Q4 2019 Earnings Call

[music].

Welcome to the fact brands Inc. fourth quarter 2019 earnings conference call.

At this time all participants are in place they don't listen only mode.

The launch will be open for your questions. Following the presentation.

Please note that this conference is being recorded today April 27 2020.

On the call today from Brent, our President and Chief Executive Officer, Andy Wheater Horn, and Chief Financial Officer, Rebecca Hershinger.

Now, let's turn the call over to Elecsys just yet.

We are to be get.

Thank you and good afternoon, everyone by now everyone should have access to our earnings release, which can be found on our investor relations website at <unk> Dot dot.

In the press release section.

Well, we begin I need to remind everyone that part of our 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 that.

Actual results may differ.

Differ materially from those indicated by these forward looking statements did what number of risks and uncertainties.

The company does not undertake the update these forward looking statements that later date.

For more detailed discussion of the risks that could impact future operating results financial condition. Please see todays earnings press release at our recent filings.

During today's call the comedy made GAAP non-GAAP financial measures, which I believe can be useful in evaluating performance.

The presentation of this additional information should not be considered in isolation known as a substitute results prepared in accordance with GAAP.

Reconciliations to comparable GAAP measures are available at today's earnings release.

I would now like to try to call over to Andy We aren't President Chief Executive Officer.

Thank you Alex is good afternoon, everyone. Thank you all for joining us on the call today.

The Koby 19 pandemic has brought many challenges for many people I hope you all seen safe and healthy I also want to refer you to our Investor Relations page of our website, which hasn't earnings supplement posted separate from the press release, which I think you'll find informative to look out at some point after this call.

Well technically today's call is intended to discuss our fourth quarter 2019 results given the changing environment due to the pandemic.

I'll touch briefly on 2019 and of course, our fourth quarter financials are in the press release and hearing supplement.

I feel free to ask any questions you hogs and I really want to talk about stayed in the nation how different is doing today.

We will be filing our 10-K later today and you should see it obviously see website.

Tonight.

Before Cobi 19 ramped up in U.S., we were excited about the year to come you had ended 2019 was solid momentum across most of our brands.

For the fiscal year 2019, we saw system wide decline of 7% that's less than one person. However, when we exclude the ponderosa Bonanza brands from that metric, we see positive same store sales growth.

Plus 0.9%.

It's important to highlight this as we believed that this weakness in the ponderosa Bonanza brands bands that are over 50 years old is a direct result of limited marketing campaigns and expenditures, we have been able to make in the past on behalf of those two brands.

At the beginning its 2020, the ponderosa and Bonanza franchisees approved Eugene National Marketing fund, which increased marketing and advertising spending similar to the increase we implemented 29 team for the Hurricane Brent.

Our hurricane franchisees and by extension Fat brands enjoyed an uplift in sales subsequent to our acquisition and throughout 2019 because of the introduction of refreshing revitalize marketing campaigns.

Hurricane ended 2019 system wide same store sales gross.

Positive, 6.4%, while fourth quarter system wide sales growth was positive 8.3%.

This compares to same store sales declined 4% for 2018, when we acquired Brent. This is more than a 10 point swing in the positive direction and I applaud our team and our franchisees I'm getting this done and this is exactly. The example, we presented to the ponderous had been able to franchisees and they bought into it.

During 2019, our franchisees opened 24 new stores worldwide.

On the corporate side, we realized and successful acquisition and integration elevation Berger.

44 unit better Burger brand.

At the end of the second quarter of 2090.

Combination of operational performance and the acquisition that would be should resulted in adjusted EBITDA, increasing by over 54% from 2018 levels.

Annualizing revenue contribution of the elevation Burger stores as well 24 new stores.

We would've seen revenue uplift I'm, an additional $1 million, if we don't elevation for a full year.

Given our asset light model and lean operating platform vast majority of this revenue uplift would have dropped directly into our income from operations EBITDA and adjusted EBIT. So we felt good about where we were from a business momentum standpoint, starting out in 2020 I'm looking ahead with the subsequent completion of the refinancing transaction, we are still poised to ramp expenses.

<unk> growth strategy in 2020.

We were very very fortunate to have completed our refinancing shortly before the severity of the impact of Cobot 19 became more apparent.

It really March we announced our 40 million dollar whole, there's a securitization transaction, which significantly lowered our cost.

The proceeds were used primarily to repay our expensive term loan decreasing our annual interest expense by approximately $2 million. Additionally, the structure includes an accordion feature that can be easily access and the future as needed to grow our brand portfolio.

On the flip side March was also a month in which things were turned upside down, particularly for the restaurant industry.

That's cobot 19 continue to spread state and local jurisdictions implemented safer at home orders and restaurant traffic plummeted almost overnight.

In compliance with the state local orders, our franchisees close dining rooms and were forced to rely solely on the off premise channel delivery into garbage not regard we were fortunate to already have a strong to go and delivery business across many of our brands and subsequently have experienced significant increases in these low contact modes over the last.

Six weeks.

As you likely expect our Burger brands, which account for roughly half of revenues on a normalized non Tobin 19 basis have held up better off only approximately 28% on a comparable basis and 40% in absolute dollars as compared to a casual dining brands, which was 65%.

But now subject to reopening in a number of states, we think things will prove rapidly.

Across the system approximately 150 of our 375 restaurants are temporarily closed shutdown primarily across the steak house concepts as well as some top rigor restaurants, located inside casinos, which are themselves closed.

During these unprecedented.

Our top priority remains the health and see if people are franchise partners. The restaurant teams. When he gets to that end, we're committed to supporting our partners and doing everything we can to ensure there will be in both the near and long term.

The actions, we're taking include helping franchisees to acquire personal protective equipment for their stuff.

And developing enhance cleaning and social distance he procedures in the restaurants. So that franchisees can continue to see if we sort of new communities.

We're helping them optimize their off premise business through improved packaging and curated menus.

In addition, we are coaching franchise partners and how to access funds available through the carriers Act TPP program and the S.P.A. economic injury disaster loan program.

And we're walking them through the process to negotiate rent deferrals from new landlords and we've secured extended terms from distributors like U.S. foods, and Cisco and and PFT and food suppliers on their behalf.

As I mentioned earlier, the timing of our whole business transaction.

The securitization was fortunate as it enabled us to enter the crisis with a significantly stronger capital and liquidity position.

I'll give the securitization, resulting net proceeds of the company of over $10 million after deal fees and repayment of the term loan and accrued interest.

In addition to the significant reduction in quarterly cash interest payments given lower cost of capital.

The excess proceeds out of working capital to our balance sheet on the operational perspective, we've taken action at the corporate level to reduce expenditures, including layoffs of certain team members, whose rules related activities meant to accelerate our growth initiatives in order to mitigate the impact of the reductions royalty income from our franchisees. During this closure time period.

This 20% reduction in headcount is not impacted our ability manager ongoing operations and to assist our franchisees independent.

While the duration and severity of the ultimate impact and probably 19 on industry remains uncertain. We are excited about our future and our platform.

We are continuing to make progress on third party delivery initiatives.

Some of our brands were well ahead of the curve as they had been offering delivery services, such as you've reached Grubhub and Postmates for years now well others are much earlier in that process as well in conjunction with we are continuing to roll out our goes kitchens adena location in Chicago last week.

Our gross kitchens, not only drive third party delivery business, but I guess to access our brands delicious food even in markets, where the brands don't have a brick and mortar presence.

Our development pipeline is active and we anticipate opening between 25 and 40 new locations. In 2020, we've opened 11 already this year. There are three more stores ready to open and they've been fully built in there just waiting for local authorities to permit you openings construction is continuing to many locations, though we do not expect.

Ladies and new store openings.

And new development yields are being signed both domestically and internationally.

Furthermore, we have many opportunities for brand acquisitions, though is always evaluate them sonically and precede liberally, adding only the very best to the top brand platform.

Before we open the call for your questions I'd like to extend my heartfelt. Thanks to all of our team numbers franchise partners and their employees industry is facing difficulties of alike. We have never experienced before this group has done an incredible job rising to meet the challenge.

With that I'm going to ask the operator to open the lines for questions and I'm going to remind you that we're not going to make projections for 2019 or give guidance for 2020, you can give guidance for 2020, given the uncertainty as to when different markets will open but you can talk at the guidance as you ask questions just don't expect to specific cancer operator.

Thank you.

Ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask a question your May press star one on your telephone keypad.

A confirmation total indicate your line is in the question Q.

You May press star too if you like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before prosigna Starkey.

Our first question comes on line of Gregory fortunate off.

Private Investor. Please proceed with your question.

Hey, Andy how are you.

Hi, Greg.

Hey.

Andy So my first question wasn't it'd be are we going to make it through that's but I.

After reading the press release and how your comments I know that isn't an issue, but I guess the question is what are we gonna look like.

Do you expect to lose.

Many franchisees.

And what does it looked like somewhere you're sitting as best I can tell.

Understood. The question. Thank you I look we are certainly going to make it through this as a company. We've done every stress test imaginable and if necessary could ride. This out in the current disastrous stayed for a year. So we're very comfortable that we have adequate liquidity now to survive.

This but the real question is when are we allowed to reopen is there any kind of relapse, how do we plan for that how do we how do we ensure you get it's not as much momentum as possible at each brand level.

We will lose some source everyone. We'll do some stores I don't think it's going to be a huge number if we have 400 stores by the end of your EUR 379 stores now or we could lose five or 10 stores for sure.

Probably if youve steakhouses not sure that you have any topic resort Buffalo's kefir hurricanes or that was an elevation, but not not tons of stores. It's a small number and generally if we lose any units they were probably.

The they were lower contributors in terms of you know high average volumes and higher royalties, that's not that group. So if you sort is closing its probably wasn't doing that we'll start with and just another staying power here, but I don't expect to lose a lot.

Okay second question.

International you were starting to get some momentum internationally I'm, assuming that's going to slow a little bit is that the case or am I wrong.

Well internationally is there's a lot going on that's positive we have some deals in China to roll out on more of the Burger businesses, we will announce those hopefully very soon for a large.

Development deal across China, and candidates continuing to build stores, although they will probably be a little bit slower than originally planned. This year I think we had planned 10 stores now, though we'll have a few us we've already opened a couple the Singapore is working on new stores right now in there that's a pretty high average unit volumes. So I don't think international is.

Is that in the water and with the momentum we have in China I expect that that's good that's really going to pick up you pieces and those are not really in our projections for the 25 to 40 stores this year and and I think there are.

Of course domestically with them, we have a bunch of stores coming out as well. So you know I feel pretty good about development actually about at least world.

Okay less less question I'll, let someone else.

Yes, so I was pleasantly surprised to hear that you're still talking about doing deals I mean, I would assume that the the environment is right.

For deals as people are struggling can you talk about your strategy I mean, when should we look to expect.

The last call you were talking about a deal sort of imminently in the first quarter. Obviously, that's delayed can you give us idea of well we can be looking for deal and what your criteria are.

Yes expertise that up so the existing financing facility is expandable and is structured to adding more brands.

We have some targets identified weve had extensive negotiations.

You know there are no binding deals yet but there.

Could be soon.

Hopeful that we complete.

One or more acquisitions before the end of quarter.

And I think that we'll see the opportunity to acquire two or three brands.

The entire year.

The what's different here is of course valuations are lower everyone understands that we're getting more flexibility from sellers, who want to go to deal done some need to get to deal done. Some just want to get a deal done it depends on their circumstances, but there's more flexibility in terms of like a seller carry back node or ticking preferred.

Dock or something like that to help us get the deal done as well because capital is precious and even though it's available in our securitization spreads are wider and things like that so so far I'm. The sellers that we've been negotiating with still want to make deals happen I'm trying to be cautious about valuations and cautious about mechanism to.

Make an acute to make.

Acquisition, so that.

There's a little bit of a formula involved that we're not setting 100% of the price today.

Without some sort of earn out along the way that could be adjusted its good brand does better grade if the brand doesn't do as well you acquire than our purchase prices reduced and therefore, we're not having to take on all that all that risk. So there's definitely stuff to happen and I hope that by the ended the quarter, we'll be able to announce or at least one acquisition.

Okay. Thank you very much.

Thank you.

Our next question comes on the line of Joe Gomes with Noble capital. Please proceed with your question.

Good afternoon, thanks for taking the and the question [noise].

I just wanted to go back to the fourth quarter for a quick moment here.

I think in the.

Third quarter, you had mentioned that Youre expecting.

EBITDA nine to 11 million for the year.

We came in at 7.7 million I'll just do you can help me understand what happened in the fourth quarter, especially if you're saying that it was a solid corridor.

Yeah. So here's there's really two things to point to that or that are relevant and understand it again and we didn't you only owned elevation burden for six months or there's another million dollars of.

Revenue from elevation Burger and another $250000 from new franchises were open during the year that one open a four year, but with respect to the quarter hour.

Hour.

Transactions, where we call them re franchising a affected negatively our quarter and that's where.

We have gains from the sale of restaurants to franchisees, where we buy them and resell them. We had a transaction fall apart to a buyer who of course are lucky to have it was from move on and put it down payment down on buying some restaurants and signed a contract you had recorded the the.

Transaction in Q3 and had to essentially reverse it in Q4, which caused a loss is substantially less refranchising income we should have had.

Another million dollars a positive income in.

Q4, <unk> that we expected that didnt happen because that person, they're stuck and move on their money stuck that couldn't completed transaction and.

And now we're not certain that they ever will so that's a big chunk of it that's a million dollars or there's also.

An adjustment in the revenue side of things.

Joe of about $400000, you can see negative store opening fees and that's a if you're familiar with a and C. Six so six in the recognition of income.

Four franchise fees and how you have to amortize them over the life of the franchise agreement, which didnt isn't the way it used to be and there's we adopted it initially oh formula to.

Allocate some of those revenues to the actual cost, we incur and fees that we charge for opening a store and the balance we amortize [noise].

And well we believe that's the right way to account for it and we believe the dots would gap permits just aren't seeing any of our competitors.

Recognized franchise fee income the way that we all used to recognize it now everyone straight line amortize units. So if you have a charts $50000 for franchise fees you have a 15 year Manchester agreement you have to amortize. The 50000 over 15 years, you can't recognize 25000 of it or whatever the number is two to.

Allocate to the actual costs you spent hoping that franchisee opened a store training or.

Store design or anything like that so historically, we've done that but we decided to take most conservative view possible and and get in line with everybody else I know that cozby is continuing to review. This they just came out with a new bulletin that said the reevaluating this but we decided to go with that drop so those two things that come to that.

<unk> million for.

Or more of a.

A change in revenue from what we forecasted the into Q3.

Okay.

Thanks for the insight there just wondering if maybe you could kind of just educate me a little bit here.

You know if if some of these.

You know some of the stores you lose.

You know do they go back to you are are they potentially stores that you would operate and then book to try and resell or just just a little bit more color on detail how that whole process would work I'd just be appreciated that yes.

So again that falls into that Refranchising bucket, and we had before stepped up acquired.

Franchise locations.

Put them in our portfolio repositioning them and we sold those to new franchisees. So there is an expectation that you know for some of those stores. We will do that there isn't there's also you know the chance. It. We just let some go that are that are either like a really old location, where the new capital expenditure doesn't pencil, where the market may have moved up its.

30, or 40 year old location and it was the hotspot at one point, but it's no longer in the hotspot.

It may not make sense to acquired that store and refranchise it versus just try to selling new franchise not community. So I think there is that chance, we haven't liquidity to do it if we need to but I can't give you any specifics today.

Okay, great. Thanks for taking the call.

Thank you.

Our next question comes on the line of Richard Ehrlich with J.H. Darby and company. Please proceed with your question.

Hi, Andy how are you doing.

Although ritchie.

Okay, Oh could you explain how you'd goes kitchen expansion because you're not sit today. Some news on that can you explain how that.

Does not negatively impact like physical locations or possibly may open up in that area.

Yes, so we made a decision with the goes kitchen.

Operator, who is committing to opened 10 goes kitchens three this year to let them try it in some markets, where we don't have an active franchise base and don't have any next 12 month or 24 month plans by franchisees to develop stores.

So you know, it's another way to get a presence in a market and we'll have to see how it performs and see what kind of volumes they get and how successful they are.

We had franchises in Chicago years and years ago, We haven't had a lot of French franchise interest in that market in recent years and decided that let's try to sell our products through delivery and to go what better time to do it now and see if we get some traction and if it works and we'll reevaluate.

Okay.

I do have one more question, though.

I'd have to imagine there are some restaurant.

Companies corporations.

That.

For future growth for yourself to purchase they could possibly still some names where you may not be able to make acquisitions on the exact quantity you'd like but as far as getting the name and maybe doing some.

Some home some real building the left to do both to rebuild these restaurants, but I imagine you can really steal some names out there.

For almost no cost it's a delicate yeah, there's a delicate.

Once you're right on that for for sure you know, there's an opportunity to make acquisitions.

There are.

Buyers that were sellers were negotiating with who like I said need to make a deal and some who just want to make a deal and no one wants to make a deal if they feel they were getting picked off horribly. So unless they are in absolute desperation. So we're going to look at those things we want to buy brands that are fitters brands, we can really move the needle with.

And so you know there's only so many hours a day and and heavy lifting you know we have we have enough heavy lifting to do on her own so trying to be thoughtful about we're gonna by brand what does that mean towards we've we've been shown an awful lot of deals over the last six weeks.

A number of them had high concentration to company owned stores definitely not what we want to do you know if we're going to buy a brand that has some company owned stores because not every brand is gonna be 100% franchise. We have to have a plan. We think we can execute onto refranchise no stores.

Yeah I think there's also there's also.

Some brands that are more.

I sneak it in others like cream barbecue were sushi or something like out where it may or may not make sense rush to try to integrate that into our platform right now burgers chicken.

Well I can buy any more steak houses at this point, but it burgers and the waste is very good for us I'm, sorry, he will be opportunities there.

We don't have a pizza chain, yet you don't have a salad chain or coffee dessert sandwiches like I've said before those will all makes sense, but I, but I feel like in this environment, we know what to do with the brands, we have and brands that are similar like that will be the better acquisition candidates been just buying anything that comes along on capital is you know very.

Valuable today, we want to really make it work that doesn't mean that I'm not listening to you are hearing your comment as I've heard from many others that there should be a really good time to make acquisitions. We think so the platform is well positioned to make acquisitions.

That's the whole point of that's getting this platform to the scale and now the financing in place to do that so.

This is our time for sure.

Great Good luck and I'm confident.

There's a chance into quarter from now you'll be actually bigger than you are now so I think that's right.

Thank you.

Yeah, I think that's a very that's right. We don't look at it this platform a decides needs together.

There are no other especially the only Q.

I'd like to hand, the call back over to a Andy Wieder Horn for closing remarks.

Thank you operator, I want to thank everyone again for joining todays call. Please look at our earning supplement the tiny IR website stay safe and have a great night and look forward to updating you with Q1 around the end of <unk>.

Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.