A&W Revenue Royalties Income Fund announces strong second quarter 2019 results

HIGHLIGHTS 

• Q2 Same Store Sales Growth up +10.3% for the quarter
• Royalty income increased by 15.3% for the quarter from 2018
• Net income increased by 6.7% for the quarter from 2018
• Distribution payable in August increased by 3.3%
• Since the start of the year the monthly distribution rate has increased 11.2%

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

VANCOUVER, July 24, 2019 /CNW/ - 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 ended June 16, 2019. The Fund will hold a conference call to discuss the results on Wednesday, July 24, 2019 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time). The call can be accessed by dialling toll-free 1-866-254-3590 or [phone] Passcode 7153330#. A replay will be available until July 31, 2019, by dialling toll-free 1-888-203-1112 or [phone] Passcode 7153330#.

A&W posted another very strong quarter with Same Store Sales Growth (defined below) of +10.3% for the second quarter of 2019, bringing the year to date Same Store Sales Growth to +10.2%.

The continuing Same Store Sales Growth, along with the sales from 38 net new restaurants added to the Fund's Royalty Pool on January 5, 2019 resulted in a 15.3% increase in gross sales reported by A&W restaurants in the Royalty Pool and royalty income for the quarter. On a year to date basis, gross sales reported by A&W restaurants in the Royalty Pool increased by 15.3%.

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 that it is increasing the monthly cash distributions by 3.3% from 15.4¢ per unit to 15.9¢ per unit beginning with the July 2019 distribution. On an annualized basis this represents a distribution rate of $1.908 per unit. The July distribution of 15.9¢ per unit will be payable to unitholders of record on August 15, 2019 and will be paid on August 30, 2019.

"We are very pleased by the sales performance achieved in the second quarter and, indeed, in the first half of the year. Connecting with Canadian burger lovers through our continued focus on great tasting food made with high quality natural ingredients has delivered strong results," said Susan Senecal, President and CEO of A&W Food Services. "I am delighted that the success of our efforts has once again allowed the Fund to increase distributions to the unitholders."

Financial Highlights

(dollars in thousands except per unit amounts)	Period from Mar 25, 2019 to Jun 16, 2019	Period from Mar 26, 2018 to Jun 17, 2018	Period from Jan 1, 2019 to Jun 16, 2019	Period from Jan 1, 2018 to Jun 17, 2018
Same Store Sales Growth^(1)	+10.3%	+6.6%	+10.2%	+6.0%
Number of restaurants in the
Royalty Pool	934	896	934	896
Gross sales reported by A&W
restaurants in the Royalty Pool^(2)	$351,845	$305,132	$660,668	$572,820
Royalty income	$10,555	$9,154	$19,820	$17,185
General and administrative
expenses	117	90	398	397
Term loan and other interest
expense	577	592	1,149	1,186
Current income tax provision	1,997	1,503	3,702	2,863
Total distributable cash generated
for distributions and dividends^(3)	$7,864	$6,969	$14,571	$12,739
Distributable cashper equivalent
unit (2019 – 17,659,154 units;
2018 – 16,874,762 units)^(3)(4)	$0.445	$0.416	$0.825	$0.760
Distributions and dividends
declared per equivalent unit	$0.455	$0.412	$0.745	$0.684
Net income^(5)	$7,554	$7,082	$13,220	$13,387
Net income, excluding non-cash
items^(5)	$7,764	$7,254	$14,061	$13,137

^(1)	"Same Store Sales Growth" is calculated as the change in the gross sales reported by A&W restaurants in the Royalty Pool that operated during the entire 26 4-week periods ending 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 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.
^(3)	"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 Food Services. See footnote (4) below for more information. Distributable cash is calculated as the operating cash flows of the Fund, adjusted for net changes in items of working capital. Changes in items of working capital are excluded as the Fund's working capital requirements are not permanent and are primarily due to the timing of payments between related parties.  No deduction is made for capital expenditures as the Fund has no capital expenditures. Distributable cash per equivalent unit is calculated as distributable cash divided by the weighted average number units of the Fund outstanding during the relevant period.
^(4)	The number of equivalent units and distributable cash per equivalent unit in 2019 is calculated on a fully-diluted basis and includes the 156,878 LP units (as hereinafter defined) representing the remaining 20% of the estimated initial consideration for the January 5, 2019 adjustment to the Royalty Pool which is held back until December 2019 when the actual annual sales are reported by the new restaurants. The number of equivalent units and distributable cash per equivalent unit in 2018 is calculated on a fully-diluted basis and includes the 263,472 LP units exchanged for 526,944 common shares of Trade Marks representing the final consideration paid in December 2018 for the January 5, 2018 adjustment to the Royalty Pool.
^(5)	Net income in 2019 and 2018 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".

FINANCIAL RESULTS
Royalty income for the second quarter of 2019 was $10,555,000 based on gross sales reported by restaurants in the Royalty Pool of $351,845,000. This was an increase of 15.3% from royalty income of $9,154,000 and gross sales reported by A&W restaurants in the Royalty Pool of $305,132,000 for the second quarter of 2018. Year to date royalty income was $19,820,000 based on gross sales reported by A&W restaurants in the Royalty Pool of $660,668,000, an increase of 15.3% from royalty income of $17,185,000 and gross sales reported by A&W restaurants in the Royalty Pool of $572,820,000 for 2018 year to date. Combined general and administrative expenses and interest increased by $27,000 in the quarter and by $1,000 year to date. Interest expense decreased by $15,000 in the quarter and by $37,000 year to date which is primarily attributable to an increase in interest income as a result of an increase in cash year over year.

Current income taxes payable increased by $494,000 for the second quarter and by $839,000 year to date compared to 2018 due to an increase in earnings before income tax. Total income tax including current tax, non-cash deferred income tax and refundable income tax increased by $600,000 in the quarter and by $1,053,000 year to date compared to 2018.

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" and "payout ratio" are reported to provide investors with more meaningful information. The payout ratio is calculated by dividing the total of (i) distributions declared per unit plus (ii) accrued distributions per unit to the last day of the quarter or year, as applicable, by the distributable cash per equivalent unit generated in that period. 

The Fund's net income for the second quarter of 2019 was $7,554,000 compared to $7,082,000 for the second quarter of 2018 and $13,220,000 year to date compared to $13,387,000 in the prior year. The year to date decrease in net income was primarily a result of the non-cash loss on the interest rate swap of $1,096,000, versus the gain of $689,000 in 2018, and a $1,053,000 increase in total income tax expense. An increase of $2,635,000 in year to date royalty income partially offset the 2019 year to date loss on the interest rate swap and the higher income tax expense.

Distributable cash generated in the second quarter of 2019 to pay distributions to unitholders and dividends to Food Services was $7,864,000 compared to $6,969,000 in the second quarter of 2018. Distributable cash generated in year to date 2019 to pay distributions to unitholders and dividends to Food Services was $14,571,000 compared to $12,739,000 in year to date 2018. The $1,832,000 year to date increase in distributable cash was attributable to the $2,635,000 increase in royalty income and the $36,000 net decrease in general and administrative expenses and interest expense, partially offset by a $839,000 increase in the current income tax provision (excluding refundable income tax).

Distributable cash generated per equivalent unit increased by 2.9¢ to 44.5¢ per unit in the second quarter of 2019 from 41.6¢ for the second quarter of 2018. Year to date distributable cash per unit increased by 6.5¢ to 82.5¢ in 2019 from 76.0¢ for 2018 year to date. The year to date increase in distributable cash per equivalent unit was due to the increase in royalty income and the decrease in cash expenses, less the increase in current income taxes. 

Three monthly distributions totaling 45.5¢ per unit were declared in the second quarter of 2019 compared to 41.2¢ per unit in the same quarter of 2018. 2019 year to date distributions were 74.5¢ per unit compared to 68.4¢ per unit in 2018 year to date. The payout ratio for the second quarter was 94.4% compared to 92.1% for the same quarter of 2018 and the year to date payout ratio was 101.1% compared to 99.9% for 2018 year to date. The trailing four quarter payout ratio as at the end of the second quarter of 2019 was 90.4% (2018 – 96.0%).

The cumulative surplus of distributable cash on reserve at the end of the second quarter of 2019 was $7,244,000, compared to a reserve of $7,660,000 at the beginning of the year, a decrease of $416,000. 

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 gross sales reported by 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 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 17^th annual adjustment to the Royalty Pool took place on January 5, 2019 at which time the number of restaurants in the Royalty Pool increased from 896 to 934. 

A&W Food Services owns 19.6% of the common shares of Trade Marks, and therefore owns the equivalent of 19.6% 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, and are thereby isolated from many of the factors that impact an operating business.

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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", "payout ratio" and "net income, excluding non-cash items" as non-IFRS measures in this report. 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 second quarter ended June 16, 2019, 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 information in this news release includes statements related to: the increase in the monthly cash distribution and the amount and timing thereof. 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. 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

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

Related Links

www.awincomefund.ca