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 second quarter of 2022. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. As a reminder, this conference call is being recorded on August 10th, 2022. I would now like to turn the conference call over to Mr. Alexander Suratin, Director of Finance. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corps' earnings call for the second quarter ended June 30, 2022. Joining me on the call today are Pizza Pizza Limited's Chief Executive Officer, Paul Goddard, and Chief Financial Officer, Christine Da 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 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 in the previous year, less any restaurants that have been permanently closed. For the fiscal year 2022, the royalty pool was adjusted on January 1st, 2022, to include 624 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.

Thanks, Alex, and welcome, everyone, to Pizza Pizza's second quarter investor conference call. Today, I'll discuss our second quarter results, and then Christine will summarize our key financial highlights for the Q&A at the end of the call. We are very pleased to report strong sales and earnings per share growth for the second quarter. Our results were driven by a 20.3% sales and 19.5% growth in adjusted earnings per share, both of which are drivers of shareholder value. As a result, our board was pleased to announce a 3.8% increase in the monthly dividend effective June 2022. And this marks the second dividend increase in 2022, supported by a healthy $6.5 million working capital balance. So building on the momentum of the first quarter, we continue to see growth in our walk-in and non-traditional channels, as well as our pickup category. And we're also excited to see many of our special events, major special events especially, return this summer, such as Honda Indy, lots of conventions, music festivals, Calgary Stampede Out West, and many more. And the consumer demand for hot and fresh pizza slices has been exciting to see after these past few years. And the lifting of COVID-19 government restrictions this year provided relief in all channels. It was as though the lights turned back on, which is fantastic to see. Our non-traditional sales channel, which was 10% of total sales pre-COVID, is being restored, and we expect universities and colleges to reopen fully in the fall. We continue focusing on our core competitive advantages of convenience, innovation, high-quality menu offerings, and, of course, our restaurant network expansion. Further enhancements continue to be made in regards to product development and operational programs. Internally, we continue to enhance our already strong operational excellence in our day-to-day operations. And that's both on the food level, of course, and our customer service. And we're really happy with an amplified effort in recent quarters, especially on that internally. And based on customer feedback, our execution, where it matters most of all, continues to improve. We have two fully staffed customer contact centers that have been very active taking care of customer orders and also working towards securing school, business, and other large catering orders. Returning to our marketing and food innovations, this spring, Pizza Pizza continued to focus on pizza quality and innovation via our Gourmet Thins food innovation campaign. Four new recipes were introduced, along with our first vegan Gourmet Thin option, and during this promotional period, we saw our Gourmet Thins category sales more than double, and sales have remained strong. Ongoing innovation in the pizza category continues to be a critical component of our food quality and innovation strategy, introducing customers to high-quality and on-trend ingredients. As we expand our menu offerings into new categories, such as chicken sandwiches, where we've done really well, beer, of course, and dessert offerings, and many more, it remains critical to still maintain focus on our best-in-class pizza offerings. Both brands continue to find success winning the moment as we work to build brand relevance around key occasions and sales opportunities throughout the quarter. In April, Pizza Pizza launched a renewed 420 strategy, offering four small pizzas for $20, High-impact media placements, including massive billboards in Yonge and Dundas Square, were purchased, which, along with a highly effective social media campaign, catapulted Pizza Pizza to the number one brand associated with the 420 occasion and resulted in a 60% sales increase on the day versus last year. Similar success was achieved at Pizza 73 as we leveraged our team sponsorships and incremental paid media to associate the brand with a rare Battle of Alberta playoff series that ended with the Edmonton Oilers advancing. Unfortunately, that one didn't last that long, but we still saw some nice increase in activity when that Battle of Alberta was on. We also continue to leverage new partnerships to expand the sales opportunity for each Pizza Pizza and Pizza 73 location. This spring, we launched a pilot program with Chinese-language third-party delivery service Tantuan at over 30 Pizza Pizza locations. If the pilot proves successful, we will expand to all applicable Pizza Pizza and Pizza 73 locations. We also expanded our pioneering Ben & Jerry's ice cream virtual store pilot to over 130 Pizza Pizza locations, with significant incremental sales realized immediately from this net new category, along with the ongoing efforts of introducing beer on both Pizza Pizza and Pizza 73, where over 100 locations are live and more coming online weekly. Leveraging our spaces for maximum sales benefits, both from our traditional business and new opportunities such as these, and they'll continue to be a perfect priority for us for both brands. 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. And, of course, all of our campaigns are supported holistically by our in-house marketing team who design and create it and deploy it on an array of assets from radio, flyer, billboards, and on our multiple social media and digital channels. So obviously, we continue to be very pleased with our overall momentum and continue to work plans and strategies to further enhance our customers' experience. On the flip side, we, like the rest of the world, continue to face significant inflationary cost increases across our supply chain and restaurant labor. We successfully have been able to balance an increase in customer traffic while selectively taking many price increases. We know our customers are looking for value. It's a core, core part of our brand. They also want quality, so we have to find the right balance there of perceived value for money. We are really good at that, and we don't always get it exactly right, but I think we have a pretty good track record of finding that balance quite well. It's a fine line to walk, and we need to keep customers happy, of course, while also simultaneously doing all we can to drive not just sales growth, but also profitability for our restaurant owner-operators and our private operating company, Pizza Pizza Ltd. I should mention, too, though, that realty court investors are, of course, insulated from that operational risk since our key drivers for investors are limited to same-store sales growth and net restaurant network growth. So turning to that restaurant network growth, during the quarter, PPL opened five traditional and three non-traditional pizza restaurants. And meanwhile, two traditional and five non-traditional pizza restaurants were closed. Over at the Pizza 73 brand, we opened one non-traditional location and closed one traditional and one non-traditional restaurant. The new restaurants were opened outside of our core markets as we continue to expand our footprint across Canada. And as an interesting quarter as well, we really were all over the place. We had some openings in Quebec, sold in Lake Alberta. We had a conversion to a Pizza Pizza, downtown Vancouver opening down on Robson Street, one in Saskatchewan. And we've also been really accentuating our non-traditional locations location development plan as well. And we actually had, I think, two out of three openings there were at high volume service stations and one in a landmark cinema, movie theater. So lots going on there and, you know, happy to see that growth that we've really been pushing, carrying on across the country. Pizza Pizza Limited's management team expects to continue its restaurant network expansion to hit our three to four percent traditional restaurant growth target. And by the way, we've had that higher last year, and we think we can do better than that, but we're being a little conservative, I think. We've been very happy with the franchisee pipeline and very happy with our siting. Our real estate team has been great at finding locations in our core markets and in newer markets, be it Quebec, B.C., or in more remote areas of the Maritimes or what have you. But we have seen these supply chain issues, and that's why we've reduced our target a little bit because we've seen issues with things like oven – lead times. We've had issues with permit approvals with the government institutions at the different levels. It's been very much slower than last year even. And so that has impacted us. But on the bright side, I think commercially, the things that we can control, we're moving as fast as we can. And that's working really nicely. So we'll see how we do. But we're saying, I would say, conservatively 3% to 4%. And hopefully, we'll do a little bit better. We realize we're a little slow compared to last year in terms of where we are at this point in the calendar year. But our team's very confident that it's going to be a busy couple of quarters coming up here, and hopefully we'll finish maybe a little bit of that. We'll see. And to date, I would say as well that we're really proud to say that over 80% of our restaurants now feature our hot and fresh new look and or a refresh on the interior and exterior. And significant upgrades continue to be made in regards to restaurant equipment, such as new and more efficient ovens, digital menu boards, and in-store technology. And this quarter, the first full quarter without restrictions, exceeded our expectations. Our business has really returned to its full capacity and more. And it's just great to see all the hard work really paying off. And so it's super exciting. And I think it's also motivating for our internal team and our operators out there and hopefully customers as well. They seem to be agreeing with us that, hey, we're really reinvesting, we're really refreshing, and we're pushing hard to always reinvent ourselves and really lift the brand to ever new heights. And our restaurants and operators were refreshed and excited to serve all of our loyal customers returning to the stores. We knew our brand was resilient, and we want to thank all of our restaurant owner operators, our passionate employee team, and our devoted customers for continuing to support our brand during the last two-plus years of COVID. Our restaurant network growth continues to be very strong, as I said, and as we continue to scale effectively, we've only become stronger. So we look forward to the rest of the year, continued momentum from the return to full operations. Thanks for listening and tuning in today, and I'll now ask Christine to provide a brief financial update.