Boston Pizza International Inc. (BPFUN) Earnings Call Transcript

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 10, 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 2020 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 fourth 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. From a complete description of The Fund and this business, please see the annual information Form dated February 9, 2021, which was filed 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 fourth quarter investor conference call. Today, I'll be discussing our fourth quarter results and sharing a brief outlook. Michael will summarize our key financial highlights and provide an update on the status of our COVID-19 Response Plan. As usual, we'll leave time for your questions at the end of today's call. The COVID-19 pandemic has had a profoundly negative impact on the Boston Pizza system in 2020. Throughout the second half of 2020, the sales of Boston Pizza Restaurants in the Royalty Pool initially improved and then subsequently declined as a result of the second wave of the pandemic. COVID-19 case counts in Canada rose during the fourth quarter, causing certain jurisdictions across Canada to further restrict on-premise dining operations and restaurant operating hours. As at December 31, 2020, approximately 370 Boston Pizza Restaurants were providing takeout and delivery services, with approximately 100 of these restaurants also having their dining rooms and sports bars open with reduced seating capacities in accordance with government mandates. Looking forward, our focus continues to be on the safety of our staff and guests and helping our franchisees to pull through these challenging times. Franchise sales and the resulting royalty and distribution income for October, November and December 2020 were 80.7%, 68.0% and 59.9% of prior year levels. For these same periods, same-restaurant sales were negative 21.2%, negative 34.2% and negative 43.2%, respectively. We are pleased with our ability to mitigate declines in total franchise sales and same-restaurant sales during the pandemic. Franchise sales and the resulting royalty and distribution income for January 2021 were 55.1% of the levels they were in January 2020. Same-restaurant sales for January 2021 was negative 49.5% when compared with the same period in 2020. As at January 31, 2021, approximately 375 Boston Pizza Restaurants were providing takeout and delivery services with approximately 105 of these restaurants also having their dining rooms and sports bars open with reduced seating capacity. While we've been pleased with our ability to manage through the pandemic, our outlook remains cautious due to the high level of uncertainty that remains. Turning to our financial results. As shared in the press release and financial statements filed this morning, Boston Pizza posted system-wide gross sales of $181.7 million for the quarter and $773.5 million for the full year, representing decreases of 34.3% and 30.1%, respectively, versus the same periods 1 year ago. In addition, The Fund posted franchise sales from restaurants in the Royalty Pool of $146.6 million for the quarter and $613.2 million for the year, representing decreases of 30.6% and 28.2%, respectively, versus the same periods 1 year ago. In the fourth quarter, we launched our Boston Pizza Classics promotion, which brought back some classic menu items such as the Pizzaburger and Smoky Mountain Spaghetti and Meatballs. Also during the fourth quarter, Boston Pizza's Holiday 2020 promotion included a selection of new and popular menu items, along with a promotional bonus card offer. These fourth quarter promotions helped increase our takeout delivery sales, which offset some of the negative same-restaurant sales on-premise from the COVID-19 pandemic. Turning to restaurant development. No new Boston Pizza Restaurants opened during the fourth quarter. In 2020, Boston Pizza opened a total of 2 new full service restaurants. Boston Pizza closed one restaurant in the fourth quarter, bringing our total to 11 permanently closed restaurants for all of 2020. Overall, guest traffic remains weakened by various provincial and local health orders and regulations. With the second wave of COVID-19 underway, we expect -- or we anticipate that the business of Boston Pizza Restaurants will continue to be negatively impacted during at least the first half of 2021. The 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 the safety of our guests and our staff at our restaurants, serving our communities with takeout and delivery in restaurant or -- and in restaurant were permitted and supporting our franchisees during these challenging times. I'll now pass it over to Michael to review the Fund's financial performance. Michael?

Thank you, Jordan. Before I provide an overview of the fund's quarterly results, I'd like to provide an update on the status of the COVID-19 recovery plan. The Fund and BPI entered into agreements intended to holistically address the financial challenges caused by the COVID-19 pandemic. As shared in our press release on June 22 of last year, this COVID-19 recovery plan provides various measures designed to bring liquidity and stability to the Boston Pizza system during these challenging times. In September 2020, Boston Pizza Canada Limited Partnership began collecting from its franchisees over a 15-month period the royalty and advertising fees that were deferred from March, April and May 2020. Also in September and over the same 15-month period, BPI commenced paying The Fund its deferred royalty and distribution income plus interest. Additional details on the recovery plan between The Fund and BPI are contained in a document called the Pandemic Recovery Plan Amendment Agreement, a copy of which is available on sedar.com. To date, all parties have satisfied the conditions of the COVID-19 recovery plan that was jointly agreed to by BPI and The Fund. While the joint recovery plan and recently amended credit facilities with the bank were designed to provide improved stability for the foreseeable future, the full impact of COVID-19 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 to build its business back to normal operating levels as well as mitigate the number of permanent closures. While uncertainty exists in these areas, we would like to emphasize that BPI anticipates that it has sufficient liquidity to fund its operations and debt service payments for the foreseeable future. On October 1, 2020, the trustees of The Fund recommended monthly distributions of $0.065 per unit compared to monthly distributions of $0.102 per unit that existed prior to The Fund temporarily sustaining distributions on March 23, 2020. Monthly distributions recommenced with the September 2020 distribution that was paid to unitholders on October 30, 2020. On December 16, 2020, the trustees' fund declared a special onetime cash distribution of $0.20 per unit, which was paid on January 29, 2021, to unitholders of record at the close of business on December 31, 2020. The declaration of the special distribution is a departure from The Fund's historical distribution practices and is not expected to become a long-term strategy. However, the trustees believe that declaring the special distribution was a prudent approach to dealing with the challenges presented in 2020 by the ongoing COVID-19 pandemic. With that, I'll now turn to The Fund's fourth quarter financials and provide a more conventional summary of the financial highlights. The Fund posted royalty income of $5.9 million for the quarter and $24.5 million for the year compared to $8.4 million and $34.1 million, respectively, for the same periods 1 year ago. The Fund posted distribution income of $1.9 million for the quarter and $8.1 million for the year compared to $2.8 million and $11.2 million, respectively, for the same periods 1 year ago. Royalty and distribution income for the quarter were based on 395 Boston Pizza Restaurants in the Royalty Pool that reported franchise sales of $146.6 million for the quarter and $613.2 million for the year. For the same period in 2019, royalty and distribution income were based on the Royalty Pool of 396 Boston Pizza Restaurants reporting franchise sales of $211.2 million and $853.7 million, respectively. The Fund's net and comprehensive income was $19.6 million for the period compared to net and comprehensive loss of $4.6 million for the fourth quarter of 2019. The $24.2 million increase in The Fund's net and comprehensive income for the period compared to the fourth quarter of 2019 was primarily due to a $27.5 million increase in fair value gain and lower income tax expense of $0.4 million, all partially offset by lower royalty and distribution income of $3.4 million and higher interest on long-term debt of $0.3 million. The Fund's net and comprehensive income of $9.6 million in 2020 compared to net and comprehensive income of $22.5 million year-to-date in 2019. The $12.9 million decrease in The Fund's net and comprehensive income for the year compared to the same period in 2019 was primarily due to the lower royalty and distribution income of $12.7 million, a $4.3 million increase in the fair value loss and higher interest on long-term debt of $0.6 million, all partially offset by lower income tax expense of $2.7 million and lower interest on Class B units of $2 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 material 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 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. In the fourth quarter of 2020, The Fund changed how it calculates distributable cash and distributable cash per unit to factor in principal repayments that The Fund is contractually required to make on The Fund's credit facilities from and after the fourth quarter of 2020 as part of the Pandemic Recovery Plan. The Fund did not have a requirement to repay any principal payments under its credit facilities prior to the fourth quarter of 2020. Accordingly, the change in how distributable cash is calculated does not impact the calculation of distributable cash for periods prior to the fourth quarter of 2020. The change to how distributable cash is calculated also affects payout ratio since payout ratio is calculated using distributable cash. The Fund generated distributable cash of $5.4 million for the period compared to $7 million for the quarter -- fourth quarter of 2019. The decrease in distributable cash of $1.6 million or 22.6% was primarily due to a decrease in cash flow generated from operating activities of $0.8 million, contractually required debt repayment of $0.7 million, for which there is no comparable repayment in the fourth quarter of 2019 as well as an increase of interest paid on long-term debt of $0.2 million and higher SIFT tax on units of $0.1 million, all partially offset by a decreased entitlement for BPI's Class B units of $0.2 million. The Fund generated distributable cash of $16.3 million in 2020 compared to $28.7 million year-to-date in 2019. The decrease in distributable cash of $12.4 million or 43.2% was primarily due to a decrease in cash flow generated from operating activities of $12.8 million, contractually acquired debt repayment of $0.7 million, for which there's no comparable repayment in 2019, an increase of interest paid on long-term debt of $0.3 million and higher SIFT tax on units of $0.3 million, partially offset by decreased entitlement for BPI's Class B units of $1.7 million. The Fund generated distributable cash per unit of $0.25 for the period compared to $0.319 per unit for the fourth quarter of 2019. The decrease in distributable cash per unit of $0.069 or 21.6% was primarily attributable to the decrease in distributable cash for the reasons just mentioned, partially offset by fewer units outstanding compared to the same period in 2019 due to The Fund's normal course issue or bid. The Fund generated distributable cash per unit of $0.756 in 2020 compared to $1.317 per unit in 2019. The decrease in distributable cash per unit of $0.561 or 42.6% was primarily attributable to the decrease in distributable cash outlined, as just mentioned, partially offset by fewer units outstanding compared to the same period in 2019 due to The Fund's NCIB, which will expire on February 18, 2021. The Fund's payout ratio for the period was 77.9% compared to 108% in the fourth quarter of 2019. The decrease in the fund's payout ratio for the period was due to the combined effects of distributions a decreasing by $3.3 million or 44.2%, offset by distributable cash decreasing by $1.6 million or 22.6%. The Fund's payout ratio for the year was 68.2% compared to 104.8% in 2019. The decrease in The Fund's payout ratio for the year compared to the same period in 2019 and was due to distributions paid decreasing by $18.9 million or 63%, offset by distributable cash decreasing by 24 -- excuse me, by $12.4 million or 43.2%. The effects of the COVID-19 pandemic have materially affected The Fund's payout ratio in the period and for the year, and they continue to materially affect The Fund's payout ratio in the future. 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 year does not factor in the special distribution that was paid on January 29, 2021, even though the cash generated to fund that special distribution was generated during the year. If the special distribution was included in the calculation of payout ratio for the year, the payout ratio would have been 94.6%. In addition to the special distribution on February 9, 2021, the trustees of The Fund approved a cash distribution to unitholders of $0.065 per unit in respect to the period from January 1, 2021, to January 31, 2021. This monthly distribution will be payable on February 26, 2021, to unitholders of record at the close of business on February 21, 2021. The trustee's 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 the COVID-19 pandemic. While the COVID-19 pandemic persists, the trustees expect that the franchise sales and same-restaurant sales and the resulting royalty and distribution income and distributable cash available for distribution to unitholders will 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 encouraged by the efforts of our local franchisees and their restaurant teams working in local Boston Pizza Restaurants across the country during these difficult times. In terms of our outlook, Boston Pizza began its first quarter of 2021 with a meal deal promotion supported by significant TV, digital and social media ads. The promotion provides our guests with extra value when ordering special pizza, wing, salad and pasta combinations. Also in the first quarter of 2021, we look forward to our Valentine's Day promotion coming up next weekend when the popular Boston Pizza heart-shaped pizzas will be served and $1 from each pizza sold will go to help local charities chosen by each restaurant. Currently, guests are able to donate $2 with their order to support a local charity. And for those with a sweet tooth, $1 from each Chocolate Explosion dessert also goes to support a local cause. For the first time ever, Boston Pizza has extended the sale of the BP heart-shaped pizzas to both Saturday, February 13 and Sunday, February 14, to give guests more opportunities to enjoy a heart-shaped pizza while ensuring our restaurants can maintain social distancing. With respect to our outlook on COVID-19, the pandemic has had a continued impact on the general economy in Canada and on the restaurant industry in particular. For the foreseeable future, COVID-19 will continue to cause significant disruption to the business of The Fund and to BPI. BPI's management will continue to closely monitor the evolving COVID-19 situation and modify the operating procedures of Boston Pizza Restaurants to ensure the safety of our staff and guests. We will also maximize the opportunity to grow our takeout and delivery business and adapt other areas of our business such as expanded patios and enhanced digital options to responsibly address additional challenges and opportunities presented by COVID-19. Management of BPI anticipates that franchise sales levels for the first half of 2021 will continue to be challenged as a result of COVID-19. With that, I'd like to begin the question-and-answer session. Operator?

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

So just looking at same-restaurant sales, it looks like they've been deteriorating from kind of September, October to January. What do you think is driving that deterioration?

Nick, maybe I'll start, and Michael can provide some extra color. But in our third quarter financial release in early November, we included the results for the month of October, just as for this fourth quarter release of financial information we included in January. And that's a new disclosure for us in order to give investors line-of-sight into how the trends are continuing. And you think back in October, we had, had, I believe it was 5 or 6 sequential months of increased sales versus the year ago, reaching up to 90% of year-ago sales for the month of September. We then included the October number to show that the month of October stepped back by about 10%. It was about 80% of year-ago sales. And that -- to answer your question, that's really driven by the on-premise restrictions that started October 1 in Québec and then in Ontario and Manitoba. And we did include some of the numbers in our filings and press release today as well as some of the comments that Michael and I made earlier about 375 restaurants being open for takeout and delivery today. But at the start of this week, it was only about 110 that were offering, 105 that were offering on-premise bar and restaurant under earlier last call restrictions, social distancing, limited seating capacity and so forth, but nonetheless open. We are seeing that number rise now with Alberta opening and a couple of regions of Québec and there are signs that Ontario is also going to ease restrictions in Manitoba. So we should see that number come up. But the deterioration in same-restaurant sales over the fourth quarter, was predominantly driven by the inability to open our restaurants and bars due to regional health restrictions impacting those on-premise operations. Michael, did you want to add anything?

Thanks, Jordan. Nothing further to add on that one.

And then with the restrictions being used in Alberta, Québec, Ontario and Manitoba, do you think that January will potentially be a low water mark? Or is there something that might give you pause?

Well, yes, I mean my pause is just in all the changes that have happened over the last 4 months. We don't want to get ahead of ourselves in saying the second wave is over and the reopening process is in full steam ahead. It's definitely positive news for us. And the 3 regions that are -- have been operating the on-premise, most recently being British Columbia, Saskatchewan and the Atlantic provinces, they show significantly higher sales results because they're able to welcome guests into their dining rooms and sports bars. Again, albeit with social distancing, sanitation, PPE and capacity limits and early last call all in place. And those will continue, I believe, for quite some time. But definitely a positive news in Alberta on Monday and parts of Québec and then the announcements about Manitoba and parts of Ontario beginning to ease on-premise restrictions for restaurants is positive news and should benefit our overall sales levels going forward.