Pizza Pizza Royalty Corp.

Good afternoon, ladies and gentlemen, and welcome to the Pizza Pizza Royalty Corp. 3rd Quarting Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on November 4, 2024. I would now like to turn the conference over to Christine De Silva, CFO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the third quarter, ended September 30th, 2024. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer, Paul Goddard. Just a quick note, our discussion today will contain forward-looking statements that may involve risks relating to future events. Actual events may differ materially from the projections discussed today. All forward-looking statements should be considered in conjunction with the cautionary language in our earnings press release and the risk factors included in our annual information form. Please refer to our earnings press release and the MD&A in the investor relations section of our website for a reconciliation and other disclosures related to our non-IFRS financial measures mentioned today. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers, media, and shareholders can contact us after the call. I will now turn the call over to Paul Goddard to provide a business update.

Thanks, Christine, and good afternoon, everyone. Thanks for joining us today. We appreciate it. I'd like to invite you to our call, third quarter investor conference call. Today, I will discuss our results and we'll share a brief outlook for what's ahead as we close out this year. Christine will then summarize our key financial highlights before the Q&A at the end. So in the third quarter, we continue to experience headwinds as we navigate ongoing reduced consumer spending and its impact on food service, particularly delivery channels. And in this environment, we've seen ongoing shifts to pickup orders across Pizza QSR, which continues to be an opportunity for us with our best-in-class restaurant footprint across Canada. In the third quarter of 2024, our brands reported a combined 5.3% same-store sales decline, as pizza restaurants reported a 5.9% decline after two years of very strong growth, and Pizza 73 restaurants reported a sales decline of 1.5%. So both brands saw a decline in traffic as a result of pressures on consumer spending and heightened competition, and relatively flat checks as the brands introduced new value offerings and consumers migrated to picking up instead of delivery orders. Our sales recovery strategy for the remainder of 2024 and into 2025 will leverage our strong everyday value leadership position backed by ongoing enhancements to our menu, convenient restaurants, and customer experience, including the digital experience. On value, while it's obvious, customers are looking for continued value as well as quality. So we have to find the right balance of perceived value for money. We need to keep customers happy and willing to purchase while simultaneously doing all we can to drive not just sales growth, but also profitability for our restaurant owner operators and for our private operating company, Pizza Pizza Limited. And this is not always easy. in the heightened competitive QSR landscape. In the third quarter, we continue to focus and promote value to our customers as we look to gain share of consumers' QSR spend. At the Pizza 73 brand, we successfully launched an XXL pizza at a $19.99 price point, speaking directly to the value customers were looking for and that they're looking for. And this new offering has been well received by our customers. We saw significant sales throughout the quarter as it quickly became our number two deal. So building off the success of this offer, we then introduced the all-for-one special consisting of four small pizzas for $19.99, and a back-to-school discount was added with our unlimited two-topping pizza special at a $10 price point. Meanwhile, over at Pizza Pizza, over the last three years, we have seen a shift in consumer behavior, with customers moving to pickup orders to save on delivery, tip, and other surcharges. We decided to lean into that trend and heavily promoted our pickup specials leading into the summer season, in early Q3 in particular, and our pickup artists campaign was supported with billboard, TV, and digital media advertising, and we continue to see growth in that category. Ensuring we are convenient and accessible to all potential customers has always been a key priority of our business and has proven to be a key differentiator for us, especially with our expansive restaurant network across Canada and our best-in-class digital footprint for customers to order on. In terms of enhancements, Our customers continue to recognize our strong value proposition and convenience, but our marketing and menu innovation continues to be an asset in driving brand visibility and incremental sales. This summer, we tapped into the spicy food trend with a collaboration with legacy brand Tabasco. We developed items across six product categories on our menu to showcase our menu variety while adding something new and exciting. We also used this collaboration to develop new on-the-street social media content, further driving brand awareness. In the past, we've talked about owning key days and occasions, and summer months are no different. We partnered with dozens of festivals and events across Canada, including the Calgary Stampede, Ontario's Honda Indy, the CNE, Montreal and Vancouver's Pride events, and the East Coast Music Festival, to name a few. At these events, tens of thousands of pizza slices were sold, building the brand's equity with Canadians everywhere. As the summer ended, We welcome students back to post-secondary campuses across the country during Frosh Week with a creamy garlic dip mini keg. You know there's a strong affinity for our creamy garlic dip, so we developed some fun social content around that, got lots of attention around that. And while honestly it was not a big sales-driving initiative, it does keep our brand top of mind with that generation of pizza consumers, so we feel like we're seen in refreshed light more and more, which is great. As we look to closing out 2024, we know there is significant competition for consumer spending, But the overall strengths of our foundation remain, to name a few, brand strength, resonant marketing messages, a continually enhanced, ever-changing menu, innovations in our technology, reliable consistency and quality, and probably above all, convenience for customers and value for money. So these leading attributes will be our key to our growth as we go forward, as they have been in the past. Turning to restaurant network growth, five traditional and three non-traditional Pizza Pizza locations, and one traditional Pizza 73 location opened in the third quarter, and three non-traditional locations. For the nine months, we've opened 33 locations, 13 traditional and 20 non-traditional Pizza Pizza locations, and one traditional and one non-traditional Pizza 73 restaurant. Well, we have closed three traditionals and 16 non-traditionals. So we're net 16 year to date. While we continue to focus on openings across Canada, we are pleased to say that half of our traditional store openings have actually been in our biggest and longest standing market, province of Ontario. Meanwhile, our successful expanses to the major newer markets of BC and Quebec continue. And beyond Canada, we continue working with our Mexican partners on the next set of restaurant openings under the direction of their new CEO. We continue to see good momentum in Mexico and expect a few more restaurant openings there in the coming months. Just for some closing remarks, as mentioned, we will continue to drive business by leaning into our value offerings, our innovation, our marketing and brand initiatives, while providing high-quality, delicious, hot and fresh food to our customers wherever and whenever they want us. We know the economic landscape is challenged, but we will ensure that our customers continue to see us offering the best food at the best price. As we always say, always the best food made especially for you. So thank you for listening, and I'll now ask Christine to provide our brief financial update.

Thanks, Paul. Before going into the results for the quarter, I wanted to remind everyone of our structures. Pizza Pizza Royalty Corp is a top-line restaurant royalty corp that earns a monthly royalty through a lease agreement with Pizza Pizza Limited. We're in exchange for the use of the Pizza Pizza and Pizza 73 trademark in its restaurant operations. Pizza Pizza pays the partnership a monthly royalty, calculated as a percentage of royalty pool sales. Growth in the corp is derived from increasing same-store sales of the restaurants in the pool, and by adding new restaurants to the pool. For 2024, there are 774 restaurants in the royalty pool compared to 2023 when there were 743 restaurants. So briefly covering the financial results for the quarter, as Paul mentioned, same-store sales, the key driver of yield for shareholders, decreased 5.3% per quarter. Pizza restaurants reported same-store sales declines of 5.9%, and Pizza 73 restaurants decreased 1.5. Both brands experienced a decline in traffic with a relatively flat average ticket. The combination of new restaurants added to the pool on January 1st and the same-store sales decline resulted in a decrease in royalty pool system sales and the corresponding royalty income for the quarter. Royalty pool system sales for the quarter decreased 4.6% to 155.8 million, from 163.2 million in the same quarter last year. By brand, sales from the 672 pizza pizza restaurants in the royalty pool decreased 5% to 134.9 million, and sales from the 102 pizza 73 restaurants decreased 1.8% to 20.8 million for the quarter. The partnership's royalty income earned as a percentage of the royalty pool sales decreased 4.4% to 10 million for the quarter. The partnership also earned interest on its cash and short-term investments, and for the quarter, the partnership earned $93,000. Turning to partnership expenses, administrative expenses for the quarter were $176,000 and include listing and director, legal, and auditor fees. In addition to administrative expenses, the partnership is also making interest-only payments on its $47 million credit facilities. Interest paid in the quarter was $322,000. The interest rate is locked through April 2025 using the swap agreement that has fixed the interest rate at a core rate of 1.81 plus a credit spread for a combined interest rate of 2.685. The company is currently in the process of renegotiating the terms of its new facility for one that will mature in 2025. And the company expects that the new facility will be similar in size, however, at a higher interest rate as compared to the maturing facility. So after the partnership has received royalty income and interest income, it pays administrative and interest expense, the resulting cash is available for distribution to its two partners based on their ownership. Effective January 1st, 2024, after adding new restaurants to the royalty pool and the 2023 Vend and Recruit Up, Pizza Pizza Limited owns 25.2% of the fully exchangeable shares. Pizza Pizza Royalty Corp shares in the remaining 74.8% of the partnership. It pays taxes on its share of the partnership earnings, and any residual cash is then available for dividends to the company shareholders. The company declared shareholder dividends of $5.7 million for the current quarter, or $0.23.25 per share, compared to $5.5 million, or $0.22.5 per share in 2023. The payout ratio of 109% per quarter resulted in the company's working capital decreasing 500,000 and ending the quarter at 6.3 million. This excludes the reclassification of the credit facility to a current liability. The reserve is available to stabilize dividends and to fund other expenditures in the event of short to medium-term sales variabilities. The company has historically targeted the payout ratio at or near 100% on an overall annualized basis. That concludes our financial overview. I'd like to turn the call back to our operator to poll for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline your To decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please flip the handset before pressing any keys. Your first question comes from the line of Derek Lessard from TD Securities. Your line is now open.

Yeah, thanks and good afternoon, everybody. Glad to hear your voice. Likewise, Derek. Thank you. Paul, I just wanted to maybe start on maybe consumer behavior. I know it's tough. It's tough out there for everybody and definitely the consumers feeling the pinch. I was just curious if you've seen any changes, even if they're subtle, given the recent decreases in the interest rate environment.

Yes. Good question, Derek. I mean, I think we are overall. I mean, you know, we've seen it It's definitely a good signal in many ways with rates coming down and especially 50 basis points. But I think the reality is there's still a lot of people really suffering out there with the discretionary spend. And people seem to just be more deliberate in managing that overall spend. Our core pizza products, for instance, continue to grow, but how they obtain their pizza from us has changed. In other words, as I mentioned, we've seen quite a lot fewer deliveries and more pickup. And that's fantastic. good in some way because we have that flexibility with our omnichannel strategy, but often the pickup channel or the walk-in channel isn't as high a check, right? And so we actually, on an obviously revenue basis, that hurts us, although we still get the customer. And also, I think, you know, in times like this, we've seen it, although, say, Core Pizza might be doing okay, you do see a little bit of that behavior in terms of maybe not getting that extra dip or that extra drink or that extra side as much as we try and bundle. And I think what we've tried to do is really seeing that coming and experiencing it for some time now say, look, we can still get under, you know, to a good price point, whether it's a $10 price point or a 1999 sub $20 price point with a bundle of attractive food and really good value for money. It's really quite exceptional. So I could sort of combat that, but I think you can just feel that people are just not as free spending and they're not using third-party channels. At least some people, for instance, as much as they used to either. And you've seen that with some of those folks and what they've said lately. So I think it, It does vary, but that is something we've seen, is that people just being much more judicious and not spending as much.

Okay, that's helpful. And I guess, I mean, along the same lines, I was curious, like within the store, you said core pizza is growing, but what about, you know, maybe some of your higher priced items or more premium pizza offering or, you know, or chicken wings? Like, how are those? Do you find that people are trading down from those higher-priced categories?

We have seen some of that, yes, I would say, and something like chicken. I mean, we're a major chicken player. I would say, not to get ahead of myself for next quarter, et cetera, but we're seeing some encouraging signs of late. But we have seen, going back to this quarter, some reduction in chicken. And so what we did, seeing that starting a little while ago, was to really... make sure we come right out with a pizza and chicken special that was very attractive. It's a $19.99 price point as well. So you're getting tremendous value there. And so people really, I think, see that. And Will, I think, it takes a little bit of time sometimes for these things to get the traction. But that's one example of the $19.99. And the other one that's, you know, we're pretty excited about it. And we've seen already some, you know, some really nice pickup with that is the bipartisan wings special, which obviously is making, you know, with the... I mean, the U.S. election and, you know, who knows in Canada, but it was really more targeted at the U.S. But to say, look, no matter whether you're left wing or right wing, we still think you should be united and just sort of wings, you know. And I think that's just a novel way to look at things. It just highlights that we are a big chicken player. But, you know, some of those items historically have been a little pricier. And so we need to come up with novel ways like this to try and get some of that traffic back, some of that volume back.

Yeah, that clever, that was a clever campaign, the left wing, right wing.

Yeah, thanks. And that is a Q4, I should clarify, just for anyone who doesn't realize that, that will be a part of Q4, as will, you know, Halloween and things like that, which went really well. But that is, you know, very fresh news.

Okay. Thanks for that. And so maybe just hitting on, you touched on it on your remarks, Paul, in terms of the competitive environment. One of the, I guess, the bigger pizza players noted that they expect to be I guess, more aggressive on promotional pricing and, and I guess diversity beyond just beyond delivery, just to grow that, that carry out sort of like you guys. I was just wondering, like, have you felt any of the impact from, you know, the third party providers or, or more aggressive pizza competitors or even just QSRs in general?

you know, it's always hard to ascertain sort of causality, you know, where, you know, if we're down in volume, where is it coming from? It's honestly, you know, our general sense is it's probably from multiple places. You know, we have seen some very aggressive behavior, and I would say that aggressive behavior that we haven't seen probably in some years with some of the bigger names that are, you know, being very, very aggressive. And we've tried to sort of generally not You know, we're always conscious of our franchisees' profitability. We'd rather get something that has long-term attractiveness for people with core products and specials and things. But, you know, we're in an environment where customers do have that choice. So we have to be pretty close or, you know, hit some of those key price points as well ourselves. We just prefer to do it through specials and make sure that our overall food basket, our food costs, et cetera, make sense for our franchisees. But, you know, our franchisees also know that sometimes we just have to drive volume. And when you have to drive volume and focus even more on value, you've got to be flexible. So, you know, yes, they get pushed a little harder at times like this as well. But I think they see that we also need to really get that volume back when you see others being so aggressive. And I think third party, you are starting to see that, you know, more loyalty programs on third party and things like that. And there certainly are people that are perhaps less price sensitive that use those platforms extensively. But I think there's also customers that used to use those platforms that they can no longer afford to. or not willing to. And they see brands like us that have really great organic technology platforms and loyalty programs where they say, wait a minute, I can save some real dollars here by going organic. So I think it's probably a combination at the end of the day. But we have seen a lot of aggressive behavior by many people.

Absolutely. Okay. And maybe on the, I guess on, sorry, initiatives around walk-in and pick-up, you mentioned you know, a couple of value promos that you have going on. Does that pertain to the walk-in? And maybe just add some, maybe if you could talk about some initiatives you have around driving that traffic.

Yeah, I mean, I think there are, you know, I've talked about the Q4 one, the bipartisan wings. There's a four-topping, large four-topping pizza for $13.99 that we actually just announced. Again, that's a Q4 thing, but it's a slice-the-price offering. really focusing on providing a ton of value for a really good price. And what we see is, you know, there's different price points obviously for different customers, whether it's slices or walk-in or pickup special versus a gourmet pizza. You know, we'll take price where we can get it from people, especially with those customer segments and those products where we can get away with a higher price and people are just more fixated on, you know, high quality or something very unique maybe versus value. But obviously the bulk of our, you know, our customer base is more that value customer. So, I think just whether it's snack boxes or poutine, stromboli, things like that, we've got a lot of things as examples at a sub-$10 price point that are attractive and also are very good food cost items for our franchisees as well. So, you know, I think we've got some pretty good data on some of that stuff. We tend to know what works well. We're obviously not happy with, you know, the volume levels we've seen this last quarter, but I do think we have a lot of levers that we can pull and we can shift very quickly. And so that feels pretty good. And at West, just to talk about that, we do have you know, the poutine chicken snack boxes as well. And you've got the create your own capability as well out there that we didn't have for a very long time. So I think people are getting familiar with that and the XXL out there. So I think there's quite a lot we have on offer and we're just trying to really amplify the value offerings more than maybe we did a little bit the last couple of quarters.

Yeah. And I mean, you know, a lot of it is outside of, outside of your control. And I think you, I mean, you just touched on, um, on Out West and Pizza 73. It's clearly, it's still doing better than the Pizza Pizza brand out east. I was just curious what the difference is in market or maybe consumer behavior is out west versus out east.

Yeah, I mean, I think, you know, we have also come off very strong comps, I will say, not to sort of use that as an excuse because we know we have to get positive sales. That's our job. But when you look at Pizza Pizza coming off those strong comps, very strong the last two years as well, it's harder. But it also, you know, with Pizza 73, I'd say that we have, I think, optimized a little more. We've got, you know, more renovated stores this year there. You know, we didn't, if you recall, Derek, we didn't start our renovation program as early as we did at Pizza 73, or at Pizza Pizza, sorry. So the store experience is one part of that. I think the create your own pizza is another part of that. The enhanced tech platform out at Pizza 73, You know, the XXL, some of these things like poutine have done well. You know, we've got donairs out there, donair pizza things. So there's some really unique things out there that I think have resonated. And I think people are starting to see that creativity out there. And so it seems to have weathered it a little better just in the current economic environment out there. But I would say, you know, there's still a hyper-competitive market situation in Alberta as well. So we certainly see some, you know, very aggressive behavior there with others as well. It doesn't It's not any easier out there. So we need to keep pushing super hard out there, even though, you're right, our decline out there was not as bad.

Okay. That's it for me. Thanks for taking all my questions, guys.

Okay. Thanks a lot, Derek. We appreciate it.

Thank you. There are no further questions at this time. I'd now like to turn the call back to presenters for final closing remarks.

Thank you everyone for joining us on the call today. If you have any further questions, please contact us. Our information is available online. Have a great evening.

Ladies and gentlemen, this concludes our conference call for today. We thank you for participating and ask that you may please disconnect your lines.