For Immediate Release
Attention Business Editors:
Toronto, Ontario, March 6, 2024 – Pizza Pizza Royalty Corp. (the “Company”) (TSX:PZA), which indirectly owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months (“Quarter”) and twelve months (“Year”) ended December 31, 2023.
Fourth Quarter highlights:
- Same store sales(2) increased 4.0%
- Royalty Pool sales increased 7.0%
- Adjusted earnings per share(5) increased 7.1%
- Restaurant network increased by 11 net locations
2023 Full Year highlights:
- Same store sales(2) increased 8.2%
- Royalty Pool sales increased 10.6%
- Adjusted earnings per share(5) increased 10.9%
- Restaurant network increased by 32 net locations
- Monthly cash dividend increased three times, aggregating to 10.7%
- Royalty Pool of restaurants for 2023 increased by 16 restaurants on January 1, 2023
Paul Goddard, CEO, Pizza Pizza Limited (“PPL”) said, “2023 was an exceptional year for our brands as we achieved 8.2% same store sales growth over already strong 2022 results, and we strengthened our presence across Canada by opening 45 new restaurants. This culminated in total sales crossing the $600 million threshold and enabled us to declare three dividend increases in the year. We also continued to leverage our marketing and technology strengths in 2023 while featuring our high quality menu offerings.”
SALES
Royalty Pool System Sales for the Quarter increased 7.0% to $163.9 million from $153.2 million in the same quarter last year. By brand, sales from the 644 Pizza Pizza restaurants in the Royalty Pool increased 6.8% to $141.1 million for the Quarter compared to $132.1 million in the same quarter last year. Sales from the 99 Pizza 73 restaurants increased 8.5% to $22.9 million for the Quarter compared to $21.1 million in the same quarter last year.
Royalty Pool System Sales for the Year increased 10.6% to $628.3 million from $568.3 million in 2022. By brand, for the Year, sales from the 644 Pizza Pizza restaurants in the Royalty Pool increased 11.0% to $544.4 million compared to $490.6 million in the prior year. Sales from the 99 Pizza 73 restaurants increased 8.1% to $83.9 million compared to $77.7 million in 2022.
For the Quarter and Year, the increase in Royalty Pool System Sales is primarily driven by the increase in same store sales and new restaurants added to the Royalty Pool on January 1, 2023. Additionally, while the number of restaurants in the Pizza 73 Royalty Pool remains less than 2019 when there were 104 restaurants, the negative impact on Royalty Pool System Sales due to prior year restaurant closures has been mitigated by the Make-Whole Carryover Amount.
SAME STORE SALES GROWTH (“SSSG”)
SSSG, the key driver of yield growth for shareholders of the Company, increased 4.0% (2022 –13.0%) for the Quarter and 8.2% (2022 – 15.2%) for the Year.
| SSSG | Fourth Quarter
(%) |
Year (%) |
||
| 2023 | 2022 | 2023 | 2022 | |
| Pizza Pizza | 3.5 | 15.2 | 8.4 | 17.8 |
| Pizza 73 | 7.3 | 1.3 | 7.2 | 1.1 |
| Combined | 4.0 | 13.0 | 8.2 | 15.2 |
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 as the brands passed along retail price increases. At both brands restaurant traffic increased due to strong value messaging, promotional brand activities and product innovation. Additionally, 2022 results reflected a comparison to periods impacted by COVID-19, and 2023 reflects more normalized performance.
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
The Company declared shareholder dividends of $5.7 million for the Quarter, or $0.230 per share, compared to $5.1 million, or $0.2075 per share, for the prior year comparable quarter. The payout ratio is 96% for the Quarter and was 91% in the prior year, comparable quarter.
The Company declared shareholder dividends of $21.8 million for the Year, or $0.8875 per share, compared to $19.6 million, or $0.7975 per share, for the prior year comparable period. The payout ratio is 97% for the Year and was 95% in 2022.
The Company’s policy is to distribute all available cash in order to maximize returns to shareholders over time, after allowing for reasonable reserves. Despite seasonal variations inherent to the restaurant industry, the Company’s policy is to make equal dividend payments to shareholders on a monthly basis in order to smooth out income to shareholders.
The Company’s working capital reserve is $8.2 million at December 31, 2023, which is an increase of $0.7 million in the Year due to the 96% payout ratio. System sales for the quarter ended March 31 have generally been the softest and historically results in a payout ratio over 100%. 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.
CREDIT FACILITY
On June 28, 2019, the Partnership amended and extended its $47 million credit facility with a syndicate of chartered banks from April 2020 to April 2025. The credit facility bears interest at the Canadian Bankers’ Acceptance rate plus a credit spread between 0.875% to 1.375%, depending on the level of debt-to-earnings before interest, taxes, depreciation and amortization (“EBITDA”), with EBITDA defined as annualized earnings before interest, taxes, depreciation and amortization.
In April 2021, the credit spread increased to 1.125% pursuant to the table described below, raising the combined interest rate to 2.935%. In April 2022, the credit spread decreased as the impact of COVID-19 lessened and earnings improved, causing the effective interest rate to decrease to 2.685%.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.8 million from $1.7 million in the prior year comparable period. For the Year, current income tax is $7.0 million, which increased when compared to 2022 at $6.1 million. The increase in current income tax for the Quarter and Year is a result of the increase in the Company’s earnings before income taxes from the increase in royalty income.
Of particular note is that the Company’s adjusted 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, as well as the taxable income allocated to PPL. The amount of tax amortization deducted is based on a declining balance basis and will decrease annually.
EARNINGS PER SHARE (“EPS”)
Fully-diluted basic EPS increased 7.3% to $0.249 for the Quarter compared to the prior year comparable quarter.
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 increased 7.1% to $0.255 when compared to the same period in 2022, and increased 10.9% to $0.979 for the Year.
RESTAURANT DEVELOPMENT
As announced in 2023, the number of restaurants in the Company’s Royalty Pool increased by 16 locations to 743 on the January 1, 2023 Adjustment Date, and consists of 644 Pizza Pizza restaurants and 99 Pizza 73 restaurants. The number of restaurants in the Royalty Pool remained unchanged through December 31, 2023.
During the Quarter, PPL opened seven traditional and five non-traditional Pizza Pizza restaurants, and closed one non-traditional Pizza Pizza restaurant.
During the Year, PPL opened 21 traditional and 20 non-traditional Pizza Pizza restaurants, and closed five traditional and seven non-traditional restaurants. Additionally, at the Pizza 73 brand, PPL opened two traditional and two non-traditional restaurants, and closed one traditional restaurant. These restaurants have been added to the Royalty Pool on January 1, 2024 with 774 restaurants included in the 2024 Royalty Pool.
New restaurant construction continues across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. PPL management expects to grow its traditional restaurant network by 3-4% and continue its renovation program through 2024.
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 tables set out selected financial information and other data of Pizza Pizza Royalty Corp. (“PPRC” or the “Company”) and should be read in conjunction with the December 31, 2023 consolidated financial statements of the Company (“Financial Statements”). Readers should note that the 2023 results are not directly comparable to the 2022 results due to there being 743 restaurants in the 2023 Royalty Pool compared to 727 restaurants in the 2022 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, 2023 |
Three months ended December 31, 2022 | Year ended December 31, 2023 |
Year ended December 31, 2022 |
|
| Restaurants in Royalty Pool(1) | 743 | 727 | 743 | 727 | |
| Same store sales growth(2) | 4.0% | 13.0% | 8.2% | 15.2% | |
| Days in the Period | 92 | 92 | 365 | 365 | |
| System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6) | $ 141,051 | $ 132,108 | $ 544,388 | $ 490,626 | |
| System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) | 22,861 | 21,077 | 83,949 | 77,656 | |
| Total System Sales | $ 163,912 | $ 153,185 | $ 628,337 | $ 568,282 | |
| Royalty – 6% on Pizza Pizza System Sales | $ 8,463 | $ 7,926 | $ 32,663 | $ 29,438 | |
| Royalty – 9% on Pizza 73 System Sales | 2,058 | 1,898 | 7,556 | 6,989 | |
| Royalty income | $ 10,521 | $ 9,824 | $ 40,219 | $ 36,427 | |
| Interest paid on borrowings(3) (5) | (323) | (323) | (1,280) | (1,322) | |
| Administrative expenses | (229) | (233) | (643) | (632) | |
| Interest Income | 115 | 82 | 378 | 82 | |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5) | $ 10,084 | $ 9,350 | $ 38,674 | $ 34,555 | |
| Distribution on Class B and Class D Exchangeable Shares(4) | (2,370) | (2,059) | (9,117) | (7,823) | |
| Current income tax expense | (1,834) | (1,679) | (7,002) | (6,142) | |
| Adjusted earnings available for shareholder dividends(5) | $ 5,880 | $ 5,612 | $ 22,555 | $ 20,590 | |
| Add back: | |||||
| Distribution on Class B and Class D Exchangeable Shares(4) | 2,370 | 2,059 | 9,117 | 7,823 | |
| Adjusted earnings from operations(5) | $ 8,250 | $ 7,671 | $ 31,672 | $ 28,413 | |
| Adjusted earnings per share(5) | $ 0.255 | $ 0.238 | $ 0.979 | $ 0.883 | |
| Basic earnings per share | $ 0.249 | $ 0.232 | $ 0.958 | $ 0.856 | |
| Dividends declared by the Company | $ 5,662 | $ 5,108 | $ 21,849 | $ 19,633 | |
| Dividend per share | $ 0.230 | $ 0.2075 | $ 0.8875 | $ 0.7975 | |
| Payout ratio(5) | 96% | 91% | 97% | 95% | |
| December 31, 2023 | December 31, 2022 | ||||
| Working capital(5) | $ 8,237 | $ 7,512 | |||
| Total assets | $ 370,092 | $ 367,831 | |||
| Total liabilities | $ 76,184 | $ 75,408 | |||
(1) The number of restaurants for which the Pizza Pizza Royalty Limited Partnership (the “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 2023 fiscal year, the Royalty Pool includes 644 Pizza Pizza restaurants and 99 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 (“PPL”) on an annual basis as the periods for which they are reported differ slightly.
(2) Same store sales growth (“SSSG”) is a supplementary financial measure under NI 52-112 and therefore may not be comparable to similar measures presented by other issuers. SSSG means the change in Period’s gross revenue of a particular Pizza Pizza or Pizza 73 restaurant as compared to sales in the previous comparative 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, the sales used to derive the Step-Out Payment (calculated as the difference between the average monthly Pizza 73 Royalty payment attributable to that Adjusted Restaurant in the 12 months immediately preceding the month in which the territory reduction occurs, less the Pizza 73 Royalty payment attributable to the restaurant in the current month) may be added to sales to arrive at SSSG. SSSG does not have any standardized meaning under International Financial Reporting Standards (“IFRS”). See “Exhibit One: Reconciliation of Non-IFRS Measures”.
(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.
(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 License and Royalty Agreements, respectively, and represent 23.9% of the fully diluted Shares at December 31, 2023 (December 31, 2022 – 23.5%). During the quarter ended March 31, 2023, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2022 Adjustment to the Royalty Pool, PPL was not paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2022. Included in the three months ended March 31, 2023, is the payment of $nil in distributions to PPL pursuant to the true-up calculation (March 31, 2022 – PPL received $nil).
(5) “Adjusted earnings available for distribution to the Company and Pizza Pizza Limited”, “Adjusted earnings from operations”, “Adjusted earnings available for shareholder dividends”, “Adjusted earnings per Share”, “Interest paid on borrowings”, “Payout Ratio”, and “Working Capital” are non-GAAP financial measures under NI 52-112. They do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. See “Exhibit One: Reconciliation of Non-IFRS Measures”.
(6) 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, and the monthly Make-Whole Payment, 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 unaudited interim condensed consolidated financial statements and related Management’s Discussion and Analysis (“MD&A”) will be available at www.sedarplus.ca and www.pizzapizza.ca after the market closes on March 6, 2024.
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, March 6, 2024 |
| Time: | 5:30 p.m. ET |
| Call-in number: | 416-764-8650 / 888-664-6383 |
| Recording call in number: | 416-764-8677 / 888-390-0541
Available until midnight, March 20, 2024 |
| Conference ID: | 005650 |
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 MD&A. 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 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), 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 foregoing MD&A, the PPL financial statements for the period ended December 31, 2023 and the related MD&A and the Company’s Annual Information Form.
For further information:
Christine D’Sylva, Chief Financial Officer, Pizza Pizza Royalty Corp.
(416) 967-1010 x393 cdsylva@pizzapizza.ca
www.pizzapizza.ca and www.pizza73.com or www.sedarplus.ca.
Exhibit One: Reconciliation of Non-IFRS Measures
The Company’s earnings, as presented under IFRS includes non-cash items, such as deferred tax, that do not affect the Company’s business operations or its ability to pay dividends to shareholders. The Company believes its earnings are not the only, or most meaningful, measurement of the Company’s ability to pay dividends or measure the rate at which the Company is paying out its earnings. Therefore, the Company reports the following non-IFRS measures:
- Adjusted earnings available for distribution to the Company and PPL;
- Adjusted earnings from operations;
- Adjusted earnings available for shareholder dividends;
- Adjusted earnings per share (“EPS”);
- Payout Ratio; and
- Working Capital.
The Company believes that the above noted measures provide investors with more meaningful information regarding the amount of cash that the Company has generated to pay dividends, and, together with Interest Paid on Borrowings and SSSG, help illustrate the Company’s operating performance and highlight trends in the Company’s business. These measures are also frequently used by analysts, investors, and other interested parties in the evaluation of issuers in the Company’s sector, particularly those with a royalty-based model. The adjustments to net earnings as recorded under IFRS relate to non-cash items included in earnings and cash payments accounted for on the statement of financial position. Investors are cautioned, however, that this should not be construed as an alternative to net earnings as a measure of profitability. The method of calculating the Company’s NI 52-112 non-IFRS financial measures: Adjusted earnings available for distribution to the Company and Pizza Pizza Limited, Adjusted earnings from operations, Adjusted earnings available for shareholder dividends, Adjusted EPS, Payout Ratio, Working Capital, Interest Paid on Borrowings and SSSG for the purposes of this MD&A may differ from that used by other issuers and, accordingly, these measures may not be comparable to similar measures used by other issuers.
The table below reconciles the following to “Earnings for the period before income taxes” which is the most directly comparable measure calculated in accordance with IFRS:
- Adjusted earnings available for distribution to the Company and Pizza Pizza Limited;
- Adjusted earnings from operations; and
- Adjusted earnings available for shareholder dividends.
| (in thousands of dollars, except number of shares) | 2023 | Q4 2023 | Q3 2023 | Q2 2023 | Q1 2023 |
| Earnings for the period before income taxes | 38,674 | 10,084 | 10,080 | 9,742 | 8,768 |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited | 38,674 | 10,084 | 10,080 | 9,742 | 8,768 |
| Current income tax expense | (7,002) | (1,834) | (1,833) | (1,766) | (1,568) |
| Adjusted earnings from operations | 31,672 | 8,250 | 8,247 | 7,976 | 7,200 |
| Less: Distribution on Class B and Class D Exchangeable Shares | (9,117) | (2,370) | (2,316) | (2,255) | (2,176) |
| Adjusted earnings available for shareholder dividends | 22,555 | 5,880 | 5,931 | 5,721 | 5,024 |
| Weighted average Shares – diluted | 32,337,580 | 32,337,580 | 32,337,580 | 32,337,580 | 32,337,580 |
| (in thousands of dollars, except number of shares) | 2022 | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 |
| Earnings for the period before income taxes | 34,555 | 9,350 | 9,106 | 8,647 | 7,452 |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited | 34,555 | 9,350 | 9,106 | 8,647 | 7,452 |
| Current income tax expense | (6,142) | (1,679) | (1,663) | (1,528) | (1,272) |
| Adjusted earnings from operations | 28,413 | 7,671 | 7,443 | 7,119 | 6,180 |
| Less: Distribution on Class B and Class D Exchangeable Shares | (7,823) | (2,059) | (1,984) | (1,924) | (1,856) |
| Adjusted earnings available for shareholder dividends | 20,590 | 5,612 | 5,459 | 5,195 | 4,324 |
| Weighted average Shares – diluted | 32,177,276 | 32,177,276 | 32,177,276 | 32,177,276 | 32,177,276 |
The Basic EPS and the Adjusted EPS calculations are based on fully diluted weighted average shares, and both include PPL’s Class B and Class D Exchangeable Shares since they are exchangeable into and economically equivalent to the Shares. See “Adjusted EPS”.
Adjusted EPS is calculated by dividing Adjusted earnings from operations, as explained above, by the fully diluted weighted average shares.
| Basic EPS is adjusted as follows: | Three months ended | Year ended | ||
|
December 31, 2023 |
December 31, 2022 | December 31, 2023 |
December 31, 2022 |
|
| Basic EPS | $ 0.249 | $ 0.232 | $ 0.958 | $ 0.856 |
| Adjustments: | ||||
| Deferred tax expense | 0.006 | 0.006 | 0.021 | 0.027 |
| Adjusted EPS | $ 0.255 | $ 0.238 | $ 0.979 | $ 0.883 |
Payout Ratio is a non-IFRS financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. The Company presents the Payout Ratio to illustrate the earnings being returned to shareholders. The Company’s Payout Ratio is calculated by dividing the dividends declared to shareholders by the adjusted earnings from operations, after paying the distribution on Class B and Class D Exchangeable Shares, in that same period.
| Three months ended | Year ended | |||
| (in thousands of dollars, except as noted otherwise) |
December 31, 2023 |
December 31, 2022 | December 31, 2023 |
December 31, 2022 |
| Dividends declared to shareholders | 5,662 | 5,108 | 21,849 | 19,633 |
| Adjusted earnings available for shareholder dividends | 5,880 | 5,612 | 22,555 | 20,590 |
| Payout Ratio | 96% | 91% | 97% | 95% |
Working Capital is defined as total current assets less total current liabilities. The Company views working capital as a measure for assessing overall liquidity and its ability to stabilize dividends and fund unusual expenditures in the event of short- to medium-term variability in Royalty Pool System Sales.
| (in thousands of dollars) | December 31, 2023 | December 31, 2022 | December 31, 2021 |
| Total current assets | 12,549 | 11,582 | 9,341 |
| Less: Total current liabilities | 4,312 | 4,070 | 2,804 |
| Working Capital | 8,237 | 7,512 | 6,537 |
SSSG is a key indicator used by the Company to measure performance against internal targets and prior period results. SSSG is commonly used by financial analysts and investors to compare PPL to other QSR brands. SSSG is defined as the change in period gross revenue of Pizza Pizza and Pizza 73 restaurants as compared to sales in the previous comparative 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, the sales used to derive the Step-Out Payment may be added to sales to arrive at SSSG. It is a key performance indicator for the Company as this measure excludes sales fluctuations due to store closings, permanent relocations and chain expansion.
The following table calculates SSSG by reconciling Royalty Pool System Sales, based on calendar periods, to PPL’s 13-week sales reporting period used in calculating same store sales.
| Three months ended | Year ended | |||
| (in thousands of dollars) |
December 31, 2023 |
December 31, 2022 | December 31, 2023 |
December 31, 2022 |
| Total Royalty Pool System Sales | 163,912 | 153,185 | 628,337 | 568,282 |
| Adjustments for stores not in both periods, Make-Whole Carryover Amount, Step-Out payments, and the impact of calendar reporting | (5,112) | (499) | (20,899) | (7,067) |
| Same Store Sales | 158,800 | 152,686 | 607,438 | 561,215 |
| SSSG | 4.0% | 13.0% | 8.2% | 15.2% |
