TORONTO, ONTARIO--(Marketwire - Feb. 14, 2013) -
Attention Business Editors:
Pizza Pizza Royalty Corp. (the "Company") (PZA.TO), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the fourth quarter and year ended December 31, 2012.
Full Year 2012 highlights included:
- Same store sales increased 2.7%
- Working capital reserve increased $1.8 million to $4.6 million
- Payout ratio was 90%
- Monthly distribution increased 2.7% in May 2012
- Effective tax rate was 19.21%
- Converted to a corporation effective December 31, 2012
Fourth Quarter highlights included:
- Same store sales increased 3.2%
- Working capital reserve increased $635,000
- Payout ratio was 86%
In the fourth quarter, System Sales reported by Royalty Pool restaurants increased 3% to $127.3 million from $123.6 million in the 2011 comparable quarter. For the year, System Sales increased 2.9% to $481.5 million from $467.9 million in the prior year.
The Company's two market-leading brands generated positive same store sales growth ("SSSG") of 3.2% in the fourth quarter and 2.7% for the full year over the comparable periods last year. SSSG is the key driver of shareholder yield growth.
|Fourth Quarter (%)||Full Year (%)|
|Same store sales growth||2012||2011||2012||2011|
For the fourth quarter and year, restaurant sales at both brands benefited from an increase in the average customer cheque and an increase in customer traffic counts.
Paul Goddard, CEO, Pizza Pizza Limited, said: "Throughout 2012, we focused our efforts on major initiatives that provided consistent sales growth. In addition to improving upon our quality menu offerings, we made excellent progress in the areas of consumer satisfaction and technological advances. In this competitive and challenging environment our convenience factor is a major advantage in keeping our brands a step ahead of the competition, as shown by our latest "iPad" ordering app."
MONTHLY DISTRIBUTIONS AND WORKING CAPITAL RESERVE
For tax purposes in 2012, the distributions by the Company's predecessor, Pizza Pizza Royalty Income Fund (the "Fund"), are considered 32.5% return of capital and 67.5% taxable eligible dividend. Beginning in January 2013, the Company's dividend will be considered a taxable eligible dividend without a return of capital component.
For the fourth quarter, distributions were $3.9 million or $0.18 per share and the Company reported an 86% payout ratio. For the year, the Company declared distributions of $15.6 million, or $0.7136 per share and a 90% payout ratio.
In January 2013, the Company announced a 4.2% increase to its monthly dividend, thereby increasing the annual dividend to $0.75 from $0.72. This increase follows a May 2012, increase of 2.7% to $0.72 from $0.70.
The Company's working capital reserve increased $635,000 during the quarter and increased $1.8 million for the year. At December 31, 2012, the balance was $4.6 million. The reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in System Sales and, thus, the Company's royalty income. With this reserve now in place, going forward, the Company will target a payout ratio closer to 100%. The Company does not have capital expenditure requirements or employees.
CURRENT INCOME TAX EXPENSE
For the year ended December 31, 2012, the Company reported current income tax expense of $3.8 million compared to $3.7 million for 2011. The increase is due to increased taxable income offset by a decreased tax rate. Of particular note is that the Company's 2012 adjusted accounting earnings from operations before income taxes differs significantly from its taxable income due largely to the tax amortization of the Pizza Pizza and Pizza 73 Rights and Marks. The amount of the tax amortization deducted is based on a declining basis and will decrease yearly.
This tax amortization deduction and certain other minor tax deductions resulted in an effective tax rate of 19.21% compared to the Company's applicable statutory tax rate of 26.5% (28.25% for 2011).
On December 31, 2012, the Fund completed its conversion from an income trust to a dividend-paying corporation (the "Conversion").
Under the Conversion, the trust units of the Fund held by unitholders of the Fund were transferred to the Company in consideration for common shares of the Company ("Shares") on the basis of one Share for each unit so transferred. As a result, on December 31, 2012, immediately after the completion of the Conversion, there were 21,818,392 Shares issued and outstanding.
The key terms and economics reflected in the Pizza Pizza Royalty Limited Partnership (the "Partnership") Agreement and all other agreements between Pizza Pizza Limited ("PPL") and the Partnership were not affected by the Conversion.
RESTAURANT ROYALTY POOL
As previously announced, the number of restaurants in the Company's Royalty Pool increased to 694 from 690 on the January 1, 2013 Adjustment Date.
During the fourth quarter, PPL opened eight restaurants four of which were traditional Pizza Pizza restaurants and four were non-traditional Pizza Pizza locations; five non-traditional locations were closed. This brings the total number of Pizza Pizza restaurants to 605. There was no change in Pizza 73 restaurants open during the quarter, so the total number of Pizza 73 locations remained at 89.
During the year, PPL opened ten traditional restaurants and eleven non-traditional Pizza Pizza locations; seventeen non-traditional locations were closed. Of the ten traditional PPL restaurants opened, three were in Nova Scotia, three in Manitoba, three in Quebec and one in Ontario. One Pizza 73 non-traditional location opened and one non-traditional location closed during the year.
PPL anticipates increasing the number of restaurants in its portfolio by approximately 3% in 2013.
SELECTED FINANCIAL HIGHLIGHTS
The following tables set out selected financial information and other data of the Company and should be read in conjunction with the consolidated financial statements of the Company. Readers should note that the 2012 results are not directly comparable to the 2011 results because of an extra day of royalty revenue received from PPL in 2012 due to the leap year and the fact that there are 690 restaurants in the 2012 Royalty Pool compared to 695 restaurants in the 2011 Royalty Pool.
|(in thousands of dollars, except restaurants and per Share amounts)||2012||2011|
|Restaurants in Royalty Pool||690||695|
|Same store sales growth(1)||2.7||%||2.6||%|
|Days in Period||366||365|
|System Sales reported by restaurants in the Royalty Pool(8)||$||481,519||$||467,880|
|Total Royalty on System Sales||$||31,275||$||30,375|
|Partnership interest expense and administrative expenses(2)||(2,714||)||(2,916||)|
|Corporate Conversion costs(3)||(350||)||-|
|Adjusted earnings available for distribution to the Company and Pizza Pizza Limited||28,211||27,459|
|Pizza Pizza Limited's distribution(4)||(8,877||)||(8,623||)|
|Adjusted earnings available for distribution to the Company||19,334||18,836|
|Adjusted earnings before income tax expense||$||21,134||$||20,636|
|Provision for current income taxes||(3,786||)||(3,710||)|
|Adjusted earnings from operations(6)||$||17,348||$||16,926|
|Adjusted basic earnings per Share(6)||$||0.795||$||0.776|
|Basic earnings per Share(7)||$||0.372||$||0.545|
|Distributions per Share||$||0.7136||$||0.7008|
(1) Same store sales growth ("SSSG") means the change in annual gross revenue of a particular Pizza Pizza or Pizza 73 restaurant as compared to sales in the previous year, where the restaurant has been open at least 13 months. Additionally, for a Pizza 73 restaurant whose restaurant territory was adjusted due to an additional restaurant, a Step-Out Payment may be added to sales to arrive at SSSG.
(2) The Company, indirectly through the Pizza Pizza Royalty Limited Partnership (the "Partnership"), incurs administrative expenses and interest expense on the $47,000 outstanding bank loan (2011 - $47,000). Interest expense on the bank loan, including an adjustment to earnings of $249 for the cash paid to draw down the interest swap instrument termination cost for the three months and year ended December 31, 2012 was $524 and $2,087 respectively (2011 - $512 and $2,299).
(3) The Ontario Superior Court of Justice approved the Conversion, as defined below, which became effective on December 31, 2012. Total Conversion costs incurred in 2012 were $350 and will not reoccur in 2013.
(4) Represents the distribution to PPL from the Partnership on Class B, Class C and Class D units of the Partnership. The Class B and D units are exchangeable into Shares based on the value of the Class B Exchange Multiplier and the Class D Exchange Multiplier at the time of exchange as defined in the amended and restated Pizza Pizza license and royalty agreement (the "Pizza Pizza License and Royalty Agreement") and the amended and restated Pizza 73 license and royalty agreement (the "Pizza 73 License and Royalty Agreement"), respectively, and represents 26.5% of the fully diluted Shares at December 31, 2012 (2011 - 26.5%).
(5) The Company indirectly earned interest income on the $30,000 loan to PPL, with interest income accruing at 6% per annum, payable monthly. The loan was paid in full at December 31, 2012 by PPL delivering 3,000,000 Class C units of the Partnership to the Pizza Pizza Holdings Trust (the "Trust") in accordance with the amended and restated exchange agreement (the "Exchange Agreement").
(6) "Adjusted earnings from operations" and "Adjusted basic earnings per Share" are not recognized measures under International Financial Reporting Standards ("IFRS"). References to adjusted earnings from operations and adjusted basic earnings per Share 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 Company 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.
(7) "Basic earnings per Share", as reported in the consolidated financial statements, include the non-cash amounts for "Change in fair value of exchangeable units", "deferred tax expense", less the cash repayments made on the interest rate swap provision during the period.
(8) System Sales (as defined in the License and Royalty Agreements) reported by Pizza Pizza and Pizza 73 restaurants include the gross sales of Pizza Pizza company-owned, jointly-controlled and franchised restaurants, excluding sales and goods and service tax or similar amounts levied by any governmental or administrative authority. System Sales do not represent the consolidated operating results of the Company but are used to calculate the royalties payable to the Partnership as presented above.
(9) As a result of the Conversion, the exchangeable Class B and Class D units are no longer considered liabilities as they are no longer convertible into puttable Fund units. Therefore, they were reclassified to equity based on their conversion date carrying value.
A copy of management's discussion and analysis and audited financial statements of the Company for the quarter and year will be available at www.sedar.com and www.pizzapizza.ca on or before February 15, 2013. The Company will host a conference call to discuss the results on Friday, February 15 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 Friday March 1, 2013 by dialing 647-436-0148 or 1-888-203-1112 and entering the reservation number 2026645.
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; changes in the Company's distribution policy, tax position and availability and use of deductions and related structuring decisions; 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 2011 Annual Information Form. The Company assumes no obligation to update these forward looking statements, except as required by applicable securities laws.
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