Pizza Pizza Royalty Corp. (PZA.TO) Q4 2024 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp.'s Earnings Call for the Fourth Quarter of 2024. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on March 31, 2025. I will now turn the call over to Christine D'Sylva, CFO. Please go ahead. Christine D'Sylva: Thank you, everyone, and welcome to Pizza Pizza Royalty Corp.'s earnings call for the fourth quarter ended December 31, 2024. 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 of non-IFRS measures mentioned on this call. As a reminder, analysts are welcome to have 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.

Thank you, Christine, and good afternoon, everyone. Thanks for joining us. Today, I will discuss our Q4 results and provide a brief outlook on 2025. Christine will then summarize our key financial highlights before the Q&A at the end of our remarks. I'm proud of what our brands accomplished this past year. Despite industry-wide challenges, we achieved remarkable milestones in our network growth with the opening of 48 new restaurants across Canada. In fact, we now have a restaurant in every Canadian province. Moreover, when we include our Mexican restaurants, we have surpassed 800 locations, so we're very proud of that. However, 2024 was not without its challenges. We continued to experience headwinds as we navigated ongoing reduced consumer spending and its impact on foodservice, particularly on our delivery channels. Additionally, in Q4, our marketing plans were impacted by the Canada Post strike as our holiday flyers did not reach our customers as initially planned. As we closed out 2024, our brands reported a combined 3.9% same-store sales decline in the fourth quarter with Pizza Pizza restaurants reporting a 4.3% decline after two prior years of strong growth and Pizza 73 restaurants reporting a sales decline, a small decline of 0.7%. So for the year, Pizza Pizza restaurants reported same-store sales decline of 3.8%, while Pizza 73 reported positive sales growth of 2.3%. Both brands saw a decline in traffic, mainly on the delivery side of the business as a result of heightened competition and pressures on consumer spending. In terms of average check, Pizza Pizza's check was flat, while Pizza 73 had an increase in the average check. While we recognize we still have work to do, we see many opportunities ahead. Our sales recovery strategy for 2025 will leverage our brand strength and strong everyday value leadership position backed by our core product propositions and ongoing menu innovation, convenient restaurants and superb customer experience, including the digital experience. So speaking to a few specific areas, first is our focus on value. As we discussed on our last call, the QSR foodservice category is highly competitive and a heightened level of discounting continued in the quarter. We need to ensure we can attract customers, but we have to find the fine balance between value pricing and also ensuring the profitability of our restaurant owner operators. In the fourth quarter, we continued our focus on promoting value to our customers as we look to gain share of consumers’ QSR spend. Beyond our always on value messages, in the fourth quarter, Pizza Pizza launched a new promotion to ensure we are delivering to our customers, craving for value. Our Slice the Price campaign offer customers a large pizza with four toppings at an industry-leading $13.99 price point. We also continue to aggressively promote our pizza and wings combo, offering incredible value at a $19.99 price point. And at Pizza 73, as we’ve mentioned on previous calls, we’ve introduced new offers and bundles, each at attractive price points from snack boxes at the sub-$10 level to the successful launch of an XXL 18-inch pizza at a $19.99 price point, we’ve been speaking directly to the value that customers are looking for, and these new offerings have been very well received. Meanwhile, at Pizza Pizza, over the last three years, we have seen a shift in customer behavior with customers increasingly moving to pick up orders to save on delivery tip and third-party channel surcharges where that’s relevant. We continued our focus on this channel and refreshed our creative across the Pizza Pizza storefront network, promoting aggressive value options. And just an example of that is our two for $6 slice special and other attractive pickup specials. Ensuring we are convenient and accessible to all potential customers has always been a key priority for our business and has proven to be a key differentiator for us, especially with our expansive restaurant network across Canada and our award-winning digital channels for customers to order on. Our customers continue to recognize our strong value proposition and convenience and our innovative marketing activities and partnerships continue to be recognized as industry best-in-class and are always well received by Canadians driving visibility and incremental sales. So I wanted to quickly highlight a few points about our brand strength and innovation as seen this quarter. In the past, we’ve talked about owning key days and occasions, but we also like to be at the forefront of current trending topics. This fall, we tapped into political zeitgeist to help boost visibility for our chicken category. We launched the Bipartisan Wings program as tensions rose amidst the U.S. election. Complete with Left Wing and Right Wing parity ads, the campaign thrust Pizza Pizza into the headlines, while giving a significant sales lift to our chicken category. Fourth quarter is always an exciting time for our brands as our high-profile sports sponsorships kick off their seasons. This quarter to celebrate our long-standing partnership with the Toronto Raptors during their 30th anniversary season, Pizza Pizza has launched the Raptors Mega Slice, a gigantic pizza slice equal in size to a large pizza. This unique item packaging and product experience drove significant engagement within the Raptors fan base and actually the packaging became a collector’s item for people on social media as well. So it’s amazing to see the secondary effects of that, and we had support from the Raptors mascot as well. And we also continued our pioneering Score A Slice and Score A Pie promotions at our NHL partner arenas across the country. These activations drive customers to our app and allows our marketing team to keep engaging with them and importantly, for return visits. This leads me to the third and I would say, the most critical aspect of our sales driving initiatives, and that is the customer experience. Because customers have a plethora of restaurants to choose from, we have to ensure that from end-to-end, the customers’ experience with us is second to none. To that end, we continue to invest in our digital ordering platform, loyalty program, business intelligence tools as well as our in-store design and technology. And also important, I just mentioned on the human side, we also focus on ensuring that we have the friendliest possible experience for our guests, whether it’s at the front counter, when they walk in, whether it’s at the front door, if it’s a delivery order or over the phone, if they call 967–1111 or 7373 in Alberta or online. We want to make sure we give that personal human touch. And on the tech side, we have an in-house team of app and website developers and QA experts who are constantly enhancing our platform based on customer feedback while also removing any friction points or bugs. We were a pioneer in loyalty, having had our Club 11-11 program running now for over 10 years, and we have approximately 1.5 million enrolled users, which we're very proud of. We are currently updating Club 11-11 with new functionality, including real-time push notifications, reminding members when the rewards are available and again, when they're about to expire. Last year, we saw a record use of the program as well due to the enhancements with really millions of dollars in loyalty dough redemptions. So that's very exciting to see. We continue to improve our tech stack supporting this existing program, while we investigate opportunities to enhance it. We're constantly working on our restaurant refresh and renovation program, adding the most current and inviting look for our customers with new contemporary designs and exterior signage. Customer satisfaction is paramount. It's a mission we focus on each and every day, and we continually work to elevate that customer experience with our talented operators who are trained and retrained and motivated to become A-level, the best of the best, not only at Pizza Pizza, but in the QSR industry. As we look ahead to 2025, we know that there is significant competition for consumer spending, especially with the impact tariffs are poised to have on our customers' wallets. But the overall strength of our foundation remains the same. Our brand strength and resonant marketing messages, a continually enhanced menu and industry-leading packaging, relentless innovations across our technology platform, reliable consistency and quality and unrivaled convenience for our customers. These leading attributes will be key to our growth as we go forward. And before I turn the call over to Christine, I just wanted to briefly discuss our restaurant network growth as well. We remain focused on growing our business across Canada, and we are known and respected as a major homegrown national brand and the leading pizza chain in the country. During the quarter, we opened eight traditional and three non-traditional Pizza Pizza locations. Meanwhile, at Pizza 73, we opened one traditional location and one non-traditional Pizza 73 location. And we closed three non-traditional Pizza Pizza sites and three non-traditional Pizza 73 sites. And as I mentioned earlier, for the full year, we opened a record 48 new restaurants across Canada, which we're very proud of. And we also did close 22 smaller non-traditional locations and three traditional locations. For the traditional closures, adjacent restaurants benefited by absorbing the closed stores territory. While we continue to focus on our national expansion plans, we are pleased to see that half of our traditional store openings have been in our biggest, longest standing, most penetrated lucrative market, the province of Ontario. And beyond Canada, we now have four restaurants operating in Guadalajara, Mexico, and the royalties to the Royalty Corp. commenced in October 2024. Although it is still early days for Mexico, we're pleased with our restaurant's performance to-date, and we are continuing to work closely with our Mexican partners on the next set of restaurant openings and expect more openings this year. So stay tuned. And as we look to 2025, Pizza Pizza management expects to continue its restaurant network expansion, with roughly 2% to 3% traditional restaurant growth. Additionally, we look to complete our renovation program as we currently have over 93% of our restaurants featuring our new modern image, and we'll also continue with significant upgrades in regards to restaurant equipment such as more efficient ovens, digital menu boards and other in-store technology. We continue to have a large pipeline of franchise leads that are eager to join the team. We also have many of our current franchisees looking to expand, too. And I would just mention in passing as well that we did receive a very prestigious award this quarter from the Elite Franchise Group out of the UK that evaluated 100 applicants across Canada, many, many leading brands that you would know very, very well. So we have some very stiff competition, but Pizza Pizza came out on top of the number one recognized Elite Franchise. So we're very proud of that as well. And certainly, that reflects the quality of our operators, our business and certainly helps sell more franchises as well. So we’re very proud of that. Now some closing remarks. As mentioned, we will continue to drive business by leaning into our value offerings, innovation, marketing and brand initiatives while providing high-quality, delicious hot and fresh food to our customers wherever and whenever they want us. We know the economic landscape is challenged and customers are much more deliberate in managing their overall spend, but we will ensure that our customers continue to see us offering the best food at the best price. And finally, I’d like to close by thanking our entire team, our corporate employees, and operators alike for everything you do for our customers, our communities and for each other, especially in this difficult macro operating environment. It is truly an honor to work alongside all of you as we built an innovative, ambitious and collaborative culture right across the country at both brands. And I think the best is yet to come. Thank you for listening, and I’ll now ask Christine to provide a brief financial update. Christine D'Sylva: Thanks, Paul. Before going to the results of the quarter, I wanted to remind everyone of our structure. Pizza Pizza Royalty Corp. is a top line restaurant Royalty Corp. that runs 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 Limited pays the Partnership a monthly royalty calculated as a percentage of Royalty Pool sales. Growth in the Corp. is derived from increasing the same-store sales of the restaurants in the pool and by adding new restaurants to the pool this year. For fiscal 2024, the Royalty Pool was adjusted on January 1, 2024, to 774 restaurants comprised of 672 Pizza Pizza and 102 Pizza 73. With that, I’ll briefly cover some financial results for the quarter. As Paul mentioned, same-store sales, a key driver of yield growth for shareholders, decreased 3.9% for the quarter. Pizza Pizza restaurants reported same-store sales declines of 4.3%, and Pizza 73 restaurants decreased 0.7%. Both brands experienced a decline in traffic with Pizza Pizza’s average ticket being relatively flat and Pizza 73 is increasing. The combination of new restaurants added to the Royalty Pool on January 1 and the same-store sales decline resulted in a decrease in Pizza Pizza’s Royalty Pool System sales and the corresponding royalty income. Royalty Pool System sales for the quarter decreased 2.1% to $160.5 million from $163.9 million in the same quarter last year. By brand, sales from the 672 Pizza Pizza restaurants in the pool decreased 2.4% to $137.7 million for the quarter and sales from 102 Pizza 73 restaurants decreased 0.2% to $22.8 million for the quarter. For the year, Royalty Pool System sales decreased 1.2% to $620.6 million from $628.4 million. The Partnership’s royalty income, earned as a percentage of Royalty Pool sales, decreased 1.9% to $10.3 million for the quarter and decreased 1% to $39.8 million for the year. Beyond royalty income, the Partnership also earns interest income on its cash and short-term investments. For the quarter, the Partnership earned $70,000, and for the year, it earned $386,000. Now turning to Partnership expenses. Administrative expenses, including listing costs as well as director, legal and auditor fees for the quarter were $221,000 and for the year were $717,000. In addition to administrative expenses, the partnership is making interest-only payments on its $47 million credit facility. Interest paid in the quarter was $322,000 and $1.3 million for the year. The interest rate is locked through April 2025 using swap agreements that fixed the interest at a rate of 1.81% plus the credit spread for a combined rate of 2.685%. And subsequent to year-end, the company renewed the credit facility for three years, with maturity now set for April 2028. The balance of the facility remain unchanged. However, the credit spread table increased slightly. The company is working with its lenders to establish new three-year interest rate swaps, which would commence when the existing ones expire in April 2025. So now after the Partnership has received royalty and interest income and paid administrative and interest expenses, the resulting net cash is available for distribution to its two partners based on their ownership. After the 2024 vend-in and the true-up of the prior year, Pizza Pizza Limited's ownership increased to 25.2% of the fully diluted shares. Pizza Pizza Royalty Corp. shares in the remaining 74.8% of the Partnership distributions. The Royalty Corp. pays its taxes on its share of the Partnership earnings and any residual cash is available for dividends to the company shareholders. Turning to shareholder dividends. The company declared shareholder dividends of $5.7 million for the quarter or $0.2325 per share. This is compared to $0.23 per share in 2023. And the payout ratio for the quarter was 104%. For the year, the company declared shareholder dividends of $22.9 million or $0.93 per share compared to $21.8 million or $0.8875 per share in 2023. The payout ratio was 110% for the year and resulted in the company’s working capital reserve decreasing to $6.1 million as of the end of 2024. This excludes the reclassification of the credit facility. The $6.1 million working capital reserve is available to stabilize dividends and fund other expenditures in the event of short to medium-term variability in sales and intern royalty income. The company has historically targeted a payout ratio at or near 100% on an annualized basis. That concludes the financial overview. I’d like to turn the call back to our operator to poll for questions.

[Operator Instructions] Your first question comes from Derek Lessard of TD Cowen. Your line is already open.

Good afternoon, everybody. Good to hear your voices and congrats on that 800th store.

Thanks, Derek, likewise.

Maybe just want to start on the consumer. Just curious, obviously, you guys are on the front lines. So I was wondering in terms of the behavior. Are you seeing the effects more on the bundling side? Are consumers maybe foregoing the extra dipping sauce and sides? Are they picking up more to avoid the delivery costs, how is the – I guess, the weakness in the consumer really manifesting itself?

Yes. That’s a good question, Derek. And really to answer, it is a bit of all of the above. I mean we definitely see it trend towards pickups for sure, away from delivery, which I think shows the affordability of delivery being challenged across the whole industry. So that is the case. And people are – if you noticed, our bundles are still very popular. I mean, we may see some shift in which bundles. But we try and create those to really speak to value, as I tried to indicate in my prepared remarks. Whether it’s the $19.99 special or the dips $0.99, but there’s definitely some shift there. But also people are getting less sides and less dips, less pop than they otherwise had, especially if they’re a la carte. So we are seeing a bit of all of the above of that as an indicator of just the tough environment.

Okay. That’s fair. I understand that. And maybe about how about the sales maybe through the third-party delivery channels, which typically are a little bit more expensive. Have any of those sales that were going through that channel coming back to you guys?

Yes, it's always hard. I mean Christine might have some more specifics on that. But I mean, it's an important channel for us, too. We always prefer organic, of course, and we think our customers should prefer it. But we do see some weakness their overall. The way – it's hard to measure the results of those companies, just given there vast scale. But you can just anecdotally see in Canada, there is some challenge there. We see that they're not – the rate of growth is not as fast. And I think it's really been a problem for them. You've seen actually lay off of some of those firms, even as a reflection of just how challenging it is for them. So people are sensitive to the higher surcharges that tend to come with those networks. There's different ways that relay on charges to the customer. But yes, we are seeing that in general overall. And maybe Christine has something to add. Christine D'Sylva: And we're using a lot of our actual promotions right now to direct customers back to our app. So in December, we offered a bounce back. So we had individuals purchasing through the app, receive a free medium pizza when they came back in January. So while we're seeing some softness in the third-party, we're trying to heavily entice them to come back to our organic app. It is cheaper. We have a lot more specials on that platform. And that's where we always say, that we have avenues for customers to get our product, no matter which way they want to go. There are still though [ph] only use third party, right? There are still those customers that will only use third-party apps. So we're still present on them. We're still active, but we still try to continue to get them back to our organic channel.

Yes. And we're going to still continue to try new approaches to actually get more of those people switching those that at least are willing to. We do for our promo is display QR code, for instance, that drives right into our app, for instance, and we're also doing things like SMS push notifications, more loyalty reward reminders, more constant communication with the customers to sort of try and build and deepen the relationship with our customers through our organic channels as best we can. So that's something we do think is an untapped opportunity that we can get some more success with if we play our cards right.

Yes. I guess – I mean, you guys had – you already answered what my follow-up was in terms of like if you're able to leverage your app for that. So that's helpful. And so maybe I'll ask it a different way. Like are you seeing folks maybe wait for those promos to spend more? Or is that – are they waiting for those targeted apps? and other promotional spend?

I don't think we can see that for sure. I mean I get what you're getting at, Derek, I think it's just – it's hard for us to measure that. I think people want to order, they want to order, and I think they’re a bit habitual in terms of what platform or their favorite method of ordering. Let’s say, it’s by app. Like Christine was saying if it’s through one of the popular [ph] third-party apps that may be their default. But yes, I think we can have some success just as we continue to invest in technology, which we feel is a real advantage we have and just leveraging the data we have to our BI platform, which we continue to invest in as well. We’re able to just get more granular data on different types of transactions when people are ordering, what results in better frequency, et cetera? And just trying to build – I guess what I’m trying to see is more frequent contact with our customers where we do have the customer data and try and really amplify that. So that’s something we are going to put more and more attention to. And we’ve been pretty happy even with some initial, I would say, fairly limited sort of SMS push – SMS messages and push notifications from the app, but we think there’s actually quite a bit more we can do with that.

Okay. And that definitely makes sense. Paul, I was actually – my ears perked up during your prepared remarks when you talked about the Canada Post strike and the impact on the flyers. I knew this was a big – the flyers were big for the grocers, for example, just so – I mean I was just curious on how important are flyers to you guys to drive traffic?

Yes. I mean we – again, generally, I mean, we’ve been using them less than we did once upon a time, I would say, but we still see them actually playing a key role, and we do see a real direct sort of cause and effect relationship there. And it does depend, I mean, sometimes it depends on a flyer that just happens to be better bundling of specials and some great innovative products and other times, it’s not. It’s not always a slam dunk, but generally speaking, we think it is a good use of dollars, even though it’s a mass solution, and we can price differentiate across different regions and things to some degree. But we do see that. So when we were not able to get that out, I mean, that is a real painful hit for us. And we really were counting on that flyer going out and then the strike happened. And we were, I think, able to get some out in a more limited way, but it was very, very small compared to our multi, multimillion person drop that we normally do when we do create distributed flyers. So it does impact us. And I would say, although we were disappointed with our Q4 overall, obviously, we want to be positive every quarter. When you look at Q3, we did get some improvement. I think we do feel that directionally, we were going and are going the right way, and we do have some momentum. So despite that, that was definitely a hiccup that we couldn’t control. But we do otherwise feel that what we put in place, especially in Q4, it has been positive, it’s trending the right way, and we do feel we have real momentum.

Yes, it feels – you said you’re disappointed, but it feels like you’re controlling what you can control in this environment, right?

Yes. The – I think [indiscernible] we are.

Yes. Maybe just touching on inflation. Curious on how the franchisees are managing through that. And also, in terms of maybe like your food sourcing, is that mostly Canadian sourced?

Yes. Happily, it is. I guess to speak to the food sourcing, then I can touch on inflation or Christine can. But food sourcing, yes, I mean, almost all the ingredients we have are Canadian, there are a couple of exceptions, and we have contingency plans there around those, but we definitely are happy and we do try wherever we can to use Canadian ingredients where we can. With the exceptions like I've talked about many times, things like Kalamata olives from Greece, which the quality is so strong, we feel we need to keep those, but those are not coming in the U.S. They're not grown in the U.S. So that is something that's helpful, at least. But we do face cost increases on things like our smallwares and oven costs and things like that, which are coming from the United States as well. So on the food side, it's a pretty good story. But on the non-food, it is something that does create some risk for us. And on the inflation side, I mean, certainly, we have seen some increases, but generally, we've been very good at getting our suppliers negotiating hard with our volumes, our scale to really hold the line very effectively. So I think our franchisees have been generally pretty happy with how we've really held the line and how the suppliers heats the fire there. So not a major concern or maybe one or two items that are, but some of the biggest input costs, I think we've held the line pretty well.

Okay. Maybe just one final one for me. I'm glad to see still like you're holding the 2% to 3% restaurant growth for this year. And I know everybody operates their business on a longer-term basis, and you can't really ebb and flow with all the tariff talk. But I was curious if you'd expect or if you can maybe pull forward any of the – any of those construction earlier to maybe try and avoid any tariff risk? Or how do you plan for that?

Yes, it's a good question. I think generally, we try and do that wherever we can. I mean, even in terms of input costs, we've kind of – even for instance, some of the products we do have from in the United States, we have brought them in early and kind of stockpiled a little bit there. So we can do that a little bit, but you can't do too much of that because oftentimes the site may not be ready, et cetera. It's hard to kind of align everything even if we say, "hey, we want to front-end load development this year." And by the way, we've tried to actually do that anyway. But there's only so much we can do there to sort of get ahead of, say, a tariff impact. I think our development schedule does look good for this quarter, next quarter. We do try and front-end load it anyway a little bit, but there's not much to be honest, that we can do to really push it months and months ahead of what we would have otherwise. There's just a limit to availability of sites, labor, materials, et cetera. So it's probably pretty limited what we can do on that front.

Okay, that's fair. And then actually I do have one more and I just wanted to touch maybe on the competitive environment. Have you seen – I know you touched on it in your remarks, Paul, opening remarks, but have you seen any, I'd say like more bouts of irrational activity versus where you guys were a year ago when inflation and tariff talk wasn't as hot?

I think it's been relatively as the same. I mean, different players have different tactics, I suppose. I mean, I just sense generally across QSR generally, you can almost see or feel a little more desperation on the part of some groups. Maybe players we haven't seen go to extreme measures. But I wouldn't say there's too much new aspect in the pizza sub segment that, it's a lot of the same things we've seen from others. It doesn't mean it doesn't make it more competitive, it does. But we – I guess we try to speak to value and bundle things in such a way that people feel good about it. They're still going to choose us. They might have a very similar competitive offer. But we think that hopefully we, what we're doing, if we're doing our jobs right, is we'll have the edge and we want to make sure that we make sure our franchisees can do well. I mean, we want to make sure they can also make a profit. So putting customers first to get the value offering. And we do know we need to do more to get the traffic back. But we are encouraged by the trend and the momentum we have. So I think we are more often than not getting it right. And despite some of those folks resorting to – I mean, I guess you could say in some cases irrational behavior, we think in some cases it is. But all we know is we're going to do what we think works well and what customers see as the best value option.

Okay. Well, with that, thanks, Paul, Christine that’s – here's hoping to a long front.

Okay, thanks very much, Derek. Appreciate it.

[Operator Instructions] There are no further questions at this time. I would hand over the call to Christine D’Sylva for closing remarks. Please go ahead. Christine D'Sylva: Thank you, everyone, for joining us on the call today. If you have any questions following the call, please reach out to us. Our information is available on our website and on the press release. You may now disconnect your lines. Thank you.

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