Release Date: July 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- A&W Revenue Royalties Income Fund (AWRRF, Financial) reported positive growth in the first half of the year with same-store sales growth of 0.3% in Q2 and 0.5% year-to-date.
- The proposed strategic combination with A&W Food Services of Canada offers unit holders a 30% premium to the current unit price.
- Unit holders who exchange units for shares of NewCo will maintain the existing level of distributions in the form of quarterly dividends.
- The new structure (NewCo) is expected to provide greater liquidity and attract institutional investment and research analyst coverage.
- The combined entity (NewCo) is projected to have a higher cumulative average growth rate (11.5%) compared to the current fund (8.1%).
Negative Points
- The current economic environment, including increased interest rates and inflation, has pressured consumer discretionary spending.
- The proposed transaction involves a complex proration mechanism for cash exchange, which may be confusing for some unit holders.
- The legacy trust structure of the fund has limited ability to raise capital or pursue other strategic initiatives.
- The trading value of units has been largely driven by the spread between interest rates and bond yields, rather than business results.
- The fund's payout ratio remains high, with a year-to-date payout ratio of 100% in 2024 compared to 99.4% in 2023, indicating limited room for distribution increases.
Q & A Highlights
Q: Can you explain the proration related to the $37 cash exchange value?
A: Unit holders can opt for $37 cash per unit, but there's a cap of $125.6 million for the total cash payout. If more unit holders choose cash than the cap allows, the payout will be prorated to ensure the total cash outlay does not exceed $125.6 million. - Kelly Blankstein, CFO
Q: Could you elaborate on the combined adjusted EBITDA target for the next three years?
A: The target does not include potential openings from new initiatives like the Canadian franchise of Cromology, as these are still in the early stages. The forecast is based on the existing business operations. - Susan Senecal, CEO
Q: What are the CapEx expectations for NewCo, especially regarding new builds?
A: The CapEx strategy remains consistent with past levels, focusing on franchisee-funded restaurant openings. Recent higher CapEx was due to investments in the mobile app, which are not expected to recur. - Susan Senecal, CEO
Q: How did A&W perform in terms of same-store sales growth in Q2 2024?
A: A&W achieved a same-store sales growth of 0.3% in Q2 2024, bringing the year-to-date growth to 0.5%. This is notable given the economic pressures on consumer spending. - Susan Senecal, CEO
Q: What were the financial results for the second quarter of 2024?
A: Royalty income grew modestly to $13 million, with gross sales of $432.2 million. Distributable cash was $10.2 million, consistent with the previous year. The payout ratio was 89.1%, slightly up from 88.9% in Q2 2023. - Kelly Blankstein, CFO
Q: What are the benefits of the proposed strategic combination for unit holders?
A: Unit holders can either receive $37 in cash per unit or become shareholders in NewCo, gaining access to greater growth potential and maintaining existing distribution levels. The transaction is deemed fair and beneficial by independent evaluations. - Susan Senecal, CEO
Q: How will the new corporate structure of NewCo impact unit holders?
A: NewCo will offer income stability with an annualized dividend of $1.92 per share. It will also provide greater liquidity, financial flexibility, and potential for institutional investment and research coverage. - Kelly Blankstein, CFO
Q: What are the next steps for unit holders regarding the proposed transaction?
A: Unit holders should vote on the transaction at or ahead of the special meeting. Detailed voting instructions will be provided in the management information circular expected in September. - Susan Senecal, CEO
Q: How has the A&W Revenue Royalties Income Fund performed historically?
A: The fund has shown a cumulative average growth rate of 8.1% in annual cash distributions over the past four years, compared to 11.5% for the combined adjusted EBITDA of NewCo. - Kelly Blankstein, CFO
Q: What is the current state of A&W's restaurant network and sales?
A: As of June 16, 2024, A&W operates 1,062 restaurants in Canada. The system sales for 2023 were $1.85 billion, with a combined adjusted EBITDA of $91 million. - Susan Senecal, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
