Pizza Pizza Royalty Income Fund

Pizza Pizza Royalty Income Fund

May 04, 2011 17:13 ET

Pizza Pizza Royalty Income Fund Announces First Quarter Financial Results

TORONTO, ONTARIO--(Marketwire - May 4, 2011) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (the "Fund") and Pizza Pizza Limited (the "Company") today announced results for the first quarter ended March 31, 2011.

First Quarter Highlights

  • Same store sales increased 4.5%
  • Payout ratio was 92%
  • Working capital increased $345,000
  • Earnings per unit before income taxes increased 12.7%


Same store sales growth ("SSSG") increased 4.5% for the quarter compared to the same period last year. By brand, Pizza Pizza's SSSG increased 3.6% and Pizza 73's SSSG increased 8.3%. SSSG is the key driver of yield growth for Fund unitholders.

"We're sensing a strengthening in North American economies which should bode well for the Pizza Pizza and Pizza 73 brands, which operate largely in Ontario and Alberta, our core markets, where improvements in job prospects are beginning to drive sales increases in the retail industry and increases in our customer traffic counts", said Paul Goddard, Chief Executive Officer.

The restaurants in the Royalty Pool, the sales of which determine the royalty payable to the Fund, increased to 695 on the January 1, 2011 adjustment date, to include 24, net new restaurants. In the prior year, the Royalty Pool included 671 restaurants.

System sales from the 695 restaurants in the Royalty Pool for the quarter ended March 31, 2011 were $112.3 million. For the prior year, comparative quarter, system sales for the 671 restaurants in the Royalty Pool were $108.3 million. Sales results for the quarter were positively impacted by an increase in walk-in and delivery transactions as well as an increase in the average customer cheque.


The Specified Investment Flow-Through ("SIFT") tax legislation, that was enacted in 2007 and applies to the Fund commencing on January 1, 2011, created a current tax liability of $862,000 for the first quarter which reflects the SIFT tax rate of 28.25% and the use of discretionary deductions to lower taxable income.


The first quarter's basic loss per Fund unit of $0.06, is net of current income tax expense, non-cash deferred tax expense and non-cash change in fair value of exchangeable units. However, excluding the aforementioned non-cash items, the quarterly earnings per unit would have been $0.19, which is net of a $0.04 provision for current income tax. For the quarter ended March 31, 2010, and prior to the Fund becoming a taxable entity, comparable earnings per unit before income tax was $0.20.


Beginning with the January 2011 distribution, payable February 15, 2011, the Trustees set the monthly distribution to unitholders at $0.0584 per unit or $0.70 annually. At this level, the Fund believes that the eligible dividend portion of the Fund's distribution combined with the return of capital component of the distribution will provide taxable Canadian individuals with an effective after-tax yield comparable to 2010 levels. There can be no assurance that this effective after-tax yield will be maintained in the future, whether as a result of changes in distribution levels or as a result of changes in the tax attributes of the Fund's income or other tax planning strategies.

The Fund declared distributions of $3.8 million or $0.1752 per unit for the quarter ended March 31, 2011, equating to a 92% payout ratio, compared to $5.1 million or $0.2325 per unit for the prior year comparable quarter, which equated to a 114% payout ratio.

During the first quarter, the working capital reserve increased by $345,000 to $1.6 million at March 31, 2011, after an $862,000 provision for current income taxes.


As at March 31, 2011, there were 687 locations consisting of 371 traditional Pizza Pizza restaurants and 72 traditional Pizza 73 restaurants. As well, there were 228 non-traditional Pizza Pizza locations and 16 non-traditional Pizza 73 locations. During the first quarter, the Company closed eight traditional locations and one non-traditional location; one non-traditional location was opened. By the end of 2011, Pizza Pizza management expects to have increased the restaurants in the chain by 3% with the majority of new restaurants to be opened as part of our continued national expansion plan. Organically, Pizza Pizza expects to grow outside its largely Ontario and Alberta markets by opening additional locations in Quebec, parts of Atlantic Canada, as well as in selected western provinces.


The Fund prepares its unaudited interim consolidated financial statements in accordance with Canadian generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA Handbook"). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards ("IFRS") and required publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Fund commenced reporting on this basis with the quarter ended March 31, 2011. In conjunction with the adoption of IFRS, the financial results of the Pizza Pizza Royalty Limited Partnership (the "Partnership") will be included in the consolidated financial statements of the Fund commencing with the quarter ended March 31, 2011. Previously, as a "variable interest entity" for accounting purposes, the Partnership's financial results were included in the Company's consolidated financial statements, even though the Partnership is controlled by the Fund.

The following tables set out selected financial information and other data of the Fund and should be read in conjunction with the consolidated financial statements of the Fund. Readers should note that the 2011 results are not directly comparable to the 2010 results due to the difference in the number of restaurants in the Royalty Pool between the two periods.

3 months ended March 31, 20113 months ended March 31, 2010
(in thousands of dollars, except number of restaurants, days in the quarter and per unit amounts)
Restaurants in Royalty Pool695671
Same store sales4.5%-2.3%
Days in the Quarter9090
System Sales reported by Pizza Pizza restaurants in the Royalty Pool$ 93,249$ 89,990
System Sales reported by Pizza 73 restaurants in the Royalty Pool19,09318,309
$ 112,342$ 108,299
Royalty – 6% on Pizza Pizza System Sales$ 5,595$ 5,399
Royalty – 9% on Pizza 73 System Sales1,7181,648
Total Royalty on System Sales7,3137,047
Partnership expenses(762)(757)
Earnings available for distribution to the Fund and Pizza Pizza Limited6,5516,290
Pizza Pizza Limited's interest(1,978)(2,283)
Equity income4,5734,007
Interest income450450
Net earnings before income tax expense(1)$ 5,023$ 4,457
Provision for current income taxes8620
Net earnings from operations$ 4,161$ 4,457
Basic earnings per Fund unit before income tax expense(1)$ 0.230$ 0.204
Basic earnings per Fund unit(2)$ 0.191$ 0.204
Diluted earnings per Fund unit(2)$ 0.191$ 0.204
Distributions declared$ 3,823$ 5,072
Distributions per Fund unit$ 0.1752$ 0.2325
Payout ratio92%114%
March 31, 2011March 31, 2010
Working capital$ 1,581$ 1,813
Total assets$ 353,491$ 352,276
Total liabilities$ 158,494$ 143,032
(1)"Net earnings before income tax expense" and "Basic earnings per Fund unit before income tax expense" are not recognized measures under Canadian GAAP. References to net earnings before income tax, are to earnings determined in accordance with GAAP applicable to the financial statements before amounts for taxes and change in fair-value of exchangeable units, as included in net earnings. The Fund believes that, in addition to net earnings, net earnings before income tax is a useful supplemental measure in evaluating its performance as it provides investors with an indication of operating earnings. Investors are cautioned, however, that this should not be construed as an alternative to net earnings as a measure of profitability. The method of calculating net earnings before tax for the purposes of this report may differ from that used by other issuers and, accordingly, it may not be comparable to that used by other issuers.
(2)Basic earnings per Fund unit and Diluted earnings per Fund unit exclude "Change in fair value of exchangeable units" of $4,606 and "deferred tax expense" of $814 which are non-cash items. Basic loss per Fund unit for the first quarter of 2011, which calculates to $0.06, reflects these non-cash items.

The unaudited, 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 May 5, 2011.

The Fund will host a conference call to discuss the results on Thursday, May 5, 2011 at 9:00 a.m. EDT. The call can be accessed by dialing 416-640-5925 or 1-800-711-9538. A replay will be available until Friday, May 20, 2011 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 9362619.

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; risk of technology failures; 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 607 Pizza Pizza restaurants in the Royalty Pool for 2011. 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 88 Pizza 73 restaurants in the Royalty Pool for 2011.

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.

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