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Edited Transcript of AW.UN.TO earnings conference call or presentation 12-Feb-20 9:00pm GMT

Q4 2019 A and W Revenue Royalties Income Fund Earnings Call

North Vancouver Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of A and W Revenue Royalties Income Fund earnings conference call or presentation Wednesday, February 12, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald T. Leslie

A&W Revenue Royalties Income Fund - CFO

* Susan D. Senecal

A&W Revenue Royalties Income Fund - President & CEO

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Presentation

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Operator [1]

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Good day, and welcome to the A&W Revenue Royalties Income Fund Fourth Quarter 2019 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Susan Senecal. Please go ahead, ma'am.

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Susan D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [2]

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Thanks very much. Good afternoon, everyone, and thank you for taking the time to attend our call today. I'm Susan Senecal, President and CEO of A&W Food Services of Canada, Inc. and the CEO of the A&W Revenue Royalties Income Fund. With me on the call today is Don Leslie, who's the Chief Financial Officer of A&W Food Services and the Fund; and [Jenna Judith], the Controller of A&W Food Services.

The results that we're presenting today are for A&W Revenue Royalties Income Fund for the fourth quarter and year ended December 31, 2019. A&W's fourth quarter 2019 same-store sales were down 1.9% as compared to the fourth quarter of 2018. The fourth quarter of 2018 results was one of A&W's strongest quarters on record with plus 12.3% same-store sales growth. Despite the decline in the quarter, we're pleased with the 2019 annual same-store sales growth of plus 4.1%, especially following 2018's record annual sales -- same-store sales growth of plus 9.8%. I will review our sales performance and our strategic initiatives in more detail at the end of the call.

Now I'll turn things over to Don, who will review the Fund structure and go through the financial results for the quarter.

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Donald T. Leslie, A&W Revenue Royalties Income Fund - CFO [3]

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Great. Well, thank you, Susan. So before we can tell you much more about our results, I just need to read the following comment on forward-looking information. Certain statements in this presentation may be forward-looking in nature. These include references to liquidity, earnings and anticipated earnings from growth in same-store sales and 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 the ability of A&W Food Services of Canada 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. Any forward-looking statements in this presentation should be evaluated in light of these important factors.

With that, I'll just spend a few moments reviewing the Fund structure, and then we can go through the financial results for the quarter and for the year. After that, Susan will review our sales performance, strategies and outlook. We'll be happy to answer your questions at the end of our call.

So for those of you who might not be as familiar with the Fund structure, I'll just quickly review the highlights. The Fund currently owns 76.4% 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 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 trademarks, Food Services pays A&W Trade Marks a royalty equal to 3% of the gross sales reported by the 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.

I want to emphasize that 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 the operation of the Fund. So this is a top line fund, meaning it is not subject to the variability of earnings or expenses associated with an operating business. Also, an important aspect of the Fund is that Food Services owns the equivalent of 23.6% of the units of the Fund through its ownership of common shares of A&W Trade Marks. As a result, interest of Food Services is very 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 has 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, 2020, the Royalty Pool was increased from 934 restaurants to 971.

Now I'll go through our financial results for the fourth quarter of 2019 as compared to the fourth quarter of 2018. The news release issued earlier this morning outlines most of the financial results of the Fund, while the annual audited financial statements and MD&A will be released in the coming weeks.

Gross sales reported by restaurants in the Royalty Pool increased by 2.6% to $451 million in the fourth quarter of 2019 and by 8.8% for the year to $1.48 billion. Royalty income for the quarter was $13.5 million, an increase of $340,000 from the same quarter of 2018. Royalty income for the year was $44.5 million, an increase of $3.6 million from 2018. The increase in sales and corresponding increase in royalty income was driven by the plus 4.1% annual same-store sales growth and the additional sales from the net 38 restaurants that were added to the Royalty Pool at January 5, 2019.

Of significant interest to unitholders is the amount of distributable cash being generated and the payout ratio. Total distributable cash generated in the quarter was $10.2 million or $0.574 per equivalent unit as compared to $10.2 million or $0.605 per unit in the same quarter of 2018. On an annual basis, $33.1 million of distributable cash was generated in 2019, a $1.9 million increase over the $31.3 million generated in 2018. The increase in distributable cash was due primarily to the $3.6 million increase in royalty income and a $223,000 decrease in cash expenses, plus a $1.9 million increase in the current income tax provision, which is excluding refundable income tax. Distributable cash per equivalent unit increased by $0.01 to $1.863 in 2019 from $1.853 for 2018. At the end of 2019, the cumulative surplus of distributable cash on hand was $8.1 million compared to $7.7 million at the beginning of the year. That's an increase of $431,000.

The annual payout ratio was 99.5% in 2019. That compares to 90.3% in 2018. The payout ratio for the quarter was 105.7% compared to 86.2% for the fourth quarter last year. The year-over-year increase in the payout ratio is driven by the increase in the distribution rate, which was increased 3x during 2019. The monthly distribution rate at the end of 2019 of $0.159 per unit represents an annualized distribution rate of $1.908 per unit. That's an 11.2% increase from the annualized rate of $1.716 per unit at the end of 2018.

Total distributions paid or declared in 2019 were $1.853 per unit, and that compares to $1.674 per unit in 2018. That was an overall increase of 10.7%. Dividends to Food Services were declared at the same rate as distributions to unitholders.

The Fund will continue to periodically review distribution levels and distribute available cash in order to maximize returns to unitholders and to maintain uniformity of distributions.

So with that, I'll just turn things back over to Susan to discuss our progress on our strategic initiatives.

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Susan D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [4]

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Thanks, Don. Given that record-high comparable than the competitive marketplace, we're very pleased by the strong sales performance in 2019. The same-store sales growth of 4.1% was led by excellent growth in BC, Quebec and Ontario. Strategic initiatives, including repositioning and differentiating A&W brand through the use of better ingredients, continued rapid new restaurant growth and delivering an industry-leading guest experience are all key to delivering strong results and improved market share in the quick-service restaurant or QSR burger market.

A&W is proud to be a Canadian company, 100% Canadian owned and operated. As a leader in the QSR industry, we believe that sourcing simple, great-tasting ingredients, farmed with care is the right thing to do. We're known for being an innovator and are driven by both the desires of our guests and the expertise of our partners. We've led the QSR industry and sourcing better ingredients since 2013 when A&W became the first and only national burger chain in Canada to serve beef raised without the use of artificial hormones or steroids. Since then, we've been first in the QSR industry to introduce countless other natural ingredients, including chickens that have grain-based vegetarian diet and raised without the use of antibiotics, eggs from hens that have fully vegetarian diet without animal by-product and pork that's raised without the use of antibiotics, along with organic fair-trade coffee.

You've heard us say, change is good, and while the words are new, the underlying principle isn't. Our brand, our restaurants and our people are known for being innovators and are driven by a genuine desire to do what's right. The guests who visit our restaurants also encourage and champions us and embrace change. They're definitely our biggest motivation to keep going.

In 2017, we launched all-day breakfast, a menu innovation which was very enthusiastically received by our guests. Also in 2017, we reached another important milestone with the launch of the new root beer guarantee. A&W Root Beer served in the restaurant is now made from natural cane sugar and all-natural flavors, another first for the QSR industry. A&W removed all processed cheese from its menu and moved to using real cheese made in Canada on all burgers and breakfast sandwiches. A&W further strengthened its positioning as a leader in food and innovation with the introduction of the Beyond Meat Burger in 2018. Food Services was very excited to be the first national burger chain in Canada to offer burger lovers across the country this burger patty made using 100% plant-based protein with peas, rice, mung beans, coconut oil, pomegranates, potatoes, apples and beets. In 2019, the Beyond Meat Sausage & Egger was introduced, and also in 2019, A&W added to its plant-based offerings by launching plant-based nuggets as a limited-time menu item in A&W restaurants in BC and Ontario.

A further important strategic initiative of Food Services is to deliver an industry-leading guest experience. To ensure each guest in an A&W restaurant has a positive experience, Food Services introduced new satisfaction measurement and feedback systems, system-level processes, staffing, climate and restaurant equipment. This initiative also includes the ongoing reimaging and modernizing of our existing restaurants and innovation in technology. The Good Food Makes Good Food design was rolled out to restaurants to communicate A&W's ingredients guarantee to its guests. Costs of reimaging A&W restaurants are borne by the franchisees, and there is no cost to the Fund.

A&W has also expanded upon its strategy to reach more consumers by launching a mobile app and by joining forces with Uber Eats, SkipTheDishes, DoorDash and Foodora to make ordering and enjoying A&W's menu options more convenient and accessible. For those who are looking for the convenience and delivery and don't have a chance to visit a restaurant, it's a new way to enjoy their A&W favorites from the comfort of home or wherever they may be.

And to update you on our progress in opening new restaurants, 25 new A&W restaurants were opened across the country in the fourth quarter of 2019, bringing the total restaurants opened in 2019 to 50, a new record for Food Services. 36 of the 50 new restaurants were opened in key Ontario and Quebec markets. Our pipeline of new restaurants under development remains very strong. We currently have 16 new restaurants under construction that are expected to open in the coming months, with many more in various stages of permitting.

Looking ahead to the first quarter of 2020, A&W plans to continue to focus on key strategies that drive sales, which, in combination with the work to improve guest experience, aim to fuel additional visits and build loyalty. These initiatives are expected to build the competitiveness of the A&W brand and to enhance performance over the long term, which, in turn, will grow royalty income for the Fund.

We're very pleased to see the impact that our commitment to strategy has had. We continue to deliver strong results despite some ongoing challenges in the foodservice industry. Rapid growth of new locations and industry-leading innovation, in addition to the continued efforts to consistently deliver great food and a better guest experience, in combination with reimage progress, is winning guest visits and building loyalty, enhancing performance over the long term. We look forward to continued success.

Thank you for your attention, and we would now be happy to answer your questions.

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Operator [5]

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(Operator Instructions) Speakers, I'm showing no questions at this time.

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Susan D. Senecal, A&W Revenue Royalties Income Fund - President & CEO [6]

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Perfect. Well, thanks, everyone, again, and we look forward to presenting our Q1 results coming up pretty soon. Thanks very much.