Boston Pizza Royalties Income Fund (BPFUN) Earnings Call Transcript & Summary

Hello. This is the chorus call conference operator. Thank you for standing by. Welcome to Boston Pizza's fourth quarter conference call. [Operator Instructions] And the conference is being recorded on February 13, 2020. [Operator Instructions] At this time, I would like to turn the conference over to Michael Harbinson, Chief Financial Officer. Please go ahead.

Thank you, and welcome to the call. Today, we'll be discussing the 2019 Fourth 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 2019 fourth quarter materials filed earlier today on SEDAR or visit The Fund's website at www.boston.bpincomefund.com (sic) [ www.bpincomefund.com ]. Should you require additional information after the call, you can reach us via the Investor Relations phone number listed in 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 remind everyone about the risks inherent in forward-looking information. Certain information in the following discussion may constitute forward-looking information that involves known and unknown risks, uncertainties, future expectations and other factors, which may cause the actual results, performance or achievements of The Fund, Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, Boston Pizza Canada Limited Partnership, Boston Pizza Canada Holdings Inc., Boston Pizza Canada Holdings Partnership, Boston Pizza Restaurants or industry results to be materially different from any future results, performance or achievements expressed or implied by such 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 and except as required by law, we assume no obligation to update or revise forward-looking information to reflect new events or circumstances. With that, I will turn the call over to Jordan.

Thank you, Michael, and welcome, everyone, to Boston Pizza's fourth quarter investor conference call. Today, I'll discuss our results for the quarter ended December 30, 2019, and Michael will review the key financial items. Later, I'll discuss Boston Pizza's upcoming plans and we'll leave time for your questions at the end of the call. As shared in the press release and financial statements filed this morning, Boston Pizza posted system-wide gross sales of $276.5 million for the quarter and over $1.1 billion for the year representing decreases of 0.7% and 0.8%, respectively, versus the same periods in 2018. In addition, The Fund posted franchise sales from restaurants in the Royalty Pool of $211.2 million for the quarter and $853.7 million for the year, representing decreases of 0.1% and 0.2%, respectively, versus the same periods in 2018. A positive contributor to our sales results for the quarter was additional sales from 5 net new Boston Pizza restaurants that opened during 2018, and which were added to the Royalty Pool on January 1, 2019. Offsetting this positive contribution was same restaurant sales or SRS, which was negative 2.1% for the quarter and negative 2.2% for the year. SRS on a franchise sales basis was negative 1.8% for the quarter and negative 1.5% for the year. Negative same restaurant sales results for the quarter and the year were principally due to declines in restaurant guest traffic from increased competition in the full-service restaurant sector in response to increased menu pricing as a result of minimum wage increases. These industry-related declines were partially offset of Boston Pizza by increased takeout delivery sales as well as menu price increases. Takeout and delivery sales at Boston Pizza continue to be positively impacted by our focus on both direct and third party delivery channels. While the quarter was challenging for Boston Pizza and the full-service restaurant industry in Canada, Boston Pizza did experience several bright spots that are worth highlighting. First, we launched our brand-new partnership with Hockey Night in Canada, helping to make Boston Pizza Restaurants, an even better place to watch Hockey games, particularly on Saturday nights. Also, our holiday feature menu, which featured our Christmas Pizza had a successful launch and continued to gain traction throughout the promotion. At the same time, our new national main menu, which was introduced partway through the year, continued to generate positive feedback from both our franchisees and our guests. Rounding out the fourth quarter, we offered Boston Pizza's holiday gift card promotion, which also contributed positively within the period. Turning to restaurant development. Boston Pizza opened 5 new full-service restaurants and closed 5 full-service restaurants and 1 quick express restaurant for a decrease of 1 restaurant in 2019. BPI also completed 10 restaurant renovations during the fourth quarter of 2019, contributing to a total of 36 restaurant renovations completed during the year. Restaurants typically close for 2 to 3 weeks to complete a renovation and then experience an incremental sales lift in the year following the reopening. While the quarter and most of 2019 have been challenging for Boston Pizza, and again, for the full-service restaurant industry, we are aggressively pursuing strategies to increase guest visits in 2020. These strategies include new menu innovation, targeted promotional campaigns and substantial renovations of existing Boston Pizza restaurants across the country. In addition, we are taking advantage of the growing consumer preference for takeout and delivery meal occasions by enhancing our online ordering capabilities via bostonpizza.com and the MyBP app. And we're also expanding our partnership with SkipTheDishes and initiating new third-party delivery partnerships with DoorDash, Uber Eats and Foodora, starting in the first quarter of 2020. In other important matters, yesterday on February 12, 2020, after careful consideration and a review of all factors, the trustees of The Fund decided to reduce the monthly cash distribution to unitholders from $0.115 to $0.102 per unit beginning with the January 2020 distribution. While this is the Fund's first distribution decrease since the federal's SIFT tax adjustment in 2010, it's important to note that The Fund has increased its distribution level a total of 18 times since The Fund's IPO in 2002. Since increasing the distribution level in 2016, The Fund has experienced soft same-restaurant sales results and was negatively impacted by an unforeseen increase in its corporate tax rate. The general corporate tax income rate in British Columbia increased 1% starting in 2018, negatively impacting The Fund's distributable cash balance. The new distribution level aligns go forward distributions with anticipated future revenues and in doing so, provides greater certainty over The Fund's ability to sustain its distributions into the foreseeable future. In addition, the new distribution level assists The Fund in maintaining a strong financial position and payout ratio. I'll pass it over to Michael to provide further detail on the distribution adjustment and for a review of The Fund's financial performance. Michael?

Thank you, Jordan. I'll begin by providing an overview of The Fund's financials for the quarter and year, and then I'll elaborate on The Fund's recent distribution changes, as Jordan has just mentioned. Starting with The Fund's financials. The Fund posted royalty income of $8.4 million for the quarter and $34.1 million for the year compared to $8.5 million and $34.2 million, respectively, for the same periods 1 year ago. The Fund posted distribution income of $2.8 million for the quarter and $11.2 million for the year compared to $2.8 million and $11.4 million for the same periods 1 year ago. Royalty and distribution income for the quarter and year were based on 396 Boston Pizza Restaurants in the Royalty Pool that reported franchise sales of $211.2 million for the quarter and $853.7 million for the year. For the same periods in 2018, Royalty and Distribution income were based on the Royalty Pool of 391 Boston Pizza Restaurants reporting franchise sales of $211.4 million and $855.1 million, respectively. The Fund's net and comprehensive loss was $4.6 million for the quarter compared to net and comprehensive loss of $1 million for the fourth quarter of 2018. The $3.6 million decrease in The Fund's net and comprehensive loss for the quarter compared to the fourth quarter of 2018 was primarily due to a $3.5 million change in fair value adjustments. The Fund's net and comprehensive income was $22.5 million for the year compared to net and comprehensive income of $8.7 million in 2018. The $13.8 million increase in The Fund's net and comprehensive income for the year compared to prior year was primarily due to a $17 million change in fair value adjustments, partially offset by higher noncash deferred income taxes of $2.5 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 the fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, the Class B unit liability, interest rate swaps and changes in deferred income taxes. Consequently, The Fund reports the non-IFRS measures 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 million for the quarter compared to $7.3 million in the fourth quarter of 2018. For the year, The Fund generated distributable cash of $28.7 million compared to $29.2 million in 2018. The decrease in distributable cash of $0.5 million or 1.8% was primarily due to an increase in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties Limited Partnership of $0.4 million. The Fund generated distributable cash per unit of $0.319 for the quarter compared to $0.332 per unit for the fourth quarter of 2018. The decrease in distributable cash per unit of $0.013 or 3.9% was primarily due to the decrease in distributable cash, as just described, partially offset by there being fewer units outstanding compared to the same period in prior year due to The Fund's normal course issuer bid that was active from November 26, 2018 to December 14, 2018, which resulted in the purchase and cancellation of 98,300 units at an average price of $15.86 per unit. For the year, The Fund generated distributable cash per unit of $1.317 compared to $1.336 per unit. The decrease in distributable cash per unit of $0.019 or 1.4% was primarily due to the decrease in distributable cash, as already mentioned, partially offset by there being fewer units outstanding compared to the same period in 2018 due to The Fund's normal course issuer bid, as also just mentioned. The Fund's payout ratio was 108% for the fourth quarter and 104.8% for the year compared to 103.8% and 103.3%, respectively, for the same periods in 2018. The decrease in the Fund's payout ratio for the quarter compared to the same period in 2018 was due to the combined effects of distributable cash decreasing by $0.3 million or 4.2%, partially offset by distributions paid decreasing by a nominal amount. The decrease in The Fund's payout ratio for the year compared to 2018 was due to the combined effects of distributable cash decreasing by $0.5 million or 1.8%, partially offset by distributions paid decreasing by $0.1 million or 0.4%. The decrease in distributions paid during the quarter was a result of there being fewer units outstanding compared to the same period in 2018 due to The Fund's normal course issuer bid. 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 the fourth quarters each year compared with the second and third quarters each year, since Boston Pizza Restaurants generally experience higher franchise sales during summer months when restaurants are -- have their patios open, and they've got the benefit of just increased guest traffic. That provides an overview of the fund's financials for the quarter and for the year. And now we'll turn back to the distribution adjustment that was announced yesterday. As Jordan mentioned, it was after a careful consideration that the trustees decided to reduce the monthly cash distribution from $0.115 to 10.2% -- $0.102 per unit for the January 2020 distribution, which will be paid on February 28. This new distribution level aligns The Fund's future distributions with anticipated future revenues. In this respect, the distribution reduction provides greater certainty over The Fund's ability to pay and sustain distributions into the foreseeable future. To elaborate on this point, The Fund's actual annual payout ratio for 2019 was 104.8%. A payout ratio of above 100% means the distribution is being paid, exceed the distributable cash available. Well, this can be manageable -- managed on a short-term basis, as just described with -- referring to the seasonal fluctuations in The Fund's annual payout ratio, an annual payout ratio of above 100% over a longer period of time is not sustainable. The Fund's mandate is to generate sustainable distribution levels over the longer term. As mentioned, yesterday, the trustees declared a distribution for January 2020 of $0.102 per unit which will be payable on February 28, 2020. If The Fund had paid this $0.102 per unit per month throughout 2019 instead of the $0.115 per unit that it did pay, The Fund's annual payout ratio would have been 93.4% rather than the 104.8%. This pro forma annual payout ratio of 93.4% means The Fund is now in a strong financial position and poised to continue its long history of sustainable distributions. In addition to the pro forma annual payout ratio of 93.4%, The Fund ended the quarter with $1.8 million in cash. The Fund's current cash balance is another positive factor that will contribute to its ability to sustain distributions into the foreseeable future. Looking forward, we remain optimistic about the long-term prospects for Boston Pizza. And are prepared to be active with a normal course issuer bid or NCIB in the periods ahead. On January 24, 2020, The Fund amended and extended its credit facilities. The new credit facilities provides The Fund with lower fees and interest rates, more favorable financial covenants and approximately $6.7 million more in borrowing capacity for opportunistic NCIB purchases. The Fund is prepared to be active with an NCIB starting next week. Management believes that the current unit price does not properly reflect the underlying value of The Fund's business, and as such, we are opportunistically looking to acquire units at an attractive price and in a manner that is immediately accretive to unitholders. As Jordan mentioned, the trustees made the decision to adjust the distribution level after careful consideration and a thorough review of all factors impacting the future performance of The Fund. For further information about The Fund's business, distribution levels, pro forma results, please also refer to The Fund's investor deck and fact sheet, both of which have been updated and are now available on The Fund's website. With that, I'll turn the call back over to Jordan for the outlook. Jordan?

Thank you, Michael. The first quarter of 2020 includes some proven and compelling Boston Pizza promotions. Our Hockey Night in Canada partnership is continuing throughout the NHL regular season, providing guests at Boston Pizza Restaurants with an enhanced and unique hockey viewing experience. For the off-premise side of our business, Boston Pizza Restaurants are offering free delivery, appealing to guests who prefer to enjoy Boston Pizza in the comfort of their homes. Also in the first quarter, tomorrow, in fact, we look forward to our February 14 Valentine's Day promotion when heart-shaped pizzas will be served and $1 from each pizza sold will go to help local charities. We have 395 restaurants today, including a brand-new one that opened earlier this week in Morinville, Alberta. And we are optimistic about the continued new restaurant expansion opportunities for Boston Pizza over the longer term. We also have already completed one renovation to date and have many more reservations scheduled for completion in 2020. These renovations help keep Boston Pizza Restaurants looking fresh and inviting. And at the same time, enable technology and equipment to be brought up to the latest standards. Initiatives are also underway in 2020 to elevate food quality and consistency along with Boston Pizza's core beverage programs. In addition, we are investing in areas of staff recruiting and staff training in an ongoing effort to elevate our guest experiences. On the off-premise side of our business, we anticipate a positive impact from a new digital ordering platform that we'll be launching later this year. We're also expecting to make positive gains from growing third-party delivery partnerships as this line of business will allow us to capitalize on changing consumer preferences. We will continue to aggressively pursue strategies that further strengthen our business and drive increased unitholder value over both the short and longer term. With that said, I would like to begin the question-and-answer session. Operator?

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

Just my first question has to do with the new store openings and closings. You -- so there's one new restaurant in Alberta. Have you had any closures in the first quarter?

I don't believe we've had any permanent closures. We have had a temporary closure of 4 locations in Ontario, but those we expect to reopen in the near term. So nothing that affects unit count long term.

And then do you have any new restaurants currently under construction?