Q3 2021 FAT Brands Inc Earnings Call

Welcome to the Fat brands, Inc. Third quarter 2021 earnings conference call. At this time, all participants I've been placed in a listen only mode. The lines will be open for your questions. Following the presentation. Please note that this conference is being recorded today November 4th 2021.

On our call today from Fat brands, our President and Chief Executive Officer Officer, Andy Wheater Horn, and Chief Financial Officer can cubic by now everyone should have access to the earnings release, which can be found on our investor Relations website at I R. Dot fat brands Dot Com and the press release section B.

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 guarantee 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 of uncertainties.

Risks and uncertainties the company.

Every day for a more detailed discussion of the risks that could impact future operating results and financial condition. Please see today's earnings release in our recent SEC filings.

During today's call the company may discuss non-cash financial measures, which it believes it can be useful in evaluating its performance. The presentation of this additional information should not be considered in isolation, nor as a substitute for results prepared in accordance with GAAP reconciliation to comparable GAAP measures are available in today's <unk>.

<unk> release, I would now like to turn the call over to Andy Whitehorn, President and Chief Executive Officer.

Did you offer you and good afternoon, everyone did you want to join this phone call today.

I'm hopeful that everyone is continuing to stay safe and <unk>.

This afternoon, we made our third quarter 2021 financial results publicly available. Please refer to the Orange, Louisiana earnings supplement both of which are available in the investors section of our website at www Dot <unk> Dot com. Each continued additional details about the third quarter, which closed on September 26th.

And particularly excited to talk to you today about a recent acquisitions emanate strategy, resulting synergies your seat and continued strong brand performance is driven solid operating results.

It has increased 70%.

Compared to last year's quarter, while great American cookies increased to 23% I'm talking to stick increased 68%.

Marble slab creamery increased 25%.

We'll make or increased 50 per cent and roundtable pizza increased 9%.

More importantly, when comparing same store sales for the third quarter of 2021 to the third quarter of 2019, we saw continued performance at Buffalo's and hurricanes, increasing 14% and 18% respectively. While elevation Burger had its first quarter of positive same store sales growth posting 5% growth over there.

Third quarter of 2019, and domestic locations saw an increase of 4% that's happening.

On a consolidated basis, which again excludes recently acquired brands same store sales increased 4% in the third quarter of 2021 compared to third quarter of 2019.

We are encouraged to see a continued reopening of restaurants that were temporarily closed as a result of COVID-19.

We ended the third quarter 52 locations across the system. Excluding the recently acquired concepts remained temporarily closed to COVID-19 compared to 63 at the end of the second quarter and 107 at the end of the first quarter.

With scheduled reopening anticipated throughout the fourth quarter of 2021, we believe we will see continued topline revenue improvement through the remainder of 2021.

Even with the reopening of dining rooms delivery sales are showing resilience facilitated by the rollout of although shall we and hunger across our portfolio.

Augmenting dis continuing operating performance improvements of the currently owned locations both new construction and franchise sales are stronger than we've seen in many years if not ever.

Our franchisees opened 25, new locations in the third quarter and a total of 59 locations year to date with another 26 anticipated to open through the end of 2021.

That will be in addition to approximately three new twin peaks sports lodges that will open still this year, bringing the grand total to 28 to 88.

Turning to the development pipeline during the third quarter, including global franchise groups, but excluding twin peaks and facilities, we signed nine new deals, including a 200 unit development agreement in the Middle East a 25 unit development agreement in Illinois that brings the year to date total to 32.

And our total pipeline to 581 locations 157 of those are G. F G.

Add to that number 117, up-and-coming twin peaks locations and 114 up and coming for US all these locations and the total pipeline exceeds 800 additional units or growth of another 33% and unit count organically.

Sure I don't need to point out that the organic growth is free versus acquisitions. So we are equally as focused on it executing on this vertical.

Also we anticipate continued success as we cross sell our concepts to the franchisees recently acquired brands.

The performance of our existing franchisees very promising and we're looking forward to their continued recovery.

Important to our corporate strategy is the growth of our platform fueled by the identification and an addition of new restaurant concepts on October one we completed the $300 million acquisition of twin peaks and are thrilled to welcome the sports lottery chain into the fat brands family.

With the acquisition of twin peaks and its 84 locations across 25 states. We have further diversified our growth and the restaurant portfolio in general and entered into a new restaurant category polished casual dining as.

As we've alluded to previously through our acquisition growth strategy. We are looking to identify brands that complement our current portfolio, while delivering high a vs and appealing growth pipeline.

Twin peaks checks those boxes with top tier au vs. In the range of five to six and a half million dollars and I believe we can grow this brand globally at a swift pace.

As a result of the acquisition of twin peaks, we expect post COVID-19, normalized EBITDA to increase by approximately $25 million to $30 million.

Fats post COVID-19 normalized EBITDA to increase by another 14 $5 million to $15 million in 2022.

Transaction is expected to close by mid December.

This should bring our normalized post COVID-19 EBITDA, including twin peaks and there's always two approximately a $95 million run rate for 2022, whenever we get the rest of the restaurants back open in Covid dies down, but it's likely that that will make a full calendar year of 2022 as we hit those numbers.

On the acquisition front, we are still in the early innings of this has been an exciting and aggressive year, so far and our growth strategy and we remain active in evaluating additional acquisition candidates to augment our existing brands.

We also still anticipate the opportunity to further refinance our securitization facilities in the coming year, thus significantly lowering our cost of capital even further.

Third quarter marked yet another successful quarter in 2022 for fat brands and it wouldn't be possible without the hard work of our team members franchise partners and their employees and I'd like to express my utmost appreciation to all of you for constantly delivering during this unique time I'd also like to welcome the twin peaks. It there's always teams into the fat family, we look forward to finishing off 2021 strong.

Fat and head into 2020 with positive momentum.

With that I'd like to hand, it over to Ken to talk about our financial highlights from the quarter.

Yeah.

Thanks, Andy.

Increased 628% to $29 $8 million, reflecting revenue from global franchise group acquired during the third quarter of 2021 revenue from Johnny Rockets acquired during the third quarter of 2020, and the ongoing recovery from the negative effects of COVID-19 on restaurant royalties.

Costs and expenses increased to $27 $4 million in the third quarter compared to $4 $9 million in the year ago period.

The acquisition of <unk> was the primary driver of the increase in costs that included restaurant and factory operating expenses acquisition costs and higher G&A costs as we begin working on realizing the synergies from the acquisition.

Additionally, advertising expense increased to $5 $5 million in the third quarter compared to $8 million in the prior year period, reflecting advertising expense related to gmg and Johnny rockets as well as increased customer activity as the Covid recovery continues.

Other expense was $7 $2 million in the third quarter, primarily comprised of interest expense.

Our GAAP net loss for the quarter was $3 $6 million or 26 cents per diluted share.

Compared to a net loss of $6 million or <unk> <unk> per diluted share in the prior year period.

Two.

You May press star two if he would 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 one moment. Please while we poll for your questions.

Our first questions come from the line of Joe Gomes with Noble capital markets. Please proceed with your questions.

Good afternoon, Andy can.

Yes.

Good afternoon, Hi, Joe.

So.

Maybe we'll start with <unk>.

Maybe you can give us a little more color on how that all all came about.

Was there any crossover there with the roundtable.

You know in price if you looked at 130 million price on the roughly 15 million of normalized EBIT. That's you know roughly a nine multiple I mean, how comfortable worth you argue with that and do you think that'll come down with you seeing any synergies there.

So I think that first of all that there's always acquisition is really exciting for us.

Getting another kiosk or brand that is 99% drive thru, it's uniquely in the Italian space, there's really nobody else that's squarely in that space with all the different classes and fixing meatballs sandwiches and things like that.

We think it's a great addition to the portfolio and right now it's predominantly in the Midwest and if it's not you know everywhere that it could be when we when we offer it to our other franchisees, who we have 750 franchisee partners in our system and offering them the chance to open facilities in different markets I think will be.

A big opportunity with regards to the growth story and you have to step back and think about the growth story. That's apprehends today, we have more than 400 units in our growth pipeline as fat Burger and Buffalo's Express we have over 150 in the global franchise group portfolio primarily at the.

Cookies and ice cream brands and then at twin peaks, we have well over 100 units planned for growth announced there's always 100 use it. So the growth story is significant here I mean, we will grow over the next few years by another 33, 40% organically, which is free compared to buying or making additional acquisitions.

Actions, which will still make but.

But on this was always front I think it's gonna be a function of a price and in terms of.

Is it worth giving up that company owned store cash flow can we get them multiple that's reasonable two two refranchise those stores and focus the operations makes noises already set up to run those stores, there's a geographic concentration right around their corporate headquarters. So I don't think it's difficult to keep them. It just may not make financial sense too.

Seldom, but it's such a small percentage of the total revenue stream or total EBITDA, but uhm, we'll just have to see how you know how the valuations turn out when we started talking to franchisees.

Okay and [laughter].

During you know the the you.

Are you guys as you mentioned you've signed a lot of agreements in the Middle East, France, I think some in Latin America, and you could just touch a little bit more on those in and how you see all of those unfolding today.

So our franchise sales are just on fire. We've we haven't sold this many units in in a single year ever and I think that's true of the acquired brands as well in other words. They had sales that were on fire as well in the end there.

There's all the usual headaches and whether it's trucking or whether it's outages or its prices.

We're very firmly focusing our franchisees on taking price.

Seen a 4% increase generally across the board we've seen some shortages something like an hour premium alcohol is we've had no problems in some of the markets getting the right to cure the right Bourbon or whatever but it's solvable. It's just annoying and then you get into you know.

The price increases and if you think about it look prices going up isn't bad for the franchise or right, we get even more royalties, but you have to encourage the franchisee to take margin take price. So they've maintained their margin otherwise they'll get squeezed. So that's and then of course. The same thing is true for our company owned stores. So we're trying to balance that it's not really no.

Causing any giant disruption, but yeah.

The only place where it really affects us is on new store construction, where if we're trying to build new restaurants, sometimes we can't get the equipment in time, it's delayed a month or two like freezers refrigerators things like that where we just can't open because we don't have the right equipment, but the labor side, we've been able to kind of muscle through it. It's just a little bit more work on the food side food supply chain side, you know it's there.

It's just that again, it's a function of price.

Whatever the number is now you know I don't know if it will get 200, so there's nothing here, but we'll get 100 and something up in the air and let's see how that goes and that's even that's a very powerful dynamic.

Yeah organic growth is always good are you are there any are you losing any stores I mean, that's one thing I mean is that something that she now or is that not really a big that's a good question. I. You know you always you always lose a little bit leases expire franchisees you know hang up the towel once in a while but it's it's a couple of percent it's not a it's not a big number our our new store openings forest.

She'd our closures we went through the worst of it we had the biggest bang at Ponderosa Bonanza, where we lost quite a few stores 24 of them in Puerto Rico, but those stores were only pain is three quarters of 1%. That's something we inherited so it was only a couple of hundred grand out of.

A couple of hundred 300 million in revenues for next year. So it's really it's really insignificant on the closest I. Thank goodness and we don't really feel that we have any weakness in the franchise system of any of the brands. You know you always have one or two stores that where something's going on but it's not a systemic problem in any of the brands.

Okay any of this corner you had I I believe it was 7.2 million of adjusted EBITDA. So for 2022 at a run at that you know 80 to 100 million you need to start doing like next quarter needs to be like in the 20 range or something is that what we're gonna see that kind of progression.

Yeah. So so we acquired twin peaks on October one, which is like one week into the fourth quarter. So we so we should get you know.

<unk> 12, not 13 weeks of revenues and earnings added twin peaks and they're just a few stores in twin peaks. It opened in queue for so you won't get a full quarter of those stores, but and and on a global franchise group side. You know, we've we've lung out quite a bit of synergies probably close to 5 million already but I think there's a total of 10 million of synergies to be.

[noise] realized there remember that we have this factory business, which makes more than 15 million a year by itself and it totally running at 130 capacity. So we fully intend to put more production to that factory and get that even off from the factory up to 30 or $49 and not then we can decide how we grow that big.

Now we have the restaurant operators, becoming to vaccine police to let customers into the restaurants and how much of the drop in sales might you see from from.

Some customers not being allowed into the restaurants without their proof of vaccination.

So on and so I just don't know what I don't know and we all know what we've already experienced and so the only safe.

Way to position that guidance and that comment. It's just certain things are back to normal. We all know what normal is and we're not quite at normal we're pretty close but we're not quite at normal assuming things are back to normal that's what I mean, and we do have those stores to open we have to assume we don't have new closures or new restrictions that are ridiculous like six feet apart or 25% capacity.

Things like that that you know I'm not sure how much of a difference it made anyway, but here we are and so that's that's what anybody likely.

Okay. So my last question, so if I'm, a new investor and I start looking at Fat brands I see you know a certain amount of equity and debt someone like me who knows what Scott you know have been following the company knows what your plan is known as a comfort level with that.

To that end in the coverage.

You know it feels comfortable but someone who might not know that well says when I look at this company. They have you know $744 million of debt and they only have $150 million of equity or so.

Can you just give a little bit of a comment on why you're comfortable with that and you know what the end game is here I mean, obviously youre not going to be the.

That little equity company for Forever.

That's right and that's a good question and thank you for that so we've used our securitization facilities on an unrated basis to make acquisitions, which enables us to move very quickly and we've had a great banking relationship with Jefferies and they've really helped us there.

Been a very good move up the food chain for us as we move forward, we fully intend to get our debt right and like I mentioned earlier, we had our debt rating.

In place that's exactly what has to happen and we will do that and I think our investors know that our debtholders know that as well and I think the rating agencies will be happy with that and that'll help us get that rating that we want so all of those things lead to delever, even more equity and that that should be a self fulfilling prophecy of increasing their stock price etc.

Okay. Thank you I'm looking forward to 'twenty two.

Yeah. Thank you very much.

Operator are there any other questions.

Looks like there are no more questions at this time I'd like to turn the call back over to you for any closing comments.

Great I just want to thank everyone for joining today's call. Please.

Please enjoy your evening all these remarks will be posted on the company's website and the earnings supplement that you can do there he track any of the numbers that we discuss today and operator that concludes our call for today.

Thank you everyone for joining today's call enjoy your evening you may disconnect your lines at this time.