Good morning, ladies and gentlemen. Thank you for standing by. Welcome to MTY Food Group Inc's second quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question‑ and‑ answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, please be advised 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, July 12th, 2019. I will now turn the conference over to Eric Lefebvre, Chief Executive Officer.
Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for joining me for MTY's 2019 second quarter results conference call. The press release in the MD&A, with complete financial statements and related notes, were issued earlier this morning and are also available on our website at mtygroup.com and on SEDAR. [Non -English content] Before I begin, let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated. Please be aware that we refer to certain indicators that are non-IFRS measures. You can refer to our MD&A for more details. Let's start with a brief overview of our network. Network sales for the second quarter were up 12% to CAD 832 million. The growth is primarily attributable to recent acquisitions and to a favorable variance in foreign exchange rates. The net organic change in our network sales was a positive CAD 3.2 million for the quarter.
On a year-to-date basis, the net organic change was essentially flat. System sales include eight days of operations for Papa Murphy's, which was acquired late during the quarter. Consolidated same-store sales grew by 0.6% during the quarter. Canada posted a positive same-store sales growth for the seventh consecutive quarter with a 1.4% growth. Ontario and British Columbia continue on the momentum gained last year and posted positive results. After a decline in the first quarter, Quebec and the Maritimes saw a turnaround in the second quarter with growth of 1.2% and 2.9%, respectively. After being impacted by adverse weather conditions during the first quarter, same-store sales in the United States. Also improved this quarter and posted a 0.6% increase, benefiting from more favorable conditions in March and April. As you know, our exposure to the West Coast is important. It represents 49% of our total U.S. system sales.
We are pleased to report a growth of 0.4% in that region. As for the East Coast, the region's performance remains strong. The situation and performance of stores located outside of North America remains similar to the past few quarters, with same-store sales decrease of 9.2%. The decline is primarily attributable to our stores in the Middle East, where economic conditions remain very difficult, and in Asia, where we were impacted by some factors that are out of our control, but that should not affect the long-term profitability of our locations. We finished the second quarter with 7,345 locations as we acquired 1,444 locations of Papa Murphy's and South Street Burger. We also opened 75 locations, which were spread across all categories, Cold Stone leading the way with 22 locations split between the U.S. and international, and we closed 115 locations for a net decrease of 40.
The acquisition of Papa Murphy's, in particular, caused important changes in our network and shifted geographical distribution of our locations. At the end of the quarter, 56% of our locations were in the U.S. compared to 46% in the first quarter, whereas 37% of our locations were in Canada compared to 45% the previous quarter. It will also change the seasonality of our business materiality as Papa Murphy's generates the majority of its sales and profitability in Q1 and Q4, while Q2 and Q3 are seasonally softer periods. Now let's discuss MTY's financial results. We're pleased with our second quarter results. Revenues increased 22% to CAD 130.6 million, mainly driven by the increase in processing, distribution, and retail segments, which were impacted by strong performance of retail division and by the acquisition of the processing and distribution business of Casa Grecque.
Cost of sales and other operating expenses increased 31%, mainly because of additional costs associated with the revenues of the processing, distribution, and retail division. There was also an increase in consulting and professional fees related to the acquisition of Papa Murphy's and to the implementation of new accounting standards. As a result, EBITDA increased 1.2% to CAD 34.1 million in the second quarter of 2019, compared to CAD 33.7 million for the same period last year. On a normalized basis, our EBITDA posted a solid 11% increase. This is the second consecutive quarter of organic growth in EBITDA. For the second quarter, organic growth was 1.0%, bringing our year-to-date organic EBITDA growth to 3.6%. Net income attributable to shareholders increased to CAD 19.3 million or CAD 0.76 per share for the second quarter of 2019 from CAD 16.2 million or CAD 0.64 per share for the same period last year.
On a normalized basis, the basic EPS increased from CAD 0.66 to CAD 0.89. Turning now to liquidity and capital resources. In the second quarter of 2019, MTY generated cash flows from operating activities of CAD 21.1 million compared to CAD 25.4 million last year. The decrease is mainly due to the CAD 4.037 million incurred in consulting and professional fees in relation to the Papa Murphy's transaction. There were also larger than normal income tax payments made in the month of March. In both cases, we don't expect such payments in the coming quarters. We're very pleased with our free cash flow generation capabilities, which grew 5% to CAD 25.8 million on a normalized basis. In the second quarter of 2019, our capital was primarily allocated to the acquisition and payment of dividends to our shareholders, for which we disbursed CAD 265.9 million and CAD 4.2 million, respectively.
Prior to the acquisition of Papa Murphy's, we exercised the accordion feature on our credit facility, which resulted in an increase of the authorized amount to CAD 650 million, of which CAD 513.7 million was drawn at May 31st. Also note that as a result of the size of the acquisition, a step-up in the debt-to-EBITDA covenant has been triggered, making the covenant go up to 4x EBITDA for a period of nine months. MTY ended the 2Q of FY 2019 with a healthy financial position. As at May 31st, 2019, MTY had CAD 47.5 million in cash on hand and long-term debt of CAD 526.5 million in the form of holdbacks and acquisitions and bank facilities. To conclude, we will maintain the focus on maximizing shareholder value by adding new locations for some of our existing concepts and seeking highly accretive acquisitions.
Starting in the 3Q, we will have the full contribution of Papa Murphy's in our results, which despite being a seasonally softer quarter, will undoubtedly contribute to our profitability. This is a significant acquisition for MTY, as we add a brand with a differentiated position in the pizza business to our existing U.S. portfolio. It also allows us to diversify away some of the cyclicality and seasonality of our business. Prior to the end of the quarter, we announced that we have signed agreements to acquire the assets of Allô! Mon Coco and Yuzu Sushi. These acquisitions have not closed yet and are expected to be completed shortly. With that, I thank you for your time, and I will now proceed to answer your questions.
Thank you. At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of Vishal Shreedhar from National Bank. Please go ahead.
Hi. Thanks for taking my questions. Just on the positive same-store sales growth, the inflection in the U.S. I'm wondering how much of that was due to the initiatives that management has been implementing, or is that more just lapping of easier comps on a year-over-year basis?
The reality is, in Q1, I blame the weather for the negative same-store sales, and I'll say that in Q2, we had more favorable weather, especially in March and April. I believe that what we were doing with the business was the right thing. We had great results in some parts of the country, and results that was not as good in other parts of the country. Although we do have a number of initiatives for a number of brands, the reality is, I think we're doing the right things and being in the frozen treats business, we do have more dependence on weather, which in Q1 impacted us adversely and in Q2 was more normal.
Okay. Given that weather helped on a more normal kind of pattern, could you maybe characterize what you're seeing as a result of these initiatives that you're focusing on to drive better organic growth so far? Or is it too early days? The food innovations, the different management structures, the different focus from management. Are you seeing any benefit or is it too early?
We are seeing some benefits. Most of the changes we've done were more related to the Canadian business. This is where we made more drastic changes, including the change in the management structure. In the U.S., the changes were a little bit more subtle. We do have a number of initiatives that we're working on at the moment that are being implemented. None of these initiatives are expected to generate a very abrupt peak that might not be sustainable. We're working instead on initiatives that will ramp up slowly, but that will have a more sustainable impact. That's a long answer, the reality is, I think the initiatives are starting to pay off, but they're certainly not at full speed at the moment.
Okay. Understood. Food inflation in Canada, at least, has been favorable for some period of time. Wondering how much pricing is in the basket in Canada or even in the U.S., and is that driving the comp there as well?
For sure, there is a part of the comp that's related to pricing. There's no question about that, and the fact that the food inflation has been a little bit softer in the past few months is helping us. There are other costs that are increasing at the moment, including the labor. Especially in the U.S., we're seeing a lot of labor increases. Yeah, there's a little bit of both, but in terms of pricing, we do take some pricing on most of our brands. We're trying to be careful and being conscious of the customer's ability to pay and willingness to pay. There is some pricing in the basket for sure.
Okay. How does that work? Is that the franchisee's decision to take pricing, or does MTY authorize it?
Well, MTY will recommend pricing, but we can't really dictate the pricing. There are some rules against that. You will see in certain of our brands, most of our brands will have consistent pricing, but you'll see some pricing differences within the same brand sometimes, depending on whether the location is in the mall or on the street, or depending on the location also. For example, if you're in GTA, you might have slightly higher rent and higher labor costs, so you might have to have a slightly higher price than if you're in a more rural area. We will recommend pricing. We will work with our franchisees to try to establish the right price. Ultimately, the franchisee, in most cases, especially in the U.S., will have the liberty to fix the pricing.
Okay. It may have been in the documents, I didn't see it, how do you define normalized free cash flow?
Yeah. The only normalization we've done is really with the transaction cost. In the quarter, we had CAD 4 million of transaction costs related to Papa Murphy's. We did normalize that, and we also went back to previous quarters to normalize the transaction costs away from prior quarter numbers also. Last year, if you remember, we had Investcorp, which spread over Q1 and Q2. We normalized those costs away as well. It's the only thing we normalize. We don't want to start normalizing too many things to make it confusing and make it unpredictable. It's only transaction cost.
Okay. All right. Thanks for that. I'll jump off. Thank you.
Your next question comes from the line of George Doumet from Scotiabank. Please go ahead.
Yeah, morning, Eric.
Morning.
I just wanted to focus a little bit on Quebec, a nice turnaround there. Just wondering, was that more macro-driven? How did IRG do there? Maybe, if anything you can share on that strength.
Well, we were never necessarily worried with the Quebec business. There are some factors here and there, and weather, if you remember, George, it's not too long ago that the winter agonized on us, and it was pretty harsh. I don't necessarily like to blame weather in Quebec because we have it every year. This year was particularly harsh, we were never really worried about the Quebec business. IRG continues to be strong, continuing on the same path it had before, with positive comps, and it does contribute to our growth in the quarter, for sure. It's not the only brand. We have a lot of other brands that are doing really well in the territory as well.
Earlier you had mentioned some initiatives that were working on the U.S. to improve operations. Can you maybe share with us what a few of those may be?
Well, I don't necessarily want to go on the details of initiatives because we have a lot of initiatives for all of our brands. You take examples, we have a rejuvenation plan for some of our brands where we feel the stores are getting older. We have better focus on innovation also. There's a number of things that we want to align. We're also going through a phase now where we're going to add a little bit more science to our decision-making. We're hiring some people that will help us drill down into the data we have to make sure that whatever decision we made is supported and is also measured after the fact, to make sure that we're aligning the company in the right direction.
On a brand-by-brand basis, we might have a list of a few or many, and depending the brand initiatives, so I'm not necessarily going to bore you with all the initiatives on a line-by-line basis.
Okay, great. I just want to ask one if I may. Maybe just focusing on the store closure, it seems a bit elevated. Maybe talk to the expectations there. I noticed that there were more Papa Murphy's, I guess, closures between the time the deal was announced and the time the deal closed. I'm just wondering, is there a deliberate push to kind of accelerate the store closure rate there? Anything you can share maybe on Papa Murphy's. Appreciate it.
Yeah. Papa Murphy's is certainly not a contributor to the store closures. There were, I think there were one or two closures between closing and quarter end, and we're certainly not pushing to close locations. There are some locations that need to close, but calling it a push is a big word. If we can keep them open, if we can restore profitability for the stores that are having a difficult time, then we will, and we'll try to keep them open. You're right, the number of store closures was very high in the quarter. Fortunately, there are some closures that are predictable, that we know will happen, and there are some other closures that are less predictable. In this case, there were a lot of these one-off closures that seemed to surprise us a little bit more.
Unfortunately, I anticipate that this will continue for 2019. I don't have visibility on 2020 yet for the closures. It's easy to see the openings. It's a lot harder to see the closures. I think for 2019, we should expect not necessarily the pace we had in Q2 because that was very high number. I do expect to have more closures coming.
Okay. Thanks for your answers.
Your next question comes from the line of Elizabeth Johnston from Laurentian Bank Securities. Please go ahead.
Hi, good morning.
Morning.
Just to go back to Papa Murphy's. Briefly, you mentioned in your prepared remarks about seasonality. Just to clarify, when you say the second and third quarters are softer periods, I am assuming you mean on an MTY fiscal basis, not a calendar basis, just to clarify that point.
That's MTY fiscal, right. Yep.
Okay, great. In terms of how that business is, it's very early days, obviously, but you mentioned some initiatives already on the call. Are some of these initiatives specifically aimed at Papa Murphy's, especially when it comes to driving positive same-store sales growth?
Yeah, for sure. The Papa Murphy's team, as I mentioned in the previous conference call, had a number of initiatives that were on the go already at the time of acquisition. What we're doing is really continuing on these initiatives that the team had planned, and we're trying to push forward with those. Obviously, with the help of the system we have with MTY, we're going to try to push some additional initiatives or maybe accelerate the pace of these initiatives. We feel that the team was on the right path, and we just want to try to support them going down that path and trying to restore positive same-store sales.
I don't know if you have time to go through the MD&A, but for the short period of eight days between closing and quarter end, the same-store sales were positive, and we're seeing a little bit of pluses and minuses at the moment. There's good days and bad days, and again, it's very dependent on weather, and it's almost exactly offsetting the weather impact of Cold Stone, which is interesting.
Okay, great. Just going back to a previous comment you made about adding science to decision-making. In terms of that data analysis that you are looking to invest in, would that be around finding the locations of real estate, let's say, when it comes to finding locations for franchisees? Any kind of elaboration you can provide there would be helpful.
Yeah, it's more in terms of our operations and in terms of marketing that I want to bring the science into the decision-making. I think we already have the science in terms of the real estate. It's widely available, and there are tools for that we can rely on. When it comes to the intelligence we have in our point-of-sale systems, when it comes to the intelligence we have in our loyalty programs, when it comes to everything that goes into the payment solutions and everything, this is where we need to invest, and we need to really use that intelligence that it's there.
The information is there in our systems, we just need to build something around it to be able to use it in a way that's going to be helping us into predicting future patterns and also analyzing the impact of our decisions to make sure that we repeat our successes and we don't repeat where we might have lacked.
Can you say at this point if you expect this will help drive sales or improve on your cost side or a combination of both?
No, it's more on the top line that we're working. I think on the cost side, we're running a pretty lean operation, I don't see much there. I certainly see a lot in terms of the top line. We're working really to generate more revenues.
Okay, great. I wanted just to touch upon Canada same-store sales growth. You called out British Columbia specifically. I know you already talked about Quebec and the Maritimes, a result of the over 6% that you highlighted is really outside of what we've seen in other provinces in general in the industry. I understand that menu pricing was alluded to being a part of this, is there anything else that you can call specifically in that province having contributed to such a large number?
Yeah, British Columbia has been firing on all cylinders for a number of years now. I think the economy is doing great. People have a good amount of disposable income, and they eat more and more in restaurants. We're seeing in British Columbia very good traffic increases for most of our stores, and that's the way to go. Not sure what the secret is and why we're so successful in BC compared to other provinces, because we're doing more or less the same thing in both provinces. The territory seems to be very good for us at the moment. The problem we have is finding good real estate at reasonable prices, that's our main impediment to grow more and open more stores in the region. Other than that, the territory is certainly doing great, and all of our brands are producing good numbers there.
Overall, are you able to quantify how much that menu price increase has contributed to the consolidated same-store sales, either in Canada or overall?
It's not a number I have. Not a consolidated number, at least. We have it on a brand-by-brand basis, but consolidated is not a number that we've produced.
Okay. This may be one more from me in terms of M&A. I know in the past you discussed how it can be quite competitive. Can you give us any update on how the pipeline looks either in Canada or in the U.S. and what you're hoping to achieve this year in terms of additional additions?
That's a good question. Given where we are in terms of our debt and given where we are in terms of the number of acquisitions, I think we're not expecting to do any major acquisitions in the next few months, that will probably go into 2020 as well, unless there's a golden opportunity that we can't miss. We're probably going to concentrate on the smaller and mid-size acquisitions going forward. We need to make sure that we integrate the acquisitions that we have lined up, both Allô! Mon Coco and Yuzu. We need to make sure that we're successful integrating these brands into our operations, making sure that we set ourselves up for success. Then for the next acquisitions, we also need to make sure that we're successful with the integration with the business in general.
Also, we're also very conscious of our debt level, which is around 3x EBITDA. We don't necessarily want to go much higher than that. We're going to try to keep it within a few decimals of 3x and potentially deleverage if there's a shortage of acquisitions in the future. We're not stopping the M&A, but we're probably going to take a pause on the larger ones.
Can you comment on the competitive market in the U.S.? In the past, you said it's very competitive. Would you say it's just as competitive as before, or any change in that region?
No, it's very competitive. The private equity funds seem to have a lot of capital to deploy. Especially in the U.S., they're very big participants in the market. It is a competitive market in terms of M&A in the U.S., predominantly.
Okay, thank you.
If there are any additional questions at this time, please press star followed by the number one on your telephone keypad. Your next question comes from the line of Derek Lessard from TD Securities. Please go ahead.
Yeah, thanks and good morning, Eric. You guys got some solid top-line growth, but on the EBITDA margin side, a lot of things going on, changes in IFRS. I was just wondering if maybe you could give us, how should we look at your EBITDA margins going forward, both from a, you talked about seasonality, so from a seasonality standpoint and even relative to current levels?
Yeah, that's a good question. I think the margins, especially now, we'll need to look at it more and more on a segment-by-segment basis or on a division-by-division basis, because if you try to use the consolidated, it's going to send you in the wrong place. One of the reasons is the growth we have in our retail business at the moment, which has much lower margins, is great, and we're producing more bottom-line dollars with it. In terms of margins, it's a lower margin, and it's certainly a weight on the consolidated margins. If you want to look at margins, I would say you should probably look at it on a segment-by-segment basis. If I take them one by one, in terms of franchising, our margins were a little bit lower this quarter.
A lot of the impact came from the acquisition costs we had for Papa Murphy's. The margins were also a little bit lower than they were in previous years, and one of the reasons is the resources that we've added in the business to try to set ourselves up for growth for 2020 and after. We did add a certain number of people to the team, especially in development, to try to generate better growth down the road. The corporate stores are currently at a loss, so we won't necessarily discuss the margins. There's the retail, which is an important part of our business now, and it's a growing part of our business. They produce very low margins in general.
If you go a few years back, even last year, for retail, most of our deals were licensing deals where we generated 100% margins with them. We don't have costs, we just have a royalty. Now we're more and more the vendor on record, and we're going to generate much lower margins with this business, but it's better for us to generate dollars. Ultimately, this is I think what our shareholders want is MTY producing dollars, not necessarily percentage points.
Okay. I guess if I look at the 25% or so in Canada and 27%, 28% in the U.S., international, is that sort of the levels that we should be looking at now?
No, I think you need to break it down between the segments. I think if you look at it on a consolidated basis, you'll probably see it go down further in Canada because of the change in our sales mix. As we increase our retail presence, we're going to see the margins go down, and that's not a bad thing. That's a really good thing because it increases our profitability. In the U.S., we don't have a similar retail business, so there's not as much changes to be expected, but in Canada, you certainly need to look at it on a segment-by-segment basis.
Okay, thanks. Maybe if you could just talk about, I was wondering if you had enough, or your thoughts on your bench strength, given now that you guys have so many brands, regions, and restaurants that you have to manage. Just maybe talk about your management group.
Yeah. We're very happy with the group. With the management group that we put in place in November is a very strong group, and we're very happy with the way it is, and we're preparing succession plans, and we're preparing the next generation of leaders also in the company. We have initiatives in place that make sure that our bench strength, as you call it, is strong and getting stronger. We're trying to prepare people in the organization to take any role that might be vacated for any reason. I would categorize it as very strong at the moment. We have a lot of good talent in the company and a lot of people that are being groomed for higher positions, a lot of people that have the talent and the potential and the desire to take it.
It's up to us to nurture the growth of these people and make sure that we keep them on board and motivated until there is an opportunity. The good thing is with the acquisition strategy we have, there are a lot of opportunities, and that's something that people are seeing in the organization. I would say that the bench strength is stronger and getting stronger and stronger as time goes.
Maybe a few more for me. Maybe just talk about the actual Papa Murphy's integration, some of the progress you're making there, and are there any synergies that you're able to point to now that a couple of months into the integration?
Well, it's been going really well with the group there. I think the group at Papa Murphy's really embraced the transaction, and they welcomed a little bit of stability in their future. That was good, and it really helps when the group there really wants to integrate and really wants to benefit from the resources, we have at the head office level. It's going really well. We are working on a certain number of things, and obviously there's nothing that happens overnight, but we're happy with some of the progress we've made. I think we have a few initiatives that will benefit both Papa Murphy's and other Kahala franchisees in the very short run. We have a few things that are on the go. I can't necessarily announce them yet because we haven't announced them to the community.
We do have a few things that will help with the profitability of our stores that will benefit the franchisees in the first place. We do have a few initiatives that hopefully will help generate more profitability also for MTY as a consolidated entity. That's going to come over time, but it's looking very positive at the moment.
Okay. Thanks for that color, Eric. Maybe one last final one for me, it's just coming back to the seasonality. I know, again, it's early days of Papa Murphy's, but are you able to provide any sort of color around what we should be seeing in terms of seasonality on a quarterly basis going forward?
Yeah, it's pretty extreme. What we see is people don't typically turn on the oven on very hot days. Papa Murphy's is a take and bake, so you need to turn on the oven if you're going to buy Papa Murphy's. We're seeing on rainy days, Papa Murphy's being very successful, and then on bright sunshine days, Papa Murphy's being a little bit soft. It's almost the exact opposite of Cold Stone, and it's almost as extreme the seasonality as Cold Stone seasonality. If you want to make a picture, you can graph the two, and they'll be almost exact opposite.
Okay. All right. Thanks for the color.
Your next question comes from the line of Vishal Shreedhar from National Bank. Please go ahead.
Hi. Thanks for taking my follow-up. The retail business you noted growing quick in Canada, but lower margin. Just wondering, is it more capital and asset intensive as well?
Yeah. In that segment that we've just created, we have two manufacturing plants. Those will tend to be more capital intensive. You're right. The retail business itself does not involve any capital. It's just human resources, really. Most of the products we sell are produced by external suppliers. We buy the resource from them and sell it to the retailers. There's no capital investment. There's a little bit of working capital investment in there. There's no capital investments to be made in physical equipment.
Okay. Just switching gears here, I'm wondering if management measures customer satisfaction scores at its brands and franchisee satisfaction scores, and how are those trending?
Yeah, we do. It's a brand - by - brand basis. I'd like to say it's all positive. We do have some brands where customer satisfaction is very high. We do have some brands where it's a little bit more challenging. We do have to take the feedback and try to improve on what we're doing. For the franchisees, it's the same thing. I wish I could say that all our franchisees are happy. The reality is there are some franchisees that are not profitable enough. They're right to be dissatisfied. We need to try to help them become more profitable. Become more satisfied with their investment. Out of 7,300 stores, there's always going to be a few stores that are not performing to where we think they should be. Those stores obviously will be dissatisfied with MTY.
We need to try to minimize that, but there's always going to be some.
That's understandable. Could you give us some color on how it's trending, or you don't have that information?
That's not something we measure. We do look at it on a brand- by -brand basis, obviously, but it's not something we consolidate at the head office level.
I'm wondering what you meant when maybe you can give it to me in terms of enterprise value when you're talking about mid-size deals. What does that mean?
Yeah. We're looking at price tags anywhere between zero and CAD 50 million would be small to mid-size. I would say that a large acquisition would be anywhere CAD 100 + million would become a large acquisition for us. If you want to put ballpark figures, that would probably be about it.
Okay. When, Eric, you and your senior management team look at metrics for the year, I'm wondering what are the few key metrics that you look at to say MTY had a good year or not?
Obviously, we look at probably a lot of the same measures that you're looking at. We're looking at our free cash flows on a consolidated basis. We look at free cash flows, and we look at it on a division - by - division basis also. We want to have organic growth and free cash flows, and the entire management team is compensated based on our growth in free cash flows. Their incentive pay is based on that. We also look at certain metrics that will impact franchisee profitability or that will reflect franchisee profitability. That's new store openings, store closures will be important, and same store sales is a metric. We don't necessarily compensate people on same store sales, but it's a factor that we need to look at.
Do you look at return on invested capital for the senior management team?
Yeah, we look at it, but we don't have a split of return on invested capital for each of the individual executives, and they also don't necessarily make the M&A decisions. It wouldn't be fair to compensate people based on that.
Okay. That's it for me. Thanks.
Your next question comes from the line of Elizabeth Johnston from Laurentian Bank Securities. Please go ahead.
Hi, thanks for taking my follow-up. Just briefly, you mentioned about the margin in Canada and the U.S., when it comes to revenue in Canada, franchise operations revenue, if you look at that as a percentage roughly on Canada system sales, it seems to have trended lower. Is there something to be said for this coming from royalties from brands with a lower royalty fee rate, or is there something else happening in there?
That's a good question. That's a metric we track internally. The royalties we derive from our franchisee system sales. That's relatively flat at the moment, so it's not the cause of the decline in franchising revenues. In terms of decline, you need to look at more the rent that we collect from franchisees. You need to look at the number of turnkey locations we have, for example, and the sales of stores and material to our franchisees. That's been going down for a number of years. That's on purpose. We're trying to reduce our involvement there. That's been happening this quarter. If you look at the decline, it's not caused by a decline in the royalty rates. It's more any ancillary products or sales that we would do around the core business.
What we've seen for the first half of this year, would you say that this is a fair run rate to think about going forward, just on this particular item in terms of percentage?
We're still trying to decrease it. We're still trying to decrease the number of turnkeys. We're still trying to decrease the number of sales coming from head office. There will be periods where we're going to have peaks and valleys. It depends on the store openings and for given brands and given territories. We're still trying to reduce that. We want to keep the royalties where they are. The rest of the revenues are something that we're trying to address and trying to reduce our involvement with.
Great. Maybe one other brief one just on Cold Stone. Are you able to give us a little more color? I know it's hard to mention all the initiatives by brand. Since it's an important brand in the U.S., any color on specific initiatives to drive results would be helpful. Thank you.
Yeah, for Cold Stone specifically, because it's such an important brand and because it's an iconic brand that has a very strong brand name and the customer perception is great, we're going slowly for this one. For Cold Stone, we do have a number of marketing initiatives, but nothing that would be earth-shattering or worth mentioning. We are evaluating a few things for the brand, but we haven't implemented anything, and I don't think we'll be implementing any major initiatives before the end of 2019. We need to be careful with this one. We can't make a mistake.
Okay, understood. Thank you.
The brand is doing really well. It's hard to change everything when the brand is doing so well.
Your next question comes from the line of Derek Lessard from TD Securities. Please go ahead.
Yeah, thanks. Just one follow-up for me. In the MD&A, you did talk about the impact mix had on your margins. Can you just add some color there, please?
Yeah, the mix is what we talked about earlier, because we have more sales coming from retail and distribution and production. That puts weight on the margins, not in Canadian dollars, but in percentages. The increase this year was pretty abrupt, if you compare to last year in that segment and with much lower margins. As you put more weight on this with lower margins, it's going to put a weight on the consolidated margins. That's what I meant by the sales mix.
Okay. Thanks, Eric.
There are no further questions at this time. I turn the call back over to you, Mr. Lefebvre, for closing remarks.
Thank you again for joining me on this call. I look forward to speaking with you again in our next quarterly call. Thank you.
Thank you. This concludes today's conference call. You may now disconnect.