MTY Food Group Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 11, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the MTY Food Group Inc. Third Quarter of 2024 Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Before turning the meeting over to management, please be advised 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.

Operator

Please note that this conference call is being recorded today, Friday, October 11, 2024. I would now like to turn the conference over to Eric Lefebvre, Chief Executive Officer. Eric, please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us for MTY's 3rd quarter conference call for fiscal 2024. 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 Plus. During the call, we will be referring to forward looking statements and to certain numbers that are non IFRS measures. You can refer to our MD and A for more details.

Speaker 1

Please note that all figures presented on today's call are in Canadian dollars unless otherwise stated. I'd like to open with a few highlights from last quarter. Normalized adjusted EBITDA for the quarter reached $71,900,000 or $3.01 per diluted share. That compares to $72,900,000 or $2.98 per diluted share last year. Our franchising segment generated a 2% positive year over year growth last quarter with an EBITDA of $57,400,000 Normalized adjusted EBITDA margins for the segment grew to 56 percent compared to 54% in the Q3 of 2023 as our restructuring efforts are starting to bear fruits.

Speaker 1

Cash flows provided by operating activities grew by $14,900,000 or 29% over last year reaching 66 $400,000 compared to $51,500,000 in the same period last year. Free cash flows net of rent payments were $49,300,000 in the 3rd quarter, a historical high for MTY. On a per diluted share basis, free cash flows net of rent payments were $2.06 per share compared to $1.31 per share last year. During the 3 month period ended August 31, 2024, and TWY's network generated $1,470,000,000 in sales, an increase of $5,600,000 compared to the same period last year. The U.

Speaker 1

S. And International segment had overall positive growth in system sales of $22,000,000 for the quarter, while Canada recorded a decline of $16,400,000 or 3%. Canada's decline was felt in all types of restaurants with fast casual concepts recording the largest drop. The U. S.

Speaker 1

Snack category with brands such as Wetzel's Pretzels and Sweet Frog continued to outperform prior year. Our casual dining concepts on the other hand continued to face declines in traffic offsetting the good performance of our QSR brands. Digital sales once again grew in proportion to overall sales in both countries. They now represent 19% of total sales compared to 17% in the same period last year. This is a reflection of the continued investment of our brands toward creating a smoother digital sales channel and enhancing the customer experience online as well as in stores.

Speaker 1

As an overview of MTY's location count, the company ended the Q3 with 7,066 locations, a decline of 41 compared to the end of last quarter. During the Q3 of 2024, the company's network opened 67 locations and closed 108 locations. Store openings were affected by delays in inspections with many new locations opening in the 1st few days of the subsequent quarter. Store closures were also higher than in previous quarter, mainly because of a higher number of Papa Murphy's closures once again this quarter. Of the 7,066 locations in operation, 6,830 or 97 percent were franchised or under operator agreements and the remaining 2 36 locations or 3% were operated by MTY.

Speaker 1

I will now turn the call over to Renee who will discuss MTY's financial results in greater details.

Speaker 2

Thank you, Eric, and good morning, everyone. During the quarter, MTY's total revenue decreased to $292,800,000 from $298,100,000 a year earlier. Looking at the Canadian segment, revenue from franchise locations decreased by 3%. The decrease was attributed to the decrease in recurring revenue stream, which is correlated to the 3% decrease in system sales Eric spoke about. Streetfront locations and mall locations had the largest impact on the year over year decline, decreasing by 4% each.

Speaker 2

The U. S. And International franchising segment, however, saw an improvement of 1% year over year, reaching 65,600,000 Again, this is tightly correlated to the increase in system sales of 2%. Revenue from corporate owned locations in Canada increased by 30% to 11,200,000 during the quarter due to a net increase in corporate owned locations year over year, while the U. S.

Speaker 2

Corporate owned locations saw a decline of 1% due to the decrease in organic system sales of 0.6% compared to the same period last year. Globally, food processing, distribution and retail revenue decreased by 7% due to lower sales in the Canadian Retail segment. Similar to last quarter, this is the result of market conditions and grocers focused increase on promoting house labels. However, I'd like to note, overall segment profits increased year over year by $800,000 with margins improving to 13% from 10% in prior year. The U.

Speaker 2

S. Retail segment also continues to make strides with its existing product labels, which generated $700,000 increase over prior year. In terms of normalized adjusted EBITDA, we saw a decrease of 1% with $71,900,000 in the quarter compared to $72,900,000 in Q3 2023. As a reminder, normalized adjusted EBITDA excludes our SAP implementation costs. The U.

Speaker 2

S. And international normalized adjusted EBITDA contributed to 68% of total normalized adjusted EBITDA, realizing an increase of 1%, while Canada contributed 32% of total normalized adjusted EBITDA, a decrease of 6% or $1,500,000 compared to the same period last year. For the Canadian segment, the fluctuations were primarily impacted by the changes in recurring revenue streams with operating expenses remaining relatively flat for the quarter year over year, while the U. S. And International segment improvement was largely impacted by cost reductions.

Speaker 2

As mentioned by Eric, the restructuring initiatives taken in the first half of the year and continuing into the later half are starting to show their impacts on our results. These initiatives are also showing in our franchising segment margins, which improved to reach 56% compared to 54% in Q3 2023. Corporate store margins saw a slight dip to 8% compared to 10% in last year. Turning our attention to the income attributable to owners. For the 3 months ended August 31, 2024, a net income attributable to owners of $34,900,000 was recorded or $1.46 per diluted share compared to $38,900,000 or $1.59 per diluted share last year.

Speaker 2

The decrease is primarily attributable to an impairment charge of $3,000,000 on property, plant and equipment and intangible assets as well as the charge for revaluation of financial liabilities and derivatives recorded at fair value, which compares to a gain on such revaluations last year. Moving on to look at cash flows. The 3rd quarter generated cash flows from operating activities of $66,400,000 compared to $51,500,000 in Q3 2023, an increase of $14,900,000 mainly attributable to a favorable working capital variance during the quarter and a fluctuation in income taxes received paid year over year. The free cash flows net of lease payments increased to $49,300,000 in the quarter compared to 32,100,000 in Q3 2023. Regarding liquidity and capital stock resources, as at August 31, 2024, the amount held in cash totaled 51,000,000, a decrease of 7,900,000 since the end of the 2023 fiscal period.

Speaker 2

During the 3 months ended August 31, 2024, we repurchased and canceled 254,700 shares for $11,400,000 through our NCIB and paid $6,700,000 in dividends to our shareholders. During the quarter, we repaid $33,900,000 of our long term debt, bringing the total to $85,400,000 in the last 12 months. At the end of the second quarter, we had $506,000,000 drawn from our revolving credit facility. Interest on long term debt decreased by $700,000 as a result of entering into fixed interest rate swaps, which have resulted in savings of $0.6 million or CAD0.8 million this quarter. In early June of this year, we sold our fixed interest rate swap of US200 million dollars for a sum of US4.8 million dollars or CAD6.6 million, which will be recognized on a straight line basis over the period equal to the original hedge date of April 10, 2026.

Speaker 2

As mentioned in our subsequent events note, we also entered into 2 more interest swaps in September on CAD100 1,000,000 CAD50 1,000,000 at rates of 2.79 percent and 2.77 percent respectively. Finally, looking ahead, I'd like to note the upcoming quarterly dividend payment of $0.28 per share on November 15, 2024. And with that, I will turn the call back to Eric for a few words before the Q and A session.

Speaker 1

Thank you, Renee. As we entered the last quarter of our 20 20 4 fiscal period, MTY remains focused on creating shareholder value from 2 channels. First, we remain committed to produce organic growth in earnings and cash flows by optimizing the assets we have in our portfolio. 2024 is a challenging year from a macroeconomic point of view, but we find ourselves well positioned to realize our objectives in the future. Our cash flow generation ability has once again been put to the test and we have delivered.

Speaker 1

There will always be hurdles like the recent Florida hurricanes, which will impact many households in many of our locations. However, our team is working today to put in place all the ingredients needed to achieve our full potential. 2nd, we continue to actively seek new acquisitions to continue the growth trajectory our founder had established. We will remain disciplined in our approach to finding attractive transactions at the right price, no matter the size, type of food or geography. The market works in ebbs and flows and MTY intends to be opportunistic when favorable conditions surface.

Speaker 1

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

Operator

We will now begin the question and answer session. The first question today comes from John Zamparo with Scotiabank. Please go ahead.

Speaker 3

Thank you. Good morning. I wanted to start kind of higher level and just ask about consumer sentiment and your outlook was unchanged versus a quarter ago. But I wonder if you've seen any discernible shift in consumer behavior either on traffic or check size? I know you have got lots of formats and geographies in your network, but wondering if there is anything notable when it comes to behavior in Q3 or subsequent to it now that we are seeing a potential path to lower rates?

Speaker 1

Yes. We haven't seen a material shift in consumer behavior. Consumer is still discerning in how they spend their money. So they want the customers expect value, they expect an experience and we need to deliver on that. We need to be better than our competitors if we want to gain market share.

Speaker 1

So nothing has really changed in the past 1 or 2 or 3 quarters. It's more of the same.

Speaker 3

Okay, understood. And then maybe we could get to a couple of specific brands and start with Cold Stone and Papa Murphy's. Cold Stone seems like it's continued to excel. It's nearly your largest banner by system sales now. But you also mentioned the outsized closure number from Papa Murphy's.

Speaker 3

So can you add some color on net openings and same store sales for those 2 banners?

Speaker 1

Yes. I won't go into the specifics as usual, but just in terms of the specific quarter, Cold Stone performed extremely well. We were unfortunately comping against the huge success we had with the Barbie Movie Association last year. So in terms of comps, it was a little bit more difficult in the Q3, but still outstanding performance by the brand and still opening a lot of stores with Cold Stone. So that brand is certainly firing on all cylinders.

Speaker 1

In terms of Papa Murphy's, the comps were actually a little bit better this quarter. We're starting to see some traction and we're still experimenting with certain types of promotions and offers to clients to see what gains traction and what doesn't. But in terms of comps doing better, but obviously, as I mentioned earlier, in terms of openings and closings, there's still a number of closures. There are certain markets that are a little bit more troubled than others. So we don't see massive closures across the board.

Speaker 1

We see specific clusters of stores being shut down by their owners and where we can we try to save the stores as much as possible, but there are instances where we can't necessarily save the store because we don't have the proper infrastructure to run those stores in those markets where we can't find a new franchisee for them. So fortunately that resulted in some closures.

Speaker 3

Understood. Okay. And then on Wetzel's and the Barbecue Holdings acquisitions, you're about 2 years out from these deals that were in late 'twenty two. I wonder how you'd characterize the performance of those 2. I know that at the time Wetzel had pretty ambitious growth targets in terms of net store openings, whereas, BBQ had seen net closures.

Speaker 3

I wonder how you're feeling about the ability to grow these banners in 2025?

Speaker 1

Yes. WetSouls is doing fantastic, comping positive with a lot of stores openings and a lot of new stores also being sold. So new stores are going into the pipeline. I'm super happy with how the team is integrating into the Kahala team also where we leverage the size and the depth of talent we have in Kahala to help accelerate the growth at Wetzel. So if anything, we're probably doing a little bit better than we anticipated with Wetzel so far.

Speaker 1

In terms of BBQ, I think the economic context has changed a little bit. So we're trying to stabilize the brands in the portfolio. Some brands are doing better than others. It's a little bit like MTY, it's a portfolio of multiple brands with different offerings. All in all, it's performing more or less in line with what we expected, maybe a little bit less in terms of comp sales.

Speaker 1

I think the market is in a place where we could not necessarily anticipate how the consumer spending would be today 2 years ago. But all in all, still super happy with the talent we acquired, the brands we acquired in the portfolio. So the team is all hands on deck to try to reverse some of the trends we're seeing. And again, a little bit like with Papa Murphy's, we're starting to see some initiatives gain traction and really positive for the future.

Speaker 3

Okay. That's good color. And then last one for me on your restructuring efforts. I wonder if this is a cost base that you can maintain moving forward or other efforts you have underway that would see higher OpEx specific to your franchising business and I suppose your retail and processing business too?

Speaker 1

Yes. Everything we are doing now is not something that we are doing for the short term. We are trying to position the company in a place to be aligned with our long term objectives. So we're certainly not doing the restructuring with the short term vision. We want to do everything so that we're successful in 3 years and in 5 years from now, trying to position the people where they have the best chance of success and trying to put the brands in the best under the best leaderships for them to thrive and to help our franchisees be successful as well.

Speaker 1

So, there's probably a little bit more to go on this restructuring, but it's more or less over at this time. We've done the major changes that we wanted to make and the rest is going to be mostly the maintenance part. So, but yes, we're happy with our team, we're happy with where we are now and I think the restructuring is going to bear fruits in a few years from now.

Speaker 3

All right, understood. Thank you very much. I'll pass it on.

Operator

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

Speaker 4

Hi, thanks for taking my questions. In the commentary that you provided, you indicated that organic growth was one of your focus and focus areas and you seem to express some optimism that the business is gaining traction. Just wondering if you can highlight for us the reasons behind that optimism and what of your initiatives are tracking well that's underpinning that?

Speaker 1

Yes. Well, we've always been confident in our ability to generate organic growth. That was a message I conveyed as soon as I started on the job in 2018 that it was going to be one of the primary objectives. So that hasn't changed and we were able to deliver unfortunately a number of things happened with COVID and different market situations. There's always going to be some ups and downs, but we think that over a long period of time we have the brands, the franchisees and the team to be able to generate that organic growth.

Speaker 1

And what we're seeing right now in the company is for the most part positive. There are brands that are a little bit more troubled. There are brands that are hugely successful. But all in all, we're happy with where we are. We're happy that we're in a good place now with everything that we do, and we're seeing a lot of positive for the future.

Speaker 1

So I can't necessarily point out to one specific item, but the feeling inside the business is that we're doing well, we're producing cash flows, we're delivering on most of what we wanted to deliver and we don't control the macroeconomic environment, but over a long period of time when everything stabilizes, we feel really confident about our ability to generate organic growth.

Speaker 3

Okay.

Speaker 4

And in that organic growth question, I'm sure this has been asked before in different ways, but Cold Stone's success just it seems to be building on success year after year. And I know there's been a number of initiatives implemented at Cold Stone over the years that has contributed to that. But is there something that's unique about that brand where some of those some of that momentum can't be transferred to the other brands? Or is it just the scale and the operational strength within that that eventually will be transferred? Or is it the strength of the brand, the category?

Speaker 4

How should we contemplate that and consider versus the other brands?

Speaker 1

Yes. Well, we always talk about Goldstone because this is one of our larger brands, but there are other brands that are in similar situations with a long track record of success. I wish it was a one size fits all type of solution. It's not, but you look at Cold Stone, we have an incredible product. We have incredible R and D being done.

Speaker 1

We have new products all the time. Our marketing group is doing an outstanding job. We were ahead of our time when we started doing digital with Goldstone and we're trying to stay ahead of the curve. We have outstanding PR opportunities like the Barbie movie last year was a really good one. So and operations are good.

Speaker 1

So, everything is going in the right direction for that brand and we put all our efforts also to make sure we don't lose momentum. And that can certainly be transferred to some other brands. You look at Sweet Frog for example, Sweet Frog especially in Q2 and Q3 is an important brand for MTY and the performance has been stellar in terms of same store sales as well and in terms of profitability. So there are more brands that are successful than just Cold Stone and now we're putting Wetsolls under the same leadership and we believe that Wetsolls can also build momentum on the same build momentum in good years over good years over good years. So we have a lot of brands in that situation.

Speaker 1

We talk about Goldstone, but it's not a unique proposition in our portfolio.

Speaker 4

And lastly, could you just update us on your acquisition thinking if there's been any incremental changes and how you see the market in prices?

Speaker 1

Yes. Well, I'm sure you've seen what's on the market. There's been a lot of troubled companies that have been on the market recently. So obviously, you look at those and then you look at some other companies as well that are either on the market or just testing whether there is an interest or not. And it's always it goes into waves and sometimes the market has higher expectations for the sellers, sometimes the sellers become more reasonable and we just need to be opportunistic when that happens.

Speaker 1

So, MTY is ready to pounce as always And I think we're in a good place now with our balance sheet and with the cash flow production that we have and we've shown our resilience once again that we can still produce cash flows in more difficult macroeconomic environment. So, we're ready to bounce, we're ready when the market is going to be ready for us. And as always, there are a number of opportunities that are shown to us. They're not always interesting. Sometimes they're not realistic.

Speaker 1

Sometimes they're just not a good fit. But when the time comes, we will be ready to pounce.

Speaker 4

Thank you.

Operator

The next question comes from Derek Lessard with TD Cowen. Please go ahead.

Speaker 5

Yes. Good morning, everybody. Eric, I just wanted to maybe hit on the margin side of the EBITDA equation. Obviously, great performance there, but it has bounced around quite a bit. So I guess, number 1, I was wondering if you can maybe just talk about the sustainability of those margins in the U.

Speaker 5

S. And Canada? And second, more specifically, just maybe wondering if you could address the lower labor costs and the much lower controllable expenses in the U. S?

Speaker 1

Yes. Well, they go hand in hand. So in terms of the margins, they do bounce around. There are a number of items that impact our margins. The seasonality of our business obviously is 1.

Speaker 1

As you know, our business is a little bit seasonal. Our cost base is for the most part fixed because it's mostly labor and this is where we don't change our labor depending on the season. So, I would say, yes, on this seasonally adjusted basis, margins are certainly sustainable. They are in the right place. If anything, I think there is probably still room for some improvement.

Speaker 1

And in terms of our costs, I don't see what's not sustainable on the structure at the moment. So I feel pretty confident that we can maintain that cost structure.

Speaker 5

Okay. And you did sort of note in the well, you did note in the MD and A, you discontinued the rejuvenation program. Is that temporary or maybe some of the reasons why you would have stopped that?

Speaker 1

Yes, we stopped the rejuvenation, I'll say probably over 2 years ago. So that was just a decision where we felt the network was in a good place and we still work with our franchisees to try to help them renovate their stores. We don't necessarily have a subsidy program in place to renovate the stores, but we do try to encourage our franchisees via different methods, different brands will have different processes to do that. But we just chose to stop subsidizing the rejuvenation for the stores and we haven't necessarily seen a slowdown in the pace of renovations for franchisees. So, it shows to me that there are alternative ways for us to get to where we want without necessarily having to take out our checkbook.

Speaker 5

Okay. And on the ERP, you've spent, I guess, year to date about $1,000,000 and I think you've guided to about $7,000,000 to $10,000,000 Just wondering how we should be modeling the balance of those expenses going forward? And I guess when do you expect to see or start seeing some of those ERP benefits?

Speaker 2

Hi, John. It's Janai. The ERP, we're expecting to see some of the benefits starting in March. Right now, we have expected go live for 1 of our divisions. In margin, we actually already launched our budgeting tool 2 years ago and that went extremely well.

Speaker 2

So we were really happy about that. And we're launching our CRM now actually. So hopefully that will be a success, but so far everything is going well. As for the future of costs, as Eric mentioned in past quarters and our budget is not something of great scale compared to other companies. We expect it to fall between $7,000,000 to $10,000,000 and right now we're faring really well.

Speaker 2

We're still on to hit our timeline and our budget. So we're really happy.

Speaker 5

So we should still expect $7,000,000 to $10,000,000 overall?

Operator

Yes.

Speaker 2

Okay. That was always our expected total budget. We've capitalized so far about $2,000,000 with about $800,000 hitting our P and L.

Speaker 5

Okay. And so I guess that would be my follow-up question is how much do you expect to capitalize versus expense of that 7% to 10%?

Speaker 2

Yes. With cloud technology, it's always a bit tricky. There's a very specific accounting guidelines regarding anything that goes on the cloud, but we're expecting to capitalize between 60% to 70% of that.

Speaker 5

Okay. Thank you very much.

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