Pizza Pizza Royalty Corp. Announces Third Quarter 2021 Results
TORONTO, Nov. 10, 2021 /CNW/ - 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") and nine months ("Period") ended September 30, 2021.
Third Quarter Highlights:
- Royalty Pool sales increased 3.5%
- Same store sales increased 2.8%
- Adjusted earnings per share increased by 2.0%
Paul Goddard, CEO, Pizza Pizza Limited said, "We're pleased with the strong sales growth in our largest markets which was supported by strong marketing campaigns, effective product innovation in the quarter, high vaccination rates and the lifting of COVID-19 restrictions in many provinces, especially in Ontario. In most provinces during the quarter, consumers became more comfortable with social interactions which increased our walk-in sales. Additionally, several key, non-traditional locations re-opened including universities, schools, and large sporting and entertainment venues. While we continue to experience lingering effects of the pandemic in certain provinces, we remain optimistic that the fourth quarter, which historically has been our strongest, will continue this positive momentum, especially as we continue expanding our restaurant network in British Columbia and Quebec."
- Royalty Pool sales decreased 2.4%
- Same store sales decreased 3.4%
- Adjusted earnings per share decreased 3.5%
- Restaurant network increased by five locations during the Period
- Royalty Pool of restaurants for 2021 decreased by 24 net restaurants on January 1, 2021
For the three months ended September 30, 2021, System Sales from the 725 restaurants in the Royalty Pool increased 3.5% to $129.7 million from $125.4 million in the same quarter last year when there were 749 restaurants in the Royalty Pool. By brand, sales from the 622 Pizza Pizza restaurants in the Royalty Pool increased 6.4% to $111.3 million and the 103 Pizza 73 restaurants decreased 11.2% to $18.4 million for the Quarter.
For the nine months ended September 30, 2021, System Sales decreased 2.4% to $355.9 million from $364.6 million in the prior year comparative period. For the nine months ended September 30, 2021, sales from the 622 Pizza Pizza restaurants in the Royalty Pool decreased 0.6% to $300.2 million and sales from the 103 Pizza 73 restaurants decreased 11.1% to $55.7 million.
Royalty Pool System Sales of the Pizza Pizza restaurants increased in the Quarter due to positive SSSG, as the economy began reopening, restaurant visits increased and Pizza Pizza non-traditional locations began to re-open with capacity limitations. However, the Royalty Pool System Sales of the Pizza 73 restaurants were negatively impacted during the Quarter due to lingering effects of the pandemic. Additionally, while the number of stores in the Royalty Pool are less than the comparative periods, the negative impact on Royalty Pool System Sales has been mitigated by the Make-Whole Carryover Amount. The Make-Whole Carryover Amount added $4.1 million to System Sales for the Quarter, and $12.4 million for the Period.
SAME STORE SALES GROWTH ("SSSG")
SSSG, the key driver of yield growth for shareholders of the Company, increased 2.8% for the Quarter (2020 – decreased 9.5%), and decreased 3.4% for the Period (2020 – decreased 10.8%).
When comparing the results of 2021 to 2020, it is important to remember that the COVID-19 pandemic began impacting business in mid-March 2020. While it is over a year since the initial and sudden impact of the pandemic began, the effect continued through the third quarter of 2021.
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. For the Quarter, the increase in SSSG at the Pizza Pizza brand was largely driven by the lifting of COVID-19 related public health restrictions, especially in Ontario, which led to increased walk-in traffic, plus many of PPL's non-traditional locations reopened. As walk-in traffic increased, we experienced a decrease in the average check. At Pizza 73, the SSSG was impacted by the decrease in traffic as COVID-19 lockdowns continued to impact consumer behavior.
In the prior year, beginning in March 2020, 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 on a year-to-date basis. Initially, 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 Period.
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
The Company declared shareholder dividends of $4.3 million for the Quarter, or $0.175 per share, compared to $3.7 million, or $0.15 per share, for the prior year comparable quarter. The payout ratio was 90% for the Quarter and was 74% in the prior year comparable quarter.
For the Period, the Company declared shareholder dividends of $12.4 million, or $0.505 per share, compared to $12.7 million, or $0.5139 per share, for the prior year comparable period. The payout ratio was 97% for the Period and was 92% 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. After the reduction in the monthly dividend in April 2020, the increase in November 2020, and the increase in August 2021, 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 $5.8 million at September 30, 2021, which is an increase of $0.5 million in the Period due largely to the improvement in Royalty Pool System Sales and the 90% payout ratio. With the change in the monthly dividend beginning in August 2021, 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.
Interest expense for the Quarter and Period increased due to a higher effective interest rate on the facility. The interest rate swap agreements fixed the facility interest rate at the Bankers' Acceptance rate of 1.81% plus a credit spread that moves based upon covenant test levels.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.4 million from $1.3 million. For the Period, current income tax decreased slightly from $3.8 million to $3.7 million. The increase for the Quarter and decrease for the Period are a result of the increase and decrease in the Company's earnings before income taxes, respectively.
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 by 2.6% to $0.195 for the Quarter compared to the prior year comparable quarter.
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 increased 2.2% to $0.202 when compared to the same quarter in 2020.
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").
As announced earlier this year, the number of restaurants in the Company's Royalty Pool decreased by 24 locations to 725 on the January 1, 2021 Adjustment Date, and consists of 622 Pizza Pizza restaurants and 103 Pizza 73 restaurants. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2021.
During the Quarter, PPL opened six traditional and one non-traditional Pizza Pizza restaurants;14 non-traditional Pizza Pizza restaurants were closed. During the Period, PPL opened 16 traditional and five non-traditional Pizza Pizza restaurants, and closed two traditional and 15 non-traditional restaurants. The majority of the non-traditional restaurant closures were in smaller movie theatre venues. Additionally, for the Period at the Pizza 73 brand, the Company opened two traditional restaurants and closed one non-traditional restaurant. These restaurants will be added to the Royalty Pool on January 1, 2022.
During the Quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open for delivery and pick-up customers across Canada. As the provincial governments began lifting restrictions early in the current Quarter, some of PPL's non-traditional locations, which initially closed, reopened in a limited capacity as allowed by each province. With the full reopening of the economy, PPL will see a return of its larger non-traditional locations, especially those in key sporting arenas.
New restaurant construction continues across Canada and PPL expects to accelerate restaurant network expansion and increase renovations for the remainder of 2021, assuming pandemic effects are mitigated in the coming months.
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 2021 results are not directly comparable to the 2020 results because of the fact that there are 725 restaurants in the 2021 Royalty Pool compared to 749 restaurants in the 2020 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, 2021
Three months ended
September 30, 2020
Nine months ended
Nine months ended
September 30, 2020
Restaurants in Royalty Pool(1)
Same store sales growth(2)
Days in the Period
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6)
System Sales reported by Pizza 73 restaurants in the Royalty Pool(6)
Total System Sales
Royalty – 6% on Pizza Pizza System Sales
Royalty – 9% on Pizza 73 System Sales
Interest paid on borrowings(3) (5)
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5)
Distribution on Class B and Class D Exchangeable Shares(4)
Current income tax expense
Adjusted earnings available for shareholder dividends(5)
Distribution on Class B and Class D Exchangeable Shares(4)
Adjusted earnings from operations(5)
Adjusted earnings per share(5)
Basic earnings per share
Dividends declared by the Company
Dividend per share
September 30, 2021
December 31, 2020
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 2021 fiscal year, the Royalty Pool includes 622 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 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 September 30, 2021 (December 31, 2020 – 23.5%). During the quarter ended March 31, 2021, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2020 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2020. Included in the three months ended March 31, 2021, is the payment of $nil in distributions to PPL pursuant to the true-up calculation (March 31, 2020 - PPL was paid $164).
"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 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 MD&A will be available at www.sedar.com and www.pizzapizza.ca after the market closes on November 10, 2021.
As previously announced, the Company will host a conference call to discuss the results. The details of the conference call are as follows:
Wednesday, November 10, 2021
5:30 p.m. ET
416-764-8650 / 888-664-6383
Recording call in number:
416-764-8677 / 888-390-0541
Available until midnight, November 24, 2021
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 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 October 3, 2021 and the related MD&A and the Company's Annual Information Form.
SOURCE Pizza Pizza Royalty Corp.
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