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

Good day, and thank you for standing by. Welcome to the Pizza Pizza Royalty Corporation Annual Meeting 2021. [Operator Instructions] I would now like to hand the conference over to your speaker today, Chairman, Jay Swartz. Please go ahead.

Thank you. Ladies and gentlemen, the annual meeting of Pizza Pizza Royalty Corporation will now come to order. Good morning. My name is Jay Swartz. I'm the Chairman of the Board of Directors of Pizza Pizza Royalty Corporation. I will act as Chairman of this meeting. With me on this virtual call are Paul Goddard, the President and CEO of Pizza Pizza Limited; and Christine D'Sylva, the CFO of Pizza Pizza Limited. Although we are disappointed that we cannot see each of you today, our thoughts are with you, your families and your communities. Hopefully, we can return to an in-person meeting next year. Instructions on how to ask questions on the voting procedure will appear on your screens. As with any new technology, unexpected glitches may occur, but the Lumi Platform is very user friendly. Pizza Pizza Royalty Corp indirectly owns Pizza Pizza and Pizza 73 brands and trademarks through its subsidiary Pizza Pizza Royalty Limited Partnership. The 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 Corporation that earns a monthly royalty through a license agreement with Pizza Pizza Limited and 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 its royalty 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. I will ask Ms. D'Sylva to act as the 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 the scrutineers of the meeting. The secretary has a confirmation that the notice of meeting -- calling this annual meeting was mailed to shareholders in accordance with the company's bylaws and applicable securities regulations. I will ask the secretary to append the confirmation of mailing to the minutes of this meeting as a schedule. With the consent of the meeting, the reading of the notice of meeting will be dispensed with. The scrutineer has provided a preliminary report on attendance, and I will adopt the scrutineer's report and accordingly declare that a quorum is present. Although, there is a quorum present, and the adequate notice of the meeting has been given, I now declare that the meeting has been duly called and constituted for the transaction of business. We will first deal with the formal business to fulfill the legal requirements of the meeting. After that, Mr. Goddard will present a business update. If you have logged in as a registered holder or a proxy holder, you can submit questions at any time during the meeting. If there are any questions, the secretary will take note, and the company will respond at the end of the meeting. I have been advised that we may have guests at this meeting, who are not registered holders or proxy holders. We welcome all guests, but remind them that they do not have the legal right to vote on any motion and are not entitled to speak at the meeting. If you have any questions, please contact us after the meeting. 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 the 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 the proxies received to date indicate that the company has sufficient votes to pass all matters in accordance with the recommendations of management. The online voting polls are now open and will remain open as we proceed. The financial statements of the company for the year ended December 31, 2020, and the report of the auditors thereon were mailed to the shareholders prior to this meeting. I would invite you to raise any questions concerning the financial statements. You can submit the questions at the end of the meeting or at any time during the meeting. If there are any questions from registered holders, the secretary will take note and respond directly at the end of the meeting. He directed the secretary table those financial statements. The next item of business relates to the appointment of the auditors of the company. I will now ask for someone to move a motion that KPMG LLP Chartered Accountants be appointed as auditors for the company for the ensuing year and that the directors be authorized to fixed remuneration to be paid to the auditors, who will move the motion?

So moved.

Who will second the motion?

I second the motion.

Thank you, Mr. Goddard. Is there any discussion on motion? As there is no discussion, I will now call for a vote on the motion before the meeting with all voting shareholders, please enter your votes in Lumi. It is now in order to proceed with the nomination and election of directors. The number of independent directors of the corporation 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 will 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 Catherine Walsh.

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

So moved.

Who will second the motion?

I second the motion.

Thank you. Is there any discussion on this motion? As there is no discussion, I now call for a vote on the motion before the meeting. With all voting shareholders, please enter your votes in Lumi. Proxies representing the shares were submitted in advance of the meeting. We will report on the specific results when we receive the scrutineer's formal report, but the preliminary count shows well more than a majority of support for each resolution. As such, voting is now closed. Based on the preliminary report of the scrutineers, proxies were received from a sufficient number of shares relative to the votes cast in the meeting. Such that I declare that the motion for the appointment of the corporation's auditors has been passed. I also declare that each of the 5 nominees of the Board of Directors have been elected. I declare that -- I hereby direct that a copy of the scrutineer's final 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 upon the Chief Executive Officer of Pizza Limited to review the business of the company and Pizza Pizza Limited. As a cautionary note, the presentation will contain forward-looking statements. Investors should be aware that any forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and achievements of the company and Pizza Pizza Limited to differ materially from those disclosed here today. We are also adopting for this presentation, the cautionary language regarding forward-looking statements that are set out in the company's annual information form, to which we refer you for any additional details concerning the risks, uncertainties and assumptions, relating to forward-looking statements. With that, I'm pleased to introduce Paul Goddard, the President and CEO of Pizza Pizza.

Thank you, Jay, and good morning, everyone. Welcome to our 2020 Annual General Meeting. Since our AGM today is audio only, we have uploaded a full 2020 AGM presentation on our website at pizzapizza.ca/investors/presentations. The presentation provides a robust financial summary, while today we are only providing highlights of 2020 and the first quarter of 2021. Well, 2020 is certainly a year we will never forget, of course, and the world-changing pandemic seems like the distant pass for our company. Since mid-March 2020, we have focused our energies on battling the effects of COVID-19. Over the past year, 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. Our financial results reflect the impact of pandemic on our business starting in mid-March 2020. The brief financial results for 2020 include Royalty Pool sales decreased 11.8%, same-store sales decreased 12.5%. Adjusted earnings per share decreased 12.7%. Restaurant network decreased by 23 locations. Dividends were initially decreased in April, but subsequently increased in November, and the payout ratio was 90% for the year. The first quarter of 2021, which lapsed a mostly pre-pandemic quarter last year, experienced recurring virus waves and lockdowns, which negatively impacted the company's results. So for Q1, Royalty Pool sales decreased 13.9%. Same-store sales decreased 13.3%. Adjusted earnings per share decreased 14.5%. Restaurant network increased by 7 locations, Royalty Pool of restaurants decreased by 24 net restaurants, effective January 1, 2021, and the payout ratio was 106%. 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 year. 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 has been especially apparent during the pandemic. Additionally, our management team has developed a proven franchise 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 as well, further strengthening our geographic diversification. We have exceptional brand strength. Our marketing strength and spend have made Pizza Pizza the leading QSR in the Ontario market and with Pizza 73 leading the Alberta market. We are also extremely proud of our long-standing reputation as a true innovation leader in our industry in terms of food, marketing and technology. Again, especially during the pandemic, as we provided customers a wide array of digital ordering options, quickly launched contact-less delivery and also an industry first, a tamper-free pizza box receiver delivery. Let's take a 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 8 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 we provide are considered some of the very best in the industry. Our recently renovated Pizza Pizza innovation and learning center provides training for new franchisees and ongoing courses for more than 2,000 team members each year. Pizza Pizza is Canada's #1 QSR pizza chain. As of March 31, 2021, we have 743 locations across Canada. Pizza Pizza, with the majority of restaurants located in Eastern Canada, accounts for over 80% of our 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 BC to play out in a similar fashion. We are very excited about our strong unit sales in that new market for us. Meanwhile, over Pizza 73, the market leader in Alberta, also has a presence in Saskatchewan, BC and the Yukon, and it continue penetrating those markets nicely as well. Fortunately, our traditional restaurants have remained open for delivery and take out business since the pandemic began, including throughout the latest lockdowns in Ontario and in other provinces. However, our customer dine-in channel, where customers typically walk in, order and stick around for a slice or 2 in a drink, that has generally been closed since the onset of the pandemic following public health guidelines with the exception of the occasional brief periods. 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 restaurant seating areas. And although it varies a bit depending which province we're talking about, generally speaking, it's just a tough reality that the lack of dine-in, combined with work from home, virtual school and reduction in broader social and business activities has led to a significant decrease to our normally very robust walk-in sales, especially for those in our urban locations. Despite this uncontrollable headwind, the very good news here is that our delivery and pickup sales, which combined give us that 60% of our sales continue to offset a sizable portion of those lost walk-in sales. And we continue to innovate and grow the offense to drive those parts of the business we can control. During the early stages of the pandemic, we quickly introduced innovative customer-centric safety measures such as contact-less pickup and delivery transactions and an industry first, as I said, an award winning tamper-free pizza box, which provides customers additional insurances when ordering. Our nontraditional restaurants, which account for 10% of total sales and play 2 important roles for us, number one, 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, like Wonderland and hospitals, across the country. Unfortunately, the vast majority of these nontraditional locations at Pizza Pizza and Pizza 73, along with most special events, such as outdoor concerts and festivals, we're temporarily closed as of March 2020 and for the most part have remained closed, but we are excited to see that these locations such as Wonderland in Toronto, Central Island, [indiscernible] West, et cetera, are starting to reopen in a limited capacity in some cases, but it's a good sign as governmental legislation is beginning to ease and vaccinations are rolling out at a much faster pace now. 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 through our wide array of digital ordering platforms, a key differentiator from our competitors or by visiting one of our 700-plus locations across the country. 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 greatly on future growth and innovation. The pandemic is, of course, a global crisis, the likes of which our generation has never seen, but at the same -- very same time, the opportunities arising from it are also unprecedented. Consumers continue to migrate to online purchasing in large numbers, which has accelerated into 2021. The world has changed, and we all know people are not going to revert back to off-line habits once the pandemic effects recede. We are building the platforms and building our company for the future. And 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, Pizza Pizza realized before most other competitors did how critical it would be to invest in our digital platforms. No other pizza player in Canada has more digital channels for hungry customers to choose from, and therefore, no one is more convenient than we are or able to capitalize on this digital e-commerce search and QSR as much as us. Customer delivery and pickup orders transacted through our array of digital ordering platforms account for nearly 2/3 of all our orders, and this percentage will only continue to increase, benefiting our customers, our company and our franchisees. Our relaunched digital ordering channels have driven loyalty and frequency, and the release was timed well as online sales during the pandemic increased significantly. Our successes in 2020 continued into 2021, especially during the pandemic as customers look for variety as the lockdown continued far longer than originally thought. New on-trend product offerings such as our new gourmet thins, plant-based toppings, popcorn, chicken, keto, crust, super food pizza, et cetera, continue to resonate with consumers' ever-evolving preferences while always delivering excellent value for money. Our diverse high-quality menu, relaunched webs -- web and apps plus our improved customer service and market share position the company well to weather these pandemic challenges. And additionally, our delivery done better promise and delivery guarantee designed to increase our delivery traffic are proving to be major competitive advantages for our brands, and we're clearly delighting our customers, it's great to see. So while we did not open as many new restaurants as projected in 2020 with everything going on, we did accelerate our renovation and refresh program. And in fact, over 70% of our traditional stores have the new look, and we are excited for customers to see that new look as restrictions continue to be lifted. There was strong pipeline of storage ready as we rent up new restaurants construction in 2021. Following any major, massive resurgence or adverse long-term effects of the pandemic, we expect our number of traditional restaurants to increase by approximately 5% in 2021. So what's ahead, while we are cautiously optimistic, however, the medium- and long-term impact of the company from COVID-19 will, of course, depend very much on consumer behavior after the economy fully reopens, the financial solutions achieved with government, lenders, franchisees, landlords and of course the overall macro impact on the overall economy, in particular, household debt and levels of disposable income. We are encouraged when looking forward to the latter half of the year, which has historically been stronger for pizza sales than the first half. Beyond the normal sales increases, it is reassuring to see the vaccination rates increasing across the country and the easing of restrictions in the economy. This past year has been a challenge for everyone. I'm [ understating ] that, and I want to that personally thank our team for their hard work and efforts this year. The health and safety of our customers and our restaurant teams continue to remain a top priority for us. We are committed to delivering great food and the best customer experience, which will translate into loyal customers and improving performance over the long term. That concludes my presentation. I'd like to thank you for your interest in Pizza Pizza Royalty Corp., and as I mentioned, a full AGM presentation can be found on our website at pizzapizza.ca/investors/presentations. So stay safe and enjoy the rest of your summer. I'll now turn the call back over to Jay Swartz, our Chair.

Thank you, Paul. As previously stated, if you have signed in as a registered shareholder or proxy holder and have asked a question, we will address them now. If you are a guest, the secretary will be taking note and responding to you directly after the meeting. Christine, were there any questions?

There are no questions at this time.

Thank you. That concludes the agenda for the meeting. Thank you for your attendance. Stay safe and healthy. Thank you. Bye.

Ladies and gentlemen, this does conclude today's conference. You may now all disconnect.