Cara Reports First Quarter 2016 Results - Operating EBITDA grows 10.4%, Earnings Before Tax increases 161% to $20.1 million and Total System Sales grew 4.9%

VAUGHAN, ON, May 5, 2016 /CNW/ - Cara Operations Limited, today announced results for the first quarter ending March 27, 2016.

"We continued to improve results during the first quarter.  Total System Sales growth of $21.2 million (4.9%), driven by new restaurant openings and the acquisition of New York Fries, drove a 10.4% improvement in Operating EBITDA compared to the same quarter last year.  First quarter Earnings before taxes improved $12.4 million or 161% to $20.1 million.  This was the result of operating improvements, the addition of New York Fries and a reduction in interest on long-term debt due to our IPO in the second quarter of 2015," said Bill Gregson, Chief Executive Officer.

"We also continued to grow our business for the long-term.  On March 31st, we announced that we entered into a definitive agreement to acquire 100% of Groupe St-Hubert Inc., Québec's leading full-service restaurant operator and Canada's fourth largest full service restaurant company, as well as a fully-integrated food manufacturer, for $537 million. We look forward to officially welcoming St-Hubert to the Cara family and are excited about the restaurant growth and food retail opportunities that lie ahead for our combined business. 

Even after completing the acquisition, our Debt to EBITDA ratio will be approximately 2.0x, leaving Cara with balance sheet strength and financing room to pursue further strategic acquisition and growth targets."

First Quarter Highlights:

  • System Sales grew $21.2 million to $450.2 million for the 13 weeks ended March 27, 2016 as compared to the 13 weeks ended March 29, 2015, representing an increase of 4.9%; 

  • Same Restaurant Sales ("SRS") Growth was +0.5%, representing 12 weeks compared to 12 weeks of sales instead of 13 weeks to provide comparable quarter over quarter results as Easter weekend occurred in the last week of the first quarter compared to the first week of the second quarter in 2015.  The Company will include the 13th week from the first quarter in the second quarter of 2016 and 2015 and compare 14 weeks to keep the impact of Easter weekend comparable in the second quarter for both 2016 and 2015; 

  • Operating EBITDA increased to $27.5 million for the 13 weeks ended March 27, 2016 from $24.9 million in 2015, an improvement of $2.6 million or 10.4%;

  • Operating EBITDA Margin on System Sales improved to 6.1% in 2016 from 5.8% during the same period in 2015;

  • Achieved Earnings from continuing operations before income taxes increase to $20.1 million for the 13 weeks ended March 27, 2016 from $7.7 million in 2015, an improvement of $12.4 million or 161%;

  • Increased Net earnings to $14.3 million after deducting $1.1 million in one-time transaction costs primarily related to the St-Hubert transaction in the quarter compared to $6.2 million in 2015, an increase of $8.1 million or 131%, primarily related to operating improvements, the addition of New York Fries, and reduction of interest on long-term debt. 

  • On March 31, 2016, the Company announced that it entered into a definitive agreement to acquire 100% of Groupe St-Hubert Inc., Québec's leading full-service restaurant operator of 117 restaurants consisting of 11 corporately-owned restaurants and 106 franchised restaurants, as well as a fully-integrated food manufacturer, for $537 million.  The transaction will be funded by a combination of approximately $230 million through its private placement (announced on April 15, 2016, see details below), $50 million vendor take-back to be settled in Cara subordinate voting shares and an increased lending commitment from Cara's syndicate upsized from $150 million up to $700 million.

  • On April 15, 2016, the Company announced that it had completed an offering of 7,863,280 Subscription receipts, on a private placement basis at a price of $29.25 per Subscription Receipt for gross proceeds of approximately $230 million. The gross proceeds, less a 50% portion of the agents' fees, are being held in escrow pending the closing of the St-Hubert transaction.

  • On May 5, 2016, the Company's Board of Directors declared a dividend of $0.10170 per share of subordinate voting shares, multiple voting shares, and subscription receipts outstanding.  Payment of the dividend will be made on June 15, 2016 to shareholders of record at the close of business on May 31, 2016.

  • On May 5, 2016, the Company suspended the Dividend Reinvestment Plan (the "DRIP"or the "Plan') which provided holders of Subordinate Voting Shares of Cara and Multiple Voting Shares of Cara, to acquire additional Subordinate Voting Shares by reinvesting all of their cash dividends at a purchase price discount of 3%.


For the 13 weeks ended

($ millions unless otherwise stated)(1)


Mar. 27, 2016


Mar. 29, 2015



(unaudited)


(unaudited)

Total System Sales from continuing operations


$450.2


$429.0

Total System Sales Growth


4.9%


5.0%

SRS Growth


0.5%


3.3%

Number of restaurants (at period end)


997


834






Corporate restaurant sales


$63.2


$53.1

Number of corporate restaurants


118


92

Contribution from Corporate segment


$5.1


$3.6

Contribution as a % of corporate sales


8.1%


6.7%






Franchise restaurant sales


$387.0


$375.9

Number of franchised restaurants


879


742

Contribution from Franchise segment


$15.7


$14.9

Contribution as a % of Franchise sales


4.1%


4.0%






Contribution from Central segment


$6.7


$6.4

Contribution as a % of Total System Sales


1.5%


1.5%






Total gross revenue from continuing operations


$84.2


$75.7

Operating EBITDA


$27.5


$24.9

Operating EBITDA Margin


32.7%


32.9%

Operating EBITDA Margin on Total System Sales


6.1%


5.8%






Net earnings


$14.3


$6.2

Earnings per share from continuing operations attributable to common
shareholders (in dollars)(2)






Basic


$0.29


$0.35


Diluted


$0.27


$0.17









(1)

See "Non-IFRS Measures" for definitions of System Sales, SRS Growth, Operating EBITDA, Operating EBITDA
Margin & Operating EBITDA Margin on System Sales.

(2)

Amounts per share give effect on a retrospective basis for the 2.79 to 1 share consolidation for common
shares outstanding at April 10, 2015, that took place as part of the Offering.

The Company's unaudited interim consolidated financial statements for the 13 weeks ended March 27, 2016 and Management's Discussion and Analysis are available under the Company's profile on SEDAR at www.sedar.com.

Outlook

Management is satisfied with the net earnings and operating EBITDA improvements achieved in the first quarter, despite challenging economic conditions in many markets.  The continued System Sales increases and cost reductions have resulted in increases in Operating EBITDA and improved contribution margins in all segments.  Cara has also greatly reduced its risk profile and its ability to weather challenges by reducing debt, increasing profits and free cash flow.  Despite year to date progress, management remains cautious on the Canadian economy and its potential impact on restaurant sales stemming from challenges in western Canada, and foreign exchange fluctuations in the Canadian dollar.  With respect to 2016, Management provides the following comments regarding its strategies and initiatives:

  • System Sales and SRS Growth — While Management is satisfied with total System Sales growth of 4.9%, SRS Growth of +0.5% in the quarter fell below Management's expectations. The weakness in SRS Growth was primarily related to the continued challenges in the western provinces and uneven performance in certain restaurant banners.  As Cara is a multi-branded company, not all brands will have strong results at the same time which can result in overall variable sales and SRS results.  Management will continue to focus on building momentum and long-term sales growth through its various initiatives across all of its brands.  Overall SRS Growth is dependent on the Company's ability to have positive momentum with most brands at the same time. 

  • Restaurant Count — Management is targeting to open a minimum of 30 net new restaurants in 2016 before the impact of Casey's closures and any acquisitions.  The 2016 plan includes one new Bier Markt and two new Landings.  Management is also pursuing the sale of certain Kelsey's, Montana's and East Side Mario's corporate restaurants to franchisees to continue to improve the corporate-franchise portfolio mix.

  • Corporate restaurant profitability — Management is pleased with the increase in corporate restaurant profitability from 6.7% to 8.1% as a percent of corporate sales in the first quarter of 2016.  The improvement of 1.4 percentage points is primarily related to strong Landing and Bier Markt restaurant contribution and the reduction in food costs and labour costs across the corporate store portfolio. 

  • Franchise segment —Franchise contribution as a percentage of franchise sales improved to 4.1% in the first quarter of 2016 from 4.0% in 2015 reflecting improved franchise sales and profit performance resulting in less assistance provided to its franchise network.  Cara reduced the number of restaurants receiving assistance by 9 restaurants to 163 restaurants from a total of 172 restaurants at December 27, 2015 and from 189 restaurants at the end of the first quarter of 2015.  The continued sales challenges experienced in the western provinces may require the Company to provide financial assistance to certain franchised locations which will result in slower improvements in franchise contribution rate over the short term.  In 2016 and beyond, we expect to increase the franchise contribution rate by (1) adding new franchisees at the full 5% standard royalty rate and (2) by continuing to reduce the number of franchisees on assistance over the long term. 

  • Central segment — Going forward as the run rate for central expenses normalizes, the improvements in the central contribution rate will be driven by growing sales faster than head office expenses and by expanding our off premise business.

  • Total Operating EBITDA — The combined contributions from Corporate, Franchise and Central segments resulted in Total Operating EBITDA margin of 6.1% as a percentage of total System Sales compared to 5.8% in 2015.  The Company will continue to work on all three segments to increase both segmented EBITDA Contribution and Total Operating EBITDA in relation to Total System Sales.

  • Improved net income and cash available — The improvements in operations and reduction in interest and finance costs from the debt reduction will improve net income, EPS and cash available for growth in future periods.

  • Growth and acquisitions — Following the closing of the St-Hubert acquisition and the related increased lending commitments from Cara's lending syndicate from $150 million up to $700 million, and the Company's expectation is to have a debt to EBITDA ratio of approximately 2.0x.  Consequently, Cara will be well positioned to pursue further acquisitions for growth.


    With Cara's strong financial performance in 2015 plus the anticipated addition of St-Hubert on a pro-forma basis including $10 million of synergies, Cara is now close to achieving the beginning of its 5 to 7 year growth targets set out during Cara's IPO in April of 2015, well before 2019.  As originally communicated in 2015, the 5 to 7 year target range for System Sales was between $2.5 billion and $3.0 billion and Operating EBITDA was targeted to be 7% to 8% of System Sales or $175 million to $240 million but these ranges did not contemplate the early addition of St. Hubert which now puts the target range into reach. For example, if SRS is held at 0.0%, and only 20 net new stores are added over the next 4 years (5 per year), Cara should achieve $2.5 billion of System sales and over $180 million of Operating EBITDA by 2019. Still holding SRS at 0.0% and adding 240 net new stores over the next 6 years (40 per year), Cara should achieve $3 billion of System Sales and $245 million of Operating EBITDA by 2021.  Alternatively, if SRS is 1.0% and 180 net new stores are added over the next 6 years (30 per year), Cara should achieve $3 billion in System Sales and $245 million in Operating EBITDA by 2021.


    Management is expecting to over-achieve these illustrative SRS and new store levels in addition to completing further acquisitions over the next 4 to 6 years.  Consequently, management believes the top end of the 4-6 year range (2019 to 2021) will now be System Sales of $3.7 billion and Operating EBITDA of $296 million (i.e. 8.0% of System Sales).

The foregoing description of Cara's outlook is based on management's current strategies and its assessment of the outlook for the business and the Canadian Restaurant Industry as a whole, may be considered to be forward looking information for purposes of applicable Canadian securities legislation. Readers are cautioned that actual results may vary. See "Forward Looking Information" and "Risk & Uncertainties" for a description of the risks and uncertainties that impact the Company's business and that could cause actual results to vary.

Non‑IFRS Measures

This press release makes reference to certain non‑IFRS measures. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company's results of operations from management's perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company's financial information reported under IFRS. The Company uses non IFRS measures including "System Sales", "SRS Growth", "Operating EBITDA", "Operating EBITDA Margin", "Operating EBITDA Margin on System Sales", "Adjusted Basic EPS", and "Adjusted Diluted EPS", to provide investors with supplemental measures of its operating performance and thus highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors and other interested parties frequently use non IFRS measures in the evaluation of issuers. The Company's management also uses non IFRS measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets, and to determine components of management compensation.

 "System Sales" represents top line sales received from restaurant guests at both corporate and franchise restaurants including take-out and delivery customer orders. System Sales includes sales from both established restaurants as well as new restaurants. Management believes System Sales provides meaningful information to investors regarding the size of Cara's restaurant network, the total market share of the Company's brands and the overall financial performance of its brands and restaurant owner base, which ultimately impacts Cara's consolidated financial performance.

"System Sales Growth" is a metric used in the restaurant industry to compare System Sales over a certain period of time, such as a fiscal quarter, for the current period against System Sales in the same period in the previous year.

"SRS Growth" is a metric used in the restaurant industry to compare sales earned in established locations over a certain period of time, such as a fiscal quarter, for the current period against sales in the same period in the previous year. SRS Growth helps explain what portion of sales growth can be attributed to growth in established locations and what portion can be attributed to the opening of net new restaurants. Cara defines SRS Growth as the percentage increase or decrease in sales during a period of restaurants open for at least 24 complete fiscal months relative to the sales of those restaurants during the same period in the prior year. Cara's SRS Growth results exclude Casey's restaurants as the Company is in the process of winding down its operations and will either convert certain locations to other Cara brands or close.  SRS Growth also excludes sales from international operations from 38 New York Fries and 4 East Side Marios. For the first quarter of 2016, SRS excludes the timing impact resulting from Easter weekend occurring in the last week of the first quarter as compared to being in the first week of the second quarter in 2015.  For comparative purposes, the last week of the first quarter has been excluded to provide comparable quarter over quarter results. The Company will include the 13th week from the first quarter in the second quarter and compare 14 weeks in 2016 to 14 weeks in 2015 to include the impact of Easter weekend in the same quarter.

 "EBITDA" is defined as net earnings (loss) from continuing operations before: (i) net interest expense and other financing charges; (ii) loss (gain) on derivative; (iii) write-off of financing fees; (iv) income taxes; (v) depreciation of property, plant and equipment; (vi) amortization of other assets; (vii) impairment of assets, net of reversals; and (viii) transaction costs.

 "Operating EBITDA" is defined as net earnings (loss) from continuing operations before: (i) net interest expense and other financing charges; (ii) gain (loss) on derivative; (iii) write-off of financing fees; (iv)  income taxes; (v) depreciation of property, plant and equipment; (vi) amortization of other assets; (vii) impairment of assets, net of reversals; (viii) losses on early buyout / cancellation of equipment rental contracts; (ix) restructuring; * conversion fees; (xi) net (gain) / loss on disposal of property, plant and equipment; (xii) stock based compensation; (xiii) change in onerous contract provision; (xiv) lease costs and tenant inducement amortization; and transaction costs.

"Operating EBITDA Margin" is defined as Operating EBITDA divided by total gross revenue from continuing operations.

"Operating EBITDA Margin on System Sales" is defined as Operating EBITDA divided by System Sales.

"Adjusted Basic EPS" is defined as net earnings plus deferred income tax expense (reversal) divided by the weighted average number of shares outstanding.

"Adjusted Diluted EPS" is defined as net earnings plus deferred income tax expense (reversal) divided by the weighted average number of shares outstanding plus the dilutive effect of stock options and warrants issued.

Forward-Looking Information

Certain statements in this press release may constitute "forward-looking" statements within the meaning of applicable Canadian securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or the industry in which they operate, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this press release, such statements use words such as "may", "will", "expect", "believe", "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this press release.  These forward-looking statements involve a number of risks and uncertainties, including those related to: (a) the Company's ability to maintain profitability and manage its growth including SRS Growth, System Sales Growth, increases in net income, Operating EBITDA and Operating EBITDA Margin on System Sales (b) competition in the industry in which the Company operates;  (c) the general state of the economy; (d) integration of acquisitions by the Company; (e) risk of future legal proceedings against the Company.  These risk factors and others are discussed in detail under the heading "Risk Factors" in the Company's long form prospectus dated March 31, 2015.  New risk factors may arise from time to time and it is not possible for management of the Company to predict all of those risk factors or the extent to which any factor or combination of factors may cause actual results, performance or achievements of the Company to be materially different from those contained in forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Although the forward-looking statements contained in this press release are based upon what management believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this press release.

Related Communications

Bill Gregson, Chief Executive Officer and Ken Grondin, Chief Financial Officer, will hold an investor conference call to discuss 2016 first quarter results at 8:00 am Eastern Time on Friday, May 6, 2016.

To access the call, please call (647) 427-7450 or 1-888-231-8191, five to ten minutes prior to the start time. Conference id 91288551. A telephone replay of the call will be available until midnight on June 6, 2016.  To access the replay, please dial (416) 849-0833 or 1-855-859-2056 and enter passcode 91288551.

About CARA

Founded in 1883, Cara 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, Milestones, Montana's, Kelsey's, East Side Mario's, Casey's, New York Fries, Prime Pubs, Bier Markt and Landing restaurants.  As at March 27, 2016, Cara had 997 restaurants, 959 of which were located in Canada and the remaining 38 locations were located internationally.  88% of Cara's restaurants are operated by franchisees and 66% of Cara's locations are based in Ontario.  Cara's shares trade on the Toronto Stock Exchange under the ticker symbol CAO.  More information about the Company is available at www.cara.com.

SOURCE Cara Operations Limited

For further information: INVESTOR RELATIONS: Cara Operations Limited, Ken Grondin, (905) 760-2244, Chief Financial Officer, Email: kgrondin@cara.com or investorrelations@cara.com

RELATED LINKS
http://www.cara.com

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