Status Update

Aug 13, 2019

Slides

Morning, everyone, and thank you for joining us for our IFRS 16 information session. The purpose of this call is to provide a better understanding of the new accounting standard and of its impact on our financial reporting and results. You will find our presentation on our corporate website in the Investor Relations section under the heading Corporate Presentations. We will be referring to it throughout this webcast. The presentation as well as an audio recording of this webcast will be available on our website for a period of 30 days. Also, please remember that today's discussion may include forward looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. The information session will also be presented by Mr. Mathieu Deschneaux, Vice President, Finance and Madame Julie Terrien, Director, Financial Reporting and Controls. Mathieu, you may begin your conference. Thank you, Jean Marc. Good morning to all of you listening on the phone and thanks for being with us this morning. I'll start the presentation from Page 3 for those of you who are looking at it. So as mentioned by Jean Marc, the purpose of the call is to discuss the impact on our financials from IFRS 16, which is a new accounting standard on lease accounting that now puts most operating leases on the company's balance sheet. It's important to note that since this is purely an accounting change, there will be no change to CushTard's strategy. And also, we don't anticipate any impact on our cash balance, cash flows or leverage capacity. However, we do anticipate impact on our financial statements. Starting with the fiscal 2020 opening balance sheet, we will have a new liability and a matching asset and should see an increase in the range of $2,400,000,000 to $2,800,000,000 to both our total assets and total liabilities. On the income statement, we currently estimate the positive impact on EBITDA of $400,000,000 to $430,000,000 and much smaller negative impact on net earnings ranging from $20,000,000 to 40,000,000 dollars Certain KPIs such as debt leverage ratios and returns measure will be affected and we'll talk about this a bit later on. Turning to Page 4, we will quickly go over the mechanics of the new accounting treatment. So we recognize that most of you should already be familiar with this by now. Starting with the income statement, the rent expense, which was treated as an operating expense will now be eliminated and replaced with depreciation and interest expense. Over the life of the lease, the total charge to the income statement will be the same as in pre IFRS 16 accounting, but in the short term operating profit will increase since the depreciation expense will be smaller than the rent expense. Since the interest charge will be higher in the early stage or early years of the lease, net income will be impacted negatively at the start of the lease and balanced out over time. Looking at the balance sheet impacts, operating leases will be transferred to the balance sheet via right of use asset and an equivalent lease liability calculated as the present value of future lease payments. The new asset will depreciate on a straight line basis over the term of the lease and the lease liability will decrease over time based on cash rent paid net of the interest expense. On the cash flow statement, there will only be reclassification impacts as a portion of the cash rent paid will flow through financing cash flows rather than operating cash flows. Turning to Page 5, some items fall out of the scope of this new standard for us. For example, any variable lease payments related to performance, volumes and other such measures. As well, we have chosen to exclude rent for low value assets and for leases shorter than 12 months as permitted by the new standard. These will be expensed to SG and A as incurred and are not expected to be significant. Turning to Page 6, to apply the new standard, we had some options and we selected what we call the cumulative catch up approach with a simplified right of use asset. This methodology made sense for us because our business did not change significantly in fiscal 2019 as we did not make any acquisition or dispose of asset in any meaningful way. So under this approach, we will not be restating prior periods in our financial statements. The right of use assets will be equal to the lease liability on the opening balance sheet and any existing balance sheet item related to lease accounting such as prepaid rent will be reclassified with the new asset. However, in the MD and A, in order to help analyze results, we will be estimating the impact on fiscal 2019 results as if the new standard had been in effect then. We will also be adjusting a few key measures in fiscal 2019 such as leverage ratios and ROCE to ease the comparability. Turning to Page 7, this slide is simply a high level overview of the impacts of IFRS 16 on our financial statement and certain KPIs. Of note, with regards to our performance ratios, ROCE will decrease as a result of adding more assets to the balance sheet and our adjusted leverage ratio also will decrease since debt was previously capitalized at a multiple of 8 times. While the effective multiple under resulting from the application of IFRS 16 is closer to 7 times. Turning to Page 8, here we're showing what the impact of IFRS 16 would have been on fiscal 2019 income statement to help with modeling going forward. So on the left side, we're starting from the reported numbers pre IFRS for fiscal 2019. The second column exclude the current accounting for IAS 17, sorry, the current or the former standard. The next column adjust for the new standard and we have the other column there that takes care of some the treatment for sublease contracts under the new contract. So you have there the impact of IFRS by line with on the right side the post IFRS P and L for last year. So as you can see, the highlights there are a positive impact of about $415,000,000 EBITDA as a result and negative impact to net income of about $30,000,000 dollars Turning to Page 9, same analysis, but on the balance sheet. You see the highlights in the adjustments where we're adding in the assets, the right of use assets of about $3,000,000,000 and with a net impact on total assets of about 2 point $6,000,000,000 On the liability side, we're introducing the concept of lease liability both in the short term section for $405,000,000 and in the long term section for almost $2,600,000,000 but you also see that we're reducing some of our long term declines to get the effect of the old standard out of our balance sheet. So again, on the liability side, about 2.6 $1,000,000,000 addition to liability on a net basis. Turning to Page 10. Finally, this is another high level view on the estimate of the impact on certain lines, including EBITDA, net earnings and EPS. Again, EBITDA and adjusted EBITDA move favorably by $415,000,000 net earnings and adjusted net earnings would reduce by 30,000,000 dollars And on EPS and adjusted EPS, we would expect an impact of around $0.06 per share. Turning on Page 11, going forward you can expect to see the new asset and liability on our balance sheet starting in Q1. As well in our notes to the financial statements of Q1, we will be reconciling the current lease obligation to the prior operating lease commitments that were reported as at April 28, 2019. Lastly, we also want to remind everyone that the anticipated to be linear and that it should decrease as we move through the year. So in a simple extrapolation of the Q1 impacts could not be representative of fiscal 2020 full year results. So just wanted to make sure that you were aware of that. So turning on Page 12, that pretty much ends our presentation. We hope that this helped clarify the impact and the implication of IFRS 16 for Cush Tard. We will now open for questions, if 1, Your first question comes from Michael Van Aelst from TD Securities. Your line is open. Hi, good morning, Matthew. Good morning. Can you give us an idea of the impact by division? I know you don't really split out EBITDA that way, but we try to. So how do you come up with that? How would we split it? Would it be pretty much just proportionate? I don't have the information on hand, Michael. And I'm not sure it would be proportionate because we don't I don't think the portfolio is necessarily proportionate. So what I suggest is that we pull up on this later on. And then how what's your average lease term? And with that in mind, when would you expect to transition from a negative EPS impact to a positive? Average lease term, we typically have leases, especially in North America that range from 5 to 15 years initially. We do adjust the lease term according to IFRS 16 standard adding some options to our lease term for the sake of the calculations. But and most of our lease include not necessarily in the calculation, but in our agreement several options for renewal, so that we have enough optionality there. But I would say initially we would like to get into 5 to 10 15 years lease term. 5 to 15 without the options? Without the options. Usually options bring us to maybe 40 years or so in terms of optionality. So does that mean you're not going to really hit it wouldn't turn to a positive impact for a number of years like many years to come? Well, if you look at individual lease terms, yes, when you look at the entirety of our portfolio, I don't have the information. We didn't calculate the prospective impact of IFRS 16, but maybe that's something we can look at and revert back with comments on. I'm not sure if we can get there though. Okay. And when you say that the impact in the quarters for fiscal 2020 is not going to be linear, is it just going to be a are you just thinking about a very minor decrease as the year goes on? Or is it or is there some kind of swings for some reason? It should be linear because the standard by itself is somewhat linear. But I think the way to look at it is if you look at our Q1 results and extrapolate, you should see you could see the results are different than the numbers we've talked about today on an annual basis. I think we believe that the numbers we've shared today are more representative on a yearly basis than looking at its quarter to quarter. Okay. Thanks guys. Your next question comes from Peter Sklar from BMO Capital Markets. Your line is open. Matthew, on Page 10 of the slide deck where you give that high level forecast of the impact on the I'm not too sure like is that just a summary of the detailed page you provided on, let me just see what page that is. Page 8. Yes. Yes. That's a recap of Page 8. Okay. And then could you just explain on Page 8 the other column sublease contracts like why does IFRS impact revenues? So we do sublease some of our well lease or sublease of the properties we own or rent. So IFRS 16 had some rules around how to account for this and this the current other is a representation of us applying IFRS 16 on the rental income that we have for properties we lease or sublease. Okay. That's all I have. Thank you. Thank you, Peter. Your next question comes from Krishna Ruthnum from CIBC. Your line is open. Hi, Matthieu and Jean Marc. I just wanted to know if you're giving any disclosure on either the discount rate that you use or the average lease life? I'll refer to Julie that can answer that. Yes. So in our Q1 financial statements, we're going to disclose as required the average weighted average discount rate of our whole portfolio. In terms of lease term, we're not planning on disclosing anything for Q1, but we're going to disclose it at the end of fiscal 2020. It's still similar to what we've disclosed in the past that our leases range from 5 years to 50 plus years. But we might provide a little bit more detailed information, but it's still going to be remain limited in terms of lease term. Okay. And I had another little more detailed question on Slide 8. In the non controlling interest line at the bottom of the slide and the other column you have minus 15%. Is that just netting out, I guess, like the rent impact from basically your sublease contracts or sorry, the depreciation and interest impact from your sublease contracts or is that related to something else? It's removing 80% of the impact from CrossAmerica. Okay. That's helpful. Thank you. Welcome. Your next question comes from Keith Howlett from Desjardins Securities. Your line is open. Yes. Can you roughly break down your owned properties by market? Is it similar proportion in each of the three regions or is it quite different by region? No, it can be it can vary by region. I don't remember if we report this in our annual information form. I think so. Maybe I can refer you to the AIF, Keith, and if you have more question on it, we can take it offline. And I realize this is accounting change, but does anything in this affect your interest or ability to spin properties off in a REIT from your point of view? No. I think spinning it off into a REIT has several consideration, but no accounting consideration. However, contrary to maybe in the past where you could spin off some assets in the REIT and not have those in the balance sheet anymore. I think IFRS 16 would bring back those assets to the balance sheet. So that's the resulting effect. But for spinning off in 2 or 3 would be mostly a financial and business decision not an accounting decision. Thank you. There are no further questions at this time. Mr. Ayles, you turn the call back over to you. Thanks, Julianne, and thank you all for attending the call. We look forward to speaking with you again when we report our Q1 2020 results in September. Have a good day, everybody. Thank you. This concludes today's conference call. You may now disconnect.