Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

March 07, 2016 08:00 ET

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

TORONTO, ONTARIO--(Marketwired - March 7, 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 fourth quarter and year ended December 31, 2015.

Fourth Quarter highlights:

  • Royalty Pool sales increased 4.4%
  • Same store sales increased 3.4%
  • Adjusted earnings per share increased 0.9%
  • Restaurant network grew by three, net locations

Annual highlights:

  • Royalty Pool sales increased 5.6%
  • Same store sales increased 4.5%
  • Adjusted earnings per share increased 3.9%
  • Two dividend increases:
    • 1.95% in April 2015
    • 2.50% in November 2015
  • Publicly-traded shares increased by 2.8 million in March 2015
  • Credit facility interest rate decreased by 1.37% to 2.75% in April 2015
  • Restaurant network grew by seven, net locations

SALES

For the quarter, System Sales from the 730 restaurants in the Royalty Pool increased by 4.4% to $141.4 million from $135.5 million in the prior year quarter when there were 722 restaurants in the pool. For the year, Royalty Pool System Sales increased 5.6% to $533.8 million from $505.4 million in the prior year.

Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, increased 3.4% for the quarter when compared to the same period in 2014 and increased 4.5% for the full year when compared to the prior year.

SSSG Fourth Quarter
(%)
Annual
(%)
2015 2014 2015 2014
Pizza Pizza 5.3 1.3 5.2 -0.3
Pizza 73 (5.3 ) 5.4 1.1 7.6
Combined 3.4 2.0 4.5 1.1

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. On a consolidated basis, during the quarter and year, both the average check and traffic increased when compared to the same periods last year.

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "Overall, we're pleased with the performance at our restaurants with Pizza Pizza performing especially well in Ontario. In Alberta, the decline in the price of oil has put pressure on Pizza 73 sales growth. Geographic diversification has proven to be key in maintaining consistent and stable sales growth. The consistent SSSG over the past four years has allowed the Company to increase dividends six times while also building a $4.9 million working capital reserve."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $5.1 million, or $0.2074 per share, for the quarter compared to $4.4 million, or $0.2001 per share, for the prior year quarter. The payout ratio was 91% for the quarter and was 90% in the prior year quarter.

For the year ended December 31, 2015, the Company declared dividends of $19.7 million, or $0.8155 per share, compared to $17.5 million, or $0.8004 per share for the prior year; the payout ratio was 95% for the year and 99% in 2014. 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).The previous dividend increase was in January 2014, when the Company increased the monthly dividend by 2.6% to $0.0667 per Share.

The Company's working capital reserve is $4.9 million at December 31, 2015, compared to $3.9 million at December 31, 2014, which is an increase of $1.0 million for the year. 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 $0.225 per share compared to $0.222 per share for the same quarter in 2014. The period over period increase is attributable to an increase in royalty income and decrease in interest 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 0.9% to $0.233 per share compared to adjusted EPS of $0.231 per share in the comparable period last year.

For the year, EPS was $0.821 compared to $0.826 for the prior year. The period over period decrease is attributable to a non-cash expense of $1.25 million related to renewing the Company's credit facility during the second quarter, offset by an increase in royalty income and decrease in interest expense. When adjusted for non-cash items, EPS for the Year increased 3.9% to $0.895 per share compared to adjusted EPS of $0.861 per share in the prior 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 $1.5 million compared to $1.2 million for the prior year quarter. For the year, the income tax expense was $5.1 million compared to $4.3 million for the prior year. The increase in tax expense is due to an increase in royalty income and a decrease in the tax amortization, offset by a tax deduction for the swap termination cost.

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 yearly.

SALE BY PIZZA PIZZA LIMITED ("PPL") OF 2,800,000 EQUIVALENT SHARES

On March 23, 2015, PPL, the private operating company of the Pizza Pizza and Pizza 73 businesses, entered into an underwriting agreement for the sale by PPL of 2,800,000 common shares of the Company at a price of $15.00 per share. In order to provide the 2,800,000 common shares to the underwriters, PPL exchanged 1,564,889 of its Class B Units of the Pizza Pizza Royalty Limited Partnership ("Partnership"), applying the Class B Exchange Multiplier of 1.789264. PPL's ownership of the Company's fully-diluted shares decreased from 29% to 19.9% as a result of the transaction while the Company's ownership in the Partnership increased from 71% to 80.1%. The total number of fully-diluted shares did not change. All proceeds of the sale were paid to PPL.

CREDIT FACILITY INTEREST RATE DECREASE

Earlier in the year, on April 24, 2015, the Partnership entered into an agreement with its existing syndicate of lenders to significantly improve the terms of its credit facility.

The amended term of the loan is for five years maturing on April 24, 2020, with an initial effective interest rate of 2.75%. The amended facility was to mature December 6, 2016 and had a fixed interest rate of 4.12%.

In conjunction with the early renewal of the credit facility, the Partnership terminated its then existing swap agreements and entered into two new interest rate swap agreements that fixed the facility interest rate until April 2020. As a result of terminating the swap agreements, the non-cash, out-of-market loss in comprehensive earnings of $1.2 million associated with the swaps, was reclassified to the statement of earnings.

The lower interest rate on the $47 million facility will result in approximately $640,000 interest savings annually. Projected annual savings per share is $0.021 and the new interest rate was effective April 24, 2015.

RESTAURANT DEVELOPMENT

The number of restaurants in the Company's Royalty Pool increased by eight to 730 on the January 1, 2015 Adjustment Date. The number of restaurants in the Royalty Pool remained unchanged through December 31, 2015.

During the quarter, PPL opened nine restaurants and closed six. By brand, for the quarter, Pizza Pizza opened two traditional and five non-traditional restaurants and closed two traditional and two non-traditional locations. Pizza 73 opened one traditional location and one non-traditional location; two non-traditional locations were closed.

For the year, PPL opened 28 restaurants and closed 21, increasing the overall number of restaurants by seven. By brand, for the year, Pizza Pizza opened five traditional and 19 non-traditional locations; two traditional and 16 non-traditional locations were closed. Pizza 73 opened two traditional and two non-traditional locations; one traditional 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 audited annual consolidated financial statements of the Company. Readers should note that the 2015 results are not directly comparable to the 2014 results because there are 730 restaurants in the 2015 Royalty Pool compared to 722 restaurants in the 2014 Royalty Pool.

3 months ended Year ended
(in thousands of dollars, except number of restaurants, per Share amounts, days in period and as noted otherwise) December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014
Restaurants in Royalty Pool 730 722 730 722
Same store sales growth(1) 3.4 % 2.0 % 4.5 % 1.1 %
Days in Period 92 92 365 365
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 117,614 $ 110,991 $ 441,226 $ 415,719
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 23,792 24,464 92,608 89,670
Total System Sales $ 141,406 $ 135,455 $ 533,834 $ 505,389
Royalty - 6% on Pizza Pizza System Sales $ 7,056 $ 6,659 $ 26,473 $ 24,943
Royalty - 9% on Pizza 73 System Sales 2,142 2,202 8,335 8,070
Royalty income $ 9,198 $ 8,861 $ 34,808 $ 33,013
Interest paid on borrowings(2) (330 ) (497 ) (1,523 ) (2,006 )
Administrative expenses (227 ) (210 ) (624 ) (585 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 8,641 $ 8,154 $ 32,661 $ 30,422
Distribution on Class B and Class D Exchangeable Shares(3) (1,577 ) (2,122 ) (6,764 ) (8,441 )
Current income tax expense (1,480 ) (1,168 ) (5,132 ) (4,335 )
Adjusted earnings available for shareholder dividends(4) $ 5,584 $ 4,864 $ 20,765 $ 17,646
Add back:
Distribution on Class B and Class D Exchangeable Shares 1,577 2,122 6,764 8,441
Adjusted earnings from operations(4) $ 7,161 $ 6,986 $ 27,529 $ 26,087
Adjusted earnings per share(4) $ 0.233 $ 0.231 $ 0.895 $ 0.861
Basic earnings per share $ 0.225 $ 0.222 $ 0.821 $ 0.826
Dividends declared by the Company $ 5,106 $ 4,365 $ 19,703 $ 17,463
Dividend per share $ 0.2074 $ 0.2001 $ 0.8155 $ 0.8004
Payout ratio(4) 91 % 90 % 95 % 99 %
(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 19.9% of the fully diluted Shares at December 31, 2015 (December 31, 2014 - 28.0%). During the quarter ended March 31, 2015, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2014 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2014. Included in the year ended December 31, 2015, is the receipt of distributions of $80 pursuant to the true-up calculation (March 31, 2014 - PPL returned $41).
(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 audited consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca before the market opens on March 7, 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: Monday, March 7, 2016
Time: 3:00 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, March 21, 2016
Passcode: 9252389

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 statements as to expected reductions to interest rate expense and resulting impacts to the Company, 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.

www.pizzapizza.ca and www.pizza73.com or www.sedar.com.

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