Pizza Pizza Royalty Corp. (PZA.TO) Q3 2026 Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp. Earnings Call for the Third Quarter of 2026. [Operator Instructions] As a reminder, this conference is being recorded on November 2, 2026. I will now turn the call over to Christine D'Sylva, CFO.

Christine D'Sylva: Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp.'s Earnings Call for the third quarter ended September 30, 2026. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer and President, Paul Goddard; and Chief Operating Officer, Phil 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. 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 press 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 this call. I would now like to turn the call over to Paul to provide a business update.

Paul Goddard: Thanks, Christine, and good afternoon to everyone. Thanks for joining us for our third quarter results conference call. This afternoon, we released our results for our third quarter of 2026, which is available on our website. Our operating environment remained challenging throughout the third quarter. Discretionary consumer spending remains tight amid intensifying promotional competition across the quick service restaurant sector and particularly on third-party delivery aggregator platforms. In the third quarter, our overall same-store sales decreased by 2.3%. Pizza Pizza restaurants were down 2.7%, while Pizza 73 restaurants fared comparatively better as they held flat with 0% same-store sales growth. Despite the obvious challenges in our operating environment, going into our third quarter, we knew that our traffic would see pressure due in significant part to the Blue Jays' extended World Series run right up to those extra innings in Game 7 a year ago on Halloween night, which unfortunately didn't quite work out, but it was a great night for business. Government immigration policy changes also continue to work against us with our nontraditional sales, including a large number of affected colleges. Several of these locations were operating a year ago that have subsequently closed due to changes by the government's student visa and permanent residence program, or PR program. This demographic represents a high-frequency customer segment. Consequently, this shift pressured both our on-campus nontraditional restaurants as well as our neighboring traditional restaurants. However, turning to our direct channels, we saw encouraging signs of stabilization. Our proprietary digital platforms did well, led by order growth from our iOS, iPhone, et cetera, and Android apps, alongside solid gains in our walk-in and preorder pickup business. Supporting the sales on each channel are innovative marketing and brand activations. During the quarter, we launched a premium, delicious and healthier option with our ancient grain crust pizzas to connect with evolving preferences for smaller portions and lighter crusts with protein-forward recipes. To balance our premium offerings, we also continue to highlight value with our Buck an Inch pizzas. This deal caters to every customer where every 2-topping pizza is priced at $1 per inch. So yes, an 18-inch XXL 2-topping pizza is only $18. And at Pizza 73, our Double Up deal performed well given its strong value offering of 2 medium 2-topping pizzas and 4 drinks for just $22.50. And to attract walk-in customers, we continued to promote our $5 Mega Slice deal, featuring a new, bigger slice and a drink. We also launched pizza rolls with 6 different delicious flavors at a compelling, value-oriented price of 2 for $5. Our pizza rolls are packaged very nicely, are incredibly tasty and are very portable for travel family people, very ergonomic. And finally, to capitalize on the strength of our well-known and loved dipping sauce category, we introduced a new delicious Chicken Chicken dip to complement our best-in-class dips and chicken offerings. At Pizza 73, following the successful launch of our Golden Crispy chicken tenders, we expanded the offering to Golden Crispy chicken sandwiches. This product launched in September and is positioned at a value price point of $5. Our marketing calendars balance value perception with check-building innovation. We also capitalized on peak summer foot traffic through high-impact brand activations. At Canadian National Exhibition, the CNE, as we call it, our brand campaign highlighted by our viral creamy garlic diving attraction with high divers jumping from staggering heights into a massive creamy garlic dipping sauce-shaped swimming pool, generated over 180 million media impressions, which is pure media gold. In the West, meanwhile, Pizza 73 achieved its strongest Calgary Stampede activation to date, earning third place in a highly competitive food innovation award competition with our deep-fried Hot Cheetos cheese slices. Turning to our restaurant development. During the quarter, the brand's expansion was limited to 2 nontraditional Pizza Pizza openings, offset by the closures of 10 nontraditional and 2 traditional restaurants. The total number of Pizza 73 restaurants remained unchanged. There are several new restaurant openings that are slower to come online due to construction delays and in a few markets, sourcing highly qualified franchisees has been somewhat more challenging. Accordingly, we have adjusted our development outlook to 1% to 2% for the year, down from a typical 2% to 3%, which we feel is also prudent in this tougher economic cycle. In closing, I'd like to thank all of our franchisees, partners and our company team members for their relentless commitment, energy and resiliency as we navigate through the new business norm and work diligently on controlling what we can. Having been in the business now for almost 60 years, with our big anniversary coming up next year in 2027, we've always found a way to enhance our brands through good times and tougher times and we'll continue to do so, focusing on value, quality, convenience, innovation and most importantly, delighting our customers each and every time. All of this means we remain focused on the fundamentals that will drive our business forward, strengthening our brand, delivering compelling value to our customers and driving operational excellence through consistency and unyielding innovation. By staying true to our customers, continually sharpening our execution and building on our core strengths, we are confident in our ability to navigate the current environment and position the business for sustainable long-term growth. Thank you again for joining us today, and I'll now ask Christine to provide our detailed financial update.

Christine D'Sylva: Thanks, Paul. As a reminder, Pizza Pizza Royalty Corp. is a top line restaurant royalty corp and earns a monthly royalty through a license agreement. Growth in the corp is derived from increasing the same-store sales of the restaurants in the pool and by adding new restaurants to the pool each year. As announced earlier this year, on January 1, 2026, the Royalty Pool increased by 20 restaurants as a result of opening 39 new restaurants less 19 which permanently closed. So for fiscal 2026, there were 814 restaurants in the Royalty Pool, comprised of 712 Pizza Pizza and 102 Pizza 73. This is compared to 2025 when there were 794 restaurants. So now I'll briefly cover the financial results for the quarter. As Paul mentioned, same-store sales, the key driver of yield for shareholders, decreased 2.3% in the quarter. Both brands saw a decline in traffic, which resulted in Pizza Pizza restaurants reporting same-store sales decreases of 2.7%, while Pizza 73 restaurants were flat. The positive impact of the 20 net new restaurants added to the Royalty Pool was offset by the same-store sales decline and resulted in an overall decrease in the Royalty Pool system sales and the corresponding royalty income. Royalty Pool system sales for the quarter decreased 0.9% to $157.4 million from $158.8 million in the same quarter last year. The partnership's royalty income earned as a percentage of Royalty Pool sales increased 0.7% to $10.1 million for the quarter. As a reminder, the Pizza Pizza and Pizza 73 restaurants are subject to seasonal variations in their business. System sales for the first quarter of the year are generally slowest, while system sales for the last quarter are generally our highest. So turning to partnership expenses. Administrative expenses, including listing costs as well as director, legal and auditor fees decreased in comparison to the prior year. This quarter, they totaled $141,000 compared to $181,000 in the prior year. The decrease in the quarter reflects lower professional fees 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 $444,000. As a reminder, in March of 2025, the company renewed the facility for 3 years with maturity now set for 2028. The balance of the facility remained unchanged. However, the credit spread table increased slightly with the lowest tier increasing from 0.875% to 1%. Additionally, in April 2025, the partnership entered into a 3-year forward swap. The new 3-year swap commenced when the existing ones expired and our lock-in rate is currently at 2.51%. So the all-in rate for the facility for the next 3 years is 3.51%. Now after the partnership receives royalty and interest income, pays administrative and interest expense, the resulting net cash is available for distribution to its 2 partners based on their ownership. After the 2026 vend-in and the prior year true-up, Pizza Pizza Limited's ownership increased to 27.2%. Pizza Pizza Royalty Corp. shares in the remaining 72.8% of the partnership distribution. It pays taxes on its share of the partnership earnings and any residual cash is available for dividends to shareholders. For the quarter, the company declared shareholder dividends of $5 million or $0.2025 per share compared to $5.7 million or $0.2325 per share in the same quarter of last year. The dividend reduction in May of 2026 lowered the payout ratio for the quarter to 93%, down from 111% in the prior year comparable period. And this resulted in the company's working capital increasing by $400,000 to end the quarter at $2.6 million. This $2.6 million working capital reserve is available to stabilize dividends and fund other expenditures in the event of short- to medium-term variability in system sales. The company has historically targeted a payout ratio at or near 100% on an annualized basis and any dividend decisions will be made with this target in mind. So that concludes the financial overview. I'd like to turn the call back to our operator to poll for questions.

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

Yaozhi Zhang: Great to hear from you. So my first question is on same-store sales. I think you noted that consumer discretionary spending remains tight. How did the overall same-store sales trend from July to September and into October?

Paul Goddard: Yes, we just -- we haven't really given detail on throughout the quarter. But I think that we can say that certain things were introduced at certain times that worked really well, like, for instance, our Buck an Inch promotion, which is our #1 mixer. It was sort of late Q2 and all of Q3. So I think that had a positive impact there. I just don't want to get too granular on that for competitive reasons. But I mean, we are -- overall, we obviously want positive same-store sales every quarter, but -- and we're not thrilled with having a negative again here. But we do feel it's a step in the right direction if you look at our prior results and then seeing Pizza 73 come up to flat is progress from where they were as well. So overall, we're encouraged by some of the trends.

Yaozhi Zhang: Okay. Got it. Do you see any performance difference by geography like with certain markets doing better or worse than the others?

Paul Goddard: Yes, I think a little bit on that. I mean we -- a lot of it has to do with how long we've been in certain markets as well and how new our network is. But I would say we've been encouraged recently with the GTA in area, broader area, Ontario core, which makes us really happy. That's a real sign of hopefully more contagion in a good way. Also markets like Quebec continue to be strong for us, especially more core to the more urban areas. That's generally been positive for us. Some of the newer markets, we're still climbing up on getting our average unit values up, and that would include places like BC and in Maritimes where we don't have that many restaurants and some of the newer areas that we're in are still really early days, and it's also a tough economic environment. So -- but in Ontario, we're encouraged in a lot of ways with what we're seeing, but we certainly have concerns here, too, with the geopolitical environment, tariffs, potential further impact to the auto plants and things like that. So we want to make sure that we have a firm footing in value and convenience with the customers who are no doubt struggling and some may end up struggling even more than they are now.

Yaozhi Zhang: Got it. That's helpful. And I wanted to double-click on the performance by different brands. For Pizza 73, it's pretty impressive that it's flat given the environment. I'm curious what's driving that outperformance other than I think you highlighted quite a few of menu innovation in the quarter.

Paul Goddard: Yes, we were happy with the menu innovation. We're really happy with the Stampede, as we said this year, weather-wise and our team just executed very well on the food development side. We got a lot of attention there. And we've really been highlighting the Alberta element there. It's a homegrown brand in Edmonton, but we're super popular in Calgary, really all over the whole province. And so that's been really, really good. And we have seen their check overall up, but orders still down. So what we really want is orders up, right? And we'll certainly get check growth when we can get it. But really, we look at traffic is more important, and that's how we want to really build our growth. So we have work to do still there, even though it is better than it was. So we're encouraged, but we just got to be careful to maintain the order growth.

Yaozhi Zhang: Okay. That's helpful color. And then speaking of traffic and check, you noted that traffic is down. Is that becoming more negative from last quarter? Or has it improved?

Paul Goddard: I think it's improved a bit, the traffic. I mean, Christine was just going to jump in there.

Christine D'Sylva: Yes.

Paul Goddard: Go ahead, Christine.

Christine D'Sylva: I think as the quarters have progressed this year, we've seen the declines in traffic moderating. We're happy to see a lot of our iOS and digital orders improving as well as we focus on growing those channels. We also leaned into value; knowing customers are shifting their buying preferences to picking up and walking in, we've really leaned into the value there with some great compelling offers, as Paul mentioned, an extra large slice of pizza for $5 with a pop, speaking to people just trying to grab and go and get something that will fill the belly at a reasonable price point.

Yaozhi Zhang: Okay. That's great to hear. And then on the average check, I think adjusting the promo pricing helped. But what about the number of items being ordered? Is that stabilizing? Is that down? Or has it improved?

Paul Goddard: I think stable overall. Philip can chime in. But I think overall, I mean, we still think checks up and orders overall down, but not as much. And so we are encouraged by the early days of the trend there.

Yaozhi Zhang: Okay. That's helpful. In your prepared remarks, you noted heightened competitive activity. Are you seeing a step-up in promo? Or is it just staying at a high level?

Paul Goddard: We certainly see it at a high level and on third-party aggregator platforms, we really see a lot of activity, the promo offers from everyone, not just pizza QSR, but all QSR. That tends to be the go-to sort of tactic for folks, and it does generate sales, but those are also pretty expensive sales. So we feel that we're quite unique and relative to many players in that our digital platforms, our organic offering is so compelling, and we've got more channels than anyone else. So we're trying to really steer things more in that direction. We have certain products that are only available on our organic channels or on digital channels. Not everything is available on, say, third-party aggregator. So it is a valuable channel for us, too, but we really want to make sure for ourselves and for our stores, the profitability is there as well as the sales growth.

Christine D'Sylva: And Cheryl, we've augmented. We're not just doing value. We have the Ancient Grains, which are nice premium, higher-priced products. We're trying to get check where we can and where we know it's going to resonate with certain customers. But everyone competitive-wise has a always-on value message. That really hasn't changed much over the course of the year. It's just that it's still there at that same competitive level. We're just trying to balance the premium with the value message for the overall profitability of our stores.

Paul Goddard: And we are trying to innovate as well, just aside from all the other comments that Christine just made, is on the food side, for instance, the Pizza 73, I said in my prepared comments, but on the Golden Crispy, that is a real movement in itself. I mean people love our chicken out there, and they always have, and we've been innovating on that. So just expanding our Golden Crispy tender success with sandwiches and other chicken products. We think there's still some more runway there, too, and that's pretty encouraging there. We sell a lot of product out there. It's not just pizza. And that also applies to Pizza Pizza as well. But the Golden Crispy is unique to Pizza 73, and we've been pretty encouraged by how that's performed.

Yaozhi Zhang: Okay. That's very helpful. I wanted to double-click on the new restaurants. You lowered your outlook on restaurant development this year and noted challenges in sourcing qualified franchisees. Could you elaborate on those challenges, please?

Paul Goddard: Sure. Yes. I think it's sort of just a sign of the times. I mean, we've actually seen a lot of franchise sales activity, for instance, within our network. But we certainly, in places like Quebec, for instance, as you get further and further away from Montreal and the more purely French-speaking areas where perhaps our brand is less known, that has been a bit of a challenge, just finding good, capable franchisees where we want them. And so that -- we have cases, it's not very common, but we had a few cases where we have a store ready or we have a location we know will be successful, but actually getting someone to buy a store in that environment is more challenging than perhaps buying an existing restaurant, let's say. So we are seeing that in some pockets. And we've also consciously slowed down a little bit, just consciously to also focus on our existing network a little bit, for instance, in BC, where we've been really happy with our number of restaurants growth there, but we really want to focus on driving up the performance of our existing portfolio, especially in the Lower Mainland rather than just adding tons of BC new stores as well. So, part of it's our being more selective ourselves of where we have restaurants as well and just making sure that wherever we do open one up, as much as we would rather open 2% to 3%, we would really, if it comes to it, rather go a little slower and make sure that there's a greater chance of those sites being profitable for the franchisee.

Yaozhi Zhang: Right. Absolutely. And then you also noted construction delays. Is that due to permitting or equipment supply issues?

Philip Goudreau: Mostly, Cheryl, this is Philip Goudreau. It's just really permitting and we didn't show any growth in Q3. However, in the quarter that we're in now, we're on track based on what Christine mentioned 1% to 2%.

Yaozhi Zhang: Okay. So on franchisees, can you comment on the health of your existing franchise system? How has the average franchisee margin and return trended in the past few quarters? And are you seeing more or less franchisees requiring financial assistance?

Christine D'Sylva: So I mean, what we do because we are doing all the procurement for the stores, we're trying to stabilize what we can control, things like food costs and what we do charge them, trying with our marketing messages to make sure that their net penny profits are still whole and we try to keep it within a safe, healthy range. We do see a lot of pressure on a lot of the fixed costs. Utilities are going up, rents are going up, labor, minimum wage, things that we can't control. What we are looking at is trying to be more efficient in the stores, making sure that the stores have the best equipment to have a better output and throughput for what they're selling. We do see, though, that the top line same-store sales has decreased, does put pressure on our stores. So it's something that all stores right now are facing generally in the industry where there are negative sales comps.

Yaozhi Zhang: Okay. That's helpful. And then speaking of those internal initiatives, I think you shared some of them over the past couple of quarters from construction to procurement, just trying to help improve franchisee profitability. Curious if you can give any update on those initiatives? Any impact that you can share on how it has been helping franchisees?

Paul Goddard: On my end, Cheryl, we've obviously continued to implement the conveyor ovens versus deck ovens. And every conveyor oven that we add to the system, it definitely saves 40 to 50 hours of staffing. And at the end of the day, everybody can cook on a conveyor oven versus you have a highly skilled cook to go through a busy day with the deck oven. So we're really happy with that. We're almost 75% complete, which is great. And then we've done some optimization with our pizzas and our veggies and so forth as well that has helped stabilize just some of the inflation we've seen on some of the proteins and so forth. But ultimately, as Christine mentioned, we had 2%, 3%, 4% sales growth, certainly help our EBITDA and our restaurant-level profit.

Christine D'Sylva: We also look at the menu and look at menu simplification. Are there items on the menu that take a lot of labor that are high labor costs that don't really generate a lot of net profit. So we are constantly looking at our menu for revisions and looking for efficiencies that way too, Cheryl.

Paul Goddard: We also have a lot of touring and meeting with our franchisees, Cheryl. And anything that's working really well, we hear about it real quick. Anything that's not working really well, our franchisees are wonderful at providing feedback and so forth.

Philip Goudreau: I'd just add to that, those comments are all very valid. It is just the use of technology, we just see more and more of that from us. I mean, we're already using technology to allow customers to track their orders visually like some of the third-party aggregators are doing, but I think we're unique in that regard in Canada aside from the third-party aggregators. So that's also helped give us more operational data to actually improve our order delivery times because we always want to earn our guarantee, which is 40 minutes or better, and we're well under that. And I think the fact that we know exactly when the orders are leaving and when they arrive at the customer's home using technology our drivers have on an app for them is also a step in the right direction. So that just enables more throughput, and that can result also in things like it seems to maybe not as immediately evident, but more tips for our drivers because they get more orders, the food is hotter, delivered faster. So the use of technology to benefit the customer experience and the food quality. So we're going to keep focusing on things we can automate, improve the delivery time, the experience overall of the customer, make it extraordinary.

Operator: [Operator Instructions] So there are no further questions at this time. I will now turn the call over to Christine D'Sylva, CFO. Please continue.

Christine D'Sylva: Thank you, everyone, for joining us on the call today. If you have any questions after this, please give us a call or information is on the release. And thank you, as always, for supporting the brand and Pizza Pizza. Have a great day.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.