Good morning, ladies and gentlemen. Thank you for standing by. Welcome to NTY Food Group Inc. 1st 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 during the queue up for questions. Before turning the meeting over to management, I would like to indicate that the proposed and offer to be discussed in this communication has not yet commenced. This communication is for informal purposes only and is not a recommendation, an offer to purchase or a solicitation of an offer to sell shares of Papa Murphy's stock. Once filed, the tender offer statement will be available at no charge on the SEC's website at www dotsec.gov.
Certain forward looking statements made in this communication, including any statements as to future results, operations and financial projections, may constitute forward looking statements within the meaning of the political law. Forward looking statements include, among other things, statements about the potential benefits of the proposed transaction, the prospective performance and outlook of the surviving company's business, performance and opportunities, the ability of the parties to complete the proposed transaction and the expected timing of completion of the proposed transaction as well as any assumptions underlying any of the foregoing. You are cautioned not to present your reliance on these forward looking statements, which speak only as of the date hereof. Furthermore, 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 Thursday, April 11, 2019.
I will now turn the conference over to Andre Clafebvre, Chief Executive Officer. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Thank you for joining me for MTY's Q1 conference call. Today, we will discuss the financial and operating results of the company's Q1 ended February 28, 2019. Our press release reporting 1st quarter results was published earlier morning.
We also issued a separate press release concerning our definitive merger agreements with Papa Murphy's. Both can be found on our website at mtygroup.com and on SEDAR. And the merger press release with Papa Murphy's was filed in the U. S. Securities and Exchange Commission by Papa Murphy's.
Before I begin, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated, And please be aware that we will refer to certain indicators that are non IFRS measures. You can refer to our MD and A for more details. I will begin with an overview of our Q1 results and then discuss the acquisition that was announced this morning. So let's start with a brief overview of our network. We finished the Q1 with 5,941 locations.
During the Q1, we acquired 31 locations of Casa Grec. We opened 60 locations and closed 134 for a net decrease of 43. Most of the closures during the quarter came from our frozen treats and sandwiches and coffee categories. During the quarter, the sandwiches and coffee category remained the most challenging with a net reduction of 28, while the frozen treats category had a negative 29 locations. The frozen treats decline was mainly due to a seasonal decrease in sales.
The openings were spread across all categories, Cold Stone leading the way with 17. Network sales for the Q1 were up 27% to 688,000,000. Dollars The growth is primarily attributable to recent acquisitions and to a favorable variance in foreign exchange. Consolidated same store sales was down 1.4%. Canadian same store sales was up marginally again this quarter, making this the 6th consecutive quarter of positive growth.
Ontario continues to show positive same store sales growth. British Columbia also continued on the momentum gained last year and posted strong positive results. Alberta had a 4th consecutive positive same store sales quarter, while Saskatchewan posted a slightly positive quarter. Same store sales in the United States saw a decline as a result of the impact of adverse weather, which primarily affects our frozen treats segment, but also affects other types of restaurants when we go through such extremes. The West Coast, which represents 47% of our total system sales, suffered from extreme colds, which resulted in a 4% decline.
California saw the biggest drop in same store sales with over 5% year over year sales drop. This drop was partially offset by positive same store sales of 1.5% on the East Coast. We hope that the good performance of the East Coast provides a good indication of the performance of our underlying network under comparable circumstances. Stores located outside of North America experienced a decline in same store sales of 9.2%. Also, the decline is attributable to our stores in the Middle East and in Asia.
Finally, same store sales for our best core restaurants, which are not included in the consolidated same store sales, have grown by 0.2% in the first quarter, led by Ben and Florentine and Mike. Now let's turn to NTY's financial results. Before I comment on the results, I would like to remind you about the impact of seasonality on MTY's results. Particularly, 1st and 4th quarter sales are slower than average, while sales in the 2nd and third quarter are the strongest given the number of locations operating in the ice cream and frozen treats category, which have represented over 28% of our system sales during 2018. That has a direct correlation with our EBITDA since most of our cost base is fixed.
I would also like to briefly discuss the implementation of new camping standards. For the first time this quarter, our results were presented applying IFRS 9 and IFRS 15. While IFRS 9 did not have a material impact on results, IFRS 15 did. This standard mainly affected the way we account for initial franchise fees as well as renewal and transfer fees, which are now being amortized over the term of the related franchise agreement. IFRS 15 also requires us to include the revenues and expenses related to the promotional funds of our brand onto our P and L.
In the past, those were considered a balance sheet transaction and did not affect our results. As a result, we have added an additional category into our segmented information to isolate this from the rest and make sure margins for this category remains relevant. You can see a more detailed of the 2 new standards in our financial statements and in our MD and A. I invite you to read those carefully as we have a material impact on how the business is presented. We are very pleased with our Q1 results.
Revenues quarter quarter increased 42% to $107,300,000 mainly driven by the acquisition of Bescore Restaurant Group and Cavaillac. Cost of sales and operating expenses increased 41 percent, mainly driven by the additional costs associated with those recent acquisitions. And they were partially offset by a decrease in professional fees, lease termination costs, rents and royalties paid to master franchisees. As a result, EBITDA increased 47% to $28,400,000 in the Q1 of 2019 compared to $19,400,000 for the same period last year. Consolidated EBITDA margins increased slightly from 25.7% last year to 26.4% this year.
The increase in EBITDA was driven by the acquisitions as well as by an organic growth of 8%. Our franchising EBITDA margins have increased from 43% last year to 47% this year. Net income attributable to shareholders decreased to $14,700,000 or $0.59 per share for the Q1 of 2019 from $44,300,000 or $2.07 per share for the same period last year. Last year's results were impacted by an adjustment in the prospective income tax rate in the United States used to calculate the deferred income taxes. Excluding the impact of this non recurring adjustment, net income attributable to owners would have been $8,800,000 in 20.18 or $0.41 per share.
Turning now to liquidity and capital resources. In the Q1 of 2019, MTY generated robust cash flows from operating activities of $26,800,000 compared to $13,700,000 last year as the strong growth momentum continued. Excluding the variation in non cash working capital items and some taxes and interest paid, operations generated $28,700,000 in cash flows, up 46% compared to the $19,600,000 we generated in the same period last year. This increase was primarily driven by higher EBITDA. In the Q1 of 2019, our capital was primarily allocated through acquisitions and payments of dividends to shareholders, for which we disbursed $20,900,000 $4,300,000 respectively.
Furthermore, on January 21, the Board of Directors approved an increase of its quarterly dividend of 10% to $0.165 per common share. This increase represents a 7th increase since our first dividend was declared in 2010. The increase further demonstrates not only our confidence and the ability to generate solid cash flows in the future, but also our confidence in our brands and our franchise partner network. MTY concluded fiscal 2018 with a healthy financial position. As of February 28, 2019, MTY had $40,400,000 of cash on hand and long term debt of $284,600,000 in the form of holdbacks and acquisition and bank facility.
Finally, on March 21, 2019, after quarter end, we acquired most of the assets of South Street Burger for a total consideration of approximately $5,100,000 Moving now to the acquisition of Papa Murphy's, which was announced this morning. You will find for your reference on MTYS Corp. Website a short presentation summarizing the transaction. Papa Murphy's is a unique concept with over 35 years history. It has a network of over 1400 mostly franchised stores, which sells fresh handcrafted pizzas made to order for guests to take and bake at home.
It is the 5th largest pizza chain in the U. S. With a highly differentiated position in the pizza segment. The superior quality of the pizza with fresh ingredients is a true differentiator. Furthermore, it is the only national pick and bake chain in the U.
S, and we believe the brand presents an attractive growth potential. This acquisition represents another important step for MTY and its continued growth strategy, and we see tremendous opportunities in this exciting transaction. Papa Murphy's has a compelling strategic fit with MTY. First, Papa Murphy's is driven by the 6 core values of MTY, great quality of food, great service and great value. 2nd, our Murphy's concept is unique.
Its brand resonates well with customers looking for custom made pizza fresh from their own oven and enjoyed an optimal freshly baked addition. 3rd, the brand will continue to benefit from favorable consumer trends, which has ready to cook ready to cook home meals and a greater focus on the quality and freshness of ingredients. 4th, Papa Murphy's network is highly complementary to our existing U. S. Operations and will allow us to cater to a new market in the U.
S, thus strengthening our leading position of brands and adding strengthening our leading portfolio of brands and adding significant sales to our U. S. Platform. Furthermore, we will diversify our business, lessen seasonality within our portfolio of brands and increase our exposure to the robust and growing U. S.
Pizza market. Finally, we believe in the upside potential of the recently refreshed corporate strategy and the benefits of the implemented initiatives. We expect to work with Mr. Murphy's to make capital investments, focus on further improving guest experience and increased sales. We will offer to acquire all of the issued and outstanding shares of common stock of Papa Murphy's for US6.45 dollars per share in cash.
It represents a total equity consideration of approximately US113 million dollars or CAD150 1,000,000 Including the refinancing of Papa Murphy's net debt outstanding, this represents a total transaction value of approximately US190 million dollars or US253 million dollars This communication is for informational purposes only and is not an offer to purchase or solicitation of an offer sell shares of Papa Murphy's stock. The offer to purchase will be filed with the SEC within 10 business days. The transaction will be 100% funded from our cash on hand and existing credit facilities. This purchase price implies $22,300,000 and we expect the acquisition to be immediately accretive to our EBITDA and cash flows per share. Pro form a the transaction, MTY's leverage will be just over 3 times and net debt to last 12 months EBITDA.
Following the completion of the transaction, MTY is expected to continue to generate significant cash flows, allowing for deleveraging and providing liquidity to pursue future M and A opportunities. Transaction is subject to customary closing conditions, including applicable regulatory approval. We anticipate the transaction closing in the Q2 of calendar 2019. Following the transaction, we expect to maintain the current Papa Murphy support center in Vancouver, Washington as well as the seasoned management team that's currently doing a fantastic job with the brand. In conclusion, we are very excited about this transaction.
We're looking forward to welcoming Papa Murphy's franchise partners employees into the MTY family and working with them and growing and further expanding the business. I will now be pleased to answer any questions you may have.
Thank Your first question comes from the line of Michael Glen from Macquarie. Please go ahead. Hey,
good morning, Eric. Eric, can you run through some of the timeline surrounding this transaction? I think the company was undergoing a strategic review. I'm just kind of interested in understanding when you guys got involved in looked at the
deal? Michael. You're right, the company did announce we're going for looking for strategic alternatives a few months ago. And we were contacted by their agent as the transaction became more likely. And we went through the process.
It was a pretty intense auction process, I would say. There was a lot of back and forth and due diligence happening at the same time. So it took a few months, but we got where we are this morning. And hopefully, within the next 10 days, we'll be able to submit all the necessary documents with the regulatory authorities, and then we'll go forward in the next 45 to 60 days. The transaction should be able to close.
Okay.
And there so there were multiple vendors at the table for this deal?
Yes, that's hard to tell for me. I only know of MTY bidding on the transaction. I'm not aware of everything that happened in the auction process. I have to assume there were other bidders in the transaction, but I think that's going to be described in more details as we file everything with the SEC describing the transaction and the process that was run to make sure Faha Murphy's shareholders got the best deal.
Okay. And just on the you made reference to the management team. Can you talk about any are there is the intention to put some retention type contracts in place with the incumbent management team there? Can you talk a little bit about their background with the organization as well?
Yes, sure. Well, the intention is certainly to retain all of the management that's currently in place. And hopefully, they'll want to continue with Papa Murphy's and MTY going forward. I think it's a little bit early and even premature to discuss exactly what form compensation will take and whether or not there will be retention packages. I think that's going to have to be announced after we close the transaction.
Yes, I think the management team is composed of 5 executive people. 2 of them have been with the company for a certain period of time and 3 of them are have joined recently, the CEO, the CFO and the Chief Marketing Officer. And I think they've been undergoing transformation with Papa Murphy's and taking a lot of steps in the right direction. And as you know, these measures that are taken, they don't produce results immediately. They happen over time.
And I think the company is going in the right direction at the moment. So I'm happy to see the progress that's being made. And hopefully, the management team will be able to continue on what we began a year ago and really push the company forward.
And as you look at the as a company right now, the store base, the current level of organic growth, like where do you what do you think the right level of store count is for this organization? Do you think that you can continue to grow the store count over time?
I'd like to have a 1,000,000 stores. That would be the right level. But more seriously, I think the company has been reducing the number of stores in the last few years, really focusing on franchisee profitability and some of the underperforming stores have left the network. There might be a little bit of it left to do, although hopefully, we can maintain the current store base. Realistically, I think there might be a few more stores that will close, whether they're corporate or franchise remains to be confirmed.
And once that's done, I think we're going to push harder on development and expanding of new stores. But yes, we really hope that we're going to be able to keep all our franchise partners in business and make them profitable. But that's something that we're going to have to really look at carefully after quoting.
Okay. And your platform right now in the U. S, as you integrate this business and given where the stores are, it looks fairly broad based throughout the U. S, Do you see any level of integration savings that you can make as you look at what you have in the U. S.
And what they have in the U. S?
I hope there will be. I hope there will be. I think the bigger you get, the more optimal your procurement becomes, the more optimal your distribution becomes. As you have more density of stores, I think it's easier for full class as a franchisor or an owner of corporate stores and it's also easier for our distributors. So hopefully, we'll find good opportunities in there.
But yes, we're our presence is going to be a lot better and we're going to have a better density of stores going forward. So hopefully, we'll be able to make things work. But again, that's another one that happens over time. We have contracts with distributors. We have contracts with our suppliers.
And we can't all of a sudden take all those contracts and flex our muscles and everyone. So we need to be respectful of the business and our business and our partners' businesses also. And these synergies will happen over time.
Okay. Thanks for taking the questions. I'll come back on for more.
Thank you.
Your next question comes from the line of Georges Doumet from Scotiabank. Please go ahead.
Hi, Eric. This is Jonathan stepping in for George.
Hi, Jonathan.
Hi. So just to start off, I was wondering, I noticed the exposure between U. S. International and Canadian locations. The U.
S. Exposure has been increasing daily and even more so with this new acquisition. So just wondering what the targeted geographic breakdown would be looking ahead between U. S. International and Canada?
Yes. We're pretty agnostic when it comes to the geography of our acquisitions within North America. I think naturally, because of the size and the depth of the U. S. Market, naturally, there might be more acquisitions in the U.
S. That become available and our business might grow faster in the U. S. Than it grows in Canada. We still have a lot of good companies we'd like to acquire in Canada, and there are also a lot of good companies we'd like to acquire in the U.
S. And sometimes it's a matter of the company being for sale, us being able to cross the finish line with these people, with the sellers, prospective sellers. So there's many factors that come into play. But really, I think the depth of the market is probably the number one factor that influences our growth and where we realize acquisitions.
Okay. Thanks for that. And now I just thought you came more on the acquisition, the merger. Looking back 2 to 3 years of half of Murphy's history, what was the number of locations in the average same store sales growth performance?
That's a good question. Unfortunately, I don't have those numbers handy. I guess just roughly. I wish I had a good answer for you, but I'd rather not produce numbers that might not be accurate. Papa Murphy is with a public company.
So all this information is public and available for people to look at. But unfortunately, I don't want to give numbers that might be inaccurate.
Okay. So maybe just to rephrase the question, moving forward, where do you see same store sales for the next 12 to 18 months, let's say?
Yes. I wish I was able to give you an answer for that. There's just too many factors at play. And for the same reason, we've never given guidance for MTY in the past. Regarding our results in same store sales, I think I'll I'll keep the same amount of reserve for Papa Murphy's.
1, it's very premature for me to try to predict same store sales and where exactly we're going. We don't own the brand yet, so we still have to go through the process. And then even after, I think I'll stay out of trying to predict results.
Okay. No worries. And then just one more question, if I may. Yes, just related more to California specifically, it's been the weakest performance or biggest drop in transfer sales growth 5% year over year. I was just wondering over the next year or so, how do you see California playing out as it looks like in California?
Yes. California is a really important market for us. So hopefully, it's going to be better. The early Q2 results we're seeing in California are a lot better than they were in Q1. And I think the weather is going back to more normal patterns.
We don't have sub-sixty degree temperatures in Southern California. We don't have snow in Arizona and in Nevada. So I think as the weather goes back to normal, I think our results will also go back to normal. And we're getting early signs of that. It's too early to tell what exactly is going to happen for the rest of 2019, but we're certainly seeing that March April so far have been better than the 1st 3 months of the year.
Okay. Thanks for that.
Next question comes from the line of Elizabeth
Another question on the acquisition. You mentioned potential for maybe additional store closures as the network continues to right size itself. What else has been going on in the last year that you could talk about that gives you I'm just excited about this acquisition, whether it's other internal initiatives, something else the management team has been working on, just to get a sense of what they've accomplished in the last year and where they're going, going forward?
Yes. I think in general, there's been a certain repositioning of the brand and a focus to go back to the basics and focus on where the strengths are for the company. There's also been a major initiative when it comes to online ordering that's been done. I'm sure if you probably haven't had time to go through all the disclosure that the company has made in the past year or so. There was a major online ordering platform that was developed and when the current management team joined, they decided to trash this online ordering platform, write off the entire investment.
That was pretty large one and replaced it with a better platform. There's good new innovations that are coming to market also. Some have come to market and some will be coming to market that are really interesting and that hopefully will bring some excitement around the brand as new flavors are added and as we try to please customers and make them say something different. And hopefully, we'll be able to compete. But yes, I think in general, it's just refocusing of the business and making sure that we put our efforts in the right place.
So that's been, I think, the mandate for the time that Weldon, Nick and Laura have been here with the rest of the team that's been working really hard to achieve those results. I know the online ordering was put in place really fast. So it's an impressive performance there. So there's a number of good things that are happening.
When you say online ordering, I'm assuming that means mobile application as well as a website, correct?
Yes. I think the website is and the app are certainly there. The website ordering is certainly very convenient, whereas in the past, I don't think it was so convenient. So yes, you're right. And it's very big for any company in the restaurant industry at the moment.
You need to have performing online ordering and performing app that will enable customers to have smooth experiences to order. Otherwise, customers will just go somewhere else.
Right. And in terms of the existing management team, which are staying on, is there something that they are that need from MTY, whether it be capital to invest or some other source of support to continue to work to improve the operations? Or do you feel like they're well on their way to meeting their targets?
Well, I think they're well on their way to achieve their targets, but a little help won't hurt in the future. We've had a few discussions with management already, and I think it's too early to announce exactly what we're going to put in place. But I think combining the 2 companies will probably help to do some synergies. And hopefully, we'll be able to know that the synergies don't have to be cost synergies. I think they'll be more top line than cost in this case.
So we don't necessarily have cost cutting synergies in the plant at the moment. So I think that major synergies will happen from procurement, will happen for certain other initiatives that will be announced soon and probably some capital investments as well. There's a need in various areas of the business to make sure that the stores are activated, refreshed and that the right technology is in place in the stores. So it's too early to announce anything, but there's certainly a number of things that we're looking at that will help push the business forward.
Okay, great. And my next question, just going back to MTY's business, which you've certainly gone through. In terms of same store sales growth, we've seen fairly negative results from the international segment. I know you called out Asia among other regions. Can you give us a little more insight into what's going on internationally and what might be accounted for some of the negativity here?
Yes. Well, for Asia, it's a relatively new it's a relatively new thing. So hopefully, this is going to turn around. I don't see any major fundamental issues with our Asian markets. We're very strong in Japan.
We're very strong in Philippines and Korea, a number of other countries. And I don't see really a macro reason for why these markets would go down abruptly. In the Middle East, the economy is just beaten up everywhere. There's trade sanctions on Qatar, UAE, Bahrain, Kuwait, economies are going down for the most part. We're seeing double digit declines in the economy and that's across the board.
It's not only one brand. It's all our brands are going down. And when we talk to people in the region, they all agree that the economy is really not doing great, that people are no longer spending like you used to spend. The number of tourists that are going is also not the same. So the Middle East is, I would say, the trouble at the moment.
And hopefully, our partners there are strong enough to weather the storm and still be very strong when the market should cover. And unfortunately, I don't know when that's going to happen. But yes, that's what we're seeing. I visited the market myself because I wanted to see it with my own eyes and experience it. And some of the things I saw were certainly indicating that economy is worse than what people might say about
it. Okay. And you mentioned that in the
region, I think, a relatively new market. Do you think therefore as we start to lap the introduction of those regions, I don't know if that's maybe later in 2019, some of the comparables will get a little easier and we should see more of a normalization of growth even as a set statement?
No, no, no. That's not what
I meant. Asia is not a new market. Asia is negative is new. Asia, Cold Stone is our main brand that we have in Asia. The Cold Stone has been there for a long time.
So what's new is that the sales were have been growing for a long time, and now we're seeing a downward trend. So hopefully, that's going to turn around soon.
Okay, that's great. That's it for me. Thank you. Your next question comes from the line of Derek Lessard from TD Securities. Please go ahead.
Yes. Good morning and congratulations on the deal. Derek, I just want to maybe touch on the same store sales that we saw in 2017 2018 at Purple Murphy's. I wonder if you can give us some indication of what was going on here and maybe some of the more, I guess, concrete mitigating effects?
Alfred, sorry.
Yes. Well, yes, well, yes, it's hard for me to talk about the past. We did not and we still don't own the business. So I think it would be wrong for me to try to draw conclusions on what happened in the past just for the fact that I was not there, I was not in the business. So it's hard for me to tell you exactly what was happening.
What I can tell you is what will be happening. We have more than half of the management is new in the business, taking some really good measures, taking some really good action to shift the trend to being a more positive and more I think the trend is and the actions that are being taken are probably on the spot going to focusing on improving franchisee profitability, focusing on improving guest experience and focusing on all the right things. So I can only hope that going forward, the business is going to do better. And I think that the last results that were presented did show some very encouraging signs. Same store sales were still negative, but there was a month of positive same store sales that was the first in a long time.
And that's showing that the actions are starting to produce or bear fruit. But yes, as I said, I don't think it would be right for me to draw conclusions or speculate on what happened 2 years ago in the company.
Okay, fair enough. And I just wanted to get your thoughts on how you view the overall pizza market in this business in particular. I'm trying to figure out what you think is the advantage of the take and take versus regular delivery or even buying frozen pizza from the grocery store? Just wondering what the competitive environment looks like, who you think you're or who the true competitors are?
Yes. Well, the pizza market is certainly extremely competitive. There's no doubt about that. Pizza is a huge category in the U. S.
And I think there's room for all the players that are in the market at the moment. It's a market that's still robust and growing. So we're happy with that. I mean, if we do a good job, there's going to be money for us. There's going to be customers going to our stores.
In terms of Papa Murphy's itself, you mentioned frozen pizza, you mentioned competition. I think the number one factor is the freshness of the ingredients. Everything is produced fresh. Everything is produced from scratch. Nothing is frozen.
So that makes a difference, I think, in terms of taste and also in terms of customer perception. And then again, the taste of the pizza is really good. And when you bake and bake, you have the optimal customer experience where your pizza hasn't traveled half an hour to get to your door. So you would bake it and you have perfect experience. It's out of the oven, you slice it and then you enjoy it.
And that too, I think, makes a big difference. So I think we have an advantage compared to the frozen pizza in terms of the freshness of the ingredient. And I think we have an advantage compared to pizza that's mostly being delivered at the moment because of the quality of the product and because of the experience of eating fresh pizza.
Okay. Is there an ability or is Papa Murphy's delivering any of their product to direct to consumer or is it all pickup in store?
Yes, it's mostly pickup in store, but there are some while we the top of Murphy's is now with some of the integrators, and delivery is happening at the moment with via the existing aggregators. So it's a new and I don't want to speculate on the numbers, but it's a fairly new thing for Papa Murphy's. So we're going to need a few months more experience to see the results of that. But I would say for the moment, mostly pickup.
Okay. And maybe on your operations, same store sales were flat in Canada. Ontario was up, B. C. Was up significantly as well as Alberta.
Does this mean Quebec was down significantly? And I guess if that's the case, I'm just wondering what's going on there?
Quebec was down. Quebec is such a big part of the Canadian portfolio, it doesn't need to be down significantly in order to bring the whole network to a flat position. I think Quebec and Ontario to a certain extent was pretty beaten up by weather again and it affected some of our restaurants. There's been a few occasions where we had to close restaurants because the staff just can't get to the restaurant and that doesn't help. Sales.
That doesn't help with a number of other factors. So we're seeing some declines in some segments. We're seeing some declines in some markets. But overall, I think the portfolio is still doing great in Quebec, and I'm not worried about what I'm seeing at the moment.
Okay. And maybe just one last, and maybe it's along the same lines with Investcor. The flat growth there, is that because of the over indexation in Quebec?
Yes, absolutely. Yes, there's no question about that. There's Baton Rouge is same store sales have been going down also, as they have for the other steakhouse brands that we have in the portfolio. And then the other brands were a little bit weaker than they were in the previous quarters because of various factors I explained. So that brings Envyscor to just over flat as an overall position.
And I think we're taking the right actions for all the brands. We're seeing really good results. When we have favorable conditions, we're seeing a little bit more difficult results when the having the conditions that are not as favorable as I'm sure you can expect. But I think overall, I'm satisfied with the portfolio for MTY and for MBSCOR. And we're doing the right things.
And we're starting to see results from our initiatives. The team is working really hard and fixing that hard to make sure that all our franchisees have the best chance possible to being possible and that goes with increasing the top line is the first aspect that we're working on.
Are you able to give any detail on what those specific actions are?
Yes. Well, that's a lot of brands. There would be a lot of actions.
At least, I mean, Escora or
Yes. And then new innovation is certainly very big. So we're trying to come up with good menu, new items on the menu that will attract customers and that will satisfy customers so that they return to our stores. We're working on our operations to make our operations better and more consistent and to make sure the customer is satisfied with the product and is satisfied with the overall experience. There's so much competition out there that we need to be perfect in order to make sure the customer will return.
And we're working also on various marketing initiatives that we think will bring customers to our stores. And the key here is the marketing can bring the customer once and then operations needs to take it over from there and make sure the customer is happy with the experience and returns. So it's pretty generic as an answer, but I can't really tell you all the initiatives we have for all the concepts. Okay. Thanks, Eric.
Your next question comes from the line of Nick Hogerin from Acumen. Please go ahead.
Good morning and congratulations on the acquisition.
Thank you.
I just have I think one question has already been answered. I just have a question about the pro form a debt following the closing of Papa Murphy. Do you have a target debt to EBITDA level?
Well, ideally, we'd like to have 0. That would be amazing. But the reality is we're comfortable using our balance sheet to realize good acquisitions like this one. So our EBITDA. We're very comfortable.
The business is producing very, very strong cash flows. And I think that's the key. We're in a business that's healthy and that can support a certain level of debt. So 3x we did that, I've always indicated, was an optimal level for us. This is where we are now.
That won't stop us from doing more acquisitions if we have good opportunities down the road next week, next month or next year. We still have room. We feel that MTY has the ability to deleverage fast because of the cash flows it's producing. So the fact that we've reached our optimal our target level of leverage doesn't mean that we're going to be sitting on our hands from now on.
Great. And then just going back
to Investcor, I think this is the slowest growth in terms of same store sales in the last probably 8 or 10 quarters. Do you see this being just 1 quarter?
Or could this
be structural thing happening with the chain?
Well, we're comping against very strong results. So when you're comping against strong results, just maintaining those sales is a good thing. If you did plus 10 last year and you do plus 0.5% this year, you're still plus 10.5% or 11% for those 2 combined years, and that's good. So my preference is to have steady growth. But whenever you have strong growth like Investcor experienced last year, as long as you can maintain those sales, I think you're in good shape.
The key here is to avoid having a very strong growth when you're in a very strong decline the year after, which is probably more detrimental to the brand than having more steady growth. So I don't think it's anything structural. I think when you're comping against very strong results, maintaining those sales is good. Obviously, I'd like bigger numbers. But I'm not disappointed also by the numbers.
Your next question comes from the line of Michael Glen from Macquarie. Please go ahead.
Hey, Eric. Just back to the you talked about deleverage. Did you have any deleverage targets in mind by, say, a year from now or a year after closing
on this deal? No. And the reason is we want to do more acquisitions, and we don't know if there will be more acquisitions to do. So obviously, all the cash flows we're producing between now and the next one are going to go against our debt. But if there are more acquisitions down the road, we won't hesitate to go for them.
So it's hard to say exactly how much we can deleverage or how much more we're going to put on our balance sheet given the fact that we don't control the pipeline of acquisitions and whether or not we're going to be able to cross the finish line with them. So we don't set those kinds of targets, but one thing is for sure is that we're not stopping the M and A So we're not going to be sitting in our hands waiting for our debt to go down to a certain level before we go back to making more acquisitions.
Okay. And the all in interest rate with your debt pro form a in this acquisition, that would be what would be the right rate to use?
It's supposed to go up a little bit because we're going up to different levels in our jet facility. I wish I had the proper answer for you, but I would assume we're probably going to go up about 0.5% for all of the debt.
Total. Okay. And the tax rate for this business would be 21% in and around?
No, the tax rate is going to be the normal U. S. Tax rate, which is around which is probably around 27%, if I'm not mistaken.
Okay. And for if we were trying to calculate what the D and A coming out of this tool would look like, are you able to give an indication what that might be?
The D and A? The pre amortization? The amortization. Yes. No, it's too early.
We need to do the of our purchase price. Obviously, there will be more amortization coming from the franchise rights and the corporate stores. But I don't have a proper number to give you at the moment.
Okay. And the level you referenced the capital investments. Can you indicate a level that you would be looking to put into the business?
And that will go through CapEx line,
I guess.
No, it would not. Whatever if we contribute something to our corporate stores, it would go through CapEx. But if we contribute something to our franchise stores, it's not through our P and L. It's too early to mention any numbers for that. I need to concentrate on trying to close the transaction first.
And that's the most important. And then once we close the transaction, we'll be for sure talking with management and the franchisee advisory committee to try to find the right action and the right balance between how much MTY can invest and how efficient that investment is going to be. But I would expect this is going to take some time before we can really produce a number and give you indications. It also depends on a number of other factors. The engagement of our franchisees in the network is certainly going to be a big factor in our investment.
We have engaged franchisees that look forward to push their top line. Our investment might be a little bit bigger in the short term if we have franchisees that want to sit on the sidelines and watch while others are taking action and watch the impact of those actions on their results, then it's probably going to be a little bit slower. So we'll see what time, but that's something we're going to have to play by here at the moment.
Okay. That's all my questions. Thanks.
There are no further questions at this time. Mr. Lathan, I turn the call back over to you for closing remarks.
So thank you everyone for joining me on this call. I look forward to speaking with you again on our next quarterly call. Thank you.