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.

Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star 1 on your phone now. Our first question comes from Joe Gomez. Please take your question.

Good afternoon, and thanks for taking my questions.

Hi, Joe.

So just wanted to kind of start here. We talked a lot about normalization, but as we're all aware, there seems to be a Delta variant that is coming around and some more mandates coming in or potentially coming in. Are you guys seeing any near-term impact on the store base over the past couple of weeks, or is it still kind of more in recovery mode?

We're absolutely in recovery mode. We're not seeing it across the store base. You have an occasional store here or there that might have some employees that have gotten sick and they've had to shut down for a day or two to get everybody tested and adjust their staffing, but that's it. We are still seeing the supply chain issues that the industry suffers where you have shortages or outages from the broad line distributors like Cisco or PFG. They're not gigantic, but they're just a constant headache for the management team to make sure that we have as many products as possible across the system. We think all of this will come to an end here as we get into September and the stimulus goes away and the 2.9 million people with jobless claims are back to work. I think this all goes away, but we've got another month or two of it.

Okay. Thanks for that. You touched on the manufacturing facility that came along with the global acquisition. Maybe you could give us a little more idea. You said it's only operating at about 33% utilization right now. Where do you see the ability to take that facility and add on so that utilization rate increases?

There are a number of opportunities that are low-hanging fruit there. When I say 33%, it's only operating one out of three shifts, not operating a swing shift or a graveyard shift. It also has significant excess land available if we needed to knock down a wall and expand the amount of equipment in the factory. But the primary focus right now is to sell the cookie brands across all of our other fat brands, family brands where we can, and that will create additional manufacturing opportunities. We also want to look on the pizza side at dough and see if the dough can be manufactured in the facility and save all those western state franchisees from the horrible labor costs that they have to deal with. So I think there's a real opportunity there where it might not have been there before, but to manufacture dough in the factory might really save the franchisees. I'm not committing to that. I'm saying that we're investigating it, but we think there's an opportunity there. And then also there's cross-branding opportunities that will come, which will generate additional manufacturing. Then one more opportunity would be to manufacture for others or to buy an additional brand that has ingredients or menu items that can be manufactured in the factory. So there's a lot of options there. Finally, the e-commerce business in the factory is something that was started a couple of years ago. It became the number one seller at Amazon for cookies in terms of mail order or online ordering. And I think that's an opportunity that can grow and grow. And so we're going to focus on that. And I made reference to that when I talked about grocery and licensing. Because if you remember, Faberger sold frozen patties at Walmart, and we got to a point where we were selling 8 million patties a year at Walmart, which is very significant, just not a big margin with doing business with Walmart. But moving these brands, now that we have 14 brands, exploring the grocery and licensing aspect of these different brands for some of their products, roundtable Pizza, for example, with great brand equity could be certainly in the frozen section for all kinds of products. So we will explore that as well as we get into the end of this year.

Okay, thank you. Thank you for that. You mentioned that you were able to re-franchise two of the Johnny Rockets locations in the quarter. I know there was, I think you had a total of about nine of them What's the status of the other ones that were still company-owned?

Most of them are in escrow now to close over the coming month. There's, I think, only one or two not in escrow as we speak. And those we have potential buyers are just not in escrow yet. But I anticipate that the majority of these stores will be refranchised before we end this Q3 period. And As you might know, on the global franchise group side in the QSR division, they re-franchised many of the roundtable pizzas, and there's just a sliver of roundtable pizzas left to go, which should close next week in terms of re-franchising. So it will be very, very clean as a franchise war when that completes. There are still 30-something hot dog on a stick locations that are corporate, and we'll look at re-franchising those as well as we move into Q3 and Q4.

Okay, one final one for me, and then I'll jump back in queue. The legacy store count, I think in the May presentation, you had a number there of 646 stores and 38 under construction. And in today's presentation, it says that the end of June store count was 628 stores. You know, maybe you can provide a little more color detail there. You know, where are you seeing the store closures? I'm assuming it's probably the steakhouses, but any additional color you can provide there would be great. Thank you.

Yeah, primarily it's all the steakhouses, not really Saperger's or Johnny Rockets. There's one or two that might have happened there in the ordinary course. But we had a 24-store operator in Puerto Rico close yesterday, in the Ponderosa system. We had anticipated the closing for some time. They teetered on bankruptcy for years. But on a revenue basis, they were only paying us $200,000 a year in total revenue, like 75 basis points under sales, not any material amount of money. Just by unit count, it looks weird. But that was something that's been out there for a long time and did occur. So that's changed the unit count slightly for that reason.

All right. Thank you, Andy, and congratulations on the deal, the global franchise. I mean, just fantastic. Appreciate the time.

Yeah, thank you. We're very excited about it, and it's just transformative for fat brands in terms of our scale. Okay, next question, please.

Our next question comes from Mr. Whitehead. Please say your question.

All right. Good afternoon. I've got two questions. My first one is, On June 29, 2021, written consent was taken to pay a dividend of 0.1 shares of Class B common stock for each share of Class A common stock. What is or was the ex-dividend date for this distribution?

Yeah, that date is coming up in just a few days. There's an 8K out there. Ken, you might have the date handy, but we're very close to the date here. I'll get it for you in a second if you don't have it, but it hasn't occurred yet.

Okay, thank you. And my second question is this. Will management commit to limiting themselves to encouraging our employees to get the COVID vaccine?

Sorry, could you say again, will they commit to limiting themselves?

Yes. Basically, are you going to mandate our employees to get the COVID vaccine?

Yes, we are mandating the vaccine for employees. all SAPRAM's employees, both in our corporate headquarters and those visiting our franchisees. We're an advocate of the vaccine, and we feel that it's important to protect our franchise partners and their employees, as well as our own team.

Thank you. Thank you for your questions.

Our next question comes from Gregory Fortunoff. Please state your question.

Hey, Andy. How are you? Hey, Greg. Thank you. Good. Okay, just a couple questions. Staffing, is that a pain point at this point? And if so, what are the effects for us?

Staffing is, I've been quoted widely in the media of saying that staffing is a total nightmare, and it is. It's really more prevalent for franchisees opening new locations and really new franchisees opening their first location. As we have multi-unit operators who open additional units, they can borrow from their teams and staff as they need to. It may be some overtime and things like that, but they're getting through it. It's not really delaying the openings. But for new store operators, it's hard for new franchisees to find new managers, you know, because it's not really just about the money because wages are already so high. So that is a little bit of a pain threshold. We anticipate that as we get through August and September and all the stimulus money is flushed through the system, that this will significantly change. But there's a little bit of road still to go here.

Okay. So in the press release, and you've been talking about, you know, 55 to 60 million run rate. Prior to that, I think it was like 15 million or so. So today you had 2.1 million of EBITDA, which on an annualized basis would be 8 million. When will we see the numbers tick up? I mean, they need to start getting to the $4 or $5 million a quarter number. So when can we expect that?

So we still have in the pre-existing portfolio, the older portfolio before global franchise group, you still have 10% of the restaurants closed, which all of that revenue goes right to the bottom line. There's almost no incremental expense. So we anticipate those remaining locations will open rather quickly here in the rest of Q3 and some of Q4. Some of it's the cruise ship lines and some of it's the theme parks or amusement parks. movie theater complexes that have not fully reopened yet and a bunch of international venues. And so I expect that over the coming two quarters, that will all smooth out and we'll be back to those pre-COVID levels. Also, those remaining restaurants scheduled to open will be out there. So we should see everything really kick into high gear in addition to, of course, the global franchise group acquisition. I expect that our Q4 numbers will be very representative of everything, assuming that COVID doesn't force new shutdowns, will be very representative of the runway we're talking about. And I think that Q3 will have a little bit of noise in it from still the continued closures and also from GFG not being fully integrated and not owning it a full quarter.

Okay. Andy, let's talk about debt for a second. So you did a big deal, a great amount of EBITDA. You've taken on a lot of debt. You mentioned you're going to do another deal, which I assume will also bring debt. And I feel like you're comfortable with the level you're at now, and you're comfortable using this going forward. I'm thinking it's possible that others may not be as comfortable, especially with the possible next round of COVID. Can you sort of articulate why you think this is an opportunity, why you're comfortable with these debt levels, the coverage of the debt that you have, and and just make the general shareholder comfortable with what your plan is.

You bet. Thanks for the question. Our securitization facilities have performed fabulously for the last year and a half since we first issued them and then did another deal in September of 2020 to buy Johnny Rockets and then April to refinance and create liquidity for this next acquisition. So we're seeing... far in excess of two times debt service coverage, closer to three or more in some of the tranches, and we're not concerned about it at all. The global franchise group acquisition, there's tremendous cash flow coming from this business as well, and then there's also this additional manufacturing revenue that we anticipate bringing in, which will, that business alone earns $15 million a year, and if we grow it just another one-third, it's $30 million a year, so there's tremendous excess cash flow. That being said, I have every expectation that with the right stock price being achieved, which really should be in the $30, $40, $50 range using any of the comparable multiples to franchise entities, that we'll access the capital markets for additional equity capital and de-lever sometime in 2022. But at a significantly higher stock price, not at the current stock price, it doesn't make sense.

How much, like, is there a limit of, like, where do you draw the line as far as your debt?

I mean, is there a point where you say, like... We're running, you know, somewhere between six and seven and a half times in terms of total leverage. Those are the limitations built into our securitization facility, and we're in compliance with those, of course. And so it's not crazy amounts of debt, but you know, we'd rather be at the five to six times than the seven or seven and a half times level. And part of that, of course, is driven by the EBITDA that we generate and the cash flow that we generate. And that number is just going up and up and up. There's tremendous unit growth. I know that we spoke of signing over 130 new franchise locations on top of like the 200 store pipeline that we have. So there's a big, big, and that's on the FAT brand's legacy portfolio. And then Global Franchise Group has their own pipeline of new stores. So I think driving the growth in revenue will come very quickly over the next 12 months. We'll see significant jumps that just gives us excess cash flow and all the new store construction will contribute to that.

Okay, two more quick questions. Andy, what's the biggest risk right now to fat brands?

Well, I think the biggest risk, if you look in the review mirror would be shutdowns and I don't think that anyone believes that's really going to happen again. You know, just didn't work the 1st time and the vaccinations have to work and and that's really the role. So that would be the biggest limitation would be very, very difficult to revenues. And I just don't see that happening. And we look at the states that reopened quickly versus the ones that reopen slowly and. Sales were off the charts, and we didn't see recurrences there. And I'm talking about primarily Texas, Georgia, Florida, and stuff like that. So I don't see that happening again, but I do see that as the risk. I think this labor shortage issue and the supply chain issue are short-lived, and we do have, you know, there is some inflation out there. I don't know that the inflation pulls back. I mean, the price increases that have taken place are what they are, but we've coached our franchisees to take price and maintain their margins. So I think that they will. I don't see the margin suppression sticking.

Okay. Last question. This is a tough one. So you just mentioned a few minutes ago that you thought our stock was undervalued versus comps. Can you maybe tell us why you think that is and what you think you could do or you and your management can do to, you know, bridge that gap for us?

Well, I think that this has been a thinly traded stock to begin with. That merger of our family office vehicle, Fog Cutter Capital, at the end of last year increased the free float, which helped a little bit. The issuance of new common stock and new preferred stock in the acquisition of Global Franchise Group helps increase the float significantly. And in additional transactions that we're considering where there's a similar structure in place, I think that will also increase our float. But the bottom line here is that we need to print the earnings that we are pointing to, and those earnings need to come, you know, in a post-COVID or more normalized COVID environment. So, you know, I think that getting a quarter or two under our belt where people can really see those earnings, I think that's going to be important. I think getting additional investors into the stock to create, you know, they really haven't seen it before, paid attention to it will also help. That's a key part of our Q3 and Q4 investor outreach program will be to do that and tell that story. Because if you look at the comp table of the franchising companies, and we used to consider ourselves in the burger space where you'd comp against the other burger guys and we were very undervalued. But now we really have to look at the broader franchisor base. And there you have multiples of between 20 and 40 times, let alone the outliers. And we're not even in that bucket and we should be in that bucket. And so- You know, increasing our float will help doing some sort of a follow-on offering at some point will also help in getting a couple of additional sponsor investors. I think will help create awareness to the common stock and what a value plate is.

But as you said, you wouldn't do a follow-on until the stock was significantly higher. That's right. We wouldn't. Not at default. Yeah, there's no need to. Okay. Well, listen, you guys are, you know, you've done everything you said you were going to do. I think you're setting us up for a great future and keep it up. Thank you very much.

Thank you for the questions and comments. Operator, does anyone else have a question?

Once again, if you'd like to ask a question, please press star 1 on your phone now. At this time, we have no further questions.

All right. Operator, thank you very much, everyone, for participating today. I appreciate your time and listening to our story and watching us continue to grow here, and we look forward to future calls and future announcements of new transactions as we get through COVID, and I hope that everyone stays safe and healthy here. Thank you, operator. This concludes today's call.

This concludes today's conference call. Thank you for attending. Have a great day.