Pizza Pizza Royalty Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Pizza Pizza Royalty Corps earnings call for the second quarter of 2020. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. At that time, if you have a question, you will need to press star and the number one on your touchtone phone. As a reminder, this conference is being recorded on Wednesday, August 12th, 2020. I will now turn the call over to Christine Da Silva, Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the second quarter ended June 30th, 2020. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, and Chief Financial Officer, Kurt 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 the MD&A in the investor relations section of our website for a full reconciliation and other disclosures related to non-IFRS financial measures mentioned on our 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 a business update.

Thanks, Christine. Good afternoon, and thanks, everyone, for joining our call today. The food service industry has been particularly a hard hit since the pandemic began affecting Canada in mid-March. Fortunately, our Pizza Pizza and Pizza 73 traditional restaurants were allowed to remain open for delivery and takeout sales and have exceeded the sales projections we made at the beginning of the pandemic. While being allowed to remain open, Pizza Pizza and Pizza 73 system sales have still been impacted as restaurant operators took significant and necessary measures in their restaurants to protect the health of employees and customers. Our teams were very proactive and complying with social distancing recommendations and requirements of applicable health authorities, including the closure of restaurant seating areas. Same-store sales growth, the key driver of yield growth for shareholders of the company, decreased 16.3% for the quarter, with April's decrease weighing heavily on the quarter. However, the real story I will focus on during this call is how our core business model has outperformed month-over-month from April to July, despite losing the vast majority of our walk-in sales in nearly all of our non-traditional sales. From a high level, the company's royalty pool sales mix includes sales from pizza deliveries, customer pickup, and walk-in, and also non-traditional locations and special events. And just to clarify, in terms of the terminology here, we refer to pickup as premeditated orders placed remotely in advance by phone or digitally by app or web or what have you for pickup, at the restaurant, whereas when we say walk-in, we're referring to unpremeditated walk-ins that also include dine-in orders. You can also just simply think of all delivery and pickup as off-premise, left together as well. So, royalty sales from the 749 restaurants in the royalty pool decreased 15.5% to 113.5 million from 134.3 million in the same quarter last year, when there were 772 restaurants in the royalty pool. The majority of the decrease is due to the closure of most of our non-traditional locations. Looking back from today to the beginning of the pandemic, July comparable sales have rebounded quickly, up 20 percentage points from April sales. Our traditional restaurants posted solid results in the latter part of the quarter and end of July, and account for approximately 90% of royalty pool system sales. Our delivery and pickup sales, the off-premise, particularly through our digital channels, grew significantly through the second quarter, nearly offsetting a major decrease in our dine-in and walk-in sales that was unavoidable due to government-mandated legislation. So that's a key point that I think everyone should recognize there. So it's sort of masked with a decrease, but we were really pleased to see our delivery and pickup really growing well. During the early part of the quarter, we quickly introduced innovative customer-centric safety measures such as contract-listed digital transactions, and another of our industry firsts, tamper-free pizza boxes, providing customers additional assurances when ordering. Most of our non-traditional restaurants, which account for about 10% of our sales, remain closed due to government legislation, although we are encouraged to see provinces beginning to ease restrictions on some of these captive market locations. But we think it will be a slow process there coming back. As well, many key municipalities recently began allowing restaurant dine-in to resume, which we expect to provide a helpful tail-end to our overall business, given walk-in, dine-in historically represents 40% of total sales at Pizza Pizza. And we're also optimistic that the return of televised professional sports events should add additional momentum for our delivery business at both brands. What better way to enjoy your favorite team back in action than to order in a pizza? Sushi, subs, noodles, they just aren't the same. During the second quarter at both brands, we continued executing our long-term strategy of promoting our value-based menu offerings, supported by product innovation, food quality, on-trend product introductions, and operational excellence at our restaurants, with the majority of our marketing efforts focused on delivery as part of our ongoing promise to provide our customers with delivery done better. We're pleased with our significantly improved results at both brands, particularly our Pizza 73 performance, and especially with Pizza 73 operating in a very challenged economic environment in the prairies, even prior to the pandemic's adverse effects. Our total sales continue recovering from the minus 26% same store sales low watermark in April, as we reported July's minus 7.8% comparable store sales. Progressively, we are seeing our traditional restaurant sales improving. Our strong and growing delivery focus at both brands, together with our recent successful relaunch of our digital ordering apps, have been major sales driving advantages during the pandemic. Customers are finding our digital channels faster and more convenient than ever before. I'd also like to note that Pizza 73 has actually been less affected during the pandemic than has Pizza Pizza as a result of the brand sales mix, with 90% of sales from delivery and pickup are off-premise at Pizza 73. At Pizza Pizza locations, as I said, approximately 60% of traditional restaurant sales are from delivery and pickup transactions, while the remaining 40% sales are from walk-in sales, which decreased significantly once the government-mandated social distancing kicked in. And as I also mentioned, nearly 10% of system sales are from those non-traditional captive markets, small locations, which decreased almost entirely to zero due to the mandated closures of schools, sporting arenas, entertainment venues, you name it. So not surprisingly, with the decrease in system sales, the company's royalty income also decreased, and as a result, the company reduced its monthly dividend by 30% in April from 0.0713, just over 7 cents a share, down to 5 cents a share. However, good news for shareholders. During Q2, we were pleased that the company generated $760,000 in excess cash, which added to our working capital reserve, now at $3.4 million. Our payout ratio was 83% for Q2. The excess cash and payout ratio was much better than our internal projections in early April when the lockdown first began. I'll now turn briefly to restaurant operations. Since mid-March, what actions have we taken at both brands to drive sales? Well, first, we are fortunate to operate in the quick service retail pizza industry. We have a large portion of our sales obviously derived from off-premise delivery and pickup. At both brands, our marketing strategies are structured to support restaurant profitability while also increasing customer orders and order frequency by placing orders for delivery or pickup through our wide array of digital ordering platforms or, of course, visiting one of our approximately 750 locations across the country. And as I mentioned, Pizza and Pizza's 17-day delivery and pickup business has grown significantly, and we continue to take nimble and targeted actions via our marketing, operations, and technology teams to further drive our delivery business. While every restaurant you can think of is now scrambling to get into delivery or use third parties since they can't do it themselves, delivery is our mastercraft, and we've been doing it for over 52 years now, and we're improving and innovating the customer delivery experience all the time, constantly over the years, and especially during COVID-19. Guided by the needs of our restaurant employees and the communities we serve, we've implemented rigorous additional health and safety measures, including face shields and masks, heightened sanitation on all work and touch services. We also provide our customers contactless transactions, as I said, for in-store pickup as well, not just delivery. And it's important to note that as part of contactless delivery as well, customers are now able to easily pre-tip their driver if they'd like to, have no physical contact, and this speeds up the entire delivery for both the customer and our driver. So it's truly a win-win situation there. Also in July, we readied our restaurants for in-store dining, which began late July, and should slowly start to build that up as restrictions ease. And of course, as customers start to feel more comfortable walking into our restaurants for a quick slice and beverage or dining in if they prefer. So more than ever before, Pizza Pizza has focused squarely on future growth and innovation. Pandemic is a global crisis, the likes of which our generation has never seen. But at the same time, the opportunities arising from it are also unprecedented if you look at it a different way. Consumers are moving to online purchasing in large numbers, which has accelerated in the first half of 2020, large part due to the pandemic, of course. And they are going to move back offline after the pandemic recedes. And just to provide some of you some context, you may have seen some of the comments made this past week by the CEO of Microsoft, Sergio Nadella, saying they've seen two years' worth of digital transformation in two months. You know, maybe a little more accentuated in their case versus some other businesses, but it's just an example of what's going on in the world now. And, of course, for many, many years, Pizza Limited has invested heavily in technology platforms, from business intelligence to accounting and distribution, supply chain software, et cetera. We are building the platforms and building our company for the future. And we're not just building, we're continuing to reinvest in our business continuously as well. The largest single investment has been in our digital ordering platforms. No other pizza player in Canada has more digital channels for hungry customers to choose from. Customer delivery and pickup orders transacted to our array of digital ordering platforms account for about 60% of all orders now, and this percentage will continue to increase. We see it trending, and it's benefiting our customers, our company, and our franchisees and JV partners at Pizza73. Our successes in late 2019 continued into 2020, especially during the pandemic, as customers looked for variety as the lockdown continued far longer than originally thought. New on-trend product offerings such as our gourmet thins, plant-based toppings, and keto pizza offerings continue to resonate with consumers' ever-evolving preferences while always delivering excellent value for money. In Q2, we introduced a new dessert, strawberry cheesecake truffles, and we also introduced our new cauliflower bites. Lightly battered and fried cauliflower florets serve as your choice to dip on the side, really appealing. And this new side item pairs well with our popular cauliflower pizza crust, of course. cauliflower crust pizza, and we were the first major national chain in Canada to offer cauliflower crust pizza, and not to mention keto crust pizzas, which we launched more recently at the beginning of this year. Our diverse, high-quality menu, our newly relaunched web and apps, plus our improved customer service and market share have positioned the company well to weather these difficult pandemic challenges. And additionally, our delivery done better promise, designed to increase our delivery traffic, is proving to be a major competitive advantage for our brands and is clearly delighting our customers. I'd like to briefly talk about Pizza Pizza Limited, the private operating company. The success of Pizza Pizza Realty Corp depends primarily on the ability of Pizza Pizza Limited, or PPL, to maintain and increase system sales of the royalty pool and to meet its royalty obligations. Therefore, the health of the underlying operational company is critical. At Pizza Pizza Limited, PPL, the following actions have been taken to maintain the financial health of the operating company. First, G&A expenses decreased significantly in Q2. Second, we work with all our partners, especially our supply chain, to operate our business in a smooth, uninterrupted fashion. And I want to thank our accounting, procurement, and logistics teams for their amazing efforts behind the scenes to keep things running so smoothly during this storm. These are the types of roles where you don't hear about anything until there's a problem, but there's an incredible amount of work just to keep things running smoothly, and they did a great job. Third, from a financial and managerial standpoint, PPL has also minimized, delayed, in some cases eliminated, some significant capital expenditures and anything non-essential at this time, just for prudent reasons. But we certainly look to resume capital allocation expenditures as soon as it makes sense to do so. But obviously, we're being very careful just to maintain our cash flow, keep our costs down, and until we get our volumes more fully back. And lastly, I'd just say PPL is also working very closely with our franchisees and our JV partners out at PINZE 73 through these unprecedented market conditions and to come up with financial solutions where required, and there's certainly a number of cases where they are, and examples of that are obtaining sufficient financial support from the governments, for us, corporately, and for the operators, whether it's CEBA loans, or the wage subsidy, or CCRA, et cetera, getting additional support from lenders, obtaining rent relief from landlords where possible, so our real estate team has worked very hard on that front as well, and had some good success with landlords. So all of these actions combined have been In our view, it's a battle, but overall, they've been tremendously helpful and essential, in my view, to keep us on solid footing as an operating company now and for the future. Now, turning to restaurant development for a moment. During the second quarter, new restaurant construction was permitted during the pandemic in BC and Alberta, but Ontario and Quebec governments mandated restrictions on commercial construction for several weeks there, which slowed us down. During the quarter, PPL opened one traditional restaurant and one non-traditional pizza pizza location. Five traditional and eight non-traditional pizza pizza restaurants were permanently closed. Additionally, one traditional pizza 73 restaurant opened. And during the period, PPL opened three traditional restaurants and one non-traditional pizza pizza location. Nine traditional and 12 non-traditional pizza pizza restaurants were closed. Additionally, one traditional pizza 73 restaurant opened and one non-traditional pizza 73 restaurant closed. As mentioned earlier, during the first quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada, but 15 locations have temporarily closed after the quarter due to the pandemic. However, almost all of our non-traditional Pizza Pizza and Pizza 73 restaurants were required to close, with the exception of just a few locations in hospitals and gas stations and the like. So we do have a strong pipeline of stores to ramp up for later in 2020, and especially for 2021. Barring any massive resurgence or adverse long-term effects to the pandemic, we currently do expect 2021 to be stronger than 2020 in terms of network growth, given the unique challenges 2020 has thrown at all of us. All right, so what's ahead? Well, we are cautiously optimistic. However, the medium and long-term impacts to the company from COVID-19 will, of course, depend very much on consumer behavior after the economy fully reopens, the financial solutions achieved with governments, lenders, franchisees, and landlords, and the macro impact on the overall economy, of course, in particular household debt and levels of disposable income. We are encouraged when looking forward to the latter half of the year, which has historically been stronger for pizza sales than the first half as well. And I will say that the resilience of the pizza delivery business should not be underestimated and should help us grow and thrive relative to other QSR and FSR players in what will no doubt continue to be a challenging post-COVID environment for quite some time. My personal view is that because so much of our core business and core competency has always been around delivery, and also digital, the high level of professional service itself, the design of the food and packaging, the IT systems, the business processes, our continued innovation, our marketing machine, all that kind of jumbles together to keep us well-positioned to continue growing and should help us corporately and help our restaurant operators and PZA investors alike prosper well into the future. And going forward, we will continue to place the needs and health of our restaurant operators first and our employees and the communities we serve as well as we build same-store sales back to consistent positive growth territory. And I want to personally thank our employees, restaurant owners, and their team members, our incredible delivery drivers, and especially all healthcare workers and other frontline workers, including emergency responders who are putting others first daily. They've shown tremendous courage and leadership during this pandemic. Our team has been performing extremely well under extremely unprecedented circumstances, and it's truly inspiring to see people helping each other, donating food to the frontlines across the country, and keeping the faith. So thanks again for joining our call this afternoon. I'll now ask Kirk Feltner, our Chief Financial Officer, to provide a brief financial update.