Q4 2023 MTY Food Group Inc Earnings Call

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode.

Good morning, ladies and gentlemen, thank you for standing by welcome to the M. T Y Food Group, Inc. Fourth quarter 2023 earnings Conference call. At this time all participants are in listen only mode. Following the presentation. We will conduct a question and answer session to join the question queue.

Operator: Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then 1 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 management, please be advised that this conference call will contain forward-looking statements and are 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 15, 2024. I would now like to turn the conference call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

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 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 15th 2024.

I would now like to turn the conference call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

Eric Lefebvre: Thank you. Good morning everyone. Thank you for joining us for MTY's fourth quarter conference call for Fiscal 2023. The 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 CDAR. 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 MD&A for more details.

Okay.

Thank you.

Good morning, everyone. Thank you for joining us for <unk> fourth 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.

Eric Lefebvre: I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. MTY delivered a remarkable financial performance in fiscal 2023, with record results across the board, including system sales of $5.6 billion and normalized adjusted EBITDA of $271.9 million, which led to free cash flows of $154.1 million, or $6.30 per diluted share. We are especially proud of those free cash flows as they were realized despite the drastic increase in interest costs, which more than quadrupled during the year and higher than normal capital expenditures during the year.

I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated.

Empty white delivered a remarkable financial performance in fiscal 2023 with record results across the board, including system sales of $5 6 billion and normalized adjusted EBITDA of $271 $9 million, which led to free cash flows of $154 $1 million or $6 30.

Per diluted shares.

We're especially proud of those free cash flows as they were realized despite the drastic increase in interest costs, which more than quadrupled during the year and higher than normal capital expenditures during the year.

Eric Lefebvre: Our dual growth strategy, leveraging strategic acquisitions and organic growth, largely enabled us to overcome uncertain market conditions and inflationary pressure during the past year. MTY generated system sales growth of 33% year-over-year, largely due to the acquisitions of barbecue holdings late in our 2022 fiscal year and wet-sauce pretzels and sauce pizza and wine early during the 2023 fiscal period. Excluding acquisitions and foreign exchange impact, system sales were up 4%, with our Canadian divisions accounting for most of the organic growth.

Our dual growth strategy, leveraging strategic acquisitions, and organic growth largely enabled us to overcome uncertain market conditions and inflationary pressure during the past year.

MTI generated system sales growth of 33% year over year, largely due to the acquisitions of barbecue holdings later in our 2022 fiscal year and the Wetzel Pretzels and SaaS Pizza in Hawaii early during the 2023 fiscal period.

Excluding acquisitions and foreign exchange impact system sales were up 4% with our Canadian divisions accounting for most of the organic growth in.

Eric Lefebvre: In the fourth quarter, system sales improved 11% to $1.3 billion, while same-store sales dropped 0.9% year-over-year as consumers reined in discretionary spending, which affected certain segments of our portfolio. The comparable sales decline came mainly from brands commanding a higher price point, while our quick-service restaurant business remained solid in Canada and the US. I'm also encouraged by the positive outcome of the company's increased efforts in the usage of data, digital marketing, online ordering, and websites during the past year. Our digital sales grew 25% year-over-year to $1 billion in fiscal 2023, excluding acquisitions and foreign exchange impact. Digital sales rose 5%. There's still a lot of work to do to achieve our objectives, but we continue to take steps to make the customer experience as seamless and engaging as possible so that the growth momentum continues in the future. The fourth quarter was also highlighted by 94 new store openings, the highest number in any given quarter in our history.

In the fourth quarter system sales improved 11% to $1 $3 billion, while same store sales dropped 0.9% year over year as consumers reined in discretionary spending which affected certain segments of our portfolio.

The comparable sales decline came mainly from brands commanding a higher price point, while our quick service restaurant business remains solid in Canada and in the U S.

I'm also encouraged by the positive outcome of the company's increased efforts and usage of data digital marketing online ordering and websites during the past year.

Our digital sales grew 25% year over year to $1 billion in fiscal 2023, excluding acquisitions and foreign exchange it back digital sales rose four 5%.

This is there's still a lot of work to do to achieve our objectives, but we continue to take steps to make the customer experience is seamless seamless and engaging as possible. So that the growth momentum continues in the future.

The fourth quarter was also highlighted by 94, new store openings the highest number in any given quarter in our history that brought us within a few stores are breaking even versus historical orders for the third consecutive reporting period, our pipeline of future store openings remained strong at year end and we're confident that we will continue to open new locations at the solid base.

Eric Lefebvre: That brought us within a few stores of break-even versus store closures for the third consecutive reporting period. Our pipeline of future store openings remains strong at year-end, and we're confident that we will continue to open new locations at a solid pace in the future. At the end of the fourth quarter, our network had 7,116 locations in operation, of which 6,897 were franchised or under operator agreements, and 219 were corporately owned.

In the future.

At the end of the fourth quarter, our network at 7116 locations in operation of which 6897 were franchise or other operator agreements and 219 or Corporately owned.

Eric Lefebvre: 58% of our locations are in the U.S., 35% in Canada, and 7% international. Turning to our fourth-quarter results, we generated strong normalized adjusted EBITDA and cash flows from operations of $60.4 million and $47.8 million, respectively. The 79% conversion rate of EBITDA into free cash flows is sequentially better than in recent quarters and is reflective of our efforts to maximize cash flows and optimize our asset-light model. As previously communicated, additions to property, plant, and equipment decreased significantly in the fourth quarter to $3.2 million.

58% of our locations are in the U S, 35% in Canada, and 7% International.

Turning to our fourth quarter results, we generated strong normalized adjusted EBITDA and cash flows from operations of $64 million and $47 8 million respectively.

The 79% conversion rate of EBITDA into free cash flows is sequentially better than in recent quarters and is reflective of our efforts to maximize cash flows and optimize our asset light model.

As previously communicated additions to property plant and equipment decreased significantly in the fourth quarter to $3 $2 million.

Eric Lefebvre: We expect CAPEX to return to a normal run rate in 2024 with some ups and downs as the business adjusts to its environment. Of note, we are now going full throttle on our new ERP implementation. This is an investment that will impact 2024 and 2025 and that will benefit the company for an extended period thereafter. To conclude, it should be noted that we recently announced a 12% increase in our quarterly dividend to $0.28 per common share, reflecting our confidence in our ability to generate strong free cash flows in the future. I will now turn the call over to Rene, who will discuss MTY's fourth-quarter results in greater detail. Thank you, Eric, and good morning, everyone.

We act, we expect Capex will return to a normal run rate in 2024, with some ups and downs as the business adjustments. It's environment of note. We are now going full throttle our nine on our new ERP implementation. This is an investment that will impact 2024, and 2025 and that will benefit the company for an extended extended period thereafter.

To conclude that it should be noted that we recently announced a 12% increase in our quarterly dividend to <unk> 28 per common share, reflecting our confidence in our ability to generate strong free cash flows in the future.

I will now turn the call over to Renee, who will discuss <unk> fourth quarter results in general in greater details.

Thank you Eric and good morning, everyone as mentioned earlier normalized adjusted EBITDA totaled $64 million in the fourth quarter of 2023 up 13% from $53 5 million in the fourth quarter of 2022 a.

Rene: As mentioned earlier, normalized adjusted EBITDA totaled $60.4 million in the fourth quarter of 2023, up 13% from $53.5 million in the fourth quarter of 2022. The year-over-year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holdings, Wetzel pretzels, and sauce pizza and wine for the U.S. and international segments, which accounted for $9.8 million of the increase in the segments, partially offset by a $4.1 million decrease in our Canadian operations. The decrease in Canada stems mainly from higher provisions for lease buyouts and disputes, as well as lower profitability generated by our retail segment, which saw sales and margins shrink as a result of the current economic environment affecting grocers and retailers. The U.S. and international segments accounted for 69% of the normalized adjusted dividend in the quarter, while Canada represented 31%.

The year over year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holding wetzel pretzels and fast pizza and wind up for the U S and international segment.

[noise], which accounted for $9 8 million of the increase in the segment, partially offset by a $4 $1 million decrease in our Canadian operation.

Yes.

The decrease in Canada that was mainly from higher provisions for lease buyouts and disputes as well as lower profitability generated by our retail segment, which saw sales and margins shrink as a result of the current economic environment affecting groceries and retailer.

The U S and international segment accounted for 69% of normalized adjusted EBITDA in the quarter, while Canada represented 31%.

In terms of that come out of the repeatable to owners it amounted to $16 4 million or 67 per diluted share in the fourth quarter of 2023 more than doubling over prior year, which was $7 1 million or 29 cents per diluted share.

The year over year improvement.

Excuse me a year over year improvement can mainly be attributed to our higher normalized adjusted EBITDA and lower income taxes. These factors were partially offset by several items, including amongst others greater depreciation of property plant and equipment and right of use assets increased amortization of intangible assets and higher interest rates on long term debt.

We're all greatly impacted by our newest acquisition as well as higher interest rates mentioned before.

Of note as mentioned in previous Investor calls, we put into place hedging strategies in 2023, including three year and two year fixed interest rate swap, which have provided the company with savings of approximately 500000 of interest payments monthly for a total of $3 2 million in savings in 2023.

Rene: In terms of net income attributable to owners, it amounted to $16.4 million or $0.67 per diluted share in the fourth quarter of 2023, more than doubling over the prior year, which was $7.1 million or $0.29 per diluted share. The year-over-year improvement can mainly be attributed to higher normalized adjusted EBITDA and lower income taxes. These factors were partially offset by several items, including, amongst others, greater depreciation of property, plant, and equipment, and right-of-use assets, increased amortization of intangible assets, and higher interest rates on long-term debt, which were all greatly impacted by our newest acquisitions, as well as the higher interest rates mentioned before. Of note, as mentioned in previous investor calls, we put into place hedging strategies in 2023, including three-year and two-year fixed interest rate swaps, which have provided the company with savings of approximately $500,000 of interest payments monthly for a total of $3.2 million in savings in 2023.

Company revenue grew 16% year over year to $280 million in the fourth quarter, mainly driven by the acquisitions of barbecue holdings, Wetzel pretzels and thoughts behind why an acquisition the.

The impact of these transactions delivered revenue growth for corporate restaurants, and franchise operations at 50% and 18% respectively in the U S and international segment.

In Canada revenue from franchise operations declined 1% year over year, while food processing distribution and retail sales decreased 10% due to the existing market conditions and grocers I can focus on promoting house label.

Turning to liquidity and capital resources cash flow from operations amounted to $47 8 million in the fourth quarter of 2023 compared to $37 4 million in the fourth quarter of 2022.

Free cash flows reached $44 3 million or $1 81 per diluted per diluted share in the fourth quarter of 2023 compared to $34 8 million or $1 42 per diluted share in the same period in 2022 to.

27% increase was the result of our higher EBITDA as well as lower income taxes paid and improvements to our working capital.

Year over year.

We are especially pleased with our free cash flow growth given the almost double interest payments made during the quarter.

In the fourth quarter of 2023, we reimburse $27 6 million of long term debt paid $6 1 million in dividends to our shareholders and repurchased 80800 shares for a total consideration of $4 2 million on top of paying $12 1 million in interest on our bank facilities.

Rene: Company revenue grew 16% year-over-year to $280 million in the fourth quarter, mainly driven by the acquisitions of barbecue holdings, Wetzel's Pretzels, and Soft Pizza & Wine. The impact of these transactions delivered revenue growth for corporate restaurants and franchise operations of 50% and 18%, respectively, in the U.S. and international segments. In Canada, revenue from franchise operations declined 1% year-over-year while food processing, distribution, and retail sales decreased 10% due to the existing market conditions and grocers' heightened focus on promoting house labels. Turning to liquidity and capital resources, cash flows from operations amounted to $47.8 million in the fourth quarter of 2023, compared to $37.4 million in the fourth quarter of 2022. Free cash flows reached $44.3 million, or $1.81 per diluted share, in the fourth quarter of 2023, compared to $34.8 million, or $1.42 per diluted share, in the same period of 2022.

At the end of the quarter Nty had a very healthy cash position of $58 9 million and long term debt of 767 4 million mainly.

Mainly in the form of bank facilities and promissory notes on acquisition.

Our revolving credit facility has an authorized amount of $900 million of which 558 million U S dollars had been drawn.

Finally, 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 lines 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, you'll hear atone acknowledging your request.

If you are using a speakerphone. Please pick up your handset before pressing any cheese to withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.

Our first question comes from George <unk> of Scotiabank. Please go ahead.

Hi, Good morning. This is behind me and on behalf of George.

Can you give us some color on the consumer behavior, how it's impacted same store sales and have you put through any price increase or decrease during the quarter and how was traffic response to that question.

Rene: The 27% increase was the result of our higher EBITDA, as well as lower income taxes paid and improvements to our working capital, year-over-year. We are especially pleased with our free cash flow growth given the almost doubled interest payments made during the quarter. In the fourth quarter of 2023, we reimbursed $27.6 million of long-term debt, paid $6.1 million in dividends to our shareholders, and repurchased 80,800 shares for a total consideration of $4.2 million, on top of paying $12.1 million in interest on our bank facilities. At the end of the quarter, MTY had a very healthy cash position of $58.9 million and long-term debt of $767.4 million, Our revolving credit facility has an authorized amount of $900 million, of which $558 million U.S. dollars has been drawn.

Yeah.

I'll start with the price increases the answer is there's always some adjustments to prices but.

Very very minimal in the past.

I would say in the past 12 to 18 months, we have to really control the price increases and make sure that that we don't alienate the customer.

I would say that the customer today is probably more sensitive to the price increases than they were before.

Probably because we have to do a lot in the previous year.

So very minimal price increases we need to we need to make sure. We don't that we don't push your customers away, what we're seeing from consumers.

It really depends on which brand.

But traffic really is.

Is keeping at a good level.

So traffic is not the problem with what we're seeing is the average spend tends to go down a little bit for most of our brands.

So we have we have a smaller basket size.

Operator: Finally, our net debt-to-normalized adjusted EBITDA ratio stood at 2.8 times at quarter end. And with that, I thank you for your time and will now open the lines for questions. Operator?

For any given customer that we have so.

How are our sales have been affected.

We're also seeing some some groups of customers being a little bit farther from our business for example, with the with Papa Murphy's the EBT categories, it seems to be going away.

Operator: Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys.

And I know theres less benefits the government is putting less emphasis on the EBT and putting less resources towards it so thats affecting our business as well.

Okay.

Papa Murphy's is around a quarter or so.

George Dumet: To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. Our first question comes from George Dumet of Scotiabank. Please go ahead.

Do you see any deflation in input costs that might suggest high school full price decrease clinical cohort.

Yeah, Papa Murphy's for the quarter was a was affected by EBT. So our regular.

Eric Lefebvre: Good morning, this is Bahamin on behalf of George. Can you give us some color on consumer behavior and how it's impacted same-store sales? And have you put through any price increases or decreases during the quarter, and how has the traffic responded to that? Yeah, I'll start with the price increases. The answer is there's always some adjustments to prices, but we're very, very minimal. In the past, I would say in the past 12 to 18 months, we had to really control the price increases and make sure that we didn't alienate the customer. I would say that the customer today is probably more sensitive to price increases than they were before, probably because we had to do a lot in the previous year. So, very minimal price increases. We need to, we need to make sure we don't push the customers away.

<unk> EBT customer is.

The traffic is still good.

You know the sales are still good EBT is going down slightly so that affected our our business. So we're trying to find ways to make up for it obviously.

The fact that ABTS guy is going down and the fact that the government is putting less resources towards it doesn't help us so we need to we need to figure out a way to make it up.

As far as price deflation, we are seeing some.

A lot more stability I would say than we had before so its stability is good predictability is good.

So that really helps us with the business model.

We are seeing some items go down packaging for example seems to be more reasonable recently, so that helps a lot.

We did we did have the benefit of some price decreases here and there.

It's not.

Its not generalized yet the way to price increases where but at least we're seeing some hope anywhere.

Eric Lefebvre: What we're seeing from consumers, it really depends on which brand, but traffic really is keeping at a good level. So, traffic is not the problem, but what we're seeing is the average spend tends to go down a little bit for most of our brands. So we have a smaller basket size for any given customer that we have.

We're certainly seeing some signs that there might be some some lower inflation and maybe deflation going forward.

Thanks ill pass the line.

Our next question comes from <unk> Khan of RBC capital markets. Please go ahead.

Okay, great Thanks, and good morning.

We mentioned it a little bit in your press release, just wanted to get a bit more color on some of the the operational efficiency initiatives that we're talking about maybe just to what extent are those at the head office level versus at the store level and any commentary you can share there.

Eric Lefebvre: So that's how our sales have been affected. We're also seeing some groups of customers being a little bit farther from our business. For example, with Papa Murphy's, you know, the EBT category is it seems to be going away, and I know there are fewer benefits. The government is putting less emphasis on EBT and putting less resources towards it. So that's affecting our business as well. How did Papamurphy do during the quarter?

Yeah.

Yeah, well in terms of operational efficiency. This is something we always look at.

So theres definitely operational efficiency at the store level that we're looking at so there's.

There's a number of measures that we're trying to take and tools that we're trying to implement to make ourselves better and make our franchisees stores more profitable.

Eric Lefebvre: Also, do you see any deflation in input costs that might suggest a possibility for price? Yeah, Papa Murphy's for the quarter was affected by EBT. So our regular non-EBT customers, you know, the traffic is still good. Then, you know, the sales are still good. EBT is going down slightly, so that has affected our business. So we're trying to find ways to make up for it, obviously. The fact that EBT is going down and the fact that the government is putting less resources towards it doesn't help us, so we need to figure out a way to make it up.

If we can measure better what we're doing.

Analyze versus peers and analyze versus theoretical models, then that helps a lot as far as the head office is concerned I did mention that that we're implementing a new ERP in the business I think thats going to help us tremendously gain more efficiency.

So that's a longer term project, but obviously this is something that we need to invest and to reap those benefits down the road.

And there is also some some reshuffling and internally where we are.

Eric Lefebvre: As far as price deflation is concerned, we are seeing a lot more stability than we had before, so stability is good, predictability is good, so that really helps us with the business model. We are seeing some items go down in price; packaging, for example, seems to be more reasonable recently, so that helps a lot. We did have the benefit of some price decreases here and there. It's not...

Where we're rethinking the way, we do business a little bit the same way that we had to take a few steps back at the beginning of the pandemic four years ago.

And when you look at our business and rethink at our business and we're in the process of doing that now so.

There is nothing drastic that we that we need to announce we're not we're not cutting heavily in the staff or anything, but we might be able to reorganize some functions.

Eric Lefebvre: If not generalized yet, the way the price increases were, but at least we're seeing some hope, and we're certainly seeing some signs that there might be some lower inflation and maybe deflation going forward. Thanks. I'll pass the line.

We optimize some people and make sure that we are we elevate the game as much as we can for four toward the organization we have.

Okay, Great and then you mentioned that the ERP is going to be a little while just broadly speaking and what's kind of the timeline on executing against some of these initiatives and when those benefits maybe start to show up in some of the the.

Sabahat Khan: Our next question comes from Sabahat Khan of RBC Capital Markets. Please go ahead. Thanks, and good morning.

The numbers over the next while.

Eric Lefebvre: You kind of mentioned it a little bit in your press release, but I wanted to get a bit more color on some of the operational efficiency initiatives you were talking about, maybe just to what extent are those at the head office level versus at the store level, any commentary you can share there. Yeah, well, in terms of operational efficiency, this is something we always look at. So there's definitely operational efficiency at the store level that we're looking at. So there's a number of measures that we're trying to take and tools that we're trying to implement to make ourselves better and make our franchisee stores more profitable. If we can measure better what we're doing and analyze versus peers and analyze versus theoretical models, then that helps a lot. As far as the head office is concerned, I did mention that we're implementing a new ERP system in the business. I think that's gonna help tremendously and gain more efficiency.

Yeah, well, it's an ongoing it's an ongoing process. So it's hard to put a date on it. There are there are some some items that were implemented last year late last year that we should be able to start seeing the benefits now and then there is always something else going on so it's hard to put a date on something that's a.

That's a constant that's a constant project Thats a forever project. So we're constantly looking at.

The way, we do business in there and we're constantly trying to improve and maybe a little bit more emphasis on certain items now but.

Yes, it's hard to put a date on it.

Okay.

Great. Thanks very much.

Our next question comes from Derek Lessard TD Cowen. Please go ahead.

Yeah. Thanks, Eric I just wanted to maybe you know clearly there is pressure on the consumer here and I just want to see if maybe you could give us a sense I know you you you pointed out casual and fast casual, but I was curious on the impact that you might be seeing on cold stone and how you'd think.

Eric Lefebvre: So that's a longer-term project, but obviously this is something that we need to invest in to reap those benefits down the road. And there's also some reshuffling internally where we're... We're rethinking the way we do business a little bit the way that we had to take a few steps back at the beginning of the pandemic four years ago and relook at our business and rethink our business And we're in the process of doing that now.

<unk> brand in particular might be positioned in this environment.

Yeah, well Goldstone Mac also performed extremely well in Q4.

Had a very strong December life like most of the like most of the business and then what was the extreme cold way even in.

And most of North America that really affected our sales.

We're kind of limping back into into where.

Eric Lefebvre: So, you know, there's nothing drastic that we need to announce. We're not cutting heavily in the staff or anything, but we might be able to reorganize some functions, re-optimize some people, and make sure that we elevate the game as much as we can for the organization we have. Great, and then you mentioned that the ERP is going to be a little while, just broadly speaking, and what's kind of the timeline on executing against some of these initiatives and when those benefits maybe start to show up in some of the numbers over the next while? Yeah, well, it's an ongoing process, so it's hard to put a date on it.

Where we think we should be with Goldstone.

But yes, I'm not super worried for cold stone businesses and iconic brand and people Crave Goldstone, it's something that.

That's a relatively affordable price point.

For consumers to treat obviously it is not it's not necessarily part of the.

The necessities, but it's also.

And affordable way for people to have a pleasant experience as a family as a group.

So I think goes on is well positioned in its market to retain its market share and to continue growing.

Okay and within the competitive environment, I guess I'm talking for most of Europe.

Eric Lefebvre: There are some items that were implemented last year, or late last year, that we should be able to start seeing the benefits now. But then there's always something else going on, so it's hard to put a date on something that's a constant project. It's a forever project, so we're constantly re-examining the way we do business, and we're constantly trying to improve. Maybe a little bit more emphasis on certain items now, but yeah, it's hard to put a date on it. Thanks very much.

Your banners have you seen any or have you seen any I guess increase in competitive behavior anything irrational, that's going out there that's going on out there in response to sort of that tougher consumer outlook.

No I think it's I think most competitors are no there are fiercely as usual in the AR.

We come up with new products new innovations.

Come up with new ways of doing things.

They relaunched some old products that seem to be very successful.

Eric Lefebvre: Our next question comes from Derek Lessard of TD Cowan. Please go ahead. Yeah, thanks, Eric. I just wanted to maybe, you know, clearly there's pressure on the consumer here. And I just want to see if maybe you could give us a sense. I know you pointed out casual and fast casual, but I was curious about the impact that you might be seeing on Cold Stone and how you think that brand in particular might be positioned in this environment. Yeah, well Coldstone performed extremely well in Q4, had a very strong December like most businesses, and then it was the extreme cold wave in most of North America that really affected our sales, and we're kind of limping back into where we think we should be with Coldstone. But yeah, I'm not super worried about Cold Stone.

So I don't see the competition being irrational on the price side, there's always some.

Value offers out there so thats not a thats no different but I don't see anything Super irrational way, what I see is people being a lot more effective with the way to do marketing with the way they approach consumers in.

How do you create a buzz around certain things that that are not necessarily new that are not necessarily different but.

Buzzworthy in today's world So.

It's up for us to create that experience and make sure that the food doesn't doesn't only mean.

Functional and eating some galleries, but more importantly create an experience for the consumer.

Okay and there is one more question before I re queue I just want to hit on the labor cost.

In Canada, it looks like wages as a percentage of revenue was particularly high this quarter or is that just wage inflation or is there any market that you see wage inflation pressure on core labor shortage is hurting you there and then again, maybe just get some updated comments on.

Eric Lefebvre: This is an iconic brand, and people crave Cold Stone. It's something that, at a relatively affordable price point for a consumer. It's a treat, obviously.

Eric Lefebvre: It's not necessarily part of the..., the necessities, but it's also an affordable way for people to have a pleasant experience as a family, as a group. So I think Goldstone is well positioned in its market to retain its market share and to continue growing. And within the competitive environment, I guess I'm talking for most of your banners, have you seen any, or have you seen any, I guess, increase in competitive behavior, anything irrational that's going on out there in response to sort of that tougher consumer outlook? No, I think most competitors are fierce, as usual, and they come up with new products, new innovations, they come up with new ways of doing things, and they relaunch some old products that seem to be very successful.

The higher minimum wages in California, and the potential impact for you guys there.

Yeah, I think there is there some seasonality in terms of the labor cost versus the rest of the business. So im not worried about the queue for Bart.

Obviously, a minimum wage increases are our thing.

In California.

Increasing from 16 to $20 in April is going to it's going to hurt and we know it's not the last increase for California.

It's not the first time, we see California take drastic moves and we'll adjust as we always have but obviously it's going to.

Yes, it creates some inflation on the on their menu prices, there's no other option everybody's going to have to take some price.

To compensate for that there's there's no secret recipe.

Eric Lefebvre: So I don't see the competition being irrational on the price side. There are always some value offers out there, so that's no different. But I don't see anything super irrational, where what I see is people being a lot more effective with the way they do marketing, with the way they approach consumers, and how they create a buzz around certain things that are not necessarily new, that are not necessarily different, but that are buzzworthy in today's world. So it's up for us to create that experience and make sure that food doesn't only mean being functional and eating some calories but, more importantly, creating an experience for the consumer.

And what's a little bit more worrisome for us is how many copycat states or are there going to be out there.

If it's only California.

We're kind of used to it with California, but if there are some copycat states then we'll need to we'll need to be on the.

Unnoticed and make sure that we take the right actions to compensate for it.

Okay. Thanks for taking my question Derek.

Once again, if you have a question. Please press Star then one.

Our next question comes from Michael Glen of Raymond James. Please go ahead.

Hey, good morning, Eric can you. This ERP implementation can you just dig into that just a bit is this a U S. Canada initiative like cross border like what exactly are some of the big.

Eric Lefebvre: Okay, and there's one more question before I requeue. I just want to hit on the labor cost. In Canada, it looks like, you know, wages as a percentage of revenue were particularly high this quarter. Is that just?

Eric Lefebvre: wage inflation, or is there any market where you see wage inflation pressure and or labor shortages hurting you there? And then again, maybe just get some updated comments on the higher minimum wages in California and the potential impact for you guys there. Yeah, I think there's some seasonality in terms of labor costs versus the rest of the business. So I'm not worried about the Q4 part. Obviously, minimum wage increases are a thing. And California, increasing from $16 to $20 in April is going to hurt.

Big items that Youre looking to achieve with this.

Yeah, well Nty had the same ERP since forever.

So we were still on a small ERP we were on stage, we're still on stage.

Then we had to we had overgrown that that ERP to the point, where we had a number of other systems that we're attaching to it to try to compensate for it or weaknesses of the ERP.

So Andy systems are getting to end of life now and also getting to their limit. So we had to change the ERP and we are <unk>.

Eric Lefebvre: And we know it's not the last increase for California. It's not the first time we've seen California take drastic moves, and we'll adjust as we always have. But obviously, it's going to... Yeah, create some inflation on the menu prices. There's no other option. Everybody's going to have to take some price. To compensate for that, there's no secret recipe.

Are we thinking all our processes and the way so.

It's for the entire business its cross border, we're replacing pretty much all our legacy systems that we have some of them are.

Five or six years passed at the end of life. So we're going to be a little bit more robust than that.

Eric Lefebvre: And what's a little bit more worrisome for us is how many copycat states there are going to be out there. So if it's only California, We're kind of used to it with California, but if there are some copycat states, then we'll need to be on that, on notice and make sure that we take the right actions to compensate for it. Okay, thanks for taking my questions, Eric. Once again, if you have a question, please press star then 1. Our next question comes from Michael Glenn of Raymond James. Please go ahead. Hey, good morning.

Certainly a lot more agile in how we can collect and use data.

Now we can.

Just our processes to have better practices for where the business. So yeah. So it's a pretty big project that something thats going to be.

Probably last another two years with some parts going live in 2024, and some parts going live a little bit later, but yes big projects for us, but lots of positives are going to come out of it.

Michael Glenn: Eric, can you, this ERP implementation, can you just dig into that just a bit? Is this a US-Canada initiative, like cross-border, like what exactly are some of the big items that you're looking to achieve with this? Yeah, well, MTY had the same ERP since forever, so we were still on a small ERP, we were on SAGE, we're still on SAGE, and we had to, you know, we had overgrown that ERP to the point where we had a number of other systems that were attaching to it to try to compensate for the weaknesses of the ERP, and these systems are getting to end of life now and also getting to their limits, so we had to change the ERP and we're rethinking all our processes in the way, so it's for the entire business, it's cross-border, we're replacing pretty much all our legacy systems that we have, some of them are, you know, five or six years past the end of life, so we're going to be a little bit more robust and certainly a lot more agile in how we can collect and use data, how we can adjust our processes to have the better practices for the business, so yeah, so it's a pretty big project, it's something that's going to...

And.

If I think about these ERP.

Implementations.

Always risk attached to them like what type of mitigating steps are you taking within the organization.

I've gone through a few in my previous lives in there.

I know the horror stories, so yeah, we obviously.

We did consider that risk.

Either the ERP not delivering on what we wanted to deliver or to the drastic price.

Overruns cost overruns that we see in some other businesses. So I mean, there is there is no substitute for preparation. So it's spending the right amount of time to scope. The project is really key and spending the right amount of time also to prepare everything and put a tight fence around it we have a really good project team, they're all reporting under Rene.

And I think the team so far is doing an outstanding job of really making sure that we do what we need to do we do as little customization as possible. Because this is where also you run into cost overruns.

And so far I'm really happy with where it's going we're still on time and on budget.

Michael Glenn: Probably will last another two years, with some parts going live in 2024 and some parts going live a little bit later. But yeah, a big project for us, but lots of positives are going to come out of it. And if I think about these ERP implementations, there's always risk attached to them. What type of mitigating steps are you taking within the organization? Yeah, I've gone through a few in my previous lives, and I know the horror stories.

But the Devil lies into details so obviously when the time when the time comes to turn everything on.

It's going to be a good test, but so far so good and pretty confident that the team is doing the right job to keep everything in very tight.

Okay.

For Capex, you talked about a normal run rate in 'twenty. Four can you just indicate what that level is exactly.

Eric Lefebvre: So yeah, obviously, we did consider the risk of either the ERP not delivering on what we wanted it to deliver or the drastic price overruns and cost overruns that we see in some other businesses. So, I mean, there's no substitute for preparation. So spending the right amount of time to scope the project is really key, and spending the right amount of time also to prepare everything and put a tight fence around it. We have a really good project team. They're all reporting under Rene.

From a gross dollar me on that.

Yes, it should be.

I mean, it should be somewhere around the lines of what you saw in Q4.

So hopefully we will be able to have a run rates on some quarters might be a little bit higher some quarters might be a little bit lower depending on.

Where we're at our needs in the business sometimes.

Large and commence that go at once and then the next quarter it doesn't come back so.

It's going to be a little bit more there is going to be ups and downs, but you should you should think of Q4 as a normal run rate excluding the ERP, obviously, that's going to cost a little bit more than normal.

Eric Lefebvre: And I think the team so far is doing an outstanding job at really making sure that we do what we need to do. We do as little customization as possible, because this is where you run into cost overruns. And so far, I'm really happy with where it's going. We're still on time and on budget. But yeah, the devil lies in the details.

Okay and last question for me so there's been news regarding this.

Some of these.

Paybacks associated with the program that we're.

Eric Lefebvre: So obviously, when the time comes to turn everything on, it's going to be a good test. But so far, so good, and pretty confident that the team is doing the right job to keep everything very tight. Okay, and for CapEx, you talked about a normal run rate in 2040. Just indicate what that level is exactly, from a gross dollar. Respect. Yes, it should be.

In.

Now that we're in access during the pandemic, so the CRB and the CRB theres been some stories about the government looking for recoveries on some of these payments restaurant industry was a huge benefactor under some of these programs like what are you seeing in terms of your franchisees are are they.

Eric Lefebvre: I mean, it should be somewhere around the lines of what we saw in Q4. Hopefully, we'll be able to have a run rate. So some quarters might be a little bit higher. Some quarters might be a little bit lower, depending on, you know, where there are needs in the business. Sometimes, you know, it's large increments that go out at once, and then the next quarter, it doesn't come back.

Are they having are they are they facing any reassessment under any of these programs.

Yeah.

I mean, if they didn't pay the loan it doesn't result in them having to pay it right away. It just results in the loan being alone and you have to repay it over a certain amount of time and a forego the 20% subsidy. So.

Eric Lefebvre: So, it's going to be a little bit more, you know, there will be ups and downs, but you should think of Q4 as a normal run rate, excluding EDRP. Obviously, that's going to cost a little bit more than normal.

That's where to see balloons.

Most of our franchisees were able to either repay it or refinance it so that we got the subsidy not all of them. Obviously, there are some exceptions to that.

Eric Lefebvre: Okay, and last question for me. So there's been news regarding some of these paybacks associated with the programs that were in place during the pandemic. So the CERB and the CRB, there've been some stories about the government looking for recoveries on some of these payments. The restaurant industry was a huge benefactor under some of these programs.

But I would say for the vast majority are franchisees, either repaid or refinanced and now have just regular loans that they need to be.

Eric Lefebvre: What are you seeing in terms of your franchisees? Are they facing any reassessments under any of these programs? Yeah, I mean, if they didn't pay the loan, it doesn't result in them having to pay it right away; it just results in the loan being a loan, and they have to repay it over a certain amount of time.

Okay. Thanks for taking the questions.

Our next question comes from Vishal, Sri Dar of National Bank Financial. Please go ahead.

Hi.

Gabriel authors hall, thanks for taking our questions.

Wanted to go back to the network stability.

Close to breakeven.

This quarter last quarter I was just wondering if you have any thoughts on when you would anticipate.

Eric Lefebvre: And they forego the 20% subsidy. So that's where the SIBA loans come in. So most of our franchisees were able to either repay it or refinance it so that they got the subsidy. Not all of them, obviously.

Just going back to <unk>.

And that organic growth.

And maybe following on that.

If you can share some color you have on your.

So our pipeline as well.

Yeah, well I was hoping we'd be positive at some point during 2023, obviously, we we fell short of that and we're still pushing to try to get there in 2024.

Eric Lefebvre: There are some exceptions to that, but I would say for the vast majority, our franchisees either repaid or refinanced and now have just regular loans that they need to pay. Okay, thanks for taking the question. Our next question comes from Vishal Shreedhar of National Bank Financial. Please go ahead. One of the guys will come back.

There are we control to a certain extent the openings. Although there are some surprises out there with the permitting and sometimes inspections and everything so sometimes there are delays that we can control but.

Vishal Shreedhar: I was wondering if you have any thoughts on this. Thank you. Yeah, well, I was hoping we'd be positive at some point during 2023. Obviously, we fell short of that, and we're still pushing to try to get there in 2024. There are, you know, we control to a certain extent the openings, although there are some surprises out there with the permitting and sometimes the inspections and everything. So sometimes there are delays that we can't control, but to a major extent, we control the openings. In terms of the closings, there can be surprises, and sometimes we get surprised by one franchisee closing multiple stores or some partners internationally and everything. So it's hard for us to predict exactly when we think we're going to go back. We came close, three quarters in a row, disappointed not to have made it to a positive number, but we continue to push. So to answer your question, no, it can't come soon enough, but I can't give you a date for it, unfortunately.

Two major extent, we control the openings.

In terms of the closings there can be surprises and sometimes we get surprised by one franchisee closing multiple stores or some partners internationally and everything so it's hard for us to predict exactly when.

We think we're going to go back to.

Positive we came close three quarters in a row disappointed not to have made it too.

To a positive number but we continue on pushing so to answer your question.

It can't come soon enough, but I cannot give you a date for it.

Unfortunately, and as far as the store pipeline is concerned.

I think you can see in our financial statements with.

Our deferred revenues that there are a lot of franchise agreements that are signed where we did collect the AR.

Our franchise fees and and we are.

I mean, our pipeline has never been healthier.

So really happy with where we are in pretty bullish about the future.

Eric Lefebvre: And as far as the store pipeline is concerned, I think you can see in our financial statements with our deferred revenues that, you know, there are a lot of franchise agreements that are signed where we did collect the... I mean, our pipeline has never been healthier. We're really happy with where we are and pretty bullish about the future. For more information, visit www.fema.gov. In terms of the supply chain related to the construction, it's not perfect yet, but we're really getting there, so I can't say that it's really stopping us at this time.

Okay I appreciate it and then the construction issues that we've discussed about before they've.

More or less all participate at the not concern for the future.

Yeah and in terms of the supply chain related to the construction.

Perfect yet, but it's we're really getting there so.

I would say that it's really stopping us at these at this time.

The cities I think for the most part are getting over the hump now and they're able to start delivering on time.

And youll provide inspections on the timely manner.

Eric Lefebvre: The cities, I think, for the most part, are getting over the hump now, and they're able to start delivering on time and providing inspections in a timely manner. There are still pockets of problems here and there, and sometimes they're pretty dramatic, but all in all, I think that within the next year, we should be back to normal, and hopefully these hurdles will be behind us in the distant memory. Our next question comes from Derek Lessard of TD Cowan. Please go ahead.

There are still pockets of problems here and there and sometimes they are pretty dramatic but all in all I think that within the next year, we should be back to normal.

And hopefully these hurdles will be behind us and a distant memory.

Okay I appreciate it.

Jump back in the queue.

Our next question comes.

Comes from Derek Lessard of Cowen. Please go ahead.

Derek Lessard: Yeah, just a few follow-ups for me. I just want to hit back on the ERP implementation, Eric. Are you able to give us maybe a sense of sort of the cost benefit, you know, sort of the upfront margin impact before it starts to improve? Yeah, well, not on the margin impact specifically, but we're looking at a project that should be between $7 and $10 million, and we're pushing to stay within that range. That's gonna be over two years.

Yes, just a few follow ups for me I just wanted to hit back on the ERP implementation Eric.

Are you able to give us maybe a sense of sort of the cost benefit sort of the upfront margin impact before it.

Two to improve.

Yeah, well not on the margin impact specifically, but yeah. We're looking at a project that should be it should be between seven and $10 million.

And we're pushing to to stay within that range, that's going to be over two years.

And and yet so I can't give you an exact margin impact I can't give you an exact timing for when the expenditures are going to happen, but this is the magnitude of the project we're looking at right.

Eric Lefebvre: And yeah, so I can't give you an exact margin impact. I can't give you an exact timing for when the expenditures are going to happen. But this is the magnitude of the project we're looking at. Right. And are you capitalizing on that?

And are you capitalizing that.

Eric Lefebvre: We're still looking at the possibilities to capitalize versus the costs, so this is something that we're doing in conjunction with our auditors to make sure that we have the right position and the right approach for how we account for it. Okay, and one last one for me, just in terms of the US EBITDA margin, now that you've largely lapped the acquisitions, you know, what would I guess a reasonable run rate or baseline run rate for EBITDA margin would be going forward? or should we look at Q4?

We're still we're still looking at.

The possibilities to capitalize versus expense it.

So.

This is something that we're doing in conjunction with our auditors to.

To make sure that we have the right position and the right approach for.

Or how we account for it.

Okay and one last one for me just in terms of the U S EBITDA margin.

Now that you've largely lapped the acquisitions.

What would I guess, a reasonable run rate or base baseline run rate for EBITDA margin going going forward.

Or should we look for.

Eric Lefebvre: Yeah, no, what you saw in 2023 was probably the normal run rate for margins. So there's, you know, the integration doesn't cost us any money. So it's an effort, but it's not an incremental cost. So what you see in 2023 should be reflective of what we think the future should bring. Okay, I guess I'll ask the same question then for Canada. Same answer. Yep. Thanks, Derek. Our next question comes from Nishant Rafi of CIBC. Please go ahead.

Yeah, No. What you saw in 2023 was was probably the normal run rates for for margins.

So there is the integration doesn't cost us any money. So it's effort, but its not an incremental cost. So what you saw in 2023 should should be reflective of what we think the future should should give us.

Okay.

I'll ask the same question of Canada same same answer.

Yes.

Okay. Thanks, Eric.

Yeah.

Our next question comes from Michelle Rafi of CIBC. Please go ahead.

Nishant Rafi: Hi, good morning. Thanks for taking my question. I wanted to know your thoughts regarding the M&A pipeline. How are you thinking about that going into the year? Thank you. Yeah, thank you. Yeah, well, you know, there are a lot of transactions available out there. They're not all good.

Hi, good morning.

Taking my question.

I wanted to know your thoughts regarding the M&A pipeline.

How are you thinking about that going into the year.

Yeah.

Yeah. Thank you.

Yeah, well there are a lot of transactions available out there theyre not all good there is a lot of broken stuff.

Eric Lefebvre: There's a lot of, you know, broken stuff that's on the market, but there are also some good companies. In this market, it's all a matter of getting expectations aligned with what people are willing to pay. The cost of money is a little bit higher, so we need to adjust for that. No, we need to be patient, as we always have been, and we still want to do M&A. Obviously, this year, given how much debt we have on the balance sheet, we can't do a very large acquisition, so it would probably be more of the smaller or medium-sized acquisitions, and then try to pay that aggressively so that we... We're a little bit more prepared for larger acquisitions going forward. But yeah, there could be some smaller or medium-sized acquisitions in the future. And it's just, you know, MTY has always been very, very disciplined in how it acquires and when it acquires, and for what price. And we'll keep it this way.

That's on the market. There are also some good companies.

It's in this market, it's all a matter of getting expectations aligned with.

With.

What people are willing to pay the cost of money is a little bit higher.

So we need to we need to adjust for that.

So.

No we need to be patient as we always have been and we still want to do M&A. Obviously this year given.

How much debt we have on the balance sheet. We got we got to do a very large acquisition. So it would be probably be more on the smaller or medium sized acquisitions, and then try to pay debt aggressively so that we are.

We're.

We're a little bit more prepared for for larger acquisitions going forward, but yes, there could be some some smaller or medium sized acquisitions in the future.

And it's just.

And do I always has been very very disciplined in how it acquires and when it acquired for what pricing.

We'll keep it this way and we're just working diligently to try to align sellers' expectations with ours.

Eric Lefebvre: And we're just working diligently to try to align sellers' expectations with ours. Thank you. I wanted to ask another question on that.

Thank you.

I wanted to ask another one on <unk>.

Eric Lefebvre: Specifically, the casual and the fast casual portion of the portfolio, as obviously there was some weakness. So I wanted to understand how you're thinking about strategies to improve that going into the quarter considering the consumer environment. Yeah, that's a good question, and that's something we talk about all the time. So if the consumer is reducing the basket size for us, it's a matter of creating that experience and trying to make the consumer go back to normal spending habits. So, it's all experiential for us. So, if we come up with new stuff or more attractive stuff, they'll probably go for it because people are prepared to pay if they see value and if they see that you have something in return or at least enough in return.

Specifically the cash within the fast casual.

A portion of our portfolio as obviously there was some weakness so I wanted to understand how are you thinking about.

Scott could you Stu.

Improve that going into the quarter, considering the weak consumer environment.

Yeah.

A good question and that's something we talk about all the time.

So if the consumer is is reducing the basket size for us, it's a matter of creating that experience and try to try to make the consumer to go back to normal spending habits.

So it's all experiential for us so if we come up with new stuff or more attractive stuff.

They will probably go for it because people are prepared to pay if they see value and if they see that there is you have something in return or at least enough and return.

Eric Lefebvre: So, we're working on that, and we're also, for some of our brands, working on different days of the week, trying to find ways to attract customers for lunch, for example. And what drives customers is different for every brand, but we have a number of initiatives going on with that. And for some restaurants, we're trying to drive traffic because this is where we're going to see a difference. And for some other restaurants, we're trying to drive basket size because the traffic is up, and we can't necessarily handle more. We just need people to spend more every time they visit the restaurant. So, different initiatives for different brands, but yeah, we did see that weakness in casual and fast casual, and we need to address that for sure.

So we're working on that and we're also for some of our brands. We're also working on different day parts trying to find ways to attract customers for for launch for example.

And what drives customers is different on every brand, but we have a number of initiatives going on.

With that then.

For some restaurants, we're trying to drive traffic because this is this is where we're going to see.

A difference in for some other restaurants, where we're trying to drive basket size because the traffic is up and we got necessarily handle more we just need people to spend more every time they visit the restaurant so different initiatives for four different brands, but yes, we did see that weakness in casual and fast casual and.

We need to address that for sure.

Thank you and I have another question on your thoughts regarding the food processing business goes how are you thinking about that going forward.

Eric Lefebvre: Thank you. And I have another question about your thoughts regarding the food processing business. Of course, how are you thinking about that going forward? I love food processing. It's a great business. It's a little bit more capex intensive, so obviously not necessarily aligned with the traditional MTY asset light business, but still hugely profitable for us, considering the returns on investment. We love the food processing, and it's a good way also for us to make our supply chain secure. You know, a lot of our suppliers had short shipments or back orders during different times, and for some reason, our We have always found a way to serve our restaurants, and that also has value.

Yeah, I love food processing, it's a great business.

It's been very stable for us Thats a business that.

And so we really like it's a little bit more capex intensive so obviously not necessarily aligned with the traditional <unk> asset light business, but still hugely profitable for us considering their returns on investment where we love the food processing and it's a good way also for us too.

Okay.

Our supply chain secure.

There is.

A lot of our suppliers had short shipments or back orders.

During different times.

For some reason at all our plants never had.

Short shipments in back orders, we always found a way to serve our restaurants.

That also has value so really happy with that.

Eric Lefebvre: So, I'm really happy with that. Okay, thank you. That would be all from me.

Okay. Thank you that would be from be it for me. Thank you.

Operator: Thank you. This concludes the question and answer session as well as today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

This concludes the question and answer session as well as today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.

Sure.

Yeah.

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Okay.

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Okay.

Yeah.