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Edited Transcript of PZA.TO earnings conference call or presentation 2-Mar-20 10:30pm GMT

Toronto Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Pizza Pizza Royalty Corp earnings conference call or presentation Monday, March 2, 2020 at 10:30:00pm GMT

* Derek J. Lessard

Ladies and gentlemen, thank you for standing by, and welcome to the Pizza Pizza Royalty Corp.’s Fourth Quarter and 2019 Annual Conference Call. (Operator Instructions) As a reminder, this conference is being recorded on Monday, March 2, 2020. I will now turn the call over to Christine D’Sylva, Vice President of Finance and Investor Relations.

Thank you. Good afternoon, everyone, and welcome to Pizza Pizza Royalty Corp.’s earnings call for the fourth quarter and 2019 year, which ended on December 31. Joining me on the call today are Pizza Pizza Limited’s Chief Executive Officer, Paul Goddard; and Chief Financial Officer, Curt Feltner.

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 the MD&A in the Investor Relations section of our website for a reconciliation and other disclosures related to our non-IFRS measures mentioned on this call. As a reminder, analysts are welcome to ask questions after the prepared remarks. Portfolio managers and media can contact us after the call.

Thanks, Christine. Good afternoon, and thanks everyone for joining our call. I’ll begin with a few high-level comments on our fourth quarter and full year results followed by an overview of our successes driving sales growth at Pizza Pizza and Pizza 73.

So for the quarter, system sales increased 3.8% to $146.9 million from $141.5 million in Q4 of last year, and for the year, system sales increased 1.3% to $553.5 million. In this highly competitive market, we are also pleased to report that same-store sales growth, the key driver of yield growth for shareholders of the company, increased by 2.0% for the quarter and increased by 0.5% for the year.

As Canada’s #1 QSR pizzeria, Pizza Pizza Limited leverages its market-leading position by staying top of mind to consumers. We believe our leading market share is a result of providing a variety of high-quality menu offerings, introducing new products and investing heavily in technological innovation. And all of that is under — in line with our customer-first mentality and excellent, consistent food and service from our restaurant operators coast to coast. During Q4, at both brands, we continued executing our long-term strategy of promoting our popular, value-based menu offerings supported by product innovation and our high-quality food. And for both Pizza Pizza and Pizza 73, our marketing strategies are structured to support restaurant profitability while also driving customer orders and order frequency and placing orders for delivery or pickup through our wide array of digital ordering platforms or, of course, by visiting one of our 750 locations.

Regarding the fourth quarter, our successes are partially attributable to the quarter’s on-trend product introductions, operational excellence in our restaurants plus our full relaunch of our Pizza Pizza website and apps this quarter. And so examples of new products introduced at Pizza Pizza are Gourmet Thins, gourmet thin pizzas featuring new toppings like creamy truffle, steak and blue cheese, and sriracha with honey. All of these gourmet toppings are served on a much lighter, thinner crust, which has shown to be very appealing to our customer base. As well, our popular cauliflower pizza crust, first introduced at Pizza Pizza back in 2018, was also introduced at Pizza 73 in Q4 this year. And earlier in the year, we launched our plant-based protein toppings, creating a Super Plant Pizza that featured a plant-based pepperoni and also plant-based sausage crumble, both of which have been well received on that recipe. Product innovation showcases our brands’ continuous innovation and quality focus to meet customers’ evolving preferences while always delivering excellent value for money.

Additionally, our delivery done better promise designed to increase delivery traffic is proving to be a major competitive advantage for our brands and is clearly delighting our customers of late. This delivery promise, coupled with our loyalty program, is part of our ongoing strategy to set our brands apart from third-party delivery apps. The pizza industry, in general, is responding to third-party delivery aggregators on price and reliability. During Q4, we continued to see a significant amount of competitive pressure applied by third-party aggregators through a substantial amount of discounting and heavy advertising in the marketplace in an attempt to build market share. In Q4, Pizza Pizza fully launched its web and apps in the quarter. This is a major tech investment by Pizza Pizza Limited, one that most competitors cannot afford, especially smaller brand and independent pizzerias which when taken as a whole is really our largest competitor out of all of those individuals. As a result of the relaunch of our digital channels, Pizza Pizza became more convenient for customer ordering, which translates directly into an increase in digital traffic and average customer check.

Turning to digital orders. Of total delivery and pickup orders, nearly 60% were placed through one of our many digital channels, and this percentage continues to increase at both brands. We will continue to accelerate this conversion of digital ordering to provide customers a wide array of ordering options and platforms, thereby allowing us to be the most convenient choice for our customers and in doing so, outpace our competitors and critically drive our franchisees’ and partners’ profitability. And the new and improved website also includes a cleaner, more visual, more intuitive preview of the variety of menu options that we offer at Pizza Pizza. And design-your-own or create-your-own alternatives also provides the user with a unique experience to quickly customize like never before, and it’s much more intuitive experience and it also allows customers to remain more easily than ever while informed of the nutritional value of each selection made, which used to be a little more tricky to find.

And telling our customers about our new products and technological investments is really the job of our in-house marketing team, which employs data-driven analytics and business intelligence software to optimize our traditional and digital media. And all of this is supported and enhanced by our ongoing innovation across all facets of our business particularly when it comes to tech innovation and menu innovation. And at both brands, we will continue to ramp up our usage of various digital marketing channels to generate sales while varying and tailoring our marketing mix appropriately to see various customer segments and behaviors. Balancing our media mix between traditional and digital marketing involves an understanding, but in general, we are increasingly stretching this balance more effectively.

And also, as I mentioned last quarter, we are also in the early stages of reimagining our successful Club 11-11 loyalty program and — based on extensive audit of our consumer base through various research that we’ve done, and that’s ongoing. We’re taking our time here to make sure we get it right. I’m sure you may have heard some other loyalty programs offered by other QSRs out there that cause issues. So we want to make sure that we’re also consultative with our stakeholder base, our franchisers — franchisees and customers and just making sure that we get it right if we are going to relaunch that. So it’s now being worked on. It’s going to be some time before it hits the market, but we’re certainly doing a lot of work on that, on loyalty.

So really, this strategy, focusing on value, innovation, customer experience and high quality, is really key to driving customer traffic and kind of gets back to the more historical same-store sales growth level and again increasing restaurant-level profitability.

Also, as I touched on last quarter and as we’ve seen a little bit in the media essentially is our customer contact centers are using some AI, artificial intelligence, to speed up ordering process. It’s still very much in the early stages, I will say. It’s not across the country with all of our calling queues, for instance, but we’ve been encouraged by the early-stage usage of that in our customer base and to also tweak the algorithms a little bit. And that is promising and it allows us to basically keep our cost down, speed up service to customers and just provide that more automated, pleasant and convenient experience. And so we’re excited about that. There’s still more potential there, and we’ll continue to develop other aspects of our technology platforms as well that will leverage our in-house know-how and partnering with others as well. So we’ll take the order however we can get it. We still like our manual phone calls that people make, but we increasingly are driving, accelerating our push to digital. And even if you call the old-fashioned way the 967-1111, we’re still going to try and automate as much as we can with AI and it just makes a lot of sense.

So really, in summary, various strategic IT investments will continue to drive our brand relevance and perception and keep us ahead of the competition and top of mind as we further drive convenience and loyalty and leverage that single advantage of ours.

And just touching on restaurant development. During the quarter, Pizza Pizza Limited opened 7 traditional Pizza Pizza restaurants, 3 in British Columbia, 2 in Quebec and 2 in Ontario, and PPL closed 4 traditional and 13 nontraditional Pizza Pizza restaurants. Additionally, 1 traditional and 2 nontraditional Pizza 73s were closed. And during the year, Pizza Pizza Limited opened 11 traditional Pizza Pizza restaurants, 5 in British Columbia, 3 in Quebec and 3 in Ontario, and 11 traditional Pizza Pizza restaurants were closed. Additionally, 8 nontraditional Pizza Pizza restaurants were opened and 23 nontraditional locations were closed. And over the Pizza 73 brand, PPL closed 2 traditional and 7 nontraditional restaurants in Alberta. Regarding the nontraditional restaurants, to touch on that for a second, we mentioned previously the volatile nature of the nontraditional locations versus the traditional ones due to their shorter contractual arrangements that had to be positive or negative. But just to take a look at the 30 nontraditional closures, 13 of those were operating in cinemas and 6 were in gas stations, and management anticipates returning to overall net positive store growth for 2020 at both brands.

And as I think we’ve mentioned on prior calls as well relative to most of our Canadian QSR peers, Pizza Pizza has historically had a low restaurant closure rate especially for our traditional restaurants and — but we do feel that the closure of traditional restaurants that we’ve gone through, whether as a result of our management review or a bunch of underperformers, is an enhanced focus on that restaurant-level profitability across the entire network, so just taking a more regimented, even more disciplined portfolio approach and just focusing on the ones that are succeeding and the ones that are not after certainly repeated efforts, be it operator or competitor issues and what have you. We’ve sort of bitten the bullet when we needed to and said, “Look, we’re going to get rid of the ones that we don’t think are going to make it here, and let’s focus on the ones that are and let’s grow the network aggressively on the offense.”

So at the same time, as we said, the nontraditional, they’re more volatile. It gives us further contractual arrangements and license fees and they often grow or shrink in spurts depending on the nature of the deal and the partnership. And in some markets where we — or our franchisee partners have underperforming nontraditional locations for some time, again, we’ve taken the decision not too different from our traditional ones. We just said, “Look, for our partners, some of these aren’t going to make it. Let’s close them and let’s focus more on driving sales and profit growth at the higher volume locations that are doing really well.”

Also, in addition to our mandate to grow net new restaurants, our restaurant imaging program continues. That’s ongoing. We have well over 25% of our Pizza Pizzas nationally got new look. And as we said on prior calls, customers do like that new design, and it does also evidence our reinvestment and our commitment to just keeping the brand fresh always. So that’s an important, ongoing initiative.

So to wrap up, our internal teams and operators continue to press harder than ever to drive that top line sales growth and restaurant profitability and the overall results for the various stakeholders, including our investors. So we do feel that strategy is paying off and we do feel some decent positive momentum at both brands. And I just wanted to finish off quickly by thanking our entire team of employees, partners and franchisees and their families as well that are a huge part of everyone’s success here for their collective passion, their impression, their resilience. All of these should really help us, I think, get to a better place here. We’re feeling good about the brands despite it being a very competitive market as always. I think we’re starting to get some lots of successes into those as I try to do over here.

So thanks again for joining the call this afternoon, and I’ll now ask Curt Feltner, our CFO, to provide a brief financial update.

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Curtis Feltner, Pizza Pizza Limited – CFO, VP of Finance & Director [4]

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Thank you, Paul, and good afternoon. At the end of each year, we like to pause and provide investors an organizational structure overview. So for investors to better understand the relationship between the public company, Pizza Pizza Royalty Corp. and Pizza Pizza Limited, the private company, let’s review the following background. So Pizza Pizza Royalty Corp. indirectly owns the Pizza Pizza and Pizza 73 brands and trademarks through a subsidiary, Pizza Pizza Royalty Limited Partnership. And so the partnership has 2 partners: Pizza Pizza Royalty Corp. owns 77% of the partnership and Pizza Pizza Limited, the private co, owns the remaining 23%. So the Royalty Corp. is the top line restaurant Royalty Corp. that earns a monthly royalty through a lease agreement with Pizza Pizza Limited, which uses the Pizza Pizza and Pizza 73 trademark in its restaurant operations.

So the success of the Royalty Corp. depends primarily on the ability of Pizza Pizza Limited to maintain and increase the restaurant system sales and to meet its royalty obligations. Increases in the restaurant sales are derived both from opening new restaurants and also increasing same-store sales growth. So the partnership’s monthly royalty income is calculated as a percentage of the top line system sales reported by those restaurants that are in the Royalty Pool. So this Royalty Pool is expanded at the beginning of each year by adding new restaurants opened in the past year, less any restaurants which are permanently closed. So royalties lost due to the permanent closure of restaurants are replaced with royalty from new restaurants at the time of the next expansion of the Royalty Pool on January 1. Until then, Pizza Pizza Limited continues to pay royalties as if the restaurants are not closed.

So with that background, let’s turn to Q4 and 2019 financial results. First, just with regards to touching on same-store sales that Paul mentioned earlier, same-store sales is the key driver of yield growth for our shareholders. For the full year, same-store sales increased 2% over the same period last year in 2018 when sales decreased 2.1%. So for the full year, same-store sales increased 0.5% compared to last year same time when sales increased 1.6%. So in Q4, Pizza Pizza — the Pizza Pizza brand same-store sales increased 2% compared to Q4 in 2018 when same-store sales decreased 2.6%. For the full year, Pizza Pizza was flat. And for the Pizza 73 brand, same-store sales increased 2% in Q4 and grew 3.1% for the full year.

So on January 1, 2019, on the adjustment date, the number of restaurants in the Royalty Pool increased by 14 to 772 locations, and this remained unchanged throughout 2019. The Royalty Pool system sales for the quarter increased 3.8% to $146.9 million over the same quarter last year. For the full year, system sales increased 1.3% to $553.5 million over 2018. By brand, for the year, system sales from the 660 Pizza Pizza restaurants in the Royalty Pool increased 0.8% to $452.3 million. Sales from the 112 Pizza 73 restaurants increased 4.2% to $91.2 million for the year. So one note on our Royalty Pool Sales: We do conduct an independent audit this year by KPMG, and this sales audit is done and prepared annually.

So now turning to the company’s statement of earnings. The following partnership transactions are consolidated to Pizza Pizza Royalty Corp.’s financial statements. So as I mentioned earlier, due to the lease agreement, Pizza Pizza Royalty Limited Partnership receives royalty income from Pizza Pizza. Royalty income earned by the partnership increased 3.8% to $9.5 million for the quarter and increased 1.5% to $35.9 million for the year. Using the royalty income, the partnership pays administrative expenses and interest expense before making monthly partnership distributions. Admin expenses for the quarter was $142,000 and for the year was $494,000. Administrative expenses are directors’ fees, audit, legal and public reporting fees. And as a reminder, the partnership or the corporation has no employees or capital expenditures.

In addition to the administrative expenses, the partnership paid interest expense on its $47 million credit facility. Interest paid for the year was unchanged at $1.3 million from 2018. The credit facility interest rate was also unchanged at 2.75%, and this rate of 2.75% will remain unchanged through April of 2020. So as you recall, in — earlier in Q3 of 2019, the partnership actually entered into a new 5-year forward swap arrangement with chartered banks, which will begin in April of 2020 and will have a new effective interest rate of 2.685%. So after the partnership receives royalty income and pays admin and interest expense, the resulting net cash is available for distribution to its 2 partners. So after the adjustment date of January 1, 2019, when new restaurants were added to the Royalty Pool, Pizza Pizza Limited’s ownership increased 0.7% to 23%, and the increase is the result of adding the additional royalties from the net 14 restaurants. Pizza Pizza Royalty Corp. owns the other 77% of the partnership.

The company’s operating earnings before income taxes for the quarter increased 4.6% to $9.1 million compared to $8.7 million in Q4 last year and for the full year increased 1.5% to $34.1 million. Current income tax for the year was $5.9 million compared to $5.7 million in 2018. And just briefly, regarding earnings per share, using the company’s basic earnings per share, certain noncash adjustments are made to arrive at, what we call, adjusted earnings per share. So the company considers adjusted earnings per share to be a more meaningful indicator of the company’s operating performance and its ability to pay the monthly dividend. So adjusted EPS for the quarter increased 3.1% and was $0.234 when compared to the same period in 2018 and increased 0.9% for the year to $0.885. The 3.1% increase in Q4 is a result of the 3.8% increase in royalty income and the decrease in admin expenses. The adjusted EPS calculation is based on earnings adjusted for deferred taxes and actual interest paid, and you can refer to the company’s MD&A for a full reconciliation of adjusted earnings.

And finally, turning to dividends and working capital. In the quarter, the company declared shareholder dividends of $5.3 million, which is unchanged from the prior year comparable quarter. Payout ratio was 95% for the quarter compared to 99% in Q4 2018. For the full year, the payout ratio was 103% compared to 104% in 2018. The company’s working capital reserve is $3.6 million at December 31, 2019, and reserve balance increased in Q4 by $240,000, however actually decreased $628,000 for the full year. With this reserve in place for 2020, the company will target an annual payout ratio at or near 100%.

So that concludes the financial overview. I will now turn the call back to our operator for questions. David, questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Derek Lessard with TD Securities.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [2]

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You pointed to an increased check as one of the drivers of same-store sales. And congratulations on a good number, by the way. Just wondering how close you are to getting that traffic just to finally turn positive.

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Curtis Feltner, Pizza Pizza Limited – CFO, VP of Finance & Director [3]

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Derek, we are — 2019 was a year lapping over the 2018, and we talked extensively in 2018 about the increase in the check at that time, which really hurt our traffic significantly. So throughout the year — and we’re talking on a high-level basis, using both brands at this point. So we are systematically working through. And with — first of all, we look at how same-store sales has done with the 2 brands combined at a positive 0.5%. So that’s an indication that things are working the way we wanted to do that and so especially with Q4 being 2%. So we’re getting the ticket moderated and we’re seeing — we’ve seen moderate results also on the check. So we’re striking that good balance that historically we had prior to 2018. So we’re pleased with that.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [4]

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Okay. All right. And I guess, how much of the same-store sales improvement do you think was driven by your own initiatives? And I’m asking the question versus elasticity of the competitive environment, but it doesn’t seem like that’s going on currently.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [5]

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Yes. I would say that we can take some credit, I think. I think just as one example was — as I tried to point to in my comments was the apps and then we pretty quickly saw an uptick there in terms of traffic and check and just actual transaction growth in that segment. And so that was our own doing really. We knew that we would — well, we had this feeling that, that would pay off quickly, which was good. And I think on the innovation side, that’s been nice because that’s a new life with the alternative crust and the Super Plant side of things. And I think we are really trying to show that, look, we’re really about quality. We know how to do great pizza. We know how to cater to a lot of different tastes and different demographics, but we’re not going to forget about our core value customer. So I think we’re, I think, getting some credit there for — I would say you can point at some very real examples, concrete examples of innovation and picking up the pace on innovation, where, I think, perhaps we hadn’t been doing as much on that front for a little while. I’d like to think we’re always innovating, but I think some of the additions that we’ve put in place have really been hitting it more successfully.

And on the competitive side, I mean I don’t think it’s any easier. I think of third-party platforms still out there. Some people out there seem to think that they’re losing some momentum. I think maybe some of them are. Obviously, there’s an issue of profitability with a lot of those platforms, all the aggregation of those aggregators, I always say. But they are something that a lot of customers do find a convenient option. And so that’s why we believe we need to pay very close attention to what they’re doing and how they’re presenting themselves. But we’re trying to make sure that we promote organic first, and we’re really trying to drive that organic volume and especially digital organic volume. I would say that’s one of our big, big, big focuses. It’s because we know it’s an advantage. We know we can really push that and people see our tools. They’re very easy to use. And we’ll take the order however you want to give it to us. And so I think we probably offer more — including our phone, 967-1111 of course and the 73 number at West. But the digital side especially, we covered the base as well. I mean even if you want to use a third-party platform to come to us, while you can, we’ll still take your order but we’re going to try to convert you back to organic.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [6]

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And I guess, like how — if we’re talking about the ease of use or the app itself, how confident are you that — I guess it’s an easier application to use than some of those — and I haven’t used a third party, to be honest with you. Just wondering how you guys feel or how you feel that you’re positioned with the app versus the third party.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [7]

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That’s a good question. I mean I think that to give some credit there, I mean some of those third-party apps are super slick, they’re very fast, it’s really easy to pay. And so we’ve closed the gap and we continue to do that with our functionality on our apps and our web as well. So — and mobile stuff continues to grow faster than even web, which does grow, but for instance, payment, prepayment, online payment, I mean that — we offer that very, very easily and seamlessly. Now it’s as convenient, certainly on par with the best third-party platforms right now. But we realize that some people still aren’t on those platforms and maybe not everyone’s comfortable paying that way upfront and some people tipping upfront as well on the third-party platforms. So we also offer that now. And even at Pizza 73, we have that prepayment, which we didn’t have for a long, long time. So that’s an enhancement there.

But there are people that’s still in the doorstep, want to pay using their debit card or their credit card with our secure TD terminal or those that want to pay cash even though that’s a smaller and smaller segment. So however you want to do that on delivery or at — on walk-ins, same thing, you can swipe your card or pay on Apple Pay. We’ve got a number of different ways to pay it. We’re just trying to be the most convenient no matter how you want to order from us.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [8]

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Got it.

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Curtis Feltner, Pizza Pizza Limited – CFO, VP of Finance & Director [9]

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Again, we’ve closed the gap — closing the gap.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [10]

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All right. So I know it’s early on this thing and I guess I want to get the elephant out of the room, but I was wondering how you guys are thinking about the coronavirus on your supply chain labor or even how do you view it as a potential opportunity.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [11]

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Yes. It’s a good question and it’s on everyone’s mind, of course, right now, I think every organization, every business, every household. We’re obviously monitoring it extremely closely like everyone is. You can see the massive impact in the marketplace that’s happened overseas and obviously what’s starting to happen over here in North America and in Canada. So I think there’s certainly risks, so we’re making sure that we’re doing everything we can to mitigate potential risk there at the franchise level and our distribution center level, et cetera.

So I think on the bright side, I think we have very, very professional, well-trained people at franchisees, on the food safety side of things. So any kind of outbreak, treatment, flu and things like that and I think we have a pretty good track record of not having contaminated food and things like that. Our procedures are very strong. And so I think that we’re just making sure that we’re accentuating that even more right now, obviously, given some of the unknown severity and duration of the COVID-19 virus and is it going to become a full-blown pandemic. It’s spreading quickly. So there’s a lot of uncertainties but we’re — I think we’re trying to think about things as quick as we can. And the labor side and things like that could be challenging, especially supply chain. There’s no doubt suppliers are affected. Manufacturing in some places can be affected.

So those are real risks, but I also think that there could be a bit of upside especially if people start cocooning and delivering more if you get people that have to stay home and schools are closed. Some employees need to be home, et cetera. People might actually say, “Look, it’s just safer for me to order from — most food at home for a little while.” So if that’s the case, well, we’ll make sure our delivery drivers are looking good and presentable and we’ll — maybe that’s a bit of opportunity for us. But I think it would hurt us on pickup and walk-in, obviously, if people start to sort of cocoon and hibernate depending on how severe things get.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [12]

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Yes. I guess that was my follow-up question. Can you just remind me what the — I guess the mix is of walk-in versus delivery or dine in?

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [13]

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We can safely say it’s 60-40, 60 delivery, 40 walk-in and pickup. Let me tell you, it is more — Curtis is nodding, which is a good point.

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Curtis Feltner, Pizza Pizza Limited – CFO, VP of Finance & Director [14]

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Large delivery.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [15]

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Depending on weather and whatnot. I mean obviously if that’s Pizza 73, it’s higher on the delivery side. It’s more 85, I believe, percent delivery. We’re sure we’re a little more hedged in terms of channel.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [16]

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Okay. And maybe just switching gears, just to the network growth and you did touch a bit on this on — in your prepared remarks. And I think you pointed that some of these restaurants were underperformers. Just wondering now, like, how you look at your overall network in terms of — I guess in terms of how healthy it is.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [17]

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Right. Well, I guess we’re, I guess, being more disciplined than we ever have been. I think we always apply a lot of discipline, but I think we’re just trying to look at things extremely holistically, whereas can a store make decent profits. Obviously, we look at top line sales, how can you keep your cost base down at every unit. And also, I think you start to see little more patterns of where we are more successful, going from some of our expansions at certain places that haven’t gone as well, for instance, or certain rural locations as an example. We do have some successful rural locations, for sure, but we also have some that don’t make sense when you consider entire system even if you have healthy sales with that location, for instance. So we have to try and look at things very holistically.

So I think we’re just trying to take a little more of a portfolio approach, seeing what we’ve done in 750 locations here. We can tier them as we do in the different categories. And we know that we can — that’s the nonperformers up quite quickly. So I would say we’re very patient. Maybe you could criticize us for being a little too patient sometimes. But we also, I think, have had a good track record of really getting people back on track because if our marketing is hitting, our execution is there and they have good support in the field from our strong operations folks, you — we can see people get really back in action and back on track. So we’re not — as with some folks might be quicker to shut locations that don’t perform after, say, a year. We tend to sort of give it multiple attempts. It might be the operator. Maybe it’s our local store marketing is not quite hitting. What else can we do to help them, right?

And so we’ve done that and continue to do that, but we also said, look, there, we have to be a little more impatient with chronic underperformers or even ones that maybe after 2 years or so, 2 years in some cases, or a long-term person and locations, it’s just not working anymore, we need to be bold enough to say, “Look, it’s just not going to do it. Let’s move it or let’s create a new one, focus on new grills and stores that are performing.” So I think it’s just a little more rigor and just much more sort of intense approach to what is the whole economic picture overall and the unit performance of the operator obviously being paramount.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [18]

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Okay. That’s great. And maybe just a few more from me. You did touch on the AI. Can you just remind me exactly what that entails and where you are in that…

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [19]

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That’s still — it’s fair to say we’ve — it’s ongoing, our development in that, and we’re still early stages. It is live in some markets. We haven’t lit it up across the country. We want to make sure that we were getting the customer feedback. But basically, the customer, just to kind of keep it fairly simple, is — we got a third party to be partner with that we’ve looked at for a long time. We think the technology is mature enough. So basically, you’re calling our phone number, depending where you are and what queue, you will receive a robot voice, a pleasant voice that will basically take your order and take your address and some basic information. And it will handle a basic order or a favorite order, things like that, very quickly. But if you decided, “Look, this isn’t for me, I don’t like it,” you can — or if it’s a very complex order, you can escalate to an agent very easily. So it’s a much more sophisticated version of a basic IVR system it used to have. It was sort of “Just hit 1 for your last order,” and we still have that capability but it’s much more robust. So that’s really using AI algorithms basically so you can make that experience hopefully faster and easier.

But we realize some people may not enjoy it. They call mainly because they haven’t used an app for instance because they prefer a human. So we’re just having it very easy for them to take over to human, but the future development of this that’s kind of next phase that we’re looking at is to challenge ourselves more to say, look, we want to take it forward or even if it is more complex. So we don’t really want people to be hitting 0 and going to the human all that time. So that’s kind of the next level of the AI, where I think it will take — I don’t know exactly, but obviously, it’s still many months yet before we get to that more robust, full order capability for — especially for orders that are more complex and then — and before we — it gets rolled out more nationally. But it is — a lot of it is working in some queues, and we’re actively iterating on that.

And the other one I would mention is it’s actually more to do with our apps but the — a voice assist functionality on our app so that you can actually talk to your app, seems a little ironic, but you can actually talk to your app for the pizza assistant if you can care to look at our apps and speak to it and you can say, “I want a large pepperoni and I want 3 drinks.” And it will actually build the order like a sentence and then you can basically submit it. So that’s already live across the whole system on the app, which we haven’t really talked about. And so we are trying to do things at multiple fronts there to make the process as convenient as possible, know what channel you’re dealing with, but certainly leveraging the technology foundation that we have underneath it. And it does enable us, I think, to explore future channels we haven’t yet contemplated as well because of the design of our entire infrastructure.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [20]

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Okay. And maybe just touching on your delivery done better promise, can you maybe talk about some of the wins that you have going on there?

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [21]

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Yes. Well, we think that there’s certainly some real, very real customer benefits in this delivery done better promise. I think the fact that in one dimension, we are out in the doorstep. It’s our brand. We obviously have the time guarantee as well and that — we’re well known for that. And we haven’t even really been shouting that from the rooftop, the guarantee itself, but it is a benefit. I think we are very trusted and we deserve the trust. There’s accountability if the order goes wrong and our customers know that. And so as we are somebody, digital or whatnot, that door-to-door service is very critical. And I think if the order goes wrong there, it’s also a nice, reliable delivery fee. It’s not very, in certain jurisdictions — or let’s say a $3.50 delivery charge. It’s a fixed charge. There’s no surge pricing. And so we feel that that’s something that those — the third parties are very weak on. And we have poked a little fun, a little tongue-in-cheek, more of a playful video campaign we did a little while ago just to basically make that point that you can get a pizza faster, more reliably from us and cheaper. So why don’t you get it from us? We know how to do delivery better in a long time, but we’re also a really leading innovator in that space. We’re not just the phone number anymore.

So I think that we could point to some of these differentiators, the food being hotter and fresher, coming directly from us, it’s safer, all that aspect but — and internally promote the benefits of our ordering process as well. And we can list in loyalty as well much more with our own program. So there is that benefit for customers, but we will take a third-party order, too. It’s just that we’re thinking about how can we creatively try to move people perhaps off those platforms as we sort of get introduced to those customers.

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Derek J. Lessard, TD Securities Equity Research – Research Analyst [22]

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Okay. And maybe just one final one from me. Just on your loyalty program, I know you’re waiting to — or you’re — I guess you’re trying to get it right, and that’s important. Just wondering if you have sort of a time frame that you’re looking at for long term.

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Paul Goddard, Pizza Pizza Limited – CEO, President & Director [23]

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First of all, you can say we have already done quite a lot of work on it, to be honest with you. We look internally here. We look at what’s working well in our current program. It’s actually quite successful. We’ve got a lot of interested people on that. But we also think that we could really take a different approach. And part of the challenge is how do you evolve your current program and whatnot. So it is definitely obviously a few quarters out. It’s a big project. The nice thing is though — I think once we kind of blend on what the business rules really want to do here and satisfying all the different constituents as well and making sure that the math works well is that our foundation, our technical platform is in a really good place. So I think that it won’t take as long as prior loyalty scaling up did. I remember talking a way back doing it in phases and it did take longer. I think right now, we’re just taking more time, not so much on the tech side yet but more on the design, how to make sure we feel really good about that, before we really start the heavy lifting in the tech development. But I think that part, when we do get to the tech development, I think that will go faster. So it’s very hard to quantify right now. So I think it’s sort of obviously, probably quite late this year or even possibly early next year is kind of my estimate right now.

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Operator [24]

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There are no further questions at this time. I will turn the call back over to the presenters.

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Christine D’Sylva, Pizza Pizza Limited – Director of Finance and IR [25]

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Thank you, David, and thank you, everyone, for being on the call with us this evening. If you have any questions after this call, please feel free to contact us. Our information is on the earnings release. Thank you, and have a good evening.

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Operator [26]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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