Q4 2021 Franchise Group Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to franchisee groups fiscal 2021 fourth quarter and year end conference call. At this time all participants are in a listen only mode. After the speaker presentation that will be a question and answer session.
I would now like to hand, the conference over to your host Andrea Kaminski Executive Vice President and Chief administrative officer of franchise squeeze.
Thank you good afternoon, and thank you for joining our conference call I'm on the call is Brian Kahn franchise groups, President and CEO and Eric seeing franchise groups CFO .
We're 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 laws. These forward looking statements are based on management's current expectations and are not guarantees of future performance actual results could materially differ from those.
Suppressed 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.
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 indicating the forward looking statements. Please see our 10-K for the fiscal year ended December 25th 2021 and other filings that 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.
Please see our earnings release in the news and events section of our website at franchised Euro P. 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 or superior to GAAP 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 for informational and comparative purposes. The non-GAAP financial measures. The company uses have limitations.
It may differ from those used by other companies.
Now I'd like to turn over the call over to Brian .
Thanks, Andrew and good afternoon, and thank you all for joining us.
I'll provide a general update before turning the call over to Eric to provide financial details and then we will be happy to answer questions.
'twenty one was another busy year for franchise group overall my hat is off to the management teams of our current brands that combined to create impressive organic growth for <unk> could.
But equally important allowing me and my team to devote the majority of our time and resources towards the M&A activity. It continues to add diversification and scale of the franchise group, while also improving our cash flow and profitability.
The results of those efforts allowed us to generate non-GAAP earnings per share of $3.99 in fiscal 'twenty one.
And a 50% increase in our dividend last year, followed by another 66% increase in our targeted dividend this year.
I loved the scale ability and the repeatability of the <unk> model, we target great businesses with Great management teams that had generated a lot of cash flow and then we leverage our combined balance sheet in order to add new brands and transactions that are necessarily accretive to our earnings.
Earnings per share and dividend per share.
So far we've been able to rapidly delever, our balance sheet through operational cash flow and the sale of noncore assets, which in turn was positioned FRG for additional accretive acquisitions.
In March 2021, we acquired pet supplies plus for $700 million financed with a new syndicated term loan that reduce their cost of capital significantly three months later, we paid down approximately $182 million of that term loan with the cash proceeds from the Liberty tax sale.
And then in November we financed the acquisition of backlog furniture entirely with a new $575 million term loan from our existing lenders and then one month later sold noncore consumer credit receivables for $400 million that was used to pay down that debt.
I'm happy to say that we now expect to pay off the remaining $175 million.
All of the bad cop financing from the sale leaseback of a bad Cox real estate within the next 90 days.
In 2021 F. R. G will have acquired PSP backpack F F O and Sylvan learning.
Using only debt financing and balance sheet cash to fund the purchases, but a combination of quickly delevering the balance sheet combined with growing up Rajeev EBITDA will leave us with under two five turns of leverage after the sale of bad Cogs real estate.
We're seeing many opportunities in the M&A market to put our balance sheet back to work and transactions that would further diversify and enhance our cash flows.
And we were pleased with the overall M&A environment is shifting back to our favor over the last couple of months.
Shifting back to the fourth quarter franchise group had an active quarter just like it had an active year the acquisition of Sylvan learning allowed us to diversify our business into the growing consumer services sector.
With a fully franchised model, we acquired bad talk in November and added scale to our growing value oriented home furnishing businesses over time, we believe we can achieve material synergies between American freight buddies and bad crop.
In the fourth quarter, but he has produced systemwide same store sales comp of positive nine 4%.
Our full year fiscal 2021 comp a positive nine 8% franchisee comps grew nine 5% in the quarter and 10, 6% for the year, while corporate stores grew eight 6% for the quarter and five 8% for the year.
American freight comped down two 8% for the quarter and down 8% for the year American freight added 49 locations in 2021, and currently has a backlog of 17 franchise stores well Buddy's added 21 stores and has a current backlog of 100 locations.
Pet supplies plus continued to focus on franchise growth and brand building wall, surpassing a milestone by opening 600 location in the fourth quarter P.
P. S. P re franchise 12 locations in the fourth quarter, allowing certain franchisees to continue to build critical mass in their markets. While opening 19 additional franchise locations DSP finished the year with continued momentum in franchise sales, adding 40 stores to its backlog, which now stands at 214 units.
S. P produced systemwide same store sales comps for the fourth quarter of positive 13, 5%, which contributed to an annual comp a positive $16, 1% franchisee.
Franchisee comps grew 15, 8% in the quarter and 18, 1% for the year, while corporate comps grew 10, 7% in the quarter and 13, 6% for the year.
This afternoon, we announced that PSP acquired wagon wash natural pet food and grooming and emerging natural pet food self Washington, grooming franchise with 15 locations that focus primarily on dogs, we expect that wagon wash would be a great opportunity for franchisees to add smaller more.
Focused stores within their geographies.
With an enhanced selection of products that will be supported by PSP back office and distribution services. We see this as a great opportunity for PSP to leverage their core strengths to enhance our franchisees' businesses better serve our customers and build incremental cash flow.
And shop fourth quarter comps were up eight 5% contributing to a full year comp a positive $14, 4% store traffic has continued to increase as consumers visit our stores to discover new products and seek advice from our associates.
The vitamin Shoppe, who's been multi pronged with a growing active customer file increased private brand penetration and an increasing average order value.
Direct to consumer comp slightly positive and 0.7% in the fourth quarter and just under 1% for the full year overall direct to consumer accounted for approximately 24% of the business in 2021.
In January we re franchised, our first vitamin Shoppe store and we're starting to build sales momentum with nine new stores and franchise backlog.
Before I turn the call over to Eric I want to reiterate how impressed I am and our management team's ability to navigate continued supply chain constraints and overall inflationary pressure.
As I've told you before we're absorbing tens of millions of dollars of profitability headwinds from inflationary pressures and supply chain constraints already but if we had.
That.
But we think the financial impact actually could have been over $100 million if not for the management teams actively managing their businesses on a daily basis I. Appreciate their individual efforts that have combined to grind out excellent collective performance for franchise group and also once again I'd like to thank all of our dedicated associates.
For their hard work their support of each other and their support of our franchisees all of which leads to the success of franchise group I'll pass the call over to Eric now to provide some financial detail there.
Okay. Thank you Brian .
Before I address the results of operations I would like to remind you that we wouldnt, making many references to pro forma items throughout this call. Our press releases and filings may refer to historical financial results for the acquired businesses prior to their acquisition by franchise group.
These items have been adjusted to align with our fiscal calendar and accounting policy is to the extent reasonable comp.
Comparison to pro forma results will allow us to discuss and evaluate performance of the acquired companies when a comparable periods is not available due to the timing of the acquisition.
As a reminder, in order to conform with SEC rules consistent with concepts and article 11 of regulation S stack.
Extra non-GAAP reporting franchise group will not be reporting synergies and other acquisition costs.
Company will continue to report adjusted EBITDA in the same format. It has in the past we did not report any supplemental information for 2021 and do not anticipate reporting any of the future.
Pacific amounts included in each disclosure are fully discussed in detail in the non-GAAP financial measures and metrics section of our earnings release.
For the fourth quarter of 2021 total reported revenue for franchise group was $942 3 million net income from continuing operations was $151 8 million or $3 64 per fully diluted share adjusted EBITDA was $86 6 million and non-GAAP EPS was <unk> 77 per share.
For the fiscal year end December 22021, total reported revenue for franchise group was $3 3 billion net income from continuing operations was $192 million or $4.48 per fully diluted share.
Adjusted EBITDA was $338 4 million and non-GAAP EPS was $3 99 per share.
Frg's overall financial results include the financial results of all the acquisitions from the date of acquisition. The fourth quarter includes results from Sylvan learning from September 27, and the results of backlog from November two through the end of the fiscal year our.
Our press release details our results by our six reportable segments, which will show that Bangkok added $101 1 million of revenue $10 1 million of adjusted EBITDA and $22 7 million of operating income.
These amounts were not included in our previously announced financial outlook.
Without Bangkok, FRG would have reported $3 2 billion of revenue and $328 $3 million of adjusted EBITDA.
We ended the quarter with approximately $1 4 billion in outstanding term debt, which included a $219 million repayment from the sale of the bad cop consumer receivables.
We repaid an additional $181 million on December 27th reducing net debt to approximately $1 2 billion.
At year end, we had approximately $122 million of availability on our ABL revolver and cash of approximately $292 7 million before the additional 181 million.
<unk>.
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.
As of today, we are maintaining our previously announced financial outlook for fiscal year 'twenty two of revenue of approximately 4.45 billion.
Net income of approximately $180 million or $4.20 per share adjusted EBITDA of approximately $450 million and non-GAAP EPS of approximately $5 per share.
In formulating our outlook, we expect we will complete the sale of the Babcock real estate portfolio by the end of our fiscal second quarter of 2022, and I expect we will reduce net debt to approximately $1 1 billion by the end of fiscal year 2022.
In calculating EPS the company is using approximately 41 million weighted average shares outstanding.
And our outlook does not include any assumption for additional acquisitions divestitures or refranchising activity.
I do want to thank all of our shareholders and lenders for their support to date.
Operator, please open the line for questions. Thank you.
Yeah.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your touch tone telephone.
Has it been answered or you wish to remove yourself from the queue. Please press the pound.
We do have our first question from Mike Baker of D. A Davidson your line is open.
Okay.
Thanks, guys. So two questions from me first off I'll ask.
But with the backhaul acquisition I think on an annual basis, you know of about 50% exposure on the sales line at least to the two two a furniture a lot of that focused on discount moderately priced low income whatever you want to call. It.
That customer it seems to have come under pressure in 2022 and home furnishing in particular is an area that seems to have come under pressure. How do you guys think about your increasing exposure to the lower end furniture business.
Yes, Thanks, Mike.
Actually I think that that customer has been under pressure for some time.
It's just now with the news articles catching up to the reality of what's going on that it's become more of a focal point, but.
Units have been down units were down a year ago units were down substantially and really what's happened is selling fewer units and the revenue has held up because pricing tier.
That's that's just the state that we're in I love the businesses that we're in.
Over the next decade American grade Buddies in Bangkok, we're gonna be great businesses, they're going to generate a lot of cash for franchise group and they're gonna grow.
But we're a diversified business and we will continue to diversify.
You know I like I said I feel great about what we've got and I don't think there's anything really new to us and what everybody else is talking about today I think it's given us opportunities I think it will continue to give us opportunities in the unit economics of American free there's nothing that's changed there and franchisees are still going up.
It's on our stores and we can multiply a couple of times the store count of that business and we will keep investing in it.
Despite you know what's happening over the last year and continues to happen today with with that customer.
And so just follow up on that I do you know sort of accomplish better than American friend I think write down.
I think you said, 2%, which if I compare that to what I have in my model from last year. They actually does look like its getting better versus the third quarter on both a one year and a two year basis, which which I think is surprising but.
That's more of a statement than a question. The question would be you said, you're you're you you loved this business for the next 10 years are not to be short term focused but do you love. It for the next 12 months for 2022 again with some of these gushers Oh, My Gosh I do look.
I think that Oh.
<unk> freight continues to generate.
A ton of activity for us in franchising continues to generate tremendous amount of EBITDA, but it's absolutely not generating anywhere near what it is capable of generating.
Lots of headwinds across the board there with inflationary pressures in the supply chain constraints that everybody talking about it I think that the business will perform for us this year.
If we.
I guess the way that I would describe it to you is.
Yeah.
Yeah, we would be thinking even greater EBITDA and earnings per share, we thought that that business was going to be operating in a normal environment. This year and we don't.
Units are probably on a comparable store basis, probably down again. This year, we will add units and that'll help that business of.
The stores will continue to generate a lot of cash, but it's it's certainly suboptimal.
You know relative to what it could be doing and that's what it's been for the last year also I would you know regarding the comp and it's not just the general.
A general comment about any any one period I wouldn't get overly excited because they they beat.
Comp estimate in one period relative to another nor would I get overly concerned if they didn't.
Make your comp estimate for any one period, you know directionally the business is going to continue to grow.
Yeah Fair enough I'll ask one more and then I'll turn it over you said the M&A.
Landscape is moving in your direction or something along those lines I suppose what you meant by that is you know some some valuations have come down, but I guess could you flesh it out a little bit more what did you mean by that comment.
Yeah, I think that is.
I expected last year to be more to our liking.
And it wasn't I think what there was.
You know there are a lot of auctions a lot of processes that attracted you know a lot of buyers and everybody had access to capital and the valuation expectations were very high.
That the environment that we're in now has already seen a pretty significant shift in that landscape I don't think that valuation requirements or nearly as high as what they were and I think that.
Because now you see what happens when capital markets are quite as flushes.
You know they were at the peak you've got fewer people able to compete because they can't get enough leverage to compete with you on the acquisition I think with franchise group all of our cash flow and the diversification I think it will be able on the margin to have a better.
Financing package than others, which should help us over the next year. That's my that's what I meant by that.
Perfect I appreciate that thank you.
Yes.
Your next question is from Larry Solow from CJS Securities. Your line is open.
I guess, Brian just to piggyback on that question in terms of acquisitions.
I guess my question is you know obviously you have your you have a vision to bring the debt down.
Pretty soon capacity any issue in terms of you know you guys had a pretty active 'twenty 'twenty. One in terms of you know do you need to take a pause or is it you know.
Plenty of.
Capacity and manpower to continue and I know you don't have a specific target, but obviously you continue to look to grow the business.
No real hesitation in terms of.
Obviously.
Find a deal you can do a deal.
Sir right. Yeah, I think that is fair I think we have the financial capacity and I think that each transaction is different and there will need to have I think the limiting factor is going to be the management capacity or are we going to be getting.
Getting into a business, where we can actually invest in the management team as well that's just a prerequisite for us because we don't have I.
Don't want to and.
You have to go down to actually run a business.
On a day to day basis, that's not going to be the best use of our time at franchise groups. So we need to have an investable management team.
And that is always going to be eliminating factor. We don't I don't think that we feel the need to go run out and deploy the balance sheet every time, we delever.
It's good to know that we have options, but remember the minute we deploy the balance sheet for another transaction, if we are getting up.
We won't go past four turns of leverage is as you know, but you know once we get up over three we need to Delever before we can really do something else. So.
Once you spend those bullets you you you you are somewhat waiting so theres an opportunity cost there.
Always going away as well and that's just something to consider there may be a great.
It's a great transaction that they could diversifies further they could be very accretive to us, but we still may not.
Cute on that transaction that if we think that there's some other and a better use of our capital in the near future coming so it's it's all somewhat of a balancing act.
Got it.
I appreciate that color just a couple of quick is on the some of the segments vitamin Shoppe up another good year, a good quarter a couple of questions. It sounds.
It sounds like you think there's more legs to the story.
Probably expect growth in 'twenty two.
Question I had could you just remind us what the.
The direct to consumer was last year I think it was a little bit lower than this right I know it probably didn't grow as much obviously because people were coming back to the stores more I guess.
Well when you mean last year, you mean, 'twenty 2021 versus 'twenty.
Yeah. So so in 'twenty 'twenty, just if you think about what was happening you had stores shut down and then when you didn't have before shut down you had people that weren't going out anyway. So right right to consumer penetration was actually higher which is why when you look at this year you see the retail comps actually grew faster.
After than the direct to consumer comps I think I thought that coming into this year, we would give some back on direct to consumer at vitamin Shoppe and remarkably they were still able to eke out.
Positive comp revenue.
Despite the reopening so.
Okay.
Just because of what was going on in the mechanics in the environment. It would have been higher than in 2020, but not not significant not a significant difference.
Right.
I'm sorry, if I missed one of your other question just remind me you know Oh just.
Just saying just overall gross you start you know I know you don't guide to individual sandwich, but you'd think vitamin shoppe stores. So there's still a lot more you think some obviously less top line growth probably than last year, but you still think there's some growth perhaps in this just for this year.
Sure well look I think.
Couple of things about vitamins job number one is as long as.
They have not grown their customer file in a very very long time predates all of us involved in the business right as long as they're continuing to grow the customer file and Directionally that business ultimately is going to grow.
I think that the other thing that we have going for US now now that we have the franchise program launch we've actually got unit growth for the first time.
Also in any of our histories with the vitamin Shoppe and that's something that I think is worth mentioning and certainly something that we're excited about as well. So I look I feel great about what they're doing and how they continue to execute and generate a ton of cash Revpar G. So.
No.
Good stuff last question its American freight 49.
We had a 49 corporate stores, that's a pretty big number right for the year.
It's probably an acceleration from the last couple of year I guess lunch was COVID-19 so I'm.
Work on it but it is a catch up.
A chunk of that was from the acquisition of <unk> and the rebranding so right. Okay, I'll kind of let Bruce that I didnt. They didnt Oh, yeah, exactly that was a big contributor.
And typically just to remind you on a corporate store basis. We've looked opened in 2025, a year on a corporate side and then right as many franchise stores as we can get opened we will hope franchisees get opened.
And just last question if I may just on inflation I know you gave guidance for like two months ago and it doesn't sound like.
You've changed things much.
Does sound like you probably have been having a much better year without inflation, but you and many other companies out there.
But do you think has inflation gotten worse or you know the last couple of months or maybe just around the edges, but not anything material I guess for you guys.
Supply chain not just.
Other issues employee.
Worker availability all that stuff.
Yeah, I think that from from a personnel perspective, I think that people are starting to come back I think that the.
Government stimulus money has been spent and everybody enjoyed it and you know on the margin I think that that that's getting better not not worse and inflation for products I don't think that that's gotten any better I think that a.
Raw materials are going up I think that your logistics to get product landed into your stores or to your customer that that's gone up and so I think that there's still a lot of pressure on the cost side for product.
And I don't.
I know ultimately you know supply and demand will work itself out, but I wouldn't be one to predict when that's going to happen and we're going to continue to operate as if we were living with this for a while for sure.
Okay.
Your next question is from Susan Anderson from B Riley Your line is open.
Hi, Good evening, and just curious and you mentioned.
Thank you.
You might have spent the stimulus money I'm curious if you have seen any slowdown in <unk>.
You have your business segments with consumer spending or any pushback, maybe on higher prices there.
Yeah.
Well I think we have I don't think that that I don't think that's anything new I think we've seen that going back a year pretty regularly.
Where we've been selling fewer units.
And.
But you don't see it in the revenue because the prices are higher so I think the consumer absolutely.
Has.
You know determine that there's only so much that they're going to pay for a product on the margin and so your marginal customers either sitting on their hands or doing something else with their money.
Got it okay.
And then I think I saw it did pet surprise surprise plus by wagon was just curious if that's material at all.
Yeah.
Well mentally or physically material mentally, but probably not so much physically or financially today. It's a 15 store chain. It's a it's a smaller box concept that we think there's a lot of legs. The PSP management has been working on that for quite some time.
Very excited about the opportunity because even existing PSP franchisees.
With the larger stores in their markets can can get opened several wagon watches and they're in their geographies for very low capital cost and we think that they'll generate a high return on their investment. So we're excited about it but as far as the immediate impact of franchise group.
It's negligible.
Got it Okay is this something like it's going to be like next to our pet supplies plus and I guess you know is there like a number of stores do you think that the.
Segment could get to.
It's not.
It's not like you would put it right next to one I think it would be in a general geography and as far as the quantity it's.
There's 15, I mean, you could.
At that size will do is think about this if you've got 500 petco and petsmart.
We got room for certainly more of these smaller units so it's not that.
That's going to happen anytime soon but it's going to take quite some time to fully build out.
You know the footprint of a wagon, Washington, and it's gonna be franchisees doing it. So it's it's also gonna be unpredictable, it's not like we're going to open 100 corporate stores a year, but it is an option for franchisees that we think will be very attractive.
Got it Okay, and then lastly on inflation it sounded like that was you know obviously it was a pressure last year.
It sounds like you're expecting that this year should we expect that could pressure margins or are you guys doing things to offset that and all the different business segments.
Yeah. So I think it has pressured margins I think that the performance in last year includes significant pressure to margins.
Due to inflation, yes, and to your point there are things that we can do to mitigate the margin impact and and and also just mitigate the impact of profitability and cash flow, but it. It's just not unfortunately, it's not new and I know the management teams are exhausted from having to deal with.
It means digging and dragging because they get a price increase from one vendor or another vendor and I'm sure it's happening to them on a daily basis, whether it's a product vendor or it's a logistics company right whatever but it's just it's a regular occurrence.
Would not want to predict the end of that I know everybody will be very happy when the tide turns but but it's.
It won't turn by the time, we speak again next quarter.
Great. Okay. That's helpful. Thanks, so much good luck this year.
Sure.
Again to ask a question. Please press star and then the number one key on your Touchtone telephone we do have a follow up question from Mike Baker of D. A Davidson your line is open.
Okay, Thanks, and sorry chassis in the background is very excited about a wash if you can't hear good.
I'll ask another.
Devil's Advocate type question, but you beat this year relative to previous guidance, even when you include exclude bad Cox.
That you kept your 2022 guidance the same but a skeptic might say well it doesn't that imply a lower growth rate than you had previously thought how would you respond to that.
Yeah.
Yeah. That's a good question I don't I don't think it's a lower growth I think that just the the numbers are what the numbers are and it's so early in the year.
And the one thing Hum.
Really confident in is by the time, we get it its February right now by the time, we get to the end of the year.
Franchise group in some form or fashion will look different than it does right now so it just seems like it's not.
Worth trying to figure out everything that is going to happen on.
On the margin differently I think what what do we buy your math you are saying that we ended up.
Beating your number by by how much I don't know I don't think it's a tremendous amount and that's why we've said approximately $5 of earnings per share and approximately $450 million of EBITDA. It's it's it's good round numbers. It's early in the year and I think it would be.
Too early to have any different views sitting here today anyway.
I'm showing no further questions at this time I would now like to turn the conference back to Brian .
Great well look we thank you all for joining us.
And look forward to speaking to you again next quarter and operator, you can please 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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