FAT Brands Inc. (NASDAQ:FAT) Q3 2023 Earnings Call Transcript

FAT Brands Inc. (NASDAQ:FAT) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good afternoon, ladies and gentlemen. Welcome to the FAT Brands, Inc. Third Quarter 2023 Earnings Conference Call. At this time all participants have been placed in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded today, October 26, 2023. On the call from FAT Brands are Chairman of the Board, Andy Wiederhorn and Co-Chief Executive Officer and Chief Financial Officer, Ken Kuick. This afternoon, the company made its third quarter 2023 financial results publicly available. Please refer to the earning release and earnings supplement, both of which are available in the investor section of the company’s website at www.fatbrands.com. Each contain additional details about the third quarter, which closed on September 24, 2023.

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 upon 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 condition, please see today’s earnings release and recent SEC filings. During today’s call, the company will also discuss non-GAAP financial measures, which it believes can be useful in evaluating its performance.

The presentation of this additional information should not be considered in isolation, nor as a substitute for 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 Andy Wiederhorn, Chairman of the Board. Please go ahead.

Andrew Wiederhorn: Thank you, operator. We appreciate everyone joining us this afternoon. First and foremost, I would like to thank our teams, franchisees and their employees for their unwavering commitment and hard work that have resulted in the continued growth of FAT Brands. Total revenue grew 6% to $109.4 million in the third quarter of 2023 compared to $103.2 million in the prior year third quarter. The increase was driven by a 4.8% increase in royalties, a 2% increase in company-owned restaurant revenues, a 228.5% increase in franchise fees and an 18.9% increase in revenues from our manufacturing facility. System-wide sales in the third quarter grew to $564.6 million, a 0.8% increase when compared to the prior year quarter.

On profitability, third quarter adjusted EBITDA was $21.9 million compared to $24.6 million in last year’s third quarter. And just to point out that in last year’s third quarter, there were $7.2 million of tax credits. Without those tax credits, it would be a 26% increase on a quarter-over-quarter year-over-year basis. Throughout Q3, we were extremely busy executing on our three strategic pillars. One, growth by acquisition. Two, organic growth. And three, productivity growth for our Georgia-based manufacturing facility. I’ll begin with our first strategic pillar of growth through acquisitions. Over the last two years, our growth strategy has been very focused on our organic development as we digested eight new restaurant brands that we acquired throughout 2020 and 2021.

We continue to be selective and opportunistic in our acquisition strategy. Under this strategy, we recently purchased Smokey Bones Bar and Fire Grill, a full-service restaurant chain with a sports bar atmosphere from an affiliate of Sun Capital Partners for $30 million. This was funded from our existing securitization facilities. In 2020, Johnny Rockets was similarly acquired from Sun Capital Partners. Smokey Bones is known for its great barbecue, award-winning ribs and perfectly seared steaks. And currently, Smokey Bones operates 61 company-owned locations across 16 states. We expect Smokey Bones to increase annual adjusted EBITDA by approximately $10 million. The acquisition marks our expansion into the barbecue segment and bolsters our presence in polished casual dining, which until now has been represented exclusively by our Twin Peaks chain.

Smokey Bones currently has the second highest AUVs in our portfolio following Twin Peaks at greater than approximately $3 million. Adding a strong player in the barbecue space like Smokey Bones provides our sales team with more development options to offer franchise partners so that they can further their new unit growth. We plan to work hard and hand-in-hand with the Smokey Bone’s leadership team to grow the concept through our franchising model. And through our re-franchising strategy, we have plans to build Smokey Bones back to the location count it once had, approximately 120 units. Approximately half of the operators in the FAT Brands system are multiunit franchisees, operating anywhere from 2 to 75 units, and they are hungry to grow their portfolio with brands that have strong AUVs. In fact, a number of franchisees have already expressed interest in acquiring existing Smokey Bones corporate stores as franchises so that they can grow their portfolio of restaurants.

Smokey Bones has many prime real estate locations that could provide conversion opportunities for Twin Peaks and our franchise partners. Over time, we plan to selectively convert locations where appropriate, which will enhance the growth of the Twin Peaks system. Inclusive of Smokey Bones, the FAT portfolio now consists of 18 distinctive brands with approximately 800 different franchisees who operate more than approximately 2,125 franchise restaurants in addition to our approximately 180 company-owned stores. Presently, we have a total of 2,300 units operating or under construction, ranking us as approximately the 25 largest restaurant company in the U.S. by unit count. While we have more recently focused on the polished casual segment, we are also looking at other categories to round out our portfolio, such as salad sandwich or coffee brand.

As we continue to assess potential targets for acquisition, our focus remains on identifying strategic and EBITDA accretive opportunities with brands that have demonstrated long-term sustainability and robust profitability. They also must be scalable and synergistic with our existing platform, including leveraging our existing manufacturing capacity when possible. On that note, another strategic priority for us is the growth of our Georgia-based manufacturing facility, which provides pretzel mix and cookie dough for several brands. We believe our factory business today is in its early stage of growth, operating at only about 40% to 45% of its capacity. Still, this is up from 33% two years ago. We also have the ability to significantly expand the capacity of the plant by tapping into our 3.5 acres of excess real estate and the ability to invest in additional equipment that will also enhance capacity.

During the third quarter, our manufacturing facility generated $9.3 million in sales, an 18.9% increase over last year’s third quarter. To help increase productivity at our manufacturing facility, earlier this year, we strategically introduced cookie offerings throughout our burger portfolio, FAT Burger, Johnny Rockets and Elevation Burger. We see these additions as a way to further build and enhance our dessert programs. We continue to explore opportunities to add cookie offerings at our remaining brands, including our casual dining concepts and facilities. Now let’s take a closer look at our organic growth. Year-to-date, we’ve opened a total of 107 new units, including 30 that opened in Q3. For all of 2023, we’re aiming to open a total of 150 units.

Additionally, this year, we have signed franchise development deals for over 200 new locations, bringing our pipeline for new units to over 1,100 signed agreements, on top of the 2,300 restaurants already open. This pipeline of organic growth is estimated to be worth approximately $60 million in incremental increase to adjusted EBITDA, which massively de-levers us organically. As mentioned, we are particularly focused on the growth of our polished casual segment, which now consists of our Twin Peaks and Smokey Bones concepts. Twin Peaks is a best-in-class brand that appeals to a broad demographic of customers across the country. The units produce industry-leading AUVs of around $6 million while some of our highest volume locations in Florida are generating AUVs between $9 million and $12 million.

They are highly profitable restaurants with an elevated food and beverage program that far suppresses anything else in the category. This year, we have opened 11 new Twin Peak lodges, bringing our current portfolio to 106 units across 27 states in Mexico, of which more than 70% are franchised. For the remainder of the year, we plan to open five more lodges ending 2023 with approximately 111 lodges. This is a 34% increase in unit count since Fat Brands acquired the brand in 2021 just two years ago. Over the next several years, Twin Peaks plans to grow its unit count to more than 200 lodges and increase the mix of franchise locations to between 75% and 80%. We currently have over 125 new franchise units signed paid and committed to be built in the next five years.

As mentioned, we also plan to selectively convert between 30 and 40 of the Smokey Bones units into Twin Peaks, which will help accelerate Twin Peaks growth. These conversions can take as little as 9 months compared to the 2.5 years needed to build a Twin Peaks from the ground up. The planned unit growth is expected to increase system wide sales of Twin Peaks to approximately $1 billion. As a result of the concept’s industry-leading economics and strong pipeline of profitable growth, as previously announced, we plan to take Twin Peaks public in the future. However, the timing and the size of the transaction will be subject to market conditions and other factors, which could include simply a sale or spin out of the brand with proceeds primarily used to pay down debt.

Another avenue of growth we are pursuing is nontraditional venues, our Fatburger location at Six Flags, Great Adventure in New Jersey, which opened last year has exceeded our expectations. As a result, in July, we announced an expansion of this partnership with a new restaurant at Six Flags Fiesta Texas. This is our sixth Fatburger location in Texas with over 40 additional locations planned to open in the state over the next 10 years. Similarly, we opened a co-branded Marble Slab Creamery and Great American cookies concept in Cooks, Children’s Hospital in Fort Worth, Texas, and we’ll continue to expand that partnership with a second location in their hospital in Prosper, Texas. We also announced a new development deal to bring 20 new franchised Johnny Rockets to Texas over the next decade.

A Chili’s Grill & Bar restaurant filled with happy customers enjoying a meal.

The first location is planned to open in 2024 and will triple the chain’s footprint in the state. Texas continues to be a key growth market for FAT Brands and our portfolio overall, as exemplified by the 80 store development deal we signed in the quarter, which includes several Fatburger, Buffalo’s Express and Round Table Pizza locations across the state. Our brands are also expanding internationally. We plan to open 10 new franchised Hot Dog on a Stick locations in Iraq over the next five years, the first unit slated to open next year in 2024. There is also demand in our snack and dessert category. We signed a deal to open 25 new franchised Pretzelmaker locations in Canada over the next 10 years. In doing so, we are building on Pretzelmaker’s existing footprint of over 50 Canadian units which underscores our dedication to international growth as we continue scaling the brand.

This deal comes on the heels of the third quarter’s comprehensive rebrand of Pretzelmaker. Pretzelmaker’s new look will complement the brand’s increased demand for online and to-go orders, while continuing to offer fresh baked bite-sized products directly from Pretzelmaker’s bakery case. The new design is also optimized for drive-thru locations. To date, we have opened three drive-through locations, two of which opened this year. Over the last 2 years, our Great American Cookie brand has also experienced accelerated growth opening 80 new locations while entering new states such as Arizona, Oregon, Illinois and New Mexico. This summer, the brand celebrated its 400 opening, including its first location in Philadelphia, which broadened its East Coast presence and increased brand visibility.

Since then, the brand has also opened in the Orlando market and debuted for the first time in the Pacific Northwest. Great American Cookies is now located in 33 states in five countries around the world and continues to find success as a co-branded model with sister brand Marble Slab Primary. There are now over 150 co-branded locations worldwide. We are proud to note all three of our QSR snack brands, Great American Cookies, Marble Slab Creamery and Pretzelmaker were named to QSR’s Best Franchise deals list in September, further illustrating the strength of our concepts. Our fast casual brand, Fazoli’s also opened a new location in Orlando, which features a double drive-through lane to meet high traffic demand and a second location in Little Rock, Arkansas.

It also received recognition as a top innovator in the fast casual space for delivery from Nation’s Restaurant News. Fazoli’s continues to see strong demand for delivery post pandemic. Further underscoring the growth of our brands, we’ve received a number of press accolades this quarter. 13 of our brands were recognized in Franchise Times Franchise 400 list. Additionally, Fatburger was again mentioned as one of the most iconic and well-loved burgers in Los Angeles by the LA Times. During the quarter, we also bolstered our Board of Directors by welcoming five new directors Peter Feinstein, Matthew Green, John Metz, James Ellis and John Allen. Our Board now consists of 14 members. John Allen, Peter Feinstein and Matthew Green will also serve on our Audit Committee.

We are confident that our new Board members’ contributions will help us to drive returns for our shareholders. I would also like to share an update on the FAT Brands Foundation. To date, over 35 grants have been awarded to a wide range of nonprofit organizations in areas, including food insecurity, mental health, the arts, adults and children with disabilities, STEM, education and more. What makes it even more rewarding is that the grants hit close to home, all near FAT Brands locations. Further, during Q3, the team at Marble Slab Creamery and Great American Cookies were proud to announce a partnership with March of Dimes to show support and raise money for their NICU support teams during September NICU awareness month. To close, there are significant opportunities on the horizon for FAT Brands.

And in summary, we are in a strong position for continued growth. We have a veteran leadership team and a robust management platform and we possess the capability to seamlessly and cost effectively integrate new brands. And our pipeline for organic growth is healthy and continually developing, ensuring sustained growth for years to come, which will naturally delever our balance sheet. We look forward to updating you on our progress on future calls. We sincerely appreciate you joining us today and for your interest in FAT Brands. And with that, I would like to hand it over to Ken Kuick to talk about our financial highlights from the quarter. Ken?

Kenneth Kuick: Thanks, Andy. Total revenue during the third quarter increased 6% to $109.4 million, driven by a 4.8% increase in royalties, a 2% increase in company-owned restaurant revenues, a 228.5% increase in franchise fees and an 18.9% increase in revenues from our manufacturing facility. Cost and expenses remained largely unchanged in the quarter, increasing 0.5% from the year ago quarter. Included in cost and expenses, general and administrative expense decreased to $24.5 million in the third quarter from $28.8 million in the prior year period, primarily due to the recognition of $1 million related to employee retention credits during the third quarter of 2023 and lower professional fees related to certain litigation matters.

Cost of restaurant and factory revenues increased to $59.2 million in the third quarter of 2023, compared to $55.3 million in the prior year quarter due to higher company-owned restaurant and built factory revenues and the recognition of employee retention credits during the third quarter of 2022. Depreciation and amortization expense increased slightly to $7 million in the third quarter from $6.9 million in the year ago quarter, primarily due to depreciation of new company-owned restaurant, property and equipment. Advertising expense increased to $11.7 million in the third quarter of this year from $11.2 million in the year ago period, and these expenses vary in relation to advertising revenues. Total other expense, net for the third quarter of 2023 and 2022 was $32.6 million and $23.9 million, respectively, which is inclusive of interest expense of $29.7 million and $24.5 million, respectively.

Additionally, total other expense net for the third quarter of 2023 included a $2.7 million net loss on extinguishment of debt related to the repurchase of $78.4 million in aggregate principal amount of outstanding securitization notes, which will be held pending resale to third-party investors. In total, we have $218.3 million of retained securitization notes on our balance sheet available for third-party investors. Net loss for the quarter was $24.7 million or $1.59 per diluted share compared to a net loss of $23.4 million or $1.52 per diluted share in the prior year quarter. And on an as-adjusted basis, our net loss was $17.1 million or $1.14 per diluted share compared to a net loss of $16.3 million or $1.08 per diluted share in the prior year quarter.

And lastly, adjusted EBITDA for the quarter was $21.9 million, a $2.7 million decrease compared to $24.6 million in the year-ago quarter. And as a reminder, last year’s quarter included $7.2 million of employee retention tax credits. And excluding these credits, adjusted EBITDA increased $4.5 million or 26% over last year’s quarter. And with that, operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joe Gomes with Noble Capital. Please go ahead.

Joseph Gomes: Good afternoon. Thanks for taking my questions.

Andrew Wiederhorn: Hi, Joe.

Kenneth Kuick : Hi, Joe.

Joseph Gomes: So Andy, Ken, I wanted to start out on the quarter as your expectations going into the quarter, did the quarter results meet your expectations? Were they better or worse? And if they were better or worse, what drove the above or below where your expectations were for the quarter?

Andrew Wiederhorn: Well, I think we beat our estimates of earnings per share and our sales estimates. So we’re happy on both fronts there. And something that I think we continue to see success is new franchise sales. Having sold now 200 more stores in year-to-date, adding to our pipeline just shows the strength and interest of our franchise partners in growing the portfolio of brands. So that’s always a very good measurement of franchisee health.

Joseph Gomes: Okay. Great. Thanks for that. And I wanted to talk about same-store sales for a moment, if we could. Year-to-date, I think you said they were up 1.3%. But that’s down from the first quarter when same-store sales were 4.3% positive. So I was just wondering, maybe just give us what that driving same-store sales and how they were just for the third quarter? And any color there would be appreciated.

Andrew Wiederhorn: Yes. I mean we are seeing what I think everyone else has seen, which is a softer Q3 than Q2 or Q1 and Q2. It’s spotty as to which brand it might apply to. For example, Ponderoza and Bonanza Steakhouse chains are now up 18% or 19% year-to-date in comp same-store sales, probably because it’s a $15, $16 all-you-can-eat meal with a steak. But we’re seeing our snack brands and our dessert brands like cookies, ice cream, pretzels, hotdogs, those brands are up nicely. Again, maybe customers are moving their dollars around. So it’s just a little bit choppy. Burgers were a little bit flat for the quarter. And so I don’t know if it’s consumer spending across the board, but it’s just a little choppier than it was before. It’s still positive. And we’re still opening a lot of stores. We opened 150 new stores this year. So things are pretty good. It’s just a little softer than it was last quarter.

Joseph Gomes: Okay. And on the store openings, I know I think at the beginning of the year, you were using the 150 to 175 range. And I think in the transcript for the second quarter, you said 175. Now you’re at 150. Outside of just timing of opening, is there anything behind going back to the low end of that range?

Andrew Wiederhorn: It’s just pushing into Q1. It’s a function of equipment availability, of permitting delays, mainly a little bit of hiring delays and training on the manager side, but it’s just slipping a few units looking into the next quarter, and you get visibility early in the year of what people have under construction and their estimated completion dates and opening dates. And to be honest, it’s probably no different than remodeling your kitchen. It doesn’t always get done on time.

Joseph Gomes: Don’t I know that. The preferred, I’ll ask the question that after every quarter, you have the roughly $90 million that was due to be repaid and you haven’t yet. Any movement or anything new on the preferred that needs to be repaid?

Andrew Wiederhorn: So we have modified that preferred a bit, meaning that — we’ve traded some bonds for preferred and some of those bonds were sold to help redeem that preferred. There’s still ultimately $90 million outstanding, down from $137 million. So we’ve made substantial progress in it. It is a high visibility focus for us right now in terms of best use of capital. And so we do plan to work hard on redeeming that preferred with additional liquidity that we have. As Ken pointed out, we have over $200 million of available-for-sale securities on our balance sheet that gives us liquidity on top of our cash balances. And to the extent that we can raise liquidity from the bond portfolio at prices that we like and use that to redeem preferred we’ll do that.