A&W Revenue Royalties Income Fund (OTC:AWRRF) Q3 2023 Earnings Conference Call October 18, 2023 4:00 PM ET
Company Participants
Susan Senecal - President and Chief Executive Officer
Kelly Blankstein - Chief Financial Officer
Agatha Tymke - Director of Finance
Conference Call Participants
Tom Burke - Canaccord
Ed Sollbach - Spartan Fund Management
Harry Levant - IncomeResearch.ca.
Operator
Good afternoon, ladies and gentlemen, and welcome to the A&W Revenue Royalties Income Fund Q3 2023 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, October 18, 2023.
I would now like to turn over the call to Susan Senecal. Please go ahead.
Susan Senecal
Thanks, Lester. And good afternoon, everyone. 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, as well as Agatha Tymke, who's the Director of Finance.
Today, we're presenting the Fund's results for the third quarter, which ended on September 10, 2023. While the quarterly Royalty Pool same-store sales growth of 1.1% was softer than previous quarters, we are pleased with the year-to-date Royalty Pool same-store sales growth of 3%, which is against strong comparable sales in 2022.
Now, I'll turn things over to Kelly who will touch on the Fund's structure and go through the financial results for the third quarter.
Kelly Blankstein
Thank you, Susan, and good afternoon, everyone Before we can tell you more about our results, I do need to read the following comment on forward-looking information. So certain statements in this presentation may be forward-looking in nature. These include statements with respect to the recovery of the foodservice industry and the ability of foodservices to rebound from the impacts of COVID-19.
The foodservice industry resuming growth, timing for releasing the interim unaudited financial statements and MD&A of the funds, building loyalty, and enhancing performance over the long-term. And 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 as planned, 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 and except as required by applicable securities laws will not be updated, if management's beliefs, estimates or opinions or other factors should change.
Now I want to speak a little bit to the Fund's structure, and then we'll go through the financial results. After that Susan will provide an update on A&W Restaurants and some of A&W's key corporate development. We'll be happy to answer questions at the end of our call.
The Fund 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. For a more comprehensive description of the Fund's structure, please refer to the about the fund section on our website.
Next, I'll go through our financial results for the third quarter of 2023 as compared to the third quarter of 2022. The interim unaudited financial statements and MD&A were released on SEDAR this morning, SEDAR+ this morning, and the news release issued today summarizes the selected financial results of the Fund.
The Royalty Pool same-store sales growth in both the quarter and year-to-date period was primarily driven by growth in average check size, which was mainly attributable to modest increases in response to industry wide inflation on goods, services and labor.
Royalty income for the third quarter of 2023 was $13.7 million based on gross sales reported by restaurants in a Royalty Pool of $456.8 million compared to royalty income of $13.2 million and gross sales reported by A&W Restaurants in the Royalty Pool of $440 million for the third quarter of 2022.
The 3.8% increase in royalty income for the quarter, and 5.4% year-to-date is attributable to the Royalty Pool same-store sales growth, and the gross sales from the 22 net new restaurant added to the Royalty Pool on January 5, 2023 earlier this year. The increase in royalty income for the year-to-date period, was partially offset by there being one less day in 2023, as compared to 2022.
Royalty Pool same-store sales growth is based on an equal number of days in the quarter and the year. Of significant interest to unitholders is the amount of distributable cash that the Fund has generated to pay distributions, as well as the payout ratio. Distributable cash generated in the third quarter of 2023 was $11.1 million compared to $10.6 million in the third quarter of 2022.
Distributable cash generated in the year-to-date period, was $29.3 million, compared to $26.1 million in the comparable period in 2022. This $3.2 million year-to-date increase in distributable cash generated, was attributable to this $2 million increase in royalty income, a $700,000 decrease in long-term interest loan, and $565,000 decrease in current tax expense.
The decrease in the current tax expense in 2023, 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 $0.48 per unit, were declared in the third quarter of 2023, compared to three monthly distributions totaling $0.465 per unit in the third quarter of 2022. The current monthly distribution rate of $0.16 per unit translates to an annualized distribution rate of $1.92 per unit.
We'll now turn to discussing the payout ratio, which is a key metric for unitholders. And the Fund's long-term objective, is to maintain an annual payout ratio at or below 100%. However, the Fund does strive 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. This quarterly payout ratio does fluctuate.
The year-to-date payout ratio for 2023 was 92.6%, compared to 98.4% for the comparable period in 2022. The year-to-date payout ratio of 92.6% is higher than the trailing four quarter payout ratio of 91.9%, due to both the seasonality of sales, and the timing impact of current income taxes.
With that, I'll turn it back over to Susan for additional comments.
Susan Senecal
Thanks, Kelly. I'm pleased to say that A&W's brand positioning remains very strong, growth of new locations, industry leading innovation, a safe and supply -- stable supply chain, and continued efforts to consistently deliver great tasting food, and a better guest experience, are all expected to continue to contribute, to building loyalty, and enhancing performance over the long-term.
Food Services has continued to grow new A&W Restaurants. As of September 10, 2023 10 new A&W Restaurants had opened in the year, two of which were opened during the third quarter of 2023, bringing the total number of A&W Restaurants in Canada to 1,048 and an additional 13 restaurants were under construction.
In 2022, Food Services signed an agreement to introduce the Pret brand within A&W Restaurants, and select markets in Canada for a two-year pilot period. As at September 10, 2023, eight A&W locations, three of which were in Vancouver and five in Toronto, were offering Pret products in their restaurant.
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 17, A&W celebrated its 15th Annual Burgers to Beat MS Day, and raised more than $1.6 million for MS Canada, a result we're all very proud of.
Thank you very much for your attention, and we would now be happy to answer any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Tom Burke from Canaccord. Your line is now open.
Tom Burke
Hi guys, thanks for taking my question. And congrats on navigating -- what is still a pretty challenging environment out there?
Susan Senecal
Thank you.
Tom Burke
Can you break us? Can you try and give us a sense of where the strong geographic regions are in the country, and ones that are lagging a little bit? Obviously, I would imagine that things are, a little bit different depending on where you are in the country. I was wondering if you could give us a little bit of color on that?
Susan Senecal
Sure. I mean, it's some -- it's kind of hard to do to be honest, because some of the regions that are performing really well, but they also might have had impact and things like fires, and different weather patterns and so on. So, I'd say that there hasn't really been a region in Canada that's been untouched by some sort of disruption during the year. It's a little bit hard to get a read on exactly what's happening.
But we're pleased with the results that throughout the country, basically, we think that, we've always had a strong Western Canadian presence, and performance. But we're seeing lots of good things coming out of Eastern Canada as well. So it's a little bit hard to tell, in fact -- you see the ebbs and flows of things. We'll be anxious to see how it all evens out by the end of the year. So hopefully, on a on a positive note for the -- franchisees in those regions who had to put up with quite a lot.
Tom Burke
Right. And sometimes we forget about that, with everything that's going on in the world. And -- we're so short-term oriented, you bring up a good point that might have been lost on us. Obviously, fires I know, here in Quebec, we were dealing with, some serious smoky days to, due to fires, in more Northern Quebec as well. So any way to sort of characterize to what sense, you think there was an impact on sales, because of these unfortunate events?
Susan Senecal
It's really hard to tell. The thing is that sometimes there's evacuations that create sort of pockets of population, where there weren't any before. It's one of these ones where we try and wait for time to smooth things out. And then we're able to look backwards, and see where the real settling in is. And we're looking forward to the end of the year, and the ability to kind of look at the whole of 2023.
And certainly looking forward to 2024, when most of the post pandemic impacts will be, will have settled themselves as well, because all of that is just causing us to have a bit of a cloudy, a cloudy crystal ball for sure.
Tom Burke
And can you talk about this new beta test? It's -- I don't even know the name of it. It's called Prep, P-R-E-P or can you give us some more.
Susan Senecal
Yes, so Pret a Manger is a brand out of the U.K. They are a grab-and-go brand that specializes in freshly made foods. They share a lot of the same ingredient values, and the same ingredient quality as A&W does. And so especially, during the advent of our urban restaurants experiencing different declines in traffic during the heat of the pandemic and with office towers and so on being empty, we thought it was a good time to look at other options and have that two-year trial period to look at what happens when you put Pret A Manger into an A&W Restaurants.
And so, we were happy to be able to open eight locations in fairly short order. And we've been quite pleased with the results. You learn something -- we're still in that phase of learning. But I certainly we can see that the products are very popular, people do enjoy them. And we've seen, you know, people are becoming a bit of -- it's becoming a bit of their favorite for reasons that they come to maybe presumably more often or at different times, and they might have come for their favorite A&W Burger.
Tom Burke
Oh, that's great. And so does that sort of hit on a different time of the day. Talk a little bit more about how you sort of slot that in for sort, of course of the day strategy?
Susan Senecal
It's interesting Tom, I'll share -- I mean, what I'm sharing is anecdotal, not so much we don't have do that.
Tom Burke
Okay, sure.
Susan Senecal
But for example, one of the things that we see is that, a lot of people are buying both at the same time. And so sometimes, we'll see people come in for breakfast at A&W, and pick up a sandwich to eat later at the office or at school. Other times, we'll see people come in, and they'll maybe have, sandwich along with some onion rings.
And so, they'll combine things in that way. I'd say that the dayparts are roughly the same as A&W probably ending a little bit earlier than our, late night business. But I'm certainly very well developed in all three dayparts, particularly breakfast and lunch.
Tom Burke
Right? Well, now that you mentioned that it is a very well-known brand name, obviously in U.K. and I believe in Europe as well. So yes there's, to a certain extent, no introduction needed. So what type of -- in order to sort of get either A) a fully validated beta test or B) a more serious commercialization? What type of rollout planned gets scheduled, say over the next 18 months?
Susan Senecal
Well, our test period was two years and we're sort of about, I guess, probably almost 18 months into the test period that ends in June of 2024. So what we're doing now, is sort of gathering all the learnings that we've had, comparing the results in different locations, extending the test in some cases, we're also looking at opening a standalone Pret, that will be another way to learn about a wider range of products.
And so, yes, we're just -- experimenting with all of the potential options, but we do see an opportunity for Pret inside A&W Restaurants. We just haven't figured out exactly what the right way to do that is. So at this point, we're not making any sort of firm plans or commitments, but we do see opportunity for sure.
Tom Burke
Okay, great. And just one last and then I'll check and see if other questions. So, the rollout of new innovations, et cetera. Is it more like in this day and age or what's the thinking more of the sort of new age healthy items depending on the market that you're reaching out to, or doubling back on sort of some creative stuff that would energize the traditional portfolio, any comments in that regard?
Susan Senecal
Well, right now, our main focus of innovation is on two innovations that are sort of in their early days with A&W, so our Brew Bar that we really launched in terms of, a marketing push over the summer, and we're very pleased with the results, but continuing to have people try out our delicious drinks and so on, is one focus with the Brew Bar. And the second one is our mobile app that launched sort of toward the end of June of this year.
And we're really focused on making that sort of a household name, in terms of people's convenience. And so, we're really focused on those two pieces of innovation. But we've always got stuff sort of -- on the back shelf, that's working we call it explorations. And those explorations often lead to new launches, and new innovation that we always want to keep our fingers into the things that are happening, changes in the world changes in opportunities as we as we go. So, we'll be sure that in addition to those two innovations, there'll be other things coming along.
Tom Burke
Fantastic. Okay. I'll step back in the queue. Thanks very much.
Susan Senecal
Right, thanks. Nice chatting with you.
Operator
Your next question comes from Ed Sollbach. Sir, your line is now open.
Ed Sollbach
Hello. I'm wondering if you have any data about the volume year-over-year?
Kelly Blankstein
Our sales for Q3 were up 1.1% and for the year-to-date are up 3% over 2022, which was also a solid sales year.
Ed Sollbach
Okay. But that's that dollar value, right?
Kelly Blankstein
Correct. Yes.
Ed Sollbach
Yes, like I'm talking after inflation, like, I know, prices have gone up. So I would think -- that the same-store sales were actually down after inflation?
Susan Senecal
It's a bit of a mixed bag. We have like shopping center restaurants that are sort of still rebounding, from the post pandemic period, in terms of people shopping habits, and so on. We have urban restaurants where things are growing as people come back in. And of course, things like delivery and mobile ordering has become more of a factor. So it's a little bit hard to tell what the underlying trends are.
Because what we measure in our business is transactions. So, I would say that, that's still settling in -- settling down. And what we what we see going forward would be growing -- our number of visits, and continuing to find those opportunities, like either dayparts, as Tom was mentioning, or products and seeing how all of those do. So right now, it's a little bit hard to kind of pin a number that says, with or without inflation, because the restaurants or the business has changed quite a bit.
Ed Sollbach
But what would the transaction number be?
Susan Senecal
Well, that's what I'm saying. It depends which concepts you're looking at what regions you're looking at, sort of how deep the impact was of the -- pandemic. So, we don't look at -- break it out exactly like…
Ed Sollbach
Are you going to share that data with shareholders like what those transactions are, overall?
Susan Senecal
Yes, I'd say that in some regions, in some concepts, we're seeing growth and others, we're seeing sort of a setback, depending on how strong they were, some drive thru restaurants, for example, during the pandemic, they really were maybe unique in their marketplace, and they had huge growth, they've given some of that back. So it's, it's a little bit hard to tell what the actual trend is, Ed and we'll be certainly of interest to us.
And we just don't think that at this moment that the transaction number is very relevant in terms of how the business is growing. So, we're going to -- see how we settle out in 2023. But we've certainly got goals to see that continue to grow over time.
Ed Sollbach
Okay. Because with 5%, 6% inflation, I would think transactions are down materially year-over-year?
Susan Senecal
No, I'd say that, we've really been able to keep pricing in a range that said -- that we're not looking at inflation numbers and saying that our prices -- will change by that much. In fact, we've sort of done the opposite. And really, with our Brew Bar items, for example, had lower average checks, more affordable options, things for guests.
And again, it's quite, it's quite sporadic in terms of -- it depends on where you look and what you look at. So, we're still trying to get a read on what that number is and should be. And we think that 2023 will be a good baseline year straight for growth in 2024.
Ed Sollbach
Okay. And how are you going to drive that growth in '24?
Susan Senecal
We've got lots of promotional and marketing plans up our sleeve, and as I say our focus will be as well on the Brew Bar as well as on the mobile app transactions.
Ed Sollbach
Okay. Yes I mean, just overall, like just, because the A&W like, I think four or five years ago, it was seeing double-digit, same-store sales growth, right. And now it's slowed down a bit. So, is there any thought to slowing down the expansion? Like maybe there's, you're getting saturation I see A&W Restaurants all over the place now, like is, at some point, there's like, how wide do you think you can? How many more restaurants do you think you can put in Canada, or it seems like in a lot of areas, you're getting pretty saturated?
Susan Senecal
Yes it's funny or yes, sorry for interruption.
Ed Sollbach
Yes. No, I'm saying it's kind of showing the numbers, because the same-store sales -- I think is slowing down quite a bit over -- what it was five, six years ago?
Susan Senecal
Yes. Well interestingly, our experience is that -- our markets that have the most A&W's per capita also the markets that, are performing the best in terms of average volumes. And in terms of growth this year, I don't think that that's necessarily causing effect. But we're seeing very strong growth.
And certainly our experience, is that as the number of restaurants, and the convenience grows, so to our top line sales and all of the restaurants in that region. So, we're experiencing positive and positive, positive in terms of volumes, positive in terms of number of restaurants that we see able to open successfully.
Ed Sollbach
Okay. And I guess, because you mentioned, the app that was launched, like what is the take up on the app? And how's -- do you metrics on that you can share with us, like how many times is downloaded how many -- what percentage of transactions go through the app? Like I know, McDonald's is pretty high now. But how is the app doing?
Susan Senecal
Yes, it's doing well. We launched at the end of June. So it's just been a couple of months. So what's interesting right now, is one of the big, one of the big metrics that people look at is, how often do people use it? How -- many recent transactions. And really, that's the measure of success is are people coming back and using it again, and again. But today, all of our transactions are fairly recent, given when we launched the app, we had a break between the shift between our old and our new app.
And so really, these are brand new transactions, we're seeing sort of very high growth against a small base, the real, I think the real answer will be how do we use the mobile app? And how do we promote it in order to keep that that growth going and make it a -- really big part of how guests might choose to order. And as you say, it's very common today to have mobile apps, and I think a lot of people, that's their preferred way of ordering and buying food.
Ed Sollbach
Right. Yes. No, I think we have to use for -- it's quite convenient so. Okay. Thanks very much and best of luck.
Susan Senecal
Yes. Thanks so much. Thanks for your questions.
Operator
Your next question comes from Harry Levant from IncomeResearch.ca. Your line is now open.
Harry Levant
Yes, thank you. Good morning or good afternoon. I mean -- I was just wondering about the sort of the profitability structure with Pret versus, say, your existing A&W brands as you've kind of got another party involved, whom I presume want something in return for their brand. Can you make us up on margins? Or can you provide any sort of color on that for me?
Susan Senecal
Sure. I think one of the ways that we've structured this test is to -- it comes into existing A&W Restaurants and so, the incremental costs are really just about the cost of the goods and so on and so forth. But when you think about that location, it's sort of piggybacking on some of the fixed costs of the A&W restaurant is already incurring. So for us to the degree that there are incremental sales, which they've proven to be, the profitability ratio, I think, is quite promising.
Harry Levant
Okay. Thank you. That's my only question and best of luck on that brand.
Susan Senecal
All right, thank you.
Operator
[Operator Instructions] Your next question comes from Tom Burke from Canaccord.
Tom Burke
Yes. Just on the Pret A Manger, just on the history. So what was the sort of genesis of that agreement? And what did everybody sort of kind of agree on at the beginning of what the game plan was, obviously, this beta test, et cetera? And what was the thinking -- is there any sort of telegraphing of what their ambitions are when it comes to, say, a North American rollout?
Susan Senecal
Pret has, I guess, a smaller or a decent presence in the U.S. They launched in New York City many years ago, and have quite a big presence there. So they've got a foothold certainly in the U.S. I think from a Canadian perspective, I think Pret is good at looking for great partners that can help with things like the supply chain and so on. So I think the two things that would probably set us into motion were, number one, their expertise in urban markets and especially highly developed urban markets.
With the sort of positive correlation between our ingredient guarantees and Pret's and our access to a very stable supply chain in Canada, and the relationships we have with the different parties. So, all those things together made it very viable for us to do a test on this scale, and understand if there's opportunity ahead. So that was the genesis, I guess, as you called it, or the idea.
Tom Burke
Right. And to what degree do they -- are they product innovators? Are they -- did they sort of bring new products at the same type of tempo is what we're kind of used to in the A&W network?
Susan Senecal
Yes. So it gives us a look -- and a way to how tested the successful recipes and so on. And so yes, there's a lot of innovation in that category.
Tom Burke
Right. And do you guys bring storm back and forth to sort of maybe cross-pollinate some ideas?
Susan Senecal
Well, basically, we look at what they do mostly in the U.K., also in the U.S., and see what their best sellers are that we can bring into the Canadian marketplace. But at the same time, we also are thinking about our supply chain and local partnerships and so on, so we can sort of -- make the recipes more Canadian.
We're interested in making sure that we are able to source Canadian whenever we can. So, we look at those things as well in terms of the recipe. And in some cases, use exactly the recipe; in other cases, we adapt it for A&W and for Canadians.
Tom Burke
Okay. Great. And is there a localized type of agility to product offerings, either probably not necessarily an A&W, obviously, such a big machine, and trying to resonate with things that would, I guess, be pretty homogeneous across the country. But in a concept like Pret, does that lend itself to some regional specification depending on the cultural makeup of the local population, all that kind of stuff?
Susan Senecal
I think it's not impossible, but just like A&W, I think consistency and people that are developing a love for certain products and expecting them in all locations, I think a certain degree of customization. Just like for A&W, we do have some markets that have some very specific regional preferences that we're able to include in our offering. But for the vast majority of products, I think consistency in terms of the training tools, and all those things are important.
We are looking -- when we do the Brew Bar, it's another opportunity for us to just kind of learn about local preferences, and see there could absolutely be some opportunity there for us to think about personalization or customization for the marketplace.
Tom Burke
Great. Okay. Super. All right, thanks again guys.
Susan Senecal
Yes, thanks Tom.
Operator
There are no further questions at this time. Susan, please go ahead.
Susan Senecal
Thank you. Well, thanks, everyone, for attending the call today. We do look forward to updating you on our results after our fourth quarter of 2023. In the meantime, if you do have questions that weren't answered or you'd like further details, please do feel free to call Kelly Blankstein or myself at 604-988-2141. Thanks very much again.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Susan Senecal
Thank you.
- Read more current AWRRF analysis and news
- View all earnings call transcripts