Franchise (TAX) 28 Feb 232022 Q4 Earnings call transcript

Ladies and gentlemen, thank you for standing by, and welcome to Franchise Group's Fiscal 2022 Fourth Quarter and Year-End Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After the speaker presentation there will be question and answer session. [Operator Instruction] Please note, this conference is being recorded.

I would now like to hand the call over to your host, Andrew Kaminsky, Executive Vice President and Chief Administrative Officer of Franchise Group. ahead. go Please

Group's Good conference Gary. Kahn, thank for Seeton, you Group's Thank I'm afternoon, on our Franchise Eric and call. and Brian the joining President you, CEO; and CFO. call Franchise with

results based Before forward-looking meaning discussed contain this expressed are management's or Franchise matters no guarantees obligation that of the on on and made are Private the by federal them. I'd statements materially Securities place as getting this could laws. statements within the Group Act forward-looking assumes undue call Investors the the other on reliance of except differ Actual law, of and of like XXXX forward-looking date started, expectations from in statements mention are certain future or these revise to statements. cautioned by update as forward-looking of forward-looking are to of may not call These those statements. to Litigation The securities current Reform provisions and not implied required performance.

XX-K statements. year uncertainties we see detailed and make those more and other indicated risks SEC. materially Group's could the filings to cause these ended Franchise in December forward-looking and XX, a discussion actual Form from fiscal of our results For for other that the differ Please XXXX, with the

information our non-GAAP companies. uses limitations financial be we purposes. to among for News our or peer a useful from results believe measures. the and management on company the of substitute considered financial in focus other financial operating section our to is of The non-GAAP isolation that see superior and it comparing used regarding investors release when have provides meaningful investors not financial to measures between for GAAP franchisegrp.com financial differ because a supplemental our as website we non-GAAP those in and results by periods assessing information, include measures measures information for but business Events Non-GAAP The and GAAP believes measures today it informational our reconciliation should and our at in include Please may earnings from, comparative companies.

Now turn over to Brian? to Brian. I'd the call like

good Thank joining thank provide turning afternoon the and you general and over to details. our for update Andrew, a us. provide to listeners, call I'll to Eric you, financial before

to We answer questions. will happy be then

Our in X% the transactions you were our line we financial the at told and fourth that outlook quarter value experienced comparable just the was XX% a levels in we negative going quarter move the expect, American were in November. did we performance in down fourth offering Freight, with to inventory in We dramatic that. provided from that earlier customers approximately of improvement year. American the Freight

we a their high-cost through selling is more There's a go. optimism Although financial inventory, still as that to back in at our business, we've better the renewed progress we will be optimistic working XXXX are culture American value and in all of Freight year performance. made for have the

dealers. provide will adjusting the continued XX to waterfall our last months We've rolling for stores third-party At to solutions believe better corporate we customers a of before been most dealers. and system-wide Badcock, XX we for test in out experience that our our tests

at we've This Badcock intend Importantly, dealer we and into first the later one by this week, in-house and our credit time new second the of stores of we the to transition year. moved away operated will are owned from test quarter be by the end introducing waterfall dealers. of test a providing X to trusted this locations,

across sold year with locations. XXXX. brands in XXX new to franchising and backlog continued activity XXX We Our accelerate all the territories FRG of across finished

for and priority teams units unit over new from a new much open large growth is have as organic us openings. gain we have converting our into a It's backlog controllable in the mature store substantial And our and internally, time. XXXX. by opportunity We this

easier As stores opening the couple construction franchisees cost years. over to couple next of materials of last compared and an will we the believe improve, time of labor our years. have

allocation. and deployment The interest discretionary capital the cash cost about of XXXX. to into has that in approximately repurchases shares further shares rates the an We reduced not make and by XX%. approximately Turning own reduced acquisitions acquisitions. significant year. we did our increased material X.X investment million flow the outside increased bar our any for half back in $XX.XX outstanding at capital we rapid of by Instead The repurchasing our in increase the in brands average opportunistically

As of about a when XXXX, that year $XXX per expected to we million a adjusted you $X earnings for EBITDA to shared recap we and in produce share. spoke the of ago, approximately non-GAAP full we year

per of original short of of fell earnings performance $XXX expectations as adjusted share. our actual $X.XX Our non-GAAP we EBITDA and delivered million

in key of us original performance, primarily and non-GAAP to earnings $X.XX cost then shortfall per approximately last us non-GAAP shares I $X.XX $X.X in increase added about unplanned our Freight rates operational from interest American see the cost deviations plan, The about per earnings three of share year. at share. repurchase

million million, XXrd up to of Looking our adjusted the which year, approximately million week EBITDA last from be a that we included believe $XX.X ahead million contributed $XXX least last adjusted we of slightly EBITDA XXXX, year. reported at will $XXX $XXX

a in in not of slight offsetting rebound, grow Sylvan whole Pet are PSP, EBITDA, Plus, fully decline as a industry We somewhat expect to pre-COVID be as Sylvan expect larger Buddy's lower-margin mix Badcock's to EBITDA American and Vitamin continue Freight we likely potential. growth as are landed as closer at levels. and continued the struggle will Supplies home Shoppe immediately costs XXXX and to nutrition its Freight, sports furnishings well favor Buddy's in EBITDA to in to driven a to full inventory decline products albeit by until shift likely

by franchise per rates $X.XX are month, to sheet billion our revenue, closed add-on to $X.X grew cost was and million lower to loan. of From to compared and of in first approximately share $X.XX about we $XXX this XXXX to share. million generate non-GAAP interest EBITDA compared adjusted count to expect we per share the $XXX Higher of balance expected Overall, earnings about is earlier term lien on a perspective, a expected the as benefit XXXX. $X.XX

continued the year incremental a a term ABL pay credit witnessing all markets in and cash additional We like support our year, generated debt economic the outstanding substantially servicing loan cost from loan. an working which lenders. net for create of of XXXX flow the our include and year. of unanticipated believe to from when reduce cash to from We of environment, operations in I used of intend last year After grateful last additional potentially proceeds trust we're excess will capital, opportunity extremely the cash use was the liquidity inaccessible incremental the our to unwind fleeting our which term difficult a outweighed through this down were large

are function until in While royalty acquired for may small bankruptcy, we've in environment, a step significant conversion XX to in our delevered franchise or contribution. PSP the Case competitor locations can today, months. point, in a there existing stores from difficult new this unit be create tuck-in those to franchise in coming franchisees that sell and growth and priority acquisitions they expect count not acquisitions one-off opportunities

be wash will or locations these of banner. under rebranded the wagon PSP All

call turn to it over I'll and up Eric, provide you we with then the can details, to financial Q&A. wrap

Thanks.

Brian. Great. Thank you,

pro items address be I like I forma making to references many Before operations, that throughout we the to of call. will results would remind you this

prior Our their and policies fiscal extent historical Group. to may businesses financial reasonable. These acquisition to acquired align by Franchise press items been releases to have with for our to filings the adjusted and accounting the refer calendar results

the will forma acquired timing of not a to performance results pro the allow due comparable the and period to to discuss acquisition. available us companies when is of Comparison evaluate

Buddy's For sales had the XXXX, system-wide, franchisee comps corporate positive and quarter same-store stores fourth X.X%. X.X% with a growing of declining X.X% comp of

new stores XX For backlog new growing franchise to XXX its and opened awarded XX locations Buddy's XXXX locations.

fourth down comped quarter. XX.X% for Badcock the

in to opportunity in franchises fourth Sylvan new units. XXXX growth a and facets continues X% the were consumer for enhanced financial and to the by million its down at receivable accounts of has $XX.X in backlog all the in and recently $XX.X business in we We proceeds sold of sold During January of as $XX.X sold $XX.X another net used quarter, Badcock million The for million. pay million XX.X% franchises, XX continued XX performance. of locations. American bringing and market completed lot franchise accelerate have to Sylvan another XX delivered execute comps Freight for down PSP new the XXXX. to quarter. team year well there's backlog quarter Sylvan in our total sold We sales a and education demonstrated believe growth. consistent of franchise the its XX comp ABL.

comps Franchise the sales fourth Plus continued XXX in backlog X.X% to same-store comps at Supplies Pet corporate to sale X.X%. grew quarter, locations while of of PSP the PSP stores XXXX in generated XX growth the accelerate grew its franchise new with bringing in total system-wide X.X% quarter, locations.

and the XX stores, backlog direct-to-consumer year which a sold to Shoppe stores. built have our franchising, XX.X% have business. approximately accounted of sold first stores. backlog XX We locations In wagon currently Vitamin XX comps of wash XX quarter, of for positive our we

fully operations $X.X On revenue fourth total XXXX, was Group $X.XX. was quarter a from of $X.XX loss per EBITDA EPS basis, was reported million, diluted $XX.X share. million was Adjusted and continued the or for $X.X Franchise consolidated for Net billion. non-GAAP

Franchise ended year EPS was or and from per reported $XXX continuing billion. XXXX, Net $XX.X Adjusted fully December share. operations for fiscal share. Group EBITDA total was diluted XX, revenue million loss $X.X was $X.XX $X.XX per the For was million, non-GAAP

and the to noncore consumer we business have the reiterate to the from and want that third-party EPS. partners transitioning finance I of from in non-GAAP financing adjusted of at EBITDA Badcock process excluded results still in-house are

third a most Once assets forma we and liabilities the the the will income accounts we customer for sheet the having receivables securitized been to longer lending, While and balance reported sheet. and our discontinue securitization to accounted originating balance continues be can as for receivable pro sale on despite reflect statement parties. we of receivables believe will sold be consumer no debt related loans, the

we $X.X our performance, with have the of revolver. on debt year, continue We quarter with we do I continued conjunction shareholders businesses approximately billion believe the our foreseeable million support and million. end lenders our support availability of thank the approximately approximately of to to the and business future. all our all sheet At want ended In remaining for for date. obligations to $XX.X their liquidity of outstanding term sufficient meet cash ABL our balance and in we $XX.X had all to and of of

questions. open you. the for Thank line Gary, please

is question Larry first Solow CJS ahead. with Our go Instructions] Please [Operator from Securities.

more the through I growth one doesn't was growth Strong quarter a quarter. discuss maybe may forward? by year. trend, in but you wash sounds know some just accelerating openings is same-store growth That I maybe franchisee digit. and dynamic a driven sort It know the that mid-single wagon swell going of was and -- for this there. of and just just EBITDA make organic margin Can be that driver really mixed like XX% growth that

consistent real we store as that think the Thanks, this impact from year Sure. ramp but maturation both last opened forecasting from stores, I we're the doors PSPs growth of before comp new opening year as the also up. Larry. and and of single-digit they the the and year, look comp benefited continued gains at comes low additional units

year ton a we're revenue us. operate get performance. initial to openings. continue their to cash and of They You of and free and pleased contribution their very grow the flow in the for with continue don't But EBITDA

drawn you so to get overnight. done improvement then you And just out just earnings just to of you've sort then -- sort million this right outline million potential. purchasing I to 'XX. need on switching the could in things inventory business the to besides how year, the American not few freight. million? you the $XXX $XX Could that to breakeven on maybe get Clearly, Okay. to back I happen it's initiatives but get basically direction. or we in And EBITDA were mean, of going fast $XXX the and that could know

I So said you you growth know expect in 'XX.

for that. hope we think all would I

better So a maybe years contributions EBITDA 'XX? when is economy? of a it better get to take couple in Or you a and meaningful -- little going

Sure.

EBITDA last year, year. see was at of actually you was quarterly the breakeven negative cadence, it about back look but half you'll So the if it in the

operations, positive from about and think consumed how momentum contribution. EBITDA then negative think in from We financial working I us. from capital of you those if and -- usage. breakeven American and progressed, from we've think breakeven on to have don't things certainly -- So don't the think dependent are tremendous need is it's including we behind negative cash American economy. back I to that Freight that operating that days that Freight's turnaround we're year amount and continue cash get a gone the last performance flow

our I within think really control. it's

But we coming have and need high-cost that we one in cycle. coming is back we've we are have of need continued in in, as those discussed through inventory control to that quickly we moving get inventory the to November things the but that turn that have to can how been still out, old orders we

year, that prices take team levels Freight. closer But that good focused from -- American job, we required as customers on a did grown really and the respect tremendous through I really expect back and I going to to the think should the do inventory, get focus you think expect and the value think that profitability to to that very levels, part a the us we will have moving normalized midyear. see down we of from amount out significant in of increase. to it's inventory this their a cleaning go expect this year. through I I but a don't be I for most material increase by the do

are happen we what it, to, get asked the need things profitability X You normalized that that do about or back need or X call level. to to to

us. of able that getting times not had can to the a that but last value we're cost now coming have were pre-COVID over unit costs that Freight couple talk better, unit at fully the but cost a have from up product we make expect to do years. price landed at coming we of to been from bit It the really costs the and that there. been margin you've has level to make If And have costs find If and me the same quite unit freight being with heard time, have cost significantly. XX% customer about it's they're down. XXX% attractive you down the expecting

XX% maybe we're XX%. So if it was up now

it's back we're but the not So going par still to in right direction.

it deals, turn great that aggressively to expect buying just going business -- to infrastructure to are the now. we're need a than of if this is a we to on been lower need able have inventory and we and through we and that at that sake not and could that less stuffed while, right we the operate efficiently. the place stores. for growth. significantly and going to were deal think and we're I had a had handle inventory we've great franchisees convert now, replace to the we That's to what inventory the in We cash just seeing we're inventory But cost but our -- open for not to flush able buy to going we're even able company-owned be to systems be

careful. we'll be very I So think

is Davidson. go Baker next D.A. Please Mike question from with ahead. The

right. got All you. I

the American So this a your How still? Are questioning. -- report about one quick XX% to year, going going Freight on follow-up drag quarter line throughout it et through XX%, to it get process? negative far is moving improve cetera? EBITDA I And X that through to XX%, you you that is are be now when maybe it's inventory Or is first EBITDA? can numbers way still the to that think but right of you

been. has it Well,

tell but because that think the of X QX calendar, business to helpful. at at help X, is positive tax But breaking cash January, you generated the The in be free the business were cadence going to flow. calendar X, retail calendar EBITDA, likely the can we the EBITDA. because money probably in quarterly I is it generated negative I operated negative

what in cash seeing that what generating. good interested business how is So you're just is impacts is the really how free I when flow think of a -- really the much is accounting example I'm

scientific pick time probably but a next wouldn't to think we dribs midyear process, a that take As it. I we majority say in be to I of because out inventory -- it far far be we've bank. number, same but this have, through the I'd to moving inning I as If think wouldn't cleansing going we the still the to great don't higher perfecting cost. at drabs the coming and hard what with inventory certainly are issue and XX% job to we at through, take through that really have get we'll say in and was to done how or but still year, I dealing

about talked that commented your flow, next will segue XXXX. is free outlook total cash on in you question. for -- cash flow my What so You free into

between of you'll cash bridge to what really, as sort free of give to and dividend. can important have of EBITDA us enough $XXX you free the If point and the guidance your maybe gap part flow? your is flow cash million that the that, confidence you And pay expect

Sure.

have year. you'll that's conclusions generation. last going cash free year, to it or with good the better but not, at can to news certainly on own than was help I pretty The year is but how this to easy be So it's your we flow look draw dividend last beat you

PSP, going which think $XX $XX growth you've maintenance though, we'll million a we a $XXX million the of would me we'll operate should get up working new probably and million them about is complete is converted think certainly I $XX benefit have It that that interest for and million, the significant take, as have great we'll or million expense is being that This heard but give this distribution funding we the for we've $XX we're to tied do, and into about if got well, don't be to that year, the cash and If of I in And FRG total tax all $XXX get -- million working is, of got back whole. CapEx. majority benefit of the excess year. of center $XXX cash a capital. about of of And EBITDA, both we'll say CapEx, before, will around of have back. have we cash. if million which you've we have capital growth expense, for perhaps

you of see free think numbers still But add were it's flow. year amount cash those not the you'll a used when to together, all a that to healthy not I So we it's -- levels ago.

But yes, okay.

So as gives which -- I pay I back and in queue about go the another get over go to I'll maybe enough that through -- you was million cash, else. so $XXX well, X, more I in dividend. the someone turn to I'll than quickly, have it that

Oppenheimer. The is Ian with next from question Zaffino

maybe up severity Freight now excess the Freight follow inventory maybe Or to what situation? on of we wanted this what like there. on real are drove comments and to sort I of it of following is the inventory playbook like Badcock be, might did well? was it Just is seems can inventory help we and I the that you that American understand problem, out but guess as Babcock guess us same at American kind the

Yes.

American inventory excess So happy in not so anything I'm the about not I that I inventory you I'm Freight don't Badcock tell was Ian, to having situation. system. think referenced unique

all PSP do Shoppe that don't apples-to-apples Vitamin be all to have Badcock, -- inventory this an four businesses of we Freight, levels. year. reduced and are And inventory American optimal about down on necessarily happy you're referring this you're back But basis that those at at help -- think comment if expect you not Badcock thinking clarify, I think that sure Or either over that to but inventory throw to comment not my an way. being to specifically about I'm just year? I'll if to I'm EBITDA and I

that misunderstood so Badcock inventory at I was of sort I elevated guess that you but have mentioned regardless might it,

elevated That -- but everywhere, because it's situation. same it, it's it's nearly the if I true said not

hope yes, So that clarifies.

Okay.

as the elevated to of one opposed So meaningfully. mill

Correct.

we has this guidance if you what know where comfortable thinking the investors but the on as asked, don't been as about here, far given maybe we dividend, I now then right how just forward? we going about dividend are should it Are and expect is. are how And thinking

Yes.

make is it to Board the outcome. We dividend. So set the each quarter, on don't that an the them annual give determine the determine and basis. do We analyze information we going recommendations a I quarterly and

dividend meeting that five So rate that, -- last, and a we same and and it that the last or and today. the been I we've quarters approved recommended had I maybe at think, so, Board Board quarters the issued four week, over even paying we've declared and and

happens As down don't road, the far I know. what as

is valued certainly understands think understand, that the highly that our shareholders. I think the also I and I by Board that dividend

-- important with And it's forecast any at it's certainly I what's to want But so dividend wouldn't the to happen us, you. important going time. to that's to in point

question next from Caintic with is Stephens. The Vincent

First back to of going that. one, kind just

kind But stand the of could and you're out positive. talk a And the of So But a far and of of cash -- we're quarter talking talk taken laid share going you liquidity for uses actions return? maybe potential into you so going have dividend are pretty this the given about now. targets uses the also maybe the that your if liquidity past what of cash you've of bit did the some kind as already well. of kind you of you could generation, about buyback about would -- capital kind kind targets if leverage XXXX, when

Sure.

really service shows opening did three gone turns credit January very We that comfortable. to that think, the The same, costs three capital that we the higher leverage why ultimately financial upsizing. policy markets think, and experienced our that of remains look, rates has two our two under to belong we EBITDA, is launch I in of turns the we've to turns are three spot. where advantage the cost up. interest is, the comfortable, sweet being paying take I to we're So of debt The

never increase liquidity. know I'm it did to what's we have you because glad happen. So to going our

I And need be we're that want perform to expected. to cost have the have high. too last you thing that actually But way think good businesses have a and the spot. we capital The is in of capital continued

our our have entirety to cash to to interest I overall, ability on. on that We've into a this capital interest is chunk the we be deal that's billion flow think our expense convert before. pay got that of going generate ability by we pay on And a cash. the year augmented higher our to working now large $XXX cash new that offsetting the because really pay free had the have really of debt because a additional not that's million big to just rate to we that cash $X.X

we we'll enough If cash then our responsibilities. anything cover we So could generate if think to all look, fail that at operate, I operate that to of happen point?

that appreciate question, one. and of kind second financial another I

here. been adjusted getting difference it investor questions the to be Badcock and and about adjustments EPS, seems I've some between the GAAP So

into you If adjusted out? of detail. kind delve those, that in more could more of being how I then be losses -- guess, wondering Just expecting that lasts. and being long Should we

Eric, I than do. because it understand you let much will that handle Yes. better you I

Yes. Thanks, Brian. Yes.

to GAAP is components essentially with the what we all adjusted financing. to related between of out delta strip and So do that Badcock EBITDA

P&L. the into within financing then that it And mentioned middle you'll and one up where to as go into time away better we time. year at business we X it so broken exit it lines in end out those the would the -- by Brian of earlier, shows to essentially in all therefore, the And QX, instead comes the see point we've -- within lumping where what of describe that's the on of expect add-backs this

the -- of but was base operations. line add-back the effect So in just

that's once So -- off planned -- quarter lines or on if the right balance And it's already on I I it is or it's sheet, of understand balance you sell now, sheet don't the balance business if we anymore. guess the sheet, the see it's sort the correctly? second

that's Yes, process in Yes. yes.

question next follow-up Mike from The with a Baker Davidson. D.A. is

promised. As

a follow-up line on me Badcock let just So of questioning. -- and that

your the this that the into well? So Or is, question that, of subsequent less that does quarter excluding quarter, I that by A those of of spot, the presume debt on question, linger receivables less than than to about you the I et related correct? go leverage as go end you're do the X quarters? you're Is sheet and sweet to out receivables. times, related what away? talk balance will debt the that if guess -- when cetera, away part the second second the

how I say then are weren't hasn't of easy finding get in have trouble by part now. It here confident you -- heading it that of offload are you of I you that tests maybe And some the to been had as second originally is right having quarter? direction ways those -- rid receivables. last that know the it end the the But some thought. as you're sounds like done you you some tests that that

second you much this have is how that the confidence do quarter? So by gone

and handle if repeat the first that. may two. part to So I'll try can you Eric, of And need to some last then the take you

the So the last was one -- was one level. confidence

about recourse of The the to is question last the second debt, that was

when yes, More calculation. about you what leverage you include about in you when talk your

we what pay include balance to sheet leverage, anything That's money count. actually I don't own on. include I I incurred debt for we we calculations nonrecourse. It's and have not my the that it because have that back. So is that It's securitization item. a in

our if just sheet you leaves you've pretty think we're balance like I out financing are eloquently and the did. magic. -- securitized out So If said debt we of altogether, the in-house

illustration you've got. So that I really think that's the

two about be as not being talking Badcock a I'm anything that to include when So leverage receivables. where with turns to we to having three target want do does of

Badcock from here that the to we've here waterfall we write continuing are. continuing would XXXX, third-party far level that end expect gotten the we test we we but in-house that would the transition As as offering. credit, of in-house be as February I didn't how and be with confidence to sit today at to

me. was a bet not We're by that there. just So bad

it a think make have comes you just to time out decisions. figure I there that and

think that's And I where we are.

really by we June, end X test need a around able dealer think us now what know I it's for if think, and operator, and Badcock know, to X XX and years that working this I good stores, to what's tell dealer that who particular, been the stores what's with in is we should we'll of right into has moving not. the be

Would I months a Absolutely. it, that life bet Do really my Absolutely. I end not. absolutely think is think realistic? us. ago, is big I there step I that Would June on that several of were for that, the prefer we

I qualitative where personal we that's to the my be. give think you summary we I to are, So of need probably where could best views

I away don't go you give yes, want sorry, Well, on. to

No. around I question answer sorry, going -- accounting. was just your ask the to Mike, first

the but balance So customer essentially, on the it's until And it because we where stop from paper. related a a accounting this stopped a those the sheet, we as unwind accounting to all sale once nuances of legal a is originating an as of we sale well. sale from add-backs perspective, true do, one it's get we perspective, that counted doesn't

you'll we accounts, of see when from So point the stopped online time balance at that the sheet. it in origination

Right.

by quarter, the it June, to point you're be but you're quarter. But the within because that not So in presumably, sheet. then if by have quarter, the balance we're it's not third but you'll would with the done balance the at some some by life, still you're if sheet and right, be be -- -- will on if done the second by that the it of won't XQ third quarter Brian's bet going it right, on

Correct.

where how to that, though. on point, is you give -- to for a to a implication have just I going decision. to priority you away you I that would up? But you good that show would say just -- to just thing as wanted? as your don't mean, some when have that negotiations at where more here. would that's One And you're you with -- got make a would make Okay. deal third want not the

to But how I'm right deal question, say me than we answer do it. that where I'm Other That's more. lead Yes. and whatever sure strike are absolutely fair that certain wanting will we that's really now. a to not

than I to know look, consider. other we that to really don't say options remaining to have so answer how multiple And

expanding and Yes. test. months still meet we're to deadline. it To sorted get to We but We're four test, out. continue hopeful, self-imposed got the We've our

over concludes Brian This our turn Kahn conference session. remarks. to question-and-answer to back would I any like for closing the

joining Great. Group. and for Franchise interest Well, us, you for can you call. thank you the your conclude thank Operator, all in

for has conference Thank presentation. attending The concluded. now today's you

You may disconnect. now