MTY Food Group Inc. (MTYFF) CEO Eric Lefebvre on Q2 2019 Results - Earnings Call Transcript

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About: MTY Food Group Inc. (MTYFF)
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Earning Call Audio

MTY Food Group Inc. (OTC:MTYFF) Q2 2019 Earnings Conference Call July 12, 2019 8:30 AM ET

Company Participants

Eric Lefebvre - CEO

Conference Call Participants

Vishal Shreedhar - National Bank

George Doumet - Scotiabank

Elizabeth Johnston - Laurentian Bank Securities

Derek Lessard - TD Securities

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to MTY Food Group Inc.’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Friday, July 12, 2019.

I will now turn the conference over to Eric Lefebvre, Chief Executive Officer. Please go ahead, sir.

Eric Lefebvre

Thank you. Good morning, everyone and thank you for joining me for MTY’s 2019 second quarter results conference call. The press release and the MD&A with complete financial statements and related notes were issued earlier this morning and are also available on our website at mtygroup.com and on SEDAR. [Foreign Language]

Before I begin, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Please be aware that we refer to certain indicators that are non-IFRS measures. You can refer to our MD&A for more details.

Let's start with a brief overview of our network. Network sales for the second quarter were up 12% to $832 million. The growth is primarily attributable to recent acquisitions and to a favorable variance in foreign exchange rates. The net organic change in our network sales was a positive 3.2 million for the quarter. On the year-to-date basis, the net organic change was essentially flat.

System sales include eight days of operations for Papa Murphy's, which was acquired late during the quarter. Consolidated same store sales grew by 0.6% during the quarter, and Canada posted positive same store sales growth for the seventh consecutive quarter with a 1.4% growth. Ontario and British Columbia continue on the momentum gained last year and posted positive results, and after a decline in the first quarter, Quebec and the Maritime saw a turnaround in the second quarter with growth of 1.2% and 2.9% respectively.

After being impacted by adverse weather conditions during the first quarter, same store sales in the United States also improved this quarter and posted a 0.6% increase benefiting from more favorable conditions in March and April. As you know, our exposure to the West Coast is important. It represents 49% of our total US system sales. We are pleased to report a growth of 0.4% in that region, and as for the East Coast, the region's performance remained strong.

The situation and performance of stores located outside of North America remains similar for -- to the past few quarters with same store sales decrease of 9.2%. The decline is primarily attributable to our stores in the Middle East, where economic conditions remain very difficult. And in Asia, where we were impacted by some factors that are out of our control, but that should not affect the long-term profitability of our locations.

We finished the second quarter with 7,345 locations, as we acquired 1,444 locations of Papa Murphy's and South Street Burger. We also opened 75 locations, which were spread across all categories. Cold Stone leading the way with 22 locations split between the US and international and we closed 115 locations for a net decrease of 40.

The acquisition of Papa Murphy's, in particular, caused important changes in our network and shifted the geographical distribution of our locations. At the end of the quarter, 56% of our locations were in the US compared to 46% in the first quarter, whereas 37% of our locations were in Canada compared to 45% in the previous quarter. It will also change the seasonality of our business materiality as Papa Murphy's generates the majority of its sales and profitability in Q1 and Q4, while Q2 and Q3 are seasonally softer periods.

Now, let's discuss MTY’s financial results. We're pleased with our second quarter results. Revenues increased 22% to 130.6 million, mainly driven by the increase in processing, distribution, and retail segments, which were impacted by strong performance of retail division and by the acquisition of the processing and distribution business of Casa Grecque.

Cost of sales and other operating expenses increased 31%, mainly because of additional costs associated with the revenues of the processing, distribution, and retail division. There was also an increase in consulting and professional fees related to the acquisition of Papa Murphy's and to the implementation of new accounting standards. As a result, EBITDA increased 1.2% to 34.1 million in the second quarter of 2019 compared to 33.7 million for the same period last year.

On a normalized basis, our EBITDA posted a solid 11% increase. This is the second consecutive quarter of organic growth in EBITDA. For the second quarter, organic growth was 1.0%, bringing our year-to-date organic EBITDA growth to 3.6%. Net income attributable to shareholders increased to 19.3 million or $0.76 per share for the second quarter of 2019 from 16.2 million or $0.64 per share for the same period last year. On a normalized basis, the basic EPS increased from $0.66 to $0.89.

Turning now to liquidity and capital resources, in the second quarter of 2019, MTY generated cash flows from operating activities of 21.1 million compared to 25.4 million last year. The decrease is mainly due to the $4,037,000 incurred in consulting and professional fees in relation to the Papa Murphy's transaction. There were also larger-than-normal income tax payments made in the month of March. In both cases, we don't expect such payments in the coming quarters.

We're very pleased with our free cash flow generation capabilities, which grew 5% to 25.8 million on a normalized basis. In the second quarter of 2019, our capital was primarily allocated to the acquisition and payment of dividends to our shareholders, for which we disbursed $265.9 million and $4.2 million respectively. Prior to the acquisition of Papa Murphy's, we exercised the accordion feature on our credit facility, which resulted in an increase of the authorized amount to 650 million, of which 513.7 million was drawn at May 31. Also note that as a result of the size of the acquisition, a step up in the debt to EBITDA covenant has been triggered, making the covenant go up to four times EBITDA for a period of nine months.

MTY ended the second quarter of fiscal 2019 with a healthy financial position. As at May 31, 2019, MTY had $47.5 million in cash on hand and long-term debt of 526.5 million in the form of holdbacks and acquisitions and bank facilities.

To conclude, we will maintain the focus on maximizing shareholder value by adding new locations for some of our existing concepts and seeking highly accretive acquisitions. Starting in the third quarter, we will have the full contribution of Papa Murphy's in our results, which despite being a seasonally softer quarter will undoubtedly contribute to our profitability. This is a significant acquisition for MTY as we add a brand with a differentiated position in the pizza business to our existing US portfolio. It also allows us to diversify away some of the cyclicality and seasonality of our business.

Prior to the end of the quarter, we announced that we have signed agreements to acquire the assets of Allo! Mon Coco and Yuzu Sushi. These acquisitions have not closed yet and are expected to be completed shortly.

With that, I thank you for your time and I will now proceed to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Vishal Shreedhar from National Bank.

Vishal Shreedhar

Hi, thanks for taking my questions. Just on the positive same store sales growth, the inflection in the US, I'm wondering how much of that was due to the initiatives that management has been implementing or is that more just lapping of easier comps on a year-over-year basis?

Eric Lefebvre

Well, the reality is, in Q1, I blame the weather for the negative same store sales, and I will say that in Q2, we had more favorable weather, especially in March and April. I believe that what we were doing with the business was the right thing. We had great results in some parts of the country, and results that were as not as good in other parts of the country. So, although we do have a number of initiatives for a number of brands, the reality is I think we're doing the right things and being in the frozen treats business, we do have more dependence on weather, which in Q1, impacted us adversely and in Q2 was more normal.

Vishal Shreedhar

Okay, so given that weather helped on a more normal kind of pattern, could you maybe characterize what you're seeing as a result of these initiatives that you're focusing on to drive better organic growth so far? Or is it too early days? So the Food Innovation is a different management structure, is the different focus for management, are you seeing any benefit or is it too early?

Eric Lefebvre

Well, we are seeing some benefits, most of the changes we've done were more related to the Canadian business. This is where we've made more drastic changes, including the change in the management structure. In the US, the changes were a little bit more subtle. We do have a number of initiatives that we're working on at the moment that are being implemented. But none of these initiatives are expected to generate a very abrupt peak that might not be sustainable. So we're working, instead of initiatives that will ramp up slowly, but that will have a more sustainable impact. So that's a long answer, but the reality is, I think the initiatives are starting to pay off, but they're certainly not at full speed at the moment.

Vishal Shreedhar

Okay, understood. Food inflation in Canada, at least, has been favorable for some period of time, wondering how much pricing is in the basket in Canada or even in the US and is that driving the comp there as well?

Eric Lefebvre

For sure, for sure, there's a part of the comp that’s related to pricing. There's no question about that. And the fact that the food inflation has been a little bit softer in the past few months is helping us. There are other factors that are -- other costs that are increasing at the moment, including the labor. Especially in the US, we're seeing a lot of labor increases. So, yeah, there's a little bit of both, but in terms of pricing, we do take some pricing on most of our brands. We're trying to be careful and being conscious of the customers’ ability to pay and willingness to pay, but there is some pricing in the basket for sure.

Vishal Shreedhar

Okay. And how does that work? Is that the franchisees’ decision to set price or does MTY authorize it?

Eric Lefebvre

Well, MTY will recommend pricing, but we can’t really dictate the pricing. There are some rules against that. So, you will see from, in certain of our brands, most of our brands will have consistent pricing, but you'll see some pricing differences within the same brand, sometimes depending on whether the location is in a mall or on the street or depending on the location also. For example, if you're in GTA, you might have slightly higher rents and higher labor costs, so you might have to have a slightly higher pricing if you're in a more rural area, but we will recommend pricing, we will work with our franchisees to try to establish the right price, but ultimately the franchisee in most cases especially in the US will have the liberty to fix the pricing.

Vishal Shreedhar

Okay. And it may have been in your documents, I didn't see it, but how do you define normalized free cash flow?

Eric Lefebvre

Yeah, the only normalization we've done is really with the transaction costs. So in the quarter, we had $4 million of transaction costs related to Papa Murphy's. So we did normalize that and we also went back to previous quarters to normalize the transaction costs away from prior quarter numbers also. Last year, if you remember, we had Imvescor, which spread over Q1 and Q2. So, we normalized those costs away as well. So, but the only thing we normalized, we don't want to start normalizing too many things to make it confusing and make it unpredictable. So, it's only transaction costs.

Operator

Your next question comes from the line of George Doumet from Scotiabank.

George Doumet

I just wanted to focus a little bit on Quebec, a nice turnaround there. And just wondering, was that more macro driven? How did IRG do there and maybe kind of anything you can share on that strength?

Eric Lefebvre

Yeah, well, we were never necessarily worried with the Quebec business. There are some factors here and there and whether if you remember Georgia, it's not too long ago that the winter agonized on us and it was pretty harsh, so I don't necessarily like to blame weather in Quebec as we have it every year. But this year was particularly harsh. So we were never really worried about the Quebec business. IRG continues to be strong, continuing on the same path that it had before with positive comps, and it does contribute to our growth in the quarter for sure. But it's not the only brand. We have a lot of other brands that are doing really well in the territory as well.

George Doumet

Okay. Earlier you had mentioned some initiatives that we're working on in the US to improve operations. Can you maybe share with us what a few of those may be?

Eric Lefebvre

Well, I want to, I don't necessarily want to go on the details of initiatives, because we have a lot of initiatives for all of our brands. But you take examples. We have a rejuvenation plan for some of our brands where we feel the stores are getting older, we have better focus on innovation also, and there's a number of things that we want to align, we're also going through a phase now where we're going to add a little bit more science to our decision making. So, we're hiring some people that will help us drill down into the data. We have to make sure that whatever decision we made is supported and is also measured after the fact, to make sure that we're aligning the company in the right direction. But on a brand by brand basis, we might have a list of a few or many, and depending on the brand initiatives, I'm not necessarily going to bore you with all the initiatives on a line by line basis.

George Doumet

Okay, great. And just want to ask one if I may on, maybe just focusing on the store closure rate, it seems a bit elevated. Maybe talk to the expectations there. I noticed that there were more Papa Murphy’s, I guess closure between the time the deal was announced and the time the deal closed. So I'm just wondering, is there a deliberate push to kind of accelerate this foreclosure rate there and anything you can share maybe on Papa Murphy's. Appreciate it.

Eric Lefebvre

Yeah, Papa Murphy's is certainly not a contributor to the store closures. So, I think there were one or two closures between closing and quarter end. And we're certainly not pushing to close locations. There are some locations that need to close. But calling it a push is a big word. So if we can, if we can keep them open, if we can restore profitability for the stores that are having a difficult time, then we will and we'll try to keep them open. But you're right, the number of store closures was very high in the quarter.

And fortunately, there are some closures that are predictable that we know will happen and there are some other closures that are less predictable. And in this case, there were a lot of these one-off closures that seem to surprise us a little bit more and I -- unfortunately, I anticipate that this will continue for 2019. I don't have visibility on 2020 yet for the closures, it's easy to see the openings. It's a lot harder to see the closures. But I think for 2019, we should expect not necessarily the pace we had in Q2 because that was very high number. But I do expect to have more closures coming.

Operator

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

Elizabeth Johnston

Just to go back to Papa Murphy's, briefly you mentioned in your prepared remarks about seasonality. Just to clarify, when you say the second and third quarters are softer periods, I'm assuming you mean on an MTY fiscal basis, not a calendar basis, just to clarify that point.

Eric Lefebvre

That's MTY fiscal, right.

Elizabeth Johnston

Okay. Great. And in terms of how that businesses, I mean, it's very early days, obviously, but you mentioned some initiatives already on the call. Are some of these initiatives specifically aimed at Papa Murphy's, especially when it comes to driving positive same store sales growth?

Eric Lefebvre

Yeah, for sure. And the Papa Murphy's team, as I mentioned, in the previous conference call has a number of initiatives that were on the go already at the time of acquisition. And what we're doing is really continuing on these initiatives that the team had planned and we're trying to push forward with those obviously, with the help of the system we have with MTY, we're going to try to push some additional initiatives or maybe accelerate the pace of these initiatives. But we feel that the team was on the right path and we just want to try to support them going down that path and trying to restore positive same store sales. I don't know if you have time to go through the MD&A, but for the short period of 8 days between closing and quarter end, the same store sales were positive and we're seeing a little bit of pluses and minuses at the moment. So there's good days and bad days and again, it's a lot, it's very dependent on weather. And it's almost exactly offsetting the weather impact of cold storm, which is interesting.

Elizabeth Johnston

And just going back to the previous comment you made about adding science to decision making, in terms of that data analysis that you're looking to invest in, is that -- would that be around finding the locations, so real estate, let's say, when it comes to finding locations for franchisees, any kind of elaboration you can provide there would be helpful.

Eric Lefebvre

Yeah, it's more in terms of our operations and in terms of marketing that I want to bring the science into the decision making. I think we already have the science in terms of the real estate. It's widely available, and there are tools for that that we can rely on. But when it comes to the intelligence we have in our point of sale systems, when it comes to the intelligence we have in our loyalty programs, when it comes to everything that goes into the payment solutions and everything, this is where we need to invest and we need to really use that intelligence that -- it's there, the information is there in our systems, and we just need to build something around it to be able to use it in a way that's going to be helping us into predicting future patterns and also analyzing the impact of our decisions to make sure that we repeat our successes and we don't repeat where we might elect.

Elizabeth Johnston

And can you say at this point, if you expect this will help drive sales or improve on your cost side or a combination of both?

Eric Lefebvre

It's more on the top line that we're working. I think on the cost side, we're running a pretty lean operation, so I don't I don't see much there. But I certainly see a lot in terms of the top line, so we're working really to generate more revenues.

Elizabeth Johnston

Okay, great. And I want to just touch upon Canada same store sales growth. You called out British Columbia specifically, an area that you already talked about Quebec and the Maritimes. But, a result of the over 6% that you highlighted is really outside of what we've seen in other provinces in general and the industry. So, I understand that menu pricing was alluded to being a part of this, but is there anything else that you can call it specifically in that province having contributed to such a large number?

Eric Lefebvre

Yeah, British Columbia has been firing on all cylinders for a number of years now. I think the economy is doing great, people have a good amount of disposable income and the more and more in restaurants. So we’re seeing in British Columbia, very good traffic increases for most of our stores. And that's the way to go. Not sure what the secret is and why we're so successful in BC compared to other provinces, because it's more -- doing more, more or less the same thing in both provinces, but the territory seems to be very good for us at the moment. It's -- the problem we have is finding good real estate at reasonable prices. So that's our main impediment to grow more and open more stores in the region. But other than that, the territory is certainly doing great and all of our brands are producing good numbers there.

Elizabeth Johnston

And overall, are you able to quantify how much that many price increases contributed to the consolidated same store sales, either in Canada or overall.

Eric Lefebvre

Yeah, unfortunately, it's not a number I have, not a consolidated number at least, we have it on a brand by brand basis, but consolidated is not a number that we've produced.

Elizabeth Johnston

Okay, and this may be one more from me in terms of M&A. I know in the past, you discussed how it can be quite competitive. Can you give us any update on how the pipeline looks either in Canada or in the US and what you're hoping to achieve this year in terms of additional additions?

Eric Lefebvre

Yeah, well, that's a good question, given where we are in terms of our debt, and given where we are in terms of the number of acquisitions, I think, we're not expecting to do any major acquisitions in the next few months. And that will probably go into 2020 as well, unless there's a golden opportunity that we can't miss, we're probably going to concentrate on the smaller and midsized acquisitions going forward. We need to make sure that we integrate the acquisitions that we have lined up for Allo! Mon Coco and Yuzu, we need to make sure that we're successful integrating these brands into our operations, and making sure that we're -- set ourselves up for success.

And then for the next acquisition, we also need to make sure that if we're successful with the integration or with the business in general, and also, we're also very conscious of our debt level, which is around three times EBITDA. We want -- we don't necessarily want to go much higher than that. So we're going to try to keep it within a few decimals of three times and potentially de-leverage if there's a shortage of acquisitions in the future, but we're not stopping the M&A. But we're probably going to take a pause on the larger ones.

Elizabeth Johnston

And can you comment on the competitive market in the US and in the past, you said it's very competitive, as we just say it's just as competitive as before, or any change in that region.

Eric Lefebvre

No, it's very competitive, the private equity fund seems to have a lot of capital to deploy. And they're, especially in the US, they're very big participants in the market. So, it is a competitive market in terms of M&A in the US predominantly.

Operator

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

Derek Lessard

You guys got a lot of -- some solid top line growth, but on the margin, on the EBITDA margin side, lot of things going on, changes in IFRS. So, I was just wondering if maybe you could give us, how should we look at your EBITDA margins going forward, both from -- you talked about seasonality, so from a seasonality standpoint and even relative to current levels?

Eric Lefebvre

Yeah, that's a good question. I think the margins, especially now, we’ll need to look at it more and more on a segment by segment basis or in a division by division basis, because if you try to use the consolidated, it's going to send you in the wrong place. And one of the reasons is the growth we have in our retail business at the moment, which has much lower margins is great and we're producing more bottom line dollars with it. But in terms of margins, it's a lower margin and it's certainly a weight on the consolidated margins.

So if you want to look at margins, I would say you should probably look at it on a segment by segment basis and if I take them one by one, in terms of franchising, our margins were a little bit lower this quarter. And a lot of the impact came from the acquisition costs we had for Papa Murphy's. But the margins were also a little bit lower than they were in previous years. And one of the reasons is the resources that we've added in the business to try to set ourselves up for growth for 2020 and after. So we did -- we did add a certain number of people to the team, especially in development to try to generate better growth down the road.

The corporate stores are currently at a loss, so that we want to sort of discuss the margins. And then there's the retail, which is an important part of our business now and it's a growing part of our business. And they produce very low margins in general. And if you go a few years back, even last year, for retail, most of our deals were licensing deals where we generated 100% margins with them. We don't have costs, we just have the royalty. Now, we're more and more defender on record. And we're going to generate much lower margins with this business. But it's better for us to generate dollars. And ultimately, this is, I think what our shareholders want is MTY producing dollars, not necessarily percentage points.

Derek Lessard

Okay, so I guess if I look at the 25% or so in Canada and 27%, 28% in the US International, is that sort of the levels that we should be looking at now?

Eric Lefebvre

No, I think, you need to break it down between the segments. I think if you look at it on a consolidated basis, you'll probably see it going down further in Canada because of the change in our sales mix, as we increase our retail presence, we're going to see the margins go down. And that's not a bad thing. That's a really good thing, because it increases our profitability. In the US, we don't have a similar retail business. So there's not as much changes to be expected, but in Canada, you certainly need to look at it on a segment by segment basis.

Derek Lessard

And maybe if you could just talk about, I was wondering if you had enough, if you or your thoughts on your bench strength, given now that you guys have so many brands, regions and restaurants that you have to manage, just maybe talk about your management group.

Eric Lefebvre

Yeah, we're very happy with the group, with the management group that we put in place in November is a very strong group and we're very happy with the way it is and we're preparing succession plans and we're preparing the next generation of leaders also in the company. So, we have initiatives in place that make sure that our bench strength, as you call it is strong and getting stronger. So we're trying to prepare people in the organization to take any role that might be vacated by for any reason.

So I would categorize it as very strong at the moment. We have a lot of good talent in the company and a lot of people that are being groomed for higher positions, a lot of people that have the talent and the potential and the desire to take it. So it's up to us to nurture the growth of these people and make sure that we keep them on board and motivated until there is an opportunity. And the good thing is, with the acquisition strategy we have, there are a lot of opportunities and that's something that people are seeing in the organization. So I would say that the bench strength is stronger and getting stronger and stronger as time goes.

Derek Lessard

And maybe a few more for me. Maybe just talk about the actual Papa Murphy's integration, some of the progress you're making there. And are there any synergies that you're able to point to now, now that a couple of months into the integration?

Eric Lefebvre

Yeah. Well, yeah, it's been going really well with the group there. I think the group at Papa Murphy's really embrace the transaction, and we welcomed a little bit of stability in their future. So that was good and it really helps when the group there really wants to integrate and really wants to benefit from the resources we have at office level. So, it's going really well. We are working on a certain number of things. And obviously there's nothing that happens overnight, but we're happy with some of the progress we've made. I think we have a few initiatives that will benefit both Papa Murphy's and other Kahala franchisees in a very short run.

So we have a few things that are on the go. I can’t necessarily announce them yet because we haven't announced them to the community. But we do have a few things that will help with the profitability of our stores that will benefit the franchisees in the first place and we do have a few initiatives that hopefully will help generate more profitability also for MTY as a consolidated entity. So that's going to come over time, but it's looking very positive at the moment.

Derek Lessard

Okay, thanks for that color, Eric. And maybe one last final one for me and it's just coming back to the seasonality. I know again it's early, early days of Papa Murphy's, but are you able to, like, are you able to provide any sort of color around what we should be seeing in terms of seasonality on a quarterly basis going forward?

Eric Lefebvre

Yeah, it's pretty extreme. It's pretty extreme and what we see is people don't typically turn on the oven on very hot days and Papa Murphy's is that they can bake, so you need to turn on the oven if you're going to buy Papa Murphy's. So we're seeing on rainy days, Papa Murphy's being very successful and then on bright sunshine days, Papa Murphy's being a little bit soft. So, it's almost the exact opposite of Cold Stone and it's almost as extreme the seasonality as Cold Stone’s seasonality. So if you want to, if you want to make a picture, you can graph the two and they'll be almost exact opposite.

Operator

Your next question comes from the line of Vishal Shreedhar from National Bank.

Vishal Shreedhar

Hi, thanks for taking my follow up. The retail business you noted are growing quick in Canada, but lower margin, just wondering is it more capital and asset intensive as well?

Eric Lefebvre

Yeah, there's -- in that segment that we've just created, we have two manufacturing plants and those will tend to be more capital intensive. You're right. The retail business itself does not involve any capital. It's just human resources, really. Most of the products we sell are produced by external suppliers. And we buy the resource from them and sell it to the retailers, so there's no capital investment. There's a little bit of working capital investment in there. But there's no capital investments to be made in physical equipment.

Vishal Shreedhar

Okay. And then just switching gears here, I'm wondering if management measures customer satisfaction scores at its brands and franchisee satisfaction scores and how it goes trending?

Eric Lefebvre

Yeah, we do. It's a brand by brand basis. So, I'd like to say, it's all positive. But we do have some brands where customer satisfaction is very high. We do have some brands where it's a little bit more challenging. And we do have to take the feedback and try to improve on what we're doing. And for the franchisees, it's the same thing. I wish I could say that all our franchisees are happy. The reality is, there are some franchisees that are not profitable enough and the right to be dissatisfied. So we need to try to help them become more profitable and become more satisfied with their investment. And out of 7300 stores, there's always going to be a few stores that are not performing to where we think they should be. And those stores obviously will be dissatisfied with MTY. So we need to try to minimize that. But there's always going to be some.

Vishal Shreedhar

And that's understandable. But, could you give us some color on how it's trending or you don't have that information?

Eric Lefebvre

Yeah, that's not something we measure. We do look at it on a brand by brand basis, obviously. But it's not something we consolidate at the head office level.

Vishal Shreedhar

Okay, and wonder what you meant when you're, maybe you can give it to me in terms of enterprise value when you're talking about mid size deals? What does that mean?

Eric Lefebvre

Yeah, we're looking at price tags between -- anywhere between zero and $50 million would be small to mid size. I would say that a large acquisition would be anywhere 100 plus million would become a large acquisition for us. So if you want to put ballpark figures, that would probably be about it.

Vishal Shreedhar

Okay, and when, Eric, you and your senior management team look at metrics for the year, wondering what are the few key metrics that you look at to say MTY had a good year or not?

Eric Lefebvre

Well, we -- obviously we look at probably a lot of the same measures that you're looking at. We're looking at our free cash flows on a consolidated basis, we look at that free cash flows and we look at it on a division by division basis also, we want to have organic growth and free cash flows and the entire management team is compensated based on our growth in free cash flows, their incentive pay based on that. And we also look at certain metrics that will impact franchisee profitability, or that will reflect franchisee profitability, as well as new store openings, store closures will be important and same store sales is a metric we don't necessarily compensate people on same store sales, but it's a factor that we need to look at.

Vishal Shreedhar

Do you look at return on invested capital for the senior management?

Eric Lefebvre

No, that's me. So yeah, we look at it, but we don't necessarily, we don't have a split of return on investment capital for each of the individual executives and they also don't necessarily make the M&A decisions. So it wouldn't be fair to compensate people based on that.

Operator

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

Elizabeth Johnston

Just briefly you mentioned about the margin and cat on the US. And when it comes to revenue in Canada, so franchise operations revenue, if you look at that as a percentage, roughly on Canada system sale that seems to trend -- look trended lower. Is there something to be said for this coming from royalties from brands of the lower royalty fee rate or is there something else happening in there?

Eric Lefebvre

Yeah, the royalties are, that's a good question. And that's a metric we track internally. The royalties we derive from our franchisees system sales, and that's relatively flat at the moment. So it's not the cause of the decline in franchising revenues. I think in terms of decline, you need to look at more the rent that we collect from franchisees, and you need to look at the number of turnkey locations we have, for example, in the sales of stores and material to our franchisees, that's been going down for a number of years. And that's on purpose. So we're trying to reduce our involvement there. And that's been happening this quarter. So if you look at the decline, it's not caused by a decline in the royalty rates, it's more any ancillary products or sales that we would do around the core business.

Elizabeth Johnston

Okay, so what we've seen for the first half of this year, would you say that this is a fair run rate to think about going forward, just on this particular item, in terms of percentage?

Eric Lefebvre

Yeah, we're still trying to decrease it, we're still trying to decrease the number of turn keys, we're still trying to decrease the number of sales coming from head office. There will be periods where we're going to have peaks and valleys and it depends on the store openings and for given brands and given territories. So we're still trying to reduce that. Obviously, we want to keep the royalties where they are. But the rest of the revenues are something that we're trying to address and trying to reduce our involvement with.

Elizabeth Johnston

Okay, great. And maybe one other brief one just on Cold Stone. Are you able to give us a little more color, I know it's hard to mention all the initiatives by brand, but since it's an important brand in the US, any color on specific initiatives to drive results would be helpful.

Eric Lefebvre

Yeah, for Cold Stone specifically, because it's such an important brand and because it's an iconic brand that has a very strong brand name and customer perception is great, we’re going slowly for this one. So for Cold Stone, we do have a number of marketing initiatives, but nothing that would be earth shattering or worth mentioning. We are evaluating a few things for the brand, but we haven't implemented anything. And I don't think we'll be implementing any major initiatives before the end of 2019. And we need to be careful with this one. We can’t make a mistake. And the brand is doing really well. So, it's hard to change everything when the brand is doing so well.

Operator

Your next question comes from the line of Derek Lessard from TD Securities.

Derek Lessard

Just one follow up for me. In the MD&A, you did talk about the impact mix had on your margins, can you just add some color there please?

Eric Lefebvre

Yeah, the mix is what we talked about earlier, because we have more sales coming from retail and distribution and production. That puts weight on the margins, not in dollars, but in percentages. And the increase this year was pretty abrupt, if you compare it to last year in that segment, with much lower margins. So as you put more weight on this with lower margins, it's going to put a weight on the consolidated margins. So that's what I meant by the sales mix.

Operator

There are no further questions at this time. I turn the call back over to you Mr. Lefebvre for closing remarks.

Eric Lefebvre

Thank you again for joining me on this call. I look forward to speaking with you again in our next quarterly call. Thank you.

Operator

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