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Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Conference Call for Recipe Unlimited Corporation 2020 Fourth Quarter and Year-End Results. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.Before turning the meeting over to management, please be advised that this call contains certain forward-looking statements that are based on current expectations and are subject to a number of uncertainties, risks and other factors, which may cause the actual results, performance or achievements of Recipe to be materially different. Further information identifying risks, uncertainties and assumptions and additional information on certain non-IFRS measures referred to in this call can be found in the company's management discussion and analysis and annual information form available on SEDAR.I will now turn the meeting over to Frank Hennessey, Chief Executive Officer of Recipe Unlimited Corporation. Mr. Hennessey, you may begin your conference.
Thank you, Mariama, and good morning, everyone. Thank you for joining today's conference call. On the call with me, again, today is Ken Grondin, our Chief Financial Officer.It was almost 1 year ago, that we faced the daunting decision on if we should close our restaurants preemptively due to the growing pandemic concerns and all the call to flatten the curve. As we reflect on that moment and the other moments that have occurred this past year, it's important to note that we have relied upon our values as an organization to do the right thing to help guide us, while still ensuring that maintained our strict working capital discipline. So from decisions, such as proactively closing our restaurants before being mandated to close, to our decision to financially support our franchisees to help bridge them to the other side, it has been our values that have been at the center of all that we do.I want to thank all of our teammates and franchisees for their resilience in what has been the most challenging year in our industry's history. And as well, I want to thank our vendor partners who have stepped up with their support.The diversification of Recipe's portfolio of brands has helped hedge our business from the full brunt of the COVID restrictions on indoor dining. Brands such as Swiss Chalet and St-Hubert, both of whom already had well-established off-premise businesses, performed better than some of our brands that were primarily dining-room-only brands such as The Keg. Harvey's and Burger's Priest, both have performed extremely through this period as limited service was not as impacted as full-service dining.Our restaurants are also diversified geographically with locations across the country in rural, suburban and urban markets, each area having been impacted differently by the COVID pandemic. The impact of the restrictions on Recipe's operations is highlighted on Page 4 of the presentation. As indicated in the chart, 43% of the company's operating weeks during the fourth quarter were impacted by complete or partial restaurant closures, which largely occurred in Ontario during the second half of the quarter and in Québec since October 1. It is important to note that while dining rooms may have been open for 57% of operating weeks in Q4, restaurants had to operate at severely reduced capacity, mandated by local public health. The most egregious rules are still in the red zone areas in Ontario, where only 10 people are allowed in the restaurant, regardless of the size of the restaurant is 100 square feet or 8,000 square feet.During the quarter, we only had 6% of our operating weeks where there were no restrictions in place other than standard social distancing rules.Notwithstanding the operating restrictions, total system sales in the fourth quarter were $611.3 million compared to $895.8 million in 2019, representing a year-over-year decrease of 31.8%, as shown in the chart on Page 5. For the full year 2020, total system sales were $2.4 billion as compared to $3.5 billion in 2019, representing a 30.5% decrease. While these decreases are significant, we were pleased to see the steady increase in system sales through the third quarter and the first half of the fourth quarter. This reflects the strength and resilience of our brands, and gives us confidence that we will recover from the effects of the pandemic when our restaurants are allowed to operate at reasonable capacity limits.Since the beginning, our priorities have been consistent throughout the time of this pandemic. I will go through each of them in more detail later in the presentation, but let me take a moment to emphasize that our highest priority will always be the health and safety of our guests, teammates and franchise partners. We will continue to develop and follow industry-leading safety measures, including comprehensive protocols, related to food safety and strict standard operating procedures. Our goal continues to be to provide excellent food and great service in an environment that enables people to be social safely.Turning to Page 7. The company has taken a number of initiatives to provide direct support to our franchise partners during COVID-19. In May 2020, Recipe introduced a Rent Certainty Program, which provides franchise partners direct rent support, effective April 1, 2020. In the wake of the second wave of the pandemic, the company swiftly introduced the Recipe COVID Support Program, which extends financial support to franchise partners through the end of March 2021. The total estimated cost to Recipe of these 2 programs is between $32 million to $36 million. We expect that this cost will be partially reduced through benefits received by franchisees under various government assistance programs. In 2020, Recipe also introduced a royalty reduction program, providing direct support to its franchise partners through a temporary reduction in royalties paid to Recipe. This reduction in royalties was effective through the end of 2020 at a total cost to Recipe of $7.5 million.Recipe has also been working with franchisees to help them navigate their way through the various government assistant programs such as CEWS, CECRA, CERS and the Ontario property tax and energy rebate program. This includes providing tools and guidance with respect to how to access these programs, helping franchisees maximize liquidity and maintain operations. And as a result of these initiatives, we are very confident that our franchise partners will emerge from this pandemic healthy and ready to compete.The next 2 slides focus on the strength and growth of Recipe's Retail operations. Since Recipe's acquisition of St-Hubert, we have significantly increased the number of products sold through grocery stores and retail outlets, including Sobeys, Walmart, Loblaws and Costco.As you can see on the Slide 8, our Retail business in grocery continues to grow. We now have over 200 branded products on grocery store shelves across the country, making us the largest restaurant brand company in grocery. A key part of this expansion has been the introduction of new items, including Swiss Chalet and Montana's ribs, Swiss Chalet pot pies, Swiss Chalet gravy mix and other branded items. The strength of our offering is evidenced by our leading market share in these product categories and categories that continue to grow.In addition, Recipe produces and ships other private label products to grocers and restaurants across Canada. We believe there is a significant opportunity to continue to grow this channel through the introduction of new recipe and third-party branded products. We will continue to leverage our iconic brands, our 60-plus person national sales force team and our talented retail, marketing and manufacturing groups as we continue to expand our Retail food program.Slide 10 shows the significant growth in Recipe e-commerce sales, which reached over $0.5 billion million by the end of 2020. This growth has been fueled by our ongoing investments in e-commerce and IT platforms and apps. In 2020, Recipe launched all new native in-house developed ordering apps for Swiss Chalet for Apple, Android and on the web. These were followed with new order apps and websites for East Side Mario's, Kelsey's, Montana's, Harvey's and St-Hubert. Collectively, these represent the top 6 rated restaurant apps in Canada on the Apple app store, with higher consumer ratings than all other large chain quick-service restaurant and full-service restaurant operators in Canada.The company is leveraging this platform to launch new ordering channels such as kiosk and digital assistance and has focused its effort on expanding its off-premise options in light of the COVID-19 pandemic and shifting consumer trends to include contactless service, curbside and frictionless takeout. Recipe has also leveraged and developed strategic partnerships with food and delivery aggregators to grow delivery sales.In 2020, Recipe expanded these online aggregator relationships to over 850 Recipe restaurants to enable customers to place delivery and pickup orders through their channel and application of their choice. During 2020, we opened 2 Ultimate Kitchens concept locations in Toronto. Ultimate Kitchens is a delivery and takeout concept where a single location is able to offer customers greater choice and the ability to order from multiple brands within the same order at the same time. This model allows guests to have delivered to order ahead and pick up multiple brands on a one-stop shop basis. It also allows Recipe to serve markets where it may otherwise be cost prohibitive to build a traditional restaurant. 2 additional Ultimate Kitchens locations in Montreal and Hamilton will open by the end of the second quarter, and we will have up to 6 additional locations by the end of the year. We believe Ultimate Kitchens represents a significant opportunity for the future growth and expansion of Recipe.At this time, I'll turn it over to Ken for a review of our financial results.
Thank you, Frank, and good morning, everyone. For the first part of the financial review, I will focus on Recipe's 2020 consolidated results, and I'll finish with a summary of our segmented business performance, as reported last night and posted on SEDAR.As illustrated on Slide 13, total gross revenue for the fourth quarter of 2020 was $210.9 million compared to $327 million in the fourth quarter of 2019, a decrease of $116.1 million or 35.5% for the quarter. Total gross revenue for the full year 2020 was $864.6 million compared to $1.3 billion in 2019, a decrease of $387.9 million or 31% for the year. The decreases in gross revenue were primarily related to corporate restaurant revenue decreases, particularly in urban city centers, that were most severely impacted by the COVID-19 pandemic, partially offset by revenue growth in our retail segment.Operating EBITDA was $35 million in the quarter compared to $60.5 million last year, representing a decrease of $25.5 million or 42.1%. Operating EBITDA for the year was $113.8 million compared to $216 million in 2019, representing a decrease of $102.2 million or 47.3%. The decreases in operating EBITDA were primarily driven by the decrease in gross revenue, partially offset by lower SG&A costs, the receipt of government subsidies, strong retail contribution and various cost-saving measures implemented by the company.Now moving to Slide 14. Adjusted net earnings was $16.1 million in the quarter compared to $44.8 million last year, representing a decrease of $28.7 million or 64.1%. Adjusted net earnings for the year was $46.1 million compared to $105.7 million in 2019, representing a decrease of $59.6 million or 56.4%. The decreases in adjusted net earnings were driven by the decreases in operating EBITDA, the decrease in fair value of the Keg's exchangeable partnership units and an increase in impairment charges, which includes the cost of the Recipe Rent Certainty Program introduced in 2020 to assist our franchise partners with rent costs during the COVID-19 pandemic from April 1, 2020 to March 21 2021, as described earlier by Frank on this call.Adjusted diluted earnings per share decreased to $0.28 in the fourth quarter compared to $0.77 in 2019. For the full year, adjusted diluted earnings per share was $0.82 compared to $1.71 in the prior year.Turning to segment results for the quarter and year-to-date, starting on Slide 15. The total system sales from corporate restaurants was $93.1 million in the fourth quarter compared to $197.4 million in 2019, representing a decrease of $104.1 million or 52.8%. For the full year, corporate system sales was $423.8 million compared to $790.1 million in the prior year, representing a decrease of $366.3 million or 46.4%. Total contribution from corporate restaurants was $1.5 million and $358,000 for the 13 and 52 weeks ended December 27, 2020 compared to $19.3 million and $75 million in 2019, a decrease of $17.8 million or 92.2% for the quarter and a decrease of $74.6 million or 99.5% for the year. The decreases are due to sales declines due to COVID-19, while still incurring full fixed costs, including rent and other fixed cost charges, partially offset by decreases in variable overhead costs and federal wage subsidies.As illustrated on Slide 16, total system sales from franchise restaurants was $425.7 million in the fourth quarter compared to $606.1 million in 2019, representing a decrease of $180.4 million or 29.8%. For the full year, franchise system sales were $1.7 billion compared to $2.4 billion in the prior year, representing a decrease of $717 million or 29.2%. Total contribution from franchise restaurants was $16.7 million in Q4 compared to $26.6 million for the same period in 2019. Full year total contribution from franchise restaurants was $64.8 million compared to $105.1 million in 2019, a decrease of $40.3 million or 38.3%. The decreases reflect the negative sales impact caused by the COVID-19 pandemic and the company's direct support to its franchise partners in 2020, including the introduction of Recipe's royalty subsidy program, which reduced royalty rates by 1%.Turning to the Retail and Catering segment on Slide 17. Retail sales reported within the Retail and Catering segment relate to the manufacture and distribution of fresh, frozen and nonperishable branded and private label food products. Catering sales relate to food and beverage sales from Recipe's Catering divisions, operating under the Pickle Barrel, Rose Reisman and Marigolds and Onions banners. System sales from the Retail and Catering division in Q4 was $92.6 million compared to $92.3 million in 2019. For the full year, retail and catering system sales was $337.9 million compared to $316.4 million in 2019, representing an increase of $21.5 million or 6.8%. This demonstrates the strong customer demand for Recipe-branded retail offerings sold in grocery channels, even after restaurants opened, partially offset by declines in the Catering segment due to the impact of COVID-19 restrictions.Contribution from the Retail and Catering division in Q4 was $13.4 million -- $13.1 million compared to $13.1 million in 2019. Year-to-date contribution from Retail and Catering is $48.4 million compared to $36.5 million in 2019, an increase of $11.9 million or 32.6%. Changes in the Retail and Catering contribution was driven by increased Retail sales at high gross margin rates.Turning to the Central operations segment on Slide 18. Central operations segment sales consists of sales generated by Recipe's off-premise call center business, representing fees generated from delivery call ahead, web and mobile-based meal orders. Central operations segment EBITDA consists of franchise fees, property and equipment rent and vendor volume rebates reduced by net central overhead costs after wage subsidies and after royalties paid to the Keg Royalty Income fund. Central segment contribution before the net royalty expense was $4.8 million for the quarter compared to $5 million in 2019, representing a decrease of $200,000 or 4%. Full year Central segment contribution before the net royalty expense was $5.8 million compared to $13.7 million in 2019, representing a decrease of $7.9 million or 57.7%. The net change in the quarter and the year reflects higher revenues generated from off-premise call center fees, federal wage subsidies, offset by lower franchise fees and lower vendor rebates.Moving to Slide 19. During the 52 weeks ended December 27, 2020, management successfully opened 32 new restaurants and closed and exited 64 locations. The company ended the year with 1,341 restaurants compared to 1,373 restaurants at the end of 2019. Recipe's restaurant closures were mostly part of a pre-COVID long-term strategic plan, where management identified locations that no longer fit the long-term plan for the company or restaurants that were underperforming under pre-COVID conditions.For corporate restaurant locations that no longer fit the long-term strategic plan of the company, management is taking steps to exit these sites. The franchise locations that are underperforming, the company will work with franchisees to help them achieve sustainable success, which may include the company providing financial support in the form of royalty relief or other financial systems.Now turning to total net debt on Slide 20. Through prudent cash management, in 2020, Recipe generated over $50 million of free cash flow before growth CapEx, and Recipe maintain a stable net debt position throughout 2020, while still providing direct financial support to our franchisees throughout the pandemic. The company will continue to prudently manage its cash flows and liquidity to protect the short-term and long-term health of Recipe brand and franchisees. On February 18, 2021, Recipe successfully amended its lending covenants with its banking syndicates and private noteholders, which will provide additional covenant flexibility through to the end of Q2 -- Q1 2022.This concludes the financial commentary of the call. I'll now turn the discussion back to Frank.
Thanks, Ken. As consumer confidence towards restaurants rebuilds, we believe that customers will still have questions around safety and will make choices based on their level of confidence and the positive answer to that question. For 138 years, Recipe has been committed to delivering best-in-class experiences by operating safe and clean restaurants. Since the onset of the COVID-19 pandemic, Recipe is amplified its safety procedures so that we can continue to keep guests and our teammates safe. As part of our ongoing commitment, in 2020, we launched our Social Safely campaign. This program outlines all of the safety protocols our restaurants make to their communities each and every single day. And it's our commitment to do all that we can to keep both our guests and teammates safe. In addition to social distancing, wearing a mask and frequent hand washing, this program includes disinfecting tables after each use, cashless payments, safe food handling processes, third-party inspections and continuous training.Our goal is always to provide a safe and healthy environment so that our guests feel confident that they can be social safely. We have been actively marketing the brand Social Safely across all of our digital platforms as well as on our take out packaging. The second phase will commence on March 15 with a national media ad that is time to correspond with more dining room openings across the country.We are excited to begin to welcome guests back to our patios and our dinning rooms. We know the importance of delivering on our 4-pillar program of serving great food, great service, value for the experience and an Ambience that reminds guests of what they have been missing. These 4 pillars touch every aspect of the company's core restaurant business and guide our multipronged approach to delivering strong business results. Our teams are excited to have our guests back, and we are confident in their ability to execute upon their plans once they are able to do so and restrictions are lifted.I'll now turn it back to Mariama to take some questions.
[Operator Instructions] You have a question from Monica Lutz, CIBC.
This is Monica on for John Zamparo. Can you maybe talk about how the change in system sales trended in January and February? And maybe also remind us what the decline in system sales was in March of last year?
I'll talk to -- kind of reference back to -- turn to Ken on the March question. I mean, listen, January, February, we -- for the most part, Ontario and Québec, we've been pretty -- our dine-in was pretty much locked down. Still sitting today. It's now approaching the middle of March. We still have significant parts of the province and gray zones and red zones. And like I said in my prepared remarks, the red zones are egregious in the way that the province has mandated what you can -- what is to a dinning room. We think that number of limiting people to -- limiting restaurants to only 10 people. We think that they'll make a change on that to move to more of a BC-like program where it's a percentage, but we're not anticipating that until perhaps maybe near the end of March.So we think -- we're watching the numbers just like everyone else. I wish, I had kind of a crystal ball for how the provinces are going to act and what the trend line is going to be on COVID. But we feel pretty good that as we reach into more warmer temperatures, the vaccine starts rolling out, people and confidence returns that -- just like we saw in Q3 that our sales will start to rebound.I think Ken has the March number.
Yes. For March, I don't have an exact number, but for the first half of March, we were down to probably 20%, and then we were shut down for the back half of March. Now when the lockdown happened and we voluntarily closed restaurants. So we -- our decline would have been more than 50% for the full month of March.
Yes.
Understood. And just a follow-up on that. It seems like the Retail and the Catering growth stalled a bit in Q4 versus earlier in the past few quarters. Is there any color that you could maybe add there? And like is there still excess capacity? And can that division continue to grow into 2021?
Yes. I think when you look at the Retail and Catering segment, so what's involved in that segment is, first off, Retail and Catering. So our Catering business, which typically, in Q4, with lots of parties and everything else going on, is probably their strongest quarter. So that obviously was impacted very severely in the quarter.And then in Retail. Then retail, there's lots going on in Retail. There's sales in grocery, there's kind of what we call industrial sales, but there's also sales to foodservice. So the sales of grocery was very strong and continue to be strong, and it was strong all year and actually even grew even more in Q4. But it was offset somewhat with sales into foodservice. So that's -- there's a lot in that bucket and a lot of moving pieces, but it was really the Catering that really pulled down the overall Retail.
And your next question comes from Sabahat Khan, RBC Capital Markets.
I just wanted to get a little bit more color on the plans for the Ultimate Kitchen. It looks like from the slides that you could have up to 10 by the end of this year. Can you maybe share your thoughts on what this business, even what those 10 restaurants can scale to in terms of ballpark numbers for maybe system sales? And what kind of economics you see on these restaurants? Is it similar to kind of a corporate store plus a delivery fee? Just any color there will be great.
Yes, I can expand a little bit more on Ultimate Kitchen. So we're -- every day, we're learning on these kitchens. The first one we opened, which was at the end of March last year, was delivery only. Candidly, I don't think you'd see us do another one of those where it's only delivery, and it's really because of the cost factors of the aggregator commissions doesn't get us -- they're profitable, but doesn't get us to the number we really want. So when we opened the second one, which is hopefully, pictures, you saw on the slide show of that actually aired. It was kind of our first time with it, and we're not really sure. There's a healthy percentage of that business that is pickup and takeout, and that helps. It's more convenient for guests, so it's not just delivery, but it also helps blend the overall cost down.So we think these things can have -- It always seem to be out there in the sales, but we want these things to be well north of $2 million, maybe approaching $3 million a unit and with healthy returns. How many we can build? We think we'll come back to you, a little later, when we really flesh it out. But we think it can be a healthy amount of units here in Canada. But remember, it doesn't necessarily always have to be Recipe branded items in there. We have explored other parties in there that we don't own as long as they're good contributors and can help fill the basket. So it's a very unique model. There isn't a model like this that I'm aware of anywhere in the world, and we also believe that this is something that's exportable, that we can take into other markets.So again, it is -- we are still in the -- very much in the learning phase of not so much the operations aspect of it of integrating the kitchens, but it's really -- working very hard on getting the tech right because, again, it's unique, and there's just not something off-the-shelf that you can have out there that makes the tech work really smoothly. But our guys are made a lot of progress. And yes, very impressed with what's going on there. And Hamilton and Montreal will just be another further iteration of this program that we're excited for.
All right. And I guess just in terms of where you're deciding open these, I know you've mentioned, obviously, you don't want to compete with your franchisees, but is this made for a certain market or a certain size market, suburban versus urban? I guess there an opportunity maybe when you're thinking about corporate stores instead of opening a single location to go with one of these. Just want to understand how -- when you map out the potential size of this thing, where you're kind of targeting? And maybe you can even just share how much it cost to kind of set these up? And are they all about standard size, the way you're thinking about it?
Yes. The economics are pretty good. I mean, really, the cost is mainly the equipment that we have in there because you don't need a lot of fancy things that we'd have in a typical restaurant. We do make the -- as you see in the pictures, the front area for the -- where guests can come in and pick up. We make it -- try to make it look kind of cool, but it's all tech, right? There's no cash here and there. So the economics are pretty good. They're probably -- we try to target around the -- less than $1 million to put one of these things in place, so we get the right returns.Where -- as far as where they can go? We're in large markets. We're in rural markets. We're in small markets. In all markets, people, I think, there's an assumption that people in small markets don't do delivery and don't do takeout, they all do. So it's really about where do we feel that we can generate a radius of enough volume to make the setup work and not forgetting that one of the big features here is the ability to get multiple brands on one order.So we don't think this is limited to big urban centers. We will try different market sizes, and we'll learn, and we'll find the answer to that question about how big the market needs to be for us to be successful.
Okay. Good. And then just broadly on the off-premise side, I know you mentioned, you've got about 850 locations on the third-party aggregators. And as we look forward into late '21 and beyond, do you expect the growth in this off-premise channel is maybe more of these locations signing up? Is there maybe things you need to add on the technology front or just broader market penetration of people doing more takeout even post-pandemic? Just how do you see -- or what are the growth drivers you expect of this off-premise channel over the next 1, 2, 3 years?
Well, listen, I think people are always going to want convenience, right? But again, convenience can come -- I talk a lot about this subject, so it's not just off the delivery front. Again, we have technology in place now that makes pickup just a lot smoother, a lot easier, particularly for curbside, and frictionless.So you don't have to really wait and just come there. So we'll get better and better at that. The economics are better for us and for our franchisees. When -- on the pickup takeout side versus delivery. But we're 85% of our business is franchise. We're predominantly full service. We want people back in our dining room. So our focus, delivery will be there. We'll always offer that as an opportunity for our guests. We would prefer people enjoy our experience inside our dining rooms and have the pickup takeout option be as convenient as possible for them. So that will be our focus. We price ourselves appropriately in the delivery channel to help with the economics. But again, we want to focus really on getting people back into our dining rooms because that's our best channel, and that's how we win.
Okay. If I could just squeeze one last one. Can you maybe comment -- I guess, you've obviously provided a very broad safety net for your franchisees, which has helped. How do you feel about just the broad health of the franchisee network? Do you feel -- are we through sort of the thick of it in terms of the challenges for them? And how do you plan on sort of unwinding some of these social -- or not, sorry, these -- just like whether it's royalty or rent relief and so forth, how are you thinking about that over the next year?
Well, royalty relief, we've already unwound. So that program only went up to the end of the year. I think the steps that -- we were consciously wanted to make sure that our franchisees could make it to the other side and can continue to grow their business and invest in their business.And I think one of the things that, hopefully, these programs helped was it prevented many of these franchisees from having to take on a lot of debt, which I know that many other restaurant tours had to take on, particularly independence, had to take on enormous amounts of debt. Debt that they really couldn't afford to take more on, if they had to, in order to be able to survive.So as we go forward, we still have a healthy renovation program to initiate. We want people to invest in more technology, particularly in their kitchens. So again, we feel good about the decisions that we made, the investments that we made in our partners will yield us a return and that will propel our growth.
This concludes the Q&A portion of today's call. I will now turn it back to presenters.
Well, thank you, everyone. We certainly appreciate your attendance today. We hope to see you out in our restaurants whenever we're fully allowed to get back out there. In the meantime, we hope everyone stays safe, and we'll talk to you soon. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.