FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands, Inc. Second Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Please note that this conference is being recorded today, July 28, 2022. On the call today from FAT Brands are 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. 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 recent 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 will now turn the call over to Andy Wederhorn, President and Chief Executive Officer.

Thank you, Operator, and hello, everyone. We sincerely appreciate you joining us today and for your interest in fat brands. This afternoon, we made our second quarter 2022 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 second quarter, which closed on June 26, 2022. I would like to start by thanking our entire team who have worked diligently as we continue to scale this business. It is due to the hard work of our team members, franchisees, and their employees that we move forward with confidence in the long-term opportunities for fab brands. Now I would like to discuss our performance in the most recent second quarter. I am pleased to report that the strong sales momentum we experienced in the first quarter of 2022 continued in the second quarter. Specifically, we reported total revenue of $102.8 million in the second quarter 2022 compared to $8.3 million in the second quarter of 2021. The significant increase in revenue was a result of the 2021 acquisitions we made coupled with ongoing sales recovery from the negative effects of the COVID-19 pandemic in the prior year. Comparable system-wide same-store sales increased 5.6% for the quarter. Equally impressive, system-wide sales grew to $553.4 million, or like 284%, when compared to the prior year quarter. When looking at our legacy FAP Brands portfolio, which includes only the brands we own for all of 2021, system-wide sales increased 7.5% for the same period. For the full fiscal year 2022, we remain on track to deliver an annual run rate revenue of approximately $400 million system-wide sales of over $2.2 billion. Our top line growth was matched by an equally robust increase in adjusted EBITDA. Adjusted EBITDA increased to $29.5 million in the second quarter following a strong Q1 adjusted EBITDA of $15.1 million. Looking to the second half of the year, we expect both Q3 and Q4 adjusted EBITDA to be similarly strong for an annualized run rate adjusted EBITDA of approximately $90 to $95 million for fiscal year 2022. Fat Brands continues to grow both organically and through acquisitions. We're very pleased with the progress we've made against our asset-light growth strategy as we've expanded our portfolio to 17 restaurant brands with approximately 760 different franchisees who operate an aggregate of 2,227 franchise restaurants in addition to our 127 company-owned stores. Today, with a total of 2,350 restaurants open, we are approximately the 25th largest restaurant company in the country by unit count. We believe we have a strong trajectory of growth ahead through both verticals. Looking at our organic growth strategy, during the second quarter, we opened 26 restaurants, bringing our year-to-date openings to over 60 restaurants. with plans to achieve approximately 110 to 120 new restaurant openings this year. As we integrate the eight new restaurant concepts that we acquired in 2021 within the FAP Brands portfolio, we are seeing robust demand from our existing and new franchise partners to add a variety of our brands to their portfolio of restaurants. In fact, we have over 325 multi-unit franchisees at the end of Q2. We also continue to play into the synergistic nature of our portfolio with co-branding, We've experienced great success by co-branding Fatburger and Buffalo's Express and by co-branding Marble Slab Creamy and Great American Cookies. We see great value in pairing other similar brands in our portfolio together as a way to drive additional revenue growth. For example, in the near future, we will be co-branding a Roundtable Pizza with a Fatburger as well as a Johnny Rockets with a hot dog on a stick. All four iconic California-based brands each have very loyal customer base. Our restaurant development pipeline continues to be robust with over 900 restaurant commitments signed and paid for, which represents an additional 38% unit growth and will provide us with an estimated $50 million in incremental adjusted EBITDA or approximately 50% EBITDA growth over the next few years. At the end of August, we will host our biannual franchisee convention in Las Vegas, where we expect approximately 2,000 of our franchisees suppliers, and significant stakeholders to participate. This will be the first time that we are hosting our in-person convention since the pandemic began. We are looking forward to this gathering and the energy it will bring to the entire organization. It will also be an opportunity to further our development pipeline as we will be offering incentives for franchisees to buy additional restaurants. Another important part to our growth strategy is our Atlanta-based manufacturing facility, which produces pretzel mix and cookie dough for several of our brands. During the second quarter, our manufacturing facility generated over $8.6 million in sales. In addition to being accretive to revenue and EBITDA, our manufacturing facility helps our franchisees mitigate supply chain issues and purchase goods at an approximate 20% discount relative to the price they could get from retail distributors. We believe our factory business today is in its early stage of growth, operating at about 30% capacity with significant white space to expand. Our focus is on adding to the goods we currently manufacture for our entire portfolio of brands and selling goods to third-party brands not in our current portfolio. Notably, we recently hired a VP of manufacturing sales to promote our manufacturing business to third parties where we can add value. Now turning to Fat Brand's second strategic pillar, growth by acquisition. Our primary goal for 2022 has been to digest the eight new restaurant brands we acquired in 2021 and to identify and capitalize on potential synergies and cost savings as we scale the business. That being said, there are a number of strategic acquisition candidates that could fit within our current operations or give us the chance to acquire additional strategic platforms as well as fill out our factory business. We are considering how to capitalize on these opportunities in a manner that would be de-levering to the business, such as using some form of our publicly traded common and preferred equity securities. This could also improve our publicly traded flow course subject to watching the limitations of issuing equity that could affect the preservation of our very valuable and substantial net operating tax loss carry forward. When evaluating potential acquisition targets, we focus on brands with a proven track record of long-term sustainable and profitable operating performance, and that can show an existing pipeline or path to significantly grow their business rather than focus on brands that need significant turnaround efforts and are simply cheap to buy. These acquisition opportunities take time to complete, and there is no guarantee that we will get any of them done. However, we think there are interesting targets available in the market today. We may combine one or more of these opportunities with our refinancing efforts as well. During the quarter, we acquired the Nestle Tollhouse Cafe by Chip franchise business from Crest Foods, Inc., and are in the process of rebranding approximately 85 stores as Great American Cookies. We are set to open our first converted store in September. We believe this tuck-in acquisition will increase our foothold as a leader in the cookie and ice cream dessert category, joining our existing Great American Cookies and Marble Slab Creamery brands. Though we are focused on our deep organic growth pipeline this year, we saw great value in making this a creative acquisition. These stores will fold seamlessly into our quick service division and provide us the opportunity to utilize the capacity of our manufacturing business, providing supply chain efficiencies and cost savings. To date, acquisitions have been a strong growth vehicle for fat brands and we anticipate the combination of our production and distribution facility and scale to increase the profitability of the franchisees that have joined us with this acquisition. Diving back into synergies, we have a seasoned senior leadership team in place that has experience in identifying synergies and removing excess overhead across our portfolio of brands. Notably, our corporate IT systems have now moved to a shared service model focusing on bringing our 17 brands together on a simplified, functionally robust, scalable, and efficient platform. This new shared services model will allow our brands and franchisees to use technology to drive additional traffic, to be where the guest is through delivery, and enable customers to order on their terms, be it drive-through in the restaurants, online, or on mobile with their own devices. As you know, we are currently in a period of historically high inflation with supply chain challenges. However, with 17 brands in our portfolio, we are fortunate to have both strong purchasing power and relationships with our suppliers and distributors. As a result of our purchasing power of more than $600 million per year in food, beverage, and paper costs, we were able to generate savings for our franchise partners of approximately 2% to 3%, which is beneficial in this inflationary environment. We continue to aggressively negotiate with our suppliers and manufacturers so that we can provide our guests the highest quality and freshest ingredients at competitive prices. That said, menu price increases are inevitable in this current environment. We have encouraged our franchisees to take price where necessary. That means increasing price so that they can continue to profitably operate and serve their communities. When it comes to menu price increases, we look to implement smaller increases over time so we lessen the price impact on our consumers. It's important to note, though, that we have started to see the cost of goods come down, even though at somewhat of a slow rate. Looking at our balance sheet, we are working with our bankers and actively pursuing the rating and refinancing of our different securitization facilities, beginning with our FAT 2021 and FAT GFG 2021 securitization trusts. Given the choppiness of the capital markets and the fairly long lead time with the ratings process, we think any potential refinancing would likely be either a Q1 or Q2 2023 event rather than Q4 of this year. In addition, we are working on a planned redemption of $135 million of our Series B preferred stock from the sellers of Twin Peaks and the sellers of Global Franchise Group, sometime over Q3 and potentially Q4. The securitization refinancing and the preferred stock redemption will each provide substantial savings from a free cash flow perspective by lowering our cost of capital, which is a top priority for us. It is important to note that earlier this month, on July 15th, we announced that we have raised our third quarter common stock, Class A and Class B dividend from $0.13 per share to $0.14 per share, representing a 7.7% increase in the dividend rate, which further demonstrates our desire to reward our investors with quarterly dividend distributions. We recently strengthened our current board of directors with the elevation of James Neuhauser to executive chairman of the board and added Lynn Collier to our board as new independent director. Our prior chairman, Edward Renzi, will transition to the role of vice chairman of the board of directors and will continue to provide strategic counsel to FapRans and serve as our lead independent director. Jim and Ed have been tremendous assets to FapRans over the last five years as we have reached a whole new level of scale. I look forward to tapping further into Jim's deep expertise in the public equity markets. I'm also pleased to welcome Lynn, who brings a new skill set to our board as an experienced restaurant analyst. In summary, The opportunities ahead for Fat Brands are considerable, and we are well positioned for growth. Fat Brands is built on providing an authentic, superior dining experience, and I'm confident our brands will weather this current economic environment. We have a seasoned senior leadership team coupled with a strong and dynamic brand management platform capable of seamlessly and cost-effectively integrating new brands. We also have a healthy and growing development pipeline that will fuel organic growth and naturally further de-lever us for many years to come. We look forward to updating you on our progress on future calls. And with that, I would like to hand the call over to Ken to talk about our financial highlights from the quarter.

Thanks, Andy. Total revenue during the second quarter increased 1,141% to $102.8 million, reflecting revenue from Global Franchise Group, Twin Peaks, Fazoli's, and Native Grill and Wings, all of which were acquired during 2021. Additionally, revenue benefited from the ongoing recovery of the negative effects of COVID-19 in the second quarter. Costs and expenses increased to $89.6 million in the second quarter compared to $7.2 million in the second quarter of 2021. Included in costs and expenses, general and administrative expense increased to $20.8 million in the second quarter from $5.1 million in the prior year period. This increase was attributable to the 2021 acquisitions, coupled with increased compensation costs, professional fees, and travel expenses, reflecting the significant expansion of the organization. I'll also add that beginning in the second quarter, we are presenting depreciation and amortization expense separately from general and administrative expense. Depreciation and amortization expense increased to $6.7 million in the second quarter, from $0.4 million in the year-ago quarter, attributable to the 2021 acquisitions, including depreciation of acquired company-owned restaurants and the amortization of acquired intangible assets. Cost of restaurant and factory revenues increased to $49.8 million in the second quarter, compared to $0.2 million in the prior year period, primarily related to the 2021 acquisitions including the operations of the acquired company-owned restaurant locations and the Atlanta-based manufacturing facility. Advertising expense was $11.6 million in the second quarter compared to $1.4 million in the prior year period. These expenses vary in relation to the advertising revenue and reflect advertising expenses related to the 2021 acquisitions and the increase in customer activity as the recovery from COVID continues. Other expense for the quarter was $21.6 million compared to $9.1 million in the year-ago quarter and was primarily comprised of interest expense on our securitizations. Other expense for last year's quarter included a $6.4 million loss on extinguishment of debt that did not recur this quarter. Net loss for the quarter was $8.2 million or 50 cents per diluted share compared to a net loss of $5.9 million or $0.48 per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss was $3.1 million, or $0.19 per diluted share, compared to $1.1 million, or $0.09 per diluted share in the prior year quarter. And with that, Paul, please open the line for questions.