FAT Brands Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to FAT Brands, Inc. Second Quarter 2024 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 31st, 2024. On the call from FAT Brands are Chairman of the Board, Andy Waterhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Hewitt. This afternoon, the company made its Second Quarter 2024 financial results publicly available. Please refer to the earnings release and earnings supplement, both of which are available in the investor section of the company's website at www.fatbrands.com. Each contain additional details about the first quarter. 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 conditions, please see today's earnings release and recent SEC filing. During today's call, the company will also 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 the 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 Weiderhorn, Chairman of the Board.

Thank you, operator. I'd like to begin by thanking all of our team members franchisees, and dedicated employees across our brand portfolio. Their unwavering commitment and strong execution are the driving forces behind our continued growth. First, let's briefly discuss our financial highlights for the second quarter. Total revenue grew 42.4% to $152 million, compared to $106.8 million in the prior year quarter, driven by the acquisition of Smokey Bones in September of 2023. System-wide sales grew to $614.7 million, a 7.3% increase when compared to the prior year quarter. Turning to profitability, adjusted EBITDA was $15.7 million compared to $23.1 million in last year's same quarter. It's important to note that in Q2 of 2023, we received employee retention tax credits of $12.7 million versus $2.1 million in Q2 of this year, a difference of $10.6 million. If you exclude the ERTCs and you look at adjusted EBITDA on an apples-to-apples basis, our adjusted EBITDA actually increased $2.8 million, or 30.8% in Q2 of 2024. Over the last several years, Fat Brands has experienced significant expansion, boasting a portfolio of 18 diverse brands, To support this rapid expansion and to allow for continued growth, which together form the cornerstone of our strategy, we have implemented a robust and comprehensive management and systems platform. The infrastructure was designed to not only sustain our current brands, but also enable an efficient and accretive incorporation of other brands that we may acquire. This month, we were recognized for our commitment to excellence throughout our continued growth, earning a spot on Time Magazine's and Statista's America's Best Midsize Companies of 2024 list. The list factored in revenue growth, employee satisfaction, and sustainability transparency. Our brands also achieved many accolades over the quarter, including 11 of our brands being named to Technomic's Top 500 list for 2024, which ranks the highest-grossing restaurant brands in the U.S. Fazoli is being recognized by Technomic Ignite, consumer for the highest score in the value amongst other fast casual brands and Marvel Slab Creamery receiving a top spot on USA Today's 2024 10 Best Readers Choice Awards list in the dessert and treat category. Now let me provide some updates on each of our three strategic priorities. First, organic growth. As of June 30, 2024, our franchisee base consisted of approximately 790 franchisees who operate in aggregate of approximately 2100 restaurants, including restaurants under construction. We also directly own and operate approximately 190 corporate restaurants across four brands. In the second quarter, we expanded our footprint by opening 24 new locations, bringing our total year-to-date openings through July 31 to 45 units. We anticipate opening 120 new units in total this year, which is comparable to the amount of new stores we opened in 2023. Both established and new franchisees alike are actively signing new development agreements for not only brands they currently own and operate, but also for other brands within our portfolio. This ongoing investment and diversification by our franchisees is a strong indicator of the overall health and confidence within the FAT franchise system. Our development pipeline remains robust with over 1,100 additional units slated to open in the coming years. We project when opened that this substantial pipeline of additional units can generate approximately $50 to $60 million in incremental adjusted EBITDA, which provides an opportunity to organically reduce our leverage. As part of this pipeline, we are prioritizing accelerated growth within our polished casual segment, which consists of our Twin Peaks and Smoky Bones brands. Twin Peaks is currently our fastest growing concept with average unit volumes at company-operated locations of $6 million, but at some key market locations, particularly in Florida, locations generate sales between $9 and $12 million. Twin Peaks currently operates 113 locations, up from 83 locations when we acquired the brand two and a half years ago. During the quarter, we opened a lodge in Naples, Florida, and in July, we opened a restaurant in Fort Mill, South Carolina, our fourth location in that state. Most of our development pipeline is weighted to the back half of the year when we plan to open 12 to 15 total new Twin Peaks, ending 2024 with approximately 125 lodges. This will equate to a growth in unit count since our 2021 acquisition by approximately 50%. Over the next five years, the Twin Peaks development pipeline calls for 125 additional new restaurants, potentially driving system-wide sales to around $1 billion and 250 units by count. The opening of these restaurants will increase the mix of franchise locations to between 75% and 80% of the total unit count. As you know, we purchased Smokey Bones in Q4 of last year. Our intention is to use Smoky Bones to fuel Twin Peaks growth through conversions, while over time still restoring the Smoky Bones brand to the 120 unit count it once had. This fall, we will complete our first Smoky Bones to Twin Peaks conversion in Lakeland, Florida. We expect several additional conversions to take place later this year, with the majority occurring throughout 2025 and 2026. In May, Twin Peaks and Smoky Bones as a combined entity confidentially submitted a registration statement to the Securities and Exchange Commission to become a standalone public reporting company. While the timing and the size of any transaction is subject to market conditions and other factors, we are working diligently to expedite a successful transaction. We view an IPO or alternative transaction as an opportunity to monetize the business for the benefit of fat shareholders. We plan to use proceeds to deleverage the balance sheet and build new restaurants. We are also planning to refinance our Twin Peaks securitization debt prior to an IPO or other transaction. Looking to our other segments, in May, Roundtable Pizza strengthened its presence in Texas with the opening of a second location in San Antonio. This development is part of a broader strategic partnership with Braumet Brands. Notably, this new San Antonio location marks the beginning of Braumet Brands' commitment to establish 40 Roundtable Pizza locations across the state, underscoring the substantial growth potential we see in this market. Our Fizzoli's brand continues to gain momentum in Florida with the recent opening of our second Tampa location, bringing our total presence in the state to six restaurants. We've also bolstered Fizzoli's footprint in Arizona, launching our third location in the greater Phoenix area with a new restaurant in Glendale. This location featuring a fresh brand look is off to an incredibly strong start, breaking Fizzoli's opening weekend sales records. These strategic expansions reflect our ongoing commitment to grow in key markets and our confidence in the brand. Co-branding also continues to be a key part of our strategy. Following the debut of our first Fatburger and Roundtable Pizza co-branded concept last year, we've seen remarkable interest in the pairing with over 50 new locations currently under development. The success of this model was evident from its launch in Texas. And building on this momentum, we're thrilled to announce our expansion into Utah. Our newly announced deal will bring 12 co-branded Fatburger and Roundtable Pizza franchised restaurants to Utah over the next six years, with the first unit set to open in 2025. Our co-branded model of Great American Cookies and Marble Slab Creamery also continues to thrive. Over the last several months, we have continued to secure our foothold in Georgia, where we currently operate over 50 locations. Recently, the sister concepts opened four new locations in Georgia, namely Ackworth, Bethlehem, Marietta, and Snellville. Additionally, a standalone Great American Cookies opened in Columbus, Georgia. We continue to lean into strategic value offerings across our brands to drive customer engagement and traffic. At Fazoli's, we underscored the brand's longstanding value proposition during the July 4th holiday by offering $4 pasta dishes, then relaunching a fan favorite limited time offer, pizza baked spaghetti at $5.99. Both promotions reinforce our commitment to providing high quality menu items at an affordable price point, a key pillar of the brand since its inception. Similarly, Smokey Bones celebrated National Hamburger Day with a nostalgic promotion offering their signature cheeseburger platter for just $6.49 with the purchase of a beverage. The same price as when the brand launched in 1999. To celebrate National Ice Cream Day and Ice Cream Month in July, Marble Slab Creamery offered $5 off their ice cream cakes and a free small cup of ice cream with the purchase of another small or large cup on National Ice Cream Day. And on that day, we saw same-store sales up 3.8%. over strong comparables from last year. Our brands continue to innovate and excite customers with new menu items and exciting partnerships. Pretzel Maker debuted Cheetos Pretzel Bites as a limited time offering. Fatburger and Buffalo's Express introduced a new collaboration with Frank's Red Hot, launching Nashville Hot Chicken Strips and Nashville Hot Fries. And Hot Dog on a Stick announced its latest hand-stomped lemonade creation, Sour Patch Kids Watermelon Lemonade. These initiatives across our portfolio demonstrate our ongoing efforts to keep our offerings fresh, engaging, and aligned with current consumer preferences. Non-traditional venues such as airports, cruise lines, amusement parks, universities, and casinos represent a key area of growth. This type of expansion not only diversifies our revenue streams, but also increases brand visibility in unique high volume locations. During the quarter, we opened a round table pizza location at Stanford University in their student union and have further plans to build round table brand on campus in the coming months In July, we also expanded our partnership with Royal Caribbean by opening our 15th location on their iconic ships, the Johnny Rockets, on the newly launched Utopia of the Seas. Moving on to our second strategic pillar, growth through acquisitions. We are assessing several new potential acquisitions that could add significant strategic value to our organization, similar to how we targeted Smoky Bones to fuel growth at Twin Peaks and Nestle Tollhouse Cafe by Chip to boost our manufacturing facilities' utilizations. We're also looking at other categories to round out our portfolio, such as salad, sandwich, or coffee brands. When evaluating acquisition targets, we must ensure that the brand is both scalable and synergistic within our existing platform, and when possible, leverage our existing manufacturing capacity, which brings us to our third strategic priority, leveraging our Georgia-based manufacturing facility. Our manufacturing facility, which produces pretzel mix and cookie dough for our portfolio brands, demonstrated strong performance in Q2. While sales remained relatively constant at $9.6 million for the quarter, the factory contributed $3.8 million to adjusted EBITDA, an increase of 9.3% over last year's quarter. The plant's utilization has improved from 33% at acquisition nearly three years ago to its current 45%. Should additional demand materialize beyond what we could currently absorb, a modest $1.5 million investment in additional equipment could double our capacity. We also have 3.5 acres of unused real estate on site that can be expanded upon. This presents a significant growth opportunity for our factory business. To boost utilization, we have leveraged our portfolio of brands by enhancing our dessert offerings, selling cookies and other products made at the facility within our restaurants. Recently, we added dessert items across the Fazoli's locations and have plans to complete the rollout in our remaining casual dining and polished casual segments in the future. Fat Brands Foundation, I'd like to mention for a minute. I'd like to update you on the growth and work at the foundation. The foundation continues to make incredible strides with its grant giving. Through June, the foundation made 36 grants, which already has nearly surpassed the number of grants they were awarded in the full year of 2023, supporting many impactful nonprofit organizations. We're also honored to share Fat Brands Foundation recently gained recognition from the Los Angeles Business Journal at its annual Nonprofit and Corporate Citizenship Awards. Jessica Wiederhorn, the foundation's president and also founding member, was named nonprofit executive of the year in the emerging category by the LA Business Journal. To conclude my remarks, Fab Brands continues to position itself for significant growth. Our business is built on delivering exceptional, authentic dining experiences across our portfolio, and we're uniquely positioned with a seasoned leadership team and a robust, adaptable brand management platform that allows for efficient integration of new brands. Our strong and expanding development pipeline promises sustained growth for years to come. We sincerely appreciate your participation today and your ongoing interest in FAP Brands. With that, I'd like to hand it over to Ken to discuss our financial highlights from the second quarter.

Thanks, Andy. I'd like to now review our quarterly performance. Total revenues increased 42.4% to $152 million, driven by the acquisition of Smokey Bones in the fourth quarter of 2023 and revenues from new restaurant openings. Costs and expenses increased $66.4 million or 75.2% in the second quarter. Included in costs and expenses, general and administrative expense increased $19.6 million or 197.2% to $29.6 million from $9.9 million in the prior year period, primarily due to the Smoky Bones acquisition and the recognition of $12.7 million in employee retention tax credits during the second quarter of 2023, partially offset by the recognition of $2.1 million in employee retention tax credits during the second quarter of 2024. Cost of restaurant and factory revenues increased to $100.1 million compared to $59.5 million in the prior year quarter, primarily due to the Smokey Bones acquisition and higher company-owned restaurant sales. Depreciation and amortization expense increased $3.2 million to $10.2 million from $7.1 million in the year-ago quarter, again, primarily due to the Smokey Bones acquisition, along with depreciation of new company-owned restaurant property and equipment. Advertising expense varies in relation to advertising revenues, and increased to $14.7 million from $11.6 million in the year-ago period. Total other expense net for the second quarter of 2024 and 2023 was $34.8 million and $24.2 million, respectively, which is inclusive of interest expense of $34 million and $24.3 million, respectively. Net loss was $39.4 million, or $2.43 per diluted share, compared to a net loss of $7.1 million, or 53 cents per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss was $30.9 million, or $1.93 per diluted share, compared to net income of $3 million, or $0.08 per diluted share in the prior year quarter. And lastly, EBITDA was $6.8 million compared to $25.6 million in the second quarter of 2023. And adjusted EBITDA for the quarter was $15.7 million compared to $23.1 million in the year-ago quarter. And as Andy mentioned, we received employee retention tax credits of $12.7 million in the second quarter of 2023. versus $2.1 million in the second quarter of 2024, a difference of $10.6 million. And with that, Kaylee, please open the line for questions.