Pizza Pizza Royalty Income Fund

Pizza Pizza Royalty Income Fund

March 23, 2010 18:27 ET

Pizza Pizza Royalty Income Fund Announces 2009 Financial Results

TORONTO, ONTARIO--(Marketwire - March 23, 2010) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) and Pizza Pizza Limited (the "Company") today announced results for the fourth quarter and year ended December 31, 2009.

2009 Annual Summary:
    42 new locations opened in 2009; 11 closed
    Royalty Pool system sales decreased 4.1%
    Same store sales decreased 5.9%
    Pre-tax earnings per unit decreased 10.1%

Same store sales (SSS) decreased 4% for the quarter and decreased 5.9% for the year ended December 31, 2009, compared to the same periods last year. The fourth quarter results reflected an improvement over the preceding second and third quarters. SSS is the key driver of yield growth for Fund unitholders. 

During the quarter, continuing poor economic conditions and unemployment negatively impacted Canada's foodservice industry, particularly in the Company's southwestern Ontario and Alberta markets.


System sales from the 637 restaurants in the Royalty Pool for the quarter and year ended December 31, 2009 were $118.8 million and $451.4 million, respectively. For the prior year comparative quarter and year, system sales for the 609 restaurants in the Royalty Pool were $122.4 million and $470.6 million, respectively. The decrease in sales was directly related to the decrease in SSS partially offset by system sales generated from the addition of 28 net, new restaurants to the Royalty Pool during the year.


Net Earnings before Income Taxes

Net earnings before income taxes for the quarter ended December 31, 2009 were $5.2 million, or $0.237 per unit, as compared to $5.7 million, or $0.263 per unit, for the comparable quarter in 2008, which equates to a 9.9% decrease per unit.

Net earnings before income taxes for the year ended December 31, 2009 were $19.7 million, or $0.902 per unit, as compared to $21.9 million, or $1.003 per unit, for the 2008 year, which equates to a 10.1% decrease per unit.

The net earnings per unit before income tax, decreased as a result of the decline in the sales of the Royalty Pool restaurants and the decrease in the Fund's proportionate interest in the Partnership.

Income Tax Matters

The Specified Investment Flow-Through (SIFT") tax legislation that was enacted in 2007 and that will apply to the Fund commencing on January 1, 2011, has raised a number of organizational and tax planning issues for consideration by the Fund's Trustees. The SIFT Legislation will impose a tax (the "SIFT Tax") on certain income earned by the Fund and will treat the distribution of such income to investors as a dividend from a taxable Canadian corporation. In preparation for the application of the SIFT Legislation, in 2007 the Fund began executing a tax planning strategy to conserve the significant, discretionary tax deductions that are available to it. Although the SIFT Tax is expected to result in an adjustment to the Fund's monthly distributions commencing in 2011, the Trustees expect that the Fund's earnings that would otherwise be subject to the SIFT Tax will be partially sheltered from the SIFT Tax as a result of this tax planning strategy. 

In addition, the Trustees have been researching and considering options available to the Fund to convert from its current structure as a trust to a corporation. In 2008, as part of the SIFT Legislation, the federal government enacted rules that permit the Fund to convert to a corporation on a tax-deferred rollover basis, provided that the conversion is completed prior to January 1, 2013. The Trustees continue to consider whether to convert to a corporate structure prior to 2011 but should they decide not to convert prior to 2011 the Trustees recognize that they have until the end of 2012 to complete the conversion using the tax-deferred rollover provisions.


The Fund declared distributions of $5.1 million or $0.233 per unit for the quarter ended December 31, 2009, equating to a 98% payout ratio; for the 2008 comparable quarter, the Fund declared distributions of $5.1 million or $0.233 per unit for a payout ratio of 88%. For the year ended December 31, 2009, the Fund declared distributions of $20.3 million or $0.93, equating to a 103% payout ratio; in 2008, the Fund declared distributions of $20.1 million or $0.923 per unit for a payout ratio of 92%.

For those unitholders holding units outside a tax deferred plan, the 2009 distributions will be treated as 85% taxable income and 15% as a tax-deferred return of capital.

In 2009, the Fund used $1.07 million of its working capital reserve balance to supplement distributions, as the reserve decreased to $2.42 million from $3.49 million. As anticipated, fourth quarter distributions were fully funded by fourth quarter operations, however the first three quarters had payout ratios above 100%. The fourth quarter has historically been the strongest in terms of top-line, system sales while the first quarter has been the Fund's softest; we see this historical trend continuing in the first quarter of 2010.

The Fund's historically, conservative distribution policy has produced a net $2.42 million working capital reserve at December 31, 2009, which will continue to be available for use at the Trustees' discretion in the event of future, short- to medium-term reductions in system sales and, thus, the Fund's royalty income. As a royalty income fund, the Fund does not have any capital expenditure requirements or significant cash commitments other than fixed interest expense and administrative expenses.


As at December 31, 2009, there were 671 locations consisting of 374 traditional Pizza Pizza and 72 traditional Pizza 73 restaurants. As well, there were 216 non-traditional Pizza Pizza locations and 9 non-traditional Pizza 73 locations. During the fourth quarter, the Company opened 3 locations and closed one while during the year, 42 restaurants were opened and 11 closed. 


As previously announced, effective January 1, 2010, the pool of restaurants (the "Royalty Pool"), on which royalties are paid to the Fund by the Company, has been increased to include 31 new Pizza Pizza restaurants and 12 new Pizza 73 restaurants. Of the 31 new Pizza Pizza restaurants opened between January 1, 2009 and December 31, 2009, ten are traditional restaurants and 21 are non-traditional locations. The 12 Pizza 73 restaurants are comprised of ten traditional restaurants and two non-traditional locations opened between September 2, 2008 and September 1, 2009. The Royalty Pool will decrease by nine Pizza Pizza restaurants which were closed during the year, of which five were traditional and four non-traditional. With the addition of the 34 net, new restaurants, royalty payments to the Fund during 2010 will be based on 671 restaurants in the Royalty Pool. Also with the addition of the 34 restaurants, the Company now owns 26.3% of the fully diluted units of the Fund.


The following table sets out selected financial highlights of the Fund and the Pizza Pizza Royalty Limited Partnership (the "Partnership"):

  3 months ended   12 months ended  
  December 31, 2009   December 31, 2008   December 31, 2009   December 31, 2008  
(in thousands of dollars, except number of restaurants and per unit amounts)  
Restaurants in Royalty Pool   637     609     637     609  
Same store sales growth   -4.0 %   -0.6 %   -5.9 %   1.7 %
System sales reported by Pizza Pizza restaurants in the Royalty Pool $ 98,340   $ 101,464   $ 370,115   $ 389,518  
System sales reported by Pizza 73 restaurants in the Royalty Pool   20,484     20,975     81,297     81,105  
  $ 118,824   $ 122,439   $ 451,412   $ 470,623  
Royalty – 6% on Pizza Pizza system sales $ 5,900   $ 6,088   $ 22,207   $ 23,371  
Royalty – 9% on Pizza 73 system sales   1,844     1,887     7,317     7,299  
Total Royalty on System Sales   7,744     7,975     29,524     30,670  
Partnership interest and admin. expenses   (868 )   (791 )   (3,343 )   (3,280 )
Earnings available for distribution to the Fund and Pizza Pizza Limited   6,876     7,184     26,181     27,390  
Pizza Pizza Limited's interest   (2,156 )   (1,899 )   (8,298 )   (7,311 )
    4,720     5,285     17,883     20,079  
Interest income   450     450     1,800     1,800  
Net earnings before non-cash future income tax expense and issuance costs $ 5,170   $ 5,735   $ 19,683   $ 21,879  
Share of Partnership issuance costs   -     -     -     -  
Provision for (recovery of) future income taxes   -     -     (293 )   (2,235 )
Net earnings $ 5,170   $ 5,735   $ 19,976   $ 24,114  
Basic earnings per Fund unit excluding the impact of non-cash future income tax expense and issuance costs $ 0.237   $ 0.263   $ 0.902   $ 1.003  
Basic earnings per Fund unit $ 0.237   $ 0.263   $ 0.916   $ 1.105  
Diluted earnings per Fund unit $ 0.237   $ 0.258   $ 0.912   $ 1.065  
Distributions declared $ 5,073   $ 5,073   $ 20,291   $ 20,127  
Distributions per Fund unit $ 0.233   $ 0.233   $ 0.930   $ 0.923  
Payout ratio   98 %   88 %   103 %   92 %

The audited, consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, will be available at and on the Fund's website at on or before March 24, 2010.

The Fund will host a conference call to discuss the results on Wednesday, March 24, 2010 at 9:00 a.m. EST. The call can be accessed by dialing (416) 640-5926 or 1-800-820-0231. A replay will be available until April 7, 2010 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 6709472.

Forward Looking Statements

Certain statements in this report may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this report, such statements include such words as "may", "will", "expect", "believe", "plan", and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this report. These forward-looking statements involve a number of risks and uncertainties. The following are some factors that could cause actual results to differ materially from those expressed in or underlying such forward-looking statements: competition; changes in demographic trends; changing consumer preferences and discretionary spending patterns; changes in national and local business and economic conditions; legislation and governmental regulation; accounting policies and practices; and the results of operations and financial condition of the Company. The foregoing list of factors is not exhaustive and should be considered in conjunction with the other risks and uncertainties described in the Fund's Annual Information Form. The Fund assumes no obligation to update these forward looking statements, except as required by applicable securities laws.

About the Fund, a publicly-traded entity

The Fund is a limited purpose, open-ended trust established under the laws of Ontario. The Fund, indirectly through the Partnership, has acquired the trademarks and trade names used by the Company in its Pizza Pizza and Pizza 73 restaurants. The Pizza Pizza trademarks were licensed to the Company in 2005 for 99 years, for which the Company pays the Fund a royalty equal to 6% of the system sales of its Pizza Pizza restaurants in the Royalty Pool. There are 568 Pizza Pizza restaurants in the Royalty Pool for 2009. On July 24, 2007, the Partnership acquired the trademarks and other intellectual property of Pizza 73 (the "Pizza 73 Rights") and licensed them to the Company for 99 years, for which the Company pays the Fund a royalty equal to 9% of the 69 Pizza 73 restaurants in the Royalty Pool for 2009. The 2009 Royalty Pool has 637 total restaurants. As a result of the January 1, 2010 Adjustment Date, the 2010 Royalty Pool will contain 671 restaurants.

A key attribute of the Fund is that revenues are based on top-line, system sales of the Royalty Pool restaurants and not on the profitability of either the Company or the restaurants in the Royalty Pool. Moreover, the Fund is not subject to the variability of earnings or expenses of the operating companies. The Fund's only expenses are administration expenses and the interest on debt. Thus, the success of the Fund depends primarily on the ability of the Company to maintain and increase system sales of the Royalty Pool restaurants and to meet its royalty obligations.

The Fund's trust units are listed on the Toronto Stock Exchange under the symbol PZA.UN.

About Pizza Pizza Limited, a privately-owned, operating company

The Company, a privately-held Canadian corporation, is one of Canada's most successful operators in the quick service restaurant industry. It operates franchised, owner/operator and corporate restaurants under the brand names Pizza Pizza and Pizza 73. The Pizza Pizza brand celebrated its 40th anniversary in 2007 and dominates the Ontario pizza quick service industry and is expanding nationally. The Pizza 73 brand is celebrating its 24th anniversary in 2009 and operates largely in Alberta. The Company is guided by a mission to provide the "best food, made especially for you" and a focus on quality ingredients, customer service, community contribution and continual innovation, especially in offering health-conscious menu choices.

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