Pizza Pizza Royalty Corp. (PZA) Earnings Call Transcript & Summary

Hello...

Good morning, ladies -- oh, go ahead.

Hello and welcome to the Annual Meeting of Pizza Pizza Royalty Corporation. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Jay Swartz, Chairman of the Board. Sir, the floor is yours.

Good morning, ladies and gentlemen. The Annual Meeting of Pizza Pizza Royalty Corp. will now come to order. My name is Jay Swartz. I'm the Chairman of the Board of the Directors of Pizza Pizza Royalty Corp. I will act as Chair of the meeting. With me on this call are Paul Goddard, the President and CEO of Pizza Pizza Limited; and Curt Feltner, the CFO of Pizza Pizza Limited. Although we are disappointed that we cannot see each other today, our thoughts are with you and your families and your communities. We want to thank you for your patience as we've navigated through this unprecedented situation and hope that you agree that we did the right thing by moving this to an electronic meeting in light of the circumstances. Instructions on how to ask questions and the voting procedure will appear on your screens. As with any new technology, unexpected glitches may occur, but we understand that the Loomie platform is very user friendly. I will ask Curt Feltner to act as secretary of the meeting. With the consent of the meeting, I will ask AST Trust Company (Canada) through its representatives, Helen Kim and Carol Pineda, to act as scrutineers of the meeting. The secretary has a confirmation that the Notice of Meeting calling this annual meeting was mailed to the shareholders in accordance with the bylaws of the corporation and the applicable securities regulation. With the consent of the meeting, we will dispense with the reading of the Notice of the Meeting. I will ask the secretary to append the confirmation of mailing to the minutes of this meeting as a schedule. The scrutineer has provided a preliminary report on attendance, which shows that a quorum is present. I adopt the scrutineers' report. As there is a quorum present and as adequate notice of the meeting has been given, I now declare that the meeting is regularly constituted and properly constituted for the transaction of business. We will first deal with the formal business to fulfill the legal requirements for this meeting. After that, Mr. Goddard will provide a business update. If you have logged in as a regular shareholder -- as a registered shareholder or proxy holder, you can submit questions at any time during the meeting. Unfortunately, we will not be able to respond to the questions during the meeting. If there are any questions, the secretary will take note, and the company will contact you with a response after the meeting. I have also been advised that we have guests at this meeting who are not registered proxy holders or shareholders. I welcome all those guests but remind them that they do not have the legal right to vote on any motion and not entitled to speak at the meeting. [Operator Instructions] We will conduct today's votes by a single electronic ballot. If you have already voted in advance by proxy, you do not need to do anything when balloting is open unless you wish to change your previously submitted vote. Voting can only be done through our virtual meeting platform. We note that proxies received to date indicate that the company has sufficient votes to pass all matters in accordance with the recommendation of management. The online voting polls are now open and will remain open as we proceed. The financial statements for the company for the year ended December 31, 2019, and the report of the auditors thereon were mailed to the shareholders prior to this meeting. This information is also set out on the corporation's website. I invite you to raise any questions concerning the financial statements by submitting questions to the company in writing. These questions will be answered after the meeting. I direct the secretary to append this -- the financial statements to the minutes of the meeting. The next item of business before the meeting relates to the appointment of the auditors of the company. I will now ask someone to move a motion that KPMG LLP, Chartered Accountants be appointed as auditors of the company for the ensuing year and that the directors be authorized to fix the remuneration to be paid to the auditors. Who'll move the motion?

So moved by Curt Feltner.

And seconder?

It's Paul Goddard here. I second the motion.

Is there any discussion on this motion? As there is no discussion, I will now call for a vote on the motion before the meeting. Would all voting shareholders please enter your votes with -- in Loomie? [Voting]

It is now in order to proceed with the nomination and election of directors. The number of independent directors of the company has been fixed at 5 for the coming year. The meeting is now open for nominations for the election of directors for the ensuing year. I now ask the secretary to read the names of the persons nominated as directors as listed in the company's information circular.

The names of the persons nominated as directors of the company for the ensuing year are Neil Lester, Edward Nash, Michelle Savoy, Jay Swartz and Kathryn Walsh.

Since the number of nominees is the same as the number of vacancies to be filled, I now ask for someone to move a motion that the persons nominated for election as directors be elected as directors of the corporation to hold office until the next annual meeting. Who'll move the motion?

So moved by Curtis Feltner.

Who'll second it?

I second the motion. It's Paul Goddard.

Is there any discussion on the motion? As there is no discussion, I now call for a vote on the motion before the meeting. Would all voting shareholders please enter your votes in Loomie? [Voting]

Proxies representing the shares were submitted in advance of the meeting. We will report on the specific number of voting results when we receive the scrutineers' formal report. But the preliminary count shows well more than a majority support for each resolution. Therefore, voting is now closed. Based on the preliminary report of the scrutineers, proxies were received from sufficient number of shares relative to the votes cast at the meeting such that I can now declare that all resolutions have been carried. I declare that the motion for the appointment of the corporation's auditors has been passed and that the motion for -- that each of the 5 nominees to the Board be elected has also passed. I hereby direct that a copy of the scrutineers' final report on voting results be annexed to the minutes of the meeting. That concludes our formal business. I wish to thank you for attending, and I now declare that the formal part of the meeting be terminated. I would now like to call on the Chief Executive Officer of Pizza Pizza Limited, Paul Goddard, to review the business of the company and Pizza Pizza Limited. As a cautionary note, the presentations contain forward-looking financial statements. Investors should be aware that any forward-looking statements are subject to risks and uncertainties that could cause actual results, performance or achievements of the company of Pizza Pizza to differ materially from those discussed here today. We are also adopting for this presentation the cautionary language relating to forward-looking financial statements that is set out in the company's annual information form, to which we refer you for additional details concerning the risks, uncertainties and assumptions relating to our forward-looking statements. With that, I'm pleased to introduce Paul Goddard, President and CEO of Pizza Pizza. Paul?

Thank you, Jay, and good morning, everyone. Welcome to our 2019 Annual General Meeting. Well, 2019 certainly seems like a distant past for our company due to this world-changing pandemic affecting us all. Since mid-March of this year, we have focused our energies on battling the effects of COVID-19. Over the past several months, we have worked hard to ensure the success of our Pizza Pizza and Pizza 73 restaurant operators, the safety of our restaurant employees and our customers, all of whom are critical to the success of Pizza Pizza Royalty Corp. As you may be aware, 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 2 partners: Pizza Pizza Royalty Corp., which owns 76.5% of the partnership; and the other partner, Pizza Pizza Limited, a 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, which uses the Pizza Pizza and Pizza 73 trademarks in its restaurant operations. The success of the Royalty Corp. depends primarily on the ability of Pizza Pizza Limited to maintain and increase restaurant system sales and to meet its royalty obligations. Increases in restaurant sales are derived from both the opening of new restaurants and increases in same-store sales growth. The partnership's monthly royalty is calculated as a percentage of system sales reported by the restaurants in the Royalty Pool. The Royalty Pool is expanded at the beginning of each year by adding new restaurants opened in the past year less any restaurants that are permanently closed. Royalties lost due to the permanent closure of restaurants are replaced with royalties from new restaurants at the time of the next expansion of the Royalty Pool. Until then, Pizza Pizza Limited continues to pay the royalty as if the restaurant had not closed. Since our AGM today is audio only, Pizza Pizza Royalty Corp. has uploaded a full 2019 AGM presentation on our website at pizzapizza.ca/investors/presentations, and it's also -- you'll see the URL on the title page on your Loomie screen as well. The presentation provides a robust financial summary. Well, today, we are only providing highlights of 2019 and the first half of 2020. So let me briefly provide the company's 2019 financial highlights. Royalty Pool sales increased 1.3%, same-store sales increased 0.5%, adjusted earnings per share increased 0.9%, restaurant network decreased by 24 locations and the payout ratio was 103% for the year. Our second quarter 2020 financial results were released earlier this week, and I direct you to that press release and our second quarter conference call for details of the first 6 months of 2020. Financial highlights for the first 6 months show the effect of the pandemic. And here are the 2020 year-to-date highlights. Royalty Pool system sales decreased 10.8%, same-store sales decreased 11.4%, adjusted earnings per share also decreased 11.4%, restaurant network decreased by 17 locations, Royalty Pool of restaurants decreased by 23 net restaurants effective January 1, 2020, and the payout ratio was 103%. Now for Q2, for the 3 months ended June 30, 2020, the payout ratio was 83% after adjusting the monthly dividend in April, down by 30%. And the working capital reserve increased by $761,000 to $3.4 million at June 30, 2020. The underlying business fundamentals of the private operating company, Pizza Pizza Limited, have proven to be critical in successfully stabilizing restaurant sales and rebuilding the lost sales we experienced from the pandemic this past spring. Pizza Pizza Limited's strong business fundamentals have made our brands the QSR pizza industry's market leaders in Canada. Being in the delivery business for over 50 years has proven to be a major advantage over other operators in the quick service restaurant sector and our deep delivery expertise and frankly ability to quickly adapt to market demands has been especially apparent during the pandemic. Additionally, our senior management team averages over 20 years with the company. And together, we have developed a proven franchise business model, which we will continue to leverage and scale. Our restaurant operators continually reinvest in their restaurants, and this provides our customers with a modernized setting to enjoy our diverse menu offerings. Our national restaurant expansion program continues to take us into growth markets, further strengthening our geographic diversification. We have exceptional brand strength. Our marketing strength and spend have made Pizza Pizza the leading pizza QSR in the Ontario market, with Pizza Pizza -- or sorry, with Pizza 73 leading the Alberta market. We're also extremely proud of our long-standing reputation as a true innovation leader in our industry in terms of our food, marketing and our technology, again especially during the pandemic as we provided customers a wide array of digital ordering options, quickly launched contactless delivery and also an industry first, a tamper-free pizza box for safer delivery. So let's take a quick look at some of these key business fundamentals. We're very proud of our franchise system, and we work as one team right alongside our franchisees. For the past 7 consecutive years, the Canadian Franchise Association has awarded Pizza Pizza the Franchisees' Choice award, a huge vote of confidence from our restaurant operators. This franchise relationship is absolutely key to our record of strong growth and also our future growth. The ongoing service, support and training that we provide are considered some of the very best in the industry. And our recently renovated Pizza Pizza Innovation & Learning Centre provides training for new franchisees and ongoing courses for more than 2,000 team members each year. And whether you're looking at our market share or our total number of restaurants nationwide, Pizza Pizza is Canada's #1 QSR pizza chain. As of June 30, 2020, we have 732 locations across Canada. Pizza Pizza, with the majority of restaurants located in Eastern Canada, accounts for over 80% of Royalty Pool sales. Pizza Pizza is continuing its successful national expansion by focusing on Québec and British Columbia. Our Québec expansion has been extremely successful, and we expect B.C. to play out in a similar fashion. Although it is still early days for us in B.C., we are very excited about our strong unit sales there in that major new market for us. Meanwhile, Pizza 73, the market leader in Alberta, also has a presence in Saskatchewan, B.C. and the Yukon, and we continue penetrating those markets nicely as well. During the pandemic, substantially all traditional Pizza Pizza and Pizza 73 restaurants remained open across Canada. Initially, during the onset of COVID-19, 15 restaurants were temporarily closed for part of March and April due to the pandemic. Currently, only 9 restaurants remain temporarily closed. As a marketing powerhouse, in addition to our primary marketing activities of digital, print, radio, TV and the like, we have also successfully expanded our brand awareness using our nontraditional restaurant locations as well as selling pizza at major community special events. Our nontraditional restaurants, which account for 10% of total sales, play 2 important roles for us: first, they are a vehicle for growing outside our core markets and establishing a national presence by building brand awareness prior to opening traditional restaurants; and second, they offer significant brand visibility and sales in captive markets and other venues such as arenas, theme parks and hospitals. But as you might imagine, unfortunately, the vast majority of these nontraditional locations at Pizza Pizza and Pizza 73, along with most of our special events such as outdoor concerts and festivals, temporarily closed in March and most have remained closed, although certain locations are beginning to reopen in a limit capacity as government legislation begins to sort of ease and permit that. So we expect these smaller, nontraditional locations will take quite some time to grow back to their prior business levels, but the pace will ultimately depend on how quickly the pandemic effects subside across Canada. I'll now turn briefly to restaurant operations. 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, collectively off-premise, through our wide array of digital ordering platforms or by visiting one of our 700-plus locations across the country. Pizza Pizza and Pizza 73 delivery and pickup business has grown significantly during the pandemic, and we continue to take nimble and targeted actions via our marketing, operations and technology teams to further drive our delivery business. More than ever before, Pizza Pizza is focused squarely on future growth and innovation. The pandemic global crisis, the likes of which our generation has never seen, but, at the very same time, the -- from it are also unprecedented. Consumers are moving to online purchasing in large numbers, which has accelerated in the first half of 2020 in large part due to pandemic, of course. And they are going to move back offline after the pandemic recedes. And of course, for many, many years, Pizza Pizza Limited has invested heavily in technology platforms, from our business intelligence platform to our accounting and logistics software, et cetera. We are building the platforms and building our company for the future. And we're not just building but continuing to reinvest in our business continuously as well. The largest single investment we've made has been in our digital ordering platforms. No other pizza player in Canada has more digital channels for hungry customers to choose from. Customer delivery and pickup orders transacted through our array of digital ordering platforms account for roughly 60% of all orders, and this percentage will continue to increase, benefiting our customers, our company and our franchisees. Our recently relaunched digital ordering channels have driven loyalty and frequency, and the new release was timed well as online sales during the pandemic increased significantly. Our successes in late 2019 continued into 2020, especially during the pandemic as customers looked for variety as the lockdown continued far longer than originally thought. New, on-trend product offerings, such as our gourmet thins introduced back in January, our plant-based toppings and [ Tito ] pizza offerings, an industry first, continue to resonate with consumers' ever-evolving preferences as well, always delivering excellent value for money. Our diverse, high-quality menu, our newly relaunched web and our apps, plus our improved customer service and market share have positioned the company well to weather these pandemic challenges. And additionally, our Delivery Done Better promise, designed to increase our delivery traffic, is proving to be a major competitive advantage for our brands and is clearly delighting our customers. We have a strong pipeline of stores to ramp up for later in 2020 and especially for 2021. Barring any massive resurgence or adverse long-term effects of the pandemic, we currently do expect 2021 to be stronger than 2020 in terms of network growth given the unique challenges 2020 has thrown at all of us. So we are encouraged by looking forward to the latter half of the year, which has historically been stronger for pizza sales than the first half. And that concludes my presentation for today. I'd like to thank you for your interest in Pizza Pizza Royalty Corp. And as I mentioned before, a full AGM presentation can be found on our website at pizzapizza.ca under investors/presentations. So stay safe and enjoy the rest of your summer, and I will now turn the call back over to Jay Swartz.

Thank you, Paul. As previously stated, if you have asked a question, the secretary will be taking note and responding to you directly after the meeting. That concludes the agenda for the meeting. Thank you for your attendance. Stay safe and healthy. Thank you.

This concludes the meeting. You may now disconnect.