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

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp.'s Earnings Call for the Second Quarter of 2026. [Operator Instructions] As a reminder, the conference is being recorded on August 5, 2026. I will now turn the call over to Christine D'Sylva, CFO.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp.'s Earnings Call for the second quarter ended June 30, 2026. Joining me on the call today is Pizza Pizza Limited's President and Chief Executive Officer, Paul Goddard, and Chief Operating Officer, Philip Goudreau. Just a quick note, our discussion today will contain forward-looking statements that may involve risks relating to future events. Actual events may differ materially from the projections discussed today. And all forward-looking statements should be considered in conjunction with the cautionary language in our earnings release and the risk factors included in our annual information form. Please refer to our earnings release and the MD&A in the Investor Relations section of our website for a reconciliation and other disclosures related to 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 to provide a brief business update.

Thank you, and good afternoon, everyone. Thanks for joining the call. This afternoon, we released our results for the second quarter of 2026, which you can find posted on our website. The overall macroeconomic environment remained challenging throughout the second quarter. Persistent pressures on consumer confidence, discretionary spending and overall QSR demand continued to weigh on our retail sales and guest traffic across both brands. So in the second quarter, our overall same-store sales decreased by 5.0%. Pizza Pizza restaurants were down 4.9%, while Pizza 73 restaurants were down 5.3%. Before addressing our operational highlights, I want to comment on the dividend adjustment we announced in May. In the ongoing macroeconomic headwinds and lower overall sales volume across the network, our Board took the prudent step to reduce our monthly dividend by about 12.9%. It was $0.01 per share from $0.0775 to $0.0675. And this decision was made to ensure our distribution payout ratio remains sustainable, while preserving our working capital balance. Maintaining financial stability and protecting long-term shareholder value remain core priorities for our leadership team and our Board. Beyond broader economic pressures, a few additional factors impacted our top line sales comparisons this quarter. First, tough prior year comps with the 2025 NHL playoff runs, which everyone I'm sure remembers. We faced a difficult comp Q2 of 2025. As a result, and last year's second quarter benefited significantly from that deep extended NHL playoff runs -- multiple runs by multiple Canadian teams, which generated exceptional home viewing -- sorry, viewing, apologies, event-based sales at our nontraditional locations and late night pizza consumption that did not repeat to the same extent this year. Second, declines in international student enrollment, affecting many of our nontraditional sites at colleges. So reduced numbers of international students across Canada at many of these post-secondary campuses. I think many are familiar with that. That just presented direct headwinds for our nontraditional locations at these campuses we have across the country and nearby hubs as well. So this demographic traditionally represents a high frequency, the late-night customer base, and the volume did drop significantly and impacted both transaction counts and overall sales at these sites. So navigating the shifting consumer dynamics requires us to be agile and creative, and while input costs and market conditions remain challenging, we are focused on execution. And that means driving traffic through value and product innovation, expanding our store network in key markets, and really leading into operational efficiencies to build long-term customer loyalty and engagement. Starting with our value and product offerings, our core pizza category remains resilient, supported by strong value offerings across every price point. In this environment, value gets customers through the door of continuous menu innovation and cultural relevance keeps them coming back. In the second quarter, we executed a comprehensive strategy focused on value leadership, key cultural moments and high-impact product launches. So as an example, first, on value, we took aggressive steps to reinforce our value leadership position and support our walk-in channel. In mid-May, we introduced our Buck an Inch special featuring Buck Martinez, as many will know, from the Blue Jays, pricing every 2 topping pizza at just $1 per inch from the $10 small up to an $18 XXL pizza. And this simple compelling value message resonated immediately, quickly surging to our #1 selling menu offer in our sales mix. The popularity of this offer has allowed us to remove a number of legacy deals simplifying the menu, and helping streamline operations at the restaurants. In late May, we increased the size of our pizza slices as well nationally by 25% with only a nominal price adjustment to protect profitability. This move delivered a noticeable boost in perceived customer value and elevated the overall slice experience. This return to our famous XXL pizza slices has been extremely well received by customers. And alongside our slice refresh, our $5 meal deal, the Slice and Drink combo continue to perform well, driving sustained improvements in walk-in traffic and sales throughout Q2. Second, we lean heavily into culture to keep our brands top of mind, capitalizing on the immense viewer engagement during the FIFA World Cup. We introduced Dip Cup Nations featuring dip trios matching participating country flags, which was quite fun and really had good take-up. We also launched a Pitch Party Pizza, transforming our party pizza box into an interactive tabletop football or soccer game, complete with mini nets, driving an increase in party pizza sales and significant increase, I will say. We also capitalized on match play momentum with something called Pie-dration Break instead of hydration breaks. So we have codes associated with that offering 25% off pizzas during match hydration breaks. And our media analysis that showed that we were the #1 search pizza brand in Canada during the activation of the Pie-dration Break. So that was a great success. Together, these activations established Pizza Pizza as the most searched brand, like I said, and we're pretty proud of that. Finally, targeted menu innovation allowed us to drive incremental snack and individual consumption occasions across both brands. At Pizza 73, we expanded our core chicken category with the launch of Golden Crispy Chicken tenders reinforcing Pizza 73's strength in chicken and providing a premium craveable option for family and group orders. We also brought back our popular 420 rolls -- pre-rolls with new flavors, elevated packaging and an attractive $2 for $5 value offer. This campaign doubled our pre-roll sales during 4/20 week and sustained strong momentum to its month-long LTO run. To capture the growing snacking market, we launched 3 new loaded poutine recipes at Pizza Pizza, driving a 36% year-over-year sales lift in our poutine categories. So we're definitely encouraged by that. So as you can see, hopefully, by balancing everyday value, high-energy cultural campaigns and smart product innovations, we are continuing to give consumers compelling reasons to choose our brands every day. Turning to our restaurant network with well over 800 restaurants now from coast to coast, we have many points of convenience for our customers to experience our brand. During the quarter, we opened 4 traditional and 2 nontraditional Pizza Pizza locations, and closed 1 traditional and 6 nontraditional Pizza Pizza restaurants, and 1 nontraditional Pizza 73. It is worth noting that while our nontraditional locations saw the majority of the closures, our core high revenue traditional restaurants expanded net positive by 3 locations across B.C., Ontario and Quebec. And as mentioned on numerous -- previous calls, our business is driven by 2 revenue streams, that traditional restaurant network which generates about 90% of our royalty tool sales, and our nontraditional and special event locations, which typically generate the remaining 10%. And as I alluded to earlier, our nontraditional segment continues to face some headwinds, particularly those locations in colleges and universities where lower attendance tied to international student policies, essentially less students coming in from a far, has resulted in reduced operating hours and overall sales and challenges for those colleges themselves. Looking ahead, we continue to look at growth opportunities across our network. And at the same time, we're taking a more disciplined approach than ever. Carefully setting locations and formats to ensure long-term profitability, particularly in the context of rising costs. We want sales growth, we want network growth, but we want viable, great locations. And I will say our long-term growth track record speaks for itself, both for same-store sales and network growth as we've grown from -- I think it was roughly 500 locations back in 2005 at our IPO to well over 800, as I said, as of '25, and that's a 20-year period. So if you look at things on an ROE basis, return on equity or a CAGR growth rate, I think we look quite good over time. We've had a lot of institutional and long-term holders and retail holders. And as you well know, if you're familiar with our stock, our dividend profit on a 6% to 8% yield range, which represents a reliable, consistent investment for retail and institutional investors alike and we certainly look forward to getting more investors on board as well at these levels. So we are really now Canada's very owned national Pizza QSR chain leader, and we're excited to grow beyond our orders. First in Mexico, and then on to other countries that suit our system and our brand well. In closing, while we expect the macroeconomic environment to remain challenging in the near term, consumers are hurting, and we know that, we are not standing idly on the sidelines. We are proactively driving our business forward, leaning into our scale, sharpening our value proposition and relentlessly focusing on menu innovation. With a resilient business model, a proven track record to these economic cycles and the dedication of our franchisee partners across Canada, we are fully confident in our ability to navigate this period and strengthen our competitive position. And as always, I want to give a shout out to our owner operators. They are really the absolute key frontline people and an extension of our bigger team, and also our employees internally. We work very seamlessly together, and it's all about the passion and the hard work day in and day out. And I think that's something that makes us real special and we're very proud of. So thank you again for joining us today. And I'll now ask Christine to provide our detailed financial update.

Thanks, Paul. And as a reminder, Pizza Pizza Royalty Corp is a top line restaurant Royalty Corp. that earns a monthly royalty through a license agreement with Pizza Pizza Limited. In exchange for the use of the trademarks, Pizza Pizza Limited pays the partnership a monthly royalty calculated as a percentage of Royalty Pool sales. Growth in the corp is derived from increasing the same-store sales of the restaurants that are in the pool, and by adding new restaurants to the pool each year. As announced earlier this year, on Jan 1, 2026, the royalty pool increased by 20 restaurants as a result of adding 39 new restaurants less 19, which permanently closed. So for fiscal 2026, there were 814 restaurants in the Royalty Pool, comprised of 712 Pizza Pizzas and 102 Pizza 73. This is compared to 2025 when there were 794 restaurants in the pool. So with that, I'll briefly cover the financial results for the quarter. And as Paul mentioned, same-store sales growth is the key driver of yield to the shareholders. And during the quarter, that decreased by 5%. Both brands saw decline in traffic, which resulted in Pizza Pizza restaurants reporting a decrease of 4.9%, and Pizza 73 restaurants reporting a decline of 5.3%. The positive impact of the 20 restaurants added to the pool was offset by the same-store sales decline and resulted in an overall decrease to the Royalty Pool system sales and the corresponding royalty income. The partnership royalty income earned as a percentage of Royalty Pool sales decreased 3.6% to $10 million for the quarter. As a reminder, the Pizza Pizza and Pizza 73 restaurants are subject to seasonal variations in the business. System sales for the first quarter of the year is generally the lowest, while system sales for the last quarter of the year are generally the highest. So turning to partnership expenses. Administrative expenses, including listing costs as well as directors, legal and auditor fees decreased in comparison to the prior year. This quarter, they totaled $181,000 compared to $283,000 in the prior year's comparable quarter. The decrease in the quarter reflects lower professional and director fees. In addition to administrative expenses, the partnership is making interest-only payments on its $47 million credit facility. Interest paid in the quarter was $439,000. As a reminder, in March of 2025, the company renewed the credit facility for 3 years, with maturity now set for April 2028. The balance of the facility remained unchanged. However, the credit spread increased slightly from 0.875 to 1%. Additionally, in 2025, the partnership entered into a new 3-year forward swap. The 3-year swap locked in interest at 2.51%, which was an increase from the maturing swaps of 1.81%. Now the all-in rate on the credit facility for the next 3 years will be 3.51% compared to the maturing rate of 2.685%. After the partnership received its royalty and interest income, and paid its administrative and interest expense, any resulting cash was then available to distribute to the partners based on their ownership. And after the 2026 pending, Pizza Pizza Limited's ownership increased to 27.2%. Pizza Pizza Royalty Corp. shared in the remaining 72.8% of the partnership distributions. It paid its corporate taxes, and any residual cash was available for dividends to the company's shareholders. As previously announced, and Paul mentioned earlier on the call, the company reduced its monthly dividend from $0.0775 per share to $0.0675 beginning with that May dividend. And this was done in response to the ongoing market conditions and their impact on top line system sales. So for the quarter, the company declared dividends of $5.2 million or $0.2125 per share compared to $5.7 million or $0.2325 per share. The payout ratio decreased to 102% and from 108% in the prior year's comparable period. And the company used $100,000 of its working capital to end the quarter with $2.2 million. The $2.2 million working capital reserve is available to stabilize dividends and fund other expenditures in the event of short to medium-term sales variability. The company has historically targeted a payout ratio at or near 100% on an annualized basis. And with the recent dividend decisions, the company continues to target this on a go-forward basis. That concludes my financial overview. I'd like to turn the call back to the operator to poll for questions.

[Operator Instructions] Your first question comes from Cheryl Zhang with TD Cowen.

I wanted to first double quick on consumer behavior. I'm wondering if there's any change in concern behavior that you can point to in Q2 versus Q1? And if you can comment on what are consumers cutting back on in their purchases?

Yes, it's a good question, Cheryl. I mean I think that generally speaking, the backdrop is still quite negative out there. I mean, obviously, we had even less traffic this quarter, which we are not happy about. It does seem like some customers are reducing their frequency. So that obviously impacts overall traffic occasions. And we do sense that people are just generally in this environment, more likely to shop around. Even though we have a loyal customer base, some people are only loyal to their last great deal they received, and they'll pop around and get a similarly priced burger or even another pizza slice et cetera. So that's a factor, just generally customers struggling and then overlying all this. I made a comment in my prepared remarks was just the fact that the NHL playoffs -- last year, we had that long, long run with the orders and other teams, the least. And we just -- this year, just didn't see that. And we were lapping also for Nations last year as well. And so that was really good for us last year. And we just don't have that this year. So because we are somewhat leveraged to the success or lack of success of the big sports events, that's a factor, at least through that kind of fan base that really likes the eat more pizza when these events are on. But I think just generally speaking, we are seeing a little bit less frequency and just people being a little more choosy, pivoting more to pick up, saving on delivery fee, and also on third-party platforms. I think they're getting expensive not just for us, but I think all restaurants out there. So some people will use a certain third-party app but we're trying to make it more and more attractive to have them use our organic apps, which are really much more effective to come with our time guarantee and whatnot. And we also see, just from some of our data analysis, people are -- some people are just not having as many add-ons. They might have gone for a drink before or 2 drinks, they might downgrade to 1, maybe not get a dessert, maybe not get a dipping sauce. So we have to counter things like that. We have been really actively promoting things like dipping sauces as add-ons because maybe a little more proactively than perhaps we used to in the past because people are hurting. So I think hard to just get a definitive behavior change just specifically in Q1 and Q2, but certainly, things are not better, I would say, overall.

And Cheryl, I think I don't remember for Pizza 73, they used to be like 90% delivery, 10% walk-in and pick up. And over the years and even especially in the last few years, they shifted to almost 40% walk-in and pick up as a combination of their sales. So what Paul is saying, people are still coming, but they're shifting and trading down slightly but within our own ecosystem. So that's the trend that we are seeing more of.

Yes. So as much as we can. We're obviously very known for value, and we can segment our customer base in some places where value is not as key, but obviously for our main core value is critical. So pricing and convenience, we know that's one of our advantages. We have a lot of levers to pull there and our omnichannel approach does help to like customers lots of ways to get to us. And so we'll take them however they want to get us, pickup, walk-in, delivery and even third-party app, but we'll take them all. But we do notice, I mean, more than ever, pricing is super competitive, and we've got to have that convenience factor.

That's all very helpful. And speaking of competition, how -- it sounds like competitive activity has increased in Q2 versus Q1. Is that a fair comment? And do you feel that you need to increase promo versus what you have now?

I think our sort of mix of promos to none, it's fairly consistent, although we're certainly not happy with our traffic this quarter. We have noticed, I would say, a little more of the sort of what we call some cases, sort of irrational deep discounting by some significant players where they'll often at the end of a certain period or cycle quarter, they'll have extreme discounting for a period. And that does drive traffic. But we don't think that's a super sustainable economic model. So we're trying not to chase that. We'd rather provide sort of consistent value on those real traffic moving items. And we're not -- certainly, we do, do discounts and opportunistic things, and we've been successful with things like SMS broadcast to certain customers that are sort of dormant customers and things with very attractive discounts, but that's not to all our customers. It's only the targeted people. So we're trying to be smart about it rather than just discount all of our products out of just extreme desperation for traffic because we want to be sustainable. We want to make sure our operators can also make money at the end of the day. So we're driving top line all the time. That's critical for investors and that network growth, but we got to make sure that the bottom line works for franchisees. So we -- it's always a tight rope, but I think generally, we would trying to find that pretty well.

Yes, absolutely. And then do you feel like you're gaining or losing share versus your pizza category peers in this environment?

I think we do have some recent data basically saying that both in Ontario and nationally, we have gained some share. And so that's positive. I think just like the fact that traffic is down, I think it's so that reflects that the whole pizza segment is a tough place to be even within the tough sector QSR. And I think -- I'm still a big believer in long-term ubiquity of pizza and people still love it, but there are a lot of other choices. And so it does -- we do take some comfort in the fact that we did gain some share there. Even though, look, even when it's in our favor, I will say sometimes market share data, it's sort of directionally helpful. But in absolute terms sometimes the data can be a little bit questionable. That's all I will say. But we have said that we -- in our biggest market of Ontario, it's gone up and nationally, so that's good. And sometimes it's down a little bit, too, but I think this has been quite encouraging. So I do think some of the things we've been putting out there have been resonating even though traffic is still not where we want it to be.

Okay. That's helpful. And I know it's probably still early, but any initial reads on how things are trending so far in Q3?