Mr. Paul Goddard reports

PIZZA PIZZA ROYALTY CORP. ANNOUNCES STRONG SECOND QUARTER 2023 RESULTS

Pizza Pizza Royalty Corp. has released financial results today for the three months (quarter) and six months (period) ended June 30, 2023.

Second quarter highlights:

• Royalty pool sales increased 11.2 per cent;
• Same store sales increased 9.4 per cent;
• Adjusted earnings per share increased 11.8 per cent;
• Restaurant network increased by three net locations;
• Monthly dividend increased by 3.5 per cent.

Year-to-date highlights:

• Royalty pool sales increased 13.5 per cent;
• Same store sales increased 11.4 per cent;
• Adjusted earnings per share increased 13.6 per cent;
• Restaurant network increased by 10 net locations;
• Monthly dividend increased twice by a total of 7.1 per cent;
• Royalty pool of restaurants for 2023 increased by 16 restaurants on Jan. 1, 2023.

Paul Goddard, chief executive officer, Pizza Pizza (PPL), said: "We are pleased to share yet another quarter of exceptional growth at Pizza Pizza and Pizza 73, which led to another dividend increase in June. We are particularly proud of our strong results this quarter, since it is the first time since the pandemic that we have experienced such solid comparable same store sales growth against a period without any material COVID impact. Furthermore, we are extremely excited to announce the opening of our first-ever restaurants outside of Canada, with three locations already operating in Mexico."

Sales

Royalty pool system sales for the quarter increased 11.2 per cent to $158.5-million from $142.5-million in the same quarter last year. By brand, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 12.0 per cent to $137.7-million for the quarter compared with $122.9-million in the same quarter last year. Sales from the 99 Pizza 73 restaurants increased 6.4 per cent to $20.8-million for the quarter compared with $19.6-million in the same quarter last year.

Royalty pool system sales for the period increased 13.5 per cent to $301.2-million from $265.4-million in the same period last year. By brand, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 14.8 per cent to $261.3-million for the six-month period compared with $227.7-million in the same period last year. Sales from the 99 Pizza 73 restaurants increased 5.8 per cent to $39.9-million for the period compared with $37.7-million in the same period last year.

For the quarter and period, the increase in royalty pool system sales is primarily driven by the increase in same store sales and new restaurants added to the royalty pool on Jan. 1, 2023. Additionally, while the number of restaurants in the Pizza 73 royalty pool remains less than 2019 when there were 104 restaurants, 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 9.4 per cent (2022 -- 20.3 per cent) for the quarter, and increased 11.4 per cent for the period (2022 -- 17.1 per cent).

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. During the quarter, the average customer check increased as the brands successfully passed along retail price increases. Additionally, at both brands restaurant traffic increased due to strong value messaging, promotional brand activities and product innovation.

Monthly dividends and working capital reserve

During the quarter, the board approved a 3.5-per-cent increase in the monthly dividend effective for June, bringing the monthly dividend to 7.5 cents per share.

The company declared shareholder dividends of $5.4-million for the quarter, or 22 cents per share, compared with $4.9-million, or 19.75 cents per share, for the prior-year comparable quarter. The payout ratio is 95 per cent for the quarter and was 94 per cent in the prior-year comparable quarter.

The company declared shareholder dividends of $10.6-million for the period, or 43.25 cents per share, compared with $9.5-million, or 38.75 cents per share, for the prior-year comparable period. The payout ratio is 99 per cent for the period and was 100 per cent 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 $7.6-million at June 30, 2023, which is an increase of $300,000 in the quarter due to the 95-per-cent payout ratio. System sales for the quarter ended March 31 have generally been the softest and historically results in a payout ratio over 100 per cent. The reserve is available to stabilize dividends and finance 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 per cent on an annualized basis.

The reserve is available to stabilize dividends and finance 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 per cent on an annualized basis.

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 per cent to 1.375 per cent, 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, 2020, the facility interest was at an effective interest rate of 2.685 per cent comprising a fixed rate of 1.81 per cent plus a credit spread of 0.875 per cent through to March 31, 2021. In April, 2021, the credit spread increased to 1.125 per cent pursuant to the table described herein, raising the combined interest rate to 2.935 per cent. In April, 2022, the credit spread decreased as the impact of COVID-19 lessened and earnings improved, causing the effective interest rate to decrease to 2.685 per cent.

Current income tax expense

Current income tax expense for the quarter increased to $1.8-million from $1.5-million in the prior-year comparable period. For the period, current income tax is $3.3-million, which increased when compared with the prior-year comparable six-month period at $2.8-million. The increase in current income tax for the quarter and period is a result of the increase in the company's earnings before income taxes 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 12.1 per cent to 24.7 cents for the quarter compared with the prior-year comparable quarter.

As compared with basic EPS, the company considers adjusted EPS 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 11.8 per cent to 24.7 cents when compared with the same period in 2022, and increased 13.6 per cent to 46.9 cents for the period.

Restaurant development

As announced earlier this year, the number of restaurants in the company's royalty pool increased by 16 locations to 743 on the Jan. 1, 2023, adjustment date, and consists of 644 Pizza Pizza restaurants and 99 Pizza 73 restaurants. The number of restaurants in the Royalty pool will remain unchanged through Dec. 31, 2023.

During the quarter, PPL opened five traditional Pizza Pizza restaurants and opened two non-traditional Pizza Pizza restaurants. PPL closed three traditional and one non-traditional Pizza Pizza restaurants. At the Pizza 73 brand, PPL opened one non-traditional restaurant and closed one traditional restaurant.

During the period, PPL opened seven traditional and nine non-traditional Pizza Pizza restaurants, and closed five traditional and two non-traditional restaurants. Additionally, at the Pizza 73 brand, PPL opened one traditional and one non-traditional restaurant, and closed one traditional restaurant. These restaurants will be added to the royalty pool on Jan. 1, 2024.

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 3 to 4 per cent and continue its renovation program through 2023.

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 attached 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 June 30, 2023, unaudited interim condensed consolidated financial statements of the company. Readers should note that the 2023 results are not directly comparable with the 2022 results due to there being 743 restaurants in the 2023 royalty pool compared with 727 restaurants in the 2022 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 SEDAR and the company website after the market closes on Aug. 10, 2023.

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, Aug. 10, 2023

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, Aug. 24, 2023

Conference ID:  517525

A recording of the call will also be available on the company's website.

We seek Safe Harbor.