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Cara MDA FY 2017
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CARA OPERATIONS LIMITED
Management’s Discussion and Analysis For the years ended December 31 , 2017 and December 25, 2016
The following Management’s Discussion and Analysis (“MD&A”) for Cara Operations Limited (“Cara” or the “Company”) provides information concerning the Company’s financial condition and results of operations for the 14 and 53 weeks ended December 31, 2017 (“fourth quarter”, “Q4”, “the quarter” or “the period”). This MD&A should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying notes as at December 31, 2017. The consolidated results from operations for the 14 and 53 weeks ended December 31, 2017 are compared to the 13 and 52 weeks ended December 25, 2016. Cara’s fiscal year ends on the last Sunday in December. As a result, the Company’s fiscal year is usually 52 weeks in duration but includes a 53rd week every five to six years. The Company’s fiscal 2017 ended on December 31, 2017 and was a 53 week year.
Some of the information contained in this MD&A contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” and “Risk and Uncertainties” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those indicated or underlying forward-looking statements as a result of various factors, including those described in “Risk and Uncertainties” and elsewhere in this MD&A.
This MD&A was prepared as at March 9, 2018. Additional information relating to the Company can be found on SEDAR at sedar.
Basis of Presentation
The year end Financial Statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and all amounts presented are in Canadian dollars unless otherwise indicated.
Fourth quarter and Year End Highlights:
System Sales(1) grew $133 million to $774 million for the 14 weeks ended December 31, 2017 as compared to 13 weeks ended December 25, 2016, representing an increase of 20 .9% or 13% with the 53rd week excluded. For the 53 weeks ended December 31, 2017, System Sales(1) grew $737 million to $2,779 million compared to 52 weeks ended December 25, 2016, representing an increase of 36 .1% or 33% with the 53rd week excluded. The increase in System Sales is primarily related to the addition of St -Hubert in September 2016, Original Joe’s in November 2016 , Pickle Barrel in December 2017, Same Restaurant Sales (“SRS”) (1) increases, and the addition of 56 new restaurants that opened in 2017, partially offset by restaurant closures. The System Sales impact from the additional week in 2017 was $48 million.
SRS Growth for the 14 and 53 weeks ended December 31, 2017 was 2% and 0%, respectively, compared to the same 14 and 53 weeks in 2016. The improvement in trend to positive SRS is primarily driven by sales increases from renovated restaurants, menu enhancements, digital marketing, strong performance in Quebec and improvements in Alberta. SRS excludes the impact from the Original Joe’s transaction that was completed on November 28, 2016, the Burger’s Priest investment that was completed on June 1, 2017, and the Pickle Barrel transaction that was completed on December 1, 2017. These banners will be included in SRS for 2018.
The Company achieved Operating EBITDA(1) of $58 million for the quarter and $191 million for the year, the highest level since the IPO, compared to $46 million for the 13 weeks ended December 25, 2016, an improvement of $11 million or 25% for the quarter, and $144 million for the 52 weeks ended December 25, 2016, an improvement of $47 million or 32% for the full year. The increases have been driven by an increase in contribution dollars in each of the Company’s operating segments, being Corporate restaurants, Franchise restaurants and Central, from the addition of St-Hubert in September 2016 (including food processing and distribution which is part of Central operations), Original Joe’s in November 2016. The estimated impact from the additional week in 2017 is $3 million in Operating EBITDA.
Operating EBITDA Margin on System Sales(1) for the fourth quarter was 7% compared to 7% in 2016, and was 7% with the 53rd week excluded, within our long-term target range of 7%-8%. Operating EBITDA Margin on System Sales for the 53 weeks ended December 31, 2017 was 6% compared to 7% in 2016. Management’s focus will be to build earnings efficiency from 6% well into our target range of 7%-8% by the
period ending 2020-2022, by leveraging increased system sales from acquisitions and by realizing synergies with the added banners.
Earnings before income taxes reached the highest since IPO at $37 million for the 14 weeks ended December 31 , 2017 compared to $30 million for the 13 weeks ended December 25, 2016, an increase of $6 million or 22% for the quarter. Earnings before income taxes for the 53 weeks ended December 31, 2017 was $116. million compared to $96 million, an improvement of $20 million or 21%. The increases were mainly attributed to increased contribution dollars from corporate and franchised restaurants, from the additions of St- Hubert and Original Joe’s corporate and franchise restaurants, the impact of an additional week in the fiscal year, SRS increases, improved contribution from the central segment driven by the addition of St -Hubert’s food processing and distribution business, and overall cost reductions, offset by increased interest expense and depreciation expense (both related to the St-Hubert and Original Joe’s 2016 transactions), non-cash impairment provisions and restructuring charges.
Adjusted Net Earnings (1) was $36 million and $117 million for the 14 and 53 weeks ended December 31, 2017 compared to $25 million and $97 million for the 13 and 52 weeks ended December 25, 2016, respectively, representing increases of $10 million or 40% for the quarter and $20 million or 20% for the year.
Basic Earnings per Share (“EPS”) for the 14 and 53 weeks ended December 31, 2017 was $0 and $1, compared to $0. 33 and $1 for the 13 and 52 weeks ended December 25, 2016, respectively. Diluted EPS for the 14 and 53 weeks ended December 31, 2017 was $0 and $1. 77 compared to $0 and $1 for the 13 and 52 weeks ended December 25, 2016. The increases are primarily related to improvements in Net Earnings, offset by the impact from the increased number of subordinate voting shares outstanding as a result of the Q 2016 subscription receipt offering to support the St-Hubert transaction reduced by shares repurchased and cancelled under the NCIB in the second, third, and fourth quarters of 2017.
Management continues to focus on both short-term and long-term strategies to improve SRS through restaurant renovations, greater emphasis on menu innovation, enhanced guest experiences, expanded off-premise sales through new and improved e-commerce applications that will be expanded to most brands over the next 2 years, and brand specific digital-social media marketing. Some specific accomplishments in 2017 include:
o The Company completed 92 major and contractual renovations of corporately-owned and franchised locations in 2017. Restaurant renovations rejuvenate sales long-term and positively contribute to SRS on a sustainable basis.
o In 2017 , the Company launched new native, in-house developed ordering apps for Swiss Chalet on iOS and Android. These were followed with a new fully-responsive mobile-friendly ordering website for Swiss Chalet. The new Swiss Chalet apps have been very positively received by consumers and have become the #1-rated branded restaurant app in Canada on the iOS app store. The new Swiss Chalet app and responsive website form the technical foundation for the Company to quickly launch new apps for Montana’s, East Side Mario’s, Kelsey’s and additional brands in the future.
o In 2017, Cara expanded its on-line aggregator relationships (including Uber-Eats) to over 500 restaurants to enable customers to place delivery and pick-up orders through the channel and application of their choice; the Company will continue to roll out this initiative across its corporate and franchised restaurants and expects to be active in at least 600 restaurants by the end of Q1 2018.
o The Company continues to build on existing partnerships with key media partners including Facebook and Google and has also built new partnerships and integrations with strategic digital media partners including the Weather Network, TeamSnap and Waze where their subscribers overlap with Cara customers. This is part of the continued goal of enhancing customer specific marketing and marketing effectiveness.
o In 2017 the Company fully deployed a new CRM tool and database management system to market directly to customers and to effectively maximize life time value of these guests. With the help of this new CRM tool and database, brands can more effectively identify opportunities and put plans in place to drive not only new guests but also to grow life time value with purchase frequency and order size tactics of each consumer segment.
Overview
Cara is a full-service restaurant company that franchises and operates iconic restaurant brands. As at December 31, 2017, Cara had 18 brands and 1, 272 restaurants, 87% of which are operated by franchisees and joint venture partners. Cara’s restaurant network includes Harvey’s, Swiss Chalet, Kelsey’s, East Side Mario’s, Montana’s, Milestones, Prime Pubs, Casey’s, Bier Markt, Landing, New York Fries, St-Hubert, Original Joe's, State & Main, Elephant & Castle, Burger’s Priest, Pickle Barrel, and 1909 Taverne Moderne restaurants. Cara’s iconic brands have established Cara as a nationally recognized franchisor of choice.
Unit count (unaudited) Corporate Franchise
Joint Venture Total Corporate Franchise
Joint Venture Total
Swiss Chalet ........................... 8210021892060215 Harvey’s ................................ 112710282132580271 Montana’s ............................. 798010513900103 East Side Mario’s (1).................. 373076276078 Kelsey’s.................................. 12 56 0 68 13 57 0 70 Casey’s................................... 0 2 0 2 0 5 0 5 Prime Pubs............................... 4 37 0 41 5 32 0 37 Bier Markt................................ 8 0 0 8 8 0 0 8 Milestones............................... 23 23 2 48 27 25 2 54 Landing.................................... 90097007 New York Fries ........................ 151460161171500167 St-Hubert............................... 121100122131100123 Original Joe's............................ 2018286620172865 State & Main............................ 154827124824 Elephant & Castle....................... 101011100010 Burger's Priest.................... 0014140000 1909 Taverne Moderne.......... 00220000 Pickle Barrel................... 12 0 0 12 0 0 0 0 Total restaurants........................ 169 1,049 54 1,272 169 1,030 38 1, 13% 83% 4% 100% 14% 83% 3% 100% (1) Unit count excludes East Side Mario rest aurant s locat ed in t he Unit ed St at es.
As at December 31, 2017 As at December 25, 2016
Selected Financial Information
The following table summarizes the select results of Cara’s operations for 2017, 2016, 2015, and 2014:
53 weeks 52 weeks 52 weeks 52 weeks (C $ mi l l i on s u n l e ss oth e rwi se state d) Dec 31, 2017 Dec 25, 2016 Dec 27, 2015 Dec 30, 2014
System Sales(1)(3) ............................................................................. $ 2,779 $ 2,041 $ 1,765 $ 1,691.
System Sales Growth(1)(3) ................................................................. 36% 15% 4% 23% SRS Growth(2)(3).......................................................................... 0% (1%) 2% 2% Total number of restaurants ...................................................... 1,272 1,237 1,010 837
Total gross revenue ................................................................ $ 775 $ 463 $ 326 $ 281. Operating EBITDA(3)..................................................................................................... $ 191 $ 144 $ 112 $ 83.
Operating EBITDA Margin (3) ..................................................................................................... 24% 31% 34% 29% Operating EBITDA on System Sales(3)..................................................................................................... 6% 7% 6% 4% a Earnings before income taxes ......................................................... $ ......116 $ 96 $ 66 $ 9. Adjusted Net Earnings (3).................................................................................. $ 117 $ 97 $ 64 $ 10. Adjusted Basic EPS(3) (in dollars).............................................................................................................. $ 1 $ 1 $ 1 $ 0.
Adjusted Diluted EPS(3) (in dollars)....................................................................................................... $ 1 $ 1 $ 1 $ 0.
(1) Results from East Side Mario restaurants in the United States are excluded in the System Sales totals and number of restaurants. See “Non-IFRS Measures” on page 41 for definition of System Sales. (2) Results from New York Fries located outside of Canada, East Side Mario restaurants in the United States, Casey’s restaurants, Original Joe’s, Burger’s Priest restaurants, and Pickle Barrel are excluded from SRS Growth. See “Non(3) -IFRS Measures” on page 41 for definition of SRS Growth. See “Non-IFRS Measures” on page 41 for definitions of System Sales, System Sales Growth, SRS Growth, Operating EBITDA, Operating EBITDA Margin, Operating EBITDA on System Sales, Adjusted Net Earnings, Adjusted Basic EPS, and Adjusted Diluted EPS..
14 weeks 13 weeks 53 weeks 52 weeks (C $ m i l l i on s u n l e ss oth e rwi se state d) Dec 31, 2017 Dec 25, 2016 Dec 31, 2017 Dec 25, 2016
Dividends Declared (in dollars per share) (1) Subordinate Voting Shares, M ultip le Voting Shares and Subscription Receipts ..................................... a $ 0 $ 0 $ 0 $ 0. a Reconciliation of net earnings to Adjusted Net Earnings (2) a Net earnings ....................................................................................................................................................... $ 27 $ 19 $ 109 $ 67. Deferred income taxes................................................................................................................................... 5 5 (4) 22. Restructuring and other ...................................................................................................................... 1 - 4 - Transaction costs...................................................................................................................... 0 - 0 3. Impairment charges......................................................................................................................................... 2 0 6 1. Inventory fair value adjustment resulting from acquisition......................................................................................................................................... - 0 - 2. Adjusted Net Earnings (1)(2)............................................................................................ $ 36 $ 25 $ 117 $ 97.
Reconciliation of net earnings to EBITDA (2)
Net earnings ..............................................................................................................................................................$ 27 $ 19 $ 109 $ 67. Net interest expense and other financing charges................................................................... 3 2 12 5. Income taxes...................................................................................................................................................................... 9 10 6 29. Depreciation of property, plant and equipment............................................................................ 12 10 43 26. Amortization of other assets........................................................................................................................ 2 1 7 5. EBITDA(2)......................................................................................................................................................................$ 54 $ 44 $ 180 $ 134. Reconciliation of EBITDA (2) to Operating EBITDA (2):
Losses on early buy out/cancellation of equip ment rental contracts ........................................................ (0) 0 0 0. Restructuring and other............................................................................................................................................................... 1 0 4 0. Transaction costs........................................................................................................................................................ 0 - 0 3. Conversion fees.................................................................................................................................................................. (0) (0) (1) (1) Net gain on disposal of property, plant and equipment...................................................... (0) (2) (2) (3) Impairment charges........................................................................................................................................... 2 0 6 1. Inventory fair value adjustment resulting from acquisition.......................................................................................................................................... - 0 - 2. Stock based compensation.............................................................................................................................. 0 0 2 4. Change in onerous contract provision............................................................................................................. 0 2 (0) 2. Prop ortionate share of equity accounted investment in associates and joint venture ......................................... 0 - 0 - Operating EBITDA (1)(2)...........................................................................................................$ 58 $ 46 $ 191 $ 144. % change....................................................................................................................25% 57% 32% 28% (1) Figures may not total due to rounding. (2) See “Non-IFRS Measures” on page 41 for definitions of Adjusted Net Earnings, EBITDA and Operating EBITDA.
The following table summarizes Cara’s System Sales Growth, SRS Growth, number of restaurants, Selling, general and administrative expenses, Operating EBITDA, Operating EBITDA Margin, and Operating EBITDA on System Sales.
14 weeks 13 weeks 53 weeks 52 weeks (C $ mi l l i on s u n l e ss oth e rwi se state d) Dec 31, 2017 Dec 25, 2016 Dec 31, 2017 Dec 25, 2016 a (unaudit ed) (unaudit ed) System Sales (1)(3)(unaudited).............................................. a $ 774 $ 641 $ 2,779 $ 2,041. System Sales Growth (1)(3) (unaudited)............................................................................ 20% 39% 36% 15% SRS Growth (2)(3)...(unaudited).................................................................................................. 2% (2%) 0% (1%)
Number of corporate restaurants (at period end)............................. 169 169 169 169 Number of joint venture restaurants (at period end)......................... 54 38 54 38 Number of franchised restaurants (at period end).......................... 1,049 1,030 1,049 1, Total number of restaurants (1)(at period end)........................................................... 1,272 1,237 1,272 1, a. Total gross revenue..................................................................... $ 225 $ 175 $ 775 $ 463. Selling, general and administrative expenses ("SG&A").................. $ 92 $ 74 $ 335 $ 217. SG&A as a percentage of gross revenue..................................... 41% 42% 43% 46% a. Operating EBITDA (3)....................................................... a. $ 58 $ 46 $ 191 $ 144. Operating EBITDA Margin (3).......................................... a. 25% 26% 24% 31% Operating EBITDA Margin on System Sales (3)..................................... 7% 7% 6% 7% a
(1) (2)Results from East Side Mario restaurants in the United States are excluded in the System Sales totals and number of restaurants. See “Non-IFRS Measures” on page 41 for definition of System Sales. Results from New York Fries located outside of Canada, East Side Mario restaurants in the United States, Casey’s restaurants, Original Joe’s, Burger’s Priest restaurants, and Pickle Barrel are excluded from SRS Growth. See “Non(3) -IFRS Measures” on page 41 for definition of SRS Growth. See “Non-IFRS Measures” on page 41 for definitions of System Sales, System Sales Growth, SRS Growth, Operating EBITDA, Operating EBITDA Margin, and Operating EBITDA on System Sales.
Factors Affecting Our Results of Operations
SRS Growth
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 and the same period in the previous year. SRS Growth helps explain what portion of sales growth can be attributed to growth in established locations separate from the portion that can be attributed to the opening of net new restaurants. Cara calculates SRS Growth as the percentage increase or decrease in sales of restaurants open for at least 24 complete months. Cara’s SRS Growth results exclude Original Joe’s as the transaction was completed on November 28, 2016; Burger’s Priest as the transaction was completed on June 1, 2017; Pickle Barrel as the transaction was completed December 1, 2017; Casey’s restaurants as the Company is in the process of winding down its operations; and sales from international operations from 44 New York Fries and 3 East Side Mario’s.
SRS Growth is primarily driven by changes in the number of guest transactions and changes in average transaction dollar size. Cara’s SRS Growth results are principally impacted by both its operations and marketing efforts. Cara’s SRS Growth results are also impacted by external factors, particularly macro-economic developments that affect discretionary consumer spending regionally and across Canada.
Atypical weather conditions over a prolonged period of time can adversely affect Cara’s business. During the summer months, unseasonably cool or rainy weather can negatively impact the patio business that exists in many of Cara’s eighteen brands. During the winter months, unusually heavy snowfalls, ice storms, or other extreme weather conditions can reduce guest visits to restaurants and, in turn, can negatively impact sales and profitability.
SRS growth for the 14 and 53 weeks ended December 31, 2017 was 2% and 0% compared to the same 14 and 53 week periods in 2016. The improvement in trend to positive SRS is primarily driven by sales increases from renovated
Total gross revenue
Total gross revenue represents sales from corporate restaurants and catering division, franchise revenues (including royalty fees net of agreed subsidies, new franchise fees, property and equipment rental income and corporate to franchise conversion fees), fees generated from Cara’s off-premise call centre business, new restaurant development revenue, and St- Hubert food processing and distribution revenues from sales to retail grocery customers and to its franchise network.
Total gross revenue was $225 million and $775 million for the 14 and 53 weeks ended December 31, 2017 compared to $175 and $463 million for the 13 and 52 weeks ended December 25, 201 6, representing an increase of $49 million or 28% for the quarter and $311 million or 67% for the year. The increase in gross revenues was primarily the result of new restaurant openings in 2016 and 2017, and the additions of St-Hubert and Original Joe’s in 2016, including the food processing and distribution business from the St-Hubert acquisition, and the addition of Pickle Barrel in December 2017. The estimated impact from the additional week in 2017 was $10 million in gross revenue.
Selling, general and administrative expenses
SG&A expenses represent direct corporate restaurant costs such as labour, other direct corporate restaurant operating costs (e. supplies, utilities, net rent, net marketing, property taxes), overhead costs, franchisee rent assistance and bad debts, central overhead costs, costs related to the food processing and distribution division, lease costs and tenant inducement amortization, losses on early buyout / cancellation of equipment rental agreements and depreciation and amortization on other assets. These expenses are offset by vendor purchase allowances.
Direct corporate restaurant labour costs and other direct corporate restaurant operating and overhead costs are impacted by the number of restaurants, provincial minimum wage increases and the Company’s ability to manage input costs through its various cost monitoring programs. Central overhead costs are impacted by general inflation, market conditions for attracting and retaining key personnel and management’s ability to control discretionary costs. Food processing and distribution costs are impacted by minimum wage increases, union contract negotiations, volume of sales and the Company’s ability to manage controllable costs related to the promotion, manufacture and distribution of products. Franchisee rent assistance and bad debts are impacted by franchisee sales and overall franchisee profitability. Vendor purchase allowances are impacted by the volume of purchases, inflation and fluctuations in the price of negotiated products and services. Losses on early buyout/cancellation of equipment rental contracts, recognition of lease cost and tenant inducements, and depreciation and amortization related to St-Hubert represent non-cash expenses generally related to historical transactions where corporate restaurants were converted to franchise.
SG&A expenses for the 14 and 53 weeks ended December 31, 2017 were $92 million and $335 million compared to $74 million and $217 million for the 13 and 52 weeks ended December 25, 2016, representing an increase of $17 million or 23% for the quarter and $118 million or 54% for the year. The increase is primarily related to the addition of the St-Hubert food processing and distribution, increased direct restaurant labour and other direct restaurant costs from the increase in number of corporate restaurants. These increases were offset by variable wage savings at corporate restaurants and other overhead cost reductions. The estimated impact from the additional week in 2017 was $4 million in SG&A expenses.
SG&A expenses as a percentage of gross revenue for the quarter decreased from 42% in 2016 to 41% in 2017, a decrease of 1 percentage points. For the year, SG&A expenses as a percentage of gross revenue decreased from 46% in 201 6 to 43% in 2017, a decrease of 3 percentage points. The decreases are driven by gross revenues increasing faster than operating and overhead expenses.
Net interest expense and other financing charges
Finance costs are derived from Cara’s financing activities which include the Existing Credit Facility and amortization of financing fees.
Net interest expense and other financing charges were $3 million and $12 million for the 14 and 53 weeks ended December 31, 2017 compared to $2 million and $5 million for the 13 and 52 weeks ended December 25, 2016, an increase of $0 million and $6 million, respectively. The increase is due to the additional borrowings made for the St- Hubert, Original Joe’s, Burger’s Priest, and Pickle Barrel transactions and for buying back and cancelling 1,468, Subordinate Voting Shares under the normal course issuer bid (“NCIB”).
Earnings before income taxes
Earnings before income taxes were $37 million and $116 million for the 14 and 53 weeks ended December 31, 2017 compared to $30 million and $96 million for the 13 and 52 weeks ended December 25, 2016, representing an increase of $6 million or 22 .1% for the quarter and $20 million or 21% for the year. The increases are mainly attributed to higher contribution dollars from additional corporate and franchise restaurants from the St-Hubert and Original Joe’s transactions, improved contribution in a number of Cara’s banners, improved contribution dollars from the central segment driven by the addition of St-Hubert’s food processing and distribution business, the impact from the additional week, and overall cost reductions partially offset by higher interest and financing costs, increases in depreciation from more depreciable assets after the St-Hubert and Original Joe’s acquisitions, a non-cash impairment provision, and restructuring charges.
Income taxes Cara’s earnings are subject to both federal and provincial income taxes. Cara has income tax losses available from prior years to offset taxable earnings and at present does not pay significant cash income taxes on its operating earnings.
The Company recorded a current income tax expense of $4 million and $11 million for the 14 and 53 weeks ended December 31, 2017, compared to $5 million and $6 million for the 13 and 52 weeks ended December 25, 2016, representing an income tax expense decrease of $0 million for the quarter and an increase of $4 million for the year. The current income tax expense is primarily related to St-Hubert earnings resulting in taxes payable that are not sheltered by Cara’s tax losses.
The Company recorded a net deferred income tax expense of $5 million and recovery of $4 million for the 14 and 53 weeks ended December 31, 2017, compared to an expense of $5 million and $22 million for the 13 and 52 weeks ended December 25, 2016, respectively, representing a deferred income tax expense change of $0 million for the quarter and $26 million for the year. The change for the year is due to the Company recognizing a deferred tax asset of $24. million in the first quarter in respect of additional non-capital losses available from prior years to offset future income tax payable on operating profits.
Net earnings
Net earnings were $27 million and $109 million for the 14 and 53 weeks ended December 31, 2017 compared to $19 million and $67 million for the 13 and 52 weeks ended December 25, 2016, representing an increase of $7 million or 38% for the quarter and an increase of $42 million or 63% for the year. The increases are primarily related to the additional corporate and franchise restaurants from the 2016 St-Hubert and Original Joe’s transactions, improved contribution from the central segment driven by the addition of St-Hubert food processing and distribution business and overall cost reductions, the change in deferred income taxes described above, partially offset by increased interest and financing charges of $0 million ($6 million for the year), higher depreciation, an increase in non-cash impairment provision of $2 million ($4 million for the full year), and increased restructuring costs of $0 million ($4 million for the full year).
Adjusted net earnings
Adjusted net earnings were $36 million and $117 million for the 14 and 53 weeks ended December 31, 2017 compared to $25 million and $97 million for the 13 and 52 weeks ended December 25, 2016 , representing an increase of $10 million or 40% for the quarter and an increase of $20 million or 20 .7 % for the year. The increases for the quarter and full year are related to the increased contribution dollars from additional corporate and franchise restaurants related to the 2016 St-Hubert and Original Joe’s transactions, improved contribution dollars from the central segment driven by the addition of St-Hubert food processing and distribution business and overall cost reductions, partially offset by increased interest and financing charges, and higher depreciation on a larger asset base.
Adjusted EPS
Adjusted basic EPS for the 14 and 53 weeks ended December 31, 2017 was $0 and $1, compared to $0. 44 and $1. for the 13 and 52 weeks ended December 25, 2016, respectively. Adjusted diluted EPS for the 14 and 53 weeks ended December 31, 2017 was $0. 59 and $1, compared to $0. 42 and $1. 76 for the 13 and 52 weeks ended December 25, 2016, respectively. The increases are primarily related to improvements in Adjusted Net Earnings, offset by the impact from the increased number of subordinate voting shares outstanding as a result of the 2016 subscription receipt offering to support the St-Hubert transaction reduced by shares repurchased and cancelled under the NCIB in the second, third and fourth quarters of 2017.
Segment Performance
Cara divides its operations into the following four business segments: corporate restaurants, franchise restaurants, food processing and distribution, and central operations.
The Corporate restaurant segment includes the operations of the company-owned restaurants, the proportionate results from 54 joint venture restaurants from the Original Joe’s investment, the Burger’s Priest investment, and 1909 Taverne Moderne joint venture, and catering sales which generate revenues from the direct sale of prepared food and beverages to consumers.
Franchised restaurants represent the operations of its franchised restaurant network operating under the Company’s several brand names from which the Company earns royalties calculated at an agreed upon percentage of franchise and joint venture restaurant sales. Cara provides financial assistance to certain franchisees and the franchise royalty income reported is net of any assistance being provided.
Food processing and distribution represent sales of St-Hubert and Cara branded and other private label products produced and shipped from the Company’s manufacturing plant and distribution centers to retail grocery customers and to its network of St-Hubert restaurants.
Central operations includes sales from call centre services which earn fees from off-premise phone, mobile and web orders processed for corporate and franchised restaurants; and income generated from the lease of buildings and certain equipment to franchisees as well as the collection of new franchise and franchise renewal fees. Central operations also includes corporate (non-restaurant) expenses which include head office people and non-people overhead expenses, finance and IT support, occupancy costs, and general and administrative support services offset by vendor purchase a llowances. The Company has determined that the allocation of corporate (non-restaurant) revenues and expenses which include finance and IT support, occupancy costs, and general and administrative support services would not reflect how the Company manages the business and has not allocated these revenues and expenses to a specific segment.
The CEO and CFO are the chief operating decision makers and they regularly review the operations and performance by segment. The CEO and CFO review operating income as a key measure of performance for each segment and to make decisions about the allocation of resources. The accounting policies of the reportable operating segments are the same as those described in the Company’s summary of significant accounting policies. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Operating EBITDA
Operating EBITDA(1) was $58 million and $191 million for the 14 and 53 weeks ended December 31, 2017 compared to $46 million and $144 million for the 13 and 52 weeks ended December 25, 2016, representing an increase of $11 million or 25% for the quarter and $47 million or 32% for the year. The increases were driven by increased contribution dollars in all of the Company’s operating segments, being corporate restaurants, franchise restaurants, and central operations, positive SRS in the fourth quarter and for the year, the addition of St-Hubert in September 2016 resulting in a new segment for food processing and distribution, the addition of Original Joe’s in November 2016, Burger’s Priest in June 2017, and Pickle Barrel in December 2017. The estimated impact from the additional week in 2017 was $3 million in Operating EBITDA.
Contribution dollar increases from the Corporate restaurant segment for the 14 and 53 weeks ended December 31, 2017 were primarily driven by additional sales from the addition of 13 St-Hubert corporate restaurants acquired in September 2016, the addition of 42 Original Joe’s corporate restaurants and 36 joint venture restaurants acquired in November 2016, partially offset by the second quarter impact from temporary restaurant closures for renovation. Overall contribution dollars from the Franchise segment has increased from the addition of St-Hubert and Original Joe’s, but was offset by increased temporary franchise assistance to western Canada restaurants. The Food Processing and Distribution segment contribution is the result of the September 2016 St-Hubert acquisition. Central segment improvements are primarily a result of central costs growing slower than System Sales.
(1) See “Non-IFRS Measures” on page 41 for definition of Operating EBITDA.
The following table presents the financial performance of Cara’s business segments:
(unaudited)
(C$ thousands unless otherwise stated) Corporate Franchised Central Total Corporate Franchised Central Total
System Sales............................... $ 125,794 $ 570,977 $ 78,144 $ 774,915 $ 82,069 $ 492,510 $ 66,500 $ 641, Corporate Results Sales....................................... $ 125,794 $ - $ 3,672 $ 129,466 $ 82,069 $ - $ 3,191 $ 85, Cost of inventories sold and cost of labour............ (78,522) - - (78,522) (51,760) - - (51,760) Restaurant contribution before other costs............................ 47,272 - 3,672 50,944 30,309 3,191 33, Restaurant contribution before other costs %........................ 37% 36% Other operating costs................. (34,938) - - (34,938) (23,507) - - (23,507) Total Contribution....................... 12,334 - 3,672 16,006 6,802 - 3,191 9, Franchise Results Franchise royalty income............. - 25,525 - 25,525 - 21,956 - 21, Franchise royalty income as a % of franchise sales.................... - 4% - - - 4% - - New franchise fees, property and equipment rent............. - - 4,584 4,584 - - 3,185 3, Franchise rent assistance and bad debt................................... - (1,429) - (1,429) - (1,820) - (1,820) Contribution from franchise restaurants.............................. - 24,096 4,584 28,680 - 20,136 3,185 23, Food processing and distribution Net food processing and distribution contribution .......... - - 6,628 6,628 - - 5,900 5,
Central Net central contribution............. - - 7,231 7,231 - - 7,526 7,
Operating EBITDA (1).................... $ 12,334 $ 24,096 $ 22,115 $ 58,545 $ 6,802 $ 20,136 $ 19,802 $ 46,
Contribution as a % of corporate sales..................................... 9% - - - 8% - - - Contribution as a % of franchise sales...................................... - 4% - - - 4% - - Contribution as a % of total System sales............................ - - 2% 7% - - 3% 7%
December 31, 2017 December 25, 2016
For the 14 weeks ended For the 13 weeks ended
Corporate
As at December 31, 2017, the corporate segment restaurant count consisted of 169 restaurants compared to 169 at December 25, 2016. The acquisition of 12 Pickle Barrel restaurants in December 2017, 7 new restaurant openings, and 5 corporate buybacks were offset by 10 closures and 14 restaurants re-franchised during the year. The corporate restaurant segment includes the proportionate results from 54 joint venture restaurants from the Original Joe’s investment, the Burger’s Priest investment, and 1909 Taverne Moderne joint venture.
Sales
Sales represent food and beverage sales from Cara’s corporate restaurants. Corporate restaurant sales are impacted by SRS Growth and the change in number of corporate restaurants. Sales were $125 million and $439 million for the 14 and 53 weeks ended December 31, 2017 compared to $82 million and $2 88 .4 million for the 13 and 52 weeks ended December 25, 2016, an increase of $43 million or 53% for the quarter and $150 million or 52% for the year. The increase was primarily related to the increase in number of corporate restaurants from the addition St-Hubert and Original Joe’s, the addition of 7 new corporate restaurants in 2017, the increases in SRS, partially offset by 10 closures and 14 corporate restaurants sold to franchisees. The impact from the additional week of sales in 2017 was $7 million.
Cost of inventories sold and cost of labour
Cost of inventories sold represents the net cost of food, beverage and other inventories sold at Cara’s corporate restaurants. Cost of inventories sold and cost of labour is impacted by the number of corporate restaurants, fluctuations in the volume of inventories sold, food prices, provincial minimum wage increases, and Cara’s ability to manage input costs at the restaurant level. Cara manages input costs through various cost monitoring programs and through the negotiation of favourable contracts on behalf of its corporate and franchise restaurant network.
Cost of inventories sold and cost of labour combined was $78 million and $277 million for the 14 and 53 weeks ended December 31, 2017 compared to $51 million and $180 million for the 13 and 52 weeks ended December 25, 2016, an increase of $26 million or 51% for the quarter and $97 million or 54% for the year. The increase was primarily due to new restaurant openings, the addition of 42 corporate restaurants related to the addition of St-Hubert and Original Joe’s, 36 joint venture restaurants from the Original Joe’s investment, 14 restaurants from the Burger’s Priest investment, 2 restaurants from 1909 Taverne Modene, and 12 restaurants from the acquisition from Pickle Barrel.
Cost of inventories sold and cost of labour as a percentage of sales for the quarter have decreased from 63% to 62%, a decrease of 0 percentage points. For the year, cost of inventories sold and cost of labour as a percentage of sales have increased from 63% to 63 .2%, an increase of 0 percentage points. With the addition of Original Joe’s, which operate at slightly higher cost of inventories sold and higher cost of labour than other Cara brands, there are opportunities for improvement as these brands benefit from the total Company’s purchasing power and labour management tools.
Contribution from Corporate segment
Total contribution from corporate restaurants was $12 million and $42 million for the 14 and 53 weeks ended December 31, 2017 compared to $6 million and $29 million for the 13 and 52 weeks ended December 25, 2016, an increase of $5 million for the quarter and $12 million for the year. The increases are primarily driven by the increase in number of corporate restaurants, including the addition of St-Hubert, Original Joe’s, Burger’s Priest, and Pickle Barrel, the increase in SRS, partially offset by lower contribution from restaurants temporarily closed for renovation. The estimated impact from the additional week of contribution in 2017 was $1 million.
Total contribution from corporate restaurants as a percentage of corporate sales was 9% and 9% compared to 8% and 10% for the quarter and year, respectively. Excluding the additional week, the contribution from corporate restaurants as a percentage of corporate sales was approximately 9% and 9% for the quarter and full year, respectively. The reductions were primarily from lower percentage contribution rates from Original Joe’s corporate restaurants that operate at lower contribution levels than other Cara brand corporate restaurants and from lower contribution from the restaurants temporarily closed for renovation in Q2 and Q3.
Franchise
As at December 31, 2017, the franchise restaurant segment consisted of 1, 049 restaurants compared to 1,030 at December 25, 2016, an increase of 19 locations. The increase is related to 47 new restaurant openings and 14 restaurants re- franchised, partially offset by 34 closures, excluding the impact of 3 Casey’s closures, and 5 corporate buy backs. The franchise segment includes the proportionate share of royalties earned from the joint venture restaurants from the Original Joe’s transaction.
Franchise segment System Sales were $571 million and $2,092 million during the 14 and 53 weeks ended December 31, 2017 compared to $492 million and $1,669 million for the 13 and 52 weeks ended December 25, 2016, an increase of $78 million or 15% for the quarter and $423 million or 25 .3% for the year. The increase was primarily attributed to the new restaurant openings, SRS increases, the sale of 14 corporate restaurants to franchisees, the 2016 addition of St-Hubert and Original Joe’s, partially offset by restaurant closures. The impact from the additional week of sales was $39 million of Franchise System Sales.
Franchise revenues
Franchise revenues represent royalty fees charged to franchisees as a percentage of restaurant sales net of contractual subsidies and temporary assistance to certain franchisees.
The primary factors impacting franchise revenues are SRS Growth and net new restaurant activity, as well as the rate of royalty fees (net of contractual subsidies and temporary assistance) paid to Cara by its franchisees. In certain circumstances, the royalty rate paid to Cara can be less than Cara’s standard 5% royalty rate due to different contractual rates charged for certain brands (e. St-Hubert’s standard royalty rate is 4%) and contractual subsidies primarily associated with prior year’s conversion transactions or agreements to temporarily assist certain franchisees. With the majority of contractual subsidies scheduled to end at prescribed dates and the reduction in the number of restaurants requiring temporary assistance, management believes the effective royalty recovery rate will gradually increase over time closer to 5% for franchisees (excluding St-Hubert at 4%).
Franchise revenues were $25 million and $93 million for the 14 and 53 weeks ended December 31, 2017 compared to $22 million and $75 million for the 13 and 52 weeks ended December 25, 2016, an increase of $3 million or 15% for the quarter and $17 million or 23% for the year. The increase was primarily attributed to the addition of St- Hubert and Original Joe’s and the increase in SRS in the fourth quarter and for the year. The franchise revenue impact from the additional week of sales was $1 million.
Contribution from franchise segment
Total contribution from franchise restaurants was $24 million and $84 million for the 14 and 53 weeks ended December 31, 2017 compared to $20 million and $67 million for the 13 and 52 weeks ended December 25, 2016, an increase of $4 million or 19% for the quarter and $17 million or 25% for the year. The increase was related to increased royalty income as a result of the franchise sales increase and the addition of St -Hubert and Original Joe’s. The estimated impact from the additional week of contribution was $1 million.
The effective net royalty rate was 4% and 4% for the quarter and year, compared to 4% and 4% in 2016. Cara’s standard royalty rate is 5%. There are brands acquired since 2014 which charge different standard royalty rates, in particular St-Hubert which charges 4% as its standard royalty.
As at December 31, 2017, a total of 138 restaurants were paying Cara a royalty below the standard rate as compared to 148 restaurants at December 25, 2016, a decrease of 10 restaurants. 71 out of the 138 restaurants paying below the standard royalty are related to previously agreed upon conversion agreements, an improvement of 20 restaurants compared to 91 as at December 25, 2016. 67 out of the 138 restaurants paying less than the standard royalty were related to temporary assistance provided to certain other restaurants, an increase of 10 restaurants compared to 57 as at December 25, 2016. The increase is primarily related to temporary assistance to restaurants in the western provinces.
Selected Quarterly Information
The following table provides selected historical information and other data of the Company which should be read in conjunction with the annual consolidated financial statements of the Company.
Q4 – 2017 Q3 – 2017 Q2 – 2017 Q1 – 2017 Q4 – 2016 Q3 – 2 016 Q2 – 2016 Q1 – 2016 (C$ millions unless otherwise stated) (1)
Dec 31, 2017
Sept 24, 2017
Jun 25, 2017
Mar 26, 2017
Dec 25, 2016
Sept 25, 2016
June 26, 2016
Mar 27, 2016 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
System Sales (1) ..................................................................... $ 774 $ 684 $ 660 $ 659 $ 641 $ 500 $ 450 $ 450. Total System Sales Growth (1) .....................................................................20% 36% 46% 46% 39% 14% 3% 4% SRS Growth (1)..................................................................2% 0% (0%) (0%) (2%) (2%) (2%) 0% Number of restaurants (at period end)................................ 1,272 1,249 1,255 1,238 1,237 1,127 1,003 997 Operating EBITDA (1).................................................... $ 58 $ 48 $ 41 $ 42 $ 46 $ 36 $ 32 $ 27. Operating EBITDA Margin on System Sales (1).....................7% 7% 6% 6% 7% 7% 7% 6%
Corporate restaurant sales.............................................. $ 125 $ 111 $ 103 $ 98 $ 82 $ 74 $ 68 $ 63. Number of corporate and JV restaurants..................................... 223 211 200 204 207 136 119 118 Contribution from Corporate segment............................... $ 12 $ 11 $ 10 $ 8 $ 6 $ 9 $ 8 $ 5. Contribution as a % of corporate sales.............................. 9% 10% 10% 8% 8% 12% 13% 8%
Franchise restaurant sales............................................... $ 571 $ 515 $ 504 $ 500 $ 492 $ 407 $ 381 $ 387. Number of franchised restaurants..................................... 1,049 1,038 1,041 1,034 1,030 991 884 879 Contribution from Franchise segment............................... $ 24 $ 20 $ 19 $ 20 $ 20 $ 16 $ 15 $ 15. Contribution as a % of Franchise sales.............................. 4% 3% 3% 4% 4% 3% 4% 4%
Contribution from food processing and distribution............ $ 6 $ 3 $ 0 $ 4 $ 5 $ 2 $ - $ - Contribution from Central segment................................... $ 22 $ 16 $ 11 $ 14 $ 19 $ 11 $ 8 $ 6. Contribution as a % of total System Sales.......................... 2% 2% 1% 2% 3% 2% 1% 1%
Total gross revenue ...................................................................... $ 225 $ 188 $ 178 $ 182 $ 175 $ 114 $ 89 $ 84. Operating EBITDA Margin (1)..............................................25% 25% 23% 23% 26% 32% 36% 32% Earnings before income taxes........................................................... $ 37 $ 30 $ 21 $ 27 $ 30 $ 20 $ 24 $ 20. Net earnings ................................................................ $ 27 $ 21 $ 17 $ 43 $ 19 $ 14 $ 18 $ 14. Adjusted Net Earnings (1)................................................................ $ 36 $ 28 $ 26 $ 25 $ 25 $ 24 $ 25 $ 21.
Net earnings operations attributable to common shareholders of the Company........................................ $ 27 $ 21 $ 17 $ 44 $ 19 $ 14 $ 18 $ 14. EPS attributable to common shareholders of the Company (in dollars) Basic EPS................................................................ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0. Diluted EPS.............................................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0. Adjus ted Bas ic EPS (1)............................................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0. Adjus ted Diluted EPS (1)........................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0.
(1) See “Non-IFRS Measures” on page 41 for definitions of System Sales, System Sales Growth, SRS Growth, Operating EBITDA, Operating EBITDA Margin, Operating EBITDA Margin on System Sales, Adjusted Net Earnings, Adjusted Basic EPS, and Adjusted Diluted EPS.
The Company’s quarterly operating results may fluctuate significantly because of numerous factors, including, but not limited to:
restaurant and other complimentary acquisitions; the timing of restaurant openings and closures; increases and decreases in SRS Growth; royalty recovery rates and the extent to which Cara provides financial assistance or incurs bad debts with franchisees; restaurant operating costs for corporate-owned restaurants; labour availability and costs for hourly and management personnel at corporate -owned restaurants and at its manufacturing and distribution facilities; profitability of the corporate-owned restaurants, especially in new markets; fluctuations in sales to retail grocery chains, including seasonality;
changes in interest rates; impairment of long-lived assets and any loss on restaurant closures for corporate -owned restaurants; macroeconomic conditions, both nationally and locally; changes in consumer preferences and competitive conditions; expansion in new markets;
increases in fixed costs; and fluctuations in commodity prices.
Seasonal factors and the timing of holidays cause the Company’s revenue to fluctuate from quarter to quarter. Revenue per restaurant is typically lower in the first quarter when consumer spending generally is lower following the holiday season. Adverse weather conditions may also affect customer traffic during the first quarter. The Company has outdoor patio seating at some of its restaurants, and the effects of adverse weather may impact the use of these areas and may negatively impact the Company’s revenue. Food processing and distribution sales are typically highest in the fourth quarter, followed by the third quarter, then the first quarter, with the second quarter being lowest. During the quarters with higher sales, food processing and distribution contribution rate is also higher as fixed overhead costs are covered by higher gross margin.
Operating EBITDA has improved significantly from $27 million in the first quarter of 2016 to $58 million in the fourth quarter of 2017. Operating EBITDA has improved each quarter (year over year) as a result of growth in all three of the Company’s historical segments, the addition of new restaurants, and from the acquisitions of New York Fries, St-Hubert, Original Joe’s, Burger’s Priest, and Pickle Barrel. The fourth quarter Operating EBITDA of $58 million also represents the highest quarter Operating EBITDA contribution in the Company’s history.
Operating EBITDA Margin on System Sales was 7% for the fourth quarter 2017 compared to 7% in the same quarter for 2016, both within the Company long range target of 7%-8%, and the best result in 2017. Excluding the impact of the 53rd week in 2017, Operating EBITDA Margin on System Sales was approximately 7% in the fourth quarter.
Contribution dollars from the corporate restaurant segment have increased (year over year) each quarter as a result of the addition of corporate restaurants. Contribution as a percentage of sales from the corporate restaurant segment is impacted by seasonality where the sales are lower in the first quarter and highest during the fourth quarter, thus contribution as a percentage of sales is typically lower in the first quarter as a result of lower sales in the period. In the second and third quarters, contribution rate was less than last year due to lower percentage contribution from Original Joe’s corporate restaurants that operate at lower contribution levels.
The franchise restaurant segment improved in the fourth quarter to 4% compared to 3% to 4% in prior quarters. Improvement in the fourth quarter is primarily related to improved sales resulting in less franchise assistance.
Cara MDA FY 2017
Course: Auditing Standards and Application (BUSI 3170)
University: University of Ontario Institute of Technology
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