Mr. Paul Goddard reports

PIZZA PIZZA ROYALTY CORP. ANNOUNCES A 3.3% DIVIDEND INCREASE AND STRONG THIRD QUARTER 2023 RESULTS

Pizza Pizza Royalty Corp. has released financial results for the three months and nine months ended Sept. 30, 2023.

Third quarter highlights:

• Royalty pool sales increased 9.0 per cent;
• Same-store sales increased 7.0 per cent;
• Adjusted earnings per share increased 10.3 per cent;
• Restaurant network increased by 11 net locations.

Year-to-date highlights:

• Royalty pool sales increased 11.9 per cent;
• Same-store sales increased 9.8 per cent;
• Adjusted earnings per share increased 12.4 per cent;
• Restaurant network increased by 21 net locations;
• Monthly dividend increased three times aggregating to 10.7 per cent;
• Royalty pool of restaurants for 2023 increased by 16 restaurants on Jan. 1, 2023.

Paul Goddard, chief executive officer of Pizza Pizza Ltd. (PPL), said: "We are pleased to report another strong quarter of continued growth at Pizza Pizza and Pizza 73. Our customers continue to recognize our strong value proposition and convenience. This consistency in performance has enabled our board to announce another dividend increase today, resulting in an annualized rate of 93 cents per share."

Sales

Royalty pool system sales for the quarter increased 9.0 per cent to $163.2-million from $149.7-million in the same quarter last year. By brand, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 8.6 per cent to $142-million for the quarter compared with $130.8-million in the same quarter last year. Sales from the 99 Pizza 73 restaurants increased 12.4 per cent to $21.2-million for the quarter compared with $18.9-million in the same quarter last year.

Royalty pool system sales for the period increased 11.9 per cent to $464.4-million from $415.1-million in the same period last year. By brand, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 12.5 per cent to $403.3-million for the nine-month period compared with $358.5-million in the same period last year. Sales from the 99 Pizza 73 restaurants increased 8.0 per cent to $61.1-million for the period compared with $56.6-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 7.0 per cent (2022: 14.0 per cent) for the quarter and increased 9.8 per cent for the period (2022: 16.0 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 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

Today, the board announced a 3.3-per-cent increase to its monthly cash dividend from 7.5 cents per share to 7.75 cents per share, effective November, 2023. The dividend will be payable to shareholders of record at the close of business on Nov. 30, 2023, and will be paid on Dec. 15, 2023.

The company declared shareholder dividends of $5.5-million for the quarter, or 22.5 cents per share, compared with $5-million, or 20.25 cents per share, for the prior-year comparable quarter. The payout ratio is 93 per cent for the quarter and was 91 per cent in the prior-year comparable quarter.

The company declared shareholder dividends of $16.2-million for the period, or 65.75 cents per share, compared with $14.5-million, or 59 cents per share, for the prior-year comparable period. The payout ratio is 97 per cent for the period and was 97 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 $8-million at Sept. 30, 2023, which is an increase of $400,000 in the quarter due to the 93-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-term 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 banker acceptance rate plus a credit spread between 0.875 per cent and 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, 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 $1.7-million in the prior-year comparable period. For the period, current income tax is $5.2-million, which increased when compared with the prior-year comparable nine-month period at $4.5-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 10.7 per cent to 24.9 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 10.3 per cent to 25.5 cents when compared with the same period in 2022 and increased 12.4 per cent to 72.4 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 seven traditional Pizza Pizza restaurants and opened six non-traditional Pizza Pizza restaurants. PPL closed four non-traditional Pizza Pizza restaurants. At the Pizza 73 brand, PPL opened one traditional restaurant and one non-traditional restaurant.

During the Period, PPL opened 14 traditional restaurants and 15 non-traditional Pizza Pizza restaurants and closed five traditional restaurants and six non-traditional restaurants. Additionally, at the Pizza 73 brand, PPL opened two traditional restaurants and two non-traditional restaurants 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 per cent 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 table sets out selected financial information and other data of Pizza Pizza Royalty and should be read in conjunction with the Sept. 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 discussion and analysis (MD&A) will be available on SEDAR+ and the company's website after the market closes on Nov. 7, 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:  Tuesday, Nov. 7, 2023

Time:  5:30 p.m. ET

Call-in numbers:  416-764-8650 or 888-664-6383

Recording call-in numbers:  416-764-8677 or 888-390-0541

The recording will be available until midnight on Nov. 21, 2023.

Conference ID:  643429

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

We seek Safe Harbor.