Edited Transcript of FRII.TO earnings conference call or presentation 26-Feb-20 1:30pm GMT

Our omnichannel mission continued to take shape in 2019, and we found creative ways to bring relevant health trends to our guests around the world. Last quarter, we shared our 3 pillars that we are focused on for 2020. One, driving sales through marketing and menu initiatives. Two, delivering a world-class customer experience. And three, strengthening the partnerships we have with our franchise partners.

From a marketing and menu perspective, in Q4 2019 and into the first quarter of 2020, we launched Beyond CHILii using the Beyond Meat crumble. We followed that menu campaign with the launch of the keto Cobb salad, a keto diet-friendly play on the traditional Cobb launched alongside a number of predesigned, customized order tickets that allow our guests to follow the most popular eating plans today, like paleo, keto, vegan and vegetarian diets.

From a customer experience perspective, in Q4, we completed an RFP and subsequently signed a partnership with a market leader in the customer experience management space, and we will begin leveraging their platform to interact more frequently and on more topics with Freshii eaters. We will be receiving robust real time feedback, allowing us to learn even more about what’s most important to our guests. This deeper understanding of what our customers are looking for and how they feel about the things we’re doing in our restaurants will allow us to ensure that the experience we’re delivering is tailored to exactly what they want. We will use that perspective we gain to both delight our current guests and drive new guests to our restaurants.

Finally, in Q4, we furthered the connection between HQ and our franchise partners, ensuring the voice and views of our operators are at the forefront of everything we do. We are now in the third consecutive year of working closely with our Freshii Franchise Council, or FFC, which represents the interests of the broader Freshii franchise network. The FFC provides valuable infield insight around the menu, technology, marketing and operations initiatives at each stage of their development and rollout. I look forward to personally spending time with our FFC members who have flown in from around North America as we kick off our first day session tomorrow at HQ.

With that, I’ll now turn the call over to Dan Haroun, our CFO, to provide some additional color on our financial results before opening up the call to any questions.

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Daniel Haroun, Freshii Inc. – CFO [4]

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Thanks, Matthew, and good morning, everyone. I’ll give an overview of our fourth quarter results and then some highlights of the full fiscal 2019 year. I’ll start off with our Q4 results with comparisons versus Q4 2018. In Q4, system-wide sales increased $1.8 million or 4{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} to just over $42 million driven by 6 net new openings in the quarter. This growth from net new openings was partly offset by same-store sales decline of 2{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} as we continue to see traffic declines that are partly offset by higher check.

Growth in system-wide sales drove revenue growth in our royalties and other income streams. These increases were offset by a reduction in franchise fee revenue, driven by less net new openings as well as the reduction in corporate store revenue due to having fewer corporate stores, similar to what we communicated in our Q3 results. This resulted in a reduction in revenue in Q4 of 3{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5}. Adjusted EBITDA was down $0.2 million or 15{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} versus Q4 of 2018, including the impacts of foreign exchange in Q4 of 2019 and the prior quarter. Once we exclude the impacts of foreign exchange, adjusted EBITDA would have been up 8{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} versus Q4 of 2018, a solid result given the headwinds on franchise fee revenue. We benefited from SG&A being roughly flat on a dollar basis in the quarter, driving leverage from the 4{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} system-wide sales growth previously noted.

On a full year basis, system-wide sales were up 7{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} to over $184 million, driven by 31 net new openings, partly offset by same-store sales decline of 2.7{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5}. We saw very consistent results in drivers of sales in the quarter and the full year with in-store traffic declines, which are partly offset by growth in average check. On a full year basis, revenue was up 3{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} versus 2018 with higher system-wide sales, driving an increase in franchise revenue, partly offset by lower corporate store revenue due to less locations.

On a full year basis, we reported adjusted EBITDA of $5.8 million, roughly flat to the prior year. Similar to the quarter, fiscal 2019 adjusted EBITDA was also impacted by foreign exchange. Excluding these impacts of foreign exchange, we would have had adjusted EBITDA of $6 million, which would have represented growth of 10{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} versus the prior year. For the full year, we generated $4.8 million in free cash flow. And as of December 29, 2019, we had just over USD 31 million on the balance sheet. Our strong cash position gives us important flexibility to drive progress against the 3 pillars Matthew outlined as we head into 2020.

At this time, we’d like to open up the call to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from John Zamparo of CIBC World Markets.

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John Zamparo, CIBC Capital Markets, Research Division – Associate [2]

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Maybe we can start with the closures in the quarter, and you’ve seen a relatively elevated level of closures over the past 5 or 6 quarters. So I was just wondering if you could give some color on these as it relates to geography or average age of these restaurants or any unique elements that’s worth looking at.

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Daniel Haroun, Freshii Inc. – CFO [3]

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John, in terms of closures, you’re right, we have continued to be hard at work on looking at every individual site, the partner that’s operating that site, the trade area, to make sure that the locations that we are running are locations that will be good for our brand for the long term. And we did have some elevated closures in the quarter, and it’s really a matter of us be much more disciplined about our approach to the sites that we’re going to continue to operate on a go-forward basis. At this point, we won’t give additional color on the geography or vintage. But we’re really looking at each site from the lens of is that site a site that we’re going to be able to grow with for the long-term in a way that works for both us and the franchise partner.

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John Zamparo, CIBC Capital Markets, Research Division – Associate [4]

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Okay. And is it fair that we’ve seen the peak when it comes to closures? Or is the level that we’ve seen over the past 5 or 6 quarters, is that reflective of what you’re expecting for 2020?

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Daniel Haroun, Freshii Inc. – CFO [5]

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Yes. So we won’t give forward guidance. We do believe that we need to continue on the journey that we’re on, of looking at each individual site. I think a lot of progress has been made over the last 6 quarters, but we’re going to continue to look at the estate in a very thoughtful way on a go-forward basis.

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John Zamparo, CIBC Capital Markets, Research Division – Associate [6]

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Okay. And then average unit volumes, so these aren’t moving the way you’d like? What’s been the impact on attracting new franchisees to the system or compelling existing franchisees to open new stores? And just generally, what can you say about franchisee profitability at the moment versus prior year?

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Daniel Haroun, Freshii Inc. – CFO [7]

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I think we’re excited about moving forward with our franchisees and continuing to strengthen the partnership that we’ve got together. As Matthew highlighted in his prepared remarks, we’ve got our Franchisee Advisory Council in Toronto over the next 2 days, to spend time thinking through 2020 and our strategy on a go-forward basis.

In terms of the development pipeline, again, we’re going to be disciplined on how we look at new sites the same way we’re disciplined about how we look at the sites that we’ve got open today. We continue to put franchisee profitability at the center of our decision-making as much now as ever before, and it’s something that’s critical for us as we move forward with that pillar that Matthew highlighted in his prepared remarks.

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John Zamparo, CIBC Capital Markets, Research Division – Associate [8]

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Okay. And just a couple more. On same-store sales, it seems like the entire industry has been pretty challenged on this. I was wondering how you view the industry and competition at the moment. And just what do you think has changed over the past 6 months or so, to make it more challenging?

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Daniel Haroun, Freshii Inc. – CFO [9]

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I think you’ve — we’re starting to see a real challenge for the industry from a traffic perspective, and I think whether it’s through in-store activities or the third party aggregators, I think check is continuing to grow, as customers are looking for that convenience. I think the industry is challenging, but the industry is the same for us and our competition, and we’re clear about the challenges that the industry faces, and we’re taking those into account as we build our go-forward approach in partnership with the franchisees.

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John Zamparo, CIBC Capital Markets, Research Division – Associate [10]

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Okay. And then 1 housekeeping question on the other income line that keeps trending up, it reached almost 3.5{ff534ea0be041245dec5650aca40b93bf0fbd21a075cea1ec885fc4881d621f5} of system sales in the quarter. Presumably, you’ve made some gains from vendor rebates, but can you walk us through the puts and takes of that number? And what else is impacting that P&L line?

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Daniel Haroun, Freshii Inc. – CFO [11]

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Yes. So I think over the long term we expect our other income line and our royalty lines to continue to grow in line with system-wide sales. There will be timing from quarter-to-quarter, but that’s our approach and how we’re thinking about it on a go-forward basis.

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Operator [12]

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(Operator Instructions) This concludes the question-and-answer session. I would like to turn the call back to Matthew Corrin for closing comments.

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Matthew Corrin, Freshii Inc. – Founder, Chairman & CEO [13]

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Great. Thanks, again, for your time this morning, and we look forward to updating you on our progress next quarter and throughout 2020. Have a great day.

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Operator [14]

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This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.