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Edited Transcript of PZA.TO earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q3 2019 Pizza Pizza Royalty Corp Earnings Call

Toronto Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Pizza Pizza Royalty Corp earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine D'Sylva

Pizza Pizza Limited - Director of Finance and IR

* Curtis Feltner

Pizza Pizza Limited - CFO, VP of Finance & Director

* Paul Goddard

Pizza Pizza Limited - CEO, President & Director

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Conference Call Participants

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* Derek J. Lessard

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp. Third Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Thursday, November 7, 2019.

I will now turn the call over to Christine D'Sylva, Vice President of Finance and Investor Relations. Please go ahead.

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Christine D'Sylva, Pizza Pizza Limited - Director of Finance and IR [2]

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Thank you. Good morning, everyone, and welcome to Pizza Pizza Royalty Corp.'s earnings call for the third quarter ended September 30, 2019. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard; and Chief Financial Officer, Curt Feltner.

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 press release and the risk factors included in our annual information form. Please refer to our earnings release and MD&A in the Investor Relations section of our website for a reconciliation and other disclosures relating to non-IFRS measures mentioned on this call. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers and media can contact us after the call.

With that, I'd like to turn the call over to Paul Goddard for our business update.

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [3]

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Thanks, Christine. Good snowy morning in Toronto, and thanks, everyone, for joining our call today. I'll begin with a few high-level comments on our third quarter sales results, then share my views on the continued successes at Pizza 73 in Western Canada and assess Pizza Pizza where we continue to hone in on and iterate on our various tactics in order to drive stronger performance in Ontario, our largest market nationwide.

Pizza Pizza Realty Corp.'s third quarter System Sales were $138.5 million, which is flat compared to Q3 2018. For the 9 months ended December 30, 2019, Royalty Pool System Sales increased 0.4% to $406.6 million compared to $404.9 million in the same period of last year. As for same-store sales growth, the key driver of yield growth for shareholders of the company, we were essentially flat having decreased slightly by 0.1% for the quarter. For the 9 months, we reported flat same-store sales growth at 0%.

During Q3 at both brands, we continued executing our long-term strategy of promoting our popular value-based menu offerings boosted by product innovation designed to be on trend and demonstrating our high food quality. And I should mention by demonstrating our high food quality, I don't just mean through our marketing imagery and such, but also very importantly through flawless operational execution at each of our restaurants to guarantee a positive customer experience. So it's not only through the imagery, but really through that execution piece. I just want to mention that on the side.

But with every marketing campaign, we utilize our in-house data-driven analytics and business intelligence software to help us optimize our media mix model using both traditional and digital media. All of this is supported and enhanced by our ongoing innovation across all facets of our business, but particularly when it comes to tech innovation and menu innovation lately. This strategy, focusing on value, innovation, customer experience and on quality, is key in our minds to win back customer traffic lost in 2018 and returning to historical same-store sales growth levels and increasing the level of profitability for our operators.

We feel both Pizza Pizza and Pizza 73 are well positioned in a pizza QSR market by leveraging our well-oiled marketing machine to continuously promote our leading brands and in many cases be the first to market such as with our Cauliflower Crust launch and more recently with our plant-based protein launch with our Super Plant Pizza at both brands, just to give 2 quick examples. And technological investments by the private operating company continues at Pizza Pizza Limited working to greatly improve the customer digital order experience across all channels, and I'll talk a little bit more about that in a minute.

And most important is our food quality, of course. In 2019, our restaurant operations team and our R&D teams have renewed our customer plans to make the very best food, especially for you. We have measurably been enhancing our cooking procedures and recipes and doing third-party metrics as well to benchmark our quality and taste profile, which we see improvements on, and as well as our franchisee training program is another example of something we've been really working on. It continues to improve the customer experience over time.

So let's look at details of our strategies to drive customer traffic and also enhance the brand's image in the consumer's eyes. First, Pizza 73 continued its positive sales momentum by posting 1.7% same-store sales growth in the challenging western economies. In addition to driving baseline everyday deal offering, which is buy one get one, we also promoted single pizza offerings for delivery, which has been successful in targeting the single customer. And that's a bit of a new demographic, a new segment we see growing for us. So it's a true sales builder also with the quarter's marketing campaigns featuring the launch of our Cauliflower Pizza Crust and plant-based toppings to Western Canada.

Pizza 73 also introduced 3 new limited time only pizzas during the summer months, which demonstrated further innovation and variety to our frequent customers, while also attracting new customers. Meanwhile, at the Pizza Pizza brand, similar to our Pizza 73 strategy, we leveraged our brand recognition and marketing strength across all traditional and digital channels, including billboards, prints, radio, digital and social marketing channels. And to drive traffic, our targeted markets received flyers, emails, display ads promoting our popular core menu items, our Cauliflower Crust options, plus the new plant-based protein toppings introduction with our Super Plant Pizza as I mentioned.

And we continue on our delivery done better message, which we started back in Q2. And in Q3, we had video campaigns as some of you may have heard highlighting the advantages of ordering directly from Pizza Pizza rather than through the -- what we consider to be less reliable third-party aggregators, emphasizing such attributes as food safety, trust and our longstanding 40-minute time guarantee and that, again, emphasizing our oven to doorstep type of theme that others can't really claim on the third-party side.

The pizza industry in general is responding to third-party delivery aggregators on price and reliability. During Q3, we continue to see a significant amount of pressure applied by third-party aggregators through a substantial amount of discounting and heavy advertising in the marketplace and in attempts by those folks to build market share. At both brands, we will continue to ramp up our usage of various digital marketing channels to generate sales, while varying and tailoring our marketing mix appropriately to suit various customer segments and behaviors. And that's always the tricky part. Balancing our media message in the traditional and the digital -- it's really both an art and a science. But in general, we -- I think we said this on our last call. We feel we are increasingly striking this balance more effectively, at least.

And touching now on Pizza Pizza Limited's technology innovation. As I've said, I think, from the get-go way back many years, technology investment by Pizza Pizza Limited has been and continues to be one of our top strategic priorities, especially to counter the third-party aggregators in the more current scenario. And in terms of digital orders, our total delivery and pickup orders, nearly 55%, are phased through one of our many digital channels. And this percentage continues to increase at both brands. We will continue to accelerate the conversion of digital ordering and to provide customers a wide array of ordering options and platforms, thereby allowing us to be the most convenient choice for our customers.

We've talked about extreme convenience before. And that's really important to us. No matter how you want to order from us, we're going to be there. And in doing so, taking that approach, lets us outpace our competitors and critically drive our franchisees and partners' profitability. And an example of this tech innovation is in October actually, which is out in the marketplace already, we launched our online ordering website, a substantial investment and a massive improvement in our asset there. Consumers are now experiencing much greater ease at the whole ordering process and with more seamless payment.

It's quicker, fewer clicks, et cetera, much more graphically appealing, so I encourage you to check it out if you haven't already. And early results, it's still early days, but in terms of the many web launches I've been involved with in my career, this one's gone, touch wood, I think very smoothly. We've had really nothing but great feedback and it's been really smooth. So I congratulate our IT team primarily but also our marketing folks. That's really a nice launch there. So the early results are telling us that the average customer check is increasing through that channel, mainly through the newly enhanced suggestive upselling features, which we've added to the web ordering. It's just a little more sophisticated and easy to use versus what we had before.

So this successful website we launched will be shortly followed by a relaunch of our iPhone, iPad and Android ordering app before the end of 2019, so very shortly. As I also mentioned last quarter, we are also in the early stages of reimagining our successful Club 11-11 loyalty program and in general our approach to CRM and customer relationship management based on our extensive audit of our consumer base through first-party and third-party research we conducted. And as I mentioned, we expect to drive further conversion of digital ordering over time with the enhancements, let's say, in apps as well as, as with our enhanced loyalty efforts in future, although our enhanced loyalty platform won't deploy likely until sometime in 2020. That's a quite a big project. And we do, by the way, have a lot of users, active people with the increased frequency profiles in our existing Club 11-11 program. So that's still there, but we are looking to do something even better.

And I'll just briefly mention as well. I think I touched on this last quarter. It has been covered a little bit by the media. Our customer contact centers are beginning to employ artificial intelligence, AI, to further speed up the ordering process and to reduce opening costs and errors. And we do believe we are a first-mover in Canada in QSR with this initiative. And although we are -- definitely still in early development mode there. We have done sort of a soft launch of some aspects of it, and we are excited with the prospect of allowing customers to speak to a pleasantly human sounding AI robot, to order by phone, should they choose to do so.

They don't have to, but it's sort of a default, and that's what we'd like to see. So we do see potential for our AI voice solution to further speed up the process of ordering. For customers, it just makes it more convenient and quicker, in this case, all that much easier, just reducing the friction even further. So in summary, these various strategic IT investments will continue to drive our brand relevance and perception and should keep us ahead of the competition on top of mind as we further drive convenience and loyalty and leverage our digital advantage.

Touching on restaurant developments. During the quarter, PPL opened 2 traditional Pizza Pizza restaurants, one in Ontario and one in British Columbia, and we closed one traditional Pizza Pizza restaurant. Additionally, 2 nontraditional Pizza Pizza locations were opened and 2 nontraditional locations were closed. During the 9 months, PPL opened 4 traditional Pizza Pizza restaurants, one in Quebec, 2 in BC and 1 in Ontario, meanwhile, 7 traditional Pizza Pizza restaurants were closed. Additionally, 8 nontraditional Pizza Pizza locations were opened and 10 nontraditional locations were closed. At the Pizza 73 brand, we closed one traditional and 5 nontraditional restaurants in Alberta.

In 2019 and continuing into 2020, PPL has enhanced its focus on restaurant level profitability across the entire national network of locations. And as we have done for many years, but I would say now with even greater discipline and scrutiny, the management has recently undertaken a comprehensive review of underperforming restaurants and will be closing 4 traditional and 8 nontraditional locations in the fourth quarter, which, when added to the closures until 9 months, will exceed openings for the full year. So that's quite unusual for us. We project opening 8 traditional and 2 nontraditional restaurants in the fourth quarter. And management does anticipate returning to overall net positive store growth for 2020 at both brands.

And I should say that relative to most of our Canadian QSR peers, Pizza Pizza has historically held low restaurant closure rate, as I'm sure some of you're aware of, especially for our traditional restaurants. At the same time and as we've often said on these calls, nontraditional restaurants are more volatile in nature due to their shorter contractual arrangements with licensees, quick service partners. And they often grow or shrink more in spurts, just by nature, so we can get a comp of 5 all of a sudden or we can lose 6 or 7 as well and in kind of a block. And so that does happen on the upside and the downside.

But regardless, in some markets, where we or our franchisee partners have had underperforming nontraditional locations for some time, we've taken a decision along with them to close those locations and focus more on driving sales and profitable growth at higher volume locations where they would just get more bang for the buck. And in addition to our mandate to grow our net new restaurants, always part of our program and our strategy, our restaurant reimaging program continues to move along, albeit a little slower pace lately I'd say. We continue to do that. We've still got well over 25% renovated, but we've been taking stock on how that's been going as well, and we're tweaking it a little bit and just making sure that we're doing the rentals the best way we can, at an economically feasible level as well as we get through the portfolio.

And as I think I said on the last call, customers are definitely giving us positive feedback for the much more modern, contemporary store ambience. We've got music, tables, charging stations for your iPhone or your Android and butcher block tables, private seating, et cetera. So it's just a more inviting environment to go to, to be seen in and to fit in and to stick around for a while and eat more food. So customers do like that new design, and the feedback has been positive. But we are also open to feedback, and we are -- as I said we are tweaking it a little bit. And meanwhile, our nontraditional locations are also continuously evolving through this new look. And all nontraditional locations since 2017, when we set up the traditional location house, also having the design as well. So to wrap up, our internal teams and operators continue to press harder than ever to drive top line same-store sales growth and overall results for our various stakeholders. Our teams certainly realizes we have more wood to chop here, but feel our strategy is paying off. And we do feel that would give us overall some decent positive momentum at both brands.

And I just want to finish off by thanking our entire team of employees, partners and franchisees for their passion, ambition and their grit, which you need a lot of these days. And I think all of that really helps us stick together and puts a lot of wind in our sails, even in this incredibly disruptive hyper competitive market that we all live in. So we are still very optimistic and working really hard.

So thanks again, everybody, and thanks for joining the call this afternoon -- sorry, this morning. I'm pretending it's afternoon already. I know -- I'll now ask Curt Feltner, our CFO, to provide a brief financial update.

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [4]

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Thank you, Paul, and good morning, everyone. So this morning, I want to provide a background overview of our company's organizational structure before reviewing Q3. So Pizza Pizza Royalty Corp. indirectly owns the Pizza Pizza and Pizza 73 brands and trademarks through its subsidiary, Pizza Pizza Royalty Limited partnership. The partnership has 2 partners, Pizza Pizza Royalty Corp., which owns 77% of the partnership, and the other partner, Pizza Pizza Limited, a private operating company owns the remaining 23% of the partnership. The Royalty Corp. is a top line restaurant royalty corp that earns a monthly royalty through its lease agreement with Pizza Pizza Limited, which uses the Pizza Pizza and Pizza 73 trademarks in its restaurant operations.

The success of the Royalty Corp. depends primarily on the ability of Pizza Pizza Limited to maintain an increased restaurant system sales and to meet its royalty obligations. Increases in restaurant sales are derived from both the opening of new restaurants and increases in same-store sales growth. And same-store sales growth, in our opinion, is the key metric for shareholder yield growth. The partnership's monthly royalty is calculated as a percentage of system sales reported by the restaurants in the Royalty Pool. The Royalty Pool is expanded at the beginning of each year by adding new restaurants opened in the past year less any restaurants, which are permanently closed.

Royalties lost due to the permanent closure of restaurants are replaced with royalties from new restaurants at the time of the next expansion of the Royalty Pool. And until the adjustment date of January 1, Pizza Pizza continues to pay the royalty of any restaurant closed during the year. The number of restaurants in the Royalty Pool increased by 14 to 772 restaurants on the January 1, 2019, adjustment date. The number of restaurants in the Royalty Pool will remain unchanged through December 31, 2019.

So with that background, let's turn to the Q3 financial results. So as Paul mentioned, our same-store sales growth decreased by 0.1% for the quarter compared to Q3 last year, and year-to-date same-store sales growth was flat. And our same-store sales growth is driven by our change in our customer check and also customer traffic, both of which are affected by changes in pricing and sales mix. And during the quarter and also for the 9 months, the average customer check increased and the customer traffic decreased when measured against the same period last year.

So for our Royalty Pool System Sales for the quarter, we were -- reported $138.5 million, which was relatively unchanged from the prior year comparative quarter. And for the 9 months, sales increased 0.4% to $406.6 million. By brand, sales from the 660 Pizza Pizza restaurants in the Royalty Pool decreased 0.6% to $116.5 million for the quarter. And sales for the 112 Pizza 73 restaurants increased 3.2% to $22 million for the quarter.

So now turning to the company's statement of earnings. The following partnership transactions are consolidated into Pizza Pizza Royalty Corp.'s financial statements. So through the lease agreement I mentioned earlier, Pizza Pizza Royalty Limited partnership receives royalty income from Pizza Pizza Limited calculated as a percentage of top line System Sales. So that royalty income earned by the partnership for the quarter increased 0.2% to $9 million and has increased 0.7% to $26.4 million for the 9 months.

So using this royalty income, the partnership paid administrative expenses and interest expense before making monthly partnership distributions. Administrative expenses for the quarter were $108,000 compared to $122,000 in Q3 last year. And for the 9 months, admin expenses were $352,000 versus $399,000 in the 9 months last year. And admin expenses consist of directors' fees, auditing, legal and public reporting fees as well as directors and officers insurance, and the company has no employees for capital expenditures.

So in addition to the admin expenses, the partnership paid interest expense on its $47 million credit facility. And one important note on our credit facility, which was set to mature in April 2020. Earlier this year, on June 28, the partnership amended and extended its $47 million credit facility with a syndicate of chartered banks. The partnership's current interest rate is 2.75% and is projected to remain unchanged through April 2020.

The rate is comprised of a portion fixed with swaps of 1.875%, plus the credit spread, which is currently set at 0.875%. Early in Q3, the partnership entered into a 5-year forward swap arrangement, which will begin April 2020 and will have a new effective interest rate of slightly lower than the current rate of 2.685% comprised of a fixed portion of 1.87% plus -- 1.81% plus a credit spread of 0.875%. We felt it's prudent to lock in rates early in order to provide shareholders comfort over future interest payments.

So with regards to interest paid for the quarter, we paid $327,000. And this is relatively unchanged from third quarter last year because we've got the same [enterprise]. Interest expense on the statements of earnings differs from interest actually paid due to hedge accounting. And we've provided a full interest expense reconciliation in our MD&A.

After the partnership receives royalty income, pays the admin expenses and interest expense, the resulting net cash is available for distribution to its 2 partners based upon their ownership. And Effective January 1, 2019, after new restaurants were added to the Royalty Pool, Pizza Pizza Limited's ownership increased by 0.7% to 23%. The increase is a result of adding the additional royalties from the 14 net restaurants I mentioned earlier. Pizza Pizza Royalty Corp. owns the remaining 77% of the partnership.

So the company's operating earnings before income taxes for the quarter was $8.5 million and was relatively unchanged from Q3 last year. Same with current income taxes for the quarter, was $1.5 million, and this is also unchanged from Q3 2018. Regarding earnings per share, using the company's basic EPS, certain noncash adjustments are made to arrive at what we call adjusted EPS.

The company considers adjusted EPS to be a more meaningful indicator of the company's operating performance and its ability to pay the monthly dividend to shareholders. Adjusted EPS for the quarter decreased slightly by 0.5% to $0.221 from $0.222 in Q3 2018. For the 9 months period, adjusted EPS increased to 0.2% to $0.651. The adjusted EPS calculation is based on earnings adjusted for deferred taxes and actual interest paid, and you can find a reconciliation in our MD&A as well.

Turning to dividends and working capital. In the quarter, the company declared shareholder dividends of $5.3 million or $0.2139 per share. This is unchanged from the prior quarter. Payout ratio was 103% for the quarter and 106% year-to-date. The company's working capital reserve is $3.3 million at September 30, 2019, which is a decrease of $870,000 for the year. The decrease in the reserve is attributable to the flat same-store sales growth and the 106% payout ratio.

With this reserve, for the first 9 months, the company is targeting an annual payout ratio at or near 100%. However, the ratio for the full year may exceed 100% due to the reported same-store sales growth. But one note on the Q4, our final quarter for the year. Our Royalty Pool System Sales have historically been the strongest in Q4, which has historically resulted in the Q4 payout ratio being less than 100%, thereby adding cash to the working capital in Q4.

So that concludes my financial overview. I will now turn the call back to our operator for questions.

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Questions and Answers

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Operator [1]

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Your first question comes from Derek Lessard with TD Securities.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [2]

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First of all, congratulations on the new website, and congratulations to your team. It does look really good. I haven't actually gone through the ordering process, but visually it's much better. Maybe I'll start with the easier one. You talked about the closures, and I missed the number of closures in Q4 and the openings.

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [3]

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Yes. So we're projecting to close 12 and open 10.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [4]

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Okay. And that was 4 traditional, 8 nontraditional closures, right?

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [5]

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Right.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [6]

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And what was the open -- what was the split?

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [7]

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The split was 8 traditional and 2 nontraditional.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [8]

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Okay. So you mentioned in the -- I guess, in the MD&A that Pizza Pizza was winning back the customer and recovering traffic in Ontario. Just wondering if you can maybe just add some color to that. Like what was driving that? And where do you think that those customers went? And why you think they're coming back now?

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [9]

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Yes. It's a good question. It is hard to attribute specifically. But I would say the impact of third-party still continues to be, I think, a headwind for the entire industry, and we're not immune to that either. So I think that some people there is just abundance of choice out there. So pizza is not necessarily chosen as much, let's say, in some cases. So I think that's part of it. But I think that we see certainly a lot of discounting done by some competitors as well. And I guess what we're trying to do is we -- mix -- the value is still a big part of what we offer. That's a very critical part for us to get the traffic. But we also are trying to evolve as well. And we think we can get some more new customers, for instance, for some of our new innovative products and things like that.

And I think some of the investments we've made in the technology side, speaking of that convenience factor, just makes it so much easier and quicker on our platform and more affordable. And so by shutting that a little more loudly in the marketplace builds us some things we're trying to do to combat the third-party tendency of some people that otherwise say, well, I'm going to order a pizza or a sushi through a third-party platform. And I'd say, no, these guys are quite affordable. It's a nice experience and I'd go for pizza. And I think also the marketing mix we continue to hone. And it is, like I said, a real art and science. I think when we go back to about 1.5 years ago, I think we went over to digital, vert gladly learned a lot about it and then kind of lot of data-driven strategies there.

But I think we may have basically, frankly gone a little too far too quickly. And so I think we've sort of come back and struck the balance a little more there. And so just some of our traditional advertising is still very important like billboard, radio, for instance. So people know we are there. And we're also presenting ourselves in a new like. If you get heard and seen when you're driving around the garden or the 401, with the billboards you're getting radio spots. You can hear what we're talking. Its a little different than what we used to talk about. We talk about quality, some new things, innovation on the tech side more than ever, and it's not just the value only that we're offering. So I think some of that is helping us win back some folks, but I mean nothing to exaggerate either. It's very tough to whittle back that traffic as well. You just have to be even more innovative than I think we have been in order to really trying to get in those games. Well, we've certainly got a lot of work to do still.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [10]

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Yes. So maybe just hitting on that traffic comment. You said that traffic was improving. But I mean, is it still negative or significantly negative? And I mean, I guess, you mean traffic trends are improving, but still negative, I guess, is my overall question?

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [11]

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Yes, yes. That's right, yes. Our traffic for the quarter and year-to-date is still trending negative, but we are seeing positive trends in our targeted areas.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [12]

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Okay. And I guess with the vegan trend being on trend and the new offerings you have there with the Cauliflower Crust and the vegan -- the -- I guess the plant-based toppings, I would have figured to see a bit more of a bump in same-store sales. And I know it's only one product. But maybe could you just talk about the success you're having in new products more broadly and your plant-based option more specifically?

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [13]

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Yes. We haven't given specifics out on -- to that granular level, but I understand you need a bit of detail on that, I suppose. I think it's not just speaking to this vegan or vegetarian market, but through this more flexitarian segment where the trend is to be on trend basically. And so sometimes, it's not that we get massive material increase in our transactions through those, but what it does is there are times right on our overall brand evolution improvement. And I think people might still create their own pizza, for instance. They may not necessarily go to the Super Plant or they might try it out of curiosity, but the next order they might be something a little more back to their -- what they usually order. But the point is they're now ordering from us again. So I mean, we did see a healthy, I would say -- not giving out too much for competitive reasons. But when we look at things like our mediums, I would say we were pretty happy with the percentage of mediums that were, for instance, seeing orders on Cauliflower Crust. And that seems to be still sustaining quite nicely.

So that's a healthy mix. I don't think it's going to keep growing and growing and growing. But I do think there's going to be a lot of people that would say, "Well, I enjoy that product, whether I'm a vegan, a vegetarian. I just really like for health reasons true servings of vegetables in my cauliflower pizza." And with the Super Plant, I mean we'll see. I mean I do think there is an element, frankly, of that being somewhat of a fad potentially. Not -- I think plant-based proteins I think aren't here to stay. But I think there has been a little bit of a -- if you look at the whole QSR and FSR market, everyone is rushing with something. And we feel, for instance, with our sausage topping, our pizza topping on that pizza is fantastic. We like the vegan pepperoni. We think it taste great. Are we going to convert over 20% of our customers to that? No, we're not, right?

And well, actually it's keeping us around for a while as long as we have some demand in there, and maybe they're permanent. I hope that they are. There's certainly some good sort of interest there. So I think it's just repainting us in a new light. It's almost -- I don't want to say symbolic because we have 2 transactions going through there. But it's -- I guess people see us in a new light in actually how we are innovating on that, and there are other healthy toppings as well. And the funny thing is we've always had a lot of plant-based toppings, just not the plant-based proteins, right? So we've always been very, very popular with vegetarians, vegans. But I think they also say, "Oh, your bread is getting a little more vegan, flexitarian friendly. So now I'm going to consider you more than I might have."

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [14]

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Okay. And I guess your -- the introduction of the product in Pizza 73, that happened in Q3?

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [15]

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Yes. That's right. So yes. That's right.

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [16]

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So Derek, it's Curt. Just additional to what Paul was saying. So we look at baseline driving, so the large 3 topping with pepperoni and 3 (inaudible), right? So the cauliflower and the plant-based toppings. And in Q4, we've been in the news a lot with our Gourmet Thins. That's adding on our baseline. So we're looking at quality and price, and we're trying to make sure we hit all our buttons. So baseline plus attracting new demographics. And that's where we feel like we're on a positive.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [17]

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Okay. And maybe on -- one of your larger competitors finally acknowledged in the U.S. the pressure they're feeling from the third-party aggregators. And to me, it sounded like they were going to get even more aggressive in areas like fortressing and stuff like that. I was just wondering if you've seen any of that carry into Canada in any way.

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [18]

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I mean, I think, I hear you. For instance, I mean I think we're looking at all the competitors. I mean we do see different behaviors. But certainly, the value side is still very important. So I think that's a big part of who we are. But I guess we feel that we're kind of differentiated on a couple of the attributes that I think is something that resonates more with people. For instance, some of these ads that we're seeing from some of these competitors out there where they're not even showing any imagery of the food anymore. It's just a very low price on a very dark billboard. That might actually get to certain customers. But to me, it's fairly kind of one dimensional. And I think we all have these challenges to make sure that our franchisees are profitable. But that gets quite challenging when you're doing that -- doing every month -- every 2 weeks a 50% off type of promotion.

We've experimented with that last year, just to see what would happen, but it's not really the direction you want to go. So we -- I guess we feel that we're trying to compete on these different fronts. And we're certainly cognizant of the big U.S. players and some of the nimble players in some of the markets in Canada as well that might be smaller, but quite nimble and trying to pick themselves as the super gourmet option, what it will be for. You know what, our pizzas is actually better, and we're going to start talking about Gourmet Thins a lot more. So I guess we're cognizant of that. We're not going to ignore the activities of major, major competitor. We have to be very, very careful that we're not losing our base. So as Curt said, the baseline value thesis is critical to us. But I think we're again trying to strike that balance.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [19]

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Okay. And maybe, has there been any change in how the aggregators are behaving? In other words, I'm just asking if the competitive intensity has grown? Or is it the same? Or like what's been the change in competitive intensity in the market?

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [20]

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I would say that they continue to grow. I mean, there's some third-party data. Just at NPD conference, I guess, the rest of the industry pretty much saw every company in Canada (inaudible) FSR. But just the rate of growth of the third-party in terms of the traffic that third-party channels are achieving, it continues to grow. I mean there's just no doubt this continue to grow, and they are continually trying to outdo each other with very aggressive discounting and free delivery on first order and things like that. None of them, as we know, are making profits, but they are gaining share. And they are certainly continuing to sign up, I think, a lot of change in mom-and-pops across the country for whatever kind of food that is just our FSR. So I think that's intensifying. But I mean, I think I might have said -- I think you're right that at some point I think there might be a somewhat of an aggregation of the aggregators because I just don't see how the market can support so many that aren't making money basically.

So we are -- I guess fight that. Again I think it's in the comments that the delivery done better notion is something we do feel is very credible. And we can get some good feedback even on from customers with our regular spots that it took a little bit of a focus to third-party people. And we only use the third-parties a little bit on the margin as well. We see that is a small acquisition channel for us. It is a fast-growing one, but we do believe it's better for customers to order going into our organic brand and our apps. And we do think that royalty to be faster, cheaper. And if it's a driver that's in a uniform, they're reliable. There's a time guarantee, all those things. So we think that there's a pretty good argument there. But we're not going to ignore the fact that the third-party is a massively growing, tighter in the market. And so we don't feel that we can entirely ignore it either, if that helps.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [21]

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Yes, it does help. And I mean, I guess, a follow-up to that, and I know it's very tough to do. But I was just wondering if you guys have a sense of as to how long this can -- or the duration of the intensity. Your indication that anybody is going away or anybody is -- I noted like you said, they're not making profits, and they could go away tomorrow?

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [22]

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Yes. I mean, I haven't seen anyone going away. I mean you just sort of hear certain things, certain players in the U.S., that you hear maybe not getting volumes as they thought they were. Some competitors in the space have even commented that they -- some of them just aren't quite getting the massive share. If they are in fourth or fifth place, for instance, I don't think they're necessarily going to do that well. But some of the ones that are in first or second or third place, they're very well capitalized. Some of them public entities, some of them not, but you've got massive venture cap backing, et cetera. So it's sort of too big to fail type notion. But I sort of -- I wonder. But -- so I think there'll be a consolidation is my own personal theory. But I may be wrong. But I do think that there's convenience that people expect through third-party. I think that's here to stay. I think we're kind of -- we're kidding ourselves if we think that they're going to go away really on us. I think a few will probably go away and a few will probably get better and better, and we'll have to deal with them somehow.

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Curtis Feltner, Pizza Pizza Limited - CFO, VP of Finance & Director [23]

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So Derek, just to add to that. With regards to the third-party aggregators stacking up against say for Pizza Pizza or some of the competitors that have delivery already, right? So we're -- you look at the experiences that the customers will have over a period of time with third-party aggregators versus someone who has traditionally had delivery, in our case, for 50 years. And so when you go into key days where a large number of people need a delivery, for instance, Halloween, and you look at the customers' experiences, surge pricing increases significantly. And for those people who are trying to use a third-party aggregator, that's when you find out that people really have a learned behavior of it's better to go back to the original stores. And by shaking out the industry, I think that's a key part of the go-forward for third-party is the learn behavior from the average consumer. The third-party is new. But at some point, value customers, which are a large part of our baseline, understand then that value. And they understand that if you want good service and you want dependable service and if we have the guarantees, these are the things that are delivery done better messages will continue pounding home. And that's a key advantage for anyone who's had delivery before, especially consistently proven delivery.

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Derek J. Lessard, TD Securities Equity Research - Research Analyst [24]

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And have you seen -- thanks, Curt. Like have you seen any -- I guess any switches to like the -- because they are now offered on the platforms to the more mom and pop? Or do you think that's fleeting as well? Like people will eventually go back to their tried and tested branded pizza.

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Paul Goddard, Pizza Pizza Limited - CEO, President & Director [25]

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It's probably a little bit of the mix, Derek. I think, I mean, I certainly know in my demographic, for instance, and probably yours, there's people that also say, "I'd like to get a very, very expensive and important pizza delivered now from my favorite restaurants in Yorkville using one of these services, and it's pretty attractive as it arrives high and on time and if you're pricing sensitive, right? There's going to be people that will say that, I think, that never before could do that. But I also think that the baseline like to Curt's comment is that there's a heck of a lot of people that really have been disappointed by store delivery times, unreliable drivers, et cetera, cold pizza because maybe they don't have their operation. They are maybe not as used to doing as much delivery, for instance, even though they might make a fantastic Neapolitan pizza. You know what I mean? It's not the line really go out the door as much. And so we have been doing this.

And so I think -- there was NPD conference I was at on Monday, but the industry could -- all the folks that really don't have their own delivery, I guess, non-pizza, non-Chinese food tech companies that are relying on third-party, I mean, you can see the pressure that they're under as well. That they just -- obviously, the commissions are so big to the third-party people. And they're also struggling with things like packaging and getting things out the door on time because they don't really have the operations management procedures to really deal with this. I think the third-parties are kind of helping them a little bit. They'll school them a little bit, but it's kind of messy. They've all talked about packaging and additional costs they're facing, and already their margins are so squeezed, whereas, at least in some ways, who are the greatest under threat is the pizza competitor because he's against the world now. But on the other hand, I think pizza competitors and those that used to deliver before have inherent advantage like Curt said because we know what we're doing there. We do have expertise there, and we have a huge baseline of people and, I guess, sort of some other people. If that make sense.

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Operator [26]

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At this time, there are no questions.

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Christine D'Sylva, Pizza Pizza Limited - Director of Finance and IR [27]

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Thank you. Thank you, everyone, for being on the call with us this morning. And if you have any additional questions after the call, please contact us. Our information is on the earnings release. Have a great day.

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Operator [28]

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This concludes today's conference. You may now disconnect.