Q4 2022 MTY Food Group Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the empty Whitewood Group, Inc. Q4, 2022 earnings conference call.
At this time all participants are in a listen only mode. Following the presentation, we'll conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.
Anyone has any secret is hearing the conference. Please press star followed by the zero for operator assistance at any time.
Before turning the meeting over to management. Please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated I would like to remind everyone that this conference call is being recorded today Thursday February 16th 2020.
I will now like to turn the call over to Eric Lefebvre Chief Executive Officer. Please go ahead.
Thank you.
Everyone. Thank you for joining us for empty wife's fourth quarter conference call for fiscal 2022.
Press release, and MD&A with complete financial statements and related notes were issued earlier. This morning and are available on our website as well as on SEDAR.
During the call we will be referring to forward looking statements into certain numbers that are non <unk> measures you can refer to our MD&A for more details.
I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated.
We're extremely proud of the results realized during fiscal 2022 during the year, we generated organic and acquisition growth to deliver record normalized adjusted EBITDA of over $187 million, while system sales exceeded $4 billion for the first time in <unk> history.
Operations generated cash flows of $143 million or $5 84 per diluted shares.
All of those highlights were generated during a year marked by numerous challenges, including COVID-19 related restrictions at the beginning of the year labor and supply chain constraints inflationary pressure in uncertain market conditions.
Needless to say our team and franchisees have shown extraordinary resilience creativity and dedication.
We continued our growth momentum in the fourth quarter with both both normalized adjusted EBITDA in system sales, increasing 25% year over year to $53 $5 million and $1 2 billion respectively.
During the year, we closed two acquisitions could talk hotwire desktop early in the fiscal year and barbecue holdings in late September .
The barbecue division therefore contributed only two months to our 2022 results, although the full impact of the barbecue transaction will only be measured during 2023 its contribution to <unk> results was meaningful in the fourth quarter.
Excluding the impact of acquisitions and the impact of changes in foreign exchange rates system sales grew 10% organically, while organic growth in normalized adjusted EBITDA was 9% in fiscal 'twenty two for the fourth quarter, specifically organic growth in system sales and normalized adjusted EBITDA were respectively, 4% and 9%.
Digital sales continued their progression growing 8% year over year to $208 $5 million in the fourth quarter.
Digital sales, which includes mostly takeout orders and delivery sales benefited from the company's increased investments in online ordering and third party delivery options in the past year.
In 2023, we intend to further raise our game by dedicating additional resources to further improving our guests overall digital experiences ranging from our websites to online ordering and to every possible way in which we interact with our existing and prospective customers electronically.
Moving onto our network MTI completed the fiscal year with 6788 locations of which 6580 900 franchise or other operator agreements and the remaining 199 locations were operated by the company.
56% of our locations are based in the U S, 37% in Canada and 7% International.
The Wetzel Spritsail deal, which closed December eight adds over 350 locations. So empty wise network across 25 states in the U S, Panama and Canada.
SaaS Pizza in Hawaii, which closed on December 15 is a smaller concept with 13 corporate owned locations in Arizona is expected to be accretive immediately and offers good franchising potential in the medium and long term.
With our three latest acquisitions Nty's network has over 7100 locations of which approximately 96, 5% of our franchise and three 5%.
Our corporately owned.
This is slightly higher than <unk> historical average, but given the performance of the newly acquired locations and the infrastructure in place to operate them successfully we do not intend on liquidating our portfolio of corporate stores.
However, we also do not intend on adding significantly to that number as we remain a franchise or at heart.
Looking ahead to fiscal 2023, we expect a major lift in sales and profitability for barbecue holdings Wetzel spreads holes and SaaS pizza in wine.
In terms of capital allocation Nty's priority remains to acquire quality brands and further expand its network.
As such paying down some of our debt to build capacity for future deals is also a priority.
Proportional free cash flow distributed as a dividend is expected to remain within historical range.
I will now now turn the call over to Renee, who will discuss <unk> financial results in greater details.
Thank you, Eric and good morning, everyone.
As previously mentioned by Eric empty White delivered amazing normalized adjusted EBITDA of $53 5 million in the fourth quarter of 2022, which excludes $3 6 million in acquisition related expenses related to the acquisition of barbecue holdings and Wetzel Pretzel.
Most of the improvement came from our corporate store segment in the U S as well as the processing distribution and retail segment in Canada.
Excluding the acquisition of Cuda Coldwater theft, all the Canadian segment realized an impressive organic normalized adjusted EBITDA growth of 27%.
In the U S and international segment normalized adjusted EBITDA increased by $7 8 million, mainly due to the acquisition of barbecue holdings, which generated $5 million in normalized adjusted EBITDA.
This level of profitability for barbecue holdings is highly encouraging given us represented a two month contribution in a seasonally soft quarter for this portfolio of brands.
The additional weight of corporate locations arising from the acquisition of <unk> holdings caused the fourth quarter consolidated normalized adjusted EBITDA margin decreased from 29% to 22%.
We added corporate locations fueled the corporate location segment, which went from a loss in the fourth quarter of 2021 towards $7 4 million profit in 2022 with a normalized adjusted EBITDA margin of 9%.
The processing distribution and retail segment had margins increased from 11% to 16%, while the franchising segment saw a drop from 55% to 44% year over year.
Decrease in the franchising segment margin is mostly due to the higher expected credit loss provision taken on leases receivable as well as higher amount of low margin revenues generated such as uncertainties and sale of various supplies equipment and materials to franchisees.
In term of net income attributable to owners it amounts to $7 1 million or 29 cents per diluted share in the fourth quarter compared to $24 9 million or $1 per diluted share in the same period last year.
The decrease in both cases was mainly due to acquisition costs higher noncash impairment charges on intangible assets as well as higher interest paid on long term debt.
Okay.
Company revenue grew 65% year over year to $242 million in the fourth quarter, mainly driven by the barbecue acquisition Holdings acquisition. The two month impact following the deal delivered growth for franchise operations and corporate restaurants of $4 3 million and $67 6 million respectively in the U.
And international segment.
In Canada franchise operations, and food processing distribution and retail or the major revenue contributors with year over year growth of 25% and 22% respectively.
Turning to liquidity and capital resources cash flow from operations totaled $35 5 million in the fourth quarter of 2022 compared to $31 9 million in the fourth quarter of 2021, the increase of 11% and operating cash flow.
From the strong adjusted EBITDA, we generated during the quarter.
Free cash flows amounted to $32 9 million or $1 34 per diluted share in the fourth quarter compared to $35 6 million or $1 44 per diluted share in the same period last year. The decrease in free cash flow is due to the sale of two portfolio of Papa Murphy's corporate owned locations in 2021.
In the fourth quarter, we reimburse $23 9 million of long term debt and paid $5 1 million in dividends to shareholders.
For the full fiscal year, we paid $82 million in long term debt and $25 million in dividends to shareholders.
Also we repurchased 256400 and shares.
$14 6 million under our CIP program in fiscal 2022.
Following the year end, we raised our dividend by 19% to 25 per share. This marked our 10th increase since we first declared a dividend in November 2000 22010.
At the end of the fiscal year <unk> had a healthy cash position of $59 5 million and long term debt of $561 million, mainly in the form of bank facilities and promissory notes on acquisition.
During the fourth quarter, we raised our revolving credit facility to $900 million in anticipation for the acquisition of Wetzel Pretzel.
The additional capacity also gives MTI added flexibility for future acquisitions.
Knowing the acquisition, we anticipate the depths to normalize adjusted EBITDA ratio will fall between three and three five times EBITDA, which is around the comfort level, we have communicated in the past.
Given <unk> cash flow generation ability the current leverage does not impair the possibility of realizing more acquisitions in the future.
And with that I. Thank you for your time, and we will now open the line for questions operator.
Yes.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you want to ask a question. Please press star followed by the number one.
You want to withdraw your question please place start to.
Your question is it will be both in the order they are received.
You are using a speaker phone please lift the handset before briefing amicus one moment. Please for your first question.
Your first question comes from Joseph <unk> from CIBC. Please go ahead.
Yes.
Thanks, Good morning, I wanted to ask about the integration of your two large recent acquisitions is there anything you've learned.
Now run those banners at least for a short period of time.
You've learned about those standards that you could share about potential for accelerating growth either same store or units or margin expansion.
Yeah, well in terms of integration is going extremely well we have two teams that are completely engaged and really wanting to work with with the rest of empty white.
Is that doing exactly what you mentioned has which is accelerating growth.
And <unk>.
Proving profitability for our franchisees and for the company so.
It's going extremely well.
In both cases, where we're really happy with what we're seeing.
So in terms of the growth plans and everything they remain intact. We are trying to accelerate the plans, we're not necessarily changing the plans, but if we can push and help to accelerate everything and we will so we have a number of initiatives that we're working on nothing we can announce at this point yet.
But there are a lot of things that we're working on that we feel are very promising for the future in both cases.
Okay.
<unk> is it fair to assume there is no no change in plan on potential Refranchising of your corporate stores.
And their portfolio.
Yes, that's correct.
The corporate store portfolio is really well run and we have a good team of corporate store performance people that really manage the corporate stores.
They are among the best stores, we haven't been network and Thats, what we want to do if we have a corporate stores should be run as the example.
And these stores are run really well, we have the infrastructure in place to run them. So.
Profitability, we derived from those restaurants is really something we don't want to part with.
So, although we don't intend on building more corporate stores or necessarily requiring a large number of corporate stores in the future.
We also don't necessarily want to part with the portfolio there might be stores here and there that we might sell if geographically it doesn't make sense for us because it's a little bit harder too.
Operate but other than that we'll probably keep the portfolio intact.
Okay understood.
You mentioned franchisee profitability I know, there's a lot of puts and takes on this but any measurement you can give or even just qualitatively on overall franchisee profitability in 'twenty, two compared to either 21 or pre pandemic.
Yeah, well, obviously for franchisees.
There are there, especially in certain areas and maybe certain brands more than others, obviously with the number of brands, we have theyre not all affected the same way but.
There is inflation on costs, whether it's labor or food or packaging.
There is also a shift in the wake of consumers.
Go about the business.
Delivery orders for example.
Take a drain on our profitability so.
We have we have regular discussions with our franchisees for the most part we have access to their P&L as well when we try to work with them to improve profitability.
The ability as much as possible.
The good news is so far we've been able to adjust prices too.
Two two.
To offset the increase in costs.
Going through and the customers are accepting the price increases.
But it's not easy we need to react fast the cost increases happen.
It happened a lot faster.
And then you used to happen.
And it's a little bit more complicated in that type of environment, but that being said, we're nimble team were all entrepreneurs.
We're reacting fast though.
What we're seeing now is that for the vast majority of our franchisees profitability is very satisfactory.
And obviously there are exceptions to that but for the vast majority of the network. The profitability is good.
Customers are taking the price increases.
Relatively well so no impact on traffic for the moment.
Okay. That's helpful. Thanks, just a couple more.
One is on closures it was relatively high this quarter I don't imagine you're going to guide us on this but I wonder if you feel confident then closures will decline to 23 versus 22.
Yeah, well they need to.
This is certainly not a number we're happy with that we had we had some better quarters earlier in the year and then in Q4.
Number of closures was a lot higher so.
This is not a number we're proud of this is not a number that we expect it to be that high. So obviously, we're addressing the situation with our teams.
And.
We make it a priority to focus on our existing stores, it's a lot easier to keep an existing stores to open in <unk>.
So we need to preserve the integrity of our network and that's.
That's been our main area of focus for the team.
And everybody understands.
What we need to do to keep those stores open.
As long as it's a priority it's communicated.
We have conversations with our franchisees also a little bit more regularly to make sure that we understand where they're at.
If we can help them sell their assets instead of closing their assets then it's better for both our franchisee in the franchisor.
So, but yes, the closures were high in Q4, there is no doubt about it.
Okay understood and then my last one is on the food processing segment I Wonder if you can give a sense of how many points of distribution you're in right now and how that's growing just because of that.
That business is growing well into double digits for years, and just would like to get some sense of how large you think that business can get over time.
Yes, well the market is huge so we're addressing a very small portion of the network at the moment, we're predominantly in eastern Canada, we have some business in the U S as well but.
There is the runway for us is huge so as you as you know this is more cyclical market, we go up and down depending on the performance of grocers.
So if they generate a lot of traffic they will tend to go better and if they don't then it's going to be a little bit softer, but the runway is huge and <unk>.
This could well become a very very important it is a very important segment for empty why but it could become even bigger as the year go by and we certainly have aggressive targets for our team.
Okay, Great. That's all for me. Thank you very much.
Okay.
Thank you.
Your next question comes from George <unk> from Scotiabank. Please go ahead.
Good morning, this is baja calling on Youll just behalf congrats on the quarter.
Following up on the retail and distribution seems to me that the high margin here.
During this quarter.
Wondering if you could provide some color on that on the sustainability of this cohort.
These margins always depend on a lot of different things.
They depend on the sales mix we have.
Depending on whether we're selling a certain product or another the margins will shift to that they also depend on the price of commodities.
As you know we can change the price very rapidly with grocers. So.
We tend to absorb a little bit of the price increases or decreases.
A certain amount of time I would say the margin is probably higher than normal in Q4.
Do we hope we'll be able to repeat it we do.
Something thats going to happen to every quarter going forward probably not.
As we increase our revenues, we will continue to absorb the fluctuations of the market, So where we're going to land I am not sure. But this is this is on the high side for sure.
Thank you very helpful. Also can you provide some color on Papa Murphy's performance I'll do the comps.
Competition is looking at all on that question.
Yes for Q4.
Sales of Papa Murphy's were down low single digit.
It was we closed a lot of stores also in 2022. Unfortunately.
So the performance was not exactly where we wanted it to be but we felt that.
<unk> was softening and what we're seeing now since the beginning of Q1 is.
Is it a much better performance from Papa Murphy's is our sales are up same store sales system sales are both up compared to last year.
We just had a really good Valentine's day.
So we're feeling pretty good about where Papa Murphy's is Q4 was kind of a soft landing and hopefully now we're past that point and we are on the rise now.
Okay great helpful.
Thank you Lisa.
A reminder, should you have a question please press star one.
Your next question comes from Derek Lessard from TD Securities. Please go ahead.
Echo the congratulations on navigating a difficult Yuri but.
<unk>.
You alluded you did thanks for the color on the organic sales growth.
I was wondering Eric maybe you could add some color to both.
In Canada and U S around pricing you did touch on it but I was wondering if how much of that 4% organic growth is is pricing versus versus traffic.
Yes, it's hard to quantify because we I mean, our systems and the number of different pass as we have done it allow us to.
Be able to know exactly what the pricing versus traffic is but.
A good portion of that is certainly in pricing. We did we did have to increase our price compared to last year and different brands had to increase prices by different amounts, but there is pricing that was taken for every single one of our brands. So a good portion of the increase in <unk>.
In sales for the organic increase in sales for the fourth quarter is.
It was driven by traffic, although we do have much fewer stores than we had in Q4 last year. Unfortunately.
The individual stores, we have did much better than they did last year.
So it's a mixed bag I would say.
Okay.
I know, it's a difficult question to ask but in terms of future pricing.
How well positioned are you or do you think youre going to do you need to take more price going forward.
Yes, that's the big question, Mark we don't know what.
The market is going to be like in the future I wish I had.
Better Crystal ball, but mine doesn't really work that well so.
But we will need to react to what the market throws at us if we see a.
Stabilization of the costs for our restaurants, maybe we'll be able to keep the prices intact.
But if we see a major ryzen and our costs and we will need to we need to adjust price. If you look at that.
And certain certain territories in which we operate we're going to see some some pretty massive.
Raises in minimum wage and although we are.
We're not necessarily paying minimum wage in most of our restaurants anymore of it does have an impact on the salary structure. So in these cases, we will have to adjust prices slightly so we will see we will see how the market goes for for 2023, but we are.
We're ready to react our teams are prepared we have all the science behind.
What we need to increase and when and by how much.
So hopefully the market stabilizes and we don't need to do it but if we if we do need to do it will we'll be ready.
Okay, and maybe just a follow up on that you just alluded to the minimum wage increases what are the.
I guess, where are the biggest markets that youre expecting those that those increases.
Yes, well a few markets already announced their increases.
So for example, Quebec, which is an important territory for US is going to increase on me first by a material amount.
So that's going to have an impact for sure and then we're always watching California.
That's also a little bit more unpredictable for California, and we don't know where that there. It already territory is going to go.
But they might have some influence on the rest of the market. So we'll be watching.
Those I would say those are the two main ones that we're watching at the moment.
Okay, and then I'm curious too.
Given the the level of inflation and the price increases you've had pushed through in everybody's had to do it.
Are you seeing in terms of promotional or competitive activity overall in your markets.
It depends for which product.
No you can tell for example in pizza, which is.
Very competitive market.
There tends to be a little bit more extreme value offers in the markets but for.
Other types of restaurants, we don't see it that much.
Everybody is trying to protect their margins now.
Traffic is pretty good in general so.
This is not a time when you need to really go aggressive on.
The price point to drive traffic.
So there is some promotional competition nothing.
That's not normal so nothing unexpected there, but I would say, it's a pretty good times in terms of.
The extreme value offers that might be offered out there in the market.
That's helpful. One last one for me.
Just maybe just talk about the.
The write down.
I think in the press release, you talked about five brands or five banners.
Or they are with it.
Yes, I don't necessarily want to talk specifically about the banners in this case.
The.
The impairment charges, we had to take our mostly related to the change in the discount rate, but not necessarily in the performance of the brands.
As you know the interest rates have been going up and Theres been.
Speculation about a potential recession also which makes our risk.
Our risk premium go up a little bit so the write downs are mostly caused by the increase in our.
Our cost of capital more than.
Then because of the performance of the brands so in the context.
Rather not necessarily discuss about the brand specifically because we do believe those brands are are good and theyre not necessarily impaired.
But obviously, we need to comply with the rules and there are a certain number of parameters that we need to abide by and Thats one of them.
Okay.
That's fair and I appreciate the color thanks, Eric.
Okay.
Thank you.
Should you have a question please press star one.
There are no further questions at this time.
And gentlemen, this concludes your conference call for today, we thank you for participating on best that you. Please disconnect your lines have a good day.