Toronto, Ontario, March 2, 2021 – Pizza Pizza Royalty Corp. (“PZA”, the “Company”), which indirectly owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months (“Quarter”) and year ended December 31, 2020.
Fourth Quarter highlights:
- Working capital reserve increased $0.7 million during the quarter to $5.4 million at December 31, 2020
- Payout ratio was 84%
- Beginning in November 2020, dividend increased 10%, or by $0.06 per share annually.
- Royalty Pool sales decreased 15.8%, attributable to the pandemic’s negative impact
- Same store sales decreased 17.6%
- Adjusted earnings per share decreased 17.1%
Year-to-Date highlights:
- Working capital reserve increased $1.8 million during the year
- Payout ratio was 90%
- Royalty Pool sales decreased 11.8%
- Same store sales decreased 12.5%
- Adjusted earnings per share decreased 12.7%
- Restaurant network decreased by 23 locations; pipeline steadily building for 2021 growth
Paul Goddard, CEO, Pizza Pizza Limited said, “Acknowledging the continued uncertainty surrounding the pandemic, the Company increased the monthly dividend in November and maintained a relatively low payout ratio for the quarter. We continue to prioritize the health and safety of our customers right across Canada, and our award winning tamper-proof box, contactless delivery, and e-gift cards were all key innovations that helped us deliver even more for our customers. In the fourth quarter, government mandated dining restrictions resumed, reversing the sales momentum we experienced in the summer months. In addition to losing restaurant dine-in sales, the majority of our non-traditional locations remained closed, particularly sports and entertainment venues. The Company is on solid financial footing at the current levels, as we wait for various restrictions to be lifted. Meanwhile, we have ramped up new restaurant construction and renovations for 2021, and expect that an accelerated vaccination rollout program will help increase consumer confidence as the year progresses.”
SALES
For the three months ended December 31, 2020, System Sales from the 749 restaurants in the Royalty Pool decreased 15.8% to $123.7 million from $146.9 million in the same quarter last year when there were 772 restaurants in the Royalty Pool. By brand, sales from the 645 Pizza Pizza restaurants in the Royalty Pool decreased 15.6% to $103.4 million and sales from the 104 Pizza 73 restaurants decreased 16.6% to $20.3 million for the Quarter.
For the year ended December 31, 2020, System Sales decreased 11.8% to $488.3 million from $553.5 million in the prior year. For the year, sales from the 645 Pizza Pizza restaurants in the Royalty Pool decreased 12.3% to $405.3 million and sales from the 104 Pizza 73 restaurants decreased 9.0% to $83.0 million.
Total Royalty Pool System Sales decreased over the comparative periods largely as a result of the negative impact of the COVID-19 pandemic and the change in the number of restaurants in the Royalty Pool on January 1, 2020.
SAME STORE SALES GROWTH (“SSSG”)
SSSG, the key driver of yield growth for shareholders of the Company, decreased 17.6% (2019 – increased 2.0%) for the Quarter and decreased 12.5% (2019 – increased 0.5%) for the year.
As mentioned previously, the loss of walk-in sales and non-traditional sales have resulted in a significant reduction in System Sales, however the increase in delivery sales at both brands have partially offset this reduction.
| SSSG | Fourth Quarter (%) | Year (%) | ||
|
| 2020 | 2019 | 2020 | 2019 |
| Pizza Pizza | -17.6 | 2.0 | -13.4 | 0.0 |
| Pizza 73 | -17.6 | 2.0 | -8.1 | 3.1 |
| Combined | -17.6 | 2.0 | -12.5 | 0.5 |
SSSG is normally driven by the change in the customer check and customer traffic, both of which are affected by changes in pricing and sales mix. As mentioned earlier, beginning in mid-March, SSSG was negatively impacted as a direct result of the COVID-19 pandemic and the government-mandated social distancing policies. As a result of closing restaurant seating, walk-in sales decreased significantly, negatively impacting overall customer traffic. The decline in walk-in sales resulted in an overall increase in the average check at both brands as the average check of a walk-in customer is much lower than a delivery order check amount. The negative sales effect from the decline in customer traffic, as well as the decrease in non-traditional sales, more than offset the effect of the increase in the average check, resulting in negative SSSG for the Quarter and year.
MONTHLY DIVIDEND AND WORKING CAPITAL RESERVE
For the Quarter, the Company declared shareholder dividends of $3.9 million, or $0.16 per share, compared to $5.3 million, or $0.2139 per share, for the prior year comparable quarter. The payout ratio was 84% for the Quarter and was 95% in the prior year, comparable quarter.
For the year, the Company declared shareholder dividends of $16.6 million, or $0.6739 per share, compared to $21.1 million, or $0.8556 per share in 2019. The payout ratio was 90% for the Year and was 103% in the prior year.
When COVID-19 first impacted System Sales in March, the Company reduced its monthly dividend from $0.0713 per share to $0.05 per share beginning with the April 2020 dividend. Since April, System Sales have partially recovered. After careful consideration, the Board of Directors announced a 10% increase in the monthly dividend, to $0.055 per share from $0.05 per share, beginning with the November 2020 dividend, resulting in an 84% payout ratio for the Quarter and 90% for the year.
The Company’s working capital reserve is $5.4 million at December 31, 2020, which is an increase of $0.7 million in the Quarter and $1.8 million in the year, largely attributable to the April dividend reduction offsetting the first quarter’s payout ratio of 123%, the ongoing financial impact of the COVID-19 pandemic, as well as a 2020 true-up payment to PPL of $164,000 made in relation to the January 1, 2019 Adjustment Date.
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 has historically targeted a payout ratio at or near 100% on an annualized basis. However, this policy is under review as the Company continues to closely monitor System Sales and royalty income, and will consider further changes to the monthly dividend taking into account the duration and impact of the COVID-19 pandemic on Royalty Pool sales, and the timing and pace of economic recovery in the markets that Pizza Pizza and Pizza 73 serve.
EARNINGS PER SHARE (“EPS”)
Fully-diluted basic EPS decreased 17.7% to $0.186 for the Quarter compared to the prior year comparable quarter, and decreased 10.9% to $0.761 for 2020
As compared to basic EPS, the Company considers adjusted EPS 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 17.1% to $0.194 when compared to the same period in 2019, and decreased 12.7% for the year.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter and year was $1.3 million and $5.1 million, respectively, and decreased when compared to the prior year comparative periods at $1.6 million and $5.9 million, respectively. The Company’s decreases in royalty income and ownership of the Partnership, offset by a decrease in tax amortization, resulted in the reduction in tax expense.
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, as well as the taxable income allocated to PPL. 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 decreased by 23 locations to 749 on the January 1, 2020 Adjustment Date. The number of restaurants in the Royalty Pool remained unchanged through December 31, 2020.
During the Quarter, PPL opened one traditional restaurant and one non-traditional Pizza Pizza location and one traditional Pizza 73 restaurant; three traditional Pizza Pizza restaurants were permanently closed. During the year, PPL opened six traditional restaurants and three non-traditional Pizza Pizza locations; 17 traditional and 15 non-traditional Pizza Pizza restaurants were closed. Additionally, two traditional Pizza 73 restaurants opened and one traditional and one non-traditional location closed.
During the fourth quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open for delivery and pick-up customers across Canada; however, the majority of non-traditional Pizza Pizza and Pizza 73 restaurants remained closed, with the exception of a few locations in hospitals and gas stations.
New restaurant construction continues across Canada as government-mandated restrictions on commercial construction have been lifted in all provinces. We expect accelerated restaurant network expansion and increased renovations in 2021, assuming pandemic effects are mitigated in the coming months.
When PPL reports closed restaurants, an amount reflecting the reduction in the Royalty resulting from the decrease in System Sales will be paid by PPL to the Partnership, monthly (the “Make-Whole Payment”), commencing from the date of permanent closure of a restaurant and paid until the following Adjustment Date (January 1). On the subsequent Adjustment Date, the calculated lost System Sales from the closed restaurants will be offset against forecasted System Sales of the new restaurants added to the Royalty Pool. The details of the full calculation can be found in the Company’s Annual Information Form.
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 2020 results are not directly comparable to the 2019 results because of the fact that there are 749 restaurants in the 2020 Royalty Pool compared to 772 restaurants in the 2019 Royalty Pool.
| (in thousands of dollars, except number of restaurants, days in the year, per share amounts, and noted otherwise) | Three months ended December 31, 2020 | Three months ended December 31, 2019 | Year ended December 31, 2020 | Year ended December 31, 2019 |
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| Restaurants in Royalty Pool(1) | 749 | 772 | 749 | 772 |
| Same store sales growth(2) | -17.6% | 2.0% | -12.5% | 0.5% |
| Days in the Period | 92 | 92 | 366 | 365 |
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| System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6) | $ 103,399 | $ 122,539 | $ 405,335 | $ 462,251 |
| System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) | 20,283 | 24,321 | 82,987 | 91,235 |
| Total System Sales | $ 123,682 | $ 146,860 | $ 488,322 | $ 553,486 |
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| Royalty – 6% on Pizza Pizza System Sales | 6,204 | $ 7,352 | $ 24,320 | $ 27,735 |
| Royalty – 9% on Pizza 73 System Sales | 1,826 | 2,189 | 7,469 | 8,211 |
| Royalty income | $ 8,030 | $ 9,541 | $ 31,789 | $ 35,946 |
| Interest paid on borrowings(3) (5) | (319) | (329) | (1,222) | (1,271) |
| Administrative expenses | (183) | (142) | (636) | (494) |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5) | $ 7,528 | $ 9,070 | $ 29,931 | $ 34,181 |
| Distribution on Class B and Class D Exchangeable Shares(4) | (1,572) | (1,935) | (6,481) | (7,771) |
| Current income tax expense | (1,277) | (1,577) | (5,069) | (5,891) |
| Adjusted earnings available for shareholder dividends(5) | $ 4,679 | $ 5,558 | $ 18,381 | $ 20,519 |
| Add back: |
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| Distribution on Class B and Class D Exchangeable Shares(4) | 1,572 | 1,935 | 6,481 | 7,771 |
| Adjusted earnings from operations(5) | $ 6,251 | $ 7,493 | $ 24,862 | $ 28,290 |
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| Adjusted earnings per share(5) | $ 0.194 | $ 0.234 | $ 0.773 | $ 0.885 |
| Basic earnings per share | $ 0.186 | $ 0.226 | $ 0.761 | $ 0.854 |
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| Dividends declared by the Company | $ 3,938 | $ 5,266 | $ 16,590 | $ 21,063 |
| Dividend per share | $ 0.160 | $ 0.2139 | $ 0.6739 | $ 0.8556 |
| Payout ratio(5) | 84% | 95% | 90% | 103% |
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| December 31, 2020 | December 31, 2019 |
| Working capital(5) |
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| $ 5,388 | $ 3,583 |
- The number of restaurants for which the Pizza Pizza Royalty Limited Partnership earns a royalty, 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”). For the 2020 fiscal year, the Royalty Pool includes 645 Pizza Pizza restaurants and 104 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 Pizza Pizza Limited on an annual basis as the periods for which they are reported differ slightly.
- 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.
- 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.
- 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 License and Royalty Agreements, respectively, and represent 23.5% of the fully diluted Shares at December 31, 2020 (December 31, 2019 – 23.0%). During the quarter ended March 31, 2020, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2019 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2019. Included in the three months ended March 31, 2020, is the payment of $164 in distributions to PPL pursuant to the true-up calculation (March 31, 2019 – PPL was paid $31).
- “Adjusted earnings from operations”, “Adjusted earnings available for shareholder dividends”, “Adjusted earnings per Share”, “Payout Ratio”, “Working Capital” and “Interest paid on borrowings” 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.
- 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 audited consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on March 2, 2021.
As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:
Date: Tuesday, March 2, 2021
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, March 16, 2021
Passcode: 2997853
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, including information regarding the Company’s dividend policy, its ability to meet covenants and other financial obligations, and the potential business and financial impacts of the COVID-19 pandemic on the Company, PPL and its franchisees and restaurant operators and their ability to achieve their business objectives, constitute “forward-looking” statements, which involve known and unknown risks, uncertainties and other factors that 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 in conjunction with a discussion of future events or operating or financial performance. These statements reflect management’s current expectations regarding future events and operating and financial performance and speak only as of the date of this report. The Company does not intend to or assume any obligation to update any such forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. 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: changes in national and local business and economic conditions including those resulting from the COVID-19 pandemic (such as restrictions on restaurant operations, customers’ ability and willingness to visit restaurants and their perception of health and food safety issues, discretionary spending patterns and supply chain limitations, and the related financial impact on PPL and its franchisees and restaurant operators and their ability to meet debt and lease obligations), impacts of legislation and governmental regulation, accounting policies and practices, competition, changes in demographic trends and changing consumer preferences, and the results of operations and financial condition of PPL. The foregoing list of factors is not exhaustive and should be read in conjunction with the other information included in the Company’s MD&A, the PPL financial statements and the related MD&A, and the Company’s Annual Information Form.
For further information:
Christine D’Sylva, Chief Financial Officer, Pizza Pizza Limited
(416) 967-1010 x393
cdsylva@pizzapizza.ca
