Pizza Pizza Royalty Corp.
TSX : PZA

Pizza Pizza Royalty Corp.

November 09, 2016 17:00 ET

Pizza Pizza Royalty Corp. Announces Third Quarter Financial Results

TORONTO, ONTARIO--(Marketwired - Nov. 9, 2016) - Pizza Pizza Royalty Corp. (TSX:PZA) (the "Company"), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months and nine months ended September 30, 2016.

Third Quarter highlights:

  • Royalty Pool sales increased 2.7%
  • Same store sales increased 2.2%
  • Restaurant network grew by three, net locations

Year-to-date highlights:

  • Royalty Pool sales increased 2.5%
  • Same store sales increased 1.9%
  • Restaurant network grew by ten locations
  • Royalty Pool of restaurants increased by a net, six effective January 1, 2016

SALES

For the three months ended September 30, 2016 ("Quarter"), System Sales from the 736 restaurants in the Royalty Pool increased by 2.7% to $136.9 million from $133.3 million in the prior year quarter when there were 730 restaurants in the pool. For the nine month period, Royalty Pool System Sales increased 2.5% to $402.2 million from $392.4 million in the same period last year.

Total Royalty Pool System Sales for the Quarter and the nine months increased over the prior year comparative periods as a result of the reported same store sales growth ("SSSG"), and the impact of net new restaurants added to the Royalty Pool on January 1, 2016. The nine months ended September 30, 2016 system sales also benefitted from the extra day of sales in February 2016 due to the leap year, which management estimates to be approximately $1.0 million.

SSSG, the key driver of yield growth for shareholders of the Company, increased by 2.2% (6.3% - 2015) for the Quarter when compared to the same period in 2015. Year-to-date, SSSG increased by 1.9% when compared to the same period in 2015 (4.9% - 2015). SSSG is not affected by the additional day in the leap year. SSSG is calculated using the 13-week and 39-week comparative basis.

SSSG Third Quarter
(%)
Year to Date
(%)
2016 2015 2016 2015
Pizza Pizza 3.5 7.5 3.7 5.2
Pizza 73 (4.6) 0.8 (6.8) 3.4
Combined 2.2 6.3 1.9 4.9

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 and for the nine months, the average check increased while customer traffic decreased when compared to the same periods last year.

Paul Goddard, CEO, Pizza Pizza Limited ("PPL"), said: "Our Pizza Pizza restaurants, which have generated over 80% of the Company's total royalty sales this year, continue to report solid growth. We're very pleased with this quarter's performance over an exceptional quarter last year reflecting the brand's strength in our key Ontario and Quebec markets. Our strong performance at Pizza Pizza more than offsets the results at Pizza 73 in Alberta, where we continue to encounter economic uncertainty related to the decline in the price of oil."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

In June 2016, the Company increased the monthly dividend by 2.3% to $0.0713 per share. On an annualized basis, the dividend was increased by $0.019 to $0.8556 per share. The previous dividend increase was in November 2015, when the Company increased the monthly dividend by 2.5% to $0.0697 per share or $0.8364 annualized.

The Company declared shareholder dividends of $5.3 million, or $0.2139 per share, for the Quarter compared to $5.0 million, or $0.2040 per share, for the prior year comparable quarter. The payout ratio was 97% for the Quarter and was 96% for the prior year comparable quarter.

For the nine months ended September 30, 2016, the Company declared dividends of $15.6 million, or $0.6337 per share, compared to $14.6 million, or $0.6081, for the prior year comparable period. The payout ratio was 100% for the nine months and was 96% in the prior year comparable period.

For Canadian federal tax purposes, the dividend is considered a taxable eligible dividend.

The Company's working capital reserve is $4.9 million at September 30, 2016, which is an increase of $153,000 for the Quarter. The increase in the reserve was the result of higher royalties earned by the Company, offset by an increase in the dividend in June 2016.

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 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 $0.221 per share compared to $0.213 per share for the same quarter in 2015. The increase in earnings for the Quarter and nine months is attributable to increased royalty income. Additionally, prior year earnings for the nine months period were negatively impacted by the non-cash swap termination costs recognized in April 2015 of $1.2 million.

However, instead of EPS, the Company considers "adjusted" EPS(1) to be a more meaningful indicator of the Company's operating performance and, therefore, presents fully-diluted adjusted EPS. Adjusted EPS for the Quarter increased 3.6% to $0.229 compared to $0.221 in the same quarter last year, and increased 0.3% for the nine months ended September 30, 2016. The prior year adjusted earnings benefited from a non-recurring tax deduction in the second quarter last year provided by the "non-cash swap termination costs" mentioned above. The benefit from the tax deduction increased adjusted EPS by $0.0107 in the first nine months of 2015. Without the tax deduction, adjusted EPS for the nine months ended September 30, 2016, would have increased 1.9%(2) over the prior year comparable periods.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.3 million and $4.1 million for the nine months. For the 2015 comparative quarter and nine months, the current tax was $1.4 million and $3.7 million, respectively. The increase in tax expense over the prior year is largely due to the Company's increased ownership percentage of Pizza Pizza Royalty Limited Partnership ("Partnership") earnings in the current year coupled with the fact that the prior year's taxable income was reduced by the "non-cash swap termination costs" mentioned above.

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 annually.

RESTAURANT DEVELOPMENT

The number of restaurants in the Company's Royalty Pool increased by a net, six to 736 on the January 1, 2016 Adjustment Date. The number of restaurants in the Royalty Pool remained unchanged through September 30, 2016.

During the quarter, PPL opened seven restaurants and closed four. By brand, for the quarter, Pizza Pizza opened three traditional and four non-traditional restaurants; three non-traditional locations were closed. Pizza 73 closed one non-traditional location.

For the nine month period, PPL opened 18 restaurants and closed eight, increasing the overall number of restaurants by ten. By brand, for the nine months, Pizza Pizza opened eight traditional restaurants and nine non-traditional locations; five non-traditional locations were closed. Pizza 73 opened one non-traditional location; three 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 unaudited interim condensed consolidated financial statements of the Company. Readers should note that the 2016 results are not directly comparable to the 2015 results because of an extra day of royalty revenue in 2016 due to the leap year, in addition to the fact that there are 736 restaurants in the 2016 Royalty Pool compared to 730 restaurants in the 2015 Royalty Pool.

(in thousands of dollars, except number of
restaurants, days in the period, per Share 3 months ended 9 months ended
amounts, and noted otherwise) September 30, 2016 September 30, 2015 September 30, 2016 September 30, 2015
Restaurants in Royalty Pool(1) 736 730 736 730
Same store sales growth(2) 2.2 % 6.3 % 1.9 % 4.9 %
Days in the period 92 92 274 273
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6) $ 115,424 $ 111,209 $ 337,403 $ 323,612
System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) 21,435 22,103 64,800 68,817
Total System Sales $ 136,859 $ 133,312 $ 402,203 $ 392,429
Royalty - 6% on Pizza Pizza System Sales $ 6,926 $ 6,673 $ 20,244 $ 19,417
Royalty - 9% on Pizza 73 System Sales 1,929 1,989 5,832 6,193
Royalty income $ 8,855 $ 8,662 $ 26,076 $ 25,610
Interest paid on borrowings(3) (337 ) (329 ) (1,003 ) (1,193 )
Administrative expenses (139 ) (133 ) (464 ) (400 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5) $ 8,379 $ 8,200 $ 24,609 $ 24,017
Distribution on Class B and Class D Exchangeable Shares(4) (1,654 ) (1,556 ) (4,931 ) (5,187 )
Current income tax expense (1,308 ) (1,392 ) (4,092 ) (3,651 )
Adjusted earnings available for shareholder dividends(5) $ 5,417 $ 5,252 $ 15,586 $ 15,179
Add back:
Distribution on Class B and Class D Exchangeable Shares(4) 1,654 1,556 4,931 5,187
Adjusted earnings from operations(5) $ 7,071 $ 6,808 $ 20,517 $ 20,366
Adjusted earnings per share(5) $ 0.229 $ 0.221 $ 0.664 $ 0.662
Basic earnings per share $ 0.221 $ 0.213 $ 0.644 $ 0.596
Dividends declared by the Company $ 5,266 $ 5,022 $ 15,601 $ 14,597
Dividend per share $ 0.2139 $ 0.2040 $ 0.6337 $ 0.6081
Payout ratio(5) 97 % 96 % 100 % 96 %
(1) The number restaurants for which the Partnership earns a royalty ("Royalty Pool"), 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"). For the 2016 fiscal period, the Royalty Pool includes 636 Pizza Pizza restaurants and 100 Pizza 73 restaurants. The number of restaurants added to the Royalty Pool each year may differ from the number of restaurant openings and closings reported by Pizza Pizza Limited ("PPL") on an annual basis as the periods for which they are reported differ slightly.
(2) 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").
(3) 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.
(4) 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 Licence and Royalty Agreements, respectively, and represent 20.4% of the fully diluted Shares at September 30, 2016 (December 31, 2015 - 19.9%). During the quarter ended March 31, 2016, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2015 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2015. Included in the three months ended March 31, 2016, is the receipt of distributions of $22 pursuant to the true-up calculation (March 31, 2015 - PPL received $80).
(5) "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.
(6) 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 interim condensed consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on November 9, 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: Thursday, November 10, 2016
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 24, 2016
Passcode: 6653374

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 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.

(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").

(2) 9 months ended September 30, 2016 Adjusted EPS of $0.664 compared to 9 months ended September 30, 2015 Adjusted EPS $0.662 less $0.0107 tax benefit or $0.6513

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