Mr. Paul Goddard reports

PIZZA PIZZA ROYALTY CORP. ANNOUNCES STRONG FOURTH QUARTER AND FULL YEAR RESULTS

Pizza Pizza Royalty Corp. has released financial results for the three months and 12 months ended Dec. 31, 2023.

Fourth quarter highlights:

• Same-store sales increased 4.0 per cent.
• Royalty pool sales increased 7.0 per cent.
• Adjusted earnings per share increased 7.1 per cent.
• Restaurant network increased by 11 net locations.

Full-year 2023 highlights:

• Same-store sales increased 8.2 per cent.
• Royalty pool sales increased 10.6 per cent.
• Adjusted earnings per share increased 10.9 per cent.
• Restaurant network increased by 32 net locations.
• Monthly cash 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, Pizza Pizza Ltd., said: "Two thousand twenty-three was an exceptional year for our brands as we achieved 8.2-per-cent same-store-sales growth over already strong 2022 results, and we strengthened our presence across Canada by opening 45 new restaurants. This culminated in total sales crossing the $600-million threshold and enabled us to declare three dividend increases in the year. We also continued to leverage our marketing and technology strengths in 2023 while featuring our high-quality menu offerings."

Sales

Royalty pool system sales for the quarter increased 7.0 per cent to $163.9-million from $153.2-million in the same quarter last year. By brand, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 6.8 per cent to $141.1-million for the quarter compared with $132.1-million in the same quarter last year. Sales from the 99 Pizza 73 restaurants increased 8.5 per cent to $22.9-million for the quarter compared with $21.1-million in the same quarter last year.

Royalty pool system sales for the year increased 10.6 per cent to $628.3-million from $568.3-million in 2022. By brand, for the year, sales from the 644 Pizza Pizza restaurants in the royalty pool increased 11.0 per cent to $544.4-million compared with $490.6-million in the prior year. Sales from the 99 Pizza 73 restaurants increased 8.1 per cent to $83.9-million compared with $77.7-million in 2022.

For the quarter and year, 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 carry-over amount.

Same-store-sales growth

SSSG, the key driver of yield growth for shareholders of the company, increased 4.0 per cent (2022: 13.0 per cent) for the quarter and 8.2 per cent (2022: 15.2 per cent) for the year.

SSSG is driven by the change in the customer cheque and customer traffic, both of which are affected by changes in pricing and sales mix. During the quarter, the average customer cheque increased as the brands passed along retail price increases. At both brands, restaurant traffic increased due to strong value messaging, promotional brand activities and product innovation. Additionally, 2022 results reflected a comparison with periods impacted by COVID-19, and 2023 reflects more normalized performance.

Monthly dividends and working capital reserve

The company declared shareholder dividends of $5.7-million for the quarter, or 23.0 cents per share, compared with $5.1-million, or 20.75 cents per share, for the prior-year comparable quarter. The payout ratio is 96 per cent for the quarter and was 91 per cent in the prior-year comparable quarter.

The company declared shareholder dividends of $21.8-million for the year, or 88.75 cents per share, compared with $19.6-million, or 79.75 cents per share, for the prior-year comparable period. The payout ratio is 97 per cent for the year and was 95 per cent in 2022.

The company's policy is to distribute all available cash 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 to smooth out income to shareholders.

The company's working capital reserve is $8.2-million at Dec. 31, 2023, which is an increase of $700,000 in the year due to the 96-per-cent payout ratio. System sales for the quarter ended March 31 have generally been the softest and historically result in a payout ratio of 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.

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 and 1.375 per cent, depending on the level of debt to earnings before interest, taxes, depreciation and amortization.

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 year, current income tax is $7.0-million, which increased when compared with 2022 at $6.1-million. The increase in current income tax for the quarter and year 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 differ 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 Pizza Pizza Ltd. The amount of tax amortization deducted is based on a declining balance basis and will decrease annually.

Earnings per share

Fully diluted basic EPS increased 7.3 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 7.1 per cent to 25.5 cents when compared with the same period in 2022, and increased 10.9 per cent to 97.9 cents for the year.

Restaurant development

As announced in 2023, 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 remained unchanged through Dec. 31, 2023.

During the quarter, Pizza Pizza Ltd. opened seven traditional and five non-traditional Pizza Pizza restaurants, and closed one non-traditional Pizza Pizza restaurant.

During the year, Pizza Pizza Ltd. opened 21 traditional and 20 non-traditional Pizza Pizza restaurants, and closed five traditional and seven non-traditional restaurants. Additionally, at the Pizza 73 brand, Pizza Pizza Ltd. opened two traditional and two non-traditional restaurants, and closed one traditional restaurant. These restaurants have been added to the royalty pool on Jan. 1, 2024, with 774 restaurants included in the 2024 royalty pool.

New restaurant construction continues across Canada as government mandated restrictions on commercial construction have been lifted in all provinces. Pizza Pizza Ltd. management expects to expand its traditional restaurant network by 3 to 4 per cent and continue its renovation program through 2024.

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 Pizza Pizza Ltd. 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, and should be read in conjunction with the Dec. 31, 2023, 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 will be available at SEDAR+ and the Pizza Pizza website after the market closes on March 6, 2024.

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 6, 2024

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 20, 2024

Conference ID:  005650

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

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