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 MTY'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 SEDAR. 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 CAD 52.6 million in the quarter, compared to CAD 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 CAD 1.01 per share for the quarter and CAD 5.21 per share in the last twelve months.
System sales for the quarter remained relatively stable at CAD 1,459 million, a decrease of 1%. Most of the decrease in system sales came from Canada, with a decline of CAD 13.8 million or 3%, while the U.S. saw an improvement of CAD 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 CAD 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, sweetFrog, 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 -5. 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. Cold Stone 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 CAD 12.8 million. This brings the total to 337,500 shares repurchased so far this year, for consideration of CAD 16.4 million. I will now turn the call over to Renée, who will discuss MTY's financial results in greater detail.
Thank you, Eric, and good morning, everyone. During the quarter, MTY's total revenues decreased slightly from CAD 305.2 million in Q2 2023 to CAD 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 CAD 0.6 million in revenues, resulting from new listing for our Cold Stone Creamery in 2024. In terms of normalized adjusted EBITDA, we saw a decrease of 1% with CAD 73.7 million in the quarter, compared to CAD 74.6 million in Q2 of 2023. As a reminder, normalized adjusted EBITDA excludes our SAP 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 US and international normalized adjusted EBITDA contributed to 73% of total normalized adjusted EBITDA, realizing an increase of 3% or CAD 1.7 million, while Canada contributed 27% of total normalized adjusted EBITDA and a decrease of 12% or CAD 2.6 million compared to the same period last year. For both the Canadian and US 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 CAD 27.3 million, or CAD 1.13 per diluted share, compared to CAD 30.4 million, or CAD 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 CAD 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 CAD 40.6 million compared to CAD 51.9 million in Q2 of 2023. A decrease of CAD 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. Free Cash Flow, net of lease payments, decreased to CAD 24.3 million in the quarter, or CAD 1.01 per diluted share, compared to CAD 29.5 million or CAD 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 CAD 52.3 million, a decrease of CAD 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 CAD 12.8 million through our NCIB and paid CAD 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 dividend and NCIB distributions to CAD 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 CAD 725.6 million drawn from our revolving credit facility, with repayments of CAD 16.3 million made during the quarter. During the last 12 months, we have repaid a total of CAD 77.9 million towards our long-term debt.
Interest on long-term debt decreased by CAD 1.6 million as a result of entering into fixed interest rate swaps, which have resulted in savings of $1.5 million or CAD 2 million this quarter, compared to $0.6 million in the same period last year. As mentioned in our subsequent events note, we sold in early June of this year our fixed interest rate swap of 200 million for a sum of $4.8 million, 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 CAD 0.28 per share on August 15th, 2024. And with that, I thank you for your time and will now open the lines for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question today comes from Vishal Shreedhar with National Bank. Please go ahead. Vishal, your line is open. You may ask your question.
Oh, hi. Sorry, I was on mute. Can you talk about the lifting of the CAD 50 million restriction on, on, related to the credit agreement? And also, is that an indication that management may get more active on buybacks? And how does that relate to the comment that you made last quarter regarding possible smaller acquisitions this year? Should we think that view may have changed?
Yeah. Well, first thing is, the priority for us in terms of capital allocation remains to do more acquisitions in the future. So, the CAD 50 million restriction was there since 2016, when we first got into that credit facility. So, I mean, there was historical, I guess, restrictions that no longer applied. So our bankers were supportive, and it was a really smooth amendment that we did to remove the cap, that basically frees us up if we need to do more on the NCIB or more on the dividend. But priority remains to do M&A. That's what MTY does. That's how we've created value over the years, and that's how we intend to create value.
But that being said, we had reached our cap for the last 12 months, and we needed to do something about it. So, Renée and her team went with the bank and amended the facility. So we can resume buying back probably next week at some point.
Okay. And, with respect to acquisitions, the view is still, smaller acquisitions, possible this year and larger acquisitions unlikely. Is that still the, the view?
Yeah, that would probably be the view. Although nothing's impossible, but we're still looking for the right acquisition at the right price. Obviously, given our current share price, it makes it a little bit more complicated. But I mean, if we find the right acquisition at the right price, we'll make sure we figure it out, and we're gonna make the M&A for the right reasons, but it's still a priority for us.
Okay. And could you contrast for us the differences in same store between Canada and the U.S.? Is that due to... Is there any specific reason for that, or is that just generally economics, economic factors?
Well, the mix of brands we have in both countries is very different. So, I wouldn't necessarily call out on the difference in the consumer behavior or anything. I would, I'd probably call out the mix of brands we have. Our snack category in the U.S. performed extremely well, and that's a category we don't have as much in Canada. Whereas in Canada, for example, the two sushi brands that performed spectacularly well since COVID had a little bit more of a sluggish quarter, maybe because of the price point or maybe because of other factors that we're still exploring. So I think the mix of brands we have in both countries is probably the main differentiator here.
Okay. Then maybe just to get your thoughts on, you know, we've been hearing comments, particularly, related to some of these large U.S. QSRs, related to increasing promotional activity and value offers. If you're seeing that percolate more into the brands that you operate, in terms of the aggressiveness of promo, or is it still more an experiential focus for you guys?
Yeah. The activity definitely intensified, so there's a lot more focus on, I won't even call it value, I'll call it price. So definitely a lot more focus, maybe more so in the U.S. than in Canada. But I mean, we can't necessarily play that game with the big guys, we're gonna focus on the experiential nature of what we're doing with our restaurants. We do have to have some value offers with each of our brands. We need to have a price point that will attract consumers into our stores. And we are trying different things, and we are testing the water with different brands, with different promotional activities to see what gets traction and what doesn't.
Yeah, you're correct in saying the promotional activities dramatically intensified, and especially in some spaces, if you look at pizza and burgers, for example, it's really intensified. In other spaces, maybe not as much. We need to keep the standard for our brands, and we don't want to set a new standard where price point would be too low or the expectation would be too low. We also need to preserve the food quality that we have, but it's definitely a lot more competitive than it's been the last few years.
Okay, thanks. I'll pass it on.
The next question comes from Tom Callahan with RBC Capital Markets. Please go ahead.
Thanks. Morning. Morning, guys. Maybe just follow up on same-store sales here. Eric, can you talk a bit about what you're kind of seeing in terms of traffic or average spend and kind of the drivers between the two?
Yeah, it really depends for which brand we're looking at. For some brands where we have a little bit more promotional activity or where we're in a space that's a little bit more competitive, we really need to focus on traffic, and the average basket is a little bit more complicated. For some other brands, I mean, we haven't really taken pricing in the last 12 months for most of our brands. So we're-- I mean, we need to drive traffic, we need to drive the average basket, we need to drive the experience. But it's tough. To preserve the existing basket compared to 12 months ago, it's a little bit more difficult, so we really need to drive traffic to maintain sales.
Okay, thanks for that. And then maybe just follow up, can you just provide, you know, maybe a bit of an update with respect to what you're seeing thus far in California, just given the wage legislation there that came in a few months ago?
Yeah. California is, it's not the easiest environment for restaurant operators, for sure. What we're seeing is that the consumers were, for the most part, ready to receive the price increase. They expected it. I think pretty much everyone in the industry has increased their prices to some level to compensate for the increased cost. But we're—I mean, we don't make the rules, we have to follow them. Unfortunately, that has adverse consequences on us. But we haven't seen a dramatic impact on the price on the consumer traffic yet. Not saying there's not going to be one, but for the moment, I guess people are getting accustomed to it.
Understood. Thanks for the color. I'll, I'll turn it back.
The next question comes from Michael Glen, with Raymond James. Please go ahead.
Hey, good morning. Just to start on the sale of the fixed interest swap, maybe Renée, like, how does this actually impact your interest expense relative to where it's been over Q1 and Q2? Does it change it-
It won't
... meaningfully?
It actually won't have an impact, as it's going to be amortized. Because this was a perfect hedged instrument, it's going to be amortized interest expense until the original end date, which was April 2026. So it'll continue to—you'll continue to see about $500,000 on a quarterly basis, hitting our interest expense.
Okay, perfect. And then, Eric, can you provide an update on the ERP implementation and how that's progressing, what we should expect over the coming quarters?
Yeah. Yeah, it's, it's progressing well, actually. We're still, we're still on budget with this one. I know that's the, that's the major concern for everyone. The team is progressing really well. We have a really strong team around that project. We, we wanted to make sure we had tight controls around it, and, it's progressing well. I think now that the—it's, it's about to intensify, as we start the, really, the programming of the solution and deploying modules. So, you, you should see the intensity going up for the next, I guess, for the next 12 months, the intensity of, of, of the spend and the intensity of, of the effort is going to, is going to increase.
What's the risks that investors see some type of operational disruption as you go through deploying modules and intensifying this? I'm just trying to get a sense. Is that something that could happen?
Yeah, I don't, I don't see how that would disrupt the business. It might make some people's lives a little bit more complicated during the transition period, but again, we have pretty tight processes around that for the training and the change management. But I don't, I don't think there would be anything external facing that could possibly happen that would disrupt our business. It's not connected to our POS, it's not connected to the main systems we use to do business. Maybe that's the difference between MTY and some, for example, manufacturing or distribution companies that really depend on these systems to make production, schedule production, or schedule routes, for example. In our case, it's all different systems that will be integrated, but that won't necessarily depend on SAP or that won't be affected by the SAP solution.
Okay. And, can you speak to... I think you've been looking at some initiatives over time, but, like, where delivery penetration sits with MTY in the U.S. and Canada right now, is this still an opportunity for the company? Have you been? Is there investments that have been made? I'm just trying to get an assessment of where the business sits on delivery.
Yeah, for sure it's still an opportunity. We're at 20% digital. You know, it's not all of it is delivery. Obviously, we have a lot of takeout. What we're seeing right now is that the consumer is a little bit more sensitive to the cost of these aggregators. It adds up. Obviously, we increase our prices on the delivery apps, and then they take their delivery fees and everything, so it really adds up. So we're seeing consumers being a little bit more sensitive to that cost and maybe using the takeout or skip-the-line options a little bit more, which is more favorable for MTY, obviously. So there's a little bit of both.
So we want to grow both, but the important factor here is that delivery orders need to be incremental. If the delivery just substitutes an order that would have been internal before, then that becomes very unfavorable for us. So we're trying to maximize both, and we're trying to grow all the sales channel, but we're trying to be smart about it at the same time.
Okay, and just one more for me. The corporate, you—it looks like you sold a handful of corporate stores in the quarter. Is there any strategic shift, or should we think about the sale of some more corporate stores as we go through the balance of this year and into next year?
Yeah, this quarter was actually pretty quiet on the sale of corporate stores. We will have a few corporate stores being sold in Q3. We don't want to, at least there's no intention in the short term to shift the portfolio dramatically. We're still a franchisor at heart, and that's important for us, so we don't plan on adding on corporate stores. We will sell some corporate stores. We'll be opportunistic about that. So you will see a few sales in Q3, probably in Q4 as well. But it's not going to be a massive shift of selling 100 stores or something like that. There's no such initiative at the moment.
Okay. Thank you for the questions.
As a reminder, if you would like to ask a question, please press star then one to be joined into the question queue. The next question comes from Cheryl Xiong with TD Cowen. Please go ahead.
Good morning, Eric. This is Cheryl calling in for Derek. Thanks so much for taking our questions. So my first question is on the wage. So would you be able to quantify or maybe give us a sense, a rough sense of, any impact of the California wage increase on your U.S. EBITDA margin this quarter?
Yeah, I don't have the number handy, but we did have to increase price for to compensate for it. We did not fully reflect the price increase, the increase in the price, so there's a little bit. Renee made a comment about it, that it did affect our margins adversely. It's not a super material amount, but it's something we're watching for.
Okay, thanks for that. And then, I believe previously you announced some cost control measures, and looks like it may have started to show in your margins, particularly on the U.S. side. Just curious if you could talk about some of the initiatives that you have implemented so far, and maybe give us a sense of where you are in the process.
Yeah. In the U.S., we combined a few divisions. So we combined the Papa Murphy's divisions and the barbecue division. We also combined the Wetzel's Pretzels with Kahala. So we basically reduced the number of divisions, tried to have our strongest people work on the brands, and consolidate the knowledge and the expertise we have towards different things for these various brands. So, for the U.S., I would say we're pretty much done. There's probably some action to come in the future in Canada and in other functions. But there's nothing major coming in the U.S. that I'm aware of at the moment.
Okay, that's very helpful. And, and last one, the barbecue. So you noted the strong performance of your snack brands, particularly on Cold Stone, Wetzel's Pretzels, and, sweetFrog. So these are arguably on the more discretionary side, and, Cold Stone is a higher price point dessert brand. So in an environment where consumers are looking for value and are cautious about spending, just wonder if you could help us understand what's really driving the strong performance in those brands?
Yeah. It's just we have terrific brands with terrific products, and that's always the key success factor. If you have something that's craveable, and if you have something that consumers will really want and that's experiential, then that helps. And then we have really good teams with really good franchisees. The marketing is outstanding, so we just need to be exceptional at every function we have and everything we do. And those brands are, so you talk about Cold Stone, you talk about Wetzel's Pretzels, you know, those are exceptional brands we have. And this needs to set the tone for all the other brands we have in the portfolio.
Okay. Thanks so much for the color.
This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.