Franchise Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Franchise Group's fiscal 2022 first quarter conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. During the question and answer session, if you wish to ask a question, please press zero, then one on your touchstone phone. I would now like to hand the conference over to your host, Andrew Kaminski, Executive Vice President and Chief Administrative Officer of Franchise Group.

Thank you, Richard. Good afternoon, and thank you for joining our conference call. I'm on the call with Brian Kahn, Franchise Group's President and CEO, and Eric Seaton, Franchise Group's CFO. Before getting started, I'd like to mention that certain matters discussed in this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by the forward-looking statements. The forward-looking statements are made as of the date of this call and except, as required by law, franchise group assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For more detailed discussion of these and other risks and uncertainties that could cause franchise groups' actual results to differ materially from those indicated in the forward-looking statements, Please see our form 10-K for the fiscal year ended December 25th, 2021, and other filings we make with the SEC. The financial measures discussed today include non-GAAP measures that we believe investors focus on in comparing our results between periods and among our peer companies. Please see our earnings release in the news and events section of our website at FranchiseGRP.com for reconciliation of non-GAAP financial measures to GAAP measures. Non-GAAP financial information should not be considered in isolation from as a substitute for or superior to GAAP financial information. We include it because management believes it provides meaningful supplemental information regarding our operating results when assessing our business and is useful to investors for informational comparative purposes. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. Now I'd like to turn the call over to Brian. Brian?

Thanks, Andrew. And good afternoon and thank you all for joining us. I'll provide a general update before turning the call over to Eric to provide financial details. We'll then be happy to answer questions. First of all, I'm extremely proud of Franchise Group's overall performance in the first quarter. Our financial performance persevered despite consumer headwinds driven by spikes in interest rates and energy costs. as well as the other obstacles like supply chain constraints and general cost pressures on wages and products that have persisted for some time now. FRG's diversification across various discretionary and non-discretionary products and services continue to serve us well. Our diversification is a matter of capital allocation decisions that we can control over time. But the real heroes within FRG are our A-plus management teams who live in the trenches, and who seem to compete with each other to see who can be the most nimble and adapt most rapidly to changing environments in order to produce the most reliable cash flows for us. I can't stress enough how important our management teams are to FRG. We have some of the best partners in the world running our brands, and it's their collective success that's allowing us to gain momentum with all of our stakeholders as we continue to diversify and scale FRG through strategic internal and external investment opportunities. Within FRG, our homes furnishings business has seen wider variability of financial performance than our other businesses as cost pressures have been higher there to the tune of over 25%, and that's driven higher prices to our customers. Unit sales have been lower, fairly consistent for over a year now, partly due to the high demand during COVID and partly due to price increases that ultimately price out the marginal customer each step of the way. Demand for health and wellness, pet, and educational services and products have seen far less variability. Within FRG, these businesses also happen to be the least discretionary and have the least amount of cost pressure and pricing variability. That said, across all of Franchise Group, we estimate our freight and logistics costs are running in excess of $100 million more than they will in the steady state. As these cost excesses subside, FRG and our franchisees and dealers stand to be significant beneficiaries. And while we don't expect any immediate gratification, we do believe that recent consumer headwinds are likely to catalyze a quicker return equilibrium sooner than we thought on our last conference call. Moving to the first quarter results, I'll start with a quick recap of our home furnishings businesses. In the first quarter, System-wide, Buddy's had negative same-store comp of negative 1.6%, with franchisee comps declining 2.2% and corporate stores growing 1.6%. Buddy's opened 10 new franchise stores in the first quarter, ending with 323 stores operating under the Buddy's banner. Buddy's also awarded 12 new area development agreements in the quarter, increasing its backlog to 102 franchise locations. Badcock comped down negative 4.5% for the first quarter. We're in the process of transitioning away from Badcock's in-house credit program in favor of adding several new and enhanced payment options from our trusted third-party partners. We have excluded the traditional profitability of the credit business from our non-GAAP results. During the quarter, we entered into a series of real estate transactions at Badcock. We've closed one, generating gross cash proceeds of $94 million, and we've signed definitive purchase and sale agreements for Badcock's distribution centers, corporate headquarters, and other real estate for a combined more than $170 million of additional cash proceeds. The majority of the Badcock real estate transactions are expected to close in the current quarter, and combined with the $400 million of consumer receivables sold in December, all of these transactions will bring gross proceeds from the sale of non-core assets at Badcock to over $660 million since we closed on the purchase of Badcock for $580 million last November. American Freight comped down 6.4% for the quarter. A-Freight opened two net new company-owned stores in the quarter, bringing total store count to 369 units. We continue to be very optimistic about the growth prospects for A-Freight franchising. We expect that franchisee demand will continue to increase when the A-Freight ecosystem normalizes. In its first full quarter with FRG, Sylvan performed well and delivered positive comps of over 16%. Sylvan opened three new locations and sold three new franchises. We continue to work with the Sylvan team on accelerating franchise growth and are starting to see traction in that process. Yesterday in Baltimore, Sylvan concluded its first in-person franchise convention in three years, and you can feel the excitement among the Sylvan management team and its franchisees. It's a wonderful combination when you can offer franchisees a chance to provide a service to their communities while also generating a profit for the privilege. Sylvan operates 563 physical centers today and over 700 total locations, and we expect that count to grow substantially over time. Pet Supplies Plus generated system-wide same-store sales comps for the first quarter of positive 8.5%. Franchisee comps grew over 10% in the quarter, while corporate stores grew 5.7% for the quarter. PSP continues to accelerate its growth and brand building with 19 new store openings and the sale of 21 new franchise area development agreements in the first quarter, bringing total backlog at PSP to 216 locations. PSP's acquisition of Wagon Wash is off to a successful start, and it's been well received by customers and franchisees. We believe that Wagon Wash will be an attractive opportunity for franchisees to add smaller, more focused stores within their geographies. and that this second concept will complement existing PSP footprints or provide franchisees new market opportunities or both. Vitamin Shop comps were positive 6.1% for the first quarter due to continued increases in store traffic and growing customer interest in its health and wellness products and services. Direct-to-consumer revenue accounted for over 25% of the business in the quarter. Franchising continues to build momentum at Vitamin Shop as well, with 12 stores now in backlog, and we see growing interest from franchisee candidates as evidenced through Discovery Day attendees. Before I turn the call over to Eric, I just want to reiterate how impressed I am by our management team. They collectively are great stewards of our capital, and they're the driving forces behind Franchise Group's opportunities to invest internally and externally as we continue to diversify and scale our business. And once again, I'd like to thank all of our dedicated associates for their tenacity and for their support of each other, their support of our franchisees and dealers, and ultimately the success of Franchise Group. Eric?