Good morning, everybody. I'm Michelle Michalski, Senior Vice President at ICR. Here with me today is Andrew Wiederhorn, Chairman and founder of FAT Brands.
Good morning.
Okay, Andy, can we begin with a brief history of FAT Brands? What spurred you to continue to grow the company to an 18-brand portfolio, growing by tenfold in the last three years?
Sure. Well, our first brand that we acquired back in 2003 was Fatburger, when it had 40 restaurant locations in really Los Angeles and Las Vegas, and about half company-owned stores and half franchised. You know, we grew that brand to now more than 200 units and restaurants all over the world. We went on to buy Buffalo's Cafe a number of years later in 2011, and created Buffalo's Express, which is sort of like a Wingstop copycat, and went on to co-brand that. So we ended up with two or three brands at that point in time, and then took the business public in 2017, really with that model of trying to be a global restaurant franchising company. It was really just about waiting for the right opportunities to come along.
You know, during COVID, we were very acquisitive, and we were able to grow just, you know, gigantic growth, 10, 10 times. So that's how it all started.
Great. Thank you. Can you talk about the synergistic opportunities that have presented themselves as a result of having such a deep arsenal of concepts?
Yeah, it's really, it's really been a great opportunity for us to build out. We're, we're organized in terms of five different silos. We have a QSR division, a fast-casual division, a casual dining division, our, our sports bars, Twin Peaks, it's just a rocket ship and Smokey Bones we just acquired, and then we have a manufacturing business. And so with the different silos, they sort of run separately, but we've had a lot of opportunity for franchisees to cross-pollinate, if you will, in terms of different brands. And from the synergy perspective, you're trying to run most of those businesses with one back office, one accounting department, one legal department, one purchasing department, all, all of those kinds of things, different marketing at the brands, but there's just tremendous leverage there.
With that, you also get this franchisee base. We have more than 2,300 restaurants open, and a gigantic pipeline, we'll talk about another 1,100-1,200 restaurants that have been sold to be built, paid for, signed, committed. So we're probably 25th largest restaurant company today, and by unit count in the U.S., and it gives us the opportunity to deal with franchisees across multiple brands. We can say to them, "You know, you've got five Fatburgers, do you want five Round Tables?" Things like that, where they only have one franchisor. So there's synergies, not only in purchasing, not only in the back office, but with the franchisees themselves.
Moving on now to the macro. What is the state of the consumer within your portfolio of brands? Are you seeing guests trade down to your quick-service, fast-casual brands as a result of the current economic conditions?
Really interesting question. This 2024 is gonna be a year about the top line to see what do sales really do across the portfolio. You know, we ended last year with positive comps. They were softer in the second half of the year than the first half of the year, but still positive. You know, we did see some moving around. It's interesting, our Ponderosa and Bonanza Steakhouses were up between 10% and 20% on any given month in terms of same-store sales. So definitely that means the consumer is following value, right? An all-you-can-eat buffet with a steak or something versus perhaps fast casual or casual. But we've seen some movement. We also saw growth in the snack brands categories: cookies, ice cream, pretzels, up like crazy, and very interesting.
Our Johnny Rockets brand, very positive too, high single digit, low double digit comps, particularly internationally. So I don't know how much of that was any kind of COVID rebound versus, just ordinary, growth in sales, but we definitely saw some movement of the consumer within the categories. And of course, at the sports bars, you know, people wanted to come back and watch games and be together and drink and eat and, and stuff, so we saw great numbers there.
Great. Thank you. Most recently, you acquired Smokey Bones. What was your investment rationale there, and how do you think that fits within the portfolio of brands?
First, I would say, who doesn't love barbecue? And, you know, once you can cross that barrier and you get into the barbecue space, we didn't own any other brand that was similar to Smokey Bones, so we're excited to get into barbecue. And, you know, we all know barbecue is somewhat regionalized, right, with different flavor profiles. But Smokey Bones has, you know, just a long 30-year history. Of course, our predecessor presenting here right before us grew that brand, created that brand, 30 years ago.
But really, the opportunity for us as we grow Twin Peaks, you know, today we have 109, this month we'll have 111 Twin Peaks that are open, and a number of those stores at Twin Peaks are second-generation restaurant spaces, probably three-quarters of them are. And we all know how attractive a second-generation restaurant can be to remodel and reopen versus a ground-up build. And so when you do a ground-up build, it can take 2.5 years to buy the land, build the building, get it all, you know, titled, and get it open. And if you do a second-generation, it can be nine months, so it's a much faster path to market. And so, Twin Peaks-...
team has done a number of second generation conversions, as I just mentioned. Smokey Bones became an opportunity there, where about two-thirds of that portfolio is slated to be converted. And, you know, look, it, Smokey Bones by itself is our second highest AUV business, with a $3.5 million average unit volume, but Twin Peaks has a $6 million average unit volume. And we have, in the Twin Peaks portfolio, another 125 units that have been acquired by franchisees, in terms of development rights. And so we'll go from 110 to 230-something pretty quick.
And to have 40 of those 60 locations from Smokey Bones eligible to be converted right away, it's just gonna be like pouring lighter fluid on the fire here for it to grow and have committed locations. We have committed franchisees. And the only reason, you know, we aren't converting the other 20 locations is we already have a Twin Peaks across the street. So, and that doesn't mean that Smokey Bones goes out the window. We love that barbecue brand. We will start franchising it. We will re-franchise the remaining company-owned stores that we can and start selling it to our franchise base. Twin Peaks doesn't work everywhere, and Smokey Bones is a good complement as a, you know, traditional barbecue and sports bar location.
I'm optimistic that we will sell a number of new franchises in the coming year.
Great. Thanks, Andy. What is your timeline for converting these into Twin Peaks locations?
Well, generally, you know, it's this nine-month lead time. You can't do them all at once. And when we look at the portfolio, those 40 or so locations that we plan to convert, 10 of them are in corporate markets, 'cause Twin Peaks is about 25% corporate. 30 of them are in franchise markets. About 20 of the 30, they're in franchise markets where we have franchisees. 10 of them we don't today, so we'll either get some franchisees to stretch their territories or corporate will stretch a little bit. We can't do all 40 at once. We'll get the first few open this year, and then there'll be a whole bunch of them next year that convert.
So really, you know, a two-year timeline, maybe three years, to the extent that there's some stragglers at the end, but we're moving pretty quick on it. And you know, it's a great opportunity for landlords. They get to, they get a new, refreshed building. They're gonna a big boost in their sales. And in the markets where Smokey Bones is killing it, we're gonna replace those stores. We'll put new Smokey Bones back in those markets 'cause there's brand equity, so we're working on all of those things at once. So you know, we're busy with it, but it's gonna happen pretty quickly.
Wow, that sounds great. Can you—most recently, you discussed taking Twin Peaks public. Can you give us an update on the timing relative to that announcement?
So I can't say much about it. You can read into that. You know, I think that we hope this year it goes public. We expect the market window to open here at some point. I think we all expect it to open again as we get into Q1 and into Q2. So, you know, I don't know when this will actually come to market, but, you know, knock on wood, Q2 or later, you know, there's something to talk about that'll be exciting. It's... There's a lot of demand in the market for new IPOs. Twin Peaks is one concept where we kept the management team separate. We kept everything about that business separate when we talk about synergies.
Sure, they get the benefit of some of our purchasing agreements and relationships, but they're a pretty big business by themselves. More than $500 million in sales today on their way to, you know, gigantic numbers, $1 billion or more, in the future. We think that it's very ready to go public as it stands today. So as we break that out as a separate entity to take it public, and knock on wood, we'll do some sort of tax-free spin out to shareholders, and it'll be very exciting in terms of the reward that shareholders will get. If you own, you know, a share of FAT and then you get a share of Twin Peaks, it's a big value play.
Great, thank you. Last year, you acquired Nestlé's Toll House Café franchise business, and you've been converting those to Great American Cookies. Where are you in that conversion process, and what benefits have you seen with this acquisition?
Yeah, so again, we have these four verticals: QSR, fast casual, casual, polished casual dining, and sports bars. And then we have this manufacturing business, number five. Manufacturing business makes cookie dough and pretzel mix. Our manufacturing facility is in Atlanta by the airport, and it has tremendous capacity, tremendous excess capacity. And so the acquisition of the Nestlé Toll House Café by Chip business was to convert those into our Great American Cookies platform. We converted 61 stores so far. I think we're pretty much done with the Nestlé conversion. It's very profitable acquisition based on the purchase price and the conversion ratio, and then we get to sell them cookie dough, and it drives all those, all those businesses. Our factory is now around 40%, 45% utilized today, but there's tremendous excess capacity.
Something that's interesting and something we didn't really figure out when we bought the factory as part of the Global Franchise Group acquisition in 2021 was that with a very modest capital expenditure, a CapEx investment of, like, $1 million-$1.5 million, we can double the size of that factory in its existing footprint, just having bigger mixing equipment. And so we have—when I say we're 45% utilized, I could also say we're only 25% utilized because we could just spend a little bit of money and have a lot more capacity, and that factory sits on four acres, and we use up half an acre of the four acres. So we've got all this land as well. So it's really an interesting business.
We're selling cookies across all of our brands now. It's fully integrated in most of them, and soon will be all the way integrated across all brands. And that also soaks up utilization, making more cookie dough or pretzel mix, stuff like that. So, we've looked at that. We've also looked at third-party manufacturing since we have excess space. And the real question is whether we buy some more cookie brands or pretzel brands or anything that's a dry mix brand. But if we're gonna do third-party manufacturing, we want it to be really profitable. We have a very good margin on the stuff that we make for our franchisees, and they still buy cookie dough and pretzel mix at a really attractive price.
You know, that's something that we don't wanna just fill it up to have low-margin business. We really wanna save the capacity for opportunities that come along, just like Nestlé.
Great, thank you. What do you think the capacity of the factory will look like at the end of 2024?
That is a good question. You know, I, I think it'll be, again, before we make this CapEx investment, it'll be north of 50%. We really wanted to get it to 60%, and then we talked about maybe selling it and having a long-term contract to produce for us and pay down debt with the proceeds of that. But knowing now that we have the ability to have so much extra capacity with a small investment, I'm not really sure when we would go to market with the factory, but you know, you never know when opportunities come along.
Great, thank you. Now, shifting gears to co-branding. Co-branding continues to be a key pillar of growth for FAT Brands. Can you explain to us your co-branding strategy?
Yeah, so, you know, we have several models, five different variations of the co-branding. Most common is Fatburger and Buffalo's Express, so burgers and wings, but we also have Johnny Rockets and Hurricanes. We've added Hot Dog on a Stick to a number of our brands, where they're selling burgers and hot dogs. And now we're adding Fatburger to Round Table Pizza locations. You know, those dining rooms at Round Table Pizza, there's 400-something Round Table Pizzas, and they have big dining rooms. They don't get used as much as they used to. Delivery is much, much higher at Round Table than it used to be. And so we have that dining room capacity, and we have operators that wanna add a Fatburger to their dining room. They have the kitchen already.
They can add a Fatburger, wall off a little bit of space and utilize it. Today, we have out of our 2,300 restaurants, we have about 200 co-branded locations, about 100 Buffalo's Fatburger co-brands, and then a number of Marble Slab Creamery and Great American Cookies locations. And so I think, you know, look, co-branding is great, right? You get it. It's one facility, it's two menu boards, it's one cash register. You get menu diversity out of it. So I think that's just gonna be a growing theme for the entire industry, not just FAT Brands.
Great. Thank you. When would you consider adding to your restaurant portfolio, and what is the criteria you look at when making an acquisition of another brand?
We're always looking at new acquisitions. You know, I really feel like the M&A market is heating up again, even though rates remain high. That's definitely a driver, right? And so we've tried to be as strategic as we could be about it. If we're gonna make acquisitions today, we're so big, we don't just need another brand to have another brand. We don't have salad or coffee or things like that, a sandwich brand. So those are interesting as fill in the blanks. But we really focused, as you saw us buy Nestlé a couple years ago, it was to get more cookie dough business and convert at the same time, so kind of two bites at the apple. We can make cookie dough and have more franchise units.
With Smokey Bones, same things. We're getting locations for Twin Peaks. We're also getting a barbecue brand we can franchise. We're sort of getting two bites at the apple. So I think when we look at opportunities, it's what can we do with it? Now, having such a large franchise base, 800 different franchise operators, half of them mom-and-pops, half of them multi-unit operators from two to 75 units, you know, we have a built-in group of franchise buyers who are always looking for more brands for their management teams. And so that's another, you know, check the box on our criteria of: Is this something that we think we can sell across the portfolio? Do we have it geographically? Can we support it? Can we get synergies? And then there's price.
You know, we still haven't seen sellers generally come to the realization that prices from a couple years ago are not what prices are today for brands, and that's really just because of the cost of capital, let alone the macro environment. So, you know, we've always been patient to wait for the right deals to come to us, and I think that to the extent you have a seller that's ready, there are deals that we're gonna see that get done this year. We're certainly, you know, continuing to be active, continuing to see deals every week. But I think it's a function of the sellers being, you know, ready to make a deal.
Great. Thanks, Andy. You mentioned, you know, higher interest rates. Given the high operating environment, especially minimum wage rising, is this hurting your existing franchisees and making it more challenging for you to find franchisees?
So franchise sales, really interesting, sort of a barbell, answer to this question. Our franchise sales are, are stronger than ever, and that's usually a sign of a very healthy franchise system. When franchisees are buying more stores, they, they wanna continue to grow their business. So that's been very positive for us. We sold hundreds of units last year, hundreds of units the year before, and we're very happy with our, our development progress and this 1,100-1,200 store pipeline that we have of new stores to be built on top of the ones that... You know, knock on wood, we'll build 150 new stores a year, this year maybe 175, and, we built, I think, 125 last year.
But in terms of pricing, you know, all the, all the restaurant operators are facing pricing pressures, right? Maybe inflation and food costs are now sort of stabilizing from the giant leap, and you've got the disparity between grocery and, you know, whatever the time period was when it was more expensive to go to the grocery store than go to the restaurant. You know, that's kind of caught up a little bit. So we definitely see that, and we're trying to encourage our operators to think about value in terms of what they're offering. You can't just raise prices and tell the customer, "Look, gotta raise prices. Our costs went up. Sorry." You got to give them something to be able to afford to come back to your restaurant and stay in your restaurant.
So big value push there to try to help the operators. You know, being part of the FAT Brands system, a franchise operator saves 2%-3% in their food costs just 'cause we have such big purchasing power, $600 million-$800 million a year in purchasing power. So that's a benefit. But, you know, when have you ever seen a restaurant operator lower their prices, right? They don't. Once you take price, you stick with it. So I'm hopeful that as inflation calms down, it'll rebuild the restaurant operator's margin without them having to take too much more price.
And then speaking of growth, do you have the G&A needed to support your current development plans, or should we expect growth in your G&A line?
Yeah, no. I think if anything, we, we-- we're continuing to look at our, our G&A in, in terms of, is there an opportunity to be even leaner than we are today? And that's sometimes you acquire G&A when you make an acquisition, or you, you beef it up to be able to handle what you're doing. We certainly did that ahead of it. We leaned into our acquisition spree in 2021 by really building our team. And if anything, today we're looking at, you know, are we as efficient as we can be everywhere, have we consolidated offices, things like that. So I don't think that, there's any need for more G&A, and I think we'll, we'll try to grind it out a little bit during 2024.
Can you just talk to us a little bit about the balance sheet management and your comfort level for leverage?
Yeah. So, you know, by the end of 2021, I think we spent $1 billion buying the next eight or nine brands that we talked about, from Johnny Rockets to Global Franchise Group to Twin Peaks and so on, Fazoli's. We all thought in 2020 the equity markets would go roaring in the right direction, not the wrong direction, and that rates would be stable, and that didn't really pan out. So fortunately, we have very long-term debt. It. We don't have any, like, very stiff amortization locks that kick in for the most part until 2026, a little bit in 2025, but the big bulk of it is in 2026. So, you know, I don't think we're gonna see six interest rate cuts in 2024. I think we'll see...
You know, if we get lucky, we'll see a couple, but definitely, you know, knock on wood, in 2025, we'll see some more cuts. And so I feel like we're well-positioned for refinancing along the way, where rates will come back down, and it'll, it'll make more sense. But as we, as we looked in the mirror in, at the beginning of last year and said, "Boy, rates have gone up, what are we gonna do?" You know, we made the decision: "Let's create a couple of liquidity events and pay down debt, and then it doesn't really matter anyway." And so, the IPO of Twin Peaks is definitely a de-levering event. If we were to sell our manufacturing business, that would pretty much pay off all of our debt between those two assets.
So it'd be very interesting to have that much free cash flow and no debt, something that would be very different for us. Not sure it'll ever really happen, but that's an angle. And then we're just balancing that with, if we're gonna make a new acquisition, what's the cost of capital today, and what's, you know, what's available? But, you know, I think that it's a dynamic process. You know, I really hope that we see the IPO market, that window, open, 'cause I think that'll let a lot of brands access capital, and it'll help us manage it long term.
Great, thank you. And then in closing, what do you believe the most crucial lever for FAT Brands to pull to continue rising the ranks in terms of being one of the largest U.S.-based restaurant companies?
Well, I think it's being patient for opportunities to come to us that make sense. We view this business where the franchisee is our customer. It's not the guy eating the chicken wings or the hamburgers, it's really the franchisee. That's who pays us every week with their royalties, and their financial success is critical. So if we focus on our customer, which is really the franchisee, we focus on making sure that they make money, then they'll develop more stores, that 1,100-unit pipeline. And that's how we get the most bang for our buck, is getting those stores open, 'cause our EBITDA, that's another $50-$60 million of EBITDA that just drops to our bottom line, is they get those stores open with virtually no cost.
So those are things that I really wanna make sure work for us, and that's our franchisees, that they're making money.
Great. We have time for maybe one question in the audience. Does anybody have a question?
... you know, Twin Peaks, obviously, as you mentioned, you know, what kind of ways the market's gonna open. But what would be, you know, whether it's IPO or I think you've referenced other, you know, potential moves to do with that brand, what is your ideal scenario? Is it to go public with that brand?
So, I think, you know, the greatest long-term value for the FAT shareholders would be to take Twin Peaks public and spin it out on a tax-free basis. I think it'd be very, very interesting. You know, in an IPO scenario, we would move a big chunk of debt over with Twin Peaks and off of FAT's balance sheet, so it delevers FAT as well. But, you know, we're gonna own that stock for a long time in that spin-out, right? It wouldn't be something where we would be able to sell out of our position. So an alternative would be, you know, a Bain Capital, Fogo de Chão situation, where they, you know, somebody comes along and says, "Hey, I wanna buy it. Don't go public.
Here's a check." You know, that could always happen. You know, there's other ways to go public besides a pure IPO, so that could always happen, but I don't think so. And look, the worst case is we own it for another few years and ride out the growth. The EBITDA at that brand just goes like a hockey stick because of the inherent growth. So time is our friend there. The longer we sit on that asset, the more it's worth to everyone. And so we don't really feel like we have a gun to our head. Our bondholders are very supportive and our bonds have performed very well, so they're very happy, and I think that's, you know, that's just the horse we ride here.
All right. Thank you, everybody. Appreciate you.
All right.