FRG (2021 - Q3)

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00:04 Ladies and gentlemen, thank you for standing by, and welcome to Franchise Group's Fiscal twenty twenty one Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. I would now like to hand the conference over to your host, Andrew Kaminsky, Executive Vice President and Chief Administrative Officer of Franchise Group.

00:28 Thank you, Fay. Good afternoon and thank you for joining our conference call. I'm on the call with Brian Kahn, Franchise Group's President and CEO; and Eric Seeton Franchise Group's CFO. 00:39 Before getting started, I'd like to mention that certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of nineteen ninety five and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by the forward-looking statements. 01:02 The forward-looking statements are made as of the date of this call, and except as required by law Franchise Group assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For more detailed discussion of these and other risks and uncertainties that could cause Franchise Group's actual results to differ materially from those indicated in the forward-looking statements, please see our Form 10-K for the fiscal year ended December 26, twenty twenty and other filings we make with the SEC. 01:31 The financial measures discussed today include non-GAAP measures that we believe investors focus on in comparing results between periods and among peer companies. Please see our earnings release and the news and events section of our website at franchisegrp.com for reconciliation of non-GAAP financial measures to GAAP measures. 01:49 Non-GAAP financial information should not be considered in isolation from, as a substitute for or superior to GAAP financial information, but we included because management believes that it provides meaningful supplemental information regarding our operating results, when assessing our business and is useful to investors [Technical Difficulty]. The non-GAAP financial measures the company uses have limitations and may differ from those used by other companies. 02:13 Now, I'd like to turn the call over to Brian. Brian?

02:18 Thanks, Andrew, and good afternoon to our listeners, and thank you for joining us. I will briefly discuss the highlights of Franchise Group's third quarter, provide an update on recent corporate activities and discuss current trends in our markets and businesses before turning the call over to Eric to provide financial details. We will then be happy to answer questions. 02:40 In the third quarter of twenty twenty one Franchise Group continued to execute operationally and capitalized on the momentum of our brands, while staying focused on driving discretionary cash flow. During the third quarter, we closed on the sale of Liberty Tax and repaid one hundred and eighty two million dollars of debt. And then on September twenty seven, we completed the acquisition of Sylvan Learning. 03:04 The addition of Sylvan provides Franchise Group with another growing franchise concept and further our diversification into an expanding twenty billion dollars consumer services market. Sylvan has been a leader in the educational services industry for decades and Sylvan offers attractive unit economics to its growing franchisee base, like all of our acquisition, Sylvan is expected to expand our discretionary cash flow generation. Although, we just closed on Sylvan about a month ago, its associates and franchisees have already seamlessly become part of Franchise Group. 03:40 Financially, we are increasing our expectations for the balance of fiscal year twenty twenty one and as we look towards twenty twenty two, we see significant further growth for Franchise Group. I'm very proud of the way our management teams are navigating continued supply chain constraints and overall inflationary pressures. The momentum of the brands is strong that nobody is coasting. 04:03 We are in a dynamic environment that requires our management teams to actively manage literally on a daily basis. They have overcome tens of millions of dollars of potential profitability headwinds, and I appreciate their individual efforts that have combined to grind out strong collective performance for Franchise Group. 04:22 Regarding franchising, all of our brands have continued to enjoy robust demand from both existing and new potential franchisees due to the strength of their operating models. New store openings by franchisees are providing healthy system wide unit growth and a continued shift on our overall mix toward franchise units. Today, our mix is roughly fifty percent franchised. 04:44 In the third quarter, we increased franchise store count by twenty two locations, and on a net basis closed one corporate location, while signing fifty one area development agreements. For the first three quarters of fiscal twenty twenty one, excluding Sylvan, we opened one hundred and twenty four new locations, signed area development agreements for one hundred and fifty three new franchise locations and have grown our total backlog of new stores across all brands to three thirty nine units. Adding in Sylvan, our backlog now stands at three six five locations. 05:18 In the third quarter, Pet Supplies Plus advanced a variety of internal growth and improvement initiatives. Management rolled out an online prescription service, relaunched a new improved loyalty program and grew its franchise backlog of store openings to over two twenty units. PSP same store sales for the third quarter were up fourteen point five percent. 05:39 At the end of the quarter, PSP had five eighty three stores with three forty three franchise locations and two forty corporate stores. Total revenue at American Freight was down eight point eight percent year over year in the third quarter due to comping the reopening surge in demand from last year's comparable period. 05:57 If you recall, last year A Freight comp positive fifteen point three percent in the third quarter, this year, A Freight comped negative thirteen point four, the two year stack remains positive, and we continue to see significant interest in the American Freight franchise opportunity due to its superior unit economics and unique position in the market. American Freight had three sixty seven units at the end of the third quarter, including seven franchise locations. 06:24 Buddy’s same store sales were up one point four percent in the third quarter, Buddy’s carried it's franchising momentum into the third quarter by signing area development agreements for twenty four new stores and refranchising eight location. Buddy’s footprint now stands at three zero nine units, including two seventy two franchise locations. 06:46 Vitamin Shoppe, positive trends from the second quarter continued as well as the brand benefited from consumers focus on health and wellness and the growing demand for Vitamin Shoppe products. Once again store traffic increased as consumers comfort, leaving their homes to shop on premise. These trends are evidenced by Vitamin Shoppes third quarter same stores sales growth of over thirteen percent, consisting of positive seventeen percent in store and negative one point seven percent for direct to consumer. Vitamin Shoppe ended the third quarter with seven thirteen stores in the system. 07:19 Regarding M&A, we continue to evaluate M&A opportunities that will either further diversify Franchise Group's revenue and cash flow streams, accelerate our growth or both. We believe that each acquisition opportunity that we are reviewing by the clear path to enhancing Franchise Group’s discretionary cash flow, and we expect to have more to discuss on M&A in the near future. 07:41 Before turning the call over to Eric, I would once again like to thank all of our dedicated associates for their hard work. For their support of each other and their support of our franchisees. Thank you very much. Eric?

7:54 This is Andrew stepping in from minute Brian. I just want to reiterate, the PSP same store sales for the third quarter up fourteen point five percent, there was a glitch and you are speaker at the time and it sounded as four point five percent. So just wanted to correct that. Now I turn ove to Eric.

08:09 Thank you, Brian and Andrew. Before I address the results of operations, I would like to remind you that we’ll be making many references to pro form items throughout this call. Our press releases and filings may refer [Technical Difficulty] acquired businesses prior to their acquisition by Franchise Group. 08:29 These items have been adjusted to align with our fiscal calendar and accounting policies to the extent reasonable. Comparison to pro form results will allow us to discuss and evaluate performance of the acquired companies when a comparable period is not available due to the timing of the acquisition. As a reminder, our SEC rules is consistent with concepts and Article 11 of Regulation S-X for non=GAAP reporting, the Franchise Group will not be reporting synergies and other acquisition costs. 08:58 The company will continue to report adjusted EBITDA in the same format as it has in the past. At this time, we do not anticipate reporting any supplemental information for twenty twenty one. The specific amounts included in each disclosure are fully discussed in detail and the non-GAAP financial measures and metrics section of our earnings release. 09:18 For the third quarter of twenty twenty one, total reported revenue for Franchise Group was eight hundred and twenty eight point eight million dollars, net income from continuing operations was thirty six million dollars or zero point eight three dollars per fully diluted share. Adjusted EBITDA was eighty point eight million dollars and non-GAAP EPS was zero point nine seven dollars per share. 09:37 We currently have four reportable segments, American freight. Vitamin Shoppe, Pet Supplies Plus and Buddy’s and report Liberty Tax as a discontinued operation. For the quarter ended September twenty five, twenty twenty one American Freight had revenue and adjusted EBITDA of two hundred and twenty three point six million dollars and sixteen million dollars respectively. The Vitamin Shoppe had revenue and adjusted EBITDA of three point eight million dollars and thirty five point nine million dollars respectively. 10:01 Buddy’s had revenue adjusted EBITDA of seventeen point eight million dollars and four point four million dollars respectively. And PSP had revenue and adjusted EBITDA of two hundred and eighty six point six million dollars and twenty five million dollars, respectively. 10:15 For the quarter, consolidated cash flow from operating activities for FRG was ten point nine million dollars and capital expenditures of twelve point two million, netting to free cash flow negative one point three million dollars defined as operating cash flow less capital expenditures. Within these amount our cash flow from operating activities is two point seven million dollars and capital expenditures of zero point two million dollars. 10:36 Cash flow attributed to Franchise Group continuing operations was eight point two million dollars from operating activities plus twelve million dollars of capital expenditures netting to a free cash flow three point -- negative three point eight million dollars. We ended the quarter with approximately one point one billion dollars in outstanding term debt, which included a one hundred and eighty two point one million dollars repayment and an undrawn one hundred and fifty million dollars ABL [Technical Difficulty] approximately one hundred and sixty million dollars. 11:03 We used approximately eighty one million dollars of this cash to pay for the Sylvan acquisition on September twenty seven. In conjunction with our balance sheet and business performance, we believe we have sufficient liquidity to continue and meet all of our obligations and support all of our businesses for the foreseeable future. 11:19 As of today, we are increasing our expectations for annual adjusted EBITDA for fiscal year twenty twenty one from at least three twenty million dollars to at least three twenty five million dollars. Non-GAAP EPS from at least three point four five dollars per share to at least three point eight zero dollars per share and revenue from at least three point zero five billion dollars to at least three point one billion dollars. In calculating EPS, we are using approximately forty one million dollars weighted average shares outstanding. And our expectations for the balance of twenty twenty one includes one quarter of Sylvan, but does not include any assumptions for additional acquisitions, divestitures or additional refranchising activity. 11:58 I want to thank all of our shareholders and lenders for their support today. Operator, please open the line for questions. Thank you.

12:06 Thank you. [Operator Instructions] Your first question is from Mike Baker from D.A. Davidson. Your line is open.

12:36 Okay. Hi. Just want to follow-up on that very last thing. You said the guidance include one quarter of Sylvan. So the guidance is up on all the important line items, but is -- can you just help us understand, is the guidance increased just on the Sylvan acquisition or it doesn't include what looks like a little bit of a better than expect third quarter here? Thanks. And I have some follw-up.

13:02 Mike, this is Eric. So yes, the zero point three five dollars per share non GAAP EPS raise referencing, it's a combination of [Technical Difficulty] certainly the ongoing business performance, which incorporates our latest forecast for the year. We shoot up tax estimates while we expected to be initially minimal cash taxpayer for the year. We now expect not to be a cash tax payer from a continuing operations standpoint, which is driven by updated forecast and the post Liberty sale. So obviously those tax aspects that came from that trued up our forecast. 13:38 And then certainly a true up -- the last part was a true up of estimates from our purchase accounting, which positively impacted our GAAP EPS. So combination of those three items were led to the increase in the guidance for the full year.

13:52 Okay. That's helpful. Two more quick one – well, it might be quick. Sylvan, can you talk about -- when you acquired it, it looks like the numbers are pretty good, strong margins. They're all franchises and mostly franchises already. So, what do you bring to this company to make them better. It's not like one of these cases where a Vitamin Shoppe where you refranchise them, because they're already franchises. So I'm just curious how do you drive incremental value to that acquisition?

14:22 Yes. Mike, it's Brian. I think that we will help them accelerate their growth of units. And potentially add additional services that they can offer in their units. But Sylvan was well run business, it would have been fine without us. We think that we can accelerate their growth. And I guess we'll see if we can.

14:47 Okay. One more than I'll turn it over. Just switching gears American Freight. Obviously, the business was a little bit weaker here, but on a two year basis, it's pretty good. Can you talk about the supply levels there. That's where I think you were seeing the biggest supply issues in the last two quarters. Thanks

15:07 Yes. So, look, supply chain is generally still a mess, but the management team -- both the American Freight and frankly everywhere else they continue to fight the fight. Inventory levels are actually sufficient at American Freight, mix may not be ideal, but we've invested significant dollars in inventory they are well inventoried. We wouldn't expect to miss a lot of sales, but it's not that it's easy having to grind it out and find ways to switch vendors and get inventory into the system, but they have done that and they're are ready for the high season, which as you know, is around tax season next February.

15:51 Okay. Fair enough. I'll turn it over to someone else.

15:55 Sure.

15:58 Your next question is from Larry Solow from CJS Securities. Your line is open.

16:04 Good afternoon. Thanks for taking the questions. Sort of sticking with the supply chain and inflationary theme. Any impacts of Vitamin Shoppe, obviously a really nice top line growth and incremental margins still look pretty good, actually, I think it was within historical range, about forty percent. So has there been any impact on that business? And part two of that question is, do you continue to see -- I know you sort of give an outlook for twenty twenty two. I maybe to want to get specific segment or company outlooks, but do you still think this business could grow as you look out over the next few years.

16:40 Sure. So, I would say as a blanket statement, there is wage pressure in every business that we're involved in. So, I think that would include Vitamin Shoppe as well. On the inventory side, there's -- there's cost pressures and inventory as well, but Vitamin Shoppe isn't -- they don't have the magnitude of the issues that maybe others have that are waiting for containers coming across the ocean. But they have made, I think, the right decision to carry excess inventory, safety stock so that to the extent that certain categories that are very popular, they see a rush demand that they have them. I think it's the right move when we bought Vitamin Shoppe a couple of years ago, one of the goals was actually reduce inventory and -- because they had so much in the system. Now we're actually increasing inventory and it's not insignificant, they're certainly carrying eight digits more than typical levels might be. But I think that's permanent from my seat. So I don't think that's just a temporary increase that will ultimately be worked down. I think that having safety stock matters and it’s useful and can be a competitive advantage them. So that's how I would look at that. 18:10 And as far as the growth there, look, their business is growing, they've had tremendous momentum of success over the last couple of years, it has continued extremely encouraged by --for the first time and forever, actual customer accounts increasing and as those customer accounts increases they hang on to those customers, you've got a whole new level of business. So very encouraged by what we see there, it's certainly no guarantees, but I think that they're prospects for being able to continue to grow the top line look very promising.

18:51 Great. I just have one follow-up. It sounds like franchise interest is strong across your businesses. The twenty two openings this quarter, can you just give us a little more color on that? Was that mostly at Pet Supplies or it actually looks like Vitamin Shoppe went down a couple quarter over quarter. Did they close a couple? Just trying to get a little --

19:15 Franchise stores for Vitamin Shoppe –

19:18 For Vitamin Shoppe you haven’t said total stores was seventy six, I think were down three percent quarter over quarter, I think it was seven sixteen to seven thirteen?

19:25 Yes, That's correct. So, we had three corporate stores that we closed at Vitamin Shoppe. The franchising was strong. We opened ten PSP stores and eleven Buddy’s stores, that's the bulk of it, that’s twenty one of them. So that was really driven there.

19:41 Got you. Perfect. Thanks. I appreciate the color. All those are good. Thanks.

19:48 Your next question is from Susan Anderson from B. Riley. Your line is open.

19:54 Hi. Good evening. I just wanted to follow-up on your EBITDA payout, I guess now with the addition Sylvan and the increase in EBITDA and then maybe another acquisition and the works, are you guys still looking to pay out twenty five percent of EBITDA? And also just curious that is calculated?

20:14 Sure, Susan. Thanks for the question. And yes, EBITDA has grown, the long term on target is twenty five percent dividend rate as a percentage of EBITDA. And as you know, we have paid out the same rate for the last four quarters and we are readdressing the dividend for next year. 20:35 As we sit here now in November, we're going through the annual budgeting process and management will submit a dividend recommendation to the board shortly and after a plan is approved, we'll declare that next dividend. Yes, certainly it makes sense based on the revenue and profitability growth that we see today, it's reasonable to expect that at least management's recommendation will be for a significant increase in the dividend.

21:03 Great. And should we expect that to go closer to that twenty five percent? I guess that will be more forward looking given Sylvan won't be on there really to next year?

21:15 Yes. We'll look at next year's budget, so we don't look at -- we look at last year's So we look at what next year looks like, maybe we'll leave a little bit of cushion we did this year turned out that the EBITDA growth was a little higher than we expected. So the gap was wider. And as we sit here now, unfortunately as long as EBITDA keeps going up, the ability to close the gap on the twenty five percent and the EBITDA going higher leads to healthy dividend growth. So I mean, I wouldn't guarantee it will be exactly twenty five percent, but I also can't guarantee exactly where EBITDA will shake out for year. So -- but we'll get good job as we can.

22:03 Okay, great. And then I guess just on PSP, nice same store sales increase there. I guess maybe if you could talk about the drivers of that increase among the categories or also are you seeing new customers come into the business? Then also, I think you mentioned the online prescription service. Is that fully rolled out to all of the stores now and I'm just curious, do you have to go into the store to pick it up for delivery?

22:32 Yes. So the the prescription -- it's brand new. So it's not a very big driver right now. It's just an example of the initiatives that they are working on. As far as the categories, I would -- I think for competitive reasons, we're trying to stay away from getting too deep into any of the specific businesses. We've seen especially, I'd say in the pet industry a significant increase in advertising among the competitors and everybody is planning their own strategies and including PSP and we'd like to let them continue to run their business as quietly as possible since they aren't a separate publicly traded company, they can keep things a little bit closer to the best.

23:25 Got it. And –

23:27 Just to add to Brian's answer on the prescription, it is an online model. So it's -- you would log in online, you'd set up your account, put in the information, the system then checks with your vet to make sure that it's a valid prescription and it's a shift, you don't go into the store it gets delivered.

23:45 Okay, Got it. And then just curious, if there's any -- like have you -- fourteen point five comp obviously very nice. Is -- do you know if consumers are just spending more in the stores or are you guys getting new stores to come in -- new customers to come into the stores?

24:07 Yes. So, it's a combination of both. And certainly, I think that one of the – one variable that helps them as well as they've opened so many, some of the younger stores that as those stores ramp up to mature levels they get the benefit of outside comps. And as long as they continue to have new stores, they'll continue to have that benefit over the first few years.

24:35 Got it. Okay

24:36 Generally speaking, the basket sizes across the board are higher and customer tends to be higher as well.

24:44 Got it. Okay. And then I think you guys had said last quarter, there's no supply issues within NPFT like some of your peers had seen, maybe within some categories that you guys don't play in?

24:56 They've had to fight it out as well. They're not at one hundred percent, they haven't had this -- I'd say the severe -- the severity of their struggles haven't been quite as large as others maybe. But they have been below par all year long as well and there are certain categories that are bigger struggle than others, but they've figured out how to grind it out and make sure that the customers are getting served. And of course, dealing with the customers that come and look in for something and can't find it and then call in to say where is it? So it's a constant grind.

25:36 Great. Okay. Well, thanks so much. Nice job on the quarter and good luck for the rest of the year.

25:42 Thanks.

25:44 Your next question is from Ian Zaffino of Oppenheimer. Your line is open.

25:49 Hi. Great. Thank you very much. Question would be just can you maybe help us understand the quantification of inflation versus price? And how much are you able to offset it? How much does it impact you in the third quarter, how much should we expect in the fourth quarter and beyond? Thanks.

26:13 Yes. I'll speak to it generally, but not specifically and certainly not by brand and it's been different -- we have some brands that have been able to pass it on because that's how their pricing model works and the customer -- the customer accepts the higher pricing. But there are others that -- it's a struggle and there's margin pressure because of it. Costs are going up, there's no doubt about that, pricing has gone up as well, but there are some instances where the price increases are not fully offsetting the cost increases and that's -- that's what we have. And it's amazing that the businesses are continuing to do as well as they are despite that. 27:02 But I think that at some point, if your costs go up too much, you just can't keep raising prices, as you're going to price the customer out. So, I think you need to be very careful about that and the management teams are. 27:18 I would -- trying to add that to help you out. It's -- the pricing pressure is as high today as it has been, so what you're seeing now is the worst that it's been, it's also informing budgets for next year, because you can't count on things reversing and it's still very optimistic about what next year looks like. I can't imagine what it would look like if the inflationary pressures subsided. But right now, I think we've got to continue to believe that inflation is here and it's going to be an issue.

28:03 Okay. And then just finally, and this has sort of touched out before. Sylvan’s contribution in the fourth quarter, what should we expect, is three million dollars the right number or would it be less than the next incremental costs?

28:19 Yes, this is Eric, Ian. So generally in that ballpark, yes, for Q4.

28:26 Okay. Perfect. Thank you very much.

28:30 Your next question is from Brian Hollenden from Aegis Capital. Your line is open.

28:36 Hi guys. Thanks for taking my call. Just sort of follow-up, I guess to that the last question is three million dollars impact for 4Q. Is that the right -- if we annualize that, is that's the right way to think about sort of the next twelve months impact from Sylvan?

28:56 Yes. Bryan --

28:58 Go ahead, Eric.

29:00 Yes. I mean, I think, that's about the -- right now. We'd expect some moderate growth out of that before we start to grow the franchise base with our efforts.

29:11 Okay. And then what was it particularly about Sylvan acquisition that made it appealing, just given that most locations were already franchised?

29:22 Well, the ability to add locations, the efficiency of their model and the free cash flow that we get out of that business for the amount that we had to pay for it. I think that business ultimately will be a much larger business and our entry point was very attractive at eighty one million dollars.

29:46 And then last quick one for me. Are any of your segments working on adjusting their supply chain in the future kind of producing closer to the customer?

29:57 I think, we have businesses that have already adjusted significantly how they look at supply chain moving countries that’s the one thing, that's a hard thing to do. Also adjusting their vendors, but that's been an ongoing battle and I think that will continue and I wouldn't even want to predict how much additional change will come over the next year or several years. But --because you don't know what forces you're going to be fighting again? But yes, there's been significant adjustment in many ways.

30:39 All right. Thank you.

30:41 Sure.

30:42 I'm not showing any further questions. I would now like to turn the call back to Brian Kahn for any further remarks.

30:49 Sure. Well, again, thank you all for joining us this afternoon. And operator, you may conclude the call.

30:56 Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.