FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAP Brands Incorporated Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. The lines will be open for questions following the presentation. Please note that this conference is being recorded today, August 5th, 2021. On the call today from FAP Brands are President and CEO Andy Wiederhorn and CFO Ken Keurig. By now, everyone should have access to 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 the number of risks and uncertainties. The company undertakes no obligation 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 on our recent SEC filings. During today's call, the company may discuss non-GAAP financial measures, which is believed can be useful in evaluating its performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results repaired in accordance with GAAP. Reconciliations to comparable GAAP measures are available in today's earnings release date. I'll now turn the call over to Andy Wiederhorn, President and CEO. You may now begin.

Thank you, Operators. Good afternoon, everyone, and thank you all for joining us on the call today. I'm hopeful that as we begin to put the COVID-19 pandemic in the rearview mirror, everyone is continuing to stay safe and healthy. This afternoon, we made our second quarter 2021 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 additional details about the quarter, which closed on June 27th. I am especially excited to talk to you today, given the great work we have done over the past quarter, from strengthening our executive team to posting solid operating results, completing a transformative acquisition, and capital structure work. I'll start with the additions of four talented members to our executive team. Alan Sussman, our general counsel, Ken Kuick, our chief financial officer, and Rob Rosen, our executive vice president of capital markets, who joined the company during the second quarter. These three come with a tremendous amount of experience and bolster our already talented executive team. They are already proving to be key additions to our team, and we continue to advance our strategic objectives. Finally, with the acquisition of Global Franchise Group, now named the fat brand QSR division, we gained the leadership of Jen Johnston, who will serve as president of our QSR division. Jen has a long history of leadership heading the QSR brand that are now part of our portfolio. Moving to operations, we are encouraged by our second quarter 2021 operating performance, which has shown a continued return to normalcy as many of our franchisees have reported sales in line with or above pre-pandemic levels, reflecting the strength of our brands, the impact of easing local dining room restrictions, and increased dining room capacities in certain markets, as well as the continued rollout of vaccines, especially in the United States and Europe. These hard-earned gains continue to be a testament the tenacity of not only our franchisees but also our employees. While COVID is not completely in our rearview mirror and there is work to be done within the system, especially at the steakhouse brands in select international locations and in special venues such as cruise ship stadiums and theme parks, I am pleased to report that our Fatburger, Buffaloes, and Hurricane brands performed very well during the second quarter of 2021 with the brands posting system-wide sales growth of 68%, 49%, and 72%, respectively, over the second quarter of 2020. On a same-store sales basis, we've seen a similar trend of 24%, 48%, and 68%, respectively, over the second quarter of 2020. More importantly, Fatburger and our Wings brands, Hurricane and Buffaloes, are returning to pre-pandemic levels. When comparing same source sales to 2019, Fatburger saw a 610 basis point improvement from the first quarter to the second quarter of 2021. And same source sales increased 18% at Buffalo's and 24% at Hurricane when comparing the second quarter of 2021 to the second quarter of 2019. We are encouraged to see a continued reopening of restaurants that were temporarily closed as a result of COVID. As of the end of the second quarter, 63 locations across the system remained temporarily closed compared to 107 at the end of the first quarter, primarily at Johnny Rockets, which has a significant number of locations and special venues and within the steakhouse brands. With scheduled reopenings anticipated throughout the third and fourth quarters of 2021, we believe we will see continued top-line revenue improvement through the remainder of 2021. Even with the reopening of dining rooms, delivery sales are showing resilience facilitated by the third quarter 2020 rollout of Chow Lee and Hunger. Augmenting these continuing operating performance improvements of the currently open locations, both new construction and franchise sales are stronger than we've seen in many years. Our franchisees opened 10 new locations in the second quarter of 2021 and a total of 15 locations year-to-date with another 32 locations anticipated to open through the end of 2021. And that will be in addition to approximately 21 new units in the QSR division still to open this year on top of 18 QSR units already open. Turning to the development pipeline, during the second quarter, we signed 12 new deals for 99 locations, including a 50-unit development agreement in Mexico and a 40-unit development agreement in France. That brings the year-to-date total to 23 deals and 128 locations. We anticipate additional multi-unit agreements in other domestic and international locations in the coming months. While we are pleased with the recovery of our existing franchisees, no less important to our corporate strategy is the identification of additional restaurant concepts to add to our platform. We are thrilled to welcome the Global Franchise Group to the Phat family as we completed the $442.5 million acquisition in late July. These five iconic brands, Roundtable Pizza, Marble Slab Creamery, Great American Cookies, Hot Dog on a Stick, and Pretzel Maker, along with a manufacturing facility that supports the various global franchise group brands, give us tremendous opportunity to realize synergies, leverage cross-brand sales opportunities, and provide incremental revenue opportunities through the manufacturing facility. This acquisition launches our new QSR division and is a key milestone for us increasing our portfolio to more than 2,000 units worldwide. The hard work of integrating these brands into our system is underway, and we expect to realize material synergies as we execute on our integration strategy. Once the integration work is behind us and the brands return to pre-COVID sales, we expect the QSR division to increase our EBITDA by approximately $40 million and bring our annual revenue to over $100 million. On top of that, there are significant strategic opportunities to drive growth in these brands, such as building their e-commerce capabilities, capturing third-party delivery potential within Roundtable Pizza, expanding the manufacturing facility capacity, which today runs at only around 33%, cross-selling products between our now 14-brand portfolio, and so many untapped other opportunities, such as grocery and licensing. On the acquisition front, we are not done yet. We are actively evaluating additional acquisition candidates to augment our existing brands and expect to announce another significant acquisition in the coming months. I think there will also be the opportunity to further refinance our securitization facilities in the coming year, thus lowering our cost of capital even further. I'd like to express how appreciative I am for all the hard work that our team members, franchise partners, and their employees have delivered during this challenging time. I'd also like to welcome the now QSR division of GFG to the Fatt family and thank them for their hard work. We look forward to the continued recovery in 2021 as we lay the groundwork for a more normalized 2022. Now I'd like to turn the call over to Ken to talk about our financial highlights from the quarter.

Thank you, Andy, and it's nice to join everyone. I'm excited about the opportunities we have ahead of us, and I look forward to continuing to work with Andy and the team on executing our strategic roadmap. I'll touch on our capital structure and the acquisition of GFG and then discuss the financial highlights of the second quarter and give some insight into our expectations for normalized performance. As mentioned on last quarter's call, on April 26th, we completed our third successful whole business securitization transaction in a little over a year with the completion of the offering of $144.5 million in three new tranches of secure notes. We refinanced our existing $80 million securitization notes, leaving approximately $57 million in funds available to us for working capital and future acquisitions. Equally important to the excess liquidity that it generated is the substantial reduction to our borrowing rate. On a blended basis, this securitization has a weighted average interest rate of 5.92%, a 283 basis point reduction compared to the 2020 transactions. In the second quarter of this year, we executed an underwritten offering of 460,000 shares of Series B cumulative preferred stock, raising $8.3 million in net proceeds. In connection with the $442.5 million acquisition of GFG in the third quarter, we issued $350 million of new notes comprised of three tranches with a weighted average interest rate of 6.8%, 3.1 million shares of Series B cumulative preferred stock, and 2 million shares of common stock. This brings our total securitization to $494.5 million, with a weighted average interest rate of 6.5%. Future issuances of our Series B cumulative preferred stock and our common stock are available to us, which would provide us with additional flexibility to fund potential acquisitions further reduce our cost of capital and drive shareholder value. In terms of financial highlights, total revenue during the second quarter increased 167% to $8.3 million, reflecting continued improvements in royalty revenue across the system as we return to pre-COVID sales levels and as temporarily closed restaurants continue to open. Costs and expenses decreased $2.7 million to $6.2 million in the second quarter. Costs and expenses in last year's quarter included non-cast charges totaling $3.2 million related to intangible asset impairments. Excluding these charges, costs and expenses increased $515,000 due primarily to higher compensation expense as we filled out the management team and increased professional fees, partially offset by re-franchising games related to the re-franchising of two Johnny Rockets locations during the second quarter. We returned a positive operating income of $2 million in the quarter compared to an operating loss of $5.8 million in the prior year quarter. Other expense was $10 million in the second quarter and was primarily comprised of $2.4 million in interest expense compared to $289,000 last year resulting from the securitization I mentioned earlier and a $6.4 million net loss on extinguishment of debt related to the April securitization, partially offset by the forgiveness of our PPP loans during the quarter. GAAP net loss for the quarter was $5.9 million, or $0.48 per diluted share, compared to a net loss of $4.3 million, or $0.36 per diluted share, in the prior year period. We also report our net loss on an as-adjusted basis, which excludes the after-tax impact of impairments, re-franchising activities, acquisition costs, and losses on extinguishment of debt. On an as-adjusted basis, our net loss was $1.1 million, or 9 cents per diluted share, compared to a net loss of $3.4 million, or 28 cents per share, in the prior year period. While we are not providing guidance for 2021 on this call, I can provide some color on where we anticipate ending 2021 and beginning 2022 using 2019 as a guideline for pre-COVID performance. As we discussed during our first quarter earnings call, normalizing our 2019 top line revenue for a full year of ownership of Elevation Burger and adding pre-pandemic franchise revenue of Johnny Rockets, we would have anticipated seeing total top line revenue of $34 to $36 million. Adding on pre-pandemic revenues for the GFG brands, we would have anticipated seeing an additional $55 to $65 million for a total revenue of over $100 million. We anticipate that if the recovery from the pandemic continues this positive momentum, we would return to that run rate level by the end of 2021 or the beginning of 2022. And with that, Erica, please open the line for questions.