Q4 2019 Earnings Call

The net income attributable to shareholders increase to 20.7 million for $0.83 per share for the fourth quarter of 2019 from 13.2 or $0.53 per share for the same period last name.

during the

How to liquidity and capital resources in the fourth quarter of 2019 mty generated cash flows from operating activities of 37.9 million compared to Thirty point five million last year with the full year. Our operations generated cash flows of 113 million surpassing the hundred million Mark for the first time in our history.

On a per diluted share basis or cash flows from operations were $4.48 per share while they were $4.03 per share in 2018 an increase of over 14% off.

Drink 2019. Our Capital was predominantly allocated to Acquisitions for which we disbursed 332.1 million dividends to shareholders amounted to $16,000 billion in share repurchases amounted to 5.2 million, four two thousand and four 2020. We plan on reducing the amount investing in acquiring new businesses as we do not anticipate positions. We will continue to pay dividends to our shareholders and according to our dividends policy and we will continue to be opportunistic with our ncib.

Free cash flows for the quarter were forty three point six million up significantly from 27.5 million for the same period last year for the full year. We generated free cash flows of 116.9 million. From ninety two point six million in 2018, nty end of the year with a healthy financial position as that November Thirty empty why I had fifty point seven million dollars in cash on Hancock and a long-term debt of 540.7 million mainly in the form of old box and Acquisitions and Bank facilities.

To conclude. We are very pleased with the accomplishments realizing 2019, which was a transition year for empty why our team worked tirelessly to make empty? Why ready for the challenges? The next few years will bring and delivered strong performance while making all these adjustments. I'm extremely proud of all nine hundred plus employees and want to thank all of our franchise Partners. We're delivering great food every day for 2020. We will maintain our focus on maximizing shareholder value by making every effort to generate Positive Growth from our existing Concepts integrating our recent acquisitions and seeking a position to increase our market share with that. I thank you for your time. And I will now proceed to answer your questions to ask the question. You will need to press down one on your telephone. So we draw your question, please press the pound key, please stand by while recompile the coupon errors.

Your first question comes on the line of Michael Glenn of Raymond James, please go ahead.

The line is open.

Good morning, Eric just to I know that you said you weren't going to answer any questions on the whistle-blower, but this obviously is a huge talking point. So, I mean, I'm just trying to understand at the time that this individual made the allegations had indeed then the financial statements being audited fully audited.

Well, good morning Michael. Well for for the audit was completed with the approval of financial statements yesterday at the board meeting. So this is when the audit was completed.

So up until the time that those so there had not they Auditors had not signed off then on the financial statement that the point of those allegations. No.

Okay, and can you give an idea then on on the range of topics that were flagged by the individual?

Yeah, we we got to go into the specifics and simply for the reasons that the allegations were deemed to be baseless. So there's there's no point listing them at the at this time, but it was it was a wide array of allegations. So it's not it's not only one topic.

Okay, and in in retrospect, was it Justified to postpone the release of the financial results?

Given the timing of the allegations. Yes. It was the right decision. We we had time the regulatory deadline was February 28th. So we had time to make sure that we did things in the pro-life conservative a matter which is how empty why does things in general? Um, so we took the time we took a step back to make sure we review and reassess our positions and and and you know home now that we have taken that time we are happy we did and can you explain for a whistleblower? How The Whistleblower process works exactly.

Yeah, we have a we have a whistle blower policy. So so the policy basically I think is is very standard for any industry. Wow. Oh it goes to direct manager. And then if if it's the allegations are about something else it can go all the way to the chairman of the audit committee.

Okay, and then okay, so I moved away from The Whistleblower in terms of can you just talk about the in the corner from circling back to home when you report a Q3 was the sequential contribution from Papa Murphy's was that in line with where you wanted it to be in the. Were you happy with the contribution?

We're happy with the contribution. It's it's probably a little bit lower than the guidance. We had given when we did the transaction and it's not a surprise at this point. We we are in the transition for a lot of different things up Papa Murphy's, um in operations and marketing and in a lot of different functions. Um, so so we have to incur some fees and we have to hire a certain amount of money to make sure that we do the right things going forward. So it's probably a little bit lower than what we had indicated but we're happy with the contribution. We're certainly happy with where we see the business had a

Okay.

In the original comment, was that the when you reported Q3 was that Papa Murphy's would contribute something like three times. Uh, the the the office sequential basis from the Q3. Was can you give an idea of where it came in relative to your original expectation? Yeah. Well it came in about 30 times with you had given us and in q1 and Q3. Sorry for the first quarter with Papa Murphy's but it is slightly lower than what we had indicated when we did the transaction. So if you remember that preparation, we made to the investors when we announced the transaction. So we're a little bit lower than that. Okay, and then when you when we look at the the the organic off or it's one of the locks provided in the not the organic one, but the E Bedell walk the 6.3 million for USA and international contributions.

From increased due to Acquisitions. Is that is that entirely attributable to pop?

Please or I guess there's probably a few other things and I'm just trying to get a a sense as to what what amount is that 6.3 million is Papa Murphy's. No, it's Papa Murphy's a Papa Murphy's. Okay, and then just finally on store closures you provided a a bit of commentary like as we look into wage. Um next year. Can you talk about is there anything on the horizon with respect to any of the brands? We should think about in terms of maybe stemming some of the the pace of the store closures wage?

Yeah, well, the store closures are a little bit everywhere. So it's not one brand specifically that has store closures. So so yes, obviously, we have a number of initiatives that we are putting in place now in Iraq and that are rolling out to try to address that some store closures will always happen. Some of them were need to happen. Uh, but I think some of them can probably be vented and we have a number of initiatives that we are putting in place now to you know, work with our franchisees work with our landlords work with all this business partners and all the stakeholders that are involved in in these decisions and try to make the stores this profitable as possible and have the best condition possible for for stores to remain open and and do good business.

And and across one of your larger Brands Cold Stone they're there.

I'd been some some store closures that took place through the past couple of years is that should we anticipate that that peso closure will will moderate and coming years? Well Goldstone is just a number of stores will obviously there's always going to be more store openings and More Store closures for a Cold Stone just because it's such a big brand. So so I think I'd like to have a zero store closure, but I I don't think that's realistic so there will always be some store closures and hopefully we're going to have better store openings. And and then that's the way things are going to go well,

Okay, that's that's it for my question. Thanks.

Your next question comes from the line of of RBC Capital, please go ahead your line is open.

Thanks and good morning. Can you maybe give us some updates on some of the specific initiatives that you said you were going to be working on at Papa Murphy's specifically things around technology updates their life and the menu Innovation. Just want to get an understanding of how far along you are right now.

Yep.

Well, thank you for the question in terms of in terms of uh Information Technology. Uh, I assume that with referring to is is really the Loyalty platform that we're launching in the the online banking. So the online ordering is is doing well. And it's it's it's it's a platform that's where you know constantly improving. So hopefully the process is going to become smoother and smoother for the clients and I'm trying to have more and more of the online ordering and we're seeing the the metric a little bit in the right direction. So that's that's very positive in terms of the Loyalty program. It's being rolled out and test markets at the moment. So we have a few test markets that are live. We want to make sure we do the right things and and and really nail it the first time, so the full rollout is expected early in our second quarter. Uh, but yeah, so the loyalty is being rolled out in the moment. We have also a few other platforms dead.

That RIT related but I also more business-related that are being rolled out. You know, some of them are are aimed at providing more.

Timely assistance to our franchisees with regards to their profitability so we can monitor, you know, a certain number of metrics that will help us address any concerns we have earlier in the process and and make sure that the we don't have a major problem down the road. So that's something that we are rolling out as well. And and it's it's really showing some really positive results. Now you mentioned faith in terms of product Innovation. So we are working with the the entire Marketing Group really it's not only R&D but we are working on a marketing calendar which is something the business at home for a long time. So we have a marketing calendar in place. Now, we have R&D dedicated people that are coming up with some really interesting products. And the fact that we didn't have a gander and the fact that these uh, launches hadn't been planned, you know, normally you plan these things they twelve to eighteen months ahead of time. So so I mean we are fighting to age

get these things out earlier, but we need to make sure that we aligned the supply chain the marketing and every

Thing to make these product launches successful. So we are doing that. We are testing a few products. Also, we're being very systematic and how we want the test. We don't necessarily want the dead something for the entire market and then and then uh have something that doesn't work. So we're we're a little bit system more systematic in the approach. Uh, but yeah, it's going well God, you know, it's there's nothing instantaneous. So we need to take the time to collect the data properly and make sure that we have the right products and the right product launches and the the execution is dead is a spectacular for the customer. So there's there's a lot going on there.

All right. Thanks. And then I think the store closures at Papa Murphy's a while ago. I was the number mentioned something on the ballpark of potentially up to $100. I guess now that you have the business for some time. Is that the number you're still thinking about in terms of over the long run or do you have a different view on that?

Yeah, well, I'd like to make it smaller for sure so far. We have thirty-two closed. It's a little bit less than what we had anticipated and hopefully we'll be able to keep it this way. I know we have a number of stores that are more fragile that we need to monitor. But hopefully we can we can keep those stores open and then we can work with our franchise Partners to make Thor's as profitable as possible. So I don't I don't necessarily want to give uh an adjusted guidance at this point. All I'm saying is we're a little bit ahead of our schedule.

okay, and then

Acquisitions, I mean if I heard you correctly you mentioned that you might sort of moderate the larger ticket ones over the next is that more so to focus on the core business or is the pipeline any different than it was a little while ago. What what what kind of driving back up process. Oh, well, there's a variety of reasons and and one of them is we've made a lot of in the past two years including two larger ones with Invesco and Papa Murphy's Law. And then the number of you know medium sized ones in the few smaller ones. And and I think at this point we need to take a little breather and to make sure that we we stabilize everything before we start the question again, and while we're doing that will be able to you know, uh, let's build a treasure chest to be able to have the financial resources to to make large positions without necessarily going too far into our credit facility. So we just want to make sure that we take a conservative approach. We want to make sure that we focus on the assets we have in the portfolio now and May

and once once we've

Stabilize everything and that we we feel confident we can move forward again. We'll we'll do it. But at the moment we're still only focusing more on the existing Brands than than focusing on having.

Okay, and then just one last one for me, I guess more just on the process around the the commentary on The Whistleblower stuff, I guess from your perspective. This is the end of that announcement and we shouldn't expect to hear anything else from your end.

That's right.

Okay. Thank you.

Your next question comes on the line of vision of National Bank, please go ahead you line is open. Hi. Thanks for taking my questions in your home and your disclosure documents. You note increased competition and increased uncertainty. Just hoping you can provide some perspective on this and it particularly in light with your your life strategy to grow seems store and you know how produce the store closures as much as possible. So maybe you can help me understand how those two things interact.

Yeah, well well in terms.

Of competition, there's there's always more and um, you know, there's more and more restaurants. There's also a more customer food dollars going into restaurants, which is a good thing. But competition is certainly very Fierce and it's Jeff from areas where we didn't see competition before so I'm thinking of you know, the ghost kitchens that are starting to pop a little bit everywhere. We're we're thinking of, you know, the meal kits that are a little bit more popular than they were before and the and the number of restaurants that are opening almost on a daily basis is is really large. So for us competition is always there's probably now more than it was before so hopefully the customers can keep keep spending more food dollars in their restaurants, but there's certainly a lot of competition in terms of certainty, but there's always uncertainty related to a lot of different things, you know, uncertainty related to customer Behavior uncertainty related to you know dead.

Political landscape uncertainty related to you know, the economic Cycles. There's certainly uncertainty just at the moment.

And with with the cobit 19 virus that's out there. There's always uncertainty related to our supply chain. There's a blockade on on Railways and Canada the moment that brings uncertainty on our supply chain as well. So there's there's always something else. So there's there's always going to be uncertainty and it it brings a certain amount of risks.

Okay, so I guess what I was trying to get at is in light of you know, the increasing competition and and uncertainty. Is there any path for France e y to provide royalty type relief to to your franchisees off in order to to help them, you know a transition against this this challenging backdrop.

Oh, yeah. Yeah. Well our franchisees for sure is our goal is to make our franchisees profitable. So we are business partners. We are in it together. We want to make our franchisees profitable. There are a number of things that we want to do before we give relief on royalties. And the first one is really to make sure that the operations are taken care of that. We are operating at optimal levels and that the customers are wild every time to go in the store. So there's there's a lot of work to do and and before we give any relief, we also want to go into our restaurants address the local marketing campaigns and the local marketing strategies we have and try to improve business. So, you know, there are a few stores are under relief for various circumstances. For example, the city tears up the road in front of the store. Well, that's a problem. Obviously if the customer is cannot go to your birth.

It's it's going to create some hard times. So we need to address those. But yeah in general.

So we try to address any problems at the store would face with different strategies instead of trying to give a relief to the franchisee, which really doesn't solve anything in the long run.

Okay, so so so I guess the this comment of royalty type release to address this competitive backdrop is isn't materially bigger isn't material than it's been in Prior years that fair way to look at it. Absolutely. Okay on Papa Murphy's the same store sales. I know you have a lot of things on the go but it kind of a weekend a little bit. Sequentially. What is that due to the the all the disruption happening from all the initiatives or how would you characterize that?

No, the initiatives take time to to to gain traction. So we're going one by one with the initiatives. We're we're confident. We have a lot now on the go off. So if anything it's going to help and it certainly no distraction or disruption caused by all these initiatives, but when you look at Papa Murphy's it's a business that had had declining for a number of years and it's it's hard to offend them around especially in the context where you know, the weather was more favorable to ice cream in our queue for it and it was to Papa Murphy's and it showed with our performance with off-screen Browns. Okay in terms of just changing topics here and I know Acquisitions aren't going to be as big of a theme in twenty nine and twenty $20 as it was in 2019. But when you look at the acquisition multiples, are you noticing them Trend higher generally overtime or is it stable ish for the ones you look at?

well every time

You have a more competition in the process has the multiples tend to creep up, um in our case because we we are going after slightly larger Acquisitions. You'll you'll see the multiple go up. You have more sophisticated sellers you have Bankers, uh, the the the increase the competition for the processes. So the multiples will creep up a little bit but it's not necessarily more than it was in the past. I would say the multiples are fairly stable. Um, and we're not necessarily seeing sellers being more greedy or or more demanding than the aware in breast in the past few years. Okay and walk you touched on this already but the the rail blockages and coronavirus is it fair to say impact is fairly Limited at this point on your business. Yeah. Well, it took a moment that is limited. We we do have we do have some anecdotal evidence of some impact in certain communities for the virus. Uh, but uh dead

And that that can I guess they can deteriorate fast if something happens. So for now, we're I think we're good and we haven't seen too much impact for from either.

The virus or from the rail. Um, and hopefully it's going to stay this way, but we haven't seen anything so far.

Okay, thank you. Your next question comes on the line of charge of Scotiabank, please go ahead your line is open.

Good morning. I just have a whistle-blower question maybe without getting into them to specifically but just wondering over the last 10 days to what extent did your auditor is maybe log into any of your specific Financial allegations made?

Well the Auditors they don't audit one specific topic the audit the you know, the audit the entire financial situation and every topic will need to be addressed. But obviously he's allegation bring a certain, uh, you know a certain, uh,

A certain way to look at these risks that might be different than the than they were before. So they've done their work. We've done our work with with them to make sure everybody's comfortable with with what we're doing and what we're publishing today. And this is it but it's not you know, as I said the Auditors don't provide an opinion on on allegations the provides pinion and financial statements, which is is a lot bigger than just these allegations.

Okay, that's helpful.

Some pretty good numbers on a from a comp Trend in the in the East is that predominantly favorable weather or maybe can you call out some other Trends or some other factors that contribute to that strength? Oh, I like to say we do it terrific job. So so that's probably the main element. I think the teams are are doing amazing. We have a lot of good things on the go for a lot of our Concepts. So I think I'm doing an amazing job, whether it certainly helps and you know, I think it's normal weather this year last year if you remember in Q4 of 18 and in q1 of nineteen, I took blame the weather and we had some extreme cases that really hurt our business. Um, and this year in Q4 was whether it was a lot more normal. Um, and I would say the same thing for the beginning of Cubes one where you're not seeing these extreme weather patterns that we had in in last year.

I guess I guess at least you to my next question like we're well into q1. Just wondering if the same Trends you're seeing I guess maybe in Canada as well as the are they kind of is a momentum there as well.

Oh, we we started the year with good momentum for sure. There has been a number of different things affecting our businesses and in different areas. Uh, but we we did start the year with the momentum package operations have been doing really well. I'm just wondering is that the liberal an area that you would like to maybe build up over the next little bit do you see that being a significant percentage sales? Maybe you know through Thursday. Maybe they bought that that specific part of the business. Yeah. Well retail is really good segment for us. It's something that is is relatively new for m t y m and then I think we're putting more emphasis on it. Now that we're seeing the how how good it can be for for us for the brand image also for the everything that's off that's in the stores. And then we have a certain number of guidelines we have for our products, but we certainly have a team now and that's dedicated to it. And that's pushing hard to try to develop new mod.

Develop new products. Um

And then and push to to get our products on the shelves as in in as many places as possible.

Okay. I just want to ask me if I'm Eric on the buyback activity. It seems like it's kind of going up compared to historical standards. So I'm just wondering is is that something that you that you plan on maybe stepping up wage? Um, you know if the share price doesn't fully recover is that near mind right now a good way to deploy Capital to shareholders as opposed to maybe I'm in a

It is it is and again if if empty why is is cheap for us. If it's if empty why is the best company we can acquire will acquire empty, why will buy shares of in our own company, you know, when you buy empty why for us, there's no integration risk. There's no cost Associated to advisers. There's no integration. There's everything is is really easy and we'll be opportunistic if empty why is trading at the price that is too cheap for what we think it should trade will certainly continue to buy back.

Okay. Thanks your answers.

Again to ask a question. You will need to press star one on your telephone. Your next question comes on the line of Derek Lessard of TD Securities, please go ahead. Yeah. Good morning. I was wondering did you guys bring in any third parties to to review the the the allegations and I guess if not, is this something that you'd expect to do with?

Well, this is not necessarily something. I'm prepared to to to discuss Derek. Unfortunately, this is something we'll keep for for inside the company. I don't think we need to give these details wage, but I'm just I guess some you did say that you you think that this is the end of the I guess the impact from your from from the whistle blower and we shouldn't hear anything from that page. Is that is that clearly what I understood?

I didn't say that so no, I mean I can't control what's going to happen next. Unfortunately in our case we've done our homework regarding the allegations that were in front of us now with the next steps are going to be I don't know. I I can't I can't tell you what the impact is going to be for us. We took to close the book on it, but I don't know what else is going to happen at this point. Okay. So Switching gears, are there any challenges to converting some of the Papa Murphy's Corporate stores to the franchise that the franchisees and can you just maybe let us know where you are in that process?

Yep. Well when last time we talked we we mentioned there.

We're going to be three major territories that would be transferred to franchisees. One of them was transferred during the fourth quarter. One of them was transferred during the first quarter of this year. And the last one is expected to go in the second quarter of this year. Okay, and maybe just one final one for me again strong since it says sales, pretty much across the border of Canada. And and are you able to talk or give any color around? Um, you know what you're seeing in terms of of traffic versus check or pricing.

Yeah, well, we're we're always trying to increase the basket size. So we have a few Brands where we see the check going up. We can't take too much pricing these days. We we've we need to be extremely careful with the price we take so um, so we have good traffic cops at the moment. And then we also have good basket size comps and in some of our brands.

Okay, that's it for me. Thanks.

they're on

For the Christian. So this time I turn the call back over to the presenter.

Thank you again for joining me on this call. I look forward to speaking with you again for next quarterly call ladies and gentlemen, this concludes to this conference call. Thank you for participating wage. Disconnect.

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