FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FedBrands, Inc. First Quarter 2023 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, May 8, 2023. On the call from FedBrands, our Chairman of the Board, Andy Ritterhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Kiewik and Rob Rosen. This afternoon, the company made its first quarter 2023 financial results publicly available. Please refer to the earnings release and earnings supplement, both of which are available in the Investors section of our website at www.fetbrands.com. Each contain additional details about the first quarter, which closed on March 26, 2023. 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, under-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 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. Reconciliation to comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andy Ritterhorn, Chairman of the Board.

Thank you, operator. And hello, everyone. And thank you all for joining us on the call today. This afternoon, we made our first quarter 2023 financial results publicly available. Please refer to the earnings release in 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 first quarter which closed March 26. Let me begin by thanking our teams, franchisees and their employees for their hard work as we continue to grow this business. Last week, Ken Kiewik and Rob Rosen were named co-chief executive officers effective May 5. Both Ken and Rob joined Fat Brands in 2021 and have played an integral role in our strategic growth initiatives, including acquisitions and driving company profitability. Ken and Rob will also continue in their respective roles as chief financial officer and head of debt capital markets while assuming the co-CEO role. Together, they will focus on driving forward the company's overarching goals of increasing organic growth through new store openings, growing utilization of our manufacturing facility, and bolstering the success of our high growth brands, including Twin Peaks. I will continue in my new role as chairman of the board, which I was appointed to in March of 2023, where I will focus on our strategic direction, capital allocation, and ensuring that we execute our business plan while maintaining quality restaurant operations. Stepping down from the CEO and president role, my goal is to remove the distraction of the personal investigation tied to me regarding matters from several years ago before our merger with Fog Cutter. Ken and Rob are taking the reins of the company with a fresh slate of directors, and I support the growth and evolution of Fat Brands, including championing our talented executive team. We have taken the company from three brands to 17 iconic restaurant brands with over 2,000 units open or under construction and system-wide sales of $2.2 billion annually over the last five years. Today, FapRant is approximately the 25th largest restaurant company by unit count in the U.S. 95% of our restaurants are franchised. We have more than 750 different franchise owners, of which approximately half are multi-unit operators. We operate in 40 countries and 48 U.S. states. Notably, 10 of our 17 brands were just named to Technomics' 2023 Top 500 list, which is determined by key growth metrics such as sales and unit growth. I believe we are creating tremendous long-term shareholder value as well as short-term dividend yield. Now, turning to Q1 specifically, total revenue grew 8.5% in the first quarter of 2023 to $105.7 million compared to $97.4 million in the first quarter of 2022. The increase reflects an increase in same-store sales and revenues from new restaurants. Same-store sales increased 4.3% in the first quarter of 2023. We grew system-wide sales 9.9% to $550 million when compared to the prior year quarter of $504.9 million. Looking at profitability, we saw over a 26.8% increase in adjusted EBITDA to $19.2 million from Q1 2022 adjusted EBITDA of $15.1 million. On a trailing 12-month basis, adjusted EBITDA was $92.9 million. Now I would like to discuss our two-part growth strategy consisting of organic growth and growth by acquisition. As you know, over the last two years, we have had a very robust acquisition strategy by acquiring nine brands. Similar to 2022, this year our focus will be on building upon our impressive organic growth pipeline. During the first quarter, we opened 41 units and for quarter two are slated to open 45 units. In total, we are projected to open 175 new units this year representing 25% unit growth from the prior year. Our total development pipeline of organic growth remains the strongest in our company's history, with agreements for more than 1,000 new restaurants over the next few years. We estimate this growth to be worth approximately $60 million of incremental adjusted EBITDA, which will raise our adjusted EBITDA to approximately $150 million. This is also noteworthy as it will naturally delever our balance sheet. Interest in Fat Brands' concepts remain high as our franchisees see value in building their portfolio within the Fat Brands family. We have signed 77 new franchise development deals year-to-date and expect to hit 100 by the end of this quarter. This is evidenced by an agreement to open 10 new co-branded Great American Cookies and Marble Slab Creamy locations in Puerto Rico. These locations are set to open over the next five years, the first two locations slated to open by 2024. Additionally, we signed a new development deal to bring 20 additional franchised Johnny Rockets locations to Mexico over the next 10 years. Johnny Rockets has been operating in Mexico since 1991 and currently has approximately 25 restaurants throughout the country. Also, we've signed a development agreement to bring 12 co-branded Fatburger and Buffalo's Express restaurants and 10 co-branded Marble Slab Creamery and Great American Cookie locations to Iraq, adding to our existing restaurants in that country. We also continue We also continue to innovate with our brands, creating additional opportunities for our franchisees. During the quarter, Pretzel Maker opened its first drive-thru location in Iowa. Since opening, the location has performed incredibly well, paving the way for future growth of this store model across the globe. As part of our organic growth strategy, we're also laser-focused on the accelerated development of Twin Peaks based on the strong economics and the long-term growth potential we see for the brand. Twin Peaks continues to produce industry-leading AUVs of around $6 million, with some of our highest volume locations in Florida generating AUVs between $9 million and $12 million each. Additionally, these restaurants have very strong margins. Twin Peaks is also set to hit a key benchmark by the end of this month, surpassing 100 locations. We anticipate opening 18 to 20 new Twin Peaks in 2023, closing the year with approximately 115 lodges and almost 40% growth in unit count in just two years since that brand's acquisition of Twin Peaks. Our current Twin Peaks pipeline includes over 100 new stores. We see similar unit growth for 2024. Twin Peaks is the only brand where we are materially growing the number of company-owned locations in key markets, as both the return on invested capital and absolute dollar profit are very high. Traditionally, we've opened two to three company-owned units each year, but we are striving to increase that in 2024 to five or six units per year and more in the years thereafter. Co-branding is another key part of our strategy to help drive sales and leverage margins. We see great value in pairing similar brands in our portfolio together as a way to drive additional revenue growth through a combined menu approach. We presently have more than 230 co-branded locations, mainly consisting of our Fappurger, Buffalo's Express, or Marble Slab Creamy Great American Cookie pairings. During the quarter, we brought Fatburger back to Illinois with the opening of co-branded Fatburger and Buffalo's Express in the Chicago area in partnership with ADTJ Development LLC, which includes basketball stars Anthony Davis Jr., Derrick Rose, and Tim Hardaway Jr. This opening is just the start of our growth in the state as it is tied to a larger multi-unit Illinois franchise development deal. Similarly, brand synergies are within our portfolio continue to be an important strategy for fat brands. In April, we unveiled a new cookie offering across all Elevation Burgers. We saw an opportunity to enhance Elevation Burgers' dessert program with the cookie dough we currently produce at our manufacturing facility in Georgia. Not only will this provide a boost to the Elevation menu, but it will also increase the productivity of our manufacturing facility. Following the Elevation Burger cookie launch, we began rolling out cookies across many of the other burger brands in our portfolio, which should be substantially complete by the end of the summer. As you know, our Georgia-based manufacturing facility produces pretzel mix and cookie dough for several of our brands. We believe our factory business today is in its early stages of growth because it only operates at about 35 to 40 percent of its capacity. We began expanded utilization of the factory just about a year ago when we acquired the Nestle Tollhouse Cafe by Chip franchise business. We are still in the process of rebranding approximately 20 Nestle Tollhouse Cafe by Chips to Great American Cookies. To date, we have converted approximately 50 stores and expect to complete the remaining 20 conversions by late 2023. Now, let us turn to Fabbrand's second strategic pillar of growth. That's by acquisition. When evaluating potential acquisition targets, our focus remains on strategic acquisition opportunities of brands with a proven track record of long-term sustainable and profitable operating performance. And as noted, we are focused on our high growth brands, particularly our sports lodge category, and would consider acquiring concepts with locations that can be converted into Twin Peaks. We're also looking at other categories to round out our portfolio, such as salad, sandwich, or coffee brands. And finally, we are looking at opportunities that would allow us to further expand our manufacturing business. Looking at our balance sheet, we have worked hard to maintain a healthy liquidity position consisting of both cash and marketable securities. Further, we have taken steps to reduce approximately $5 million in corporate G&A for 2023. As we all navigate this challenging interest rate and inflationary environment, we have adjusted our focus to realize long-term goals that will yield significant shareholder value and execute our corporate strategy. Making sure we have adequate liquidity and runway, nurturing the brands that we expect will generate significant value in the future to reduce debt, and growing our EBITDA through new unit openings takes priority in this environment. I want to address recent discussions regarding the state of our financials. Fat Brands has strong liquidity and is in compliance with all of our debt covenants. Our securitized debt, which is the only debt we have, matures in 2051. It begins to amortize a little bit each year for the next couple of years, beginning later this summer. We are prepared for such amortization. We locked in our fixed interest rate in 2021 at favorable rates before the crazy increase in interest rates. And we are like many other acquirers of brands, using debt and equity to make those acquisitions and then paying down that debt over time. We are focused on getting to a cash flow positive and gap net income positive position in the coming quarters. But we are not unlike a number of our peers in this space that are not yet gap net income profitable because they are in a high growth state. We are creating tremendous value in our brands, which we expect to realize in the future. Next, I'm proud to share in March that we officially launched a newly formed 501c3 charitable organization, the Fat Brands Foundation. Giving back has always been a part of the Fat Brands DNA. This foundation was created to amplify the existing charitable efforts of our company. The foundation will partner with local nonprofit organizations in areas in which Fat Brands has a presence to provide essential programs to help families and communities thrive. As our company continues to grow in size, we want to take our charitable efforts to the next level by launching a new arm that more broadly supports our employees and customers' communities. We are excited to be officially live and to have the opportunity to become more ingrained with local nonprofits that are committed to making a positive impact in the markets where we operate. Since its launch, the foundation has already funded five local organizations in the following areas, children in poverty, families with special needs, food insecurity, education, and theater. The foundation was seeded with a $250,000 donation from Fat Brands upon its inception and will continue to receive support from the company, our vendor partners, employees, and franchise partners to further the directive and impact of the organization in the years to come. And finally, as announced, we have also made several changes to our board of directors in addition to my appointment as chairman of the board. In March, we elected control company status under the applicable NASDAQ rules. Further, we expanded the board from seven to 10 seats and welcomed eight new directors all of whom bring unique, valuable skill sets that will aid in furthering the success of Fat Brands as a leader in the restaurant space. The new director appointments include several current Fat Brands C-suite executives, Thayer Wiederhorn, Chief Operating Officer Taylor Wiederhorn, Chief Development Officer Mason Wiederhorn, Chief Brand Officer, and Donald Borktold, Chief Concept Officer. Carmen Vidal, our International Legal Consultant for Fat Brands, is also appointed to the board. Additionally, we appointed three independent directors, Mark Olenowicz, Kenneth Kepp, and Tyler Child, joining Lynn Collier, who remains on the board and is now the chair of our audit committee. We expect these board changes will save the company $1.1 million per year. I want to point out that we did not increase our director's fees. We simply combined the annual and committee fees into a flat rate equal to the same amount. And further, management team members who serve on the board do not receive board fees. Additionally, I want to thank the Baker Tilly firm for four years of extremely hard work and professional partnership that helped us grow the company significantly, and we will miss working with them. We expect to name and appoint new auditors for the 2023 fiscal year shortly. I also want to thank those board members that chose not to continue to serve on the Fat Brands Board for their dedicated service. In summary, I am confident that we have a very strong leadership team in place and a robust pipeline of growth ahead that will naturally deliver our balance sheet. Our long-term strategy is to create value through the organic growth of our brands, acquire additional brands that are strategic to our portfolio makeup, realize value when appropriate to manage any debt outstanding, and increase long-term value for our stakeholders while giving them a consistent dividend along the way. We sincerely appreciate you joining us today and for your interest in fat brands. And with that, I would like to hand it over to Ken to talk about our financial highlights from the quarter.

Thank you so much, Andy. I am extremely humbled to take on this new responsibility as co-CEO and drive forward the key goals of the company. We are very fortunate to have such a talented team of fat brands, and I see great opportunity ahead in building upon our positioning as one of the largest restaurant companies in the US. Turning to our first quarter results, total revenue during the first quarter increased 8.5% to $105.7 million, reflecting increased same-store sales and revenues from new restaurant openings. Cost and expenses increased to $105.3 million in the first quarter, compared to $96.9 million in the year-ago quarter, primarily due to increased activity from company-owned restaurants and the company's factory, as well as professional fees related to certain litigation matters. Included in cost and expenses, general and administrative expense increased to $28.4 million in the first quarter, from $24.8 million in the prior year period, primarily due to increased professional fees related to pending litigation and government investigations. Cost of restaurant and factory revenues increased to $59.1 million in the first quarter of 2023, compared to $54.8 million in the prior year period, primarily due to higher company-owned restaurant and dough factory revenues. Depreciation and amortization expense increased to $7.1 million in the first quarter from $6.6 million in the year-ago quarter, primarily due to depreciation of new company-owned restaurant property and equipment. Refranchising losses in the first quarter of 2023 were $0.2 million and were comprised of $0.1 million in net gains related to the sale or closure of refranchised restaurants. partially offset by $0.3 million in restaurant operating costs, net of food sales. Advertising expense was $10.5 million in the first quarter compared to $10.3 million in the prior year period. These expenses vary in relation to advertising revenue. Other expense for the quarter was $30 million compared to $19.7 million in the year-ago quarter and was primarily comprised of interest expense on our securitizations. Our income tax provision for the quarter was $2.5 million compared to $4.5 million in the year-ago quarter. Net loss for the quarter was $32.1 million, or $1.95 per diluted share, compared to a net loss of $23.8 million, or $1.45 per diluted share in last year's quarter. And on an as-adjusted basis, Our net loss was $23.5 million, or $1.43 per share, compared to $18.5 million, or $1.13 per diluted share in last year's quarter. Turning to cash flows, it's worth noting that our $32.1 million net loss for the quarter included $7.1 million of non-cash depreciation and amortization, $7.7 million of non-recurring litigation expense, $5 million of non-cash interest expense, $1.1 million of non-cash share-based compensation, and $0.4 million of non-cash lease expense. In the total of these items, internet loss was $21.3 million. And with that, I'll turn it over to Rob Rosen for a few remarks.