CA - Pizza Pizza Royalty Corp. (PZRIF) Q3 2023 Earnings Call Transcript

2023-11-11 17:09:03 ET

Pizza Pizza Royalty Corp. (PZRIF)

Q3 2023 Results Conference Call

November 07, 2023 04:30 PM ET

Company Participants

Christine D’Sylva - CFO

Paul Goddard - CEO

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp.'s Earnings call for the Third Quarter of 2023. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, November 7, 2023.

I will now turn the call 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, 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. All forward-looking statements should be considered in conjunction with the cautionary language in our earnings press release and the risk factors included in our annual information form. Please refer to our earnings press release and the MD&A in the Investor Relations section of our website for a reconciliation and other disclosures related to 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.

Paul Goddard

Thank you, Christine, and welcome, everyone, to Pizza Pizza's Third Quarter Investor Conference Call. Today, I will discuss our third quarter results, and then Christine will summarize our key financial highlights before the Q&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. 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 third quarter 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 a super 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 nontraditional locations, welcome more hungry customers this year. We have many high-profile sponsorships and marketing activations through which we sell our delicious product.

At our traditional locations, our customers continue to recognize our strong value proposition and 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 -- PizzaPizza specifically into fun and relevant social and cultural conversations.

For example, this summer, unlike some companies who hopped on the popular shrink inflation bandwagon, in other words, shrinking the size of volume of their product, but still selling it for the same price, Pizza Pizza announced its grow inflation campaign to come back to inflation by giving our medium pizza instead of a small pizza for the same small price. This campaign continues to highlight our promotional and value offerings that speak to the pressures Canadian feel related to rising interest rates and price inflation.

Food innovation also continues to be a key asset in driving brand visibility and incremental sales for us. In August, we were the first national QSR to introduce strong BOLIs to Canadians, essentially have 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 a solid performance since the initial marketing campaign. And good margin, by the way, for operators on that product as well. So it's a real win-win.

Meanwhile, at Pizza 73, we focus 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.

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 CNE and the Calgary Stampede, just as an example, our team innovated our product offering at the CNE this year of the exhibition as we introduced Deep Fried Pizza. This innovation drove national media attention and helped nearly double our sales of the event versus previous years. So it really worked, and we had a lot of attention there, 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. 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 business as well. So behind the scenes, there's a lot of IT investment reinvestment as I think -- long time 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 third-party sales channel growth for that platform. 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 to further invest in their business and help drive our expansion too. We ended the third quarter with a total of 763 locations, of which, 661 were Pizza Pizza's and 102 were Pizza 73. During the quarter, we opened 7 traditional and 6 nontraditional Pizza Pizza restaurants.

Meanwhile, 4 nontraditional Pizza Pizza restaurants were closed. And at the Pizza 73 brand, we opened 1 in traditional and 1 nontraditional restaurant. 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 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. So they're quicker and cheaper to deal. So we expect to move a 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 3 stores and what they're achieving down there and are excited about the long-term potential of this high-growth, high pizza consuming market. Like 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 not 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 strong. And lastly, the key to our strong performance is our strong team. So I want to give a big thank you to all of our restaurant owner operators and our corporate team who are 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.

Christine D’Sylva

Thanks, Paul. Since Paul covered many of our initiatives, I'd like to briefly discuss how those promotions and activities drove our financial results for the quarter. As mentioned, same-store sales, a 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 $163.2 million from $149.7 million in the same quarter last year.

By brand, sales from the 644 Pizza Pizza restaurants in the Royalty Pool increased 8.6% to $142 million for the quarter and sales in the 99 Pizza 73 restaurants increased 12.4% to $21.2 million for the quarter. The partnership's royalty income earned as a percentage of system sales, increased 9.2% to $10.4 million for this quarter. The partnership also earned interest income on its cash and short-term investments.

Turning to partnership expenses. Administrative expenses for the quarter were $123,000 and includes listing costs as well as director, legal and auditor fees. In addition to admin expenses, the partnership paid interest expense on its $47 million credit facility. Interest paid in the quarter was $322,000. The partnership is currently making interest-only payments on the nonrevolving facility.

The interest rate loss through April 2025 using swap agreements but has fixed the interest at a banker acceptance rate of 1.81% plus a credit spread for a combined interest rate of 2.685%. So [ as said ], the partnership receives royalty and interest income and paid admin and interest expense, the resulting net cash is available for distribution to its 2 partners: Pizza Pizza Limited and the Pizza Pizza Royalty Corp., based on their ownership percentage.

Pizza Pizza Royalty Corp. shares 76.1% of the partnership distribution. 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 third time this year. The 3.3% increase brings the monthly dividend to $0.0775 per share, and this dividend increase will begin with the November dividend, which is payable in December. The company declared shareholder dividends of $5.5 million in this past quarter or $0.225 per share compared to $5 million or $0.2025 per share in 2022. The resulting payout ratio was 93% for the quarter.

The company targets a payout ratio at/or near 100% on an annualized basis. The company's working capital reserve increased $400,000 during the quarter and was $8 million as of September 30, 2023. With today's dividend increase, the company believes that there is sufficient cash flow to service the obligations 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.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Derek Lessard of TD Cowen.

Unidentified Analyst

This is Cheryl standing for Derek, and congrats on another strong quarter. Obviously, another strong print of same-store sales growth. I was wondering if you could help us break it down in terms of pricing and volume and the number is particularly strong for Pizza 73. Could you highlight some of the drivers there?

Paul Goddard

Yes. I can relate over to Chris for any more details. But I think it's helpfully both. I mean, I think what we really -- 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 how we've been able to keep the traffic growth coming.

So I'd say that Pizza 73, for instance, we had a lot of innovation there. I tried to touch on that in my formal remarks. With chicken snacker boxes, curly fries 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 snacking dayparts there that represent great value out there. And so we think that's resonating.

We also think that the new website and app that we launched a while go back there, they seem to get some pretty quick traction. It's just easier to use. People like ordering that way. And these new items that we introduce are really -- they obviously work very well for delivery. But for pickup, they 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.

Christine D’Sylva

And in terms of traffic in chicken, a lot of the increase in our same-store sales, as Paul said, is really from traffic. We saw the return of our nontraditional business, a lot of people returning to special events. So that's 1 of our biggest drivers in terms of our same-store.

Unidentified Analyst

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?

Paul Goddard

I think some of the latest data we've seen seems to indicate that we are ever 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. But we seem to be outpacing some others there, which is good because I think for a while there, at least at 73, I think we were losing and it does seem as though we are getting some of that back.

Unidentified Analyst

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

Paul Goddard

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. So we're always looking for ways to drive more traffic and more customer revenues. But I think overall, we're pretty happy. I mean in days like Halloween will be reported on next quarter, things like that. But New Year's Eve will be coming up soon, 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 very careful to make sure we stay relevant. So I mean, so far so good, but I just don't want to comment on Q4 specifically.

Unidentified Analyst

Okay. That's helpful. 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?

Paul Goddard

I would say 1 thing that we did notice, and this hasn't been adjusted 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 walk-in as unpremeditated, walking down the street, Queen Street in Toronto, for instance, or Montreal or wherever, we decided 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 2 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. We're 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 stating that delivery fee.

And so we're making sure that we have appropriate offerings for those channels for those customers.

Unidentified Analyst

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 prepandemic level?

Paul Goddard

I'd say competition-wise, I mean everyone gets better at their game, I would say. I mean we never underestimate 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 we -- if you look at the number of marketing initiatives we have, I would say the content generation run, especially on social platforms, digital content, use of influencers and other channels, I would say that's stronger for sure than prepandemic. And that's -- I think we've learned what we'll do 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.

Christine D’Sylva

Additionally, to add on to what Paul is saying a lot of competitors may do discounting, where 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 across 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 piece of 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.

Unidentified Analyst

That's great to hear. And maybe just a follow-up on that. You highlighted some of the digital infrastructure investments in the quarter. Can you just provide some more color around that? And do you see that driving either increased traffic and/or add-ons?

Paul Goddard

I think things like in-app messaging for sure do, I mean it's a not that easy within in-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 traffic. I mean, if you get a relevant -- contextually relevant message on your phone, when you're commuting home for instance, that there's something going on at the location nearby you, things like that. And Score A Slice is another 1 with in-venue, ability to download and get people really using their phones more. 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 third-party platforms have up. But as far as I know, the other major Pizza chain in Canada that I know of has that visual ability to track your order. So we're providing that more convenience to the customer on the web or on their app as well, and they're creating more dialogue and more relationship with our customer makes them stickier. As well, I think things just to optimize our presence on Google and other platforms, social media wise and search capabilities and things, I think -- I want to get too specifics. I don't want to tell everyone 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.

Unidentified Analyst

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?

Paul Goddard

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've seen -- not the massive levels of inflation that we did see a while ago, that -- those seems 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're trying 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 cost 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. In other words, less price increases than perhaps some others have put through. So I think that also helps our operators' margins.

Unidentified Analyst

Okay. That's helpful. And in terms of new development, we've heard from some small format researching, but there's delays in new store opening as developers slowdown in your 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? And how do you feel about your pipeline for '24?

Paul Goddard

Yes. That's a good point. I mean I think that the financing for some of these people, like we see our pipeline has been very healthy, but certainly the cost of financing for new franchisees is higher. I mean this cost of lending, whether it's a first tier lender or a second 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 reduction, 3% does seem 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. But I wouldn't be surprised if it actually does slow a little for sure, given that sort of tougher environment out there.

Unidentified Analyst

Okay. That's very helpful. And then maybe switching gears. So in terms of -- like the recent news about Ozempic GLP-1 drugs. Just curious what your thoughts are on the potential impact of that?

Paul Goddard

Yes. I think 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 think to say that, look, as much as we might sell fried foods and things like that as well, and that's where we populate them.

We feel there's such a range of items that are actually very healthy as well, and it's very, very feasible to have thin-crust pizza, easy on the cheese, if you like, vegetable toppings, grilled chicken, et cetera. So there's so many -- or salad. There's so many options. And even though, look, the bulk of our proximity 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.

And so I don't really see that. I mean, we've seen health trends in the past when actions was big as well and other trends. And then 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 health -- 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.

So it's obviously a big news item now with those epic, but I don't necessarily see that something has kind of materially impact us. We don't really see that.

Unidentified Analyst

Okay. And then in terms of Mexico, now that you have your first 3 [ Pizza 73] out 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?

Paul Goddard

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 restaurants that we have and our partners are excited about building on it. We've got some unique menu items down there, some things that we really have our standard menu here, a little smaller version, but there are some items that they have done there that we don't have here, like garlic puffy bread and kind of a spicy [indiscernible] pizza as well and some other things. So we like that the cater to the local face there and it seems to be resonating. So it is early days, but we are pretty excited about next year.

It's about building on the initial success.

Unidentified Analyst

Okay. That's helpful. And maybe one last one for me. How are your franchisees bearing given the current environment? I mean, the interest rates are so high and then the macro outlook is weakening. How do you feel about the health of the franchisees overall?

Paul Goddard

I think overall, and Chris may have more to add, but I think we feel pretty good. I think that we're in a really high touch with our franchisees. And so we usually hear if there's concerns or pockets of concern 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 have obviously smaller footprints as well as part of our strategy, so trying to keep leasing costs in order. 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. But yes, certainly, for some of them, their interest costs are higher than they used today. And for a new franchisee getting a brand-new loan, it's more expensive. So we want to make sure that it'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 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.

Operator

[Operator Instructions] There are no further questions at this time. I would hand over the call to Christine D’Sylva. Please proceed.

Christine D’Sylva

Thank you, everyone, for joining us on the call today. If you have any questions following the call, please contact us. Our contact information is on our website and on the earnings release. Have a great evening.

Operator

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

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