Pizza Pizza Royalty Corp.

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp earnings call for the first quarter of 2021. 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 the time, if you have a question, you will need to press star 1 on your touch-tone phone. As a reminder, this conference is being recorded on Tuesday, May 11th, 2021. I would now like to hand the call over to Alex Seredin, Director of Finance. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earning call for the first quarter ended March 31st, 2021. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, Chief Financial Officer, Christine DaSilva, 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 press release and the risk factors included in our annual information forum. Please refer to our earnings press release and MD&A in the investor relations section of our website for reconciliation and other disclosures related to our non-IFRS financial 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. 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, which owns the remaining 23.5%. The Royalty Corp is a top-line restaurant royalty corp that earns a monthly royalty 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 Limited pays the partnership a monthly royalty, calculated as a percentage of royalty pool sales. Growth in the corp is derived from increasing the same store sales of the restaurants in the royalty pool and by adding new restaurants to the pool each year. The royalty pool was adjusted at the beginning of each year by adding new restaurants open in the previous year, less any restaurants that have been permanently closed. For the fiscal year 2021, the royalty pool was adjusted to include 622 Pizza Pizza restaurants and 103 Pizza 73 restaurants on January 1st, 2021. So with that review, I'll turn the call over to Paul Goddard to provide a business update.

Thank you, Alex, and good afternoon. Thank you everyone for taking the time to attend our call this afternoon. Today, we will highlight the results of our first quarter ended March 31st, 2021. On balance, our Q1 results demonstrated our brand's resilience during these turbulent times. The pandemic first impacted our sales in mid-March 2020, so Q1 is lapping a mostly pre-pandemic quarter last year. Occurring virus waves and lockdowns continued affecting important sales channels, particularly walk-in sales and our non-traditional sales, including business catering. Before the pandemic, as a reminder, our business was comprised of two primary revenue streams, our traditional restaurant network, which generates 90% of our royalty pool sales, and our non-traditional and special event locations, which typically generate the remaining 10% of sales. So, Within our traditional restaurant network across the country, our customers access our food in three different ways. Number one, ordering for delivery digitally or via 967-1111. Number two, by ordering ahead for pickup, again, digitally or by phone. Or three, by walking into one of our many convenient locations on a spur-of-the-moment basis. Fortunately, our traditional restaurants have remained open for delivery and takeout business since the pandemic began, including throughout the latest lockdowns in Ontario and other provinces. However, our customer dine-in channel, where customers typically walk in, order on the spot, and then stick around for a slice and a drink, let's say, has generally been closed since the onset of the pandemic due to the public health guidelines, with the exception of a few occasional brief periods. While our business is, of course, deemed essential and has therefore been 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 their employees and their customers, while focusing, of course, on delivery and pickup orders, which are the channels they can control at the moment. Our teams have also been 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. And although it varies a fair bit depending which province we're talking about, generally speaking, it's just a tough reality that the lack of dine-in combined with working from home virtual schooling, reductions in broader social and business activities have all led to a significant decrease in our normally very robust walk-in sales, especially for those in our urban locations. And again, walk-in is a very critical channel for us, typically giving us 40% of total store sales. So despite this uncontrollable pandemic headwind, if you like, the very good news here is that our delivery and pickup sales, which combined give us that 60% of sales, continue to offset a sizable portion of those lost walk-in sales. And we continue to innovate and go on the offense to drive those parts of the business that we can control, such as driving our deliveries and the pickup business, which has been really strong, and especially leveraging our digital advantage in the market. During the early stages of the pandemic, we quickly introduced innovative customer-centric safety measures, such as contactless pickup and delivery transactions with pre-tipping even, and an industry-first approach an award-winning tamper-free pizza box, which provides customers additional assurances when ordering. And that's gone over really well as well. The other 10% of our typical sales are from our non-traditional locations, along with our special community events, have for the most part remained closed since the onset of the pandemic due to the various government mandates. Simply put, our non-traditional business, including sporting arenas, colleges, universities, hospitals, etc., major outdoor entertainment venues, they're largely responsible for that reported decrease in our first quarter sales. And as you will have seen or will be shortly from our Q1 press release, for the first quarter, system sales from the 725 restaurants in the royalty pool decreased 13.9% to $108.2 million from $125.7 million in the same quarter last year, and there were 749 restaurants in the royalty pool. Same-store sales, the key driver of yield growth for shareholders of the company, decreased 13.3% for the quarter. Also, as a reminder to investors, the company's first quarter has historically been the weakest sales quarter, and the fourth quarter is the strongest. So there's that seasonality factor. Meanwhile, the company's working capital reserve is sitting at a healthy $5.2 million as at March 31, 2021, and the dividend payout ratio was 106%. Looking at the last four quarters, the rolling payout ratio was just 86%. So we will continue to monitor our payout ratio very carefully, as always. And while our target payout ratio is 100% annually, we also need to remain vigilant given the ongoing effects of the pandemic across Canada. And however, you know, we are pleased to see cautiously, but the long time delayed, but if you like, recently accelerated rollout of the vaccination programs in most provinces are beginning to help bring the cases down, generally speaking. And at this time, it seems that there really may be some proper sunshine at the end of the tunnel this time, as opposed to the headlights of yet another locomotive filled with more COVID variants coming our way. So we'll see. Regardless, our goal continues to be to provide stability in our dividends to shareholders and dividend growth over time. Now I'd like to touch on restaurant operations at PPL, private operating company, given it is the true engine behind our underlying business. I'd just kick that off. I'd say first off, operations excellence requires excellent people and excellent execution, and that's what we're seeing. So I'd just like to personally give a shout out to all of our employees, our restaurant owners, operators, their teams, our incredibly brave delivery drivers who've shown incredible energy and courage throughout this whole crisis, and our suppliers too. They've all shown tremendous resilience, courage, collaboration, and leadership. We've all helped each other. It's been actually a good story that way at least. And our team has performed exceptionally well under extreme circumstances. So it's really inspiring and heartwarming to see people helping each other. And, of course, our customers are always grateful to them. Their safety is our number one priority, but we are so grateful to keep their trust and keep earning their loyalty every day. On the marketing front, I'll give a quick update. 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 you prefer to phone 967-1111, tap your Pizza Pizza app, or simply walk into your local neighborhood Pizza Pizza. Our time guarantee ensures you get your pizza on time where it's free, and this is yet another key differentiator from competitors and always has been. And we stand behind that guarantee, and we will continue to always strive to be top of mind as the most convenient, the most reliable, and the best quality pizza chain, not just the biggest one. But more than ever, Pizza Pizza has focused squarely on future growth and innovation. Consumers continue to migrate at a dizzying pace toward online purchasing in large numbers, which is, of course, only accelerated into 2021, a large part due to the pandemic, of course, and just overall increasing consumer comfort with e-commerce even before the pandemic. So the world has changed. We all know it. And we all know that people are not going to revert back to their offline habits once the pandemic effects recede. And that's good for us. As we've always stated and shown through our ongoing digital initiatives, Pizza Pizza Limited realized, I would say before most other competitors did way back when, how critical it would be to invest in our digital platforms. We were the first national pizza chain to launch our iPhone app in 2009, for which we won a prestigious Webby Award, and the only pizza chain in Canada to launch a fully functional Apple Watch app and also a native iPad app. So no other pizza player in Canada has more digital channels for customers to choose from. No one is more convenient. than we are, and we're able to capitalize on this digital e-commerce surge that we're seeing across all retail and QSR. Our customer delivery and pickup orders transacted through our array of digital ordering platforms account for about two-thirds of all orders, and this percentage will only continue to increase, benefiting our customers, our company, our franchisees, everyone involved. It's a true win-win-win all around with faster, more automated, more efficient order capture and processing. As I've touched on, innovation and continual evolution have always been the key to our success, fueling Pizza Pizza's growth, not only in technology, but also staying current and ahead of the curve even on our menu offerings. And also, I'd say our restaurant ambiance and overall our branding. It's always changing and improving. So this innovation is creative. It's a growth mindset we have, and it's a fabric of our company culture. It's really who we are. We'll always push for ever-increasing quality and service, yet always at a decent, attractive price. And really, part of our innovation culture means we're just never satisfied with the status quo. We always see more opportunity. We're just not going to sit back, given that even if we're a market leader, that's just not good enough. The market's getting more competitive, and we've got to keep pushing harder than ever. So pretty excited about the innovation pipeline going on the rest of this year as well and beyond. I would say that in Q1, as examples, we did add superfood crust, really exciting, to our extensive alternative crust offerings. No other national chain has come so close to offering what we offer in terms of a variety of crusts and so many healthy options, catering to numerous customer segments with our cauliflower crust, our keto crust, our gluten-free whole wheat crust we've had for a while, and also our gourmet thins, which has been really successful. Additionally, on the fun and tasty side of things, popcorn chicken was added to our menu recently at both brands, and that was an immediate customer favorite too. So that always feels good when we hit the mark on the menu creation side, and I think we're getting better and better at doing that, even though we realize not every menu innovation wins, but we're not going to sit back and we're going to keep trying and innovating all the time. Also, in the back half of the quarter, we partnered with the number one card game in the world, Uno, to offer our customers the ultimate pizza and game night experience, which was a timely offering to families who may be a bit tired of Zoom and online games at this point, and school for that matter. This campaign was massively successful, especially on our multiple social media channels as well, and it hit at just the right time as we anticipated, so that's been a real hit. Our diverse, high-quality menu, continually enhanced websites and suite of apps, plus our ever-improving customer service stats, our quality scores have positioned the company well to weather this pandemic and come out stronger, gain market share, and increase our restaurant's bottom-line profits, along with their top-line sales. We're seeing positive economic signs and more hopeful than we were last quarter, I would say, overall, that the worst is over. We're not going to claim victory, not far from it, but I think things are looking overall better than they have been. So hopefully these long-lasting lockdowns will finally be lifted soon or start to. It will vary by province, I'm sure, but our core markets, Ontario, Quebec, Alberta, we'll see that, I think, hopefully soon. so we can get the economy safely back on track with a largely fully vaccinated population and one that hopefully feels safe and more confident to get back out there and live their lives. Just wanted to give a quick update on restaurant development, which has been especially exciting for us recently, I will say, and will continue to be moving forward as well. During the quarter, PPL opened three traditional and four non-traditional pizza restaurants, while one traditional pizza was closed. PPL also opened two traditional Pizza 73 restaurants and closed one non-traditional Pizza 73 restaurant. New restaurant construction continues across Canada as government-mandated restrictions on commercial construction have been lifted or largely lifted in the provinces. PPL management expects to accelerate our restaurant network expansion to about 5% traditional restaurant growth and continue our successful and exciting renovation program as well in 2021. Management funerals are excellent retail sites available. We've seen it at generally attractive commercial rent levels, or reasonable at least, in some cases very attractive. And we plan to take full advantage of the opportunities to go on offense, as I said, when others or some others are really forcing to go into more defensive retreating mode or frankly may lack the capital to expand or for some unfortunate folks out there that even continue operating altogether in this very tough environment. As previously mentioned during the quarter, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada. However, that majority of non-traditional Pizza Pizza and Pizza 73 restaurants, special events, etc., and catering, catering has been low, but all this non-traditional clump has remained closed, with the exception of really just a handful of these small locations in hospitals, gas stations, etc., so Really, I mean, our NTS network essentially was shut down along with our walk-in, and so we're looking forward to that surging back, and we'll be ready when the market's ready for us. And as I said at the beginning, this year has been such a monumental challenge for everyone, and I want to personally thank our entire team for their hard work and efforts this year. It seems like it's never going to end sometimes. I talk about perseverance for everyone, but I think we're really a tightly knit group, and I think we're feeling pretty good going forward about how how we're handling things. And, you know, the health and safety of our customers and our restaurant teams continues to remain the top priority for us. Pizza Pizza has implemented strict protocols in our restaurants and our deliveries as well. Super critical for us. We've got our uniformed drivers with masks on, gloves on. We've got a platform that people put the box on so the box doesn't ever touch the ground. You can tip in advance. It's all contactless. And that's, you know, I think that's optional in some places, but I think it's going to just increase and become more the way that we do things. So it's great to see that we can adapt so quickly and make our customers feel safer and happier, and it's faster as well, faster and more efficient. So if there's any silver lining, that's maybe one of them. So we are completely committed to delivering great food and the very best customer experience each and every time. And we know that mastering these fundamentals, if you like, is just what we look at. Every day you've just got to do better on these fundamentals, every aspect, better execution, better strategy, and just having that discipline. I think that we do that better than anyone else can. We have got some worthy competitors, but we're going to keep trying our darndest to beat them every day out there. And it means we will gain more new returning little customers, new ones. We'll drive our organic sales and our digital, and we will continue to see our performance improve. And particularly once we are finally able to reopen the floodgates, even if maybe the floodgates don't open all at once, but maybe it's a series of floodgates opening in sequence. But once we're able to fire on all cylinders again, with all our sales channels be fully operational, we're pretty excited about that. And meanwhile, we're going to push as we are in the channels we control, like delivery and pickup, and so far I think we're managing that pretty well. So thanks again for listening and for joining the call this afternoon, and I'll now ask Christine DeSilva, our CFO, to provide a brief financial update.