Boston Pizza Royalties Income Fund (OTC:BPZZF) Q4 2022 Results Conference Call February 9, 2023 9:30 AM ET
Company Participants
Michael Harbinson – CFO
Jordan Holm – President, BPI
Conference Call Participants
Megan Bergen – Acumen Capital
Operator
Hello. This is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza’s Fourth Quarter 2022 Quarterly Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded on February 09, 2023. After the presentation, there will be a question-and-answer session. Participants on the call may also post their questions via email to Boston Pizza’s Investor Relations department at investorrelations@bostonpizza.com. [Operator Instructions]
At this time, I would like to turn the conference over to Michael Harbinson, Chief Financial Officer. Please go ahead.
Michael Harbinson
Thank you, and welcome to the call. Today, we’ll be discussing the 2022 fourth quarter results for both Boston Pizza Royalties Income Fund, or The Fund, and for Boston Pizza International, or BPI. For complete details on our financial results, please see our fourth quarter materials filed earlier today on SEDAR, or visit The Fund’s website at bpincomefund.com. Should you require additional information after the call, you can reach us via the Investor Relations phone number that is listed in our press release.
The Fund is a limited purpose, open-ended trust established under the laws of British Columbia to acquire indirectly certain trademarks and trade names used by BPI in its Boston Pizza Restaurants in Canada. BPI pays royalty and distribution income to The Fund based on franchise revenues of Royalty Pool restaurants. For a complete description of The Fund and its business, please see the annual information form dated February 08, 2023, which was filed on sedar.com.
Before I turn the call over to Jordan Holm, President of BPI, I would like to note that, certain information in the following discussion may constitute forward-looking information. For a more complete definition of forward-looking information and the associated risks, please refer to The Fund’s management discussion and analysis issued earlier today. Forward-looking information is provided as of the date of this call and, except as required by law, we assume no obligation to update or revise forward-looking information to reflect new events or circumstances.
And with that, I will now turn the call over to Jordan. Jordan?
Jordan Holm
Thank you, Michael, and welcome, everyone, to Boston Pizza’s fourth quarter investor conference call. Today, I’ll be discussing our fourth quarter results and share a brief outlook. Michael will summarize our key financial highlights. And as usual, we will save time for your questions at the end of today’s call. COVID-19 continued to impact the business of Boston Pizza during 2021 and the first half of 2022. Since then, COVID-19 case counts have improved, government restrictions related to COVID-19 have largely been eliminated and sales levels at Boston Pizza Restaurants have returned to pre-pandemic levels.
Turning to our financial results, The Fund posted franchise sales from restaurants in the Royalty Pool of $227.2 million for the quarter and $855 million for the year, representing an increase of 24% and 29.5% respectively versus the same periods one year ago. Same restaurant sales were 24.5% for the quarter and 30.4% for the year. The increase in SRS for the quarter and year compared to the same periods in 2021 was principally due to increases in restaurant guest traffic, mainly due to the easing and elimination of dining restrictions and increased average guest check. We are pleased that our sales results have supported another monthly increase to The Fund’s distribution rate and a special cash distribution, which Michael will elaborate on later in the call.
From a marketing standpoint, we began the fourth quarter of 2022 with our Hockey Night in Canada partnership, which was supported by significant TV, digital and social media channels, along with in restaurant promotions at participating Boston Pizza restaurants across the country. In addition to this, we launched our 2022 holiday menu, which featured a selection of innovative items along with a promotion or bonus card offer. Guests also receive a free Ferrero Rocher 3 pack with the purchase of any qualifying holiday menu item. Also, we have the highest gift card sales in 2022 that we’ve had in any previous year, helped by a successful yearend holiday gift card promotion.
Turning to restaurant development. Boston Pizza open no new restaurants and closed three Boston Pizza restaurants during the quarter. BPI also completed 8 restaurant renovations during the fourth quarter, and 18 renovations for the full year. Restaurants typically closed or partially close for two to three weeks to complete a renovation, which incorporates updated design elements that result in a refreshed and more appealing restaurant.
We have some exciting initiatives planned to drive sales in 2023, which I’ll speak about in a moment. First of all, I’ll turn the call back to Michael for a review of The Fund’s financial performance. Michael?
Michael Harbinson
Thank you, Jordan. The Fund posted royalty income of $9.1 million for the quarter and $34.2 million for the year, compared to $7.3 million and $26.4 million, respectively, for the same periods one year ago. The Fund posted distribution income of $3 million for the quarter and $11.3 million for the year compared to $2.4 million and $8.8 million respectively, for the same periods one year ago.
Royalty and distributions income for the quarter and year were based on 383 Boston Pizza restaurants in the Royalty Pool that reported franchise sales of $227.2 million for the quarter and $855 million for the year. For the same period in 2021, royalty and distribution income more based on the Royalty Pool of 397 Boston Pizza restaurants reporting franchise sales of $183.2 million for the fourth quarter and $660 million for the year.
The Fund’s net and comprehensive income was $6.4 million for the quarter, compared to $12.6 million for the fourth quarter of 2021. The $6.2 million decrease in The Fund’s net and comprehensive income for the period compared to the fourth quarter of 2021 was primarily due to a $7.5 million increase in fair value loss, an increase in income tax expense of $0.7 million and an increase in interest on Class B units of $0.6 million, all partially offset by an increase in royalty and distribution income of $2.3 million and lower interest expense on long-term debt of $0.2 million.
The Fund’s net and comprehensive income was $30.6 million for the year compared to $37.4 million in 2021. The $6.8 million decrease in The Fund’s net and comprehensive income for the year, compared to the same period in 2021 was due to a $13.5 million decrease in the fair value gain an increase in income tax expense of $2.6 million and an increase in interest on Class B units of $1.2 million partially offset by an increase in royalty and distribution income of $10.3 million and lower interest expense on long-term debt of $0.3 million.
The Fund’s cash flows generated from operating activities was $8.9 million for the period compared to $8.5 million for the fourth quarter of 2021. The increase of $0.4 million was due to an increase in a royalty and distribution of income of $2.3 million partially offset by a decrease in changes in working capital of $1.1 million, and the increase income taxes paid $5.8 million.
The Fund cash flow is generated from operating activities was $34.4 million for the year, compared to $30.5 million for the same period in 2021. The increase of $3.9 million was due to an increase of royalty and distribution income of $10.3 million partially offset by a decrease in changes in working capital of $4 million and an increase in income taxes paid of $2.4 million.
Well, net and comprehensive income or loss and cash flows from operating activities are both measures unrelated under International Financial Reporting Standards, or IFRS. The Fund is of the view that net income or loss and cash flows from operating activities do not provide the most meaningful measurement of The Fund’s ability to pay distributions.
Net income contains noncash items that do not affect The Fund’s cash flows, whereas cash flows from operating activities is not inclusive of all of The Fund’s required cash outflows, and therefore is not indicative of the cash available for distribution to unit holders. Noncash items include the fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, the Class B unit liability, interest rate swaps and changes in the deferred income taxes.
Consequently, The Fund reports the non-IFRS metrics of distributable cash and payout ratio to provide investors with a fund’s opinion more meaningful information regarding the firm’s ability to pay distributions to unitholders. The Fund generated distributable cash of $7.2 million for the period, compared to $6.1 million for the fourth quarter of 2021. The increase in distributable cash of $1.2 million, or 19.2%, was primarily due to lower repayments of long-term debt of $0.7 million, an increase of cash flows generated from operating activities $7.4 million and SIFT Tax on this adjustment of $0.2 million partially offset by increased Class B entitlement, a $0.2 million.
The Fund generated distributable cash at $25.6 million for the year, compared to $20.4 million for the same period in 2021. The increase in distributable cash of 5.2 million or 25.2%, was primarily due to an increase in cash flow generated from operating activities, a $3.9 million and a decrease in repayments of long-term debt of $2.3 million partially offset by increased BPI Class B unit entitlement of 0.9 million and SIFT Tax on units’ adjustment of $0.2 million.
A fund generated distributable cash per unit of $0.0336 for the period compared to $0.0282 per unit for the fourth quarter of 2021. The increase in distributable cash per unit of $0.054 or 19.1% was primarily due to the increase in distributable cash as previously described. The Fund generated distributable cash per unit of $1 and $0.0189 for the year compared to $0.95 per unit for the same period in 2021. The increase and distributable cash per unit of $0.0239, or 25.2% was primarily due to the increase in distributable cash as previously described.
The Fund’s payout ratio for the period is 115.1% compared to 90.4% in the fourth quarter of 2021. The increase in The Fund’s payout ratio for the period was primarily due to distributions paid increasing by 2.8 million or 51.8% partially offset by distributable cash increasing by $1.2 million or 19.2%. The Fund’s payout ratio for the year was 99.4% compared to 109.5% in 20 21.
The decrease in The Fund’s payout ratio year-to-date was due to distributable cash increasing by $5.2 million or 25.2% partially offset by distributions paid increasing by $3 million or 13.7%. The payout ratio is calculated by dividing the amount of distributions paid during the applicable period by the distributable cash for that period. Accordingly, the payout ratios for 2021 factored in the 2020 special distribution that was paid on January 29, 2021, even though the cash generated to fund the 2020 special distribution was generated during 2020. This 2020 special distribution was excluded in the calculation of payout ratio for 2021. The payout ratio would be 88.4%.
The Fund’s payout ratio is typically higher in the first and fourth quarters compared to the second and third quarters, since Boston Pizza Restaurants generally experience higher franchise sales levels during the summer months, when restaurants open their patios and benefit from increased tourist traffic.
As Jordan mentioned earlier, with the recent solid financial performance of Boston Pizza International and The Fund. The Fund increased its monthly distribution rate payable to $0.102 and issued a special cash distribution of $0.085 that were both paid on December 30, 2022. A new monthly distribution rate per unit is now equal to the level it was at immediately prior to the start of the pandemic. Trustees will continue to closely monitor The Fund’s available cash balances and distribution levels, based on the goal of stable and sustainable distribution flow to unitholders.
On February 08, 2023, the trustees of The Fund approved a cash distribution for the period of January 01, 2023 to January 31, 2023 of $0.102 per unit, which will be paid on February 28, 2023, to unitholders of record at the close of business on February 21, 2023. The trustees objective in setting a monthly distribution amount is that it’d be sustainable. The trustees will continue to monitor closely The Fund’s available cash balances, given the volatile economic outlook.
And with that, I’ll turn the call back over to Jordan for more on the outlook. Jordan?
Jordan Holm
Thank you, Michael. Boston Pizza began its first quarter of 2023 with our new Pasta Tuesday all month long promotion, where guests were able to enjoy pasta every day and a week starting at $10.99 and Gourmet Pastas were $14.99 throughout January. This promotion paired perfectly with the line up sporting events this winter, as we continue our partnership with Hockey Night in Canada throughout the full regular NHL season.
On Saturdays, guests will be offered access to a predictive hockey trivia game with every qualifying purchase, and many franchises up for grabs throughout the hockey season. We are also looking forward to our popular Valentine’s Day promotion next Wednesday when heart-shaped pizzas will be served and $1 from each pizzas sold will go to held local charities. This year, the iconic Boston Pizza Paper Heart is celebrating its 30th anniversary of raising funds to support charities across Canada.
We continue to be extremely pleased with the efforts of our team and franchisees during the current recovery phase. The easing and elimination of government-endorsed prescriptions in Canada related to COVID-19 has enabled Boston Pizza to continue to drive improved performance and guest traffic.
However, with supply chain challenges, rising interest rates and increasing input costs and labor shortages impacting most of the restaurant industry, BPI’s management remains cautious. BPI’s management continues to adapt the business to mitigate these challenges and capitalize on the recent sales momentum resulting from the elimination of COVID restrictions across the country.
With that, I’d like to begin the question-and-answer session. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Megan Bergen of Acumen Capital.
Megan Bergen
Hello, this is Megan on behalf of Nick Corcoran at Acumen. My question is has takeout and delivery normalized?
Michael Harbinson
Megan, thank you for the question. So as background during the COVID period, Boston Pizza, many Boston Pizza restaurants across the country were restricted to takeout delivery only. And we saw as a result of that the percentage of our sales from off premise grow considerably. Pre-COVID, it would have been 18% of total sales. And throughout the pandemic period, depending on what the restrictions were at the time it was, at times double the volume that we have been doing previously through takeout and delivery. We have seen a continued over indexing on off premise or takeout delivery sales throughout 2022, while we have reopened the dining room, spires and patios of Boston Pizza restaurants and most are in all regions, certainly since about mid to late February of 2022 despite the on premise activity ramping backup. We still saw an over indexing or a higher level of takeout delivery sales. Part of that was evident before COVID started, that was an area of guest demand, people were choosing the convenience of eating at home or eating off out of the restaurant versus coming and dining in, in restaurants. But nonetheless, we are continuing to see a higher percentage of takeout delivery sales. And that’s one of the reasons that the January passed a Tuesday. All month long promotion was specifically targeted at in restaurant dining to attract people back into the restaurants.
Megan Bergen
Another question that I have is, have you had any feedback from customers on the price increases with the larger check sizes?
Michael Harbinson
We haven’t, we are very careful with how we take menu price increases. And we know that consumers are seeing the effects of inflation in all aspects of their lives. So we don’t want to stand out and we want to avoid sticker shock. We are a value player in the midscale casual dining space and we want to make sure that each visit for Boston Pizza guests result in them feeling good value for their money. So we haven’t had any specific feedback and we want it to stay that way. So appreciate the question.
Megan Bergen
And then can you speak a little bit about the pipeline for new restaurants if you have any that you expect to open in 2023 and how it’s going with new franchisees?
Michael Harbinson
Yes. So, obviously during the last couple of years, we haven’t been able to move forward on some of the projects that we have in our pipeline, but we expect to get back to new restaurant development in 2023.
The last restaurant, we opened brand new restaurant would have been Keswick Ontario in August of 2020. But we do have a few in the pipeline for 2023. We don’t give a specific forecast. But I know one in BC has already been published locally in a small town in British Columbia, that it’s under construction currently. And just depending on how the construction cycle works for, for this season, now we expect to add to that maybe a couple more as we ramp back up to new restaurant development.
Megan Bergen
And one final question here. Can you speak a little bit about the system sales growth throughout the previous quarter and then going into 2023? How have system sales been so far?
Jordan Holm
Michael, do you want to take that one?
Michael Harbinson
So system sales on a franchise basis, and on a same restaurant sales basis for the fourth quarter of 2022. So just the quarter we finished, compared to the fourth quarter of 2019, which would be the pre-pandemic baseline. The same restaurant sales were up 10.8%. So that was a very kind of positive trend and a very good indicator for us that on a same restaurant sales basis. The average restaurant in our system was kind of seeing some growth compared to the pre-pandemic numbers. And so that was a positive trend that built towards Q4 the back half of 2022. And as Jordan mentioned, we started 2023 with a strong value promotion in the form of a pastor promotion. But in terms of the overall trend, it’s been positive. Jordan, anything to add.
Jordan Holm
I agree with that. Michael. Thanks.
Megan Bergen
Just a follow up to that. I guess, I was kind of looking month by month. So to kind of ramp up towards the end of the quarter. Was it pretty steady throughout the quarter?
Michael Harbinson
It was pretty steady throughout the quarter. We tend to when we report publicly anyway, look at kind of quarter-by-quarter results, just because there can be quite a bit of variability month to month. If you look at the quarter-to-quarter results throughout the year, we definitely saw a positive trend in that respect.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Jordan Holm for any closing remarks.
Jordan Holm
Thank you, operator. There are no further questions, I’d like to thank you all for taking the time to listen in. We look forward to speaking with you again at our first quarter conference call in May 2023. Thanks everyone.
Michael Harbinson
Thanks, everyone.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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