Pizza Pizza Royalty Corp.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp.'

s Earnings Call for the First Quarter ended March 31, 2026. Joining me on the call today is Pizza Pizza Limited's President and Chief Executive Officer, Paul Goddard.

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 our cautionary language in the earnings press 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 full reconciliation of 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.

I'll now turn the call over to Paul for a business update.

Thank you, Christine, and good afternoon, everyone. We appreciate you joining our call.

This afternoon, we released our results for the First Quarter of 2026, which you can find posted on our website. The overall macroeconomic conditions remained challenging through the first quarter of 2026.

We saw the impact on consumer confidence, spending and demand, all of which negatively impacted our retail sales, specifically traffic. In the first quarter, our overall same-store sales growth was actually negative 4.1%.

Pizza Pizza restaurants were down 4.3%, while Pizza 73 restaurants were down 2.7%. Beyond the current macroeconomic impact on sales, the impact of last year's nonrecurring sales tax holiday was also felt at both brands.

So while consumer confidence remains low, businesses continue to face rising costs and ongoing uncertainty. In this environment, we are focused on controlling what we can, strengthening our product offering, further expanding our footprint across Canada and driving operational discipline.

Starting with product offerings. Our core pizza category remains resilient, supported offerings at all price points.

And while value continues to be critical, staying top of mind through innovation is equally important. Our innovation pipeline allows us to attract new customers, encourage trade-up within our existing mix through premium offerings and deepen overall brand engagement.

This quarter, following the success of the Volcano Dipper Pizza at Pizza 73, we rolled out the product at Pizza Pizza. This unique, ownable new product provided us with the opportunity to showcase Pizza Pizza and our food in a fun and playful narrative while enforcing -- reinforcing our gift leadership position.

We also recently introduced a $5 Meal Deal slice and drink combo in late March to strengthen our walk-in channel and compete with other QSRs offering entry-level value meals. We saw immediate improvements in both sales and traffic within this channel, which is exciting.

We remain focused on delivering strong value to our customers, knowing that we're competing for a share of increasingly constrained consumer spending. Turning to our restaurant network.

In terms of restaurant development, I'm pleased to share that we started the year stronger than we have in the last 5 years. And as a reminder, with over 800 restaurants from coast to coast, we have more points of convenience than any other QSR pizza chain in the country.

During the quarter, we opened 6 traditional and 3 nontraditional Pizza Pizza locations and closed 1 traditional and 1 nontraditional Pizza 73 restaurant. Our new traditional restaurants span the country with openings in BC, Manitoba, Ontario, Quebec and 2 in Newfoundland.

And as mentioned on previous calls, our business is driven by 2 revenue streams. First, our traditional restaurant network, which generates 90% of our Royalty Pool sales; and secondly, our nontraditional and special event locations, which typically generate the remaining 10%.

Our nontraditional segment is currently facing some headwinds, particularly locations within colleges and universities where lower attendance tied to international student policies stemming from reduced immigration, et cetera, has resulted in reduced operating hours and overall sales. But looking ahead, we continue to see growth opportunities across our network.

At the same time, we are taking a more disciplined approach, carefully selecting locations and formats to ensure long-term profitability, particularly in the context of rising costs. As I close out my comments, we expect us to continue to face headwinds across our entire system in the near future.

Consumer confidence is still low, and there continues to be much uncertainty. However, we will continue to be there to provide our customers with the best food and especially for them.

Our platform is solid and battle tested. We will drive further value and innovation, and we have the experience and track record to do so.

The strength of our brands and experience of our team and our owner operators as a critical part of that team have enabled us to navigate through these challenging conditions before, and we have great confidence in our ability to successfully manage well through this latest period of economic uncertainty and leveraging our proven competitive advantages and leading brand platform. So thank you again for listening in today.

And I'll now ask Christine to provide a 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 with Pizza Pizza Limited.

In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its operations, Pizza Pizza Limited pays the partnership a monthly royalty calculated as a percentage of the Royalty Pool sales. 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 we announced earlier this year, on January 1, 2026, the Royalty Pool increased by 20 net new restaurants as a result of adding 39 new locations less than 19 restaurants which permanently closed.

So for fiscal 2026, there will be 814 restaurants in the Royalty Pool, comprised of 712 Pizza Pizzas and 102 Pizza 73. This is in comparison to 2025 when the pool was 794 restaurants.

So now briefly covering the financial results for the quarter. As Paul mentioned, same-store sales, the key driver of yield for shareholders, decreased 4.1% in the quarter.

Both brands saw a decline in traffic, which resulted in Pizza Pizza restaurants reporting same-store sales decrease of 4.3% and Pizza 73 restaurants reporting a decline of 2.7%. 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 to the Royalty Pool System sales and the corresponding royalty income.

Royalty Pool System sales for the quarter decreased 3.5% to $145.8 million from $151.3 million in the same quarter last year. By brand, sales from the 712 Pizza Pizza restaurants decreased 4.1% to $124.5 million and sales from the 102 Pizza 73 restaurants decreased 0.9% to $21.3 million for the quarter.

The partnership's royalty income earned as a percentage of Royalty Pool sales decreased 3.5% to $9.4 million in 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 lowest, while system sales for the last quarter are generally the highest. So turning to partnership expenses.

Administrative expenses, which include listing costs as well as director, legal and auditor fees decreased in comparison to the prior year. This quarter, they totaled $132,000 compared to $152,000 in the prior year.

In addition to administrative expenses, the partnership is making interest-only payments on the $47 million credit facility. Interest paid in the quarter was $435,000.

The all-in rate for the credit facility for the next 3 years will be 3.51% compared to the maturing rate that expired in April of 2025 of 2.685%. So after the partnership received royalty income and interest income and paid administrative and interest expense, the resulting net cash was available to distribute to its 2 partners based on their ownership.

After the [ event ] on January 1, 2026, Pizza Pizza Limited's ownership increased to 27.2% and Pizza Pizza Royalty Corp. shared in the remaining 72.8% of the partnership distribution.

The Royalty Corp. received distributions, paid taxes on its share of the earnings and any residual cash was available for dividends to the company's shareholders.

The company declared shareholder dividends of $5.7 million in the quarter or $0.2325 per share, which was consistent with the prior year. The payout ratio for the quarter was 134% and resulted in the company's working capital decreasing by $1.4 million to end the quarter at $2.3 million.

This $2.3 million working capital reserve is available to stabilize dividends and fund expenditures in the event of short- to medium-term variability in system sales and interim royalty income. The company has historically targeted a payout ratio near 100% on an annualized basis, and any dividend decisions will be made with this target in mind.

That concludes our financial overview. I'd like to turn the call back to our operator to poll for questions.

So obviously, certainly not an easy quarter for anyone in the QSR space. I'm curious what you're seeing that customers are cutting back on in particular?

And is there any notable changes in consumer behavior compared to last quarter?

Yes, it's a good point, Cheryl. I think we see the landscape we live in and some common issues people face.

I think just generally, not unlike our last call, I mean traffic is overall weak. I mean, we still did see some growth positively in pickup but certainly, people are shying away from delivery.

So we saw negative in delivery, and that's something we certainly have some plans to try and address. We've been trying for a while, but we have some other ideas we think we will be more successful.

So I think there are some signs of light, but definitely, people are just really hurting. I mean you've got the global geopolitical situation.

Gas prices are on everyone's mind. I think we're $2 gas in British Columbia, things like that.

And so really since sort of mid-Feb really, we and I think the whole market has seen just all that much more conservative, careful behavior on the part of customers. So that translates into things like less frequency, less add-ons, people just getting what they really need and not sort of treating themselves as much and as often.

So we just sense it's just been weakening as we saw really in the quarter, weaker than it was even in the last quarter.

I see. That makes sense.

And curious if you could offer any early reads on the trends so far in Q2?

Well, it's still a little early, right? I mean we're just kind of end of April here.

So I think we really need to see. We've got a lot of menu innovation going on and other things we're planning on doing later this year.

But I think things like our $5 slice and a coke deal, we think that's out in the market that that's going to have a big impact in walk-in in a positive way. That's something that's really unique to us really as a major chain.

There's others that do slice, but nowhere near kind of the volume that we do. So that's just one example.

Things like that, we're actually pretty optimistic about having a material impact. But the overall landscape is still very tough.

People are looking for value and you're seeing some extreme discounting -- extreme,extreme discounting by other folks that we don't think is really sustainable. So we certainly discount ourselves, but we're also trying to play the long game here and play to our advantages.

So I think some of our menu innovations have done well, and we're going to keep pushing things like organic delivery a little more, and we've had some signs of success there. But I'd say it's still a little early for the quarter to really make more comment on that.

Yes. Speaking of competition, how do you feel about your pricing and offering compared to competitors?

And how do you think about keeping your value edge without escalating discount? You mentioned in your prepared remarks some subsequent improvement after you launched the $5 new deal, and I'm curious if you could add some color to it.

Yes. I mean I think we generally have a good sense of price.

I mean when we look at competitors, which we're doing all the time and seeing where we have traffic strength, traffic dropping off, what's happening with relative check. I mean we saw check was up, generally speaking, but traffic was down.

It's always hard to find that balance. We think we're well priced.

I mean we are not shy to change prices. We've changed prices on a la carte items.

We've changed prices on specials from time to time. So I think generally, we feel like we're in the right zone for what we offer.

I mean we know we offer very high quality relative to some others. And yet we think with our cost structure, we can be very competitive with our pricing.

So I think we feel we're sort of in the right zone, but we do see downward pressure overall from people that are being extremely aggressive, I guess, you could say. So we're aware of that.

We have to get good results. We have to get top line sales growth.

That's our job. But we also got to make sure it's profitable for our franchisees as well.

So I think just overall, we're really looking to play to our strengths. So things like the slice deal, we launched chicken tenders at Pizza 73, some unique items there.

We've got more in the pipeline. I think BOGO has been successful out there for us as well.

So I think we've had some success with things that we think will work well and some other things that maybe haven't resonated quite as well. I mean one example would be the Volcano Dipper, which we did very well in Pizza 73, we translated it over here, didn't quite get the pickup that we thought, to be honest.

So not everything we try does work, but we have a pretty quick cycle time on our innovative marketing team. So we don't always hit it right, but we thought that was great value.

But we also have more success with things like our Vladdy Junior Special, the XXL [ $19.99 ] 3-topping pizza, which became very quickly one of our top mixing specials and it's certainly fantastic value in a fun way and especially in our major markets, it's done really, really well. So it's just not doing well enough because customers are still, at the end of the day, hurting so much that even though it's a great deal and talking to a lot of customers, even that only has limited potential.

So we're also looking at how do we get something even better, more interesting that can drive traffic further. But overall, I think we're well placed as a value player overall.

We're really careful about our pricing. We're looking for opportunities to accentuate things like dips as well, which we're really famous for having the best dips as add-ons.

But we know people are cautious. So we need to really get more and more creative about how we can really leverage our advantages, still be a value player and get that traffic up.

It's just all about transaction count, getting that traffic up and doing whatever we need to do to do so.

And then to add on to that, Cheryl. We do have the multiple channels, right?

We make sure that we have value at every point where the customer is interacting with us. If we're coming in for a walk-in, we've got a walk-in special.

If you want to come in to pick up to save on the delivery and the tip, which as consumers are getting more constrained in their available spend, we have pickup specials that are available to you. So you can save on the delivery and tip.

And we always have our delivery specials like the XXL Vladdy deal. So we try to make sure that at every price point and at every convenience point, we have something to offer our customers.

And across dayparts as well, I mean, we slice and dice the numbers every way you can imagine, of course, but we're always looking for growth in various dayparts and those sort of omnichannels, like Christine said. So that is some flexibility that others don't have.

But at the end of the day, we're still not getting enough transactions. We know we've got to get traffic up.

And we are pretty excited about some of the things coming down the line. And some of them will take longer as well to bear fruit, to be honest, but it's kind of a -- we have kind of a long view on the platform and what we can do to really win over more people from competitors and then get our loyal customers actually coming to us more often, more frequently and adding on more items.

So it's a bit of a long game, but we do think there's some signs of hope, but the overall economic climate is still pretty concerning.

It's very helpful. Actually, I did mention that you still see some improvement in organic delivery.

I'm curious if there are any drivers for that, that you could highlight? Is it because of better speed visibility?

Or is it SMS tracking from all construct like free delivery or anything that you could highlight there?

Yes. I mean we do think there's benefits to the customer and there's economic benefits.

I mean we've actually been -- as of the last couple of months, I think it was sort of the end of Q2, correct me Christine if I'm wrong, but the -- with the sort of time, the guarantee time, and we try to highlight that a little more because that is something that we -- people don't get on a third-party platform. So we do use those as a channel like everyone else, but customers can rely on a uniform Pizza Pizza delivery driver with really good tracking times.

We have much like the third-party providers, a customer tracking map, see where your order is on the map as it comes to the customer with an SMS reminder as it's supposed to get to your door. So it's better service, better speed, it's cheaper rather than paying commission to a third-party aggregator.

So we -- and we think that's helpful because our delivery charges are really nominal really compared to those. And we think that's a real competitive advantage we have.

We're famous for our guarantee. And although the third parties are a channel that some people only order from, they're also shying away from that.

I think we see some weakness overall in the sector there for third party because delivery is just so expensive. So we see people trending more towards pickup.

But we think leveraging things like loyalty and cross-channel marketing, getting people to behave in multiple channels, loyal customers or winning new ones in some of our multiple channels, that's a good pathway to success.

We also have on game days, because we have such big partnerships with a lot of the sports teams across Canada, we have free game day delivery. So we try to get those customers who are watching the game with friends at home, ordering and saving on that delivery fee to keep them coming to us.

And we always promote our on time or free, right? We are always less than 40 minutes with a guarantee that Pizza Pizza has always had, and we're proud of it and the fact that you can trust your order now is something that our marketing team has done a great job this quarter of promoting as well.

That's great. And just last one for me.

What are you expecting for network expansion in 2026? And are you seeing any early impacts from the rising costs like fuel costs?

Any impact on equipment construction costs or input costs that might impact franchisee profitability and interest in opening new stores?

Yes, we are. I mean we still are, I would say, on offense growth-wise.

So we think in terms of traditional stores, we're still looking at 2% to 3% range. I mean last -- this quarter has been encouraging in that respect.

And so we do think really most parts of the country, we have lots of green space to grow on it while others perhaps are being a little more defensive. We're certainly defensive about our key markets, but on offense on the store development side.

So I think we are getting suppliers increasingly looking for fuel surcharges and things like that. But that does indirectly impact us.

We're holding the line on that as best we can. We haven't seen sort of equipment costs necessarily go up yet, but I wouldn't be surprised if we see more of that in the future.

And we've been really challenging our construction team to also ensure that the unit economics look good for a franchisee. Can we reduce construction costs?

Can we skip certain items or reduce the cost of certain items so that the investment for the franchisee is more palatable? So I think we're being pretty creative with some aspects like that, and that's pretty exciting.

I think we have a good record, a good franchisee pipeline. But certainly, there's headwinds.

I mean with the inflationary pressure depending on how long this big crisis goes on overseas and just even without that general economic malaise, I mean, that's what we expect. So we say, well, if it's a tough environment, we still need to be successful.

So what do we got to do? And if it ends up not being as bad, well, then we'll look even better.

But we are seeing some pressure, things like fuel. Most of our Canadian ingredients are Canadian, for instance, so we mirror that quite well, and we've held the line pretty well there.

But certainly, we'll control what we can control and make sure that the food basket overall is okay. And same with lease costs and things like that for franchisees.

So we're trying to make sure that our economic -- unit level economics are attractive even in a sort of really not helpful economic backdrop.

Thank you. Thank you, everyone, for joining us on the call today.

If you have any further questions after the call, please feel free to contact us. Our information is on the earnings release.

And thank you for your support of Pizza Pizza Royalty Corp. You may now disconnect your lines.