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Recipe Unlimited Corp
Symbol C : RECP
Shares Issued 27,235,177
Close 2019-05-09 C$ 27.20
Recent Sedar Documents

Recipe Unlimited earns $22.7-million in Q1

2019-05-09 20:01 ET - News Release

Mr. Frank Hennessey reports

RECIPE UNLIMITED REPORTS Q1 2019 TOTAL SYSTEM SALES GROWTH OF 12.5%, OPERATING EBITDA GROWS 8.4%

Recipe Unlimited Corp. has released its financial results today for the 13 weeks ending March 31, 2019.

"In the first quarter, system sales grew by $94.8-million or 12.5 per cent to $850.7-million, contributing to operating EBITDA and operating EBITDA margin improvements. Operating EBITDA increased to $50.1-million, representing 8.4-per-cent growth over last year. Our steady operating EBITDA growth continues to drive our strong free cash flow position, leaving us well positioned to take advantage of future growth opportunities. Our corporate, franchise, and retail and catering segments all demonstrated year-over-year growth in absolute dollars and as a per cent of sales. The new pie production line that was added in the third quarter of 2018 has increased production capacity and has helped us meet the increased demand for our St-Hubert and Swiss Chalet frozen pie products, contributing to the growth in the retail and catering segment in the first quarter. We are excited about further growth in this segment in 2019, as we continue to expand our Recipe branded retail product offerings in grocery," commented Frank Hennessey, chief executive officer.

"While we are satisfied with the growth of system sales and operating EBITDA, we continue to focus on same-restaurant sales, which decreased 1.6 per cent in the quarter. Our ongoing goal is to increase guest visits into our restaurants by improving their overall experience. We are in the early days of our four-pillar operational strategy, which will drive ongoing improvements in the areas of quality of food, quality of service, value for experience and ambience. While the metrics we use to measure our progress demonstrate recent improvement on all four pillars, there is still much work to be done and upside to be realized," Mr. Hennessey added.

Highlights for the 13 weeks ended March 31, 2019:

  • 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 share repurchases under the company's normal course issuer bid (NCIB) for the 13 weeks ended March 31, 2019, was $35.1-million, compared with $33.2-million for the 13 weeks ended April 1, 2018, an increase of $1.9-million or 5.7 per cent.
  • Free cash flow per share before growth capex, dividends and NCIB on a diluted basis was 55 cents for the 13 weeks ended March 31, 2019, compared with 53 cents for 2018, an increase of two cents per share or 3.8 per cent.
  • Subsequent to the quarter, the company completed the refinancing of its $550.0-million credit facilities on more favourable borrowing terms and raised $250.0-million of 10-year 4.72 per cent private notes. This increase in borrowing capacity, coupled with the company strong free cash flow, will enable the company to finance growth and pursue strategic opportunities to further enhance shareholder value.
  • System sales grew $94.8-million to $850.7-million for the 13 weeks ended March 31, 2019, compared with 2018, representing an increase of 12.5 per cent. The increase in system sales is primarily related to the addition The Keg in February, 2018, and increases in the retail and catering segment from the Swiss Chalet branded products at grocery, increases in frozen pot pie sales from the addition of the new pie production line, and the addition of Marigolds and Onions in December, 2018.
  • Same-restaurant sales (SRS) growth for the 13 weeks ended March 31, 2019, was a decrease of 1.6 per cent compared with the same 13 weeks in 2018. Contributing factors to the company's SRS results include: mixed performance between its brands; early progress on its new four-pillar operating model, with much work still to be done; and challenging winter weather conditions across the country.
  • Operating EBITDA* increased to $50.1-million for the 13 weeks ended March 31, 2019, compared with $46.2-million in 2018, an improvement of $3.9-million or 8.4 per cent for the quarter. The increases were driven by the improved contribution from the corporate and franchise segments related to the addition of The Keg in February, 2018, and increases in the retail and catering segment, which offset full-quarter net central expenses from The Keg.
  • Operating EBITDA margin on system sales before The Keg royalty expense was 6.3 per cent for the quarter compared with 6.3 per cent in 2018. Operating EBITDA margin on system sales after The Keg royalty expense was 5.9 per cent for the quarter as compared with 6.1 per cent in 2018. While The Keg adds EBITDA dollars, because of higher net central overhead costs and the royalty payments to The Keg Royalty Income Fund, in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target range of 7 per cent to 8 per cent. Management's focus will continue to be on improving the earnings efficiency of the company's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the target range of 7 per cent to 8 per cent by 2020 to 2022.
  • Contribution from retail and catering for the 13 weeks ended March 31, 2019, was $4.5-million compared with $3.3-million for the 13 weeks ended April 1, 2018, an increase of $1.2-million or 36.4 per cent for the quarter. The increases are primarily driven by sales increases of Swiss Chalet branded products at grocery, increases in frozen pot pie sales from the addition of the new pie production line, the addition of The Keg retail business in February, and the addition of Marigolds and Onions in December, 2018.
  • Earnings before income taxes for the 13 weeks ended March 31, 2019, were $31.3-million compared with $29.3-million in 2018, an increase of $2.0-million or 6.8 per cent. The increase was driven by the improved contribution from the corporate and franchise segments related to the addition of The Keg in February, 2018, increases in the corporate, franchise, retail and catering segments, increase in non-cash fair value adjustment related to the exchangeable Keg partnership units, partially offset by a net $300,000 decrease in earnings related to the new IFRS 16 (international financial reporting standard), Lease, standard.
  • Adjusted net earnings for the 13 weeks ended March 31, 2019, were $17.7-million compared with $20.6-million in 2018, a decrease of $2.9-million for the quarter. The decrease is primarily related to: higher stock-based compensation expense of $1.4-million; higher income tax expense of $800,000; and the adoption of the new IFRS 16, Lease, standard, which caused a decrease in net earnings of $300,000. The decrease was partially offset by improved contribution dollars from the corporate, franchise, retail and catering segments.
  • Basic earnings per share (EPS) for the 13 weeks ended March 31, 2019, were 36 cents compared with 36 cents in 2018, while diluted EPS for the 13 weeks ended March 31, 2019, was 35 cents compared with 35 cents in 2018.
  • Under the company's NCIB, the company purchased and cancelled 266,197 subordinate voting shares for $7.1-million during the 13 weeks ended March 31, 2019. Subsequent to March 31, 2019, until May 9, 2019, the company has repurchased 120,650 Recipe subordinate voting shares for $3.2-million under the NCIB and has purchased 983,160 subordinate voting shares for $25.5-million since June 22, 2018.
  • On May 9, 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 aggregate. Payment of the dividend will be made on June 14, 2019, to shareholders of record at the close of business on May 31, 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.

                                        HIGHLIGHTS
     (in millions of dollars, except per-share amounts and as otherwise stated) (1)

                                                                  13 weeks        13 weeks
                                                            March 31, 2019  April 1,  2018

Total system sales from continuing operations                      $850.7           $755.9
Total system sales growth (2)                                       12.5%            14.7%
SRS growth (3)                                                      (1.6%)            2.1%
Number of restaurants (at period-end)                               1,382            1,382
Operating EBITDA before Keg royalty                                 $53.9            $47.6
Operating EBITDA margin on total system sales before Keg royalty     6.3%             6.3%
Operating EBITDA                                                    $50.1            $46.2
Operating EBITDA margin on system sales                              5.9%             6.1%
Corporate restaurant sales                                         $192.6           $146.1
Number of corporate restaurants                                       211              208
Contribution from corporate segment                                 $18.5            $13.1
Contribution as a percentage of corporate sales                      9.6%             9.0%
Franchise restaurant system sales                                  $581.3           $543.1
Number of franchised and joint venture restaurants                  1,171            1,174
Contribution from franchise segment                                 $25.5            $22.4
Contribution as a percentage of franchise sales                      4.4%             4.1%
Contribution from retail and catering                                $4.5             $3.3
Contribution from central segment (excluding net royalty expense)    $5.4             $8.9
Contribution as a percentage of total system sales                   0.6%             1.2%
Total gross revenue                                                $304.6           $244.1
Operating EBITDA margin on gross revenue                            16.4%            18.9%
Earnings before income taxes                                        $31.3            $29.3
Net earnings                                                        $22.7            $21.5
Adjusted net earnings                                               $17.7            $20.6
Earnings per share attributable to common 
shareholders of the company (in dollars)                            
Basic earnings per share                                            $0.36            $0.36
Diluted earnings per share                                          $0.35            $0.35
Adjusted basic earnings per share                                   $0.29            $0.34
Adjusted diluted earnings per share                                 $0.28            $0.33
Free cash flow before growth capex, dividends and NCIB              $35.1            $33.2
Free cash flow per share -- basic (in dollars)                      $0.57            $0.55
Free cash flow per share -- diluted (in dollars)                    $0.55            $0.53
Quarterly dividend declared per share (in dollars)                $0.1121          $0.1068

(1) System sales, system sales growth, SRS growth, operating EBITDA, adjusted net 
earnings, adjusted basic earnings per share and adjusted diluted earnings per share are
non-IFRS 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 of Canada, East Side Mario restaurants in 
the United States and Casey's restaurants are excluded from SRS growth.                  

The company's unaudited interim consolidated financial statements for the 13 weeks ended March 31, 2019, and the management's discussion and analysis (MD&A) are available under the company's profile on SEDAR.

Outlook

Despite negative SRS, the company saw improvements with operating EBITDA and operating EBITDA margin for the quarter. System sales grew $94.8-million or 12.5 per cent to $850.7-million, operating EBITDA before the net royalty expense increased $6.3-million or 13.2 per cent to $53.9-million, with a contribution margin of 6.3 per cent as a percentage of total system sales.

Management provides the following comments regarding its strategies and initiatives:

Free cash flow: 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 share repurchases under the company's NCIB for the 13 weeks ended March 31, 2019, was $35.1-million compared with $33.2-million for the 13 weeks ended April 1, 2018, an increase of $1.9-million or 5.7 per cent.

Free cash flow per share before growth capex, dividends and the NCIB on a diluted basis was 55 cents for the 13 weeks ended March 31, 2019, compared with 53 cents for 2018, an increase of two cents per share or 3.8 per cent.

At Q1 2019, the company's debt to EBITDA ratio was 1.7 times compared with 2.2 times at the end of Q1 2018, illustrating how quickly the company's leverage has reduced from free cash flow being used to reduce debt on the company's revolving credit facility.

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 12.5 per cent. Management is not satisfied with negative SRS of 1.6 per cent. Contributing factors to the company's SRS results include: mixed performance between its brands; early progress on its new four-pillar operating model, with much work still to be done; and challenging winter weather conditions across the country.

The company's continuing goal is to increase guest counts by improving the overall experience. Its operational focus in achieving this goal is through a disciplined approach to its four-pillar plan -- quality of food, quality of service, value for experience and ambience. And while the company's metrics that it uses to measure its progress demonstrate improvement on all four pillars, there is still much work to be done. In Q2, most brands will launch new menus that will be optimized to ensure the company is improving overall guest satisfaction while reducing complexity for its operations teams. Reducing this complexity will further enhance guest satisfaction and speed of service for both dining room and the company's growing off-premise business. The company is using data insights and scorecards to highlight specific areas of opportunity. It can identify specific challenges down to an individual restaurant, day of week and hour of day. This information allows the company to work with its operations team on solutions to individual needs. New training programs at both brand and leadership levels are being initiated this year so that the company becomes a better restaurant operating company for both today and the future. The company's new renovation incentive program announced last year to assist franchisees with the cost of major renovations should greatly enhance guest experience and consequently generate positive SRS. This program has been enthusiastically received by franchisees and as a result the company expects to have a significant increase in renovations completed in fiscal 2019.

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 the company 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 6.3 per cent for the quarter compared with 6.3 per cent in 2018. The combined contributions from corporate, franchise, food processing and distribution and central segments resulted in total operating EBITDA margin of 5.9 per cent for the quarter compared with 6.1 per cent in 2018. While The Keg adds 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 range of 7 per cent to 8 per cent. Management's focus will continue to be on improving the earnings efficiency of the company's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the company's target range of 7 per cent to 8 per cent by 2020 to 2022.

Corporate restaurant profitability: Corporate restaurant profitability for the 13 weeks ended March 31, 2019, was 9.6 per cent compared with 9.0 per cent in 2018. The improvement during the quarter was mostly from the full-quarter impact of The Keg, which operates within the company's target range, and improvements at Original Joe's. 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.

Franchise segment: Franchise contribution as a percentage of franchise sales has improved to 4.4 per cent compared with 4.1 per cent in 2018. The increase is primarily related to the addition of The Keg, which collects average royalties over 5 per cent and from new franchisees that pay full royalties.

Management believes the effective royalty recovery rate will gradually increase over time closer to 5 per cent for franchisees as the company adds new franchisees and renews existing locations at the full royalty rate. In addition, The Keg will also increase Recipe's overall net royalty rate as new and renewed Keg franchisees pay a 6-per-cent royalty while others pay 5 per cent until their franchise agreement is renewed.

Retail and catering: Contribution dollars from retail and catering were $4.5-million compared with $3.3-million in 2018. A new pie production line was added in the third quarter 2018, 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 Q4 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 the company 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 13 weeks ended March 31, 2019, the company opened 15 new restaurant locations, as compared with 17 in the first quarter of 2018, and closed 15 locations, as compared with 13 in 2018. 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 net debt to EBITDA ratio of approximately 1.7 times compared with 1.7 times at the end 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 weeks ended March 31, 2019, the company purchased and cancelled 266,197 subordinate voting shares for $7.1-million under the company's NCIB program and has purchased 983,160 subordinate voting shares for $25.5-million since June 22, 2018. In addition, the company's new financing structure positions Recipe for strategic and opportunistic growth at long-term favourable borrowing rates and credit terms. Management believes that locking in long-term fixed rate capital before interest rates increase is prudent and will enable future accretive growth.

* EBITDA is defined as net earnings before: (i) net interest expense and other financing charges; (ii) income taxes; (iii) depreciation of property, plant and equipment; and (iv) amortization of other assets and deferred gain.

Related communications

Mr. Hennessey and Ken Grondin, chief financial officer, will hold an investor conference call to discuss 2019 first quarter results at 9 a.m. Eastern Time on Friday, May 10, 2019.

To access the call, please dial 647-427-7450 or 1-888-231-8191 five to 10 minutes prior to the start time. The conference ID is 2755034. A telephone replay of the call will be available until midnight on May 31, 2019. To access the replay, please dial 416-849-0833 or 1-855-859-2056 and enter passcode 2755034.

About Recipe Unlimited Corp.

Founded in 1883, Recipe 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, Marigolds & Onions, and 1909 Taverne Moderne.

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