A&W Revenue Royalties Income Fund Announces Fourth Quarter 2018 Results

TRADING SYMBOL: The Toronto Stock Exchange – AW.UN   

VANCOUVER, Feb. 13, 2018 /CNW/ -

HIGHLIGHTS 

• Another strong quarter with same store sales up +12.3%
• Excellent year as same store sales growth up +9.8%
• Net income increased by 11.9% for 2018
• Distributable cash generated increased 19.0% year over year
• Distributions to be increased 2.8%

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, 2018.  The Fund will hold a conference call to discuss the results on Wednesday, February 13, 2019 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-888-254-3590 or [phone] Passcode 1982505.  A replay will be available until February 20, 2019, by dialling toll-free 1-888-203-1112 or [phone] Passcode 1982505. 

A&W reported strong same store sales growth of +12.3% for the fourth quarter of 2018 and 9.8% for the full year.  Same store sales growth was achieved in all provinces and concepts. 

Annual royalty income for 2018 increased by 14.7% to $40,890,000 based on sales of $1,362,996,000.  The increase in sales and royalty income was due to the same store sales growth and the increase in the number of restaurants in the Royalty Pool on January 5, 2018 from 861 to 896.  Distributable cash increased by 12.9% and distributable cash per unit increased from $1.641 per unit to $1.853 per unit.  

As a result of the performance of the Fund and the underlying A&W restaurants in the Royalty Pool, the Fund is pleased to announce an increase to the monthly cash distributions. The increase is 2.8%, from 14.3¢ per unit to 14.7¢ per unit, beginning with the February 2019 distribution.  On an annualized basis this represents a distribution rate of $1.764 per unit. The February distribution of 14.7¢ per unit will be payable to unitholders of record on March 15, 2019 and will be paid on March 29, 2019.

"We are very pleased by the positive sales performance achieved in 2018.  Our successful focus on innovation and quality ingredients, along with continued efforts to consistently deliver great food and a better Guest Experience, in combination with Reimage progress, is contributing to winning guest visits and building loyalty," said Susan Senecal, President and CEO of A&W Food Services. "With rapid growth of new locations - 42 restaurants opened in 2018 - and industry leading innovation, A&W's brand positioning is strong.  We are excited that the resulting growth has allowed the Fund to increase distributions to the unitholders."

FINANCIAL HIGHLIGHTS

(dollars in thousands except per unit amounts)	Period from Sep 10, 2018 to Dec 31, 2018	Period from Sep 11, 2017 to Dec 31, 2017	Period from Jan 1, 2018 to Dec 31, 2018	Period from Jan 1, 2017 to Dec 31, 2017
Same store sales growth^(1)	+12.3%	+3.1%	+9.8%	+2.0%
Number of restaurants in the Royalty Pool	896	861	896	861
Sales reported by the restaurants in the
Royalty Pool	$439,950	$372,679	$1,362,996	$1,188,818
Royalty income	$13,199	$11,181	$40,890	$35,665
General and administrative expenses	236	228	713	654
Net third party interest expense	788	789	2,568	2,583
Current income tax provision	1,960	1,879	6,346	5,985
Total distributable cash generated for
distributions and dividends^(2)	$10,216	$8,119	$31,262	$26,279
Distributable cashper equivalent unit
(2018 – 16,874,762 units; 2017 –
16,015,038units)^(2)(3)	$0.605	$0.507	$1.853	$1.641
Distributions and dividends declared per
equivalent unit	$0.570	$0.541	$1.674	$1.605
Net income^(4)	$9,823	$8,160	$31,575	$28,220
Net income, excluding non-cash items^(4)	$10,816	$8,430	$32,547	$26,816

^(1)	Same store sales growth does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  This information is provided as it is a key driver of growth in the Fund.  Same store sales growth is based on an equal number of days in each quarter and year.  See "Sales Performance".
^(2)	Distributable cash and distributable cash per equivalent unit do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  This information is provided as it identifies the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services.  See "Distributable Cash".
^(3)	The number of equivalent units and distributable cash per equivalent unit in 2018 includes the 263,472 LP units (as hereinafter defined) representing the final consideration paid in December 2018 for the January 5, 2018 adjustment to the Royalty Pool.  The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 150,665 LP units exchanged for 301,330 common shares of Trade Marks representing the final consideration paid in December 2017 for the January 5, 2017 adjustment to the Royalty Pool.
^(4)	Net income in 2018 and 2017 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 does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.

FINANCIAL RESULTS
Royalty income for the fourth quarter of 2018 was $13,199,000 based on sales of $439,950,000.  This was an increase of 18.1% from royalty income of $11,181,000 and sales of $372,679,000 for the fourth quarter of 2017.  There were 113 days of sales in the fourth quarter of 2018 as compared to 112 days in the same quarter of 2017. 

Annual royalty income for 2018 was $40,890,000 based on sales of $1,362,996,000, an increase of 14.7% from royalty income of $35,665,000 and sales of $1,188,818,000 for 2017.  The increase in sales and royalty income was due to the combined impact of the additional net 35 new restaurants in the Royalty Pool and the same store sales growth of 12.3% for the quarter and 9.8% for the full year 2018 as compared to 2017.

Combined general and administrative expenses and interest increased by $7,000 in the quarter and $44,000 for the year.  Interest expense decreased in 2018 year to date as compared to 2017 due to the refinancing of the term loan in Q4 2017 at a lower rate of interest.  General and administrative expenses were higher due to increased filing and professional fees. 

Distributable cash generated in the fourth quarter of 2018 to pay distributions to unitholders and dividends to Food Services was $10,216,000 compared to $8,119,000 in the fourth quarter of 2017.  Distributable cash generated per equivalent unit increased by 9.8¢ to 60.5¢ per unit in the fourth quarter of 2018 from 50.7¢ for the fourth quarter of 2017.  There were 113 days of sales in the fourth quarter of 2018 as compared to 112 days in the same quarter of 2017.

Distributable cash generated in 2018 was $31,262,000 compared to $26,279,000 in 2017.  The $4,983,000 annual increase in distributable cash was comprised of the $5,225,000 increase in royalty income and a $164,000 decrease in refinancing fees less the $44,000 net increase in general and administrative expenses and interest expense, and a $361,000 increase in the current income tax provision (excluding refundable income tax).  Distributable cash generated per equivalent unit increased by 21.2¢ to $1.853 per unit in 2018 from $1.641 for 2017. 

Four monthly distributions totalling 57.0¢ per unit were declared in the fourth quarter of 2018 compared to 54.1¢ per unit in the same quarter of 2017.  Total distributions declared in 2018 were $1.674 per unit compared to $1.605 per unit in 2017, an increase of 4.3%.  The annual payout ratio for 2018 was 90.3% compared to 97.8% for 2017.    

As a result of the performance of the Fund and the underlying A&W restaurants in the Royalty Pool, the Fund increased the monthly cash distributions by from 13.6¢ per unit to 13.8¢ per unit starting with the April distribution, from 13.8¢ per unit to 14.1¢ per unit starting with the July distribution, and then from 14.1¢ per unit to 14.3¢ per unit starting with the October distribution.  The monthly distribution rate at the end of 2018 was 14.3¢ per unit which translates into an annualized distribution rate of $1.716 per unit, an increase of 5.1% from the 2017 annualized rate of $1.632 per unit. 

The cumulative surplus of distributable cash on reserve at the end of 2018 was $7,660,000, compared to a reserve of $3,363,000 at the beginning of the year, an increase of $4,297,000. 

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) receives royalties equal to 3% of the sales of A&W restaurants in the Royalty Pool.  A&W is the second largest quick-service hamburger restaurant chain in Canada.  Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family^®, Chubby Chicken^® and A&W Root Beer^®.

The Royalty Pool is adjusted annually to reflect sales from new A&W restaurants, net of the sales of any A&W restaurants that have permanently closed.  Additional limited partnership units (LP units) are issued to A&W Food Services to reflect the annual adjustment.  A&W Food Services' additional LP units are exchanged for additional shares of Trade Marks which are exchangeable for units of the Fund.  The 16^th annual adjustment to the Royalty Pool took place on January 5, 2018 at which time the number of restaurants in the Royalty Pool increased from 861 to 896. 

A&W Food Services owns 24.7% of the common shares of Trade Marks, and therefore owns the equivalent of 24.7% of the units of the Fund on a fully-diluted basis.   

Trade Marks' dividends to A&W Food Services and the Fund, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks, and are thereby isolated from many of the factors that impact an operating business.

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Certain statements in this press release may contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.  The forward-looking information is based on assumptions that management considered reasonable at the time it was prepared.  The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by the forward-looking information.  The factors which could cause results to differ from current expectations are described in the Fund's most recent Management Discussion and Analysis under the heading "Risks and Uncertainties" and the Fund's Annual Information Form under the heading "Risk Factors", available on SEDAR at www.sedar.com.

SOURCE A&W Revenue Royalties Income Fund

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

Related Links

www.awincomefund.ca