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

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

HIGHLIGHTS

• Strong Q2 same store sales growth of +6.6%
• Royalty income increased by 11.3% for the quarter from 2017
• Q2 2018 Net income increased by 10.7% versus prior year
• Distributions to be increased by 2.2%

VANCOUVER, July 24, 2018 /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 17, 2018.  The Fund will hold a conference call to discuss the results on Tuesday, July 24, 2018 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-877-260-1479 Passcode 9762733.  A replay will be available until July 31, 2018, by dialling toll-free 1-888-203-1112 or [phone] Passcode 9762733. 

A&W posted another very positive quarter with same store sales growth of +6.6% for the second quarter of 2018, bringing year to date same store sales growth to +6.0%.   

The continuing same store sales growth, along with the sales from 35 net new restaurants added to the Fund's Royalty Pool in January 2018 resulted in an 11.3% 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 10.3%.

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 2.2% from 13.8¢ per unit to 14.1¢ per unit beginning with the July 2018 distribution.  On an annualized basis this represents a distribution rate of $1.692 per unit.  The July distribution of 14.1¢ per unit will be payable to unitholders of record on August 15, 2018 and will be paid on August 31, 2018.

"We are excited by the impressive sales performance achieved through the first half of the year.  A focus on great tasting burgers made with high quality "better" ingredients has delivered strong results and is contributing to winning guest visits and building loyalty, enhancing performance over the long term," said Susan Senecal, President and CEO of A&W Food Services.  "We are also pleased with the success of our promotional programs and our progress in delivering a great experience to our guests."

Financial Highlights

(dollars in thousands except per unit amounts)	Period from Mar 26, 2018 to Jun 17, 2018	Period from Mar 27, 2017 to Jun 18, 2017	Period from Jan 1, 2018 to Jun 17, 2018	Period from Jan 1, 2017 to Jun 18, 2017
Same store sales growth^(1)	+6.6%	+0.7%	+6.0%	+0.2%
Number of restaurants in the Royalty Pool	896	861	896	861
Sales reported by the restaurants in the Royalty Pool	$305,132	$274,140	$572,820	$519,297
Royalty income	$9,154	$8,224	$17,185	$15,579
General and administrative expenses	90	78	397	349
Net third party interest expense	592	597	1,186	1,201
Current income tax provision	1,503	1,456	2,863	2,649
Total distributable cash generated for distributions and dividends^(2)	$6,969	$6,094	$12,739	$11,382
Distributable cash per equivalent unit (2018 – 16,760,352 units; 2017 – 16,015,038 units)^(2)(3)	$0.416	$0.382	$0.760	$0.714
Distributions and dividends declared per equivalent unit	$0.412	$0.399	$0.684	$0.665
Net income^(4)	$7,082	$6,395	$13,387	$11,819
Net income, excluding non-cash items^(4)	$7,254	$6,169	$13,137	$11,606

^(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.
^(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.
^(3)	The number of equivalent units and distributable cash per equivalent unit in 2018 includes the 149,063 LP units (as hereinafter defined) exchangeable for 298,126 common shares of Trade Marks representing the remaining 20% of the consideration for the January 5, 2018 adjustment to the Royalty Pool which is held back until December 2018 when the actual annual sales are reported by the new restaurants.  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 second quarter of 2018 was $9,154,000 based on sales of $305,132,000.  This was an increase of 11.3% from royalty income of $8,224,000 and sales of $274,140,000 for the second quarter of 2017.  Year to date royalty income was $17,185,000 based on sales of $572,820,000, an increase of 10.3% from royalty income of $15,579,000 and sales of $519,297,000 for 2017 year to date.  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 6.6% for the quarter and 6.0% year to date as compared to 2017.

Combined general and administrative expenses and interest increased by $7,000 in the quarter and $33,000 year to date.  General and administrative expenses were higher due to increased filing and professional fees.  Interest expense decreased compared to 2017 as a result of a decrease in the interest rate upon the renewal of the term loan on December 22, 2017. 

Current income taxes payable increased by $47,000 for the second quarter and by $214,000 year to date compared to 2017 due to an increase in earnings before income tax and from the increase in British Columbia's general corporate tax rate from 19% in 2017 to 20% in 2018.  Total income tax including current tax, non-cash deferred income tax and refundable income tax increased by $6,000 in the quarter and by $396,000 year to date compared to 2017.

The Fund's net income for the second quarter of 2018 was $7,082,000 compared to $6,395,000 for the second quarter of 2017 and $13,387,000 year to date compared to $11,819,000 in the prior year.  The year to date increase in net income was a result of the increase in royalty income noted above, plus an increase in the non-cash gain on the interest rate swap, partially offset by increased income taxes. 

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 unit and payout ratios are reported to provide investors with more meaningful information. 

Distributable cash generated in the second quarter of 2018 to pay distributions to unitholders and dividends to Food Services was $6,969,000 compared to $6,094,000 in the second quarter of 2017.  Distributable cash generated year to date in 2018 was $12,739,000 compared to $11,382,000 in 2017 year to date.  The $1,357,000 year to date increase in distributable cash was primarily comprised of the $1,606,000 increase in royalty income, less the $33,000 increase in combined general and administrative and interest expenses and a $214,000 increase in the current income tax provision. 

Distributable cash generated per equivalent unit increased by 3.4¢ to 41.6¢ per unit in the second quarter of 2018 from 38.2¢ for the second quarter of 2017.  Distributable cash generated per equivalent unit increased by 4.6¢ to 76.0¢ per unit in 2018 year to date from 71.4¢ for 2017 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 41.2¢ per unit were declared in the second quarter of 2018 compared to 39.9¢ per unit in the same quarter of 2017.  2018 year to date distributions were 68.4¢ per unit compared to 66.5¢ per unit in 2017 year to date.  The payout ratio for the second quarter of 2018 was 92.1% compared to 96.1% for the second quarter of 2017 and the year to date payout ratio was 99.9% compared to 103.5% for 2017 year to date.

The cumulative surplus of distributable cash at the end of the second quarter of 2018 was $3,771,000, compared to a cumulative surplus of $3,363,000 at the beginning of the year. 

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]