Fat Brands, Inc Q2 FY2024 earnings call

• Franchisee base consisted of ~790 franchisees operating ~2,100 restaurants (including under construction). Directly own/operate ~190 corporate restaurants. Opened 24 new locations in Q2, with 45 YTD through July 31, anticipating 120 total new units in 2024.
• Twin Peaks is fastest-growing concept, with 113 locations up from 83 since acquisition 2.5 years ago; plans to open 12-15 new Twin Peaks by end 2024, reaching ~125 lodges, with franchise locations to be 75%-80% of total. First Smoky Bones to Twin Peaks conversion in Lakeland, FL in fall 2024, with more conversions in 2025-2026.
• Co-branding efforts: Over 50 new Fatburger and Round Table Pizza co-branded locations under development, and 12 co-branded units in Utah over 6 years. Great American Cookies and Marble Slab Creamery co-branded locations thriving in Georgia.
• Strategic value offerings: Fazoli's offered $4 dishes and relaunched Pizza Baked Spaghetti at $5.99; Smoky Bones had National Hamburger Day promotion; Marble Slab Creamery had National Ice Cream Day offers.
• Growth through acquisitions: Assessing new potential acquisitions in categories like salad, sandwich, or coffee brands, ensuring scalability and synergy with existing platform.
• Manufacturing facility: Sales $9.6 million, contributed $3.8 million to adjusted EBITDA, utilization up from 33% to 45% since acquisition, with potential to double capacity with $1.5 million investment.

Total revenue grew 42.4% to $152 million compared to $106.8 million in the prior year quarter. System-wide sales grew to $614.7 million, a 7.3% increase. Adjusted EBITDA was $15.7 million compared to $23.1 million in last year's same quarter; excluding ERT credits, adjusted EBITDA increased 30.8%. The manufacturing facility had sales of $9.6 million for the quarter, contributing $3.8 million to adjusted EBITDA, a 9.3% increase over last year. Revenue contribution details: Acquisition of Smoky Bones in 2023 drove revenue growth.

• Anticipate opening 120 new units in 2024.
• Twin Peaks aims to end 2024 with ~125 lodges, representing a 50% growth in unit count since 2021 acquisition.
• Plan to complete first Smoky Bones to Twin Peaks conversion in fall 2024, with several more conversions in 2024 and majority in 2025-2026.
• Assessing new potential acquisitions to add strategic value, looking at categories like salad, sandwich, or coffee brands.
• Twin Peaks plans to go public via IPO or alternative transaction to monetize the business, reduce debt, and build new restaurants.

• Dependence on franchisee execution for store openings and development.
• Market conditions affecting M&A potential, including seller expectations and valuation challenges.
• Interest rate impacts on debt and refinancing efforts.
• Potential challenges with timing and execution of Smoky Bones to Twin Peaks conversions.

Q: Somewhat of a similar theme with the first quarter, revenues were up nicely, but expenses were up even more. When do we think we'll start to see that kind of flex and where the revenue growth will exceed the expense growth on a quarterly basis?

A: Reconcile difference in net loss/adjusted net loss by refinancing Twin Peaks debt, public listing of Twin Peaks to reduce interest expense, pipeline of new store builds adding incremental royalties, and legal expenses ending.

Q: You talked about the new store development, why did the rate of store openings slow down from initial expectations?

A: Franchisees may be dragging feet slightly with financing, but remaining 75+ stores are on track to open by end of year, with many international and multiunit repeat operators on schedule.

Q: Are these the same M&A opportunities or new ones? Any opening in restaurant industry for acquisitions?

A: More deals than ever, sellers with reasonable expectations, opportunities in 3x to 4x cash flow range, and M&A as a way to delever balance sheet and add scale.

Q: Same-store sales held flat in 2Q versus first quarter. Any key outperformers in portfolio?

A: Burger segment, fast casual segment, and snack segment have been solid; Ponderosa and Bonanza Steakhouse brands up mid to high single digits; casual segment recovering from earlier slump.