A&W Revenue Royalties Income Fund Announces First Quarter 2020 Results
TRADING SYMBOL: TSX: AW.UN
VANCOUVER, April 29, 2020 /CNW/ -
- Same Store Sales Growth -4.0% in first quarter
- COVID-19 has had immediate impact on A&W restaurant sales
- Distributions on Units are temporarily suspended
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 first quarter ended March 22, 2020. The Fund will hold a conference call to discuss the results on Wednesday, April 29, 2020 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time). The call can be accessed by dialling toll-free 1-888-394-8218 or (647) 484-0475 Passcode 3800056#. A replay will be available until May 6, 2020 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 3800056#.
Same Store Sales Growth was -4.0% for the first quarter of 2020 as compared to the first quarter of 2019. Same Store Sales Growth for January and February was positive, however starting March 13, 2020, COVID-19 began to have an immediate effect on A&W restaurant sales. Approximately 200 restaurants primarily in shopping centre food courts and street front locations are currently temporarily closed and sales at remaining open restaurants are restricted to drive thru, delivery and mobile ordering. As a result, starting March 13, 2020, total sales of A&W restaurants in the Royalty Pool are approximately 42% of sales prior to March 13, 2020, including the impact of closed restaurants.
The -4.0% decline in Same Store Sales was partially offset by the sales from 37 net new restaurants that were added to the Fund's Royalty Pool on January 5, 2020, resulting in a 0.1% decrease in gross sales reported by A&W restaurants in the Royalty Pool and royalty income for the quarter.
"I am pleased with the significant measures we have taken in our restaurants and broader operations to protect the health of employees and guests during this period of unprecedented uncertainty caused by COVID-19," said Susan Senecal, President and CEO of A&W Food Services. "Together with our franchisees, we are working diligently to develop and implement plans and programs which I am confident will not only mitigate the effects of this pandemic but also ensure the long-term success of A&W Food Services and its franchisees, which drives the success of the Fund."
To enable A&W Food Services to continue to support the A&W system through this challenging period, A&W Food Services has taken action to bolster its liquidity, including an equity injection of $10 million by A&W Food Services' shareholders (as previously announced by A&W Food Services on April 14, 2020), as well as a planned increase in A&W Food Services' credit facility from $6 million to $25 million, in respect of which A&W Food Services has received a term sheet from its senior lender. This credit facility is secured solely by A&W Food Services' indirect interest in the Fund, as permitted under the existing agreements between A&W Food Services and the Fund. The completion of the increase in A&W Food Services' credit facility remains subject to completion of definitive agreements and other customary conditions for transactions of this nature.
Given the extraordinary level of business uncertainty, especially related to the restaurant industry, coupled with the immediate decline in A&W restaurant sales and therefore the royalty payable to the Fund by A&W Food Services, the Trustees announced on March 31, 2020 that monthly distributions on the Units would be temporarily suspended commencing with the distribution that would ordinarily have been declared in April 2020 and been payable on or about April 30, 2020 to unitholders of record on or about April 15, 2020. The Trustees have determined that temporarily suspending distributions to unitholders is the most prudent course of action until business conditions and sales trends become less uncertain. They have done so mindful of the long-term interests of the Fund, recognizing that it is in the long-term interest of unitholders to have a healthy and stable network of A&W restaurants coming out of the COVID-19 crisis.
As announced on April 19, 2020, A&W Food Services has delayed the royalty payment of $2,890,000 payable to the Fund on April 17, 2020 for system sales for the last royalty payment period in Q1 2020 and has informed the Fund that it expects to defer payment of royalty payments for Q2 2020. As contemplated in the agreement governing the royalty, late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. A&W Food Services has not requested a waiver from its obligation to make royalty and interest payments, nor has the Fund provided any waiver of these obligations. The Fund has reserved all rights under its agreements with A&W Food Services.
The Trustees are continuing to closely monitor the results of operations and outlook of A&W Food Services and the A&W system with the intention to preserve unitholder value by restarting distributions in a prudent manner based upon A&W restaurant sales that permit distributions to be paid in amounts that are reasonably predictable.
A&W Food Services has provided the Fund with extensive financial information and projections. The Trustees have retained independent financial and legal advisors who have examined the business performance and the projections in detail. The financial projections prepared by A&W Food Services and reviewed by the Fund's independent financial advisors show that the deferred royalties are expected to be paid in full, with interest, by December 31, 2021, if not earlier. The Fund is currently, and based upon the projections, expects to remain, in compliance with all covenants related to its term loan.
In order to assist the Trustees in their ongoing monitoring the A&W business, A&W Food Services has agreed to provide the Trustees and their independent legal and financial advisors with timely pertinent financial and other information.
FINANCIAL RESULTS
(dollars in thousands except per unit |
Period from |
Period from Jan |
|
Same Store Sales Growth(1) |
-4.0% |
+10.0% |
|
Number of restaurants in the Royalty |
|||
Pool |
971 |
934 |
|
Gross sales reported by A&W |
|||
restaurants in the Royalty Pool(2) |
$308,679 |
$308,823 |
|
Royalty income(3) |
$9,260 |
$9,265 |
|
General and administrative expenses |
193 |
281 |
|
Term loan and other interest expense |
509 |
572 |
|
Current income tax provision |
1,030 |
1,705 |
|
Total distributable cash generated for |
|||
distributions and dividends(4) |
$7,528 |
$6,707 |
|
Distributable cash per equivalent unit |
|||
(2020 – 18,403,413 units; 2019 – |
|||
17,659,154 units)(4)(5) |
$0.409 |
$0.380 |
|
Distributions and dividends declared |
|||
per equivalent unit |
$0.318 |
$0.290 |
|
Total distributions and dividends |
|||
declared and accrued per unit |
$0.427 |
$0.400 |
|
Net income(6) |
$5,548 |
$5,666 |
|
Net income, excluding non-cash |
|||
items(6) |
$7,705 |
$6,297 |
(1) |
"Same Store Sales Growth" is calculated as the change in the gross sales reported by A&W restaurants for which the royalty is payable (the Royalty Pool) that operated during the entire 12-week periods ending March 22, 2020 and March 24, 2019, and is based on an equal number of days in each quarter and year. "Same Store Sales Growth" is a non-IFRS measure – see "Non-IFRS Measures". |
(2) |
"Gross sales reported by A&W restaurants in the Royalty Pool" is calculated in respect of A&W restaurants in Canada in the Royalty Pool, as the amount of gross sales reported to A&W Food Services by franchisees of such A&W restaurants in the Royalty Pool without audit, verification or other form of independent assurance and the gross sales of A&W restaurants owned and operated by A&W Food Services in the Royalty Pool, in each case, after deducting amounts for discounts for coupons and other promotional offerings and applicable sales taxes. |
(3) |
Royalty income for Q1 2020 includes a receivable of $2,890,000 from Food Services for the royalty payable in respect of the gross sales reported by restaurants in the Royalty Pool for the period February 24, 2020 to March 22, 2020. Due to the impact of COVID-19, Food Services has delayed this royalty payment which was payable to the Fund on April 17, 2020. Interest accrues on unpaid royalties in accordance with the Amended and Restated Licence and Royalty Agreement. |
(4) |
"Distributable cash" and "distributable cash per equivalent unit" are non-IFRS measures – see "Non-IFRS Measures". This information is provided as it identifies the amount of actual cash generated to pay distributions to unitholders and dividends to A&W Food Services. |
(5) |
The number of equivalent units and distributable cash per equivalent unit in 2020 is calculated on a fully-diluted basis but does not include any LP units (as hereinafter defined) in respect of the remaining consideration for the January 5, 2020 adjustment to the Royalty Pool, which LP units, if any, are held back until the number of LP units is determined in December 2020 based on the actual annual sales reported by the new restaurants. The number of equivalent units and distributable cash per equivalent unit in 2019 is calculated on a fully-diluted basis and includes the 156,878 LP units exchanged for for 313,756 common shares of Trade Marks representing the remaining 20% of the initial consideration paid in December 2019 for the January 5, 2019 adjustment to the Royalty Pool, but does not include the 132,401 LP units exchanged for 264,802 common shares of Trade Marks representing the additional consideration paid in December 2019 based on the actual system sales for the A&W Restaurants added to the Royalty Pool as part of the January 5, 2019 adjustment to the Royalty Pool. |
(6) |
Net income in 2020 and 2019 includes non-cash gains and losses on an interest rate swap, 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" is a non-IFRS measure – see "Non-IFRS Measures". |
Royalty income for the first quarter of 2020 was $9,260,000 based on gross sales reported by restaurants in the Royalty Pool of $308,679,000. This was a decrease of 0.1% from royalty income of $9,265,000 and gross sales reported by A&W restaurants in the Royalty Pool of $308,823,000 for the first quarter of 2019. Royalty income for the first quarter of 2020 includes a receivable of $2,890,000 from Food Services for the royalty payable in respect of the gross sales reported by restaurants in the Royalty Pool for the period February 24, 2020 to March 22, 2020. Due to the impact of COVID-19, Food Services has delayed this royalty payment which was payable to the Fund on April 17, 2020. Interest accrues on unpaid royalties in accordance with the Amended and Restated Licence and Royalty Agreement.
General and administrative expenses decreased by $88,000 in the quarter due to timing of expenses, and net interest expense decreased by $63,000 due to a lower effective interest rate on the term loan. Current income taxes payable decreased by $675,000 for the quarter. Total income tax including current tax, non-cash deferred income tax and refundable income tax decreased by $764,000 in the quarter.
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 equivalent unit" and "payout ratio" are reported to provide investors with more meaningful information. The payout ratio is calculated by dividing the total of (i) distributions declared per unit plus (ii) accrued distributions per unit to the last day of the quarter or year, as applicable, by the distributable cash per equivalent unit generated in that period.
The Fund's net income for the first quarter of 2020 was $5,548,000 compared to $5,666,000 for the first quarter of 2019. The $118,000 decrease in net income was primarily a result of a $5,000 decrease in royalty income, offset by the $151,000 total decrease in general and administrative expenses and interest expense, the $764,000 decrease in total income tax, less a $1,028,000 increase in the non-cash loss on the interest rate swap as compared to the first quarter of 2019.
Distributable cash generated in the first quarter of 2020 to pay distributions to unitholders and dividends to Food Services was $7,528,000 compared to $6,707,000 in the first quarter of 2019. The $821,000 increase in distributable cash was attributable to the $151,000 decrease in general and administrative expenses and interest expense, and $675,000 decrease in the current income tax provision (excluding refundable income tax), less the $5,000 decrease in royalty income. Distributable cash per equivalent unit increased by 2.9¢ to 40.9¢ per unit in the first quarter of 2020 from 38.0¢ per unit for the first quarter of 2019.
Two monthly distributions totaling 31.8¢ per unit were declared in the first quarter of 2020 compared to 29.0¢ per unit in the same quarter of 2019. Total distributions declared and accrued for the quarter were 42.7¢ per unit compared to 40.0¢ for the first quarter of 2019. The payout ratio for the quarter was 104.4% compared to 105.3% for the same quarter of 2019.
The cumulative surplus of distributable cash on reserve at the end of the first quarter of 2020 was $7,929,000, compared to a reserve of $8,091,000 at the beginning of the year, a decrease of $162,000.
As noted above, the Trustees announced on March 31, 2020, that distributions on the units of the Fund would be temporarily suspended commencing with the distribution that would ordinarily have been declared in April 2020 and been payable on or about April 30, 2020 to unitholders of record on or about April 15, 2020.
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) is entitled to royalties equal to 3% of the gross sales reported by A&W restaurants in the Royalty Pool.
The Royalty Pool is adjusted annually to reflect gross sales from new A&W restaurants, net of the gross 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.
As at March 22, 2020 and April 29, 2020, A&W Food Services owned 23.6% of the common shares of Trade Marks, and therefore owned the equivalent of 23.6% 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.
ABOUT A&W FOOD SERVICES
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®.
CONTACT
Follow A&W on Facebook (www.facebook.com/AWCanada) and Twitter @AWCanada or visit www.awincomefund.ca.
NON-IFRS MEASURES
The Fund believes that disclosing certain non-IFRS financial measures provides readers of this news release with important information regarding the Fund's financial performance and its ability to pay distributions to Unitholders. By considering these measures in combination with the most closely comparable IFRS measure, if any, the Fund believes that readers are provided with additional and more useful information about the Fund than readers would have if they simply considered IFRS measures alone.
The Fund uses "Same Store Sales Growth", "distributable cash", "distributable cash per equivalent unit", "payout ratio" and "net income, excluding non-cash items" as non-IFRS measures in this news release. These measures do not have a standardized meaning prescribed by IFRS and the Fund's method of calculating these measures may differ from those of other issuers or companies and may not be comparable to similar measures used by other issuers or companies. For further details, including how such measures are calculated by the Fund see "Financial Highlights" above and for reconciliations of certain of these non-IFRS measures to the most closely comparable IFRS measure, see the Fund's MD&A for first quarter ended March 22, 2020, which will be filed on SEDAR at www.sedar.com in due course.
Forward-Looking Information
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. Specific forward-looking statements include statements with respect to: the expected amount and terms of the increase to AW& Food Services' credit facility, and the completion of such facility remaining subject to definitive legal documentation and other conditions customary for transactions of this nature; A&W Food Services' expectation that it will defer royalty payments during the second quarter of 2020; A&W Food Services' financial projections show that the deferred royalties are expected to be paid in full, with interest, by December 31, 2021, if not earlier; A&W Food Services' working diligently with its franchisees to develop and implement plans and programs which A&W Food Services is confident will not only mitigate the effects of the COVID-19 pandemic, but also ensure the long-term success of A&W Food Services and its Franchisees, which drives the success of the Fund; the temporary suspension of the Fund's monthly distribution and the reasons for such temporary suspension; the Trustees will continue to monitor the results of operations and future prospects of A&W Food Services and the A&W system with the intention to preserve unitholder value by restarting distributions in a prudent manner based upon A&W restaurant sales that permit distributions to be paid in amounts that are reasonably predictable; the expectation that the Fund will remain in compliance with all covenants related to its term debt based on current projections; and the ongoing monitoring by the Trustees of the A&W business and A&W Food Services in consultation with their independent legal and financial advisors. The forward-looking information is based on assumptions that management considered reasonable at the time it was prepared, which assumptions include: current store closures will be temporary and restaurant performance will recover post COVID-19; the Fund will receive sufficient revenue in the future (in the form of royalty payments from A&W Food Services) to recommence the payment of monthly distributions; the projections for the A&W business provided by A&W Food Services are accurate and any overdue royalties will be repaid in full, with interest, by December 31, 2021, and the Fund will remain in compliance with all covenants related to its term debt; A&W Food Services will be successful in completing the increase in its Credit Facility in the amount and on the terms currently contemplated; and the impacts of the COVID-19 pandemic on the A&W system will not significantly worsen. 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. Those risks and uncertainties include, among other things, risks related to: the impacts of the COVID-19 pandemic on the Canadian economy, the QSR industry, the willingness of the general public to dine outside their homes and travel, the level of consumer confidence in the safety of QSR restaurants and A&W restaurants, all of which have and are expected to continue to negatively impact A&W Food Services and the Fund and have or may, as applicable, adversely affect each of A&W Food Services', their franchisees' and the Fund's respective investments, results of operations, financial condition, ability to obtain additional equity or debt financing, or re-finance existing debt, or make interest and principal payments to their respective lenders, and otherwise satisfy their respective financial obligations as they become due and may cause each of A&W Food Services, their franchisees and the Fund to be in non-compliance with one or more of the financial covenants under their respective existing credit facilities and cause a default thereunder; A&W Food Services may become liable for the lease obligations of certain of its franchisees, if such franchisees default on their leases, and such obligations may be significant and A&W Food Services may be unsuccessful in seeking recovery from such franchisees, all of which may adversely affect A&W Food Services' investments, results of operations and financial condition; A&W Food Services may not complete the increase of its credit facility, and if completed, it may not be completed in the amount or on the terms currently expected; there is no guarantee that A&W Food Services will repay any delayed royalty payments, and interest thereon, in accordance with the currently expected timing, or at all, or that further royalty payments will not be delayed; A&W Food Services' projections may be inaccurate, and do not represent a financial forecast and actual results may differ materially from those anticipated by the projections; the Fund may not remain in compliance with all covenants related to its term loan; there is no guarantee that the Fund would be successful in taking action to enforce any of its rights under its agreements with A&W Food Services in respect of any the delayed royalty payments, and such actions, if taken, may cause other material adverse effects to the Fund and A&W Food Services to occur; there is no guarantee that A&W Food Services will meet its objectives, or that its strategies to meet its objectives will be successful; there is no guarantee that monthly distributions will be reinstated, and if reinstated, as to the timing thereof or what the amount of the monthly distribution will be; the temporary suspension of monthly distributions is expected to negatively impact the market price of the Units; the pace of recovery following the COVID-19 pandemic cannot be accurately predicted and may be slow; certain A&W restaurants that are currently temporarily closed may not reopen; further government restrictions related to COVID-19 may be imposed, which restrict the ability of A&W restaurants to operate, or result in forced closures, further reduced guest traffic, supply interruptions or staff shortages; and, government programs expected to be helpful to A&W Franchisees may not be available to some franchisees, and may not be available in amounts expected for those franchisees for which such programs are available. Additional 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. The forward-looking information contained in this news release represent The Fund's expectations as of the date of this news release, and are subject to change after this date. The Fund assumes no obligation to update or revise any forward-looking information, except as required by applicable law.
SOURCE A&W Revenue Royalties Income Fund
For the Fund and A&W Food Services: Don Leslie, Chief Financial Officer: (604) 988-2141 or [email protected]
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