Pizza Pizza Royalty Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by, and welcome to the PIXATICHA Royalty Corp. Earnings Call for the Q2 of 2023. As a reminder, this conference is being recorded. I would now like to turn the call over to Alexander Suretyn, Director of Finance. Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to the Pizza Pizza Royalty Corp's earnings call for the Q2 ended June 30, 2023. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard and Chief Financial Officer, Christine D'Silva. 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 on our earnings press release and the risk factors included in our annual information form. Please refer to our earnings press release and MD and A in the Investor Relations section of our website for a reconciliation and other disclosures related to our non IFRS financial measures mentioned on this call. As a reminder, analysts are welcome to ask questions after the prepared remarks and portfolio managers and media can contact us after the call. Before turning the call over to Paul for the business update, I wanted to spend a few moments reviewing the structure of the Corp. For our new investors.

Speaker 1

Pizza Pizza Royalty Corp. Indirectly owns the Pizza Pizza and Pizza 73 brands and trademarks through its subsidiary Pizza Pizza Royalty Unlimited Partnership. The Royalty Corp is a top line restaurant Royalty Corp that earns a monthly royalty through a lease agreement with Pizza Pizza Limited. In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations, Pizza Pizza pays the partnership a monthly royalty calculated as a percentage of Royalty Pool sale. Growth in the Corp.

Speaker 1

Is derived from increase in the same store sales of the restaurants in the Royalty Pool and by adding new restaurants to the pool each year. The Royalty Pool is adjusted at the beginning of each year by adding new restaurants opened in the previous year, less any restaurants that have been permanently closed. For the fiscal year 2023, the Royalty Pool was adjusted on January 1, 2023 include 6 44 Pizza Pizza Restaurants and 99 Pizza 73 Restaurants. So with that review, I'll turn the call over to Paul Goddard to provide a business update.

Speaker 2

Thanks, Alex, and good afternoon, everyone. You for joining us today on our call to discuss our Q2 twenty twenty two results. We are delighted to report continued strong results As we reported another positive quarter with same store sales growth of 9.4%. We are extremely proud that both brands reported positive sales this quarter And this is actually the Q1 in which we had no impact from the pandemic when compared to the prior year. This Strong same store sales growth translated into a 10.9% increase in royalty income and drove our 2nd dividend increase this year back in June 2023 and yielded an adjusted EPS growth of 11.8%.

Speaker 2

During the quarter, Pizza Pizza brand reported a 9.8% in same store sales and the Pizza Settings 2 brand reported a 7% increase. Growth at both brands was driven by increases in both guest traffic and average check. Now let's get into more detail on our performance for the quarter. Pizza Pizza Limited's success stems from its long history of menu and technology innovation, along with its convenient restaurant locations and high quality menu offerings. This quarter, we continued our focus on building brand engagement through innovative promotions and products, delivering great value and celebrating key

Speaker 1

moments. When we

Speaker 2

launched our protein offerings at Pizza Pizza in 2022, we experienced a nice lift in our appetizer and sides category. When we launched our Buffalo Chicken sandwiches in 2021, it was also well received. So we decided to combine them. And this quarter, we added a new offering at Pizza Pizza, The Buffalo Chicken Poutine. This new item has highlighted the poutine category and provides customers with a compelling value offering of less than $10 Additionally, with the success of Pichina Pizza Pizza, we took our learnings and ported them over to Pizza 73, but this time with a twist.

Speaker 2

Well known and well loved curly fries at Pizza 73 were essentially reintroduced as spoutine. This new item has done Well, it's become an important part of that brand's lunch offering. So we're extremely happy with how this product is doing and look at this as a great example of how cross pollination Evanization can drive incremental new sales growth. Our pipeline for product development is strong and we look forward to introducing more items to our customers as we progress through the year and beyond. And as discussed on our last call, Pizza Pizza has always celebrated special occasions and this quarter was no different.

Speaker 2

We ran our annual 4/20 promotion and created a new Buzz Off Pizza to keep mosquitoes away for the May long weekend and Canada Day. Additionally, our teams are in the community during the Pride events across Canada. And for every special moment, we are there celebrating with our customers and their communities. We are focused on building our brand engagement and our promotions for the 1st 6 months have proven successful as we experienced a continued increase in traffic. Like all businesses, our stores are faced with continued inflationary cost increases across the supply chain and some tight labor markets.

Speaker 2

Our goal is to take modest selective price increases across our menu when needed to help with input cost increases, while not adversely impacting customer traffic. No customers are looking for value, so we have to find the right balance of perceived value for money. It is a fine balance, but one that we have been able to achieve. As we move into the second half of the year, we will continue to leverage our brand assets with innovative marketing campaigns focused on driving traffic to our restaurants, while also increasing brand awareness. Additionally, we will continue to support enhancements of our digital capabilities, stay focused on our core Competitive advantages of convenience, innovation, high quality menu offerings and network expansion.

Speaker 2

And turning to the restaurant network expansion, We ended the Q2 with a total of 752 locations, of which 652 were Pizza Pizzas and 100 were Pizza 73s. We opened 5 traditional and 2 non traditional Pizza Pizzas and closed 3 traditional locations and 1 non traditional location. Additionally, during the quarter, the company opened 1 non traditional Pizza 73 and closed 1 traditional Pizza 73. Our Pizza Pizza restaurant offerings this quarter were across many provinces, including British Columbia, Ontario, Quebec and Manitoba. So while we continue our expansion plans, we have not taken our sights off our renovation programs.

Speaker 2

Over 85% of our traditional Pizza Pizza stores have our new look And 25% of the Pizza 73 traditional stores have also been renovated this year. And those renovations, by the way, are a little quicker and easier to see them in smaller footprint The pizza is certainly in our reception area there a little quicker. And our new refresh look overall creates a warm, modern and inviting space for our customers to come pick up Or sit and enjoy our hot and fresh offerings. And we're really focused on growing our business right across Canada. We are well known as Canada's very own homegrown Leading national pizza brand, something we're very proud of.

Speaker 2

One exciting piece to note, during the quarter, our Mexican partners opened the first 3, TZA Pizzeria. The TZA Pizzeria brand has been well received in Mexico. And while it is not material at this early stage, We are excited by our early success there and for the potential it provides for us to further scale our business down there in Mexico with 3 times the population in Canada and a fast growing pizza loving market. And of course, we also see potential for other international markets as well. Looking ahead, in 2023, you will see us continue pushing hard Menu innovation, marketing initiatives, restaurant growth, technology and other digital first investments, and we will work closely with our owner operators to ensure they are delivering excellent and consistent products and service in a clean, safe and attractive restaurant ambiance.

Speaker 2

I'd like to close by congratulating our entire team, our operators and our employees. We're all one team. We've worked all very hard together to create a very innovative, Ambitious and collaborative culture right across the country and now internationally at both brands. So with that, I'd like to turn the call over to Christine for a brief financial update.

Speaker 3

Thanks, Paul. Since Paul covered many of the drivers for this quarter, I'd like to briefly discuss how those promotions and activities drove our financial results. As mentioned earlier, same store sales growth, a key driver of deals for shareholders, increased 9.4% for the quarter. Pizza Pizza Restaurants reported 9.8% same store sales growth and Pizza 73 Restaurants reported 7% this quarter. Both brands saw an increase in customer traffic as well as the average shipping.

Speaker 3

The combination of 16 net new restaurants being added to the royalty Royalty pool system built for the quarter increased 11.2 percent to $158,500,000 from $142,500,000 in the same quarter last year. Ibrance sales moved 6 44 Pizza Pizza Restaurants in the Royalty Group increased 12% to $137,700,000 for the quarter and sales from the 99 feet to 73 restaurants increased 6.4% to $20,800,000 for the quarter. Support interest royalty income earned as a percentage of royalty pool sales increased 10.9% to $10,100,000 for the quarter. The partnership also earned interest income on its cash and short term investments. Now turning to partnership expenses.

Speaker 3

Administrative expenses for the quarter were $148,000 and includes listing costs as well as director, legal and auditors. In addition to administrative expenses, the partnership paid interest expense on its $47,000,000 credit facility. Interest paid in the quarter was 320,000 The partnership is currently making interest only payments on the non revolving facility. The interest rate is lost through April 2025 using swapping We have fixed the interest rate at a bankers' expectations rate of 1.81% plus the credit spread. The price spread changes based on the level of debt to EBITDA and the all in rate is currently at 2.685%.

Speaker 3

So after the partnership receives royalty and interest income and pays administrative and interest expenses, the resulting net cash is available for distribution With 2 partners, Pizza Pizza Limited, the private operating company and Pizza Pizza Royalty Corp. Based on their ownership percentage. Pizza Pizza Royalty Corp's shares in 76.1 percent of the partnership distribution, it pays taxes on its share of the partnership earnings and the residual cash is available for dividends to the company's shareholders. Turning to shareholder dividends. During the quarter, The company increased its monthly dividend for the 2nd time this year.

Speaker 3

With the most recent 3.5% increase, The current monthly dividend exceeds the pre COVID rate and sits at $0.075 per share per month. The company declared shareholder dividends of $5,400,000 in the current quarter or $0.22 per share compared to $4,900,000 or $0.195 per share in 2022. The resulting payout ratio was 95% for And the company targets a payout ratio at or near 100% on an annualized basis. The company's working capital reserves increased $300,000 during the quarter and was $7,600,000 at June 30, 2023. With the most recent dividend increase, the company believes there is sufficient cash flow to service obligations as they fall due And we will continue to monitor sales, both fleet and royalty income in terms of when additional dividend increases may be warranted.

Speaker 3

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 session. One moment please for your first question. Your first question comes from Derek Lessard from TD Cowen. Please go ahead.

Speaker 2

Good afternoon, everybody. Good to hear your voices. Good afternoon, likewise. Hey, Ed. I just I wanted to hit on the same store sales strength.

Speaker 2

I mean that 2 year stack is really impressive and congratulations on that. So Maybe just talk about what you're seeing in terms of the consumer. It doesn't seem like there's been any deceleration in spend here In the face of, I guess, mortgage payments that may have doubled for some. So any color on the consumer would be helpful, whether it's trade down, maybe dynamics, ordering preferences, etcetera. Yes.

Speaker 2

I think thanks, by the way. We appreciate Yes, complimented. I think we are pretty proud of what we've done here, and it's nice even to get past the last day of the pandemic and have a quarter Purchase are prependana. I can see the strength continue. So we do see the strength continuing.

Speaker 2

And I think we certainly with a lot of other people share some concerns about I mean, there's lots of different viewpoints out there on consumer confidence. And we've got rates. I mean, hopefully, inflation has peaked, I guess. I mean, you saw the Central Bank increase the rate by etcetera, recently. But there's certainly some concerns and some potential headwinds there.

Speaker 2

So we're being really To make sure we provide that value, I would say number 1. And yes, we have we've been pretty just about price increases here and there Because our input costs, they went up massively. And I would say that escalation has been tempered. So we've seen some relief there. But there's still certainly some inflation in input costs with store construction, for instance, as well, not just food input costs That are definitely not necessarily going fully out of the way.

Speaker 2

And so we think consumer confidence is It seems to be holding up, but don't take it for granted. And so we think we're going to stay focused on value, but we are also Really pushing ahead on the restaurant expansion and innovation. Like we feel like we've the things like the Buffalo Chicken Boutin, Create Your Own Pizza or 5073, the Gourmet Thin's out there. I mean, we really feel we need to innovate and keep doing it, and we think consumer confidence will hang in there, at least enough for us as long as we're providing us value And people see the quality that we provide and the convenience, I guess, above all.

Speaker 3

Additionally, Derek, we have multiple channels for our customers To get our pizza. So where a customer may have chosen delivery in the past, we're at every corner. So they can walk to the store if they can't afford the delivery fee And pick up their orders. So that ability to pivot within our own system for our customers has really helped us Ensure that we don't lose customers should they face headwinds in the economy.

Speaker 2

Okay. Makes sense. Thanks for that. I guess also nice to see Pizza 73 joining in on the front, anything I know you pointed alcohol to the Puxin Bell and the curly fries, but anything I think that you can point out that's driving that nice 7% jump? Yes.

Speaker 2

I think it's a combination of factors, but I think we talked to you in our last call about our new website and app there that really, I think, it's just it's so much easier to use. It's faster, quicker, Much more pleasant experience. We believe it or not, we didn't have to create our own pizza capability, and a lot of people don't, by the way. And so it's just very easy. So I think just the easy Convenience.

Speaker 2

It's just so much more pleasant experience there.

Speaker 1

And then I think we

Speaker 2

have been successful with poutine. It's been very successful out there. People like those curly fries, but they also like the poutine twist on that and the gourmet things that we had great success with out here and still do have success with That seems to have been pretty well as well out there. So many innovations, some technology stuff. And also, I would highlight our local marketing team there that works very closely with our hear about it.

Speaker 2

We've got some very senior people that are invested in more people that are very capable and they're Alberta based. And we think that's really given a new Renew vigor, I guess, and have some different approaches. We're not just taking what Pizza Pizza does and sticking blue color on the logo in a bit, right? And it's a different market, different behavior, Different demographics. And so we're trying to really do a lot more sort of localized stuff, but then we also are cross pollinating when it makes sense.

Speaker 2

If it works here, it seems to

Operator

be a good point

Speaker 2

really nicely over there. So I think it's sort of a combination of all those things. And I think the brand is sort of and The renovations that we're underway with as well, people do start to see us just we're continuing to reinvest in the brand just like we did here. And so I think it's I don't think consumers there necessarily are massively better. I don't think the market is tremendously healthier than it was last quarter, let's say, out there.

Speaker 2

But I just think generally, we've kind of been picking up our game there overall. And I think you mentioned 25% of the restaurants have been renovated. Is the plan to roll it out? Should I get the remaining 75? Yes, pretty much.

Speaker 2

And we do have some new stores as well as we're building them and that has much pace with the growth there as we have with the rest of Country, Pizza Pizza, but we still do have some growth there. And those renovations are smaller by nature. It's a smaller footprint restaurant. The customer area is smaller. It's just slightly different approach where people are more trained to come in for pickup and they might sit at some high Counter kind of our steel type arrangement, but it's very small compared to a typical Pizza Pizza.

Speaker 2

And so the cost associated with renovating that, what we call sort of a lobby or customer area, It's much smaller for the operator, and it's quite quick and easy relative to the Pizza Pizza one, which is actually pretty substantial For our operators at the time, let me take that. Right. And so it seems for here anyway, it seems like the summer of rain here in Real, and that's and otherwise, forest fires. And that got me thinking about I guess the first thing is, like how have Your outdoor venues been doing? And second, do you guys benefit from inclement summer weather?

Speaker 2

Yes, it's a good question. I think we have, for instance, had some big success. I mean, the weather does play a big role. And often, When it's raining, generally speaking, we do get kind of a boost in deliveries. So it might hurt lock in overall, but when weather when it's raining even in summer, people Do you do delivery a little more?

Speaker 2

And we do see still pickup overall growing very rapidly, like faster than delivery growth. But we have had some success. I know it's more getting to Post quarter, but we do annually do quite a big exercise in Montreal, moving day on Canada Day there. And this year, we did a huge amount of extra marketing Promoting our how we are very active in Montreal, and we do certain things like boots and hearts and Tiger stampede, obviously, and That's sort of again this next quarter. But we have done very well in these outdoor venues in places like Canada's Wonderland.

Speaker 2

I mean, we've been very successful There for many years and they've been a great partner and we've actually just been increasing our presence and number of our units on-site there at very key locations for them, It's the most popular rides and things. So I would say it's a real specialty we have that really I can't if anyone else that really has that specialty where Our outdoor events, our special events teams, they're kind of a mobile army. They know how to set up equipment and tents and trailers and deploy student resources mostly, train them up fast. And we can be really nimble, really increasingly nationally, still primarily Ontario and Alberta, but we also think there's potential to do even more in Quebec, even more in British Columbia, Basically, the Maritimes. So I think that is a really unique skill set we have in our team.

Speaker 2

But weather overall, sometimes it does hurt Walking business, if it was not so good, but we could get the delivery based, I'd say, overall. Okay. And I know it's always tough out there, but I was Has there been any changes to the competitive intensity? Or has sort of that inflationary backdrop kept everyone Sort of monics, so to speak. Yes.

Speaker 2

I haven't really noticed overall. I mean, we certainly have some very serious Competitors that we monitor very closely, and I think we really have our ear to the ground there, but we're trying to be driven by our own demographics, our own analysis, our own Data and customer behavior, but it doesn't wind up for us. I think that there's some strong competitors out there as well and they're creative as well. But We think that relative to the peer group, especially in pizza, we've been outpacing pretty much everyone we can think of. And we don't get costly about it because other things can change very quickly.

Speaker 2

So Our view is let's keep innovating and let's keep being the leader and let's not let anyone leave progress. So but it's a strong field out there. I mean, there's some really smart companies out there. We're not the only one, but We think that we've got the best track record recently and we hope to keep it that way. Okay.

Speaker 2

That's it for me, everyone. Thanks for taking my questions. Have a good night. Okay.

Operator

Thank you. There are no further questions at this time. You may proceed.

Speaker 1

Thank you all for your time today. If you have any other questions, you can contact myself or Christine Da Silva, and our contact information can be found on our earnings press release. Thank you again.

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Pizza Pizza Royalty Q2 2023
00:00 / 00:00
Remove Ads