Toronto, Ontario, March 2, 2022 – Pizza Pizza Royalty Corp. (“PZA”, the “Company”), which indirectly owns the Pizza Pizza and Pizza 73 Rights and Marks, released financial results today for the three months (“Quarter”) and year ended December 31, 2021.
Fourth Quarter highlights:
- Royalty Pool sales increased 11.4%
- Same store sales increased 12.4%
- Adjusted earnings per share(5) increased 10.3%
- Working capital(5) reserve increased $0.7 million during the quarter to $6.5 million at December 31, 2021
- Payout ratio(5) was 87%
Year-to-Date highlights:
- Royalty Pool sales increased 1.1%
- Same store sales increased 0.5%
- Adjusted earnings per share(5) decreased 0.1%
- Working capital(5) reserve increased $1.1 million for the year
- Payout ratio(5) was 94%
Paul Goddard, CEO, Pizza Pizza Limited (“PPL”) said, “We’re pleased with the 12.4% same store sales growth as our customer traffic continues to improve significantly. With the easing of restrictions across Canada during the Quarter, we immediately experienced an increase in our many sales channels, but especially at several key non-traditional store locations and in our catering and walk-in business. This positive momentum continued the trend we experienced when pandemic restrictions were eased early in the second half of 2021. As a result, our Board was pleased to announce an 8.3% increase in the shareholder dividend effective February 2022.”
SALES
For the three months ended December 31, 2021, System Sales from the 725 restaurants in the Royalty Pool increased 11.4% to $137.7 million from $123.7 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 12.9% to $116.7 million and sales from the 103 Pizza 73 restaurants increased 3.5% to $21.0 million for the Quarter.
For the year ended December 31, 2021, System Sales increased 1.1% to $493.6 million from $488.3 million in the prior year. For the year, sales from the 622 Pizza Pizza restaurants in the Royalty Pool increased 2.9% to $416.9 million and sales from the 103 Pizza 73 restaurants decreased 7.6% to $76.7 million.
For the Quarter and year, the increase in Royalty Pool System Sales is largely due to lapping the initial impact of COVID-19, and the re-opening of the economy and many non-traditional locations as the year progressed. The overall decrease in Royalty Pool System Sales for Pizza 73 restaurants for the year is largely due to the negative impact COVID-19 had for the first nine months of 2021. 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 $16.6 million for the year.
SAME STORE SALES GROWTH (“SSSG”)
SSSG, the key driver of yield growth for shareholders of the Company, increased 12.4% (2020 – decreased 17.6%) for the Quarter and increased 0.5% (2020 – decreased 12.5%) for the year.
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 the impact of COVID-19 was significant in 2020 and early 2021, the impact of the pandemic lessened as 2021 progressed.
| SSSG | Fourth Quarter (%) | Year (%) | ||
|
| 2021 | 2020 | 2021 | 2020 |
| Pizza Pizza | 13.9 | -17.6 | 2.1 | -13.4 |
| Pizza 73 | 5.0 | -17.6 | -7.1 | -8.1 |
| Combined | 12.4 | -17.6 | 0.5 | -12.5 |
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 was largely driven by the lifting of COVID-19 related public health restrictions, which led to increased walk-in traffic, plus many of PPL’s non-traditional locations reopened.
MONTHLY DIVIDEND AND WORKING CAPITAL RESERVE
For the Quarter, the Company declared shareholder dividends of $4.4 million, or $0.18 per share, compared to $3.9 million, or $0.16 per share, for the prior year comparable quarter. The payout ratio was 87% for the Quarter and was 84% in the prior year, comparable quarter.
For the year, the Company declared shareholder dividends of $16.9 million, or $0.6850 per share, compared to $16.6 million, or $0.6739 per share in 2020. The payout ratio was 94% for the Year and was 90% in the prior year.
When COVID-19 first impacted System Sales in March 2020, the Company reduced its monthly dividend from $0.0713 per share to $0.05 per share beginning with the April 2020 dividend. In November 2020, as system sales began to partially recover, the monthly dividend was increased 10% to $0.055 per share. In the third quarter of 2021, the monthly dividend increased another 9%, to $0.06 per share, effective August 2021. Subsequent to the year end, after careful consideration and taking into account the working capital reserve, the Board of Directors announced another 8.3% increase in the monthly dividend, from $0.06 to $0.065 per share, effective February 2022.
With government-mandated pandemic restrictions scheduled to ease in most provinces in the near future, the Company will continue closely monitor sales and royalty income to determine when additional dividend adjustments may be warranted.
Dividends were funded entirely by cash flow from operations and the working capital reserve. No debt was incurred during the year to fund dividends.
EARNINGS PER SHARE (“EPS”)
Fully-diluted basic EPS increased 11.3% to $0.207 for the Quarter compared to the prior year comparable quarter, and decreased 2.4% to $0.743 for the year.
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 10.3% to $0.214 when compared to the same period in 2020, and decreased 0.1% to $0.772 for the year.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.5 million from $1.3 million. For the year, current income tax increased slightly from $5.1 million to $5.2 million. The increase for the Quarter and year are a result of the increase in the Company’s earnings before income taxes.
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 24 locations to 725 on the January 1, 2021 Adjustment Date. The number of restaurants in the Royalty Pool remained unchanged through December 31, 2021.
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 Pizza Pizza Royalty Limited Partnership (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.
During the Quarter, PPL opened seven traditional restaurants and seven non-traditional Pizza Pizza locations; 15 non-traditional Pizza Pizza and two non-traditional Pizza 73 restaurants were permanently closed. During the year, PPL opened 22 traditional restaurants and 12 non-traditional Pizza Pizza locations; two traditional and 30 non-traditional Pizza Pizza restaurants were closed. The majority of the non-traditional restaurant closures were in smaller movie theatre venues. Additionally, at the Pizza 73 brand, two traditional restaurants opened and three non-traditional locations closed. As previously announced, the Royalty Pool was adjusted to include these restaurants on January 1, 2022.
New restaurant construction continued across Canada as government mandated restrictions on commercial construction lifted in all provinces. PPL management expects to accelerate its restaurant network expansion to 5% traditional restaurant growth and continue its renovation program in 2022.
Paul Goddard said, “We are very proud of our traditional store growth with new restaurant construction continuing right across Canada, particularly in British Columbia and Quebec, as part of Pizza Pizza’s national expansion strategy. Despite the pandemic, we have successfully accelerated our pace of growth and innovation and are well positioned for further success. Our pipeline of future openings and franchisees is strong and supports our growth plans.”
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 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 December 31, 2021 | Three months ended December 31, 2020 | Year ended December 31, 2021 | Year ended December 31, 2020 |
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| Restaurants in Royalty Pool(1) | 725 | 749 | 725 | 749 |
| Same store sales growth(2) | 12.4% | -17.6% | 1.5% | -12.5% |
| Days in the Period | 92 | 92 | 365 | 366 |
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| System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6) | $ 116,729 | $ 103,399 | $ 416,904 | $ 405,335 |
| System Sales reported by Pizza 73 restaurants in the Royalty Pool(6) | 20,997 | 20,283 | 76,718 | 82,987 |
| Total System Sales | $ 137,726 | $ 123,682 | $ 493,622 | $ 488,322 |
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| Royalty – 6% on Pizza Pizza System Sales | 7,004 | 6,204 | 25,014 | $ 24,320 |
| Royalty – 9% on Pizza 73 System Sales | 1,890 | 1,826 | 6,905 | 7,469 |
| Royalty income | $ 8,894 | $ 8,030 | $ 31,919 | $ 31,789 |
| Interest paid on borrowings(3) (5) | (350) | (319) | (1,355) | (1,222) |
| Administrative expenses | (179) | (183) | (559) | (636) |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5) | $ 8,365 | $ 7,528 | $ 30,005 | $ 29,931 |
| Distribution on Class B and Class D Exchangeable Shares(4) | (1,779) | (1,572) | (6,856) | (6,481) |
| Current income tax expense | (1,463) | (1,277) | (5,154) | (5,069) |
| Adjusted earnings available for shareholder dividends(5) | $ 5,123 | $ 4,679 | $ 17,995 | $ 18,381 |
| Add back: |
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|
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| Distribution on Class B and Class D Exchangeable Shares(4) | 1,779 | 1,572 | 6,856 | 6,481 |
| Adjusted earnings from operations(5) | $ 6,902 | $ 6,251 | $ 24,851 | $ 24,862 |
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| Adjusted earnings per share(5) | $ 0.214 | $ 0.194 | $ 0.772 | $ 0.773 |
| Basic earnings per share | $ 0.207 | $ 0.186 | $ 0.743 | $ 0.761 |
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| Dividends declared by the Company | $ 4,431 | $ 3,938 | $ 16,864 | $ 16,590 |
| Dividend per share | $ 0.180 | $ 0.160 | $ 0.685 | $ 0.6739 |
| Payout ratio(5) | 87% | 84% | 94% | 90% |
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| December 31, 2021 | December 31, 2020 |
| Working capital(5) |
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| $ 6,537 | $ 5,388 |
- 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 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 (“PPL”) on an annual basis as the periods for which they are reported differ slightly (see “Royalty Pool Adjustments”).
- 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 December 31, 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 not 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).
(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 figures presented by other companies. 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 audited consolidated financial statements and related MD&A will be available at www.sedar.com and phx2uat.pizzapizza.ca after the market closes on March 2, 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: Wednesday, March 2, 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, March 16, 2022
Conference ID: 762293
A recording of the call will also be available on the Company’s website at phx2uat.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.
For further information:
Christine D’Sylva, Chief Financial Officer, Pizza Pizza Limited
(416) 967-1010 x393
cdsylva@pizzapizza.ca
phx2uat.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. 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.
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| Three months ended | Year ended | ||
| (in thousands of dollars, except number of shares) | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 |
| Earnings for the period before income taxes | 8,365 | 7,528 | 30,005 | 30,433 |
| Non-cash swap expiry | – | – | – | (502) |
| Adjusted earnings available for distribution to the Company and Pizza Pizza Limited | 8,365 | 7,528 | 30,005 | 29,931 |
| Current income tax expense | (1,463) | (1,277) | (5,154) | (5,069) |
| Adjusted earnings from operations | 6,902 | 6,251 | 24,851 | 24,862 |
| Less: Distribution on Class B and Class D Exchangeable Shares | (1,779) | (1,572) | (6,856) | (6,481) |
| Adjusted earnings available for shareholder dividends | 5,123 | 4,679 | 17,995 | 18,381 |
| Weighted average Shares – diluted | 32,177,276 | 32,177,276 | 32,177,276 | 32,177,276 |
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 10.3% to $0.214 when compared to the same period of 2020, and for the Year was relatively flat when compared to 2020.
Basic EPS is adjusted as follows:
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| Three months ended | Year ended | ||
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| December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 |
| Basic EPS | $ 0.207 | $ 0.186 | $ 0.743 | $ 0.761 |
| Adjustments: |
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| Non-cash swap expiry | – | – | – | (0.016) |
| Deferred tax expense | 0.007 | 0.008 | 0.029 | 0.028 |
| Adjusted EPS | $ 0.214 | $ 0.194 | $ 0.772 | $ 0.773 |
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.
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| Three months ended | Year ended | ||
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(in thousands of dollars, except as noted otherwise) | December 31, 2021 | December 31, 2020 | December 31, 2021 | December 31, 2020 |
| Dividends declared to shareholders | 4,432 | 3,938 | 16,864 | 16,590 |
| Adjusted earnings available for shareholder dividends | 5,123 | 4,679 | 17,995 | 18,381 |
| Payout Ratio | 94% | 84% | 94% | 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) | December 31, 2021 | December 31, 2020 |
| Total current assets | 9,341 | 7,829 |
| Less: Total current liabilities | 2,804 | 2,441 |
| Working Capital | 6,537 | 5,388 |
