FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fat Brands, Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants have been placed in listen-only mode. Please note that this conference is being recorded today, February the 22nd, 2023. On the call from Fat Brands are President and Chief Executive Officer Andy Weirderhorn, and Chief Financial Officer, Kim Bjork. This afternoon, the company made its fourth quarter and fiscal year 2022 financial results publicly available. Please refer to the earnings release and earnings supplement, both of which are available in the investor section on our website at www.fatbrand.com. My apologies. www.fatbrand.com. Each contain additional details about the fourth quarter, which closed on December 25th, 2022. But before we begin, I must remind everyone that part of the 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 on 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 more detailed discussion of the risks that could impact future operating results and financial conditions, please see today's earnings release and recent SEC filings. During today's call, the company will 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 gap measures are available in today's earnings release. I would now like to turn the call over to Mr. Andy Wedderhorn, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and hello, everyone. 2022 is a big year for fat brands as we continue to execute on our growth and integration strategies. I would like to express my sincere appreciation to our teams, franchisees, and their employees who helped us close a record-breaking year. It is due to their hard work and dedication that we move forward with confidence and execute the incredible growth opportunity that lies ahead for Phat Brands. What was once in 2003 just Phat Burger has now transformed itself into a 17 concept portfolio with a strong worldwide presence. We ended fiscal year 2022 with over 2,300 locations open or under construction across more than 40 countries. We currently have over 750 franchise partners with nearly half serving as multi-net operators operating anywhere from 2 to 75 restaurants. To close the year, we received the prestigious honor of Public Company of the Year from the Los Angeles Business Journal, and Fatburger was ranked as the number one burger in the USA by a Los Angeles Times food contributing writer. Pretty cool. Turning to fiscal year 2022, we grew total revenue over 240% to $407.2 million from $118.9 million in the prior year. For fiscal year 2022, system-wide sales increased 108% to $2.2 billion. We leveraged this strong top line growth into an almost 320% increase in adjusted EBITDA ending 2022 with $88.8 million in adjusted EBITDA. Now, moving on to our most recent fourth quarter performance, total revenue grew 40% in the fourth quarter of 2022 to $103.8 million, compared to $74.2 million in the fourth quarter of 2021. The increase in total revenue was a result of three acquisitions, Twin Peaks in October 2021 and Fazoli's and Native Grilling Wings in December 2021, coupled with ongoing sales recovery from negative effects of the COVID-19 pandemic in the prior year. We grew system-wide sales 22.1% to $532.9 million when compared to the prior year quarter of $436.3 million. And finally, comparable system-wide same-store sales increased 2.7% in the fourth quarter of 2022 and 6% for the full year. Looking at profitability, we saw an 88.5% increase in adjusted EBITDA ending the fourth quarter with $19.6 million in adjusted EBITDA. Now, I'd like to discuss our two-part growth strategy consisting of organic growth and growth by acquisition. We had strong organic growth in 2022 as demonstrated by the record opening of over 140 new units, including 44 units opening in the fourth quarter. We achieved all of this despite supply chain headwinds and permitting and construction delays. Included in the 2022 openings were the conversion of 21 Nestle cafes to Great American Cookies as a result of the May 22 acquisition of Nestle Toll House Cafe by Chip franchise business. Franchisee interest is at an all-time high from new and existing franchise sales alike. which speaks volumes to our robust portfolio of brands that continue to deliver strong same-store sales and attract new fans around the globe. During 2022, we signed 110 new franchise development agreements representing a total of 362 new stores. Leading the way in new store development amongst FAP Brands concepts was FAP Burger and Buffalo's Express with 86 stores, Bozzoli's with 61, Round Table Pizza with 56, and Twin Peaks with 50 new sports lodges signed. Noteworthy, franchise deals included a combined 80 store development agreement for 40 Thapurger and Buffalo's Express locations and 40 Round Table Pizza restaurants in Texas, a 32 store agreement for Twin Peaks in Mexico, and a 10 store agreement for Johnny Rockets in Israel. Our pipeline in total of additional restaurants to be built remains strong signed agreements representing more than 1,000 new restaurants. This represents 43% unit growth and is worth an estimated $60 million in incremental adjusted EBITDA when it materializes over the next few years, lifting our adjusted EBITDA from approximately $90 million today to approximately $150 million. This organic growth is a naturally delevering event, and when we achieve that level of adjusted EBITDA, we bring our leverage ratio down to approximately seven times our securitized debt. This year, we remain focused on converting our pipeline. Year to date, we have opened 26 new units and we will continue this robust growth throughout 2023. We anticipate we will open between 150 and 175 new stores in 2023, which represents up to a 25% unit growth from 2022 and we'll set yet another new store opening record including a record for Q1, which would see between 50 and 60 total units open. Now I would like to touch upon our polished casual strategies, specifically Twin Peaks, which we acquired in October of 2021. Since our acquisition of the brand a little over a year ago, the chain has grown over 20% from 80 to 96 units open. We have plans to build another 18 to 20 restaurants in 2023, and therefore we will be quickly surpassing the key milestone of 100 units ending the year with approximately 115 lodges and yet another year of approximately 20% growth, or said differently, approximately 40% unit growth in just two years. New stores are seeing AUVs north of $6 million, and some locations in Florida are generating between $9 and $12 million each. The focus for 2023 is to identify opportunities to accelerate Twin Peaks openings in our pipeline based on the strong unit economics and the long-term growth potential we see for the brand. As we look across our portfolio of brands, another area focused for 2023 is our co-branding and tri-branding strategy. In November, we opened our first tri-branded location, which consists of a Fatburger, Buffalo's Express, and Hot Dog on a Stick in the Los Angeles neighborhood of Valley Village. This year, we will look to pair Fatburger and Round Table pizzas, as well as Johnny Rockets and Hot Dog on a Stick. We've seen great success with co-branding and now tri-branding as it drives sales and enables us to grow margins through a combined menu approach. We presently have more than 200 co-branded locations, mainly consisting of our Fatburger Buffalo's Express model or Marble Slab Great American Cookie pairing. Additionally, we have jump-started a new initiative to place more focus on non-traditional growth in 2023 and beyond, which includes opening in airports, universities, amusement parks, hospitals, and stadiums as we see great value in these venues. Our manufacturing facility is another important part to our growth story as it produces pretzel mix and cookie dough for several of our brands. For the fiscal year 2022, the manufacturing facility contributed $33.5 million in sales and added approximately $15 million in EBITDA to the business. We believe our factory business today is in its early stage of growth and is only operating at about one-third capacity, which provides significant room for expansion. We have launched an initiative to distribute cookie dough and other dessert products to many of our other brands, including ovens to bake that cookie dough and sell fresh hot cookies. This will materially grow our factory EBITDA. Further, to ramp up utilization of the excess factory capacity, Fab Brands may serve as a third-party manufacturer for other companies, and we may also acquire a business that requires factory production. As a result of the May 2022 Nestle Toll House Cafe by Chip franchise business acquisition, we're now able to produce cookie dough in-house for those Nestle franchisees who have converted to Great American Cookie. This allows the franchisees to buy the cookie dough at an approximately 20% discount and we're also able to capture the manufacturing revenues which contribute to our EBITDA. To date, we have converted approximately 35 Nestle Tollhouse Cafe stores to Great American Cookies and approximately 25 or so more units to follow this year. Now, turning to Fat Brand's second strategic pillar, growth by acquisition. Going forward, we plan to lean into the expansion of our high-growth brands, particularly our Sports Lodge category, including considering potential strategic acquisitions of concepts with locations that can be converted into Twin Peaks and opportunities that would continue to expand our factory business. We are also looking at other categories to round out our portfolio, such as salad, sandwich, or coffee. We continue to look for brands with a proven track record of long-term, sustainable, and profitable operating performance. We are seeing a number of opportunities in the current environment and expect to see more in the coming months as valuations continue to come down. Now, turning to our balance sheet, During the quarter, we announced the redemption of approximately 1.8 million shares of our eight and a quarter Series B cumulative preferred stock from an affiliate of Garnett Station Partners for $43.2 million. These shares were redeemed at a price of 23.69 per share, plus accrued and unpaid dividends to the date of redemption. The redemption of this tranche of Series B preferred stock will yield significant cash flow savings for FabRans as our securitization facility, which funded the transaction, has a lower cost of capital than the effective dividend rate on the redeemed preferred stock. We are also actively working towards the redemption of another approximately $92 million in Series B preferred stock issued in connection with the 2021 acquisitions of Global Franchise Group and Twin Peaks. In addition, we are pursuing the rating and or refinancing of our different securitization facilities beginning with FAT Royalty 2021 and FAT GFG 2021 securitization trusts. During the quarter, we strengthened our leadership team with the hiring of our first chief growth officer, Jeremy Tyson. Jeremy joined FapRans with over 20 years of experience in significantly increasing the revenue stream for high-growth startups in the restaurant sector and will be focused on spearheading the growth of the development pipeline across the FapRans portfolio. This includes bringing new franchisees into the system and driving multi-unit expansion with existing franchisees. His experience of quickly scaling companies from startups to industry leaders aligns with our fast-paced growth mentality. Jeremy is a great addition to our team to drive this growth forward exponentially in the years to come. Further, we appointed Mark Avery as our global head of partnerships and supply chain strategy, as well as our senior vice president of diversity, equity, and inclusion. I'm also proud to report that our recently formed FAP Brands Foundation, a 501c3 organization, is up and running with its own board of directors. The mission of the foundation is to change the lives by supporting local causes that uplift and unite FAP Brands communities. The foundation will look to partner with local nonprofits to provide essential programs to help families and communities thrive. The foundation was seeded with a $250,000 donation from FAP Brands, Inc. to start things off, and our franchise partners, their employees, and our corporate employees and brand partners can contribute as well. BAP Brands is covering 100% of the administrative cost of the organization, so 100% of the money raised will go to the beneficiaries. In summary, I would like to reiterate that 2022 was a great year, and 2023 is off to a strong start as franchisee interest remains high. We are excited to accelerate the build-out of our 1,000-unit organic pipeline of new stores, which will drive EBITDA growth in the years to come. We have a strong management team in place and a robust platform that supports the expansion of our existing brands while enabling the accretive acquisition and efficient integration of additional restaurant concepts with minimal overhead. We look forward to updating you on our progress on future calls. We sincerely appreciate you joining us today and for your interest in FAP Brands. And with that, I would like to hand it over to Ken to talk about our financial highlights from the quarter. Ken.

Thanks, Andy. A total revenue during the fourth quarter increased 40% to $103.8 million. reflecting revenue contributions from the acquisition of Twin Peaks in October of 2021 and the acquisitions of Fazoli's and Native Grill and Wings in December of 2021. And for ease, I'll refer to these as the fourth quarter 2021 acquisitions. Additionally, revenue benefited from the ongoing recovery from the negative effects of COVID-19 in the fourth quarter of last year. Costs and expenses increased to $136.4 million in the fourth quarter compared to $77 million in the year-ago quarter, primarily due to the fourth quarter 2021 acquisitions. Included in costs and expenses, general and administrative expense increased to $39.1 million in the fourth quarter from $21.6 million in the prior year period primarily related to the fourth quarter 2021 acquisitions, increased compensation costs related to our significant expansion, legal fees, and a $16.1 million non-cash reserve on claimed employee retention tax credits recorded during the quarter based on the governing accounting standards. Cost of restaurant and factory revenues increased to $61.7 million in the fourth quarter, compared to $36.9 million in the prior year period, primarily related to the fourth quarter 2021 acquisitions, including the operations of the acquired company-owned restaurant locations. During the fourth quarter of 2022, we recognized $14 million of non-cash trademark impairment, primarily resulting from the significantly increased interest rate environment and its inherent effect on our discounted future cash flow calculations. Depreciation and amortization expense increased to $6.9 million in the fourth quarter from $5.3 million in the year-ago quarter, attributable to the fourth quarter 2021 acquisitions, including depreciation of acquired company-owned restaurants and the amortization of acquired intangible assets. Refranchising losses in the fourth quarter were $3.1 million and were comprised of restaurant costs and expenses that are food sales. Refranchising losses in the fourth quarter of the prior year, 2021, were $1 million and were comprised of $2.1 million of restaurant operating costs, net of food sales, partially offset by $1.1 million in net gains related to refranchised restaurants. Advertising expense was $11.6 million in the fourth quarter compared to $9.9 million in the prior year period. These expenses vary in relation to the advertising revenue and reflect advertising expenses related to the fourth quarter 2021 acquisitions, including company-owned restaurant locations and also an increase in customer activity. Other expense for the quarter was $24.2 million compared to $17.1 million in the year-ago quarter and was primarily comprised of interest expense on our securitizations. Our income tax provision for the quarter was $14 million compared to a benefit of $200,000 in the prior year quarter, primarily driven by a $20.4 million non-cash valuation allowance related to naked indefinite live tax credits. Net loss for the quarter was $70.8 million or $4.29 per diluted share compared to a net loss of $19.6 million or $1.38 per diluted share in the prior year quarter. On an as-adjusted basis, our net loss was $43 million or $2.60 per diluted share compared to $16.5 million or $1.16 per diluted share in the prior year quarter. And turning to cash flows, it's worth noting that our $70.8 million net loss for the quarter included a $20.4 million non-cash valuation allowance on naked indefinite life tax credits, a $16.1 million non-cash reserve on claimed employee retention tax credits, a $14 million non-cash trademark impairment charge, $6.9 million of non-cash depreciation and amortization, $4.8 million of non-recurring litigation expense, $1.6 million of non-cash share-based compensation and $800,000 of non-cash lease expense. And the total of the non-cash items portion of this and our net loss was $59.8 million. And with that, Judith, please open the line for questions.