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Edited Transcript of RECP.TO earnings conference call or presentation 9-Aug-19 1:00pm GMT

Q2 2019 Recipe Unlimited Corp Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Recipe Unlimited Corp earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Hennessey

Recipe Unlimited Corporation - CEO

* Kenneth Joseph Grondin

Recipe Unlimited Corporation - CFO

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Conference Call Participants

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* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Analyst

* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* John Zamparo

CIBC Capital Markets, Research Division - Associate

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Phyllis, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call for Recipe Unlimited Corporation 2019 Second Quarter Results. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Before turning the meeting over to management, please be advised that this call contains certain forward-looking statements that are based on current expectations and are subject to a number of uncertainties, risks and other factors, which may cause the actual results, performance or achievements of Recipe to be materially different. Further information identifying risks, uncertainties and assumptions and additional information on certain non-IFRS measures referred to in this call can be found in the company's management discussion and analysis and annual information form available on SEDAR.

I will now turn the meeting over to Frank Hennessey, Chief Executive Officer of Recipe Unlimited Corporation. Mr. Hennessey, you may begin your conference.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [2]

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Thank you, Phyllis. Good morning, everyone. Welcome to our 2019 Second Quarter Conference Call. Joining me this morning, again, is Ken Grondin, our Chief Financial Officer.

Performance for Recipe in the quarter was mixed. While we were pleased with the positive performance from our retail and catering divisions as well as improved contribution from our franchise segment that led to an overall improvement in our operating EBITDA in both dollars and margin rate, we were disappointed in the decrease of our same restaurant sales of 1.7%, which was the main contributor to a decrease in System Sales of $2.9 million or 0.3%. Same restaurant sales was impacted by mixed performance between our brands, a challenging winter and spring weather conditions which delayed the start of a typically busy patio season and a heightened activity of competitor deep discount programs.

Year-to-date, System Sales grew $91.9 million to $1.7 billion, representing an increase of 5.6%. The year-to-date improvement was primarily the result of the addition of The Keg in February 2018 and positive performance in the retail and catering segment on the success of the Swiss Chalet branded products in grocery, increases in frozen pot pie sales and the addition of Marigolds and Onions in December 2018.

Year-to-date, we've opened 23 new restaurants and closed 23 restaurants. We expect to have net positive openings in the year. As I've mentioned on previous calls, our focus here is on improving the quality of our sales and providing a better experience for our guests, which includes refreshing their current portfolio and renovating existing assets.

Despite the decline in same restaurant sales, our disciplined operating model and our focus on long-term network health and franchise profitability enabled us to increase second quarter operating EBITDA to $56 million in the quarter compared to $54 million last year, representing an improvement of $2 million or 3.7%.

Year-to-date, operating EBITDA increased $106.1 million compared to $100.2 million in 2018, an improvement of $5.9 million or 5.9%. The increases were primarily driven by the improved contribution from the franchise and central segments that more than offset a decrease in corporate contribution.

The positive contribution from the franchise segment, both in the quarter and year-to-date, was a result of our focus on the quality of our sales and our 4 Pillar operating strategy of improvement of food, service, value and ambiance as well as the opening of new restaurants and the closure of underperforming locations. These actions result in a franchise contribution as a percentage of franchise sales increasing to 4.5% in the quarter and 4.4% year-to-date compared to 4.1% in the same periods last year.

Year-to-date, operating EBITDA increased to $106.1 million compared to $100.2 million last year, an improvement of $5.9 million or 5.9%, resulting from improved contribution from the corporate franchise and retail and catering segments. Year-to-date improvements in the franchise and retail and catering segments were positively impacted by the same key drivers as in the quarter.

The year-to-date increase in corporate segment contribution was primarily the result of the addition of The Keg in February 2018, which more than offset the year-to-date impact of SRS and the decrease in central contribution resulting from full period net central expenses from The Keg.

Operating EBITDA margin on System Sales before The Keg royalty expense was 6.8% for the quarter compared to 6.6% in 2018. Year-to-date, operating EBITDA margin on System Sales before The Keg royalty expense was 6.6% compared to 6.4% in 2018. Operating EBITDA margin on System Sales after The Keg royalty expense was 6.4% for the quarter and 6.2% year-to-date as compared to 6.2% and 6.1% in 2018, respectively. The improvements in margin rate were primarily driven by improved franchise contribution margin and better central segment results that offset lower corporate contribution margin. We will continue to focus on improving the earnings efficiency of our assets and our increased sales base to grow operating EBITDA as a percentage of System Sales back to within our 7% to 8% target range.

We continue to generate significant free cash flows which provide us with the financial flexibility to consider alternatives for capital deployment, including growth investments, strategic acquisitions, enhanced shareholder returns through dividend growth and share buybacks as well as investments in our core businesses.

Free cash flow before growth CapEx, dividends and NCIB was $40 million in the quarter and $75.5 million year-to-date. Free cash flow on a diluted per share basis was $0.63 in the quarter and $1.18 year-to-date.

At Q2 2019, the company's debt-to-EBITDA ratio was 1.7x compared to 2.1x at the end of Q2 2018, illustrating how quickly the company's leverage has reduced from free cash flow being used to reduce debt on the company's revolving credit facility.

At this time, I'll turn it over to Ken for a review of our financial results.

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Kenneth Joseph Grondin, Recipe Unlimited Corporation - CFO [3]

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Thank you, Frank, and good morning, everyone. My overview will refer to our second quarter financial statements and MD&A issued last night, both of which are available on SEDAR. For the first part of the financial highlights, I will focus on Recipe's consolidated results and will finish with a summary of our segmented business performance.

I would like to remind everyone that our 2019 second quarter year-to-date financial statements include the impact of IFRS 16, the new lease accounting standard which Recipe adopted on December 31, 2018. As a result of the new lease accounting standard, in the second quarter and year-to-date, earnings before income taxes decreased by $600,000 and $900,000, respectively.

Total gross revenue was $311.9 million and $616.5 million for the 13 and 26 weeks ended June 30, 2019, compared to $309.5 million and $553.7 million in 2018, representing an increase of $2.4 million or 0.8% for the quarter and an increase of $62.8 million or 11.3% year-to-date. The increase in gross revenues was primarily related to the addition of The Keg in February 2018 and increases in retail and catering sales, partially offset by same restaurant sales decreases.

Operating income was $32.3 million and $63.9 million for the 13 and 26 weeks ended June 30, 2019, compared to $34.2 million and $65 million in 2018, representing a decrease of $1.9 million or 5.6% for the quarter and $1.1 million or 1.7% year-to-date. The net decrease in the quarter was primarily the result of noncash fixed asset impairment expenses of $3.3 million and restructuring charges of $200,000, which were offset by higher gross revenue of $2.4 million and the implementation of IFRS, which increased operating income in the quarter by $3 million from a $13.8 million decrease in rent expense, offset by an increase in depreciation expense of $10.8 million related to the rate of the new right-of-use lease assets.

The net decrease in year-to-date operating income was primarily driven by noncash fixed asset impairment charges of $2.7 million, offset by the implementation of IFRS 16, which increased our operating income in the quarter by $5.1 million from a $26.5 million decrease in rent expense, offset by an increase in depreciation expense of $24.1 million related to the new right-of-use lease assets and lower restructuring charges of approximately $200,000.

Net interest expense for the 13 weeks ended June 30, 2019, excluding the net interest related to the new lease standard, was $3.4 million compared to $2.5 million in 2018, an increase of $900,000. The increase was primarily related to the noncash write-off of deferred financing fees related to the credit facilities that were renewed in May 2019. Year-to-date, net interest expense and other financing charges were $5 million compared to $5.4 million in 2018, a decrease of $400,000. The decrease was due to a full year of interest income earned on Keg Partnership units, partially offset by a full quarter of The Keg interest on long-term debt expense and the $1 million write-off of deferred financing fees.

Earnings before income taxes for the 13 weeks ended June 30, 2019, was $23.8 million compared to $28.4 million in 2018, a net decrease of $4.6 million or 16.2%. The net decrease in the quarter was primarily driven by the $2 million increase in operating EBITDA and a $2.7 million reduction in noncash fair value changes related to The Keg Exchangeable Partnership units and noncontrolling interest liability that was offset by a $4.7 million increase in noncash impairment and onerous contracts expenses, $2.6 million higher depreciation and amortization before the impact of the IFRS lease accounting standard changes, a noncash write-off of deferred financing fees of $1 million, higher stock-based compensation of $400,000 and a net $600,000 expense related to the new IFRS lease standard.

Year-to-date, earnings before income taxes was $55.1 million compared to $57.8 million in 2018, a net decrease of $2.7 million or 4.7%. The net decrease was primarily driven by the $5.9 million increase in operating EBITDA and a $5.3 million reduction in noncash fair value adjustments related to The Keg Exchangeable Partnership units and noncontrolling interest liability, offset by $4.9 million higher depreciation and amortization expenses before the impact of the IFRS lease standard changes; noncash impairment and onerous contracts expense increases of $4.1 million; a noncash write-off of deferred financing fees in the amount of $1 million; higher stock-based compensation expense of $1.8 million; an increase in loss on disposal of assets of $1 million; and a net $900,000 expense related to the new IFRS lease standard.

Adjusted basic earnings per share for the 13 weeks ended June 30, 2019, was $0.38 compared to $0.39 in 2018, while adjusted diluted earnings per share for the 13 weeks ended June 30, 2019, was $0.37 compared to $0.38 in 2018. Year-to-date, adjusted basic EPS was $0.67 compared to $0.74 in 2018, while adjusted diluted EPS for the 26 weeks ended June 30, 2019, was $0.65 compared to $0.71 in 2018.

Turning to segmented results for the quarter and year-to-date. Total contribution from corporate restaurants was $20.5 million and $39 million for the 13 and 26 weeks ended June 30, 2019, compared to $24.3 million and $37.4 million in 2018, a decrease of $3.8 million or 15.6% from the quarter and an increase of $1.6 million or 4.3% year-to-date. The decrease in the quarter is related to the sales decrease and contribution rate decrease, mostly from taking back underperforming franchise restaurants that operate below our 10% to 15% target contribution level. The increase year-to-date is primarily driven by the increase in the number of corporate restaurants, including the full year impact from the addition of The Keg in February 2018.

For the 13 weeks ended June 30, 2019, total contribution from corporate restaurants as a percentage of corporate sales was 10.5% compared to 12% in 2018. Year-to-date, total contribution from corporate restaurants as a percentage of corporate sales was 10% compared to 10.7% for the 26 weeks in 2018. The decreases were primarily related to the sales decreases and wage rate increases in Western Canada, partially offset by the addition of The Keg, which operates corporate restaurants within our 10% to 15% target range.

Total contribution from franchise restaurants was $26.9 million for the 13 weeks ended June 30, 2019, compared to $24.7 million in 2018, an increase of $2.2 million or 8.9% for the quarter. Year-to-date, total contribution from franchise restaurants was $52.4 million for the 26 weeks ended June 30, 2019, compared to $47.1 million in 2018, an increase of $5.3 million or 11.3%.

The effective net royalty rate for the 13 and 26 weeks ended June 30, 2019, was 4.5% and 4.4% compared to 4.1% and 4.1% in 2018. The increase in the quarter and year-to-date was related to the improvement into the quality of sales due to the ongoing practice to open new franchise restaurants at the standard royalty rate while closing or taking back underperforming previously subsidized locations and from the addition of The Keg.

There are brands acquired since 2014 which charge different standard royalty rates, in particular, St-Hubert which charges 4% as its standard royalty and The Keg which charges over 5% when considering its total franchise portfolio.

Turning to the retail and catering segment now. The retail and catering segment consists of sales related to the manufacturing and distribution of fresh, frozen and nonperishable food products under the St-Hubert, The Keg and Swiss Chalet brand names as well as under several private-label brands. Retail sales are impacted by orders from franchise restaurant locations and by the volume of orders generated from retail grocery chains.

Catering sales relate to food and beverage sales from Recipe's catering divisions operating under the names of Pickle Barrel, Rose Reisman and Marigolds and Onions. Catering sales were impacted by the number of customer orders and by the number of contracts obtained by the catering divisions.

Total contribution from retail and catering for the 13 weeks ended June 30, 2019, was $3.2 million compared to $2.8 million in 2018, an increase of $400,000 or 14.3% for the quarter. Year-to-date contribution from retail and catering for the 26 weeks ended June 30, 2019, was $7.7 million compared to $6 million in 2018, an increase of $1.7 million or 28.3%. The increases are primarily driven by sales increases from the Swiss Chalet branded products and grocery, increases in frozen pot pie sales from the addition of the new pie production line and the addition of The Keg retail business in February 2018 and Marigolds and Onions catering business in December 2018.

The central operations segment consists of processing fee revenues from Recipe and St-Hubert's off-premise business, franchise fees, property and equipment rent and vendor volume rebates reduced by central overhead costs and Keg royalties paid to the Keg royalty income fund. Central segment contribution before the net royalty expense for the 13 weeks ended June 30, 2019, was $8.8 million compared to $5.7 million in 2018, representing an increase of $3.1 million or 54.4% for the quarter. Year-to-date, central segment contribution before the net royalty expense for the 26 weeks ended June 30, 2019, was $14.3 million compared to $14.6 million in 2018, representing a decrease of $300,000 or 2.1%. The $3.3 million central segment contribution increase in the quarter is primarily the result of effective cost controls and synergies from consolidating certain shared service functions with acquired brands.

Total central segment contribution before the net royalty expense as a percentage of total System Sales for the 13 weeks ended June 30, 2019, was 1% compared to 0.6% in 2018, an increase of 0.4 percentage points for the quarter. Year-to-date, total central segment contribution before the net royalty expense as a percentage of total system sales for the 26 weeks ended June 30, 2019, was 0.8% compared to 0.9% in 2018, a decrease of 0.1 percentage points. The decreases are primarily related to the addition of The Keg which operates with higher net overhead costs, which are more than offset by The Keg corporate and franchise contributions.

On June 20, 2019, the company announced that it will be continuing with its NCIB program, and the company renewed its NCIB for the period June 24, 2019 to June 23, 2020. During this time, Recipe can purchase up to 1,822,329 shares.

For the 13 and 26 weeks -- or during the 13 and 26 weeks ended June 30, 2019, the company purchased and canceled 437,727 subordinated voting shares for the quarter and 703,924 subordinated voting shares year-to-date or $11.7 million and $18.8 million, respectively. Subsequent to June 30, 2019, until August 8, 2019, the company repurchased 564,956 subordinated voting shares for $15.1 million under the NCIB and has purchased 1,865,193 subordinate voting shares for $49.1 million since June 22, 2018.

Lastly, yesterday evening, we announced that for the 13 weeks ended June 30, 2019, the company declared a dividend of $0.1121 per share for subordinate and multiple voting common shares outstanding. The dividend will be paid on September 13, 2019, to shareholders of record at the close of business on August 30, 2019.

This concludes the financial commentary for the call. I'll now turn the discussion back to Frank.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [4]

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Thanks, Ken. Q2 was a disappointing sales quarter. However, despite challenging market conditions, I'm proud that our teams remain focused on improving the guest experience while maintaining cost control discipline. This allowed us to grow operating EBITDA by $2 million in the quarter and improve our operating EBITDA margin on System Sales to 6.4% compared to 6.2% last year.

We have the leading market share of full-service restaurants in Canada. However, the macroeconomic conditions for full-service restaurants are challenging, and we are facing headwinds on several fronts. There are more full-service restaurants in the market. Consumer spending is being influenced by rising household debt and higher fuel prices. In Alberta, a province where we have a significant presence, we continue to see economic weakness. And in some markets, labor shortages are creating conditions that are pushing wage rates to surpass any minimum wage legislation.

We are also starting to see some early signs of competitors beginning to deploy deep discounting strategies to prop up short-term same restaurant sales growth. This deep discounting path is not a path we intend to follow. We believe that the best path forward for the long-term health of our brands and franchisee profitability is to amplify our efforts behind our 4 Pillar operational strategy, to improve the quality of our food, the quality of our service, the value for the experience and to improve the ambiance of our restaurants.

Under our food pillar, in Q3, we are continuing new menu launches in Kelsey's, Swiss Chalet, Montana's, East Side Mario's and Milestones. Our new menus are focused on delivering exciting new food news while reducing overall menu count for simplicity and excellence of execution. We have countless new menu items that we'll be introducing to Canadians over the next several weeks. Too many to mention actually in one sitting. Everything from the new salt and vinegar popcorn shrimp at Kelsey's as well as their new burly beef chili, which will also feature a Lightlife plant-based option to complement the very successful bourbon barbecue Lightlife burger. The new Milestones menu has several new craveable items, including a new wagyu beef meat loaf, Baja fish tacos or their new Korean steak sandwich. And at Harvey's, we will be featuring the new Lightlife burger chargrilled and garnished exactly the way each of our guests want it.

Our off-premise business continues to grow, and we are making investments in both packaging and food innovation to ensure a high-quality of food consistency and temperature control as well as taking our first steps to reduce single-use plastics, including the new takeout box for Swiss Chalet's new crispy chicken.

On our last quarterly call, I introduced the Chalet Market salad bar concept for Swiss Chalet. Chalet Market is an unlimited salad bar concept that features 40 fresh ingredients, including salad bar staples, signature Swiss Chalet items and vegetarian options. We have seen very encouraging results with high participation rates in SRS in our operational test location on Highway 27 and 7 here in the GTA and have just now expanded our test through our newly renovated restaurant in Barrhaven that just opened its doors yesterday. Chalet Market provides great value to our guests and gives them another reason to enjoy their experience in our dining rooms without complicating our kitchens so that we can still focus on quality and speed of service for our dining, takeout and delivery business.

Turning to our service pillar. At the end of Q2, Recipe had 1,160 restaurants on Aggregators, enabling customers to order from Recipe brands through partners like UberEats, Skip the Dishes and DoorDash. We have seen the continued rapid growth of the Aggregator business in Canada. While we are seeing growth in our own off-premise business, data suggests that the Aggregator business in Canada will increase 100% from $2 billion in sales in 2018 to close to $4 billion projected by the end of 2019. So while we value our third-party delivery partnerships, we are also continuing to invest in our own internal delivery programs at both Swiss Chalet and St-Hubert. We launched driver tracking for our Swiss Chalet off-premise app. This now allows our guests to track their order in a similar way they could track where their Uber driver is. This new tool is providing effective information for our store managers and franchisees to improve their own service and increase guest satisfaction by offering them peace of mind on the status of their delivery.

We also launched the order ahead and pay ahead app for Harvey's to further enhance guest satisfaction and speed of service. The brand initiated a campaign to get people to download the app with an offer of free burger, and the result far exceeded Harvey's expectations with downloads exceeding 165,000. The new app at Harvey's is really spectacular and completely developed in-house by a bunch of very talented people.

Total digital sales for the restaurant brands at Recipe, excluding The Keg, are at 10% and are up 16% this year. Digital is an area that we will continue to invest in as it provides the convenience that many guests want today.

Providing our guests with the experience they expect and that will make them want to come back first starts with our people. We need to always find the right people to join our team and to provide them with the right type of training, training that is both engaging and effective. We are now rolling out a new gamified training program that provides the right bite-sized learning nuggets in a fun but effective manner that maximizes retention of information. This is just one part of an overall comprehensive training program that our team is putting together, including classroom and webinars, under the banner of Recipe University. And to me, our new training program is one of the most important initiatives we have as a company.

Under the pillar of ambiance, we are focusing our efforts on restaurant renovations and strategic closures. Year-to-date, we have renovated 52 restaurants, and we've opened 23 new restaurants and closed 23. 2019 renovation programs for the Swiss Chalet and Harvey's brands are accelerating as franchisees take advantage of the renovation incentive programs we have put in place. We expect 2019 will be one of our busiest renovation years ever.

Turning briefly to acquisitions. On May 24, Recipe acquired Anejo restaurant and Blanco Tex-Mex Cantina, a Calgary-based Mexican concept. The restaurants have been operating for over 4 years, and each concept targets a slightly different market niche. Anejo is an elevated premium price Mexican experience that fits in urban downtown locations. While Blanco is a lower-priced, Cantina-style, Mexican experience that is better suited to suburban locations. The Anejo and Blanco Mexican brands complement Recipe's existing portfolio with a food and cocktail experience that is completely differentiated from our existing offerings. This concept fits into our emerging brands category, along with Fresh and Burger's Priest, which all have upside growth potential.

So there's lots going on with more to do. Despite some headwinds, we are choosing to continue and increase our investment in programs and initiatives that benefit our guests, our franchise partners and our associates. We choose to invest in marketing, technology, training, corporate social responsibility programs. We choose to continue to invest in incentive programs for our franchisees to refresh their restaurants and we choose to continue to improve the quality of our sales by closing underperforming restaurants while opening new restaurants in markets where they have the ability to succeed. Due to the strength of our free cash flow and balance sheet, we can make these investments in our core business and continue to enhance shareholder returns through dividends, share buybacks on the NCIB as well as strategic acquisitions.

And on that note, I'd like to thank you all for attending the call and turn it back to Phyllis to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of George Doumet, Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Frank, I'd like to focus a little bit on what you called heightened activity of competitor deep discount programs. Maybe a bit more detail there, maybe what categories. Is that a higher level of competition than we're typically accustomed to?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [3]

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Yes. I mean I think we've seen over probably the last 5 or 6 months, there's certainly -- there's a competitor out there that's in the -- they're in the sitdown space. I mean they're very cheaply priced. And I think you see -- we're seeing some others starting to mimic some of that behavior, particularly on the beer and cocktail side. And so it's -- these things -- and companies pop up every now and then, assuming over time. They can have some short-term disruption to you.

But I think the -- not the path to go is to start playing somebody else's game, and we just need to stick to what we believe in and what works for us.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. Shifting gears maybe to corporate restaurants. Some margin compression there. How much of that was the underperforming locations? And how much of that was I guess the other items, stuff you called out and maybe some competition in high wages?

And a two-part question to that. On those underperforming locations, can you just remind us how many there are and how long we expect to hold on to them for?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [5]

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Well, firstly, the corporate restaurant side on the margin piece, some of that was some restaurants we picked up with Swiss Chalet in Q3 of last year that's contributing to that. Some of the other corporate restaurants, we have some higher minimum wages out west that short term impacted us, but I think they've got good plans in place to get those under control. But that's been contributing to it.

And I'm sorry, I think I missed the second part of your question, George.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Well, I just wanted to know how many stores kind of are underperforming and how long we expect to hold on to them for.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [7]

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Well, I mean we're constantly assessing that, right? I mean in some cases, we've had restaurants that you can take back and they may be underperforming, and it could be a multitude of things. A lot of times, it's the leadership. And when you change the leadership, you can change dramatic results. In other cases, there may be situations whereby the restaurant is coming upon its end of lease, and we'll run it out until the end of the lease. But I don't think we're prepared to get into specific numbers.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. And just one last one, if I may. On M&A, I mean we're obviously in a good place here with our balance sheet. Just wondering how the landscape is in Canada. Are multiples that are all coming down? And maybe lastly, I guess in terms of value accretion. I mean we traded 9x EBITDA. Does that make you kind of think twice about executing yields in Canada?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [9]

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Does it make me think twice about executing yields in Canada?

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Yes. I guess in terms of value accretion, like just given -- I mean are we seeing a lot of targets kind of in that range, below that range? And just maybe just general commentary there.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [11]

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Yes. I mean I think -- listen, I think for -- we've had that fairly, as you know, well. As you go back and look at the history, I mean it's been kind of a disciplined range that we play in. And we paid up in the past for brands like St-Hubert that have worked out very well.

I think for us, we're looking for acquisitions that complement spaces that we're not in. That's why Anejo and Blanco is a nice fit. Just like Fresh is more on the vegan, vegetarian side. Anejo is in the Mexican space that we don't play in. We're not going to -- we're pretty disciplined. We're not going to overpay for anything.

As far as our multiples going up or down, that always just kind of depends on the concept and where it is and where you think that growth potential is and if you can reach a deal. I haven't really seen any material change in it.

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Kenneth Joseph Grondin, Recipe Unlimited Corporation - CFO [12]

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George, it's Ken. Just to add to that, obviously, we'll focus on -- any deal we'll look at, we're focused on it being accretive. Lots of room on our balance sheet and debt capacity to fund with debt, not equity. So we'll continue to look at deals that we can do positively, and then we've been very successful in the past of getting synergies to reduce those multiples. And that would be our plan going forward as well.

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Operator [13]

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Your next question comes from the line of John Zamparo with CIBC.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [14]

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Frank, you mentioned franchisee profitability is always a key focus for you. Obviously, a lot of puts and takes across the network as a whole. But how would you describe franchisee profitability versus, say, a year ago, either on a dollars or margin basis?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [15]

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I think -- listen, I don't think we're seeing any material, certainly not seeing any changes on the downside of it. I think the changes in things that we're doing on the menu side, not only does it improve the quality of the product. But more times, you can execute something and get it out the door, but it reduces your overall labor cost in back of house. When you have to train somebody, it reduces the training cost. So we're seeing some improvements on that. And we're also just seeing improvements on the labor side, frankly, as people are getting more used to how to manage in this market. We all know what the increases were, and it took some time for people to get used to that.

So they worked hard at this, and we have good systems that have been developed here to really help our restaurants understand their cost management side. We're putting in -- we're actually rolling out -- and I didn't talk about it in the call. We're rolling out a complete new restaurant management system for back of house that helps these restaurants and our franchisees on inventory management and also some different aspects of cost control. So when top line can be tough, pennies count, and we're certainly seeing some of the effect of that in a positive way.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [16]

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Okay. And maybe we could talk about traffic for a moment. It's continually challenged in the industry, particularly in casual. How do you think Recipe's performance on traffic fares compared to the rest of the industry?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [17]

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Well, there's not a lot of publicly reported full-service restaurants out there from what I've seen from people that have reported. It sounds like we're kind of in the same space. I would say it is challenging.

Again, though, it's going to sound self serving, but I do believe it. I think when you're in challenging times, when you want to have the power of a company like Recipe behind you that can make these investments that I talked about, that can control costs and get synergies and pass those along to franchisees versus being an independent out there today is probably very challenging for them. So I think that's just stuff that we have to continually get better at and make sure that we are passing those savings along to our franchisees.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [18]

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I appreciate the increased disclosure on digital sales, so 10% of total. Are you able to see how this compares to Q2 last year?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [19]

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It was up 16% versus last year.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [20]

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Are you able to say what percent of sales it was last year, though?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [21]

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No.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [22]

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Okay. I want to clarify something on the renovations. You mentioned I guess 52 in total. I saw reference to 37 in the MD&A. Was that the franchise base that was doing the 37%? And then broadly, has the ROIC on renovations been in line with what you've seen in the past?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [23]

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Well, it is 52. I think we have -- potentially a mistake in the MD&A that we'll clarify. The renovation costs -- and I think one of the reasons that it's accelerated as far as the number of renovations, and particularly in Swiss Chalet, is getting the model right as far as what the costs are to do it versus the impact and the return that we're getting. We're seeing the right -- we're seeing that uplift on those stores when they renovate. But I'm going to draw back just one second.

You have a renovation is one thing. But if you don't take that opportunity to retrain staff and to refocus your efforts on the experience of foodservice value, et cetera, then when people come back in and try you, they could be just disappointing. And you've wasted that opportunity. And what I'm very pleased by is that we track these things over time. And what we're seeing is that it is building. So you get a renovation path and people try you and they're coming in and they're there saying, man, this is pretty good. I haven't been here in a while. And they continue to come back and give you a try.

So that's what we're seeing. That's why there's been such a focus on getting our so-called freshness rates up and getting these renovations going. So 52 so far this year is a big number. We -- I didn't exactly have the data. But going back in time, we couldn't find another period of time where we've done this many renovations.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [24]

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Okay. That's helpful. And then one last housekeeping one perhaps for Ken. What's the $3.5 million impairment charge related to?

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Kenneth Joseph Grondin, Recipe Unlimited Corporation - CFO [25]

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Yes, John. Every quarter, we look at corporate restaurants and their specific performance compared to the carrying value of the assets to those restaurants. And again, it's really a model that we apply to see if we need to write down the assets.

So in this period, we had $3.5 million of write-downs. We've had them in various quarters, and it's a regular test we do every quarter.

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Operator [26]

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Your next question comes from the line of Sabahat Khan with RBC Capital.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Just one on the competitive pressure that you talked about a little bit earlier. I guess for the rest of the year and just looking forward, is this just a matter of kind of chipping away at kind of the 4 Pillar model and the initiatives that you've talked about? Or is there specific actions like promotions and so forth that you're taking in the markets where you're seeing added competition? Just trying to understand if there's sort of tactical things you're looking to do. Or do you think it's something that you don't want to compete with or drop your prices to compete with?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [28]

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No. Listen, I think we're always going to do limited time offers. Most of our brands, our largest brands, have always had kind of a history of doing that, and we'll continue to do those. And some of those are usually new food news-related and giving good value.

I think what I'm talking about is we're not going to do things that are permanent. We're not just going to drop our prices 20% and increase cost on a permanent basis. That's not the path that we will go. But we are always looking at ways of improving the experience and driving traffic. And I think we've been relatively successful in some cases in doing that. We just have to do it on a more consistent basis.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Okay. And are you able to call out just directional trends across the various formats that you're involved with, whether it's the higher-end restaurants versus the bar formats or quick service? Just trying to get an understanding of how much -- if the backdrop is affecting one type of a banner versus the others more.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [30]

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Well, I mean listen, I mean we're -- our same restaurant sales are negative 1.7%. It's not a -- they're negative, but it's not off the cliff type of stuff. So again, we have kind of mixed performance. I think it's probably more -- I'd say more regional, Alberta and Ontario. Quebec still performed extremely well, and it was very positive. St-Hubert has done a great job. The market is good.

So it's sort of spread out across the board. And some -- even within the banner, some -- lots of stores in the banner may be positive. But depending on where they are and where they're in the market, new competition has come in. So it's very hard to kind of pinpoint down to 1 specific area.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [31]

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And then just lastly on sort of your digital strategy. You talked a little bit about the changes you're making with the Swiss Chalet app. I just want to get an idea of your current outlook based on the progress with some of your third-party Aggregators where some of your most advanced banners might be. I know you're still sort of working towards a two-pronged approach using third-party folks as well as your own apps.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [32]

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Yes. I mean there's lots of changes happening in that. And I think what we're going to see probably happen over time here is that the ability to, even in banners where, typically, we don't have internal delivery today. We have internal delivery today at Swiss Chalet and St-Hubert primarily, a little bit of East Side Mario's.

But I do think that we're seeing an openness from the Aggregators to have information flow through our own apps and maybe dispatched out to an Aggregator driver. So that's stuff that's going on. There's lots of things technology-wise that are happening sort of in the mechanics that will help improve service and the seamlessness stuff, things that guests wouldn't see but helps us operationally that our teams are working on with the Aggregators.

So again, it's always going to be a -- it's a part of our world going forward. We believe for us that we are going to -- with Swiss Chalet and St-Hubert, we're going to continue to invest in our own internal networks, and use our Aggregator partners appropriately. And now it's just about making sure that we get the service right and we get the economics right on it, that it can be a very profitable and growing channel for us.

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Operator [33]

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Your next question comes from the line of Elizabeth Johnston with Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [34]

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Can you give us an update on the virtual kitchen? You mentioned last quarter you're doing a first launch. How is that going? And is there any update to the -- to that program?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [35]

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Yes. It's been a very interesting process. We've learned a lot about that process, information we'd like to try to hang on to ourselves versus giving it away.

Listen, we think there's some promise there. I think the -- ultimately, I think one of the things that we can do with kind of our multiple brand strategy is -- and you hear this from guests, is can they place 1 order and get delivery from multiple brands? And so the ability to do that out of 1 kitchen is something that we're certainly looking at.

So again, we've seen some -- we've got some very interesting data, some interesting results out of it. As it was initially launched, we probably won't -- we'll probably make some fundamental changes to it, but there's definitely something to the model. And we think that, again, we're uniquely positioned to capitalize more on it by perhaps having multiple brands in 1 kitchen.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [36]

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Okay, great. And on a different topic in terms of same-store sales growth. You've mentioned before both being somewhat conservative on pricing heading into this year. And so in the context of that, if we assume that competitors haven't taken this approach, is it reasonable to think that we could see underperformance in same -- underperformance in terms of same-store sales maybe for part of this year, but then you might catch up on following year that you're able to maintain brand awareness and build the brand and traffic without having to take price to do so?

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Frank Hennessey, Recipe Unlimited Corporation - CEO [37]

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Yes. I mean listen, I think we're -- we view this as sort of a cautious world. And we've been cautious on pricing. We do think that there are ways of -- especially as you do menu engineering and how we -- items that we promote and mix that we can still make sure that the average check is at a level that is profitable for our franchisees and gives good value to our guests. So we're going to continue to look at that.

And if pricing is a part of that mix going forward, then it will be. We're not opposed to take new pricing. We've just been cautious to date and focused mainly on driving traffic into our dining rooms.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [38]

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Okay. And just a clarification question. When you mentioned digital sales at 10%, does that mean sales on your own mobile platforms or Aggregators? Just a little bit more clarity for me [to work on this...]

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Frank Hennessey, Recipe Unlimited Corporation - CEO [39]

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All of the above. So both internal and through Aggregators.

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Operator [40]

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And at this time, there are no further questions.

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Frank Hennessey, Recipe Unlimited Corporation - CEO [41]

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Okay. Well, thank you, everyone, for joining us today, and we look forward to speaking to you again at the end of Q3. Thank you. Bye-bye.