MTY Food Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group, Inc. Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. 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, Tuesday, July 11, 2023. I would now like to turn the call over to Eric Lefevre, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us for MTY's second quarter conference call for fiscal 2023. The press release and MD&A 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 MD&A for more details. I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. We're delighted by MTY's continuing robust financial performance in the second quarter of 2023, marked by adjusted EBITDA of $74.6 million and record high system sales of $1.5 billion. The company's made significant strides towards its objective to supplement acquisitive growth with steady organic growth by investing in its banners, supporting franchise partners, and improving operating creativity and efficiency. During the last quarter, same-store sales rose 5% year-over-year, Canada reported the strongest growth in same-store sales with 6%, followed by the U.S. and international regions with improvements of 4% and 2%, respectively. The second quarter of 2023 represents the first fully comparable quarter on a year-over-year basis since the outbreak of COVID-19, so we have reintroduced same-store sales data and provided some historical information in the MD&A. During the quarter, we opened 73 new locations and closed 77 for a net loss of four locations. This remains short of our objective to grow our store count organically, but it represents our best quarterly net result in the last nine years. Narrowing the gap between openings and closings is a key objective as we continue to build better practices to limit network erosion while opening more new restaurants. This growth momentum on the heels of a robust first quarter also reflects the successful integration of recent acquisitions in the U.S. Two-thirds of system sales are now derived south of the border. The acquisitions of barbecue holdings in the fourth quarter of 2022, along with Wetzel's pretzels and sauce pizza and wine in the first quarter of 2023, have continued the transformation of MTY into a truly diversified North American franchising company. Without losing sight of where we come from, we aspire to continue expanding throughout North America and globally via our local partners. At the end of the quarter, 58% of our 7,124 locations were based in the U.S., 35% in Canada, and 7% internationally. Our top five banners in terms of system sales predominantly operate in the U.S., namely Papa Murphy's, Cold Song Creamery, Famous Dave's, Wetzel's Pretzels, and Village Inn. Through our recent acquisitions, we've also diversified our restaurant offering, which includes 90 different banners of all types and formats. Although we still operate some locations in malls and food courts, their weight has steadily diminished over the years. System sales generated in malls and office towers represented 15% of total sales in the first half of 2023, while street front locations account for most of our network sales at 77%. In comparison, Those proportions in the second quarter of 2013, a decade ago, were 46% in malls and office towers and 44% on the street. Turning to our capital allocation strategy, with the increased leverage resulting from recent acquisitions and the rapid increase in interest rates, the interest charges on our long-term debt increased to $13.5 million last quarter, a sharp increase over last year. As a result, We intend to prioritize debt reduction in the near term while keeping a watchful eye on accretive tuck-in acquisitions on an opportunistic basis. MTY continues to generate strong free cash flows, as shown once again by the $45.1 million generated in the second quarter, and we expect that our capital allocation strategy will quickly provide additional flexibility for future capital allocation decisions. I will now turn the call over to Rene, who will discuss MTY's financial results and greater details.

Thanks, Eric, and good morning, everyone. As previously mentioned, normalized adjusted EBITDA totaled $74.6 million in the second quarter of 2023, up 57% from $47.6 million in the second quarter of 2022. The strong year-over-year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holdings, Wetzel's Pretzels, and sauce pizza and wine, which positively impacted our U.S. and international segment in the second quarter of 2023. The U.S. and international business segments generated 70% of normalized adjusted EBITDA in the second quarter, while Canada accounted for 30%, demonstrating, as Eric mentioned, that our U.S. and international segments continue on their growth momentum as we further increase our presence across North America. In terms of net income attributable to owners, it amounted to $30.4 million or $1.24 per diluted share in the second quarter of 2023 compared to $28.6 million or $1.17 per diluted share in the same period last year. The year-over-year improvement can be attributed to higher normalized adjusted EBITDA and lower income taxes. This was partially offset by an increase in depreciation and amortization, which is the result of the increase in property, plant, and equipment, as well as the increase in our intangibles stemming from the acquisition. The company's interest in long-term debt also increased as a result of our higher leverage and the increase in market interest rates. The company's revenues grew 88% to $305.2 million in the second quarter of 2023 from $162.5 million in the second quarter of 2022. The year-over-year increase is mainly due to the three acquisitions which computed to revenue growth of $16.5 million and $119.9 million, respectively, to franchise operations and corporate restaurants in the U.S. and international segment. In Canada, we are also extremely proud that revenues from franchise operations and corporate restaurants improved 10% and 6% respectively. Given this is the first quarter in which we can say we had no impact from the pandemic when compared to prior year, the Canadian revenues grew on the strength of organic growth from increased customer traffic. As mentioned before, this stems primarily from the growth in system sales, which increased by 7% during the quarter compared to prior year. Turning to liquidity and capital resources, cash flows from operations amounted to $56.3 million in the second quarter of 2023 compared to $30.1 million in the second quarter of 2022. The increase of 87% in operating cash flows is the result of higher EBITDA generated and a more favorable variation in working capital, which were partially offset by higher interest and income taxes paid. Free cash flows reached $45.1 million or $1.84 per diluted share in the second quarter of 2023, compared to $25.3 million or $1.04 per diluted share in the same period in 2022. The improvement in free cash flows is due to the same reason I mentioned for the increase in operating cash flows, partially offset by an increase in CAPEX spend. The increase in CAPEX spend is mainly the result of pre-existing corporate store commitments we had on acquisition, some village refreshes, the reconstruction of a flagship Baton Rouge restaurant in downtown Montreal, as well as further investments in our cyber protection and technology infrastructure. In the second quarter of 2023, we also reimbursed $26.8 million in long-term debt and paid $6.1 million in dividends to our shareholders. At the end of the quarter, MTY had a cash position of $62.6 million and long-term debt of $816.2 million, mainly in the form of bank facilities and promissory notes on acquisition. Our net debt to normalized adjusted EBITDA ratio stood at 3.1 times at quarter end. The company also has a revolving credit facility of $900 million, of which US $590.3 million had been drawn as of May 31st. A hedging strategy with fixed interest rate swaps was implemented last quarter, and we continue to utilize cross-currency interest rate swaps in order to provide additional financial flexibility. Although we didn't repurchase shares in the first quarter, first half of 2023, We recently renewed our normal course issuer bid or NCIB. The NCIB allows us to repurchase for cancellations up to 1.2 million shares representing approximately 5% of outstanding common shares during the 12-month period ending on July 2nd, 2024. We believe the timely purchase of common shares at prevailing market rates is a worthwhile part of a capital allocation strategy. And with that, I thank you for your time and we will now open the lines for questions. Operator?