Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Q3 2021 Earnings Call. All lines are 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. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, October 8, 2021. I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer.
Please go ahead.
Good morning, everyone, and thank you for joining us for MTY's 2021 Q3 results conference call. The press release and the MD and A with complete financial statements Related notes were issued earlier this morning and are also available on our website as well as on SEDAR. During the call, we will be referring to forward looking statements and to certain indicators that are not IFRS measures. You can refer to our MD and A for more details. I also remind you that all figures Before I begin, I would like to commend our franchise partners and all our crew members for their resilience And extend heartfelt thanks to customers who continue to support the MTY family.
Despite the ongoing impact of the pandemic and related short term challenges, We're seeing light at the end of the tunnel with customer traffic gradually returning to pre pandemic levels for many of our brands and progressing in the right direction for the others. Now turning to our results. Given the lingering impact of COVID-nineteen pandemic restrictions and robust quarterly results reported in the same period last year, We are very proud of our financial results for the Q3 of 2021. We delivered a 13% year over year increase in system sales, 15% growth in adjusted EBITDA and 21% improvement in cash flows from operating activities. Some of these key metrics reached record highs or near record highs in the 3rd quarter, including a record adjusted EBITDA of $49,700,000 and a record Free cash flows of $45,600,000 During the 3rd quarter, lost about 19,300 business days due to COVID related restrictions and many restaurants that were operating were doing so in a restricted capacity.
These last business days were at their lowest level since the pandemic began, but they remain material for our franchise partners and for MTY. While the business is far from fully recovered, major brands such as Cold Stone, Sweet Frog, Baton Rouge, Thai Express, Sushi Shoppe and Mike's outperformed compared to the same period last year. Casual dining restaurants had a very strong recovery, posting a 45% year over year growth, while mall locations had a 42% growth over the Q3 of last year. This was realized despite restrictions on dining room and food court capacity in many throughout the quarter. Once again, we used our strong cash flows predominantly to reduce our debt level in the 3rd quarter.
The $35,200,000 applied to debt this quarter brings total repayment since the start of the pandemic to approximately $180,000,000 This disciplined deleverage brings the business well within our target leverage ratios with net debt to adjusted EBITDA for the last 12 months sitting at 2.06 times. Turning to our network. We ended the Q3 with 6,848 locations. We opened 59 locations, including 3 via joint ventures, Permanently closed 105 and disposed of 13 for a net store loss of 59 locations. Although this represents a slight erosion in our location count, We are reassured to see that the number of closures this quarter is the lowest we've experienced in the Q3 since 2016.
As of August 31, the 6,848 locations in our network represented 94% of the locations we had before the pandemic, implying a net erosion of approximately 6%. Our teams are actively working with franchise partners and landlords Prevent store closures to the extent possible, working on franchisee profitability and renewals. We've also put everything in place to accelerate the pace of store openings. Our objective is to bring our network back to where it was before the pandemic and keep expanding past this point. We still had 164 temporary closed location at the end of the quarter.
Many of those locations are in movie theaters, airports, colleges, health clubs and in major urban centers, which have not yet recovered. Since the end of the quarter, 25 of those locations have reopened. We're actively working with our franchise partners to reopen the remaining temporarily closed locations. Although we are hopeful they will reopen, we will get a clearer picture in the next quarter or 2. As for new store openings, we are slowly rebuilding momentum and remain confident we can continue this upward trend.
Due to labor shortages and supply chain issues, the process to build a new restaurant unfortunately takes much longer than before. That being said, the pipeline of new franchisees remains healthy and we expect a more normal rate of store openings to resume in the upcoming quarters as supply chain issues subside and construction goes back to normal level. System sales for the quarter reached $1,020,000,000 up 13% compared to the Q3 of 2020. Our network benefited from a strong rebound of some of our brands and continued strong performance of others. This performance was realized despite adverse foreign exchange variations, which shaved $43,400,000 from our sales during the quarter.
Our system sales were up 29% in Canada, 5% in the U. S. And 7% internationally. I will now turn the call over to Renee, who will discuss MTY's financial results.
Thank you, Eric, and good morning, everyone. Although the COVID-nineteen pandemic appears to be easing in North America, the restaurant industry remains challenging in the short term with labor shortages and supply chain disruptions being felt across the network. We believe, however, that our brand's continued focus on innovation, product quality and store design position MTY well for the future. Now let's start with our network. In total, 456 locations were closed at least one day during the Q3, which resulted in about 19,300 loss The majority of these lost days of business were in Canada, primarily due to the Ontario shutdown, which impacted a good portion of our Q3 results.
These closures as well as various other government imposed restrictions impacted our recurring revenue streams and adjusted EBITDA. Currently, we still have 139 restaurants temporarily closed, an improvement over the 164 locations we had closed as of August 31. As mentioned by Eric, of the 164 temporary close locations, a majority of these are located in non traditional locations such as Health clubs, cinemas, universities and Air Force, where our ability to encourage reopening is more constrained. We expect this figure, however, to continue dropping as more restrictions are lifted and restaurants are doing normal operations once again. In the Q3, total revenues grew by 11% to reach $151,000,000 Our franchise operations revenues increased 13% as recurring revenue streams from franchise locations rose $5,400,000 in Canada $3,300,000 in the U.
S. And international markets. These are closely related to our system sales, which were up 13%. The increase stems primarily from malls, which outperformed prior year with sales growth of 42% as well as a strong performance in the Canadian casual dining segment with a similar growth of 42%. This increase in restaurant sales also contributed to the increase in promotional fund revenue, which had a quarterly increase of 20% compared to prior year.
Revenue from our food processing, distribution and retail operations remained stable $31,000,000 While our food processing and distribution centers had increases in revenues stemming from the increased restaurant demand, Our retail segment saw a slight decrease as customer spending shifted back to the restaurants. Corporate store revenues also saw an increase of 14%, mainly due to the reopening of locations that were temporarily closed in Q3 of last year. Digital sales continued to be an important sales channel in our Q3, reaching 18.8 percent of total system sales. Although overall digital sales decreased In the Q3 as a percentage of total sales dropping from 21.2% in the prior year, the Canadian segment continued to deliver solid results with a year over year improvement of $16,900,000 The U. S.
Declined from $24,500,000 of total sales to 20.7%, reflecting the gradual effects of the reopening. Our 3rd quarter adjusted EBITDA increased 15% to $49,700,000 compared to $43,400,000 for the same period last year. This was mainly due to the increase in restaurant sales, which as mentioned earlier led to a significant increase in our franchising revenues as well as our continued efforts to manage our controllable expenses. The Canadian segment contributed 42% of total adjusted EBITDA, representing a year over year increase of $3,200,000 or 18%, While the U. S.
And International segments contributed 58% of total adjusted EBITDA, accounting for a year over year increase of $3,100,000 or 12%. During the quarter, we also continued to benefit from the Canadian emergency wage and rent subsidies. It represented $800,000 in total was evenly between wage and rent subsidies. This represents a decrease of $1,800,000 compared to last year, mainly attributable MTY not qualifying for the program for 2 out of 3 of the month in Q3. We also saw a recovery in expected credit loss on accounts receivable of $1,300,000 which comes mainly from better than expected collection from franchisees.
Net income attributable to shareholders was $24,300,000 or $0.99 per share for the Q3 of 2021 compared to $22,900,000 or $0.93 per share for the same period last year. Turning to liquidity and capital resources. With the impressive EBITDA generated by MTY during the Q3, we generated solid cash flow from operating activities of 40 $6,600,000 compared to $38,600,000 for the same period last year. This growth was driven by higher profitability and proactive cash management. Free cash flows increased by $8,500,000 or 23 percent to $45,600,000 or $1.84 per diluted share from $1.50 per diluted share for the same period last year.
This significant increase was primarily driven by higher adjusted EBITDA. In the quarter, we also reinstated the distribution to our shareholders and paid $4,600,000 of dividends or $0.185 per share. Now turning to our financial position, we continued to pay down our debt. At the end of the Q3, long term debt mainly in the form of bank facilities and Hold back on acquisition stood at $387,000,000 down from $426,000,000 in the 2nd quarter. We also ended the quarter with $56,000,000 of cash on hand.
And with that, I'll turn it back to Eric for the conclusion.
Thank you, Renee. Given these strong financial results in the Q3 and improved financial situation and a positive outlook for our business, I'm proud to see MTY the MTY family navigating through this We now have more options in terms of our capital allocation strategy. During the Q3, we lowered our long term debt, restored our quarterly dividend and renewed our NCIB share buyback program. Looking ahead, Our long term strategic plan remains to deliver organic growth while searching for accretive acquisition targets at the right price and with the right attributes. In closing, I would like to sincerely thank our employees, customers and suppliers for their ongoing support.
With that, thank you for your time and we'll now open the lines for questions. Operator?
Thank And your first question will come from Vishal Shreedhar from National Bank, please go ahead. Your line is open.
Hi, thanks for taking my Questions. I'm just wondering if you can give us some perspective on supply chain challenges and labor challenges and how that's impacting Your restaurants and maybe if you expect those challenges to get worse in the future?
Yes. And that's a really interesting question. That's obviously labor has been widely Discussed in the last few weeks, last few months and it's been a challenge throughout North America. Some pockets are better than others, but it's certainly a challenge For us and also for our suppliers, so obviously we're struggling with our restaurants and finding staff is not easy. For our suppliers, they face the same problems, whether it's our distributors, whether it's our suppliers.
We're all facing the same thing. So supply chain is definitely disrupted. There are some challenges in terms of inflation and cost, but also in terms of getting the products. But the good news is we have a great team. They're working really hard to try to find substitute products When the main product is not available, finding ways to make sure distribution is done on time as much as possible.
We are seeing the situation get a little bit better in the last few weeks. So that's encouraging. And in terms of supply chain, I mean, it's disrupted. I'm not sure how long it's going to take to go back to normal. This is an unprecedented situation, so it's hard to base ourselves on anything that happened in history to look at How it's going to be resolved, but I do anticipate that supply chain is going to be a challenge for a certain amount of time.
And in terms of our labor shortage, I mean the demographic deficit that we're facing throughout North America is nothing new and it's going to be around us for Certain period of time. So again, there's going to be a period of adjustments, but I don't see that problem going away in the next few months. So we're going to have to Learn to live with it, find ways to be more efficient, find ways to offer good experiences to our customers With the amount of staff that we have available and that's all it is. So whether it's in Adjusting our menus to make sure that the menus are a little bit easier to execute or working with our suppliers to have a certain portion of Whatever it is that we're producing that gets automated, I'm not sure where the solution is and it's probably not only from one place that the solution is going to come from. It's going to be working together that we're going to solve it.
But I don't see anything here that's insurmountable. So we'll get there.
Okay. With respect to inflation, obviously another major topic in the industry and we're hearing companies that they're increasing wages for employees to attract employees. Can you comment on the pressures that Franchisees are seeing and the inflation that you have in your P and L and what should we expect looking forward?
Yes, there's definitely inflation and getting access to resources is not as easy as it It was before. And with the labor shortage, we're finding ourselves in the market that's easier for employees and harder for employers. So Obviously, there's inflation in terms of salaries, but it's not only the amount of money you're going to pay people, it's how you treat them. It's the other benefits that you're offering them that are going to make a difference. So people are asking for a little bit more than just money nowadays.
So it's a slightly So we have to be aware of that and we need to be adaptable to the situation. So there's definitely inflation on our side in our restaurants. Labor cost is a certain amount of pressure for MTY as a franchisor as well. And then you look at our suppliers and they're facing the same thing. Their suppliers are increasing their prices.
They have to pay people more to have access to them and they face inflation as well. So It goes throughout the supply chain and there is inflation at every step of the way. So again, it's something that we need to Adjust to, unfortunately, it forces us to increase our prices slightly in some of our restaurants, but we really have no choice. This is the way it is in 2021, and I'm not sure how it's going to unfold for the future. But right now, we're facing a certain amount of inflation, and we need to adjust.
Okay. And lastly, with respect to organic growth, obviously, that was a focus for MTY pre pandemic. And it seems like it's all lies back on organic growth looking forward. So can you give us Some comments on what you think will be the major drivers to establish sustainable organic growth for MTY?
Yes. Well, it all starts with franchisee profitability. Ultimately, we have franchisees that are making an investment And they're looking for a return in exchange for that investment that they're making. And if they do realize that return, they'll invest more In their businesses, they'll talk to other people about the investment that they can make and we will reduce the number of closures, we'll increase the number of new openings And ultimately, this is where it starts and this is where it ends. We need to focus on franchisee profitability.
We need to Make our franchisees' lives as easier as easy as possible as a franchisor, and make them proud of being associated to a certain brand and the rest will go well. New store openings is always the easiest way for us to grow organically and this is certainly an area of focus for us.
Okay. And are we talking about marketing investments or maybe other investments into infrastructure to help them as well? Is that a major factor?
Well, there's a number of different areas where we need to invest and every brand is different. So I'm not going to list the brands and The required investments, but obviously online ordering is a big thing, technology is a big thing, investing in menu innovation, making sure that our Store designs are new and fresh and this is what people are looking for. Obviously, the pandemic has changed a few things there as well. So we need to work on a number of different fronts. Just buying marketing is one way to address the situation, but It's certainly not the only one.
Okay. Congrats to the team on the results. Thank you. Thank you.
Your next question comes from John Zamparo from CIBC. Please go ahead. Your line is open.
Thank you. Good morning. I wanted to start on M and A and I'm curious what you're seeing here at the moment. We've seen a few names go public recently at 20 times plus EBITDA valuations. Are you seeing that in negotiations right now?
And would you say there's a divergence between private valuations versus public?
Yes, there's no question we're competing with the very hot IPO market. So there's a certain standard that's set and a certain expectation. Obviously, it applies only to the larger companies. But yes, so I mean, you've seen some IPOs, there's There will be more I'm sure in the market in the fall and in the winter. A number of different players are rumored to be looking for IPO.
So Obviously, when it comes to larger targets, we're competing with private equities and we're competing with IPO valuations. And As you know, MTY has always been disciplined in acquiring companies, and we're not going to pay multiples of that magnitude. That being said, if you look at the smaller targets, I think the valuations are probably a little bit more reasonable. Expectations are still High expectations are still a certain number, but realistically I think if you're at a size where private equities I'm not necessarily interested and you don't have access to the IPO market. You need to be a little bit more reasonable.
So the deal flow is still Relatively slow when it comes to M and A at the moment, especially for the smaller targets. So we'll be patient with what we're seeing on the market. There's good and bad. There's a number of companies that are not ticking all the boxes That we want to look at. So we're going to be patient.
But yes, I'm expecting the deal flow to accelerate at some point In the near future. And hopefully, we'll be there to be able to acquire new companies. We're building our treasure chest now. We've paid down a lot of our debt. We're comfortable with where we are.
And it's just a matter of finding the right targets at the And we'll be back on the M and A train.
Okay, that's helpful. Thanks. And then I want to stick with that topic on capital allocation. You referenced the balance sheet, it's in really healthy shape. M and A may take a pause for a little bit.
So given that, is it fair to expect that you'd make some investments to drive organic growth, whether that's Incentivizing new store growth or renovations and contributing towards those or investments in technology for point of sale integration, those types of things. Is that something you might accelerate given the current M and A environment and the stable balance sheet?
Well, Whatever we're going to do in the future is something we're going to do no matter what the M and A market looks like. So we are investing in renovating our stores. We have a number of programs in place to rejuvenate some of our older brands and some even of our recent brands that need to Maybe take the next step. But whatever the M and A market is, it's not going to prevent us from investing in our Existing network, which is the most important for us. We need to take care of what we have in our portfolio before we get So the IT investments are ongoing and this is not something that We detailed, but it's ongoing.
The investments and rejuvenation of our networks are also ongoing and They've been going forever, but not forever, but for many years. So this is not something that we Detailed for you or for the markets, but this is not related to whatever we do in M and So we manage the business on a decentralized basis. M and A is one thing and it doesn't distract people away from making sure that their stores and their brands are Operating optimally. So we're going to keep investing where we're investing at the moment. There might be an acceleration or not, but whether there's M and A or not is not going to make a difference on that.
Okay, understood. One more on capital allocation. How do you think about using the NCIB versus paying down debt with the balance sheet where it is?
Yes. Well, we're looking at both options. The NCIB is always there for us. Buying back shares is, I think, a very valid capital allocation and we were buying back shares before the pandemic. We haven't bought back shares in Q3.
It doesn't mean we're not going to buy shares back in the future, especially in the context If we end up in a place where M and A is not available for us, maybe buying MTY is going to be our best target. But This is something that we talk at the Board level every quarter, every meeting, And it's a regular topic. So I'm not saying we're going to buy or we're not going to buy on the NCIB, but it's there for us and It's a very valid capital allocation strategy that we appreciate.
Okay. That's helpful. Thanks. And then last one for me. You've talked in the past, Eric, about being encouraged about the franchisee pipeline and the prospects for driving unit growth.
How would you characterize the likelihood of closures moving forward? Do you think the restaurants that were going to close as a result of the pandemic, Have most of those largely closed? And is it reasonable to think that you can get to positive net unit growth in, I don't know the timeline, but the not too distant future.
Yes. This is certainly what we're aiming for. We'd like to have positive store growth at some point. We're always going to have some closures for whatever reason given the size of our network. I think it's normal to have some non renewals Of leases or some stores that are underperforming, Mike, those.
So we're always going to have some, Whether there's a pandemic or not. That being said, it's hard to predict Where the closures are going to be going forward, we have there's so many market forces that are at stake now with we're working with landlords, we're working with our franchisees. The employment market is difficult. Getting our franchisees to renew is certainly a challenge for us, Not because they're not profitable, but because of the supply chain and labor challenges they have and the investment they need to make, not knowing if they're going to be operating To optimize their asset that they're buying. But I mean in terms of closures, Time will tell.
There's still a certain number of stores that are at risk because of the pandemic. I'm thinking of major urban centers, for example, that have not yet recovered They're still fragile. There's still some pockets that depend largely on tourism, for example, that are a little bit more fragile. So we need to be we need to monitor the situation closely and work with our franchisees. And in terms of new store opening, The pipeline is really healthy.
So at least we have that. Hopefully, we're going to be able to accelerate the pace of opening. I think people We're seeing now that restaurants are back and it's an investment that makes sense. It's interesting. Customers are there for the right brands.
Banks are lending money again, where banks Received restaurants maybe as a little bit riskier a year ago. And now we just need to figure out the supply chain And find people to build our stores and find the equipment to operate our stores. But yes, to your point, we're Definitely aiming at positive store growth at some point. The timeline is unpredictable, but we're this is certainly a goal we have internally.
Okay, great. That's all for me. Thank you very much.
Your next question comes from Nick Corcoran from Acumen Capital, please go ahead. Your line is open.
Good morning and congrats on the strong quarter.
Thanks, Nate.
My first question just has to do with Papa Murphy's. It looked like sequentially it was down a bit. I understand Q3 is Typically, seasonally with the quarter, but can you give a little bit more color on how you felt performed in the quarter and what you're expecting going forward?
Yes. Well, Papa Murphy's, you're right. The performance in Q3 was a little bit softer, but not that much softer than last year. We still performed really well with Papa Murphy's. We're really happy with the performance.
We have a number of initiatives that are being put in place To continue on the momentum we have, so we're really bullish on Papa Murphy's at the moment. We're accelerating the pace Of selling stores and opening new stores, we're rejuvenating our network at the moment. A number of franchisees in their stores and making them look fresh again. So lots of enthusiasm around the brand. So we're really happy Where we are and we had a slightly softer quarter.
But to me, it's I mean, it can be a function of many different things. There's a lot of Factors that are at play there, including the very hot weather in all the West Coast, which are very big territories, very important territories For Papa Murphy's, if you look at the entire West Coast in the summer, it was much warmer than normal and lots of forest fires, lots of everything. It doesn't necessarily encourage people to turn on the oven in their house and create more heat. So we will see. I don't want to draw conclusions based on our Q3.
I'm pretty excited with what's coming going forward. So we're still very bullish about that brand.
Great. And then you mentioned the pipeline for new franchisees is healthy. Can you give any color on the U. S. Versus Canada and where the new franchisees may be coming from?
Yes. Well, the pipeline is healthy in both countries. If you look at the U. S, obviously, we have some brands That have proven to be COVID proof. Those were easier to sell.
And obviously, it takes a certain amount of time between time We reached an agreement with a franchisee to open a store and the store opening, especially when it's so hard to build new stores. So very, very strong pipeline in the U. S. We're looking at Canada. The pipeline is also really healthy.
So really proud of the job our team has made Really create a buzz around our brands and Making the best we can of the tough situation during the pandemic and really highlighting the strength of our brands during the pandemic that really Sean, for many of our brands and we're talking a lot about all the negative that happened during the pandemic, but there's also a
lot of positive. And if you
look at our performance over the last 18 months, I think we've proven that a lot of our concepts are resilient, are nimble And some of our concepts performed extremely well during the pandemic and obviously these concepts are a little bit easier to sell now and We're focusing on the positive here.
And the last question for me. I believe you're in the process of replacing your BAWN app with Brands specific apps, can you maybe give some color on how that's going and when you expect those to roll out?
Yes. It's not an easy process for sure to have the brand specific loyalty and gift cards, The brand specific online ordering, so we're still happy with where Bon App is and we're happy with the partner we have to operate Bon App and We're still going to keep doing business with the same partner on a certain number of different things. So Bon App is still working well. We are In the process of implementing the brand specific items, there's a timeline in place. We sent a first communication to our Bon App customers, I think it was last week of September.
So the process is Going as planned, and I expect that in November, most of the new solutions are going to be implemented, and the brand specific Online ordering, loyalty and gift cards are going to be fully deployed probably by the end of November.
That's all from me. Thanks for taking my questions.
Next question comes from Derek Lessard from TD Securities. Please go ahead. Your line is open.
Yes, thanks. Congratulations, Derek, to you and your team on a Solid quarter and the recovery. So a lot of my questions have been asked.
I'm just going to ask some follow ups.
I guess in terms of pricing, I'm curious as to how much you were able to pass through and sort of what has been, If any pushback that you're seeing from customers there?
Yes. Well, unfortunately, we had to Pricing on most of our brands. There are some brands that were a little bit immune based on maybe on the input costs that we have. But For the most part, we've had to push pricing and the customers adjust well, I would say. People expect that there's going to be pricing.
There's inflation In everything and MTY's brands are not the only ones that are increasing prices in the restaurants. So We try to keep it as reasonable as possible. We try to limit it as much as possible because we know there's eventually going to be A line where the customers are going to slow down their visits to our stores. So we're trying to push pricing, but we're very cautious about it, trying to Maybe come up with new menu items that have better food costs and less labor involved for our franchisees trying to help them as much as Possible trying to direct customers to certain different SKUs that might be more advantageous for the franchisee. But pricing It's happening across our brands.
And there's been a certain amount of pricing done during the pandemic. There's For many of our brands, there's another round of pricing that's taking place now or in the very near future, but we're trying to limit it as much as possible.
Okay. Thanks for that. As well, I think I was curious to get your opinion on things like vaccine passports in terms of whether or not Seeing Passports, in terms of whether or not you think they're helping restaurant sales or keep Some of your restaurants opened that might have otherwise closed. And maybe just a follow-up to that is, If you could highlight some of the mall and office traffic trends that you're seeing coming back?
Yes. Well, on the vaccine pass, Pass, obviously, it's a trade off here where we're I mean, obviously, we'd like to not have the vaccine pass and we'd like to not have All the other measures that are in place for in our restaurants, but if those are necessary to keep our dining rooms open, then we'll accept the measures Temporarily, and this is where we're at. Obviously, the vaccine pass prevents a certain number of our customers to visit our stores. So we are losing some sales, but it's certainly a better solution than having our dining rooms close. So I mean, we're working with our governments where the vaccine pass has been implemented.
We're trying to reduce the other measures We're trying to be logical and not duplicate and maybe triple the measures. But yes, as a temporary measure to Keep our restaurants open. I think it's a valid option. When it comes to mall, obviously, if you look at Our sales in Canada compared to 2019 before the pandemic, most of the difference that's left between 2021 2019 is coming from malls. Certain malls are doing really well in some areas.
But for the vast majority, mall traffic It's down, dwell time in the malls is down. And now with in Canada with the vaccine pass in most provinces now, Obviously, it's creating an additional hurdle for our customers to enjoy the food in the food court. So Malls are still a challenge for us and the vaccine passes, again, if it makes a difference between closing the Food court or keeping the food court open with some restrictions, I'll take the vaccine pass. But it's not a very pleasant experience. I don't know if you visited The food court recently, but when you approach a seating area with your tray in your hands and you need to drop everything, take out your wallet to show your ID, It's not a very pleasant experience.
But again, if it keeps our Food court is open. I'm happy to do it for a certain amount of the pandemic goes away.
Okay. And
what we haven't touched on is maybe you also were able to get some decent margin expansion. You've obviously had some costs come back into the business naturally and you've had lower government subsidies. So curious on the drivers of The of your margin?
Yes. Well, our structure is very scalable and it's always been. So the margins are slightly higher than normal, I think, in this quarter. And not necessarily because the EBITDA is not normal, but because maybe we have fewer turnkey restaurants that we're building, we have fewer low margin items that are impacting our business. They're not items that will reduce profit, but there are items that will push our margins down a little bit.
So it looks like the margins are higher than normal. But yes, I mean, We don't have that much cost in MTY other than the staff we have because by far Biggest expense as a franchisor is the workforce we have. And if our restaurants open or if the sales In a given restaurant go up 50%, it doesn't require more staff. It's just the same people that are visiting the same restaurants and Helping and assisting the same franchisees, and these franchisees are just doing better. So yes, there's a scalability to our structure.
And Obviously, during the pandemic, we had to address the way we do things and we're probably a little bit more nimble than we were before, certainly A little bit leaner than we were before, and that's why the margins are so high.
Okay. And just to Confirm, you said you there was about there was 2 months that you didn't qualify for the subsidy in this quarter. Is that because you were showing sales Growth, I believe?
Yes, there's sales growth. There's also new rules that have been published by the government. Well, they're not Published. They've been floated by the government that seem to indicate that we might no longer qualify. We don't know exactly what those rules are yet.
So we chose not to take the subsidies until the rules are published. And if we qualify, we'll definitely go for the money. But If we don't qualify, then we'd rather not claim the money and have to return it. So Yes. So we're waiting for clarification on a certain set of rules.
And obviously, our business is doing better, so that disqualifies us For a certain number of items as well.
Right. Okay. That's helpful. And maybe just one last one for me and just touch on the labor For the last time, I was wondering if you've seen any financial impact or impact on Sales because of the difficult labor environment?
No, there's no question about I mean, we have a number of our restaurants that can't open 7 days anymore. A number of our restaurants are constrained and they need to Open fewer days, open some restaurants were doing the 3 day parts. Now we're doing only 2 day parts or even only one day part. So We've lost some dayparts. We've lost some business days.
And those are not counted, by the way, in the number of 19,000 lost business days we mentioned. Lots of our restaurants are closing 1 or 2 days a week because they just can't staff. So yes, definitely there's an impact on sales from not being to Operate at full capacity and even if a restaurant is open, sometimes you're going to find yourself with a section closed because we just can't service it properly And we want to make sure the customer experience is adequate. So yes, definitely it's really hard to measure what the impact on sales is, but there's definitely an impact.
Your next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead. Your line is open.
Thanks and good morning. Just I guess a question on your comment earlier around just trying to adjust to the current environment with rejigging menus where possible so forth to address the labor shortage. I guess, how are you guys thinking about it? Because I would think adjusting the menu training staff might take a little while and by then things could get better. How are you guys managing or balancing kind of the short term solutions versus maybe just adjusting to this as maybe this could go on for a long time?
Yes. Well, the key is always to have the best possible customer experience. And the customer experience comes from the food, it comes from The service comes from the value proposition. So whenever we make changes, we keep all these things in mind. So we're trying to make our menu simpler to execute to compensate for the labor shortage.
We're also trying to Make our menus more profitable for franchisees. So I mean, I think in the short term, we have no choice. We have to go through That process. And if anything, it's probably once again teaching us some valuable lessons. As you know, the last 18 months, we've learned so much about ourselves and about the market and about our business.
And I think this is no different. This is just a continuation The learning process that we've had for 18 months, it forces us to rethink the way we operated. And I think For the long run, it's going to be a good thing.
Okay. And then just I guess the commentary on digital sales earlier. Based on the investments or how you're going about it now, are you assuming do you have an assumption for, hey, look, going forward coming out of the pandemic, X percent of our Sales are going to be digital, so let's invest to get to that level or is this still just want to understand how you're making those decisions?
Yes. Well, I think digital is here to stay and there's there are many positive attributes with digital. The first one is You have a way to communicate with your customer that's outside of the store, which is very valuable for us. Higher average basket, which is really interesting. And I mean, it's just more orders.
A lot of people are looking for digital solutions now Instead of being on premise. So yes, we're seeing the future in digital. I'm not sure exactly where it's heading in the future. I know it's going to grow. So we're investing massively in both U.
S. And Canada. Obviously, in the U. S, we're a little bit ahead Of Canada, but I think with the investments we're making now in Canada, we're hoping to close the gap. But I think Online ordering is here to stay and it's going to grow.
At what pace it's going to grow, I don't know. But one thing is for sure, we can't afford not to be there.
Okay. And then just a follow-up there, I guess, as digital continues to grow and as a franchisor, I guess, does the focus maybe shift to some extent on more productive Stores versus just expanding store count, if the same store can do a lot more volume with digital line in store. Is that something you guys are thinking about?
Well, we yes, we've always wanted to make our stores more productive. So that's nothing new. We're trying to improve the sales for each of our locations. And whether we have digital or not, This has been an ongoing thing for the last 40 years for MTY trying to improve the sales for each of our location and make our locations more productive. So this is nothing new and digital is certainly going to help.
It's easier to sometimes get sales outside of the peak hours or get sales differently. So you don't have someone that's taking the orders, instead you're just producing the orders. So you're using your staff more efficiently, making your stores more productive. I don't think We need to choose between opening new stores and making our stores more productive. I think those are two objectives that need to go Hand in hand, so we're going to keep pushing on both.
Okay, great. Thanks very much.
Your last question comes from George Doumet from Scotiabank. Please go ahead. Your line is open.
Yes, thanks. Good morning and congrats on a good quarter, Eric. I just wanted to talk a little bit about cold stone. Maybe how the outlook looks over the next 12 months as the cold weather comes and As we lap a very successful last 12 months, just wondering your view on the ability for that banner to continue to grow on top of the solid growth?
Yes. I wish I had a crystal ball, Jordi, but yes, we're certainly I think we're doing all the right things To make sure that we can continue growth and it's not only the last 12 months, I mean this brand has been on a fantastic pace for a number of years In terms of same store sales, in terms of making the stores more productive as we just mentioned, and now we're implementing new tools, we have new ways to do marketing, We have a lot of new product innovation that's just outstanding. We have really good associations and partnerships that we're making With worldwide renowned brands that are really exciting. So I mean, we're pushing all the right buttons. How this is going to translate into sales?
I can't make promises, but I think We're doing a lot of good things with Goldstone now to just make the brand incredible with the best possible experience and Decadent ice cream as we've always had. So again, Cold Stone is a great brand. I really believe in it. It's a brand that we had some network erosion in the past few years with some stores closing, but we're I think We're on the right pace now to reverse that trend and start growing the unit count again. So yes, just to have when We have a lot of good things about Cold Stone.
There's certainly no negative in the forecast.
Okay. And last question, I promise, on labor shortage. Are there any banners that you'd like to call out that are maybe facing the more queue challenges there or any geographies, any flavor you can go there?
No, it's a problem for everyone. Obviously, if you have 50 employees and you're missing 20, It's more employees, but if you have 5 employees and you're missing 1, it's still a big problem. So I think all our franchisees are facing that problem. There are regions where it's more difficult to hire. I'm thinking of Quebec at the moment is probably one of the most challenging geographies, especially the farther east you go in Quebec, the more difficult it gets.
But we were facing problems everywhere in North America. So I wouldn't Say one brand is suffering more than the other. I think all our brands are facing the same problems.
Okay. And
just to follow-up on, you just mentioned there's a new round of price increases. I think you mentioned that earlier. Can you maybe quantify that? Is it low single digits? Is it mid single digits?
Is it more than that?
What do
you think the likelihood of you getting any pushback from your franchisees, just maybe worried about losing sales there?
Yes. Well, that's always a concern of our franchisees. They're the ones that are facing the customers every day and they're the ones that are taking in the comments If we increase prices too aggressively. So obviously, we need to try to balance that. And the price increases generally are No, low to very low single digits.
If we need to go higher than that, we need to have some value proposition that we're going to offer in Change to try to make it up to our customers or give them options. But yes, where Price increases are they've always been there and now this year there's probably a little bit more pressure to increase prices. So far customers have been understanding About the price increases, but yes, again, we need to be we don't know where that line is. It's not easy to determine how much the right price increase is and where the customers are going to stop visiting our stores. So We need to move very cautiously.
So we're trying to keep it to very low numbers so that it doesn't have drastic repercussions on our brands.
Okay. That's helpful. And can you talk to the 139 locations that remain closed in the quarter? I understand that there's A large number of non trad. I'm just trying to get a sense of the likelihood of all of them reopening maybe over the next couple of quarters.
Yes. Well, the likelihood of all reopening, I think, is not very high. There will be some closures in That number, unfortunately. We are working with our franchise partners for all of these locations. But some of them might end up with The end of their lease, some of them might end up in especially the ones, for example, that are more volatile in movie theaters or university campuses Sorry, a little bit more unpredictable.
So I wouldn't say they will all reopen. There's probably going to be Some closures here, and our role here is to try to limit that number as much as possible so that the vast majority of them reopens And we don't lose too many stores.
Okay. And last one for me. Can you maybe remind us of the rationale for the divestiture of Houston's last quarter? And I guess, how do you think of future divestitures, especially given the high valuations out there? Is that something that we can see MTY maybe do more of?
Well, nothing is impossible, but it's certainly not something we're contemplating. This is not something we normally do in terms of divestitures. In this case, we had a brand where we still like the brands a lot. I still actually visit the brands. But yes, we just we have partners in that brand and we reached a point where we felt We either had to buy them out or they had to buy us out and they chose that option to buy us out.
So it was amicable and we ended the relationship this way. We sold it back to the people that had sold it to us. They're great brands, but at some point, if If we don't have the right plan for it as a franchisor and as MTY, then maybe it's better for us to leave it In good hands with other people and that's what we chose to do. But this is an anomaly. This is not something we're looking to do.
And Even with high valuations, generally, we're pretty protective of our brands and we're not looking to sell any of them.
Okay. Thanks for answers.
We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.