Start Time: 11:30 January 1, 0000 11:56 AM ET
Boston Pizza Royalties Income Fund (OTC:BPZZF)
Q2 2020 Earnings Conference Call
August 14, 2020, 11:30 AM ET
Company Participants
Michael Harbinson – CFO
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 on August 14, 2020. 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 [email protected]. [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. We’ll be discussing the 2020 second 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 second quarter materials filed earlier today on SEDAR or visit the Fund’s Web site at www.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 12, 2020, which was filed on sedar.com.
Before I turn the call over to Jordan Holm, President of BPI, I’d 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 MD&A that was 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’ll 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 discuss our results for the quarter ended June 30, 2020 and Boston Pizza’s upcoming plans. Michael will then provide a summary of key financial highlights for the quarter plus recap the COVID-19 recovery plan that was recently agreed to between The Fund, BPI and its lenders. As usual, we will leave time for questions at the end of the call.
In the second quarter, the pandemic continued to have a significant impact on all Boston Pizza restaurants in our network. Since the beginning of the pandemic, we have had to continually adapt our business practices to react to the constantly changing landscape. In the face of this change, Boston Pizza has continued to prioritize the health and safety of our staff and guests.
In the second quarter, Boston Pizza restaurants began to gradually reopen dining rooms, sports bars and patios as permitted by provincial health authorities. The reopening of our restaurants placed us on a gradual path to recovery. However, our total guest traffic in the second quarter remained negatively impacted by the limited seating capacity restrictions and changes in guest behavior driven by the pandemic.
The restrictions to our on-house or on-premise business plus the temporary closure of some restaurants resulted in material declines to our franchise sales and same restaurant sales in the quarter. I’ve been extremely pleased with our team’s ability to mitigate declines in total franchise sales and same restaurant sales through an aggressive focus on takeout and delivery. We saw positive momentum and strong year-over-year increases in both our takeout and our delivery businesses.
Looking forward, we will continue to aggressively focus on staff and guest safety. We have established high brand standards for health and safety, sanitation procedures, social distancing, contactless delivery and online payments. Our top priority throughout this pandemic remains on earning the confidence of our restaurant staff and guests by demonstrating that Boston Pizza is taking appropriate precautions to protect their health.
This included the delaying of the opening of individual restaurants or whole regions until we were assured that the operating standards in our reopening guide could be consistently delivered. Currently, approximately 380 Boston Pizza locations are open for takeout and delivery with approximately 375 of those locations also having their dining rooms, sports bars or patios open.
Turning to the results, as shared in the press release and financial statements filed this morning, Boston Pizza posted system-wide gross sales of $129.8 million for the quarter and $354.6 million year-to-date, representing decreases of 53.8% and 35.1%, respectively, versus the same period one year ago.
In addition, The Fund posted franchise sales from restaurants in the Royalty Pool of 107.1 million for the quarter and 281.2 million year-to-date, representing decreases of 50.6% and 33.6%, respectively, versus the same periods one year ago.
Negative same restaurant sales results for the quarter were principally due to declines in restaurant guest traffic and the temporary closure of all dining rooms and sports bars in Boston Pizza restaurants across Canada, starting on March 17, 2020, both as a result of the COVID pandemic.
The decline in same restaurant sales year-to-date was principally due to declines in restaurant guest traffic and the temporary closure of all dining rooms and sports bars in the Boston Pizza restaurants across Canada on March 17, 2020, again both as a result of the COVID pandemic but partially offset by the increased takeout and delivery sales that I mentioned a moment ago.
Turning to restaurant development. Boston Pizza opened no new full service restaurants during the quarter and has opened one new full service restaurant year-to-date. Boston Pizza closed four full service restaurants in the quarter and has closed six restaurants year-to-date.
BPI has worked diligently to build a consortium of financial relief and support for our franchisees across our financial institutions, governments and landlords to help offset the otherwise unprecedented financial impact facing Boston Pizza’s many franchisees.
Consistent with many other franchisors, in the second quarter, BPI deferred the collection of royalties and advertising fees in order to provide franchisees the financial support during these challenging times.
Due to the deferral of cash collection coupled with the decline in revenue, BPI and BP Canada LP delayed the payment of royalty and distribution income to The Fund starting in March 2020. This in turn caused significant declines in the amount of cash received by The Fund and its cash available to distribute to unitholders. As communicated last quarter, the trustees of The Fund temporarily suspended the monthly distribution until further notice.
I’ll now pass it to Michael to provide a review of The Fund’s financial performance. Michael?
Michael Harbinson
Thank you, Jordan. Before I provide an overview of The Fund’s quarterly results, I’d like to recap the COVID-19 recovery plan that was recently agreed to. The Fund and BPI recently entered into agreements that were intended to holistically address the financial challenges caused by the COVID-19 pandemic.
As shared in our press release, on June 22 of this year, this COVID recovery plan provides various measures designed to bring both liquidity and stability to the Boston Pizza system during these challenging times.
As part of the recovery plan, BPI received additional capital from its sole shareholder, Jim Treliving, as well as its bank, the Bank of Montreal. Mr. Treliving invested 5 million of additional capital in BPI in June and will invest an additional 5 million of capital in BPI before October 1, 2020. These proceeds are being used to pay down BPI’s existing bank debt as well as provide BPI with increased funds for working capital.
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 on July 2, 2020. As part of the joint recovery plan, The Fund and BPI amended their existing credit facilities with the bank.
As Jordan mentioned, BPI deferred the collection of royalties and advertising fees from March to May in order to provide our franchisees with financial support in the form of increased liquidity during these challenging times. These deferred fees from March to May will be collected from Boston Pizza franchisees over a 15-month period, starting this September. BPI will pay The Fund its full deferred royalty and distribution income with interest over this same 15-month period, again starting in September.
Also, as part of the joint recovery plan, BPI resumed charging its franchisees royalty and advertising fees in June of this year. Additional details on the COVID 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.
While the actions and joint recovery plan I’ve just outlined provide increased stability for the foreseeable future, the full impact of the pandemic on Boston Pizza and its 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 restaurant closures.
While uncertainty exists in these areas, I do want to emphasize that we do anticipate that BPI will have sufficient liquidity to fund its operations and its debt service payments into the foreseeable future also. Also, of particular interest to unitholders, as a condition of the comprehensive recovery plan that I was speaking to, the bank is requiring that The Fund not pay distributions to unitholders before October 1, 2020.
The Fund intends to reinstate monthly distributions as soon as it’s responsible and reasonable to do so. Resumption of and the amount and timing of monthly distributions will be determined by the trustees of The Fund and The Fund’s distribution level is being set in a way that really will depend on the stability and the amount of royalty and distribution income received by The Fund, which itself continues to be impacted by uncertainties related to the pandemic and the underlying Boston Pizza business.
With that, I’ll now turn to The Fund’s second quarter results and provide a more conventional summary of the financial highlights. The Fund posted royalty income of 4.3 million for the quarter and 11.2 million year-to-date compared to 8.7 million and 16.9 million, respectively, for the same periods one year ago.
The Fund posted distribution income of 1.4 million for the quarter and 3.7 million year-to-date compared to 2.9 million and 5.6 million, respectively, for the same periods one 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 107.1 million for the quarter and 281.2 million year-to-date. For the same periods in 2019, royalty and distribution income were based on Royalty Pool restaurants that were 396 in terms of number of restaurants and those restaurants reported franchise sales of 216.9 million and 423.3 million, respectively.
The Fund’s net and comprehensive income was 7.6 million for the period compared to 9.2 million for the second quarter of 2019. The 1.6 million increase in The Fund’s net and comprehensive income for the period compared to the second quarter of 2019 was primarily due to lower royalty and distribution income of 5.8 million, partially offset by 1.8 million change in net fair value gain, lower income tax expense of 1.4 million and lower interest on Class B units of 1 million.
The Fund’s net and comprehensive loss was 9.3 million year-to-date compared to the net and comprehensive income of 20.3 million year-to-date in 2019. 29.6 million decrease in The Fund’s net and comprehensive income year-to-date compared to the same period in the prior year was primarily due to lower royalty and distribution income of 7.5 million and a 24.8 million increase in net fair value loss, partially offset by lower income tax expense of 1.8 million and lower interest on Class B units of 1.1 million.
While net and comprehensive income or loss is a measurement of The Fund’s earnings under international financial accounting 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 non-cash items that did not affect The Fund’s cash flow.
Non-cash items include the fair value adjustments on the investment in Boston Pizza Canada Limited Partnership, Class B Unit liability, interest rate swaps and changes in 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 negative 2.2 million for the period compared to 7.3 million for the second quarter of 2019. The decrease in distributable cash of 9.5 million or 130% was primarily due to the increase in cash flow used in operating activities of 9.7 million, offset by lower SIFT Tax on units of 0.9 million and lower interest on Class B Units of 1 million.
The Fund generated distributable cash of 5.5 million year-to-date compared to 13.9 million year-to-date in 2019. The decrease in distributable cash of 8.4 million or 60.8% was primarily due to a decrease in cash flow generated from operating activities of 8.6 million, offset by lower Sift Tax on units of 1.3 million and lower interest on Class B Units of 1.4 million.
The Fund generated distributable cash per unit of negative $0.104 for the period compared to $0.336 per unit for the second quarter of 2019. The decrease in distributable cash per unit of $0.44 or 131% was primarily due to the decrease in distributable cash outlined above and fewer units outstanding compared to the same period in 2019, due to The Fund’s normal course issuer bid that was active from February 19 to February 18, 2021.
The Fund generated distributable cash per unit of $0.253 year-to-date compared to $0.639 per unit year-to-date in 2019. The decrease in distributable cash per unit of $0.386 or 60.4% was primarily due to the decrease in distributable cash outlined above and a fewer units outstanding compared to the same period in prior year due to The Fund’s NCIB.
As at June 30, 2020, The Fund acquired 266,300 units under the NCIB at an average price of $12.98 per unit. Between June 30, 2020 and August 14, 2020, The Fund did not acquire any additional units under the NCIB and The Fund’s NCIB is no longer active and will not be reactivated for the foreseeable future.
The Fund’s payout ratio for the period was 0% compared to 102.6% in the second quarter of 2019. The decrease in The Fund’s payout ratio for the period compared to the same period in prior year was due to the temporary suspension of distributions by the trustees on March 23, 2020.
The Fund’s payout ratio year-to-date was 126.8% compared to 108% year-to-date in 2019. The increase 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 8.4 million or 60.8% and distributions paid decreasing by 8.1 million or 54%.
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 and restaurants open their patios and benefit from increased tourist traffic.
On a trailing 12-month basis, The Fund’s payout ratio was 108.5% as at June 30, 2020. However, the effects of COVID-19, including the temporary suspension of distributions, have materially affected The Fund’s payout ratio in the period and year-to-date.
And with that, I’ll turn the call back over to Jordan for the outlook. Jordan?
Jordan Holm
Thank you, Michael. We continue to be pleased with the efforts of our team and our franchisees to safely reopen our restaurants and welcome back our guests wherever possible. We have made adjustments to our menu to suit the new COVID-19 operating standards, and, as I mentioned earlier, we have established stringent operating procedures to ensure the safety of our staff and our guests at all of our restaurants.
While we scaled back our marketing efforts in the second quarter due to the pandemic, we have recently restarted and reengaged with our guests in more traditional promotional strategies as our recovery plans continue to progress.
We started the third quarter with our summer Playoffs promotion in partnership with our Hockey Night in Canada sponsorship which includes a featured menu consisting of three pizza slice or 6-inch gourmet pizzas and some new wing flavors and other new menu items. This promotion in conjunction with the return of televised sports in our restaurants have been well received by our guests and contributed to positive same-store sales momentum in the current quarter.
In terms of our shorter-term outlook, the COVID-19 pandemic has had a sudden and 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 to BPI.
BPI’s management will continue to closely monitor the continuously evolving COVID-19 situation and modify the operating procedures of Boston Pizza restaurants to ensure the safety of our staff and our guests.
We will also maximize the opportunity to grow our takeout and delivery business and adapt other areas of our business to responsibly address additional challenges and opportunities presented by COVID-19.
Approximately 95% of all the Boston Pizza restaurants which were open prior to the COVID-19 pandemic have reopened their dining rooms, sports bars and patios to date with reduced seating capacity. We are pleased with the improvement in sales trends we are experiencing since the reopening of our restaurants.
The trustees of The Fund expect that if the recent improvement and performance continues and if sales trends become less uncertain that The Fund will reinstate monthly distributions in the fourth quarter of 2020 with the view to ensuring the payment of regular monthly distributions at a sustainable level. The trustees will closely monitor this situation and continue to act in the best interest of The Fund and its unitholders.
With that, I’d like to turn it back to the operator so we can 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]. The first question comes from Nick Corcoran from Acumen Capital. Please go ahead.
Nick Corcoran
Good morning. A couple of questions from me as far as sales. Can you give us any indication whether or not you closed any locations subsequent to quarter end and what are you expecting for new openings through the end of 2020?
Jordan Holm
Yes. Thank you, Nick. So we did close two locations subsequent to June 30. So we had four closures in the quarter and then two subsequent to. We did have one new opening earlier in the year that I mentioned, February in Alberta and we have a new location actually opening today in Ontario. We did have more openings planned for the year but just with all of the disruption in the second quarter and its impact on the construction calendar there, it doesn’t look like we will have more new restaurant openings for the remainder of the year. Those will likely slide into 2021. But that said, we do have active real estate and development and franchising teams in each of the three big markets across the country that are looking for opportunities with all the changes that are going on, but the reality is we’re focusing much more on the restaurants that are opened in our system right now and we’ll get back to development when we have more of a pipeline focus in that area.
Nick Corcoran
And the restaurants that might slide [ph] into 2021 or any under construction at least, maybe just call out?
Jordan Holm
No. I don’t believe there are any under – are you talking about partial construction and that kind of thing?
Nick Corcoran
Yes, exactly.
Jordan Holm
No. I think because of the timing; the late February, early March time, we would have had – we wouldn’t have broken ground on anything that I’m aware of. And so there’s still a possibility that we would move forward on a retrofit of an existing site or something like that that takes less full construction time. But if it’s a new build from the ground up starting in August with construction ending in late November or December, we just wouldn’t have time to squeeze it into this calendar year. But I don’t believe there’s any partial. It’s just construction projects being put on hold temporarily.
Nick Corcoran
Then just one more question from me. Can you give any indication what you’re seeing in the net working terms of sequential improvement in system sales from the end of Q2 into Q3?
Michael Harbinson
Yes. Thanks, Nick. So we did cut off our guidance or our financial reporting as of June 30, which is our reporting standard and has been for a long time. In our comments, we indicated that we were pleased with the – as the restaurants have been reopening with the sales results and the return of the guests to our sports bars and dining rooms and patios, we’ve, in many cases, expanded the size of our patios and seen good sales results from that through the summer months. And the momentum as we reopened more restaurants throughout each of the months of the second quarter continued beyond June 30, but we just didn’t quantify that. But directionally, we’re encouraged by where it’s going. I should call out, it is the summer months and we do have the benefit of patios and some municipalities expanded footprints for our patio, so that is a benefit that obviously will go away when the weather changes into the fall. But for now, we’re quite encouraged with the sales direction and momentum and the return of the guests to our restaurants.
Nick Corcoran
Great. Thanks for taking my questions.
Jordan Holm
Thank you.
Operator
And this concludes the question-and-answer session. I would like to turn the conference back over to Jordan Holm for any closing remarks.
Jordan Holm
Okay. Thank you, operator. Since there are no further questions, we’ll go ahead and wrap up the call. I will thank you all for taking the time to listen in. As I said before, we look forward to safely welcoming back more of our guests and our restaurant staff as our restaurants continue to reopen. Please continue to stay safe and healthy, and we look forward to speaking with you all again at our Third Quarter Conference Call in November. Thank you.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.