FAT Brands Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the FAT Brands Inc. 4th 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, February 27, 2025. On the call from FAT 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 earning 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 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 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 risk 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 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 Wiederhorn, Chairman of the Board. Please go ahead.

Thank you, Operator, and thank you all for joining us today. As a Los Angeles-based company, our thoughts are first and foremost with those affected by the devastating fires. Before I begin today, I want to thank our team members, franchisees, and employees. Their dedication to our business, to each other, and to our communities during this time exemplifies the true spirit of FapRant. We kicked off 2025 with a major milestone, the spin-out of Twin Hospitality Group, Inc., which operates our Twin Peaks and Smoky Bones restaurants. In January, we distributed 5% of Twin Hospitality's Class A common stock to shareholders while retaining the remaining shares. This amounts to approximately a $50 million dividend paid to our fat brand's shareholders of Twin Hospitality shares. Twin Hospitality now trades separately on the NASDAQ under the ticker TWNP. The public listing of Twin Hospitality creates an opportunity for shareholders to directly participate in the growth and success of the Twin Peaks brand. This strategic move enhances transparency and enables the market to better appreciate the distinct value of Twin Peaks. Furthermore, it provides Twin Peaks additional currency to sustain and accelerate its robust growth. If you reference the original $12 per share IPO price of Phat Brands in 2017 and adjust the price for all the ordinary and special dividends paid to Phat Brands shareholders, the current basis in Phat Brands stock is $2.74. In other words, Phat has paid more than $9 in cumulative dividends. The current trading price of Phat reflects an approximately $2.50 per share adjustment for the dividend of the TWNP shares to establish the listing of Twin Hospitality Group. Following this call, we invite you to listen to the Twin Hospitality inaugural call at 515 Eastern Time, led by CEO Joe Hummel and CFO Ken Kuick. The details are contained within their earnings release, also issued this afternoon. As noted in our public filings for Twin Hospitality Group regarding our bond refinancing that took place In Q4 of last year, we are committed to raising equity at Twin Hospitality and reducing debt in 2025 by $75 million or more, including a minimum of $25 million by late April. We believe we are on track to fulfill that commitment. As part of that same debt reduction obligation, we agreed not to pay a fat common dividend until that $25 million is paid. So we expect to complete that over the next 60 days and declare and pay the Q1 dividend as usual at that time. A key driver for FAT brands in 2025 is unlocking the tremendous amount of value created at Twin Hospitality. With TWNP operating as a separate independent public company, and while market prices may fluctuate at the time of the spinoff listing, FAT's shares in TWNP were valued at more than $900 million. This is in addition to shedding over $400 million of Twin Hospitality's debt to the spinoff entity from FAT. FAT will continue to consolidate the twin hospitality financials for the foreseeable future because of our ownership and control percentages. Nonetheless, we will break out this information so that you can see the clear unlocking of value at FAT. So another way to summarize the balance sheet post-spinoff is that FAT now owns the remaining 16 brands and their cash flow, plus all of its fully diluted 85% of the TWNP stock and has net debt of approximately $850 million. plus approximately $150 million in preferred stock. On another note, we are also looking to refinance our remaining three securitization silos as the market permits. Perhaps most or all of those in the second half of 2025. Now, turning to our fourth quarter results, which Ken will dive into in more detail, there were 13 weeks in the fourth quarter of 2024 and 14 weeks in the fourth quarter of 2023. total revenue decreased 8.4% to $145.3 million compared to $158.6 million in the prior year quarter as a result of the incremental operating week in the prior year quarter. Our system-wide sales were $580.2 million for the quarter, representing a 7.4% decrease from the last year's quarter, again due to the incremental operating week last year. To put this in perspective, that one less week equals about $45 to $50 million of sales and $2.5 to $3 million of royalties and another $3 to $5 million of adjusted store level EBITDA. So there's quite a lot of noise in our numbers because of that one week by one week adjustment. And also as we convert the Smokey Bones stores and or close a few of the underperforming units that won't make the conversion list. We hope that this noise can be eliminated in 2025. So it will be a very clear line of sight for both TWNP, and FAT going forward in 2026. We ended 2024 with total revenue increasing 23.4% to $592.7 million and system-wide sales increasing 3.1% to $2.4 billion. As a reminder, we are focused on three core strategic initiatives that drive our success. First, generating organic growth across our existing brand portfolio's 1,000-plus new unit pipeline. Second, evaluating strategic acquisitions that could complement and strengthen our portfolio. And third, expanding manufacturing capabilities at our Georgia facility, particularly in cookie dough and dry mix production. Turning first to our organic growth initiatives, throughout 2024, we opened 92 new restaurants. This year, we plan to open over 100 new locations, having already opened 17 units a year to date. We anticipate strong organic growth across our portfolio in 2025, in particular with Great American Cookies and Marble Sub Creamery, Fatburger and Buffalo's Express, Round Table Pizza, and Fazoli's. This growth trajectory is further supported by our robust Twin Peaks new store development pipeline. Our current development pipeline consists of signed agreements for approximately 1,000 additional locations, which includes over 250 units that were signed in 2024. Once these units are open, we expect them to generate approximately $50 million in incremental annual adjusted EBITDA, which will naturally strengthen our balance sheet and reduce our leverage. This robust development pipeline demonstrates both strong consumer demand for our brands and the significant growth opportunities provided to our franchisee base. Co-branding also continues to be a key driver of our growth strategy, as seen by the success of multiple brand pairings across our portfolios. Great American Cookies and Marble Slab Creamery has been a standout example, growing to over 160 co-branded locations since 2014, including 15 locations opening in 2024 and approximately 15 projected for this year. Co-branded locations typically generate 10 to 20% higher incremental sales compared to single brand units. These compelling unit economics continue to attract franchisees and drive expansions. Building on our co-branding success, we're looking to further lean into this strategy in 2025. To kick off the year, we opened a tri-branded model of Great American Cookies, Marble Slab Creamery, and Pretzel Maker in the Dallas area. Similarly, we are set to open several more Fatburger, Buffalo's Express, and Hot Dog on a Stick locations in addition to Fatburger and Round Table pizzas this year. The international appeal of our brands is especially evident with Johnny Rockets, where international locations now represent over 55% of the brand's global footprint. In 2024 alone, we opened 11 new international locations across multiple markets, two in Chile, two in Bali, Indonesia, four in Mexico, two in Brazil, and a ghost kitchen in the United Arab Emirates. Our presence continues to grow in key international markets with over 40 locations now operating in Brazil and nearly 25 in Mexico, demonstrating the strength of our international expansion strategy. Additionally, we continue to see significant opportunities in non-traditional venues. A prime example is the recent opening of Hurricane Grill and Wings at the Six Flags Great Escape Lodge in Lake George, New York, our first theme park location for the brand. Johnny Rockets also continued to grow across non-traditional venues, opening at the Soaring Eagle Casino and Resort in Mount Pleasant, Michigan. We believe these non-traditional venues represent a significant growth avenue, allowing us to reach new customers while leveraging existing infrastructure and foot traffic. I'd like to also address our renewed focus on synergies and cost reductions. We are continuing to reduce costs as we separate out Twin Hospitality Group from the rest of the brands at VAT, taking essentially half of our 200 corporate stores and spinning them off with Twin Hospitality, meaning the corporate stores at Twin Peaks and the Smoky Bones locations. We plan to re-franchise additionally our 57 company-owned Fazoli's locations, leaving us with approximately 33 hot dog and a stick locations out of our 2,300 total locations, or 2,125 if you exclude Twin Peaks and Smokey Bones. This will bring us back to being almost 100% franchised. If you look at our supplement filed on January 13th, and it's in our investor section on our website, you will see on pages 11 and 12, a third-party valuation of all of our brands, less our debt, and given various assumptions And this supplement gives a good roadmap to value creation and our strategy to unlock the same, which is clearly our focus today. Now, turning to our growth by acquisitions strategy. Our recent transactions have been highly strategic, creating multiple avenues for value creation. A prime example is our acquisition of Nestle Tollhouse Cafe by Chip about three years ago. This transaction was particularly compelling as it allowed us to convert these units to Great American Cookies locations, effectively growing our cookie footprint while simultaneously increasing production volume in our manufacturing facility. Similarly, we bought Smokey Bones in late 2023 to help fuel Twin Peaks growth, which will allow us to convert about 30 of the Smokey Bones locations into Twin Peaks. This dual benefit illustrates our approach to acquisitions. We look for opportunities that not only expand our restaurant portfolio, but also drive incremental value through our manufacturing capabilities, essentially getting two bites at the apples. Looking ahead, our acquisition strategy remains focused on opportunities that are synergistic with our existing portfolio. We're especially interested in concepts that could leverage our manufacturing capabilities, such as additional cookie concepts that would utilize our cookie dough or pretzel mix operation. However, we maintain strict discipline in our approach, and we're not interested in turnaround situations of which we have seen many lately. Turning to our manufacturing operations, we currently generate approximately $38 million in annual sales from our franchisees through our Georgia facility with a profit of about $15 million, representing a 40% margin. This is a win-win situation as our franchisees buy cookie dough and pretzel mix at a below-market price from us, and we benefit from this high-margin revenue stream. Our manufacturing facility presents significant growth potential, currently operating at only 40% capacity. We have substantial room for expansion. The facility spans four acres, and we are only utilizing about half an acre. We can also increase production capacity through modest equipment upgrades within the existing facility when needed. Our near-term goal is to increase utilization to 60% to 70%, which would significantly enhance the facility's value. Ultimately, this asset could provide an opportunity to reduce our leverage through a potential sale. But for now, we're focused on optimizing its operations and capturing the available growth opportunities. Before concluding, I'd like to share an update on the Fat Brands Foundation. Since the Fat Brands Foundation commenced its giving in 2023, the organization continues to further cement itself as an emerging nonprofit leader. In one year, the foundation increased its giving by 36%, providing approximately $325,000 in grants. The foundation also provided 27 more grants to deserving nonprofits across the U.S., an increase of 59% from 2023 for a total of 70 grants in 2024 across 17 states plus Washington, DC. Our commitment to community support also extends to crisis response as demonstrated during the recent LA wildfires. Through Fatburger's food truck, the Fatmobile, we provided 10,000 meals to first responders sites and shelters while Round Table Pizza offered free personal cheese pizzas to first responders at over 50 Los Angeles area locations and Hot Dog on a Stick handed out free lemonade at a fundraising event at the Santa Monica Pier. These initiatives particularly resonated in Los Angeles where many of our brands have their roots. The combination of immediate crisis response capabilities and long-term community development through our foundation's work demonstrates our ongoing commitment to making meaningful contributions to the communities we serve. The strong support from both FAP Brands corporate and our franchisees shows how deeply embedded community engagement is in our company culture. In conclusion, 2025 is off to an exciting start with a successful launch of Twin Hospitality Group as a standalone public company. As we look ahead, our primary focus for 2025 is deleveraging our balance sheet while continuing to execute on our robust pipeline of organic growth opportunities. The energy momentum I see across our organization makes me incredibly optimistic about FAPRAM's future, and I look forward to updating you on our progress in the coming quarters. And with that, I'd like to hand the call over to Ken Kiewik to discuss our financial highlights from the fourth quarter. Ken.

Thanks, Andy. Before I discuss our quarterly results, I'd like to briefly recap, and Andy covered it a bit, our recent spinoff of Twin Hospitality. On January 30th, we distributed 5% of our ownership in Twin Hospitality Group Inc.' 's classic common stock to our shareholders, while the remaining shares continue to be held by fab brands. Twin Hospitality Group began trading on the NASDAQ at the time of the spinoff, and we're excited as we begin this next chapter. Separately, during the fourth quarter, we refinanced our Twin Peaks debt to a new series of 30-year fixed rate notes. This refinancing strengthens our financial structure and enabled us to complete the public listing of Twin Hospitality. As Annie mentioned, we are committed to raising equity at Twin Hospitality and reducing debt by $75 million in 2025 and believe we are on track to fulfill that commitment. Moving on to our fourth quarter results, I'll start by noting that 2024 was a 52-week fiscal year, and 2023 was a 53-week fiscal year. The fourth quarter of 2024 was a 13-week quarter, and the fourth quarter of 2023 was a 14-week quarter. So there's one more week of operations in last year's results, and the extra week falls in the fourth quarter. Moving on to our quarterly results, total revenues were $145.3 million in the quarter, an 8.4% decrease from $158.6 million in last year's quarter. This was driven by the incremental operating week in the prior year quarter, which contributed $11.3 million in revenue, lower same-store sales, and the closure of Smokey Bones locations for conversion into Twin Peaks Lodges, particularly are partially offset by revenue generated by our new Flint Beach Lodges. Turning to costs and expenses, general and administrative expense increased to $34.5 million in the quarter from $30.3 million in the year-ago quarter, primarily due to $5 million in Smoky Bones store closure costs, partially offset by the incremental operating week in the prior year quarter. Cost of restaurant and factory revenues decreased to $97.2 million, compared to $105.1 million, primarily due to lower company-owned restaurant sales. During the fourth quarter of 2024, we recognized $30.6 million of non-cash goodwill and other intangible asset impairment, primarily resulting from the decline in restaurant performance during 2024. Advertising expense varies in relation to advertising revenues and decreased to $11.8 million from $13.8 million in the year-ago period. Additionally, we slowed down advertising at Smokey Bones as we continue our strategy of converting locations into Twin Peaks Lodges. Total other expense net, which consisted primarily of interest expense, was $36.4 million in the quarter, compared to $31.9 million in last year's quarter. Additionally, in the fourth quarter of 2024, we recognized a $2.2 million non-cash loss on extinguishment of debt related to the refinancing of our Twin Peaks securitized debt. Net loss was $67.4 million, or $4.06 per diluted share, compared to a net loss of $26.2 million, or $1.68 per share, in the prior year quarter. And on an as-adjusted basis, our net loss was $29.9 million, or $1.87 per diluted share, compared to $17.3 million, or $1.15 per diluted share, in the prior year quarter. And lastly, adjusted EBITDA for the quarter was $14.4 million, compared to $27 million in the year-ago quarter. with the extra operating week and the fourth quarter of 2023 contributing $1.9 million to adjusted EBITDA.