Earnings Call: Q3 2022

Nov 7, 2022

Earnings release

Good afternoon, ladies and gentlemen, and welcome to the Pizza Pizza Royalty Corp. 3rd Quarter Earnings Call Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Monday, November 7, 2022. I would now like to turn the conference over to Alex Zarater, Director of Finance. Please go ahead. Thank you. Good afternoon, everyone, and welcome to the Pizza Pizza Royalty Corp. Earnings call for the Q3 ended September 30, 2022. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard and Chief Financial Officer, Christine Da Silva. 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 MD and A in the Investor Relations section of our website for a reconciliation and other disclosures related to our non IFRS financial measures mentioned on this call. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers and media can contact us after the call. Before turning the call over to Paul for the business update, I wanted to spend a few moments reviewing the structure of the corp for our new investors. Pizza Pizza Royalty Corp. Indirectly owns the Pizza Pizza and Pizza 73 brands and trademarks through its subsidiary Pizza Pizza Royalty Limited Partnership. This partnership has 2 partners, Pizza Pizza Royalty Corp, the public company, which owns 76.5% and the other partner, Pizza Pizza Limited, the private operating company, which owns the remaining 23.5%. The Royalty Corp. Is a top line restaurant Royalty Corp. That earns a monthly royalty through a lease 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 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 Royalty Pool and by adding new restaurants to the pool each year. The royalty pool is adjusted at the beginning of each year by adding new restaurants opened in the previous year less any restaurants that have been permanently closed. For the fiscal year 2022, the royalty pool was adjusted on January 1, 2022 to include 6 24 Pizza Pizza Restaurants and 103 Pizza 73 Restaurants. With that review, I'll turn the call over to Paul Goddard to provide a business update. Thanks, Alex, and welcome everyone to Pizza Pizza's 3rd quarter investor conference call. Today, I will discuss our Q3 results and then Christine, our CFO, We'll summarize our key financial highlights before the Q and A at the end. Before I get into our results, I'd be remiss if I didn't start with a big thank you to all of our franchisees, Partners and our corporate teams who have been working tirelessly to support and grow our business are taking care of satisfying our customers each and every time. We're very excited to report another robust quarter with strong sales. Our results were driven by 14% same store sales growth, a key driver of shareholder value. The positive results for the quarter were due to the increase in guest traffic as well as an increase in average check. As a result, Our Board was pleased to announce the 3rd dividend increase in 2022, a 3.7% increase in the shareholder dividend effective November 2022. Our positive momentum has continued in the 3rd quarter and was driven by a few key factors. Building on our previous quarters We have seen further growth in our walk in and nontraditional channels as well our pickup channel continues to excel. And as mentioned on our last call, our nontraditional sales, which typically account for about 10% of our total sales pre COVID, It has been great to see universities and colleges reopen as well as numerous other key venues such as NHL arenas across the country and also the Raptors of course, where we have high profile sponsorships and marketing activations and sell our Atosius product. We continue to focus on our core competitive advantages of convenience, innovation, high quality menu offerings, top of mind brand visibility and our ongoing restaurant network expansion. Let's talk restaurant operations. Our delivery business is our highest producing sales channel and we continue to improve the delivery During 2022, we have rolled out our new order tracking system to over 50% of our restaurants providing a new level of convenience and transparency to customers Ordering via our app or website, customers are now able to see their pizza order making its way all the way to their delivery address on a live map right from within our app. And based on the success of our rollout to date, we anticipate full deployment of this helpful new feature to the remaining 50% of our restaurant network in the coming months. In addition, our 2 customer contact centers provide our customers with another level of convenience in placing their orders. We've also partnered with a Canadian e bike manufacturer for a pilot in both Toronto and Vancouver. These e bikes are helping with speed of service in urban areas and they also support our numerous sustainability efforts. While our in store operations ensure our customers are receiving quality product, our marketing and product development teams are busy showcasing our brands and building customer loyalty. Our strategic areas of focus for marketing continue to be building the brand, innovating our menu, driving organic orders and driving sales and profits for our franchisees across Canada. On the brand front, we made significant progress in Q3 with the launch of our new Q3 campaign positioning. Sorry, this is our new campaign positioning, not just Q3. This new platform represents a strategic shift from more tactical deal based messaging of the past to find common ground between the brand and our everyday lives. The marketing team worked with a leading marketing agency partner to uncover the insight that our brand and our food are uniquely credible and bringing Canadians from all corners of the country together and enjoying pizza being common ground for all of us. That insight led us to the idea that everyone deserves pizza and our new strategic positioning is centered around inclusivity and togetherness. Early creative expressions of the campaign idea were a series of ad placements in key markets across Canada, leveraging local insights related to different groups of people with Pizza being a common ground we can all agree on. These ads were featured on high impact media such as streetcars, train wraps in major markets, Yonge Dundas Square in Toronto, paid social media, web display ads, television, billboards, buses and other highly visible public places right across the country. To further bring this campaign idea to life for Canadians, this July, Pizza Pizza was first to market with a promotion that spoke to the pressures Canadians are beginning to feel related to rising rates and price inflation. With the idea in mind that in this uncertain economic environment, Everybody deserves pizza. We developed the concept of a fixed rate pizza. Canadians were offered the opportunity to lock in a pizza deal at a fixed price, so they don't have to worry about getting priced out pizza. The offer is based on an extra large 4 topping pizza deal locked in at $16.99 for 1 year. A fun website was developed with a mock up sign up form to get pre approved. And guess what, everyone qualifies. That program was very well received. It was also supported with an integrated media plan, billboards, video, paid social, web, etcetera, and a significant PR push as well. The idea immediately resonated with Canadians and beyond. We even got some kudos mentioned in The Wall Street Journal. And Pizza Pizza received Massive exposure totaling over $85,000,000 impressions through 118 earned media stories published, including Financial Post, Toronto Star, yen and Bloomberg and internationally in the Wall Street Journal as I said and others as well. So in addition to a media win, the deal itself proved popular with customers and serves to becoming a top seller across all our various specials. Moving on to menu innovation. This summer, we built upon the success of last year's chicken sandwich product, launched via new flavor and format innovations. We offered customers a new option to double up the chicken fillet and created a new line of big sandwiches led by the big Buffalo sandwich. Buffalo and spicy flavors in general remain a leading flavor trend. The innovations in Supporting marketing campaign reinvigorated and grew the category by 50%, that's 5.0 throughout the campaign period. Moving on to local and regional focus, we continue to see the Pizza Pizza brand come alive in communities across Canada via our best in class sponsorship and special events programs. This summer saw the welcome return of critical sponsored events such as the Honda Indy, Boots and Hearts, the CNE, Fan Expo and more. And this is in addition to record sales at critical entertainment venues such as Budweiser Stage, Canada's Wonderland and many more. These events generate significant brand equity for Pizza Pizza in communities as well as critical concession sales at the events themselves. So it's really a real double win for us. And we also continue to optimize our high profile, longstanding sports sponsorship programs. And this summer expanded our famous SCOR A Slice program to the Toronto FC, Toronto Argos and the Hamilton Tiger Cats. These events now receive a free slice when the team hits select winning milestones such as the first goal or touchdown. This program continues to add energy to the games themselves, really gets fans going and associates Pizza Pizza with the team in winning moments and drives app downloads, customer acquisition and traffic to our restaurants. As we celebrate our success in driving brand equity and sales via food innovations, We continue to push to drive more orders through our owned digital channels, customer contact centers as well and into our restaurants. While sales via 3rd party platforms remain a helpful additional sales channel for us, our focus continues to be leveraging our best in class technology and our unique relevant offers and messaging to continually driving customers to use use of our own organic sales channels. In support of our Pizza 73 brand operating largely in Alberta, our marketing team is leveraging a series of proprietary consumer research studies to refocus messaging and spend in key areas of opportunity for the brand. We're also investing in incremental resources to support the brand now with a strong Alberta based marketing team. Critical to our success is the enhanced food innovation strategy, growing existing categories and pushing into new ones. And similar to Pizza Pizza, we built upon last year's successful chicken sandwich launch of Pizza 73. And Pizza 73 also benefited greatly from a return to sponsored marquee summer events such So we look forward to continued sales improvement at Pizza 73 throughout Q4 as we focus messaging on key menu categories, namely pizza and wings, further strategic value offerings and a new app and website currently in the final stages of development. So at both brands, our strategy remains the same really, and We continue to mitigate the seemingly ever increasing input costs due to record high inflation with modest menu price increases taken more often than prior to the pandemic. Customers are looking for continued value as well as quality. So we have to find the right balance of perceived value for money. So we need to keep those customers happy and willing to purchase and coming back for more, but while simultaneously doing all we can, not just to drive sales growth, but also profitability for our restaurant owner operators and our private operating company, Pizza Pizza Limited. I should mention though, for those that are newer to this to the Corp potentially, I mentioned this in the past that the Royalty Corp. Investors are of course insulated from that operational risk since our key drivers for investors are limited to same store sales growth, top line and net restaurant network growth. Turning to restaurant network growth. We continue to have a large pipeline of franchisee or franchise leads that are eager to join the team And we also have many of our current franchisees looking to expand too. And that's always a good barometer for the health of our entire network by the way. So during the quarter, we continued our national expansion program by opening 6 traditional and 3 non traditional Pizza Pizza Restaurants. Meanwhile, 1 traditional and 9 non traditional Pizza Pizza Restaurants were closed. At the Pizza 73 brand, we opened 1 new traditional restaurant and closed 1 traditional and 3 non traditional restaurants. The new restaurants were opened outside of our core markets as we continue to expand our footprint across Canada. This quarter we opened in Alberta, PEI and added 4 more in BC. And we also added some more new ones in the non traditional sites such as the Winnipeg airport by the way Another one in Manitoba as I think about it. And overall, Pizza Pizza Limited Management expects to continue Restaurant network expansion to hit our 3% traditional restaurant growth target and despite the slower start to building so far for 2022 And that was mainly due to supply chain issues really more than anything. We've got a good pipeline of locations on our charts and our growth plans, We'll continue to see further growth throughout the rest of 2022 and beyond. And really our new our cadence really is aggressive and we're really aiming for that 3% if not more and future. So that puts us around us roundabout 3 dozen or so locations a year that we think we can sustain. And today, we're proud to say that 84% of our restaurants feature our hot and fresh new look and or a refresh on the interior and exterior and significant upgrades continue to be made in regards to restaurant equipment as well, such as new and more efficient energy efficient ovens, digital menu boards and in store technology. And customers, we can feel that they And we hear from them on the surveys that we conduct as well that they noticed that we're reinvesting and noticed that we're making a big effort to renew ourselves continually and that's paying off in So we remain focused on growing our business right across Canada and it's safe to say we are known and respected as a major homegrown national brand and the leading pizza chain in the country. Lastly, I just wanted to mention we are currently working with our Mexican partners with a view to opening up our first late in Q4 or possibly early in Q1 of 2023. We're excited about the long term potential of this high pizza consuming market of Mexico, but we're going to be very careful and purposeful in how and when we expand our new footprint there. And that's what all we have to say about Mexico right now, but we'll certainly have more to talk about in the future with Mexico. So thank you for listening. And I'll now ask Christine, our CFO, to provide a brief financial update. Thanks, Paul. Same store sales growth, a key driver of yield for shareholders, increased 14% for the quarter. By brand, Pizza Pizza reported same store sales of 16% and Pizza 73 reported growth of 1.8%. Gross sales reported by the restaurants in the Royalty Pool for the quarter were $149,700,000 a 15.4% increase as compared to the same quarter of 2021. By brand, sales from the 6 24 Pizza Pizza Restaurants in the pool increased 17.5 percent to 130,800,000 and sales from the 103 Pizza 73 restaurants increased 2.6% to $18,900,000 for the quarter. For the 9 month period, sales increased 16.6 percent to $415,100,000 from $355,900,000 in prior year comparative period. The partnership's royalty income earned as a percentage of royalty pool sales increased 14.5 percent to $9,500,000 for the quarter and 15.5 percent to $26,600,000 for the 9 month period. The increase in the royalty pool sales and royalty income was largely driven by the lifting of COVID-nineteen related restrictions, the reopening of non traditional locations and the many marketing initiatives Paul mentioned, all of which led to increased customer traffic. Additionally, both brands passed along price increases to manage industry wide inflation and labor cost increases. Turning to the partnership expenses, administrative expenses, which include director, legal, auditor fees as well as public company listing costs $119,000 for the quarter $399,000 for the 9 month period. In addition to administrative expenses, the partnership interest expense on its $47,000,000 credit facility. Interest paid in the quarter was 322,000 and $1,000,000 for the 9 month period. The partnership is currently making interest only payments on the non revolving credit facility. The interest rate is locked through April 2025 using swap agreements that fits the rate at a bankers acceptance rate of 1.81% plus the credit spread. The credit spread ranges based on the level of debt to EBITDA. In April of 2022, Due to the increase in the partnership earnings, the credit spread on the facility decreased by 25 basis points for a combined interest rate of 2.6 85% compared to the same period last year when the combined rate was 2.935. So after the partnership has received royalty income, paid administrative and interest expenses, the resulting net cash is available for distribution to its 2 partners based on their ownership. Pizza Pizza Royalty Corp. Then pays taxes on its share of the partnership earnings and the residual cash is available for dividends to company shareholders. So turning to shareholder dividends. As Paul announced, to date, the Board of Directors increased the monthly dividend for the 3rd time this year. The 3.7% increase brings the monthly dividend to $0.07 per share. And we'll begin with the November dividends, which is payable in December. During the Q3, the company declared shareholder dividends of $5,000,000 or $0.225 per share compared to $4,300,000 or $0.175 per share in the prior year comparable quarter. The resulting payout ratio is 91% for the quarter. For the 9 month period, the company declared dividends of $14,500,000 or $0.59 per share compared to $12,400,000 or $0.155 per share in 2021. The payout ratio for the 9 month period is 97%. As a result of the payout ratio being 91%, company's working capital reserve increased $500,000 during the quarter and at September 30 was $7,000,000 With the increase in the monthly dividend in February, June November of 2022, the company believes that there is sufficient cash flow to service the company's obligations as they fall due. And the company will continue to closely monitor sales and royalty income to determine when additional dividend adjustments may be warranted. That concludes the financial overview. I'd like to turn the call back to our operator Your first question comes from Derek Lessard with TD Securities. Please go ahead. Yes. Good evening, everybody, And congratulations on another great quarter. Thank you. Thank you. Just maybe curious about the Another strong performance on same store sales. Curious as to the what was the bigger driver? Was it Check, what was it and pricing or was it traffic and the rebound in your non traditional sites? Good question, Derek. It was really, I think the biggest part was traffic. So I mean, obviously, we want to get order growth Above all, and certainly, as we mentioned, we did take some price as well, but tried to find the balance there and we prefer to drive traffic at guest count. That's what we're able to do. Loca? And traffic being not just our nontraditional, even at our traditional restaurants with all of the initiatives in our marketing This quarter it really drove traffic to our stores. Okay. That's fair. And if I'm nitpicking here, there was a small Decline, I guess, in at Pizza 73. Just maybe what was the differences between the two regions there? I think that with 73, we obviously had a more challenging backdrop overall, but I think as I think we've touched on last quarter, we've really taken some action there. So we sort of feel that it's turning around. We've got more resources based in Alberta. We think that Our enhanced product innovation suite and what we're doing is just ever more tailored to that market. Certainly, we see To some extent, the competitive set also very strong there in that market, even though we are a leader, but it's a very tight race some of our best competitors there. Okay. And how's that and I guess that we can And the question to the rest of the business as well. Has that competitive environment changed materially in any way over the last 3 to 6 months? And As the sort of as there's a little bit more pressure on the economic backdrop. Just with respect to Alberta general or? Yes, border across the country as well. I don't think so. I mean, I think obviously everyone is feeling these incredible effects, knock on effects from inflation, no matter where you go. So Input costs for items such as cheese, packaging, input ingredients, labor, Doing construction side of things and that slowed us down a little bit, just our supply chain waiting for things like ovens and things like that. So I think it's more of that aspect that's kind of got our attention right now and where we're really trying to reduce any friction in the supply chain. But I mean competitively, I think we're really holding our own. I mean, I think we're really actually outpacing most and albeit with respect to some very strong competitors. I think that we've shown some real acceleration, especially with our marketing innovation, our tech innovation and just really pushing quality. We've got more Menu choices for instance, like our gourmet thins for instance, which are selling incredibly well, in addition to our chicken offerings and pizza offerings. But just to talk about gourmet thins as an example, That's a product that is really to a less price sensitive customer that's all about quality and choice and a really light gourmet pizza topping that Really our competitors aren't able to offer. And so we have a lot of those sort of examples where I think we offer something that's sort of unique to the sort of Typical pizza chain. And I think we're realizing that some of those core competitive advantages we have can really be pushed and we can really do some real volume on some of those items. Okay. And maybe Stolong because it's obviously topical today, but The labor challenges that we're seeing out there, whether it's in store, maybe at your call center, Maybe it's a lack of drivers or what have you. Have you has that impacted has there been any consumer impact on or sorry impact on the consumer in terms of Late deliveries or orders taking longer. No, I see what you're saying. I see what you're saying, Derek. Yes, no, no, we do we stand behind our guarantee. And there's times where we have extended our guarantee. I mean, we're famous for a 40 minute or free guarantee. There are occasions where we will extend that to be Longer in certain markets or certain times or sometimes often it's if there's really severe weather is really typically when we've done that. But there are times due to labor shortages where we will extend the time It should be a little longer than we'd like, but we'll still deliver it on time or free, even if it's a little bit longer in some cases, let's say, 50 minutes. But I would say that overall, we've managed the Various types of labor shortages quite well, but we have seen some markets and some stores where, yes, it's hard to get as many drivers as we want when we're busy in it. It's something that's frustrating in some cases because we know we have the demand, so we want to make sure it gets there. But we do believe that we're very nimble in that regard. So for instance, in the urban centers, We might even as I think all companies and whether it's a pizza chain or a third party delivery company are having trouble getting enough drivers to deliver their food. We have been able to leverage the fact that we have such proximity with this density of our store network that for instance, if there's a store that may be constrained On delivery, for instance, at an important time, we can actually redirect or reallocate seamlessly to the customer some orders and we can sort of increasingly share some of our driver resources amongst stores, so they're not just 100% allocated to a given location. So there's things like that. I think we have flexibility that others don't. I mean, if you're a restaurant that needs one of the well known third party delivery platforms to deliver, if you don't have a driver, you just don't Driver, you have no organic fleet and you have no other partner restaurant to help you, whereas we do, and that's something unique to us. But it certainly is still causing us some issues. I don't want to make it sound like everything's running a lot of tickety boo. It is a frustration. We think it will sort of mitigate over time, But we're doing all we can to sort of stay as nimble as we can and make sure we don't impact customers. Okay. No, that's really good color, And obviously, I understand what's going on in the world today. Maybe I just maybe I got this wrong and correct me if I'm wrong, but the sort of the campaign around the everyone deserves pizza like the $16.99 that was locked in for the year. I guess how are you balancing that with sort of the inflationary period that we're in? Like Is that going to affect your margin? No, not really. And I think we might have even touched on it last time we spoke. But I mean that was really a sort of a tactical marketing campaign to really drive some attention and which really worked within the everyone deserves pizza umbrella really. And so basically that is one special. It's a 4 topping special. It's actually a pretty decent item for our franchisees as well. So it doesn't hurt them. And it is mixing well. It's one of our most popular specials. I mean, to be honest with you, it's doing even more volume than we thought it would. We thought it would be successful, but it's been Very successful. But if you look at our entire slate of offerings, it's just 1 and even that special does quite well. So It's really not impacting our stores. There's not a lot of people that necessarily want to have 4 toppings. A lot of people want 2 or 3 toppings, but they don't always want 4. And if they get the floor while they're paying $16.99 So that's a good price point for us. It's a good price point for our franchisees. And we have all the other mix Specials and also a la carte create your own gourmet thins, chicken wings, plant based offerings, etcetera, etcetera. So When you look at the entire slate, we're looking good and even the $69,000,000 itself looks good. Okay. And maybe switching gears a little bit on the On to the network growth, still looking for 3% traditional or about 36 new openings a year. Just curious Where do you see the opportunity for growth? Yes, I think we've been primarily focusing on D. C. And Quebec. We've actually we're now as far east as Quebec City. We've got 2 there, I believe, or 1 or 2. And in filling and other regions as well, Quebec and BC are the biggest, but we also see even within our Core markets opportunity to expand further as well. And we've kind of moved towards having a lot of non traditional locations in some markets that do offer delivery. So In a way, they're more of a super duper non traditional or a mini traditional, that has more capability to get more volume. For instance, we have some High traffic gas stations that might be sort of seen as almost in the middle of nowhere if you're not from that region. But if we are able to do some delivery there, if there's a reasonable amount of Nearby township or something, which we've found does work quite well, then we can actually get delivery and just random walk in traffic. So we're sort of trying to optimize where we think we can get enough volume to justify a small location. And then the traditional is obviously we want to get as many of those as we can as long as we can do that growth profitably. So that does slow us down sometimes where we say, look, we could expand faster, we could grow even more, but we want to make sure that we're judicious about where those locations are. So we'd rather almost be slightly lacking in terms of our actual growth rate if it means that those locations are Really keepers that we know we're going to make it or have a much greater chance, if you know what I mean. So I think we've been slowed down a little bit on supply chain, permitting, procurement, but I think it's not for lack of Sites that we want to go to and it's not for lack of franchisees. We've got really healthy franchisee pipeline at both brands. And I think as This may comment on, we've got people even want to expand to multiple locations. And so that's a really good indication as well that the pipeline is healthy. Has the interest rate environment sort of opened up more real estate opportunities? We've seen I mean, we've seen some evidence of that. I mean, it really depends where I would say not everywhere. I actually would have thought we might have seen a little more of that by now, but I I think we will see things that will be more favorable for us to opportunistically pick up some more real estate. So we haven't necessarily seen that price signal sort of across the board for reduced costs, but we have a really strong in house real estate team that Has been making sure that our sort of our economic formula of what we need in terms of rent as a percent of sales and other aspects are are within a range and they've done a good job of that. So I think we've had some that we've been fortunate to say, yes, we've benefited, but I wouldn't say it's sort of Right across the country. I don't think I can confidently generalize it that far, but I tend to think it will help us more as we go ahead. Okay. And one final one for me. Obviously, 3 dividend increases this year. Just Speaking to the Board's confidence in the outlook? Yes, I think so. I mean, I think we try We always want to grow that network, grow same store sales and have a stable and increasing dividend. So we're saying we can do it. We feel like we have real momentum here and I think the Board agrees. And we regularly look at this, right, as a group and Trying to strike that balance right. And we certainly think if we continue that momentum, there's no reason why we can't see future dividend increases as well on a hopefully higher frequency. But We obviously we got to prove it and we got to earn those results, but we like where we are right now. Yes, absolutely. Congratulations again. Thanks for answering my questions. Okay. Thanks very much, Derek. Great questions. Appreciate it. There are no further questions at this time. Please proceed. Thank you all for joining the If you have any further questions, you can contact myself, Alex Doradan, Director of Finance or Christine Da Silva, Chief Financial Officer, after this call. Our information can be found on the earnings release. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.