Pizza Pizza Royalty Income Fund

Pizza Pizza Royalty Income Fund

March 18, 2009 17:00 ET

Pizza Pizza Royalty Income Fund Announces 2008 Financial Results

TORONTO, ONTARIO--(Marketwire - March 18, 2009) - Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) today announced results for the fourth quarter and year ended December 31, 2008.

2008 Highlights:

---Royalty Pool system sales increased 14.9%

---Same store sales increased 1.7%

---Pre-tax earnings per unit increased 5.1%

---Working capital balance increased by 84% to $3.5 million and is held as a reserve

Same store sales growth (SSSG) increased 1.7% for the year compared to the prior year, while fourth quarter same store sales decreased slightly by 0.6% compared to the same quarter in 2007. SSSG is the key driver of yield growth for Fund unitholders and includes results of Pizza 73 restaurants for the periods after July 24, 2007.


Annual System sales of the 609 restaurants in the Royalty Pool increased by 14.9% to $470.6 million as compared to $409.5 million in sales generated by the 579 restaurants in the 2007 Royalty Pool. For the quarter, Royalty Pool sales increased 2.9%, to $122.4 million, compared to $118.9 million for the same quarter in 2007. The annual increase in Royalty Pool sales was the result of the positive SSSG, the addition of 37, net new restaurants to the Royalty Pool on January 1, 2008, and the full-year impact of the 41 Pizza 73 restaurants added to the Royalty Pool on July 24, 2007.


In 2008, the Fund's earnings per unit before income taxes increased 5.1% to $1.003 per unit from $0.954 per unit in 2007. Earnings in 2008 have benefited from SSSG and the accretive acquisition of the Pizza 73 trademarks in the third quarter of 2007. Earnings for the year, before income taxes, were $21.9 million compared to earnings before income taxes of $18.5 million in 2007. In the fourth quarter of 2008, earnings before taxes were $5.7 million compared to pre-tax net earnings of $5.6 million for the fourth quarter of 2007.

In the second quarter of 2007, the Canadian federal government enacted tax legislation which included a provision to eliminate the deduction of distributions from taxable income commencing generally in 2011 for certain forms of publicly traded income trusts and partnerships, such as the Fund. Accordingly, the Fund gave accounting recognition to these new rules beginning in the second quarter of 2007 by incorporating the notion of future income tax expense and recovery. The provision for or recovery of future income taxes are non-cash items in accordance with generally accepted accounting principles, details of which can be found in the financial statements released today.


In June 2008, the Fund increased its monthly distribution by 2% to $0.93 per unit on an annual basis.

For those unitholders holding units outside a tax deferred plan, the 2008 distributions will be treated as 94% taxable income and 6% as a tax-deferred return of capital.

For 2008, the Fund declared distributions of $20.1 million or $0.923 per unit, for a 92% payout ratio compared to a 94% payout ratio in 2007. The fourth quarter payout ratio was 88% for 2008 and was also 88% in the comparable quarter of 2007. This relatively conservative distribution policy, combined with the Pizza Pizza and Pizza 73 chains' historically strong SSSG performance, has produced a $3.5 million working capital reserve at the Pizza Pizza Royalty Limited Partnership (the "Partnership"). This reserve is available for use at the Trustees' discretion in the event of short- to medium-term reductions in System Sales and, thus, the Fund's royalty income. As a royalty income fund, the Fund does not have any capital expenditure requirements or significant cash commitments other than interest expense.


During the fourth quarter, Pizza Pizza Limited (the "Company") opened two traditional locations and one non-traditional location and closed two traditional locations; six traditional and 12 non-traditional locations have opened and four traditional and five non-traditional locations have closed during 2008. This brings the total number of Pizza Pizza locations to 568 at December 31, 2008, of which 559 were in the Fund's 2008 Royalty Pool. Two traditional Pizza 73 locations were opened during the fourth quarter; for the year, nine traditional and six non-traditional locations opened, bringing the total Pizza 73 locations to 72, of which 50 were in the Fund's 2008 Royalty Pool.

As previously announced, royalties from all Pizza Pizza restaurants opened in 2008, and the Pizza 73 restaurants opened from September 2, 2007 to on or before September 1, 2008, were vended into the Fund on January 1, 2009. The Pizza 73 restaurants opened after September 1, 2008 will be vended into the Fund on January 1, 2010.


The following table sets out selected financial highlights of the Fund and the Partnership:

3 months ended 12 months ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
(in thousands of dollars, except number of restaurants and per
unit amounts)

Restaurants in Royalty Pool 609 572 609 572
Same store sales growth -0.6% 4.9% 1.7% 4.6%

System sales reported by
Pizza Pizza restaurants
in the Royalty Pool $ 101,463 $ 99,654 $ 389,518 $ 376,375
System sales reported by
Pizza 73 restaurants in
the Royalty Pool 20,975 19,230 81,105 33,124
$ 122,438 $ 118,884 $ 470,623 $ 409,499

Royalty - 6% on Pizza
Pizza system sales $ 6,088 $ 5,979 $ 23,371 $ 22,583
Royalty - 9% on Pizza 73
system sales 1,887 1,731 7,299 2,981
Total Royalty on System
Sales 7,975 7,710 30,670 25,564
Partnership interest and
admin. expenses (791) (896) (3,280) (2,545)
Earnings available for
distribution to the Fund
and Pizza Pizza Limited 7,184 6,814 27,390 23,019
Pizza Pizza Limited's
interest (1,899) (1,619) (7,311) (6,200)
5,285 5,195 20,079 16,819
Interest income 450 450 1,800 1,849
Net earnings before
non-cash future income
tax expense and issuance
costs $ 5,735 $ 5,645 $ 21,879 $ 18,668
Share of Partnership
issuance costs - - - 169
Provision for (recovery of)
future income taxes - (4,690) (2,235) 8,208
Net earnings $ 5,735 $ 10,335 $ 24,114 $ 10,291

Basic earnings per Fund
unit excluding the impact
of non-cash future income
tax expense and issuance
costs $ 0.263 $ 0.259 $ 1.003 $ 0.954

Basic earnings per Fund
unit $ 0.263 $ 0.474 $ 1.105 $ 0.526
Diluted earnings per Fund
unit $ 0.258 $ 0.430 $ 1.065 $ 0.526

Distributions declared $ 5,073 $ 4,974 $ 20,127 $ 17,608
Distributions per Fund unit $ 0.233 $ 0.228 $ 0.923 $ 0.888
Payout ratio 88% 88% 92% 94%


The audited, consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, will be available at and on the Fund's website at on or before March 19, 2009.

The Fund will host a conference call to discuss the results on March 19, 2009 at 9:00 a.m. EDT. The call can be accessed by dialing 416-640-3405 or 1-866-322-2356. A replay will be available until April 1, 2009 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 6255439.

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 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; 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 Fund's Annual Information Form. The Fund assumes no obligation to update these forward looking statements, except as required by applicable securities laws.

About the Fund, a publicly-traded entity

The Fund is a limited purpose, open-ended trust established under the laws of Ontario. The Fund, indirectly through the Partnership, has acquired the trademarks and trade names used by the Company in its Pizza Pizza and Pizza 73 restaurants. The Pizza Pizza trademarks were licensed to the Company in 2005 for 99 years, for which the Company pays the Fund a royalty equal to 6% of the system sales of its Pizza Pizza restaurants in the Royalty Pool. There are 568 Pizza Pizza restaurants in the Royalty Pool for 2009. On July 24, 2007, the Partnership acquired the trademarks and other intellectual property of Pizza 73 (the "Pizza 73 Rights") and licensed them to the Company for 99 years, for which the Company pays the Fund a royalty equal to 9% of the 69 Pizza 73 restaurants in the Royalty Pool for 2009. The 2009 Royalty Pool has 637 total restaurants.

A key attribute of the Fund is that revenues are based on top-line, system sales of the Royalty Pool restaurants and not on the profitability of either the Company or the restaurants in the Royalty Pool. Moreover, the Fund is not subject to the variability of earnings or expenses of the operating companies. The Fund's only expenses are administration expenses and the interest on debt. Thus, the success of the Fund depends primarily on the ability of the Company to maintain and increase system sales of the Royalty Pool restaurants and to meet its royalty obligations.

The Fund's trust units are listed on the Toronto Stock Exchange under the symbol PZA.UN.

About Pizza Pizza Limited, a privately-owned, operating company

The Company, a privately-held Canadian corporation, is one of Canada's most successful operators in the quick service restaurant industry. It operates franchised, owner/operator and corporate restaurants under the brand names Pizza Pizza and Pizza 73. The Pizza Pizza brand celebrated its 40th anniversary in 2007 and dominates the Ontario pizza quick service industry and is expanding nationally. The Pizza 73 brand celebrated its 23rd anniversary in 2008 and operates largely in Alberta. The Company is guided by a mission to provide the "best food, made especially for you" and a focus on quality ingredients, customer service, community contribution and continual innovation, especially in offering health-conscious menu choices.

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