MTY Food Group Inc

TSX:MTY

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Q2 2021 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 9, 2021. I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

[Eric Lefebvre, CEO & Non]

Good morning, everyone, and thank you for joining us for MTY's 2021 Second Quarter Results Conference Call. The press release and the MD&A with complete financial statements and related notes were issued earlier this morning and are also available on our website as well as on SEDAR. During the call, we will be referring to forward-looking statements and to certain indicators that are 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. Before I begin, I would like to take a moment to thank our customers for their continued support, patience and understanding. The last 15 months have been an intense rollercoaster of COVID-related restrictions, being at times heavier and at times looser. But despite all the changes, our customers have always been there to consume our food with an open mind regarding the type of experience they will get. Restaurant owners will still have a tough road ahead in their quest to return to profitability, while facing a major labor shortage problem and a dislocated supply chain that is also struggling to find its balance. MTY has built its foundation of small entrepreneurs who have trusted us to invest in their business. Throughout the pandemic, our franchisees have shown a lot of courage and determination when it would have been easy to throw in the towel. We are seeing the benefit today as restrictions are gradually being lifted and customers return into our dining rooms, food courts and office towers. I would like to -- I would also like to highlight the work of our franchise partners and their staff who have continued to serve customers under difficult conditions. The resilience and dedication of people who work in the MTY family have been nothing short of exceptional. I wish to sincerely thank all of them for their commitment to our common goal and success. Now to our results. We are pleased with our second quarter results, during which we operated facing heavy COVID-related restrictions in some of our key markets throughout the quarter. During the second quarter, MTY's network lost more than 38,000 business days because of those restrictions, and many restaurants that we're still operating, we're doing so in a much reduced capacity. While the 38,000 lost business days marked a sequential improvement over the first quarter, numbers are higher than in the fourth quarter of last year, reflecting the new wave of restrictions in Quebec and Ontario that started in December 2020. Together, these markets account for approximately 1/4 of our total system sales in normal times. We are extremely pleased to report that adjusted EBITDA for the quarter more than doubled over last year despite the lingering impact of the pandemic and the end adverse variation in foreign exchange rates. While the business is far from fully recovered, our recurring streams of revenues are improving, especially in the U.S., where Cold Stone, Papa Murphy's and a few other brands continued to perform extremely well during the quarter. Once again, we used our strong cash flow to reduce our debt level. The $15 million applied to debt this quarter brings total repayments since the start of the pandemic to close $145 million, bringing the business well within our target leverage ratios and providing the necessary flexibility to explore various capital allocation possibilities. We finished the second quarter with 6,907 locations. We opened 61 locations and permanently closed 103, for a net store loss of 42. Although that number remains a net erosion of our network, we are happy to see the number of closures is relatively stable at a level that is lower than in the second quarter of 2020 and 2019. We still had 359 temporary closed locations at the end of the quarter. Although we are hopeful those will reopen, we will get a better picture once all restaurants are in a position to reopen. Since the end of the quarter, 101 of those have reopened already. As for new store openings, we reached the highest level since the fourth quarter of 2019, and are confident we will continue to improve in the coming quarters. As indicated in the past few quarters, the pipeline of new franchisees remains healthy, and we expect a more normal rate of store openings to resume in upcoming quarters as visibility over the after pandemic becomes better. System sales for the quarter reached $891.5 million, up 33% compared to the second quarter of 2020, a quarter that was materially impacted by the pandemic. This performance was realized despite the adverse impact of foreign exchange variation, which shaved $53.8 million from our sales during the quarter. System sales were up 56% in Canada, 24% in the U.S. and 38% internationally. During the quarter, 23.5% of system sales came from digital channels compared to 22.6% in the same period last year. As mentioned in the past, we are aggressively investing in technology to improve the customer experience and our teams are continuously rolling out new solutions that we hope will have a positive impact on our sales. Although the sales mix will shift as other sales channels are reopening, we expect digital channels to grow in the foreseeable future and are hoping to position MTY as a leader in the industry for the quality of its solution in the next 12 to 18 months. I will now turn it over to Renée, who will discuss MTY's financial results.

[Renée St-Onge]

Thank you, Eric, and good morning, everyone. Notwithstanding some challenges that remain ahead of us, we're encouraged by our second quarter financial results, especially since our Canadian network and parts of our U.S.A. network were still impacted by ongoing government and cost restrictions related to the COVID-19 pandemic. As mentioned by Eric, Quebec, Ontario as well as California, being 3 of our most prominent territories, still had the most restrictions imposed during the second quarter. In total, 977 locations were closed at least 1 day during the quarter, which resulted in over 38,000 loss days of business. These closures and other government-imposed restrictions impacted our recurring revenue streams and adjusted EBITDA. Currently, we still have 258 restaurants temporarily closed, an improvement over the 359 locations we had closed as of May 31. And we expect this figure to continue to come down as more Canadian provinces move into the reopening phases. In the second quarter, total revenues improved by 39% to reach $136 million as the impact of the pandemic was more severe in Q2 of last year. Our franchise operations revenue increased 49% as recurring revenue streams from franchise locations rose $8.8 million in Canada and $15.5 million in the U.S. and international. These are closely related to our system sales, which, as mentioned by Eric, were up 33%. Revenues for our food processing, distribution and retail operations increased 33% as it continues to benefit from higher consumer spending in grocery stores, extension into new provinces and additional SKUs. The number of branded products for sale in the Canadian market continued to progress in the second quarter, reaching 158 compared to 147 in the first quarter and 114 a year ago. Corporate store revenues also saw an increase of 21%, mainly due to the reopening of locations that were temporarily closed in Q2 of the prior year. As mentioned by Eric, digital sales for the second quarter increased to reach 23.5% of total system sales compared to 22.6% for the prior year. While Canada was up 26.7% this quarter versus 19.7% last year, the percentage in the U.S. slightly declined from 23.6% last year to 22.1% this year, reflecting the gradual impact of the reopening. However, the year-over-year increase in digital sales remained very solid in Canada with more than doubling its digital sales footprint and the U.S.A. increasing by 16.2%. Our second quarter adjusted EBITDA increased to $43.5 million compared to $18.2 million for the same period last year. The U.S. and International segment's adjusted EBITDA posted a $14.1 million increase year-over-year. Excluding the impact of foreign exchange, the segment posted organic growth of $15.3 million. In Canada, adjusted EBITDA improved $11.2 million. The severe adverse impacts of the onset of the COVID-19 pandemic in the second quarter of last year are the primary reasons for the increases, which led to an improvement in the recurring franchising revenues of $24.3 million. MTY also continues to benefit from the Canadian emergency wage and subsidies. In total, we benefited from these subsidies with a total of $1.4 million in wage subsidy and $0.5 million in rent subsidies during the quarter. We also saw a decrease in expected credit losses on accounts receivable of $2.8 million, which stems mainly from better-than-expected collection from franchisees. These gains were reduced by an increase in wages as MTY has temporarily furloughed about half of its workforce at the onset of the pandemic in 2020, most of which were brought back by the third quarter. Net income attributable to shareholders was $23 million or $0.93 per share for the second quarter of 2021 compared to a net loss of $99 million or $4.01 per share for the same period last year. Last year's loss was mostly due to a noncash impairment charge of $120.3 million. As for our liquidity and capital resources, despite the ongoing impact of the pandemic and its negative impact on revenues and EBITDA, MTY generated solid cash flow from operating activities of $29.5 million in the second quarter of 2021 compared to $19.2 million for the same quarter last year. As we continue to tightly manage our liquidity, free cash flows remained solid in the second quarter of 2021 with a marginal decrease of $1.4 million to $27.5 million or $1.11 per share on a fully diluted share basis compared to $1.17 for the same period last year. The decrease was mostly due to the franchising of multiple corporate stores in 2020, which generated cash of $10.7 million. On the balance sheet front, at the end of the quarter, long-term debt stood at $426.1 million, mainly in the form of our credit facility and holdbacks on acquisitions. Furthermore, to lower our standby fees and increase our financial flexibility, we renegotiated our existing credit facility during the second quarter. Our revolving credit facility now has an authorized amount of $600 million instead of $700 million and an accordion feature was increased by $100 million to $300 million. The maturity was also extended to April 22, 2024, and many financial covenants or reinstated to pre-pandemic levels, thereby, lowering overall interest costs. Now I'll turn it back to Eric for the conclusion.

[Eric Lefebvre, CEO & Non]

Thank you, Renée. With restrictions having been lifted recently in some of our major markets, we are cautiously optimistic about the future, even though our industry is still facing many challenges. Customers are showing they missed our food, and our team is excited to deploy a wide array of innovations that will wow our customers even more. Overall, we are confident about our prospects, and our goal is to return to the business momentum we experienced just prior to the pandemic. Our optimism is also supported by the tough but necessary actions we had to take, which are giving MTY a lot of flexibility today. These decisions now place us in an excellent financial position with $41.5 million of cash on hand, over $205 million in available credit and with leverage ratios well within our comfort zone. In light of our financial situation and with more favorable outlook, we are very proud to announce that we are restoring our quarterly dividend. The quarterly dividend resumes at the same level as before, which is to say, $0.185 per share. The next quarterly dividend will be paid on August 13, 2021, to shareholders registered at the end of the business day on August 3, 2021. Restoring the dividend is a major step for MTY following the crisis we faced in the last 15 months. It shows the confidence we have in our network and in our ability to continue to produce strong free cash flows. We want to thank our shareholders for their patience with MTY. We have also renewed our normal course issuer bid, and we'll continue to have the ability to buy back our own shares based on internal considerations and market conditions. Finally, with regards to potential acquisitions, we remain active and are in a strong position to take advantage of opportunities. In closing, I would like to sincerely thank our employees, customers and suppliers for their ongoing support. With that, thank you for your time, and we'll now open the lines for questions. Operator?

[Operator]

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

[John Zamparo, Associate]

I wanted to ask about Papa Murphy's and Cold Stone. You mentioned they performed well in the quarter. Is there any more color you can add there, either on a year-over-year basis or maybe versus pre-pandemic? And are you seeing any divergence within those brands in markets that are more reopened versus ones where restrictions still exist?

[Eric Lefebvre, CEO & Non]

Yes. I'll start with Cold Stone. Cold Stone is performing extremely well, well above double-digit performance compared to 2020 or 2019. During Q2 and even after Q2 ended, Cold Stone is still performing extremely, extremely well. So we're really happy with that.For Papa Murphy's, Q2 was very strong, still comping strong over 2020 and very, very strong over 2019. We did lose a little bit of steam since the end of Q2 as we're lapping stronger periods. And also, with the massive heat wave in the Pacific Northwest that we had, we suffered a little bit in terms of our pizza offering. We're confident we're going to go back to a better momentum. We're still over 2019, but we lost a little bit of momentum compared to 2020 since the end of the quarter.

[John Zamparo, Associate]

Got it. That's helpful. I wanted to move to Sushi Shop, which is now in your top 5. I mean, this is a category that's done really well in the pandemic. Can you just remind us what percent of your system sales come from this category overall? And how have they been performing versus pre-pandemic levels?

[Eric Lefebvre, CEO & Non]

You mean the sushi category or just Sushi Shop itself?

[John Zamparo, Associate]

The category, in general.

[Eric Lefebvre, CEO & Non]

Yes, the category is probably just under 10%. It's performed really well during the pandemic, and it was already performing extremely well before the pandemic. So there was a lot of good tailwinds for our sushi brands. And our sushi brands are also -- some of those that are the most advanced in terms of technology, online ordering and everything, the marketing is really up there. So those are brands that performed well before the pandemic. They performed well during the pandemic, and we continue to perform well as we're getting out of that crisis.

[John Zamparo, Associate]

Got it. And then last one for me, and I'll pass it on. We've seen a flurry of M&A deals of late, mostly smaller, but maybe some in areas you'd be interested in. I'm curious, what comments you can make on deal flow for MTY? What you're seeing on valuations? And maybe what your preference on M&As versus use of the NCIB through the rest of this year?

[Eric Lefebvre, CEO & Non]

Yes. Well, the deal flow seems to be coming back slowly. There are opportunities that are presented to MTY more than we had maybe in the previous 15 months. That being said, it's still not the normal pace of deal flow, and it's probably not also in the sweet spot of what we might be looking for, in terms of valuation or in terms of quality of chains that are being offered to us. So we're still going to be very disciplined.I mean we're eager to do M&A. We haven't done an acquisition in a certain amount of time, and it's in our DNA to acquire and grow via acquisitions. So we will eventually go back to do more acquisitions. But we'll stay disciplined. And if we can't find the right target, we'll stay on the sidelines while things settle down and valuations go back to a more normal level. And ultimately, we can buy back our own shares. We can continue to pay down our debt and build a treasure chest. And when the time comes, we'll be ready to bounce. But I would say the deal flow is starting to be better. So it's -- I'm cautiously optimistic about the future.

[Operator]

Your next question comes from Derek Lessard from TD Securities.

[Derek J. Lessard, Research Analyst]

Eric, congratulations to you and your team navigating through all this craziness. Just anecdotal observation, like we were in trouble in the past couple of days. The drive-thru at McDonald's alone was at least 0.5 hour. Even our hotel restaurant was closed on Monday and Tuesday, and everything was because of the shortage of labor, which you did point to and some inflation pressures. Just wondering, I guess, how you're seeing the impact play out currently? And what's your view for your guys' ability to the pass-on prices?

[Eric Lefebvre, CEO & Non]

Yes. Well, shortage of labor is certainly a big problem everywhere in North America. There are pockets where we're better, and there are pockets where it's more of a problem. But all in all, there is just not enough workforce to work in hospitality and even for our suppliers and their manufacturers.It's also not enough quality people and even for the unqualified labor that we might be looking for, for certain duties. It's hard to find good, reliable staff. So there's going to be an impact on the cost of labor, for sure. We're already paying more than we were paying before the pandemic, even though labor was already a problem before the pandemic in a lot of regions. So we're going to end up paying more. Suppliers are also paying more for their staff. Our distributors are also struggling to find drivers and struggling to find people to work in their distribution centers. So the problem is everywhere.And in terms of our ability to pass prices, it's not like we have any options here because the ability of our franchisees to absorb these costs is nonexistent. We work with very tiny margins. We're a penny business, and we'll need to figure it out. But it's either going to be through gaining efficiencies, working with our suppliers to reduce the number of hours we need to work in our restaurants, or it's going to have to go through prices. But our franchisees can absorb more. So ultimately, we're going to need to do pricing and pass it on to our customers. And hopefully, we'll be able to revamp some of our menus to focus more on the better food cost items. We're going to be able also to do promotions to direct our customers to items that are a little bit more profitable for our franchisees. But ultimately, pricing will need to happen. And I don't think we're any different from anyone else in the industry. Everyone is going to have to take prices, not only for the shortage of labor, but also for the inflation that's happening in food costs at the moment.

[Derek J. Lessard, Research Analyst]

Has some of those pricing actions already taken place or been implemented?

[Eric Lefebvre, CEO & Non]

Yes. We had to do some pricing already. There's going to be more pricing in the next few months also. It depends. Some brands did it early, some brands did it late. In some cases, we staged it over 2 or 3 different increments of price increases. So it's going to have to happen over time, but the -- this situation is evolving so quickly that it's hard to say I'm going to do one batch of price increases, and that's going to be it. And we need to be more nimble than that. We just look at the price of a container, for example. It's probably the best example where you ship something from Asia. The cost of the container is probably about 10x what it was a year ago. So it's not even the food. It's just shipping it that's costing a lot more. So -- and then that changed over a 4- to 6-week span. So if we're not nimble with our pricing, we're going to end up in a place where we can't support the cost structure anymore.

[Derek J. Lessard, Research Analyst]

Okay. I guess -- but you also had a strong rebound in your margins this quarter. I assume a lot of that is just operating leverage. But are you able to point to any other positive margin contributors this quarter?

[Eric Lefebvre, CEO & Non]

Yes. Well, there is one large item there that's contributing to the margins that, that might be a little bit more [ pollution ] than anything else, it's the reversal of expected credit losses. Last year, when we looked at our numbers, we had a certain number of risks and a lot of uncertainty. So -- and the collection was lower, so it forced us to take a little bit more provisions for these expected credit losses. And now we're collecting more than anticipated at this time. So we had to reverse a certain amount of it. So that does contribute to the margins for sure. And that's not going to last forever. I mean once we reversed the provision, it's reversed and it's not coming back. So that contributes more. For the rest, you're right, it's operating -- we're more efficient. And as we grow sales, we bring in royalties. Our cost structure is pretty much fixed. So as the business continues to recover, you might see a little bit more weight on the top line and not necessarily more weight on the bottom line -- on the middle line with the expenses. So margins should continue to be strong if everything stays constant and business keeps improving.

[Derek J. Lessard, Research Analyst]

Eric, and one last one for me actually, have your traditional revenues or your revenues from your traditional business fully recovered to prepandemic levels? And then maybe if you could just talk to us about the outlook for the nontraditional and sort of the mall office sites. And where those sales are in relation to pre-pandemic?

[Eric Lefebvre, CEO & Non]

Yes. We're not even close to where we were pre-pandemic, and we're not even close to being fully recovered. So if you look at major urban centers, those have not come back yet. Anything that's in the mall hasn't come back. I mean if you just look at Ontario, is under a lockdown. Still not allowed to have dining rooms or food courts operating properly. So malls are not even .And even if you look at the other major areas like Quebec, for Q2, we were still under lockdown for pretty much the entire quarter. We're a little bit more relaxed in terms of restrictions now. But for the quarter, we were still under lockdown. So our mall operations are not close to being back. And in terms of nontraditional, airports are certainly not back to where they were, although in the U.S., it's starting to get better. University campuses, for example, are not back yet. So we do have a long road ahead to fully recover in terms of our sales.

[Operator]

Your next question comes from Vishal Shreedhar from National Bank.

[Vishal Shreedhar, Analyst]

I just wanted to follow up on some of the questions asked earlier, particularly on inflation. I was noticing that inflation at restaurants, in general, seems to be meaningfully higher than inflation at grocery stores. And I'm wondering if you -- in general, if you agree with that perspective for your banners? And number two, if as a result of this higher inflation at restaurants, if you see the restaurant sector eventually grabbing back all the shares that have lost to grocery stores, is that viable? Or is that still on the open?

[Eric Lefebvre, CEO & Non]

Yes. I'm not sure how we can compare grocery stores and restaurants because, obviously, there are items in the grocery stores that are not necessarily comparable to what we sell in restaurants. But I would say, in our case, the inflation in our restaurants hasn't been that much higher than what you would witness in the grocery store, if you wanted to buy the ingredients to prepare that same type of food.We try to be pretty cautious with price increases, and we don't do more than we need to do. So yes, it's hard to compare. In terms of what happens in the future to grocery stores to restaurants in terms of inflation, I wouldn't risk trying to speculate about where all that's going. But yes, I do think that restaurants will fully recover at some point. When that's going to happen, I'm not sure. But I do think restaurant sales will recover to fully and you can resume growth as maybe in the next few years. I don't know exactly when that's going to happen because I wish I had a crystal ball that would be very reliable, but unfortunately, I don't.

[Vishal Shreedhar, Analyst]

Okay. And continuing along the same theme. I noticed that the grocery stores are seeing a little bit more pressure year-over-year in their recent months. But the food processing business at MTY seems to still be doing quite well. So wondering what you attribute that to? Is it market share gains? Is it new products? And how should we think about that business going forward?

[Eric Lefebvre, CEO & Non]

Yes. Well, that segment is made up of 3 different subsegments. You have our distribution centers that are serving our brands. In Q2, those were really struggling because our brands were more or less idle, the brands that are supported by these distribution centers. Our food processing was doing well, though. Our food processing does products for retail and does product for some of our brands that are performing well. So the food processing was doing well, and it seems to be in a really good place now where we can see some good growth in the future.And in terms of our retail operations, I think we are capturing market shares. We are launching new SKUs that have been successful. We have a few champions there in terms of our products that we're really proud of and that seem to be performing really well. We're developing new sales channels as well and trying to expand in terms of geography where we sell those products. So it's really promising in terms of the retail, in terms of selling to grocery stores, selling to other retailers like Cosco, Walmart, or Giant Tiger, or other retailers like that. So I'm pretty optimistic about that segment and the growth that we can see in coming years, even though those grocery stores are -- might be seeing -- feeling the weight of lapping a very strong year. I think in our case, we didn't capture share with our existing products and with new products as well.

[Vishal Shreedhar, Analyst]

Okay. And hoping to expand upon your thoughts on acquisitions. Has this pandemic changed the way MTY thinks about acquisitions? And when you talked about your sweet spot earlier, wondering what is your sweet spot in terms of region of acquisition? In terms of types of acquisitions that turn around? Is it a larger chain? Smaller chain? Is there any more color you can give us on what constitutes a good deal for MTY?

[Eric Lefebvre, CEO & Non]

Yes. Well, in terms of geography, we're pretty agnostic. So we're -- as long as it's in North America, we're happy if there is any opportunity. We're present everywhere, and I think we can integrate well throughout North America. The type of offering is the same thing. There are a few things that we'd rather stay away from. But in general, the type of food doesn't really matter for us. So it's more in terms of where the business is in its life cycle and the valuation that's related to it, and it needs to be -- the sweet spot is a moving target depending on which brand we're considering and where it is in its life cycle. So we're not necessarily going to give you numbers. But we do have certain number of metrics that we use internally that we wanted any acquisition to fit in. And if we don't find something that does go into that sweet spot, we will not necessarily go after it. We want to be disciplined about it.And if the pandemic showed us one thing is that we need to be very careful in terms of how we deploy capital, and we need to be very protective of MTY because there's no guarantee that the business is going to keep growing forever and that there's not going to be another pandemic at one point, maybe in 5 years, in 10 years, in 20 years, I don't know. So we need to be careful what we buy, how we buy it, how we integrate it and how comfortable we are with everything that's -- that becomes part of MTY's portfolio.

[Vishal Shreedhar, Analyst]

Okay. And maybe lastly, you commented that Papa Murphy's performance flowing -- flung a little bit subsequent to quarter end, if I got that right. I was just wondering if you could comment on some of the initiatives -- the improvement initiatives you implemented at the brand? And whether you're pleased with those initiatives? If they're working or not in your estimation? And what next brands should we anticipate MTY to roll out its improvement initiatives, too?

[Eric Lefebvre, CEO & Non]

Yes. Well, yes, we're really proud of the progress we made with Papa Murphy's. Some of the initiatives related to technology are really paying off. The online ordering and the constant improvement of those platforms is really interesting. The investments we're making with the marketing also are really paying off. The research and development that we're doing is interesting. We have a product now that's gotten a lot of attention in the U.S. and even in regions where we're not operating with our Fritos Outlaw Pizza, in partnership with Pepsi. So that was huge for us.So there's a number of things that we're doing now that are really paying off and gives me a lot of hope to be that we're going to continue to grow that brand in the future. So really happy with it. We're pushing hard now on development because we feel the brand is ready to start growing again. So all in all, a lot of positives. And in terms of the other brands, I would say all the other brands are pushing hard now on major initiatives when it comes to technology, online ordering, better usage of data, more efficient marketing. So there's a lot going on for all our brands in Canada and in the U.S. So I wouldn't necessarily be able to pinpoint one brand in particular and tell you this one is doing more than the others because we're pushing on all fronts now.

[Operator]

Your next question comes from George Doumet from Scotiabank.

[George Doumet, Analyst]

Congratulations on a strong quarter. I just wanted to ask about the store openings, so the 61 in the quarter. Eric, can you maybe give us a little bit of flavor in terms of what's being opened by maybe by banners or by geographies? Maybe some flavor there.

[Eric Lefebvre, CEO & Non]

Yes. Well, we're opening a lot of the brands that performed well during the pandemic. So the brands that we're opening are the ones you would expect to open. So it's not necessarily the answer you might be looking for, but unfortunately, this is reality. We're opening a lot of Yuzu, a lot of Cold Stone. We're still opening Planet Smoothies. So those are brands that performed well during the pandemic and that keep opening. So -- and you should be expecting, I guess, those brands to continue to open for a certain amount of time because there's good momentum there.

[George Doumet, Analyst]

Okay. And maybe focusing on the closures, they're obviously lower than what we've seen in the past. But I'm just wondering to what extent do you think that will pick up again when the aid -- the government aids subsides or continues to subside into the fall?

[Eric Lefebvre, CEO & Non]

Yes. I'm hoping that by that time, the sales will be high enough that we won't see a flurry of closures. And what we're seeing now is that, in general, sales for the majority of our restaurants are picking up nicely and -- so I don't necessarily expect a flurry of closures. I'm not seeing a huge amount of risk. I'm not saying there's going to be none, but I'm not seeing a huge amount of risk in Canada or in the U.S. for massive closures in the future. I would say international might be a little bit more challenging as there's still massive lockdowns going on and in certain countries. But for Canada and U.S., I'm not expecting a flurry of closures.

[George Doumet, Analyst]

Okay. Great. And just going back to your commentary about Papa Murphy's kind of moving steam, exiting the quarter. Obviously, there's a COVID hangover. But I'm just wondering how much of that is maybe due to aggressive promotions we're seeing by some of our more delivery-focused competitors in the pizza category? And do you guys, at all, plan on responding to that?

[Eric Lefebvre, CEO & Non]

Yes. There's certainly an impact. I mean we're seeing some of the major competitors really go aggressive on the pricing and on promotions. I mean Papa Murphy's has always been a little bit more expensive than these guys. Our product is of higher quality. So we don't necessarily want to discount our product the same way they do. We do have some value offers that are going on. But would we go to the same levels, these guys are going? We -- I mean the brand has done it in the past. It's shown that it increases the top line.So for the franchisor, maybe it's good, but it doesn't necessarily increase the franchisee's bottom line, which is ultimately the goal for all of us. So we're not necessarily going to that deep discounting strategy because we don't believe that's the long-term solution for our franchisees and for the industry, in general.

[George Doumet, Analyst]

Okay. And just last one for me, Eric. On the credit reversals that you guys called out, do you have that number for this quarter? How much the total number was? And maybe, I guess, more importantly, maybe if you look at Q3 and Q4, should we expect similar level of reversals, like half the reversal this quarter? Anything you can give us there would be appreciated.

[Eric Lefebvre, CEO & Non]

Yes. The number is presented in the table in the MD&A. It's $2.8 million. So we really put it on a single line because we wanted -- we didn't want to hide it. We wanted to make it obvious. Are we going to have the same level of reversals in the future? I don't think so. This is all based on actuarial models that we have that the team is running every quarter. But yes, once the expected credit losses reversed, it can't be reversed again. So I don't think there's going to be the same level going forward.

[Operator]

Your next question comes from Dimitry Khmelnitsky from Veritas.

[Dimitry Khmelnitsky]

A lot of them were already asked, but I still have a few. Just to confirm, the reversal of provisions was -- in the quarter was $2.8 million, right? That's the contribution to EBITDA?

[Eric Lefebvre, CEO & Non]

That's correct.

[Dimitry Khmelnitsky]

Got it. Okay. And if you can comment on how food court stores in malls have performed after the very limited reopening that we've seen recently. I know a lot of the food courts, you can't sit in there, but you can take out and some people went back to malls to shop. Any comments on what you're seeing in terms of performance from food court locations and malls?

[Eric Lefebvre, CEO & Non]

Yes, it's recovering slowly. It's -- we need to recreate habits in customers. So it's going to take a certain amount of time. I'm not sure how long it's going to take, but what we're seeing is that it's recovering slowly. But at least we're trending in the right direction. Some malls are performing a lot better than others. Some malls are more lifestyle type of malls where people will go hang out, and I guess those are performing better. Some malls are more in-and-out type of operation, and those tend to take a little bit longer. So we'll see what the future holds for us, but at least, we're trending in the right direction.

[Dimitry Khmelnitsky]

And can you comment on the health of the franchisees, particularly in the food courts?

[Eric Lefebvre, CEO & Non]

Yes. Well, obviously, our franchisees are -- have been under pressure at massive lockdowns and then the reopening with no seating and -- so it's been challenging for our franchisees. Most of our landlords have been really good to us, and working with us to alleviate some of that pain. So at least, we have good collaboration from our important business partners. But it's going to take a while for franchisees to make up the losses of the past 15 months. So we're working hard with them to make the offering as good and as relevant as possible to try to help their operations, at least go back to profitable -- profitability now and then recover.

[Dimitry Khmelnitsky]

So you don't expect a wave of closures due to franchisee health in the food court over the next year?

[Eric Lefebvre, CEO & Non]

Not a big wave. No. There might be a few here and there. And I guess, we can have some surprises. There are always some surprises, but I'm not expecting a massive wave of closures, no.

[Dimitry Khmelnitsky]

Understood, Eric. And in terms of food courts in the offices -- in the office towers, those have been hit particularly hard. What's the strategy there? And also in terms of franchisee health there, I presume this has been hit very hard, and it's still uncertain how long the reopening period will really take? How many people will eventually get back to the office? Any comments on that?

[Eric Lefebvre, CEO & Non]

Yes. Office towers have been -- they've been beaten up. The good news is that most of the landlords are working with us, and then the abatement on rent is pretty aggressive for the most of them. So at least, it's the fixed cost portion of our franchisees' operations is taken care of. And where landlords refused to help that, there has been some store closures just because it's not possible to make a living if you're not selling, if you don't have any customers in the office tower.So those -- this is more challenging. Where landlords work with us, I think we have a path forward to reopen and then be profitable as people come back to the offices, but we need good collaboration. Now the good news is that we are gradually seeing people come back to offices. New York seems to be a little bit more busy now. We're seeing people coming back in offices in Montreal now. Toronto is still locked down, so it's fewer people. But we're seeing some major cities come back to life. And hopefully, office towers will be back in full force in the fall and then our franchisees can resume operations and hope for profits.

[Dimitry Khmelnitsky]

Right. Okay. Understood. And so you already addressed a question about acquisition. I just want to dig deeper, if possible. Is there a particular price tag about which -- and above which you wouldn't go up? And you mentioned you have some certain sweet spot metrics. If you can just talk to us about what metrics, in particular, are you looking at financial metrics and operating metrics when you make an acquisition?

[Eric Lefebvre, CEO & Non]

Yes. We don't want to close the door on any specific price tags. So if the price tag is heavy, but the business goes an opportunity, we'll go for it. So we don't want to limit ourselves or close the door on something just for one reason. So I mean every business could be evaluated for its own merits, without us placing hurdles where there shouldn't be. And in terms of giving you more accurate numbers or more precise numbers, I want for competitive reasons, it would be -- it would not be a right and smart move for me to say how much we're willing to pay for something because then that pretty much sets the price tag for the next time someone calls us.

[Dimitry Khmelnitsky]

No, that's fine. Any comments on maybe EBITDA margins or revenue growth profile that you're looking at?

[Eric Lefebvre, CEO & Non]

Yes. Well, again, there's a price for everything. I mean there's a price for a mature business that might not be growing, and there's a price for a strong growth business. So we adjust our buying strategy based on the business we have. Obviously, especially with COVID now, there have been some concepts that have shown more COVID-proofed than others. So maybe those tend to be a little bit more attractive. And franchisee profitability and franchisee health is a major criteria. Buying a network of franchisees that are under is not necessarily something that's that interesting for us at the moment.

[Dimitry Khmelnitsky]

Understood. Okay. And if you can comment on some of your older brands, how they are doing, in particular, Country Style and Mr. Sub? And there's a couple of more.

[Eric Lefebvre, CEO & Non]

Yes. Well, you know what Country Style, it's -- it largely depends on business traffic, on frequency of purchases and everything. So like most of our coffee brands, Country Style has been affected by the pandemic. And as traffic resumes and as people commute a little bit more, I think we're going to see the business recover. In terms of Mr. Sub, it's a really well-performing brand. It's a mature brand, but that's performing extremely well. I'm really proud of what the team came up with in terms of marketing. In terms of product offering, the brand image is spot on. So I'm really proud of that brand, and it's performing really well, and it has been for many years.

[Dimitry Khmelnitsky]

Is it growing organically or declining? And how much? If you can give any details on its growth profile.

[Eric Lefebvre, CEO & Non]

Yes, I'm not sure going to specific numbers on the brand. So yes, I'll stop my comment there.

[Dimitry Khmelnitsky]

Okay. And any comments on Extreme Pita and Mucho Burritos?

[Eric Lefebvre, CEO & Non]

Yes. Extreme Pita has been struggling for us much since we acquired it. So I mean it's -- and the pandemic affected it even more. So we're working hard on Extreme Pita. We have a new product line that's being tested at the moment. That, hopefully, will reverse the trends for Extreme Pita. So cautiously optimistic about it.We have a lot of in the pipeline to try to bring it back to where it should be, because we always believe in the food, but there's some reason we weren't able to either market it or communicate it well to our customers or the response wasn't the one we expected. So -- but we have a lot of new things going on for Extreme Pita. So we're cautiously optimistic.Mucho Burrito was still one of our top growth brands. It's a very strong brand, really good product offering. Still working on the brand, on product, on the marketing, on even the store image, the design and everything. So constantly evolving that. But in general, really proud of Mucho Burrito, and it's one of our top growing brands, and we want to keep it that way.

[Dimitry Khmelnitsky]

And when you made that acquisition back some time ago, in terms of the store numbers, was the majority of them -- did the majority relate to Extreme Pita? Or was it like -- what was the split between Extreme Pita and Mucho Burritos, that was back in 2013, I think?

[Eric Lefebvre, CEO & Non]

Yes. You're going pretty deep in my memory, so I won't be able to quote you the exact numbers. But I can tell you, Extreme Pita was a lot larger than Mucho Burrito at the time. So -- and now that's reversed. Extreme Pita has reduced the number of restaurants since we acquired it and Mucho Burrito's grown really nicely. So where Extreme Pita was the larger brand back then, now Mucho Burrito is much larger than Extreme Pita.

[Operator]

Your next question comes from Michael Glen from Raymond James.

[Michael W. Glen, Equity Research Analyst]

Just, Eric, you called out the $2.8 million credit loss provision. What's the item on there? Is this variance due to impact of IFRS 16 on impairment of lease receivables? It was $1.3 million in the quarter. Is that a onetime item? Or is that something else?

[Eric Lefebvre, CEO & Non]

No. It's -- well, it's something that we reassess every quarter. And it's the -- it's a little bit more complicated, but it's basically an estimation of our collection ability on the leases that will be receivable in the future, not necessarily for what was a receivable in the past. So it's an assessment that's growing, looking forward assessment of our ability to collect.

[Michael W. Glen, Equity Research Analyst]

Okay. So it would kind of bounce back and forth between this type of level in any given period?

[Eric Lefebvre, CEO & Non]

It could go up and down, yes, depending on the various different factors.

[Michael W. Glen, Equity Research Analyst]

And any comments you can give on the outlook for working capital over coming quarters? Like any notable items that we should think about?

[Eric Lefebvre, CEO & Non]

Well, not necessarily. I mean, as the business is growing and recovering, I think we're going to have higher sales and that's going to generate higher accounts receivable, and that's good thing, I guess, because it means the business is doing better. I think you should expect our prepaids to be amortized over the next 2 quarters. We had some pretty heavy payments in the first 2 quarters. But other than that, in terms of working cap, I don't see anything major coming in the next few quarters.

[Michael W. Glen, Equity Research Analyst]

Okay. And then I think -- and you can correct me if I'm wrong. I think you made a comment during the opening remarks just about strong royalty collections during the period. Was that -- is that something you said? Or did I mishear something?

[Eric Lefebvre, CEO & Non]

No, you did hear that. That's -- it's -- we're collecting more of our old royalties than we had anticipated, and that's why you have the reversal on expected credit loss.

[Operator]

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