Pizza Pizza Royalty Income Fund

Pizza Pizza Royalty Income Fund

November 11, 2009 16:00 ET

Pizza Pizza Royalty Income Fund Announces Third Quarter Financial Results

TORONTO, ONTARIO--(Marketwire - Nov. 11, 2009) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) and Pizza Pizza Limited (the "Company") today announced results for the third quarter ended September 30, 2009.

Third Quarter Summary:
-12 new locations opened
- Royalty Pool system sales decreased 5.2%
- Same store sales decreased 7.6%
- The Fund's earnings decreased 11.1%

System sales of the 637 restaurants in the Royalty Pool decreased 5.2% to $114.1 million for the third quarter compared to $120.4 million generated by the 609 restaurants in the Royalty Pool during the 2008 comparable quarter. For the nine months ended September 30, 2009, Royalty Pool system sales from the 637 restaurants decreased 4.5% to $332.6 million from $348.2 million in the comparable period in 2008, which had 609 restaurants in the Royalty Pool. 

Same store sales (SSS) decreased 7.6% for the quarter and decreased 6.6% for the nine months ended September 30, 2009, compared to the same periods last year. SSS is the key driver of yield growth for Fund unitholders. 

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

"In recent months, the Canadian economy has begun showing positive signs causing Pizza Pizza to become more optimistic about future sales in many of our core markets. The consumer confidence index and the housing market continue to yield positive trends which are good news for the Canadian foodservice industry," said Curt Feltner, Chief Financial Officer.

For the third quarter of 2009, net earnings before tax, decreased 11.1% to $5.0 million, or $0.229 per unit, compared to earnings of $5.6 million, or $0.257 per unit, for the third quarter in 2008. For the nine months ended September 30, 2009, net earnings before tax decreased 10.1% to $14.5 million, or $0.665 per unit, compared to net earnings of $16.1 million, or $0.74 per unit, for the same period in 2008.

During the quarter, the Fund declared distributions of $5.1 million or $0.233 per unit, equating to a 102% 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 90%. For the nine month period, the Fund declared distributions of $15.2 million or $0.698 per unit, equating to a 105% payout ratio; for the 2008 comparable period, the Fund declared distributions of $15.1 million or $0.690 per unit for a payout ratio of 93%.

The Fund used $116,000 of its working capital reserve balance to supplement the third quarter distributions, after using $497,000 to supplement second quarter distributions and $350,000 in the first quarter. The fund anticipates that the fourth quarter distributions will be fully funded by fourth quarter operations, thus, not requiring further use of the working capital reserve in 2009. 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 $2.3 million working capital reserve at September 30, 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 interest expense.

The following table sets out selected financial highlights of the Fund and the Partnership:

  3 months ended9 months ended
  September 30, 2009September 30, 2008September 30, 2009September 30, 2008
(in thousands of dollars, except number of restaurants, days in the quarter  and per unit amounts)
Restaurants in Royalty Pool637609637609
Same store sales -7.6%2.2%-6.6%2.5%
Days in the Quarter9292273274
System sales reported by Pizza Pizza restaurants in     
 the Royalty Pool$        94,400$        99,894$      271,776$      288,054
System sales reported by Pizza 73 restaurants in  
      the Royalty Pool
Royalty – 6% on Pizza Pizza system sales$          5,664$          5,994$        16,307$        17,283
Royalty – 9% on Pizza 73 system sales1,7731,8445,4735,412
Total Royalty on System Sales7,4377,83821,78022,695
Partnership expenses(805)(810)(2,474)(2,489)
Earnings available for distribution to the Fund and     
 Pizza Pizza Limited6,6327,02819,30620,206
Pizza Pizza Limited's interest(2,096)(1,867)(6,142)(5,412)
Equity income4,5365,16113,16414,794
Interest income4504501,3501,350
Net earnings before non-cash future income tax    
 expense$          4,986$          5,611$        14,514$        16,144
Provision for (recovery of) future income taxes--(293)(2,235)
Net earnings$          4,986$          5,611$        14,807$        18,379
Basic earnings per Fund unit excluding the impact of     
 non-cash future income tax expense$          0.229$          0.257$          0.665$          0.740
Basic earnings per Fund unit$          0.229$          0.257$          0.679$          0.842
Diluted earnings per Fund unit$          0.229$          0.253$          0.675$          0.807
Distributions declared$          5,073$          5,073$        15,219$        15,055
Distributions per Fund unit$          0.233$          0.233$          0.698$          0.690
Payout ratio102%90%105%93%
  September 30, 2009 September 30, 2008
Working capital of Partnership $          2,279 $          3,486
Total assets of Fund $      226,363 $      221,467
Total liabilities of Fund $          7,371 $          7,664

The unaudited 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

The Fund will host a conference call to discuss the results on November 11, 2009 at 5:00 p.m. EST. The call can be accessed by dialing 416-640-3404 or 1-866-322-1159. A replay will be available until November 24, 2009 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 8049776.

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 Pizza Pizza Limited. 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 system sales of its 69 Pizza 73 restaurants in the Royalty Pool for 2009. The 2009 Royalty Pool has 637 total 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. 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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