FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fat Brands, Inc. Third Quarter 2021 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 4th, 2021. On our call today from Fat Brands, our President and Chief Executive Officer, Andy Wiederhorn, and Chief Financial Officer, Ken Kiewik. By now, everyone should have access to the 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. For a more detailed discussion of the risks that could impact future operating results and financial condition, please see today's earnings release and our recent SEC filings. During today's call, the company may discuss non-cap financial measures, which it believes it 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 prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in today's earning release. I would now like to turn the call over to Andy Weiderhorn, President and Chief Executive Officer.

Thank you, Operator, and good afternoon, everyone, and thank you all for joining us on the call today. I'm hopeful that everyone is continuing to stay safe and healthy. This afternoon, we made our third quarter 2021 financial results publicly available. Please refer to the earnings release in our earnings supplement, both of which are available in the investor section of our website at www.fatbrands.com. Each contain additional details about the third quarter, which closed on September 26th. I'm particularly excited to talk to you today about our recent acquisitions, M&A strategy, resulting synergies, and we are seeing a continued strong brand performance that has driven solid operating results. In the third quarter, our franchise partners continued to report improving sales, and in some instances, sales are in line with or above pre-pandemic levels, indicating the strength of our brand accompanied by a continued return to normalcy within the industry. Our growth reflects the hard work and efficiencies of our franchise partners and employees, and as local dining room restrictions ease further and capacity restraints subside, we expect our brands to continue building on these well-earned gains. We are incredibly proud of our restaurant operators and franchise partners for successfully navigating through this challenging restaurant environment. While COVID is not completely in our rearview mirror and there is work to be done within the system, I'm pleased to report that our portfolio of brands, including those recently acquired, performed well during the third quarter of 2021, posting system-wide sales growth of 30% over the third quarter of 2020, driven by increases for Elevation Burger of 51%, Great American Cookies of 25%, Hot Dog on a Stick of 241%, Johnny Rockets of 104%, and Pretzel Maker of 74% over the same period last year. On a same-store basis, we've seen a similar trend of 16% growth in the third quarter of 2021 compared to the prior year quarter, driven by increases of Elevation Burger of 51%, Fat Burger of 14%, Buffalo's of 13% and Hurricane of 17% over the same period last year. While we do not include acquired companies or concepts in our consolidated same-store sales calculations until we have owned them for a full fiscal year, our recently acquired brands have had strong performance during the third quarter of 2021 as well. On a same-store basis, Johnny Rockets increased 70%. compared to last year's quarter, while Great American Cookies increased 23%. Hot Dog on the Stick increased 68%, Marble Flab Creamery increased 25%, Pretzel Maker increased 50%, and Round Table Pizza increased 9%. More importantly, when comparing same-store sales from the third quarter of 2021 to the third quarter of 2019, we saw continued performance at Buffaloes and Hurricanes increasing 14% and 18%, respectively. While Elevation Burger had its first quarter of positive same-store sales growth, posting 5% growth over the third quarter of 2019, and domestic locations saw an increase of 4% at Fat Burger. On a consolidated basis, which again excludes recently acquired brands, same-store sales increased 4% in the third quarter of 2021 compared to the third 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 third quarter, 52 locations across the system, excluding the recently acquired concepts, remained temporarily closed to COVID compared to 63 at the end of the second quarter and 107 at the end of the first quarter. With scheduled reopenings anticipated throughout the fourth quarter 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 rollout of OLO, chow we and hunger across our portfolio augmenting these continuing operating performance improvements of the currently owned locations both new construction and franchise sales are stronger than we've seen in many years if not ever our franchisees opened 25 new locations in the third quarter and a total of 59 locations year to date with another 26 anticipated to open through the end of 2021 that will be in addition to approximately three new twin peaks sports lodges that will open still this year, bringing the grand total to 88. Turning to the development pipeline, during the third quarter, including Global Franchise Group, but excluding Twin Peaks and Fazoli's, we signed nine new deals, including a 200-unit development agreement in the Middle East and a 25-unit development agreement in Illinois. That brings the year-to-date total to 32 deals and our total pipeline 581 locations, 157 of those are GFG. Add to that number 117 up-and-coming Twin Peaks locations and 114 up-and-coming Fazoli's locations, and the total pipeline exceeds 800 additional units or growth of another 33% in unit count organically. I'm sure I don't need to point out that the organic growth is free versus acquisitions, so we are equally as focused on executing on this vertical. Also, we anticipate continued success as we cross-sell our concepts to the franchisees of recently acquired brands. The performance of our existing franchisees is very promising, and we are looking forward to their continued recovery. Equally important to our corporate strategy is the growth of our platform, fueled by the identification and addition of new restaurant concepts. On October 1, we completed the $300 million acquisition of Twin Peaks and are thrilled to welcome the sports lunch chain into the SAP brand's families. With the acquisition of Twin Peaks and its 84 locations across 25 states, we have further diversified our growth and the restaurant portfolio in general and entered into a new restaurant category, polished casual dining. As we've alluded to previously, through our acquisition growth strategy, we are looking to identify brands that complement our current portfolio while delivering high AUVs and appealing growth pipelines. Twin Peaks checks those boxes with top-tier AUVs in the range of $5 to $6.5 million and and I believe we can grow this brand globally at a swift pace. As a result of the acquisition of Twin Peaks, we expect post-COVID-19 normalized EBITDA to increase by approximately $25 to $30 million. More specifically on synergies, we see significant opportunities given our gigantic purchasing power of more than $600 million a year in food, beverage, and paper, as well as cross-selling opportunities between our now 16-brand portfolios. Lastly, I would like to comment on a Fazoli's acquisition, which we were very excited to announce on Tuesday of this week. We acquired Fazoli's, known for its freshly prepared pasta, submarino sandwiches, and unlimited signature breadsticks from Sentinel Capital Partners for $130 million, funded with cash from the issuance of new notes from our securitization facilities. This is our first endeavor into the Italian dining category, yet we have been eyeing the category for a long time in search of the right brand and know that we found the right one in Fazoli's. They have 214 stores currently open with 114 units in the pipeline to be developed in the next several years, and their recent performance has been outstanding. The mix of restaurants is approximately two-thirds franchised to one-third corporate-owned. This transaction checked our boxes in being a high-growth brand with numerous identifiable synergies. We view this transaction as a fantastic addition to our rapidly diversifying group of brands in the fat families. It's important to note that we plan on leaving both the Twin Peaks and Fazoli's management teams in place to run these businesses and execute on their growth pipeline rather than trying to integrate them and wring out some synergies that could just risk disrupting their momentum. The incremental synergies pale in comparison to the added royalties from successfully executing on the new unit opening plans. As we guide in our press release, as a result of the Fazoli's transaction, we expect 2022 system-wide sales at BAT to rise to over $2.1 billion and expect FATS post-COVID normalized EBITDA to increase by another $14.5 to $15 million in 2022. The transaction is expected to close by mid-December. This should bring our normalized post-COVID EBITDA, including Twin Peaks and Pizzoli's, to approximately a $95 million run rate for 2022 whenever we get the rest of the restaurants back open and COVID dies down. but it's likely that that will make a full calendar year of 2022 as we hit those numbers. On the acquisition front, we are still in the early innings. This has been an exciting and aggressive year so far in our growth strategy, and we remain active in evaluating additional acquisition candidates to augment our existing brands. We also still anticipate the opportunity to further refinance our securitization facilities in the coming year, thus significantly lowering our cost of capital even further. Third quarter marked yet another successful quarter in 2022 for FAP Brands, and it wouldn't be possible without the hard work of our team members, our franchise partners, and their employees. I'd like to express my utmost appreciation to all of you for constantly delivering during this unique time. I'd also like to welcome the Twin Peaks and Pizzoli's teams into the FAP family. We look forward to finishing off 2021 strong here at FAP and heading into 2022 with positive momentum. With that, I'd like to hand it over to Ken Kiewik to talk about our financial highlights from the quarter.

Thanks, Andy. I'll touch on our capital structure and then discuss the financial highlights of the third quarter and provide some insight into our expectations for normalized performance. As we mentioned on last quarter's earnings call, in connection with the 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. In connection with the acquisition of Twin Peaks in the fourth quarter, we issued $250 million of new notes comprised of three tranches with a weighted average interest rate of 8% and 2.8 million shares of Series B cumulative preferred stock. This brings our total securitization facilities to $744.5 million with a weighted average interest rate of 7.04%. 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. Turning to our financial highlights, total revenue during the third quarter increased 628% to $29.8 million, reflecting revenue from global franchise group acquired during the third quarter of 2021, revenue from Johnny Rockets acquired during the third quarter of 2020, and the ongoing recovery from the negative effects of COVID-19 on restaurant royalties. Costs and expenses increased to $27.4 million in the third quarter, compared to $4.9 million in the year-ago period. The acquisition of GFG was the primary driver of the increase in costs that included restaurant and factory operating expenses, acquisition costs, and higher G&A costs as we begin working on realizing the synergies from the acquisition. Additionally, advertising expense increased to $5.5 million in the third quarter compared to $0.8 million in the prior year period, reflecting advertising expense related to GFG and Johnny Rockets, as well as increased customer activity as the COVID recovery continues. Other expense was $7.2 million in the third quarter, primarily comprised of interest expense. Gap net loss for the quarter was $3.6 million, or 26 cents per diluted share, compared to a net loss of $.6 million, or 4 cents 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 refranchising activities, acquisition costs, and losses on extinguishment of debt. And on an as-adjusted basis, our net loss was $2 million, or 14 cents per diluted share, compared to net income of $0.3 million, or 2 cents per share, in the same period last year. While we're not providing specific guidance on this call, I can provide some color regarding a revenue run rate on where we anticipate beginning 2022 using 2019 as a guideline for pre-COVID performance. As we discussed during our second 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 anticipate seeing an additional $55 to $65 million. And further, as we add in the expected revenue contribution from Twin Peaks and Fazoli's that Andy mentioned earlier, we would anticipate a normalized total annual revenue run rate of over $140 million exiting 2021 and going into early 2022. And with that, operator, please open the line for questions.