Pizza Pizza Royalty Income Fund
TSX : PZA.UN

Pizza Pizza Royalty Income Fund

August 10, 2011 17:10 ET

Pizza Pizza Royalty Income Fund Announces Second Quarter Financial Results

TORONTO, ONTARIO--(Marketwire - Aug. 10, 2011) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (TSX:PZA.UN) (the "Fund") and Pizza Pizza Limited ("PPL") today announced results for the second quarter ended June 30, 2011.

Second Quarter Highlights
  • Same store sales increased 3%
  • Earnings per unit before income taxes increased 6.2%
  • Payout ratio was 96%
  • Working capital increased $161,000

Sales

Same store sales growth ("SSSG") increased 3% (0% - 2010) for the quarter compared to the prior year quarter; for the six month period SSSG has increased 3.5% (-1.2% - 2010) over the same prior year period. By brand, for the second quarter, Pizza Pizza's SSSG increased 3.3% and Pizza 73's increased 1.4%. SSSG is the key driver of yield growth for Fund unitholders.

Paul Goddard, CEO, Pizza Pizza Limited, said: "We're pleased with the combined performance of our two great brands during the second quarter and year-to-date. Although we found consumer buying patterns sensitive to gasoline price increases at the pump and to grocery item increases, our value-driven promotions and evolving menu are resonating in the quick service marketplace."

System sales from the 695 restaurants in the Royalty Pool for the quarter ended June 30, 2011 were $114.3 million. For the prior year, comparative quarter, system sales for the 671 restaurants in the Royalty Pool were $110.5 million. Sales at the Pizza Pizza chain benefited from an increase in traffic counts, offset by a slight decrease in the average customer cheque. At the Pizza 73 brand, customer traffic counts decreased slightly while the average customer cheque increased.

Earnings

The second quarter's basic earnings per Fund unit is $0.146. Adding back the per unit effect of current income tax expense and non-cash deferred tax expense, the adjusted basic earnings per unit would be $0.222 compared to the prior year period's earnings per unit before income tax of $0.209 or a 6.2% increase.

Current Income Taxes

The Specified Investment Flow-Through ("SIFT") tax legislation enacted in 2007 and which applies to the Fund commencing on January 1, 2011, created a current tax liability of $875,000 for the second quarter and $1.7 million for the first six months of 2011. This reflects the SIFT tax rate of 28.25% and the use of discretionary deductions to lower taxable income.

Unitholder Distributions

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 and distributed eligible dividends of $3.8 million or $0.1752 per unit for the quarter ended June 30, 2011, equating to a 96% payout ratio, compared to $5.1 million in interest income or $0.2325 per unit for the prior year quarter, which equated to a 111% payout ratio.

During the second quarter, the working capital reserve increased by $161,000 to $1.7 million at June 30, 2011, this after an $875,000 provision for current income taxes.

Credit Facility

In July 2011, the Fund's subsidiary, Pizza Pizza Royalty Limited Partnership (the "Partnership") terminated its three existing interest rate swaps and blended and extended them into two new interest rate swap agreements. The credit facility's interest rate is comprised of a portion fixed using the new swap agreements plus a credit spread. Beginning July 25, 2011, the interest rate portion fixed with the new swaps has decreased from a blended rate of 4.04% to 2.87%, for the five year term of the new swaps. The two new swaps, each at $23.5 million, will obligate the Partnership to pay the swap counterparties an amount based upon a fixed interest rate of 2.87% per annum plus the current credit spread of 1.25% through October 24, 2011, and the swap counterparties will be obligated to pay the Partnership an amount equal to the Canadian Bankers Acceptance rate. The credit spread of 1.25% will be renegotiated when the related credit facility is renewed on the presently targeted date of October 24, 2011. Indicative credit spread pricing is quoted by two financial institutions to initially be 1.5% upon renewal in October but can increase or decrease with the Fund's financial performance.

Selected Financial Highlights

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 6 months ended
June 30,
2011
(unaudited)
June 30,
2010
(unaudited)
June 30,
2011
(unaudited)
June 30,
2010
(unaudited)
(in thousands of dollars, except number of restaurants, days in the quarter and per unit amounts)
Restaurants in Royalty Pool 695 671 695 671
Same store sales Growth 3.0 % 0 % 3.5 % -1.2 %
System Sales reported by Pizza Pizza restaurants in the Royalty Pool
$ 96,040 $ 91,956 $ 189,289 $ 181,946
System Sales reported by Pizza 73 restaurants in the Royalty Pool 18,229 18,505 37,322 36,814
$ 114,269 $ 110,461 $ 226,611 $ 218,760
Royalty - 6% on Pizza Pizza System Sales $ 5,762 $ 5,517 $ 11,357 $ 10,916
Royalty - 9% on Pizza 73 System Sales 1,641 1,665 3,359 3,313
Total Royalty on System Sales 7,403 7,182 14,716 14,229
Partnership expenses (787 ) (789 ) (1,549 ) (1,546 )
Earnings available for distribution to the Fund and Pizza Pizza Limited
6,616 6,393 13,167 12,683
Pizza Pizza Limited's interest (2,216 ) (2,284 ) (4,194 ) (4,567 )
Equity income 4,400 4,109 8,973 8,116
Interest income 450 450 900 900
Net earnings before income tax expense(1) $ 4,850 $ 4,559 $ 9,873 $ 9,016
Provision for current income taxes (875 ) - (1,737 ) -
Net earnings from operations $ 3,975 $ 4,559 $ 8,136 $ 9,016
Basic earnings per Fund unit before income tax expense(1) $ 0.222 $ 0.209 $ 0.453 $ 0.413
Basic earnings per Fund unit(2) $ 0.146 $ 0.392 $ 0.088 $ 0.546
Diluted earnings per Fund unit(2) $ 0.146 $ 0.211 $ 0.088 $ 0.423
Distributions declared $ 3,822 $ 5,073 $ 7,645 $ 10,145
Distributions per Fund unit $ 0.1752 $ 0.2325 $ 0.3504 $ 0.4650
Payout ratio 96 % 111 % 94 % 113 %
June 30, 2011 December 31, 2010
Working capital 1,742 1,236
Total assets 354,485 351,828
Total liabilities 159,228 151,922
(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 expense 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 expense 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 income tax expense 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 for 2011 include the effect of non-cash charges of "Change in fair value of exchangeable units" of $Nil and $4.6 million, and "deferred tax expense" of $799,000 and $1.6 million for the three and six months ended June 30,

The unaudited, consolidated financial statements of the Fund, together with its Management's Discussion and Analysis, will be available at www.sedar.com and on the Fund's website at www.pizzapizza.ca on or before August 11, 2011.

The Fund will host a conference call to discuss the results on Thursday, August 11, 2011 at 9:00 a.m. EDT. The call can be accessed by dialing 416-640-5926 or 1-800-820-0231. A replay will be available until Thursday, August 25, 2011 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 3247372.

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 PPL. 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 PPL in its Pizza Pizza and Pizza 73 restaurants. The Pizza Pizza trademarks were licensed to PPL in 2005 for 99 years, for which PPL 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 and licensed them to PPL for 99 years, for which PPL 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 PPL 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 current income tax, administration expenses and the interest on debt. Thus, the success of the Fund depends primarily on the ability of PPL 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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