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Edited Transcript of BPF.UN.TO earnings conference call or presentation 7-Nov-19 4:30pm GMT

Q3 2019 Boston Pizza Royalties Income Fund Earnings Call

Richmond Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Boston Pizza Royalties Income Fund earnings conference call or presentation Thursday, November 7, 2019 at 4:30:00pm 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 of Research

* 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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Thank you and welcome to the call. We will be -- pardon me. This is the operator.

Thank you for standing by. This is the conference operator. Welcome to the Boston Pizza's Third Quarter Conference Call. (Operator Instructions) The conference is being recorded on November 7, 2019. (Operator Instructions)

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

Pardon me. One moment please. Yes, pardon me. Mr. Harbinson, your line is open.

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

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Yes. Thank you, and welcome to the call everyone. We'll be discussing the 2019 third quarter results for Boston Pizza Royalties Income fund, or the Fund, and for Boston Pizza International, or BPI. For complete details on our financial results, please see our 2019 third 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 on 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 our 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'd like to remind everyone about the risks inherent in forward-looking information. Certain information in the following discussions 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 Holdings 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.

With that, I will turn the call over to Jordan. 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 Third Quarter Investor Conference Call. Today, I'll discuss our results for the quarter ended September 30, 2019, and Michael will review the key financial items. Later, I'll discuss Boston Pizza's plans for the remainder of the year, and we'll leave time for your questions at the end of the call.

As shared in the press release and financial statements filed this morning, Boston Pizza posted system-wide gross sales of $283.6 million for the period and $830.2 million year-to-date, representing decreases of 2.3% and 0.8%, respectively, versus the same periods in 2018. In addition, the Fund posted franchise sales from restaurants in the Royalty Pool of $219.2 million for the period and $642.6 million year-to-date, representing decreases of 2.3% and 0.2%, respectively, versus the same periods in 2018. A positive contributor to our sales results for the period was additional sales from 5 net new Boston Pizza restaurants that opened during 2018, which were added to the Royalty Pool on January 1, 2019. Offsetting this positive contribution was same restaurant sales, which was negative 4.2% for the period and negative 2.3% year-to-date.

Same restaurant sales on a franchise sales basis was negative 3.6% for the period and negative 1.4% year-to-date. Negative same restaurant sales results for the period and year-to-date were principally due to declines in the restaurant guest traffic, due to increased competition in the full-service restaurant sector, shifts in consumer spending habits in response to increased menu pricing tied to rising minimum wages, winning consumer confidence in the retail sector and higher levels of household debt.

These industry-related declines were partially offset at Boston Pizza by increased take-out delivery sales as well as menu price increases. Take-out delivery sales of Boston Pizza continued to be positively impacted by our focus on both direct and third-party delivery channels. Despite the negative same restaurant sales results for the quarter, there were several bright spots worth highlighting. Boston Pizza started the third quarter of 2019 with our pineapple summer promotion, featuring our pineapple-inspired summer menu, including the popular new Royal Hawaiian Pizza. Our pineapple summer campaign was supported with television advertising as well as digital and social media campaigns.

On Monday, August 12, we held our Annual High Five Day event to thank our guests for being fans of Boston Pizza. Individual-sized gourmet pizzas were sold for just $5, which surpassed last year's results for the same promotion, resulting in more than 150,000 individual pizzas sold across Canada on that day, a 22% increase compared to the High Five Day event we held last year.

Towards the end of the third quarter, we launched our annual Kids Cards promotion, which provides guest with 5 free kids meals in exchange for $5 donation to the Boston Pizza Foundation.

The 6-week long promotion ran through fall back-to-school period and represented another record year, raising over $1.3 million in donations.

Turning to restaurant development. We opened 2 new Boston Pizza restaurants during the third quarter of 2019, bringing our total to 5 new Boston Pizza restaurants opened so far this year. We also completed 11 restaurant renovations during the period compared to 9 restaurant renovations in the third quarter of 2018.

Restaurants typically close for 2 to 3 weeks to complete the restaurant renovation and then experience an incremental sales lift in the year following the reopening. We have some exciting initiatives planned to drive sales for the rest of 2019, which I'll speak about in a moment.

But now I would like to turn the call back to Michael for a review of the Fund's financial performance. Michael?

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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 $8.8 million for the period and $25.7 million year-to-date compared to $9 million and $25.8 million, respectively, for the same periods 1 year ago. The Fund posted distribution income of $2.9 million for the period and $8.5 million year-to-date compared to $3 million and $8.6 million for the same periods 1 year ago.

Royalty and distribution income for the period and year-to-date were based on 396 Boston Pizza restaurants in the Royalty Pool that reported franchise sales of $219.2 million for the period and $642.6 million year-to-date. For the same periods in 2018, royalty and distribution income were based on the Royalty Pool restaurants of 391, reporting franchise sales of $224.4 million and $643.8 million, respectively.

The Fund's net and comprehensive income was $6.9 million for the period compared to net and comprehensive income of $0.9 million for the third quarter of 2018. The $6 million increase in the Fund's net and comprehensive income for the period compared to the third quarter of 2018 was primarily due to a $7.4 million change in fair value adjustments, partially offset by higher noncash deferred income taxes of $1.1 million.

The Fund's net and comprehensive income of $27.1 million year-to-date compared to net and comprehensive income of $9.6 million year-to-date in 2018. The $17.5 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 $20.5 million change in fair value adjustments, partially offset by higher noncash deferred income taxes of $2.5 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 because the calculation 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 metrics of distributable cash and payout ratio to provide investors with, in the Fund's opinion, more meaningful information regarding the Fund's ability to pay distributions to unitholders.

The Fund generated distributable cash of $7.8 million for the period compared to $8 million in the third quarter of 2018. The Fund generated distributable cash of $21.7 million year-to-date compared to $22 million year-to-date in 2018. The decrease in distributable cash of $0.3 million or 1.1% was primarily attributable to an increase in BPI's entitlement related to Class B, general partner units of Boston Pizza Royalties Limited Partnership or $0.3 million, partially offset by lower SIFT tax of $0.1 million.

The Fund generated distributable cash per unit of the Fund -- $0.359 for the period compared to $0.364 per unit for the third quarter of 2018. The decrease per unit of $0.005 or 1.4% was primarily attributable to the decrease in distributable cash, as just described, partially offset by 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 $0.998 year-to-date compared to $1.004 per unit year-to-date in 2018. The decrease in distributable cash per unit of $0.006 or 0.6% was attributable to the decrease in distributable cash, as already mentioned, partially offset by there being fewer units outstanding compared to the same period in 2018 due to the Fund's normal course issuer bid, as just mentioned.

The Fund's payout ratio was 96.2% for the period and 103.7% year-to-date compared to 94.7% and 103.1%, 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 combined effects of distributable cash, decreasing by $0.2 million or 2%, partially offset by distributions paid decreasing by a nominal amount.

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 $0.3 million or 1.1%, partially offset by distributions paid, decreasing by $0.1 million or 0.5%. 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.

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 the fourth quarters each year compared to 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 guest traffic.

Higher franchise sales generally result in increased distributable cash. On a trailing 12-month basis, the Fund's payout ratio was 103.7% as of September 30, 2019. For additional context of the Fund's annual payout ratio for the prior 3 years ended December 31, were: 103.3%, in 2018; 100%, in 2017; and 98.9%, in 2016.

The Fund also ended the quarter with $2.2 million in cash. On November 7, 2019, the trustees declared a monthly cash distribution to unitholders of $0.115 per unit for October 2019. This distribution will be payable on November 29 to unitholders of record on November 21. This represents the 208th consecutive monthly distribution since the Fund's initial IPO. And with this distribution, the Fund will have paid out total cash distributions of $331.9 million or $21.79 per unit since the IPO happened in July 20 -- in July 2002.

With that, I will turn the call back to Jordan for the outlook. Jordan?

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

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Thank you, Michael. We have some exciting promotions and new menu items in store for our guests at Boston Pizza for the remainder of the year and into 2020. With the NHL Hockey season in full swing, we kicked off the fourth quarter of 2019 with our new Hockey Night in Canada partnership. Our partnership launched with significant TV, digital and social media activity, along with a major in-restaurant promotion at participating Boston Pizza Restaurants across the country.

Our partnership with Hockey Night in Canada will continue throughout a full regular NHL season, and on Saturdays throughout the season, guests will be offered unique Saturday menus with food-and-drink features as well as opportunities to participate in contests and games for a chance to win prizes.

This program will provide guests at Boston Pizza across Canada with an enhanced and unique hockey-viewing experience. At the same time, our 2019 holiday promotion begins on Tuesday, November 12. The promotion includes the selection of new and exciting menu items, along with the promotion card bonus offer. The centerpiece of our new holiday menu is our Christmas Pizza that has all the flavors of a traditional Christmas dinner on a Pizza.

Our holiday menu also includes craveable items, like Christmas poutine, smoked gouda ravioli, and chicken and bacon and cranberry barbecue ribs. And for dessert, we have our chocolate almond lava cake. This year, our guests will also receive a free Toblerone chocolate bar with the purchase of any qualifying holiday menu item.

Sharing the spotlight with our new holiday menu and Hockey Night in Canada partnership is our annual Boston Pizza Gift Card Incentive program. When a guest purchases at least $50 worth of Gift Cards, they'll receive a promotional card for $10 off their purchase from January 1 to March 31 of 2020.

Overall, we feel optimistic about the marketing programs in place for this winter. With the -- from a restaurant count perspective, we have 397 restaurants today, and 2 more restaurants that are currently under construction. We're optimistic about the continued new restaurant expansion opportunities for Boston Pizza over the longer term.

We've also completed 26 renovations to date and have more renovations scheduled for completion during the remainder of 2019. These renovations help keep Boston Pizza restaurants looking fresh and inviting, and at the same time, enable technology and equipment to be brought up to the latest standards.

Our experience shows that a franchisee's investment in a restaurant renovation is rewarded with an incremental sales increase when the restaurant reopens and guests are attracted to the enhanced experience.

This quarter has been challenging for the full-service restaurant industry in Canada as in-restaurant guest traffic continues to decline. Helping offset those industry-wide trends, Boston Pizza continues to see positive results in other areas, including: increased take-out and delivery sales online, driven by an increased adoption of our direct and third-party delivery channels.

We believe Boston Pizza is well positioned to attract guests, achieve positive SRS over the longer term and continue to strengthen its position as the #1 casual-dining brand in Canada.

With that, I'd like to begin the question-and-answer period. Operator?

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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 of Acumen Capital.

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

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Just a couple of questions for me. The first has to do with new menu that you put out. Can you remind me what that was first started?

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [3]

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It launched on June 19 of this year.

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

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And then, looking -- since your sales growth is down 4% year-over-year, can you give any indication of the breakdown between price and traffic? Because I assume there was a price increase on your new menu depending on region.

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [5]

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Yes. It really was region-specific. So we have different pricing groups across the country, and they look at their competitive set. And a major factor, certainly in D.C., Alberta and Ontario, is consideration of changes to minimum wage, and those regions have experienced accelerated increases in minimum wage above and beyond sort of the natural inflation rate. But we did highlight that guest -- in-restaurant guest traffic declined, and that was the major contributor to the negative same restaurant sales in the quarter.

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

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And then if we talk about the negative same-store sales growth, can you maybe give a little more detail by region what the trends were?

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Jordan Holm, Boston Pizza International Inc. - President [7]

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Yes. The major contributing areas to the declines, although we saw softness in most parts of the country, other than Québec and Atlantic, or Ontario and then Alberta, Saskatchewan. And we've talked about Alberta, Saskatchewan being an area that -- where Boston Pizza started. We're very well represented in those regions, and they've been under economic pressure for several years now. And with our -- about 40% of our sales coming from that region, we definitely see it in our results. And that continued with not just economic pressures, but with rising minimum wage, they're now at $15 in Alberta. And that also puts pressure on menu pricing and in-guest visitation as a result.

The issue in Ontario is really specific to minimum wage that you had 23% menu or -- increase in minimum wage put through January 1, 2018. The industry took about a 7% menu price increase to help offset some of that labor cost increase. And that had a cooling effect on customer spending in restaurants, and we see that definitely in our Ontario results.

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

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And then what about BC?

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Jordan Holm, Boston Pizza International Inc. - President [9]

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BC was, you said, it was relatively flat, but we did see a little bit of softness in the quarter there. But really if you look at the lion's share, it was -- the oil regions, Alberta, Saskatchewan, and then Ontario.

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Nick Corcoran, Acumen Capital Finance Partners Limited, Research Division - Equity Research Analyst [10]

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And then the last question for me before I pass the line. Can you give any indication what the percentage of take-out kind of delivery is now?

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Jordan Holm, Boston Pizza International Inc. - President [11]

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So we're at about 18% nationally in take-out delivery. It's much -- it's higher and more established in Western Canada, where we've been known for take-out delivery for 50-plus years. And as -- less penetration, and then therefore, lower percentage of sales in Ontario, Québec and Atlantic, where the brand is newer and it's still establishing that channel of our business. But nationally, its 18%, and that's split between take-out and delivery.

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Operator [12]

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(Operator Instructions) The next question is from Elizabeth Johnston with Laurentian Bank Securities.

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

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Just to build on the last question about off-premise take-out and delivery, at 18% nationally, that would represent a meaningful increase from the level we saw as a percentage of sales in 2018. So I was just wondering if you're able to divide that out or is it third-party delivery versus your own in-house that's driving it. Would you say it's coming from both of those channels? Any additional color would be helpful.

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

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Sure. I mean, certainly, the activities that we've seen, incremental growth in that area from partnering with third-party delivery services is the largest area of growth. But as I alluded to there, we've been doing take-out delivery as part of our business model for many, many years. And so we have direct or proprietary delivery that's well established, and we get a lot of just phone calls, or bostonpizza.com e-commerce platform or our app, where we have 1.1 million people that have signed up as MyBP Members, and they can order through the app as well.

So we definitely support direct take-out delivery as something we've been doing for years and years. We continue to drive online and phone orders directly. But you're right, the year-over-year lift will be primarily because of the participation by well over 200 locations across the country and using third-party delivery services on top of their proprietary delivery.

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

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So in which case, the majority of that -- of those sales are still coming from your direct or your in-house delivery. It's still the vast majority of those?

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

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That's correct.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst of Research [17]

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Okay. And just talking about new restaurant development. If you look back compared to other years, it seems like there's been a lower number of stores opened at this point versus in other years. At least when we look at numbers you have under construction at this point, points to a smaller number of openings for Q4 than last year as well. So just wondering, if there's something that's different in 2019 when it comes to new stores, be it real estate or attracting new franchisees or is it really just a timing issue?

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

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I think, it is a change. I mean we now have 400 -- close to 400 locations across the country. And as we alluded to in previous investor conference calls, the development is split between traditional, which would be freestanding 5,000 to 6,000 square-foot Boston Pizza small towns and suburbs. Those kinds of things to nontraditional, and we have increasingly gone into urban areas, we've gone -- we've an airport location, we've gone into recreational centers. So we're growing in different ways, and that transition to more nontraditional development opportunities does take a little bit of time and maybe involves a different franchisee audience for example.

So we are tracking it slightly lower than our typical 10 to 15 new restaurants run rate, but we still believe that there's lots of areas for growth. I would point to the fact that the industry, whether it's the minimum wage, or changing guest expectations or competition, or just the other factors that are impacting restaurant growth and top line sales, would have a -- would be a consideration for investors as they're looking to develop new Boston Pizza locations.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst of Research [19]

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And my last question just with respect to renovation activity. In your press release, you mentioned substantial renovations at existing BP restaurants. Should I take this to mean a change in look or a step-up in taste or is it just really a renewed focus on your the-planned every 8-year renovation that franchisees would be doing anyway. I mean any color on that?

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Jordan Holm, Boston Pizza International Inc. - President [20]

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Yes. Just to remind those on the call, we do have a standard 7-year renovation cycle that's built into our franchise agreement. Franchisees are required to renovate to the new current standard every 7 years at their own expense, and they get -- they do see an incremental sales lift as a result.

We really feel that, that program is -- has been a differentiator for Boston Pizza that we don't have old or tired looking restaurants across the country.

Our franchisees keep up-to-date through that program, and we want to make sure that everyone's committed to taking full advantage of that even in times of top line sales pressure that -- we have completed, I think the number was 26 renovations to date, and those are substantial. So we do exterior, signage, paint, interior, equipment, a lot of AV as well keeping up with the tuck-in, in Canada or the other sporting events or the other things that we use our sound systems and screens for in the restaurants, that all gets overhauled in a renovation and it is a substantial investment, but like I said, we believe that it helps to keep our brand fresh and relevant to be competitive in the markets that we participate in.

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Operator [21]

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This concludes the question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

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Jordan Holm, Boston Pizza International Inc. - President [22]

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Okay. Thank you, operator. And since there are no further questions at this time, I'd like to thank you all for taking the time to listen in. We look forward to speaking with you all, again, at our fourth quarter conference call in February of 2020. Thanks for joining us.

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Michael Harbinson, Boston Pizza Royalties Income Fund - CFO of Boston Pizza International Inc. [23]

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Thank you.

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Operator [24]

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This concludes today's conference call. You may disconnect your lines. Thank you for your participating, and have a pleasant day.