CA - A&W Revenue Royalties Income Fund (AWRRF) Q4 2022 Earnings Call Transcript

A&W Revenue Royalties Income Fund (AWRRF)

Q4 2022 Earnings Conference Call

March 1, 2023, 04:00 PM ET

Company Participants

Susan Senecal - President and CEO

Kelly Blankstein - CFO

Conference Call Participants

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the A&W Revenue Royalties Income Fund Q4 2022 Financial Results Conference Call. At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. [Operator Instructions]. This call is being recorded today, Wednesday, March the 1st 2023.

I would now like to turn the conference over to Susan Senecal, CEO. Please go ahead.

Susan Senecal

Thanks very much. Good afternoon, everyone. And thank you for taking the time to attend our call today. I am Susan Senecal, President and CEO of A&W Food Services of Canada Incorporated, and the CEO the A&W Revenue Royalties Income Fund.

With me on the call today are Kelly Blankstein, who's the Chief Financial Officer of A&W Food Services and the Fund as well as [indiscernible], who's Director of Finance. Today we're presenting the fourth quarter results for the year ended December 31 2022.

I'm very pleased to report that A&W achieved royalty same store sales growth of 4.3% in the fourth quarter, as compared to the fourth quarter of 2021, which brought the annual royalties to the same store sales growth to 7.4% for the year.

As a result of the performance by the A&W restaurants in the royalty pool, the funds distribution rate was increased from 15.5¢ to 16.0¢ per unit beginning with the October distribution which was paid out on November 30 2022. The distributions declared by the Fund in 2022 increased by 7.8%, as compared with 2021. The new distribution rate translates into a go forward annualized distribution rate of $1.92 per unit, which is an increase of 3.2% from the prior level of $1.86 per unit, and it's the new high watermark for the Fund.

Now I'll turn things over to Kelly who will touch on the Fund current structure and go through the financial results for the quarter. Kelly?

Kelly Blankstein

Good afternoon, everyone. And thank you Susan. So of course before we can tell you more about our results, we need to read you the following comment on forward looking information. Certain statements in this presentation may be forward-looking in nature. These include statements with respect to the recovery of the Food Service industry and the ability of Food Services to rebound from the impacts of COVID 19.

The Food Service industry resuming growth, timing for releasing the annual audited financial statements and MD&A of the funds, building loyalty and enhancing performance over the long term. Actual results may differ from those expressed or implied in these forward looking statements. The forward looking statements contained in this presentation are subject to a number of risk factors, including risks related to COVID-19 the ability of A&W Food Services to implement its strategies as planned, general economic and business conditions, financial and political instability, international conflict and other factors disclosed previously and from time to time in the funds public filings.

Any forward looking statements in this presentation should be evaluated in light of these important factors. And except as required by applicable securities laws will not be updated if management's beliefs, estimations or opinions or other factors should change.

So I'm going to quickly touch on the funds structure and then go through the financial results after that Susan will provide an update on A&W Restaurants and some of A&Ws key corporate development. Will of course be happy to answer any of your questions at the end of our call.

So the fund is a top line fund meaning the distributable cash available to make distributions to unitholders is based on the sales of the restaurants in the royalty pool, with only minimal operating expenses associated with operating the fund.

In prior calls, we've spent a bit of time providing a more comprehensive description of the fund structure. So for those of you who are not familiar with that fund unstructured, please do refer to the about the funded section of the A&W Revenue Royalties Income Fund website. We won't be covering that here today.

I want to go through our financial results for the fourth quarter of 2022 as compared to the fourth quarter of 2021. The news release issued earlier today summarizes the financial results of the fund and the annual audited financial statements. And that document plus the MD&A will be released in the coming days.

Royalty Pool same store sales growth is a function of changes in guest count and check size, both of which are impacted by sales mix and menu price changes. The Q4 2022 Royalty Pool same store sales growth of 4.3% was a product of an increase in both guest count and average check size. The growth in average check size was partly attributable to menu prices, which have modestly increased in response to industry wide inflation on goods services and labor.

Royalty income for the fourth quarter of 2022 was $16.2 million based on gross sales reported by restaurants in the Royalty Pool of $541 million compared to Royalty income of $50 million and gross sales reported by A&W Restaurants in the Royalty Pool of $499 million for the fourth quarter of 2021.

Annual Royalty income for 2022 was $52.2 million, based on gross sales reported by restaurants in the Royalty Pool of $1.7 billion compared to Royalty income of $47 million and gross sales reported by A&W Restaurants in the Royalty Pool of $1.6 billion in 2021.

This 8.4% increase in royalty income for the quarter and 10.8% increase for the year was driven by Royalty Pool same store sales growth and the gross sales from the 21 net new restaurants added to the Royalty Pool on January 5 2022. The increase in royalty income for the quarter was also by impacted there being one additional day in the fourth quarter of 2022 as compared to the fourth quarter of 2021.

Royalty Pool same store sales growth is of course based on an equal number of days in the quarter and the year.

Of significant interest to unit holders is the amount of distributable cash that the fund has generated to pay distributions and the payout ratio. Distributable cash generated in the fourth quarter of 2022 was $12.6 million, compared to $12.4 million in the fourth quarter of 2021.

Distributable cash generated in the year was $38.6 million compared to $36.3 million in 2021. The $2.3 million increase in distributable cash generated in the year was attributable to $5.1 million increase in royalty income partially offset by $3.2 million increase in the current income tax expense. The increase in the current tax expense in 2022 is largely driven by a timing difference related to when income from the partnership is captured and trademarks taxable income.

Four monthly distributions totalling $63.5 per unit were declared in the fourth quarter of 2022, compared to four monthly distributions totalling $61.5 per unit, and one special distribution of $0.05 per unit declared in the fourth quarter of 2021.

12 monthly distributions totalling $1.87.5 per unit were declared in 2022, compared to 12 monthly distributions totalling $1.69 per unit, and one special distribution of $0.05 per unit in 2021.

The current monthly distribution rate of 16% per unit translates into an annualized distribution of $1.92 per unit. And as Susan mentioned the performance by restaurants in the royalty pool, the monthly distribution rate was increased from $15.5 per unit to 16% per unit in the fourth quarter of 2022. And this began with the October distribution, which was paid on November 30, of 2022.

So the new distribution rates translates into a go forward annualized distribution rate of $1.92 per unit. That's an increase of 3.2% from the prior year, and the prior level of $1.86 per unit. And we're pleased to announce that that is the highest most positive point on the fund ever with the distribution rates.

So we now want to turn that over to discussing the payout ratio, which is another key metric to unitholders. The Funds long term objective is to maintain an annual payout ratio at or below 100%. However, the funds strives to provide unit holders with regular monthly distributions. And as a result of seasonality of sales in the A&W restaurant and the timing of current income taxes, the quarterly payout ratio can fluctuate.

The payout ratio for the fourth quarter of 2022 was 90.3%, compared to 81.5% for the fourth quarter of 2021. And the annual payout ratio for 2022 was 96.6% compared to 92.3% in 2021.

With that all, I’ll now turn things back over to Susan

Susan Senecal

Thanks, Kelly. Since March 2020 the COVID 19 pandemic has, of course, adversely impacted A&W Restaurant operations across Canada, in particular those restaurants located on urban street front end in shopping centres. Restrictions on the operations of A&W Restaurants in response to COVID-19 continue to impact system sales at A&W restaurants in early 2022, particularly in the first quarter. However, by the year end through the efforts of our franchisees, all concepts and regions had demonstrated recovery and growth over 2021.

To help better understand where A&W is along the road to recovery from the impact of COVID-19 we've measured same store sales growth in 2022 over 2019, with 2019 being the first the most recent pre COVID comparable year, the Funds achieved Royalty Pool same store sales growth of plus 6.5% in 2022.

The 6.5% Royalty Pool same store sales growth over 2019 has been led by sales growth from 2019 to 2022 in A&W Restaurants just drive through.

Based on recent results in the food service industry, food services believe that the QSR segment of the industry is recovering from the impacts of COVID-19. The success of the A&W brand and individual franchisee A&W Restaurants is paramount to the long term success of the overall A&W system and in turn to the fund. Both food services and its franchisees have worked diligently to develop and implement plans and programs to mitigate the effects of the COVID 19 pandemic.

Food Services objective is to ensure that A&Ws restaurants are able to safely operate and have the ability to emerge from a period of uncertainty in a financial condition that enables them to compete effectively and to grow their businesses.

Food Services believes that its mission to become number one with millennial burger lovers chosen and trusted for truly good food and the convenience and crave will help it to continue to rebound from the impacts of COVID-19 and better position it to withstand other risks, such as those associated with current economic conditions.

A&Ws brand positioning remains strong and growth of new locations, industry leading innovation and a safe and stable supply chain. Along with continued efforts to consistently deliver great tasting food and a better guest experience are all expected to contribute to building loyalty and enhancing performance over the long term. Food Services is committed to the long term health and success of its franchise network and the fund.

Food Services has continued to grow new A&W restaurants particularly in the key Ontario and Quebec market.

23 new A&W restaurant opens in 2022, bringing the total number of A&W restaurants in Canada up to 1046. Nine of these restaurants were opened during the fourth quarter of 2022, and an additional nine restaurants were under construction as at December 31 2022.

During the second quarter of 2022 Food Services announced that it had signed a Country Agreement with Pret A Manger, which gives Food Services the exclusive right to use the prep brand in Canada for a two-year pilot during which Food Services will introduce the prep brand within A&W restaurants and select markets in Canada. If the trial phase is successful, Food Services will have the exclusive right to expand the prep brand across Canada pursuant to an agreed development plan.

As at December 31 2022 five A&W locations three in Vancouver and two in Toronto, were offering prep products in their restaurant.

The royalty payable to the fund applies to prep products sold within A&W Restaurants, to the extent that such restaurants are in the Royalty Pool.

During third quarter on August 18 A&W celebrated its 14th Annual Burgers to Beat MS Day and raised more than $1.8 million for the MS Society are results that we're all very proud of.

With that, I want to thank you for your attention and say that we'd now be happy to answer your question.

Question-and-Answer Session

Operator

[Operator Instructions] Ms. Senecal there are no questions from the phone lines, I will turn the conference back to you.

Susan Senecal

Thanks very much. And thanks to all of you for attending our call today. We do look forward to updating you on our results after the after the next quarter. And in the meantime, if anyone does have questions that were not answered on our call today, please feel free to call either Kelly Blankstein or myself at area code 604-988-2141. Thanks again.

Operator

Ladies and gentlemen, this does conclude your conference call for this afternoon. We would like to thank everyone for participating and ask you to please disconnect your lines.

For further details see: