Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

March 02, 2015 17:39 ET

Pizza Pizza Royalty Corp. Announces Fourth Quarter and Annual Financial Results

TORONTO, ONTARIO--(Marketwired - March 2, 2015) - 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 fourth quarter and year ended December 31, 2014.

Fourth Quarter highlights:

  • Royalty Pool sales increased 4.2%
  • Same store sales increased 2.0%
  • Adjusted earnings per share ("EPS") increased 5.0%
  • Restaurant network grew by three locations

Annual highlights:

  • Royalty Pool sales increased 2.9%
  • Same store sales increased 1.1%
  • Adjusted EPS increased 2.7%
  • Dividends increased 2.6% in January 2014
  • Loan interest rate decreased 0.25%
  • Restaurant network increased by nine locations

SALES

In the fourth quarter ended December 31, 2014 ("Quarter"), System sales from the 722 restaurants in the Royalty Pool increased 4.2% to $135.5 million from $130.0 million in the prior year comparable quarter when there were 694 restaurants in the Pool. For the year, System Sales increased 2.9% to $505.4 million from $491.1 million in the prior year.

Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, increased by 2.0% (1.6% increase - 2013) for the Quarter when compared to the same period in 2013, and increased 1.1% (2.1% increase - 2013) for the year.

Same store sales growth Fourth Quarter
(%)
Annual
(%)
2014 2013 2014 2013
Pizza Pizza 1.3 0.7 -0.3 1.6
Pizza 73 5.4 6.3 7.6 4.4
Combined 2.0 1.6 1.1 2.1

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. During the Quarter, the average check decreased while customer traffic increased compared to the same quarter last year. For the year, the average customer check increased while customer traffic decreased slightly.

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "We are pleased with the momentum created across both brands during the quarter in light of the ever-changing economic landscape. The recent decline in crude oil prices is currently working its way through the economy and management is closely monitoring the potential impact, if any, the movement in price may have on sales. In our Ontario market, consumer value messages were given extra focus as we placed marketing messages across multiple advertising platforms including TV, print and digital. These promotional campaigns were positively received by customers as evidenced by our increased traffic numbers and resulting sales growth. Following our solid fourth quarter, we look to build further on this momentum and capitalize on the improving consumer confidence."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $4.4 million ($0.2001 per share) for the Quarter compared to $4.3 million ($0.195 per share), for the prior year comparable quarter. This is a 2.6% increase on a quarter-over-quarter basis. The payout ratio was 90% for the Quarter and was 92% in the prior year comparable quarter.

For the year, the Company declared dividends of $17.5 million ($0.8004 per share) compared to dividends of $16.8 million ($0.7675 per share) in 2013; the payout ratio was 99% for the year and 97% in 2013. For Canadian federal tax purposes, the dividend is considered a taxable eligible dividend.

In January 2014, the Company increased the monthly dividend by 2.6% to $0.0667 per share. On an annualized basis, the dividend was increased by $0.02 to $0.80. The previous dividend increase was in June 2013 when the Company increased the monthly dividend by 4% to $0.065 ($0.78 annualized) from $0.0625 ($0.75 annualized). Prior to the June 2013 dividend increase, the Company had increased the dividend in January 2013 by 4.2% to $0.0625 per Share.

The Company's working capital reserve is $3.9 million at December 31, 2014, which is an increase of $222,000 for the Quarter and a decrease of $1.2 million for the year. The overall decrease in the reserve for 2014 was the result of a decision made by the Board of Directors, on the January 1, 2014 Adjustment Date, to use $1.4 million to make a cash payment to PPL in lieu of PPL receiving 85,571 equivalent Shares.

EARNINGS PER SHARE ("EPS")

Fully-diluted EPS for the Quarter was $0.222 per share compared to $0.209 per share in the same quarter in 2013. For the year, EPS was $0.826 compared to $0.793 for 2013. 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.

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").

For the Quarter, adjusted EPS increased 5.0% to $0.231 per share compared to $0.220 per share in the same quarter in 2013; for the year, adjusted EPS increased 2.7% to $0.861 from $0.838 for 2013.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.2 million and $4.3 million for the year. For the 2013 comparative quarter and year, the current tax expense was $1.1 million and $4.1 million. The increase is due to increased taxable income and a decrease in the tax amortization.

Of particular note is that the Company's adjusted accounting earnings from operations before income taxes differs significantly from its taxable income due largely to the tax amortization of the Pizza Pizza and Pizza 73 Rights and Marks. The tax amortization deducted is based on a declining basis and will decrease yearly.

CREDIT FACILITY INTEREST RATE DECREASE

For the rolling four quarter period ended March 31, 2014, the Company achieved a profitability threshold under its credit agreement at which the interest rate decreased by 0.25% effective April 22, 2014. The credit agreement contains a financial covenant, which is customary for agreements of this nature, using a four quarter rolling basis in which the loan amount is divided by earnings before interest expense, taxes depreciation and amortization. The covenant will continue to be tested going forward.

RESTAURANT DEVELOPMENT

The number of restaurants in the Company's Royalty Pool increased to 722 on the January 1, 2014 Adjustment Date from 694 in 2013. The number of restaurants in the Royalty Pool remained unchanged through December 31, 2014.

During the Quarter, PPL opened eight restaurants and closed five, increasing the overall number of restaurants to 732. By brand, for the Quarter, Pizza Pizza opened four traditional restaurants and two non-traditional locations; three traditional and two non-traditional Pizza Pizza restaurants were closed. Pizza 73 opened two non-traditional locations and none were closed.

For the year, PPL opened 32 restaurants and closed 23, increasing the overall number of restaurants by nine. By brand, for the year, Pizza Pizza opened 13 traditional and 10 non-traditional locations; three traditional and 19 non-traditional locations were closed. Pizza 73 opened one traditional and eight non-traditional locations; one non-traditional location was closed.

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 audited condensed consolidated financial statements of the Company. Readers should note that the 2014 results are not directly comparable to the 2013 results because there are 722 restaurants in the 2014 Royalty Pool compared to 694 restaurants in the 2013 Royalty Pool.

3 months ended Year ended
(in thousands of dollars, except number of restaurants and per Share amounts) December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013
Restaurants in Royalty Pool 722 694 722 694
Same store sales growth(1) 2.0% 1.6% 1.1% 2.1%
Days in Period 92 92 365 365
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 110,991 $ 107,049 $ 415,719 $ 408,438
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 24,464 22,950 89,670 82,620
Total System Sales $ 135,455 $ 129,999 $ 505,389 $ 491,058
Royalty - 6% on Pizza Pizza System Sales $ 6,659 $ 6,423 $ 24,943 $ 24,506
Royalty - 9% on Pizza 73 System Sales 2,202 2,066 8,070 7,436
Royalty income $ 8,861 $ 8,489 $ 33,013 $ 31,942
Interest paid on borrowings(2) (497) (527) (2,006) (2,087)
Administrative expenses (210) (275) (585) (666)
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 8,154 $ 7,687 $ 30,422 $ 29,189
Pizza Pizza Limited's distribution(3) (2,122) (1,974) (8,441) (7,867)
Adjusted earnings available for distribution to the Company $ 6,032 $ 5,713 $ 21,981 $ 21,322
Current income tax expense (1,168) (1,095) (4,335) (4,073)
$ 4,864 $ 4,618 $ 17,646 $ 17,249
Add back:
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Shares 2,122 1,974 8,441 7,867
Adjusted earnings from operations(4) $ 6,986 $ 6,592 $ 26,087 $ 25,116
Adjusted earnings per share(4) $ 0.231 $ 0.220 $ 0.861 $ 0.838
Basic earnings per share $ 0.222 $ 0.209 $ 0.826 $ 0.793
Dividends declared by the Company $ 4,365 $ 4,255 $ 17,463 $ 16,746
Dividend per share $ 0.2001 $ 0.1950 $ 0.8004 $ 0.7675
Payout ratio 90% 92% 99% 97%
As at December 31, 2014 As at December 31, 2013
Working capital 3,892 5,097
Total assets 335,112 329,598
Total liabilities 61,139 59,798
(1) Same store sales growth ("SSSG") means the change in annual gross revenue of a particular Pizza Pizza or Pizza 73 restaurant as compared to sales in the previous period, where the restaurant has 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.
(2) The Company, indirectly through the Pizza Pizza Royalty Limited Partnership (the "Partnership"), incurs interest expense on the $47,000 outstanding credit facility. 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 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 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"), respectively, and represents 28.0% of the fully diluted Shares at December 31, 2014 (December 31, 2013 - 27.1%). During the first quarter, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2013 Adjustment to the Royalty Pool, PPL returned a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2013. Included in the first quarter was the return of a dividend of $41 pursuant to the true-up calculation (2013 - PPL received $57).
(4) "Adjusted earnings from operations" and "Adjusted earnings per share" do not have any standardized meaning under International Financial Reporting Standards ("IFRS"). Therefore, these figures are unlikely to 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 License 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 audited consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on March 2, 2015.

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, March 3, 2015
Time: 9:00 a.m. ET
Call-in number: 416-340-2219 / 866-225-2055
Recording call in number: 905-694-9451 / 800-408-3053 / 800-3366-3052
Available until midnight, March 17, 2015
Passcode: 9292503

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, including under the heading "Sales", 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 Company'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 Company. The foregoing list of factors is not exhaustive and should be considered in conjunction with the other risks and uncertainties 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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