Mr. Wes Bews reports
BOSTON PIZZA ROYALTIES INCOME FUND ANNOUNCES SECOND QUARTER 2018 RESULTS INCLUDING SYSTEM-WIDE GROSS SALES OF $280.8 MILLION FOR THE PERIOD, AN INCREASE OF 1.9%
Boston Pizza Royalties Income Fund and Boston Pizza International Inc. have released financial results for the second quarter period from April 1, 2018, to June 30, 2018, and Jan. 1, 2018, to June 30, 2018. A copy of this press release, the condensed consolidated interim financial statements and related management's discussion and analysis of the fund and Boston Pizza International are available on SEDAR and on the Boston Pizza website. The fund will host a conference call to discuss the results on Aug. 9, 2018, at 8:30 a.m. PT (11:30 a.m. ET). The call can be accessed by dialling 1-800-319-4610 or 604-638-5340. A replay will be available until Sept. 9, 2018, by dialling 1-800-319-6413 or 604-638-9010 and entering the access code: 2506 followed by the pound sign.
System-wide gross sales of $280.8-million for the period and $546.4-million year to date, representing increases of 1.9 per cent and 1.8 per cent, respectively, versus the same periods one year ago.
Franchise sales from royalty pool restaurants of $215.4-million for the period and $419.4-million YTD, representing increases of 1.3 per cent and 1.0 per cent, respectively, versus the same periods one year ago.
Same-store sales growth of 0.3 per cent for the period and 0.3 per cent YTD.
Distributable cash per unit decreased 3.7 per cent for the period and decreased 3.0 per cent YTD.
Payout ratio of 103.0 per cent for the period, 107.8 per cent YTD and 101.6 per cent on a trailing 12-month basis. Cash balance at the end of the period was $2.2-million.
Effective Jan. 1, 2018, the British Columbia provincial government increased the general corporate income tax rate by 1 per cent, which increased the fund's SIFT tax rate by 1 per cent to 27 per cent. The decreases in distributable cash per unit and the increases in payout ratio for the period and YTD compared with the same periods in 2017 were principally due to the 1-per-cent increase in SIFT tax.
Trustees declared the July, 2018, distribution to unitholders of 11.5 cents per unit.
- Same-store sales growth, a key driver of distribution growth for unitholders of the fund, was positive 0.3 per cent for the period and positive 0.3 per cent YTD compared with negative 1.6 per cent and negative 0.9 per cent, respectively, for the same periods in 2017. Franchise sales, the basis upon which royalty and distribution income is paid to the fund, exclude revenue from the sale of liquor, beer, wine, and approved national promotions and discounts. On a franchise sales basis, SSSG was negative 0.4 per cent for the period and negative 0.6 per cent YTD, compared with negative 1.6 per cent and negative 1.0 per cent, respectively, for the same periods in 2017. The SSSG for the period and YTD was principally due to menu repricing and increased takeout and delivery sales, offset by weak general economic conditions in regions directly connected to the Canadian oil and gas industry. SSSG was also impacted YTD by the adverse impact of the Saskatchewan 6-per-cent provincial sales tax on restaurant purchased food. Franchise sales of restaurants in the fund's royalty pool were $215.4-million for the period and $419.4-million YTD compared with $212.7-million and $415.1-million, respectively, for the same periods in 2017. The increases in franchise sales for the period and YTD were primarily due to the additional franchise sales from eight net new restaurants added to the royalty pool on Jan. 1, 2018, partially offset by negative SSSG on a franchise sales basis.
"While we continue to see challenges in certain areas of our business such as the regions directly connected to the Canadian oil and gas industry, we are seeing positive results in other areas, including increased on-line takeout and delivery sales through our website, MyBP app and our recently launched Skip the Dishes partnership," said Jordan Holm, president of BPI. "Our successful thin crust pizza creations promotion, which drove increased pizza sales during the period, also contributed positively to our second quarter results."
The fund's net and comprehensive income was $6.3-million for the period compared with net and comprehensive income of $7.9-million for second quarter of 2017. The $1.6-million decrease in the fund's net and comprehensive income for the period compared with the second quarter of 2017 was primarily due to a $2.6-million change in fair value adjustments and lower interest income of $500,000, partially offset by higher royalty income of $100,000, higher distribution income of $200,000, lower income taxes of $300,000, and lower interest and financing expenses of $800,000. The fund's net and comprehensive income was $8.7-million YTD compared with net and comprehensive income of $14.5-million year to date in 2017. The $5.8-million decrease in the fund's net and comprehensive income YTD, compared with the same period in 2017, was primarily due to an $8.1-million change in fair value adjustments and lower interest income of $900,000 partially offset by higher royalty income of $200,000, higher distribution income of $400,000, lower income taxes of $1.4-million, and lower interest and financing expenses of $1.3-million.
The fund generated distributable cash of $7.3-million for the period compared with $7.1-million for the second quarter of 2017. The increase in distributable cash of $200,000 or 3.8 per cent was primarily attributable to a decrease in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties LP of $400,000 as a result of Boston Pizza International having exchanged 1,910,597 Class B units for 1,191,851 units of the fund on Sept. 26, 2017, and higher royalty and distribution income of $300,000, partially offset by higher SIFT tax of $300,000 and interest paid on debt of $100,000. The fund generated distributable cash of $14.0-million YTD compared with $13.4-million year to date in 2017. The increase in distributable cash of $600,000 or 4.6 per cent was primarily attributable to a decrease in Boston Pizza International's Class B unit entitlement of $700,000, and higher royalty and distribution income of $600,000, partially offset by higher SIFT tax of $400,000 and interest paid on debt of $100,000.
The fund generated distributable cash per unit of 33.5 cents for the period compared with 34.8 cents per unit for the second quarter of 2017. The decrease in distributable cash per unit of 1.3 cents or 3.7 per cent was primarily attributable to the British Columbia provincial government increasing the general corporate tax rate by 1 per cent, effective Jan. 1, 2018, which increased the fund's SIFT tax rate by 1 per cent to 27 per cent for the period, and negative SSSG on a franchise sales basis for the period. The fund generated distributable cash per unit of 64 cents YTD compared with 66 cents per unit for the same period in 2017. The decrease in distributable cash per unit of two cents or 3.0 per cent was primarily attributable to higher SIFT tax and negative SSSG on a franchise sales basis YTD.
The fund's payout ratio for the period was 103.0 per cent and 107.8 per cent YTD, compared with 99.1 per cent and 104.6 per cent, respectively, for the same periods in 2017. The increase in the fund's payout ratio for the period compared with the same period in 2017 was due to the combined effects of distributions paid increasing by $600,000, or 7.9 per cent, and distributable cash increasing by $200,000, or 3.8 per cent. The increase in the fund's payout ratio YTD compared with the same period in 2017 was due to the combined effects of distributions paid increasing by $1.1-million, or 7.9 per cent, and distributable cash increasing by $600,000, or 4.6 per cent. The increase in distributions paid in the period and YTD compared with the same periods in 2017 was due to Boston Pizza International having exchanged 1,910,597 Class B units and 40,815,839 Class 2 general partner units of Boston Pizza Canada LP for 1.6 million units on Sept. 26, 2017. The fund strives to provide unitholders with consistent monthly distributions, and as a result, the fund will generally experience seasonal fluctuations in its payout ratio. The fund's payout ratio is likely to be higher in the first and fourth quarters each year compared with the second and third quarters each year since Boston Pizza restaurants generally experience higher franchise sales during the summer months when restaurants open their patios and benefit from increased tourist traffic. Higher franchise sales generally result in increases in distributable cash. On a trailing 12-month basis, the fund's payout ratio was 101.6 per cent as at June 30, 2018. A key feature of the fund is that it is a top-line structure, in which Boston Pizza International and BP Canada LP pay the fund an amount based on franchise sales from restaurants in the fund's royalty pool. Accordingly, unitholders of the fund are not directly exposed to changes in the operating costs or profitability of Boston Pizza International, BP Canada or individual Boston Pizza restaurants. Given this structure, and that the fund has no current mandate to retain capital for other purposes, it is expected that the fund will maintain a payout ratio close to 100 per cent over time as the trustees of the fund continue to distribute all available cash in order to maximize returns to unitholders.
On Aug. 8, 2018, the trustees of the fund approved a cash distribution to unitholders of 11.5 cents per unit in respect of the period from July 1, 2018, to July 31, 2018. This distribution will be payable on Aug. 31, 2018, to unitholders of record at the close of business on Aug. 21, 2018. The fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders. Including the July, 2018, distribution, which will be paid on Aug. 31, 2018, the fund will have paid out 193 consecutive monthly distributions totalling $294.3-million or $20.07 per unit. Unitholders have received 18 distribution increases since the fund's initial public offering of units in 2002.
The attached table sets out selected information from the fund's condensed consolidated interim financial statements together with other data, and should be read in conjunction with the condensed consolidated interim financial statements and management's discussion and analysis of the fund for the three- and six-month periods ended June 30, 2018, and June 30, 2017.
(in thousands of dollars -- except restaurants, SSSG, payout ratio and per-unit items)
Q2 2018 Q2 2017 YTD 2018 YTD 2017
System-wide gross sales $280,848 $275,637 $546,383 $536,837
Number of restaurants in royalty pool 391 383 391 383
Franchise sales reported by restaurants in the royalty pool 215,353 212,691 419,390 415,097
Royalty income 8,615 8,508 16,776 16,604
Distribution income 2,871 2,686 5,593 5,244
Interest income 7 452 16 904
Total revenue 11,493 11,646 22,385 22,752
Administrative expenses (327) (335) (653) (637)
Interest expense on debt (662) (612) (1,311) (1,213)
Interest expense on Class B unit and Class C GP unit liabilities (934) (1,756) (1,575) (2,953)
Profit before fair value adjustments and income taxes 9,570 8,943 18,846 17,949
Fair value adjustment on investment in BP Canada LP (1,800) 2,575 (11,948) 1,868
Fair value adjustment on Class B unit liability 719 (1,561) 4,773 (1,414)
Fair value adjustment on interest rate swaps 17 493 22 492
Current and deferred income tax expense (2,219) (2,527) (2,994) (4,400)
Net and comprehensive income 6,287 7,923 8,699 14,495
Basic earnings per unit 0.29 0.39 0.40 0.71
Diluted earnings per unit 0.23 0.39 0.19 0.71
Distributable cash/distributions/payout ratio
Cash flows from operating activities 8,958 9,379 17,248 18,121
Class C GP unit distributions to BPI - (450) - (900)
BPI Class B unit entitlement (931) (1,304) (1,881) (2,634)
Interest paid on long-term debt (669) (619) (1,340) (1,220)
SIFT tax on units (29) 53 (24) 20
Distributable cash 7,329 7,059 14,003 13,387
Distributions paid 7,550 6,998 15,101 13,997
Payout ratio 103.0% 99.1% 107.8% 104.6%
Distributable cash per unit 0.335 0.348 0.640 0.660
Distributions paid per unit 0.345 0.345 0.690 0.690
Same-store sales growth 0.3% (1.6%) 0.3% (0.9%)
Number of restaurants opened 1 1 1 2
Number of restaurants closed 0 1 1 2
Boston Pizza is well positioned for future growth and should continue to strengthen its position as the No. 1 casual dining brand in Canada by achieving positive SSSG and opening new Boston Pizza locations across Canada.
The two principal factors that affect SSSG are changes in customer traffic and changes in average guest cheque. Boston Pizza International's and BP Canada LP's strategies to drive higher guest traffic include attracting a wide variety of guests into the restaurant, sports bar, and takeout and delivery parts of each location, offering a compelling value proposition to guests and leveraging a larger marketing budget versus the previous year, along with a revised calendar of national and local store promotions. Increased average cheque levels are expected to be achieved through a combination of culinary innovation and annual menu repricing. In addition, the franchise agreement governing each Boston Pizza restaurant requires a complete store renovation every seven years. Restaurants typically close for two to three weeks to complete the renovation and experience an incremental sales increase in the year following the
Boston Pizza remains well positioned for future expansion as evidenced by the eight net new restaurants that opened in 2017, the two new locations that have opened to date in 2018 and the six new locations currently under construction. Boston Pizza International's management believes that Boston Pizza will continue to serve more guests in more locations than any other casual dining brand in Canada by pursuing further restaurant development opportunities across the country.
About Boston Pizza Royalties Income Fund
The fund is a limited-purpose open-ended trust with an excellent record for investors since its initial public offering in 2002. The fund has delivered 18 distribution increases and 192 consecutive monthly distributions to unitholders totalling $291.7-million or $19.95 per unit since 2002. The fund earns revenue based on the franchise system sales from the 391 Boston Pizza restaurants included in the fund's royalty pool.
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