FAT Brands Inc (FATAV) 2020 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Inc. Fourth Quarter 2020 Earnings Conference Call. By now, everyone should have access to our earnings release, which can be found on our Investor Relations website at ir.fatbrands.com in the press release section.

(Operator Instructions) Please note that this conference is being recorded today, March 25, 2021.

Before we begin, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them. Actual results may differ materially from those indicated by such 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 press release and our recent SEC filings.

During today's call, the company may discuss non-GAAP financial measures, which it believes can be useful 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 comparable GAAP measures are available in today's earnings release.

Today on the call from FAT Brands are President and Chief Executive Officer, Andy Wiederhorn; and Chief Financial Officer, Rebecca Hershinger.

I would now like to turn the call over to Andy.

Thank you, operator. Good afternoon, everyone, and thank you all for joining us on the call today. I hope you're all continuing to stay safe and healthy as we begin to round the corner of the COVID-19 pandemic and look forward to brighter days.

This afternoon, we made our fourth quarter and fiscal 2020 financial results publicly available. Please refer to our press release and our earnings supplement, both of which are available in the Investors section of our website at www.fatbrands.com. Both contain additional details about the quarter and full year, which closed on December 27.

Just about 1 year ago, when we announced our 2019 results, we were 6 weeks into the pandemic. During that call, I outlined a number of initiatives we were taking as a company to assist our franchisees in navigating through what we've come to know as one of the most challenging environments our industry has ever faced.

I'm pleased to be able to report that through those initiatives and the tremendous efforts of our franchisees and our employees, our franchisees' restaurants have and are continuing to rebound. And FAT Brands is poised to continue this momentum throughout 2021 and into 2022.

On the operational front, our franchisees reported system-wide sales of just over $107 million for the fourth quarter, fueled by the continued easing of COVID restrictions, representing a 46% increase over the third quarter. As I mentioned during our third quarter call in September, we began the rollout of Chowly, a third-party delivery aggregator and HNGR, a native online ordering and delivery as a service platform across our brands.

During that first month, we saw an increase in delivery sales of over 40% for domestic Fatburger and co-branded Fatburger and Buffalo's Express locations, with December showing a 65% increase over pre-rollout levels. While we all eagerly anticipate the full reopening of dining rooms, technology-enabled delivery models have proven to be a valuable revenue generator for our franchisees.

In addition to improving performance levels in our franchisees currently opened locations, both new construction and franchise sales are fueling the first pillar of growth for FAT Brands organic growth.

Despite the pandemic, we are seeing above-average levels of activity on both fronts. Our franchisees opened 29 locations in the fourth quarter with 62 openings for the full fiscal year inclusive of Johnny Rockets locations that opened prior to our ownership during last year.

Similarly, our development pipeline is strong. We've signed multiunit development deals in France, Kuwait and the Democratic Republic of Congo in addition to individual domestic locations in Illinois, D.C. Metro area, California, Arizona and Alabama. Combined, these represent up to 56 new locations globally over the coming years and add to our existing pipeline of more than 200 units to be built.

I'd now like to spend a few minutes talking about FAT Brands second pillar, acquisition. By highlighting our most recent acquisition, as of today, we've owned Johnny Rockets, the iconic fast casual burger and shake brand for 6 months. In that time, we have fully integrated it into our platform, rightsizing the organization to maximize potential growth and launching a number of strategic initiatives so that our franchisees can better reach and serve their customers.

As I mentioned previously, third-party delivery is a cornerstone of our model for our franchisees, and we partnered with Olo to launch native or direct online ordering across domestic locations. We've also made a series of many changes to align with consumer preferences by introducing plant-based proteins.

We've been pleased with the financial performance of Rockets thus far, and we expect the trends to improve further, especially in the second and third quarters of 2021 as we anticipate that Rockets locations in special venues, such as theme parks and cruise ships and movie theaters will begin to reopen.

As 2021 continues, we are actively pursuing other concepts to acquire, which could similarly benefit from having a strategic and experienced operator as their franchisor and would be accretive to our platform. Before talking about our 2020 results and providing some insight into our expectations for normalized performance, I would like to recap the changes to our capital structure that occurred during the year.

In March of 2020, we closed our $40 million whole business securitization that not only provided us with a lower borrowing cost, but also included an accordion feature that allows us to add additional brands into the facility. In September of 2020, we did utilize the feature, adding another $40 million of subordinated notes for the acquisition of Johnny Rockets and additional working capital.

In July of 2020, we closed a $9 million public offering, Series B cumulative preferred stock, a perpetual preferred security. Concurrently, we converted approximately $7.5 million of other preferred securities, which were all classified as debt on our balance sheet into the Series B cumulative preferred stock, all of which is now treated as equity and trades on the NASDAQ under the symbol FATBP for Series B and P for preferred.

Lastly, in December of 2020, we finally completed the merger with Fog Cutter Capital Group, which prior to the merger, had been required to hold 80% of the FAT Brands' common stock. One of the key benefits of the merger is the lifting of this restriction, which will allow us to use common stock to make future potential acquisitions in addition to the continued utilization of the Fog Cutter net operating loss carry forward which is approximately $100 million.

Between the whole business securitization, the Series B cumulative preferred stock and our common stock, we have many levers to pull that provide us with flexibility to fund potential acquisitions and further reduce our cost of capital and drive shareholder value. As outlined in our earnings release, total revenues were $6.5 million in the fourth quarter of 2020 compared to $5.2 million in the fourth quarter of 2019.

The revenue performance overwhelmingly reflects a decline in royalty revenue related to the impact of COVID-19, which otherwise would have been around $9 million for the quarter. Costs and expenses increased to $14.4 million in the fourth quarter of 2020 compared to $5 million in the fourth quarter of 2019. Included in the $14.4 million is an impairment charge taken against certain of our goodwill and intangible assets.

During the pandemic, our buffet concepts, Ponderosa and Bonanza Steakhouses, have struggled. While we believe in the brand's ability to be successful in the future, as restrictions continue to loosen and greater portions of the population become vaccinated in a measure of conservatism, we have impaired portions of the brand's intangible assets to reflect the effects of the pandemic.

Looking strictly at general and administrative expenses, we incurred $4.3 million in the fourth quarter of 2020 compared to $3 million in the prior period. This increase of $1.3 million was attributed to increase in occupancy costs, legal expense, additional amortization expense related to the intangible assets of Johnny Rockets and bad debt expense related to the COVID-19 global pandemic, marginally offset by decreases in travel and entertainment.

Other expense was $2 million in the fourth quarter of 2020 compared to other expense of $900,000 in the fourth quarter of 2019 and consisted primarily of net interest expense of $1.6 million in 2020 compared to $1.2 million in the prior period as well as $535,000 of expenses related to the acquisition of Fog Cutter in the fourth quarter of 2020 without comparable activity in 2019.

The $400,000 increase in net interest expense related primarily to the additional interest expense associated with the $40 million of Series 2020-2 fixed rate asset-backed notes sold in September 2020, the proceeds of which were used to fund our acquisition of Johnny Rockets as well as for general corporate purposes.

The combination of these revenues and expenses resulted in a net loss of $7.7 million in the fourth quarter of 2020 compared to a net loss of $1 million in the fourth quarter of 2019. While we are not providing guidance for 2021 on this call, I can provide some color on where we anticipate ending 2021 and beginning 2022, using 2019 as a guideline for pre-COVID and post-COVID performance.

As you know, we only owned Elevation Burger for half of the year in 2019. Normalizing our 2019 top line revenue for a full year of ownership of Elevation Burger, we would have anticipated seeing revenue of at least $23.5 million to $24 million in 2020, had it not been for the global pandemic. Layering pre-pandemic franchise revenue of Johnny Rockets onto this base case, we would have anticipated seeing an additional $10 million to $12 million in top line revenue to bring us to a total of $34 million to $36 million of total revenue.

We anticipate that if the recovery from the pandemic continues its positive momentum, we will return to that run rate level by the end of 2021 or the beginning of 2022. So our 2019 EBITDA adjusted at $7.7 million plus another $1 million or so for Elevation Burger, takes you to $9 million of EBITDA at the end of 2019 adding another approximately $9 million to Johnny Rockets would get you to basically an $18 million run rate on a post-COVID basis or a pro forma pre-COVID basis with the acquisition of Johnnie Rockets.

Before we open the call for your questions, I'd like to express how appreciative I am for all the hard work that our team members, franchise partners and their employees during this challenging past year put in. We very much look forward to this recovery phase in 2021 and beyond.

And with that, operator, please open the line for questions.

(Operator Instructions) And our first question today will come from Joe Gomes with NOBLE Capital.

A couple of quick accounting type of questions here first. In the release, you talked about advertising costs were in excess of collections. Could you just give us a little more color what's going on there? And do you -- would you expect going forward, that normally, those are somewhat equal on a quarterly basis of -- would you expect that to continue being on an equal basis?

Very good question. So normally, they're matched up and they perfectly match the dollar of revenue and dollar of expense for advertising and marketing expense. Here, the losses attributed to COVID-19, basically, we enter into contracts for certain services with third-party providers, it could be PR, it could be something else, advertising related and -- or social media related. And we matched that with the expected revenue from the brands as the franchisees pay marketing assessment that matches that.

In this case, sales were so drastically affected by COVID-19 to the negative, we didn't collect as much revenue as we would have otherwise normally collected. And so there's a deficit, and we need to be write-off that deficit, we can't carry that as a receivable. However, I anticipate that we will recover that out of future marketing funds and other funds that are generally associated with advertising in the coming quarters.

You're not expecting to see that same -- and I don't expect to see that happen again in 2021 or 2022 because we will budget accordingly and contract accordingly, obviously not expecting a COVID-19 relapse.

Right. Okay. And then also, you had a fairly substantial refranchising loss (inaudible) [kind of combine 2 here]. If you could give us a little more detail on that. And the Johnny Rockets locations that you owned upon acquisition, have they all been sold at this point in time, are refranchised at this point in time?

So 2 different answers here. On the refranchising loss due to COVID-19, we had a couple of sales that were in process where these were EB-5 sales, the sales to foreign investors who are getting the green card and buying the restaurant and we manage it for them, as we've talked about before. And here, franchisees or these owners put up money, they failed to pay the rest of the money because of COVID-19, and we either canceled the sale or we closed the restaurant.

We closed a couple of dollar restaurants. It was our Mediterranean concept because they weren't performing under COVID-19 and the investor was not funding their ownership for any losses that restaurant was suffering. So that's really a onetime thing. We don't expect to see that going forward, but that's what that number relates to.

And then with respect to Johnny Rockets, all of the 9 Johnny Rockets restaurants that we acquired in September of last year are in escrow to be sold. None of them have actually sold and closed yet, although we anticipate all of them to go by Q2. So they should all be closed by the end of Q2.

And that should not be at a loss, that should be at a gain.

Okay. That would be fantastic. And then across the different brands, how many locations are still closed at this point in time?

Temporarily closed, there's over 100 locations. Many -- there's a bunch of international locations that are still closed. We have now -- 175 units came over internationally with Johnny Rockets and another 70 in Canada and another 30 around the world. So we have quite a bit of international exposure.

So there's still more than 100, between 100 and 125 locations still temporarily closed internationally. And some of those markets you read about on the news are recovery is better than others. And so some in Italy, some in places like Brazil or Peru and markets like that, where they've been open, but it just depends on the market. So we anticipate over the summer that this will all calm down to a great degree.

Okay. And one last one, and I'll jump back in queue. You've talked about the securitization and potentially refinancing that here, I think, in the first half of this year. Can you give us just a little more color on what your current thoughts are in terms of when you might look to do that?

Yes, we are in the middle of the refinancing of the securitization facility at a substantially lower rate than we were currently paying from the deal we put in place last year and then grew down upon again in September. We anticipate closing that in the next 30 to 45 days and it's very far along. We're just putting the final touches on it. We needed to get our 10-K on file, which will happen on Monday, which is part of that final disclosure for selling those bonds. And it's going very well at the rate, again, will give us substantial savings, provide additional liquidity for future acquisitions and is being led by a major New York Investment bank.

And our next question will come from Roger Lipton with Lipton Financial Services.

So if I understand it right, the stores that are still closed the 100, 125 are mostly international. Johnny Rockets, is that the picture in terms they will closed currently, still closed?

Yes. I mean there's some Fatburgers in the Middle East that are temporarily closed. It's mostly Johnny Rockets or some Ponderosas that we consider to be international like Puerto Rico, even though that's part of the U.S., it's offshore. And there are some in Canada that are also temporarily closed, not a lot though.

Right. And you got any feel for when some of the -- when those international Johnny Rockets will start to come back on stream at all?

It's happening quickly now. It's mainly the special purpose venues in those markets. We have a lot of theme parks, a lot of cruise ships, amusement parks, movie theaters, things like that. It's not really just the regular restaurants, it's those special venues that slow it down.

Okay. And the...

Well, I think by Q2, Q3, everything will be open in Q2, Q3.

Okay. So you mentioned 56 new signings. It sounded like those were recent signings over the last 3 months or so, is that what you were saying?

Yes.

Okay. So that's...

Our franchise sales have been off the charts, just tremendous momentum of existing restaurant operators and some new restaurant operators coming in, buying new development rights for brands that we have, and they have very aggressive schedule.

So we're going to see a very strong organic growth on top of any acquisitions we make. And remember, organic growth is free, right? We're not paying for those additional stores and that additional revenue. It's -- I always try to put a goal of 10% a year of new organic growth. So if we have almost 700 restaurants. We can open 70 more in 2021, that's sort of my goal. You might -- you'll have a few closures, but the new restaurant far exceed the closures. So it's great organic growth.

All right. You said that quickly. So in terms of a guesstimate for how many stores might open this year? Was you saying...

I always shoot for 10%. So if we have almost 700 stores, that would be 70 new stores. We have 50 or so on the -- we've opened half a dozen so far, and we have 50 or so on the chalkboard for construction. We'll see how construction goes with COVID that is with -- they're underway.

And roughly, what would be the breakdown of brands? If you -- should we open 70, how would that break between brands?

It's predominantly Fatburger and Johnny Rockets. There are some Hurricanes. There's some Yallas. There are not any new Ponderosas. There's one new Buffalo's and some -- and 1 or 2 Hurricanes.

Right. Okay. So your 2 biggest brands will be the biggest expansion vehicles, which is...

Yes. I anticipate -- I do anticipate more growth on the Hurricane side, Hurricane and Buffalo's Cafe, which are virtually identical brands, have just been rock stars throughout the pandemic. They're trending at like 110% to 115% of normal same-store sales. So they've just been killing it. And we have franchisees planning to develop additional units. They're just -- there's only 70 of them. So even by percentage, if they open 5 or 6, is a big jump.

Right. Okay. And lastly, at the moment, what can you say about the sales trends this year so far? [We're all set] I know there's still a lot of -- everything is in the state of flux.

Sales trends this year are they're a hockey stick. They're rebounding like crazy. And our sales went from -- it could be down 30% to down 25% to down 20%. I mean they're coming back very quickly across most of the brands. It's still the special purpose venues that are trying to get back up and running, the cruise ships, amusement parks, theme parks, things like that by -- and movie theaters by the end of Q2, in Q3.

And so -- but the regular restaurants are comping way over where they were -- they're all in the [black] so they're comping where they were over pre-pandemic level. So we're seeing very, very strong comp levels in existing restaurants. So a big demand out there. I don't believe that, that's all attributed to the stimulus checks that just can't hold up after a week. And it's very...

All right. So setting aside the period we're in now, as the comparisons get ridiculously easy. January and February were sequentially much improved from the fourth quarter?

Yes, absolutely. And if you think back, right, to when the vaccine started rolling out when reopening started occurring in markets other than Florida and Georgia and Texas, you really saw things start to loosen up. So it's very -- it's directly related to, of course, reopening. You can only do so much business by delivery and to go. So very, very strong. It continued. It has not been like all of a sudden 1 week, it's been every week building, and we feel very good about it.

(Operator Instructions) And this concludes the question-and-answer session. I'd like to turn the call back to Andy.

I think there's one question pending.

All right. Yes, I do see that question now. And that will be from [Gregory Fortunoff].

Andy, a couple of questions. I'm sorry I got in late. I was having some problems signing in. Did you give an EBITDA forecast for the year now that you're getting a better handle on the trends?

Yes, I did. You can replay the transcript. But basically, what I said was on a post-COVID basis, whenever we're fully open, again, we should be running around $18 million or $19 million of EBITDA and I bridged how we got there from the 2019 levels to the acquisition of Johnny Rockets and the related EBITDA from Johnny Rockets to get us to somewhere around $18 million or $19 million run rate as soon as we're back open, whether that's Q3 or Q4, who knows, but we're well on our way to it and excited about it.

And our next question will be a follow-up from Roger Lipton with Lipton Financial services.

You mentioned very quickly the third party, the delivery and the digital ordering, and you mentioned Chowly, which I'm not familiar with at all. And you also mentioned Olo. How do they -- again, if it's a complex answer, we could talk about it off-line, but how do they integrate? And what's happening there?

Yes, sure. So you are familiar with how Uber Eats Postmates, DoorDash, Grubhub, everybody works as a third-party delivery service. And what Chowly does is it aggregates all of those third-party ordering platforms and directly connects with the POS system. So that it goes directly into it in that way, you're not taking tablets by the registers you probably have seen years ago, and then they have to reenter the order and you can lose sales and have unreported sales and all kinds of things. So Chowly is a delivery aggregator.

And then Olo and HNGR are online ordering providers where you can go direct to the brand. So you might come into the brand through Uber Eats or Postmates or Grubhub or something else. But if you reorder through Olo or HNGR, you're going directly into the POS system of the franchisee and placing your order, and you're not having to pay a franchise to operator is not having to pay the third-party delivery company for sourcing that component, right, where you're getting that lead. You still use the delivery services for that last mile of delivery. You're just not paying them for sourcing the leading. And so it's very beneficial to the operator. They save a lot of money.

And Olo and HNGR do that?

Yes.

And Chowly aggregates, but you have to pay the delivery fee, the delivery...

Yes. Chowly -- right. Chowly is funneling it directly into the POS system, which is from a franchisor's perspective, very important, so you don't have sales that don't get keyed into the register. It also make it seamless. You don't have like order accuracy problems where they've keyed in wrong, it's very important.

And so you're using -- you use these systems in parallel on a parallel basis?

Yes. All of them. Yes.

Is more on the same -- in the same facility, can we -- we can use it all?

Yes. That's correct. Operator, I don't see any other questions. So I'd like to thank everyone for participating in today's call. And again, remind you to visit our Investors section of our www.fatbrands.com website to see our earnings supplement, which is a detailed PowerPoint about the fourth quarter and 2020.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.