Pizza Pizza Royalty Corp. Announces Third Quarter Financial Results

Marketwired

TORONTO, ONTARIO--(Marketwired - Nov 5, 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 third quarter ended September 30, 2013.

Third Quarter highlights:

  • Nine new stores opened; four closed
  • Same store sales increased 1.9%
  • Adjusted earnings per share was unchanged
  • Working capital reserve decreased $44,000 to $4.7 million
  • Payout ratio was 101%

Year-to-date highlights:

  • 24 new stores opened; six closed
  • Same store sales increased 2.2%
  • Adjusted earnings per share increased 1.8%
  • Monthly dividend increased 4.2% in January 2013 and 4% in June 2013
  • Working capital reserve increased $167,000 to $4.7 million
  • Payout ratio was 99%

SALES

In the third quarter ended September 30, 2013 ("Quarter"), System Sales from the 694 restaurants in the Royalty Pool increased to $121 million from $119.3 million in the same quarter last year.

For the first nine months, Royalty Pool System Sales increased to $361.1 million from $354.2 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 1.9% (1.3% - 2012) for the Quarter and increased 2.2% (2.5% - 2012) for the nine months ended September 30, 2013, when compared to the same periods in 2012. The Company is reporting its thirteenth consecutive, positive SSSG quarter.

Same store sales growth Third Quarter (%) Year-to-date
(%)
2013 2012 2013 2012
Pizza Pizza 1.9 1.1 1.9 2.5
Pizza 73 2.0 2.4 3.7 2.6
Combined 1.9 1.3 2.2 2.5

By brand, for the Quarter, SSSG for the Pizza Pizza restaurants was 1.9% and 2.0% for Pizza 73 restaurants (1.1% and 2.4% in 2012, respectively). For the nine month period, SSSG for Pizza Pizza restaurants was 1.9% and was 3.7% for the Pizza 73 restaurants (2.5% and 2.6% in 2012, respectively).

Restaurant sales benefited from an increase in both the average customer cheque and customer traffic counts during the quarter compared to the same quarter last year. For the nine month period, the average customer cheque increased while traffic was flat compared to the same period last year.

Paul Goddard, C.E.O., Pizza Pizza Limited, said: "Technology and innovation continue to play an important part in maintaining Pizza Pizza as the market leader. During the quarter we launched our Android mobile ordering app and also introduced our "Club 11-11" loyalty program. Both are sales-driven initiatives designed to encourage customer frequency and attract new customers."

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE

The Company declared shareholder dividends of $4.25 million, or $0.195 per Share, for the Quarter compared to $3.9 million, or $0.18 per unit, for the prior year comparable quarter. This is an 8.3% increase on a quarter-over-quarter basis. The increase is a result of the thirteen consecutive, positive quarters of SSSG and the accumulation of the $4.7 million cash reserve. With this reserve now in place, going forward, the Company has begun to target a payout ratio closer to 100% as was the case with the current quarter. The payout ratio was 101% for the Quarter and was 90% in the prior year comparable quarter.

For the nine months ended September 30, 2013, the Company declared dividends of $12.5 million, or $0.5725 per Share, compared to distributions of $11.6 million, or $0.5336 per unit, in 2012; the payout ratio was 99% for the nine month period and was 91% in the comparable period in 2012.

In June 2013, the Company increased the monthly dividend by 4% to $0.065 ($0.78 annualized) from $0.0625 ($0.75 annualized). Prior to the June 2013 dividend increase, 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 of the second quarter by 2.7% to $0.06 per unit from $0.0584.

During the Quarter, the Company's working capital reserve decreased slightly by $44,000 to $4.73 million for the Quarter; the reserve has increased $167,000 for the nine month period. 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. The Company does not have capital expenditure requirements or employees.

EARNINGS PER SHARE

Fully-diluted earnings (loss) per share for the Quarter was $0.20 compared to ($0.11) 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 earnings per share ("EPS").

For the Quarter, adjusted EPS was unchanged at $0.207 per share compared to $0.207 per unit in the same quarter last year. For the nine months ended September 30, 2013, adjusted EPS increased 1.8% to $0.619 per share from $0.608 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") for the Quarter.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $994,000 and was $957,000 for the prior year comparable quarter. For the nine months ended September 30, 2013, current tax expense was $2,979,000 compared to $2,783,000 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 nine 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 in 2012. The number of restaurants in the Royalty Pool will not change again until January 1, 2014.

During the Quarter, Pizza Pizza Limited ("PPL") opened a net, five additional restaurants, increasing the number of restaurants to 712 at September 30, 2013. By brand, Pizza Pizza opened three traditional restaurants and five non-traditional locations; three non-traditional locations were closed. One Pizza 73 non-traditional location opened and one non-traditional location closed during the quarter. For the nine month period, PPL has opened a net, 18 restaurants. By brand, Pizza Pizza has opened five traditional restaurants and fourteen non-traditional locations, and closed five non-traditional locations. Pizza 73 has opened one traditional and four non-traditional locations; one non-traditional closed during the 39-week period.

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 9 months ended
(in thousands of dollars, except number of restaurants and per share /unit amounts) September 30, 2013 September 30, 2012 September 30, 2013 September 30, 2012
Restaurants in Royalty Pool 694 690 694 690
Same store sales growth(1) 1.9 % 1.3 % 2.2 % 2.5 %
Days in Period 92 92 273 274
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(7) $ 101,271 $ 99,900 $ 301,389 $ 296,300
System Sales reported by Pizza 73 restaurants in the Royalty Pool(7) 19,700 19,444 59,670 57,945
$ 120,971 $ 119,344 $ 361,059 $ 354,245
Royalty - 6% on Pizza Pizza System Sales $ 6,076 $ 5,994 $ 18,083 $ 17,778
Royalty - 9% on Pizza 73 System Sales 1,773 1,750 5,371 5,215
Royalty income $ 7,849 $ 7,744 $ 23,454 $ 22,993
Interest paid on borrowings(2) (526 ) (525 ) (1,560 ) (1,563 )
Administrative expenses (148 ) (102 ) (392 ) (412 )
Conversion costs(3) - (20 ) - (182 )
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited $ 7,175 $ 7,097 $ 21,502 $ 20,836
Pizza Pizza Limited's distribution(4) (1,979 ) (2,245 ) (5,889 ) (6,632 )
Adjusted earnings available for distribution to the Company $ 5,196 $ 4,852 $ 15,613 $ 14,204
Interest income(5) - 450 - 1,350
Adjusted earnings before current income tax expense $ 5,196 $ 5,302 $ 15,613 $ 15,554
Current income tax expense (994 ) (957 ) (2,979 ) (2,783 )
$ 4,202 $ 4,345 $ 12,634 $ 12,771
Add back:
Pizza Pizza Limited's distribution on Class B and Class D Exchangeable Shares/Units $ 1,979 $ 1,795 $ 5,889 $ 5,282
Adjusted earnings from operations(6) $ 6,181 $ 6,140 $ 18,523 $ 18,053
Adjusted earnings per share/unit(6) $ 0.207 $ 0.207 $ 0.619 $ 0.608
Basic earnings (loss) per share/unit $ 0.20 $ (0.11 ) $ 0.58 $ (0.36 )
Dividends/Distributions declared by the Company $ 4,255 $ 3,927 $ 12,491 $ 11,642
Dividend/Distribution per share/unit $ 0.195 $ 0.18 $ 0.5725 $ 0.5336
Payout ratio 101 % 90 % 99 % 91 %
September 30, 2013 December 31, 2012
Working capital $ 4,730 $ 4,563
Total assets $ 328,120 $ 325,736
Total liabilities(8) $ 58,229 $ 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 nine months ended September 30, 2013, was $518 and $1,536 (2012 - $516, and $1,538 respectively). Interest expense also includes amortization of loan fees. See "Interest Expense" in the Company's Management's Discussion and Analysis.
(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 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 September 30, 2013 (September 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 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" are not recognized measures under International Financial Reporting Standards ("IFRS"). See "Reconciliation of Non-IFRS Measures" in the Company's Management's Discussion and Analysis.
(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 November 5, 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: Wednesday, November 6, 2013
Time: 9:00 a.m. ET
Call-in number: 416-340-2218 / 866-223-7781 / 800-6578-9898
Conference ID: 4173962
Recording call in number: 905-694-9451 / 800-408-3053 / 800-3366-3052
Available until midnight, November 20, 2013
Passcode: 2587403

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.

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

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

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