Q2 2022 Franchise Group Inc Earnings Call

August 4, 2022

Ladies and gentlemen, thank you for standing by and welcome to franchise groups fiscal 2022 second quarter conference call. At this time, all participants are in listen only mode.

After the Speakers' 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, a franchise group.

Thank you <unk>.

Good afternoon, and thank you for joining our conference call around the call, Brian Kahn franchise groups, President and CEO and Eric <unk> franchise groups CFO .

We're getting started I would 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 differ materially from those express.

In or implied by the forward looking statements by 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.

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 25, 2021, and other filings we make with the SEC.

The financial measures discussed today include non-GAAP measures that we believe investors focus on it and comparing our results between periods and among our peer companies.

Please see our earnings release in the news and events section of our website at franchised <unk> 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 financial information, where we included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business is useful to investors for informational and comparative purposes. The.

The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies now.

Now I'd like to turn the call over to Bryan Bryan.

Thank you Andrew and good afternoon to our listeners and thank you for joining us.

Before we discuss FRG business, just like to give a quick shout out to Charlie Loudermilk, who passed away yesterday at the age of 95.

Charlie happens to be the founder of Aaron rents and he also happens to have been an all around good guy among other things he.

He was larger than life and his legacy does live on in many aspects of what we do at FRG in how we do it.

So moving onto FRG business I'll provide a general update before turning the call over to Eric to provide financial details. We will then be happy to answer questions for.

The franchise group second quarter financial performance was within our expectations for the full year 2022, we're lowering our financial outlook for revenue to approximately $4 3 billion from 445 billion adjusted EBITDA to approximately $390 million from $450 million and non-GAAP earnings per share.

Approximately $4 a share from $5 a share.

Inflation, aerie pressures, leading to lower profitability in our home furnishing businesses.

While profit growth in pet health and wellness and education services, you are providing the diversification and scale that allowed FRG to declare another quarterly dividend of $2 50 per share annual rate.

Specifically product and freight costs within our home furnishing businesses are reducing margins in food and energy inflation is taking a larger share of our lower income customers wallet.

Which is reducing transaction volumes. This combination is meaningful although American freight is emphatically expected to be a material contributor to <unk> long term growth the impact of inflation. This year is likely to result in approximately 100 million less EBITDA.

And then what the current store base would be expected to generate in the steady state.

<unk> freight is expected to generate approximately $200 million less revenue than planned.

Revenue loss comes with roughly 30% EBITDA flow through and additionally, the nearly $1 billion of revenue that American freight will generate will come at a cost of over 500 basis points of excess break that.

<unk> totaled over $100 million of EBITDA impact at American freight this year alone.

We are frequently asked how <unk> will perform in a suboptimal economic environment shareholders lenders.

Vendors and franchisees all want to understand the downside just as we want to understand the downside when we perform diligence on potential acquisition candidates or vendors I think this environment will provide an excellent opportunity to enhance our credibility with all of our stakeholders by demonstrating that FRG is built to burn but not to break.

Frg's cumulative profitability and cash flow are more reliable in the hole then in part and that ultimately should make FRG more valuable as a whole than in parts. The primary difference between the business climate today and the one we shared after the first quarter is that freight cost and home furnishing product costs.

Pete we are now ordering new inventory and lower product costs and lower incoming freight costs. Some cost reductions are more material than others, but generally we're headed in the right direction markets are ultimately a self correcting mechanism and we believe the supply and demand imbalance for product and human capital are both correcting in our favor.

And we expect this trend to continue.

These changing trends in our favor since the velocity of transactions are much lower than normal it will likely take the rest of this year to sell the older higher cost inventory through our system.

We're also keeping an eye on energy prices as a surge in gas prices has deterred the marginal customer from getting in the car to make an incremental trip to the store. We've seen this phenomenon manifest itself with fewer transactions and larger transaction sizes as customers attempt to limit their need to buy fuel.

We expect typical market forces ultimately to reduce gas prices back to within a normal range and provide relief for our customers. If we're wrong and fuel prices continue to increase it would be worse for our customers and our same store profitability.

As a management team, we spend significant time diligence acquisitions to further diversify and scale FRG, but we recognize the tremendous opportunity to drive material incremental cash flow and earnings per share from continuing to block and tackle as we drive franchise unit growth and execution within our current brands more importantly unit grow.

<unk> is with within our current brand is completely within our control and does not require any M&A or capital market cooperation.

Franchising activity continues to accelerate across FRG for the first six months of 2022, we sold 88, new territories and opened 54, new locations, we're starting to see cost of construction materials and labor improving and believe our franchisees will have an easier time opening stores over the next couple of years compared to the last couple.

All of us.

I'll be happy to answer any questions after Eric provide the financial details.

Before I hand, it over I just want to publicly thank all of our financial partners for their support over the last several months FRG is very lucky to have the support of a great group of lenders and real estate partners, it's very easy to get lender support when the risk free rate is zero and when the economy is humming, but I've always learned the most about people and stressful times when the credit markets shut.

Down completely last quarter Oak Street real estate stepped up and closed on the sale of our backpack Dc's anyway and earlier. This week closed again on the Babcock headquarter sale. We also appreciate that our revolver lenders chose to give us a larger share of their balance sheets, despite sub optimal market conditions and recently upsize our.

Our revolver and our term loan lenders a nimble lists.

Most creative and smartest partners, we could ask for and we appreciate their efforts on our behalf everybody plays his role really well and everybody works well together and the group. We've assembled is uniquely positioned to help us take advantage of opportunities that are going to come our way in the current environment their patients will pay off in <unk>.

I appreciate their support of FRG and their trust in our management team Eric alternative to you to provide the financial details and then we can wrap up with Q&A. Thank you.

Okay. Thank you Brian .

Before I 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.

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 policies to the extent reasonable.

Comparisons pro forma results will allow us to discuss and evaluate performance of the acquired companies when a comparable period is not available due to the timing of the acquisition.

Moving to the second quarter results I will start with a quick recap of our home furnishings businesses in the second quarter system wide bodies had a negative same store sales comp of four 8% with franchisee comps declined by four 7% and corporate stores declined five 4% bodies.

But he has opened seven new franchise stores and awarded three new locations, bringing the backlog to 98 locations.

Backup Comped down 11 four.

For the second quarter during the quarter, we closed on the sale of <unk> retail and distribution centers for $94 million at $150 million, respectively and used the net proceeds to pay off the balance of the <unk> acquisition financing.

Earlier this week, we closed on the previously announced sale of backup headquarters for $23 5 million.

The net proceeds will be used to reduce outstanding debt.

American Frank Comped down 13, 7% for the quarter, we sold 10, new franchises in the second quarter, bringing the total franchise backlog to 26 locations.

Silvan continued to perform well in the second quarter and delivered comps of three 7% as it heads into the slower summer months.

Silvan opened one new location and sold seven new franchises in the quarter, bringing its backlog to 20 units.

Pet supplies plus generated system wide same store sales comps for the second quarter of five 8% franchisee comps grew seven 1% in the quarter, while corporate stores grew four 2% for the quarter.

PSP continues to accelerate its growth and brand building with eight new store openings and the sale of 20, new franchisee area development agreements in the second quarter, bringing total backlog at PSP the 230 locations.

The acquisition of wagon wash has been going well and is almost integrated into the PSP system.

There has been strong interest in the concept and we believe we will be in a position to capitalize on this demand later this quarter why do we expect that wagon wash SPD to be approved.

Vitamin Shoppe comps were up two 1% in the second quarter due to continued increases in store traffic and increased customer interest in sports nutrition products.

Direct to consumer accounted for approximately 24, 8% of the business in the quarter.

I think continues to build momentum with eight stores sold in the second quarter, bringing backlog to 20 stores.

On a consolidated basis for the second quarter of 2022 total reported revenue for franchise group was $1 1 billion net income from continuing operations was $41 million or <unk> 94 per.

Fully diluted share adjusted EBITDA was $103 4 million and non-GAAP EPS was $1 19 per share.

<unk> overall financial results included the financial results of all acquisitions from the date of acquisition in.

In the second quarter and for the first six months of fiscal 2022, all six businesses segments were fully included in our results and are detailed in our press release and filings.

We are still in the process of transitioning consumer finance at <unk>.

Cut from Inhouse to third party partners and have excluded the non core results of the finance business from adjusted EBITDA and non-GAAP EPS, while we cant pro forma income statement for consumer lending the balance sheet continues to reflect securitization debt and accounts receivable. Despite most of the receivables having been sold to third parties.

Once we discontinued originating customer loans, we believe the securitized receivables will be accounted for as a sale and the related assets and liabilities will no longer be reported on our balance sheet.

We ended the quarter with approximately $1 1 billion in outstanding term debt and cash of approximately $95 million during the quarter. We increased the size of our ABL revolver to $250 million and had approximately $130 million of availability remaining.

All of our debt so for base and with the recent increase in interest rates.

Our cash interest expense has increased accordingly is expected to cost an incremental $10 million annually.

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.

Operator, please open the line for questions. Thank you.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk>.

Larry Solow from CJS Securities.

Great good.

Afternoon. Thanks, guys. Thanks for the questions.

First question just on.

High level on guidance I know you don't guide specifically to the to.

So the businesses, but.

Clearly the biggest driver here is.

The furniture business is it really specifically American freight does that mean does that like the lion's share of this deduction was there anything else coming out at all.

And your general outlook.

A significant yeah.

Larry I'd say that the balanced American freight has had.

You're seeing the greatest impact from inflation I think that relative to our guidance overall the rest is really just noise.

Minor pluses and minuses in the other businesses, but it's really amounts to noise outside of American freight.

Stephen Byrd Cox, specifically I'm, just trying to get my hands, a little bit better on that because I know I know you've taken out.

The EBITDA contribution from the from the lending piece of it.

This 25.

You've done like 50 million year to date, EBITDA or something close to that.

But I thought the run rate number was more like a $60 million because you had a little excess last year.

From government stimulus that you thought and then obviously taking out the lending business. So I'm just trying to get my hands, a little bit better on.

Because the backlog numbers were actually a little bit the first two quarters were actually better than.

As an offset to the American freight, which was obviously worse so any thoughts there on what sort of an annualized EBITDA number.

Could look like should look like is there anything artificial or one timing onetime in this quarter.

Yes, no. It's a good point and Thats why I said that the rest of the businesses combined to be noise bad comp on an overall EBITDA performance in the first half of the year outperformed by a little bit versus what we would've expected, but backpack as the home furnishing business as well.

Name.

Name and its gene.

Inflationary pressures not quite to the same extent that American American freight.

Our unit cost and their average selling prices are significantly below that of what rack in Bangkok is pretty deep value as well. So American freight has seen more of it we obviously set our projections for the year.

Giving back HOKA cushion as well so.

It's important that you understand that.

All of the home furnishing businesses are seeing the same inflationary pressure, but as far as the impact relative to our financial projections for effort GE as a whole that the bridge really come through American freight.

Right and then it seems like the magnitude for what you're thinking.

Bangkok, though is directionally correct.

And just correct me if I'm wrong, because it seems like American freight is that cheaper furniture thats much more sensitive to price both on the fact that you are.

Freight expenses are now significantly relative to the overall price of the <unk>.

But more importantly, your customers, who normally youre attracting are now being basically priced out it's not a normal type of recession, usually prices are lower not higher.

Consumers.

I've heard more of it yes.

Totally correct for a lot of reasons American freight if you look at their freight costs that are loaded onto the product cost compared to pre COVID-19.

The last couple of years don't really give you much.

Terms of.

Really good information, but they.

Freight costs are up almost 200% from where they were at.

Talk is up more order of magnitude, 50%. So we think that there.

There is a very large difference and you're also correct that.

At American freight.

Yes.

Would you would typically see.

Is in a recession, you would see though the lower income customer everybody.

<unk> freight going up unemployment is increasing.

So you have a trade down the higher income customer now become to your customer.

And.

The lower income customer, who you may lose is replaced that.

Not really what's happening now we're not seeing unemployment go up what we're seeing is the low income customer having their wallet squeezed and then we're compounding their problem as we've been increasing our prices.

We've been getting price increases from our vendors we're very.

But we're not doing that again for the back half of the year, which is part of the reason for our guidance as we continue to increase prices to that low income consumer.

We're just having more and more customers say no I'll wait so you could increase the pricing youre going to end up taking more from the customers who continue to buy from you, but you're just going to lose more customers and we've got 370 stores going to.

<unk> hundred stores, it is an opportunity for us to to get back into being that value.

Home furnishings business.

It has spread by word of mouth I think you know that the American freight stores theyre not at the corner of main and main because they don't have to be the best form of advertising for American freight.

As word of mouth, because you get a great deal and then you hear about it from a Buddy and then you go to the American freight store will.

All of a sudden American freight as an offering those great deal.

End up having a bigger impact so we're just not going to increase prices, we're going to eat.

The cost increases that we have embedded in the inventory now we see cost coming down and in some cases very significantly we are one of our larger and better vendors decreasing prices.

Our product cost 30% to 40%.

In major categories. So.

We will shift our purchasing as much as we can to those vendors that are.

Reducing their prices.

Dramatically as that and see where we go.

On the other hand, the higher income customer.

<unk> is not losing their job so they don't need to trade down and we see this.

Yes, quite a bit in and the applications, we use a third party.

Virtual rent to own provider and we see in the applications that score of 600 or more in FICO scores are actually the applications are up.

So it shows you that that customer is.

Fine.

Or is below 600, we're seeing applications that just applications forget what actually gets completed applications are down on average over 20% and the lower the FICO score the bigger the decrease in application so you're absolutely seeing it and it's very.

Fair to us and we're not going to do anything to make it worse for that customer because that customer and we want that customer to be a customer for life.

Alright I appreciate all the color can you just briefly switching gears on <unk>.

Vitamin Shoppe pet supplies, I think you mentioned like 2% and 6% or maybe a little bit less on the same store growth are those numbers.

They are aided by price I imagine right, you've got some decent price of both of those companies. So.

I'm, just trying to figure out what the sort of volume growth.

It's not as dramatic the inflation is not nearly as dramatic in either health and wellness or pet supplies as it is in home furnishings.

Units year to date, both the vitamin Shoppe.

<unk> traffic down to PSP units are down.

Vitamin Shoppe, but pricing is up but youre talking single digits on both sides and that end up leading to positive same store sales.

He has got higher tickets, but lower correct.

PSP.

Usually you get the same so historically pet supplies has kind of a pet.

Industry has grown but we have heard that.

There is some less.

People buying the dog food and the food that some less like the bones and more.

Discretionary stuff have you guys seen that also absolutely absolutely okay right. Okay, great and just lastly, just a quick comment I saw nice to see encouraging to see that you've added.

Good.

And vitamin shop, and I think 2006, you said the backlog for franchise because I know both of those businesses. We're basically starting at zero, just like last year, right, so or close to zero.

You'll see that start to pick up that said I'm also had thanks.

Got it thank you.

Thank you and one moment.

Our next question comes from the line of <unk>.

Michael Baker.

Okay. Thanks can you hear me guys.

Yes, Thank you Brian .

Alright, So first I'll start off I guess I'd be remiss, if I didn't ask you about Kohl's put out some press release.

Ah regard press releases regarding the out so I think it's fair game.

In some ways.

Your criteria of what you might buy just because of the cash flow generation and the fact that you could sort of buy it without any incremental equity on the other hand franchise group, but it doesn't feel like it causes a franchise model I guess could you explain the thought process. What you were thinking to even be involved in that and then what.

If you wanted to ask why didn't work out it seems like it could it could.

Could fit ultimately what happened.

Yes, good good questions and.

Yes, I'll make a couple comments I think I can help you youre right first of all we don't view Coles as a franchise.

<unk>.

And we struggled in the first couple of times, we were approached with the concept it didn't really make sense for us because it didn't fit franchise group as a franchise of the business.

But ultimately it was the structure.

What was proposed to us that just a transaction structure that was too good to ignore.

If we have.

The opportunity to.

No.

To engage in a transaction that brings that much potential cash flow to franchise group.

Without actually having any net cash investment risk out of FRG that kind of transaction, we have to at least explore.

Ultimately and I know, we did put out a couple of releases one outlining what we might do and then also saying that we werent going forward.

But ultimately the goalposts moved a little bit from where we started as far as not having any net cash investment risk out of FRG, but.

It didn't move by so much that it made sense to just walk away from.

Offhand.

I think we.

We proceeded.

It would've been a structure, where we would've had.

At a minimum all of our <unk>.

Risk all of our cash risk.

Paid off very quickly months not years, and then ultimately the goal would be to use that free cash flow to accelerate the growth and diversification of franchise group with franchise level businesses.

Yes, obviously the transaction did not go forward I think we.

Actually to see a lot of benefit from going through the process, but.

Not a transaction that we ultimately culminated.

So I guess, a follow up to that would be.

What now plenty of dry powder that was that was going to be a big one.

You were willing to do it.

Did it go forward. So now you presumably have a lot of dry powder.

So.

How does the acquisition pipeline now is it better because businesses are struggling is it worse, because maybe it's harder to get financing and how should we think about the next steps for our franchise group.

Yes, all of the above.

That is correct I think that the.

The environment, there are plenty of opportunities plenty efficient to see plenty of opportunities for us to explore some bigger some smaller.

Look our lenders and I mentioned them in the script.

Our lenders were fantastic in that transaction and I have to say as I sit here today I think our lenders are probably more disappointed.

Then we work even that the transaction didn't end up going forward.

They were there for us and they are very anxious to help us with whatever comes next and we're going to take them up on that I think we're certainly <unk>.

Within our comfort zone as far as leverage even under Levered.

If the right opportunity comes up I think that we will be prepared to take advantage of it for sure Youre absolutely correct capital markets.

<unk>.

We're quite chaotic the cost of capital.

Is extremely high generally to the extent that our cost of capital is going to be high the threshold for what we're going to need to get in return for accepting that cost of capital threshold goes up as well.

But yes look I think that this environment that we're in.

No.

And we will continue to create more opportunities and as we've discussed many times on these calls before there is an opportunity cost to doing that next transaction because it.

If youre going to lever up.

We need to Delever before we can really engage in anything else meaningfully after that so I think we're going to be.

Sure.

Mindful about what that next larger transaction is and while we're at it we can certainly.

Look at tuck ins and other verticals to add on a smaller basis.

Makes sense, thanks for that if I could sorry, one more just switching gears on American freight.

One thought is that this was a little bit perhaps a recession I don't want to call. It recession proof, but a recession recession resistant model I guess thats turning out not to be the case, but if you could just talk about the long term expectations. If you will for American freight why this is still.

A good business and part of that if you could talk about the idea that inflation now coming down.

When does that start to flow through the P&L, presumably from you guys. It's not this year it sounds like.

The process, maybe next year, but if you could just delve into that a little bit.

Sure Yes.

You are correct, we do believe American freight is recession resistant and I think that the problem is this is not an actual recession recession, where youre going to see unemployment rates go up and that impacts.

The lower income middle income and higher income customers. This is really just an impact of inflation. This is.

I'm not sure what the right term would be but this is like.

Three standard deviation type.

Inflation that we're seeing.

And unfortunately, it's not a recession I think in a good old.

And recession Youll see American freight perform.

Very well and one someday there will be another.

And recession.

The.

American freight in my mind is.

Still its the best unit economics of all of the brands that we have right now there is a ton of demand from franchisees.

<unk>.

We're limited by finding real estate and being able to get stores open as I think you know it's the only brand that we have where we are.

As eager as we can be to even open company owned stores and part of our plan is to open company owned stores every year, whether we end up ultimately refranchising, those or not but whether it's two years three years five years 10 years from now American freight.

Ultimately likely to be the most valuable business that we own.

<unk> the most free cash flow of any business that we own.

Today that is of course and it really is a fantastic business has just been hit with.

Quite a storm that makes it very deep value products.

Not so deep value in the in the customers eyes, and our main customer.

Can't afford the product so we're seeing.

If I told you we would be seeing units in furniture, and mattress down over 50% compared to pre COVID-19 levels not not COVID-19 peak pre COVID-19 levels in the business would still be generating the EBITDA that it is generating I don't think I would have believed that myself, but but but it is that's just <unk>.

Good of a business it is withstanding as I said.

At least three standard deviations.

Chaotic performance right now.

Understood. Thanks for the color sure.

Thank you and one moment our next question.

Our next question from Paul.

Zeno at O P C O.

Thank you.

From Oppenheimer.

A couple of questions here I guess, the first one I guess you explained.

Comp or the same store sales slowdown.

And pet supply it seems like its traffic was down.

Discretionary was weaker but can you tell us maybe why that traffic was down.

You are seeing there and then also vitamin shop I guess also decelerated.

What was that attributable to on a same store basis. Thanks.

Yes, thanks, Thanks, Ian and I think that is.

Really across the board.

Although the.

I know, we spent a lot of time talking about the home furnishings business because.

There's the inflation there has been such a.

Such a dramatic impact but across the board.

Youre still seeing the average consumer for all of our businesses seeing food and energy inflation in the cost of fill up the tank is greater and they're trying to limit the number of trips to any store and that would include vitamin Shoppe that would include pet supplies, plus I think thats why even though we're seeing the true.

<unk> down in <unk>.

We're seeing still higher average ticket prices and thats whats leading to the positive revenue comps.

Vitamin Shoppe same thing people are making fewer trips to the store.

Their units are down tickets up but the units per transaction are actually down.

As well so I just think that.

Across the board Silvan.

Even as we get into the summer customers are taking vacation that they didn't take last summer and so utilization is down it's still comp positively, but utilization is still lower so.

I think it's really across the board buddies.

The same same dynamic.

Fewer customers per store that are paying more.

On a monthly basis than they're used to paying and so the business still generates plenty of cash the business is doing well, but theres a lot going on underneath the scenes were.

Under under the covers with the with the actual customer activity.

Okay, Perfect and then also.

Doc is well off its high.

We'll probably see some more downside.

Coming up.

Any consideration of a meaningful buyback here or anything like that as far as return to capital to take advantage of where the share price is at this point. Thanks.

Yes, so we authorized.

At our two board meetings, we authorized $500 million buyback over the next few years, we did not intend to do.

At <unk>, one we want to be strategic.

Strategic about.

When and how much we acquire.

Certainly.

Something that we.

Just just to say we have not had an open window still don't have an open window. We didn't have an open window because of the Coles transaction and then we got into the quiet period. So we havent had an open window yet to speak of but but look we will we now have the ability to weigh.

Buying.

More of our existing businesses against.

You're buying other businesses.

Not a tool that we've had in the toolbox for we have it now and we're very excited about that and I don't think anybody knows our business is better than we do which is a good thing. So I think we will be opportunistic as we can be.

Okay. Thank you very much sure.

Thank you I would now like to turn it back to Brian for closing remarks.

Great.

Thank you very much for joining us today and operator, please end the call.

<unk>.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Okay.

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Yeah.

Sure.

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So.

Okay.

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The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Okay.

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Ladies and gentlemen, thank you for standing by and welcome to franchise groups fiscal 2022 second quarter Conference call.

At this time, all participants are in listen only mode.

After the Speakers' 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, a franchise group.

Thank you <unk> good afternoon, and thank you for joining our conference call on the call, Brian calling franchise groups, President and CEO and Eric seating franchise groups CFO .

Getting started I would 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.

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 by forward looking statements are made as of the date of this call and except as required by law franchise group assumes no obligation to.

Outdate or revised.

Investors are cautioned not to place undue reliance on these forward looking statements.

The financial measures discussed today include non-GAAP measures that we believe investors focus on in comparing our results between periods and among our peer companies.

Please see our earnings release in the news and events section of our website at franchised <unk> 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 financial information will be included because management believes it provides meaningful supplemental information regarding our operating results when assessing our business is useful to investors for informational and comparative purposes. The.

The non-GAAP financial measures. The company uses have limitations and may differ from those used by other companies now.

Now I'd like to turn the call over to Bryan Bryan.

Thank you Andrew and good afternoon to our listeners and thank you for joining us.

Before we discuss FRG business, just like to give a quick shout out to Charlie Loudermilk, who passed away yesterday at the age of 95.

Charlie happens to be the founder of Aaron rents and he also happens to have been an all around good guy among other things he.

He was larger than life and his legacy does live on in many aspects of what we do at FRG in how we do it.

So moving onto FRG business I'll provide a general update before turning the call over to Eric to provide financial details. We will then be happy to answer questions for.

Approximately $4 a share from $5 a share.

Inflationary pressures, leading to lower profitability in our home furnishing businesses, while profit growth in pet health and wellness and education services or providing the diversification and scale that allowed FRG to declare another quarterly dividend of $2 50 per share annual rate.

Specifically product and freight costs within our home furnishing businesses are reducing margins in food and energy inflation is taking a larger share of our lower income customers wallet.

And then what the current store base would be expected to generate in the steady state.

<unk> freight is expected to generate approximately $200 million less revenue than planned.

<unk> totaled over $100 million of EBITDA impact at American freight this year alone.

We are frequently asked how <unk> will perform in a suboptimal economic environment shareholders lenders.

And we expect this trend to continue despite these changing trends in our favor since the velocity of transactions are much lower than normal it will likely take the rest of this year to sell the older higher cost inventory through our system.

Importantly unit growth is with within our current brands is completely within our control and does not require any M&A or capital market cooperation.

All of us.

I'll be happy to answer any questions after Eric provide the financial details.

Down completely last quarter Oak Street real estate stepped up and closed on the sale of our backpack Bce's anyway and earlier. This week closed again on the Babcock headquarter sale. We also appreciate that our revolver lenders chose to give us a larger share of their balance sheets, despite sub optimal market conditions and recently upsized.

Our revolver and our term loan lenders a nimble lists.

I appreciate their support of FRG and their trust in our management team Eric alternative to you to provide the financial details and then we can wrap up with Q&A. Thank you.

Okay. Thank you Brian .

Before I 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.

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 policies to the extent reasonable.

Comparisons pro forma results will allow us to discuss and evaluate performance of the acquired companies when a comparable period is not available due to the timing of the acquisition.

<unk> opened seven new franchise stores and awarded three new locations, bringing backlog to 98 locations.

Backup Comped down 11, 4% for the second quarter during the quarter, we closed on the sale of <unk> retail and distribution centers for $94 million at $150 million respectively.

Use of net proceeds to pay off the balance of the Babcock acquisition financing.

Earlier this week, we closed on the previously announced sale of backup headquarters for $23 5 million.

Net proceeds will be used to reduce outstanding debt.

American Frank comp down 13, 7% for the quarter, we sold 10, new franchises in the second quarter, bringing the total franchise backlog to 26 locations.

<unk> continued to perform well in the second quarter and delivered comps of three 7% as it heads into the slower summer months.

Silvan opened one new location and sold seven new franchises in the quarter, bringing its backlog to 20 units.

Pet supplies plus generated system wide same store sales comps for the second quarter of five 8% franchisee comps grew seven 1% in the quarter, while corporate stores grew four 2% for the quarter.

PSB continues to accelerate its growth and brand building was eight new store openings and the sale of 20, new franchisee area development agreements in the second quarter, bringing total backlog at PSP the 230 locations.

The acquisition of wagon wash has been going well and is almost integrated into the PSP system.

There has been strong interest in the concept that we believe will be in a position to capitalize on this demand later this quarter why do we expect that lag and wash FTE to be approved.

Vitamin Shoppe comps were up two 1% in the second quarter due to continued increases in store traffic and increased customer interest in sports nutrition products.

Direct to consumer accounted for approximately 24, 8% of the business in the quarter.

Franchising continues to build momentum with eight stores sold in the second quarter, bringing backlog to 20 stores.

On a consolidated basis for the second quarter of 2022 total reported revenue from franchise group was $1 1 billion net income from continuing operations was $41 million or <unk> 94 per <unk>.

Fully diluted share adjusted EBITDA was $103 4 million and non-GAAP EPS was $1 19 per share.

<unk> overall financial results included the financial results of all acquisitions from the date of acquisition.

In the second quarter and for the first six months of fiscal 2022, all six businesses.

Once were fully included in our results and are detailed in our press release and filings.

We are still in the process of transitioning consumer finance App.

Bad cut from Inhouse to third party partners and have excluded the non core results of the finance business from adjusted EBITDA and non-GAAP EPS, while we can pro forma income statements for consumer lending the balance sheet continues to reflect securitization debt and accounts receivable. Despite most of the receivables having been sold to third parties.

All of our debt sulfur base and with the recent increase in interest rates are.

Our cash interest expense has increased accordingly is expected to cost an incremental $10 million annually.

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.

Operator, please open the line for questions. Thank you.

Our first question comes from the line of <unk> <unk>.

Larry Solow from CJS Securities.

Great. Good afternoon. Thanks, guys. Thanks for the questions.

First question just on.

High level on guidance I know you don't guide specifically to the to.

So the businesses, but.

Clearly the biggest driver here is.

The furniture business is it really specifically American freight does that mean does that like the lion's share of this deduction was there anything else coming out at all.

And your general outlook.

Significant yes.

Larry I'd say that the balance of American freight has had.

You're seeing the greatest impact from inflation I think that relative to our guidance overall the rest is really just noise.

Minor pluses and minuses in the other businesses, but it's really amounts to noise outside of American freight.

Stephen Byrd Cox, specifically I'm, just trying to get my hands, a little bit better on that because I know I know you've taken out.

The EBITDA contribution from the from the lending piece of it.

But this 25 I think you've done like 50 million year to date EBITDA something close to that.

But I thought the run rate number was more like a $60 million because you had a little excess last year.

From government stimulus that you thought and then obviously taking out the lending business. So I'm just trying to get my hands, a little bit better on.

Does the backlog numbers were actually a little bit the first two quarters were actually better than.

What does it offset the American freight, which was obviously worse so any thoughts there on what sort of an annualized EBITDA number.

Could look like should look like is there anything artificial or one timing onetime in this quarter.

Yes, no. It's a good point and that's why I said that the rest of the businesses combined to be noise bad comp on an overall EBITDA performance in the first half of the year outperformed by a little bit versus what we would've expected, but backpack as the home furnishing business as well.

As the trade name and its gene.

Inflationary pressures not quite to the same extent that American American freight.

Given backpack, a cushion as well so.

It's important that you understand that.

All of the home furnishing businesses are seeing the same inflationary pressure, but as far as the impact relative to our financial.

Projections for <unk> as a whole that the bridge really come through American freight.

And then it seems like the magnitude for what you're thinking.

Backstop those is directionally correct.

Right and just correct me, if I'm wrong, because it seems like American freight is that cheaper furniture thats much more sensitive to price both on the fact that your your freight expenses are now significantly relative to the overall price of the good but more importantly, your customers who normally youre attracting are now being basically priced out it's not a normal type of recession usually price.

There's a lower not higher.

Consumers get hurt more or is it totally correct for a lot of reasons North American freight if you look at their freight costs that are loaded onto the product cost compared to pre COVID-19.

Last couple of years don't really give you much in terms of.

Really good information, but.

Freight costs are up almost 200% from where they were at.

Stock is up more order of magnitude, 50%. So we think that there.

There is a very large difference and you're also correct that at American freight.

Yes.

Which you would typically see.

As a.

A recession, you would see though the lower income customer everybody.

Jobless rate going up unemployment is increasing so you have a trade down the higher income customer now become to your customer.

The lower income customer who you may lose is replaced that's not really what's happening now we're not seeing unemployment go up what we're seeing is the low income customer having their wallets squeezed and then we're compounding their problem as we've been increasing.

Our prices.

As we've been getting price increases from our vendors we're very.

But we're not doing that again for the back half of the year, which is part of the reason for our guidance as we continue to increase prices to that low income consumer.

<unk> hundred stores, it is an opportunity for us to to get back into being that value.

Home furnishing business.

It has spread by word of mouth I think you know that the American freight stores. They are not at the corner of main and main because they don't have to be the best form of advertising for American freight is word of mouth, because you get a great deal and then you hear about it from a Buddy and then you go to the American freight store will.

All of a sudden American freight as an offering those great deal that could end up having a bigger impact. So we're just not going to increase prices, we're going to eat.

The cost increases that we have embedded in the inventory now we see cost coming down and in some cases very significantly we are one of our larger and better vendors decreasing prices.

Our product cost 30% to 40%.

In major categories. So.

We will shift our purchasing as much as we can to those vendors that are.

Reducing their prices.

Dramatically as that and see where we go.

On the other hand, the higher income customer.

<unk> is not losing their job so they don't need to trade down and we see this.

Quite a bit in and the applications, we use a third party.

Virtual rent to own provider and we see in the applications that score of 600 or more in FICO scores are actually the applications are up.

So it shows you that that customer is.

Fine.

Scores below 600, we're seeing applications that just applications forget what actually gets completed applications are down on average over 20% and the lower the FICO score the bigger the decrease in application so you're absolutely seeing it in.

Clear to us and we're not going to do anything to make it worse for that customer because that customer and we want that customer via customer for life.

Right No I appreciate all the color can you just briefly switching gears on just vitamin Shoppe pet supplies I think you mentioned like 2% and 6% or maybe a little bit less on the same store growth are those numbers.

They are aided by price I imagine right you get some decent price of both those companies. So.

I'm, just trying to figure out what the sort of volume growth or what was it.

It's not as dramatic the inflation is not nearly as dramatic in either health and wellness or pet supplies as it is in home furnishings.

Units year to date, both the vitamin Shoppe.

<unk> traffic down at PSP units are down.

At vitamin Shoppe, but pricing is up but youre talking single digits on both sides and that end up leading to positive same store sales.

He has got higher tickets, but lower.

And it is PSP.

Because usually you get the same so historically pet supplies.

The industry has grown but we have heard that.

There is some less.

People buying the dog food and the food that some less like the bones and more.

More discretionary stuff have you guys seen that also absolutely.

Okay.

Okay, Great and just lastly, just a quick comment I saw nice to see it encouraging to see that you've added.

Good.

<unk> and vitamin shop, and I think 2006, you said the backlog for franchise because I know both of those businesses. We're basically starting at zero just like last year, right, so or close to zero. So.

Good to see that start to pick up that said I'm also opex, yes, you got it. Thank you.

Thank you and one moment.

Our next question comes from the line of <unk>.

Michael Baker.

Okay. Thanks can you hear me guys.

Yes, Thank you Brian .

Alright, So first I'll start off I guess I'd be remiss, if I didn't ask you about kohl's.

Put out some press release.

Regard press releases regarding that so I think it's fair game.

In some ways it fit your criteria of what you might buy just because of the cash flow generation and the fact that you could sort of buy it without any incremental equity on the other hand franchise group, but it doesn't feel like it causes a franchise model I guess can you explain the thought process. What you were thinking to even be involved in that.

Then what.

If you wanted to ask why didn't work out it seems like it could could fit ultimately what happened.

Yes, good good questions and.

Yes, I'll make.

Couple of comments I think I can help you youre right first of all we don't view Coles as a franchise business.

And we struggled in the first couple of times, we were approached with the concept it didn't really make sense for us because it didn't fit franchise group as a franchise business.

But ultimately it was the structure.

What was proposed to us that the transaction structure that was too good to ignore.

If we have.

The opportunity to.

Yes.

To engage in a transaction that brings that much potential cash flow to franchise group.

Without actually having any net cash investment risk out of FRG.

That kind of transaction, we have to at least explore.

Ultimately and I know, we did put out a couple of releases one outlining what we might do and then also saying that we werent going forward.

But ultimately the goalposts moved a little bit from where we started as far as not having any net cash investment risk out of FRG, but.

It didn't move by so much that it made sense to just walk away from.

Offhand.

I think we.

Had preceded.

It would've been a structure, where we would have had at a minimum all of our.

Risk all of our cash risk.

<unk> paid off very quickly months not years, and then ultimately the goal would be to use that free cash flow to accelerate the growth and diversification of franchise group with franchise of all businesses.

Yes, obviously the transaction did not go forward I think we likely to see a lot of benefit from going through the process, but.

Not a transaction that we ultimately culminated.

So I guess, a follow up to that would be.

What now plenty of dry powder that was that was going to be a big one you were willing to do it.

Did it go forward. So now you presumably have a lot of dry powder.

So.

How is the acquisition pipeline now is it better because businesses are struggling is it worse, because maybe it's harder to get financing and how should we think about the next steps for our franchise group.

Well all of the above.

Is correct I think that the.

The environment, there are plenty of opportunities plenty efficient to see plenty of opportunities for us to explore some bigger some smaller.

Look our lenders and I mentioned them in the script.

Our lenders were fantastic in that transaction and I have to say as I sit here today I think our lenders are probably more disappointed.

And then we work even that the transaction didn't end up going forward.

They were there for us and they are very anxious to help us with whatever comes next and we're going to take them up on that I think we're certainly back.

Within our comfort zone as far as leverage even under Levered.

If the right opportunity comes up I think that we will be prepared to take advantage of it for sure.

Youre, absolutely correct capital markets.

We're quite chaotic the cost of capital.

But yes look I think that this environment that we're in.

No.

And we will continue to create more opportunities and as we've discussed many times on these calls before there is an opportunity cost to doing that next transaction because it.

If you're going to lever up.

We need to Delever before we can really engage in anything else meaningfully after that so I think we're going to be.

<unk>.

Mindful about what that next larger transaction is and while we're at it we can certainly.

Look at tuck ins and other verticals to add on a smaller basis.

Makes sense, thanks for that if I could slide in one more just switching gears on American freight.

One thought is that this was a little bit perhaps recession I don't want to call. It recession proof, but a recession recession resistant model I guess is turning out not to be the case, but if you could just talk about the long term expectations. If you will for American freight why this is still.

A good business and part of that if you could talk about the idea of that.

Now coming down.

When does that start to flow through the P&L, presumably from you guys. It's not this year it sounds like.

Out of the process, maybe next year, but if you could just delve into that a little bit.

Sure Yes.

And you're correct, we do believe American freight is recession resistant and I think that the.

The problem is this is not an actual recession recession, where youre going to see unemployment rates go up that impacts.

Lower income middle income and higher income customers. This is really just an impact of inflation. This is.

I'm not sure what the right term would be but this is like.

Three standard deviation type.

Inflation that we're seeing.

And unfortunately, it's not a recession I think in a good old fashion recession, Youll see American freight perform.

Very well and one someday there will be another good.

And recession.

<unk>.

The.

Yes.

American freight in my mind is.

Still its the best unit economics.

All the brands that we have right now there is a ton of demand from franchisees.

We're limited by finding real estate and being able to get stores open as I think you know it's the only brand that we have where we are.

Ultimately likely to be the most valuable business that we own contributing the most free cash flow of any business that we own.

Today that is of course and it really is a fantastic business has just been hit with.

Quite a storm that makes it very deep value products.

Not so deep value in the in the customers eyes, and our main customer.

Can't afford the product so we're seeing.

Yeah.

It is withstanding as I said.

At least three standard deviations.

Chaotic performance right now.

Understood. Thanks for the color sure.

Thank you and one moment our next question.

Our next question comes from.

Zeno at O P C O.

Thank you.

From Oppenheimer.

Couple of questions here I guess, the first one I guess you explained.

The comp or the same store sales slowdown.

And pet supply it seems like its traffic was down.

Also discretionary was weaker but can you tell us maybe why that traffic was down what you're seeing there and then also vitamin shop I guess also decelerated.

What was that attributable to on a same store basis. Thanks.

Yes. Thanks.

And I think that is.

Really across the board.

Although the <unk>.

I know we've spent a lot of time talking about the home furnishings business because.

The inflation there has been such a.

Such a dramatic impact but across the board.

<unk> down.

We're seeing still higher average ticket prices and that's what's leading to the positive revenue comps.

Vitamin Shoppe same thing people are making fewer trips to the store.

Their units are down tickets up but the units per transaction are actually down.

As well so I just think that it's.

Across the board look silvan.

As we get into this summer customers are taking vacations that they didn't take last summer and so utilization is down it's still comp positively, but utilization is still lower so.

I think it's really across the board buddies.

Same same dynamic we have fewer customers per store that are paying more.

On a monthly basis than they're used to paying and so.

The business still generates plenty of cash the business is doing well, but theres a lot going on underneath the scenes.

Sure.

Under the covers with the with the actual customer activity.

Okay, Perfect and then also.

Stock is.

Well off its high.

We see some more downside.

Coming up.

Any consideration of a.

Meaningful buyback here.

Anything like that as far as return to capital to take advantage of where the share price is at this point.

<unk>.

Yes, so we authorized.

At our two board meetings, we authorized $500 million buyback over the next few years, we did not intend to do.

At <unk>, we want to be.

Strategic about.

When and how much we acquire.

Certainly.

It is something that we just just to say we have not had an open window.

Don't have an open window, we didn't have an open window because of the closed transaction and then we got into the quiet period. So we havent had an open window yet to speak of but but look we will we now have the ability to weigh in.

Buying.

More of our existing businesses against.

Are you buying.

Other businesses.

Not a tool that we've had in the toolbox for we have it now and we're very excited about that and.

I don't think anybody knows our business is better than we do which is a good thing. So I think we will be opportunistic as we can be.

Okay. Thank you very much sure.

Thank you I would now like to turn it back to Brian for closing remarks.

Great. Thank.

Thank you very much for joining us today and operator please.

Call.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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