Pizza Pizza Royalty Corp.

Paul Goddard - Chief Executive Officer Christine D’Sylva - Chief Financial Officer Alex Sewrattan - Director of Finance

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp’s earnings call for the first quarter ended March 31, 2022.

Joining me on the call today are Pizza Pizza Limited’s Chief Executive Officer, Paul Goddard; and Chief Financial Officer, Christine D’Sylva. 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 a 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 and 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 1, 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 first quarter investor conference call. Today I will discuss our first quarter results and then Christine, our CFO, will summarize our key financial highlights before the Q&A at the end.

Well today, we are pleased to present the financial results of the Royalty Corp for the first quarter which ended March 31, 2022. Results for the first quarter were driven by strong same store sales.

Pizza Pizza reported same store sales growth of 16.0% and Pizza 73 reported 2.1% growth for a combined 13.6% same store sales growth. The positive results for the quarter were due to the increase in guest traffic from the easing of government restrictions, and an increase in the average track.

As a result, our Board was pleased to announce an 8.3% increase in the shareholder dividend, effective February 2022. Turning to our quarterly results, we didn't expect that after nearly two years since the start of the pandemic we would once again see government restrictions return in January and February due to the Omicron surge of course, but that’s exactly what happened as you know, and however, the good news was that as those restrictions lifted we experienced an increase in sales from walk-in traffic and saw the reopening of key nontraditional stores, especially sports venues.

And in addition to increased sales through our already strong pick-up and delivery business, growth across all channels was well supported by menu innovation, strong promotional campaigns and operational excellence. Now with almost all restrictions removed and the return of warmer weather as we enter the second quarter, we are optimistic that this momentum will continue as almost all government restrictions have been removed and customers are feeling more comfortable visiting our restaurants.

We're still waiting for some non-traditional locations to reopen, such as some University and College location that are waiting until the September and for a more robust return to office in our urban markets, but at the same time we know that the pandemic has affected consumer behavior and the importance of digital sales channels, including delivery has grown. So we will continue to support ongoing enhancements to our digital assets and to our digital marketing capabilities and will continue to focus on our core competitive advantages of convenience, innovation, high quality menu offerings and restaurant network expansion.

Speaking to our operations during the first quarter. First quarter is always an exciting one for us.

In spite of the government restrictions we saw this year as I said in Jan and Feb; it’s always the beginning of a New Year with new food innovation, new marking campaigns and a lot of excitement at our key non-traditional locations where the NHL and NBA teams make their playoff runs. Pizza Pizza and Pizza 73 are the official pizza sponsors for almost all the Canadian NHL teams and for Canada's only NBA team.

While fans enjoy watching their teams, especially when they make it into the playoffs, they can also enjoy a hot and fresh slice from our many concessional locations in the arenas or can order our Game Day Specials to enjoy while watching from the comfort of their own homes. Additionally, as I mentioned on our last call, we reintroduced our Score a Slice promotion and during Raptors games and new in 2021, Maple Leafs games as well, fans were directed to a massive QR Codes, some of you may have seen it if you’ve been to some of the games in Toronto, shown on the Central Arena scoreboard which loaded a Free Slice coupon into their digital wallet to use with their Pizza Pizza App.

In addition to being a fun digital giveaway for existing customers, this was also a phenomenal program to drive app downloads for fans that didn't already have our app and have used to our array of fast and convenient organic ordering platforms. Seeing the success of this activation, we’ve also now rolled it out for the Toronto Football Club, TFC, Home Games at BMO field in Toronto and are excited to see how fans similarly engaged with the activation of the season.

Turning to our marketing and food innovation, Pizza and Wings have gone hand-in-hand at Pizza Pizza for decades and we’ve established a lead position on our quality wings which are raised without antibiotics and fried to crispy perfection. So early in the quarter we built on the success of our Chicken Sandwich Lunch, and our overall chicken category with the introduction of three new wing sauces, Hot Honey, Natural Hot and Mango Inferno.

These new sauces capitalized on the Hot Wings trend we are seeing and were launched in time for all of those Superbowl orders, a day when wing sales are at the very highest. And just in time for New Year's resolutions at Pizza 73, we started the year off with a New Year New Crust Campaign, where we introduced customers to our Keto Crust Pizzas that were well received at Pizza Pizza back in 2021.

Pizza Pizza’s always been at the forefront of alternative crusts, and we took the opportunity to expand that category at the Pizza 73 brand as well. We're excited to be able to provide an offering that is relevant to consumers at that unique time of the year as well, where our Google Search Trends show a spike in interest in Keto Diets not surprisingly.

Continuously refreshing the Pizza category with New Crust, recipes and toppings brings new life to our Pizza menu. Early in 2022 we introduced two new Gourmet Pizza’s, the Chicken Shawarma and Halifax Style Donair Pizzas.

Both of these pizza flavor profiles are emerging trends and the Donair Pizzas been on the menu on Halifax for several years and is very popular with customers. So a constant innovation and focus on our core helps us stay top of mind and the first choice for Pizza eaters.

Sharing key moments with customers from Valentine's Day to Friday Night Game Nights at home, all translate into winning moments for us. In the latter part of the quarter we once again partnered with a number one card game in the world UNO, by Michelle to offer our customers the ultimate pizza and game night experience, another opportunity to share moments with our customers.

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 all our campaigns are supported by our in-house marketing team to be designed the creative and deploy it on an array of assets from radio, flyer, billboards and on our multiple social media digital channels. So, on the sales side we are very pleased with our momentum.

On a more sobering side of things though and consistent with our comments on the last earnings call, we do continue to face significant inflationary cost increases across our supply chain and in labor markets. Our goal is to take modest selective price increases across our menu to offset – often double digit input cost increases we've seen, but using a balanced approach, a balanced way so as not to adversely impact overall customer traffic.

We know our customers are looking for value, as well as quality, so we ought to find that proper balance of perceived value for money, and it's a fine line to walk. It's certainly an art and we need to keep those customers happy and revisiting and continuing to see the value and the quality that we always promise.

But we've also got a separate chance to do that while we drive profitability and sales growth for our unit operators, our own operators and our private operating company Pizza Pizza Limited as well. So I just want everyone to be aware of that.

But I do want to emphasize a little bit, the Royalty Corp investors are of course insulated from that operational risk since our key drivers for the Royalty Corp Investors are really the top line revenues and in turn the same store sales growth and net restaurant network growth. So turning to network growth, during the quarter PPL opened its two traditional and five nontraditional Pizza Pizza restaurants and four traditional Pizza Pizza restaurants were closed.

The new restaurants were opened outside of our core markets as we continue to expand our footprint across Canada. This quarter we opened in potential a three, Minnesota and Montana Brunswick.

Our non-traditional location development plan continues to be well executed with three of the five openings in high volume service stations where we offer delivery as well. Pizza Pizza’s limited management expects to accelerate its restaurant network expansion to 5% traditional restaurant growth and continue its renovation program throughout 2022 and beyond.

Today we are proud to say that 80% of our restaurants feature our Hot and Fresh new look. As the warmer weather returns and walk-in sales increase, customers will experience the new look and style of Pizza Pizza locations across the country.

We remain focused on growing our business across Canada and its safe to say we are known and respected as a major homegrown national brand and the leading pizza chain in the country. The past two years have thought us a lot about ourselves, our business and our customers, and we couldn't have emerged through the worst of this pandemic without the tireless dedication and resilience of our restaurant owner/operators and our passionate employees as well.

So a quick shout out and big thank you to all of them, and of course to all of our loyal customers at both brands as well. We know trends continuously change, but our diverse, high quality menu network - menu network penetration, digital assets and strong customer service reputation, all helped us stay stronger in these uncertain times and have been a real constant.

Our restaurant network growth continues to be strong and as we continue to scale effectively, we only become stronger. So we look forward to the rest of the year, the return to full operations and the sales that will come with it.

Thanks for listening, and I'll now hand it over to Christine, our CFO for a brief financial update.

Thanks Paul. Before I go into the financial results for the quarter, I briefly like to discuss the January 1 Royalty Pool adjustment.

As Alex mentioned, on January 1 of each year the Royalty Pool adjusted by adding new restaurants opened in the past year, plus any restaurant that have permanently closed. On January 1, 2020 the Royalty Pool increased by two net restaurants as a result of opening a 37 new locations, while closing 35 restaurants permanently in 2021.

In exchange for adding new restaurants to the Royalty Pool, Pizza Pizza Limited is compensated in equivalent company shares using an agreed upon formula which is designed to be accretive to the current shareholders. Generally when additional restaurants are added to the pool, the forecasted increases of system sales, and in turn the company’s royalty income would result in an increase in Pizza Pizza’s interest in the company.

In the case where resistance sales of the close restaurant exceed those of new restaurant as we saw in 2020 and 2021, a deficit or Make-Whole Carryover Amount will be created, and royalties on this deficit will be paid by Pizza Pizza Limited to the partnership in that year. The Make-Whole Carryover Amount will be carried forward and royalties will continue to be paid for subsequent year and so on an adjustment base, system sale of new restaurants are sufficient to offset the system sales of the deficit.

On January 1, 2022 the net sale from the vendors partially offset the Make-Whole Carryover from 2020 and 2021. The remaining Make-Whole Carryover amount will continue to be paid and a royalty will happen every year until an adjustment base have ended in sales that exceed the deficit.

As noted earlier, for 2022 there will be 727 restaurants in the Royalty pool, comprised of 624 Pizza Pizza locations and 103 Pizza 73 locations. Now turning to the result for the quarter, same store sales, a key driver of yield growth for shareholders of the company, increased 13.6%.

Gross sales reported by the restaurants in the Royalty Pool for the quarter were $122.9 million, a 13.6% increase as compared to $108.2 million in the first quarter of 2021. By brand, sales from the 624 Pizza Pizza restaurants increased 13.2% to $104.8 million and sales from the 103 Pizza 73 restaurants increased 0.7% to $18.1 million for the quarter.

Royalty Income for the quarter was $7.9 million compared to $7 million in 2021. As Paul mentioned earlier, the increase in Royalty Pool sales and Royalty Income for the quarter is largely due to the reopening of the economy and many of our non-traditional locations.

Turning to the partnership expenses, administrative expenses which include director, legal and auditor fees, as well as public company listing costs were $112,000 for the quarter. In addition to the administrative expenses, the partnership paid interest expense on its $47 million credit facility.

Interest paid in the first quarter was $356,000. The partnership is making interest only payments on the non-revolving credit facility.

The interest rate swap agreements fixed the interest rate at a bank of acceptance rate of 1.81 plus the credit spread. This slot in locked in and matures in April 2025.

The credit spread range is based on the level of debt to EBITDA. Due to the impact of COVID-19 in the partnership, the credit spread did increase by 25 basis points in April 2021 for a combined rate of 2.935.

The debt to EBITDA ratio for the last four quarters is 1.46, and therefore the credit spread has decreased to the lowest tier effective April of 2022. Please reference the company’s MD&A for the full credit spread schedule.

And after paying partnership expenses and administrative expenses, the resulting net cash is available for distribution to its key partners based on their percentage ownership. For shareholder dividend, the company declared shareholder dividend of $0.19 per share or $4.7 million for the quarter compared to $4.1 million or $0.165 per share for the prior year comparable quarter.

The resulting pay-out ratio for the quarter was 108% and was 106% in the prior year’s quarter. The company initially reduced the monthly dividend in April 2020 and had subsequent increases in November 2020, August 2021 and most recently, February 2022.

Any further changes will be implemented with a view to maintain the continuity and consistency of monthly distribution. The company’s working capital decreased $350,000 in the quarter to $6.2 million as at March 31.

System sales for the first quarter have generally been the socket, resulting in the utilization of ground working capital during this period. Our little government mandate, restrictions predominantly elected, the company will continue to closely monitor sales and royalty income to determine when additional dividend injustice may be warranted.

With that financial overview, I would like to turn the call back to our operator to ask the questions.

Ann, if you would like to advice if there are any questions.

Yeah thanks, and good afternoon everybody. Hope you're all well?

Hi Derek!

Hi Derek!

I just wanted to maybe – the first point is to maybe touch a little bit on inflation and pricing. I’m just curious on how much more that you think you might need to do and secondly, I was just wondering how the consumer reception has been?

Yeah, Christine might have a little more to add to that, but I think generally we're just obviously keeping a very close eye on our input costs and we have seen increases cross the board for all food and non-food items that you can really think of, because of some of what you're just seeing in the overall economy, so we're definitely not immune to that. I think we've just been staying really close to it and trying to strike that balance.

So you know we have seen traffic in check up, so we think we're refining the balance quite well. We know consumers are definitely value conscious, especially our core demographic, but we also feel that we do need to and can get away with some price increases that we do pass on.

So we're trying to be quite systematic about that, and to orchestrate when throughout the year with both brands is the best time to do that. Do we see an end to that?

I don't think anyone can say that right now. We just sort of put some increases through recently and we'll see how it goes I guess.

Certainly it would be nice to see some relief, but I don't think we're anticipating any in the short term. I don’t know if Christina would like to add to that or…

No, I think that covers it. I think customers reception of it, given the fact that traffic is up and take-outs are both positive, moving in the right direction, I think we’ve got a good balance of communicating the changes as well as doing it modestly and slowly over periods of time.

Okay, and I guess you touched on sort of my follow up to that in terms of the mechanism. So has it been price increases sort of across the board?

Are you doing it through bundling? Maybe some color on sort of the mechanisms.

Yeah, I think it's been a combination of things. You know I don’t want to go too much into detail just for proprietary reasons, but to give some transparency, I mean definitely some key specials.

You can see there are three key price points for us. So we’ve also taken a close look at competition and what people are doing and you know we’ve definitely tried to be judicious about it, but you know we look at the mix of our different specials, and create your own side items, things like that and just look for certain opportunities there as well.

And also on that fuel side we’re conscious of drivers also you know having that additional pressure they face economically would vastly increase fuel costs just as another example. So we're trying to sort of take all that into account with our pricing, our delivery, etc.

and just our overall supply chain.

Okay, I appreciate the color and also the sensitivity around it. I guess another question I do have is, where are you guys in terms of the recovery for walk-in’s and I know you alluded to it a little bit in your prepared remarks Paul, but how many non-traditionals are still closed in the network?

Yes, it’s about 20%, 25% I would say.

Yeah.

About a quarter are still not sold and mainly the college university side I think is the piece that a lot of those institutions just said look, we’re just going to wait till the next school year in September, rather than with all the different restrictions and different promises. So that's a pretty big number for us and we're very strong in that market, so about a quarter.

But obviously some of those are a bit lumpy like the sports venues and things that we have turned back on. As soon as those were not restricted and were open, we really sprung back.

So things like walk-in just overall has actually been trending really nicely for us, and also pick up is also very, very strong for us, which we really like and in fact we think we can capitalize on pick up growth further at both brands as well.

And you’re not fully recovered on the walk-in side just yet?

No, we're not yet I would say when we look back at 2018, 2019, but we certainly like the trend line. It does seem that as these restrictions have lifted we still have a little way to go, but it's definitely been showing some good trend there.

So that, you know with a bit of good execution, that should continue.

Okay. I guess another hot topic has been labor availability.

I guess how have you guys and your franchisees in particular been managing through that, and I was just wondering if it – has it impacted your pool of call it, qualified potential franchisees.

I guess I’ll just address the latter point first. On the pool of franchises we continue to see really strong pipeline there, which I think is really encouraging.

We’re pretty excited about that, especially as we’ve really now become so known in places like Quebec and BC, and so we really view that national profile now and we're getting you know fresh applications from all over the place too, those new regions and of course our popular core regions of Ontario and Alberta and things like that, so really good on the pipeline. I think people are seeing us as a very solid business with a great reputation and good track record, and good investment return for people.

In terms of labor, it is tough. I mean we are definitely having to manage things, be very creative.

There's definitely a tightness of labor for drivers, no question about it. We're competing with others, other pizza delivery companies, we are competing with third party companies that are also of course large employers of drivers and it's very difficult.

So I think we certainly have to be creative I guess. We’ve managed it I think quite well, but it has been a burden.

I mean there's cases where we have owner operators going out and delivering their own food during peak times. If they have to get in their car and do it, they are happy to do it and they are very dedicated to do that, but it's not ideal and I think we do have a little bit of stickiness I would say in a good way with one of our family operated businesses that perhaps some that are maybe you know – you know all our drivers are independent contractors, but some of them, I think they like the environment and they have stayed with us for a long time, as much as we also have a churn rate as well with some drivers.

I think generally we have a lot of long time drivers too that tend of stick around where they may not if they are working for another company. So it is tough is the bottom line, especially with wage increases and things all the time, availability and wage is definitely a pressure on us.

Okay, and maybe along the same lines, maybe just remind me of your – did the outlook for your restaurant grow this year, and you know has any – have you experienced any things like construction delays and permit delays and what have you because of the labor issue?

We haven't had issues. Actually it’s surprising in a way with construction and labor as much.

That side’s actually been pretty good, we've been really happy with our own team which we've grown, we're very solid and our contractors and our quality of build and things like that. I would say with some aspects, yes.

It's more the inflationary aspects of things, like I’ll just give an example, something like steel for our cabinets and our back of house operations. I mean just the cost of those items has going up, so we're worried about that.

We have actually tried to pre-empt some of those problem supply chain issues we saw coming by ramping up on inventory a little more than we otherwise would, just so you tie up with the capital on the private company side to do that for ovens or construction materials, etc. So I think we’ve sort of managed to have a bit of a shock absorber in there, rather than have massive delays that way and we realize we're a little bit late this quarter for sure, but we're pretty on target for Q2, Q3 especially, so that's our plan.

It’s you know round about 5% again. We're really trying to say you should be able to grow you know three dozen-ish locations a year, and so that's our ambition and with non-traditional we're hoping to have Circa 20 and there would be some closures in there as well with normal cleaning and just optimizing some of the laggards, so we would expect some closures.

But we want to show more in that growth and I think we've really got a team that can execute on that. Although yes, there are some supply chain things that keep coming up and it’s definitely in some parts you can get slowed down with waiting for certain items, but it's the inflationary part that probably wears us more than anything.

Yeah, okay. And maybe just one last one for me.

I know in the MD&A most doors have been opened just yet in Mexico, but just curious again about sort of the time frame there and maybe just remind us about the opportunities that you see in those markets and maybe others?

Yeah, I will definitely give more detail Derek, because I'm glad you mentioned that. Mexico, we’re excited about it.

We’ve been working with these folks for now well over two and a half years I guess, and they've been up here and we've been down there and you know we're certainly sort of kicking into a higher gear. But it will still be in our estimation probably that you know very late this year, I think before we see any locations light up there, it would be starting in the Guadalajara region with our partner base there and then scaling up over time.

But we’ve been doing a lot of work behind the scenes on you know as you can imagine, supply chain, construction planning, real estate, citing locations, procurement, branding, marketing strategies, all that stuff. There's a lot of ongoing work behind the scenes there.

It’s just right now we don't have much to say on it, but excited in future quarters to start talking more about that.

Okay, fair enough. That's it for me.

Thanks for taking my question.

Okay Derek, thanks very much. I appreciate you dialing in.

Thank you everyone for joining our call this afternoon. If you have any questions following the call, please feel free to contact us.

Our information is on the earnings release. Have a good evening!