Cara Reports Q2 2016 Results - Operating EBITDA grows 15.5% to $32.8 million and to 7.3% of Total System Sales

VAUGHAN, ON, Aug. 4, 2016 /CNW/ - Cara Operations Limited, today announced results for the second quarter ending June 26, 2016.

"We are happy to report our highest Operating EBITDA quarter since we started our transformation in 2013 and an increase in our EBITDA contribution as a % of Total System Sales to 7.3%, marking the first quarter where this contribution rate is within our long-term target range of 7% to 8%," commented Bill Gregson, Cara's Chief Executive Officer.

"Total System Sales increased $13.3 million or 3.0% for the quarter and $34.5 million or 4.0% year to date.  This increase was driven by new restaurant openings and the acquisition of New York Fries, which drove a 15.5% improvement in Operating EBITDA in the quarter and a 13.1% improvement year to date, compared to the same period last year.  Second quarter earnings before tax improved $7.8 million, or 45.6% to $24.9 million.  Year to date, earnings before taxes increased to $45.0 million from $24.8 million, an improvement of $20.2 million or 81.5%."

"While we are satisfied with total System Sales growth of 4.0% year to date, SRS growth of -0.7% fell below our expectations.  SRS has been impacted by a poor June overall, challenges in the western provinces, and uneven performance in certain restaurant banners.  We are building a strong platform for success and continue to focus on short-term and long-term strategies to improve SRS with restaurant renovations, greater emphasis on exciting food news, better guest experiences, and expanded e-commerce sales through new or improved off-premise applications for most brands over the next 2 years. We will also add several digital marketing initiatives that are expected to launch in 2017 to reach new customer segments." 

 Highlights for the 13 and 26 weeks ended June 26, 2016:

  • Operating EBITDA increased to $32.8 million for the 13 weeks ended June 26, 2016 compared to $28.4 million in 2015, an improvement of $4.4 million or 15.5% for the quarter. This increase to $32.8 million also represents the highest quarterly Operating EBITDA since Cara's transformation started in 2013. Year to date, Operating EBITDA was $60.3 million compared to $53.3 million in 2015, an improvement of $7.0 million or 13.1% year to date. The increases have been driven by improved performance in all three of the Company's operating segments, being Corporate restaurants, Franchise restaurants and Central operations, and from the addition of New York Fries in the fourth quarter of 2015.

  • Increased Operating EBITDA Margin on System Sales to 7.3% for the quarter compared to 6.5% in 2015, representing the first quarter the Company has reached its long-term Operating EBITDA Margin target of between 7% and 8% of System Sales. Year to date, Operating EBITDA Margin on System Sales was 6.7% compared to 6.2% in 2015.

  • System Sales grew $13.3 million to $450.3 million for the 13 weeks ended June 26, 2016 as compared to 2015, representing an increase of 3.0%. Year to date, System Sales grew $34.5 million to $900.5 million for the 26 weeks ended June 26, 2016 compared to the same period in 2015, representing an increase of 4.0%.

  • Same Restaurant Sales ("SRS") Growth for the second quarter was a decrease of 2.0%, representing 14 weeks compared to 14 weeks of sales instead of 13 weeks to measure and compare the impact of Easter weekend in the same (second) quarter for both 2016 and 2015 as Easter weekend occurred in the last week of the first quarter of 2016 compared to the first week of the second quarter in 2015. SRS for the 13 weeks compared to the same 13 weeks in 2015, with the impact of Easter, was a decrease of 1.3%. Year to date, SRS was a decrease of 0.7% for the 26 weeks ended June 26, 2016 compared the same period in 2015. SRS for the second quarter was impacted by a poor June overall, challenges in the western provinces, and uneven performance in certain restaurant banners. The positive results for April and May in a number of banners and in a number of provinces failed to offset these weaknesses.

    Management continues to focus on both short-term and long-term strategies to improve SRS through restaurant renovations, greater emphasis on exciting food news, enhanced guest experiences, and expanded e-commerce sales through new or improved off-premise applications for most brands over the next 2 years.  In addition, we will add several digital marketing initiatives that are expected to launch in 2017 to reach new customer segments and to increase the frequency of existing ones.  In order to accelerate these e-commerce and digital marketing initiatives we will be increasing our investment in technology resources and we have recently hired a Chief Technology Officer and additional resources dedicated to e-commerce and digital development and data analytics. Compared to 2014, SRS remains positive over a 2 year period at 1.6% for the quarter and 2.8% year to date.

  • Earnings from continuing operations before income taxes was $24.9 million for the 13 weeks ended June 26, 2016 up from $17.1 million in 2015, an improvement of $7.8 million or 45.6%. Year to date, earnings from continuing operations before income taxes increased to $45.0 million from $24.8 million, an improvement of $20.2 million or 81.5%. The increase is related to operating improvements described above, the addition of New York Fries, reduction of interest on long-term debt, offset by one-time transaction costs related to the St-Hubert acquisition.

  • Net earnings increased to $18.1 million after deducting $0.9 million in one-time transaction costs primarily related to the St-Hubert transaction in the quarter compared to $15.9 million in 2015, an increase of $2.2 million or 13.8%. Year to date, net earnings increased to $32.4 million after deducting $2.0 million in one-time transaction costs, an increase of $10.2 million or 45.9%. The improvements are 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. ("St-Hubert"), Québec's leading full-service restaurant operator as well as fully integrated food manufacturer for $537.0 million. As of St-Hubert's financial year ended September 30, 2015, it had 117 restaurants consisting of 11 corporately-owned restaurants and 106 franchised restaurants. The transaction will be funded by a combination of approximately $230.0 million through its private placement (announced on April 15, 2016, see details below), $50.0 million vendor take-back to be settled in Cara subordinate voting common shares and an increased lending commitment from Cara's syndicate, increased from $150.0 million up to $550.0 million (reduced from the prior $700.0 million upsize plan after confirmation of the $230.0 million private placement).

  • On April 15, 2016, the Company announced that it had completed an offering of 7,863,280 subscription receipts (the "Subscription Receipts"), on a private placement basis at a price of $29.25 per Subscription Receipt (the "Offering") for gross proceeds of approximately $230.0 million plus accrued interest and less underwriting fees. Each Subscription Receipt represents the right of the holder to receive, upon closing of the St-Hubert transaction and without payment of additional consideration, one subordinate voting share of Cara (a "Subordinate Voting Share") plus an amount per Subordinate Voting Share equal to the amount per Subordinate Voting Share of any dividends for which record dates have occurred during the period from the closing date of the Offering to the date immediately preceding the closing of the St-Hubert transaction, less applicable withholding taxes. The Offering proceeds are being held in escrow pending the closing of the St-Hubert transaction and are included in restricted cash on the balance sheet. Subject to customary conditions, including the receipt of relevant regulatory approvals, the transaction is targeted to close in the third quarter of 2016.

  • On August 4, 2016, the Company's Board of Directors declared a dividend of $0.10169 per share of subordinate voting shares, multiple voting shares, and subscription receipts outstanding. Dividends per share will be comprised of: (i) $0.05373 per share eligible dividend, and (iii) a $0.04796 per share taxable dividend. Payment of the dividend will be made on September 15, 2016 to shareholders and subscription receipt holders of record at the close of business on August 31, 2016. The Company expects to return to paying 100% eligible dividends after the third quarter.









For the 13 weeks ended


For the 26 weeks ended

($ millions unless otherwise stated)1


June 26,
2016

June 28,
2015


June 26,
2016

June 28,
2015



(unaudited)

(unaudited)


(unaudited)

(unaudited)

Total System Sales from continuing operations


$450.3

$437.0


$900.5

$866.0

Total System Sales Growth2


3.0%

4.6%


4.0%

4.7%

SRS Growth3


(2.0%)

3.3%


(0.7%)

3.3%

Number of restaurants2 (at period end)


1003

827


1003

827








Corporate restaurant sales


$68.4

$60.6


$131.6

$113.7

Number of corporate restaurants


119

92


119

92

Contribution from Corporate segment


$8.9

$7.7


$14.0

$11.3

Contribution as a % of corporate sales


13.0%

12.7%


10.6%

9.9%








Franchise restaurant sales


$381.9

$376.4


$768.9

$752.2

Number of franchised restaurants


884

735


884

735

Contribution from Franchise segment


$15.4

$14.7


$31.1

$29.7

Contribution as a % of Franchise sales


4.0%

3.9%


4.0%

3.9%








Contribution from Central segment


$8.5

$5.9


$15.2

$12.4

Contribution as a % of Total System Sales


1.9%

1.4%


1.7%

1.4%








Total gross revenue from continuing operations


$89.0

$80.9


$173.2

$156.6

Operating EBITDA


$32.8

$28.4


$60.3

$53.3

Operating EBITDA Margin


36.9%

35.1%


34.8%

34.0%

Operating EBITDA Margin on Total System Sales


7.3%

6.5%


6.7%

6.2%








Net earnings


$18.1

$15.9


$32.4

$22.2

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








Basic EPS


$0.37

$0.34


$0.66

$0.69


Diluted EPS


$0.34

$0.31


$0.61

$0.51


Adjusted Basic EPS4


$0.50

$0.36


$0.91

$0.73


Adjusted Diluted EPS4


$0.46

$0.32


$0.84

$0.50















(1)

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

(2)

Results from East Side Mario restaurants in the United States are excluded in System Sales totals and number of restaurants

(3)

Results from New York Fries located outside of Canada, East Side Mario restaurants in the United States and all Casey's restaurants are excluded from SRS Growth

(4)

Adjusted EPS excludes the impact related to non-cash deferred income tax expense.  See "Non-IFRS Measures" for definitions of Adjusted Basic EPS and Adjusted Diluted EPS.

The Company's unaudited interim consolidated financial statements for the 26 weeks ended June 26, 2016 and Management's Discussion and Analysis are available under the Company's profile on SEDAR at www.sedar.com.

Outlook

Management believes the Net Earnings and Operating EBITDA improvements achieved in the first half of 2016 are significant.  With Operating EBITDA growth in all 3 segments and the second quarter being the first quarter in our long term range of 7% to 8% of System Sales, we continue to increase the efficiency of our sales dollars.  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 4.0% year to date, SRS Growth year to date of negative 0.7% fell below Management's expectations. SRS in the second quarter was impacted by a poor June overall, 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. The positive results for April and May in a number of banners and in a number of provinces failed to offset these weaknesses. Compared to 2014, SRS remains positive over a 2 year period at 2.8%. Management continues to focus on both short-term and long-term strategies to improve SRS through restaurant renovations, greater emphasis on exciting food news, enhanced guest experiences, and expanded e-commerce sales through new or improved off-premise applications for most brands over the next 2 years. In addition, we will add several digital marketing initiatives that are expected to launch in 2017 to reach new customer segments and to increase the frequency of existing ones. In order to accelerate these e-commerce and digital marketing initiatives we will be increasing our investment in technology resources and we have recently hired a Chief Technology Officer and additional resources dedicated to e-commerce and digital development and data analytics.

  • Restaurant Count — During the first half of 2016, the Company completed 15 new openings and closed 12 restaurants for a net increase of 3 restaurants. 10 Casey's restaurants were also closed during the first half of 2016 as part of the wind down strategy. Management is targeting to open a minimum of 30 net new restaurants in 2016 before the impact of Casey's closures and any acquisitions. During the second quarter, one new Bier Markt and one new Landing restaurant were opened corporately. An additional Landing restaurant opened subsequent to the end of the second quarter on July 1. 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 12.7% to 13.0% as a percent of corporate sales in the second quarter and from 9.9% to 10.6% year to date. The improvement of 0.3 and 0.7 percentage points for the quarter and year to date, respectively, is primarily related to strong Landing and Bier Markt restaurant contribution and the reduction in food and labour costs across the corporate store portfolio.

  • Franchise segment — Franchise contribution as a percentage of franchise sales improved to 4.0% in the first half of 2016 from 3.9% in 2015 reflecting improved franchise sales and profit performance resulting in less assistance provided to Cara's franchise network. Cara reduced the number of restaurants receiving assistance by 12 restaurants to 160 restaurants from a total of 172 restaurants at December 27, 2015 and from 178 restaurants at the end of the second 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 7.3% as a percentage of total System Sales for the for the quarter compared to 6.5% in 2015, representing the first quarter the Company has reached its long-term Operating EBITDA Margin target of between 7% and 8% of System Sales. Year to date, Operating EBITDA margin was 6.7% compared to 6.2% 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 $550 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.

    The acquisition of St-Hubert is expected to add approximately $640 million in System Sales, including sales from the food operations division, approximately $44.8 million in Operating EBITDA, and $10 million of expected synergies within the first 3 years.  Including the St-Hubert acquisition, over the next 4 to 6 years, management is targeting to achieve System Sales of between $2.9 billion to $3.7 billion and Operating EBITDA between $203 million and $296 million representing 7% to 8% 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

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 45 New York Fries and 3 East Side Mario's. For the first quarter of 2016, SRS excludes the timing impact resulting from Easter weekend occurring in the last week of the first quarter of 2016 as compared to being in the first week of the second quarter in 2015.  To provide comparable quarter over quarter results, SRS for the first quarter was comprised of 12 weeks compared to the same 12 weeks in 2015 and the second quarter SRS compares 14 weeks in 2016 to the same 14 weeks in 2015 to include the impact of Easter weekend.

"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 new 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 Annual Information Form dated March 3, 2016.  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 second quarter results at 9:00 am Eastern Time on Friday, August 5, 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 45493815. A telephone replay of the call will be available until midnight on September 4, 2016.  To access the replay, please dial (416) 849-0833 or 1-855-859-2056 and enter passcode 45493815.

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 June 26, 2016, Cara had 1,003 restaurants, 958 of which were located in Canada and the remaining 45 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

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http://www.cara.com

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