A&W Revenue Royalties Income Fund. (OTC:AWRRF) Q3 2022 Earnings Conference Call October 19, 2022 4:00 PM ET
Company Participants
Susan Senecal – President, CEO
Kelly Blankstein – CFO
Lisa Marzocco – Director of Finance
Conference Call Participants
Operator
Good day everyone, and welcome to the A&W Revenue Royalties Third Quarter Results Conference Call. As a reminder, today’s call is being recorded.
I would now like to turn the call over to Miss. Susan Senecal for opening remarks and introduction. Susan, please go ahead.
Susan Senecal
Thanks Melinda. Good afternoon everyone and thank you for joining us today on our call. I’m Susan Senecal. I’m President and CEO of A&W Food Services of Canada, Inc. and CEO of the A&W Revenue Royalties Income Fund.
With me on the call today are Kelly Blankstein who’s the Chief Financial Officer of A&W Food Services and the Fund, as well as Lisa Marzocco, who is the Director of Finance. Today, we’re presenting the Funds results for the third quarter which ended on September 11 2022. And I’m pleased to report that A&W achieved Royalty Pool Same Store Sales Growth of 4% in the third quarter as compared to the third quarter of 2021. This brings the year-to-date Royalty Pool Same Store Sales Growth to 8.9%.
As a result of the performance by the A&W restaurants in the Royalty Pool, I’m also pleased to report that the monthly distribution to unit holders will increase from $0.155 [ph] per unit to $0.160 [ph] per unit, beginning with the October distribution which is payable on November 30, 2022.
Now we’ll turn things over to Kelly who will review the Funds structure and go through the financial results for the quarter.
Kelly Blankstein
Thank you, Susan and good afternoon everyone. Before we can tell you more about our results I need to read the following comment on forward-looking information. Certain statements in this presentation may be forward-looking in nature. These include Food Services belief that the food service industry and more particularly the QSR segment is recovering from the impacts of COVID-19.
Food Services believe that its mission and strategic initiatives will help it to continue to rebound from the impact of COVID-19 and better position it to withstand other risks such as those associated with economic conditions and international conflict. Statements regarding the food service industry resuming growth, timing for releasing the interim on audited financial statements and MD&A of the Fund and the expectation that 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 these 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 A&W Food Services to implement it 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 funds public filings. Any forward-looking statements in this presentation should be evaluated in light of these important risk factors.
Now I will spend a few moments reviewing the funds structure and then go through the financial results for the quarter. After that Susan will provide an update on A&W restaurants of key corporate developments. And we’ll be of course happy to take any questions at the end of our call.
For those of you who might not be familiar with the Fund Structure, I want to quickly review the highlights. The Fund is the majority owner of A&W trade marketing, which through its interest in A&W Trade Marks Limited Partnership owns the A&W Trade Marks used in Canada. These Trade Marks include some of the best known names in the Canadian food service 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 Trade Marks to A&W Food Services.
In return for the use of the Trade Marks, 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 income fund, meaning the distributable cash available to make distributions to unit holders 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 Royalty Pool was increased from 994 to 1,015 restaurants. Another important aspect of the Fund is that as at September 11, 2022, Food Services owned 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, the interest of Food Services are closely aligned with the interest of unit holders. So now I’ll go through and turn to our financial results for the third quarter of 2022 as compared to the third quarter of 2021.
The news release issued earlier today summarizes these financial results of the Fund, and the interim unaudited financial statements and the MD&A will be released in the following days. Royalty Pool same-store sales growth is a function of changes in guest counts and check size, both of which are impacted by sales mix and menu price changes. The Q3 2022 royalty pool same store sales growth of 4% was a product of an increase in both guest counts and average check size. The growth in average check size was partly attributable to menu prices, which have modestly increased in response to industry wide inflation on goods, services and labor.
Royalty income for the third quarter of 2022 was $13.2 million based on gross sales reported by restaurants in the Royalty Pool of $440 million compared to royalty income of $12.3 million and gross sales reported by A&W restaurants in the Royalty Pool of $409 million for the third quarter of 2021.
Year-to-date, royalty income was $36 million based on gross sales reported by restaurants in the Royalty Pool of $1.2 billion compared to royalty income of $32.1 million and gross sales reported by A&W restaurants and the Royalty Pool of $1.1 billion 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 4% for the quarter and 8.9% 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 one less day in the first quarter of 2022
Usually offset by bit there being one last 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 unit holders is the amount of distributable cash that the fund has generated to pay distributions and the payout ratio. Distributable cash generated in the third quarter of 2022 was $10.6 million compared to $9.5 million in the third quarter of 2021. This $1.1 million increase in distributable cash generated was primarily attributable to the $900,000 increase in royalty income.
Distributable cash generated in the year-to-date period was $26.1 million compared to $23.9 million in the comparable period of 2021. This $22.1 million increase year-to-date increase is attributable to the $3.8 million pardon me increase in royalty income partially offset by the $1.8 million increase in the current income tax expense. The increase in the current tax expense in 2022 is largely driven by a timing difference related to when income from the partnership is captured and Trade Marks, taxable income.
Three monthly distributions totaling $0.465 per unit were declared in the third quarter of 2022 compared to 3 monthly distributions totaling $0.435 per unit in the third quarter of 2021. Eight monthly distributions totaling $1.24 per unit were declared in the 2022 year-to-date period compared to 8 monthly distributions totaling $1.075 per unit for the comparable period in 2021.
The current monthly distribution rate of $15.05 per unit translates to an annualized distribution of $1.86 per unit. But as Susan mentioned earlier at the top of the call, due to the performance by restaurants in the Royalty Pool, the monthly distribution rate will be increased from $15.05 cents per unit to $0.16 per unit beginning with the October distribution, which is payable on November 30, 2022. This new distribution rate translates into a go-forward annualized distribution rate of $1.92 per unit, an increase of 3.2% from the prior level of $1.86 per unit.
I want to now turn to discussing the payout ratio which is another key metric important to unit holders. The fund’s long term objective is to maintain an annual payout ratio at or below 100%. However, the fund strives to provide unit holders with regular monthly distributions, and as a result of seasonality of sales A&W restaurants and the timing of current income taxes, the quarterly payout ratio fluctuates. The payout ratio for the third quarter of 2022 was 80.3% compared to 77.5% for the third quarter of 2021. The year-to-date payout ratio was 98.4% compared to 93.6% for the comparable period in 2021.
The payout ratio for the year-to-date period in 2022 is higher than the trailing four quarter payout ratio of 92.8% due primarily to the timing, impact of current income taxes.
So with that, I’ll now turn things back over to Susan.
Susan Senecal
Thanks, Kelly. Since March 2020 COVID-19, as you know, is adversely impacted A&W restaurant operations across Canada and in particular for those restaurants located on urban street fronts and in shopping centres. 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, who brought many Canadians back to their offices and into shopping centers, which has helped us to grow sales in 2022. To help better understand where A&W is along the road to recovery from the impacts of COVID-19, we have measured same store sales growth in 2022 over 2019, with 2019 being the most recent pre-COVID comparable period. Despite the on-going impacts of COVID-19 the fund achieved Royalty Pool Same Store Sales Growth of plus 5.1% in the 2022 year-to-date period, as compared to the comparable year-to-date period in 2019.
The 5.1% 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. Food Services believes that the food service industry and more particularly the QSR segment of the industry is recovering from the impacts of COVID-19. The success of the A&W brand and individual franchise A&W restaurants is paramount to the long term success of the overall A&W system and in turn to the fund. Both food services and its franchisees have worked diligently to develop and implement plans and programs to mitigate the effects of COVID-19 pandemic. Food Services objective is to ensure that A&Ws restaurants are able to safely operate and have the ability to emerge from this period of uncertainty and a financial condition that enables them to compete effectively and grow their businesses.
Food Services believes that its mission to become number one 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 and better position it to withstand other risks such as those associated with economic conditions and international conflict.
A&W’s brand positioning remains strong. The 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. Food Services has continued to grow new A&W restaurants particularly in the key Ontario and Quebec markets. As at September 11, 2022 15 new A&W restaurants have been opened in 2022, three of which were opened during the third quarter of 2022 bringing the total number of A&W restaurants in Canada to 1039 as at September 11 2022.
During the second quarter, Food Services announced that 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 Prep brand across Canada pursuant to an agreed development plan. As at September 11 2022, two A&W locations one in Vancouver and one in Toronto, were offering Pret products in their restaurants. 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.
During the third quarter on August 18, A&W celebrated its 14th annual Burgers to Beat MS day and raised more than $1.8 million for the MS Society, a result that we’re all very proud of. Thank you very much for your attention and we would now be happy to answer your questions.
Question-and-Answer Session
Operator
Susan Senecal
Thank you. Everyone must be racing off to get a team burger. So thanks everyone for attending our call today. We look forward to updating you on our results after our fourth 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
That does conclude today’s conference. We do thank you for your participation. You may now disconnect.
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