Toronto, Ontario, March 2, 2020 – 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”) and year ended December 31, 2019.
Fourth quarter highlights:
- Royalty Pool sales increased 3.8%
- Same store sales increased 2.0%
- Adjusted earnings per share increased 3.1%
- Restaurant network decreased by 13 locations
- Royalty Pool sales increased 1.3%
- Same store sales increased 0.5%
- Adjusted earnings per share increased 0.9%
- Restaurant network decreased by 24 locations
- Royalty Pool of restaurants increased by 14 net restaurants effective January 1, 2019
For the three months ended December 31, 2019, System Sales from the 772 restaurants in the Royalty Pool increased 3.8% to $146.9 million from $141.5 million in the same quarter last year when there were 758 restaurants in the Royalty Pool. For the year, Royalty Pool System Sales increased 1.3% to $553.5 million from $546.3 million in the prior year.
Royalty Pool System Sales for the Quarter and year increased over the comparative periods as a result of the reported increase in same store sales growth (“SSSG”) and the impact of net, new restaurants added to the Royalty Pool on January 1, 2019.
SSSG, the key driver of yield growth for shareholders of the Company, increased by 2.0% for the quarter compared to the same quarter last year, and increased 0.5% for the year compared to 2018.
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 and year, the average customer check increased and customer traffic decreased when measured against the same periods in 2018, when the average check increased significantly. In 2109, the average customer check amount has moderated with the use of value-focused promotional offerings as Pizza Pizza Limited (“PPL”) executes on its strategy to grow customer traffic counts
Paul Goddard, CEO, Pizza Pizza Limited said, “We are pleased with the sales growth at both brands in this highly competitive environment. Our successes are attributable to this quarter’s on-trend product introductions, restaurant operational excellence and our full relaunch of Pizza Pizza’s website and apps. The “Gourmet Thins” pizzas launched at Pizza Pizza and the Cauliflower pizza crust at both Pizza 73 and Pizza Pizza, showcased our brands’ continuous innovation and quality focus to meet customers’ evolving preferences, while always delivering excellent value for money. Additionally, our “Delivery Done Better” promise, designed to increase delivery traffic, is proving to be a major competitive advantage for our brands and is clearly delighting our customers.”
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 95% for the Quarter and was 99% in the comparative quarter last year.
For the year, the Company declared shareholder dividends of $21.1 million, or $0.8556 per Share, which is unchanged from 2018. The payout ratio was 103% for the year and was 104% in the prior year.
The Company’s working capital reserve is $3.6 million at December 31, 2019, which is a decrease of $628,000 since December 31, 2018. During the fourth quarter, the reserve increased $240,000. With this reserve in place, the Company had targeted an annual 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. In 2020, the Company will target an annual payout ratio at or near 100%.
EARNINGS PER SHARE (“EPS”)
Fully-diluted basic EPS increased 4.1% to $0.226 for the Quarter and increased 0.6% to $0.859 for the year when compared to the prior year periods.
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 increased 3.1% to $0.234 and increased 0.9% to $0.885 per share for the year when compared to the same periods in 2018.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter and year, at $1.6 million and $5.9 million respectively, increased slightly when compared to 2018 comparable periods. The Company’s increase in royalty income and a decrease in tax amortization, offset by a decrease in ownership of the Partnership resulted in the increase 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.
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 remained unchanged through December 31, 2019.
During the Quarter, PPL opened seven traditional Pizza Pizza restaurants; four traditional and 13 non-traditional Pizza Pizza restaurants were closed.
For the year, PPL opened 11 traditional Pizza Pizza restaurants, five in British Columbia, three in Quebec and three in Ontario; 11 traditional Pizza Pizza restaurants were closed. Additionally, eight non-traditional Pizza Pizza restaurants were opened and 23 non-traditional locations were closed. At the Pizza 73 brand, PPL closed two traditional and seven non-traditional restaurants in Alberta.
The closure of traditional restaurants is the result of management’s review of underperforming restaurants with an enhanced focus on restaurant level profitability across its entire national network. Non-traditional restaurants can be more volatile in nature than traditional restaurants due to their shorter contractual
arrangements. Of the 30 nontraditional closures, 13 were operating in cinemas and six were in gas bars. Management anticipates returning to overall net positive store growth in 2020 at both brands.
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.
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 Partnership’s current interest rate is 2.75% and is projected to remain unchanged through April 2020 (2018 – 2.75%). The effective rate is comprised of a portion fixed with two interest rate swaps at 1.875% plus the credit spread, currently set at 0.875%. In the third quarter, the Partnership entered into a five year forward swap arrangement, commencing April 2020, at which time the credit facility will have a new, effective interest rate of 2.685% comprised of a fixed rate of 1.81% plus a credit spread, currently at 0.875%.
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.
 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”).
(1) The number 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 2019 fiscal year, 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 Pizza Pizza Limited 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 License and Royalty Agreements, respectively, and represent 23.0% of the fully diluted Shares at December 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”, “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.
(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.
As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:
Date: Monday, March 2, 2020
Time: 5:30 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, 2020
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
Christine D’Sylva, Vice President, Finance & Investor Relations, Pizza Pizza Limited
(416) 967-1010 x393