Pizza Pizza Royalty Q2 2024 Earnings Call Transcript

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August 7, 2024

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 Q2 of 2024. During the 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 August 7, 2024.

Operator

I would now like to turn the call over to Christine D'Silva, CFO.

Speaker 1

Thank you. Good Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp. Earnings call for the Q2 ended June 30, 2024. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer, Paul Goddard.

Speaker 1

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 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.

Speaker 1

Portfolio managers, media and shareholders can contact us after the call. I would now like to turn the call over to Paul Goddard to provide a business update.

Speaker 2

Thanks, Christine, and good afternoon, everyone. Thank you for joining Pete's Pizza Royalty Corp's Q2 investor conference call. Today, I will discuss our Q2 results and will share a brief outlook for what's ahead in the second half of 2024. Christine will then summarize our key financial highlights before the Q and A at the end. Following 12 consecutive quarters of robust positive same store sales growth, we experienced headwinds as consumers faced challenges with higher interest rates trickling through the economy, which has impacted household purchasing power.

Speaker 2

In the Q2 of 2024, our brands reported a combined 3.9% same store sales decline as Pizza Pizza Restaurants reported a 5.1% decline after 2 years 2 very strong years of double digit and near double digit growth, while Pizza 73 Restaurants reported a positive 3.7% growth. And both brands saw an increase in the average customer check offset by a decline in traffic. As we have discussed on past calls, our sales are driven by key areas of our strategy, including our well positioned and diverse value offerings throughout our menu, our convenience and presence where customers can experience and interact with our brands through a variety of platforms, and the strength and resiliency of our brands supported by effective marketing initiatives. So, as consumer discretionary spending has decreased in the last few months, the competition in the QSR industry has increased. And while many brands speak to customers about price, we are focused on speaking to value.

Speaker 2

Throughout our entire menu and our multiple ordering channels, we promote and highlight products and specials at all price points to attract every customer. We know our customers are looking for value as well as quality, especially in a challenged economic landscape. So we have to find the right balance of perceived value for money. At the Pizza 73 brand, we successfully launched an XXL Pizza, extra large at a $19.99 price point, speaking directly to the value customers are looking for and the creative new offering has been well received by customers. It's a very large 18 inches pizza.

Speaker 2

And as we move into the second half of twenty twenty four, we will continue to focus on and promote value to our customers as we look to gain traffic and share of consumer QSR spend. We are fortunate to have an expansive restaurant digital footprint nationally from coast to coast across Canada to ensure that we are able to reach customers in all metropolitan areas across Canada and rural areas as well. As noted on previous calls, we have seen a shift in customer behavior with customers moving increasingly to pick up orders. And with well over 750 locations across Canada, we are ideally positioned to capture all audiences, especially those looking to save on delivery, tip and surcharges that many companies charge. Our in store pickup channel has grown steadily over the last 3 plus years and continues to look strong.

Speaker 2

And also, we know convenience is key for our busy customers and our industry leading omni channel approach lets people get their favorite hot and fresh pizza and wings in the most convenient, fast and easy way possible. In addition to our in store orders, we have the best in class technology for customers to order on, whether it's through their smartphone app, iPad app, Apple Watch app or by ordering through our websites. And we continue to invest in critical technology infrastructure to ensure we are successfully receiving even more orders through our websites' apps and also via our customer contact center. As mentioned in the past, over 60% of our orders are being placed on our digital platforms and Pizza Pizza customers ordering on the app or web can also visually track their orders on a map as it is delivered to them. Ensuring we are accessible to all potential customers has been a key priority of our business and has proven to be a key differentiator for us.

Speaker 2

In terms of the strength of the brands, it's something we're very proud of. Pizza Pizza's marketing activities have been recognized as industry best in class, winning numerous industry awards for our brand work and everyone deserves pizza platform. We've talked about owning key days and this quarter was no different. We had a viral launch of our 4/20 promotional pre rolls and hot boxes to a specific customer demographic. This promotion was hugely successful, earning us a massive $2,000,000 sales day and the pre roll promotion allowed us to highlight a new product at a great price point and margin for our stores.

Speaker 2

And our flavor of that was really quite a cheeky specific campaign, really targeted and it really was validating to us to see how well that could work for that particular demographic. And this was a really fruitful brand building initiative and it's an example of how we continually succeed at keeping our brands top of mind with customers, which is always so critical of course in our highly competitive QSR market. We also highlight our brands through our best in class sponsorship programs. You can see our brands at fields and arenas across country from Little League teams all the way to the National Hockey League and the NBA. These sponsorship programs have been key to driving brand recognition, especially as we expand in new markets.

Speaker 2

In this quarter, we are happy to announce we have partnered with BC Place, home to the BC Lions and Vancouver Whitecaps. We look forward to introducing sports enthusiasts and concert goers to our delicious food as we continue to ramp up our already strong presence in British Columbia. And I would be remiss if I didn't mention the additional benefit of our sponsorships that comes when your favorite team makes the playoffs via the in stadium concessions. This quarter, our nontraditional sales were bolstered by the incredible playoff run by the Edmonton Oilers where our Pizza 70 3 brand is a key sponsor. So as we look at the overall strength of our foundation, we've got brand strength, resonant marketing messages, a continually enhanced menu, innovations in technology, reliable consistency and quality and convenience for our customers.

Speaker 2

And this will continue to be key to our growth as we go forward. Turning to restaurant network growth. After a bit slower start to the year, we ramped up our store openings with 6 new traditional and 8 non traditional Pizza Pizza locations opening in the 2nd quarter, while we closed 1 traditional and 8 non traditional locations. So for the 6 months, we have opened 26 locations, 8 traditional and 18 non traditional locations, while we have closed 3 traditional and 13 non traditional locations. While we continue to focus on openings across Canada, we are pleased to say that half of our traditional store openings have been in our biggest and longest standing market, Province of Ontario.

Speaker 2

Meanwhile, our successful expansion to the major markets of DC and Quebec continues. And beyond Canada, we continue working with our Mexican partners on the next set of restaurant openings and are happy to report that 2 locations opened in the Q2, bringing our current total to 4 locations. So, we continue to see good momentum there in Mexico and we expect several more restaurant openings there this Now on to our outlook and some closing remarks. As we look forward to the remainder of 2024, we are well positioned to continue driving our business, executing on our plans of innovation, marketing initiatives, digital investments and providing high quality, great value, delicious hot and fresh food to our customers, however, and wherever 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.

Speaker 2

And remember, our vision is always the best food and especially for you. Lastly, thank you to our team members and restaurant owner operators for your relentless commitment and dedication to our customers and our brands and for being such passionate team members in our success. Thank you for listening today. And I'll now ask Christine, our CFO, to provide a brief financial update.

Speaker 1

Thanks, Paul. Before going into the results for the quarter, I wanted to remind everyone of our structure. Pizza Pizza Royalty Corp. Is a top line restaurant Royalty Corp. That earns a monthly royalty through a lease agreement with Pizza Pizza Limited.

Speaker 1

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 sales. Growth in the corp is derived from increasing the same store sales of the restaurants in the royalty pool and by adding new restaurants to the pool each year. On January 1, 2024, the royalty pool increased by 31 restaurants as a result of adding 45 new restaurants, less 14 which were permanently closed in 2023. So for 2024, there will be 774 restaurants in the Royalty Pool compared to 2023 when there were 743. So now let's briefly cover some financial highlights.

Speaker 1

As Paul mentioned, same store sales, a key driver of yield growth for shareholders, decreased 3.9% for the quarter. Pizza Pizza Restaurants reported same store sales declines of 5.1%, while Pizza 73 Restaurants were 3.7% positive. Both brands saw an increase in the average ticket offset by a decline in traffic. The combination of new restaurants added to the Royalty the quarter. Royalty pool system sales for the quarter decreased 2% to $155,400,000 from $158,500,000 in the same quarter last year.

Speaker 1

By brand, sales in the 6 72 Pizza Pizza Restaurants in the Royalty Pool decreased 2.8 percent to $133,800,000 for the quarter and sales from the 102 Pizza 73 Restaurants increased 3.3 percent to $21,500,000 for the quarter. The partnership's royalty income earned as a percentage of royalty pool sales decreased 1.6% to $10,000,000 this quarter. Partnership also earned interest income on its cash and short term investments. For the quarter, the partnership earned $103,000 of interest income. Turning to partnership expenses.

Speaker 1

Administrative expenses for the quarter were $194,000 and these included listing and shareholder meeting costs as well as director, legal and auditor fees. In addition to administrative expenses, the Partnership is making interest only payments on its $47,000,000 credit facility. Interest paid in the quarter was $319,000 To note, during the quarter, in response to the cessation of the SEDAR benchmark interest rate, the credit facility was amended. The amendment transitioned the $47,000,000 term loan from Bankers Acceptances to CORA loans. The remaining terms and conditions are consistent with those of the previous facility.

Speaker 1

The fixed interest rate on the swaps remained unchanged with this amendment and the company will continue to pay 1.81 percent plus the credit spread through April 2025. The company's normal practice is to renegotiate the terms of its credit facility approximately 1 year in advance of its maturity. As such, it intends to renegotiate the facility that matures in April 2025 later this year. The company expects the new facility will be similar in size, however, at a higher interest rate as compared to the existing facility. So now after the partnership has received its royalty and interest income and pays administrative and interest expense, the resulting net cash is available for distribution to its 2 partners based on their ownership percentage.

Speaker 1

Effective January 1, 2024,

Speaker 2

2024, after new restaurants

Speaker 1

were added to the royalty pool and the 2023 vending was trued up, Pizza Pizza Limited's ownership increased to 25.2%. Pizza Pizza Royalty Corp. Shares in the remaining 74.8% of the partnership distributions. 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 and working capital.

Speaker 1

The company declared shareholder dividends of $5,700,000 for the current quarter or $0.2325 per share compared to $5,400,000 or $0.22 per share in 2023. The payout ratio of 109% resulted in the company's working capital reserve decreasing by $400,000 this quarter. But the company ended the quarter with a healthy reserve of $6,800,000 excluding the reclassification of the credit facility. The reserve is available to stabilize dividends and to fund other expenditures in the event of short to medium term variability in system sales and in turn royalty income. The company has historically targeted a payout ratio at or near 100% on an annualized basis and we'll continue to do so.

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 session. The first question comes from Derek Lessard with TD Cowen. Please go ahead.

Speaker 3

I guess I just wanted to drill down in terms of the sort of that consumer weakness that you're seeing. Are you able to maybe add some color there to what you're seeing in terms of the habits, if consumers are trading down, buying less? I know you, Paul, you mentioned less delivery versus walk in. So just maybe some color there would be helpful.

Speaker 2

Right. No, I understand, Derek. It's a very good question. And we are basically. I mean, I know you see that as a macro situation backdrop right now.

Speaker 2

I think just with macro indicators and other GSRs reporting, other retailers reporting. But we are seeing that. I mean, people are definitely being more deliberate and a little more discerning in their overall spend. Our core sheets of products continue to grow. Our mix, I would say, stayed pretty strong.

Speaker 2

But in terms of how they obtain their orders, that seems to have changed. Pickup has been growing for us steadily. That continues. And we do see delivery as a channel being challenged. And that's something that we've actually put a lot of effort we need to put a lot of effort into regaining, especially organic delivery.

Speaker 2

And we've done a lot to do that, but it's definitely difficult. And I think people are getting a little fatigued, and especially with 3rd party aggregators as well. I can see that some of those folks, some are doing strong, but some are seeing a little bit of plateauing if you like there just given the level of check size, especially on those platforms where you're often paying a higher price and you have a platform fee or something. So, it's not only the merchant being charged, but the end customer as well. But even for us with much more efficient cost effective delivery, some people are saying, you know what, I'm going to preorder, I like the convenience of that and I'm going to pick it up, I'm going to save on that charge.

Speaker 2

So we are seeing that. And I think, I guess, we just continue to notice things like average check varying obviously by channel and by brand. So our walk in business is still strong. I would say not as strong relatively in terms of growth. It was sort of fairly flat for some other areas.

Speaker 2

That means what in our parlance would be unpremeditated walk in orders where you just come and get a slice or 2 and a drink or something and a salad. That's obviously lower check, but that's been fairly stable. But late night has also been a little lower average ticket, we've noticed, sort of lunch late night day parts and lower average ticket than our delivery orders as well. So when people stop doing delivery or stop doing delivery as much, we do feel that quite readily.

Speaker 3

And do you think it I guess, do you have a feeling of whether it's trending worse or is it stabilizing? Like how do you feel about the trend so far?

Speaker 2

I think it's a little early to tell. I mean, I think just generally, there's a people just seem to be in the market really emphasizing value. You see it everywhere and I think customers seem to be responding to that pretty well. I think just generally people, although inflation has come off a little bit, obviously, and interest rates seem to be poised to go down a little more, I still think there's a bit of a lag there. My view would be in just looking at some research that people still feel economically squeezed, many, many people in our core markets.

Speaker 2

So I think, if anything, I would say it's probably stabilizing. Maybe there is a little bit more deterioration potentially, I suppose. But I don't think it's sort of a massive decline, but it's just sort of subtle. But I think fortunately for us, I mean, I think we are able to adjust different levers a little bit to emphasize, say, things like walk in a little more or pick up a little more. Delivery is hard to move the needle on.

Speaker 2

We've had a hard time doing delivery. But I think we've got some good plans, I think, for the remainder of the year that hopefully with some product innovation and some really compelling, not only price points, but I think just the innovation of the products and the flavor profile of some things coming up that will help. But I mean, the overall backdrop is challenging right now. I think people are feeling the squeeze and they're still feeling almost a hangover effect even if interest rates are coming down and inflation isn't as bad. And I think that's kind of clear across the market, not just for us.

Speaker 3

So you did try to take some price, it looks like. I guess, average check was up. So how do you balance that out with sort of the backdrop that we're talking about here?

Speaker 2

Yes, that's a very good point and that's sort of the art of it, right? What we really want is primarily revenue growth through traffic growth, right. We want more orders really at the end of the day. We don't really want to be relying on price increases, that's for sure, especially in this environment. But I think we've been pretty nimble in adjusting.

Speaker 2

So a couple of examples would be even a piece of 73, as I mentioned on my prepared comments, with the XXL, the 1999, that immediately got a response that sort of sub-twenty dollars price point for a really large 18 inches pizza, it's the biggest one in the market around pizza. People really like that. They also like our 4 small pizza deal in $19.99 out there. There's a snack box out there as well that's real snack size, it's resonated well. And at Pizza Pizza, the fixed rate pizza, we've done very well.

Speaker 2

We actually increased the price this year for 2024, but it was fixed price last year it's fixed price for all this year, but we took an extra dollar there at $17.99 And yet that is still mixed very, very well. It's in sort of our top 3 or 4 mixing specials and that's been very powerful. And so I think that's done well and I think some of our creative occasion making efforts, if you like to call it that, like the 4 20 promotion, even though it's in limited audience, really got media attention. And I think it actually stole some thunder even that week that it was released from some other large QSRs doing big launches that week. And to be honest with you, we didn't expect that quite that much.

Speaker 2

It was really exciting. And then on Valentine's Day is another one where we had a 3rd wheel deal where celebrating a couple with a 3rd wheel and that 3rd person gets an extra pizza sort of thing or free pizza. So we've kind of created some new occasions. It was a little bit novel and just get some media attention and some focus. And people might not necessarily buy that special that we are offering, but it really gets our name out there and it gets into their mind and they basically still want to transact, maybe if it's still their favorite pepperoni pizza that they end up buying.

Speaker 2

So I think some of those occasion making aspects have really helped. And we've also had some success with 3rd party with Ghost Kitchens with Chicken Chicken on 3rd party apps where we really haven't had to invest really much at all and yet we have a solid offering on those programs, those channels. When people are looking for chicken, pizza, they find chicken, chicken and we are pretty clear that it's us behind the scenes, but we can deliver to that channel. So it becomes a new revenue stream. So sort of, I would say, it's a combination of offerings and yes, some little more value conscious price points that in some cases are lower than what we've had for a while.

Speaker 3

Okay. That's helpful, Paul. And thanks for that. And I guess, I don't mean to beat a dead horse, but obviously, with these challenges comes an increasingly competitive environment. We're seeing whatever it may be, like fight all the menu deals.

Speaker 3

So I was curious on, one is the competitive environment, has it yes, it's definitely increased, but has it become irrational? And 2, are you seeing maybe any customers shop the grocery channel more often? I don't know, like frozen pizza or stuff like that.

Speaker 2

In terms of substitutes and things, I mean, there is just increasingly more and more competition, I would say, across the board. It is hard to say as attribute where are we losing. We look like our market share data shows that we're pretty stable. I know last year we seem to take quite a bit of share from people. It does look like we may have lost a tiny bit of market share relative to last year.

Speaker 2

But we had big gains last year of the expense of many of our competitors we felt. And it seems like we may have given a little bit of that back. And so, I think there is a bit of that and we know I think we know which levers you need to pull to try and pivot even more to value to drive traffic. But you got some very good competitors out and they're pretty nimble as well. But I think like to think that we're more nimble and with our omni channel approach, I mean essentially, this is counting up with the Pizz Beatz, I think it's something like 10 or 11 channels essentially we have if you include our different third party channels and digital channels, call center, walk ins, special events, non traditional, etcetera, etcetera.

Speaker 2

We just we are so available, right, and we are so convenient. But we have to have a compelling offering. And grocery is another competitor. I mean, I think depending on what piece of the grocery market, some people get very, very value conscious people can get a very, very good deal on frozen pizzas at the low end of the market. But the quality, I would say, is not comparable.

Speaker 2

But there probably are some customers that do drop off and say, you know what, I'm okay with 2 pizzas for $5.99 or something like that, if it's a really low end pizza. But those gourmet pizzas that you also see shrink wrapped at sort of more upscale grocery stores, I've got sort of mixed data on that one, nothing really robust. But I mean, it seems like that's also an area where people are realizing, those are pretty expensive, even though the quality is actually a little bit better than some other grocery items, frozen grocery items. But the price point is pretty high versus getting a fresh pizza delivered or for pickup. So I think generally, I would say, I am probably a little more worried about more the best of the best competitors or other substitutes for pizza itself in QSR and the 3rd party channels just because there's so much choice on those more so than losses, I think, to the grocery channel would be my sense overall.

Speaker 3

All right. That's fair. And I guess maybe Paul just talk on, I think you did highlight some of the innovation in your last comments, but you did launch, I guess, the Hawaiian Stromboli in Q2. Just curious about any like how well, one, how that's how demand has been trending for that and any kind of new and exciting innovations in the pipeline?

Speaker 2

Yes, we do have some coming up. I think we always do. I don't want to look the cat out of the bag too much, but there are some coming very soon, literally in the next few weeks even, so exciting one and beyond. The Strom pulleys have done well. We did promote the Hawaiian one as sort of the attention grabbing one on the window clings and digital channels and things.

Speaker 2

But we actually have several different trombolis and I would say they've all done well. They're really easy to make operationally. The margin for operators quite frankly is excellent and they are super tasty, kind of you can eat with one hand, it's snack size and people have really, really, I think, been excited about it. It's a really it's not like we invented Strombolis, but a lot of competitors in our space, larger chains don't tend to do it because I think they consider it operationally complex. And we've, I think, found a successful way to have great tasting product at a good price point, good margin for franchisees.

Speaker 2

So it's done well. And so have other things like poutine and other sides that we've had, jalapeno poppers and some of the ones we've introduced a long time ago. We still see really good take up on those sides. And I think sometimes it's really just showing people that we're novel and creative and we have something for them. And they might or may not try it, but that might actually win their visit to our store, for instance.

Speaker 2

And they may try it, they may not, or they may only try it once, but we tend to keep in their minds and they keep thinking about Pizza Pizza and Pizza 73.

Speaker 3

Awesome. And maybe one final one for me. Again, in the context of this higher interest rate environment, I was curious on sort of your ability to attract quality franchisees given the I guess given the higher interest rates and what it would cost to own a franchise?

Speaker 2

So you're saying the delay? I didn't quite answer the beginning of your question there.

Speaker 3

No, I think the increase in interest the higher interest rate environment. Yes.

Speaker 2

I mean, right. We've still seen a very strong pipeline of franchisees. I'd say, we don't always get the franchisees where we want them, but I think we've had a really good success overall matching up where we need real estate, where we need franchisees or want franchisees. I mean, I know in Quebec, I think we've got a couple of sites that are ready and we are waiting for those franchisee deals to get finalized. So there is sometimes a timing issue.

Speaker 2

But I think generally we're quite good at flanging them up. And I do think, so far despite higher loan costs for those folks, I mean, I think generally it's been pretty attractive. I think people see us as a very attractive business to own and be an entrepreneur. And so what we try to do, we obviously control interest rates, but I think what we've really tried to do is keep the cost of the stores down. And in some cases, you've given franchise fee breaks or discounts or ways to sort of help their cash flow in that first beginning period, so the 1st 6 months or year to make it a little more economically attractive and soften the blow of those higher interest rates for the loan they're taking.

Speaker 2

So I think it's sort of a combination of that. But we've been pretty successful at slowly but carefully decreasing the cost of our store construction because we did see inflation there. And we really tried to sort of take some decisive action to do that, which makes it obviously more affordable. So they don't have as much of their assets leverage for the franchisee. Appreciate it.

Speaker 1

Thank you, everyone, for joining our call today. If you have any further questions after the call, please feel free to contact us. Our information is on the press release and on our website. Have a great evening.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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