Q3 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the M.P. Vijay Food Group Inc. Q3, 2019 earnings Conference call.
This time all participants on the unless there was only mode.
Following the presentation, we'll conduct a question and answer session and.
Construction will be provided at that time for you fix your first question. If anyone has any difficulty hearing to conference. Please press star followed by zero operator assistance at any time.
Turning to meeting over to management.
Yeah advice that this conference call would contain statements that are forward looking and subject to a number of risk and uncertainties that could cause actual results to differ materially from self anticipated.
I would like to remind everyone. That's this conference call is being recorded on Friday October 11th 2019.
Well I couldn't get calls over to you think that five Chief Executive Officer. Please go ahead.
Good morning, everyone and thank you for joining me for Mt. Wires 2019 third quarter results Conference call. The press release, and Mdna would complete financial statements and related notes were issued earlier. This morning and are available on our website and to your why group Dot com and on SEDAR.
Well it sounds like a fun. Since then I think it's got Jonathan must not federal Bastianelli Blitz, while Jim Keane RESCULA Todd here, we do business. So if it does not let me go there is definitely a few that bothers us jostled splendid lacrosse. This will not sit web if he gets us at all.
Please be aware that we will refer to certain indicators that are non I FRS measures you can refer to our mdna for more details.
I also remind you that all figures expressed on todays call or in Canadian dollars unless otherwise stated.
Before I begin I would just like to remind you that this is the first full quarter with the contribution of Papa Murphy's our results, while the second and third quarters, where historically the strongest four quarters for Mt. Why even our large exposure to the ice cream in frozen foods categories, you acquisition of Papa Murphy's will partially offset the seasonality pattern going forward.
As its operational peaks and valleys are almost exact opposite does of course films.
Third quarter of Papa Murphy's is by far its weakest generating approximately 13% of its annual EBITDA. While Q4 is by far the strongest quarter would approximately three times the EBITDA of Q3.
Let's start with a brief overview of our network consolidated same store sales grew by 8.3% during the quarter, Canada boasted a positive same store sales growth 48th consecutive quarter with a 0.7% growth qubec, a western provinces and the Maritimes continued to show positive same store sales growth with respective growth of 1%.
0.7% at 3.8%.
However, Ontario had a slight decline a 0.6% mostly due to weakness in mall sales.
Same store sales in the United States boosted the second consecutive quarter of growth with a 0.6% increases our initiatives continue to bear fruit as.
As you know our exposure to the west coast as important it represents 52% of our total U.S. system sales were pleased to report a growth of 0.2% in that region.
As far as the East coast is concerned into regions performance remained strong with the 1.3% increase.
We continue to experience negative same store sales growth in our stores located outside of North America. However, the magnitude of the decline has subsided after three quarters of high single digit declines we both at the same store sales decrease of 5.4%.
Decline is primarily attributable to our stores in the middle East where economic conditions remain very difficult, Indonesia, where we were impacted by some factors that are out of our control, but that should not affect the long term profitability of our location.
Network sales for the third quarter were up 36% to 1.076 billion.
Making this the first quarter nephew wise history to exceed 1 billion in system sales.
The growth is primarily attributable to the recent acquisition of Papa Murphy's, which generated 21% of ourselves during the quarter.
The net organic change in our network sales was a negative 5 million for the quarter with the favorable impact of positive same store sales being more than offset by the next net store closures experienced so far in 2019.
On the year to date basis, the net organic change was a negative 5.3 million to put things in perspective, the organic decline represents 0.2% of art system sales on the year to date basis.
We finished the third quarter with 7441 locations as we acquired a 169 locations of idle Mako and uses sushi.
During the quarter. We also opened 84, new locations across Canada, U.S. and international up 25% compared to last year, while we closed 157 locations.
Of this number 17.
Closures resulted from two brands being completely closed in the middle East and 22, where to result of underperforming Papa Murphy's.
The closures and Papa Murphy's are in line with the indications we had provided to the market. Following the acquisitions of the net the acquisition of the network, which were that we believed approximately 100.
Murphy's locations, we're going to goes over to.
12 to 18 months following the transaction.
We will work hard to prevent as many as possible to those.
Finally, the joke geographical distribution of our locations remained in line with last quarter with 55% in the U.S., 38% in Canada and 7% International.
On the year to date basis, our mall exposure continues to decrease going from 23% of our sales in 2018% to 18% of ourselves in 2019 in the U.S. that exposure went down from 10% to 7% of ourselves an agenda that it proportion went from 31% to 27% of ourselves.
Now, let's discuss empty wise financial results.
We're pleased with a record setting third quarter, our EBITDA increased 8% to reach a historical high of 41.8 million compared to 38.8 million for the same period last year.
Increases, mainly driven <unk> driven by the results generated by two recent acquisitions at Papa Murphy's and also suite frog, which was acquired last September and for which Q3 is the high season.
The increase in EBITDA comes from the 44% increase in our revenues to 163.1 million, which was offset by 63% increase in our expenses both of which are mainly attributable to recent acquisitions.
When analyzing our quarterly EBITDA performance you should keep in mind the following points.
First the third quarter is the softest quarter for Papa Murphy's represents approximately 13% of the total EBITDA generation for the year.
Second as I mentioned last quarter, our franchise segment is impacted by the investment an additional people and resources required to generate organic growth going forward.
As well as by the additional resources required to deliver to new accounting standards and finally, when compared to last year to food processing in retail retail division was down the decrease is attributable to the timing of certain deliveries, which will happen in Q4 this year, but happened in Q3 last year.
Q4 of 2018 was generally weak for debt division and we should be considerably stronger. This year. The contribution of the segments can remained relatively stable in the past few quarters on a sequential basis, and we'll continue that steady growth pattern going forward.
The net income attributable to shareholders increased to 22.9 million or 91 cents per share for the third quarter of 2019 from 22.1 million or 88 cents per share for the same period last year.
Turning now to liquidity and capital resources third quarter of 2019 and few why generated cash flows from operating activities of 27.2 million compared to 28.2 million last year.
Slight decreases mainly due to higher interest payments due to the Papa Murphy's acquisition as well as higher income tax payments that are attributable to payments of balances in the U.S. during the third quarter.
Excluding the variation in noncash working capital items income taxes and interest paid operations generated 42.3 million in cash flows from operations compared to 39.1 million for the same period last year. The increase is primarily driven by EBITDA.
Free cash flows for the quarter were 26.7 million down slightly from 27.9 million last year.
Again, the deeply decline is mainly due to higher interest payments and tax payments.
Subsequent to the end of the quarter, we amended our credit agreement, which resulted in increase of the authorized amount to 700 million.
While the maturity of pricing terms changed to the remaining terms were mostly unchanged.
At the end of the quarter 545.9 million was drawn on our credit facility. The good news is that this new amendment was negotiated at lower interest rates, which should result in savings of about $3 million per year at current levels.
And few I ended third quarter fiscal 2019, with a healthy financial position as at August 31st.
I had $43.7 million its cash on hand in the long term debt to 570 million in the form a pull backs and acquisition bank facilities.
To conclude we will maintain a focus on maximizing shareholder value by adding new locations for some of our existing concepts integrating our recent acquisitions seeking highly accretive acquisitions and de leveraging the company.
Subsequent to the end of the quarter, we announced that we signed an agreement to acquire 70% interest internal Jack's Mysql could grow group Wicked chicken and Fratzke Regina three casual dining concepts operating in province of Ontario transaction is expected to close in the next few weeks.
With that thank you for your time and I will now proceed to answer your questions.
At this time I would like to remind everyone in order to ask a question Press Star then a number.
Phone if you'd like to withdraw your question press. The punky. Thank you will fall for a moment to compile the county roster.
Your first question comes from the line of fiber has caused from RBC capital markets. Your line is open.
Hi, Thanks, and good morning, just maybe a question or under commentary on the EBITDA margins. Some of the drivers of that I think you indicated that part of it as accounting statements and part of it is going to be some of the investments can you maybe talk about how we should think about Q4 and what the potential we still don't impact could be uneven prior year, because I think.
This quarter those I think borderline about 10 percentage points step down in the prior year EBITDA margin as a result to the restatement just trying to get a better handle on the impact of the accounting side of things.
Hi, good morning Fab.
Well in terms of the margins.
There is there's a few things going on obviously, our we're still happy with our franchising margins in Canada were at 54% franchising into your west where at 48.
So we're happy with those margins.
I mean, there they are pretty strong.
Obviously called Psalms Big quarter was this quarter, so that helps to margins and next quarter is going to be Papa Murphy's big quarter, So thats going to help the margin so I mean.
Without giving guidance second that can say that I don't anticipate our margins for franchising to be significantly different or at least not.
Significantly lower than they are for this quarter.
And then there's there's the retail portion obviously the margins this year were lower than last year for retail and the weight of the.
The retail division now on on the total business of Mt. Wise is is getting bigger so obviously that that pulls down on the margins on a consolidated basis, even though in terms of dollar that we're bringing to the bottom line were so we're still very happy with that line of business and we're going to continue to push and dragged the business too.
More sales.
And then theres their corporate stores obviously.
The corporate stores are.
Our what they are the generate lower margins. So I mean, and you know it's always a same thing I am not necessarily comfortable discussing the margins on the consolidated business I'd rather go segment by segment.
Yes, so I don't see any reason for.
Drastic shifts.
Richard in terms of accounting change why that would have an impact on on the margins at this point.
Especially dot between Q3 in Q4.
But maybe if you want if you want to refine the question to directly to something more specific on the accounting that you would like to explore but.
I don't see a reason why Q4, we'd be very different from Q3.
I'm, sorry, I'll say it was along the lines of just the.
Q3, 18 margin under the restated accounting versus what it was when you reported last year.
The thing part of that might be driven by IRS 15.
And there is a little bit of I as far as 15 for sure.
Don't forget also last year, we we changed the way we we account for to retail Division, we went from a net.
Gross way of and delivering.
The information.
Bottom line is the same thing, but obviously that pulls on the margins because we when your account for it and that you have a 100% margin on that on that part of the business.
And obviously now we don't have that anymore.
And there is also.
As a Greg distribution center.
That was added to that business that we didnt have last year, so again thats.
That's a slightly bigger.
That's a say slightly bigger amount of dollars.
That are produced at low margins, but again its.
Dollars that are bringing to the bottom line so that pulls down the margins. There is also another aspect of the consolidated margins that I didn't address but theres a promo funds.
That are now accounted into.
As revenues and expenses in the past due or balance sheet items. So that's always has approximately 5% impact on the margins going down because thats a zero percent margin item.
Okay, Great and then just on the the Papa Murphy's you said the closures were inline with expectation. This year can you maybe talk about some of the initiatives that you're undertaking there since you acquired the business and so your outlook based on what you've seen over the last few months for that platform.
Yeah. So.
Well the biggest thing we had at Papa Murphy's is we needed to complete the management team. We had we had two people leave.
The company when we did the transaction so we just.
Our new marketing person just started with the company last week.
So now we have a full management team. So that was the first step I think two to getting.
So getting things done and getting traction with with the business. So now we are reassessing a lot of different things and operations for Papa Murphy's there has already been changes that have been made to try to optimize the operations under the franchise.
Stores, but also the corporate stores as you know there's over 100 of those.
So we're trying to focus more attention on those bringing them to produce better income for us and we're also in the process of Refranchising as many as possible of these corporate stores and we've had some some really good.
We've had some really good.
Feedback from the from the from the franchisee community and I think we're going to be able to franchise those and put them in good hands, so that the produce.
Optimally.
So thats that's the main items that we've been working on obviously, we have to work on the technology aspect of it we are launching.
Our loyalty platform.
It's being tested now it should roll out completely in January .
And there's there's a few different initiatives that will come to market very soon.
So hopefully I.
Hopefully that will help the business dread the results as we're expecting from it but all in all of as I said my previous calls I think that plan.
That said management team at Papa Murphy's had is still very valid and it's just a matter of executing that plan and continuing to drive the results that are.
I think from that land. So I mean, how we have the full team to do that and we're going to.
Reassess a few things here and there, but the plan was there and so for us to executed.
Hi, Thanks, and then just one last one for me can you maybe talk about what you're seeing with the just the broader consumer across the U.S. encana in your markets.
The comps look to be.
Slightly about positive in both of those markets, but are you seeing any did the trends change across the quarter are there any other banners that or maybe doing a little bit better just one I understand the consumer.
Uptake and both of your major markets.
Yeah, well I mean, it was a pretty steady quarter in Q3, sometimes sometimes we have a one or two good months in one or two bad months in a quarter.
And we aggregate the results of this case it was pretty steady.
Three months, where we're very similar.
So we didn't see any major shifts and how the consumers are behaving.
The early data that we have in September seems to be indicating that it is continuing along the same patterns.
So I don't know when it Tolbert November were going to have are going to have in store for us but.
It seems pretty steady at the moment I'm not seeing any major shifts and how the consumers are behaving one way or another.
Right. Thank you.
Your next question comes on line of Vishal Shreedhar from National Bank. Your line is open.
Hi, Thanks for taking my questions.
Maybe we could take a few steps back here and just get your assessment, Eric on in the quarter things that.
You are pleased with.
And things that you know, maybe you will put a little bit more effort on in the quarters ahead.
I just high level bullet points.
Yeah, well in general we're pleased with obviously the same store sales and as as I've.
I mentioned on pretty much every call since we started doing calls last year.
The.
The major focus for us at the moment is to fix the operational.
Metrics for.
Most of our brands and where we're in we're making good progress there. So we're really happy with some of the progress we are happy with.
84 opened stores in the quarter, we're happy with the same store sales being positive for us in Canada. So those are good metrics that we want to put some emphasis on.
Obviously.
The recurring streams of revenue in Canada.
Okay very positive so thats, the bread and butter for the business in the US we've been declining a little bit but.
All in all I think it's under control so.
Lots of good indicators pointing into right direction.
If I look in the into more negative aspects, because you're asking obviously I'm not happy with the store closures.
There are Papa Murphy's stores.
That have close that we expected. There's also no 17 stores that are close by one of our franchisees in the middle East for two brands that are removed from those markets. We're disappointed with that and we need to we need to bring more attention to those stores that are fragile.
The try to make them more profitable and try to save them as much as possible.
So thats, that's an emphasis of ours.
I know you probably haven't had time to look at the new disclosures we've put together.
It comes to store closures, but I think it's pretty interesting and its a.
It sounds a little bit more of the story than what you hadn't fast so hopefully we'll be able to aspire to read into the data a little bit better than than what we allowed you to do before.
Yes. Thank you. Thank you for the additional data.
I could see it but after viewpoint that really.
Last quarter and I know in English.
Very little of quarter, but last quarter, you gave us some early insight into Papa Murphy's same store performance wondering.
If you could give us a little color on that in the quarter into the same store in and maybe also cold stone as well just given the materiality of that business in this quarter.
Yep Yep.
Well it continues to behave and pretty much exact opposite ways.
When we have warm weather, we sell a lot of ice cream, we don't sell any Papa Murphy's pizza.
So it's very.
The negative correlation is that is pretty strong there.
And this is this is what we saw in Q3 and when we had the warm weather ghosts, almost performing really well and when we had warm weather Papa Murphy's was struggling a little bit and this is a close almost very strong in the quarter.
And it was also very strong in the month of September which is the month after quarter end and Papa Murphy's was suffering a little bit from the warm weather and the northwest.
Part of the U.S.
And in September was the same thing.
So I mean, all in all adds so they're very dependent on whether theyre, they're behaving in opposite ways, which one.
It's not surprising.
If we went the other way, we'd probably have to ask ourselves question.
Yes. This is for those two brands, it's a it's performing as expected given the wetter weather patterns.
Okay. So so.
Right, noting the weather's it'd be fair to say Papa Murphy's, maybe a little bit negative on same store on cold stone in a little bit Talbot also on same store have you had a fair okay.
The weather normal when the weather as normal Thats, what we will expect.
I think this summer was.
No I think that I think the summer was pretty steady in terms of weather.
Yes, so thats, probably a normal summer for us.
Okay in terms of organic EBITDA growth I think you gave us that negative 2.4 million and maybe doesn't know right.
Question for the call, but just wondering if management considers that metric to be key I know they look to disclosure, there's some transient things in there like.
Like non material differences or consulting and stuff like that so is that an important metric that management looks that or would you more look at the variance in recurring revenues expenses in the corporate story EBIT EBITDA cadence.
And again, we look at both we look at both but I can tell you amended the management team is compensated on organic growth in EBITDA. So there everybody on the team is looking at that metric.
So it is an important metric.
We want to have that metric being positive in terms of organic growth and EBITDA organic growth and free cash flows.
Organic growth and system sales Thats really key for us.
And that's that's part of everyone's compensation so.
We're all aligned there.
We do have a negative organic growth this quarter after two quarters of slightly positive organic growth.
And obviously.
We want to bring it back two or a positive organic growth in Q4.
We do have line of sight on a certain number of things that will help us but.
We need that we need to.
We need to do.
Better job, but.
Upping our stores open.
And keeping we need to keep the cadence on store opening we need to keep the cadence on same store sales, while we're doing that.
Okay. Okay.
And and I think.
Got you may have alluded to this last quarter in terms of your insight to provide test this color but.
On the same store is it as it predominantly tropic basket or both on an aggregate basis.
Yeah. There is there's a there's a large portion of it thats basket.
The traffic for some of our brands is up for some of our brands it's down.
But yeah, when when you're a when you're under 1% you have to assume that most of its is going to come from their basket size and that's that's the that's the reality for us.
Wonderful thanks for your color.
Your next question comes from the line up charge Duval from Scotiabank. Your line is open.
Good morning, Eric I, just wanted to follow up on the questions about the organic EBITDA and kind of you guys.
Put that out a bridge there. So I went talking about maybe two factors on the seems to be little bit of weakness in the corporate restaurant category corporate store category and then I think you alluded to to higher Opex for people and resources. So can you just give us a little bit or color on both those categories in kind of where you see them playing out over the next 12 months.
Yeah. That's that's a that's a good question for four to corporate stores that we are slightly weaker than actually we are weaker than last year.
Theres theirs.
It's really a tale of few stores only so we are addressing those.
Those are those are some stores that are struggling.
That we need to address some of them need to close some of them need to be.
Managed better than some of them need to be put into hands of a capable franchisees. If we're if we're not finding the right people to manage those stores.
So there's certainly a part of that Theres also some stores that are.
Suffering from Roadwork ill give you. An example, we have a store Knoxville and Lake shore.
And there is machinery, that's literally blocking the door. So the customers got go away. So.
I mean, there's we're losing a lot of EBITDA would with some of these stores and some of their old work, that's going on hopefully for the winter some of it will subside, but.
We don't have any guarantees for that.
Theres also last year, we sold.
Our most of our Pink Berry stores, we add in New York City.
And those stores in Q3 was the strong quarter for those stores. So there were extremely profitable in Q3.
But for the rest of the year. It was a slightly more difficult operation for us to manage especially trying to manage an operation in New York City from an office Thats based in Arizona, So those stores where franchise.
And they will do produce.
Much better results with into has of the franchisee.
But obviously for Q3 it makes it makes our EBITDA it looks like its decline.
Okay, great and maybe quantify the I think you alluded to earlier like we're hiring some folks and we're investing in accounting centers can you maybe quantify them out for us.
No.
No I mean.
I can tell you we were we invested people.
I want I, one quantified the amounts, but we did invest in the in more resources into development groups.
Because we believe.
That if we want to open stores and the with the number of brands, we have it's not fair for the.
Selected few people, we had to try to sell everything and franchise. All these concepts and do it well for all of them.
So we did we did add a certain number of people when we finally completed our team.
A few weeks ago, I think two or three weeks ago.
So we have been looking for some people in certain regions for longer time.
So thats done we've added.
Certain number of people also in our.
Supply chain and procurement group, where we think that we can bring more value for our franchisees and for the corporation.
By having a little bit more people given the expansion in number of brands we have Andy.
The complexity of our business, it's getting a little bit more.
It's a lot more work. So we we've added people there and obviously, we have a lot more people in accounting just because of the new accounting standards.
Just to give you an idea we have we have we had to higher 13th temporary people just for FRS 16.
Just to be able to deliver that and thats on top of I FRS nine and as far as 15 that are also there.
So obviously, that's a that's bringing a lot more resources into the company and they're not optional.
So in a nutshell thats, where we added people.
Okay, and that's really helpful.
I'll see you guys called out a bit of weakness in Ontario from the malls.
Maybe a little bit color there is.
Maybe which malls that would be in.
Just wondering if your thing that give you start of a bigger trend there.
Yeah, not sure it would be whites for me to tell you, which malls that we were weekend, Georgia I guess.
Okay.
No I think in general the malls were slightly weaker in Ontario.
I wouldn't read too much into it.
It's hard to really drive conclusions from one quarter.
For one territory.
So we need we need to wait a little bit longer to see if it was related to.
External noise or if it was related to the performance of the malls themselves.
Which we've been seeing in the past few years, especially in Canada as did the malls are still strong.
And we still believe that the malls are good businesses for us.
But obviously, we're tracking the data very.
Without a lot of attention because we want to make sure that if there is if there is a shift in the in how the malls behave we're going to have to be and reacting very quickly to to make sure we don't.
On end up in trouble in a few years, but as I mentioned on the call our exposure to malls is getting lower and lower.
Especially in the U.S., but even in Canada. The percentages is getting lower so I think thats a natural.
Way for us to look at things.
Hi enough on just one last one if I may on on.
Im just wondering what is the reason why.
The Corp. The Papa Murphy's corporate stores underperformed the rest of the network I guess from a same store sales perspective, and can you maybe these share with us like a timeline.
As to when you think you're going to kind of.
Franchise.
Most corporate stores.
Yeah well.
In terms of corporate stores I think in general our corporate stores underperform the rest of the network.
And I think the reason is pretty simple when you have a franchisee in the store.
It's always better than than having the corporation try to manage them. They have more attention to the little details that to get involved in their communities.
Yeah.
Really put all their energy in there they make sure that everything is top notch in terms of purchasing in terms of scheduling in terms of everything.
When we're trying to manage a corporate store from a distance while we managed to rest of the franchise network. It's hard for us to do as good a job as our franchisees wooden we're just not wired properly too.
To manage corporate stores at the moment, so it's not specific to Papa Murphy's that the corporate stores underperform. The rest of the network, it's pretty widespread now when it comes to Papa Murphy's because of the number of stores we have.
We have restructured the operations team to put more emphasis on these.
And these corporate stores and put more and more energy to bring them to bar and hopefully recover and bring them back to where it should be.
Especially the ones, where we're not going to be refranchising the stores.
For the ones that are being re franchised.
We have agreements signed with two groups that are taking a cluster of source quarter given territories.
We have another agreement that see that seems to be coming close to being signed also.
So I think between Q4 in Q1, we should we should be at least 50% of our corporate stores should be franchise, where Papa Murphy's.
Thanks for answering is very helpful.
Your next question comes on line of Lisabeth Johnston from Laurentian Bank Securities. Your line is open.
Hi, good morning, Eric.
Hi this.
Im just going back to the international segment.
Good to see an improvement directionally in same store sales growth.
But can you talk maybe a little bit more about what you think could be done should continue to improve or what you're already doing in terms of strategy.
Oh, you mentioned the question of the closures there is it just a matter of closing underperforming locations any additional color would be helpful.
Yeah, well first I'll comment on you, saying, we're improving directionally.
Versus the previous quarters, but for me anytime we have a negative were deteriorating further done than previous quarters. So.
The negative is less but it's still negative so I want to bring it back to positive.
There's a few things going on in the markets where we're at.
Obviously, the middle East economies are really struggling other than a few countries, but the countries where we are.
Seem to be struggling the most so you we Saudi Arabia.
Our stores or are struggling for most part Bahrain is also struggling and the closure as you've seen they're coming from those countries.
We try to help our partners as much as possible to make the stores profitable we're working with our partners on the supply chain, we're working with our partners on the certain number of things.
To try to help them make the stores profitable and weathered the storm eventually the economies are going to come back and we're going to do better.
So for the Middle East, it's still tricky, we haven't few stores in Asia also that that are struggling and this is for the most part external factors that we can't control. So you have.
All that being under severe construction you have rolled word to have all these things that are affecting the stores, but that normally should come back to normal at some point next year.
So again, that's it's a matter for us of trying to weather the storm.
I'm trying to.
[noise] do as well as possible to help our franchisees survive, while the problems last and hopefully still be there when when the.
The more shiny daves comment that the stores can recover to the level they were before.
So in that regard then have you been implemented at lower royalty rate on royalty rate.
LTC relief in order to help tragedies in that region.
No we tried to work on different things royalty relief usually is.
It's very temporary solution, but it doesn't help in the long run so instead of doing that we're trying more to.
Help them improve profitability with supply chain improved profitability with.
Marketing material.
Innovation, if we havent chance. So we're trying to help them with with more long term solutions that will drive the traffic and that will drive to customers into the stores.
Instead of going for a quick branded solution that really doesn't solve anything.
Okay, and I suppose I would ask you how long you think it will be well be negative for that would be almost impossible to say.
Yeah, I wish I had a good answer for that but especially for territories that are outside of North America, it's a little bit harder for us to have that.
In the right visibility in.
A good take on on the economies it would be.
I don't think it would be right for me to try to predict how the Dubai going to economy is going to do.
Next year to year after.
They have the global Expo and you we next year, how much traffic thats going to drive I'm not sure. So there's a few things going on that Theres.
The World Cup in Qatar in a few years, how much traffic thats going to drive I don't know.
This is going to drive traffic before the event for the construction or is it only specific good Wendy event is going to happen I'm not sure.
So I wish I had an answer for that but I don't.
Okay I understood.
Turning over to different topic here on M&A I'm, just wondering when it comes to valuations have you seen multiples in Canada in the U.S. for deals are starting to move higher on average have you found that you've had to pay more for some of your deals any color on when it comes devaluation.
No I think.
Multiples went up a few years ago when when there was when the IPO market was very hard for smaller companies I think now that the IPO market does become more normal.
Multiples of.
Let's come back to a reasonable level and there you are pretty steady.
Sleeved bigger assets tend to come in higher multiples and that's that's a function of having more people interested including private equity groups.
But since we're not going after large targets for four to meantime.
We find we find that the multiples are.
Right spot.
Most of it falls in the in the normal empty why range multiple that we're going after so.
We are happy we're happy with the multiples are where they are at the moment.
Okay, Great and just one final question for me perspective at the food processing and distribution sales.
Obviously, we're seeing very strong growth in that.
Can you just don't discuss a little further you already alluded to in your prepared remarks, but maybe more detail of what we expect in terms of have to gross contribution either for Q4, if you're able to give those specifics or just generally.
Feature.
Yeah, well for Q4 is obviously, there's a the distribution and food processing portion of the Categoric acquisition that that's going to be our fourth quarter.
So if we didnt have comparables last year for that business. So that's a that's going to be in addition in our retail business.
Is really is really doing well the moments our sales are increasing fast.
And we're looking at the portfolio, we're happy with the products, we have with the launches we have.
Scheduled for for this quarter next quarter and even.
After.
So so we're seeing really good growth there I think Q3 of last year was an anomaly in terms of the margins.
And when you look at Q4.
Last year to margins really leveled off and it was an offset between the one quarter and the other I think this year were allowed steadier, so you're going to see continuous growth in that segment, where we're driving.
Normal margins.
The business keeps growing quarter over quarter, so I'm expecting a good Q4.
And a good Q1 of next year also.
With the retail business.
Okay, Great. That's it from me thank you.
As a reminder, if you'd like to ask a question press Star one on your telephone. Your next question comes from the line of Lasalle from TD Securities. Your line is open.
Good morning, Erika I, just wondering if you just could remind us what what concepts are in the middle East and and Asia.
Maybe the if which ones are doing better than others.
Yeah, we have a lot of concepts.
In Asia, it's mainly it's mainly cold stone.
But we have a lot of concepts in the middle East we have.
We have called song we have analyses.
We have a number of other gone so a number of other concepts that are there and.
Lower number of stores.
We have Papa Murphy's also in you we have.
Yes, I know it so we have.
Hi Express is there. So we have a number we probably have about 12 15 concepts in the middle East.
But the two main ones are really of analyses and goldstone during those are the ones that.
The highest volume of business.
And in terms of Middle East I don't think anybody is doing great at the moment.
And in Asia, obviously, it's cold stone driven.
Okay, Thanks for that and I.
Let me just drilling backed out on on the U.S. side I was wondering if you can explain like two things. One there was there was a big jump in and sale of goods and second the EBITDA margin.
Came in at 24% and that's that's down significantly from 36 sequentially like last quarter just wondering.
What's the dynamic is there and what we can expect in terms of normalized margins.
Yeah, well the U.S. the sale of goods is coming from the corporate stores or Papa Murphy's. We just added over 100 corporate stores. So that obviously, we're selling a lot of goods, there which are not the normal franchising revenues that you used to see and that will drive the margins down also if you look at the margins on a consolidated basis.
That's going to drive the margins down or corporate stores are profitable with Papa Murphy's, but don't generate the margins the franchise or would normally generate so higher volume of revenues the higher volume of expenses to generate.
Profit dollars, whereas franchising, obviously its low volumes.
But I have high margin items.
So so thats the main driver for the decrease in the margin.
I mean, theres Theres no secret there the more corporate stores you have to lower your consolidated margins are going to be.
Okay. So that explains like 12, roughly 12% difference is all corporate stores.
Yes for the most part that's what it is okay. Okay.
And maybe if maybe just talk about the partnership you guys announced back in and July with door Dash.
Hi, there had there been any impact on same store sales, maybe talk about the economics, there and just.
It was unclear. If this was was holding a week promo or or is this a bigger rollout.
Yeah, we have.
And then we have a we have partnerships with door dashwood skip the dishes with Uber with Grubhub in different regions for different brands. We are we're going to have different partnerships.
But we are we are in partnerships with all of that major aggregators. It does have an impact on same store sales.
These aggregators do drive some additional traffic into the stores, it's hard to measure on much of it is incremental.
Versus if we don't do anything but.
For the moment that seems to be for most part incremental so we are driving business. We have a few brands that are more successful than others.
With the integrators.
And they are generating some really good results. We have some brands that are in the process of.
Launching with them and we have some brands that are not as relevant as others.
Where do you integrators that are not.
Producing large numbers. So we're we're assessing the situation we're trying to make most of our brands.
Friendly for Aggregators.
We're also trying to work with our franchisees.
Delivered a product.
And.
Logistically, it's not easy.
To operate in the store when you have all these aggregator so we need to we need to work on that also too.
Maker operations, a little bit.
Or adjusted for afford that new reality.
And I guess more specifically like how do you how do you view I guess Papa Murphy's and in the context of what's become.
Extremely competitive market, some would say irrational and with some of the bigger players in that segment.
Seemingly getting a lot more aggressive whether it's through fortress, saying or significant marketing and.
We're throwing more marketing and promo dollars at it.
Yeah, well Papa Murphy's has a better product.
And then all these guys. So we need we need to keep focusing on that product.
I think trying to compete with dominoes on price and on convenience and on everything is not necessarily the way to go for us because we I mean, we won't succeed so we need to focus on something else.
We need to focus on our product we need to.
The restored the innovation pipeline to bring new products to the market.
And we need to make ourselves convenient and we are we are delivering wood door dash.
And then more and more to customers are getting used to it we are seeing.
A good trend on online ordering also for up products.
So we need to make ourselves convenience, we need to make ourselves.
Easy for the customer to to get too.
And we need also to make our pizza deliverable, even though it's not make doesn't mean that deliver.
So I mean, we need we need to do all these things and we need to we need to work.
On that product to be a two to stay relevant in our market.
A major players like Dominos and Pizza hut and the other guys I think have.
One a lot more stores and we do lot more marketing resources than we do so we need to we need to compete on something else and the quality of our product needs to be the center of what we do.
And then I guess, where do you think you are in that that evolution in terms of.
Differentiated product or quality product.
Well the quality of the product is there. So we we are there.
Where where we need to.
Work is to make sure to customers understand that we have a better product and also for for some customers to remember that we have a better product. We are in 1400 locations in the U.S. So we are conveniently located in many different places and we just need to drive the customer through the door and make them use our product again bill.
They'll really enjoy it and then it's a certain extent.
Pizza for a lot of people is more about convenience and it's a very functional meal. When you when you drive and when you order your pizza I think for for Papa Murphy's the keys to be more than functional but to be create some emotional links with our customers.
Between the product and family and the customers and everyone.
To make sure that the customers do go forward that option.
Is there do you have any expectation of.
Having franchisees install ovens and have like a fully cooked product or.
Are you sticking with the with that whats your current strategy.
So it's a conversation we have all the time.
Theres always a there's always a discussion that theres, there's few things that we need to consider in there. The first one is if you. If you want to install 11 first there is a large costs for it the layout of the stores is not built for it and also you need to.
You know how do you need to have an exhaust system you need to have a certain number of different things. So installing innovation might seem simple, but it's not as simple as it looks.
And the other thing is we don't want to create too much confusion with our customer if we start baking in some stores and not making and other stores.
The consumer will walk in there will be disappointed because we don't making a restaurant or there will be surprising.
We just don't want to create too much confusion so.
If we did it I think we'd have to cover entirely certain markets with it and in a franchise environment, it's always difficult to to cover entire markets with within initiative like that.
Okay, and maybe just one final one for me you Didnt mention menu in your remarks.
That you had some initiatives in Canada that we're beginning to bear fruit I was wondering if you can maybe talk a little bit more about these.
And what you're doing specifically in this area.
Yes, well, we are conducting a deep dive on each of our brands.
We have we have a lot more focus on.
And how each individual stores performing.
How it's performing it its environment also and what we can expect from that store or what the store needs.
In order to bring it to perform we are also doing deep dives on the brands themselves to make sure that the brands.
Our still relevant they remain relevant in the long run we've had a number of initiatives.
Going on in some of our starting.
Somebody are starting to come out of it where we question pretty much everything from the logo through the food offering to the design of the stores to the way we market our products and we've done a number of those some of some of those are still going on where we did a little bit more work.
But some of them are starting to.
To come out and it's really interesting to see what comes out of these things when it comes out of these deep dives. It's a huge effort for the teams to do that but once once they're done I think it's going to really make our lives easier for 20 2022 anyone.
And after okay. Thanks for that I guess my final one is like where are you in that and that whole deep dive process.
Well, it's going to be continuous and now so.
And I want to have a deep dive and then let it go so we're going to do if we're going to do deep dives into continual basis. Now. So is there is probably going to be.
More and more diagnostics being run Navarro, a lot of our brands of all of our stores now going forward.
So we're putting obviously, we're putting more efforts into.
Into that and.
It's not something that we want to stop at something Thats.
We need to question ourselves all the time, we need to listen to the market. All the time the markets are changing faster now than they were even five years ago.
So we need to adjust to that also the consumer expects different things and they are at these shifts quite rapidly. So overseas I can't say, where we're 50% through 75% through because the reality is we're always starting over.
How much could weaken the dark.
Thank you.
Yeah No further questions at this time I will turn the call back over to the presenter for closing remarks.
Thank you everyone. Thanks for joining me on a call I look forward to speaking with you again at our next quarterly call for a year end 2019.
This concludes today's conference call you may now disconnect.