Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

August 06, 2015 16:32 ET

Pizza Pizza Royalty Corp. Announces Strong Second Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - Aug. 6, 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 second quarter and six months ended June 30, 2015.

Second Quarter highlights:

  • Royalty Pool sales increased 7.3%
  • Same store sales increased 6.0%
  • Adjusted earnings per share increased 8.7%
  • Monthly dividend increased 1.95% in April, 2015
  • Restaurant network grew by four locations
  • Loan interest decreased 1.37% in April, 2015

Year-to-date highlights:

  • Royalty Pool sales increased 5.4%
  • Same store sales increased 4.2%
  • Adjusted earnings per share increased 5.3%
  • Restaurant network grew by seven locations
  • Royalty Pool of restaurants increased by eight effective January 1, 2015

SALES

For the quarter ended June 30, 2015 ("Quarter"), System Sales from the 730 restaurants in the Royalty Pool increased by 7.3% to $130.3 million from $121.4 million in the prior year comparable quarter when there were 722 restaurants in the pool. For the six month period, Royalty Pool System Sales increased 5.4% to $259.1 million from $245.8 million in the same period last year.

Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, increased by 6.0% (-0.3% - 2014) for the Quarter when compared to the same period in 2014. Year-to-date, SSSG increased by 4.2% when compared to the same period in 2014 (0.7% - 2014).

SSSG Second Quarter
(%)
Year-to-date
(%)
2015 2014 2015 2014
Pizza Pizza 6.0 -2.1 4.1 -0.8
Pizza 73 5.7 8.8 4.7 8.0
Combined 6.0 -0.3 4.2 0.7

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "We were very pleased with the performance of both brands during the quarter, especially at Pizza 73, which reported solid sales growth in Alberta over a very strong quarter last year. Also, our operational execution at store level and our 'new pizza flavour' marketing campaign continue to provide strong momentum at the Pizza Pizza brand, which contributes over 80% of total sales."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $5.0 million, or $0.204 per share, for the Quarter compared to $4.4 million, or $0.2001 per share, for the prior year comparable quarter. The payout ratio was 94% for the Quarter.

For the six months ended June 30, 2015 the Company declared dividends of $9.6 million, or $0.4041 per share, compared to $8.7 million, or $0.4002 per share) for the same period in 2014; the payout ratio for the six month period was 96%.

In April 2015, the Company increased the monthly dividend by 1.95% to $0.068 per share, or $0.816 annually. Prior to this increase, the Company had last increased the monthly dividend in January 2014 by 2.6% to $0.0667 per share, or $0.80 on an annualized basis.

The Company's working capital reserve is $4.2 million at June 30, 2015, compared to $3.9 million at December 31, 2014. 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.

EARNINGS PER SHARE ("EPS")

Fully-diluted EPS for the Quarter was $0.173 per share compared to $0.197 per share in the same quarter in 2014. The decrease is related to a non-cash expense of $1.25 million related to renewing the Company's credit facility during the second quarter. When adjusted for non-cash items, EPS increased 8.7% to $0.225 per share compared to adjusted EPS of $0.207 per share in the comparable period last year.

For the six month period, EPS was $0.383 compared to $0.403 for the same period in 2014. When adjusted for non-cash items, EPS increased 5.3% to $0.441 per share compared to adjusted EPS of $0.419 per share in the comparable period last year.

CREDIT FACILITY INTEREST RATE DECREASE

On April 24, 2015, Pizza Pizza Royalty Limited Partnership (the "Partnership") entered into an agreement with its existing syndicate of lenders to significantly improve the terms of its current credit facility.

The facility was to mature December 6, 2016 and had a fixed interest rate of 4.12%. The amended term of the loan will now be for five years maturing on April 24, 2020, with an initial effective interest rate of 2.75% for the five year term. The 2.75% interest rate is comprised of a fixed swap rate of 1.875% and a credit spread of 0.875%. The credit spread is based on the current Debt-to-EBITDA covenant calculation.

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 is effective April 24, 2015.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.1 million compared to $1.0 million for the comparable quarter in 2014. The tax expense for the quarter contains a tax deduction for the swap termination cost of $1.2 million. For the six months ended June 30, 2015, the income tax expense was $2.3 million compared to $2.1 million for the same period of 2014. The increase in tax expense is due to increased taxable income related 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 due largely 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.

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 will remain unchanged through December 31, 2015.

During the Quarter, PPL opened seven restaurants and closed three. By brand, for the Quarter, Pizza Pizza opened six non-traditional restaurants and closed three non-traditional locations. Pizza 73 opened one traditional location.

For the six month period, PPL opened 12 restaurants and closed five, increasing the overall number of restaurants by seven. By brand, for the six months, Pizza Pizza opened one traditional restaurant and 10 non-traditional locations; four non-traditional locations were closed. Pizza 73 opened one traditional location; one traditional location was closed.

SELECTED FINANCIAL HIGHLIGHTS

The following tables set 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 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.

(in thousands of dollars, except number of restaurants, per Share amounts, days in period and as noted otherwise) 3 months ended 6 months ended
June 30,
2015
June 30,
2014
June 30,
2015
June 30,
2014
Restaurants in Royalty Pool 730 722 730 722
Same store sales growth(1) 6.0% -0.3% 4.2% 0.7%
Days in Period 91 91 181 181
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 107,138 $ 99,831 $ 212,403 $ 202,243
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 23,125 21,529 46,713 43,550
Total System Sales $ 130,263 $ 121,360 $ 259,116 $ 245,793
Royalty - 6% on Pizza Pizza System Sales $ 6,428 $ 5,990 $ 12,744 $ 12,135
Royalty - 9% on Pizza 73 System Sales 2,081 1,937 4,204 3,919
Royalty income $ 8,509 $ 7,927 $ 16,948 $ 16,054
Interest paid on borrowings(2) (379) (498) (864) (1,013)
Administrative expenses (139) (117) (264) (241)
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 7,991 $ 7,312 $ 15,820 $ 14,800
Pizza Pizza Limited's distribution(3) (1,557) (2,123) (3,631) (4,196)
Adjusted earnings available for distribution to the Company $ 6,434 $ 5,189 $ 12,189 $ 10,604
Current income tax expense (1,069) (1,036) (2,259) (2,102)
$ 5,365 $ 4,153 $ 9,930 $ 8,502
Add back:
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Shares 1,557 2,123 3,631 4,196
Adjusted earnings from operations(4) $ 6,922 $ 6,276 $ 13,561 $ 12,698
Adjusted earnings per share(4) $ 0.225 $ 0.207 $ 0.441 $ 0.419
Basic earnings per share $ 0.173 $ 0.197 $ 0.383 $ 0.403
Dividends declared by the Company $ 5,022 $ 4,366 $ 9,575 $ 8,732
Dividend per share $ 0.204 $ 0.2001 $ 0.4041 $ 0.4002
Payout ratio 94% 105% 96% 103%
(1) Same store sales growth ("SSSG") means the change in period 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 bank loan. Interest expense also includes amortization of loan fees. See "Interest Expense" in the Company's MD&A.
(3) Represents the distribution to Pizza Pizza Limited ("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 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"), respectively, and represent 19.9% of the fully diluted Shares at March 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 three months ended March 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" 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 unaudited consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca on August 6, 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: Thursday, August 6, 2015
Time: 5:00 p.m. ET
Call-in number: 416-340-2219 / 866-225-2055
Recording call in number: 905-694-9451 / 800-408-3053
Available until midnight, August 20, 2015
Passcode: 3781494

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.

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