A&W Revenue Royalties Income Fund Reports Another Strong Quarter

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

VANCOUVER, July 26, 2016 /CNW/ -

HIGHLIGHTS

• Year to date same store sales growth 5.4%
• Q2 same store sales growth up 2.7%
• Year to date Royalty Pool sales up 12.5%

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 19, 2016.  The Fund will hold a conference call to discuss the results on Tuesday July 26, 2016 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-866-530-1553 or [phone] Passcode 4133399.  A replay will be available until August 1, 2016, by dialling toll-free 1-888-203-1112 or [phone] Passcode 4133399. 

A&W posted a solid quarter, despite the impact of difficult economic and market challenges in Alberta and Saskatchewan, two of A&W's strongest markets.  Same store sales increased by 2.7% in the quarter, bringing year to date same store sales growth to +5.4%.  The year to date two year stacked same store sales growth is +14.4%.  A&W has now reported positive same store sales growth for 13 consecutive quarters.      

The continuing strong same store sales growth, along with the sales from 24 net new restaurants added to the Fund's Royalty Pool in January 2016, resulted in a 6.0% increase in sales reported by restaurants in the Royalty Pool for the quarter.  On a year to date basis, sales reported by restaurants in the Royalty Pool increased by 12.5%.  

"While the foodservice market was more challenged in the second quarter, we are  pleased with our continued solid sales and financial performance", said Paul Hollands, Chairman and CEO of A&W Food Services.  "Our results are especially noteworthy given our strong results from the same quarter last year.  Our strategy to reposition and differentiate A&W as a "better burger" QSR restaurant continues to be very well received by our guests."

A&W lives by its motto "Good Food Makes Good Food", only serving its guests beef raised without the use of hormones and steroids, eggs from hens fed only a diet without animal by-products, chicken raised without the use of antibiotics, and organic and Fair Trade coffee.  In 2016, A&W launched bacon from pork raised without the use of antibiotics, another first for the QSR industry.

FINANCIAL HIGHLIGHTS

(dollars in thousands except per unit amounts)	Period from Mar 28, 2016 to Jun 19, 2016	Period from Mar 23, 2015 to Jun 14, 2015	Period from Jan 1, 2016 to Jun 19, 2016	Period from Jan 1, 2015 to Jun 14, 2015
Same store sales growth^(1)	+2.7%	+8.9%	+5.4%	+9.0%
Number of restaurants in the Royalty Pool	838	814	838	814
Sales reported by the restaurants in the Royalty Pool	$264,057	$249,110	$507,853	$451,558
Royalty income	$7,922	$7,474	$15,236	$13,547
General and administrative expenses	60	82	316	341
Net third party interest expense	589	554	1,200	1,089
Current income tax provision	1,519	1,261	2,922	2,457
Total distributable cash generated for distributions and dividends^(2)	$5,754	$5,577	$10,798	$9,660
Distributable cash per equivalent unit (2016 – 15,482,676 units; 2015 – 14,870,367 units)^(2)(3)	$0.371	$0.375	$0.697	$0.650
Distributions and dividends declared per equivalent unit	$0.380	$0.351	$0.630	$0.585
Net income^(4)	$5,758	$7,197	$9,087	$9,227
Net income, excluding non-cash items^(4)	$5,497	$5,577	$9,532	$9,660

(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 2016 includes the 122,462 LP units exchangeable for 244,924 common shares of Trade Marks representing the remaining 20% of the consideration for the January 5, 2016 adjustment to the Royalty Pool which is held back until December 2016 when the actual annual sales are reported by the new restaurants.  The number of equivalent units and distributable cash per equivalent unit in 2015 includes the 181,101 LP units exchanged for 362,202 common shares of Trade Marks representing the final consideration paid in December 2015 for the January 5, 2015 adjustment to the Royalty Pool.
(4)	Net income in 2016 and 2015 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.

FINANCIAL RESULTS
Royalty income for the second quarter of 2016 was $7,922,000 based on sales of $264,057,000.  This was an increase of 6.0% from royalty income of $7,474,000 and sales of $249,110,000 for the second quarter of 2015.  Year to date royalty income was $15,236,000 based on sales of $507,853,000, an increase of 12.5% from royalty income of $13,547,000 and sales of $451,558,000 for 2015 year to date.  The increase in sales and royalty income was due to the combined impact of the additional net 24 new restaurants in the Royalty Pool and the same store sales growth of 2.7% for the quarter and 5.4% year to date as compared to 2015.

Combined general and administrative expenses and interest increased by $13,000 in the quarter and $86,000 year to date.  General and administrative expenses did not change significantly in 2016 year to date as compared to 2015.  Interest expense was higher due to the increase in the interest rate on the term loan from 4.0% per annum to 4.3% per annum under an interest rate swap agreement which became effective on December 22, 2015. 

Distributable cash generated in the second quarter of 2016 to pay distributions to unitholders and dividends to Food Services was $5,754,000 compared to $5,577,000 in the second quarter of 2015.  Distributable cash generated year to date in 2016 was $10,798,000 compared to $9,660,000 in 2015 year to date.  The $1,138,000 year to date increase in distributable cash was comprised of the $1,689,000 increase in royalty income, less the $86,000 increase in combined general and administrative and interest expenses and a $465,000 increase in the current income tax provision.  The current income tax provision for the year to date includes transitional partnership tax of $425,000 compared to $328,000 in 2015 year to date.  Total transitional partnership tax is expected to be $909,000 in 2016 which is the last year that this tax is payable.          

Distributable cash generated per equivalent unit decreased by 0.4¢ to 37.1¢ per unit in the second quarter of 2016 from 37.5¢ for the second quarter of 2015.  Distributable cash generated per equivalent unit increased by 4.7¢ to 69.7¢ per unit in 2016 year to date from 65.0¢ for 2015 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 38.0¢ per unit were declared in the second quarter of 2016 compared to 35.1¢ per unit in the same quarter of 2015.  2016 year to date distributions were 63.0¢ per unit compared to 58.5¢ per unit in 2015 year to date.  The payout ratio for the second quarter of 2016 was 97.8% compared to 86.1% for the second quarter of 2015 and the year to date payout ratio was 103.3% compared to 97.7% for 2015 year to date.    

The cumulative surplus of distributable cash at the end of the second quarter of 2016 was $2,540,000, compared to a cumulative surplus of $4,148,000 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.  Refundable income tax of $1,266,000 also impacted the surplus distributable cash. Refundable income tax paid or payable in 2016 is expected to be recovered in future years when sufficient dividends are paid by A&W Trade Marks Inc. (Trade Marks).         

A copy of the Fund's management discussion and analysis and the financial statements of the Fund and A&W Food Services for the second quarter will be available on www.sedar.com and www.awincomefund.ca on or before July 29, 2016.   

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.  A&W Food Services owns 21.0% of the common shares of Trade Marks, and therefore owns the equivalent of 21.0% 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]