Q2 2025 Pizza Pizza Royalty Corp Earnings Call
Speaker #1: During the presentation, all participants will be in listen-only mode. After the speaker's remarks, there will be a question and answer session. As a reminder, this conference is being recorded on August 7.
Speaker #1: 2025. At this time, all lines will be in listen-only mode. Again, following the presentation, we will conduct a question answer session. I would now like turn the conference over to Christine D'Sylva, CFO.
Speaker #1: Please go head.
Speaker #2: Thank ou. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Q1 earnings call for the second quarter ended June 30th, 2025. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer, Paul Goddard.
Speaker #2: 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 ay.
Speaker #2: All forward-looking statements should be considered in conjunction with the cautionary language in our earnings release and the risk section included in our annual information form.
Speaker #2: Please refer to our earnings release and the MDNA in the Investor Relations section of our website for a reconciliation and other disclosures related to non-IFRS measures mentioned on this call.
Speaker #2: As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers, media, and shareholders can contact us after the call. With that, 'd like to turn the call over to Paul Goddard to provide a business update.
Speaker #3: Good afternoon. Everyone, and thanks for joining us on today's call, especially on a midsummer night's evening. I'm pleased to report that our brands delivered another strong quarter growth.
Speaker #3: Underscoring the continued momentum of our business and the strength of our brands, in a highly competitive QSR landscape. Our second quarter performance reflects solid execution, strong customer demand, and strategic menu innovation that all translated into sales.
Speaker #3: So for the quarter, our brands reported a combined same-store sales growth of 2.1%, with Pizza Pizza Restaurants reporting 2.1% growth, Pizza 73 Restaurants reporting growth of slightly less at 2.0%.
Speaker #3: At both brands, growth this quarter was driven by increases in both guest traffic and the average customer check, which is great to see. Impactful and timely marketing initiatives and new product launches resulted in an increase in traffic and we're happy to see another quarter of rowth in our organic delivery channel as well, which helped increase the average check.
Speaker #3: This quarter, we continued our focus building brand engagement through innovative promotions, products, and partnerships, delivering great value and celebrating key moments. Speaking a little about our brand building promotions and partnerships, we continued to build off our score slice and hockey game box campaigns as we created custom social content to tap into fan culture during NHL playoffs, leveraging our nerships with the Leafs, Habs, Jets, Flames, and Oilers.
Speaker #3: Between digital discount codes and special offers such as the large whiteout pizza for 12.99 in Winnipeg at Pizza izza, and the Skinner dinner at Pizza 73 in Edmonton, we were actively in the game day conversation exactly when viewership and engagement were at their peaks.
Speaker #3: Additionally, we identified the opportunity to deepen our connection in Winnipeg. This quarter, we became the official pizza of the Winnipeg Blue Bombers and launched several high-visibility concession stands in the stadium, broadcast assets, and our much envied coveted score slice program to drive app downloads and usage in that market.
Speaker #3: We also continued to build our brand engagement through exciting menu innovations. With the immediate success of our stuffed crust pizza launch last year, this quarter, we introduced two new stuffed crust cheese flavors, dill pickle and spicy habanero.
Speaker #3: And expanded availability to include XL and XXL sizes for those as well. This evolution reinforces our commitment innovation, elevating flavor options and positioning ourselves as leaders in crust varieties.
Speaker #3: Meanwhile, at Pizza 73, to launch our new signature wraps, we introduced a secret menu item revealed by 10 influencers generating hundreds thousands of organic impressions and engagements while driving demand for the new category.
Speaker #3: These crispy chicken wraps offered in four flavors add variety to our menu and are a great addition to our expanding lunch day part. And beyond our innovative marketing messages and promotions, we have our core of always-on value offerings.
Speaker #3: Our job is to ensure that our ustomers constantly see us offering the best food at the best price. We continue to lean into our value offerings as we promoted our XXL pizza and our pizza and chicken combo.
Speaker #3: And we did a re-hit on our 25% reverse tariff offer as well, lining up perfectly with Canada Day. As mentioned earlier, Pizza Pizza has always celebrated special occasions and this quarter was no different.
Speaker #3: Pizza Pizza dominated the QSR share of voice during the 420 cannabis festivities with the return of the pizza pre-rolls exclusively on the menu during the week.
Speaker #3: And a collector vinyl album, Pizza Pizza Dope Jams, featuring six psychedelic tracks inspired by the Pizza Pizza jingle. And I will mention these were specifically targeted at that particular demographic, not our family demographic.
Speaker #3: So we are careful where we promote that, but we were very happy with the relevant social media demographic there in the response. Meanwhile, at Pizza 73, where we are celebrating that brand's 40th anniversary, we offered a buy one, one campaign for customers and even celebrated Oil Country with free hard pizzas for fans during the Edmonton Oilers playoff run.
Speaker #3: Select Edmonton and its Bruce Grove locations there joined in, showcasing the brand's strong community roots there. Our plans for the second half of 2025 will see us continuing to leverage our brand assets and strengths as we implement new promotions backed our core product propositions, ongoing menu innovation, conveniently located restaurants, and an award-winning tech platform.
Speaker #3: All of these fundamental pillars ensure a superb customer experience each and every time. And that's something that we continually iterate upon as well. Customers' needs evolve and so do our capabilities as well.
Speaker #3: So it's a dynamic situation. We never rest on our laurels. And we are continuing to enhance our web and app experiences through iterative data-driven improvements including not just new menu items, but enhancements to various parts of the functionality and ordering process, and to the speed and simplicity of ordering on our digital channels.
Speaker #3: We'll continue to leverage our competitive tech advantage with more customer-focused capabilities as time goes on. Stay tuned for future updates and future quarters. And before I turn the call over to Christine, I just also wanted to briefly discuss our restaurant network growth.
Speaker #3: We ended the second quarter with a total of 800 locations in Canada. A really exciting milestone. 696 were Pizza Pizza sites and 104 were Pizza 73s.
Speaker #3: We opened three traditional and five non-traditional Pizza Pizza locations during the quarter. And I'll just add that we are also adding some more non-traditionals as well this year.
Speaker #3: And we'll likely have a few closures there too, but we'll definitely be a net positive on the non-traditionals as well. So we have a solid site expansion plan, and we have a lot of pipeline; a lot of franchisees, pardon me, in the pipeline as well.
Speaker #3: So feel good about that. And we expect the pace to pick up in the remaining quarters. Meanwhile, at Pizza 73, we opened one traditional location and we closed one traditional and four non-traditional Pizza Pizza sites and one traditional Pizza 73 location closed.
Speaker #3: We continue to see opportunities right across Canada, but also in Ontario where we have the highest concentration of restaurants. In Mexico, our existing four stores have had good sales growth and continue to generate buzz, traffic, and continue momentum in Guadalajara.
Speaker #3: Our Mexican partners have cited several more locations and have commenced the ction process on two new sites in Guadalajara. We continue to believe there is a significant potential to really scale up there in Mexico, especially given the population of 3X Canada.
Speaker #3: In the coming years, and we do think it might take a little longer than we expected to reach our get of approximately 10 new restaurants per year, but we do feel that we've got great initial traction and the ales of the existing stores are excellent.
Speaker #3: So we're pushing hard to get even more momentum there. As we head into the second half of 2025, we expect to see restaurant network expansion of roughly two to three percent of traditional restaurant growth.
Speaker #3: Now, some closing remarks. While we're pleased with the positive growth we achieved this quarter at both brands, the Canadian economy in general does appear to be showing signs of continued softening.
Speaker #3: Despite the strong TSX, for instance, since late spring, but perhaps we'll see increased softening in consumer spending continue. It's a little unsure when you look at the roeconomic environment.
Speaker #3: But generally, the trend is that it’s affecting much of the GSR industry, not just in Canada, but also in the United States. So, since we can’t control the macroeconomic environment, we’re staying proactive.
Speaker #3: We're sharpening our value messaging, optimizing promotions, and continuing invest in digital and loyalty to drive customer frequency and retention. We're confident these actions will help us maintain our momentum even as the macro environment appears poised to become more complex and potentially less favorable to us.
Speaker #3: Finally, I'd like to close by thanking our entire team both our corporate employees and restaurant owner-operators alike for bringing their passion, professionalism, and ambition each and every day.
Speaker #3: For our ustomers, our communities, and for each other. We're pleased with our performance in this highly competitive market environment and feel we're really just getting started.
Speaker #3: When it comes to realizing the potential of our iconic brands. So thank you for listening in. On this warm summer night, I'll now hand things back over to our CFO, Christine, to wrap up the call.
Speaker #2: Thanks, Paul. As a reminder, Pizza Pizza Royalty Q1 is a top-line restaurant royalty corporate owned. A monthly royalty through the license agreement with Pizza Pizza Limited.
Speaker #2: In exchange for the use of the brand, Pizza Pizza Limited pays the partnership a monthly royalty calculated as percentage of royalty pool sales. So growth in the corp is derived from increasing the same-store sales of the restaurants in the pool, but also by adding new restaurants to the pool each year.
Speaker #2: And as announced in Q1, we added 20 net new restaurants to the royalty pool on January 1st, 2025. So for fiscal 2025, there will be 794 restaurants in the pool, comprised of 694 Pizza Pizzas, and 100 Pizza 73s.
Speaker #2: Returning to the financial results, the combination of the 20 net new restaurants added to the pool on January 1st and the same-store sales growth resulted in an increase to royalty pool system sales and the corresponding royalty income.
Speaker #2: Royalty pool system sales for the quarter increased 3.9% to 161.4 million. From 155.4 million in the same quarter of last year. By brand, sales from the Pizza Pizza restaurants in the pool increased 4.1% to 139.3 million.
Speaker #2: And sales from the 100 Pizza 73 restaurants in the pool increased 2.4% to 22 million for the quarter. The partnership's royalty income earned as a percentage of royalty pool sales increased 3.8% to 10.3 million for the quarter.
Speaker #2: Beyond royalty income, the partnership also earns interest income on its cash and short-term investments. For the quarter, the partnership earned $61,000. Now, turning to the partnership expenses, administrative expenses, including listing costs as well as director, legal, auditor fees, and other professional fees, totaled $283,000 for the quarter.
Speaker #2: Compared to $194,000 in the prior quarter. The increase reflects non-recurring one-time professional fees and higher director fees which were associated with the onboarding of two new directors.
Speaker #2: As part of the overall succession plan, in addition to administrative expenses, the partnership is making interest-only payments on its $47 million credit facility. Interest paid in the quarter was $392,000.
Speaker #2: And as a reminder, in March 2025, the company renewed the facility for three years with maturity set now for April 2028. The balance of the facility remains unchanged.
Speaker #2: However, the credit spread table increased slightly with the lowest tier increasing from 0.875 to 1%. Additionally, this quarter, in April 2025, the partnership entered into a new three-year forward swap.
Speaker #2: The new three-year swap commenced when the existing ones expired at the end of April. And the new lost-in-rate is 2.51%, which is an increase from the maturing rate of 1.81.
Speaker #2: Overall, the all-in rate for the credit facility for the next three years will be 3.51% compared to the maturing rate of 2.685. So now, after the partnership receives its royalty and interest income, pays administrative and interest expense, the net resulting cash is available for distribution to its two partners, based on their ownership percentages.
Speaker #2: After the venting and the true-up on January 1st, 2025, Pizza Pizza Limited's ownership increased to 26.2%. Pizza Pizza Royalty Corp shares in the remaining 73.8% of the partnership.
Speaker #2: Distributions: It pays taxes on its share of partnership earnings, and the residual cash is available for dividends to the company shareholders. Now, turning to shareholder dividends, the company declared shareholder dividends of $5.7 million for the current quarter, or 23.25 cents per share, which was consistent with the prior year's quarter.
Speaker #2: The payout ratio was 108%. And resulted in working capital reserves being used to the tune of $400,000 in the quarter, and we ended at June 30th with 4.8 million dollars.
Speaker #2: And the working capital reserve. This reserve is available to stabilize dividends and fund any expenditures in the event of short to medium-term variability in sales.
Speaker #2: The company has historically targeted a payout ratio at or near 100% on an annualized basis. And any future dividend changes will be evaluated in respect to that.
Speaker #2: That concludes our cial overview. I'd like to turn the call back to the operator to pull for questions.
Speaker #1: Thank you, ladies and gentlemen. We will now begin the question and answer. If you're ing a speaker phone, please lift the handset before pressing any keys.
Speaker #1: One moment, for your first question. Your first question comes from Cheryl Zhang from TD. Go ahead.
Speaker #4: Hi. Good evening, Paul and Christine. Hope you're doing well. And thanks for taking our questions.
Speaker #3: Thanks. Nice to hear, Cheryl.
Speaker #4: Hi. So our question is on same-store sales. Congrats on the very strong prints, especially under this macro environment. What we're seeing, many of the peers are still reporting negative figures.
Speaker #4: So I'm curious about what do you ink helped you to outperform your peers? What helped you stand out?
Speaker #3: Well, I think it's multiple factors. I try to touch on that a little bit in my initial comments, Cheryl. But I ink, you know, value is probably the primary one, right?
Speaker #3: I mean, we really try to emphasize value. And I think our business model is really set up for that. So I think that's one.
Speaker #3: I think the tech advantage is another one. And I think the convenience, just the fact that our ale that we have, you know, just Pizza Pizza well, sorry, combined network, over 800 locations, we're just very convenient.
Speaker #3: So whether you want us to deliver your pickup, we have that big footprint that, you know, many others don't. So I think it's that.
Speaker #3: And the other thing I'd like to say is I think just the sort of brand aura, if you like, the sort of innovative nature of our marketing and some of the offerings we have are just a little more unique, whether it's different types of crust, different types of pizza, more options on stuffed crust, things ike that that are just not, you ow, they're itely distinguished from a lot of other competitors.
Speaker #3: And so those things all bundled together are some examples where I think people say, look, you know, I'm getting really good value here. It's convenient.
Speaker #3: It's super easy to get it on the app or whatever. And I like it. And, you know, as long as we do a great job on the quality, then people will keep ing back.
Speaker #4: That's great color. Thank you. And I know that it's probably still early, but just curious, considering, you know, your strong Q2, but also keep in mind the soft macro backdrop, what are you seeing in terms of momentum so far in Q3 compared to Q2?
Speaker #3: Well, I mean, it is early, right? And it's summer. It's been a different weather patterns, I'd say, this summer. I mean, I would say it's a little early.
Speaker #3: 's kind of mixed in terms of our non-traditional sites and things like that. But I think generally what we've been ing is really been resonating still.
Speaker #3: I mean, things like the XXL, which is really unique in the market. No one has a pizza that size, and no one certainly has a stuffed crust.
Speaker #3: Like we do in that size, just as one example. And I think some of our pizza and wing combos are really resonated as well.
Speaker #3: And I ink just people are starting to recognize and see that we are allocating ever more of our marketing towards targeted digital channels, social media, and that's seeming to bear greater fruit than in the past too.
Speaker #3: And, you know, perhaps some our leading competitors can kind of come close to us on that. But many others can't. And so I think that's helping us sort of hang in there.
Speaker #3: I mean, it is we don't want to get ahead of ourselves for Q3, but, you know, we generally feel we're doing the right things.
Speaker #3: And, you know, we can adapt quickly if we fall, let's say we didn't see traffic growing to the extent we like we didn't see check as strong, then we can really quickly pivot.
Speaker #3: So we obviously want to stay head. And we want to be positive every quarter. But, you know, that macro backdrop is concerning. There are some consumer uncertainties and people are being very deliberate on how they spend.
Speaker #3: But we just sort of ink, well, we sort of planned for the customer being very, very value-oriented. And so far, 's been a good bet.
Speaker #4: You got it. And I think you're a prepared remark. You mentioned that the organic delivery channel is showing growth again. Just curious, if you could provide any color on, you know, any of the initiatives that you've in place to drive that growth and are you seeing any changes in maybe a turn in consumer demand for delivery?
Speaker #3: Yeah. So I'm glad you highlighted that because that is something that I think we are very excited about, in particular this quarter, is we always are pushing organic delivery.
Speaker #3: But it is proving to be quite a hard channel to grow. So to get that positive for both brands, we're really excited about that.
Speaker #3: And so one example would be our game day promotions. For instance, in the heat of the playoffs, we had so much attention and so much media spend there.
Speaker #3: You know, at both brands, as I tried to ate on my prepared remarks, but basically, we had game day specials. We had things like no delivery if you come through our apps.
Speaker #3: And so that really generated a lot of incremental orders, especially when people are watching the Oilers game or Leafs game and the latter stages of the playoffs.
Speaker #3: And so once people try out that channel, they realize, oh, this is quite good. And you know what? It's ally a lot cheaper. And the kicks of Pizza Pizza, we've been able to guarantee.
Speaker #3: So, there really are some advantages. You know, it's faster. You get a uniform driver. It's a, you know, tenured, trusted Pizza Pizza driver.
Speaker #3: They might even recognize. So things like that, it's kind of a nice snowball effect. And so it's more sometimes the ick is just getting them to try our app.
Speaker #3: You know, we have many customers that, for instance, use our adaptive web, our mobile website on mobile devices. But not all of them even have our app.
Speaker #3: So we want to make it really clear and really easy, which is why we have a QR code to download our app on our packaging.
Speaker #3: And we're really trying to incent people to do that. And we'll be pushing that even harder in the future. So right now, if someone orders, you know, even if they do order on a third-party delivery platform, if you look at our packaging, we've QR codes all over our boxes and packaging to incent them to then next time come organic, to the table.
Speaker #3: And we'll even throw in a freebie or something to get them to go to that stickier channel and stay there. So it isn't easy.
Speaker #3: I will say, I mean, a lot of people, especially younger demographic, Gen Z and whatnot, they often use third-party channels. They don't really like having 20 restaurant apps on their phones, for instance.
Speaker #3: But we are showing, you know, some indications of winning some people back into organic channels. So we're going to keep really pushing for that more and more.
Speaker #4: That is awesome to hear. And very helpful color. Just in terms of consumer behavior, other than the growth in delivery channel, like are you seeing any other changes in their behavior in terms of, you know, whether it's demographic groups or income cohorts?
Speaker #3: I would say it's probably, you know, it does vary. I ink one of some of the trends we see, aside from the organic delivery growth, is, and I do commented on prior calls to this, and this trend is continuing, is pickup.
Speaker #3: So just in terms of consumer behavior, and this is across different consumer demographics, people are picking up a lot more. That includes, you know, Gen Z.
Speaker #3: It includes people, you know, in the sort of boomer segment. People are just seeing, especially on third-party forms, very high network charges and things like that.
Speaker #3: And they may not get it as fast as they might otherwise, unless they're very close to where they're ordering from. And so pickup continues to really, really grow.
Speaker #3: And we're not the ones seeing that. But I do think that, you know, our business model has always really been designed to take the customer, no matter whether it's delivery or pickup.
Speaker #3: And some others out there in the market, there might have been more configured for delivery. And they may not have as, let's say, as prime locations as us.
Speaker #3: For instance, you know, the urban cities: downtown Toronto, downtown Edmonton, downtown Calgary, Vancouver, et cetera. So, think that that is something that we feel happy to do.
Speaker #3: You know, we get those pickup orders. We'll handle them however people want us to. We'll be there. But obviously, delivery is really exciting because we can do very well with delivery on organic delivery, especially.
Speaker #4: You got it. And in terms of the competitive environment, are there any changes in the trend or the intensity of Q3 and how you feel about the promotional intensity?
Speaker #3: I would say we do see, you know, certain competitors that almost seem to have almost a habit of extreme discounting in a certain window often owards the end of calendar periods and ings like that.
Speaker #3: We try and avoid doing that. We want to have a sustainable model for our franchisees. So obviously, we want sales, but we want our stores to do well and be profitable.
Speaker #3: So we see a little bit of that. That's not entirely new. But I would say the predominance of things like Bogo offers on third-party platforms continues.
Speaker #3: And we also participate in that from time to time. But we notice that, you know, some people will really almost overly chase sales by paying pretty aggregators to get, you know, primary ad placement.
Speaker #3: But that's also quite a expensive endeavor to really keep that on always on on those platforms. They're very expensive. So we see a little more of that going on, I say, than we have in the past.
Speaker #3: It's not new, but we notice a little more of that which just speaks to, I think, how everyone in the market's generally struggling to get same-store sales.
Speaker #4: Okay. Got it. And maybe just one last one for me. Is there any changes to your expectations? I think priorly you said that it's around 3% network expansion in 2025.
Speaker #3: Yes. We did sort of temper that a little bit, I expensive fees to third-party ink, just we're saying, you know, right now we look really good for the next quarter or so on development.
Speaker #3: We've just had some development review today. And there's a lot in the pipeline for franchisees and sites, you ow, across the country. But we just one of the things that we're where we thought we will temper that potentially a little bit is because that is an area where, you know, these tariffs and the uncertainty around that are a wind for us, construction costs for things like ovens.
Speaker #3: If they're coming from the US, I mean, we're looking at alternative supply chains. But that is something that can really with the uncertainty right now, especially at the minute, ou know, the sort of 35% type tariff makes us pause a little for sure.
Speaker #3: But we can sort of turn that tap on pretty quickly as well and accelerate, which means we’ll see now and at the end of the year.
Speaker #3: So we're certainly still on offense, I would say, and we're motivated to get as many great sites as we can get. Across the country.
Speaker #3: So, you ow, 3% would be nice, but we just thought 2% might be more realistic. And I think 're going to try and get that and hopefully beat it.
Speaker #3: So we do still do expect some good net store growth on traditional and non-traditional stores this year, regardless of us, you know, that tariff uncertainty causing us a little more hesitation.
Speaker #4: That's very helpful. Thanks so much for taking our questions, and congrats again on the strong quarter.
Speaker #3: Thanks very much, Cheryl. Appreciate good estions.
Speaker #1: Okay. There are no further questions at this time. I'll now turn the call over to Christine D'Sylva. Please continue.
Speaker #2: Thank you very much, everyone, for joining us on the call today. If you have any questions after this call, please feel free to contact us.
Speaker #2: Our contact information is available online and on the press release. Have a good evening.