MTY Food Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Thought Group Inc. Q1 2023 Earnings Conference Call. At this time, all participants are in a listening mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by the zero for operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded today, Wednesday, April 12, 2023. I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for MTY's first quarter conference call for fiscal 2023. The press release and MDNA with complete financial statements and related notes were issued earlier this morning and are available on our website as well as on CDAR. 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 MDNA for more details. I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. We're pleased with the robust operation on financial performance realized in the first quarter of 2023, highlighted by normalized adjusted EBITDA of $64 million and a record high system sales of $1.4 billion. We're particularly proud of that organic growth complemented our business acquisitions with year-over-year organic growth of 20% in consolidated normalized adjusted EBITDA and 14% in system sales. During the first quarter, The average unit volume of our restaurants was 39.6% higher than it was during the first quarter of 2020, which was the last quarter before the pandemic. This organic growth reflects the impact of numerous initiatives put in place many months ago that are now bearing fruit. The key performance indicators are flashing green across our management dashboard, but we're not yet satisfied and we will keep pushing for more. That being said, the acquisitions of Wetzel's pretzels and sauce, pizza, and wine during the quarter, along with the barbecue holdings transaction, which closed last fall, largely contributed to the year-over-year growth in EBITDA and system sales. Wetzel's pretzels, which added over 360 locations to MTY's network, delivered strong results during the holiday season in December. We expect this deal to be accretive to MTY's earnings, EBITDA, and free cash flow per share in 2023. On the Canadian side, our network generated 32% system sales growth in the first quarter as the business continued on its strong momentum compared to a quarter marked by pandemic-related restrictions last year. Digital sales for the first quarter, meanwhile, increased 17% year-over-year to $246.2 million, including the positive impact of acquisitions and foreign exchange rate. Our digital sales, which consists mostly of takeout orders and delivery sales, benefit from the increased focus of our team put on digital marketing and sales channel, emphasizing the growing importance of the customer experience when they are away from our restaurants. Looking deeper at normalized adjusted EBITDA, our consolidated margins declined to 22% in Q1 2023 due to the higher weight of corporate stores following recent acquisitions. However, taken individually, our segment margins are all trending favorably compared to last year, with the exception of the US franchising, which is mostly flat at just above 50% when excluding acquisition costs. Turning to our network, we ended the first quarter with a total of 7,128 locations, of which approximately 97% were franchised. We acquired 379 locations during the quarter, opened 76 and closed 115 others in what we consider a typical turnover for the first quarter of any period. Both openings and closings were slightly better than our 10-year average in proportion of our network, which is in line with our objective of reducing closures and increasing the pace of openings. Construction and supply chain issues have largely subsided early in 2023, but we're still experiencing significant delays to obtain permits and final inspections in many jurisdictions. Despite these temporary issues, our management team remains dedicated to delivering healthy organic growth and maximizing the assets in our portfolio. Finally, looking ahead to capital allocation priorities for 2023, we will continue to opportunistically seek acquisitions, reduce debt, invest in our business, and reward shareholders with dividends. I will now turn the call over to Renee, who will discuss MTY's financial results in greater details.

Thank you, Eric, and good morning, everyone. As previously mentioned by Eric, MTY delivered record-breaking normalized adjusted EBITDA of $64 million in the first quarter of 2023, which includes $1.1 million in acquisition-related expenses. The 79% year-over-year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holdings, Wetzel pretzels, and sauce pizza and wine, which positively impacted our U.S. and international segment in the first quarter of 2023, generating 13 million in EBITDA when excluding the impacts of IFRS 16. This is a 63% improvement to the U.S. and international segment over prior year and is a strong and early indicator of the strength of the brands we just acquired. The Canadian segment also generated a 52% year-over-year growth in normalized adjusted EBITDA with a return to pre-pandemic market conditions in Canada. Organic growth in the Canadian segment accounted for 96% of the total improvement generated primarily by our franchising segment. In terms of net income attributable to owners, it amounted to $18.4 million or 75 cents per diluted share in the first quarter of 2023 compared to 16.6 million or 68 per diluted share in the same period last year. Net income in the first quarter was negatively affected by a few factors, including higher interest on long-term debt caused by our increased borrowings, as well as higher borrowing rates, increases in the depreciation of property, plants, and equipment, and right-of-use assets due to the higher number of corporate stores in our portfolio, additional unrealized foreign exchange losses, and acquisition-related transaction expenses linked to the Wessel pretzels and sauce pizza and wine deals in the amount of $1.1 million. Although we know that some of these items are non-recurring in nature, we expect some of these increases, such as the increase in our interest expense and amortization of tangible assets, to remain for the foreseeable future. Looking at our revenues, the company saw a growth of 104% year-over-year to $286 million in the first quarter of 2023. Revenues more than doubled, driven by the barbecue holdings, Wetzel pretzels, and soft pizza and wine transactions that raised revenues for franchise operations and corporate store restaurants in the U.S. and international segment by $14.1 million and $110 million, respectively. In Canada, franchise operations, corporate restaurants, as well as food processing, distribution, and retail revenue improved 33%, 31%, and 5%, respectively, as the overall business recovered from government-imposed restrictions related to the pandemic in the first quarter of 2022. Turning to liquidity and capital resources, cash flows from operations totaled $36.7 million in the first quarter of 2023 compared to $38.8 million in the first quarter of 2022, while free cash flows amounted to $29.2 million or $1.19 per diluted share in the first quarter of 2023 compared to $36.1 million or $1.47 per diluted share in the first quarter of 2022. Both our cash flows from operations and free cash flows were impacted by higher interest rates, as well as two one-time non-recurring payments totaling $10.4 million during the first quarter of this year. Excluding the impacts of those non-recurring payments, the conversion of EBITDA into cash flow is in line with the potential of MCY to turn EBITDA into cash flows in this higher interest environment. Excluding variations in non-cash working capital items, income taxes, interest paid, and other, operations generated $63.3 million in cash flows in the first quarter of 2023, compared to $36 million in the same period last year. In the first quarter of 2023, we also reimbursed $29.6 million of long-term debt and paid $6.1 million in dividends to our shareholders. At the end of the first quarter, NCY had a healthy cash-on-hand balance of $58.7 million in and long-term debt of $839.7 million, mainly in the form of bank facilities and promissory notes on acquisition. Our net debt to normalized adjusted EBITDA ratio stood at 3.6 times at quarter end, which is at the higher end of our comfort level. The company has a revolving credit facility of $900 million, of which $609 million, or $827.1 Canadian dollars, has been drawn. A hedging strategy with interest swaps has been implemented to provide additional financial flexibility, as well as minimize interest payments during a time when market rates are extremely high and volatile. And with that, I thank you for your time, and we will now open the lines for questions. Operator?