A&W Revenue Royalties Income Fund reports solid Q3 results

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

VANCOUVER, Oct. 17, 2016 /CNW/ -

HIGHLIGHTS

  • Year to date same store sales growth 4.3%
  • Q3 same store sales growth up 2.3%
  • Year to date Royalty Pool sales up 10.3%
  • Year to date Net Income up 9.8%

A&W Revenue Royalties Income Fund (the Fund) and A&W Food Services of Canada Inc. (A&W Food Services) today reported results for the third quarter ended September 11, 2016.  The Fund will hold a conference call to discuss the results on Monday, October 17, 2016 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-866-530-1553 or (416) 847-6330 Passcode 1533761.  A replay will be available until October 24, 2016, by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 1533761. 

A&W posted its 14th consecutive quarter of same store sales growth.  In what was a challenging quarter for North American foodservice markets, exacerbated in Canada by serious economic weakness in Alberta and Saskatchewan, A&W posted solid same store sales growth of 2.3% and achieved a 6.6% increase in sales reported by restaurants in the Royalty Pool.  Year to date same store sales growth is now +4.3%. 

The same store sales growth along with the sales from 24 net new restaurants added to the Fund's Royalty Pool in January 2016, resulted in a 6.6% increase in royalty income for the quarter and a 10.3% increase in royalty income year to date.  Year to date distributable cash increased by 9.6% and year to date distributable cash per unit increased from $1.037 per unit to $1.092 per unit.       

"We are pleased to report same store sales growth of 2.3% for the quarter on top of 8.3% growth for the same quarter last year.  In light of continuing challenging industry conditions, we have strengthened our marketing programs for the fourth quarter", said Paul Hollands, Chairman and CEO of A&W Food Services.  "Overall, our strategy to differentiate A&W through the use of "better ingredients" continues to be very successful.  We are also very pleased with our progress in our two most important growth markets, Ontario and Quebec."

Earlier this year, A&W became the first North American restaurant chain to launch bacon from pork that's raised without the use of antibiotics.  A&W's journey to source simple, great tasting ingredients began in 2013 when Food Services began to serve its guests beef raised without the use of hormones and steroids.  Eggs from hens fed only a diet without animal by-products, chicken raised without the use of antibiotics, and organic and Fair Trade coffee were introduced in the following years. 

FINANCIAL HIGHLIGHTS






(dollars in thousands except per unit

amounts)

Period from

Jun 20, 2016 to

Sep 11, 2016

Period from

Jun 15, 2015 to

Sep 6, 2015

Period from

Jan 1, 2016 to

Sep 11, 2016

Period from

Jan 1, 2015 to

Sep 6, 2015

Same store sales growth(1)

+2.3%

+8.3%

+4.3%

+8.8%

Number of restaurants in the Royalty Pool

838

814

838

814

Sales reported by the restaurants in the

$278,473

$261,177

$786,326

$712,735


Royalty Pool





Royalty income

$8,354

$7,835

$23,590

$21,382

General and administrative expenses

56

100

372

441

Net third party interest expense

593

557

1,793

1,646

Current income tax provision

1,596

1,411

4,518

3,868

Total distributable cash generated for

$6,109

$5,767

$16,907

$15,427


distributions and dividends(2)





Distributable cash per equivalent unit (2016 –

$0.395

$0.387

$1.092

$1.037


15,482,676 units; 2015 – 14,870,367 






units)(2)(3)





Distributions and dividends declared per

$0.396

$0.359

$1.026

$0.944


equivalent unit





Net income(4)

$5,856

$4,386

$14,943

$13,613

Net income, excluding non-cash items(4)

$5,709

$5,767

$15,241

$15,427

 

(1)

Same store sales growth does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  This important information is provided as it is a key driver of growth in the Fund.  Same store sales growth is based on an equal number of days in each quarter. 

(2)

Distributable cash and distributable cash per equivalent unit do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  This important information is provided as it identifies the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services.  

(3)

The number of equivalent units and distributable cash per equivalent unit in 2016 includes the 122,462 LP units exchangeable for 244,924 common shares of Trade Marks representing the remaining 20% of the consideration for the January 5, 2016 adjustment to the Royalty Pool which is held back until December 2016 when the actual annual sales are reported by the new restaurants.  The number of equivalent units and distributable cash per equivalent unit in 2015 includes the 181,101 LP units exchanged for 362,202 common shares of Trade Marks representing the final consideration paid in December 2015 for the January 5, 2015 adjustment to the Royalty Pool. 

(4)

Net income in 2016 and 2015 includes non-cash gains and losses on interest rate swaps, amortization of deferred financing fees and deferred income taxes.  These non-cash items have no impact on the Fund's ability to pay distributions to unitholders.  The Fund's net income excluding these non-cash items is presented for information purposes only.  Net income excluding non-cash items does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  



FINANCIAL RESULTS
Royalty income for the third quarter of 2016 was $8,354,000 based on sales of $278,473,000.  This was an increase of 6.6% from royalty income of $7,835,000 and sales of $261,177,000 for the third quarter of 2015.  Year to date royalty income was $23,590,000 based on sales of $786,326,000, an increase of 10.3% from royalty income of $21,382,000 and sales of $712,735,000 for 2015 year to date.  The increase in sales and royalty income was due to the combined impact of the additional net 24 new restaurants in the Royalty Pool and the same store sales growth of 2.3% for the quarter and 4.3% year to date as compared to 2015. 

Combined general and administrative expenses and interest decreased by $8,000 in the quarter and increased by $78,000 year to date.  Interest expense was higher due to the increase in the interest rate on the term loan from 4.0% per annum to 4.3% per annum under an interest rate swap agreement which became effective on December 22, 2015. 

Total income tax including non-cash deferred income tax and refundable income tax increased by $839,000 in the quarter and $2,369,000 year to date.  The current income tax provision increased by $185,000 for the quarter and $650,000 year to date.  Current income taxes payable include transitional partnership tax of $633,000 compared to $496,000 in 2015 year to date.  Total transitional partnership tax is expected to be $909,000 in 2016 which is the last year that this tax is payable.  Refundable income tax was $400,000 for the quarter and $1,666,000 year to date.  Refundable income tax paid or payable in 2016 is expected to be recovered in future years when sufficient dividends are paid by A&W Trade Marks Inc. (Trade Marks).

The Fund's net income and comprehensive income was $5,856,000 for the quarter compared to $4,386,000 for the third quarter of 2015.  Net income and comprehensive income was $14,943,000 year to date compared to $13,613,000 for 2015 year to date.  The Fund's net income under International Financial Reporting Standards (IFRS) includes non-cash items, such as the fair value adjustment of the interest rate swap, that have no impact on the Fund's ability to pay distributions to unitholders.  Therefore, net income is not the only or most meaningful measure of the Fund's ability to pay distributions and consequently, non-IFRS measures of distributable cash, distributable cash per unit and payout ratios are reported to provide investors with more meaningful information.               

Distributable cash generated in the third quarter of 2016 to pay distributions to unitholders and dividends to Food Services was $6,109,000 compared to $5,767,000 in the third quarter of 2015.  Distributable cash generated year to date in 2016 was $16,907,000 compared to $15,427,000 in 2015 year to date.  The $1,480,000 year to date increase in distributable cash was comprised of the $2,208,000 increase in royalty income, less the $78,000 increase in combined general and administrative and interest expenses and a $650,000 increase in the current income tax provision.            

Distributable cash generated per equivalent unit increased by 0.8¢ to 39.5¢ per unit in the third quarter of 2016 from 38.7¢ for the third quarter of 2015.  Year to date distributable cash generated per equivalent unit increased by 5.5¢ to $1.092 per unit in 2016 from $1.037 for 2015 year to date.  The increase in distributable cash per equivalent unit was due to the increase in royalty income less the increase in cash expenses and taxes as discussed above.     

Three monthly distributions totaling 39.6¢ per unit were declared in the third quarter of 2016 compared to 35.9¢ per unit in the same quarter of 2015.  2016 year to date distributions were $1.026 per unit compared to 94.4¢ per unit in 2015 year to date.  The payout ratio for the third quarter of 2016 was 92.4% compared to 87.6% for the third quarter of 2015 and the year to date payout ratio was 99.4% compared to 93.9% for 2015 year to date.    

The cumulative surplus of distributable cash at the end of the third quarter of 2016 was $2,582,000, compared to a cumulative surplus of $4,148,000 at the beginning of the year.  The refundable income tax of $1,666,000 was the primary reason for the decrease in surplus distributable cash. As noted above, this refundable income tax is expected to be recovered in future years when sufficient dividends are paid by Trade Marks.         

A copy of the Fund's management discussion and analysis and the financial statements of the Fund and A&W Food Services for the third quarter will be available on www.sedar.com and www.awincomefund.ca on or before October 21, 2016.   

About the Fund
The Fund is a limited purpose trust established to invest in Trade Marks, which through its interest in A&W Trade Marks Limited Partnership (the Partnership), owns the A&W trade-marks used in the A&W quick service restaurant business in Canada.  The A&W trade-marks comprise some of the best-known brand names in the Canadian foodservice industry.  In return for licensing A&W Food Services to use its trade-marks, Trade Marks (through the Partnership) receives royalties equal to 3% of the sales of A&W restaurants in the Royalty Pool.  A&W is the second largest quick-service hamburger restaurant chain in Canada.  Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family®, Chubby Chicken® and A&W Root Beer®.

The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants, net of the sales of any A&W restaurants that have permanently closed.  Additional limited partnership units (LP units) are issued to A&W Food Services to reflect the annual adjustment.  A&W Food Services' additional LP units are exchanged for additional shares of Trade Marks which are exchangeable for units of the Fund.  A&W Food Services owns 21.0% of the common shares of Trade Marks, and therefore owns the equivalent of 21.0% of the units of the Fund on a fully-diluted basis.   

Trade Marks' dividends to A&W Food Services and the Fund, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks, and are thereby isolated from many of the factors that impact an operating business.

Follow A&W on Facebook (www.facebook.com/AWCanada) and Twitter @AWCanada or visit www.awincomefund.ca.

Certain statements in this press release may contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.  The forward-looking information is based on assumptions that management considered reasonable at the time it was prepared.  The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by the forward-looking information.  The factors which could cause results to differ from current expectations are described in the Fund's most recent Management Discussion and Analysis under the heading "Risks and Uncertainties" and the Fund's Annual Information Form under the heading "Risk Factors", available on SEDAR at www.sedar.com.   

SOURCE A&W Revenue Royalties Income Fund

For further information: Don Leslie, Chief Financial Officer, (604) 988-2141 or investorrelations@aw.ca

RELATED LINKS
www.awincomefund.ca

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