MTY Food Group Inc

TSX:MTY

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the MTY Food Group Inc. Q4 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'd like to remind everyone that this conference call is being recorded on Thursday, February 18, 2021. I'd now like to turn the call over to Eric Lefebvrelate, Chief Executive Officer. Please go ahead.

[Eric Lefebvre, CEO & Non]

Good morning, everyone, and thank you for joining me for MTY's 2020 Fourth Quarter 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 as well as 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 presented on today's call are in Canadian dollars unless otherwise stated. Before I begin, I would like to take a moment to thank all our customers who continue to support our restaurants despite the heavy restrictions and limitations imposed by some local authorities. Please continue to support our restaurants. Our industry needs every bit of support it can get. I would also like to thank our franchise partners and their staff for being there every day, facing hardship and doing everything they can to make a living despite the massive headwinds they're facing. As the impact of the pandemic persists, I remain impressed by the tremendous work, resilience and dedication of our restaurant and head office staff. I sincerely want to thank them all for their commitment to our common success. First, allow me to start with a quick summary of our results. Looking back at the past year, 2020 was unquestionably marked by many challenges and uncertainties, which forced us to react very quickly and adapt to volatile market conditions. We're extremely proud of the resilience of our business model, which, in the past year has proven robust facing unprecedented adversity. At some point during the last year, there seem to be some panic externally about the future of MTY. This is in stark contrast with what we saw internally, which is determination, passion and creativity. While our network was severely impacted, we still managed to generate record levels of cash flows from operations and free cash flows. As you know, in light of the unique circumstances, our Board of Directors determined in March that it was best for us to be prudent during such an unpredictable environment and to focus our capital allocation priorities on reducing debt, which is why we repaid an impressive $109 million, of which over $100 million were repaid after the beginning of the pandemic. As you know, the results of the past year reflect our quick response to changing conditions and stringent control over expenses and working capital. Our ability to adapt in the face of ambiguity was also showcased in the rapid adjustment of our marketing strategies and the shift of our sales channels towards online ordering. To this end, we invested significant time and resources in enhancing our online ordering offer to customers, removing friction and enhancing the customer experience, and we expanded our third-party delivery partnerships with major and local players. Consequently, our digital sales increased significantly, reaching 25% of total U.S. system sales and 18% of Canadian system sales during the fourth quarter. Turning to an overview of our network. We finished the fourth quarter with 7,001 locations. We opened 39 locations and permanently closed 161 locations for a net store loss of 122. While the number of closures remains relatively stable, the number of openings is less than half of the previous year's level. This is explained in large part by the economic uncertainty created by the pandemic, which causes franchisees and banks to be more cautious until the restrictions recede and business goes back to normal. Our pipeline of franchisees remains very healthy, and we have no doubt that a normal level of restaurant openings will come back in the future. During the quarter, more than 30,000 business bases were lost, and many of our restaurants are operated in a limited capacity. At the beginning of Q4, 364 restaurants were temporarily closed, while 338 or approximately 5% of the network remain so at the end of the quarter. A new wave of restrictions in Québec and Ontario hit our restaurant following the end of the year that led to additional temporary closures. As of today, there are 408 temporarily closed locations. System sales for the quarter reached $891.4 million, down 13% compared to the fourth quarter of 2019. Following a promising month of September in Canada, which showed sequential improvement compared to June, July and August, the new wave of restrictions was imposed on dining rooms and food courts in October that significantly impacted our business in Québec and Ontario for the last 2 months of the quarter. In the U.S., our network continued its recovery with increases in sales in all 3 months during the quarter, fueled by the strong performances of Cold Stone Creamery and Papa Murphy's, which produced a combined $49.9 million in organic growth in sales. This performance was realized despite the very heavy restrictions imposed by California that had devastating impacts on some of our brands in the area. Given the solid performance of U.S. operations, system sales for the market now represent 61% of total sales compared to 49% in 2019. Canada and international now represent 35% and 4% of system sales, respectively. As for the evolution of our network, everyone now understands the impact that the dynamic had on some location types. For example, in Canada, our mall and office tower sales were down 51% and 85%, respectively, during the quarter. Our street locations fared better with the exception of our casual dining restaurants -- with our casual dining restaurants, which had to operate without their dining rooms in most of the country. Similar trends affect our U.S. sales, although to a much lesser extent, since malls and office towers only represent 3% of sales for that market. As we speak today, we are seeing some restrictions being lifted in some of the markets in which we operate, and there is hope that we will see further relaxation during the second quarter of our fiscal year. We remain subject to health authorities' decisions affecting our restaurants, but we're hopeful that we will see gradual return to normal in 2021 and that our franchise partners can operate their businesses the way they had envisioned when they made the decision to invest in the restaurant. I will now turn it over to Renée, who will 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 in our first quarter, we implemented the new IFRS 16 accounting standards related to leases. We opted not to restate comparative figures as permitted under the standards specific transitional provisions. You'll find a more detailed description of the impact of the new standard in our financial statements and MD&A. I invite you to read them carefully as they have a material impact on how the business is presented. Revenues for the quarter were down 19% from $156.8 to $127.2 million due primarily to the pandemic. The decrease mostly came from our recurring revenue streams, which are closely related to our system sales, which decreased by 13%. With just under 50% of total system sales, Papa Murphy's and Cold Stone Creamery continue to be very strong and, as Eric indicated, contributed $49.9 million to organic growth in the fourth quarter.In addition, retail operations continued to benefit from higher consumer spending in grocery stores, new SKUs and new expansion into new provinces. At the end of 2020, we had 147 branded products for sale in the Canadian market compared to 102 in 2019. This translates in sales growth of 11% year-over-year. The growth in our retail sector, however, was offset by a reduction in sales in our food processing and distribution centers, which were impacted by the decrease in sales of the restaurants they support. Fourth quarter adjusted EBITDA was $35.2 million compared to $43 million for the same period last year. The decrease in adjusted EBITDA is attributable to Canada, while the U.S. and international segments posted a 12.4% increase year-over-year. This is an exceptional performance given current circumstances. Canada's fourth quarter EBITDA decreased by $10.1 million, mostly explained by the decrease in revenues due to the pandemic. This was offset by a reduction in cost, which reflects aggressive cost curtailment measures put in place to mitigate lower revenue. To put things in perspective, we succeeded in reducing recurring controllable expenses by $2.1 million, most of which was due to reductions in wages. MTY continues to also benefit from the Canada emergency wage and rent subsidies. For the quarter, this represented $1.6 million. Excluding the impact of IFRS 16, adjusted EBITDA would have been $32.3 million. Net income attributable to shareholders was $20.1 million or $0.81 per share for the fourth quarter of 2020 converts to a net income of $20.7 million or $0.83 per share for the same period in previous year. Net income remained relatively stable due to reduced operating expenditures, coupled with contribution of the U.S. and international segments, as indicated previously. As for our liquidity and capital resources, in the fourth quarter, MTY generated cash flow from operating activities of $44.8 million, up 18% compared to $37.9 million for the same period last year. The increase was driven by the positive variance and income taxes paid and strict capital management to preserve liquidity. For the same period, free cash flows increased 1% to $43.9 million or $1.78 per share on a fully diluted share basis compares to $1.74 per diluted share in the fourth quarter of last year. For the year, our free cash flow reached $5.68 per diluted share compared to $4.64 in 2019. As mentioned by Eric, with our focus on repaying debt, we used our cash generation during the quarter to reduce our long-term debts by paying $37.6 million, ending the quarter with $460.5 million of long-term debt. We also continue to remain well within our credit agreement ratio. Even with these debt repayments, we continue to have a healthy financial position with $44.3 million in cash at the end of the year and over $260 million available on our credit facilities. We'll continue to repay debt where possible over the coming quarters, and we'll continue to evaluate our liquidity and where to best utilize them. Now I'll turn it back to Eric for the conclusion.

[Eric Lefebvre, CEO & Non]

Thank you. As Renée just mentioned, owing to the decisions we made in 2020, we entered 2021 in a strong financial position. We will continue to be prudent for the next few months, and we'll prioritize debt repayments over other capital allocation strategies until the sky is clear up. Our priority is, and always will be to protect MTY against shocks, such as the one we are going through. And as such, we choose a conservative approach. Our balance sheet is improving and as we continue to build our treasure chest, we remain on the lookout for attractive M&A opportunities that may emerge. Acquisitions are part of our DNA, but we will be patient and do everything we can to make sure we choose the right businesses to successfully continue growing MTY in the future. We've always been very disciplined in the choice of our targets and in the prices we pay, and this will still be the case post pandemic. In upcoming quarters, our road to recovery remains closely tied to the lifting of COVID-19 restrictions. We spent the last year adapting our operations, marketing strategy and sales channels to a new and evolving business environment. I can proudly state that in many ways, MTY is stronger now than it was before to face the future. Finally, I would like to sincerely thank our employees, customer and suppliers for their support during the past year. With that, I thank you for your time, and we will now open the lines for questions. Operator?

[Operator]

[Operator Instructions] And our first question comes from the line of John Zamparo with CIBC.

[John Zamparo, Associate]

Eric, what can you say about franchisee health at the moment, in particular, access to government assistance programs in the U.S. and Canada. I know it's a broad subject and it's different by franchisee and by banner, but maybe the way we can frame it, how are you feeling about franchisee held versus last quarter?

[Eric Lefebvre, CEO & Non]

Yes. Well, if I compare to last quarter, we're pretty much at the same place we were. So I mean, it would be better if everything was opened. I'm looking specifically at California, where the new wave of CARES Act hasn't necessarily materialized the way it should have been. So this is probably where our franchisees are the most vulnerable at the moment. They need customers, and they need to be able to use their real estate the way it's intended to. They need to be able to use the assets that they invested in to serve customers. So I would say, in general, in the U.S., it's very good if I look at our main brands, but obviously, there are pockets where it's a little bit more fragile. In Canada, the government assistance has been really good for our business. And even though it certainly doesn't make up for all of our losses, it does compensate to a large extent. We have helped in terms of wages. We have help in terms of our rent. In certain provinces, we have more help in terms of our other fixed costs. So it's really a blessing that we have all this help to help us weather that storm. And on top of that, we have suppliers and landlords and other stakeholders that are being patient that are making concessions as well. So I would say, in general, the health hasn't necessarily changed that much versus last quarter. But obviously, the longer this lasts, the more difficult it's going to become. So we need to see an opening at some point.

[John Zamparo, Associate]

Okay. Understood. On the digital sales front, I appreciate the added disclosure here. Presumably, Papa Murphy's is a meaningful driver. But are there any other brands you can call out as meaningful contributors to that? And what can you say about digital sales from internal apps versus third party providers?

[Eric Lefebvre, CEO & Non]

Yes. Well, we have many brands that are doing a great job with digital sales. And some of them, we had made investments in that channel before the pandemic hit, and it really paid off. And looking at the Papa Murphy's, it's certainly one of them, where we do have a large proportion of our sales that are going through that channel. And we do have a lot of sales for Cold Stone, for example, that are going from online ordering. Yuzu Sushi in Canada is doing fantastic with online ordering. So those are brands that had stabilized their platforms and finalized all the testing and done everything before the pandemic hit. And then since the pandemic began, we did push quite hard on online ordering to make sure that the takeout option was really good and remove a lot of lit hurdles that our customers were facing. And that part of our digital environment is growing a lot faster than the third-party environment where we do have some products that deliver really well, and we do have some really good partners to deliver and to work with, with Uber and DoorDash and Postmates and Skip, and there's a bunch of them. Grubhub is one. So we're dealing with everyone, and they're good partners. But they don't service all of the areas where we operate, especially where we're outside of the major urban centers. So those options are not necessarily available through our network. So we need to focus really on our own internal solution for takeout orders. And this is also a much better profitability and economic model for the franchisees when we use that online ordering channel with our own infrastructure. So we're pushing hard on that. We have more investments that are being made now. We are limited with some brands, but we are still pushing really hard to maximize that, and this is something that will keep increasing going forward. So we need to continue to invest and make sure that we are where our customers expect us to be.

[John Zamparo, Associate]

Okay. That's helpful. And then just one more for me. You enacted some pretty meaningful cost cuts in 2020. As system sales recover in 2021, can you give us a sense of what -- which of those cost cuts are or -- what percent of those cost cuts are sustainable versus what should we expect to ramp back up as system sales do increase?

[Eric Lefebvre, CEO & Non]

Yes. What we have in Q4 is a maturity level. It's not going to get higher than Q4 for at least a controllable part.

[John Zamparo, Associate]

Got it.

[Operator]

Our next question comes from the line of Nick Corcoran with Acumen.

[Nick Corcoran, Equity Research Analyst]

Just starting with EBITDA margins. Can you maybe give a little bit of color of what the sequential decline was? And how much of that was maybe costs being layered back into the business?

[Eric Lefebvre, CEO & Non]

Yes. Well -- yes, yes margins are lower than in Q3. And in Q3, I had warned people that our margins were abnormally high, especially in the U.S. So we did layer costs back in. We did invest a little bit, like I said, in resources and time in our online ordering channels and in a certain number of places in the business. So I would not necessarily look at Q3 as normality. So I think Q4 is probably back to where we've been historically. So in terms of where we're going, as revenues increase, obviously, our cost base is going to stay more or less where it is. There are going to be some increases in some aspects, if the sales really ramp back up, but nothing major. So our margins will increase with revenues going forward.

[Nick Corcoran, Equity Research Analyst]

Great. And then maybe just switching gears to M&A. What have you seen in terms of the pipeline there? And have the multiples -- are they at an attractive level? Or have they remained high?

[Eric Lefebvre, CEO & Non]

Yes. We're competing with multiple different players for M&A and including the IPO market, which has been really hot in the last few months. There's a lot of capital out there. So I mean there's -- there are going to be opportunities. Right now, the market is pretty quiet, but there are going to be opportunities down the road. And I'm not sure exactly what price is going to be, but I think a little bit like I was saying before the pandemic, if we hunt for the bigger assets, I think that the multiples will go way up just because there's so much capital out there for the private equities. But if we stay where MTY has always been the most successful with the medium-sized acquisitions, I think there are going to be some good opportunities that will come in the next few years.

[Nick Corcoran, Equity Research Analyst]

And just the last question for me. Any expectation what you expect to receive in either Qs or serves or any other governance subsidies in Q1?

[Eric Lefebvre, CEO & Non]

I'm sorry. I'm sorry, can you repeat the question, Nick?

[Nick Corcoran, Equity Research Analyst]

Yes. What do you expect again in terms of government subsidies in Q1?

[Eric Lefebvre, CEO & Non]

Yes. It's -- well, the government subsidies are in the U.S., we're going to get none in Canada. There is a little bit of rent subsidy. It's really not material. And in terms of wages, it's more or less what we're seeing in Q4. As the business recovers, we're seeing less subsidies coming our way. So I expect to be subsidies will reduce all the way to 0 by the end of the period where we're allowed. So it's not going to be material amounts for Q1 and forward.

[Operator]

Our next question comes from the line of Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, Analyst]

Just a question, I guess, on the -- some of the variation you talked about in terms of sales based on where the stores are located, street level versus mall. Some of the, I guess, franchises you have on -- in malls or in office towers that are seeing significant declines. Do you expect there might be a bit of a recycling of franchisees? Or do you think some of those folks do survive and kind of makes the transition easier? Just how are you thinking about that over the long term, some of those folks that are seeing these 50% to 80% decline. What does that mean for your network going forward?

[Eric Lefebvre, CEO & Non]

Yes. Well, they're the ones that are suffering the most at the moment. There's no question. And I mean if you look at Q1, it's not much better where malls were closed for a lot of our territories. So I mean, not only did they not have tables and chairs, but they didn't have a business to operate at all. But landlords are understanding. So we're talking to our landlords, and we -- I mean, we have a good relationship with them. And we're trying to obtain concessions for our franchisees. The government is still helping where the closures are mandated by the government in Canada. I mean we have the extra kicker that we can claim from the government. So all in all, I think we're -- for the vast majority of our franchisees, they're going to be able to cover the fixed costs. But I mean, it's a tough situation for them. They fight and they want to survive, but eventually, we'll need to see some reopening, and we'll need to see some form of normalcy come back. It's a year now that we're into that pandemic. And definitely, the malls and office towers have suffered the most. So we need to see something -- some light at the end of the tunnel at some point.

[Sabahat Khan, Analyst]

Right. And if we look at the pipeline of new franchisees that you're talking about, is it -- should we assume that is more focused on maybe the areas that are doing better, maybe the U.S. and street front type banners? Or is it mixed bio or across your network by geography and banner?

[Eric Lefebvre, CEO & Non]

Yes. Well, we don't have many for malls just because they're not building new malls, and we are already in most of the malls. So there the pipeline of franchisees for malls and office towers is limited for that reason, not because that model is not attractive. I think malls, when we go back to normal, will still be a great place to do business. We were going to have more success in the malls going forward, and we're happy with that but the pipeline is not there. So it's mostly street. And where we see the pipeline is really healthy in general. We're seeing a little bit more action into converting the pipeline into actual stores where concepts are proven to be pandemic-proof. So we're seeing Cold Stone open. We're seeing Yuzu open. We're seeing -- our Sushi brands have been successful during the pandemic. So we're seeing more of those open. Then maybe some of the other brands where we need to wait a little bit to go back to normal before the businesses are going full stride again. So it's -- the pipeline is good for many of our brands, but the conversion into actual stores is very different from one brand to the next.

[Sabahat Khan, Analyst]

Okay. And then just last one for me on the digital side. I guess, it sounds like you're doing a lot more partnerships with some of the third-party aggregators. Do you see that as a path forward until you have some more clarity on the operating environment? Or have you identified maybe opportunities for banners where maybe you didn't think a digital strategy made sense and now you may invest behind it?

[Eric Lefebvre, CEO & Non]

Yes. I think definitely, we -- where we saw digital being maybe a marginal addition to sales and complication to operations in some brands, now we're seeing it as a necessary sales channel that we need to develop. So definitely, we're going to push very hard. Now the delivery, you mentioned the aggregators, most of our digital sales are not coming from the aggregators. They're coming from the takeout option with our own platforms. And this is where we'll keep pushing. The aggregators are great for us, and they are helping us generate more sales. And I see them more as a marketing platform than as a delivery service per se because a lot of people, they want to go on that platform and being offered a certain number of options. And it's not necessarily the delivery, that's the key point for us there. It's really to be part of that list of options that people are going to consider for lunch or dinner. But yes, so we're going to keep pushing in some brands, where a year ago, we would have said, yes, digital maybe not now, maybe later. We're not prepared for it. Our operations are going to be complicated. We can't really accommodate during rush hour or whatever reason we had not to do it. Now we're seeing it as a necessary sales channel for us to survive in the future, and we are pushing pretty hard to develop those brands. And some of them are lagging for various reasons, and some of them are pushing forward. So -- but yes, we -- you should certainly expect more progress in the next 12 months over digital in general.

[Operator]

Our next question comes from the line of George Doumet with Scotiabank.

[George Doumet, Analyst]

I just wanted to dive in a little bit on the 160 locations that were closed in the quarter. Maybe how many of those our office and mall locations?

[Eric Lefebvre, CEO & Non]

I don't have the exact number in front of me, but the proportion is not necessarily out of the ordinary. We did choose to close some locations because we did not want to renew some of the leases. MTY had to be on the lease. Now is a difficult time for us to sign for another 10 years, not knowing what the future is going to be. So there are some closures that happened in that context. But I wouldn't say that the proportion is completely out of whack compared to the rest of the closures. So malls and office towers are probably a little bit heavier than the other types of restaurants but nothing crazy.

[George Doumet, Analyst]

Okay. And did it cost us anything in terms of payment to close any of these stores?

[Eric Lefebvre, CEO & Non]

Yes. Lease buyouts are always a thing for a franchisor like MTY, and it's not because of the pandemic. We've always had a few lease buyouts every quarter in every year of our existence. So I wouldn't say that we're doing more of that now than we were in the past. So yes, we did have to buy out some leases. And that's part of normality for us, unfortunately, with 7,000 restaurants, even if you have a very, very small proportion of your restaurants that don't succeed, there will always be 1 or 2 every quarter that you're going to need to work on and buyout and negotiate with your landlord. And during the pandemic is no different than before the pandemic.

[George Doumet, Analyst]

Okay. And then just thinking about that number, like, is there any seasonality there? Like how should we think about cadence as we go into Q1 and Q2?

[Eric Lefebvre, CEO & Non]

Yes. Good question. Normally, we do have more seasonality where people go through Christmas period because this is the hardest period of the year. And then January, February, March, other than maybe a few brands is generally a little bit quieter. But this year, I think the seasonality is going to be off in terms of store closures and in terms of lease buyouts. I think the pandemic has really leveled all the seasons.

[George Doumet, Analyst]

Okay. Okay. And maybe just kind of moving over to Papa Murphy. Specifically on the corporate locations, can you maybe share your game plan in terms of the number of stores you're looking to maybe sell or maybe franchise or close in 2021?

[Eric Lefebvre, CEO & Non]

Yes. Well, Papa Murphy's, as you know, there's a large number of corporate stores, although we did reduce it over the last 18 months. Our goal is always to have no corporate stores. So we are working on these corporate stores that we have in the portfolio to improve the profitability, stabilize them in some cases and then refranchise them. So that's always the goal for all our corporate stores. So Papa Murphy's, I wouldn't expect anything different. We are working on certain territories that might not be as successful as we'd hope for or certain territories where we -- our stores are not optimized, where we need to better our profitability and make the stores more attractive. And this is what we've been doing. We're also using our corporate stores to test the new redesign that we have. So we have a few options for our franchisees that will be offered very soon to them, and we are testing these options to make sure that we can iron out the kinks. But ultimately, the goal is to refranchise all these stores. And the time line is unknown. We'll just wait for the right time to do it for each individual store and make that decision.

[George Doumet, Analyst]

Okay. And just one more, if I may, Eric, just kind of reading between the lines, it seems that M&A activity will be concurrent with maybe restrictions easing. I guess it's kind of playing through in the spring. But I'm just -- I'm just curious would MTY be interest at all and maybe taking on a turnaround or kind of a more distressed concept if the price is right?

[Eric Lefebvre, CEO & Non]

Yes. We're not closing the door on anything, George. So ideally, we'd like to buy successful proven concepts that have been successful that have had even a great ride during the pandemic and everything. But reality, we need to evaluate each option based on what it is now, what it can be in the future and what plan it is that we have for it and the price that we're paying for to acquire those chains and those cash flows. So I don't want to say we're going to go one way or another, but all I'm going to say is we're not closing the door on anything.

[Operator]

[Operator Instructions] Our next question comes from the line of Derek Lessard with TD Securities.

[Derek J. Lessard, Research Analyst]

Yes. Thanks, Eric. You guys did make a small call out in the MD&A in reference to ghost kitchens. Just wondering if you can maybe talk about that initiative and how permanent they are and how, I guess, imperative they were in driving online sales or delivery?

[Eric Lefebvre, CEO & Non]

Yes. Yes, that's an interesting question. And ghost kitchens are they're a little bit controversial because we want to make sure that we protect our franchisees, and we don't want to compete with our franchisees on their own turf. So we need to be careful with that. So it's not something that's going to be widespread in MTY, but we do have opportunities in certain areas to use our assets in the store to prepare more food or address different dayparts. So we do -- we are testing different models with different brands in different territories as well. We are also seeing, for example, where we have a kitchen unlimited that we're testing with. We're testing with a few different options where we want to see how economically viable, the model is. And so far, what we've seen is, from our experience, at least, and I'm not saying it's the same experience for everyone, the pure ghost kitchen model doesn't necessarily work for us financially. What we've seen is it's good, and we do have sales, but the sales are never enough to cover the costs, and this is not what we're in business for. But where we do implement a ghost kitchen concept in an existing restaurant, just to add on to the menu offering or just to add on to another daypart, this has proven very successful in some cases. And it's a model that we're exploring further now. We are deploying more and more now that the testing phase is done, and we're seeing some success there. So without investing too much in new equipment because we don't want to ask our franchisees to invest too much. We are seeing a lift in sales in certain concepts based on those kitchens that we're offering.

[Derek J. Lessard, Research Analyst]

Okay. And maybe just on the -- you briefly touched on the reimaging of Papa Murphy's. Just maybe where are you in that initiative? And what does it encompass?

[Renée St-Onge]

We're still in the testing phase, I would say. It's -- we did come up with a new logo, a new branding, new store design, and then it's how we're going to communicated to the market to the customers, how do we really make it our own and create the brand identity that's going to be strong enough for us to push it forward. And we don't want to we don't want to deploy it too aggressively in the market before we finish testing it. So -- and we are in the testing phase. We did renovate, I think, 5 stores now in different capacities. Some -- one of them was completely gutted. One of them was more just changing the signage and fresh code of paint and some of them were in between. And we're testing the new design. We're testing how the makeline is positioned, how the staff can operate in it. We're testing our signage also to see how customers respond to it. So it's still the testing phase and PMI and Papa Murphy's being such an important brand for us and being so successful at the moment. We don't want to do something that would jeopardize what we have. So we are going to be cautiously, but we're pretty much there now where we think we've landed on what we need to do for the future. And I'm really happy with it.

[Derek J. Lessard, Research Analyst]

Okay. And does any of that include, I guess, changing the overall product offering, whether -- I mean, installing ovens and having more of a cook product?

[Eric Lefebvre, CEO & Non]

No. Papa Murphy's is a take and bake. It's an oddity in the market, and we are embracing that oddity. The problem with baking, and we do bake in Canada, and we do bake also in UAE. But in the U.S., we've chosen not to bake and if we choose to have a few stores that bake and a few stores that don't -- it's going to create confusion with the customers. And it's a discussion we have every year. But if we wanted to offer the a baking option, we'd have to pretty much deploy it across the market. And our stores are just not -- they're not designed for it. Some of them can't because you need to have a certain number of -- electrical is more complicated, the exhaust facilities need to be installed in some places. So we are embracing our take and bake. It is working. The stores are really good at the moment. And it's just up to us to communicate it effectively and letting people know who we are and what we are. Now in terms of R&D, it's certainly not -- it's not tied to the rebranding, but we are pushing pretty hard on research and development to beef up the lineup of pizzas us but also beef lineup of other products that we can sell in our stores. We've run a few tests. Some of them were very successful, some of them less and that's why we test. But yes, definitely, there's more work going on for the product offering as well.

[Operator]

Our next question comes from the line of Dimitry Khmelnitsky with Veritas.

[Dimitry Khmelnitsky]

Can you please quantify any unsustainable changes in working capital during the quarter due to deferred tables or accelerated receivables collection?

[Eric Lefebvre, CEO & Non]

Well, to quantify it would be difficult, but I can say that, obviously, accounts receivable are lower because our revenues are lower. So as revenues go back up, I expect that accounts receivable will go back up at the same time and that's a good problem to have. In terms of accounts payable, there's a certain amount of seasonality going on with how we spend the advertising dollars that franchisees are paying us and that we need to deploy in the markets, there's a certain seasonality in various different payments there. So there's going to be ups and downs. But in terms of saying something is sustainable or not, I would say that there's nothing special on our working cap at the moment.

[Dimitry Khmelnitsky]

Okay. Can you comment a little more about the pace of franchise applications? Whether you see any meaningful increases in overall number of franchisee applications can then converse it into the actual store openings?

[Eric Lefebvre, CEO & Non]

Yes. The pace of applications is really good. It's going well both sides of the border. We do have a pretty healthy pipeline, and we keep adding to that pipeline. So the additions to our pipeline and the number of interested parties is growing, and especially where the brands have been very successful in the last 12 months, and franchisees feel comfortable that we can pretty much face anything. We are seeing more interest also from existing franchisees to acquire more stores. So that's a really good thing for us. And then in terms of the pace of conversion into new stores, that really depends on how successful the brands have been during the pandemic. So if you have a brand that struggled a little bit more typically, franchisees will be a little bit more patients before they choose to build the store and where our sales have been through the roof during the pandemic, franchises will be more aggressive trying to capture some of that momentum.

[Dimitry Khmelnitsky]

And so I guess some of your brands probably saw a meaningful increase in number of new applications that others didn't.

[Eric Lefebvre, CEO & Non]

Yes, that's for sure. And that's always the case.

[Dimitry Khmelnitsky]

Understood. Okay. Can you talk a little more about the cost savings? If I remember correctly, it was about $10 million per quarter as of Q3, right?

[Eric Lefebvre, CEO & Non]

Q3 was $10 million. Yes. It was abnormal, as I had mentioned on that call.

[Dimitry Khmelnitsky]

And in Q4, what is the level of cost savings?

[Eric Lefebvre, CEO & Non]

Yes. In Q4, I think we're at about $2 million in cost savings. It's probably a little bit lower than what we had expected. There's a few items here that we needed to invest in, as I mentioned earlier on the call, to help us grow the business in the future. But yes, the cost savings now, I think, are -- they can't be called cost savings. Now it's our normal baseline that we're -- that we have, and it's not necessarily something that will come back up.

[Dimitry Khmelnitsky]

And so okay, let me rephrase it that maybe on an annualized basis, where do you see this new -- I know you mentioned, I guess, not to call it cost savings, but where do you see that delta on an annual basis in terms of reduced costs versus pre-COVID period?

[Eric Lefebvre, CEO & Non]

Yes. As I said, Q4, I think, is now our baseline.

[Dimitry Khmelnitsky]

Okay. So Q2 about $8 million per year then, right?

[Eric Lefebvre, CEO & Non]

I'll let you do the forecast. I'm not giving any guidance.

[Dimitry Khmelnitsky]

No, no, that's fine. Okay. Fine. All right. And then do you see any changes in business model for the full-service restaurant and food court stores and perhaps nontraditional stores in a post-COVID world?

[Eric Lefebvre, CEO & Non]

Yes. For sure. Everyone needs to adapt. Pandemic has created the new normal, and we're not sure exactly what it's going to be. And it might be different in some places. So yes, definitely, we need to readjust everything that we're doing, everything that we've always done. I think it's we were going through some evolution. Delivery and online ordering was getting bigger and food trends were different. I think the pandemic has just accelerated everything. And we'll need to adjust how we do business in every place. So the nontraditional, we need to adjust. The malls and office towers definitely will need to adjust. The business model, and it needs to be adjusted both on customer acquisition and on the cost structure of these stores. And whatever is on the street also needs to adjust because we -- even the design of our stores needs to be adjusted now that we have so much online ordering and so much takeout that we need to have different store designs to be able to handle that without people having to line up with or without the cash. And so if people want to be in and out of our stores and skip the line, we need to have our stores design accommodate that. So there's a number of changes that need to happen, but it's really everywhere. Everything needs to be not necessarily changed, but everything needs to be incrementally adjusted.

[Dimitry Khmelnitsky]

Okay. What they already material royalty waivers granted in Q4?

[Eric Lefebvre, CEO & Non]

Yes. We did grant some royalty breaks for some of our franchisees. I wouldn't say they're material, but we did for some of our restaurant chains that really had zero way to make a profit or really do business. We did have some concessions. But again, this is more focused now and based on individual store realities than it is on a widespread basis. So I wouldn't say it's anything material.

[Dimitry Khmelnitsky]

And probably more geared towards the food court stores and -- of these towers essentially and malls and full-service restaurants, that's where you see the royalty waivers?

[Eric Lefebvre, CEO & Non]

Not necessarily. If you look at food courts, for example, in Québec and Ontario, the food courts, they were closed. So whether we give a royalty break or not doesn't make a difference if the sales are 0. Whether we charge royalties or not, they're still 0. So you would see more concessions where we had the full-service restaurants that have very high rents because of the footprint of the stores and very -- while possibility to do business really. So this is where it would be concentrated.

[Operator]

And there are no further questions at this time. I'd like to turn the call back over to Mr. Lefebvre.

[Eric Lefebvre, CEO & Non]

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

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. We thank you for joining us. You may now disconnect.