FAT Brands Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the FAD Brands Inc. 3rd Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in the listen-only mode. Please note that this conference is being recorded today, October 30, 2024. On the call from FAD Brands are Chairman of the Board, Andy Wiederhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Quick. this afternoon the company made its third 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 contains additional details about the third quarter but before we begin i must remind everyone that part of the discussion today 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 more details, discussion of the risks that would impact future operating results and financial conditions, please see today's earning 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 results prepared in accordance with GAAP. Reconciliation to comparable gap measures are available in today's earnings release. I would now like to turn the call over to Andy Wiederhorn, Chairman of the Board. Please go ahead.

Thank you, Operator. Let me start by expressing my gratitude to our exceptional team members, franchisees, and employees. Their commitment to FAP Brands continues to fuel our success, and I'm very encouraged by what we are accomplishing together. Over the last three years, we have expanded our brand portfolio to include 18 distinct concepts, while our footprint has increased tenfold, now encompassing over 2,300 locations open or under construction across more than 40 countries and 49 US states or territories. The results we will discuss today showcase the strength of our multi-concept approach. We are enhancing operational efficiencies through our scale. We are providing a strong backbone for each brand through a shared services model. and we are fueling our expansion through our deep franchising acumen. By combining these elements, scale advantages, shared resources, and franchise expertise, we've built a robust platform that will continue delivering value as we further grow the company over the long term. Now, let me briefly highlight our financial performance for the third quarter. Total revenue grew 31.1% to $143.4 million, up from $109.4 million in the same quarter last year. This significant growth was primarily fueled by our strategic acquisition of Smoky Bones in September of 2023. We achieved system-wide sales of $600.7 million in Q3, marking a 6.4% increase year over year. Adjusted EBITDA was $14.1 million compared to $21.9 million in the corresponding quarter last year. Over the last few years, we have been busy executing on our three main strategic pillars, organic growth, growth by acquisition, and increasing cookie dough and dry mix production at our Georgia-based manufacturing facility. Let me provide brief updates on each strategic pillar. From an organic growth perspective, we opened 22 new units during the quarter, bringing our year-to-date openings through Q3 to 62 units And in fact, we've already opened nine units this quarter, bringing the total to 71 units year to date as of today. Looking to the full fourth quarter, we plan to open approximately 40 units, ending the year with over 100 new units. Our development pipeline remains healthy with signed agreements to open approximately 1,000 new units in the coming years. Once fully operational, these additional units are projected to incrementally contribute $50 to $60 million to our annual adjusted EBITDA. This substantial increase in earnings will organically reduce our leverage over time, enhancing our balance sheet. We continue to see significant traction by emphasizing our focus on digital marketing initiatives, which I'll go into in greater depth in a minute, and also on establishing value perception in terms of delivering an outstanding guest experience for our customers. Further, we are prioritizing growth within the polished casual dining segment, specifically Twin Peaks, our most rapidly expanding concept. Twin Peaks locations continue to perform very well. Company-operated lodges continue to achieve average unit volumes of approximately $6 million annually, with select high-performing markets seeing AUVs materially higher in the $9 to $14 million range. During the quarter, we strengthened Twin Peaks' presence in South Carolina, opening in Fort Mill, our fourth lodge in the state. In August, we opened in Terrell, Texas, our 10th lodge in the Dallas-Fort Worth market. Most recently, in October, we ventured into a new market with our first Northern Nevada lodge in Reno. As you know, our acquisition of Smoky Bones last year was strategically designed to fuel Twin Peaks' rapid expansion. We see great value in converting approximately 30 Smoky Bones locations into Twin Peaks over the next several years. This conversion process offers significant advantages. notably reducing construction time by about 18 months compared to building from the ground up. In September, we completed our first Smoky Bones to Twin Peaks conversion in Lakeland, Florida, marking Twin Peaks' 15th lodge in our top performing state, growing the sales in this location from 3.6 million in 2023 as a Smoky Bones to a current annualized run rate of approximately $8.3 million as a Twin Peaks. Seven additional conversions will take place throughout 2025, five corporate and two franchised, with many more converting in 2026. Today, Twin Peaks has 115 lodges across the U.S. and Mexico, and we plan to open another 19 lodges in 2025, including the seven Smokey Bones conversions that I just mentioned. Five of those 19 units will be corporate stores and 14 will be franchised. The expansion represents a 42% growth in unit count since our 2021 acquisition, and a 62% total unit growth, including the planned 2025 stores. This underscores the brand's strong market performance and our effective growth strategy. Over the coming years, the Twin Peaks development pipeline calls for more than 100 additional restaurants, which could potentially drive system-wide sales to more than $1 billion. Twin Peaks sales, we continue to invest in menu items that move the needle, such as our new game day menu, which features bold, globally inspired twists on classic dishes, such as chicken tikka flatbread and a new wing sauce, spicy chili crisp. Twin Peaks also continues to work with the veteran-focused nonprofit Tunnel to Towers, highlighting our commitment to our passionate fan base and a cause they care about, our nation's veterans. Twin Peaks recently raised $65,000 for the cause, increasing its total charitable contribution to over $435,000 to date for Tunnels to Towers. As you're aware, Twin Peaks and Smokey Bones, as a combined entity, took a significant step towards becoming a standalone public company this past May. We confidentially submitted a registration statement to the Securities and Exchange Commission, initiating the process to achieve public reporting status. 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, and we hope to provide you with further updates in the coming weeks. As previously discussed, we view this potential IPO or alternative transaction as a strategic opportunity to unlock value for FAT shareholders. Our plans for the proceeds remain focused on two key areas, the leveraging our balance sheet and funding the construction of new restaurants. We are also in the process of refinancing Twin Peaks securitization debt prior to any IPO or other transaction. This move is designed to optimize our structure as we prepare for this potential transition. Again, we expect to provide an update soon on this subject. Another area of growth we've been leveraging is co-branding. We've long recognized the power of co-branding to enhance both growth and customer experience. A prime example of this strategy's success is our Great American Cookies Marble Slab Ice Cream co-brand initiative. Since launching the pairing in 2014, there are now over 160 Great American Cookies and Marble Slab creamery locations worldwide. Most recently, the co-branded concept added to its presence in Texas with openings in Sugarland and Louisville. We also just surpassed 55 locations in Georgia with our most recent Atlanta area opening. Building on this success, we took a significant step in September by introducing an innovative co-branded online ordering platform for Great American Cookies and Marvel's Love Creamery. In collaboration with partners 3Owl and Olo, we set out to create a best-in-class digital experience. The highlight of this new platform is our groundbreaking, customizable 3D cookie cake filter, a first of its kind in the industry. This digital tool improves the customer's experience by offering real-time, design capabilities. Users can now visualize their creations as they experiment with various icing colors, flavors, and personalized messages. The result is not just an improved guest experience, but also enhanced order accuracy for our stores. While still in the early days, since launching this platform, we are seeing higher average order values and improving online conversions. Looking ahead, we plan to extend this great American cookies cookie cake builder to physical locations in the form of self-serve kiosks and select stores by early 2025. As part of our ongoing digital transformation, we also launched a new loyalty program and app experience for Great American Cookies and Marble Slab Creamery. The app seamlessly integrates ordering and rewards across both brands for guests, driving guests towards higher average check size. We're also seeing great success with our co-branded Fatburger and Buffalo's Express locations. Most recently, we opened the first co-branded Fatburger and Buffalo's Express in Puerto Rico, located in Plaza Carolina, the island's second largest shopping center. This is the first of 10 locations set to open in Puerto Rico over the next several years. We have more than 100 co-branded Fatburger and Buffalo's Express locations open today. We are building momentum with our tri-branded model of Fatburger, Buffalo's Express, and Hot Dog on a Stick, recently opening our second tri-branded location in the Los Angeles market. We continue to see growth at Fazoli's. In August, we opened our eighth Fazoli's location in the state of Georgia. We recently signed a new development agreement to bring Fazoli's back to Utah with five new locations set to open in the next five years. The first unit is scheduled to open in Saratoga Springs in 2025, and future openings are slated throughout Salt Lake City and Utah counties. Also worth noting is QSR Magazine's recognition of Fazoli's on their Best Restaurant Franchising Deals list for 2024. In addition to this recognition, 13 of our restaurant brands were recognized on Franchise Times' Top 400 list, which ranks the largest US-based franchise systems by global system-wide sales. Non-traditional venues and international markets are important growth areas for the company as well. To help accelerate this expansion, we strengthened our development team with two new hires this quarter. Amy Harrison joins us as Senior Vice President non-traditional development, bringing a fresh perspective from her experience with Papa John's International and Penn Station East Coast Subs. And based in Hong Kong, Mayo Hood joins us as Vice President of International Development, leveraging his international knowledge from his previous role as Managing Director at Subway Greater China, where he was key in driving forward the development of over 4,000 locations across the area. Menu innovation continues to play a part in our growth strategy as we are committed to enhancing menu items for guests across our brands. Recently, Marble Slab Creamery and Great American Cookies added a fall-inspired pumpkin spice latte ice cream and caramel churro cookies LTO to their menus. To address the growing demand for occasions and catering, Pretzel Maker debuted a new shareable item, Bucket of Bites, which includes approximately 120 pretzel bites served with six different sauces. Hot Dog on a Stick unveiled an all-new lychee lemonade. Currently, Hot Dog on a Stick's classic hand-stomped lemonade makes up 40% of daily product mix. We are also committed to creating innovative lemonade offerings to further position the brand as a go-to spot for fresh lemonade. In terms of acquisitions, we continue to assess brands with growth potential that complement our existing portfolio, prioritizing franchise brands with strong momentum and proven market traction rather than brands that require a turnaround. While the market is starting to transition in our favor, we continue to remain selective with acquisitions, ensuring that they align with our business model. Moving on to our third strategic priority, leveraging our Georgia-based manufacturing facility, which provides pretzel mix and cookie dough for several brands. During the third quarter, our manufacturing facility generated 3.5 million of adjusted EBITDA and 9.5 million in sales. We maintain that our factory business is in its early stage of growth today, operating at only about 40 to 45% of its capacity compared to 33% of the acquisition three years ago. We continue to enter RFP processes and aggressively pursue avenues to utilize our remaining excess capacity. Now I'd like to provide you with an update on our fat brand foundation. The foundation continues to make incredible strides with its grant giving. Through September, the foundation has awarded over 50 grants, which has surpassed the number of grants that were awarded in 2023. Additionally, the board has formed a 17-person committee team to help with a variety of tasks, including events and amplifying fundraising efforts. This added support will ensure we continue to make a lasting impact in Fat Brands communities. Further illustrating our commitment to giving back, this quarter Fat Brands announced a new partnership with DonationScout, an enterprise software solution that streamlines restaurant fundraising efforts for operators and their guests. the new platform creates a more seamless experience to host additional community events for our franchisee base. The pilot program, which launched at Fatburger and Roundtable Pizza, far exceeded DonationScout's average pilot donation programs, affirming the community service-focused nature of our brands in addition to the overall benefit of the platform itself. In conclusion, Fatbrands continues to position itself for growth. We have a strong pipeline of organic growth opportunities, and we also plan to monetize our polished casual brands through a potential IPO or alternative transaction. Together, this will enhance our balance sheet and create value for our shareholders. I look forward to further updating you about this in the near future. If you can't tell, I'm excited about creating value for our shareholders and for the future of FabRans. With that, I'd like to hand this call over to Ken to discuss our financial highlights from the third quarter.

Thanks, Andy. I'd like to now review our quarterly performance. Total revenues increased 31.1 percent to $143.4 million driven by the acquisition of Smokey Bones in the fourth quarter of 2023 and revenues from new restaurant openings. Costs and expenses increased $45.8 million or 44.6 percent in the third quarter. Included in costs and expenses, general and administrative expense increased $10 million or 41% to $34.5 million from $24.5 million in the prior year period, primarily due to the Smokey Bones acquisition and increased professional fees related to pending litigation. Cost of restaurant and factory revenues increased to $96.8 million compared to $59.2 million in the prior year quarter, again, primarily due to the Smokey Bones acquisition and also higher company-owned restaurant sales. Depreciation and amortization expense increased $3.7 million to $10.7 million in the year-ago quarter, again, primarily due to the Smoky Bones acquisition, along with depreciation of new company-owned restaurant property and equipment. Advertising expense varies in relation to advertising revenues and decreased to $10 million from $11.7 million in the year-ago period. Total other expense net for the third quarter of 2024 and 2023 was $35.8 million and $32.6 million, respectively, which is inclusive of interest expense of $35.5 million and $29.7 million, respectively. Net loss was $44.8 million, or $2.74 per diluted share, compared to a net loss of $24.7 million or $1.59 per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss was $40 million or $2.34 per diluted share compared to $18.9 million or $1.14 per diluted share in the prior year quarter. And lastly, EBITDA was $5.3 million compared to $10.8 million in the third quarter of 2023, while adjusted EBITDA for the quarter was $14.1 million compared to $21.9 million in the year-ago quarter. And with that, operator, please open the line for questions.