Q3 2023 MTY Food Group Inc Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by.
Welcome to the <unk> Food Group, Inc. Third quarter 2017 Suite earnings conference call at.
At this time, all participants are in listen only mode.
Following the presentation, we will conduct a question and answer session.
He joined the question Julian The press Star then one on your telephone keypad.
Should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
Before turning the meeting over to rich. 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 Wednesday, so pretty low.
<unk> 23.
I would now like to turn the call over to Eric Lefebvre Chief Executive Officer. Please go ahead.
Yeah.
Good morning, everyone. Thank you for joining us for empty wise third quarter conference call for fiscal 2023 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.
Also remind you that all figures presented on today's call arent Canadian dollars unless other.
Otherwise stated.
Thank you I continued to reap the benefits of its dual growth strategy in the third quarter of 2023 with normalized adjusted EBITDA, increasing 44% year over year to $72 $9 million.
We're very pleased with the performance of our latest acquisition, which helped increase system sales, 33% to $1 5 billion in the quarter.
As well as with same store sales growth of 3% produced by the concepts we have owned for more than 12 much a.
A few months ago during our first quarter conference call I mentioned that most key performance indicators were flashing Green Cross our management dashboard.
This strong financial performance was sustained in the second quarter with normalized adjusted EBITDA of $74 $6 million and record system sales of $1.5 billion and our momentum continued in the third quarter with comparable numbers across the board.
T Y continues to deliver profitable growth with exceptional predictability. Despite a mixed economic environment marked by higher interest rates.
Missionary pressures and heightened price sensitivity on the part of consumers.
During the quarter empty Wise network opened 87 locations. This is the highest number of openings in the quarter in our history that brings our year to date total to 236 new locations opened.
Which is also a record for the first nine months of the year construction and supply chain issues are gradually dissipating while delays to secure permits and schedule inspections are slowly trending back to normal in most jurisdictions, however, obtaining adequate and timely financing for franchisees has been more challenging recently the cost of money has increased significantly in the last two years.
Banks have become slower to disburse funds, putting pressure on new store development during.
During the quarter empty wise network closed 92 locations for it and that store closure of five location. Once again this quarter. We fell just short of our objective to achieve net store growth as we continue to implement measures and best practices to limit the closures as much as possible.
The 92 closures represent our best performance in the third quarter since 2016, when our network was much smaller.
However, we remain focused on our objective to deliver net store growth looking more closely at our network. We ended the third quarter with a total of 7119 locations of which approximately 97% were franchised the.
The geographical split among empty wise location consisted of 58% based in the U S, 35% in Canada and 7% International.
Moving onto the same store sales, Canada, and the U S recorded sales increases of 3% and 2% respectively. While international region was stable compared to the third quarter of 2022.
In the U S. The increase is mainly attributable to quick service restaurants, as Papa Murphy's suite Frogging Cold Stone creamery continued to be positive this quarter and Canada sales lift came from the casual dining and quick service restaurant concepts.
The last few months, we've noticed that consumers have become more demanding for their hard earned dollars in this current environment.
The increase in prices of the last three years has resulted in higher expectations and our brands have to elevate their game to be relevant in this market.
Value does not necessarily mean lower prices, but rather an experience that matches or exceeds the pricing of our menu.
N P. Why it has a diversified restaurant offering including 90 different banners of various types and formats to satisfy a wide area of cause summer restaurants is an increasing our resilience in the face of economic uncertainty.
Quick service and fast casual dining concepts to make up 90% of our restaurants and over 70% of our system sales.
More than three quarters of our sales are generated by street front locations, while mall in office towers represent 15% of non traditional locations in 9%.
Turning to our capital allocation strategy, we will keep a watchful eye on accretive tuck in acquisitions.
Prioritizing debt repayment and building a reserve for future opportunities.
Our goal remains to produce solid organic growth to complement the growth from acquisitions, which has been part of empty wise do you need for the past 20 years.
I will now turn the call over to Renee, who will discuss empty wise financial results in greater details.
Thank you Eric and good morning, everyone. As previously mentioned by Eric normalized adjusted EBITDA totaled $72 $9 million in the third quarter of 2023 up 44% from $56 million in the third quarter of 2022.
The year over year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holding wetzel pretzel and tossed pizza in Hawaii, which positively impacted our U S and international segment in the third quarter of 2023 and accounted for 64% the year over year growth the.
The U S and international business accounted for 66% of normalized adjusted EBITDA in the quarter, while Canada represented 34%.
Our normalized EBITDA margins for the franchising and corporate store segment improved year over year with margins of 54% and 10%.
Corporate store margin of 10% is a drastic improvement over prior year when the segment reported a loss.
On the retail distribution and manufacturing segments friend margins did see a slight dip from 13% in 'twenty 'twenty, 2% to 10% in 2023, mostly due to the termination of a licensing agreement in the U S.
In terms of net income attributable to owners it amounted to $38 $9 million or $1.59 per diluted share in the third quarter of 2023 compared to $22.4 million or 92 cents per diluted share in the same period last year.
The year over year improvement can be attributed to higher normalized adjusted EBITDA lower income taxes, and the impact of the revaluation of certain derivative interest swap hedging arrangements entered into earlier in 2023.
The three into your fixed interest rate swap arrangements have also accounted for an average interest saving of 600000 per month and consumption on our cash flow.
These factors were partially offset by several items, including amongst other higher depreciation of property plant and equipment and right of you thought that as well as greater interest on long term debt. These increases were the result of the acquisitions of barbecue holding wetzel, pretzels, and Fox pizza and wine as well as higher market interest rates witnessed.
Across North America.
Company revenue grew 74% to $298 $1 million in the third quarter of 2023 from $171 5 million in the third quarter of 2022.
In the U S and international segment of $104 6 million search and the corporate owned location revenue largely due to our acquisitions in the past year contributed to the year over year revenue growth.
This growth was complemented by a $17 6 million increase in franchising revenues in the U S and international segment of which $13 4 million result from the acquisition.
In Canada organic revenue growth from franchise operations improved 3% year over year on the strength of heightened interest in sales, while the food processing distribution and retail division posted similar graph.
Turning to liquidity and capital resources cash flow from operations amounted to $51 7 million in the third quarter of 2023 compared to $42 3 million in the third quarter of 2022.
Free cash flows reached $43 5 million or dollars 77 per diluted share in the third quarter of 2023 compared to $40 9 million or $1 67 per diluted share in the same period in 2022, mostly due to the increase in normalized adjusted EBITDA.
In the third quarter of 2023, we reimbursed $26 3 million of long term debt paid $6 1 million in dividends to our shareholders and $12 4 million in interest on our banking facility.
At the end of the quarter and see why it had a cash position of $54 3 million and long term debt of 784.3 million, mainly in the form of bank facilities and promissory note on acquisitions.
Our revolving credit facility has an authorized amount of 900 million of what's U S. $571 8 million has been drawn at the end of the quarter, our net debt to normalized adjusted EBITDA ratio stood at two eight times at quarter end.
And with that I. Thank you for your time and we'll now open the line for questions operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
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Our first question comes from Derek Lazard, a T D code.
Go ahead.
Yeah, Good morning, Eric and congratulations on the quarter.
Thank you.
First question is is it.
They've got the resiliency of the consumer I was just wondering if you could maybe talk about.
Any cracks that you might be seeing if any on the back of the economic environment and then a follow up to that is how does how does the traffic versus check work.
Yeah, well for the moment the consumers still I'm still is there for us.
I mean.
What we're noticing is the customers probably more demanding in terms of the experience you're going to deliver it to them and.
Wherever we have a we have drax is where maybe the experience is not where it should be.
We just need to step up our game, but there is no customer is there the customer doesn't throw money at any restaurant any more of the customer will be a little bit more demanding.
The prices have gone up so the experience has to go up and at the same at the same pace, but other than that the customer is there for us and we.
We havent seen massive cracks yet in anything.
Most of what's been announced for so long, we haven't necessarily witnessed in our restaurants yet.
I don't know, if we will or if we want but we are certainly preparing for it.
Our teams to be it could be ready, we want our franchisees to be ready.
And we're trying to offer a good value.
Two are to our customers offer good experiences and and people are still there now where we can't take anything for granted obviously the student loan repayments in the U S has started again or they have to alber. So this is something we're watching obviously geopolitics. There's also something were watching I don't know, if that's going to impact us or not but.
It's certainly something that we need to keep an eye on.
Okay and has the have you have you noticed a change in the competitive environment.
Given the backdrop.
Not really I think for the most part yeah.
Competition is healthy competition is mostly on experience and on foods and not necessarily an extreme discounts and so.
So for the moment.
<unk> landscape is.
Where are we we like it to be we like to compete on our menu we like to compete on experience.
We're not necessarily prepared to go into the deep discount type of competition, but so far the market seems to be avoiding that and in and competing on the right ground, so pretty happy with where it is now.
Okay and it looks like it appears that your you got some good control on wage growth.
In your business, we did see increased wages in California.
Curious on you know how you know how you're how you're managing that that wage growth.
You know any impact given that California.
As markets, Germany saw the number of stores are corporate stores that you might have there.
Yeah. This is definitely an area of concern for us.
California is an important market for us and for our corporate stores and franchisees.
And what's going on there is something we need to.
We need to have to watch and prepare for again it's.
It's not the first time, we see a shock like that we've seen that in other jurisdictions before including California.
And it is what it is we're all competing on the same ground in.
All our competitors are facing the same wage increase and hopefully we'll be able to.
To weather that storm without increasing the menu too much because that's getting a little bit more sensitive. So our teams are working now to try to.
Well see where we can be more efficient in our stores and see where we can maybe leverage some of our suppliers to reduce the number of hours, we we use in our stores.
And and keep our costs under control.
Okay, and maybe just one more housekeeping for me it looks like you had a loan.
But the tax rate.
This quarter, what should we be what's a reasonable tax rate assumption to be modeling.
Yeah, well, yeah, there's a lot of things going in our favor for the last few quarters in terms of the tax rate again. This is this is not something we can take for granted there are some elements are working for us that might not be there in the future. So.
Probably something in the 20% to 22% range is probably a normal run rate for the long term, but in the short term there might be some some other good quarters in the future, although we got necessarily predict.
The impact of everything that's going on in our in our environment that it looks it looks pretty favorable for now.
Yeah. So what are they what are those buckets or what are those drivers.
Yeah, it's mostly the mostly has to do with.
We've got in the way the company is structured between Canada and U S.
So there are there are some tax advantages and depending on where you finance the company and how your company is structured.
I won't go into the details of that but Theres no crazy foreign tax structures, though yeah offshore or overseas dock structure, It's just mostly optimizing the Canada and U S taxes.
Okay. Thank you.
Your next question comes from Michael Glen and Raymond James. Please go ahead.
Yeah.
Hey, good morning, it's Eric.
Yes.
The net closure, so if we circle back to.
Going back in time here, but if we circle back to <unk>.
And best core he.
He had a program in place to help the franchisees in terms of you know renovating stores and keeping stores opened is this something that you have in place right now is that helping at all with with what we're seeing from the closure rate.
You said this is something we had been in place until until last year for this year, we terminated most of our rejuvenation programs, but there's there's still something going on we do have some plans that are slightly different they're not necessarily the same structure as the best course plans for most of our brands, but we don't subsidize the.
The the renovations as as massively as is invesco or did at the time.
Okay, and you have no plans to push have more heavily on that at all at this point in time.
It's something we talk about every time and there's a there's a balance to be achieved.
We've we've pushed quite a bit on that and that in the last few years.
This year was a time, where we see if we can consolidate with we've known what we've done in the past few years.
It's the way it's looking good.
I don't know what it means for the future I don't know if we're at the board level going to say well. This is something we want to push on again or if this is something we want to.
Consolidated more.
But you know those are irregular discussions that we need to have for their strategic for strategic reasons, but right. Now we do have plans for a few of our brands where it makes the most sense and where strategically we need to do it because the a lot of stores are getting through that period, where where they need to be renovated or you know some of the networks are getting a little bit older.
Sure.
So it's a brand by brand decision, it's not necessarily an M. P y level decision.
And for the corporate stores. There are you talking about the level of profitability.
Coming out of those stores right. Now can you is there any update about your thoughts surrounding corporate stores could we.
Essentially see MTI had looked at that at best some of those are corporate stores, particularly on the U S side.
There's there's not going to be a massive program of divestiture of corporate stores.
I don't think it would it would create value for shareholders, even those stores are profitable and.
At fire sale prices, not necessarily something that will produce value for shareholders.
There will be some divestitures here and there where you know this.
Some stores might be a little bit more difficult for us to operate it might be in geographies, where we don't have that critical mass. It makes it really efficient for us to do.
Have stores, so there might be a few divestitures here and there, but there's not going to be structured and systematic program to divest of all the stores.
Okay.
And then so for the on the on the income statement.
You're right.
I take your total interest charges.
Three Q2 Q.
It was about 16 million combines into Q, and then 16 point too.
And three Q is that.
Like they did.
Does your total interest expense and this is long term debt and your lease interest expense does it stabilize at these levels at around 16 million Mark or.
Does it potentially move higher with somebody with the recent rate moves.
But I think it's I think it's stabilized until if the central banks don't move their rates I don't think our our interest is going to move much from from where it is now.
Other than us getting to a better bracket in the in our in our credit agreement, where we can save some money.
I think we're at a stable level, obviously, we don't control with the central banks are doing as you know probably half of our debt is at variable rates right now so.
If rates go up or down that's going to have an impact on us.
The other impact we can have is for us to deleverage and maybe moved from one bracket to the other and in our credit agreement.
And are you able to say what the what the leverage level is that true triggers that is.
Yes, there's a number of different brackets are typically it's about half turns of EBITDA. So right. Now for example, if we move under three turns of EBITDA, we're going to save you know a certain amount of BS and then if we move to under $2 five we'd save another amount of dips a bps. So so this is how to do.
It's it's it's a number of different levels, where the rates are different and they go up or down do they go up as the leverage goes up when they go down as the leverage goes down.
Okay.
Cramps in the questions.
Once again, if you have a question. Please press Star then one.
Yeah.
Yeah.
The next question comes from Arthur No corn RBC capital market.
Please go ahead.
Uh huh.
Hey, good morning.
So last year, you mentioned that you had 150 restaurants under construction that are being impacted due to supply chain and permitting issues.
Just wondering if some of the strength that we're seeing in recent quarters and new store openings are reflection of construction coming to completion at these locations and can you also comment on I guess, where the pipeline of new store openings sits at today.
Yeah, the Soviet Yeah answer is yes and no.
We do a lot of the stores, we're opening our stores that had been under construction for a certain amount of time, so yes definitely.
For stores that that's we're swinging hammers and six months ago.
The opening now.
But you have the same number of stores under construction at the moment, probably more actually I don't have the exact number right now, but probably more under construction now than we did the last time, we reported on it. So we're we're certainly stronger because of all the stores that were delayed in the past what we the fact that there our pipeline is still really healthy is encouraging for the fee.
Sure.
Got it.
And then.
In your prepared remarks, you mentioned the tougher financing environment for franchisees impacting the pipeline of new store openings, but can you also comment on the impact that it's having on store closures.
Yeah. It doesn't really have an impact on store closures for the most part the stores that are about to close our stores that have a pay down their debt and the you know the leases are expiring or the franchise agreements are expiring and some franchisees decided to move on or you know, sometimes it's a joint decision anywhere.
We see that you know there's there's.
There's no economic model for us in the future for example, if the landlord increases there ray.
It's our or various demographic changes or whatever and in an area.
But no it doesn't impact the number of store closures, but definitely for store openings. It slows down the process a little bit obviously, the economic model for all of our brands is challenged by.
Debt service costs that have increased materially so we need to do our homework and make sure. We provide an adequate return for our franchisees and once we achieve that then it takes a little bit longer for franchisees to find adequate financing and it takes longer also for the Baxter disbursed in these days there.
Got to be a little bit more protective of their capital and they tend to have more control over disbursements.
But it's not the first time, we navigate something like that we've seen that before.
Our teams are trained for it and very patient.
And we'll get through it.
Alright, and then last one for me I guess pricing is obviously, one way to deal with the inflationary backdrop or the minimum wage increases that we're seeing but can you also talk about your ability to manage.
The number of menu offerings that you have.
They're your stores.
Yeah. This is really good question and this is something that we're constantly.
Reviewing.
Introducing new menu items as as a certain costs for franchisees. So we're trying to.
For most of our brands, we're trying to introduce new menu items that won't necessarily require new skus in the store and you inventory items try to reuse whatever we already have in the store to optimize you know.
The working capital for our franchisees.
Optimize our the turnover, we have and the volumes we have for each for each item.
Removing some menu items is also part of it that typically if we introduce a new menu item, we need to remove at least one or two try.
Try to streamline that make it simpler for the kitchen also.
And then.
Terms of.
We designed the menus, how we designed the promotion was try to direct customers to items that might have more favorable food costs are more favorable labor cost is also a strategy that we need to look at.
Sometimes you you will keep some items that are not as good and from profitability standpoint, just because there is something you need to keep on your menu, but you try to direct your customers too.
Something other than it will be a little bit more favorable and that fluctuates over time, obviously the prices of these proteins will go up or down overtime and.
The same the same happens with the all the commodities. So yeah. It's a it's an art more than a science.
But our teams are looking at that on a daily basis.
Yes.
The next question comes from Nissan Rafi.
<unk>. Please go ahead.
Hi, good morning, and congratulations on doing yourself.
I had just one question regarding <unk>.
The outlook if you have.
Uh huh.
Regarding the M&A and I'm looking at too if there's a pipeline.
Okay. Thank you.
Yeah.
M&A is always we're always looking at something in terms of M&A. So theres no theres no one time, where we're not looking at anything I would say the market right now is a little bit quieter than normal there are not that many buyers out there. So I think the sellers are choosing their timing are probably a little bit more widely than they have before.
Seen a lot of processes that go into the market and fail.
To either attract buyers or attract offers that are satisfactory to.
Sellers, obviously, the cost of financing right now and the cost of money is a factor for anyone who wants to buy a company.
Hum.
I'd say that the market is a little bit acquired quieter, there's not that many sellers out there and when there's a seller does not that many buyers either.
So I mean for us where we're okay with that were patient as usual as you know I think our.
People that have followed M. P Y for a long time know how patient we can be and we're going to wait for the right Diamond the right opportunity and in the meantime, we pay down our debt, we build our treasure chest.
And we'll be ready for when the time comes.
Okay.
Thanks, and I have another question and I think this would be a little more topical because.
In the past.
The last one you have seen some news emerging regarding <unk>.
And the other obesity drugs and the impact it could have on consumption in general.
So do you have any thoughts about that or how are you looking at that as yet.
At risk and you have to them on long term. Thanks.
So sorry I missed the early part of your question can you repeat that I'm, sorry, So one of the things which has been in the news in the last few days have been regarding <unk>.
And the potential for them to reduce consumption over some time. So just wanted to know your thoughts on that.
Okay.
Yeah, I'm not sure what you're referring to to be honest, but.
No we're not we're not seeing anything in the last few days that would.
Create a dent in their current trajectories, we're seeing so.
Yeah.
Not exactly sure.
What you're referring to but I'm not aware of anything that would that would change materially consumer behavior.
Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Derek Lazard TD Colin Please go ahead.
Yeah, Eric just a couple of follow ups for me over the last couple of quarters, you've you've highlighted the improvement that Papa Murphy's you know kind of like mid single digit same store sales growth I'm. Just curious if you could maybe just give us an update on the progress you're seeing in that banner in particular.
Yeah, Papa Murphy's continued to perform well during the quarter.
New harvesting a lot of what we have.
A lot of what we've done a lot of the initiatives that have been implemented in the last.
18 to 24 months.
Yeah.
So yes, it was just the.
I won't call it smooth sailing, but where we're continuing on the same trend.
Okay.
Maybe just two.
Get your thoughts as well on the food processing and retail.
Segment, just curious I think last quarter. It had been slowing a touch what are the some of the trends that youre seeing in that business.
Yeah more of the same.
Obviously, you've noticed in the U S that we've lost that are.
But licensing agreement so that causes a dent in our and our profits are it takes a little bit longer for us to.
This is the products, where we're going to relaunch these products and we're working really hard doing that this takes a little bit longer for us to list in the U S than we anticipated but.
But we hope will be a it will be getting there soon.
In Canada, I would say that the market is a little bit slower as well it's slower for us to launch new products. It's also slower.
For example, some of our existing products.
So I mean, it's it's it's still a really good business segment for US, we're still really happy with it.
It's got a huge opportunity.
We're launching.
A lot of really interesting products still our team is really dedicated that being successful with everything we do.
But it's a it's a slower environment where were dependent on the grocers as well on the retailers.
For a certain amount of items.
But all in all I mean, despite this slight slowdown we're we're still happy with it and we're still thinking that it's a it's a really good growth segment for MTI.
Eric is that the slowing do you think it's a function of the.
The inflation than maybe some higher pinch points lets say or is it.
Is it some pushback that you're getting from the retailers themselves in terms of trying to pass that price on.
Yes.
Pushback is constant that's it's always been like that so it's nothing new.
The current environment is not different than.
And what it was before I think the retailers are probably.
Pushing on their private labels, a little bit more than we have in the past you youre going to see a lot of advertising of private labels youre going to see a lot of advertising on the cheaper products are on the bundles.
And maybe less on the branded products. So it's probably a function of what the promote what they try to push customers to them.
The customer at the same time, probably.
Going for for discounts a little bit more but.
Even even with that we have some of our very premium products that are selling.
They've never sold before so the customer again, it's it's a question of value if you offer a value to the customer even if the prices high.
Your experiences there to meet that price tag customers will will will accept the price.
But yeah, I think it's a matter of priorities its a matter of adjusting to the markets and you know all the retailers are adjusting at the moment and it's causing probably.
A little slowdown in the market, but nothing that will last forever will will be back on our feet.
Pretty quickly I'm sure.
Thanks for the color.
The next question comes from Michael Glen and Raymond James. Please go ahead.
Her on the on the new openings, maybe you can speak to what are the top three banners.
That you are having success with the openings.
Yeah by far of Cold stone is the highest.
So I mean, so it sounds has been hugely successful.
In the past.
In the past two years I would say and.
And we're still swinging hammers on a lot of stores too, but yeah cold stone by far is the highest in terms of openings.
There's a few brands that have been successful as well, but well it's.
As far as you know as far as the top top brands.
Exceed all the others I would say cold stone and then what's old is also been opening a lot of stores as in the past that mall since we've acquired it we've had a lot of success with.
With converting the pipeline into new stores.
So those would be two brands, if I had to make to that would be at the top of the list.
Yeah.
And and then just on the cash flow are you able to give a guidance on on your capex for the year.
Yeah. So I think that I think our Capex will go back to more normal levels in Q4, we do have to go.
No finish building to a two of the stores that were pre committed.
But other than that I think capex will go back to normal I don't anticipate.
Massive capex going forward so Q4.
No trending back to normal and then after I don't anticipate any major capex for next year.
Okay. Thank you.
Once again, if you have a question. Please press Star then one.
The next question comes from Derek Lazard TD Cowen. Please go ahead.
Yeah, sorry, one last one for me I I I did noticed in your press release, Eric that you guys pointed to average monthly unit volume up new locations.
I was just curious if that number that you provided has trended higher as you focus more on on.
Quality locations.
Yeah. This is it's hard to tell because we stopped using that metric during the pandemic. We thought we thought it was a little bit misleading, so where its trending I'd like to say it's trending higher.
But yes.
I would be lying if I told you have the <unk>.
Last 10 quarters or the last 15 quarters to really have a trend on it so I'd rather not give you an answer on this one.
That's fair Okay.
Yeah.
Yeah.
This concludes the question and answer session and today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
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