MTY Food Group Inc

TSX:MTY

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the MTY Food Group Inc. Q2 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, July 10, 2020. I would now like to turn the call over to your speaker today, Eric Lefebvre, Chief Executive Officer. Please go ahead.

[Eric Lefebvre, CEO & Non]

Good morning, everyone, and thank you for joining me for MTY's Second Quarter of 2020 Conference Call. The 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. I will begin with an overview of the impact of COVID-19 on our business and some key highlights for the quarter. From a high-level perspective, COVID-19 impacted most of our restaurants adversely. The extent of the impact varied depending on the geographic locations, the type of food served and whether the location was street front, mall, office tower or other types of locations. From a system sales perspective, the second half of March and the month of April were hit the hardest. This was followed by a gradual recovery in the U.S. and a much more moderate pickup in Canada in May. The latter can be explained by the greater exposure of our Canadian locations to malls and office towers as well by the larger proportion of casual dining restaurants in the Canadian portfolio. Let me highlight a few key elements for the quarter. First, with the uncertainty created by COVID-19 and the impact on impairment indicators, the complete impairment test was conducted on tangible and intangible assets as well as on goodwill. The lower cash flow forecast, combined with a higher weighted average cost of capital caused by the higher risks assessed by the market to our business as a result of COVID-19, led us to record a nonrecurring noncash impairment charge of $120.3 million during the quarter. Second, very early in the COVID-19 pandemic, we implemented drastic cost-control measures that yielded approximately $10 million in savings in our controllable expenses for the quarter. At this time, we still have approximately 130 employees that remains furloughed, and we eliminated close to 100 permanent positions at the head office. For the last few months, we operated the business with an extremely low-cost base, which is not sustainable in the long run. As restaurants reopened, we had to call back our people so that we would provide the support our franchise partners need. That being said, we will continue to aggressively manage our liquidities and adjust the volatile market conditions. Third, as indicated during the last conference call, we took decisive actions, implementing a range of measures, this time to finally -- financially help our franchisees who are facing an abrupt halt in their business. For example, we granted a blanket deferral in royalties for 4 weeks and offered a second 4-week period to most of our brands. Some brands have benefited from additional deferrals based on the type of restaurant and the potential for mitigation of the sales decreases. We also offered all our franchisees the option to either pay the deferred amounts early in exchange for a 40% abatement on royalties owed or benefit from that interest-free loan until the repayments are scheduled. The success of the abatement offer helped the company generate much needed cash flows when our sales hit the bottom. As of the end of the quarter, there was $7.3 million in deferred royalties and advertising fund contributions in accounts receivable. The repayment of the deferred amounts will begin in the fall and will be staged over enough time to make the repayment possible for our franchisees. Fourth, we were successful in negotiating an amendment to our existing credit facility that will provide more financial flexibility going forward and reduce the uncertainty related to our capital structure. The new agreement incorporates some restrictions on our ability to pay dividends and repurchase shares until the debt-to-EBITDA ratio falls below 3.5x. For the second quarter, our debt-to-EBITDA ratio was below 3.5x, but we need to remain conservative as there will be considerable pressure on our covenants for the next few quarters, given that the EBITDA is based on previous 12 months of business and does not allow for the normalization of the impact of the pandemic. As part of the amendment, we also retain the possibility to make small and medium-sized acquisitions should the opportunities arise. Now here is a brief overview of our network. We finished the second quarter with 7,236 locations. During the quarter, we opened 48 locations, of which 40% were in Canada and the rest in the U.S. and international, and we closed 111 locations and 1 joint venture, in which -- of which 43 were in Canada, 61 in the U.S. and 8 international. Network sales for the second quarter were down 19% to $671 million. At peak level, 2,757 locations were temporarily closed. In total, close to 139,000 business days were lost during the quarter as a result of those temporary closures, representing lost sales of between $225 million and $250 million. Most of the stores that remained open saw their sales drastically reduced by restrictions on dining rooms and shelter-in-place measures. While our locations are now gradually reopening, overall customer traffic remains affected by various local regulation, widespread work-from-home policies, massive job losses and changes in consumer behavior. As of the end of the quarter, 1,470 stores were still closed. And as of July 9, that number is down to 573 stores. As a result of the impact of COVID-19, our mall and office tower sales decreased from 21% of our total system sales last year to 11% this year, while the proportion of sales from our street-front locations increased from 66% and to 80%. Many malls were closed for an extended period of time and as reopenings often came in later stages of de-confinement plans by authorities, and many food courts open without seating areas for customers to enjoy their food. The reduction in our mall exposure started several years ago and has now been further exacerbated by COVID-19. As for office tower food courts, we have been drastically affected by stay-at-home measures, and a return to some sort of normalcy could take some time. Considering the circumstances, we will not be reporting same-store sales until next year. We believe the data would be misleading as it would only include the subset of locations that remained open and therefore would not be a fair reflection of our networks' potential to generate royalties. It would also not be a proper indicator of the health of our networks since the closed locations will be excluded. We believe that a combination of store closures, days of business lost and system sales are more reliable data points in the current circumstances. Our Chief Financial Officer, Renée St-Onge, will now discuss MTY's financial results.

[Renée St-Onge]

Thank you, Eric. Good morning, everyone. Before I comment on the results, I would like to remind you that we implemented in our first quarter the new IFRS 16 accounting standards related to leases. We have selected 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. I invite you to read those carefully as they have a material impact on how the business is presented. Revenues for the quarter decreased 22.1% from $125.6 million to $97.8 million, mainly because of the impact of the pandemic. The decrease mostly came from our recurring revenue streams, which are tightly correlated to our system sales. On the bright side, our Papa Murphy's Take 'n' Bake concept thrived during the rest of the months of April and May. As well, retail operations benefited from the increased sales of grocery stores and other food retailers during that period. With the important decline in system sales, EBITDA decreased by 46.6% to $18.2 million or 18.6% of sales as compared to $34.1 million or 27.1% of sales for the same period last year. We are very pleased by Papa Murphy's performance, which accounted for almost 50% of total EBITDA. The net loss attributable to shareholders was $99.1 million or $4.01 per share for the second quarter of 2020, compared to a net income of $19.3 million or $0.76 per share for the same period last year. The loss is mostly due to the noncash impairment charge of $120.3 million discussed earlier by Eric. Turning now to liquidity and capital resources. In the second quarter, MTY generated cash flows from operating activities of $19.2 million compared to $21.1 million last year. The decline was limited by strict working capital management to preserve liquidities. On a per diluted share basis, our cash flow from operations were $0.78 per diluted share during the second quarter of the year, while they were $0.84 in the same period last year, a decrease of 7.1%. During the first 2 weeks of March, the company repurchased and canceled shares for $9.2 million. The share buybacks were stopped when it became clear that the pandemic was going to hit North America the way it did. For the same reason, the payments of our normal quarterly dividend was suspended for the second quarter due to COVID-19. Free cash flows were $28.9 million, resulting from a combination of the EBITDA generated during the quarter and the nonrecurring proceeds from the sale of 2 groups of Papa Murphy's corporate locations during the quarter, which were refranchised. MTY ended the quarter in a healthy financial position. As of May 31, we had $49.9 million of cash on hand and a long-term debt of $536 million, mainly in the form of holdbacks on acquisition and bank facilities. Now I'll turn it back to Eric for his conclusion.

[Eric Lefebvre, CEO & Non]

Thank you, Renée. Over the next few quarters, our primary focus is to reopen restaurants, provide customers with a safe and friendly environment and optimize the profitability of our restaurants despite the limits and restrictions imposed by various local authorities. The company's focus will continue to be on innovation, quality of food and customer service in each of the outlets and maximizing the value offered to customers. At this stage, we are confident that we will be able to regain customer confidence in our brands and restore the positive momentum similar to what was achieved in the first quarter of 2020. However, this could take some time and will undoubtedly be the result of our relentless efforts to support our franchisees in every aspect of their business. We will continue to monitor the situation closely, and we'll adapt our measures as needed going forward. To conclude, with cash on hand just shy of $50 million, over $190 million available on our credit facility and more flexibility provided by our amended financial covenants, MTY remains in a financial position that will make the execution of its recovery plan and future growth plans the only focus of our entire team. Before we go to the Q&A portion of the call, I want to express my sincere gratitude to our employees who have faced the challenges of the past few months working with a skeleton crew and very limited resources to support them. I also want to thank our colleagues that were furloughed during this difficult period for their patience and understanding. In both cases, everyone handled the situation with extreme professionalism both on a business and personal level. With that, I thank you for your time, and we'll now proceed to answer your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Sabahat Khan.

[Sabahat Khan, Analyst]

Just a question on -- you provided some color on the prepayment that you were able to collect on the royalties. Can you maybe give us an idea of where you stand on that? And in terms of -- is that another offer you're making franchisees for fiscal Q3? And then in terms of the amounts that you collected in Q2, was there any sort of pull forward of some of those collections? Or was it sort of a "Hey, look, you owe us this much by the end of May. You can pay us and then you deal with it in a quarter." Just I want to understand that timing as well as is that an offer you're continuing to make to your franchisees?

[Eric Lefebvre, CEO & Non]

Yes. No, it's not an offer that continues. It was a limited-time offer where we offered our franchisees to either pay early for 40% abatement and/or -- or basically continue deferring the royalties to a later period, that was undetermined at the time. It still is, to a certain extent. So we offered that. I think it was in early May, late April, early May, and it was for a limited time. About half of the network participated in the abatement. So it was a successful campaign for us. I think franchisees appreciated to have the options to either pay or benefit from this interest-free loan that we were offering them. But yes, this is not something we're extending further. It's -- it was a onetime offer, and this is over now.

[Sabahat Khan, Analyst]

Okay. And then in terms of the relief that you were able to get from your banks for the next 4 quarters, are you able to share sort of any details in terms of the amount of flexibility you're getting underneath that? And then how you're just generally feeling about the balance sheet over the next few quarters? In terms of results, do you think it's more of the LTM calculation on the EBITDA that will impact? Or do you see potential sequential downside to the EBITDA? Just want to get your perspective on how you see the business evolving for the next few quarters.

[Eric Lefebvre, CEO & Non]

Yes. Well, for the covenants, I think we disclosed all the details in our statements in our MD&A. We have basically different maximum debt-to-EBITDA ratio for each quarter, going from 4.25 to 4.50 back to 4.25. And after a year, back to the 3.50, that we typically have. There are some restrictions around our debt and our usage of cash as well. There are some restrictions on dividends and on share buybacks. And there's also restrictions on the amount of cash we're allowed to hold in our bank account and restrictions on acquisitions. All that is subject to us being over the 3.5 ratio, and we're not at quarter end. But yes, it just gives us a little bit of breathing room, and we're really happy with the way everything went with our banks. Everybody was very supportive of MTY and understand that what we needed the most is time and patience. So everybody was on board with us, and we're happy that we were able to secure that. So we don't have to think about our covenants anymore, and we can just focus on our business. In terms of the second part of your question regarding the future of the business. I mean there's -- certainly, June was better than April and May. So sequentially, we're doing better. But there's still a lot of ground to make up. We're nowhere close to where we were before mid-March. So there's a lot of ground to make up. And then we still have a lot of our locations that need some significant increases in sales for them to be where they should be financially. So I mean I'll keep it at that. I don't know what's in front of us for July, for August and for after. It's all -- there's a lot of factors that we don't control at this point. We don't control how the consumer will react. We don't consumer -- we don't control how the pandemic will evolve. We're seeing some outbreaks in the U.S. We're certainly not immune to it in Canada as well. We don't know what form of government assistance is going to come our way or not come our way. So there's a lot of factors that we don't control. But one thing for sure is we're trying to optimize everything that we do control so that we not only protect MTY, but more importantly, protect our network and try to do the best we can for our franchisees.

[Sabahat Khan, Analyst]

Okay. And then just the last one for me on the store closures. Was that sort of in line with what you're expecting for the quarter? And were there any surprises by geography or banner in that mix -- in the 112 stores that were announced for Q2?

[Eric Lefebvre, CEO & Non]

Yes. That's more or less what we thought would happen. I think we'll have better visibility on the impact of the pandemic in our Q3, by the end of August. For Q2, everybody was suffering through the pandemic. There were a number of store closures that resulted from us not renewing leases because it was not a good time for us to renew leases. There was a lot of franchisees taking the opportunity also to move on to different things, not knowing what's in front of them, especially in the early part of the pandemic where there was not necessarily light at the end of the tunnel. Now there is, but at some point, it was a little bit darker. But now we're down to under 600 stores closed. So we are focusing on those. There's a number of them that can't reopen. So there's a good reason. But there's also a number of them that are being challenged, and we're trying to help our franchisees reopen their stores as much as possible and then do good business so that they can recover and make a profit and save all these locations. So I think we'll know better by the end of Q3 what the real impact of the pandemic is. And it's really hard for us to predict at this point in time if the store closures will be more or will be less than in Q2, but we're certainly addressing the situation on a location-by-location basis to make sure that we optimize everything we can optimize.

[Operator]

Your next question comes from the line of Nick Corcoran.

[Nick Corcoran, Equity Research Analyst]

Just maybe diving into the brands a little bit more. I think your press release said that Papa Murphy's is relatively strong. Are there any brands that you can call out that have had relative strength compared to other ones?

[Eric Lefebvre, CEO & Non]

Yes. I don't necessarily want to go on a brand-by-brand analysis at this point just because there's -- there are so many factors that are at play now that one brand that might have been doing great at one point in time might not necessarily be doing that good in the future and vice versa. But yes, there are a few bright spots -- quite a few bright spots actually. We have a few brands that are averaging better sales than they were last year, for May mainly and even for June after. There are a few brands that are struggling more. The brands that are predominantly in shopping centers and our casual dining brands. While dining rooms were all closed, we're suffering a little bit more. But other than that, I want to keep it a little bit more general this time. I don't necessarily want to dive into a brand-by-brand analysis.

[Nick Corcoran, Equity Research Analyst]

Okay. And then maybe taking a step back and thinking of the health of the network. How -- what is the health of your franchisee network? And is there any risk that locations that are open will be forced to close for liquidity or other reasons?

[Eric Lefebvre, CEO & Non]

Yes. Well, the health of the network, obviously, it's been challenged by the pandemic and by everything that's taking place at the moment. So generally, I'm worried for a lot of our stores. I'm happy with where we are considering the circumstances. But certainly, the number of locations that are fragile that we need to pay attention to, and there is certainly a risk that some locations that are currently open might close if we can't improve business. So -- and that's the same thing for -- with a pandemic or without a pandemic. There's always a certain set of circumstances that need to happen for our franchisees to be running a profitable operation. And now a lot of the parameters that we do before have changed, and some stores that were doing fantastic are struggling and some stores that might have been struggling before are finding themselves in a much better position. But overall, yes, there are some locations that are at risk, and we are addressing those individually.

[Nick Corcoran, Equity Research Analyst]

And then if we were to think about the network maybe in terms of the number of locations or percentage of locations that were cash flow positive, can you give any indication of that?

[Eric Lefebvre, CEO & Non]

Yes. I wish I had that information. We don't have that granular information, especially not in real-time. So I wouldn't have a good answer for you, if I wanted to have one.

[Nick Corcoran, Equity Research Analyst]

Okay. And then the last question for me. Did you receive any funds from the Canadian or U.S. payroll protection programs?

[Eric Lefebvre, CEO & Non]

No. In the U.S. -- as we mentioned on the last conference call, in the U.S., we have made requests for funds. We had 4 different requests out there. Two of them were funded by the government, and we returned the funds when it became clear that the rules were not meant to allow companies like MTY to benefit from the payroll protection program. And we canceled the other 2 requests. So we -- net, we get -- we got $0 from the U.S. We are getting some subsidies in Canada for the wage subsidy. So we got -- I think we've got the first 3 installments. And now we're always challenged by the "30% decline in revenues" rules. So there's no guarantee that we will get that subsidy for the subsequent periods.

[Nick Corcoran, Equity Research Analyst]

And what was the amount of the Canadian?

[Eric Lefebvre, CEO & Non]

Yes. It's not something we're prepared to disclose at this time.

[Operator]

Your next question comes from the line of Vishal Shreedhar.

[Vishal Shreedhar, Analyst]

Can you hear me?

[Eric Lefebvre, CEO & Non]

Yes.

[Vishal Shreedhar, Analyst]

Okay. Great. So I understand that management doesn't want to necessarily provide performance by banner. However, maybe I just thought I'd try on Cold Stone because the situation is so unique given its dependence on -- strong dependence on a particular season and the materiality in your business. Maybe you can give some qualitative color on Cold Stone and what you think about that banner.

[Eric Lefebvre, CEO & Non]

Yes. I can give you a little bit more information maybe on Cold Stone. So Cold Stone, as you know, is a very important brand for us. And as you mentioned, seasonally, it's an important period for Cold Stone. All I'm going to say is Cold Stone is performing better than the average of our network. So we're pretty happy with where Cold Stone is at the moment.

[Vishal Shreedhar, Analyst]

Okay. And I understand that some of your businesses, you don't get the ability to track how the franchisees are doing. But is Cold Stone one where you have better data on the franchisee health? Or is that kind of in line with the average of the business?

[Eric Lefebvre, CEO & Non]

Now at Cold Stone, we were in the process of implementing new tools to be able to track profitability better, in Cold Stone, when the pandemic hit. So we are resuming the project now. But unfortunately, we were cut short of our progress there, and we do not have the granular data. I think we are going to have it in the next few months. But at the moment, we don't have it.

[Vishal Shreedhar, Analyst]

Okay. The management's tone, at least from my perspective, it certainly sounds more encouraged relative to last quarter. And you talked about looking at acquisitions to the extent that you're allowed by your creditors. So maybe you can give us a sense of what you see in terms of that opportunity. Are you seeing files? And if you are, what constitutes a medium- and small-size deal?

[Eric Lefebvre, CEO & Non]

Yes. There is an opportunity for us if we want to acquire businesses. But at this point, we are not necessarily considering any acquisition. We are focusing 100% of our energy on our current network of franchisees. So we have chosen to focus on preserving the assets we have and making sure we optimize everything we have in our portfolio before we consider acquisitions. So it is out there. It is a possibility for us to do small and medium deals, but we are not, at the moment, considering anything, even though there are files that are coming through and there are people that are putting the for-sale sign in front of their business. We are not considering any at the moment.

[Vishal Shreedhar, Analyst]

Eric, before the pandemic hit, you and the team were making a lot of changes to the business, focusing on organic growth initiatives, among one of many initiatives. Looking at this pandemic and reflecting on the changes that the consumer is going through at this moment and potentially in the future, has that caused you to revisit any of MTY's strategies in terms of the types of businesses it acquires, where it wants to acquire if, in fact, they'll be as quick as it was in the past, and where management will put its focus? And if so, maybe you can highlight some of those to us.

[Eric Lefebvre, CEO & Non]

Yes. What I'm going to say is that I'm really happy we made the, call it, changes. I like to call it adjustments. We had a great foundation to work with, so I was not going to change everything, but we made some small adjustments to tweak the business slightly. And I'm happy we made those adjustments because it really paved the way to a better recovery for the pandemic. Now are we going to change our strategy? To a certain extent, yes, we need to adjust our strategy again. There will be permanent changes in how consumers consume and where they are, also in how we approach them. So there will be changes in the marketing strategy. There will be changes in which locations are the most relevant. There will be changes on the type of food people are looking for, and there are changes in operations, on how we need to serve our customers and what customers are expecting when they go to our restaurants. So yes, there will be tweaks, undoubtedly, in the future. And is it going to affect future acquisitions? Probably, there will be a certain set of expectations we're going to have, and they're going to affect profitability. So we will definitely factor in everything we know now and to new acquisitions. And you had the second part of your question, asking if we were going to be as acquisitive in the future as we were in the past. And the answer is yes. MTY has always been acquisitive, and we will be acquisitive once we go past that COVID period. And then once we remove the handcuffs to a certain extent, we will certainly become acquisitive again. It's part of our DNA. It's how we grew the business to where it is, and we will continue to grow by acquisition.

[Vishal Shreedhar, Analyst]

Okay. And just switching gears here. Management highlighted that there are $10 million of OpEx savings as part of the initiatives that's taken early in the pandemic hit. I understand, and you highlighted, that some of these initiatives are now fading away, and we're starting to reinvest back into certain franchisee support. So just wondering, of that $10 million, how should we forecast those savings looking forward? Is the bulk of that saving?

[Eric Lefebvre, CEO & Non]

Yes. Well, I'm not necessarily going to give you guidance on how to prepare your models. So that's up to you. You're the expert. But yes, there's definitely a certain amount of that $10 million that will remain as we're adjusting the business again, but there's also a certain amount that was just not sustainable. At a point in time where you have 2,700 restaurants closed, you can afford to shed a little bit of your workforce. The marketing was put to halt to a certain extent. So again, a lot of people had to pay the price for that. There was also a lot of other people that had to suffer for it. And we also stopped a lot of the programs we had internally for various things that are normal business practices. So we just put a halt on everything. The $10 million is certainly not a sustainable saving that we can repeat every quarter. And then we are, as we mentioned, in the number of employees that are still furloughed, we have called back a great number of people. And we are continuing to call back people now as we're adjusting the business as our -- as franchisees need support, as marketing is required, as we have more invoices to process and accounting as our corporate stores reopen. And it affects every function. Just the CECRA itself that we're dealing with the landlord is requiring a massive amount of people just to process all the paperworks, so we have to call back a number of people there. So we're going back to a certain state of normalcy. And in order to do that, we need to reinvest in the business and call back our people and restore the programs we had before, and restore the expenses that we were incurring for a normal business before.

[Operator]

[Operator Instructions] Your next question comes from the line of Derek Lessard.

[Derek J. Lessard, Research Analyst]

Yes. And I guess, congratulations, I think, to you and your team for managing through an unprecedented pressure. I just want to maybe follow up on the last question. Are you able to give us maybe a sense, percentage-wise, of what costs are sustainable? Is it 50%, 25% cost reduction maybe?

[Eric Lefebvre, CEO & Non]

Yes. I'm going to give you the same answer I gave Vishal. Unfortunately, I can't guide you there.

[Derek J. Lessard, Research Analyst]

Okay. Maybe just -- I have a few questions on Papa Murphy's. Can you just talk maybe about the refranchising of those locations? How many stores that included, and the impact on your cash flow?

[Eric Lefebvre, CEO & Non]

Yes. Well, the impact on cash flows was, for the quarter, $10 million. So you can see it in the cash flow statement. So we -- it's basically 2 clusters of stores that we sold to franchisees, and they were sold to existing franchisees that are reinvesting more in the business. And yes, so it's a certain number of stores. And I don't have the exact number in hand, but I believe it was 7 stores for one and a little bit -- a slightly different number for the other. So yes, so we're refranchising these stores, and it was part of the plan all along that we would pass these stores to franchisees that would probably do a better job at managing these clusters of stores than we do. We're just not wired to run corporate stores. And franchisees have the proper organization to run them, and we're seeing the performance of these stores. They're doing really good since we refranchised them. So the proof is in the pudding. So yes, so it's all it is. We have a certain number of geographies where we have a higher density of corporate stores. We will probably have more clusters of stores that we will sell in the future, maybe not in 2020, but maybe going forward, we will have more. And it's part of the plan for us to franchise these stores and to run a franchise organization.

[Derek J. Lessard, Research Analyst]

Okay. And that $10 million impact on free cash flow, did you -- or are you able to quantify the impact on EBITDA this quarter?

[Eric Lefebvre, CEO & Non]

No, it's 0. It's not part of our EBITDA.

[Derek J. Lessard, Research Analyst]

It's not part of the EBITDA. Okay.

[Eric Lefebvre, CEO & Non]

No.

[Derek J. Lessard, Research Analyst]

And -- I mean you didn't really disclose the comp on Papa Murphy's. But if you were to analyze -- or annualize the EBITDA, that's about $32 million annualized. Just wondering -- and that first is $30 million in the last 12 months. Maybe can you just talk to some of the sales trends that you're seeing in this environment?

[Eric Lefebvre, CEO & Non]

Yes. Well, Papa Murphy's started, we had a relatively weak March for Papa Murphy's. And I think we were missing some of the sporting events that are normally important for the brand, like March Madness. And I think March Madness concluded last year on April 6 or April 8. And after we lap that last major sporting event, the sales just exploded. So April was really good. May was fantastic, and we continued on that trend. So the business is doing good. We have also -- we did not lay off or furlough anyone at Papa Murphy's, but we did put a freeze on the number of expenses. That improved the EBITDA significantly for the brand. So there's a few things that are at stake. But certainly, it was a really good quarter overall for Papa Murphy's, for our franchise partners, where we do have access to profitability numbers for our franchise partners for Papa Murphy's, and the profitability was up. The territories that are traditionally a little bit weaker had good improvements in their sales and in their profitability as well. So all in all, it was a really good quarter. And hopefully, we can keep on that momentum and just continue to build on it.

[Derek J. Lessard, Research Analyst]

Okay. And I guess maybe just one last one for me in terms of COVID. Obviously, we're seeing the increasing severity of the pandemic in the Southern U.S. states. And just wondering, particularly in one of your biggest markets of California, just maybe help us understand how you're looking at this and the potential impact on any closures there.

[Eric Lefebvre, CEO & Non]

Yes. Well, like everyone, I think we're a little bit worried about what's going on in the U.S. so far. It hasn't affected our restaurants too much because of how we're located and the types of restaurants we have in each location. A number of our stores in California have not reopened yet. So the fact that they're closing back is not necessarily going to hurt us more. We are hurting in California, but it's not going to be worse than it was before. But yes, we're worried that there's going to be more stringent measures required for the country, and that would be detrimental to our business. So we're watching the situation like everyone, and we want the situation to go back to having people healthy and having a normal life and being able to go to a restaurant without being worried about touching anything. So hopefully, things will get back under control soon, and then everybody is going to stay healthy, and it's going to be better for not only our business, but for everyone's businesses.

[Operator]

Your next question comes from the line of Michael Glen.

[Michael W. Glen, Equity Research Analyst]

Eric, I'm just wondering if you can speak to -- when we -- when you reported Q1 and you provided some guidance for free cash of about negative $10 million for the period, I know that the forecasting was difficult at that point in time, but things came in rather massively ahead of that number. Just wondering if -- and I know some of that is an asset sale, but I'm just wondering if you can speak to some of the other elements that created the delta.

[Eric Lefebvre, CEO & Non]

Yes, absolutely. So yes, for sure, we had anticipated a cash burn of $10 million. That cash burn included the share buybacks. So basically, we assumed we'd be more or less cash flow neutral, maybe slightly negative for the quarter. A few things came in a lot better than we had anticipated. One of them is the decrease in interest rates. The decrease in CDOR did help. It contributed about $1 million. We had fantastic performance on the working capital that I'm really happy with. It certainly came in a lot better than we thought. We were able to defer a lot of payments to our suppliers. And obviously, that's going to put some pressure on our Q3 cash flows, but we are managing. And the 40% abatement offered to our franchisees brought in a lot more cash than we had anticipated again. So all in all, the working capital management was fantastic, and I'm really happy with the performance of the team there to really preserve liquidity and make sure that we optimize every aspect. And the last part, which is important, is we did perform better than anticipated on EBITDA. The month of May was a little bit better in terms of recovery in the U.S. than we had anticipated. If you look at our MD&A, you'll say that -- you'll see that Canada is not recovering as fast, but the U.S. did have a good rebound. So our royalties came in a little bit stronger than we thought they would. And our cost-control measures also yielded more results than what we were anticipating. So these 2 factors combined together caused a variance in our EBITDA. And again, it's -- the environment is so volatile that we had a number of different scenarios in hand. And the scenario we chose to communicate to the street might have been a little bit too conservative considering what we know now.

[Michael W. Glen, Equity Research Analyst]

Okay. And then on cash taxes, was there -- I know that there's some noise related to the asset impairments in the quarter. But was there any deferral on cash tax payments?

[Eric Lefebvre, CEO & Non]

Yes. The government of Canada did allow people to -- companies to defer their installment payments. So that's pushed into Q3 and Q4. So we will see more cash payments for taxes going forward. Obviously, we will have to reforecast everything to calculate the right amount of installments that are due for these periods. But yes, there was some deferral on the -- not only the income taxes, but also on the sales taxes side, which was also deferred into Q3. So we did take advantage of these deferrals that were offered by the various governments.

[Michael W. Glen, Equity Research Analyst]

And was that -- that was only in Canada? Or is it in the U.S. as well?

[Eric Lefebvre, CEO & Non]

Yes. Typically, the U.S. works differently. The installments are not paid on a monthly basis. So the installments were planned to be paid in Q3 in the U.S. anyway, so we did not take advantage of deferrals there.

[Michael W. Glen, Equity Research Analyst]

Okay. And then are you able to give -- there's been some -- perhaps some indications in the U.S. regarding landlords sort of capitulating in terms of rents and things like that. Are you able to speak to some of that in terms of the U.S. and Canada? Are you seeing landlords become a little more lenient towards rent levels?

[Eric Lefebvre, CEO & Non]

The rent levels? No. So landlords are our business partners the same way our franchisees are. And we need to make sure that everyone is going to be hurting a little, but that nobody share -- nobody shares too big a part of the burden. So we are in negotiations with our landlords in Canada to participate in the CECRA program, in the U.S. to offer us some forms of deferral or abatements. It's really a landlord-by-landlord conversation that we need to have. So far, we're seeing that people are understanding. And in general, most of the landlords are playing ball with us. It doesn't mean that they're going to offer us what we'd like to have and what may be -- might be necessary for our business, but at least we're trying to ask everyone to share a little part of the burden. But those are conversations that keep us busy 100% of our time because it's the biggest fixed cost we have for our franchise locations, and it's where it hurts the most if your sales are down. So we're trying to work with our landlords, but at the same time, we understand that these landlords also have their obligations. They also have their payments to make. They need to still pay their real estate taxes, their insurance. They need to pay for the gardening. They need to pay for all these things. You need to pay for their staff. So we understand that they can't give us free rent. So we're trying to find the right balance with everyone and have that conversation to work in a partnership instead of working against each other.

[Michael W. Glen, Equity Research Analyst]

Okay. And just one more. The royalty abatement, are you able to give some indication about -- you take the 40% abatement, what -- how does the accounting work on that exactly? Does the balance of that -- go ahead.

[Eric Lefebvre, CEO & Non]

Yes. The balance of that will go against our revenues. So basically, it's a decrease in our revenues. You have $100 and we give you back $40, we're going to deduct it from our revenues.

[Michael W. Glen, Equity Research Analyst]

Okay. And does that -- is there adjustment on account receivable as well for that?

[Eric Lefebvre, CEO & Non]

Yes, yes.

[Operator]

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

[Eric Lefebvre, CEO & Non]

Thank you again for joining us on this call. We look forward to speaking with you again on our next quarterly call. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.