A&W Revenue Royalties Income Fund Announces Second Quarter 2017 Results

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

HIGHLIGHTS

• Q2 same store sales growth accelerated to +0.7%
• Royalty income up 3.8%
• Seventeen new restaurants open year to date

VANCOUVER, July 25, 2017 /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 18, 2017.  The Fund will hold a conference call to discuss the results on Tuesday July 25, 2017 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-800-274-0251 or [phone] Passcode 7887183.  A replay will be available until August 1, 2017, by dialling toll-free 1-888-203-1112 or [phone] Passcode 7887183. 

A&W reported an acceleration in same store sales for the second quarter of 2017 to +0.7%, after a challenging first quarter and despite the impact of a generally weak Canadian food service industry.  Year to date same store sales growth improved to +0.2%. 

The same store sales growth, along with the sales from 23 net new restaurants added to the Fund's Royalty Pool in January 2017 resulted in a 3.8% increase in sales reported by restaurants in the Royalty Pool and royalty income for the quarter.  On a year to date basis, sales reported by restaurants in the Royalty Pool increased by 2.3%.  

"We are encouraged by our sales performance in Q2 and are enthusiastic about our strategic innovations and continued growth, especially the introduction of root beer made with only natural ingredients and 100% cane sugar," said Paul Hollands, Chairman and CEO of A&W Food Services.  "We are also seeing a very strong pipeline of new restaurant openings, with seventeen new A&W restaurants opened across the country in the first six months of 2017.  We are looking forward to reaching another milestone in the coming weeks when the 900^th restaurant is opened."

FINANCIAL HIGHLIGHTS

(dollars in thousands except per unit amounts)	Period from Mar 27, 2017 to Jun 18, 2017	Period from Mar 28, 2016 to Jun 19, 2016	Period from Jan 1, 2017 to Jun 18, 2017	Period from Jan 1, 2016 to Jun 19, 2016
Same store sales growth^(1)	+0.7%	+2.7%	+0.2%	+5.4%
Number of restaurants in the Royalty Pool	861	838	861	838
Sales reported by the restaurants in the Royalty Pool	$274,140	$264,057	$519,297	$507,853
Royalty income	$8,224	$7,922	$15,579	$15,236
General and administrative expenses	78	60	349	316
Net third party interest expense	597	589	1,201	1,200
Current income tax provision	1,456	1,519	2,649	2,922
Total distributable cash generated for distributions and dividends^(2)	$6,094	$5,754	$11,381	$10,798
Distributable cash per equivalent unit (2017 – 15,950,970 units; 2016 – 15,482,676 units)^(2)(3)	$0.382	$0.371	$0.714	$0.697
Distributions and dividends declared per equivalent unit	$0.399	$0.380	$0.532	$0.630
Net income^(4)	$6,395	$5,758	$11,819	$9,087
Net income, excluding non-cash items^(4)	$6,169	$5,497	$11,606	$9,532

^(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.
^(2)	Distributable cash 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 identifies the amount of actual cash available to pay distributions to unitholders and dividends to Food Services.
^(3)	The number of equivalent units and distributable cash per equivalent unit in 2017 includes the 86,596 LP units (as hereinafter defined) exchangeable for 173,192 common shares of Trade Marks representing the remaining 20% of the consideration for the January 5, 2017 adjustment to the Royalty Pool which is held back until December 2017 when the actual annual sales are reported by the new restaurants.  The number of equivalent units and distributable cash per equivalent unit in 2016 includes the 157,774 LP units exchanged for 315,548 common shares of Trade Marks representing the final consideration paid in December 2016 for the January 5, 2016 adjustment to the Royalty Pool.
^(4)	Net income in 2017 and 2016 includes non-cash losses on interest rate swaps, 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 second quarter of 2017 was $8,224,000 based on sales of $274,140,000.  This was an increase of 3.8% from royalty income of $7,922,000 and sales of $264,057,000 for the second quarter of 2016.  Year to date royalty income was $15,579,000 based on sales of $519,297,000, an increase of 2.3% from royalty income of $15,236,000 and sales of $507,853,000 for 2016 year to date.  The increase in sales and royalty income was due to the combined impact of the additional net 23 new restaurants in the Royalty Pool and the same store sales growth of 0.7% for the quarter and 0.2% year to date as compared to 2016.

Combined general and administrative expenses and interest increased by $25,000 in the quarter and $33,000 year to date.  Interest expense did not change significantly in 2017 year to date as compared to 2016.  General and administrative expenses were higher due to increased filing and professional fees. 

Distributable cash generated in the second quarter of 2017 to pay distributions to unitholders and dividends to Food Services was $6,094,000 compared to $5,754,000 in the second quarter of 2016.  Distributable cash generated year to date in 2017 was $11,381,000 compared to $10,798,000 in 2016 year to date.  The $583,000 year to date increase in distributable cash was comprised of the $343,000 increase in royalty income, less the $33,000 increase in combined general and administrative and interest expenses and a $273,000 decrease in the current income tax provision.  The current income tax provision for the prior year to date period included transitional partnership tax of $425,000. 2016 was the last year that this tax was payable.          

Distributable cash generated per equivalent unit increased by 1.1¢ to 38.2¢ per unit in the second quarter of 2017 from 37.1¢ for the second quarter of 2016.  Distributable cash generated per equivalent unit increased by 1.7¢ to 71.4¢ per unit in 2017 year to date from 69.7¢ for 2016 year to date.  The increase in distributable cash per equivalent unit was due to the increase in royalty income less the increase in cash expenses and taxes as discussed above.     

Three monthly distributions totalling 39.9¢ per unit were declared in the second quarter of 2017 compared to 38.0¢ per unit in the same quarter of 2016.  2017 year to date distributions were 53.2¢ per unit compared to 63.0¢ per unit in 2016 year to date.  The payout ratio for the second quarter of 2017 was 96.1% compared to 97.8% for the second quarter of 2016 and the year to date payout ratio was 103.5% compared to 103.3% for 2016 year to date.    

The cumulative surplus of distributable cash at the end of the second quarter of 2017 was $2,237,000, compared to a cumulative surplus of $2,417,000 at the beginning of the year.  Surplus distributable cash historically decreases in the first half of the year due to the seasonality of sales in A&W restaurants.

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 15^th annual adjustment to the Royalty Pool took place on January 5, 2017 at which time the number of restaurants in the Royalty Pool increased from 838 to 861. 

A&W Food Services owns 21.2% of the common shares of Trade Marks, and therefore owns the equivalent of 21.2% 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