Pizza Pizza Royalty Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Pizza Pizza Royalty Corp's earnings call for the fourth quarter of 2021. During the presentation, all participants will be in the listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then number one on your telephone keypad. And as a reminder, this conference is being recorded on Wednesday, March 2, 2022. And I would like to turn the conference over to Alex Radden, Director of Finance. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp's earnings call for the fourth quarter ended December 31st, 2021. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, and Chief Financial Officer, Christine De Silva. 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 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 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 restaurant 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 in the previous year, less any restaurants that have been permanently closed. For the fiscal year 2021, The royalty pool was adjusted on January 1st, 2021 to include 622 Pizza Pizza restaurants and 103 Pizza 73 restaurants. With that review, I'll turn the call over to Paul Goddard to provide a business update.

Thank you, Alex, and welcome everyone to Pizza Pizza's fourth quarter investor conference call. Today I'll be discussing our fourth quarter results and we'll share a brief outlook for 2022. And then Christine will summarize our key financial highlights before the Q&A at the end. Last year, our Pizza Pizza and Pizza 73 restaurants were impacted by local government's restrictions in response to the COVID-19 pandemic. However, we were encouraged to see our results strengthen as 2021 progressed when compared to 2020. Customer orders and sales in the second half of 2021 improved significantly compared to the first half of the year, especially at key non-traditional locations and in our catering and walk-in businesses. However, by the end of the fourth quarter, the Omicron variant caused restrictions to be reinstated, which negatively impacted our restaurants. Provincial governments across Canada reinstated restrictions on in-restaurant dining and indoor social and event gatherings. These restrictions continued into 2022. Just the opposite of the recent lifting of restrictions in most provinces, we will have the wind at our backs and we'll continue experiencing the strong momentum we experienced in the latter part of 2021. And that's, of course, barring any new unexpected restrictions. Today, we are pleased to present the financial results of the Realty Corp for the fourth quarter, which ended December 31st, 2021. Results for the fourth quarter were driven by strong same-store sales at both brands. Pizza Pizza reported same-store sales growth of 13.9%, and Pizza 73 reported 5% growth for a combined 12.4% same-store sales growth. The positive results for the quarter were mainly due to the increase in guest traffic and the easing of government restrictions. As a result, our board was pleased to announce an 8.3% increase in the shareholder dividend effective February 2022. Even with the easing of restrictions, we still have restaurants that continue to be impacted by the loss of walk-in sales, specifically those located in urban markets, which are particularly impacted by corporate work from home policies. As a reminder, at Pizza Pizza, approximately 40% of our sales typically come from our walk-ins. Additionally, many of our non-traditional locations, specifically those in colleges and universities, had not reopened by December 31st. So, while we wait for the full and hopefully permanent reopening of the economy at Pizza Pizza Limited, we continue to focus on our core competitive advantages of convenience, innovation, high-quality menu offerings, and network expansion. This year, we had tremendous success with our national expansion program. During the year, Pizza Pizza opened 22 traditional restaurants and 12 non-traditional Pizza Pizza locations and opened two traditional Pizza 73 restaurants. The new locations opened across all provinces Pizza Pizza operates in, including BC, Quebec, Ontario, Alberta, Manitoba, Nova Scotia, and New Brunswick. That's seven provinces. Proud of that. It's something we're really pleased to see, and we've really bolstered our construction efforts right across the country and really seen that accelerated growth this year. And we expect to maintain this pace, by the way, with projected unit growth of approximately 5% in our traditional restaurants in 2022. During the year, two traditional and 30 non-traditional Pizza Pizza restaurants closed, and three non-traditional Pizza 73 restaurants closed permanently. While the sheer number of non-traditional closures seems large, the locations that closed have been closed for most of the last two years in any event due to COVID and are smaller, low-volume sites. So I just wanted to mention that. And as mentioned last quarter, the majority of these closures were lower-volume movie theater locations. Beyond the borders of Canada, in November, Pizza Pizza Limited signed an international license and royalty agreement with the Pizza Pizza Realty Corp to use the Pizza Pizza rights in Mexico. We have a master franchisee in Mexico and are in the early stages of a long-term development plan there. The appeal for pizza continues to grow in Mexico as one of the highest per capita pizza consumption markets in the world, in fact. And accordingly, we are definitely excited to introduce Mexico to our innovative and unique offerings and do see further international potential as well for Pizza Pizza down the road. That said, we remain laser-focused on growing our business across Canada, and it's safe to say we are certainly known and respected as a major homegrown national brand and the leading pizza chain in the country. Whether the architecture is store count, overall sales, or pizza market share, we believe we are the market share leader in all major urban markets, though we do see a definite incremental opportunity in parts of the country where we may not yet have deep enough market penetration. So, turning now to our Canadian restaurant operations. Pizza Pizza, like companies across all industries, is facing significant inflation in our input costs and labor. And our goal is to strike a balance between increasing retail prices to guard our restaurant's bottom line profits, but also ensuring we don't adversely impact overall transaction volumes or customer order counts. Over the last year, we have been strategic in taking modest price increases across our menu to offset those input costs. And we will continue to monitor the supply chain landscape and judiciously pass along price increases where needed to while also looking at operational efficiencies to lower costs, and also just keep our overall food costs as a percent of sales in line with historical levels as best we can. And all the while, we will be careful to make sure that we still provide tremendous value to our customers, something we are certainly known for. And this is definitely no small task when we see double-digit increases in virtually every input cost we see, whether it's meats, tomato sauce, dough with wheat futures and oil. Cheese, we've seen approximately 8% mandated price increase with supply management in Canada as of February, and we're likely to see more increases there as well. And just to give people a sense, if you don't know already, cheese is about 40% of the cost of a pizza. So it's the major one, but everything's going up basically. So there's no question input costs have gone up significantly across the board, and we expect them to continue to go up more this year. putting pressure on our franchisees and on our private operating company as well, Pizza Pizza Limited. Fortunately, however, we have been able to manage our overall food costs well and non-food costs. And it's challenging, but we're doing quite well on that so far. And part of this has been due to the selective price increases, as I mentioned earlier. And one key point we'd like to reiterate on these calls to our investors as well is that a key attribute of the Royalty Corp, remember, is that revenues are based on top-line revenues. system sales of the restaurants in the royalty pool and not on the profitability of either PPL or the restaurants themselves. Moreover, the company is not subject to the variability of earnings or expenses of either PPL or the restaurants. So this therefore mitigates much risk for our investors. And as long as we consistently generate those positive same store sales growth and grow the net number of restaurants in our network, investors should continue to be well rewarded with our strong monthly dividend. And our yield is circa 6%, as you all know at the moment. and over time should see further dividend increases based on strong performance, as long as we get that strong performance. So we think this has really been an outstanding, longstanding track record. We're proud of that, and we're more ambitious than ever about creating even more value for our shareholders as we look to the future. Finally, Pizza Pizza continues to leverage its brand and its proud history of homemade innovation and innovation alongside our strategic partners, too. By way of example, last quarter, through our longstanding partnership with MLSE, we introduced our score slice promotion, which was significantly enhanced from a prior version we had. And now, if some of you haven't had the chance to go to Raptors release game, you'll see that very visually and very, very apparently. But during Raptors games and more recently for 2021, the Leafs for the first time as well are part of this. But fans are essentially directed to a massive QR code shown on the arena scoreboard and it loads basically a free slice coupon into their digital wallets to use with their Pizza Pizza app. So, for instance, if the Leafs score first in the first period, that's a concept we set up, you know, up pops the QR code and thousands of fans at the venue pull out their smartphones and they download our award-winning Pizza Pizza app. In addition to being a fun digital giveaway for existing customers, it's fun. The crowd loves it. It really gets them going, supporting the team more as well. Really, this was a phenomenal program to drive organic app downloads for fans that didn't already have our app as well. That introduces them to our entire array of fast and convenient organic ordering platforms. We're really pushing the app. Also, with the apps, we continue to reinvest in those and enhance them all the time. We're not going to stop. If anything, we'll do even more in the future. We also, as part of that, introduced SMS push notifications, which are Sounds pretty simple as text messages, but actually there's a lot of complexity behind the scenes to get something that's really data-driven, intelligent, and based on marketing data. And so we've just started to do those now, and that's really exciting. I think we're going to see some real benefits from that. It's just early days right now, but we really like what we see, which a lot of companies really don't have the capability of doing in a sophisticated way. So I feel pretty excited about that one. And we continually... evaluate and enhance these ordering platforms to ensure that customers have the best experience possible, want it to be fast, easy, and we want to be available to them no matter how they want to come to us. So from the time they place their order to delivery at their door or pick up at the store, we'll do it right, we'll do it fast, we'll make it easy. And customers will continue to see us bring out new innovative features in the coming quarters with our apps. We like being first, we like doing things that are truly making the experience better. Just as one example, at Pizza 73, we have a digital scratch and win aspect. So when you finish your order, it's kind of like a lottery scratch and win card, but it's on your screen. And you actually scratch away the different squares to see what you won. And that's something that I haven't seen anyone else do. And that's just a fun little thing designed to get a return order. It's not redeemable until your next order. So it keeps you sticky in that channel, keeps you ordering on the app, and keeps you coming back to Pizza 73. And you'll continue to see other innovative app features develop for Pizza Pizza app as well. Our diverse, high-quality menu, our appealing websites and apps, and our strong customer ratings, all these things help keep us out in front of our competitors and have helped us weather the COVID-19 pandemic well over these past two years. They say never waste a good crisis, and we sure took these words to heart and went on offense, not defense, these past two years. It's certainly been tough for us and everyone else in the world, but we have emerged stronger and closer and better. I think that means not only our corporate people, but our franchisee teams as well as operators. I think we're really more cohesive than ever going through tough times together. And that's really proven out by our latest results and our overall trends. And with this accelerated network growth to boot, we are committed more than ever to delivering great food and the very best customer experience across Canada. And we know that this means we'll gain new and returning loyal customers more and more over time. So we are seeing growth. positive economic signs in many ways, as I mentioned earlier. We have the inflationary concerns as well, but I think that overall we're more hopeful that now that these long-lasting restrictions have been lifted that we'll be able to do better than we have been. And yet we are trending well, which is great. So we know that as the restrictions continue to lift and customers return to these urban city centres, which we can start to see happening now, and to our non-traditional sites when they all reopen, We'll be ready to greet them with our high-quality, hot and fresh food, our welcoming staff, and our newly opened restaurants, which we're super excited about. And again, you know, you see most of our growth is in the BC and in Quebec regions, but there are other places such as New Brunswick where we've opened up another location too, even in the smaller markets. So looking back at 2021, I just want to thank our strong team of restaurant owner-operators across the country for all their efforts, especially during these tough times, as well as our internal teams at both brands. I think everyone's been working hard. really nicely together. And there's an excitement level inside the company that despite the challenging, you know, macro environment for the world and for everywhere, we are excited to see our momentum, you know, picking up. So, you know, a crisis like COVID really does test a company's culture and fortitude. And yet we feel like we've learned to work even closer, like I said, and more united than ever before. So we think we have a special combination of entrepreneurial nature, you know, real innovative entrepreneurial attitude and a real hunger to do better and better, and it's pretty exciting when we start to see the fruits of our labours come to reality. So thank you for listening, and I'll now turn it over to Christine to provide a brief financial update.