Pizza Pizza Royalty Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Pizza Pizza Royalty Corporation's earnings call for the third quarter of 2020. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you 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 live. on Wednesday, November 11, 2020. I will now turn the call over to Christine De Silva, Vice President of Finance and Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the third quarter ended September 30, 2020. 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 press release and the MDNA in the investor relations section of our website for a reconciliation and other disclosures related to non-IFRS financial measures mentioned on this call. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, and Chief Financial Officer, Kurt Feltner. Before we begin our discussion of the third quarter results, we wanted to highlight the structure for those new to our call. Pizza Pizza Royalty Corp. indirectly owns the Pizza Pizza Corporation and Pizza 73 brands and trademarks through its subsidiary, Pizza Pizza Royalty Limited Partnership. This partnership has two partners, Pizza Pizza Royalty Corp., which owns 76... The Royalty Corp. is a top-line restaurant royalty corp. that earns a monthly royalty through a lease agreement with Pizza Pizza Limited for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations. The partnership's monthly royalty is calculated as a percentage of royalty pool system sales reported by the restaurants in the royalty pool. Increases in royalty income are derived from both increases in same-store sales growth and the opening of new restaurants. The success of the Royalty Corps depends primarily on the ability of Pizza Pizza Limited to maintain and increase restaurant system sales and to meet its Royalty obligations. Before I turn the call over to Paul Goddard to provide the business update, we wanted to share a note on the company's reporting. As you are probably aware, when the pandemic first triggered shutdowns in March, creating extraordinary conditions for the country and our business, Pizza Pizza began to provide monthly updates on comparable sales in addition to our normal quarterly reporting. Though there remains uncertainty and volatility around the impact of the pandemic going forward, on a relative basis, the sudden increase in uncertainty and volatility that initially led us to institute monthly sales reporting has passed. For that reason, we will return to our normal quarterly reporting going forward, which is in line with our industry peers. Now, I would like to turn the call over to Paul Goddard.

Thanks, Christine. Good afternoon, evening, and thanks everyone for joining our call today. Our Pizza Pizza and Pizza 73 traditional restaurants are fortunate to operate in the pizza segment's quick service industry, especially considering the widespread devastation that has occurred in the entire food service and hospitality industry since the pandemic began affecting Canada and back in mid-March. As winter months arrive, there's real concern about the survival of dine-in restaurants across Canada, and I think you're probably seeing that in the media as well. It is honestly a very real cause for concern. For Pizza Pizza, colder weather signals the arrival of increased delivery business as Q4 has historically been our strongest quarter in sales. From a high level, the company's royalty pool sales mix includes sales generated by our traditional restaurants from three main ordering types, which are number one, pizza deliveries, number two, from customers who order ahead for pickup, and three from pure walk-in sales. And in addition to these main ordering types, we also have non-traditional locations as well as sales at various special events, both indoor and outdoor. So three main sales channels, the deliveries, the pickup, and the walk-in. So if we look at these more closely, break them down, our traditional restaurants accounting for 90% of royalty pool sales have remained open for delivery and takeout since the pandemic began. At times, certain health authorities have allowed limited customer dine-in only to but then only to restore restrictions, especially as we've seen cases increasing across Canada. And certainly even the last few days, you can see the case surging and the government's public health reactions. The other 10% of sales is generated by our non-traditional locations and special events, special community events, the majority of which have been closed due to these government mandates during the pandemic. Our non-traditional business, including sporting arenas, colleges, universities, and major outdoor entertainment venues, are largely responsible for the reported decrease in our third quarter sales. While being allowed to remain open, Pizza Pizza and Pizza 73 system sales have still been impacted in material ways as restaurant operators took significant and necessary measures in their restaurants to protect the health of their employees and customers. Our teams were very proactive and agile in complying with all social distancing recommendations and requirements of the applicable health authorities, including the closure of restaurant seating areas, which the dining restrictions we saw being temporarily relaxed for a portion of the quarter, but also put on in places like Ontario back in October. So what this has meant for our stores is that walk-in sales, especially for those in our urban locations, which typically represent 40% of our total sales, these walk-in sales, has decreased significantly. And as I alluded to earlier, fortunately, delivery and pickup sales, that key 60% portion of our sales, continue to offset a large portion of those lost walk-in sales. So turning to Q3 results, same store sales growth, the key driver of yield growth for shareholders of the company, decreased 9.5% in Q3, which was a significant improvement from the 16.3% decrease in Q2. And when the loss of the vast majority, frankly, nearly all of our non-traditional sales, same-store sales growth is expected to continue facing headwinds in the near future as the pandemic and its harsh effects continue to impact us all. Since the pandemic began, Pizza Pizza Realty Corp. and Pizza Pizza Limited, the private operating company, adapted and innovated even faster than we normally do to boost both companies' financial strength. Stronger order volumes, particularly in delivery, pickup, and digital ordering, have enabled the company to increase the shareholder dividend by 10%, as the company generated $1.3 million in surplus cash during the third quarter. And so overall, we feel our restaurants have performed quite well compared to the wider restaurant industry, both in Canada and the U.S., and we've really shored up our financial strength at the corporate and franchisee level and reduced costs wherever possible, controllables, while driving sales and channels we are still allowed to have open, such as delivery and pickup. And you'll recall that back in April of 2020, we chose to temporarily decrease the dividend by 30%. So we are making good progress here for this 10% dividend increase. Royalty pool sales from the 749 restaurants in the royalty pool decreased 9.4% to $125 million from $138.5 million in the same quarter last year, when there were 772 restaurants in the royalty pool, with the majority of the decrease due to the closure of most of our non-traditional locations, as I said. During the third 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. And we've kept the majority of our marketing efforts focused on delivery as part of our ongoing promise to provide our customers with that delivery done better. And lots of examples of that, we talked about it I think last time, some of them, but the tamper-proof box, best-in-class contactless delivery from Unifor drivers you can trust, Our time guarantee, of course, our laser-fast award-winning apps, et cetera, et cetera. So we're pleased with our significantly improved results at both brands, especially with Pizza 73 operating in a very challenged economic environment in the Prairies, in Alberta, obviously, particularly. But the prolonged negative effects on employment and the overall economy are certainly of concern to us. Our strong and growing delivery focus at both brands, together with our successful relaunch of our digital ordering apps, have been major sales-driving advantages during the pandemic. Customers are finding our digital channels faster, our apps, our websites, even our AI-enhanced call center queue, other channels, more convenient than ever before. I'll turn now briefly to restaurant operations. As I mentioned, Pizza Pizza and Pizza 73 delivery and pickup business have grown significantly, and we continue to take nimble and targeted actions via our marketing, our operations, and technology teams. to further drive our delivery business. And I would like to say too, it's probably hard to understand just listening to the call, but one of the things that has been really helpful is the fact that we're just operating very holistically, I would say more than we ever have actually, despite the fact that our workforce is predominantly remote. And it's been nice to see that agility, which I think is also a key advantage. And we have implemented rigorous additional health and safety measures, of course, including face shields and masks and heightened sanitation on all work and touch surfaces. And we're also one of the first in Canada to provide our customers safe 100% contactless transactions, not only for delivery, but also for in-store pickup as well, which has been encouraging to see the pickup channel grow as well. So it is important to note that as part of contactless delivery, as some of you may be aware if you've ordered, customers are now able to also easily pre-chip their driver, much as third-party aggregators are provided on their functional apps. And that's proven to be extremely popular with most of our customers, pre-chipping. meaning really there's no need for a physical contract at all. The driver can leave the order on the doorstep if you like or whatever instructions you give them. And this, of course, speeds up the entire delivery, makes it safer for both the customer and the drivers, and so it's really truly a win-win. And customers can opt out of contactless delivery too, but if they want to check the box, it defaults to contactless right now. And so we could easily switch that off if you ever wanted to, but it's a nice feature and people really love it. 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 by visiting one of our many locations across the country. So really, more than ever before, Pizza Pizza has focused squarely on future growth and innovation. Innovation has always been a big part of our story, but I think you'll see going forward it's going to be an even bigger part, which is pretty exciting, and I think it's essential. And consumers are moving to online purchasing, of course, in large numbers. Of course, that's accelerated in 2020 in large part due to the pandemic. And we're in a good position because of that. You know, we've got the infrastructure, all of the investments we've made. You know, we're very fortunate to benefit from that despite the pandemic and its awful effects. So we feel that, you know, people aren't going to move back offline after the pandemic recedes. This is sort of a transformation in society. And that's just all good for us. And of course, for many, many years, Pizza Pizza Limited has invested heavily in technology platforms from our business intelligence dashboard software to our now state-of-the-art accounting and distribution ERP software. That's gone very well and enabled us to make things more efficient, sharing of data, a lot more automation, a lot less manual labor. And so there's lots of internal efficiencies as well at the operating company. And really, we're building the best platforms to run our business and also for our customers. And we're building not only the platforms, but also the company for the future. And that includes the organizational structure as well and how we reconfigure ourselves to just be ready for the future. And we're going to continue to reinvest in our business every quarter as well. The largest single investment, of course, has been in our digital ordering platforms. No other pizza player in Canada has more digital channels for hungry customers to choose from. We've got the whole laundry list of web, mobile web, iPhone app, Android app, et cetera. And we'll continue to invest in in those areas. We've got an Apple Watch app, an AI-enhanced automated phone ordering queue, or IVR, and all these things add up, they really do, and give us an advantage over others. And customer delivery and pickup orders transacted through this various array of platforms account for over 60% of all orders, and we see this percentage going up, and we're certainly ambitious about increasing it more and more, and I think more rapidly over time as well than the already rapid rate we've had, converting people to more digital That really helps our customers who want it, and it helps the company, obviously, and it helps our franchisees and our JV partners out at Pizza 73. Innovation also, key to our growth at Pizza Pizza, not only in technology, but in menu offerings and really every facet of our business. It's not just tech division. It's all aspects of our business. We can look to see where can we innovate the best and get the biggest bang for our buck. So in Q3, we continued baseline menu promotional activity. We did a complete overhaul of our menu and looked at things that were working and things that maybe weren't working, but we had perhaps left on there for a while. And we really optimized it. And so one example of something that really worked nicely was our very popular $7.99 unlimited medium two-topping pizza, Pizza Pizza. And out in Alberta and the prairies, we had the $9.73 special at Pizza 73. It also worked well. We also promoted our alternative crusts, particularly the fairly new cauliflower crust, paired with a side of our new cauliflower bites, which are a lightly battered and fried cauliflower floret, served with your choice of dip. So that's been nice to see. And additionally, we leveraged our Toronto Raptors and hockey team partnerships during the return of sports to TV, which I think people liked in the summer. And of course, although we didn't see the Raptors and any Canadian NHL teams last as long as we would have all liked in the playoffs, we certainly did see that people continue to love ordering and eating pizza at home on game nights. And 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 this pandemic. And heaven forbid any similar future pandemics or continuation of this pandemic. So I think we're just assuming conservatively that if things continue to be really tough out there for not only Canada but the world, that we need to control what we can and be well-positioned. And I think we are despite these headwinds that we see in general. And touching on franchisee financial health, I know that's of interest to folks out there, Pizza Pizza Limited has also worked really closely with our restaurant owners through these unprecedented market conditions to come up with financial solutions where required, such as obtaining sufficient financial support from governments for restaurant operators, whether it's a SIBA loan, SEWS, or SECRA, and obviously the wage subsidy was extended, which was helpful. The government's tried to do something that's a little more fitting, I guess, on the rent relief side, although even that they frankly didn't get right. And I think now they're rapidly shifting to try and accommodate to getting more rent relief to direct to tenants without them hopefully having to pay back rent first, which was kind of ridiculous if they even thought that could happen. But anyway, I think that we will see some more rent relief where possible. Our real estate team, by the way, has done a tremendous job negotiating with some tough landlords and some more sympathetic landlords as well. But regardless, we pride ourselves on being a great tenant and a reliable and reputable one. And in fact, all of our teams have worked very hard to maximize any and all opportunities to bolster our network financially from all angles. And I'm very proud, as I said earlier, of the collaboration and commitment everyone has shown, and particularly with almost everyone working remotely as well, other than critical people that have to be in the office, like our distribution people and our dough plant and things like that. That's really a manufacturing distribution operation. But we've really embraced a mindset of what we call team, teammate self, where everyone has everyone else's back. And it's really an amazing culture of trust and collaboration we've developed up and down and across the entire Pizza Pizza and Pizza 73 network. And especially during tough times, that's actually a real achievement in my view. And it speaks to our culture because you can get, of course, a lot of emotion and a lot of real stress obviously in the system and yet it does actually pull people together. So we feel good about that. And these various actions and continuous iterative improvements have been tremendously helpful and essential and in my view have put us on extremely solid footing as an operating company now and for the future. Now turning to restaurant development for a moment, during the quarter we opened two traditional restaurants and one non-traditional Pizza Pizza location. five traditional and three non-traditional Pizza Pizza restaurants were permanently closed. So for the first nine months, we've opened five traditional restaurants and two non-traditional Pizza Pizza locations, 14 traditional and 15 non-traditional Pizza Pizza restaurants were closed. Additionally, one traditional Pizza 73 restaurant opened and one closed. And during the third quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada, However, the majority of non-traditional Pizza Pizza and Pizza 73 restaurants have remained closed, as I said, with the exception of a few typically smaller locations in hospitals and gas stations and the like. And we do have, for instance, some interesting new takes on the non-traditional or quasi-traditional, which is some Walmart locations. I believe we have two in Ontario and there's a couple in Alberta as well. So those are locations that are It's sort of more of a non-traditional experience if you go to a Walmart, but they actually have the capability of delivery, which is really nice in some of these smaller towns. So we think that's kind of an interesting model that we may do more of. We'll see how that goes. So I would also like to mention just quickly that we've also continued on with our renovation and site refresh program. And this last quarter, we saw a number of sites renovated as well. We've been trying to keep the pace up there, but You know, we feel it's very important to demonstrate to the market that we always will reinvent ourselves and keep refreshing our brand. And I think the franchisees like it. And so do our customers. They see us refreshing the entire environment. But at the same time, we are being very careful right now not to burden our operators, our franchisees with too much expenditure with renovations as well or any other non-essential spending that they don't have to do right now. So I think we're striking the balance there. We're doing things, frankly, more affordably than we were before. Mini rentals in some cases, as it makes sense, just to make sure we are doing something. But we are very careful of that. And as we weather this pandemic storm, we're making sure we're helping versus hurting unit cash flow for our operators wherever we can. And we do have a strong pipeline of stores to ramp up for later in 2020 here, the remainder of the year, and into 2021 especially. And barring any massive resurgence or adverse long-term effects of the pandemic, we currently do expect 2021 to be much stronger than 2020. in terms of network growth and our pace of renovations as well. I hope that will pick up as well. We've been okay, but I'd like to see that faster. So I think we're poised to do that. And certainly that's given the unique challenges that 2020 has thrown at all of us, you know, delaying us in some respects with construction and rentals. But in closing, I just want to personally thank all of our employees and our restaurant owners across the country and their team members are incredible delivery drivers. You've just been absolutely amazing. You know, just phenomenal, their dedication. And especially all healthcare workers and other frontline workers, including emergency responders, who are putting others first daily and continue to do so, especially through this worrying surge we're seeing. They've all shown tremendous courage and leadership, and I think it's a real inspiration to everybody. So during the pandemic, our team has been performing extremely well under extremely unprecedented circumstances, and it's truly inspiring to see that happen. The people helping each other, donating food to the frontlines, as well as charities, hospitals, especially SickKids Hospitals, which is always a big component for us, for our main charity, Slices First My House, right across the country, and just keeping the faith and staying on offense, controlling what we can control. So that's really it for me. I'd say thanks again for joining the call this evening, and I'll now ask Kurt Feltner, our CFO, to provide a brief financial update.