Debt, losses do not defray TW Services expansion plan

Nation's Restaurant News, June 11, 1990 by Milford Prewitt

Debt, losses do not defray TW Services expansion plan

SPARTANBURG, S.C. -- Despite two consecutive and large quarterly losses and the debt service on a $1.7 billion leveraged buyout, TW Holdings remains committed to its ambitious expansion and remodeling program.

Profit has been elusive since management and Coniston Partners formed TW Holdings last year to buy TW Services, the diversified conglomerate whose sales volume makes it the fourth-largest foodservice company in the industry.

But in reviewing the health of the company, which is nearly $2.5 billion in debt, executives put a higher premium on long-term growth via expansion, facility improvements and improved customer service over short-term profits.

"We are not afraid of our leveraged position because we know we operate our businesses right," said Walter M. Brice, vice president and chief financial officer. "It is true that this kind of debt is a new environment for us, but the cash flow is there to service the debt and we have the people in place in leadership roles to do the job."

TW Services operates some of the best-known food service names and most-watched concepts in the industry. Its stable of operations includes: Canteen, the largest contract feeder; Denny's, the largest family restaurant chain; Spartan Foods, operator of 465 Hardee's units and owner of the 213-unit Quincy's Family Steakhouse chain; and El Pollo Loco, the 206-restaurant quick-serve chicken chain.

The company also owns some distribution and supply facilities to keep its empire fueled, but it expects to sell some of the non-strategic distribution businesses in the future.

Interest and other expenses related to the buyout and flat sales from Canteen, which heretofore has been the company's largest contributor to total corporate sales and profit, have wrought two consecutive quarterly losses.

For the first quarter ended March 31, revenues from the restaurant division and Canteen rose 8 percent, to $862 million. But after interest and other debt-related expenses and taxes, the company lost $46 million in the quarter in contrast to an $8 million profit a year ago.

Canteen enjoyed a 26-percent boost in income, to $8.9 million, on a slim 1-percent increase in revenues, to $312.5 million. During the fiscal year ended December, Canteen's sales reflected similar flat growth, rising 2 percent, to $1.3 billion, while net income slumped 2.2 percent, to $67 million.

TW Services ended its fiscal 1989 with a $57.3 million loss on a 5-percent increase in revenues, to $3.4 billion.

Brice said the softness in Canteen's performance of late has been largely due to the slowdown from military accounts and automobile plants, both of which are slowing down production and laying off workers.

But even with the retrenchment in heavy industry, Brice said Canteen is already building a new client base with executive corporate catering, stadiums and prisons. Moreover, Brice stressed that despite the historic relationship Canteen has had with industrial accounts, no one client accounts for no more than 3 percent of the company's total sales volume.

"There has been a strategy in place for some time to diversify Canteen's client base," Brice said. "We are still heavily involved in automotive and defense industries, and traditionally through the years both of these industries have been very cyclical and our revenues and customer base -- and by that I mean the number of people who are in these factories -- have diminished.

"But when you push back and look at Canteen some five to eight years ago, 60 to 70 percent of our business was in the blue-collar industries, and since that time through acquisitions or marketing strategies that percentage has decreased. Our strategy is balanced diversification.

Brice said one of Canteen's strengths has been the ability to adapt to new markets and treat each client facility as a separate entity rather than imposing one smorgasbord of services to different customers.

"We are trying to make opportunities out of adversity, and when you squeeze the balloon, something else has got to bulge somewhere else," Brice said. "Our emphasis is going to the field to the customer with no headquarters emphasis, with people who can touch the people's lives.

"That's why we are extremely pleased with our low turnover. When we lose a customer, what we worry about are the ones in which a customer feels he has found a better service or better quality."

The new expansion opportunities for Canteen have some similarities in the company restaurant divisions as well, particularly Denny's, El Pollo Loco and Hardee's, Brice pointed out.

He said Denny's is in the midst of a major franchisee expansion drive whose goal is to add about 50 to 60 new units a year. Brice said one of the tacks the company is taking is to market the Denny brand to small mom and pop operators in the segment who do about $500,000 to $600,000 in annual volume or to those restaurateurs who operate three or four similarly themed restaurants.

TW Services operates 1,001 of the 1,342 units in the chain. Denny's made a 9-percent profit gain last year, to $101.7 million, on $1.3 billion, a 5-percent increase.