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A&W Revenue Royalties Income Fund Trust Units

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A&W Revenue Royalties Income Fund Announces Second Quarter 2020 Results

A&W Revenue Royalties Income Fund Announces Second Quarter 2020 Results

Canada NewsWire

TRADING SYMBOL:  TSX: AW.UN   

VANCOUVER, BC, July 22, 2020 /CNW/ -

  • Same Store Sales Growth -31.6% in second quarter, -18.7% year to date
  • Distributions on Units resumed in July
  • Royalty Payments from Food Services to the Fund resumed in July

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 second quarter and year to date period ended June 14, 2020.  The Fund will hold a conference call to discuss the results on Wednesday, July 22, 2020 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 6333810#.  A replay will be available until July 29, 2020 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 6333810#. 

Same Store Sales Growth was -31.6% for the second quarter of 2020 as compared to the second quarter of 2019.  Year to date Same Store Sales Growth was -18.7%.  Actions required in response to COVID-19 have adversely impacted A&W restaurant operations across Canada, including the temporary closure of a large number of restaurants.  At its peak, since March 1, 2020, a total of 230 restaurants (out of 971 restaurants in the Royalty Pool) were temporarily closed.  There was steady improvement in the latter half of the second quarter and at quarter end (June 14, 2020), 109 A&W restaurants in the Royalty Pool remained temporarily closed. At the date hereof, approximately 88 of these temporarily closed A&W restaurants have reopened and 21 remain closed.  The remaining 21 temporarily closed A&W restaurants are expected to reopen when permitted by the appropriate authorities.  For most of the second quarter, A&W restaurants that were operating were restricted to drive thru operations, delivery and mobile ordering.  In a number of locations, A&W restaurants are now permitted to open for limited dine-in and take-out sales.  As the provinces move through their reopening phases and restaurants begin to reopen, sales performance has begun to improve, from -45% Same Store Sales in the first four-week period of the second quarter, to -20% Same Store Sales in the last four-week period of the second quarter.

The decline in Same Store Sales was partially offset by the sales from the 37 net new restaurants that were added to the Royalty Pool on January 5, 2020, resulting in a -28% decrease in gross sales reported by A&W restaurants in the Royalty Pool and royalty income for the quarter, and a -15% decrease year to date.

"I am pleased with the recent improvement in sales trends during this period of unprecedented uncertainty caused by COVID-19, and that the strict protocols we implemented in our restaurants have been successful in protecting the health and safety of our employees and guests," said Susan Senecal, President and CEO of A&W Food Services.  "We believe that our natural ingredients, menu innovation and continued new restaurant growth will help us to rebound from the impacts of COVID-19."     

As previously announced by the Fund on July 7, 2020, the Trustees have approved the resumption of monthly distributions to unitholders commencing with the June distribution of 10¢ per unit that is payable on July 31, 2020 to unitholders of record as of the close of business on July 15, 2020.  The Trustees had previously temporarily suspended monthly distributions on the units; accordingly, no distributions were declared by the Fund in the second quarter.  The Trustees, in consultation with their independent financial and legal advisors, will continue to closely monitor the sales results of, and projections for, the A&W restaurants in the Royalty Pool with a view of continuing the payment of regular monthly distributions at a sustainable level.

On July 7, 2020, A&W Food Services announced that it would resume regular royalty payments to the Fund, commencing with the royalty payment of $3,038,000 in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period ended June 14, 2020, which was paid in full on July 10, 2020.  Food Services has deferred royalty payments totaling $7,448,000 payable to the Fund for gross sales reported by restaurants in the Royalty Pool for the period February 24, 2020 to May 17, 2020.  As contemplated in the Amended and Restated Licence and Royalty Agreement between A&W Food Services and A&W Trade Marks Limited Partnership (the Amended and Restated Licence and Royalty Agreement), late payments of royalties accrue interest at the rate of 2% per annum over the prime rate.  A&W Food Services and the Fund have agreed repayment of this amount plus interest will take place no later than December 31, 2021.  A&W Food Services has agreed with the Fund and A&W Trade Marks Inc. (Trade Marks) that dividends declared on the common shares of Trade Marks held by Food Services will not be paid to Food Services until Food Services has paid all deferred royalties, together with interest.

FINANCIAL RESULTS






(dollars in thousands except per unit
amounts)

Period from
Mar 23, 2020 to
Jun 14, 2020

Period from

Mar 25, 2019 to
Jun 16, 2019

Period from
Jan 1, 2020 to
Jun 14, 2020

Period from

Jan 1, 2019 to
Jun 16, 2019

Same Store Sales Growth(1)

-31.6%

+10.3%

-18.7%

+10.2%

Number of restaurants in the Royalty





Pool

971

934

971

934

Gross sales reported by A&W





restaurants in the Royalty Pool(2)

$253,173

$351,845

$561,852

$660,668

Royalty income(3)

$7,596

$10,555

$16,856

$19,820

General and administrative expenses

214

117

407

398

Term loan and other interest expense

543

577

1,052

1,149

Current income tax provision

1,967

1,997

2,997

3,702

Total distributable cash generated for





distributions and dividends(4)

$4,872

$7,864

$12,400

$14,571

Distributable cash per equivalent unit





(2020 – 18,403,413 units; 2019 –





17,659,154  units)(4)(5)  

$0.265

$0.445

$0.674

$0.825

Distributions and dividends declared





per equivalent unit

-

$0.455

$0.318

$0.745

Total distributions and dividends





declared and accrued per equivalent





unit(6)

-

$0.425

$0.462

$0.834

Net income(7)

$4,240

$7,554

$9,788

$13,220

Net income, excluding non-cash





items(7)

$3,727

$7,764

$11,432

$14,061

 

(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 and 24-week periods ending June 14, 2020 and June 16, 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 2020 year to date includes a receivable of $10,486,000 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 June 14, 2020, including royalty payments totaling $7,448,000 deferred by Food Services for the period February 24, 2020 to May 17, 2020.  Interest accrues on unpaid royalties in accordance with the Amended and Restated Licence and Royalty Agreement at two percent per annum over the prime rate.  Food Services has resumed regular royalty payments to the Fund commencing with the royalty payment of $3,038,000 in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period ended June 14, 2020, which amount was paid in full on July 10, 2020. This amount was included in royalty income for the second quarter as part of the above noted receivable of $10,486,000 from Food Services outstanding as at June 14, 2020.      

(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. Distributable cash and distributable cash per equivalent unit for 2020 include the royalty payments totaling $7,448,000 deferred and not yet paid by Food Services for the period February 24, 2020 to May 17, 2020, of which $4,558,000 is attributable to Q2 2020 and $2,890,000 is attributable to Q1 2020.   

(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 the 12-week and 24-week periods ended June 16, 2019 are calculated on a fully-diluted basis and include 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 do 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)

Total distributions and dividends declared and accrued per equivalent unit is a non-IFRS measure  - see "Non-IFRS Measures" - and is calculated as the sum of (i) distributions and dividends declared per equivalent unit in respect of each full calendar month in the applicable period, and (ii) the aggregate run-rate amount of the current monthly distribution for the remainder of the calendar year, with the sum of (i) and (ii) pro-rated based on the number of days in such period. Total distributions and dividends declared and accrued per equivalent unit are not reported for Q2 2020 as no distributions were declared in Q2 2020 due to the temporary suspension of distributions commencing with the March distribution which would normally have been paid in April 2020.

(7)

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 second quarter of 2020 was $7,596,000 based on gross sales reported by restaurants in the Royalty Pool of $253,173,000, compared to royalty income of $10,555,000 and gross sales reported by A&W restaurants in the Royalty Pool of $351,845,000 for the second quarter of 2019.  Year to date royalty income for 2020 was $16,856,000 based on gross sales reported by restaurants in the Royalty Pool of $561,852,000, compared to royalty income of $19,820,000 and gross sales reported by A&W restaurants in the Royalty Pool of $660,668,000 for the comparable period in 2019.  The decrease in gross sales for the quarter and year to date is due to the decline in Same Store Sales as a result of the impact of COVID-19, partially offset by the sales from the 37 net new restaurants that were added to the Royalty Pool on January 5, 2020.  Royalty income for 2020 year to date includes a receivable from Food Services of $10,486,000 for the royalty payable in respect of the gross sales reported by restaurants in the Royalty Pool for the period February 24, 2020 to June 14, 2020, including royalty payments totaling $7,448,000 deferred by A&W Food Services for the period February 24, 2020 to May 17, 2020.  Interest accrues on unpaid royalties in accordance with Amended and Restated Licence and Royalty Agreement at two percent per annum over the prime rate.  Food Services has resumed regular royalty payments commencing with the royalty payment of $3,038,000 in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period ended June 14, 2020, which amount was paid in full on July 10, 2020.  This amount was included in royalty income for the second quarter as part of the above noted receivable of $10,486,000 from Food Services outstanding as at June 14, 2020.   

General and administrative expenses for the second quarter of 2020 increased by $97,000 to $214,000 compared to $117,000 for the second quarter of 2019 due to timing of expenses.  Year to date expenses were $407,000 for 2020 compared to $398,000 for the comparable period in 2019. 

Net interest on the term loan was $543,000 for the second quarter of 2020, $34,000 lower compared to the second quarter of 2019.  Year to date interest expense was $1,052,000, $97,000 lower than the comparable period in 2019.  Current income taxes payable decreased by $30,000 for the quarter and $705,000 year to date.  Total income tax including current tax, non-cash deferred income tax and refundable income tax decreased by $285,000 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.  Total distributions and dividends declared and accrued per equivalent unit is calculated as the sum of (i) distributions and dividends declared per equivalent unit in respect of each full calendar month in the applicable period, and (ii) the aggregate run-rate amount of the current monthly distribution for the remainder of the calendar year, with the sum of (i) and (ii) pro-rated based on the number of days in such period.  The payout ratio is calculated by dividing total distributions declared and accrued per equivalent unit, by the distributable cash per equivalent unit generated in that period. 

The Fund's net income for the second quarter of 2020 was $4,240,000 compared to $7,554,000 for the second quarter of 2019. Year to date net income was $9,788,000 compared to $13,220,000 for the comparable period in 2019.  The $3,432,000 decrease in year to date net income was a result of a $2,964,000 decrease in royalty income, $840,000 increase in the non-cash loss on the interest rate swap, offset by the $87,000 total decrease in general and administrative expenses and interest expense and $285,000 decrease in total income tax.  

Distributable cash generated in the second quarter of 2020 to pay distributions to unitholders and dividends to Food Services was $4,872,000 compared to $7,864,000 in the second quarter of 2019.  Distributable cash generated year to date was $12,400,000 compared to $14,571,000 in the comparable period in 2019.  The $2,171,000 decrease in distributable cash was attributable to the $2,964,000 decrease in royalty income, offset by an $88,000 total decrease in cash general and administrative expenses and interest expense and $705,000 decrease in current income tax. 

Distributable cash per equivalent unit decreased by 18.0¢ to 26.5¢ per unit in the second quarter of 2020 from 44.5¢ per unit for the second quarter of 2019.  Year to date distributable cash per equivalent unit decreased by 15.1¢ to 67.4¢ per unit for 2020 from 82.5¢ per unit for the comparable period in 2019.  The decrease in distributable cash per equivalent unit in the quarter was attributable to the decrease in royalty income, less the decrease in current income taxes, interest expense and cash expenses.      

Two monthly distributions totaling 31.8¢ per unit were declared year to date in 2020 compared to five monthly distributions totaling 74.5¢ per unit in the comparable period in 2019.  The Trustees had previously temporarily suspended monthly distributions on the Units; accordingly, no distributions were declared by the Fund in the second quarter.  As noted above, on July 7, 2020, the Fund announced that the Trustees approved the resumption of monthly distributions to unitholders commencing with the June distribution of 10¢ per unit that is payable on July 31, 2020 to unitholders of record as of the close of business on July 15, 2020. 

Total distributions and dividends declared and accrued per equivalent unit year to date were 46.2¢ per unit for 2020 compared to 83.4¢ for the comparable period in 2019.  The year to date payout ratio was 68.5% compared to 101.1% for the comparable period in 2019.  The cumulative surplus of distributable cash on reserve at the end of the second quarter of 2020 was $10,364,000, compared to a reserve of $7,429,000 at the beginning of the year, an increase of $2,935,000

Distributable cash, distributable cash per equivalent unit and the cumulative surplus of distributable cash for 2020 referred to above include the royalty payments totaling $7,448,000 deferred and not yet paid by Food Services for the period February 24, 2020 to May 17, 2020, of which $4,558,000 is attributable to Q2 2020 and $2,890,000 is attributable to Q1 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 June 14, 2020 and July 22, 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", "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 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 the second quarter ended June 14, 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 resumption of monthly distributions on units of the Fund and the amount thereof; the payment date for the distribution to be paid on the units in July 2020; the Fund and A&W Food Services have agreed that repayment of the deferred royalties plus interest will take place no later than December 31, 2021; the expectation that currently closed A&W restaurants will reopen when permitted by appropriate authorities; the Trustees, in consultation with their independent financial and legal advisors, will continue to closely monitor the sales results of, and projections for, the A&W restaurants in the Royalty Pool going forward with a view of continuing the payment of regular monthly distributions at a sustainable level; the dividends payable to A&W Food Services on its shares of Trade Marks are to be deferred until the deferred royalties and interest are paid in full; 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 and any deferred royalties will be repaid in full, with interest no later than December 31, 2021; 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; there is no guarantee that A&W Food Services will repay any deferred royalty payments, and interest thereon by December 31, 2021, or at all, or that further royalty payments will not be deferred; 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 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

Cision View original content: http://www.newswire.ca/en/releases/archive/July2020/22/c9643.html

For the Fund and A&W Food Services: Don Leslie, Chief Financial Officer: (604) 988-2141 or investorrelations@aw.caCopyright CNW Group 2020

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