A&W Revenue Royalties Income Fund (AWRRF) CEO Susan Senecal on Q4 2021 Results – Earnings Call Transcript


A&W Revenue Royalties Income Fund (OTC:AWRRF) Q4 2021 Earnings Conference Call February 16, 2022 4:00 PM ET

Company Participants

Susan Senecal – President and Chief Executive Officer

Kelly Blankstein – Chief Financial Officer

Lisa Marzocco – Director, Finance

Conference Call Participants

Tom Burke – Canaccord Genuity

Operator

Good day, everyone and welcome to the A&W Revenue Royalties Income Fund Q4 2021 Results Conference Call. Today’s call is being recorded. And now at this time, I would like to turn the call over to Susan Senecal. Please go ahead.

Susan Senecal

Thanks so much. Good afternoon, everyone and thanks for taking the time to attend our call today. I am Susan Senecal, President and CEO of A&W Food Services of Canada, Inc. 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 Lisa Marzocco, who is our Director of Finance.

Today, we are presenting the fund’s results for the fourth quarter, which ended on December 31, 2021 and I am pleased to report that we ended the year with a strong fourth quarter. Royalty Pool same-store sales growth was 13.8% as compared to the fourth quarter of 2020, bringing the annual Royalty Pool same-store sales growth for 2021 to 14%. Due to the strong performance of the restaurants in the Royalty Pool, the funds distribution rate was increased 3x in 2021 and including the $0.05 per unit special distribution that was paid to unitholders on December 31, 2021, the distributions declared by the fund in 2021 increased by 14.6% as compared to 2020. The fund’s current monthly distribution rate of $0.155 per unit translates to an annualized distribution rate of $1.86 per unit.

I will now turn things over to Kelly, who will review the fund structure and go through the financial results for the quarter.

Kelly Blankstein

Thank you, Susan and good afternoon everyone. Before we can tell you more about our results, I, of course, need to read you the following comment on forward-looking information. Certain statements in this presentation may be forward-looking in nature. These include food services expectation that the foodservice industry and more particularly the QSR segment will recover from the impacts of COVID-19. Food Services believe that its mission and strategic initiatives will help it to continue to rebound from the impact of COVID-19; statements regarding the foodservice industry resuming growth; timing for releasing the annual audited financial statements and MD&A of the fund and the expectation that 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 will contribute to 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 regarding the marketing of the A&W system, 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.

Now, I will spend a few minutes reviewing the fund structure and then we can go through the financial results for the quarter. After that, Susan will provide an update on the impact that COVID-19 has had and continues to have on A&W restaurants. And we will, of course, be happy to answer any questions at the end of our call. So for those of you who might not be familiar with the fund structure, I will quickly review the highlights. The fund is the majority owner 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 foodservice industry, including A&W Root Beer, the Burger Family and Chubby Chicken.

The fund earns income through its ownership 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 these trademarks, Food Services pays A&W Trade Marks, a royalty equal to 3% of the gross sales reported by 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. This 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.

Growth in the fund is achieved in two ways: first and most importantly, by increasing the same-store sales of the restaurants in the Royalty Pool; and secondly, by adding new restaurants to the pool each year. On the second point, the Royalty Pool is expanded at the beginning of each year by adding new A&W Restaurants opened less any restaurants, which have permanently closed. On January 5, 2022, our most recent Royalty Pool expansion, the Royalty Pool was increased from 994 restaurants to 1,015 restaurants.

Another important aspect of the fund is that Food Services owns the equivalent of 26% of the units of the fund on a fully diluted basis through its ownership of limited voting units of the fund and common shares of Trade Marks, both of which are exchangeable at the option of Food Services for units of the fund. The 26% ownership stake takes into account the common shares of Trade Marks that were issued to Food Services on January 5, 2022 as part of the annual Royalty Pool amendment. As a result, the interest of Food Services, are closely aligned with the interest of unitholders.

Now, I will go to the financial results for the fourth quarter of 2021 as compared to the fourth quarter of 2020. The news release that we issued earlier today, of course, summarizes those financial results of the fund and the annual audited financial statements and MD&A will be released in the coming days. 13.8% Royalty Pool same-store sales growth achieved in the quarter was primarily driven by there being fewer COVID-19 related restrictions in place, which led to a reduction in the number of A&W restaurants that were temporarily closed or were not able to offer dine-in services as compared to the fourth quarter of 2020. We are delighted to report that as of today and December 31, 2021, all of the A&W Restaurants that had been temporarily closed due to COVID-19 related restrictions have reopened.

Royalty income for the fourth quarter of 2021 was $15 million based on gross sales reported by restaurants in the Royalty Pool of $499 million compared to royalty income of $13.4 million and gross sales reported by A&W Restaurants in the Royalty Pool of $445 million for the fourth quarter of 2020. Annual royalty income for 2021 was $47.1 million based on gross sales reported by restaurants in the Royalty Pool of $1.57 billion compared to royalty income of $44.4 million and gross sales reported by A&W Restaurants in the Royalty Pool of $1.35 billion for 2020. The 12% increase in royalty income for the quarter and 16.5% increase for the year is attributable to Royalty Pool same-store sales growth and the gross sales from the 23 net new restaurants added to the Royalty Pool on January 5, 2021. The increase in royalty income for the quarter was partially offset by there being 6 fewer days in the fourth quarter of 2021 as compared to the fourth quarter of 2020. The increase in royalty income for the year was partially offset by there being 1 less day in 2021 than in 2020. Royalty Pool same-store sales growth is based on an equal number of days in the quarter and year. So of significant interest to unitholders is the amount of distributable cash that the fund has generated to pay distributions to unitholders and dividends to Food Services as well as the payout ratio. Distributable cash generated in the fourth quarter of 2021 was $12.4 million compared to $9.4 million in the fourth quarter of 2020.

On an annual basis, the fund generated $36.3 million in distributable cash for 2021 compared to $30 million in 2020. This $6.3 million year-over-year increase in distributable cash generated can be attributed to a $6.7 million increase in royalty income and $177,000 decrease in general and administrative expenses partially offset by $337,000 increase in net interest expense and $175,000 in financing fees that were paid in relation to the renewal of Trade Marks’ credit facility which was completed in the third quarter of 2021.

The payout ratio for the fourth quarter of 2021 was 81.5% compared to 162% for the same quarter of 2020. The annual ratio for 2021 was 92.3% compared to 93.8% for 2020. 4 monthly distributions totaling $0.615 per unit and one special distribution of $0.05 per unit were declared in the fourth quarter of 2021 compared to 4 monthly distributions totaling $0.40 per unit and two special distributions totaling $0.50 per unit in the fourth quarter of 2020. 12 monthly distributions totaling $1.69 per unit and one special distribution of $0.05 per unit were declared in 2021 compared to 9 monthly distributions totaling $1.18 per unit and two special distributions totaling $0.50 per unit in 2020. No monthly distributions were declared in the second quarter of 2020 as the trustees had temporarily suspended monthly distributions due to COVID-19.

Total monthly distributions and special distributions declared in 2021 were $1.74 per unit as compared to total monthly distributions and special distributions of $1.518 per unit in 2020. The current monthly distribution of $0.155 per unit, as Susan had indicated, translates to an annualized distribution rate of $1.86 per unit.

Now back over to you, Susan.

Susan Senecal

Thanks, Kelly. The actions required in 2020 and 2021 in response to COVID-19 have adversely impacted A&W restaurants and their operations across Canada, particularly for those restaurants located on urban street fronts and in shopping centers. Since the second quarter of 2020 when COVID-19 impacts on A&W were at their peak, the impact of COVID-19 on the Royalty Pool same-store sales has lessened. There does, however, continue to be uncertainty related to COVID-19 and its impact on our business. It’s possible that there will be restaurants that are required to temporarily close or that other restrictions or requirements are introduced affecting operations, guest counts and/or sales.

Our objective is to ensure that A&W’s restaurants are able to safely operate and that they have the ability to emerge from this period of uncertainty in a financial condition that enables them to compete effectively and grow their businesses. Food Services and its franchisees have worked together throughout the pandemic on initiatives to help accelerate sales recovery.

Key initiatives include promotional activity, strengthening and expanding partnerships with third-party delivery service providers, increasing the speed of service for drive-thru and continuing to evolve the technology we need to be highly convenient for our guests. We believe that the foodservice industry and, more particularly, the quick service restaurant segment of the industry will recover from the impact of COVID-19. However, the timing and the strength of that recovery cannot yet be predicted with any degree of certainty. During the pandemic to-date, various levels of government have offered a number of important financial programs which have helped support individual restaurant businesses, including A&W franchisees. However, the eligibility criteria for most of these programs, has become stricter and some programs have ceased.

The health and safety of A&W’s customers and restaurant team members remains a top priority. We believe that Food Services’ 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 rebound from the impacts of COVID-19. Strategic initiatives, including repositioning and differentiating the A&W brand through the use of natural ingredients, continued new restaurant growth and delivering an industry-leading guest experience have all contributed to A&W’s strong appeal and the trust it is built with Canadian consumers over many years. These strengths will be key to delivering strong results as the foodservice industry resumes growth.

Food Services opened 33 new restaurants across the country in 2021, 13 of which opened in the fourth quarter, bringing the total number of restaurants in the Canada to 1,028 as of December 31, 2021. A&W’s brand positioning remains strong. The growth of new locations and industry-leading innovation, along with 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 the performance over the long-term. Food Services is committed to the long-term health and success of its franchise network and the fund.

Thanks very much for your attention, and we would now be happy to answer any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will first hear from Tom Burke of Canaccord Genuity.

Susan Senecal

Hi, Tom.

Tom Burke

Hi, guys. Congrats on the quarter.

Susan Senecal

Thank you.

Tom Burke

Obviously, the elephant in the room, maybe to discuss more, and maybe you addressed it during your prepared remarks because I got on just a bit late, all about inflation, and this is a really big story that we haven’t confronted in a very long time. And I just wanted your thoughts on, obviously, the challenges around getting quality employees and all the stuff revolving around food inflation. Could you talk about that?

Susan Senecal

Sure. Yes, it’s definitely a question that’s on lots of people’s minds, and I’ve commented that based on our sort of predicting capabilities prior to the pandemic, I think we all would have guessed different things. The economy has been astonishingly resilient during a long period of time when we wouldn’t have necessarily expected that. But inflation does certainly seem like a certainty more and more sort of people coalescing around the idea that inflation will be part of the economy for a good period of time. What we are seeing is that food inflation is certainly there. That’s happening in grocery stores. That’s happening in food service. At the same time, there is also supply chain disruptions that are raising an importance. So, if there is elephants in the room, I think one of them is standing up, pricing is one piece of it. And then availability and continuity of supply is another one that people are working on. So, I believe that it’s kind of a dual thing where, from a perspective of inflation, it is something that’s a reality. There is a lot more money in the economy. And eventually, this kind of cycles around and it impacts our guests’ ability to have disposable income and to be in the food service market in the way that they had previously. So, I think we are looking at it from two sides. One side is that having a stable supply of food and certainly the cost of producing that, storing that, transporting that have gone up. So, we expect that there will be price increases and cost increases going forward. At the same time, it’s important for us to recognize and for all the food service to recognize that our guests don’t have unlimited availability to funds, and so we will have to be really careful and prudent in terms of how we manage the pricing in our restaurants and look for efficiencies so that we are able to continue to deliver great value on that side.

Tom Burke

And what do you think – if we can talk maybe a bit philosophically about that, what are the large – obviously, a large organization with tremendous scale you have shown over the years about just great innovation and bringing in new products, bringing in new ingredients, etcetera. What are the competitive advantages for an organization like A&W in a situation like this? Is it the – are you agile enough? Obviously, it’s – you can have obviously decent negotiating power with suppliers, etcetera. Can you dive into that a little bit more?

Susan Senecal

Sure. I think I mean, whether it’s a competitive advantage or just a plain old advantage is the long-term partnerships that we have with so many of our suppliers really status in good stead in terms of our ability to innovate, as you mentioned, but also in terms of being able to assure consistent supply, which I think has been our number one goal, and we have been able to continue that throughout some pretty big challenges. So, that’s super important to us. In terms of agility, again, because we have had these long-term relationships, I think we are able to see into the future a little bit maybe more quickly and be able to adopt. And we certainly have proven that through floods in BC and highway closures in addition to pandemic impacts. And I think there is – I could continue listing some of the challenges that have impacted our ability to give 100% availability of food to our restaurants, but we have managed through that really, really well. And it’s with the support and help of our partners, whether that’s the distributors or the people supplying our products. So, in some cases – in many cases, we have personal relationships that date back many, many years. And then you might wonder about agility and thinking, okay, well, that’s great on the stability side. What about the agility side enabled to changes. We are constantly looking because we are in the innovation business, I would say, in terms of looking for what’s next and helping our guests to get something that they might not expect or that they might not have even thought of and being able to get it conveniently and affordably. That causes us to cast our eyes over a large number of different possibilities. And when you do that, you come across things come across ideas, and those ideas could be for innovation. Those ideas could also just be for completing your supply in a way that can meet sort of local conditions, and that’s been very useful to us as well. So, just a couple of thoughts for you on the – sort of the value we see in the partnerships, but also the value that we see in sort of constant looking for what’s next and how that translates into potential relationships for the future and potential ways to be agile and to respond to individual and local circumstances.

Tom Burke

When we look back, say, the days where A&W initiated, of course, the famous hormone-free steroid-free beef, etcetera. And in the early days, I think you had to even go and look outside of Canada and have international sourcing to make sure that there was a security of supply, etcetera. Are you finding more these days that there is or there should be a more – an intense focus on having a more locavore-oriented supply chain? Can you talk about that?

Susan Senecal

Sure. Well, we are a Canadian company with our home office, as you know, here in North Vancouver. And we always look to Canada first when it comes to sourcing supply for our restaurants. We just think it’s good business. It’s a convenient business, and that’s the way that we always proceed. At the same time, sometimes as you say, just in order to really doubly ensure that when we have made a promise or a commitment to our guests that we are able to follow through on that, we do need to make sure that we have got some redundancies and duplications and ability to expand quickly or contract or change when we need to. And so that does cause us to look – it’s a global world, and we sometimes look outside, but we always end up building advantage for Canada. And I think the fact that we are here has really been a bit of a plus, a lot of our suppliers and our producers that know us would say, yes, this is good when we can have consistency in terms of someone buying that really gives us the confidence to invest and the confidence to make change. So, I think it’s been a win on both sides of things, but we are certainly never had a loss for new ideas when it comes to making sure that our guests are going to get exactly what they are hoping for when they come to our restaurants.

Tom Burke

Great. And any just kind of categories or novelties that we should all be just generally looking out for? You guys obviously are a willing participant in any of the new kind of trends in great new food. Just wanted to see if I can get any thoughts in that regard?

Susan Senecal

Sure. We have announced that we were launching our Brew Bar and that is going very well. So, we expect that by the time are more and more Canadians will be able to get not just a frosty mug of Root Beer in our restaurants, but a frosty mug of frozen Root Beer to go along with in for that or to substitute in for that or to try for the first time. And of course, that’s accompanied by a wide range of beverages, including hot espresso-based beverages. So, that’s a new initiative, and we think that it pairs perfectly with the great food that we have to offer. So, that would be something to keep your eye open for.

Tom Burke

Okay, great. Thanks very much.

Susan Senecal

Prefect. Thank you.

Operator

[Operator Instructions] And it appears there are no further questions at this time.

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 our first quarter of 2022. In the meantime, if anyone does have questions that weren’t answered on our call today or you didn’t think of, please feel free to call either Kelly Blankstein or myself at 604-988-2141. Thanks again.

Operator

And that does conclude today’s conference. Thank you all for your participation. You may now disconnect.

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