MTY Food Group Inc

TSX:MTY

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to MTY Food Group Inc.'s Q1 2022 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'd like to remind everyone that this conference call is being recorded on Friday, April 8, 2022.

I'd now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

[Eric Lefebvre, executive]

Good morning, everyone. Thank you for joining us for MTY's First Quarter Conference Call for Fiscal 2022. The press release and MD&A with complete financial statements and related notes were issued earlier this morning and are available on our website as well as on SEDAR. During the call, we will be referring to forward-looking statements and to certain numbers that are non-IFRS measures. You can refer to our MD&A for more details. I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated.

Our network demonstrated great resilience once again in the first quarter of 2022. Although we faced stringent public health measures in Canada and had to close our dining rooms for the better part of the quarter, we're pleased with our overall financial results.

Net income attributable to owners increased 24% year-over-year to $16.6 million in the first quarter of 2022, while cash flows from operations and adjusted EBITDA improved 27% and 9%, respectively. Although the recovery was slowed down by those public health measures, our system sales grew 16% to $885.7 million in the first quarter of 2022, mainly due to momentum in the recovery from the COVID-19 pandemic.

Canadian sales continued to recover with 46% growth in system sales year-over-year. U.S. system sales improved 4% in the first quarter of 2022, and international sales increased 12% during the same period. Despite the new lockdown that affected the segment in the first quarter, casual dining concepts added $44 million to overall system sales growth in the first quarter, representing an increase of 86% year-over-year. The sales from our casual dining locations were still off from pre-pandemic pace by 53% during the first quarter, and we hope the lifting of COVID-related restrictions in Q2 will help us close that gap in the coming quarters. Mall and office tower locations have also shown a promising trend in the first quarter with sales increases of 63% and 73%, respectively, over the same period last year. Similar to casual dining locations, they are still lagging the first quarter of 2020 by 34% and 71%, respectively, so there's room to improve as customers return to normal habits and workers and tourists return to urban areas.

Of note, 9 of our top 10 brands have shown positive system sales growth in the quarter, growing by an average of 5.4% over the first quarter of last year. Those brands combined represents 71% of the network's total sales. Given the relative strength of Canada and incremental growth in the United States in Q1 of 2022, the geographical split changed somewhat year-over-year. The U.S. represented 60% of system sales this quarter versus 67% last year. Canada increased to 36% from 29% and international remained stable at 4%.

Digital sales declined slightly in the first quarter of 2022 to $210.8 million or 24% of total sales, reflecting the impact of the reopening of more traditional sales channels. The Canadian segment, however, delivered solid results with a year-over-year improvement of $9.5 million. Digital sales and the digital experience as a whole remain a key area of focus for our brands, and we believe there's significant growth potential if we take the right actions and make our platforms relevant to customers. Accordingly, we will keep investing time, effort and resources in digital to make sure we harvest the potential of those sales channels.

Turning to our network. We ended the first quarter with a total of 6,704 locations. We opened 75 new locations, an all-time high for our first quarter and acquired another 31 through the Kuto Comptoir a Tartares transaction for a total addition of 106 locations. However, we permanently closed 121 locations, including 23 from an insolvent international partner. Although this slightly eroded our location count, we're highly encouraged by the opening of 75 new locations throughout MTY's network in the first quarter compared to 41 in the same period last year. These new openings bode well for further openings in the future.

Inflationary pressure and supply chain disruptions are issues our teams are coping with on a daily basis. Our teams have done a phenomenal job keeping our stores stocked and making sure we don't have to compromise on the food we offer to our guests.

Preserving our franchisees' profitability is of tremendous importance for us, and we're trying to help as much as we can with various initiatives that involve menu adjustments, innovation, marketing and promotions on lower food cost items, efficiency improvements, training, price increases, et cetera. Inflation is something we've had to deal with in the past. And so far, customers have been accepting the price increases without material impact on traffic. Labor challenges represent another ongoing issue that affect the operating hours, quality of service and the overall experience for customers. We recently implemented the scholarship program in the U.S. to help franchise partners attract and retain quality employees.

MTY will provide grants to certain qualifying employees to help them pay for their cost of studies. It's a classic win-win situation for all parties involved. The program is in the start-up phase. And if it's worse, as anticipated, it could expand rapidly. During the last quarter, MTY has continued to produce strong cash flows despite the lingering impact of COVID-related restrictions. It is now 8 full quarters of pandemic ups and downs during which we've repaid $213 million of long-term debt, positioning MTY advantageously for future merger and acquisition opportunities. We're continuing to seek accretive acquisitions aggressively. But as always, we will remain disciplined in our approach, and we'll focus on transactions we believe can create the most shareholder value.

We’ll now turn it to Renée who will discuss MTY's financial results in greater details.

[Renée St-Onge, executive]

Thank you, Eric, and Good morning, everyone. As previously mentioned, we're pleased with our financial results in the first quarter of 2022, considering that public health measures were strengthened in Canada during parts of the quarter. Total revenues for the quarter increased 18% to $140.5 million. The increase can mainly be attributed to growing recurring revenue streams from franchise locations in Canada. Altogether, revenue from franchise locations in Canada surged 54% year-over-year. Food processing, distribution and retail revenue in Canada also contributed to growth, including 27% year-over-year on the strength of new listings in retail and extension into new territories. Revenue from franchise locations in the U.S. and international, meanwhile, grew 6% year-over-year in the first quarter of 2022.

As mentioned by Eric, a large portion of the growth in our Canadian and U.S. franchise division came from improvements in system sales in the casual dining segment, which grew by 86% year-over-year. The growth in the casual dining segment had the largest impact on our reform location sales, which represent 80% of total system sales. As for the decrease of $5.7 million in the revenues in the U.S. corporate-owned locations segment, the decrease was primarily due to the sale of several Papa Murphy's locations that were converted into franchises.

MTY opened the first quarter with 82 locations temporarily closed due to the pandemic. 69 of these locations were still shut down as at February 28, 2022. Altogether, 225 locations were closed for one or more days during the quarter. Today, 67 remains shut. These were predominantly located in nontraditional locations such as cinemas, hospitals and gyms or locations of [ close-ends ] due to an outbreak of COVID on-premise. These locations usually reopen quickly, however. These data points are a significant improvement over last year when 321 locations were closed at the end of the first quarter.

Adjusted EBITDA improved 90% year-over-year to $35.6 million in the first quarter of 2022. The Canadian segment contributed 41% of total adjusted EBITDA, representing a year-over-year increase of $4.4 million. The U.S. and international segment contributed 59% of total adjusted EBITDA, accounting for a year-over-year decrease of $1.4 million or 6%. Our franchising segment margin saw a slight decrease from 50% to 47%. This was partially due to the company no longer qualifying for the government wage subsidy as well as an inflation impact on wages that was slightly more elevated compared to the same quarter last year. Our Processing and Distribution and Retail segment had a strong performance, however, and was impacted by the rising cost of supply on the market. Net income attributable to owners reached $16.6 million or $0.68 per share -- per diluted share in the first quarter of 2022 compared to $13.4 million or $0.54 per diluted share in the same period last year.

Now turning to liquidity and capital resources. Cash flow from operations amounted to $39.7 million in the first quarter of 2022 compared to $31.3 million in the first quarter of 2021 or a 27% year-over-year improvement. Excluding the variation in noncash working capital items, income taxes, interest paid and other, operations generated $36.9 million of cash flows in the first quarter of 2022 compared to $34.4 million in the same period in 2021. Free cash flow reached $37 million or $1.51 per diluted share in the first quarter of 2022 compared to $30.3 million or $1.23 per diluted care in the same quarter last year.

In terms of capital allocation during the first quarter of 2022, we used cash to reduce our debt by $10.1 million. Of particular note, interest on long-term debt is down $1.9 million year-over-year due to our disciplined debt reduction as well as the utilization of interest rate swap instruments. We also paid out dividends totaling $5.1 million in the first quarter and repurchased 256,400 shares for total consideration of $14.6 million under our NCIB program. At the end of the quarter, long-term debt mainly in the form of bank facilities and holdbacks and acquisition stood at $362.2 million. We also closed the quarter with $52.5 million on cash on cash on hand, leaving us in a healthy cash flow position. Between our available credit facility and our cash, we have approximately $350 million in liquidities at our disposal.

And with that, I thank you for your time, and we will now open the line for questions. Operator?

[Operator]

[Operator Instructions] And our first question will come from John Zamparo from CIBC.

[John Zamparo, analyst]

I wanted to start on the restaurant openings number you referenced was quite strong relative to Q1 in the past. My question is, when you look at this quarter and say the past quarter 2 and also your development pipeline, what are the 2 or 3 brands that are driving most of that growth?

[Eric Lefebvre, executive]

Yes. Well, it's not 1 brand or 2 brands, it's multiple brands that are driving the growth. Obviously, we have some larger brands like Cold Stone that tend to open more stores than the others just because of the sheer number of locations. But we have other really good brands that are performing well in terms of their pipeline and in terms of opening new stores. So yes, it's -- I mean we're pushing on certain brands to develop faster to take markets and it's working out. So those efforts have started before the pandemic and continued during the pandemic, and we're seeing now that the results of the efforts we've put in. And now that the environment seems to be a little bit more favorable for investors to put money into restaurants. It's starting to open more in line with what we expected.

[John Zamparo, analyst]

Okay. And then as a follow-up on that, you mentioned in the past, I think it was the last call, Eric, that you've seen delays in opening restaurants, whether it was equipment shortages or construction permits. Is that contributing to the increase in openings or do you get a sense it's more a function of franchisee profitability?

[Eric Lefebvre, executive]

Well, yes, the problems with the supply chain and construction are still very real. We are facing significant delays in our construction groups are working with suppliers to try to secure necessary equipment to be able to open stores effectively, but right now, the delays are still pretty important. And even when it comes to the base building that the landlords are building, even that suffers some significant delays. So the number we opened is certainly not a function of the delays or the removal of those delays. So it's still a factor for us at the moment and for the future. It takes a lot longer to open stores.

[John Zamparo, analyst]

Okay. That's helpful. And then on the digital side, you mentioned last call that you relaunched digital in much of Canada in November. I know you're operating with some restrictions in the quarter, but can you talk about the progress of the rollout so far and what you're seeing?

[Eric Lefebvre, executive]

Yes. Well, in November, what happened is really we were able to undo and basically detangle everything in Canada because if you remember, everything was on common platform. And it took us some time to get there. So the first step was to be able to get the brands on individual brand platforms. So we've done that now. We're still ironing out some kinks when it comes to digital, especially for the online ordering, the loyalty platforms, even the websites need to be a little bit better for a lot of our brands. So we're still working on that, but we're happy with the progress. We're seeing some real good progress with the brands that were a little bit farther down the road in terms of how the process was going to work. Now we're seeing the basket size improve. We're seeing the customer experience improve.

And now we're tracking some really important metrics to see how we progress not only in terms of the amount of sales, but also in terms of customer satisfaction and how seamless the experience needs to be for our customers because when you look at digital, it's not only the online sales that you want to generate, but it's an entire experience. And for as much as we worked for the last 42 years on the in-store experience, I think now the online experience is becoming almost as important as the in-store experience.

So you need to provide customers with the proper website, with the proper digital marketing, social media, content and everything to create that experience and create that emotional connection to your brand outside of the store because a lot of your interaction with your customers doesn't happen in the store anymore. It happens before they visit the stores or happen between visits. So we need to really put a lot of emphasis on that, and this is what we're doing at the moment. So it's a work in progress. I don't think it's ever going to end. I think that's something that we're always going to be working on going forward. But there's certainly a ramp-up that we need to do now, and I'm pretty happy with where we are at the moment.

[John Zamparo, analyst]

All right. That's helpful color. And then one last one, and I'll get back in the queue. The financial statements made reference to a change in control of the JV. Can you just add some color there?

[Eric Lefebvre, executive]

Yes. That's -- yes, really nothing happened. And business-wise, nothing happened. It's purely the result of interesting accounting standards, I'll call it that. But business-wise, nothing happened. This is related to the transaction with Turtle Jack's and COOP. So I mean, the business is continuing and nothing happened there. It's just after we met the 2-year mark, there were some wording in the agreement that triggered some accounting. But other than that, I mean, business-wise, nothing changed.

[Operator]

Our next question comes from Vishal Shreedhar from National Bank Financial.

[Vishal Shreedhar, analyst]

Just given the pervasive market concerns regarding the consumer backdrop, I was hoping you could provide us with your insight on what you're seeing with the consumer. Are you seeing trade down, any price sensitivity? And if so, maybe you can characterize that by market.

[Eric Lefebvre, executive]

Yes. Well, obviously, it's -- we're walking a very fine line with what's happening in the world in general with a lot of different factors at stake. For us, I mean, there's a number of different factors we need to work on. Pricing is one of them. Customer experience is another. But ultimately, if we're better than our competitors, our customers will continue to come. So we need to continue to work on being better than the rest of the market. We need to provide that experience to the customers. We need to give customers value because everything is relative. So if you increase your prices but your perception of value is still superior, your customers will continue to come because they perceive that value.

So we need to work on a number of different factors, but so far, I mean, we haven't seen declines in traffic and customers are still loyal to MTY. We're acquiring new customers with a lot of new initiatives in Canada and the U.S. I'm seeing a lot of creative stuff being done by our teams. So far, the customer is there for us. We don't take the customer for granted because there's a lot going on. So it's -- our teams just need to continue to work really hard to be better than everyone and our franchisees need to continue in that same way.

[Vishal Shreedhar, analyst]

Okay. Obviously, the public market has reflected declines in the stocks of many discretionary type names. And wondering if you're seeing that lower valuation percolate into the acquisition market? And maybe on that topic as well, given value where valuation stands, is management more keen to acquire or buyback stock?

[Eric Lefebvre, executive]

Yes. Well, I can't necessarily comment on what the public market is doing because the markets are still a mystery to me, but as far as the acquisition pipeline is for us, the valuation is still high. But given the volume of deal flow that's coming back now, I think ultimately, we will find good targets at attractive prices. So -- we've been disciplined in the past, and now we're -- and we've had periods in the past where there were no acquisitions, and we were patient and then all acquisitions came in a flurry at the same time.

So I'm not saying this is what's going to happen this time, but we're confident that valuation is going in the right direction. I think the number of deals that are available in the market is increasing, and that will help with the pricing. And it's up to us to be able to find the right targets and find common ground with the sellers to be able to acquire good quality concepts. So there's no magic formula there. But as always, we're patient, we're disciplined, and we're waiting for the market to be there for us, and we're not going to force transactions just for the sake of forcing transactions.

[Vishal Shreedhar, analyst]

Okay. And what's your point of view on share repurchases given your balance sheet strength and your cash flow generation?

[Eric Lefebvre, executive]

Yes. Well in terms of capital allocation in general is a discussion we have with the Board every time we meet and even sometimes between meetings. So our priority remains to acquire good quality businesses to add them to our network. So we're -- I mean we've repurchased shares, as you've seen in the statement. We're still open to repurchasing shares. But our priority remains to find good M&A targets. And if we do, we'll allocate more capital towards that. Then if we don't, then we'll buy back MTY. The valuation is, I think, attractive on our stock and the execution risk is nonexistent. So it's not a bad offer for us, but as I said, our priority remains M&A.

[Vishal Shreedhar, analyst]

Okay. And drilling a little deeper into the banners and concepts that MTY employees, it looks like QSR, including Cold Stone and fast casual performed well despite some restrictions. Papa Murphy's steady while lapping tough year-over-year comps. Looking forward, is there any color you can provide on how we should think about the growth of these various buckets?

[Eric Lefebvre, executive]

Yes. Well, I think the buckets can be separated a little bit differently. If you look at our casual dining segment, we were still under massive lockdown during Q1. We missed pretty much all of the quarter with our dining rooms, our casual dining are predominantly in Quebec and Ontario and even some in the rest of Canada were also affected. So if you compare our Q1 '20 sales to our Q1 '22 sales, pretty much all of the discrepancy that's left for us to make up is coming from the casual dining segment. So for me, it's encouraging.

We know casual dining is now operating at full capacity. And it's up to us to capture these customer dollars and make sure that customers continue to come to our stores and become once and we create that intent to return. And then sales will work for us. So the other segments, I think, are doing well. They're doing what they need to do. As you said, Cold Stone is rocking, and that's really good for MTY and we hope it continues this way. But yes, there's a lot of other concepts that are doing great. As I mentioned earlier, 9 of our top 10 brands are comping positive in Q1 in terms of system sales, which is really good because this is a large chunk of our revenues.

[Operator]

Our next question comes from Michael Glen from Raymond James.

[Michael Glen, analyst]

Eric, can you just characterize the M&A environment like how different is it in the U.S. and Canada right now? And where is your -- where is your preference? Is it more in the U.S. or is it more in Canada right now?

[Eric Lefebvre, executive]

Yes, the deal flow is coming back, which is good news. So I mean, where we used to see a deal here and there that was probably priced too expensive a few months ago. Now we're seeing a regular deal flow that looks a lot more like what we had before the pandemic. So there's a number of deals out there in both countries, in all segments, corporate franchise, QSR, fast casual, casual dining. So it's a little bit of everything. So we're pretty happy with that, and we're optimistic with it. When it comes to preference in countries or geographies, we remain very opportunistic buyers. We'll price everything according to the risk that's involved with these acquisitions. So I mean, Canada, we're happy, U.S., we're happy. I think naturally, the depth of the U.S. market will make it that there's more opportunities in the U.S. and they're probably larger but we're totally agnostic when it comes to one country or the other.

[Michael Glen, analyst]

And if you're thinking of M&A, is there anything -- like over time, you do a number of tuck-ins which tend to be quite nicely accretive to your EBITDA. Is there anything -- are you seeing some large transactions or do you think investors should be thinking about MTY doing something of the scale of Papa Murphy's or even bigger?

[Eric Lefebvre, executive]

I'm not going to close the doors on any possibilities. One of our mentors is known to make the small acquisitions if they're strategically relevant, and they also make the really, really big acquisitions when strategically it makes sense, so for us to close the door on the size of a deal, not necessarily. I think in general average size deals are probably more common on the market. There's probably more of those available for us, and they're probably priced a little bit more reasonably, but if we find a larger deal that's attractive to us strategically and accretive for shareholders, we'll go for it. So I'm not saying there's going to be one or the other. There could be both big and small deals. There could be a combination of average size deals. There can be any sorts of different combinations that happen, but I'm not going to close the door on any types of deals.

[Michael Glen, analyst]

And in terms of real estate, what are you seeing in terms of rent levels and site availability? Are you able to -- like competition, if the site comes available, are you able to -- are you seeing a lot of interest in those sites and rents are -- rents continue to move higher or just characterize that situation?

[Eric Lefebvre, executive]

Yes, it's a competitive environment for real estate. There's no question about that. One, because I think the economy in general is doing well. And two, there are important delays in construction of new sites, but when you look at it from a different perspective, I don't know that many companies in North America that opened a number of stores we've opened in North America in the last 3 months. So I have to assume it makes us attractive for landlords because they know we're serious to know we open. And they know we are going to open a lot more in the future. So I hope it gives us better access to sites. I think it does. MTY is not perfect, and certainly, sometimes it can be frustrating working with us because we have a certain set of standards. But we're opening a lot of stores. And I think a lot of our brands are attractive for landlords also as we are for customers. So I'm pretty -- again, I'm pretty optimistic on the availability of real estate.

Now in terms of cost, there's inflation there like in everything. So we need to -- again, we need to be disciplined on setting up our franchisees for success and not just getting any franchisee in any site for any brand because sometimes the math doesn't work, and we need to be disciplined and say, well, you know what? It's -- we're going to need to pass on this really good site because it's just too expensive for that brand or it's too expensive, period. So -- but there's inflation, but again, there's so many different sites throughout North America that we can go to that we're always going to find good sites at reasonable prices that we can afford.

[Michael Glen, analyst]

Okay. And then in terms of -- I'm not sure if you said this, but in general, how much [ price ] are you putting through right now or you're recommending? [ So price ], are you putting through or recommending for your franchisees to put through?

[Eric Lefebvre, executive]

Yes. That's a brand-by-brand discussion. There is price that's going on for sure, for all of our brands. So that's no secret, but it's really a brand-by-brand discussion. Ultimately, our franchisees have the freedom to influence on price. So it's a fine line we're walking. Again, it's do we increase price to preserve margins but lose a bunch of customers. So we need to be cautious. We're benchmarking our competitors. We're looking at the market. We're trying to improve the value offer that we have for customers, but price is something we just can't avoid at the moment. So there was price done last year. There was price done this year. There is going to be more price done in the future. Some brands have gone very light with almost no pricing at all, and some brands have had to go 14%, 15% depending on the product mix and what they sell to customers.

[Operator]

Our next question comes from Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, analyst]

A while before the pandemic, I think there was a bit of an increased focus on maybe rolling out some common POS overlays, just focused on kind of digging into some of the operational performance of the franchisees. I guess are we at the point of the pandemic where we've gone from focusing on a recovery to going back to some of those initiatives or are there anything you're more focused on? Just like to get an update on where you might be on that.

[Eric Lefebvre, executive]

Yes. The focus, yes, we've never really lost focus on these things, but we -- given the pressures that we're coming from outside, we decided to lift the pedal a little bit but yes, definitely, the focus is still there. We want to have better data to be able to better assist our franchisees with their businesses. So we are trying to collect more and more. It's not an easy one. Franchisees are all short-staffed franchisees are all fighting for every minute they have in their day. So it's hard to implement these types of initiatives, but they are necessary. So we are getting back at it, but we're also very sensitive to the individual situation of each franchisee and their ability to spend time on something that's not directly related to the operations of their locations.

[Sabahat Khan, analyst]

Okay. And then just one last one. I guess, as we are at this point in the recovery, are there any banners that you look across your network that maybe didn't perform even enough to get by? Are there any opportunities to rationalize the network as you look at M&A opportunities or are you that comfortable with the mix of banners that you currently have in your portfolio?

[Eric Lefebvre, executive]

Well there are certainly some brands that are suffering more than others. But we owe it to those franchisees to do the best we can to bring their business back to where they thought it would be when they invested to where -- to the trajectory it had before the pandemic. So we're not giving up on any of them. We love all our brands. We love all our franchisees. And we owe it to everyone to try to do as good as we can with each brand. So we're not in exit mode at the moment. There are brands that are struggling more. I think, for example, brands that are predominantly in major urban areas that depend on office traffic, for example, are still struggling. So we need to try to push and try to make the brands better and try to make the brands more relevant and attract a bigger proportion of the customers that are available for us increase our market share, but we're not in an exit mode. We're not giving up on any of our brands, and we're not giving up on our franchises there.

[Operator]

Our next question comes from Derek Lessard from TD Securities.

[Derek Lessard, analyst]

Eric, I guess maybe just to hit back on the pricing trends or menu pricing. I think some of the overall data in Canada and the U.S. suggest that pricing is up 4% or 5%, in some cases and 7% to 8% in the U.S. Is that sort of the magnitude of the overall price increases that you guys have been able to push through or is it lower than that?

[Eric Lefebvre, executive]

Some brands are lower. Some brands are higher. I would so on average, we're probably in that ballpark for the last 12 months. So yes, we're probably in that ballpark on average but yes, some -- like I said earlier, some brands have had to push prices a lot more just because of the mix we have. And some brands have had to do less because, again, the products did not suffer the same amount of inflation.

[Derek Lessard, analyst]

Okay. And I think you touched on it earlier, but I guess, are you able to add some color to the -- I guess, the pull of the consumer between, obviously, things like higher grocery fee base spend on fuel and gas versus that -- having that discretionary spend on restaurants? And if you're seeing any of that, I guess, those headwinds start to creep through into your sales numbers?

[Eric Lefebvre, executive]

We're not seeing it yet. I'm not saying it's never going to happen, but right now, we're not seeing declines in traffic related to all sorts of inflation. Customers are loyal discretionary income seems to be there at least when it comes to buying food in restaurants. So again, I'm pretty optimistic about the future. I think we're doing a great job. I think our teams are really providing that value offering that customers are looking for and value offering doesn't necessarily mean cheap price, it just means that the perception of value is there in relation to the price we're asking. So right now, the consumers are there for us, and we're not necessarily seeing a letdown. So hopefully, it's going to keep this way, but there's certainly some pressure on price, and we need to be very careful how far we go.

[Derek Lessard, analyst]

Okay. And one last one for me. You mentioned some client acquisition initiatives. Just wondering if you could point out a couple of them that you're working on now and maybe some of the success that you're seeing with those initiatives?

[Eric Lefebvre, executive]

Yes well, I'll give you one example, and there's similar examples in every brand. So don't think it as the one example, but we launched a dairy-free product with Cold Stone that's called in partnership with Silk. And that's just a gold mine for us. Not in terms of a super large proportion of our sales, but in terms of the proportion of customers that are coming from that very free product with Silk, which is really well known that our customers that did not visit Cold Stone before. So that's a good customer acquisition strategy for us.

And what we're seeing is that the average basket size is very high and seems to indicate that whenever one of these customers that buy Silk so comes to our stores, they tend to bring 2 or 3 of their friends or their family with them. So their basket size is really high for customers that are almost exclusively new customers for us. So this type of initiative is going on across the network and attracting new customers to our brands is important. We want loyal customers to continue to come to our stores, but we also want to acquire new customers if we can. And that's an example of a successful customer acquisition campaign.

[Operator]

Our next question comes from George Doumet from Scotiabank.

[George Doumet, analyst]

How does Papa Murphy's do this quarter? And how is the comping compared to pre-pandemic levels? And I also think last call you mentioned some initiatives that you guys were working on. Can you maybe talk about a little bit, too?

[Eric Lefebvre, executive]

Yes. Papa Murphy's continued more or less on the trend it was for Q4, so slightly off. So yes, we're still working on a number of initiatives. I think pizza is still a very relevant market that I think most of the major pizza players have suffered a little bit in the last few months. But we're still well above our 2019 or pre-pandemic 2020 levels, which is good, but we're working to try to preserve that volume that we have. And we have a certain number of initiatives that are in place, other new initiatives that are coming and we need to help our franchise partners generate more sales for their stores to be profitable in the long run. So a lot going on. We're happy in general with the brand, with Papa Murphy's. We'd like the sales to be comping positive, but we're confident we're going to get there with everything we're working on.

[George Doumet, analyst]

Okay. Congrats on the 75 openings, it's a big number. I'm just wondering maybe how sustainable the number is going forward? And maybe switching to closures, do you think we've seen the worst of them or is that going to maybe trend in, I guess, stay a little bit elevated given that we're seeing a lot of government aid coming off?

[Eric Lefebvre, executive]

Yes. Well in terms -- I'll start with the openings, 75 is a good number. We would have liked to be better than 75, to be honest with you, and we slipped a little bit because of the delays in construction. So normally, openings tend to be a lot more predictable than closures. But in this environment, we know our pipeline. We know the number of stores we have ready for construction or under construction, but we don't know how long it's going to take. So is 75 an indication for the future, I think we can do better than that. But the key here is to be able to build them. So from one quarter to the next, there might be variations just based on the delays caused by construction. So we'll see how the next quarter has come, but we're pretty optimistic when it comes to the number of store openings.

As far as the closures are concerned, you saw there's 23 related to one partner that became insolvent that also affected our Q4. They're now at 0. So that 23 is not going to happen again, so that leaves about 100 closures. It's too high. So we need to work on that. There are some closures that are happening for various reasons. Labor shortage is one of them. We have some partners that elected to not renew certain leases in certain territories where they had multiple stores to just concentrate their workforce in the remaining stores. I think it's a short-term decision that will have adverse consequences in the long term. So we're trying to work with our franchisees to prevent that from happening, and we're trying to come up with new initiatives to attract workforce, so we don't have to take drastic actions like these ones. But closures are a little bit more unpredictable. So I wouldn't necessarily say too much about closures, although I can say that we're not happy with the number we have now. We want to close fewer than that.

[George Doumet, analyst]

Okay. And just one last one for me. On the labor situation, as it relates to our franchisees, would you characterize it maybe as worse, better or the same since our last quarterly update?

[Eric Lefebvre, executive]

I think it's slightly better. I think we're starting to readjust. We had a scare when we locked down again in most of Canada because it took us so long to rebuild our teams after the previous lockdown, and we were worried that we'd lose all our staff again, but for the most part, the staff state. So I think we avoided a disaster there. So I think we're getting slightly better in terms of staff. It's certainly not perfect. We'd like to have more people available to work in our stores. But it is what it is. We're not the only sector that's suffering from labor shortage, and it's up to us to make our sector more attractive as restaurant owners, as franchisors, we need to make restaurants sexy again and it's going to take some time. Our industry has been seen as unstable because of all the pandemic's ups and downs but we're -- again, we're not giving up on that. And I think the restaurant industry is a great industry for people to work in, and it's up to us to promote it this way.

[Operator]

Our next question comes from Derek Lessard from TD Securities.

[Derek Lessard, analyst]

Eric just a follow-up, I was just wondering if you had a view internally, maybe on the office mall locations and whether or not you might think that some of those may be -- or some of those sales may be permanently impaired, especially if we don't all get back to work as we were pre-pandemic?

[Eric Lefebvre, executive]

Yes. And yes, that's definitely a good question there. There are definitely a certain amount of these sales that are not coming back. We have terminated some leases in some malls or some office towers where we feel traffic is not going to come back. And we're going to have to make decisions in the future again on some of them. What we're seeing now is that they're really good models, are always going to be really good malls. So traffic is there. Traffic is back for the most part. The malls that are what I would call a B or C mall are struggling a little bit more to generate the traffic again. So this is where some decisions might need to be made.

And as far as office towers are concerned, we can look at it in 2 different ways. We can look at it as -- well, maybe business traffic is never going to be where it was. It's a possibility. But we can also look at it as an opportunity where maybe some operators will choose to vacate these premises and maybe this is an opportunity for MTY to bring in some concepts that we've adjusted to be relevant in this type of environment. So I prefer to look at it as an opportunity for office towers, and we're working with some of our teams to try to create that offer that's going to be interesting for our franchisee, and that's also going to be interesting for our landlord. And that will be relevant in an environment where traffic is slightly reduced, but where there is traffic that is looking for a certain service. So I like to look at office towers as an opportunity.

[Operator]

We have no further questions in queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.