Pizza Pizza Royalty Corp. Announces Second Quarter 2020 Results and August Dividend

TORONTO, Aug. 12, 2020 /CNW/ - Pizza Pizza Royalty Corp. (the "PZA", "Company"), which indirectly owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three three months ("Quarter") and six months ("Period") ended June 30, 2020.

Paul Goddard, CEO, Pizza Pizza Limited said, "Looking back from today to the beginning of the pandemic, July comparable sales have rebounded quickly, up 20 percentage points from April sales. Our traditional restaurants posted solid results in the latter part of the quarter and into July, and account for approximately 90% of Royalty Pool System Sales. Our delivery and pickup sales, particularly through our digital channels, grew significantly throughout the second quarter, nearly offsetting a major decrease in our dine-in sales that was unavoidable due to government mandated restrictions. During the early part of the quarter, we quickly introduced innovative customer-centric safety measures such as contactless digital transactions and industry-first tamper-free pizza boxes, providing customers additional assurances when ordering. Most of our non-traditional restaurants, which account for 10% of sales, remain closed due to government restrictions, although we are encouraged to see provinces beginning to ease restrictions on some of these captive-market locations. As well, many key municipalities recently began allowing restaurant dine-in to resume, which we expect to provide a helpful tailwind to our overall business, given walk-in/dine-in historically represents 40% of total sales at Pizza Pizza. We are also optimistic that the return of televised professional sports events should add additional momentum to our delivery business at both brands."  

Second Quarter highlights compared to the second quarter 2019:

• Payout ratio was 83% after adjusting the monthly dividend in April
• Working capital reserve increased $761,000 during the quarter to $3.4 million at June 30, 2020
• Royalty Pool sales decreased 15.5%, largely due to non-traditional restaurant temporary closures
• Same store sales decreased 16.3%, largely due to non-traditional restaurant temporary closures
• Adjusted earnings per share decreased 15.4%
• Restaurant network decreased by 10 locations; pipeline steadily building for 2021 growth

Paul Goddard continued, "We're pleased with our significantly improved results at both brands, and particularly our Pizza 73 results, especially operating in a challenged, economic environment, even prior to the pandemic's adverse effects. Our total sales continue recovering from the -26% same store sales low watermark in April. July reported -7.8% comparable store sales as traditional restaurants continued posting strong sales improvements. Our strong and growing delivery focus at both brands, together with our recent relaunch of our digital ordering apps, have been major sales-driving advantages during our recovery. A special thanks to our restaurant owners and their teams, our employees, and especially our restaurant delivery drivers for their tireless work, resilience and commendable customer focus through these unprecedented market conditions."

Year-to-Date highlights:

• Royalty Pool sales decreased 10.8%
• Same store sales decreased 11.4%
• Adjusted earnings per share decreased 11.4%
• Restaurant network decreased by 17 locations
• Royalty Pool of restaurants decreased by 23 net restaurants effective January 1, 2020

SALES
For the three months ended June 30, 2020 System Sales from the 749 restaurants in the Royalty Pool decreased 15.5% to $113.5 million from $134.3 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 17.9% to $92.1 and sales from the 104 Pizza 73 restaurants decreased 3.1% to $21.4 million for the Quarter.

For the six months ended June 30, 2020, System Sales decreased 10.8% to $239.3 million from $268.2 million in the prior year's comparative period. For the six months, sales from the 645 Pizza Pizza restaurants in the Royalty Pool decreased 11.6% to $197.3 million and sales from the 104 Pizza 73 restaurants decreased 6.6% to $42.0 million.

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. 

To better understand the COVID-19 impact on the Company's Royalty Pool System Sales, readers should note that Pizza Pizza and Pizza 73 operate traditional and non-traditional restaurants. The Royalty Pool sales mix includes delivery, pickup, and walk-in sales from traditional restaurants, plus sales at non-traditional locations.

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 only 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 and have continued to improve in June and July. During the same period, delivery sales have grown significantly and, thus, have partially offset the lost walk-in sales.

Non-traditional store locations, offering a limited menu and typically operating in sporting arenas, outdoor entertainment venues, universities, hospitals, and cinemas, account for nearly 10% of Royalty Pool System Sales. Unfortunately, the majority of non-traditional Pizza Pizza and Pizza 73 locations temporary closed in March and most have remained closed, although certain locations are beginning to reopen in a limited capacity.

SAME STORE SALES GROWTH ("SSSG")
SSSG, the key driver of yield growth for shareholders of the Company, decreased 16.3% (2019 – increased 1.6%) for the Quarter and decreased 11.4% (2019 – flat) for the Period.

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; July is also included.

As mentioned previously, the loss of walk-in sales and non-traditional sales have resulted in a reduction in System Sales, however the increase in delivery and pickup sales at both brands are working to offset this reduction, especially most recently as traditional restaurant sales turned positive in July.

SSSG	Monthly - 2020 (%)
	January	February	March	April	May	June	July
Pizza Pizza	3.1	0.2	-18.4	-29.3	-17.7	-12.5	-8.7
Pizza 73	-1.4	-8.0	-13.7	-12.2	7.2	-1.9	-2.9
Combined	2.3	-1.2	-17.6	-26.4	-13.4	-10.8	-7.8

SSSG	Second Quarter (%)		Year-to-Date (%)
	2020	2019	2020	2019
Pizza Pizza	-19.1	0.8	-12.6	(0.8)
Pizza 73	-2.4	5.8	-5.5	4.3
Combined	-16.3	1.6	-11.4	0.0

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 and Period.

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
Today, the Company's Board announced its monthly cash dividend of $0.05 per share for August 2020. The dividend will be payable to shareholders of record at the close of business on August 31, 2020, and will be paid on September 15, 2020.

For the Quarter, the Company declared shareholder dividends of $3.7 million, or $0.15 per Share compared to $5.3 million, or $0.2139 per share, for the prior year comparable quarter. The payout ratio was 83% for the Quarter and was 107% in the prior year, comparable quarter.

For the Period, the Company declared shareholder dividends of $9.0 million, or $0.3639 per share, compared to $10.5 million, or $0.4278 per share, for the prior year comparable period. The payout ratio was 103% for the Period and was 107% in the prior year, comparable period.

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 Pizza Pizza Limited ("PPL") by 30% on PPL's Class B and Class D Exchangeable Shares, beginning with the April 2020 distribution.

After the 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 $3.4 million at June 30, 2020, which is an increase of $761,000 in the Quarter due largely to the 30% dividend decrease in April which resulted in an 83% payout ratio for the Quarter. For the Period, the reserve decreased $225,000 attributable to the first quarter's payout ratio of 123% which was a direct result of the financial impact of the COVID-19 pandemic, 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 impact 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 service.

EARNINGS PER SHARE ("EPS")
Fully-diluted basic EPS decreased 8.3% to $0.189 for the Quarter compared to the prior year comparable quarter, and decreased 7.7% to $0.384 for the Period.

As compared to basic EPS, the Company considers adjusted EPS[1] 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 15.4% to $0.181 when compared to the same period in 2019, and decreased and decreased 11.4% for the Period.

^{_______________________________________
1} 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").

CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter and Period were $1.2 million and $2.5 million, respectively, and decreased when compared to the prior year comparative periods at $1.4 million and $2.8 million, respectively. 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.

RESTAURANT DEVELOPMENT
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 one traditional restaurant and one non-traditional Pizza Pizza location; five traditional and eight non-traditional Pizza Pizza restaurants were permanently closed. Additionally, one traditional Pizza 73 restaurant opened. During the Period, PPL opened three traditional restaurants and one non-traditional Pizza Pizza location; nine traditional and 12 non-traditional Pizza Pizza restaurants were closed. Additionally, one traditional Pizza 73 restaurant opened and one non-traditional Pizza 73 restaurant closed.

As mentioned earlier, during the second quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada; nine locations remain temporarily closed after the quarter due to the pandemic. However, the majority of non-traditional Pizza Pizza and Pizza 73 restaurants have remained closed, with the exception of a few locations in hospitals and gas stations.

New restaurant construction has resumed across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. We expect accelerated restaurant network expansion and increased renovations in 2021, assuming pandemic effects are mitigated in the coming months.

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	Three months		Three months		Six months		Six months
restaurants, days in the year, per share amounts,	ended		ended		ended		ended
and noted otherwise)	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Restaurants in Royalty Pool^(1)	749		772		749		772
Same store sales growth^(2)	-16.3%		1.6%		-11.4%		0.0%
Days in the Period	91		91		182		181
System Sales reported by Pizza Pizza restaurants in
the Royalty Pool^(6)	$	92,113	$	112,173	$	197,283	$	223,205
System Sales reported by Pizza 73 restaurants in the
Royalty Pool^(6)	21,393		22,077		41,974		44,957
Total System Sales	$	113,506	$	134,250	$	239,257	$	268,162
Royalty – 6% on Pizza Pizza System Sales	$	5,527	$	6,730	$	11,837	$	13,392
Royalty – 9% on Pizza 73 System Sales	1,925		1,987		3,778		4,046
Royalty income	$	7,452	$	8,717	$	15,615	$	17,438
Interest paid on borrowings^(3) (5)	(271)		(305)		(580)		(616)
Administrative expenses	(181)		(140)		(296)		(244)
Adjusted earnings available for distribution to the
Company and Pizza Pizza Limited^(5)	$	7,000	$	8,272	$	14,739	$	16,578
Distribution on Class B and Class D Exchangeable
Shares^(4)	(1,384)		(1,935)		(3,525)		(3,901)
Current income tax expense	(1,166)		(1,422)		(2,485)		(2,843)
Adjusted earnings available for shareholder
dividends^(5)	$	4,450	$	4,915	$	8,729	$	9,834
Add back:
Distribution on Class B and Class D Exchangeable
Shares^(4)	1,384		1,935		3,525		3,901
Adjusted earnings from operations^(5)	$	5,834	$	6,850	$	12,254	$	13,735
Adjusted earnings per share^(5)	$	0.181	$	0.214	$	0.381	$	0.430
Basic earnings per share	$	0.189	$	0.206	$	0.384	$	0.416
Dividends declared by the Company	$	3,693	$	5,266	$	8,959	$	10,532
Dividend per share	$	0.150	$	0.2139	$	0.3639	$	0.4278
Payout ratio^(5)	83%		107%		103%		107%
					June 30, 2020		December 31, 2019
Working capital^(5)					$	3,358	$	3,583

(1)	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.
(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 23.5% 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).
(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.

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 August 12, 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, August 12, 2020
Time:	5:00 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, August 26, 2020
	Passcode: 2436256

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 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 and the related MD&A and the Company's Annual Information Form.

SOURCE Pizza Pizza Royalty Corp.

Curt Feltner, Chief Financial Officer, Pizza Pizza Limited, [phone] x307, [email protected], www.pizzapizza.ca and www.pizza73.com or www.sedar.com; Christine D'Sylva, Vice President, Finance & Investor Relations, Pizza Pizza Limited, [phone] x393, [email protected], www.pizzapizza.ca and www.pizza73.com or www.sedar.com.