Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

November 06, 2014 16:00 ET

Pizza Pizza Royalty Corp. Announces Third Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - Nov. 6, 2014) - 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, 2014.

Third Quarter highlights:

  • Royalty Pool sales increased 2.6%
  • Same store sales increased 0.8%
  • Adjusted earnings per share ("EPS") increased 1.9%
  • Restaurant network grew by three locations

Year-to-date highlights:

  • Royalty Pool sales increased 2.5%
  • Same store sales increased 0.7%
  • Adjusted EPS increased 1.8%
  • Dividends increased 2.6% in January
  • Loan interest rate decreased 0.25%
  • Restaurant network increased by seven locations

SALES

In the third quarter ended September 30, 2014 ("Quarter"), System Sales from the 722 restaurants in the Royalty Pool increased 2.6% to $124.1 million from $121.0 million in the same quarter last year when there were 694 restaurants in the Pool. For the nine months, Royalty Pool System Sales increased 2.5% to $369.9 million from $361.1 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 0.8% (1.9% increase - 2013) for the Quarter when compared to the same period in 2013, and has increased 0.7% (2.2% increase - 2013) for the nine month period.

Third Quarter
(%)
Year-to-date
(%)
Same Store Sales Growth 2014 2013 2014 2013
Pizza Pizza -0.9 1.9 -0.8 1.9
Pizza 73 9.3 2.0 8.4 3.7
Combined 0.8 1.9 0.7 2.2

SSSG is driven by growth in the average customer cheque and growth in customer traffic. Compared to the same quarter last year, the average customer cheque and customer traffic both increased. For the nine month period, the average customer cheque has increased while the traffic counts have decreased.

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "During the third quarter, we employed several strategies which increased customer traffic and the average cheque, resulting in combined positive same store sales; this reversed the previous quarter's results. While Pizza Pizza sales growth in Ontario is currently below our expectations, Pizza 73 has achieved exceptional growth in the stronger Alberta market. In the near-term future, our marketing campaigns will remain focused on promoting our high-quality menu offerings and delivering a strong value message to consumers; this strategy should continue to increase customer traffic."

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 which equates to a 2.6% increase. The payout ratio was 102% for the Quarter compared to 101% in the third quarter of 2013.

For the nine months ended September 30, 2014, the Company declared dividends of $13.1 million ($0.6003 per share) compared to $12.5 million ($0.5725 per share) for the same period in 2013; the payout ratio for the nine month period was 102% and was 99% in the same period of 2013.

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 $3.7 million at September 30, 2014, which is a decrease of $79,000 for the Quarter and a decrease of $1.4 million for the nine month period. As previously announced, the majority of the decrease in the reserve was the result of a decision made by the Board of Directors, on the January 1, 2014 Adjustment Date, to compensate PPL in cash of $1.1 million in lieu of PPL receiving 85,571 equivalent Shares on account of Royalty Pool adjustments.

EARNINGS PER SHARE ("EPS")

Fully-diluted EPS for the Quarter was $0.201 per share compared to $0.195 per share in the same quarter last year. For the nine month period, EPS was $0.604 compared to $0.584 for the same period in 2013. However, instead of EPS, the Company considers "adjusted" EPS(1) to be a more meaningful indicator of the Company's operating performance and, thus, also presents fully-diluted adjusted EPS.

For the Quarter, adjusted EPS increased 1.9% to $0.211 per share compared to $0.207 per share in the same quarter last year; for the nine month period, adjusted EPS increased 1.8% to $0.630 from $0.619 for the same period of 2013.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.1 million and $3.2 million for the nine months. For the 2013 comparative quarter and period, the current tax expense was $1.0 million and $3.0 million. The increase is due to increased taxable income and a decrease in the tax amortization.

Of particular note is that the Company's 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 amount of 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 certain 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

As previously announced, 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 will remain unchanged through December 31, 2014.

During the Quarter, PPL opened 11 restaurants and closed eight, increasing the overall number of restaurants to 730. By brand, for the Quarter, Pizza Pizza opened four traditional restaurants and five non-traditional locations; eight non-traditional Pizza Pizza restaurants were closed. Pizza 73 opened two non-traditional locations and none were closed.

For the nine month period, PPL opened 24 restaurants and closed 17, increasing the overall number of restaurants by seven. By brand, for the nine months, Pizza Pizza opened nine traditional and eight non-traditional locations; 16 non-traditional locations were closed. Pizza 73 opened one traditional and six non-traditional locations; one non-traditional location was closed.

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").

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 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 9 months ended
(in thousands of dollars, except number of restaurants and per Share amounts) September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Restaurants in Royalty Pool 722 694 722 694
Same store sales growth(1) 0.8 % 1.9 % 0.7 % 2.2 %
Days in Period 92 92 273 273
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(5) $ 102,485 $ 101,271 $ 304,727 $ 301,389
System Sales reported by Pizza 73 restaurants in the Royalty Pool(5) 21,656 19,700 65,206 59,670
Total System Sales $ 124,141 $ 120,971 $ 369,933 $ 361,059
Royalty - 6% on Pizza Pizza System Sales $ 6,149 $ 6,076 $ 18,284 $ 18,083
Royalty - 9% on Pizza 73 System Sales 1,949 1,773 5,868 5,371
Royalty income $ 8,098 $ 7,849 $ 24,152 $ 23,454
Interest paid on borrowings(2) (497 ) (526 ) (1,509 ) (1,560 )
Administrative expenses (134 ) (148 ) (375 ) (392 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 7,467 $ 7,175 $ 22,268 $ 21,502
Pizza Pizza Limited's distribution(3) (2,123 ) (1,979 ) (6,319 ) (5,889 )
Adjusted earnings available for distribution to the Company $ 5,344 $ 5,196 $ 15,949 $ 15,613
Current income tax expense (1,065 ) (994 ) (3,167 ) (2,979 )
$ 4,279 $ 4,202 $ 12,782 $ 12,634
Add back:
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Shares 2,123 1,979 6,319 5,889
Adjusted earnings from operations(4) $ 6,402 $ 6,181 $ 19,101 $ 18,523
Adjusted earnings per share(4) $ 0.211 $ 0.207 $ 0.630 $ 0.619
Basic earnings per share $ 0.201 $ 0.195 $ 0.604 $ 0.584
Dividends/distributions declared by the Company $ 4,366 $ 4,255 $ 13,098 $ 12,491
Dividend/distributions per share $ 0.2001 $ 0.1950 $ 0.6003 $ 0.5725
Payout ratio 102 % 101 % 102 % 99 %
September 30, 2014 December 31, 2013
Working capital 3,670 5,097
Total assets 334,071 329,598
Total liabilities 60,371 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 September 30, 2014 (September 30, 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 first quarter was the return of a dividend amount 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 unaudited interim consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on November 6, 2014.

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, November 6, 2014
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 / 800-3366-3052
Available until midnight, November 20, 2104
Passcode: 6149963

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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