FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fat Brands, Inc. Third Quarter Fiscal 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only moment. Please note that this conference is being recorded today, October 20, 2022. On the call today from Fat Brands are President and Chief Executive Officer Andy Reederhorn and Chief Financial Officer Ken Kulik. 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 four licking statements. These four licking 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 four licking statements due to a number of risks and uncertainties. The company does not undertake to update these four licking 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 would now like to turn the call over to Andy Wiederhorn, 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 third 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 contained additional details about the third quarter, which closed on September 25, 2022. I would like to start by thanking our entire team who have worked so 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. Let me also note that this month we celebrate our five-year anniversary of becoming a publicly traded company on the NASDAQ. I couldn't be prouder of where we are today. Back in 2017, we launched Fat Brands with a goal of becoming a global leader in the restaurant franchising space. What started as just Fat Burger under our ownership 20 years ago has grown to a 17-brand portfolio company with over 2,350 locations and 760 franchisees around the world in over 40 countries. Also, we have more than 325 multi-unit operators operating anywhere from 2 to 75 restaurants. This is truly impressive, and we are just getting started. Now I would like to discuss our recent performance. We reported total revenue of $103.2 million in the third quarter of 2022 compared to $29.8 million in the third quarter of 2021, a 247% increase. The significant increase in revenue was a result of our 2021 acquisitions coupled with ongoing sales recovery from the negative effects of the COVID-19 pandemic in the prior year. Comparable system-wide sales increased 7% year-to-date on a pro forma basis, including all our brands acquired, it's 5% year-to-date. System-wide sales grew to 548.2 million or by 57% when compared to the prior year quarter of 349.8 million. Year-to-date system-wide sales increased to $1,623.9 million. For the full fiscal year 2022, we remain on track to deliver an annual run rate of approximately $400 million of revenue and system-wide sales of over $2.2 billion. Our sales remain resilient in this economic environment due to our diverse portfolio of brands with average checks ranging from approximately $8 to $37. Our top line growth was matched by a strong increase in adjusted EBITDA. Adjusted EBITDA increased to $24.6 million in the third quarter and year-to-date $69.2 million. We expect Q4 adjusted EBITDA will be similar to Q3 for an annualized run rate adjusted EBITDA of approximately $90 to $95 million for fiscal year 2022. At Fat Brands, we continue to execute on a two-pronged growth strategy consisting of organic growth and growth by acquisition. While our acquisition activity has gained significant attention over the last few years, as we've acquired nine brands in a two-year time period, our organic pipeline is equally impressive. During the third quarter, we opened 38 restaurants, bringing our year-to-date openings through tomorrow to over 100 restaurants. We plan to open 25 more restaurants before year end, bringing us to approximately 125 new restaurants this year, a new opening milestone for Fat Prince. Looking to our 2023 restaurant pipeline, we will continue this robust growth as we already have more than 90 additional units under construction and anticipate we will open between 130 and 150 new restaurants in 2023. To further fuel this growth, At the end of August, we hosted our biannual Franchisee Summit in Las Vegas with our franchisees, suppliers, and key stakeholders. This was the first time we hosted an in-person event for our franchisees since the pandemic began, and the first time we held all of our brand partners together in the same place. The energy level and the enthusiasm couldn't have been higher. At the summit, we offered incentives for franchisees to buy additional units and signed over 150 new development deals. We now have agreements in place for over 1,000 new franchise restaurants, which represents 43% unit growth and will provide us with an estimated $60 million in incremental adjusted EBITDA, or approximately 66% adjusted EBITDA growth over the next few years organically. And while the summit was a financial investment by Fab Brands, we expect to see a significant return on this investment, i.e. a substantial increase in royalties due to the number of franchise agreements signed in conjunction with this event. We also made an exciting announcement regarding our community involvement. While we are always looking to make an impact in the areas in which we operate in, we've decided to take this step further and the newly formed FAP Brands Foundation 501C3 organization was announced. The mission of the foundation is to change lives by supporting local causes that uplift and unite FAP Brands communities. We will look to partner with local nonprofits to provide essential programs to help families and communities thrive. We have seeded the foundation with $125,000 for 2022 and $125,000 for 2023, a total of $250,000 to start things off. Our franchise partners, their employees, our corporate employees, and our brand partners can all contribute as well. Fab Brands is covering 100% of the administrative costs of the organization, so 100% of the money goes to the beneficiaries. We look forward to sharing more details on this in the coming weeks. Now, back to our growth pipeline. We are seeing significant franchisee interest across our diverse portfolio of restaurant concepts. In our polished casual segment at Twin Peaks, we plan to open our 95th restaurant by year end with over 100 new Twin Peaks remaining in the pipeline. Next year, we plan to open between 15 and 20 new Twin Peaks with a similar number of new stores opening each year going forward for the foreseeable future. This is a high growth brand with very strong margins and extraordinary average unit volumes. Our newest class of Twin Peaks stores have approximately $6 million in average unit volumes. A significant focus for 2023 is to accelerate the opening of stores in our pipeline as the equipment supply chain calms. The sooner those new stores open, the sooner we receive royalty revenue. In the fast casual burger category, we have deals for over 350 new fat burgers and Johnny Rockets. both domestically and internationally. And speaking of Fatburger, last week we earned the prestigious honor of being ranked the number one fast food burger in the country by Los Angeles Times, beating out 22 other top chains. Our QSR business also has a solid pipeline of more than 400 restaurants, especially at Fazoli's, Round Table Pizza, Great American Cookies, and Marble Slab Creamery. We also continue to play into the synergies and the nature of our portfolio co-branding offerings. Co-branding is a great opportunity for us to drive sales and leverage margins through a combined menu approach. We first started our co-branding strategy back in 2013 with Buffalo's Cafe, launching a fast casual version of the chicken wing chain, Buffalo's Express, co-branded with Thaperton. The growth of this co-branded offering remains strong with over 100 locations worldwide. Similarly, we have seen great success with pairing Great American Cookies and Marble Slab Creamery together with with approximately 225 co-branded units. Most recently, we have diversified our burger and wing co-branded options and debuted Johnny Rockets with a newly created model of hurricane grilling wings named Hurricane Wings. To close out the year, we will also unveil our first tri-branded unit, a fat burger hot dog and a stick, and Buffalo's Express. We are also launching a new initiative to expand into non-traditional venues, including airports, universities, amusement parks, and stadiums. Across our portfolio, we have opened 13 non-traditional locations this year. Looking ahead, we see great value in investing further resources to expand in this area. As we have stated, another important part to our growth lever is our Atlanta-based manufacturing facility, which produces pretzel mix and cookie dough for several of our brands. During the third quarter, our manufacturing facility generated over $7.8 million in sales, and sales of approximately $25 million year-to-date. Our focus continues to be 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. We believe our factory business today is in its early stage of growth and is now operating at about 33% capacity with significant white space to expand. We expect to see an increase in operating utilization from 33% to 38% related to the May acquisition of the Nestle Tollhouse Cafe by Chip franchise business once it's fully integrated into the coming months. We're still in the process of rebranding approximately 55 Nestle Tollhouse Cafe stores to Great American Cookies. Our first rebranded unit opened in August, and we will look to convert several more locations by year end. As a result of this acquisition, we are now able to produce the cookie dough ourselves instead of Nestle franchisees buying dough from a third party. This allows the franchisees to buy the cookie dough at an approximate 20% discount. We're also able to capture the manufacturing revenues which contribute approximately $15 million of our adjusted EBITDA. We continue to evaluate acquisitions that will increase our manufacturing capacity and grow our EBITDA. Now, turning to FAP Brand's second strategic pillar, growth by acquisition. As you know, our main objective this year has been to digest the eight new restaurant brands we acquired in 2021 and capitalize on potential synergies and cost savings as we scale the business. We are extremely impressed with how seamlessly these brands have fit into our portfolio. There's also been significant interest from our franchisees to purchase and develop other fat brands-owned restaurant concepts, in other words, adding second or third brands to their territories. We're always evaluating acquisitions to capitalize on, particularly brands that strategically fit within our current operations that have a proven track record of long-term sustainable and profitable operating performance or that give us the chance to expand our factory business. In other words, we're not looking for turnarounds, but rather growth brands. We are seeing a number of opportunities in the current environment and expect to see more in the coming months and hope to announce some of that activity before the end of the year. Looking at the current landscape, we remain in a period of historically high inflation along with supply chain challenges. However, with 17 brands in our portfolio, we are fortunate to have a strong purchasing power of more than $600 million per year in food, beverage, and paper costs. As a result, we're able to generate savings for our franchise partners of approximately 2% to 3%, which is highly beneficial in this inflationary environment. That said, menu price increases are inevitable in this current environment. We continue to coach our franchisees on the review of the financial metrics in their business so that they can continue to profitably operate and serve their communities. It's about making sure they understand the labor and food costs and to know if they need to raise menu prices. And even though our franchisees have been taking price, we've not seen a notable decline in sales. Looking at our balance sheet, we are actively pursuing the rating and refinancing of our different securitization facilities beginning with our FAT Royalty 2021 and FAT GFG 2021 securitization trusts, which we expect to complete in Q2 of 2023. And while we may not see huge interest expense savings from the ratings process in this current environment, we are picking up a portion of the savings effect in the top-line royalties as prices go up, royalties will go up. Further, the ratings process will create substantial additional liquidity in our bond portfolio, which will help us fuel new acquisitions and growth. Tomorrow, we plan to redeem $43 million, or 1,821,831 shares of our Series B preferred stock at a price per share of $23.69 from one of our private equity counterparties who sold us the Twin Peaks brand in 2021. The redemption of this Series B preferred stock will yield significant cash flow savings for us as our securitization facility, which will fund the transaction, has a lower cost of capital than the preferred share dividend rate. We are actively working with our bankers towards the redemption of another $95 million of Series B preferred stock sometime in the coming two or three quarters. In summary, the opportunities ahead for BAP brands are considerable, and we are well positioned for growth. We have a strong and dynamic brand management platform capable of seamlessly and cost-effectively integrating new brands. We also have a healthy and growing organic development pipeline that will fuel organic growth 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 it over to Ken Kuick to talk about our financial highlights from the quarter. Ken.

Thanks, Andy. The total revenue during the third quarter increased 247% to $103.2 million, reflecting a full quarter of revenue from Global Franchise Group acquired in July of 2021 and revenue from Twin Peaks, Fazoli's, and Native Grill & Wings, all of which were acquired during the fourth quarter of 2021. Additionally, revenue benefited from the ongoing recovery from the negative effects of COVID-19 in the third quarter last year. Costs and expenses increased to $102.2 million in the third quarter, compared to $27.4 million in the year-ago quarter, primarily due to the 2021 acquisitions. Included in costs and expenses General and administrative expense increased to $28.8 million in the third quarter from $10.6 million in the prior year period. And this increase was attributable to the 2021 acquisitions, coupled with an increase in compensation costs, professional fees, and travel, reflecting the significant expansion of the organization. Cost of restaurant and factory revenues increased to $55.3 million in the third quarter of 2022, compared to $7.1 million in the prior year period, primarily related to the 2021 acquisitions, including the operations of the acquired company-owned restaurant locations and our Atlanta-based manufacturing facility. Depreciation and amortization expense increased to $6.9 million in the third quarter from $2.4 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. Advertising expense was $11.2 million in the third quarter compared to $5.5 million in the prior year period. These expenses vary in relation to the advertising revenue and reflect advertising expenses related to the 2021 acquisitions, including company-owned restaurant locations, and also the increase in customer activity as the recovery from COVID continues. Other expense for the quarter was $23.9 million compared to $7.2 million in the year-ago quarter, and was primarily comprised of interest expense on our securitizations. Net loss for the quarter was $23.4 million, or $1.42 per diluted share, compared to a net loss of $3.6 million or 26 cents per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss was $16.3 million or 98 cents per diluted share compared to $2.3 million or 16 cents per diluted share in the prior year quarter. And for those that are focused on cash flows, it's worth noting that our $23.4 million net loss for the quarter included $7 million of non-cash depreciation and amortization, $2 million of non-cash share-based comp, $1 million of non-cash lease expense, and $6.9 million of non-recurring litigation expenses. And with that, operator, please open the line for questions.