MTY Food Group Inc.

Good day and welcome to the MTY Group fiscal 2024 second quarter results conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Eric Lefebvre. Please go ahead.

Good morning, everyone. Thank you for joining us for NTY's second quarter conference call for fiscal 2024. 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 CDARC. During the call, we will be referring to forward-looking statements and certain numbers that are non-IFRS measures. You can refer to our MD&A for more details. Please note that all figures presented on today's call are in Canadian dollars unless otherwise stated. I'd like to open with a few highlights and a look into MTY system sales for the quarter. Emerging from a difficult January and February period, MTY's second quarter produced positive system sales growth for our U.S. locations, along with higher profitability and EBITDA margins in our franchising segment. More specifically, in the second quarter of 2024, quick service restaurants and fast casual restaurants have remained strong in the U.S. and reported same-store sales growth of 0.3% and 0.9%, respectively, for the three-month period ended May 31, 2024. The franchising segment normalized adjusted EBITDA increased 1% to reach $52.6 million in the quarter, compared to $51.9 million in the second quarter of 2023, with normalized adjusted EBITDA as a percentage of revenues remaining stable at 52%. Despite higher working capital outflows, we are happy with our free cash flow production, which amounted to $1.01 per share for the quarter, and $5.21 per share in the last 12 months. System sales for the quarter remained relatively stable at $1,459,000,000, a decrease of 1%. Most of the decrease in system sales came from Canada, with a decline of $13.8 million, or 3%, while the U.S. saw an improvement of $3.5 million. In Canada, the fast casual concepts drove a large portion of the decrease, representing 70% of the drop. The slight increase in the U.S. of 3.5 million can be attributed to the gains of the QSR and fast casual locations being partially offset by a decline in our casual dining restaurants. The snack category continued to perform extremely well in the U.S. with Cold Stone, Wetzel's Pretzels, Sweet Frog, Planet Smoothie, and Pinkberry all posting strong gains during the quarter. Regarding same-store sales, the quarter ended May 31, 2024, saw a decrease of 2.1% over the last year. Same-store sales in the U.S. were sequentially better than in Q1, with a decline of 1%, while the Canadian and international locations saw same-store sales declines of 3.6% and 8.1%, respectively. Digital sales for the second quarter of 2024 increased by 8% compared to the same period last year, from $266.8 million to $287.7 million. Digital sales represented 20% of total sales compared to 19% in the same period last year. Canadian digital sales are in line with the same period last year, while U.S. digital sales saw a growth of $20.9 million. Pivoting to look at MTY location count. The company ended the quarter with 7,107 locations compared to 7,112 locations at the end of the previous quarter. During the second quarter, the company's network closed 90 locations and opened 85 for a net negative five. This quarter marks the fifth consecutive quarter of net closures being between three and five locations. Of note, 25 of the closures in the second quarter are Papa Murphy's locations, which brings the total closures for this brand to 38 in the first six months. Goldstone and Wetzel's Pretzels continue to outperform when it comes to openings. As of May 31, 2024, 97% of locations were franchised or under operator agreements, and the remaining 3% were operated corporately by MTY. Lastly, the company renewed a normal course issuer bid program on June 28, 2024. During the three-month period ended May 31, 2024, the company repurchased and canceled 266,700 shares for a total consideration of $12.8 million. This brings the total to 337,500 shares repurchased so far this year for a consideration of $16.4 million. I will now turn the call over to Rene, who will discuss MTY's financial results in greater details.

Thank you, Eric, and good morning, everyone. During the quarter, MTY's total revenues decreased slightly from $305.2 million in Q2 2023 to $303.7 million in the current year. Although overall revenues decreased, the U.S. franchising segment saw an increase of 3%. This is mostly due to the increase in recurring revenue streams as well as an increase in gift card breakage revenue stemming from higher redemptions and usage of gift cards. The Canadian franchising segment, however, saw a decrease of 3%, mostly as a result of decreasing recurring revenue streams. This was the result of lower system sales, which, as mentioned by Eric, decreased by 3% for the quarter compared to prior year. Globally, food processing distribution and retail revenue decreased by 8% due to lower sales in the Canadian retail segment. which are the result of market conditions and grocers' increased focus on promoting house labels. The U.S. retail segment, however, saw an increase of $0.6 million in revenues, resulting from new listing for our Cold Stone Creamer in 2024. In terms of normalized adjusted EBITDA, we saw a decrease of 1%, with $73.7 million in the quarter compared to $74.6 million in Q2 of 2023. As a reminder, normalized adjusted EBITDA excludes our SEP implementation costs. It's also important to note that while our quarterly EBITDA was lower than that of last year, it still represents the second best quarter ever reported with Q2 2023 being the best in the history of MTY. The U.S. and international normalized adjusted EBITDA contributed to 73% of total normalized adjusted EBITDA, realizing an increase of 3% or $1.7 million. while Canada contributed 27% of total normalized adjusted EBITDA and a decrease of 12% or $2.6 million compared to the same period last year. For both the Canadian and U.S. and international segments, the fluctuations were primarily impacted by the changes in recurring revenue streams with operating expenses remaining relatively flat for the quarter year over year. Our franchising segment margins, as well as our overall company margins, stayed steady at 52% and 24% respectively when compared to prior year. Corporate store margins saw a slight dip to 13% compared to 14% in prior year due to an overall increase in minimum wages and supply chain costs. We are optimistic, however, on the supply chain side as we see inflationary pressures stabilizing to some degree. Turning our attention to the income attributable to owners, it amounted to $27.3 million or $1.13 per diluted share compared to $30.4 million or $1.24 per diluted share in Q2 2023, representing a decrease of 10% year over year. The decrease is primarily attributable to lower normalized adjusted EBITDA, as well as impairment charges of $3.2 million taken on some corporately owned restaurants, and higher foreign exchange losses reported on the P&L. Moving on to look at cash flows, the second quarter had cash flows from operating activities of 40.6 million compared to 51.9 million in Q2 of 2023. A decrease of 11.3 million mainly attributable to an unfavorable working cap variance during the quarter. The negative working capital variance stems mostly from timing of collections and payables including promotional fund spending, third-party gift card sales collections, and a material outstanding sum from an insurance carrier related to one of our corporate locations. Pre-cash flows net of lease payments decreased to $24.3 million in the quarter, or $1.01 per diluted share, compared to $29.5 million, or $1.21 per diluted share, in Q2 2023. The decline is the result of the working cap variance I mentioned, partly offset by a decrease in investments in capital assets during the quarter compared to prior year. Regarding liquidity and capital stock resources, as of May 31, 2024, the amount held in cash totaled $52.3 million, a decrease of $6.6 million since the end of the 2023 fiscal period. As Eric mentioned, during the three months ended May 31, 2024, we repurchased and canceled 266,700 shares for $12.8 million through our NCIB and paid $6.7 million in dividends to our shareholders. We recently had to pause our NCIB due to a covenant restriction in our credit facility agreement, limiting dividends and NCIB distributions to $50 million per year. I'm happy to report that we signed an amendment yesterday which removes this restriction. Regarding our long-term debt, at the end of the second quarter, we had $725.6 million drawn from our revolving credit facility with repayments of $16.3 million made during the quarter. During the last 12 months, we have repaid a total of $77.9 million towards our long-term debt. Interest on long-term debt decreased by $1.6 million as a result of entering into fixed interest rate swaps, which have resulted in savings of $1.5 million U.S. dollars or 2 million Canadian this quarter, compared to 0.6 million US dollars in the same period last year. As mentioned in our subsequent events notes, we sold in early June of this year, our fixed interest rate swap of 200 million for a sum of 4.8 million US dollars, which will be recorded in our cash flows in our third quarter. Looking ahead, I'd also like to note the upcoming quarterly dividend payment of 28 cents per share on August 15th, 2024. And with that, I thank you for your time and will now open the lines for questions. Operator?