Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the MTY Food Group Inc Q4 2019 Earnings Conference C all. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 24th, 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 on MD&A with complete financial statements and related notes were issued earlier this morning and are also available on our website on SEDAR. [Non-English content]. 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 14th, 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 in 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 had made about those matters in the past. We were able to confirm that our positions and judgments were sound, and as such, 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 five 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 three of the four quarters this year, and free cash flow growth both as an absolute number and on a 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 CAD 100 million. 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 continued 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. As far as the East Coast is concerned, the region's performance remains strong with a 3.7% increase. We continue 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%, U.S. 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 CAD 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 CAD 10.6 million for the quarter, fueled by the impact of positive same-store sales. For the year, the net organic growth was CAD 3.2 million. We finished the fourth quarter with 7,373 locations. We opened 84 new locations during the last three 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 five transactions, opened 303 new locations, and closed 558. Our network sales grew by 30% to reach a historical high of CAD 3.6 billion, surpassing the CAD 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. Let's discuss MTY's financial results.
Our fourth quarter EBITDA increased 30% to reach a historical high of CAD 43.0 million, compared to CAD 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 CAD 0.9 million or 3% increase in the quarter. We are 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 segment, which demonstrated strong growth both in an absolute and margin basis. The net income attributable to shareholders increased to CAD 20.7 million, or CAD 0.83 per share for the fourth quarter of 2019, from CAD 13.2 or CAD 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 CAD 37.9 million, compared to CAD 30.5 million last year.
For the full year, our operations generated cash flows of CAD 113 million, surpassing the CAD 100 million mark for the first time in our history. On a per diluted share basis, our cash flows from operations were CAD 4.48 per share, while they were CAD 4.03 per share in 2018, an increase of over 14%. During 2019, our capital was predominantly allocated to acquisitions, for which we disbursed CAD 332.1 million. Dividends to shareholders amounted to CAD 16.7 million, and share repurchases amounted to CAD 5.2 million.
For 2020, we plan on reducing the amount 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 CAD 43.6 million, up significantly from CAD 27.5 million for the same period last year.
For the full year, we generated free cash flow of CAD 116.9 million, up from CAD 92.6 million in 2018. MTY ended the year with a healthy financial position. As at November 30, MTY had CAD 50.7 million in cash on hand and a long-term debt of CAD 540.7 million, mainly in the form of holdbacks and 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+ 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.
To ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael Glen of Raymond James. Please go ahead. Your line is open.
Good morning, Eric. Eric, I know that you said you weren't going to answer any questions on the whistleblower, this obviously is a huge talking point. I'm just trying to understand, at the time that this individual made the allegations, had indeed then the financial statements been audited, fully audited?
Well, good morning, Michael. Well, for the audit was completed with the approval of financial statements yesterday at the board meeting. This is when the audit was completed.
Up until the time that the auditors had not signed off then on the financial statements at the point of those allegations?
No.
Okay. Can you give an idea then on the range of topics that were flagged by the individual?
Yeah, we can't go into the specifics, simply for the reasons that the allegations were deemed to be baseless. There's no point listing them at this time. It was a wide array of allegations. It's not only one topic.
Okay. 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 28th, 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. 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.
Can you explain for a whistleblower, how the whistleblower process works exactly at MTY?
Yeah. We have a whistleblower policy. The policy basically, I think is very standard for any industry. It goes to a direct manager and then if the allegations are about something else, it can go all the way to the chairman of the audit committee.
Okay. I'll move away from the whistleblower. In terms of, can you just talk about the U.S. EBITDA in the quarter? If I'm 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? Were 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. It's not a surprise at this point. We are in transition for a lot of different things at Papa Murphy's, in operations and marketing and in a lot of different functions. 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. 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. The original comment was that when you reported Q3 was that Papa Murphy's would contribute something like 3x the EBITDA on a sequential basis from the Q3 period. Can you give an idea of where it came in relative to your original expectation?
Yeah. Well, it came in about 3x what it had given us in Q3 for the first quarter with Papa Murphy's. It is slightly lower than what we had indicated when we did the transaction. If you remember that presentation we made to the investors when we announced the transaction. We're a little bit lower than that.
Okay. 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 CAD 6.3 million for USA and international contribution from increased due to acquisitions. Is that entirely attributable to Papa Murphy's? I guess there's probably a few other things, and I'm just trying to get a sense as to what amount of that CAD 6.3 million is Papa Murphy's.
No, it's all Papa Murphy's.
It's all Papa Murphy's. Okay. Just finally, on store closures, you provided a bit of commentary. 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?
Well, the store closures are a little bit everywhere, so it's not one brand specifically that has store closures. 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 need to happen. I think some of them can probably be prevented. 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.
Across one of your larger brands, Cold Stone, there had been some store closures that took place through the past couple of years. Should we anticipate that pace of closure will moderate in coming years?
Cold Stone is just a number of stores, where obviously there's always going to be more store openings and more store closures for Cold Stone, just because it's such a big brand. I think I'd like to have a zero store closure, but I don't think that's realistic. There will always be some store closures but hopefully we're going to have better store openings and then things are going to go well.
Okay. That's it for my questions, thanks.
Your next question comes from the line of Sabahat Khan of RBC Capital. Please go ahead. Your line is open.
Thanks. Good morning. 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 innovations? I just want to get an understanding of how far along you are right now.
Yep. Well, thank you for the question. In terms of information technology, I assume that what we're referring to is really the loyalty platform that we're launching in the online ordering. The online ordering is doing well, and it's a platform that we're constantly improving. 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. That's very positive. In terms of the loyalty program, it's being rolled out in test markets at the moment. 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. The full rollout is expected early in our second quarter.
Yeah, so the loyalty is being rolled out at 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. 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.
We have a marketing calendar in place now. We have R&D dedicated people that are coming up with some really interesting products. The fact that we didn't have a calendar and the fact that these launches hadn't been planned, normally you plan these things 12 to 18 months ahead of time. 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. 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. We're a little bit more systematic in the approach. Yeah, 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. There's a lot going on there.
All right, thanks. I think for store closures at Papa Murphy's a while ago, there was a number mentioned something on the ballpark of potentially up to 100. I guess now that you've had the 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?
Yeah. 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, 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, hopefully we can keep those stores open, we can work with our franchise partners to make the stores as profitable as possible. 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, on acquisitions, if I heard you correctly, you mentioned that you might sort of moderate the larger ticket ones over the next little while. Is that more sort of focused on the core business, or is the pipeline any different than it was a little while ago? 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 past two years, including two larger ones with Imvescor and Papa Murphy's, and then a number of medium-sized ones and a few smaller ones. I think at this point we need to take a little breather and to make sure that we stabilize everything before we start acquiring again. While we're doing that, we'll be able to 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. 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.
Once we've stabilized everything and that we feel confident we can move forward again, we'll do it. At the moment, we're certainly focusing more on the existing brands than focusing on M&A.
Okay. 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.
Okay, thank you.
Your next question comes from the line of Vishal Shreedhar of National Bank. Please go ahead. Your line is open.
Hi, thanks for taking my questions. In your disclosure documents, you note increased competition and increased uncertainty. Hoping you can provide some perspective on this, and particularly in light of your strategy to grow same-store sales and help reduce the store closures as much as possible. Maybe you can help me understand how those two things interact.
Yeah. Well, in terms of competition, there's always more and there's more and more restaurants. There's also more customer food dollars going to restaurants, which is a good thing. Competition is certainly very fierce, and it's coming from areas where we didn't see competition before. I'm thinking of the ghost kitchens that are starting to pop a little bit everywhere. We're thinking of the meal kits that are a little bit more popular than they were before. The number of restaurants that are opening almost on a daily basis is really large. For us, competition is always there, probably now more than it was before. Hopefully the customers can keep spending more food dollars in their restaurants. There's certainly a lot of competition. In terms of certainty, well, there's always uncertainty related to a lot of different things.
Uncertainty related to customer behavior, uncertainty related to the 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. There's always something else. There's always going to be uncertainty, and it brings a certain amount of risks.
Okay. 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?
Yeah. Our franchisees for sure, our goal is to make our franchisees profitable. 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. The first one is really to make sure that the operations are taken care of, that we are operating at optimal levels, and that the customers are wowed every time they go in the store. There's a lot of work to do. Before we give any relief, we also want to go into our restaurants, address the local marketing campaigns and the local marketing strategies we have, and try to improve business. There are a few stores that are under relief for various circumstances. For example, the city tears up the road in front of the store.
Well, that's a problem. Obviously, if the customers can't go to your store, it's going to create some hard times. We need to address those. Yeah, 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. 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 all the disruption happening from all the initiatives, or how would you characterize that?
No. The initiatives take time to gain traction. We're going one by one with the initiatives. We're confident we have a lot now on the go. If anything, it's going to help, and there's certainly no distraction or no disruption caused by all these initiatives. When you look at Papa Murphy's, it's a business that had had declining sales for a number of years, and it's hard to turn 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 stable-ish for the ones you look at?
Every time you have 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. 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. You touched on this already, but the rail blockages and coronavirus, is it fair to say impact is fairly limited at this point on your business?
Yeah. Well, at the moment it is limited. We do have some anecdotal evidence of some impact in certain communities for the virus. I guess that can deteriorate fast if something happens. For now, I think we're good and we haven't seen too much impact, from either the virus or from the rail. Hopefully it's going to stay this way, but we haven't seen anything so far.
Okay. Thank you.
Your next question comes from the line of George Doumet of Scotiabank. Please go ahead. Your line is open.
Good morning, Eric.
Hey, George.
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 the specific financial allegations made?
Well, the auditors, they don't audit one specific topic. They audit the entire financial situation. Every topic will need to be addressed. Obviously these allegations bring a certain way to look at these risks that might be different than they were before. 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. 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. Some pretty good numbers from a comp trend in the U.S., especially in the East. Is that predominantly favorable weather? Maybe can you call out some other trends or some other factors that contribute to that strength?
I like to say we do a terrific job. 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 concepts. 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 2018 and in Q1 of 2019, I blame the weather, and we had some extreme cases that really hurt our business. This year in Q4, the weather was a lot more normal. 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 that leads me to my next question. 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., 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. 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 through M&A as well? Maybe about that specific part of the business.
Yeah. Well, retail is a really good segment for us. It's something that is relatively new for MTY. 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, and also for everything that's in the stores. We have a certain number of guidelines we have for our products. 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 push to get our products on the shelves in as many places as possible.
Okay. Just one last one, if I may, Eric. On the buyback activity, it seems like it's kind of going up compared to historical standards. 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. If MTY is cheap for us, if MTY is the best company we can acquire, we'll acquire MTY. We'll buy shares in our own company. When you buy MTY, for us, there's no integration risk. There's no cost associated to advisors. There's no integration. Everything is really easy. 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.
Okay. Thanks for your answers.
Again, to ask a question, you will need to press star one on your telephone. Your next question comes from the line of Derek Lessard of TD Securities. Please go ahead.
Yeah, good morning, Eric. I was wondering, did you guys bring in any third parties to review the allegations? 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 is something we'll keep for inside the company. I don't think we need to give these details.
Okay. You did say that you think that this is the end of the impact from the whistleblower, and we shouldn't hear anything from that. Is that clearly what I understood?
I didn't say that. No, 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. I don't know what else is going to happen at this point.
Okay. Switching gears. Are there any challenges to converting some of the Papa Murphy's corporate stores to franchisees? Can you just maybe let us know where you are in that process?
Yeah. Well, when last time we talked, we mentioned there were going to be three 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. Maybe just one final one for me, again, on strong same sales comp pretty much across the board at Canada and 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?
Yeah. Well, we're always trying to increase the basket size. We have a few brands where we see the check going up. We can't take too much pricing these days. We need to be extremely careful with the price we take. We have good traffic comps at the moment. We also have good basket size comps in some of our brands.
Okay. That's it for me. Thanks.
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.