A&W Food Services of Canada (TSX:AW) Q3 2026 Earnings Call

0:00 Hello everyone. Thank you for joining us and welcome to the A&W Food Services of Canada Q3 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.

0:29 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 6th, 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.

1:24 Actual results may differ materially from the conclusions, We also refer you to Food Services Q3 2026 MDNA 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' CDAR Plus profile, as well as on our investor website at www.awinvestors.ca.

2:19 We're pleased to report that A&W achieved same-store sales growth of 1.8% for Q3 2026, A&W Smashed Burger, which we introduced as a nationwide limited-time offer at the end of Q2, ran nationally for five 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.

3:07 We continue to focus on growing restaurant counts across Canada, and in Q3 2026, we opened nine new A&W restaurants, bringing year-to-date new A&W restaurant openings to 21, seven 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 Prêt-à-Manger, During the quarter, we opened our second franchised Pret Shop at Vancouver International Airport, bringing our total to four Pret Shops in Canada.

3:58 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 three to four franchise prep shops to be opened by the end of fiscal 2026, in addition to the two 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?

4:46 The consumer, business and economic environment for the Canadian QSR industry has changed significantly in recent years. Elevated costs 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, Thank you for joining us today. and a consistently excellent experience that drives return visits, success and opportunity for franchisees.

5:52 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 three 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.

6:46 The success of A&W's 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 five-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.

7:33 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 the 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 And our climate goals, which have guided how we work together for more than 50 years, identify the behaviours that we believe will enable us to succeed in achieving our mission.

8:24 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.

8:54 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 Thank you for joining us today. and three of the nine new A&W restaurants opened in the quarter were turnkey restaurants compared to one of three in Q3 of 2025.

9:49 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 will also continue to benefit from the ongoing migration of A&W restaurants from a 2.5% to a 3.5% service fee rate. As at September 6, there was approximately 120 franchised A&W restaurants still at the lower 2.5% service fee rate.

10:35 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's 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 PrEP VAT brand.

11:35 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 71% per diluted share in Q3 of 2025.

12:28 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 four quarter basis adjusted EBITDA margin for Q3 2026 was 33% versus a four quarter trailing Q3 2025 margin of 33.5.

13:25 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. 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 5th guidance.

14:20 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, and increase of 2.5 million from Q3 2025, primarily due to timing differences that resulted in lower use of working capital. We declared a cash dividend of 48 cents per share in Q3 2026, which was paid on September 29th of this year. And we remain committed to maintaining the current level of quarterly dividends for the foreseeable future. As a reminder, on March 18th, 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 20th, 2026 and ending on March 19th of 2027.

15:20 We launched the NCIB because the 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 cancelled 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.

15:52 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 Prêt-à-Manger. The continued success of A&W's Smashed 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 number one 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.

16:39 We believe that our new strategy builds on A&W's strengths and positions as 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. We will now begin the 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. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device.

17:25 Please stand by while we compile the Q&A roster. Your first question comes from the line of Logan Reich with RBC Capital Markets. Your line is open. Please go ahead.

17:46 Hey, good morning. Thanks for taking my questions and appreciate all the color in the prepared remarks. I thought the comment in the press release about evaluating more complementary brands was interesting. Adding brands beyond the A&W and Pret logos of direction you see the company heading and How do you balance adding new brands versus executing against the A&W growth opportunities ahead of you?

18:13 Thanks for the question, Logan. Good morning. Clearly for us, you know, 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 best for franchisees, best for the brand, continued Thank you very much.

19:01 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. And I think this is something that, you know, across the space in multiple markets we've seen, 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, clearly the low income is under pressure here. Are you moving in the direction of maybe a more barbell value and premium approach or just any further color there would be helpful?

19:51 Sure. I think as we look at the economic situation, clearly all of us would love to see Canadians doing better Thank you for joining us. There are certainly lots of guests, including some guests that might be under economic pressure, but really want to, you know, enjoy something different.

20:36 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 two parts to the market and we're looking at both of them.

20:58 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 they've seen the rise of these 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 and more operationally intense sort of platform. Just curious any color on the beverage side of things.

21:36 Sure. Well, as you know, we've 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 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.

22:12 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.

22:38 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 out or slightly ahead of the market as far as we can tell.

23:36 Got it. Okay, that's helpful. I guess just like how that progressed through the quarter, I mean, oil prices have been a bit of pressure and The longer oil prices are high, it continues to win the consumer. Do you see any deterioration in the underlying environment through the quarter, or has it been kind of stable?

23:56 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 Thank you very much.

24:45 Okay, that's very helpful. I have a few more, but happy to hop back in the queue and let others jump in.

24:53 Great. All right. Thank you. Always good chatting with you. There are no further questions at this time. I will now turn the call back to Susan Senecal for closing remarks.

25:12 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 email to investorrelations at aw.ca. Thanks again. This concludes today's call. Thank you for attending. You may now disconnect.