Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the FAT Brands Inc. Fourth Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen only mode. The lines will be open for your questions following the presentation.

Please note that this conference is being recorded today April 27, 2020. On the call today 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 Alexis Tessier of ICR to begin..

Thank you, and good afternoon everyone. By now, everyone should have access to our earnings release, which can be found on our Investor Relations Web site 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 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 to the comparable GAAP measures are available in today's earnings release. I would now like to turn the call over to Andrew Wiederhorn, President and Chief Executive Officer..

Thank you, Alexis. Good afternoon, everyone. And thank you all for joining us today. The COVID-19 pandemic has many challenges for many people, and I hope you all stay safe and healthy.

I also want to refer you to our Investor Relations page of our Web site, which has an earnings supplement posted separate from the press releases I think you’ll find informative to look at, at some point after this call.

While technically today's call is intended to discuss our fourth quarter 2019 results, given the changing environment due to the pandemic, I'll touch briefly on 2019 and of course our fourth quarter financials are in the press release and the earnings supplement. So, feel free to ask any questions you have.

But I really want to talk about the state of the nation and how governance is doing today. We will be filing our 10-K later today and you should see it on the SEC Web site either tonight or tomorrow. Before COVID-19 ramped up in U. S., we were excited about the year to come. We had ended 2019 with solid momentum across most of our brands.

For the fiscal year of 2019, we saw system-wide decline of 0.7% that's less than 1%. However, when we exclude the Ponderosa & Bonanza brands from that metric, we see positive same-store sales growth of plus 0.9%.

It's important to highlight this as we believe that this weakness in the Ponderosa & Bonanza brands, brands that are over 50 years old, is a direct result of a limited marketing campaigns and expenditures we have been able to make in the past on behalf of those two brands.

At the beginning of 2020, the Ponderosa & Bonanza franchisees approved using a national marketing fund, which increased marketing and advertising spending similar to the increase we implemented in 2019 for the Hurricane brand.

Our Hurricane franchisee and by extension FAT Brands enjoyed an uplift in sales subsequent to our acquisition and throughout 2019, because of the introduction of refreshed and revitalized marketing campaigns.

Hurricane ended 2019 with system-wide same-store sales growth of positive 6.4%, while fourth quarter system-wide sales growth was positive 8.3%, and this compares to same-store sales declines of 4% for 2018 when we acquired the brand.

This is more than 10 point swing in the positive direction and I applaud our team and our franchisees for getting this done. And this is exactly the example we presented to Ponderosa & Bonanza franchisees and their volumes. During 2019, our franchisees opened 24 new stores worldwide.

On the corporate side, we realized successful acquisition and integration of Elevation Burger, a 44 unit better burger brand at the end of the second quarter of 2019.

The combination of operational performance and the acquisition of Elevation resulted in adjusted EBITDA increasing by over 54% in 2018, annualizing the revenue contribution of the Elevations of new stores, as well in 24 new stores. We would have seen a revenue uplift of an additional $1 million if we had owned Elevation for a full year.

Given our asset light model and lean operating platform, the vast majority of this revenue uplift would have dropped directly into our income from operations, EBITDA and adjusted EBITDA.

So we felt good about where we were from a business momentum standpoint starting out in 2020 and looking ahead with the subsequent completion of a refinancing transaction. We are still poised to ramp our acquisition growth strategy in 2020.

We were very, very fortunate to have completed our refinancing shortly before the severity of the impact of COVID-19 became more apparent. In early March, we announced our $40 million whole business securitization transaction, which significantly lowered our cost of capital.

The proceeds were used primarily to repay our expenses term loan, decreasing our annual interest expense by approximately $2 million. Additionally, the structure includes an accordion feature that can be easily accessed in feature as needed to grow our brand portfolio.

On the flip side, March was also the month in which things were turned upside down, paticularly for the restaurant industry. As COVID-19 continued to spread, state and local jurisdictions implemented safer at home orders and restaurant traffic plummeted almost overnight.

In compliance with the state and local orders, our franchisees closed dining rooms and were forced to rely solely on the off premise channel delivery and to go in.

In that regard, we were fortunate to already have a strong to go in delivery business across many of our brands and subsequently have experienced significant increases in these low contact modes over the last six weeks.

As you'd likely expect, our burger brand which account for roughly half our revenues on a normalized non-COVID-19 basis, have held up better off only approximately 28% on a comparable basis and 40% in absolute dollars as compared to our casual dining brands which lost 55%, but now subject to reopening in a number of states, we think things will improve rapidly.

Across the system, approximately 150 of our 375 restaurants are temporarily closed or shutdown primarily across the Steakhouse concepts, as well as in Fatburger restaurants located inside casinos, which are themselves closed.

During these unprecedented times, our top priority remains the health and safety of our franchise partners, their restaurant teams and their guests. To that end, we are committed to supporting our partners and doing everything we can to ensure their well being in both the near and long term.

The actions we are taking include helping franchise to acquire personal protective equipment for their staff and developing enhanced cleaning and social distancing procedures in the restaurants so that franchisees can continue to safely serve their communities.

We are helping them optimize their off premise business through improved packaging and curated menu. In addition, we are coaching franchise partners on how to access funds available through the Cares Act PPP program and the SBA economic injury disaster loan program.

And we're walking them through the process to negotiate rental growth from their landlords and we have secured extended terms from distributors like US Foods and Cisco and [TFG] and food suppliers on their behalf.

As I mentioned earlier, the timing of our whole business transaction of securitization was fortunate as it enabled us to enter the crisis with a significantly stronger capital and liquidity position.

Closings the securitization resulting in net proceeds to the company of over $10 million after deal fees and repayment of the term loan and accrued interest.

In addition to the significant reduction in quarterly cash interest payment given the lower cost of capital, the excess proceeds out of working capital to our balance sheet from the operational perspective, we've taken action at corporate level to reduce expenditures, including lay offs at certain team members whose roles were related to activities meant to accelerate our growth initiatives in order to mitigate the impact of the reductions in royalty income from our franchisees during this closure time period.

This 20% reduction in headcount has not impacted our ability to manage our ongoing operations, and to assist our franchisees through the pandemic. While the duration and severity of the ultimate impact from COVID-19 on the industry remains uncertain, we are excited about our future and our platform.

We are continuing to make progress on our third party delivery initiatives.

While some of our brands were well ahead of the curve as they had been offering delivery through services, such as Uber Eats, Grubhub and Postmates for years now, while others are much earlier in that process as well in conjunction with and we are continuing to roll out our ghost kitchens adding a location in Chicago last week.

Our ghost kitchens not only drives third party delivery business but our guest to access our brands even in markets where the brands don't have a brick and mortar presence. Our development pipeline is active and we anticipate opening between 25 and 40 new locations in 2020. We've opened 11 already this year.

There are three more stores ready to open and they've been fully built and are just waiting to local authorities to permit the opening. Construction is continuing in many locations though we do not expect delays in new store openings, and new development deals have been being signed both domestically and internationally.

Furthermore, we have many opportunities for brand acquisitions. Though we always evaluate them methodically and proceed delivery, adding only the very best to the FAT Brands’ platform. Before we open the call for your questions, I'd like to extend my heartfelt thanks to all of our team members, franchise partners and their employees.

The industry is facing difficulties of the like we have never experienced before and this represented incredible job rising to meet the challenge. And with that, I'm going to ask the operator to open the lines for questions.

And I'm going to remind you that we're not going to make projections for 2019 or give guidance for 2020 given the uncertainty as to when different markets will open and we can talk about that is as you ask questions, just don't expect specific answer.

Operator?.

[Operator Instructions] Our first question comes from the line of Gregory Fortunoff, a private investor. Please proceed with your question..

Andy, so my first question was going to be, are we going to make it through this. But I, after reading the press release and hearing your comments, I know that isn't an issue.

But I guess the question is, what are we going to look like? Do you expect to lose many franchisees and what does it look like from where you're sitting as best you can tell?.

We are certainly going to make it through this as a company. We've done every stress test imaginable and if necessary, could ride this out in the current disaster state for a year. So we're very comfortable that we have adequate liquidity now to survive this.

But the real question is when are we allowed to reopen? Is there a kind of a relapse? How do we plan for that and how do we ensure that we get as much momentum as possible at each brand level? We will lose some stores, everyone will lose some stores.

I don't think it's going to be a huge number, if we have 400 stores by the end of the year, 270 stores now, we could lose five or 10 stores for sure, probably a few steak houses not sure that we have any type of reserve with Buffalo’s Cafe, or Hurricane or not even an elevation, but not tons of stores. It's a small number.

And generally if we lose any units, they were probably the -- they were lower contributors in terms of high average volumes and high royalties that's not that group. So the store that’s closing, it probably wasn't doing that well to start with and just didn't have the same power here, but I don't expect to lose a lot..

International, you're starting to get some momentum internationally assuming that's a slow little bit.

Is that the case or am I wrong?.

Well, internationally there's a lot going on and is positive. We have some deals in China to roll out, more of the burger businesses will announce those hopefully very soon for a large development deal across China.

And Canada is continuing to build stores, although, they'll probably be a little bit slower than they originally planned this year, I think they had planned 10 stores now they’ll a few less, we’ve already opened a couple. The Singapore is working on new stores right now and they've some pretty high average unit volume.

So I don't think international is dead in the water. And with the momentum we have in China, I expect that that's really going to be pick up the pieces and those are not really in our projections for the 25 to 40 stores this year. And I think there are, of course, domestically we have a bunch of stores coming out as well.

So I feel pretty good about development actually about new store..

Last question and I’ll let someone else ask. So, I was pleasantly surprised to hear that you were still talking about doing deals. I mean, I would assume that the environment is right for deals as people are struggling.

Can you talk about your strategy? I mean, when should we look to expect? And the last call you were talking about a deal sort of imminently in the first quarter. Obviously, that's delayed.

Can you give us an idea of when we could be looking for a deal and what your criteria are?.

So the existing financing facility is expandable and is structured to add in more brands. We have some targets identified. We've had extensive negotiations. There are no binding deals yet but there could be soon and I'm hopeful that we complete one or more acquisitions before the end of the quarter.

And I think that we'll see an opportunity to acquire two or three brands for the entire year. What's different here is of course valuations are lower, everyone understands that. We're getting more flexibility from sellers who want to get a deal done, some need to get a deal done, some just want to get a deal done. It depends on the circumstances.

But there's more flexibility in terms of like a solitary back note of taking preferred stock or something like that to help us get the deal done as well because capital is precious. And you know, it's available in our securitization, spreads are wider and things like that.

So, so far, the sellers that we’ve been negotiating with still want to make deals happen, trying to be cautious about valuations and cautious about the mechanism to make an acquisition so that there's a little bit of a formula involved that we're not setting 100% of the price today without some sort of earn out along the way that could be adjusted as the brand does better grade as the brand doesn't do as well that we acquired then purchase prices reduced and therefore, we're not having to take on all that risk.

So there's definitely stuff to happen and I hope that by the end of the quarter, we'll be able to announce at least one..

Our next question comes from the line of Joe Gomes with Noble Capital. Please proceed with your question..

I just wanted to go back to the fourth quarter for a quick moment here. I think in the third quarter, you had mentioned that you were expecting EBITDA of 9 million to 11 million for the year. We came in at 7.7 million.

Just if you can help me understand what happened in the fourth quarter, at present you're saying that it was a solid quarter?.

Yes, so there's really two things to point to that are relevant. And understand that, again we didn't -- we own Elevation Burger for six months, so there's another million dollars of revenue from Elevation Burger and another $250,000 from new franchises were opened during the year that went on for the full year.

But with respect to the quarter, our transactions where we call them refranchising affected negatively our quarter, and that's where we have gains from the sale of restaurants to franchisees where we buy them and resell them.

We had a transaction fall apart to a buyer who of course are luckily have it was from Wuhan, and put a down payment down on buying some restaurants and signed the contract.

We had recorded the transaction in Q3 and had to essentially reverse it in Q4, which caused losses with substantially less refranchise income we should have had another million dollars of positive income in Q4 that we expected that didn't happen because that person they're stuck in Wuhan and their money is stuck, they couldn't complete the transaction and now we're not certain that they ever will.

So, that's a big chunk of it as a million dollars of it.

There's also an adjustment in on the revenue side of things, Joe, of about $400,000 you can see in negative store openings and that's -- it appears familiar with ASC 606 and the recognition of income for franchise fees and how you have to amortize them over the life of the franchise agreement, which didn't -- isn't the way it used to be.

And there's we adopted initially a formula to allocate some of those revenues to the actual cost we incur and fees that we charge for opening the store and the balance we amortize.

And while we believe that's the right way to account for it and we believe that that's what got permits, we just aren't seeing any of our competitors recognize franchise fee income the way that we all used to recognize it now everyone's straight line amortizing it.

So, if you have a -- charge $50,000 for franchise fee and you have 15 year franchise agreement, you have to amortize the 50,000 over 15 years, you can't recognize 25,000 of it or whatever the number is to allocate to the actual cost you spent helping that franchise open new store, or training, or store design, or anything like that.

And so historically, we've done that but we decided to take the most conservative view possible and get in line with everybody else. I know that FASB is continuing to review this, they just came out with a new bulletin that says they’re reevaluating this, but we decided to go with that drop.

So those two things count to about 1.4 million or more of the change in revenue from what we forecasted in Q3..

And just wondering if maybe you can kind of just educate me a little bit here. If some of the stores you lose, did they go back to you. Are they potentially stores that you would operate and then look to try and resell? Or just a little bit more color and detail how that whole process would work, it’d be appreciated? Thanks..

So again that falls into that re-franchising bucket and we have before stepped up acquired franchise locations booked in our portfolio, repositioned them and we sold those to new franchisees. So, there is an expectation that for some of those stores we will do that.

There's also the chance that we just let some go that are either like a really old location where the new capital expenditure doesn't cancel or the market may have moved, if it’s a 30 or 40 year old location and it was the hotspot at one point that it's no longer in the hotspot.

It may not make sense to acquire that store and re-franchise it versus just try to sell a new franchise in that community. So, I think there is a chance we have liquidity to do it if we need to, but I can't give you any specifics today..

Our next question comes from the line of Richard Ehrlich with JH Darbie & Company. Please proceed with your question..

Could you explain how your ghost kitchen expansion, because we announced today some news on that.

Can you explain how that does not negatively impact like physical locations that possibly may open up in that area?.

So we made a decision with the ghost kitchen operator who is committing to open 10 ghost kitchens, three this year to let them try it in the some markets where we don't have an active franchise base and don't have any next 12 months or 24 months plans by franchisees to develop stores.

So, it's another way to get a presence in the market and we'll have to see how it performs and see what kind of volumes they get and how successful they are.

And we had franchisees in Chicago years and years ago, we haven't had a lot of franchise interest in that market in recent years and decided that, let's try to sell our products through delivery and to go what better time to do it now and see if we get some traction. And if it works, then we will evaluate..

I do have one more question though.

I'd have to imagine there are some restaurant companies, corporations that for future growth for yourself to purchase that they’d possibly steal some names where you may not be able to make acquisitions on the exact quantity you'd like, but as far as giving the name and maybe doing some home, some building or to rebuild these restaurants, but I imagine you can really feel some names out there for almost no cost..

It's delicate, there's a delicate balance here. For sure, there's an opportunity to make acquisitions. There are buyers that -- sellers we're negotiating with who like I said, need to make a deal and some who just want to make a deal.

No one wants to make a deal if they feel they're getting picked-off horribly, so unless they're in absolute desperation. So we're going to look at those things. We want to buy brands that are brands we can really move the needle with. So, there's only so many hours in a day and heavy lifting. We have enough heavy lifting to do on our own.

So trying to be thoughtful about if we're going to buy a brand, what does that mean to us. We've been shown an awful lot of deals over the last six weeks, a number of them had high concentrations company owned stores, definitely not what we want to do.

If we're going to buy a brand that has some company owned stores, because not every brand is going to be hundred percent franchised, you have to have a plan. We think we can actually key it onto refranchise those stores.

I think there's also some brands that are more ethnic than others like Korean barbecue, or sushi or something like that where it may or may not make sense for us to try to integrate that into our platform. Right now, burgers, chicken, there aren’t went through by any more steakhouses at this point, but the burgers and the wings is very good for us.

So I think there'll be opportunities there. We don't have a pizza chain yet. We don't have a salad chain or coffee and dessert, sandwiches like I said before, those will all make sense.

But I feel like in this environment, we know what to do with the brands we have and brands that are similar like that will be the better acquisition candidates than just find anything that comes along, capital is very valuable today.

We want to really make it work, that doesn't mean that I'm not listening to you or hearing your comment as I've heard from many others that there should be a really good time to make acquisitions we think so. The platform is well positioned to make acquisitions.

That's the whole point of getting this platform to this scale, and now the financing is in place to do that. So this is our time for sure..

Great. Good luck. And I'm confident that there's a chance in two quarters from now, you'll be actually bigger than you are now. Thank you..

There are no other question in the queue. I'd like to hand the call back over to Andy Wiederhorn for closing remarks..

Thank you, operator. I want to thank everyone again for joining today's call. Please look at our earnings supplements, it’s on the IR Web site. Stay safe and have a great night. And look forward to updating you with Q1 around the end of May..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day..