Q4 2020 FAT Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to the Fat Brands, Inc. Fourth quarter 2020 earnings conference call by now everyone should have access to our earnings release, which can be found on our investor Relations website at IR Dot fat brands Dot Com and the press release section.
At this time, all participants have been placed on listen only mode.
It'll be open for your questions. Following the presentation. Please note that this conference is being recorded today March 25th 2021.
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 such forward looking statements due to a number of risks and uncertainties. The company just under.
To update these forward looking statements at a later date for a more detailed discussion of the risks that could 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, which it believes can be useful in evaluating its performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP reconciliations compared to comparable GAAP measures are available in today's earnings release.
Today on the call from Fat brands are President and Chief Executive Officer, Andy Wheater Horn, and Chief Financial Officer, Rebecca Hirsch Inger I would now like to turn the call every day Andy.
Thank you operator, good afternoon, everyone and thank you all for joining us on the call today I Hope you are all continuing to stay safe and healthy as we begin to round the corner of the COVID-19, pandemic and look forward to brighter days.
Noon, we made our fourth quarter and fiscal 2020 financial results publicly available.
Please refer to our press release and our earnings supplement both of which are available in the investors section of our website at www fat brands Dot com both contain additional details about the quarter and full year, which closed on December 27.
Just about one year ago, when we announced our 2019 results we were six weeks into the pandemic.
During that call I outlined a number of initiatives, we were taking as a company to assist our franchisees navigating through what we've come to know is one of the most challenging environments our industry has ever faced.
I'm pleased to be able to report that through those initiatives and the tremendous efforts of our franchisees and our employees.
Our franchisees restaurants have and are continuing to read out in <unk>.
Fat brands is poised to continue this momentum throughout 2021 and into 2022.
On the operational front, our franchisees reported system wide sales of just over $107 million for the fourth quarter fueled by the continued easing of Covid restrictions.
Presenting a 46% increase over the third quarter.
As I mentioned during our third quarter call in September we began the rollout of Charlie is third party delivery aggregator and hunger and native online ordering and delivery as a service platform across our brands.
During that first month, we saw an increase in delivery sales of over 40% for domestic fat Burger and co branded fabric on Buffalo's Express locations with December showing a 65% increase over pre rollout levels.
While we all eagerly anticipate the full reopening of dining rooms technology enabled delivery models have proven to be a valuable revenue generator for our franchisees.
In addition to improving performance levels in our franchisees currently opened locations both new construction and franchise sales are fueling the first pillar of growth for fat brands.
Growth.
Despite the pandemic, we were seeing above average levels of activity on both fronts.
Our franchisees opened 29 locations in the fourth quarter with 62 opening for the full fiscal year inclusive Johnny rockets locations that opened prior to our ownership during last year.
Similarly, our development pipeline is strong we've signed multi unit development deals in France, Kuwait in the Democratic Republic of Congo, and in addition to individual domestic locations in Illinois, The D C Metro area, California, Arizona and Alabama.
Combined these represent up to 56, new locations globally over the coming years and add to our existing pipeline of more than 200 units to be built.
Yeah.
I'd now like to spend a few minutes talking about fat brands second pillar of growth acquisitions.
Highlighting our most recent acquisition as of today, we've owned Johnny rockets, the Iconix fast casual Burger and shake brands for six months.
In that time, we have fully integrated into our platform right sizing the organization to maximize potential growth launching a number of strategic initiatives. So that our franchisees can better reach and serve their customers.
As I mentioned previously third party delivery is a cornerstone of our model for our franchisees and we partner with all owe to launch native or direct online ordering across domestic locations. We've also made a series of menu changes to align with consumer preferences by introducing plant based proteins.
We've been pleased with the financial performance of rockets, thus far and we expect the trends to improve further, especially in the second and third quarters of 2021, as we anticipate that rockets locations and special venues such as theme parks and cruise ships and movie theaters will begin to reopen.
As 2021 continues we are actively pursuing other concepts to acquire which could similarly benefit from having a strategic an experienced operator as their franchise or it would be accretive to our platform.
Before talking about our 'twenty 'twenty results and providing some insight into our expectations for normalized performance I would like to recap the changes to our capital structure that occurred during the year.
In March of 'twenty, 'twenty, we closed on $40 million, a whole business securitization not only provided us with a lower borrowing cost. But also included an accordion feature that allows us to add additional brands into the facility.
September of 'twenty 'twenty, we did utilize the feature adding another $40 million of subordinated notes from the acquisition of Johnny Rockets and additional working capital.
In July of 2020, we closed a $9 million public offering series B cumulative preferred stock.
A perpetual preferred security.
Concurrently we converted approximately $7 5 million of other preferred securities, which were all classified as debt on our balance sheet into the series B cumulative preferred stock all of which is now treated as equity and trades on the NASDAQ under the symbol S E T.
P for series B and T for preferred.
Lastly in December of 2020, we finally completed the merger with fog cutter capital group, which prior to the merger had been required to hold 80% of the fat brands common stock.
One of the key benefits of the merger is the lifting of this restriction, which will allow us to use common stock to make future potential acquisitions. In addition to the continued utilization of the fog cutter net operating loss carryforward, which is approximately $100 million.
Between the whole business securitization the series B cumulative preferred stock and common stock we have many levers to pull that provide us with flexibility to fund potential acquisitions and further reduce our cost of capital and drive shareholder value.
As outlined in our earnings release total revenues were $6 5 million in the fourth quarter of 2020 compared to $5 2 million in the fourth quarter of 2019.
The revenue performance overwhelmingly reflects a decline in royalty revenue related to the impact of COVID-19, which otherwise would have been around $9 million for the quarter.
Cost and expenses increased to $14 $4 million in the fourth quarter of 2020 compared to $5 million in the fourth quarter of 2019.
Included in the 14th with $4 million is an impairment charge taken against certain of our goodwill and intangible assets.
During the pandemic, our Fe concepts ponderosa and Bonanza Steakhouses have struggled while we believe in the brand's ability to be successful in the future as restrictions continue to loosen and greater portions of the population become vaccinated.
Of conservatism, we've impaired portions of the brands intangible assets to reflect the effects of the pandemic.
Looking strictly at general and administrative expenses, we incurred $4 $3 million in the fourth quarter of 2020 compared to $3 million in the prior period.
This increase of $1 3 million was attributed to increase in occupancy costs legal expense additional amortization expense related to the intangible assets, Johnny rockets and bad debt expense related to the COVID-19, global pandemic marginally offset by decreases in travel and entertainment.
Other expense was $2 million in the fourth quarter of 2020 compared to other expense of $900000 in the fourth quarter of 2019 and consisted primarily of net interest expense of $1 $6 million in 2020 compared to $1 $2 million in the prior period as well as $535000 of expenses related to the acquisition of Fox.
Got it.
In the fourth quarter of 2020 without comparable activity in 2019.
The 400000 on increased net interest expense related primarily to the additional interest expense associated with the $40 million of series 2020 dash to fixed rate asset backed notes sold in September 2020, the proceeds of which were used to fund our acquisition Johnny rockets as well as for general corporate purposes.
The combination of these revenues and expenses resulted in a net loss of $7 $7 million in the fourth quarter of 2020 compared to a net loss of $1 million in the fourth quarter of 2019.
Well, we are not providing guidance for 2021 on this call I can provide some color on where we anticipate ending 2021 and beginning of 2022 using 2019 as a guideline for pre Covid and post Covid performance.
As you know, we only owned elevation Burger for half of the year in 2019.
Normalizing, our 2019 topline revenue for a full year of ownership and that would be of elevation Burger we would've anticipated seen revenue of at least 23 and a half to $24 million in 2020 had it not been for the global pandemic.
Layering pre pandemic franchise revenue Johnny rockets on to this base case, we would have anticipated seeing an additional $10 million to $12 million on topline revenue to bring us to a total of $34 million to $36 million of total revenue.
We anticipate that if the recovery from the pandemic continues its positive momentum we would return to that run rate level by the end of 2021 or the beginning of 2022.
So our 2019 EBITA adjusted at $7 7 million plus another $1 million or so per elevation Burger takes you to $9 million on EBITDA at the end of 2019, adding another approximately $9 million to Johnny rockets would get you to basically an $18 million run rate on a post COVID-19 basis or a pro form.
A pre COVID-19 basis with your acquisition of Johnny Rockets.
Before we open the call for your questions I'd like to express how appreciative I am all of the hard work that our team members franchise partners and their employees during this challenging past year put it.
We very much look forward to this recovery phase in 'twenty, 'twenty, one and beyond and with that operator. Please open the line for questions.
Thank you.
At this time, we will be conducting the question and answer session. If you would like to ask a question. Please press Star then one on your telephone keypad, a confirmation tone will indicate that your line is an expense in Q. You May Press Star then two if you would like to remove yourself from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll poll for questions.
Okay.
Okay.
And our first question today will come from Joe Gomes with Noble capital. Please go ahead.
Yeah.
Good afternoon Andy.
Hi, Joe.
So a couple on that.
Quick.
Accounting type of questions here first in the release you talk about advertising cost were in excess of our collections can you just give us a little more color on what's going on there and do you would you expect going forward that you know normally goes R. R.
On somewhat equal on a quarterly basis or would you expect that to continue on being on an equal basis.
Very good question. So normally they are matched up in day perfectly match on the dollar of revenue is a dollar of expense for advertising and marketing expense here on the losses attributed to COVID-19, basically we enter into contracts for certain services with third party providers that could be PR it could be on something else advertising.
Weighted on.
And our social media related and we match that with the expected revenue from the brands as the franchisees pay a marketing assessment that matches that.
In this case because sales were so drastically affected by COVID-19.
The negative we didn't collect as much revenue as we would have otherwise normally collected and so there's a deficit and we basically write off that deficit. We can't carry that is on receivable. However, I anticipate that we will recover that at a future marketing funds and other funds that are generally associated with advertising in the coming.
Quarters.
Okay, great you're not exactly see that same and I don't expect to see that happen again in 2021 or 'twenty 'twenty, two because we will budget accordingly on contract Accordingly, obviously, not expecting a COVID-19 relapse.
Right, Okay and then.
So you you had a fairly substantial refranchising a loss on alcon.
On a combined two here if you could give us a little a little more detail on that and the Johnny rockets locations that you owned a PON acquisition have they all been solved at this point in time, our Refranchising at this point in time.
So on to two different answers here on the Refranchising loss due to COVID-19, we had a couple of sales that were in process, where these are <unk> five sales with sales to foreign investors, who are getting a green card and buying the restaurant that we manage it for them as we've talked about before.
Here. These franchisees are these owners put up money they failed to pay the rest of the money because of COVID-19, and we either canceled the sale or are we close the restaurant. We closed a couple of yellow restaurants. It was on Mediterranean concept, because they werent performing under COVID-19 on the Investor was not funding their ownership for any losses that restaurant was suffering.
That's really a one time thing we don't expect to see that going forward.
That's what that number relates to and then with respect to Johnny rockets all of the nine Johnny rockets restaurants that we acquired in September of last year are in escrow to be sold none of them have actually sold and closed yet although we anticipate all of them to go.
So by Q2, so they should all be closed by the end of Q2.
Okay, great and that should not be at a at a loss that should be it again.
Okay that'd be fantastic.
And then of course the.
The the different brands.
How many locations are still closed at this point in time.
It's temporarily closed theirs on over 100 locations.
There's a bunch of international locations that are still closed.
We have now 175 units came over internationally with Johnny Rockets, and another 70 in Canada on another 30 around the world. So we have quite a bit of international exposure. So there is still more than 100 between 100 and 125 locations still temporarily closed internationally.
Some of those markets.
Read about on the news are recoveries better than others, and so you know somebody Italy some.
In.
In places like Brazil, or or on Peru, and markets like that where do they've been open but it just depends on the market. So we anticipate over the summer that this will all come down.
To a great degree.
Okay.
And one last one on all I'll jump back in queue, you know you've talked about the securitization the and potentially refinancing that are here I think in the first half on this year. If you could give us just a little more color on on what your current thoughts are on terms.
When you might look to do that.
Yes, we are in the middle of.
The refinancing of the securitization facility at.
At a substantially lower rate than we're currently paying from the deal we put in place last year and then drew down upon again in September we anticipate closing that.
In the next 30 to 45 days.
And it's very far along we're just putting the final touches on it we needed to get our 10-K on file which will happen on Monday, which is part of that final disclosure for selling those bonds and it's going very well right.
Again will give us substantial savings provide additional liquidity for future acquisitions and.
It's been led by a major New York investment Bank.
Great. Thanks for that and they really appreciate the answers.
You bet. Thank you.
Next question on our next question. Our next question will come from Roger Lipton with Lipton Financial services. Please go ahead, Yeah, Hi, Yeah, Hi, Andy how are you.
I registered.
Good.
So if I understand it right.
Or is there still close to the 125 are mostly international <unk> is that.
Is that right.
The picture in terms of the current source currently I mean, theres theres some theres some fat burgers in the middle East that are temporarily closed as mostly Johnny rockets. There's some ponderosa's that we consider to be internationally like on like Puerto Rico on even though that's part of the U S. It's offshore on and.
And there are some in on.
In Canada, there there are some temporarily close a lot them.
Right and you got any feel for when they went to some of that but when that was international Iraq. It from start to come back on stream at all.
It's it's happening quickly now on it.
Finally, the special purpose venues in those markets. We have on you know we have a lot of theme parks a lot of cruise ships on the amusement parks movie theater. It seems like that it's not really just the regular restaurants, it's so special venues that slowed down.
Okay.
And the like.
You know Q2 Q3, everything will be opened in Q2 Q3.
Okay. So you you had mentioned 56, new signings it sounded like recently there was a recent signing since then over the last two.
Three months or so is that what you were getting.
Okay. So that our our franchise sales have been off the charts just tremendous momentum.
You've seen restaurant operators and some new restaurant operators coming in buying new development rights for brands that we have and they have very aggressive schedule. So we're going to see a very strong organic growth on top of you know any acquisitions, we make and you'll remember organic growth is free right. We're not paying for those additional stores on that additional revenue.
I always try to set a goal of 10 per cent of Europe of new organic growth. So if we have almost 700 restaurants can open 70 more 'twenty 'twenty. One that's that's sort of my goal you might you'll have a few closures, but the new restaurants far exceed the closures so its great organic growth.
Alright, you said that quickly.
So in terms of your guesstimate for how many stores might open this year.
What did you say, what I always shooting for 10%. So if we have almost 700 stores that would be 70% leased.
We have 50 or so on the move up and down a half a dozen so far and we have 50 or so on the chalkboard for construction, we'll see you know how construction goes with Covid.
They're underway.
And roughly what would be the breakdown of brands. If there should be opened 70, how would that break between brands.
It's predominantly fabric and Johnny rockets, there are some hurricanes, there's some y'all is on.
There are not any new ponderosa's, there's one new buffalos on.
Brian in some in one or two hurricanes.
Right. Okay. So your two biggest brands will be the biggest expansion vehicles, yes.
Great.
I do anticipate more growth on the hurricane side Hurricane and Buffalo's Cafe, which were virtually identical brands have just been rock stars throughout the pandemic. They there they're trending at like 110% to 115% of normal same store sales.
So they've just been killing it and we are franchisees planning to develop additional units. There just there's only 70 of them. So so even by percentage of pay up in <unk>.
Or six jump.
Okay and lastly.
At the moment, what what what what can you say about that.
Sales trends this year so far.
I know, there's still a lot of everything's instead of slots.
Those trends this year are there a hockey stick there rebounding like crazy on our sales went from you know could be down 30% to down 25 to down 20 day, I mean, they're coming back very quickly across most of the brands.
It's still the special purpose venues that are trying to get back up and running on the cruise ships, you know amusement parks theme parks things like that by in movie theaters by the.
On the end of Q2, Q3, and so but the regular restaurants are are comping.
I'm way over where they were all in the black sea, they're copying where they were over pre pandemic levels. So we've seen very very strong.
Comp level in existing restaurants, so big demand out there I don't believe that that's all attributed to the stimulus checks that just can't hold on capture weekend, it's weird right. So.
Setting aside the lap the period, we're in now as the comparisons get ridiculously easy January and February were sequentially much improved from the.
The fourth quarter.
Yes, absolutely and then if you think back to when the vaccine started rolling out when reopening started occurring.
In markets other than Florida, and Georgia, and Texas, You know you really saw on.
Things start to loosen up so it's very it's directly related to of course reopening that you can only do so much business by delivery and to go so very very strong. It's continued and has not been like all of a sudden one week. It's been every week building and we feel very good about it.
Alright, it sounds real good. Thank you so much thank you.
And once again, if you'd like to ask a question. Please press Star then one.
And this concludes the question and answer session I would like to turn I think there's one day.
Question I think there's one question on pending.
Alright, yes, I do see that question now.
And that will be from Gregory fortunate enough. Please go ahead.
Hey, Andy how are you.
Greg good thank you.
And a couple of questions I'm, sorry, I got on late I was having some problems on again did you give on EBITDA forecast for the year now that you're getting a better handle on the trends.
Yes, I did you can replay the transcript, but basically what I said was on a post COVID-19 basis whenever we're fully open again, we should be running around 18 $19 million of EBITDA and a bridge to how we got there from the 2019 levels to the acquisition of Johnny rockets and the related EBITDA.
From Johnny rockets to get us to somewhere around $18 million to $19 million run rate as soon as we're back open whether that's Q3 or Q4, you know who knows but we're well on our way to it and excited about it.
And our next question will be a follow up from Roger Lipton with Lyft in financial services.
Yes, Hi, again.
You mentioned very quickly that day, the third party delivery and the digital ordering and you had mentioned shallowly, which I'm not familiar with it all and you also mentioned <unk>.
How do they again.
Complex answer we could talk about it offline but.
But how do they interface with what's happening there.
Yeah sure. So you are familiar with.
How are you supposed to nate's toward Ash Grubhub, everybody works as a third party delivery service.
Right what.
Charlie does is it aggregates all of those third party ordering platforms and directly connects with the POS system. So that it goes it goes directly into it in that way you're not taking tablets by the register as you probably have seen years ago, and then day, that's already under the order and you can lose sales and Havent on reported sales and all kinds of things.
On Charlie is the delivery Aggregators, and then Oh Lo and hunger, our online ordering providers where.
And you can go direct to the brands you might come into the brands through Uber eats are posed to me to grubhub or something else, but if you reorder through although are hungry youre going directly into the Pos system of the franchisee and placing your order and you're not having to pay the franchises. The operator is not having to pay the third party delivery company.
For sourcing that component right, where you're getting that you're getting that lead you still use the delivery services for that last mile of delivery, you're just not paying them for sourcing the lead and so it's it's very beneficial to the operator day, you save a lot of money.
And although on a hunger do that.
Exactly and Shao Lee aggregates, but you have to pay the delivery fee that day.
On the delivery challenges shall is finally in a directly into the Pos system, which is from a franchise worst perspective very important. So you don't have sales that don't get keyed into the registry.
Alright, Okay, alright, and it also makes it seamless you don't have you don't have like order accuracy problems were they kidding wrong. So it's very important.
So youre using you use these systems.
Parallel on a parallel basis.
Yes, yes, I mean all of them.
Yes, yes.
On the same in the same facility can be can use at all.
Yes, that's correct, okay, Okay alright good.
Interesting. Thank you.
You bet. Thank you Roger.
Operator, I don't see any other questions. So.
I'd like to thank everyone for participating on today's call and again remind you to visit our investor section of our Www fat brands Dot Com web site to see on.
Our earnings supplement, which is a detailed powerpoint about the fourth quarter and 2020.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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