Q3 2021 Franchise Group Inc Earnings Call
Ladies and gentlemen, thank you for speeding by and welcome to franchise with fiscal 2021 third quarter Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session I would now like to hand, the conference over to your host Andrew Kaminski.
Executive Vice President and Chief administrative officer of franchise screen.
Thank you good afternoon, and thank you for joining our conference call on the call with Brian Kahn franchise groups, President and CEO and Eric seating franchise groups CFO.
Before getting started I'd like to mention that certain matters discussed in this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, and other provisions of the federal Securities laws.
These forward looking statements are based on management's current expectations and are not guarantees of future performance.
Actual results could differ materially from those expressed in or implied by the forward. Looking statements are forward 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.
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 franchise groups actual results to differ materially from those indicated in the forward looking statements. Please see our Form 10-K for the fiscal year ended December 26, 2020, and other filings we make with the SEC.
The financial measures discussed today include non-GAAP measures that we believe investors focus on and comparing results between periods and among peer companies.
Please see our earnings release in the news and events section of our website at franchise.
Allegation of non-GAAP financial measures to GAAP measures.
Non-GAAP financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information, but we included because management believes it provides meaningful supplemental information regarding our operating results.
When assessing our business and is useful to investors.
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 Bryan Bryan.
Thanks, Andrew and good afternoon to our listeners and thank you for joining us.
Ill briefly discuss the highlights of franchise groups third quarter provide an update on recent corporate activities and discuss current trends in our markets and businesses before turning the call over to Eric to provide financial details. We will then be happy to answer questions.
The third quarter of 2021 franchise group continued to execute operationally and capitalize on the momentum of our brands, while staying focused on driving discretionary cash flow during the third quarter. We closed on the sale of Liberty tax and repaid $182 million of debt and then on September 27.
We completed the acquisition of Sylvan learning.
The addition of Sylvan provides franchise group with another growing franchise concept and furthers our diversification into an expanding $20 billion consumer consumer services market.
Silver has been a leader in the educational services industry for decades in Sylvan offers attractive unit economics to its growing franchisee base like all of our acquisitions Sylvan is expected to expand our discretionary cash flow generation.
Although we just closed on silver and about a month ago, its associates and franchisees have already seamlessly become part of franchise group.
Financially, we are increasing our expectations for the balance of fiscal year 'twenty, one and as we look towards 2022, we see significant further growth for our franchise group and very proud of the way. Our management teams are navigating continued supply chain constraints and overall inflationary pressures the momentum of the Brad.
<unk> is strong, but nobody is coasting.
We're in a dynamic environment that requires our management teams to actively manage literally on a daily basis.
They have overcome tens of millions of dollars of potential profitability headwinds and I. Appreciate their individual efforts that have combined to grind out strong collective performance for franchise group.
Franchising all of our brands have continued to enjoy robust demand from both existing and new potential franchisees due to the strength of their operating models new store openings by franchisees are providing healthy system wide unit growth and a continued shift in our overall mix toward franchise units today, our mix is roughly 50% franchise.
In the third quarter, we increased franchise store count by 22 locations and on a net basis closed one corporate location, while signing 51 area development agreements for the first three quarters of fiscal 'twenty, one excluding Sylvan, we opened 124, new locations signed area development agreements.
153, new franchise locations and have grown our total backlog of our new stores across all brands to 339 units, adding in Sylvan our backlog now stands at 365 locations.
In the third quarter pet supplies, plus advanced the variety of internal growth and improvement initiatives management rolled out an online prescription service relaunched a new and improved loyalty program and grew its franchise backlog of store openings to over 220 units PSP same store sales for the third quarter were up 14, 5%.
At the end of the quarter PSP had 583 stores with 343 franchise locations and 240 corporate stores.
Total revenue at American freight was down eight 8% year over year in the third quarter due to comping the reopening surge in demand from last year's comparable period.
If you recall last year, a freight comp positive 15, 3% in the third quarter. This year, a free comp negative $13 four to your stack remains positive and we continue to see significant interest in the American freight franchise opportunity due to its superior unit economics and unique position in the market American freight had.
367 units at the end of the third quarter, including seven franchise locations.
<unk> same store sales were up one 4% in the third quarter, but he's carried its franchising momentum into the third quarter by signing area development agreements for 24, new stores and Refranchising eight locations, but he's footprint now stand at 309 units, including 272 franchise locations.
Vitamin shops positive trends from the second quarter continued as well as the brand benefited from consumers' focus on health and wellness and the growing demand for vitamin Shoppe products. Once again store traffic increased as consumers gain comfort, leaving their homes to shop on premise. These trends are evidenced by vitamin Shoppe third quarter same store sales growth.
Of over 13%.
<unk>, a positive 17% in store and negative one 7% for direct to consumer.
Vitamin Shoppe ended the third quarter with 713 stores in the system.
Guarding M&A, we continue to evaluate M&A opportunities that will either further diversify franchise group's revenue and cash flow streams accelerated growth or both we believe that each acquisition opportunity that we were reviewing provides a clear path to enhancing franchise groups discretionary cash flow and we expect to have more to discuss on M&A in the.
Near future.
Before turning the call over to Eric I would once again like to thank all of our dedicated associates for their hard work for their support of each other and their support of our franchisees. Thank you very much Eric.
This is Andrew stepping in for a minute Brian you I just wanted to reiterate the PSP same store sales for the third quarter up 14, 5% there was a glitch and you are.
<unk> at the time and it sounded at four and a half. So just wanted to correct that now I'll turn over to Eric Okay. Thanks. Thanks. Thank.
Thank you, Brian and air and Andrew.
I'll address the results of operations I would like to remind you that we will be making many references to pro forma items throughout this call our press releases and filings may refer.
That's for the acquired businesses prior to their acquisition by franchise group.
These items have been adjusted to align with our fiscal calendar and accounting policies to the extent reasonable comps.
Comparison to pro forma results will allow us to discuss and evaluate performance of the acquired companies when a comparable period does not available due to the timing of the acquisition.
As a reminder in our.
SEC rules consistent with concepts in article 11 of regulation S X for non-GAAP reporting franchise group will not be reporting synergies and all the acquisition cost.
The company will continue to report adjusted EBITDA in the same format as it has in the past at this time, we do not anticipate reporting any supplemental information for 2021 the.
The specific amounts included in each disclosure are fully discussed in detail in the non-GAAP financial measures and metrics session section of our earnings release.
For the third quarter of 2021 total reported revenue for our franchise group was $828 8 million net income from continuing operations was $36 million or <unk> 83 cents per fully diluted share adjusted.
Adjusted EBITDA was $80 8 million and non-GAAP EPS was <unk> 97 per share.
We currently have four reportable segments American freight the vitamin Shoppe pet supplies, plus and bodies and report Liberty tax as a discontinued operation for.
For the quarter ended September 27, 2021 American freight had revenue and adjusted EBITDA of $223 6 million and 16 million respectively.
The vitamin Shoppe had revenue and adjusted EBITDA of $308 million and $35 9 million respectively.
But he has had revenue and adjusted EBITDA of $17 8 million and $4 4 million respectively.
N PSP had revenue and adjusted EBITDA of $286 6 million and $25 million respectively.
For the quarter consolidated cash flow from operating activities for FRG was $10 9 million and capital expenditures.
$12 2 million netting to free cash flow of negative $1 3 million defined as operating cash flow less capital expenditures.
Within these amounts.
Cash flow from operating activities of $2 7 million in capital expenditures of $2.
$2 million cash flow attributed to franchise group continuing operations was $8 2 million from operating activities less $12 million of capital expenditures netting to a free cash flow of three point negative $3 8 million.
We ended the quarter with approximately $1 1 billion in outstanding term debt, which included a $182 1 million repayment and an undrawn $150 million ABL.
Approximately $160 million.
We used approximately $81 million of this cash to pay for the <unk> acquisition on September 27, and.
In conjunction with our balance sheet and business performance. We believe we have sufficient liquidity to continue to meet all of our obligations on support all of our businesses for the foreseeable future.
As of today, we are increasing our expectations for annual adjusted EBITDA for fiscal year 2021 from at least $320 million to at least $325 million non-GAAP EPS from at least $3 45 per share to at least $3 80 per share and revenue from at least $3 5 billion to at least $3.
$1 billion in.
When calculating EPS, we are using approximately 41 million weighted average shares outstanding and our expectations for the balance of 2021 includes one quarter of silver, but does not include any assumptions for additional acquisitions divestitures or additional refranchising activity.
I want to thank all of our shareholders and lenders for their support state.
Operator, please open the line for questions. Thank you.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If a question has been answered or you wish to remove yourself from the queue. Please press the pound key we ask that you. Please limit yourself to one question and one follow up one.
One moment for our questions.
Your first question is from Mike Baker from D. A Davidson your line is open.
Okay Hi.
Just want to follow up on that very last thing.
You said the guidance includes one quarter of Sylvan also the audience is up on all the important line items, but is can you just help us understand is the guidance increase just on the southern acquisition or it doesn't include.
What looks like a little bit of a better than expected third quarter here. Thanks, and then also.
Mike This is Eric so yeah, the 35 per share non-GAAP EPS raised referencing it's a combination of.
<unk>.
One is certainly the ongoing business performance Witching Corporate's, our latest forecast for the year, we've chewed up tax estimates, while we expected to be initially a man and minimal cash taxpayer for the year, we now expect not to be a cash taxpayer from our continuing operations standpoint.
Which is driven by our updated forecast and in the post Liberty sale. So obviously those pass that tax aspects that came from that chewed up our forecast and then certainly a trough or the last part was a true up of estimates from a purchase accounting, which positive positively impacted our GAAP EPS for the combination of those three items.
Mark.
The increase in the guidance for the full year.
Okay. That's helpful. Two more quick ones well they might might be quick.
And then can you talk about you know when you acquired it looks like the numbers are pretty good strong margins.
All franchises and mostly franchises already so what do you bring to this company to make them better it's not like one of these cases, we are vitamin Shoppe, where you re franchise them because they're already franchises. So I'm just curious.
How do you drive incremental value to that acquisition.
Yeah, Mike, It's Brian I think that we will help them accelerate their growth of units.
Potentially add additional services that they can offer in their units, but sylvan was a well run business.
It would have been flying without us, we think that we can accelerate their growth and I guess, we'll see if we can.
Okay, one more and then I'll turn it over just switching gears American freight.
Obviously, the business was a little bit weaker here, but on a two year basis, it's pretty good.
Can you talk about the supply levels, there, that's where I think you were saying the biggest.
Supply issues like the last two quarters. Thanks.
Yes. So it was supply chain is generally still a mess, but the management team book, but both the American freight and then frankly everywhere else. They continue to fight the fight.
Inventory levels are actually sufficient at American freight mix may not be ideal, but we've invested significant dollars in inventory they are well inventoried.
We wouldn't expect to Miss a lot of sales, but its not that its easy either having to grind it out and find ways to switch vendors and get inventory into the system, but they have done that and they are ready.
For the high season, which as you know is around tax season.
February.
Okay fair enough I'll turn it over to someone else.
Sure.
Your next question is from Larry Solow from CJS Securities. Your line is open.
Good afternoon, thanks for taking the questions sort of sticking with the supply chain and inflationary theme any.
Any impacts of vitamin Shoppe, obviously, you had really nice topline growth.
And incremental margins still look pretty good actually I think within historical ranges only 40%. So has there been any impact on.
That business in.
Part two of that question is do you continue to see I know you sort of give an outlook for 2022.
Maybe you don't want to give specific segment or company outlooks, but do you still think this business could grow as you look out.
Over the next few years.
Sure so.
I would say as a blanket statement there is wage pressure in every business that we're involved in right. So I think that that would include vitamin shoppe as well on the inventory side.
Theres inventory, there's cost pressures in inventory as well, but vitamin shoppe isn't.
Hey, there.
Don't have the magnitude of the issues that maybe others have that are waiting for containers coming across the ocean.
But yes.
They have made I think the right decision to carry excess inventory safety stock so.
That.
To the extent that certain.
Categories that are very popular they see a rush of demand that they have them and I think it's the right move when we when we bought vitamin Shoppe a couple of years ago. One of the goals was actually reduce inventory and because they had so much in the system now were actually increasing inventory and it's not it's not insignificant there.
There is certainly carrying.
Eight eight digits more than.
Typical levels might be but I think that's permanent.
So I don't think that's just a temporary increase that will ultimately be worked down I think that having a safety stock matters and as useful and can be a competitive advantage to them. So I'm sure.
That's how I would look at that.
As far as the growth there.
Look the.
Their business is growing they've had tremendous amount of success over the last couple of years that has continued.
Extremely encouraged by for the first time in and Forever.
Actual customer counts increasing.
Customer accounts increase if they hang on to those customers you've got a whole new level of business.
So very encouraged by what we see there it.
Certainly.
No guarantees, but I think that there <unk>.
Prospects for being able to continue to grow the top line look very promising.
Okay, Great and if I just may one follow up just sounds like franchise interest as strong cross across your your businesses.
The 22 openings. This quarter can you just give us a little more color on that was that mostly a pets pet supplies or actually it looks like vitamin Shoppe went down a couple of quarter over quarter or did they close a couple.
Just trying to get a little light.
Vitamin a franchise stores for vitamin Shoppe vitamin.
On the Trump said total stores were 76, I think we're down three quarter over quarter I think about 716 at 713, yes. That's correct. So we have three corporate stores that we closed at vitamin Shoppe. The franchising was strong we opened 10 PSP stores.
At 11, <unk> stores Thats, the bulk of it 21 of them.
Got it so that that was really driven there.
Got you perfect. Thanks, I appreciate the color. Thanks.
<unk>.
Your next question is from Susan Anderson from B Riley Your line is open.
Hi, good evening.
I just wanted to follow up on your EBITDA Pal I guess now with the addition of sell in and the increase in EBITDA and then maybe another acquisition in the works and are you guys still working to pay out 25% of EBITDA and also just curious when that is calculated.
Sure Susan Thanks for the question and.
Yes, EBITDA has grown the long term target is 25% dividend rate as a percentage of EBITDA and and as you know we have paid out the same rate for the last four quarters and we are re addressing the dividend for next year.
As we sit here now in November we're going through the annual budgeting process.
Management will submit a dividend recommendation to the board shortly and.
After a plan is approved we'll declare that next dividend.
Yes, certainly makes sense based on the revenue and profitability growth do we see today, it's reasonable to expect that at least management's recommendation will be for significant increase in the dividend.
Great and should we expect that to go closer to that 25%.
I guess, what does that do.
Forward looking given solving won't be on there really to make sure.
We look at it we'll look at next year's budget. So we don't we don't look at it.
Don't look at last years.
So we look at what next year looks like maybe it will leave a little bit of cushion. We did this year turned out.
The EBITDA growth was a little higher than we expected. So the gap was wider and as we sit here now Unfortunately as long as EBITDA keeps going up the ability to.
Closed the gap on the 25% and the EBITDA going higher leads to <unk>.
The dividend growth, so I mean, I wouldn't I wouldn't guarantee it would be exactly 25%, but I also can't guarantee exactly where EBITDA will shake out for next year. So we'll get.
<unk>.
Good a job as we can.
Okay great.
And then I guess just on PSP nice same store sales increase there I guess, maybe if you could talk about the drivers of that increase among the categories or also are you seeing new customers come into the business.
And then also I think you mentioned the online prescription service.
Is that fully rolled out to all of this towards now and I'm. Just curious do you have to go into the store to pick it up or is it delivery.
So the the prescription it's brand new so it's not a very big driver right now. It's just an example of the initiatives there.
They are working on.
As far as the categories.
I think for competitive reasons, we're trying to stay away from getting too deep into any of the specific businesses.
We've seen it.
Especially I'd say in the pet.
In the pet industry significant increase in advertising among the competitors and everybody's planning their own strategies, including PSP and we'd like to let them continue to run their business I was quietly as possible since they arent a separate publicly traded company.
Keep things a little bit closer to the best.
Got it.
I mean just.
Just to add to Brian's answer on the prescription. It is an online model. So you would log in online you'd set up your account yet but any information.
The system, then checks with your vet to make sure that it's a valid prescription and ship.
Chip so that you don't go into the store it gets delivered.
Okay got it and then just curious.
If there is any like have you.
You know 14, and a half comp obviously very nice.
Do you know if consumers are spending more in the stores or are you guys getting new stores.
And kind of in a new customer to come into the stores.
Yeah. So it's it's a combination of both.
And certainly I think that one of the.
One variable that helps them as well as they've opened so many ah if some of the younger stores that as those stores ramp up to mature levels.
They get the benefit of kind of outsized comps and as long as they continue to have new stores they'll continue to have that benefit over the first few years.
Got it.
Generally speaking the basket sizes across the board are higher.
And in customer counts are higher as well.
Got it Okay, and then I think you guys had said last quarter. There was no supply issues with N PSP like some of your peers had seen that maybe it was in some categories that you guys don't play in.
They've had they've had to fight it out as well, they're not at a 100% they haven't had.
I'd say the.
The severe the severity of their.
Struggles haven't been quite as large as others may be but but they have been below par all year long as well and there are certain categories that are a bigger struggled in others, but they've figured out how to grind it out and make sure that the customers are getting served in.
And of course dealing with the customers that come in looking for something can't find it and then.
Calling to say where is it so it's a it's a constant growing.
Great. Okay, well, thanks, so much and nice job on the quarter and step up the rest of the afternoon.
Thanks.
Your next question is from Ian Zaffino of Oppenheimer. Your line is open.
Hi, great. Thank you very much.
Question would be just just can you maybe help us understand.
The quantification of inflation.
Versus price and how much are you able to offset it and how much did it impact you.
Third quarter, how much should we expect in the fourth quarter and beyond thanks.
Yeah.
I'll speak to are generally but not <unk>.
Specifically and certainly not by brand and its been different there we have some brands that have been able to pass it on because that's how they're pricing model works and the customer.
The customer accepts the higher pricing.
But there.
There are others that it's.
It's a struggle and there is margin pressure because of it costs are going up there's no doubt about that pricing has gone up as well, but there are some instances where the price increases are not fully.
Offsetting the cost increases and that's.
That's what we have in.
It's amazing that the businesses are continuing to do as well they are despite that but.
But but I think that as you know at some point you if your costs go up too much.
You just can't keep raising prices are you going to price the customer out so.
So I think you need to be very careful about that and the management teams.
Sure.
I would.
I guess trying to add to that to help you out.
It's the the pricing pressure is as high today as it has been so what youre seeing now and it is.
The worst it's been it's also.
Informing budgets for next year, because you can't count on things reversing.
It's still.
Still very optimistic about what next year looks like I can't imagine.
What it would look like if the inflationary pressures subsided, but right now I think we've got to continue to believe that inflation is here and it's going to be an issue.
Okay.
And then just finally and this is sort of touched on before.
Sheldon contribution in the fourth quarter.
What should we expect as three millions by the right number or what would it be less than that because of incremental costs.
Yes. This is Eric.
Generally in that ballpark guess for Q4.
Okay perfect. Thank you very much.
Your next question is from Brian <unk> from Aegis capital. Your line is open.
Hi, guys. Thanks for taking my call.
Yes, just a follow up I guess to that last question is $3 million impact for <unk>.
Is that the right. If we annualize that is that the right way to think about sort of the next 12 months impact from silvan.
Yeah right.
Go ahead or.
Yeah, I mean, I think that's about the rate. They are right now we would expect some moderate growth from out of that before we start to grow the franchise base with our efforts.
Okay, and then what wasn't particularly about Sylvan acquisition that made it appealing just given that most locations we're already franchised.
Well the ability to add add locations the efficiency of their model and the free cash flow that we get out of that business for the amount that we had to pay for it.
I think that that business ultimately will be a much larger business than our entry point was very attractive.
$81 million.
And then last quick one for me are you.
Any of your segments working on adjusting their supply chain in the future kind of producing closer to the customer.
But I think our we have businesses that have already.
Justice significantly.
How they look at supply chain moving countries.
The one thing that's a hard thing to do also adjusting their vendors, but it's that that's been an ongoing battle and I think that that will continue and I wouldn't even want to predict how much additional change will come over the next year or several years, but could you do.
Don't know what forces youre going to be fighting against but yes, theres been significant adjustment.
And in many ways.
Alright, thank you.
Sure.
I'm not showing any further questions I would now like to turn the call back to Brian Coleman for any further remarks.
Sure well again, thank you all for joining US this afternoon and operator, you may conclude the call.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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