Transcripts
A&W Revenue Royalties Income Fund (AWRRF) Q1 2023 Earnings Call Transcript
Operator
Good afternoon. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the A&W Revenue Royalties Income Fund Q1 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]
Ms. Susan Senecal, you may begin your conference.
Susan Senecal
Great. Thank you, Jenny, and good afternoon, everyone. Thanks for taking the time to attend our call today. I’m Susan Senecal, 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 Kelly Blankstein, who is the Chief Financial Officer of A&W Food Services and the Fund; and Agatha Tymke who’s the Director of Finance.
Today, we’re presenting the Fund’s results for the first quarter ended March 26, 2023. I’m pleased to report that A&W has started the year off strong with the Fund achieving royalty pool same-store sales growth of 6.1% in the first quarter. The loyalty of our guests and our mission to become number one with millennial burger lovers chosen and trusted for truly good food and the convenience they crave will help us continue to grow successfully.
Now, I’ll turn things over to Kelly, who will touch on the Fund’s structure and go through the financial results for the quarter.
Kelly Blankstein
Thank you, Susan, and good afternoon, everyone. Of course, before we can tell you more about our results, I do need to read the following comments on forward-looking information.
Certain statements in this presentation may be forward-looking in nature and these include statements with respect to the recovery of the food service industry and the ability of foodservices to rebound from the impacts of COVID-19, the foodservice industry resuming growth, timing for releasing the annual audited financial statements and MD&A of the Fund, as well as the quarterly results, building loyalty and enhancing performance over the long term. Actual 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 Fund’s public filings. Any forward-looking statements in this presentation should be evaluated in light of these important factors, and is accepted as required by applicable securities laws will not be updated if management beliefs, estimates or opinions, or other factors should change.
Now, I want to just quickly speak to the Fund’s structure and then go through the financial results. And after that, Susan will provide an update on A&W restaurants and some of A&W’s key corporate development. We’ll be of course happy to answer any of your questions at the end of our call.
So, the Income Fund is a top line fund, meaning the distributable cash available to make distributions to unit holders is based on the sales of the restaurants in the royalty pool with only minimal operating expenses associated with operating the Funds. For a more comprehensive description of the Fund’s structure, please do refer to the About the Fund section on our Fund Web site.
Next, I will go through our financial results for the first quarter of 2023 as compared to the first quarter of 2022. The news release issued earlier today summarizes the select financial results of the fund and the interim unaudited financial statements and MD&A will be released in the coming days. So, the 6.1% royalty pool same-store sales growth in the quarter was primarily driven by there being no public health restrictions related to COVID-19 in place across Canada during the first quarter of 2023, as compared to the first quarter of 2022. There were no temporary closures of A&W restaurants due to COVID-19 restrictions in Q1 ’22 of however. Many of those restaurants were still required to operate with reduced operating hours and capacity limits on dining guests for all or a portion of the quarter in the same period last year.
Royalty income for the first quarter of 2023 was $11.4 million based on gross sales reported by restaurants in the royalty pool of $381.3 million compared to royalty income of $10.6 million and gross sales reported by A&W restaurants in the royalty pool of $352.6 million for the first quarter of 2022. The 8.1% increase in royalty income for the quarter is attributable to the 6.1% royalty pool same-store sales growth and the gross sales from the 22 net new restaurants that were added to the royalty pool on January 5th of this year, January 5, 2023.
The increase in royalty income for the quarter was partially offset by there being one last day in the first quarter of 2023 as compared to the first quarter of 2022. Royalty pool same-store sales growth is based on an equal number of days in the quarter and year. So, its significant interest to unit holders is the amount of distributable cash that the Fund has generated to pay distributions as well as the associated payout ratio. Distributable cash generated in the first quarter of 2023 was $8.1 million compared to $6 million in the first quarter of 2022. This is a $2.1 million increase in distributable cash and that is generated and attributable to the $0.9 million increase in royalty income and $0.9 million decrease in current tax expense. The decrease in the current tax expense in 2023 is largely driven by a timing difference related to when income from the partnership is captured in trademarks taxable income.
So, two monthly distributions totaling $0.32 per unit were declared in the first quarter of 2023 compared to two monthly distributions totaling $0.31 per unit in the first quarter of 2022. The current monthly distribution rate of $0.16 per unit translates to an annualized distribution rate of $1.92 per unit, and that’s a new high watermark for the Fund.
I want to now turn to discussing the payout ratio, which is a key metric. The Fund’s long-term objective is to maintain an annual payout ratio at or below 100%, however, the Fund strives to provide unit holders with regular monthly distributions and as a result of seasonality of sales in A&W restaurants and the timing of current income taxes, the quarterly payout ratio does fluctuate. The payout ratio for the first quarter of 2023 was 112.9%. And that compares to 145% for the first quarter of 2022, which was higher due to the timing impact of current income taxes.
Now, I’m going to pass things back over to Susan.
Susan Senecal
Thank you, Kelly. Food Services believes that its mission to become number one with millennial burger lovers chosen and trusted for truly good food and the convenience they crave will help it continue to grow. Strategic initiatives including repositioning and differentiating the A&W brands through the use of natural ingredients, continued new restaurant growth and delivering an industry leading guest experience have all contributed to A&W strong appeal and the trust that has built with Canadian consumers over many years. These strengths will be key to delivering strong results as a quick service restaurant industry and the QSR burger market continue resumed growth post pandemic but in the face of more challenging general economic conditions.
A&W’s brand positioning remains strong, growth of new locations, industry leading innovation, a safe and stable supply chain and 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. Three new A&W restaurants opened in the first quarter of 2023 and an additional 10 restaurants were under construction as of March 26, 2023.
In 2022, Food Services signed an agreement to introduce the prep brand within A&W restaurants and select markets in Canada for a two-year pilot project. As at March 26, 2023, eight A&W locations, three in Vancouver and five in Toronto were offering prep products in their restaurants. 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.
Thank you for your attention, and we would now be happy to answer your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question is from Ed Sollbach from Spartan. Please ask your question.
Ed Sollbach
Good day. Nice to see the same-store sales growth again, as a long-term unit holder, I can’t help, but notice there seems to be less promotional activity and less advertising, less new product introductions than pre-pandemic, and it does seem to affect the results if you look at — we’re barely back to where we were in 2019, and obviously there’s been a lot of inflation in terms of food products and prices. So, what are your thoughts around promotional activity, and new products, and what do you have in the pipe, and what can you do there to get the same-store sales growth going again like it was pre-pandemic?
Susan Senecal
Yes, thanks for the question, Ed. There is certainly lots of innovation in our pipeline and in our restaurants. Our biggest initiative right now is the launch of the Brew Bar, which is an extended beverage program that we now have in over 500 of our locations across Canada, and we see that as a great way to appeal to more guests and give them different options. Particularly, we’re looking forward to the summer and the hot weather with the frozen root beer available and frozen drinks; lots of different ways to enjoy A&W. So, that’s one of the big examples of an innovation that’s currently rolling out underway. And we’ve launched a number of different advertising and promotional campaigns during that same time period. So, we’re pretty proud of the relationship that we’ve developed with the Blue Jays, and I see lots of us in a promotional way, but certainly, we continue to be focused on reaching the guests where they are, and experimenting with different ways of building A&W’s appeal and awareness in every market that we operate in.
Ed Sollbach
And so, what’s the feedback on the Brew Bar that you’ve — I’ve seen that in some stores. How’s that going?
Susan Senecal
It’s been really good. A lot of guests have already found that they have a new favorite beverage. And in fact, as we were rolling out, you can’t flip a switch and have it in every single restaurant on the same day. So, we were hearing from our operators like hurry up and get me my Brew Bar, because guests are coming in and saying I had one at different A&W location and I’d love to have it available here. So, I think that’s going really well and we’re getting a positive response on both the taste and flavor and excitement of the beverages. But also, from our franchisees who have been the big supporters of the program from day one.
Ed Sollbach
Well, the franchisees — that’s good endorsement because they probably know the best on how things are going.
Susan Senecal
I like that people.
Ed Sollbach
Yes. And then, on like promotions, like where are you in terms of an app? I know you used to do emails, like I get your emails occasionally, but that seems to have quieted down, like where are you in terms of those promotions?
Susan Senecal
Yes, we are doing work as well on a mobile app, so we’ve had a mobile app of course for some time but we think that there’s an opportunity here to revamp the ways that we reach guests that they are able to interact with us. So, we’ve seen lots of interest in digital through the pandemic was really accelerating and we’ve used that opportunity to take a step back and figure out how we want to come forward as A&W. So, that’s something that’s certainly in the cards.
Ed Sollbach
And what’s the timeline for that?
Susan Senecal
Don’t stop looking at your phone, it could be very soon.
Ed Sollbach
Okay. Well, thanks for the update, and look forward to some new initiatives.
Susan Senecal
Yes. Well, thanks for your loyalty and for your question.
Ed Sollbach
Welcome.
Operator
Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.
Susan Senecal
Thank you, and thanks to everyone for attending our call today. We look forward to updating you on our results after the second quarter of 2023. And in the meantime, if anyone does have questions that weren’t answered on our call today, please feel free to call either Kelly Blankstein or myself at area code 604-988-2141. Have a good rest of the day. Thank you.
Operator
Thank you. Ladies and gentlemen, that includes our conference for today. You may all disconnect.