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Recipe Unlimited Corp
Symbol C : RECP
Shares Issued 26,880,005
Close 2019-08-08 C$ 26.85
Recent Sedar Documents

Recipe Unlimited earns $16.6-million in Q2

2019-08-08 19:41 ET - News Release

Mr. Frank Hennessey reports

RECIPE UNLIMITED REPORTS Q2 2019 RESULTS - STRONG OPERATING EBITDA AND FREE CASH FLOW

Recipe Unlimited Corp. has released its financial results for the 13 and 26 weeks ended June 30, 2019.

"In the second quarter, operating EBITDA increased by $2.0-million and operating EBITDA margin improved to 6.4 per cent compared to 6.2 per cent last year. Total system sales decreased $2.9-million to $871.3-million compared to $874.2-million in Q2 of last year. System sales were impacted by SRS [same-restaurant sales] performance, which decreased 1.7 per cent both in the quarter and year to date, and by the timing of restaurant closures compared to last year. EBITDA [earnings before interest, taxes, depreciation and amortization] growth in the quarter was primarily the result of improvements in the contribution from the franchise, central, and retail and catering segments of our business," commented Frank Hennessey, chief executive officer.

"Our focus remains on network health and franchisee profitability. Despite a disappointing sales quarter, impacted by the late start to the patio season and the heightened activity of competitor deep-discount programs, we believe that the resilience of our multibrand earnings model and our disciplined four-pillar operating strategy, focused on improvements in the areas of quality of food, quality of service, value for experience and ambience, is a more sustainable model for the long-term health of our brands and our franchisees," added Mr. Hennessey.

Highlights for the 13 and 26 weeks ended June 30, 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 (capital expenditures), dividends and share repurchases under the company's normal course issuer bid (NCIB) for the 13 and 26 weeks ended June 30, 2019, was $40.0-million and $75.5-million, respectively.
  • Free cash flow per share before growth capex, dividends and NCIB on a diluted basis was 63 cents and $1.18 for the 13 and 26 weeks ended June 30, 2019.
  • At the second quarter of 2019, the company's debt to EBITDA ratio was 1.7 times, compared with 2.1 times at the end of the second quarter of 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 facilities, leaving capacity for growth investments and enhanced shareholder returns.
  • System sales decreased $2.9-million to $871.3-million for the 13 weeks ended June 30, 2019, compared with $874.2-million in 2018, representing a decrease of 0.3 per cent. The decrease is related to the SRS decreases. Year to date, system sales grew $91.9-million to $1,722.0-million, compared with $1,630.1-million in 2018, representing an increase of 5.6 per cent. The increase in system sales is primarily related to the addition of 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.
  • SRS growth for the 13 and 26 weeks ended June 30, 2019, was a decrease of 1.7 per cent compared with the same 13 and 26 weeks in 2018. Contributing factors to the SRS results include mixed performance between brands; early progress on the new four-pillar operating model (quality of food, quality of service, ambience and value for the experience), with much work still to be done; and challenging winter and spring weather conditions across the country during the first and second quarters.
  • Operating EBITDA increased to $56.0-million for the 13 weeks ended June 30, 2019, compared with $54.0-million in 2018, an improvement of $2.0-million or 3.7 per cent for the quarter. Year to date, operating EBITDA increased to $106.1-million for the 26 weeks ended June 30, 2019, compared with $100.2-million in 2018, an improvement of $5.9-million or 5.9 per cent. The increases were primarily driven by the improved contribution from the franchise and central segments that more than offset a decrease in corporate contribution.
  • Operating EBITDA margin on system sales before The Keg royalty expense was 6.8 per cent for the quarter, compared with 6.6 per cent in 2018. Year to date, operating EBITDA margin on system sales before The Keg royalty expense was 6.6 per cent, compared with 6.4 per cent in 2018. Operating EBITDA margin on system sales after The Keg royalty expense was 6.4 per cent for the quarter and 6.2 per cent year to date, as compared with 6.2 per cent and 6.1 per cent in 2018, respectively. The improvements in margin rate were primarily driven by improved franchise contribution margin and better central segment results that offset lower corporate contribution margin. 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 7-per-cent to 8-per-cent target range. 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 7-per-cent to 8-per-cent target range by 2020 to 2022.
  • Contribution from retail and catering for the 13 and 26 weeks ended June 30, 2019, was $3.2-million and $7.7-million, compared with $2.8-million and $6.0-million for the 13 and 26 weeks ended July 1, 2018, an increase of $400,000 or 14.3 per cent for the quarter and an increase of $1.7-million or 28.3 per cent year to date. 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 in February, 2018, and the addition of Marigolds and Onions in December, 2018.
  • Earnings before income taxes for the 13 weeks ended June 30, 2019, were $23.8-million, compared with $28.4-million in 2018, a net decrease of $4.6-million or 16.2 per cent. The net decrease in the quarter was primarily driven by the $2.0-million increase in operating EBITDA and a $2.7-million reduction in non-cash fair value changes related to the exchangeable Keg partnership units and non-controlling interest liability, offset by a $4.7-million increase in non-cash impairment and onerous contract expenses, $2.6-million higher depreciation and amortization expense (before IFRS (international financial reporting standards) lease standard changes), a non-cash write-off of deferring financing fees of $1.0-million, higher stock-based compensation expense of $400,000, and a net $600,000 expense impact related to the new IFRS lease standard.
  • Year to date, earnings before income taxes were $55.1-million, compared with $57.8-million in 2018, a net decrease of $2.7-million or 4.7 per cent. The net decrease was primarily driven by the $5.9-million increase in operating EBITDA and a $5.3-million reduction in non-cash fair value adjustments related to the exchangeable Keg partnership units and non-controlling interest liability, offset by $4.9-million higher depreciation and amortization expense (before IFRS lease standard changes) non-cash impairment and onerous contract expense increases of $4.1-million, a non-cash write-off of deferring financing fees in the amount of $1.0-million, higher stock-based compensation expense of $1.8-million, an increase in loss on disposal of assets of $1.0-million, and a net $900,000 expense related to the new IFRS lease standard.
  • Adjusted basic earnings per share (EPS) for the 13 weeks ended June 30, 2019, were 38 cents, compared with 39 cents in 2018, while adjusted diluted EPS for the 13 weeks ended June 30, 2019, was 37 cents, compared with 38 cents in 2018. Year to date, adjusted basic EPS was 67 cents, compared with 74 cents in 2018, while adjusted diluted EPS for the 26 weeks ended June 30, 2019, was 65 cents, compared with 71 cents in 2018.
  • On May 24, 2019, the company purchased the assets of Anejo and Blanco Cantina, two Mexican-themed restaurants, and related brand intellectual property for $5.0-million, which was settled by drawing on the company's existing credit facility on the date of acquisition. The company intends to franchise and increase the number of Anejo and Blanco Cantina restaurants in Canada and it is excited to add these new brands to its emerging brand category along with Burger's Priest and Fresh, which are both in the early stages with high growth potential.
  • Under the company's NCIB, the company purchased and cancelled 437,727 and 703,924 subordinate voting shares for $11.7-million and $18.8-million during the 13 and 26 weeks ended June 30, 2019. Subsequent to June 30, 2019, until Aug. 8, 2019, the company has repurchased 564,956 Recipe subordinate voting shares for $15.1-million under the NCIB. During the period from June 22, 2018, to June 21, 2019, the company purchased 1,281,972 subordinate voting shares for $33.5-million, compared with a total of 1,907,816 subordinate voting shares that were eligible to be purchased under the NCIB.
  • On Aug. 8, 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 $6.8-million in total. Payment of the dividend will be made on Sept. 13, 2019, to shareholders of record at the close of business on Aug. 30, 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   13 weeks ended   26 weeks ended   26 weeks ended         
($ millions unless otherwise stated) (1)              June 30, 2019     July 1, 2018     June 30 2019     July 1, 2018
                                                         (unaudited)      (unaudited)      (unaudited)      (unaudited)

Total system sales from continuing operations                $871.3           $874.2         $1,722.0         $1,630.1
Total system sales growth (2)                                 -0.3%            32.3%             5.6%            23.5%
SRS growth (3)                                                -1.7%             1.9%            -1.7%             1.9%
Number of restaurants (at period-end)                         1,384            1,379            1,384            1,379
                                                          ---------        ---------        ---------        ---------
Operating EBITDA before Keg royalty                           $59.4            $57.5           $113.4           $105.1
Operating EBITDA margin on total system sales
before Keg royalty                                            19.0%            18.6%            18.4%            19.0%
                                                          ---------        ---------        ---------        ---------
Operating EBITDA                                              $56.0            $54.0           $106.1           $100.2
Operating EBITDA margin on system sales                        6.4%             6.2%             6.2%             6.1%
                                                          ---------        ---------        ---------        ---------
Corporate restaurant sales                                   $196.2           $203.6           $388.8           $349.7
Number of corporate restaurants                                 209              212              209              212
Contribution from corporate segment                           $20.5            $24.3            $39.0            $37.4
Contribution as a % of corporate sales                        10.5%            12.0%            10.0%            10.7%
                                                          ---------        ---------        ---------        ---------
Franchise restaurant system sales                            $595.9           $596.8         $1,177.2         $1,139.9
Number of franchised and JV restaurants                       1,175            1,167            1,175             1167
Contribution from franchise segment                           $26.9            $24.7            $52.4            $47.1
Contribution as a % of franchise sales                         4.5%             4.1%             4.4%            4.10%
                                                          ---------        ---------        ---------        ---------
Contribution from retail and catering                          $3.2             $2.8             $7.7            $6.00
                                                          ---------        ---------        ---------        ---------
Contribution from central segment (excluding
net royalty expense)                                           $8.8             $5.7            $14.3            $14.6
Contribution as a % of total system sales                      1.0%             0.6%             0.8%             0.9%
                                                          ---------        ---------        ---------        ---------
Total gross revenue                                          $311.9           $309.5           $616.5           $553.7
Operating EBITDA margin on gross revenue                      18.0%            17.4%            17.2%            18.1%
Earnings before income taxes                                  $23.8            $28.4            $55.1            $57.8
Net earnings                                                  $16.6            $19.5            $39.3            $41.0
Adjusted net earnings                                         $23.5            $24.4            $41.3            $45.1
                                                          ---------        ---------        ---------        ---------
EPS attributable to common shareholders of
the company (in dollars)                                      $16.6            $19.5            $39.3            $41.0
Basic EPS                                                     $0.27            $0.31            $0.64            $0.67
Diluted EPS                                                   $0.26            $0.30            $0.61            $0.65
Adjusted basic EPS                                            $0.38            $0.39            $0.67            $0.74
Adjusted diluted EPS                                          $0.37            $0.38            $0.65            $0.71
                                                          ---------        ---------        ---------        ---------
Free cash flow before growth capex, dividends
and NCIB                                                      $40.0            $41.0            $75.5            $74.1
Free cash flow per share -- basic (in $)                      $0.65            $0.66            $1.23            $1.21
Free cash flow per share -- diluted (in $)                    $0.63            $0.63            $1.18            $1.16
                                                          ---------        ---------        ---------        ---------
Quarterly dividend declared per share (in $)                $0.1121          $0.1068          $0.2242          $0.2136
                                                          =========        =========        =========        =========

(1) 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 and 26 weeks ended June 30, 2019, and its related management's discussion and analysis are available under the company's profile on SEDAR.

Outlook

Despite the declines in sales, the company saw improvements in operating EBITDA and operating EBITDA margin for the quarter. Operating EBITDA before the net royalty expense increased $1.9-million or 3.3 per cent to $59.4-million, with a contribution margin of 6.8 per cent as a percentage of total system sales, compared with 6.6 per cent in the second quarter of 2018.

Management provides the following comments regarding its strategies and initiatives:

  • Free cash flow: The company generates significant free cash flow, which provides 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 June 30, 2019, was $40.0-million, compared with $41.0-million for the 13 weeks ended July 1, 2018, a decrease of $1.0-million or 2.4 per cent.
    • Free cash flow per share before growth capex, dividends and NCIB on a diluted basis was 63 cents for the 13 weeks ended June 30, 2019, compared with 63 cents for 2018.
    • At the second quarter of 2019, the company's debt to EBITDA ratio was 1.7 times, compared with 2.1 times at the end of the second quarter of 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 not satisfied with the decline in system sales and SRS of negative 1.7 per cent. Contributing factors to the SRS results include mixed performance between brands; early progress on the new four-pillar operating model, with much work still to be done; and challenging weather conditions across the country during the first and second quarters. Despite negative SRS, Recipe's disciplined operating model, and its focus on long-term network health, franchisee profitability and cost control, enabled the company to increase operating EBITDA by $2.0-million and improve operating EBITDA margin to 6.4 per cent.
    • Management continues to review its portfolio of restaurants to maximize site potential and profitability to the company and its franchisee partners. Management's focus will continue to be on the quality of sales from its portfolio of restaurants as Recipe improves site selection, renovates to improve guest experience, and continually enhances its food and service pillars while maintaining its practice to open new franchise restaurants at the standard royalty rate while closing or taking back underperforming previously subsidized locations. On a year-to-date basis, the company has renovated 52 locations and has opened 23 new locations and closed 23 underperforming restaurants.
  • Total operating EBITDA: Before the impact from the net royalty to the Keg Royalties Income Fund, total operating EBITDA margin was 6.8 per cent for the quarter, compared with 6.6 per cent in 2018. The combined contributions from the corporate, franchise, retail and catering, and central segments resulted in total operating EBITDA margin of 6.4 per cent for the quarter, compared with 6.2 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 7-per-cent to 8-per-cent target range. 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 7-per-cent to 8-per-cent target range by 2020 to 2022.
  • Corporate restaurant profitability: Corporate restaurant profitability for the 13 weeks ended June 30, 2019, was 10.5 per cent, compared with 9.6 per cent in the first quarter of fiscal 2019 and 12.0 per cent in the second quarter of 2018. The decline in the quarter was mostly from the reduction in sales, higher wage rates and taking back underperforming restaurants. Management believes that corporate restaurant profitability will improve as the four-pillar strategy focus on food, service, ambience and value for the experience progresses, and Recipe continues to improve the quality of its portfolio and sales while it responds to increased competition and a cautious consumer.
    • 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 4.5 per cent in the quarter compared with 4.1 per cent in 2018. The increase is primarily related to improvement to quality of sales due to the continuing practice to open new franchise restaurants at the standard royalty rate while closing or taking back underperforming previously subsidized locations. Management believes the effective royalty recovery rate will gradually increase over time closer to 5 per cent as the company adds new franchisees, renews existing locations at the standard royalty rate and exits underperforming locations. In addition, The Keg will also increase Recipe's overall net royalty rate, as new and renewed Keg franchisees pay 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 was $3.2-million in the quarter, compared with $2.8-million in 2018. A new pie production line was added in the third quarter of 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 2016, 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 identified 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 26 weeks ended June 30, 2019, the company opened 23 new restaurant locations, compared with 27 in the first half of 2018, and closed 23 locations, compared with 26 in 2018. The company has also renovated 52 locations. Included in the closures were underperforming locations where the closure will benefit the overall system performance and the company's corporate and franchise contribution models 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 in the long term.
  • Growth, acquisitions and share buybacks: The company currently has a net debt to EBITDA ratio of approximately 1.7 times, compared with 2.1 times at the end of the second quarter of 2018. At this debt level, and with strong cash flow from operations, the company has the ability to consider more growth opportunities, including acquisitions, while continuing to reduce its debt, and by opportunistically repurchasing its subordinate voting shares for cancellation under the NCIB. During the 26 weeks ended June 30, 2019, the company purchased and cancelled 703,924 subordinate voting shares for $18.8-million under the company's NCIB program. Subsequent to June 30, 2019, until Aug. 8, 2019, the company has repurchased 564,956 Recipe subordinate voting shares for $15.1-million under the NCIB. 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.

Related communications

Frank Hennessey, CEO, and Ken Grondin, chief financial officer, will hold an investor conference call to discuss the 2019 second quarter results at 9 a.m. ET on Friday, Aug. 9, 2019.

To access the call, please call 647-427-7450 or 1-888-231-8191 five to 10 minutes prior to the start time. The conference ID is 5067639. A telephone replay of the call will be available until midnight on Aug. 30, 2019. To access the replay, please dial 416-849-0833 or 1-855-859-2056 and enter passcode 5067639.

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. As at June 30, 2019, Recipe had 22 brands and 1,384 restaurants, 85 per cent of which are operated by franchisees and joint venture partners.

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