Boston Pizza Royalties Income Fund (BPFUN) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the Boston Pizza Third Quarter 2020 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Michael Harbinson, Chief Financial Officer. Please go ahead, sir.

Thank you, and welcome to the call. We'll be discussing the 2020 Third 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 third 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 that's listed in our press release. The Fund is a limited purpose, open-ended trust that's 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 12, 2020, 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 risk 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'll now turn the call over to Jordan.

Thank you, Michael, and welcome, everyone, to Boston Pizza's Third Quarter Investor Conference Call. Today, I'll be discussing our third quarter results and sharing where we are focusing our efforts going forward. Michael will summarize our key financial highlights for the quarter, plus provide an update on the status of our COVID-19 recovery plan. As usual, we'll leave time for your questions at the end of today's call. In the third quarter, COVID-19 continued to have an adverse impact on all restaurants in our network. Since the beginning of the pandemic, we have adapted our business practices in response to a constantly changing landscape. As at September 30, 2020, approximately 380 Boston Pizza Restaurants were providing takeout and delivery services and operating their dining rooms and sports bars with reduced seating capacities in accordance with government mandates. Franchise sales and the resulting royalty and distribution income for May, June, July, August and September 2020 were, 45.3%, 67.2%, 81.0%, 84.2%, and 88.9% compared to prior year levels. For these same periods, same-restaurant sales were negative 58.3%, negative 34.3%, negative 18.3%, negative 15.9% and negative 10.9%, respectively. We are pleased so far with our ability to mitigate declines in total franchise sales and same-restaurant sales during the pandemic. 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. Boston Pizza has high brand standards as it relates to safety and sanitation as well as social distancing. COVID-19 case counts in Canada rose during the third quarter, causing certain jurisdictions to restrict on-premise operating hours for restaurants. Also, effective October 1, 2020, the Québec government mandated the closure of dine-in restaurant operations for 28 days in certain regions and has since extended such closures until November 23, 2020. Effective October 10, 2020, the Ontario government also mandated the closure of dine-in restaurant operations in certain regions, including Toronto, Peel region and York region. On November 7, 2020, restaurants in Ottawa, Peel and York region resumed in-restaurant service with capacity limits and limited hours. Effective November 2, 2020, the Manitoba government mandated the closure of dine-in restaurant operations for 2 weeks in the city of Winnipeg and on November 10, 2020, mandated the closure of all dine-in restaurant operations for the rest of Manitoba, effective November 12, 2020. The combination of government restrictions mandated in Québec, Ontario and Manitoba from October 1 to November 10, 2020, resulted in between 15 and 70 Boston Pizza restaurants, depending on the specific date, again temporarily closing their dining rooms and sports bars and in some locations, their patios. These locations continued to provide takeout delivery services, while their dining rooms, sports bars and some patios were closed. Franchise sales for October 2020 were 80.7% of prior year levels for the comparative period. This represents an unfavorable change in the trend when compared to September 2020 franchise sales, which were 88.9% of prior year levels. Similarly, same-restaurant sales were negative 21.2% in October 2020 compared to 10.9% in September 2020. While we've been pleased with our ability this year to manage through the pandemic, our outlook remains cautious due to the high level of uncertainty that remains. Turning to our financial results that we shared in the press release and the financial statements that were filed this morning, Boston Pizza posted system-wide gross sales of $237.2 million for the quarter and $591.8 million year-to-date, representing decreases of 16.3% and 28.7%, respectively, versus the same periods, 1 year ago. In addition, The Fund posted franchise sales from restaurants in the Royalty Pool of $185.4 million for the quarter and $466.6 million year-to-date, representing decreases of 15.4% and 27.4%, respectively versus the same periods, 1 year ago. Negative same-restaurant sales results for the quarter were principally due to the COVID-19 pandemic. Our third quarter included some successful promotions, starting with our Summer of Playoffs promotion, which included pizza flights consisting of any 3 6-inch gourmet pizzas. The promotion was well received by our guests and contributed to the positive sales momentum in the quarter. Towards the end of the quarter, we also launched our annual BP Kids Cards promotion, which offered guests, 5 free kids meals for a $5 donation to the Boston Pizza Foundation Future Prospects. The promotion exceeded our expectations by raising over $745,000 in donations for the BP Foundation. Turning to restaurant development. Boston Pizza opened one new full-service restaurant during the third quarter. This brings our year-to-date new restaurant count up to 2 new openings. Boston Pizza also closed 4 restaurants during the third quarter, and that brings our total to 10 closed restaurants year-to-date. BPI has worked diligently to build a consortium of financial support to help offset the otherwise unprecedented financial impact facing our franchisees. This support included BPI and Boston Pizza Canada Limited Partnership deferring the collection of royalties and advertising fees due from our franchisees. The collection of royalties and advertising fees generated from sales in March, April and May 2020 were deferred. In September 2020, we commenced collecting these deferred royalty and advertising fees on a straight-line basis without interest over a 15-month period. I'll now pass it over to Michael for a review of 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 that were caused by the COVID-19 pandemic. As shared in our press release on June 22 of this year, this COVID-19 recovery plan provides various measures designed to bring liquidity and stability to the Boston Pizza system during these challenging times. BPI's sole shareholder invested $5 million of additional capital into BPI on June 22, 2020, and invested an additional $5 million of capital in BPI on September 24, 2020, in order to reduce indebtedness and enhance liquidity and cash flow. In addition, the bank provided BPI with $6.25 million of additional credit facilities under a program with the Export Development Bank of Canada. BPI also received an additional $2 million of financing from the Business Development Bank of Canada, and that happened on July 7, 2020. As Jordan mentioned, this September, 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 this September and over the same 15-month period, BPI commenced paying The Fund its deferred royalty and distribution income plus interest. To date, all parties have satisfied the conditions of the COVID-19 recovery plan that was generally agreed to by The Fund and by BPI, and additional details on the recovery plan itself 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. 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 impacts on The Fund and BPI will depend on the ability of Boston Pizza to build back its business to normal operating levels as well as mitigate the number of permanent restaurant 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 its debt service payments into the foreseeable future. On October 1, 2020, the trustees of The Fund recommenced monthly distributions of $0.065 per unit compared to monthly distributions of $0.102 per unit that existed prior to the fund temporarily suspending distributions on March 23, 2020. Monthly distributions recommenced with the September 2020 distribution that was paid to unitholders on October 30, 2020. With that, I'll now turn to The Fund's third quarter financial results and provide a more conventional summary of the financial highlights. The Fund posted royalty income of $7.4 million for the quarter and $18.7 million year-to-date compared to $8.8 million and $25.7 million, respectively, for the same periods, 1 year ago. The Fund posted distribution income of $2.5 million for the quarter and $6.2 million year-to-date compared to $2.9 million and $8.5 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 $185.4 million for the quarter and $466.6 million year-to-date. For the same periods in 2019, royalty and distribution income were based on the Royalty Pool of 396 Boston Pizza Restaurants, reporting franchise sales of $219.2 million and $642.6 million, respectively. The Fund's net and comprehensive loss was $0.7 million for the period compared to net and comprehensive income of $6.9 million for the third quarter of 2019. The $7.6 million decrease in The Fund's net and comprehensive income for the period compared to the third quarter of 2019 was primarily due to lower royalty and distribution income of $1.8 million, higher interest on long-term debt of $0.3 million and a $7 million fair value change. This was partly offset by lower interest on Class B units of $1 million and lower income tax expense of $0.4 million. The Fund's net and comprehensive loss was $10 million year-to-date compared to net and comprehensive income of $27.1 million year-to-date in 2019. The $37.1 million decrease in The Fund's net and comprehensive income year-to-date compared to the same period in 2019 was primarily due to lower royalty and distribution income of $9.3 million, higher interest on long-term debt of $0.3 million and a $31.8 million fair value change, partially offset by lower income tax expense of $2.3 million and lower interest on Class B units of $2.1 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 the 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 $5.5 million for the period compared to $7.8 million for the third quarter of 2019. The decrease in distributable cash of $2.3 million or 30.2% was primarily due to a decrease in cash flow generated from operating activities of $3.3 million and an increase of interest paid on long-term debt of $0.2 million, partially offset by higher SIFT tax on units of $1.1 million related to the remittance on tax installments previously deferred. The Fund generated distributable cash of $10.9 million year-to-date compared to $21.7 million year-to-date in 2019. The decrease in distributable cash of $10.8 million or 49.8% was primarily due to a decrease in cash flow generated from operating activities of $11.9 million, an increase in interest paid on long-term debt of $0.1 million and lower SIFT tax on units of $0.2 million, all partially offset by decreased entitlements for BPI's Class B units of $1.4 million. The Fund generated distributable cash per unit of $0.253 for the period compared to $0.359 per unit for the third quarter of 2019. The decrease in distributable cash per unit of $0.106 or 29.5% was primarily attributed to the decrease in distributable cash outlined above, partially offset by fewer units outstanding compared to the same period in 2019 due to The Fund's normal course issuer bid that is active from February 19, 2020, to February 18, 2021. The Fund generated distributable cash per unit of $0.506 year-to-date compared to $0.998 per unit year-to-date in 2019. The decrease in distributable cash per unit of $0.492 or $0.493 was primarily attributable to the decrease in distributable cash outlined above, partially offset by fewer units outstanding compared to the same period in 2019 due to The Fund's NCIB. As at September 30, 2020, The Fund acquired 266,300 units under the NCIB at an average price of $12.98 per unit. Between October 1, 2020, and November 13, 2020, The Fund did not acquire any additional units under the NCIB. The Fund's NCIB is no longer active and will not be reactivated for the foreseeable future. Commencing with the fourth quarter of 2020, The Fund will change how it calculates distributable cash and distributable cash per unit to factor in certain principal payments that The Fund is contractually required to make on the credit facilities from and after the fourth quarter of 2020 as part of the Pandemic Recovery Plan it has agreed to. The Fund has not had a requirement to repay any principal amounts under the credit facilities prior to the fourth quarter of 2020. Accordingly, the change to how distributable cash will be calculated does not impact the calculation of distributable cash for periods prior to the fourth quarter of this year. The change to how distributable cash will be calculated will also affect payout ratio, since payout ratio is calculated using distributable cash. The Fund's payout ratio for the period was 0% compared to 96.2% in the third quarter of 2019. The decrease in The Fund's payout ratio for the period compared to the same period in 2019 was due to the temporary suspension of distributions by the trustees on March 23, 2020. The Fund's payout ratio year-to-date is 63.5% compared to 103.7% year-to-date in 2019. The decrease in The Fund's payout ratio year-to-date compared to the same period in 2019 was due to the combined effects of distributable cash decreasing by $10.8 million or 49.8% and distributions paid decreasing by $15.6 million or 69.3%. On a trailing 12-month basis, The Fund's payout ratio was 80.8% as at September 30, 2020. However, the effects of COVID-19, including the temporary suspension of distribution on units, have materially affected The Fund's payout ratio in the period and on a year-to-date basis and may continue to affect in a material way, The Fund's payout ratio in the future. As I mentioned earlier, on October 1, 2020, the trustees of The Fund directly commenced monthly distributions of $0.065 per unit compared to the monthly distributions of $0.102 per unit that existed prior to The Fund, temporarily suspending distributions on March 23, 2020. Monthly distributions recommenced with the September 2020 distribution that was paid to unitholders on October 30, 2020. On November 12, 2020, the trustees of The Fund approved a cash distribution to unitholders again of $0.065 per unit in respect of the period from October 1, 2020, to October 31, 2020. This distribution will be payable on November 30, 2020, to unitholders of record at the close of business on November 21, 2020. In deciding to reinstate monthly distributions on units of $0.065 per unit, the trustees of The Fund considered, amongst other factors, the recent financial performance of The Fund, BPI and Boston Pizza Restaurants in the Royalty Pool, The Fund's cash position and debt repayment obligations and internal financial projections of The Fund, Boston Pizza and Boston Pizza Restaurants in the Royalty Pool for the remainder of 2020 and 2021, and with a view to ensuring that the payment of regular monthly distributions can happen at a sustainable level. Trustees objective in setting a monthly distribution amount is that it be sustainable. The trustees of The Fund will continue to closely monitor The Fund's available cash balances for the remainder of 2020 and beyond. To the extent that the trustees of The Fund determined that after paying monthly distributions, The Fund has any additional cash available for distribution for the year 2020, the trustees will consider declaring a special distribution in December 2020, this December. Taking into account any potential increase in effective tax rate paid by The Fund, if The Fund does not distribute sufficient cash each year. While the consideration of declaring a special distribution would be a departure from The Fund's historical distribution practices and is not envisioned to be a long-term strategy for the fund, the trustees believe doing so could be prudent and a -- a prudent approach during the COVID-19 pandemic, given the continued volatility and economic uncertainty. With that, I will now turn the call back to Jordan for an update on the outlook. Jordan?

Thank you, Michael. We continue to be pleased with the efforts of our BPI team and our franchisees and their staff working in our restaurants every day during these challenging times. In terms of our outlook, Boston Pizza began its fourth quarter with significant TV, digital and social media support behind an NHL hockey promotion that invited guests to enjoy Boston Pizza in our restaurants or in their homes. We also recently launched our Boston Pizza Classics promotion, which brings back some classic menu items such as the Pizzaburger and Smoky Mountain Spaghetti. The feedback from guests has been extremely positive. Finally, Boston Pizza's 2020 holiday promotion begins November 24 and runs through to January 3. Our holiday promotion includes a feature menu with some new and exciting menu items, along with a Boston Pizza Gift Card promotional bonus offer. With respect to our outlook on COVID-19, the pandemic has had a sudden, unexpected and unprecedented impact on the general economy 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 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 delivery business and adapt other areas of our business to responsibly address additional challenges and opportunities presented by COVID-19. With that, I'd like to begin the question-and-answer session. Operator?

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

A few questions from me. The first is, can you give an indication of how much takeout and delivery was of total revenue in Q3?

Well, for historical context, takeout and delivery has been part of the Boston Pizza business model for over 50 years. And in 2019, just as a reference, it would have represented just under 20% of our sales nationally, about 18%, split between takeout and delivery. That is the largest area of growth in the restaurant industry and a clear focus for Boston Pizza coming into this year. And certainly, when the pandemic hit in mid-March, it became for a while, our only business, it was declared -- takeout delivery was declared an essential service in all municipalities that we operate in. So we continue to encourage our restaurants to serve their communities through takeout and delivery to introduce contactless delivery, curbside pickup, online payment and even to work more with some of the third-party delivery providers to grow that part of the business. So that's just for broader context on what that part of the business means for us. Michael, do you want to comment in terms of Q3 and the contribution from TOD?

There's a certain seasonality, Nick, to our business during kind of non-COVID times that would see takeout and delivery, be higher in the fourth quarter and higher in the first quarter of each year. But more directly in response to your question, takeout and delivery combined represented approximately 38% of the total sales for the third quarter.

Okay. That's helpful. And then have you seen that proportion increase Q4? I know we're only 1.5 months in, but interested to hear what the trend is.

Yes. I can speak to that. So -- and that's, again, part of the natural seasonality to our business as we would expect to see that shift, but also the move to restrict some of the dine-in operations in certain regions would be driving that up as well. So we've shared the October same-restaurant sales results because October is effectively in the books, and we'd like to provide some kind of guidance on what the trend looks like. So I'm happy to share the October takeout and delivery results as well. So as I mentioned, Q3 was about -- takeout and delivery was about 38% of the total share of the sales. In October, that moved up to about 44%.

Great. Great. And then you kind of got to the next part of my question, which is how same-restaurant sales have trended into November. Can you give any indication whether overall it's been up or down or flat?