Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

May 09, 2017 16:30 ET

Pizza Pizza Royalty Corp. Announces First Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - May 9, 2017) - 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 three months ended March 31, 2017.

First Quarter highlights:

  • Royalty Pool sales increased 0.6%
  • Same store sales decreased 0.7%
  • Restaurant network grew by 4, net locations
  • Royalty Pool of restaurants increased by a net, 15 effective January 1, 2017

SALES

For the three months ended March 31, 2017 ("Quarter"), System Sales from the 751 restaurants in the Royalty Pool increased 0.6% to $133.9 million from $133.1 million in the prior year comparable quarter when there were 736 restaurants. System Sales in the prior year quarter included an extra day of sales in February 2016 due to the leap year, which management estimated to be $1.0 million.

Royalty Pool System Sales for the Quarter increased over the prior year comparative period as a result of the impact of net, new restaurants added to the Royalty Pool on January 1, 2017, offset by the reported same store sales decrease. Additionally, the extra day of sales in the prior year quarter should be considered when comparing 2017 to 2016.

Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, decreased by 0.7% for the Quarter compared to a 2.5% increase in the same quarter last year. SSSG is not affected by the additional day during the leap year in 2016, as SSSG is calculated using a 13-week comparative basis.

SSSG First Quarter
(%)
2017 2016
Pizza Pizza (0.7 ) 4.9
Pizza 73 (0.7 ) (7.9 )
Combined (0.7 ) 2.5

Paul Goddard, CEO, Pizza Pizza Limited, said: "Our sales were softer than anticipated this quarter. The average customer check increased, but customer traffic decreased compared to the prior year quarter. In the past year, we've selectively increased prices on a few of our most popular offerings which has negatively impacted traffic, but positively impacted restaurant profitability. In what seems to be an industry-wide trend, we encountered continued weakness in consumer spending, not only in western markets, but, in parts of Ontario as well. Having said that, we are excited to begin celebrating Pizza Pizza's 50th anniversary with sales-building campaigns designed to increase traffic."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $5.3 million, or $0.2139 per share, for the Quarter compared to $5.1 million, or $0.2091 per share, for the prior year comparable quarter. The payout ratio was 103% for the Quarter and was 100% for the prior year comparable quarter.

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

The Company's working capital reserve is $5.0 million at March 31, 2017, which is a decrease of $150,000 as compared to December 31, 2016. The decrease in the reserve was the result of flat adjusted earnings in the Quarter, coupled with an increase in the dividend effective June 2016.

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 in place, the Company has set a 2017 targeted 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 basic EPS for the Quarter increased 1.4% to $0.217 per share compared to $0.214 per share for the same quarter in 2016. The increase in EPS for the Quarter is attributable to increased royalty income and a decrease in administrative expenses.

As compared to basic EPS, the Company considers "adjusted" EPS1 to be a more meaningful indicator of the Company's operating performance and, therefore, presents fully-diluted adjusted EPS. Adjusted EPS for the Quarter was flat at $0.219 when compared to the same quarter in 2016.

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 consistent with the 2016 comparable period at $1.4 million, as the operating results were comparable.

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 a net, 15 to 751 on the January 1, 2017 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2017.

During the Quarter, Pizza Pizza Limited ("PPL") opened six restaurants and closed two. By brand, for the Quarter, Pizza Pizza opened three traditional and one non-traditional restaurants; two non-traditional locations were closed. Pizza 73 opened two traditional restaurants; no Pizza 73 restaurants 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 2017 results are not directly comparable to the 2016 results because of an extra day of royalty revenue in 2016 due to the leap year, in addition to the fact that there are 751 restaurants in the 2017 Royalty Pool compared to 736 restaurants in the 2016 Royalty Pool.

3 months ended
(in thousands of dollars, except number of restaurants, days in the period, per Share amounts, and noted otherwise) March 31, 2017 March 31, 2016
Restaurants in Royalty Pool(1) 751 736
Same store sales growth(2) -0.7 % 2.5 %
Days in the period 90 91
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6) $ 112,508 $ 111,210
System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) 21,355 21,881
Total System Sales $ 133,863 $ 133,091
Royalty - 6% on Pizza Pizza System Sales $ 6,751 $ 6,673
Royalty - 9% on Pizza 73 System Sales 1,922 1,969
Royalty income $ 8,673 $ 8,642
Interest paid on borrowings(3) (314 ) (332 )
Administrative expenses (135 ) (163 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5) $ 8,224 $ 8,147
Distribution on Class B and Class D Exchangeable Shares(4) (1,735 ) (1,644 )
Current income tax expense (1,375 ) (1,375 )
Adjusted earnings available for shareholder dividends(5) $ 5,114 $ 5,128
Add back:
Distribution on Class B and Class D Exchangeable Shares(4) 1,735 1,644
Adjusted earnings from operations(5) $ 6,849 $ 6,772
Adjusted earnings per share(5) $ 0.219 $ 0.219
Basic earnings per share $ 0.217 $ 0.214
Dividends declared by the Company $ 5,266 $ 5,148
Dividend per share $ 0.2139 $ 0.2091
Payout ratio(5) 103 % 100 %
(1) The number restaurants for which the Partnership earns a royalty ("Royalty Pool"), as defined in the amended and restated Pizza Pizza license and royalty agreement (the "Pizza Pizza License and Royalty Agreement") and the amended and restated Pizza 73 license and royalty agreement (the "Pizza 73 License and Royalty Agreement") (together, the "License and Royalty Agreements"). For the 2017 fiscal period, the Royalty Pool includes 651 Pizza Pizza restaurants and 100 Pizza 73 restaurants. The number of restaurants added to the Royalty Pool each year may differ from the number of restaurant openings and closings reported by Pizza Pizza Limited ("PPL") on an annual basis as the periods for which they are reported differ slightly.
(2) 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, the sales used to derive the 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").
(3) The Company, indirectly through the Partnership, incurs interest expense on the $47 million outstanding bank loan. Interest expense also includes amortization of loan fees. See "Interest Expense" in the Company's MD&A.
(4) 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 Licence and Royalty Agreements, respectively, and represent 21.1% of the fully diluted Shares at March 31, 2017 (December 31, 2016 - 20.4%). During the quarter ended March 31, 2017, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2016 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2016. Included in the three months ended March 31, 2017, is the payment of $8 in distributions to PPL pursuant to the true-up calculation (March 31, 2016 - PPL was paid $22).
(5) "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.
(6) 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 9, 2017.

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

Date: Wednesday, May 10, 2017
Time: 9:00 a.m. ET
Call-in number: 416-340-2216 / 800-377-0758
Recording call in number: 905-694-9451 / 800-408-3053
Available until midnight, May 24, 2017
Passcode: 5616015#

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.

Contact Information