A&w Foodrvices Of Canada Stock

Hello, everyone. Thank you for joining us, and welcome to the A&W Food Services of Canada Q3 2026 Earnings Call. [Operator Instructions]

I will now hand the call over to Susan Senecal, President and CEO. Please go ahead.

Thank you, Chase. Good morning, everyone, and 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 this morning by A&W's Chief Financial Officer, Kelly Blankstein. Today, we're presenting A&W's results for the third quarter of fiscal 2026, which was a 12-week period that ended on September 6, 2026. We will also be introducing A&W's new mission and corporate strategy, which we announced alongside our third quarter results.

Before we begin, as a reminder, remarks on this call may include our expectations, our future plans and intentions, including statements regarding our new mission and corporate strategy 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 2026 MD&A 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' Q3 2026 MD&A for definitions or reconciliations of any non-IFRS financial measures mentioned in today's call. Our Q3 earnings release, financial statements, MD&A as well as our fiscal 2025 annual information form are each available on Food Services' SEDAR+ 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 1.8% for Q3 2026 compared to 1.4% in Q3 2025 and has us achieving positive same-store sales growth in 6 of the last 7 quarters. A&W Smashed burger, which we introduced as a nationwide limited time offer at the end of Q2, ran nationally for 5 of the 12 weeks in the quarter and continued to resonate strongly with guests. At its peak, A&W Smashed burger drove same-store sales growth of 15% in a single week, and it was the primary driver of our same-store sales growth in Q3. System sales increased 3.8% to $497.6 million, reflecting both our same-store sales growth and the growth in our restaurant network.

We continue to focus on growing restaurant counts across Canada. And in Q3 2026, we opened 9 new A&W restaurants, bringing year-to-date new A&W restaurant openings to 21, 7 of which were opened in partnership with Suncor. We ended the quarter with 1,113 A&W restaurants and a further 26 restaurants were under construction at quarter end. We remain particularly focused on expansion in Quebec and Ontario, and we're encouraged by the progress of our new lower-cost freestanding restaurant design with additional locations either newly opened or under construction.

We also continue to build on momentum with Pret A Manger. During the quarter, we opened our second franchised Pret shop at Vancouver International Airport, bringing our total to 4 Pret shops in Canada. We're very encouraged by the strong early performance at Vancouver International Airport and the consumer demand for premium grab-and-go options. We have secured leases for additional locations and are actively pursuing new sites in Calgary, Vancouver, Toronto and Montreal and continue to expect 3 to 4 franchise Pret shops to be opened by the end of fiscal 2026, in addition to the 2 corporate locations we operate in Toronto.

Before I turn things over to Kelly, I'd like to take a few minutes to introduce A&W's new mission and corporate strategy, which will guide our priorities, our investment decisions and our operating plans in the years ahead and provide the framework against which we will report our progress. First, why are we evolving our strategy? The consumer business and economic environment for the Canadian QSR industry has changed significantly in recent years. Elevated cost of living have affected households unevenly. Many guests have become more value conscious, while others continue to spend on premium experiences.

At the same time, there is sustained consumer interest in quality QSR and a new generation of guests who discover food through social media and expect novelty, bold flavors and globally inspired options and which is becoming an increasingly important share of QSR visits. We see this as a significant opportunity for A&W, and our strategy has evolved to seize it.

Our new mission is to transform A&W to become #1 in Canada for today's generation of QSR fans, delivering scroll-stopping food with iconic taste and quality, effortless convenience and a consistently excellent experience that drives return visits, success and opportunity for franchisees. This mission reflects our focus on building relevance with a new generation of QSR guests while remaining true to the taste and quality that have defined the A&W brand for 70 years. It also reinforces something we firmly believe that sustained guest loyalty and franchisee success go hand-in-hand.

To deliver on our mission, we have established 3 strategic directions. The first is to expand and extend A&W's position as a leading burger brand to grow market share, capture many more visits from the fastest-growing consumer groups and enhance success for A&W franchisees. This means boosting interest and appeal through distinctive menu innovation, including premium beef burgers, chicken, plant-based and globally inspired offerings.

The success of A&W Smashed burger is a strong example of what distinctive innovation can do for guest counts and average check. It also means delivering a consistently excellent experience that inspires guests to return more often, building on the gains we are seeing from our 5-star operating system, the A&W mobile app and our A&W Rewards loyalty program.

The second direction is to continue to support new restaurant growth, including developing new restaurant formats and business models that broaden access to franchise ownership and create additional opportunities for franchisees. Our lower-cost restaurant design and our continued focus on improving restaurant-level profitability are important foundations for this growth.

The third is to be ready for Pret and more. We plan to grow the Pret brand, Canada's only premium grab-and-go concept, by opening additional shops in airports, city streets and other pedestrian locations across Canada. We expect that this expansion will occur primarily through the franchise model. We will also evaluate other complementary brands that offer opportunities for growth.

Importantly, the principles that have served A&W well remain central to this strategy, including our franchisor capital-light business model and our commitment to keeping the cost of becoming an A&W franchisee affordable. And our Climate Goals, which have guided how we work together for more than 50 years, identify the behaviors that we believe will enable us to succeed in achieving our mission.

Under our new corporate strategy, we will measure our progress using the key performance indicators we already report, including same-store sales growth, system sales growth, adjusted EBITDA and the total number of A&W and Pret locations. And we look forward to reporting on the execution of our corporate strategy in our future quarterly and annual results.

With that, I'll now turn things over to Kelly, who will take us through A&W's financial highlights for Q3.

Thank you, Susan, and good morning, everyone. I will be providing an overview of our financial results for the third quarter ended September 6, 2026. Total revenue for the quarter was $79.3 million, an increase of 11% or $8.1 million compared to Q3 2025. This increase was driven by higher equipment and turnkey revenue due to opening more restaurants in Q3 2026 as compared to Q3 of 2025 as well as having higher service fees, distribution revenue and advertising fund contributions, all of which are driven by system sales.

We opened 6 more A&W restaurants and 1 more Pret shop in Q3 of 2026 than we did in Q3 of 2025. And 3 of the 9 new A&W restaurants opened in the quarter were turnkey restaurants compared to 1 of 3 in Q3 of 2025. The Pret shop opened in the quarter was also turnkey, further contributing to the growth in revenue in Q3 2026 over Q3 2025. 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. Because the number and timing of turnkey openings varies, turnkey revenue can fluctuate from quarter-to-quarter and year-to-year.

Service fee revenue also continued to benefit from the ongoing migration of A&W restaurants from a 2.5% to a 3.5% service fee rate. As of September 6, there was approximately 120 franchised A&W restaurants still at the lower 2.5% service fee rate. System sales increased 3.8% to $497.6 million, driven by growth in our total restaurant count and same-store sales growth of 1.8%. As Susan mentioned, our same-store sales growth was boosted by the success of A&W Smashburger promotion this quarter.

Operating costs for the quarter were $40.5 million, an increase of 27% or $8.7 million, and this increase largely reflects the cost of sales associated with the additional restaurant openings in the quarter as well as a $3.4 million increase in marketing-related costs incurred by A&W's advertising funds, which is largely a timing difference. General and administrative expenses were $11.4 million, up 5% or $0.6 million over Q3 of 2025, driven by higher professional fees due to timing differences and additional resources to support the expansion of the Pret brand.

Income before income taxes increased by $2.8 million or 12% to $26.4 million, largely as a result of the increase in revenues described above. 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 $2.1 million unrealized gain on our interest rate swap in Q3 2026 compared to a $1.4 million unrealized loss in Q3 2025.

Net income for the quarter was $19.5 million compared to $17.6 million in Q3 of 2025. Net income per share was $0.80 and $0.80 per diluted share compared to $0.71 per share and $0.71 per diluted share in Q3 of 2025. Adjusted EBITDA for the quarter was $26.6 million, an increase of $0.8 million or 3% from Q3 2025's adjusted EBITDA of $25.8 million due to the increase in revenue, partially offset by higher operating costs and G&A expenses. Adjusted EBITDA margin decreased approximately 260 basis points to 33.6% from 36.2% in Q3 of 2025.

Turnkey and equipment revenue carries a lower margin than our other revenue streams, so the higher proportion of revenue coming from turnkey and equipment revenue in the quarter does have a downward effect on adjusted EBITDA margin and is temporary and a timing difference. On a trailing 4-quarter basis, adjusted EBITDA margin for Q3 2026 was 33% versus a 4-quarter trailing Q3 2025 margin of 33.5%. Our outlook for fiscal 2026 remains unchanged from the guidance we provided on March 1 -- March 5, rather, and includes achieving adjusted EBITDA within the range of $103 million to $105 million, up from the $100 million achieved in 2025.

We are also forecasting our guidance 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% achieved in 2025, and we also expect to achieve same-store sales growth in the range of 0.5% to 3% compared to 1.2% achieved in 2025. So again, our range forecast for the year remains unchanged from our March 5 guidance.

Turning to the balance sheet. We have continued to deleverage, reducing our net debt to adjusted EBITDA ratio to 2.2 at the end of Q3 2026 from 2.3 at the end of 2025 and 2.4 at the end of Q3 2025. Free cash flow for the quarter was $19.5 million, an increase of $2.5 million from Q3 2025, primarily due to timing differences that resulted in a lower use of working capital. We declared a cash dividend of $0.48 per share in Q3 2026, which was paid on September 29 of this year. And we remain committed to maintaining the current level of quarterly dividends for the 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 March 20, 2026, and ending 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 does not reflect A&W's intrinsic value and that repurchasing shares is an attractive and appropriate use of corporate funds. Year-to-date, we have repurchased and canceled 61,000 common shares under the NCIB and have 23.9 million common shares outstanding.

With that, I'll now turn it back over to Susan for some closing remarks. Thank you, everyone.

Thanks, Kelly. In summary, Q3 2026 delivered another quarter of positive same-store sales growth, growth in adjusted EBITDA and net income, strong new restaurant development and continued progress with Pret A Manger. The continued success of A&W Smash burger shows what happens when we bring guests distinctive premium value, exciting food with iconic A&W taste and quality. Today also marks an important step for A&W as we introduced our new mission and corporate strategy.

Our focus is on becoming #1 in Canada for today's generation of QSR fans by growing our leading burger brand, supporting new restaurant growth and new formats that create opportunity for A&W franchisees, growing in our strength as a franchisor of Pret and more. We believe that our new strategy builds on A&W's strengths and positions us well to drive return visits and market share and deliver continued success for our franchisees and growth for our shareholders. We extend our gratitude to our shareholders for their ongoing support and appreciate the hard work of our employees, our franchisees and partners.

With that, I'll turn the call over to the operator for questions. Thanks very much.

[Operator Instructions] Your first question comes from the line of Logan Reich with RBC Capital Markets.

I thought the comment in the press release about evaluating more complementary brands is interesting. Is adding brands beyond the A&W and Pret logos a direction you see the company heading? And how do you balance adding new brands versus executing against the A&W Pret growth opportunities ahead of you?

Thanks for the question, Logan. Clearly, for us, our A&W success has fueled sort of our interest in other ways that we can extend our success as a franchisor. But clearly, A&W is our focus and the focus of this strategy is success for franchisees, success for the brand, continued growth and continued extension within Canada, where we know that we've got lots of A&W fans that aren't able to get A&W as conveniently as they would like. So that is the focus of the strategy. At the same time, the experience we've been having with Pret and our early success really helps us understand that potentially there could be other opportunities, and we just wanted to signal that we are on the lookout for such opportunities should they exist.

Got it. Okay. That's very helpful. And then the other part of the -- or one of the other parts of the strategic priorities you touched on is just how the QSR industry has changed in recent years. I mean I think this is something that across the space in multiple markets we've seen.

Can you just expand on like what you're seeing in the industry? And then what changes to the business you're doing to address those, whether that be menu or marketing or value? I mean, clearly, the low income is under pressure here. I mean, is there any are you moving in the direction of maybe a more barbell value and premium approach? Or just any further color there would be helpful.

Sure. I think as we look at the economic situation, clearly, all of us would love to see Canadians doing better, better in their lives, better with disposable income, better with discretion and so on. But the reality is that there is pressure throughout the market. And that's not, in our opinion, likely to change very quickly or very much in the next few years. So we really have focused on how does value fit in. And we're really thinking about how we deliver premium value. It's affordable prices, but along with the quality that A&W is really famous for.

And if you think about the other side of things, there are certainly lots of guests, including some guests that might be under economic pressure, but really want to enjoy something different, they're attracted by things, interested by things. Drinks have become a bigger part of how consumers are viewing sort of a fast food occasion. So we're looking at all of those opportunities as well for people that are in a mood to kind of really indulge themselves and that exists as well. So there's kind of 2 parts to the market, and we're looking at both of them.

Got it. That's helpful. And I guess just on the beverage comment, a lot of your peers have been rolling out more beverage platforms, and we've seen the rise of the specialty beverage retailers. Is adding to the portfolio of beverages something that you're focused on currently? And just what could that potentially look like? Obviously, you have the physical infrastructure in the stores to maybe support a more operationally intense sort of platform? Just curious any color on the beverage side of things.

Sure. Well, as you know, we've been -- we launched lots of new beverages and have really been learning a lot about the beverage market. And through this strategy, we really want to create even more focus against really delighting guests with the kinds of beverages that they can have at A&W while continuing to understand and really internalize the fact that Root Beer is really at the core of our beverage success, and it's something that guests come back for again and again. So I think on both sides of that, new and innovation as well as really focused on our core beverage offerings, both sides of it, I think, will be important in the years to come.

Okay. That's helpful. And then I guess just broadly across the industry, obviously, the macro backdrop has not been supportive for restaurants generally for quite some time now. Just curious what you've seen through the quarter, just industry-wide, consumer-wide and how that has trended through Q3 and then maybe into Q4 would be helpful.

Sure. I'll comment a bit more on Q3. Q4 is still new enough that I don't really have a great barometer of how things are going. Certainly, in Q3, what we saw was some positives were domestic travel. We did see some uplift from that. On the other side of things, people are still reticent to spend, especially families for whom every few cents on a meal kind of adds up -- and so I think we've had that balance through the summer of innovation, and we had our float promotion that did well.

But at the same time, we were very conscious of offering value through our coupon offers and through our mobile app to make sure that we were addressing the affordability needs of so many Canadians at this time. In terms of the industry, we do track things, and I think we're performing at or slightly ahead of the market as far as we can tell.

Got it. Okay. That's helpful. And I guess just like how that progressed through the quarter? I mean, oil prices have a bit of pressure and the longer oil prices are high, it continues to weigh on the consumer. I mean, do you see any deterioration in the underlying environment through the quarter? Or has it been kind of stable?

I think here, we've seen -- I mean, there's certainly been volatility in things like gasoline prices, but it feels like consumers are sort of setting aside -- mentally setting aside the money that they need to drive around and get to work and get to school and all of those kinds of things. So we've not seen sort of a distinct difference through the slight volatility of oil prices.

But I think the fact that they're high and that they're consuming more and more of the wallet of a consumer is certainly a factor in terms of how people view their discretionary income and their caution in terms of not wanting to go take on debt or any of those kinds of things at this time. So they're trying to balance their budgets, and that's admirable. At the same time, we know that it's very difficult, especially during times like back-to-school when there's more expenses coming into the household.

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

Thank you, Chase, and thanks, everyone, for attending our call today. We look forward to updating you on our results for the fourth quarter and fiscal 2026. In the meantime, if anyone has questions that were not answered on our call today, please do feel free to send a follow-up e-mail to [email protected]. Thanks again.

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