Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

May 10, 2016 16:00 ET

Pizza Pizza Royalty Corp. Announces First Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - May 10, 2016) - Pizza Pizza Royalty Corp. (the "Company") (TSX:PZA), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the first quarter ended March 31, 2016.

First Quarter highlights:

  • Royalty Pool sales increased 3.3%
  • Same store sales increased 2.5%
  • Adjusted earnings per share increased 1.4%
  • Restaurant network grew by two, net locations

SALES

For the quarter, System Sales from the 736 restaurants in the Royalty Pool increased by 3.3% to $133.1 million from $128.9 million in the prior year quarter when there were 730 restaurants in the pool. Total Royalty Pool System Sales for the Quarter increased over the comparative period in 2015 as a result of the reported same store sales growth ("SSSG"), the impact of net new restaurants added to the Royalty Pool on January 1, 2016, and the extra day of sales in February 2016 due to the leap year, the last of which management estimates to be approximately $1.0 million.

SSSG, the key driver of yield growth for shareholders of the Company, increased 2.5% for the quarter when compared to the same period in 2015. SSSG is not affected by the additional day in the leap year. SSSG is calculated using the 13-week comparable periods.

SSSG First Quarter
(%)
2016 2015
Pizza Pizza 4.9 2.2
Pizza 73 (7.9 ) 3.8
Combined 2.5 2.5

SSSG is driven by the growth in the average customer check and in customer traffic both of which are affected by changes in pricing and sales mix. On a consolidated basis, during the quarter, the average check and customer traffic increased when compared to the same quarter last year.

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "Quarter-over-quarter, we work in many ways to increase shareholder value and offer an attractive dividend yield backed by a healthy cash reserve. The geographic diversification of our brands across Canada has proven to be a successful strategy in building value. Our successes at Pizza Pizza, operating largely in Ontario and Quebec, are reflected in our SSSG, while we continue to closely monitor Pizza 73 and the current economic uncertainty in Alberta affecting consumer spending patterns."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $5.1 million, or $0.2091 per share, for the quarter compared to $4.6 million, or $0.2001 per share, for the prior year quarter. The payout ratio was 100% for the Quarter and for the prior year quarter.

For Canadian federal tax purposes, the dividend is considered a taxable eligible dividend.

In 2015, the Company increased the monthly dividend twice. First, in April 2015, the Company increased the monthly dividend by 1.95% to $0.068 per Share ($0.816 annualized). The second increase was in November 2015, when the Company increased the monthly dividend by 2.5% to $0.0697 per Share ($0.836 annualized). As well, the number of shares outstanding increased in March 2015 with the exchange of Class B Partnership units and subsequent sale by PPL of 2,800,000 equivalent shares.

The Company's working capital reserve is $4.9 million at March 31, 2016, which is relatively unchanged for the Quarter. The reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in System Sales and, thus, the Company's royalty income. With this reserve now in place, going forward, the Company will continue to target a payout ratio at or near 100% on an annualized basis. The Company does not have capital expenditure requirements or employees.

EARNINGS PER SHARE ("EPS")

Fully-diluted EPS for the quarter was $0.214 per share compared to $0.210 per share for the same quarter in 2015. The period over period increase is attributable to an increase in royalty income and decrease in interest expense, offset by an increase in current tax expense. However, instead of EPS, the Company considers "adjusted" EPS1 to be a more meaningful indicator of the Company's operating performance and, thus, also presents fully-diluted adjusted EPS. When adjusted for non-cash items, EPS for the quarter increased 1.4% to $0.219 per share compared to adjusted EPS of $0.216 per share in the comparable period last year.

1 Adjusted earnings and adjusted EPS are not recognized measures under International Financial Reporting Standards ("IFRS") and may be calculated in a manner that differs from that used by other issuers. For additional information about the calculation and use of these measures, please see "Reconciliation of Non-IFRS Measures" in the Company's Management's Discussion & Analysis ("MD&A").

CURRENT INCOME TAX EXPENSE

Current income tax expense for the quarter was $1.4 million compared to $1.2 million in the same quarter last year. The increase in tax expense is due to an increase in royalty income and a decrease in the tax amortization, coupled with an increase in the Company's share of taxable income.

Of particular note is that the Company's earnings from operations before income taxes, calculated under International Financial Reporting Standards ("IFRS"), differs significantly from its taxable income, largely due to the tax amortization of the Pizza Pizza and Pizza 73 Rights and Marks. The amount of the tax amortization deducted is based on a declining basis and will decrease annually.

RESTAURANT DEVELOPMENT

The number of restaurants in the Company's Royalty Pool increased by six to 736 on the January 1, 2016 Adjustment Date. The number of restaurants in the Royalty Pool remained unchanged through March 31, 2016.

During the quarter, PPL opened four restaurants and closed two. By brand, for the quarter, Pizza Pizza opened two traditional and one non-traditional restaurant. Pizza 73 opened one non-traditional location and two non-traditional locations were closed.

Readers should note that the number of restaurants added to the Royalty Pool each year may differ from the number of restaurant openings and closings reported by PPL on an annual basis as the periods for which they are reported differ slightly.

SELECTED FINANCIAL HIGHLIGHTS

The following table sets out selected financial information and other data of the Company and should be read in conjunction with the unaudited interim condensed consolidated financial statements of the Company. Readers should note that the 2016 results are not directly comparable to the 2015 results because of an extra day of royalty revenue in 2016 due to the leap year, plus the fact that there are 736 restaurants in the 2016 Royalty Pool compared to 730 restaurants in the 2015 Royalty Pool.

(in thousands of dollars, except number of restaurants and per Share amounts) 3 months ended
March 31, 2016
3 months ended March 31, 2015
Restaurants in Royalty Pool 736 730
Same store sales growth(1) 2.5 % 2.5 %
Days in Period 91 90
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 111,210 $ 105,265
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 21,881 23,588
Total System Sales $ 133,091 $ 128,853
Royalty - 6% on Pizza Pizza System Sales $ 6,673 $ 6,316
Royalty - 9% on Pizza 73 System Sales 1,969 2,123
Royalty income $ 8,642 $ 8,439
Interest paid on borrowings(2) (332 ) (485 )
Administrative expenses (163 ) (125 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(4) $ 8,147 $ 7,829
Distribution on Class B and Class D Exchangeable Shares(3) (1,644 ) (2,074 )
Current income tax expense (1,375 ) (1,191 )
Adjusted earnings available for shareholder dividends(4) $ 5,128 $ 4,564
Add back:
Distribution on Class B and Class D Exchangeable Shares(3) 1,644 2,074
Adjusted earnings from operations(4) $ 6,772 $ 6,638
Adjusted earnings per share(4) $ 0.219 $ 0.216
Basic earnings per share $ 0.214 $ 0.210
Dividends declared by the Company $ 5,148 $ 4,553
Dividend per share $ 0.2091 $ 0.2001
Payout ratio(4) 100 % 100 %
(1) SSSG means the change in period gross sales of Pizza Pizza and Pizza 73 restaurants as compared to sales in the previous period, where the restaurants have been open at least 13 months. Additionally, for a Pizza 73 restaurant whose restaurant territory was adjusted due to an additional restaurant, a Step-Out Payment may be added to sales to arrive at SSSG. SSSG does not have any standardized meaning under IFRS. Therefore, these figures may not be comparable to similar figures presented by other companies. See "Reconciliation of Non-IFRS Measures" in Management's Discussion & Analysis ("MD&A").
(2) The Company, indirectly through the Partnership, incurs interest expense on the $47,000 outstanding bank loan. Interest expense also includes amortization of loan fees. See "Interest Expense" in the Company's MD&A.
(3) Represents the distribution to PPL from the Partnership on Class B and Class D Units of the Partnership. The Class B and D Units are exchangeable into common shares of the Company ("Shares") based on the value of the Class B Exchange Multiplier and the Class D Exchange Multiplier at the time of exchange as defined in the amended and restated Pizza Pizza licence and royalty agreement (the "Pizza Pizza Licence and Royalty Agreement") and the amended and restated Pizza 73 licence and royalty agreement (the "Pizza 73 Licence and Royalty Agreement") (together, the "Licence and Royalty Agreements"), respectively, and represent 20.4% of the fully diluted Shares at March 31, 2016 (December 31, 2015 - 19.9%). During the quarter ended March 31, 2016, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2015 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2015. Included in the three months ended March 31, 2016, is the receipt of distributions of $22 pursuant to the true-up calculation (March 31, 2015 - PPL received $80).
(4) "Adjusted earnings from operations", "Adjusted earnings available for shareholder dividends", "Adjusted earnings per Share", and "Payout Ratio" do not have any standardized meaning under IFRS. Therefore, these figures may not be comparable to similar figures presented by other companies. See "Reconciliation of Non-IFRS Measures" in the Company's MD&A.
(5) System Sales (as defined in the Licence and Royalty Agreements) reported by Pizza Pizza and Pizza 73 restaurants include the gross sales of Pizza Pizza company-owned, jointly-controlled and franchised restaurants, excluding sales and goods and service tax or similar amounts levied by any governmental or administrative authority. System Sales do not represent the consolidated operating results of the Company but are used to calculate the royalties payable to the Partnership as presented above.

A copy of the Company's unaudited interim condensed consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on May 10, 2016.

As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:

Date: Tuesday, May 10, 2016
Time: 5:30 p.m. ET
Call-in number: 416-340-2218 / 866-223-7781
Recording call in number: 905-694-9451 / 800-408-3053
Available until midnight, May 24, 2016
Passcode: 8107258

A recording of the call will also be available on the Company's website www.pizzapizza.ca.

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 speak only as of the date of this report. These forward-looking statements involve a number of risks and uncertainties, including those described in the Company's annual information form. The Company assumes no obligation to update these forward looking statements, except as required by applicable securities laws.

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