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Edited Transcript of AW_u.TO earnings conference call or presentation 14-Oct-20 8:00pm GMT

·14 mins read

Q3 2020 A and W Revenue Royalties Income Fund Earnings Call North Vancouver Oct 15, 2020 (Thomson StreetEvents) -- Edited Transcript of A and W Revenue Royalties Income Fund earnings conference call or presentation Wednesday, October 14, 2020 at 8:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Donald T. Leslie A&W Revenue Royalties Income Fund - CFO * Susan D. Senecal A&W Revenue Royalties Income Fund - President & CEO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the A&W Revenue Royalties Income Fund Q3 2020 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 D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [2] -------------------------------------------------------------------------------- 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 is Don Leslie, who's Chief Financial Officer of A&W Food Services and the Fund; and Thomas Hughes, the controller of A&W Food Services. The results that we're presenting today are for A&W Revenue Royalties Income Fund for the third quarter ended September 6, 2020. Same-store sales for the third quarter of 2020 decreased by 12.7% as compared to the same quarter of 2019, and year-to-date same-store sales have now decreased by 16.5% compared to 2019 year-to-date. Another highlight is that the trustees have declared a special distribution of $0.30 payable October 30 to unitholders of record on October 23. I will review the impact of COVID-19 pandemic on our restaurant operations and the measures we're taking to support our restaurants in more detail at the end of this call. But now I'll turn things over to Don Leslie, who will review the fund's structure and go through the financial results for the quarter. -------------------------------------------------------------------------------- Donald T. Leslie, A&W Revenue Royalties Income Fund - CFO [3] -------------------------------------------------------------------------------- That's great. Thank you very much, Susan. So before we can get into the results, I'm going to just read the following comment on forward-looking information. Certain statements in this presentation may be forward-looking in nature. These include the fund and A&W Food Services have agreed that the repayment of the deferred royalties plus interest will take place no later than December 31, 2021. The expectation that currently closed A&W Restaurants will reopen when able to do so. A&W Food Services believe that its strong market position and the efforts of its franchisees along with the use of great-tasting natural ingredients, menu innovation and continue new restaurant growth will help it to rebound from the impacts of COVID-19. The fund and food services have agreed that the repayment of the deferred royalties plus interest will take place no later than December 31, 2021. The trustees in consultation with our independent financial and legal advisers will continue to closely monitor the sales of and projections for the A&W Restaurants in the royalty pool going forward with a view of continuing the payment of regular monthly distributions at a sustainable level. Food Services expectation that the foodservice industry and more particularly the QSR segment will recover from the impact of COVID-19. Food Services believe that its mission and strategic initiatives will help up to rebound from the impact of COVID-19. Growth of new locations, industry-leading innovation, a safe and stable supply chain, and continued efforts to consistently deliver great food and a better guest experience are all expected to contribute to building loyalty and enhancing performance over the long term. Liquidity, earnings and anticipated earnings from growth in same-store sales in new restaurant openings. 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 and the opening of new A&W Restaurants, 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. So any forward-looking statements in this presentation should be evaluated in light of these important factors. All right. So with that, I'll just spend a few moments reviewing the fund's structure and then go through the financial results for the quarter. After that, as previously mentioned, Susan will discuss the impact of COVID-19 and the actions we are taking to mitigate this impact. We'll be happy to answer your questions at the end of our call. So for those of you who might not be familiar with the fund's structure, I'll just quickly review some of the highlights. The fund currently owns 76.4% of A&W Trademarks, Inc., which through its interest in A&W Trademarks Limited Partnership, owns the A&W Trademarks used in Canada. These trademarks 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 [funder] income through its ownership interest in A&W Trademarks, 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 Trademarks 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. So 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. An important aspect of the fund is that Food Services owns the equivalent of 23.6% of the units of the fund or its ownership of common shares of A&W Trademarks, Inc. As a result, interest of Food Services are closely aligned with the interest of unitholders. Growth in the fund is achieved in 2 ways: first and most importantly, by increasing the same-store sales of 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. Earlier this year on January 5, the Royalty Pool was increased from 934 to 971 restaurants. With that, I'll go through our financial results for the third quarter of 2020 as compared to the third quarter of 2019. The news release that was issued earlier today outlines most of the financial results of the fund, while the interim unaudited financial statements, along with the MD&A will be released in the coming days. Gross sales reported by A&W Restaurants in the royalty pool for the third quarter of 2020 were at $340.6 million. This was a 8.1% decrease against sales of $370.4 million for the third quarter of 2019. Year-to-date sales reported by A&W Restaurants in the Royalty Pool were $902.4 million, a 12.5% decrease from sales of $1.031 billion for the comparable period in 2019. Royalty income for the third quarter of 2020 was $10.2 million compared to royalty income of $11.1 million for the third quarter of 2019, and year-to-date royalty income for 2020 was $27.1 million compared to royalty income of $30.9 million for the comparable period in 2019. A decrease in gross sales and royalty income for the quarter and year-to-date is due to the decline in same-store sales as a result of the impact of COVID-19. Royalty income for 2020 year-to-date includes a receivable from Food Services of $7.5 million, representing royalty payments deferred by Food Services for the period February 24 to May 17, 2020. Interest accrues on unpaid royalties in accordance with the amended and restated license and royalty agreement at 2% per annum over the current bank prime rate. Food Services has resumed its regular royalty payments to the fund, commencing with the royalty payment for the 4-week period, which ended June 14, 2020. Of significant interest to unitholders is the amount of distributable cash being generated and the payout ratio. The cumulative surplus of distributable cash on reserve at the end of the third quarter of 2020 was $13.6 million compared to a reserve of $7.4 million at the beginning of the year. That's an increase of $6.2 million. The cumulative surplus of distributable cash does include the royalty payments totaling $7.5 million, which has been deferred by Food Services, as just mentioned earlier. Distributable cash generated in the third quarter of 2020 to pay distributions to unitholders and dividends to Food Services was $8.2 million compared to $8.4 million in the third quarter of 2019. Distributable cash generated in 2020 year-to-date was $20.6 million, and this compares to $22.9 million in 2019 year-to-date. The $2.3 million year-to-date decrease in distributable cash was attributable to the $3.9 million decrease in royalty income and a small increase in G&A expenses, and this was partially offset by lower net interest expense and a $1.4 million decrease in the current income tax provision that excludes the refundable income tax. The distributable cash generated year-to-date includes the royalty payments, again totaling $7.5 million deferred by Food Services. Five monthly distributions totaling $0.618 per unit were declared year-to-date in 2020. This compares to 8 monthly distributions totaling $1.217 per unit in the comparable period in 2019. No monthly distributions were declared in the second quarter of 2020 as the trustees had previously temporarily suspended monthly distributions on the units, [fencing] with the March distribution that would have been declared in April 2020. Regular monthly distributions were resumed commencing with a June distribution of $0.10 per unit, and that was paid on July 31, 2020. Earlier this month, the September distribution of $0.10 per unit was declared, and that will be paid on October 30, 2020. In addition, on October 13, the trustees declared a special distribution of a further $0.30 that will also be paid on October 30, 2020. Since the start of the COVID-19 pandemic, the trustees of the fund have been in close and regular contact with the management of Food Services. The trustees in consultation with their independent financial and legal advisers will continue to closely monitor the sales results of and projections for the A&W Restaurants in the royalty pool going forward with a view of continuing the payment of regular monthly distributions at a sustainable level. The Fund and Food Services have agreed repayment of the deferred royalty, plus interest will take place no later than December 31, 2021. So with that, I'll turn things back over to Susan. -------------------------------------------------------------------------------- Susan D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [4] -------------------------------------------------------------------------------- Thanks, Don. Actions required in response to the COVID-19 pandemic have adversely affected A&W Restaurants in Canada, including the temporary closure of a large number of restaurants at the peak since March 1, 2020, a total of 230 A&W Restaurants out of the 971 in the royalty pool were temporarily closed. There was steady improvement through the summer. And today, only 11 A&W Restaurants remain closed. Those remaining temporary closed, A&W Restaurants are expected to reopen when they're able to do so. For most of the third quarter, A&W Restaurants, which were operating, were restricted to drive-through operations, delivery and mobile ordering. In a number of locations, A&W Restaurants are now permitted to open for limited dine-in and takeout sales. As the provinces began to ease restrictions and restaurants began to reopen, sales performance began to improve from minus 17.1% same-store sales for the first 4-week period of the third quarter to minus 7.3% same-store sales in the last 4-week period of the third quarter. However, a number of jurisdictions have recently announced a second round of closures and/or restrictions on dine-in restaurants, which will have an impact on a number of our restaurants. Our objective is to ensure that as many as possible of A&W Restaurants are able to operate as permitted during the pandemic and emerge from this period of uncertainty in 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. And there are certainly more challenges to come. The path that governments are following and easing restrictions on business operations and in particular restaurants, could last many months and new restrictions may be reimposed at any time. Various levels of government have announced a number of important programs, which have helped support individual restaurant businesses, including A&W franchisees. However, the details and the duration of these programs remain uncertain. We believe that our strong market position and the efforts of our franchisees will help A&W rebound from the impact of COVID-19. Strategic initiatives, including repositioning and differentiating the A&W brand through the use of great-tasting natural ingredients, menu innovation and continued new restaurant growth have all contributed to A&W's strong appeal and the trust we have built with Canadian consumers over many years. These strengths will be key to delivering strong results and improved market share as the QSR industry and the QSR burger market resumed growth. Speaking of great-tasting food, in September, we launched grass-fed beef. Since 2013, A&W has been serving beef raised without artificial hormones and steroids. And now we are serving only grass-fed beef from cattle who only graze on grass and other forage, like, hay. And to update you on our progress in opening new restaurants, we've opened 9 new A&W Restaurants so far this year, and we currently have 54 new restaurants under construction or in varying stages of permitting. I'm certainly delighted to share that in August, our 12th annual A&W Burgers to Beat MS Campaign in partnership with the Multiple Sclerosis Society of Canada raised $1.3 million in support of those living with multiple sclerosis. We hosted our first-ever takeout burgers to Beat MS Day at A&W Restaurants across Canada by donating $2 from every teen burger sold on that day to the MS Society of Canada. In 12 years, the annual burgers to Beat MS Campaign has raised more than $16 million, making A&W the single-largest annual corporate fundraiser for the MS Society. I'm really very proud of our operators and our restaurant teams across the country whose commitment led directly to this success at a time when it could not be more needed. The health and safety of A&W's customers and restaurant team members remains a top priority. A&W has implemented stringent protocols in its dining rooms and restaurants to limit contact and ensure physical distancing. A&W's brand positioning is strong. The growth of new locations, our industry-leading innovation, a safe and stable supply chain, and continued efforts to consistently deliver great food and a better guest experience are all expected to 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. Thank you for your attention. We would now be happy to answer your questions. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- (Operator Instructions) At this time, there are no questions in queue. -------------------------------------------------------------------------------- Susan D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [6] -------------------------------------------------------------------------------- Well, thanks to everyone for attending our call today. We do look forward to updating you on our results after the fourth quarter. And in the meantime, if anyone has questions that weren't answered today, please feel free to call either Don or myself at (604) 988-2141. Thanks very much. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen, for your participation in today's call. You may now disconnect.