TRADING SYMBOL: TSX: AW.UN
VANCOUVER, BC, Feb. 17, 2021 /CNW/ -
Fourth Quarter 2020 Results
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, 2020. The Fund will hold a conference call to discuss the results on Wednesday, February 17, 2021 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time). The call can be accessed by dialling toll-free 1-800-430-8332 or (647) 792-1240 Passcode 1666175#. A replay will be available until February 24, 2021 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 1666175#.
Same Store Sales Growth was -9.3% for the fourth quarter of 2020 as compared to the fourth quarter of 2019. Annual Same Store Sales were –14.3%. The COVID-19 pandemic continued to adversely impact A&W restaurant operations across Canada, including the temporary closures of a number of restaurants. During the first wave of the pandemic, a total of 230 A&W restaurants (out of 971 restaurants in the Royalty Pool) were temporarily closed. For most of the second and fourth quarters, A&W restaurants which were operating were restricted to drive-thru operations, limited take-out, delivery and mobile ordering only. After seeing steady improvements in the third quarter, with a number of A&W restaurants permitted to re-open for limited dine-in sales, some provinces increased restrictions due to the resurgence of COVID-19 cases in the fourth quarter. As at December 31, 2020, 42 A&W restaurants in the Royalty Pool remained temporarily closed due to these increased restrictions. As at February 16, 2021, 30 restaurants remained temporarily closed. These temporarily closed A&W restaurants are expected to reopen when permitted to do so, however, there continues to be uncertainty related to COVID and its impact on our business. It is possible that there could be temporary further closures or that the number of restaurants closed increases again as the situation evolves in the next year.
"Our franchisees and their restaurant teams have worked diligently to enhance safety in their restaurants while providing great food and service to their guests", said Susan Senecal, President and CEO of A&W Food Services. "In addition to the top priority of guest and staff safety, we intend to stay focused on our natural ingredients, menu innovation, and continued new restaurant growth, which we believe will help us to rebound from the impacts of COVID-19."
Food Services deferred royalty payments totaling $7,448,000 payable to the Fund for gross sales reported by restaurants in the Royalty Pool for the period of February 24, 2020 to May 17, 2020. In July, Food Services resumed regular royalty payments to the Fund, commencing with the royalty payment in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period beginning May 18, 2020, which was paid in full on July 10, 2020. On December 3, 2020, Food Services paid the deferred royalty payments in full plus accrued interest to the Fund.
In March, the Fund temporarily suspended monthly distributions on the units; accordingly no distributions were declared by the Fund for the months of March, April and May 2020. The Trustees had determined that temporarily suspending distributions to unitholders was the most prudent course of action at that time until business conditions and sales trends became less uncertain. Regular monthly distributions to unitholders resumed in the third quarter of 2020, commencing with the June distribution of 10¢ per unit that was paid on July 31, 2020. The Fund also declared and paid two Special distributions to unitholders in the fourth quarter of 2020 totaling 50¢ per unit. The Trustees determined to recommence monthly distributions to unitholders in the third quarter on the basis of the improvement in the performance of A&W restaurants in the Royalty Pool and the resumption of royalty payments by Food Services. The Trustees also declared two Special distributions in the fourth quarter, reflecting the payment of deferred royalties to the Fund by Food Services and the accumulation of cash by the Fund. In making both of these decisions, the Trustees considered the amount of the cumulative surplus of the Fund, reviewed financial and other information regarding the performance of Food Services and the A&W restaurants in the Royalty Pool, and financial projections for the Fund and Food Services for the remainder of 2020 and obtained advice from their independent financial advisors and legal counsel.
The Fund is pleased to announce that it is increasing the monthly cash distributions by 3.5¢ per unit from 10.0¢ per unit to 13.5¢ per unit beginning with the February 2021 distribution payable in March.
On an annualized basis this new monthly amount represents a distribution rate of $1.62 per unit and is consistent with the total annual amount of $1.618 in distributable cash per unit generated in 2020. The February distribution of 13.5¢ per unit will be payable to unitholders of record on March 15, 2021 and will be paid on March 31, 2021.
(dollars in thousands except per unit amounts)
Sep 7, 2020 to
Sep 9, 2019 to
Jan 1, 2019 to
Same Store Sales Growth(1)
Number of restaurants in the Royalty Pool
Gross sales reported by A&W restaurants in the Royalty Pool(2)
General and administrative expenses
Term loan and other interest (net)
Current income tax provision
Total distributable cash generated for distributions and dividends(3)
Distributable cash per equivalent unit (2020 – 18,551,185 units; 2019 – 17,791,555 units)(3)(4)
Distributions and dividends declared per equivalent unit
Net income excluding non-cash items(5)
"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 or were temporarily closed at any point due to COVID-19, during the entire 26 4-week periods ending December 27, 2020, 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".
"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.
"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.
The number of equivalent units and distributable cash per equivalent unit in 2020 are calculated on a fully-diluted basis and include the 147,772 LP units (as hereinafter defined) exchanged for 295,544 common shares of Trade Marks representing the final consideration paid in December 2020 for the January 5, 2020 adjustment to the Royalty Pool. The number of equivalent units and distributable cash per equivalent unit in 2019 are calculated on a fully-diluted basis and include the 289,279 LP units exchanged for 578,558 common shares of Trade Marks representing the final consideration paid in December 2019 for the January 5, 2019 adjustment to the Royalty Pool.
Net income in 2020 and 2019 includes unrealized 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 fourth quarter of 2020 was $13,350,000 based on gross sales reported by restaurants in the Royalty Pool of $444,977,000, compared to royalty income of $13,539,000 and gross sales reported by A&W restaurants in the Royalty Pool of $451,279,000 for the fourth quarter of 2019. Annual royalty income for 2020 was $40,422,000 based on gross sales reported by restaurants in the Royalty Pool of $1,347,387,000 compared to royalty income of $44,470,000 and gross sales reported by A&W restaurants in the Royalty Pool of $1,482,323,000 for 2019. The decrease in royalty income and gross sales for the quarter and year is due to the decline in Same Store Sales as a result of the impact of COVID-19.
General and administrative expenses for the fourth quarter of 2020 increased by $121,000 to $463,000 compared to $342,000 for the fourth quarter of 2019. Annual general and administrative expenses for 2020 increased by $203,000 to $994,000 compared to $791,000 for 2019. The increase in general and administrative expenses resulted from higher professional services costs due to COVID-19 and additional fees payable to the trustees of the Fund and independent directors of Trade Marks for their increased meetings in dealing with discussions and agreements with Food Services relating in part to the deferral of the royalties payable to the Fund.
Net interest on the term loan and other interest was $681,000 for the fourth quarter of 2020, $136,000 higher compared to the fourth quarter of 2019. Annual net interest expense was $2,177,000, $90,000 lower than 2019. An interest rate swap agreement is used to manage risks from fluctuations in interest rates and facilitate uniform monthly distributions when paid. Net interest expense is net of interest income of $184,000 paid to the Fund by Food Services on the previously deferred royalties which were paid in full to the Fund in the fourth quarter of 2020.
Current income taxes payable increased by $356,000 for the quarter and increased by $1,027,000 for the year. Total income tax including current tax, non-cash deferred income tax and refundable income tax decreased by $1,167,000 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 equivalent unit", "total distributions and dividends declared and accrued per equivalent unit" and "payout ratio" are reported to provide investors with more meaningful information. The payout ratio is calculated by dividing total distributions and dividends declared and accrued per equivalent unit, by the distributable cash per equivalent unit generated in that period.
The Fund's net income for the fourth quarter of 2020 was $11,194,000 compared to $10,725,000 for the fourth quarter of 2019. 2020 annual net income was $28,374,000 compared to $32,558,000 for 2019. The $4,184,000 decrease in annual net income was a result of the $4,048,000 decrease in royalty income, $1,189,000 increase in the unrealized loss on the interest rate swap, $203,000 increase in general and administrative expenses, less the $1,167,000 decrease in total income tax expense, $90,000 decrease in net interest expense and a small increase in amortization of financing fees.
Distributable cash generated in the fourth quarter of 2020 to pay distributions to unitholders and dividends to Food Services was $9,408,000 compared to $10,210,000 in the fourth quarter of 2019. Distributable cash generated in 2020 to pay distributions to unitholders and dividends to Food Services was $30,009,000 compared to $33,143,000 in 2019. The $3,134,000 annual decrease in distributable cash was attributable to the $4,048,000 decrease in royalty income and $203,000 increase in general and administrative expenses, partially offset by the $1,027,000 decrease in the current income tax provision (excluding refundable income tax) and $90,000 decrease in net interest expense.
Distributable cash per equivalent unit decreased by 6.6¢ to 50.8¢ per unit in the fourth quarter of 2020 from 57.4¢ per unit for the fourth quarter of 2019. Annual distributable cash per equivalent unit decreased by 24.5¢ to $1.618 per unit for 2020 from $1.863 per unit for 2019. The decrease in distributable cash per equivalent unit was attributable to the decrease in royalty income and increase in general and administrative expenses, partially offset by the decrease in current income taxes and net interest expense.
Nine monthly distributions totaling $1.018 per unit were declared in 2020 compared to twelve monthly distributions totaling $1.853 per unit in the comparable period in 2019. No monthly distributions were declared in the second quarter of 2020 as the Trustees had previously temporarily suspended monthly distributions on the units commencing with the March distribution that would ordinarily have been declared in April 2020. The Trustees approved the resumption of regular monthly distributions to unitholders commencing with the June distribution of 10¢ per unit that was paid on July 31, 2020. The Trustees declared and paid two Special distributions totaling 50¢ per unit in the fourth quarter of 2020. Total monthly distributions and Special distributions declared in 2020 were $1.518 per unit.
The annual payout ratio for 2020 was 93.8% compared to 99.5% for 2019. The cumulative surplus of distributable cash on reserve at the end of 2020 was $8,967,000, compared to a reserve of $7,429,000 at the beginning of the year, an increase of $1,538,000.
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. The 19th annual adjustment to the Royalty Pool took place on January 5, 2021 at which time the number of restaurants in the Royalty Pool increased from 971 to 994.
As at December 31, 2020, A&W Food Services owned 24.2% of the common shares of Trade Marks, and therefore owned the equivalent of 24.2% of the units of the Fund on a fully-diluted basis. Following the adjustment to the Royalty Pool that took place on January 5, 2021, A&W Food Services owns 26.0% of the common shares of Trade Marks, and therefore owns the equivalent of 26.0% 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.
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®.
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", "total distributions and dividends declared and accrued 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 Results" 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 the fourth quarter ended December 31, 2020, which will be filed on SEDAR at www.sedar.com in due course.
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 expectation that currently closed A&W restaurants will reopen when able to do so; the expectation that the increased monthly rate of cash distributions to unitholders will be maintained; the impact of the COVID-19 pandemic ("COVID-19"), including its impact on store closures, on the global economy in general and on the businesses of A&W Food Services and the A&W franchisees in particular; and A&W Food Services' belief that its natural ingredients, menu innovation, and continued new restaurant growth, will help it to rebound from the impacts of COVID-19. 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 continue to improve; the Fund will receive sufficient revenue in the future (in the form of royalty payments from A&W Food Services) to maintain monthly distributions; the projections for the A&W business and the Fund provided by A&W Food Services are accurate; no material changes will occur in the quick service restaurant burger market including as a result of changes in consumer taste or health concerns or changes in economic conditions or unemployment, the COVID-19 pandemic or a disease outbreak; 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, all of which have negatively impacted 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, and financial condition; 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' projections may be inaccurate, and do not represent a financial forecast and actual results may differ materially from those anticipated by the projections; monthly distributions are not guaranteed and may be reduced, suspended or terminated at any time; the current sales improvement trends of the A&W restaurants in the Royalty Pool may not continue and may slow or regress; certain A&W restaurants that are currently temporarily closed may not reopen; government restrictions related to COVID-19 may have their durations extended, or may be reinstated, in the case of those that have recently been lifted, which measures may 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 and may be terminated at any time, and following the termination of such programs, or the reduction of amounts available under such programs, franchisees currently receiving support under those programs may need to find alternative sources of financial support and may make requests for such support from, among other parties, A&W Food Services. 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 represents 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