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Pizza Pizza Royalty Corp. Announces Third Quarter Financial Results Monday, November 6th, 2017

Toronto, Ontario, November 6, 2017 – 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 and nine months ended September 30, 2017.

          Third Quarter highlights:

  • Royalty Pool sales increased 1.6%
  • Same store sales decreased 0.5%
  • Restaurant network decreased by four locations

          Year-to-date highlights:

  • Royalty Pool sales increased 1.3%
  • Same store sales increased 0.1%
  • Restaurant network grew by two locations
  • Royalty Pool of restaurants increased by 15 effective January 1, 2017

SALES
For the three months ended September 30, 2017 (“Quarter”), System Sales from the 751 restaurants in the Royalty Pool increased 1.6% to $139.0 million from $136.9 million in the prior year comparable quarter when there were 736 restaurants in the Royalty Pool. For the nine month period, Royalty Pool System sales increased 1.3% to $407.4 million from $402.2 million in the same period last year. System Sales in the prior year nine month period included an extra day of sales in February 2016 due to the leap year, which management estimated to be $1.0 million.

Royalty Pool System Sales for the three and nine months increased over the comparative periods in 2016 as a result of the change in same store sales growth (“SSSG”) and the impact of restaurants added to the Royalty Pool on January 1, 2017. Additionally, the extra day of sales in the prior year should be considered when comparing 2017 to 2016.

SSSG, the key driver of yield growth for shareholders of the Company, decreased by 0.5% for the Quarter compared to a 2.2% increase in the same quarter last year. Year-to-date, SSSG increased by 0.1% compared to a 1.9% increase in 2016.

Paul Goddard, CEO, Pizza Pizza Limited (“PPL”), said: “Our sales were softer than anticipated as a weakened Alberta economy continued to negatively impact sales. At Pizza Pizza, an unusually wet summer resulted in reduced attendance and sales at several, large, outdoor nontraditional venues which offset same store sales growth at our traditional locations. As well, we were up against a strong quarter in 2016 during which the Toronto Blue Jays made it into post-season action.”

SSSG is driven by the growth in the average customer check and in customer traffic, both of which are affected by changes in pricing and sales mix. During the Quarter and for the nine months, PPL continued to execute on its strategy of growing customer traffic through compelling promotional offerings at both brands. The promotions, which were designed to drive traffic at attractive price points, successfully grew both delivery and walk-in traffic when compared to the same periods last year, however the average customer check decreased slightly. Management believes this near-term strategy will stabilize and grow same store sales, especially at the Pizza 73 brand which operates largely in the weakened Alberta economy.

Paul Goddard also added: “Sound fundamentals at our brands have successfully increased customer visits at Pizza Pizza and Pizza 73. Over the past year, the quick service industry has struggled with negative traffic counts in this highly competitive, price sensitive retail environment. We were pleased to reverse the trend at our brands. We will continue this strategy into the final quarter while also positioning marketing campaigns to grow the average customer check during what appears to be a promising hockey season.”

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 101% for the Quarter and was 97% in the prior year quarter.

For the nine months ended September 30, 2017, the Company declared shareholder dividends of $15.8 million, or $0.6417 per Share, compared to $15.6 million, or $0.6337 per Share, for the prior year comparable period. The payout ratio was 102% compared to 100% in the prior year comparable period.

For Canadian federal tax purposes, the dividend is considered a taxable eligible dividend.

The Company’s working capital reserve is $4.8 million at September 30, 2017, which is a decrease of $374,000 since December 31, 2016. The decrease in the reserve was the result of relatively flat adjusted earnings, coupled with an increase in the dividend effective June 2016.

With this reserve in place, the Company has set a 2017 targeted payout ratio at or near 100% on an annualized basis.

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 (“EPS”)

Fully-diluted basic EPS for the Quarter decreased 2.4% to $0.216 per share compared to $0.221 per share for the same quarter in 2016. For the nine month period, the basic EPS was flat at $0.644 per share and is attributable to an increase in royalty income offset by an increase in current taxes. 

As compared to basic EPS, the Company considers “adjusted” EPS1 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 2.6% to $0.223 when compared to the same period of 2016, and decreased 0.4% for the nine month period.

CURRENT INCOME TAX EXPENSE

Current income tax expense for the Quarter was $1.5 million and $4.2 million for the nine month period. For the 2016 comparable quarter and period, the current tax was $1.3 million and $4.1 million, respectively. The tax expense increased in both periods due to an increase in royalty income plus the fact that the available tax amortization on undepreciated capital assets decreased for the period. 

Of particular note is that the Company’s earnings from operations before income taxes, calculated under International Financial Reporting Standards (“IFRS”), differs 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 by 15 locations to 751 on the January 1, 2017 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2017.

During the Quarter, Pizza Pizza Limited (“PPL”) opened five restaurants and closed nine. By brand, for the Quarter, Pizza Pizza opened three non-traditional restaurants; six traditional and two non-traditional locations were closed. Pizza 73 opened two traditional restaurants; one Pizza 73 non-traditional location was closed.

During the nine month period, PPL opened 18 restaurants and closed 16. By brand, for the nine month period, Pizza Pizza opened five traditional and six non-traditional restaurants; eight traditional and six nontraditional locations were closed. Pizza 73 opened seven traditional restaurants; two Pizza 73 nontraditional locations were closed.

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 unaudited interim condensed consolidated financial statements of the Company. Readers should note that the 2017 results are not directly comparable to the 2016 results because of an extra day of royalty revenue in 2016 due to the leap year, in addition to the fact that there are 751 restaurants in the 2017 Royalty Pool compared to 736 restaurants in the 2016 Royalty Pool. 


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
cfeltner@pizzapizza.ca
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
cdsylva@pizzapizza.ca
www.pizzapizza.ca and www.pizza73.com or www.sedar.com.