Pizza Pizza Royalty Corp.

Christine D´Sylva - Director of Finance and Investor Relations Paul Goddard - President & CEO Curtis Feltner - Chief Financial Officer & Vice President, Finance

Derek Lessard - TD Securities Inc.

Thank you, Anna. Good morning everyone and thanks for joining us.

With me on the call are our Chief Executive Officer, Paul Goddard; and our Chief Financial Officer, Curtis Feltner. Today’s call is being recorded for replay, and will also be available on our website following this call.

Before I turn the call over to Paul, I would like to remind everyone that the forward-looking statements in our earnings release and management’s discussion and analysis also applies for our comments here today. Those documents are available on our website, www.pizzapizza.ca and any reconciliations of non-IFRS measures mentioned on the call with its corresponding measures to IFRS.

I would now like to turn the call over to Paul.

Thanks Christine and thank you for joining our call this morning. In our Ontario market, consumer value messages were given extra focus in our promotional campaigns this quarter.

These successful efforts saw customer traffic increase significantly over last year resulting in a strong Q4. Royalty Pool sales increased 4.3%, same store sales grew 2%, and adjusted earnings per share increased 5%.

So we are pleased with the sales momentum increasing across both brands during the quarter. Geographic diversification has driven to be a key factor in driving consistent sales growth over the past four years.

The year-over-year solid sales performance has been responsible for building the company’s strong financial position as we begin 2015. In 2014, Royalty Pool sales increased 2.9% and same store sales grew 1.1%.

We believe these results are clearly geographical strengths and weaknesses of the Canadian economy. Pizza 73 operating largely in Alberta reported 7.6% same-store sales growth for the full year, while our Pizza Pizza, the market region in Ontario experienced a slight decline of 0.3% in same-store sales related to economic pressures felt by cautioned consumers.

For shareholders, our year-over-year sales growth continues to provide an attractive investment return. During the first quarter of 2014, the company increased the monthly dividend by 2.6%, increasing the annualized dividend to slightly above $0.80 a share.

The Pizza Pizza brand continues to lead all pizza competitors in Ontario in terms of market share, while Pizza 73 brand leads the pizza category in Alberta. Our market leading brands provide consumers the convenience of dining in, taking out or choosing delivery when ordering from our high-quality menu.

These multiple sales channels are proving to be another major competitive advantage in driving sales within the restaurant industry, especially during the extreme cold winter days and customers have convenience of pizza delivered to their door as a top priority when making dining choices. In addition to the brand dominance and convenience another Pizza, Pizza core strength is our long history of innovation, and for us innovation comes in many forms.

In the pizza industry being innovative with new product offerings is key to keeping consumers interested. We recently added pickles and poppers to our snack menu and also introduced pizza [Indiscernible].

Customers love new products we have seen time and time again. As well, technological innovation is extremely important.

We invest heavily in our strategy to increase customer accessibility through our numerous digital channels, including apps for iPad, iPhone and android. We have also made enhancements to online ordering and over the last year have introduced our one of a kind Club 11-11 digital royalty program.

The popularity of Club 11-11 continues to build as customers currently receive a significant discount for repeat visits. We leverage this tool for attract customers not only from major brand competitors but from independent [pizza] that show the largest combined pizza market share.

And a very interesting trend that has been occurring is that while recognized brands are outpacing independent operators, our capitalized economic buying buyer, operational excellence, well funded advertising budget and for some time now technology [Indiscernible] advantages. Touching on the restaurant operations briefly, while the first quarter has historically been our strongest sales quarter as has the case again this year.

Royalty Pool sales grew 4.2% in the quarter and 2.9% for the year. 2014 is a record sales year for the company as Royalty Pool sales exceeded $500 million coming in at $505 million.

So we are quite proud of that milestone. Two of our biggest sales aids, [Indiscernible] Slices for Smiles charitable event.

Traffic at both brands increased especially in the delivery channel and is responsible for 2% same-store sales growth for the quarter. For the year, at 1.1% was below our expectations but as I mentioned earlier we are pleased with the sales momentum generated in Ontario in the latter part of 2014, where it appears consumers [Indiscernible] a little more optimistic about the economy with gasoline prices still falling.

Our combined same-store sales growth benefited from another excellent quarter in Pizza 73 where same-store sales growth increased 5.4% in Q4 and can be attributable to well received marketing campaigns and excellent restaurant operational results. To further support same-store sales growth, most Pizza 73 locations are now open for lunch seven days a week instead of three or four days a week previously.

Consumers are responding well as walk-in sales are showing strong quarter-over-quarter growth. For both brands, the recent decline in crude oil prices is currently working its way through the economy and Madison is closely monitoring the potential impact if any the movement in price may have on sales.

Looking now at restaurant growth and new restaurant development, during the quarter we opened 8 restaurants and closed 5, increasing the overall number of restaurants to 732 at December 31. For the year we opened 32 restaurants, and of the 32, 14 were traditional and 18 were non-traditional.

During 2014, 23 locations closed. Of the 23 closures, 20 were non-traditional sites, which by their nature can be more volatile due to the short-term contracts under which these centers operate, especially in colleges and universities.

We have 250 non-traditional locations across Canada, operating typically in universities, sports arenas and outdoor entertainment venues representing approximately 10% of top line sales. They are valuable locations in terms of consumer exposure to our products as you can imagine, and we try to continue sourcing lucrative, non-traditional sites as part of our overall national expansion [Indiscernible].

So overall, we are pleased with the solid quarter and year for both brands and we remain confident in our team’s ability to continue growing top line sales and capitalize on our momentum. We continue to leverage our size and scale and competitive advantages to grow our customer brand dominance, geographic diversification, new product introductions and technological advances.

These together [bolster] shareholder value now and will do so in future years as well. With that I will turn the call over to our Chief Financial Officer, Curtis Feltner, for a financial update.

Thank you, Paul and good morning. As Paul mentioned earlier, same-store sales growth increased by 2% in our Q4 compared to 1.6% in Q4 in 2013.

For the full year same-store sales were 1.1% versus 2.1% in 2013, which is our fourth consecutive year of positive same-store sales growth. 2014 was a record year for Royalty Pool sales resulting in record Royalty income and record earnings per share for the company.

I will begin with a few financial highlights. First for the fourth quarter, aforementioned Royalty Pool sales increased 4.2% and the associated royalty income increased 4.4%.

Our restaurant network grew by three locations, and our same-store sales increased 2% in the fourth quarter. For the year, Royalty Pool sales increased 2.9% and the associated royalty income for the company increased 3.4%, same-store growth grew 1.1%, our restaurant network increased by nine, our dividend increased in January 2014 by 2.6% and our credit facility interest rate decreased 25 basis points during the year.

The same store sales growth by brand first by Pizza Pizza, operating largely in Ontario and Quebec, increased 1.3% for Q4 and decreased slightly by 0.3% for the full year. At Pizza 73 same-store sales growth in Q4 increased 5.4% and 7.6% for the full year.

Royalty Pool system sales from the 722 restaurants in the Royalty Pool increased 4.2% to 135.5 million from 130 million in the same quarter last year from 694 restaurants. For the year, the company reached a record milestone for Royalty Pool system sales, by growing the system sales 2.9% to 505.4 million from 491.1 million in 2013.

So using these system sales each month a percentage of these systems sales is paid to Pizza Pizza Royalty Limited partnership. So this royalty income is paid by Pizza Pizza Limited for the use of the rights and marks of the Pizza Pizza and Pizza 73 brands.

So, as a reminder, so Pizza Pizza Royalty Corp, our publicly traded company, consolidates this partnership into its financial reporting. So let us keep this in mind as I touch on some financial results for the quarter and the year.

Royalty income earned by the partnership increased 4.4% to 8.9 million for the quarter, and increased 3.4% to 33 million for the year. A 6% royalty was earned on sales reported by Pizza Pizza restaurants and a 9% was earned on sales from Pizza 73 restaurants.

So the partnership - using this royalty income, the partnership pays interest expense and administrative expenses before making partnership distributions to Pizza Pizza Royalty Corp. and to Pizza Pizza Limited based on the proportionate ownership of the partnership.

So regarding the partnership’s expenses, administrative expenses, which include directors fees, audit, legal and filing fees as well as directors and officers insurance decreased to 210,000 for the quarter compared to 275,000 for the prior year quarter. For the full year, admin expenses were 585,000 compared to 666,000 in 2013.

In addition to administrative expenses, the partnership pays interest expense on its 47 million credit facility and as I mentioned during the year the interest rate on the credit facility decreased from 4.37% to 4.12%. Interest paid was 2 million for 2014 compared to 2.1 million in 2013.

The 25 basis point decrease in the interest rate is due to the company achieving that lower threshold of debt to EBITDA. The annual savings is approximately 117,000 and management projects that the interest rate will remain at 4.12% until the facility is renewed or reaches maturity in early December 2016.

So as a reminder, the partnership has no employees or capital expenditures. So after admin and interest expense, the resulting net income of the partnership is available for distribution to the partners.

In 2014, Pizza Pizza Royalty Corp. received a 72% proportionate ownership share of the partnership distribution.

The Royalty Corp. pays current income tax on this income and then declares a monthly shareholder dividend.

The current income tax for Q4 was 1,168,000 versus 1,095,000 in Q4 2013. The taxes for the full year were 4.3 million versus 4.1 million in 2013.

Tax amortization of the partnership’s Rights and Marks and certain other minor deductions, tax deductions, resulted in an effective tax rate of 20.7% for 2014 and this is compared to 19.5% in 2013. The company’s applicable statutory tax rate as a reminder is 26.5%.

So after the current income tax we are not onto net earnings. So consolidated net earnings for the quarter, the company believes that adjusted consolidated earnings from operations is a much more useful supplemental measure in evaluating our performance.

We believe adjusted earnings provide investors with a clear indication of cash available for dividends. Consolidated adjusted earnings were 7 million for the quarter versus 6.6 million in Q4 2013.

The 7 million in earnings was used to pay 4.4 million dividends to common shareholders and 2.1 million was used to pay distributions to Pizza Pizza Limited on its 28% ownership with the partnerships. The company’s adjusted earnings for 2014 increased 3.9% to 26.1 million versus 25.1 million in 2013.

The 26.1 million in earnings was used to pay 17.5 million in dividends to common shareholders and 8.4 million was used to pay distributions to Pizza Pizza Limited. For the quarter, adjusted earnings per share increased 5% to $0.231 compared to $.022 per share in the same quarter last year for the year EPS increased 2.7% to $86.1 versus $83.8 in 2013.

So for the year the company declared dividend of $0.80 per share compared to dividend of [$0.76.5] in 2013 this is 4.3% increase on year-over-year basis. The pay off ratio 99% for 2014 and 97% in 2013 and as a reminder our fourth quarter has historically as it was this year, as always been our strongest sales quarter.

So now just changing subject just a little bit, the company's working capital reserve currently is $3.9 million as of December 31, 2014 and this reserve increased $222,000 in the fourth quarter. The company began 2014 with a working capital reserve of $5.1 million and a decision was made by the board of director on January 1, of 2014 to use $1.4 million of this reserve to compensate Pizza Pizza in lieu Pizza Pizza limited receiving 85571 equivalent shares.

So in effect what we had was a mini share buyback and what we consider a good use of the excess cash. So, I mentioned our working capital balance is currently $3.9 million.

So that's the company are very sound financial position going into 2015 after finishing our fourth consecutive year positive sales growth involving shareholder value. So that concludes our financial overview for the quarter and the year.

I will now turn the call back to our operator for questions. Allana?

Hi, good morning everyone and congratulations on a pretty good quarter given the headwind you are facing. I apologize in advance if any of the questions I ask you already addressed in your remarks I just had troubles logging in.

In the press release you pointed to momentum and trying to capitalize on improving confidence. Maybe you can just add some color on improving conference statement where you are seeing it and how is that translating in terms of ticket and traffic.

Okay. I think we are seeing really -- that's the nice strategy, the positive growth for the quarter at PCL on the side and that's an encouraging, I mean we are really concerned that's just really drive that and we saw traffic come back this quarter [indiscernible] is actually held strong and we did make a comment that obviously crude prices decline significantly that we are going to monitor how crude oil will affect both Montreal and the whole country for that matter but really the main point was that the - we did see some of the traffic coming back particularly Montreal.

Does that help?

Yes that's fine. Are you still seeing the same pockets of weakness in the manufacturing part?

I think it’s patchy but I think we still continue to see Montreal being pretty weak in manufacturing part, yes. But it’s fairly patchy total utilization for the entire area its interesting where you see positive strength and weakness but overall its relative to the GTA definitely that will not generally speaking as strong.

And the GTA?

Yes, I say the GTA is stronger sort of more manufacturing sort of [indiscernible]

Okay. Thanks Paul and maybe if you can just talk about some of the initiatives or promotions that you guys have that are on going to build on the momentum you are talking about.

Okay. I think we’re happy with our - lot of our stuff right balance in terms of that real _ really talk about - but also keep ticket up and I think -- this time.

So we do have 399 offer that's a large pizza two drinks offers and we have also been late night date part with 11/11 offer after 11 which we have also picked up some traffic. So there is few others, mega mind deal, hot and fresh value deal, 899 point so we have got very price point.

It seems to be coming in the market quite nicely and also the royalty side it’s been [indiscernible] so we have seen registration go up, royalty transactions go up and that's really good, we are able to stiff lot of information to show that data and as we continue to push more in the digital realm and that royalty side as well we think we will future benefit there.

Okay. So I guess it’s just following up on that where you guys in terms of the royalty program and any milestones that you can point to?

I would say we talked about, multi stage and I am -- well with the going out -- so there is still more to come but I think what's unique to our knowledge is knowing the industry in the pizza business that has such a comprehensive program will be encompassing all channel and fully digital. So I think that's should put us in a position where we really have a competitive advantage at least for some time that we can really attract customers through those various channels digital and non-digital.

Okay. And -

- just one example will give more color on that I mean we try to really press the 11/11 at 11 program where we can and integrated a lot of existing offerings we had in various channels so this is one simple example that probably a lot of people can relate to is maybe call we often given a few slices and things like that based on certain conditions that the - so this year we’ve recently just come out marketing team put together we thought quite an innovative program called -- which are basically you don't get a free slice coupon you get basically a kind of 11/11 lucky card which is $5 pre-loaded on that card but you only just collect that $5 if you actually register your card. So we are sort of putting little bit of condition on there but we think it will get attraction to people it’s a more innovative way to really get that data that costumers find out rather than a free slice which is nice for traffic but it’s kind of unanimous at times right.

Yes. [Indiscerible] I guess.

That's right.

Maybe if we can just switch gears and talk about your outlook for restaurant growth by brand in 2015 how is the flow down in Alberta changed your view in any way on growth in west or has resulted in you guys delaying or canceling any plant openings?

I don't think so really. I mean, growth in restaurants are probably a little more modest out west anyway speaking more about Alberta and other.

So not too much I mean we have got some locations on the slate, and some of those will take a bit to get done anyway so maybe we are not pushing quite as hard but I wouldn't say we are sort of active we are trying to delay anything or slow down. We certainly are concerned if we continued out there so far the sales seem to be other than here looking okay.

So I guess we are kind of -- if it’s the case may be, but I think we have been trying to grow our non-traditional footprints out there and that's seems to be [indiscernible] we have lot of opportunities still in Alberta for instance and then with respect to Pizza, Pizza banner we still have some, but we are largely, we think the market doesn't really need for any more stores and at least city we have centers in purchase for brand as well. So it kind of depends where you go.

But we are successful putting - last year as well which had great so its I think we are certainly press release monitoring it’s pretty to see what will impact the economy hopefully theoretically it should be little better for Montreal with the dollar and the lowest fixed rates and what not, but obviously we have something in Alberta if - effect from [indiscernible] and other factors. So we have to be nimble right and I think we will be as we need to be but so far dramatic change in our plans really.

Okay. Thanks for the color and that is - is it fair to assume I mean in the past you have talked about the restaurant growth in the range of 2% to 3% is that still sort of the rate we should be looking at going forward?

I think so. I think I probably would look at 2% versus 3% right now and possibly Alberta, if the things pull downward versus sort of hit kind of a bottom here.

But also places like Quebec we found that even with expansion with we are very happy about what's happen there we found places like [indiscernible] and Montreal area takes longer to get the locations in place. There is just a little more tape involved despite of pushing and so that’s slow down our cash a little bit more than we would like but we - I think 2% is probably a pretty good target.

Okay and I guess when you guys start to last getting the majority of the pizza 73 initiatives that put in the place I mean I am talking specifically like the longer opening hours in particular?

I guess, this quarter. We will start to see that.

So that will be interesting to see but we are covering most of the market area, I think, but I think we are roughly 85% of our all of our -- and we want it 100% there so there is still smart opportunities, there is still incremental launch because you don't have every single location on one seven days a week but that's certainly lot of, we feel we definitely we can do that.

Okay. And I guess just one final question, last couple of years you guys said you will increase the dividend just wondering what your view was in with respect to returning capital to shareholders going forward.

Yes, so of course we are not forward looking really - we as I mentioned on the call, have a strong working capital reserve and that's in place and is used against any kind of headwind we may face in sales as Paul mentioned we have good sales momentum and so we will have to keep an eye for investors to keep an eye on that same-store sales growth and that will be your indicative member for the half. So.

Okay. Thanks a lot guys.

Okay. Thanks a lot Derek.

Thank you and thank you for your continued interest in the Pizza Pizza Royalty Corp. if anyone have any questions on this call, please contact our information is on the [indiscernible].

Thank you for joining us and have a great day.