Openings





North America - Total / Net


10 / -11


12 / 2

International - Total / Net


25 / 24


7 / 6

Global Restaurant Openings - Total / Net


35 / 13


19 / 8






Global Systemwide Sales (In US$ Millions)(2)





North America


$2,521.2


$2,426.5

International(3)


$118.8


$103.5

Global Systemwide Sales


$2,640.0


$2,530.0






Global Systemwide Sales Growth(1)





North America


4.1%


1.8%

International(3)


16.4%


2.5%

Global Systemwide Sales Growth


4.6%


1.8%






(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.

Financial Highlights

  • Total revenues were $320.3 million in the second quarter of 2017, compared to $382.7 million in the second quarter of 2016. The 16.3 percent decrease resulted primarily from the ownership of 251 fewer Company-operated restaurants at the end of the second quarter 2017 compared to the beginning of the second quarter 2016, which resulted in fewer sales at Company-operated restaurants, partly offset by higher franchise royalty revenue and fees and franchise rental income.
  • Company-operated restaurant margin was 19.6 percent in the second quarter of 2017, compared to 21.9 percent in the second quarter of 2016. The 230 basis-point decrease was primarily the result of increased labor rates and higher commodity costs.
  • General and administrative expense was $51.3 million in the second quarter of 2017, compared to $61.1 million in the second quarter of 2016. The 16.1 percent decrease resulted primarily from cost savings related to the Company's system optimization initiative, lower professional fees and legal reserves, and a year-over-year decrease in incentive compensation accruals.
  • Operating profit was $25.8 million in the second quarter of 2017, compared to $65.6 million in the second quarter of 2016. The 60.7 percent decrease resulted primarily from system optimization losses that were related to the DavCo-NPC transactions (see below for further information). Reorganization and realignment costs related to the G&A expense savings initiative also contributed to the year-over-year decrease in operating profit.
  • The Company reported a net loss of $1.8 million in the second quarter of 2017, compared to net income of $26.5 million in the second quarter of 2016. The year-over-year decrease resulted primarily from system optimization losses that were related to the DavCo-NPC transactions (see below for further information) and reorganization and realignment costs related to the G&A expense savings initiative.
  • Adjusted EBITDA was $116.1 million in the second quarter of 2017, compared to $102.5 million in the second quarter of 2016, despite the ownership of 251 fewer Company-operated restaurants at the end of the second quarter of 2017 compared to the beginning of the second quarter of 2016. Franchise fees driven by Buy and Flip activity also contributed to the 13.3 percent year-over-year increase in adjusted EBITDA.
  • Adjusted EBITDA margin (adjusted EBITDA divided by total revenues) was 36.2 percent in the second quarter of 2017, compared to 26.8 percent in the second quarter of 2016. The 940 basis-point improvement reflects the positive impact of the Company's system optimization initiative.
  • The Company recorded a reported diluted loss per share of $0.01 in the second quarter of 2017, compared to a reported diluted earnings per share of $0.10 in the second quarter of 2016.
  • Adjusted earnings per share were $0.15 in the second quarter of 2017, compared to $0.10 in the second quarter of 2016. The 50.0 percent increase resulted primarily from the items discussed above and reflects a 6.2 percent year-over-year reduction in the weighted average diluted shares outstanding.
  • Year-to-date cash flows from operations through the second quarter of 2017 were $120.6 million, compared to $105.8 million through the second quarter of 2016. The 14.0 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 second quarter of 2017 were $32.1 million, compared to .5 million through the second quarter of 2016.
  • Year-to-date free cash flow (cash flows from operations minus capital expenditures) through the second quarter of 2017 was $88.5 million, compared to $37.3 million through the second quarter of 2016. The 137.2 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 36 percent of the global system featuring the new image, the Company and its franchisees continue to expect that approximately 42 percent of the global system will be image activated by the end of 2017. The Company is reiterating its 2017 net new unit growth expectations of approximately 1 percent in North America and raising its International expectations from approximately 12.5 percent to approximately 14 percent.

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. In addition, Buy and Flips also contribute to the Company's improved quality of earnings by generating franchise fees and net rental income. During the second quarter, the Company facilitated 294 Buy and Flips, which includes the DavCo-NPC transactions, and expects to complete approximately 475 in 2017.

DavCo-NPC transactions
As previously announced on June 1, 2017, the Company successfully completed a series of transactions of strategic importance. Under the transactions, the Company acquired 140 restaurants in the Maryland, Virginia, and Washington, D.C. markets from DavCo Restaurants, LLC ("DavCo"), which were immediately sold to NPC International, Inc. ("NPC"). The Company did not operate the restaurants prior to the disposition to NPC. As part of the transaction, NPC has agreed to remodel 90 restaurants by the end of 2021 and build 15 new restaurants by the end of 2022. Prior to the closing of the transactions, seven restaurants in these markets were closed. The acquisition of Wendy's restaurants from DavCo was not contingent on executing the sale agreement with NPC; as such, the Company accounted for the transactions as an acquisition and subsequent disposition of a business. Due to the unique nature of the transactions, the Company incurred a total pre-tax loss of $43.1 million and a net cash outflow, exclusive of franchise fees received, of $17.8 million in the second quarter.

"NPC is a great franchise partner and best-in-class operator. We are excited about NPC's commitment to help these important growth markets reach their full potential through aggressive reimaging, building new restaurants, implementing key in-restaurant technology, and starting to participate in national programs such as the 50¢ Frosty®," Penegor said.

Company provides update regarding G&A expense savings initiative
During the second quarter, the Company commenced its previously announced G&A expense savings initiative in order to further reduce G&A expense to approximately 1.5 percent of global systemwide sales by 2020. The Company recognized costs totaling $17.2 million during the second quarter, which primarily included severance and related employee costs and share-based compensation. The Company did not incur significant cash expenditures in the second quarter, but expects cash expenditures to begin in the second half of 2017. The Company expects to incur total costs aggregating approximately $28 million to $33 million, of which $23 million to $27 million will be cash expenditures.

Company repurchases 2.3 million shares for $34.6 million in second quarter
The Company repurchased 2.3 million shares for $34.6 million in the second quarter at an average price of $15.11 per share. As of the end of the quarter, the Company had approximately $98 million remaining on its existing $150 million share repurchase authorization, which expires March 4, 2018.

2017 outlook
This release includes forward-looking guidance for certain non-GAAP financial measures, including adjusted EBITDA, adjusted earnings per share and adjusted tax rate. The Company excludes certain expenses and benefits from adjusted EBITDA, adjusted earnings per share and adjusted tax rate, such as impairment of long-lived assets, reorganization and realignment costs and system optimization gains, net. 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 or reported tax rate or a reconciliation of projected adjusted EBITDA, adjusted earnings per share or adjusted tax rate to projected net income, earnings per share or reported tax...


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