TRADING SYMBOL: TSX: AW.UN
VANCOUVER, BC, May 5, 2021 /CNW/ -
FIRST QUARTER 2021 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 first quarter ended March 28, 2021. The Fund will hold a conference call to discuss the results on Wednesday, May 5, 2021 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time). The call can be accessed by dialling toll-free 1-800-367-2403 or (647) 490-5367 Passcode 9872106#. A replay will be available until May 12, 2021 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 9872106#.
Same Store Sales Growth(1) was -5.6% for the first quarter of 2021 as compared to the first quarter of 2020. In 2020, COVID-19 only impacted the last two weeks of the quarter, whereas in 2021, the impacts of COVID-19 were prevalent throughout the first quarter of the year. Since the second quarter of 2020, when COVID-19 impacts on A&W were at their peak and 230 of A&W's restaurants needed to be closed because of restrictions or other COVID-19 impacts, Same Store Sales Growth(i) has trended upwards.
Actions required in response to COVID-19 continue to adversely impact A&W restaurant operations across Canada, particularly for those restaurants located on urban street fronts and in shopping centres. Throughout the first quarter of 2021, there continued to be a number of A&W restaurants that were either temporarily closed or were not able to offer dine-in services due to government imposed COVID-19 restrictions. As at May 4, 2021, 45 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-19 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.
Gross sales reported by restaurants in the royalty pool (the Royalty Pool) were $310.7 million, a 0.7% increase from sales of $308.7 million for the first quarter of 2020. The increase is due to there being five additional sales days in the first quarter of 2021 as compared to the first quarter of 2020 and the gross sales from the net 23 new restaurants added to the Royalty Pool on January 5, 2021, partially offset by the decline in Same Store Sales(1) as a result of the impact of COVID-19. Same Store Sales Growth(1) is based on an equal number of days in each quarter.
"The health and safety of our guests and employees remains A&W's top priority", said Susan Senecal, President and CEO of A&W Food Services. "We also continue to work in partnership with our franchisees and their restaurant teams to ensure that A&W's mission "To become #1 with millennial burger lovers, chosen and trusted for truly good food and the convenience they crave" remains a strategic focus as we believe staying true to our mission will accelerate A&W's recovery from the impacts of COVID-19."
(dollars in thousands except per unit amounts)
Jan 1, 2020 to
Same Store Sales Growth(i)
Number of restaurants in the Royalty Pool
Gross sales reported by A&W restaurants in the Royalty Pool(ii)
General and administrative expenses
Term loan and other interest (net)
Current income tax provision
Total distributable cash generated for distributions and dividends(iii)
Distributable cash per equivalent unit (2021 – 19,132,830 units; 2020 – 18,556,378 units)(iii)(iv)
Distributions and dividends declared per equivalent unit
Net income excluding non-cash items(v)
"Same Store Sales" and "Same Store Sales Growth" are calculated as the change in the gross sales reported by A&W restaurants in the Royalty Pool (as defined below) that operated, or were temporarily closed at any point due to COVID-19, during the entire 12-week periods ending March 28, 2021 and March 22, 2020 and is based on an equal number of days in each quarter. "Same Store Sales" and "Same Store Sales Growth" are non-IFRS measures – see "Non-IFRS Measures". This important information is provided as it is a key driver of growth in the Fund. See "Sales Performance".
"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 defined below), as the amount of gross sales reported to 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 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", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit" and "payout ratio" 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 Food Services. See "Distributable Cash" and footnote (iv) below for more information, including a description of how these non-IFRS measures are calculated.
The number of equivalent units and distributable cash per equivalent unit in 2021 is calculated on a fully-diluted basis and includes the 116,329 LP units (as hereinafter defined) exchangeable for 232,658 common shares of Trade Marks representing the remaining 20% of the initial consideration for the January 5, 2021 adjustment to the Royalty Pool, which LP units are held back until the number of LP units is determined in December 2021 based on the actual annual sales reported by the new restaurants. See "Adjustment to the Royalty Pool". The number of equivalent units and distributable cash per equivalent unit in Q1 2020 is calculated on a fully-diluted basis and includes 152,965 LP units, exchangeable for 305,930 common shares of Trade Marks representing the remaining 20% of the initial consideration for the January 5, 2020 adjustment to the Royalty Pool but does not include the adjustment to reduce the final consideration by 5,193 LP units, equivalent to 10,386 common shares of Trade Marks, made in December 2020 based on the actual system sales for the A&W Restaurants added to the Royalty Pool as part of the January 5, 2020 adjustment to the Royalty Pool.
Net income in 2021 and 2020 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 first quarter of 2021 was $9,322,000 based on gross sales reported by restaurants in the Royalty Pool(ii) of $310,726,000, compared to royalty income of $9,260,000 and gross sales reported by A&W restaurants in the Royalty Pool(ii) of $308,679,000 for the first quarter of 2020. The increase in royalty income and gross sales for the quarter is due to the five additional sales days in the first quarter of 2021 and the gross sales from the net 23 new restaurants added to the Royalty Pool on January 5, 2021, partially offset by the decline in Same Store Sales(i) as a result of the impact of COVID-19.
General and administrative expenses for the first quarter of 2021 increased by $13,000 to $206,000 from $193,000 for the first quarter of 2020. The increase in general and administrative expenses is attributable to higher insurance premiums as result of a market-wide increase in insurance costs due to COVID-19.
Net interest on the term loan and other was $606,000 for the first quarter of 2021, $97,000 higher compared to the first quarter of 2020. The increase was due to a higher effective interest rate. An interest rate swap agreement is used to manage risks from fluctuations in interest rates and facilitate uniform monthly distributions when paid.
Current income taxes payable increased by $1,002,000 for the quarter. Total income tax including current tax, non-cash deferred income tax and refundable income tax increased by $962,000 for the quarter, largely due to a $2,153,000 increase in net income before taxes. The increase in net income before taxes is primarily attributable to a $2,201,000 year-over-year positive variance in the fair value adjustment on the interest rate swap.
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 first quarter of 2021 was $6,739,000 compared to $5,548,000 for the first quarter of 2020. The $1,191,000 increase in net income was a result of the $2,201,000 increase in the unrealized gain on the interest rate swap and the $62,000 increase in royalty income, less the $962,000 increase in total income tax expense, the $97,000 increase in net interest expense and the $13,000 increase in general and administrative expenses.
Distributable cash generated in the first quarter of 2021 to pay distributions to unitholders and dividends to Food Services was $6,478,000 compared to $7,528,000 in the first quarter of 2020. The $1,050,000 decrease in distributable cash was attributable to the $1,002,000 increase in the current income tax provision (excluding refundable income tax), the $97,000 increase in net interest expense and the $13,000 increase in general and administrative expenses, partially offset by the $62,000 increase in royalty income.
Distributable cash per equivalent unit decreased by 6.7 cents to 33.9 cents per unit in the first quarter of 2021 from 40.6 cents per unit for the first quarter of 2020. The decrease in distributable cash per equivalent unit is a result of the increases in current income taxes, net interest expense and general and administrative expenses as well as the increase in the number of equivalent units, partially offset by the increase in royalty income.
Two monthly distributions totaling 23.5 cents per unit were declared in first quarter of 2021 compared to 31.8 cents per unit in the same quarter of 2020. Total distributions declared and accrued per equivalent unit for the quarter were 37.8 cents compared to 42.7 cents for the first quarter of 2020.
The payout ratio for the first quarter of 2021 was 111.5% compared to 105.2% for the same quarter of 2020. The cumulative surplus of distributable cash on reserve at the end of the first quarter of 2021 was $7,862,000, compared to cumulative surplus of distributable cash on reserve of $8,967,000 at the beginning of the year, a decrease of $1,105,000.
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 March 28, 2021, A&W Food Services owned 26.0% of the common shares of Trade Marks, and therefore owned the equivalent of 26.0% of the units of the Fund on a fully-diluted basis.
Subsequent to the period end, on April 16, 2021, A&W of Canada Inc. ("A&W Canada"), an indirect shareholder of Food Services, completed a reorganization to provide liquidity for some of its long-standing shareholders and to simplify the indirect ownership of Food Services (the "Reorganization").
As part of the Reorganization, and pursuant to the Amended and Restated Declaration of Trust and the Amended and Restated Exchange Agreement, Food Services exchanged 1,042,000 common shares of Trade Marks for 521,000 units of the Fund, which were then purchased by shareholders of A&W Canada at a price of $36.42 per unit. The 521,000 units are subject to a four-month statutory hold period under applicable securities laws. After the exchange and sale of these units, and as at May 4, 2021, there were 14,585,673 Fund units outstanding.
The shareholders who purchased the 521,000 units of the Fund also entered into an agreement with three individuals (each a "Designated Representative"), which agreement provides that any two of the Designated Representatives are entitled to exercise the voting rights attached to the 521,000 Units while they remain held by those shareholders. There is no agreement, arrangement, commitment or understanding among the Designated Representatives themselves or amongst the Designated Representatives and those shareholders as to how the voting rights attached to the 521,000 Units will be exercised in any particular circumstance. The Designated Representatives, individually, therefore do not have control or direction over any of the 521,000 Units.
In addition, Food Services exchanged 3,014,040 of its common shares of Trade Marks for 1,507,020 limited voting units of the Fund. The limited voting units will continue to be owned by Food Services and may be converted to units of the Fund. Limited voting units have equal rights and privileges as units except that holders of the limited voting units, or the common shares of Trade Marks that are exchangeable for limited voting units, are not entitled in the aggregate to cast more than 40% of the votes cast upon a resolution with respect to the appointment or removal of Trustees of the Fund and are not entitled to cast votes upon a resolution to amend the Declaration of Trust.
Prior to the Reorganization, Food Services owned 26.0% of the outstanding voting securities of the Fund on a fully diluted basis. Following the Reorganization, but excluding the issuance of the excess units that represent the remaining 20% of the initial consideration for the January 5, 2021 Adjustment to the Royalty Pool that are payable in December 2021, Food Services owned approximately 23.3% of the outstanding voting securities of the Fund on a fully diluted basis. Including the issuance of the excess units that represent the remaining 20% of the initial consideration for the January 5, 2021 payable in December 2021, Food Services' ownership in the Fund is approximately 23.8% on a fully diluted basis (26.5% prior to the Reorganization). Overall, the Reorganization was not dilutive to unitholders of the Fund because the calculation of the number of the fully diluted Fund Units did not change. Post Reorganization, Food Services holds both Limited Voting Units in the Fund and exchangeable common shares of Trade Marks, whereas prior to the Reorganization, Food Services only held exchangeable common shares of Trade Marks.
The Fund did not receive any proceeds from the Reorganization and Food Services paid for the expenses of the Reorganization. The Reorganization does not constitute a change of control of Food Services, as the existing shareholders will continue to maintain majority control of Food Services. There will also be no change in management or the operations of the Food Services' business in connection with the Reorganization.
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®.
Subsequent to the period end, on April 23, 2021, Food Services increased its credit facility from $25,000,000 to $40,000,000 to fund working capital and for general corporate purposes. Consistent with the terms under the $25,000,000 credit facility, amounts advanced under the $40,000,000 facility bear interest at the bank prime rate plus 1.0% and are repayable on demand. The covenants, which remain unchanged from of those of the $25,000,000 credit facility, include the requirement to meet certain debt to earnings before interest, taxes, depreciation, amortization and non-cash charges/income (EBITDA) ratios and debt to Food Services' investment in Trade Marks ratios during each trailing four quarter period. The amendment included a reduction to the number of Trade Marks common shares that Food Services is required to pledge from 7,000,000 shares to 5,000,000 shares. The reduction did not have an impact on Food Service's ability to comply with its covenants.
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 first quarter ended March 28, 2021, 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 impact of 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 staying true to its mission will accelerate A&W's recovery 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 COVID-19 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 COVID-19 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