Pizza Pizza Royalty Corp. Announces Second Quarter Financial Results
TORONTO, ONTARIO--(Marketwired - Aug. 8, 2013) -
Attention Business Editors:
Pizza Pizza Royalty Corp. (the "Company" or "PPRC") (PZA.TO), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the second quarter ended June 30, 2013.
Second Quarter highlights:
11 new stores opened; one closed
Same store sales increased 1.3%
Adjusted earnings per share increased 3.6%
Monthly dividend increased 4% in June 2013
Working capital reserve increased $40,000
Payout ratio was 99%
Year-to-date highlights:
15 new stores opened; two closed
Same store sales increased 2.4%
Adjusted earnings per share increased 2.7%
Monthly dividend increased 4.2% in January and 4% in June 2013
Working capital reserve increased $212,000
Payout ratio was 98%
SALES
In the second quarter ended June 30, 2013 ("Quarter"), System Sales from the 694 restaurants in the Royalty Pool increased 1.7% to $119 million from $117 million in the same quarter last year.
For the first six months, Royalty Pool System Sales increased 2.2% to $240.1 million from $234.9 million in the same period last year. Last year had an extra day of sales in February due to 2012 being a leap year. The extra day of sales is estimated by management to be $1.2 million.
Same store sales growth ("SSSG"), the key driver of yield growth for shareholders of the Company, increased by 1.3% (3.4% - 2012) for the Quarter and increased 2.4% (3.1% - 2012) for the six months ended June 30, 2013, when compared to the same periods in 2012. The Company is reporting its twelfth consecutive, positive SSSG quarter.
Same store sales growth | Second Quarter | Year-to-date | ||||||
2013 | 2012 | 2013 | 2012 | |||||
Pizza Pizza | 0.8 | 3.2 | 2.0 | 3.2 | ||||
Pizza 73 | 3.9 | 4.1 | 4.5 | 2.7 | ||||
Combined | 1.3 | 3.4 | 2.4 | 3.1 | ||||
By brand for the quarter, SSSG for the Pizza Pizza restaurants was 0.8% and 3.9% for Pizza 73 restaurants (3.2% and 4.1% in 2012, respectively). For the six month period, SSSG for Pizza Pizza restaurants was 2.0% and was 4.5% for the Pizza 73 restaurants (3.2% and 2.7% in 2012, respectively).
Restaurant sales at both brands benefited from an increase in the average customer cheque while traffic decreased slightly for the Quarter compared to the same quarter last year.
EARNINGS PER SHARE
Fully-diluted earnings (loss) per share for the Quarter was $0.19 compared to ($0.13) per unit in the same quarter last year; however, the Company considers adjusted earnings to be a more meaningful indicator of the Company's operating performance and, thus, also presents diluted adjusted earnings per share ("EPS").
For the Quarter, diluted adjusted EPS increased 3.6% to $0.204 per share compared to $0.197 per unit in the same quarter last year. For the six months ended June 30, 2013, diluted adjusted EPS increased 2.7% to $0.412 from $0.401 in the same period last year.
Adjusted earnings and adjusted earnings per share are not recognized measures under International Financial Reporting Standards ("IFRS") and may be calculated in a manner that differs from that used by other issuers. For additional information about the calculation and use of these measures, please see "Reconciliation of Non-IFRS Measures" in the Company's Management's Discussion & Analysis ("MDA") for the Quarter.
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
In June 2013, the Company increased the monthly dividend by 4% to $0.065 ($0.78 annualized) from $0.0625 ($0.75 annualized). The Company declared shareholder dividends of $4.15 million, or $0.19 per share, for the Quarter compared to $3.89 million, or $0.1784 per unit, for the prior year comparable quarter. This is a 6.5% increase on a quarter-over-quarter basis. The payout ratio was 99% for the Quarter and was 96% in the same quarter last year.
For the six months ended June 30, 2013, the Company declared dividends of $8.24 million or $0.3775 per share compared to $7.72 million or $0.3536 per unit in 2012; the payout ratio was 98% for the six month period and was 92% in the same period in 2012.
The Company's working capital reserve has increased $212,000 to $4.77 million as of June 30, 2013. 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% as was the case with this Quarter. The Company does not have capital expenditure requirements or employees.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter was $978,000 and was $899,000 for the prior year's comparable quarter. For the six months ended June 30, 2013, current tax expense was $1,984,000 compared to $1,826,000 for the same period last year. The increase is due to increased taxable income and a decline in the tax amortization.
Of particular note is that the Company's 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 deductions resulted in an effective tax rate of 18.4% through the first six months of the year compared to the Company's applicable statutory tax rate of 26.5% (2012 - 26.5%).
RESTAURANT DEVELOPMENT
As previously announced, the number of restaurants in the Company's Royalty Pool increased to 694 on the January 1, 2013 Adjustment Date from 690. The number of restaurants in the Royalty Pool will not change again until January 1, 2014.
Paul Goddard, C.E.O., Pizza Pizza Limited, said: "During the quarter we reached a major corporate milestone when we opened our 700th restaurant in Canada. Our newest opening in Montreal pushed us over the mark as we continue expanding nationally."
During the Quarter, Pizza Pizza Limited ("PPL") opened a net, ten additional restaurants, increasing the number of restaurants to 707 at June 30, 2013. By brand, PPL opened two traditional and seven non-traditional Pizza Pizza locations; one non-traditional location closed. There were also two non-traditional Pizza 73 openings during the Quarter. For the six month period, PPL has opened a net, 13 restaurants.
SELECTED FINANCIAL HIGHLIGHTS
The following tables set out selected financial information and other data of the Company, formerly Pizza Pizza Royalty Income Fund (the "Fund"), and should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements. For this discussion, references to the Company for the periods prior to December 31, 2012 are references to the Fund, and references to units are to the trust units of the Fund. Readers should note that the 2013 results are not directly comparable to the 2012 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 694 restaurants in the 2013 Royalty Pool compared to 690 restaurants in the 2012 Royalty Pool.
3 months ended | 6 months ended | |||||||||||||||
(in thousands of dollars, except number of restaurants and per share/unit amounts) | June 30, | June 30, | June 30, | June 30, | ||||||||||||
Restaurants in Royalty Pool | 694 | 690 | 694 | 690 | ||||||||||||
Same store sales growth(1) | 1.3 | % | 3.4 | % | 2.4 | % | 3.1 | % | ||||||||
Days in Period | 91 | 91 | 181 | 182 | ||||||||||||
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(7) | $ | 99,502 | $ | 98,179 | $ | 200,118 | $ | 196,400 | ||||||||
System Sales reported by Pizza 73 restaurants in the Royalty Pool(7) | 19,504 | 18,786 | 39,970 | 38,501 | ||||||||||||
$ | 119,006 | $ | 116,965 | $ | 240,088 | $ | 234,901 | |||||||||
Royalty - 6% on Pizza Pizza System Sales | $ | 5,970 | $ | 5,890 | $ | 12,007 | $ | 11,784 | ||||||||
Royalty - 9% on Pizza 73 System Sales | 1,755 | 1,691 | 3,597 | 3,465 | ||||||||||||
Royalty income | $ | 7,725 | $ | 7,581 | $ | 15,604 | $ | 15,249 | ||||||||
Partnership interest expense(2) | (520 | ) | (519 | ) | (1,034 | ) | (1,038 | ) | ||||||||
Administrative expenses | (115 | ) | (150 | ) | (243 | ) | (310 | ) | ||||||||
Corporate conversion costs(3) | - | (162 | ) | - | (162 | ) | ||||||||||
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited | $ | 7,090 | $ | 6,750 | $ | 14,327 | $ | 13,739 | ||||||||
Pizza Pizza Limited's distribution(4) | (1,938 | ) | (2,232 | ) | (3,914 | ) | (4,388 | ) | ||||||||
Adjusted earnings available for distribution to the Company | $ | 5,152 | $ | 4,518 | $ | 10,413 | $ | 9,351 | ||||||||
Interest income(5) | - | 450 | - | 900 | ||||||||||||
Adjusted earnings before current income tax expense | $ | 5,152 | $ | 4,968 | $ | 10,413 | $ | 10,251 | ||||||||
Provision for current income taxes | (978 | ) | (899 | ) | (1,984 | ) | (1,826 | ) | ||||||||
$ | 4,174 | $ | 4,069 | $ | 8,429 | $ | 8,425 | |||||||||
Add back: | ||||||||||||||||
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Share/Units | $ | 1,938 | $ | 1,782 | $ | 3,914 | $ | 3,488 | ||||||||
Adjusted earnings from operations(6) | $ | 6,112 | $ | 5,851 | $ | 12,343 | $ | 11,913 | ||||||||
Adjusted earnings per share/unit(6) | $ | 0.204 | $ | 0.197 | $ | 0.412 | $ | 0.401 | ||||||||
Basic earnings (loss) per share/unit | $ | 0.19 | $ | (0.13 | ) | $ | 0.39 | $ | (0.26 | ) | ||||||
Dividends/Distributions declared by the Company | $ | 4,145 | $ | 3,892 | $ | 8,236 | $ | 7,715 | ||||||||
Dividend/Distribution per share/unit | $ | 0.19 | $ | 0.1784 | $ | 0.3775 | $ | 0.3536 | ||||||||
Payout ratio | 99 | % | 96 | % | 98 | % | 92 | % | ||||||||
June 30, | December 31, | |||||
Working capital | $ | 4,774 | $ | 4,563 | ||
Total assets | $ | 328,143 | $ | 325,736 | ||
Total liabilities(8) | $ | 55,941 | $ | 57,622 | ||
(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 period, 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 interest expense on the $47,000 outstanding bank loan. Interest paid on the bank loan for the three months and six months ended June 30, 2013, was $511 and $1,002 (2012 - $511, and $1,022 respectively). See "Interest Expense" in the Company's MD&A for the Quarter. | |
(3) | The Ontario Superior Court of Justice approved the plan of arrangement under which the Fund was converted to a corporate structure (the "Conversion"), 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 and Class D Units of the Partnership; PPL also received a distribution on Class C Units until December 31, 2012. The Class B and D Units are exchangeable into common shares of the Company ("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 27.1% of the fully diluted Shares at June 30, 2013 (June 30, 2012 - 26.5%). During the quarter ended March 31, 2013, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2012 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2012. Included in the three months ended March 31, 2013, is a dividend amount of $57 paid pursuant to the true-up calculation (2012 - PPL returned $50). | |
(5) | In 2011 and 2012, 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 as a result of PPL delivering 3,000,000 Class C limited partnership units to the Pizza Pizza Holdings Trust in accordance with the amended and restated exchange agreement (the "Exchange Agreement"). The Company now receives a monthly distribution on the 3,000,000 Class C units. | |
(6) | "Adjusted earnings from operations" and "Adjusted earnings per Share" are not recognized measures under IFRS. See "Reconciliation of Non-IFRS Measures" in the Company's MD&A for the Quarter. | |
(7) | 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. | |
(8) | 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, at December 31, 2012 the exchangeable Shares were reclassified to equity based on their conversion date fair value. | |
A copy of the Company's unaudited interim condensed consolidated financial statements and related Management's Discussion and Analysis for the Quarter will be available at www.sedar.com and www.pizzapizza.ca after the market closes on August 8, 2013.
As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:
Date: | Friday, August 9, 2013 | |
Time: | 9:00 a.m. ET | |
Call-in number: | 416-642-5212 or 1 866-321-6651 | |
Recording call in number: | 647-436-0148 or 1-888-203-1112 | |
available until midnight, August 23, 2013 | ||
Conference ID: | 2502508 | |
REINSTATEMENT OF OSC FILING REQUIREMENT FOR PPL
In the Company's first quarter earnings press release, the Company announced that the Ontario Securities Commission ("OSC") had given permission to PPL to no longer publicly file PPL's financial statements and the related MD&A. However, during the second quarter, after given the matter further consideration, the OSC has requested PPL to revert to the prior filing requirements.
Prior to May 2, 2013, the Company regularly filed the PPL annual and interim financial statements and the related MD&A. These filings were done to satisfy the undertaking PPL filed in 2005. The policy rationale to file these documents was to have visibility and transparency of the underlying restaurant operations. Following PPRC's conversion from an income trust to a corporation, and after discussions held between representatives of PPRC and staff of the OSC, PPRC proposed to discontinue filing PPL's annual and interim financial statements and the related MD&A. Staff of the OSC agreed to this change in disclosure based on their understanding that the underlying operations of PPL would continue to be reflected in PPRC's new disclosure, which consolidated the financial information of the Pizza Pizza Royalty Limited Partnership (the "Partnership"). Upon further review and consideration, staff of the OSC have now asked PPRC to file the annual and interim financial statements and related MD&A of PPL.
Forward Looking Statements
Certain statements in this report, including under the heading "Restaurant Development", 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 Company's 2012 Annual Information Form. The Company assumes no obligation to update these forward looking statements, except as required by applicable securities laws.
