A & W Food Services of Canada Inc.

Hello everyone. Thank you for joining us and welcome to the A&W Food Services of Canada Q2 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I will now hand the call over to Susan Senecal, President and CEO. Please go ahead.

Thanks, Chase, and good morning, everyone. Thanks for taking the time to attend our call today. Sorry, my tongue got twisted up there. I'm Susan Senecal, President and CEO of A&W Food Services of Canada, and I'm joined this morning by A&W's Chief Financial Officer, Kelly Blankstein. Today, we are presenting A&W's results for the second quarter of fiscal 2026, which was a 12-week period that ended on June 14th, 2026. 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 Q2 2026 MDNA and Fiscal 2025 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 A&W's future performance and our ability to deliver on the forward-looking information. We also refer you to Food Services Q2 2026 MDNA for definitions and reconciliations of any non-IFRS financial measures mentioned on today's call. Our Q2 earnings release, financial statements, MDNA, as well as our fiscal 2025 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 that A&W achieved same-store sales growth of 2.1% for Q2 2026, making it our strongest quarterly performance in terms of same-store sales growth in more than two years. In Q2 2026, we continued to offer value-based promotions, and at the end of the quarter, we introduced a smash-style burger as a nationwide limited-time offering. A&W was the first Canadian QSR to offer a smash-style burger at this scale, and it's resonated strongly with guests, driving increases in both guest counts and average check. And it was a significant contributor to our same-store sales growth of 2.1% for the quarter. The success of our recent promotions demonstrates our strength in marketing and innovation. We continue to focus on growing restaurant counts across Canada, and in Q2 2026, we opened eight new A&W restaurants, bringing the year-to-date total new A&W restaurant openings to 12. We remain particularly focused on expansion in Ontario and Quebec, and through our partnership with Suncor. We're also excited to have reached an important milestone in our Pret-a-Manger expansion, On June 12th, we opened our first franchised Pret Shop located at Vancouver International Airport. We have secured additional leases and are actively pursuing new sites in Vancouver, Calgary, Toronto and Montreal, and we continue to expect three to four franchised Pret Shops to be open by the end of fiscal 2026. With that, I'll now turn things over to Kelly, who will take us through A&W's financial highlights for Q2.

Thank you, Susan, and good morning, everyone. I will provide an overview of our financial results for the second quarter ended June 14th, 2026. Total revenue for the quarter was 70.8 million, an increase of 3% or 2.5 million compared to Q2 of 2025. This increase was driven by higher service fees, distribution revenue and advertising fund contributions, all of which are linked and driven by system sales. These increases were particularly offset by lower equipment and turnkey revenue due to fluctuations in the timing of turnkey restaurant openings and the sale of equipment to franchisees. For those unfamiliar with our turnkey program, these are new restaurants that are constructed and then sold to franchisees upon completion with revenue recognized in the amount paid by the franchisee for the restaurant. Sometimes, however, restaurants are built by franchisees themselves, such as in the case of Suncor, So turnkey revenue can fluctuate from quarter to quarter and year to year. System sales increased 3.9% to $469.7 million, driven by growth in our total restaurant count and same-store sales growth of 2.1%. As Susan had mentioned, that same-store sales growth was our strongest in over two years and was driven by the success of our burger promotions during the quarter, which increased both guest counts and average check and demonstrates the effectiveness of our marketing and menu innovation. Operating costs for the quarter were $37.2 million, an increase of 3%, in line with the growth in franchising revenue. General and administrative expenses were $13.1 million, up 18% or $2 million from Q2 2025. This increase was largely related to the cost of hosting our biannual A&W National Convention, which was held in Q2, 2026, but did not occur in 2025, as well as higher employee compensation and the addition of resources to support the expansion of the PrEP brand. Income before income taxes decreased by 1.2 million or 7% to 16 million, largely as a result of the increase in general and administrative expenses I just described, partially offset by the increase in revenue. Net finance expense decreased by $0.5 million, reflecting a lower average debt balance and a reduced interest rate on the operating loan. We also recorded a $1.5 million unrealized loss on our interest rate swap in Q2 2026 compared to a $0.8 million loss in Q2 of 2025. Net income for the quarter was $11.7 million compared to $12.5 million in Q2 2025. Net income per share was $0.46 or $0.46 per diluted share compared to $0.51 or $0.50 per diluted share in Q2 of 2025. Adjusted EBITDA for the quarter was $24.4 million, a decrease of $1.1 million or 4% from Q2 2025's adjusted EBITDA of $25.5 million, due largely to the increase in general and administrative expenses related to the national convention we just spoke about. Adjusted EBITDA margin decreased basis points to 34.5% from 37.1% in Q2 2025 as a result of the decrease in adjusted EBITDA and that increase in revenue. Our outlook for fiscal 2026 remains unchanged from the guidance we provided on March 5th and includes achieving adjusted EBITDA within the range of 103 to 105 million up from the $100 million achieved in 2025. It also includes ending fiscal 2026 within the range of 1,112 to 1,120 A&W restaurants up from 1,094 at the end of 2025. We expect to achieve system sales growth in the range of 2.5% to 5% compared to 2.8%, which was achieved in 2025. And we expect to achieve same store sales growth in the range of 0.5% to 3%, which is compared to 1.2% achieved in 2025. Very quickly to the balance sheet. In 2026, we have de-leveraged and reduced the net debt to adjusted EBITDA ratio from 2.3 at the end of 2025 to 2.2 at the end of Q2 2026. The capex to revenue ratio was 1.2% for quarter two of 2026, up 30 basis points from 0.9% for Q2 of 2025. In Q2 of 2026, we invested capital in plant and equipment to modernize two of our corporately owned and operated A&W restaurants, leading to an increased capital investment in plant and equipment in this quarter of 2026, as compared to the same quarter in the prior year. We declared a cash dividend of 48% $48 per share in Q2 2026, which was paid on June 30, 2026, and we remain committed to maintaining that current level of quarterly dividends for this foreseeable future. As a reminder, on March 18, we announced that the TSX had approved a normal course issuer bid that allows us to purchase up to 600,000 A&W shares over the 12-month period beginning on March 20, 2026 and ending one year later on March 19, 2027. We launched the NCIB because A&W's management and its board believe that from time to time, the market price of A&W shares do not reflect A&W's intrinsic value and that repurchasing the shares is an attractive and appropriate use of corporate funds. We repurchased and cancelled 18,350 common shares during Q2 2026 under this NCIB. I'll now hand it back over to Susan for some closing remarks. Thanks, Kelly.

In summary, Q2 2026 showcased the strength of our marketing and our menu innovation. The success of the Smash Style Burger promotion is a great example of what happens when we bring an exciting product to guests at the right value. We remain focused on our strategic initiatives, including operational excellence through the five-star operating system and delivering value that resonates with our guests. We continue to see benefits and incremental gains from the investments we have made in the A&W mobile app, including our loyalty program, A&W Rewards, and our five-star operating system. We also remain focused on menu innovation and new restaurant growth, particularly in strategic markets and through our partnership with Suncor. We're very proud of the milestone we reached with Pret-a-Manger this quarter, opening our first franchise shop at the Vancouver International Airport. We're very pleased with that shop's early results and look forward to continuing our expansion of Pret, with two other airport locations already under construction. We extend our gratitude to our shareholders for their ongoing support and appreciate the hard work of our employees, franchisees, and partners. With that, I'll turn the call over to the operator for questions. Thank you.

We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Logan Reich of RBC Capital Markets. Your line is open, please go ahead.

Hey, good morning. Thanks for taking the questions. Morning. Morning. I guess just starting out, there are some headlines of an outbreak here in some reports just starting here in the US. I guess just any color you guys can give on any sort of potential exposure you have to maybe some of the suppliers or some of the products that have been attached to the outbreak here over the last few weeks.

No, fortunately, none whatsoever.

Okay. That is good to know.

And then I guess just next –

Can you just give like a State of the Union or an update on the consumer? I mean, there's been a lot of macro headline volatility and energy prices impacting consumer sentiment and inflation. Can you just give us some color on what you're seeing most recently with your consumer, maybe broken out by income cohorts or geographies and specifically related to gas prices?

Sure. I'm not sure how directly I can relate it specifically to gas prices. I mean, gas prices have increased and been a bit volatile, frankly, across the country. So that's definitely having an impact on disposable income. I'd say particularly in areas where people's cars or vehicles are necessary for their work or for getting to work or even for their work, you know, farming and other types of activities where there's some high fuel usage. But I do think that all consumers in Canada have experienced Some form of compression in terms of their disposable income and also their certainty about the future. And so we see that in things like consumer confidence and so on, kind of having settled in. And I would say that it feels like the population in general is settling in for a bit of a long haul in terms of pressure, whether that's from, you know, sort of things they know about today, like gas prices or whether that's worries about things like, you know, interest rates or, you know, We do see regional differences, particularly in the surrounding markets where there are key economic drivers that have been impacted by the economy or by things like tariffs or by things like reduced consumer spending in their products. Those are most concentrated in Ontario and to a slightly lesser degree Quebec, but they do occur in provinces right across the country. So it feels like there's a bit of a subdued consumer sentiment, I would say, and certainly a very big consciousness about spending and thoughtfulness. Impulsiveness is a decreased thoughtfulness and careful consideration about Things like value and making sure I get value for my money when I do decide to spend it is the attitude I think that we see most commonly.

Okay, got it. That is very helpful. And then I think that the Smashburger performance was interesting in the quarter, and it seems like it drove a significant portion of the comp in Q2. Is there any way you can sort of break out the impact from the Smashburger to just give us any color on the sort of underlying comp trend, and then just any sort of call-outs you guys would have on LTOs in the back half of the year that you currently have on the roadmap.

Sure. Yeah, definitely. Our Smash Dollar Burger was a hit with consumers. I think people in the summertime especially are looking for something to do. Looking for something to try and smash burgers have certainly been a popular menu item in all different kinds of places and trending. But our ability to provide it with great value, affordably, quickly, was certainly welcomed. In terms of numbers and how many and so on, you know, anytime I think we run a really successful beef burger promotion, it really does hit the right node and we do see, you know, spikes in in sales of those products at that time. But, you know, Smash was a little bit special. So I would say that that was a really nice wave for us. And it did, as you say, impact the entire quarter, even though it was only there really for the last period of the quarter.

Okay, that's helpful. And is it still running through Q3? Have you given a sort of ended on that?

It ran for seven weeks, so about halfway. half through Q2 and the other half through the beginning, early part of Q3.

Okay, got it. And then just last for me, just any update on the loyalty program, how that's performing. I think you've shared some metrics on that program previously. Just curious if there's been an update there as the program's been out for just over a year.

Yeah, we continue to be happy with continued uptake. It takes time for these things to hit the Hit the phone, I guess you'd say, and we're seeing continued growth. And so the growth is pleasant. We're also starting to see our ability with greater adherence to the loyalty rewards program, our ability to start to use some of the data from that program to understand our consumers' needs a little bit better and to use the information to make us more effective. So we're starting to see success on both sides, both uptake as well as our ability to leverage

There are no further questions at this time. I will now turn the call back to Susan Senecal for closing remarks.

Excellent. Thank you, Chase, and thanks to all of you for attending our call today. We look forward to updating you on our results after the third quarter of 2026. In the meantime, if anyone does have a question that wasn't answered on today's call, please do feel free to send a follow-up email to investorrelations at aw.ca. Thanks again. We'll talk to you soon.

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