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 Second Quarter Conference Call. [Operator Instructions] The conference is being recorded today, August 5, 2022. [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 2022 second quarter results for 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 second 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 that's 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 fund 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 9, 2022, 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. Jordan?

Thank you, Michael, and welcome, everyone, to Boston Pizza's Second Quarter Investor Conference Call. Today, I'll be discussing our second quarter results and also share a brief outlook. Michael will summarize our key financial highlights. And as usual, we will leave time for your questions at the end of today's call. . We were pleased to see our sales performance improved during the second quarter compared to the same period 1 year ago. In fact, the second quarter generated our strongest sales results since the start of the pandemic. We were pleased to see our guests excited to come back to our restaurants and our sales performance exceeded pre-pandemic levels in the quarter. We also continued to safely operate the dining rooms, sports bars and patios of Boston Pizza Restaurants across Canada during this phase of the COVID-19 pandemic. Turning to our financial results. The Fund posted franchise sales from restaurants in the Royalty Pool of $219.4 million for the quarter and $398.0 million year-to-date, representing an increase of 62.7% and 50.8%, respectively versus the same periods 1 year ago. Same-restaurant sales was positive 64.9% for the quarter and positive 52.3% year-to-date. Positive results for the quarter and year-to-date were principally due to increases in restaurant guest traffic mainly due to the easing and elimination of pandemic-related dining restrictions. We are pleased that our sales results have supported an increase to the Fund's distribution rate, which Michael will elaborate on further later in the call. COVID-19 first began to adversely affect Boston Pizza restaurants in March of 2020. As a result, the Fund believes it's useful to report additional sales metrics that compare sales in 2022 to sales in 2019. Comparing to 2019 allows investors to gauge Boston Pizza's current sales levels against sales levels on a pre-pandemic basis. If SRS on a franchise sales basis were calculated by comparing to the same period in 2019, SRS would be positive 4.6% for the quarter and negative 2.8% year-to-date. SRS for July 2022 was approximately 6.5% when compared to the same period in 2021 and approximately 8.3% when compared to the same period in 2019. Total franchise sales and the result in royalty and distribution income for July 2020 to increase by approximately 6.1% compared to July 2021, and approximately 4.6% compared to July 2019. From a marketing standpoint, we began the second quarter of 2022 with a specially priced burger and beer promotion featuring a pint and a burger for $17.99. Also in the second quarter, we launched our summer patio campaign that introduced new food and drink menu innovations, and both promotions have been exceptionally well received by our guests. Turning to restaurant development. Boston Pizza opened no new restaurants in the quarter and did not close permanently any Boston Pizza restaurants in the second quarter. BPI continues to focus on the safety of our guests and restaurant staff serving our communities with takeout delivery and on-premise dining as permitted, and helping our franchisees to effectively manage through the ensuing phase of the pandemic. 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 $8.8 million for the quarter and $15.9 million year-to-date compared to $5.4 million and $10.6 million, respectively, for the same periods 1 year ago. . The Fund posted distribution income of $2.9 million for the quarter and $5.3 million year-to-date compared to $1.8 million and $3.5 million, respectively, the same periods 1 year ago. Royalty and distribution income for the quarter and year-to-date were based on 383 Boston Pizza restaurants in the Royalty Pool that reported franchise sales of $219.4 million for the quarter and $398 million year-to-date. In the same period in 2021 royalty and distribution income were based on the Royalty Pool of 387. Boston Pizza restaurants reporting franchise sales of $134.8 million for the second quarter in 2021 and $263.8 million year-to-date in 2021. The Fund's net and comprehensive income was $1.8 million for the quarter compared to $7.7 million for the second quarter of 2021. The $6 million decrease in the Fund's net and comprehensive income for the period compared to the second quarter of 2021, was primarily due to an increase in fair value loss of $10.4 million and an increase in interest expense on the Class B units of $0.1 million, all partially offset by an increase in royalty and distribution income of $4.5 million and a decrease in income tax expense of $0.2 million. The Fund's net and comprehensive income was $14.7 million on a year-to-date basis compared to $19.3 million through year-to-date in 2021. The $4.6 million decrease in the Fund's net and comprehensive income was due to a decrease in the fair value gain of $9.7 million, an increase in income tax expense of $1.7 million and an increase in interest expense on Class B units of $0.3 million, all partially offset by an increase in royalty and distribution income of $7.1 million. The Fund's cash flow generated from operating activities was $9.1 million for the period compared to $6.4 million for the second quarter of 2021. The increase of $2.7 million was due to an increase of royalty and distribution income of $4.5 million, partially offset by a decrease in changes in working capital of $0.8 million and an increase in income taxes paid of $0.9 million. The Fund's cash flows generated from operating activities was $15.8 million year-to-date compared to $12.4 million for the same period in 2021. The increase of $3.4 million was due to an increase of royalty and distribution income of $7.1 million, partially offset by a decrease in changes in working capital of $2.1 million and an increase in income taxes paid of $1.5 million. While net and comprehensive income or loss and cash flows from operating activities are both measures under International Financial Reporting Standards, or IFRS, 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 noninclusive of all the funds required cash outflows and therefore, is not indicative of cash available for distributions to unitholders. 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 distribution to unitholders. The Fund generated distributable cash of $6.2 million for the period compared to $4 million for the second quarter of 2021. The increase in distributable cash of $2.2 million or 53.4%, was primarily due to an increase in cash flow generated from operating activities of $2.7 million, partially offset by increased BPI Class B unit entitlement of $0.4 million and increased SIFT tax on units of $0.2 million. The Fund generated distributable cash of $10.9 million year-to-date compared to $7.7 million for the same period in 2021. The increase in distributable cash of $3.2 million or 41.1 -- 41.4%, was primarily due to an increase in cash flow generated from operating activities of $3.4 million and a decrease in repayments of long-term debt of $0.6 million, partially offset by increased BPI Class B unit entitlement of $0.6 million and increased SIFT tax on units of $0.2 million. The Fund generated distributable cash per unit of $0.287 for the period compared to $0.187 per period for the second quarter of 2021. The increase in distributable cash per unit for the period of $0.10 or 53.5%, was primarily due to the increase in distributable cash as previously described. The Fund generated distributable cash per unit of $0.505 year-to-date compared to $0.357 per unit for the same period in 2021. The increase in distributable cash per unit year-to-date of $0.148 or 41.5%, was primarily due to the increase in distributable cash, as previously described. The Fund's payout ratio for the period was 88.9% compared to 104.3% in the second quarter of 2021. The decrease in the Fund's payout ratio for the period was due to distributable cash increasing by $2.2 million or 53.4%, partially offset by distributions paid increasing by $1.3 million or 30.8%. The Fund's payout ratio year-to-date was 100% -- 100.9% rather compared to 165.1% year-to-date in 2021. The decrease in the Fund's payout ratio year-to-date was due to distributable cash increasing by $3.2 million or 41.4% and distributions paid decreasing by $1.7 million or 13.6%. Payout ratio is calculated by dividing the amount of distributions paid during the applicable period by the distributable cash for that period. Accordingly, the payout ratio for year-to-date in 2021 factors in the special distribution of $0.20 per unit 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 in the calculation of payout ratio for year-to-date 2021, the payout ratio would be 109.1%. 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. The effects of COVID-19 may have materially affected the Fund's payout ratio. On a trailing 12-month basis, the Fund's payout ratio was 87.5% as at June 30, 2022. On August 4, 2022, the trustees of Fund approved a cash distribution for the period of July 1, 2022 to July 31, 2022, of $0.10 per unit for July 2022. This is an increase of $0.015 per unit or 17.6% from the previous monthly rate of $0.085 per unit. On an annualized basis, the new monthly distribution rate equates to $1.20 per unit compared to $1.02 per unit for the previous monthly distribution rate. The July 2022 distribution will be paid on August 31, 2022, to unitholders of record at the close of business on August 21, 2022. And deciding to increase monthly cash distributions from $0.085 per unit to $0.10 per unit. The trustees of the Fund considered, amongst other factors, the recent financial performance of the Fund, Boston Pizza International and Boston Pizza Restaurants in the Fund's Royalty Pool as well as the Fund's cash position and debt repayment obligations and internal financial projections for the Fund as well as Boston Pizza Restaurants in the Fund's Royalty Pool for the remainder of 2022 and beyond. The trustees objective in setting a monthly distribution amount is that it be sustainable. The trustees will continue to closely monitor the Funds available cash balances, given the continued volatility and economic uncertainty caused by COVID-19. While COVID-19 persists, trustees expect that franchise sales and same-restaurant sales and the resulting royalty and distribution income along with the distributable cash available for distribution to unitholders will continue to be adversely affected. With that, I'll turn the call back over to Jordan for more on the outlook. Jordan?

Thank you, Michael. We continue to be extremely pleased with the efforts of the Boston Pizza team and our franchisees during these challenging times. During the third quarter of 2022, we are continuing our summer patio campaign, which highlights new food and drink innovations, and we'll also launch our fall themed menu, which will feature a selection of new indulgent items just in time for the fall season. Our popular BP Kids Cards promotion will also return towards the end of the third quarter. This promotion is always a favorite with families where for a $5 donation to the Boston Pizza Foundation, they received a card for 5 free kids meals at future Boston Pizza visits. BPI management continues to monitor the COVID-19 situation and modify the operating procedures of Boston Pizza Restaurants to ensure the safety of our guests and our staff. Our top priority is to responsibly and safely operate the dining rooms, sports bars and patios or Boston Pizza restaurants across Canada. We will continue to maximize our takeout and delivery business while also adapting other areas of our business to responsibly address the challenges and opportunities presented by COVID-19. With that, I'd like to begin the question-and-answer, session. Operator?

[Operator Instructions] The first question is from Nick Corcoran with Human Capital.

Congrats on a strong quarter. Just looking at the network, thinking about the kind of the broader macro factors, have there been any supply chain or labor issues that might have impacted the results in the quarter?

Yes, both. I think industry-wide and in fact, probably economy-wide, those are the 2 kind of headwind factors affecting a number of businesses across Canada, a number of different industries. And certainly, Boston Pizza is among those, both in supply chain disruption. Our suppliers have been through many of the same things that the restaurants have been through in terms of COVID restrictions, different operating procedures. Some of them completely had to close for periods of time, and that recovery process is -- it has been bumpy. But we're fortunate we have a really strong supplier network. We've been in business, as you may know, almost 60 years, and significant purchasing power. So we feel like we've been able to navigate the supply chain challenges, but nonetheless, there are factors in that area. I would say, even perhaps more impactful in the quarter in terms of a headwind would be labor. Again, certainly not specific to Boston Pizza or to the restaurant industry, but there are shortage of employees, and we're constantly looking for new ways to bring people in to our kitchens in particular, but also servers, hosts, managers. And that can have an impact on restaurant capacity and operating hours. I would say, in terms of both of the supply chain and the labor issue, the trend is positive, meaning that those issues are having less and less impact as the recovery is underway, but it is a restaurant-by-restaurant experience certainly on the labor side. And so -- but yes, to your point, did they have a headwind impact in Q2? Yes. Will that continue? Yes. But it is improving, and we're doing everything we can to mitigate both of those factors.

That's helpful. And then maybe thinking about the takeout and delivery volumes, how are they compared to prepandemic levels as people move back to more in restaurant dining?

Yes. So maybe I'll start on this one, Nick, and then turn it over to Michael. But just for a recap, when COVID first affected our restaurants, and we closed nationally all our dining rooms and bars in advance of being required to by regional health requirements. . We saw an immediate uptick obviously in the take of delivery part of our business. We doubled the sales volume. So going into the pandemic, takeout delivery accounted for about 18% of our sales. And we were able to take that dollar volume and double it in the days when our restaurants were -- on-premise was closed, and that was just take out in delivery. Since we've been able to open up the on-premise business regionally and locally as allowed under the various health restrictions, we have held on to that lift. And I believe right now, we're trending in sort of that 40% to 50% higher in total takeout delivery sales than where we were heading into the pandemic in March of 2020. But Michael, do you want to add any color there?