Q4 2024 MTY Food Group Inc Earnings Call
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Rene St, Eric Lefebvre
Good day and welcome to the MTY Food Group Fiscal 2024 fourth quarter results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star and then two. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Eric Lefebvre, CEO of MTY Food Group. Please go ahead.
Rene St, Eric Lefebvre
Speaker Change: Thank you. Good morning everyone. Thank you for joining us for MTY's fourth quarter conference call for fiscal 2024. 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.
Speaker Change: 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. I also remind you that all figures presented on today's call are in Canadian dollars, unless otherwise stated.
Speaker Change: MTY delivered a remarkable financial performance once again in fiscal 2024. Despite a more challenging macroeconomic environment, our free cash flow's net of rent payments reached $5.75 per share, or $137.9 million.
Speaker Change: Those funds were used to return a record amount to our shareholders in the form of shared buybacks and dividend payments, which totaled over $68.6 million combined.
Speaker Change: MTY also paid back over $79.5 million of its long-term debt during the year, making our balance sheet healthy and well-positioned for future growth.
Speaker Change: During the fourth quarter, and for the first time in 10 years, MTY achieved a net positive location growth in the quarter with a net of plus 13 restaurants.
Speaker Change: This is a major milestone for our teams. We had been pursuing this objective for a long time. A strong pipeline of new locations and a good control of closures remain two of our top priorities for the future. We were able to align the two metrics during the last quarter with 92 openings and 79 closures.
Speaker Change: During our 2024 fiscal period, our system sales remained flat at over 5.6 billion dollars.
Speaker Change: Sales sequentially improved every quarter, starting the year with a minus 2% in the first quarter and finishing with a plus 2% in the fourth quarter.
Speaker Change: Our snack brands in the U.S. performed especially well with Cold Stone Creamery, Wetzel's Pretzels, and Sweet Frog leading the way.
Speaker Change: In the fourth quarter, the Canadian, U.S. and international segments all saw organic growth and system sales, coming mostly from the performance of recently opened locations.
Speaker Change: I am also encouraged by the positive outcome of the company's increased efforts in usage of data, digital marketing, online ordering, and websites during the past year.
Speaker Change: Our digital sales grew 9% year-over-year to $1.1 billion in fiscal 2024. There's still a lot of work to do to achieve our objectives, and 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.
Speaker Change: Digital sales are now 20% of MTY's total sales and still represent a significant opportunity for growth, especially in Canada.
Rene St, Eric Lefebvre
Speaker Change: representing 96.4% of our total store count while 252 were corporately owned representing 3.6% of our network.
Speaker Change: At November 30th, 57% of our restaurants were located in the U.S., reducing 66% of our network sales. Of note, 84% of our locations are now street front or non-traditional, with only 16% being in shopping malls or office tower food courts.
Speaker Change: 2024 was a year of adjustments for MTY. Following the major acquisitions of the last few years, we undertook a restructuring process that led to the elimination of several senior positions in the organization and to the redefinition of others.
Speaker Change: Our industry is changing at a fast pace and it was important for MTY's present and future success to have the right structure and, more importantly, the right talent in the right position.
Speaker Change: Although we need to continue challenging ourselves to further adjust and be more efficient, we anticipate more stability in 2025 as we hope to harvest the fruits of the cost control measures and synergies realized in 2024.
Speaker Change: This should culminate later this year with the delivery of our new ERP, which promises to make MTY's infrastructure more robust and built for significant future growth.
Speaker Change: I will now turn the call over to Rene, who will discuss MTY's fourth quarter results in greater details.
Rene: Thank you, Eric, and good morning, everyone. In the fourth quarter, normalized adjusted EBITDA totaled $59.4 million, a decrease of 1.6% from the $60.4 million realized in the fourth quarter of 2023.
Rene: Our franchising segment had an exceptional quarter, with franchising margins increasing from 47% last year to 51% this year, generating a 7.9% increase in normalized adjusted EBITDA year over year.
Rene: This performance is aligned with the realizations we made in the previous quarter and is further evidence of the reliability, consistency, and resilience of our main business components, which represents 83% of normalized adjusted EBITDA.
Rene: Our corporate restaurant segment, however, had a challenging fourth quarter. While revenues were up during the quarter, mainly as a result of additional locations repossessed during 2024, our margins were under pressure, causing our EBITDA to decrease by 39%.
Rene: Some of our predominantly corporate concepts, such as Barrio Queen and Granite City, saw top-line sales decreases which caused a decline in the profitability of these restaurants.
Rene: Of note, our corporate location sales performance has trailed that of our franchise location and our teams have implemented various initiatives in 2025 to reverse that trend and restore profitability to these corporate restaurants.
Rene: Our retail distribution and manufacturing, which represents 6% of our total normalized adjusted EBITDA, concluded a difficult 2024 fiscal period with a decrease of 12% compared to prior year.
Rene: Our manufacturing plants continued to perform well during the quarter, but our retail business once again struggled to generate the desired level of sales as grocery stores continued to decline.
Rene: Customers continue to migrate to discount brands and house labels during the period.
Rene: During the fourth quarter, a reassessment of the valuation of certain tangible and intangible assets led to a non-cash impairment charge of $64.6 million.
Rene: The charge on property, plant, and equipment was recorded on certain recently acquired corporate locations that did not perform at the level expected when their valuation was established, while the charge on intangible assets was due to lower-than-expected 2024 performance for some brands.
Rene: Similarly, we recorded goodwill empowerment charge on our Papa Murphy's brand based on past performance and lower expected future growth.
Rene: The volatility in foreign exchange rates also caused a charge of $26.3 million during the fourth quarter. This was driven by the conversion of some intercompany loans dominated in U.S. dollars, the result of which is a large charge to our net income and a corresponding gain in our statement of comprehensive income.
Rene: As a result of the impairment charge and the accounting for the foreign exchange variations on intercompany loans, NCY reported a net loss attributable to owners of $55.3 million during the fourth quarter or $3.34 per diluted share.
Rene: That accounting loss should not, however, overshadow the strong performance realized during 2024, including the fourth quarter, during which we generated $2.52 in normalized adjusted EBITDA per share and $1.85 in operating cash flows per share.
Rene: We are wrapping up the year with just over $11 per share in normalized adjusted EBITDA, $8.54 in operating cash flows per share, and $5.75 in free cash flows net of rent payments per share.
Rene: Those metrics once again prove the strength of our business model and demonstrate the financial health of MTY.
Rene: We end the year with a net debt of $656 million, a reduction of over $52 million compared to the end of 2023.
Rene: Considering our strong cash flow generating ability, our debt-to-evidence of approximately 2.5 times is a level of debt that gives us flexibility to make acquisitions should the opportunity arise, while we continue to return capital to shareholders in the form of dividends and share buybacks.
Rene: And with that, I'd like to thank you for your time and we'll now open the lines for questions. Operator?
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star and 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: So there is regular discussions with existing franchisees.
Speaker Change: Large portion of our new store openings comes from existing franchisees, it's about two thirds.
Speaker Change: So to us that's the.
Speaker Change: That's the validation we need to show that our brands are relevant and that franchisees can be successful with our stores.
Speaker Change: So yes.
Speaker Change: We don't necessarily have a formal process to conduct surveys.
Speaker Change: We have a few brands that will do it annually, but.
Speaker Change: Even annual leaves a timeline that.
Speaker Change: That is not regular enough. So the regular discussions with our franchisees happened with our field people being.
Speaker Change: And the restaurants on a regular basis and talking to franchisees.
Speaker Change: Thanks for that.
Speaker Change: And.
Speaker Change: I wanted to see the trends in.
Speaker Change: And the ongoing quarter so far.
Given the tax on it in Canada.
Speaker Change: And unfavorable weather across U S and Canada reported by some companies just wondering what the impact was.
The trends are for Nty, just for the quarter so far.
Speaker Change: Yeah.
Speaker Change: It's hard to assess the exact impact of the the tax holiday.
Speaker Change: Obviously, there are provinces, where it makes a bigger difference than others. If you take for example, Ontario.
Speaker Change: It's a 13%.
Speaker Change: Discount, whereas get back get to only 5% in the Atlantic provinces get a little bit more depending on which province.
Speaker Change: So, but it's hard to exactly assess the impact, which we know is that in Q1, our Canadian restaurants or have performed exceptionally well.
Speaker Change: So we're really happy with what our Canadian.
Speaker Change: Canadian segment in Q1, so far in the U S. It's been a little bit more challenging as you mentioned there has been.
Speaker Change: Very cold weather Theres been the fires in California, there's been.
Speaker Change: Snow storms that affected regions that don't normally get snow and cold.
Speaker Change: Texas, and Louisiana, and Florida being affected with snow.
Speaker Change: And cooler than normal weather as well and considering that we're selling a lot of ice cream and frozen yogurt and smoothies.
Speaker Change: Not necessarily good for business. So I would say right now for Q1, Canada is doing exceptionally well the U S is lagging a little bit.
Speaker Change: But all in all were happy with the beginning of the year in terms of our sales.
Speaker Change: That's great color. Thank you and just finally I wanted to touch on the topic of tariffs I wanted to get a sense.
Speaker Change: How much of cross border sourcing is done that could be impacted by tariffs and how much leverage does empty warehouse to limit that impact.
Speaker Change: Well, yes.
Speaker Change: It's early because we don't have the exact details of tariffs and then the countermeasures that might or might not happen.
Speaker Change: So it's a fluid situation that we're monitoring.
Speaker Change: There's not that much cross border obviously.
Speaker Change: If there's a tariff on fruits and vegetables coming from from the U S to Canada that would be that would be a problem because there is no.
Speaker Change: As you might expect Canada doesn't grow much in the winter. So we do need to source and a lot of it from California and other.
Speaker Change: Other major agricultural.
Speaker Change: Producers.
Speaker Change: So but right now there is there are no tariffs announced on these products so that that would be the biggest impact.
Speaker Change: But other than that we source a lot of what do we need domestically.
Speaker Change: In the U S.
Speaker Change: There's a little bit of packaging, that's coming from outside the country.
Speaker Change: There might be some impacts on equipment, as well, where you need stainless steel and you need to aluminum.
Speaker Change: So there might be some impacts there but.
Speaker Change: The impact is not.
Speaker Change: It is not super drastic.
Speaker Change: Canada, we feel the same way waters, we resource a little bit from outside.
Speaker Change: Right now we have no visibility on something that would be of great magnitude on the business.
Speaker Change: Thank you.
Speaker Change: Again, if you have a question. Please press star and then one.
Speaker Change: Next question comes from Derek Lessard with TD Cowen. Please go ahead.
Derek Lessard: Yes, good morning, Eric.
Speaker Change: I wanted to get a sense around what youre thinking in terms of your 2025 outlook I guess in the context sort of a difficult macro backdrop still in the competitive environment and and then just maybe as a follow up as well kind of your expectations are down your two.
Derek Lessard: 2025 network expansion.
Derek Lessard: Yeah well.
Derek Lessard: I mean, we don't give guidance so not necessarily prepared to give you an outlook for 2025.
Derek Lessard: What I'll say is we're off to a good start of 2025.
Derek Lessard: And we're happy with where we are now we're happy with the actions we took in 2024 to prepare for for that coming year.
Derek Lessard: So so far so good for 2025, we don't necessarily want to give more information than that for the rest of the year, but.
Derek Lessard: We're off to a good start.
Derek Lessard: And then as far as network expansion I mean, we had one quarter of positive store growth.
I'm not going to say that it's going to be an easy ride going forward I do think that we have.
Derek Lessard: We have the foundation to have other quarters of positive positive store growth, but no negative store growth might still happen also in the future and will still happen in the future.
Derek Lessard: So we're not at that point, yet, where we feel confident like every quarter it would be positive store growth okay.
Derek Lessard: Okay, and maybe just on the on your U S same store sales growth this year really strong <unk> performance.
Derek Lessard: <unk> been strong on the SaaS casual side just curious.
Derek Lessard: If you can maybe add some color to some of the drivers Darin and maybe.
Derek Lessard: As.
Derek Lessard: Follow up to that I was curious does that do those same stores seeing those same store sales numbers include foreign exchange benefits.
Derek Lessard: Yeah.
Derek Lessard: No no our same store sales never include foreign exchange. So it's always done in domestic currency.
So we exited the noise there.
Derek Lessard: But yes, <unk> did well our snack category and then we call it <unk> and most of it in the U S as our snacks wetzel.
Derek Lessard: <unk> perform.
Derek Lessard: Mark would be remarkably well suite frog, which is a brand that we don't talk about enough Thats one of our big brands, especially in the two quarters of the summer.
Derek Lessard: That's performed really really well.
Derek Lessard: Goldstone again was a strong brand and even the smaller brands like Ikea. Thank Barry for example was super successful in 2024 or so.
Derek Lessard: Happy with the work of the team.
Derek Lessard: The consumer still responds well to that impulse buy into that.
Derek Lessard: Indulgence, you just need to be top of the lists and people.
Derek Lessard: People still appreciate these moments needs. These family moments. These these first dates that theyre doing it goldstone in all of these these experiences that we're offering.
Derek Lessard: And yes, I mean, we have a great product great team, great marketing great franchisees. So overall good experience for the snack segment.
Derek Lessard: Okay, that's helpful and maybe a thought that maybe.
Derek Lessard: Turning to my next question just around the impairment charge.
Derek Lessard: Papa Murphy's just wondering if you could maybe elaborate on that.
Derek Lessard: In terms of the outlook Youre seeing with Papa Murphy's and I think it was.
Derek Lessard: A couple of other or you said a dozen or so other brands that were included so just curious on what youre seeing there.
Yeah.
Yes, it's interesting you mentioned a number of brands and unfortunately, when we do the purchase price allocations. After we acquire a brand based on our forecast we have.
Derek Lessard: And if we beat our forecast we got used to bump up but if we don't meet our forecast we have to we have to impair the accounting rules are made in a way where.
Derek Lessard: It becomes extremely sensitive to these different variations in your models.
Derek Lessard: As far as Papa Murphy's is confirmed is concerned the performance was a little bit less in 2024 as you know we've closed more stores than you have the details in the annual information form that's also out today.
Derek Lessard: And as a result, we lowered a little bit our existing store base in the.
Derek Lessard: The baseline is lower for us to forecast so that causes a situation where you are.
Derek Lessard: Sure.
Derek Lessard: Realizable value becomes a little bit less.
Derek Lessard: And we have to take that impairment, but.
Derek Lessard: Again, these impairments are largely accounting driven and that's really based on the original forecasts you make on.
Derek Lessard: On the acquisition.
Derek Lessard: Again, if you beat your forecast you got recognize it and we have a lot of upside on other acquisitions that were not allowed to talk about but we have to talk about where are we slightly missed on our forecast.
Speaker Change: Thanks, Eric that's it for me.
Speaker Change: And the next question comes from and Shaw.
Speaker Change: <unk> with National Bank. Please go ahead.
Speaker Change: Hi.
Speaker Change: I just wanted to.
Speaker Change: Touch on your capital allocation priorities as well going forward.
Speaker Change: Able to quantify.
Speaker Change: In CIB and dividends as well as Europe.
Speaker Change: Outlook for acquisitions.
Speaker Change: 25.
Speaker Change: Yeah, well I mean with the stock price, where it is we feel that like empty why is a really attractive target at the moment. So we chose to buy our own shares.
Speaker Change: And when we still are buying our own shares and we're going systematically about it so we're not buying large quantities, but.
Speaker Change: We're buying enough that if we continue buying four year, where we're going to be right against the maximum allowed by the regulators.
Speaker Change: So we feel that that's a very relevant capital allocation strategy, especially considering where the share prices.
Speaker Change: And then as far as as far as other uses of our cash we were still aggressively pursuing.
Speaker Change: Acquisitions, we still want to acquire businesses.
Speaker Change: As you know in the over the years as people have seen it we were patient and were disciplined and we won't acquire businesses at the wrong price or for the wrong reasons.
Speaker Change: So we're patient and where we're looking at the market there are some transactions in the market.
Speaker Change: A lot of them are very expensive and we've seen some this year that were.
Speaker Change: And in the stratosphere in terms of valuation and we're not prepared to do that so we're we're patient we're going to wait for the market to adjust and we're going to wait for the right targets to be available for us to pull the trigger but.
Speaker Change: No priority is still acquisitions, we still want to acquire businesses and the fact that we haven't acquired in 2024 doesn't mean, we want to pause or stop it just means that.
Speaker Change: Because of our approach and because of how disciplined we are there was no suitable target, but it doesn't mean that for the future there won't be.
Speaker Change: And as far as dividend.
Speaker Change: What it is where we're paying a small dividend, we're not going to be a dividend stock but.
Speaker Change: We feel like it's appropriate to return some capital to our shareholders.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Okay.