Toronto, Ontario, May 9, 2019 – Pizza Pizza Royalty Corp. (the “Company”), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months (“Quarter”) ended March 31, 2019.
First quarter highlights:
- Royalty Pool of restaurants increased by 14 net restaurants effective January 1, 2019
- Royalty Pool sales decreased 1.1%
- Same store sales decreased 1.5%
- Restaurant network decreased by 3 locations
SALES
For the three months ended March 31, 2019 (“Quarter”), System Sales from the 772 restaurants in the Royalty Pool decreased 1.1% to $133.9 million from $135.3 million in the prior year comparable quarter when there were 758 restaurants in the Royalty Pool.
Total Royalty Pool System Sales for the Quarter decreased as a result of the reported decrease in same store sales growth (“SSSG”), offset by the sales from new restaurants added to the Royalty Pool on January 1, 2019.
As shown in the following table, SSSG, the key driver of yield growth for shareholders of the Company, decreased by 1.5% for the quarter compared to the same quarter last year.
SSSG is driven by the change in the customer check and customer traffic, both of which are affected by changes in pricing and sales mix. During the Quarter, the average customer check increased, when the two brands are combined, while the customer traffic count decreased resulting in negative sales growth. Management continues to employ retail pricing strategies designed to increase traffic, in what continues to be, a highly competitive, value-oriented retail environment.
Paul Goddard, CEO, Pizza Pizza Limited said, “Although our first quarter sales results were below our expectations, customers have begun responding positively to our refreshed marketing approach, along with more effective value-oriented campaigns. In addition, we were pleased to see our Alberta brand, Pizza 73, report back-to-back positive sales quarters.”
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
In the Quarter, the Company declared shareholder dividends of $5.3 million, or $0.2139 per Share, which is unchanged from the prior year comparable quarter. The payout ratio was 107% for the Quarter which is unchanged from the comparative quarter last year.
The Company’s working capital reserve is $3.9 million at March 31, 2019. The reserve is available 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. The reserve has decreased $345,000 since December 31, 2018.
The year-to-date decrease in the reserve is attributable to the reported negative SSSG, as well as a 2018 true-up payment to Pizza Pizza Limited (“PPL”) of $31,000 made in relation to the January 1, 2019 Adjustment Date. With this reserve in place, the Company will continue to target an annual payout ratio at or near 100% on an annualized basis.
EARNINGS PER SHARE (“EPS”)
Fully-diluted basic EPS decreased 2.8% to $0.211 for the Quarter when compared to the prior year comparable quarter. EPS decreased due to a decrease in royalty income and an increase in PPL’s Equivalent Shares on the January 1, 2019 Adjustment Date.
As compared to basic EPS, the Company considers “adjusted” EPS(5) to be a more meaningful indicator of the Company’s operating performance and, therefore, presents fully-diluted, adjusted EPS. Adjusted EPS for the Quarter decreased 1.0% to $0.216 per share, when compared to the same period in 2018.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter was relatively consistent with the 2018 comparable period at $1.4 million.
Of particular note is that the Company’s earnings from operations before income taxes, calculated under International Financial Reporting Standards (“IFRS”), can differ significantly from its taxable income, largely due 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 annually.
RESTAURANT DEVELOPMENT
The number of restaurants in the Company’s Royalty Pool increased by 14 locations to 772 on the January 1, 2019 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2019.
During the Quarter, PPL opened two traditional Pizza Pizza restaurants, one in Quebec and one in British Columbia; three traditional Pizza Pizza restaurants were closed. Additionally, four non-traditional Pizza Pizza locations were opened and four non-traditional locations were closed. At the Pizza 73 brand, PPL closed one traditional and one non-traditional restaurant in Alberta.
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 and should be read in conjunction with the consolidated financial statements of the Company. Readers should note that the 2019 results are not directly comparable to the 2018 results because of the fact that there are 772 restaurants in the 2019 Royalty Pool compared to 758 restaurants in the 2018 Royalty Pool.
(1) The number restaurants for which the Pizza Pizza Royalty Limited Partnership earns a royalty (“Royalty Pool”), 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”) (together, the “License and Royalty Agreements”). For the 2019 fiscal period, the Royalty Pool includes 660 Pizza Pizza restaurants and 112 Pizza 73 restaurants. 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.
(2) SSSG means the change in period gross sales of Pizza Pizza and Pizza 73 restaurants as compared to sales in the previous period, where the restaurants have been open at least 13 months. Additionally, for a Pizza 73 restaurant whose restaurant territory was adjusted due to an additional restaurant, the sales used to derive the Step-Out Payment may be added to sales to arrive at SSSG. SSSG does not have any standardized meaning under IFRS. Therefore, these figures may not be comparable to similar figures presented by other companies. See “Reconciliation of Non-IFRS Measures” in the Company’s MD&A.
(3) The Company, indirectly through the Partnership, incurs interest expense on the $47 million outstanding bank loan. Interest expense also includes amortization of loan fees and off-market swap payments. See “Interest Expense” in the Company’s MD&A.
(4) Represents the distribution to PPL from the Partnership on Class B and Class D Units of the Partnership. 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 Licence and Royalty Agreements, respectively, and represent 23.0% of the fully diluted Shares at March 31, 2019 (December 31, 2018 – 22.3%). During the quarter ended March 31, 2019, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2018 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2018. Included in the three months ended March 31, 2019, is the payment of $31 in distributions to PPL pursuant to the true-up calculation (March 31, 2018 – PPL was paid $111).
(5) “Adjusted earnings from operations”, “Adjusted earnings available for shareholder dividends”, “Adjusted earnings per Share”, “Payout Ratio”, and “Working Capital” do not have any standardized meaning under IFRS. Therefore, these figures may not be comparable to similar figures presented by other companies. See “Reconciliation of Non-IFRS Measures” in the Company’s MD&A.
(6) System Sales (as defined in the Licence 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.
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 May 9, 2019.
As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:
Date: Thursday, May 9, 2019
Time: 5:00 p.m. ET
Call-in number: 647-427-7450 / 888-231-8191
Recording call in number: 416-849-0833 / 855-859-2056
Available until midnight, May 23, 2019
Passcode: 7762977
A recording of the call will also be available on the Company’s website at www.pizzapizza.ca.
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 speak only as of the date of this report. These forward-looking statements involve a number of risks and uncertainties, including those 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.
For further information:
Curt Feltner, Chief Financial Officer, Pizza Pizza Limited
(416) 967-1010 x307
www.pizzapizza.ca and www.pizza73.com or www.sedar.com.
Christine D’Sylva, Vice President, Finance & Investor Relations, Pizza Pizza Limited
(416) 967-1010 x393
www.pizzapizza.ca and www.pizza73.com or www.sedar.com.
[1] Adjusted earnings and adjusted EPS 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 (“MD&A”).
