MTY Food Group Inc. ($MTY)

Good morning, and welcome to the MTY Food Group 2026 First Quarter Earnings Conference Call. [Operator Instructions] Listeners are reminded that portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For more information on MTY Food Group's risks and uncertainties related to these forward-looking statements, please refer to the company's annual information form dated February 19, 2026, which is posted on SEDAR+. The company's press release, MD&A and financial statements were issued earlier this morning and are available on its website and on SEDAR+. All figures presented on today's call are in Canadian dollars, unless otherwise stated. This morning's call is being recorded on Friday, April 10, 2026 at 8:30 a.m. Eastern Time. I would now like to turn the call over to Mr. Eric Lefebvre, Chief Executive Officer of MTY Food Group. Please go ahead, sir.

Thank you, and good morning, everyone. This morning, we released our 2026 first quarter results, which you can find posted on our website. The macroeconomic conditions remain challenging through the first quarter. Consumer confidence remains low and impacts consumer spending negatively, as reflected in our same-store sales figures and traffic trends. Encouragingly, early Q2 data shows signs of sequential improvement and gives us cautious optimism for the second quarter despite the broader global dynamics. Same-store sales for the first quarter were stronger in Canada than in the U.S. and International segments. Overall, same-store sales decreased by 2.5% in the quarter. Canada was down 0.8%, with the impact of last year's nonrecurring sales tax holiday being felt in most provinces, while U.S. locations were up 3.6%. Some of our seasonal brands had a soft first quarter, while for some of our other U.S. brands, we took some actions late in 2025 that are in the best interest of our brands in the long term, but that hurt us in the short term. For example, we interrupted gift card sales at Costco for some brands, resulting in reduced visits in the first few months of the year following the holiday period. Most U.S. brands did sequentially better in March than in the first quarter. Digital sales held steady at 23% of total sales in the quarter. Excluding foreign exchange, digital sales grew 3% compared to the same period last year. Digital sales in Canada were up 13%, while they remained flat in the U.S. with the positive momentum we are seeing across the basket of brands in the U.S., offset by the weakness of one brand. One of the areas we've been focused on is enhancing the digital experience for our guests. We continue to invest in technologies that improve the way we interact with our consumers to improve their overall experience by bringing a more personal touch to our marketing efforts. New tools are being deployed in the U.S. to achieve that, and Canada is finally catching up and should be able to begin deploying similar solutions in Q2. We believe digital sales are a key component for our growth in our industry. As we mentioned on our last call, Q1 is typically a seasonally weaker period for new location openings. We opened 52 locations in the quarter, and we closed 90. We also ended our master agreement with TCBY, which resulted in the elimination of 8 stores. The negative store growth in the first quarter was anticipated. We remain confident that 2026 will produce net locations growth as everything is in place to meet our objectives. We've had a good start in Q2, and we have a large number of stores in the pipeline. There are currently just under 200 locations under construction, and we expect new stores to be a bright spot for 2026. Our new store pipeline is robust and ranks among the strongest we've ever seen at MTY. A growing share of our new location is being driven by existing franchise operators. Today, a significant portion of our pipeline comes from these experienced franchisees will offer a stronger, lower-risk expansion profile. We're also investing in new tools that support identifying the best locations for new stores where white space exists in the market, and that shows signs of strong traffic flows. With that, I'll turn it over to Renee to discuss the financials. Renee?

Thank you, Eric, and good morning, everyone. Starting this quarter, we've transitioned to a 52-week reporting basis, ending on the Sunday closest to November 30th each year. This quarter reflects a 13-week period ending March 1, 2026, whereas the comparable period in 2025 is based on the calendar month-end basis ending February 28, 2025. Normalized adjusted EBITDA came in at $60.1 million for the first quarter, in line with the same period last year. This 2026 period benefited from a $5.5 million employee retention credit related to [ 2020 to 2022 ] fiscal year received from the U.S. government. Franchise normalized adjusted EBITDA was $43.2 million in the quarter, down slightly compared to $44 million reported in the same period last year. Franchise revenue was $90.7 million in the quarter compared to $92.9 million in the same period last year, primarily impacted by foreign exchange variations due to a weaker U.S. dollar as well as lower system sales. The Canadian segment was essentially flat, while the U.S. and International segment was down 3% compared to the prior year period. Franchise normalized operating expenses were also down in the quarter to $47.5 million compared to $48.9 million last year, primarily due to the impact of foreign exchange and lower gift card program costs. Normalized franchise EBITDA margins for the quarter improved slightly to 48% compared to 47% in the same period last year. As we continue to add higher quality new stores and capture efficiencies from our ongoing initiatives, we expect franchisee EBITDA growth to outpace same-store sales growth. Segment and normalized adjusted EBITDA for the Corporate Store segment came in at $13.2 million up 8% or $1 million from the same period last year. This includes the $5.5 million employee retention credits I mentioned previously. Excluding this, margins for the segment were 7% compared to 10% in the last period last year. Corporate segment's revenue was $109.7 million and operating expenses was $96.5 million in the quarter. Corporate revenue and expenses were tightly correlated to lower system sales and a decrease in the number of corporate-owned locations in the U.S. We are confident in our ability to drive improvements in the corporate store over time as macroeconomic trends improve and system sales accelerate. This would enable us to consistently deliver corporate segment margins in the high single-digit levels. Our Food Processing, Distribution and Retail segment delivered segment and normalized adjusted EBITDA of $3.7 million in the period off of a revenue of $40.8 million compared to EBITDA of $4 million and revenue of $38.2 million in prior year. Margins came in at 9% in the quarter, slightly below the 10% in the same period last year on account of higher supply chain costs. We believe meaningful opportunities exist within the retail channel for top line and margin expansion as we continue to build scale and strengthen our presence in underpenetrated markets. We reported $36.9 million in net income attributable to owners or $1.62 per share per diluted share compared to $1.7 million or $0.07 per diluted share in the prior year. As Eric mentioned earlier, our asset-light well diversified model continues to generate strong free cash flows. This performance provides us with significant optionality to reduce debt, invest for the future and return capital to shareholders. Cash flows from operations were $40.9 million compared to $64.6 million in the same period last year, and free cash flows net of lease repayments of $29 million in the quarter compared to $49.3 million in the same period last year. The change is mainly attributable to fluctuations in working capital and income taxes paid, partially offset by lower interest paid. The decrease in working capital is mostly due to variances in accounts receivable, payables and accruals due to timing of transactions and payments. We generated $59.9 million in cash flows from operations compared to $58.6 million last year, once you exclude variations in noncash working capital, income taxes and interest paid. We ended the quarter with net debt of approximately $549 million. Considering our strong cash flow generating ability, our debt-to-EBITDA of approximately 1.9x is at a level that gives us the opportunity to take advantage of the optionality we possess to deliver enhanced shareholder return. And with that, I'd like to take your time -- I'd like to thank you for your time and turn it back to Eric for closing remarks.

Thank you, Renee. We've built a great business. Our asset-light model is well diversified across geographies, brands and formats, and we continue to invest in the business to drive long-term returns and growth. Our focus on further strengthening the business during the past 2 years has positioned us for stronger performance once the persistent macroeconomic conditions improve. The strength of our brands and the experience of our team and franchise owners have enabled us to manage through these challenging conditions. While we navigate the recent volatility of the consumer sentiment, we continue to believe in the long-term fundamentals of the business to deliver for shareholders. Before we open the lines for the question period, please note that I cannot comment on the strategic review process that is currently underway. We will provide an update or make announcements as appropriate or as required by law. We cannot provide a specific timeline or assurance that any transaction will result. In parallel, MTY continues to run the business as usual with the same discipline and long-term focus that's defined the company since our founding. With that, let's open the lines for questions. Operator?

[Operator Instructions] Your first question comes from the line of John Zamparo with Scotia Bank.

I wanted to ask about the comment of sales in March improving from Q1. It's difficult to reconcile this against the timing of the war. So just wondering if you could elaborate on that? And do you see any impact in consumer sentiment from the start of the war?

Well, it's hard to find any correlations now. I think it's too early, but all I can say is our sales have been significantly better in March and continues in April so far. We had a little period in mid-March where there was snowstorms and ice storms in most of Canada, and that also affected the U.S. But other than that, March and April are pretty strong. So I'm not sure if or what the impact of the war is, but so far, it's showing in our data that our consumers are resilient and showing up to our stores.

Okay. And in the outlook for this year, you've added some language about potential for higher inflation from higher oil and gas prices. I wonder if you could elaborate what the key components are through your supply chain from the potential for higher for longer inflation this year?

Yes. Well, obviously, for supply chain shipping is complicated right now and the cost of shipping, whether it's ground or air or maritime is also becoming more expensive as fuel prices increase. Obviously, we don't know how long that's going to last, and we hope that the solution will come and fuel prices will go down. But for now, we're starting to see more and more fuel surcharges on our network. And obviously, that funnels through the chain. So there is inflation there that's coming only from fuel charges. And then we'll see if -- how the supply chain is affected depending on how long the problems last in the Middle East.

Okay. And then one more, and I'll pass it on. I wonder how you feel about the current corporate versus franchise mix at MTY? Should we expect that you might want to sell more corporate stores, if so, would those be more in casual or quick service? Anything you can say on that front?

Yes, for sure. There's -- I mean, we're a little bit heavy on corporate right now. So we are selling some corporate stores. We don't have specific initiative to run a fire sale process where we liquidate everything because they do produce good EBITDA, and we don't want to give it away. But we are reducing the number of corporate stores. We have sold a few in Q1, and we have already a few that are sold in Q2 as well. So I mean, you should expect that -- well, not necessarily the number to go down because I can't control everything. But our desire is to reduce that number of corporate stores right now systematically, so it's not going to be a fire sale. But gradually, you should see some corporate stores go into the franchise world instead of being run by MTY.

Your next question comes from the line of Vishal Shreedhar with National Bank.

I wanted to get your perspective on discounting, particularly as it relates to the pizza category, but more broadly and how you see that evolving and how you think MTY needs to respond?

Yes. It's a competitive environment, for sure, and whether you look at one category or the other, ultimately, every time you miss a meal opportunity, you miss a meal opportunity that never comes back. So every food dollar that's spent is competitive. And I think we should not necessarily look at certain segments more than others just because we all compete for the same meal opportunity. It's competitive for sure. Discounting is part of what's necessary for a lot of our brands. It doesn't mean you need to discount all your products. You also don't want to offer discounts where it's not necessary, where you just basically reduce your revenues for consumers you would have had anyways. But you do need to have an entry point for every customer that will satisfy them and not push them away from your store because you don't want to miss on a group of 4, for example, if -- because 1 person looking for more discounts or was looking for an easier entry point. So we always have to be conscious of that. So the key for us is to offer something an entry point and hope that consumers won't necessarily go for it. And if they do go for it, that they buy something else with it, but it's become a necessity for a lot of our brands. We do have brands where it's not as required. You look at Cold Stone and Wetzel's, for example, you don't need to offer those discounts. But for the vast majority of the other brands, you do need to have an entry point that's a little bit easier for consumers.

Okay. So do you see through the course of the year discounting at MTY's brands going up? And I wanted to relate that as well? If so, how do you perceive the health of the franchisee at the MTY base?

Yes. I don't think we need to ramp up more discounting. We have the programs we needed to have. I mean they're in place. They've been in place for some time. So I don't think we need to do more. What we need to do is make sure that we have a variety in that space and that the entry point is not always the same product and that these consumers that are looking for budget-friendly option that they also have some variety. So I don't expect that it would go up. And as far as franchisees are concerned, obviously, for us, it's always the #1 priority. It's easy as a franchisor to discount your product to a point where your franchisee no longer makes money. But that can only last so long for your franchisees get in trouble. So for us, the key is to have healthy franchisees that are financially sound and to offer discounts on products that are also profitable, and find ways -- to find creative ways to help everyone make money even with slightly discounted products. So if you have a higher discount, you'll probably want to have higher velocity to make up for the lost margin and ultimately have the same amount of dollars in the bank account.

Okay. And I was hoping to get your perspective on the customer -- the suite of customer-facing technologies scheduled to launch at Papa Murphy's and it's already launched, if I'm not mistaken. And to get your perspective on how we should anticipate that to benefit trends? Is it something that we'll see? Or is it more of a gradual benefit?

Yes. I mean, that remains to be seen. I hope it will be seen. I think realistically, it's going to be seen over time. The goal here is -- I mean, there's many goals you have on one side, you have customer acquisition, which is always a little bit more challenging. And then you have your customer win back also for consumers you might have lost or that might have forgotten about you. And then you have initiatives for existing consumers to try to improve frequency or improve basket. So I mean, we have a number of tools that are already in place, especially for our main U.S. brands. We're improving those tools. We're adopting new technologies that we hope will help us communicate better with these consumers, and help us create frequency but also make sure that we don't lose them. And for the consumers that we might have lost try to win them back. In Canada, we don't really have anything in place at the moment. It's very primitive. So we feel the adoption of these technologies in the next few months should really create a lift. But that -- I mean, that remains to be tested. We've experienced really good trends when we adopted these technologies in the U.S., and we hope we're going to see the same thing in Canada.

Your next question comes from the line of Derek Lessard with TD Cowen.

So Eric, maybe could you just talk about the thinking behind the interrupted gift card sales, I think you said to Costco? And then in those comments, you also said that you have other actions going on. So maybe just talk about the other initiatives you got going on in this area.

Yes. Well, for the gift cards at Costco specifically, I mean it's always difficult because of the discount that's required by Costco. So we did continue the Cold Stone program, for example, which is really key for Cold Stone. But for some other brands, financially didn't make sense anymore to have that program at Costco. So we might choose to do maybe some seasonal offers or timely offers for Costco again because I mean people do visit Costco. But we don't want it to become almost a cheat code where people go to Costco before they go to our restaurants by $100 of Costco gift cards for $75 and then go to our restaurants that they would have gone anyways. So we're trying to avoid that -- we're trying to avoid that discount that's given to consumers for the wrong reasons. But that does create a problem, especially after the holiday season, where we have fewer redemptions. But it's just a program we couldn't afford anymore with some specific brands. And we're suffering in the short term. There's no doubt about it. But that's going to free up a lot of resources for other initiatives that we're going to be putting forward with the team.

Okay. And maybe one last one for me. In your prepared remarks, you did highlight some new tools for site selection. So curious on what you've seen so far? And any incremental results that you can share with us would be helpful.

Yes. The tools are deploying as we speak. So I mean, again, this is something we're pretty positive about that we're going to be better -- even better at site selection. We did have some tools in the past that were good and served a purpose, but we feel like in today's world, the amount of data you can feed into a tool and how it processes it is really key. And the new tools we're deploying are far superior in our opinion and not only to evaluate a given property, but also to find white space where we might see our competitors are successful, and we have no restaurants. Sometimes you don't suspect some areas to be so productive, and then you realize from the data you now own that maybe you should have a restaurant in there, and the prospects are better. So again, everything we do is to try to find sites that are going to be productive for our franchisees and profitable, and try to avoid sites that might not necessarily be as productive as they might look. So it's all trying to find the right balance for our franchisees to be profitable.

Your next question comes from the line of Michael Glen with Raymond James.

Eric, just in terms of the digital strategy that you're talking about, are you able just to elaborate a bit more? Is this something that is considered into your CapEx? Is it expensive? I'm just trying to understand how some of that spending gets funded?

Yes. There's no CapEx there. Most of the funding is done by the advertising funds of the various brands that are using it. We do have some -- we do have like a data science team internally. That's grown quite a bit in the last few years because of how important it is, and that's funded by MTY. And they're allocated to certain projects right now that are marketing driven, but you won't see that in CapEx, and you also won't see a lift in the amount of OpEx because these people are already on payroll. So you won't see an impact of these new projects.

Okay. And is this -- do you think we could see for the company a common development or something along those lines? Or it would be a digital strategy, brand by brand?

It's brand by brand. We've tried the common app in the past and it took us 2 years to be able to detangle everything. Different brands require different strategies and different promotions and different ways to address your consumers. So no, it's going to be a brand-by-brand thing. But what we're doing is building platform and all the connectors with the various new tools that we have, and then each brand is going to have their own strategy, their own set of data that they're going to be using. So it's going to be a common tool, but it's going to be a brand-by-brand strategy.

Okay. And then what are the -- like Digital is now becoming a larger portion of your sales? What are the franchise economics for digital sales equivalent to an in-store sale or just some insight into how digital sales impact the franchisee?

It really depends which type of digital sales, because we tend to lump everything into the third-party aggregator world. But a lot of our digital sales are also first party. So on first party, if anything, it's probably better for the franchisee economically. The menu price is the same as in store, but it's also typically in order that's slightly larger. So we really like these first-party orders that go through our own websites or our own apps. And you have a lot of that. I'll give you the example of Papa Murphy's, almost 100% of our digital sales is done through our first-party app, which is really, really productive for everyone. So that's good economics. Now if you look at third-party aggregators, obviously, it's a little bit more complicated. The business model is interesting. As long as these sales are incremental sales, we can make it profitable. Obviously, our prices are slightly higher on these platforms, but the cost is also higher because of the commission and because of the packaging and everything. But if it's an incremental sale, it's still a profitable proposition for the franchisee where it gets less profitable if you have a substitution of an in-store order by third-party aggregator order, obviously, then that becomes a little bit more challenging.

Okay. Then on working capital, there was some investment in working capital that took place through the back half of last year Q2 to Q4. Are you able to give some outlook on how we should think about working capital for the balance of this year?

Yes. I mean the way we look at working cap, I mean, there were some timing differences in Q1, and it seems that everything that had a potential to be in our face ended up in our face. But for 2026, we feel like working cap should be about flat compared to last year. So there's no reason why the investment we had this quarter wouldn't come back to us.

Okay. And then just one more for me. I mean, with your leverage where it is right now or should we think about you looking at M&A? Are you actively looking at M&A?

Yes. We continue to look at M&A. So it's always a possibility. Obviously, no promises because we don't control the 100% of the sequence there. But yes, we continue to look at M&A. Our leverage is very favorable. As we mentioned, in previous calls, we wanted to create optionality for ourselves where we could go M&A, we could go NCIB or SIB or any possibility that's going to be deemed appropriate by the Board. So everything is on the table.

Okay. So we could expect you to become active on the share repurchase program in the near term as well?

We have that option open.

[Operator Instructions] Your next question comes from the line of Ryland Conrad with RBC.

I guess just to start off on the store network, I appreciate the seasonal weakness, but I was a bit surprised to see net closings increase year-over-year. Were there any one-offs to call out in the quarter? And I guess, bigger picture, just with respect to the construction pipeline. Are you able to characterize the strength that you're seeing relative to last year? Like correct me if I'm wrong, but I think you were previously referencing roughly 100 locations in the pipeline.

Yes. I mean, I'll start off by saying I was disappointed by the Q1 numbers as well. So I mean, again, it was that type of quarter where we had a little bit more closures than anticipated a little bit fewer openings than anticipated. But again, the pipeline is really strong. We have just under 200 locations under construction at the moment in addition of the ones that we've already opened during the quarter. So what we're seeing now is that there's no reason to believe that 2026 would not be a positive net store opening. So nothing specific to call out. There were no major one-timers other than, obviously, TCBY master license being terminated. But other than that, there were no one-timers. It's just -- I mean the cards fell this way for Q1, but we're still feeling very bullish about 2026. We feel like the net store opening is going to be a bright spot for us, and the fact that we're swinging hammers on so many stores is really positive.

Okay. Got it. And then just the MD&A, I believe mentioned in organic system sales decline of about 8% for Papa Murphy's. Are you able to put that performance into context, just relative to recent quarters where I think you saw a bit of sequential improvement?

Yes. I'm not sure exactly about the numbers you quote, but I mean, Papa Murphy's is certainly facing headwinds in terms of sales right now. We're -- again, they should benefit from the tools that we're deploying now. So hopefully, that's going to create a dent in the trajectory. We're also revising the way we do marketing and which promotions we want to push a little bit harder for Papa Murphy's. We have the Detroit pizza is out now. It seems to be doing a reasonable job in the PMIX and creating maybe some excitement around the brand. And hopefully, that's going to result in more repeat business going forward. But there's no doubt that Papa Murphy's, we had a reasonable 2024 with Papa Murphy's, but then '25 was complicated and it's continuing in '26.

Okay. And just on Papa Murphy's. I think you took ownership of about 50 underperforming locations last year. Could you give an update just where you're at with respect to turning those around and kind of getting them back to breakeven in refranchise?

It's proving to be more complicated than anticipated. I won't lie to you. We do see somewhat of a sales mix and somewhat of an improvement, not a sales mix but a sales lift and some improvement in the way we operate the business, but it's taking longer than we thought to turn those around. We are suffering losses with these restaurants. At the moment, we did franchise a few, but not many. So I mean, we're not giving up. We still believe in these restaurants, the fundamentals that were there in the markets still exist, but it's not impossible that we might have to make decisions with certain stores if we're continuing to incur losses, and we see that there might be less hope. But for now, we're not giving up, but it's taking longer than anticipated.

I appreciate the color there. And then lastly for me, I was surprised to see the employee retention credit as I thought that was largely done last quarter. So could you just give an update there? And should we expect to see any more this year?

Yes. We were surprised as well, to be honest. Pleasant surprise. But now we feel like it's really done done. So there should be no more ERCs in the future.

We have no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.