PIZZA PIZZA ROYALTY CORP. ANNOUNCES A 3.7% DIVIDEND INCREASE AND THIRD QUARTER 2022 RESULTS

TORONTO, Nov. 7, 2022 /CNW/ - 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 nine months ("Period") ended September 30, 2022.

Third Quarter highlights:

• Royalty Pool sales increased 15.4%
• Same store sales increased 14.0%
• Adjusted earnings per share⁽⁵⁾ increased 14.4%
• Traditional restaurant network increased by five net locations

Paul Goddard, CEO, Pizza Pizza Limited ("PPL") said, "Our strong sales growth across all channels continued during the quarter at Pizza Pizza; we were also pleased to see Pizza 73 report improved sales. With successive, quarterly same store sales growth, our Board announced a 3.7% increase in the shareholder dividend effective November 2022; this is our third increase this year. Our on-trend product introductions, creative marketing campaigns, including our "Everyone Deserves Pizza" campaign, and strategic partnerships with our many non-traditional restaurants, will continue to support sales growth as we enter our strongest sales quarter."

Year-to-Date highlights:

• Royalty Pool sales increased 16.6%
• Same store sales increased 16.0%
• Adjusted earnings per share⁽⁵⁾ increased 15.6%
• Monthly cash dividend increased 16.7%
• Traditional restaurant network increased by six net locations
• Royalty Pool of restaurants for 2022 increased by two restaurants on January 1, 2022

SALES
For the three months ended September 30, 2022, System Sales from the 727 restaurants in the Royalty Pool increased 15.4% to $149.7 million from $129.7 million in the same quarter last year when there were 725 restaurants in the Royalty Pool. By brand, sales from the 624 Pizza Pizza restaurants in the Royalty Pool increased 17.5% to $130.8 million and sales from the 103 Pizza 73 restaurants increased 2.6% to $18.9 million for the Quarter.

For the nine months ended September 30, 2022, Royalty Pool System Sales for the Period increased 16.6% to $415.1 million from $355.9 million in the same period last year. By brand for the Period, sales from the 624 Pizza Pizza restaurants in the Royalty Pool increased 19.4% to $358.5 million and sales from the 103 Pizza 73 restaurants increased 1.5% to $56.6 million.

The increase in Royalty Pool System Sales is due to the full re-opening of the economy and many non-traditional locations reopening as the Period progressed. Additionally, while the number of restaurants in the Royalty Pool increased in 2022, it remains less than 2019 when there were 772 restaurants in the Royalty Pool. 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 14.0% (2021 – 2.8%) for the Quarter, and increased 16.0% for the Period (2021 – decreased 3.4%).

SSSG	Third Quarter (%)		Year-to-Date (%)
	2022	2021	2022	2021
Pizza Pizza	16.0	5.7	18.8	-1.8
Pizza 73	1.8	-11.4	1.0	-10.9
Combined	14.0	2.8	16.0	-3.4

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. At Pizza Pizza, for the Quarter and Period, the increase in SSSG was largely driven by the lifting of COVID-19 related public health restrictions and the reopening of non-traditional locations, both of which lead to increased customer traffic. Additionally, during the quarter the average customer check increased as the brands passed along industry-wide price and commodity inflation and labour cost increases. At Pizza 73, for the Quarter and Period, the SSSG was affected by an increase in average check, offset by a decrease in customer traffic.

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
Subsequent to the quarter end, after careful consideration and taking into account the working capital reserve, the Board of Directors announced another 3.7% increase in the monthly dividend, from $0.0675 to $0.07 per share, effective November 2022. The dividend will be payable to shareholders of record at the close of business on November 30, 2022, and will be paid on December 15, 2022.

The Company declared shareholder dividends of $5.0 million for the Quarter, or $0.2025 per share, compared to $4.3 million, or $0.175 per share, for the prior year comparable quarter. The payout ratio was 91% for the Quarter and was 90% in the prior year, comparable quarter.

For the Period, the Company declared shareholder dividends of $14.5 million, or $0.59 per share, compared to $12.4 million, or $0.505 per share, for the prior year comparable period. The payout ratio was 97% for the Period and was 97% in the prior year, comparable period.

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 $7.0 million at September 30, 2022, which is an increase of $0.5 million in the Quarter due to the 91% payout ratio. With the increase in the monthly dividend in February and June 2022, the Company believes that there is sufficient cashflow to service the Company's obligations as they fall due, while also partially restoring the monthly dividend to pre-COVID levels.

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. See "Dividends".

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 2022, the credit spread decreased to 0.875% as the impact of COVID-19 lessened and earnings improved resulting in the effective interest rate decreasing to 2.685%. Previously, in April 2021, the credit spread had increased to 1.125%, raising the combined interest rate to 2.935%. 

CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.7 million from $1.4 million in the prior year. For the Period, current income tax was $4.5 million, which increased when compared to the prior year comparative period at $3.7 million. The increase for the Quarter and Period is a result of the increase in the Company's earnings stemming 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 15.4% to $0.225 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 14.4% to $0.231 when compared to the same period in 2021, and increased 15.6% to $0.645 for the Period.

RESTAURANT DEVELOPMENT
As announced earlier this year, the number of restaurants in the Company's Royalty Pool increased by two locations to 727 on the January 1, 2022 Adjustment Date, and consists of 624 Pizza Pizza restaurants and 103 Pizza 73 restaurants. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2022.

During the Quarter, PPL opened six traditional Pizza Pizza restaurants, including four openings in British Columbia, one in the Yukon and one in Prince Edward Island, and opened three non-traditional Pizza Pizza restaurants. PPL closed one traditional and nine non-traditional Pizza Pizza restaurants, the majority of which were smaller movie theatre venues. At the Pizza 73 brand, PPL opened one traditional restaurant and closed three non-traditional restaurants, while converting one Pizza 73 traditional restaurant in the Yukon, into a Pizza Pizza restaurant.

During the Period, PPL opened 14 traditional and 11 non-traditional Pizza Pizza restaurants, and closed seven traditional and 14 non-traditional restaurants, the majority of which were smaller movie theatre venues. Additionally, at the Pizza 73 brand, PPL opened one traditional and one non-traditional restaurant, closed two non-traditional restaurants, and converted two Pizza 73 traditional restaurants into Pizza Pizza restaurants.

New restaurant construction continues across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. PPL management has revised its traditional restaurant network growth expectation to 3 to 4% due to supply chain issues. However, its franchisee pipeline remains strong and its renovation program continues through 2022.

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 September 30, 2022 unaudited interim condensed consolidated financial statements of the Company ("Financial Statements"). Readers should note that the 2022 results are not directly comparable to the 2021 results due to there being 727 restaurants in the 2022 Royalty Pool compared to 725 restaurants in the 2021 Royalty Pool.

(in thousands of dollars, except number of    restaurants, days in the year, per share amounts,    and noted otherwise)		Three months ended September 30, 2022		Three months ended September 30, 2021	Nine months ended September 30, 2022	Nine months ended September 30, 2021
Restaurants in Royalty Pool^(1)		727		725	727	725
Same store sales growth^(2)		14.0 %		2.8 %	16.0 %	-3.4 %
Days in the Period		92		92	273	273
System Sales reported by Pizza Pizza restaurants in the Royalty Pool^(6)		$         130,794		$         111,303	$         358,518	$        300,175
System Sales reported by Pizza 73 restaurants in the Royalty Pool^(6)		18,881		18,408	56,579	55,720
Total System Sales		$         149,675		$         129,711	$         415,097	$        355,895
Royalty – 6% on Pizza Pizza System Sales		$             7,848		$             6,678	$           21,511	$          18,010
Royalty – 9% on Pizza 73 System Sales		1,699		1,657	5,092	5,015
Royalty income		$             9,547		$             8,335	$           26,603	$          23,025
Interest paid on borrowings^(3) (5)		(322)		(350)	(999)	(1,006)
Administrative expenses		(119)		(119)	(399)	(379)
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited^(5)		$             9,106	$             7,866		$           25,205	$          21,640
Distribution on Class B and Class D Exchangeable Shares^(4)		(1,984)		(1,743)	(5,764)	(5,076)
Current income tax expense		(1,663)		(1,362)	(4,463)	(3,691)
Adjusted earnings available for shareholder dividends^(5)		$             5,459		$             4,761	$           14,978	$          12,873
Add back:
Distribution on Class B and Class D Exchangeable Shares^(4)		1,984		1,743	5,764	5,076
Adjusted earnings from operations^(5)		$             7,443		$             6,504	$           20,742	$          17,949
Adjusted earnings per share^(5)		$             0.231		$            0.202	$             0.645	$            0.558
Basic earnings per share		$             0.225		$            0.195	$             0.624	$            0.536
Dividends declared by the Company		$             4,985		$            4,308	$           14,525	$          12,432
Dividend per share		$           0.2025		$            0.175	$             0.590	$            0.505
Payout ratio^(5)		91 %		90 %	97 %	97 %
					September 30, 2022	December 31, 2021
Working capital^(5)					$            7,002	$            6,537

(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 2022 fiscal year, the Royalty Pool includes 624 Pizza Pizza restaurants and 103 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 23.5% of the fully diluted Shares at September 30, 2022 (December 31, 2021 – 23.5%). During the quarter ended March 31, 2022, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2021 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, 2021. Included in the three months ended March 31, 2022, is the payment of $nil in distributions to PPL pursuant to the true-up calculation (March 31, 2021 - 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.sedar.com and www.pizzapizza.ca after the market closes on November 7, 2022.

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, November 7, 2022
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, November 21, 2022

Conference ID:                        367009

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 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 foregoing MD&A, the PPL financial statements for the period ended January 2, 2022 and the related MD&A and the Company's Annual Information Form.

www.pizzapizza.ca and www.pizza73.com or www.sedar.com.

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-GAAP 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)	Q3 2022	Q2 2022	Q1 2022	Q4 2021
Earnings for the period before income taxes	9,106	8,647	7,452	8,365
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited	9,106	8,647	7,452	8,365
Current income tax expense	(1,663)	(1,528)	(1,272)	(1,463)
Adjusted earnings from operations	7,443	7,119	6,180	6,902
Less: Distribution on Class B and Class D Exchangeable Shares	(1,984)	(1,924)	(1,856)	(1,779)
Adjusted earnings available for shareholder dividends	5,459	5,195	4,324	5,123
Weighted average Shares – diluted	32,177,276	32,177,276	32,177,276	32,177,276

(in thousands of dollars, except number of shares)	Q3 2021	Q2 2021	Q1 2021	Q4 2020
Earnings for the period before income taxes	7,866	7,156	6,618	7,528
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited	7,866	7,156	6,618	7,528
Current income tax expense	(1,362)	(1,219)	(1,110)	(1,277)
Adjusted earnings from operations	6,504	5,937	5,508	6,251
Less: Distribution on Class B and Class D Exchangeable Shares	(1,743)	(1,667)	(1,667)	(1,572)
Adjusted earnings available for shareholder dividends	4,761	4,270	3,841	4,679
Weighted average Shares – diluted	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. Adjusted EPS for the Quarter increased 14.4% to $0.231 when compared to the same period of 2021, and increase 15.6% to $0.645 for the Period.

Basic EPS is adjusted as follows:

	Three months ended		Nine months ended
	September 30, 2022	September 30, 2021	September 30, 2022	September 30, 2021
Basic EPS	$        0.225	$0.195	$       0.625	$       0.536
Adjustments:
Deferred tax expense	0.006	0.007	0.020	0.022
Adjusted EPS	$        0.231	$0.202	$       0.645	$       0.558

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		Nine months ended
(in thousands of dollars, except as noted otherwise)	September 30, 2022	September 30, 2021	September 30, 2022	September 30, 2021
Dividends declared to shareholders	4,985	4,308	4,985	4,308
Adjusted earnings available for shareholder dividends	5,459	4,761	5,459	4,761
Payout Ratio	91 %	90 %	91 %	90 %

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)		September 30, 2022	December 31, 2021
Total current assets		10,460	9,341
Less: Total current liabilities		3,458	2,804
Working Capital		7,002	6,537

SOURCE Pizza Pizza Royalty Corp.

Christine D'Sylva, Chief Financial Officer, Pizza Pizza Royalty Corp., [phone] x393, [email protected]; Alexander Sewrattan, Director of Finance, Pizza Pizza Limited, [phone] x415 [email protected]