Pizza Pizza Royalty (TSX:PZA) Q3 2026 Earnings Call

0:00 As a reminder, this conference is being recorded on November 2nd, 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 third quarter ended September 30th, 2026. Joining me on the call today is Pizza Pizza Limited's Chief Executive Officer and President, 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. 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.

0:52 Please refer to our earnings press release and the MD&E in the investor relations section of our website. for our reconciliation and other disclosures related to non-IFI. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers, media, and shareholder can contact us after this call. I will now like to turn the call over to Paul to provide a business update. Thanks, Justine, 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.

1:38 Discretionary consumer spending remains tight, and then 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%, Well, 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 to, 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. Unfortunately, it didn't quite work out, but it was a great night for business.

2:24 Government integration policy changes also continue to work against us with our non-traditional sales, including a large number of affected colleges. Several of these locations were operating a year ago, but 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 non-traditional 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, etc., and Android apps, alongside solid gains in our walk-in and pre-order pickup business.

3:11 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 grains crust pizzas, to connect with evolving preferences for smaller portions and lighter crusts with protein-forward recipes. To balance our premium offerings, we also stated to highlight value with our buck-an-inch pizzas. This deal caters to every customer, where every two-topping pizza is priced at $1 per inch. So yes, an 18-inch XXL two-topping pizza is only $18. And at Pizza 73, our double-up deal performed well. given its strong value offering of two medium two-topping pizzas and four drinks for just $22.50.

3:58 And to attract walk-in customers, we continue to promote our $5 mega slice deal featuring a new, bigger slice and a drink. We also launched pizza rolls with six different delicious flavors at a compelling value-oriented price of two for $5. Our pizza rolls are packaged very nicely, are incredibly tasty, and are very portable and 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.

4:47 Our marketing calendars balance value perception with check-building innovation. We also capitalized on peak summer foot traffic through high-impact brand activations. At the Canadian National Exhibition, the CNE, as we call it in Toronto, 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 Toggery 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 two non-traditional Pizza Pizza openings, offset by the closures of 10 non-traditional and two traditional restaurants.

5:45 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 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 will continue to do so, focusing on value, quality, convenience, innovation, and most importantly, delighting our customers each and every time.

6:43 All of this means we remain focused on the fundamentals that will drive our business forward, strengthening our brand, Thank you again for joining us today and I'll now ask Christine to provide our detailed financial update. Thanks, Paul. As a reminder, Pizza Pizza Royalty Corp. is a top-line restaurant royalty corp. that 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.

7:30 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 Corp., comprised of 712 pizza pizzas and 102 pizzas at decrease. This is compared to 2025 when there were 794 restaurants. So now briefly covered the financial results for the quarter. As Paul mentioned, same store sales, the key drive 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.

8:19 The positive impact of the 20 net new restaurants added to the royalty pool was offset by the same store sale decline and resulted in an overall decrease to 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 decreased 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 the slowest, while system sales for the last quarter are generally at our highest.

9:07 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 three years, with maturity now set for 2028. The balance of the facility remained unchanged.

9:52 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 three-year forward swap. The new three-year swap commenced when the existing ones expired, and our locked-in rate is currently at 2.51%. So the all-in rate for the facility for the next three 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 two 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.

10:54 For the quarter, the company declared shareholder dividends of $5 million, or 20.25 cents per share compared to 5.7 million or 23.25 cents 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's 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.

11:49 So that concludes the financial overview. I'd like to turn this call back to our operator to fold for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline the pulling process, please press star followed by the number two. If you are using speakerphone, please leave the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Cheryl Zhang, Dee Dee Cohen.

12:35 Great to hear from you and thanks for taking our questions. Hi Paul and Christine, great to hear from you and thanks for taking our questions. Thanks Cheryl, nice to hear you too. So my first question is on seems for sales. I think you noted that consumer discretionary spending remains tied How did the overall same source sales trended from July to September and into October? 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 number one mixer. It's sort of late Q2 and it's in all of Q3.

13:23 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, you know, overall, we obviously want positive things for our sales every quarter, but, and we're not, you know, 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. Okay, got it. Do you see any performance difference by geography, like with certain markets doing better or worse than the others? Yeah, I can give a little bit on that. I mean, we, you know, a lot of it has to do with how long we've been in certain markets as well and how, you know, how new our network is. But I would say we've been encouraged, you know, recently with the GTA in area, Royalty Corp., which, you know, makes us really happy.

14:17 That's, you know, a real sign of, you know, hopefully, you know, more and 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 and getting our average unit values up and that would include places like BC and then Maritimes where we don't have that many restaurants and some of the newer areas that we're in are still really in the early days and it's also a tough economic environment. 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.

15:14 Got it, that's helpful. And I wanted to double-click on the performance by different brands. For a piece of 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. Yeah, we were happy with menu innovation. We were really happy with the stampede, as we said this year. WeatherWise 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 from Edmonton, but we're super popular in Calgary, really all over the whole province. And so that's been, you know, really, really good.

15:59 And we have seen, you know, their check overall up, but orders still down. So what we really want is orders up, right? And we'll certainly get check rows when we can get it, but really we look at traffic as more important and we know 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 okay that's helpful color and then speaking of traffic and and Chuck you know that the traffic is down is that becoming more negative from last quarter or has it improved I think it's improved a bit, the traffic. Maybe Christine was just going to jump in there. Go ahead, Christine. 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.

16:56 We also, you know, leaning into value, knowing customers are shifting their buying preferences to picking up and walking in. We've really leaned into value there with some great compelling offers. As Paul mentioned, you know, an extra large leg piece 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. Okay, that's great to hear. And then on average, Chuck, 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? It's pretty stable overall, Philip can chime in, but I think overall, I mean, we still think, you know, checks up and orders overall are down, but not as much.

17:43 And so we are encouraged by the early days of the trend there. 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? We certainly see it at a high level, and on third-party aggregator platforms, we really see a lot of activity, particularly BOGO offers from everyone, not just P6USR, 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, a third-party aggregator.

18:46 So it is a valuable channel to 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. And Cheryl, we've augmented. We're not just doing value. We have beans and 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 an 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. We are trying to innovate as well, just aside from all the other comments that Christine just made. on the food side, for instance, at Pizza 73, I said in my prepared comments, but on the Golden Crispy, I mean, that is a real movement in itself.

19:37 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 to sandwiches and other, you know, chicken products, we think there's still, you know, some more runway there too, and that's pretty encouraging that 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. Okay, that's very helpful. Thank you both. 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? Sure. Yeah, 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, you know, good capable franchisees where we want them. And so that, you know, we have cases, it's not very common, but we have 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 a existing restaurant, let's say. So we are seeing that in some pockets.

20:58 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 B.C. new stores as well. So part of it is being more selective ourselves with 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. Right, absolutely. And then you also noted construction delays. Is that due to permitting or equipment supply issues?

21:45 Mostly Cheryl, this is Philip Goudreau. It's just really permitting and it 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%. Okay. Thanks so much. 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? 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 try to keep it within a safe, healthy range.

22:46 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 store. It's 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 as 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. Okay, that's helpful. And then speaking of those internal initiatives, I think you shared some of them over the past couple quarters from construction to procurement, just trying to help improve franchisee profitability.

23:34 I'm curious if you can give any update on those initiatives, any impact that you can share on how it has been helping franchisees. On my end, Cheryl, we've obviously continued to implement the conveyor oven 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, if we had 2%, 3%, 4% sales growth, it would certainly help our EBITDA and our restaurant-level profit.

24:38 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 Thank you for joining us. Just to add to that, those comments are all very valid. The use of technology, we just see more and more of that from us. We're already using some 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.

25:23 That's also helped give us more operational data to actually improve our order delivery times, because we always want to honor our guarantee, which is 40 minutes or better, and we're well under that. 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 them maybe not as immediately evident, but more chips for our drivers because they get more orders, the food's 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, the customer, make it extraordinary. This is all super helpful. Thanks, everyone, and good luck.

26:13 Thanks very much, Cheryl. So as a reminder, if you wish to ask question, please tar once. So there are no further questions at this time. I will now turn the call over to Christine D'Sylva, CFL. Please continue. Thank you everyone for joining us on the call today. If you do have any questions after this, please give us a call. Our information is on the release. And thank you as always for supporting the brand and Pizza Pizza. Have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.