Q1 2025 Pizza Pizza Royalty Corp Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Pizza Pizza Royalty Corpse Erning's call for the first quarter of 2025.
Speaker Change: During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded on May 7, 2025.
Speaker Change: Thank you and good afternoon, everyone. Welcome to Pizza Pizza Royalty Corpse. Erning's call for the first quarter ended March 31st, 2025.
Speaker Change: Joining me on the call today is Pizza Pizza Limited's chief executive officer, Paul Goddard.
Actual events may differ materially from the projections discussed today.
Speaker Change: All four of the 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.
Speaker Change: Please refer to our earnings press release and the MCNA in the Investigation Section of our website for a reconciliation and other disclosures related to non-IFRS measures mentioned on this call.
Speaker Change: As a reminder, analysts are welcome to ask questions after the prepared remarks.
Speaker Change: Portfolio Managers, Media and Shareholders can contact us after this call.
Speaker Change: With that, I'd like to turn the call over to Paul Goddard to provide a business update.
Paul Goddard: Thanks very much, Christine. Good afternoon everyone and thank you for joining us on today's call to discuss our Q1 2025 results.
Paul Goddard: We are happy to report a solid start to 2025 with positive sales growth at both Pizza Pizza and Pizza 73
Paul Goddard: For the quarter, our brands reported a combined seamstor sales growth of 1.2% with Pizza Pizza restaurants reporting to 0.6% growth and Pizza 73 restaurants reporting growth of 4.3%.
Paul Goddard: I should mention also this was lapping a positive Q1s in first sales growth of 1.7% for 2024 so we are positive on top of positive for this first quarter and we're pleased to see that we've regained some positive momentum recently.
Paul Goddard: As we discussed on our last call, our plans for 2025 see us continue to leverage our brand assets and strengths as we implement new promotions backed by our core product propositions and ongoing menu innovation, two-minute restaurants and tech platform and through all of this is a approved customer experience.
Paul Goddard: Now let's get into the details of our performances quarter.
Paul Goddard: As I said, we kicked off the year with positive same-store sales, which is great, and at both brands growth this quarter was driven by increases in both guest traffic and the average customer check.
Paul Goddard: Customer traffic growth was driven by thoughtful calendar initiatives and new product launches and we were happy to see growth in our organic delivery channel which helped increase the average check.
Paul Goddard: As we've mentioned in the past, the QSR Food Service category is highly competitive and we do see a heightened level of discounting continuing in the quarter. We continue to strive to find the right balance between offering competitive offers and discounts, but also protecting the profitability of our restaurant order operators.
Speaker Change: Pauling the success of the extra extra large pizza, the XXL at Pizza 73.
Paul Goddard: We introduced the massive AT&H Pizza to Pizza Pizza customers as well.
Paul Goddard: A unique benefit of operating two unique but similar brands in Canada and that's something that allows us to test and learn at one banner before launching at the other, which we've really really I think gotten better and better at as well.
Paul Goddard: At Pizza Pizza the XXL was an immediate hit with customers growing our pizza category overall and providing Canadians with a completely unique value option on our menu.
Paul Goddard: At $20 with three toppings, this big pizza can feed a family for an unbeatable price.
Paul Goddard: Elbrowns like to be at the forefront of current trending topics.
While many brands added proudly Canadian badges on their ads
Paul Goddard: We took it a step further with the timely and actionable reverse term promotion providing Canadians with memorable advertising and true financial savings in the form of a 25% discount.
Paul Goddard: Close collaboration with our agency partners and our in-house creative team allowed us to launch the program in time for the four nations hockey final.
Paul Goddard: Our breakthrough in funny ads ran in the lead-up throughout the game and in the four weeks following dominating the proudly Canadian conversation while driving up sales via the tactical 25% off reverse tariff offer.
Paul Goddard: As well, the tag actually canadian with something you might have seen while watching one of our many sponsored professional sports teams this quarter.
The Undehr score of slice
Paul Goddard: and score a pie promotions at our partner arena across the country. This quarter we leveraged our NHL team sponsorships and our longstanding Coca-Cola supplier relationship to create our custom hockey boxes.
Paul Goddard: These boxes provided hockey fans a unique hockey table top game, complete with hockey net with their pizza eating experience. We had regional versions for our Montreal Canadians, Winnipeg Jets, and Toronto Maple Leaf fans, as well as generic boxes for all other provinces.
Paul Goddard: And, coincidentally, obviously, three of those teams actually are three sponsored teams who made it to the playoffs and are still in it, obviously, the jets, the oilers, and the leaf. So, pretty exciting times. Maybe the hockey box is good luck.
Paul Goddard: Pizza 73 to leverage our relationship with the Edmonton Oilers, we introduced the Skinner Dinner, a product endorsement with the Oilers Goli Stewart Skinner. This offer is done well and was very timely as the Oilers battle on and round through the playoff shirt.
Paul Goddard: While we are always innovating on our messages, I would also be remiss if I didn't speak to our product innovations this quarter.
Paul Goddard: At Pizza Pizza, we introduced a unique product in the QSR space for Canada, the loaded tager tots. This program was led with our ownable and craveable creamy garlic tots in the forefetch.
Paul Goddard: This offer was a great addition to orders and help lift organic sales during the promotion window. Meanwhile at Pizza 73, we introduced new signature wraps, including crispy chicken and don't air to highlight our menu of variety, drive lunch and snacking occasions.
Paul Goddard: Following the successful launch of cheese stuffed crust pizza pizza, we also introduced a program of the pizza 73 this quarter, again, you know, proving it in one brand and take it to the other if it works.
Paul Goddard: The new stuff crest option was an immediate hit with our customers, nearly doubling our sales expectation, providing us an instant net new revenue stream.
Paul Goddard: As we look ahead to the second half of 25, we know that there is significant competition for consumer spending, especially with the impact tariffs we'll have on our customers wallets. But the overall strengths of our foundation remain the same. Our branch drink and resident marketing messages, it continually enhance menu.
Paul Goddard: has lentless innovations across all aspects of our business and unrivaled quality and convenience for our customers.
Paul Goddard: So together these pillars have been a winning formula for us in the past and we feel we'll continue to drive our future growth and success as well.
Speaker Change: Before I turn the caller to Christine, I just wanted to briefly discuss our restaurant network growth.
Speaker Change: We remain focused on growing our business across Canada, and we are by any measure the leading homegrown national QSRP to Brown.
Speaker Change: During the quarter, we opened two traditional and two non-traditional pizza locations. Meanwhile at Pizza 73, we opened one traditional location.
Speaker Change: Now we close four non-traditional pizza sites and one traditional pizza pizza, which actually converted to a pizza 73 site.
Speaker Change: So we continue to see opportunities across Canada, and I would also mention that in Ontario, where we have the highest concentration of restaurants at off-drill, that's where we're originally from, and continue to see growth opportunities there in select places, and in fact the two traditional restaurant openings this quarter were both in Ontario.
Speaker Change: As we head into the second half of 2025, we expect to see restaurant network expansion of roughly 2% to 3% traditional restaurant growth.
And I will also mention type of...
Speaker Change: The network growth side, just on the tech side, we're also continuing to invest heavily in our technology platform, with increased restaurant order automation and streamlining, visual order tracking for customers which we already have but we're looking to enhance that on our app and web and getting much more conversion now with what you see on third-party platforms.
Speaker Change: as well as features like SMS broadcast messaging and order reminders particularly for app users and our Club 1111 loyalty members. So our ongoing investments here on the tech side help drive customer engagement and loyalty along with increased order frequency.
Speaker Change: Just to close off, I just say we are a piece to see the improvement in sales and especially traffic growth. We always want volume, we always want transactions, so I think that's, you know, most pleasing of all. But we do know that the economic landscape is challenged and customers are much more deliberate in managing the overall spin.
Speaker Change: Our job, of course, is to ensure that our customers see us offering the best food at the best price.
Speaker Change: And I think we're really well known for that. So we will continue to lean into our value offerings but supported by product innovations and tech innovations and also marketing activations and we will be wherever our customers are and will be available whenever and however they want to order from us.
Speaker Change: Finally, I'd just like to close by thanking our team, corporate employees and operators alike for all they do, day in and day out, for our customers, for our communities, and for each other, especially in a difficult economic environment with a lot of uncertainty, and potentially worsening climate or recessionary climate that's...
Speaker Change: could be ahead of us even more than it is now. So I think we have to prepare for that. But so great about our team. We've got a very unique special team culture from coast to coast. And the level of passion, commitment, ambition is second to none. So I feel very confident we'll continue to be a leader in the market, continually innovating, refreshing and reinventing ourselves. [inaudible]
Speaker Change: So thank you for listening and I'll now ask Christine to provide a brief financial update.
Christine: Thanks, Paul. As a reminder, Pizza Pizza Royalty Corp is a top-line Royalty Corp that earns a monthly royalty through a licensed agreement with Pizza Pizza Limited.
Christine: In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations, Pizza Pizza pays the partnership of monthly royalty, calculated as a percentage of royalty-fulfailed.
Christine: Growth in the Corp is to rise from increasing seamstor sales of the restaurants in the Royalty pool and by adding new restaurants to the pool.
Christine: On January 1st of each year, the Royalty pool is adjusted by adding new restaurants opened in the previous year, less any restaurants that have permanently closed.
And in return, Pizza Pizza's ownership increases.
Christine: So for this goal 2025, there will be 794 restaurants in the Royalty pool, comprised of 694 pizza pizzas and 100 pizza 73.
Christine: So with that estimation, let's briefly cover the definition results for the quarter.
Christine: As Paul mentioned, same-store sales the key driver of yield growth for shareholder increased 1.2% third quarter. Pizza Pizza restaurants reported same-store sales 0.6% for the quarter and pizza 73 restaurants increased 4.6%
Christine: Both brands saw an increase in traffic as well as average check.
Christine: The combination of new restaurants back to the Royalty Pool on Jamie Reefers and the same store sales growth resulted in an increase in Royalty Pool system sales and the corresponding Royalty income.
Christine: Royalty pool system sales of the recorder increased 1.6% to 151.3 million from 148.9 million in the same quarter last year.
Christine: By brand, sales from the 694 pizza pizza restaurants increased 1.2% to 129.8 million and sales from the 100 pizza 73 restaurants increased 4.3% to 21.5 million and a quarter.
Christine: The partnership's royalty income earned a percentage of royalty-pool sales increased 1.9% to 9.7 million in the quarter.
Christine: Beyond Royalty Income, the partnership also earns interest income on its cash and short-term investment.
and for the quarter of the partnership earned $68,000.
Christine: Turning to the partnership expenses, administrative expenses including listing costs as well as director, legal and auditor fees, totaled 152,000 for the quarter compared to 126,000 in the prior year.
Christine: The increase was left higher legal expenses and higher director fees, which were associated with one additional director joining the board as part of its succession planning.
Christine: In addition to administrative expenses, the partnership is making interest only payments on its $47 million credit facility.
Interest paid in the quarter was 317,000.
Christine: For the quarter, the interest rate was locked through April of 2025 using the swap agreement that fixed the interest at a quarter rate of 1.81 plus a credit spread for a combined interest rate of 2.685.
Christine: In March 2025, the company renewed the credit facility for a three-year term with maturity now set for April 2020-28.
Christine: Additionally, in April 2025, the company entered into Ford Interest Rate Slot.
The new three-year interest rate swaps.
Christine: which is an increase from the mature and swapped that were 1.81 percent.
Christine: After the partnership has received its Royalty and interest income, made it administrative and interest expense, the resulting net cash is available for distribution to its two partners based on their ownership.
Christine: After the 2025 bend-in and the prior year's trip, Pizza Pizza Limited's ownership increased to 26.2%.
The Pizza Pizza Royalty Corp shares in the remaining 73.8% of the partnerships to
Christine: It then pays taxes on its share of the partnership earning and any residual cash is available for dividends to company shareholders.
Christine: Turning to dividends, the company declared shareholder dividends of 5.7 million in the current quarter, or 23.25 cents per share, which was consistent with the prior year comparative quarter.
Christine: As a reminder, assistance sales for the quarter ended March 31st have generally been the softest, and historically, this quarter results in a payout ratio over 100%.
Christine: The Payout Ratio for Q1 2025 was 117 percent and resulted in the companies working capital reserve decreasing by 900,000 and we ended the quarter with 5.2 million available.
Christine: The 5.2 million working capital reserve is available to stabilize buildings and fund other expenditures in the event of short to medium-term variability in our system sales and Royalty income.
Christine: The company historically targets a payout ratio at or near 100% on an annualized basis.
Christine: That concludes the financial overview. I'll now turn the call back to the operator to pull for questions.
Speaker Change: Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Should you have a question, please press star, followed by the one on your touchstone phone. You'll hear a prompt that man has been raised.
Speaker Change: To Jewish should be quiet under polling process, please press star followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys.
Speaker Change: First question comes from Derek Lessard with T.D. Cohen. Please go ahead.
Derek Lazard: Yeah, good morning. Good morning. Good afternoon, everyone. How are you doing? Very well, Derek.
Speaker Change: Paul the the the custom hockey box doesn't look like it brought any luck to the have. So I'm going to give you everyone but to have. Yeah, exactly.
I'm hoping they get by, yeah maybe they will.
Speaker Change: is a positive same-source sales as everyone else might be, but I'm just wondering if you can maybe talk to how you guys think about maybe the sustainability of the traffic and the check.
Derek Lazard: Yeah, it's a good question, Derek. I mean, I think sort of, first of all, you know, the macro environment is concerning. I think that would be pretty good to everyone, anyone out there. So, you know, who knows what it's going to look like the rest of this year, the general economic climate, that's probably the...
Derek Lazard: Biggest factor, but I do think even for the end of last year, although, you know, I results were
Derek Lazard: You know, Stellar last year, we could really feel that what we're starting to do really around Q4 even was really starting to
Derek Lazard: to work, and a lot of that was just a lot of the novel marketing items, sort of the deutavations.
Derek Lazard: at the hockey box or the XXL, you know, the wraps, things like that, out west, the tots. And so I thought a lot of it, I think, was the new product intros, and I think the tone that we took as well with the tariff ads and things really got, you know, a real cultural buzz, I think, aside from specific promos.
or a specific promo product, central piece.
Derek Lazard: The overall brand arching message under the everyone deserves pizza sort of seen.
Derek Lazard: I think just resonated, you know, and I think we did also see
Derek Lazard: with that increase and delivery that I said in my comment, you know, the average check is up on that and so that helps pull us up as well. And those are not heavily absurd, not easily won battles, the organic delivery side.
Derek Lazard: It is tough. I mean, we've generally seen more growth in pickup and we still juicy good growth in pickup but it's been harder to grow that organic delivery channel.
Derek Lazard: and others in the market have also had this tough trouble. It's just a reality of the market.
Derek Lazard: and growing through party platforms and things. But I think we're pretty happy with how people have really taken advantage of that and things like our special code, for instance, let's say it's the least or in the Habs market. There'll be a Habs delivery or at least Dell code.
Derek Lazard: on Game Day's Christmas. It stays on delivery charge. And so things like that really do nudge people towards our own organic apps or web and drive organic deliveries. So that helps us to check, which is nice, but the traffic side, I think.
Derek Lazard: It's just really been compelling, I think, compelling specials more than anything and just the overarching marketing messages really resonating.
Speaker Change: Thanks for that color. Congratulations. It's a really shot shot through and in that same store sales number.
Speaker Change: Pizza 7.3 was particularly strong and I know who you...
Speaker Change: You know, you talked about the signature wraps and the stuff crusts. Do you think that was the, you know, I guess was that the biggest driver that that new innovation was that the biggest driver that out performance there?
Speaker Change: I think so. I mean, could you Christine might have more thoughts, but I think, you know, the reverse tariff, the XXL did very well there, stuff crusted, very well there. That's why we
Speaker Change: You know, extended it. So I mean, the Skinner dinner was also a factor, but you know, not maybe it's significant as some others, but it still was definitely relevant and then with the oilers making the playoffs and continuing and that's that's helping as well. So I think it was was good to see that.
Speaker Change: You know, on the organic delivery, what's up as well, that's presented to us, like I said, similar to Pizza Pizza, so those are probably the biggest factors.
Derek Lazard: Well, and to add on it, Derek, I think you might remember a Pizza 73 used to be thought of as you know like you get two pizzas for a certain price but with us introducing a lot of single pizza offerings. We've been able to attract another level of customers as well. So the Skinner dinner is a single pizza offering at a 19 dollar price point. [inaudible]
Derek Lazard: The Double XL Pizza, again, at a sub-$20 price point. So those have really helped us as we continue to lean into value at that brand too.
Okay, that's the top point and uh...
Derek Lazard: You know, maybe just hitting a long-standing theme on the sort of that consumer backdrop of you.
Derek Lazard: Have you noticed any changes? I guess in the consumer behavior from from last quarter as it you know has it deteriorated? I know it's tough to...
Derek Lazard: I just get a beat on sort of that given the economic challenges, but I just wonder if you've seen any change in that behavior.
Hey, you know, overall, I mean, we've seen [inaudible]
Derek Lazard: I've been happy that our traffic has gone up at both brands, along with Chuck, but I haven't set anything dramatically to cheer reading. I'm honestly more concerned about the rest of this year based on the geopolitical situation of things.
Derek Lazard: So I would say I think two dramatic. I just think our messages have been resident more. We deal to see a lot of competitor discounting that we think is not sustainable for some. But overall I think
Derek Lazard: You know, we feel like it's it's working overall and I mean, people are still in some cases and some demographics and not ordering as many add-ons, dips, drinks, sides. I think I mentioned it on our last call. But then on the other hand, we are, you know, we're getting good success with our creamy garlic. We've been really trying to create that.
Derek Lazard: And it really has turned into almost like a cult phenomena that creamy graphics thoughts itself, right M&R?
Derek Lazard: Social media right now, I think there's kind of an influencer.
Derek Lazard: He's doing an ad with this massive creamy garlic sauce, as he's eating pizza on a leash jersey. Unfortunately, not a half a jersey for you, but, you know, something like that really helps. So I think creamy garlic and creamy garlic tauts, for instance, that helps kind of spread through different products, because we are famous for that in some cases.
Speaker Change: That's an order winners the fact that people love our creamy garlic sauce even if they're different about well, you know these chicken wings are comfortable to another leading chain let's say in their mind are pizza similar to another leading chain well only we have the creamy garlic so we are successful with that and we are always trying to work with partners like coke for instance who you know help with our hockey box to promote more drinks more beverages as well so [inaudible]
Speaker Change: I think it's been a bit patchy I would say in some cases we've had a little more success recently have some results but overall I still think the consumer climate is very challenged and my sense is probably worsening.
I look up and I guess
You know the-
Speaker Change: What I did notice is that you were expectations and this is on network expansion, so your expectations for I think that 3% network expansion is still in place, have you?
Speaker Change: You know, given the environment, you know, I guess what's the level of franchise interest that you have currently?
Speaker Change: I think our pipeline has been pretty solid overall. I mean, as I mentioned, we've had some success even in Ontario, which is fairly mature for us, but we do see.
Speaker Change: Parts of Ontario, for instance, that have been good and also recently Newfoundland.
Speaker Change: places like that, which went off to a great start. And there we have had in places like Quebec, it has a little bit more been a little more challenging as we move eastward to Quebec City, where I think we are still looking to fill in a couple stores looking for the franchisee even though we have the store built. So that's it.
Speaker Change: That shows a bit ahead when there, but you know we're pretty confident that's gonna get resolved very quickly but so that's a little bit weaker there, but we do have for instance in British Columbia where we're still quite new and still climbing up the growth curve there.
Speaker Change: We've got some franchisees there. They're actually asking for another restaurant and we're saying well no no hang on it's a little early for that, but even though they're actually still in a real growth mode to grow their sales up, some of them are very enthusiastic to get another store so.
Speaker Change: I, I, we've always been pretty happy with our franchise. He's quite the franchise, he's Pipeline in the recent years and it still looks good. And I think I'm going to mention on our call last month, we also
Speaker Change: You know won the Elite Franchise Award or that you know 100 Franchises in Canada leading Franchises and we're pick number one and that type of thing helps our Franchise seals team when we can say look an independent group from Europe came and rated us the number one franchise. Thank you very much for joining us.
Speaker Change: So all those factors and just you know obviously kind of success begets success so we never take it for granted there's always a few disgruntled fetches out there but I think overall. [inaudible]
Speaker Change: The mood is good, and then when they're in a better mood, they also talk to their friends, family members, etc. And that's part of our organic franchise sales, you know, new prospect network. Are those people and if they're happy ambassadors, then we tend to have a pretty good pipeline. [inaudible]
Speaker Change: Absolutely, so then maybe along the same lines, Mexico, you notice that you started to report the royalties.
It's small, but forget it. Yeah, it's small. Yeah.
Speaker Change: We just thought we would and obviously it's still early days in Mexico. We really like our partner down there. It has gone slower than expected for sure. I mean, we've had cases where at least it's taken many months where I think we could do it much quicker in Canada. I think we'll why.
Speaker Change: construction costs are cheaper, but you know, you can't control the flow of things down there, it's just not as quick, but our partners there are looking to, I think, you know...
Speaker Change: Bath and the envelope got probably five or six more this year. We've got our four performing well there that exists right now in Guadalajara.
Speaker Change: So I'm quite confident we'll be getting five or six more and hopefully to to 10 by the end of the year. You know, they've already got sites and leases that I think pretty close on most of them. So we're excited it will be faster this year, but it's still quite early.
Speaker Change: Okay, that's for me. Congratulations on on on the quarter. And good luck.
Speaker Change: No, thanks a lot, Derek. Thanks for your great questions. As always, appreciate it.
Speaker Change: Thank you everyone for joining us on the call this afternoon. If you have any further questions, you can reach us after the call. Our information is all that we're going to release. Thank you, and you may disconnect you on sale.
Speaker Change: Ladies and gentlemen, this concludes today's conference. Call. Thank you for your participation. You may now disconnect.