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 First Quarter 2021 Conference Call. [Operator Instructions] And the conference is being recorded on May 12, 2021. [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, everyone, to the call. We'll be discussing the 2021 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 first quarter materials that were 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 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 and as Boston Pizza Restaurants in Canada. BPI pays royalty and distribution income to the Fund based on franchise revenue of royalty pool restaurants. For a complete description of the Fund and its business, please see the annual information form dated February 9, 2021. This was filed earlier today on sedar.com. Before I turn the call over to Jordan Holm, President of BPI, 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 the 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. And with that, I will now turn the call over to Jordan.

Thank you, Michael, and welcome, everyone, to Boston Pizza's First Quarter Investor Conference Call. Today, I'll be discussing our first quarter results and sharing a brief outlook. Michael will summarize our key financial highlights. As usual, we'll leave time for your questions at the end of today's call. The first quarter -- the first quarter continued to present challenges brought on by COVID-19, adversely affecting the business of Boston Pizza Restaurants across Canada. Overall guest traffic remained weakened as a result of public health restrictions having a negative impact on in restaurant dining. The rise in COVID-19 cases due mainly to COVID-19 variants and the resulting increase of local government restrictions, we anticipate that the business of Boston Pizza Restaurants will continue to be negatively impacted during 2021 and particularly during the first half of 2021. Throughout the first quarter, approximately 375 Boston Pizza Restaurants were providing takeout and delivery services with a low of approximately 100 Boston Pizza Restaurants and a high of approximately 350 Boston Pizza Restaurants, also having their dining rooms, sports bars and patios open, with reduced seating capacity. Looking forward, our focus continues to be on the safety of our guests and our restaurant staff, serving our communities with takeout and delivery and on-premise dining where permitted and helping our franchisees manage through these challenging times. Franchise sales were 74.1% of the levels they were in the same period one year ago, resulting in corresponding royalty and distribution income decreases compared to the prior year period. SRS on a franchise sales basis for the first quarter was negative 24.9% compared to negative 15.9% reported in the first quarter of 2020 as COVID-19 began to adversely affect the sales in Boston Pizza Restaurants in March of 2020. The Fund believes that it is also useful to calculate and report SRS comparing 2021 franchise sales to 2019 franchise sales. If SRS were calculated comparing franchise sales in the quarter to franchise sales in the first quarter of 2019, SRS would be negative 36.7%. Franchise sales and the result in royalty and distribution income for April 2021 were approximately 164% of the level they were in April 2020 and approximately 56% of the level they were in April 2019. SRS for April 2021 was approximately positive 74% when compared to the same period in 2020 and approximately negative 47% when compared to the same period in 2019. While we've been pleased with our ability to manage through the pandemic, our outlook remains cautious due to the high-level uncertainty that remains. Turning to our financial results. As shared in the press release and financial statements filed on SEDAR this morning, Boston Pizza posted system-wide gross sales of $156.7 million for the quarter, representing a decrease of 30.3% versus the same period one year ago. In addition, the Fund posted franchise sales from restaurants in the royalty pool of $129.0 million for the period, representing a decrease of 25.9% versus the same period one year ago. From a marketing standpoint, we began the first quarter with a guest favorite meal deals promotion, which offer varying combinations of pizza, pasta and wing bundles at compelling price points. Also in the first quarter of 2021, for the first time ever, Boston Pizza extended its popular Valentine's Day promotion to sell heart-shaped pizzas on both Saturday, February 13 and Sunday, February 14, to give our guests more opportunities to enjoy heart-shaped pizza and give back to the local communities. These first quarter promotions helped increase takeout delivery sales, which offset some of the negative same-restaurant sales results due to COVID-19. We would like to thank our generous customers for supporting Valentine's Day promotion during these challenging times. The Boston Pizza Foundation raised over $270,000 this year to help local charities and communities across Canada. Turning to restaurant development. No new Boston Pizza restaurants were opened during the first quarter and one restaurant was permanently closed. BPI continues to work diligently to build a consortium of financial support to help offset the otherwise unprecedented financial impact facing our franchisees. Our focus continues to be on the safety of our guests and restaurant staff, serving our communities with takeout and delivery and in-restaurant dining where permitted and supporting our franchisees during these challenging times. I'll now pass it over to Michael for a review of the Fund's financial performance. Michael?

Thank you, Jordan. The Fund posted royalty income of $5.2 million for the quarter compared to $7 million for the same period one year ago. The Fund posted distribution income of $1.7 million for the quarter compared to $2.3 million for the same period one year ago. Royalty and distribution income for the quarter were based on 387 Boston Pizza Restaurants in the royalty pool that reported franchise sales of $129 million for the quarter. For the same period in 2020, royalty and distribution income were based on the royalty pool of 395 Boston Pizza Restaurants reporting franchise sales of $174.1 million. The Fund's net and comprehensive income was $11.6 million for the quarter compared to net and comprehensive loss of $16.9 million for the same period one year ago. The $28.5 million increase in the Fund's net and comprehensive income for the quarter compared to the first quarter of 2020 was primarily due to a $30.2 million increase in fair value gain, lower income tax expense of $0.5 million, lower interest expense on Class B units or $0.2 million and lower administrative expense of $0.1 million, all partially offset by lower royalty and distribution income of $2.4 million and higher interest expense on long-term debt of $0.2 million. While net and comprehensive income or loss is the 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 metric 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. As such, the Fund generated distributable cash of $3.7 million for the quarter compared to $7.7 million for the first quarter of 2020. The decrease in distributable cash of $4 million or 52.3% was primarily due to a decrease in cash flow generated from operating activities of $3.6 million, contractually acquired debt repayment of $1 million, of which there is no comparable repayment in the first quarter of 2020 and an increase in interest paid on long-term debt of $0.2 million. All that was partially offset by lower SIP tax on units of the Fund of $0.6 million and decreased entitlement for BPI's Class B general partner units of Royalties LP of $0.2 million. The Fund generated distributable cash per unit of $0.17 for the quarter compared to $0.355 per unit for the first quarter of 2020. The decrease in distributable cash per unit of $0.185 or 52.1% was primarily due to the decrease in distributable cash, as just mentioned, partially offset by fewer units outstanding compared to the same period in 2020 due to the Fund's normal course issuer bid that was active on February 19, 2020, to February 18, 2021. The Fund's payout ratio for the quarter was 231.8% compared to 90% in the first quarter of 2020. The increase in the Fund's payout ratio for the quarter was due to the combined effects of distributable cash decreasing by $4 million or 52.3% and distributions paid increasing by $1.6 million or 22.8%. Payout ratio is calculated by dividing the amount of distributions paid during the applicable period by the distributable cash for that same period. Accordingly, the payout ratio for the quarter factors on -- or factors in rather the $0.20 distribution -- the special distribution that is, that was paid on January 29, 2021, even though the cash generated to fund that special distribution was generated during 2020. If the special distribution was excluded from the calculation of the payout ratio for the quarter, the payout ratio would have been 114.5%. The Fund's payout ratio is typically higher in the first and fourth quarters compared to the second and third quarters of the year since Boston Pizza Restaurants generally experienced higher franchise sales during the summer months when restaurants open their patios and benefit from increased tourist traffic. On a trailing 12-month basis, the Fund's payout ratio was 103.5% as at March 31, 2021, and the effects of COVID-19 may materially affect the Fund's payout ratio going forward in the future. That's just a good thing to reinforce. On May 11, 2021, the trustees of the Fund approved a cash distribution to unitholders of $0.065 per unit in respect of the period from April 1, 2021 to April 30, 2021. This monthly distribution will be payable on May 31, 2021, to unitholders of record at the close of business on May 21, 2021. The trustees' objective in setting a monthly distribution amount is that it be sustainable. The trustees will continue to closely monitor the Fund's available cash balances, given the continued volatility and economic uncertainty caused by COVID-19. While COVID-19 persists, the trustees expect that franchise sales and same-restaurant sales and the result in royalty, distribution income and distributable cash available for distribution to unitholders will all continue to be adversely affected. With that, I will now turn the call back to Jordan for more on the outlook. Jordan?

Thank you, Michael. We continue to be pleased with the efforts of our team and our franchisees during these challenging times. Boston Pizza began the second quarter of 2021 with our NHL Call the Shot promotion. Customers can participate in predictive hockey trivia while enjoying a Pizza Flight trio and a Molson Canadian beer, either in restaurant or at home. Also during the second quarter, we continued our new deals promotion supported by significant television, digital and social media ads. As mentioned, this promotion provides our guests with extra value when ordering special pizza wing and pasta combinations. With respect to our outlook, the main focus of BPI's management is to continue to monitor the evolving COVID-19 situation and to modify the operating procedures of Boston Pizza Restaurants to ensure the safety of our guests and our staff. Our goal is to responsibly and safely operate the dining rooms, sports bars and patios of Boston Pizza Restaurants across Canada when permitted by applicable health authorities, maximize the opportunity to grow our takeout and delivery business and adapt our plans to responsibly address the challenges and opportunities presented by COVID-19. Management of BPI anticipates that sales wallets for the first half of 2021 will continue to be challenged as a result of COVID-19. With that, I'd like to turn it back to the operator for the question-and-answer session. Andrea?

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

My first question is just to do with the restaurant sales you provided in the disclosure for April. Can you provide any comment on the impact of lockdowns on the network in May?

And maybe I'll start and ask Michael to add color here. But we're only about a week into the patio restrictions in Alberta. So as mentioned, going back to October, you'd had earlier last calls in most parts of the country. We had other hours operating restrictions, seating sizes, capacity limits on total number of seating in order to ensure social distancing as part of the health regulations. Most recently, we've had additional restrictions on on-premise or in-restaurant dining on patios and sports bars. Ontario currently has no patio access. It's only takeout and delivery. And that was followed by Alberta. Last week, the announcement came. I believe that actually just started the patios on Monday. So obviously that has an effect because we have patios at almost all of our Boston Pizza locations across the country. And given the preference for guests to eat outdoors and that help guidance around that, we've invested in making those patios more accessible, more attractive and even extending them into parking lots or other parts of the surrounding areas wherever possible to allow for more guests to enjoy the patio, and we see that continuing throughout the summer as people return to on-premise dining and have a preference to dine outdoors. So in terms of how it's trended or impacted the April or May sales numbers nationally, Michael, do you want to add any color there?

Yes. Thanks, Jordan. I can add a little more detail providing a specific answer. So for 3 weeks of closing down the patios in Alberta, that equates to roughly $2.2 million in franchise sales that will no longer materialize as a result. And so that just gives kind of a sense of the order of magnitude. But as Jordan was saying, really our push at this point is to make sure that as a system, we're ready to capture all those patio sales, that's the patios in Alberta, but also nationally start to open up.

Great. That's good color. And then just a broader question, but have you seen any change in the input costs across your network? And have you been able to implement price increases to help offset those?

Thanks, Nick. So the short answer is yes. I mean we are seeing our supplier network face pressures. They did to COVID the same way other industries. And certainly the foodservice industry has in terms of limited operating capacities in their production facilities, costs relating to absolute fees and other factors that would affect their production costs and raise rates. One of the benefits of being a larger system like Boston Pizza is that we do negotiate using economies of scale, and we often lock in multiyear contracts to avoid shorter-term fluctuations. The other element for us is that we have gone to reprinting our national menu twice a year. So we used to do that annually. But now we do it a couple of times a year so that we can adjust for pricing where needed. We obviously want to be very cautious about taking price. We prefer to grow our sales in other ways. But when it comes to mitigating the costs of operating our restaurants and dealing with specific supply increase, we do have the ability to take pricing on menu twice a year.

Good. And then just the last question for me. With the pandemic being almost 12 months now, how has franchise health been? And do you have any concerns of what the impact of another lockdown in certain regions might have on your franchisees?

Yes, that's a great question. And obviously something that we are incredibly focused on as a pure franchise organization. We have only 4 corporate restaurants out of over 380 across the country. They are predominantly owned by local independent franchisees. And it's been the most challenging year, I would say, in the 56-year history of the Boston Pizza brand in Canada. When we closed our dining rooms and sports bars across the country in the middle of March 2020, at that time, takeout delivery was only 18% of our total national sales. So we are dominantly an on-premise business. And we've been able to obviously lean heavily into takeout and delivery. We report a doubling of that sales last year, and we saw a great rebound in the third quarter of last year when we reported our July, August, September numbers. We demonstrated that guests will return to Boston Pizza Restaurants when they're permitted to do so by health authorities. And we definitely sense that there's pent-up demand and that we will see some positive momentum return once we are allowed to open the dining, sports bars and patios in some regions that are all closed at this point. But it's been incredibly difficult from a financial perspective, from a team perspective, reducing our staff numbers dramatically because of closures and because of limited operating hours and those sales as a result of that. And really I have to give a ton of credit to the franchisees themselves. They have done a great job I think of leaning into protecting their restaurants. But doing so, leading through protecting their guests and their staff. It's health and safety first. They take every precaution, they follow every municipal health guidelines. We've spent probably hundreds of thousands, if not millions of dollars, on everything from social distancing, personal protective equipment, health checks, sanitization. And then as I mentioned, those extended patios and other things as a way to protect our businesses, but also to protect our staff and our communities. So I think the health of the system is as good as can be expected, given the circumstances, that we're just really looking forward to the end of this third wave and some of the loosening of restrictions and return to normal abilities in our private and commercial lives that we can see in other countries like the U.K. and the U.S. that are further ahead of us on vaccinations and the lowering of COVID rates. So overall, positive, but not to take anything away from what the last 14 months have been like for restaurants across Canada and for Boston Pizza Restaurants as well.

This concludes the question-and-answer session. I would like to turn the conference back over to Jordan Holm for any closing remarks.

Jordan, are you there?

My apologies. I am here. Thank you. As there are no further questions, I'd like to take the time to say thank you to our unitholders for their patience, understanding and support during these unprecedented times. 2021 continues to be challenging for Boston Pizza and for the Canadian restaurant industry. Thank you to our franchisees and restaurant staff for their commitment and hard work to keep Boston Pizza Restaurants open, adhere to provincial and local health orders and ensure the safety of our customers and employees. Finally, a thank you to our BPI corporate staff who have worked tirelessly to help safeguard the health of restaurant guests and employees and to support our franchisees in all aspects of their business. Thank you for taking the time to listen in. Continue to stay safe and healthy, and we look forward to speaking with you all again at our second quarter 2021 conference call in August. Thank you, everyone.

Thanks, everyone. Bye-bye.

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