Q2 2020 MTY Food Group Inc Earnings Call
Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.
If anyone has any difficulties having become friends.
Sorry, followed by zero, operator assistance at any time before turning the meeting over to management. Please be advised on this conference call contain statements that are forward looking and subject to a number of risk and uncertainties that could cause actual results could differ materially from don't anticipate.
I would like to remind everyone. At this conference call is being recorded on Friday July.
2020, I would now like to tentacles over to your speaker today Easy Cafe, Chief Executive Officer. Please go ahead.
Good morning, everyone and thank you for joining me for Mt. Why second quarter of 2020 conference call. The press release Sunday Mdna would complete financial statements and related notes were issued earlier. This morning and are available on our website and on SEDAR [laughter] 40 Bucks ballpark, if I'm not pick it up she also did not get put into that got sick.
Please be aware that we will refer to certain indicators that are not all your first measures you can refer to our indeed mdna for more details.
I'd also remind you that all figures expressed on todays call are in Canadian dollars unless otherwise stated.
I will begin with an overview of the impact school that 19 on our business in some key highlights for the quarter.
From a high level perspective, covert 19 impacted most of our restaurant adversely the extent of the impact varied depending on the geography by geography locations. The type of food served in the weather.
The location with street from more office tower or other types of applications.
From a system sales perspective, the second half of March the month of April were hit the hardest. This was followed by a gradual recovery in the U.S. and a much more moderate pick up in Canada in May.
The latter can be explained by the greater exporter of our Canadian locations, two miles and office towers as well as by the larger proportion of casual dining restaurants in the Canadian portfolio.
We highlight a few key elements for the quarter.
First with the uncertainty created by called at 19, and the impact on impairment indicators complete impairment test was conducted on tangible and intangible assets as well as on goodwill.
The lower cash flow forecast combined with a higher weighted average cost of capital caused by the higher risk.
Assessed by the market to our business.
As a result of Golden 19, let us to record a nonrecurring noncash impairment charge of 120.3 million during the quarter.
Second very early in the gold at 19 pandemic, we implemented drastic cost control measures that yielded approximately $10 million and savings in our controllable expenses for the quarter.
At this time, we still have approximately 130 employees that remain for alone and we eliminated close to 100 permanent positions at the head office.
For the last few months, we operated the business when it extremely low cost base, which is not sustainable under long run.
As restaurants reopened we'd have to call back our people. So that we would provide to support our franchise partners need.
That being said, we will continue to aggressively manage our liquidities and adjusted a volatile market condition.
Third as indicated during the last conference call. We took decisive actions implementing a range of measures. This time to finally financially help our franchisees who are facing an abrupt halt in their business.
Example, we'd rather than a blanket deferral and royalties for four weeks and offered to second four week period to most of our brands. Some brands have benefited from additional deferrals based on the type of restaurants and the potential for mitigation of the C.L. decreases.
We also offered all our franchisees the option to either pay the deferred amounts early in exchange for 40% the basing that on royalties old or benefit from the interest free alone until the repayments or schedule.
The success of the basement offer helped the company generate much needed cash flows when our sales hit the bottom.
As of the ended the quarter there was $7.3 million.
In deferred royalties and advertising front contribution in accounts receivable.
The repayment of the deferred amounts will begin in the fall and will be stage over enough time to make the repayments possible for franchisees.
Fourth we were successful in negotiating an amendment to our existing credit facility that will provide more financial flexibility going forward and reduce the uncertainty related to our capital structure.
And you agreement incorporate some restrictions and our ability to pay dividends and repurchase shares until the debt to EBITDA ratio falls below 3.5 thing.
For the second quarter, our debt to EBITDA ratio was below 3.5 times, which we need to remain conservative as there will be considerable pressure on our covenants for the next few quarters given that the EBITDA is based on the previous 12 months of business and does not allow for the normalization of the impact of pandemic.
As part of the Amendment, we also rethinking the possibility to make small and medium sized acquisition should the opportunities arise.
Now here's a brief overview of our network. We finished the second quarter with 7236 locations during the quarter, we opened 48 locations of which 40% where in Canada and the rest in the U.S. and international and we closed 111 locations and one joint venture in which four of which 43 words.
Canada 61 into U.S. and paid international.
Network sales for the second quarter were down 19% to 671 million.
At peak level 2757 locations were temporarily goes.
In total closed 239000 business days were lost during the quarter as a result of those temporary closures representing lost sales of between 225 in $250 million.
Most of the stores that remained open saw their sales drastically reduced by restrictions on dining rooms and shelter in place measures.
While our locations are now gradually reopening overall customer traffic remains affected by various local regulation widespread work from home policies massive job losses and changes in consumer behavior.
As of the ended the quarter a thousand 470 stores were still grows and as of July nine death numbers down to 573 stores.
As a result of the impact of Golden like team our mall in office tower sales decreased from 21% of our total system sales last year to 11%. This year, while the proportion of sales from our street front location increased from 66% to 80%.
Minimill workflows for an extended period of time has and as Reopenings often came in later stages of the confinement plans by authorities and many food courts opened without seating areas for customers to enjoy our firm.
The reduction in our mall exporter started several years ago and has now been further exacerbated by Golden Monkey.
As for office tower from courts, the have been drastically affected by sea at all measures and a return to some sort of normal so you could take sometime.
Considering considering the circumstances, we will not be reporting same store sales until next year.
We believe the data would be misleading as it would only include the subset of locations that remained open and therefore would not be a fair reflection of our networks potential to generate royalties.
I would also.
Now I'd be a proper indicator of the health of our network since the goals locations would be excluded we believe that a combination of store closures days of business lost and system sales are more reliable data points and the current circumstances.
Our chief Financial Officer, and they say its own will now discuss empty wise financial results.
Thank you Eric Good morning, everyone before I comment on the resolved I would like to remind you that we implemented in our first quarter than you want I enforce 16 counting vendors related to leases.
We have selected not to restate comparative figures as permitted under the specific transitional provisions in the standard you.
You can see a more detailed description of the impact of new standard in our financial statements and Mdna.
I invite you to read those carefully as they haven't material impact on how the business is presented.
Revenues for the quarter decreased 22.1% from 125.6 million to 97.8 million, mainly because of the impact of dependent Nick the decrease mostly came from our recurring revenue streams, which are tightly correlated to our system sale.
On the bright side, our Papa Murphy's taken big concept right. During the month of April and May as well retail operations benefited from increased sales of grocery stores another food retailers during that period.
With the important decline in system sale EBITDA decreased by 46.6 person to 18.2 million or 18.6% of sales as compared to 34.1 million or 27.1% of sales for the same period last year.
We're very pleased by Papa Murphy's performance, which accounted for almost 50% of total EBITDA.
The net loss attributable to shareholders was 99.1 million or for.
$4.01 per share for the second quarter of 2020 compared to net income of 19.3 million or 76 cents per share for the same period last year.
The loss was mostly due to the noncash impairment charge of 120.3 million discussed earlier by Eric.
Turning now to liquidity and capital resources.
And the second quarter empty wise generated cash from operating activities of 19.2 million compared to 21.1 million last year.
The decline was limited by strict working capital management to preserve liquidity.
On a per diluted per diluted share basis, our cash flow from operations were 78 cents per diluted share during the second quarter of the year.
While they were 84 cents in the same period last year, a decrease of 7.1 person.
During the first two weeks of March the company repurchased and canceled shares for 9.2 million.
The share buybacks were stopped when it became clear that dependent make was going to hit in order to North America, we did.
For the same reason the payment of our normal quarterly dividend was suspended for the second quarter due to cobot 19.
Free cash flows were 28.9 million, resulting from a combination of the EBITDA generated during the quarter ended nonrecurring recurring proceeds from the sale of two groups of Papa Murphy's corporate locations during the quarter, which where we franchise.
Empty white ended the quarter in a healthy financial position.
That may 31st we had 49.9 million of cash on hand, and a long term debt a 536 million mainly in the form of hold backs on acquisition and bank facilities now I'll turn back to Eric for his conclusion.
Thank you really over the next few quarters. Our primary focus is to reopen restaurants provide customers with the safe and friendly environment and optimize the profitability of our restaurants, despite the limits and restrictions imposed by various local local authorities.
The company's focus will continue to be on innovation quality of food and customer service in each of the outlets maximizing the value offered to customers.
At this stage, we are confident that we will be able to regain customer confidence in our brands and restore to positive momentum similar to what was achieved in the first quarter of 2020.
However, just could take some time and will undoubtedly be the result of and relentless efforts to support our franchisees in every aspect of their business. We will continue to monitor to situation closely and we'll adapt our measures as needed going forward.
To conclude with cash on hand, just shy of 50 million over 190 million available on our credit facility and more flexibility provided by our amended financial covenants.
And few why remains in the financial position that will make the execution of its recovery blend in future growth plan, the only focus of our entire team.
Before we go to the Q any portion of the call I want to express my sincere gratitude to our employees who have faced the challenges of the past few months working with the skeleton crew and very limited resources to support them.
I also want to thank our colleagues that were furloughed during this difficult period for their patients and understanding.
In both cases, everyone handled the situation with extreme professionalism, both in a business and personal level.
With that thank you for your time and I will now proceed to answer your questions.
At this time, if you'd like to ask a question press star one on your telephone keypad to withdraw your question pressed upon Keith please wait while be compiled the question.
Your first question comes from the line of sub <unk>. Please go ahead.
Alright, Thanks, and good morning, just a question on it with you provided some color on the prepayment that you're able to collect on the Royal keys can you maybe give us an idea where you stand on back in terms of <unk> is that another offer you're making the franchisees for fiscal Q3 I'm going in terms of.
[laughter] amounts that you collected in Q2 was there any sort of pull forward of some of those collections or was it sort of here look you asked this much by the end of May you can pay offs and any deal with it on a quarter to someone understand that timing as well as you know is that an offer you're continuing to make you a franchisee. Thanks.
Yeah, no. It's not an offer to continue the with your was limited time offer where we offered our franchisees to either.
Hey, early for 40% of basement, and or a or basically continue deferring the royalties to a later period. There was on determined that the diamonds as still has to a certain extent.
So we offered that I think he was in early May late April early may and it was for a limited time about half of the network participated in.
In the basement I'm so.
It was a successful campaign for us I think franchisees appreciate it to have the options.
To either pay or a benefit from this interest free loan that we were offering them.
But yes. This is this is not something we're extending further it's a it was a one time offer and this is a this is over another.
Alright, Thanks for that and then in terms of or the relief. There you were able to get from your banks for the next four quarter are you able to show sort of any detailed and terminal.
The amount of flexibility getting underneath that and then you know how you're just generally feeling about the balance sheet over the next few quarters.
In terms of results do you think you know it's more of the LTM calculation on EBITDA that'll impact or do you see potential no sequential downside to the but just want to get your perspective on how you see that business evolving for the next few quarters.
Well for debt covenants I think we disclosed all the details in our as Dave mentioned, our Mdna we have.
We have basically.
A different the different maximum debt to EBITDA ratio for each quarter.
Going from 425 to 450 back to for 25 and after a year.
Back two to 350 that we typically have there are some restrictions around our debt than that our usage of cash as well there are some restrictions on dividends and on share buybacks and there is also restrictions on the amount of cash were allowed to hold in our bank account and.
And restrictions on acquisitions.
All that is subject to us being over the 3.5 ratio and we're not at quarter end.
But it just gives us a little bit of breathing room, and we're really happy with the with away everything went with our banks everybody was very supportive.
Why and understand that.
We need at the most its time and patients.
So everybody was onboard with us and we're happy that we were able to secure that so we don't have to think about our covenants anymore and we can just focus on our business.
In terms of the second part of your question regarding the future of the business.
I mean, Theres certainly June was better than than than April and May So sequentially, we are doing better.
But theres still a lot of ground to make up we're nowhere close to where we were before.
Mid March.
So so there is there's a lot of ground to make up and we still.
I have a lot of our location that need.
Significant increases in sales for for them to be where they should be financially.
So I mean I'll keep it at that I don't know what's in front of us for for July for August and for after it's all.
There's a lot of factors that we don't control at this point, we don't control how the consumer will react we don't consumer we don't we don't control how the pandemic will evolve where we're seeing some outbreaks into your Wes we're certainly not immune to it in Canada as well.
Where we don't know what form of government assistance is going to come our way or not come our way. So there's there's a lot of factors that we don't control.
But one thing for sure as we're trying to optimize everything that we do control. So that we not only protect empty why but more importantly, protect our network and tried to do the best we down for franchisees.
Okay and then just the last one for me on another store closures, how was that sort of in line with.
Well, you're expecting for the corridor, and where there any surprises by geography or banner ads that mix.
Wind down 112 stores that were Oh.
Now for Q2.
Yeah, that's more or less what we thought would happen I think we'll have better visibility on the impact of dependent making our Q3 by the end of August.
Now for four for Q2, everybody was suffering through the pandemic. There were a number of store closures that resulted from us not renewing leases because it was not good time for us to renewal leases. There was a lot of franchisees thinking the unfortunate also to move on to different things not knowing what's in front of them.
Especially in the early part of the pandemic, where there was there was not necessarily life at the end of that until now we know there is but at some point there was a little bit darker.
But now we were we're down to under 600 stores.
So we are focusing on those theres a number of them that down three open. So there's there's a good reason, but there's also a number of them that.
That are being challenged and we're trying to help our franchisees reopened their stores as much as possible and then do good business. So that they can recover and make a profit and save all these locations. So I think we'll know better by the end of Q3 with the real impact of the pandemic is and it's really hard for us to predict at this point in time.
If the store closures will be more or will be less than in Q2.
But we're certainly addressing the situation on the location by location basis to make sure that we optimize everything we can optimize.
Great. Thank you.
[laughter].
Your next question comes online ethnic Corcoran. Please go ahead.
Good morning.
Maybe diving into the brands a little bit more.
Thank you press release said that Papa Murphy's is relatively strong are there any drag that you can call out that have had a relative strength compared to other ones.
Yeah, I don't necessarily want to go on the brand by brand analysis at this point just because theres a.
There are there are so many factors that are play now that.
One brand that might have been doing great at one point in time might not necessarily be doing that good in the future and vice versa.
But yes, there there are few bright spots.
Quite a few bright spots actually we have a few brands that are.
Averaging better sales and the where last year at for it for me mainly in the even for for June after.
There are few brands that are struggling more the brands that are predominantly in shopping centers and our casual dining brands, while dining rooms were all close were suffering a little bit more.
But other than that I want to keep it a little bit more general this time I don't necessarily want to dive into a brand by brand analysis.
Okay, and then maybe taking a step back in particular the health.
Network.
How what is the health of your your franchisee network and is there any risks that job bookish narrow band wall will be forced to close for liquidity or other reasons.
Yeah, well did the health of the network obviously, it's been it's been challenged.
By the pandemic and buy everything Thats, taking place at the moment so.
Generally.
Oh I'm worried for a lot of our stores I'm happy with.
Where we are considering the circumstances, but certainly the number of locations that are fragile.
We need to pay attention to and.
Theres certainly a risk thats. Some locations that are currently open might close if if we can improve business. So.
And that's the same thing for with the pandemic or without a pandemic theres always a certain set of circumstances that need to happen floor franchisees to be running it profitable operation and now.
A lot of the parameters that we that we knew before have changed.
And some stores that were doing fantastic are struggling and some stores that might have been struggling before are finding themselves into much better position.
But overall, yes. There are there are some locations that are at risk and we are addressing those individually.
And then if we're if we were to think what the network maybe in terms of the number of location for same percentage of location that were cash flow positive can you give an indication of block.
Yeah, we I wish I had that information.
We don't have that granular information, especially.
In real time.
So I wouldn't have a good answer for you if I if I wanted to have one.
Okay and then the last question for me did you receive any funds from the Canadian or U.S.
Payroll protection programs.
No in the U.S. as we mentioned on the last conference call.
In the U.S., we hadn't made requests for funds.
We had four different requests.
There.
Two of them were funded by the government and we returned to funds when we when it became clear that the rules.
We're not meant to allow companies like empty why did benefit from the barrel protection program and we canceled the other two redress. So we met we get we got $0 from the U.S.
We are getting some subsidies in Canada for where the which subsidy.
So we got the I think we got the first three installments and now we're always challenge might at 30% decline in revenues rule. So there's no guarantee that we will get that subsidy for the subsequent periods.
And what was the amount of the Canadian.
Yeah, it's not something we're prepared to disclose at this time.
Okay. That's fair that's all for me. Thank you.
Your next question comes from line of Vishal Shreedhar. Please go ahead.
Michelle Your line is now open.
Hello can you hear me.
Yep Okay.
Okay, great so I understand that.
Management doesn't want to necessarily provide performance by by banner. However, maybe I just thought I'd try on cold stone because.
Situation, so unique given its dependence on.
Strong dependence on a particular season and the materiality in your finger business, maybe you can give some.
Qualitative color on Cold stone in what you think about that manner.
Yeah.
I can give you a little bit more information me, but maybe on goldstone.
So colds Copaxone as you know is a very important brands for us and as you mentioned the seasonally it's an important period for for Cold stone.
I'm going to say is cold stone is.
Is performing better than than the average of our network.
So we're pretty happy with where goldstone is at the moment.
Okay, and I understand that some of your businesses.
Don't get the ability to track how does that franchisees are doing but is called on one where you have better data on the franchising health because that's kind of inline with the average for the business.
No. It goes on we were in the process of implementing new tools to be able to track profitability better in cold stone when the better pandemics yet. So we are resuming the project now, but unfortunately, we were cut short of our.
Of our progress there and we do not have the granular data I think where we are going to have it in the next few months, but at the moment, we don't have it.
Okay.
[noise] the a bench.
Management tone at least from my perspective.
It sounds more encouraged relative to last quarter and you talked about.
Looking at acquisitions to extent that you're allowed by your your creditors. So maybe you can give us a sense of what you see in terms of that opportunity are you seeing file and and if you are what constitutes the medium and small size deal.
Yes, there is there's an opportunity for us if we if we want to acquire businesses, but at this point, we are not necessarily considering any acquisition, we are focusing 100% of our energy on the our current network of franchisees.
So we have chosen to.
I will focus on preserving the assets, we have and making sure we optimize everything we have in our portfolio.
Before we consider acquisition so.
It is out there. It's it is a possibility for us to do.
Small and medium deals, but we.
We are not at the moment considering anything even though they are files that are coming through.
[music].
And there are people that are putting the for sale sign in front of their business. We are not considering any of the moment.
Hi, Eric had before the Pentagon, a kit unity, when making a lot of changes to the business focusing on organic growth initiatives. Among one in so many initiatives.
Looking at this pandemic and reflecting on the changes that the consumer.
As it is going to at this moment and potentially in the future because that caused you to visit any of Mt wide strategies.
The types of businesses acquired where it wants to acquire if in fact, there will be as quickly to that's it wasn't the past and where management, but its focus and if so maybe you can highlight some of those to us.
Yeah, well, what I'm going to say that Im really happy we we've made the and you called it changes I would like to call. It adjustments, we had a great foundation to work with so I was not going to change everything, but we made some small adjustments to tweak the business slightly and I'm happy we made those adjustments because it's really paved the way to a better recovery for.
For defend them make now are we going to change our strategy to.
There are certain extent, yet we need to adjust our strategy again, there will be permanent changes and how consumers consume and where they are also in how we approach them. So there will be.
It will be changes in the marketing strategy, there will be changes in.
Which locations are the most relevant there will be changes on the type of food people are looking for there are changes in operations on how we need to serve our customers and what customers are expecting when they go to our restaurants.
So yes, there will be there will be tweaks undoubtedly.
In the future and is it going to affect future acquisitions, probably.
There will be a certain set of expectations were going to have and they're going to affect profitability. So.
We will definitely factor in everything we know now and two new acquisitions.
Yeah. The second part of your question asking if we were going to be as acquisitive in the future as we were in the past and the answer is yes.
Empty wise always been acquisitive, and we will be acquisitive. Once we go past that golden period and once we.
We move to handcuffs to a certain extent, we will we will certainly become acquisitive again.
It's part of our DNA is how we would have business to where it is and we will we will continue to grow by acquisition.
Okay, and just switching gears here management highlighted the $10 million of Opex savings.
As part of the initiatives taken early going the pandemic hit I understand and highlighted that some of these initiatives are now fading away into central be best reinvest back into certain.
[laughter] franchisee support so just wondering about 10 million how should we forecast those savings nothing forward is the bulk of that's 80.
Yeah, why not not necessarily going to give you guidance on how to prepare your models. So that's that's a few years, you're the expert but yes. There is there's definitely a certain amount of that $10 million that that will remain.
As as we are adjusting to business again, but there's also a certain amount that was just not sustainable at a point in time, where you have 2700 restaurants closed.
You can afford to shed a little bit of your.
Of your of your workforce.
The marketing was put to off to a certain expense. So again a lot of people.
To be the price for that there was also.
A lot of other people that that had to suffer for it and.
We also stopped a lot of the programs we had internally.
For various things.
That are that are normal business practices. So we just we just put a halt and everything that $10 million, it's certainly not a sustainable.
Saving that we can repeat every quarter.
And that we are.
As we mentioned in the number of employees that are still furloughed, we have called back a great number of people.
We are continuing to call back people now.
As we are adjusting to businesses are as franchisees need support.
As as marketing is required to as.
We have more invoices to process and accounting as our corporate stores reopened and as it affects every function and just to see dry itself that we're dealing with the landlord is requiring a massive amount of people just to process. All the paperwork. So we have to call back a number of people there.
So we're going back to.
Certain.
The certain state of normalcy.
In order to do that we need to we need to reinvest in the business and call back our people and.
To restore to programs, we had before and restored the expenses that we were incurring for normal business before.
Thank you agreements.
Hi, Dan if you like to ask a question press Star one on your telephone Keypad. Your next question comes from line. That's definitely a thought please go ahead.
Yes, Thanks, Eric and I guess that congratulations I think appeared to UN and your team for for managing through one unprecedent unprecedented pressure.
I just want to maybe follow up on on the last question.
Are you able to give up maybe a sense percentage wise.
What costs are sustainable is it 50% 25.
Cost reduction.
Yeah, I'm going to give you the same answer I gave the shallow unfortunately again I can't tell you there.
Okay.
Maybe just a few questions on on Papa Murphy's can you talk maybe helped with the re franchising of both location.
Any store that included and and the impact on.
Cash flow.
Yeah, well the impact on cash flows was that for the quarter $10 million.
So so you can see if India and the cash flow statement. So we it's basically two clusters of stores that we sold.
To franchisees.
There were sold to existing franchisee.
That are reinvesting more in the business.
Yes, so it's it's a certain number of stores and I don't have the exact number.
And but.
I believe it was seven stores for one and a little bit.
A slightly different number for the other.
So so yes, so we're refranchising these stores.
And it was part of the plan all along that we would pass these stores to franchisees that would probably do a better job managing these clusters of stores than we do we're just not wired to run corporate stores and franchisees have the proper organization to run them and we're seeing the performance of these stores.
If you're doing really good since we refranchised them. So is that the truth isn't isn't the putting.
Yeah. So so it's all it is we have a certain number of.
Geographies, where we have.
Our density of corporate stores, we will probably have more clusters of stores that we will sell in the future maybe not in 2020, but maybe going forward, we will have more.
And it's part of the plan for us to franchise these stores and to Refranchise organization.
Okay, and that 10 million dollar impact.
Free cash flow did you or are you able to quantify the.
The impact on EBITDA quarter.
No. The it's zero, it's not part of our EBITDA.
Part of EBITDA.
Not only.
And I mean, you didn't really difficult comp on on Papa Murphy's.
We were analyzed.
Right.
The EBITDA, that's about $32 million annualized just wondering.
And that's versus 30 million last 12 month, maybe can you just talked to some of the sales trends that you're seeing in this environment.
Yeah, well Papa Murphy's started we had we had a relatively weak March.
For Papa Murphy's.
And.
I think we were missing some of the sporting events that are normally important for four to brand like March madness.
I think March Madness concluded last year on April six where April eight.
And after we lap that last.
Major sporting event the sales just exploded.
So April was really good may was.
That's taken we continued on that trend.
So the business is doing good do we have also.
We did not really off or furlough anyone at Papa Murphy's, but we did put.
Put a freeze on a number of expenses that improved the EBITDA significantly for the brand.
So there's a few things that are at stake, but certainly it was it was a really good quarter overall for Papa Murphy's.
No for four franchise partners, where we do have access to profitability numbers for franchise partners for Papa Murphy's and profitability was up.
The territories that are traditionally a little bit weaker had good improvements in their sales and in their profitability as well.
So all in all it was it was a really good quarter and hopefully we can keep on that momentum and just continued to build on it.
Okay, and I guess, maybe just one last one for me in terms of the Colgate, obviously, we're seeing the.
Increasing severity of the pandemic and southern.
And just wondering particularly in one of your biggest market, California, maybe help us understand.
You know how you're looking at this and the potential impact on closure.
Yeah, well like everyone I think we're a little bit worried about what's going on in the U.S.. So far it hasn't affected our restaurants too much.
Because of how we are located in the types of restaurants, we haven't each location.
A number of our stores in California.
I would not reopened yet.
So the fact that.
They are closing back is not necessarily going to hurt us more that we are hurting in California, but it's not going to be worse than it was before.
But yeah, we are.
Worried that that there's going to be more stringent measures required for the country and we'd be detrimental to our business. So we're watching the situation like everyone and we want the situation to.
To go back to.
Two.
Having people healthy and having a normal life and being able to go to a restaurant without being worried about catching anything.
Hopefully things will get back under control Susan.
And then everybody is going to stay healthy and it's going to be better for not only our business much where everyone's businesses.
Okay. That's it for me thanks.
Your next question comes on line of Michael Glenn. Please go ahead.
Hey, good morning, Eric I'm, just wondering if he can speak to but when we when you reported Q on and you provided some guidance for free cash of about negative 10 million.
Period, and how that you know the forecasting was difficult at that point in time, but.
You know things came in rather massively ahead of that number.
I'm, just wondering if and I have some of that is an asset sale, but I just wonder if you can speak to some of the other elements that created the delta.
Yeah absolutely.
So yeah for sure we had the anticipated the cash burn of $10 million that cash burn included the share buybacks. So basically we we assumed we'd be more or less cash flow neutral maybe slightly negative for the quarter.
A few things came in a lot better than than we had anticipated.
No.
One of them as a decrease in interest rates decreases the door did help did contribute about a million dollars.
We had.
Fantastic performance on the working capital.
Really happy with.
It certainly came in a lot better than we thought we were able to defer a lot of payments to our suppliers and obviously that's going to put some pressure on our Q3 cash flows, but we are managing and.
No duty to 40% abatement offered to our franchisees have brought in a lot more cash than we had anticipated again. So all in all the working capital management was fantastic I'm really happy with the performance of the team there.
To to really preserved liquidities and make sure that.
That that we optimize every aspect and the last part two which is important as.
We did perform better than anticipated on EBITDA.
The month of May was a little bit better in terms of recovery in the U.S. and we had anticipated if you look at our Mdna, you'll see that you'll see that Canada.
It's not recovering as fast with US did have a good rebound so our royalties came in a little bit stronger than we thought there would and our cost control measures also yielded more results than what we were anticipating.
So these two factors combined together.
Caused.
Variance in our EBITDA and again, it's the environment to so volatiles that.
We had a number of different scenarios in hand, and the scenario, we chose to communicate to the street might've been a little bit too conservative considering what we know now.
Okay and then on.
On cash taxes was there.
Yeah, I know, there's some noise related to the asset.
Parents in the quarter, but.
It was was there any deferral on cash tax payments.
Yes.
The government of Canada.
Did allow people to companies to to defer their installment payments.
So thats pushed into Q3 in Q4.
So we will see more cash payments for taxes going forward. Obviously, we will have to re forecast everything to calculate the right amount of installments that are due for these periods.
But yes, there was some.
For on the.
Not only the income taxes, but also on the sales taxes site, which was also deferred into Q3.
So we did take advantage of these deferrals that were offered by the various governments.
And it was that there was only in Canada or is it in the U.S. as well.
Yes, typically the U.S. works differently. The installments are not paid on the monthly basis. So the installments, we're glad to be paid in Q3 in the U.S. anyways. So we did not take advantage of deferrals there.
Okay.
And then are you able to give.
Theres been some.
Perhaps some indications in the U.S. regarding landlords sorta capitulating in terms of rents and things like that.
Are you able to speak to some of that in terms of the U.S. and Canada are you seeing landlords become a little more lenient toward some rent levels.
[noise] and Lorenz levels that problem no.
Yes so.
Landlords are business partners the same way our franchisees are.
And we need to make sure that.
Everyone is going to be.
Hurting a little but that nobody shared nobody to shares to bigger part of the burden.
So we are in negotiations with our landlords.
In Canada.
Participate in the secret program.
In the us to offer us some forms of deferral or abatements, and it's really a landlord by landlord conversation that we need to have.
So far we're seeing that people are understanding and in general.
Most of the landlords are playing ball with us.
Doesn't mean that they're going to offer us, which we'd like to have in with maybe might be necessary for our business, but at least we're trying to.
Ask everyone to share a little part of the burden, but those are conversations that keep us busy.
3% of our time because there is.
The biggest fixed costs, we have four franchise locations and it's.
It's where it hurts the most of your sales are down so.
We're trying to work with our landlords, but at the same time, we understand that these landlords also have their obligations.
We also have their payments to make the need to still pay their real estate taxes their insurance.
You need to pay for the gardening the need to pay for all these things you need to pay for it or staff.
So we understand that he can give us free rent.
So we're trying to find the right balance with everyone and have that conversation to work in the partnership instead of working.
Against each other.
Okay, and just one more the royalty abatement.
Are you able to give some indication about if you take that 40% debate, but how does the accounting work on that exactly.
The balance of that but.
Yeah, the balance of that will go against our revenues. So basically it's a decrease in our revenues.
Yes, you have $100 and we give you back 40, we're going to deducted from our revenues.
Okay and does that is there any adjustment on account receivable as well for that yes, yes. Okay.
Okay.
For me thanks.
And there are no further questions at this time I will turn the call back over to their presenters for closing remarks.
Thank you again for joining us on this call. We look forward to speaking with you again on our next quarterly call. Thank you.
This concludes today's conference call you may now disconnect.
[music].