Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded today, May 11, 2021. On the call today from FAT Brands are President and Chief Executive Officer, Andy Wiederhorn.

And I would now like to turn the call over to Lynne Collier of ICR to begin..

Thank you, operator, and good afternoon, everyone. 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. 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 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, 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.

Reconciliation for comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andy Wiederhorn, President and Chief Executive Officer..

Thank you, and good afternoon, everyone, and thank you all for joining us on today's call. 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 first 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 March 28.

Our first quarter 2021 operating performance has shown a modest return to normalcy for FAT Brands as many of our franchisees have begun reopening and reporting sales in line with pre-pandemic levels, reflecting the continuing easing of local dining room restrictions and increased dining room capacities in certain markets as well as the widespread rollout of the vaccines, especially in the United States and Europe.

These hard-earned gains are a testament to the tenacity of not only our franchisees, but also our employees as we collectively navigated the most challenging environment our industry has ever faced. While there is still substantial work to be done within the system, especially at the Steakhouse and buffet brands.

In the 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 well during the first quarter of 2021, with the brands posting system-wide sales growth of 18%, 19%, and 16%, respectively, over the first quarter of 2020.

On a same-store sales basis, we've seen similar trends of 6%, 26%, and 20%, respectively, over the first quarter of 2020.

More importantly, our Wings brands specifically are returning to pre-pandemic levels with same-store sales increases of 9% at Buffalos and 10% at Hurricane when comparing to the first quarter of 2021 back to the first quarter of 2019, a significant accomplishment.

At the end of the first quarter, 107 locations across the system remained temporarily closed, primarily at Johnny Rockets, which has a significant number of locations and special venues and within the Steakhouse brands.

With scheduled reopenings anticipated throughout the second and third quarters of 2021, we believe we will see continued top line revenue improvement through the remainder of 2021. Even with the reopening of dining rooms, delivery sales are showing resilience facilitated by the third quarter 2020 rollout of Chowly and HNGR.

As of the end of the first quarter of 2021, third-party delivery sales have increased 70% over the third quarter of 2020 pre-rollout levels. Augmenting these continuing operating performance improvements of the currently owned locations, both new construction and franchise sales are stronger than we've seen in many years.

Our franchisees opened 5 new locations in the first quarter of 2021 and a total of 8 locations year-to-date, with another 36 anticipated to open through the end of 2021. Turning to the development pipeline.

In addition to the previously announced multi-unit development deals in France, Kuwait, and Africa, we recently signed a multiunit development agreement in California and Arizona as well as in Mexico marking FAT Brands entry into that market, and we anticipate additional multiunit agreements in other domestic and international locations in the coming weeks.

While we are pleased with the recovery of many of our franchisees as well as the 2 indicators of organic growth, no less important to our corporate strategy is the identification of additional restaurant concepts to add to our platform. We are actively evaluating additional acquisition candidates to augment our existing 9 brands.

Before talking about our first quarter 2021 results and providing some insight into our expectations for normalized performance, I'll recap the significant change to our capital structure that occurred just 2 weeks ago.

As you recall, in March of 2020, we closed our whole business securitization and issued 2 tranches of senior notes, a $20 million in senior note securities and $20 million in senior subordinated notes.

That transaction not only reduced our borrowing costs from the previous levels we had, but also included an accordion feature that allows us to easily add additional brands into the facility.

We took advantage of the accordion structure in September of 2020 and we added another $40 million of subordinated notes used for the $25 million acquisition of Johnny Rockets, with the remainder providing additional working capital.

After the September 2020 transaction, the blended borrowing rate for the 3 tranches of secured notes was 8.75% per year. 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 $144,500,000 worth of 3 new tranches of secured notes.

We refinanced our existing $80 million securitization notes, leaving approximately $57 million in available funds to us for working capital and future acquisitions. No less important than this liquidity is the substantial reduction to our borrowing rate.

On a blended basis, the 2021 securitization transaction has a weighted average interest rate of 5.92%, a 283% basis point -- 283 basis point reduction compared to the 2020 transactions. I wish it was 283%.

In addition to the 2021 whole business securitization, the issuance of additional shares of our Series B Cumulative Preferred Stock and the use of our common stock are available to us, which will provide us with additional flexibility to fund potential acquisitions, further reduce our cost of capital, and drive shareholder value.

As outlined in our earnings release, total revenues were $6.6 million in the first quarter of 2021, a 50% improvement as compared to $4.4 million in the first quarter of 2020.

Our revenue performance reflects improvements in royalty revenue across the system as COVID-19 restrictions ease, dining rooms reopen, and the vaccines become more widely available and utilized as well as the acquisition of Johnny Rockets.

Costs and expenses increased to $6.5 million in the first quarter of 2021 compared to $5 million in the first quarter of 2020. Our general and administrative expenses totaled $4.9 million in the first quarter of 2021 compared to $3.5 million in the prior period.

This $1.4 million increase is attributed to increases in compensation as we ramp up staffing for continued recovery and growth as well as increased legal expenses and higher depreciation and amortization expenses related to the acquisition of Johnny Rockets without comparable activity in the prior period.

These increases in certain components of G&A expenses are marginally offset by decreases in accounting and travel and entertainment expenses. Other expense was $2.7 million in the first quarter of 2021 compared to other expense of $2 million in the prior year. Our interest expense was $2.8 million in both periods.

The combination of these revenues and expenses resulted in a return to positive income from operations of $104,000 in the first quarter of 2021 compared to a loss of operations of $578,000 for the first quarter of 2020, with our net loss remaining flat at $2.4 million in both periods.

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 pre-COVID as a guideline for performance. As I discussed during our fourth quarter 2020 earnings call a few weeks ago, 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 revenues of at least $23.5 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 revenues to bring us to a total of somewhere between $34 million and $36 million in top line revenue on a pre-COVID or what we hope will be post-COVID basis.

We anticipate that if the recovery from the pandemic continues its positive momentum, we'd return to that run rate level by the end of 2021 or the beginning of 2022.

So by example, if 2019 adjusted EBITDA was $7.9 million, and we would have gotten another $1 million from a full year ownership of Elevation Burger, that's about a $9 million run rate at the end of 2019, with approximately $10 million to $12 million in incremental EBITDA from Johnny Rockets, let's say -- sorry, $9 million to $10 million in Johnny Rockets, let's say it's somewhere between $18 million and $20 million of EBITDA run rate going forward on a post-pandemic basis, whether that kicks in, in Q4 or the beginning of Q1 next year, that's what our run rate is anticipated to be.

Before we open the call for questions, I would like to express how appreciative I am for all the hard work that our team members, franchise partners, and their employees have delivered during this challenging time. We look forward to the continued recovery in 2021 as we lay the groundwork for a more normalized 2022 and future acquisitions.

With that, operator, please open the line for questions..

[Operator Instructions]. Our first question is from Joe Gomes with NOBLE Capital..

So I apologize, I got on the call a little late, had another one run over a little bit. So if I'm asking something that you already talked about, I apologize in advance.

But on the acquisitions, can you just kind of give us a little more color or timeframe of what you think is going to happen? So you just raised a lot of dry power here through the recent refinancing.

I'm sure you want to put that money to work thoughtfully, but you would like to get it to work?.

Absolutely. Great question. Very important for everyone to consider. We raised the additional capital, not only for liquidity, but for sure, for additional acquisitions. We are anticipating announcing 1 or 2 acquisitions in Q2 of 2021, so right away.

And we hope that we'll get to the final definitive agreements and be in a position to make those announcements shortly..

Here's kind an oddball question for you, but I was at a restaurant a week ago or so and went to order some wings and instead of having a price, it said market price. And obviously, I've seen the new stories about some shortages.

How is that impacting your franchisees, this shortage of chicken wings?.

With every chicken comes two wings. That's it. So you really want to sell a lot of other chicken products too, if you can. But the wing shortage is nationwide. We are really fortunate that we haven't had product outages, but we have seen prices increase, and we have to have our franchisees take price to maintain their margin.

We have very strong contracts with our suppliers, different contracts for different brands and regional. But we haven't had the outages. So we're fortunate, perhaps more than most. But let's hope that -- the problem really isn't the availability of chicken or the wings.

It's the availability of labor in the chicken plants to process them and get them distributed. So that's really the same problem you see on TV, you read in the paper, you hear people talking about, that's really what's driving this.

And we're very hopeful that that comes back to normal here by the time the summer is over where the benefit sort of run out, the unemployment benefits..

And kind of a follow-up to that, obviously, would then be -- again, I mean, you cannot drive past any type of a restaurant with a help wanted sign sitting outside.

Is that having an impact, again, on the franchisees and either opening fully for sit down where that's now available? Or maybe even could that crimp some of the new openings that we're hoping for here this year?.

Well, so yes, I think it affects everything, but just to a limited extent, and it's just a matter of time. So for example, our different brands opened approximately 60 locations, slightly more than 60 locations in 2020 with a lot of demand and units under construction coming out of 2019.

We'll end up with 40 to 50 units this year because everything got a little bit slower during 2020. So the plans for 2021 are feeling that. On the labor front, you have certain franchisees that, for example, may have operated a 24-hour location, and they've eliminated the graveyard shift because that may have been their slowest shift.

And if labor is tight, they're repositioning their staff, so as to be able to have enough employees for the day shift, the regular shift and the evening shift. So we see some things like that. These are all small annoying factors. But look, the fact is that our brands came through the pandemic.

And other than the pain threshold at Ponderosa and Bonanza, where they really had more closures than any other brand, the rest of our brands hardly had any closures on a permanent basis.

The brands will rebound, the restaurants will rebound, the operators have really paid attention to the guidance we've tried to give them about getting PPP loans, getting SBA, economic injury disaster loans, looking for the restaurant relief packages or the employee retention tax credits and trying to manage their business, manage their margin, negotiate deferred rent payments with their landlords and then use out PPP money to pay it.

So I think that what I'm trying to say is that there are a lot of these little labor issues or food cost issues that are annoying.

I think that the operators are really lucky that there's restaurant relief money out there, and we've encouraged all of them to take advantage of it because they can and it's there and it certainly helps them get caught up and get reengaged.

And so they're going to have to work through the labor issues over the next 3 to 6 months, but those issues will cure themselves soon enough, and we'll be on our way..

One last one for me, and I'll get back in queue. Did you talk any on the call about the refranchising of the owned Johnny Rockets locations? I think last time that was something you thought was going to occur pretty soon..

Great question, and I did not talk about it. But all of those 9 restaurants are in escrow to -- sales to be completed. We completed 1 or 2 of them already in Q2, and we have the balance, the other seven, which we anticipate completing all or almost all of them before the end of the quarter. They're all various closing dates.

So that's gone very smoothly. We've generated good sales prices for those stores and the refranchising effort. And so we're very happy with that. And thank you for that question because I did not mention it..

And our next question is from Roger Lipton with Lipton Financial Services..

In terms of the deals you're looking at, can you give us any characterization at all? I know, obviously, nothing is done.

In terms of are they fast casual or quick service or full-service and, I mean, are the sellers typically, are they -- are these private equity owners you're negotiating with or family businesses? And lastly, in the same vein, you've got several different currencies to work with.

Your stock is higher than it was, your preferred is much higher than it was. And of course, you've got some cash available. So what's sort of your preference in terms of which currency you'd like to use..

Yes, those are all good questions. So we are looking at a variety of different brands. We have 9 or 10 different acquisition targets that we're presently evaluating.

I think, like I said earlier, there are two, hopefully, that we can announce during Q2 and possibly another 1 or 2 before the end of the year, but at least a couple of them and may range from fast casual to casual similar to brands that we own that are performing very well. So on both spectrums, and one of them is multi-brand.

So it's a little bit more complex than just -- than one brand, but it has significant scale. So I really anticipate that we'll be active in the acquisition front. To give you -- to be more specific to your -- the second part of your question, we have had a robust year negotiating with private equity sellers. They seem to be very practical.

They're focused on making the deal, completing the transaction. I've seen founders be much more emotional during 2021, end of 2020, than I expected, some of them fixated on 2019 prices or valuations and really just not ready to make a deal.

There's also kind of a counter influence, which is all the government subsidy programs that are available to deal with COVID-19, some of those founders are saying, geez, I should just take the money from PPP or from the $28 billion relief fund and take that money first, put it in my pocket, clean up my balance sheet and then make a deal next year.

I don't think I should make a deal the same year because they've got to get forgiveness of that money. So there are some really interesting things going on, but private equity is definitely active. They're definitely active selling. They're also buying, I mean, I've seen some competition on some deals. But we're not looking to find dining.

We're not going to go too crazy ethnic brands where we can't manage them properly because it takes such a highly -- high skill set in this labor market to manage something, for example, like sushi or Korean barbecue or something which is complex to franchise. But really just straight up the stairway, we think there are some great opportunities..

And I would -- just doing the article, actually, as we -- today, I was working all day in an article about the SPACs that are out there. And there are still 6 restaurant oriented SPACs that are looking for deals. But there -- I wouldn't imagine you're running up against them as competition.

I mean, they raised $200 million at a shot, and they're going to leverage that. I mean, one of them that I was writing up is looking for $40 million of EBITDA to consider. So you're somewhat below. So I would imagine you're a bit below that kind of range.

So you're not competing?.

Yes. I mean, I think the way to look at it is that the problem with the restaurant SPACs, and we've looked at our own restaurant SPAC and decided that we really have enough currency available with our preferred stock and our common and the cash we have in our securitization facility.

And that is that you've got to have like a hockey stick growth story to destock and really sell into the stock like that. And so you're either going to get a crazy high valuation, which is problematic as we all know, to get a deal done like that.

And so I don't think that those restaurant stocks have found -- restaurants SPACs have found targets that have the hockey stick growth story right now coming out of COVID and going into 2021, where many of those targets will justify that valuation. And so I think that's a good fact for us that we're not really competing against them..

It's going to be interesting because you've got BurgerFi, of course, it was done. And now the second one, for the deal is Tilman Fertitta is $6 billion company. But the other 6 are out there shopping. It's going to be very interesting to see how it evolves..

[Operator Instructions]. Our next question is from Gregory Fortunoff, a private investor..

So I just want to follow-up on something Joe was getting at about the prices going up, commodities, I'm sure, paper and all of that stuff.

So are you planning to do any kind of price increase like nationwide? Or do you do that? Or do the stores decide on their own? Or how does that work?.

Yes. So as mandated by law, the franchisees have to set their own pricing.

And what we can do is kind of give them guidance as to like here's the Tier 1 price, a Tier 2 price, a Tier 3 price, like depending on whether it's a high price market or a low price market, they should be in a certain range to maintain profitability, and we try to coach them on their margins to make sure.

It's very important that restaurant operators maintain their margin. It doesn't do any good to not take price when your costs go up and then you don't make any money and you go out of business or you fall behind.

So very important to coach them on their labor percentage, on their food cost and paper cost because we don't own and operate restaurants directly other than any interim refranchising efforts. This is really a franchisee issue, and we're all over it in terms of menu pricing.

Something that's flexible with all the delivery and to go after today's third-party deliveries, of course, you can take price immediately on those things. And if you have printed menu boards, you can -- today with digital menu boards, you can update it pretty quickly, but it's not really been an issue to get prices in place.

We generally negotiate for longer-term contracts. And so it's not something where we're taking market price on everything that we -- the franchisees sell to the customers..

So what percentage of the franchisees do you think are raising -- have raised prices over the last few months or plan to?.

I think most franchisees, a very high percentage across the entire system of our almost 700 restaurants. They're all taking price wherever they need to or can take price, but we coach that regularly. So we have certain -- we don't do it immediately in either direction. It's not like, oh, prices went up yesterday, we need to raise our prices today.

It's systematic where it might be on a quarterly basis or when we put new menus or bring in a new product or something we adjusted. So we have a plan for it. It's constant and deliberate, not something that's too reactionary. We also have contract pricing for our commodities.

So we're not subject to the swings on a daily basis for most of the ingredients that we offer..

I guess my point is that as, and correct me if I'm wrong, but as the franchisees raise prices, it would generate more revenue for you because you're getting a percentage of the revenue regardless of the cost, correct?.

Right. I mean it's not a deliberate outcome, but you're right that if prices go up, the amount of royalties as a percentage, in dollar terms goes up, it's still the same, 4%, 5%, 6% of sales. But if the sales are higher because prices are higher, then we get a little bit more revenue. Sure.

That benefits us, absolutely, to the extent that there is a 10% increase in prices and there should be a 10% increase in revenues for us. That's absolutely right..

Next question regarding deals. You're getting bigger, 40, 50 stores. It's okay, but it's not going to move the meter that much or move the needle.

What are you thinking as far as like what are you looking to add in acquisitions over the next 12 months as far as stores and all of that?.

Yes. So my strategic goal is to significantly increase the size of the platform during the next 12 months. You know that I like to shoot rabbits and squirrels as well as an occasional elephant. I use that analogy. And we have some of both teed up in our acquisition pipeline.

And so I think that you'll see the scale of FAT Brands grow significantly, not just moderately during the coming couple of quarters, and that will really help us grow into what this platform was built for in the first place, which is to acquire brands and to cross-sell those brands to our base of franchisees and to get scale in purchasing and pass that through to our franchisees in terms of lower food costs and things like that.

So I really feel like we're well positioned to just kill it in the second half of this year..

Last question. So one of the thing -- important thing that you didn't talk about was the re-initiation of the dividend, that obviously was a big deal. Certainly, I'm happy to have it. And I guess just my question would be, and I'm sure you're confident that you can fund it, otherwise, you wouldn't have done it.

So can you just discuss the dividend and just funding it and all of that?.

You bet. So you're right. Our return to paying a common dividend on a quarterly basis and the last one we declared was $0.13 a couple of weeks ago and just got paid. We plan to have that dividend policy on a regular basis going forward on a quarterly basis. We believe we have adequate liquidity or more than adequate liquidity to cover that dividend.

For us, it was something that we wanted to return too long ago, but we needed to get our financing in order. If you remember from a year or 2 ago when we started out on the securitization path, and we had some struggles with one third-party that didn't close the financing they should have for us.

So we did it again ourselves, and it took a little while and then the pandemic hit. And so we put our dividend on hold for a long time to make sure we had adequate liquidity, we had the right scale of earnings, and we plan to continue it and that dividend, I think, people will look firmly upon.

And it's only a small portion of the cash flow that this business should generate, and the rest of it we'll reinvest in the business as we grow..

And we have reached the end of our question-and-answer session. And I'll now turn the call back over to Andy Wiederhorn for closing remarks..

I just want to thank all of you for taking the time to participate during this very challenging environment out there for all of us. And again, thank our franchisees and their employees and our own staff at FAT Brands Inc. for all of the hard-work and dedication.

And I look forward to giving everyone a further update as we announce some pending acquisitions. Thank you, operator..

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..