PZRIF Q2 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 Second Quarter of 2025. [Operator Instructions] As a reminder, this conference is being recorded on August 7, 2025. [Operator Instructions] I would now like to turn the conference over to Christine D'Sylva, CFO. Please go ahead.

Christine D'Sylva: Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp.'s earnings call for the second quarter ended June 30, 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 release and the risk section included in our annual information form. Please refer to our earnings 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 the call. With that, I'd like to turn the call over to Paul Goddard to provide a business update.

Paul Goddard: Good afternoon, everyone, and thanks for joining us on today's call, especially on a mid-summer nights evening. I'm pleased to report that our brands delivered another strong quarter of growth, 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. 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%. 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 growth in our organic delivery channel as well, which helped increase the average check. This quarter, we continued our focus on 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 continue to build off our Score A Slice and hockey game box campaigns as we created custom social content to tap into fan culture during NHL playoffs, leveraging our partnerships with the Leafs, Habs, Jets, Flames and Oilers. Between digital discount codes and special offers such as the large White Out pizza for $12.99 in Winnipeg, Pizza Pizza 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. 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 A Slice program to drive app downloads and usage in that market. We also continue 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 2 new Stuffed Crust cheese flavors, Dill Pickle and Spicy Habanero and expanded availability to include XL and XXL sizes for those as well. This evolution reinforces our commitment to innovation, elevating flavor options and positioning ourselves as leaders in crust varieties. Meanwhile, in Pizza 73, to launch our new signature wraps, we introduced a secret menu item revealed by 10 influencers, generating hundreds of thousands of organic impressions and engagements while driving demand for the new category. These crispy chicken wraps offered in 4 flavors, add variety to our menu and are a great addition to our expanding lunch daypart. And beyond our innovative marketing messages and promotions, we have our core of always-on value offerings. Our job is to ensure that our customers 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, and we did a rehit 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. 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 and a collector vinyl album Pizza Pizza Dope Jams featuring 6 psychedelic tracks inspired by the Pizza Pizza Jingle. I will mention, these were specifically targeted at that particular demographic, not our family demographic. So we are careful where we promote that, but we're very happy with the relevant social media demographic there and the response. Meanwhile, at Pizza 73, where we are celebrating that brand's 40th anniversary, we offered a buy one, get one campaign for customers and even celebrated Oil Country with free Heart Pizzas for fans during the Edmonton Oilers playoff run. Select Edmonton and Spruce 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 by our core product propositions, ongoing menu innovation, conveniently located restaurants and an award-winning tech platform. 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. Our customers' needs evolve and so do our capabilities as well. 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. We will continue to leverage our competitive tech advantage with more customer-focused capabilities as time goes on. Stay tuned for future updates in future quarters. Before I turn the call over to Christine, I just also wanted to briefly discuss our restaurant network growth. 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. We opened 3 traditional and 5 nontraditional Pizza Pizza locations during the quarter. And I'll just add that we are also adding some more nontraditionals as well this year, and we'll likely have a few closures there, too, but we'll definitely be a net positive on the nontraditionals 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. So we feel good about that. And we expect the pace to pick up in the remaining quarters. Meanwhile, at Pizza 73, we opened 1 traditional location, and we closed 1 traditional and 4 nontraditional Pizza Pizza sites and 1 traditional Pizza 73 location closed. We continue to see opportunities right across Canada, but also in Ontario, where we have the highest concentration of restaurants. In Mexico, our existing 4 stores have had good sales growth and continue to generate buzz, traffic and continued momentum in Guadalajara. Our Mexican partners have cited several more locations and have commenced the construction process on 2 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 in the coming years. And we do think it might take a little longer than originally expected to reach our target of approximately 10 new restaurants per year, but we do feel that we've got great initial traction and the sales of existing stores are excellent. 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 2% to 3% traditional restaurant growth. 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 despite the strong TSX, for instance, since late spring. But perhaps we'll see increased softening consumer spending continue. It's a little unsure when you look at the macroeconomic environment. But generally, the trend is it's affecting much of the QSR industry, not just in Canada, but also in the United States. So since we can't control the macroeconomic environment, we're staying proactive. We're sharpening our value messaging, optimizing promotions and continuing to 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. 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 for our customers, 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 when it comes to realizing on the potential of our iconic brands. So thank you for listening in on this warm summer night, and I'll now hand things back over to our CFO, Christine, to wrap up the call.

Christine D'Sylva: Thanks, Paul. As a reminder, Pizza Pizza Royalty Corp. is a top line restaurant Royalty Corp. that owns a monthly royalty through the license agreement with Pizza Pizza Limited. In exchange for the use of the brand, Pizza Pizza Limited pays the partnership a monthly royalty calculated as a 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. And as announced in Q1, we added 20 net new restaurants to the Royalty Pool on January 1, 2025. So for fiscal 2025, there will be 794 restaurants in the pool comprised of 694 Pizza Pizza and 100 Pizza 73. Turning to the financial results. The combination of the 20 net new restaurants added to the pool on January 1 and the same-store sales growth resulted in an increase to Royalty Pool system sales and the corresponding Royalty income. 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 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. Beyond royalty income, the partnership also earned 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 compared to $194,000 in the prior quarter. The increase reflects nonrecurring onetime professional fees and higher director fees, which were associated with the onboarding of 2 new directors 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. And as a reminder, in March 2025, the company renewed the facility for 3 years with maturities set now for April 2028. The balance of the facility remains unchanged. 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 3-year forward swap. The new 3-year swap commenced when the existing ones expired at the end of April and the new lock-in rate is 2.51%, which is an increase from the maturing rate of 1.81% Overall, the all-in rate for the credit facility for the next 3 years will be 3.51% compared to the maturing rate of 2.685%. So after the partnership receives its royalty and interest income, pays its administrative and interest expense, the net resulting cash is available for distribution to its 2 partners based on their ownership percentages. After the vein and the true-up on January 1, 2025, Pizza Pizza Limited's ownership increased to 26.2%. Pizza Pizza Royalty Corp. shares in the remaining 73.8% of the partnership distribution. It pays taxes on its share of partnership earnings and the residual cash is available for dividends to the company's shareholders. Now turning to shareholder dividends and working capital. The company declared shareholder dividends of $5.7 million for the current quarter or $0.2325 per share, which was consistent with the prior year's quarter. The payout ratio was 108% and results in working capital reserves being used to the tune of $400,000 in the quarter, and we ended at June 30 with $4.8 million in 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. 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. That concludes our financial overview. I'd like to turn the call back to the operator to poll for questions.

Operator: Your first question comes from Cheryl Zhang from TD.

Yaozhi Zhang: So our first question is on same-store sales. Congrats on the very strong trends, especially under this macro environment. Where we're seeing many of the peers are still reporting negative figures. So I'm just curious like what do you think help you to outperform your peers? What help you stand out?

Paul Goddard: Well, I think it's multiple factors. I tried to touch on that a little bit in my initial comments, Cheryl, but I think value is probably the primary one, right? I mean we really try and emphasize value, and I think our business model is really set up for that. So I think that's one. I think the tech advantage is another one. And I think the convenience is the fact that our scale that we have just on Pizza Pizza -- sorry, combined network of over 800 locations, we're just very convenient. So whether you want to delivery or pickup, we have that big footprint that many others don't. So I think it's that. 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 like that, that are just not -- they're definitely distinguished from a lot of other competitors. And so those things all bundled together are some examples where I think people say, look, I'm getting really good value here. It's convenient. It's super easy to get it on the app or whatever, and I like it. And as long as we do a great job on the quality, then people will keep coming back.

Yaozhi Zhang: That's great color. And I know that it's still early, but just curious, considering 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?

Paul Goddard: Well, I mean, it is early, right, summer. It's been different weather patterns, I'd say, this summer. I mean -- I would say it's a little early. It's kind of mixed in terms of our nontraditional size and things like that. But I think generally, what we've been doing has really been resonating still. 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 like we do in that size, just as one example. And I think some of our pizza and wing combos have really resonated as well. And I think 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. And perhaps some of 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. I mean it is -- we don't want to get ahead of ourselves for Q3, but we generally feel we're doing the right things. And we can adapt if we do fall, let's say, we didn't see traffic growing to the extent we like or we didn't see check as strong, then we can really quickly pivot. So we obviously want to stay ahead, and we want to be positive every quarter. But that macro backdrop is concerning. There are some consumer uncertainties and people are being very deliberate in how they spend. But we just sort of think -- we sort of plan for the customer being very, very value oriented. And so far, that's been a good bet.

Yaozhi Zhang: And I think in your prepared remarks, you mentioned that the organic delivery channel is showing growth again. Just curious if you could provide any color on any of the initiatives that you put in place to drive that growth? And are you seeing any changes in maybe a churn in consumer demand for delivery?

Paul Goddard: Yes. 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, 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. And so one example would be our game day promotions, for instance. So in the heat of playoffs, we had so much attention, so much media spend there. Both brands, as I tried to indicate in my prepared remarks, but basically, we had game-day specials. We had things like no delivery if you come through our apps. And so that really generated a lot of incremental orders, especially when people are watching the Oilers game or Leafs game at the latter stage of playoffs. And so once people try out that channel, they realize this is quite good, and it's actually a lot cheaper. In the case of Pizza Pizza, we even have the time guarantee. So there really are some advantages. It's faster. You got a uniform driver. It's often a trusted Pizza Pizza driver they might even recognize. So things like that, it's kind of a nice snowball effect. And so it's more -- sometimes the trick is just getting them to try our app. 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. 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. 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 -- even if they do order on a third-party delivery platform, if you look at our packaging, we've got QR codes all over our boxes and packaging to incent them to then next time come organic to the table 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, 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. But we are showing some indications of winning some people back into our organic channels. So we're going to keep really pushing for that more and more.

Yaozhi Zhang: 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 the behavior in terms of whether it's demographic groups or income cohorts?

Paul Goddard: I would say it's probably -- it does vary. I think one -- some of the trends we see aside from the organic growth is, and we've commented on prior calls to this, and this trend has continued is pickup. So just in terms of consumer behavior, and this is across different consumer demographics, people are picking up a lot more. That includes Gen Z, it includes people in the sort of boomer segment. People are just seeing, especially on third-party platforms, very high network charges and things like that, 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. And we're not the only one seeing that. But I do think that our business model has always really been designed to take the customer no matter whether it's delivery or pickup. And some others out there in the market, they might have been more configured for delivery, and they may not have as, let's say, as prime locations as us. For instance, in the urban cities, downtown Toronto, downtown Edmonton, downtown Calgary, Vancouver, et cetera. So I think that is something that we feel happy to do. We get those pickup orders, we'll take them however people want us, we'll be there. But obviously, delivery is really exciting because we can do very well with delivery and organic delivery, especially.

Yaozhi Zhang: Got it. And in terms of the competitive environment, are there any changes in the trend or the intensity in Q3? And how do you feel about the promotional intensity?

Paul Goddard: I would say we do see certain competitors that almost seem to have almost habit of extreme discounting in a certain window often towards the end of calendar periods and things like that. 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. So we see a little bit of that. That's not entirely new. But I would say that the predominance of things like BOGO offers on third-party platforms continues. And we also participate in that from time to time, but we noticed that some people will really almost overly chase sales but paying pretty expensive fees to third-party aggregators to get primary ad placement, but that's also quite an expensive endeavor to really keep that on always on, on those platforms are very expensive. So we see a little more of that going on, I would say, than we have in the past. It's not new, but we noticed a little more of that, which just speaks to, I think, how everyone in the market is generally struggling to get same-store sales.

Yaozhi Zhang: Got it. And maybe just one last one for me. Is there any changes to your expectations? I think probably you said that it's around 3% network expansion in 2025.

Paul Goddard: Yes, we did sort of temper that a little bit. I think just we're saying -- right now, we look really good for the next quarter or so on development. We've just had some development today. And there's a lot in the pipeline for franchisees and sites across the country. But we just -- one of the things where we thought we will temper that potentially a little bit is because that is an area where the tariffs and the uncertainty around that are a headwind for us, construction costs for things like ovens if they're coming from the U.S. 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, the sort of 35% type tariff makes us pause a little for sure. But we can sort of turn that tap on pretty quickly as well and accelerate between now and the end of the year. 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. So 2% would be nice, but we just thought 2% might be more realistic, and I think we're going to try and get that and hopefully beat it. So we still do expect some good net store growth on traditional and nontraditional stores this year, regardless of that tariff uncertainty causing us a little more hesitation.

Yaozhi Zhang: Congrats again on the strong quarter.

Paul Goddard: Thanks very much Cheryl, appreciate your questions.

Operator: There are no further questions at this time. I'll now turn the call over to Christine D'Sylva. Please continue.

Christine D'Sylva: 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. Our contact information is available online and on the press release. Have a good evening.

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