Q3 2020 MTY Food Group Inc Earnings Call

[music] good morning, ladies and gentlemen, thank you for standing by welcome to the M.T. wife, Citigroup, Inc. Q Sweet Twentytwenty earnings Conference call.

This time, all participants are in a listen only mode. Following.

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 any.

If anyone has any difficulties hearing the conference. Please press star followed by zero for operator assistance at any time before turning the meeting over to management. Please be advised that this conference call contains statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results.

To differ materially from those anticipated I would like.

I would like to remind everyone that this conference call is being recorded on Friday. The burden 19, 2020, I would like to turn the call over to your speaker today any clarified Chief Executive Officer. Please go ahead Sir.

Good morning, everyone and thank you for joining me for Mt Wise third quarter 2020 conference call. The press release and the Mdna would complete financial statements and related notes were issued earlier. This morning and are also available on our website and on SEDAR.

Spark a fun not because thats you also did not live today Patrick.

Please be aware that we will refer to certain indicators that are not under your forest measures you can refer to our end DNA for more details I also remind you that all figures expressed on todays call are in Canadian dollars unless otherwise stated.

First off I want to take the opportunity to thank our restaurant stuff works tirelessly to make the customer experience as good as good as it can be given the unusual circumstances and additional procedures and protective equipment that are required. Thanks.

Thank you to our head office staff.

We have been short handed for most of the quarter, who have found creative solutions to complex and volatile problems and to help our franchisees make the best of the current situation. Your engagement is making a difference.

Also want to thank our franchisees and many of whom are fighting against significant headwinds and making a tremendous effort to read.

To restore to success of their business.

And last I want to thank everyone, who is buying food from restaurants, whether they are in P.Y. restaurants or competitors are industry more to never needs to support for its customers.

I will begin with a summary of our results.

We are extremely pleased with our third quarter results given the current context and the challenges faced in the bank and the past few months well our system sales were down year over year. Many of our key financial performance metrics surpassed the third quarter of last year.

This improvement was driven by several factors. So charters are very strict discipline on controllable expenses tight cash management and the strong performance of many of our concepts, including the two largest cold stone creamery in Papa Murphy's.

In the quarter, we use the cash we generate it to repay $38 million on our long term debt and ended the quarter in a robust financial position.

Turning to an overview of our network.

We finished the quarter with 7123 locations, we opened 45 locations and permanently close to 157 locations and one joint venture.

We're not store or loss of 113.

We started the third quarter with 1470 temporarily closed locations.

During the quarter, many locations reopened with a gradual lifting a restrictive public measures, which allowed restaurants within the network to slowly resume operations, although in many cases at a reduced capacity.

We ended the quarter 364 locations, we're still temporarily closed.

System sales performance, followed a similar pattern as restrictions were lifted restaurants reopened and consumer confidence was gradually restored as such.

As such excluding the impact of acquisitions the year over year system sales decline improved from 24% in June to 16% in July and August.

If you remember that follows declines of 67% and 48% in April and May.

System sales for the quarter, reaching 897.5 million.

The declines remain more material in Canada and international locations than in the U.S., mainly because of the higher proportion of mall in office tower locations.

Which are 26%, 38% and 5% respectively for Canada International in the U.S.

Globally, our sales in mall locations were down 54% during the quarter, while office tower locations were down 86%.

Modern office tower locations represent 15% of empty wise locations at the end of the quarter.

Locations that remain temporarily closed are mostly located in mall locations office towers, and nontraditional locations, such as airports gems and universities.

Total approximately 52900 business days were lost during the quarter as a result of these temporary closures representing lost sales in excess of $80 million.

Evolving government imposed restrictions and public Oh, there already is response to cope in 19 continues to impact them to you why for example in October 1st the government have cut back and Bose.

Restrictions that caused many of our restaurants to close their dining rooms in patios and go back to takeout and delivery operations only.

Of note the cutback market directly represents 18.5% of total third quarter network sales, that's all of which came from casual dining restaurants.

The same time, we're seeing other jurisdictions lifting restrictions with obvious favorable impacts on our business.

Therefore ongoing government imposed restrictions will continue to impact the health of our network as a result over the coming months. The number of impacted locations will continue to fluctuate in response to the rapidly changing environment with a corresponding effect on consumer traffic volumes and revenue.

As we mentioned last quarter, considering the circumstances, we will not be reporting same store sales, we believe that a combination of store closures.

Days of business lost and system sales are more related reliable data points for the time being.

I will now turn it over to Renee, who will discuss empty wise financial results.

Thank you Eric Good morning, everyone before I comment on the results I would like to remind you that we implemented our first quarter in our first quarter than you I for a 16 accounting standards related to lease as we are.

We have selected not to restate comparative figures as permitted under the specific transitional provisions in the standard you can see a more detailed description of the impact of the new standard in our financial statements and Mdna I'm.

I'm, good and I invite you to read those carefully as they had a material impact on how the business is presented.

Revenues for the quarter decreased 16.1% from 161.2 million up 235.4 million, mainly because of the impact of dependent Nick.

The decrease mostly came from our recurring revenue streams, which declined in line with our system sales decline of 17%.

On a positive note two of our flagship brands Papa Murphy's and Cold Stone creamery represented 40% of total sales year to date.

They performed very well in the quarter. In addition, retail operations benefited from higher consumer spending in grocery stores, the launch of new products and expansion into new provinces, which generated 20% higher revenues during the quarter when compared to prior year.

It's also important to note that on a sequential basis revenues improved from 22% decline in the second quarter as our manufacturing and distribution businesses were impacted by the closure of our restaurants.

Despite the decline in revenues adjusted EBITDA increased 4% from 41.8 million last year to 43.4 million.

Excluding the impact of I ever 16, adjusted EBITDA would have been stable at 41.7 million, which is an exceptional performance and our current environment.

Well a decrease in recurrent recurring revenue streams brought on by the pandemic put pressure on profitability aggressive cost control measures that mitigated the negative impact there.

During the quarter. The company continued to preserve capital as a result of the temporary layoffs made in Q2.

Our Canadian segment also benefited from the Canada emergency wage subsidy, which contributed 2.6 million to EBITDA.

We also reduced travel and meal caused by restricting travel to a minimum and reduced office expenses, resulting mainly from our work from home policy.

With customers moving to online orders in food delivery. We also saw a significant decrease in our gift card program costs as customers are shifting to online electronic gift cards.

Net income attributable to shareholders was 22.9 million or 93 cents per share for the third quarter of 2020 compared to a net income of $22.9 million or 91 cents per share for the same period last year net.

Net income remains stable to the reduction in operating expenditures in response to the pandemic coupled with the contribution from Papa Murphy's and Cold Stone Creamery mentioned previously.

Turning now to liquidity and capital resources.

In the third quarter empty white generated cash flows from operating activities of 38.6 million or $1.56 per diluted share up 42% compared to 27.2 million or dollar an eight cents per share per diluted share for the same period last year the increase.

The increase was mainly driven by favorable variances in EBITDA, a reduction in income taxes and interest paid and by strict working capital management.

In turn we generated free cash flow of 37.1 million in the third quarter up 39% from 26.7 million for the same period last year.

As announced last quarter, we used the cash we generate it to pay down debt and did not pay a dividend or buyback shares during the.

During the quarter, we made repayments of 38 million on our long term debt and remain well within our credit agreement ratios we.

We ended the quarter in a healthy financial position with 43.8 million of cash on hand, and over 230 million available on our credit facilities and plan to continue to repay our debt in the fourth quarter where possible alter.

Ill turn it back to Eric for the conclusion.

Thank you Renee.

For next quarter, we will continue to monitor do you get back some of the pandemic adjust our operations through these volatile market conditions help our franchisees access government programs that are available to them and aggressively manage our expenses levels and liquidity.

Primary focus is to reopen restaurants help our franchisees succeed to the best of our ability and provide customers with a safe and friendly environment, while optimizing the profitability of our restaurants in these challenging times.

At this stage, we are confident that we will be able to regain and retain customer confidence in our brands and restored to positive momentum similar to what was achieved in the first quarter of 2020.

However, this could take several quarters, we will continue to monitor the situation closely and we'll adapt our measures as needed going forward and few why remains in a solid financial position to execute its recovery plan and pursue its growth strategy. When the time is right.

I would like to thank our employees customers and suppliers for their support during these unprecedented times with that I. Thank you for your time and we will now open the lines for questions operator.

Thank you at this time, if you like to ask a question press Star one on your telephone to withdraw your question press the pound key piece ways, probably compiled the question.

And your first question comes from minus Nick Carr, correct, but acumen capital. Please go ahead.

Good morning could you maybe give a little bit more color around how our cold stone and Papa Murphy's perform both in the quarter.

Of course.

Hi, Nick Yeah, well Goldstone performed extremely well during the quarter clearly.

Clearly it does benefit from from people I'd being at home a little bit more so a very good performance and the performance of September was also really good for gold zone. So there's a there's a good trend there continuing for calls already I mean, we got taken for granted how long it's going to be.

Last and obviously, we're getting into the seasonal low for this brand.

But the fact that we're performing well is still extremely positive.

For Papa Murphy's the same thing we had a very good summer.

And and performance of September was also good. So we're continuing on the same trend and nothing much has changed there and the environment of the U.S. and the past few months.

So we have we have our ups and downs, but I were.

Doing a lot to try to maintain that momentum and capitalize on it so that especially for Papa Murphy's as we're now entering the strong season for this brand, we're hoping that we're going to be able to maintain that momentum. So there's no guarantee that we don't know what's in the future.

What's in the future with the goal of it in with everything else that's going on.

But we're trying.

We're trying hard to capitalize on the momentum we gained in the summer.

Great then switching gears to keep back with a second wave.

Kinda restrictions and in the province, how do you see your brands being position for us to deliver.

Well most of our brands, our takeout and delivery in their DNA. So I mean, obviously, we have a now we're a little bit more in casual dining even though it's not a very large portion of our portfolio look forward to rest most of our brands, our takeout and delivery brands and operations and their very nature or you look at our brands.

We just talked about cold stone and Papa Murphy's those are.

Makeup brands you looked at our sushi brands their takeout brands you look at.

You look at our Tai brands, and obviously, where we're suffering a little bit more in malls, but for for whatever is on the street. It is a takeout Brandon you look at our larger brands and for the most part they are takeout and delivery brands. So obviously there are adjustments we need to make when when the pandemic had some we've we've now had seven months.

To prepare for these things so I'm not saying, we're not going to have an impact. If there is a very massive second wave and theres more restrictions, but I think we're better prepared now than we were in March when everything unfolded really fast.

Great then the last question for me with two quarters of really strong cash flow generation, what would you need to see to reinstate either the dividend or the.

<unk>.

Yeah, we need to remain prudent we don't know whats in the future I wish I had a very reliable crystal ball, but I don't.

So so we have the discussion with the board yesterday.

As to whether we should reinstate the dividend or not I don't think we're at that point, yet I don't think were out of the woods with this pandemic. So.

So we decided to be prudent and allocated 100% of our funds to our long term debt so that we.

You can do we can protect our balance sheet and you know if everything goes well, we're going to have more dry powder for more acquisitions down the road and if a if there is a second wave at least we're going to have a protected.

Resources, we had done and made sure that the company was robust so crude.

Prudence I think is still the main elements for us so for the fourth quarter to our capital allocation strategy is going 100% against our depth and it's good it's going to be the same as the second and third quarter basically.

Great. Thanks for taking my questions.

And your next question comes from the line of sub <unk> with RBC capital markets. Please go ahead.

Thanks, and good morning, just on the $10 million of cost savings that you called out in the quarter EBITDA.

Talk about where those were and I'm trying to get an understanding of those can continue into subsequent quarters. It seems like most of your network is open now for those could be a laundry, but want to get more color on what they are.

Yeah, there's there's a large portion of it that's coming from salaries.

As you know we have deferred a little a lot of people. So a lot of people sacrifice no four afford a company in for for the future of empty why.

Starting in September we had to make a decision on everyone and either we called them back or are we terminated people. So in all I think we terminated permanently about a 125 people.

So those will be permanent savings, but the rest of the people were all called back in September.

Or before.

So there is a portion of it there is a portion of these expenses that are going to come back and hopefully it's going to go.

Along with higher sales as well so that we can afford to pay for these additional expenses.

But there is a large portion of our expenses also that I think weve learn new ways of doing things during the pandemic we.

These events force you to take a step back and reassess the way you do things and reassess that where you want to look at things so there.

So theres a good portion of it that's that's going to be a permanent savings so not saying all of it can be permanent but there is a portion of it that will be but definite.

But definitely in terms of whatever wages, we sale.

Some of it will not be permanent and as we disclosed in our notes and as Randy mentioned during Uh Huh.

The commission script she.

She mentioned the amount of which subsidies we got so that obviously.

That obviously is not something that's permanent does our revenues will go up the wage subsidy will will phase out and and you'll see that one disappear at some point hopefully.

Okay, great. Thanks, and then can you maybe provide an update on the sort of the royalty collection, where we are on that.

Okay accelerate a royalty payment option for your franchisees can you just talk about how the royalty collection of going across their network.

Yeah, well you know, what that's it's going pretty well off.

All things considered and obviously if you look at our notes, you'll you'll see that we made larger allowances for.

For for collection problems for collection losses.

So we do have.

More provisions than we had in the past and we do expect that theres going to be more franchisees that might not be able to pay.

But all things considered it's doing pretty well and for the deferred amounts are being collected at the moment.

For the for the most part our franchisees are understanding that this is this is our bread and butter and we need to we need to collect these these royalties.

Obviously whenever we have more restrictions that causes more challenges for us to collect.

But all in all considering everything we're pretty satisfied with where we are sitting now.

Hi, Thanks, and then just last one from me could you provide a bit of color on sort of the takeout and delivery during Q3, and then where those trends are I know what you're seeing there.

Your own App, perhaps what you're seeing with aggregators or where the network is on.

On some of those platforms.

So.

Yeah, well, we I'm not going to give you a full network percentage it because it's because of the number of concepts. We have it wouldn't necessarily be a very good data point for you, but there has been an increase for sure in the past few months.

We were seeing some customers.

Phasing out of delivery and going more in the pick out options with tends to deal with these tend to be cheaper.

For the customer they are better for us as well so.

So we're for sure.

Trying to Bush every channel we have to sell to our customers. If we have a chance to favor takeout over delivery I think its a its cheaper for everyone. The customer experience tends to be more controllable for us as well but.

But there has been an increase we are investing in these tools. We are spending a considerable amount of time trying to maximize every channel. We have we are spending some.

Important amounts of money also into.

Promoting these channels and making sure that our franchise.

Our franchisees are maximizing it and that we are maximizing it our our web sites or are being challenged as well in terms of how functional they are and how seamless do you experience can be so we are building building rebuilding a few of our web sites.

And and.

And obviously I think this is a trend that's here to stay. So these investments are going to be important now and they are going to be important in the future as well.

Okay, great. Thank you.

And your next question comes the line of Vishal Shreedhar National Bank. Please go ahead.

Thanks.

Yeah.

Sorry have a shot I can't hear you.

Sorry, the shall I can't hear the question.

[laughter] pricing.

Yeah.

Operator can we move to the next person please.

Of course, one moment please.

And your next question comes from the line, that's my called glad with Raymond James. Please go ahead.

Hey, good morning.

Eric just hoping that you can provide some insights into how.

How your franchisees in Canada are they is there a active participation.

In the secret in the skews programs and what kind of Ben.

Benefits are getting from participation.

Yeah for sure to wage subsidy is is a key program and.

And making the industry survives and not only our industry, but many other industries. It's also key programs for our suppliers for our distributors for everyone that.

That is involved around here and around the restaurants so.

The fact that this program was extended well into 2021 is certainly there.

A key attribute for.

Attribute for for everyone, including Mt why.

So so we're really happy with that and I have to assume that all our franchisees that are eligible have participated we did provide a lot of information to them to try to get to guide them on how this was going to work and how to access the program in terms of secret.

Wherever the franchisees are eligible for it and as you know the criteria are pretty strict there and it does exclude a number of our franchisees, but wherever it's applicable I would say that the vast vast majority of our franchisees have had access to it and didn't take the benefit from it so.

Our landlords are for the most part understanding.

We see that our industry is in trouble, it's not only.

Empty wise stores that are facing challenges, it's all of the restaurant industry. If you look at that.

The major urban areas that are pretty much deserted, though you look at the mall food courts the office towers.

There is there is a lot less business than there was so with obviously dry I don't think any.

Many restaurant and really survive so.

So the landlords are understanding.

Been amazing to work with for the vast majority of them. So.

So we're pretty happy with where we stand now.

Now that leaves all the restaurants that did not qualify for C dried and we're working diligently with our landlords to try to.

Find ways to make it a little bit more palatable financially for our franchisees and for anyway.

But I would say that the relationship with the landlords as Ben.

Very very positive.

No. There is there is a few exceptions, obviously and mainly with the with the smaller landlords that maybe can afford to give us any abatement or any form of assistance, but for the vast majority of landlords it's been extremely positive.

And with secret I don't know if we've seen all of the detailed step program.

Takes on a bit of a new farm post October 1st is that a bigger benefit to your franchisees under the new rules were.

We're still waiting for the rules on this one I don't think unless I missed something I don't think anything.

Anything has really been disclosed yet so we know something might becoming although it hasn't been 100% confirmed.

We're still waiting for that and we do have the details of the provincial program for Qubec.

And were satisfied with that program the mechanics are a little bit complicated, but all in all its a good program, but as far as the federal government is concerned we're still waiting for details.

Okay, and then where would your where do you think your leverage would need to be there.

For the company would would start to look at some M&A options.

I don't think its related to leverage really at this point I think it's more related to.

Having better visibility on where the world is going.

So I think in terms of leverage where we're at a point now that is.

He is getting a little bit more comfortable.

So I think financially.

You know if everything stayed equal we'd probably be looking at that something but we don't know what tomorrow holds and if they are.

If there's more problems coming our way.

Starting next week or next month, I think we need to be prudent. So no. We're not closing the door on anything and if the if there is an unfortunate either comes our way that we really need to.

Look at that and we will but for.

But for the moment Prudence is.

His forward to next quarter is going to be the way to go for us.

And how would you characterize the opportunity set for M&A right now.

Well there is.

There is a lot of financial distress in our industry.

So we're seeing a lot of distressed concepts come our way.

Especially in the U.S.

Where there has been probably more distressed and in Canada.

Even though we tend to do better in the U.S. and not everyone does.

So, but I expect a seller's market too.

At full gear very soon so we'll probably see some some good concepts change hands very soon.

And we'll be ready I mean, we're we're not closing the door on anything and if a process starts today is not going to end.

In a month from now we would go into 2021, so we probably invest sometime in it but.

I think the good quality sellers at the moment are not on the market. The good quality sellers will come when when it's a better market for them to do so without having to discount their their assets.

Okay. That's it for me thanks.

And your next question comes from the line of charged him up with Scotia Bank. Please go ahead.

Yeah. Good morning, Erik last conference call, you mentioned that we'll know more the impact of the pandemic on store closures at the end of Q3 sort. So here. We are can you maybe give us an update on that.

Yeah, well I think you've seen the number of restaurants, we have that are so close at the moment. So obviously, we do have better visibility. We don't have full visibility because we don't know five theres going to be a second wave or how hard it is going to be we know we are better prepared we though we understand how this all works.

Better now the assistance programs or are in place. So we do have better visibility you see our store closures are not necessarily a much higher than normal.

And.

So among the stores that are still closed some of them just threeq levels.

Last week with the government of Qubec announcing new restrictions. So we had a few casual dining restaurants that flows.

And the other ones for the most part there. They are so close because they just don't have any business and whether they're in airports and fitness facilities are in office towers.

There's there's just no reason for them to open.

So we are starting to get better visibility.

Your next question is going to be how many of those are going to close and I'm not going to answer that question is when you don't get any.

Guidance.

Okay, I was going to ask but sure maybe on the Qubec locations you mentioned earlier the lockdown.

Can you talk a little bit about what you think the expected sales for those stores would be maybe versus the last lockdown.

Well the sales will be better. There is no question now are there going to be sufficient no absolutely not for four to casual dining restaurants its a.

You know there is there is going to be a few restaurants that will do better depending on on the customers around the restaurant and different.

Different attributes of each restaurant franchisees, but I know the sales are not sufficient to make ends meet for sure.

Thats a good thing we have the provincial program there.

As announced to help us with the fixed costs.

So that's that's already big Big help that were waiting for the federal government to announce something under.

On the rest of the business, but.

Yes, we just don't know how long it's going to last for now it's on until October 28 is it going to be extended or not we don't know we can all guests, but at this point, it's all speculation.

But yes sales are going to be better than the first time around.

But there is still not sufficient to make at restaurants make a profit so we need to his assistance programs.

Okay I just wanted to follow up on the earlier question on the on the royalty abatement program.

And we determined that deferral period, you can maybe share some color on who hasn't paid royalties back by banner made my job.

Fears or by type of location.

Well did there that everyone is repaying the royalties at the moment. So all the concept started repaying we did have a programs for repayment that worked with some brands repayment over six months and some other over 12 months.

We started collecting in September to first week of September.

So so that's that's all it is for now there is a there is a we tried to make it as simple as possible we tried to make it.

As small as possible for the franchisees on a weekly basis. So they don't have to.

Face large repayments of royalties on top of everything else that need to be.

So thats why we chose to four.

For most of our franchisees, it's between six and 12 months on repayments and it breaks it down into smaller amounts.

Okay.

Eric I think you gave some color on Papa Murphy's you said you did the.

Concept accounted for 50 million the year over year growth and EBITDA for the first nine months would you have that number just for this quarter.

Uh huh.

[music].

Well no I don't.

Okay.

And just one last one just to clarify maybe for an air for yourself.

I know I called 2.6 million of waste subsidies in the quarter is there anything else like from terms of government aid be like.

The other item or maybe talk deferral reading the receipt. We also received this quarter.

Yes, there is no other subsidies so.

That's the only one we got and it's it's a good number of.

It's a good number so.

It's immaterial for us and we really appreciate it.

In terms of other government programs that we did have a.

A deferral and payment of tax installments in Canada to September Thirtyth. So those were paid in September.

So so thats that is more or less at theres nothing else out there other than that.

Thanks for the answers.

And your next question comes from the line of static Lasalle with TD Securities. Please go ahead.

Yeah, Good morning, everybody and I guess, congratulations there can you achieve it.

It's a difficult environment out there.

Maybe if I can just get you did.

You did highlight that you wanted to continue the momentum of Papa Murphy's Q4, just wondering if you could highlight some of the initiatives that Youve got on the go whether from a marketing that.

Pointer promo standpoint.

Yeah, there's a lot going on up.

Papa Murphy's and.

I'm not going to tell.

Tell you all of what we're doing because we have a lot of regions species specific initiatives also so I am going to bore you to death for two hours, but we do have a few major initiatives. We have the one now that said that's actually a lot of fun is.

The trade your frozen pizza, so we're asking people to go in there for either and that figure.

The galafold frozen pizzas that they have and treat them for for Papa Murphy's Pizza.

That's a lot of fun actually if you can follow it on Twitter it is and Theres people that find.

Five year past due frozen pizza, there freezers and it's created a good buzz on social media we.

We also have the tail baking soda.

So we are associating with them with the football season, the NFL football season.

Like this weekend, we're going into a football stadium, and where we're going forward.

For the party in the parking lot and.

And we're calling it theyll bake so it's we're making fund with these things.

So we have a number of these initiatives that are going on some some more major some smaller and we've also reshuffle the way we do marketing in the way we approach our customers.

Obviously, the old medias are not as relevant as before so we're we're we're adjusting that and theres going to be more changes coming but im really proud of everything were doing in terms of marketing that we've started to ship around.

Is quite impressive so Steve do.

Stay tuned because there is a lot more to come.

But I think we have a lot of good things going now to make the brand relevant again.

As one of the things we know.

We noticed when we acquired it just over a year ago.

As everybody loved the brand, but nobody goes.

So I talk to my Mike.

Mike we're drivers to my job drivers. They all said, we love Papa Murphy's and when I asked him When's. The last time, you went they said well maybe 10 years ago.

So that's not good enough for us or we are trying to make the brand relevant we're trying to make the brand fun younger also to attract a different drought and it seems to be working at the moment.

Some some dollar.

Sounds all probably I wonder.

You have any.

Metrics on how you're performing I guess relative to fresh pizza.

Keep the QSR.

Yeah, well, we we were.

We're kind of in between the frozen in the end the fresh.

So we do compare to other players in the fresh pizza with but we also compare to whatever is going on with frozen.

So I'm not going to.

Start putting numbers out there to compare against one or against the other but I think we're we're faring pretty well.

Okay.

Sure. Let me a couple of more questions. I guess, you mentioned in your remarks that Papa Murphy's and cold stone were like almost 50% of revenues.

And obviously the majority of the U.S. sales.

Okay. So I guess, if you're if your U.S. royalty was down overall was down $2 million year over year does that mean cold stone with Comping negatively, especially if you take into consideration like how strong the pizza environments has been.

No go some costs on those by Comping positive.

Domestic us was comping very strong.

Internationally, it was a little bit more challenging we're we're in different jurisdictions internationally, where.

We're located in malls and in major urban centers. So.

International was a little bit more difficult for cold stone, but domestically extremely positive and overall positive.

So no, but we do have concepts for example in the U.S. said that our major concepts for us that are predominantly in California, where restrictions haven't been lifted they've been sort of lifted for a few weeks and then they were put back in place.

So these concepts that are predominantly California are struggling a little bit more we also have or.

Or New York City, and basically all of new England, that's a little bit more different.

More difficult. So we do have concepts that are in pockets that are in these areas that are more difficult and we also.

We also have suite frog, that's another concept thats, especially in the summer it's an important one for us.

It's a self serve type of concept, which is a problem for covance and were not allowed to operate normally and it.

And it does take away a lot of the.

Activeness of the brand to consumers. So this brand is also down four to the best season for for this brand so.

All in all in the U.S. cycles on Papa Murphy's Comping positive and very strong, but some other concepts are a little bit more challenged okay that I mean, that's that's great color. Eric just wondering maybe go down a little bit more in California, what what would be your top concepts there.

Well Baja fresh is one of them.

The counters another one those those two concepts or us.

More impacted by restrictions government restrictions than others. So.

So those are two of the main ones.

That are.

That are being affected okay. Okay. Thanks for that and one last one for me.

Great Great job Boston.

Controlling your expenses and you did get at a 2.6 million dollar benefit from the wage subsidy.

Just wondering how if im looking at your your financials properly effect that you paid 7.7 billion or so in in cost of goods sold in and read but you have 95% of your locations opened its just wondering if you could help me tie those two together.

So you're questioning why the Cogs are solo or why they are so high why.

Why that why they're still low I mean, if I, if I look at year over year to date.

Were 22.8 million a lot last year and seven point.

7.7 this quarter.

Yes, there's a few things in there.

You look at that I can.

Our construction of restaurants for example has gone down quite massively.

It was as you might expect if people are a little bit slower to invest and build new restaurants of the moment.

So those are an important component of these cost of goods sold we also sold a lot.

A large number of Papa Murphy's corporate locations.

Over the last few quarters, and obviously that reduces our rent and our cost of goods sold.

And then you also have to look at our distribution centers.

Which are serving some of our brands, including one that's in the casual dining space, where sales were more impacted so theres a few elements there.

I don't think its unusually low considering everything that's going on in the components that are in there. So yes.

Okay.

It gets more in line and if you see our revenues go up. This is this is a line that's also going to go up.

Okay, Okay. Thanks for that arc.

And your next question comes from the line of Dynegy Verifone. Please go ahead.

Hi, I am John Thanks.

Thanks for taking my question.

Eric would you please.

Let us hold percentage of digital sales for some subsystem sales so give us some rough indication.

Bob each of the digital sales.

Yeah. This this is not a metric we publish dimitrios I apologize for that because of the number of brands. We have in the number of jurisdictions I don't think it would be certainly a very relevant metric. If we published it we do have a few brands that are performing.

That are there are selling a lot more.

Digitally you look at for example, Papa Murphy's our online orders are very strong and we're trying to push our customers towards online orders you look at some of our Mexican brands also where online orders are very strong.

And you have you have a few of the other concepts that are stronger and and some of them are just not.

Not as relevant for online sales and for delivery. So they are lower so.

All in all it's not a metric that we publish but I can confirm we do have some brands that are performing very well and some brands that have unfortunate either.

Okay and just.

Just to clarify the meeting off toward strongest ever week too.

Gauge what that is.

[laughter].

How do you want me to define it.

Well, let's say for Papa Murphy's and possibly the Mexican brands that you mentioned.

If you have some kind of.

What percentage of system sales coming through digital support those brands.

Yes.

I'll give you only one.

If you look at Papa Murphy's for example were between 25 and 30%.

There it goes up and down depending on promotions, depending on on marketing and everything and depending on the day of the week, but typically it's going to be between 25 and 30%.

Right. Thank you I appreciate it.

The other question wildly on Papa Murphy's I wonder.

I wondered if you could perhaps quantify for us Papa Murphy's as well it comes from.

Year over year system sales growth in the quarter.

No we don't give brand specific information for afford to sales growth for all the brands. All I can tell you is that both of them are performing very well.

Alright, there theyre up versus last year.

But where we're not going to quantify the exact performance of each brand.

Got it okay. Good all right. The other question is just on the cash flow statement.

That was the increase in provision speed of $7 million this quarter.

Usually it got.

Related to working capital management and the prior quarter, just trying to understand how just.

How to think about the cash flows related to payment of previous ones going forward yeah.

That's a good question you've been you've been studying the statements pretty hard.

In a short amount of time. So we had the provisions we have two major lawsuits that were settled during the quarter. Both of them were Papa Murphy's preexisting lawsuits. So there would be dated from the Borg acquisition and and those were settled during the quarter. So that accounts for the pretty much the entire amount of provisions.

Provisions that we that we paid off.

I see okay and.

Let me see here, if there was anything else so little.

A lot of my questions watch with by the way. So thanks, a lot for that.

Do you anticipate any major assistance to franchisees in foreseeable future that might require.

M life to provide either long or.

Or additional royalty relief.

Well, we're not looking at anything at the moment doesn't mean nothing will will be required at the moment I think in the us.

Generally our franchise community is doing well and our exception. So we're managing that on a case by case basis.

In Canada.

The only province, Thats really reinstated restrictions is get back and there was a good program.

Offered by the bridge provincial governments and as I mentioned, we're waiting for the federal government to come up with something and then.

And then we're going to have to make decisions if the programs are sufficient.

May be empty why won't have to do anything.

But there is there is a possibility at some point that if.

If the restrictions last longer than we might have to help our franchisees now that being said, we're not a bank.

So we don't lend money to people they are.

There are institutions that are specialized in that so if we if we do something it's going to be for royalties.

But at the moment there is nothing in the cards.

Okay and in terms of the location.

Thats, our receiving rent relief right now.

Especially given the fact that you are on the lease for some of them. How do you think about a potential loss exposure to results.

Floor.

Franchisees that might potentially fail.

Yep.

It's a very valid possibility under there had been unfortunately, some casualties already where we've had to.

We'll face.

Please the situation. So we have many opportunities when these things come and we could refranchise the location or we can operate the location corporately.

Try to turn it around or or we can try to.

Try to find a way to exhibit lease with with our landlord and.

Spending on each situation, it's something that we need to and low case by case, but.

We did take more provisions this quarter and last quarter to three.

To take these things into account. So if you look at the amount of.

Provisions that we took for bad debts and for collection problems. There there are a lot more material than they were in the past just for that reason because there's there's a possibility that we're going to have to be and if we do then we're prepared for it.

And I guess, how easy it is to act.

From a headwind in situations like that I understand probably depends on your digital negotiations with that specific landlords, but in general how.

How how should we think about your.

Your ability to exit that lease in situations where stores that are underperforming.

It's never easy.

It's never easy the first thing Thats not easy to use to except the fact that our franchisees is failed and.

And.

So we like our franchisees to succeed we don't like them to fail. So we need to we need to accept that first part and then.

Depending on the location on the on the landlord and on.

Quality of the location if the landlord as a lineup of tenants for the space, sometimes it's a little bit easier to get out of the lease but if it's a it's an area that's not as popular or debts that a little bit more difficult for them to find tenants.

Then it's going to be a difficult discussion with the landlord so I guess.

Again, it's really case by case and you know, it's not about one given landlord or when given location its really depending on.

Cost of.

Of.

Facts that are related to each location that we need to take into account, but it's never easy to get out of at least it's a contract on the.

You know there is a.

Theres two parties and landlords, obviously, the like to have their dentistry, the rent and Thats, what they do for a living so for us.

For us to take that away from them is not easy.

I understand do you have any comments about the general she also pure franchisees I know you have a lot of different brands. So it might be because our bodies you'd give us some kind of.

Got you know peak charge off.

How they are feeling maybe how many of them are relying on various forms of government assistance be thoughtful around side.

We're on the.

No the whole assistance programs.

Any color on that.

Yeah, well the health of our franchisees is very variable.

Even if I told you for a concept thats all our franchisees are doing well if you have a franchisee in that specific concept thats an immediate urban area, that's been deserted than they're struggling with that one location.

Before a franchisee.

Only location that matters is there because that's where to put their savings and thats, where it did invest so much time and energy.

So the health of our network in general considering everything I think is is good.

But obviously, we are facing challenges with the number of locations with the number of franchisees.

And.

And yes so.

It's not perfect for sure given the circumstances. So we are trying to assist everyone to make the best of it to weather the storm and will restore good profitability and good returns after the crisis, but.

When you have for example, like get back where you were deal, but up and then the lock back.

Look back the dining rooms, it's actually a little bit more challenging.

Financially, but also mentally on the franchisees, it's very draining when.

You are facing these situations that are out of your control on that are affecting your your livelihood to such a material amount.

Yep, Okay. Thanks, Eric appreciate it.

Okay.

And there are no further question at this time I will turn the call back over to Eric 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.

This concludes today's conference call you may now disconnect.

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