Q2 2021 MTY Food Group Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
Come to the M. T Y Food Group, Inc, Q2, 'twenty 'twenty 1 earnings conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
Instructions will be provided at that time for you to queue up for questions.
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 the bits conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those interest to pay that.
I would like to remind everyone that this conference call is being recorded on Friday July 19.2021.
I would now like to turn the call over to Eric and the fact that she likes.
Record of Officer. Please go ahead.
Good morning, everyone and thank you for joining us for <unk> 2021 second quarter results Conference call. The press release in the MD&A with complete financial statements and related notes were issued earlier. This morning are also available on our website as well as on SEDAR.
During the call, we will be referring to forward looking statements and for certain indicators that are non <unk> measures you can refer to our MD&A for more details.
Ill remind you that all figures presented on today's call are in Canadian dollars unless other.
The wife stated.
Before I begin I would like to think of moment to thank our customers for their continued support patients and understanding the law.
Last 15 months have been an intense rollercoaster of COVID-19 related restrictions.
At the times heavier in the thank you Sir.
All of the changes our customers have always been there the consumer food within the company.
The mind regarding the type of experience they will get.
The restaurant owners will still have a tough road ahead and the request to return to profitability, while facing a major labor shortage problem and the dislocated supply chain that is also struggling to find its balance.
<unk> has built the foundation on small entrepreneurs, who have trusted us to invest in their business.
All of the pandemic, our franchisees have shown a lot of courage and determination when it would have been easy to throwing the towel.
We are seeing the benefit today as restrictions are gradually being lifted and customers returned into our dining rooms food courts in office towers.
Yeah.
I would like to I would also like to highlight the work of our franchise partners in the SaaS, who have continued to serve customers under difficult conditions, the resilience and dedication of people who work in the <unk> why suddenly has been nothing short of exceptional I wish to sincerely. Thank all of them for the commitment to our common goal in success.
Now to our results.
We are pleased with our second quarter results during which we operated facing heavy COVID-19 related restrictions in some of our key markets throughout the quarter.
During the second quarter and few other network lost more than 38000 business days because of those restrictions in many restaurants. Since we are still operating we're doing so in the much reduced capacity.
While the 38000 loss of business days, Mark the sequential improvement over the first quarter the numbers higher than in the fourth quarter of last year, reflecting the new wave of of restrictions in Quebec and Ontario.
That started in December 2020.
Together these markets account for approximately a quarter of our total system sales in normal times.
We are extremely pleased to report the adjusted EBITDA for the quarter more than doubled over last year. Despite the lingering impact of the pandemic and the address variation from foreign exchange rates.
While the business is far from fully recovered our recurring streams of revenues are improving especially in the us where it goldstone Papa Murphy's in the few other brands continued to perform extremely well during the quarter.
Once again, we used our strong cash flow to reduce our debt level.
The $15 million of flight the debt this quarter, bringing total repayments since the start of the pandemic the close of $145 million.
Bringing the business well within our target leverage ratios and providing the necessary flexibility to explore various capital allocation of possibilities.
We finished the second quarter with 6907 locations, we opened 61 locations and permanently closed the 103 for net store of loss of 42.
Although the number remains of net erosion of our network. We are happy to see the number of closures is relatively stable at a level that is lower than in the second quarter of 2020 and 2019.
We still had the 359 temporary closed locations at the end of the quarter.
Though we are hopeful of those will reopen we will get a better picture once all of the restaurants are in a position to reopen.
Since the end of the quarter 101 of those have reopened already.
As for new store openings, we reached the highest level since the fourth quarter of 2019 and are confident we will continue to improve in the coming quarters as indicated in the past few quarters of the pipeline of new franchisees remains healthy and we expect the more normal rate of store openings to resume in upcoming quarters us visibility over day after the pandemic becomes.
<unk>.
System sales for the quarter reached $891.5 million.
Up 33 times debt of.
33% compared to the second quarter of 2020.
Quarter, there was materially impacted by defending the.
This performance was realized despite the adverse impact of foreign exchange variation, which shaved $53.8 million from our sales during the quarter.
System sales were up 56% of Canada, 24% in the us and 38% internationally.
During the quarter 23, 5% of system sales came from digital channels compared to 22, 6% in the same period last year.
As mentioned in the past we are aggressively investing in technology to improve the customer experience and our teams are continuously rolling out new solutions that we hope will have a positive impact on our sales of.
The sales mix will shift as other sales channels of reopening we expect digital channels to grow in the foreseeable future and are hoping to position <unk> as the leader in the industry for the quality of its solutions in the next 12 to 18 months.
I will now turn it over to Renee who.
Who will discuss <unk> financial results.
Thank you, Eric and good morning, everyone.
Notwithstanding comes online does that remain ahead of US we're encouraged by our second quarter financial results, especially some of our Canadian network in parts of our USA network was still impacted by ongoing governmental closer of friction related to the COVID-19 pandemic.
As mentioned by Eric, Quebec, Ontario, as well as the California in 3 of our most prominent territory they'll have the most restrictions imposed during the second quarter.
In total 977 locations were closed at least 1 day during the quarter, which resulted in over 38000 loss base of business.
With us and other government imposed restrictions impacted our recurring revenue stream and adjusted EBITDA.
Currently we still have 258 restaurants temporarily closed an improvement over the 369 locations. We have closed as of May 31, and we expect this figure to continue to come down as Mark noted the provinces moving to the the reopening of basis.
In the second quarter total revenue.
39% to reach of $136 million as the impact of the pandemic with more severe in Q2 of last year.
Our franchise operations revenue increased 49% of.
Regarding revenue streams from franchise location growth.
$8.8 million in Canada, and $15.5 million in the U S and international.
These are closely related to our system sales with as mentioned by Eric were up 33%.
Revenue for our food processing distribution and retail operations increased 33%.
The benefit from higher consumer spending in grocery stores extension into new provinces and additional kit.
The number of branded products for sale in the Canadian market continued to progress in the second quarter, reaching 158 compared to 170 in the first quarter and 114 of the year ago.
Corporate store revenues also saw an increase of 21% mainly due to the reopening of the patients that were temporarily closed in Q2 of the prior year.
As mentioned by Eric.
Total sales for the second quarter increased to reach 23, 5 percentage of total system sales.
Compared to 22, 6% for the prior year.
While Canada was up 26, 7% growth this quarter versus 19, 7% last year.
Sensors in the US slightly declined from 23, 6% of last year to $22..1 Christmas this year, reflecting the gradual impact of the reopening however.
However, the year over year increase in digital sales remained very solid in Canada with more than doubling its digital sales footprint and the USA increasing by 16, 2%.
Our second quarter adjusted EBITDA increased from $43.5 million compared to $18.2 million for the same period last year the.
The us and international segments, adjusted EBITDA posted a $14.1 million increase year over year.
Excluding the impact of foreign exchange the segment posted organic growth of $15.3 million.
In Canada, adjusted EBITDA improved $11.2 million.
Of the severe adverse impacts of the onset of the COVID-19 pandemic from the second quarter of last year are the primary reasons for the increases which led to an improvement in your recurring from franchising revenue of $24.3 million.
<unk> also continued to benefit from the Canadian emergency wage subsidy.
In total we benefited from the subsidy with a total of $1.4 million in wage subsidy and $5 million and ramp of cities during the quarter.
We also saw a decrease in <unk>.
Expected credit losses on accounts receivable of $2.8 million, which stems mainly from better than expected collection from franchisee.
These gains were reduced by an increase in wages of MTI had temporarily furloughed about half of its workforce at the onset of the pandemic from 2020, most of which for black box by the third quarter.
Net income attributable to shareholders was $23 million for 93 per share for the second quarter of 2021 compared to a net loss of $99 million or $4 <unk> per share for the same period last year of.
Tears losses, mostly due to a noncash impairment charge of $123 million.
As for our liquidity and capital resources, despite the ongoing impact of the pandemic and its negative impact on revenue and EBITDA.
What generated the generated solid cash flow from operating activities of $29.5 million in the second quarter of 2021 compared to $19.2 million for the same quarter last year.
As we continue to tightly manage our liquidity free cash flow remains solid in the second quarter of 2021 with a marginal decrease of $1.4 million to $27.5 million or of $1.11 per share on a fully diluted share basis compared to the dollar.
The <unk> 17 for the same period last year.
The decrease was mostly due to the franchising of multiple corporate stores in 2020, which generated cash of $10.7 million.
On the balance sheet from at the end of the quarter long term debt stood at $426.5 million, mainly in the form of our credit facility in the pullbacks on the acquisition.
Furthermore to lower assumed by the standby fees and increase our financial flexibility, we have renegotiated our existing credit facility during the second quarter.
Our revolving credit facility now has an authorized the amount of $600 million instead of $700 million and an accordion feature with increased by 100 million for $300 million.
Maturity was also extended to April 22024, and many financial covenants or reinstated the pre pandemic level, thereby lowering overall costs.
Now I'll turn it back to Eric for the conclusion.
Thank you Ron Inc, which was fixed with restrictions having been lifted recently in some of our major markets. We are cautiously optimistic about the future even though our industry is still facing many challenges.
Customers are showing the missed our food and our team is excited to deploy a wide array of innovations that will 1 of our customers even more.
Overall, we are confident about our prospects and our goal is to return to the business momentum we experienced just prior to the pandemic. Our optimism is also supported by the <unk>.
Best of luck necessary actions, we have the FH, which are giving nty of lot of flexibility today.
Now place us in an excellent financial position with $41.5 million of cash on hand over $205 million.
And available credit and with leverage ratios well within our comfort zone.
In light of our financial situation and with more favorable outlook. We are very proud to announce that we are restoring our quarterly dividend.
Quarterly dividend resumes at the same level us before which is the say $18.5 per share.
The next quarterly dividend will be paid on August 13, 2021 to shareholders registered at the end of the business day on August 3rd 2021 for <unk>.
The dividend is a major step for MTI. Following the crisis, we faced in the last 16 months. It shows the confidence we have in our network and in our ability to continue to produce strong free cash flows.
We want to thank our shareholders for their patients with <unk>.
We have also renewed our normal course issuer bid and we will continue to have the ability to borrow buyback of our own shares based on the internal considerations in the market conditions.
Finally, with regards to potential acquisitions, we remain active and are in a strong position to take advantage of opportunities.
In closing I would like to sincerely, thank our employees customers and suppliers for their ongoing support.
With that thank you for your time and we'll now open the lines for questions operator.
Thank you if you'd like to ask a question. Please press star followed by the number 1 on your telephone keypad.
Your first question will come from John <unk> from CIBC. Please go ahead. Your line is open.
Thank you and good morning.
Hi, John I wanted to ask the boat.
I wanted to ask about Papa Murphy's and Cold Stone you mentioned they performed well in the quarter is there any more color you can add there either on a year over year basis or maybe versus pre pandemic.
See any divergence within those brands in markets that are more reopened versus ones where restrictions still exist.
Yes, I'll start with Goldstone with Goldstar on us.
<unk> is performing extremely well.
Well above double digit performance compared to 2020 or 2019.
During Q2 and even after Q2 ended.
The cost on the sub performing extremely extremely well so we're really happy with that for Papa Murphy's Q2 was very strong.
The still comping strong over 2020.
And very very strong over 2019, we.
We did lose a little bit of steam since the end of Q2 as we're lapping.
Stronger periods end.
Also with the massive heatwave in the Pacific Northwest that we had.
We suffered a little bit in terms of in terms of our pizza offering we're confident we're going to go back to a better momentum we're still over 2019, but we lost a little bit of momentum compared to 2020 has since the end of the quarter.
Got it that's helpful. Thanks.
I wanted to move to sushi shop now.
When your top 5 minutes in the category that has done really well in the pandemic can you just remind us what percent of your system sales.
From this category overall, and how they've been performing versus the pre pandemic level.
You mean, the sushi category of just sushi shop itself.
For the category in general.
Yes, the category is probably just under 10%.
It's performed really well.
During the pandemic.
It was already performing extremely well before the pandemic. So there was a lot of good tailwind for for our sushi brands.
Our sushi brands are also.
Some of those that are the most advanced in terms of technology.
Online ordering and everything.
The marketing is really up there so.
So those are brands that the performed well before the pandemic there for the performed well during the pandemic and the continued to perform well as we were getting out of that of the crisis.
Got it thanks.
And then last 1 for me and I'll pass it on we've seen a flurry of M&A deals of late mostly smaller, but maybe some some area of you'd be interested in I'm curious what comments you can make on deal flow for empty why what youre seeing on valuations and maybe what your preference on M&A. It's vs use at the end of CIB.
For the rest of the team.
Yeah, well the deal flow seems to be coming back slowly.
There are opportunities that are presented to empty y.
More than we had maybe in the previous 15 months.
That being said.
It's still not the normal pace of deal flow and it's probably not also in the in.
In the sweet spot of what we might be looking for in terms of valuation or in terms of.
Quality of chains that are being offered to us. So so we're still going to be very disciplined I mean, we're we're eager to do M&A, we haven't done the acquisition.
And the certain amount of time and it's in our DNA to to acquire and drove the acquisition. So we will eventually go back to do more acquisitions, but we will stay disciplined and if we can't find the right target will we.
We will stay on the sidelines of all while while things settle down and then the valuations go back to a more normal level.
And yes, ultimately we can buy back our own shares we can continue to pay down our debt and build the treasure chest and when the time comes we'll be ready to bounce back, but I would say the deal flow is starting to be better so.
I'm cautiously optimistic about the future.
Okay. That's helpful. Thank you very much.
Your next question comes from Derek Lessard from TD Securities. Please go ahead. Your line is open.
Yes, Thanks, and good morning, Eric and congratulations to you and your team navigating through all of this craziness.
Thank you.
Just anecdotal observation.
Like we were in trouble of the past couple of days the <unk>.
Drive through at Mcdonald's alone without leap for half an hour, even our hotel restaurant was closed on Monday and Tuesday.
Everything was because of the shortage of labor.
You did point to some inflation pressures just wondering I guess, how youre seeing the impact play out currently and what's your view.
For your for your guys ability to pass on prices.
Yeah, well shortage of labor us.
It is certainly a big problem everywhere in North America, there are pockets, where we're better in the our buckets, where it's more of a problem.
But.
All in all of there is just not enough work force to work in hospitality and even for our suppliers and they're in their manufacturers.
It's also not enough.
Quality people in the even even.
For for the.
Unqualified.
The unqualified labor that we might be looking for for certain duties, it's hard to find.
The good reliable staff so.
There's going to be an impact on the cost of labor for sure.
Already paying more than we were paying before the pandemic, even though the labor was already.
<unk> before the pandemic and a lot of regions.
So.
We're going to end up being more suppliers are also paying more for for their staff. Our distributors are also struggling to find drivers and struggling to find people to work in their distribution centers. So so of the problem is everywhere.
And in terms of our ability to pass prices.
It's not like we have any options here because of the ability of our franchisees to absorb these costs is nonexistent, we work with very tiny margins, where Benny business.
And we will need to figure it out, but it's either going to be through gaining efficiencies working with our suppliers to reduce the number of hours, we need to work in our restaurants.
Or it's going to have to go through prices, but.
For our franchisees can absorb more so ultimately we're going to need to do pricing and.
And pass it onto our customers and hopefully we'll be able to.
Revamped some of our menus.
To focus more on the better food.
The cost items, we're going to be able also to.
Do promotions to direct our customers 2 items that are a little bit more profitable for our franchisees.
But ultimately pricing will need to happen.
And we.
I don't think we're any different from anywhere to anyone else in the industry, everyone is going to have to take price is not only for the shortage of labor, but also for the inflation that's happening in food cost at the moment.
Has the some of those pricing actions already taken place for being implemented.
Yes.
We have to we have to do some pricing already and there is going to be more pricing in the next few months also the.
Depends some of some brands that at the early some brands that us late in some cases, we stated it over.
2 or 3 different increments of price increases so it's going to have to happen over time of day.
The situation is evolving so quickly that it's hard to say I am going to do 1 batch of price increases in net that's going to be that we need to be more nimble than that.
We just look at the price of the container for example is probably the Best example of where you ship something from Asia. The cost of the container is probably about 10 times, what it was a year ago.
So it's not even the food, it's just shipping the discussing a lot more so.
And that that changed over a 4 to 6 week span. So if we're not nimble with our pricing we're going to end up in the place where we can support the cost structure anymore.
Okay. Thanks for that I guess, but you also had a strong rebound in your margin this quarter I assume.
A lot of that is just the operating leverage but are you are you able the point to any other positive.
Margin contributors this quarter.
Yeah, well there is 1 there is 1 large item there.
Contributing to the margin that might be a little bit more.
Pollution than anything else, it's the reversal of expected.
<unk> losses.
Last year when we.
When we looked at our numbers, we had a certain number of risks and the a lot of uncertainty. So in collection was slower so it forced us to take a little bit more provisions for these.
<unk> credit losses, and now we're collecting more than anticipated at this time. So we had to reverse of certain amount of it so that does contribute to the margins for sure.
And that's not going to last forever I mean, once we reversed the provision it's reversed.
It's not coming back so that contributes more toward the rest of you are right Thats operating.
It's operating at 11.
We were more efficient and as we grow sales we bring in royalties our cost structure is pretty much fixed.
So as the business continues to recover.
<unk> see a little bit more.
The little bit more weight on the topline and not necessarily more weight on the bottom line on the on the.
The middle line with the expenses. So the margins should continue to be strong if everything stays constant and the business keeps improving.
And then thanks for that Eric and the 1 last 1 for me actually is in the have your traditional revenues for your revenues from your traditional business fully recovered to pre pandemic levels.
And then maybe if you could just talk to us about the outlook for the non traditional and sort of the mall office sites and where those sales are in relation to pre pandemic.
Yes, we're not even close to where we were pre pandemic and we're not even close to being fully recovered.
If you look at the.
At the major urban centers those have not come back yet.
That's in the mall.
I don't come back.
I mean, you just look at Ontario is selling their lockdown the.
Yes, it's still not allowed to have dining rooms or food courts.
The operating properly so.
The malls are not even close and even if you look at the other.
The other major areas like Quebec for for Q2, we were still under Lockdown for a pretty much of the entire quarter where were.
We're a little bit more relaxed in terms of restrictions now but for the quarter. We were still under lockdown. So our mall operations are not close to being back end.
In terms of non traditional airports are certainly not back to where the aware although in the U S of starting to get better.
The University campuses for example are not back yet. So so we do have the long road ahead to fully recover in terms of our sales.
Thanks, Eric.
Your next question comes from Vishal sweetheart from National Bank. Please go ahead. Your line is open.
Hi, Thanks for taking my question.
I just wanted to.
Follow up on some of the questions asked earlier, particularly on inflation.
Noticing that inflation net restaurants in general.
Close to be meaningfully higher than inflation at grocery stores.
And I'm wondering if you in general if you agree with that perspective for your banners and number 2.
Hey.
As the result of this higher inflation ex the restaurants, if you see the restaurant sector is actually grabbing backhaul. The share then it loss to grocery stores does that debt viable or is that still of the open.
Yes, Im not sure how we can compare grocery stores and restaurants.
Because obviously there are items in the grocery stores that are not necessarily comparable to what we saw in restaurants, but.
I would say in our days of the inflation in our restaurants hasnt been that much higher than what you would witness in the grocery store. If you wanted to buy the ingredients to prepare to us on the same type of food.
We try to be pretty cautious with price increases and we don't we don't do more than we need to do.
So yes, it's hard to compare in terms of what happens in the future the grocery stores the restaurants in terms of inflation.
I Wouldnt risks trying to speculate about where all of that is going.
But yes, I do think that the restaurants will fully recover.
At some point when that's going to happen I am not sure, but I do think restaurant sales will recover to fully in.
We resumed growth.
<unk>.
Maybe in the next few years I don't know exactly when that's going to happen because I.
I wish I had a crystal ball that would be very reliable, but unfortunately I don't.
Okay, and continuing along the same theme.
I noticed that the the grocery stores are seeing a little bit more pressure year over year.
In the recent months, but the food processing business at <unk> seems to still between doing quite well.
So wondering what you attribute that to us market.
The market share gains is it.
New products and.
And how should we think about that business going forward.
Yes, well of that segment is made up of 3 different sub segments. You have our distribution centers that are serving our brands in the Q2 of those where we're really struggling because of our brands were more or less idle. The brands that are supported by the.
Distribution centers of our food processing was doing well, though and our food processing.
Does products for retail and does product for some of our brands.
That are performing well.
All of the food processing was doing well and seems to be.
And the really good place now where we can see some good growth in the future and in terms of our retail operations.
I think we are capturing market shares we are launching new skus that have been successful we have a few.
A few champions there in terms of our products that we're really proud of and that seem to be performing really well, we're developing new sales channels as well and trying to expand in terms of geography, where we sell those products.
So it is really promising in terms of the retail in terms of selling to grocery stores selling to other retailers like Costco and Walmart are giant tiger or or other retailers like that so I'm pretty optimistic about that segment and the growth that we can see the.
Coming years, even though grocery stores are might be seeing.
Feeling the weight of lapping of very strong year I think in our case, we can capture I'm sure.
With our existing products and with new products as well.
Okay.
Moving to expand upon your.
Thoughts on acquisitions.
The pandemic change the way Nty thinks about acquisitions and when you talked about your sweet spot earlier wondering.
What is your sweet spot in terms of us.
The region of acquisition in terms of types of acquisitions net of turnaround as it.
Is it a larger chain smaller chain is there anymore color you can give us some of what <unk>.
It's a good deal from T y.
Yeah, well in terms of geography, we're pretty agnostic, so where the.
As long as it is in North America, we are happy to answer the there any opportunity.
We're present everywhere and I think we can integrate well throughout North America. The type of offering us. The same thing there are a few things that we'd rather stay away from.
But in general of the type of food doesn't really matter for us.
So it's more in terms of.
Where the business is in its lifecycle and the valuation that's related to it.
It needs to be the <unk>.
Sweet spot is a moving target, depending on which Brad we're considering and where it is in its lifecycle so of them not necessarily going to give you numbers.
But we do have a certain number of metrics that we that we use internally.
That we want to any of any acquisition to fit in.
If we don't find something that does go into that sweet spot, we will not necessarily.
Go after it the way we want to be disciplined about it.
The pandemic showed us 1 thing is that we need to be.
Need to be very careful.
In terms of how we deploy capital and we need to be very protective of empty why because there is no guarantee debt.
The business is going to keep drawing forever and that theres not going to be another pandemic at 1 point, maybe in 5 years in the 10 years and 20 years I don't know.
So we need to be careful what we buy how we buy it how we integrated and how comfortable we are with 2 of everything.
That becomes part of <unk> portfolio.
Okay, and maybe lastly, you commented that Papa Murphy's performance.
Flowing to us buying a little bit subsequent to quarter end.
If I got that right I was just wondering if you could comment on some of the initiatives. The improvement initiatives you hope you implemented at the brand and whether Youre pleased with those initiatives.
The working or not in your estimation and what what's next brands should and should we anticipate <unk> edits improvement initiatives too.
Yes, well, yes, we're really proud of the progress we've made with the with Papa Murphy's some of the initiatives related to technology.
Are really paying off the online ordering in the can as constant improvement of those platforms is really interesting.
For the investments, we're making with the marketing also.
Really paying off the research and development that were doing.
There is interest in them, we have a product now.
That's gotten a lot of attention in the us and even in regions, where we're not operating with.
With our free dose outlaw pizza.
The partnership with Pepsi.
That was huge for us so there's a number of things that we're doing now debt.
That are really paying off and gives me a lot of hope to be.
But we're going to continue to grow that the brand in the future. So really happy with it where we're pushing hard now on development because we feel of the brand is ready to start growing again.
So so all in all of a lot of positives and in terms of the other brands I would say all of the other brands are pushing hard now on the.
The major initiatives when it comes to technology online ordering.
Usage of data more efficient marketing. So so there is a lot going on for all our brands in Canada and in the us.
So so I wouldn't necessarily be able to pinpoint 1 brand in particular and value.
This 1 is doing more than the others, because we're pushing on all fronts now.
Okay. Thank you.
Your next question comes from George <unk> from Scotiabank. Please go ahead. Your line is open.
Hey, good morning, guys. The congratulations on a strong quarter I just wanted to ask about the store openings. So the 61 in the quarter.
Eric can you maybe give us a little bit of flavor in terms of what's being what's being opened by many of our banners are by geographies, maybe some flavor there.
Yeah, well we're.
We're opening a lot of the brands that performed well during the pandemic. So the brands that we're opening are the ones you would expect to open.
So it's not necessarily the answer you might be looking for but unfortunately. This is this is reality.
We're opening a lot of yuzu of lot of Goldstone, we're still opening plan it's Moody's.
So those are brands has performed well during the pandemic and the keep opening.
So and you.
You shouldnt be expecting.
I guess those brands to continue to opened for certain amount of time, because there's good momentum there.
Okay, and maybe focusing on the closures there are obviously lower than we've seen in the past, but I'm just wondering if to what extent do you think that will pick up again, when the aid the government aid and us subsides for confused the subsidence of the fall.
Yes, im hoping that by that time of the sales will be high enough that we won't see a flurry of closures in the.
What we're seeing now is that in general.
Sales for.
For the majority of our restaurants are picking up nicely.
So I don't necessarily expect the flurry of closures.
I'm not seeing.
Huge amount of risk I'm, not saying, there's going to be none, but I'm not seeing a huge amount of risk of Canada or in the U S for for massive closures in the future.
I would say international might be a little bit more challenging.
As there is still a massive lockdowns going on and in certain countries.
But for Canada, and U S I'm not expecting.
I'm not expecting a flurry of closures.
Okay, great and just going back to your commentary about Papa Murphy's kind of moving steam exiting the quarter.
Obviously, there is of Covid hangover, but I'm just wondering how much of that is maybe due to aggressive promotions, we're seeing by some of our more delivery focused competitors in the pizza category.
And do you guys at all client on responding to that.
Yes, there is certainly an impact I mean, we are seeing.
We're seeing some of the major competitors.
Really go aggressive on the pricing on promotions.
I mean, Papa Murphy's has always been a little bit more expensive than these guys our product is higher.
Higher quality.
So we don't necessarily want the discount of brought US the same way day do we do have some value offers that are going on.
But we'd would we go to the same levels. These guys are going.
Yes, I mean, the brand has done it in the past.
It's shown that it increases the topline for the franchise or maybe it's good but it doesn't necessarily increase the franchisees' bottom line, which is ultimately the goal for for all of us.
So we're not necessarily go into the deep discounting strategy because we don't believe that's the long term solution for our franchisees and for the industry in general.
Okay, and just last 1 for me Eric on the credit reversals that you guys called out.
Do you have that number for this quarter how much of the total number was.
Maybe I guess more importantly, if you look at Q3 and Q4.
Should we expect similar level of reversal of the cough the reversal of this quarter or any of that you can give us there would be appreciated.
Yes. The number is presented in the table in the MD&A, it's $2.8 million.
So so we really put it on the single line because we wanted.
We didn't want to hide it.
We wanted we wanted to make it obvious.
Or are we going to have the same level of reversals in the future.
I don't think so.
This is all based on actuarial models that we have the team is running every quarter.
But once the once the your expected credit losses reverse that if that would be reversed again, so I don't think theres going to be at the same level going forward.
Okay. Thank you.
Your next question comes from Dmitry <unk> from Baird. Please go ahead. Your line is open.
Hi, and thanks, a lot for taking my questions a lot of them were already of.
But I still have a few words.
Just to confirm the reversal of provisions was.
In the quarter was $2.8 neely on the right that's the contribution to EBITDA.
That's correct.
Got it okay.
And the.
If you can comment on how food court stores in malls have performed after the survey of the limited reopening that we've seen recently I know a lot of the food for us. So you can see it in there, but you can take.
Takeout and some people went back for most of the salt.
Any comments on.
What you're seeing in terms of the performance from food court locations in malls.
Yes, it's recovering slowly.
Mitch.
We need to recreate habits and customers.
So so.
It's going to take a certain amount of time I'm not sure how long, it's going to take but what we're seeing is that it's the recovering slowly.
But at least we are trending in the right direction. Some malls are performing a lot better than others.
Some of the malls are more lifestyle type of malls, where people will go hang out and I guess those are performing better.
So of malls are more in and out of that type of operation and those tend to take a little bit longer. So we'll see what the future holds for us but at least we are trending in the right direction.
Inc.
Can you comment on the health of the franchisees, particularly in the fourth quarter.
Yeah well.
Obviously, our franchisees are have been under pressured in the massive lockdowns and then the reopening with no seating.
So it's been challenging for our franchisees most of our landlords have been really good to us.
Working with us to alleviate some of that range, though at least we have.
Have a good collaboration from our important business partners.
But it's going to take a while for franchisees to make up the losses of the past 15 months.
So we're working hard with them to make.
To make the offering is good and as relevant as possible and to try to help their operations the.
Please go back to a profitable profitability now and then recover.
So you don't expect the wave of <unk>.
<unk>.
As you all franchisee sales in the fourth quarter.
Over the next year.
Not I'm not a big way of no there might be a few here and there.
And I guess I can have some surprises there are always some surprises, but im not expecting a massive wave of closures now.
I understood the Eric Thank you and the in terms of food courts in the offices.
In the office towers dose have been hit particularly hard.
What's the strategy of they are and and.
Also.
In terms of franchisee sales they are I presume.
This have been very hard and its still uncertain how long the.
The opening day Red will really take how many people will eventually get back to the all sorts of any comments on debt.
Yes, all stores of Ben Yes, they've been they've been beaten up day. The good news is that the most of the landlords are working with us.
And then the abatement on the wrath is pretty aggressive for most of them so at least.
Fixed cost portion of our franchisees operations has taken care of and where landlords refused to help.
There hasnt been some store closures just because it's.
It's not possible to make a living if youre not selling if you don't have any customers in the office tower.
No.
So this is a more challenging where landlords work with US I think we have a path forward to reopen and be profitable as people come back to the offices, but we need to we need good collaboration now the good news is that we are gradually seeing people come back to offices.
The New York seems to be a little bit more busy now.
We're seeing people coming back in offices in Montreal, now Toronto is still locked down so it's fewer people but.
We're seeing we're seeing from major cities come back the lives from the hopefully.
Hopefully office towers will be back in full force.
In the fall and then.
And then the our franchisees can resume operations and the hope for hope to cultural profit.
Right, Okay understood thanks for that.
And.
<unk> already addressed.
The address a question about acquisitions I just wanted to dig deeper.
Possible is there of a particular oil.
Price started about few weeks above which you Wouldnt go up and you mentioned you have some certain sweet spot metrics. If you can just talk to us about what Netflix in particular are you looking at signing.
<unk> financial metrics operating metrics when you make an acquisition.
Yeah, we don't want to close the door on any specific price tag So if the price.
The stag is heavy but the business is a golden opportunity we'll go for it.
So we don't want to limit ourselves are closed the door on something just for 1 reason.
So I mean every business can be evaluated for its own merits without the without the us play of placing hurdles where there shouldn't be.
And in terms of giving you more accurate number there are more precise numbers I won't for competitive reasons. It would be it would not be right at the smart move for me to say how much we are willing to pay for something bigger than that pretty much sets. The price tag for the next time someone calls us.
No that's fine any comments on maybe EBITDA margins low revenue growth for all filed that Youre looking at.
Yes, well again, there is a price for everything I mean, there is there is a price for a mature business that might not be growing and there is a price for a strong growth of business. So we adjust our we adjust our buying strategy based on the business we have obviously.
Especially with Covid now.
It hasnt been some concepts that have shown more COVID-19, Bruce and others. So maybe the tend to be a little bit more attractive.
And franchisee profitability and translated the franchisee health is a major major criteria buying.
And that's the work of franchisees that are under us not necessarily something that interesting for us for the moment.
Okay, and if you can comment on some of your <unk>.
All of their brands, how they are doing in particular.
Country style and Mr. Saab and there was a couple of more.
Yes, well, let the country style.
Yes.
It largely depends on the business traffic on on frequency of purchases and everything so so like most of our coffee brands country style has been affected by the pandemic and the.
And as traffic resumes and as people act of mute a little bit more I think we're going to see the business recover in terms of Mr. Sub it's a really well performing brand, it's a mature brand, but thats performing extremely well and I'm really proud of what the team came up with in terms of marketing.
In terms of product offering the of the brand image is spot on so I'm really proud of that brand and it's performing really well and it has been for many years.
Is it is the growing organically or declining.
So if you can give any any any details on its growth profile.
Yes, im not necessarily going to the.
Specific numbers on the brand.
So yes.
I'll stop my comment there.
Okay and any comments on the on.
Extreme pizza and mutual burrito.
Yeah, Peter the system.
It hasn't been struggling for low <unk>.
Since we acquired it.
I mean, it's and the pandemic affected even more so we're working hard on extreme beta we have of new product line that said thats being tested at the moment.
That hopefully will will reverse the trends for extreme beat us cautiously optimistic about us near we have.
We have a lot of in the pipeline to to try to bring it back to where it should be because we always believed in the food, but for some reason we weren't able to.
Either marketed or communicated well to our customers are the response wasn't the 1 that we expected so but we have a lot of new things going on for extreme beat us or cautiously optimistic Mucho Burrito is still 1 of our top growth brands.
It's a very strong brand really good product offering.
Still working on the brand on the product on the marketing on uneven the the.
For the image the design and everything so constantly evolving that but in general we're really proud of mutual Brito and it's 1 of our top growing brands and we want to keep it that way.
And when you made that acquisition.
Yeah.
The back some time ago.
In terms of the store numbers.
The majority of them.
The majority of relate too extreme.
Like what was the split between extreme data in which a burrito.
That was back in 2013, I think youre going youre going pretty deepened my memory, so I won't be able to quote you. The exact numbers, but I can tell you extreme beta was a lot larger than mutual burrito at the time.
So and now now that's reversed extreme beat us.
The reduced the number of restaurants since we acquired it and mutual Burrito has grown really nicely.
So were extreme beta was the larger brands.
Back then now Mucho burrito is much larger than the extreme Peter.
Understood. Okay. Thank you so much.
Your next question comes from Michael Glen from Raymond James. Please go ahead. Your line is open.
Hey, good morning, just Eric.
Eric you called the <unk>.
8 million credit loss provision what's the.
The item on there it says variance due to the impact of <unk> 16 on impairment of lease receivables. It was of 1.3.
In the quarter or is that of onetime item or is that something else.
No.
It's something that the.
That we reassess every quarter and it's.
It's the.
It's a little bit more complicated, but it's basically an estimation of our collection of ability on the leases that will be receivable in the future not necessarily for what was the receivable in the past. So it's an assessment of going looking forward assessment of our ability to collect.
Okay. So it would kind of bounce back of force between this type of level in any given period.
It could go up and down depending on various different factors.
And any comments you can give on the outlook for working capital.
Over the coming quarters like any any notable items that we should think about.
Well not necessarily.
As of the business is growing and recovering I think we're going to have higher sales and that's going to generate higher accounts receivable and thats. The good thing I guess because it means the business is doing better.
I think you should expect our prepaid to be amortized over the next 2 quarters, we had some some pretty heavy payments in the first 2 quarters.
But other than that in terms of working GAAP I don't see anything major coming in the next few quarters.
Okay, and then I think you can correct me if im wrong I think you made a comment during the opening remarks just about.
Strong royalty collections. During the period was that is that something you said or did I Miss here something.
You did hear that debt.
It's weird.
We're collecting more of our old royalties.
Than we had anticipated and that's why you have the reversal of an expected credit loss.
Okay.
Okay.
Thanks for taking the questions.
We have no further questions in queue. This will conclude today's conference call. Thank you for your participation you may now disconnect.
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The host has ended this call Goodbye Lenny Mehta of my question. So it looks.