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

Hello. This is the conference call operator. Thank you for standing by. Welcome to Boston Pizza's First Quarter 2024 Conference Call. [Operator Instructions] The conference is being recorded on May 10, 2024. [Operator Instructions] Participants on the call may also post their questions via e-mail to Boston Pizza's Investor Relations department at investorrelations@bostonpizza.com. [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, everyone. Today, we'll be discussing the 2024 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 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 in its Boston Pizza Restaurants in Canada. BPI pays royalty and distribution income 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 13, 2024, which was filed on SEDAR+. 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. 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 share a brief outlook. Michael will summarize our key financial highlights, and as usual, we'll leave time for your questions at the end of today's call. The first quarter of 2024 presented certain macroeconomic challenges for the full-service industry, prevailing economic conditions characterized by high interest rates and inflationary pressures have influenced consumer behavior, impacting discretionary spending and leading to a cautious approach toward dining out. The Fund posted franchise sales from restaurants in the Royalty Pool of $222.0 million for the quarter, representing a decrease of 1.0% versus the same period 1 year ago. Same-restaurant sales was negative 1.0% for the quarter. SRS for the quarter was principally due to macroeconomic challenges faced by the full-service industry, partially offset by menu price increases. From a marketing standpoint, we began the first quarter of 2024 with our Pasta Tuesdays all-month-long promotion, where guests were able to enjoy pastas every day of the week, starting at $11.99 and gourmet pastas for $15.99 all month long in January. The promotion was supported by significant TV, digital and social media channels, along with in-restaurant promotions at participating Boston Pizza restaurants across the country. Boston Pizza also celebrated Valentine's Day with its paper hearts fundraising program and heart-shaped pizza promotion, where $1 from each pizza sold went to help local charities. These charitable initiatives combined to raise over $570,000 for local charities. Also in the first quarter, Boston Pizza unveiled new flavors for our New York Sicilian square footer pizza lineup, garnering positive feedback from our guests. Turning to restaurant development. 1 restaurant opened during the first quarter and 3 restaurants closed permanently, and 7 restaurants completed full renovations during the quarter. We have some fantastic initiatives planned to drive sales and guest traffic in the second quarter of 2024, which I'll speak about in a moment. First, however, I'll turn the call back to Michael for a review of the Fund's financial performance. Michael?

Thank you, Jordan. The Fund posted royalty income of $8.9 million for the quarter compared to $9 million for the same period 1 year ago. The Fund posted distribution income of $2.9 million for the quarter, a nominal change from the same period 1 year ago. Royalty and distribution income for the quarter were based on 372 Boston Pizza restaurants in the Royalty Pool that reported franchise sales of $222 million for the quarter. For the same period in 2023, royalty and distribution income were based on the Royalty Pool of 377 Boston Pizza restaurants reporting franchise sales of $224.2 million. The Fund's net and comprehensive income was $8.5 million for the quarter compared to $6.7 million for the same period in 2023. The $1.8 million increase in the Fund's net and comprehensive income for the quarter compared to the first quarter of 2023 was primarily due to a $2.4 million increase in fair value gain partially offset by a $0.4 million increase in deferred income tax expense, a $0.1 million decrease in royalty and distribution income and a $0.1 million increase in interest expense on Class B unit liability. The Fund's cash flows generated from operating activities were $9.1 million for the quarter compared to $9.2 million for the same period in 2023. The decrease of $0.1 million was primarily due to an increase in income taxes paid of $0.2 million and a decrease in royalty and distribution income of $0.1 million partially offset by an increase in working capital of $0.2 million. While net and comprehensive income or loss and cash flows from operating activities are both measurements under IFRS accounting standards, the Fund is of the view that net income or loss and cash flows from operating activities do not provide the most meaningful measurement of the Fund's ability to pay distributions. Net income contains noncash items that do not affect the Fund's cash flow, whereas cash flow from operating activities is not inclusive of all the Fund's required cash outflows and therefore, is not indicative of cash available for distributions to unitholders. Noncash items include fair value adjustments of 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 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 $7.3 million for the quarter compared to $7.2 million for the same period in 2023. The increase in distributable cash of $0.1 million or 1.8% was primarily due to SIF tax on units adjustment of $0.2 million and lower interest paid on debt of $0.1 million partially offset by decreased cash flows from operating activities of $0.1 million. The Fund generated distributable cash per unit of $0.344 for the quarter compared to $0.334 per unit for the same period in 2023. The increase in distributable cash per unit of $0.01 or 3% was primarily due to the increase in distributable cash stated earlier, and fewer units outstanding compared to the same period in 2023 due to the Fund's normal course issuer bid that was in effect from June 20, 2023, to no later than June 19, 2024. The Fund's payout ratio for the quarter was 96.8% compared to 91.6% for the same quarter in 2023. The increase in the Fund's payout ratio for the quarter was due to distributions paid increasing by $0.5 million or 7.6%, primarily offset by distributable cash increasing by $0.1 million or 1.8%. On a trailing 12-month basis, the Fund's payout ratio was 89.9% as at March 31, 2024. The Fund's payout ratio is typically higher in the first and fourth quarters compared to the second and third quarters since Boston Pizza Restaurants generally experience higher franchise sales levels during the summer months when restaurants open their patios and benefit from increased tourist traffic. On May 9, 2024, the trustees of the Fund approved a cash distribution for the period of April 1, 2024 to April 30, 2024, of $0.113 per unit, which will be paid on May 31, 2024, to unitholders of record at the close of business on May 21, 2024. 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 fluctuating economic outlook. And with that, I will turn the call back to Jordan for more on the outlook. Jordan?

Thank you, Michael. Boston Pizza began its second quarter of 2024 with our playoff promotion as hockey and basketball playoffs get underway. This promotion introduces several new shareable menu items, plus cocktail innovations and includes new TV and digital media advertising focused on Boston Pizza's new Team Up for the Win campaign, optimizing every aspect of the Boston Pizza sports bar experience to maximize enjoyment for our guests. An updated main menu will also launch in May, introducing several new recipes in various menu categories, all available every day for our guests to enjoy. Earlier this month, Boston Pizzas franchisees, supplier, partners and corporate employees gathered at our franchisee conference to kick off Boston Pizza's 60th anniversary celebrations. To commemorate this special occasion, we have planned a series of special events, exclusive promotions and culinary delights that pay homage to our rich history. 2024 marks 6 decades of culinary innovations, warm hospitality and unforgettable experiences at Boston Pizza. With continued supply chain challenges, higher interest rates and increasing input costs impacting most of the restaurant industry, BPI's management remains cautious. Despite these obstacles, we had solid franchise sales in the first quarter, underscoring the resilience of our business. We remain pleased with the dedication demonstrated by our franchisees and their restaurant teams. BPI's management continues to adapt the business to successfully mitigate these challenges and to maintain positive sales levels in 2024. With that, I'd like to turn it back to the operator to begin the question-and-answer session.

[Operator Instructions] Please note, those questions that we do not get to during the call will be answered via e-mail immediately following the end of the investor conference call. The first question comes from Nick Corcoran with Acumen Capital.

Maybe just one question on the month-to-month trend in same-restaurant sales growth. Maybe can you speak to the trend through the quarter and what you've seen in April kind of quarter-to-date?

Michael, do you want to take that one?

Yes, I can jump in on that. And maybe just to give a little more context breaking down the clock back to, call it, maybe Q3 of last year, just to start. So we're talking same-restaurant sales on a franchise sales basis, obviously, versus prior year. So Q3 of last year, we were positive 5.3%. And then Q4, which followed that were a positive 6%. So we saw a bit of a deceleration in the SRS from Q3 to Q4. And then this quarter, the first quarter of 2024, same-restaurant sales was negative 1%. So we've seen kind of a gradual softening kind of quarter-to-quarter. But Nick, more to your question in terms of the trend within the quarter. So yes, looking at January, February, March results for Q4 2024, same-restaurant sales was pretty consistent within the quarter. So meaning the 1% where we ended the quarter, it was pretty consistent throughout Q1. There was some kind of lumpiness week-to-week as you would expect as there were certain kind of calendar timing differences that drive that, but just kind of by and large from a trend perspective, yes, it was a pretty consistent trend throughout the quarter. And then in terms of April, what I would share there is there's not a dramatic swing kind of upwards or downwards. It's really kind of a consistent trends that we're seeing compared to the Q1 results.

That's helpful. And maybe if we can just break apart the change in cash traffic versus check size just so I can understand that.