Eric Lefebvre - CFO

George Doumet - Scotiabank Derek Lessard - TD Securities Leon Aghazarian - National Bank Financial Michael Glen - Macquarie Elizabeth Johnston - Laurentian Bank Securities.

Thank you. So, good morning, ladies and gentlemen.

[Foreign Language]. So thank you for joining me for MTY's first quarterly conference call with the financial community.

Over the past few months, there has been an increase in the number of requests for conference calls. And consequently, we have made the decision to hold this call going forward.

Today, I will discuss the financial and operating results of the company for the third quarter ended August 31, 2018. Our press release reporting the third quarter results was published earlier this morning.

It can also be found on our website at mtygroup.com or on SEDAR. Now, let me remind you that all figures expressed today -- on today's call are in Canadian dollars unless otherwise stated, and that we will refer to certain indicators that are non-IFRS measures.

Now you can refer to our MD&A for more details. We'll now begin with a brief overview of our network sales for the quarter.

So, at the end of the quarter, MTY's network had 5,690 locations in operation. During the quarter, we opened 67 locations and closed 111 for a net organic reduction of 44 locations, and that results from a multitude of factors including landlords redeveloping their properties, competitive pressures, lease expiring, and closure of underperforming stores.

Our network sales were up 24% to $787.9 million. The increase is primarily attributable to recent acquisitions and to a lesser extent to a favorable foreign exchange impact.

In addition, our same-store sales were up slightly during the quarter. Our Canadian sales grew 1.2% with most territories showing positive results with the exception of Saskatchewan, which remains under significant pressure following the introduction of the meal tax in the second quarter of 2017.

Conversely, our sales in the United States declined slightly by 0.3% during the quarter, primarily affected by some headwinds in the states of California, Arizona, and Oregon. Our same-store sales for Imvescor Restaurants, which are not included in the numbers I just quoted, were up by 0.7% in the third quarter led by strong performances of Ben & Florentine, Mikes and Scores.

So now, let's turn to MTY's financial results. So, before I comment on the results themselves, I'd like to remind you about the impact of the seasonality on our results.

Since the addition of Cold Stone Creamery, which is now MTY's largest concept representing over 20% of our total network sales and which is extremely seasonal, as you would expect our first quarter sales are typically the lowest while the third quarter are at their annual peak. Revenues for the third quarter increased 26% to $91.2 million, mainly driven by the acquisitions of Imvescor Restaurant Group in Canada and The Counter Custom Burgers in US.

Our franchising margins in Q3 were very strong reaching 53% compared to 45% last year. The increase in the margins is mainly driven by higher quality of revenues and by lower lease termination costs.

Our margins are at the seasonal high in Q3, given that most of our costs are fixed. As a result, our EBITDA increased 55% to $39.6 million, a historical high for the company, which is compared to $25.6 million last year.

These results are very solid and will represent a strong comp for next year excluding potential acquisitions. Our net income attributable to shareholders increased by 85% to $22.3 million or $0.89 per share or $0.88 per diluted share compared to $12.0 million or $0.56 a share for the same period last year.

Turning now to liquidity and capital resources, our cash flows generated by operating activities were $28.4 million compared to $24.9 million last year. During the quarter, we had higher working cap requirements mainly because of higher inventories and higher disbursements of accounts payable and accrued liabilities.

That's mainly due to the construction of some restaurants under Imvescor brand. As a result, excluding the variation in non-cash working capital items, income taxes and interest paid, their operations generated $38.1 million in cash flows during the quarter compared to $27.3 million in 2017.

In the third quarter, our cash flows were primarily used to repay our debt and pay dividends. At the end of the quarter, we had $49.1 million of cash and a total net debt of $236.1 million compared to a net debt of $182.2 million at November 30.

The increase is mainly due to some acquisitions we've made this year, including the Imvescor acquisition. Our net debt-to-EBITDA remains relatively low leaving plenty of room for additional acquisitions in the future.

Finally, the Board of Directors has declared a quarterly dividend of $0.15 per share payable November 15 to shareholders registered in the company's records at the end of business on November 5th. Before I conclude the call, I would like to make a brief comment on our next quarterly results.

Although we never provide guidance, I would like to remind you that while the fourth quarter results are expected to increase over the same period last year, they're not expected to do so in the same magnitude as they have in the past two quarters as the lift from recent acquisitions will subside given that some were closed in the fourth quarter last year. In addition, in the fourth quarter last year, we benefited from a non-recurring gain from early termination of a contract which will not be repeated this year.

I will now be pleased to answer any questions you may have.

Hey, good morning. Congrats on having your first conference call and on a good quarter.

Thanks, George.

May I just focus a little bit on the expenses; it seems to be a pretty sizable reduction in franchise costs in the US and also in corporate costs in Canada. So, can you maybe share some details as to where those are coming from and should we think of them as sustainable, I guess, going forward?

Yes, well I'll start with the US. The main driver in the US is the lease termination cost last year in Q3.

We had to clean up after a multiple unit franchisee declared bankruptcy. So, we had quite a bit of lease termination costs in Q3 of '17.

That was not something that we hope to repeat. So, I would say in the US for Q3, I would say, definitely this is sustainable.

We're also buying back some of our underperforming area developers. So, we're sharing less of our royalties in the US at the moment than we were at the same time last year and again that too is sustainable.

In Canada, I think it's mostly business as usual. We have -- if anything, we're probably a little bit understaffed at the moment.

We're having like most companies, especially in Eastern Canada some struggles to hire people. So, we have a few vacancies more than we would like to.

But all-in-all, it's mostly sustainable normal business for Canada.

I mean that's helpful. And maybe shifting gears to same-store sales, can you talk a little bit about pricing; obviously there's been some wage pressure in Ontario and Alberta.

Maybe some details around some of the initiatives we've taken, and if we’re seeing at all any volume -- maybe negative volume response from some of the banners on pricing?

Yes, well, we did have to take pricing obviously, especially in Ontario where the increase was a little bit more abrupt. We took some measures internally to try to optimize the way we do business, optimize the labor we have in the stores.

And then once that is taken care of, unfortunately, we have to increase prices and some brands increased prices more than others, but I would say all of our brands did increase their prices. Our same-store sales at the moment in Ontario are lower than the total price increase we took, so we do have a certain reduction in traffic, but it's too early to really say if the reduction in traffic is caused by the price increases or by some external factors.

And I'll give you an example, last year, we had the celebrations in Ottawa for Canada's anniversary, which is not repeated this year. So, what's the impact of that compared to the price increases is really hard to -- it’s really hard to tell.

So, we're going to need a little bit more time to really be able to assess the impact of the price increases we took.

Yes, that's helpful. Thanks.

Can you also give us a little bit of -- maybe some color on the integration of IRG to-date, and I saw in the same-store sales for the quarter for IRG, it looked to be well below the three-year average at that -- I guess at that company. Just wondering, maybe overtime, how you see that same-store sales growth kind of evolving?

I wish I had a crystal ball for that. Yes, well, there's many questions in that.

The first is in terms of integration, we're happy that all of our IRG colleagues moved in yesterday in our r St. Laurent offices, so we're all now one big family under the same roof.

The integration is going really well. I think in terms of operations and everything, it's more or less status quo for them.

We haven't really changed the structure of Imvescor or anything really that would affect the brand. The back office has changed a little bit.

But in terms of operating each of the concepts themselves, there has been no real change. And you did comment on the same-store sales for the overall business being lowered in the past few quarters, and you're right, and we have a few concepts that are performing really good, and fortunately in Q3, Bâton Rouge suffered from really good weather in Eastern Canada.

The barbeque season was very strong, and people seem to have cooked at home a little bit more. We have the same trends in Houston and in Madisons this summer where our Friday nights and Saturday nights and even the Sunday nights to a certain extent seem to have been weaker than they were in previous years, and we think that it's partly attributable to the really good weather we had.

Okay. Thanks for your comments.

I'll get back in queue.

Yes, thanks. And good morning, everybody.

And again, thank you for setting up these calls. Eric, just maybe if I can come back to the lower operating costs, I was wondering how much of the decline was due to lower -- it seems like there was lower labor -- or lower labor and wages?

You're right. As a proportion of royalty, the wages are a little bit lower.

And that's mainly a function of being in a casual dining environment. We have higher revenues for each employee that we have in the head office.

So, for any concepts we acquire in that space, we will have an abnormal labor ratio compared to MTY's traditional business.

And maybe just a follow-up on the Imvescor. I was just -- and you did point to some weather impact.

I was just wondering if you're able to split out the difference between what you thought was weather-related versus the lapping of tougher comps?

Yes, it's really hard. I wish I had a really good measure for that, but I don't.

I wish I had a really good answer for you, and I wish I could give you a little bit more information, but it's really hard to be able to separate the impact of weather versus the impact of competition versus the impact of our promotions and the effectiveness of everything we've done this year compared to last year or the impact of any other factor as consumer spending or anything else. So, I don't really have a good answer for you Derek.

I'm sorry about that.

Okay. Maybe if I ask it another way.

Is there -- like are you able to provide us sort of with the mix split between steak and rib concepts versus your other concepts?

Oh! Yes, I can tell you, the steak and ribs is much weaker than the other concepts.

And then for Houston and Madisons, it was also much weaker. It was a deep negative for the period.

So yes, it does affect the overall performance for sure.

Alright, that's helpful. And maybe just a follow-up for me.

Do you have any comments around the performance of Pizza Delight?

Yes. Pizza Delight is -- we do have some struggles in certain areas where fishing was just not present this year because of the whale protection regulation.

So, we do have a few stores which struggled a little bit more because of that, the seasonal workers did not come to some of the cities. But other than that, Pizza Delight is -- it's performing okay.

So, I wouldn't say it's a spectacular performance, but it's also not underperforming, so we're happy with Pizza Delight at the moment.

Okay. So was it -- it was flat or better than flat?

It's slightly better than flat.

Okay. Thanks for that.

Yes, hi. Good morning, Eric.

And yes, congratulations on hosting your first call. There was a lot of emphasis on cost justifiably on past questions.

I mean you did mention in your prepared remarks that the quality of revenues was also better. Can you talk to us a little bit about that and what do you mean by that exactly please?

Yes. Well, one of the things I always look at to assess the state of the business is the strength of our recurring streams of revenues.

We can have initial franchise fees, we can have a bunch of one-timers. We can have a lot of turnkeys, which will push the margins down.

But ultimately the health of our business going forward is driven by recurring revenues, which are royalties and some other streams that are also recurring. So those are also very high margin revenues and in the quarter you can look at our MD&A, you'll see that the growth of our recurring streams of revenues were -- was very strong, even excluding Imvescor.

So this is what I refer to when I talk about the quality of revenues, those are the ones that are the bread and butter of MTY and the ones that will make us successful in the long run. So we need to focus our attention on those and instead of the one-timers.

And was that the same in Canada and in the US, or is it more pronounced in Canada?

No, it's the same in both territories.

Okay. You did mention obviously some performances for some other brands.

Can you talk just a little bit about Cold Stone and how that did obviously Q3 seasonally with the summer weather, with the summertime, it’s obviously your biggest brand. Can you talk to us about what the performance was like there please?

Yes, well, Cold Stone is continuing to perform well. In Q3, it was a slightly positive comp for Cold Stone.

So, we're happy with that, obviously, being about 23% of our system sales. It's a really important concept for us.

And we need to focus the right amount of attention to it. We do open and close a few stores and because of the number of stores, it's normal that there's going to be more volatility.

We did open a large number of international stores in Q3 for Cold Stone, which is very promising as future territories develop. So we're happy with Cold Stone in general.

Okay. You did mention also that for the outlook, obviously not giving any guidance, but for the Q4 '18 performance to be better than Q4 '17, but not with the same order of magnitude.

Can you perhaps quantify that a little bit for us?

No.

Okay.

I'll keep it as my comment.

Okay, fair enough. And then on the M&A front, I mean what's the landscape looking like in terms of potential targets that you're seeing, and whether it's more Canadian-focused or even US-focused?

Well, there's going to be a lot of consolidation in the coming years. We're seeing a lot of M&A activity.

Obviously, the US market is a lot deeper than the Canadian market. We do have opportunities that we're looking at on both sides of the border.

Larger targets will tend to be more in the US but they also tend to be more interesting for private equity firms that have a lot capital to deploy at the moment. So we're going into some processes and knowing that some private equities might interfere.

And we did have that for a few of the opportunities we looked at recently, where private equities just drew the multiples to a level where we're no longer following, as you know, and Leon you've been covering MTY for a long time, you know our discipline. So we don't let our emotions get in the way and we just -- we're going to wait and see if those larger acquisitions are too expensive at the moment, we will wait for the next recession and then we'll pick them up for more reasonable prices.

So do you feel like the price and the multiples are more or like the impediment right now in terms of making more acquisitions? Or do you feel like there's a lack of targets or potential sellers out there?

There's certainly not a lack of targets, there are a plenty of targets. I would say that where we're going to struggle to make more acquisitions because of the high prices is anything that has a price tag over $100 million will attract the attention of private equities.

And this is where we're seeing a little bit more pressure on prices. If we go lower than that price tag, the multiples tend to be a little bit more reasonable.

And this is probably a space where we're going to be more comfortable doing more M&A in the future.

Okay. And one final one from me just on the leverage, I mean you did mention that you're quite comfortable with where it is right now.

What would be the upper end of the comfort range right now before using other sources of funding for M&A?

Well, I've always communicated that up to 3 times pro forma EBITDA, we’re extremely comfortable. We would be prepared to go slightly higher than that for a short period, if we have a solid de-leverage plan in place.

It wouldn't stay over 3 times for a long period. But if we have to do it for a shorter period, we would.

And then if we ever had to do something, find a sizable target that would bring us over let's say 4 times EBITDA, we would probably be a little bit uncomfortable and we'd look at other options for financing the acquisition.

Thank you. Appreciate the color.

Thank you, Leon.

Hey, good morning. So Eric, in about just under a month you're sort to going to assume the -- officially assume the CEO role at MTY.

Can you maybe just speak to some of the initiatives that as you assume that role that you'd like to put in place at the company?

Yes, well, I'm certainly not waiting for November 2nd to start making some adjustments. There is not going to be anything shattering.

We've built something over the past 39 years. I think have been really successful and I'm not going to change that.

But we will adjust a few things. Stanley and I are two different people, two different leaders.

So we approach the business in slightly different ways. We will try to have a little bit more focus on our existing assets probably.

That's probably one thing we'll try to focus on going forward. And that's started already.

But the main driver for MTY's growth is still going to be acquisitive and we're still looking at M&A very aggressively going forward. So in that sense I don't think the story about MTY is going to change that much.

Okay. And just honing on that a little bit more, you've talked a more about internal growth.

Are you able to share some of your own views on where you would like to take internal growth numbers at the company?

Well, no, I'm not going to provide guidance on that. And any initiative we're going to put forward is going to take us certain amount of time before it starts bearing fruits.

So we do have now three COOs for the Canadian business that are focused on a certain line of business. So we’re probably going to have a little bit more time to drill down and provide more initiatives for the brands that are under their umbrella.

And I'm certainly going to have objectives for them and then their compensation is going to be highly incentivized to provide growth. But at this point, I'm not prepared to share targets that I have for the three COOs.

Okay. And then just on the rate of sort of nets where we are in terms of net closings or gross closings of store -- stores.

How do you think that that -- how would you like to see that play out in coming quarters? I'm not looking for specific guidance.

But I mean do you think it's on the gross closings, do you think we sort of hit a peak and we should level out from here or should we -- are we going to see some more elevated numbers on store closings?

Yes, store closures are hard to predict especially and this quarter was a good example. We had a number of closures of Maui Wowi [tots] and Country Style non-traditional restaurants.

And those are -- those tend to be very volatile. There we can open a lot in the short period of time but we can also close a lot.

And we don't know when the closures are going to come. So it would be hard for me to tell you if we’ll have more closures or less closures and I would hope to have fewer obviously.

We like to open stores. We don't necessarily like to close them.

But it's really hard to predict. So I'm going to try to focus on franchisee profitability to the extent possible and try to keep them in business and then we'll focus on opening stores which is a part where it's a little bit more predictable and a little bit easier to control.

And can you provide a comment there on the franchisee pipeline as it stands today and versus where it stood historically, some -- give some context?

Yes we have a good pipeline of franchisees. And I think it's pretty much where it's been in the past few years.

I would say probably 10 years ago it was probably easier in franchisees. Now, there is a more competition.

There is a lot of restaurants out there. There is a lot of good franchisers that have good concepts to offer.

But we do have a really good pipeline where we're very happy with where we stand. And obviously we have some brands that are more attractive than others at the moment that have longer pipelines.

But all-in-all, we're satisfied with where the pipeline is sitting. And then in many cases, it's a matter of finding the right real estate at the right price and getting the store to open.

Okay. Thanks for taking my questions.

Thank you, Michael.

Hi, good morning.

Hi, Elizabeth.

I just wanted to go back to the COO that you mentioned briefly. In terms of the new COOs in Canada and how that relates to your M&A strategy, do you have a preference when it comes to acquiring sort of QSR versus a full-service?

No, we're very agnostic when it comes to the type of food that we're offering, the type of restaurant and also very agnostic geographically within North America. So we tend to be a little bit more opportunistic and very highly selective on one type of food or one geography that we're looking for.

Obviously, we have to be sensitive to a certain number of factors. And there have been a few brands that have been for sale recently that we have decided for various reasons that we would not want to be associated with them, or with the type of food or the type of restaurant they offer.

But other than that, we'll go for good opportunities that are priced right. We have to be careful where we go in malls, for example, if we're in really good malls, it's one thing; if we're in secondary malls, there's always a question about where the traffic is going in those locations in the future.

So we need to assess that. But even if we're all in B malls if it's priced right and if the concept is relevant in that type of environment, then we'll go for it.

Okay, great. And just changing topics here, I just want to talk a little bit about delivery and the -- your mobile application.

Can you just give us an update of where you're at with respect to the involvement of those two items?

Yes, well, we're very happy to see the progression of our BonApp and you should all download BonApp and start ordering on it. So, it's been a good ride for BonApp.

We have more and more restaurants on it. We have more and more orders.

We see a really good progression. The graphics are impressive.

The average ticket is also really good on BonApp. It's higher than what we normally see for the brands in the restaurants ordering.

So that part is growing well, and it's probably going to be ready for a stronger push in the near future. For delivery, obviously it’s there, you can’t avoid it.

That’s -- it's one of the aspects of the business that we need to address. So we have more and more of our restaurants that are on SkipTheDishes and on UberEats.

And we did sign an agreement with one of the large providers to have more of our restaurants on their platform. So this is something we're starting to deploy, maybe a little bit more aggressively, but it's also a business model that we need to reflect on and make sure that it's not impacting our franchisees adversely.

At the moment, we're seeing mostly incremental sales. So it still works.

But when we start [eating] into our own existing sales and the business model might not be working anymore. So we'll need to reflect on that in the future and decide where all this is going but delivery is a necessary service we need to offer to our customers at the moment and it's going to be same thing in the future.

So definitely something we're pushing on at the moment.

And are you able to give us a sense as what -- how much of your system sales either in Canada or US overall is coming from this delivery channel, any kind of range you can give us?

It's still a very tiny portion of our sales. It’s an insignificant portion of our sales.

Okay. And just when it comes to orders through the BonApp, again would that be a small percentage of orders coming through that channel?

Yes, well, for certain brands it’s starting to be more meaningful. We have a few brands that are more present on BonApp and that are probably doing a better job at it.

And for -- I would think of two of our brands at the moment with Sushi Shop and ThaiZone, they are seeing the BonApp orders really go through the roof and it's working really well for these two brands. So it's becoming a larger proportion of their sales, even though it's still not a big proportion, it's becoming more and more important.

And we need to track that and see the impact on the brands. But so far, it's been a very positive impact.

And just finally on that point then, can you give us a percentage or range of how many of the stores in the network are on the application right now?

I don't have the exact number. Maybe I can take that one offline and should you know later today.

It's still not a very large proportion. But for example, for Sushi Shop I believe it's almost all of our stores that are on it.

But for some other of our banners, we're still in investing period and there is a number of things we need to address before we do a full launch of BonApp for a brand including whatever customer orders during peak periods, the sequence of producing the food and then making sure that the customer that's on premise is not suffering from the online ordering. So there’s a few things to work on and there’s a few tests to be run for each brand before we do a full launch.

But this is all in the works now and we have a number of brands that are in testing. So we should deploy more aggressively soon.

Okay, great. Thank you very much.

Yes, just a few follow-ups for me. On the same-store sales, it looks like the international segment disproportionately affected the overall or the consolidated same-store sales number.

I'm just wondering what was going on there?

Yes, our international is -- international tends to be very volatile. I wish I had a good answer for you.

We will have pluses and minuses depending on, for example, in the Middle East we have one of our master franchisees, that's renovating stores at various times that will trigger some good same-store sales or if they're not renovating it triggers lower sales. We had a few things happen also in our Asian markets where we had a little bit more weather.

If you follow the news you will have seen Philippines for example being hit quite abruptly by a few typhoons, so we have that. So there’s a few things going on.

But with the diversity of markets that we're serving, it's hard to really pinpoint exactly one reason for that. But you're right, the international sales -- same-store sales have been the more negative.

Okay. And maybe just along the same lines, you pointed to California and Arizona and Oregon.

What was the -- I guess the reason behind the weakness there?

It's a good question and it's something we're evaluating. We can't blame it on the weather.

So we need to work with the team to understand why certain territories are working really well for us at the moment and certain others that are -- that have the same brands are not working as well. So there is something going on in those specific geographies and the team is addressing the question as we speak to make sure we have a plan to reverse those trends.

Okay. And could you talk about the swing in operating margin from I guess zero to 15% in the Canadian corporate stores?

Yes, well, corporate stores again are an interesting piece. They tend to be more volatile than the normal business simply because of how we repossess certain stores for a given period.

That might be struggling. We turn them around and resale them to a franchisee.

So sometimes we have a few really good stores in the portfolio. We make a lot of money and those stores as you can imagine are easier to franchise.

So we franchise the stores and then we lose that stream of EBITDA and we gain royalties in the franchising segment. And we have stores that are also underperforming and those unfortunately we can't franchise them because it wouldn’t be fair for a franchisee to have to assume those losses.

So we're more or less stuck with those underperforming restaurants. If anything I would say that the Q3 number is high and it's not a normal number and you shouldn't expect that type of profitability in Q4.

Okay. And maybe just a housekeeping for me.

So wondering if you have the system sales split between Canada and the US this quarter?

I don't have it in my papers. But something we can follow-up on.

And it’s certainly something we can present the exact number in our next MD&A. We do have the split on Page 20 of the MD&A where you have all the various markets.

So we’re at 44% of our sales in the US -- 44% of our locations and 44% of our sales in the US for the quarter but I'm -- I don't have the exact number.

Yes, I’d just be waiting.

Yes, well, I'll try to help you. In Q4, we will make the exact number available.

That's all from me. Thanks.

Okay. So thank you everyone for joining me on this call.

I look forward to speaking you again for our next quarterly call. Thank you.