Good morning, ladies and gentlemen, thank you for joining me for MTY’s fourth quarter and year-end conference call. Today, we will discuss the financial and operating results of the company for the fourth quarter ended November 30, 2018.

[Foreign Language] Press release reporting the fourth quarter and year-end results was published earlier this morning. It can also be found on our website and at on SEDAR.

Before I begin, let me remind you that all figures expressed on today’s call are in Canadian dollars unless otherwise stated, and at least be aware that we will refer to certain indicators that are non-IFRS measures and you can refer to our MD&A for more details. So, let’s start with a brief overview of our network.

We finished the year with the 5,984 locations. During the fourth quarter, we acquired the 331 locations of sweetFrog Premium Frozen Yogurt and we opened 68 locations in those 105 for a net increase of 294.

Most of the closures during the quarter came from the sandwich and coffee categories, which experienced that reduction of 34 locations. The openings were spread across all categories.

Cold Stone leading the way with 13. For the full year, we acquired 702 locations via five transactions, opened 269 locations and closed 456 for a net positive of 515 locations.

Our network sales grew by 21% to reach a historical high of $2.8 billion. The growth of our network locations and sales went – was entirely driven by acquisitions.

Network sales for the fourth quarter were up 30% to $707 million. The growth is primarily attributable to recent acquisitions, although organic growth was marginally positive for the first time in five quarters.

Canadian same-store sales were up slightly making this the fifth consecutive quarter of positive growth. Most of our territories showed positive results with the exception of Saskatchewan, which remains under significant pressure, and Quebec, which experience its first decline after a series of positive periods.

The sales in the United States declined by 1.9% primarily driven by the markets of California, Arizona, Maryland, and Oregon. California was negatively impacted by extreme weather including the major forest fires, which disrupted the operations for a large part of the states for an extended period of time.

Given the weight of California, on the U.S. portion of MTY’s network, the negative results of the quarter have translated into negative performance for the United States as a whole.

The stores located outside North America experienced the decline of same-store sales of 8.9% and most of the decline is attributable to our stores in the Middle East, which are suffering from rapidly declining economies and trade sanctions on certain countries in which our stores are located. Finally, same-store sales for Imvescor restaurants, which are not included in the consolidated same-store sales, grew by 1.9% in the fourth quarter led by Ben & Florentine, Mikes and Scores.

Now, let’s turn to MTY’s financial results. Before I comment on the results, I would like to remind you of the impact of seasonality on MTY’s results.

Typically, the first and fourth quarter sales are slower than average while the sales in the second and third quarters are strongest given the number of locations operating in the ice cream and frozen treats categories, which have represented over 28% of our sales during 2018, that has a direct correlation with our EBITDA since most of our cost base is fixed. Our revenues for the fourth quarter increased 56% to $108.5 million and the cost of sales and operating expenses increased by 79% both mainly driven by the acquisitions of Imvescor Restaurant Group and The Counter Custom Burger in the U.S.

As a result, EBITDA increased 20% to $32.7 million, compared to $27.2 million for the same period last year. Our EBITDA margins have declined from 39% last year to 30% this year.

The decline in margins is mainly thought by a change in the accounting presentation of our retail revenues and expenses, which are now presented gross instead of net as we had been presented in the past. The growing amount of such revenues, we have decided that this is a more accurate way to present information to investors.

Those of true up in those numbers for Q2 and Q3 retail revenues and expenses, which cause a 4% drop in the margin. The net income attributable to shareholders decreased by 33% for the fourth quarter to $12.9 million or $0.34 a share when compared to $19.4 million or $0.91 per share for the same period last year.

The decrease is due to a net impairment charge increase of $4.5 million in 2018; coupled with two non-recurring items that impacted 2017 favorably, a $3.4 million gift card retroactive catch up adjustment and a $1.9 million lease termination gain. Those figures are all before tax.

After tax, they combined for a net unfavorable variance of $7.2 million this year. Turning down to liquidity and capital resources.

In 2018, MTY generated cash flows from operating activities of $97.6 million compared to $93.5 million last year. Excluding the variation in non-cash working capital items, income taxes and interest paid operations generated $129 million in cash flows compared to $96.6 million in 2017.

This increase was primarily driven by higher EBITDA, which was partially offset by higher working capital requirements. During fiscal 2018, our capital was primarily allocated to acquisitions and payments to dividends to shareholders for which we disbursed $123.2 million and $14.5 million respectively.

MTY concluded fiscal 2018 with a healthy financial position. As of November 30, 2018, MTY had $32.3 million of cash on hand and the long-term debt of $275.6 million in the form of holdbacks on acquisition and banks facilities.

Considering the EBITDA of $127.7 million and cash flows from operations of $97.6 million realized during the year, we consider our current debt level very comfortable with the increase of our – in our revolving credit facility to $500 million and we have ample access to capital to grow MTY further. Finally, on January 21, the Board of Directors of MTY approved an increase of its quarterly dividend of 10% to $0.165 per common share on a quarterly basis.

This increase represents the seventh increase since our first dividend was declared in 2010. This increase further demonstrates not only our confidence and our ability to generate solid cash flows in the future, but also our confidence in our brands and our franchisee network.

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

Hey, good morning, Eric. Thanks for taking my questions.

Hi, George.

Hi. I’d like to focus a little bit on the weakness in the U.S.

I think last quarter; we had some trouble pinpointing some of the factors behind that. I guess other than mother nature’s forces, can you maybe call out anything you’re seeing in our key markets of California, Maryland, and Arizona?

Yes. Well, there’s – obviously, there’s a lot of competition in those markets.

And some of our competitors are doing really, really well. So, we have to be on top of our game.

Obviously, nature is always easy to blame and it’s a factor that’s hard to measure. But there’s other factors and there’s brands that we acquired in the past and I’ll name Pinkberry and Baja for example, where there has been some struggles I would say since the acquisition and we’re re-launching these brands and we’re hoping that we’re going to get strong performance from these brands in the future and there’s still some of our top brands in terms of development, but at the same-store sales have been relatively sluggish for the past year or so.

Thanks for that. And shifting over to Canada, some deceleration, I guess, in the comps compared to last quarter.

I think you did call out Quebec has been in the first week comp in awhile. Can you maybe talk a little bit about what happened there?

Yes. I think it’s a little bit too premature to draw conclusions from one quarter.

The performance in December wasn’t bad for Quebec. So, we’ll wait to see if we have more struggles in the coming months before we draw conclusions on one quarter.

As you know, there’s a lot of factors that are impacting same-store sales and whether it’s the position of statutory holidays or the timing of snow falls or the cold or whatever and competitive activity. So I’d rather wait for a quarter or two before I can draw conclusions.

And my hope is that we’ll be back to a large normal growth in Quebec in the next quarters.

Okay. One last one, if I may.

On IRG, there’s an improvement – pretty big improvement from the last quarter and your MD&A calls out like pickup in ribs and steaks at Baton Rouge, some I guess normalized whether compared to last quarter. but is there anything else that you’d like to call out and some of those barriers that are just performing better than expected or is it just the pickup in those sales?

No. they’re not performing better than expected.

They’re performing as we expected them to. Yes.

And that pretty much confirms that we shouldn’t draw conclusions on the one quarter. Last quarter was a little bit slower and this quarter is a little bit better.

We’re not out of the woods for some of our brands and we need to keep the effort on the ones that are very successful at the moment. But yes, those brands are fantastic.

We have some really good brands in our hands and we need to make sure we maintain the current performance and then improve on if we can. But it’s certainly a lot easier to have good momentum when the brands are successful and it’s easier to keep the face and trying to turn around something that’s struggling.

Okay. Thanks a lot.

That’s it for me. Okay, bye.

Thank you.

Hi. So, my first question is regarding same-store sales growth.

So, can you break down what drove the flat same-store sales growth in Canada and it seems like Ontario, Alberta and British Columbia were all positive while Saskatchewan was weak; however, Saskatchewan is quite small? So what else is offsetting the positive growth in those three big provinces?

Yes. Well, I would say that the positive growth is not as positive as it was in previous quarters.

So, there was a little bit less in terms of same-store sales there and as we mentioned before, Quebec was weaker than the previous quarters and Quebec was negative. So, Quebec being one of the biggest territories we have in Canada, Quebec is negative.

It affects the entire overall performance.

Got it. That makes sense.

Then my second question in regards to IFRS 16, can you talk about how it will impact your financial statements and how should we think about our forecasting going forward?

Yes. 16, it’s a little bit too early for us to start quantifying the impact of IFRS 16.

We know the impact will be a very material on our financial statements, both from a P&L and a balance sheet point of view. But it’s a little bit early for us to draw exact conclusions on it.

We’re at the beginning of the process, trying to evaluate the impacts and trying also to come up with the math with which it is proving to be extremely time consuming and extremely tedious. So, it’s a little bit early, but all I can say is that the impact will be very material.

Okay, perfect. And then my question is regarding delivery.

We read a lot about growth and delivery among various plans and we know that Scores, for example, is a brand, where delivery is very important. Can you discuss some of the other brands in the portfolio, where you’re seeing the most significant impact on delivery?

Yes, for sure. And all the brands that have started delivery with some form of intensity has seen some pretty interesting spikes and their sales.

I’ll mention Mucho Burrito, where we have introduced SkipTheDishes for the vast majority of our restaurants and we’ve seen a good lift in sales. Now whether those sales are incremental or not as it’s hard to measure, but there’s certainly a good lift in sales from those.

We have introduced – we have introduced delivery for most of our brands. Some brands are more closer to having 100% of the network than others.

But even in the U.S., we’re delivering ice cream now, and I wouldn’t think that ice cream would be a deliverable product, but it’s proving to be very successful. So, hopefully in the summer, when we reach the peak season, we’re going to see some good lifts there as well.

Perfect. And I guess I’ll sneak one last one since you did mention SkipTheDishes.

Are you seeing an uptick in third-party delivery services and how are you managing profitability with these services?

Yes. That’s the big question.

We are with various providers. I mentioned Skip, but we have – we have contracts with other providers as well.

It’s – yeah, it was a – we are seeing a lift in sales. And I think as long as the sales are incremental or at least the vast majority of those sales that we’re generating from these platforms are incremental, the economic model will work.

The day we start selling to customers that would otherwise come to the store. I think that’s where we’re going to have to ask ourselves questions, because the fees that are related to delivery will have an impact on our franchisees margins.

And then the business model will have to shift one way or another. So we’re not there yet.

What we’re seeing at the moment is mostly incremental sales. And it’s proving to be very positive.

And I don’t know how long that’s going to last until we have to start thinking about the shift in our business model.

That makes sense. Okay.

Thanks for taking my questions.

Hi. Good morning.

Hi, Elizabeth.

Just in terms of M&A, do you think there’s an opportunity when it comes to, I guess in the U.S. specifically to try to add acquisitions that are not in the frozen treats category?

Is that something that you’ve thought about doing or do you really prefer to be more opportunistic? Any thoughts around that strategy?

Yes. We’re – yes, that’s a good question.

I think it just happened this way for us that we’re so focused on frozen treat. But we are looking at various other opportunities in the U.S.

and there are ways for us to try to improve and diversify our portfolio. We acquired this year, The Counter Custom Burgers, which was one example of our focus to try to acquire something else.

We also acquired Grabbagreen. But you’re right, there needs to be some form of diversification in our portfolio and we’re very opportunistic and we’re very agnostic when it comes to the type of food that we’re acquiring.

And it happened that we had more opportunities in the frozen treats category for now, but you’re absolutely right that there’s certainly with over the quarter of our sales being in frozen treats, there’s certainly a way for us to diversify away from it.

And when it comes to geographic representation, and again, in the U.S. specifically, is it possible that you could look to, even within frozen treats, if you would to add locations or additional banners more in the central U.S., would that help with some of the diversification?

Or do you feel that the best diversification still would be to go outside of the frozen treats category?

No, we’re also agnostic when it comes to the geographical region. We acquired sweetFrog, which is mainly on the East Coast, that was our fourth quarter acquisition.

It happened that California was big for us. It’s also a big territory and it’s also an important one to cover for us.

But if we have opportunities in California or somewhere else, if the opportunities are good, we’ll go for it.

Okay, great. And just in terms of the impairment taking this quarter – taken in this quarter specifically, is there any additional color you can provide with respect to what exactly it was in Canada and the U.S.?

Yes. The brands are all U.S.

– the brands are all U.S. Their brands we acquired with Kahala and they’re their smaller brands that we have acquired and it’s a reassessment of our performance.

Unfortunately, some brands are performing a lot better than we thought and we can’t – we can’t increase the value of those brands and the brands that are performing a little bit less than our forecasts we have to take an impairment. So overall, it’s still a very positive acquisition even though it looks bad from the impairment standpoint.

But it’s we have impaired four smaller brands and we have also impaired some corporate stores. As you know, we’ve impaired the Tosto stores last quarter and we have impaired one corporate store that we built this year.

We’ve impaired it in Q4 also for about $0.5 million. So, there’s a few brands that are impacted and there – there’s a few other brands that are still on the bubble.

So, I’m not saying there won’t be an impairment next year. It depends on how the brands perform.

And some of those smaller brands that aren’t performing as well, do you see an opportunity potentially divest those brands, not to say they’d be any better than someone else’s hands, but then we see would have those impairments on your book, because there’s something you consider as a divestiture?

Yes. Well, everything is for sale if the price is right.

So, I’m not – I’m not going to close the door on it. This is not something we’ve done traditionally selling brands and it’s certainly not something we’re trying to do or we’re not actively seeking buyers for some of our brands.

But yes, if somebody comes up and says, we’d like to acquire X brand and give you X amount of money for it, we’d consider it. And that’s true for all our brands, whether we love them or not, there is a price to everything.

Okay. Great.

Thanks. Those are all my questions.

Good morning, Eric. I was just wondering you had mentioned about the relaunching of Pinkberry and Baja, when do you expect to relaunch those brands?

Yes. Well, relaunching might not have been the best choice of words.

I would say probably, changing the trajectory on certain initiatives that were taking. Pinkberry is actually doing fantastic, where it’s doing great.

It is really doing great. I think the stores, the designs are very relevant.

The products are very relevant. Pinkberry, we’re talking about a brand that we acquired that was really troubled and we acquired this brand after two or three years of not having any advertising done, no contributions to the advertising fund.

So, it’s hard to gain the momentum again from the marketing initiatives that we’re doing. So, I think this year, we’re bringing some new ideas to the table that will help generate positive same-store sales.

As I said, the product is amazing and the store designs are very relevant. I think the brand is still very strong in the U.S.

and it’s one of the brands that, that we’re seeing a good development potential for, we’ve opened a lot of stores for Pinkberry. And I still see it for the future.

So, relaunching might not have been the right choice of word for Baja Fresh a slightly different situation. Again, it’s a brand that we acquired.

It was declining rapidly when we acquired it in late 2016. And it’s – we’re trying to turn the tide on it.

So, there is a renovation program that’s in place for the franchisees that’s very similar to the rejuvenation plan that we have at Imvescor. And we’re trying to renovate our stores and be as relevant as possible for the consumers.

We are also developing Baja fresh pretty aggressively. We’ve reintroduced the brand in the Phoenix market and the stores are very successful that customers are very happy with the stores, the food, the design and everything.

So, it’s just a matter of trying to refresh our stores, and we’ll give some new energy to the brands. So relaunching again, might not have been the right choice of words.

So, Baja, like how far along are you in the rejuvenation process?

Yes. We’re at the beginning.

I’m not going to lie to you we’re at the beginning. We have renovated a certain number of stores, but there are more stores that need to be renovated and I think that’s going to go a long way for us to achieve better performance in the future.

Unfortunately, the renovation is possible only if you have term on your lease. If the franchisee is willing to do it and as we trusted the franchisor that this is going to help sales and that the franchisor is getting to support them in the future.

And it takes time to gain that trust and go with the franchisees and reinvest in the stores. So, it’s a process that’s going to happen over a few years.

But the brand is still very well received by the customers and I think it answers a need in the market where, where you might not have much direct competition to the brand, and we’re predominantly in California, but also in other parts of the U.S.

Thanks for that. Maybe just to touch back on to the U.S.

same-store sales, could you write the headwinds in order of magnitude, whether it’s the forest fires competition or operationally?

Yes. I wished I had a good accurate measure for all these factors.

There’s hundreds of factors that played to the same-store sales and it’s really hard to measure one the expensive other. But for sure, weather is a big impact, it was a very cool fall in California and other parts of the U.S., the forest fires certainly played a huge impact, where you have stores in regions that are evacuated or that are filled with smoke.

So, it does play into ourselves, tourism was down massively during those periods. The locals were not necessarily spending in the restaurants.

So, it does play a role and I would say weather it’s probably the one that’s the – that has the highest correlation of all the factors. And we’re seeing it again if you look at the months of November was we’re pretty snowy in the northern U.S.

and even in the Eastern Canada for that matter. We are seeing the extreme cold conditions now and in January and February that we’ve seen in some parts of the U.S.

those are all impacting ourselves for sure, but I’m hopeful that as we get through February and March last year, those were not very good weather wise. So hopefully, this year, we’ll comp with better weather and then we’ll have better results to show for those months.

Okay. Maybe, a few more from me.

Can you maybe just explain what was driving the weakness in Quebec? I don’t know if you have a good answer for that.

No, I wish I had one, but I don’t – I want to wait for at least a quarter or two before we drop inclusions. I’m hopeful that the weakness was caused by external factors and that our initiatives that we have in the hard work that the teams are putting to each of the brands and to each of the stores that the positive same-store sales will come back.

And hopefully in Q1 and Q2, we don’t have numbers yet, but hopefully, it was just a short passage of negative.

Okay. Maybe, just a follow-up on that, maybe could you just update us on the – on your growth from within initiative, where you’re at with that initiative and are you seeing some initial positives?

Yes. Well, it’s going to be a process.

It’s not going to happen overnight. There’s certain initiatives that we are taking internally and that that will start paying off this year, but I think for the most part that’s going to happen over one or two or three years even.

So, hopefully, we will be able to reach some of the harvest this year. But yes, it’s a process – but yes, we are putting everything in place.

So, I’m happy with where we’re at the moment. We are doing certain things that we haven’t done in the past and hopefully, some of it hurts in the short-term, because we’re taking initiatives that are a little bit more drastic with some of our brands, but hopefully, they’re going to pay off in the long run.

Okay. That’s it for me.

Thank you.

Well, thank you for joining me on this call. I look forward to speaking with you again at our next quarterly call.

Thank you.