A&W Revenue Royalties Income Fund Announces Fourth Quarter 2017 Results

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

HIGHLIGHTS

• Another strong quarter with same store sales up +3.1%
• Royalty income increased by 6% for the quarter
• Net income increased by 18% for 2017
• Distributable cash increased 7% year over year

VANCOUVER, Feb. 13, 2018 /CNW/ - 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 fourth quarter and year ended December 31, 2017.  The Fund will hold a conference call to discuss the results on Tuesday, February 13, 2018 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-800-263-0877 or [phone] Passcode 9460268.  A replay will be available until February 20, 2018, by dialling toll-free 1-888-203-1112 or [phone] Passcode 9460268. 

A&W reported strong same store sales growth of +3.1% for the fourth quarter of 2017, continuing the momentum from the previous two quarters, driven by a combination of successful marketing programs, the launch of natural A&W Root Beer and guest experience improvements. 

Annual royalty income for 2017 increased by 4.5% to $35,665,000 based on sales of $1,188,818,000.  The increase in sales and royalty income was due to the same store sales growth and the increase in the number of restaurants in the Royalty Pool on January 5, 2017 from 838 to 861.  Distributable cash increased by 4.1% and distributable cash per unit increased from $1.577 per unit to $1.641 per unit.  

"We are encouraged by the positive sales performance, despite the continuing challenge for the food service market, and the continued success of both our "better ingredients" strategy and our marketing programs.  We are also delighted with our expansion program - 45 new locations were opened in 2017, bringing the total number of restaurants to 918 at the end of the year," said Paul Hollands, Chairman and CEO of A&W Food Services.  "A&W is committed to being a leader in Canadian food service.  In the fourth quarter, A&W Food Services was proud to announce a substantial investment in the Canadian beef industry with a $5 million donation toward the University of Saskatchewan's Livestock and Forage Centre of Excellence - an investment that will be used to develop new approaches for healthy, sustainable agricultural practices. This cost is not borne by the Fund."

FINANCIAL HIGHLIGHTS

(dollars in thousands except per unit amounts)	Period from Sep 11, 2017 to Dec 31, 2017	Period from Sep 12, 2016 to Dec 31, 2016	Period from Jan 1, 2017 to Dec 31, 2017	Period from Jan 1, 2016 to Dec 31, 2016
Same store sales growth^(1)	+3.1%	+1.7%	+2.0%	+3.4%
Number of restaurants in the Royalty Pool	861	838	861	838
Sales reported by the restaurants in the Royalty Pool	$372,679	$351,494	$1,188,818	$1,137,830
Royalty income	$11,181	$10,545	$35,665	$34,135
General and administrative expenses	228	214	652	586
Net third party interest expense	789	781	2,583	2,574
Current income tax provision	1,879	1,982	5,985	6,500
Total distributable cash generated for distributions and dividends^(2)	$8,119	$7,568	$26,279	$24,475
Distributable cash per equivalent unit (2017 – 16,015,023 units; 2016 – 15,517,988 units)^(2)(3)	$0.507	$0.488	$1.641	$1.577
Distributions and dividends declared per equivalent unit	$0.541	$0.532	$1.605	$1.558
Net income^(4)	$8,160	$8,973	$28,220	$23,916
Net income, excluding non-cash items^(4)	$8,430	$7,205	$26,816	$22,446

^(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 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 does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  This information is provided as it identifies the amount of actual cash available to pay distributions to unitholders and dividends to Food Services.
^(3)	The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 150,665 LP units (as hereinafter defined) exchanged for 301,330 common shares of Trade Marks representing the final consideration paid in December 2017 for the January 5, 2017 adjustment to the Royalty Pool.  The number of equivalent units and distributable cash per equivalent unit in 2016 includes the 157,774 LP units exchanged for 315,548 common shares of Trade Marks representing the final consideration paid in December 2016 for the January 5, 2016 adjustment to the Royalty Pool.
^(4)	Net income in 2017 and 2016 includes non-cash 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 fourth quarter of 2017 was $11,181,000 based on sales of $372,679,000.  This was an increase of 6.0% from royalty income of $10,545,000 and sales of $351,494,000 for the fourth quarter of 2016.  There were 112 days of sales in the fourth quarter of 2017 as compared to 111 days in the same quarter of 2016.  Annual royalty income for 2017 was $35,665,000 based on sales of $1,188,818,000, an increase of 4.5% from royalty income of $34,135,000 and sales of $1,137,830,000 for 2016.  The increase in sales and royalty income was due to the combined impact of the additional net 23 new restaurants in the Royalty Pool and the same store sales growth of 3.1% for the quarter and 2.0% for the full year 2017 as compared to 2016.

Combined general and administrative expenses and interest increased by $22,000 in the quarter and $75,000 for the year.  Interest expense did not change significantly in 2017 year to date as compared to 2016.  General and administrative expenses were higher due to increased filing and professional fees. 

Distributable cash generated in the fourth quarter of 2017 to pay distributions to unitholders and dividends to Food Services was $8,119,000 compared to $7,568,000 in the fourth quarter of 2016.  Distributable cash generated per equivalent unit increased by 1.9¢ to 50.7¢ per unit in the fourth quarter of 2017 from 48.8¢ for the fourth quarter of 2016.  There were 112 days of sales in the fourth quarter of 2017 as compared to 111 days in the same quarter of 2016.

Distributable cash generated in 2017 was $26,279,000 compared to $24,475,000 in 2016.  The $1,804,000 annual increase in distributable cash was comprised of the $1,530,000 increase in royalty income, less the $241,000 increase in combined general and administrative, financing fees and interest expenses and a $515,000 decrease in the current income tax provision (excluding refundable income tax).  Distributable cash generated per equivalent unit increased by 6.4¢ to $1.641 per unit in 2017 from $1.577 for 2016. 

Four monthly distributions totalling 54.1¢ per unit were declared in the fourth quarter of 2017 compared to 53.2¢ per unit in the same quarter of 2016.  Total distributions declared in 2017 were $1.605 per unit compared to $1.558 per unit in 2016, an increase of 3.0%.  The annual payout ratio for 2017 was 97.8% compared to 98.8% for 2016.    

The cumulative surplus of distributable cash at the end of 2017 was $3,363,000, compared to a cumulative surplus of $2,417,000 at the beginning of the year, an increase of $946,000. 

As a result of the performance of the Fund and the underlying A&W restaurants in the Royalty Pool, the Fund increased the monthly cash distributions by 2.3% from 13.3¢ per unit to 13.6¢ per unit beginning with the November 2017 distribution.  The current monthly distribution rate of 13.6¢ per unit represents an annualized distribution rate of $1.632 per unit, an increase of 2.3% from the 2016 annualized rate of $1.596 per unit.  The Fund will continue to periodically review distribution levels and distribute available cash in order to maximize returns to unitholders and maintain uniformity of distributions.

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.  The 16^th annual adjustment to the Royalty Pool took place on January 5, 2018 at which time the number of restaurants in the Royalty Pool increased from 861 to 896. 

A&W Food Services owns 24.7% of the common shares of Trade Marks, and therefore owns the equivalent of 24.7% 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.

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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

Don Leslie, Chief Financial Officer: [phone] or [email protected]