Pizza Pizza Royalty Income Fund

Pizza Pizza Royalty Income Fund

March 29, 2011 18:11 ET

Pizza Pizza Reports Fourth Quarter and 2010 Annual Results

TORONTO, ONTARIO--(Marketwire - March 29, 2011) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) and Pizza Pizza Limited ("Pizza Pizza") released financial results today for the fourth quarter and year ended December 31, 2010. 

Fourth Quarter Highlights

  • Same store sales increased 1.3%
  • Royalty Pool sales increased 3%
  • Payout ratio was 97%
  • Earning per unit increased 0.8%
  • Working capital increased $165,000


Same store sales growth ("SSSG") is the key driver of yield growth for Fund unitholders. As previously reported, SSSG for the quarter grew 1.3% and was flat (0%) for the year compared to negative 4% and negative 5.9%, respectively, in the same periods in the prior year. By brand, SSSG for the quarter was 1.1% for Pizza Pizza and was 2.2% for Pizza 73. For the year, SSSG reported by Pizza Pizza was 0.9% and negative 4.4% for Pizza 73.

System sales of restaurants included in the pool for which a royalty is payable (the "Royalty Pool") were $122.3 million for the quarter and $455.8 million for the year, compared to $118.8 million and $451.4 million, respectively, in the same periods in 2009. Sales results for the quarter were positively impacted by an increase in walk-in and delivery transactions, partially offset by a decrease in the average customer cheque.

Net Earnings

The Fund's earnings before non-cash income taxes for the quarter and year were $5.2 million or $0.239 per unit and $19.5 million or $0.892 per unit, respectively, compared to the same periods in 2009 during which earnings before non-cash income taxes were $5.2 million or $0.237 per unit and $19.7 million or $0.902 per unit, respectively. The Fund's earnings per unit before non-cash income tax expense increased 0.8% for the quarter and decreased 1.1% for the year.

Restaurant Development

During the year, Pizza Pizza opened six traditional and 18 non-traditional restaurants, and closed one traditional and six non-traditional locations. For the Pizza 73 brand, seven non-traditional locations were opened. This brings the total number of Pizza Pizza and Pizza 73 locations to 695 at December 31, 2010.

As previously announced, the number of restaurants in the Fund's Royalty Pool increased from 671 to 695, on the January 1, 2011 Adjustment Date, to include the royalties from 24 net, new restaurants.


The Fund declared distributions of $5.1 million or $0.233 per unit for the quarter ended December 31, 2010, equating to a 97% payout ratio; for the 2009 comparable quarter the Fund declared distributions of $5.1 million or $0.233 per unit for a payout ratio of 98%. For the year, the Fund declared distributions of $20.3 million or $0.93 per unit for a payout ratio of 104% compared to $20.3 million or $0.93 per unit for a 103% payout ratio in 2009.

Pizza Pizza Royalty Limited Partnership increased its working capital balance by $165,000 during the fourth quarter. In 2010, the Fund used $1.2 million of its working capital reserve to supplement distributions, bringing the working capital reserve balance to $1.2 million at December 31, 2010.

Tax Considerations

The Canadian federal government has enacted the Specified Investment Flow Through ("SIFT") tax legislation effective commencing in the Fund's 2011 taxation year. Under the legislation, certain income earned and distributed by the Fund will be taxed in a manner similar to income earned by a corporation and distributions or allocations of such income made to investors will be taxed in a manner similar to dividends from taxable Canadian corporations. The deemed dividend will be eligible for the enhanced dividend tax credit if paid or allocated to a resident of Canada.

The SIFT tax legislation raised a number of organizational and tax planning issues for consideration by the Fund's trustees. The Fund's trustees decided to retain the Fund's current income trust structure into 2011. In January 2011, the Fund's trustees adopted a new distribution policy, with a reduced monthly distribution that reflects the Fund's obligation to make SIFT federal tax payments. In determining the level of distributions, the Trustees considered factors related to the Company's operations, the need to augment the cash reserve fund, future costs of converting to a corporation, their assessment of economic conditions in the Company's principal markets, and the discretionary tax deductions that are available as a result of the Fund's past tax planning strategy.

Beginning with the January 2011 distribution, payable February 15, 2011, the Trustees have set the monthly distribution at $0.0584 per unit or $0.70 annually. At this level, the eligible dividend portion of the Fund's distribution combined with the return of capital component of the distribution will provide taxable Canadian individuals with an effective after-tax yield comparable to 2010 levels. There can be no assurance that this effective after-tax yield will be maintained in the future, whether as a result of changes in distribution levels or as a result of changes in the tax attributes of the Fund's income or other tax planning strategies.

Financial Highlights

The following table, as previously announced, sets forth the audited financial results for the Fund for the fourth quarter and year ended December 31, 2010.

  3 months ended   12 months ended  
  December 31, 2010   December 31, 2009   December 31, 2010   December 31, 2009  
(in thousands of dollars, except number of restaurants and per unit amounts)  
Restaurants in Royalty Pool   671     637     671     637  
Same store sales growth   1.3 %   -4.0 %   0 %   -5.9 %
System sales reported by Pizza Pizza restaurants in the Royalty Pool $ 101,920   $ 98,340   $ 379,623   $ 370,115  
System sales reported by Pizza 73 restaurants in the Royalty Pool   20,410     20,484     76,225     81,297  
  $ 122,330   $ 118,824   $ 455,848   $ 451,412  
Royalty – 6% on Pizza Pizza system sales $ 6,116   $ 5,900   $ 22,777   $ 22,207  
Royalty – 9% on Pizza 73 system sales   1,837     1,844     6,860     7,317  
Total Royalty on System Sales   7,953     7,744     29,637     29,524  
Partnership interest and admin. expenses   (889 )   (868 )   (3,230 )   (3,343 )
Earnings available for distribution to the Fund and Pizza Pizza Limited   7,064     6,876     26,407     26,181  
Pizza Pizza Limited's interest   (2,306 )   (2,156 )   (8,739 )   (8,298 )
    4,758     4,720     17,668     17,883  
Interest income   450     450     1,800     1,800  
Net earnings before non-cash future income tax expense $ 5,208   $ 5,170   $ 19,468   $ 19,683  
Provision for (recovery of) future income taxes   -     -     248     (293 )
Net earnings $ 5,208   $ 5,170   $ 19,220   $ 19,976  
Basic earnings per Fund unit excluding the impact of non-cash future income tax expense $ 0.239   $ 0.237   $ 0.892   $ 0.902  
Basic earnings per Fund unit $ 0.239   $ 0.237   $ 0.881   $ 0.916  
Diluted earnings per Fund unit $ 0.239   $ 0.237   $ 0.881   $ 0.912  
Distributions declared $ 5,073   $ 5,073   $ 20,291   $ 20,291  
Distributions per Fund unit $ 0.233   $ 0.233   $ 0.930   $ 0.930  
Payout ratio   97 %   98 %   104 %   103 %

A copy of management's discussion and analysis and audited financial statements of the Fund and Pizza Pizza for the quarter and year will be available at and on or before March 30, 2011. The Fund will host a conference call to discuss the results on March 30, 2011 at 9:00 a.m. Eastern Standard Time. The call can be accessed by dialing 416-640-5926 or 1-800-820-0231 and by entering the reservation code 3635025.

Forward Looking Statements

Certain statements in this report, including those mentioned under "Tax Considerations", 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; changes in the Fund's distribution policy, tax position and availability and use of deductions and related structuring decisions; and the results of operations and financial condition of the Fund. 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.

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