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Recipe Unlimited Corp
Symbol C : RECP
Shares Issued 27,265,015
Close 2019-03-06 C$ 27.30
Recent Sedar Documents

Recipe Unlimited earns $73.8-million in 2018

2019-03-06 19:52 ET - News Release

Mr. Frank Hennessey reports

RECIPE UNLIMITED REPORTS FISCAL 2018 RESULTS AND ANNOUNCES 5% DIVIDEND INCREASE - TOTAL SYSTEM SALES GROW TO $3.4 BILLION, OPERATING EBITDA INCREASES TO $219.6 MILLION

Recipe Unlimited Corp. has released its financial results for the 13 and 52 weeks ending Dec. 30, 2018.

"Two thousand eighteen was a successful year for Recipe as we continue to deliver strong and consecutive quarter-over-quarter growth in system sales, operating EBITDA [earnings before interest, taxes, depreciation and amortization] and free cash flows. After the acquisition of St-Hubert in 2016, we revised our long-term growth targets to include target ranges for system sales of $2.9- to $3.7-billion and EBITDA of $203.0- to $296.0-million. In 2018, growth in our core business as well as the merger with The Keg helped us achieve total system sales of $3.4-billion and operating EBITDA of $219.6-million, putting us well within the range of our 2020 to 2022 long-term targets.

"In 2018, we introduced our four-pillar strategy with a focus on quality of food, quality of service, value for experience and ambience. I would like to thank all of our associates and franchisees for their commitment and efforts to help build programs and drive initiatives that will help us deliver and execute on our four-pillar strategy in the years to come," commented Frank Hennessey, chief executive officer.

"For 2018, the company generated approximately $164-million of free cash flow before growth capex [capital expenditures], dividends and share buybacks. On the strength of our free cash flow, we are pleased to enhance our shareholder returns with a 5-per-cent increase in our dividend for the second consecutive year," added Mr. Hennessey.

Fourth quarter and year-end highlights:

  • The company generates significant free cash flow which provides the company the ability to finance growth and enhance shareholder returns. Free cash flow before growth capex, dividends and NCIB (normal course issuer bid) for the 52 weeks ended Dec. 30, 2018, was $164.1-million, compared with $144.3-million for the 53 weeks ended Dec. 31, 2017, an increase of $19.8-million or 13.7 per cent. Free cash flow before growth capex, dividends and NCIB per share on a diluted basis was $2.66 for the 52 weeks ended Dec. 30, 2018, compared with $2.42 for 2017, an increase of 24 cents per share or 9.9 per cent. During the 52 weeks ended Dec. 30, 2018, the company repaid $116.0-million in debt, more than the $104.0-million that the company drew on its credit facilities to finance the merger with The Keg in February, 2018. At the end of 2018, the company's debt to EBITDA ratio was 1.68 times, compared with the end of the first quarter of 2018 at 2.2 times, illustrating how quickly the company's leverage can reduce from free cash flow.
  • On the strength of the company's free cash flow, the board of directors is increasing the dividend by 5 per cent to 11.21 cents per quarter per share on subordinate and multiple voting common shares.
  • System sales grew $130.5-million to $905.4-million for the 13 weeks ended Dec. 30, 2018, compared with $774.9-million for the 14 weeks ended Dec. 31, 2017, representing an increase of 16.8 per cent. For the 52 weeks ended Dec. 30, 2018, system sales grew $635.8-million to $3,415.3-million, compared with $2,779.5-million for the 53 weeks ended Dec. 31, 2017, representing an increase of 22.9 per cent. The sales impact from the additional week in 2017 was $48.2-million. The increase in system sales is primarily related to same-restaurant sales increases for the year and the additions of Pickle Barrel in December, 2017, and The Keg in February, 2018.
  • Same-restaurant sales (SRS) growth for the 13 weeks ended Dec. 30, 2018, was a decrease of 0.2 per cent and an increase of 1.3 per cent for the 52 weeks ended Dec. 30, 2018, compared with the same 13 and 52 weeks in 2017. Management continues to focus on long-term profitable SRS growth with both short- and long-term strategies to improve SRS with focus on four pillars of operational excellence -- quality of food, quality of service, value for experience and ambience.
  • The company achieved operating EBITDA of $64.5-million for the quarter and $219.6-million for the 52 weeks ended Dec. 30, 2018, compared with $58.5-million for the 14 weeks ended Dec. 31, 2017, and $191.0-million for the 53 weeks ended Dec. 31, 2017, an improvement of $6.0-million or 10.3 per cent for the quarter, and an improvement of $28.6-million or 15.0 per cent for the year. The estimated operating EBITDA impact from the additional week in the fourth quarter of 2017 was $3.5-million in operating EBITDA, increasing the 2018 improvement over 2017 for the quarter to $9.5-million or 16.2 per cent, and on a 52-week basis to $32.1-million or 16.8 per cent. The increases for the year have been driven by same-restaurant sales increases, improved contribution from the corporate and franchise segments, improved contribution from Original Joe's, and the addition of The Keg in February, 2018.
  • Operating EBITDA margin on system sales before The Keg royalty expense was 7.5 per cent for the fourth quarter, as compared with 7.6 per cent in 2017. Operating EBITDA margin on system sales after The Keg royalty expense was 7.1 per cent for the quarter. Operating EBITDA margin on system sales before The Keg royalty for the 52 weeks ended Dec. 30, 2018, was 6.8 per cent, compared with 6.9 per cent in 2017. Operating EBITDA margin on system sales after The Keg royalty for the year was 6.4 per cent, compared with 6.9 per cent in 2017. While The Keg will add EBITDA dollars, because of higher net central overhead costs and the royalty payments to The Keg Royalties Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target 7- to 8-per-cent range. In the fourth quarter, operating EBITDA was within Recipe's target of 7 per cent to 8 per cent, showing improvement from the second quarter and the third quarter. Management's focus will continue to be on improving the earnings efficiency of Recipe's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the 7- to 8-per-cent target range by 2020 to 2022.
  • The contribution from retail and catering for the 13 and 52 weeks ended Dec. 30, 2018, was $8.9-million and $19.5-million, compared with $6.6-million and $15.3-million for the 14 and 53 weeks ended Dec. 31, 2017, an increase of $2.3-million or 34.8 per cent for the quarter and $4.2-million or 27.5 per cent for the year. The increases are primarily driven by sales increases from the Swiss Chalet-branded products, increases in frozen pot pies from the addition of the new pie production line, and the additions of The Keg retail business in February, 2018, and Pickle Barrel catering in December, 2017.
  • Earnings before change in fair value of certain financial instruments and income taxes was $23.3-million for the 13 weeks ended Dec. 30, 2018, compared with $37.0-million for the 14 weeks ended Dec. 31, 2017, a decrease of $13.7-million for the quarter or $11.1-million when excluding the additional week in the fourth quarter of 2017. The change in the quarter and the year to date reflects an earnings increase of $1.1-million over 2017 from the addition of The Keg and improvements in the corporate, franchise, and retail and catering segments, before the $12.2-million effect of the $7.9-million increase in restructuring costs related to the expected cost to exit the company's IT (information technology) data centre lease, as well as a $4.3-million increase in non-cash impairments recorded in the quarter. The fourth quarter restructuring provisions should result in future earnings increases from reduced home office and franchise bad debt and rent subsidy costs.
  • Earnings before changes in fair value of certain financial instruments and income taxes was $114.4-million for the 52 weeks ended Dec. 30, 2018, compared with $116.6-million for the 53 weeks ended Dec. 31, 2017, a decrease of $2.2-million or 1.9 per cent. However, after excluding the $2.6-million earnings from the additional week in the fourth quarter of 2017, 2018 earnings were $400,000 higher than 2017. This reflects an earnings increase of $9.6-million over 2017 from the addition of The Keg and improvements in the corporate, franchise, and retail and catering segments, before the $9.2-million effect from the $7.9-million increase in restructuring costs related to the expected cost to exit the company's IT data centre lease, as well as a $1.3-million increase in non-cash impairments recorded in the year.
  • Adjusted basic earnings per share (EPS) for the 13 and 52 weeks ended Dec. 30, 2018, were 56 cents and $2.00, compared with 62 cents and $1.96 for the 14 and 53 weeks ended Dec. 31, 2017, a decrease of six cents per share for the quarter and an increase of four cents per share for the full year. Adjusted diluted EPS for the 13 and 52 weeks ended Dec. 30, 2018, was 54 cents and $1.93, compared with 59 cents and $1.88 for the 14 and 53 weeks ended Dec. 31, 2017, a decrease of five cents per share for the quarter and an increase of five cents per share for the full year. The fourth quarter decreases were the result of the $7.9-million increase in restructuring costs and $4.3-million increase in non-cash impairments that offset the earnings increase of $1.1-million from The Keg and improvements in the corporate, franchise, and retail and catering segments.
  • On Dec. 11, 2018, the company completed the 100-per-cent acquisition of Marigolds and Onions Ltd. for approximately $6.8-million, of which $4.0-million was settled by drawing on the company's existing credit facility on the date of acquisition. The remaining balance of $2.8-million will be paid in December, 2019, and December, 2020, if certain targets and conditions are met. Marigolds and Onions is an event catering company based in Ontario with annual sales of approximately $12.8-million.
  • During the 13 and 52 weeks ended Dec. 30, 2018, the company purchased and cancelled 568,613 and 634,850 subordinate voting shares for $14.5-million and $16.2-million, respectively, under the company's NCIB.
  • On March 6, 2019, the company's board of directors declared a dividend of 11.21 cents per share of subordinate and multiple voting common stock, representing a 5-per-cent increase over the 2018 quarterly dividend rate, or approximately $6.9-million in total. Payment of the dividend will be made on April 15, 2019, to shareholders of record at the close of business on March 29, 2019. With the company's strong balance sheet and growing cash flows, management will continue to pursue strategic acquisitions and will explore alternatives to return more capital to its shareholders, including continuation of its NCIB and increases to the company's dividend rate.

                                                 13 weeks ended   14 weeks ended   52 weeks ended   53 weeks ended
($ millions unless otherwise stated) (1)          Dec. 30, 2018    Dec. 31, 2017    Dec. 30, 2018    Dec. 31, 2017
                                                     (unaudited)      (unaudited)

Total system sales from continuing operations            $905.4           $774.9         $3,415.3         $2,779.5
Total system sales growth (2)                             16.8%            20.9%            22.9%            36.1%
SRS growth (3)                                            (0.2%)            2.5%             1.3%             0.7%
Number of restaurants (at period-end)                     1,382            1,272            1,382            1,272
Operating EBITDA before Keg royalty                       $68.3            $58.5           $231.9           $191.0
Operating EBITDA margin on total system
sales before Keg royalty                                   7.5%             7.6%             6.8%             6.9%
Operating EBITDA                                          $64.5            $58.5           $219.6           $191.0
Operating EBITDA margin on system sales                    7.1%             7.6%             6.4%             6.9%
Corporate restaurant sales                               $205.0           $125.8           $765.1           $439.1
Number of corporate restaurants                             208              169              208              169
Contribution from corporate segment                       $21.5            $12.3            $80.5            $42.5
Contribution as a % of corporate sales                    10.7%             9.8%            10.7%             9.7%
Number of joint venture restaurants                          46               54               46               54
Franchise restaurant sales                               $615.3           $571.0         $2,362.4         $2,092.2
Number of franchised restaurants                          1,128            1,049             1128             1049
Contribution from franchise segment                       $26.6            $24.1            $99.3            $84.4
Contribution as a % of franchise sales                     4.3%             4.2%             4.2%             4.0%
Contribution from retail and catering                      $8.9             $6.6            $19.5            $15.3
Contribution from central segment
(excluding net royalty expense)                           $11.3            $15.5            $32.6            $48.7
Contribution as a % of total system sales                  1.2%             2.0%             1.0%             1.8%
Total gross revenue                                      $320.7           $233.9         $1,191.9           $832.7
Operating EBITDA margin                                   20.1%            25.0%            18.4%            22.9%
Earnings before income taxes                              $15.4            $37.0           $104.6           $116.6
Net earnings                                               $9.0            $27.3            $73.8           $109.8
Adjusted net earnings                                     $34.9            $36.3           $123.2           $117.1
Net earnings from operations attributable
to common shareholders of the company                      $9.0            $27.4            $73.8           $109.7
EPS attributable to common shareholders
of the company (in dollars)
Basic EPS                                                 $0.15            $0.47            $1.20            $1.84
Diluted EPS                                               $0.14            $0.45            $1.16            $1.77
Adjusted basic EPS                                        $0.56            $0.62            $2.00            $1.96
Adjusted diluted EPS                                      $0.54            $0.59            $1.93            $1.88

(1) Non-IFRS (international financial reporting standards) measures.
(2) East Side Mario restaurants in the United States are excluded from system sales and number of restaurants.
(3) Results from New York Fries located outside Canada, East Side Mario restaurants in the United States and 
    Casey's restaurants are excluded from SRS growth.

The company's unaudited interim and audited year-end consolidated financial statements for the 13 and 52 weeks ended Dec. 30, 2018, and its related management's discussion and analysis are available under the company's profile on SEDAR.

Outlook

Management is satisfied with 2018 results despite some fourth quarter SRS challenges. Management is pleased with the continued growth in all segments, operating EBITDA and operating EBITDA margin. Total systems sales grew $635.8-million or 22.9 per cent to $3,415.3-million, operating EBITDA before the net royalty expense increased $40.9-million or 21.4 per cent to $231.9-million, with a contribution margin of 6.8 per cent as a percentage of total system sales, and adjusted net earnings increased $6.1-million or 5.2 per cent to $123.2-million.

With the full-year effect of The Keg merger, the company's system sales will be approximately $3.5-billion, compared with the initial 2015 IPO (initial public offering) target range for 2020 to 2022 of $2.5-billion to $3.0-billion, and the updated target range provided in 2016 after the St-Hubert acquisition of $2.9-billion to $3.7-billion. The Keg merger will add approximately $23.5-million of operating EBITDA, resulting in combined full-year operating EBITDA of approximately $220.0-million, also within Recipe's updated target EBITDA range of $203.0-million to $296.0-million (based on 7 per cent to 8 per cent of system sales). However, while The Keg will add EBITDA dollars, because of net central overhead costs and royalty payments to The Keg Royalties Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target 7- to 8-per-cent range. Management's focus will continue to be on improving the earnings efficiency of Recipe's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the 7- to 8-per-cent target range by 2020 to 2022.

Management provides the following comments regarding its strategies and initiatives:

Free cash flow: The company generates significant free cash flow before growth capex, dividends and NCIB, which has increased to $164.1-million compared with $144.3-million in 2017, an increase of $19.8-million or 13.7 per cent. During the 52 weeks ended Dec. 30, 2018, the company repaid $116.0-million in debt, more than the $104.0-million that the company drew on its credit facilities to finance the merger with The Keg in February, 2018. At the end of 2018, the company's debt to EBITDA ratio was 1.68 times, compared with the end of the first quarter of 2018 at 2.2 times, illustrating how quickly the company's leverage can reduce from free cash flow.

Management and the board of directors will continue to evaluate alternatives for capital deployment, including growth investments, strategic acquisitions, and enhanced shareholder returns through dividends and share buybacks.

System sales and SRS growth: Management is satisfied with total system sales growth of 22.9 per cent and with SRS of 1.3 per cent for the full year. Management continues to focus on long-term profitable SRS growth with both short- and long-term strategies to improve SRS with a focus on four pillars of operational excellence -- quality of food, quality of service, value for experience and ambience. Sales growth initiatives under the four-pillar strategy include growing off-premise sales with third party aggregators (UberEats and Skip the Dishes), optimizing and reducing menu size to improve quality and service operating standards, launching new and improved e-commerce applications, including mobile applications and other digital platforms to reach our customers, and utilizing technology to provide brand-specific digital social media marketing and to drive operations, customer feedback and customer preference insights that will enable management to enhance guest experiences and realize operational efficiencies. The company is also launching renovation incentive programs to assist franchisees with the cost of major renovations that should generate significant SRS increases from enhanced guest experiences across all four pillars of operational excellence.

Management continues to review its portfolio of restaurants to maximize site potential and profitability to the company. Management's focus will continue to be on the quality of sales from its portfolio of restaurants as it improves site selection, closes weaker locations and renovates to improve guest experience. For restaurant locations that no longer fit the longer strategic plan of the company, management will take steps to exit these underperforming sites.

Total operating EBITDA: Before the impact from the net royalty to The Keg Royalties Income Fund, total operating EBITDA margin was 7.5 per cent for the quarter and 6.8 per cent for the year, as compared with 7.6 per cent and 6.9 per cent for the 14 and 53 weeks ended Dec. 31, 2017. While The Keg will add EBITDA dollars, because of net central overhead costs and royalty payments to The Keg Royalties Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target 7- to 8-per-cent range. Management's focus will continue to be on improving the earnings efficiency of Recipe's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the 7- to 8-per-cent target range by 2020 to 2022.

The combined contributions from the corporate, franchise, retail and catering, and central segments for the 13 and 52 weeks ended Dec. 30, 2018, after the effect of The Keg royalty resulted in total operating EBITDA margin of 7.1 per cent and 6.4 per cent, respectively, as compared with 7.6 per cent and 6.9 per cent for the 14 and 53 weeks ended Dec. 31, 2017.

Corporate restaurant profitability: Corporate restaurant profitability for the 13 and 52 weeks ended Dec. 30, 2018, was 10.7 per cent and 10.7 per cent, respectively, compared with 9.8 per cent and 9.7 per cent in 2017. The improvement during the quarter was mostly from the addition of The Keg, which operates within Recipe's target range. Management believes there is significant opportunity for improved contribution in the future from Original Joe's and Pickle Barrel as management realizes operating synergies from lower food and beverage costs and better labour management tools. Contribution will also improve as renovated restaurants reopen at higher sales levels and from the sale of certain corporate restaurants in franchise banners.

Management will continue to pursue the sale of certain corporate restaurants in its franchise banners to franchisees and will pursue the sale of its share in joint venture locations to the company's joint venture partners to convert joint venture locations to franchise to improve the corporate-franchise portfolio mix. During the 52 weeks ended Dec. 30, 2018, 12 corporate restaurants were franchised and 10 joint venture restaurants were franchised.

Franchise segment: Franchise contribution as a percentage of franchise sales has improved to 4.3 per cent and 4.2 per cent for the 13 and 52 weeks ended Dec. 30, 2018, compared with 4.2 per cent and 4.0 per cent in 2017. The increase is primarily related to the addition of The Keg, which collects average royalties over 5 per cent.

Retail and catering: Contribution dollars from retail and catering were $8.9-million and $19.5-million for the 13 and 52 weeks ended Dec. 30, 2018, respectively, compared with $6.6-million and $15.3-million for the 14 and 53 weeks ended Dec. 31, 2017. A new pie production line was added in the third quarter, which has increased production capacity and enabled the company to meet the increased demand for its St-Hubert and Swiss Chalet frozen pie products with less reliance on higher-cost third party producers. Since the acquisition of St-Hubert in 2017, the company has successfully launched a number of products, including Swiss Chalet ribs and pot pies, across the country in grocery chains. The company will be adding a new rib line in the fourth quarter of 2019 to increase its rib production capacity to meet the increased demand. Management is also pursuing the launch of several more Recipe-branded retail products to expand its retail presence in national grocery chains. The company has also added catering sales and contribution as a significant opportunity for growth with the acquisitions of Pickle Barrel catering in December, 2017, Rose Reisman catering in December, 2017, and Marigolds and Onions in December, 2018.

Central segment: The addition of The Keg has added net central overhead costs, including the royalty payments to The Keg Royalties Income Fund, thus reducing central contribution as a percentage of system sales. Management will work toward realizing synergy opportunities with the companies acquired as Recipe continues to improve on its model for growing sales faster than head office expenses and realizing earnings efficiency on higher system sales.

Restaurant count: In the 52 weeks ended Dec. 30, 2018, excluding the acquisitions, the company opened 61 new restaurant locations, as compared with 56 in 2017. During 2018, the company closed 56 restaurants (excluding Casey's closures), compared with 44 closures in 2017. Included in the closures were underperforming locations where the closure will benefit the overall system performance and the company's profitability going forward. Closures also included locations that no longer fit the long-term strategy of certain brands. Management will continue to review its portfolio of restaurants and will opportunistically close underperforming or non-strategic locations that will benefit the company long term.

Growth and acquisitions: The company currently has a debt to EBITDA ratio of approximately 1.68 times, compared with 2.2 times at the end of the first quarter of 2018. At this debt level, and with strong cash flow from operations, the company has the ability to consider more growth opportunities while continuing to reduce its debt, and by opportunistically repurchasing its subordinate voting shares for cancellation under the NCIB. During the 13 and 52 weeks ended Dec. 30, 2018, the company purchased and cancelled 568,613 and 634,850 subordinate voting shares for $14.5-million and $16.2-million, respectively, under the company's NCIB program.

About Recipe Unlimited Corp.

Founded in 1883, Recipe (formerly Cara Operations) is Canada's oldest and largest full-service restaurant company. The company franchises and/or operates some of the most recognized brands in the country, including Swiss Chalet, Harvey's, St-Hubert, The Keg, Milestones, Montana's, Kelsey's, East Side Mario's, New York Fries, Prime Pubs, Bier Markt, Landing, Original Joe's, State & Main, Elephant & Castle, The Burger's Priest, The Pickle Barrel and 1909 Taverne Moderne. As at Dec. 30, 2018, Recipe had 19 brands and 1,382 restaurants, 85 per cent of which are operated by franchisees and joint venture partners.

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