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Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the conference call for Recipe Unlimited Corporation 2018 Third 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 contain 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'll now turn the meeting over to Frank Hennessey, Chief Executive Officer of Recipe Unlimited Corporation. Mr. Hennessey, you may begin your conference.
Thank you, Denise. Good morning, everyone. Welcome to our third quarter fiscal 2018 results conference call. Joining me this morning is Ken Grondin, our Chief Financial Officer; and Bill Gregson, our Executive Chairman.I'd like to begin again by thanking our franchisees, our brand teams and our shared service groups for all of their hard work this past quarter. Same Restaurant Sales for the third quarter and year-to-date increased 1.8% and 1.9% compared to the same 13 and 39 weeks in 2017. The Q3 increase of 1.8% is on top of positive Same Restaurant Sales of 0.9% in Q3 2017 and represents our fifth consecutive positive Same Restaurant Sales quarter. Please note that we estimated the impact of the malware incident to be 30 basis points in the quarter. Without the malware incident, Q3 Same Restaurant Sales would have been 2.1%.Total System Sales increased to $879.8 million and $2.5 billion for the 13 and 39 weeks ended September 30, 2018, compared to $684.7 million and $2 billion in 2017, representing an increase of $195.1 million or 28.5% for the quarter and $505.4 million or 25.2% year-to-date. These results are the result of the combination of positive Same Restaurant Sales growth and the additions of Pickle Barrel in December 2017 and The Keg in February 2018.Our operating EBITDA was $52.4 million and $155 million for the 13 and 39 weeks ended September 30, 2018, compared to $48 million and $132.5 million in 2017, representing an improvement of $4.4 million or 9.2% for the quarter and $22.6 million or 17% year-to-date. The increase has been driven by positive Same Restaurant Sales, improved contribution from the Corporate and Franchise segments and the addition of The Keg in February 2018, partially offset the by The Keg royalty expense paid to The Keg Royalty Income Fund and a third quarter shift of overhead bonus accrual expense compared to 2017 of $2.8 million.Operating EBITDA margin on System Sales was 6% for the third quarter compared to 7% in 2017. The decrease is primarily related to The Keg royalty expense and the shift in bonus accrual expenses.Excluding The Keg royalty expense and the impact from the shift in bonus accrual expenses, operating EBITDA margin on System Sales was 6.7% for the quarter. Year-to-date operating EBITDA margin on System Sales was 6.2% compared to 6.6% in 2017. The decrease is primarily related to The Keg royalty expense. Year-to-date, operating EBITDA margin on System Sales, before excluding The Keg royalty, was 6.5% compared to 6.6% in 2017.The Keg corporate restaurant portfolio adds incremental EBITDA with contribution margins within our target range of 10% to 15%. However, because of higher net central overhead cost and the royalty payments to the Royalty Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on System Sales below the target 7% to 8% range. Management's focus will continue to be 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 by 2020 to 2022.During the quarter, we closed net 9 restaurants. A majority of the closures impacted 2 brands, East Side Mario's and Swiss Chalet. In East Side Mario's, we closed 5 restaurants due to a single franchisee that was no longer able to meet his obligations. We fully expect to reopen the majority of those restaurants in the near term.With regard to Swiss Chalet, we have 33 restaurants in Western Canada. And we made the decision to take actions on 12 of those restaurants. This has resulted in 3 permanent closures, while the balance will operate corporately with the intention to refranchise. These restaurants for several years have not operated to the brand's standards, have been on full subsidy and have been burdened with high ransom deals that were done several years ago.We believe that the Swiss Chalet brand has a better future in Western Canada. Yet the operations of these results -- restaurants was not demonstrating that potential. As we go forward, we're continuing to evaluate performance in other Western Canada markets for the Swiss Chalet brand. As I mentioned, we believe strongly that Swiss Chalet has a bright future in the West, and we have multiple examples that demonstrate this. While these decisions are difficult for all involved, they were necessary to enable us to move forward.Staying with Swiss Chalet for a moment, we have revised our design for renovations of Swiss Chalet. This new design achieves our stated goal of having renovations that are impactful to the guests, but practical from a cost perspective. We also announced a renovation incentive plan for Swiss Chalet franchisees to accelerate the pace of those renovations. The cost of this plan is estimated at $5 million over the next 3 years to renovate an estimated 100 restaurants.During the quarter, we also changed the leadership at Swiss Chalet in both operations and marketing. And the new team at Swiss is already fully engaged. We anticipate other guests-facing changes to both menu and marketing in the months ahead. While the Swiss Chalet brand -- I think this is important to note -- is reporting positive Same Restaurant Sales for the quarter and on a year-to-date basis, our desire is to be more aggressive with the evolution of the brand, so that it continues to prosper in the years ahead.Overall, at Recipe, on a year-to-date basis, we have renovated 54 restaurants and have an additional 16 planned for Q4. Also, on a year-to-date basis, we have opened 39 new restaurants. And we expect to have positive net new restaurants by the end of 2018. I want to emphasize that we are primarily focused on the quality of our portfolio of restaurants. Closures, openings and renovations all work together to ensure a healthy network.On Friday, September 28, Recipe experienced a network outage as a result of a malware virus. As part of the containment strategy, our IT security team acted quickly by disconnecting restaurants from the network and internet. This had the effect of temporarily disrupting the operations of our restaurants for some locations, and a limited number of restaurants closed temporarily. Since we regularly back up all of our systems, we were able to re-niche, reactivate and bring our restaurants back online relatively quickly without any data loss.By Tuesday, October 2, all restaurants were opened and were operating. And by Thursday, October 4, all restaurants were back to normal operations. We anticipate that this incident impacted overall Recipe Same Restaurant Sales by an estimated 30 basis points in Q3, since the incident took place in the last weekend of the quarter. For security reasons, we will not be disclosing more additional information on this incident, except to say that we're working with a third-party IT forensic firm to analyze the malware infection and source. And we have no evidence that any data was compromised. I would like to thank the Recipe team for working many long hours to diligently restore our systems, our third-party partners who were on site reactivating our restaurants and most of all, I'd like to thank our franchisees for their patience as we worked to restore system functionality and regular operations.Now at this time, I'll turn it over to Ken to review our financial results.
Thank you, Frank, and good morning, everyone. My overview will refer to our third 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.Total revenue was $312.4 million and $871.3 million for the 13 and 39 weeks ended September 30, 2018, compared to $205.9 million and $598.8 million in 2017, representing an increase of $106.5 million or 51.7% for the quarter and $272.5 million or 45.5% year-to-date. The increases in gross revenues was primarily the result of positive SRS, the Pickle Barrel acquisition in December 2017 and the addition of The Keg in February 2018.Operating income was $35.8 million and $100.8 million for the 13 and 39 weeks ended September 30, 2018, compared to $33.7 million and $88.4 million in 2017, representing an increase of $2 million for the quarter and $12.4 million or 14% year-to-date. The increase was driven by SRS increases; improved contribution in the Corporate and Franchise segments; higher third quarter contribution from food processing and distribution, including Keg retail sales; and the addition of The Keg corporate and franchise operations starting in February 2018, partially offset by The Keg royalty expense paid to The Keg Royalty Income Fund and higher Keg central cost and depreciation on Pickle Barrel and Keg corporate restaurants.Net interest expense and other financing charges were $2.8 million and $9.1 million for the 13 and 39 weeks ended September 30, 2018, compared to $3.2 million and $9 million in 2017, a decrease of $400,000 in the quarter and an increase of $100,000 year-to-date. The increase is due to additional borrowings made for the Pickle Barrel and The Keg transactions, net of interest income received on Keg partnership units.At the quarter end, Recipe's debt-to-EBITDA ratio was 1.94x. With our strong balance sheet and growing cash flows, we're well-positioned to pursue additional acquisitions and at the same time explore alternatives to return more capital to our shareholders.Earnings before income taxes has increased from $30.4 million in the third quarter of 2017 to $31.4 million in the third quarter of 2018. The increase is related to improvements in contribution dollars from the Corporate and Franchise segments, improvements in the Food Processing and Distribution segment and from the addition of The Keg and Pickle Barrel, partially offset by The Keg royalty expense of $3.6 million and a $1.9 million increase in restructuring expenses and higher depreciation from the addition of The Keg and Pickle Barrel.Adjusted net earnings for the 13 and 39 weeks ended September 30, 2018, was $32.1 million and $88.3 million compared to $28.4 million and $80.5 million in 2017, an increase of $3.7 million for the quarter and $7.8 million year-to-date. The increase was driven by the SRS increase; higher contribution dollars from the Corporate and Franchise segments; from the addition of Pickle Barrel in December 2017 and The Keg in February 2018, partially offset by The Keg royalty expense paid to royalty fund, an increase in interest on long-term debt related to the acquisitions and increased depreciation expense from the addition of corporate restaurants, primarily related to the Pickle Barrel and Keg additions.Adjusted diluted earnings per share for the 13 and 39 weeks ended September 30, 2018, was $0.50 and $1.38 compared to $0.46 and $1.30 in 2017, an increase of $0.04 per share in the quarter and $0.08 per share year-to-date, respectively. The increases are related to improvement in adjusted net earnings.Now turning to segmented results for the quarter and year-to-date. Total contribution from corporate restaurants was $21.6 million and $59 million for the 13 and 39 weeks ended September 30, 2018, compared to $11.8 million and $30.2 million in 2017, an improvement of $9.8 million or 83.1% for the quarter and $28.8 million or 95.4% year-to-date. The increases are primarily related and driven by SRS increases and the increase in the number of corporate restaurants, including the additions of The Keg and Pickle Barrel.For the 13 and 39 weeks ended September 30, 2018, total contribution from the corporate restaurants as a percentage of corporate sales was 10.8% and 10.8% compared to 10.6% and 9.6% in 2017. The addition of The Keg, which operates corporate restaurants within our target range, was offset by lower percentage contribution rates from Original Joe's and Pickle Barrel corporate restaurants that operated at lower contribution levels.Total contribution from franchise restaurants was $25.7 million for the quarter and $72.8 million for the year-to-date ended September 30, 2018, compared to $20 million and $60.3 million in 2017, an increase of $5.7 million or 28.5% for the quarter and $12.5 million or 20.7% year-to-date. The increase was related to increased royalty income as a result of the franchise SRS increases and the addition of The Keg franchise restaurants.The effective net royalty rate for the 13 weeks ended September 30, 2018, was 4.2% compared to 3.9% in 2017. For the 39 weeks ended September 30, 2018, the effective net royalty rate was 4.2% compared to 4.0% in 2017. Recipe's standard royalty rate is 5%, though our 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.The Central operations segment consists of processing fee revenues from Recipe and St-Hubert's off-premise business, franchise fees, property and equipment rent, Food Processing and Distribution sales, catering sales and vendor volume rebates reduced by central overhead cost and net Keg royalties paid to The Keg Royalty Income Fund. Central segment contribution before the net royalty expense for the 13 and 39 weeks ended September 30, 2018, was $8.8 million and $31.8 million compared to $16.2 million and $42 million in 2017, representing a decrease of $7.4 million or 45.7% for the quarter and $10.2 million or 24.3% year-to-date.The decreases are primarily related to the addition of The Keg, which operates with higher net overhead cost and the third quarter shift in Recipe overhead bonus and accrual expenses. Bonus expense, excluding The Keg, for 13 weeks ended September 30, 2018, was $2.8 million higher than Q3 2017. We expect the Central segment results will normalize in the second quarter 2019 when we have 4 full quarters of Keg results in both the current and prior years.The Keg central net overhead costs are approximately $5 million for the quarter and royalty paid to The Keg Royalty Income fund vary with sales that are approximately $3.6 million per quarter. Total Central segment contribution before the net royalty expense as a percentage of total System Sales for the 13 and 39 weeks ended September 30, 2018, was 1.0% and 1.3% compared to 2.4% and 2.1% in 2017, a decrease from both the quarter and year-to-date.In Q3 2018, Recipe repurchased and canceled a total of 27,700 shares at an average price of $26.93, representing approximately $746,000 in aggregate cost. Year-to-date 66,237 shares have been purchased and canceled at a total cost of $1.7 million under our NCIB program.Lastly, yesterday evening, we announced that for the 13 weeks ended September 30, 2018, the company declared a dividend of $0.1068 per share for subordinate and multiple voting common shares outstanding. The dividend will be paid on December 14, 2018, to shareholders of record at the close of business on November 30, 2018.This concludes the financial commentary of the call. I'll now turn the discussion back to Frank.
Thank you, Ken. Our third quarter and year-to-date results show that we continue to deliver year-over-year growth in both top line sales and EBITDA. In the third quarter year-to-date, total System Sales grew to $2.5 billion and operating EBITDA grew to $155 million. When considering the expected full year contribution from The Keg, both System Sales and operating EBITDA are on track to be within our revised target ranges for 2020 to 2022, up $2.9 billion to $3.7 billion for System Sales and $203 million to $296 million for operating EBITDA.I'd like to now turn to a few highlights from some of our business lines. Our retail groups spearheaded by the team at St-Hubert has been busy launching new products since the acquisition. These new Recipe-branded products have generated over $30 million in sales since the acquisition. We have already put into markets Swiss Chalet ribs, pot pies, both family and single portion, canned and dry sauces.Currently, on the national stage, we have an 83% market share in the pot pie market and a 24% market share in the ribs category. And we have more to come in 2019 with an expansion to a new lineup of products for the Montana's banner and continued line extensions at Swiss Chalet. The retail team is also still active in promoting and innovating on the St-Hubert side as well. And the new pot pie line at our St-Hubert factory is fully operational, in time to meet this year's holiday demand.Our retail business now also includes Keg's signature products that are sold at grocery, including Keg branded ribs, frozen burgers and Keg spice mixes. At our restaurants at St-Hubert, we are continuing to expand on the successful brunch program that is adding to our positive Same Restaurant Sales of the brand. The team, which has responsibility for Harvey's in Quebec and parts of Eastern Canada continues to open up Harvey's in existing St-Hubert locations, the latest being in Fredericton. These inserts assist in giving guests more choice and convenience, while the franchisee grows overall sales and improves profitability as the restaurant achieves operating leverage due to the higher sales over fixed costs. In Q4, St-Hubert will be launching their annual holiday feast, along with their new Joe Beef beef rib. I would encourage all of you in the Eastern Canada market to check it out. I have. And it's a great product.Our Kelsey's banner is a prime example of the successful execution of our 4 pillar strategy. As a reminder, our 4 pillars are focused on food, service, value and ambience. The brand under strong leadership has made significant progress. They have an impactful renovation program, but they have combined that reno with a heavy focus on training to achieve operational excellence.They have menu engineered their offer to highlight the greatest hits, while working to improve their cost of goods to generate improved margins. All of this has led to significant positive Same Restaurant Sales for the brand and improved profitability for their franchisees. So if you've not been to a Kelsey's in a while, I'd recommend to check it out. It's a fantastic experience and some beautiful ambience.This year will be the first year in almost 15 years that the brand will have net positive new store openings. We continue to see consumers consistently seeking more convenience and choice in when, where and how they order and how they dine. Our off-premise sales, sales from takeouts and delivery, continues to grow. And how guests are placing their orders is also changing. Digital sales, that is sales through the web and mobile, is up 55% versus last year, with people using mobile up by 102%.This demonstrates that our guests are appreciating the user-friendliness of our mobile apps, especially the East Side Mario's and Swiss Chalet. And also the average order size is typically higher in digital sites versus traditional phone owners. So as the category continues to demonstrate strength, our brands will be working on how we can further improve the guest experience so that we can make this more of a quick and seamless experience for our guests that are in a hurry.Each morning, I read all the new social media guest reviews that the company receives. Going back in time, we can track almost 0.5 million reviews. While the majority are positive, there are clear areas of opportunity that we need to focus on across all brands. And these areas fall under our 4 pillars of focus of food, service, value and ambience. Many rationalization will enable us to improve the quality of our food, improve accuracy of our orders and improve inventory turns, while maintaining gross margins that allow our franchisees to be profitable.New kitchen systems will enable us to improve both the speed and accuracy of orders in our dining rooms and in our off-premise business. A more accelerated renovation program, combined with improved service and menu offering, will amplify both ambience and value for our guests. Improved learning of the use of gamification software incorporated into our overall training program that will enable us to more quickly onboard hourly associates with a higher degree of efficacy and in a cost-efficient manner.And beginning next year, we'll commence Recipe University. The only way we could become a better company is by developing a service culture and ensuring that we're providing both the hard and soft skills for our franchisees, our shared service and brand themes. The teaching of the path to increased profitability must always begin with having strong foundational roots in a service culture. In an ever-evolving and dynamic industry, investing in our people by ensuring that we have the tools required to be successful will ensure that we can continue to build our brands for success today and in the future. And on that note, I'll turn it back to Denise to open it up for questions.
[Operator Instructions] Your first question comes from George Doumet with Scotiabank.
I just wanted to focus a little bit on the corporate restaurant segment. A significant sequential decline when we compare to Q2 '18. I guess it's partly caused by the take-back of maybe 8 underperforming Swiss locations and some malware issues. But is there anything else going on that impacted that segment?
No. I mean, look, there's a couple things. First off, I know it's a little difficult on the modeling on this. And I think if you're -- again, as Ken mentioned in his comments, once we get to kind of Q2, we'll have 4 full quarters of The Keg in. But I think always reluctant, George, to give guidance on this stuff. But I think you're going to see fluctuations probably by quarter, but it's probably going to be in that range of 10% to 12.5% range. Candidly, Original Joe's had a bit of a tougher quarter. I'm highly reluctant to always point to weather, but they had kind of some crazy stuff going on in the West with both smoke that impacted patios and then snow in September. So it wasn't a great quarter for them. They're having a much better performance this quarter.
Okay. How many of the Swiss locations out West do we intend to hold on to versus close? And how long do we expect to hold on to them for?
Well, we don't expect to hold on too long. But we want to make sure that we got them operating properly before we refranchise them. We have interest in both those locations. To expand a bit more on that, the main thing here or the main impact was the single operator in the Calgary market who had 8 locations. And so again, we closed 3 of those. We may look at doing that with another 2 or 3. But we expect the balance to be refranchised in a healthier -- much healthier way.
Okay, great. Can you maybe give us a little bit of color on the 1.8% SRS growth maybe by geography? And as it relates to Ontario, are we seeing similar levels of volume response pricing that we did in the first few quarters?
Sorry. I'm not quite sure I followed the last part of your question.
Yes. I was just wondering in Ontario, like, given the price increases that's happened in the industry, as it relates to our banners, is it -- are we seeing the same level of negative volume response? Is there a -- has there been any shifts at all in Ontario, I guess, SRS growth in last couple quarters?
No. I think it's relatively consistent. Ontario is actually up a little bit. BC was up a little bit. But it's clearly -- I think you're seeing it in the industry and people are reporting that traffic is down slightly, and it's kind of understandable with the amount of pricing that a lot of companies took. So we're still showing good SRS in Ontario. And we'll see how Q4 plays out.
Okay. Great. And just a quick clarification before I'll get back in queue. You mentioned the malware outage impacted results by 30 basis points or about $2.5 million or so of EBITDA. Is that accurate?
That's probably accurate.
Sales.
Sales. Yes, sales.
Not EBITDA.
Not EBITDA.
30 basis point of sales?
That's correct. Yes, just to clarify. So we had 1.8% Same Restaurant Sales. We estimated the impact to be 30 basis points, and so it would've been 2.1% Same Restaurant Sales without the malware incident.
Do you guys have the impact on EBITDA at all available?
No.
Your next question comes from John Zamparo with CIBC.
Frank, you called out Kelsey's as a success story and that you got the right people and the right menu and the right look. You're making some changes at Swiss. But other than that, do you have 1 or 2 banners that you target as being your next focus?
Yes. Well, frankly, focus is on all the banners. I mean, David -- as you know, David Aisenstat. He's got eyes on our premium brands. And David's very engaged with his team on Bier Markt and Landing, Milestones. And obviously not taking his eye off The Keg. There is a change in -- we had a change in kind of the leadership there on Bier Markt, especially which is an ex-Keg person is taking control of that. So they're actively doing a lot of Keg-like things, which is exactly why the acquisition made sense from a lot of different levels. My focus has really been turned to the Swiss Chalet and Harvey's and East Side's banners. St-Hubert's running just fine. And again, I don't want to overplay this, right? I mean Swiss Chalet is running positive Same Restaurant Sales on the year. But we just feel we can do better. We feel we have too many tired looking restaurants. And so we have a -- I think we have a very impactful renovation plan. I think we got the cost right. We had a franchisee show here this past weekend. We had a tremendous turnout, between 300, 400 people showed up. And we had a lot of our existing franchisees at Swiss Chalet that are in looking at the renovations and talking about it. And there's a lot of excitement around it. So yes, I don't want to overplay something. But sometimes, you -- when you see something that's not reflective of where the brand could be, you have to act. And you have to take some actions. And we did that.
Okay, great. Appreciate the commentary you gave on off-premise. I was wondering how you approach the concept of using your own app versus the third-party aggregators. And how do you incentivize customers to use your platform to save that margin?
That's a good question. I mean, we don't -- typically we only have the app for our traditional Swiss Chalet and East Sides. And Swiss Chalet has its own delivery. And we have lots of people who are still calling on for phone orders. So the aggregators has been additive to Swiss Chalet. With regards to East Side Mario's, probably predominantly it's more an aggregator business there. I think giving people enough flexibility, we -- our East Side Mario app and the Swiss Chalet app are pretty highly ranked on the Apple App Store. So I think people are choosing that on their own based on the functionality of it. And that's probably the best way that we can incent people to use is to make it easy for them to use. And we think it's a -- these are great apps. And we advertise this a lot in our -- both in our restaurants and on our commercials. So I think we want to try to avoid at all times trying to discount things, to incent people, instead just have great performing functioning devices that are easy for people to use.
Okay. That's helpful. Maybe we could move to franchisee profitability. Some of your competitors -- I guess some of these you sell to the border, but I guess the sentiment is kind of the same. They've endured challenges in keeping franchisees happy and providing sufficient cash on cash returns. What can you say about franchisee profitability versus say a year ago or 2 years ago across the system?
Well, I mean we're still -- we have decent eyes on that. Listen, it's certainly clear that when you have some of the minimum wage increases that the country's experienced in Alberta in here, that that's going to impact profitability. I think a lot of the actions and things that we have done is designed to acting differently about how we operate our restaurants and how we can help protect profitability. One of the biggest ways we can do that is, as the traditional economic model, restaurants is slightly changing with labor becoming more expensive. Other aspects on the cost line become more imperative. One of the principal cost in restaurants is rents. And so the real estate process -- and I've talked about this in the past, that Bill and the team is set up here is highly efficient and effective. And the guys negotiate hard. So that helps improve margins. In some cases like we're talking about Swiss Chalet, Western Canada, those are legacy deals with really high rents that are not really sustainable in the long term, so -- particularly as wages go up. So we're constantly looking at how do we influence margin to make sure that our Same Restaurant Sales are profitable Same Restaurant Sales. And that they flow through. And it takes -- in some cases, it takes doing a lot of little things on all lines of the P&L to make sure that it's absolutely necessary to do the cost, the expenditures -- absolutely necessary to do to drive result. And if it's not, get rid of it.
Understood. Last one for me. Your debt levels are pretty healthy right now. Understanding that M&A is your biggest priority. But if you don't find either a concept or a term with deal that you like, would you reexamine capital allocation and maybe take a look at greater increases to the dividend or a more material buyback?
I wouldn't say M&A is our -- I'm not sure if I heard you right in saying M&A is our top priority. I think our top priority is profitable Same Restaurant Sales. But -- and you're right. Our debt to EBITDA is very healthy at this point. I think the history here in the last couple of years and will continue to be is that we look at that dividend on an annual basis. And we're constantly having discussions about how we allocate capital. You see us some -- in some case we talked with the NCIB that's -- actions we're taking to take some -- buy back some stock. So yes, I guess all options are still open.
Your next question comes from Peter Sklar with BMO Capital Markets.
On this shift in bonus accrual that impacted the quarter, could you give us the backdrop to that, and like it shifted from where to where?
Peter, it's Ken. The bonus accrual, the $2.8 million difference shift compared to 2017 Q3 was really because last year, 2017, we had a bonus correction adjustment down to reduce bonus on a year-to-date basis. So on a quarter-over-quarter basis, as we booked kind of more normal bonus this year, it was much bigger than the reversal last year.
Okay. And then the other thing too. When I look at your financial statement disclosure, there's a line -- just I can -- I'm just bringing it up here -- called net central contribution. And that's kind of in your segmented reporting table. And that has declined quite a bit year-over-year. Actually as part of that, this bonus accrual reversal is running through there? And if so, what is the -- is the rest of it because of this different overhead structure at The Keg?
Yes. Peter, it's both. So it is the -- in the quarter, it's the bonus adjustment. Second, it's the net Keg central overhead cost to go through that, about $5 million. And then separately, we've got The Keg royalty expense, which was $3.6 million in the quarter, which is shown on the line below in that same table.
Right. Okay. And then the last question. On the -- when you want to take out a weak franchisee, so you take the store corporate, and then the intention is to refranchise. So you've done that with some of your Swiss Chalet units out West. I assume you might do that with other banners. My question is like do you have to go out and recruit strong franchisees? Or do you already have a roster of franchisees that you can refranchise to?
All the above. I mean I think you're constantly -- it's like a sales funnel, right? You want to have kind of a big pipeline of candidates. And then you want to put them through kind of a selection process. I think that the key is that -- we're not just taking people because they have the money. Do they fit the right profile to operate a restaurant and a service culture? So in some cases, we have people that are -- we know from our own system and our own network that are expandable. And we have lots of examples of that. We have lots of multiple unit franchisees. In other cases, like we -- like I just said, we had a franchise show here on the weekend. We had a lot of brands to display. And we opened that up for the public. And we start talking about our brands and get in potential candidates to fill that pipeline. So it's a bit of both.
And do you encourage multiple franchisees and cross-banner franchisees?
Yes. I mean, I think sometimes it makes a lot of sense, right? If you're a -- I think that's one of the powers of having multiple brands. If you're a franchisee, say, in a market like London, Ontario, and you only have -- you're only -- you're with a -- you're a singular -- where the franchisor only has 1 banner, and you're probably precluded in your franchise agreement from owning another restaurants. Your growth is kind of stuck. Here, you can have access to lots of different brands. We prefer that because that individual knows that market. They're involved in their community. And they know the real estate in that market really well. So we have lots of examples of that. And as long as they're able to maintain the standards of excellence that we want in their operations, then they go on our expandable list.
Your next question comes from Sabahat Khan with RBC Capital Markets.
There was some discussion earlier about forward-looking growth, new franchisees. I guess as you look forward, can you maybe talk about, are there particular banners within your platform that you see as the ones that can help you attract a lot more new franchisees or expand units going forward? A few years ago, there was a focus on [ time of that appear on], Swiss Chalet and Harvey's. Just want to understand how management views kind of the -- or what they view as growth banners given the additions over the last few years?
Well, it is -- I think Swiss Chalet and Harvey's are always attractive to franchisees. They are iconic brands. And so they're always of interest. Yes, it's interesting. In Ontario, of late, State & Main is getting a lot of interest from franchisees to grow and develop, sold new in the market kind of sits in kind of between premium and casual, almost. So got a unique setting. It's got a good look. So that's generating a lot of interest. Yes, I mean it's kind of across the board. There's not one in particular that stands out. It's really I think -- there's a bit of an intangible here. But it really does kind of go to the personality and the profile of the person, the franchisee, which is another really incredible strength of having all these banners is that you could match that personality up to the franchisee. The example I always give is our [ comfort in the cools ]. If you're a real gregarious person, outgoing, well-known in your community, then that's a great match for a public concept like [ Finn's ]. So that's kind of how it operates.
Okay. And then, I guess, with the recent announcement by the government on Ontario to hold a minimum wage rate at $14 an hour, did -- I guess across the system, were you thinking about potentially taking a pricing again? And given the pricing that you've already taken, does this create an opportunity to maybe invest more in the customer proposition? So I understand what that means for your business going forward.
Yes. We were not looking to take -- we're not looking to take more price. I think you know, we're certainly focused. I mean value is one of our pillars, and that's value for the experience. And so that's our focus. Now I will say this is that when we talk about menu rationalizations, there's a lot of things on menu rationalizations. Doesn't mean that we are not going to do more menu engineering that may increase the average check. But we want to make sure that at the end of the day, our guests are getting the value for their experience because we want the frequency of their visits. And so if -- a lot of times, you can have an experience where people think it's great. But it may be a little pricey for them and they come back less often. So each brand has a certain cadence of how many guests that they -- for heavy users and how frequently they want to use. And we want to make sure we're always matched up to that. So bottom line is we're not looking to take inflation. But we're always looking to make sure that we're optimizing our menu engineering.
Your next question comes from Elizabeth Johnston with Laurentian Bank Securities.
I just want to go back to a comment you made in your prepared remarks about renovation activity at Swiss Chalet. Can you just go over again the plans there? And in terms of the look for Swiss Chalet, I know this was in works for a while. Did that change since the beginning of the year? And the cost of the renovation, if you can clarify, that's borne by the franchisee or Recipe corporate?
So there's already been a couple of examples of the renovated look. Ones up in Barrie as an example. And they look great. I think this is -- as we were examining some of the materials that were used, particularly on the facade of the building, we felt we could bring the cost down, but still give the guest impact that we wanted to achieve. So that's really what we did. And we also -- you also want to make sure that you're getting -- franchisees are getting that right return for their investment. So the plan really is a -- we're going to invest 20% of the capital cost up to a cap of $50,000 per restaurant. So that's the nature of the plan.
Okay. And is this limited to Swiss Chalet at this point, this contribution that Recipe will be making to the investments?
This particular plan is. I mean, I think as we look and examine things and as we're going through renovation, we'll take a look at other aspects. But for now, it's strictly done for Swiss Chalet.
Okay. And given your commentary about Swiss was -- is comp positive there. I believe that's what you said.
Yes.
Why do you feel that this contribution is still one that either need to be made or one that you want to be making, given that these restaurants are performing positively or growing positively?
Because -- I think you've started looking at it and you're looking at the -- our different channel mixes. I don't think you wait until you're in a really bad spot before you do this. And it's clear. I mean, people go up and they can see that some of our Swiss Chalets just don't -- they don't reflect the quality of the people that we have or products that we serve. And when we talk about 4 pillars, we mean it. It's not just the food, but it is the ambience there. And we want people to feel and have a comfortable experience when they come in and dine with us. It's great. Our off-premise business is very, very healthy. But we want our dine in business to be as healthy. And to do that, we have to make some investments. And our franchisees recognize that.
Okay, great. And just going to talk a bit about same-store sales here. Year-to-date, you had some consistent results. Is there anything you could point to this year compared to last year that you feel really made a difference in sustaining this positive growth?
I'm sorry. I didn't hear the first part of your question, Elizabeth. Can you repeat?
Sorry, just on same-store sales growth, results year-to-date have been much stronger than the results year-to-date at this point in 2017. Is there any one thing that you would point to that's really contributed to that, be it menu pricing or something else to explain the sustained, continued positive SRS?
I think it's just -- there's just a lot of things, right? I mean you get into this. We keep it -- try to keep it simple for talking points. These are our 4 pillars, but there's a lot of -- I think Bill and Ken and team, prior to me getting here, did a lot of cleanup. They've put in a lot of great initiatives you may think of, I guess, that -- not just the real estate process and reducing rents, but finding properties for new stores. We have a lot of talent out in the organization. Don't want to get into talk about minimum wage and all that stuff again. But the funny nature of this business is that you're only as good as the last visit. And so we have to continually make sure that we earn every visit. And that we deliver what we're supposed to do. So it's always a lots of little things. And probably going forward it will be a lots of little things. But if we have a culture of service and that we endlessly talk about that, then I like our prospects for the future.
Okay, great. And just one more question for me in terms of the St-Hubert manufacturing. Since acquisition, can you talk about the improvement or the growth in capacity? Any additional color in terms of the new pie line, which was brought on in Q3?
No. We're expecting that you'll be out there in your local grocery store buying as many pot pies as you can for your family and friends. It's a -- the new line looks great. Team did a great job getting that up and running and expecting good things from that. So I mean, listen, the retail business -- the St-Hubert team does a great job at this stuff. I think you've seen -- you've toured the private factory. It's an impressive place. And we're constantly looking and examining to see what other opportunities there are. I want to point out that this is not done in isolation of the St-Hubert team. If it's a restaurant-branded product, one of our other brands, that those brand teams are involved as well with the St-Hubert to make sure that we're delivering as much of the in-restaurant quality as we're doing in grocery.
Okay. And so in terms of margin, since some of that -- those pies were being done off by a third-party, should we expect some improvement in margin we'd be getting in 2019?
I'm very reluctant always to give guidance on that, Elizabeth. But listen, we think that -- I'll say this. We believe that operating that and making products in our own facility is a better economic model for Recipe.
[Operator Instructions] Your next question comes from Kenric Tyghe with Raymond James.
I wondered if you could -- in the context of the portfolio changes at Bier Markt and The Keg overlay, I wonder if we could just revisit the Landing and any potential -- sort of current thinking or revised thinking in the context of these changes with respect to experience, positioning, growth trajectory. I meant would there be a fairly -- I guess I'm asking, would there be -- or is there a possibility of a fairly meaningful shift in any of those attributes? Or are you pretty comfortable with Landing? We just haven't circled back on Landing Group for a while. So I'm curious to think, see how the thinking is evolved with respect to Landing to the extent you can provide some color.
Yes. So Landing, we did open a new Landing this year in Calgary called Owens. I think the size and the scale of a Landing type of restaurant is not going to lend itself to multiple units a year. Because they're big in kind of where they operate is probably [ expansion ] in kind of urban centers. So I think the team there, with David and Steve Pelton, really focused. You've have had -- we've had fairly decent expansion over the last couple years, almost 100% expansion. So their focus is really to make sure that the experience and the quality and all those things is -- they're delivering on those in the restaurants that they have. But we're a big fans of Landing. Kellys continues to impress. And so we expect good things in the future.
There are no further questions queued up at this time. I'll turn the call back over to the presenters.
I'd say, well, thank you, everyone. I notice that the snow is falling outside the window here in Vaughn. And next time we'll speak will be in early '19. So like to take this opportunity to wish everyone a safe and happy holiday season. It is the Festive Special at Swiss Chalet. So go out and enjoy. Thanks, everyone.
This concludes today's conference call. You may now disconnect.