Q3 2020 FAT Brands Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and thank you for standing by.
Welcome to the Fat French incorporated third quarter 2020 earnings conference call.
At this time all participants have been placed then they listen only.
The lines will be opened for your questions. Following the presentation.
Please note that this conference is being recorded today November 10 2020.
On the call today that French, our president and Chief Executive Officer, Andy Winterbourne, and Chief Financial Officer Dr. Hershberger.
I'll now like to turn the call over to actually de Simone I see our together.
Thank you operator, and good afternoon, everyone bye.
By now everyone should have access to our earnings release, which can be found on our investor Relations website at IR Dot dot brands Dot com in the press release section.
Before 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 them.
Actual results may differ materially from those indicated by these forward looking statements due to a number of risks and uncertainties.
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 condition. Please see today's earnings press release, and our recent SEC filings.
During today's call. The company May discuss non-GAAP financial measures would you believe can be useful in evaluating performance.
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 todays earnings release.
I would now like to turn the call over to Andy We don't <unk>, President and CEO Andy.
Thanks, Ashley good afternoon, everyone and thank you all for joining us on the call today I hope, you're all seeing safe and healthy as we continue to navigate through the COVID-19.
This afternoon, we beat our third quarter financial results publicly available. Please refer to our press release and the earnings supplement both of which are available in the investors section of our website at www sovereigns Dot com both contain details about the quarter, which closed on September 27.
This is our fourth Investor conference call since the beginning of the pandemic and I want to use this time to give you an update on the organic performance of the business and then walk through the two transformative transactions that closed during this quarter.
The acquisition of Johnny Rockets on September 21st and the preferred stock offering related transactions on July 16th.
Then I would be happy to open up the line for questions.
We have seen an uplift in system wide sales as we moved from 42 million in Q2, 2020 shells 68 million Q3, 2020 sales increased 63.2%.
On average across all of our brands for the past eight to 12 weeks, we've seen an average of 1% or 100 basis points improvement each week in cells, So very encouraging.
These increases reflect the easing of shelter in place orders phased reopening across the country outdoor dining strong to go into Liberty sales across all brands various initiatives, we put in place to continue the positive trends around delivery.
In September we began the rollout of child, we use third party delivery aggregator.
And hunger, a native online ordering ordering and delivery as a service platform across our brands during that first month, we saw an increase in the liver cells over 40% for domestic stop Burger and Cobranded copper and Buffalo's Express locations.
As we discussed in our previous calls we continue to work closely with our franchisees across our brands to provide the support that they need as we navigate through this global pandemic together.
Rudy assisting with enhanced to go packaging and delivery options.
Operating practices and procedures that align with local state and federal regulations safety.
Safety sanitation, social distancing measures to provide comfort to guess.
And redesign menu in certain options, which for example me focus on family talks to go or tendon served buffets.
Let me now give you an update on our development pipeline, where we think we will end this year compared to 22.
During the third quarter franchisees opened 12, new stores worldwide, which includes 12.
Johnny rockets openings.
Bringing the year to date total 15 stores not 12, Johnny rockets, Okay, sorry, which includes Johnny rockets.
Bringing the year to 15, the 45 total sources of numbers number six with 12 additional stores slated to open by the end of you expect to close 2020 with 57, new stores in total compared to 2019, when we opened 24 stores.
Excluding Johnny rockets in 52, including Johnny Rockets. So during this pandemic, we're growing even more than last year.
We remain optimistic about our prospects even during this global crisis as we're focused on driving our organic growth.
Not only assisting our franchisees with the topline sales recovery, but also by opening additional stores across every.
Now, let me turn to two key transaction to occur during the third quarter, which in many ways transformed the company.
On September 21st we successfully completed the acquisition Johnny Rockets from an affiliate of private equity groups Sun capital partners for the purchase price of approximately $25 million.
It's actually was funded with proceeds from an increase in the Companys $80 million securitization facility, which I will expand upon in a few minutes.
With the acquisition of Johnny Rockets that brands now franchise is more than 700 restaurants around the globe in more than 30 countries with 2019 annual system wide sales exceeding $700 million.
In a pre cobot environment on a normalized annualized basis, we estimate that the addition of the rockets brand would have increased our 2019 revenues by approximately 50% and our EBITDA by approximately a 100%.
In addition to providing the rockets franchisees with the same support through the pandemic that we provide to our existing franchisees.
And to accelerate the brands growth through a number of initiatives such as the introduction of plant based proteins opening a virtual restaurants.
Utilization of our significant purchasing muscle.
Expansion of marketing and advertising programs.
Implementation of additional delivery technology.
This acquisition represents a significant milestone for us as we continue to leverage our platform affirmed our positioning as an asset light franchise.
As we've discussed on prior calls March 2020, we closed on our whole business securitization facility, which has a key structural element called an accordion feature that allows us to expand facility with relative ease to raise new money in support pepper and acquisition growth strategy.
At the March closing, we raised $40 million.
20 million senior notes rated double B by DBRS, one sorry, 20 million senior subordinated notes, we didn't single B by DBRS morning, Sir.
Then just at the end of September we utilized that accordion feature and raised another 40 million of subordinated notes, which funded the acquisition of Johnny rockets as well as provide us with additional liquidity for working capital and organic growth.
Second, but no less important transaction during the third quarter was the completion of the underwritten public offering of $9 million or even a quarter percent series b cumulative preferred stock and warrants.
The preferred stock and the warrants began trading on the NASDAQ on July 14th concurrent with this offering we issued additional shares in the face value of over $6 million from the exchange or the portion of the series a preferred stock and accrued dividends there on into series D preferred as well as the exchange of series a one into series <unk>.
These transactions simplified our capital structure, raising 9 million in cash and a total of 15 million in equity.
I also like to note.
Oh, the series E nearly $3 million or owned by company insiders or affiliates and we believe that demonstrate a true sense of confidence in our company.
Turning now to the third quarter total revenue increased to $4.1 million from $3.1 million in the second quarter of 2020, and our system wide sales increased 52% quarter over quarter, reflecting a bounce back from the high depends on it.
As I mentioned on our last call. The Burger brands are recovering very quickly. They are more in line with consumer behavior versus the faith and our hurricane and Buffalo's coffee brands have shown extremely strong resilience during the pandemic, even more so than the Burger brands copying over 100% on a weekly basis at this point.
Total costs and expenses were $4.9 million in the quarter compared to $3.6 million last year, but when you exclude we franchisee losses of $300000 and Refranchising gains $900000 in 2019, as well as an impairment charge during the third quarter of 2020, our costs and expenses totaled 3.8.
Million dollars in the third quarter of 2020 compared to $4.5 million in the third quarter of 2019.
$700000 savings.
These combined effects of lower revenue and higher cost there.
Resulted in an adjusted EBITDA of $621000. This compares to adjusted EBITDA of $2.3 million in the third quarter of 2019.
While we are currently working through this challenging time in the industry, we already stronger company today due to the progress strategies and transactions, we've achieved an executed year to date.
As we all look forward to vaccine I'm confident we're well positioned to drive our growth both organically and through opportunistic acquisitions in the years ahead.
Before we open the call for your questions I'd once again like to extend my heartfelt. Thank you to all of our team members our franchise partners and their employees as they have done an outstanding job. During these unprecedented times in adapting to rising to the challenges our industry faces very proud of our team and our partners remain excited for the opportunity in front of us, especially as we proceed.
Industry's recovery period.
Operator, please open the line for questions.
Ladies and gentlemen, we will now have a question and answer session.
He would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing star keys well.
One moment, please while we now poll for questions.
Our first question comes from Joe Gomes with Noble capital. Please proceed with your question.
Thank you.
Nice quarter congrats on the transaction.
Thank you Joe.
Uh Huh real quick will put you on the on the spot all the spotlight on yet so.
So you.
You've been operating Johnny rockets now for about say call it six to eight weeks.
Can you talk a little bit there about some of the synergies.
Care to give what you think you can that brand can do in terms of revenues and EBITDA for you in the fourth quarter.
[noise]. So you know the synergies are significant we picked up about half of the Johnny rockets team. We're fortunate to have them, they're working hard helping to franchisees all around the world remember that wouldn't have to Johnny rockets units or international locations, so very different issues country by country or market by market.
It's important that we get as many of those restaurants back open as possible. We still have a number of cruise ships, an amusement parks theme parks movie theater seems like that that are closed some malls that are closed so there's tremendous upside with Johnny rockets and this is amazing brand.
And as we get through COVID-19 over the next lets say six months or so and the vaccine is out we anticipate a very strong recovery there.
I'm not going to project Q4 revenues, yet because we just don't know how the rest of the default here.
For the next six weeks is going to go but I would say that it's it's performing as expected we are continuing to open new restaurants, both at Johnny Rockets and.
Copper hurricanes et cetera, and so that's just one comment that I think is very important our franchise sales are just off the charts compared to what we expected we really are doing well selling new territories.
And finding people, who just don't want to work anymore for someone else it wouldn't be a business for themselves or multi unit operators, who are stepping up to buy more locations and build more stores. So very positive there.
Sounds good <unk>.
Can you just give us a little more color here on the steak houses I know that's been an.
An issue given their their nor more historical way of serving and in fact, I mean, it'll have a a takeout business I'll just kind of what's going on at all that those brands.
Yes, so definitely the steak houses have been eaten up the most there have been some closures a year to date from the steak houses that are permanent or some other operators that have just thrown into town said I'm done I don't really want to ride through the winter, which is always a tough time, the Midwest and the northeast for example.
We did go to an attendant type of serving at the face of the customer walk down and when you go to an all you can eat salad bar the phase one of our attendance would serve up the gas and that was that's worked very well it actually lowered food costs, a little bit because you had less waste, but probably is offset by the additional labor steak house brands represent about eight.
Percentage of our revenue going forward and so it's not going to affect us that much but definitely had some you know some closures there remarkable on the with the other brands have strong they've been but steak houses and I've been to pinpoint.
Okay.
[laughter] I'm talking.
Talking about the the winter weather.
No in fact I read in the newspaper today up here in upstate New York about a local restaurant that is closing.
Until March because of the weather and having the loss of the outdoor spaces outside of you know ponderosa Bonanza Hum watching.
More of the the.
Unit count would be in that potentially that type of a similar situation, where they would would lose access to any type of outdoor dining.
Really good question, because we don't really have that much exposure outside of China recently into it. So you know we have restaurants in the New York area.
It also a number of restaurants in Florida, Georgia, Texas, where and Arizona, where you have sort of the sunbelt states that have much better weather and then of course, all of California, and the West Coast, Nevada. So we don't really have the dining room weather issue the outdoor dining room weather issue other than in the northeast Midwest with Ponderosa. So you should.
Do pretty well in delivery and to go off the charts on the Burger side, the outdoor dining rooms, with hurricane and buffalos I've been on the east coast and in.
In South I'm very strong to more than 100% of normal sales, which is crazy right and you know and have consistently building on sales.
So much so that even when you have the hurricanes that have come through we're still having positive sales over last year. So very very popular on the outdoor dining rooms, and we're fortunate that that hurricanes and the Buffalo were all built with those outdoor dining rooms or access to two outdoor space. So we've been able to test it off we prepped all the franchisees early got heaters for the winter.
Ahead of time plastic walls intense and things like that.
So I think we're well positioned for it there.
Okay, and if you could just provide us a little update here I know, it's where we're kind of getting towards the end of the year. One of the goals was to complete the transaction with fog Cotter capital and just give us an update there would be appreciated.
Yeah, we are knee deep in the details of completing that transaction the respective boards are negotiating with special committees on each side and fairness opinions and all those things and so on we hope to be in a position before the end of the year to complete a transaction announced transaction and be done with this once it's Raul and.
For everyone's benefit to get the tax losses into fat brands increase the float and all those things.
Great and just one one last one for me kind of a point here.
In the.
You know that in the prepared materials and the earnings fell back there you talked about over 700 locations.
But and then the press release. It says 678 stores. Yeah that does not include the stores that are under construction and about to open I think we have.
Okay. Seven hundreds we have 12 more that will open before the end of the year in the next six weeks, we're opening like crazy right to weaken not basis and then there are another 26 under development for the first half of 2021, a number of them opened in January February.
So.
That's 700 number 705 number includes those under construction that are fully committed leases signed literally almost built.
Okay, Great I'll give a for somebody else. Thank you.
Thank you.
Operator next question.
Operator next question.
[noise] [noise] Hello, operator.
They've lost forever.
[laughter].
Okay Mr. fortunate off can you hear us.
Oh I can hear you now.
Okay. Please proceed with your question Oh, I didn't hear you say my name sorry about that that anyone here I'm sorry.
Okay. How are you Andy.
He disappeared yeah, Okay, a couple of questions.
<unk>.
The cash burn or what it was probably higher is that over with I mean, assuming things stay fairly stable the cash will start building.
That's right. So we're not burning cash any longer we were generating cash.
We never say never we have the winter here, but we are positively cash flowing and we'll just even the difference between whatever our revenues are now in normal is is you know all profit that it's just for the short term, but we're not losing money anymore made <unk> expense reductions, we could and with the additional.
Revenue from Johnny rockets in the new stores constantly coming online on cash flows.
Okay.
Earlier, you mentioned that the vaccine to stop obviously.
It seems like one is on the way.
Can you quantify the leverage you have or the <unk> vaccine I mean, as you mentioned a bunch of stores are in cruise ships or casinos or whatever I mean I.
Either with numbers are just sort of.
Give us some idea.
Well, so I went or as we talked about when you look at 2019.
Revenues in 2019, EBITDA and you add in the Johnny Rockets transaction, we see.
The revenues going up by 50% EBITDA going up by 100% from 2019 levels on a stabilized basis been getting all these stores back open that's significant right. That's very significant and we have very little marginal cost and that's already units those projections for.
Johnny Rockets acquisition, so to be able to make that acquisition and bring.
Bring all those team members, but not all the other corporate overhead and you know it if we did $7.7 million in EBITDA in 2019, and not only had six months of elevation Berger.
You can double that.
Well, you know anything close to that on a run rate basis. Once the vaccine is out in all these restaurants are back open it's very very powerful.
And that's why I've said over and over again. This is transformative to actually makes this company right.
Right sized for being a public company. So those public company costs are spread against so much more revenue and very little incremental cost.
As I mean, our margin will be above.
Above 50% to the bottom line for EBITDA and as we continue to grow that margin will continue to get bigger and our cost of financing will continue to go down and we'll look to we.
Re securitize refinance our securitization facility next year that will I believe further lower our cost of capital because we were a first time issuer first went out in the bond market now we've issued a second time to deal is performing very very well and so I expect that our cost will go down as well.
Okay, well, that's good so as far as growing and doing deals what do you. What are your criteria now I mean, obviously your things are different the small deals may not mean as much and.
And you know you have to digest Johnny rockets, So what do you foresee.
The plan being for the next 12 months as far as that goes good.
Good question Weve looked at a lot of transactions.
That has been shown to us over the last couple of quarters. He joined rock expenses actually there's a deal that I was working on for three years. So was it somebody that just dropping a lot. We were renegotiations before quoted by you know we were able to make a little bit better deal quite a bit better deal on three coverage by it but it also means that was a little bit backed up.
Hmm there there's a lot for sale there is a lot more that will be for sale you.
You are right that the smaller deals are out there they are sort of across the board on some sellers haven't realized the valuations have come down for some of these businesses.
Somehow but its just you know we really we get so much more mileage just executing right now on Johnny rockets in every way possible. We can execute our revenues increased faster than our EBITDA increased faster that I don't want to take our eye off the ball without executing on this it doesn't mean that we aren't prepared to make another acquisition.
In the next three to six months, if you find the right deal we have the ability under our securitization facility, but.
You know I'm not 100% sure when that will happen, but it will be very accretive because the way. The business is structured now we can make these acquisitions without having to issue equity and and their delevering, they're not we're not increasing our leverage would be leveraging because the price we're paying.
By these businesses as it as a multiple of the cash flow under four times cash flow is you know get allows us to draw down our facility up to four times cash flow without any issue. So too do you have any transactions. The extent, we acquire more brands and we will acquire more brands sometime in the next six to 12 months.
But the but the size of the of the deals are now a couple of a little bigger than before on that because.
Need that the scaling and the smoking center right I I would I would expect that we buy something like Johnny rockets once a year going forward, which will just.
You like a lightning rod to range. It doesn't mean, we won't buy some smaller deals, but it means bigger deals.
We just moved the needle you know faster for us.
You know the old saying that you know small just take as much time as the big deals in some extent that's true to some extent, it's not I mean by more wings brands I'm pretty easy for us and regionally. We've got a lot of room to go. So it's very easy for us to buy more wings brands like that and to put into our system pick those casual dining brands you know over 100%.
<unk> same store sales growing system wide sales very easy to we then combine it a burger brand. It it would have to be a compelling acquisition strategy. If somebody isn't because we really have with having proper elevation Burger and Johnny rockets really gives us a complete portfolio when I'm talking to land.
And we can sit down and say, what what kind of Burger brand would work best in your venue is it an urban brand is it a super healthy organic grass fed brand like elevation Burger or do you Wanna scheme brand like Johnny rockets. The landlord can help work with us to figure out what's going to work best in that location, we have a really complete portfolio.
On the on the Burger side wings. It's more just scale you know, we just don't have the geographic coverage and we could add more wings brands and also you know the virtual restaurants concept they don't want it.
We've got behind without talking more about that being able to offer virtual restaurants wouldn't I'm different brands in our portfolio being able to say to our franchisees look you're running I sat Burger and the buffaloes expenses that you could sell hurricane really wings for delivery or or the Johnny rockets franchise, you can sell hurricane or buffalos delivery out of your restaurants and.
And take advantage of those real estate locations not rent you're paying to sell incremental sales on the weak side very compelling for them and the delivery platforms are set up for it. It just means bringing in product, there's not really a lot of waste because most of its frozen some pressure, but not a lot of ways you can manage it I think the big opportunity.
Okay last question as important as doing deals or more is organic growth. This year, you're obviously blowing it out even with the Cove it.
Next year, you're already doing about 26 stores I mean do you see this kind of growth going for a while or you know like what do you. What do you see organic growth for the next 12 months, how about that yeah. We we always have targeted and try to get to approximately 8% to 10% organic growth. So we had 375 restaurants, you're trying to get.
37 restaurants in gross new stores and I, you know here with Iraq is getting to 57.
Out of 700 or 678, whatever you know pretty close and I don't see that stopping to meet our franchise sales are very active right now and so I I anticipate we will continue to have very strong organic growth. There's just a lot of franchise partners, who have interest in adding brands are adding units their portfolio and we want to do everything we can to help them.
One thing about being part of this operating system now or.
Purchasing power to buy food and paper and beverage is one of the 250 million a year that we're spending and so when you're a smaller branding spend you know.
20 million to your well 15 linear it's costing you two or 3% more and you get that saving so unit level economics are better now for our franchisees in part of this happens family then when they're Standalone brand and also I mean, I think we all know that the prices for real estate are gonna be nothing but better right now in the in the restaurant space. So its a great time.
Four new franchise sales.
All right and he is doing a great job. Thank you very much and I'll turn it over the next.
Color. Thank you. Thank you Greg.
Operator, do you have any more questions.
Yes, Sir we do.
Our next question comes from Joe Gomes from Noble Capital. Please proceed with your question.
Hey, Andy just just one quick follow up I appreciate it.
I was wondering you historically the last couple of calls you've given a kind of a break down by the brands as to how many of the stores are continued to be to be a close do duty Kobe do you have those numbers.
Yeah, I do we have out of the 177 sappers, we have about 14, there temporarily closed half those in Canada the bouncer.
Oh, sorry, sorry, seven of those are in half of those are our international only two in Canada and two outside of California in California.
So half the Muscat International I suppose cafe has a three units close internationally temporarily hurricane Everything's open yes.
You all know treat everything's open a elevation Berger a at a 42 stores nine are temporarily closed eight of those international.
Ponderosa Bonanza 45 units still temporarily closed 31 outside of the contiguous U.S. states in 14 domestically Johnny Rockets has 70 out of 322 units that are.
Fairly close so in total 141 out of 682. So about 25000 stores are still are still temporarily close and that means I see temporarily closed they're not doing delivery to go there are close on so were you know the numbers were putting up our from the restaurants that are opened that's why there's just tremendous opportunity to expand that here as we get the vaccine and.
Let it run its course.
Okay, and and it <unk>, if I'm not mistaken that I I would.
Only the vast majority of Johnny rockets, not we're talking like the cruise ships the casinos, but just the movie theater on your knees in parks and you know just just for example, we were in 15 different 15 or 16 different six flags locations.
And now they're a great partner with us, but six flags is telling us that they're really focused on 2022, maybe they get parks open you know in the second half of next year, but they think it's going to be a really tough you know first half year for them on the cruise ships are trying to come back quickly. There's a couple of new cruise ships were trying to launch that are under construction, but you know that those guys. If indeed.
Part, it's just going to take them a few months to let the vaccine I get out there and and for people to come back so I.
I think we really have to look at this as a long term investment that the demand is there. The partnerships are there with the movie theater operators that cruise ships. The theme parks that will all come back to US you know, we're just fortunate that we we can do so well and delivering it to go and most of these brands any outdoor dining rooms.
Great. Thanks, and I really appreciate the time.
Thank you for the questions operator any other questions.
No sure there are no further questions at this time.
Great well, then operator I'd like to just give some but just a closing thank you too.
Oh.
You participate in SAP brands third quarter earnings discussion.
I Hope you all say safe healthy and appreciate your continued support. Thank you operator this concludes our call.
Ladies and gentlemen, you may now disconnect your lines at this time. Thank you for your participation and have a great day.
[laughter] [laughter].
[laughter].
I know I thought I thought like my phone died I didnt.