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Edited Transcript of BPF.UN.TO earnings conference call or presentation 8-Aug-19 3:30pm GMT

Q2 2019 Boston Pizza Royalties Income Fund Earnings Call

Richmond Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Boston Pizza Royalties Income Fund earnings conference call or presentation Thursday, August 8, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jordan Holm

Boston Pizza International Inc. - President

* Michael Harbinson

Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc.

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Conference Call Participants

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* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Analyst

* Nick Corcoran

Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Hello, this is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza's Second Quarter Conference Call. (Operator Instructions) And the conference is being recorded on August 8, 2019. (Operator Instructions)

At this time, I would like to turn the conference over to Michael Harbinson, Chief Financial Officer. Please go ahead.

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [2]

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Thank you, and welcome to the call everyone. We will be discussing the 2019 second quarter results for both Boston Pizza Royalties Income Fund, or the Fund, and for Boston Pizza International, or BPI.

For complete results on our financial results, please see our 2019 second quarter materials filed earlier today on SEDAR, or visit the Fund's website at www.bpincomefund.com.

Should you require additional information after the call, you can reach us via the Investor Relations phone number 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 tradenames used by BPI in its Boston Pizza Restaurants in Canada, whereby BPI pays an amount to the Fund based on franchise revenues of Royalty Pool restaurants. For a complete description of the Fund, please see the annual information form dated February 13, 2019, which was filed on sedar.com.

Before I turn the call over to Jordan, President of BPI and the Fund, I have to remind everyone about the risks inherent in forward-looking information. Certain information in the following discussion may constitute forward-looking information that involves known and unknown risks, uncertainties, future expectations and other factors, which may cause the actual results, performance or achievements of the Fund, Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, Boston Pizza Canada Limited Partnership, Boston Pizza Canada Holdings Inc., Boston Pizza Canada Holdings Partnership, Boston Pizza Restaurants or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. For a more complete definition of forward-looking information and 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 turn the call over to Jordan.

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Jordan Holm, Boston Pizza International Inc. - President [3]

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Thank you, Michael, and welcome, everyone, to Boston Pizza's Second Quarter Investor Conference Call. Today, I will discuss our results for the quarter ended June 30, 2019, and Michael will review the key financial items.

Later, I'll highlight Boston Pizza's plans for the third quarter of this year, and we'll leave time for your questions at the end. As you can see from the press release and financial statements filed earlier this morning, Boston Pizza posted system-wide gross sales of $281.3 million for the period and $546.6 million year-to-date representing increases of 0.2% and nominal growth, respectively, versus the same period in 2018.

In addition, the Fund posted franchise sales from restaurants in the Royalty Pool of $216.9 million for the period and $423.3 million year-to-date representing increases of 0.7% and 0.9%, respectively, versus the same periods in 2018.

The key driver of our sales results for the period was the additional sales from the 5 net new Boston Pizza Restaurants opened during 2018 and added to the Fund's Royalty Pool on January 1, 2019.

Same restaurants sales, or SRS, for the period was negative 1.2% and negative 1.3% year-to-date. Same restaurant sales on a franchise sales basis which, as a reminder, is the basis upon which royalties are paid to BPI and, ultimately, to the Fund, was negative 0.3% for the period and negative 0.2% year-to-date. Same restaurant sales results for the period and year-to-date were principally due to declines in guest traffic and adverse weather conditions across Canada partially offset by increased take-out delivery sales and menu price increases. Take-out delivery sales continue to be positively impacted by our third-party delivery service partnerships.

Boston Pizza International completed 10 restaurant renovations during the period compared to 8 restaurant renovations in the second quarter of 2018. Our restaurants typically close for 2 to 3 weeks to complete the renovation and experience an incremental sales increase in the year following the reopening.

We started the second quarter of 2019 with our Shareables promotion, featuring the delicious new Pepperoni Pizza Poutine and Mad Mac Pizza. This campaign was supported with television advertising and digital and social media campaigns.

Also during the second quarter, with hockey and basketball play outs in full swing, we promoted Boston Pizza as Canada's #1 sports bar headquarters with campaigns focused on NHL Hockey and NBA basketball. For the NHL Hockey promotion, for example, guests had the opportunity to play NHL fantasy draft when they ordered Molson product to win daily prizes. These sports promotions were supported with both digital and television advertising as well as social media campaigns.

We introduced a completely refreshed national menu to all of our restaurants on June 18 of this year. We're very excited about this milestone as it represented one of the biggest national menu launches in Boston Pizza's history. A full 50% of the items on Boston Pizza's new national menu are either brand-new or improved versions of existing Boston Pizza recipes.

These changes included the introduction of several popular entrées, appetizers and desserts that have been successfully tested on past seasonal feature sheets and at selected BP restaurants across Canada. At the same time, we've slimmed down the overall menu size and eliminated about 30 ingredients. This has been and continues to be an enormous company-wide initiative aimed at significantly improving our menu offerings both from a guest appeal perspective and from the execution in our kitchens.

In addition, the new menu allows reasonable pricing adjustments where appropriate to pass along input cost inflation and also contribute to same restaurant sales.

Turning to restaurant development. We opened 3 new Boston Pizza Restaurants during the second quarter of 2019. And subsequent to June 30th, we've opened another 2 Boston Pizza restaurants bringing our total to 5 new BP restaurants opened so far in 2019.

We do have some exciting initiatives planned for the remainder of the year, which I'll speak about in a moment, but now I'd like to turn the call back over to Michael for a review of the Fund's financial performance.

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [4]

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Thank you, Jordan. The Fund posted royalty income of $8.7 million for the period and $16.9 million year-to-date compared to $8.6 million and $16.8 million, respectively, for the same periods 1 year ago. This represents an increase of 0.7% for the period and 0.9% on a year-to-date basis.

The Fund posted distribution income of $2.9 million for the period and $5.6 million on a year-to-date basis compared to $2.9 million and $5.6 million for the same periods 1 year ago.

Royalty and distribution income in respect of the period and year-to-date were based on the Royalty Pool of 396 Boston Pizza restaurants reporting franchise sales of $216.9 million for the period and $423.3 million on a year-to-date basis.

For the same periods in 2018, royalty and distribution income were based on the Royalty Pool of 391 Boston Pizza Restaurants reporting franchise sales of $215.4 million and $419.4 million, respectively.

The Fund's net and comprehensive income of $9.2 million for the period compared to net and comprehensive income of $6.3 million for the second quarter of 2018. The $2.9 million increase in the Fund's net and comprehensive income for the period compared to the second quarter of 2018 was primarily due to a $3.1 million change in fair value adjustments. The Fund's net and comprehensive income was $20.3 million year-to-date compared to its net and comprehensive income of $8.7 million year-to-date in 2018.

The $11.6 million increase in the Fund's net and comprehensive income year-to-date compared to the same period in 2018 was primarily due to a $13.1 million change in fair value adjustments partially offset by higher noncash deferred income tax expense of $1.4 million.

While net and comprehensive income is the measurement of the Fund's earnings under international financial reporting standards or IFRS, the Fund is of the view that net income does not provide the most meaningful measurement of the Fund's ability to pay distributions as calculations of net income contains noncash items that do not affect the Fund's cash flow.

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 deferred income taxes. Consequently, the Fund reports the non-IFRS measures, distributable cash and payout ratio to provide, in the Fund's opinion, investors of more meaningful information regarding the Fund's ability to pay distribution to unitholders.

The Fund generated distributable cash of $7.3 million for the period, which was relatively unchanged from the second quarter of 2018. The Fund generated distributable cash of $13.9 million year-to-date compared to $40 million year-to-date in the prior year. The decrease in distributable cash of $0.1 million or 0.6% was primarily attributable to an increase in BPI's entitlement related to Class B general partner units of Boston Pizza Royalty Limited Partnership of $0.2 million partly offset by higher royalty income.

The Fund generated distributable cash per unit of $0.336 for the period compared to $0.335 per unit for the second quarter of 2018. The increase in distributable cash per unit of $0.001 or 0.3% was primarily attributable to there being fewer units outstanding compared to the same period in 2018 due to the Fund's normal course issuer bid that was active from November 26, 2018 to December 14, 2018, which resulted in the purchase and cancellation of 98,300 units at an average price of $15.86 per unit.

The Fund generated distributable cash per unit of $0.639 year-to-date compared to $0.64 per unit year-to-date in 2018. The decrease in distributable cash per unit of $0.001 or 0.2% was primarily attributable to the decrease in the distributable cash, already mentioned, partly offset by there being fewer units outstanding compared to the same period in 2018 due to The Fund's normal course issuer bid, as I just mentioned.

The Fund's payout ratio was 102.6% for the period and 108% year-to-date compared to 103% and 107.8%, respectively, for the same periods in 2018.

The decrease in the Fund's payout ratio for the period compared to the same period in 2018 was due to the distributions paid decreasing by a nominal amount or 0.4%. The increase in the Fund's payout ratio year-to-date compared to the same period in 2018 was due to the combined effects of the distributable cash decreasing by $0.1 million or by 0.6% partially offset by distributions pay decreasing by $0.1 million or 0.4%. The decrease in distributions paid during the period was a result of there being fewer units outstanding compared to the same period in 2018 due to the Fund's normal course issuer bid, as mentioned previously.

The Fund strives to provide unitholders with consistent monthly distributions, and as a result, the Fund will generally experience seasonal fluctuations in its payout ratio. The Fund's payout ratio is likely to be higher in the first and fourth quarters each year compared with the second and third quarters each year since Boston Pizza Restaurants generally experience higher franchise sales during the summer months when restaurants open their patios and benefit from increased tourist traffic.

Higher franchise sales generally result in increases in distributable cash. On a trailing 12-month basis, the Fund's payout ratio was 103.3% as of June 30, 2019. Given the top line structure of the Fund and no current mandates to retain capital for other purposes, it is important to note that a payout ratio close to 100% is targeted over time.

For additional context on the Fund's annual payout ratio to the prior 3 years ended December 31 -- the payout ratio for the prior 3 years ended December 31, were 103.3% in 2018, a 100% in 2017 and 98.9% in 2016. The Fund also ended the quarter with $1.8 million in cash.

On August 7, 2019, the trustees declared a monthly cash distribution to unitholders of $0.115 per unit for July 2019. This distribution will be payable on August 30 to unitholders of record on August 21. This represents a 205th consecutive monthly distributions of the Fund's initial public offering, and with this distribution, the Fund will have paid out total cash distributions of $324.4 million or $21.45 per unit since our IPO in July 2002.

And with that, I will turn the call back to Jordan for the outlook.

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Jordan Holm, Boston Pizza International Inc. - President [5]

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Thank you, Michael. And I should point out here that this is Michael's first investor conference call with Boston Pizza. He is our new Chief Financial Officer, both of the Fund and of Boston Pizza International, so welcome Michael.

As I mentioned earlier, we do have some exciting promotions available for our guests at Boston Pizza today. In fact, right now, we are running the pineapple summer promotion to celebrate summer in patio weather which did take an extended period of time to reach most parts of Canada earlier this spring, but we're enforcing right now and it features our pineapple inspired summer menu with our new Royal Hawaiian Pizza, a pineapple ice cream churro dessert and some delicious tropical cocktails. This campaign is currently running in all of our restaurants nationally and is supported with television advertising and digital and social media campaigns.

On Monday, August 12, which is next Monday, we will hold our Annual High Five Day to celebrate our 55th anniversary in Canada, and also to thank all our guests across Canada for being fans of Boston Pizza. Individual-sized gourmet pizzas will be sold for just $5 for the day, which last year resulted in a record of over 120,000 individual pizzas sold across Canada on High Five Day, and we'll be looking to surpass that total during this year's event.

Toward the end of the third quarter, we'll launch our annual BP Kid's Card promotion, which offers guests 5 BP kids meals for free for a donation of $5 to the Boston Pizza Foundation Future Prospects. The promotion runs through the fall back-to-school period, and as a goal of surpassing last year's record total of over $1.2 million in donations raised for our National Charity Partners.

We have 397 Boston Pizza restaurants opened today, and 2 more restaurants that are currently under construction. So we're optimistic about the continued expansion opportunities for Boston Pizza.

We've also completed 20 restaurant renovations to date and have many more scheduled for the completion during the rest of the year.

These renovations help to keep our Boston Pizza restaurants looking fresh and modern, and it brings technology and equipment up to the latest standards.

This continued expansion further solidifies our position as Canada's #1 casual dining brand by serving more than 50 million guests annually in more restaurants than any other full-service restaurant brand in Canada.

In addition, our experience shows that the franchisees' investment in the restaurant renovation is rewarded with an incremental sales increase when the restaurant reopens and guests are attracted to the great new look.

While we continue to see challenges in guest visitation and higher labor costs across Canada, we are seeing positive results in other areas, including online, take-out delivery sales driven by increased adoption of our third-party delivery channel. And with that continued momentum, we remain Canada's #1 casual dining brand.

With that, I'd like to turn the call back to the operator for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nick Corcoran with Acumen Capital.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [2]

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And I have a few questions. The first one with the same-store sales growth, can you highlight any areas of strength or weakness, like, by region and national?

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Jordan Holm, Boston Pizza International Inc. - President [3]

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Nick, it's Jordan. So we did look at that anticipating the question, and there wasn't much variation from the national number. We did see some strength in Quebec, for example, which has been quite strong this year. We see, in Alberta, very -- the national number. Ontario was a little bit softer and Saskatchewan, which we've highlighted in previous investor conference calls, continues to be a challenge for us in terms of same restaurant sales. But overall, the variation from the national number either on a gross or a franchise basis was really nominal.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [4]

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Great. And then, you talked about your new menu that was launched in June. Can you talk about what the reception has been to that menu?

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Jordan Holm, Boston Pizza International Inc. - President [5]

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Yes. It's been really positive. I mean it is still early days. We're about 6 weeks since the launch of that menu. And the franchisees and restaurant operators, the staff in our restaurants are quite pleased with it and a lot of positive anecdotal feedback from guests, but it does take some time for people to come in and try different things. We did test it extensively through the spring, so we have 46 restaurants across the country that were running the new menu. So we've done a lot of learnings in there about how guests reacted and then also how it affected our kitchens positively or negatively. We modified based on that feedback. So we felt confident going into the launch. And so far, I think it's been smooth, and we believe that food news and innovation bringing in new products like -- there are some healthy power bowls with quinoa and grilled salmon and so forth. So some items on there that we think people will grab it to eat too and become their new favorites.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [6]

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Great. And then change in the balance sheet, I noticed your credit facility is outside its terrain. When do you expect to renew the facility? And do you have any idea what the terms will be?

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [7]

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Nick, it's Michael. We're just in those conversations right now about credit facility renewals, and we don't foresee any issues. But it's a little bit premature for us to get into what the terms are. But you're right, it's moved into the current time frame and conversations have started.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [8]

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Great. And then my last question is to do with Michael coming on board, do you see any change in your strategy growing organically versus acquisitions?

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [9]

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I can take that one, Nick, it's Michael. So it's a good question. Thank you. We've actually had that question come up recently, so it's good to be able to address it here. And really the short answer is that, we're not ruling out the possibility of a acquisition or transaction at some point in the future, but really our focus hasn't changed, and it continues to be on growing the Boston Pizza business. And so I think as relatively new executive team, we see there is a lot of opportunity to profitably grow sales on the existing restaurants as well as continuing to open the net new restaurants. And so while we're not ruling out an acquisition at some point, really our top mandate and top priority hasn't changed, that's really about profitably growing the existing Boston Pizza Restaurant business.

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Operator [10]

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The next question is from Elizabeth Johnston with Laurentian Bank.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [11]

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I wanted to talk a bit more about the new menu. It sounds like, with a really meaningful overhaul, where do this change come from? Do you think it was long overdue? Was there something specific that you've identified in the last month or years? Just trying to get a sense of a bit of a background on this.

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Jordan Holm, Boston Pizza International Inc. - President [12]

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Sure. So we've been tweaking our menu every year. We launch a new national menu every year, usually with a few kind of adds, deletes and changes, single digits. Some years are slightly larger and some years more moderate. As an example, in 2018, our national menu launch only included 2 new menu items in the food category. Some different beverage changes, but we felt coming in at this time last year that there was an opportunity in different categories to do a refresh: pasta, pizza, desserts. Even our starter section needed some changes. And like I said, it was split into 2 categories: one were brand-new items that were brought on, things like onion rings or meatballs or new pasta, the bowls -- the power bowls that I mentioned with quinoa. But some were just taking our existing recipes and saying, how can we make this more flavorful? How can we make it more inviting? So we did -- like, extensively tested through the kind of February to April time in 46 locations across the country, felt really good about how far we've pushed the menu. And like I said, the early feedback from the operators of the restaurants, the owners and guests themselves has been really positive. So we're encouraged by that, and we -- that's one revolution. And with Cara Piggot coming on board in June as our new Head of Food Services, she is definitely looking at the menu overall, food and beverage, and saying, how do we continue to evolve, how do we achieve the goals, both in terms of guest appeal and sales from that. But also in terms of consistent execution in our kitchen, so making sure that we can prepare each and every one of the recipes the way it's designed to be served.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [13]

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And did any of these changes have to do with being more friendly for take-out or delivery? Or really not a factor really primarily focused on the dining room experience or the bar experience?

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Jordan Holm, Boston Pizza International Inc. - President [14]

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Well, Elizabeth, as you know, about 15% of our sales nationally do go through take-out/delivery channel, and that's been consistent, in fact, rolling for quite a while. Some of our locations are upwards of 20% or even 25% in take-out and delivery. So it's really important when we do design any menu item that it get tested in that take-out/delivery channel, packaging, making sure that it can arrive. Sometimes there are items like ice cream or nachos, that are difficult to transport, and we make guests aware of those and keep them off of our take-out/delivery menu unless they're specifically requested.

But yes, we did consider that as a criteria for successfully coming on to the main menu is the ability to travel. And like I said, we're 50-plus years in take-out/delivery. So lots of experience in designing food that can be packaged up and transported and in such a growing area of food service industry that -- it's nice to have all that experience and to have it really built into pizza, pasta, appetizers. Everything that we do is pretty mobile in that way.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [15]

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Great. And since you started talking about -- my second question is about off-premise sales. In particular, your relationship and your use of third-party for delivery, if you could just give us an update of how that's going? And I know it has been a growing channel, although in terms of total sales, it's sort of seem to have hovered around the 15% mark, so just wondering if you think there is some kind of trade-off happening where dining room sales are going to a different channel either take-out or delivery?

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Jordan Holm, Boston Pizza International Inc. - President [16]

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Yes, that's a concern. And then it is being talked about in the industry is we've seen take-out/delivery as a very distinct occasion, usually a solo diner looking for convenience and sometimes at different times of the day, when -- different than when we're busy in restaurants and that continues to be the case. But I think as the variety and convenience of delivery services and delivery food grows and expands and more people are trying that channel, there is the risk that you replace an in-restaurant occasion with an in-home occasion, and that they aren't distinct parts of the consumer experience.

We continue to focus on ways. As I mentioned, 15% of our sales growth through take-out and delivery. 85%, of course, are in our sports bars and our dining rooms. And we continue to work on ways of bringing more guests into the restaurant. We have -- the sports bar site is naturally driven by sporting occasions, and so we focus on events that bring sports fans in. We mentioned earlier the NHL and NBA, but there are a whole variety of sporting occasions that are relevant to local fans and we use the sports bar site to really drive visitation that way. And on the dining room side, it's the same thing. It's great service. People are looking to be taken care of. We do a lot of group occasions there, teams, birthday parties, things like that. So -- as you know, the risk is there that growing take-out/delivery draws people out of the restaurant, but that's why you have to focus on more and more reasons to come in as well. And so we're focused on both of those opportunities.

Operator, are there any further questions at this time?

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Operator [17]

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There are no questions at this time.

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Jordan Holm, Boston Pizza International Inc. - President [18]

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Okay. Great. Well, I'd like to thank, everyone, for joining us on the call today. Since there are no further questions, we'll wrap it up. But we do look forward to speaking with you again at our third quarter conference call in November. Thanks, everyone.

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [19]

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Thank you.