Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

November 02, 2015 16:00 ET

Pizza Pizza Royalty Corp. Announces Strong Third Quarter Financial Results and Dividend Increase

TORONTO, ONTARIO--(Marketwired - Nov. 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 third quarter and nine months ended September 30, 2015.

Third Quarter highlights:

  • Royalty Pool sales increased 7.4%
  • Same store sales increased 6.3%
  • Adjusted earnings per share increased 4.7%
  • 2.5% dividend increase effective November 2015
  • Restaurant network reduced by three locations

Year-to-date highlights:

  • Royalty Pool sales increased 6.1%
  • Same store sales increased 4.9%
  • Adjusted earnings per share increased 5.1%
  • Two dividend increases:
    • 1.95% in April 2015
    • 2.5% in November 2015
  • Loan interest decreased by 1.37% in April 2015
  • Restaurant network grew by four locations
  • Royalty Pool of restaurants increased by eight effective January 1, 2015

SALES

For the quarter ended September 30, 2015 ("Quarter"), System Sales from the 730 restaurants in the Royalty Pool increased by 7.4% to $133.3 million from $124.1 million in the prior year comparable quarter when there were 722 restaurants in the pool. For the nine month period, Royalty Pool System Sales increased 6.1% to $392.4 million from $369.9 million in the same period last year.

Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, increased 6.3% (0.8% - 2014) for the Quarter when compared to the same period in 2014. Year-to-date, SSSG increased 4.9% when compared to the same period in 2014 (0.7% - 2014).

SSSG Third Quarter
(%)
Year-to-date
(%)
2015 2014 2015 2014
Pizza Pizza 7.5 -0.9 5.2 -0.8
Pizza 73 0.8 9.3 3.4 8.4
Combined 6.3 0.8 4.9 0.7

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "Value messages promoting high quality menu offerings in our major markets continued to attract growth in customer traffic. The Pizza 73 brand, operating largely in a weakened Alberta economy, reported modest growth for the quarter after last year's very strong third quarter. Geographic diversification has been the key to consistent Royalty Pool sales growth which has led to six dividend increases in less than four years."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

Today, the Company announced a 2.5% increase in its monthly dividend which will be effective with the November 2015 dividend. The dividend per share will increase to $0.0697 from $0.068 and will be payable December 15, 2015 to shareholders of record at the close of business on November 30, 2015. On an annualized basis, the dividend will increase to $0.836 from $0.816 per share. This is the second dividend increase in 2015.

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 96% for the Quarter.

For the nine months ended September 30, 2015 the Company declared dividends of $14.6 million, or $0.6081 per share, compared to $13.1 million, or $0.6003 per share for the same period in 2014; the payout ratio for the nine 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 $4.4 million at September 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 $0.213 per share compared to $0.201 per share in the same quarter in 2014. The period over period increase is attributable to an increase in royalty income and decrease in interest expense. When adjusted for non-cash items, EPS increased 4.7% to $0.221 per share compared to adjusted EPS of $0.211 per share in the comparable period last year.

For the nine month period, EPS was $0.596 compared to $0.604 for the same period in 2014. 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 increased 5.1% to $0.662 per share compared to adjusted EPS of $0.630 per share in the comparable period last year.

CREDIT FACILITY INTEREST RATE DECREASE

Earlier in the year, 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 was effective April 24, 2015.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.4 million compared to $1.1 million for the comparable quarter in 2014. For the nine months ended September 30, 2015, the income tax expense was $3.7 million compared to $3.2 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 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.

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 ten. By brand, for the Quarter, Pizza Pizza opened two traditional and four non-traditional restaurants and closed ten non-traditional locations. Pizza 73 opened one non-traditional location.

For the nine month period, PPL opened 19 restaurants and closed 15, increasing the overall number of restaurants by four. By brand, for the nine months, Pizza Pizza opened three traditional restaurants and 14 non-traditional locations; fourteen non-traditional locations were closed. Pizza 73 opened one traditional location and one non-traditional; one 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 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.

3 months ended 9 months ended
(in thousands of dollars, except number of restaurants, per Share amounts, days in period and as noted otherwise) September 30, 2015 September 30, 2014 September 30, 2015 September 30, 2014
Restaurants in Royalty Pool 730 722 730 722
Same store sales growth(1) 6.3 % 0.8 % 4.9 % 0.7 %
Days in Period 92 92 273 273
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 111,209 $ 102,485 $ 323,612 $ 304,727
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 22,103 21,656 68,817 65,206
Total System Sales $ 133,312 $ 124,141 $ 392,429 $ 369,933
Royalty - 6% on Pizza Pizza System Sales $ 6,673 $ 6,149 $ 19,417 $ 18,284
Royalty - 9% on Pizza 73 System Sales 1,989 1,949 6,193 5,868
Royalty income $ 8,662 $ 8,098 $ 25,610 $ 24,152
Interest paid on borrowings(2) (329 ) (497 ) (1,193 ) (1,509 )
Administrative expenses (133 ) (134 ) (400 ) (375 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 8,200 $ 7,467 $ 24,017 $ 22,268
Distribution on Class B and Class D Exchangeable Shares(3) (1,556 ) (2,123 ) (5,187 ) (6,319 )
Current income tax expense (1,392 ) (1,065 ) (3,651 ) (3,167 )
Adjusted earnings available for shareholder dividends(4) $ 5,252 $ 4,279 $ 15,179 $ 12,782
Add back:
Distribution on Class B and Class D Exchangeable Shares 1,556 2,123 5,187 6,319
Adjusted earnings from operations(4) $ 6,808 $ 6,402 $ 20,366 $ 19,101
Adjusted earnings per share(4) $ 0.221 $ 0.211 $ 0.662 $ 0.630
Basic earnings per share $ 0.213 $ 0.201 $ 0.596 $ 0.604
Dividends declared by the Company $ 5,022 $ 4,366 $ 14,597 $ 13,098
Dividend per share $ 0.204 $ 0.2001 $ 0.6081 $ 0.6003
Payout ratio(4) 96 % 102 % 96 % 102 %
(1) SSSG means the change in period gross revenue of Pizza Pizza and Pizza 73 restaurants 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. 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 the Company's 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 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", "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 consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca on November 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, November 3, 2015
Time: 9:00 a.m. ET
Call-in number: 416-340-2218 / 866-223-7781
Recording call in number: 905-694-9451 / 800-408-3053
Available until midnight, November 17, 2015
Passcode: 2121207

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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