Pizza Pizza Royalty Income Fund
TSX : PZA.UN

Pizza Pizza Royalty Income Fund

August 01, 2012 16:00 ET

Pizza Pizza Royalty Income Fund Announces Second Quarter Financial Results

TORONTO, ONTARIO--(Marketwire - Aug. 1, 2012) -

Attention Business Editors:

Pizza Pizza Royalty Income Fund (the "Fund") (TSX:PZA.UN) today announced results for the second quarter ended June 30, 2012.

Second Quarter Highlights:

Same store sales increased 3.4%
Monthly distribution increased 2.7% in May
Working capital increased by $186,000 to $3.5 million
Payout ratio was 96%, after paying $162,000 corporate conversion costs

Sales

The Fund's two market-leading brands generated same store sales growth ("SSSG") of 3.4% in the second quarter (3.0% - 2011). By brand, Pizza Pizza reported comparable sales of 3.2% and Pizza 73 reported 4.1% for the quarter.

Paul Goddard, CEO, Pizza Pizza Limited, said: "We've posted another solid quarter of sales growth in which both brands leveraged the strength of our everyday value offerings, menu variety and convenience. Royalties earned on the top line sales growth continue to generate excess cash for the Fund."

Total sales reported by restaurants in the Royalty Pool for the second quarter of 2012 was $117 million compared to $114.3 million in the same quarter last year. For the first six months, Royalty Pool sales increased to $234.9 million from $226.6 million in the same period last year.

Monthly Distribution and Working Capital

During the quarter, the Fund announced an increase in its monthly distribution thereby increasing the annualized distribution amount from $0.70 to $0.72. The distribution increase follows sustained SSSG over the last eight quarters plus the Fund's accumulation of cash reserves.

For the second quarter of 2012, distributions to unitholders were $3.9 million or $0.1784 per unit which equates to a 96% payout ratio. For the prior year comparable quarter, the Fund declared distributions of $3.8 million or $0.1752 per unit equating to a 96% payout ratio.

The Fund increased its working capital balance by $186,000 during the quarter, this after paying $162,000 of professional fees related to the corporate conversion approval process. The Fund anticipates total conversion costs will not exceed $350,000. The working capital balance is $3.5 million at June 30, 2012.

A portion of the Fund's 2012 distributions will be treated as taxable eligible dividends and a portion as return of capital.

Restaurant Development

During the quarter, the Pizza Pizza brand opened three traditional and three non-traditional restaurants; nine non-traditional locations closed. At the Pizza 73 brand, there was one non-traditional restaurant opened and two non-traditional restaurants closed. This brings the total number of restaurants to 688 at June 30, 2012.

We continue to prioritize our national expansion strategy, currently focusing on Nova Scotia, Quebec, and Manitoba.

Readers should note that the number of restaurants in the Royalty Pool may differ from the number of restaurants reported on an interim basis by Pizza Pizza Limited ("PPL") as restaurant openings and closings may occur subsequent to the annual Royalty Pool Adjustment Date every January 1st.

Conversion - Income Trust to Corporation

At the Fund's annual and special meeting of unitholders held May 30, 2012 in Toronto, Ontario, unitholders of the Fund approved the Fund's conversion from an income trust to a corporation, to be named Pizza Pizza Royalty Corp., by way of a plan of arrangement (the "Conversion"). The special resolution was adopted with 99.7 per cent of the units voted at the meeting voting in favour.

The Ontario Superior Court of Justice has approved the Conversion which is expected to become effective on December 31, 2012. Pursuant to the Conversion, unitholders would receive, for each unit held, one common share of Pizza Pizza Royalty Corp. on the effective date of the Conversion.

The Conversion is a result of the federal government's 2007 amendment to the Income Tax Act (Canada) to include the Specified Investment Flow Through tax provisions, or SIFT Tax, which is an entity-level tax on Canadian publicly listed income trusts, including the Fund. As a result, the Fund became a taxable entity effective January 1, 2011 subject to the tax rate applicable on income earned by a Canadian public corporation.

An additional rule under the SIFT Tax provisions, of which the Fund will take advantage, allows trusts to convert from an income trust to a Canadian corporation on a tax-deferred rollover basis if the conversion is completed prior to January 1, 2013. With the approved Conversion, the Fund plans to take advantage of the tax-deferred rollover option by converting to a corporation effective December 31, 2012. The new corporate structure will also allow for increased financial flexibility going forward.

The key terms and economics reflected in the partnership agreement and all other agreements between PPL and the Pizza Pizza Royalty Limited Partnership ("Partnership") will not be affected by the corporate conversion. The Fund and the Partnership will continue to operate independently from PPL, the privately-held operating company.

FINANCIAL HIGHLIGHTS

The following table sets out selected financial information and other data of the Fund and should be read in conjunction with the unaudited interim consolidated financial statements of the Fund. Readers should note that the 2012 results are not directly comparable to the 2011 results due to the difference in the number of days in the years and number of restaurants in the Royalty Pool between the two periods.

3 months ended 6 months ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
(in thousands of dollars, except number of restaurants and per unit amounts)
Restaurants in Royalty Pool 690 695 690 695
Same store sales growth 3.4 % 3.0 % 3.1 % 3.5 %
Days in Quarter 91 91 182 181
System Sales reported by Pizza Pizza restaurants in the Royalty Pool $
98,179
$
96,040
$
196,400
$
189,289
System Sales reported by Pizza 73 restaurants in the Royalty Pool 18,786 18,229 38,501 37,322
$ 116,965 $ 114,269 $ 234,901 $ 226,611
Royalty - 6% on Pizza Pizza System Sales $ 5,890 $ 5,762 $ 11,784 $ 11,357
Royalty - 9% on Pizza 73 System Sales 1,691 1,641 3,465 3,359
Total Royalty on System Sales $ 7,581 $ 7,403 $ 15,249 $ 14,716
Partnership interest and administrative expenses(1) (669 ) (787 ) (1,348 ) (1,549 )
Corporate conversion costs(2) (162 ) - (162 ) -
Earnings available for distribution to the Fund and Pizza Pizza Limited
6,750

6,616

13,739

13,167
Pizza Pizza Limited's interest (2,232 ) (2,216 ) (4,388 ) (4,194 )
Equity income 4,518 4,400 9,351 8,973
Interest income 450 450 900 900
Net earnings before income tax expense(3) $ 4,968 $ 4,850 $ 10,251 $ 9,873
Provision for current income taxes (899 ) (875 ) (1,826 ) (1,737 )
Net earnings from operations(4) $ 4,069 $ 3,975 $ 8,425 $ 8,136
Adjusted basic earnings per Fund unit(3) $ 0.228 $ 0.222 $ 0.470 $ 0.453
Basic earnings (loss) per Fund unit $ (0.127 ) $ 0.146 $ (0.256 ) $ 0.088
Distributions declared $ 3,892 $ 3,822 $ 7,715 $ 7,645
Distributions per Fund unit $ 0.1784 $ 0.1752 $ 0.3536 $ 0.3504
Payout ratio(5) 96 % 96 % 92 % 94 %
  1. The Fund, indirectly through the Partnership, incurs administrative expenses and interest expense on the $47,000 outstanding bank loan. Cash paid interest expense on the bank loan, including the cash paid to draw down the termination cost for the three and six months ended June 30, 2012, was $511 and $1,022 (2011 - $616 and $1,240).
  2. The Ontario Superior Court of Justice has approved the Conversion which is expected to become effective on December 31, 2012. Total conversion costs to be incurred in 2012 are estimated to be less than $350,000 and will not reoccur in 2013.
  3. "Net earnings before income tax expense" and "Adjusted basic earnings per Fund unit" are not recognized measures under Canadian GAAP. References to "net earnings before income tax expense" and "adjusted basic earnings per Fund unit" are to earnings determined in accordance with GAAP applicable to the financial statements before amounts for taxes, termination costs on derivative financial instrument, net of termination cost repayments during the year, 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.
  4. References to "net earnings from operations" are to earnings determined in accordance with GAAP applicable to the financial statements before amounts for deferred taxes, and change in fair value of exchangeable units, as included in net earnings, plus cash paid to draw down the termination costs.
  5. "Payout Ratio" is calculated as distributions declared divided by net earnings from operations. This non-GAAP financial measure provides investors with useful information regarding the extent to which the Fund distributes cash to unitholders. Investors are cautioned that this should not be construed as an alternative to net income as a measure of profitability.

A copy of management's discussion and analysis and financial statements of the Fund and PPL for the quarter will be available at www.sedar.com and www.pizzapizza.ca on or before August 2, 2012. The Fund will host a conference call to discuss the results on Thursday, August 2, 2012 at 9:00 a.m. Eastern Time. The call can be accessed by dialing 416-640-5925 or 1-800-711-9538. A replay will be available until Thursday, August 16, 2012 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 4166134.

Forward Looking Statements

This release may contain certain forward-looking statements, which reflect management's expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements involve a number of risks and uncertainties. The factors that could cause actual results to differ materially from our expectations are detailed in the Fund's filings with the Canadian securities regulatory authorities, including its quarterly reports and Annual Information Form.

Contact Information