Invesco National AMT-Free Municipal Bond ETF Price & Performance (PZA)

Thank you, everyone, and welcome to Pizza Pizza Royalty Corp. Earnings call for the fourth quarter ended 12/31/2024. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer, Paul Gotic. Just a quick note, our discussion today will contain forward looking statements that may involve risks related to future events. Actual events may differ materially from the projections discussed today. All forward looking statements should be considered in conjunction with 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 and 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 ask questions after the prepared remarks. Portfolio managers, media and shareholders can contact us after the call. With that, I'd like to turn the call over to Paul Goddard to provide a business update.

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 and A at the end of our remarks. 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 continue 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 Restaurants reporting a 4.3% decline after two prior years of strong growth and Pizza seventy three restaurants reporting a sales decline small decline of 0.7%.

So for the year, Pizza Pizza Restaurants reported same store sales decline of 3.8%, while Pizza seventy three 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 seventy three 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 in our last call, the QSR foodservice category is highly competitive and the 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, Big Pizza launched a new promotion to ensure we are delivering to our customers craving for value. Our Slice to Price campaign offered 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 $673 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-ten dollars level to the successful launch of an XXL eighteen inches 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 pickup 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 amid the U. S. Election. Complete with left wing and right wing parody ads that contain Thrust Pete's Peak 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 tick off their seasons.

This quarter to celebrate our long standing partnership with the Toronto Raptors during their thirtieth 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 have the support from the Raptors mascot as well. And we also continued our pioneering Score Slice and Score 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 customer's 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 importantly, 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 967111 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 are pioneer in loyalty, having had our Club eleven eleven program running now for over ten years, and we have approximately 1,500,000 enrolled users, which we're very proud of. We are currently updating Club eleven eleven with new functionality, including real time push notifications, reminding members when their rewards are available and again, when they're about to expire. Last year, we saw record use of the program as well due to the enhancements with really millions of dollars in loyalty dough redemption. 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 remain 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 seventy three, we opened one traditional location and one non traditional Pizza seventy three location. And we closed three non traditional Pizza Pizza sites and three non traditional Pizza seventy three 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 say 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 today, and we're continuing to work closely with our Mexican partners on the next set of restaurant openings and expect more openings this year. So stay tuned.

Now 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 92% 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 who 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. They 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 as 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 leading 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 of 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.

Thanks, Paul. Before going into 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 earns a monthly royalty through a license agreement with Pizza Pizza Loop. In exchange for the use of the Pizza Pizza and Pizza seventy three 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 core is derived from increasing the same store sales of the restaurants in the pool and by adding new restaurants to the pool each year. For fiscal twenty twenty four, the royalty pool was adjusted on 01/01/2024 to seven seventy four restaurants comprised of six seventy two Pizza Pizza and 102 Pizza 70 three. With that, I'll briefly cover some financial results for the quarter. As Paul mentioned, same store sales, a key driver of EOS growth for shareholders, decreased 3.9% for the quarter. Pizza Pizza Restaurants reported same store sales declines of 4.3% and Pizza seventy three restaurants decreased 0.7%. Both brands experienced a decline in traffic with Pizza two Pizza's average ticket being relatively flat and Pizza seventy three 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's royalty pool system sales and the corresponding royalty income. Royalty pool system sales for the quarter decreased 2.1% to $160,500,000 from $163,900,000 in the same quarter last year. By brand, sales from the six seventy two Pizza Pizza restaurants in the pool decreased 2.4% to $137,700,000 for the quarter and sales from 102 pieces 72 restaurants decreased 0.2% to $22,800,000 for the quarter. For the year, royalty pool system sales decreased 1.2% to $620,600,000 from $628,400,000 The Partnership's royalty income earned as a percentage of royalty pool sales decreased 1.9% to $10,300,000 for the quarter and decreased 1% to $39,800,000 for the year. Beyond royalty income, the Partnership also earned 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 In addition to administrative expenses, the Partnership is making interest only payments on its $47,000,000 credit facility.

Interest paid in the quarter was $322,000 and $1,300,000 for the year. The interest rate is lost 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 remained 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 under ownership. After the 2024 spend 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 distribution. The royalty court paid 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 $5,700,000 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 $22,900,000 or $0.93 per share compared to $21,800,000 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 $6,100,000 as of the end of twenty twenty four. This excludes the reclassification of the credit facility. The $6,100,000 working capital reserve is available to stabilize dividends and fund other expenditures in the event of short to medium term variability in sales and in turn royalties. The Company has historically targeted a payout ratio at or near 100% by an annualized basis. That concludes the financial overview. I'd like to turn the call back to our operator to poll for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Derek Lazard of TD Cowen. Your line is already open. May you open.

Yes, good afternoon everybody. Good to hear your voices and congrats on that 800 stores.

Thanks Derek.

Maybe just I 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 an issue 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 we noticed that in our bundles are still very popular. I mean, we might 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 1999 special or the business '99, but there's definitely some shift there. But also people are getting less size and less dips, less pop than they otherwise had, especially if they're a la carte. So we are seeing a bit of all the above of that as an indicator of just the tough environment.

Okay. And that's fair and 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 to increase. You 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 sense some weakness there overall. The way it's hard to measure the results of those companies just given their vast scale. But you can just anecdotally see in Canada that 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 layoffs 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 they do relay on charges to customer. But yes, we are seeing that in general overall and maybe Christina has something to add.

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 though I would say there are successful that 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 we need to try new approaches to actually get more of those people switching those that at least are willing to. If we do probably display QR codes for instance that drive right into our app for instance and we're also doing things like SMS push notifications, more loyalty reward reminders, more constant communication with our 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 said 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 are a bit habitual in terms of what platform is their favorite method of ordering, whether it's let's say it's buy app. Like Christine was saying, if it's through one of the popular 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 through 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, etcetera. And just trying to build, I guess, what I'm trying to say 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 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 a 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 banks 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 flower 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 to our multi multimillion person drop that we normally do when we do create and distribute a flyer. 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 have control, but we do otherwise feel that what we put in place, especially in Q4, has been positive. It's just 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. I think the 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 source?

Yes, happily it is. I guess to speak to 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 agreements where we can. Those assessments like I've talked about many times, things like Kalamata, olives and Greece, which the quality is so strong, we feel we need to keep those, but those are not coming from 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 small wares and oven costs and things like that, which are coming to 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 we've been I think our franchisees have been generally pretty happy with how we've really held the line and how our suppliers speak to the fire there. So not a major concern or 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 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 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 to be honest, sir, if we can't do too much of that because oftentimes, the site might not be ready, etcetera, 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 tried to actually do that anyway, but there's only so much we can do there to sort of get ahead of, say, tariff impact. I think our development schedule does look good for this quarter and 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, say, months and months ahead of what we would have otherwise. There's just a limit to availability of sites, labor, materials, etcetera. 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 the same. I mean, different players, different tactics, I suppose. I mean, I just sense generally across QSR in general, you can almost see or feel a little more desperation on the part of some groups, maybe players we haven't seen, but extreme measures. But I wouldn't say there's too much new aspect in the pizza subsegment 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. Here's hoping to a long reference.

Okay. Thanks very much, Jerry. Appreciate it.

There are no further questions at this time. I would hand over the call to Christine DaSilva for closing remarks. Please go ahead.

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.