MTY Food Group Inc. (OTC:MTYFF) Q3 2020 Earnings Conference Call October 9, 2020 8:30 AM ET
Eric Lefebvre, Chief Executive Officer
Renée St-Onge – Chief Financial Officer
Conference Call Participants
Nick Corcoran – Acumen Capital
Sabahat Khan – RBC Capital Markets
Vishal Shreedhar – National Bank
Michael Glen – Raymond James
George Doumet – Scotiabank
Derek Lessard – TD Securities
Dimitry – Veritas
Good morning ladies and gentlemen, thank you for standing by. Welcome to the MTY Food Group Inc. Q3 2020 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 and instructions will be provided at that time for you to queue up for questions. [Operator Instructions].
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 09, 2020.
I would like to turn the call over to your speaker today, Eric Lefebvre, Chief Executive Officer. Please go ahead.
Good morning, everyone, and thank you for joining me for MTY’s third quarter 2020 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 and on SEDAR.
Please be aware that we will refer to certain indicators that are non-IFRS measures. You can refer to our MD&A for more details. I also remind you that all figures expressed on today’s call are in Canadian dollars unless otherwise stated.
First off, I want to take the opportunity to thank our restaurant staff who work tirelessly to make the customer experience as good as it can be given the unusual circumstances and additional procedures and protective equipment that are required.
Thank you to our Head Office staff who have been shorthanded for most of the quarter, who have found creative solutions to complex and volatile problems, and who help our franchisees make the best of the current situation. Your engagement is making a difference. I also want to thank our franchisees, many of whom are fighting against significant headwinds and making a tremendous effort to restore the success of their business. And last, I want to thank everyone who is buying food from restaurants, whether they are MTY restaurants or competitors, our industry more than ever needs the support of its customers.
I will begin with a summary of our results. We are extremely pleased with our third quarter results given the current context and the challenges faced in the past few months. While our systems sales were down year-over-year, many of our key financial performance metrics surpassed the third quarter of last year. This improvement was driven by several factors such as our very strict discipline on controllable expenses, tight cash management and the strong performance of many of our concepts, including the two largest, Cold Stone Creamery and Papa Murphy’s. In the quarter we used the cash we generated to repay CAD 38 million on our long term debt and ended the quarter in a robust financial position.
Turning to an overview of our network, we finished the quarter with 7,123 locations. We opened 45 locations and permanently closed 157 locations and one joint venture for a net store loss of 113.
We started the third quarter with 1,470 temporarily closed locations. During the quarter many locations reopened with the gradual lifting of restrictive public measures, which allowed restaurants within the network to slowly resume operations, although in many cases at a reduced capacity. At the end of the quarter 364 locations were still temporarily closed.
System sales performance followed a similar pattern. As restrictions were lifted, restaurants reopened and consumer confidence was gradually restored. As such, excluding the impact of acquisitions, the year-over-year system sales decline improved from 24% in June to 16% in July and August. If you remember, that followed declines of 67% and 48% in April and May.
System sales for the quarter reached at CAD 897.5 million. The declines remained more material in Canada and international locations than in the U.S., mainly because of the higher proportion of mall and office tower locations, which are 26%, 38% and 5% respectively for Canada, International and the U.S.
Globally our sales and mall locations were down 54% during the quarter, while office tower locations were down 86%. Mall and office tower locations represent 15% of MTYs locations at the end of the quarter.
Locations that remain temporarily closed are mostly located in mall locations, office towers and non-traditional locations such as airports, gyms and universities. In total approximately 52,900 business days were lost during the quarter as a result of these temporary closures, representing lost sales in excess of CAD 80 million.
Evolving government imposed restrictions and public authorities’ response to COVID-19 continues to impact MTY. For example, on October 1 the government of Quebec imposed new restrictions that caused many of our restaurants to close their dining rooms and patios and go back to take-out and delivery operations only. Of note, the Quebec market currently represents 18.5% of total third-quarter network sales, half of which came from casual dining restaurants.
At the same time, we’re seeing other jurisdictions, lifting restrictions with obvious favorable impacts on our business. Therefore ongoing government imposed restrictions will continue to impact the health of our network. As a result, over the coming months the number of impacted locations will continue to fluctuate in response to the rapidly changing environment with the corresponding effect on consumer traffic volumes and revenue.
As we mentioned last quarter, considering the circumstances, we will not be reporting same store sales. We believe that a combination of store closures, days of business lost and system sales are more reliable data points for the time being.
I will now turn it over to Renée, who will discuss MTYs financial results.
Thank you, Eric. Good morning everyone. Before I comment on the results, I would like to remind you that we implemented our first quarter – in our first quarter the new IFRS 16 accounting standards related to leases. We have selected not to restate comparative figures as permitted under the specific transitional provisions in the standard. You can see a more detailed description of the impact of the new standard in our financial statements and MD&A. I invite you to read those carefully as they have a material impact on how the business is presented.
Revenues for the quarter decreased 16.1% from CAD 161.2 million to CAD 135.4 million, mainly because of the impact of the pandemic. The decrease mostly came from our recurring revenue streams which declined in-line with our system sales decline of 17%. On a positive note, two of our flagship brands Papa Murphy’s and Cold Stone Creamery represented 48% of total sales year-to-date. They performed very well in the quarter.
In addition retail operations benefited from higher consumer spending in grocery stores, the launch of new products and the expansion into new provinces which generated 20% higher revenues during the quarter when compared to prior year. It’s also important to note that on a sequential basis revenues improved from a 22% decline in the second quarter as our manufacturing and distribution businesses were impacted by the closure of our restaurants.
Despite the decline in revenues adjusted-EBITDA increased 4% from CAD 41.8 million last year to CAD 43.4 million. Excluding the impact of IFRS 16, adjusted-EBITDA would have been stable at CAD 41.7 million, which is an exceptional performance in our current environment. While a decrease in recurring revenue streams brought on by the pendant put pressure on profitability, aggressive cost control measures mitigated this negative impact.
During the quarter the company continued to preserve capital as a result of the temporary layoffs made in Q2. Our Canadian segment also benefited from the Canada Emergency Wage Subsidy, which contributed CAD 2.6 million to EBITDA. We also reduced travel and meal costs by restricting travel to a minimum and reduced office expenses resulting mainly from our work-from-home policy.
With customers moving to online orders and food delivery, we also saw a significant decrease in our Gift Card program cost as customers are shifting to online electronic gift card.
Net income attributable to shareholders was CAD 22.9 million or CAD 0.93 per share for the third quarter of 2020 compared to a net income of CAD 22.9 million or CAD 0.91 per share for the same period last year. Net income remained stable because of the reduction in operating expenditures in response to the pandemic, coupled with the contributions from Papa Murphy’s and Cold Stone Creamery mentioned previously.
Turning now to liquidity and capital resources, in the third quarter MTY generated cash flows from operating activities of CAD 38.6 million or CAD 1.56 per diluted share, up 42% compared to CAD 27.2 million or CAD 1.08 per share, per diluted share for the same period last year. The increase was mainly driven by favorable variances in EBITDA, a reduction in income taxes and interest paid and by strict working capital management. In turn, we generated free cash flow of CAD 37.1 million in the third quarter, up 39% from CAD 26.7 million for the same period last year.
As announced last quarter, we used the cash we generated to pay down debt and did not pay a dividend or buy back shares. During the quarter we made repayments of CAD 38 million on our long term debt and remained well within our credit agreement ratios. We ended the quarter in a healthy financial position with CAD 43.8 million of cash-on-hand and over CAD 230 million available on our credit facilities and plan to continue to repair our debt in the fourth quarter where possible.
I’ll turn it back to Eric for the conclusion.
Thank you, Renée. For the next quarter we will continue to monitor the impacts of the pandemic, adjust our operations to these volatile market conditions, help our franchisees access government programs that are available to them and aggressively mange our expenses levels and liquidity. Our primary focus is to reopen restaurants, help our franchisees succeed to the best of our ability and provide customers with a safe and friendly environment while optimizing the profitability of our restaurants in these challenging times.
At this stage we are confident that we will be able to regain and retain customer confidence in our brands and restore thepositive momentum, similar to what was achieved in the first quarter of 2020. However, this could take several quarters. We will continue to monitor the situation closely and will adapt our measures as needed going forward. MTY remains in the solid financial position to execute its recovery plan and pursue its growth strategy when the time is right.
I would like to thank our employees, customers and suppliers for their support during these unprecedented times. With that, I thank you for your time and we will now open the lines for questions. Operator.
Thank you. [Operator Instructions] And your first question comes from the line of Nick Corcoran with Acumen Capital. Please go ahead.
Good morning. Can you maybe give a little bit more color around how our Cold Stone and Papa Murphy’s performed, both in the quarter and subsequent to quarter end?
Hi, Nick. Yeah, well Cold Stone performed extremely well during the quarter. Clearly, it does benefit from people being at home a little bit more, so very good performance and the performance of September was also really good for Cold Stone. So there’s a good trend there, continuing for Cold Stone. I mean, we can’t take it for granted, how long it’s going to last and obviously we’re getting into this season low for this brand, but the fact that we’re performing well is still extremely positive.
For Papa Murphy’s the same thing. We had a very good summer and the performance in September was also good. So we’re continuing on the same trend and nothing much has changed in the environment in the U.S. in the past few months. So we have our ups and downs, but we’re doing a lot to try to maintain that momentum and capitalize on it, so that especially for Papa Murphy’s as we’re now entering the strong season for this brand, we’re hoping that we’re going to be able to maintain that momentum. So there’s no guarantee and we don’t know what’s in the future with the COVID and with everything else that’s going on, but we’re trying hard to capitalize on the momentum we gained in the summer.
Great! Then switching gears to Quebec with a second wave and government restrictions in the province, how do you see your brands being positioned for take-out and delivery?
Well, most of our brands are takeout and delivery in their D&A. So we, I mean obviously we have now a little bit more in casual dining, even though it’s not a very large portion of our portfolio. But for the rest, most of our brands are takeout and delivery brands and operation in their very nature.
Now you look at our brands, we just talked about Cold Stone and Papa Murphy’s, those are takeout brands. You look at our Sushi brands, they are takeout brands, you look at our Thai brands and obviously we’re suffering a little bit more in malls, but for whatever is on the street, it is a takeout brand.
You look at our larger brands and for the most part they are takeout and delivery brands. So obviously there are adjustments we need to make when the pandemic hits and we’ve now had seven months to prepare for these things.
So, I’m not saying we’re not going to have an impact if there’s a very massive second wave and there’s more restrictions, but I think we’re better prepared now than we were in March when everything unfolded really fast.
Great, then the last question for me, with two quarters of really strong cash flow generations, what would you need to see to reinstate either the dividend or the NCIB?
We need to remain prudent. We don’t know what’s in the future. I wish I had a very reliable crystal ball, but I don’t. So, we had the discussion with the board yesterday, as to whether we should reinstate the dividend or not. I don’t think we’re at that point yet. I don’t think we’re out of the woods with this pandemic. So we decided to be prudent and allocate 100% of our funds to our long term debt, so that we can protect our balance sheet and if everything goes well, we’re going to have more dry powder for more acquisitions down the road. And if there is a second wave, at least we’re going to have protected, you know resources we had and made sure that the company was robust.
So prudence I think is still the main element for us. So for the fourth quarter, our capital allocation strategy is going 100% against our debt and it’s going to be the same as the second and third quarter basically.
Great! Thanks for taking my questions.
And your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.
Thanks and good morning. Just under CAD 10 million of cost savings that you called out in the quarter, can you maybe talk about where those were? And I’m trying to get an understanding of if those can continue into subsequent quarters. It seems like most of your network is open now, so those could be runner-up [ph]. I just want to get more color on what they are.
Yeah, there’s a large portion of it that’s coming from salaries. As you know we have to furlough a lot of people. So a lot of people sacrifice for the company and for the future of MTY. Starting in September we had to make a decision on everyone and either we called them back or we terminated people. So, in all I think we terminated permanently about 125 people. So those will be permanent savings, but the rest of the people were all called back in September or before.
So there’s a portion of it, there’s a portion of these expenses that are going to come back and hopefully it’s going to go along with higher sales as well, so that we can afford to pay for these additional expenses.
But there is a large portion of our expenses also that I think we’ve learned new ways of doing things during the pandemic. You know, these events force you to take a step back and reassess the way you do things and reassess the way you want to look at things. So there’s a good portion of it that’s going to be a permanent savings.
So, I’m not saying all of it can be permanent, but there’s a portion of it that will be. But definitely in terms of whatever wages we saved, some of it will not be permanent and as we disclosed in our notes and as Renée mentioned during her allocution script, she mentioned the amount of wage subsidies we got. So that obviously is not something that’s permanent. As our revenues will go up, the wage subsidy will phase out and you’ll see that one disappear at some point, hopefully.
Alright, great! Thanks. And then can you maybe provide an update on the sort of the royalty collection, where we are on that? I know you had an accelerated royalty payment option for your franchisees. Can you just talk about how the royalty collection is going across your network?
Yeah, well know what, it’s going pretty well, all things considered. Obviously, if you look at our notes, you’ll see that we made larger allowances for collection problems, for collection losses. So we do have more provisions than we had in the past and we do expect that there’s going to be more franchisee’s that might not be able to pay.
But all things considered, it’s doing pretty well. The deferred amounts are being collected at the moment. And for the most part, our franchisees are understanding that this is our bread and butter and we need to collect these royalties. Obviously, whenever we have more restrictions, it causes more challenges for us to collect, but all-in-all, considering everything; we’re pretty satisfied with where we’re sitting now.
Alright, thanks. And then this last one for me. Could you provide a bit of color on sort of the takeout and delivery during Q3 and where those trends are, you know what you’re seeing through your own app perhaps, what you’re seeing with aggregators or where the network is on per cent on some of those platforms, represented sales.
Yeah, well I’m not going to give you a full network percentage because of the number of concepts we have, it wouldn’t necessarily be a very good data point for you, but there has been an increase for sure in the past few months.
We’re seeing some customers phasing out of delivery and going more in the takeout options, where it tends to – they tend to be cheaper for the customer, they’re better for us as well. So we’re for sure trying to push every channel we have to sell to our customers if we have a chance to favor takeout over delivery. I think it’s cheaper for everyone. The customer experience tends to be more controllable for us as well.
But there has been an increase. We are investing in these tools. We are spending a considerable amount of time trying to maximize every channel we have. We are spending some important amounts of money also into promoting these channels and making sure that our franchisees are maximizing it and that we are maximizing it, our websites are being challenged as well in terms of how functional they are and how seamless the experience can be.
So we are rebuilding a few of our websites and obviously I think this is a trend that’s here to stay. So these investments are going to be important now and they are going to be important in the future as well.
Okay, great. Thank you.
And your next question comes from the line of Vishal Shreedhar with National Bank. Please go ahead.
Hi! Thanks for taking my questions.
Sorry Vishal, I can’t hear you. Sorry Vishal, I can’t hear the questions. Operator, can we move to the next person, please?
Of course, one moment please. And your next question comes from the line of Michael Glen with Raymond James. Please go ahead.
Hey, good morning. Eric, just hoping that you can provide some insights into how your franchisees in Canada. Are they – is there an active participation in the SEWS programs and what kind of benefits they’re getting from that participation?
Yeah, well for sure the wage subsidy is a key program in making the industry survive, and not only our industry, but many other industries. It’s also a key program for our suppliers, for our distributors, for everyone that is involved around here and around restaurants. So the fact that this program was extended well into 2021 is certainly a key attribute for everyone, including MTY.
So we’re really happy with that and I have to assume that all our franchisees that are eligible have participated. We did provide a lot of information to them to try to guide them on how this was going to work and how to access the program. In terms of CECRA wherever the franchisees are eligible for it and as you know, the criteria is pretty strict there and it does exclude a number of our franchisees. But wherever it’s applicable, I would say that the vast, vast majority of our franchisees have had access to it and did take the benefit from it, so.
Our landlords are for the most part understanding. They see that our industry is in trouble. It’s not only MTY stores that are facing challenges. It’s all of the restaurant industry. If you look at the major urban areas that are pretty much deserted now, you look at the mall food courts, the office towers, there’s a lot less business than there was, so without the CECRA I don’t think any restaurant can really survive.
So the landlords are understanding. They’ve been amazing to work with for the vast majority of them, so we’re pretty happy with where we stand now. Now that leaves all the restaurants that did not qualify for CECRA and we’re working diligently with our landlords to try to find ways to make it a little bit more palatable financially for our franchisees and for MTY. But I would say that the relationship with the landlord’s has been very, very positive and you know there’s a few exceptions obviously and mainly with the smaller landlords that maybe can’t afford to give us any abatement or any form of assistance, but for the vast majority of landlords it’s been extremely positive.
And with CECRA, I don’t know if we’ve seen all of the details. That program takes on a bit of a new form post October 1. Is that a bigger benefit to your franchisees under the new rules?
We’re still waiting for the rules on this one. I don’t think – unless I missed something, I don’t think anything has really been disclosed yet. So we know something might be coming, although it hasn’t been 100% confirmed yet, but we’re still waiting for that, and we do have the details of the provincial program for Quebec and we’re satisfied with that program. The mechanics are a little bit complicated, but all-in-all it’s a good program. But as far as the federal government is concerned, we’re still waiting for details.
Okay, and then where would your – where do you think your leverage would need to be before the company would start to look at some M&A options?
I don’t think it’s related to leverage really. At this point I think it’s more related to having better visibility on where the world is going. So I think in terms of leverage, we’re at a point now that is getting a little bit more comfortable. So I think financially, you know if everything stayed equal, we’d probably be looking at something, but we don’t know what tomorrow holds and if there is more problems coming our way, starting next week or next month. I think we need to be prudent. So we’re not closing the door on anything and if there is an opportunity that comes our way that we really need to look at, then we will. But for the moment prudence is, for the next quarter is going to be the way to go for us.
And then how would you characterize the opportunity set for M&A right now?
Well, there’s a lot of financial distress in our industry, so we’re seeing a lot of distressed concepts come our way, especially in the U.S., where it has been probably more distressed than in Canada. Even though we tend to do better in the U.S., not everyone does, so – but I expect the seller’s market to hit full gear very soon, so we’ll probably see some good concepts change hands very soon and we’ll be ready.
I mean we’re not closing the door on anything and if the process starts today, it’s not going to end in a month from now, it would go into 2021. So we’d probably invest some time in it. But I think the good quality sellers at the moment are not on the market. The good quality sellers will come when it’s a better market for them to sell without having to discount their assets.
Okay, that’s it for me. Thanks.
And your next question comes from the line of George Doumet with Scotiabank. Please go ahead.
Yeah, good morning Eric. Last conference call you mentioned that we’ll know more of the impact of the pandemic on store closures at the end of Q3, so here we are. Can you maybe give us an update on that?
Yeah, well I think you’ve seen the number of restaurants we have that are still closed at the moment, so obviously we do have better visibility. We don’t have full visibility, because we don’t know if there’s going to be a second wave or how hard it’s going to be. We know we’re better prepared. We know we understand how this all works better now. The assistance programs are in place, so we do have better visibility.
You see our store closures are not necessarily much higher than normal and yeah, so among the stores that are still closed, some of them just reclosed last week with the government of Quebec announcing new restrictions, so we had a few casual dining restaurants that closed. And the other ones for the most part, they are still closed because they just don’t have any business, whether they’re in airports and fitness facilities or in office towers, there’s just no reason for them to open, so we are starting to get better visibility.
And I know your next question is going to be how many of those are going to close, and I’m not going to answer that question, because we don’t give any guidance.
Okay, I was going to ask that, but sure. Maybe on the Quebec locations that you mentioned earlier, the lockdown, can you talk a little bit about what you think the expected sales for those stores would be maybe versus the last lockdown?
Well, the sales will be better, there’s no question. Now, are they going to be sufficient? No, absolutely not. For the casual dining restaurants it’s – you know there’s going to be a few restaurants that will do better depending on the customers around the restaurant and the different attributes of each restaurant and franchisees, but no, the sales are not sufficient to make ends meet for sure and that’s a good thing we have the provincial program that was announced to help us with the fixed costs. So that’s already a big, big help and we’re waiting for the federal government to announce something on the rest of the business.
But yeah, we just don’t know how long it’s going to last. For now it’s until October 28. Is it going to be extended or not, we don’t know. We can all guess, but at this point it’s all speculation. But yes, sales are going to be better than the first time around, but they are still not sufficient to make a restaurant make a profit, so we need these assistance programs.
Okay, so let’s follow up on an earlier question on the royalty abatement program. Having determined the deferral period, can you maybe share some color on who hasn’t paid the royalties back by banner or maybe by geography or by type of location?
Well, everyone is repaying the royalties at the moment, so all the concepts are repaying. We did have programs for repayment that would put some brands repayment over six months and some other over 12 months. We started collecting in September, the first week of September, so that’s all it is for now.
There’s – we tried to make it as simple as possible. We tried to make it as small as possible for the franchisees on a weekly basis so they don’t have to face large repayments of royalties on top of everything else they need to pay. So that’s why we chose to – for most of our franchisees it’s between six and 12 months on repayments and it breaks it down into smaller amounts.
Okay. Eric, I think you gave some color on Papa Murphy. I think you said the concepts accounted for CAD 15 million via year-over-year growth and EBITDA for the first nine months. Would you add that number just for this quarter?
Well no, I don’t, I don’t.
Okay, okay. And just one last one just to clarify, maybe for Renée or for yourself. I know I saw CAD 2.6 million of waste subsidies in the quarter. Is there anything else like from the government aid, be it like any other item or maybe tax deferral or anything they received, that we also received this quarter?
Yeah, there’s no other subsidies, so that’s the only one we got and it’s a good number of – it’s a good number, so it’s material for us and we really appreciate it. In terms of other government programs, we did have a deferral and payment of tax installments in Canada to September 30, so those were paid in September. So that’s more or less and there’s nothing else out there other than that.
Okay, thanks for the answers.
And your next question comes from the line of Derek Lessard with TD Securities. Please go ahead.
Yeah, good morning everybody and I guess congratulations Eric and your team. It’s a very difficult environment out there. Maybe if I can just get – you did highlight that you wanted to continue the momentum of Papa Murphy’s into Q4. Just wondering if you could highlight some of the initiatives that you’ve got on the go, whether from a marketing standpoint or a promo standpoint?
Yeah, there’s a lot going on at Papa Murphy’s, and I’m not going to tell you all of what we’re doing, because you know we have a lot of reasons, specific initiatives also, so I’m not going to bore you to death for two hours, but we do have a few major initiatives. We have the one now that’s actually a lot of fun. It’s ‘Trade Your Frozen Pizza.’ So we’re asking people to go in their freezer and dig out old frozen pizzas that they have and trade them for Papa Murphy’s Pizza. That’s a lot of fun, actually if you can follow it on Twitter. There’s people that find the five year past due frozen pizzas in their freezers, and it’s created a good buzz on social media.
We also have the tail baking, so we’re associating with the football season, the NFL football season. Like this weekend we’re going into a football stadium and we’re going for the party in the parking lot and we’re calling it Tailbake, so it’s – we’re making fun with these things.
So we have a number of these initiatives that are going on, some more major, some smaller and we’ve also reshuffled the way we do marketing and the way we approach our customers. Obviously the old medias are not as relevant as before. So we’re adjusting that and there’s going to be more changes coming. But I’m really proud of everything we’re doing in terms of marketing. The way we’ve turned this ship around is quite impressive.
So stay tuned, because there’s a lot more to come, but I think we have a lot of good things going now to make the brand relevant again, because one of the things we noticed when we acquired it just over a year ago is everybody loved the brand, but nobody goes. So I talked to my Uber drivers, to my cab drivers, they all said, ‘yeah, we love Papa Murphy’s.’ And when I asked them, ‘when’s the last time you went?’ they said, ‘well, maybe 10 years ago.’ So that’s not good enough for us. So we’re trying to make the brand relevant. We’re trying to make the brand fun, younger and also to attract a different crowd and it seems to be working at the moment.
It sounds all promising. I wonder, do you have any metrics on how you’re performing, I guess relative to Fresh Pizza QSR’s.
Yeah, well we’re kind of in between the frozen and the fresh, so we do compare to other players in the fresh pizza, but we also compare to whatever is going on with Frozen. So I’m not going to start putting numbers out there to compare against one or against the other, but I think we’re faring pretty well.
Okay, then that’s fair. Maybe a couple more questions. I guess you mentioned in your remarks that Papa Murphy’s and Cold Stone were like almost 50% of revenues, and obviously the majority of the U.S. sales and royalty. So I guess if you’re U.S. royalty was down overall, was down I think CAD 2 million year-over-year, does that mean Cold Stone was comping negatively, especially if you take into consideration like how strong the pizza environment has been?
No, Cold Stone was comping positive, domestic U.S. was comping very strong, internationally was a little bit more challenging. We’re in different jurisdictions internationally where we’re located in malls and in major urban centers, so international was a little bit more difficult for Cold Stone, but domestically extremely positive and overall positive. So no, but we do have concepts.
For example, in the U.S. that are major concepts for us that are predominantly in California, where restrictions haven’t been lifted. They’ve been sort of lifted for a few weeks and then they were put back in place. So these concepts that are predominantly California are struggling a little bit more.
We also have our New York City and basically all of New England that’s a little bit more difficult. So we do have concepts that are in pockets that are in these areas that are more difficult and we also have sweetFrog. That’s another concept that’s – especially in the summer it’s an important one for us. It’s a self-serve type of concept, which is a problem for COVID and we’re not allowed to operate normally, and it does take away a lot of the attractiveness of the brand to consumers.
So this brand is also down for the best season for this brand. So all-in-all, in the U.S., Cold Stone, Papa Murphy’s comping positive and very strong, but some other concepts are a little bit more challenged.
Okay, that’s – I mean, that’s great color Eric. Just wondering maybe if things were down a little bit more in California, what would be your top concepts there?
Well, Baja Fresh is one of them. The Counter is another one. Those two concepts are more impacted by restrictions, government restrictions than others. So those are two of the main ones that are that are being affected.
Okay, okay thanks for that. And one last one for me, you know great, great job on controlling your expenses and you did get that CAD 2.6 million benefit from the wage subsidy. Just wondering how – if I’m looking at your financials properly, it says that you paid CAD 7.7 million or so in cost of goods sold in rent, but you have 95% of your locations open. I was just wondering if you can help me tie those two together.
So you’re questioning why the cogs are so low or why they’re so high?
Why they’re so low? I mean, if I look at year-over-year, they were CAD 22.8 million last year and they are CAD 7.7 million this quarter.
Yeah, there’s a few things in there. You look at the construction of restaurants for example has gone down quite massively. You know as you might expect, people are a little bit slower to invest and build new restaurants at the moment. So those are an important component of these cost of goods sold.
We also sold a large number of Papa Murphy’s corporate locations over the last few quarters and obviously that reduces our rent and our cost of goods sold. And then you also have to look at our distribution centers, which are serving some of our brands, including one that’s in the casual dining space where sales were more impacted, so there’s a few elements there.
I don’t think it’s unusually low considering everything that’s going on in the components that are in there. So yeah, I think it’s more in line and if you see our revenues go up, this is a line that’s also going to go up.
Okay, thanks for that Eric.
And your next question comes from the line of Dimitry with Veritas. Please go ahead.
Hi and thanks for taking my question. Eric, would you please let us know the percentage of digital sales as percentage of system sales or give us rough indication of the demand issues of digital sales.
Yeah, this is not a metric we publish Dimitry, I apologize for that. Because of the number of brands we have and the number of jurisdictions, I don’t think it would be certainly a very relevant metric if we published it.
We do have a few brands that are performing, that are selling a lot more digitally. If you look at for example Papa Murphy’s, our online orders are very strong and we’re trying to push our customers towards online orders. You look at some of our Mexican brands also, our online orders are very strong and you have a few of the other concepts that are stronger and some of them are just not as relevant for online sales and for delivery, so they are lower.
So all in all it’s not a metric that we publish, but I can confirm we do have some brands that are performing very well and some brands that have opportunities there.
Okay, and just to clarify the meaning of the word strong, is there a way to gauge what that is?
How do you want me to define it?
Well, let’s say for Papa Murphy’s and for some of the Mexican brands that you mentioned, if you have some kind of, what percentage of system sales are coming through digitals for those brands?
I’ll give you only one. If you look at Papa Murphy’s, for example, we’re between 25% and 30%. The rate goes up and down depending on promotions, depending on marketing and everything, and depending on the day of the week, but typically it’s going to be between 25% and 30%.
Right. Thank you, I appreciate it. The other question, while we are at Papa Murphy’s, I wonder if you could perhaps quantify for us Papa Murphy’s as well as Cold Stone’s year-over-year systems sales growth in the quarter?
No, we don’t give specific information for the sales growth for all the brands. All I can tell you is that both of them are performing very well and they’re up versus last year, but we’re not going to quantify the exact performance of each brand.
Got it, okay, good. Alright, the other question is just on the cash flow statement, there was an increase in provision space of CAD 7 million this quarter. Is it related to working capital management in the prior quarter? Just trying to understand how to think about the cash flows related to payments of provisions going forward.
Yeah, that’s a good question. You’ve been studying the statements pretty hard in a short amount of time. So we had the provisions, we had two major lawsuits that were settled during the quarter. Both of them were Papa Murphy’s pre-existing lawsuits. So they were dated from before the acquisition and those were settled during the quarter. So that accounts for the – pretty much the entire amount of provisions that we paid out.
I see. Okay and let me see here if there was anything else. So a lot of my questions were addressed by the way, so thanks a lot for that. Do you anticipate any major assistance to franchisees in the foreseeable future that might require MTY to provide either long or additional loyalty relief?
Well, we’re not looking at anything at the moment. It doesn’t mean nothing will be required at the moment. I think in the U.S. generally our franchise community is doing well and there are exceptions. So we’re managing that on a case-by-case basis.
In Canada, the only province that’s really reinstated restrictions is Quebec and there was a good program offered by the provincial government. And as I mentioned, we’re waiting for the federal government to come up with something, and then we’re going to have to make decisions. If the programs are sufficient, maybe MTY won’t have to do anything. But there’s a possibility at some point that if the restrictions last longer, that we might have to help our franchisees.
Now, that being said we’re not a bank, so we don’t lend money to people. There are institutions that are specialized in that. So if we do something it’s going to be for royalties, but at the moment there’s nothing in the cards.
Okay, and in terms of the locations that are receiving grant relief right now, especially given the fact that you are on the head list for some of them, how do you think about a potential loss exposure to those for franchisees that might potentially fail?
Yeah, it’s a very valid possibility and there have been unfortunately some casualties already where we’ve had to face the situation. So we have many opportunities when these things come and we can refranchise the location, we can operate the location corporately and try to turn it around or we can try to find a way to exit the lease with our landlord and depending on each situation, it’s something that we need to handle case by case. But we did take more provisions this quarter and last quarter to take these things into account.
So if you look at the amount of provisions we took for bad debts and for collection problems, they are a lot more material than they were in the past just for that reason, because there’s a possibility that we’re going to have to pay. And if we do, then we’re prepared for it.
And I guess how easy it is to exit from a head list in situations like that. I understand it probably depends on your individual negotiations with specific landlords. But in general, how should we think about your ability to exit the lease in situations where stores are underperforming?
It’s never easy, it’s never easy. The first thing that’s not easy is to accept the fact that our franchisees has failed and you know it’s – we like our franchisees to succeed, we don’t like them to fail. So we need to accept that first part and then depending on the location, on the landlord and on quality of the location, if the landlord has a line up of tenants for a space, sometimes it’s a little bit easier to get out of the lease, but if it’s an area that’s not as popular or that’s a little bit more difficult for them to find tenants, then it’s going to be a difficult discussion with the landlord.
So again, it’s really case-by-case and it’s not about one given landlord or one given location. It’s really depending on a set of facts that are related to each location that we need to take into account. But it’s never easy to get out of a lease. It’s a contract and you know there’s two parties and landlords obviously they like to have their tenants pay the rent and that’s what they do for a living, so for us to take that away from them is not easy.
I understand. Do you have any comments about the general health of your franchisees? I know you have a lot of different trends, so it might be a bit hard, but if you give us some kind of general picture of how they are faring, maybe how many of them are relying on various forms of government assistance, be it on the rent side or on the payroll assistance programs. Any color on that?
Yeah, well the health of our franchisees is very variable, and even if I told you for a concept that all our franchisees are doing well, if you have a franchisee in that specific concept, that’s in a maybe urban area that’s been deserted and they’re struggling with that one location, you know for our franchisees the only location that matters is theirs, because that’s where they put their savings, and that’s where they invest so much time and energy.
So the health of our network in general, considering everything, I think is good. But obviously we’re facing challenges with a number of locations and with a number of franchises and yeah, so it’s not perfect for sure given the circumstances. So we’re trying to assist everyone to make the best of it, weather the storm and restore good profitability and good returns after the crisis.
But when you have, for example, like in Quebec where they open up and then they lock back the dining rooms, it’s a little bit more challenging financially, but also mentally on the franchisees. It’s very draining when you’re facing these situations that are out of your control and that are affecting your livelihood to such a material amount.
Yeah. Okay, thanks Eric. I appreciate it.
And there no further questions at this time. I will send a call back over to Eric for closing remarks.
Thank you again for joining us on this call. We look forward to speaking with you again on our next quarterly call.
This concludes today’s conference call. You may now disconnect.