Mr. Paul Goddard reports
PIZZA PIZZA ROYALTY CORP. ANNOUNCES A 3.7% DIVIDEND INCREASE AND THIRD QUARTER 2022 RESULTS
Pizza Pizza Royalty Corp. has released financial results for the three months and nine months ended Sept. 30, 2022.
Third Quarter highlights:
- Royalty Pool sales increased 15.4%
- Same store sales increased 14.0%
- Adjusted earnings per share(5) increased 14.4%
- Traditional restaurant network increased by five net locations
Paul Goddard, CEO, Pizza Pizza Limited ("PPL") said, "Our strong sales growth across all channels continued during the quarter at Pizza Pizza; we were also pleased to see Pizza 73 report improved sales. With successive, quarterly same store sales growth, our Board announced a 3.7% increase in the shareholder dividend effective November 2022; this is our third increase this year. Our on-trend product introductions, creative marketing campaigns, including our "Everyone Deserves Pizza" campaign, and strategic partnerships with our many non-traditional restaurants, will continue to support sales growth as we enter our strongest sales quarter."
Year-to-Date highlights:
- Royalty Pool sales increased 16.6%
- Same store sales increased 16.0%
- Adjusted earnings per share(5) increased 15.6%
- Monthly cash dividend increased 16.7%
- Traditional restaurant network increased by six net locations
- Royalty Pool of restaurants for 2022 increased by two restaurants on January 1, 2022
SALES
For the three months ended September 30, 2022, System Sales from the 727 restaurants in the Royalty Pool increased 15.4% to $149.7 million from $129.7 million in the same quarter last year when there were 725 restaurants in the Royalty Pool. By brand, sales from the 624 Pizza Pizza restaurants in the Royalty Pool increased 17.5% to $130.8 million and sales from the 103 Pizza 73 restaurants increased 2.6% to $18.9 million for the Quarter.
For the nine months ended September 30, 2022, Royalty Pool System Sales for the Period increased 16.6% to $415.1 million from $355.9 million in the same period last year. By brand for the Period, sales from the 624 Pizza Pizza restaurants in the Royalty Pool increased 19.4% to $358.5 million and sales from the 103 Pizza 73 restaurants increased 1.5% to $56.6 million.
The increase in Royalty Pool System Sales is due to the full re-opening of the economy and many non-traditional locations reopening as the Period progressed. Additionally, while the number of restaurants in the Royalty Pool increased in 2022, it remains less than 2019 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.
SAME STORE SALES GROWTH ("SSSG")
SSSG, the key driver of yield growth for shareholders of the Company, increased 14.0% (2021 - 2.8%) for the Quarter, and increased 16.0% for the Period (2021 - decreased 3.4%).
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. At Pizza Pizza, for the Quarter and Period, the increase in SSSG was largely driven by the lifting of COVID-19 related public health restrictions and the reopening of non-traditional locations, both of which lead to increased customer traffic. Additionally, during the quarter the average customer check increased as the brands passed along industry-wide price and commodity inflation and labour cost increases. At Pizza 73, for the Quarter and Period, the SSSG was affected by an increase in average check, offset by a decrease in customer traffic.
MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVE
Subsequent to the quarter end, after careful consideration and taking into account the working capital reserve, the Board of Directors announced another 3.7% increase in the monthly dividend, from $0.0675 to $0.07 per share, effective November 2022. The dividend will be payable to shareholders of record at the close of business on November 30, 2022, and will be paid on December 15, 2022.
The Company declared shareholder dividends of $5.0 million for the Quarter, or $0.2025 per share, compared to $4.3 million, or $0.175 per share, for the prior year comparable quarter. The payout ratio was 91% for the Quarter and was 90% in the prior year, comparable quarter.
For the Period, the Company declared shareholder dividends of $14.5 million, or $0.59 per share, compared to $12.4 million, or $0.505 per share, for the prior year comparable period. The payout ratio was 97% for the Period and was 97% 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.
The Company's working capital reserve is $7.0 million at September 30, 2022, which is an increase of $0.5 million in the Quarter due to the 91% payout ratio. With the increase in the monthly dividend in February and June 2022, the Company believes that there is sufficient cashflow 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. See "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 2022, the credit spread decreased to 0.875% as the impact of COVID-19 lessened and earnings improved resulting in the effective interest rate decreasing to 2.685%. Previously, in April 2021, the credit spread had increased to 1.125%, raising the combined interest rate to 2.935%.
CURRENT INCOME TAX EXPENSE
Current income tax expense for the Quarter increased to $1.7 million from $1.4 million in the prior year. For the Period, current income tax was $4.5 million, which increased when compared to the prior year comparative period at $3.7 million. The increase for the Quarter and Period is a result of the increase in the Company's earnings stemming from the increase in royalty income.
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 15.4% to $0.225 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 14.4% to $0.231 when compared to the same period in 2021, and increased 15.6% to $0.645 for the Period.
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 six traditional Pizza Pizza restaurants, including four openings in British Columbia, one in the Yukon and one in Prince Edward Island, and opened three non-traditional Pizza Pizza restaurants. PPL closed one traditional and nine non-traditional Pizza Pizza restaurants, the majority of which were smaller movie theatre venues. At the Pizza 73 brand, PPL opened one traditional restaurant and closed three non-traditional restaurants, while converting one Pizza 73 traditional restaurant in the Yukon, into a Pizza Pizza restaurant.
During the Period, PPL opened 14 traditional and 11 non-traditional Pizza Pizza restaurants, and closed seven traditional and 14 non-traditional restaurants, the majority of which were smaller movie theatre venues. Additionally, at the Pizza 73 brand, PPL opened one traditional and one non-traditional restaurant, closed two non-traditional restaurants, and converted two Pizza 73 traditional restaurants into Pizza Pizza restaurants.
New restaurant construction continues across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. PPL management has revised its traditional restaurant network growth expectation to 3 to 4% due to supply chain issues. However, its franchisee pipeline remains strong and its renovation program continues 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 tables set out selected financial information and other data of Pizza Pizza Royalty Corp. ("PPRC" or the "Company") and should be read in conjunction with the September 30, 2022 unaudited interim condensed consolidated financial statements of the Company ("Financial Statements"). Readers should note that the 2022 results are not directly comparable to the 2021 results due to there being 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 Management's Discussion and Analysis ("MD&A") will be available at www.sedar.com and www.pizzapizza.ca after the market closes on November 7, 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: Monday, November 7, 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, November 21, 2022
Conference ID: 367009
A recording of the call will also be available on the Company's website at www.pizzapizza.ca.
We seek Safe Harbor.