MTY Food Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 11, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. 2nd Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode.

Operator

Following the presentation, we will conduct a question and answer session. 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 today, Tuesday, July 11, 2023. I would now like to turn the call over to Eric Lecover, Chief Executive Officer. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone. Thank you for joining us for MTY's 2nd quarter conference call for fiscal 2023. The press release and MD and A with complete financial statements and related notes were issued earlier this morning and are available on our website as well as on SEDAR. During the call, we will be referring to forward looking statements into certain numbers that are non IFRS measures.

Speaker 1

You can refer to our MD and A for more details. I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. We're delighted by MTY's continuing robust financial performance in the Q2 of 2023 marked by adjusted EBITDA of $74,600,000 and record high system sales of $1,500,000,000 The company has made significant strides towards its objective to supplement acquisitive growth with steady organic growth by investing in its banners, supporting franchise partners and improving operating creativity and efficiency. During the last quarter, same store sales rose 5% year over year. Canada reported the strongest growth in same store sales with 6%, followed by the U.

Speaker 1

S. And international regions with improvements of 4% and 2%, respectively. The Q2 of 2023 represents the first fully comparable quarter on a year over year basis since the outbreak of COVID-nineteen. So we have reintroduced same store sales data and provided some During the quarter, we opened 73 new locations and closed 77 for a net loss of 4 locations. This remains short of our objective to grow our store count organically, but it represents our best quarterly net result in the last 9 years.

Speaker 1

Narrowing the gap between openings and closings is a key objective as we continue to build better practices to limit network erosion while opening more new restaurants. This growth momentum on the heels of a robust Q1 also reflects the successful integration of recent acquisitions in the U. S. Two thirds of system sales are now derived south of the border. The acquisitions of Barbecue Holdings in the Q4 of 2022, along with Wetzel's Pretzels and Sauce Pizza and Wine in the Q1 of 2023 have continued the transformation of MTY into a a truly diversified North American franchising company.

Speaker 1

Without losing sight of where we come from, we aspire to continue expanding throughout North America and globally via our local partners. At the end of the quarter, 58% of our 7,124 locations were based in the U. S, 35% in Canada and 7% internationally. Our top 5 banners in terms of system sales predominantly operate in the U. S.

Speaker 1

Namely Papa Murphy's, Cold Stone Creamery, Famous Dave's, Wetzel's Pretzels and Villagen. Through our recent acquisitions, we've also diversified our restaurant offering, which includes 90 different banners of all types and formats. Although we still operate some locations in malls and food courts, their weight has steadily diminished over the years. System sales generated in malls and office represented 15% of total sales in the first half of twenty twenty three, while street front locations account for Most of our network sales at 77%. In comparison, those proportions in the Q2 of 2013, a decade ago, We're 46% in malls and office towers and 44% on the street.

Speaker 1

Turning to our capital allocation strategy. With the increased leverage resulting from recent acquisitions and the rapid increase in interest rates, the interest charges on our long term debt increased to 13,500,000 last quarter, a sharp increase over last year. As a result, we intend to prioritize debt reduction in the near term, while keeping a watchful eye on accretive tuck in acquisitions on an opportunistic basis. MTY continues to generate strong free cash flows as shown once again by the $45,100,000 generated in the 2nd quarter, and we expect that our capital allocation strategy will quickly provides additional flexibility for future capital allocation decisions. I will now turn the call over to Renee, who will discuss MTY's financial results in greater details.

Speaker 2

Thanks, Eric, and good morning, everyone. As previously mentioned, normalized adjusted EBITDA totaled $74,600,000 in the Q2 of 2023, up 57 percent from $47,600,000 in the Q2 of 2022. The strong year over year increase in normalized adjusted EBITDA is largely due to the acquisitions of Barbecue Holdings, Wetzel's Pretzels and Sauce Pizza and Wine, which positively impacted our U. S. And International segment in the Q2 of 2023.

Speaker 2

The U. S. And International business segments generated 70% of normalized adjusted EBITDA in the 2nd quarter, while Canada accounted for 30%, demonstrating, as Eric mentioned, that our U. S. And international segments continue on their growth momentum as we further increase our presence across North America.

Speaker 2

In terms of net income attributable to owners, it amounted to $30,400,000 or $1.24 per diluted share in the Q2 of 2023 compared to $28,600,000 or $1.17 per diluted share in the same period last year. The year over year improvement can be attributed to higher normalized adjusted EBITDA and lower income taxes. This was partially offset by an increase in depreciation and amortization, which is the result of the increase in property, plant and equipment as well as the increase in our intangibles stemming from the acquisition. The company's interest in long term debt also increased as a result of our higher leverage and the increase in market interest rates. The company's revenues grew 88 percent to $305,200,000 in the Q2 of 2023 from $162,500,000 in the Q2 of 2022.

Speaker 2

The year over year increase is mainly due to the 3 acquisitions, which contributed to revenue growth of $16,500,000 $119,900,000 respectively, to Franchise Operations and Corporate Restaurants in the U. S. And International segment. In Canada, we are also Extremely proud that revenues from franchise operations and corporate restaurants improved 10% 6%, respectively. Given this is the Q1 in which we can say we had no impact from the pandemic when compared to prior year, the Canadian revenues grew on the strength of organic growth from increased customer traffic.

Speaker 2

As mentioned before, this stems primarily from the growth in system sales, which increased by 7% during the quarter compared to prior year. Turning to liquidity and capital resources. Cash flows from operations amounted to $56,300,000 in the Q2 of 2023 compared to $30,100,000 in the Q2 of 2022. The increase of 87% in operating cash flows is the result of higher EBITDA generated and a more favorable variation in working capital, which were partially offset by higher interest and income taxes paid. Free cash flows reached $45,100,000 or $1.84 per diluted share in the Q2 of 2023 compared to $25,300,000 or $1.04 per diluted share in the same period in 2022.

Speaker 2

The improvement in free cash flows is due to the same reason I mentioned for the increase in operating cash flows, partially offset by an increase in CapEx spend. The increase in CapEx spend is mainly the result of pre existing corporate store commitments we had on acquisition, some village and refreshes, the reconstruction of a flagship Baton Rouge restaurant in downtown Montreal as well as further investments in our cyber protection and technology infrastructure. In In the Q2 of 2023, we also reimbursed $26,800,000 in long term debt and paid $6,100,000 in dividends to our shareholders. At the end of the quarter, MTY had a cash position of $62,600,000 and long term debt of $816,200,000 mainly in the form of bank facilities and promissory notes on acquisition. Our net debt to normalized adjusted EBITDA ratio stood at 3.1 times at quarter end.

Speaker 2

The company also has a revolving credit facility of $900,000,000 of which $590,300,000 had been drawn as of May 31. A hedging strategy with fixed interest rate swaps was implemented last and we continue to utilize cross currency interest rate swaps in order to provide additional financial flexibility. Although we didn't repurchase shares in the first quarter first half of twenty twenty three, we recently renewed our normal course issuer bid or NCIB. The NCIB allows us to repurchase for cancellations up to 1,200,000 shares, representing approximately 5% of outstanding common shares during the 12 month period ending on July 2, 2024. We believe the timely purchase of common shares at prevailing market rates is a worthwhile part of a capital allocation strategy.

Speaker 2

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

Operator

Thank you. We will now begin the question and answer session. You will hear a tone acknowledging your request. Dentsu. We'll pause for a moment as callers turn the queue.

Operator

The first question comes from John Zamparo of CIBC. Please go

Speaker 3

ahead. Thank you very much. Good morning. I wanted to start on the net closure rates and the improvement in that metric in the quarter. I really want to get a sense of the sustainability of it.

Speaker 3

I wonder if you can talk about what banners were driving the improvement either from the perspective of openings or closures versus the past year or 2.

Speaker 1

Yes. Well, it's an effort that we have in all of our brands where we try to Preserve the integrity of our network. So it's not necessarily driven by one brand or another. It's more consolidated effort with all our brands to We'll have the difficult discussions with our franchisees and make sure we try to avoid surprises as much as possible and Wherever a franchisee wants out of the system that we find a good solution where a franchisee can sell their assets instead of closing them or abandoning. So but it's not a one brand thing.

Speaker 1

It's really all the brands working together and Trying to achieve the better results. Now as far as your question about whether it's sustainable or not, Obviously, as I said, we're trying to avoid surprises, but it can always happen. But I think We're doing much better now. I wouldn't say that we're necessarily going to be positive or negative in 1 quarter or another, but I think we're doing better in terms of store opening. We have a good steady base now of opening stores, even though there are Still some hurdles for us to get the stores operating.

Speaker 1

And in terms of store closures, We're trying our best to limit the number of closures and to find elegant solutions for our franchisees. But again, That gives guidance on the future.

Speaker 3

Yes, understood. Okay. And then sticking with that topic, it looks Like a disproportionate amount of the improvement was from international and nontraditional. Can we assume the nontraditional that A reasonable proportion as from wet solds and on the international front, were any of those reopenings of previously closed sites?

Speaker 1

A few parts to your question. On the non traditional, yes, that would be mostly attributable to Wetzel's. Wetzel's pretzel's is opening in many different formats, very successfully so, which is really interesting for the brand and for MTY in general. As far as international is concerned, they are all new locations. They're not reopening of pre existing locations, and they're mostly cold stones.

Speaker 3

Got it. Okay. Speaking with M and A, the EBITDA contribution from Weftels and BBQ and Sauce. It was well above what we forecasted. I wonder if you can share the same store sales growth or

Speaker 1

Inc. Not necessarily because I don't want to rely On former owners provide data, as you know, sometimes the systems are not necessarily the systems or the controls that we have in place. All I'm going to say is there's it's a mixed bag. There are some initiatives that the sellers always put through that are geared towards jacking up the System sales artificially, sometimes very detrimental practices. So we're correcting that and sometimes it results in negative same store sales even though It's more profitable for franchisees or for MTY if we have corporate stores.

Speaker 1

But I would say it's a mixed bag. It's not a 100 Positive or 100 percent negative, there are brands on both sides of the 0.

Speaker 3

Okay. That's good insight. And then one more on the outlook. A noticeable shift this quarter, and I kind of wanted to get your broad thoughts on this. I assume some of it is just pandemic dissipating, but it does seem Like your brands are quite resilient in this environment.

Speaker 3

I wonder if you think the performance of your quick service banners means you're benefiting from a trade down transition from consumers or if you think this is just a really strong and resilient category, just would love to get your thoughts on the shift and outlook this quarter.

Speaker 1

Yes. I don't really believe in trade downs. I think people either go or don't go. So I think quick service is popular because we're offering a very good experience to our customers. I think The gap in the quality of food between quick service and casual dining has really narrowed in the last few years, and I think customers are I'm recognizing that and appreciating the quality of the food and overall experience we're offering.

Speaker 1

I think the other restaurants are doing just as well. Right now, we're I think restaurants in general and not only MTYs, but I think restaurants In general, in North America are doing well and customers are still enjoying our food. And hopefully, we're going to be able to capture That momentum and gain market share while it's happening.

Speaker 3

Okay, great. I appreciate the color. I've got a couple others, but I'll get back in the queue. Thank you.

Operator

The next question comes from Arthur Hagerty of RBC Capital Markets. Please go ahead.

Speaker 4

Hey, good morning. My first question is on same store sales growth. Would you just be able to provide some color on pricing versus traffic Growth. And then as a follow-up, how do you feel about your pricing today? Are you happy with where you're at or are you looking to increase prices anytime soon?

Speaker 1

Yes. Well, there's been a lot of pricing in the last few years. I think we've reached a point where we're kind of at We have a few brands that might have gone a little bit too far in pricing, and we're seeing the impact of that. So we have to be extremely cautious on how we approach pricing. And this is for most of our brands, this is how we've done it also in the last 12 to 15 months where There needs to be some pricing on some items, but we can't push pricing across the board and we need to be extremely careful We have webinars and meetings to try to educate our franchisees also on how they need to implement pricing And where they need to implement pricing.

Speaker 1

So we need to be extremely careful. So I would say the price increases on average haven't been Very high in the last 12 months, just because we've kind of reached that point where we need to find other ways to make up for increased costs where they happen. So most of the same store sales in the recent past has been driven by traffic.

Speaker 4

Got it. Thank you. And then just wondering how you're thinking about M and A going forward? Are you happy with your current corporate franchise mix or would you be willing to lean further into corporate going forward? And then also, what does the current acquisition pipeline look like today?

Speaker 4

What are you seeing in terms of valuation multiples out there?

Speaker 1

Yes, multiple questions in there. In terms of M and A, I mean, we will be opportunistic on what presents itself. Our preference is always to go with Franchise Models. It's not to say that we're never going to do another deal where there are more corporate stores, but It's certainly not our preference. Now we have a good group of people that have the expertise on how to run them, But we still prefer franchise systems for sure.

Speaker 1

Now as far as the pipeline is concerned, there seems to be a lot of activity recently People trying to liquidate part or all of their networks. Not all of it is good. Not all of it is interesting either. So as we've always done in the past, we're going to be looking at what presents itself and Be patient for multiple periods of time, sometimes for a few months, sometimes for even longer. We've been patient waiting Inc.

Speaker 1

And sometimes they all happen at the same time like they have last fall. So I mean as far as the pipeline is concerned, I'm not worried, but we just need to find the right target and the right fit for MTY before we decide to pull the trigger, especially in this environment where the cost of money is a little higher than it was in the past many

Speaker 4

years. Got it. And then last one for me. Now that we're operating in a post pandemic environment. Just curious how you're thinking about digital penetration going forward?

Speaker 1

Yes, digital is really key. I think we have a few paragraphs on that in the MD and A. Digital is not only the sales platforms or the online sales platforms. I think digital needs to be the overall experience of our customers where people used to shop in the store, now people spend a lot more time interacting with us On our websites, which is the primary source of information for a lot of people. And then, whether it's TikTok or Instagram or Facebook or Any other type of digital platform does become really important vehicles of information for us.

Speaker 1

We need to be Top of mind, we also need to be top of the list. If you search for restaurants near me, for example, we need to have good Guest ratings also for our restaurants. So the overall digital experience is really key and it's integrated. It's not only the online sale That's important because that's the ultimate goal, but there's a lot that goes into it before we get there. So key area of focus for us, Some brands are way ahead of others in our portfolio, which is understandable given the 90 brands we have, but we're trying

Operator

The next question comes from Vishal Shreedhar of National Bank. Please go ahead.

Speaker 5

Hi, thanks for taking my questions. In your remarks and your disclosures, you indicated that the backdrop is still good. I'm paraphrasing. Just wondering if you can provide some Color on what you're seeing with the consumer as we move through the months here and the interest rates continue to take hold on people's payments each month?

Speaker 1

Yes. Well, what we're seeing is consumers are a little bit more demanding in terms of the experience they're going to have at the restaurant, But they're still shopping and they're still going to restaurants. And what I mean by that is, with the increased prices also come with increased expectations from our customers and from our guests. So we can't take them for granted. We need to give them the best possible Inc.

Speaker 1

That's going to match the price we're charging now. But as far as available Resources to go into restaurants, the customer seems to have them and to be willing to spend the money to get that experience. So far so good. I don't have a crystal ball to tell you what's going to happen in a year from now, but at the moment, It's very good for us and for our brands.

Speaker 5

Okay. And you started reporting same store sales growth. Obviously, a lot of things in that number, including the inflation, the traffic and the benefits from the various initiatives that MTY has been implementing. As we look at that number, what is a good heuristic or kind of a thumbnail of what MTY should achieve on same store sales growth over the long term given Given all these initiatives that you've been working on over the several years, should we anticipate MTY to lever inflation or is inflation a good proxy or how should we think about it?

Speaker 1

Yes, that's a good question. I wish I had the answer to that. We're trying to beat inflation all the time, but With the portfolio of brands the size of ours, it's challenging because there's always a few brands that are way above and a few brands That are unfortunately under and that we need to implement some initiatives, but we I can't Tell you what we're going to achieve, but I can tell you what our goal is. Our goal is to beat inflation.

Speaker 5

Okay. And With respect to some of the challenges that we've been talking about over the last many quarters, the labor challenges, supply chain, Just wondering if you can update us on where including the labor challenges with installing new sites. Just wondering if you could update us on your views on where we're at?

Speaker 1

In terms of supply chain, It's getting better. There are some pockets here and there with some distributors, for example, experiencing their own set of issues, not Certainly the supply chain itself, the global supply chain, but some pockets with some suppliers and some distributors in particular. But in general, it's getting better. It's not perfect, but I think perfect doesn't really exist in our world. There's always something else.

Speaker 1

But I would say it's largely receded and it's more in control than it was before for the vast majority of our chains and territories. As far as labor is concerned, again, there are some areas where it's complicated. Eastern Quebec, for example, is complicated. There are some other areas where we face bigger challenges. But in general, I would say Labor has stabilized.

Speaker 1

It's a lot better than it was a year ago. And hopefully, it's going to keep improving a little bit. But In general, we're able to staff our restaurants adequately now. It's not perfect again, but there's a trade off between Having low unemployment rates and people having disposable income to shop in our restaurants and having high unemployment rates and being fully staffed, but with less customers. So If I have to take one situation, I take what we're experiencing now.

Speaker 5

Okay. And before you commented on difficulty of installing restaurants due to

Speaker 4

a variety of challenges. Are you

Speaker 5

still seeing that? And do you think those are anticipated to some degree?

Speaker 1

Permitting and inspections are still a big challenge. I won't lie. New restaurants take forever to be built and to open and for the most part, it's not because of supply chain and construction itself, it's because cities take a long time To grant permits and to even look at the files and then inspections also take a long time. We try to book appointments for final inspections and You can take months in some cities. So the construction itself is fine, but the cities are having a hard time keeping up With their requirements basically.

Speaker 1

But this is a situation that we have to live with. This is not something we can control, and we have a team of experts that are learning how to navigate through these problems that we have. And Hopefully, again, another one that I hope will receive in the next few months.

Operator

Thank you. The next question comes from George Doumet of Scotiabank. Please go ahead.

Speaker 6

Yes. Good morning, Eric. Congrats on a strong quarter. I just wanted to get started on the Canadian comp, I think it was 6%. Any areas of strength that you want to call out?

Speaker 6

And how should we think about in general like the performance intra quarter Over there, did you see an acceleration as the quarter moved on? Was it pretty stable?

Speaker 1

Yes, it's pretty steady. I mean, our restaurants are performing well. We obviously, like I said earlier, we have a few brands where we have a little bit more work to do and That's always going to be the case given the 90 brands in the portfolio. But our brands are generating good sales on a steady clip and there's As the CEO of the company, I don't like surprises, whether they're positive or negative. I just like Smooth sailing and I like predictability.

Speaker 1

And right now, this is what our network is giving us. It's very predictable. It's very reliable. Sales are what they are. And Other than unusual weather in some pockets here and there, generally, we're in a good place now.

Speaker 6

Any strong any banners that you want to call out that were contributed to that number?

Speaker 1

Yes, there are a lot of good banners. I don't want to call them out necessarily because I don't want to forget about some important ones, but we do have a few banners that are performing extremely well For sure.

Speaker 6

Okay. And moving over to corporate margins, it came in pretty strong, 13.5%, I think last quarter, it was closer to 9%. And I think last quarter, you mentioned You're only expecting modest expansion. It seems like it came in a lot stronger. So maybe can you talk a little bit about what drove that strength in the corporate margins and maybe how we should think of those margins going forward.

Speaker 1

Yes, they're high this quarter. There's no question about that. Our team is I mean, their outstanding attention to detail is what drives these margins. There are Seasonal variations in margins where we have patio season will generate some margins that might be different from indoor season, for example. But yes, our team is working very diligently at trying to improve margins as much as possible and optimize The way we operate our restaurants and this is a result of their efforts.

Speaker 1

Now are we going to be able to expand on the number we have now? To be honest, I don't think so. This is a very strong margin and I know they're on the call, so they're probably going to take this as a challenge. But I think those margins are pretty high now and expectation should be that it's going to be At that or between what we had in Q1 and Q2.

Speaker 6

Got it. Thanks. And I think you also last quarter on Papa Murphy, I think you mentioned And inflection and performance acceleration to Q2. So can you talk a little bit about how Papa Murphy did specifically in the quarter, please?

Speaker 1

Yes, we're super happy of the result of Papa Murphy's same store sales and everything that's Inc. It's been a really good story of where we've been able to turn around a situation that was a little bit more last year into something that's really positive. A number of initiatives and it's never one thing that's going to drive an inflection like this one. It's going to be a grind and many different initiatives. And this one was a team where They were patient and they knew they were doing the right thing.

Speaker 1

And we gave them the resources and we were patient with them while they were implementing all their initiatives and now it's paying off. And I think the franchise partners also where we had maybe challenges. Unfortunately, when sales go down, Franchise partners look at us and ask us to be accountable for this. And now I think they're all really happy that Inc. We've been able to turn this around and produce really good steady, positive mid single digit same store sales.

Speaker 6

Okay. That's helpful. Thanks. And just one last one for me, Eric. Obviously, a lot of attention being paid to AI in the restaurant industry as of late.

Speaker 6

Can you talk a little bit about The use of AI for us and maybe what banners you think will lend themselves to greater usage in the medium to longer term?

Speaker 1

Yes, we've been using AI for a long time actually. We don't necessarily use it in the restaurant operation and we've seen a number of people try to do it and we haven't seen the right technology yet, but we use it a lot for marketing initiatives. And Obviously, larger banners will tend to have more resources and more depth to be able to use AI, but this is certainly part of our digital journey where we want to be more efficient at using the data we have and the data we collect, and do a better usage of it. We need to be smart on how we use customer data. It's very sensitive and We don't want to abuse, but at the same time, if we can make better use of it, we will.

Speaker 1

And this is where AI will really help us. The quantity of data That's available to us is mind boggling and it's not something you can really use using an Excel spreadsheet. So AI will be instrumental there. Okay. Thanks

Speaker 6

for answers, top line.

Operator

The next question comes from Derek Lessard of T. V. Coen. Please go ahead.

Speaker 7

Yes, thanks. And I echo the congrats To you, Eric and Renee and your team on a great quarter. I just want to hit again maybe on the Papa Murphy's. Could you just maybe remind us of some of the or add some color to some of the initiatives that you had on the go that you Inc. Were big drivers of the results over the last year or so?

Speaker 1

Yes, for sure. I mean, there's It's hundreds of different initiatives that have small incremental value, but obviously there's Operational excellence is always a part of our initiatives and Papa Murphy's operates slightly differently from our other brands. We needed to tweak that a little bit, but operational excellence is always there. And there's research and development coming up with new products. If you look in the pizza category, there's obviously a lot of competition and you've seen a lot of new products come out in the last few months.

Speaker 1

And we've been launching some new products as well and generating some buzz around our campaigns. And then in terms of marketing also, you need to innovate in terms of what your campaign are going to do, how much buzz you can create around your campaigns. And also in the type of campaigns we're going to run. We've been running more national campaigns, more digital campaigns now, Again, using some AI to help us along the way and also working with really good business partners. So it's a lot of different things, but it all adds up incrementally and it turns into good results.

Speaker 7

Okay. Thanks for that. And maybe just, I do have a few most of my questions have been answered, but maybe some housekeeping. Does your DNA in Q2 include any one time items like tied to acquisitions?

Speaker 1

Our what, sorry? Your D and A?

Speaker 7

Yes, your depreciation. Does it include any one time items in there? No. Okay. And one last one for me.

Speaker 7

In terms of your CapEx, again, it was relatively elevated, it's about $11,000,000 You still expect it to fall back to a normal cadence of $6,000,000 to $8,000,000 a year?

Speaker 1

Yes. Well, it's going to be higher than that on a yearly basis. Just the number of corporate stores we have and the maintenance CapEx required is Going to be a little bit higher than what we've experienced historically. But if you look in the quarter, we spent a lot of money on that flagship Baton Rouge in downtown Montreal. It was about $3,500,000 That's not going to happen again.

Speaker 1

There is some residual in Q3, but that Bata Rouge is And then we had Some pre existing commitments on Barrio Queen and on Wetzel's Pretzels. There is still one on each that is going to be built. So but those will be completed probably in Q3 and won't happen again after. So there's a few things that contribute to the higher CapEx. We think that by the end of Q3, we should pretty much be done with these pre Acquisition commitments, and then we're going to find a normal run rate that's going to be slightly higher than what we had before the acquisitions.

Speaker 7

Okay. That's helpful. And maybe just one last one for me. I know you got 90 banners, Eric, so it's hard to tell. But I was curious if you can maybe add Some color around your franchisee health and your ability now, which seems to be behind some good momentum to attract new and good qualified franchisees to the system.

Speaker 1

Yes. Well, we're the good news is we're acquiring a lot of new franchisees, but we also have a really good validation where a lot of our franchise sales at the moment are 2 franchisees who want to invest more in the network. So that's a really good sign of how they're doing and How they're happy with the franchisee the franchisors performance as well. So I would say roughly probably about 60% 60% to 70% of our new stores that we sell at the moment are to existing franchisees and that's Probably the best source for us, because they're we know who we're going to be dealing with. They understand Their franchise already understand how the brands work.

Speaker 1

They have experience. So that's a really good source for us and good validation at the same time and it's always good to have new blood in the system also with new franchisees that might be coming from different industries or from the restaurant industry and looking for different investments. But yes, just the validation from existing franchisees is probably the best Testament to our franchisees.

Speaker 7

Thank you. And actually one last one for me. We haven't touched on the food Inc. Growth did seem to slow a little bit there. Just talk about what's driving that and sort of your expectations of that business going forward.

Speaker 1

Yes. The food processing itself is doing well and the distribution as well where we suffered a little bit more is on the retail side. It's been a little bit more complicated with selling our products into grocery stores, and I'm sure it's well documented how these guys are doing. So in terms of the volumes and in terms of introduction of new SKUs, it's been a little bit more challenging than we anticipated. And this is where you see the slowdown happening.

Speaker 1

So the retail, I would say, might be challenging. It's In the next few months, it's still a really high priority for us. We believe that there's very good business to be made there for MTY and for our franchisees as well. But we just need to be patient and we need to grind because It's a complicated period for the retailers and it complicates our life as well for the retail.

Speaker 7

Thanks for your answers, Eric. Thank you.

Operator

The next question comes from Michael Glen of Raymond James.

Speaker 8

So in the press release you speak about the integration efforts or the successful integration that's gone with Wetzel BBQ and some of the other. Could you just work through like what you've like the leadership at Wetzel and BBQ now and what type of integration activity you've completed?

Speaker 1

Yes. Well, integration comes on many fronts, whether it's systems or practices or processes or optimization of supply chain, for example, coordination of franchise sales of real estate, Any shared service we might have. So there's always a lot going on in terms of the integration. And also more importantly, making sure that the people are comfortable working for MTY because the People that worked for Barbecue Holdings or for Wetzel's never chose to work with MTY. They chose to work with Barbecue Holdings or with Wetzel's.

Speaker 1

And then the merger kind of forces them to change that and making sure that these people stick around is really key for us. In both cases, we have good stable leadership teams. We lost the CEO of both entities, but everyone That was really making it rain for both divisions have stayed. So we have Al and Adam And their team stayed at Barbecue Holdings. Kim, John and Vincent stayed for Wetzel's and We're really happy with how they're doing and their performance and very confident in the future.

Speaker 8

And would you say like since you've acquired the brands, I know you didn't give any sort of targeted cost savings or synergies. Would you say that those like are you achieving any sort of level of cost saving or synergy that's been above your expectations or anything along those lines?

Speaker 1

Yes. In both cases, we didn't anticipate Very material cost savings. Barbecue Holdings was run really tight. And certainly, the synergies were not going to come From cost savings, at least not on in terms of G and A. We have some people working now on the supply chain, which is probably An area where we can make a bigger difference, especially given the number of corporate stores we have.

Speaker 1

So that's probably where most of the synergies will come from for For Wetzel, the same thing, pretty tight ship, run by a private equity firm that was going to sell their assets. So obviously, there There's no fat in that company. So again, this is not where we saw the value for Wetzel. So in terms of cost savings and synergies, I wouldn't expect much To come out of these two targets.

Speaker 8

Okay. And then when I know Food Court now is a Much smaller part of your mix, but when you look at where Food Court is now, do you think it's Reached the bottom at this point in time? Or do you think that there's like is it should we think about, okay, it's all upside from here at this point in time? Or do you think there's still There could be some more pain in there.

Speaker 1

Yes, there can be some more pain in food courts. The sales haven't recovered. If I look globally, the sales haven't recovered to 2019 levels. The good malls, the really good malls are still really, really good. So If you're in the top, top malls, your sales are back to 2019 and over.

Speaker 1

But the B and C malls haven't recovered and some of them might never recover. So it's a question of, does it make sense for us to continue in these food courts? And if it does, at what price? Obviously, we hope that all these malls will recover, but I think the last 4 years have changed people's habits to a certain extent. And there might be some malls that there might be some casualties there.

Speaker 1

So it's up to us to monitor the situation and work with our landlords, try to Work together to improve traffic and improve the customer experience and help our franchisees Make money in these malls and office hours. And then we'll go from there. But I don't have a crystal ball, but AAA malls still work and B and C malls are a little bit more challenging at the moment.

Speaker 8

Okay. And then Finally, just on the EBITDA, I kind of missed this last quarter, but the IFRS 16 adjustment that's working through that would continue at similar levels through the balance of the year? Yes. Okay. And then it's once we're past that adjustment, as we think about next year, it wouldn't come through again?

Speaker 8

It would just be kind of a flat number, I guess?

Speaker 1

It should be fairly stable.

Speaker 8

Okay. Okay, thanks.

Operator

The next question comes from John Zamparo of CIBC. Please go ahead. Thanks.

Speaker 3

Just a few follow ups. Wanted to clarify from the MD and A, the 11% system sales growth for Papa Murphy's and Cold Stone in Just wanted to confirm that includes FX changes, is that right?

Speaker 1

Yes, it does.

Speaker 3

Okay. The change in control payments you had to make to exiting CEOs, can you quantify that? And was that entirely in FQ2?

Speaker 1

I'd have to check where it ends. I certainly won't Give you an amount for it. But I do believe it would have been at least in one case, it was all in Q2 And I'd have to check for the other.

Speaker 3

Got it. Okay. I

Speaker 7

think I've asked this

Speaker 3

in the past, I wonder if your views have evolved on it at all. Would you consider selling some of your underperforming brands in the portfolio? It obviously might not be immediately accretive to the stock, Inc. Could improve reported unit growth and same store sales growth? So would you consider divesting of those or would you rather keep these and try to improve them?

Speaker 1

I don't like abandoning on brands. I don't want to give up on brands and on our franchisees as well. That being said, I think everything is for sale if the price is right. But We haven't been active trying to market any of our brands. If someone comes and offers us a lot of money that we feel is Good for our shareholders in general.

Speaker 1

We'd probably consider it, but this is not something that we're Contemplating now that we're doing, and nobody's come knock on our door and try to buy assets from us as well.

Speaker 3

Okay, understood. And then one last one. I wonder if you could talk about the early returns on Twisted by Wet Sold. And I know you don't have a crystal ball on this either, but I wonder if you have a vision of what you want that concept to be. Do you think it's likely to be like a niche banner or do you think this could potentially grow to hundreds of units on its own?

Speaker 1

I hope it grows to hundreds of units on its own. I've been there. It was really good. The food was impressive and decadent. I like the brand.

Speaker 1

We're I think with one store, it's a little bit hard to draw a conclusion. We have a second store opening, I believe, later this month and the third one opening a couple of months later. I think once we reach that in different territories, different markets with 3 stores, we'll be better able to tell If the concept has legs or if it's just one store is really working well and the rest is not. So hopefully everything works out And the concept has legs as I think it will, but it remains to be tested.

Speaker 3

Okay. That's all for me. Thank you very

Speaker 5

much.

Operator

As there are no other questions from the phones, This concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Earnings Conference Call
MTY Food Group Q2 2023
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