MTY Food Group Inc.

Good morning and welcome to the MTY Food Group 2025 Second Quarter Results Earnings Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided for you at the time for questions. If anyone has any difficulty hearing the conference, you may press star zero for operator assistance at any time. Listeners are reminded that portion of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on MTY food groups, risks, and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 13, 2025, which is posted on Cedar Plus. The company's press release, MD&A, and financial statements were issued earlier this morning and are available on its website and on Cedar Plus. All figures presented on today's call are in all Canadian dollars, unless otherwise stated. This morning's call is being recorded on Friday, July 11, 2025 at 8.30 a.m. Eastern Time. I would like to turn the call over to Mr. Eric Lefer, Chief Executive Officer of MTY Food Group. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us for MTY's second quarter of 2025 conference call. I'm joined today by our Chief Financial Officer, René Saint-Ange. Last quarter was a tale of two geographies. Current macroeconomic conditions remain highly fluid and in some cases challenging. U.S. consumers have been particularly affected by economic uncertainty, which is being reflected in our results, and that of the broader restaurant industry. On the other hand, Canada was a bright spot throughout Q2. Following a soft Q1, business improved sequentially in March, April, and May. Canadian same-store sales increased by 1.4%, reflecting broad-based strength across most of our banners, especially those in our casual dining segments. The story was more challenging in the U.S., where the volatility we saw in Q1 became more pronounced, resulting in a 3.8% decline in same-store sales. The softness was broad-based across our U.S. portfolio, regardless of banner or restaurant segment. Although there were some bright spots, such as Village Inn, nearly all banners were impacted by a more cautious consumer, including Colson Creamery and Wetzel's Pretzels. Performance was similar across all our restaurant segments via QSR, fast casual, or casual dining. Our year-to-date performance is largely in line with the North American restaurant industry. In the current environment, it's become even more important for MTY to intensify initiatives that will increase the pace, energy, and agility of our company. Over the past few years, We've made significant improvements to strengthen our roster of talent and increase the pace of innovation in food, technology, or business practices. I'm incredibly excited by what I see in the pipeline, and I believe we are in the early innings of an evolution that will gradually bear fruit. One fundamental change I'm especially enthusiastic about is our product innovation. Most brands typically have three to five new product launch or LTO windows per year, which in the past were organized just a few months in advance. Due to the short lead times and the many departments involved in making a new product launch successful, executions sometimes suffered and launches were not as effective as they could have been. Fast forward to today, the vast majority of our brands plan their product launches 12 to 15 months in advance compared to the very few just three, four years ago. We are driving brands towards adding more product launches and LTOs to increasingly delight and excite our guests. All of this is part of our strategy of being a high-paced, high-energy, and nimble company that will thrive in today's environment. Another investment that I am ardent about is digital, which you've heard me discuss in previous quarters. MTY is a company rich in consumer data, and combined with our growing investment in technology, data scientists, consumer data platforms, and AI, we believe we can unlock even more demand potential for our restaurants and improve our overall guest experience. Digital sales grew by 3% this quarter and now represent 21% of total system sales. Currently, our digital successes are more concentrated than some of our U.S. brands, and we're excited about the benefits this experience will bring to our Canadian business and smaller U.S. brands once it's rolled out across our network. Shifting gears to store count, we opened 76 locations and closed 77, resulting in a net decrease of one location for the quarter. Enhancing the profitability of our restaurant network remains a key focus, and we continue to strengthen our portfolio of locations through a combination of closures of underperforming locations and building a strong pipeline of openings. As of July 1st, we had a total of 108 locations under construction, and our goal of net location growth over the medium to long term remains unchanged. Of note, we opened 35 new locations in the month of June alone, indicating a good start to our third quarter. Turning to our normalized adjusted EBITDA performance, we experienced a 5% decline this quarter. The decline was entirely driven by our corporate store segment, partially by design. As I just mentioned, we are focused on enhancing our store network, and we made a strategic decision in the last few months to take back ownership of nearly 50 underperforming Papa Murphy's locations that have high potential. Our corporate stores were also impacted by the combination of cautious consumer and prime cost pressures. This quarter, normalized EBITDA margins of our corporate segment came in at 9%, which we believe is a healthy and acceptable level given the composition of our portfolio. It's also important to highlight that our franchising segment, which represents our bread and butter, delivered a growth of 3%, while our retail segment also grew by 9%. Retail remains a powerful category for MTY with substantial growth potential. We're optimistic, owing to the early success of several products, in our nascent listings outside Quebec. NTUI continues to generate very strong free cash flows consistent with the strength of our asset-light business model. In the second quarter, cash flows from operations was approximately $40 million and free cash flows net of lease payment came in at around $24 million. Both figures were largely flat compared to last year. The second quarter typically generates lower cash flows than other quarters because of many annual recurring variances that happen consistently every year. We remain committed to a balanced capital allocation strategy, one that supports strategic growth while also returning value to shareholders through dividends and share repurchases. During the quarter, we repurchased just under 300,000 shares under our normal course issuer bid in line with the prior quarter. Going forward, we will continue to be flexible in the opportunistic regarding our use of cash. Finally, I would like to take a moment to highlight the significant progress we've made on our ERP implementation, a truly foundational initiative for MPY. I'm pleased to report that our Canadian Go Live was completed on time and on budget, marking a major milestone for the organization. This type of changes is never completely frictionless, but we're encouraged by how quickly and smoothly our teams have adopted the new system. I want to extend my sincere thanks to our head office staff across all functions for their exceptional effort, long hours, steadfast commitment throughout the process. Their dedication has been and continues to be instrumental to the successful rollout. Looking ahead, we're gearing up for the US implementation, which will take place in two phases, the first in October, followed by a second one in December. We remain confident in our timeline and are leveraging the lessons learned from Canada to ensure a seamless transition. With that, I'll now turn it over to Renee, who will discuss MTY's financial results in greater detail.

Thank you, Eric, and good morning, everyone. Looking more closely at our operating segments, Canadian franchising revenues increased by 4% to $37.5 million, mainly due to increases in both sales of material to franchisees and recurring revenue streams. Canadian recurring revenue streams increased as a result of the improvements in our organic system sales of 3%. Meanwhile, in the U.S. and international segment, franchisee operations saw largely flattish year-over-year revenues at $65.3 million, a slight improvement of $0.3 million over prior year. This was the result of a favorable foreign exchange swing of $2.2 million, offset by a 4% decline in organic system sales. On the expense side, operating costs in Canada went up by $1.2 million year-over-year, to $21.5 million, mostly due to cost of sale of material to franchisees. The cost of sale to franchisees fluctuated in line with the increase in revenues. Meanwhile, I'm happy to report that in the U.S. and international segment, operating expenses decreased by 1.4% to $28.1 million. This was the result of a $1.2 million decrease in controllable expenses, reflecting MTY's continued focus on disciplined cost management. This was partly offset by an unfavorable $1 million foreign exchange impact. As for profitability, normalized adjusted EBITDA for the franchise operations came in at $54 million, an increase of 4% compared to last year's $52.6 million, with margins of 53%, a 1% improvement over prior year's margins of 52%. Moving over to the corporate operations, Canadian revenues decreased by 5% to $11.2 million, due to a reduction in the number of corporate stores. U.S. and international revenues declined by 1% to $120.3 million due to a decline in same store sales, which was partially offset by a higher number of corporate locations compared to the second quarter of 2024. Operating expenses for the Canadian segment decreased by $1.1 million to $10.7 million while the U.S. and international segment rose by 5% to $109.5 million due to a higher number of corporate stores as well as generalized pressures on prime costs. Normalized adjusted EBITDA for the corporate store segment came in at $11.3 million, down $5.5 million from last year. As Eric mentioned earlier, this decline explains our year-over-year decline in consolidated normalized adjusted EBITDA. Globally, revenue from food processing distribution and retail grew by 4.4% to $40.2 million, driven by an increase in retail sales of 4% and an increase in food processing and distribution of 6%. The retail segment continues to be a segment with a multitude of growth opportunities across Canada and the U.S. Normalized adjusted EBITDA for the segment reached 4.7 million, up 9% from last year, with margins up to 12% from 11% last year. Turning our attention to the income attributable to owners, it amounted to $57.3 million, or $2.49 per diluted share, compared to $27.3 million, or $1.13 per diluted share in Q2 2024. The increase was mainly due to accounting for the positive foreign exchange variations on intercompany loans. Moving over to cash flows, we continue to generate strong operating and free cash flows. The second quarter had cash flows from operating activities of $40.2 million compared to $40.6 million in Q2 of 2024. Free cash flows net of lease payments decreased slightly to $23.6 million in the quarter compared to $24.3 million last year. The decline was largely due to lower EBITDA, partly offset by lower capital expenditures. As mentioned in previous quarters for 2025, we are targeting capital expenditure levels lower than 2024. As mentioned by Eric, during the three months ended May 31, 2025, we repurchased and canceled 297,000 shares for $12.6 million through our NCIB and paid $7.6 million in dividends to our shareholders. We ended the quarter with a net debt of $623.5 million, a net reduction of $32.7 million since November 2024. Since Q2 of 2024, we have repaid a total of $69.1 million in long-term debt. Considering our strong cash flow generating ability, our debt to EBITDA of approximately 2.4 times is a level of debt that continues to give us flexibility to make acquisitions should the opportunity arise. And with that, I'd like to thank you for your time and turn it back to Eric for closing remarks.