MTY Food Group Inc. (MTYFF) Q4 2022 Earnings Call Transcript

MTY Food Group Inc. (OTCPK:MTYFF) Q4 2022 Earnings Conference Call February 16, 2023 8:30 AM ET

Company Participants

Eric Lefebvre - Chief Executive Officer

Renée St-Onge - Chief Financial Officer

Conference Call Participants

John Zamparo - CIBC

George Doumet - Scotiabank

Derek Lessard - TD Securities

Operator

Good morning, ladies and gentlemen. Welcome to nan MTY Food Group Inc. Q4 2022 Earnings Conference Call. At this time, each participants are successful a listen-only mode. Following nan presentation, we will behaviour a question-and-answer session. Instructions will beryllium provided astatine that clip for you to queue up for questions. [Operator Instructions].

Before turning nan gathering complete to management, please beryllium advised that this convention telephone will incorporate statements that are forward-looking and taxable to a number of risks and uncertainties that could origin existent results to disagree materially from those anticipated. I would for illustration to punctual everyone that this convention telephone is being recorded today, Thursday, February 16, 2023.

And I would for illustration to move nan telephone complete to Eric Lefebvre, Chief Executive Officer. Please spell ahead.

Eric Lefebvre

Thank you. Good morning, everyone. Thank you for joining america for MTY's 4th fourth convention telephone for fiscal 2022. The property merchandise and MD&A, pinch complete financial statements and related notes were issued earlier this greeting and are disposable connected our website arsenic good arsenic connected SEDAR.

During nan call, we will beryllium referring to forward-looking statements and to definite numbers that are non-IFRS measures, you tin mention to our MD&A for much details. I besides punctual you that each figures presented connected today's telephone are successful Canadian dollars unless different stated.

We're highly proud of nan results realized during fiscal 2022. During nan year, we generated integrated and acquisition maturation to present grounds normalized adjusted EBITDA of complete $187 million, while strategy income exceeded $4 cardinal for nan first clip successful MTY's history. Our operations generated rate flows of $143 million, aliases $5.84 per diluted shares.

All those highlights were generated during a twelvemonth marked by galore challenges, including COVID-related restrictions astatine nan opening of nan year, labour and proviso concatenation constraints, inflationary unit and uncertain marketplace conditions. Needless to opportunity our squad and franchisees person shown bonzer resilience, productivity and dedication.

We continued our maturation momentum successful nan 4th quarter, pinch some normalized adjusted EBITDA and strategy income expanding 25% year-over-year to $53.5 cardinal and $1.2 cardinal respectively. During nan year, we closed 2 acquisitions, Küto Comptoir à Tartares early successful nan fiscal twelvemonth and Barbecue Holdings successful precocious September.

The Barbecue section truthful contributed only 2 months toward 2022 results. Although nan afloat effect of nan Barbecue transaction will only beryllium measured during 2023. It's publication to MTY's results was meaningful successful nan 4th quarter.

Excluding nan effect of acquisitions and nan effect of changes successful overseas speech rates, strategy income grew 10% organically, while integrated maturation and normalized adjusted EBITDA was 9% successful fiscal 2022. For nan 4th fourth specifically integrated maturation and strategy income and normalized adjusted EBITDA were respectively 4% and 9%.

Digital income continued their progression increasing 8% year-over-year to $208.5 cardinal successful nan 4th quarter. Digital income which includes mostly takeout orders and transportation income benefited from nan company's accrued investments successful online ordering and third-party transportation options successful nan past year.

In 2023, we intend to further raise our crippled [ph] by dedicating further resources to further improving our guests wide integer experiences ranging from our websites to online ordering and to each imaginable measurement successful which we interact pinch our existing and prospective customers electronically.

Moving onto our network. MTY completed nan fiscal twelvemonth pinch 6,788 locations, of which 6,589 were franchise aliases nether usability agreements and nan remaining 199 locations were operated by nan company. 56% of our locations are based successful nan U.S., 37% successful Canada and 7% International.

The Wetzel’s Pretzels deal, which closed December 8, arsenic complete 350 locations to MTY's web crossed 25 states successful nan U.S., Panama, and Canada. Sauce Pizza and Wine, which closed connected December 15 is simply a smaller conception pinch 13 corporate-owned locations successful Arizona. It's expected to beryllium a imaginative instantly and offers bully franchising imaginable successful nan mean and long-term.

With our 3 latest acquisitions, MTY's web has complete 7,100 locations of which astir 96.5% are franchised and 3.5% are corporately owned. This is somewhat higher than MTY's humanities average, but fixed nan capacity of nan recently acquired locations successful nan infrastructure successful spot to run them successfully, we do not intend connected liquidating our portfolio of firm stores.

However, we besides do not intend connected adding importantly to that number arsenic we stay a franchisor astatine heart. Looking up to fiscal 2023, we expect a awesome assistance successful income and profitability for Barbecue Holdings, Wetzel’s Pretzels and Sauce, Pizza and Wine.

In position of superior allocation, MTY's privilege remains to get value brands and further grow its network. As specified bang down immoderate of our indebtedness to build capacity for early deals is besides a priority. The proportionality of free rate travel distributed arsenic a dividend is expected to stay wrong its humanities range.

I will now move nan telephone complete to Renée, who will talk MTY's financial results successful greater details.

Renée St-Onge

Thank you, Eric, and bully greeting everyone. As antecedently mentioned by Eric, MTY delivered astonishing normalize adjusted EBITDA of $53.5 cardinal successful nan 4th fourth of 2022, which excludes $3.6 cardinal successful acquisition related expenses related to nan acquisition of Barbecue Holdings and Wetzel’s Pretzels.

Most of nan betterment came from nan firm shop conception successful nan U.S., arsenic good arsenic nan processing distribution and unit conception successful Canada. Excluding nan acquisition of Küto Comptoir à Tartares, nan Canadian conception realized an awesome integrated normalized adjusted EBITDA maturation of 27%.

In nan U.S. and world segments, normalized adjusted EBITDA accrued by $7.8 million, chiefly owed to nan acquisition of Barbecue Holdings, which generated $5 cardinal successful normalized adjusted EBITDA. This level of profitability for Barbecue Holdings is highly encouraging, fixed america typical 2 months publication successful a seasonally soft 4th for this portfolio of brands.

The further weight of firm locations arising from nan acquisition of Barbecue Holdings caused nan 4th fourth consolidated normalized adjusted EBITDA margins to alteration from 29% to 22%. The recently added firm location fueled nan firm location segments, which went from a nonaccomplishment successful nan 4th fourth of 2021 to a $7.4 cardinal profit successful 2022 pinch a normalized adjusted EBITDA separator of 9%.

The processing, distribution and unit segment, has margins accrued from 11% to 16%, While nan franchising conception saw a driblet from 55% to 44%, year-over-year, nan alteration successful nan franchising conception separator is mostly owed to nan higher expected in installments nonaccomplishment provisions taken connected leases receivable, arsenic good arsenic higher magnitude of debased separator revenues generated specified arsenic turnkeys and waste of various supplies, instrumentality and materials to franchisees.

And position of nett income attributable to owners, it amounts to $7.1 cardinal aliases $0.29 per diluted stock successful nan 4th fourth compared to $24.9 cardinal aliases $1 per diluted stock successful nan aforesaid play past year. The alteration successful some cases was chiefly owed to acquisition costs higher non-cash impairment charges connected intangible assets, arsenic good arsenic higher liking paid connected semipermanent debt.

Company gross grew 65% year-over-year to $242 cardinal successful nan 4th quarter, chiefly driven by nan Barbecue Holdings acquisition. The 2 months effect pursuing nan woody delivered maturation for franchise operations and firm restaurants of $4.3 cardinal and $67.6 cardinal respectively, successful nan U.S. and world segment. In Canada franchise operations and nutrient processing, distribution and unit were nan awesome gross contributors pinch year-over-year maturation of 25% and 22% respectively.

Turning to liquidity and superior resources, rate travel from operations totaled $35.5 cardinal successful nan 4th fourth of 2022 compared to $31.9 cardinal successful nan 4th fourth of 2021. The summation of 11% and operating rate travel stems mostly from nan beardown adjusted EBITDA we generated during nan quarter.

Free rate flows amounted to $32.9 cardinal aliases $1.34 per diluted stock successful nan 4th quarter, compared to $35.6 cardinal aliases $1.44 per diluted stock successful nan aforesaid play past year. The alteration successful free rate flows is owed to nan waste of 2 portfolio of Papa Murphy's firm owned locations successful 2021.

In nan 4th quarter, we reimbursed $23.9 cardinal of semipermanent indebtedness and paid $5.1 cardinal successful dividends to shareholders. For nan afloat fiscal year, we paid $80.2 cardinal successful semipermanent indebtedness and $20.5 cardinal successful dividends to shareholders. We besides repurchase 256,400 successful shares for $14.6 nether our NCIB programme successful fiscal 2022.

Following nan twelvemonth end, we raise our dividend by 19% to $0.25 per share. This marked our 10th summation since we first declared a dividend successful November 2010. At nan extremity of nan fiscal year, MTY had a patient rate position of $59.5 cardinal and semipermanent indebtedness of $561 million, chiefly successful nan shape of slope accommodation and promissory notes connected acquisition.

During nan 4th quarter, we raised our revolving in installments installation to $900 cardinal successful anticipation for nan acquisition of Wetzel’s Pretzels. The further capacity besides gives MTY added elasticity for early acquisitions.

Following nan acquisition, we expect nan debt-to-normalize adjusted EBITDA ratio will autumn betwixt 3 and 3.5 times EBITDA, which is astir nan comfortableness level we person communicated successful nan past. Given MTY's rate travel procreation ability, nan existent leverage does not impair nan anticipation of realizing much acquisitions successful nan future.

And pinch that, I convey you for your time, and we will now unfastened nan statement for questions operator?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen, we will now statesman nan mobility and reply session. [Operator Instructions] Your first mobility comes from John Zamparo from CIBC. Please spell ahead.

John Zamparo

Thanks. Good morning, I wanted to inquire astir nan integration of your 2 ample caller acquisitions. Is location thing you've learned arsenic you've now tally those banners, astatine slightest for a short play of time. Is location thing you've learned astir those banners that you tin stock astir imaginable for accelerating growth, either same-store aliases portion aliases separator description ?

Eric Lefebvre

Yes. Well, successful position of integration, it's going highly well. We person 2 teams that are wholly engaged and really wanting to activity pinch nan remainder of MTY doing precisely what you mentioned is, which is accelerating growth, and improving profitability for our franchisees and for nan company, truthful it's going highly well. In some cases, we're really happy pinch what we're seeing. So, successful position of maturation plans, and everything, they stay intact, we're trying to accelerate. The plans, we're not needfully changing nan plans. But if we tin push and thief to accelerate everything, and we will. So we person a number of initiatives that we're moving on. Nothing we tin denote astatine this constituent yet. But location are a batch of things that we're moving connected that we consciousness are very promising for nan early successful some cases.

John Zamparo

Okay. And connected BBQ, is it adjacent to presume there's nary alteration successful scheme connected imaginable refranchising of your firm stores, not successful their portfolio?

Eric Lefebvre

Yes, that's correct. The firm shop portfolio is really good run. We person a bully squad of firm shop performance, group that really negociate nan firm stores. They're among nan champion stores we person successful a web and that's what we want to do. If we person a firm store, it should beryllium tally arsenic nan example, and these stores are tally really well. We person nan infrastructure successful spot to tally them. So, nan profitability we derived from those restaurants is really thing we don't want to parkland [ph] with. So, though we don't intend connected building much firm stores, aliases needfully requiring a ample number of firm stores successful nan future, we besides don't needfully want to parkland pinch nan portfolio. There mightiness beryllium stores present and location that we mightiness waste if geographically it doesn't make consciousness for us, because it's a small spot harder to operate, but different than that, we'll astir apt support nan portfolio intact

John Zamparo

Okay, understood. You mentioned franchisee profitability. I cognize there's a batch of puts and takes connected this. But immoderate measurement you tin springiness aliases moreover conscionable qualitatively connected wide franchisee profitability successful 2022 compared to either 2021 aliases pre pandemic?

Eric Lefebvre

Yes. Well, obviously, for franchisees, particularly successful definite areas, and possibly definite brands much than others, obviously, pinch nan number of brands we have, they're not each affected nan aforesaid way. But location is ostentation connected cost, whether it's labor, nutrient aliases packaging. There's besides a displacement successful nan measurement kinds of consumers spell astir nan business and transportation orders for example, that could drain connected our profitability. So, we person regular discussions pinch our franchisees, for nan astir portion we person entree to their P&L arsenic good and we effort to activity pinch them to amended profitability arsenic overmuch arsenic possible.

The bully news is, truthful acold we've been capable to set prices to offset nan summation successful costs that we're going through, and nan customers are accepting nan value increases. But, it's not easy. We request to respond fast. The costs increases happened a batch faster than they utilized to happen. And it's a small spot much analyzable successful that type of environment. But that being said, we're a nimble team. We're each entrepreneurs. And we're reacting fast. So, to what we're seeing now is that for nan immense mostly of our franchisees, nan profitability is very satisfactory. And obviously, location are exceptions to that, but -- and for nan immense mostly of nan network, nan profitability is good. And nan customers are taking nan value increases comparatively well. So, nary effect connected postulation for nan moment.

John Zamparo

Okay. That's helpful. Thanks. Just a mates more. One is connected closures. It was comparatively precocious this quarter. I don't ideate you're going to guideline america connected this. But I wonderment if you consciousness assured that closures will diminution and 2023 versus 2022?

Eric Lefebvre

Yes. Well, they request to. No, this is surely not a number we're happy with. We had immoderate amended quarters earlier successful nan year. And past successful Q4, nan number of closures was batch higher. So, this is not a number we're proud of. This is not a number that we expected to beryllium that high. So obviously, we're addressing nan business pinch our teams. And we make it a privilege to attraction connected our existing stores, it's a batch easier to support an existing shop and to unfastened a caller one. So we request to sphere nan integrity of our network. And that's been a main area of attraction for nan team. And everybody understands what we request to do to support those doors open. So, arsenic agelong arsenic it's a priority, it's communicated. We person conversations pinch our franchisees besides a small spot much regularly to make judge that we understand wherever they're at. And if we tin thief them, waste their assets alternatively of closing their assets, past it's amended for some our franchisee and nan franchisor. So, but yes, their closures were precocious successful Q4, there's nary uncertainty astir it.

John Zamparo

Okay. Understood. And past my past ones connected nan nutrient processing segment. I wonderment if you tin springiness a consciousness of really galore points of distribution you're successful correct now and really that's grown? That business is has grown good into double digits for years. And conscionable would for illustration to get immoderate consciousness of really ample you deliberation that business tin get complete time?

Eric Lefebvre

Yes. The marketplace is huge. So, we're only addressing a very mini information of nan network. At nan moment, we're predominantly successful Eastern Canada. We person immoderate business successful nan U.S. arsenic well. But nan runway for america is huge. So, arsenic you know, this is simply a much cyclical market, we spell up and down depending connected nan capacity of grocers. So, if they make a batch of postulation it will thin to spell better. And if they don't, past it's going to beryllium a small spot softer. But nan runway is huge. And this could good go a very, very important. It is simply a very important conception for MTY, but it could go moreover bigger arsenic nan twelvemonth spell by, and we surely person fierce targets for our team.

John Zamparo

Okay, great. That's each for me. Thank you very much.

Operator

Thank you. Your adjacent mobility comes from George Doumet from Scotiabank. Please spell ahead.

Unidentified Analyst

Go. Good morning. This is [Indiscernible] calling connected George's behalf. Congrats connected nan quarter. Following up connected unit and distribution, it seems to maine that you person a precocious separator present during this quarter. I was wondering if you could supply immoderate colour connected that and nan sustainability of this going forward?

Eric Lefebvre

Yes. These margins ever dangle connected a batch of different things. They dangle connected nan income operation we have, depending connected whether we're trading a definite merchandise to another, nan margins will shift. They besides dangle connected nan value of commodities. As you know, we can't alteration nan value very quickly pinch grocers. So, we thin to sorb a small spot of nan value increases aliases decreases for a definite magnitude of time. I would say, nan separator is astir apt higher than nan normal successful Q4. Do we dream we'll beryllium capable to repetition it? We do. Is this thing that's going to hap each 4th going forward? Probably not. As we summation our revenues, we will proceed to sorb nan fluctuations of nan market. So, wherever we're going to land? I'm not sure. But this is this is connected nan precocious broadside for sure.

Unidentified Analyst

Thank you. Very helpful. Also, tin you supply immoderate colour connected Papa Murphy's performance? How do nan comps, really nan title is moving astir connected that part?

Eric Lefebvre

Yes. For Q4, nan income of Papa Murphy's were down debased single-digit. We closed a batch of stores besides successful 2022, unfortunately. So nan capacity was not precisely wherever we wanted it to be. But we felt that nan curve was softening. And what we're seeing now since nan opening of Q1 is simply a overmuch amended capacity from Papa Murphy's. Our income are up. Our same-store sales, strategy income are some up compared to past year. We conscionable had a really bully Valentine's Day. So, we're emotion beautiful bully astir wherever Papa Murphy's is. Q4 was benignant of a soft landing. And hopefully now we're past that constituent and we're connected nan emergence now.

Unidentified Analyst

Thank, Eric. It’s helpful. Thank you.

Operator

[Operator Instructions] Your adjacent mobility comes from Derek Lessard From TD Securities. Please spell ahead.

Derek Lessard

Yes. Echo nan congratulations connected navigating a difficult year. But conscionable I deliberation you alluded, acknowledgment for nan colour connected nan integrated strategy income growth. I was wondering, Eric, if possibly you could adhd immoderate colour to some successful Canada and U.S. astir pricing. You did touch connected it. But I was wondering if really overmuch of that 4% integrated maturation is pricing versus traffic?

Eric Lefebvre

Yes. It's difficult to quantify, because we, I mean, our systems and nan number of different POSs we have, don't let america to beryllium capable to cognize precisely what pricing versus postulation is. But a bully information of that is surely successful pricing. We did person to summation our value compared to past twelvemonth and different brands had to summation prices by different amounts. But location is pricing that was taken for each azygous 1 of our brands. So a bully information of nan summation successful income for nan integrated summation successful income for nan 4th fourth is driven by traffic. Although, we do person overmuch less stores than we had Q4 past year, unfortunately. So, nan individual stores we person did overmuch amended than they did past year. So it's a mixed bag, I would say.

Derek Lessard

Okay. You deliberation you're - I cognize it's a difficult mobility to ask. But successful position of early pricing, for illustration really well-positioned are you? Or do you deliberation you're going to -- do you request to return much value going forward?

Eric Lefebvre

That's nan large mobility mark. We don't cognize what nan marketplace is going to beryllium for illustration successful nan future. I wish I had a amended crystal ball. But excavation doesn't really activity that well. So, but we'll request to respond to what nan marketplace throws astatine us. If we spot a stabilization of nan costs for our restaurants, possibly we'll beryllium capable to support nan prices intact. But if we spot a awesome emergence successful our costs, past we'll request to set price. If you look astatine nan definite territories successful which we operate, we're going to spot immoderate beautiful monolithic raises successful minimum wage.

And though we're not needfully paying minimum costs successful astir of our restaurants anymore, it does person an effect connected nan net structure. So successful these cases, we'll person to set prices slightly. So, we'll spot really nan marketplace goes for 2023. But we're fresh to react. Our teams are prepared. We person each nan subject down what we request to summation and erstwhile and by really much. So hopefully, nan marketplace stabilizes, and we don't request to do it. But if we do request to do it, we'll beryllium ready.

Derek Lessard

Okay. And possibly conscionable a follow-up connected that. You conscionable alluded to minimum costs increases. What are the, I guess, nan -- what are nan biggest markets that you're expecting those increases?

Eric Lefebvre

Yes. Well, a fewer markets already announced their increases. So for example, Quebec, which is an important territory for us, is going to summation connected May 1st by a worldly amount. So that's going to person an effect for sure. And then, we're ever watching California. That's besides a small spot much unpredictable for California, and we don't cognize wherever that territory is going to go, but they mightiness person immoderate power connected nan remainder of nan market. So, we'll beryllium watching those. I would opportunity those are nan 2 main ones that we're watching astatine nan moment.

Derek Lessard

Okay. And I'm funny too, fixed nan level of ostentation and nan value increases, you've had to push done and everybody's had to do it. Were you seeing successful position of promotional aliases competitory activity wide successful your markets?

Eric Lefebvre

It depends for which products. You tin show for example, connected Pizza, which is simply a very competitory market. There tends to beryllium a small spot much utmost worth offers successful nan markets. But for different types of restaurants, we don't spot it that much. I deliberation everybody is trying to protect their margins now, nan postulation is beautiful bully successful general. So, this is not a clip erstwhile you request to really spell fierce connected nan value constituent to thrust traffic. So, location is immoderate promotional competition. Nothing -- that's not normal. So, thing unexpected there. But I would say, it's a beautiful bully times successful position of nan utmost worth offers that mightiness beryllium offered retired location successful nan market.

Derek Lessard

Okay. That's helpful. Eric, 1 past 1 for me. Just possibly you conscionable talk astir nan write-down, and I deliberation successful nan property release, you talked astir 5 brands aliases 5 banners. What banners are they aliases were they?

Eric Lefebvre

Yes. I don't needfully want to talk specifically astir nan banners successful this case. The impairment charges we had to return are mostly related to nan alteration successful nan discount rate, not needfully successful nan capacity of nan brands. As you know, nan liking rates person been going up and there's been speculation astir a imaginable recession also, which makes our consequence premium spell up a small bit. So nan write-downs are mostly caused by nan summation successful our costs of superior much than because of nan capacity of nan brands. So successful nan context, I'd alternatively not needfully talk astir nan marque specifically, because we do judge those brands are good, and they're not needfully impaired. But evidently we request to comply pinch nan rules and location are a definite number of parameters that we request to abide by and that's 1 of them.

Derek Lessard

Okay. That's adjacent and admit nan color. Thanks, Eric.

Operator

Thank you. [Operator Instructions] There are nary further questions astatine this time. Ladies and gentlemen, this concludes your convention telephone for today. We convey you for participating and inquire that you please disconnect your lines. Have a bully day.