PZRIF Q1 2025 Earnings Call

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Pizza Pizza Royalty Corp.'s Earnings Call for the First Quarter of 2025. [Operator Instructions] As a reminder, this conference is being recorded on May 7, 2025. I will now turn the call over to Christine D'Sylva, CFO.

Christine D'Sylva: Thank you, and good afternoon, everyone. Welcome to Pizza Pizza Royalty Corp.'s earnings call for the first quarter ended March 31, 2025. 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 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 this call. 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. We are happy to report a solid start to 2025 with positive sales growth at both Pizza Pizza and Pizza 73. For the quarter, our brands reported a combined same-store sales growth of 1.2%, with Pizza Pizza restaurants reporting a 0.6% growth and Pizza 73 restaurants reporting growth of 4.3%. I should mention also, this was lapping a positive Q1 same-store 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. As we discussed on our last call, our plans for 2025 see us continuing to leverage our brand assets and strength as we implement new promotions backed by our core product propositions and ongoing menu innovation, convenient restaurants and tech platform and through all of this, a superb customer experience. Now let's get into the details of our performance this quarter. 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. Customer traffic growth was driven by thoughtful calendar initiatives and new product launches, and we are happy to see growth in our organic delivery channel, which helped increase the average check. 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 while also protecting the profitability of our restaurant owner operators. Following the success of the extra extra large pizza, the XXL at Pizza 73, we introduced the massive 18-inch pizza to Pizza Pizza customers as well. The 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 it the other, which we've really, really, I think, gotten better and better at as well. 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. At $20 with three toppings, this big pizza can feed a family's for an unbeatable price. Beyond our strong always on value propositions, our convenience, innovative marketing programs and partnerships continue to be on display this quarter, driving visibility and incremental sales. So I wanted to quickly highlight a few points about leveraging our brand strength and innovation I've seen this quarter. Our brands like to be at the forefront of current trending topics. While many brands added proudly Canadian badges on their ads, we took it a step further with the timely and actionable reverse tariff promotion, providing Canadians with memorable advertising and true financial savings in the form of a 25% discount. 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. Our breakthrough and 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% of reverse tariff offer. As well, the tag actually Canadian is something you might have seen while watching one of our many sponsored professional sports teams this quarter. Beyond our Score Slice, and Score A Pie promotions at our partner arenas across the country. This quarter, we leveraged our NHL team sponsorships and our long-standing Coca-Cola supplier relationship to create our custom hockey boxes. These boxes provided hockey fans a unique hockey tabletop game complete with HockeyNet with their pizza eating experience. We had regional versions for our Montreal Canadiens, Winnipeg Jets and Toronto Maple Leaf fans as well as generic boxes for all other provinces. And coincidentally, obviously, three of those teams actually -- our three sponsored teams have 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. Now Pizza 73 to leverage our relationship with the Edmonton Oilers. We introduced the Skinner Dinner, a product endorsement with the Oilers goalie Stuart Skinner. This offer has done well and it was very timely as the Oilers battle on and around through the playoffs. While we are always innovating on our messages, I would also be remiss if I didn't speak to our product innovations this quarter. At Pizza Pizza, we introduced a unique product in the QSR space for Canada, the Loaded Tater tots. This program was led with our ownable and craveable Creamy Garlic tots in the forefront. This offer was a great addition to orders and helped lift organic sales during the promotional window. And meanwhile at Pizza 73, we introduced new signature wraps, including Crispy Chicken and Doner to highlight our menu variety and drive lunch and snacking occasions. Following the successful launch of cheese stuff across Pizza Pizza, we also introduced a program with Pizza 73 this quarter, again, proving it in one brand and take it to the other if it works. The new stuff crust option was an immediate hit with our customers, nearly doubling our sales expectation, providing us an instant net new revenue stream. 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 will have on our customers' wallets. But the overall strength of our foundation remain the same: our brand strength and resident marketing messages, the continually enhanced menu, relentless innovations across all aspects of our business and unrivaled quality and convenience for our customers. So together, these pillars have been a winning formula for us in the past, and we feel will continue to drive our future growth and success as well. Before I turn the call over to Christine, I just wanted to briefly discuss our restaurant network growth. We remain focused on growing our business across Canada, and we are, by any measure, the leading homegrown national QSR pizza brand. During the quarter, we opened two traditional and two nontraditional Pizza Pizza locations. Meanwhile, at Pizza 73, we opened one traditional location, and we closed four nontraditional Pizza Pizza sites and one traditional Pizza Pizza which actually converted to a Pizza 73 site. So we continue to see opportunities across Canada. And I would also mention, though, in Ontario, where we have the highest concentration of restaurants at Ozrell, 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. 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 also mentioned, aside from 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 you already have that we're looking to enhance that on our app and web and getting much more convergent now with what you see on third-party platforms as well as features like SMS broadcast messaging and order reminders, particularly for app users and our Club 11-11 loyalty members. So our ongoing investments here on the tech side helped drive customer engagement and loyalty along with increased order frequency. And just to close off, I'd just say we are pleased to see the improvement in sales and especially traffic growth. We always want volume. We always want transactions. So I think that's most pleasing of all -- but we do know that the economic landscape is challenged and customers are much more deliberate in managing their overall spend. Our job, of course, is to ensure that our customers see us offering the best food at the best price. 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 to them whenever and however they want to order from us. 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, a recessionary climate that could be ahead of us even more than it is now. So I think we have to be prepared for that, but feel great about our team. We've got a very unique special team culture from coast to coast. And the level of passion and 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. So thank you for listening. And I'll now ask Christine to provide a brief financial update.

Christine D'Sylva: Thanks, Paul. As a reminder, Pizza Pizza Royalty Corp. is a top line Royalty Corp. that earns a monthly royalty through a license agreement with Pizza Pizza Limited. In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations, Pizza Pizza pays the partnership in monthly royalty calculated as a percentage of Royalty Pool sales. Growth in the court is derived from increasing same-store sales of the restaurants in the royalty pool and by adding new restaurants to the pool. On January 1 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. As announced earlier this year, on January 1, 2025, the Royalty Pool increased by 20 net new restaurants. This is the result of adding 45 new locations less the 25 that permanently closed. So for fiscal 2025, there will be 794 restaurants in the Royalty Pool, comprised of 694 Pizza Pizza and 100 Pizza 73. So with that information, let's briefly cover the financial results for the quarter. As Paul mentioned, same-store sales, a key driver of yield growth for shareholders increased 1.2% for the quarter. Pizza Pizza restaurants reported same-store sales of 0.6% for the quarter and Pizza 73 restaurants increased 4.6%. Both brands saw an increase in traffic as well as average check. The combination of new restaurants back to the Royalty Pool on January 1 and the same-store sales growth resulted in an increase in Royalty Pool system sales and the corresponding royalty income. Royalty Pool System Sales for the quarter increased 1.6% to $151.3 million from $148.9 million in the same quarter last year. 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 in the quarter. The partnership's royalty income earned as a percentage of Royalty Pool sales increased 1.9% to $9.7 million in the quarter. Beyond royalty income, the partnership also earns interest income on its cash and short-term investments. And for the quarter, the partnership earned $68,000. 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. The increase reflects higher legal expenses and higher director fees, which were associated with one additional director joining the Board as part of its 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 $317,000. For the quarter, the interest rate was locked through April of 2025 using the swap agreement that fixed the interest at a core rate of 1.81% plus a credit spread for a combined interest rate of 2.685%. In March 2025, the company renewed the credit facility for a 3-year term with maturity now set for April 2028. The balance of the facility remained unchanged. However, the credit spread table increased slightly with the lowest tier increases from 0.875% to 1%. Additionally, in April 2025, the company entered into forward interest rate swaps. The new three-year interest rate swaps commenced when the existing swaps expired in April 2025. And the new locked-in rate is 2.51%, which is an increase from the maturing swaps that were 1.81%. So now after the partnership has received its royalty and interest income, paid its administrative and interest expense, the resulting net cash is available for distribution to its two partners based on their ownership. After the 2025 vend-in and the prior year's true-up, Pizza Pizza Limited ownership increased to 26.2%. Pizza Pizza Royalty Corp. shares in the remaining 73.8% of the partnership's distributions. It then pays taxes on its share of the partnership earnings and any residual cash is available for dividends to company shareholders. Turning to dividends. The company declared shareholder dividends of $5.7 million in the current quarter or $0.2325 per share, which was consistent with the prior year comparative quarter. As a reminder, system sales for the quarter ended March 31 have generally been the softest and historically, this quarter results in a payout ratio over 100%. The payout ratio for Q1 2025 was 117% and resulted in the company's working capital reserve decreasing by $900,000, and we ended the quarter with $5.2 million available. The $5.2 million working capital reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in our system sales and royalty income. The company historically targets a payout ratio at or near 100% on an annualized basis. That concludes the financial overview. I'll now turn the call back to the operator to poll for questions.

Operator: [Operator Instructions] First question comes from Derek Lessard with TD Cowen. Please go ahead.

Derek Lessard: Yes. Good afternoon, how're you doing?

Paul Goddard: Very well, Derek.

Derek Lessard: Paul, the custom hockey box doesn't look like it brought any luck to the Habs, so I'm going to kind of email that one...

Paul Goddard: Everyone but the Habs.

Derek Lessard: Yes, exactly. Maybe next year. Maybe next year. Yes, maybe. Yes, you guys are clearly working extremely hard, and I think probably over time, like everyone else, just given the environment. So maybe you're not as surprised by the swing to positive same-store sales as everyone else might be. But I was just wondering if you can maybe talk to how you guys think about maybe the sustainability of the traffic in check?

Paul Goddard: Yes. It's a good question, Derek. I mean, I think sort of first of all, the macro environment is concerning. I think that would be pretty clear for everyone -- anyone out there. So who knows what it's going to look like the rest of this year is a general economic climate. That's probably the biggest factor. But I do think even towards the end of last year, although our results were stellar last year, we could really feel that what we're starting to do really around Q4, even what's really starting to work. And a lot of that was really just a lot of the novel marketing items, sort of the new innovations, be it the hockey box or the XXL, 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 adds and things really got a real cultural buzz, I think, aside from specific promos or sort of specific promo product intro piece, the overall brand arching message under the everyone deserves pizza sort of theme I think, just resonated. And I think we did also see with that increase in delivery that I said in my comments, the average check is up on that. And so that helps pull us up as well. And that's -- those are not heavily -- or sorry, not easily won battles. In the organic delivery side. It is tough. I mean, we generally, in the recent year, seen more growth in pickup and we still do see good growth in pickup, but it's been harder to grow that organic delivery channel. And others in the market have also had this tough trouble. It's just a reality of the market and growing third-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 at Habs delivery or at least dial code on game days for instance that saves on delivery charge. And so things like that really do nudge people towards our own organic apps or web and drive organic delivery. So that helps boost check which is nice. But the traffic side, I think it's just really been compelling, I think, compelling specials more than anything and just the overarching marketing message is really resonating.

Derek Lessard: Thanks for the color. Congratulations. It's really shown through in that same-store sales number. The Pizza 73 was particularly strong. And I know you talked about the signature wraps and the stuffed crust. Do you think that was the -- I guess, was that the biggest driver, that new innovation was that the biggest driver of that outperformance there?

Paul Goddard: I think so. I mean Christine might have more thoughts, but I think the reverse tariff, the XXL did very well there. The stuffed crust did very well there. And that's why we extended it. So I mean the Skinner Dinner was also factor and not maybe as significant as some others, but it still was definitely relevant. And then with the Oilers making the playoffs and continuing and that's helping as well. So I think it was good to see that the organic delivery was up as well as sales, like I said, similar to Pizza Pizza. So those are probably the biggest factors.

Christine D'Sylva: And to add on it, Derek, I think you might remember Pizza 73 used to be thought of as 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 price point. The XXL 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.

Derek Lessard: Okay. That's helpful. And maybe just hitting along the same theme on the sort of that consumer backdrop. Have you noticed any changes, I guess, in the consumer behavior from last quarter? Has it deteriorated? I know it's tough to get a beat on sort of that given the economic challenges, but just wondering if you've seen any change in that behavior?

Paul Goddard: Overall, I mean, we've been happy that our traffic has gone up at both brands along with check. But I haven't sensed anything dramatically deteriorating. I'm honestly more, I guess, concerned about the rest of this year based on the geopolitical situation of things. So I wouldn't say anything too dramatic. I just think our messages are going to resonate more. We do see a lot of competitor discounting that we think is not sustainable for some. But overall, I think we feel like it's working overall. And I mean, people are still, in some cases, in some demographics, not ordering as many add-ons dips, drink sides. I think I mentioned on our last call. But then on the other hand, we're getting good success with our creamy garlic. We've been really trying to create that and it really has turned into almost like a cult phenomenon that creamy garlic sauce itself, right? I mean our social media right now, I think there's kind of an influencer doing an ad with this massive creamy garlic sauce as he's eating pizza on a Leaf jersey. Unfortunately not Habs jersey for you. Stuff like that. But it's something that really helps. So I think Creamy garlic and Creamy Garlic Tots, for instance, that helps kind of thread through different products because we are famous for that. And in some cases, that's an order winner of the fact that the people love our creamy garlic sauce, even if they're different about, well, these chicken wings are comparable to another leading chain, let's say, in their mind our pizza is 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 help with our hockey box to promote more drinks, more beverages as well. So I think it's been a bit patchy, I would say. In some cases, we've had a little more success recently -- has our results. But overall, I still think the consumer climate is very challenged. And my sense is it's probably worsening.

Derek Lessard: Right. Okay. And I guess what I did notice is that your expectations and this is on network expansion. So your expectations for, I think, the 3% network expansion is still in place. Have you -- given the environment, I guess, what's the level of franchise interest that you have currently?

Paul Goddard: I think our pipeline has been pretty solid overall. I mean we -- and as I mentioned, we had some success even in Ontario, which is fairly mature for us. But we do see parts of Ontario for instance have been good and also recently, Newfoundland, places like that, which went off to a great start. And there we have had in places like Quebec, it has a little bit -- been a little more challenging as we move eastward to Quebec City, I think we are still looking to fill in a couple of stores looking for the franchisee, even though we have the store built. So that shows a bit of headwind there. But we are pretty confident that's going to get resolved very quickly. 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. We've got some franchisees there that are 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 we've always been pretty happy with our franchisee pipeline in recent years and it still looks good. And I think I might have mentioned on our call last month, we also won the Elite franchise award out of the 100 franchisees in Canada -- leading franchises, and we're pick number one. And that type of thing helps our franchise sales team when we can say, look, an independent group from Europe came and rated us the number one franchise. So all those factors. And just obviously, to kind of success begets success. So we never take it for granted. There's always a few discretional franchisees out there. But I think overall, the mood is good. And then when they're in a better mood, they also talk to their friends, family members, et cetera, and that's part of our organic franchise sales, new prospect network are those people. And if they're happy ambassadors, then we tend to have a pretty good pipeline.

Derek Lessard: Absolutely. So then maybe along the same lines, Mexico, we've noticed that you started to report the royalties -- it's small but from a....

Paul Goddard: Yes. 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 leases take many months where you think we could do it much quicker in Canada and you think why? But there's some benefits as labor so cheap there. Construction costs are cheaper, but 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, back of the envelope, get probably five or six more this year. We've got our four performing well there that exists right now in Guadalajara. And so I'm quite confident we'll be getting five or six more and hopefully to 10 by the end of the year. They've already got sites and leases, I think, pretty close on most of them. So we're excited that it will be faster this year, but it's still quite early.

Derek Lessard: Okay. That's for me. Congratulations on the quarter and good luck.

Paul Goddard: Thanks a lot, Derek. Thanks for your great questions as always. Appreciate it.

Operator: There are no further questions. Please continue.

Christine D'Sylva: 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 on the earnings release. Thank you, and you may disconnect your lines now.

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