Boston Pizza Royalties Income Fund (OTC:BPZZF) Q2 2022 Earnings Conference Call August 5, 2022 11:30 AM ET
Company Participants
Michael Harbinson – Chief Financial Officer
Jordan Holm – President
Conference Call Participants
Nick Corcoran – Acumen Capital
Operator
Hello. This is the Chorus Call conference operator. Thank you for standing by. Welcome to Boston Pizza’s Second Quarter Conference Call. As a reminder all participants are in listen-only mode, and the conference is being recorded today August 5th, 2022. After the presentation there will be a question-and-answer session. Participants on the call may also post their questions via email 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.
Michael Harbinson
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 is 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 9th, 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?
Jordan Holm
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 one 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 room, 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 one 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 resulting Royalty and Distribution income for July 2022 increased 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 then 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?
Michael Harbinson
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 one 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 one 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 periods 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 year-to-date basis, compared to $19.3 million through year-to-date in 2021, a $4.6 million decrease in the Fund’s net and comprehensive income was due to a decrease in 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 non-cash items that do not affect the Fund’s cash flow, whereas cash flow from operating activities is a non-inclusive of all the funds required cash outflows and therefore is not indicative of cash available for distributions to unitholders.
Non-cash 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 41.4% 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 $0.100 or 53.5% was primarily due to the increase in distributable cash as previosuly 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 100.9%, 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 29th, 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 funds payout ratio on a trailing 12 month basis, the Funds payout ratio was 87.5%, as at June 30th, 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 $1.5 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, comapred 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.
In deciding to increase monthly cash distributions from $0.085 per unit to $0.100 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 we 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 trustee’s objective in setting a monthly distribution amount is better 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, 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 will now turn the call back over to Jordan for more on the outlook. Jordan?
Jordan Holm
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 innovation 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 receive a card for five 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 Restaurant 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 of 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?
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question is from Nick Corcoran with Acumen Capital. Please go ahead.
Nick Corcoran
Good morning and congrats on a strong quarter.
Jordan Holm
Good morning. Thank you, Nick.
Michael Harbinson
Good morning, Nick.
Nick Corcoran
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 on the quarter?
Jordan Holm
Yes, both I think industry-wide and in fact from the economy wide, those are the two kind of headwind factors affecting a number of businesses across Canada, number of different industries and certainly Boston Pizza’s 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 they — there are factors. In that area, I would say even perhaps more impactful in the quarter in terms of a headwind with the 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 as 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.
Nick Corcoran
That’s helpful. And then maybe thinking about the takeout and delivery volumes. How are they compared to pre-pandemic levels as people move back to more in restaurant dining?
Jordan Holm
Yes. So maybe I’ll start on this one, Nick, and then turn it over to Michael. But just for recap, when COVID first affected our restaurants and we close 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 takeout 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 that we were able to take that dollar volume and double it in the days when our restaurants were on-premise was closed. That was just takeout and delivery.
Since we’ve been able to open up the on-premise business regionally and locally has 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?
Michael Harbinson
Maybe just to reinforce what you said. So yes, we — in the worst periods of the pandemic, we doubled the volume of our takeout in delivery, compared to pre-pandemic and then we haven’t held on to that doubling. As Jordan said, we’re currently and trending about kind of 40% to 50% higher than pre-pandemic levels. So yes, we’re happy with that outcome just it appears to us that some of what we’ve built up with takeout delivery in terms of that business might stick with us more permanently into the future. And so that’s an encouraging sign for us.
Nick Corcoran
And when we think for the same restaurant sales growth, compared to the pre-pandemic? How much of that lift do you think is from takeout and delivery?
Jordan Holm
Yes. I mean, it is a significant part of our business and was previously, I know we had built over 50-years of good — very strong takeout delivery business. We have invested in it, in two ways. The first is we put a new e-commerce platform in, in January of this year, which helps our order volume and the guest experience as they go through the online platform for bostonpizza.com or the MyBP app. And we’ve also invested in partnerships with delivery service providers where they operate in places where we have Boston Pizza Restaurants and both of those have added to the volume, the availability, the sales that get generated through takeout delivery.
I mean your specific question about how much of the SRS lift could be attributed to the gains in takeout delivery versus pre-pandemic? I don’t have that breakout in front of me, it certainly is a contributor and you could just tell by the volume if we’re up. If we’re up 40% or 50% over pre-pandemic levels and takeout delivery sales, that’s a strong indication that, that is contributing to the overall strength of same restaurant sales versus 2019, but I don’t have an exact, kind of, it accounts for a third of the lift or half, Michael, I’m not sure if you want to expand anymore?
Michael Harbinson
No, I think that’s right in terms of it’s hard to kind of parse out how much of the growth we’ve been seeing can be attributed to takeout and delivery, but certainly significant portion of it. It was always a significant portion of Boston Pizza’s Restaurant pre-pandemics, where we were citing the 18% out of the total sales were pre-pandemic coming from takeout and delivery and we’ve grown that and sustained that. So, yes in terms of how much of the lift today is coming from ticket and delivery, I think without sharing any specifics, it’s fair to say a significant portion of our positive results are being driven by the off-premise side of our business.
Nick Corcoran
That’s fair. And then moving to the restaurant count, I think the number was flat sequentially. Were there any openings or closings after quarter end? And what’s the pipeline look for new stores?
Jordan Holm
So we haven’t announced anything subsequent to the quarter, I believe, Michael, unless there was something in the MD&A on subsequent events. But maybe I’ll comment on the pipeline, so we obviously have slowed down our development during the COVID period. I think that’s just been a natural reaction to the headwinds facing the industry, the uncertainty around openings and closings, the availability of staff in the construction trades, for example, to do build outs for us.
We did have a new opening, I think it was in the summer of 2020, but since then things have been relatively quiet. But we have a robust pipeline, not just of real estate and sites that we’ve identified across the country, but also franchisees either our own franchisees looking to expand their Boston Pizza portfolio and open new locations in areas where they perhaps already have one or two or more, but also new franchisees. I think that the COVID business disruption has been significant and a lot of people are looking at what they might like to do moving forward, including owning a small business and maybe be a franchisee of Boston Pizza, so we have new applicants and we’re sourcing both the — again, the real estate and the sites and then the individual to invest and operate those locations.
So we feel positive about the pipeline for new restaurant development heading into 2023. We don’t have anything under construction right now for 2022, but we do expect to ramp back up to new development in the next year.
Michael Harbinson
I’ll just confirm, Nick that there were no openings or closures during this quarter nor subsequent to this quarter.
Nick Corcoran
Okay. That’s great color. Again, thanks for — thanks again for taking my questions.
Jordan Holm
Thanks, Nick.
Michael Harbinson
Thank you, Nick.
Operator
There are currently no more questions from the telephone lines.
Jordan Holm
Okay. Thank you, operator. And as there are no further questions, I’d like to thank everyone for taking the time to listen in. We are pleased to be welcoming back more of our guests to our sports bars, restaurants and patios, while continuing our strong takeout and delivery sales momentum. We look forward to speaking with you all again on our third quarter conference call in November of this year. Take care and thank you all.
Michael Harbinson
Thank you.
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