A&W Revenue Royalties Income Fund (Trading Symbol. TSX - AW.UN)

VANCOUVER, April 19, 2020 /CNW/ - A&W Revenue Royalties Income Fund (the "Fund") and A&W Food Services of Canada Inc. ("Food Services") are jointly providing a further update on the impact of the COVID-19 pandemic on A&W restaurant operations as well as Food Services' immediate actions to support the A&W franchisees and the decisions taken by the Trustees of the Fund. 

Highlights:

• Since March 13, 2020:
• the impact of the COVID-19 pandemic on the economy and particularly, the restaurant business, has been sudden, unexpected and unprecedented,
• approximately 220 A&W restaurants are temporarily closed, primarily located in malls or street front locations, and
• total system sales by A&W restaurants are approximately 50% of sales prior to then, including the impact of restaurant closures.
• To assist its independent franchise restaurants A&W has deferred certain service fees and provided significant other assistance.
• Further, Food Services has determined that in order to support the entire A&W system (including franchised restaurants and the supply chain) significant additional liquidity is required to position the business for strong growth when the impact from the current pandemic abates.
• On April 14, 2020, Food Services announced a $10 million equity investment by its shareholders as part of its overall strategy to increase its liquidity to support the entire A&W system.
• Food Services has received a term sheet from its senior lender to increase its credit facility from $6 million to $25 million, secured solely by its indirect interest in the Fund, as permitted under the existing agreements between Food Services and the Fund.
• Food Services has delayed the payment of the royalties payable to the Fund that were due on April 17, 2020 for system sales for the last royalty payment period in Q1 2020 and expects to defer royalty payments during the second quarter of 2020. Interest accrues on unpaid royalties. 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.
• In response to these developments, the Trustees have retained independent financial advisors to evaluate Food Services' financial projections. Food Services' financial projections show that the deferred royalties are expected to be paid in full, with interest, by December 21, 2021, if not earlier.
• The Trustees have determined that ensuring the continuity of the A&W business, including the health of the operating independent franchise businesses, is critical to the long-term interests of the Fund. The Fund has reserved all rights under its agreements with Food Services. Food Services has agreed to provide the Fund with timely information regarding the A&W business, and the Trustees will monitor the A&W business closely as business trends and performance become clarified over the coming months.

Effect of COVID-19 on the A&W Business

The effects of COVID-19 on many businesses, especially restaurants, have been unexpected, sudden and unprecedented. Early estimates from industry data indicates foodservice sales in Canada have fallen by over 60%. The future effect of COVID -19 on the economy and businesses, in general, remains uncertain. The path that governments will follow in easing restrictions on business operations, and in particular restaurants, is yet to be determined and could last many months. It is also unclear how quickly consumer demand will resume. Various levels of government have announced a number of important programs which are expected to be helpful to the success of individual restaurant businesses, including A&W franchisees.

A&W and its franchised restaurant operators have taken significant measures in their restaurants to protect the health of employees and guests in compliance with social-distancing recommendations and requirements of applicable health authorities. This has dramatically impacted the A&W restaurants:

• In total approximately 220 restaurants are currently temporarily closed.
• Sales at remaining open restaurants are restricted to drive thru, delivery, and mobile ordering.
• As a result, starting March 13, 2020 total sales of restaurants in the Royalty Pool are approximately 50% of sales prior to March 13, 2020 (including the impact of closed restaurants).

Based on the experience of other restaurant brands in foreign markets, Food Services expects that the food service industry, and more particularly the QSR segment of the industry, will recover.  However, the timing and strength of the recovery cannot now be predicted with any degree of certainty.

Against this backdrop, the success of the A&W brand and individual franchised A&W restaurants are paramount to the long-term success of the overall A&W system and, in turn, to the Fund.

Actions taken by Food Services to protect and preserve the A&W Business

Both Food Services and the franchisees have been working diligently to develop and implement plans and programs to mitigate the effects of the COVID-19 pandemic. Food Services' objective is to ensure that as many as possible of A&W's 995 restaurants are able to operate (as permitted) during the COVID-19 pandemic and emerge from this period of uncertainty in financial condition that enables them to compete effectively and grow their businesses. From enhancing the appeal and trust of the A&W brand, to ensuring a safe and stable supply chain, to developing programs to ensure the safety of our franchisees, customers and employees, Food Services is committed to the long-term health and success of its franchise network.

To enable Food Services to continue to support the A&W system through this challenging period, Food Services has taken action to bolster its liquidity, including an equity injection of $10 million by Food Services' shareholders (as previously announced by Food Services on April 14, 2020), as well as a planned increase in Food Services' credit facility from $6 million to $25 million, in respect of which Food Services has received a term sheet from its senior lender. As noted above, this credit facility is secured solely by Food Services' indirect interest in the Fund, as permitted under the existing agreements between Food Services and the Fund. The completion of the increase in Food Services' credit facility remains subject to completion of definitive agreements and other customary conditions for transactions of this nature.

Already, these actions have enabled Food Services to assist its franchisees to deal with the unprecedented drop in sales with support on input costs, the deferral of service fees and other forms of direct assistance.  

Implications for the Fund and Unitholders

Modifications to the operations of A&W restaurants in response to COVID-19 as well as temporary restaurant closures have resulted, and are expected to continue to result, in material declines to system sales at A&W restaurants.  These declines will result in significant reductions to the amounts of royalties payable to the Fund, and, correspondingly, funds available to distribute to unitholders of the Fund.

Since the start of the sudden impact of the COVID-19 pandemic on the A&W business, the Trustees of the Fund have been in close and regular contact with the management of Food Services and are carefully monitoring the results of operations of the A&W system, including Food Services. The Trustees have retained independent financial and legal advisors to assist them in their review and analyses of the A&W system.  Food Services has provided the Trustees with financial projections that have been reviewed by the independent financial advisors, and the Trustees' deliberations and decisions have been guided by advice from legal counsel.

Given the extraordinary level of business uncertainty, especially related to the restaurant industry, coupled with the immediate decline in A&W restaurant sales, the Trustees announced on March 31, 2020 that distributions on the units of the Fund would be temporarily suspended.  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, which includes all stakeholders, including unitholders, 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. The Trustees will continue to closely monitor the results of operations and future prospects of 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.

Food Services has delayed the royalty payment of $2.9 million 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.  Food Services has not requested a waiver from its obligation to make royalty payments, nor has the Fund provided any waiver of these obligations. The Fund has reserved all rights under its agreements with Food Services.

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 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 debt.

In order to assist the Trustees in their ongoing monitoring the A&W business, Food Services has agreed to provide the Trustees and their independent legal and financial advisors with timely pertinent financial and other information.

Conclusion

"The A&W brand is one of the strongest in Canada and is well positioned to both rebound strongly and return to its record pace of growth.  All enterprises in Canada are navigating very difficult challenges as they seek to ensure the long-term health and success of those businesses, for all stakeholders." said Susan Senecal, President and CEO of Food Services.  "A&W has consistently been one of the fastest growing and best performing restaurant chains in Canada.  Food Services and our franchisees are working collaboratively to position the business for this kind of growth once the current pandemic crisis is resolved, whether in 3 months, 6 months or 24 months." 

ABOUT THE FUND

The Fund is a limited purpose trust established to invest in A&W Trade Marks Inc. (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.  In return for licensing 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 Food Services to reflect the annual adjustment.  Food Services' additional LP units are exchanged for additional shares of Trade Marks which are exchangeable for units of the Fund. 

As at April 19, 2020 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 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 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®

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

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 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; Food Services' expectation that it will defer royalty payments during the second quarter of 2020; 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; the path that governments will follow in easing restrictions on business operations is yet to be determined and could last many months; it is unclear how quickly consumer demand will resume; various government programs are expected to be helpful to the A&W franchisees; Food Services' expectation that the food service industry, and more particularly the QSR segment, will recover; the success of the A&W brand and individual franchised restaurants being paramount to the long-term success of the overall A&W system and, in turn, to the unitholders of the Fund; Food Services' objectives with respect to the A&W restaurants and its planned strategies to obtain those objectives; modifications to the operations of A&W restaurants as well as temporary restaurant closures may continue to result in material declines to system sales at A&W restaurants and in turn material reductions to the amounts of royalties payable to 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 prospectus of 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 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 Food Services) to recommence the payment of monthly distributions; the projections for the A&W business provided by 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; 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 Food Services and the Fund and have or may, as applicable, adversely affect each of 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 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; 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 Food Services may be unsuccessful in seeking recovery from such franchisees, all of which may adversely affect Food Services' investments, results of operations and financial condition; 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 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; Food Services' projections may be inaccurate, and do not represent a financial forecast and actual results to differ materially from those anticipated by the projections; the Fund may not remain in compliance with all covenants related to its term debt; there is no guarantee that the Fund would be successful in taking action to enforce any of its rights under its agreements with 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 Food Services to occur; there is no guarantee that 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.  

The Fund and Food Services typically only provide a business update during the normal quarterly reporting. Given these are not normal times, as Canadians continue to navigate this public health crisis, the Fund and Food Services have provided this information as the impact of the COVID-19 pandemic remains fluid and the Fund and Food Services are continuing to assess the impact COVID-19 has had and is expected to have on the A&W system.

SOURCE A&W Revenue Royalties Income Fund