FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Incorporated Third Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The lines will be open for your questions following the presentation. Please note that this conference is being recorded today, November 10, 2020. On the call today from Fat Brands are President and Chief Executive Officer Andy Wiederhorn and Chief Financial Officer Rebecca Hershinger. I would now like to turn the call over to Ashley B. Simone of ICR to begin.

Thank you, Operator, and good afternoon, everyone. By now, everyone should have access to our earnings release, which can be found on our Investor Relations website at ir.fatbrands.com in the Press Release section. Before we begin, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties. The company does not undertake to update these forward-looking statements at a later date. For a more detailed discussion of the risks that could impact future operating results and financial conditions, please see today's earnings press release and our recent SEC filings. During today's call, the company may discuss non-GAAP financial measures which it believes can be useful in evaluating performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable gap measures are available in today's earnings release. I would now like to turn the call over to Andy Wiederhorn, President and CEO. Andy?

Thanks, Ashley. Good afternoon, everyone, and thank you all for joining us on the call today. I hope you're all staying safe and healthy as we continue to navigate through the COVID-19 pandemic. This afternoon, we made our third quarter financial results publicly available. Please refer to our press release and our earnings supplement, both of which are available in the investors section of our website at www.fatbrands.com. Both contain details about the quarter, which closed on September 27th. This is our fourth investor conference call since the beginning of the pandemic, and I want to use this time to give you an update on the organic performance of the business and then walk through the two transformative transactions that closed during this quarter. the acquisition of Johnny Rockets on September 21st, and the preferred stock offering and related transactions on July 16th. Then I would be happy to open up the line for questions. We have seen an uplift in system-wide sales as we moved from 42 million in Q2 2020 sales to 68 million in Q3 2020 sales, an increase of 63.2%. On average across all of our brands for the past eight to 12 weeks, we've seen an average of 1% or 100 basis points improvement each week in sales, so very encouraging. These increases reflect the easing of shelter-in-place orders, phased reopening across the country, outdoor dining, strong to-go and delivery sales across our brand, and various initiatives we put in place to continue the positive trends around delivery. In September, we began the rollout of Chow Lee, a third-party delivery aggregator, and Hunger, a native online ordering and delivery as a service platform across our brands. During that first month, we saw an increase in delivery sales of over 40% for domestic Fatburger and co-branded Fatburger and Buffalo's Express locations. As we have discussed in our previous calls, we continue to work closely with our franchisees across our brands to provide the support that they need as we navigate through this global pandemic together, including assisting with enhanced to-go packaging and delivery options, operating practices and procedures that align with local, state, and federal regulations, safety, sanitation, and social distancing measures to provide comfort to guests, and redesigned menu and serving options, which, for example, may focus on family packs to go or attendant served buffets. Let me now give you an update on our development pipeline and where we think we will end this year compared to 2019. During the third quarter, franchisees opened 12 new stores worldwide, which includes 12 Johnny Rockets openings, bringing the year-to-date total of 15 stores, not 12 Johnny Rockets openings, sorry, which just includes Johnny Rockets openings, bringing the year to 15 to 45 total stores as of November 6th, with 12 additional stores slated to open by the end of the year. We expect to close 2020 with 57 new stores in total, compared to 2019 when we opened 24 stores excluding Johnny Rockets and 52 including Johnny Rockets. So during this pandemic, we're growing even more than last year. We remain optimistic about our prospects, even during this global crisis, as we're focused on driving our organic growth by not only assisting our franchisees with their top-line sales recovery, but also by opening additional stores across our brand. Now let me turn to the two key transactions that occurred during the third quarter, which in many ways transformed the company. On September 21st, we successfully completed the acquisition of Johnny Rockets from an affiliate of private equity group Sun Capital Partners for the purchase price of approximately $25 million. The transaction was funded with proceeds from an increase in the company's $80 million securitization facility, which I will expand upon in a few minutes. With the acquisition of Johnny Rockets, Fat Brands now franchises more than 700 restaurants around the globe in more than 30 countries, with 2019 annual system-wide sales exceeding $700 million. In a pre-COVID environment, on a normalized, annualized basis, we estimate that the addition of the Rockets brand would have increased our 2019 revenues by approximately 50% and our EBITDA by approximately 100%. In addition to providing the Rockets franchisees with the same support through the pandemic that we provide to our existing franchisees, we intend to accelerate the brand's growth through a number of initiatives, such as the introduction of plant-based proteins, opening of virtual restaurants, utilization of our significant purchasing muscle, expansion of marketing and advertising programs, and the implementation of additional delivery technologies. This acquisition represents a significant milestone for us as we continue to leverage our platform and affirm our positioning as an asset-light franchisor. As we've discussed on prior calls, in March 2020, we closed on our whole business securitization facility, which has a key structural element called an accordion feature that allows us to expand the facility with relative ease to raise new money and support Paprand's acquisition growth strategy. At the March closing, we raised $40 million. $20 million in senior notes rated BB by DBRS Morningstar, and $20 million in senior subordinated notes rated BB by DBRS Morningstar. Then, just at the end of September, we utilized that accordion feature and raised another $40 million of subordinated notes, which funded the acquisition of Johnny Rockets, as well as provided us with additional liquidity for working capital and organic growth. The second but no less important transaction during the third quarter was the completion of the underwritten public offering of $9 million of 8.25% Series B cumulative preferred stock and warrants. Both the preferred stock and the warrants began trading on the NASDAQ on July 14th. Concurrent with this offering, we issued additional shares with a face value of over $6 million from the exchange of a portion of the Series A preferred stock and accrued dividends thereon into Series B preferred stock. as well as the exchange of Series A1 into Series B. These transactions simplified our capital structure, raising $9 million in cash and a total of $15 million in equity. I'd also like to note that of the Series B, nearly $3 million are owned by company insiders or affiliates, and we believe that demonstrates a true sense of confidence in our company. Turning now to the third quarter, total revenue increased to $4.1 million from $3.1 million in the second quarter of 2020, and our system-wide sales increased 52% quarter over quarter, reflecting a bounce back from the height of the pandemic. As I mentioned on our last call, the burger brands are recovering very quickly, and they are more in line with consumer behavior versus buffet. And our Hurricane and Buffalo's Cafe brands have shown extremely strong resilience during the pandemic, even more so than the burger brands, copying over 100% on a weekly basis at this point. Total cost and expenses were $4.9 million in the quarter compared to $3.6 million last year. But when you exclude refranchising losses of $300,000 and refranchising gains of $900,000 in 2019, as well as an impairment charge during the third quarter of 2020, our cost and expenses totaled $3.8 million in the third quarter of 2020 compared to $4.5 million in the third quarter of 2019, a $700,000 savings. combined effect of lower revenue and higher costs resulted in an adjusted EBITDA of $621,000. This compares to adjusted EBITDA of $2.3 million in the third quarter of 2019. While we are currently working through this challenging time in our industry, we are a stronger company today due to the progress, strategies, and transactions we have achieved and executed year-to-date. As we all look forward to a vaccine, I'm confident we are well-positioned to drive our growth both organically and through opportunistic acquisitions in the years ahead. Before we open the call for your questions, I'd once again like to extend my heartfelt thank you to all of our team members, our franchise partners, and their employees, as they have done an outstanding job during these unprecedented times in adapting and rising to meet the challenges our industry faces. I'm very proud of our team and our partners and remain excited for the opportunity in front of us, especially as we participate in industry's recovery period. With that, operator, please open the line for questions.