Pizza Pizza Royalty Corp. Announces Fourth Quarter and Annual Financial Results

Marketwired

TORONTO, ONTARIO--(Marketwired - Feb 20, 2014) -

Attention Business Editors:

Pizza Pizza Royalty Corp. (PZA.TO) (the "Company" or "PPRC"), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the fourth quarter and year ended December 31, 2013.

The Company also announced a cash dividend of $0.0667 per share for February 2014. The dividend will be payable to shareholders of record at the close of business on February 28, 2014, and will be paid on March 14, 2014.

Fourth Quarter highlights:

  • Twelve new stores opened; no closures
  • Same store sales increased 1.6%
  • Adjusted earnings per share increased 2.8%
  • Dividend was 8.3% higher than the prior year quarter
  • Payout ratio was 92%

Full year 2013 highlights:

  • 35 new stores opened; six closed
  • Same store sales increased 2.1%
  • Adjusted earnings per share increased 1.9%
  • Monthly dividend increased 4.2% in January 2013 and 4% in June 2013
  • Working capital reserve increased $534,000 to $5.1 million
  • Payout ratio was 97%
  • Effective tax rate was 19.5%

SALES

In the fourth quarter ended December 31, 2013 ("Quarter"), System Sales from the 694 restaurants in the Royalty Pool increased 2.1% to $130.0 million from $127.3 million in the same quarter last year.

For the year ended December 31, 2013 ("Year"), Royalty Pool System Sales increased 2% to $491.1 million from $481.5 million 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, was 1.6% (3.2% - 2012) for the Quarter and was 2.1% (2.7% - 2012) for the Year, when compared to the same periods in 2012. The Company is reporting its fourteenth consecutive quarter of positive SSSG.

Same store sales growth Fourth Quarter
(%)
Annual
(%)
2013 2012 2013 2012
Pizza Pizza 0.7 2.7 1.6 2.5
Pizza 73 6.3 5.7 4.4 3.4
Combined 1.6 3.2 2.1 2.7

SSSG can be measured in terms of growth in the average customer cheque and growth in customer traffic. Compared to the same quarter last year, the average customer cheque increased for the Quarter while the traffic counts decreased due to weaker walk-in sales as a result of the colder than normal weather in December. For the Year, the average customer cheque increased and traffic counts declined slightly due to a decrease in walk-in traffic for the fourth quarter.

Paul Goddard, C.E.O., Pizza Pizza Limited ("PPL"), said: "We're pleased to be reporting another solid year of growth both in same store sales and in shareholder value. Three years of consistent sales growth have built a very healthy cash reserve and led to two dividend increases in 2013 and another in early 2014. I am especially proud of our franchisees, partners and employees as Pizza Pizza was recently named company of the year by Foodservice and Hospitality Magazine."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $4.3 million ($0.195 per share) for the Quarter compared to $3.9 million ($0.18 per unit) for the prior year comparable quarter which equates to an 8.3% increase.

For the Year, the Company declared dividends of $16.8 million ($0.7675 per share) compared to distributions of $15.6 million ($0.7136 per unit) in 2012, or a 7.6% increase. The payout ratio was 97% for the Year compared to 90% in 2012. The increase in dividends was the result of the fourteenth consecutive, positive quarter of SSSG and the accumulation of the $5.1 million cash reserve.

In June 2013, the Company increased the monthly dividend by 4% to $0.065 per share ($0.78 annualized) from $0.0625 per share ($0.75 annualized). Prior to the June 2013, the Company had increased the dividend in January 2013 by 4.2% to $0.0625 per share. In 2012, the shareholder dividend was increased in May by 2.7% to $0.06 per unit from $0.0584 per unit.

During the Quarter, the Company's working capital reserve increased by $367,000 to $5.1 million; the reserve increased $534,000 for the Year. The reserve is available to the Company's board of directors to fund administrative expenditures and to stabilize dividends in the event of short- to medium-term variability in System Sales and, thus, the Company's royalty income. The Company does not have capital expenditure requirements or employees.

As announced earlier in early 2014, in what was in affect a stock buy-back, the Company's board of directors and PPL agreed to pay PPL, for new Pizza 73 restaurants included in the Royalty Pool, $1.2 million in cash in lieu of issuing to PPL 85,571 Class D Units. In deciding to pay cash in lieu of increasing PPL's equivalent shares, the Company's board of directors concluded that the transaction is accretive to shareholders and that the working capital reserve balance after the payment would be at an appropriate level. Reflecting this, the cash reserve was $3.9 million at the end of January 2014, a level that the directors believe to be sufficient to permit, for the time being, the continued distribution of closer to 100% of distributable earnings.

EARNINGS PER SHARE

Fully-diluted earnings per share ("EPS") for the Quarter was $0.209 per share compared to $0.730 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 fully-diluted adjusted EPS.

For the Quarter, adjusted EPS increased 2.8% to $0.220 per share compared to $0.214 per unit in the same quarter last year. For the Year, adjusted EPS increased 1.9% to $0.838 per share from $0.822 per unit 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").

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.1 million and was $1 million for the prior year comparable quarter. For the Year, current tax expense was $4.1 million compared to $3.8 million 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 19.5% (2012 - 19.2%) for 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 722 on the January 1, 2014 Adjustment Date from 694 in 2013.

During the Quarter, Pizza Pizza Limited ("PPL") opened a net, 12 additional restaurants, increasing the number of restaurants to 723 at December 29, 2013. By brand for the Quarter, Pizza Pizza opened seven traditional restaurants and four non-traditional locations, and one Pizza 73 non-traditional location opened. For the Year, PPL opened a net, 24 restaurants. By brand, Pizza Pizza opened 12 traditional restaurants and 18 non-traditional locations, and closed six non-traditional locations. Pizza 73 opened one traditional and five non-traditional locations; one non-traditional closed during the year.

Readers should note that the number of restaurants added to the Royalty Pool each year may differ from the number of restaurant openings and closings reported by PPL on an annual basis, as the periods for which they are reported differ slightly.

SELECTED FINANCIAL HIGHLIGHTS

The following table sets 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 consolidated financial statements of the Company. 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, as well as the fact that there are 694 restaurants in the 2013 Royalty Pool compared to 690 restaurants in the 2012 Royalty Pool. References to the Company in the financial statements 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.

(in thousands of dollars, except number of restaurants and per Share amounts) 2013 2012 2011
Restaurants in Royalty Pool 694 690 695
Same store sales growth(1) 2.1 % 2.7 % 2.6 %
Days in Period 365 366 365
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(7) $ 408,438 $ 402,068 $ 391,117
System Sales reported by Pizza 73 restaurants in the Royalty Pool(7) $ 82,620 $ 79,451 76,763
$ 491,058 $ 481,519 $ 467,880
Royalty - 6% on Pizza Pizza System Sales $ 24,506 $ 24,124 $ 23,467
Royalty - 9% on Pizza 73 System Sales $ 7,436 $ 7,151 6,908
Royalty income $ 31,942 $ 31,275 $ 30,375
Interest paid on borrowings(2) (2,087 ) (2,087 ) (2,299 )
Administrative expenses (666 ) (627 ) (617 )
Conversion costs(3) - (350 ) -
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 29,189 $ 28,211 $ 27,459
Pizza Pizza Limited's distribution(4) (7,867 ) (8,877 ) (8,623 )
Adjusted earnings available for distribution to the Company $ 21,322 $ 19,334 $ 18,836
Interest income(5) - 1,800 1,800
Adjusted earnings before current income tax expense $ 21,322 $ 21,134 $ 20,636
Current income tax expense (4,073 ) (3,786 ) (3,710 )
17,249 17,348 16,926
Add back:
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Shares/Units 7,867 7,077 6,823
Adjusted earnings from operations(6) $ 25,116 $ 24,425 $ 23,749
Adjusted earnings per share/unit(6) $ 0.838 $ 0.822 $ 0.800
Basic earnings per share/unit $ 0.793 $ 0.372 $ 0.545
Dividends/Distributions declared by the Company $ 16,746 $ 15,570 $ 15,290
Dividend/Distributions per share/unit $ 0.7675 $ 0.7136 $ 0.7008
Payout ratio 97 % 90 % 90 %
December 31, 2013 December
31, 2012
December
31, 2011
Working capital 5,097 4,563 2,754
Total assets 328,681 325,736 357,293
Total liabilities(8) 58,872 57,622 161,007
(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 year ended December 31, 2013, was $519 and $2,055 (2012 - $516, and $2,055 respectively). Interest expense also includes amortization of loan fees. See "Interest Expense" in the Company's MD&A.
(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 did 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 limited partnership 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 December 31, 2013 (December 31, 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 of the Partnership to the Pizza Pizza Holdings Trust (the "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" do not have any standardized meaning under International Financial Reporting Standards ("IFRS"). Therefore, these figures are unlikely to be comparable to similar figures presented by other companies. See "Reconciliation of Non-IFRS Measures" in the Company's MD&A.
(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 consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on February 20, 2014.

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, February 21, 2014
Time: 9:00 a.m. EST
Call-in number: 416-340-2216 / 866-223-7781 / 800-6578-9898
Conference ID: 4184117
Recording call in number: 905-694-9451 / 800-408-3053 / 800-3366-3052
Available until midnight, March 7, 2014
Passcode: 4293295

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 Annual Information Form. The Company assumes no obligation to update these forward looking statements, except as required by applicable securities laws.

www.pizzapizza.ca and www.pizza73.com or www.sedar.com.

Contact:
Pizza Pizza Limited
Curt Feltner
Chief Financial Officer
(416) 967-1010 x307
cfeltner@pizzapizza.ca
www.pizzapizza.ca

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