Q2 2024 FAT Brands Inc Earnings Call

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to FAT Brands, Inc.'s second quarter twenty twenty four earnings conference call. At this time, all participants have been placed in a listen only mode.

Speaker Change: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to FAT Brands, Inc. second quarter 2024 earnings conference call. At this time, all participants have been placed in a listen-only mode.

Operator: Please note that this conference is being recorded today, July 31, 2024. On the call from FAT Brands is our Chairman of the Board, Andy Wiederhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Kuick. This afternoon, the company made its second quarter 2024 financial results publicly available. Please refer to the earnings release and earnings supplement, both of which are available in the investor section of the company's website at www.fatbrands.com. They each contain additional details about the first quarter.

Speaker Change: Please note that this conference is being recorded today, July 31st, 2024.

Speaker Change: On the call from FAT Brands, our Chairman of the Board, Andy Widerhorn, and Co-Chief Executive Officer and Chief Financial Officer, Ken Kuick.

Speaker Change: This afternoon, the company made its second quarter 2024 financial results publicly available. Please refer to the earnings release and earnings supplement, both of which are available in the investor section of the company's website at www.fatbrands.com.

Operator: But before we begin, I must remind everyone that part of the 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 on them. Actual results may differ materially from those indicated by these forward-looking 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 financial conditions, please see today's earnings release and listen to SEC filings.

Speaker Change: Each contain additional details about the first quarter. But before we begin, I must remind everyone that part of the discussion today will include forward-looking statements.

Speaker Change: These forward-looking statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties.

Speaker Change: The company does not undertake to update these forward-looking statements at a later date.

Speaker Change: For a more detailed discussion of the risks that could impact future operating results and financial conditions, please see today's earnings release and recent FEC filing. During today's call, the company will also discuss non-GAAP financial measures, which it believes can be useful in evaluating its performance.

Operator: During today's call, the company will also discuss non-GAAP financial methods, which it believes can be useful in evaluating its performance. However, the presentation of this additional information should not be considered in isolation, nor as a substitute for the results prepared in accordance with GAAP. Reconciliations to Comparable GAAP Measures are available in today's earnings release. I would now like to turn the call over to Andrew Wiederhorn, Chairman of the Board.

Speaker Change: The presentation of this additional information should not be considered in isolation, nor as a substitute for the results prepared in accordance with GAAP.

Speaker Change: Reconciliation to comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andrew Wiederhorn, Chairman of the Board.

Andrew A. Wiederhorn: Thank you, operator. I'd like to begin by thanking all of our team members, franchisees, and dedicated employees across our brand portfolio. Their unwavering commitment and strong execution are the driving forces behind our continued growth. First, let's briefly discuss our financial highlights for the second quarter. Total revenue grew 42.4% to $152 million, compared to $106.8 million in the prior year quarter, driven by the acquisition of Smokey Bones in September of 2023. System-wide sales grew to $614.7 million, a 7.3% increase when compared to the prior year quarter.

Andrew A. Wiederhorn: Thank you, operator. I'd like to begin by thanking all of our team members, franchisees, and dedicated employees across our brand portfolio.

Andrew A. Wiederhorn: Their unwavering commitment and strong execution are the driving forces behind our continued growth. First, let's briefly discuss our financial highlights for the second quarter.

Andrew A. Wiederhorn: Turning to profitability, Adjusted EBITDA was $15.7 million compared to $23.1 million in last year's same quarter. It's important to note that in Q2 of 2023, we received employee retention tax credits of $12.7 million versus $2.1 million in Q2 of this year, a difference of $10.6 million.

Speaker Change: Total revenue grew 42.4% to $152 million, compared to $106.8 million in the prior year quarter, driven by the acquisition of Smokey Bones in September of 2023.

Andrew A. Wiederhorn: System-wide sales grew to $614.7 million, a 7.3% increase when compared to the prior year quarter.

Andrew A. Wiederhorn: Turning to profitability, Adjusted EBITDA was $15.7 million, compared to $23.1 million in last year's same quarter.

Andrew A. Wiederhorn: It's important to note that in Q2 of 2023, we received employee retention tax credits of $12.7 million versus $2.1 million in Q2 of this year, a difference of $10.6 million.

Andrew A. Wiederhorn: If you exclude the ERTCs and look at adjusted EBITDA on an apples-to-apples basis, our adjusted EBITDA actually increased $2.8 million or 30.8% in Q2 of 2020. Over the last several years, FAT Brands has experienced significant expansion, boasting a portfolio of 18 diverse brands. To support this rapid expansion and to allow for continued growth, which together form the cornerstone of our strategy, we have implemented a robust and comprehensive management and systems platform.

Andrew A. Wiederhorn: If you exclude the ERTCs and you look at adjusted EBITDA on an apples-to-apples basis, our adjusted EBITDA actually increased $2.8 million or 30.8% in Q2 of 2024.

Speaker Change: Over the last several years, FAT Brands has experienced significant expansion, boasting a portfolio of 18 diverse brands.

Speaker Change: To support this rapid expansion and to allow for continued growth, which together form the cornerstone of our strategy, we have implemented a robust and comprehensive management and systems platform.

Andrew A. Wiederhorn: The infrastructure was designed to not only sustain our current brands but also enable an efficient and the Creative Incorporation, and other brands that we may acquire. This month, we were recognized for our commitment to excellence throughout our continued growth, earning a spot on Time Magazine's and Statista's America's Best Midsize Companies of 2024. The list factored in revenue growth, employee satisfaction, and sustainability transparency. Our brands also achieved many accolades over the quarter, including 11 of our brands being named to Technomics' Top 500 list for 2024, which ranks the highest-grossing restaurant brands in the U.S., has always been recognized by Technomic Ignite, and Marvel Slab Creamery receiving a top spot on USA Today's 2024 10 Best Readers Choice Awards list Now, let me provide some updates on each of our three strategic priorities.

Speaker Change: The infrastructure was designed to not only sustain our current brands, but also enable an efficient and accretive incorporation

Speaker Change: of other brands that we may acquire. This month, we were recognized for our commitment to excellence throughout our continued growth, earning a spot on Time Magazine's and Statista's America's Best Midsize Companies of 2024 list.

Speaker Change: The list factored in revenue growth, employee satisfaction,

Speaker Change: also achieved many accolades over the quarter, including 11 of our brands being named to Technomics' Top 500 list for 2024, which ranks the highest-grossing restaurant brands in the U.S.

Speaker Change: Vizzoli's being recognized by Technomic Ignite Consumer for the highest score and a value amongst other fast casual brands and Marble Slab Creamery receiving a top spot on USA Today's 2024 10 Best Readers Choice Awards list in the dessert and treat category.

Speaker Change: Now let me provide some updates on each of our three strategic priorities.

Speaker Change: First, organic growth. As of June 30, 2024, our franchisee base consisted of approximately 790 franchisees who operate an aggregate of approximately 2,100 restaurants, including restaurants under construction.

Speaker Change: We also directly own and operate approximately 190 corporate restaurants across four brands.

Andrew A. Wiederhorn: As of June 30, 2024, our franchisee base consisted of approximately 790 franchisees who operated an aggregate of approximately 2,100 restaurants, including restaurants under construction. We also directly own and operate approximately 190 corporate restaurants across four boroughs. In the second quarter, we expanded our footprint by opening 24 new locations, bringing our total year-to-date openings through July 31 to 45 units. We anticipate opening 120 new units in total this year, which is comparable to the amount of new stores we opened in 2023.

Speaker Change: In the second quarter, we expanded our footprint by opening 24 new locations, bringing our total year-to-date openings through July 31 to 45 units. We anticipate opening 120 new units in total this year, which is comparable to the amount of new stores we opened in 2023.

Andrew A. Wiederhorn: Both established and new franchisees alike are actively signing new development agreements for not only brands they currently own and operate but also for other brands within our portfolio. ongoing investment and diversification by our franchisees is a strong indicator of the overall health and confidence within the FAT franchise. Our development pipeline remains robust, with over 1,100 additional units slated to open in the coming years.

Speaker Change: Both established and new franchisees alike are actively signing new development agreements for not only brands they currently own and operate, but also for other brands within our portfolio. This ongoing investment and diversification by our franchisees is a strong indicator of the overall health and confidence within the FAT franchise system.

Speaker Change: Our development pipeline remains robust with over 1,100 additional units slated to open in the coming years.

Andrew A. Wiederhorn: We project that when opened, this substantial pipeline of additional units can generate approximately $50 to $60 million in incremental adjusted EBITDA, which provides an opportunity to organically reduce our leverage. As part of this pipeline, we are prioritizing accelerated growth within our polished casual segment, which consists of our Twin Peaks and Smokey Bones brands. Most of our development pipeline is weighted to the back half of the year, when we plan to open 12 to 15 total new Twin Peaks, ending 2024 with approximately 125 lodges, potentially driving system-wide sales to around $1 billion and 250 units.

Speaker Change: We project when opened that this substantial pipeline of additional units can generate approximately 50 to 60 million dollars in incremental adjusted EBITDA, which provides an opportunity to organically reduce our leverage.

Speaker Change: As part of this pipeline, we are prioritizing accelerated growth within our polished casual segment which consists of our Twin Peaks and Smokey Bones brands.

Speaker Change: Twin Peaks is currently our fastest-growing concept with average unit volumes at company-operated locations of $6 million, but at some key market locations, particularly in Florida, locations generate sales between $9 and $12 million.

Speaker Change: Twin Peaks currently operates 113 locations, up from 83 locations when we acquired the brand two and a half years ago.

Speaker Change: During the quarter, we opened a lodge in Naples, Florida, and in July , we opened a restaurant in Fort Mill, South Carolina, our fourth location in that state.

Speaker Change: Most of our development pipeline is weighted to the back half of the year when we plan to open 12 to 15 total new Twin Peaks ending 2024 with approximately 125 lodges. This will equate to a growth in unit count since our 2021 acquisition by approximately 50 percent.

Speaker Change: Over the next five years, the Twin Peaks development pipeline calls for 125 additional new restaurants, potentially driving system-wide sales to around $1 billion, and 250 units by count.

Andrew A. Wiederhorn: The opening of these restaurants will increase the mixed franchise locations to between 75 and 80 percent of the total unit cost. This fall, we will complete our first Smoky Bones to Twin Peaks conversion in Lakeland, Florida.

Speaker Change: The opening of these restaurants will increase the mixed franchise locations to between 75 and 80 percent of the total unit count.

Speaker Change: As you know, we purchased Smokey Bones in Q4 of last year. Our intention is to use Smokey Bones to fuel Twin Peaks growth through conversions, while over time still restoring the Smokey Bones brand to the 120 unit count it once had.

Speaker Change: This fall we will complete our first Smoky Bones to Twin Peaks conversion in Lakeland, Florida. We expect several additional conversions to take place later this year with the majority occurring throughout 2025 and 2026.

Andrew A. Wiederhorn: We expect several additional conversions to take place later this year, with the majority occurring throughout 2025 and 2026. We plan to use the proceeds to de-leverage the balance sheet and build new restaurants. We are also planning to refinance our Twin Peaks securitization debt prior to an IPO or other transaction. This development is part of a broader strategic partnership with Bromé Brands. Notably, this new San Antonio location marks the beginning of Bromé Brands' commitment to establish 40 roundtable pizza locations across the state, underscoring the substantial growth potential we see in this market.

Speaker Change: In May, Twin Peaks and Smoky Bones, as a combined entity, confidentially submitted a registration statement to the Securities and Exchange Commission to become a stand-alone public reporting company.

Speaker Change: While the timing and the size of any transaction is subject to market conditions and other factors, we are working diligently to expedite a successful transaction.

Speaker Change: We view an IPO or alternative transaction as an opportunity to monetize the business for the benefit of FAT shareholders. We plan to use proceeds to deleverage the balance sheet and build new restaurants. We are also planning to refinance our Twin Peaks securitization debt prior to an IPO or other transaction.

Speaker Change: Looking to our other segments, in May Roundtable Pizza strengthened its presence in Texas with the opening of a second location in San Antonio.

Speaker Change: This development is part of a broader strategic partnership with Bromé Brands, notably this new San Antonio location marks the beginning of Bromé Brands' commitment to establish 40 roundtable pizza locations across the state, underscoring the substantial growth potential we see in this market.

Speaker Change: Our Fizzoli's brand continues to gain momentum in Florida with the recent opening of our second Tampa location, bringing our total presence in the state to six restaurants.

Speaker Change: We've also bolstered Fezzoli's footprint in Arizona, launching our third location in the Greater Phoenix area with a new restaurant in Glendale. This location, featuring a fresh brand look, is off to an incredibly strong start, breaking Fezzoli's opening weekend sales records.

Speaker Change: These strategic expansions reflect our ongoing commitment to grow in key markets and our confidence in the brand.

Speaker Change: Co-branding also continues to be a key part of our strategy. Following the debut of our first fatburger and roundtable pizza co-branded concept last year, we've seen remarkable interest in the pairing with over 50 new locations currently under development. The success of this model was evident from its launch in Texas.

Speaker Change: And building on this momentum, we're thrilled to announce our expansion into Utah. Our newly announced deal will bring 12 co-branded Fat Burger and Round Table Pizza franchised restaurants to Utah over the next six years, with the first unit set to open in 2025.

Speaker Change: Our co-branded model of Great American Cookies and Marble Slab Creamery also continues to thrive. Over the last several months we have continued to secure our foothold in Georgia where we currently operate over 50 locations.

Speaker Change: Recently, the Sister Concepts opened four new locations in Georgia, namely Ackworth, Bethlehem, Marietta, and Snellville. Additionally, a standalone Great American Cookies opened in Columbus, Georgia.

Andrew A. Wiederhorn: We continue to lean into strategic value offerings across our brands to drive customer engagement and trust. At Fazoli's, we underscored the brand's long-standing value proposition during the July 4th holiday by offering $4 pasta dishes and then relaunching a fan-favorite limited-time offer, Pizza Bakes Spaghetti at $5.99.

Speaker Change: We continue to lean into strategic value offerings across our brands to drive customer engagement and traffic. At Fazoli's, we underscored the brand's longstanding value proposition during the July 4th holiday by offering $4 pasta dishes, then relaunching a fan favorite limited time offer.

Andrew A. Wiederhorn: Both promotions reinforce our commitment to providing high-quality menu items at an affordable price. During the quarter, we opened a roundtable pizza location at Stanford University in their student union and have further plans to build the roundtable brand on campus in the coming months. Which brings us to our third strategic priority, leveraging our Georgia-based manufacturing. While sales remained relatively constant at $9.6 million for the quarter, the factory contributed $3.8 million to adjusted EBITDA, an increase of 9.3% over last year.

Speaker Change: Pizza Bakes Spaghetti at $5.99. Both promotions reinforce our commitment to providing high-quality menu items at an affordable price point, a key pillar of the brand since its inception.

Speaker Change: Similarly, Smoky Bones celebrated National Hamburger Day with a nostalgic promotion offering their signature cheeseburger platter for just $6.49 with the purchase of a beverage. The same price as when the brand launched in 1999.

Speaker Change: To celebrate National Ice Cream Day and Ice Cream Month in July , Marble Slab Creamery offered $5 off their ice cream cakes and a free small cup of ice cream with the purchase of another small or large cup on National Ice Cream Day.

Speaker Change: And on that day, we saw same source sales of 3.8% over strong comparables from last year.

Speaker Change: Our brands continue to innovate and excite customers with new menu items and exciting partnerships. Pretzel Maker debuted Cheetos Pretzel Bites as a limited-time offering. Fatburger and Buffalo's Express introduced a new collaboration with Frank's Red Hot, launching Nashville Hot Chicken Strips and Nashville Hot Fries.

Speaker Change: And Hot Dog on a Stick announced its latest hand-stomped lemonade creation, Sour Patch Kids Watermelon Lemonade. These initiatives across our portfolio demonstrate our ongoing efforts to keep our offerings fresh, engaging, and aligned with current consumer preferences.

Speaker Change: Non-traditional venues such as airports, cruise lines, amusement parks, universities, and casinos represent a key area of growth. This type of expansion not only diversifies our revenue streams, but also increases brand visibility in unique, high-volume locations.

Speaker Change: During the quarter, we opened a roundtable pizza location at Stanford University in their student union and have further plans to build roundtable brand on campus in the coming months.

Speaker Change: In July we also expanded our partnership with the Royal Caribbean by opening our 15th location on their iconic ships, the Johnny Rockets, on the newly launched Utopia of the Seas.

Speaker Change: Moving on to our second strategic pillar, growth through acquisitions.

Speaker Change: We are assessing several new potential acquisitions that could add significant strategic value to our organization, similar to how we targeted Smokey Bones to fuel growth at Twin Peaks, and Nestle Tollhouse Café by Chip to boost our manufacturing facility's utilization. We are also looking at other categories to round out our portfolio, such as salad, sandwich, or coffee break.

Speaker Change: When evaluating acquisition targets, we must ensure that the brand is both scalable and synergistic within our existing platform, and when possible, leverage our existing manufacturing capacity, which brings us to our third strategic priority, leveraging our Georgia-based manufacturing facility.

Speaker Change: The plant's utilization has improved from 33% at acquisition nearly three years ago to its current 45%.

Andrew A. Wiederhorn: Should additional demand materialize beyond what we could currently absorb, a modest $1.5 million investment in additional equipment could double our capacity. We also have 3.5 acres of unused real estate on site that can be expanded. To boost utilization, we have leveraged our portfolio of brands by enhancing our dessert offerings, selling cookies and other products made at the facility within our restaurant. Recently, we added dessert items across the Fazoli's locations and have plans to complete the rollout in our remaining casual dining and polished casual segments in the future.

Speaker Change: Should additional demand materialize beyond what we could currently absorb, a modest $1.5 million investment in additional equipment could double our capacity. We also have 3.5 acres of unused real estate on site that can be expanded upon. This presents a significant growth opportunity for our factory business.

Speaker Change: Recently we added dessert items across the facilities locations and have plans to complete the rollout in our remaining casual dining and polished casual segments in the future.

Speaker Change: FAT Brands Foundation, I'd like to mention for a minute. I'd like to update you on the growth and work at the foundation.

Andrew A. Wiederhorn: We are also honored to share that FAT Brands Foundation recently gained recognition from the Los Angeles Business Journal at its annual Nonprofit and Corporate Citizenship Awards. Jessica Wiederhorn, the Foundation's President and also Founding Member, was named Nonprofit Executive of the Year in the Emerging Category by the LA Business Journal. We sincerely appreciate your participation today and your ongoing interest in FAT Brands. With that, I'd like to hand it over to Ken to discuss our financial highlights from the second quarter.

Speaker Change: We're also honored to share FAPAN's foundation recently gained recognition from the Los Angeles Business Journal at its annual nonprofit and corporate citizenship awards. Jessica Wiederhorn, the foundation's president and also founding member, was named nonprofit executive of the year in the emerging category by the LA Business Journal.

Speaker Change: Our strong and expanding development pipeline promises sustained growth for years to come.

Kenneth J. Kuick: Thanks, Andy. I'd now like to review our quarterly performance. Total revenues increased 42.4% to $152 million, primarily due to the Smoky Bones acquisition and the recognition of $12.7 million in employee retention tax credits during the second quarter of 2023, and hire company-owned restaurant sales. Depreciation and amortization expense increased $3.2 million to $10.2 million, from $7.1 million in the year-ago quarter. Again, primarily due to the Smoky Bones acquisition, along with depreciation of new company-owned restaurant property and equipment.

Speaker Change: Thanks, Andy. I'd like to now review our quarterly performance.

Speaker Change: Total revenue increased 42.4% to 152 million dollars driven by the acquisition of Smoky Bones in the fourth quarter of 2023 and revenues from new restaurant openings.

Speaker Change: primarily due to the Smokey Bones acquisition and the recognition of $12.7 million in employee retention tax credits during the second quarter of 2023.

Speaker Change: partially offset by the recognition of 2.1 million dollars in employee retention tax credits during the second quarter of 2024.

Speaker Change: Cost of restaurant and factory revenues increased to $100.1 million compared to $59.5 million in the prior year quarter, primarily due to the Smokey Bones acquisition and higher company-owned restaurant sales.

Speaker Change: Depreciation and amortization expense increased $3.2 million to $10.2 million.

Speaker Change: from $7.1 million in the year-ago quarter, again, primarily due to the Smoky Bones acquisition, along with depreciation of new company-owned restaurant property and equipment.

Kenneth J. Kuick: Advertising expense varies in relation to advertising revenues and increased to $14.7 million from $11.6 million in the year-ago period. Total other expense net for the second quarter of 2024 and 2023 was $24.2 million, respectively, which is inclusive of interest expense of $34 million and $24.3 million, respectively. The net loss was $39.4 million or $2.43 per diluted share. And on an as-adjusted basis, our net loss was $30.9 million, or $1.93 per diluted share, compared to net income of $3 million, or $0.08 per diluted share, in a prior year quarter. And adjusted EBITDA for the quarter was $15.7 million, compared to $23.1 million in the year-ago quarter.

Speaker Change: Advertising expense varies in relation to advertising revenues and increased to $14.7 million from $11.6 million in the year-ago period.

Speaker Change: Total other expense net for the second quarter of 2024 and 2023 was $34.8 million and $24.2 million respectively.

Speaker Change: which is inclusive of interest expense of $34 million and $24.3 million, respectively.

Speaker Change: Net loss was $39.4 million, or $2.43 per diluted share.

Speaker Change: compared to a net loss of 7.1 million dollars or 53 cents per diluted share in the prior year quarter.

Speaker Change: And on an as-adjusted basis, our net loss was $30.9 million, or $1.93 per diluted share.

Speaker Change: compared to net income of three million dollars or eight cents per diluted share in a prior year quarter.

Speaker Change: And lastly, EBITDA was $6.8 million compared to $25.6 million in the second quarter of 2023. And adjusted EBITDA for the quarter was $15.7 million.

Kenneth J. Kuick: And as Andy mentioned, we received employee retention tax credits of $12.7 million in the second quarter of 2023 versus $2.1 million in the second quarter of 2024, a difference of $10.6 million. And with that, Kaylee, please open the line for questions.

Speaker Change: compared to $23.1 million in the year-ago quarter. And as Andy mentioned, we received employee retention tax credits of $12.7 million in the second quarter of 2023 versus $2.1 million in the second quarter of 2024, a difference of $10.6 million.

Speaker Change: And with that, Kaylee, please open the line for questions.

Kaylee: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone button.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Speaker Change: Your first question comes from Joe Gomes with Noble Capital.

Operator: Good afternoon, and thanks for taking my question. Hi, Joe. Hey, Joe.

Joseph Anthony Gomes: Good afternoon, and thanks for taking my questions.

Speaker Change: Hi, Joe. Hey, Joe.

Joseph Anthony Gomes: So, somewhat of a similar theme, you know; revenues were up nicely in the first quarter, but expenses were up even more. And here in the second quarter, they grew even at a faster rate than they did in the first quarter. I understand part of that is due to the tax retention credits, but when do we think we will start to see that kind of flax and where revenue growth will exceed the expense growth on a quarterly basis?

Speaker Change: So,

Speaker Change: somewhat of a similar theme.

Speaker Change: You know, with the first quarter, you know, revenues were up nicely, but expenses were up even more, and here in the...

Speaker Change: the second quarter they grieve at a faster rate than they did in the first quarter. I understand part of that is due to the tax retention credits, but when do we think we start to see that kind of flex?

Speaker Change: and where the revenue growth will exceed the expense growth on a quarterly basis.

Kenneth J. Kuick: Sure. I think you have to reconcile the difference in net loss or adjusted net loss from Q2 a year ago to Q2 2024. There are really five or six components. One of them is interest expense. One of them is tax credits. Another one is depreciation. And then you have some net income losses from the Smoky Bones acquisition and a little bit from Fazoli's and Roundtable Pizza, where Roundtable, we own some corporate stores that were sold. We no longer have that income.

Speaker Change: Sure. I think you have to reconcile the difference in net loss or adjusted net loss from Q2 a year ago to Q2 2024. There's really five or six components. One of them is interest expense. One of them is the tax credits.

Speaker Change: One of them is depreciation and then you have

Speaker Change: some net income losses from the Smokey Bones acquisition, and a little bit from Fazoli's and Roundtable Pizza, where Roundtable, we own some corporate stores that were sold, so we no longer have that income. And you put all that together, and it gets you to that difference between.

Andrew A. Wiederhorn: And you put all that together, and it gets you to that difference between, you know, the $32 million difference. As we see the refinancing of Twin Peaks and, hopefully, the public company listing of Twin Peaks, that will pull some of that off of the FAT Brands platform. It will also create an opportunity to raise equity and reduce interest expense in total. And so that's going to be a key driver because Twin Peaks sits at approximately $400 million in debt.

Speaker Change: You know, the $32 million difference, basically.

Speaker Change: As we see the refinancing of Twin Peaks and hopefully the public company listing of Twin Peaks, that will peel some of that off of the FAT Brands.

Speaker Change: platform that will also create, you know, an opportunity to raise equity and reduce interest expense in total. And so that's going to be a key driver because Twin Peaks sits at

Andrew A. Wiederhorn: To reduce that debt with an equity raise will substantially affect that number. The second thing is, of course, the pipeline of new store builds that add somewhere between six and $10 million a year of incremental royalties, depending on which brand and how many units get opened. So I think those are the two things. And then, finally, of course, legal expense has to end somewhere, maybe 12 to 18 months from now, and that will be the final touchstone.

Speaker Change: approximately 400 million of debt. You know, to reduce that debt with equity raise will substantially affect that number. The second thing is, of course, the pipeline of new store bills that adds

Speaker Change: somewhere between six and ten million dollars a year of incremental royalties depending on which brand and how many units get opened. So I think that's those are the two things. And then finally, of course, you know, legal expense has to end here some somewhere maybe, you know, 12 to 18 months from now and that that will, you know, will be the final touch of it.

Joseph Anthony Gomes: Okay, thanks. Thanks for that, Andy.

Andrew A. Wiederhorn: You talk about new store development here. So in the second quarter, you had projected that you were going to open, you know, I think it was 40 some odd stores. On the first quarter call, you project you're going to open, I think, 40-some odd stores here in the second quarter, and obviously, we fell short of that. But you still seem to think you can come up to that 120-ish for the full year. Anything in particular that has caused the rate of store openings to kind of slow down from, you know, our initial expectations?

Speaker Change: Okay, thanks. Thanks for that, Andy.

Speaker Change: You talk about the new store development here. So in the in the second quarter you had

Speaker Change: projected that you were going to open

Speaker Change: you know, I think it was 40-some-odd stores.

Speaker Change: On the first quarter call, you project you're going to open, I think, 40-some-odd stores here in the second quarter, and obviously we fell short of that.

Speaker Change: You still seem to think you can come up to that 120-ish for the full year. Anything in particular that has caused the rate of store openings to kind of slow down from, you know, our initial expectations?

Speaker Change: So there's a couple things that contribute to it.

Speaker Change: One is that you just generally have franchisees dragging their feet just a little bit, just a little slower to get things done, whether that's financing or whatever that they're applying. But they are on track to open. We have scheduled opening dates.

Joseph Anthony Gomes: So, there's a couple things that contribute to it. One is that you just generally have franchisees dragging their feet just a little bit, just a little slower to get things done, you know, whether that's financing or whatever that they're applying. But they are on track to open. I mean, we have scheduled opening dates through the end of the year for those remaining 80-something stores, 75 stores, and 20 or 30 of those are international where they're very much on track to open, and they're multi-unit repeat operators, so they don't need a lot of assistance from corporate.

Speaker Change: through the end of the year for those remaining 80-something stores, 75 stores.

Speaker Change: And 20 or 30 of those are international where they're very much on track to open and they're multi-unit repeat operators so they don't need a lot of assistance from corporate. So we feel pretty good about these dates. But.

Joseph Anthony Gomes: So, we feel pretty good about these dates. You never want to be in December opening new stores, so we really want to get them open, as many as we can before Thanksgiving, and we have an awful lot scheduled, so we feel pretty good.

Speaker Change: You never want to be in December opening new stores, so we really want to get them open, you know,

Speaker Change: as many as we can before Thanksgiving and we have an awful lot scheduled so we feel pretty good about it.

Andrew A. Wiederhorn: Okay, and one more for me, I'll jump back in line. You talked about, you know, M&A, and you still are assessing some opportunities. You mentioned the same thing in the first quarter call. Are these the same opportunities, or have new opportunities come about here? You know, we're seeing a little bit of ups and downs here recently in the restaurant industry. I was wondering if there's been maybe an opening, so to speak, of people looking to come to somebody like you, a consolidator, and be more open on price, if maybe some of that has started to percolate. Definitely.

Speaker Change: Okay.

Speaker Change: And one more for me, I'll jump back in queue. You talked about M&A and you still are assessing some opportunities. You mentioned the same thing in the first quarter call. Are these the same opportunities or new opportunities?

Speaker Change: come about here and I'm seeing a little bit of ups and downs here recently in the

Speaker Change: restaurant industry. I was wondering if there's been maybe a opening, so to speak, of people looking to come to somebody like you, a consolidator.

Speaker Change: and be more open on price, that maybe some of that has started to percolate.

Andrew A. Wiederhorn: definitely the latter. We're seeing more deals than ever right now and certainly than we did last year and we were seeing sellers with reasonable expectations and so I think that you know there's an opportunity to make acquisitions similar to sort of the pricing around like Smokey Bones where in the three to four times cash flow range versus, you know, stuff that where people are still trying to hold out for seven to 10 times and it's just hard in this environment to justify.

Speaker Change: Definitely the latter. We're seeing more deals than ever right now and certainly than we did last year and we're seeing sellers with reasonable

Speaker Change: Expectations.

Speaker Change: And so I think that there's an opportunity to make acquisitions similar to sort of the pricing around like Smokey Bones where it was.

Speaker Change: in the three to four times cash flow range versus, you know, stuff that

Speaker Change: where people are still trying to hold out for seven to ten times and it's just hard in this environment to justify that.

Andrew A. Wiederhorn: You know, from a consumer trend standpoint, we want to see the election behind this and interest rate cuts behind us. And that would create some momentum, you know, I think as well. But, But from a pure M&A standpoint, there are opportunities out there. They are de-levering opportunities, meaning that we could add EBITDA and cash flow at a, you know, much lower rate than our leverage rate today. So that's an interesting opportunity for us as a way to de-leverage the balance sheet and add to our scale.

Speaker Change: You know, we want to see, from a consumer trend standpoint, we want to see the election behind us and interest rate cuts behind us, and that would create some momentum, you know, I think, as well.

Speaker Change: From a pure M&A standpoint, there are opportunities out there. They are de-levering opportunities, meaning that we can add EBITDA and cash flow at a

Speaker Change: a much lower rate than our leverage rate today. So that's an interesting opportunity for us as a way to de-leverage the balance sheet and add to our scale.

Joseph Anthony Gomes: Great. Thanks, Andy. I appreciate it.

Speaker Change: Great. Thanks, Andy. I appreciate it.

Operator: Your next question comes from Alton Stump with Loop Capital.

Joseph Anthony Gomes: Thank you, Joe.

Speaker Change: Your next question comes from Alton Stump with Loop Capital.

Alton Kemp Stump: Great. Thank you, Dan. Good afternoon, Andy and Ken.

Alton Kemp Stump: Hope we're doing well. I just want to ask, first off, on the state store sales being down only 1.6% held flat on a two-stack basis sequentially versus the first quarter. I'm sure you guys have all read all the negative news out there.

Alton Kemp Stump: Great, thank you, and good afternoon, Andy and Ken.

Alton Kemp Stump: Hope you're doing well. I just want to ask, first off, you know, on the, you know, state store sales being down only 1.6%, held flat on a two-stack basis, you know, sequentially versus the first quarter. I'm sure you guys have all read, you know, all of the negatives.

Alton Kemp Stump: And, you know, for those that, you know, have come out with earnings, I think you're probably going to be one, if not the only one out there that actually, you know, kept to your stacks, you know, unchanged in 2Q versus the first quarter. Clearly, you guys own, obviously, almost 20 different concepts. You've got a lot of different things going on, I'm sure, at each concept, but were there any, you know, handful of, you know, sort of key outperformers in your portfolio that you think enabled you to, you know, hold that, you know, to your stack, trying to flatten what was obviously a very challenging quarter for the overall Kuick service industry?

Speaker Change: News out there and you know for those that you know have come out with earnings

Speaker Change: [inaudible]

Speaker Change: in your portfolio that you think enabled you to, you know, hold that, you know, to your stack trying to flatten what was obviously a very challenging quarter for the overall, you know, Kuick service industry.

Andrew A. Wiederhorn: Yeah, you know, the burger segment's been very solid, the fast casual segment's been very solid, and the snack segment's been very solid as well. But where you see, what we've seen, what other people have seen, which is on the QSR side of things, your traffic is off, and your sales are off, your top line sales are off. We have company-owned stores in that bucket, so it affects you harder. And that consumer just doesn't have anywhere to go.

Speaker Change: Yeah, you know, the burger segment's been very solid. Fast casual segment's been very solid.

Speaker Change: and the snack segment's been very solid as well.

Speaker Change: where you see, where we've seen, what other people have seen, which is on the QSR side of things.

Speaker Change: Your traffic is off.

Speaker Change: and your sales are off, your top-line sales are off. We have company-owned stores in that bucket, so it affects you harder. And that consumer just doesn't have anywhere to go, and so you've gotta focus on value and try to focus on frequency.

Andrew A. Wiederhorn: And so you've got to focus on value and try to focus on frequency, and make sure that you're driving profitable value opportunities, you're not cannibalizing sales and trying to drive traffic where you're actually losing more money. So we've been focused on that, but we've definitely seen it there. So it's kind of interesting to see how snack brands and how the fast casual brands where burgers and their average checks can be in the low $20 are doing pretty well. And you've got other pain thresholds where it's a higher pushback.

Speaker Change: and make sure that you're driving profitable value opportunities, you're not cannibalizing sales.

Speaker Change: and trying to drive traffic where you're actually losing more money. So we've been focused on that, but we've definitely seen it there. So it's kind of interesting to see how snack brands and how the fast casual brands where burgers and their average checks can be in the low $20 are doing pretty well.

Andrew A. Wiederhorn: We've also seen, for example, our Ponderosa and Bonanza Steakhouse brands have just consistently been up mid to high single digits. And I'm sure that's the value proposition of an all-you-can-eat steak and all-you-can-eat buffet at a pretty good value price. So to see those up strongly is nice. We've seen in the post-casual segment, same source sales are off just a little bit and a lot less than they were off as we started the year.

Speaker Change: pain thresholds where it's a higher pushback. We've also seen, for example, our Ponderosa, Bonanza, Steakhouse brands have just consistently been up mid to high single digits and I'm sure that's a value proposition of an all-you-can-eat steak and all-you-can-eat buffet.

Speaker Change: at a pretty good value price, so to see those up strongly is nice.

Speaker Change: We've seen in the post-casual segment, same source sales are off.

Andrew A. Wiederhorn: So we've had a very good recovery in that segment, and we anticipate it getting better and better after we get out of these dog days of summer here. There's not a lot of sports that drive people to sports bars over the next few weeks, and then we'll be back into football, and everything should be great again. The Olympics don't actually drive people. People don't go to sports bars to watch the Olympics as much as they do it at home, and there's also the time change. So I don't think that's the solution. But we are pretty optimistic about the second half of the year now for the post-casual segment.

Speaker Change: just a little bit and a lot less than they were off as we started the year. So we've had a very good recovery in those segments.

Speaker Change: that segment. And we anticipate it getting better and better after we get out of the dog days of summer here. There's not a lot of sports.

Speaker Change: That drive people to sports bars in the you know over the the next few weeks And then we'll be back into football and everything should be great again But the Olympics don't actually drive people people don't go to the sports bars to watch the Olympics as much as they do it at Home, and it's also the time

Speaker Change: So, I don't think that's the solution, but we are pretty optimistic about the second half of the year now for the polished casual segment.

Alton Kemp Stump: Great, that's a great color. Thank you for all that. And then I guess just, you know, one other follow-up, and I'll hop back in the queue. But, you know, you obviously are just now underway with your first, you know, conversion of Smokey Bones to Twin Peaks. So it's all fairly early, I certainly understand that, but, you know, you know, how's that going so far? And, you know, have you, you know, learned anything yet?

Speaker Change: Great, that's a great color. Thank you for all that. And then I guess just, you know, one other follow-up and I'll...

Speaker Change: So, hop back in the queue, but you obviously are just now underway with your first conversion of Smokey Bones to a Twin Peaks, so it's all fairly early, I understand, but how has that gone so far and have you learned anything yet that could help you sort of, as you look to accelerate that conversion process, as you mentioned, not just over the course of the back half of this year, but into the next couple of year period?

Alton Kemp Stump: You know, that could help you sort of, you know, as you look to accelerate that conversion process, as you mentioned, not just over the course of the back half of this year but into the next couple of years? Yeah, we'll

Speaker Change: Yeah, well Joe Hummel, our Twin Peaks CEO and his team are pros at conversions of second-generation restaurant space. Probably 75% of the Twin Peaks restaurants in existence today are second-generation restaurants.

Andrew A. Wiederhorn: Yeah, well Joe Hummel, our Twin Peaks CEO, and his team are pros at conversions of second-generation restaurants. Basically, probably 75% of the Twin Peaks restaurants in existence today are second-generation restaurants, units. So they are very, very focused on how to do it quickly and efficiently.

Andrew A. Wiederhorn: This Lakeland, Florida, location will be up and running in under nine months, so we're very happy with that. When we bought Smoky Bones in Q4 of last year, our franchisee base, and even for corporate stores, we had already picked out most of the 2024 new stores to open. Franchisees had already purchased land, were building buildings, or leased new locations. Same thing with corporate. We had three or four company-owned stores under construction or development.

Speaker Change: units. So very, very focused on how to do it quickly and efficiently. This Lakeland, Florida location will be up and running in under nine months.

Andrew A. Wiederhorn: So the timing of the conversions of the Smoky Bones is really at 25 and 26, event just because with 24, everybody already had all their plates full with all the stores they could open. And remember, these stores take up a lot of money to open. So it can be anywhere from $3.5-$4 million on a conversion of a store to $7.5 million to build a brand new store. And so you can only ask a franchisee to write so many checks at a time in a given year, and they've planned, you know, their cash flow for that purpose, and same with corporate.

Speaker Change: So we're very happy with that.

Speaker Change: When we bought Smoky Bones in Q4 of last year,

Speaker Change: Our franchisee base, and even for corporate stores, we had already picked out most of the 2024 new stores to open. Franchisees had already purchased land, were building buildings, or leased new locations. Same thing with corporate. We had three or four company-owned stores under construction or development.

Speaker Change: So, the timing of the conversions of the Smoky Bones is really a 25 and 26, you know, event, just because 24, everybody already had all their plates full with all the stores they could open. And remember, these stores take up a lot of money to open, so it can be anywhere from

Speaker Change: $3.5-$4 million on a conversion of a store to $7.5 million to build a brand new store.

Speaker Change: And so you can only ask a franchisee to write so many checks at a time in a given year. And they've planned their cash flow for that purpose. And same with corporate. So we feel good about it. We're excited for the momentum. When you see –

Andrew A. Wiederhorn: So we feel good about it. We're excited about the momentum. You know, when you see the brands that get the best valuations and the biggest part of the multiple expansion here right now, it's brands with high unit growth. And certainly, Twin Peaks has high unit growth planned for the next three years. So does FAT Brands, having 2,300 restaurants open and another 1,100 in the pipeline, paid for by franchisees and on a schedule to build them.

Speaker Change: The

Speaker Change: that get the best valuations and the biggest part of the multiple expansion here right now it's

Speaker Change: brands with high unit growth and certainly Twin Peaks has high unit growth planned for the next three years. So does FAT Brands having, you know, 2,300 restaurants open and another 1,100 in the pipeline paid for by franchisees and on a schedule to build them. So

Andrew A. Wiederhorn: We really feel like being in a franchise war, having high unit growth, executing on that unit growth, should really see some of the stuff kept behind us here. And, of course, as we refinance our different securitization transactions over the next 24 months, we think that we'll see savings there as well.

Speaker Change: We really feel like being a franchise or having high unit growth, executing on that unit growth, you know, should really see some of the stuff get behind us here. And, of course,

Speaker Change: As we refinance our different securitization transactions over the next 24 months, we think that we'll see savings there as well.

Alton Kemp Stump: Great. It makes sense. Thank you. That's helpful. I'll hop back into the queue.

Speaker Change: Great. It makes sense. Thank you. That's helpful. I'll hop back in the queue. Thank you, Alton.

Operator: This concludes our question and answer session. I would like to turn the conference over to Andy for any closing remarks. I just want to thank you.

Speaker Change: This concludes our question and answer session. I would like to turn the conference over to Andy for any closing remarks.

Andrew A. Wiederhorn: I just want to thank all of you for joining the FAT Brands conference today, and we look forward to updating you further on our Q3 earnings call and, hopefully, some exciting stuff to talk about. Thank you very much.

Andrew A. Wiederhorn: I just want to thank all of you for joining the FAT Brands Conference today, and we look forward to updating you further on our Q3 earnings call, and hopefully some exciting stuff to talk about at that time.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Andrew A. Wiederhorn: Thank you very much, operator.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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