Twin Hospitality Group Inc.

Greetings. Welcome to Twin Hospitality Group Incorporated fourth quarter and fiscal year 2024 conference call hosted by Chief Executive Officer Joe Hummel and Chief Financial Officer Ken Kiewik. At this time, all participants have been placed in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, February 27, 2025. After the market closed, Twin Hospitality issued its quarterly and annual financial results via press release. Please refer to this document, which can be found in the investor section of the company's website at TwinPeaksRestaurant.com, among other places. 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. Twin Hospitality does not undertake to update these forward-looking statements at a later date. For more detailed discussion on risks that could impact future operating results and financial condition, please see today's earnings release and recent SEC filings. During today's conference 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 press release. I would now like to turn the call over to Joe Hummel, Chief Executive Officer.

Hello, and welcome to our inaugural conference call. Today marks another exciting new chapter for us as we begin our journey as Twin Hospitality Group, Inc., a standalone publicly traded company. Thank you to all of our team members, franchise partners, and guests for making this achievement possible. In January, our parent company, Fab Brands, spun out its two polished casual brands, Twin Peaks and Smoky Bones, into a distinct corporate entity. As a result, we now trade separately on the NASDAQ under the ticker TWNP. Our public listing creates an opportunity for shareholders to directly participate in Twin Peaks growth and success while providing us with another source of capital to execute on our robust development plans. Since Twin Peaks has always operated separately within the Fab Branch portfolio, the transition to becoming an independent company has been seamless. And our experienced executive team, most of whom have guided the brand's growth over a decade, remains firmly in place to lead our continued expansion and value creation. For those of you who are new to Twin Peaks, we're an award-winning restaurant that redefines traditional sports bar experience. Our brand's journey began in 2005 with a single location in the Dallas suburb of Louisville, Texas, and has since grown to a system of 115 restaurants across 27 states and Mexico. Twin Peaks' unwavering commitment to an exceptional guest experience defines our brand and drives our continued success. Each of our lodges provide a rugged lodge atmosphere state-of-the-art sports viewing experience, and premium dining. This creates an unparalleled entertainment destination and enables us to generate consistent customer traffic across all day parts, including lunch, happy hour, dinner, and late night. We offer our guests a made-from-scratch menu, craft beverages featuring 29-degree draft beer, signature cocktails, and attentive service from our engaging staff. Our strategic barbell pricing and approach balances accessible entry-level options with premium offerings, enabling us to serve guests across price points while maintaining exceptional value at entry level. Additionally, our extensive beverage offering supports high margin revenue across our restaurant base. We launched our newest bar menu in early February, featuring an updated drink menu that adds 19 premium handcrafted cocktails, creative mixed shots, trending categories, and top tier bourbons and tequilas. The enhancement brings bold flavors and high-end ingredients to the forefront, delivering expertly crafted beverages as Twin Peaks continues continuing to raise the bar on what a sports bar can offer. Currently, alcohol makes up nearly half of all Twin Peaks restaurants' sales, at about two to three times higher than conventional casual dining chains. Our guests exhibit strong brand loyalty as demonstrated by our black box intelligence scores. We analyze several consumer sentiment scores, including consumer perception of our food, beverages, service, ambiance, and consumer intent to return. Per BlackBox Intelligence, our scores are higher in every category relative to the broader casual dining segment, validating our brand strength. Throughout 2024, we expanded our footprint with nine new lodges, including two in the fourth quarter. Looking ahead, we plan to open nine to 11 new units in 2025, with six to seven being franchised. Additionally, we anticipate opening between 10 and 15 new lodges in 2026, and an additional 10 to 15 in 2027, including Smokey Bones conversions. As we continue growing, we're committed to maintaining a 75% to 80% franchise-based system. Our robust growth plans are supported by a pipeline of over 100 signed franchise commitments, with existing franchise partners driving about 75% of that growth. In 2024, we signed four new franchise development agreements, adding a total of 24 new lodge commitments. We then kicked off 2025 with a new five-unit development agreement that will expand Twin Peaks into two new markets, South Dakota and Montana. Based on a 2023 white space analysis by Calibrates Eastside Analytics, we believe the total addressable market for Twin Peaks is approximately 650 lodges in the U.S. and approximately 250 lodges internationally. With the current footprint of 115 lodges, we clearly have significant white space opportunities ahead. We have a flexible real estate strategy and have been highly successful at converting various other restaurants and retail stores into Twin Peaks lodges. This approach, which accounts for approximately 80% of our locations, offers several key advantages. Greater availability of potential sites, faster time to market, approximately nine months for a conversion versus 18 months on a ground up, lower build-out costs, and accelerated return on investment. To help fast-track the brand's growth at the end of 2023, FAP Brands acquired the 60-unit casual dining chain Smokey Bones with plans to convert approximately half to Twin Peaks. These ready-to-convert restaurants provide us with clear visibility into our near-term growth objectives. Our first Smokey Bones conversion took place in Lakeland, Florida last September. The location more than doubled its sales volume, growing from a $3.5 million Smokey Bones in 2023 to a current annualized run rate of approximately $8 million for Twin Peaks. Just last week, we celebrated our second Smokey Bones conversion and our first opening of the new year in Brandon, Florida, part of the greater Tampa area. This is the 16th location in our high-performing state of Florida. We currently have two additional company-owned Smokey Bones conversions planned for the remainder of the year, with more to follow in 2026. Looking at our unit economics, Twin Peaks is currently on a path to a billion dollars in sales over the next three to five years. Last year, average unit volumes reached $5.2 million, with top performing locations exceeding $10 million. When modeling Twin Peaks openings, we target the following average unit economics in the third full year of operations. AUV of approximately $6.5 million, restaurant level contribution margin of approximately 16% for our company owned Twin Peaks restaurants, and cash-on-cash returns of approximately 28.9% for conversions from previous restaurants or retail stores, and 37.1% for new-build restaurants, which equates to an approximately three-year payback period. Twin Peaks' strong union economics are a critical element of our ability to grow and attract franchise interest in developing the brand. Now let's turn to the initiatives we're working on for this year. Our marketing strategy is centered around major sporting events strategically enhanced with additional promotions and programming to create comprehensive calendar, that maintains engagement between these marquee sport events. This year, we've already had exciting new playoff games, the expanded college football playoffs, and UFC matchups that have been good for traffic drivers and are now beginning to see high enthusiasm around NHL and NBA games. Looking ahead, the NCAA college basketball tournament in March will be a key time frame for us to carve back some wins from weather challenges during January and February that we all felt We have developed some exciting new promotions geared towards driving repeat visits throughout the tournament. In the summer, FIFA Club World Cup will have an expanded format during June and July, and we're planning summer soccer promotions to capitalize on this opportunity. Then in the fall, we'll focus on fantasy football, NFL, and college football watch parties. We will complement this program with heavy sports marketing and endorsers to solidify Twin Peaks' position as the ultimate sports lodge for football season. We've been filling in the sports calendar gaps with promotions and unique campaigns around late-night flatbread specials, strong value messaging around summer-driven cocktails such as our Robust Margarita category, along with local specials unique to each lodge. Twin Peaks leverages its local sports lodge feel by building strong connections within each community throughout grassroots markets. This consists of local promo teams activating in and around each lodge, along with unique media tactics crafted for each local market to tap into local sports occasions. In summary, 2025 marks an exciting new chapter for us, and we're just getting started. We have a strong tenured management team, an underpenetrated brand that offers exceptional experiences while providing value to our franchise partners and shareholders. With that, I will now turn the call over to Ken Kuick, CFO of Twin Hospitality Group Bank, to review our fourth quarter 2024 financial information.

Thank you, Joe. Before I discuss our quarterly results, I'd like to briefly recap our recent spinoff from Fat Brands. On January 30th, Phat Brands distributed approximately 5% of their ownership in Twin Hospitality Group Inc's Class A common stock to current Phat Brands stockholders, while the remaining shares continue to be held by Phat Brands. Twin Hospitality Group began trading on the NASDAQ at the time of the spinoff, and we are excited as we begin this next chapter. Separately, during the fourth quarter, we refinanced our credit facility to a new 30-year securitization facility. The refinancing stabilizes our financial structure and provides for an additional $25 million in new store financing that will allow us to further drive growth. 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, our system-wide sales, which includes both Twin Peaks and Smoky Bones, were $184 million, a 4% decrease from last year's quarter. The extra week in 2023's quarter contributed $13.7 million of system-wide sales. Of the total, Twin Peaks system-wide sales were $148.9 million in the quarter, a slight decrease from $149 million in the prior year quarter. The extra operating week contributed $10.8 million to last year's quarter, which was offset by an increase driven by new Twin Peaks lodges that have opened since the fourth quarter of 2023. Total revenue was $86.5 million in the quarter, an 8.2% decrease from $94.2 million in last year's quarter. This was driven by the incremental operating week in the prior year quarter, which contributed $6.5 million in revenue, lower same-store sales, and the closure of Smokey Bones location for conversion into Twin Peaks Lodges, partially offset by revenues generated by our new Twin Peaks Lodges. Looking at revenue between Twin Peaks and Smoky Bones, Twin Peaks revenue was $51.4 million in the quarter, down $0.2 million from $51.6 million in the prior year quarter. The decrease was due to the extra operating week in the prior year quarter, which contributed $3.6 million of revenue, mostly offset by the opening of new lodges. Smoky Bones revenue was $35.1 million in the quarter, down from $42.7 million in the prior year quarter. Smoky Bones revenue declined as we continue our strategic conversion of Smoky Bones locations into Twin Peaks Lodges, which requires temporary closures. As Jill mentioned, approximately half of our Smoky Bones locations are part of this transition plan. Additionally, we have slowed our Smoky Bones marketing activities during this transition period. And lastly, the extra operating week in the prior year quarter contributed approximately $3 million of revenue to Smokey Bones. Company-owned restaurant sales were $77.6 million in the quarter, a 9% decrease from $85.3 million in last year's quarter. This decline was attributed to the temporary closure of two Smokey Bones locations during their conversion to Twin Peaks, lower same-store sales, and the additional operating week in last year's quarter, which contributed $3 million in company-owned restaurant sales. Twin Peaks same-store sales decreased 0.6% in the quarter, including a 1.9% decrease at company-owned locations and a 0.1% decrease at franchise locations. Similar to others in the industry, same-store sales in January and February of this year were negatively impacted by weather and other macroeconomic factors. As a result, quarter to date, Twin Peaks same-store sales have declined 2.8%. As Joe mentioned, we have a full slate of marketing initiatives in place for the remainder of the year and are excited about the upcoming NCAA college basketball tournament in March as it gives us an opportunity to drive traffic into our lodges. Franchise revenue remained steady at $8.9 million in the quarter compared to last year's quarter as growth from our new Twin Peaks franchise openings offset the impact of the extra operating week in last year's quarter, which contributed $0.6 million in franchise revenue. Turning to costs and expenses, food and beverage costs in the quarter remained flat at 27.4% of company-owned restaurant sales as menu price increases offset higher food costs. Looking ahead, we expect commodity inflation to be in the low single digits for 2025. Labor and benefits costs in the quarter improved 10 basis points to 32.8% over last year's quarter as labor efficiencies and menu price increase offset wage inflation and sales deleverage. Other operating costs increased 210 basis points to 22% in the quarter compared to 19.9% in the prior year quarter. This increase was primarily due to sales deleveraging and costs associated with the closure of two Smokey Bones locations as we prepare for their conversion into Twin Peaks Lodges. Occupancy costs increased 60 basis points to 8.2% in the quarter compared to 7.6% in last year's quarter due to deleveraging from lower sales. Restaurant level contribution margin decreased 170 basis points to 8.1% in the quarter compared to 9.8% in last year's quarter. Looking at individual brand performance, Twin Peaks restaurant level contribution margin decreased 60 basis points to 14.4% in the quarter compared to 15% in last year's quarter. reflecting the cost of managers and training and training teams associated with the opening of new lodges. As Joe mentioned, we target a 16% restaurant level contribution margin for new Twin Peaks lodges three years after opening. Smokey Bones restaurant level contribution margin decreased 410 basis points to 0.5% in the quarter from 4.6% in last year's quarter. As we continue to close higher performing Smokey Bones locations for conversion to Twin Peaks Lodges, we expect continued pressure on Smokey Bones restaurant level contribution margins. Additionally, we have identified nine underperforming Smokey Bones locations that are expected to be closed during 2025. Advertising expense decreased 50 basis points to 5.4% in the quarter from 5.9% in last year's quarter due to the slowdown in advertising activity at Smokey Bones. General and administrative expenses increased to $12.1 million in the quarter from $8.9 million in the year-ago quarter, primarily due to a $5 million store closure reserve recorded in the fourth quarter of 2024 related to the nine Smokey Bones restaurants that are expected to be closed in 2025. Total other expense net, which consisted primarily of interest expense, was $13.3 million in the quarter compared to $8.1 million in last year's quarter. Additionally, in the fourth quarter of 2024, we recognized a $2.4 million non-cash loss on extinguishment of debt related to the refinancing of our securitized debt. Net loss in the quarter was $12 million compared to $8.8 million in last year's quarter. Adjusted EBITDA decreased to $4.1 million in the quarter compared to $6.5 million in last year's quarter. The extra operating week in the fourth quarter of 2023 contributed $0.9 million to adjusted EBITDA. Twin Peaks adjusted EBITDA was $6.2 million in the quarter compared to $7.5 million in last year's quarter, with the extra operating week in last year's quarter contributing $0.8 million. Smokey Bones adjusted EBITDA was negative $1.9 million in the quarter compared to negative $0.6 million in last year's quarter, with the extra operating week in last year's quarter contributing a positive $0.1 million. And with that, I'd like to thank you again for your interest in twin hospitality. Joe and I are now happy to answer any questions that you may have. Operator, please open the line for questions.