Q2 2021 FAT Brands Inc Earnings Call
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Okay.
Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the Fat brands incorporated second quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. The lines will be opened for questions. Following the presentation. Please note that this conference is being recorded today August 5th 'twenty 'twenty 1.
On the call today from Fat brands are president and CEO, Andy Wheater Horn and CFO, Ken <unk> Bye.
By now everyone should have access to our earnings release, which can be found on our investor Relations website at IR Dot fat brands Dotcom and 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 the number of risks and uncertainties. The company undertakes no obligation to update these forward looking statements at a later date.
Uhm assessment on General Counsel, <unk>, our Chief Financial Officer, Rob Rosen, our executive Vice President of capital markets, who joined the company during the second quarter.
These 3 come with a tremendous amount of expenses and bolster our already talented executive team. They are already proving to be key additions to our team and we continue to advance on our strategic objectives.
Finally, with the acquisition of Global franchise group now named the Fat brands Keyless hard Division, we gained the leadership of Jen Johnston, who will serve as president of on Cuba subdivision.
John has a long history of leadership heading the curious our brands that are now part of our portfolio.
Moving to operations, we are encouraged by our second quarter 2021 operating performance, which has shown it continued return to normalcy as of as many of our franchisees have reported sales in line with or about Prepandemic levels.
The strength of our brands impact of easy on local dining room restrictions increased dining room capacities in certain markets as well as the continued roll out of vaccines, especially in the United States in Europe.
These hard earned gains continue to be a testament to the tenacity of not only our franchisees, but also our employees.
These continuing operating performance improvements of the currently opened locations both new construction and franchise sales are stronger than we've seen in many years. Our franchisees opened 10, new locations in the second quarter of 2021, and a total of 15 locations year to date with another 32 locations anticipated to open through the end of 'twenty.
'twenty, 1 and that would be in addition to approximately 21, new units and the Kyocera Division still to open this year on top of 18 Kyocera units already opened.
Turning to the development pipeline during the second quarter, we signed 12, new deals for 99 locations, including a 50 unit development agreement in Mexico, and a 40 unit development agreement in France that brings the year to date total to 23 deals and 128 locations, we anticipate additional multiunit agreements.
Other domestic and international locations in the coming months.
While we are pleased with the recovery of our existing franchisees no less important to our corporate strategy is the identification of additional restaurant concepts to add to our platform.
We're thrilled to welcome the global franchise group to the Fat family as we completed the $442.5 million acquisition in late July.
These 5 iconic brands round table pizza marble slab creamery, great American cookies, hotdog on a stick and pretzel maker.
Along with a manufacturing facility that supports various global franchise group brands gives us tremendous opportunity to realize synergies.
Leverage cross brand sales opportunities.
And provide incremental revenue opportunities through the manufacturing facility. This acquisition launches, our new Kyocera Division and is a key milestone for us increasing our portfolio to more than 2000 units worldwide.
The hard work of integrating these brands into our system is underway and we expect to realize material synergies as we execute on our integration strategy.
Once the integration work is behind us and the brands returned to pre Covid sales, we expect the Q S. Our division to increase our EBITDA by approximately $40 million and bring our annual revenue to over $100 million.
On top of that there are significant strategic opportunities to drive growth in these brands such as building their e-commerce capabilities, capturing third party delivery potential within round table pizza, expanding the manufacturing facility capacity, which today runs at only around 33%.
Ross selling products between are now 14 brand portfolio in so many untapped other opportunities such as grocery and licensing.
On the acquisition front, we are not done yet we are actively evaluating additional acquisition candidates to augment our existing brands and expect to announce another significant acquisition in the coming months I think there will also be the opportunity to further refinance our securitization facilities in the coming years, thus lowering our cost of capital even further.
I'd 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 I'd also like to welcome then now <unk> Division a G F G to the fat family and thank them for their hard work. We look forward to the continued recovery in 2021 as we lay the groundwork for them.
More normalized 2022.
Now I'd like to turn the call over to Ken to talk about our financial highlights from the quarter.
Thank you Andy and it's nice to join everyone. I'm excited about the opportunities. We have ahead of us and I look forward to continuing to work with Andy and the team on executing our strategic roadmap.
From new notes comprised of 3 tranches with a weighted average interest rate of 6.8 per cent.
3.1 million shares of series be cumulative preferred stock and 2 million shares of common stock.
This brings our total securitization to $494.5 million with a weighted average interest rate of 6.5 per cent.
Future issue inches of our series be cumulative preferred stock and our common stock are available to us, which would provide us with additional flexibility to fund potential acquisitions further reduce our cost of capital and drive shareholder value.
In terms of financial highlights total revenue during the second quarter increased 167 per cent to $8.3 million, reflecting continued improvements in royalty revenue across the system. As we returned to pre coverage sales levels and is temporarily closed restaurants continue to open.
Costs and expenses decreased $2.7 million to $6.2 million on the second quarter.
Costs and expenses in last year's quarter included non-cash charges totaling $3.2 million related to intangible asset impairments. Excluding these charges costs and expenses increased $515000 due primarily to higher compensation expense as we felt let the management team and increased professional fees partially on.
Set by Refranchising games related to the Refranchising up to Johnny rockets locations during the second quarter.
We returned a positive operating income of $2 million in the quarter compared to an operating loss of $5.8 million in the prior year quarter.
Other expense was $10 million on the second quarter and was primarily comprised of $2.4 million in interest expense compared to $289000 last year, resulting from the securitization I mentioned earlier and a $6.4 million net loss on extinguishment of debt related to the April securitization.
Partially offset by the forgiveness of our P. P P loans during the quarter.
[noise] GAAP net loss for the quarter was $5.9 million or 48 cents per diluted share compared to a net loss of $4.3 million or 36 cents per diluted share in the prior year period.
We also report our net loss on and as adjusted basis, which excludes the after tax impact of impairments refranchising activities acquisition costs and losses on extinguishment of debt on.
On on as adjusted basis, our net loss was $1.1 million or 9 cents per diluted share compared to a net loss of $3.4 million or 28 per cent per share in the prior year period.
While we are not providing guidance for 20th 21 on this call I can provide some color on where we anticipate ending 2021 and beginning 20 twenty-two using 2019 as a guideline for pre Covid performance.
As we discussed during our first quarter earnings call normalizing, our 2019 top line revenue for a full year of ownership of elevation Burger.
And adding Prepandemic franchise revenue of Johnny Rockets, we would have anticipated scene total top line revenue of $34 million to $36 million.
Adding on Prepandemic revenues for the G. O G brands, we would have anticipated seeing an additional $55 million to $65 million for a total revenue of over $100 million.
We anticipate that if the recovery from the pandemic continues as positive momentum, we would return to that run grade level by the end of 2021 or the beginning of 2022.
And with the air that Erica Please open the line for questions.
Ladies and gentlemen, if you would like to ask a question. Please price star 1 on your telephone keypad now you'll be placed into the King Arthur received.
As they prepare to ask a question on pumpkin once again to ask a question. Please price star 1 on your phone now our first question comes from joke on that police are question.
[noise] good afternoon, thanks for taking my questions.
Hi, Joan.
So.
Just wanted to you know kind of start here you know.
We've talked a lot about normalization.
But as we're all aware there seems to be is delta variant that comes is coming around and and some more mandates coming in.
On potentially coming in or are you guys seeing any.
Near term impact on the the store base over the past couple of weeks or is it still kind of more in recovery mode.
We're absolutely in recovery mode, we're not seen it across the store base. You have you have an occasional store here or there that might have some employees that have gotten sick and they've had just shut down for a day or 2 I figured everybody tested an adjuster staffing, but that's it where we are still seem the supply chain issues that the industry suffers where you have short.
The Jews are outages from the online distributors like Cisco <unk>, they're not they're not gigantic, but they're just a constant headache from the management team to make sure that we have as many products as possible across the system. We thank all of this will will come to an end here and get into September and the stimulus goes away and the 2.9 million people.
It was jobless claims are back to work I think this this all goes away, but we've got another month or 2 of it.
Okay.
Thanks for that and you you you touched on the.
Manufacturing facility that that came along with the the global acquisition. You know maybe you can give us a little more idea you said, it's only operating about 33 per cent utilization right now I mean, where where do you see the ability to take that facility in an AD on so that you.
Realisation rate increases.
Okay. Thank you. Thank you for that you mentioned that you were able to re franchise 2 of the Johnny rockets locations in the quarter.
I know there was I think you had a total of about 9 of them what was the status of the other ones that we are still company owned.
Most of them are in escrow now to close over the coming on.
Over the coming months on.
There's I think only 1 or 2 not in escrow as we speak and in those we have potential buyers are just moving in escrow, yet, but I anticipate that the majority of these stores will be re franchise before we end this Q3 period.
And as you as you might know are on the global finishes group side in the acute division. They re franchised many of the round table pizza and Theres just a sliver of round table Pizza is left to go which should close next week in terms of Refranchising, So very very clean as a franchise or when that completes there are still a 30.
Something I'm hardly going to stick locations that are corporate and we'll look at our refranchising knows as well as we move into Q3 and Q4.
Okay and 1 final 1 from me and then I'll I'll jump.
Jump back in queue.
Yeah.
The legacy store counts I think in the May presentation.
You you had a number there are 646 stores in 38 under construction at end of todays presentation.
No. It says that the June ended June store count was $6.28.
You know what maybe you can provide a little more color or detail there where were the are you seeing the store closures I'm, assuming it's probably the the steak houses, but any additional color you can provide there would be great. Thank you.
Primarily it's all the steakhouses I'm not not really sand per of yours or Johnny rockets, there's 1 or 2.
Might have happened in the ordinary course, but.
We had a 24 store operator in Puerto Rico clothes in the in the on Rosa system. We.
We had anticipated at closing for some time they've on the team.
On the bankruptcy for years, but the on a revenue basis from it.
We're only paying us $200000 a year in total revenue like 75 basis points on your sales not any material amount of money just by unit count It looks weird, but that was something that's been out there for a long time and it.
And then of course, so that's that's changed the unit count slightly and for that reason.
Alright, Thank you Andy and congratulations on the deal on the global franchise I mean, just fantastic I appreciate the time.
I think even though we're very excited about it it's just transformative for fat brands in terms of our scale.
Okay next question please on mute.
Our next question comes from Mr. Whitehead. Please state your question.
Hi, Good afternoon I've got 2 questions. My first 1 is on June 29, 2021 were thinking that was taken to pay a dividend a 0.1 shares of class B common stock for each share of class a common stock what is or what the ex dividend date for this distribution.
Yeah that data is coming up in just a few days as an 8-K out there cannot you might have the day Andy but.
We're very close to the day here I'll get it for your second if you don't have it but it hasn't it hasn't occurred yet.
Okay. Thank you and my second question is there well management commit.
Limiting themselves to encouraging our employees to get they felt the back book.
[laughter].
Sorry could you say you can really commit to limiting and so.
Yeah Yeah.
It is basically are you going to mandate our employees to get the Covid vaccine.
Yes, we are mandating the vaccine for all fat brands employees, both in our corporate headquarters and those visiting our franchisees.
An advocate of the vaccine and we feel that it's important to protect our franchise partners and their employees as well as our as our own team.
Thank you.
Thank you for your questions.
Our net interest income.
Comes from Gregory Fortunoff. Please state your question.
Yeah.
Hey, Andy how are you.
Great. Thank you good.
Okay. Okay just.
Just a couple of questions staffing.
Is that a pain point at this point and if so what are the effects for us.
The staffing is I've been quoted widely in the media is saying that snacking is a total nightmare on it is on it it's really more prevalent for franchisees opening new locations in really new franchisees opening their first location.
As we have multi unit operators, who opened additional units they can borrow from their teams and staff as needed.
2 it may be on some overtime and things like that but they're getting through it it's not really delaying the openings, but from new store operators, it's hard for your franchisees to find new managers.
You know because it's not really just about the money because wages are already so high.
That is a little bit of a pain threshold, we anticipate that as we get through August and September and all of the stimulus money is flushed through the system.
This will significantly change, but there's a little bit of road still still to go there.
Okay.
So in the press release and you've been talking about 55 to 60 million run rate prior to that I think it was like a $15 million or so so today you you had a $2.1 million of EBITDA, which on an annualized basis would be $8 million.
When will we see.
The the numbers ticked up I mean, they they need to start getting to the $4 million to $5 million per quarter number.
So.
Yes.
So we still have an any preexisting portfolio the older portfolio before global franchise group you still have 10 per cent of the restaurants closed which all of that revenue goes right to the bottom line theres almost no incremental expense. So we anticipate those remaining locations will open.
Rather quickly here in the rest of Q3 and some of Q4 some of its crews the cruise ship lines and some of it's the theme parks or amusement parks.
Movie theater complexes that have not fully reopened yet and there's a bunch of international venues.
And so I expect that over the coming 2 quarters that will all smoothed out or will be back to those pre COVID-19 levels also those remaining restaurants sketch.
Scheduled to open will be out there. So we should see everything it really kicked into high gear. In addition to of course, the global franchise group acquisition I expect that.
Thanks for the question our securitization facilities has.
Performed on fabulously for the last year and a half on since we first issued diamond ended another deal in September of 2020 day by Johnny Rockets, and then April on to buy 2 to refinance them and create liquidity for this next acquisition. So we're seeing them.
Foreign excess of 2 times debt service coverage closer to where you're more in.
And some of the tranches and.
We're not we're not concerned about it at all it is the global finishes group acquisition that there's tremendous cash flow coming from this business.
As well and then there's also this additional manufacturing revenue that we anticipate bringing in which will give that business alone.
Or it's $15 million a year on if we grow it just another 1 third its $30 million a year. So there's tremendous excess cash flow that being said I have every expectation that with the right stock price being achieved which really should be in the 30 $40.50 range using any of the comparable multiples to franchise entities.
That will access the capital markets for additional equity capital and de lever sometime in 'twenty 'twenty, 2 but at a significantly higher stock price not at the current stock price it doesn't make sense.
I mean, how much like is there a limit on like where do you draw the line as far as your your debt.
When are you going to is there a point, where you say Mike.
We're running somewhere between 6 and 7.5 times.
In terms of total leverage those are the limitations on bill.
Into our securitization facility and that we're in compliance with those of course and so it's not these aren't crazy amounts of debt but.
We'd rather be at day, 5 to 6 times than than the 7 or 7.5 times level and part of that of course is driven by the EBITDA that we generate and or the cash flow that we generate and that number is just going up and up and up there's tremendous unit growth I know that we spoke of signing over 130, new franchise locations on top of it.
The 200 store pipeline that we have so there's a big big and that's on the fat brands legacy portfolio and then global franchise with has their own pipeline of new stores. So I think driving the growth in revenue will come very quickly over the next 12 months well see significant jumps that just gives us excess cash flow and all the new store construction.
It will contribute to that.
Okay, 2 more quick questions.
And what's the biggest risk.
Right now too too fat brands.
Well I think that the biggest risk if you look in the rearview mirror would be shut downs.
And I don't think that anyone believes that's really going to happen again.
It just didn't work the first time and you know the vaccinations have to work and that's really the goal so that that would be the biggest limitation would be you know very difficult to revenues and I, just don't see that happening and we look at the states that reopened quickly versus the ones that reopen slowly and sales were off the charts and we didn't see.
See recurrences, there and I'm talking about primarily Texas, Georgia, Florida and stuff like that so I don't see that happening again, but I do see that as that's the risk that I think this labor shortage issue and the supply chain issue are short lived and.
We do have.
There is some inflation out there I don't know that the inflation pulls back I mean, the price increases that have taken.
Taken place.
You know are what they are but we've coached our franchisees to take price and maintain their margin. So I think that they will I don't see the margin compression on sticking.
Okay last question, that's a tough 1 so are you just mentioned on a free minutes ago that you thought our stock was undervalued versus our comps.
Can you maybe tell US why you think that is and what you think you could do or are you on your management can do too.
You know bridge that gap for us.
Well I think that on you know this has been a thinly traded stock to begin with that on that merger of our family office vehicle fog cutter capital at the end of last year increase the free float, which helped a little bit on the issuance of new common stock and preferred stock in the acquisition of global finishes group helps increase the flow significantly.
And in additional transactions that were considering where there's a similar structure in place I think that will also increase our float but the bottom line here is that we need to print. The earnings that you are pointing to and those earnings need to come in a post COVID-19 or more normalized COVID-19 environment. So.
I think that getting a quarter or 2 under our belt, where people can really see those earnings I think that's going to be important I think on getting additional investors into the stock on to create they didn't really haven't seen it before are paying attention to it will also help and that's a key part of our Q3 and Q4 Investor outreach program moving to do that.
And tell that story, because if you look at the comp table of the franchising companies than we used to consider ourselves on the Burger space when you comp against the other Burger guys and we were very undervalued, but now we really have to look at the broader franchise or base and there you have multiples of between 20, and 40 times, let alone the outliers and where.
Got you know, we're not even in that in that bucket and we should be in that bucket and so on and increasing our flow will help on doing some sort of a follow on offering at some point will also help in getting a couple of additional sponsor investors I think will help create awareness to the common stock on wood.
The value players.
But as you said you wouldn't do a set you went through a follow on until the stock quite significantly higher.
Right.
No no not at these low yeah, there's nothing too.
Okay, well listen you guys have.
You've done everything you said you were going to do I think you are setting us up for a great future and keep keep it up thank you very much.
Thank you for the questions and comments.
Operator does anyone else have a question.
Once again, if you'd like to ask a question. Please press star 1 on your phone now.
At this time, we have no further questions.
Okay. Operator, thank you very much everyone for participating today I appreciate your time and listening to our story and watching US continue to grow here and look forward to future calls and future announcements of on of new transactions as we as we get through Covid and I hope everyone stays on.
Safe and healthier thank you operator.
This concludes today's call.
This concludes today's conference call. Thank you for attending have a great day.
The House has ended this call goodbye.