A&W Revenue Royalties Income Fund (OTC:AWRRF) Q2 2022 Results Conference Call July 27, 2022 4:00 PM ET
Company Participants
Susan Senecal – President, CEO
Kelly Blankstein – CFO
Operator
Good day, and welcome to the A&W Revenue Royalties Income Fund Quarter 2, 2022 Results Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Ms. Susan Senecal. Please go ahead, ma’am.
Susan Senecal
Thanks very much. Good afternoon, everyone, and thanks for taking the time to attend our call today. I’m Susan Senecal. I’m President and CEO of A&W Food Services of Canada and CEO of the A&W Revenue Royalties Income Fund.
With me on the call today are Kelly Blankstein, who is the Chief Financial Officer of A&W Food Services and of the Fund; as well as Lisa Marzocco, who’s the Director of Finance.
Today, we’re presenting the fund’s results for the second quarter, which ended on June 19, 2022. I’m pleased to report that A&W has experienced strong growth in the first half of the year with the Fund achieving Royalty Pool same-store sales growth of 12.2% in the second quarter and 12% for the year-to-date period.
With the easing of COVID-19 public health restrictions, we’ve seen the number of guest visits continue to grow across all A&W restaurant concepts and across all provinces as compared to the first 2 quarters of 2021.
In 2021, there were a number of A&W restaurants that were either temporarily closed or were not able to offer dine-in services due to the COVID-19 restrictions.
Now I’ll turn things over to Kelly, who will review the Fund’s structure and go through the financial results for the quarter.
Kelly Blankstein
Good afternoon, everyone, and thank you, Susan. Before we can tell you more about our results, I, of course, need to read the following comment on forward-looking information. Certain statements made in this presentation may be forward-looking in nature.
These include Food Services’ belief that the foodservice industry and more particularly the QSR segment is recovering from the impacts of COVID. Food Services believes that its mission and strategic initiatives will help it to continue to rebound from the impact of COVID-19.
Statements regarding the foodservice industry resuming growth, timing for releasing the interim unaudited financial statements and MD&A of the Fund and the expectation of growth of new locations, industry-leading innovation, a safe and stable supply chain and continued efforts to consistently deliver great tasting food, and a better guest experience will contribute to building loyalty and enhancing performance over the long term.
Actual results may differ from those expressed or implied in forward-looking statements. The forward-looking statements contained in this presentation are subject to a number of risk factors, including risks related to COVID-19, the ability of Food Services to implement its strategies regarding the marketing of the A&W system, the opening of new A&W restaurants, general economic and business conditions, financial and political instability, international conflict and other factors disclosed previously and from time to time in the Fund’s public filings.
Any forward-looking statements in this presentation should be evaluated in light of these important factors. Now I want to spend a few moments reviewing the Fund’s structure, and then we’ll go through the financial results for the quarter.
After that, Susan will provide an update on the impact that COVID-19 has had and continues to have on A&W restaurants, as well as provide an update on some of A&W’s key corporate developments. And we’ll be, of course, happy to take your calls at the end of our conference.
For those of you who might not be familiar with the Fund’s structure, I will quickly review the highlights. The Fund is the majority owner of A&W Trade Marks, Inc., which, through its interest in A&W Trade Marks Limited Partnership, owns the A&W trademarks used in Canada.
These trademarks include some of the best-known names in the Candian foodservice industry, including A&W Root Beer, The Burger Family and Chubby Chicken. The Fund earns income through its ownership interest in A&W Trade Marks, who through the partnership, licenses the A&W trademarks to A&W Food Services.
In return for the use of the trademarks, Food Services pays A&W Trade Marks a royalty equal to 3% of the gross sales reported by A&W restaurants in the Royalty Pool. Royalties lost due to the permanent closure of restaurants are replaced with royalties from new restaurants at the time of the next expansion of the Royalty Pool.
Until then, Food Services continues to pay the royalty as if the restaurant had not closed. This is a top line fund, meaning the distributable cash available to make distributions to unitholders is based on the sales of the restaurants in the Royalty Pool, with only minimal operating expenses associated with operating the Fund.
Growth in the Fund is achieved in 2 ways: first and most importantly, by increasing the same-store sales of the restaurants in the Royalty Pool; and secondly, by adding new restaurants to the Pool each year. On the second point, the Royalty Pool is expanded at the beginning of each year by adding new A&W restaurants opened, less any restaurants which have permanently closed.
On January 5, 2022, the most recent Royalty Pool expansion, the Royalty Pool was increased from 994 restaurants to 1,015 restaurants. Another important aspect of the Fund is that as of June 19, 2022, Food Services owns the equivalent of 26% of the units of the Fund on a fully diluted basis through its ownership of limited voting units of the Fund and common shares of Trade Marks, both of which are exchangeable at the option of Food Services for units of the Fund.
As a result of this ownership interest, the interest of Food Services are closely aligned with the interest of unitholders. So now I’ll turn things over to talking about our financial results for the second quarter of 2022 as compared to the second quarter of 2021.
The news release issued earlier today summarizes these financial results of the Fund, and the interim unaudited financial statements and MD&A will be released in the coming days. The 12.2% Royalty Pool same-store sales growth in the quarter was primarily driven by there being fewer public health restrictions related to COVID-19 in place across Canada during the second quarter of 2022 as compared to the second quarter of 2021.
In Q2 of 2021, there were a number of A&W restaurants that were temporarily closed or were not able to offer dine-in services due to restrictions. There were no temporary closures of A&W restaurants due to COVID-19 restrictions in 2022. And by June 19, 2022, most restrictions, such as capacity limits on dine-in guests, reduced hours of operations and requirements for dine-in guests to show proof of vaccination, had been lifted.
Royalty income for the second quarter of 2022 was $12.2 million based on gross sales reported by restaurants in the Royalty Pool of $406 million compared to Royalty income of $10.5 million and gross sales reported by A&W restaurants in the Royalty Pool of $351 million for the second quarter of 2021.
Year-to-date Royalty income was $22.8 million, based on gross sales reported by restaurants in the Royalty Pool of $759 million compared to Royalty income of $19.8 million and gross sales reported by A&W restaurants in the Royalty Pool of $661 million for the comparable period in 2021.
The increase in Royalty income for the quarter and year-to-date period was driven by Royalty Pool same-store sales growth, which was plus 12.2% for the quarter and 12% year-to-date, and the gross sales from the 21 net new restaurants added to the Royalty Pool on January 5, 2022. The increase in royalty income for the year-to-date period was partially offset by there being 1 less day in the first quarter of 2022 as compared to the first quarter of 2021.
Royalty Pool same-store sales growth is based on an equal number of days in the quarter. Of significant interest to unitholders is the amount of distributable cash that the Fund has generated to pay distributions and the associated payout ratio.
Distributable cash generated in the second quarter of 2022 was $9.5 million compared to $7.9 million in the second quarter of 2021. The $1.6 million increase in distributable cash generated arose because there was a $1.7 million increase in Royalty income.
Distributable cash generated in the year-to-date period was $15.5 million compared to $14.4 million in the comparable period of 2021. This $1.1 million year-to-date increase in distributable cash generated was attributable to the $2.9 million increase in Royalty income, partially offset by a $1.9 million increase in the current income tax expense.
The increase in the current income tax expense in 2022 over 2021 is largely driven by a timing difference related to when income from the partnership is captured in Trade Marks’ taxable income.
Three monthly distributions totaling $0.465 per unit were declared in the second quarter of 2022 compared to 3 monthly distributions totaling $0.405 per unit in the second quarter of 2021. Five monthly distributions totaling $0.775 per unit were declared in the 2022 year-to-date period compared to 5 monthly distributions totaling $0.64 per unit for the comparable period in 2021.
The current monthly distribution rate of $0.155 per unit translates to an annualized distribution of $1.86 per unit. I want to turn now to discussing the payout ratio, which is a key metric to unitholders. The Fund’s long-term objective is to maintain an annual payout ratio at or below 100%. However, the Fund strives to provide unitholders with regular monthly distributions. And as a result of seasonality of sales in A&W restaurants and the timing of current income taxes, the quarterly payout ratio can fluctuate quarter-to-quarter.
The payout ratio for the second quarter of 2022 was 89.2% compared to 88.2% for the second quarter of 2021. The year-to-date payout ratio for 2022 was 110.7% compared to 98.8% for the comparable period in 2021.
The year-to-date payout ratio of 110.7% for 2022 is higher than the trailing 4-quarter payout ratio of 92.5% due primarily to the timing impact of current income taxes.
Now with that, I’ll turn things back over to Susan.
Susan Senecal
Thanks, Kelly. Since March 2020, COVID-19, of course, has adversely impacted A&W restaurant operations across country and — across the country and particularly for those locations located on urban street fronts and in shopping centers.
However, since the second quarter of 2020 when COVID-19 impacts on A&W were at their peak, the impact of COVID-19 on Royalty Pool same-store sales growth has steadily declined. The easing of restrictions has brought many Canadians back to their offices and into shopping centers, which has helped grow sales across all of A&W’s concept types and all provinces in 2022.
To help better understand where A&W is along the road to recovery from the impacts of COVID-19, we have disclosed in the Fund’s Q2 MD&A Royalty Pool same-store sales growth in 2022 over 2019, with 2019 being the most recent pre-COVID comparable period.
Despite the ongoing impacts of COVID-19, the Fund achieved Royalty Pool same-store sales growth of plus 3.3% in 2022 year-to-date period as compared to the comparable year-to-date period in 2019. The 3.3% Royalty Pool same-store sales growth over 2019 has been led by sales growth from 2019 to 2022 in A&W restaurants with drive-through.
We believe that the foodservice industry and, more particularly, the quick service restaurant segment of the industry, is recovering from the impact of COVID-19, but there continues to be uncertainty related to COVID-19 and the future impact it may have on our business.
It is possible that there will be restaurants that are required to temporarily close or that other restrictions or requirements are introduced, which would affect operations, guest counts and/or sales.
Our objective is to ensure that A&W’s restaurants are able to safely operate and that they have the ability to emerge from this period of uncertainty in a financial condition that enables them to compete effectively and grow their businesses. Food services and its franchisees have worked together throughout the pandemic on initiatives to help accelerate sales recovery and enhance employee experience.
Key initiatives include promotional activity, strengthening and expanding partnerships with third-party delivery service providers, increasing the speed of service for the drive-through and serving guests on the A&W mobile app.
The health and safety of A&W’s customers and restaurant team members remains a top priority. We believe that Food Services’ mission to become #1 with millennial burger lovers chosen and trusted for truly good food and the convenience they crave will help us continue to rebound from the impact of COVID-19.
Strategic initiatives, including repositioning and differentiating the A&W brand through the use of delicious natural ingredients, continued new restaurant growth and delivering an industry-leading guest experience have all contributed to A&W’s strong appeal and the trust that is built with Canadian consumers over many years.
These strengths will be key to delivering strong results as the foodservice industry resumes growth. Food Services has continued to grow new A&W restaurants, particularly in the key Ontario and Quebec markets.
As of June 19, 2022, 12 new A&W restaurants have been opened in 2022, 7 of which were opened during the second quarter of 2022, bringing the total number of A&W restaurants in Canada to 1,037 as of June 19, 2022.
During the second quarter on June 2, Food Services was excited to announce that it had signed a country agreement with Pret a Manger, which gives Food Services exclusive rights to use the Pret brand in Canada for a 2-year pilot during which Food Services will introduce the Pret brand within A&W restaurants in select markets in Canada.
If the trial phase is successful, Food Services will have the exclusive right to expand the Pret brand across Canada, pursuant to an agreed development plan. The first A&W restaurant to trial the Pret brand is located in Vancouver. It opened on July 20, and another Pret location is planned to open in the Toronto area in the coming months.
The royalty payable to the Fund applies to Pret products sold within A&W restaurants to the extent that such restaurants are in the Royalty Pool. A&W’s brand positioning remains strong. Growth of new locations, industry-leading innovation, a safe and stable supply chain and continued efforts to consistently deliver great tasting food and a better guest experience are all expected to contribute to building loyalty and enhancing performance over the long term.
Food Services is committed to the long-term health and success of its franchise network and the Fund. I would also like to take this opportunity to remind everyone that A&W’s annual Burgers to Beat MS day is coming up on August 19, where $2 from every Teen Burger purchased on that day will go to the MS Society to support Canadians living with MS.
Thank you very much for your attention, and we would now be happy to answer your questions.
Question-and-Answer Session
Operator
[Operator Instructions] We will take the first question from [Colin Moran].
Unidentified Analyst
How much are the A&W restaurants increased prices so far, year-to-date? And what is your expectation of further pricing actions for the remainder of the year?
Susan Senecal
Thanks for the question. Our restaurant operators are — they set their own prices in our restaurants, and we don’t have an exact number of any price changes in the restaurants at the moment that I can share with you.
But I know that, certainly, costs have increased in the marketplace. But our restaurants are really focused on retaining affordability and making sure that Canadians are able to affordably enjoy A&W across the country. So we have worked hard to work with our supplier partners as well as with our operators to be as efficient as possible so we can limit price increases at the retail level. Did that answer your question?
Unidentified Analyst
It does.
Operator
It appears there is no further question at this time, ma’am. I’ll turn the conference back to you for any additional or closing remarks.
Susan Senecal
Great. Thank you, and thanks to everyone for attending our call today. We look forward to updating you on our results after the third quarter of 2022. And in the meantime, if anyone does have questions that weren’t answered on our call today, please feel free to call either Kelly Blankstein or myself at (604) 988-2141. Thanks again.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
Be the first to comment