FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands, Inc. Second 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, August 3, 2023. On the call from FAT Brands are Chairman of the Board, Andy Wiederhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Kiewik. This afternoon, the company made its second 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.fatbrands.com. Each contain additional details about the second quarter, which closed on June 25th, 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, 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 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 GAAP measures are available in today's earnings release. I would now like to turn the call over to Mr. Andy Biederhorn, Chairman of the Board.

Thank you, Operator, and hello, everyone, and thank you all for joining us on the call today. Let me begin by thanking our teams, our franchisees, and our employees for their hard work as we continue to grow FAPRANCE. Total revenue grew $4 million in the second quarter of 2023 to $106.8 million, compared to $102.8 million in the prior year second quarter. The increase was driven by a 5% increase in royalties, a 4.6% increase in company-owned restaurant revenues, and a 13% increase in revenues from our manufacturing facilities. System-wide sales grew to $572.7 million, a 1.7% increase when compared to the prior year quarter. Turning to profitability, our second quarter adjusted EBITDA was $23.1 million compared to $29.5 million in last year's quarter. Last year's adjusted EBITDA included a $10.1 million benefit related to employee retention credits. Excluding the impact of this benefit, adjusted EBITDA increased $3.7 million, or 19%, from the $19.4 million in Q2 of 2022. During the second quarter, we continued to focus on our organic growth strategy, opening 25 new units, bringing our year-to-date openings to 66 locations. During the third quarter, we plan to open over 35 units, of which 15 have already opened. For the full year, we are projected to open 175 new units, which is a 25% increase in new unit openings from 2022. We have capitalized on high demand for our brands in the market, signing franchise development deals for over 150 new locations so far this year, bringing our pipeline to over 1,100 signed agreements for new units over the next few years. This pipeline of organic growth is estimated to be worth approximately $60 million in incremental adjusted EBITDA, bringing our total adjusted EBITDA to approximately $150 million and naturally delivering our balance sheet. Also, as previously announced, we plan to take Twin Peaks public in 2024. The timing and the size of the transaction will be subject to market conditions and other factors. While we see franchisee interest across our diversified portfolio of restaurant concepts, we remain especially focused on the expansion of the polished casual segment through Twin Peaks. Units continue to produce industry leading average unit volumes of around $6 million, with some of our highest volume locations in Florida generating AUVs between $9 million and $12 million. These restaurants also have very strong margins. Since our acquisition in October of 2021, Twin Peaks footprint has continued to grow in both unit count and geographically, and now operates in 27 states and two countries. During 2023, we plan to open 18 to 20 new lodges with eight lodges opened to date, bringing the unit count to 103 so far. We expect to end the year with approximately 115 lodges, a nearly 40% increase in unit count since that brand's acquisition. Over the next several years, Twin Peaks plans to double its unit count to more than 200 lodges and increase the mix of franchise locations from 70% today to more than 80%. The planned unit growth is expected to increase system-wide sales to approximately $1 billion. Let's shift to our burger brands, where we're also seeing consistent growth. During the second quarter, we opened a fat burger in Greater Tampa, which is the first of four locations that we'll be opening in the area over the next five years. Additionally, we plan to open 10 locations in Orlando within the next seven years, with the first location slated to open by the end of the year. Johnny Rockets has also enjoyed continued growth around the globe, with new locations in Arizona, Chile, Peru, India, and multiple locations in the UAE. The brand also signed a development agreement to open 20 new franchise locations throughout Texas in the coming years. Great American Cookies continues to expand to new territories, most recently making its debut in the state of Alaska. We were also pleased to have hit a key growth milestone for the brand, our 400th location to date. Additionally, we opened our second Pretzel Maker drive-thru location in Cedar Rapids, Iowa. Expanding the drive-thru model continues to be an important objective for the brand, thanks to the strong returns we have generated right out of the gate. Co-branding is another key strategy to drive sales and leverage margins. This spring and summer, we signed several new development deals to open over 30 new co-branded and franchised locations in Iraq. This deal includes 12 co-branded Fatburger and Buffalo's Express locations, 10 co-branded Great American Cookie and Marble Slab Creamery locations, and 10 Hot Dog on a Stick locations. They will open throughout the country outside of the Kurdistan region over the next five years with the first unit set to open in 2024. Currently, Fatburger has four units already operating in the Kurdistan region with a strong following there. In the coming months, we will also unveil the first co-branded Fatburger and Roundtable pizza location in Texas. This is just the beginning of the growth that we anticipate for this first-of-a-kind co-branded concept. Our next area of focus is the growth of our manufacturing facility. 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 stage of growth, operating at only about 40% to 45% of its capacity, up from 33% two years ago. To drive capacity at our plant, we've completed the introduction of cookie offerings at Elevation Burger and have begun to roll out cookies across our other burger brands in our portfolio, namely Johnny Rockets and Fat Burger. The rollout is now complete in the key markets of Las Vegas and Los Angeles, and the nationwide rollout for both brands should be complete by the end of the summer. During the second quarter, our manufacturing facility generated $9.7 million in sales, a 13% increase over last year's quarter. We are in the final stages of rebranding Nestle Tollhouse Cafe by Chips to Great American Cookies. As a reminder, in May of 2022, we acquired the Nestle Tollhouse Cafe by Chip franchise business. To date, we have converted over 50 stores to Great American Cookies and expect to complete the remaining conversions by late 2023. Now, let us turn to Fat Brand's second strategic pillar, growth by acquisition. When evaluating potential acquisition targets, our focus remains on strategic acquisition opportunities of brands with a proven track record of long-term sustainability and profitable operating performance. We are particularly focused on the high-growth 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 continue to evaluate acquisitions that will leverage our existing manufacturing capacity and will increase our EBITDA. As a result of our robust growth over the last several years, in June, we strengthened our leadership team with the promotion of Jen Johnston to CMO and added two new brand presidents. Prior to Jen's promotion, she was the president of our quick service division at Fat Brands. Her unique marketing and operations background will allow her to develop impactful campaigns that will increase brand visibility and drive profitable sales across our 17 concepts. We are excited to welcome Jen to the C-suite. As a result of this promotion, Alison Lowenstein now serves as the new brand president of Great American Cookie, Marble Slab Creamery, and Pretzel Maker. Alison brings over a decade of experience working with the respective brands, having previously served as executive vice president of brand operations and marketing at Global Franchise Group. Prior to joining Global Franchise Group, Allison spent 13 years at Dunkin' and Baskin-Robbins in various leadership positions. Given Allison's track record with Great American Cookies, Marble Slab, and Pretzel Maker, we expect her to provide great value to the brands that she is leading. David Pair was also hired to assume the role of brand president at Roundtable Pizza. David brings to the company strong strategic insights from his diverse restaurant backgrounds He most recently served as vice president of strategic initiatives at Desert de Oro Foods, a multi-unit franchise organization with 360 restaurants, including Taco Bell, KFC, Pizza Hut, Whataburger, Dickie's Barbecue Pit, and Dave's Hot Chicken. Prior to that, David served as senior vice president of operations at Del Taco. He brings experience from his time at Yum! Brands, Taco Bell, and Domino's Pizza, where he led operational transformation through a combination of key initiatives, focused on culture, continuous improvement of operational elements, and the elevation of the guest experience. Looking at our balance sheet, in July, we sold an aggregate principal amount of $105.8 million of new securitized notes with a 10% coupon rate of which 6% is paid current and 4% is paid on the maturity date. We have a healthy liquidity position consisting of both cash and $156.1 million of marketable securities in addition to the cash. These securities consist of bonds that were issued but not yet sold and bonds that we have repurchased, all of which are available for sale or resale to third-party investors. Before we close, I would like to share an update on the Fat Browns Foundation and a new initiative that just kicked off. First, I would like to congratulate the Fat Browns Foundation Board for successfully launching the foundation making an immediate impact only a few months in. To date, over 25 grants have been awarded to a wide range of nonprofit organizations in areas including food insecurity, mental health, education, and more. What makes it even more rewarding is that the grants hit close to home, all near FAPRAN's locations. I'm also pleased to update you on FAPRAN's commitment to DEI. Mark Avery was recently appointed to Senior Vice President DEI in addition to his existing supply chain and global partnerships role. Under Mark's leadership and in partnership with Multicultural Food Service and Hospitality Alliance, MFHA, we have launched an IDEA Council, IDEA, standing for Inclusion, Diversity, Equity, and Accessibility. The council consists of 15 individuals, including support from our partner at PepsiCo. We look forward to sharing more updates on the work of the council in the coming months. Finally, I wanted to share that last month, Marble Slab Creamery celebrated its 40th anniversary and was also named as a top dessert treat chain by the USA Today. We're proud of the team for continuing the legacy of this brand and striving for outstanding achievements. In summary, the opportunities ahead for Fab Brands are considerable and we're well positioned for growth. Fab Brands is built on providing an authentic, superior dining experience. 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. Our healthy and growing development pipeline will fuel growth for many years to come and will naturally de-lever our balance sheet. 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 Kuick to talk about our financial highlights from the quarter.

Thanks, Andy. Total revenue during the second quarter increased 3.9% to $106.8 million, driven by a 5% increase in royalties, a 4.6% increase in company-owned restaurant revenues, and a 13% increase in revenues from our manufacturing facility. Cost and expenses remained largely unchanged in the second quarter, decreasing 1.4% from the year-ago quarter. During the second quarter of 2022, we recognized $10.1 million of employee retention tax credits, which was primarily reflected as a reduction to cost of restaurant and factory revenues. During the fourth quarter of 2022, we fully reserved the entire $22 million of employee retention tax credits that we claimed during the year until such time that it has been determined that we have quote-unquote reasonable assurance that the credits will be realized. During the second quarter of 2023, we reached that determination on a portion of the credits representing cash received from the IRS and reversed $12.7 million of this reserve. For the second quarter, all of this resulted in cost of restaurant revenues being $10.1 million lower than normal in the second quarter of 2022, and general and administrative expense being $12.7 million lower than normal in the second quarter of 2023. And it's important to note that the reversal of the reserve in the second quarter of 2023 is reflected as a reduction of adjusted EBITDA. Included in cost and expenses, general and administrative expense decreased to $9.9 million in the second quarter from $20.8 million in the prior year period. excluding the reversal of the 12.7 million dollar reserve i just referenced general and administrative expense was 22.6 million dollars in the second quarter of 2023 an increase of 8.6 over the prior year quarter and this increase was primarily due to higher professional fees related to certain litigation matters costs of restaurant and factory revenues increased to 59.5 million dollars in the second quarter of 2023 compared to $49.8 million in the prior year quarter, driven by the $10.1 million of employee retention tax credits recognized in the second quarter of last year. Depreciation and amortization expense increased to $7.1 million in the second quarter from $6.7 million in the year-ago quarter, primarily due to depreciation of new company and restaurant property and equipment. Advertising expense was flat at $11.6 million in both the second quarter of this year and prior year. And advertising expenses vary in relation to advertising revenue. Other expense for the quarter was $24.2 million compared to $21.6 million in the year-ago quarter and was primarily comprised of interest expense on our securitizations. Net loss for the quarter was $7.1 million, or 53 cents per diluted share, compared to a net loss of $8.2 million, or 60 cents per diluted share in the prior year quarter. And on an as-adjusted basis, our net income was $3 million, or 8 cents per diluted share, compared to a net loss of $3.1 million, or 29 cents per diluted share in the prior year quarter.