FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fat Brands, Inc. fourth quarter and fiscal 2021 earnings conference call. At this time, more participants have been placed in a listen-only mode. Please note that this conference is being recorded today, March 21st, 2022. On the call today from Fat Brands are President and Chief Executive Officer Andy Wiederhorn and Chief Financial Officer Ken Kuick. 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. 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 condition, please see today's earnings press release and our current SEC filings. During today's call, the company may discuss non-GAAP financial measures, which it believes 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 earnings release. I'd now like to turn the conference over to Andy Wiedehorn, President and Chief Executive Officer. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you all for joining us on the call today. I am hopeful that everyone is continuing to stay safe and healthy as well. This afternoon, we made our fourth quarter and fiscal 2021 financial results publicly available. please refer to the earnings release and our earnings supplement, both of which are available in the investors section of our website at www.fatbrands.com. Each contain additional details about the fourth quarter, which closed on December 26th. I would like to start out today by thanking our team members as 2021 marked an incredible year as we executed on the two pillars of growth strategy, which include acquisitions and organic growth. BAPRANS is truly unique as we have a scalable platform that affords us the opportunity to synergistically incorporate new concepts with minimal incremental corporate overhead costs. We also have a long runway for organic growth with more than 850 new locations in our pipeline, providing us with a potential 33% unit growth and 50% EBITDA growth over the next few years. Today, I'm particularly excited to talk to you about our recent acquisitions, and resulting synergies, M&A and capital market strategy, organic growth, and continued strong brand performance. And as you know, we have the restaurant brands organized into five different categories, namely our QSR brands, which include Roundtable Pizza and Fazoli's for drive-through and delivery. And QSR also includes the snack brands, such as Marble Slab Creamery, Great American Cookies, Pretzel Maker, and Hot Dog on a Stick. Then there are our fast casual brands, the burger brands, such as Fat Burger, Johnny Rockets, and Elevation Burger, plus Buffalo's Express and Yala Mediterranean. Next are our casual dining brands, Hurricane Grill and Wings, Native Grill and Wings, Buffalo's Cafe, and Ponderosa and Bonanza Steakhouses. Finally, our polished casual dining, otherwise known as sports bars category, hosting Twin Peaks Sports Lodges. The fifth category is our manufacturing business, It came with Global Franchise Group, manufactures cookie dough and pretzel mix for our brands, as well as conducts distribution services for other products used in those same restaurant brands' operations. In the fourth quarter, we were encouraged that our franchise partners and company-owned restaurants continued to report improving sales, and in many instances, sales are equal to or above pre-pandemic levels, indicating the strength of our brands, accompanied by a return to normalcy within the industries. Our strong performance reflects the hard work and dedication of our franchise partners and employees. While the emergence of Omicron created modest headwinds late in the fourth quarter, I'm pleased to report that our portfolio of brands performed well, posting system-wide sales growth. Our legacy Fat Brands portfolio of brands, owned for all of 2021, like Fatburger, Johnny Rockets, Hurricane Grill and Wings, etc., saw an increase of 5.6% over the fourth quarter of 2019 and 12.4% versus Q4 of 2020. If we included the acquired brands in that calculation, essentially showing how our total portfolio is doing, our increase in same-store sales over 2019 for Q4 would be 8.5%, and over 2020 for Q4 would be 21.4%. For the newly acquired brands, we saw outstanding same-store sales increases in the fourth quarter of 2021 compared to the fourth quarter of 2019 and the 2020 prior year quarter as follows. And this will all be posted in our earnings supplement on our website, so you don't need to write this down. Johnny Rockets saw a 7.4% decline over 2019, but a 52.5% increase over 2020. Global Franchise Group saw a 10.6% increase over 2019 and and a 16.1% increase over 2020. Twin Peaks Sports Lodges saw a 15.8% increase over 2019 and a 30.4% increase over 2020. Fazoli's saw a 25.6% increase over 2019 and 15.7% over 2020. And finally, Native Grill and Wings saw 16.5% over 2019 and 20.7% over 2020. restaurants across the globe continue to reopen that were temporarily closed as a result of COVID-19. As of the end of the fourth quarter of 2021, 23 locations across the system, eight domestic and 15 international, excluding the recently acquired concepts, remained temporarily closed due to COVID-19, compared to 52 units at the end of the third quarter. Given the progress in reopenings, we expect to see continued top-line revenue improvement in 2022. We are also very encouraged that despite the reopening of dining rooms, delivery sales are showing resilience facilitated by the rollout of Olo and Captain, formerly known as Hunger, both of which are online ordering providers, and also Chow Yi, which is a third-party online POS system aggregator, integrating orders into our POS systems across our portfolio. Turning now to our organic growth strategy, I am encouraged that both new construction and franchise sales are stronger than we've seen in many years If not ever, our franchisees opened 30 new locations in the fourth quarter and a total of 115 locations for the full year 2021. Our current development pipeline consists of approximately 850 locations, and those are committed and have mostly been paid for in full by our franchise partners. In other words, already sold, not to be sold. Most notably, we have a pipeline of more than 470 units between Fapriger, Johnny Rockets, Buffalo's Express, and Elevation Burger, plus 157 new locations for Global Franchise Group. That's Round Table Pizza, Great American Cookie, Marble Slab Ice Creamery, Pretzel Maker, and Hot Dog on a Stick. Also, 144 sports lodges for Twin Peaks and 114 drive-thru locations for Fazones. We see strong demand from our franchise partners of recently acquired concepts to develop other brands in the FAT portfolio and vice versa. We believe that our organic growth opportunity represents 50 million of potential incremental EBITDA growth, and as I previously mentioned, 33% unit growth. Further, our factory today sits at approximately 30% capacity, mainly running one shift a day rather than potentially three, and thus has significant white space to grow the manufacturing of additional items for our entire portfolio of brands as well as third-party manufacturing. Equally important to our organic growth strategy is our acquisition strategy, which provides growth for our platform, fueled by the identification and addition of new restaurant concepts. We have developed a robust management assistance platform that supports the expansion of our existing brands while enabling the accretive acquisition and efficient integration of additional restaurant concepts. We have a disciplined and selective approach to evaluate potential targets with a focus on franchise brands with a proven track record of long-term, sustainable, and profitable operating performance. Looking forward, we plan to fund our future acquisitions with a combination of cash on hand, proceeds from securitization vehicles, and potentially tapping the equity capital markets. We're also focused on refinancing our debt facilities over the next year and lowering our effective cost of capital. I want to highlight our two most recent acquisitions, Twin Peaks and Fazoli's, which both closed in the fourth quarter. To date, we are very pleased with the assimilation of both brands, and we are already experiencing significant synergies given our existing infrastructure and purchasing power. As a reminder, on October 1, 2021, we completed the $300 million acquisition of Twin Peaks, which now operates 89 locations across 25 states, further diversifying our restaurant portfolio into polished casual dining, essentially sports bars. We continue to look to identify brands that complement our current portfolio while delivering high AUVs and appealing growth pipelines. Twin Peaks checks all the boxes with industry-leading new store AUVs in the range of 5 to 6.5 million, going as high as 12 million at some locations. I believe we can grow this brand globally at a rapid pace, ultimately achieving a 400-unit-plus platform. With projected the acquisition of Twin Peaks to add Approximately $30 million in post-COVID-19 normalized EBITDA in 2022. Twin Peaks has achieved critically acclaimed ratings by both Naptrack and Black Box Intelligence over the last few years, as well as having a rock star-like management team led by Joe Hummel. On December 15th, 2021, we completed the acquisition of Fizzoli's, presently a 216-store brand known for its freshly prepared pasta, Submarino sandwiches, and unlimited signature breadsticks from Sentinel Capital Partners for $130 million. This transaction was funded with cash from the issuance of new notes from our securitization facilities. This transaction checked our boxes in being a high-growth brand with numerous identifiable synergies. The brand's recent performance has been outstanding, and we look forward to the added royalty from successful execution on their new unit opening plan. The brand was formerly led for 13 years by Carl Howard, who recently retired, and is now in the hands of his former right hand and the current Fazoli's president, Doug Bostic, a 23-year Fazoli's veteran. As we mentioned on our third quarter call, we expect the normalized EBITDA contribution from Fazoli's to be approximately $14.5 million in 2022. More specifically on the synergies, we see significant opportunities given our enormous purchasing power of more than $600 million per year in food, beverage, and paper, as well as cross-selling opportunities between our now 17-brand portfolio. I'd like to take a moment and address the pending government investigations and pending or threatened litigations. Being a public company and a public figure attracts its share of visibility. As previously disclosed, the company's directors were named as defendants in a shareholder derivative action last summer brought by the same shareholder that had been a part of prior lawsuits against the company after the company's IPO in 2017. None of those lawsuits prevailed as the court's denied certification, yet the company spent considerable money defending itself and resolving matters. The most recent derivative suit is based upon the merger of Fogcutter Capital Group into Fat Brands, a transaction that was transformative for Fat Brands and led to its growth by more than 500% since the merger at the end of 2020. It's important to know that this derivative action case does not assert claims against Fat Brands, but seeks recovery on its behalf, meaning any monetary settlement goes to Fat Brands, not paid by Fat Brands. Given my personal history, it does not surprise me that the government would look into allegations also raised in the derivative complaint, and as previously disclosed, the government is now formally seeking documents concerning these matters from the company and me. The government's affidavit should not have been made public when it was the subject of the sealed court order. Nonetheless, the United States Attorney's Office has indicated that the company is not presently a target of the investigation, and that the investigation primarily focuses on me and my family. The LA Times article that published characterizations of the government's position has many factual errors and conflates the different entities and my family as if they were one. I categorically deny the allegations raised in the LA Times article and look forward to the opportunity for our legal team to demonstrate that all transactions were properly documented, reviewed, approved, and disclosed, and that multiple independent professionals were involved, including the boards of both Fog Cutter and Fat Brands, outside counsel, outside auditors, and my and Fat Brand's tax advisor. Our business is selling burgers, shakes and fries, pizza and meatballs, cookies and ice cream, steaks and chicken wings, and 29-degree cold beer to our customers. They are coming into our restaurants more than ever and spending more than ever before. I look forward to being able to put these matters behind us. We have a very strong senior management team made up of 18 members of our 250-plus corporate teams. in addition to an active, experienced, and independent board of directors. While these legal matters are certainly a distraction personally, our team is focused on running our business and integrating the newly acquired brands into the FAT family of brands. Turning to the acquisition front, we are still in the early innings. This is an exciting time for FAT brands, and we remain active in evaluating additional creative acquisition candidates to augment our existing brands. While we spent almost a billion dollars in the past year, I don't see that scale of acquisitions happening this year. We are now at a size and scale that we do not need to acquire additional brands. We already have so many great ones with so much organic growth already committed and paid for. That doesn't mean that we won't make some acquisitions. In fact, we're considering some presently. but our focus has to be this year on digesting what we already acquired and realizing the synergies. Additionally, as previously mentioned, there are significant cross-selling opportunities amongst the franchise community within our 17-brand portfolio. The fourth quarter marked yet another successful quarter for Fat Brands, and it wouldn't be possible without the dedication and hard work of our team members, our franchise partners, and their employees. I'm very proud and appreciative that our team members continue to deliver strong results during this unique time. With that, I'd like to turn things over to Ken to talk about our financial highlights from the quarter.

Thank you, Andy. I'll walk through our capital structure and then discuss the financial highlights of the fourth quarter and give some highlights into our expectations for normalized performance. As mentioned on last quarter's earnings call, 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 6.8%. and 2.8 million shares of Series B cumulative preferred stock. In connection with the acquisition of Fazoli's and Native Grill and Wings in the fourth quarter, we issued $193.8 million of new notes comprised of three tranches with a weighted average interest rate of 6.7%. This brings our total securitization facilities to $938.2 million with a weighted average stated interest rate of 6.98%. 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 fourth quarter increased 1,042% to $74.2 million, reflecting revenue from global franchise group acquired during the third quarter, and revenue from Twin Peaks, Fazoli's, and Native Grill & Wings acquired during the fourth quarter of 2021. Revenues also benefited from 12.4% positive same-store sales growth and 87 new store openings. Costs and expenses increased to $77 million in the fourth quarter compared to $15 million in the year-ago period. New costs and expenses in 2021 include $36.9 million of company-owned restaurant and factory operating costs related to the acquisitions of GFG, Twin Peaks, and Fazoli's during 2021. Additionally, these acquisitions contributed to higher G&A expense during the year. And finally, advertising expense increased $7.1 million, reflecting advertising expenses from GFG and Twin Peaks and an increase in customer activity as the COVID recovery continues. Other expense was $17.1 million in the fourth quarter, primarily comprised of interest expense. GAAP net loss for the quarter was $19.6 million, or $1.38 per diluted share, compared to a net loss of $7.7 million, or 64 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, re-franchising activities, acquisition costs, and losses on extinguishment of debt. On an as-adjusted basis, our net loss was $16.5 million, or $1.16 per share, compared to $5.7 million, or 48 cents per share in the prior year period. Lastly, I'll provide some color regarding a revenue run rate and where we expect 2022 will be using 2019 as a guideline for pre-COVID performance. Based on the 2021 performance of our portfolio, and including the performance of GFG, Twin Peaks, Fazoli's, and Native Grilling Wings, we anticipate a normalized total annual revenue run rate of approximately $400 million. And with that, I'll turn the call back over to Andy to take some questions.