NPC International, Inc.
Aug 15, 2014

NPC International, Inc. Reports Second Quarter Results

OVERLAND PARK, Kan.--(BUSINESS WIRE)--



NPC International, Inc. (the “Company” or “NPC”), today reported results for its second fiscal quarter ended July 1, 2014.

SECOND QUARTER HIGHLIGHTS:

YEAR-TO-DATE RESULTS:

NPC’s President and CEO Jim Schwartz said, “Clearly this was a very disappointing quarter for our Pizza Hut business. Extreme commodity pressure and soft comparable store sales combined to place significant pressure on our operating margins as we foreshadowed in our first quarter communications. Commodity inflation alone contributed roughly 50% to our year-over-year EBITDA shortfall as our second quarter was the anticipated quarterly commodity inflation “ceiling” for 2014. Fortunately, as a partial offset, our Wendy’s business continues to perform well and is delivering upon our pre-acquisition expectations.

During the initial six weeks of our third quarter our Pizza Hut business is benefitting from changes in promotional activities that are favorably impacting our margins and top line performance relative to our second quarter. This sequential improvement in these operating metrics is expected to improve our year-over-year EBITDA trends in our third quarter relative to our results to-date.

We are actively working in lock-step with Pizza Hut brand leadership to launch a major new advertising positioning along with the innovation designed to better connect with millennials and separate us from competition. Fortunately, we have a strong platform from which to launch this advertising positioning. Pizza Hut remains the clear category share leader and is the beneficiary of a leveragable 56 year heritage of quality, innovation and service. In addition, the brand is committed to steer the positioning and make the necessary infrastructure and technology investments that is required to implement the strategy changes.

On the Wendy’s front, we continue to be pleased with our investment in the Wendy’s brand, which continues to operate at a “Cut Above” its competition. In July we completed a 56-unit acquisition from a franchisee in North Carolina, primarily in the Winston-Salem and Greensboro metropolitan areas. This has historically been a strong market for the Wendy’s brand and provides NPC another toehold in the Wendy’s system for future expansion. Our initial investment in the Wendy’s business was made in July of last year. Since that time we have made 4 acquisitions in the brand and we are now operating 145 stores with annual sales of approximately $195 million, representing almost 20% of our consolidated net product sales on a pro forma basis. Obviously we are pleased with this growth, the associated benefits of diversification across two iconic brands and the remaining opportunities for continued growth.

During the quarter, we drew upon our incremental term loan to finance our recent Wendy’s acquisition and to maintain a strong liquidity profile. Despite soft comparable store sales and inflationary pressures, our two brands maintain strong cash flow characteristics that we will continue to leverage, further bolstering our liquidity. Despite our challenges in the Pizza Hut brand, we are confident that brand leadership is addressing those challenges and we look forward to updating you on the progress of those strategies after the much anticipated brand re-launch.”

The Company is a wholly-owned subsidiary of NPC Restaurant Holdings, LLC ("Parent"), which has guaranteed the Company's 10.50% Senior Notes due 2020. As a result of its guaranty, Parent is required to file reports with the Securities and Exchange Commission which include consolidated financial statements of Parent and its subsidiaries (including the Company). Parent's only material asset is all of the stock of the Company. The quarterly financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for Parent and the Company on a consolidated basis are set forth in Parent's Form 10-Q for the fiscal quarter ended July 1, 2014 which can be accessed at www.sec.gov.

CONFERENCE CALL INFORMATION:

The Company’s second quarter earnings conference call will be held Monday, August 18, 2014 at 9:00 am CT (10:00 ET). In addition to a discussion of second quarter results, the call may also include discussion of Company developments, forward-looking information and other material information about business and financial matters. You can access this call by dialing 888-391-6937. The international number is 716-247-5763. The access code for the call is 85830164.

For those unable to participate live, a replay of the call will be available until August 25, 2014 by dialing 855-859-2056 or by dialing international at 404-537-3406. The access code for the replay is 85830164.

A replay of the call will also be available at the Company’s website at www.npcinternational.com.

NPC International, Inc. is the world’s largest Pizza Hut franchisee and currently operates 1,265 Pizza Hut units in 28 states and 145 Wendy’s units in 5 states.

For more complete information regarding the Company’s financial position and results of operations, investors are encouraged to review the Parent’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, incorporated into the Parent’s Form 10-Q which can be accessed at www.sec.gov.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this news release that do not relate to historical or current facts constitute forward-looking statements. These include statements regarding our plans and expectations. Forward-looking statements are subject to inherent risks and uncertainties and there can be no assurance that such statements will prove to be correct. Actual results may vary materially from those anticipated in such forward-looking statements as a result of a number of factors, including lower than anticipated consumer discretionary spending; deterioration in general economic conditions; competition in the quick service restaurant market; adverse changes in food, labor and other costs; price inflation or deflation; our ability to successfully complete acquisitions of additional restaurant units; and other factors. These risks and other risks are described in Parent’s filings with the Securities and Exchange Commission, including Parent's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Copies of these filings may be obtained by contacting NPC or may be accessed at www.sec.gov. All forward-looking statements made in this news release are made as of the date hereof. NPC does not intend to update these forward-looking statements and undertakes no duty to any person to provide any such update under any circumstances. Investors are cautioned not to place undue reliance on any forward-looking statements.

           

NPC INTERNATIONAL, INC.

Consolidated Statements of Operations

(Dollars in thousands)

(Unaudited)

 
13 Weeks Ended
July 1, 2014 June 25, 2013
   
Net product sales (1) $ 273,232 100.0 % $ 249,403 100.0 %
Fees and other income (2)   12,674   4.6 %   12,555   5.0 %
Total sales   285,906   104.6 %   261,958   105.0 %
Pizza Hut comparable store sales (net product sales only) -5.6 %

 

-3.7 %
 
Cost of sales (3) 86,605 31.7 % 71,793 28.8 %
Direct labor (4) 80,957 29.6 % 70,449 28.2 %
Other restaurant operating expenses (5) 91,305 33.4 % 78,809 31.6 %
General and administrative expenses (6) 15,684 5.7 % 15,097 6.1 %
Corporate depreciation and amortization of intangibles 5,097 1.9 % 4,480 1.8 %
Other   (45 ) 0.0 %   416   0.1 %
Total costs and expenses   279,603   102.3 %   241,044   96.6 %
Operating income 6,303 2.3 % 20,914 8.4 %
Interest expense (7)   10,042   3.7 %   10,237   4.1 %
(Loss) income before income taxes (3,739 ) -1.4 % 10,677 4.3 %
Income taxes   (2,365 ) -0.9 %   2,589   1.1 %
 
Net (loss) income $ (1,374 ) -0.5 % $ 8,088   3.2 %
 
Percentages are shown as a percent of net product sales.
                         
Capital Expenditures $ 15,859 $ 12,472
Cash Rent Expense     $ 15,582             $ 13,301        
(1)   Net product sales increased 9.6% primarily due to the incremental sales from our Wendy’s units, which were acquired in the last half of 2013. These units contributed sales of $33.1MM, or 12.1% of net product sales during the quarter. Additionally, we had a 2.0% increase in equivalent Pizza Hut units, which was partially offset by a 5.6% decline in Pizza Hut comparable store sales.
(2) Fees and other income increased 0.9% due to the increase in delivery transactions resulting from an increase in equivalent Pizza Hut delivery units compared to the prior year.
(3) Cost of sales, as a percentage of net product sales, increased primarily due to increased ingredient costs, primarily meats and cheese, and higher food costs associated with our Wendy’s operations.
(4) Direct labor, as a percentage of net product sales, increased largely due to the deleveraging effect of negative comparable store sales on our Pizza Hut fixed and semi-fixed labor costs.
(5) Other restaurant operating expenses, as a percentage of net product sales, increased due to sales deleveraging on Pizza Hut fixed costs and increased costs associated with delivery driver insurance reserves, which was partially offset by lower operating expenses associated with our Wendy’s operations as compared to our Pizza Hut operations.
(6) General and administrative expenses increased due to field personnel costs and credit card transaction fees attributable to the Wendy’s units acquired in the last half of 2013 partially offset by a decline in incentive compensation and training expense for our Pizza Hut operations.
(7) Interest expense decreased due to a lower average borrowing rate as a result of the refinancing completed in the fourth quarter of 2013, slightly offset by increased borrowings on our revolving credit facility and from the $40.0MM incremental term loan completed during the quarter.

Note: The explanations above are abbreviated disclosures. For complete disclosure see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Parent's Form 10-Q filed with the SEC.

           

NPC INTERNATIONAL, INC.

Consolidated Statements of Income

(Dollars in thousands)

(Unaudited)

 
26 Weeks Ended
July 1, 2014 June 25, 2013
   
Net product sales (1) $ 555,535 100.0 % $ 514,074 100.0 %
Fees and other income (2)   26,624   4.8 %   26,853   5.2 %
Total sales   582,159   104.8 %   540,927   105.2 %
Pizza Hut comparable store sales (net product sales only) -5.1 % -2.9 %
 
Cost of sales (3) 174,692 31.4 % 148,641 28.9 %
Direct labor (4) 164,426 29.6 % 146,039 28.4 %
Other restaurant operating expenses (5) 180,744 32.5 % 160,539 31.2 %
General and administrative expenses (6) 31,143 5.6 % 29,521 5.7 %
Corporate depreciation and amortization of intangibles 10,194 1.9 % 8,873 1.8 %
Other   260   0.1 %   549   0.1 %
Total costs and expenses   561,459   101.1 %   494,162   96.1 %
Operating income 20,700 3.7 % 46,765 9.1 %
Interest expense (7)   20,204   3.6 %   20,477   4.0 %
Income before income taxes 496 0.1 % 26,288 5.1 %
Income taxes   (1,086 ) -0.2 %   4,956   1.0 %
 
Net income $ 1,582   0.3 % $ 21,332   4.1 %
 
Percentages are shown as a percent of net product sales.
                         
Capital Expenditures $ 35,105 $ 22,102
Cash Rent Expense     $ 31,193             $ 26,767        
(1)   Net product sales increased 8.1% primarily due to the incremental sales of our Wendy’s units, which were acquired in the last half of 2013. These units contributed sales of $62.9MM, or 11.3% of net product sales during the period. Additionally, we had a 2.3% increase in equivalent Pizza Hut units, which was partially offset by a 5.1% decline in Pizza Hut comparable store sales.
(2) Fees and other income decreased 0.9% due to the lower delivery transactions from our Pizza Hut units compared to the prior year.
(3) Cost of sales, as a percentage of net product sales, increased primarily due to increased ingredient costs, primarily cheese and meat, and higher food costs associated with our Wendy’s operations.
(4) Direct labor, as a percentage of net product sales, increased largely due to the deleveraging effect of negative comparable store sales on our Pizza Hut fixed and semi-fixed labor costs.
(5) Other restaurant operating expenses, as a percentage of net product sales, increased due to sales deleveraging on Pizza Hut fixed costs and increased costs associated with delivery driver insurance reserves, which was partially offset by lower restaurant manager bonuses and lower operating expenses associated with our Wendy’s operations as compared to our Pizza Hut operations.
(6) General and administrative expenses increased due to field personnel costs and credit card transaction fees attributable to the Wendy’s units acquired in the last half of 2013 partially offset by a decline in incentive compensation and training expense for our Pizza Hut operations.
(7) Interest expense decreased due to a lower average borrowing rate as a result of the refinancing completed in the fourth quarter of 2013, slightly offset by increased borrowings on our revolving credit facility.

Note: The explanations above are abbreviated disclosures. For complete disclosure see Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Parent's Form 10-Q filed with the SEC.

         

NPC INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(Unaudited)

 
July 1, 2014 December 31, 2013
Assets
Current assets:
Cash and cash equivalents $ 48,293 $ 20,035
Other current assets $ 35,981   37,069
Total current assets 84,274 57,104
 
Facilities and equipment, net 180,617 169,950
Franchise rights, net 631,401 640,151
Other noncurrent assets   337,031   337,907
Total assets $ 1,233,323 $ 1,205,112
Liabilities and Stockholders' Equity
Current liabilities:
Other current liabilities 100,058 $ 101,630
Current portion of debt   4,158   3,438
Total current liabilities 104,216 105,068
 
Long-term debt 592,302 561,687
Other noncurrent liabilities   270,070   273,144
Total liabilities 966,588 939,899
Stockholders' equity   266,735   265,213
Total liabilities and stockholders' equity $ 1,233,323 $ 1,205,112
 
         

NPC INTERNATIONAL, INC.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 
26 Weeks Ended
July 1, 2014 June 25, 2013
Operating activities
Net income $ 1,582 $ 21,332
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 30,935 26,201
Amortization of debt issuance costs 1,928 1,663
Deferred income taxes (1,281 ) 1,870
Other (16 ) 384
Changes in assets and liabilities, excluding acquisitions:
Assets (391 ) 3,963
Liabilities   8,526     11,379  
Net cash provided by operating activities   41,283     66,792  
Investing activities
Capital expenditures (35,105 ) (22,102 )
Proceeds from sale or disposition of assets   2,373     540  
Net cash used in investing activities   (32,732 )   (21,562 )
Financing activities
Net payments under revolving credit facility (7,000 ) -
Payments on the term loan (1,665 ) -
Issuance of debt 40,000 -
Debt issue costs (693 ) (91 )
Purchase of Company stock (60 ) -
Payment of accrued purchase price to sellers   (10,875 )   (2,847 )
Net cash provided by (used in) financing activities   19,707     (2,938 )
Net change in cash and cash equivalents 28,258 42,292
Beginning cash and cash equivalents   20,035     25,493  
Ending cash and cash equivalents $ 48,293   $ 67,785  
 
                 

NPC INTERNATIONAL, INC.

Reconciliation of Non-GAAP Financial Measures

(in thousands)

(Unaudited)

 
13 Weeks Ended 26 Weeks Ended
July 1, 2014 June 25, 2013 July 1, 2014 June 25, 2013
Adjusted EBITDA:
Net (loss) income $ (1,374 ) $ 8,088 $ 1,582 $ 21,332
Adjustments:
Interest expense 10,042 10,237 20,204 20,477
Income taxes (2,365 ) 2,589 (1,086 ) 4,956
Depreciation and amortization 15,887 13,251 30,935 26,201
Transaction costs 75 146 356 182
Pre-opening expenses and other 287 626 659 967
Development and WingStreet incentives   (1,660 )   (1,720 )   (2,800 )   (2,350 )
Adjusted EBITDA (1) $ 20,892   $ 33,217   $ 49,850   $ 71,765  
Adjusted EBITDA Margin(2) 7.6 % 13.3 % 9.0 % 14.0 %
 
Free Cash Flow:
Net cash provided by operating activities $ 16,510 $ 29,994 $ 41,283 $ 66,792
Adjustments:
Capital expenditures $ (15,859 )   (12,472 )   (35,105 )   (22,102 )
Free Cash Flow (3) $ 651   $ 17,522   $ 6,178   $ 44,690  
 
             

Unit Count Activity

 

26 Weeks Ended

July 1, 2014 June 25, 2013
Combined   Wendy's   Pizza Hut Pizza Hut
Beginning of period 1,354 91 1,263 1,227
Acquired - - - 1
Developed(4) 12 - 12 21
Closed(4) (11)   (1)   (10) (4)
End of period 1,355   90   1,265 1,245
 
Equivalent units(5) 1,350 91 1,259 1,231
(1)   The Company defines Adjusted EBITDA as consolidated net (loss) income plus interest, income taxes, depreciation and amortization, pre-opening expenses and certain other items that are non-operational in nature. Management believes the elimination of these items, as well as income taxes and certain other items of a non-operational nature, as noted in the table above, give investors and management useful information to compare the performance of our core operations over different periods and to compare our operating performance with the performance of other companies that have different financing and capital structures or tax rates. Adjusted EBITDA is not a measure of financial performance under GAAP. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation from, or as a substitute for analysis of, the Company’s financial information reported under GAAP. Adjusted EBITDA, as defined above, may not be similar to EBITDA measures of other companies.
(2) Calculated as a percentage of net product sales.
(3) The Company defines Free Cash Flow as cash flows from operations less capital expenditures. Management believes that the free cash flow measure is important to investors to provide a measure of how much cash flow is available, after current changes in working capital and acquisition of property and equipment, to be used for working capital needs or for strategic opportunities, including servicing debt, making acquisitions, and making investments in the business. It should not be inferred that the entire Free Cash Flow amount is available for discretionary expenditures.
(4) Three Pizza Hut units were relocated or rebuilt and are included in both the developed and closed total for the 26 weeks ended July 1, 2014 and June 25, 2013, respectively.
(5) Equivalent units represent the number of units open at the beginning of a given period, adjusted for units opened, closed, acquired or sold during the period on a weighted average basis.
 

Contact:
NPC International
Troy D. Cook, 913-327-3109
Executive Vice President-Finance & Chief Financial Officer