Franchise Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Franchise Group's fiscal 2022 second quarter conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. 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, Jacinda. 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 would like to mention that certain matters discussed on 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. If the forward-looking statements are made as of the date of this call and accepted as required by law, the 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 25, 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 a 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, but we include it because management believes it provides a 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?

Thank you, Andrew, and good afternoon to our listeners, and thank you for joining us. Before we discuss FRG business, I'd just like to give a quick shout-out to Charlie Loudermilk, who passed away yesterday at the age of 95. Charlie happens to be the founder of Aaron Rents, and he also happens to have been an all-around good guy, among other things. He was larger than life, and his legacy does live on in many aspects of what we do at FRG and how we do it. So moving on to FRG business, I will provide a general update before turning the call over to Eric to provide financial details. We'll then be happy to answer questions. The franchise group's second quarter financial performance was within our expectations, but for the full year 2022, we're lowering our financial outlook for revenue to approximately $4.3 billion from $4.45 billion, adjusted EBITDA to approximately $390 million from $450 million, and non-GAAP earnings per share to approximately $4 a share from $5 a share. Inflationary pressure is leading to lower profitability in our home furnishings businesses, while profit, growth, and pet health and wellness and education services are providing the diversification and scale that allowed FRG to declare another quarterly dividend at a $2.50 per share annual rate. Specifically, product and freight costs within our home furnishings businesses are reducing margins, And food and energy inflation is taking a larger share of our lower-income customers' wallet, which is reducing transaction volumes. This combination is meaningful. Although American Freight is emphatically expected to be a material contributor to FRG's long-term growth, the impact of inflation this year is likely to result in approximately $100 million less EBITDA than what the current store base would be expected to generate in the steady state. American Freight is expected to generate approximately $200 million less revenue than planned. That revenue loss comes with roughly 30% EBITDA flow through. Additionally, the nearly billion of revenue that American Freight will generate will come at a cost of over 500 basis points of excess freight. That math totals over $100 million of EBITDA impact at American Freight this year alone. We are frequently asked how FRG will perform in a suboptimal economic environment. Shareholders, lenders, vendors, and franchisees all want to understand the downside just as we want to understand the downside when we perform diligence on potential acquisition candidates or vendors. I think this environment will provide an excellent opportunity to enhance our credibility with all of our stakeholders by demonstrating that FRG is built to bend but not to break. FRG's cumulative profitability and cash flow are more reliable in whole than in part, and that ultimately should make FRG more valuable as a whole than in parts. The primary difference between the business climate today and the one we shared after the first quarter is that freight costs and home furnishing product costs have peaked. We're now ordering new inventory at lower product costs and lower incoming freight costs. Some cost reductions are more material than others, But generally, we're headed in the right direction. Markets are ultimately a self-correcting mechanism, and we believe the supply and demand imbalance for product and human capital are both correcting in our favor, and we expect this trend to continue. Despite these changing trends in our favor, since the velocity of transactions are much lower than normal, it will likely take the rest of this year to sell the older, higher-cost inventory to our system. We're also keeping an eye on energy prices as the surge in gas prices has deterred the marginal customer from getting in the car to make an incremental trip to the store. We've seen this phenomena manifest itself with fewer transactions and larger transaction sizes as customers attempt to limit their need to buy fuel. We expect typical market forces ultimately to reduce gas prices back to within a normal range and provide relief for our customers. If we're wrong and fuel prices continue to increase, it would be worse for our customers and our same-store profitability. As a management team, we spend significant time diligencing acquisitions to further diversify and scale FRG, but we recognize the tremendous opportunity to drive material incremental cash flow and earnings per share from continuing to block and tackle as we drive franchise unit growth and execution within our current brands. More importantly, unit growth is within our current brands, is completely within our control and does not require any M&A or capital market cooperation. Franchising activity continues to accelerate across FRG. For the first six months of 2022, we sold 88 new territories and opened 54 new locations. We're starting to see cost of construction materials and labor improving and believe our franchisees will have an easier time opening stores over the next couple of years compared to the last couple of years. I'll be happy to answer any questions after Eric provides the financial details. Before I hand it over, I just want to publicly thank all of our financial partners for their support over the last several months. FRG is very lucky to have the support of a great group of lenders and real estate partners. It's very easy to get lender support when the risk-free rate is zero and when the economy is humming, but I've always learned the most about people in stressful times. When the credit market shut down completely last quarter, Oak Street Real Estate stepped up and closed on the sale of our Badcock DCs anyway, and earlier this week closed again on the Badcock headquarters sale. We also appreciate that our revolver lenders chose to give us a larger share of their balance sheets despite suboptimal market conditions and recently upsized our revolver. And our term loan lenders are the nimblest, most creative, and smartest partners we could ask for, and we appreciate their efforts on our behalf. Everybody plays His role really well and everybody works well together and the group we've assembled is uniquely positioned to help us take advantage of opportunities that are going to come our way in the current environment. Their patience will pay off and I appreciate their support of FRG and their trust in our management team. Eric, I'll turn it to you to provide the financial details and then we can wrap up with Q&A. Thank you.