Mr. Jordan Holm reports
BOSTON PIZZA ROYALTIES INCOME FUND ANNOUNCES 2018 FOURTH QUARTER AND ANNUAL RESULTS INCLUDING SYSTEM-WIDE GROSS SALES OF OVER $1.1 BILLION FOR THE YEAR, AN INCREASE OF 1.5%
Boston Pizza Royalties Income Fund and Boston Pizza International Inc. (BPI) have released financial results for the fourth quarter period from Oct. 1, 2018, to Dec. 31, 2018, and Jan. 1, 2018, to Dec. 31, 2018. A copy of this press release, the annual consolidated financial statements, and related management's discussion and analysis of the fund and BPI are available on SEDAR and on the company website. The fund will host a conference call to discuss the results on Feb. 14, 2019, 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 March 14, 2019, by dialling 1-800-319-6413 or 604-638-9010 and entering the access code 2918 followed by the pound sign. The replay will also be available on the company website.
System-wide gross sales of $278.5-million for the period and $1.1-billion for the year, representing increases of 1.1 per cent and 1.5 per cent, respectively, versus the same periods one year ago;
- Franchise sales from royalty pool restaurants of $211.4-million for the period and $855.1-million for the year, representing increases of 1.7 per cent and 1.3 per cent, respectively, versus the same periods one year ago;
- Same-store sales growth of negative 0.2 per cent for the period and positive 0.1 per cent for the year;
- Distributable cash per unit increased 0.3 per cent for the period and decreased 3.1 per cent for the year;
- Payout ratio of 103.8 per cent for the period and 103.3 per cent for the year. Cash balance at the end of the year was $2.7-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 year compared with the same period in 2017 were principally due to the 1-per-cent increase in SIFT tax;
- Boston Pizza opened five net new full-service restaurants and completed 36 restaurant renovations in 2018;
- On Feb. 8, 2019, the trustees declared the January, 2019, 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 negative 0.2 per cent for the period and positive 0.1 per cent for the year compared with positive 0.1 per cent and negative 0.3 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 positive 0.1 per cent for the period and negative 0.3 per cent for the year compared with negative 0.2 per cent and negative 0.4 per cent, respectively, for the same periods in 2017. The SSSG for the period and year 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 those menu price increases contributed to reduced guest traffic compared with the same period last year. BPI continues to monitor reactions to menu strategies in order to adapt to the competitive restaurant environment. Franchise sales of restaurants in the fund's royalty pool were $211.4-million for the period and $855.1-million for the year compared with $207.9-million and $844.5-million, respectively, for the same periods in 2017. The increase in franchise sales for the period was primarily due to the additional franchise sales from eight net new restaurants added to the royalty pool on Jan. 1, 2018, and positive SSSG on a franchise sales basis. For the year, the increase in franchise sales was 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 are pleased to have opened 10 new Boston Pizza restaurants and completed another 36 restaurant renovations during 2018. In addition, we continue to see strength in takeout and delivery sales driven by on-line ordering through the BostonPizza.com website and the 'MyBP' app, and by our national partnership with Skip-the-Dishes," said Jordan Holm, president of BPI. "As a result, we achieved increases to distributable cash per unit in the fourth quarter of 2018 and to system-wide gross sales of 1.5 per cent to over $1.1-billion for the year, further solidifying our position as Canada's No. 1 casual dining brand."
The fund's net and comprehensive loss was $1.0-million for the period compared with net and comprehensive income of $7.1-million for the fourth quarter of 2017. The $8.1-million decrease in the fund's net and comprehensive income for the period compared with the fourth quarter of 2017 was primarily due to a $8.6-million change in fair value adjustments, partially offset by lower income taxes of $600,000. The fund's net and comprehensive income was $8.7-million for the year compared with net and comprehensive income of $27.0-million in 2017. The $18.3-million decrease in the fund's net and comprehensive income for the year compared with 2017 was primarily due to a $22.7-million change in fair value adjustments, partially offset by lower income taxes of $2.8-million, and higher royalty income of $400,000 and distribution income of $500,000. 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 the year. The fund's net income under international financial reporting standards 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. The fund also reports the non-IFRS metric of SSSG to provide investors useful information regarding the change in gross sales of Boston Pizza restaurants. Readers are cautioned that distributable cash, payout ratio and SSSG are non-IFRS financial measures that do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. For a reconciliation between cash flow from operating activities (the most directly comparable IFRS measure) and distributable cash see the "financial summary" section of this press release. For a detailed discussion on the fund's distributable cash and payout ratio, please see the operating results -- distributable cash/payout ratio section in the fund's MD&A for the period and the year. A reconciliation of SSSG to an IFRS measure is not possible.
The fund generated distributable cash of $7.3-million for the period compared with $7.2-million for the fourth quarter of 2017. The increase in distributable cash of $100,000 or 0.2 per cent was primarily attributable to higher royalty and distribution income of $200,000, partially offset by higher interest paid on debt of $100,000. The fund generated distributable cash of $29.2-million for the year compared with $28.6-million in 2017. The increase in distributable cash of $600,000 or 2.4 per cent was primarily attributable to higher royalty and distribution income of $900,000 and a decrease in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties LP of $900,000 partially offset by higher SIFT tax of $800,000 and higher interest paid on debt of $300,000.
The fund generated distributable cash per unit of 33.2 cents for the period compared with 33.1 cents per unit for the fourth quarter of 2017. The increase in distributable cash per unit of 0.1 cent or 0.3 per cent was primarily attributable to positive SSSG on a franchise sales basis for the period, partially offset by 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. The fund generated distributable cash per unit of $1.336 for the year compared with $1.379 per unit in 2017. The decrease in distributable cash per unit of 4.3 cents or 3.1 per cent was primarily attributable to higher SIFT tax and negative SSSG on a franchise sales basis for the year.
The fund's payout ratio for the period was 103.8 per cent and 103.3 per cent for the year compared with 104.2 per cent and 100.0 per cent, respectively, for the same periods in 2017. The decrease 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 decreasing by a nominal amount or 0.2 per cent and distributable cash increasing by $100,000 or 0.2 per cent. The increase in the fund's payout ratio for the year compared with the same period in 2017 was due to the combined effects of distributions paid increasing by $1.7-million or 5.8 per cent and distributable cash increasing by $600,000 or 2.4 per cent. The increase in distributions paid in the year compared with the same period 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 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. 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 Feb. 8, 2019, the trustees of the fund approved a cash distribution to unitholders of 11.5 cents per unit in respect of the period from Jan. 1, 2019, to Jan. 31, 2019. This distribution will be payable on Feb. 28, 2019, to unitholders of record at the close of business on Feb. 21, 2019. The fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders. Including the January, 2019, distribution, which will be paid on Feb. 28, 2019, the fund will have paid out 199 consecutive monthly distributions totalling $309.3-million or $20.76 per unit. Unitholders have received 18 distribution increases since the fund's initial public offering of units in 2002.
(in thousands of dollars -- except restaurants, SSSG, payout ratio and per-unit items)
For the years ended Dec. 31,
2018 2017 2016
System-wide gross sales $1,115,200 $1,099,107 $1,080,559
Number of restaurants in royalty pool 391 383 372
Franchise sales reported by restaurants in the royalty pool 855,108 844,496 828,619
Royalty income 34,204 33,780 33,145
Distribution income 11,407 10,904 10,700
Interest income 33 1,217 1,808
Total revenue 45,644 45,901 45,653
Administrative expenses (1,255) (1,209) (1,174)
Interest expense on debt (2,676) (2,437) (2,461)
Interest expense on Class B unit and Class C GP unit liabilities (3,722) (5,818) (6,392)
Profit before fair value adjustments and income taxes 37,991 36,437 35,626
Fair value adjustment on investment in BP Canada LP (37,099) (4,441) 24,733
Fair value adjustment on Class B unit liability 14,814 3,122 (12,960)
Fair value adjustment on interest rate swaps (412) 1,275 702
Current and deferred income tax expense (6,625) (9,400) (10,336)
Net and comprehensive income 8,669 26,993 37,765
Basic earnings per unit 0.40 1.30 1.86
Diluted (loss) earnings per unit (0.12) 1.16 1.86
Distributable cash/distributions/payout ratio
Cash flows from operating activities 35,678 36,823 36,858
Class C GP unit distributions to BPI - (1,200) (1,800)
BPI Class B unit entitlement (3,722) (4,618) (4,522)
Interest paid on long-term debt (2,710) (2,440) (2,394)
SIFT tax on units (6) (9) 37
Distributable cash 29,240 28,556 28,179
Distributions paid 30,191 28,547 27,876
Payout ratio 103.3% 100.0% 98.9%
Distributable cash per unit 1.336 1.379 1.388
Distributions paid per unit 1.380 1.380 1.373
Same store sales growth 0.1% (0.3%) (0.3%)
Number of restaurants opened 10 11 13
Number of restaurants closed 5 3 2
As at Dec. 31 2018 2017 2016
Total assets 403,686 434,939 444,332
Total liabilities 131,019 139,201 181,120
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'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 five net new restaurants that opened in 2018. There are currently six new locations 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 January, 2019, distribution, which is payable on Feb. 28, 2019, the fund has delivered 18 distribution increases and 199 consecutive monthly distributions totalling $309.3-million or $20.76 per unit. The fund earns revenue based on the franchise system sales of the 396 Boston Pizza restaurants in the fund's royalty pool.
BPI is Canada's No. 1 casual dining brand with annual gross sales of over $1.1-billion, serving more than 50 million guests through over 395 mainly franchisee-operated restaurants.
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