Pizza Pizza Royalty Corp. (PZA) Earnings Call Transcript & Summary

Since the number of nominees is the same as the number of vacancies to be filled, I will now ask for someone to move a motion that the persons nominated for election of directors be elected as directors to hold office until the next annual meeting. Who will move this motion?

So moved.

And the seconder?

I second the motion.

I will now call for a vote on the motion before the meeting. I will allow time for proxy holders and shareholders to enter their votes electronically. [Voting]

Proxies representing the shares, which were submitted in advance of the meeting, we will report on the specific results when we receive the scrutineers' formal report, but the preliminary count shows that a majority support for each resolution has been received. Therefore, I will declare the voting closed. Based on the preliminary report of the scrutineers and the proxies received were sufficient in number relative to the votes cast at the meeting such that I declare all resolutions have been carried as follows: I declare that the motion on the appointment of the auditors has passed; I declare that each of the 5 nominees to the Board have been elected. I will direct that a copy of the scrutineers' final voting results be appended to the minutes of the meeting. That concludes our formal business. I wish to thank you all for attending, I will now declare the formal part of the meeting to be terminated. I would like to call upon the Chief Executive Officer of Pizza Pizza Limited to review the business of the company and Pizza Pizza Limited. As a cautionary note, the presentation will contain forward-looking financial statements and other information. Investors should be aware that any forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and achievements of the company and Pizza Limited to differ materially from those disclosed here today. We are also adopting the cautionary language regarding forward-looking statements that is set out in the company's annual information form, to which we refer you for additional details concerning the risks, uncertainties and assumptions relating to our forward-looking statements. With that, I'm pleased to introduce Paul Goddard, President and CEO of Pizza Pizza Limited. Paul?

Thank you, Jay. Thanks very much, and good morning, everyone. Welcome to our Annual General Meeting. 2023 was a milestone year at Pizza Pizza, and I'm eager to share the business and financial update with you today. Before I discuss our financial results, I wanted to review the corporate structure and key pieces of shareholder information for any new shareholders or guests here today. Through its ownership of the Pizza Pizza Royalty Limited Partnership, Pizza Pizza Royalty Corp., or PPRC, owns the Pizza Pizza and Pizza 73 trademarks and brand names along with a number of other trademarks and brand names as well. Back in 2005, following our initial public offering, or IPO, the brands were licensed to Pizza Pizza Limited, the private operating company, in exchange for a royalty equal to 6% on the sales of Pizza Pizza restaurants and 9% royalty on the sales of Pizza 73 restaurants. Now to briefly explain the royalty stream, the company, and by that, I specifically mean Pizza Pizza Royalty Corp., or PPRC, receives royalty and interest income, pays administrative expenses, interest on its credit facility and taxes. As a reminder, the company has no employees or capital expenditures, so after the basic expenses I just mentioned, all remaining cash is available for distribution to shareholders. The company, as a top line royalty corp is insulated from the operating results of the private company and its stores. The success of the PPRC is driven by the operating company's ability, that is Pizza Pizza Limited's ability, to grow sales through same-store sales growth and new store openings. We also want to provide you a brief overview of some key pieces of important shareholder information as you see here. So as of today, Pizza Pizza Royalty Corp. is trading under the ticker PZA.TO, has 24.6 million shares issued and outstanding or on a fully diluted basis, 32.9 million shares. This fully diluted figure includes Pizza Pizza Limited's 8.3 million equivalent shares as the 100% privately held operating company. And Pizza Pizza Limited's ownership represents 25.2%, so just over 1/4 of the fully diluted shares of PPRC. So of course, this clearly demonstrates year after year that PPL has a lot of skin in the game and has always been closely aligned with the interests of PPRC and its public shareholder base. The PZA shares of PPRC pay a monthly dividend of $0.0775 per share or $0.93 per annum, providing a yield of roughly 6% to 7%. As of today, with PZA trading around $13.25 a share, the yield is approximately 7.0%. Let's now turn to PZA and our share performance. And as you can see here, it's a positive story. I'm really proud of our entire team who made this happen. As our business ramped up from the initial, obviously, adverse impact of COVID-19, we continue to accelerate and capitalize on our pre-COVID momentum, resulting in double-digit sales growth and 8 dividend increases as well as the share price at a 5-year high and more than double where it was in the depths of COVID. Just to highlight performance, one of the key metrics here. If you look at our 2023 financial results, it really reflects the true strength of our brands. We were pleased to report continued strong results, which led to record Royalty Pool sales of well over $600 million, 3 dividend increases in 2023 and a working capital reserve of $8.2 million. We also opened 45 new restaurants for the second year in a row, and our strong momentum continued into 2024. The year began with the annual adjustment to the Royalty Pool, an increase of 31 net new restaurants, positive same-store sales growth in a challenging economic environment, and we ended the quarter with $7.2 million in working capital reserve. Just as a reminder, the first quarter is generally our softest in terms of system sales, just in terms of seasonality and why we often see a greater than 100% payout ratio in Q1. On an annualized basis, we target 100% payout ratio. And if you look at -- this is driving our payout ratio is our dividend, and you can see our strong track record here. In the last 3 years, we have increased the monthly dividend 8 times, and most recently in November '23, when we increased our dividend another 3.3% to that $0.0775 monthly or the $0.92 a year. So this is almost 9% higher than our pre-COVID levels. The dividends have been funded by operations and have our working capital balance to support our dividends when there is sales variability. Speaking of working capital, as you see here, PPRC has a healthy working capital balance at $7.2 million, as I said. As of March 31, 2024, that's displayed on the graph. And it charts here the movement in same-store sales growth in relation to our working capital. So it's quite a convenient slide as we see both overlaid together. The Board will continue to closely monitor sales and working capital levels to determine when additional dividend adjustments may be warranted. So with that overview of PPRC, the royalty corp structure and the flow of funds and whatnot. I'd now like to provide a business update for Pizza Pizza Limited, a private operating company. As a reminder, Pizza Pizza Limited is the private operating company and the success of the royalty corp depends on the operating company's ability to maintain and increase restaurant system sales both through new restaurant openings and increases in same-store sales. Looking at the fundamentals here. We are extremely proud of our long-standing reputation as a true innovation leader in our industry in terms of not just food but also marketing, technology, evidenced through our wide array of digital ordering options, new product launches and many industry-leading marketing awards and recognition. Additionally, our strong management team has developed a proven franchise business model, which we will continue to leverage and scale as we execute on our national and now international expansion program. In fact, our construction pace over the last 2 years has never been stronger. So I'm very proud of our entire team, and that includes not only our corporate employees, but our owner-operators, our franchisees, our partners in the restaurants who work day in and day out to make great food. We really do just think of ourselves as one big team collectively. And just as PPL, the private operating company, continually reinvest in all aspects of our business, so, too, do our restaurant operators who likewise see the benefits of reinvesting in their restaurants on an ongoing basis as entrepreneurs to ensure they provide our customers with a modernized setting to enjoy our hot and fresh menu offerings. For our new investors, I just want to highlight our 3 brands, Pizza Pizza, which operates across the entire country. Obviously, our main brand, national brand, while Pizza 73 is our sister brand that was acquired in 2007, operating primarily in Alberta, but there is some spillover into Saskatchewan and B.C. as well, but largely Alberta. And lastly, most recently, our newest sister brand, PZA Pizzeria, which you can think of as essentially a gourmet-oriented express brand is really our new international expansion brand. And I should also mention that we do have several PZA Pizzerias operating as nontraditional sites in Canada as well. Within our main Canadian brands, we have 2 brands. We have both traditional and nontraditional locations. Our traditional restaurants comprise roughly 90% of our business in terms of sales and offer a full menu with customer seating, takeout and delivery. These restaurants are usually located in high-traffic areas that are easily accessible. Meanwhile, our nontraditional restaurants comprised the remaining 10% of our business roughly, sales-wise, and are typically located at sports and entertainment venues. Many of you are familiar, I'm sure, with MLSE, the Leafs, as well as places like Roger's Place in Edmonton, which is, of course, pretty active right now and other venues right across the country. In the last few years, we began to roll out more nontraditional locations as well in colleges, hospitals and places like high-traffic gas stations, if they work for us, even some chain convenience stores, especially in cities where we do not have a traditional restaurant presence. And some of these nontraditional restaurants offer both pickup and delivery, so they act as a great bridge between a full-size traditional restaurant and a smaller restaurant with limited offerings. Currently, in Mexico, we have those 3 traditional restaurants under PZA Pizzeria. Very excited about that. And we do have ambitious plans to scale up PZA Pizzeria there this year and beyond based on our success to date in Mexico. We also see opportunities to open more nontraditional sites as time goes on, both internationally and also within Canada. In fact, I guess, to just give you hard numbers as it says on the slide here, we do have actually 4 PZA Pizzeria NTS, non-traditional sites in Canada, operating in some colleges and whatnot. And also at Canada's Wonderland, where we also have multiple successful Pizza Pizza restaurants. So we're able to sort of cover the market very, very well and doing extremely well at somewhere like Canada's Wonderland with actually 2 brands. Looking here at the map of the country, our national expansion program continues to take us into growth markets, further strengthening our geographic diversification. In 2023, we successfully executed our strategy to further solidify our significant footprint in the Quebec and B.C. markets, and we aim to continue our strong restaurant network expansion going forward. In 2023, as I said earlier, we opened 45 new restaurants across the country. We now have over 40 Pizza Pizzas in British Columbia alone and 60 Pizza Pizzas in Quebec. Having the ability to interact with our customers through our expansive restaurant footprint right across Canada nationally, whether it's through our wide delivery network or in-store, really ensures that we're able to reach customers in all metropolitan areas across Canada and also rural areas. And in fact, one interesting data tidbit is our restaurant locations are within a 10-minute drive of 60% of Canadian households. Pretty significant. Of course, we go do have those 3 restaurants down in Mexico, not shown in the map here and more to come there. Looking at our track record of the steady restaurant growth. At the end of 2023, we had 774 restaurants in our Canadian network, with 558 being traditional Pizza Pizza and Pizza 73 restaurants, the most in company history. We have almost 50% more sites than we had at the time of our IPO in 2005. During 2023, Pizza Pizza opened 21 traditional restaurants and 20 nontraditional Pizza Pizza locations and opened 2 traditional and 1 nontraditional Pizza 73 restaurants. The new restaurants were opened across all provinces Pizza Pizza operates in, including B.C., Quebec, Ontario, Saskatchewan, Alberta, Manitoba, Nova Scotia and New Brunswick. During the year, 5 traditional and 7 nontraditional Pizza Pizza restaurants closed and 1 traditional Pizza 73 restaurant closed permanently. So we are proud of our accelerated growth last year, and expect to maintain this pace with projected unit growth of circa 3%, maybe 4% in our traditional restaurants in 2024, with continued focus in Quebec, British Columbia and also Atlantic Canada, while also looking for further market penetration opportunities in our largest 2 markets, Ontario and Alberta. As you may recall, and as Jay had outlined at the beginning, in November 2021, we entered into an international franchise agreement with partners based in Mexico to expand our footprint internationally for the first time. And in 2023, we opened our first restaurants. We are happy with the progress of the first 3 stores are achieving and are excited about the long-term potential of this high-growth, high pizza consuming market. And you may not know that Mexico also represents 3x Canadian population as well. So obviously, a massive market there. And we will see several more sites built in Mexico this year and are encouraged by our early success there. Mexicans are clearly loving our delicious pizza and other menu items such as chicken and fries. In fact, since the successful launch of our restaurants in Mexico, not surprisingly, we've been increasingly approached by multiple potential parties as well regarding further international expansion, which we'll take under consideration, but we'll certainly be judicious about that, how and where we do that. In terms of building our brands, Pizza Pizza Limited is unique in that our exceptional in-house marketing team manages a spend that is approximately $30 million and funded entirely by our restaurants. In 2023, we continue to build on our Everyone Deserves Pizza campaign platform, with messaging focused on our unique position to bring Canadians from all walks of life together and to be part of key social occasions. This includes our fixed-rate pizza promotion, which some of you may have seen multiple TV slots for, our pre-rolls for 4/20 and Creamy Garlic Halloween Sauce-tume. So we did able to fund with some of these things as well. In addition to outgoing media executions such as billboards and social media, we integrated our campaign messaging into key sports partnerships, building more meaningful connections with our fans, via our ongoing Score a Slice and Score a Pie programs, with the Toronto Maple Leafs and the Edmonton Oilers just as 2 examples or with other teams as well. But that is a free -- fun sort of free slice pizza giveaway. It's also a great way for us to drive app downloads and get us to more organic orders, digital orders, which we love. And of course, leads to future customer orders and longer-term customer relationships, real stickiness there. Looking at our food quality. It's another aspect we're very proud of at Pizza Pizza, our in-house R&D team is always looking to introduce new high-quality menu additions that also make operational sense for our franchisees and it has to be based on relevant consumer trends. Continuously refreshing the pizza category with new crusts, recipes and toppings, continuously brings new life to our pizza menu and represents the investments we continuously make in our food quality. In addition, as shown in these few quick examples, we are continuously looking at items that complement our core pizza offerings, such as South Asian Spice Delights flavors, stuffed crust, strombolis, curly fry poutine and other appetizers and sides. And even with that level of quality and innovation, we maintain our value to customers. We know that customers are very value-conscious at this time, given food inflation and a challenging macroeconomic environment. So we have to find the right balance of perceived value for money at all times. In achieving this, we promote key specials and introduce new products at price points that attract customers. Many of our marketing messages are centered around our always-on value offerings that resonate with consumers, including our fixed-rate pizza I mentioned earlier, our snack boxes and also our walk-in and pickup specials. We also have a long track record of community involvement, including all levels of sports sponsorships and are well known for our own Slices for Smiles Foundation, which primarily donates to SickKids hospitals right across the country, and we provided the funding, that -- those charity dollars back to the communities in which we generate the sales. So if it is in Winnipeg, sales go to the hospital there. If it's Toronto and the GTA area, they go to SickKids hospital. And right across the country, we've made a really big impact there, which we're very proud of. We're also active at many big cultural events such as the Pride parades right across Canada and countless live entertainment venues as well, concerts and whatnot, festivals, you name it, especially it's summertime as well. We're particularly proud of our new sponsorship as well with the PWHL in 2024 as part of our strategy to connect with sports fans across the country. And over the years, we've built and invested in our platforms and our company for the future. The largest single investment we've made has been in our digital ordering platforms and infrastructure. Going back to circa 2009, Pizza Pizza clearly saw how critical it would be to develop an industry-leading iPhone app and website, frankly, before many others did or at least in Canada, and to invest in our end-to-end digital platforms and infrastructure. No other pizza player in Canada has more digital channels for hungry customers to choose from. So no one is more convenient or able to capitalize on this digital e-commerce momentum in the pizza quick-service restaurant sector. Our continuous IT investment strategy showed their value during the pandemic and post-pandemic periods as our online ordering platforms performed exceedingly well, having been active after for years already, while others in the industry honestly struggled to develop their own as quickly as possible to really try to play catch-up. You can see it in the numbers of others. And we also developed contactless ordering and pre-tipping features and things like that for app and website within mere days of the pandemic starting, which was actually quite a feat, showing the capability of our team and our technology as well and our agility. Most recently, we launched a similarly new website and app at Pizza 73, allowing our customers to have an even smoother, faster and more enjoyable ordering experience. Customer delivery and pickup orders transacted through our array of digital ordering platforms account for nearly 2/3 of all orders, and this percentage will only continue to increase, benefiting our customers, our company and our franchisees. Additionally, we've been investing in AI infrastructure with a partner to provide intelligent delivery order tracking within our app with a slick live mapping interface for our customers so they can see where the delivery person is on a map as they approach their location. And of course, we'll ensure we meet our famous delivery time guarantee, the 40 minutes or free, big part of our brand. And our customers right across Canada are loving how they can so easily track exactly where their delivery driver is, follow them along the route graphically and have the additional comfort of having a uniformed Pizza Pizza delivery person bringing in their hot and fresh pizza order. Other pizza players often really rely on third-party aggregators to provide this type of functionality and detailed visual tracking. We have it organically. Over the last 3 years, we have seen a shift in consumer behavior with customers moving increasingly to pick up orders as well. And with over 750 locations across Canada, we are ideally positioned to capture all audiences, especially those looking to save on delivery, tip and other surcharges that many companies charge. Our in-store pickup channel has grown steadily over the last 3 years, and it is at the highest level of sales it has ever been at. When customers visit our restaurants, they also see and appreciate our renovated, refreshed new look as well. And we believe that, that ambience and overall experience is a cut above the competition and really speaks to our emphasis on quality and continuous evolution as a brand. We're proud to say that over 90% of our restaurants feature our Hot & Fresh new look. And heading inside the store, here's a little snapshot of a couple of store interiors. We're committed to ensuring that the store experience is one that keeps customers coming back again and again. And when coupled with our extensive menu, our industry-leading, award-winning app and website and our friendly in-store team for their deliver on our vision of all the best food, made especially for you. It's a great offering for customers. And just to toot our own horn a little bit here. It's always nice to think well of yourself, but of course, the market will judge you positively or negatively. And I think we're really proud of our franchise system. As I said, we work as one team right alongside our franchisees, and we're a very high-touch franchisor and we really enjoy that relationship and it's very mutually beneficial. So if you look at some of the industry accolades that we've received, it's not just us saying wonderful things about ourselves, just a few examples here. For the past 10 consecutive years, the Canadian Franchise Association has awarded us the Franchisees Choice award, which is a huge vote of confidence for our restaurant operators. This franchise relationship is absolutely key to our record of strong growth and our future growth as well. Also in 2023, we were named the champion for diversity and inclusion by the Canadian Franchise Association. So we were very proud of that as well. And diversity, of course, doesn't just stop at our menu or with our Everyone Deserves Pizza campaign platform, it runs truly throughout our entire team right across the country. And speaking of our campaigns, Pizza Pizza was recently given a coveted Brand of the Year award for 2023 by the reputable Strategy magazine, who recognized our team for all of its incredible brand work around our market campaigns. Additionally, in 2023 and 2024, we were recognized as one of Canada's most admired corporate cultures and one of Canada's certified great places to work, a true testament to the commitment, impact and passion of our team. And Pizza Pizza Limited continues to establish in the media, true to reputation as an industry leader and trusted voice in the QSR sector, QSR pizza, the advertising sector and the industry overall, food supply chain and other aspects of business and industry. We've had articles from some of our executives, our HR leader, one of our senior marketing directors as well, having pieces in The Globe and Mail Leadership Lab over the recent weeks. Really interesting pieces just giving a lot of, I think, interesting insights into corporate culture and the way that we think about marketing and building a brand and building a team. So it's really nice to see that -- that's happening. And diversity and inclusion for us is obviously very important. Brand management is always top of mind and employee retention as well is another stat that we're very proud of. We've really retained -- attracted, retained and grown people who have great capability and passion for our brand. Touching on ESG. As you know, we've always been a leader on the environmental front. However, recently, we've been challenging ourselves to do even more. For example, our boxes are made with recycled content and our head office has a rooftop, this is an example, of built-in solar panels, and we have wind turbines on site to generate additional clean energy. And we also utilize a passive solar gain wall in our head office that automatically provides us with about 60% of our heating needs for free in the wintertime, which translates into a lot of reduced natural gas usage in a material way. So it's not just the cost savings, but environmentally, we're also burning a lot less hydrocarbon. So we feel good about that. And there are other projects we're working on at the store level, including a very interesting heat recovery project which is actually not only going to be very helpful for our stores economically, but also, again, it captures a lot of otherwise wasted heat out of the chimney of a restaurant. So it's a very exciting aspects that have a really material impact on the environment and also financial performance for our stores, very important. And being active in our communities is an important ingredient of our corporate strategy. Annually, we have our Slices for Smiles fundraising campaigns, supporting children's hospitals, as I said, right across the country. And we also participate in countless fundraising initiatives, focusing on our customers and their communities by supporting events and sponsoring local organizations, be it a soccer league or a local fundraiser for a good cause. And last year, we also partnered with Too Good To Go , a very interesting company that eliminates food waste essentially, that food that would otherwise go to waste and actually feeds people at a very, very low cost, feeds our communities, especially people that really are in that tough social demographic that really, in some cases, will not be able to eat unless they get something very affordable. And that would be food that would be otherwise disposed of. So that's a wonderful platform, not just exclusive to us, but I think we have a really good take-up with people using that platform and our stores like it and certainly customers and a lot of people really do appreciate that. And we also continue to be a strong community partner to Second Harvest, big fans of them. So with that brief overview and understanding of our business operations, I hope that gives you a little window inside to the company and how we think about things and how we operate. I would just like to summarize the key advantages of being a PZA shareholder. As a top line royalty corp, the company's royalty structure reduces risk to the bottom line by eliminating exposure to restaurant operations. As I said, it's top line. The company is also a high-yield dividend corp currently yielding about 7% of the current share price level and holds sufficient working capital of $7.2 million to support this dividend. With over 55 years in experience in the quick service industry, the operating company, Pizza Pizza Limited, has a strong history of increasing sales and our brands hold market-leading positions with exceptional brand recognition. I would say, only growing. Lastly, as the company's largest shareholder, the operating company, Pizza Pizza Limited, has its interest aligned with public shareholders, ensuring that every pizza created doesn't just add value to the customer but also to the shareholder. And that's really it for me. I want to thank you very much for listening in today. We truly appreciate it. And I'd now like to hand things back over to Jay Swartz, Chair of PPRC. Thank you.

Thank you, Paul. As previously stated, if you have any questions, the secretary will take note and respond to you directly after the meeting. Also, I note that Paul's presentation will be available on the website for those who want to refer back to it. And that concludes the agenda for the meeting. And I want to thank you all for your attendance. I wish you a good day, and I remind you to eat lots of pizza. Thank you.

Thank you for attending today's meeting. You may now disconnect.