Earnings call transcript: MTY Food Group Q4 2024 sees EPS miss, stock drops

MTY Food (F:9MF) Group's fourth-quarter 2024 earnings report revealed a stark contrast between earnings per share (EPS) and revenue performance. The company, with a market capitalization of $768.53 million, reported an EPS of -$2.34, missing the forecast of $0.78 by a wide margin. However, revenue came in at $284.47 million, surpassing expectations of $267.1 million. Following the announcement, MTY's stock fell by 7.81% in pre-market trading, reflecting investor concerns over the earnings miss. According to InvestingPro analysis, the stock appears to be trading below its Fair Value, presenting a potential opportunity for value investors.

Key Takeaways

• MTY Food reported a significant EPS miss against forecasts.
• Revenue exceeded expectations, showing strong sales.
• Stock price dropped by 7.81% following the earnings report.
• Digital sales grew by 9%, now representing 20% of total sales.
• Net debt was reduced by over $52 million.

Company Performance

MTY Food Group showed mixed results in Q4 2024. While revenue growth was strong, the EPS miss suggests underlying challenges. The company's focus on digital sales and location growth indicates a strategic shift to adapt to changing market dynamics. Despite these efforts, the U.S. market faced challenges, impacting overall performance.

Financial Highlights

• Revenue: $284.47 million, up from the forecast of $267.1 million.
• Earnings per share: -$2.34, missing the forecast of $0.78.
• Digital sales: $1.1 billion, a 9% year-over-year increase.
• Net debt: Reduced to $656 million.

Earnings vs. Forecast

MTY's EPS of -$2.34 represents a significant miss from the forecasted $0.78, marking a deviation of approximately 400%. In contrast, revenue exceeded expectations by 6.5%, highlighting strong sales performance despite profitability issues.

Market Reaction

MTY Food's stock experienced a significant decline of 7.81%, dropping from $50.04 to $46.13. This reaction indicates investor concern over the unexpected EPS miss, despite positive revenue figures. The stock remains below its 52-week high of $54.25.

Outlook & Guidance

While MTY did not provide specific financial guidance, the company remains focused on strategic acquisitions and cost control. The positive start to 2025 and ongoing digital initiatives are expected to support future growth.

Executive Commentary

CEO Eric Lathat highlighted the company's performance, stating, "MTY delivered a remarkable financial performance once again in fiscal twenty twenty four." He emphasized the company's cautious approach to acquisitions, noting, "We're patient and we're looking at the market. There are some transactions in the market. A lot of them are very expensive."

Risks and Challenges

• Significant EPS miss raises concerns about profitability.
• U.S. market challenges due to weather and macroeconomic factors.
• Potential tariff impacts on cross-border sourcing.
• Market saturation and competition from discount brands.
• Dependence on franchise model, with 96.4% of locations franchised.

Q&A

During the earnings call, analysts inquired about franchisee relationships and the impact of weather on the U.S. segment. The company emphasized strong franchisee ties, noting that two-thirds of new stores are from existing franchisees. Concerns about acquisitions were addressed, with management expressing caution in pursuing new targets at appropriate valuations.

Full transcript - MTY Food Group Inc (MTY) Q4 2024:

Conference Operator: Good day, and welcome to the MTY Food Group Fiscal twenty twenty four Fourth Quarter Results. All participants will be in a listen only mode. Mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Eric Lathat, CEO of MTY Food Group. Please go ahead.

Eric Lathat, CEO, MTY Food Group: Thank you. Good morning, everyone. Thank you for joining us for MTY's fourth quarter conference call for fiscal twenty twenty four. The press release and the MD and 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 to certain numbers that are non IFRS measures.

You can refer to our MD and A for more details. I also remind you that all figures presented on today's call are in Canadian dollars unless otherwise stated. MTY delivered a remarkable financial performance once again in fiscal twenty twenty four. Despite a more challenging macroeconomic environment, our free cash flows net of rent payments reached $5.75 per share or $137,900,000 Those funds were used to return a record amount to our shareholders in the form of share buybacks and dividend payments, which totaled over $68,600,000 combined. MTY also paid back over $79,500,000 of its long term debt during the year, making our balance sheet healthy and well positioned for future growth.

During the fourth quarter and for the first time in ten years, MTY achieved a net positive location growth in the quarter with a net of plus 13 restaurants. This is a major milestone for our teams. We had been pursuing this objective for a long time. A strong pipeline of new locations and a good control of closures remain two of our top priorities for the future. We were able to align the two metrics during the last quarter with 92 openings and 79 closures.

During our 2024 fiscal period, our system sales remained flat at over $5,600,000,000 Sales sequentially improved every quarter, starting the year with a minus 2% in the first quarter and finishing with a plus 2% in the fourth quarter. Our snack brands in The U. S. Performed especially well with Cold Stone Creamery, Wetzel's Pretzels and Sweet Frog leading the way. In the fourth quarter, the Canadian, U.

S. And international segments also organic growth in system sales coming mostly from the performance of recently opened locations. I'm also encouraged by the positive outcome of the company's increased efforts in usage of data, digital marketing, online ordering and websites during the past year. Our digital sales grew 9% year over year to $1,100,000,000 in fiscal twenty twenty four. There's still a lot of work to do to achieve our objectives, and we continue to take steps to make the customer experience as seamless and engaging as possible so that the growth momentum continues in the future.

Digital sales are now 20% of MTY's total sales and still represent a significant opportunity for growth, especially in Canada. Our dual growth strategy leveraging strategic acquisitions and organic growth largely enabled us to overcome uncertain market conditions and inflationary pressure during the past years. Although, MTY did not find a suitable acquisition target at an attractive price during the year, our team still intends to diligently pursue a treative acquisition target, while maximizing the performance of the brands in our existing portfolio. At the end of the fourth quarter, our network had 7,079 locations in operation, of which 6,827 were franchised or under operator agreements, representing 96.4% of our total store count, while two fifty two were corporately owned, representing 3.6% of our network. At November 30, '50 '7 percent of our restaurants were located in The U.

S, producing 66% of our network sales. Of note, 84% of our locations are now street front or non traditional with only 16% being in shopping malls or office tower food courts. 2024 was a year of adjustments for MTY. Following the major acquisitions of the last few years, we undertook a restructuring process that led to the elimination of several senior positions in the organization and to the redefinition of others. Our industry is changing at a fast pace and it was important for MTY's present and future success to have the right structure and more importantly, the right talent in the right position.

Although we need to continue challenging ourselves to further adjust and be more efficient, we anticipate more stability in 2025 as we hope to harvest the fruits of the cost control measures and synergies realized in 2024. This should culminate later this year with the delivery of our new ERP, which promises to make MTY's infrastructure more robust and built for significant future growth. I will now turn the call over to Rene, who will discuss MTY's fourth quarter results in greater details.

Rene, CFO, MTY Food Group: Thank you, Eric, and good morning, everyone. In the fourth quarter, normalized adjusted EBITDA totaled $59,400,000 a decrease of 1.6% from the $60,400,000 realized in the fourth quarter of twenty twenty three. Our franchising segment had an exceptional quarter with franchising margins increasing from 47% last year to 51% this year, generating a 7.9% increase in normalized adjusted EBITDA year over year. This performance is aligned with the realizations we made in the previous quarter and is further evidence of the reliability, consistency and resilience of our main business components, which represents 83% of normalized adjusted EBITDA. Our Corporate Restaurant segment, however, had a challenging fourth quarter.

While revenues were up during the quarter, mainly as a result of additional locations we possess during 2024, our margins were under pressure causing our EBITDA to decrease by 39%. Some of our predominantly corporate concepts such as Berio Queen and Granite City saw top line sales decreases, which caused a decline in the profitability of these restaurants. Of note, our corporate location sales performance has trailed that of our franchise location and our teams have implemented various initiatives in 2025 to reverse that trend and restore profitability to these corporate restaurants. Our retail distribution and manufacturing, which represents 6% of our total normalized adjusted EBITDA, included a difficult 2024 fiscal period with a decrease of 12% compared to prior year. Our manufacturing plants continued to perform well during the quarter, but our retail business once again struggled to generate the desired level of sales as grocery stores continued customers continued to migrate to discount brands and house labels during the period.

During the fourth quarter, a reassessment of the valuation of certain tangible and intangible assets led to non cash impairment charge of 64.6% sorry, charge of $64,600,000 The charge on property, plant and equipment was recorded on certain recently acquired corporate locations that did not perform at the level expected when their valuation was established, while the charge on intangible assets was due to lower than expected 2024 performance for some brands. Similarly, we recorded goodwill impairment charge on our Papa Murphy's brand based on past performance and lower expected future growth. The volatility in foreign exchange rates also caused a charge of $26,300,000 during the fourth quarter. This was driven by the conversion of some intercompany loans dominated in U. S.

Dollars, the result of which is a large charge to our net income and a corresponding gain in our statement of comprehensive income. As a result of the impairment charge and the accounting for the foreign exchange variations on intercompany loans, NCY reported a net loss attributable to owners of $55,300,000 during the fourth quarter or $3.34 per diluted share. That accounting loss should not, however, overshadow the strong performance realized during 2024, including the fourth quarter during which we generated $2.52 in normalized adjusted EBITDA per share and $1.85 in operating cash flows per share. We are wrapping the year with just over $11 per share in normalized adjusted EBITDA, $8.54 in operating cash flows per share and $5.75 in free cash flows net of rent payments per share. Those metrics once again prove the strength of our business model and demonstrate the financial health of NPY.

We end the year with a net debt of $656,000,000 a reduction of over $52,000,000 compared to the end of twenty twenty three. Considering our strong cash flow generating ability, our debt to EBITDA of approximately 2.5 times is a level of debt that gives us flexibility to make acquisitions should the opportunity arise, while we continue to return capital to shareholders in the form of dividends and share buybacks. And with that, I'd like to thank you for your time and we'll now open the lines for questions. Operator?

Conference Operator: And the first question comes from Anshul Arguala with National Bank. Please go ahead.

Anshul Arguala, Analyst, National Bank: Hi. This is Anshul in for Vishal Sreedhar. We wanted to touch on your net store openings. I'm wondering if you guys conduct franchisee surveys to get a feel of what they think about their MTY offering? And what are the opportunities for them to make them more excited to add more stores?

Eric Lathat, CEO, MTY Food Group: Yes. Well, as you might expect, we talk to our franchisees on a regular basis. So that certainly happens ad hoc, especially early when franchisees open new restaurants as the efforts to lift a new business off the ground is always considerable. So we need to be all hands on deck for our operations team, our local store marketing teams and franchisees as well. So there's regular discussions with existing franchisees and a large portion of our new store openings comes from existing franchisees.

It's about two thirds. So to us, that's the validation we need to show that our brands are relevant and that franchisees can be successful with our stores. So yes, we don't necessarily have a formal process to conduct surveys. We have a few brands that will do it annually. But even annually is a timeline that is not regular enough.

So the regular discussions with our franchisees happen with our field people being in the restaurants on a regular basis and talking to franchisees.

Anshul Arguala, Analyst, National Bank: Thanks for that. And I wanted to see the trends in the ongoing quarter so far, just given the tax holiday in Canada and unfavorable weather across U. S. And Canada reported by some companies. Just wondering what the impact what the trends are for MTY through the quarter so far?

Eric Lathat, CEO, MTY Food Group: Yes. It's hard to assess the exact impact of the tax holiday. Obviously, there are provinces where it makes a bigger difference than others. If you take, for example, Ontario gets a 13% discount, whereas Quebec gets only 5% and Atlantic provinces get a little bit more depending on which province. So but it's hard to exactly assess the impact.

What we know is that in Q1, our Canadian restaurants have performed exceptionally well. So we're really happy with our Canadian segment in Q1 so far. In The U. S, it's been a little bit more challenging. As you mentioned, there's been very cold weather.

There's been the fires in California. There's been snowstorms that affected regions that normally get snow and cold with Texas and Louisiana and Florida being affected with snow and cooler than normal weathers as well. And considering that we're selling a lot of ice cream and frozen yogurt and smoothies, it's not necessarily good for business. So I would say right now for Q1, Canada is doing exceptionally well. U.

S. Is lagging a little bit. But all in all, we're happy with the beginning of the year in terms of our sales. That's great color.

Anshul Arguala, Analyst, National Bank: Thank you. And just finally, wanted to touch on the topic of tariffs. Wanted to get a sense how much of cross border sourcing is done that could be impacted by tariffs and how much leverage does NTU have to limit that impact?

Eric Lathat, CEO, MTY Food Group: Bob, yes, it's early because we don't have the exact details of tariffs and then the countermeasures that might or might not happen. So it's a fluid situation that we're monitoring. There's not that much cross border obviously. If there's a tariff on fruits and vegetables coming from The U. S.

To Canada, that would be a problem because there's as you might expect, Canada doesn't grow much in the winter. So we do need to source a lot of it from California and other major agricultural producers. So but right now there are no tariffs announced on these products. So that would be the biggest impact. But other than that, we source a lot of what we need domestically.

In The U. S, there's a little bit of packaging that's coming from outside the country. There might be some impacts on equipment as well where you need stainless steel and you need aluminum. So there might be some impacts there. But the impact is not super drastic.

And in Canada, we feel the same way whereas we source a little bit from outside. Right now, we have no visibility on something that would be of great magnitude in the

Anshul Arguala, Analyst, National Bank: business.

Conference Operator: Our next question comes from Derek Lessard with TD Cowen. Please go ahead.

Derek Lessard, Analyst, TD Cowen: Yes. Good morning, Eric. I just wanted to get a sense around what you're thinking in terms of your 2025 outlook, I guess, in the context of sort of a difficult macro backdrop still in the competitive environment? And then, just maybe as a follow-up as well, kind of your expectations around your 2025 network expansion?

Eric Lathat, CEO, MTY Food Group: Yes. Well, I mean, we don't give guidance. So, not necessarily prepared to give you an outlook for 2025. What I'll say is we're off to a good start of 2025, and we're happy with where we are now. We're happy with the actions we took in 2024 to prepare for that coming year.

So far so good for 2025. We don't necessarily want to give more information than that for the rest of the year, but we're off to a good start. And then as far as network expansion, I mean, we had one quarter of positive store growth. I'm not going to say that it's going to be an easy ride going forward. I do think that we have the foundations to have other quarters of positive store growth, but negative store growth might still happen also in the future and will still happen in the future.

So, we're not at that point yet where we feel confident like every quarter would be positive store growth.

Derek Lessard, Analyst, TD Cowen: Okay. And maybe just on your U. S. Same store sales growth this year, really strong QSR performance and even stronger on the fast casual side. Just curious if you can maybe add some color to some of the drivers there.

And maybe as a follow-up to that, I was curious, does that do those same store sales numbers include foreign exchange benefits?

Eric Lathat, CEO, MTY Food Group: No. Same store sales never include foreign exchange. So, it's always done in domestic currency. So we exclude the noise there. But yes, QSR did well.

Our snack category and we call it QSR and most of it in The U. S. Is our snacks. Wet's oils performed remarkably well. Sweet Frog, which is a brand that we don't talk about enough, that's one of our big brands, especially in the two quarters of the summer, has performed really, really well.

Cold Stone, again, was a strong brand and even the smaller brands like Pickberry, for example, was super successful in 2024. So, really happy with the work of the team. The consumer still responds well to that impulse buy and to that indulgence. You just need to be top of the list and people still appreciate these moments, these family moments, these first dates that they're doing at Cold Stone and all these experiences that we're offering. And we have a great product, great team, great marketing, great franchisees.

So overall, good experience for that snack segment.

Derek Lessard, Analyst, TD Cowen: And maybe it's a segue into my next question, just around the impairment charge at Papa Murphy's. Just wondering if you can maybe elaborate on that in terms of the outlook here you're seeing with Papa Murphy's. And I think there was a couple of other or you said a dozen or so other brands that were included. So just curious on what you're seeing there?

Eric Lathat, CEO, MTY Food Group: Yes. It's interesting you mentioned a number of brands and unfortunately, when we do the purchase price allocations after we acquire a brand, it's based on a forecast we have. And if we beat our forecast, we can't use the bump up. But if we don't beat our forecast, we have to impair. The accounting rules are made in a way where it becomes extremely sensitive to these different variations in your models.

As far as Papa Murphy's is concerned, the performance was a little bit less. In 2024, as you know, we've closed more stores and you have the details in the annual information form that's also out today. And as a result, we lowered a little bit our existing store base and the baseline is lower for the forecast. So that causes a situation where your realizable value becomes a little bit less, and we had to take that impairment. But again, these impairments are largely accounting driven, and that's really based on the original forecast you make on the acquisition.

And again, if you beat your forecast, you can't recognize it, and we have a lot of upside on other acquisitions that we're not allowed to talk about, but we have to talk about where we slightly missed on our forecast.

Conference Operator: And the next question comes from Anshul Agwala with National Bank.

Anshul Arguala, Analyst, National Bank: I just wanted to touch on your capital allocation priorities as well going forward. If you were able to quantify your NCIB and dividends as well as your outlook for acquisitions in 2025?

Eric Lathat, CEO, MTY Food Group: Yes. Well, I mean with the stock price where it is, we feel that like MTY is a really attractive target at the moment. So we chose to buy our own shares. And when we still are buying our own shares and we're going systematically about it, so we're not buying large quantities. But we're buying enough that if we continue buying for a year, we're going to be right against the maximum allowed by the regulators.

So we feel that is that's a very relevant capital allocation strategy, especially considering where the share price is. And then as far as other uses of our cash, we were still aggressively pursuing acquisitions. We still want to acquire businesses. As you know, in over the years, people have seen it. We're patient and we're disciplined and we won't acquire businesses at the wrong price or for the wrong reasons.

So we're patient and we're looking at the market. There are some transactions in the market. A lot of them are very expensive. We've seen some this year that were in the stratosphere in terms of valuation and we're not prepared to do that. So we're patient.

We're going to wait for the market to adjust and we're going to wait for the right targets to be available for us to pull the trigger. But priority is still acquisitions. We still want to acquire businesses. And the fact that we haven't acquired in 2024 doesn't mean we want to pause or stop. It just means that because of our approach and because of how disciplined we are, there was no suitable target, but doesn't mean that for the future there won't be.

And as far as dividend, I mean, it is what it is. We're paying a small dividend. We're not going to be a dividend stock, but we feel like it's appropriate to return some capital to our shareholders.

Anshul Arguala, Analyst, National Bank: Thank you.

Conference Operator: This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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