Q3 2020 Franchise Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to franchise groups third quarter Conference call. At this time, all participants are listen only mode. After.
After the speaker presentations there'll be a question answer session.
I would now like to hand, the conference over to your host Andrew Kaminski Executive Vice President and Chief administrative officer, a franchise group.
Thank you Michelle good afternoon, and thank you for joining our conference call on the call with Brian calling for insurance group's President and CEO and Eric feeding franchise group CFO.
Before getting started I'd like to mention that certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, and other provisions of the Federal Securities Law.
These forward looking statements are based on management's current expectations that are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by the forward looking statements before looking statements are made as of the date of this call and except as required by law.
Franchise group assumes no obligation to update or revise them invest.
Investor <unk> investors are cautioned not to place undue reliance on these forward looking statements.
For more detailed discussion of these and other risks and uncertainties that could cause for interest groups actual results to differ materially from those indicated in the forward looking statements. Please see our form 10-K T for the fiscal year ended December 20, Eightth 2019, and other filings we make with the FCC.
[noise] the financial measures discussed today include non-GAAP measures that we believe investor's focus on comparing results between periods and among peer companies. Please see our earnings release in the news and events section of our website at franchise Dot GRP Dot com for a reconciliation of non-GAAP financial measures to GAAP measures non-GAAP financial information should.
Not be considered in isolation from as a substitute for superior to GAAP financial information.
It included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business is useful to investors for informational comparative purposes. The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies.
Now I'd like to turn the call over to Brian Brian.
Thanks, Andrew.
Good afternoon, and thank you for joining us I will briefly walk you through an overview of the third quarter provide some updates on our recent activities and disclose and discuss current trends in our marketing businesses before turning the call over to Eric to discuss our third quarter financial results.
He will then be happy to answer your questions.
So despite the economic and political volatility and the pandemic franchise groups overall financial performance and cash flow generation has remained strong during the third quarter. We retired the balance of EUR 70 million acquisition term loan for the vitamin Shoppe. After eight months the net reduction in debt in the third quarter.
<unk> reached approximately $112 million, bringing our total debt reduction to 204 million since acquiring American freight in February.
We reduced this debt despite paying another 25 cents per share dividend.
On October 27, we launched an opportunistic bond offering into a strong bond market. We quickly saw the capital markets weaken perhaps due to the recent uptick in COVID-19 cases and uncertainty around the U.S. elections, well in market, we witnessed several other issuers price transactions why did their intended targets. So we decide.
To do withdraw our proposed offering for now we will continue to evaluate all of our options when market conditions warrant. He's every 100 basis points of interest rate reduction is worth over 10 cents annually to franchise groups fully taxed earnings per share. So.
The refinancing Wilkinson he the major focus for franchise group overall.
Regarding external opportunities we've been evaluating various external opportunity that we believe will allow us to drive increased earnings per share and discretionary cash flow.
Many of these external opportunities also provide further diversification to our sources of cash flow and we believe that as we continue to diversify we will continue to reduce or a world class capital, leaving franchise group with even more discretionary cash flow to allocate to the highest and best use for all of franchise group.
Regarding personnel.
During the third quarter, we announced the hiring of Todd Evans as our new Chief Franchising Officer, Todd has already enhanced his team with two extremely strong executives.
Got Harvey overseeing franchise operations and Jason Matt is overseeing ranch.
Franchise sales, we've recently completed our revised FTD at American freight and expect to have the vitamin Shoppe franchise ready by year end. We believe are brands unit economics, and economic resilience are extremely attractive to franchisees as we've stated in the past we will update you on our franchising progress as it materially impacts are.
Business.
Operationally the demand for home furnishings offered by American freight and bodies continued to benefit from a change in consumer spending.
We continue to see our customers reallocating their discretionary spending away from vacations and dining out and Favre, whose.
Home improvement related spending historically, our deep value products and flexible payment options performed well in either expansionary or recessionary economic environment. So we don't feel the need.
On the businesses differently based on changing economic outlooks.
This is further evidenced by comparable same store sales for American freight being up approximately 15% and buddies up approximately 14.7% in the quarter.
[noise] vitamin Shoppe had comparable same store sales growth of approximately 8.6% in the third quarter due to strong execution and a renewed focus on health and wellness by the general public are likely due to COVID-19 increased revenue combined with operational changes instituted earlier in the year.
Have driven strong cash flow at the vitamin Shoppe.
Liberty tax and seasonality has been nominally smoothed this year due to the extended tax filing deadline.
Liberty had a strong finish to the tax season and has been focused on preparing for the 2021 season with many enhancements to technology. These virtual tax prep in contact with service.
We believe receipt of certain government stimulus in unemployment payments could create additional complexity protect fares and the upcoming tax season, driving more people to our locations for assistance, we look forward to serving our customers and supporting our franchise partners.
In the 2021 tax season.
So overall the franchise group of companies has performed well in our management teams are finding ways to improve their financial prospects. Despite the distractions of 2020.
Before turning the call over to Eric I'd like to thank all of our associates, one more time for their hard work and dedication to our company. Our success would not be possible without you I will turn it over to Eric to walk through the financial details air.
Thank you Brian before.
Before I address the results of operations I would like to remind you that we will we will be making many references to pro forma lions throughout this call are.
Press releases and filings May refer to historical financial results for the acquired businesses prior to their acquisition by franchise group.
These these items have been aligned and adjusted in line tour with our recently changed fiscal calendar and the accounting policy is to the extent reasonable.
Comparison to pro forma results will allow us to discuss and evaluate the performance of the acquired companies when a comparable period is not available due to the recent timing of the acquisition.
For example, our recent 10-K T filing reflects our new fiscal yearend December retail year, but only includes the results of buddies Sears I'll, let in the vitamin shoppe from their respective acquisition acquisition dates through December 28 2019.
The 10-Q that we filed today contains the actual results for all businesses for the entire third quarter.
When discussing our pro forma results are comparable results to prior periods. We will include American freights results as if we owned it since the beginning of the fiscal year.
In order to conform with FCC rules consistent with concepts in article 11 of regulation FX for non-GAAP reporting franchise group will not be reporting synergies and other acquisition costs as part of pro forma adjusted EBITDA. The company will continue to report adjusted EBITDA in the same format as it has in the past and will provide supplemental information that reflects costs.
Cost synergies and other acquisition impacts as discussed flow.
The specific amounts included in each disclosure a fully discussed in detail in the non-GAAP financial measures and key metrics.
For the third quarter of 2020 total reported revenue for franchise group was 551 million compared to October 26 preliminary release of at least 550 million.
GAAP net loss attributed to franchise group was $8.6 million or a loss of 22 cents per share compared to our preliminary release of a net loss of at least 9.5 million.
Adjusted EBITDA was 50 million compared to our preliminary release of at least 47.5 million subs.
Supplemental information encompassing cost synergies and acquisition impacts was approximately 1.2 million compared to our preliminary release of at least 600000.
The GAAP net loss for the quarter was primarily driven by interest expense, which includes deferred financing cost and onetime items associated with purchase price accounting.
We have four reportable segments American freight.
Vitamin Shoppe Liberty tax and bodies for the three month period ended September 26, 2020 American freight had revenue adjusted EBITDA and supplemental information of 245.2 million or 24 point 6.042 million respectively.
And then a CHMP had revenue adjusted EBITDA and supplemental information of 267 million or $21.4 million and 1.1 million respectively.
He said revenue and adjusted EBITDA of 25.5 million and 6.8 million respectively.
Liberty tax had revenue and negative adjusted EBITDA of 13.3 million and $1.4 million respectively.
Liberty, Texas mentioned typically records a majority of its revenue and EBITDA in the first quarter because of the timing of the tax season, but due to the extended tax deadline. This here Liberty tax it more revenue and EBITDA in the third party then it's expected to win future third quarters.
Turning to our balance sheet and cash flow for the quarter, we have free cash flow of 70.3 million defined as operating cash flow less capital expenditures Capex.
Capex for the quarter was 10.5 million the end the quarter cash balance was 179.9 million.
During the quarter, we received $29.4 million in cash tax refunds as a result of the Iris rule changes related to net operating loss carry backs and within the cares Act.
During October we received an additional 11.7 million in cash tax refunds and we're still waiting on an additional 12.4 million in tax refunds.
As Brian mentioned, we repaid 111.9 million and debt net debt this quarter and had some are at September 26, we had outstanding debt of 628.7 million noted deferred financing costs.
In conjunction with our balance sheet and business performance. We believe we have sufficient liquidity to continue to meet all of our obligations and.
Support all of our businesses for the foreseeable future.
I'll now turn the call back to Brian to discuss our guidance for the remainder of the year.
Sure. Thanks, Eric for fiscal 2020, we now expect our adjusted EBITDA to exceed 232 million and supplemental information of 28 million of revenue is expected to be between 2.1 and 2.15 billion our.
Our guidance does not include any assumption for acquisitions divestitures or refranchising activity like to thank all our shareholders and their lenders and our lenders for their support to date and operator you can please open the line for questions.
Thank you ladies and gentlemen, if you have a question at this time please press the star key.
The one on your Touchstone telephone if your question asked and answered it well he was to remove yourself the queue. Please press the pound.
We ask that you limit yourself to one question and one follow up.
One moment for our questions.
Our first question comes from Mike Baker of D.A. Davidson Your line is open.
Hi, Thanks, guys. So just a couple of things I wanted to get into here. So one.
On the guidance specifically the EBITDA guide is is the correct way to look at it. So previously you you were saying at least 255 million now is the correct way to look at it is to take that 232, plus the 28, and then that equals to six to seven affect your income.
Leasing the guidance from 255, if we were to look at it apples to apples from what you are previously or the way you previously reported is that right.
Yeah, Mike Hi, this is Eric.
Yes that that would be the way that we would look at it I think I could provide a little more color for you as well if.
Have you looked at our last guidance of 255, if we split that out that would be adjusted EBITDA up to 19, and supplemental information related to cost synergies and other savings of 36 million.
So you certainly see that the quality of the split between adjusted EBITDA and EPS Supplementals increasing.
Less reliance on our cost synergies, which are primarily behind us and certainly that.
The pandemic and shutdown of a portion of the stores allowed us to accelerate the achievement of our synergies within the half company and so those are now captured within the adjusted EBITDA Guide.
Okay.
Sorry go on.
No I would also say in and just to make sure that you know given our change in the guidance format, we're not providing non-GAAP EPS at this time due to the reasonableness of providing a full reconciliation and it would also exclude our supplemental information side certainly as you mentioned focus on the increase to adjusted EBIT and the inclusion of supplemental items.
Well, Okay. So that was my next question, yes, there's no adjusted EPS number here, so I guess run our own for that but but I guess your point is that the the two and it was 270 adjusted EPS that that's no longer is that no longer your guidance.
Yeah, we we've pulled the we pulled it from a non-GAAP perspective, because again the if we were put to put together a non-GAAP reconciliation. He would exclude the supplemental information so we'd be a little bit of apples and oranges. So at this point in time, yeah. It's up it's it's essentially the same talked.
Lesion would've done before just in a different way and we just we don't have the ability to put it together for you.
Okay. Okay. So so now that we got to that accounting my New show just some more on the business trends. So I really strong comps, obviously I guess a question would be how sustainable do you think those trends are how much are they how much did they benefit from stimulus if at all and how reliant are you.
You on future stimulus <unk>, which we may or may not get it and maybe one way to think about that is what what are the trends look like throughout the quarter and then into the early part of the fourth quarter.
Yeah. So it's it's Brian.
I think we definitely saw a benefit if the American freight business at the beginning of the quarter due to.
Stimulus stimulus checks stopped quite some time ago and the businesses continued to perform very well we checked every day things do continue to progress and.
Yeah don't I really can't tell you, whether or not they will stop or not but right now business continues to be strong and that is without stimulus checks and.
As we said before back in the Great recession 2008, the America, great business Comped positively rent to own businesses across the land comp well on a same store sales basis back then as well. So we feel pretty good about that I, I don't believe that liberty or or vitamin shoppe.
That matter or really impacted by stimulus I think liberty was impacted by the delay in the tech deadline and vitamins vitamin Shoppe certainly it was impacted by store closures during coated but clearly also positively impacted by general.
Consumer sentiment about health and wellness and that that has not subsided either and.
And when you say still strong I mean is it possible to sort of talk about a a monthly cadence throughout the quarter or into or into this quarter has it.
Steady as it slowed at all.
Well, it's all relative and I don't think we want to get into the monthly cadence I think we did that you really want to provide people an understanding of all the stores that were shut down earlier in the year, but I would say at this point.
Yeah, they they've continued without stimulus to maintain their strength.
It's.
Understood like to leave it at that yeah, Okay, I'll pass it on to someone else and come back after.
Huh.
Our next question comes from Susan Anderson of B. Riley Your line is open.
Hi, good evening nice job on the quarter.
If you can maybe give some more color around your thought process on launching the bond and then also some more color around why you decided to call. It in the end.
Sure happy to.
So we launched the bond to try to take advantage of what was a very strong credit market.
The bond market in particular had been.
Stronger than anything we had seen in the last six months.
We were also concerned about the risks around the election. So if you look back a month ago into October in your.
The election is heating up we didn't know what might happen to the capital markets post election.
Yeah, I know all of you that know me know I predicted 20 out of the last three market decline. So I guess today seems to be no different than.
17 that I got wrong, but.
We had the opportunity we had a window, we got great support for Morgan Stanley and.
JP Morgan B. Riley Wells Fargo, CS and citizens to get all this work done and get an offering ready we watched how a couple of deals got executed.
Relative to their targets or a couple of weeks ago. We felt we compared favorably had great feedback from pre marketing and hit the button last Tuesday, and then last Wednesday, the market just crushed doesn't.
You really you know the uncertainty over the balance of the weak I think we just missed that window and we didn't need to do a refi it isn't acquisition financing or anything pressing.
It was an opportunity to significantly lower cost of capital in a permanent permanent structure.
But but also recognizing you know what the price of having to pay expensive call protection to get out of our existing term loans between now and February 14th. So it is a you know Eddie.
Price that makes sense to lock it in for five years.
But yeah, we just we just didn't need to do it and.
Yeah, we and also of course, you know we could lock it in on one hand, but with the bond. It was two year no call. So taking something that was significantly better than where we are now but not ideal.
Wasn't going to allow us to go you know improve or like six months from now just because you know we were able to for three months from now or three weeks from now so Oh look we got a lot out of the process. We went through the ratings agencies, you got new sure rating of B, one b plus by Moody's and S&P.
Got a ton of new banks and credit shops that are very supportive of what we're doing and we expect to be running this business for a long time and it's great to have new friends that are interested in what we're doing in there to support us So yeah as I said on on the pre.
Pretty range remarks, you know, we certainly will look for opportunities to refinance the leg work is done and you know we think we'll be able to do something that's smart for the long term, but you know if it if it wasn't just that right transaction. It just didnt make.
Sense, just didn't make sense to go forward, yet so I hope that helps a little bit.
Yeah got it that's very helpful. And then I guess just to follow up on follow up on vitamin Shoppe. It sounds like fourth quarter strong trends continue I guess any thoughts around the house coven environment. Do you think you know consumer awareness around health and wellness will continue and then also what do you think it would mean for next year.
Here is vitamin Shoppe trends continue and the strong cash flow.
Sure well first of all it'd be great. If those trends continue and there's no doubt about that yeah. Do strength has continued but you know we're learning a lot. Yeah. We we had plans that they just give you. An example, we had plans that.
When we acquired the business at the end of last year.
There was a plan to aggressively you know exit stores that we're losing money and.
Yeah, because of what we've seen with co bid and the impact on the business you know there are stores that.
You might have been slated for non renewal of leases or closures, because they were marginally profitable or losing money actually that now or not losing money or are no longer marginally profitable, but you're nicely profitable. So we were going to give it till the end of the year you know feel very good.
About where we're situated management is done a great job.
Of running the business and actually.
Yeah, Hey, exciting.
<unk> 5000 associates and helping boost the vitamin shoppe. So it's a very different business than it was a year ago, we feel very good about that we're going through the budgeting process now for next year I don't have anything to say about that because we're not we're not even done with it but.
We do know is as you know the first half of the year is going to anniversary weak comps pretty cold bid is going to anniversary store shutdowns that you know.
Yeah, We had zero was on the board for revenue and 90 stores for a period of time during cold bid as well as reduced hours for you know even after the stores reopened and the stores that were opened we were operating at reduced hours. So you know now you know since the start of this quarter we.
Going back to regular up when I say this quarter I mean third quarter, we've been back to normalized operations and you've seen the numbers the incremental margin from comps positive or negative is over 40% in store and a little under 30% on average for ecommerce.
So.
Positive comps would have a big impact.
But you know, it's it's too early to tell whether or not these trends will continue but you know so far so good.
Right I guess, just one little follow up there in terms of GNC liquidation any impact either way that you're never seen yet.
So GNC the Geo beans, yeah, we will assume they were doing a going out of business sales that had a negative impact on on the product categories, where we directly compete with them you know they they took out a significant chunk of chunk of supply.
From the market.
Probably 650 million or so supply that somebody has to fill so yeah. We do think that we should benefit from that but it's it. It is still too early to tell they have new ownership group New management, you I'm sure that business will be very.
Three different but you.
Definitely it has not it has not hurt us how about that.
Yeah. That's helpful. Thanks, so much I'll hop off.
Sure.
Our next question comes from Vincent centric of Stephens. Your line is open.
Hey, Thanks, good afternoon, and thanks for taking my questions.
First wanted to just get an update on the potential acquisition pipeline as the recession has progressed.
And sort of what what you might be looking at in terms of something that might fit into your existing.
Businesses are maybe a new a new segment and.
And then just to confirm that you mentioned that the the debt raise that you were planning to do that is not acquisition financing right. That's just kind of an opportunistic. Thank you.
Sure Yeah in reverse order the.
The bond offering that we did was it was very much not specifically for any acquisition I think that consolidating or capital structure.
Will certainly give us more flexibility as opportunities come up down the road. That's one of the reasons why we find that attractive on top of the lower cost of capital but.
But there wasn't anything today that that we needed to get financing for that.
Or frankly that we probably be having a different discussion and we would have closed on a financing.
And we're used to actually having to close on a financing in order to get an acquisition. This was just purely opportunistic and to the extent that something of size comes up where we need to access the debt markets. We're certainly happy to do that.
You know if you recall, we did kind of pre fund the balance sheet with a an equity offering earlier this summer as well as a little preferred that we did later in the summer, which is we have tons of liquidity and we have.
Cash, which has been very helpful for us in some yes.
While exploring some extra curricular external transactions, we have been very active.
If you haven't seen much or anything, but we have been very active and part of being active for US is is saying no. So there there [laughter]. We've spent a few months now deep into many processes and so on that one.
Even prostitutes, but just fit.
You know.
Businesses that are very attractive to us things that we think that we can franchise.
Businesses that are good add ons for existing assets, but but at the end of the day.
No our capital is precious and we need.
We need every transaction, we do to be yeah, very obviously accretive to our earnings and our available discretionary cash flow, which is what.
We get to decide what we're going to do it later, whether that's paying dividends retiring debt or redeploying that cash into other assets that we have or further diversification and.
So we've been very careful I I just think there will continue to be I think there'll be more opportunities as time goes on then fewer I don't feel the need to jump out and overpay for anything.
And and things just come up and by the way that's how Frank.
Franchise group really was put together over the last couple of years it was.
Opportunities that came up that fit it was nothing that we went out to search for and you know we've got the powder to be able to do that I think we've got some great.
Lenders that are willing to support us so it will be there when the time is right I do think that you'll see some activity sooner than later, which we had something to talk about on today's call have been much more convenient, but we don't but we are very active and I expect that the pipeline.
We'll continue to grow and not shrink yeah, I think look but one of the things that we've learned.
Beyond any doubt over the last several weeks and talking to lenders about franchise group and what we're doing is there there will be a significant benefit to the overall franchise group from.
Additional diversification and that's.
That doesn't mean you just do what you have to do to be diversified, but as we continue to build out our business and that includes you know.
Cash flows from different kinds of assets.
I think that there will be a real benefit and open doors up things that we can do that we probably wouldn't have been able to do otherwise so I'd just say stay tuned.
Okay. That's very helpful and another question about the cash and pursue potential usage is so.
The $180 million of cash EPS available is that all deployable and what are you sort of thinking about doing there and then.
Lastly, just your comments about franchising just what's the pace and then how much cash do you think you can generate there. Thank you sure.
Yeah. So we have some some of that cash is operating cash within the the operating businesses. So vitamin Shoppe has cash on their balance sheet that they used to operate their business you know they've been generating cash and paying down the revolver, they generate cash as well, but there will always be.
Some amount of cash on their balance sheet period.
So both buddies American freight Liberty tax there is operating cash on their balance sheet, which which I would say.
Yes, you could use some of it and we have there been small acquisitions 80 buybacks at Liberty tax for example that you know.
Or or small, but in the several million dollars that you were funded with cash at the operating entity, but you know the majority of the cash flow of 140 million or so resides up at a franchisee group, which is completely unencumbered and has the freedom to do.
Oh, whatever whatever it wants so I'd say, that's really other than you know.
Smaller transactions, where.
You know were literally adding something small to an existing business I would think of that as being the echo.
Equity portion of of an acquisition check.
Does that does that make sense, yes.
Yes, that's very helpful and I think I think you asked something else that I would do I'm sorry, it's in there yeah, just about the what you're thinking about in terms of the franchise opportunities and how.
How much franchising you could do in the near term and that the cash available to generate from that.
Yeah look a key part of our strategy when when we do have a company operated stores is being able to use refranchising to de lever the balance sheet, which we will lever up to two acquire assets. But then we always have to have a plan to de lever.
Fairly rapidly and we want to be in the two to three times leverage.
Ratio will but we can expand possibly up to four times to stretch to get you know a great transaction done if we think we can you.
De lever pretty quickly and Refranchising is a key piece of that strategy, but it's also key part of the strategy to grow you know we're we're we're trying to Refranchise company owned stores and you add development agreements to those I think that you know there are there.
Different businesses are at different stages of their code franchise maturation cycle, you've got to your buddies and Liberty that had been franchising for a long time and and that's that's very simple American freight you know with you right now eight franchise stores out of 300 plus.
It's new and those are really the outlet stores originally and now that outlet has become American freight and I think I said earlier, we just we just completed the FDD and we'll be ready to go on that unit economics are fantastic and we know that there's a lot of demand for franchising or the American freight business and with only 300 stores I think we.
Got.
Room to grow four or five times store count, where we are right now so that will be very aggressive about that and just bringing Todd.
Sky's adjacent on.
Which was just during this quarter.
We're we're really ready to go there and then vitamin shop, which is 100% company owned.
Yeah.
This was definitely not the year to be aggressively trying to franchise I think that you know this business as I said and really do believe it's a very different business than it was a year ago and yeah, I think we need to own that right now and we have been we took a break during covidien and now we're getting that franchise readying.
You know, we're we're weeks not months away from being ready to go there and I think that.
No just the environment and as well as just generally people passion for all things health and wellness are just so many of them out there I think that there will be a very attractive brand.
For perspective franchisees so.
Hey, it's coming this year was a very different year than I think we all expected we had a refranchising transaction ready to go back in February March and we closed American freight Kogan hit and you know things change, but I think that you'll you'll see progress there very shortly.
Okay, great. Thanks very much.
Sure.
I'm not showing further questions have a nice turn the call back to buying con any further remarks.
Okay. No further remarks from me. Thank you all for joining and operator, you can conclude the call. Thank you.
Ladies and gentlemen. This concludes today's conference you may now disconnect everyone have a great day.
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