Boston Pizza International Inc. (BPFUN) Earnings Call Transcript & Summary

Hello. This is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza's First Quarter 2020 Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michael Harbinson, Chief Financial Officer. Please go ahead, sir.

Thank you, and welcome to the call. We'll be discussing the 2020 first quarter results for both Boston Pizza Royalties Income Fund, or The Fund, and for Boston Pizza International, or BPI. For complete details on our financial results, please see our 2020 first quarter materials filed earlier today on SEDAR or visit The Fund's website at bpincomefund.com. Should you require additional information after the call, you can reach us via the Investor Relations phone number listed on our press release. The Fund is a limited purpose, open-ended trust established under the laws of British Columbia to acquire indirectly certain trademarks and trade names used by BPI in its Boston Pizza Restaurants in Canada, whereby BPI pays an amount to The Fund based on franchise revenues of Royalty Pool restaurants. For a complete description of The Fund and its business, please see the annual information form dated February 12, 2020, which was filed on sedar.com. Before I turn the call over to Jordan Holm, President of BPI and The Fund, I would like to note that certain information in the following discussion may constitute forward-looking information. For a more complete definition of forward-looking information and associated risks, please refer to The Fund's management discussion and analysis issued earlier today. Forward-looking information is provided as of the date of this call, except as required by law, and we assume no obligation to update or revise forward-looking information to reflect new events or circumstances. With that, I'll turn the call over to Jordan.

Thank you, Michael, and welcome, everyone, to Boston Pizza's First Quarter Investor Conference Call. Today, I'll discuss our results for the quarter ended March 31, 2020, and Boston Pizza's upcoming plans. Michael will then provide a summary of the key financial highlights for the quarter plus provide highlights of the COVID-19 recovery plan that was recently agreed to between The Fund, BPI and its lenders. As usual, we'll leave time for your questions at the end of the call. Before we talk about Boston Pizza's results for the first quarter of 2020, I'd like to say a big thank you to all the frontline workers, first responders and essential employees working in communities across Canada to combat the spread of COVID-19. These are challenging times, and we are grateful for your personal sacrifices and your service. The COVID-19 pandemic has had a sudden unexpected and unprecedented impact on the Canadian economy. The restaurant industry is one of the hardest hit sectors, and there has been a significant disruption to Boston Pizza Restaurants across Canada. It has been critical for us to continually adapt to the pandemic and its continuing impact on our business. Keeping the public safe has been Boston Pizza's top priority throughout. Early in the pandemic, this involved proactively closing our dining rooms and bars in advance of government mandates in most regions. While our restaurant staff, franchisees and delivery service partners have enabled us to grow our takeout and delivery business at most locations, the restrictions to our on-premise business plus the temporary closure of many restaurants has resulted in material declines to our franchise sales and same-restaurant sales. I have been pleased with our ability to mitigate declines in total franchise sales and same-restaurant sales through an aggressive focus on takeout delivery. We saw strong year-over-year increases in these areas and positive momentum steadily grew as the pandemic continued. We have also been aggressively focused on guest safety. We have put a high -- placed high-brand standards on health and safety, sanitation procedures and social distancing plus introduced new services like curbside pickup, contactless delivery and online payments. Our focus throughout this pandemic has been to earn the confidence of our restaurant guests and staff by demonstrating that Boston Pizza is taking appropriate precautions to protect their health. This includes the delayed opening of individual restaurants or whole regions until such time as the operating standards in our reopening guide can be consistently executed. To date, approximately 375 Boston Pizza locations are open for takeout delivery with approximately 340 of those locations also having their dining rooms, sports bars and/or patios open. While many of the effects of COVID-19 have had on our business began near the end of the first quarter, the full effect of these impacts will not be fully realized until the second quarter 2020 and beyond. Turning to the results, as shared in the press release and financial statements filed this morning, Boston Pizza posted system-wide growth sales of $224.8 million for the quarter, representing a decrease of 15.3% versus the same period in 2019. In addition, The Fund posted franchise sales from restaurants in the Royalty Pool of $174.1 million for the quarter, representing a decrease of 15.7% versus the same period in 2019. Negative same-restaurant sales for the quarter were principally due to declines in restaurant guest traffic and the temporary closure of all dining rooms and sports bars in Boston Pizza Restaurants across Canada starting March 17, 2020, as a result of the COVID-19 pandemic, partially offset by the increased takeout delivery sales that I mentioned earlier, plus an extra day of sales in February as 2020 is a leap year. The World Health Organization declared the COVID-19 outbreak a pandemic on March 11, 2020. To help illustrate the impact of the COVID-19 pandemic on Boston Pizza, same-restaurant sales for the period of January 1, 2020 to March 10, 2020, was negative 1.1%, and for March 11, 2020 to March 31, 2020, it was negative 60.3%. On a franchise sales basis, same-restaurant sales for January 1, 2020 to March 10, 2020, was negative 1.5% and for March 11, 2020, to March 31, 2020, on a franchise sales basis, same-restaurant sales was negative 59.3%. Turning to restaurant development. Boston Pizza opened 1 new full-service restaurant and closed 2 full-service restaurants in the quarter. As stated earlier, Boston Pizza temporarily closed all of its dining rooms and sports bars across Canada starting on March 17. And beginning on May 4, we gradually have begun reopening and resuming on-premise restaurant operations at certain locations where it was safe to do so and according to the public health guidance. Boston Pizza has worked diligently to build a consortium of financial relief and support for its franchisees across financial institutions, governments, landlords and suppliers to help offset the otherwise unprecedented financial impact facing Boston Pizza's many franchisees. Consistent with many other franchisors, BPI deferred the collection of royalties and advertising fees in order to provide our franchisees with financial support during these challenging times. Due to the deferral of cash collection, coupled with the decline in revenue, BPI and BP Canada LP delayed the payment of royalty and distribution income to The Fund starting in March 2020. This, in turn, caused significant declines in the amount of royalty and distribution income received by The Fund and cash available to distribute to unitholders. As a consequence and after a thorough review of all factors, the trustees of The Fund decided to temporarily suspend the monthly distribution until further notice in order to preserve cash. I'll now pass it over to Michael Harbinson, our CFO, to provide a review of The Fund's financial performance. Michael?

Thank you, Jordan. Before I provide an overview of The Fund's quarterly results, I'll begin by sharing the highlights of the COVID-19 recovery plan. After this, I'll discuss The Fund's recent distribution changes, as Jordan has just mentioned. As shared in our press release on June 22, which was this past Monday, the COVID-19 recovery plan has been put in place that provides various measures designed to bring liquidity and stability to the Boston Pizza system during these challenging times. The Fund and BPI have reached agreements to holistically address their financial challenges caused by the COVID-19 pandemic. As part of this recovery plan, BPI has received additional capital from its sole shareholder, Jim Treliving as well as its bank, the Bank of Montreal. Mr. Treliving invested $5 million of additional capital in BPI in June and will invest an additional $5 million of capital in BPI before October 1, 2020. These proceeds will be used to pay down BPI's existing bank debt as well as provide BPI with increased funds for working capital. In addition, the bank provided BPI with $6.25 million of additional credit facilities under the Export Development Canada's Business Credit Availability Program. BPI also anticipates receiving an additional $2 million of financing from the Business Development of Canada in early July 2020. As part of this joint recovery plan, The Fund and BPI amended their existing credit facilities with the bank. The BPI credit facility has a new maturity date of December 31, 2022, and BPI's principal payments have been waived for the second and third quarters of 2020. For The Fund, its new maturity date for its credit facility is also December 31, 2022, and its nonoperating credit facilities were converted from being committed revolving credit facilities to nonrevolving term loans. As a condition of the recovery plan, the bank required that certain principal repayments be made by The Fund commencing in October 2020 to reduce the leverage level of The Fund and that The Fund may not pay distribution to unitholders before October 1, 2020. For both BPI and The Fund, the financial covenants under the credit facilities were modified to provide BPI and The Fund with greater ability to manage through the recovery period that lies ahead. BPI continues to actively manage its financial position by taking steps to preserve liquidity. Since the pandemic began, BPI has sought to reduce and defer all nonessential capital and operating expenditures and this involved making the difficult decision to temporarily lay off half of our corporate employees. BPI has also applied and received government financial assistance, and this has involved approximately $1.2 million to date from the Canadian Emergency Wage Subsidy Program. As Jordan mentioned, BPI deferred the collection of royalties and advertising fees from March to May in order to provide our franchisees with financial support in the form of increased liquidity during these challenging times. These deferred fees from March to May will be collected from Boston Pizza franchisees over a 15-month period starting in September 2020. BPI will pay The Fund its full deferred royalty and distribution income over the same 15-month period starting in September 2020. Going forward and as agreed to as part of the joint recovery plan, BPI will resume charging its franchisees royalties and advertising fees in June 2020. Due to the adverse impact from the pandemic, at March 31 and subsequent to March 31, BPI was not in compliance with certain financial and nonfinancial covenants with the bank and The Fund. As part of the recovery plan, the bank and The Fund both agreed to waive their rights for the historical noncompliance breaches that took place under these agreements. While the actions and the joint recovery plan I've just described provide improved stability into the foreseeable future, the full impact of the pandemic on the Boston Pizza system continues to remain uncertain. The medium and long-term impact on The Fund and BPI will depend on the ability of Boston Pizza Restaurants to regain normal operating levels as well as the number of restaurants that remain open on a permanent basis. While uncertainty exists in these areas, we do anticipate that BPI will have sufficient liquidity to fund its operations and its debt service payments into the foreseeable future. As just mentioned, as a condition to agreeing to the comprehensive recovery plan, the bank requires that The Fund not pay distributions to unitholders before October 1, 2020. The Fund intends to reinstate monthly distributions as soon as it is responsible and reasonable to do so. The reinstatement of the distributions and the amount and timing of those distributions will be determined by the trustees of The Fund and will depend on the stability and amount of royalty and distribution income received by The Fund and as well depend on the significant uncertainties related to the COVID-19 pandemic and the impact that will have on BPI and The Fund. With that, I will now turn to The Fund's first quarter financials and provide a more conventional summary of the financial highlights. The Fund posted royalty income of $7 million for the quarter compared to $8.3 million for the first quarter of 2019. The Fund posted distribution income of $2.3 million for the quarter compared to $2.7 million for the first quarter of 2019. The royalty and distribution income for the quarter was based on 395 Boston Pizza Restaurants in the Royalty Pool that reported franchise sales of $174.1 million for the quarter. For the same period in 2019, royalty and distribution income were based on Royalty Pool restaurants that were 396 that reported franchise sales of $206.4 million. The Fund's net and comprehensive loss was $16.9 million for the quarter compared to net and comprehensive income of $11.1 million for the first quarter of 2019. The $28 million decrease in The Fund's net and comprehensive income for the quarter compared to the first quarter of 2019 was primarily due to a $26.6 million change in fair value levels and lower royalty and distribution income of $1.7 million. While net and comprehensive income or loss is a measurement of The Fund's earnings under International Financial Reporting Standards, or IFRS, The Fund is of the view that net income or loss does not provide the most meaningful measurement of The Fund's ability to pay distributions because the calculation of net income contains noncash items that do not affect The Fund's cash flow. Noncash items include fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, the Class B Unit liability, the interest rate swaps and changes in deferred income taxes. Consequently, The Fund reports the non-IFRS metrics of distributable cash and payout ratio to provide investors with, in The Fund's opinion, more meaningful information regarding The Fund's ability to pay distributions to unitholders. The Fund generated distributable cash of $7.7 million for the quarter compared to $6.6 million for the first quarter of 2019. The increase in distributable cash of $1.1 million or 16.6% was primarily due to lower income tax expense of $0.4 million, lower BPI Class B Unit entitlement of $0.3 million and positive working capital timing of $0.4 million. The Fund generated distributable cash per unit of $0.355 for the quarter compared to $0.303 per unit in the first quarter of 2019. The increase in distributable cash per unit of $0.052 or 17.2% was primarily due to the increase in distributable cash outlined above and fewer units outstanding compared to the same period in 2019 due to The Fund's normal course issuer bid. As at March 31, 2020, The Fund acquired 266,300 units under the NCIB at an average price of $12.98 per unit. Between March 31, 2020 and June 25, 2020, The Fund did not acquire any additional units under the NCIB. The Fund's NCIB is no longer active and will not be reactivated for the foreseeable future. The Fund's payout ratio was 90% for the quarter compared to 113.9% for the same period in 2019. The decrease in The Fund's payout ratio for the quarter compared to the first quarter of '19 was due to the combined effects of distributable cash increasing by $1.1 million or 16.6%, and distributions paid decreasing by $0.6 million or 7.9%. The decrease in distributions paid during the quarter was a result of there being fewer units outstanding compared to the same period in 2019 due to The Fund's NCIB and also our distribution reduction in January 2020. The Fund will generally experience seasonal fluctuations in its payout ratio. The Fund's payout ratio is typically higher in the first and fourth quarters as compared to the second and third quarters since Boston Pizza Restaurants generally experience higher franchise sales during the summer months when restaurants open their patios and benefit from the increased tourist traffic. On a trailing 12-month basis, The Fund's payout ratio was 98.9% as at March 31, 2020. The increases in distributable cash per unit and the corresponding decrease in the payout ratio are not fully reflective of the effects that the COVID-19 has had and will continue to have on The Fund. As noted above, the impacts on COVID-19 on the Boston Pizza system and The Fund began near the end of the first quarter and will not be fully realized until the second quarter of 2020 and beyond. As previously announced after careful consideration and a thorough review of all factors, the trustees of The Fund temporarily suspended monthly distributions on March 23, 2020, commencing with the March 2020 distribution itself. As discussed earlier, BPI and BP Canada LP delayed the payment of royalty and distribution income to The Fund as part of the recovery plan that has been agreed to that these amounts will be paid in full with interest at an annual rate equal to the prime rate for commercial loans offered by The Fund's bank plus 2%. With that, I'll turn the call back to Jordan for the outlook. Jordan?

Thank you, Michael. In terms of an outlook, BPI management anticipate that total franchise sales for the remainder of 2020 will continue to be challenged as a result of the pandemic. The trustees of The Fund will closely monitor the situation and continue to act in the best interest of The Fund and its unitholders. With the pandemic continuing and with no definitive end date in sight, the trustees of The Fund expect that franchise sales and same-restaurant sales at Boston Pizza Restaurants and result in royalty, distribution income and distributable cash available for distribution to unitholders will continue to be adversely affected and the preservation of cash by The Fund is prudent and appropriate at this time until economic conditions improve. Before we begin the question-and-answer session, I'd like to send a special thank you to our Boston Pizza franchisees, restaurant employees and corporate staff and tell you how extremely proud I am that in the midst of these difficult times, you continue to provide an essential service in our communities. Our entire Boston Pizza family has had to make sacrifices, work harder and take on additional roles as a result of layoffs. Also, I would like to thank our key suppliers who continue to deliver safe and healthy ingredients and equipment that enable us to service our customers. And last but certainly not least, a big thank you to our guests from all across Canada for remaining connected to Boston Pizza and for trusting us to provide comforting food for you and your family and your loved ones during this unprecedented time. With that, I'd like to begin the question-and-answer session. Operator?

[Operator Instructions] Our first question comes from Nick Corcoran from Acumen Capital.

Just some questions from me. The first is, I think you've indicated that system sales are about 25% of last year's level until the end of April and then 42% for May. Can you give any indication what June has been like?

Thanks, Nick. Let me turn that one over to Michael to talk about it. Obviously, the impact there is the regional openings started in Manitoba patios only around May 4. And as we were able to location-by-location and municipality or province-by-province, we've been opening more on-premise, and therefore, growing -- adding on to the takeout delivery sales as well as having some of the restaurants that were entirely closed reopen, which is contributing to that. So let me turn it over to Michael for a bit more color on June.

Yes. Thanks, Jordan. Nick, I think that is the answer, just it really has been a kind of a gradual reopening and rebuilding of sales as the restaurants have started to come back online. And I think we want to steer away from anything kind of too definitive and forward looking. But suffice it to say it, the system has been trending in the right direction.

Okay. And then one thing I'm just thinking about is takeout and delivery was -- went up significantly year-over-year. It sounds like in the restaurants that have remained open, what trend are you seeing as restaurants reopen their patios and their dining rooms? Does that takeout and delivery remain strong or is it offset by that in dining room volumes?

Yes. Thanks, Nick. And so -- yes, we definitely saw as the dining rooms and sports bars were closed March 17 and all our focus and what marketing we did continue was all focused on takeout and delivery. We have partnerships with third-party delivery services as well as a 50-year history of doing our own takeout and delivery. We promoted contactless delivery as well as curbside pickup. So definitely saw that grow from what it was previously being nationally 18% of total sales for an average Boston Pizza Restaurant across the country up to the kind of 25% number that we referenced for the month of April. As the restaurant on-premises have been opening, we've been seeing -- well, first and foremost, we've been seeing good consumer response, both in terms of sales, but more importantly, in terms of recognizing that it's a safe environment, let's say, for our staff. We take all the precautions above and beyond the health and safety guidelines of all the provinces and municipalities for our staff as well as for guests and make sure that they feel confident in coming into a Boston Pizza Restaurant, but the sales as well. There's been pent-up demand, I'm sure, across the country for people to get together safely and have a meal together, and we've seen that in the sales results. In terms of what it's doing to take out delivery, we're still over-indexing on takeout and delivery sales. We believe that will continue for some time in the future. And we've heard that from other markets that are ahead of us in the recovery phase. And so we -- like I said, we got a long history of doing takeout and delivery. We're going to remain focused on on-premise sales even as we continue to expect people to come into the restaurants. But -- and that the on-premise will recover in time with -- as we are allowed to open more than just patios when we're allowed to open on-premise in places like Ontario and also as big activities -- group activities like sporting events and so forth resume perhaps later in the fall or even into next year or so.

Great. And then the last question for me, just on the new store openings and closings. I think you said that 375 of your -- approximately 395 locations are open for takeout and delivery. Have you had any indication from the franchisees that are not open that they will not reopen? Or are they, for personal reasons or other reasons, decide and keep their restaurants closed?

Yes. Thanks, Nick. So -- yes, we put out the numbers of the restaurants that are open today. So when we started the call, we referenced 1 new opening in Alberta earlier this year, 2 permanent closures that were recognized in this -- in the first quarter. We haven't had any permanent closures definitively reached at this point, but we did have -- at one point, we had 25% of our restaurants that went totally dark for a period of time as they determined what their next course of action would be, whether it was safe to bring staff in, whether it was safe to continue with takeout and delivery, that number came back to over 90%. And now as we're opening up the on-premise, as you said, 375 locations are recording sales right now with the vast majority of them doing on-premise and takeout and delivery. We'll continue to monitor for any restaurants that are considering permanent closures. It really is a location-by-location challenge with the rents, for example, and what's happening with the Commercial Rent Subsidy Program and the ability to find some liquidity or expense relief for the months of March, April, May, and a number of other factors in terms of how well they were able to manage through the takeout and delivery only phase, keep that revenue channel going, any considerations with their lenders and debt considerations. So nothing definitive at this point, but we know through Restaurants Canada and the statistics that they have put out that within the restaurants' phase, they're projecting kind of 10% to maybe even 20% of restaurants could permanently close. Full-service restaurants will be in that range, I would imagine, simply because many of them did not have a takeout delivery business coming into this or had to pivot and try to build that part of the business from scratch. And so we know that industry-wide, we will probably see some closures, but we have nothing more than what we have talked about so far in terms of the 2 that were recognized for us in the first quarter.

And then on the new store openings, I think you had previously said you'd have about 2 new openings in the first half of the year. Have those been pushed out because of the current environment?

So we did have the one opening in the first quarter of the year, and that was in Alberta. It was something that we were working on last year, obviously, to get it open early this year, and that's open and running. We have another one coming up in Ontario. And we've just held off, obviously, as that market is one of the latest in the country to allow resumption of on-premise sales, but we will have that coming up soon. We'll continue to look at the other ones that were in the pipeline. There are some delays, obviously, with construction or just other disruptions, but we'll revisit our pipeline. Obviously, no one was going into March expecting things to get turned upside down as much as they have been. But we're pleased that there is still continued development opportunities for Boston Pizza out there and whether it's from our existing franchisee community adding on to their portfolios or whether it's new people coming into the BP system, we have a bit of both. And we'll continue to pursue those opportunities.

[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Jordan Holm for any closing remarks.

All right. Thank you, operator. Since there are no further questions at this time, I'd like to thank you all for taking the time to listen in. We look forward to safely welcoming back more of our guests and our restaurant staff as our restaurants continue to reopen. Please continue to stay safe and healthy, and we look forward to speaking with you all again on our second quarter conference call in August of 2020. Thanks, everyone.

Thank you. Take care.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.