Franchise Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Franchise Group's fiscal 2022 fourth quarter and year end conference call. 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 the speaker presentation, there will be a question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this conference is being recorded. I would now like to hand the call over to your host, Andrew Kaminsky, Executive Vice President and Chief Administrative Officer of Franchise Group. Please go ahead.

Thank you, Gary. 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 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. The forward-looking statements are made as of the date of this call and accept 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 Group's 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 31, 2022, and other filings we make with the SEC. The financial measures 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. But 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 and 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. I'll provide a general update before turning the call over to Eric to provide financial details. We will then be happy to answer questions. Our financial performance in the fourth quarter was in line with the outlook we provided in November. We told you that we were going to move inventory to American Freight, offering value that our customers expect, and we did just that. Comparable transactions in the fourth quarter were down approximately 3% of American Freight, a dramatic improvement from the negative 27% levels experienced earlier in the year. Although we've made progress in working through our high-cost inventory, we still have more to go. There is a renewed optimism at American Freight as the culture of selling value is back in the business, and we are all optimistic that 2023 will be a better year for their financial performance. At Badcock, we continue to test third-party waterfall solutions that we believe will provide a better experience for our customers and dealers. We've been adjusting tests in our 68 corporate stores for most of the last 12 months before rolling out system-wide to our dealers. Importantly, later this week, we are introducing a new waterfall test to seven stores owned and operated by one of our trusted dealers. This will be the first time we've moved the test into dealer locations, and we intend to transition away from providing in-house credit at Badcock by the end of the second quarter of this year. Our franchising activity continued to accelerate across FRG in 2022. We finished the year with 259 new territories sold and a backlog across all brands of 482 locations. We have a substantial organic growth opportunity from converting our large backlog into new unit openings, and this is a priority for our store teams in 2023. It's controllable by us internally, and we have much to gain as new units open and mature over time. As costs of construction materials and labor improve, we believe our franchisees will have an easier time opening stores over the next couple of years compared to the last couple of years. Turning to capital allocation, we did not make any material acquisitions in 2022. Instead, we increased our investment in the brands that we own by opportunistically repurchasing approximately 5.9 million shares at an average cost of about $29.13 in the back half of the year. The repurchases reduced our outstanding shares by approximately 15%. The significant and rapid increase in interest rates has further reduced our discretionary cash flow and increased the bar for capital deployment into outside acquisitions. As a recap, For the full year of 2022, when we spoke to you about a year ago, we shared that we expected to produce approximately $450 million of adjusted EBITDA and $5 in non-GAAP earnings per share. Our actual performance fell short of our original expectations as we delivered $354 million of adjusted EBITDA and $3.63 of non-GAAP earnings per share. I see three key deviations from our original plan. Shortfalls in operational performance, primarily at American Freight, cost us about $1.05 of non-GAAP earnings per share. The increase in interest rates cost us about 47 cents, and then the unplanned repurchase of shares added approximately 15 cents to non-GAAP earnings per share last year. Looking ahead to 2023, we believe adjusted EBITDA will be at least $355 million, up slightly from the $354 we reported last year, which included a 53rd week that contributed approximately $11.3 million of our $354 million of adjusted EBITDA last year. We expect American Freight to rebound, albeit not immediately to its full potential. Pet Supplies Plus, Sylvan, and Buddies are likely to grow in 2023 and offsetting EBITDA growth at A4A, PSP, Sylvan, and Buddies will likely be a slight decline in vitamin shop EBITDA, driven by continued mix shift in favor of lower margin sports nutrition products, as well as a larger decline in Badcox EBITDA as we expect the home furnishings industry as a whole to continue to struggle somewhat until fully landed inventory costs are closer to pre-COVID levels. Overall, we expect to generate approximately $4.4 billion in revenue, $355 million of adjusted EBITDA, and $2.90 of non-GAAP earnings per share. Higher interest rates are expected to cost us about $1.23 per share compared to 2022, and the lower share count is expected to benefit the franchise group by about $0.32 as compared to 2022. From a balance sheet perspective, earlier this month, we closed on a $300 million add-on to our first lien term loan. After witnessing a year like last year when credit markets were substantially inaccessible, I believe the potentially fleeting opportunity to create additional liquidity in a difficult economic environment outweighed the cost of servicing the incremental term loan. We used all of the net proceeds from the incremental term loan to pay down our ABL, and we're extremely grateful for the continued trust and support of our lenders. We intend to reduce our outstanding debt in 2023 through cash flow from operations, which this year will include additional cash generated from an unwind of our excess working capital, which was a large, unanticipated use of cash last year. While significant acquisitions are not a priority until we've delivered, In this difficult environment, there may be one-off opportunities for small tuck-in acquisitions or franchise conversions that can create step function growth in our franchise unit count and royalty contribution. Case in point, today PSP acquired 20 new locations from a competitor in bankruptcy, and they expect to sell those stores to existing franchisees in the coming months. All of these locations will be rebranded under the PSP or Wagon Wash banner. Eric, I'll turn the call over to you to provide financial details, and then we can wrap it up with Q&A. Thanks.