Pizza Pizza Royalty Corp. Announces Second Quarter Financial Results
TORONTO, Aug. 8, 2018 /CNW/ - Pizza Pizza Royalty Corp. (TSX: PZA) (the "Company"), which owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three and six months ended June 30, 2018.
Second quarter highlights:
- Royalty Pool sales decreased 2.6%
- Same store sales decreased 3.3%
- Restaurant network grew by four locations
Year-to-date highlights:
- Royalty Pool sales decreased 0.8%
- Same store sales decreased 1.7%
- Restaurant network grew by 11 locations
- Royalty Pool of restaurants increased by seven effective January 1, 2018
SALES
For the three months ended June 30, 2018, ("Quarter") System Sales from the 758 restaurants in the Royalty Pool decreased 2.6% to $131.1 million from $134.6 million in the prior year comparable quarter when there were 751 restaurants in the Royalty Pool. For the six month period ended June 30, 2018, Royalty Pool System Sales decreased 0.8% to $266.4 million compared to $268.4 million in the same period last year.
Total Royalty Pool System Sales for the three and six month periods decreased over the comparative periods as a result of the reported decrease in same store sales growth ("SSSG"), offset by the impact of new restaurants added to the Royalty Pool on January 1, 2018.
SSSG, the key driver of yield growth for shareholders of the Company, decreased by 3.3% for the Quarter compared to the same quarter last year. Year-to-date, SSSG decreased by 1.7% compared to the same period in 2017.
| SSSG |
Second Quarter (%) |
Year-to-Date (%) |
||
| 2018 |
2017 |
2018 |
2017 |
|
| Pizza Pizza |
(3.5) |
2.3 |
(1.7) |
0.8 |
| Pizza 73 |
(1.7) |
(2.1) |
(1.8) |
(1.4) |
| Combined |
(3.3) |
1.6 |
(1.7) |
0.5 |
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 first and second quarters, the average customer check increased while the customer traffic count decreased. The average customer check increased as a result of increasing retail prices to partially offset provincial minimum wage increases. The price increases resulted in softness in traffic counts compared to one year ago. Management is closely monitoring consumer reaction to retail pricing strategies, in what continues to be, a highly competitive, value-oriented retail environment.
"While disappointed in the short-term softness in customer traffic, our Pizza Pizza and Pizza 73 brands continue focusing on operational excellence and enhancing the brands' image by investing heavily in high-quality menu offerings and technological innovation. We feel this strategy will continue improving the customer experience, restaurant profitability and brand positioning in the marketplace," said Pizza Pizza Limited's CEO, Paul Goddard.
RESTAURANT DEVELOPMENT
The number of restaurants in the Company's Royalty Pool increased by seven locations to 758 on the January 1, 2018 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2018.
During the Quarter, Pizza Pizza Limited ("PPL") opened one Pizza Pizza traditional restaurant and five non-traditional locations; two non-traditional restaurants were closed.
During the six month period, PPL opened 13 restaurants. By brand, Pizza Pizza opened four traditional and five non-traditional restaurants; two non-traditional restaurants closed. Pizza 73 opened two traditional and two non-traditional restaurants.
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.
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 110% for the Quarter and was 104% in the comparative quarter last year.
For the six month period, the Company declared shareholder dividends of $10.5 million, or $0.4278 per Share, which is unchanged from the prior year comparable period. The payout ratio was 108% for the first six months and was 103% 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 $4.2 million at June 30, 2018, which is a decrease of $810,000 since December 31, 2017. The decrease in the reserve is attributable to the reported negative SSSG, as well as a 2017 true-up payment to Pizza Pizza Limited of $111,000 made as part of the January 1 Adjustment Date in the first quarter.
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.
With this reserve in place, the Company will continue to target an annual payout ratio at or near 100% on an annualized basis.
EARNINGS PER SHARE ("EPS")
Fully-diluted basic EPS decreased 5% to $0.202 for the Quarter and decreased 2.6% to $0.418 for the six month period. EPS decreased, as compared to 2017, due to a decrease in royalty income and an increase in PPL's Equivalent Shares on the January 1, 2018 Adjustment Date.
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 3.7% to $0.21 when compared to the same period in 2017, and decreased 2.3% for the six month period.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter and six month period was relatively consistent with the 2017 comparable periods at $1.4 million and $2.8 million, respectively.
| 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"). |
|
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. The amount of the tax amortization deducted is based on a declining basis and will decrease annually.
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 2018 results are not directly comparable to the 2017 results because of the fact that there are 758 restaurants in the 2018 Royalty Pool compared to 751 restaurants in the 2017 Royalty Pool.
| (in thousands of dollars, except number of |
Three months ended June 30, 2018 |
Three months ended June 30, 2017 |
Six months ended June 30, 2018 |
Six months ended June 30, 2017 |
|||||
| Restaurants in Royalty Pool(1) |
758 |
751 |
758 |
751 |
|||||
| Same store sales growth(2) |
-3.3% |
1.6% |
-1.7% |
0.5% |
|||||
| Days in the period |
91 |
91 |
181 |
181 |
|||||
| System Sales reported by Pizza Pizza restaurants in |
$ |
110,265 |
$ |
114,002 |
$ |
223,475 |
$ |
226,510 |
|
| System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) |
20,791 |
20,560 |
42,929 |
41,916 |
|||||
| Total System Sales |
$ |
131,056 |
$ |
134,562 |
$ |
266,404 |
$ |
268,426 |
|
| Royalty – 6% on Pizza Pizza System Sales |
$ |
6,616 |
$ |
6,840 |
$ |
13,408 |
$ |
13,591 |
|
| Royalty – 9% on Pizza 73 System Sales |
1,871 |
1,851 |
3,864 |
3,772 |
|||||
| Royalty income |
$ |
8,487 |
$ |
8,691 |
$ |
17,272 |
$ |
17,363 |
|
| Interest paid on borrowings(3) |
(331) |
(330) |
(658) |
(642) |
|||||
| Administrative expenses |
(131) |
(176) |
(276) |
(314) |
|||||
| Adjusted earnings available for distribution to the |
$ |
8,025 |
$ |
8,185 |
$ |
16,338 |
$ |
16,407 |
|
| Distribution on Class B and Class D Exchangeable |
(1,861) |
(1,743) |
(3,833) |
(3,477) |
|||||
| Current income tax expense |
(1,368) |
(1,367) |
(2,787) |
(2,741) |
|||||
| Adjusted earnings available for shareholder |
$ |
4,796 |
$ |
5,075 |
$ |
9,718 |
$ |
10,189 |
|
| Add back: |
|||||||||
| Distribution on Class B and Class D Exchangeable |
1,861 |
1,743 |
3,833 |
3,477 |
|||||
| Adjusted earnings from operations(5) |
$ |
6,657 |
$ |
6,818 |
$ |
13,551 |
$ |
13,666 |
|
| Adjusted earnings per share(5) |
$ |
0.210 |
$ |
0.218 |
$ |
0.428 |
$ |
0.438 |
|
| Basic earnings per share |
$ |
0.202 |
$ |
0.212 |
$ |
0.418 |
$ |
0.429 |
|
| Dividends declared by the Company |
$ |
5,266 |
$ |
5,266 |
$ |
10,532 |
$ |
10,532 |
|
| Dividend per share |
$ |
0.2139 |
$ |
0.2139 |
$ |
0.4278 |
$ |
0.4278 |
|
| Payout ratio(5) |
110% |
104% |
108% |
103% |
|||||
| (1) |
The number restaurants for which the Pizza Pizza Royalty Limited 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 2018 fiscal period, the Royalty Pool includes 652 Pizza Pizza restaurants and 106 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 PPL 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 Management's Discussion & Analysis ("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 Licence and Royalty Agreements, respectively, and represent 22.3% of the fully diluted Shares at June 30, 2018 (December 31, 2017 – 21.1%). During the quarter ended March 31, 2018, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2017 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2017. Included in the three months ended March 31, 2018, is the payment of $111 in distributions to PPL pursuant to the true-up calculation (March 31, 2017 - PPL was paid $8). |
| (5) |
"Adjusted earnings from operations", "Adjusted earnings available for shareholder dividends", "Adjusted earnings per Share", and "Payout Ratio" 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 interim condensed unaudited consolidated financial statements and related MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on August 8, 2018.
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 8, 2018 |
| Time: |
5:00 p.m. ET |
| Call-in number: |
647-427-7450 / 1-888-231-8191 |
| Recording call in number: |
416-849-0833 / 1-855-859-2056 |
| Available until midnight, August 22, 2018 |
|
| Passcode: 5452159 |
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.
SOURCE Pizza Pizza Royalty Corp.
Curt Feltner, Chief Financial Officer, Pizza Pizza Limited, (416) 967-1010 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, (416) 967-1010 x393, [email protected], www.pizzapizza.ca and www.pizza73.com or www.sedar.com
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