Pizza Pizza Royalty Corp. (OTCPK:PZRIF) Q2 2022 Earnings Conference Call August 10, 2022 5:30 PM ET
Company Participants
Alexander Sewrattan – Director of Finance
Paul Goddard – Chief Executive Officer
Christine D’Sylva – Chief Financial Officer
Conference Call Participants
Derek Lessard – TD securities
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 2022. During the presentation, all participants will be in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded on August 10, 2022.
I would now like to turn the conference call over to Mr. Alexander Sewrattan, Director of Finance. Please go ahead.
Alexander Sewrattan
Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp’s earnings call for the second quarter ended June 30, 2020. Joining me on the call today are Pizza Pizza Limited’s Chief Executive Officer, Paul Goddard and Chief Financial Officer, Christine D’Sylva.
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&A in the Investor Relations section of our website for 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 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 a subsidiary Pizza Pizza Royalty Limited partnership. This partnership has two 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 and 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.
Peter Corp. directly on the Pizza 73 brand remarks through a subsidiary, Pizza Pizza Royalty Limited partnership. This partnership has two partners, Pizza Pizza Royalty Corp., the public company which owns 76.5% and the other partner Pizza Pizza Limited, a 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 624 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.
Paul Goddard
Thanks, Alex, and welcome, everyone to Pizza Pizza’s second quarter investor conference call. Today, I’ll discuss our second quarter results and then Christine will summarize our key financial highlights before the Q&A at the end of the call.
We are very pleased to report strong sales and earnings per share growth for the second quarter. Our results was also driven 20.3% same-store sales and 19.5% growth in adjusted earnings per share, both of which are drivers our shareholder value.
As a result, our Board is pleased to announce a 3.8% increase in the monthly dividend effective June 2022. And that’s march the second dividend increase in 202, supported by a healthy $6.5 million on our working capital balance.
So building on the momentum of the first quarter, we continue to see growth in our walk-in and non- traditional channels, as well as our pick up category. And we’re also excited to see many of our special events, major special events major special events especially return this summer such as Honda Indy [ph] lots of conventions, music festivals, Calgary Stampede at west and many more. And the consumer demand for cotton fresh pizza slices has been exciting to see after these past few years, and the lifting of COVID-19 government restrictions this year provided relief in all channels It was result of light turned back on which is fantastic to see.
Our non traditional sales channel which was 10% of total sales pre-COVID is being restored and we expect universities and colleges to reopen fully in the fall. We continue focusing on our core competitive advantages of convenience, innovation, high quality menu offerings, and of course our restaurant network expansion.
Further enhancements continue to be made in regards to product developments and operational programs. Internally we continue to enhance our already strong operational excellence in our day to day operations. And that’s both on the food level, of course and our customer service. And that we’re really happy with an amplified effort in recent quarters especially on that internally.
And based on customer feedback, our execution where it matters most of all continues to improve. We have two fully staffed customer contact centers that have been very active, taking care of customer orders, and also working towards securing school, business and other large catering orders.
Turning to our marketing and food innovations, this spring pizza continue to focus on pizza quality and innovation via our Gourmet Thins food innovation campaign. Four new recipes were introduced, along with our first Vegan Gourmet Thin option. And during this promotional period, we saw our Gourmet Thins category sales more than doubled and sales have remained strong. Ongoing innovation in the Pizza category continues to be a critical component of our food quality and innovation strategy, introducing customers to high quality and on trend ingredients.
As we expand our menu offerings into new categories such as chicken sandwiches where we’ve done really well, beer of course and dessert offerings and many more, it remains critical to still maintain focus on our best in class pizza offerings.
Both brands continue to find success, winning the moments as we work to build brand relevance around key occasions and sales opportunities throughout the quarter. In April Pizza Pizza launched a renewed 4/20 [ph] strategy offerings four small pizzas for $20. High impact media placements, including massive Billboards and Yonge and Dundas Square purchase, which along with a highly effective social media campaign catapulted Pizza Pizza to the number one brand associated with the 4/20 occasion and resulted in a 60% sales increase on the day versus last year.
Similar success was achieved in Pizza 73 as we leveraged our team sponsorships, and incremental paid media to associate the brand with a rare Battle of Alberta playoff series that ended with the Edmonton Oilers advancing. Unfortunately, that was in lock up long, but we still saw some nice increase in activity when that Battle of Alberta was on.
We also continue to leverage new partnerships to expand the sales opportunity for each Pizza Pizza and Pizza 73 location. This spring, we launched a pilot program with Chinese language third party delivery service [indiscernible] at over 30 pizza locations. And if the pilot proved successful, we will expand to all applicable Pizza Pizza 73 locations.
We also expanded our pioneering Ben & Jerry’s ice cream virtual store pilot to over 130 Pizza Pizza locations, with significant incremental sales realized immediately from this net new category, along with the ongoing efforts of introducing beer on both Pizza, pizza and Pizza 73, where over 100 locations are live and more coming online weekly.
Leveraging our spaces for maximum sales benefit, both from our traditional business and new opportunities such as these, and they’ll need to be a priority for us for both brands.
At both Pizza Pizza and Pizza 73, our marketing strategies are structured to support restaurant profitability, while also increasing customer orders and order frequency. Whether you prefer to phone 967 or 1111 to have your Pizza Pizza app or simply walk into your local neighborhood Pizza Pizza. And of course, all of our campaigns are supported holistically by our in house marketing team who designed a creative and deployed it on a number of assets from Radio Flyer, Billboards and on our multiple social media and digital channels.
So obviously, we continue to be very pleased with overall momentum and continue to work plans and strategies to further enhance our customer’s experience. On the flip side, we like the rest of the world continue to face significant inflationary costs increases across our supply chain and restaurant labor.
We successfully have been able to balance an increase in customer traffic, whilst selectively taking menu price increases. We know our customers are looking for value, it’s a core, core part of our brand. There also want quality. So we have to find the right balance there of perceived value for money. We’re really good at that. And we don’t always get it exactly right. But I think we have a pretty good track record of finding that balance quite well.
It’s a fine line to walk. And we need to keep customers happy. Of course, but while also simultaneously doing all we can to drive not just sales growth, but also profitability for our restaurant owner operators and our private operating company Pizza Pizza Limited.
I should mention too though that Realty Corp investors are of course insulated from that operational risk, since our key drivers for investors are limited to same store sales growth and net restaurant network growth.
So turning to that restaurant network growth. During the quarter, PPL open five traditional and three non traditional Pizza Pizza restaurants, and meanwhile two traditional and five non-traditional Pizza Pizza restaurants were closed. Over the Pizza 73 brands, we opened one non-traditional location and closed one traditional and one non-traditional restaurant.
The new restaurants were opened outside of our core markets as we continue to expand our footprint across Canada and existing quarters as well we really were all over the place. We had some openings in Quebec, sold in like Alberta. We had a conversion to Pizza Pizza, Downtown Vancouver opening, down to on Lobster [ph] Robson Street, one into Saskatchewan. And we’ve also been really, essentially our non-traditional location development plan as well. And we actually had an intuitive three openings there, we’re in high volume service stations, and one in landmark cinema, movie theater. So lots going on there and, you know, happy to see that growth that we’ve really been pushing, carrying on across the country.
Pizza Pizza Limited management team expects to continue its restaurant network expansion to hit our 3% to 4%, traditional restaurant growth target. And by the way, we’ve always had that higher last year. And we think we can do better than that. But we’re being a little conservative. I think we’ve been very happy with the franchisee pipeline, and very happy with our citing, our real estate team has done great finding locations in our core markets, and in newer markets via Quebec, DC, or in more remote areas of Maritime or what have you.
But we have seen the supply chain issues. And that’s why we’ve reduced our target a little bit because we we’ve seen issues with things like oven lead times, we’ve had issues with permits approvals with the, obviously the government institutions at the different levels, it’s been very much slower than last year even. And so that has impacted us. But we are on the bright side, I think commercially, the things that we can control we’re moving as fast as we can. And that’s working really nicely.
So we’ll see how we do but we’re saying. I would say conservatively 3% to 4%. And hopefully we’ll do a little bit better. We realized we’re a little slow compared to last year in terms of where we are at this point in the calendar year. But our team is very confident that it’s going to be a busy couple of quarters coming up here. And hopefully we’ll finish a little bit of that we’ll see.
And to date, I would say as well that, you know, we’re really proud to say that over 80% of our restaurants now 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, such as new and more efficient ovens, digital menu boards and in store technology.
And this quarter, the first full quarter without restrictions exceeded our expectations. Our business has really returned to its full capacity and more. And it’s just great to see all the hard work really paying off. And so it’s super exciting. And I think it’s also motivating for our internal team and our operators out there. And hopefully customers as well. They seem to be agreeing with us that hey, we’re really investing, we’re really refreshing and we’re pushing hard to always reinvent ourselves and really lift the brand to everyday heights.
And our restaurants operators were refreshed and excited to serve all of our loyal customers returning to the stores, and newer brand was resilient and we want to thank all of our restaurant owner operators, our passionate employee team, and our devoted customers for continued to support our brand in the last two plus years of COVID.
Our restaurant network growth continues to be very strong as I said. And as we continue to scale effectively, we only become stronger. So we look forward to the rest of the year to continued momentum from the return to full operations.
Thanks for listening and tuning in today. And I’ll now ask Christine to provide a brief financial update.
Christine D’Sylva
Thanks, Paul. Same store sales growth, the key driver deals with shareholders increased 20.3% for the quarter, with Pizza Pizza reporting 24.6% growth and Pizza 73 reporting a slight decrease of 0.7% for the quarter.
Gross sales reported by the restaurants in the royalty pool for the quarter was $142.5 million, a 20.8% increase as compared to $118 million in the second quarter of 2021. By brand, sales in the 624 Pizza Pizza restaurants in the royalty pool increased 24.6% to $122.9 million and sales from the 103 pizza 73 restaurants increased to 1.3% to $19. 6 million for the quarter.
For the six month period, sales increased 17.3% To $265.4 million from $226.2 million in the prior year’s comparative period. The partnerships royalty income earned as a percentage of royalty pool sales increased 19.3% to $9.1 million for the quarter, and 16.1% to $17.1 million for the six month period.
The increase in royalty pool sales and royalty income for the quarter was largely driven by the lifting of COVID-19 related restrictions, three opening of non-traditional locations, both of which led to an increase in customer traffic, coupled with the increase in the average check during the period.
Turning to partnership expenses, administrative expenses, which includes director, legal and auditor fees, as well as public company listing costs were 169,000 for the quarter, and 281,000 for the six month period. In addition to administrative expenses, the partnership pays interest expense on a $47 million credit facility. The interest paid in the quarter was 320,000 and 676,000 for the six 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 fix the interest at a banker’s acceptance rate of 1.81%, plus the credit spread, 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 now at 2.685%. So, after the partnership has received royalty income, paid administrative and interest expense, the result in net cash is available for distribution to its two partners based on their ownership.
During the quarter, the company increased its dividend for the second time this year. The company declared shareholder dividends of $19.75 per share, or $4.9 million compared to 4.1 or $0.165 [ph] per share in the comparable period of 2021.
The result in payout ratio for the current quarter was 94%. For the six months period, the company declared dividends of $9.5 million or 38.75 per share, compared to $8.1 million or $0.33 per share in 2021. The payout ratio for the six month period is 100%.
The company has a healthy working capital reserve of $6.5 million as of June 30, 2022. And this is an increase of 300,000 in the quarter. With government mandated restrictions lifted, the company will continue to monitor sales and royalty income to determine when additional dividend adjustments may be warranted.
With the financial overview complete, I’d like to turn the call back to our operator to poll the question.
Question-and-Answer Session
Thank you [Operator Instructions] Your first question comes from Derek Lessard with TD securities. Please go ahead.
Q – Derek Lessard
Good afternoon, everybody. And just wanted to give you guys congratulations to you and the franchisees. This is a really great sales quarter for you guys.
Paul Goddard
Thanks, Derek. Appreciate it.
Derek Lessard
Just maybe I guess on that note, could you maybe help walk us through how you got to $123 million in system sales for Pizza Pizza, I mean, like generally speaking, or seasonally speaking, if tenth [ph] Q2 tends to be the weakest quarter, if I go back through your history and $123 million, that’s also a high watermark for you guys?
Christine D’Sylva
Well, you know, non-traditional business coming back has been key, we find that as soon as the government restrictions were lifted, just the foot traffic all over, our major urban markets increased. And with that, we saw a lot of people return in person to our restaurants for our walk in business.
Additionally, locations like Canada’s Wonderland, Center Island, in Toronto, they are extremely busy, people haven’t been out in two years. So with the restrictions lifted, the amount of tourism in these locations has increased significantly. So we’ve seen a lot of incremental sales through those sites. So those have been big key for us.
As well, we have taken price, right, so on top of our traffic, there has been an increase in our average check. So that has helped drive sales.
Paul Goddard
Yeah, okay. I’ll just add. Its interesting [indiscernible] well. I was going to say, Derek, just, I mean traffic and check [ph] fund the balance quite well. It’s always very tricky to get that line. But it’s come from kind of both buckets pretty significantly. So obviously, we’re pretty happy with that. And especially, you know, the volume side, so we always want to get more traffic, more units sold. So it seemed like we really hit it quite nicely for this last quarter. But everything sort of switched back on?
Derek Lessard
Yeah, it seems like that. And I guess maybe on – in the context of putting through price, just obviously it doesn’t seem like the consumer has been able to take it. Just wondering what you’re seeing in terms of maybe consumer reaction any pushback or anything like that?
Paul Goddard
Not really, I mean, we’re certainly you know, trying to be very judicious about it, right? We have felt like we’ve taken prices everywhere across our entire menu. You know, certainly more in some areas and some products and specials and things and we try and look at our consumer data, which we really happy with our internal system to be pretty granular, especially with our digital transactions and things and to see what is resonating, what isn’t.
So, I think we just tried to strike the balance pretty well. I mean, we don’t always get it right. But we do see the traffic drop off, if we’ve been a little too aggressive on price increase, but we just generally think we hit it pretty well. And most recently, although its next quarter, that says the market, the fixed price offering that we put out there was a bit of a cheeky tactical campaign that got a lot of media attention, including, you know, across Canada, Wall Street Journal even mentioned it, just saying, like everything else in the world is going up, it’s all negative, but at least you can count on a extra large 69 [indiscernible] from us fixed rate for a year if you qualify kind of thing.
So we had some fun with that one, and it got some real attention. And you know, that’s a different price point, that was actually a different kind of new special that, you know, I actually admitted quite well, by the way, but we don’t expect it to be our leading special, but it’s a four topping , extra large, right, it’s not for everybody, but it’s been really wonderful not to this new quarter.
But I think we’re just getting our communication out there a little more. And we’re trying to also be a little playful, a little more approachable, just in generally we had an overarching way. And even though it’s more this quarter, telling the public the everyone deserves pizza campaign, which is our overarching strategy of just trying to add a little more purpose and meaning to the brand itself versus just pricing value, right, that’s always going to be our core. But we’re trying to really make sure that you know, look, everyone, no matter who you are, you’re a little form a, thin fan, or a vegan or someone that really likes certain more specialty items, or you just like a really great value of an extra large pepperoni, you can get it from us, and no matter what we’re going to make your day better. And you can come to us wherever you want. And we’re going to have a good price, its going to be good value for money. And I think people are starting to see that, no matter where they come from, no matter what demographic, we can kind of tailor their tailored offering for everybody.
Derek Lessard
Yeah, that’s, that’s very helpful. And I’m noticing that too. But and maybe on the pricing as well. And, you know, for context, the inflationary environment. I was curious if it’s actually, you know, working to your advantage, versus, you know, like the third party delivery guys. I’m just so curious about the competitive intensity out there. And it seems to me like you’re also gaining share?
Paul Goddard
Yeah, I think we feel, I mean, certainly. I mean, it’s, you know, it’s combination of all that, all the different channels. I mean, we’ve seen constraints, like we talked about all across really, and, you know, we have that granularity to see where are we getting better, where do we still need to do better, we think there’s still definitely opportunity to do better and certain channels and things.
The third party folks, I mean, they’re certainly seen some of them even turn the corner and actually be profitable. They have huge marketing spend, they’re not going away, at least most of them, I think, and it’s a very, very powerful competitor. We do also, and we’ve been pretty open about the fact that we also – we would prefer our channel for sure. But we do augment or supplement our volume, by having our offerings at both brands on those platforms.
And yes, they’re expensive, we’d rather just have our own system, but we realize there’s customers we wont otherwise reach in some cases. So we think they can actually be a great customer acquisition channel, especially in places like Quebec, or BC, where you see, we’re not as well known as we are saying Quebec even parts of the Maritime. So you can kind of go on their coattails a little bit. And they benefit obviously, from our huge volumes. And so it is sort of a – a bit of a coo petition [ph] scenario.
But we think they have been very intensified and out west in Alberta, I would say they’ve been extremely strong there. And that has actually hurt us there in Alberta, we think we have some good plans to sort of adapt to that and be more aggressive ourselves to be better. But they they’ve been very, very aggressive there and some new entrants, they’re in the third party as well.
So again, we’ll use them to our advantage as well. But we want to focus on organic digital growth out there. And we are heavily reinvesting in our tech platform out there as well, the more common future quarters, but suffice to say we’re well on our way, with a very robust revamp of our entire platform for the Pizza 73 platform, you can think of it as essentially, pardon me, what we did for Pizza Pizza, very similar type of platform, which comes with all the different capabilities that our Pizza Pizza platform has, including data intelligence, business intelligence, that will have and that’s still some ways away, probably, you know, six months, seven months or so we’re thinking, so quite a bit of work to do, but a lot has been done there. And so we think that’ll be another way that we can help be very competitive out there.
So I don’t have – off your price point. But third parties will still need to be a choice for a lot of customers. We’re going to try and use them to our advantage but then also hopefully win back people do our organic digital platforms as much as possible, especially out there.
Derek Lessard
Okay, that’s great color, Paul. And maybe one last one for me and I did want to touch on The Pizza 73. Obviously, it’s a bit of, how should I say it, more of a stark difference in sales performance? Just curious on, you know, some of the some of the drivers, the, I guess the lower growth out west?
Paul Goddard
Yeah, no, it’s true. And it is quite stark. So we obviously expect more of ourselves, our team and so do our operators, they’re very proud. And they don’t, you know, they want to do better, and they want bigger dividend checks themselves, too, and they want keep that customers as happy as possible.
We do see – we have done some market research, especially in recent quarters. You know, we’ve been trying a lot of different things, I think some things we’ve been employing have a bit of a longer fuse, will take a little while, like the tech side. But also we do see very strong competition there in third party, and just QSR in general, and pizza players as well.
We have some data saying that pizza market is growing not massively, but it’s still growing out there. And we think we’ve gained some share on some others, we’ve also lost some share, apparently with some other pizza players, which is not something that is common for us out there.
But we also kind of – we think we’re pretty clear on where those shortcomings might be or the things we need to do to make sure we become again, the – where we’re not already top of mind and the top choice, we don’t want to be below the pack, we want to be the top choice, especially for the things that we know we can do better than others, which is, you know, the quality, the convenience, the selection, and we are a delivery powerhouse out there, right. And in one way I would highlight, and one of the reasons for the stark differences in a way Pizza 73 has more or less more to lose than others because we’ve been so dominant out there. And it’s a very delivery focused brand, right. Whereas the Pizza Pizza we’ve got quite a breadth of other channels, a little more diversity, or non traditional as well, more walk in, more pickup. But we’ve successfully gone pick up out there. And deliveries, it’s been hard. I mean, e we’ve had some others win some battles with us on delivery.
So we know, we’ve got to do more. So I think some of the things we’re doing there will help address that. And we’ve also put a very senior person on the ground recently, a senior marketing – marketing director who is going to be exclusively focused on Pizza 73 on the ground in Calgary, she’s got a ton of experience needs to co run an agency in Alberta. And she’s actually leading our efforts there, supplemented with other health care, but also our team in Toronto and referring to our Head of Marketing here. But we think that’s also going to really help. There’s some really great ideas and things we can do there. So we’re investing more, more resource on the marketing side as well.
And we think we just need to innovate a little more like we have here. And things like the tech side do take longer just by the nature of the projects. But we think if we can leverage some of the things we have here, then we shouldn’t be able to do more there. And as well things like brand identity work and things that just give people a reason for Pizza 73 to stand out, we’d like to stand out from the crowd not to be considered one of the top three, four options, we want to be number one, that’s what we expect. And that’s what we’re used to being and now we are still left as a leader on some attributes and other attributes. We are perhaps perceived not being number one so we don’t you know, like we that, we want to get back to where we should be.
Derek Lessard
Okay, thanks for that. That’s all for me. Paul and Christine, nice to see the lights back on.
Paul Goddard
Thanks, Derek
Derek Lessard
Appreciate it.
Operator
There are no further questions at this time. Please proceed.
Christine D’Sylva
Thank you, everyone for joining us on the call today. if any questions come up after the call, please contact us. Our information is available on the earnings release. Thank you and have a good evening.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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