MTY Food Group Inc

TSX:MTY

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Q3 2022 Earnings Conference Call. [Operator Instructions]

Before turning the meeting over to the management, I would like to advise everybody 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 also like to remind everyone that this conference call is being recorded today, Friday, the 7th of October 2022.

I would now like to turn the call over to your host, Eric Lefebvre, Chief Executive Officer. Please go ahead, sir.

[Eric Lefebvre, executive]

Thank you. Good morning, everyone, and thank you for joining us for MTY's third 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.

Before we address the performance of MTY, I'd like to say a few words about the devastation caused by Hurricanes Fiona and Ian and many of the communities in which we operate. As you know, many regions from Puerto Rico, Florida, South Carolina, Newfoundland, Nova Scotia and many others, suffered the impact of those natural disasters. Over 150 of our restaurants had to close, some for a day or two and some for much longer. Fortunately, all our employees and franchisees are safe. And as power returns, we expect all but a few restaurants will reopen. Many of our colleagues, franchisees and suppliers participated in efforts to support the local population as the rebuilding efforts get underway.

To brighter news now, MTY continued to perform extremely well, with record normalized adjusted EBITDA of CAD 50.6 million and system sales of CAD 1.1 billion in the third quarter of fiscal 2022 despite an ongoing challenging environment. We are very pleased with the post-pandemic recovery of our casual dining brands, which are now operating at full capacity, as well as by the progression of the locations that were most affected by the pandemic. We are also pleased with the ability of the concepts that performed well during the pandemic to capitalize on the momentum created during the pandemic to continue their growth.

The efforts deployed by our teams and franchisees are generating the results we anticipated, as shown by our sales, which increased 9% year-over-year in the third quarter of 2022. Our top 20 brands, which account for approximately 85% of our network sales, were up on average 6.6%, indicating the health of the larger brands and the strong growth of the smaller ones. The performance of our Canadian segment was particularly noteworthy, growing system sales 16% in the third quarter as customers gradually return to office and resume travel in urban areas. For its part, U.S. system sales rose 3% year-over-year, while International sales increased 17%.

Digital sales, meanwhile, improved 5% year-over-year to CAD 194.1 million or 18% of total sales in the third quarter of 2022. Canadian Digital sales increased CAD 3.3 million year-over-year on the strength of higher fast-casual digital sales, mainly owing to the gradual return to the office for many customers. We increased the frequency of lunch orders and outings. U.S. digital sales rose CAD 5.3 million compared to the third quarter last year. Digital sales are a key strategic opportunity for MTY for the future, and we're deploying efforts to increase the amount of proportion of those sales in the future.

Another encouraging data point in the third quarter was reflected by the number of restaurant openings climbing to 63, sequentially better than the 47 openings realized in the second quarter and also better than the same period last year. As mentioned in last quarter's conference call, the construction of new locations remains under pressure due to ongoing supply chain, permitting, construction and final inspection issues. At the present time, we have more than 150 restaurants under construction and a very healthy pipeline for future locations. The store construction process is gradually improving, and when combined with a strong pipeline of franchise owners, it bodes well for the future growth at MTY.

In terms of store closures, the total 117 in the third quarter of 2022. Most of those closures came from the non-renewal of existing agreements in the U.S., and to a lesser extent, in Canada. At the end of the third quarter, MTY's network at 6,606 locations in operation, of which 6,516 were franchised and 90 were corporate.

Aside from our strong financial results, the other highlight of the third quarter was unquestionably the acquisition of BBQ Holdings, which closed September 27th. BBQ Holdings is a franchise or an operator of more than 300 casual and fast casual dining restaurants across 37 states in the U.S., Canada and UAE. The season theme at BBQ Holdings, owners of flagship brands like Famous Dave's, Village Inn, Barrio Queen and Granite City, are highly proficient in operating franchise system as well as corporate-owned restaurants, which accounts for roughly 1/3 of the acquired locations. The dedication and creativity of everyone at BBQ Holdings is phenomenal, and the culture is very similar to MTY's, which will make the marriage more successful.

Through the BBQ Holdings deal, we're building additional scale in the U.S. We're expanding our casual dining footprint. We're combining complementary franchise and corporate-owned businesses, know-how. We are acquiring an established retail sales operation, and we're adding a talented management team and employee base. This latest acquisition will complement our primary expertise in running franchise-operated restaurants and expand our overall footprint to approximately 6,900 locations and pro forma system sales close to CAD 5 billion. MTY paid cash consideration of CAD 284.2 million or USD 207.1 million for BBQ Holdings, a valuation that falls in our sweet spot.

I will now turn the call over to Renee, who will discuss MTY's financial results in greater details.

[Renée St-Onge, executive]

Thank you, Eric, and good morning, everyone.

As previously mentioned by Eric, MTY delivered record normalized adjusted EBITDA of CAD 50.6 million in the third quarter of 2022, which excludes CAD 1.7 million in acquisition cost related to the BBQ acquisition. Major brands such as Cold Stone Creamery, Thai Express, Manchu Wok, SweetFrog, Scores, Ben & Florentine and Allo! Mon Coco greatly outperformed last year's results to help raise normalized adjusted EBITDA by 2% year-over-year in the third quarter of 2022.

Canada continued its growth momentum, contributing to 48% of total normalized adjusted EBITDA in the third quarter, an improvement of CAD 3.2 million from the same period last year, while the U.S. and International normalized adjusted EBITDA decreased by 8%. Net income attributable to owners amounted to CAD 22.4 million or CAD 0.92 per diluted share in the third quarter of 2022 compared to CAD 24.3 million or CAD 0.98 per diluted share in the same period last year. The main contributing factors for the decline were for the most part, non-recurring items, namely the BBQ Holdings transaction costs, a variance in the unrealized foreign exchange losses and the impact of the revaluation of financial liabilities recorded at fair value.

Company revenue, meanwhile, grew 14% year-over-year to CAD 171.5 million in the third quarter, mainly due to a 41% surge in food processing, distribution and retail revenue in Canada. New listings and expansion to new territories greatly contributed to generate revenue growth on the retail side in Canada. Our newly-acquired Kuto Comptoir a Tartares distribution and food processing center also generated an additional CAD 1.4 million on the processing and distribution end.

MTY also benefited from a 15% increase -- revenue increase from franchise locations north of the border. This increase was primarily driven by the return of customers to office towers and malls, which saw an increase of 40% in system sales compared to prior year. Street front locations also contributed to a large portion of the growth, with year-over-year growth of 10% and contributing to 75% of the overall Canadian system sales. Altogether, revenue in Canada grew 28% in the third quarter of 2022, while revenue in the U.S. and International segment declined by 1%. We're also extremely happy to note that total revenues and system sales in Q3 2022 outperformed Q3 2019 by 5% and 3%, respectively.

Now turning to liquidity and capital resources. Cash flows from operations totaled CAD 36.8 million in the third quarter of 2022 compared to CAD 46.6 million in the third quarter of 2021, while free cash flows amounted to CAD 35.5 million or CAD 1.45 per diluted share in the third quarter compared to CAD 45.6 million or CAD 1.84 per diluted share in the same period last year. The increase in interest rates affected our free cash flow adversely and will continue to do so for the foreseeable future. However, we expect free cash flows to remain strong between 70% to 80% of EBITDA in the future, as it has been in the past.

In terms of capital allocation, we reimbursed CAD 34.2 million of long-term debt and paid CAD 5.1 million in dividends to shareholders in the quarter. We will continue to steadily repay our debt to maintain a comfortable leverage ratio and target future acquisitions following the BBQ Holdings transaction. This disciplined approach will help us navigate through potential volatility should the economic environment deteriorate.

At quarter end, long-term debt, mainly in the form of bank facilities and promissory notes on acquisition, stood at CAD 315.3 million. We also closed the quarter with a cash position of CAD 55.3 million.

And with that, I thank you for your time, and we'd now like to open the lines for questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Your first question will come from John Zamparo of CIBC.

[John Zamparo, analyst]

I wanted to start on the labor shortages referenced in the outlook that's impacting system sales. I wonder if you could take a shot at quantifying that as a percentage of where you would like them to be? In other words, where are your operating hours compared to pre-pandemic levels?

[Eric Lefebvre, executive]

Yes, it's a good question. It's really hard to quantify because it varies from one restaurant to the other, and it also varies in time.

I would say in terms of opening hours, we're pretty much there versus where we were before. So maybe we lost a day part in some restaurants that did all 3 day parts, some have removed breakfast completely. But other than that, we're pretty much open the same hours we were for most of the network, but we do have sometimes sections of restaurants might have to be closed because we're running out of staff or service might be a little bit slower, and customers might not necessarily have the same experience.

But it does impact our sales, but it's almost impossible for us to quantify.

[John Zamparo, analyst]

Okay. Fair enough. Can you say relative to last quarter or quarter before, how the labor situation looks? Is it improving at all, or is it relatively similar to the last couple of quarters?

[Eric Lefebvre, executive]

It's improving very slowly, but it's improving. I think the overall labor market is kind of stabilizing. I don't think we've found the right balance yet, and I don't think we know where the baseline lies yet. But we've seen some benefits lapse, I think the last leg of COVID benefits lapsed in September. So I think we're going to see that impact, if any, in the coming weeks.

But yes, it's gradually improving. It's stabilizing, but it's still a tough situation in certain areas more than others. There are areas where we talk about it, but it's not so bad. There are areas that are significantly under pressure, but gradually getting better.

[John Zamparo, analyst]

Right. Okay. Understood. On the net closures in the quarter, those increased meaningfully in the U.S. I wonder if you could add some color on what channel or brands those were?

[Eric Lefebvre, executive]

Yes. It's a little bit of everything, so it's hard to put exactly our finger on one brand or one cause for it. Obviously, we have a few brands and have a few more closures, for example. We have 12 that are Maui Wowi carts. And as you know, those carts don't necessarily open or close. They just -- sometimes they just stop doing business because they're in the garage somewhere and then they might come back next year, we don't know. So those accounts for a large number of locations, obviously, but the impact on sales and EBITDA are minimal.

But it's a little bit of everything, so I don't necessarily want to point out one brand or one cause for it. It's just a lot of non-renewals and then a lot of consolidation of restaurants in the market where we have more concentration. Sometimes our owners decide to consolidate their labor into fewer restaurants, so we need to address that. But it's not necessarily related to one brand or one region, in particular.

[John Zamparo, analyst]

Right, okay. Okay. And when you think about your, let's say, your largest 5 banners, were any of them net positive in terms of openings in the quarter?

[Eric Lefebvre, executive]

Yes, yes. Cold Stone is doing really, really well. As you know, in terms of sales, it's our #2 brand. In terms of profitability, it's our #1 brand, so Cold Stone is doing well. We're net positive in openings domestically and international. So a large number of openings for Cold Stone, a lot more to come. So Cold Stone is really firing on all cylinders.

And then you look at other brands like Thai Express, for example, which is one of our larger brands, is also doing well in terms of development. There's always the odd closure here and there, but in general, we're growing the store count. So that's doing well.

So yes, for the majority of our top 5 brands or even our top 20 brands for that matter, we're doing pretty well.

[John Zamparo, analyst]

Okay. And then one last one for me. On BBQ, congrats on closing that deal relatively quickly. I wonder how we should think about potential for unit growth -- net unit growth for that banner? Or is it more of a comp growth story for you?

[Eric Lefebvre, executive]

No. We're already in franchising mode. Actually, I was in the market in Arizona this week, and a lot of our BBQ Holdings people were in town. We already talked about franchising, with certain concepts that we'd like to develop that are purely corporate at the moment. We see an opportunity to develop smaller versions of the Famous Dave's. We see an opportunity to work with Village Inn. The sales of Village Inn are very high, so we can refresh the restaurants and we can probably start opening again. We see huge opportunity for Barrio Queen, which is a great younger, trendier concept. So we see a lot of opportunities for a lot of concepts.

So it's certainly not a mature brand or a mature group of brands that we want to coast on. We have high hopes that we'll be able to develop and work with the team there to make BBQ Holdings even greater.

[Operator]

Your next question comes from Vishal Shreedhar of National Bank.

[Vishal Shreedhar, analyst]

Just wondering how trends progressed through the quarter for Canada and the U.S.?

[Eric Lefebvre, executive]

Trends in sales, you mean?

[Vishal Shreedhar, analyst]

Yes, system sales, yes.

[Eric Lefebvre, executive]

Yes. Well, it is -- Q3 was a good quarter. We had a lot of -- a little bit like last year. We had a lot of good tailwinds. So I think it was, for the vast majority, I wouldn't call it smooth sailing because obviously, we're facing some challenges with supply chain and with labor and with everything. But I would say that the trends are good, and we're not seeing major changes between June, July or August. It was pretty consistent throughout the quarter.

So yes, again, trending well, and hopefully, that will carry into the future.

[Vishal Shreedhar, analyst]

Okay. And are you associated with kind of softening consumer confidence? Are you seeing that being reflected post the quarter?

[Eric Lefebvre, executive]

No. So far, customers are still showing up. We're not seeing traffic declines. Obviously, price sensitivity is something that we're looking at and following because we just don't want to cross that line where our price becomes out of proportion. But so far, the customer is there for us, and it's up to us to give them a good experience, and they'll keep coming back.

[Vishal Shreedhar, analyst]

In the disclosure documents, management notes that the effort deployed is generating results as anticipated. Wondering if you could unpack that statement, and what specifically are you talking -- referring to? And how investors can gauge the result of management's efforts. Are there any key metrics would point to? And on that as well, I'm just wondering your view on same-store sales.

[Eric Lefebvre, executive]

Okay, yes. I knew that would come up.

Yes. So in terms of efforts, it's hard to give you exact efforts. As you know, we have a large number of brands and each brand has their own set of parameters that they work with and priorities. So if I give you a set of efforts, it might be applicable only to one brand or 2.

But just as a general rule, we're looking at constantly innovating in all of our brands and bringing new products, and having new news available for our customers. We're trying to address the customers the best we can with new marketing tactics also, where social and digital are becoming more important. But traditional media is still valid, if we do it right and if we do it at the right time. So a lot of new strategies in there. Obviously, digital sales channel are important, and we are working with new vendors also to try to improve on that. A lot of initiatives also related to collection and usage of data that we have, that's really key also. Refreshing a lot of our stores for a lot of our brands as well.

So our teams are just doing a lot of different things, and there's a large set of priorities for each brand. So I'm giving you some general items that might be applicable to all of our brands and probably applicable to our competitors as well, but this is more or less the best I can do to give you indications.

Now in terms of same-store sales, obviously, for Q3, same-store sales would have been applicable. We could have released same-store sales, but unfortunately, because of last year's restrictions, we -- same-store sales would have had to be taken out in Q4 and Q1 again. So instead of putting same-store sales for one quarter and then take them out for 2 quarters, we decided it was best for everyone if we wait until we have some stability in comparable periods that are consistent. So we're probably going to bring same-store sales back in Q2 of next year.

[Operator]

Your next question comes from George Doumet of Scotiabank.

[George Doumet, analyst]

I just want to talk a little bit about BBQ again, and maybe if you can talk a little bit about some of the so-called low-hanging kind of food synergies, maybe something that you envision for that business in the longer term? Just wondering, are there any plans at all to franchise some of those -- some -- the majority at all, or some of those corporate stores?

[Eric Lefebvre, executive]

Yes. Well in terms of synergies, there's certainly not that much in terms of the costs. We don't plan on the restructuring the way BBQ Holdings is operating. We like the team and we like the way they do things, so the goal for us is certainly not to generate cost synergies. There will be some synergies, I think, on revenues on development where we have some strength. We have a good team of leaders that will drive, I think, development. We can probably accelerate that. We probably have a little bit more resources also to refresh some of the restaurants than they had before. And for example, the Village Inns, the refresh is so far showing some great results. So there's probably going to be an initiative to refresh our existing corporate stores, I think. And we're in the 25, 26 Village Inn corporate stores at the moment range, so we're probably going to refresh those in the next 2 years, try to get the best results we can from those stores.

So there are some synergies, but not necessarily the types of synergies that are easily measurable like you would expect from this type of transaction normally.

In terms of franchising the corporate stores, this is not a priority. The corporate stores are very profitable. We're happy with where they are. We're happy with the ability of the team to generate performance from these corporate stores. And as I mentioned before, running corporate stores requires the company to be wired slightly differently, and BBQ Holdings is wired adequately to run those corporate stores and we have a group of great people that are generating performance from these stores. So right now, it's certainly not a priority to franchise them.

It doesn't mean we're not going to franchise a few stores here and there if they're outside of our addressable areas and become more difficult to manage. But franchising is not a priority, and we will hold on to these corporate stores.

[George Doumet, analyst]

Okay. And can you maybe give us a little bit of an update on Papa Murphy's. How it did this quarter, and maybe how the capital -- I guess the competitive intensity has been trending? Has it been the same as you see -- have you seen a tick up there? Just some general thoughts there.

[Eric Lefebvre, executive]

Yes. Well, we have some good news for Papa Murphy's. We've just launched -- just after the end of the quarter, we launched our new website. We launched the new online ordering capabilities. We can now do EBT orders that are paid at the store but ordered online, and so there are some good news, lots of innovations coming. So we're pretty happy with where we're going.

If you're talking about performance in Q3, unfortunately, it was a little bit more of the same as Q1 and Q2. So trending in mid-single digit negative. We had a few store closures as well, so it's still not where we want it to be. But I'm pretty confident with everything we're doing, and hopefully, the trend will reverse. As you know, Pizza is a very competitive environment. A lot of our competitors have gone into some really significant discounting during the quarter, so it was a little bit harder for us to compete as we don't want to go too deep into the value offering.

So yes, so I mean more to come on Papa Murphy's. We will have some better news in the short term, I'm sure. But for now, it was a little bit more of the same as the previous quarters.

[George Doumet, analyst]

Okay. And just one last one, maybe a little bit of a crystal ball question. On the openings, I mean, it improved sequentially. I'm not really sure if there's any kind of seasonality there or is that just kind of construction constraints you think, but can you talk a little bit about how we should think of that number maybe kind of for next year? Or anything you can provide maybe in terms of just general outlook on that -- the strength of that opening?

[Eric Lefebvre, executive]

Yes. To be honest, I was a little bit disappointed with the number in Q3, and nothing against our teams. Obviously, they face constraints. It takes longer to get permits now, it takes longer to get access to the material, you're always missing something. It takes longer even to get the stores inspected before you can open by -- cities often want to get them inspected, so everything takes a little bit longer. So I'm not the patient type, but unfortunately, in this context, I have to be a little bit more patient.

But we do have, like I mentioned, over 150 stores under construction, and we do have a really good pipeline of stores for the future. So I'm confident we need to build them. The environment seems to be stabilizing, but it's certainly not perfect yet, but we are trending in the right direction.

[Operator]

[Operator Instructions] Your next question will come from Michael Glen of Raymond James.

[Michael Glen, analyst]

Eric. So if we're looking at -- there's a lot of conversation during the call about the store closings in the quarter and with regard to same-store sales growth trends. Is there any view internally about the amount of capital that MTY should be investing into some of these franchise networks? Is that something that could potentially turn some of those trends around?

[Eric Lefebvre, executive]

Yes, it's something we look at every day. So there's -- money can do certain things and certain things money can't necessarily make a difference. But yes, we are looking at these things, for example, in terms of refreshing our stores. I mean, we've been very consistent on rejuvenating our casual dining stores over the last few years, and we still are. We have a certain number of other brands that are going through refresh programs. There will be more next year. So that's probably one way where MTY can make a difference for our franchisees and help rejuvenate the network and put some oxygen into the network.

But yes, whatever we can do to improve the performance of any of our brands, we talk about on a daily basis.

[Michael Glen, analyst]

And when we look at the BBQ Holdings deal you are moving into operating a larger number of corporate stores than perhaps we're used to seeing. Is this -- does this represent a somewhat of a step change for the company? Should we think that MTY is going to be operating more casual dining restaurants moving forward?

[Eric Lefebvre, executive]

It's a possibility. I'm not saying yes or no. As I mentioned before, to run corporate stores efficiently, you need to be wired a little bit differently. And for it to be worth it, you have to have a certain number of stores. And then BBQ Holdings has that number of -- the critical mass, that number of stores that we need for it to be worthwhile to invest in.

So yes, so the company is wired a little bit differently. We're happy with the corporate stores we have. We've always been open to acquiring corporate store brands or networks in the past. We just didn't find them at the right price or with the right attributes that we were looking for, so it's the first time we have that now with BBQ Holdings. So it's a possibility that we might have some more corporate stores, but it's also a possibility we would stay with that number.

[Michael Glen, analyst]

And then just finally on my side. When you look at the stock, you look at the opportunity for that BBQ Holdings offered the company. Is there any discussion as to -- from a capital allocation perspective, should we buy back the stock with that money? Should we allocate it to M&A? Is that something that even comes up internally? Is it increasing the pace of the buy back program?

[Eric Lefebvre, executive]

Yes, we talk about it all the time. It's always a decision we need to make as to how we want to allocate the capital and what we think creates the most value for our shareholders in the long run. So it's a very valid point, and it's a discussion we're pretty serious about. So yes, we -- for now, we decided that our money was best placed in acquiring brands because we believe we can generate a significant return for our shareholders with this acquisition. But again, it doesn't mean that we would go one way or another, as you mentioned the stock.

But yes, we're disappointed with the valuation of our stock. We think our stock should be trading at a much higher price, so this is something that we need to consider in a discussion, and then the decision to allocate capital towards NCIB or acquisitions or debt repayments. But yes, we talk about that all the time, and then we make decisions as a Board. And right now, the emphasis is on acquisitions. We believe there are some really good opportunities on the market, not only BBQ Holdings but others for the future, and then we're happy to resume our aggressive M&A strategy.

[Operator]

Your next question comes from Derek Lessard of TD Securities.

[Derek Lessard, analyst]

Eric. I just wanted to hit a little deeper on the legacy U.S. business, and maybe you touched on it with George's question. But obviously, there was a bit of a more muted performance there, excluding the ForEx benefit. So just curious about the drivers there, or was it all on Papa Murphy's?

[Eric Lefebvre, executive]

Can you repeat that? I'm not sure I understand your question.

[Derek Lessard, analyst]

Well, the U.S. revenue growth was more muted than versus Canada. So I was just wondering what the trends are there in the U.S.?

[Eric Lefebvre, executive]

Well, yes. Well, Canada was -- in Canada, we're still in post-pandemic recovery. Whereas the U.S., the post-pandemic recovery was last year. So that explains the trend differences. If you look at last year's MD&A, you'll probably see the U.S. growing at a much faster click than this year. So yes, we have plus and minuses. We're a portfolio of brands, so as you know, we have brands that are performing extremely well and some brands that are in a certain period of where it's a little bit more challenging. But all in all, we're happy with where the U.S. business is. We're happy with the growth we're seeing there. We do have store count decline this quarter, but it doesn't mean we're not happy with the performance of our brands and of the stores.

So, I mean, it's hard to compare the growth of Canada and U.S. because we're not -- maybe next year, we'll be able to say that we have 2 comparable -- that's really comparable. But I can't say that 2021 was fully comparable to this year because of the post-pandemic recovery.

[Derek Lessard, analyst]

Okay. And maybe just to hit on the M&A again, I guess I want to get your thoughts on the current pipeline? And how are you thinking about the activity, or how the activity might shake out given the rising interest rate environment?

[Eric Lefebvre, executive]

Yes. Well, there are a lot of opportunities on the market. The market is pretty active. I mentioned that in the last few quarters that the normality seems to be coming back in that market. So there are some good opportunities out there. Again, we're -- it's always competitive to be able to make the right acquisitions and make them -- bring them to the finish line.

So we're -- I mean, we have a disciplined approach, we always had, but there are some opportunities out there that we will be pursuing if we're given the opportunity, and we're pretty confident with our ability to resume M&A more aggressively in the future. The pause we had was not necessarily because we wanted to pause, it was more because the market was not favorable to us. As you've seen, the valuations were very high and a few players were more aggressive in the market. And when that happens, MTY tends to stay on the sidelines because we want to make the right acquisition at the right price, and we're always disciplined. So BBQ Holdings fit that profile, and there are others now that are coming into the market that might fit that profile. Hopefully, they will.

So hopefully, we'll be able to make more acquisitions in the future. But as interest rates go up and as there's a certain amount of economic uncertainty, even though we're not feeling it in our restaurants, there are a lot of people talking about it that, that might bring some more opportunities to the market. There's always more opportunities when there's uncertainty than when things are going too well.

[Derek Lessard, analyst]

Okay. And then one final one for me. I was curious on the -- we talked about the recovery in Canada. Is the office mall location, like where are you in that recovery specifically?

[Eric Lefebvre, executive]

Yes, we had a really good performance in Q3 with our malls, so we're seeing customers coming back. I think the top malls were coming back a little bit earlier. I think the bad malls will -- the C malls, if you want to call them, will probably struggle for little longer. But the A and B malls are really coming back. The traffic is there. And again, customers are showing with their wallets and happy to consume what we have to offer them. So the malls are doing better and better. I think people are gradually going back to the office, gradually more comfortable with being in a crowd. And we're seeing tourism was also back in certain regions where we have some malls that depend on a certain influx of people from outside.

So we are seeing sales gradually getting back. We're not yet at 2019 levels, but we're certainly inching towards that.

[Operator]

Your next question comes from John Zamparo of CIBC.

[John Zamparo, analyst]

Just a couple of follow-ups. Eric, you referenced the 150 stores under construction in your earlier remarks. I wonder how that compares to a typical quarter pre-pandemic?

[Eric Lefebvre, executive]

Yes, it's more than normal. And the main reason is normally we would open them faster, so you'd have fewer stores under construction. The construction process is taking a lot longer than it used to take, so 150 is a very healthy number.

[John Zamparo, analyst]

Okay. Understood. And then on OpEx, if we ignore wage inflation for a moment, which I know is quite meaningful. But if we do ignore that, would you say this is a reasonable run rate in Canada and the U.S.? Or is there additional headcount that you'll add or other costs you'll incur other than BBQ?

[Eric Lefebvre, executive]

No. I think if you exclude the noise from the acquisition costs, it's probably a good baseline.

[Operator]

Ladies and gentlemen, and Mr. Lefebvre, as there are no further questions from the phone lines, this will conclude this morning's conference call. We would like to thank everyone for participating, and you may now disconnect your lines.