Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the FAT Brands, Inc. Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, all participants are placed in a listen-only mode. Please note that this conference is being recorded today, March 7, 2024.

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 has made its fourth quarter and fiscal year 2023 financial results publicly available.

Please refer to the earnings release and earnings supplement, both of which are available in the Investors section of the company's website at www.fatbrands.com. Each contain additional details about the fourth quarter and fiscal year, which closed on December 31, 2023.

But before we begin today, 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 any -- 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 conference over to Mr. Andy Wiederhorn, Chairman of the Board. You may begin, sir..

Good afternoon, and thank you for joining us. I would like to express my gratitude to our teams, franchisees and their employees for their dedication and hard work in 2023. Their collective efforts have been key in FAT Brands' continued growth.

The company has expanded tenfold over the last three years by assembling a portfolio of 18 concepts with over 2,300 locations across more than 40 countries and 49 states. Coming off a record 2022, we are proud to have generated another year of strong growth.

During 2023, we grew total revenue over 18% to $480.5 million from $407.2 million in the prior year. System-wide sales increased 6.9% to $2.3 billion. We leveraged this strong top line growth into a nearly 3% increase in adjusted EBITDA, ending 2023 with $91.2 million in adjusted EBITDA, up from $88.9 million in 2022.

Looking specifically to our fourth quarter, we grew total revenue 52.8% to $158.6 million compared to $103.8 million in the prior year fourth quarter. The increase was driven by a 10.4% increase in royalties and 80.5% increase in company-owned restaurant revenues, and a 10% increase in revenues from our manufacturing facility.

System-wide sales in the fourth quarter grew to $626.7 million, a 16.5% increase when compared to the prior year quarter. On profitability, fourth quarter adjusted EBITDA was $27 million compared to $19.6 million in last year's quarter.

Throughout 2023, we focused on moving forward our three strategic pillars; organic growth, growth by acquisition and increasing the capacity utilization of our Georgia-based manufacturing facility. Let me give you some specifics. Beginning with the organic growth in 2023, we opened a total of 125 new units including 29 that opened in Q4.

Looking ahead, we project to open at least another 125 new units in 2024. Throughout 2023, we also signed development deals representing over 225 new franchise locations, which brings our total development pipeline to more than 1,100 units.

Once opened this pipeline, it's estimated to increase our adjusted EBITDA by approximately $60 million, which will naturally delever our balance sheet over time. Throughout the year, we celebrated many significant milestones within our portfolio of brands including the 100th location of our fastest-growing brand Twin Peaks.

The 400th location of Great American Cookies bringing our iconic brands to new and strategic growth markets including Roundtable Pizza's first location in Houston; Twin Peaks first locations in Jacksonville Florida, Columbus Ohio and Chattanooga, Tennessee; Great American cookies first locations in Arizona, Alaska and Illinois; Fazoli's highly anticipated return to the Phoenix and Orlando markets and Fatburger's return to Tampa and Chicago.

When looking at our organic growth, we are particularly focused on our polished casual segment, which consists of our Twin Peaks and Smokey Bones concepts. Twin Peaks restaurants produced category-leading AUVs of around $6 million with some of our highest volume locations in Florida generating AUVs between $9 million and $13 million.

They are highly profitable restaurants with an elevated food and beverage program that far surpasses anything else in its category. During 2023 Twin Peaks opened 14 new lodges, ending the year with 109 locations across the United States and Mexico.

Looking ahead, Twin Peaks is focused on opening its next 100-plus restaurants with 20-plus locations tentatively set to open in 2024. Year-to-date, we have opened three new restaurants including one coming up this Monday bringing the total to 112 up from 83 units when we purchased the brand just 2.5 years ago.

Twin Peaks new unit pipeline is healthy with over 125 new franchise deals signed paid and committed to be built in the next five years. The planned unit expansion is expected to grow Twin Peak systemwide sales to approximately $1 billion and increase the mix of franchise locations to between 75% and 80%.

As you may recall, we acquired Smokey Bones last October. To help capitalize on the rapid growth at Twin Peaks, we've identified a number of current Smokey Bones units to convert to Twin Peaks.

This conversion process allows us to open restaurants much quicker compared to the 2.5 years needed to build a new Twin Peaks from the ground up, and which produces higher unit sales volumes as it Twin Peaks compared to Smokey Bones.

Several of these converted units will open this year with the majority of them opening in 2025 and 2026, as both franchised and corporate locations. Twin Peaks has a strong management team led by CEO, Joe Hummel, as a result of the concept's industry-leading economics and strong pipeline of profitable growth.

And as we have previously announced last year, we plan to take Twin Peaks public. The timing and the size of the transaction is subject to market conditions and other factors. We view an IPO or any alternative transaction as an opportunity to monetize the business for the benefit of that shareholders.

Our priority is to use some of the proceeds from any transaction we might pursue to pay down debt. Additionally, we plan to refinance our Twin Peak securitization facility later this year as well as our Fazoli's and Native Grill & Wings facility. Next, co-branding. That remains another vehicle for organic growth for us.

We began co-branding over 10 years ago when we first paired Fatburger and Buffalo's Express. Today there are over 200 co-branded locations in our portfolio with the majority of them being Fatburger and Buffalo's Express on one hand and Marble Slab Creamery and Great American cookies on the other.

In 2023, we debuted our first co-branded Fatburger and Round Table Pizza in Texas with many more expected to open across the US. Co-branding is a great model from both a menu and margin perspective and produces an incremental sales lift of 10% to 20%.

From the franchisees' perspective adding another concept in the same space costs significantly less than what it would be to open on its own. As a result, our franchisees see a great return with co-branding and we will continue to roll out new options in the years to come.

We also announced a slew of new development deals in Texas, which continues to be a key growth market for the FAT Brands portfolio. The deals will bring 10 co-branded Great American Cookies and Marble Slab Creamerys to Texas and six additional Fatburger locations across the state over the next five years.

Moving on to our second strategic pillar growth through acquisitions. In Q4, we acquired Smokey Bones which is now FAT's second strongest concept by AUV with a current AUV of $3 million. To date, Smokey Bones operates 61 company-owned locations across 16 states.

We expect Smokey Bones to increase annual adjusted EBITDA by approximately $10 million net of conversions. Adding a strong player in the barbecue space to our portfolio like Smokey Bones gives our sales team more options to offer franchise partners, so they can further their new unit growth.

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 all under the FAT Brands umbrella.

While we are on track to convert some of the 61 Smokey Bones locations to Twin Peaks, our development team is also working hard to grow the concept through our franchise model. We ultimately plan to build Smokey Bones back to the location count it once had, which was roughly 120 units.

Looking ahead, 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.

We are also interested in categories we currently do not operate in to round out our portfolio such as salad, sandwich or coffee brands. Acquisition targets must be both scalable and synergistic with our existing platform, including leveraging our existing manufacturing capacity when possible.

Our third strategic priority is increasing the utilization of our Georgia-based manufacturing facility, which produces pretzel mix and cookie dough for several brands. During 2023, our manufacturing facility generated $38 million in sales, a 13% increase over the prior year.

Our factory business is only operating at about 45% of its capacity, up from 33% two years ago. So, there's still a lot of potential upside there.

We also have additional capacity that we can create both through a modest CapEx equipment upgrade, as well as expanding across the 3.5 acres of excess real estate that our plant sits on, both of which can more than double the existing capacity of the factory.

Last year, we acquired the Nestlé Toll House Café by Chip franchise business and we have converted 50 locations to our Great American Cookies platform, which enabled us to rapidly increase our footprint for Great American Cookies.

As I mentioned earlier, we reached our 400th location milestone last year and now have a presence in new states, recently debuting in Alaska, Arizona and Illinois.

Additionally, our own brands have helped fill the capacity of our manufacturing facility by strategically introducing cookie offerings throughout our burger portfolio, Fatburger Johnny Rockets and Elevation Burger. We see these additions as a way to further build and enhance our dessert programs.

This year, we plan to add cookie offerings at our remaining brands including our casual dining concepts, plus Fazoli's, Twin Peaks and Smokey Bones. Now, I would like to provide an update on the incredible growth and work of the FAT Brands foundation, which was founded in 2022.

During last year, 2023, which was our inaugural year of giving, we awarded over $250000 to 43 local nonprofits across 19 states and Washington D.C. The foundation's impact was widespread standing behind causes such as food and security, health, education, youth developments, the arts and more.

Notably, the foundation supported the critical work of nonprofits in various FAT Brands communities, including organizations tied to the fires in Maui and the tragedy in Allen, Texas.

Looking to 2024, the foundation is committed to continuing its work supporting local nonprofits in markets where we have restaurants that provide essential programs to help communities and families thrive.

I'd like to also share that we are hosting our biannual FAT Brands Summit in Las Vegas in April, where we expect to host more than 2,000 corporate team members', franchisees and partners.

The group will gather to celebrate our extraordinary growth in addition to honing in on our Summit theme All Systems Go, which encapsulates our commitment to moving forward together, navigating industry challenges and maximizing the synergies within our FAT Brands family.

I would like to reiterate, 2023 was a great year and 2024 is off to a solid start.

We've already signed two significant development deals, driving forward our strategic expansion efforts, one for 40 Marble Slab Creamery units in Canada, which will increase our foothold in the country to 140 locations, in addition to a 10-unit roundtable pizza deal in Oklahoma and a six-unit roundtable deal in Arkansas.

Additionally, Fatburger made its highly anticipated debut in Orlando. In summary, franchise interest remains strong. We have an experienced management team in place and a robust platform that supports expansion of our existing brands and accretive acquisitions that can be efficiently integrated with minimal overhead.

Our pipeline for organic growth is healthy, ensuring our 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 the call over to Ken Kuick to talk about our financial highlights from the quarter..

Thanks, Andy. Total revenue during the quarter increased 52.8% to $158.6 million, driven by a 10.4% increase in royalties and 80.5% increase in company-owned restaurant revenues driven by new restaurant openings and the acquisition of Smokey Bones during the fourth quarter of 2023 and a 10% increase in revenues from our manufacturing facility.

Costs and expenses increased $25.4 million or 18.6% in the fourth quarter.

Included in cost and expenses, general and administrative expense decreased to $30.3 million in the fourth quarter from $39.1 million in the prior year period, primarily due to a $16.6 million non-cash reserve on claimed employee retention tax credits recorded during the fourth quarter of 2022 and the recognition of $3.4 million employee retention credits during the fourth quarter of 2023, partially offset by general and administrative expenses related to Smokey Bones, again acquired in the fourth quarter of 2023, and higher professional fees related to certain litigation matters.

Cost of restaurant and factory revenues increased to $105.1 million in the fourth quarter of 2023 compared to $61.7 million in the prior year quarter, primarily due to the acquisition of Smokey Bones during the fourth quarter of 2023.

Depreciation and amortization expense increased $3 million to $9.9 million in the fourth quarter from $6.9 million in the year-ago quarter, again primarily due to the acquisition of Smokey Bones in the fourth quarter of 2023 and depreciation of new company-owned restaurant, property and equipment.

Advertising expense increased to $13.8 million in the fourth quarter of this year from $11.6 million in the year ago period and these expenses vary in relation to our advertising revenues.

Total other expense, net for the fourth quarter of 2023 and 2022 was $31.9 million and $24.2 million respectively, which is inclusive of interest expense of $28.9 million and $20.9 million, respectively.

Additionally, total other expense, net for the fourth quarter of 2023 included a $300,000 gain on extinguishment of debt related to the repurchase of $14.6 million in aggregate principal amount of outstanding securitized notes, which will be held pending resale to third-party investors.

In total, at the end of 2023, we had $196.8 million of retained securitization notes on our balance sheet available for sale to third-party investors. Net loss for the quarter was $26.2 million or $1.68 per diluted share compared to a net loss of $70.8 million or $4.39 per diluted share in the prior year quarter.

On an as adjusted basis, our net loss was $17.3 million or $1.15 per diluted share compared to a net loss of $43 million or $2.70 per diluted share in the prior year quarter.

And lastly, adjusted EBITDA for the quarter was $27 million, a $7.4 million increase compared to $19.6 million in the year ago quarter and included a $6.2 million favorable legal settlement in the fourth quarter of 2023. For the full year, adjusted EBITDA was $91.2 million, a $2.4 million increase compared to $88.8 million in 2022.

And I'll note that, 2023's adjusted EBITDA included the $6.2 million legal settlement, I just mentioned and 2022's adjusted EBITDA included $22 million of employee retention tax credits. And with that Chris, please open the line for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Joe Gomes with NOBLE Capital. Please proceed..

Good afternoon, and congrats on the quarter..

Thanks Joe..

Thanks Joe..

So I want to start off with the most tickles question. You guys did receive a Wells notice. I'm assuming, there's not much you can discuss. But maybe, Andy, you can talk about maybe the timing of how that all plays out here going forward? And kind of relatedly, litigation costs in the year were $10 million higher year-over-year.

And wondering when you might start to -- we might start to see those litigation costs start to moderate..

Well, I appreciate the question, but there's not much as you indicated that I can say other than what we've published in our 8-K or we will publish in our 10-K, which we expect to be filed very shortly here in the next couple of days. The timing of these kinds of things is uncertain. They can go on for a while.

And as it relates to legal expense, same thing, we do have a claim against our insurance carrier that we're pursuing for reimbursement of fees. And that's pretty active. So I expect that something will come of that shortly. But other than that, there's nothing that I can really add that isn't in the public disclosures..

Okay. Thanks for that. One of the things that you talked about in the past, I don't think you really touched on this time was the non-traditional locations. And I was wondering, if there was some more growth opportunities available in that segment that you're looking at for 2024..

That's a good question. Non-traditional is on fire. We have new locations coming online left and right. We've just opened in a couple of Great Wolf Lodge locations, the water parks with hotels. We have opened some additional Six Flags locations.

We're coming online at Stanford University and there are a number of others, including some airports that are on the drawing board. So we've had good success getting non-traditional off the ground..

Excellent.

When you talked on the call about potentially doing some refinancing of the securitizations for Twin Peaks, Fazoli's and -- just trying to get an idea of what do you see as kind of the goals for those? Is it trying to get interest rate relief, trying to term them out more, trying to upsize them based on the success of the businesses? Just maybe a little bit more insight into what the kind of goals of the refi would be..

Sure. So we can tap those facilities from time-to-time, when we've needed additional liquidity. And when you read our Qs and Ks, you'll be able to see that we maintain a fair amount of bonds held available for sale.

That means that we've already, what you call, tap that securitization facility, created additional bonds based on the strong performance of the brands, the cash flow from the brands. And we're holding those bonds, but we can turn them into liquidity, sell them for cash, if we need to, to fund the operations. So that's already in place.

The desire to refinance the Twin Peaks facility on the Native Grill & Wings and Fazoli's facility, stems from two things. First of all, as we've stated, we hope to take Twin Peaks public later this year.

In doing so, that securitization facility would need to be called and reissued on a stand-alone basis, where FAT isn't the 100% owner, and hopefully, with some debt reduction, along the way from the IPO proceeds, so we have less leverage.

Fazoli's, it's purely just a refinance, not -- it may result in lower leverage, if we want to pay it down a little bit. But both of those deals have amortization that starts more significantly next year in 2025. Right now, they have very, very slight amortization of 2% a year.

And so trying to get ahead of heavy amortization, which would start sometime in 2025, we want to complete the refinance in 2024. The rest of our brands don't have amortization of any material amount until 2026 and that's the second half of 2026. So we have a lot of runway to see interest rates come back down.

But we want to be ahead of any amortization between Peaks and Fazoli's and take advantage of refinancing those bonds as part of the IPO..

Okay. Thank you. You talked about some of the requirements for deals that you're looking at. Maybe you could just give us a little update on the deal environment.

We've seen prices come down be more reasonable or there's more properties coming up? What are you seeing today?.

Well to be fair, we've seen quite a few deals in the last two quarters. I think we still have not seen sellers come into the range of this reality of the interest rate environment, the capital environment and the economy. So many deals just haven't met our price tolerance threshold. Also we're trying to be very strategic right now.

We want to reduce our leverage and pay down debt. And so we're only really looking at things that make sense strategically like that would grow our Twin Peaks business like Smokey Bones, as an example, grow our manufacturing business like the Nestlé deal that we did.

Doesn't mean that we wouldn't consider another brand and make an acquisition along the way, if it made sense for us but the price would have to be right and it would have to be a delevering event. And so there's ways to do that.

It depends on the price that you pay for the brand versus the cash flow you're getting or whether we use some other type of security rather than just straight out borrowed cash to make the acquisition. It could be preferred stock, common stock, seller notes, you name it. But we want to make sure that anything we do is a delevering event.

So those are things. We have one, two or three long-term strategic acquisitions that we have been following for some time. And this year they may come around as the sellers are sort of ready to make something happen. So we'll see how 2024 plays out but there's definitely lots of opportunity out there.

We just want to make sure that our balance sheet is well positioned for it and that we deliver on our promise to delever the debt that we have today..

Great. One more if I may. On the factory, one of the goals was to get some third-party business in there. I just wanted to see where that effort stands today..

We're actively involved in RFPs for various third-parties to produce quite a bit of cookie dough and pretzel mix-type products for them right now. We aren't actually producing yet but we're in the middle of several RFPs.

We've grown the utilization of the capacity by selling cookies and other products across our other restaurants but – and we have quite a bit more to go with that. But we want one or two of these RFPs that we're in the middle of to really drop in our lap and that will soak up quite a bit of capacity at a good margin.

The factory has the capacity as I mentioned earlier to really, really grow significantly larger because when we say 45%, that's before we spend any CapEx to knock a wall down or increase the size of some of the equipment that we have in the factory which would double the capacity yet again. So we had a lot of runway in the factory.

It's a very valuable asset. And if you put that together with Twin Peaks, between those two assets alone, you have enough value to retire most likely all of the FAT Brands debt. So we've looked at it as we really want to maximize the value we extract from those assets as we look to retiring debt..

Okay. Thanks, Andy. Appreciate the answers..

Great. Thank you, Joe. Operator, next question..

The next question comes from Roger Lipton with Lipton Financial. Please proceed..

Yes. Hi, Andy and Ken.

Can you tell us anything a little more specifically as part of the timing of the Twin Peaks offering? Any guess at all in terms of when it might move ahead?.

I think it's -- it depends on market conditions, but hopefully, it would be something that would be a Q3 event..

I didn't hear. Something....

Q3 event..

Oh, Q3. Okay. Thank you. And....

When we file the IPO document, the S-1, we will file it on a confidential basis, but we'll put out a statement that it was filed confidentially. So very well know that it's been filed. And then we have to go through the SEC process and then we'll see how the market is..

Okay. And something keeps growing. So a little delay on makes it a little larger..

Time is on our side. Yes, absolutely. Time is on side. EBITDA just growing..

Right. And the Smokey Bones stores or restaurants, how many of those or do you think are conversion possibilities to Twin Peaks? What's your --.

A fair number of them. I'm not going to get into specifics, because we're negotiating with landlords today about the conversions. But we've identified a fair number of them that make a lot of sense to convert. And there's a few on the fringe and we'll see how those go. And if not, they stay as Smokey Bones..

Right.

And what can you tell us about the general tone of business in the multi-branded system, at least domestically?.

So I would say a couple of things. One, business is solid. The commodity costs have come down significantly, which is good. I think consumers are sort of at their limits in terms of how much price they're willing to take.

So operators have taken price to maintain their margin, but there's definitely traffic pushback on that across the entire industry, not just within FAT 18 brands. And we have the new increased minimum wage coming in California in just a few weeks to $20, and you're going to see prices go up again.

So it will be interesting to see how California response. The good news is it applies to everybody, not just FAT brands. And I don't see that any way around that. And of course, the voters must have known what they were getting into, and they elected everybody to raise these wages from to $20 or soon to be $25..

Right. Right. All right, that's all I need for now. Thank you very much. .

All right. Roger, thank you..

[Operator Instructions] And at this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session. At this time, I would like to turn the conference back over to Andy Wiederhorn for any closing remarks..

Thank you, operator. I want to thank everyone for joining us today. This concludes our call..

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect..