FAT Brands Inc (FATAV) 2021 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Inc. Second Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please note that this conference is being recorded today, August 5, 2021. On the call today from FAT Brands are President and CEO, Andy Wiederhorn; and CFO, Ken Kuick. By now, everyone should have access to earnings release, which can be found on our Investor Relations website at ir.fatbrands.com in the press release section.

Before we begin, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them. Actual results may differ materially from those indicated by these forward-looking statements due to the number of risks and uncertainties. The company undertakes no obligation to update these forward-looking statements at a later date. For a more detailed discussion of the risks that could impact future operating results and financial conditions, please see today's earnings press release on our recent SEC filings.

During today's call, the company may discuss non-GAAP financial measures, which is believed 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 date.

I'll now turn the call over to Andy Wiederhorn, President and CEO. You may now begin.

Thank you, operator. Good afternoon, everyone, and thank you all for joining us on the call today. I'm hopeful that as we begin to put the COVID-19 pandemic in the rearview mirror, everyone is continuing to stay safe and healthy. This afternoon, we made our second quarter 2021 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, which closed on June 27.

I am especially excited to talk to you today given the great work we have done over the past quarter from strengthening our executive team to posting solid operating results, completing a transformative acquisition and capital structure work. I'll start with the additions of 4 talented members to our executive team. Allen Sussman, our General Counsel; Ken Kuick, our Chief Financial Officer; and Rob Rosen, our Executive Vice President of Capital Markets, who joined the company during the second quarter. These 3 come with a tremendous amount of experience and bolster our already talented executive team. They are already proving to be key additions to our team, and we continue to advance our strategic objectives.

Finally, with the acquisition of Global Franchise Group, now named the Fat Brands QSR division, we gained the leadership of Jenn Johnston, who will serve as President of our QSR division. Jenn has a long history of leadership heading the QSR brands that are now part of our portfolio.

Moving to operations. We are encouraged by our second quarter 2021 operating performance, which has shown a continued return to normalcy as many of our franchisees have reported sales in line with or above pre-pandemic levels, reflecting the strength of our brands, the impact of easing local dining room restrictions and increased dining room capacities in certain markets as well as the continued rollout of vaccines, especially in the United States and Europe. These hard-earned gains continue to be a testament to the tenacity of not only our franchisees, but also our employees.

While COVID is not completely in our rearview mirror and there is work to be done within the system, especially at the steakhouse brands in select international locations and in special venues such as cruise ships, stadiums and theme parks, I am pleased to report that our Fatburger, Buffalo's and Hurricane brands performed very well during the second quarter of 2021 with the brands posting system-wide sales growth of 68%, 49% and 72%, respectively, over the second quarter of 2020. On a same-store sales basis, we've seen a similar trend of 24%, 48% and 68%, respectively, over the second quarter of 2020.

More importantly, Fatburger and our Wings brands, Hurricane and Buffalo's are returning to pre-pandemic levels. When comparing same-store sales to 2019, Fatburger saw a 610 basis point improvement from the first quarter to the second quarter of 2021 from the -- and same-store sales increased 18% at Buffalo's and 24% at Hurricane when comparing the second quarter of 2021 to the second quarter of 2019.

We are encouraged to see a continued reopening of restaurants that were temporarily closed as a result of COVID. As of the end of the second quarter, 63 locations across the system remained temporarily closed compared to 107 at the end of the first quarter, primarily at Johnny Rockets, which has a significant number of locations in special venues and within the steakhouse brands. With scheduled reopenings anticipated throughout the third and fourth quarters of 2021, we believe we will see continued top line revenue improvement through the remainder of 2021.

Even with the reopening of dine rooms, delivery sales are showing resilience facilitated by the third quarter 2020 rollout of Chowly and HNGR. Augmenting these continuing operating performance improvements of the currently opened locations, both new construction and franchise sales are stronger than we've seen in many years. Our franchisees opened 10 new locations in the second quarter of 2021 and a total of 15 locations year-to-date with another 32 locations anticipated to open through the end of 2021 and that will be in addition to approximately 21 new units in the QSR division still to open this year on top of 18 QSR units already opened.

Turning to the development pipeline. During the second quarter, we signed 12 new deals for 99 locations, including a 50-unit development agreement in Mexico and a 40-unit development agreement in France. That brings the year-to-date total to 23 deals in 128 locations. We anticipate additional multiunit agreements in other domestic and international locations in the coming months. While we are pleased with the recovery of our existing franchisees, no less important to our corporate strategy is the identification of additional restaurant concepts to add to our platform.

We are thrilled to welcome the Global Franchise Group to the FAT family as we completed the $442.5 million acquisition in late July. These 5 iconic brands, Round Table Pizza, Marble Slab Creamery, Great American Cookies, Hot Dog on a Stick and Pretzelmaker, along with a manufacturing facility that supports the various Global Franchise Group brands give us tremendous opportunity to realize synergies, leverage cross-brand sales opportunities and provide incremental revenue opportunities through the manufacturing facility. This acquisition launches our new QSR division as a key milestone for us, increasing our portfolio to more than 2,000 units worldwide.

The hard work of integrating these brands into our system is underway, and we expect to realize material synergies as we execute on our integration strategy. Once the integration work is behind us and the brands returned to pre-COVID sales, we expect the QSR division to increase our EBITDA by approximately $40 million and bring our annual revenue to over $100 million.

On top of that, there are significant strategic opportunities to drive growth in these brands such as building their e-commerce capabilities, capturing third-party delivery potential within Round Table Pizza, expanding the manufacturing facility capacity, which today runs at only around 33%, cross-selling products between our now 14 brand portfolio and so many untapped other opportunities such as grocery and licensing.

On the acquisition front, we are not done yet. We are actively evaluating additional acquisition candidates to augment our existing brands and expect to announce another significant acquisition in the coming months. I think there will also be the opportunity to further refinance our securitization facilities in the coming year, thus lowering our cost of capital even further.

I'd like to express how appreciative I am for all the hard work that our team members, franchise partners and our employees have delivered during this challenging time. I'd also like to welcome the now QSR division of GFG to the FAT family and thank them for their hard work. We look forward to the continued recovery in 2021 as we lay the groundwork for a more normalized 2022.

Now I'd like to turn the call over to Ken to talk about our financial highlights from the quarter.

Thank you, Andy, and it's nice to join everyone. I'm excited about the opportunities we have ahead of us, and I look forward to continuing to work with Andy and the team on executing our strategic road map. I'll touch on our capital structure and the acquisition of GFG and then discuss the financial highlights of the second quarter and give some insight into our expectations for normalized performance.

As mentioned on last quarter's call, on April 26, we completed our third successful whole business securitization transaction in a little over a year with the completion of the offering of $144.5 million in 3 new tranches of secured notes. We refinanced our existing $80 million securitization notes, leaving approximately $57 million in funds available to us for working capital and future acquisitions. Equally important to the excess liquidity that it generated is the substantial reduction to our borrowing rate. On a blended basis, this securitization has a weighted average interest rate of 5.92%, a 283 basis point reduction compared to the 2020 transactions.

In the second quarter of this year, we executed an underwritten offering of 460,000 shares of Series B cumulative preferred stock, raising $8.3 million in net proceeds.

In connection with the $442.5 million acquisition of GFG in the third quarter, we issued $350 million of new notes comprised of 3 tranches with a weighted average interest rate of 6.8%, 3.1 million shares of Series B cumulative preferred stock and 2 million shares of common stock. This brings our total securitization to $494.5 million with a weighted average interest rate of 6.5%.

Future issuances of our Series B cumulative preferred stock and our common stock are available to us, which would provide us with additional flexibility to fund potential acquisitions, further reduce our cost of capital and drive shareholder value.

In terms of financial highlights, total revenue during the second quarter increased 167% to $8.3 million, reflecting continued improvements in royalty revenue across the system as we return to pre-COVID sales levels and has temporarily closed restaurants continue to open.

Costs and expenses decreased $2.7 million to $6.2 million in the second quarter. Cost and expenses in last year's quarter included noncash charges totaling $3.2 million related to intangible asset impairments. Excluding these charges, costs and expenses increased $515,000 due primarily to higher compensation expense as we filled out the management team and increased professional fees, partially offset by refranchising gains related to the refranchising of 2 Johnny Rockets' locations during the second quarter.

We returned to positive operating income of $2 million in the quarter compared to an operating loss of $5.8 million in the prior year quarter. Other expense was $10 million in the second quarter and was primarily comprised of $2.4 million in interest expense compared to $289,000 last year, resulting from the securitization I mentioned earlier and a $6.4 million net loss on extinguishment of debt related to the April securitization, partially offset by the forgiveness of our PPP loans during the quarter.

GAAP net loss for the quarter was $5.9 million or $0.48 per diluted share compared to a net loss of $4.3 million or $0.36 per diluted share in the prior year period. We also report our net loss on an as-adjusted basis, which excludes the after-tax impact of impairments, refranchising activities, acquisition costs and losses on extinguishment of debt. On an as-adjusted basis, our net loss was $1.1 million or $0.09 per diluted share compared to a net loss of $3.4 million or $0.28 per share in the prior year period.

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 performance. As we discussed during our first quarter earnings call, normalizing our 2019 top line revenue for a full year of ownership of Elevation Burger and adding pre-pandemic franchise revenue of Johnny Rockets, we would have anticipated seeing total top line revenue of $34 million to $36 million. Adding on pre-pandemic revenues for the GFG brands, we would have anticipated seeing an additional $55 million to $65 million for a total revenue of over $100 million. We anticipate that if the recovery from the pandemic continues this positive momentum, we would return to that run rate level by the end of 2021 or the beginning of 2022.

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

(Operator Instructions) Our first question comes from Joe Gomes.

So just wanted to kind of start here. We talked a lot about normalization. But as we're all aware, there seems to be a Delta variant that is coming around and some more mandates coming in -- potentially coming in, are you guys seeing any near-term impact on the store base over the past couple of weeks? Or is it still kind of more in recovery mode?

We're absolutely in recovery mode. We're not seeing it across the store base. We have an occasional store here or there that might have some employees that have gotten sick and they've had to shut down for a day or 2 to get everybody tested and adjust their staffing, but that's it. We are still seeing the supply chain issues that the industry suffers where you have shortages or outages from the broadline distributors like Cisco or PFG. They're not gigantic, they're just a constant headache for the management team to make sure that we have as many products as possible across the system. We think all of this will come to an end here as we get into September and the stimulus goes away in the 2.9 million people. With jobless clients are back to work, I think this all goes away. But we've got another month or 2 of it.

Okay. You touched on the manufacturing facility that came along with the Global acquisition. Maybe you can give us a little more idea. You said it's only operating at about 33% utilization right now. I mean where do you see the ability to take that facility and add on for that utilization rate increases?

Yes. There are a number of opportunities that are low-hanging fruit there. When I say 33%, it's only operating 1 out of 3 shifts, not operating a swing shift or a graveyard shift. It also has significant excess land available if we needed to knock down a wall and expand the amount of equipment in the factory. But the primary focus right now is to sell the cookie brands across all of our other FAT Brands family, brands where we can, and that will create additional manufacturing.

We also want to look on the pizza side at dough and see if the dough can be manufactured in the facility and save all those Western state franchisees from the horrible labor costs that they have to deal with. So I think there's a real opportunity there where it might not have been there before, but to manufacture dough in the factory might really save the franchisees. I'm not committing to that. I'm saying that we're investigating it, but we think there's an opportunity there.

And then also, there's cross-branding opportunities that will come, which will generate additional manufacturing. Then one more opportunity would be to manufacture for others or to buy an additional brand that has ingredients or menu items that can be manufactured in the factory. So there's a lot of options there.

And finally, the e-commerce business in the factory is something that was started a couple of years ago. It became the #1 seller at Amazon for cookies in terms of mail order or online ordering. And I think that's an opportunity that can grow and grow, and so we're going to focus on that. And I made reference to that when we talked about grocery and licensing. Because if you remember, Fatburger sold frozen patties at Walmart, and we got to a point where we're selling 8 million patties a year at Walmart, which is very significant, just not a big margin with doing business with Walmart.

But moving these brands, now that we have 14 brands exploring the grocery licensing aspect of these different brands for some of their products, Round Table Pizza, for example, with great brand equity, could be certainly in the frozen section for all kinds of products. So we will explore that as well as we get into the end of this year.

Okay. You mentioned that you were able to refranchise 2 of the Johnny Rockets' locations in the quarter. I know there was -- I think that you had a total of about 9 of them. What's the status of the other ones that were still company-owned?

Most of them are in escrow now to close over the coming months. There's, I think, only 1 or 2 not in escrow as we speak. And those -- we have potential buyers who're just not in escrow yet, but I anticipate that the majority of these stores will be refranchised before we end this Q3 period. And as you might know, on Global Franchise Group side and the QSR division, they refranchised many of the Round Table Pizzas, and there's just a sliver of around Round Table Pizzas left to go, which should close next week in terms of refranchising. So we'll be very, very clean as a franchisor when that completes. There are still 30-something of Hot Dog on a Stick locations that are corporate, and we'll look at refranchising those as well as we move into Q3 and Q4.

Okay. And one final one for me, and then I'll jump back in queue. The legacy store counts, I think in the May presentation, you had a number there of 646 stores and 38 under construction. And then in today's presentation says that the June -- end of June store count was 628. Maybe you can provide a little more color or detail there, where the -- are you seeing the store closures? I'm assuming it's probably the steakhouses, but any additional color you can provide there would be great.

Yes. Primarily, it's all the steakhouses, not really Fatburgers or Johnny Rockets. There's 1 or 2 that might have happened in the ordinary course. But there -- we had a 24-store operator in Puerto Rico close in the Ponderosa system. We had anticipated the closing for some time. They've teetered on bankruptcy for years. But the -- on a revenue basis, they're only paying us $200,000 a year in total revenue, like 75 basis points on your sales, not any material amount of money just by unit count. It looks weird, but that was something that's been out there for a long time and did occur. So that's changed the unit count slightly for that reason.

Right. And congratulations on the deal, the Global Franchise, I mean, just fantastic. Appreciate the time.

Yes. Thank you. We're very excited about it. And it's just transformative for FAT Brands in terms of our scale.

Our next question comes from Mr. Whitehead.

I've got 2 questions. My first one is, on June 29, 2021, written consent was taken to pay a dividend of 0.1 shares of Class B common stock for each share of Class A common stock. What is or was the ex-dividend date for this distribution?

Yes. That date is coming up in just a few days. There's an 8-K out there. Ken, you might have the date here handy, but we're very close to the date here. I'll get it for you in a second, if you don't have it, but it hasn't occurred yet.

Okay. And my second question is there. Will management commit to limiting themselves to encouraging our employees to get the COVID vaccine?

Sorry, could you say a little bit -- a commit to limiting themselves?

Yes. It's basically, are you going to mandate our employees to get the COVID vaccine?

Yes. We are mandating the vaccine for all FAT Brands employees, both in our corporate headquarters and those visiting our franchisees. We're an advocate of the vaccine, and we feel that it's important to protect our franchise partners and their employees as well as our own team.

Our next question comes from [Gregory Fortuna].

Okay. Just a couple of questions. Staffing, is that a pain point at this point? And if so, what are the effects for us?

The staffing is -- I've been quoted widely in the media of saying that staffing is a total nightmare, and it is. It's really more prevalent for franchisees opening new locations and really new franchisees opening their first location. As we have multiunit operators who opened additional units, they can borrow from their teams and staff as they needed -- as they need to and maybe some overtime and things like that, but they're getting through it. It's not really delaying the openings. But for new store operators, it's hard for new franchisees to find new managers because it's not really just about the money because wages are already so high.

So that is a little bit of a pain threshold. We anticipate that as we get through August and September and all the stimulus money is flushed through the system that this will significantly change. But there's a little bit of road still to go here.

Okay. So in the press release, and you've been talking about $55 million to $60 million run rate. Prior to that, I think it was like $15 million or so. So today, you had $2.1 million of EBITDA, which on an annualized basis would be $8 million. When will we see the numbers tick up? I mean they need to start getting to the $4 million, $5 million a quarter number. So when we can expect that?

So we still have in the pre-existing portfolio, the older portfolio before Global Franchise Group, you still have 10% of the restaurants closed, which all of that revenue goes right to the bottom line. There's almost no incremental expense. So we anticipate those remaining locations will open rather quickly here in the rest of Q3 and some of Q4. Some of it's the cruise ship lines and some of it's the theme parks or amusement parks, movie theater complexes that have not fully reopened yet, and a bunch of international venues.

And so I expect that over the coming 2 quarters, that will all smooth out and we'll be back to those pre-COVID levels. Also those remaining restaurants scheduled to open will be out there. So we should see everything really kicking a high gear in addition to, of course, the Global Franchise Group acquisition.

I expect that our Q4 numbers will be very representative of everything, assuming that COVID doesn't force new shutdowns. We'll be very representative of the runway we're talking about. And I think that Q3 will have a little bit of noise in it from still the continued closures and also from GFG not being fully integrated and not owning in the full quarter.

Okay. Andy, let's talk about debt for a second. So you've done -- you did a big deal, a great amount of EBITDA. You've taken on a lot of debt. You mentioned you're going to do another deal, which I assume will also bring debt. Can you -- and I feel like you're comfortable with the level you're at now and you're comfortable using this going forward. I'm thinking it's possible that others may not be as comfortable, especially with the possible next round of COVID. Can you sort of articulate why you think this is an opportunity, why you're comfortable with these debt levels, the coverage of the debt that you have and just make the general shareholder comfortable with what your plan is?

You bet. Thanks for the question. Our securitization facilities have performed fabulously for the last 1.5 years since we first issued them and then did another deal in September of 2020 by Johnny Rockets and then April to buy -- to refinance and create liquidity for this next acquisition. So we're seeing far in excess of 2x debt service coverage closer to 3 or more in some of the tranches. And we're not concerned about it at all.

If the Global Franchise Group acquisition, there's tremendous cash flow coming from this business as well and then there's also this additional manufacturing revenue that we anticipate bringing in, which will -- that business alone earns $15 million a year. And if we grow it just another 1/3, it's $30 million a year. So there's tremendous excess cash flow. That being said, I have every expectation that with the right stock price being achieved, which really should be in the $30, $40, $50 range using any of the comparable multiples to franchise entities, that will access the capital markets for additional equity capital and delever sometime in 2022, but at a significantly higher stock price, not at the current stock price. It doesn't make sense.

How much -- like is there a limit of -- like where do you draw the line as far as your debt? I mean are you going to -- is there a point where you say like...

We're running somewhere between 6 and 7.5x in terms of total leverage. Those are the limitations built into our securitization facility and that we're in compliance with those, of course. And so it's not crazy amounts of debt, but we'd rather be at the 5 to 6x than the 7 or 7.5x level. And part of that, of course, is driven by the EBITDA that we generate and the cash flow that we generate, and that number is just going up and up and up. There's tremendous unit growth. I know that we spoke of signing over 130 new franchise locations on top of like the 200 store pipeline that we have.

So there's a big, big -- and that's on the FAT Brands' legacy portfolio and then Global Franchise Group has their own pipeline of new stores. So I think driving the growth in revenue will come very quickly over the next 12 months, so we'll see significant jumps there, which just gives us excess cash flow and all the new store construction will contribute to that.

Okay. Two more quick questions. Andy, what's the biggest risk right now to FAT Brands?

Well, I think the biggest risk if you look in the rearview mirror would be shutdowns. And I don't think that anyone believes that's really going to happen again. It just didn't work the first time and the vaccinations have to work and that's really the role. So that would be the -- biggest limitation would be very, very difficult to revenues, and I just don't see that happening. And we look at the states that reopened quickly versus the ones that reopened slowly and sales were off the charts, and we didn't see recurrences there. And I'm talking about primarily Texas, Georgia, Florida and stuff like that. So I don't see that happening again, but I do see that, that's the risk.

I think this labor shortage issue and the supply chain issue are short-lived. And we do have -- there is some inflation out there. I don't know that the inflation pulls back. I mean the price increases that have taken place are what they are, but we've coached our franchisees to take price and maintain their margins. So I think that they will. I don't see the margin compression sneaking.

Okay. Last question. This is a tough one. So you just mentioned a few minutes ago that you thought our stock was undervalued versus comps. Can you maybe tell us why you think that is and what you think you could do or you and your management can do to bridge that gap for us?

Well, I think that this has been a thinly traded stock to begin with. That merger of our family office vehicle, 500 Capital at the end of last year increased the free float, which helped a little bit. The issuance of new common stock and new preferred stock in the acquisition of Global Franchise Group helps increase the float significantly and in additional transactions that we're considering, where there's a similar structure in place, I think that will also increase our float.

But the bottom line here is that we need to print the earnings that we are pointing to and those earnings need to come in a post-COVID or more normalized COVID environment. So I think that getting a quarter or 2 under our belt where people can really see those earnings, I think that's going to be important. I think getting additional investors into the stock to create -- they really haven't seen it before, paid attention to it will also help. That's a key part of our Q3 and Q4 investor outreach program will be to do that and tell that story.

Because if you look at the comp table of the franchising companies and we used to consider ourselves in the burger space, we comp against the other burger guys and we were very undervalued. But now we really have to look at the broader franchisor base. And there, you have multiples of between 20 and 40x, let alone the outliers, and we're not even in that bucket and we should be in that bucket. And so increasing our float will help doing some sort of a follow-on offering at some point will also help in getting a couple of additional sponsor investors, I think, will help create awareness to the common stock on what the value plate is.

But as you said, you wouldn't do a follow-on until the stock was significantly higher.

That's right. We wouldn't, not at diesel. Yes, there's no need to.

Okay. Well, listen, you guys had -- you've done everything you said you were going to do. I think you're setting us up for a great future and keep it up. Thank you very much.

Thank you for the questions and comments. Operator, does anyone else have a question?

(Operator Instructions) At this time, we have no further questions.

All right, operator. Thank you very much, everyone, for participating today. I appreciate your time and listening to our story and watching us continue to grow here, and we look forward to future calls and future announcements of new transactions as we get through COVID and I hope that everyone stays safe and healthy here. Thank you, operator. This concludes today's call.

This concludes today's conference call. Thank you for attending. Have a great day.