On November 4, 2024, Pizza Pizza Royalty Corp. (PZA) reported its third-quarter results, revealing challenges amid a competitive market and shifting consumer spending habits. CFO Christine D’Sylva and CEO Paul Goddard provided insights into the company's performance, which included a decline in same-store sales and royalty income, despite strategic menu enhancements and expansion efforts.
Key Takeaways
- Pizza Pizza Royalty Corp. saw a combined same-store sales decline of 5.3%, with its Pizza Pizza brand down by 5.9% and Pizza 73 by 1.5%.
- The company opened a total of 9 new locations in Q3, contributing to a year-to-date total of 33 new locations.
- Royalty Pool (NASDAQ:POOL) system sales fell 4.6% to $155.8 million, and royalty income decreased by 4.4% to $10 million.
- Dividends increased to $5.7 million, up from $5.5 million in the previous year, with a payout ratio of 109%.
- The company holds 25.2% of Pizza Pizza Royalty Corp.'s fully exchangeable shares, with the rest owned by the partnership.
- Working capital decreased by $500,000, ending the quarter at $6.3 million, excluding the reclassification of the credit facility.
- Management is focusing on value, innovation, and marketing to address the challenging economic landscape.
Company Outlook
- Pizza Pizza Royalty Corp. is committed to maintaining a focus on value, innovation, and marketing strategies to navigate current economic pressures.
- The company is concentrating on enhancing the customer experience through store renovations and unique menu items.
Bearish Highlights
- Consumer behavior is shifting from delivery to pickup options, impacting revenue despite growth in core pizza products.
- Sales of higher-priced items have declined, prompting the introduction of new promotional strategies.
- Competitive pressures from major players and third-party delivery services are intensifying.
Bullish Highlights
- New menu offerings, such as the XXL pizza and the All for One special, have been successfully launched.
- The Royalty Pool has expanded to 774 restaurants, indicating growth in the company's physical footprint.
Misses
- The company experienced a decrease in working capital and an increase in the payout ratio beyond 100%, signaling potential financial stress.
Q&A Highlights
- Management addressed concerns about food costs for franchisees and recent volume levels.
- There is confidence in the company's ability to quickly adapt with various offerings, including poutine chicken snack boxes and a "create your own" pizza option.
- Despite strong year-over-year comparisons, the company remains committed to achieving positive same-store sales.
Pizza Pizza Royalty Corp. is navigating a period of economic uncertainty, with a clear focus on value and customer experience. While facing competitive and market challenges, the company continues to expand and innovate, striving for a turnaround in same-store sales performance. The management team invites further inquiries, signaling an openness to engage with stakeholders and address concerns.
Full transcript - None (PZRIF) Q3 2024:
Operator: Good afternoon, ladies and gentlemen and welcome to the Pizza Pizza Royalty Corp. Third Quarter Earnings Call. [Operator Instructions] This call is being recorded on November 4, 2024. I would now like to turn the conference over to Christine D’Sylva, CFO. Please go ahead.
Christine D’Sylva: Thank you. Good afternoon everyone, and welcome to Pizza Pizza Royalty Corp.’s earnings call for the third quarter ended September 30, 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 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.
Paul Goddard: 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 I’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 foodservice, particularly delivery channels. And in this environment, we have 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 Pizza restaurants reported a 5.9% decline after 2 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 we are looking for and that they are 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 Pizza Pizza over the last 3 years, we have seen a shift in consumer behavior with customers moving to pickup orders to save on delivery chip and other surcharges. We decided to lean in on into that trend and heavily promoted our pickup specials leading into the summer season in early Q3 in particular and our pickup artist 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 collaboration with legacy brands, Tabasco. We developed items across 6 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 have 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 (NYSE:HMC) 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 brands’ equity of Canadians everywhere. As the summer ended, we welcome students back to post secondary campuses across the country during Fresh Week with a creamy garlic dip, Mini Keg. We know there is 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 without generation of pizza consumers. So we feel like we are seeing 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 for our foundation remain to name a few, brand strength, resonant marketing messages and 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, 5 traditional and 3 non-traditional Pizza Pizza locations and 1 traditional Pizza 73 location opened in the third quarter and 3 non-traditional locations. For the 9 months we have opened 33 locations, 13 traditional and 20 non-traditional Pizza Pizza locations and 1 traditional and 1 non-traditional Pizza 73 restaurant, while we have closed 3 traditionals and 16 non-traditionals. So we are 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 expenses 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.
Christine D’Sylva: 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. We are 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 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 Pizza restaurants reported same-store sales decline 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 1 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 facility. Interest paid in the quarter was $322,000. The interest rates locked through April 2025 using the swap agreement that has fixed the interest rate at a quarter rate of 1.81 plus the 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 of cash is available for distribution to its two partners based on their ownership. Effective January 1, 2024, after adding new restaurants to the Royalty Pool and the 2023 vending crude up, Pizza Pizza Limited owns 25.2% of the fully exchangeable shares. Pizza Pizza Royalty Corp. shares in the remaining is 74.8% of the partnership. It pays taxes on its share of the partnership earnings and any residual cash is unavailable for dividends to the company’s shareholders. The company declared shareholder dividends of $5.7 million for the current quarter or $0.2325 per share compared to $5.5 million or $0.225 per share in 2023. The payout ratio of 109% for the 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 variability. The company has historically targeted the payout ratio at or near 100% on an overall annualized basis. That concludes our financial overview. I would like to turn the call back to our operator to poll for questions.
Operator: [Operator Instructions] Your first question comes from the line of Derek Lessard from TD Securities. Your line is now open.
Derek Lessard: Yes. Thanks and good afternoon everybody, glad to hear your voice.
Paul Goddard: Good afternoon Derek.
Derek Lessard: 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 have seen any changes, even if they are subtle, given the recent decreases in the interest rate environment.
Paul Goddard: Yes, good question, Derek. I mean I think we are overall, I mean we have 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 are still a lot of people really suffering out there with their 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 have seen quite a lot fewer deliveries and more pickup in that, that’s 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 in the times like this, we have 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 have tried to do is really seeing that coming and experience it for some time now. Say, look, we can still get under – to a good price point, whether it’s a $10 price point or a $19.99, sub-$20 price point with a bundle of attractive food and really good value for money. It’s really quite exceptional, so to sort of combat that. But I think you can just feel that people are just not as free spending, and they are not using the third-party channels, at least some people, for instance, as much as they used to either. And you have seen that with some of those folks and what they have said lately. So, I think it does vary, but that that is something we have seen is that people just being much more judicious and not spending as much.
Derek Lessard: Okay. That’s helpful. And I guess I mean along the same lines, I was curious, like within the story, you said core pizza is growing, but what about maybe some of your higher priced items, or more premium pizza offering, or chicken wings, like how are those, do you find that people are trading down from like those higher priced categories?
Paul Goddard: We have some – seen some of that, yes, I would say, and something like chicken, I mean we are a major chicken player. I would say, not to get ahead of myself for next quarter, etcetera. But we are 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, that starting a little while ago, was to really make sure we come right out with a pizza and chicken special. It was very attractive. It’s a $19.99 price point as well. So, you are getting tremendous value there. And so people, really, I think see that and will, I think it takes a little bit time sometimes for these things to get the traction. But that’s one example of the $19.99. And the other one that’s we are pretty excited about it, excited about it, and we have seen already some really nice pickup with that is the Bipartisan Wings, special, which obviously is making. With the time of the U.S. election, and who knows in Canada, but it was really more target at the U.S. But to say, look, no matter whether you are left wing or right wing, we still think you should be united and just sort of wings. And that, I think that’s just a novel way to look at things. And it just highlights that we are a big chicken player. But 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.
Derek Lessard: Yes. That’s clever. That was a clever campaign, the left wing, right wing.
Paul Goddard: Yes. Thanks. And that is a Q4, I should clarify this one. Listen, we realize that is start, will be a part of Q4 as well our Halloween and things like that, which went really well. That is very fresh news.
Derek Lessard: Okay. Thanks for that. And so maybe just hitting on, you touched on it, on your remarks call, in terms of the competitive environment, one of the, I guess the bigger piece of players noted that they expect to be, I guess more aggressive on promotional pricing and I guess diversity beyond, just beyond delivery, just to grow that that carryout, sort of like you guys. I was just wondering, like, have you felt any of the impact from the third-party providers, or more aggressive pizza competitors, or even just QSRs in general?
Paul Goddard: It’s always hard to ascertain sort of causality, where, if we are down in volume, where is it coming from. It’s – honestly, our general sense is probably from multiple places. 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 being very, very aggressive. And we have tried to sort of generally not, we are always conscious of our franchisees profitability. We would rather get something that has long-term attractiveness for people with core products and specials and things. But we are in an environment where customers do have that choice, so we have to be pretty close or 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 or food costs, etcetera, makes sense for our franchisees. But 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 have got to be flexible. So, 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, 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 is also customers that used to use those platforms that 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.
Derek Lessard: Absolutely. Okay. And maybe on the, I guess on sale – sorry, initiatives around walk-in and pick-up [ph]. You mentioned 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?
Paul Goddard: Yes. I mean I think there are – I have talked about that out of the Q4 one about Bipartisan Wings. There is a – for topping large, for topping pizza for $13.9 that we actually just announced, but again, that’s a Q4 thing. But it just sliced the price offering, really focusing on providing a ton of value for a really good price. And what we see is, there is different price points, obviously, for different customers, whether it’s slices or walk-in or pick up special versus a gourmet pizza. We will take price where we can get it from people, especially with those customer segments and those products where we can get away without a higher price, and people are just more fixated on high quality or something very unique maybe versus value. But obviously the bulk of our customer base is more that value customer. So, I think just whether it’s snack boxes or poutine stromboli, things like that, we have 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, I think we have got some pretty good data on some of that stuff. We tend to know what works well. We are obviously not happy with the volume levels we have seen this last quarter. But I do think we have a lot of levers that we can pull up and we can shift very quickly, and so that that feels pretty good. And out last, just talk about that, we do have the poutine chicken snack boxes as well. And we have 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 is quite a lot we have on offer, and we are just trying to really amplify the value offerings more than maybe we did a little bit in the last couple of quarters.
Derek Lessard: Yes. I mean a lot of it is outside of your control. And I think I mean you just touched on out west in 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.
Paul Goddard: Yes. I mean I think 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, same-store sales, that’s our job, but when you look at Pizza Pizza coming off with strong comps, very strong the last 2 years as well. It’s harder, but it also, with Pizza 73, I would say that we have, I think optimized a little more. We have got rid of more renovated stores this year there. We didn’t, if you recall Derek, we didn’t start our renovation program as early as we did at Pizza 73 so or at Pizza Pizza, sorry. So, the store experience is one part of that. I think you create your own pizza is another part of that enhanced tech platform out of Pizza 73. The XXL, some of these things like Poutine, have done well, we have got Donair is out there, Donair Pizza things. So, there are some really unique things out there that I think have resonated. And I think people are starting to see that creativity out there. So, it seems to have weathered it a little better, just in the current economic environment out there. But I would say, there is still a hyper competitive market situation in Alberta as well. So, we certainly see some 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 are right, our decline out there was not as bad.
Derek Lessard: Okay. That’s it for me. Thanks for taking all my questions guys.
Paul Goddard: Okay. Thanks a lot Derek. We appreciate it.
Operator: Thank you. There are no further questions at this time. I would now like to turn the call back to presenters for final closing remarks.
Christine D’Sylva: 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.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you may please disconnect your lines.
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