Fat Brands, Inc Q3 FY2023 earnings call

• Strategic pillars: growth through acquisition, organic growth, and productivity growth for the Georgia-based manufacturing facility. - Acquired Smokey Bones Bar and Fire Grill for $30 million from an affiliate of Sun Capital Partners; expects to increase annual adjusted EBITDA by approximately $10 million and plans to grow the concept through franchising and re-franchising. - Organic growth: year-to-date opened 107 new units, aiming to open 150 total in 2023; signed franchise development deals for over 200 new locations, with a pipeline of over 1,100 signed agreements worth approximately $60 million in incremental adjusted EBITDA. - Twin Peaks: currently 106 units, plans to open 5 more in 2023, aims to grow to over 200 units over the next several years and take it public in the future. - Manufacturing facility: operating at 40%-45% capacity in the third quarter, generated $9.3 million in sales, and strategically introduced cookie offerings in the burger portfolio. - Co-branding: many successful co-branded locations, with a 10%-20% increase in sales seen with co-branding and approximately 280 co-branded locations currently. - Board update: welcomed 5 new directors; the FAT Brands Foundation has awarded over 35 grants to nonprofits in areas near FAT Brands locations.

Total revenue grew 6% to $109.4 million in the third quarter of 2023 compared to $103.2 million in the prior year third quarter. The increase was driven by a 4.8% increase in royalties, a 2% increase in company-owned restaurant revenues, a 228.5% increase in franchise fees and an 18.9% increase in revenues from the manufacturing facility. System-wide sales in the third quarter grew to $564.6 million, a 0.8% increase when compared to the prior year quarter. Third quarter adjusted EBITDA was $21.9 million compared to $24.6 million in last year's third quarter. Without last year's $7.2 million tax credits, adjusted EBITDA would have been a 26% increase on a quarter-over-quarter year-over-year basis. The manufacturing facility generated $9.3 million in sales in the third quarter, an 18.9% increase over last year's third quarter.

• Expect Q4 to be very solid and exceed 2022 adjusted EBITDA numbers. - Plan to open north of 175 units in 2024, with the 2023 unit opening range being approximately 150-something. - Twin Peaks plans to grow its unit count to over 200 and go public in the future, with timing subject to market conditions.

• Market conditions could impact the timing and valuation of Twin Peaks' public offering. - Uncertainty in selling securitization notes at favorable prices, posing debt-related risks. - Integration risks with acquired brands, such as landlord negotiations and conversion challenges for Smokey Bones locations.

Q: Did the quarter results meet expectations?

A: Beat estimates on earnings per share and sales; new franchise sales show the strength of franchise partners.

Q: Same-store sales year-to-date down from Q1. What's driving?

A: Softer Q3 than Q2/Q1; spotty by brand, with some brands up and others like burgers flat; consumer spending is choppy.

Q: Unit openings guidance down. Why?

A: Due to delays in equipment, permitting, and hiring; however, stores are still on track and there is a well-over-100-store pipeline for 2024.

Q: Promotional environment and pricing.

A: Focus more on marketing initiatives than limited-time offers (LTOs); spending to drive brand awareness and invite customers in.

Q: Smokey Bones deal. Potential for more casual dining acquisitions?

A: Twin Peaks and Smokey Bones are polished casual; focus now is on distributing Smokey Bones through the franchise portfolio; not actively looking for another immediate casual dining acquisition but is open to good deals.

Q: Smokey Bones impact on Q4?

A: Will help Q4; expected to be a net positive with adjusted EBITDA contribution starting to be felt.

Q: Co-branding performance?

A: Higher average unit volumes with co-branding; approximately 280 co-branded locations, and a significant portion of the franchise pipeline has co-branding.

Q: Manufacturing facility capacity in 2024?

A: Can increase utilization to 60% with adding new businesses or equipment; potential to sell the facility and use proceeds to reduce debt.

Q: Timing of Twin Peaks IPO?

A: Subject to market conditions; the brand is growing, and waiting could lead to a better valuation; the market window will be watched.