Mr. Wes Bews reports
BOSTON PIZZA ROYALTIES INCOME FUND ANNOUNCES THIRD QUARTER 2018 RESULTS INCLUDING SYSTEM-WIDE GROSS SALES OF $836.7 MILLION YEAR-TO-DATE, AN INCREASE OF 1.6%
Boston Pizza Royalties Income Fund and Boston Pizza International Inc. (BPI) have provided their financial results for the third quarter period from July 1, 2018, to Sept. 30, 2018, and Jan. 1, 2018, to Sept. 30, 2018 (YTD). A copy of this press release, the condensed consolidated interim financial statements, and related management's discussion and analysis (MD&A) of the fund and BPI are available at SEDAR and the fund's website. The fund will host a conference call to discuss the results on Nov. 8, 2018, at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time). The call can be accessed by dialling 1-800-319-4610 or 604-638-5340. A replay will be available until Dec. 8, 2018, by dialling 1-800-319-6413 or 604-638-9010 and entering the access code: 2711 followed by the pound sign. The replay will also be available at the fund's website.
Same-store sales growth (SSSG), a key driver of distribution growth for unitholders of the fund, was 0.0 per cent for the period and positive 0.2 per cent YTD compared with positive 0.4 per cent and negative 0.4 per cent, respectively, for the same periods in 2017. Franchise sales, the basis upon which royalty and distribution income are 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 0.2 per cent for the period and negative 0.4 per cent YTD compared with positive 0.4 per cent and negative 0.5 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 and lower guest traffic. Much of the menu price increases were made in response to provincial minimum wage increases, and these menu price increases have contributed to reduced guest traffic compared with the same period last year. BPI continues to monitor reactions to pricing strategies in order to adapt to the competitive restaurant environment. Franchise sales of restaurants in the fund's royalty pool were $224.4-million for the period and $643.8-million YTD compared with $221.5-million and $636.6-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.
"We continue to see good results in takeout and delivery sales driven by our website and MyBP app, and our aggregator partnership with Skip the Dishes. However, our overall performance continues to be impacted by challenges in the regions directly connected to the Canadian oil and gas sector and decreased guest traffic," said Jordan Holm, president of BPI. "We have several exciting initiatives under way that we believe will drive improved performance and guest traffic in the quarters ahead, including our appy hour campaign with $4 appetizers and cocktails during certain times and our popular holiday promotion featuring tasty new menu items and a bonus promotion card offer."
The fund's net and comprehensive income was $900,000 for the period compared with net and comprehensive income of $5.4-million for third quarter of 2017. The $4.5-million decrease in the fund's net and comprehensive income for the period compared with the third quarter of 2017 was primarily due to a $5.9-million change in fair value adjustments and lower interest income of $300,000, partially offset by higher royalty income of $100,000, higher distribution income of $100,000, lower income taxes of $700,000, and lower interest and financing expenses of $700,000. The fund's net and comprehensive income was $9.6-million YTD compared with net and comprehensive income of $19.9-million year to date in 2017. The $10.3-million decrease in the fund's net and comprehensive income for the period compared with the same period in 2017 was primarily due to $14.1-million change in fair value adjustments and lower interest income of $1.2-million partially offset by higher royalty income of $300,000, higher distribution income of $500,000, lower income taxes of $2.1-million, and lower interest and financing expenses of $2.0-million. For a detailed discussion on the fund's net and comprehensive income, please see the "Operating results -- net and comprehensive income/basic and diluted earnings" section in the fund's MD&A for the period and YTD. The fund's net income under international financial reporting standards (IFRS) contains non-cash items, such as the fair value adjustments on financial instruments and deferred income taxes, that do not affect the fund's business operations or its ability to pay distributions to unitholders. In the fund's view, net income is not the only or most meaningful measurement of the fund's ability to pay distributions. Consequently, the fund reports the non-IFRS metrics of distributable cash and payout ratio to provide investors with more meaningful information regarding the amount of cash that the fund has generated to pay distributions and the extent to which the fund has distributed that cash. Readers are cautioned that distributable cash and payout ratio are non-IFRS financial measures that do not have standardized meanings prescribed by IFRS and therefore may not be comparable with similar measures presented by other issuers.
The fund generated distributable cash of $8.0-million for the period compared with $7.9-million for the third quarter of 2017. The increase in distributable cash of $100,000 or 0.6 per cent was primarily attributable to a decrease in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties LP (Royalties LP) of $200,000 and higher royalty and distribution income of $200,000, partially offset by higher SIFT tax of $300,000 and interest paid on debt of $100,000. The fund generated distributable cash of $22.0-million YTD compared with $21.3-million year to date in 2017. The increase in distributable cash of $700,000 or 3.1 per cent was primarily attributable to a decrease in BPI's Class B unit entitlement of $1.0-million and higher royalty and distribution income of $800,000, partially offset by higher SIFT tax of $800,000 and interest paid on debt of $200,000.
The fund generated distributable cash per unit of 36.4 cents for the period compared with 38.9 cents per unit for the third quarter of 2017. The decrease in distributable cash per unit of 2.5 cents or 6.4 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 $1.004 YTD compared with $1.049 per unit for the same period in 2017. The decrease in distributable cash per unit of 4.5 cents or 4.3 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 94.7 per cent and 103.1 per cent YTD compared with 88.4 per cent and 98.5 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 $100,000 or 0.6 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 $1.7-million or 7.9 per cent and distributable cash increasing by $700,000 or 3.1 per cent. The increase in distributions paid in the period and YTD compared with the same periods in 2017 was due to BPI 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 103.4 per cent as at Sept. 30, 2018. A key feature of the fund is that it is a top-line structure, in which BPI 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 BPI, BP Canada LP 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 Nov. 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 Oct. 1, 2018, to Oct. 31, 2018. This distribution will be payable on Nov. 30, 2018, to unitholders of record at the close of business on Nov. 21, 2018. The fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders. Including the October, 2018, distribution, which will be paid on Nov. 30, 2018, the fund will have paid out 196 consecutive monthly distributions totalling $301.8-million or $20.41 per unit. Unitholders have received 18 distribution increases since the fund's initial public offering of units in 2002.
Q3 2018 Q3 2017 YTD 2018 YTD 2017
(in thousands of dollars)
System-wide gross sales $290,331 $286,731 $836,714 $823,568
Number of restaurants in royalty pool 391 383 391 383
Franchise Sales reported by restaurants in the royalty pool 224,368 221,547 643,758 636,644
Royalty income 8,974 8,862 25,750 25,466
Distribution income 2,991 2,863 8,584 8,107
Interest income 8 304 24 1,208
Total revenue 11,973 12,029 34,358 34,781
Administrative expenses (303) (273) (956) (910)
Interest expense on debt (672) (611) (1,983) (1,824)
Interest expense on Class B unit and Class C GP unit liabilities (908) (1,727) (2,483) (4,680)
Profit before fair value adjustments and income taxes 10,090 9,418 28,936 27,367
Fair value adjustment on investment in BP Canada LP (13,476) (7,455) (25,424) (5,587)
Fair value adjustment on Class B unit liability 5,380 4,929 10,153 3,515
Fair value adjustment on interest rate swaps 298 668 320 1,160
Current and deferred income tax expense (1,361) (2,115) (4,355) (6,515)
Net and comprehensive income 931 5,445 9,630 19,940
Basic earnings per unit 0.04 0.27 0.44 0.98
Diluted (loss) earnings per unit (0.17) 0.02 0.05 0.80
Distributable cash/distributions/payout ratio
Cash flows from operating activities 9,548 9,953 26,796 28,074
Class C GP unit distributions to BPI - (300) - (1,200)
BPI Class B unit entitlement (915) (1,113) (2,796) (3,747)
Interest paid on long-term debt (687) (615) (2,027) (1,835)
SIFT tax on units 25 (5) 1 15
Distributable cash 7,971 7,920 21,974 21,307
Distributions paid 7,551 6,999 22,652 20,996
Payout ratio 94.7% 88.4% 103.1% 98.5%
Distributable cash per unit 0.364 0.389 1.004 1.049
Distributions paid per unit 0.345 0.345 1.035 1.035
Same-store sales growth 0.0% 0.4% 0.2% (0.4%)
Number of restaurants opened 2 2 3 4
Number of restaurants closed 4 1 5 3
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. BPI'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 reopening.
Boston Pizza remains well positioned for future expansion as evidenced by the eight net new restaurants that opened in 2017, the six new locations that have opened to date in 2018 and the seven new locations currently under construction. BPI'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. Including the October, 2018, distribution which is payable on Nov. 30, 2018, the fund has delivered 18 distribution increases and 196 consecutive monthly distributions totalling $301.8-million or $20.41 per unit. The fund earns revenue based on the franchise system sales of the 391 Boston Pizza restaurants included in the fund's royalty pool.
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