PZA Pizza Pizza Royalty Corp

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 months and nine months ended September 30, 2017.

Third Quarter highlights:

• Royalty Pool sales increased 1.6%
• Same store sales decreased 0.5%
• Restaurant network decreased by four locations

Year-to-date highlights:

• Royalty Pool sales increased 1.3%
• Same store sales increased 0.1%
• Restaurant network grew by two  locations
• Royalty Pool of restaurants increased by 15 effective January 1, 2017

SALESFor the three months ended September 30, 2017 (“Quarter”), System Sales from the 751 restaurants in the Royalty Pool increased 1.6% to $139.0 million from $136.9 million in the prior year comparable quarter when there were 736 restaurants in the Royalty Pool. For the nine month period, Royalty Pool System sales increased 1.3% to $407.4 million from $402.2 million in the same period last year. System Sales in the prior year nine month period included an extra day of sales in February 2016 due to the leap year, which management estimated to be $1.0 million.

Royalty Pool System Sales for the three and nine months increased over the comparative periods in 2016 as a result of the change in same store sales growth (“SSSG”) and the impact of restaurants added to the Royalty Pool on January 1, 2017. Additionally, the extra day of sales in the prior year should be considered when comparing 2017 to 2016.

SSSG, the key driver of yield growth for shareholders of the Company, decreased by 0.5% for the Quarter compared to a 2.2% increase in the same quarter last year. Year-to-date, SSSG increased by 0.1% compared to a 1.9% increase in 2016.

Paul Goddard, CEO, Pizza Pizza Limited (“PPL”), said: “Our sales were softer than anticipated as a weakened Alberta economy continued to negatively impact sales. At Pizza Pizza, an unusually wet summer resulted in reduced attendance and sales at several, large, outdoor nontraditional venues which offset same store sales growth at our traditional locations.  As well, we were up against a strong quarter in 2016 during which the Toronto Blue Jays made it into post-season action.”

SSSG	Third Quarter(%)				Year-to-Date(%)
	2017		2016		2017		2016
Pizza Pizza	(0.2	)	3.5		0.5		3.7
Pizza 73	(2.2	)	(4.6	)	(1.7	)	(6.8	)
Combined	(0.5	)	2.2		0.1		1.9

SSSG is driven by the growth in the average customer check and in customer traffic, both of which are affected by changes in pricing and sales mix. During the Quarter and for the nine months, PPL continued to execute on its strategy of growing customer traffic through compelling promotional offerings at both brands. The promotions, which were designed to drive traffic at attractive price points, successfully grew both delivery and walk-in traffic when compared to the same periods last year, however the average customer check decreased slightly. Management believes this near-term strategy will stabilize and grow same store sales, especially at the Pizza 73 brand which operates largely in the weakened Alberta economy.  

Paul Goddard also added: “Sound fundamentals at our brands have successfully increased customer visits at Pizza Pizza and Pizza 73.  Over the past year, the quick service industry has struggled with negative traffic counts in this highly competitive, price sensitive retail environment. We were pleased to reverse the trend at our brands. We will continue this strategy into the final quarter while also positioning marketing campaigns to grow the average customer check during what appears to be a promising hockey season.” 

MONTHLY DIVIDENDS AND WORKING CAPITAL RESERVEIn 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 101% for the Quarter and was 97% in the prior year quarter.

For the nine months ended September 30, 2017, the Company declared shareholder dividends of $15.8 million, or $0.6417 per Share, compared to $15.6 million, or $0.6337 per Share, for the prior year comparable period.  The payout ratio was 102% compared to 100% 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 $4.8 million at September 30, 2017, which is a decrease of $374,000 since December 31, 2016. The decrease in the reserve was the result of relatively flat adjusted earnings, coupled with an increase in the dividend effective June 2016.

With this reserve in place, the Company has set a 2017 targeted payout ratio at or near 100% on an annualized basis.

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.

EARNINGS PER SHARE (“EPS”)Fully-diluted basic EPS for the Quarter decreased 2.4% to $0.216 per share compared to $0.221 per share for the same quarter in 2016. For the nine month period, the basic EPS was flat at $0.644 per share and is attributable to an increase in royalty income offset by an increase in current taxes.

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 2.6% to $0.223 when compared to the same period of 2016, and decreased 0.4% for the nine month period.

CURRENT INCOME TAX EXPENSECurrent income tax expense for the Quarter was $1.5 million and $4.2 million for the nine month period. For the 2016 comparable quarter and period, the current tax was $1.3 million and $4.1 million, respectively. The tax expense increased in both periods due to an increase in royalty income plus the fact that the available tax amortization on undepreciated capital assets decreased for the period.

Of particular note is that the Company’s earnings from operations before income taxes, calculated under International Financial Reporting Standards (“IFRS”), differs 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.

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”).

RESTAURANT DEVELOPMENT The number of restaurants in the Company’s Royalty Pool increased by by 15 locations to 751 on the January 1, 2017 Adjustment Date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2017.

During the Quarter, Pizza Pizza Limited (“PPL”) opened five restaurants and closed nine. By brand, for the Quarter, Pizza Pizza opened three non-traditional restaurants; six traditional and two non-traditional locations were closed. Pizza 73 opened two traditional restaurants; one Pizza 73 non-traditional location was closed.

During the nine month period, PPL opened 18 restaurants and closed 16. By brand, for the nine month period, Pizza Pizza opened five traditional and six non-traditional restaurants; eight traditional and six non-traditional locations were closed. Pizza 73 opened seven traditional restaurants; two Pizza 73 non-traditional locations were closed.

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 HIGHLIGHTSThe 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 2017 results are not directly comparable to the 2016 results because of an extra day of royalty revenue in 2016 due to the leap year, in addition to the fact that there are 751 restaurants in the 2017 Royalty Pool compared to 736 restaurants in the 2016 Royalty Pool.

		3 months ended						9 months ended
(in thousands of dollars, except number of restaurants, days in the year, per share amounts, and noted otherwise)		September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Restaurants in Royalty Pool(1)			751			736			751			736
Same store sales growth(2)			-0.5	%		2.2	%		0.1	%		1.9	%
Days in the period			92			92			273			274
System Sales reported by Pizza Pizza restaurants in the Royalty Pool(6)		$	118,523		$	115,424		$	345,033		$	337,403
System Sales reported by Pizza 73 restaurants in the Royalty Pool(6)			20,500			21,435			62,415			64,800
Total System Sales		$	139,023		$	136,859		$	407,448		$	402,203
Royalty – 6% on Pizza Pizza System Sales		$	7,111		$	6,926		$	20,702		$	20,244
Royalty – 9% on Pizza 73 System Sales			1,845			1,929			5,617			5,832
Royalty income		$	8,956		$	8,855		$	26,319		$	26,076
Interest paid on borrowings(3)			(343	)		(337	)		(984	)		(1,003	)
Administrative expenses			(142	)		(139	)		(457	)		(464	)
Adjusted earnings available for distribution to the Company and Pizza Pizza Limited(5)		$	8,471		$	8,379		$	24,878		$	24,609
Distribution on Class B and Class D Exchangeable Shares(4)			(1,743	)		(1,654	)		(5,220	)		(4,931	)
Current income tax expense			(1,499	)		(1,308	)		(4,240	)		(4,092	)
Adjusted earnings available for shareholder dividends(5)		$	5,229		$	5,417		$	15,418		$	15,586
Add back:
Distribution on Class B and Class D Exchangeable Shares(4)			1,743			1,654			5,220			4,931
Adjusted earnings from operations(5)		$	6,972		$	7,071		$	20,638		$	20,517
Adjusted earnings per share(5)		$	0.223		$	0.229		$	0.661		$	0.664
Basic earnings per share		$	0.216		$	0.221		$	0.644		$	0.644
Dividends declared by the Company		$	5,266		$	5,266		$	15,798		$	15,601
Dividend per share		$	0.2139		$	0.2139		$	0.642		$	0.6337
Payout ratio(5)			101	%		97	%		102	%		100	%

(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 2017 fiscal period, the Royalty Pool includes 651 Pizza Pizza restaurants and 100 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 21.1% of the fully diluted Shares at March 31, 2017 (December 31, 2016 – 20.4%). During the quarter ended March 31, 2017, as a result of the final calculation of the equivalent Class B and Class D Share entitlements related to the January 1, 2016 Adjustment to the Royalty Pool, PPL was paid a distribution on additional equivalent Shares as if such Shares were outstanding as of January 1, 2016. Included in the three months ended March 31, 2017, is the payment of $8 in distributions to PPL pursuant to the true-up calculation (March 31, 2016 - PPL was paid $22).                                                                                                                      

(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 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 6, 2017.

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

Date:		November 7, 2017
Time:		9:00 a.m. ET
Call-in number:		416-340-2218 / 1-800-377-0758
Recording call in number:		905-694-9451 / 1-800-408-3053
		Available until midnight, November 21, 2017
		Passcode: 8637005#

A recording of the call will also be available on the Company’s website www.pizzapizza.ca.         

Forward Looking StatementsCertain 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.

For further information:

Curt Feltner, Chief Financial Officer, Pizza Pizza Limited(416) 967-1010 x307cfeltner@pizzapizza.cawww.pizzapizza.ca and www.pizza73.com or www.sedar.com.

Christine D’Sylva, Vice President, Finance & Investor Relations, Pizza Pizza Limited(416) 967-1010 x393cdsylva@pizzapizza.cawww.pizzapizza.ca and www.pizza73.com or www.sedar.com.