Q1 2023 MTY Food Group Inc Earnings Call
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Speaker 1: I.
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Speaker 2: Good morning ladies and gentlemen, thank you for standing by. Welcome to the MT White Soaps group in fuel 1 2023 earnings conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session.
Speaker 2: Insertions will be provided at the time for you to queue up for questions.
Speaker 2: If anyone has any difficulties hearing the conference, please press star followed by a zero for operator assistance at any time. Before returning 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.
Speaker 2: and uncertainties that could cause actual results to differ materially from those anticipated.
Speaker 2: I would like to remind everyone that this conference call is being recorded today, Wednesday, April 12, 2023.
Speaker 2: I would now like to turn the call over to Eric Defer, Chief Executive Officer. Please go ahead.
Speaker 3: Good morning everyone. Thank you for joining us for MTY's first quarter conference call for fiscal 2023. The press release and MDNA with complete financial statements and related notes were issued earlier this morning and are available on our website as well as on CDAR.
Speaker 3: During the call, we will be referring to forward-looking statements and to certain numbers that are non-IFRS measures. You can refer to our mDNA for more details.
Speaker 3: I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. We're pleased with the robust operation on financial performance realized in the first quarter of 2023, highlighted by normalized adjusted EBITDA of $64 million and a record high system sales of $1.4 billion.
Speaker 3: We're particularly proud of that organic growth complemented our business acquisitions with year-over-year organic growth of 20% in consolidated Normalized adjusted EBITDA and 14% in system sales. During the first quarter the average unit volume of our restaurants was 39.6% higher than it was during the first quarter of 2020 which was the last quarter before the last quarter.
Speaker 3: That being said, the acquisitions of Wetzel's Pretzels and Sauce, Pizza and Wine during the quarter, along with the BBQ Holdings transaction which closed last fall, largely contributed to the year-over-year growth in EBITDA and system sales.
Speaker 3: Wetzel's Pretzels, which added over 360 locations to MTY's network, delivered strong results during the holiday season in December . We expect this deal to be accretive to MTY's earnings, EBITDA and free cash flow per share in 2023.
Speaker 3: On the Canadian side, our network generated 32% system sales growth in the first quarter, as the business continued on its strong momentum compared to a quarter marked by pandemic-related restrictions last year.
Speaker 3: Digital sales for the first quarter, meanwhile, increased 17% year-over-year to $246.2 million, including the positive impact of acquisitions on foreign exchange rate.
Speaker 3: Our digital sales, which consists mostly of takeout orders and delivery sales, benefit from the increased focus of our team put on digital marketing and sales channels, emphasizing the growing importance of the customer experience when they are away from our restaurants.
Speaker 3: Looking deeper at normalized adjusted EBITDA, our consolidated margins declined to 22% in Q1 2023 due to the higher weight of corporate stores following recent acquisitions.
Speaker 3: However, taken individually, our segment margins are all trending favourably compared to last year, with the exception of the US franchising, which is mostly flat at just above 50% when excluding acquisition costs.
Speaker 3: Turning to our network, we ended the first quarter with a total of 7128 locations, of which approximately 97% were franchised.
Speaker 3: We acquired 379 locations during the quarter, opened 76 and closed 115 others, in what we consider a typical turnover for the first quarter of any period.
Speaker 3: Both openings and closings were slightly better than our 10-year average in proportion of our network, which is in line with our objective of reducing closures and increasing the pace of openings.
Speaker 3: Construction and supply chain issues have largely subsided early in 2023, but we're still experiencing significant delays to obtain permits and final inspections in many jurisdictions. Despite these temporary issues, our management team remains dedicated to delivering healthy organic growth and maximizing the assets in our portfolio.
Speaker 3: Finally, looking ahead to capital allocation priorities for 2023, we will continue to opportunistically seek acquisitions, reduce debt, invest in our business and reward shareholders with dividends.
Speaker 4: I will now turn the call over to Renée who will discuss MTY's financial results in greater details. Thank you Eric and good morning everyone. As previously mentioned by Eric, MTY delivered record-breaking normalized adjusted EBITDA of $64 million in the first quarter of 2023 which excludes $1.1 million in acquisition-related expenses.
Speaker 4: The 79% year-over-year increase in normalized adjusted IBD is largely due to the acquisitions of barbecue holdings, wetzel pretzels, and sauce pizza and wine, which positively impacted our U.S. and international segment in the first quarter of 2023, generating $13 million in IBD when excluding the impacts of IFRS 16. This is a 63% improvement to the U.S. and international segment over prior years.
Speaker 4: primarily by our franchising segment.
Speaker 4: In terms of net income attributable to owners, it amounted to $18.4 million, or 75 cents, per diluted share in the first quarter of 2023, compared to $16.6 million, or $68 per diluted share in the same period last year.
Speaker 4: Net income in the first quarter was negatively affected by a few factors, including higher interest on long-term debt caused by our increased borrowings as well as higher borrowing rates.
Speaker 4: increases in the depreciation of property, plant and equipment, and right of use assets due to the higher number of corporate stores in our portfolio, additional unrealized foreign exchange losses, and acquisition-related transaction expenses linked to the Wetzel pretzels and sauce, pizza, and wine deals in the amount of $1.1 million.
Speaker 4: Although we know that some of these items are non-recurring in nature, we expect some of these increases, such as the increase in our interest expense and amortization of tangible assets to remain for the foreseeable future.
Speaker 4: Looking at our revenues, the company saw a growth of 104% year-over-year to $286 million in the first quarter of 2023.
Speaker 4: Revenues more than doubled, driven by the barbecue holdings, wet-salt pretzels, and soft pizza and wine transactions that raised revenues for franchise operations and corporate store restaurants in the U.S. and international segments by $14.1 million and $110 million, respectively.
Speaker 4: In Canada, franchise operations, corporate restaurants, as well as food processing, distribution, and retail revenue improved 33%, 31%, and 5% respectively, as the overall business recovered from government imposed restrictions related to the pandemic in the first quarter of 2022.
Speaker 4: Turning to liquidity and capital resources, cash flows from operations totaled 36.7 million in the first quarter of 2023 compared to 38.8 million in the first quarter of 2022. While three cash flows amounted to 29.2 million or $1.19 per diluted share in the first quarter of 2023, the cash flows from the first quarter of 2022 were $1.19 per diluted share.
Speaker 4: compared to $36.1 million or $1.47 per diluted share in the first quarter of 2022.
Speaker 4: Both our cash flows from operations and free cash flows were impacted by higher interest rates as well as two one-time non-recurring payments totaling $10.4 million during the first quarter of this year. Excluding the impacts of those non-recurring payments, the conversion of EBITDA into cash flow is in line with the potential of MPY.
Speaker 4: to turn EBITDA into cash flows in this higher interest environment.
Speaker 4: Excluding variations in non-cash working capital items, income taxes, interest paid, and other, operations generated $63.3 million in cash flows in the first quarter of 2023, compared to $36 million in the same period last year.
Speaker 4: In the first quarter of 2023, we also reimbursed $29.6 million of long-term debt and paid $6.1 million in dividends to our shareholders.
Speaker 4: At the end of the first quarter, MTY had a healthy cash on hand balance of $58.7 million and long-term debt of $839.7 million, mainly in the form of bank facilities and promissory notes on acquisition. Our net debt to normalize adjusted dividend ratio.
Speaker 4: stood at 3.6 times at quarter end, which is at the higher end of our comfort level.
Speaker 4: The company has a revolving credit facility of $900 million, of which $609 million or $827.1 Canadian dollars has been drawn.
Speaker 4: A hedging strategy with interest swaps has been implemented to provide additional financial flexibility as well as minimize interest payments during a time when market rates are extremely high and volatile.
Speaker 4: And with that, I thank you for your time, and we will now open the line for questions. This is Home Depot Operator.
Speaker 2: Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Speaker 2: Should you have a question, please press star 1.
Speaker 2: If you want to withdraw your question, please press Start to.
Speaker 2: Your questions will be pulled in the order they are received. If you are using a speakerphone, please leave the handset before pressing any keys.
Speaker 5: One moment please for your first question. Your first question comes from Johnson Parro from CIBC. Please go ahead. Thank you very much. Good morning. I wonder if we could start on your latest deals.
Speaker 3: for wet soils given the malt presence. So all things are trending well for wet soils. In terms of unit growth, I think it's a little bit.
Speaker 3: premature for us to comment on unit growth. It's only three months of business so I mean we're working on a very healthy pipeline that was there when we acquired the business so we are opening stores and we will be opening stores in the future so it's not a business that we acquired with no pipeline where we had to build it it's a business that already
Speaker 3: in terms of sales. In December we had some really bad weather event in the two weeks leading to New Year's that didn't help with our sales performance. In January and February were fine but those two weeks really hurt us.
Speaker 3: also a franchisees. So we're doing the right thing and the sales are going to come. In terms of pipeline for barbecue, the pipeline was empty when we acquired so this is something we're building. It takes a few months for us to build a pipeline and then another few months for us to build the stores.
Speaker 3: So we're going to have to be a little bit more patient there, but that was something that we expected. So no surprise there.
Speaker 5: Okay, that's helpful. Thanks for that. On the outlook, you continue to call out the labor environment and I wonder if you can frame that versus prior quarters. Is it improving? Is it worsening? And are there specific regions or formats that are disproportionately impacted?
Speaker 3: Yeah, it's improving. There's no question about that, but it still remains a challenge. There are areas that are more difficult than others and sometimes they can vary. But yeah, the labor is still a challenge for us and for our suppliers as well. So sometimes we...
Speaker 3: if we do have the labor, sometimes our suppliers are running short.
Speaker 3: I mean, this is an environment we're going to have to get used to. I don't see that getting.
Speaker 3: dramatically better in the future. We already had some labor issues before the pandemic and the pandemic didn't help. So, I mean, this is something we're going to have to live with probably for the next decade. So it's up to us to be more attractive and make sure that we solve our labor problems and help our communities.
Speaker 3: our suppliers and business partners to solve their labor problems so that we have a pretty seamless operation.
Speaker 5: Okay, understood and then a couple housekeeping questions. The commentary on malls and office towers, I think you said that was a 49% year reader. Correct me if I'm wrong, but are those at pre-pandemic levels yet? Or can you quantify the gap to pre-pandemic for that format?
Speaker 3: Yeah, well, office towers are, you know, we have very few restaurants in office towers, so I mean this is hit and miss. We have some that are up, but we have for the vast majority of them, they're down dramatically still, but it's a very minute portion of our restaurant. As far as malls are concerned, the good malls are up in traffic versus pre-pandemic, so the good malls are doing really well.
Speaker 3: I would say the B and C malls are struggling a little bit more to attract traffic now. And the good news is we don't have that many stores in those B and C malls, but we do have some. And sales are not coming back the way they are for the really good malls which are firing at all cylinders now.
Speaker 5: Right, okay. And then lastly, capex. I mean, this is this is kind of new to MTY, which has historically been a really low level of capex intensity, but because of the corporate presence of BBQ, you've got a more meaningful number there. The 8 million or so in the corridor, is that a reasonable run rate?
We are building our first street stores called Twisted by Wetzel's. We're building a new Barrio Queen in Surprise for the barbecue division. We have some renovations going on on the village inn. We also have some stores that are being built now that will probably be sold as they get closer to opening.
in various brands. So I would say the 8 million is on the high side. Not a lot of that is maintenance capex. A lot of that is related to pre-deal transactions that we have to honor. And that will probably continue for Q2, but I expect that after Q2 it should go down to a more normal level.
Okay, I appreciate the color. I'll pass it on. Thank you. Your next question comes from Richard from National Bank. Please go ahead.
Thanks for taking my questions.
Just on the acquisition backdrop, I wanted to get a sense.
on how willing it is to close on acquisitions, whether we think about smaller ones.
How should we think about balance sheet and where would leverage top out or management would feel that it's a level that they don't want to exceed? How should we think about all that?
Yes, well at the moment there are always ways if we find a real great transaction to find capital and do what we need to do if it's right for the business.
I'd say if we wanted to look at acquisitions today realistically, it would probably be smaller or medium-sized acquisitions. I don't see MTY extending the leverage much past where it is now. So if we wanted to do acquisitions, I mean we are producing good cash flows and we will be paying down our debt and creating some...
some wiggle room for future acquisitions but we don't know what the market is going to throw at us. If we have small acquisitions, we'll make small acquisitions but if the market has very large acquisitions that we consider can't miss, we're going to go for it. We'll be creative and we'll find a way to raise the required capital.
realistically we should expect smaller and medium-sized acquisitions for now as our leverage is on the high side now.
How about the acquisition backdrop? Is there anything that you're noticing changing? Are there still attractive deals out there?
Well, you know what?
The market is a little bit volatile now, so we're seeing some deal flow. It's not a super active market. I think a lot of the sellers are seeing that the multiples are depressed and there's not that many buyers out there. We've seen what happened with Subway. No, they're trying to.
get high value for their asset and if a brand like Subway can't do it then maybe other people are going to think about it. But it's up to us to maintain our relationships and this is what we do when we're not acquiring, we're nurturing relationships and we're making sure that we stay top of the list for attractive companies to call us when they want to sell their business. But right now the deal flow is there, it's certainly not.
a seller's market now, so what we're seeing is multiples becoming a little bit more reasonable, but people being a little bit more cautious about maybe waiting for a few months or a few years to see how the market evolves before they sell their companies.
How would you characterize the backdrop right now? Obviously, results were strong in the quarter and management gave us that color about its initiatives flashing green. It seems fairly constructive from what we're seeing, but just wondering if you could add any perspective to that? Yeah, well, you know what, we're really happy with the performance of the company.
really happy but we don't want to stop because we know once you lose momentum it's harder to regain it so we're pushing hard to keep our momentum and accelerate so the teams are all hands on deck and everybody's pretty happy with the performance. It's really encouraging so the vibe is very positive in the company and everybody's happy with where we're going.
Thank you. Thank you. Your next question comes from George Dumé from the Scotiabank. Please go ahead.
Yeah good morning Eric. I just want to get your prognosis on the consumer in general and maybe how that can relate to restaurant sales I guess given the higher inflation and recessionary concerns. It feels that everything internally is going really well but maybe from from a macro perspective just kind of your view there.
I don't know if it's fair to ask me for a view on the macro environment. I can talk about our restaurants. People are coming to our restaurants. People are happy to gather socially and enjoy our food. We're trying to do the right things to make sure that we're top of the list when people want to consume food in restaurants.
As far as the customer is concerned, all I know is the MTY customer is still showing up to our restaurants. I can't necessarily talk for the others. But for the moment, people talk about inflation, people talk about a lot of different things.
I don't know if it's a fad, I don't know if it's flavor of the week until we talk about something else, but for the moment it's affecting us for sure, but customers are there so we're happy with the situation.
Okay, that's helpful. On your earlier comments on the 40% AUV growth versus pre-pandemic, how much of that is?
its pricing and if you exclude Papa Murphy from that, can you maybe call out some banners that you think saw the most impressive growth?
Yeah, well there's some pricing in every brand for sure. It's not a very large portion of the increase though. Our pricing is not up by anything close to that proportion.
Some brands have increased prices by 15%, some brands have increased prices by 6 or 7%, but no brands have increased their prices by 40%.
So, I mean, it's hard for me to give you an exact answer given the number of brands we have, but as far as brands performing really well...
I mean most of our brands are performing really well and for most of our brands the UB is up significantly so
I don't necessarily want to pinpoint one brand and forget about all the others.
So yeah, I would say in general it's going really well and AUVs increasing for most of our brands
The corporate restaurants saw EBITDA margins in the mid-9s this quarter. I'm just wondering is there room for continued improvement there? How should we see that margin evolving for the rest of the year?
That number is a pretty strong number. So, I think in terms of margins, we're always working to improve the margins, but we need to be realistic also. It's a pretty strong number when you consider that there are some stores also that are underperforming in that portfolio.
So pretty strong number. So our primary focus is to work on top line and increase sales. There are opportunities in a lot of our restaurants to...
to jack up the top line and if we can maintain those margins with higher top line, it's going to be better for our shareholders. So I don't see much margin expansion there. There's going to be variations up and down depending on seasonality. But where we're focusing the most is on top line. Okay, one last one from me, Eric. I feel like I always ask you this question, but Papa Murphy, how did it do in order?
Are you seeing at all, maybe a pronounced slowdown at all, or a slowdown in the takeout delivery part of that business? I'm happy you asked the question because it's doing fantastic. Okay, good. Yeah, we're finally gaining traction with a lot of the initiatives we had put in place. Last year you asked me that question and I was like, yeah, we have a lot of...
So we have a lot of proportion of our sales going up and the good news is after the quarter ended, we continued to see that momentum continue to pick up. December was good, January was slightly better, February was slightly better and then March was even better than those previous months. So we're onto something with Papa Murphy's, it's a small sample.
Michael Glenn from Breen-Wen James. Please go ahead.
You highlighted the $10 million on the free cash number. You indicated the $10 million of payments there. I didn't see those. Where do I see those in the cash flow or in the financial statements? Yeah, they're a...
There are disbursements that are out of accounts payable. So if you look at the working capital, this is one of the large items that affected working capital. They're both related to transactions. One is related to a payable we had following the Kahala transaction in 2016. So it was a relatively old one. And one is related to the Wet Holes Pretzels payment that were done after the...
line it was about 10.5 million. Does that include everything for Q1? Should that be at that level through the balance of the year all else equal?
million. Does that include everything for Q1? Should that be at that level through the balance of the year? All else equal? Yeah, this is what we expect.
Okay, and just going back to the corporate stores, the CapEx moderation in the back half of the year, can you describe what does the renovation cycle look like on those corporate stores? What causes Lisa to pay more for her website? Researchersolute.org
Yeah, we're renovating our village inns at the moment. So the refresh is, we're going to do half the refresh this year, half the refresh next year. We're showing some really good ROIs on those refreshes, so it's a good investment of our money. And then there's always a few stores that need to be refreshed. Sometimes it's just a fresh coat of paint, so it's relatively inexpensive and not necessarily accessible.
As you work through this higher level of corporate stores, I know that you've, I think you've said on prior conference calls, you would keep these stores, but is there any evolving thought process there as to whether there could be a divestment of these corporate stores at some point down the road? No, we're happy with our corporate stores. We have.
As long as we have a group now that's wired to do corporate store performance, this is something we did not have before. And with the critical mass we have, it's worth it to have these people. And they're doing a fantastic job. So it's a large part of profitability. So for me to go out and sell our corporate stores for...
maybe four or five times EBITDA doesn't necessarily bring value to the company or to the shareholders. So I'd rather keep them and maximize their performance and work on them. We're not necessarily looking to build more corporate stores and we might divest the
doesn't necessarily bring value to the company or to the shareholders, so I'd rather keep them and maximize their performance and work on them. We're not necessarily looking to build more corporate stores and we might divest the store here and there.
if it makes sense geographically because it's out of the way or something. But other than that, we intend on keeping the stores for now. Okay, and I think you said leverage was 3.6 times. Do you have like a pro forma figure? Is that the LTM IBITDA or is that a pro forma number?
if it makes sense geographically because it's out of the way or something. But other than that, we intend on keeping the stores for now. Okay, and I think you said leverage was 3.6 times. Do you have like a pro forma figure? Is that the LTM? Is that a pro forma number? No, that's based on LTM.
LPMP have a pro forma number handy? No, but we do, but we don't share guidance, as you know. Okay. Okay, thanks. Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1.
Your next question comes directly from T.V. Kalin.
Thanks, good morning everybody. Congratulations on the results. A couple of questions for me. Eric, I just want to kind of come back to what you're seeing in terms of pricing and volume. I think you mentioned some brands were pushing through prices and if I'm looking at the industry data, I would suggest that menu inclations up high.
10% for the last 12 months.
some food some some elements that are up 10% but you know, we're nowhere close to that for most of our brands
So no, traffic is good for most of the brands. I'm not saying 100% of the brands have traffic going up, but for most of our brands,
The traffic is up and there is some food inflation, but nowhere close to the number you mentioned. Okay. And maybe could you just talk about what you're seeing on the competitive front and sort of promotional activity as you would expect. Some consumers may be pulling back on the...
We have seen some competitors go very aggressively to try to get traffic up, but in general I would say the environment is
is a good one to operate in for restaurant operators.
Everybody wants to get their traffic up but everybody is also realizing more than ever that we're working on 10 margins and if you discount something too much you might run into trouble. So we'd rather keep our prices where they are at the normal level and make sure our franchisees realize the right margins for their businesses.
of what you're seeing in other regions and maybe just on the, if you expected any impact on the, I guess the electricity outage in Quebec last week.
We are looking forward to patio season to start to be honest with you. Not only in Quebec but you look at Ontario, you look at our stores that we have in Minnesota for example. I think it was minus 25 early this week.
We need patio season to start for our sales to go up in some of our concepts. You're right, it's a slow start of the spring so far. We're not seeing any dramatic impact because there's ups and downs at this time of the year. But we'll need a good patio season like we always do. Hopefully this week is going to cure that and we're going to be able to open patios and customers are going to be happy to be outside.
As far as the power outage in Quebec is concerned, a lot of our restaurants were affected, some very positively, some very negatively. We had some restaurants that were closed for four or five days, and we also had restaurants that didn't lose power, that crushed it during the weekend and ran out of food, which is a good problem to have. So we had a little bit of both extremes.
All in all we lost a little bit but it shouldn't be anything material and it's not something that should show in our sales results for Q2.
Okay that's helpful and then maybe just one housekeeping for me. You did fix interest rates on about 230 million or so US. Could you give us an indication of what you fixed those interest rates at? Yes.
Not necessarily something we want to discuss in exact figures, but we got a pretty favorable deal from our banks. We disclose it in subsequent events notes, so if you want to refer to it.
to get a little bit more specific, but we believe that time is right, the curve is inverted. We don't necessarily want to speculate about rates, but it's also a favorable environment for us to lock a certain portion of our borrowings. Okay, thanks, Eric. Thanks, everybody.
Thank you.