PZA Pizza Pizza Royalty Corp

TORONTO, May 11, 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") ended March 31, 2022.

First Quarter highlights:

• Royalty Pool sales increased 13.6%
• Same store sales increased 13.6%
• Adjusted earnings per share⁽⁵⁾ increased 12.3%
• Restaurant network increased by three net locations
• Royalty Pool of restaurants for 2022 increased by two restaurants on January 1, 2022

Paul Goddard, CEO, Pizza Pizza Limited ("PPL") said, "Our first quarter results demonstrate the strong value rooted in our brands. In addition to increased sales through our already strong pick-up and delivery business, our brands experienced an increase in sales from walk-in traffic and the reopening of key, non-traditional stores, especially in sports venues, as government restrictions were lifted. Growth across all channels was supported by menu innovation, strong promotional campaigns, and operational excellence. We are optimistic that this momentum will continue as almost all government restrictions have been removed and customers are feeling more comfortable visiting our restaurants."

SALES
For the three months ended March 31, 2022, System Sales from the 727 restaurants in the Royalty Pool increased 13.6% to $122.9 million from $108.2 million in the same quarter last year. By brand, sales from the 624 Pizza Pizza restaurants in the Royalty Pool increased 16.1% to $104.8 million for the Quarter compared to $90.2 million in the same quarter last year. Sales from the 103 Pizza 73 restaurants increased 0.7% to $18.1 million for the Quarter compared to $18.0 million in the same quarter last year.

Total Royalty Pool System Sales for the Quarter increased due to the continued re-opening of the economy and also more non-traditional locations reopened as the quarter progressed. Additionally, while the number of restaurants in the Royalty Pool increased in 2022, it remains less than the 2019 period 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. The Make-Whole Carryover Amount added $1.4 million to System Sales for the Quarter compared to $4.1 million in the prior year comparable period.

SAME STORE SALES GROWTH ("SSSG")
SSSG, the key driver of yield growth for shareholders of the Company, increased 13.6% (2021 – decreased 13.3%) for the Quarter.

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. For the Quarter, the increase in SSSG was largely driven by the lifting of COVID-19 related public health restrictions and the reopening of many key, non-traditional locations, both of which lead to increased customer traffic. Additionally, during the quarter the average customer check increased as PPL passed along industry-wide price and commodity inflation and labour cost increases.

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
The Company declared shareholder dividends of $4.7 million for the Quarter, or $0.190 per share, compared to $4.1 million, or $0.165 per share, for the prior year comparable quarter. The payout ratio was 108% for the Quarter and was 106% in the prior year, comparable quarter. The Pizza Pizza and Pizza 73 restaurants are subject to seasonal variations in their business. System Sales for the quarter ended March 31 have generally been the softest. System Sales for the quarter ended December 31 have generally been the strongest.

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. After the reduction in the monthly dividend in April 2020, and the increases in November 2020, August 2021, and the most recent increase in February 2022, any further change will be implemented with a view to maintaining the continuity of consistent 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 $6.2 million at March 31, 2022, which is a decrease of $0.4 million in the Quarter due to the 108% payout ratio. System Sales for the quarter ended March 31 have generally been the softest and historically results in a payout ratio over 100%. With the change in the monthly dividend beginning in February 2022, the Company believes that there is sufficient cash flow 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. 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 Royalty Pool sales, and the timing and pace of economic recovery in the markets that Pizza Pizza and Pizza 73 serve. See "COVID-19 Impact" and "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 2021, due to the pandemic negatively affecting earnings, the credit spread increased to 1.125% based on the Company's financial covenants, raising the combined interest rate to 2.935% from 2.685%. Subsequent to the current quarter, the credit spread decreased to 0.875% as the impact of COVID-19 lessened and earnings improved. Effective April 2022, the combined interest rate will decrease to 2.685%.

EARNINGS PER SHARE ("EPS")
Fully-diluted basic EPS increased 12.8% to $0.185 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 12.3% to $0.192 when compared to the same period in 2021.

CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.3 million from $1.1 million. The increase for the Quarter is a result of the increase in the Company's earnings before income taxes from the increase in royalty.

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. 

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 two traditional and five non-traditional Pizza Pizza restaurants; four traditional Pizza Pizza restaurants were closed. These restaurants will be added to the Royalty Pool on January 1, 2023.

New restaurant construction continues across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. PPL management expects to accelerate its traditional restaurant network expansion by 5% and continue its renovation program 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 table sets out selected financial information and other data of the Company and should be read in conjunction with the unaudited interim condensed consolidated financial statements of the Company. Readers should note that the 2022 results are not directly comparable to the 2021 results because of the fact that there are 727 restaurants in the 2022 Royalty Pool compared to 725 restaurants in the 2021 Royalty Pool.

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 11, 2022.

As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:

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.

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. 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 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.
  
  

Adjusted EPS is calculated by dividing Adjusted earnings from operations, as explained above, by the fully diluted weighted average shares.

Basic EPS is adjusted as follows:

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.

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.

SOURCE Pizza Pizza Royalty Corp.