Pizza Pizza Royalty Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp. Earnings Call for the Q3 of 2023. During this presentation, all participants will be in listen only mode. After the speakers' remarks, there will be a question and answer session. As a reminder, this conference is being recorded on Tuesday, November 7, 2023.

Operator

I will now turn the call over to Christine DaSilva, CFO, please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the Q3 ended September 30, 2023. 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.

Speaker 1

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 and A in the Investor Relations section of our website for a reconciliation and other disclosures related to non IFRS financial measures mentioned on this call. 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 would now like to turn the call over to Paul to provide a business update.

Speaker 2

Thank you, Christine, and welcome everyone to Pizza Pizza's 3rd quarter investor conference call. Today, I will discuss our Q3 results and then Christine will summarize our key financial highlights before the Q and A at the end. We are very excited to announce our 10th consecutive quarter of positive sales with 7.0% same store sales growth. During the quarter, the Pizza Pizza brand reported a 6.4% increase in same store sales And the Pizza 73 brand reported an 11.3% increase. Growth at both brands was driven by increases in both guest traffic And the average customer check.

Speaker 2

This consistency and performance has enabled our Board to announce another increase to our monthly dividend, A 3.3% increase, resulting in an annualized rate of $0.93 a share. So getting into the details of the quarter. Our positive momentum has continued in the Q3 and was driven by 2 key factors, growth in our walk in and pickup, our nontraditional sales and special events channels. And our marketing initiatives continue to show superb momentum. Our nontraditional sales typically account for 10% of total sales And it has been really refreshing to see all of these special events in non traditional locations welcome more hungry customers this year.

Speaker 2

We have many high profile sponsorships convenience as well as our innovation and high quality menu offerings, all supported by our top of mind brand visibility and our ongoing restaurant network expansion. And as mentioned on our last call, our areas of focus for marketing continue to be building the brand, innovating our menu And driving organic sales for our franchisees across Canada. And on the brand front, we continue to build on the successful Everyone Deserves Pizza campaign platform identifying opportunities to advocate for our customers and bring Pizza Pizza specifically into fun and relevant social and cultural conversations. For example, this summer, unlike some companies who hopped on the popular shrinkflation bandwagon, In other words, shrinking the size or volume of their products, but still selling it for the same price, Pizza Pizza announced its Growflation campaign to combat shrinkflation By giving out a medium pizza instead of a small pizza for the same small price. This campaign continues to highlight our promotional And value offerings that speaks to pressures Canadians feel related to rising interest rates and price inflation.

Speaker 2

Food Innovation also continues to be a key asset in driving brand visibility and incremental sales for us. In August, We were the 1st national QSR to introduce Strombolis to Canadians, essentially a rolled pizza dough filled with popular toppings, cheese and sauce, As Stromboli is a great handheld snacking option and fills the gap in our pizza menu, the launch far exceeded our initial estimates and this category has continued with solid performance Since the initial marketing campaign. And good margin, by the way, for our operators on that product as well. So it's a real win win. And meanwhile, at Pizza 73, We focused on innovation food innovation there as well this quarter and shoring up opportunity dayparts, specifically lunch and late night Through new snackable menu items such as our signature curly fries poutine and a variety of new chicken fries snack boxes And a new under $10 menu, we have seen significant growth in both these dayparts as well as our walk in business.

Speaker 2

And the food innovation isn't just for our traditional restaurants. We continue to see the Pizza Pizza brand come alive in communities across Canada via our best in class sponsorship Activities and special events programs. In addition to record sales of critical events like the C and E and the Calgary Stampede, just as an example, our team innovated our product offering at the CNE this year at the exhibition as we introduced deep fried pizza. This innovation drove national media attention and helped nearly double our sales at So it really worked and we had a lot of attention there and a lot of fun with that one and it really translated into real results. So while brand building campaigns and food innovations continue to find success driving visibility, relevance and sales, we continue to invest in critical infrastructure to ensure we are successfully pushing orders through our websites, apps and call center.

Speaker 2

In Q3, we introduced customer push notifications for Pizza 73 And a new in app messaging platform for Pizza Pizza. And we invested incremental resources to further optimize and drive our online awareness and social media presence as well. So behind the scenes, there's a lot of IT investment reinvestment, as I think long term investors will know that we are very Focused on continuing those investments, and they really do, I think, put us in a position separate from most competitors in the space as a result. And finally, we expanded our virtual chicken, chicken restaurant concept to Pizza 73 this quarter. Previously, it was just at Pizza Pizza, And that is already contributing significantly to our 3rd party sales channel growth for that platform.

Speaker 2

So that's great to see. Turning to restaurant network growth, we continue to have a large pipeline of franchise leads that are eager to join the team and we also have many of our current franchisees looking We ended the Q3 with a total of 7 63 locations, of which 661 were Pizza Pizzas and 102 were Pizza 73. During the quarter, We opened 7 traditional and 6 non traditional Pizza Pizza Restaurants. Meanwhile, 4 non traditional Pizza Pizza Restaurants were closed. And at the Pizza 73 brand, we opened 1 new traditional and 1 non traditional restaurant.

Speaker 2

Our restaurant openings continue Our national expansion plan as we opened in British Columbia, Ontario and Quebec. And COVID related delays associated with construction, permits and supply chain issues Are slowly reducing and we'd say returning to normal overall. While we continue our expansion plans, we also continue with our renovation programs. Over 85% of our traditional Pizza Pizza stores have now have our new look and approximately 25% of the Pizza 73 traditional stores Have been renovated this year. And those ones are actually very quick given a smaller store footprint lobby area as well.

Speaker 2

So they're quicker and cheaper to do. So we expect to move Little faster even with those rentals, which is great. And our restaurants feature our hot and fresh new look and or a refresh on the interior and exterior And significant upgrades continue to be made in regards to restaurant equipment such as new and more efficient ovens, digital menu boards and in store technology. And beyond Canada, we continue working with our Mexican partners on the next set of restaurant openings. We are happy with the progress of the first three stores and what they're achieving down there and And excited about the long term potential of this high growth, high pizza consuming market.

Speaker 2

But we are going to be careful and purposeful in how and where we expand our new footprint there. And we do expect to see several more locations open there during 2024. As I close my comments, We are now in our busiest quarter and aren't going to stop pushing hard and leading with innovation, marketing initiatives, digital investments And delivering high quality, great tasting food to our customers. And we look forward to closing off this year the way we started it, strong. And lastly, The key to our strong performance is our strong team.

Speaker 2

So I want to give a big thank you to all of our restaurant owner operators and our corporate team We're working hard together to continue building on our brand success by taking great care of our customers each and every day. Thank you for listening. And I'll now ask Christine to provide a brief financial update.

Speaker 1

Thanks, Paul. Since Paul covered many

Speaker 2

of our initiatives, I'd like to briefly discuss how those

Speaker 1

promotions and activities drove our financial I'd like to briefly discuss how those promotions and activities drove our financial results this quarter. As mentioned, same store sales, the key driver of yield growth for shareholders, increased 7% in the quarter. The combination of restaurants being added to the Royalty Pool and the same store sales resulted in an increase in royalty pool system sales and the corresponding increase in royalty income. Royalty pool system sales for the quarter increased 9% to $163,200,000 from $149,700,000 in the same quarter last year. By brand, sales from the 6 44 Pizza Pizza Restaurants in the Royalty Pool increased 8.6 percent to $142,000,000 for the quarter And sales from the 99 Pizza 73 restaurants increased 12.4% to $21,200,000 for the quarter.

Speaker 1

The partnership's royalty income earned as a percentage of system sales increased 9.2% to $10,400,000 for this quarter. The partnership also earned interest income on its cash and short term investments. Turning to partnership Administrative expenses for the quarter were $123,000 and include listing costs as well as director, legal and auditor fees. In addition to admin expenses, the partnership paid interest expense on its $47,000,000 credit facility. Interest paid in the quarter was 322,000.

Speaker 1

The partnership is currently making interest only payments on the non revolving facility. The interest rate is lost through April 2025 using swap agreements that have fixed the interest at a bankers acceptance rate of 1.81 percent plus its credit spread for a combined interest rate of 2.685%. So after the partnership receives royalty and interest income and pays admin and interest expense, the resulting net cash is available for distribution to its 2 partners, Pizza Pizza Limited and Pizza Pizza Royalty Corp based on their ownership percentage. Pizza Pizza Royalty Corp. Shares 76.1 percent of the Partnership distribution.

Speaker 1

It then pays taxes on its share of the Partnership earnings and any residual cash is available for dividends to the company's shareholders. Turning to dividends and working capital. As Paul announced, Today, the Board of Directors increased the monthly dividend for the 3rd time this year. The 3.3% increase brings the monthly dividend to $0.075 per share and this dividend increase will begin with the November dividend, which is payable in December. The company declared shareholder dividends of $5,500,000 in this past quarter or 0.225 dollars per share compared to $5,000,000 or $0.025 per share in 2022.

Speaker 1

The resulting payout ratio was 93% for the quarter. The company targets a payout ratio atornear100% on an annualized basis. The company's working capital reserve increased $400,000 during the quarter and was $8,000,000 as of September 30, 2023. With today's dividend increase, the company believes that there is sufficient cash flow to service The obligation as they fall due. And the company will continue to closely monitor sales, royalty income and net income to determine when additional dividend adjustments may be warranted.

Speaker 1

That concludes our financial overview. I'd like to turn the call back to the operator to poll for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer in the order they Your first question comes from Derek Lessard of TD Cowen. Your line is already open.

Speaker 3

Hi, good afternoon. This is Cheryl standing for Derek. Thanks for taking our questions and congrats on another strong quarter.

Speaker 2

Thanks, Cheryl.

Speaker 1

Thanks, Cheryl.

Speaker 3

So, obviously, another strong print on same store sales growth. I'm wondering if you could help us break it down in terms of pricing and volume and the number is particularly strong for PISA73. Could you highlight some of the drivers there?

Speaker 2

Yes. I can relay it over to Chris for any more details, but I think It's helpfully both. I mean, I think what we really are more excited about is traffic growth, right? I mean, it's there's obviously some price increases that we felt that we needed to pass along, but we're really excited about We'll be able to keep traffic growth coming. So I'd say that Epizza 73, for instance, we had a lot of innovation there.

Speaker 2

I tried to touch on that in my formal remarks With these chicken snacker boxes, these curly fried poutine, we have gourmet thins out there, which was a real success out of Pizza Pizza. So we bridge that over as well. So there's actually a lot more available and especially in the snack and dayparts there That represent great value out there. And so we think that's resonating. And we also think that the new website and app that we launched a while ago back there, they It seems to get some pretty quick traction.

Speaker 2

It's just easier to use. People like ordering that way. And these new items that we've introduced are really They obviously worked very well for delivery, but for pickup, those sort of or walk in sales, they work really well. So I would say that's part of the background behind some of the success with 73 coming back so strong.

Speaker 1

And in terms of traffic and ticket, a lot of the increase in our same store sales, as Paul said, It's really from traffic. We saw the return of our non traditional business, a lot of people returning to special events. So That's one of our biggest drivers in terms of our same store.

Speaker 3

Okay. That's very helpful. And I guess with these numbers, are you seeing yourself taking market share? And then on Pizza 73, I think in Q2 last year, you mentioned that You were losing some shares back then in Alberta. Have you gained those shares back yet?

Speaker 2

I think some of the latest data we've seen seems to indicate that we are Yes, are we gaining some share there? And so that's encouraging. I mean, I think overall, we had some data saying that pizza as a category seems to be holding strong as well, Which is good, some very modest growth. We seem to be outpacing some others there, which is good because I think for a while there, At least at $73,000,000 I think we were losing and it does seem as though we are getting some of that back.

Speaker 3

Okay. That's very helpful. And how has same store sales growth been trending so far in Q4?

Speaker 2

Well, we haven't really we don't like to really comment on Q4 before we're ready to. But I'd just like to say, I think that overall, we do feel very confident in our overall strategy of both brands. It seems to be really resonating. We're always looking for ways to drive more traffic and more customer brand resonance. But I I think overall, we're pretty happy.

Speaker 2

I mean, days like Halloween, we'll be reporting on next quarter, things like that. But New Year's Eve will be coming up So the holidays is usually a strong time for us and seasonally this is volume wise is always a good quarter for us, but We're certainly aware of strong competition and a value oriented customer. So we know that we have to be really careful to make sure we stay relevant. So I I mean, so far so good, but I just don't want to comment on Q4 specifically.

Speaker 3

And in terms of consumer behavior, obviously, macro backdrop is still a headwind overall. Any Color on what you saw in the quarter in terms of consumer behavior, whether that's trade down or order patterns, ticket or anything like that?

Speaker 2

I would say one thing that we did notice and this isn't been unique just to this past quarter, but I would say maybe this year roughly is We do see strong growth in walk in and pickup. So in our parlance, we talk about walk in as unpremeditated walk in, you might be walking down Queen Street in Toronto, for instance, or Montreal or wherever, you decide to get a slice and a drink or a salad and that's walk in and pickup is more premeditated, but you're still ordering From a different location and then picking it up. And so we noticed that both those two channels are strong and continue to be growing Faster than some of the other channels, and that's really true for both brands. So I think that is a reflection of affordability, I guess, for some Customers getting tired of delivery. We certainly are big believers in delivery.

Speaker 2

We are very, very strong at that obviously for both brands. But we noticed that people really are Looking for more walk in and pickup because they're seeing that delivery fee. And so we're making sure that we have appropriate offerings for those channels for those customers.

Speaker 3

Okay. That's helpful. And in terms of competition, are there any changes to the competitive behavior? And how do you feel the promotional environment compared to maybe pre pandemic level?

Speaker 2

I'd say competition wise, I mean, I know like everyone gets better at their game, I would say. I mean, we're never addressing our competitors. There's some really Strong competitors out there, but I think, I guess, the numbers speak for themselves. I think we've been very agile and we've been continually reinvesting in Our menu, our technology and our marketing approach. So I would say that if you look at the number of marketing initiatives we have, I would say the content generation Social platforms, digital content, use of influencers and other channels, I would say that's stronger for sure than pre pandemic.

Speaker 2

And that's I think we've learned what works through a lot of experimentation and also just using data and seeing what resonates with people and what doesn't. And I think we are getting better at that and outpacing most of our competitors.

Speaker 1

Additionally, to add on to what Paul is saying, A lot of competitors many do discounting, whereas we're taking an approach of promoting the brand and creating a halo effect on our overall offering. We've had a lot of timely messages like our fixed rate campaign, especially in periods where customers are seeing a lot of inflation and a lot of headwinds. A lot of our campaigns may not necessarily price and discounting. It's more of an offering that resonates really Strongly with our customers and it's all levered up into our Everyone Deserves Pizza campaign. So there's a lot of brand work being done In competition, and we are just outpacing competition in terms of our positioning of our brand.

Speaker 3

Okay. That's great to hear. And maybe just a follow-up on that. You highlighted some of the Digital or infrastructure investments in the quarter. Can you just provide some more color around that?

Speaker 3

And do you see that driving either increased Traffic and or add ons?

Speaker 2

I think things like in app messaging for sure do. I mean, it's actually not that easy within an app to actually create effective targeted Push messages. And so that actually is something that both brands now we have that capability with our platforms that we've invested in. So we think that does result in more I mean, if you get a relevant contextually relevant message on your phone when you're shooting home, for instance, that there's something going on at a location nearby you, Things like that. And Scoreslice is another one with the in venue ability to download and get people really using their phones more.

Speaker 2

I think that's just enhancing our websites and our apps are something we continue to do. We also put in the visual order tracking that we talked about, I think, last quarter That really, I mean, 3rd party platforms have that. But as far as I know, no other major pizza chain in Canada that I know of has that visual ability to track your order. So you're providing More convenience to the customer on the web or on their app as well. And so you're creating more dialogue and more relationship with that customer, it makes them stickier.

Speaker 2

As well, I think Thanks. Just to optimize our presence on Google and other platforms, social media wise and search capabilities and things. I think Yes, I want to get too specific. So I don't want to tell everyone and all our competitors our secrets, but we realize there's a huge advantage there if we can be a real leader and Seems as though those efforts and investments are starting to bear fruit.

Speaker 3

Okay. That's awesome to hear. And I'm curious like how are commodity prices and labor costs trending? And given the cost that you're seeing, how do you feel about your pricing today?

Speaker 2

I think generally, when we look at our Procurement across, we've generally been able to keep a pretty decent line on costs. I mean, we have seen not the massive levels of inflation that we did see A while ago, those seem to have abated generally, but things like construction costs for stores have been quite high. So we are trying to really push on our suppliers as much as possible given our scale, whether it's beverage, boxes, other Commodities, cheese, we obviously can't control, but we try our best to manage that for our franchisees. So Overall, I mean, we do see some issues, I suppose, but I think we've managed to keep our general food costs pretty consistent to help our franchisees profitability. And that does mean Passing on some price, we have done that, but the data suggests we've actually been increasing price generally a little less than the market baseline.

Speaker 2

In other words, less price increases than perhaps some others have put through. So I think that also helps our operators' margins.

Speaker 3

Okay, that's helpful. Thank you. And in terms of New development, we've heard from some small format retail chains that there are delays in new store openings as developers slow down their new development. I'm curious, is that something that you're also seeing? And do you still see the 3% restaurant network expansion rate for 2023?

Speaker 3

And how do you feel about your pipeline for 2024?

Speaker 2

Yes, it's a good point. I mean, I think that the financing for For some of these people, we see our pipeline as being very healthy, but certainly the cost of financing for new franchisees is higher. I mean, this cost of lending with Whether it's a 1st year lender or a 2nd tier lender, obviously, those rates, I think, are a headwind more than it was a year ago. So I would anticipate actually probably a slight The reduction of 3% does seem a little optimistic to me. I don't know if Chris has any comment on that, but I mean we're still Tracking quite well, but I mean it seems to me that you may see that slow a bit even though we're very we're pushing hard very much so on the offense like we have been for some time.

Speaker 2

But I wouldn't be surprised if it actually does slow a little for sure given that sort of tougher environment out there.

Speaker 3

Okay. That's very helpful. And then maybe switching gears. So in terms of like the recent news about Ozempic GLP-one drugs, just curious what your thoughts are on the potential impact of that?

Speaker 2

Yes, there's a lot in the media about that certainly right now. I think it seems like everyone's taking Ozempic. I think, Look, we look at the overall pizza sector, it seems to be growing. We would, I think, say that, look, as much as we might sell fried food and things like that as well, and that's very popular item, We feel there's such a range of items that are actually very healthy as well, and it's very feasible to have Thin crust pizza, easy on the cheese if you like, vegetable toppings, grilled chicken, etcetera. So there's so many or salad, there's so many Options and even though what the bulk of our products are going to be sales are going to be chicken and pizza, but we feel there's an ability for people to really pivot within our menu And still get great value and very healthy items.

Speaker 2

And so I don't really see that. I mean, we've seen health trends in the past when Atkins was big as well and Other trends and we've been pretty consistent through that. I mean, so I feel we have something to offer people and we actually do feel that our pizza has every food group in it. And You don't have to get the extra large deep dish for 1 person if you don't want to. And so you can actually be very clerically smart and still have our healthy food.

Speaker 2

So we it's obviously a big news item now with those Epic, but I don't Necessarily, it's something that's going to materially impact us. We don't really see that.

Speaker 3

Okay. Thanks for that. And then in terms of Mexico, now that you have your first 3 pizzerias there, I believe, offering for about a quarter now, Is there any update that you can share on the performance there? Any new learnings about the Mexican market?

Speaker 2

It's still pretty early days there, but we've been really happy with the partner down there. I mean, I think we're getting really good recognition in Guadalajara for those Those restaurants that we have and our partner is excited about building on it. We've got some unique menu items down there, some things that we Yes, we have our standard menu here, a little smaller version, but there are some items that they have down there that we don't have here, like a garlic puffy bread and kind of A spicy pork type of pizza as well and some other things. So we like that they cater to the local taste there and it seems to be resonating. So it is early days, but we are Pretty excited about next year as well in building on the initial success.

Speaker 3

Okay. That's helpful. And maybe one last one for me. How are your franchisees faring given the current environment? I mean, the interest rates are so high and then the macro Outlook is weakening.

Speaker 3

How do you feel about the health of your franchisees overall? I

Speaker 2

think overall, I mean, Chris may have more to add, but I think we feel Pretty good. I think that we're in really high touch with our franchisees. And so we usually hear that there's concerns or pockets of Concerned pretty quickly and we really do everything we can to help them. And we've I think had a really good track record, especially in the last few years with really Trying to preserve their margin level and make sure that even with things like rents going up, minimum wage going up, we've really held the line on food costs and we've actually I had obviously smaller footprints as well as part of our strategy. So trying to keep leasing costs in order.

Speaker 2

So the things that we can control or influence a little bit, I think They appreciate our efforts to do that. And I think overall, I'd say some of the proof of that is our franchisees choice awards and things. I think we have a tight level and report with them. Yes, certainly for some of them, their interest costs are higher than they used to be. And for a new franchisee getting a brand new loan, it's more expensive.

Speaker 2

So we want to make sure that That's the right partner, can they afford it and things like that. But overall, I would say, we've done pretty well and there's There's going to be some stores across the entire system that maybe aren't doing that well right now, but it's a very small number, I would say. So generally, the health barometer is still Quite strong for our franchisees, I would say.

Speaker 3

Okay. That's super helpful. Thank you so much for taking our questions.

Speaker 2

Thanks very much, Gerald. Appreciate it.

Operator

There are no further questions at this time. I would hand over the call to Christine D'Silva. Please proceed.

Speaker 1

Thank you everyone for joining us on the call today. If you have any questions following the call, please contact us. Our contact

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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