Pizza Pizza Royalty Corp.

Standing by and welcome to the Pizza Pizza Royalty Corp earnings call for the fourth 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 Tuesday, March 2, 2021. I will now turn the call over to Christine DaSilva, CFO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the fourth quarter ended December 31, 2020. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, and Senior Vice President of Strategic Analysis and Implementation, 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 release and the risk factors included in our annual information form. Please refer to our earnings press release and MDNA in the Investor Relations section of our website for a reconciliation and and 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. Before turning the call over to Paul for the business update, I wanted to spend a few moments reviewing the structure of the Corp for our new investors. Pizza Pizza Royalty Corp. indirectly owns the Pizza Pizza and Pizza 73 brands and trademarks through its subsidiary, Pizza Pizza Royalty Limited Partnership. This partnership has two partners, Pizza Pizza Royalty Corp., the public company, which owns 76.5%, and the other partner, Pizza Pizza Limited, the private operating company, who owns the remaining 23.5%. The Royalty Corp is a top-line restaurant royalty corp that earns monthly royalties through a lease agreement with Pizza Pizza Limited. In exchange for the use of the Pizza Pizza and Pizza 73 trademarks in its restaurant operations, Pizza Pizza pays the partnership a monthly royalty calculated as a percentage of royalty pool sales. Royalties lost due to the permanent closure of restaurants are replaced with royalties from new restaurants opened on the next royalty pool adjustment date. Until that date, Pizza Pizza continues to pay the royalties as if the restaurants had not closed. Growth in the corp is derived from increasing same-store sales of the restaurants in the royalty pool and by adding new restaurants to the pool each year. The royalty pool is adjusted at the beginning of each year by adding new restaurants opened, less any restaurants that have been permanently closed. For the fiscal year 2020, the royalty pool was adjusted on January 1st of 2020 to include 645 Pizza Pizza restaurants and 104 Pizza 73 restaurants. So with that brief review, I will turn the call over to Paul Goddard to provide the business update.

Thanks, Christine, for that structural overview. And good afternoon, everybody. Thank you, all of you, for taking the time to attend our call today. And before we get started here, I just would like to take this opportunity to personally thank all of our employees, our restaurant owners and their team members, our incredible delivery drivers on the front lines, and our suppliers, of course, as well. They've shown tremendous resilience, courage, and leadership over this past year. And despite this pandemic, our team is continue to really perform well under extreme circumstances. And it's truly inspiring for me to see everyone helping each other out, particularly during these really trying times. And to our customers and to you, our investors, thank you for your continued trust and loyalty. Moving on to the business side of our call, I would like to first congratulate Christine on her appointment earlier this year, as of Jan 1, to the Chief Financial Officer position of Pizza Pizza and Pizza Pizza Realty Corp. Christine has worked alongside Kurt and myself for 14 years now and is previously our VP Finance and Investor Relations. And really excited to have her in this role. And I'd also like to extend my appreciation and thanks to Kurt Feltner on his transition from CFO into the new cross-functional role of Senior Vice President of Strategic Analysis and Implementation. We've got a lot of exciting initiatives and strategies that we're embarking on here in 2021, and I'm proud of the exceptional senior management team that we have at the company. And both Christine and Kurt are here on the call today with me. Obviously, the main purpose of our call this afternoon is to highlight the results of our fourth quarter and year-end for December 31, 2020. Now, as a reminder, our business is comprised of two key revenue streams. First, our traditional restaurant network, which generates 90% of our royalty pool sales. And second, our non-traditional and special event locations, which generate the remaining 10%. So... Within our traditional restaurant network, our customers are able to enjoy our food by ordering in advance for delivery or for pickup or by simply walking into one of our restaurants on a premeditated basis for takeout or for dine-in. And about 60% of all of our orders, by the way, are done through our websites or numerous apps as well. And that's increasing over time, which is great. Fortunately, our traditional restaurants have remained open for delivery and takeout business since the pandemic began. Our customer dine-in options have generally been closed since the onset of the pandemic, following public health guidelines, with the exception of a brief period during the summer months in 2020, where we did see some good momentum. While our traditional business has been deemed essential and therefore 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 our customers. Our teams have also been proactive and agile in complying with all social distancing recommendations and requirements of the applicable health authorities, including the closure of all restaurant seating areas. So the lack of normally robust dine-in business combined with work-from-home mandates, virtual schooling, and reduction in broader social and business activities have all combined and led to a significant decrease in our walk-in sales, especially for those in our urban locations, which typically represent all that group there of walk-in, about 40% of our total store sales, so Definitely very significant. But again, fortunately, for delivering pickup channels, which represent about 60% of our sales, we continue to see that offset a large portion of those lost walk-in sales. During the early stages of the pandemic, we quickly introduced innovative customer-centric safety measures such as contactless pickup and delivery transactions, literally in about four days. So hats off to the IT operations and marketing folks for making that happen. It was laser fast. And also an industry-first award-winning tamper-free pizza box, which provides customers additional assurances when ordering from us. And all of these innovations have been very well received by our customers and appreciated. The other aspect of our business, our non-traditional locations and special events have had to remain almost entirely closed due to government mandates during the pandemic. Our non-traditional business, including sporting arenas, colleges and universities, and major outdoor entertainment venues such as Canada's Wonderland and many others, are largely responsible for the reported decrease in our fourth quarter sales. As I noted at the beginning, this component generally accounts for 10% of our sales, that non-traditional bucket. And the fourth quarter typically signals the start of the new sports season, holiday gatherings, and our strongest sales quarter. However, during this last fourth quarter, as government restrictions and stay-at-home orders resumed, the start of sports was delayed. For example, the beginning of the new NHL season was delayed until mid-January, whereas back in 2019, it began in early October. And of course, this past year, no spectators have been allowed in the sporting venues either. Halloween parties, seasonal holiday gatherings, they just were not permitted to happen this past December either. We also normally see substantial group ordering, catering orders, you know, high volume orders at businesses, school orders, doing Q4 as well, right from September through to especially the holiday season. But this was another area where we were, you know, where we were not permitted to operate, basically. We, you know, we... were open for business, but there just was no demand there because of what was going on with the pandemic restrictions. And in addition, I would also say that we saw increased pressure from third-party aggregators through a substantial amount of discounting on their part and heavy advertising in the marketplace. So our sales momentum from the summer months that we had was really materially pressured lower during the fourth quarter with the resumption of all these restrictions and the difference of behaviors going on associated with that. So for the quarter, our starting store sales, the key driver of yield growth for shareholders decreased 17.6%, and the total royalty pool sales decreased 15.8% to $123.7 million from $146.9 million. While system sales and royalty income were meaningfully lower in the fourth quarter than prior years, our ability to pay our monthly dividends remained strong. As a reminder to everyone, our Board of Trustees made the prudent decision to reduce our monthly dividend in April 2020 by 30% ahead of potential uncertainties in our business. However, I'm proud to say that our business outperformed those expectations, and we were able to announce a 10% dividend increase last year. During the quarter, we generated $745,000 in excess cash, which added to our working capital reserve, which is now at a very robust $5.4 million. As a result, our payout ratio is 84% for Q4 2020, and 90% for the year. We'll continue to monitor that payout ratio carefully, as we always do, and while our target payout ratio remains at 100%, we also need to remain vigilant given the ongoing effects of the pandemic across Canada and the possibility of a resurgence in COVID-19 cases and variants, which does appear to be happening right now in parts of Ontario, for instance. And until we see a broader vaccination rollout, hopefully by the end of September, as the federal government has promised us, We expect consumer confidence and therefore domestic economic fundamentals to remain quite weak. Nevertheless, our goal remains to be providing stability in our dividends to shareholders and increase them over time as we move past this pandemic. Turning to the operations of PPL, the private operating company, at both Pizza Pizza and Pizza 73, our marketing strategies are structured to support restaurant profitability while also increasing customer orders and order frequency, whether it is via traditional phone call-in, digital app engagement, or walk-in traffic. This year, we're focused on going on the offense. Our innovation pipeline is strong, and we see excellent growth potential, particularly in key new markets. Consumers have moved online faster than ever before during 2020 and are purchasing in large numbers, in large part due to the pandemic and increasing consumer comfort with e-commerce and contactless experiences in general. And we feel they aren't going to move back offline after the pandemic recedes either. With this trend in mind, Pizza Pizza also launched a new e-gift card program focusing on driving digital sales and quick contactless redemptions as well, versus using the more tedious plastic gift cards still so common in the industry. And for many, many years, Pizza Pizza Limited has invested heavily in our digital platforms. And we've said this before, and I'll say it again here, no other pizza player in Canada has more digital channels for customers to choose from. Our customer delivery and pickup orders transacted through our array of digital ordering platforms accounts for over 60% of all orders, And like I said, this percentage will continue to increase, benefiting our customers, our company, and our franchisees. Innovation is key to our growth, and it's one of the most important brand attributes we're known for, not only in tech, but also in our menu offerings and really in everything we do. In 2020, we continued our core menu promotional activity, featuring our very popular unlimited two-topping $7.99 medium pizza special at Pizza Pizza and our $9.73 solo special at Pizza 73. And we also promoted our alternative crusts, particularly the keto and cauliflower crust, now paired with a side order of cauliflower bites. And for the holidays, Pizza Pizza promoted a dessert option with funnel cake sticks featuring two holiday-inspired dips. Our diverse high-quality menu, together with our award-winning websites and apps, and our top-notch customer service have positioned us well to weather this pandemic and come out stronger at the other end. Now, turning to restaurant development for a moment, during the quarter, we opened one traditional restaurant and one non-traditional Pizza Pizza location. However, we permanently closed three Pizza Pizza restaurants. Additionally, we opened one traditional Pizza 73 restaurant. For the year, we opened six traditional restaurants and three non-traditional Pizza Pizza locations, while closing 17 traditional and 15 non-traditional Pizza Pizza restaurants. Additionally, two traditional Pizza 73 restaurants opened, while one traditional and one non-traditional restaurant were closed. And as previously mentioned during the quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remain open across Canada. However, the majority of the non-traditional Pizza Pizza and Pizza 73 restaurants have remained closed with the exception of a few small locations and several hospitals and gas stations and the like. So while we have not opened as many new restaurants as originally envisioned in 2020 during the pandemic, we have accelerated our renovation and refresh program now. And in fact, 70% of our traditional stores now showcase our new look. And also we've put through new uniforms and a bunch of other changes too. So if you have been to one of our stores lately, I think you'll see a very new and refreshed look right through and through, which is great to see. And that really demonstrates to the market that we will always reinvent ourselves and keep refreshing our brands. We're not waiting around for various restrictions to be lifted. That's something we're not in direct control over, so we're going to focus on what we can control. And we believe our current store network is strong, it's ubiquitous, and our franchisees are as ambitious as we are to grow faster. So we've ramped up the restaurant construction and renovations for 2021, and barring any resurgence or adverse long-term effects of the pandemic or unexpected further delays in vaccine rollout later this year, we currently expect to see traditional restaurant growth to be approximately 5% in 2021. And as I said at the beginning, this year has been, of course, very challenging for everyone, and I want to personally thank our entire team for their hard work, their sheer perseverance, and the unrelenting efforts this past year. The health and safety of our customers and our restaurant teams continues to remain our top priority, and we've implemented strict protocols in our restaurants and in our deliveries to keep our customers safe, and our track record's been really good in that regard. So we're committed to, as always, delivering great food, providing the best customer experience, and we know that will translate into loyal customers and improve performance over the long term for our investors as well. So thanks again for joining the call this afternoon. I'll now turn things over briefly to Kurt to say a few words. followed by Christine as our newly-minted CFO, who will provide the full financial update. But first, over to you, Kurt.