Q1 2021 FAT Brands Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by.
Moving to the Fat brands, Inc. First quarter 2021 earnings conference call.
At this time, all participants have been placed in a listen only mode.
Your lines will be opened for your question and trial and the presentation.
Please note that this conference is being recorded today May 11 2021.
On the call today from Fat brands are President and Chief Executive Officer, Andy We don't work and.
I would now like to turn the call over to Lynn County, or ICR to begin.
Thank you operator, and good afternoon, everyone by now everyone should have access to our earnings release, which can be found on our investor Relations website, and I are dot fat brands Dot com and the press release section.
Four we began and 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.
These statements due to a number of risks and uncertainties. The company does not undertake to update these forward looking statements at a later date.
For a more detailed discussion of the risks that could impact future operating results and so net financial condition condition. Please see today's earnings release, our 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.
And evaluating its performance and the presentation of this additional information should not be considered in isolation.
Not as a substitute for results prepared in accordance with GAAP reconciliation for comparable GAAP measures are available in today's earnings release, I would now like to turn the call over to Andy Wade, Our Horn, President and Chief Executive Officer.
Thank you Lynn and good afternoon, everyone and thank you all for joining us on today's call I'm hopeful that as we begin to put the COVID-19 pandemic in the rearview mirror, everyone is continuing to stay safe and healthy.
This afternoon, we made our first quarter 2021 financial results publicly available.
Please refer to our press release and our earnings supplement both of which are available and the investors section of our website at www fat brands Dot com.
And contain additional details about the quarter, which closed on March 28.
Our first quarter 2020, one operating performance has shown a modest return to normalcy for fat brands as many of our franchisees have begun reopening soon and reporting sales in line with pre pandemic levels, reflecting the continuing easing of local dining room restrictions and increased and even <unk>.
Capacities and certain markets as well as the widespread rollout and the vaccines, especially in the United States and Europe.
These hard earned gains are a testament to the tenacity and not only our franchisees, but also our employees as we collectively navigate it the most challenging environment our industry has ever faced.
While there is still substantial work to be done within the system, especially at the steakhouse and buffet brands.
Select international locations and and special venues such as cruise ships stadiums and theme parks I am pleased to report that our fat Burger Buffalo's and Hurricanes brands performed well during the first quarter of 2021 with the brands posting system wide sales growth of 18%, 19% and 16% respect.
Over the first quarter of 2020.
And on a same store sales basis, we've seen similar trends of 6%, 26% and 20% respectively over the first quarter of 2020 more importantly, our wings brands, specifically are returning to pre pandemic levels with same store sales increases of 9% and buffalo's and 10% and hurricane when comparing to the first.
Order of 2021 back to the first quarter of 2019, a significant accomplishment at.
And at the end of the first quarter 107 locations across the system remained temporarily closed primarily Johnny rockets, which has a significant number of locations and special venues and within the steakhouse brands with scheduled reopening as anticipated throughout the second and third quarters of 'twenty 'twenty. One we believe we will see continued topline revenue and <unk>.
Movement through the remainder of 2020 one.
Even with the reopening of dining rooms delivery sales are showing resilience facilitated by the third quarter, 2020 rollout of Shao Lee and hungry.
As of the end of the first quarter of 2021 third party delivery sales have increased 77 zero, 70% over the third quarter of 2020 pre rollout levels.
Augmenting these continuing operating performance improvements of the currently opened locations both in new construction and franchise sales are stronger than we've seen and many years, our franchisees opened five new locations and the first quarter of 2020, one and a total of eight locations year to date with another 36.
And anticipated to open through the end of 2021.
Turning to the development pipeline. In addition to the previously announced multi unit development deals in France, Kuwait and Africa, We recently signed a multi unit development agreement, and California, and Arizona as well as in Mexico.
Marking fat burgers entry into that market and we anticipate additional multiunit agreements and other domestic and international locations in the coming weeks.
While we are pleased with the recovery of many of our franchisees as well as the two indicators of organic growth.
No less important to our corporate strategy is the identification of additional restaurant concepts to add to our platform. We are actively evaluating additional acquisition candidates to augment our existing nine brands.
Before talking about our first quarter 2021 results and providing some insight into our expectations for normalized performance I'll recap the significant change to our capital structure that occurred just two weeks ago.
As you recall in March of 'twenty, and 'twenty, we closed our whole business securitization and issued two tranches of senior notes, a $20 million and senior note securities and $20 million and senior subordinated notes that transaction not only reduced our borrowing cost from the previous levels. We had but also included an accordion feature.
And it allows us to easily add additional brands into the facility.
We took advantage of the accordion structure and September of 2020. When we added another $40 million of subordinated notes used for the $25 million acquisition of Johnny rockets with the remainder providing additional working capital.
After the September 'twenty, and 'twenty transaction, the blended borrowing rate for the three tranches of security secured notes was $8 75 per cent per year.
On April 26th we completed our third successful whole business securitization transaction and a little over a year with the completion of the offering of $144.500 million worth of three new tranches and secured notes, we refinanced our existing $80 million securitization notes, leaving approximately.
$57 million and available funds to us for working capital and future acquisitions.
No less important than this liquidity is the substantial reduction to our borrowing rate.
On a blended basis, the 2021 securitization transaction has a weighted average interest rate of 5.92% a 283 per cent basis point 283 basis point reduction compared to the 2020 transactions and I wish it was 283 per cent.
In addition to the 2021 whole business securitization issuance of additional shares of our series B cumulative preferred stock and the use of our common stock are available to us, which will provide us with additional flexibility to fund potential acquisitions further reduced our cost of capital and drive shareholder value.
As outlined in our earnings release total revenues were $6 6 million in the first quarter of 2021 a 50% improvement as compared to $4 4 million and the first quarter of 2020.
Our revenue performance reflects improvements in royalty revenue across the system as COVID-19 restrictions ease and dining rooms, reopen and the vaccines become more widely available and utilized as well as the acquisition of Johnny Rockets car.
Cost and expenses increased to $6 5 million and the first quarter of 2020, one compared to $5 million and first quarter of 2020.
And our general and administrative expenses totaled $4 9 million and the first quarter of 2021 compared to $3 5 million and the prior period.
This $1.4 million increase is attributed to increases in compensation as we ramp up staffing for continued recovery and growth as well as increased legal expenses and higher depreciation and amortization expenses related to the acquisition of Johnny rockets without comparable activity and the prior period these increases and certain components of gene.
<unk> expenses are marginally offset by decreases and accounting and travel and entertainment expenses.
Other expense was $2 7 million and the first quarter of 2021 compared to other expense of 2 million and the prior year. Our interest expense was $2 8 million in both periods.
The combination of these revenues and expenses resulted and returned to positive income from operations of $104000 and the first quarter of 2021 compared to a loss of operations of $578000 for the first quarter of 2020 with our net loss remaining flat at $2 4 million in both periods.
While we are not providing guidance for 2020. One on this call I can provide some color on where we anticipate ending 2021 and beginning of 2020 two using 2019 pre COVID-19 as a guideline for performance as.
As I discussed during our fourth quarter, 2020 earnings call. A few weeks ago, we only owned elevation Burger for half of the year and 2019.
Normalizing, our 2019 topline revenue for a full year of ownership and elevation Burger we would have anticipated she and revenues 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 of Johnny rockets onto this base case, we would have anticipated seeing an additional $10 million to $12 million topline revenues to bring us to a total of somewhere between 34 and $36 million and topline revenue on a pre COVID-19 or what we hope will be post COVID-19 cases.
We anticipate that if the recovery from the pandemic continues in its positive momentum we'd return to that run rate level by the end of 2021 or the beginning of 2020 two.
So by example, if 20 and 19 adjusted EBITDA was $7 $9 million and we would have gotten another $1 million from a full year ownership of elevation Burger that's about a $9 million run rate at the end of 2019 with approximately $10 million to $12 million and incremental EBITDA.
From Johnny Rockets, let's say nine nine to 10, new and dogs and Johnny rockets lets say its somewhere between 18 and $20 million of EBITDA run rate going forward on a post pandemic basis, whether that kicks in in Q4 or the beginning of Q1 next year, that's what our run rate is anticipated to be.
Before we open the call for questions I would like to express how appreciative I am for all the hard work that our team members franchise partners and their employees have delivered during this challenging time, we look forward to the continued recovery in 2021 as we lay the groundwork for a more normalized 2020, two and future acquisitions with that operator. Please open the line for questions.
And at this time and will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and.
And confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Our first question is from Joe Gomes with Noble capital. Please proceed with your question.
Good afternoon, and thanks for taking the question.
Hi, Joe.
So I apologize I.
Got it on the call a little late I had another one run over a little bit so if I'm asking something that I and you already talked about I apologize in advance but on the acquisitions can.
Can you just kind of give us a little more color or timeframe of what you think is gonna haven't seen and you just raised a lot of dry powder here through the and recent refinancing I'm sure you'd want to put that money to work thoughtfully, but you would like to get it to work.
Absolutely great question and very important for everyone to consider we raise the additional capital not only for liquidity, but for sure for additional acquisitions, we are anticipating.
Anticipating announcing one or two acquisitions in Q2 of 2021 and so right away.
And we hope that we'll get to the final definitive agreements and B and a position to make.
You know and make those announcements shortly.
Okay, great on that.
And here's kind of oddball question for you Bob.
I was at a restaurant a week ago, or so and went to went to order.
Some wings and instead of having a price had said market price.
And obviously I've seen you know the.
New stories about some shortages.
How is that impacting your franchisees. This shortage of chicken wings, you know with them with every chicken comes to wings and that's it so.
You really you really want to sell a lot of other chicken products to if you can but the wing shortage is nationwide. We were really fortunate that we haven't had product outages, but.
But we have seen prices increase and we have had to have our franchisees take price to maintain their margin and we have we have very strong contracts with our suppliers different contracts for different brands and and regional but we haven't had the outages. So we're fortunate and perhaps more than most.
But let's hope that the problem really isn't the availability of chicken or the wings. If the availability of labor in the chicken plants to process them and get them distributed so that's really the same problem you you see on television and reading. The paper you hear people talking about that's really what's driving this and we're very hopeful that that.
It comes back to normal here by the time the summer's over.
Where the benefits are to run out the unemployment benefits.
Right and then and Kyle.
And a follow up to that obviously would then be and again I mean, you you cannot drive past.
Any type of a restaurant with a help wanted sign sitting outside.
No.
Is that having an impact again on the franchisees and and either you know opening fully for and you know sit down and where that's where that is now available or maybe even.
And that crimp some of the new.
And new openings that were hoping for here this year.
Well, so yeah, I think it affects everything but just to a limited extent and it's just a matter of time. So for example.
And our different brands opened approximately 60 locations slightly more than 60 locations in 2020 with a lot of demand and units under construction coming out of 2019 will end up with 40 to 50 units. This year, because everything got a little bit slower during 2020, so the plans for 2020. One you are feeling that.
On the on the Labor front you have certain franchisees that for example may have operated a 24 hour location and they've eliminated the graveyard shift because that may have been their slowest shift and if labor's tight they're repositioning their staff so as to be able to have enough employees for the day shift you know the regular shift and the evening shift.
And so we see some things like that and these are these are all small annoying factors, but look the fact is that our brands came through the pandemic.
And you know other than the pain threshold at ponderosa and Bonanza, where they really had more closures.
And then any other brand and the rest of our brands hardly had any closures.
On a permanent basis.
The brands will rebound the restaurants will rebound and the operators have really paid attention to the guidance. We've tried to give them about getting P. P. P loans getting SBA economic injury disaster loans looking for the restaurant relief packages or the employee retention tax credits and trying to manage their business manage their margin and negotiate deferred rent payments with the landlord.
And then use that P. P P money to pet so I think that I'm trying to say is that there are a lot of these little labor issues of food cost issues that are.
Our annoying and I think that the operators are really lucky that there's restaurant relief money out there and we'd encourage all of them to take advantage of it because they can and it's there and it certainly helps them get caught up and get re engaged and so they're gonna have to work through the labor issues over the next three to six months, but those issues will cure themselves and soon enough and.
It will be on our way.
Okay, and what one last one for me and ill get back in queue and.
And did you talk any on the call about the Refranchising of the owned Johnny Rockets locations I think the last time that was something you thought was going to occur.
And pretty soon great.
Great question, and I did not talk about it but all of those nine restaurants are in escrow to sales to be complete and we completed one or two of them already in Q2.
And we have the balance the other seven which we anticipate completing all or almost all of them before the end of the quarter, they're all and all the various closing dates so that's gone very smoothly.
And we've generated good sales prices for those stores and the Refranchising effort.
And so we're very happy with that and thank you for that question because I did not mention it.
Thanks, Andy appreciate you taking the questions. Thank you.
Yeah.
And our next question is from Roger lifting and with lived and financial services. Please proceed with your question.
Yeah, Andy a value today hi.
Hi, Roger Thank you good good.
And terms of the deals Youre looking at can you share can you give us any characterization at all I know.
And nothing is done and.
In terms of are they fast casual and quick service or full service and I mean are the sellers typically are they and these are these private equity owners and negotiating with.
Or or family businesses and assets.
And lastly, and the same vein you've got several different currencies to work with it yeah, Yeah and your stock is higher than it was your preferred is much higher than it was and of course, you got some cash available and so what's what's sort of your preference in terms of which currency you.
I'd like to use yeah. Those are all good questions. So we we are looking at a variety of different brands, we have nine or 10 different acquisition targets that we're presently evaluating I think like I said earlier there are two.
And hopefully that we can announce during Q2 and and possibly another one or two before the end of the year, but we used a couple of them and they range from a fast casual to casual similar to brands and we own that are performing very well, so and on both spectrums and wanted to and as multi brands. So it's a.
It's more complex than just and one brand, but it has.
And has significant scale, so I really anticipate that we'll be active and the acquisition front to give you to be more specific to your the second part of your question.
And we have had a robust you're negotiating with private equity sellers and they seem to be very practical and they're focused on making a deal and completing the transaction.
I've seen founders be much more emotional during and.
'twenty, 'twenty, one and 2020 than I expected and some of them fixated on 2019 prices or evaluations and really you know just not ready to make a deal. There's also kind of a counter influence which is all the all the government subsidy programs that are available to you know to deal with COVID-19, and some of those founders are saying you know.
I should just take the money from the P. P P or from the $28 billion relief fund and take that money first put it in my pocket clean up my balance sheet, and then make a deal next year I don't think I should make a deal the same year, because they've gotta get forgiveness of that of that money. So there's some really interesting things going on but private equity is definitely active and they're definitely active.
Selling and they're also buying them and I see I've seen some competition on some deals but.
We're not looking at fine dining and where we're not going to go too crazy ethnic brands, where we can't manage and properly.
Because it takes such a highly sky's skill set and you know and this labor market to manage something and.
And for example, like Sushi and Korean barbecue was something which is which is complex and franchise.
But you know really just straight up the fairway, we think there's some great opportunities.
Right and I would not I would just doing the article so absolutely as we said.
Today I was working all day and an article about these facts that are out there and there are still six restaurant oriented specs that are looking for deals but there.
I wouldn't imagine you're running up against them as competition I mean, they raised 200 million had a shot and they're going to leverage that I mean, one of them that I was writing up is looking for $40 million of EBITDA.
To consider so you're you're somewhat below and so I would imagine you're a bit below that kind of a range.
Yeah, I mean, I think the way to look at it is that the the problem with the restaurant stocks and and you know we've looked at our own restaurants back and decided that we really have enough currency available with with our preferred stock and our comment and the cash we have and our securitization facility and that is that you've got to have like a hockey stick growth story to dis back and really.
You know sell into its back like that and so you're either going to get a crazy high valuation, which is problematic because we all know.
And you know to get a deal done like that and so I don't think that those restaurant stocks have found.
Restaurants backs have found targets that have the hockey stick and.
Growth story, right now coming out of COVID-19 and going into 2021 where many of those targets will justify that valuation and so I think that's that's a good fact for us and we're not really competing against them.
Right, it's going to be interesting because is that verify of course it was done and now the second one where the deal is tilman Fertitta has $6 billion company, but the other six.
And there's you know shopping you know it's.
It could be very interesting to see how and how it evolves right. Okay. Thanks very much absolutely. Thank you.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad doing so along the journey of spot in the question and ask you to you.
Our next question is from Greg Gregory Fortunately and private Investor. Please proceed with your question.
Hey, Andy how are you hi, Greg good thank you.
So I just wanted to follow up on something Joe was getting at about the prices going up.
<unk> I'm sure paper and all that stuff. So are you planning to do any kind of price increase like nationwide or do you do you do that or do the stores aside and their own or how does that work.
So as mandated by law the franchisees have to set their own pricing and what we can do is kind of a give them guidance as to like here's a tier one price tier two price of two or three price like depending on whether it's a you know a high price market or a low price market and they should be in a certain range to maintain profitability and we try to coach them on their margins to make sure.
It's very important that restaurant operators maintain their margin. It doesn't do you any good to not take price. When your costs go up and then you don't make any money and you go out of business or you fall behind and so very important to coach them on their labor percentage on their food costs and paper costs, because we don't own and operate restaurants directly other than you know any interim refranchising.
Efforts and this is really a franchisee issue and we're all over it in terms of menu pricing and you know something and flexible with all the delivery and to go out today and third party deliveries of course, you can take price immediately on those things and if you have printed menu boards. You know you can you know today with digital menu boards, you can update it pretty quickly but.
It's not really been an issue to get get price is in place and we generally negotiate for for longer term contracts and so it's not something where we're taking market price on everything that we the franchisees sell to the customers.
So what percentage of the franchisees do you think are raising I've raised prices over the last few months our plan too.
Oh, I think most franchisees a very high percentage across the entire.
System of our almost 700 restaurants are theyre, all taking price wherever they they need to or can take price, but we coach that regularly. So we have certainly we don't do it you know immediately in either direction, it's not like gold prices went up yesterday, we need to raise our prices today, it's it's systematic where it might be on a quarterly basis or when we print new menus or <unk> or.
Or you know, bringing a new product or something we adjusted so we have a plan for it that it's constant and deliberate and not something that's two reactionary and we also have contract pricing for our commodity so we're not subject to the swings on a daily basis for most of the ingredients that we offer.
I guess my point is that as I and correct me, if I'm wrong, but as the franchisees raised prices it would generate more revenue for you because you're getting a percentage of the revenue regardless of the cost correct.
Right I mean, it is it's a it's not a deliberate outcome, but you're right that if prices go up the amount of royalties as a percentage you know in dollar terms goes up it's still the same you know four or five 6% of sales but.
And if the sales are higher because prices are higher than we'd get a little bit more revenue share that that benefits us.
Absolutely you know to the extent that there is a 10% increase and prices and there should be a 10% increases and revenues for us that's absolutely okay.
Next question regarding deals.
And you're you're getting bigger.
<unk> 40, and 50 stores you know, it's it's okay, but it's not going up and move the meter that much and move the needle what are you thinking as far as like you know what what are you looking to add and acquisitions over the next 12 months as far as stores and and all that.
Yeah. So my my strategic goal is to significantly increase the size of the platform. During the next 12 months, you know that I liked tissue rabbits, and squirrels, as well as and occasional elephant and I use that analogy and we have some of both teed up and in our acquisition pipeline and so I think that Youll see.
And the scale of fat brands grow significantly not not just moderately during the coming couple of quarters and that will really help us grow into that.
What this platform was built for and the first place was which is to acquire brands and to cross sell those brands to our base and franchisees and to get scale and purchasing and pass that through to our franchisees in terms of lower food cost and and things like that so you know I really feel like we're well positioned to just kill it and the second half of this year.
Okay last question. So one other thing important thing that you didn't talk about was the re initiation or of the dividend.
And that obviously was a big deal certainly I'm happy to have it and I guess, just my question would be and I'm sure you're confident.
And that you can fund it otherwise you wouldn't have done it. So can you just discuss the dividend and just funding it and and and all that you.
You bet, so and you're right and our return to paying a common dividend on a quarterly basis and the last one we declared was 13th sense a couple of weeks ago, and and just got paid and we plan to have the dividend policy on a regular basis going forward on a quarterly basis. We believe we have adequate liquidity are more than adequate liquidity to cover that dividend.
You know for US it was something that we wanted to return to long ago, but we needed to get our financing and order. If you remember from a year or two ago, and we started out and the securitization path and we had some struggles with.
One third party that didn't close that financing neighbors. They should've for us. So we did it again ourselves and it took a little while and then the pandemic hit and so you know we put out and we put our dividend on hold for a long time to make sure. We had adequate liquidity, we had the right scale of earnings and we plan to continue and and that that dividend I think people will will look fondly upon and it's it's only a small portion of the cash.
This business should generate and the rest of it we'll reinvest and the business as we grow.
Okay, Thanks, Andy and keep up the good work. Thank you. Thank you very much.
Yeah.
And we have reached the end of our question and answer session now and now I'll turn the call back and we would say Andy.
And for closing remarks.
I just want to thank all of you for taking the time to participate during this very challenging environment out there for all of us and again, thank our franchisees and their employees and our own staff at fat brands corporate and for all the hard work and dedication and I look forward to giving everyone. A further update as we announce some pending acquisitions.
Thank you operator.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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Yeah.
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