MTY Food Group Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group, Inc. 4th 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, Thursday, February 15, 2024. I would now like to turn the conference call over to Eric Lefebvre, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us for MTY's fourth 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 CEDAR. 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 delivered a remarkable financial performance in fiscal 2023 with record results across the board, including system sales of $5.6 billion and normalized adjusted EBITDA of $271.9 million, which led to free cash flows of $154.1 million or $6.30 per diluted shares. We're especially proud of those free cash flows as they were realized despite the drastic increase in interest costs, which more than quadrupled during the year. and higher than normal capital expenditures during the year. Our dual growth strategy, leveraging strategic acquisitions and organic growth, largely enabled us to overcome uncertain market conditions and inflationary pressure during the past year. NTY generated system sales growth of 33% year-over-year, largely due to the acquisitions of barbecue holdings late in our 2022 fiscal year and Wetzel's pretzels and sauce pizza and wine early during the 2023 fiscal period. Excluding acquisitions and foreign exchange impact, system sales were up 4%, with our Canadian divisions accounting for most of the organic growth. In the fourth quarter, system sales improved 11% to $1.3 billion, while same-store sales dropped 0.9% year-over-year as consumers reined in discretionary spending, which affected certain segments of our portfolio. The comparable sales decline came mainly from brands commanding a higher price point, while our quick-service restaurant business remained solid in Canada and in the U.S. I'm also encouraged by the positive outcome of the company's increased efforts in usage of data, digital marketing, online ordering, and websites during the past year. Our digital sales grew 25% year-over-year to $1 billion in fiscal 2023. Excluding acquisitions and foreign exchange impact, digital sales rose 5%. There's still a lot of work to do to achieve our objectives, but we continue to take steps to make the customer experience as seamless and engaging as possible. so that the growth momentum continues in the future. The fourth quarter was also highlighted by 94 new store openings, the highest number in any given quarter in our history. That brought us within a few stores of break and even versus store closures for the third consecutive reporting period. Our pipeline of future store openings remains strong at year end, and we're confident that we will continue to open new locations at a solid pace in the future. At the end of the fourth border, our network had 7,116 locations in operation, of which 6,897 were franchised or under operator agreements and 219 were corporately owned. 58% of our locations are in the U.S., 35% in Canada, and 7% international. Turning to our fourth border results, We generated strong normalized adjusted EBITDA and cash flows from operations of $60.4 million and $47.8 million, respectively. The 79% conversion rate of EBITDA into free cash flows is sequentially better than in recent quarters and is reflective of our efforts to maximize cash flows and optimize our asset-light model. As previously communicated, additions to property, plant, and equipment decreased significantly in the fourth quarter to $3.2 million. We expect CapEx will return to a normal run rate in 2024 with some ups and downs as the business adjusts its environment. Of note, we are now going full throttle on our new ERP implementation. This is an investment that will impact 2024 and 2025, and that will benefit the company for an extended period thereafter. To conclude, it should be noted that we recently announced a 12% increase in our quarterly dividend to $0.28 per common share, reflecting our confidence in our ability to generate strong free cash flows in the future. I will now turn the call over to Renee, who will discuss MTY's fourth quarter results in greater details.

Thank you, Eric, and good morning, everyone. As mentioned earlier, normalized adjusted debt totaled $60.4 million in the fourth quarter of 2023, up 13% from $53.5 million in the fourth quarter of 2022. The year-over-year increase in normalized adjusted EBITDA is largely due to the acquisitions of barbecue holdings, Wessel pretzels, and soft pizza and wine for the U.S. and international segments, which accounted for $9.8 million of the increase in the segments, partially offset by a $4.1 million decrease in our Canadian operations. The decrease in Canada stems mainly from higher provisions for lease buyouts and disputes, as well as lower profitability generated by our retail segment, which saw sales and margins shrink as a result of the current economic environment affecting grocers and retailers. The U.S. and international segment accounted for 69% of normalized adjusted EBITDA in the quarter, while Canada represented 31%. In terms of net income as reputable to owners, it amounted to $16.4 million or $0.67 per diluted share in the fourth quarter of 2023, more than doubling over prior year, which was $7.1 million or $0.29 per diluted share. The year-over-year improvement can mainly be attributed to our higher normalized adjusted EBITDA and lower income taxes. These factors were partially offset by several items, including, amongst others, greater depreciation of property, plant, and equipment, and right-of-use assets, increased amortization of intangible assets, and higher interest rates on long-term debt, which were all greatly impacted by our newest acquisitions, as well as higher interest rates mentioned before. Of note, as mentioned in previous investor calls, we put into place hedging strategies in 2023, including three-year and two-year fixed interest rate swaps, which have provided the company with savings of approximately $500,000 of interest payments monthly, for a total of $3.2 million in savings in 2023. Company revenue grew 16% year-over-year to $280 million in the fourth quarter, mainly driven by the acquisitions of barbecue holdings, Wetzel's Pretzels, and sauce pizza and wine acquisitions. The impact of these transactions delivered revenue growth for corporate restaurants and franchise operations of 50% and 18% respectively in the U.S. and international segments. In Canada, revenue from franchise operations declined 1% year-over-year, while food processing distribution and retail sales decreased 10% due to the existing market conditions and grocers' heightened focus on promoting house labels. Turning to liquidity and capital resources, cash flows from operations amounted to $47.8 million in the fourth quarter of 2023, compared to $37.4 million in the fourth quarter of 2022. Free cash flows reached $44.3 million or $1.81 per diluted share in the fourth quarter of 2023 compared to $34.8 million or $1.42 per diluted share in the same period in 2022. The 27% increase was the result of our higher EBITDA as well as lower income taxes paid and improvements to our working capital year over year. We are especially pleased with our free cash flow growth given the almost doubled interest payments made during the quarter. In the fourth quarter of 2023, we reimbursed 27.6 million of long-term debt, paid 6.1 million in dividends to our shareholders, and repurchased 80,800 shares for a total consideration of 4.2 million, on top of paying 12.1 million in interest on our bank facilities. At the end of the quarter, NCUI had a very healthy cash position of $58.9 million and long-term debt of $767.4 million, mainly in the form of bank facilities and promissory notes on acquisition. Our revolving credit facility has an authorized amount of $900 million, of which $558 million U.S. dollars has been drawn. Finally, 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 lines for questions. Operator? Thank you.