Pizza Pizza Royalty Corp.

Christine D´Sylva - Director, IR & Finance Paul Goddard - President & CEO Curtis Feltner - VP, Finance & CFO

Derek Lessard - TD Securities Inc.

Thank you. Good afternoon everyone and welcome to the Pizza Pizza Royalty Corp Earnings call for the first quarter ended March 31, 2016.

Joining me on the call are Chief Executive Officer, Paul Goddard; and our Chief Financial Officer, Curtis Feltner. Our discussion today will contain forward looking statements that may involve risk related to future events.

Actual events may differ materially from the projection stated today. All forward looking statements should be considered in conjunction with precautionary language and our earnings press release and the risk factor included in our Annual Information Form.

Please refer to our earnings press release at MD&A in the Investor Relations section of our website in the reconciliation and other disclosures related to our non-IFRS mentioned on this call. With that, I would now like to turn the call over to Paul Goddard for our business updates.

Thanks, Christine and thanks everyone for joining our call this spring afternoon. We are pleased to report the results of Pizza Pizza Royalty Corp for the first quarter of 2016.

System sales from the 736 restaurants in the Royalty Corp increased by 3.3% to $133.1 million driven by same store sales of 2.5%. One additional day in the leap year plus 6 net restaurants added to the pol on January 1st this year.

The 2.5% interest sales growth in Q1 which was unaffected by the additional day of sales is stacked on top of 2.5% of Q1 last year. So quarter-over-quarter we worked to increase shareholder value in addition to offering an attractive dividend yield backed by a healthy cash reserve.

Consistent growth has enabled Pizza Pizza Royalty Corp to increase shareholder dividends six times in five years including two increases last year. Monthly dividend has grown nearly 20% in less than five years.

Additionally the company has accumulated a healthy $4.9 million reserve to support the dividend in the event we encounter short term pressure on our combined transfer sales growth. Geographic diversification of our two brands across Canada has proven to be a successful strategy in growing value.

So by brand our successes in Pizza Pizza operating largely are reflected in the 4.9% same store sales growth. Meanwhile at Pizza 73 with more stores operating in Alberta, we reported a same store decrease of 7.9%.

And continued to closely monitor consumer spending patterns in the west and adapt our marketing strategies accordingly. I do want to mention that our partners in Fort McMurray were extremely fortunate to be evacuated safely along with other residents and our stores have not incurred physical damage from the fires unlike many residents' homes and businesses there.

Our thoughts are with the communities affected by the fires and our stores in Fort Mc have been closed since last Tuesday and will resume servicing the area when safe to do so. And we are doing our bid to raise funds as well via Red Cross for disaster relief efforts there as well.

So let's turn to restaurant operations at Pizza Pizza Ltd. As a reminder Pizza Pizza Ltd.

is a private company which operates the Pizza Pizza and Pizza 73 brands and the monthly royalty for the use of Pizza Pizza to Royalty Corp for the use of the brands. Pizza Pizza Ltd.

mandate is to grow and protect our interest. Our gross priorities include staying relevant to consumer.

Modernizing the customer experience and maintaining the brand dominance in the customer key market. We believe these priorities align with evolving consuming age and will drive the long term sustainable growth specially when combined with our competitive advantages of convenience and service.

Innovation and technology, high quality menu offerings and geographic diversification across Canada. In reflecting on what rules the overall 2.5% interest sales growth in Q1, we kicked off the year fully engaging consumers with our new fiery red hot wings advertised on TV, Radio and during the NFL playoffs and during Super bowl, which happens to be one of our biggest sales days.

We also introduced new pizzas during January just prior to launching our annual dinner and movie promotion with Cineplex which began in February and then continued on through March. Our marketing campaigns featured on billboards and major traffic areas as well as on TV, Radio and Press.

And we also complement the various digital marketing strategies and social media campaigns to drive business and further brand power. Overall, we spent over $30 million annually to remain on the top of the mind of consumers and retain our market leading position.

For the Pizza Pizza brand which is responsible for over Royalty Corp sales, consumers provided well for promotion as the average traffic and he average check both increased. The average Alberta consumer however, continues to spend less on away from home meals due to economic constraints.

This is reflected in the decreasing traffic counts and the average check in the Western markets. We fell consumers will continue to use this pattern until the Albertan economies improve.

Until then, as we said we continue to monitor and support the individual market with new and adaptive market campaigns with the intent of stealing market share during this wide spread economic down turn. Our sales growth and market share are operated by strong restaurant operation and exceptional marketing but technological innovation at Pizza Pizza has also contributed to five years of consistent overall sales growth.

Customer delivery orders transacted through our array of ordering platforms account for nearly 50% of all orders which is big change from five years ago. Consumers love the convenience and our stores lower cost model versus using live order takers which are of course more expensive.

Our latest innovation allows Pizza Pizza to take convenience one step further than our competitors as we recently enhanced ordering platforms to allow customers to place advanced pickup orders under $10. Previously customers order had to exceed $10 prior to ordering in advance.

Now no waiting for medium cheese pizza for any night. It's made hot and fresh for you and will be ready for you when you arrive.

We currently have a significant campaign running to promote this additional customer convenience. So once again we believe Pizza Pizza innovative strategy of setting of our standards.

Additionally we continue investing in our Club eleven eleven royalty program which is available on all digital platforms fully supported and complemented by ongoing marketing campaigns so great traction here. Technological investment in the quick service industry has quickly given larger operators like Pizza Pizza a distinct advantage over the smaller independent pizza operators.

The independence should be kept in mind; these independents on a combined basis have a significant market share. With some markets the largest market share if you look at them aggregated entity.

So that's the real advantage we have with the technology. Looking at restaurant development for the quarter Pizza Pizza Ltd.

Continued its national expansion of traditional stores by opening two traditional restaurants, one in Montreal and one in Winnipeg bringing the total restaurants to 741 locations. We have seven stores in our pipelines and are firming up to few more sites which should also open before year-end.

We continue to build shareholder value to leveraging our size and scale. Throwing our customer base to brand dominance, new product introductions, service enhancements and technological advances, allows our brands to build market leading positions.

We continue to be ambitious about our future growth and passionate for maintaining our lead in key markets. None of our success will be possible without our amazing people.

So I want to thank all of our employees, partners, franchisees for the unrelenting enthusiasm and sheer hard work. With that I will pass the call over to our Chief Financial Officer Curt Feltner for our financial update.

Thank you, Paul. Earlier today as Christine mentioned Pizza Pizza Royalty Corp reported another solid quarter of financial results.

Top line royalty sales increased 3.3% in Q1. Same store sales growth, key driver of growth in shareholder yield increase 2.5% over the comparative quarter in 2016 and the same quarter last year we also had a 2.5% increase stacked on top of each other as Paul mentioned at 5%.

During the quarter the company's royalty pool of restaurants increased by six net restaurants to 736 locations and remained at that number throughout 2016. In exchange for adding restaurants to the royalty pool the private company Pizza Pizza Ltd.

increased its fully diluted ownership of the royalty Corp with a 20.4% on January 1, further allowing it interest with public shareholders. During the quarter total royalty pool sales increased to $133.1 million from $128.9 million in the same quarter last year.

So breaking down these royalty pool sales by brand, Pizza Pizza Royalty Pool sales increased 5.6% to $111.2 million and were 84% of the total sales for Q1. Pizza 73 operating largely in Alberta saw royalty pool sales decrease by 7.2% to $21.9 million.

So talking about the structure of Pizza Pizza Royalty Corp. and its subsidiary Pizza Pizza Ltd.

partnership each month Pizza Pizza Ltd. the private operating company pays a percentage of the royalty pool system sales to Pizza Pizza Royalty Ltd.

partnership. This partnership owns the Pizza Pizza and Pizza 73 trademark.

So the partnership has two partners Pizza Pizza Royalty Corp and Pizza Pizza Ltd. It's important for shareholders to keep in mind the relationships of these companies.

So the partnership owns the Pizza Pizza and Pizza 73 trademark and receives royalty income from Pizza Pizza Ltd. based on top line sales for the use of the brand.

Royalty income earned by the partnership increased 2.4% to $8.6 million for the quarter. Using this royalty income the partnership pays interest expense and administrative expenses making partnership distribution to Pizza Pizza Royalty Corp.

and Pizza Pizza Ltd. based on their proportionate ownership of the partnership.

So administrative expenses of the partnership which includes director's fees, audit legal filing as well as directors and administrative assurance, the administrative expenses were $163,000 in Q1 compared to the $125,000 for the same quarter last year. The increase is due to an increase in key effects for the legal expenses.

In addition to admin expenses the partnership pays interest expense on $47 million credit facility. Interest paid was a $332,000 for the quarter compared to $485,000 in the same quarter last year.

A decrease in interest paid is a result of amending and extending the credit facility in April 2015 and as a result the interest rate on the credit facility decreased by 1.275% last year. For the credit facility matures April 2020.

After the partnership receives the royalty income, pays the admin and income expense, the net profit is available for distribution to its partners. Pizza Pizza Royalty Corp which consolidates the partnership into a financial statements owned 79.6% of the partnership at March 31, 2016.

The Royalty Corp pays tax on its share of the partnership income. Current income tax expense for Q1 was $1.4 million versus $1.2 million last year.

The increase in tax expense related to the following. A higher top line royalty income a larger percentage of the partnership profits and less tax shelter from interest expense and less amortization on the remarks so the effective tax rate increased slightly to 21.8% in Q1 compared to 21.1% in Q1 last years.

That brings us to consolidated net earnings and earnings per share with the quarter so just touching on the report as opposed to earnings on the international financial reporting standards, the company's yield adjusted earnings from operations and adjusted EPS on more meaningful measures on evaluating the performance and also it's a truer indication for cash available for distribution. Our MD&A has a full reconciliation of non-IFRS measures but with that in mind for the quarter adjusted EPS on the fully diluted basis increases to 1.4% to $0.291 per share compared to $0.216 per share for the same quarter last year.

For the shareholder dividends the company's declared dividends of $0.2091 per share for the quarter compared to $0.20 per share for the prior year quarter. This is a 4.5% increase on a quarter-to-quarter basis and the payout ratio was 100% for the quarter which was our target.

And was 100% in the prior year quarter. End of the quarter the company's working capital reserves was $4.9 million and was relatively unchanged for the quarter.

With this window on a historical basis Q1 is normally our softest quarter for our top line retail sales and Q1 is our strongest. That concludes the financial overview.

I will now turn the call back to Operator for questions.

Yes, thanks and good afternoon everybody, congratulations on another strong piece of sales of performance. Just wondering, if you could add any color behind the higher traffic to the check, I was just wondering how much of your taste profile was driving the sales?

There is nothing specific, I think we continue to push the quality standard on the dual cheese the core element. Overall we have seen traffic up and check to created strategies to bundle in different way etcetera.

But we think that the quality of feedback we get from customers as well if we monitor closely, there are a lot of comments on that. People are noticing that effort and so something we are going to continue to push because we do believe in staying off.

I don't know if Curt has something to add to that.

Yes, so with this extra quality in our sauce, dough and all the improvements we have made in our dough, we have been successful in taking selective price increases on both selective delivery and walk-in items so by the marketing campaigns going forward we will continue trying to give full value to the higher qualities we were offerings so that will be the real test in the future quarters when we are trying to get a bit more aggressive on our pricing. We will see as we have always gone slowly and strategies with any of the strategies we have on marketing campaigns and prices.

We have very attractive marketing campaigns and prices in the QSR market. But we will see if our flavor is awarded and price coming.

Well, that's great color, thanks for that and maybe if a follow up, what do you think your opportunity is in terms of further menu innovation like where do you guys go from here?

That's a good question, we are always trying to innovate, we said before on these calls, not everything we try works but we certainly put the R&D side which is important. We are always going to feel the Pizza is core and chicken thighs are obviously our second most area to continue the innovation and bundling of things.

So we look at the menu side, we are trying to look at the macro fence where generally consumer tastes are going towards. We are aware of health trends, thinner crust, our dough weight is thinner for instance, things like the free aspects that certainly attracts the consumers and we look for options to do more on that front as well.

So we are always looking to come up with things which will help move the needle. Not everything works but we have a decent track record and feel we are supposed to investing in that, both brands in decent ways.

And maybe just switching focus to Alberta, how many stores you have in Fort Mac?

02 stores.

Okay. And you are not able to quantify any potential impact from the closure are you?

I don't think as yet. Curtis will advise more.

So what we do have is business interruptions, insurance there. In support of our business interruption allows for recouping of royalties, so our partners will be getting compensation through the business interruption as well as shareholders will be partially made up for any lost revenues.

Honestly, with the Fort Mac it is a pretty large situation, it's really so many questions, in some days we will find out the macro effect of just the entire Fort Mac city, region and then extending to Alberta, Canada. How long the things will be done, you know material plants and others?

If they get back on stream pretty quickly because the physical infrastructure has not been damaged as much as the people would have thought that's maybe a positive thing. But we don't quite know when it will be back online.

We will be nimble and ready to be back online as soon as we can. We just don't yet, what it looks like.

Okay. Are you talking Alberta and general sector as that was my other question, are you guys seeing any light or going to the hope you will see a return of consumer spending there?

Various indicators, but overall as we said in general ways, we don't see any immediate updates we don't see any signs of substantial improvements and obviously we are hoping that a lot of people aren't impacted by the Fort Mac fire. This is the other sort real, substantial, prolonged economic effects.

So obviously negatives so it's hard to be optimistic in the short term so we are still assuming this won't get better in the short-term. We are preparing ourselves to be nimble and try new things in the market that hopefully will get traffic back in a bigger way.

Derek can I just add to that, at Pizza 73, it's a JV, so we work with our partners there and they are 50% shareholders. Stores have performed well over the years so as we have some pull back in the same store sales growth, our restaurants still have solid bottom line profitability.

As Pizza 73 the slogan is everyday deal and that means 2 for 1 so you are buying a pizza and then you add wings or you buy 2 pizzas. What we have been successful working with our partners is introducing single pizza and we have had a single large piece available so pick up and started last year delivering large pizzas and so the strategy here is, recently we are now introducing a medium pizzas that can be delivered.

You can order 1, of course you can order 2. But this is going to be new and the strategy is everyday deal usually can end up higher price point even at Pizza Pizza where our average ticket is less than that at Pizza 73.

So we look in helping the consumer through what we hope is the last tail. But it's hard to say, we are not seeing a lot of light at the end of the tunnel but we are thinking now at least going to achieve in single pizzas and see some resurgence from them.

Okay.

That's what the intuition is telling us the higher ticket that the consumers are looking for some help to maybe eat away from home.

Okay. And just on the I haven't asked in a while, but just an update on the loyalty program, you did touch on it in your opening comments Paul, Just wondering what would phase II be or where you hope to take this?

I think we have made huge progress on merely getting it across our digital platform which is, we initially went with a very basic card in your wallet model just to get through the door and that certainly addresses number of people that are offline. But where we want to see the future focus point is we are pushing the digital even further.

We have also measured the impact of digital and huge part of demographics, increasingly mobile whether it's on a mobile web approach or native Android or iPhone device, they just want to have access to the loyalty and exactly what they are getting including a smooth way to pay and the ease of pick up. And that's something that no one else in the market to my knowledge has done yet and we have really built that and so if you notice we are saying more happily now that we have got it working technically so we just got to keep pushing specially those digital numbers because we can be very quick and nimble in the campaigns so I guess there is a number of different strategies considered proprietary but we have been encouraged by the results and people have really registering and coming back and redeeming so we say yes, let's keep investing in this especially on the digital side more than the non-digital.

Okay. And final one for me, are there any markets in particular that you guys think that need more work or require little bit more attention?

Alberta. In fairness we have always got the economy there and everyone else in the market, we think it's looking forward but obviously the costs are easy to lap in the second half of this year but obviously Alberta has a lot of retention, we have been very pleased of our performance in Montreal.

In certain places, places like Manitoba we think we need to re-double our efforts there. We have been successful but we could use more attention there as well.

I think in Ontario we have said that too, it's kind of patchy. There are certain regions that are stronger, certain that are weaker, nothing is really new.

I think we just overall we are strong and isolate the ones that are not performing as well and just to consider those in various pockets and various markets.

And re-doubling in Manitoba, not necessarily the issue but what sort of the, what makes it less good than Montreal is I guess a way to put it?

We think we are comfortable with our market position there. I think it is a very competitive market.

I would say we are very pleased with the quality of our market, operations there. Our product quality is excellent, our grand audience is high.

I would say it is a very competitive market and so we have to be extra creative there to try and get that into a stronger mode recently. I think there are strong stores and weaker stores in every one of our markets.

We try to focus on the weaker ones wherever they are. There are some wonderfully performing stores out there but there are some that aren't strong so you got to help the bottom end of the portfolio wherever they are.

That's it from me guys. Thanks for taking questions.

Okay. Thanks again Derek.

We would like to thank everyone for being on call this afternoon. If you have any questions after the call please contact us.

Our information is on the earnings release. Thank you and have a great evening.