A&W Revenue Royalties Income Fund Reports Solid Growth In 2016

TRADING SYMBOL:  The Toronto Stock Exchange – AW.UN   

HIGHLIGHTS

• Same store sales growth up 3.4% for the year
• Two year stacked same store sales growth +11.0%
• Royalty income increased by 7.3%
• Strong year for the Fund with distributions increased twice

VANCOUVER, Feb. 14, 2017 /CNW/ - A&W Revenue Royalties Income Fund (the Fund) and A&W Food Services of Canada Inc. (A&W Food Services) reported today results for the fourth quarter and year ended December 31, 2016.  The Fund will hold a conference call to discuss the results on Tuesday, February 14, 2017 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-800-263-0877 or [phone] Passcode 9181419.  A replay will be available until February 21, 2017, by dialling toll-free 1-888-203-1112 or [phone] Passcode 9181419. 

The Fund enjoyed solid growth in 2016, with same store sales growth of +3.4%, despite a challenging year for the foodservice industry in Canada and the severe downturn in Alberta's economy due to the plunge in oil prices.  The Fund's same store sales growth is particularly notable when added to 2015's +7.6% same store sales growth, bringing the two year stacked same store sales growth to +11.0%.  Same store sales growth for the fourth quarter of 2016 was +1.7%, the 15^th consecutive quarter of positive same store sales growth.   

Annual royalty income for 2016 increased by 7.3% to $34,135,000 based on sales of $1,137,820,000.  The increase in sales and royalty income was due to the 3.4% same store sales growth and the increase in the number of restaurants in the Royalty Pool on January 5, 2016 from 814 to 838.  Distributable cash increased by 5.5% and distributable cash per unit increased from $1.559 per unit to $1.577 per unit. 

"We are very pleased with A&W's continued same store sales growth in the quarter resulting in 3.4% same store sales growth for the year", said Paul Hollands, Chairman and CEO of A&W Food Services.  "We continue to see economic challenges in the important Alberta and Saskatchewan markets that impact our overall results.  However our strategic commitment to better ingredients is having a powerful impact and has been successful at growing market share in the quick service restaurant burger market." 

A&W Food Services' better ingredients include beef raised without the use of hormones or steroids, eggs from hens fed a diet without animal by-products, chicken raised without the use of antibiotics, organic and Fair Trade coffee and bacon from pork raised without the use of antibiotics.  A&W Food Services' strategy also includes accelerating new restaurant growth, and 31 new restaurants were opened across Canada in 2016.

A&W Food Services announced on January 26, 2017 that it is adding all-day breakfast, featuring A&W's handheld Bacon & Egger^®, Sausage & Egger^®, Cheese & Egger^® breakfast sandwiches and its Breakfast Wrap to its menu effective February 27, 2017.

FINANCIAL HIGHLIGHTS

(dollars in thousands except per unit amounts)	Period from Sep 12, 2016 to Dec 31, 2016	Period from Sep 7, 2015 to Dec 31, 2015	Year ended Dec 31, 2016	Year ended Dec 31, 2015
Same store sales growth^(1)	+1.7%	+5.3%	+3.4%	+7.6%
Number of restaurants in the Royalty Pool	838	814	838	814
Sales reported by the restaurants in the Royalty Pool	$351,494	$348,116	$1,137,820	$1,060,851
Royalty income	$10,545	$10,444	$34,135	$31,826
General and administrative expenses	214	117	586	558
Net third party interest expense	781	773	2,574	2,419
Current income tax provision	1,982	1,792	6,500	5,660
Total distributable cash generated for distributions and dividends^(2)	$7,568	$7,762	$24,475	$23,189
Distributable cash per equivalent unit (2016 – 15,517,988 units; 2015 – 14,870,367 units)^(2)(3)	$0.488	$0.522	$1.577	$1.559
Distributions and dividends declared per equivalent unit	$0.532	$0.496	$1.558	$1.440
Net income^(4)	$8,973	$7,706	$23,916	$21,319
Net income, excluding non-cash items^(4)	$7,205	$7,762	$22,446	$23,189

^(1)	Same store sales and same store sales growth do not have a standardized meaning prescribed by International Financial Reporting Standards (IFRS) and therefore may not be comparable to similar measures presented by other issuers.  This important 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 important 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 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.  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 gains and 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 fourth quarter of 2016 was $10,545,000 based on sales of $351,494,000.  This was an increase of 1.0% from royalty income of $10,444,000 and sales of $348,116,000 for the fourth quarter of 2015.  There were 111 days of sales in the fourth quarter of 2016 as compared to 116 days in the same quarter of 2015.  Annual royalty income for 2016 was $34,135,000 based on sales of $1,137,820,000, an increase of 7.3% from royalty income of $31,826,000 and sales of $1,060,851,000 for 2015.  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 1.7% for the quarter and 3.4% for the full year 2016 as compared to 2015. 

Combined general and administrative expenses and interest increased by $105,000 in the quarter and $183,000 for the year.  The increase in general and administrative expenses was primarily due to higher TSX filing fees and professional fees.  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. 

Total income tax including non-cash deferred income tax and refundable income tax increased by $745,000 in the quarter and $3,114,000 for the year.  The current income tax provision increased by $190,000 for the quarter and $840,000 for the year.  Current income taxes payable include transitional partnership tax of $909,000 compared to $727,000 in 2015.  2016 is the last year that transitional partnership tax is payable.  Refundable income tax was $363,000 for the quarter and $2,029,000 for the year.  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).

The Fund's net income and comprehensive income was $8,973,000 for the quarter compared to $7,706,000 for the fourth quarter of 2015.  Net income and comprehensive income was $23,916,000 for 2016 compared to $21,319,000 for 2015.  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 fourth quarter of 2016 to pay distributions to unitholders and dividends to Food Services was $7,568,000 compared to $7,762,000 in the fourth quarter of 2015.  Distributable cash generated per equivalent unit decreased by 3.4¢ to 48.8¢ per unit in the fourth quarter of 2016 from 52.2¢ for the fourth quarter of 2015.  There were 111 days of sales in the fourth quarter of 2016 as compared to 116 days in the same quarter of 2015.  

Distributable cash generated in 2016 was $24,475,000 compared to $23,189,000 in 2015.  The $1,286,000 annual increase in distributable cash was comprised of the $2,309,000 increase in royalty income less the $183,000 increase in general and administrative and interest expenses, and $840,000 increase in the current income tax provision (excluding refundable income tax).  Distributable cash per unit increased by 1.8¢ to $1.577 per unit for 2016 from $1.559 for 2015. 

Four monthly distributions totalling 53.2¢ per unit were declared in the fourth quarter of 2016 compared to 49.6¢ per unit in the same quarter of 2015.  Total distributions declared in 2016 were $1.558 per unit compared to $1.440 per unit in 2015, an increase of 8.2%.  The annual payout ratio for 2016 was 98.8% compared to 92.4% for 2015.      

The cumulative surplus of distributable cash at the end of 2016 was $2,417,000, compared to a cumulative surplus of $4,148,000 at the beginning of the year, a decrease of $1,731,000.  The refundable income tax of $2,029,000 was the primary reason for the decrease in surplus distributable cash.  As noted above, this refundable income tax is expected to be recovered in future years when sufficient dividends are paid by Trade Marks.     

As a result of the continued strong performance of the Fund and the underlying A&W restaurants, the Fund increased monthly cash distributions twice in 2016, from 12.5¢ per unit to 13.0¢ beginning with the May 2016 distribution and then to 13.3¢ per unit beginning with the July 2016 distribution.  The current monthly distribution rate of 13.3¢ per unit represents an annualized distribution rate of $1.596 per unit, an increase of 6.4% from the 2015 annualized rate of $1.500 per unit.  The Fund will continue to periodically review distribution levels and distribute available cash in order to maximize returns to unitholders and maintain uniformity of distributions.

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 23.5% of the common shares of Trade Marks, and therefore owns the equivalent of 23.5% 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