Toronto, Ontario, May 13, 2020 – Pizza Pizza Royalty Corp. (the “Company”), which indirectly owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months (“Quarter”) ended March 31, 2020.
First Quarter highlights:
- Royalty Pool sales decreased 6.1%
- Same store sales decreased 6.6%
- Adjusted earnings per share decreased 7.4%
- Restaurant network decreased by seven locations
- Royalty Pool of restaurants decreased by 23 net restaurants effective January 1, 2020
As previously announced, the global crisis resulting from the COVID-19 pandemic has had a substantial impact on the restaurant operations at Pizza Pizza Limited (“PPL”) for the three months ended March 31, 2020, and is expected to continue with the timing of recovery uncertain. System-wide sales growth, Royalty Pool System Sales and same store sales were also negatively impacted for the three months ended March 31, 2020.
Pizza Pizza and Pizza 73 System Sales have been negatively impacted as its restaurant operators have taken significant measures in their restaurants to protect the health of employees and consumers in compliance with social-distancing recommendations and requirements of applicable health authorities, including the closure of restaurant seating areas. Fortunately, the restaurants were allowed to remain open for delivery and takeout sales.
To better understand the COVID-19 impact on the Company’s Royalty Pool System Sales, readers should know that Pizza Pizza and Pizza 73 operate traditional and non-traditional restaurants. The Royalty Pool sales mix includes delivery, pickup, walk-in and non-traditional sales. By brand, Pizza Pizza traditional restaurant sales have historically consisted of approximately 60% delivery and pickup sales and 40% walk-in sales, whereas Pizza 73 traditional restaurant sales have been approximately 90% delivery and pickup sales and 10% walk-in sales. As a result of government-mandated social distancing policies, the walk-in sales at both brands decreased significantly beginning in mid-March and this trend continued throughout April; however, walk-in sales began modestly improving in May.
During the first quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada, with only 15 locations temporarily closing after the quarter due to the pandemic. However, the majority of non-traditional Pizza Pizza and Pizza 73 restaurants have closed, with the exception of a few locations in hospitals and gas bars. Normally, non-traditional locations, offering a limited menu and operating, for example, in sporting arenas, outdoor entertainment venues, universities, hospitals, and cinemas, account for nearly 10% of System Sales.
The medium and long term impact to the Company from COVID-19 will depend on consumer behavior after the economy fully reopens, the financial solutions achieved with government, lenders, franchisees, and landlords, and the macro impact on the overall economy, in particular household debt and levels of disposable income. Potential financial solutions which may be required include, but are not limited to, obtaining sufficient financial support from government(s) for PPL and restaurant operators, support from lenders, and obtaining rent relief from landlords.
For the three months ended March 31, 2020, System Sales from the 749 restaurants in the Royalty Pool decreased 6.1% to $125.8 million from $133.9 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 5.3% to $105.2 million and the 104 Pizza 73 restaurants decreased 10.1% to $20.6 million for the Quarter.
Total Royalty Pool System Sales for the Quarter 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 6.6% (2019 – decreased 1.5%) for the Quarter.
The Company typically provides only comparative, quarterly SSSG for Pizza Pizza and Pizza 73 restaurants. However, due to the timing of the COVID-19 impact on System Sales, the Company is providing the following period-level detail which indicates how Pizza Pizza and Pizza 73 restaurant sales trended during the quarter; April is also included.
As mentioned earlier, Royalty Pool System Sales include delivery, pickup, walk-in and non-traditional sales. The sales impact felt from the pandemic began in the last two weeks of March and continued through most of April; however, both brands experienced week-over-week sales increases during the period. The significant decline in walk-in sales encountered in March and April was partially offset by increased delivery and pickup sales; however, the non-traditional sales portion of the sales mix decreased almost entirely and is not expected to return in the near future.
The Company and PPL note that the situation remains fluid and continue to assess the impact the COVID-19 pandemic has had and will have on restaurant sales.
|SSSG||Monthly – 2020
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.
Paul Goddard, CEO, Pizza Pizza Limited said, “Our delivery and pickup sales remain stable and we are actively taking measures to drive increased delivery business. Guided by the needs of our restaurant employees and the communities we serve, we have implemented rigorous additional health and safety measures, including the introduction of contactless delivery and our innovative, tamper-proof pizza box. Also, we are seeing our walk-in sales, which decreased significantly in late March and through April, beginning to gradually increase in May. A special thanks to our restaurant owners, employees and delivery drivers for their operational excellence through these unprecedented market conditions.”
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
Today, the Company’s Board announced its monthly cash dividend of $0.05 per share for May 2020. The dividend will be payable to shareholders of record at the close of business on May 29, 2020, and will be paid on June 15, 2020.
For the Quarter, the Company declared shareholder dividends of $5.3 million, or $0.2139 per Share, for the current Quarter and for the comparative quarter in 2019. The payout ratio was 123% for the Quarter, as a direct result of the pandemic, compared to 107% in the prior year, comparable quarter.
With the decrease in Royalty Pool Sales, the Company’s royalty income also decreased and, as a result, the Company previously announced its monthly dividend was reduced by 30% from $0.0713 per share to $0.05 per share beginning with the April 2020 dividend.
Pizza Pizza Royalty Limited Partnership (“Partnership”) also reduced its monthly distribution to PPL by 30% on PPL’s Class B and Class D Exchangeable Shares, beginning with the April 2020 distribution.
After the recent reduction in the monthly dividend, any further change will be implemented with a view to maintaining the continuity of uniform monthly distributions. It is expected that future dividends will continue to be funded entirely by cash flow from operations and the cash reserve.
The Company’s working capital reserve is $2.6 million at March 31, 2020, which is a decrease of $986,000 since December 31, 2019. The decrease in the reserve is attributable to the increased payout ratio of 123% 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 impacts of the COVID-19 pandemic on restaurant operations, 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 7.6% to $0.195 for the Quarter compared to the prior year comparable quarter.
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 7.4% to $0.20 when compared to the same period in 2019.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter decreased to $1.3 million compared to $1.4 million in the same quarter last year. The Company’s decrease in royalty income and decrease in ownership of the Partnership, offset by and a decrease in tax amortization resulted in the decrease 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 decreased by 23 locations to 749 on the January 1, 2020 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2020.
During the Quarter, PPL opened two traditional Pizza Pizza restaurants; four traditional and four non-traditional Pizza Pizza restaurants were closed as well as one traditional Pizza 73 restaurant.
As mentioned earlier, during the first quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada; 15 locations have temporarily closed after the quarter due to the pandemic. However, the majority of non-traditional Pizza Pizza and Pizza 73 restaurants have closed, with the exception of a few locations in hospitals and gas stations.
New restaurant construction is permitted during the COVID-19 pandemic in British Columbia and Alberta, however, PPL will be temporarily pausing restaurant construction and renovations in Ontario and Quebec until government mandated restrictions on commercial construction are lifted in these provinces.
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
March 31, 2020
|Three months ended
March 31, 2019
|Restaurants in Royalty Pool(1)||749||772|
|Same store sales growth(2)||-6.60%||-1.50%|
|Days in the Period||91||90|
|System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6)||$105,170||$111,033|
|System Sales reported by Pizza 73 restaurants in the Royalty Pool(6)||20,580||22,880|
|Total System Sales||$125,750||$133,913|
|Royalty – 6% on Pizza Pizza System Sales||$6,310||$6,662|
|Royalty – 9% on Pizza 73 System Sales||1,852||2,059|
|Interest paid on borrowings(3) (5)||-308||-311|
|Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5)||$7,739||$8,306|
|Distribution on Class B and Class D Exchangeable Shares(4)||-2,141||-1,966|
|Current income tax expense||-1,319||-1,421|
|Adjusted earnings available for shareholder dividends(5)||$4,279||$4,919|
|Distribution on Class B and Class D Exchangeable Shares(4)||2,141||1,966|
|Adjusted earnings from operations(5)||$6,420||$6,885|
|Adjusted earnings per share(5)||$0.20||$0.22|
|Basic earnings per share||$0.20||$0.21|
|Dividends declared by the Company||$5,266||$5,266|
|Dividend per share||$0.21||$0.21|
|March 31, 2020||December 31, 2019|
- 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 March 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 unaudited interim condensed consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on May 13, 2020.
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, May 13, 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, May 27, 2020
A recording of the call will also be available on the Company’s website at www.pizzapizza.ca.
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 for the period ended March 29, 2020 and the related MD&A and the Company’s Annual Information Form.
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.