A&W Revenue Royalties Income Fund's (AWRRF) CEO Susan Senecal on Q2 2021 Results - Earnings Call Transcript

A&W Revenue Royalties Income Fund (OTC:AWRRF) Q2 2021 Earnings Conference Call July 28, 2021 4:00 PM ET

Company Participants

Susan Senecal – President and Chief Executive Officer

Kelly Blankstein – Chief Financial Officer

Conference Call Participants

Operator

Good day, and welcome to the A&W Revenue Royalties Income Fund Q2 2021 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, Casey. Good afternoon, everyone, and thank you 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 is Kelly Blankstein, who is the Chief Financial Officer of A&W Food Services and the Fund; and Lisa Marzocco, who is our Director of Finance.

Today, we are presenting results of the fund for the second quarter, which ended on June 20, 2021. Same-store sales growth was 33.5% for the second quarter of 2021 as compared to the second quarter of 2020. Year-to-date, same-store sales growth for 2021 is now 12.2% as compared to the same period in 2020. When comparing results of the second quarter of 2021 to the second quarter of 2020, it's important to remember that COVID-19 had the most pronounced impact on A&W restaurants to date in the second quarter of 2020.

I will discuss the impact of COVID-19 in more detail at the end of the call. As a result of the performance by the A&W restaurants in the Royalty Pool, I'm pleased to report that the monthly distribution to unitholders will increase from $0.135 per unit to $0.15 per unit, beginning with the July distribution, which is payable on August 31, 2021.

And 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

Thank you, Susan, and good afternoon, everyone. Before we can tell you more about our results, I need to read the following comments on forward-looking information. Certain statements in this presentation may be forward-looking in nature. These include the expectation that the monthly distribution rate will be increased from $0.135 per unit to $0.15 per unit, beginning with the July 2021 distribution that is payable on August 31, 2021, expectations regarding Canada being on the road to recovery from COVID-19, the expectation that Trade Marks credit facility will be renewed and the terms under which such renewal will occur, the expectation that currently closed A&W restaurant will reopen when permitted to do so.

Food Services expectations that the foodservice industry and more particularly, the QSR segment will recover from the impact of COVID-19. Food Services belief that its mission and strategic initiatives will help its rebound from the impact of COVID-19, statements regarding the foodservice industry resuming growth, timing for releasing the interim unaudited financial statements and MDA of the fund and the expectation that growth on 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 its strategies regarding the marketing of the A&W system, the opening of new A&W restaurant, general economic and business conditions, financial and political instability 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'll spend a few moments reviewing the fund structure and then go through the financial results for the quarter. After that, as previously mentioned, Susan will be happy to review the impact that COVID-19 has had and continues to have on A&W restaurants. We'll be answering questions at the end of our call. For those of you who might not be familiar with the fund 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 Trade Marks used in Canada.

These trademarks include some of the best-known names in the Canadian 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 Trade Marks to A&W Food services. In return for the use of these trademarks, Food Services pays A&W Trade Marks, a royalty equal to 3% of the gross sales reported by A&W restaurant in the Royalty Pool.

Royalties loss 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 funds.

Growth in the fund is achieved in two 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 in the past year, less any restaurants, which have permanently closed. On January 5, 2021, the Royalty Pool was increased from 971 restaurants to 994 restaurants.

Another important aspect of the fund is that as at June 20th and July 27, 2021, Food Services own the equivalent of 23.3% 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 as 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 unitholders.

As previously announced and discussed during our first quarter results call, during the second quarter on April 16, 2021, A&W of Canada, Inc., an indirect shareholder of Food Services completed a reorganization to provide liquidity for some of its longstanding shareholders and to simplify the indirect ownership of Food Services. As part of the reorganization, Food Services exchanged common shares and trademarks for trust units of a fund and then sold a portion of those trust unit to shareholders of A&W of Canada Inc, including the issuance of the excess exchangeable LP units that represent the remaining 20% of the initial consideration for the January 5, 2021, adjustment to the royal pool – Royalty Pool that is payable in December of 2021.

Food Services ownership in the funds on a fully diluted basis decreased from 26.5% to now 23.8% as a result of the transaction. There was no change in the total number of equivalent trust units of the fund as a result of reorganization and the transaction was not dilutive to the unitholders. There is also no change in the amount of cash available to pay distributions to unitholders as a result of the reorganization. The reorganization did not constitute a change of control of Food Services as the existing shareholders continue to maintain majority control of Food Services and there was no change in management or operation of the Food Services business in connection with the reorganization.

Now, I'll finally go through our financial results for the second quarter of 2021 as compared to the second quarter of 2020. The news release issued earlier today outlines most of the financial results of the fund, while the interim unaudited financial statements and MDA will be released in the coming days. As Susan mentioned, when comparing the quarterly results, it is important to keep in mind the magnitude that COVID-19 had on Q2 2020 results.

During the second quarter of 2020, the number of A&W restaurants that were temporarily closed due to restrictions or other COVID-19 related reasons peaked at 230. And the A&W restaurants that remained open were restricted to drive-thru operation, delivery and takeout for most of that quarter. The same-store sales growth of 33.5% for the second quarter of 2021 is a reflection of Canada being on the road to recovery from COVID-19, which has led to increased guest counts and a reduction in the number of A&W restaurants that are temporarily closed as compared to the same quarter of 2020.

Royalty income from the second quarter of 2021 was $10.5 million, based on gross sales reported by restaurants in the Royalty Pool of $351 million, compared to royalty income of $7.6 million and gross sales of $253 million for the second quarter of 2020. Year-to-date royalty income for 2021 was $19.8 million based on gross sales reported by restaurants in the Royalty Pool of $661 million, compared to royalty income of $16.9 million and gross sales of $562 million for the comparable period in 2020. The 38% increase in royalty income and gross sales for the quarter, an 18% increase year-to-date is driven by the increase in same-store sales and the additional net 23 new restaurants added to the Royalty Pool on January 5 of 2021.

The five additional days in the year-to-date period for fiscal 2021 also contributed to the year-to-date increase in gross sales and royalty income. Other significant interest to unitholders is the amount of distributable cash that the fund has generated to pay distributions to unitholders and dividends to food services and the payout ratio. Distributable cash generated in the second quarter of 2021 was $7.9 million, compared to $4.9 million in the second quarter of 2020. Distributable cash generated in the 2021 year-to-date period was $14.4 million, compared to $12.4 million in the comparable 2020 period.

The $2 million year-to-date increase in distributable cash was attributable to $3 million increase in royalty income, $100,000 decrease in G&A expenses, partially offset by a $900,000 increase in the current income tax provision, excluding the refundable income tax components and a $200,000 increase in net interest expense.

The payout ratio for the second quarter of 2021 was 18.2% compared to no payout ratio or 0% for the same quarter of 2020. This is due to there being no distributions paid due to COVID-19 pardon me, and there was a temporary suspension of distributions in the second quarter of 2020. The year-to-date payout ratio for 2021 was 98.8% compared to 69.2% for the comparable period in 2020. Three monthly distributions totaling $40.05 per unit were declared in the second quarter of 2021. No monthly distributions were declared in the second quarter of 2020 as the trustees of fund had temporarily suspended monthly distributions commencing with the March 2020 distribution that would ordinarily have been declared in April of 2020.

Five monthly distributions totaling $0.64 per unit were declared in the 2021 year-to-date period, compared to two monthly distributions totaling $31.08 per unit for the comparable period in 2020. Total distributions declared and accrued per equivalent unit year-to-date were $74.03 for 2021 compared to $46.02 for the comparable period in 2020. The current monthly distribution rate of $0.135 per unit translates to an annualized distribution rate of $1.62 or $1.62 per unit, due to the performance by restaurants in the Royalty Pool, this monthly distribution to unitholders will increase from $0.135 per unit to $0.15 per unit beginning with the July distribution, which is payable on August 31 of 2021.

The new distribution rates translate into an annualized distribution rate of $1.80 per unit an increase of 11.1% from the prior level of $1.62 per unit. A cumulative surplus of distributable cash on reserve at the end of the second quarter of 2021 was $8.7 million, compared to a cumulative surplus of distributable cash on reserve of $9 million at the beginning of the year. I am also pleased to report that subsequent to quarter end on July 27 2021, Trade Marks received approval from its Board of Directors and has reached an agreement with its existing lender to renew a $60 million term loan, $2 million demand operating loan and interest rate swap.

All of which originally matured on December 22, 2022. Trade Marks proposes to extend the credit facility for an additional five year – for additional five years pardon me, on terms and conditions consistent with those of the existing credit facility.

Now I'll turn things back over to Susan.

Susan Senecal

Thanks, Kelly. Actions required in response to COVID-19 continued to adversely impact A&W restaurant operations across Canada, particularly for those restaurants located on urban street fronts and in shopping centers. Throughout the year-to-date period, which ended on June 20, 2021, there continued to be A&W restaurants that were either temporarily closed or were not able to offer dine-in services due to government-imposed COVID-19 restrictions. As of yesterday, eight restaurants remained temporarily closed. These temporarily closed A&W restaurants are expected to reopen when permitted to do so, however, there continues to be uncertainty related to COVID-19 and its impact on our business. It's possible that there could be further partial closures or that the number of restaurants closed increases again as the situation evolves.

Our objective is to ensure that as many as possible of A&W's 1,018 restaurants are able to operate as permitted during the pandemic and emerge from this period of uncertainty and financial condition that enables them to compete effectively and grow their businesses. We believe that the foodservice industry and more particularly, the quick-service restaurant segment of the industry will recover from the impact of COVID-19. However, the timing and the strength of the recovery cannot yet be predicted with any degree of certainty. Since the start of the pandemic, various levels of government have rolled out a number of important programs, which have helped support individual restaurant businesses, including A&W franchisees, however, the duration and the value of those programs remains uncertain.

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 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 impacts of COVID-19. Strategic initiatives, including repositioning and differentiating the A&W brand through the use of natural ingredients, continued new growth, delivering an industry-leading guest experience have all contributed to A&W's strong appeal and the trust it has built with Canadian consumers over many years. These strengths will be key to delivering strong results as the food industry resumes growth.

To update you on our progress in opening new restaurants as of June 20, 2021, Food Services had opened 15 new restaurants across the country in 2021, nine of which are in the second quarter. A&W's brand positioning is strong. The growth location, industry innovation 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. Food Services remains 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 everybody about Annual Burgers to Beat MS Day is coming up on August 19, where $2 from Teen Burger purchased on that day will go to the MS Society and 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

Susan Senecal

Thanks, Casey, and thanks to everyone on the line for attending our call today. We do look forward to updating you on results after the third quarter of 2021. And in the meantime, if anyone does have a question that wasn’t answered on our call today, please feel free to call either Kelly Blankstein or myself at [phone]. Thanks everyone, and look forward to seeing you on August 19. Bye.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation and you may now disconnect your phone lines.