Q3 2024 MTY Food Group Inc Earnings Call
Speaker Change: Good morning and welcome to the M.T.Y. Food Group Inc. 3rd quarter of 2024 Conference Call.
Speaker Change: I'll put it spent for being on this in only mode.
Speaker Change: Chagingy Assistance, please signal a conference specialist by pressing the star key followed by the arrow. After today's presentation, there will be an opportunity to ask questions.
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Speaker Change: Before turning the meeting over to management, please be advised, 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. Please note that this conference call is being recorded today, Friday, October 11, 2024.
Speaker Change: I would now like to turn on the conference over to Eric Lefebvre, Chief Executive Officer, Eric please go ahead.
Eric Lefebvre: Good morning, everyone. Thank you for joining us for empty-wise third-quarter conference call for fiscal 2024. The press released in MDNA with complete financial statements and related notes were issued earlier this morning and are available on our website as well as on CDAR+.
Eric Lefebvre: During the call, we will be referring to forward-looking statements and to certain numbers that are non-IFRS measures. You can refer to our MDNA for more details.
Eric Lefebvre: Lies note that all figures presented on today's call are in Canadian dollars unless otherwise stated.
Eric Lefebvre: I'd like to open with a few highlights from last quarter.
Eric Lefebvre: Normalize adjusted EBITDA for the quarter reach $71.9 million or $3.1 per dilute a chair. That compares to $72.9 million or $2.98 per dilute a chair last year.
Eric Lefebvre: Our franchising segment generated a 2% positive year-over-year growth last quarter, with an EBITDA of $57.4 million.
Eric Lefebvre: Normalized the JSTD BDOM margins for the segment grew to 56% compared to 54% in the third quarter of 2023 as our restructuring efforts are starting to bear fruits.
Eric Lefebvre: National is provided by Operate Activities Group by $14.9 million or $29% over last year, reaching $66.4 million compared to $51.5 million in the same period last year.
Eric Lefebvre: Freak Ashlo's net of rent payments were $49.3 million in the third quarter in historical high for MTY. On a part diluted share basis, Freak Ashlo's net of rent payments were $2.6 per share compared to $1.31 per share last year.
Eric Lefebvre: During the three-month period ended August 31, 2024, and TY's network generated $1.47 billion in sales, and increase of $5.6 million, compared to the same period last year.
Eric Lefebvre: The U.S. and International segment had overall positive growth and system sales of $22 million for the quarter, while Canada recorded the decline of $16.4 million or 3%. Canada's decline was felt in all types of restaurants, with fast casual concepts recording the largest drop.
Eric Lefebvre: The U.S. snack category with brands such as Wetzels Pretzels and Sweet Frog continued to outperform prior year. Our casual dining concepts, on the other hand, continued to face declines and traffic, offsetting the good performance of our QSR brands.
Eric Lefebvre: Digital Sales, once again grew in proportion to overall sales in both countries. The now represent 19% of the total sales compared to 17% in the same period last year. This is a reflection of the continued investment of our brands toward creating a smoother digital sales channel and enhancing the customer experience online as well as in stores.
Eric Lefebvre: As an overview of empty-wise location count, the company ended the third quarter with 7,66 locations, a decline of 41 compared to the end of last quarter. During the third quarter of 2024, the company's network opened 67 locations and closed 108 locations.
Eric Lefebvre: Store openings were affected by delays and inspections with many new locations, opening in the first few days of the subsequent quarter. Store closures were also higher than in previous quarter, mainly because of a higher number of pop-up Murphy's closures once again this quarter.
Eric Lefebvre: of the 7,66 locations in operation, 6,830 or 97% were franchised around their operator agreements, and the remaining 236 locations or 3% were operated by MTY.
Speaker Change: I will now turn the call over to Rene who will discuss empty-wise financial results in greater details.
Rene: Thank you, Eric, and good morning, everyone.
Rene: During the quarter, M2I's total revenue decreased to $292.8 million from $298.1 million a year earlier. Looking at the Canadian segment, revenue from franchise locations decreased by 3%. The decrease was attributed to the decrease in recurring revenue streams, which is correlated to the 3% decrease in system sales Eric spoke about.
Rene: St. Francis Locations and Mallocations has the largest impact on the year over year decline, decreasing by 4% each.
Rene: The U.S. and International franchising segment, however, saw an improvement of 1% year over year, reaching 65.6 million. Again, this is tightly correlated to the increase in system sales of 2%.
Rene: Revenue from Corporate on Locations in Canada, increased by 30% to 11.2 million during the quarter, due to a net increase in corporate on locations year over year.
Rene: while the U.S. corporate owned locations.
Rene: Sadecline of 1% due to the decrease in organic system sales of 0.6% compared to the same period last year.
Rene: Globally, food processing, distribution and retail review decreased by 7% due to lower sales in the Canadian retail segment.
Rene: Similar to last quarter, this is the result of marked conditions and brochures focused increased on promoting house labels. However, I'd like to note, overall segment profits increased your over year by $0.8 million with margins improving to 13% from 10% in prior year.
Rene: The US retail segments also continues to make strides with existing product labels, which generated 0.7 million dollars increase over prior year.
Rene: In terms of normalized adjusted evidence, we saw a decrease of 1% with 71.9 million in the quarter compared to $72.9 million in Q3 2023. As a reminder, normalized adjusted evidence includes our SAP implementation costs.
Rene: The U.S. and International Normal Life at Just a Divide, contributed to 68% of total normal life of Just a Divide, realizing an increase of 1% while Canada contributed 32% of total normal life of Just a Divide, a decrease of 6% or 1.5 million dollars compared to the same period last year.
Rene: for the Canadian segment, the fluctuations were primarily impacted by the changes in recurring revenue streams, with operating expenses remaining relatively flat for the quarter year over year, while the U.S. and International segment improvement was largely impacted by cost reductions.
Speaker Change: As mentioned by Eric, the restructuring initiatives taken in the first half of the year and continuing into the later half are starting to show their impacts on our results.
Speaker Change: These initiatives are also showing in our French housing segment margins, which improved to reach 56% compared to 54% in Q3 2023.
Speaker Change: Corporate Store margins have a slight dip to 8% compared to 10% in last year.
Speaker Change: Turning our attention to the income attributable to owners, for the three months ended August 31, 2024, and that income attributable to owners of $34.9 million was recorded, or $1.46 per diluted chair, compared to $38.9 million or $1.59 per diluted chair last year.
Speaker Change: The decreases primarily at mutable to an impairment charge of 3 million on property plant and equipment and intangible assets, as well as the charge for reevaluation of financial liabilities and the revittives recorded as fair value, which compares to gain on such revalluation last year.
Speaker Change: Lowe. Moving on to look at cash flows. The third quarter generated cash flows from operating activities of $66.4 million, compared to $51.5 million in Q3 2023. An increase of $14.9 million, mainly attributable to a favorable working capital variance during the quarter, and a fluctuation in income taxes received paid year over year.
Speaker Change: The free cash flow of medical use payments increased to 49.3 million in the quarter compared to 32.1 million in Q3 2020.
Speaker Change: Regarding liquidity in capital stock resources, as at August 31, 2024, the amount held in cash totaled 51 million, a decrease of 7.9 million since the end of the 2023 fiscal period.
Speaker Change: 3 months ended August 31, 2024. We repurchased and canceled $254,700 shares for $11.4 million through our NCIB and paid $6.7 million in dividend store shareholders.
Speaker Change: During the quarter, we repaid 33.9 million of our long-term debt, bringing total to 85.4 million in the last 12 months.
Speaker Change: At the end of the second quarter, we had 506 million US dollars drawn from our revolving credit facility.
Speaker Change: Interest in London that decreased by 0.7 million as the result of entering into fixed interest rates swaps, which have resulted in savings of 0.6 million US dollars or 0.8 billion Canadian this quarter.
Speaker Change: In early June of this year, we sold our fixed interest rates to up to $200 million for a sum of $4.8 million US dollars or 6.6 million Canadian, which will be recognized on a straight line basis over the period equal to the original hedge date of April 10th, 2026.
Speaker Change: As mentioned in our subsequent events note, we also entered into two more interest swaps in September on 100 million Canadian and 50 million Canadian as rates of 2.79% and 2.77% respectively.
Speaker Change: Finally, looking ahead, I'd like to note the upcoming quarterly dividends payment of 0.28 per share on the Vemper 15, 2024. And with that, I will turn the call back to Eric for a few words before the Q&A session.
Eric Lefebvre: Thank you, Rene.
Eric Lefebvre: As we enter the last quarter of our 2020-4 fiscal period, MTY remains focused on creating shareholder value from two channels.
Eric Lefebvre: First, we remain committed to produce organic growth in earnings and cash flows by optimizing the assets we have in our portfolio. 2024 is a challenging year from a macroeconomic point of view, but we find ourselves well positioned to realize our objectives in the future. Our cash flow generation ability has once again been put to the test and we have delivered.
Eric Lefebvre: There will always be hurdles like the recent Florida Hurricanes, which will impact many households and many of our locations. However, our team is working today to put in place all the ingredients needed to achieve our full potential.
Eric Lefebvre: Second, we continue to actively seek new acquisitions to continue the growth trajectory our founder has had established.
Eric Lefebvre: We will remain disciplined in our approach to finding attractive transactions at the right price, no matter the size, type of food or geography. The market works in absentee flows and MTY intends to be a opportunistic when favorable conditions surface.
Eric Lefebvre: I thank you for your time and we will now open the lines for questions, operator.
Speaker Change: We will now begin the question and answer session.
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Speaker Change: The first question today comes from John Bampero with Social Bank. Please go ahead.
John Bampero: Thank you. Good morning. I wanted to start the kind of higher level and just ask about consumer sentiment and your outlook was unchanged versus a quarter ago. But I wonder if you've seen any discernible shifts in consumer behavior either on traffic or check size. I know you've got lots of formats and geographies in your network. But I wonder if there's anything notable when it comes to behavior in Q3 or subsequent to it. Now that we're seeing a potential path to lower rates. [inaudible]
Speaker Change: Yeah, we haven't seen a material shift in consumer behavior, consumers still discerning and how they spend their money. So they want the customer's expect value, the expecting experience, and we need to deliver. We need to deliver on that. We need to be better than our competitors if we want to gain market share. So the thing is really changed in the past one or two or three quarters, it's more of the same.
Speaker Change: Okay, understood, and then maybe we could get to a couple specific brands and start with Cold Stone and Popa Murphy. Cold Stone seems like it's continued to excel. It's nearly your largest banner by System Sales now. But you also mentioned the outside closure number from Popa Murphy, so can you add some color on net opening constraints or sales for those two banners?
Speaker Change: Yeah, I won't go into the specifics as usual, but just in terms of the specific quarter, Coldstone performed extremely well. We were unfortunately comping against the huge success we had with the Barbie Movie Association last year, so in terms of comps it was a little bit more difficult in the third quarter, but still outstanding performance by the brand and still opening a lot of stores with Coldstone, so that brand is...
Speaker Change: Sirdly firing and all cylinders. In terms of pop-up Murphy's, the cops were actually a little bit better. This quarter, we're starting to see some traction and we're still experimenting with certain types of promotion and offers to clients to see what gain traction and what doesn't. But in terms of comps doing better, but obviously as I mentioned earlier.
Speaker Change: In terms of opening those things, there's still a number of closures, you know, there are certain markets that are a little bit more troubled than others, so we don't see massive closures across the board. We see specific clusters of stores being shut down by their owners and where we can, we try to save the stores as much as possible, but there are.
Speaker Change: Instances where we can't necessarily save the store because we don't have the proper infrastructure to run those stores and those markets where we can't find a new franchise for them. So, unfortunately, that results in some closures.
Speaker Change: Understood. Okay. And then on Wetzels and the barbecue hold exact conditions, you're about two years out from these deals that were in late 22. I wonder how you characterized the performance of those two. I know at the time Wetzels had pretty ambitious growth targets in terms of net store openings, whereas BBQ had seen net closures. I wonder how you're going about the ability to grow these banners in 25.
Speaker Change: Yeah, what's all this is, what's all this doing fantastic, comping positive with a lot of stores openings and a lot of new stores also being sold. So new stores going into the pipeline. Super happy with that.
Speaker Change: How the team is integrating into the Kahala team also, where we leverage the size and the depth of of talents we have and Kahala to help accelerate the growth of the wet's also. If anything, we're probably doing a little bit better than we anticipated with the wet's also far in terms of BBQ.
Speaker Change: I think the economic context has changed a little bit, so we're trying to...
Speaker Change: Stabilize the brands and the portfolio, some brands are doing better than others. It's a little bit like MTY, it's a portfolio of multiple brands with different offerings.
Speaker Change: All in all it's forming more or less in line with what we expected, maybe a little bit less in terms of consoles. I think the market is in a place where we could not necessarily anticipate.
Speaker Change: How the consumer spending would be today two years ago, but all and all is to super happy with the talents we acquired in the Portfolio, so the team is all hands-on deck to try to reverse some of the trends we're seeing and again a little bit like with pop-up Murphy's where we're starting to see some initiatives again in traction and it's really positive for the future.
Speaker Change: Okay, that's good color. And then last one for me on your restructuring efforts, I wonder if this is a cost base that you can maintain moving forward or other efforts you have underway that would see higher optics specific to your franchising business and I suppose your retail and processing business too.
Speaker Change: Yes, everything we're doing now is not something that we're doing for the short term. We're trying to position the company in a place to be aligned with our long term objectives. So we're certainly not doing the restructuring with the short term.
Speaker Change: Vision, we want to do everything so that we're successful.
Speaker Change: In three years, and in five years from now, trying to position the people where they have the best chance of success and trying to put the brands in the best, under the best leaderships for them to thrive and to help our franchisees be successful as well. So, there's probably a little bit more to go on their restructuring, but it's more or less over at this time we've done the major changes that we wanted to make. Thank you.
Speaker Change: and the rest is going to be mostly the maintenance part, but yeah, we're happy with our team, we're happy with where we are now and I think the rest of the structure is going to bear fruits in a few years from now.
Speaker Change: i
Speaker Change: The next question comes from the show Shrida with National Bank. Please go ahead.
Speaker Change: Hi, thanks for taking my questions. In the commentary that you provided, you indicated that organic growth was one of your focus areas and you seem to express some optimism that the business is gaining traction, just wondering if you can highlight for us the reasons behind that optimism and what of your initiates are tracking well, that's understanding that.
Speaker Change: Yeah, well we've always been confident in our ability to generate organic growth that was a message I conveyed as soon as I started on the job in 2018 that it was going to be one of the primary objectives.
Speaker Change: So that hasn't changed and we were able to deliver unfortunately a number of things happened with COVID.
Speaker Change: different market situations. There's always going to be some ups and downs, but we think that over a long period of time we have the brands, the franchisees and the team to be able to generate that organic growth.
Speaker Change: What we're seeing right now in the company is, for the most part, positive. There are brands that are a little bit more troubled. There are brands that are hugely successful. But all in all, we're happy with where we are. We're happy that we're in a good place now with everything that we do. And we're seeing a lot of positive for the future. So I can't necessarily point out to one specific item. But the feeling inside the business is that we're doing well. We're producing cash flows. We're delivering on most of what we wanted to deliver. And we don't control the macroeconomic environment, but over a long period of time when everything stabilizes, we feel really confident about our ability to generate organic growth.
Speaker Change: Okay, and in that organic growth question, I'm sure this has been asked before in different ways, but cold stone success, just, it seems to be building on a success year after year. And I know there's been a number of initiatives implemented at cold stone over the years that has contributed to that. But is there something that's unique about that brand where some of those, some of that momentum can't be transferred to the other brands, or is it just the scale and the operational strength within that that eventually will be transferred, or is it the strength of the brand, the category? How should we contemplate that and consider versus the other brands?
Speaker Change: Well, we always talk about Goldstone because it's one of our larger brands, but there are other brands that are in similar situations with a long track record to success.
Speaker Change: I wish it was a one-size-fits-all type of solution, it's not, but you know, you look at goldstone we have.
Speaker Change: An incredible product, we have incredible RND being done, we have new products all the time. Our marketing group is doing an outstanding job we were at of our time when we started doing digital with Goldstone and we're trying to stay ahead of the curve.
Speaker Change: We have outstanding PR opportunities, like the Barbie movie last year was a really good one. So, and operations are good, so everything is going in the right direction for that brand. And we put all our efforts also to make sure we don't lose momentum.
Speaker Change: And that can certainly be transferred to some other brands. You look at sweet frog, for example. Sweet frog, especially in Q2 and Q3 is an important brand for MTY. And the performance has been stellar in terms of same store sales as well in terms of profitability. So, there are more brands that are successful than just cold stone. Now we're putting wet souls under the same leadership and we believe that wet souls can also build momentum
Speaker Change: and the same build momentum and good years over, good years over, good years. So we have a lot of brand in that situation. We talk about cold stone, but it's not a unique proposition in our portfolio.
Speaker Change: And lastly, could you just update us on your acquisition thinking if there's been any incremental changes and how you see the market in the prices?
Speaker Change: Well, you know, I'm sure you've seen what's on the market. There's been a lot of troubled companies that have been on the market recently. So obviously you look at those and then you look at some other companies as well that are, you know.
Speaker Change: either on the market or you know just testing whether there's an interest or not.
Speaker Change: It's always, it goes into waves and sometimes the market has higher expectations for the sellers, sometimes the sellers become more reasonable and we just need to be a opportunistic when that happens. So I'm too wise.
Speaker Change: We're ready to pounce as always, and I think we're in a good place now with our balance sheet and with the casual production that we have, and we've shown our resilience once again, that we can still produce cash flows in more difficult, micro economic environment. [inaudible]
Speaker Change: So we're ready to bounce. We're ready when the market is going to be ready for us. And as always, there are a number of opportunities that are shown to us. They're not always interesting. Sometimes they're not realistic. Sometimes they're just not a good fit. But when the time comes, we'll be ready to bounce.
Speaker Change: As a reminder, if you would like to ask the question, please press star and one to enter the
Speaker Change: The next question comes from Eric Lefebvre, with TD Cowan. Please go ahead.
Eric Lefebvre: Good morning, everybody. Eric, I just want to maybe hit on the margin side of the EBITDA equation. Obviously, great performance there, but it has bounced around quite a bit. So, I guess number one, I'm just wondering if you can maybe just talk about the sustainability of those margins in the US and Canada, and second, more specifically, just maybe wondering if you could address the lower labor costs and the much lower controllable expenses in the US.
Eric Lefebvre: Yeah, well, they go hand in hand. So, in terms of the margins, they do bounce around. There are a number of items that impact our margins. The seasonality of our business obviously is one. As you know, our business is a little bit seasonal. Our cost basis is for the most part fixed because it's mostly labor and we don't change our labor depending on the season. So, I would say yes on this seasonally adjusted basis, the margins are certainly sustainable. They're in the right place. If anything, I think there's probably still room for some improvement.
Eric Lefebvre: And in terms of our costs, I don't see what's not sustainable on the structure at the moment. So I feel pretty confident that we can maintain that cost structure.
Speaker Change: Okay, and then you did sort of note in the, while you didn't note in the MDNA, you just continued the rejuvenation program. Is that temporary or maybe some of the reasons why you would have stopped that?
Speaker Change: Yeah, we stopped the rejuvenation. I'll say probably over two years ago. So, that was just a decision where we felt the network was in a good place and we still work with our franchisees too.
Speaker Change: I try to help them renovate their stores. We don't necessarily have a subsidy program in place to renovate the stores, but we do try to encourage our franchisees, we have different methods, different brands will have different processes to do that. But we just chose to subsidizing the rejuvenation for the stores. And we haven't necessarily seen a slowdown in the pace of renovations for franchisees. So it shows to me that, you know, our alternative ways for us to get to where we want without necessarily having to take out our checkbook.
Speaker Change: Okay. And on the ERP, you've spent, I guess, year-to-date about a million bucks. And I think you've guided about seven to ten. Just wondering how we should be modeling the balance of those expenses going forward. And I guess when you expect to see, or start seeing some of those ERP benefits.
Speaker Change: Hi, John , it's tonight. The ERP were expecting some of the benefits starting in March right now. We have an expected goal line for one of our divisions. In March, we actually already launched our budgeting tool two years ago, and that went extremely well. We were really happy about that, and we're launching our CRM now, actually, so hopefully that will be a success, but don't worry, everything is going well. As for the future of course, as Eric mentioned in past quarters, and our budget is not something of a great scale compared to other companies, we expected to fall between $7,000,000,000,000, and right now we're sharing really well. We're still on budget to hit our timeline and our budget, but we're really happy.
Speaker Change: So we should still expect 77 to 10 overall? Yes, that was always our expected total budget. We've capitalized so far about 2 million, would about 800,000 hitting our piano.
Michael Glen: Okay, and so I guess that would be my follow-up question: how much do you expect to capitalize versus expect of that seven to ten? Yeah, it was cloud technology; it's always a bit tricky. There's a very specific accounting guideline regarding anything that goes on the cloud, but we're expecting to capitalize between 60 to 70 percent of that.
Speaker Change: Okay, and so I guess that would be my follow-up question is how much do you expect to capitalize versus expensive that seven to ten?
Speaker Change: Yeah, it was cloud technology, it's always a bit tricky. There's a very specific account in guidelines regarding anything that comes on the cloud, but we're expecting to capitalize between 6 to 7% of that.
George Doumet: Okay, thank you very much.
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