Q3 2021 MTY Food Group Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the M. T Y Food Group, Inc. Q3s 2021 earnings call.
All lines at this time all participants are in a listen only mode. Following the presentation. We will conduct a question answer session and instructions will be provided at that time for you to queue up for questions.
If anyone has any difficulty 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 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 anticipated.
I would like to remind everyone that this conference call is being recorded on Friday October H 2021.
I would now like to turn the call over to Foster Chief Executive Officer. Please go ahead.
Good morning, everyone and thank you for joining us for <unk> 2021 third quarter results Conference call. The press release and the MD&A with complete financial statements and related notes were issued earlier. This morning and are also available on our website as well as on SEDAR.
During the call we will be referring to forward looking statements sent to certain indicators that are not ifr's measures.
You can refer to our MD&A for more details.
Also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated.
Before I begin I would like to commend our franchise partners in all of our crew members for their resilience and extend heartfelt thanks to customers who continue to support <unk>.
Despite the ongoing impact of the pandemic and related short term challenges, we're seeing light at the end of the tunnel with customer traffic gradually returning to pre pandemic levels or many of our brands and progressing in the right direction towards the others.
Now turning to our results.
Given the lingering impact of COVID-19, pandemic restrictions and robust quarterly results reported in the same period last year. We are very proud of our financial results for the third quarter of 2021.
We delivered a 13% year over year increase in system sales, 15% growth in adjusted EBITDA and 21% improvement in cash flows from operating activities.
Some of these key metrics reached record highs or near record highs in the third quarter, including a record adjusted EBITDA of $56.0 million and a record free cash flows of $51.0 million.
During the third quarter.
<unk> network lost about 19300 business days due to COVID-19 related restrictions in many restaurants that we're operating we're doing so in a restricted capacity. These lost business days were at their lowest levels. Since the pandemic began but there remained material for our franchise partners and for MTI.
While the business is far from fully recovered major brands, such as Cold Stone Sweet Frog Baton Rouge, Thai Express sushi shop in Mikes outperformed compared to the same period last year casual dining restaurants had a very strong recovery posting a 45% year over year growth, while mall locations at a 42% growth over the third quarter of last year.
This was realized despite restrictions on dining room and food court capacity in many jurisdictions throughout the quarter.
Once again, we use our strong cash flows predominantly to reduce our debt level in the third quarter.
$37.0 million applied to debt this quarter, bringing total repayments since the start of the pandemic to approximately $180 million.
Disciplined deleverage brings the business well within our target leverage ratios with net debt to adjusted EBITDA for the last 12 months sitting at 2.06 times.
Turning to our network. We ended the third quarter with 6848 locations. We opened 59 locations, including three via joint ventures permanently closed 105, and dispose of 13, four net store loss of 59 locations.
Although this represents a slight erosion in our locations down.
We are reassured to see that the number of closures. This quarter is the lowest we've experienced in the third quarter since 2016.
As at August 31, 6848 locations in our network represented 95%, 94% of the locations we had before the pandemic, implying a net erosion of approximately 6%.
Our teams are actively working with franchise partners and landlords to prevent store closures to the extent possible working on franchisee profitability and renewals.
We've also put everything in place to accelerate the pace of store openings. Our objective is to bring our network back to where it was before the pandemic and keep expanding at this point.
We still had 164 temporary closed location.
At the end of the quarter. Many of those locations are in movie theaters airports colleges health labs in major urban centers, which have not yet recovered.
Since the end of the quarter 25 of those locations have reopened.
We are actively working with our franchise partners to reopen the remaining temporarily closed locations. Although we are hopeful they will reopen we will get a clearer picture in the next quarter or two.
As for new store openings, we are slowly rebuilding momentum and.
We remain confident we can continue this upward trend due to labor shortages and supply chain issues the process to build a new restaurant. Unfortunately, it takes months much longer than before.
That being said the pipeline of new franchisees remains healthy and we expect a more normal rates of store openings to resume in the upcoming quarters as supply chain issues subside and construction goes back to normal level.
System sales for the quarter reached one point through $2 billion.
Up 13% compared to the third quarter of 2020, our network benefited from a strong rebound of some of our brands and continued strong performance of others. This performance was realized despite adverse foreign exchange variations, which shaved $47.0 million from our sales during the quarter.
Our system sales were up 29% in Canada, 5% in the U S and 7% internationally.
I will now I will turn the call over to Renee, who will discuss <unk> financial results.
Thank you, Eric and good morning, everyone.
Well for the future.
Let's start with our network.
Total 456 locations were closed at least one day during the third quarter, which resulted in about 19300 lost days of business.
The majority of these losses of business went in Canada, primarily due to the Ontario, shutdowns, which impacted a good portion of our third quarter.
These closures as well as various other gentlemen.
Imposed restrictions impacted our recurring revenue stream and adjusted EBITDA.
Currently we still have 139 restaurants concurrently.
An improvement over the 164 locations we have closed.
31.
As mentioned by Eric of the 164 temporarily close location a majority of these are located in non traditional locations such as health clubs minimize University and airport, where our ability to encourage the opening is not constrained.
We expect this figure however continued dropping as more restrictions are lifted and restaurants restaurant.
<unk> operations once again.
In the third quarter total revenues grew by 11% to reach $151 million.
Our franchise operation revenue increased 13% of recurring revenue driven from franchise location rose $9.0 million in Canada, and $6.0 million in the U S and international markets.
These are closely related to our system sales, which were up 13%.
The increase stems primarily from malls, which outperformed prior year with sales growth of 42% as well as the strong performance in the Canadian casual dining segment, which saw similar growth of 42%.
This increase in restaurant sales also contributed to the increase in promotional fund revenue, which had a quarterly increase of 20% compared to prior year.
Revenue from our food processing distribution and retail operations remained stable at $31 million.
While our food processing and distribution centers had increases in revenue.
Coming from the increased restaurant or.
Our retail segment saw a slight decrease of customer spending shifted back to the restaurant.
Corporate store revenues also saw an increase of 14% mainly due to the reopening of locations that were temporarily closed in Q3 of last year.
Phil.
Important sales channel in our third quarter.
$18 eight.
The percent of total systems out there.
The overall digital sales decrease.
In the third quarter as a percentage of total sales dropping from 21 two in the prior year. The Canadian segment continued to deliver solid results with a year over year improvement of $25.0 million.
The U S declined from $24 five of total sales to 27%, reflecting the gradual effects of the reopening.
Our third quarter, adjusted EBITDA increased 15% to $56.0 million compared to $47.0 million for the same period last year.
This was mainly due to the increase in restaurant sale, which as mentioned earlier led to a significant increase in our franchising revenues as well as our continued efforts to manage our controllable expenses.
The Canadian segment completed 42% of total adjusted EBITDA, representing a year over year increase of $5.0 million or 18%, while the U S and international segments contributed 58% of total adjusted EBITDA accounting for year over year increase of $4.0 million or 12%.
During the quarter. We also continued to benefit from the Canadian emergency wage subsidy.
This represented <unk> 8 million in total with evenly between wage subsidy.
This represents a decrease of $9.0 million compared to last year, mainly attributable to empty why not qualify for the program.
Two out of three of the.
One month in Q3.
We also saw a recovery in expected credit loss on accounts receivable of $4.0 million, which stems mainly from better than expected collection from franchisees net.
Net income attributable to shareholders was $27.0 million or 99 per share for the third quarter of 2021 compared to 20 to $31.0 million or <unk> 93 per share for the same period last year.
Turning to liquidity and capital resources with the impressive EBITDA generated by Nty during the third quarter, we generated solid cash flow from operating activities of $52.0 million compared to $44.0 million for the same period last year.
This growth was driven by higher profitability and proactive cost management.
Free cash flow increased by $13.0 million or 23% to $51.0 million or $85.0 per diluted share from $51.0 per diluted share for the same period last year. This significant increase was primarily driven by higher adjusted EBITDA.
In the quarter, we also reinstated the distributions to our shareholders and paid $10.0 million of dividends or $18.05 per share now.
Now turning to our financial position, we continue to pay down our debt at.
At the end of the third quarter long term debt, mainly in the form of bank facilities and hold back on acquisition stood at $387 million down from $426 million in the second quarter.
Also ended the quarter with $56 million of cash on hand, and with that I'll turn it back to Eric for the conclusion.
Thank you Renee.
Given these strong financial results from the third quarter and improved financial situation and a positive outlook for our business I am proud to see <unk>. The MTI family navigating through this pandemic with utmost resilience and determination.
We now have more options in terms of our capital allocation strategy during the third quarter, we lowered our long term debt restored our quarterly dividend and renewed our NCI share buyback program. Looking ahead, our long term strategic plan remains to deliver organic growth, while searching for accretive acquisition targets at the right price with the right attributes.
In closing I would like to sincerely, thank our employees customers and suppliers for their ongoing support.
Thank you for your time, and we'll now open the lines for questions operator.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your question. Please press Star one again, we'll pause for just a moment to compile the Q&A roster.
And your first question will come from Vishal <unk> from National Bank. Please go ahead. Your line is open.
Okay.
Hi, Thanks for taking my questions.
I'm just wondering if you can give us some perspective on supply chain challenges and labor challenges and how that's impacting.
Your restaurants.
Maybe if you expect those charges to get worse in the future.
Yes.
That's a really interesting question.
Obviously labor is.
As Ben has been widely discussed in the last few weeks last few months.
It's been a challenge throughout North America, some some pockets are better than others, but it's certainly a challenge for us and also for our suppliers.
So obviously, we were struggling with our restaurants and finding staff is not easy.
For our suppliers the face the same problems, whether it's our distributors, whether it's our suppliers.
We're all facing the same thing.
So our supply chain is definitely disrupted there are some challenges in terms of inflation in costs, but also in terms of getting the products.
But the good news is we have a great team, they're working really hard to try to five subsea.
Substitute products when the main product is not available finding ways to make sure distribution is done on time as much as possible.
We are seeing the distribution situations get a little bit better in the last few weeks. So that's encouraging.
And in terms of supply chain.
I mean, as it's disrupted im not sure how long, it's going to take to go back to normal.
This is an.
Unprecedented situations so it's hard to.
Based ourselves on anything that happened in history.
Look at how it is going to be resolved, but.
I do anticipate that supply chain is going to be a challenge for a certain amount of time and in terms of our labor shortage.
I mean, the demographic deficit that we're facing throughout North America is nothing new and it is going to be around us for a certain period of time. So again, there's going to be a period of adjustments but.
I don't see that problem going away in the next few months, so we're going to have to.
Learn to live with it find find ways to be more efficient and find ways to offer.
Good.
<unk> to our customers.
With the amount of staff that we have available.
That's all it is so.
Whether it's in.
Adjusting our menus to make sure that.
The menus are a little bit easier to execute or working with our suppliers to have a certain portion of whatever it is that we're producing that gets automated amdocs.
Im not sure where the solution is and it's probably not only from one place that the solution is going to come from it's going to be working together, that's we're going to solve it but.
I don't see anything here.
And Surmountable, so we'll get there.
Okay.
With respect to inflation.
Obviously, another major topic in the industry.
We're hearing indications from companies that they're increasing on a.
Wages for employees to attract and attract employees can you comment on the pressures that your franchisees are seeing on the inflation that you had.
And you're in your in your P&L and what should we expect looking forward.
Yes, there is definitely inflation.
No getting.
Getting access to a resource it is not as easy as it was before.
The labor shortage, we're finding ourselves in the market.
That's that's easier for our employees and harder for employers. So obviously there is inflation in terms of salaries, but.
So not only the amount of money youre going to pay people its how <unk>.
It's the other benefits that youre offering them that are going to make a difference. So people are asking for a little bit more than just money. Nowadays so it's a slightly different perspective, so we have to be over.
Of that then we need to be adaptable to the situations. So theres definitely inflation on our side in our restaurants labor cost as a certain amount of pressure.
<unk> is a franchise or as well.
And then you look at our suppliers and they're facing the same thing there their suppliers are increasing their prices.
They have to pay people more to have access to them in the face of inflation as well. So it goes it goes throughout the supply chain and there is inflation at every step of the way. So again, it's something that we need to adjust through unfortunately, it forces us to increase our prices slightly in some of our restaurants.
We really have no choice this is.
This is the way it is in 2021 and I'm not sure how.
It is going to unfold for the future, but right now we're facing a certain amount of inflation and we need to adjust.
Okay.
Lastly, with respect to organic growth, obviously, a focus for empty why pre pandemic.
And it seems like it.
Great.
All lines back on organic growth looking forward. So can you give us some comments on what you think will be the major drivers to establish sustainable organic growth from Hawaii.
Yes, but it all starts with franchisee profitability.
Ultimately, we have franchisees that are making an investment in the they're looking for a return in exchange for that investment that theyre, making and if they do realize that return they will invest more in their businesses and they'll talk to other people about the investment that we can make them.
We will reduce the number of closures will increase the number of new openings and ultimately it is this is this is where it starts and this is where it ends we need to we need to focus on franchisee profitability, we need to make our franchisees lives is easier as easy as possible as a franchisor.
And make them proud of being associated to a certain brand and the rest will go well.
New store openings as always.
The easiest way for us to grow organically.
And this is certainly an area of focus for us.
Okay and are we talking about marketing investment or maybe other than investment from two of our infrastructure to help <unk> has had.
A major factor.
Well, there's a number of different areas, where we need to invest in every brand is different so im not going to.
I'm not going to list the brands and the.
The required investments, but obviously online ordering is a big thing technology is a big thing.
Investing in menu innovation, and making sure that our store designs are.
New and fresh and.
This is what people are looking for obviously the pandemic is change a few things there as well.
So we need to work on a number of different fronts.
Buying marketing is one way to to address the situation, but it's certainly not the only one.
Okay.
That's to the team on the results. Thank you. Thank you.
Your next question comes from Jonathan <unk> from CIBC. Please go ahead. Your line is open.
Thank you good morning, I wanted to start on M&A and I'm curious what you're seeing here at the moment, we've seen a few names go public recently, yet at 20 times plus EBITDA evaluations are.
Are you seeing that in negotiations right now and what you're seeing with the divergence between private valuations versus public.
Yes, there's no question, we're competing with the very highest IPO market. So there is.
There's.
A certain standard that set in a certain expectation obviously it applies only to the larger companies.
But yes, so so.
You've seen some ipos theres going to be more I'm sure in the market in the fall and into winter.
A number of different players are rumored to be looking for IPO. So obviously when it comes to larger targets, we're who we're competing with private equities and we're competing with IPO valuation.
As you know <unk> always been disciplined in acquiring companies and we're not going to be multiples of that magnitude.
That being said if you look at the smaller targets I think they are the valuations are probably a little bit more reasonable.
Expectations are still.
Hi, expectations are still a certain number but.
Realistically I think FAA. If you are at a size where private equities are not necessarily interested in you don't have access to the IPO market you need to be a little bit more reasonable.
So the deal flow is still.
Relatively slow when it comes to M&A at the moment, especially for the smaller targets.
So it will be patients that we're seeing on the market.
There's good and bad there is there is a number of.
Companies that are not ticking all the boxes that we want to.
But we want to look at so.
We're going to be patient, but I'm expecting the deal flow to accelerate at some point.
In the near future and hopefully we will be there.
To be able to.
To acquire new companies, we are building our treasure chest now we've paid down a lot of our debt, we're comfortable with where we are.
It's just a matter of finding the right targets at the right price and and we'll be we'll be we'll be back on the M&A dream.
Okay. That's that's helpful. Thanks, and then I want to stick with that topic on capital allocation you.
You referenced the balance sheet. It can really healthy shaped M&A may take a pause for a little bit so given that.
Is it fair to expect that you would make some investments to drive organic growth, whether thats incentivizing, new store growth or renovations and contributing towards those or investments in technology for point of sale integration. Those types of things is that something you might accelerate given the current.
M&A environment in the state of the balance sheet.
Well, whatever we're going to do in the future is something we're going to do no matter what the M&A market looks like so we are investing in renovating our stores, we have a number of programs in place to rejuvenate some of our some of our older brands and some even of our recent brands that need to.
Maybe you can take the next step.
But whatever the M&A market is it's not going to prevent us from investing in our existing network, which is the most important for us.
We need to take care of what we have in our portfolio before we get side. So.
The investments are.
Ongoing.
This is not something that we we detail, but its ongoing the investments and the rejuvenation of our networks are also ongoing and they've been they've been they've been going forever, but last forever, but for many years.
So this is not something that we detailed four four for your Florida markets, but this is.
This is this is not this is not related to whatever we do in M&A. So we manage the business on a decentralized basis M&A is one thing and it doesn't distract people away from making sure that their stores and their brands are operating optimally. So.
We're going to keep investing where we're investing at the moment.
There might be an acceleration or not but.
There is M&A or not is not going to make a difference on that.
Okay understood.
One more on capital allocation, how do you think about using the tid versus paying down debt with the balance sheet, where it is.
Yes, well, we're looking at both options.
CIB is always there for us.
Buying back shares is.
I think a very valid Denver location, and we were buying back shares before the pandemic.
We haven't bought back shares in Q3 doesn't mean, we're not going to buy shares back in the future, especially in the context of.
If we ended up in.
Sure.
In a place where M&A is not available for us may be buying <unk> is going to be our best target but.
This is this is something that we talk.
We talked at the board level.
Every quarter every meeting.
And it's a regular topic, so I'm not saying, we're going to buy our we're not going to buy on the CIB, but it's there for us and it's a very valid capital allocation strategy that we appreciate.
Okay. That's helpful. Thanks, and then last one for me.
You've talked in the past Eric about being encouraged about the franchisee pipeline and the prospects for driving unit growth.
How would you characterize the likelihood of closures moving forward do you think that the restaurants that were going to close as a result of the pandemic. Most of those largely closed and is it reasonable to think the EPS at positive net unit growth and I.
I don't know the timeline, but theyre not too distant future.
Yes. This is certainly what we're aiming for or we would like to have positive store growth at some point, we're always going to have some closures.
For whatever reason given the size of our network I think it's normal to have some some some non renewals of leases or some stores that are underperforming.
My clothes, so we're always going to have some.
Whether there's a pandemic or not.
That being said.
It's hard to predict where.
Where the closures are going to be going forward, where we have there are so many markets.
Forces that are at stake now with we're working with landlords, we are working with our franchisees the employment market is difficult.
Getting our franchisees to renew is certainly a challenge for us not because they're not profitable, but because of the supply chain and labor challenges they have and the investments we need to make not knowing if theyre going to be operating.
To optimize their asset that they are buying.
But.
I mean in terms of closures.
Time will tell there is still a certain number of stores that are at risk because of the pandemic I'm thinking of major urban centers for example that have not yet recovered.
We're still fragile there is still some buckets.
And that depend largely on tourism for example that are a little bit more fragile.
So we need to be.
We need to monitor the situation closely and work with our franchisees and in terms of new store openings.
And the pipeline is really healthy so at least we have that.
And hopefully we will get it we're going to be able to accelerate the pace of opening I think people are seeing now that restaurants are back end.
It's an investment that makes sense, it's interesting customers are therefore, the right brands.
Banks are lending money again, where banks perceived restaurants, maybe is a little bit riskier a year ago.
And now we just need to figure out the supply chain and find people to build our stores and find the equipment to operate our stores.
But yes to your point, we are definitely aiming at positive store growth at some point.
Timeline.
Is unpredictable, but we're this is certainly a goal we have internally.
Okay, Great. That's all for me. Thank you very much.
Your next question comes from Nick Corcoran from Acumen capital. Please go ahead. Your line is open.
Good morning, and congrats on the strong quarter.
Thanks, Nick.
My first question just has to do with Papa Murphy's it looks like sequentially was down a bit I understand Q3 as well.
Typically a seasonally weaker quarter, but can you give a little bit more color on.
And how you felt performed in the quarter and what Youre expecting going forward.
Yes, well buy Papa Murphy's Youre right. The performance in Q3 was a little bit softer but.
Not that much softer than last year.
We are.
We still performed really well with Papa Murphy's, we're really happy with the performance. We have a number of initiatives that are being put in place to continue on the momentum we have.
So we're really bullish on Papa Murphy's at the moment, we're accelerating the pace of.
Of selling stores and opening new stores, we're rejuvenating our network at the moment a number of franchisees.
Our and reinvesting in their stores and making them look at fresh again.
So lots of enthusiasm around the brand. So we're really happy where where we are and we had a slightly softer quarter.
But.
To me, it's I mean, it can be a function of many different things.
Theres a lot of.
Factors that are at play there and including the very hot weather and all the west coast, which are very.
Very big territories very important territories for.
For Papa Murphy's if you look at the entire West coast and some area was much warmer than normal and lots of forest fires lots of everything.
It doesn't necessarily encourage people to turn on the oven in their house and create more heat.
So.
We'll see.
I don't want to draw conclusions based on our Q3 and I'm pretty excited with what's.
What's coming going forward so.
We're still very bullish about that Brian.
Great and then you mentioned the pipeline for new franchisees and as healthy can you give any color on that the U S versus CAD and where.
The new franchisees may be coming from.
Yeah, well the pipeline is healthy in both countries. If you look at the U S. Obviously, we have some brands that are.
That have proven to be COVID-19 proof those those were easier to sell.
Obviously, it takes a certain amount of time between dime we.
We reached an agreement with our franchisees to open a store and the store openings, especially when it's so hard to build new stores.
So very very strong pipeline in the U S. So we're looking at Canada to pipeline is also a really healthy so I'm really proud of the job our team has made to.
Really create the <unk>.
Great Buzz around our brand and.
We are making.
Making the best they can.
Tough situation during the pandemic and really highlighting the strength of our brands during.
During the pandemic that really shown for many of our brands and we're talking about we're talking a lot about all the negative that happened during the pandemic, but theres also a lot of positive.
And if you look at our performance over the last 18 months I think we've proven that a lot of our concepts.
Our resilient.
Or a nimble and.
Some of our concepts performed extremely well during the pandemic.
Obviously these these concepts are a little bit easier to sell now and we're focusing on the positive here.
And then last question for me I believe you are in the process of replacing your bond App with fresh specific apps can you maybe give some color on how that's going and when you expect those to rollout.
Yes, it's a it's not an easy process.
For sure two to have the brand specific loyalty and gift cards.
The brand specific online ordering.
So we're still we're still happy with whereby not business. When we're happy with the partner we have to operate upon <unk>, we're still going to keep doing business with the same partner on on a certain number of different things.
So <unk> is still working well we are in the process of implementing.
The brand specific items. So there is a timeline in place we center our first.
Acacia to our.
But customers I think it was.
And last week of September.
So the process is.
Going as planned.
And I expect that in November most of the new solutions are going to be implemented.
And the brand specific online ordering loyalty.
And to a certain extent giftcard to are going to be.
Fully deployed probably by the end of November.
That's all from me thanks for taking my questions.
Next question comes from Derek Lessard from TD Securities. Please go ahead. Your line is open.
Yes, thanks, and congratulations to your team on a solid quarter and the recovery. So a lot of my questions have been asked I'm just going to I'm, just going to ask some follow ups.
I guess in terms of pricing curious how much you were able to pass through and sort of what has been if any pushback that you're seeing from customers there.
Yes, well Unfortunately, we had to push pricing on most of our brands. There are some brands that were a little bit immune based on.
Maybe on the input costs that we have but.
For the most part we've had to push push pricing the customers adjust well I would say people expect that theres going to be pricing, there is inflation and everything and <unk>.
<unk> brands are not the only ones that are increasing prices in the restaurants. So.
We try to keep it as reasonable as possible, we try to limit it as much as possible because we know there is.
There is eventually going to be a line, where the customers are going to slow down their visits to our into our stores. So we're trying to push pricing, but we're very cautious about it trying to maybe.
Come up with new menu items that have.
Better food costs.
And less labor involved for for our franchisees trying to help them as much as possible to rank the direct customers too.
Certain different skus that might be more advantageous for where the franchisee, but pricing is happening across our brands.
There's been a certain amount of pricing done during the pandemic. There is for many of our brands. There is another round of pricing Thats taking place now.
We're in the very near future.
But we're trying to limit as much as possible.
Okay. Thanks for that as well I think.
I was curious to get your euro opinion on things like vaccine passports.
In terms of whether or not you think there theyre, helping restaurant sales are or keep some of your restaurants opened that might have otherwise closed and maybe just a follow up to that is.
If you could highlight some of the mall in office traffic trend that youre seeing coming back.
Yes, well on the vaccine bass, obviously, it's a it's a tradeoff here, where we are I mean, obviously, we'd like to not have the vaccine facet and we'd like to not have all the other measures that are in place for in our restaurants, but if if those are necessary to keep our dining rooms open and we will we will accept the measures temporary.
<unk>.
This is this is where we're at obviously the vaccine fast prevents a certain number of our customers to visit our stores. So we are losing some state some sales, but it is certainly a better solution and having our dining room dining room's growth.
So I mean, we're working with our governments, where where the vaccine fast has been implemented we are trying to reduce the other measures.
Because we are trying to be logical and not duplicate in maybe triple the measures.
But yes.
For every measure to keep our restaurants open and I think it's a valid option.
When it comes to mall, obviously, if you look at our our sales in Canada compared to 2019 before the pandemic most of the difference Thats left between 4040 is coming from malls.
Certain malls are doing really well.
Some areas.
But for the vast majority of mall traffic is down dwell time in the malls is down.
Now in.
In Canada with the vaccine bass in most provinces now.
Obviously, it's creating an additional hurdle for our customers to enjoy the food and the food court.
So.
Mulder malls are still a challenge for us in the vaccine passes again, if if it's if it makes a difference between closing the food court or keeping the food court open with some restrictions I'll I'll take the vaccine best but.
It's not a very pleasant experience I don't know if you visited a food court recently about when you when you approach a seating area with your trade in your hands and you need to drop everything take out to your wallet to show your IV take out your phone to show your vaccine facets.
It's not a very pleasant experience, but again, if it keeps our food courts open im happy to do it for a certain amount of.
The pandemic.
It goes away.
Okay.
What we haven't touched on this maybe you also were able to get some some decent margin expansion.
You've obviously had some cost come back into the business naturally.
<unk> had lower government subsidy sold so curious on the drivers of the.
Of your margin.
Of your margin.
Yes, well our structure is very scalable.
It's always been so the margins are slightly higher than normal I think.
In this quarter.
And not necessarily because of the.
EBITDA is not normal, but because maybe we have fewer turnkey restaurants that we're building we have fewer low margin items that are impacting our business, they're not items that will reduce our profit, but they are items that will push our margins down a little bit.
So it looks like the margins are higher than normal but yes.
I mean.
We don't have that much cost an empty why other than.
The staff we have because.
By far our biggest expenses are franchise or is the workforce we have.
And if our restaurants open or if the sales in a given restaurant go up 50% that doesn't require more staff. That's just it's just the same people that are.
Visiting the same restaurants in helping and assisting the same franchisees and new franchisees are just doing better. So so yes, theres a scalability to our structure and obviously during the pandemic we had to address.
The way, we do things and we're probably a little bit more.
<unk> than we were before certainly a little bit leaner than we were before.
And.
That's why the margins are so high.
Okay and just to.
Confirmed you said.
There was there was two months that you didn't qualify for the subsidy and in this quarter or is that because you were showing sales growth I believe.
Yes.
Their sales growth. There is also new rules that have been published by the government. While they are not published they've been they've been floated by the government.
That seemed to indicate that we might no longer qualify we don't know exactly what those rules are yet so we chose.
Not to take the subsidies until the rules are published and if we qualify we'll definitely go for the money, but if we don't qualified and we'd rather not blame the mining has to return it.
So.
Yes, so we're waiting for clarification on certain in a certain set of rules.
And obviously our business is doing better so that disqualifies us for for a certain number of items as well.
Right. Okay. That's helpful and maybe just one last one for me just touch on the labor.
For the last time.
Was wondering if you've seen any financial impact or impact on sales because of that.
Difficult.
Labor environment.
There's no question about it.
We have a number of our restaurants can open seven days anymore.
A number of our restaurants are.
Constrained and they need to open.
<unk> opened fewer days open.
Some restaurants, we're doing the three day parts now are doing only two day parts or even though only one day parts. So we've lost some day parts, we've lost some business days.
And those are not counted by the way and the number of 19000 lost business as we mentioned.
Lots of our restaurants are closing one or two days a week because they just can't staff.
Yes, definitely there is an impact on sales from from not being too.
Operate at full capacity and even if a restaurant is opened sometimes youre going to find yourself with a section close because we just we just can't service it properly and we want to make sure the customer experience is adequate.
So yes, definitely it's really hard to measure what the impact on sales is but there is definitely an impact.
Okay. That's it for me Thanks, Eric Congratulations.
On this journey a tough environment. Thank.
Thank you.
Okay.
Your next question comes from <unk> Khan from RBC Capital markets. Please go ahead. Your line is open.
Alright, Thanks, Dan Good morning, just I guess a question on your comment earlier around just trying to adjust to the current environment.
Rejigging menus, where possible so far is to address the labor shortage I guess, how are you guys thinking about it because I would think adjusting the menu training staff might take a little while and thereby then things could get better how are you guys managing or balancing kind of a short term solutions versus maybe just adjusting to this as maybe this could go on for a long time.
Yes, well the key is always to have the best possible customer experience and the customer experience comes from the floor and it comes from.
And the service that comes from the value proposition so.
We make changes we keep all of these things in mind.
So I mean, so we're trying to make our menu simpler simpler to execute.
To compensate for the labor shortage. We're also trying to make our menu is more profitable for our franchisees.
So I mean I think in the short term we have no choice we have to go through that.
That process.
If anything it's probably once again teaching us some some valuable lessons.
The last 18 months, we've learned so much about ourselves and about the market and about our business.
And I think this is no different this is just a continuation of the learning process that we've had for 18 months.
It forces us to rethink the way we operate it and I think ultimately for the long run it's going to be a good thing.
Okay, and then just I guess a commentary on digital sales earlier.
Based on the investments or how youre going about it now are you assuming you do you have an assumption for halo.
Going forward coming out of the pandemic X percent of our sales are going to be digital select to invest to get to that level or is it still.
So I just want to understand how you are making those decisions.
Yes, well I think digital is here to stay and theirs.
Yeah.
There are many positive attributes with digital.
The first one is.
You have a way to communicate with your customer thats outside of the store, which is very valuable for us.
Higher average baskets, which is really interesting.
And I mean, it's just more orders a lot of people are looking for digital solutions now instead of being on premise. So yes, we're seeing the future and digital Im not sure exactly where it's heading in the future I know, it's going to grow.
So.
So we're investing massively in both the U S and Canada, obviously in the U S. We are little bit ahead of Canada, but I think with the investments we're making now in Canada, we are hoping to close the gap.
But I think online ordering is here to stay and it's going to grow at what base thats going to grow I don't know.
But one thing's for sure we cannot afford not to be there.
Okay, and then just a follow up there I guess.
Digital continues to grow and as a franchise or.
Yes. It is a focus when we shift to some extent on more productive stores versus just expanding store count at the same store can do a lot more volume with digital and in store and is that something you guys are thinking about.
Well, yes, we've always wanted to make our stores more productive.
So that's not that's nothing new.
We're trying to improve the sales for each of our locations.
And whether we have digital or not.
<unk>.
This has been an ongoing thing for the last 40 years, where MTI trying to improve the sales for each of our location and make our locations more productive. So so this is nothing new and digital is certainly going to help its easier to sometimes get sales outside of the peak hours our gift sales differently. So you don't have someone that's taking the orders instead youre just producing.
The orders so youre using your staff more efficiently, making your stores more productive.
I don't think we need to choose between.
Opening new stores, and making our stores more productive I think those are two objectives that need to go hand in hand, so we're going to keep pushing on both.
Okay, great. Thanks very much.
Yes.
Your last question comes from George <unk> from Scotia Bank. Please go ahead. Your line is open.
Yes, thanks, good morning, and congrats on a good quarter Eric.
Wanted to talk a little bit about cold stone.
Maybe how the outlook looks over the next 12 months.
The cold weather comes in as we lap a very successful last 12 months just wondering your view on the ability for that banner to continue to grow on top of solid growth.
Yes, I wish I had a crystal ball George but.
Yes, we're certainly.
I think we're doing all the right things to make sure that we can continue growth and it's not only the last 12 months I mean this brand has been.
It's been a fantastic base for for a number of years in terms of same store sales in terms of making the stores more productive as we just mentioned.
And now we are implementing new tools, we have new ways to do marketing, we have a lot of new product innovation, that's just outstanding.
We have really good associations and partnerships that we're making with <unk>.
World worldwide renowned brands that are really exciting.
So I mean, we're pushing all the right buttons, how this is going to translate into sales.
I can't make promises, but I think we're doing a lot of good things with Goldstone.
Now too.
To make the brand and.
Incredible with the best possible experience in a decadent ice cream as we've always had so.
So.
Again, the cold stone is a great brand I really believe that's a brand that.
And we had some network erosion in the past few years with with some stores closing, but we're I think we're on the right base now to reverse that trend and start growing the unit count again.
So yes, just to have when we have a lot of good things about bolt on is certainly no negative in the forecast.
Okay and last question I promise.
Labor shortage.
Are there any banners that you'd like to call out that are maybe facing the more more more acute challenges there for any geographies any flavor you can go there.
No.
It's a problem for everyone. Obviously, if you have 50 employees and Youre missing 20.
It's more employees, but if you have five employees and Youre missing one.
It's still a big problem so.
All of our franchisees are facing that problem.
<unk> re.
Regions, where it's more difficult to hire and thinking of.
Quebec at the moment is probably one of the one of the most challenging geographies, especially the <unk>.
Farther east you go in Quebec, the more difficult to get.
But we were facing problems everywhere in North America. So.
I wouldn't I wouldn't say one brand is suffering more than the other I think all our brands are facing the same problems.
Okay, and just a follow up on that you just mentioned there is a new round of price increases I think you mentioned that earlier.
You may be quantify that is that low single digits to the mid single digits, but more than that.
What do you think the likelihood of you getting any pushback from your franchisees, just maybe worried about losing sales or yes.
Yes.
It's always a concern of our franchisees there.
They are the ones that are facing the customers every day and they are the ones that are taking in the comments, if we increase prices too aggressively.
So obviously, we need to try to balance that.
The price increases generally are no low to very low single digits.
If we if we need to go higher than that do we need to have somebody.
Some value proposition.
That's we're going to offer an exchange to try to make it up to our to our customers or give them options.
But yes, we are.
This increases our we've always been there and now this year, there is probably a little bit more pressure to increase prices.
So far our customers have been understanding about the price increases.
But again, we need to be we don't know where that line is it sets.
It's not easy to determine how much the right price increases and where the customers are going to stop visiting our stores. So we need to be.
We need to we need to move very cautiously. So we're trying to keep it to very low numbers. So that it doesn't have.
Drastic repercussions on our brands.
Okay. That's helpful and can you talk to the 139 locations that remain closed in the quarter.
I understand that there is a large number of our non driver I'm just trying to get a sense of the likelihood of all of them reopening maybe over the next couple of quarters.
Yes, well.
The likelihood of all of the reopening I think is.
Is not very high there will be some closures in that number unfortunately.
We are working with our franchise partners for all of these locations.
But some of them might end up with the end of their lease some of them might.
<unk> ended up in especially the ones for example that are more volatile and movie theaters are university campuses.
Or a little bit more unpredictable.
So so.
I wouldn't say they will all reopened there is probably going to be some closures here in our role here is to.
Try to limit that number as much as possible. So that the vast majority of them reopens and we don't lose too many stores.
Okay and last one for me can you maybe remind us of the rationale for the divestiture of Houston last quarter.
I guess.
How do you think a future divestiture, especially given the high valuations out there is that something that you can see MTI maybe tomorrow.
Well nothing is impossible, but it's certainly not something we're contemplating this is not something we normally do in terms of divestitures.
In this case.
We had a brand where.
We still like the brands a lot.
I still actually visit the brands.
But yes, we just.
We have partners in that brand and.
We reached a point, where we felt we either had to buy them out or you had to buy us out.
They chose that option to buy us out so it was amicable.
We ended the relationship this way we sold it back to the people that have sold it to us.
They are great brands, but at some point.
<unk>.
We don't have the right.
Our plan for it.
As a franchise or in his Nty, then maybe it's better for us to leave it in.
In good hands.
With other people and Thats, what we chose to do but this is this is an anomaly. This is not something we're looking to do in <unk>.
Even though with high valuations are generally we're pretty protective of our brands and we're not looking to sell any of them.
Okay. Thanks for answers.
We have no further questions. 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 matter will have a question so it looks.