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MTY Food Group Inc
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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc. Q4 2019 Earnings Conference Call. [Operator Instructions] 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 on Monday, February 24, 2020.I would now like to turn the call over to Eric Lefebvre, Chief Executive Officer. Thank you. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for joining me for MTY's 2019 Fourth Quarter and Year-end Conference Call. The press release and MD&A with complete financial statements and related notes were issued earlier this morning and are also available on our website and on SEDAR.[Foreign Language] Please be aware that we will refer to certain indicators that are non-IFRS measures. You can refer to our MD&A for more details. I also remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated.As you are aware from our press release issued on February 14, we chose to delay the issuance of our results until today, following certain allegations made by one of our active employees. The delay was caused by the timing of the allegations rather than their substance. Given the timing of communication from the employee and the cycle leading to the approval of our financial statements by the Audit Committee, the Board elected to be prudent and to take the additional time available to compile, review and deliver information to its auditors as part of that process. While I cannot go into details, I can say the allegations are baseless and the matters raised are all topics that MTY had evaluated and dealt with in the past. The delay in the production of our financial statements was caused by the time required to review and confirm the positions and judgments we have made about those matters in the past.We were able to confirm that our positions and judgments were sound. And as such, there's -- there was no impact on our results or financial statements. As you can appreciate, we have to stick with what is on our press release, and I won't be able to provide more color at this time. As a result, I will not answer any questions on that topic during the Q&A session.To summarize, the allegations were baseless, and there was no impact on our results. The delay was strictly caused by the timing of the allegations and not by their substance.Now turning to our 2019 results. Let me do a brief recap of the past year. In fiscal 2019, we realized 5 transactions, including Allô! Mon Coco, Yuzu Sushi, South Street Burger, Casa Grecque and Papa Murphy's, one of the largest acquisitions in our history. We also completed the acquisition of 70% of Turtle Jack's in the days following the end of our fiscal period. With these recent acquisitions, our system sales are now almost evenly split between Canada and the U.S.I'm very proud to say that we finished the year on a positive note for a multitude of key metrics. Overall, results demonstrated positive same-store sales, organic growth in system sales, solid growth in EBITDA, with an organic growth in 3 of the 4 quarters this year and free cash flow growth, both as an absolute number and on per share basis. Furthermore, I would also like to highlight the solid performance of our food processing, distribution and retail segment, which almost doubled its revenues over the last year, with revenues quickly approaching $100 million.Now turning to a brief overview of our network. Consolidated same-store sales grew by 1.5% during the fourth quarter. Canada posted a positive same-store sales for the ninth consecutive quarter with a 1.5% growth. Quebec, Western provinces and the Maritimes continued to show positive same-store sales growth with respective growth of 2.5%, 1.5% and 4.1% while Ontario locations experienced a decline of 1%, mostly due to weakness in mall sales. Same-store sales in the United States posted a third consecutive quarter of growth with a 2.7% increase as our initiatives continue to bear fruit. As you know, our exposure to the West Coast is important. It represents 52% of our total U.S. system sales. We're pleased to report a growth of 1.7% in that region. And as far as the East Coast is concerned, the region's performance remained strong with a 3% -- 3.7% increase.We continued to experience negative same-store sales growth in our stores located outside of North America. The decline of 7.6% is primarily attributable to our stores in the Middle East, where economic conditions remain very difficult, and in Asia, where we were impacted by some factors that are out of our control, but that should not affect the long-term profitability of our locations. For the full year, same-store sales increased 0.4%. We are very proud of this accomplishment as it represents the first full year positive same-store sales growth result since 2012. Canada was up 1.1%. United States grew 0.4% after a very slow start in the first quarter, and international locations were down 7.8%.System sales for the fourth quarter were up 45% to $1.02 billion. The increase is primarily attributable to the recent acquisition of Papa Murphy's, which generated 25% of our sales during the fourth quarter. The net organic growth in our network sales was $10.6 million for the quarter, fueled by the impact of positive same-store sales. For the year, the net organic growth was $3.2 million.We finished the fourth quarter with 7,373 locations. We opened 84 new locations during the last 3 months of the year, up 24% compared to last year while we closed 152 locations. Of the closures, 49 were in Canada, 82 in the United States and 21 were abroad. Since we acquired Papa Murphy's in May 2019, 32 locations have closed, slightly less than anticipated at the time of acquisition. There are still many locations that are considered fragile and at risk of closing, and the next 12 months will be critical. Our team is working very hard with our franchise partners to prevent as many as possible from closing.For the full year, we acquired 1,644 locations via 5 transactions, opened 303 new locations and closed 550. Our network sales grew by 30% to reach a historical high of $3.6 billion, surpassing the $3 billion mark for the first time. For the full year, our mall exposure decreased from 22% of our sales to 17% while the proportion of sales from our street front locations increased from 63% to 72%. The decrease in our exposure is mainly the result of our latest acquisitions, which are less exposed to food courts, in general.Now let's discuss MTY's financial results. Our fourth quarter EBITDA increased 30% to reach a historical high of $43.0 million compared to $33.0 million for the same period last year. The increase was mainly driven by acquisitions, most particularly, Papa Murphy's in the U.S., and the acquisitions of Casa Grecque, Allô! Mon Coco and Yuzu Sushi in Canada. We are also very pleased that we generated positive organic EBITDA growth for the third time this year with a $0.9 million or 3% increase in the quarter. We're also very pleased with the performance of our food processing and retail division, which increased profitability by almost 40% year-over-year as well as our franchise segments, which demonstrated strong growth, both on an absolute and margin basis. The net income attributable to shareholders increased to $20.7 million or $0.83 per share for the fourth quarter of 2019 from $13.2 million or $0.53 per share for the same period last year.Turning now to liquidity and capital resources. In the fourth quarter of 2019, MTY generated cash flows from operating activities of $37.9 million compared to $30.5 million last year. For the full year, our operations generated cash flows of $113 million, surpassing the $100 million mark for the first time in our history. On a per diluted share basis, our cash flows from operations were $4.48 per share while they were $4.03 per share in 2018, an increase of over 14%.During 2019, our capital was predominantly allocated to acquisitions, for which we disbursed $332.1 million. Dividends to shareholders amounted to $16.7 million and share repurchases amounted to $5.2 million. For 2020, we plan on reducing the amount of investing in acquiring new businesses as we do not anticipate major acquisitions. We will continue to pay dividends to our shareholders in accordance to our dividends policy, and we will continue to be opportunistic with our NCIB.Free cash flows for the quarter were $43.6 million, up significantly from $27.5 million for the same period last year. For the full year, we generated free cash flows of $116.9 million, up from $92.6 million in 2018.MTY ended the year with a healthy financial position. As of November 30, MTY had $50.7 million in cash on hand and a long-term debt of $540.7 million, mainly in the form of holdbacks on acquisitions and bank facilities.To conclude, we are very pleased with the accomplishments realized in 2019, which was a transition year for MTY. Our team worked tirelessly to make MTY ready for the challenges the next few years will bring and delivered strong performance while making all these adjustments. I'm extremely proud of all 900-plus MTY employees and want to thank all of our franchise partners who are delivering great food every day.For 2020, we will maintain our focus on maximizing shareholder value by making every effort to generate positive growth from our existing concepts, integrating our recent acquisitions and seeking potential acquisitions to increase our market share. With that, I thank you for your time, and I will now proceed to answer your questions.
[Operator Instructions] Your first question comes from the line of Michael Glen of Raymond James.
Eric, just to -- I know that you said you weren't going to answer any questions on the whistleblower, but this obviously is a huge talking point. So I mean I'm just trying to understand. At the time that this individual made the allegations, had indeed then the financial statements being audited -- fully audited?
Michael, well, for the -- audit was completed with the approval of financial statements yesterday at the Board meeting. So this is when the audit was completed.
So up until the time that those -- so there had not -- the auditors had not signed off then on the financial statements at the point of those allegations.
No.
Okay. And can you give an idea then on the range of topics that were flagged by the individual?
Yes. We can't go into the specifics, and simply for the reasons that the allegations were deemed to be baseless, so there's no point listing them at this time. But it was a wide area of allegation, so it's not only one topic.
Okay. And in retrospect, was it justified to postpone the release of the financial results?
Given the timing of the allegations, yes. It was the right decision. We had time. The regulatory deadline was February 28. So we had time to make sure that we did things in a prudent and conservative manner, which is how MTY does things, in general. So we took the time. We took a step back to make sure we review and reassess our positions. And now that we have taken that time, we are happy we did.
And can you explain for a whistleblower -- how the whistleblower process works exactly at MTY?
Yes. We have a whistleblower policy. So the policy, basically, I think, is very standard for any industry. So it goes to direct manager. And then if it's -- the allegations are about something else, it can go all the way to the Chairman of the Audit Committee.
Okay. And then -- okay. So I'll move away from the whistleblower. In terms of -- can you just talk about the U.S. EBITDA in the quarter from circling back to when you reported Q3? Was -- the sequential contribution from Papa Murphy's, was that in line with where you wanted it to be in the period? Are you happy with the contribution?
We're happy with the contribution. It's probably a little bit lower than the guidance we had given when we did the transaction, and it's not a surprise at this point. We are in the transition for a lot of different things at Papa Murphy's in operations and marketing, in a lot of different functions. So we have to incur some fees, and we have to invest a certain amount of money to make sure that we do the right things going forward. So it's probably a little bit lower than what we had indicated, but we're happy with the contribution. We're certainly happy with where we see the business headed.
Okay. And the original comment was that the -- when you reported Q3 was that Papa Murphy's would contribute something like 3x the EBITDA on a sequential basis from the Q3 period. Was -- can you give an idea of where it came in relative to your original expectation?
Yes. Well, it came in about 3x what they had given us in Q1 -- in Q3, sorry, for the first quarter with Papa Murphy's, but it is slightly lower than what we had indicated when we did the transaction. So if you remember that presentation we made to the investors when we announced the transaction, so we're a little bit lower than that.
Okay. And then when we look at the organic -- or it's one of the walks provided in the -- not the organic one, but the EBITDA walk, the $6.3 million for U.S.A. and international contribution from increased due to acquisitions, is that entirely attributable to Papa Murphy's? Or I guess there's probably a few other things in there. I'm just trying to get a sense as to what amount of that $6.3 million is Papa Murphy's.
No. It's all Papa Murphy's.
It's all Papa Murphy's. Okay. And then just finally, on store closures, you provided a bit of commentary. Like as we look into next year, can you talk about is there anything on the horizon with respect to any of the brands we should think about in terms of maybe stemming some of the pace of the store closures?
Yes. Well, the store closures are a little bit everywhere. So it's not one brand specifically that has store closures. So yes, obviously, we have a number of initiatives that we are putting in place now and that are rolling out to try to address that. Some store closures will always happen. Some of them were -- need to happen, but I think some of them can probably be prevented. And we have a number of initiatives that we are putting in place now to work with our franchisees, work with our landlords, work with all the business partners and all the stakeholders that are involved in these decisions and try to make the stores as profitable as possible and have the best condition possible for our stores to remain open and do good business.
And across one of your larger brands, Cold Stone, there had been some store closures that took place through the past couple of years. Is that -- should we anticipate that, that pace of closure will moderate in coming years?
Well, Cold Stone is -- just a number of stores will -- obviously, there's always going to be more store openings than more store closures for Cold Stone just because it's such a big brand. So I think I'd like to have a 0 store closure, but I don't think that's realistic. So there will always be some store closures and -- but hopefully, we're going to have better store openings. And then that's -- things are going to go well.
Your next question comes from the line of Sabahat Khan of RBC Capital.
Can you maybe give us some updates on some of the specific initiatives that you said you were going to be working on at Papa Murphy's, specifically things around technology updates there and the menu innovation? I just want to get an understanding of how far along you are right now?
Yes. Well, thank you for the question. In terms of information technology, I assume that what you're referring to is really the loyalty platform that we're launching in the online ordering. So the online ordering is doing well, and it's a platform that we're constantly improving. So hopefully, the process is going to become smoother and smoother for the clients. And we're trying to have more and more of the online ordering. And we're seeing the metric tick a little bit in the right direction, so that's very positive.In terms of the loyalty program, it's being rolled out in test markets at the moment. So we have a few test markets that are live. We want to make sure we do the right things and really nail it the first time. So the full rollout is expected early in our second quarter. But yes, so the loyalty is being rolled out in the moment.We have also a few other platforms that are IT related but are also more business related that are being rolled out. Some of them are aimed at providing more timely assistance to our franchisees with regards to their profitability so we can monitor a certain number of metrics that will help us address any concerns we have earlier in the process and make sure that we don't have a major problem down the road. So that's something that we are rolling out as well, and it's really showing some really positive results.Now you mentioned, in terms of product innovation, so we are working with the entire marketing group. Really, it's not only R&D, but we are working on a marketing calendar, which is something the business hadn't had for a long time. So we have a marketing calendar in place now. We have R&D-dedicated people that are coming up with some really interesting products. And the fact that we didn't have a calendar and the fact that these launches hadn't been planned normally, you plan these things, like, 12 to 18 months ahead of time. So I mean we are fighting to get these things out earlier, but we need to make sure that we align the supply chain, the marketing and everything to make these product launches successful. So we are doing that. We are testing a few products also. We're being very systematic in how we want to test. We don't necessarily want to test something for the entire market and then have something that doesn't work. So we're a little bit more systematic in the approach. But yes, it's going well. There's nothing instantaneous, so we need to take the time to collect the data properly and make sure that we have the right products and the right product launches and that the execution is spectacular for the customer. So there's a lot going on there.
All right. And then I think for store closures at Papa Murphy's a while ago, it was a number mentioned something on the ballpark of potentially up to 100. I guess now that you've had that business for some time, is that the number you're still thinking about in terms of over the long run or do you have a different view on that?
Yes. Well, I'd like to make it smaller, for sure. So far, we have 32 closed. It's a little bit less than what we had anticipated. And hopefully, we'll be able to keep it this way. We have a number of stores that are more fragile that we need to monitor. But hopefully, we can keep those stores open, and then we can work with our franchise partners to make these stores as profitable as possible. So I don't necessarily want to give an adjusted guidance at this point. All I'm saying is we're a little bit ahead of our schedule.
Okay. And then on acquisitions, I mean if I heard you correctly, you mentioned that you might sort of moderate the larger ticker ones over the next while. Is that more sort of focus on the core business? Or is the pipeline any different than it was a little while ago? What would you look at? What's kind of driving that thought process?
Well, there's a variety of reasons, and one of them is we've made a lot of acquisitions in the last 2 years, including 2 larger ones with Imvescor and Papa Murphy's and then a number of medium-sized ones and a few smaller ones. And I think at this point, we need to take a breather and to make sure that we stabilize everything before we start acquiring again. And while we're doing that, we'll be able to -- let's build a treasure chest to be able to have the financial resources to make larger acquisitions without necessarily going too far into our credit facility. So we just want to make sure that we take a conservative approach. We want to make sure that we focus on the assets we have in the portfolio now and make everyone succeed. And once we've stabilized everything and that we feel confident, we can move forward. Again, we'll do it, but at the moment, we're certainly focusing more on the existing brands than focusing on M&A.
Okay. And then just one last one for me. I guess more just on the process around the commentary on the whistleblower stuff. I guess from your perspective, this is the end of that announcement, and we shouldn't expect to hear anything else from your end?
That's right.
Your next question comes from the line of Vishal Shreedhar of National Bank.
In your disclosure documents, you note increased competition and increased uncertainty. Just hoping you can provide some perspective on this. And particularly in light with your strategy to grow same-store and help reduce the store closures as much as possible, so maybe you can help me understand how those 2 things interact?
Yes. Well, in terms of competition, there's always more. And there's more and more restaurants. And there's also more customer food dollars going into restaurants, which is a good thing. But competition is certainly very fierce, and it's coming from areas where we didn't see competition before. So I'm thinking of the ghost kitchens that are starting to pop a little bit everywhere. We're thinking of meal kits that are a little bit more popular than they were before and the number of restaurants that are opening almost on a daily basis is really large. So for us, competition is always there, probably now more than it was before. So hopefully, the customers can keep spending more food dollars in the restaurants, but there's certainly a lot of competition.In terms of uncertainty, well, there's always uncertainty related to a lot of different things, uncertainty related to customer behavior, uncertainty related to political landscape, uncertainty related to the economic cycles. There's certainly uncertainty just at the moment with the COVID-19 virus that's out there. There's always uncertainty related to our supply chain. There's a blockade on railways in Canada at the moment that brings uncertainty on our supply chain as well. So there's always something else. So there's always going to be uncertainty, and it brings a certain amount of risks.
Okay. So I guess what I was trying to get at is, in light of this increasing competition and uncertainty, is there any path for MTY to provide royalty-type relief to your franchisees in order to help them transition against this challenging backdrop?
Yes. Well, our franchisees, for sure, is -- our goal is to make our franchisees profitable. So we are business partners. We are in it together. We want to make our franchisees profitable. There are a number of things that we want to do before we give relief on royalties. And the first one is really to make sure that the operations are taken care of, that we are operating at optimal levels, that the customers are wild every time they go in the store. So there's a lot of work to do. And before we give any relief, we also want to go into our restaurants, address the local marketing campaign and the local marketing strategies we have and try to improve business. So there are a few stores that are under relief for various circumstances. For example, in the city, there's -- they're rolled in front of the store. Well, that's a problem. Obviously, if the customers can't go to your stores, it's going to create some hard times, so we need to address those. But yes, in general, we try to address any problems that the store would face with different strategies instead of trying to give a relief to the franchisee, which really doesn't solve anything in the long run.
Okay. So I guess this comment of royalty-type relief to address this competitive backdrop isn't materially bigger than it's been in prior years. Is that a fair way to look at it?
Absolutely.
Okay. On Papa Murphy's, the same-store sales, I know you have a lot of things on the go, but it kind of weakened a little bit sequentially. Is that due to the all the disruption happening from all the initiatives? Or how would you characterize that?
No. The initiatives take time to gain traction. So we're going one by one with the initiatives. We're confident we have a lot now on the go. So if anything, it's going to help. And there's certainly no distraction or no disruption caused by all these initiatives. But with Papa Murphy's, it's a business that had had declining sales for a number of years. And it's hard to pin them around, especially in the context where the weather was more favorable to ice cream in our Q4 than it was to Papa Murphy's, and it showed with our performance with our ice cream brands.
Okay. In terms of -- just changing topics here. And I know acquisitions aren't going to be as big of a theme in 2020 as it was in 2019. But when you look at the acquisition multiples, are you noticing them trend higher generally over time? Or is it stablish for the ones you look at?
Well, every time you have a more competition in the processes, the multiples tend to creep up. In our case, because we are going after slightly larger acquisitions, you'll see the multiples go up. You have more sophisticated sellers, you have bankers. They increase the competition for the processes. So the multiples will creep up a little bit, but it's not necessarily more than it was in the past. I would say the multiples are fairly stable, and we're not necessarily seeing sellers being more greedy or more demanding than they were in the past few years.
Okay. And you touched on this already, but the rail blockages and coronavirus. Is it fair to say impact is fairly limited at this point in your business?
Yes. Well, at the moment, it is limited. We do have some anecdotal evidence of some impact in certain communities for the virus, but I mean that can -- I guess, that can deteriorate fast if something happens. So for now, we're -- I think we're good, and we haven't seen too much impact for -- from either the virus or from the rail. And hopefully, it's going to stay this way, but we haven't seen anything so far.
Your next question comes from the line of George Doumet of Scotiabank.
I do have a whistleblower question. Maybe without getting into them too specifically, but just wondering, over the last 10 days, to what extent did your auditors maybe look into any of your specific financial allegations made?
Well, the auditors -- they don't audit one specific topic. They audit the entire financial situation. And every topic will need to be addressed. And obviously, these allegations bring a certain way to look at these risks that might be different than they were before. So they've done their work. We've done our work with them to make sure that everybody's comfortable with what we're doing, and what we're publishing today. And this is it, but it's not -- as I said, the auditors don't provide an opinion on allegations. They provide an opinion on our financial statements, which is a lot bigger than just these allegations.
Okay. That's helpful. And some pretty good numbers on a -- from a comp trend in the U.S., especially in the East. Is that predominantly favorable weather? Or maybe can you call out some other trends or some other factors that contribute to that strength?
I'd like to say we do a terrific job. So that's probably the main element. I think the teams are doing amazing. We have a lot of good things on the go for a lot of our concept. So I think we're doing an amazing job. Weather certainly helps. And I think it's normal weather this year. Last year, if you remember, in Q4 of '18 and in Q1 of '19, I blamed the weather, and we had some extreme cases that really hurt our business. And this year, in Q4 was -- weather was a lot more normal. And I would say the same thing for the beginning of Q1, where you're not seeing these extreme weather patterns that we had in last year.
I guess it leads to my next question. Like, we're well into Q1, just wondering if the same trends you're seeing, I guess, maybe in Canada as well as the U.S., are they kind of -- is the momentum there as well?
Well, we started the year with good momentum for sure. There has been a number of different things affecting our businesses in different areas, but we did start the year with good momentum.
Okay. Great. The retail operations have been doing really well. I'm just wondering, is that deliberately an area that you would like to maybe build up over the next little bit? Do you see that being a significant percent of sales maybe you're -- through M&A as well, maybe about that specific part of the business?
Yes. Well, retail is a really good segment for us. It's something that is relatively new for MTY. And I think we're putting more emphasis on it now that we're seeing how good it can be for us, for the brand image, also for the -- everything that's in the stores. And we have a certain number of guidelines we have for our products, but we certainly have a team now that's dedicated to it, and that's pushing hard to try to develop new markets, develop new products and then push to get our products on the shelves as -- in as many places as possible.
Okay. And just one last one, if I may, Eric. On the buyback activities, it seems like it's kind of going up compared to historical standards. So I'm just wondering, is that something that you plan on maybe stepping up if the share price doesn't fully recover? Is that in your mind right now, a good way to deploy capital to shareholders as opposed to maybe M&A?
It is. It is. And again, if MTY is cheap -- for us, if MTY's the best company we can acquire, we'll acquire MTY. We'll buy shares of -- in our own company. When you buy MTY, for us, there's no integration risk. There's no cost associated to advisers. There's no integration. There's -- everything is really easy. And we'll be opportunistic. If MTY is trading at a price that is too cheap for what we think it should trade, we'll certainly continue to buy back.
[Operator Instructions] Your next question comes from the line of Derek Lessard of TD Securities.
I was wondering, did you guys bring in any third parties to review the allegations? And I guess if not, is this something that you'd expect to do?
Well, this is not necessarily something I'm prepared to discuss, Derek. Unfortunately, this something we'll keep for inside the company. I don't think we need to give these details.
Okay. I'm just -- I guess -- you did say that you think that this is the end of the, I guess, the impact from the whistleblower, and we shouldn't hear anything from that. Is that clearly what I understood?
I didn't say that. So no, I mean I can't control what's going to happen next, unfortunately. In our case, we've done our homework regarding the allegations that were in front of us. Now what the next steps are going to be, I don't know. I can't tell you what the impact is going to be for us. We're trying to close the book on it, but I don't know what else is going to happen at this point.
Okay. So switching gears. Are there any challenges to converting some of the Papa Murphy's corporate stores to franchise -- to franchisees? And can you just maybe let us know where you are in that process?
Yes. Well, when -- last time we talked, we mentioned there were going to be 3 major territories that would be transferred to franchisees. One of them was transferred during the fourth quarter. One of them was transferred during the first quarter of this year. And the last one is expected to go in the second quarter of this year.
Okay. And maybe just one final one for me. Again, on strong sales comp pretty much across the board in Canada and in the U.S. Are you able to talk or give any color around what you're seeing in terms of traffic versus check or pricing?
Yes. Well, we're always trying to increase the basket size. So we have a few brands where we see the check going up. We can't take too much pricing these days. We've -- we need to be extremely careful with the price we take. So we have good traffic comps at the moment. And then we also have a good basket size comps in some of our brands.
There are no further questions at this time. I turn the call back over to the presenter.
Thank you, again, for joining me on this call. I look forward to speaking with you again for our next quarterly call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.