MTY Food Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Third 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. 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, October 11, 2023. I would now like to turn the call over to Eric Lefevre, Chief Executive Officer. Please go ahead.

Good morning, everyone. Thank you for joining us for MTY's third 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. MTY continued to reap the benefits of its dual growth strategy in the third quarter of 2023, with normalized adjusted EBITDA increasing 44% year-over-year to $72.9 million. We are very pleased with the performance of our latest acquisitions, which helped increase system sales 33% to $1.5 billion in the quarter, as well as with same-store sales growth of 3% produced by the concepts we have owned for more than 12 months. A few months ago during our first quarter conference call, I mentioned that most key performance indicators were flashing green across our management dashboard. This strong financial performance was sustained in the second quarter with normalized adjusted EBITDA of $74.6 million and record system sales of $1.5 billion. And the momentum continued in the third quarter with comparable numbers across the board. MTY continues to deliver profitable growth with exceptional predictability despite a mixed economic environment marked by higher interest rates, inflationary pressures, and heightened price sensitivity on the part of consumers. During the quarter, NTUI's network opened 87 locations. This is the highest number of openings in a quarter in our history. That brings our year-to-date total to 236 new locations opened, which is also a record for the first nine months of the year. Construction and supply chain issues are gradually dissipating, while delays to secure permits and schedule inspections are slowly trending back to normal in most jurisdictions. However, obtaining adequate and timely financing for franchisees has been more challenging recently. The cost of money has increased significantly in the last two years, and banks have become slower to disperse funds, putting pressure on new store development. During the quarter, NTWISE Network closed 92 locations for a net store closure of five locations. Once again, this quarter, we fell just short of our objective to achieve net store growth as we continue to implement measures and best practices to limit the closures as much as possible. The 92 closures represent our best performance in the third quarter since 2016 when our network was much smaller. However, we remain focused on our objective to deliver net store growth. Looking more closely at our network, we ended the third quarter with a total of 7,119 locations, of which approximately 97% were franchised. The geographical split among MTWISE locations consisted of 58% based in the U.S., 35% in Canada, and 7% international. Moving on to same-store sales, Canada and the U.S. recorded sales increases of 3% and 2% respectively, while international region was stable compared to the third quarter of 2022. In the U.S., the increase is mainly attributable to quick-service restaurants, as Papa Murphy's, Sweet Frog, and Cold Stone Creamery continued to be positive this quarter. In Canada, the sales lift came from the casual dining and quick service restaurant concepts. During the last few months, we've noticed that consumers have become more demanding for their hard-earned dollars in this current environment. The increase in prices of the last three years has resulted in higher expectations, and our brands have to elevate their game to be relevant in this market. Value does not necessarily mean lower prices, but rather an experience that matches or exceeds pricing of our menu. NTY has a diversified restaurant offering, including 90 different banners of various types and formats to satisfy a wide array of customer preferences and increasing our resilience in the face of economic uncertainty. Quick service and fast casual dining concepts make up 90% of our restaurants and over 70% of our system sales. More than three quarters of our sales are generated by street front locations, while mall and office towers represent 15% and non-traditional locations 9%. Turning to our capital allocation strategy, we will keep a watchful eye on accretive token acquisitions while prioritizing debt repayment and building a reserve for future opportunities. Our goal remains to produce solid organic growth to complement the growth from acquisitions, which has been part of MTY's DNA for the past 20 years. 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, normalized adjusted EBITDA totaled $72.9 million in the third quarter of 2023, up 44% from $50.6 million in the third quarter of 2022. The 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 segments in the third quarter of 2023, and accounted for 64% of the year-over-year growth. The U.S. and international business accounted for 66% of normalized adjusted EBITDA in the quarter, while Canada represented 34%. Our normalized EBITDA margins for the franchising and corporate store segments improved year-over-year with margins of 54% and 10%. The corporate store margin of 10% is a drastic improvement over prior year when this segment reported at a loss. On the retail distribution and manufacturing segment front, margins did see a slight dip from 13% in 2022 to 10% in 2023, mostly due to the termination of a licensing agreement in the U.S. In terms of net income attributable to owners, it amounted to $38.9 million or $1.59 per diluted share in the third quarter of 2023 compared to $22.4 million or $0.92 per diluted share in the same period last year. The year-over-year improvement can be attributed to higher normalized adjusted EBITDA, lower income taxes, and the impact of the revaluation of certain derivative interest swap hedging arrangements entered into earlier in 2023. The three- and two-year fixed interest rate swap arrangements have also accounted for an average interest saving of $600,000 per month since exemption on our cash flows. These factors were partially offset by several items, including, amongst others, higher depreciation of property, plant, and equipment, and right-of-use assets, as well as greater interest on long-term debt. These increases were the result of the acquisitions of barbecue holdings, Wetzel Pretzels, and sauce pizza and wine, as well as higher market interest rates witnessed across North America. Company revenue grew 74% to $298.1 million in the third quarter of 2023, from $171.5 million in the third quarter of 2022. In the U.S. and international segment, a $104.6 million surge in the corporate-owned location revenue, largely due to our acquisitions in the past year, contributed to the year-over-year revenue growth. This growth was complemented by a $17.6 million increase in franchising revenues in the U.S. and international segments, of which $13.4 million results from the acquisitions. In Canada, organic revenue growth from franchise operations improved 3% year-over-year on the strength of heightened system sales, while the food processing, distribution, and retail divisions posted similar growth. Turning to liquidity and capital resources, cash flows from operations amounted to $51.7 million in the third quarter of 2023 compared to $42.3 million in the third quarter of 2022. Free cash flows reached $43.5 million or $1.77 per diluted share in the third quarter of 2023 compared to $40.9 million or $1.67 per diluted share in the same period in 2022, mostly due to the increase in normalized adjusted EBITDA. In the third quarter of 2023, we reimbursed $26.3 million of long-term debt, paid $6.1 million in dividends to our shareholders, and $12.4 million in interest on our bank facilities. At the end of the quarter, NTUI had a cash position of $54.3 million and long-term debt of $784.3 million, mainly in the form of bank facilities and promissory notes on acquisitions. Our revolving credit facility has an authorized amount of $900 million, of which U.S. $571.8 million has been drawn at the end of the quarter. Our net debt-to-normalized adjusted EBITDA ratio stood at 2.8 times at quarter end. And with that, I thank you for your time and will now open the line for questions. Operator?