Pizza Pizza Royalty Income Fund

TSX : PZA.UN


Pizza Pizza Royalty Income Fund

November 14, 2012 16:00 ET

Pizza Pizza Royalty Income Fund Announces Third Quarter Financial Results

TORONTO, ONTARIO--(Marketwire - Nov. 14, 2012) -

Attention Business Editors:

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

Highlights:

Three months ended September 30, 2012:
Same store sales increased 1.3%
Working capital increased by $426,000 to $3.9 million
Payout ratio was 90%
Nine Months ended September 30, 2012:
Same store sales increased 2.5%
Working capital increased by $1.2 million to $3.9 million
Monthly distribution increased 2.7% in May
Payout ratio was 91%
Unitholders approved the conversion to a corporation effective December 31, 2012

Sales

Total sales reported by restaurants in the Royalty Pool for the third quarter increased to $119.3 million from $117.7 million in the same quarter last year. For the nine months ended September 30, 2012, Royalty Pool sales increased to $354.2 million from $344.3 million in the same period last year.

The Fund's two market-leading brands generated same store sales growth ("SSSG") of 1.3% (2.2% - 2011) for the third quarter and 2.5% (3.1% - 2011) for the nine months ended September 30, 2012 when compared to the comparable periods in 2011.

By brand, Pizza Pizza reported SSSG of 1.1% and Pizza 73 reported 2.4% for the quarter; for the nine months, SSSG for the Pizza Pizza restaurants was 2.5% and was 2.6% for the Pizza 73 restaurants.

Paul Goddard, CEO, Pizza Pizza Limited, said: "We've posted our ninth consecutive positive 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."

Monthly Distributions and Working Capital

For the third quarter, distributions to unitholders were $3.9 million or $0.18 per unit and the Fund reported a 90% payout ratio. For the prior year comparable quarter, the Fund declared distributions of $3.8 million, or $0.1752, per unit equating to a 90% payout ratio. The last monthly distribution increase was in May, 2012 when the distribution increased 2.7% to $0.72 on an annualized basis.

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

The Fund's working capital reserve balance increased $426,000 during the quarter and has increased by $1.2 million year-to-date, ending the quarter at $3.9 million. The Fund does not have capital expenditure requirements or employees.

Restaurant Development

During the quarter, the Pizza Pizza brand opened one traditional and three non-traditional restaurants; one non-traditional location closed. At the Pizza 73 brand, there were no restaurants opened or closed during the quarter. This brings the total number of restaurants to 691 at September 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 will be effective on December 31, 2012. Pursuant to the Conversion, unitholders will 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 9 months ended
September 30, 2012 September 30, 2011 September 30, 2012 September 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 1.3 % 2.2 % 2.5 % 3.1 %
Days in Period 92 92 274 273
System Sales reported by Pizza Pizza restaurants in the Royalty Pool $ 99,900 $ 98,783 $ 296,300 $ 288,072
System Sales reported by Pizza 73 restaurants in the Royalty Pool 19,444 18,897 57,945 56,219
$ 119,344 $ 117,680 $ 354,245 $ 344,291
Royalty - 6% on Pizza Pizza System Sales $ 5,994 $ 5,927 $ 17,778 $ 17,284
Royalty - 9% on Pizza 73 System Sales 1,750 1,701 5,215 5,060
Total Royalty on System Sales $ 7,744 $ 7,628 $ 22,993 $ 22,344
Partnership interest expense and administrative expenses1 (627 ) (673 ) (1,975 ) (2,222 )
Conversion costs2 (20 ) - (182 ) -
Adjusted earnings available for distribution to the Fund and Pizza Pizza Limited 7,097 6,955 20,836 20,122
Pizza Pizza Limited's interest (2,245 ) (2,216 ) (6,632 ) (6,410 )
Adjusted earnings available for distribution to the Fund 4,852 4,739 14,204 13,712
Interest income 450 450 1,350 1,350
Adjusted earnings before income tax expense $ 5,302 $ 5,189 $ 15,554 $ 15,062
Provision for current income taxes (957 ) (945 ) (2,783 ) (2,682 )
Adjusted earnings from operations3 $ 4,345 $ 4,244 $ 12,771 $ 12,380
Adjusted basic earnings per Fund unit 3 $ 0.199 $ 0.195 $ 0.585 $ 0.567
Basic earnings (loss) per Fund unit $ (0.106 ) $ 0.411 $ (0.362 ) $ 0.499
Distributions declared $ 3,927 $ 3,823 $ 11,642 $ 11,468
Distributions per Fund unit $ 0.1800 $ 0.1752 $ 0.5336 $ 0.5256
Payout ratio4 90 % 90 % 91 % 93 %
  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 interest swap instrument termination cost for the three and nine months ended September 30, 2012, was $527 and $1,563 (2011 - $532 and $1,779).
  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. "Adjusted earnings from operations" and "Adjusted basic earnings per Fund unit" are not recognized measures under International Financial Reporting Standards ("IFRS"). References to adjusted earnings from operations and adjusted basic earnings per Fund unit are to be determined in accordance with IFRS applicable to the financial statements before amounts for deferred taxes, termination costs on derivative financial instrument, cash paid to draw down the interest swap instrument termination cost, and change in fair-value of exchangeable units, as included in earnings (loss) for the period. The Fund believes that, in addition to earnings, adjusted earnings 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 earnings (loss) for the period as a measure of profitability. The method of calculating adjusted earnings (loss) 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. "Payout Ratio" is calculated as distributions declared divided by adjusted earnings from operations. This non-IFRS 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 November 15, 2012. The Fund will host a conference call to discuss the results on Thursday, November 15, 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, November 29, 2012 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number: 3645634.

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