A & W Food Services of Canada Inc.

Hello everyone, thank you for joining us and welcome to the A&W Food Services of Canada Inc's Q3 2025 Financial Results Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. I will now hand the call over to Susan Senecal, President and CEO. Please go ahead.

Thanks very much, Sarah, and good afternoon, everyone. Thanks for taking the time to attend our call today. I'm Susan Senecal, President and CEO of A&W Food Services of Canada, and I'm joined by Kelly Blankstein, our Chief Financial Officer. Today, we're presenting A&W's results for the third quarter of fiscal 2025, which was a 12-week period that ended on September 7, 2025. Before we begin, as a reminder, remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information within the meaning of applicable securities laws in Canada. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions, as well as the competitive environment. actual results may differ materially from the conclusions, forecasts, or projections expressed by the forward-looking information. We refer you to Food Services Q3 2025 MDNA and 2024 Annual Information Form, both of which include a summary of the material assumptions made by management, as well as risks and factors that could affect ANW's future performance and our ability to deliver on the forward-looking information. We also refer you to Food Services Q3 2025 MD&A for definitions and reconciliations of any non-IFRS financial measures mentioned on today's call. Our Q3 earnings press release, financial statements, MD&A, as well as our 2024 annual information form are each available on Food Services' CDAR Plus profile, as well as on our investor website at www.awinvestors.ca. We're pleased to report A&W's third consecutive quarter of positive same-store sales growth. Building on the positive momentum from the first half of the year, we achieved system sales growth of 3.1% and same-store sales growth of 1.4% in Q3 2025. Our marketing campaigns and commitment to delivering exceptional value continue to be well-received by our guests. In Q3, We expanded A&W's value offerings through the introduction of a dedicated value deals menu. The value deals menu provides guests with a variety of items with a price point under $4, making A&W's offerings more accessible and appealing to more customers. Although tariffs have not had a material direct impact on food services, we believe that there has been an impact on A&W system sales in 2025 due to the broader economic effects of tariffs, which have influenced the general economy and the disposable income of many Canadians. The introduction of the expanded value deals menu solidifies our position as a brand that understands and responds to the evolving needs and economic considerations of its guests. We're also making excellent progress on the implementation of our new five-star operating system. As of today, approximately 900 A&W restaurants have completed the training and onboarding program, leading to notable improvements in speed of service and guest feedback. In terms of unit growth, we opened three new A&W restaurants in Q3, bringing our year-to-date openings to 14. We remain strategically focused on growth across Canada, particularly in Ontario and Quebec, where nine of our 14 new restaurants have opened, and through our partnership with CENCOR. During the quarter on August 21st, we celebrated our annual Burgers to Beat MS Day and raised over $1.7 million in support of MS Canada, surpassing the number of teen burgers sold during last year's campaign. A big thank you to everyone on the call who participated and purchased a teen burger. Our partnership with Pret-a-Manger is also progressing well. As mentioned on our Q2 call, We signed a lease for a second corporately owned PrEP location in Toronto, which is expected to open in Q1, 2026. We are also actively pursuing additional sites in Vancouver, Calgary, Toronto, and Montreal, and we anticipate future PrEP expansion to primarily occur under a franchise model. We also continue to progress on our strategic target of achieving a 30% increase in franchisee profitability over a five-year period. We are nearly through the first two years of that five-year period and are on track to achieve our target. We originally anticipated franchisee profit improvement would stem from both sales growth and expense efficiency, so we are particularly satisfied with this outcome, considering the more challenging sales environment. With that, I'll now turn things over to Kelly, who will take us through A&W's financial highlights for Q3.

Kelly? Thank you, Susan. And good afternoon, everyone. I'll start off by giving a high level overview of our results for the third quarter of fiscal 2025. And then I'll give a brief update on our results for the year to date through Q3. So total revenue decreased by 4.8 million, primarily due to a difference in the timing of restaurant openings. There were seven fewer openings in Q3 2025 compared to the same quarter in 2024, as the timing of restaurant openings is subject to various factors and fluctuates each quarter. This decrease was partially offset by an increase in revenue from service fees, contributions to the National Advertising Fund, and revenue generated from the distribution of food and supplies. These revenues were higher in Q3 2025 as compared to Q3 2024 as they are driven by system sales, which were up 3.1% quarter over quarter. Our same store sales growth for Q3 2025 was positive 1.4%, which is a significant improvement from negative 1% reported for the same quarter in 2024. Q3 2024 was when we really started to see sales at A&W restaurants impacted by the slowdown in consumer spending in response to that economic environment. The positive same-store sales growth in Q3 2025 was due to an increase in both average check size and guest counts. The increase in guest counts was largely driven by the success of the marketing campaigns and value offerings mentioned by Susan earlier on this call, which were designed to address the evolving needs and economic considerations of A&W's guests. Amidst a challenging macroeconomic environment that continues to create headwinds for sales at A&W restaurants, we believe that achieving positive growth in sales and guest counts is a significant achievement. Average check size increased and is impacted by menu prices, menu mix, party size, and changes in consumers' discretionary spending. Our corporate restaurant also continued to experience growth in sales volume. On the operating cost side, operating costs for Q3 2025 totaled $31.8 million and decreased as compared to Q3 2024, a decrease of $14.2 million or 31%. The decrease in operating costs correlates with the decrease in revenue mentioned earlier and is primarily due to seven fewer new A&W restaurants opened in the quarter compared to Q3 2024, as well as lower marketing related costs incurred by the National Advertising Fund, which we refer to as the NAF. In Q3 2025, the NAF's contributions exceeded its expenses by $4.5 million, whereas in Q3 2024, the NAF's expenses exceeded its contributions by $3.3 million, meaning there was a resulting swing of $7.8 million quarter over quarter in net income before taxes. All contributions to the NAF are of course spent on advertising activities, and so the quarter over quarter differences in NAF expenses is purely a timing difference. General and administrative expenses for Q3 2025 were held flat with Q3 2024 and totaled $10.8 million. Our income before income taxes for Q3 2025 increased by $14.6 million or 163% to $23.6 million. The growth in income before taxes is largely a function of the cessation of the royalty expense following the strategic combination of food services with A&W Revenue Royalties Income Fund which completed in October, 2024. And we refer further on as the combination transaction. It's important to know that our Q3, 2024 results included a royalty expense of 13.7 million, which is no longer applicable following the combination transaction. Net finance expense increased by 3.4 million in Q3, 2025, primarily due to the increased average debt balance from financing the combination transaction in October, 2024. We also recognize an unrealized loss of $1.4 million on our interest rate swap in Q3 2025, which was entered into earlier this year in quarter two to manage interest rate risks associated with our credit facility. The loss on our interest rate swap is a non-cash expense. At the bottom line, adjusted EBITDA increased by $1.1 million or 5% to $25.8 million for Q3 2025. Our adjusted EBITDA margin also improved to 36.2% in Q3 2025, up from 32.5% in Q3 2024. Adjusted EBITDA improved primarily due to lower operating costs, and the decrease in operating expenses was partially offset by the decrease in revenue. However, on a net basis, it reflects an increase in margin that was driven by the growth in system sales. Now I'll just briefly touch on how we are performing on our key business performance metrics year-to-date. For the 36-week year-to-date period ended September 7, 2025, system sales increased by 2.9% to $1.33 billion and total revenue increased by 1% to $201.1 million. Income before income taxes grew by 84%. to 53.3 million and adjusted EBITDA increased as well by 8% to 70.7 million. During the year-to-date period, we opened 14 new A&W restaurants and declared cash dividends totaling $1.44 per share. We remain committed to maintaining the current level of quarterly dividends for the foreseeable future. During our Q1 call, we updated our 2025 outlook for adjusted EBITDA, system sales growth, same-store sales growth, and total units. and there has been no change to the outlook since then. I'll now hand it back over to Susan for some closing remarks. Back to you, Susan.

Thanks, Kelly. In summary, we're very pleased with A&W's performance in Q3 and our progress year to date. Despite ongoing economic headwinds, we're able to achieve growth, which is a testament to the resilience of the A&W brand, the strength of our franchise system, and the dedication of our franchisees and their team members. Our fourth and final quarter of 2025 is off to a solid start, driven by the return of our popular $4.99 Teen Burger promotion, which previously ran earlier this year in Q2. Our shift towards value-driven offerings has been positively received and has incrementally improved our results each quarter in 2025. We anticipate this momentum will continue with further value-based promotions planned for later this year. We're confident that our strategic initiatives, including the successful launch of A&W Rewards and the ongoing implementation of our five-star operating system, will continue to fuel sustained growth. These initiatives are driving operational efficiencies across our network, increasing A&W's speed of service and enhancing the overall guest experience. We've seen recent success with promotions exclusive to the A&W mobile app, particularly in Ontario, where we have done some unique things to drive sales in what is one of the more economically challenged provinces in Canada right now. Ontario also has the highest percentage of restaurants that have implemented the five-star operating system. The positive impact from five-star is evident in A&W's Google scores with Ontario scores now exceeding the national average. These successes reinforce our belief that our strategic focus is in the right direction. We also continue to focus on menu innovation and new restaurant growth particularly in strategic markets and through our partnership with Suncor. We're seeing the success of A&W's vegetable-based offerings translate to gains in market share with guest demographic we're targeting with such offerings. We appreciate the dedication of our employees, our franchisees, and partners, and we thank our shareholders for their continued support. With that, I'll turn the call over to the operator for any questions.

Thank you. Thank you. We will now begin the question and answer session. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Logan Reich with RBC. Please go ahead.

Hello. Can you guys hear me?

Hi, Logan.

Hey, good afternoon. Thanks for taking the questions. I just wanted to ask first on the same store sales growth for Q3. So, you know, certainly recognize the challenging sort of operating environment. I guess I was curious just on the deceleration from Q2. I know it's minor, about 20 basis points, but even on a two-year stack, the deceleration looks a little bit steeper. At the same time, you guys have the additional value offerings and loyalty coming in. So I'm just trying to get a better sense of what you guys are seeing in Q3 that's sort of driving that deceleration despite sort of idiosyncratic drivers in the quarter. Is it maybe a softening consumer? Is it a macro headwind? Or is there increasing competitive intensity. I'm just trying to get a little bit more texture on what you guys are seeing on the comp and Q3.

Thanks. Sure. I'll start with saying that one of the things we regard as quite positive is that part of that sales growth in Q3 was driven by positive guest counts. So we've been looking for ways to increase traffic, increase the accessibility to lots more guests to come and visit A&W more often. And it seems like to us that that's starting to take root. So I think that's a positive. On the comparison between Q3 2024, Q3 2025, as you say, it's a small difference. I think there's all kinds of factors that vary from time to time, including, you know, things like weather, tourism, you know, there's lots of macro economic factors, whether they're positive or negative, that sort of add up. So it's a little hard to dissect exactly what's there. But I think it is certainly a challenging economic environment with higher unemployment than we had last year and so on. So if there are disposable income factors that we raised and cited last year. I think those, if anything, have become even more visible and even more impactful to the average consumer.

Got it. That's helpful. And then just looking into Q4, I mean, you said Q4 is off to a strong start and you guys reiterated the full year guidance. And on the full year basis, like, It implies a relatively wide range for Q4. So I'm just trying to think of how to better get a sense of Q4 and how that's tracking and maybe just get a little bit more color on what our expectations should be. I know you guys said that it's a strong start to the quarter, but There's been also some other restaurant companies. These are U.S. brands, but they're calling out a slowdown in restaurant spending broadly in September and October. So I guess I'm just curious if you guys are seeing that as well in the data you look at, and then maybe just some directional commentary on how to think about Q4, just given the implied guidance is relatively wide.

Sure, I can answer that. I think, as you note, you know, there's a lot of talk and a lot of worries about sort of what the economy holds for consumers. And it's kind of like driving in a blizzard, you know, it's a little bit hard to tell whether you're on the right path in the road or not. But I would say that, you know, in times like that, what you need to do is, you know, stick to the things you know about good driving, stick to the things that you know will appeal to your guests. stick to the research and the data that we have about our own business. And then, you know, navigate as best we can through things that we have certainty about. So that's the approach that we've taken is to build on what we've learned positively in Q2, Q3, Q1, and really push hard to make sure that we're continuing the things that work and the things that don't work quite as well, that we're backing off on those.

Gotcha. Super helpful. And then I guess beef pricing has been a topic of discussion among people across the restaurant ecosystem. It seems like things have been a little bit higher than expected just in terms of inflation. I guess just like how do your franchisees feel about beef pricing and are you seeing them take any incremental price on the higher than maybe expected inflation? or are they sort of just weathering the storm, understanding it's maybe a cyclical commodity inflation cycle that we're in?

Yeah, well, it's certainly a cyclical. All commodities are somewhat cyclical. Our operators are very sensitive and very attuned to the needs of their guests. They see them every single day and understand how pressured some of them feel when it comes to costs. So we're not seeing that our operators take costs in anticipation of higher beef prices or anything else. What we are seeing is sort of the thoughtfulness about how do we package things, how do we make sure that we've got lots of presence in our restaurants and in our media about the value offerings that we have, and then do our very best to give them the great taste that they're coming in for and great service. And we think that that will help us build frequency and ultimately traffic.

Got it. And then just last quick one for me, a bit more of a modeling question, just on the advertising timing, should we expect that to revert back in Q4 or is that maybe normalization timeline a little bit longer than Q4?

Definitely. Oh, sorry, go on. Yeah, yeah, no, you go ahead. The goal is to spend funds earned in a year within the same year. So typically we'll see that revert by the end of the year.

Got it. Thank you very much. I'll pass the ball.

Thank you. A reminder, if you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. Your next question comes from the line of Mark Petrie with CIBC. Please go ahead.

Hey, good afternoon. Can you hear me okay?

Yes, hi, Mark.

Okay, great. I wanted to just follow up on a few of the topics that you've covered already, specifically sort of the value orientation of the menu. You called out the sort of return to the $5 teen burger in the last few weeks and I think alluded to some further value-oriented promotions coming in Q4. So is it safe to say that you continue to shift and maybe even have further shifted your sort of promotional efforts toward value, as opposed to, you know, the other aspects of your menu?

I wouldn't say as opposed to, I think we've also see a lot of innovation and, you know, recipe innovation, things like that in our plans as well. So I think there's having the right balance of, you know, we're known for the quality of our food for the taste. So we want to play on those strengths as well. But clearly, for a lot of guests, price is important. So a price focus is going to be an increasingly I guess, intentional part of our, of our overall promotional planning.

Okay. Thanks. And then specific to the, to the teen burger, you know, when it comes to actually funding the investment of that of that promotion, how does that sort of fall and split between you and the franchisees?

Well, Kelly mentioned the dollars from the national advertising fund is what funds all of the communications around the promotion. And then in terms of the impact of what gets collected, our franchisees collect the $4.99 and of course pay for the products. What really makes that promotion work is the fact that it kind of gains attention, it breaks through, and we get lots more guest visits. So that's how that balance works out to the value of our franchisees as well as to the value of our guests.

Yeah, okay. And then one other question just on that promotion. Obviously, it's a little bit sensitive just given it has occurred during Q4, but I'm just the second iteration. But I'm just curious, did you see sort of a change in how people reacted to to that promotion um you know the second time around and i'm thinking of of things like you know penetration um with other parts of the menu or beverage attachment and and those sorts of things we saw a very similar pattern and results Yeah. Okay. Perfect. Thank you. And then I also wanted to ask about the restaurant pipeline, the cadence of openings and how we should think about, you know, the progression toward the 2027 aspiration in 2026.

Sure. Kelly, did you want to take that one?

Sure. I mean, of course, some years our openings occur early in the first quarter and some years they occur a little bit more concentrated in the second quarter or third quarter. So patterning can just be different year to year. Overall, we're pleased with our pipeline. We're pleased with our progression towards our 2027 targets, as you asked about there. I think that you're just seeing some seasonality differences, but also macroscopically. I mean, things continue to be slow in the construction industry in general and particularly in relationship with city halls taking time for permitting and then landlords taking time for them to do their work and think through their economic cycles as well. So we continue to charge on and are still pleased with our progress and still confident in our forecasts for our NRO openings.

Okay, and I guess maybe just asking in a slightly different way, you know, should we expect openings in 26 to accelerate from 25 and then further in 27? Or how should we think about sort of just the general kind of outlook with regards to restaurant growth?

Yeah, a lot of our restaurant growth we already know about because it's in the pipeline. I'd say I like our pipeline. The thing I would wish for is that things are able to pop out of the pipeline a bit more quickly. As Kelly said, there's lots of things that sort of slow down the overall process from the time that we might sign an offer to lease. But there's quite a lot of certainty in terms of our openings just because they are visible to us. We know that landlords have started work or they haven't. There's heavy equipment on the site or there isn't. So we do have a high degree of certainty. Timing is the question mark. And, you know, we have some control over that, but not perfect control over that. So that's the way we see it. So I think timing is more of an issue than number of openings and the way that we do our development plans and the way that we actually track our openings gives us a good view into the future, but not necessarily a precise timeline.

yeah okay that's helpful thank you and then just my last question you know it's been i guess a year tomorrow uh since the combination um and you know recognizing that many of the implications were legal or financial in nature i'm just wondering if you have any sort of perspectives or learnings that have come out of the combination as it relates to the business and how it functions um

you know, a couple, first of all, I thought you were going to say that you were sending us a cake, but frosty, a nice frosted root beer.

How about that?

Okay. We'll settle for that. Yeah. I mean, I'd say that, you know, the first year, the main thing that I've learned or that I've heard from is a lot more interest in the market in general from people like yourself. And so different kinds of questions, different kinds of ideas out there. And, you know, those have been helpful to us, but I wouldn't say that they've changed anything about our strategy or the way that we come to market, but maybe just a broader perspective about the different kinds of impacts and different kinds of curiosities out there. And we're learning as we go.

I would just add that I think, you know, it's much more understandable. So the types of questions that we get from prospective investors or others are really much more crisp and clear where before it was very confounded and people didn't really understand what was happening. So I see that as a positive because it will lead to better understanding of our business. And over time, if we keep doing what we're going to do, that should show up in good outcomes for shareholders.

Yeah, appreciate that. Okay. Thank you both and appreciate your time and all the best.

Yeah, same time. Thank you. There are no further questions at this time. I will now hand it back to Susan Senecal for closing remarks.

Thanks very much and thanks to everyone for attending our call today. We look forward to updating you on our results after the fourth quarter. And in the meantime, if anyone has questions that come up or were not answered on our call today, please feel free to send a follow-up email to our investorrelations at aw.ca. Thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.