Pizza Pizza Royalty Income Fund announces second quarter 2007 results



    TORONTO, Aug. 1 /CNW/ - Today, Pizza Pizza Royalty Income Fund (the
"Fund") reported financial results for the three and six months ended June 30,
2007.
    As previously announced, the Fund reported another strong quarter with
4.3% same store sales growth and 4.9% for the 6 months ended June 30, 2007,
compared with 4% for the same quarter in 2006 and 5% for the 6 months ended
June 30, 2006. Same store sales growth is the key driver of yield growth for
Unitholders. This represents the eighth consecutive quarter of sales growth
since the Fund's inception in July 2005.
    System Sales for the Pizza Pizza Limited ("Pizza Pizza") restaurants in
the Fund's Royalty Pool for the second quarter increased by $6.1 million or
7.1% to $92.2 million compared with $86 million for the same quarter in the
prior year. System Sales of the Royalty Pool for the six months ended June 30,
2007 increased by $13.2 million or 7.8% to $181.7 million compared with
$168.5 million for the same quarter in the prior year. The increase in sales
reflects the sales generated by the new restaurants in the Royalty Pool and an
increase in same store sales.

    Distributable Cash

    Distributable cash for the second quarter of 2007 was $4.0 million or
$0.221 per unit compared with $3.8 million or $0.214 per unit for the second
quarter of 2006, which represents a 3.2% increase in distributable cash per
unit. The Fund declared distributions of $3.9 million or $0.219 per unit for
the quarter compared with $3.7 million or $0.209 for the same quarter last
year. The payout ratio for the quarter was 99%.
    Distributable cash for the six months ended June 30, 2007 was $7.9
million or $0.443 per unit compared with $7.5 million or $0.419 per unit for
the six months ended June 30, 2006. The Fund declared distributions of
$7.9 million or $0.438 per unit for the six months compared with $7.5 million
or $0.416 for the comparable six months of 2006. The payout ratio for the
six-month period ended June 30, 2007 was 99%.
    Distributable cash is not an earnings measure recognized by generally
accepted accounting principles ("GAAP") and therefore may not be comparable to
similar measures presented by other issuers. Distributable cash, calculated as
net earnings before non-cash, future income tax expense, is based on the
operating activities of the Fund and its share of the operations of the Pizza
Pizza Royalty Limited Partnership (the "Partnership").

    Restaurants

    Pizza Pizza opened 11 restaurants and closed 1 during the quarter, and on
a year-to-date basis opened 13 and closed 2, bringing the total number to 542
restaurants. The 542 restaurants are comprised of 357 traditional restaurants
and 185 non-traditional restaurants.

    New Income Tax Legislation and the Non-cash affect on Current Operating
    earnings

    On October 31, 2006, the Department of Finance (Canada) announced
proposed tax legislation which included a provision to eliminate the deduction
of distributions from taxable income for certain forms of publicly traded
income trusts and partnerships. The proposed legislation became substantively
enacted law on June 12, 2007 and changes the rules applicable to publicly
traded income trusts in 2011. As the new trust tax legislation has been
substantively enacted, the Fund is required to give accounting recognition to
these new rules. As a result, on June 12, 2007, the Fund recognized a non-cash
future income tax expense and corresponding liability amounting to
$8.7 million. This liability represents the Fund's proportionate share of the
temporary difference between the accounting and tax basis, at the 31.5% tax
rate applicable to the Fund, on the Rights and Marks in the Partnership. The
Fund will not be liable for current taxes until January 1, 2011.
    With the application of GAAP as a result of this new tax legislation, the
fund is reporting a net loss after impact of the non-cash, future income tax
expense for the quarter ended June 30, 2007 of $4.7 million or $0.26 loss per
unit, as compared to net earnings of $3.8 million or $0.214 per unit for the
second quarter of 2006. Net loss for the six month period ended June 30, 2007
was $0.8 million or $0.04 loss per unit, as compared to net earnings of
$7.5 million of $0.419 per unit for the comparable period in 2006. The net
loss for the current quarter and six month period ended June 30, 2007 is
solely the result of the non-cash, future tax expense recognized in the second
quarter of 2007 as further discussed below.

    FINANCIAL HIGHLIGHTS

    Equity income earned by the Fund through its interest in the Pizza Pizza
Royalty Limited Partnership (the "Partnership") and interest income from the
PPL Loan for the Period, have been derived as shown in the table below:


    
    Pizza Pizza Royalty Limited Partnership
    Analysis of Distributable Cash

                                  3 months ended          6 months ended
    -------------------------------------------------------------------------
                                June 30,    June 30,    June 30,    June 30,
                                 2007        2006        2007        2006
                              (unaudited) (unaudited) (unaudited) (unaudited)
    -------------------------------------------------------------------------
     (in thousands of dollars, except number of restaurants, days in the
                       period, and per unit amounts)

    Restaurants in Royalty Pool      531         501         531         501
    Days in the Period                90          91         181         181
    Same store sales growth         4.3%          4%        4.9%          5%
    System sales reported by
     restaurants in the Royalty
     Pool                      $  92,162   $  86,015   $ 181,680   $ 168,498
    -------------------------------------------------------------------------

    Royalty - 6% of system
     sales                     $   5,530   $   5,161   $  10,901   $  10,110
    Partnership expenses(1)         (498)       (455)       (836)       (894)
    -------------------------------------------------------------------------
    Earnings available for
     distribution to the
     Fund and Pizza Pizza          5,032       4,706      10,065       9,216
    Pizza Pizza's interest(2)     (1,508)     (1,314)     (3,017)     (2,589)
    -------------------------------------------------------------------------
                                   3,524       3,392       7,048       6,627
                                                                   ----------
    Interest income(3)               450         450         900         900
    -------------------------------------------------------------------------
    Net earnings excluding the
     impact of the non-cash,
     future income tax
     expense                   $   3,974   $   3,842   $   7,948   $   7,527
    -------------------------------------------------------------------------
    Net earnings (loss)(4)     $  (4,726)  $   3,842   $    (752)  $   7,527
    -------------------------------------------------------------------------
    Basic earnings per Fund
     unit excluding impact of
     non-cash future income
     tax expense               $   0.221   $   0.214   $   0.443   $   0.419
    Basic earnings (loss) per
     Fund unit(4)              $  (0.263)  $   0.214   $  (0.043)  $   0.419
    Diluted earnings (loss)
     per Fund unit(4)          $  (0.157)  $   0.209   $   0.058   $   0.409

    Distributable cash per
     Fund unit(5)              $   0.221   $   0.214   $   0.443   $   0.419

    Distributions declared     $   3,931   $   3,744   $   7,862   $   7,461
    Distributions per Fund
     unit                      $   0.219   $   0.209   $   0.438   $   0.416
    Payout ratio                     99%         97%         99%         99%
    -------------------------------------------------------------------------

                                       June 30, 2007       December 31, 2006
    -------------------------------------------------------------------------

    Total assets                           $ 177,785               $ 171,796
    Total liabilities                      $  10,010               $   1,275
    -------------------------------------------------------------------------
    (1) The Fund, indirectly through the Partnership, incurs administrative
        expenses and interest expense on the $20 million outstanding bank
        loan. Interest expense on the bank loan for the current quarter was
        $265 and $527 for the six months ended (2006 - $277 and $551).

    (2) Represents the interest of Pizza Pizza in the earnings of the
        Partnership from Class B and Class C Partnership units.  The Class B
        units are exchangeable into Fund units based on value of the Class B
        Exchange Multiplier at the time of exchange as defined in the Licence
        and Royalty Agreement and represents 23% of the fully diluted units
        of the Fund at June 30, 2007.

    (3) The Fund indirectly earns interest income on the $30 million loan to
        Pizza Pizza, with interest income accruing at 6% per annum, payable
        monthly.

    (4) Net loss for the quarter and six months ended June 30, 2007 reflect
        the non-cash, future tax expense of $8.7 million relating to the new
        tax legislation substantively enacted on June 12, 2007.

    (5) 'Distributable cash per unit" represents a non-GAAP measure and
        equals net earnings excluding the effect of the non-cash, future
        income tax expense of $8.7 million relating to the new tax
        legislation substantively enacted on June 12, 2007.
    

    Subsequent Events

    On July 24, 2007, the Fund and Pizza Pizza announced the acquisition of
Pizza 73, Inc. and its affiliated companies (together, "Pizza 73"). In
connection with this transaction, the Fund has acquired the trademarks and
other intellectual property associated with Pizza 73 restaurant operations.
    The Fund and Pizza Pizza acquired Pizza 73 for a combined purchase price
of $70.25 million. The Fund, through the Partnership, acquired the trademarks
and other intellectual property of Pizza 73 for $54.04 million (the
"Transaction") and Pizza Pizza acquired the operating business of Pizza 73 for
$16.21 million. An additional $3 million earnout will be paid to the Pizza 73
vendors by Pizza Pizza in July 2008, provided certain revenue and
profitability targets are met. Pizza Pizza will license the trademarks and
other intellectual property associated with Pizza 73 from the Partnership for
a 9% royalty payment to the Fund on system sales generated by the Pizza 73
restaurants in the Royalty Pool.
    Effective July 24, 2007, the Fund issued 2,600,000 units to the public at
$9.15 per unit for gross proceeds of $23.79 million and 766,392 units at $9.15
through a private placement with the ultimate shareholder of Pizza Pizza and
the vendors of Pizza 73 for gross proceeds of approximately $7 million.
Concurrent with the closing of the Transaction, the Partnership has entered
into a credit facility to finance the remaining portion of the purchase price
payable in the Transaction and to re-finance existing indebtedness.

    About PIZZA 73

    Founded in 1985, Pizza 73, with its recognizable phone numbers ending in
"7373", currently has 48 restaurants in its system. Pizza 73 operates in the
take-out and delivery pizza QSR segment, principally in the province of
Alberta. Pizza 73 currently has four locations outside of Alberta; three in
Saskatchewan and one in British Columbia. Systems sales through its
centralized call centre and pizza73.com together accounted for approximately
95% of Pizza 73's sales for the 52 weeks ended April 21, 2007. Pizza 73
restaurants are not franchised, but instead are owned and operated as
independent businesses. Each restaurant is a corporation equally owned by an
independent owner/operator and Pizza 73. Pizza 73 supports its independent
owner/operators with new restaurant openings, product development and supplier
arrangements and a centralized marketing program funded by contributions from
each restaurant equal to approximately 8% of annual sales. The Pizza 73
business also includes two commissaries and a call centre. For the 52 weeks
ended April 21, 2007, Pizza 73 had system sales of $65.0 million. For the
years ended July 22, 2006 and July 23, 2005, Pizza 73 had system sales of
$52.8 million and $40.8 million, respectively.
    The unaudited, consolidated financial statements of the Fund, together
with its Management's Discussion and Analysis, will be available at
www.sedar.com and on the Fund's website at
www.pizzzapizzaroyaltyincomefund.com on or before August 2, 2007.
    The Fund will hold a conference call to discuss the first quarter results
on August 2, 2007 at 9:00 a.m. EST. The call can be accessed by dialing (416)
642-5212 or 1-866-321-6651. A replay will be available until August 15, 2007
by dialing (416) 915-1028 or 1-866-244-4494, reservation number 786640.

    Outlook

    Pizza Pizza management has advised the Trustees that in 2007 it expects
to organically grow the number of Pizza Pizza restaurants by 3% this year, and
to continue researching strategic expansion opportunities. Additionally, Pizza
Pizza expects to continue franchising its remaining Company-owned restaurants.
    With over 95% of traditional restaurants now expanded or relocated, Pizza
Pizza offers expanded seating capacity, thereby targeting additional day-parts
and allowing for additional product offerings to enable restaurants to
continue increasing same store sales.

    Forward Looking Information

    Certain 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 operating
performance and speak only as of the date of this report. These
forward-looking statements involve a number of risks and uncertainties. The
following are some factors that could cause actual results to differ
materially from those expressed in or underlying such forward-looking
statements: competition; changes in demographic trends; changing consumer
preferences and discretionary spending patterns; changes in national and local
business and economic conditions; legislation and governmental regulation;
accounting policies and practices; and the results of operations and financial
condition of Pizza Pizza. The foregoing list of factors is not exhaustive.

    Non-GAAP Measures

    Certain financial information contained in this news release, including
references to cash available for distribution, are not standard measures under
GAAP in Canada and may not be comparable to similar measures presented by
other entities. These measures are considered to be important measures used by
the investment community to assess the source and sustainability of the Fund's
cash distributions and should be used to supplement other performance measures
prepared in accordance with GAAP in Canada.

    About the Fund, a publicly-traded entity

    The Fund is a limited purpose, open-ended trust established under the
laws of Ontario to indirectly acquire the trademarks and trade names used by
Pizza Pizza in its Pizza Pizza and Pizza 73 branded restaurants. The Pizza
Pizza trademarks were licensed to Pizza Pizza in 2005 for 99 years, for which
Pizza Pizza pays the Fund a royalty equal to 6% of the system sales of its
Pizza Pizza restaurants in the Royalty Pool. As of January 1, 2007, there were
531 Pizza Pizza restaurants in the Royalty Pool. Effective July 24, 2007, the
Fund acquired the Pizza 73 trademarks and licensed them to Pizza Pizza, for
which Pizza Pizza pays the Fund a royalty equal to 9% of the system sales of
the 41 Pizza 73 restaurants added to the Royalty Pool.
    Since its initial public offering in 2005, the Fund has increased
distributions four times while maintaining an average of 5% same restaurant
sales growth at its Pizza Pizza restaurants. The last distribution increase
was in January 2007 when monthly distributions were increased from $0.071 per
unit to $0.073 per unit.
    A key attribute of the Fund is that it is based on top-line, system sales
of the Royalty Pool restaurants and not on the profitability of either Pizza
Pizza or the restaurants in the Royalty Pool. The success of the Fund depends
primarily on the ability of Pizza Pizza to maintain and increase system sales
of the Royalty Pool and to meet its royalty obligations.
    The Fund's trust units are listed on the Toronto Stock Exchange under the
symbol PZA.UN.

    About Pizza Pizza Limited, the privately-owned operating company

    Pizza Pizza Limited, a privately-held Canadian corporation, is one of
Canada's most successful operators in the quick service restaurant industry
and is celebrating its 40th anniversary this year. Founded in 1967, Pizza
Pizza is guided by a mission to provide the "best food, made especially for
you" and a focus on quality ingredients, customer service, community
contribution and continual innovation.

    %SEDAR: 00022262EF




For further information:

For further information: Media: Daniel Vukovich, Chief Operating
Officer, Pizza Pizza Limited, Telephone: (416) 967-1010,
dvukovich@pizzapizza.ca; Investors: Curtis Feltner, Chief Financial Officer,
Pizza Pizza Limited, Telephone: (416) 967-1010, cfeltner@pizzapizza.ca; Web:
www.sedar.com or www.pizzapizzaroyaltyincomefund.com and www.pizzapizza.ca

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PIZZA PIZZA ROYALTY INCOME FUND

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