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MTY Food Group Inc
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Q1 2020 Earnings Conference Call. [Operator Instructions]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, May 1, 2020.I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining me for MTY's First Quarter of 2020 Conference Call. Press release and the MD&A with complete financial statements and related notes were issued earlier this morning and are available on our website and on SEDAR.[Foreign Language] Please be aware that we will refer to certain indicators that are non-IFRS measures. You can refer to our MD&A for more details. I also remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated.Before we begin, I would like to extend my sincere gratitude to all our restaurant staff that go into work every day to serve our delicious food, despite the potential health risks associated with their job. Without them, we wouldn't be where we are today. They are a vital part of our network, and we are thankful we can count on them.I also want to thank our franchisees who've kept their business open and continue to grind every day to make a living in difficult and uncertain circumstances.Let's start the discussion with a brief overview of our network. We entered 2020 with a solid first quarter, building on the momentum of the previous year and delivering on a number of key metrics. We generated positive organic growth in both EBITDA and system sales and recent acquisitions performed well and as expected.Network sales for the first quarter were up 45% to $999.5 million. The growth is primarily attributable to the recent Papa Murphy's acquisition, which generated 26% of our system sales during the first quarter as well as other acquisitions realized last year. The net organic change in our network sales was $6.2 million for the quarter, fueled by the impact of positive same-store sales.We finished the quarter with 7,300 locations. During the first quarter, we added 23 locations through the acquisition of Turtle Jack's Muskoka Grill, COOP Wicked Chicken and Frat's Cucina. We opened 53 locations, of which about half were in Canada and the rest in the U.S. and international. And we closed 149 locations, of which 61 were in Canada, 72 in the U.S. and 16 international.For the first quarter, the proportion of our system sales realized in malls and office towers decreased to 15%, while the proportion of our sales from street-front locations increased to 75%. The decrease in our mall exposure reflects the diversification achieved with our recent acquisitions.Consolidated same-store sales grew by 2.1% during the first quarter. Canada posted a positive same-store sales growth for the tenth consecutive quarter with a 1.6% growth. Québec, Western provinces and the Maritimes continued their upward trend with positive same-store sales growth of 2.9%, 0.6% and 3.5%, respectively, while Ontario had a slight decline of 0.8%, mostly due to weakness in mall sales.Same-store sales in the United States posted a fourth consecutive quarter of growth with a robust 4.3% increase as our various initiatives continue to bear fruit. As mentioned on the previous calls, our exposure to the West Coast is important, and we are pleased to report a growth of 2.6% in that region. As far as the East Coast is concerned, the region's performance remained strong with a 5.5% increase.We continued to experience negative same-store sales growth in our stores located outside North America. The decline of 5.4% is primarily attributable to our stores in the Middle East and Asia. COVID-19 also impacted these sales in the quarter as it affected Asia a few weeks earlier than North America.Finally, same-store sales for Papa Murphy's, which are not included in the consolidated same-store sales, posted a negative 2.4% for franchise location and negative 1.2% for corporate locations.Our Chief Financial Officer, Renée St-Onge will discuss MTY's financial results.
Thank you, Eric. Good morning, everyone. Before I comment on the results, I'd like to remind you that on December 1, 2019, the company retrospectively adopted IFRS 16 leases, but 2019 comparatives haven't been restated as allowed by the standard. Please refer to the MD&A for further details. For the first time this quarter, our results were presented applying IFRS 16. Significant changes were made to lease accounting with a distinction between operating and finance leases removed and right-of-use assets and lease liabilities recognized in respect of all leases and leases receivable in respect of all subleases.Lease-related expenses previously recorded in operating expenses, primarily as occupancy costs, are now recorded as depreciation on the right-of-use assets and finance interest charge on unwinding the discount on lease liabilities. Lease-related revenues previously recorded in rental revenues are now recorded as finance income. IFRS 16 also changes the presentation of cash flows relating to leases in the company's consolidated statement of cash flows. But it doesn't cause a difference in the amount of cash transferred between the parties of a lease.Although the standard didn't change the accounting for most lessors significantly, it does change the manner in which intermediate lessors determine the classification of sublease arrangements between operating and finance leases. Under IFRS 16, this assessment is determined relative to whether the sublease transfer significant risks and rewards of the right-of-use of assets.We have elected not to restate comparative figures as permitted under the specific transitional provisions in the standard. You can see a more detailed description of the impact of the new standard in our financial statements and MD&A, including the impact of that IFRS 16 had on our EBITDA. I invite you to read those carefully as they have a material impact on how the business is presented.We're very pleased with our first quarter results. Revenues for the quarter increased 41% to $150.8 million, mainly driven by acquisitions, particularly Papa Murphy's. The lift in revenue was also driven by our food processing, distribution and retail revenues, which increased 21%, mainly as a result of the launch of new products and the expansion into new provinces. As a result, our first quarter EBITDA increased 45% to reach $41 million or a margin of 27.2% compared to $28.4 million or a margin of 26.4% for the same period last year.Excluding the impact of IFRS 16, EBITDA would have been $38.5 million or an increase of 36% compared to 2019. The increase was mainly driven by acquisitions, most particularly, Papa Murphy's in the U.S. and the acquisitions of Allô! Mon Coco, Yuzu Sushi and Turtle Jack's Muskoka Grill in Canada. We're also very proud to report a positive organic EBITDA growth of 6% for the first quarter of 2020. The organic growth was made possible by generating organic growth in system sales, focusing on the highest quality revenues, maintaining the required discipline to control our expenses and developing new lines of business like our retail operations.The net income attributable to shareholders increased to $19 million or $0.16 per share for the first quarter of 2020, from $14.7 million or $0.59 per share for the same period last year. The increase is mostly due to the acquisitions from the past 15 months.Now turning to liquidity and capital resources. In the first quarter of 2020, MTY generated cash flows from operating activities of $31 million compared to $26 million last year. Excluding the variation in noncash working capital items, income taxes and interest paid, operations generated $41.1 million in cash flows in the first quarter of 2020, up 43% compared to $28.7 million in 2019, mostly due to the increase in EBITDA. In the first quarter of 2020, we deployed our capital mainly to make acquisitions of $19.1 million, repurchased and canceled shares for $9.7 million and paid our quarterly dividend to shareholders of $4.6 million.Free cash flows for the quarter were $30.7 million, up significantly from $24.9 million for the same period last year. On a per diluted share basis, our free cash flows reached $1.23 in 2020 compared to $0.99 in 2019, an increase of 24%.MTY ended the quarter with a healthy financial position. As of February 29, we had $56.8 million of cash on hand and a long-term debt of $561.7 million, mainly in the form of holdbacks and -- on acquisition and bank facilities. We also have over $160 million available on our credit facilities should we need additional funds.Now turning it back to Eric, who will provide an update on the impact of COVID-related measures on MTY.
Thank you, Renée. Although we are very proud of the results achieved in our first quarter and the momentum of the past few quarters, we expect at least the next 2 quarters to be negatively impacted by the COVID-19 pandemic. After 2 strong first weeks of March, health authorities started warning the population about the wave of COVID that was coming to North America. We took proactive steps to ensure the well-being and safety of our employees, franchisees and customers and when possible, the continuity of our operations and business.Sheltering measures rapidly became more drastic and the population reacted strongly, loading their pantries and staying at home. Restaurant sales dropped abruptly, malls were forced to close and office towers became deserted. It became obvious to our franchisees would need massive assistance to weather the storm. MTY was a leader in this industry, offering a first 4-week deferral on the collection of royalties and advertising fund contributions to all franchisees.Consequently, we implemented drastic cash spending reduction measures in an effort to preserve capital resources. We laid off over half of our global workforce, reduced the salaries of upper management, postponed rent payments, minimized capital and operational spending and suspended the quarterly dividend. We're working closely with our various business partners, such as franchisees, landlords, financial institutions and vendors to limit the impacts on the company's liquidity.Following the first 4 week royalties deferral period, we granted some of our franchisees an additional 4 week deferral as their capital resources were scarce and they needed further assistance. We also offered our franchisees the option to pay the deferred amounts early in exchange for a 40% abatement on the royalties owed. Over half of our network has chosen to pay early, showing how robust our network is. We continue to monitor the situation closely, and we'll adapt our measures as needed going forward.Although the disruption to operations is currently expected to be temporary, there remains significant uncertainty going forward from the impact of the pandemic. Therefore, while we expect this matter to negatively impact the company's results, at least for the next 2 quarters, the related financial impact is difficult to estimate at this time.There are just too many variables. There are just too many variables. System sales for the month of March were down 9% compared to the month of March last year. Excluding the impact of acquired brands, the decrease for March would have been 39%. Sales seem to have reached a bottom around second week of April and have started to slowly go back up. As of yesterday, we still had approximately 2,200 restaurants closed, but we're seeing more and more franchisees reopening their stores and operating with a limited offer with a skeleton crew.Approximately half of the closed restaurants are located in malls and office towers, of the balance, over 200 are casual dining restaurants. Locations that are in movie theaters, health clubs, gyms, schools and airports are obviously affected adversely as well.As far as the future is concerned, there's an infinite number of possible outcomes. And as a result, it is very difficult to come up with reliable estimates. With the visibility we have as of today, we expect to burn approximately $10 million in cash in the second quarter as our cost reduction measures took some time to bear fruit. Obviously, the range of outcomes for subsequent periods is very wide and could range materially -- could change materially depending on how the sheltering measures are relaxed and whether there is a second wave of COVID or not.Important to highlight is that we anticipate liquidities and forecasted cash flows to be sufficient to meet the company's obligations, commitments and budgeted expenditures for a period that hopefully will be long enough to make it to the other side of the crisis.In the near term, our primary focus is to reopen the temporarily closed restaurants by rebuilding customer confidence through the implementation of best-in-class safety measures and adjusting the way we serve customers.Even after the pandemic is over, customer spending patterns might shift temporarily or permanently from those traditionally witnessed, and MTY will have to adapt to new customer behaviors and preferences. Innovation will still be a key to success, even though it might not mean the same thing it meant 2 months ago.Our focus after the pandemic will still be on innovation, quality of food and customer service in each of our outlets and maximizing the perceived value offered to our customers.With that, I thank you for your time, and I will now proceed to answer your questions.
[Operator Instructions] Your first question comes from the line of Sabahat Khan with RBC Capital Markets.
Just one on reporting. The IFRS 16 impact that you called out of $2.5 million seemed a little on the lighter side compared to what we thought. I guess, is the right way to think about it that you're netting out the leases that are more with the subleased amounts that you have on your books? So how should we think about that $2.5 million impact? And is that the amount we can use every quarter going forward?
Yes. It was -- prior to IFRS 16, we did net -- our policy was to net rental revenues against rental expenses. So we kept that policy going forward into IFRS 16, so it is the net of the 2.
And then this is a good run rate amount, I guess, $10 million for the year, is the right way to think about it?
Yes. I mean, it might fluctuate a little bit, but that's approximately how much we're expecting.
Okay. Great. And then I think in the MD&A, you're calling out some discussions you're having with your lenders regarding your financial ratios and looking for some relief there on the covenant side. I guess, where are those discussions now? And sort of what kind of scenarios is that built on? Is that just even based on this $10 million cash burn, you think where you might push against covenants? Or is that just a precautionary measure? I just want to get your thoughts on where those talks are and the thought process.
Yes. Well, there is a possibility we might push against the covenants. So we need to be proactive and make sure that we're ready for it if it happens. We don't want to be caught after the fact. So we are talking to our bankers. The syndicate seems to be very supportive at the moment. It will require some amendments to our credit agreement, and we're working diligently with our bankers. But so far, there's no indication that our bankers would do anything that would be detrimental to the company. So at the moment, it's looking positive. We don't think we'll need the additional liquidities, but we need to be ready for that as well in case we need them. But so far, the discussions are positive.
Okay. And then just one last one for me on sort of working with your franchisees. You indicated that about half of them paid early with a discount. In terms of the relief that you gave them on the 4 weeks of the royalties, is there any other measure that you're looking to take maybe some royalty discounts going forward? Or maybe skipping on the promotional payment that they make? In terms of what other steps are you taking to support your network through kind of this upcoming period?
Well, the first thing we did was the first 4 month -- the first 4-week deferral, and we added the second 4-week deferral for the franchises that needed them. So it's not applied to all of our network because we have some brands that don't require more deferrals. And we offered that abatement as a measure for franchisees so as they come forward, they have MTY's liquidities and, in their case, they save some money. So it was a win-win situation.In terms of what we're going to do in the future, there is a wide range of possibilities. And obviously, it's hard to know what's going to happen tomorrow with the crisis, we're all following what's happening. And it's very unpredictable.As far as going into the promotional funds, I don't think we're going to go there. Now the promotional funds are not MTY's money. They are our franchisees money, and they're important for us to be strong and be there for our customers and make sure that we're top of mind and make sure that we have the proper rebound after the crisis is over. So I don't think we're going to reduce the advertising funds.
Your next question comes from the line of Vishal Shreedhar with National Bank.
For the tranche of franchisees that took the second deferral, what percentage of your network was that?
It's most of the network.
It's mostly...
Yes. One notable exception is Papa Murphy's where Papa Murphy's is doing well. So the network -- most of the franchisees did not need further deferrals. So that's the main exception to that rule of the 4 weeks.
Okay. And in terms of a view of the kind of consolidated balance sheet of your franchisees, do you have any sense of kind of where that stands? Or how investors should think about that?
Yes, that's a good question. And we were in the process of deploying the tools required to be able to track that with more granularity. At the moment, it's a little bit difficult for us to have the proper visibility on all of our franchisees' balance sheets and P&Ls. What we know is that our franchisees have invested significant amount of money in their stores. Obviously, they take on some debt, and they work really hard every day to try to make a living. Now that happens, it's abrupt. There were some losses in food. Obviously, they're going to need some working capital to restart the businesses after because it's not just turning on the -- turning on the ops and starting to do food again. So we need to have some working cap injection. The government measures on both sides of the border were adequate to bring some life lines for the short-term for our franchisees. The $40,000 loan in Canada and the SBA, 70 loans in the U.S. were adequate. I think we're going to need more than that. But at least for the short term, it was enough to make sure that our franchisees can at least weather the front part of the storm.
Okay. And just switching gears to a little bit kind of more on longer-term questions. Curious with the increase in unemployment, historically, that may have tended towards people looking for franchisees. What's your view on that? Maybe as a situation, do you think there will be more demand for MTY franchises? Or do you think that will taper off? How should investors see that?
Excellent question. I wish I had an answer for you. This is a little bit farther in the future, and it's really unpredictable. This is unprecedented times that we're going through. And for me to speculate on what's going to happen after and when the after is going to be, I guess it wouldn't be prudent for me. Maybe, maybe not. I don't know. I don't know if people will flock into restaurants again or if people will stay away and what's going to happen with everything. So I'm not going to speculate on what's going to happen on our pipeline of possible franchisees.
Okay. And on delivery, what are your franchisees seeing there? Maybe you can give some sort of color on what's happening to delivery? And what happens to the economics of MTY with delivery? And what happens to the economics of the franchisees?
Yes. Well, delivery, obviously, it's spiked considerably. So we're seeing, at the moment the stats we have are that we about tripled the amount we had in pick out on average for our franchisees, and we about doubled the amount we had with delivery. But that being said, that's not even close to coming to the number we had in sales before. So it really -- it's not close to compensating for the losses we have.As far as the economics are concerned, generally, our franchisees charge a higher price on these platforms than they do on on-premise. So I think the economics for the franchisees are fair. I'd like the fees to be lower and more importantly, the fees to be capped as customers sometimes have very large orders and when it's a percentage fee, the delivery becomes very onerous. But I think for the moment, the P&L and given the situation, I think we're going to try to make the best of it. Obviously, we'd all like to have the charges lower. They are high and some of our aggregators are taking advantage of the situation, unfortunately, and they're flexing their muscles on MTY and on our franchisees. But in general, people are playing ball. And especially in the U.S., we are seeing some good concessions from aggregators and trying to help everyone and maximize the business.
Okay. And just last one here for me. Obviously, good organic growth trends and some of the initiatives that you've been talking over the last quarters seem to be bearing fruit, at least, in this quarter. So I don't know if this question is relevant, but just kind of getting a sense of are those initiatives that you've implemented, maybe when we get to normal or like, have you implemented -- is there a lot to go yet in terms of your initiatives to drive the organic growth? Or have you implemented a large swath of that and it's probably -- you're not going to do that for the next few years as you try to battle this?
No, we had a lot in the pipeline. We were -- it was still just the beginning of everything we had in store. We had a lot of food innovations, a lot of different ways to operate our businesses, a lot of different ways to market to customers. We were rapidly changing the way we market, rapidly changing the way we address our customers. Our operations were getting stronger and stronger every day. So we hit the pause button for most of these initiatives for now because they're not necessarily relevant during the crisis. And it might not necessarily be time for certain things that we had in store. But we're certainly going to resume that as the new normal is going to unfold. I don't know when and I don't know how. It might be slightly different from what we had in mind because, I mean, the customer is going to be different in the way they receive our messages and our innovations is going to be different. But we're certainly going to adapt, but we still had a lot, a lot in store.
Your next question comes from the line of George Doumet of Scotiabank.
I just want to talk a little bit about your guidance. So it looks like you mentioned we're doing 40% of our volumes. And then you said in Q2, we're going to be burning $10 million of cash and in Q3, we are going to be neutral. So I'm just wondering what assumption -- like those 2 numbers, what does that assume in terms of what level of volume will we be in Q2 and in Q3 in your mind?
Yes. We're not necessarily going to disclose our assumptions. George, there's just the area of possible outcomes is too high. We provided guidance because the market was asking for some form of guidance. So for Q2, our cash burn is approximately $10 million. That's what we're seeing now. For Q3, we didn't say we would be cash flow neutral. We said we hope to be cash flow neutral. I think there's an important distinction. But yes, it depends on too many things at the moment. So I'm not going to start disclosing all the various assumptions that go into the model. But obviously, the longer this lasts, the longer our cash management policies are going to be in place, and we need to reduce our spending in accordance with the revenues that we have. So we'll have to do that for as long as the crisis lasts.
Okay. And is most of that volume gain, is that going to be more you think average unit volume per store? Is it going to be more of the new stores coming online that's going to drive most of that?
Yes. We're going to have both. We're seeing at the moment, and especially in the past 3 weeks, the volumes have crept up quite a bit. We're far from where we were before the crisis, but we have a few brands where I think we have 4 brands at the moment that are positive same-store sales for the past 2 weeks. So we are seeing some customer dollars going back into the market. Pantry loading happened and then the pantry depletion happened. And now I think people are ready to go out a little bit and enjoy different food. We're not -- I think that North Americans are not wired to cook 21 meals a week at home. So you can do that for only for so long before you get tired and you need to have something else. So hopefully, the sales trend that we're seeing now is going to continue in the future, but it's certainly promising. And what we're seeing in the U.S. is about 3 weeks delayed behind what we're seeing in Canada. So we are hitting the bottom of our sales now in the U.S. and hopefully, we're going to keep up the same way Canada did.
Okay. And I think last quarter, our net store closure rate was, I don't know, I think, 70 or so. So I'm just wondering, can you talk a little bit about what you expect the store closure rates or percentage or however you want to describe it, to look like maybe as we navigate these more challenging quarters?
Yes. I have no clue, George. I wish I had a better answer for you. But the number of store closures will really depend on how long this is going to last and on the government assistance. So we are seeing some news that could be positive in Canada regarding the commercial rent. We don't know yet if it's going to be positive because there's -- we're still missing too many details. But it's certainly promising, at least, we're talking about it. These measures could go a long way to save a lot of restaurants. So it's too early for us to estimate how many casualties there are going to be. Unfortunately, I think, there will be some people that might not make it past the crisis. But as far as what we're seeing now from our network and our communications with our franchisees, it's really well within control. We only have very few franchisees that have indicated they wouldn't reopen. So we're pretty happy with that at the moment, but it doesn't mean that there's not going to be more when the time comes to inject working capital to restart the business.
Okay. That's helpful. And just one last one, if I may, and I know this may be a difficult question to answer. But if you look at some jurisdictions globally, I think, Spain mentioned that they did want to open restaurants, 30%, some folks are saying up to 50% capacity. So just your view in terms of can franchisees adopt their business model? Is there anything they can do to maybe make profits or some kind of level of profit operating at that level of capacity?
Yes. We're going to have to be creative, for sure, especially for casual dining restaurants where if you need to operate with 50% of your capacity, if you're not allowed to have groups, which are important in the business. There will need to be some adjustments to the business model. And I think we're going to need some assistance as well because if you're paying the rent for 6,000 square feet, and you can only use half of it and turn your tables, maybe a little bit faster, but again, turning your tables faster is good sometimes, but it can also be detrimental if your customers are not there to consume for long enough. So we'll need to adjust the business model. I think it's early now to start discussing about how it's going to happen or what it is that we're going to do to achieve that? But we're certainly preparing for it, and we're having discussions every day on how this is all going to work. We know that our dining rooms are not going to be open with 100% capacity and 100% of the normal volume that we would get. So we're going to need to adjust to the new reality. And I think at the moment, we -- it's too early to discuss the after COVID. I think we need to discuss the with COVID, and that might last for a few months. So we need to be prepared for it.
Your next question comes from the line of Derek Lessard with TD Securities.
Eric, I was just wondering if you could -- if you have the split between the Canadian and U.S. restaurant closures in that 2,200 number that you gave?
Yes. It's about 1,400 in Canada and the rest in the U.S. and international. So we have a much higher number of closures in Canada, and I think it's related mostly to our mall exposure. So the mall exposure is quite a bit higher in Canada. And we also have more casual dining restaurants that are not really prepared for delivery and takeout. We have more breakfast restaurants also that are maybe less natural. So we are adjusting the offer for all these restaurants now to be able to reopen and have a relevant experience for the customer. But yes, Canada is definitely higher than the U.S.
Okay. And maybe just a follow-up to that one, you kind of pointed to it. I was wondering if you like what the percentage of your network has takeout or -- and/or delivery?
Okay. Well, I mean, they all have capabilities. Everybody can do takeout. The ones that are in malls, obviously, they can't do takeout because they can't access the location. But all the others, I mean, if we want to do take out, we can do take out. Some restaurants maybe are less relevant or not located in areas where it might be a popular option or a economically viable option. But I think we can all do that. We are onboarding restaurants that are not on delivery platforms yet. We are onboarding them at the moment. It's taking a little bit more time. Obviously, there's a lot of demand for the aggregators now to onboard a bunch of restaurants. But as far as takeout capabilities, everyone can do it, but then it doesn't mean it's going to be a profitable operation for some of them. For some of our restaurants, it doesn't make sense, unfortunately.
All right. Were you guys on DoorDash? I was just wondering if there's been an impact with them exiting Canada and trying to have to find another third-party aggregator?
Yes. We are on DoorDash. And if you go in our stores, you'll see that most of our stores now have a little deck of tablets, where you have all the aggregators and DoorDash was one of them. It is still one of them. So yes, we -- most of our restaurants are with more than one aggregator.
Okay. Maybe just switching gears here and could you talk about the initiatives you got going on in food -- on the food processing side? Just wondering if you've gotten a boost from the greater retail uptake versus food service in this environment?
Yes. Definitely, retail is a big thing. Our retail group is really firing on all cylinders. We had to add staff to the group because of the demand. Unfortunately, with retail, we're limited by production capabilities from our suppliers. So the demand is more than what our suppliers can produce at the moment. So we are selling a lot more than we would in normal times. But we're not selling as much as we could because there's just simply no production capacity at the moment. So we're limited by that, but it's a good problem to have. And we're happy with the results of retail since the beginning of the crisis.
Okay. And just maybe one housekeeping for me. I was wondering if you guys had an estimate for the IFRS impact on the bottom line or EPS?
EPS. No, we haven't done the math. Basically, you could take $10 million divide it by our number of shares. Hold on.
Yes. No, I guess, because there'd be higher interest and depreciation, right?
Yes. We don't have that number, Eric.
Yes.
We haven't made a quote rather than EPS.
Your next question comes from the line of Michael Glen with Raymond James.
Eric, can you just maybe comment on -- there's been some articles written about negotiations with landlords. Can you talk a little bit about your head leases? And how some of those discussions with landlords are going for you guys?
Yes. Well, for 99% of our landlords, the discussions are going really well. Landlords are understanding that we're facing difficult situation. They are facing a difficult situation as well. They have obligations as well. They have payments that they need to make real estate taxes and bunch of other things. So we're discussing with them and they're positive discussions. The big problem we have is that we don't know what's in front of us. We don't know how long this is going to last. We don't know how the sales will rebound after and our capacity to amortize deferred amounts over a certain amount of time. So we are requesting from our landlords that they basically be patient and that we buy time until this is all over, and we can have a more meaningful discussion on our capacity to pay. But I would say 99% of our landlords are really good, and they're playing ball with us. We're also all waiting, especially in Canada. We're all waiting for the government program to be detailed and defined so that we understand whether MTY qualifies, whether the franchisees qualify, whether our landlords qualify, and then if our landlords want to opt-in for the program or not. So we're waiting for a number of details. And at the moment, the most important thing for us is to just allow time and be patient. And I think everything is going to unfold positively for everyone. And as I said, the landlords, like other business partners are all -- not all, but virtually all very good with us.
And for your head leases, have you had any requirements at this point in time to cover some of those rent payments?
Yes. There's still that 1% of landlords that are not -- that show no flexibility. So yes, there are discussions that are a little bit harder.
Okay. And on the $10 million free cash burn in Q2, would that include -- just to be clear, that would include the royalty deferment that you're thinking about for the period?
Yes. Yes.
Okay. And in terms of the lender, you talked about the lender negotiations, there's 2 covenants mention that you go through. Where would the -- would it be a breach potentially on both covenants or just 1 in particular?
No. The 1 that's more challenged, the debt-to-EBITDA.
The debt-to-EBITDA. Okay. And just in terms of the Q1 reporting itself, the results themselves, I mean, everything that -- out of -- in the MD&A and the financial statements has been fine. I'm just wondering why the company chose to defer the reporting period?
Okay. Yes. Well, there's a new normal, not only for restaurants, but there's a new normal for work environments as well. And the reality is a lot of people that are involved in our financial reporting, including our consultants, are stuck at home. They have young children running around them all day. It's a little bit harder to coordinate the efforts of all the team. They have to work long hours because they have to work the night shift after the kids are home, and that's part of the new normal. So it just took a little bit longer for us to implement IFRS 16 for that reason, and we needed so the additional 2 weeks to get that done.
Okay. And do you also have some sense as to -- in the U.S. with the payment protection program. Do you have a sense as to what percentage of your U.S. franchisees were able to get some help under that?
Yes. Well, we had prepared our franchisees early, and we knew the tap would run dry pretty quickly. So we had prepared our franchisees, and we had told them, look, it's going to be first come first serve. So be ready the day that the demands are open, you need to be ready. So we did have a number of franchisees that missed first cut. But now with the additional payments that were made this week, I'm not sure how many franchisees received the payments and how many did not. I don't have the latest. It's good that you asked the question. I'd like to mention about MTY's eligibility and on these payments. So MTY had made 4 demands for payments totaling about $3 million. 2 of our demands went through with the first leg of it, and we did receive $1.2 million in payroll protection program.And then the clarifications came from the government, and we decided to return that $1.2 million back to the government to make it available to our franchisees and to other small businesses. And that money was returned earlier this week, and we canceled the other 2 requests we had. So we're never going to get that $1.8 million. So we really want to help our franchisees at the moment. Our goal was not -- certainly not to take money away from them. I don't think we realized how quickly that would run dry. And we also didn't realize that those clarifications would come after all the request would be made. So thank you for asking the question and reminding me to make that clarification.
Okay. But you would have had -- and all your -- a number of your franchisees would have received funds as well outside of the $1.2 million that you received?
Yes. Yes.
Okay. Okay.
Your next question comes from the line of Sabahat Khan with RBC Capital Markets.
I just had a couple of quick follow-ups. Can you maybe walk us through your mechanics of that, the royalty discount that you offered? I think you mentioned if the franchisees prepay their royalty, they get about a 40% discount. Is this sort of like pay next month's royalties now? And is this ongoing? Just want to understand the time period it relates to and kind of the frequency?
Yes. Well, no, it's not exactly what you described. So basically, what we did is we deferred royalties collection from our franchisees for an indefinite period. We are not going to define when those will need to be paid until we have a little bit more clarity on the after crisis. So that would be basically a liability that would be for the franchisees. And we offered franchisees to pay those early and make the liability go away in exchange for a 40% abatement. So for example, franchisees that had not paid their March royalties because they were deferred, had the option to keep it deferred, and basically, it's an interest-free loan to them. Or to take advantage of a 40% abatement in the early or pay now as the normal schedule would be.
Got it. And then on the Papa Murphy's platform that you kind of made a brief comment earlier that it was doing well. Just given the take out nature of that banner, can you maybe walk us through what you saw there over the last few months? And how the trajectory there might be similar or different to some of your other restaurants given the nature of its business?
Yes, the trajectory is completely different. So our sales did suffer a little bit in March and the first week of April. I think pizza is very event-driven, and we missed March madness greatly. The first week of April, where March madness comes to an end, we certainly suffered a little bit. But since then, our sales are going really well. We have been double-digit positive for most of the month of April. So we seem to be picking up. We have a great team at Papa Murphy's. They turned around really quickly. They redid the entire marketing around our brand and around the context also that we're going through. We completely redid everything and rethought everything, adjusted the approach, adjusted the messaging, and it's really paying off now. So not saying it's going to be like that forever. But at the moment, we're certainly in a very good run with Papa Murphy's. We are missing the sporting events. But all in all, it's been very positive, especially for the last 3 weeks of April.
[Operator Instructions] And your next question comes from the line of Derek Lessard with TD Securities.
Sabahat, asked my questions.
And your next question comes from the line of Dimitry.
Can you please talk a little bit more about the -- about what you see in the casual restaurants that you own? And your prognosis, if you will, there?
Yes. Well, a casual dining restaurants, obviously, the dining rooms are closed. So we're missing a large portion of our business. So I mean, what we see is that we're missing a large portion of our business because the dining rooms are closed. We do have a number of restaurants that are reopening now with a takeout and delivery option, but it's never going to make up for what we're missing in the dining room.
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you, again, for joining me on this call. I look forward to speaking with you again on our next quarterly call. Thank you.
This concludes today's conference call. You may now disconnect.