First Watch Restaurant Group, Inc.

Thank you for standing by, and welcome to the First Watch Restaurant Group Incorporated Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, the conference call will be open for analyst questions, and instruction on how to ask a question will be given at that time. This call is being recorded today, August 9, 2022, at 8 a.m. ET. and will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Rafael Gross, partner at ICR, to begin.

Good morning, everyone, and welcome. I am joined here today by First Watch's Chief Executive Officer and President, Chris Tommaso, and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the second quarter 2022 on Globe Newswire and file its quarterly report on Form 10Q with the SEC. These documents can be found at investors.firstwatch.com. Let me now first cover a few housekeeping matters before introducing Chris. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, growth strategies, and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in its filings with the SEC, including its most recent annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments, or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant-level operating profit margin, adjusted EBITDA, and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures that the comparable GAAP results contained in the company's earnings release filed this morning. And with that, I would now like to turn the call over to Chris.

Good morning. Thank you for joining us today for our Q2 2022 earnings call. I'm pleased to report that FirstWatch built momentum we reported in the first quarter and achieve continued success and sustained growth during the second quarter. We believe the results we've shared this morning speak to the strength of our brand, the distinctiveness of our offering, and an increasing awareness among consumers. These attributes reinforce our confidence in our ability to meet or exceed our stated short and long-term objectives. Our second quarter same restaurant sales growth was 13.4% year over year and 30.2% when compared to 2019. Increased customer counts continue to be the primary driver of that sales growth. I'm especially proud of our 8.1% same restaurant traffic growth when compared to a strong second quarter of 2021 and 7.4% growth when compared to 2019. This is significant when you consider that in Q2 of 2021, we had already returned to positive traffic versus 2019. Moreover, our traffic has improved sequentially quarter over quarter versus 2019 as well. Our average weekly traffic remained consistent throughout the quarter, and we experienced traffic growth in all three periods. In June, we achieved 4.2% traffic growth year over year. To add a bit of context regarding the strength of that last statement, Placer.ai reported that visits to full-service restaurants in June fell 4% year over year. Our performance clearly distinguishes us from most others in casual dining and the restaurant industry as a whole. On the back of our sales results, our restaurant-level operating profit margin was a healthy 82%, which brings us to 18.9% year-to-date, in line with our expectations, despite a challenging inflationary environment. We continue to stay true to our philosophy of utilizing menu pricing as a means to offset inflation, while continuing to elevate the First Watch experience with high-quality, evolving offerings. As you may recall, we decided early on to take a conservative approach to pricing these past few years, having made strategic decisions to, one, not take any price in 2021 as we work to welcome back our customers, and two, to take only a modest 3.9% increase at the start of this year. While we did see the expected slight impact on margins for the quarter due to increased commodity inflation, we believe our pricing approach was an important factor in driving our increased traffic growth. Additionally, we believe that much of the food inflation we've experienced has peaked, and we expect costs to normalize moving forward. We've improved our absolute and relative value proposition, especially when you consider that our increase is lower than both food away from home and grocery inflation. Customers know they can find fresh, high-quality food at First Watch for a per-person average just over $15. We believe this approach resulted in increased market share over the past year and in prior volatile periods. We did not see any negative traffic impact from our last price increase, nor have we seen what I believe to be an early indicator of pricing resistance, check management by the consumer. In fact, customers are electing to spend more in our restaurants. Overall beverage incidence is up, and our PPA is above our expected level when you consider the pricing. This reaffirms our pricing power, particularly given the value we provide. I want to pause here because as you consider the totality of the continued outsized performance that I just walked through, it becomes even more clear that First Watch is truly special. You've heard me speak about differentiation and our results continue to enforce that fact. For those of you that have had the pleasure of dining at one of our restaurants, you understand. For those who haven't, I highly encourage you to visit us or at least do the next best thing. Check out our website or Instagram and feel the freshness of our experience and our brand. Nobody's doing what we're doing at scale. The talented folks in every first watch are executing a high-quality experience in 450 restaurants that you typically see only in single-unit chef-driven restaurants. We roast vegetables, bake muffins, and juice fresh produce every single day, and our continued traffic growth shows how our commitment to quality is resonating with consumers. It's built deeply into our DNA. Consider this in the context of our most recent seasonal menu. where our queso birria-style barbacoa benedict performed far better than our already high expectations and aligned perfectly with current culinary trends, as you are seeing birria plastered across Instagram and on small independent restaurants' menus. What's most special here is that this menu item was identified and tested close to a year and a half ago, highlighting our ability to identify early trends and operational seamlessly throughout a fast-growing system. This is a unique competitive advantage that has been refined over decades. It ensures that we remain relevant and in a leadership position as we take advantage of the long runway ahead of us. And not only are we dedicated to delivering on that elevated experience for the customer, but we're also dedicated to fostering an environment for our employees that drives satisfaction, retention, and continues to help us attract some of the best and brightest talent in our industry. To that end, we're quite pleased that our staffing levels have stayed relatively consistent, with hourly staffing at 93%, while manager levels have improved slightly and currently sit at 2.8 managers per restaurant. At these levels, we are well positioned to continue to serve our increasing demand at a very high level, particularly with the additional uptake in applications that we've seen recently. At Firstwatch, there's no limit to the growth opportunities for our people, particularly as we continue to execute on our strategic development strategy and create more jobs. Consistent with our plan, we opened nine new system-wide restaurants in seven states during the quarter, including our first restaurant in Asheville, North Carolina, and our third in the Chicagoland area since our debut there last year. We ended the quarter with 449 total restaurants. Our development calendar is weighted slightly toward the back half of this year, as we've noted previously. We're on track and confident in our ability to meet that plan. In fact, thus far in the third quarter, we've opened four new restaurants, with three more slated to open by the end of this month and at least three more in September. The bottom line is we're very restaurants and have been for many years. As a reminder, in 2019, we opened 80 new first watch restaurants between organic growth and the conversion of certain acquired restaurants. We followed with 42 new restaurants in 2020 and 31 in 21. These new restaurants, which have enhanced footprints designed for higher volumes, have AUVs that reliably outperform our legacy locations, which raises my confidence in our ability to deliver on our long-term guidance in this area. Rest assured, strategic growth remains a priority for First Watch and further reinforces the competitive moat we've created and continue to widen. I'd now like to provide an update on a couple of our key initiatives that we've been talking about. Our alcohol program rollout is on track. The offering is now available in more than 75% of the system with a clear path to reaching our desired penetration by the end of this year. Additionally, our kitchen display system, or KDS rollout, is ahead of schedule and beginning to help us serve more demand, particularly during peak hours. We're on track to surpass our goal of leveraging the technology in at least half of our restaurants by the end of this year. In fact, at the end of the second quarter, KDS was in use in 114 restaurants, and today it's active in more than 200. I'm also excited to share that Stephanie Lilac, Chief People Officer of Bumble Inc., has joined the First Watch Board as an independent director. Stephanie is a respected leader in human resources strategy, including DE&I, compensation and benefits, and employee experience, having led these efforts for renowned General Mills and Dunkin' Brands. We're absolutely thrilled to have Stephanie's invaluable perspective on our board. During the quarter, we announced a national partnership with the V Foundation, whose mission it is to achieve victory over cancer. We contribute 25 cents from the sale of every kid's meal in every First Watch restaurant to the organization's Dick Vitale Pediatric Cancer Research Fund. Dick is a dear friend to Firstwatch, spending most days dining at our restaurant near his home in Lakewood Ranch, Florida. We're very proud to partner with him and the V Foundation and to share that through the first half of 2022, we've donated $300,000 to fund pediatric cancer research. Firstwatch is a company focused on quality, profitable growth, and we have a long runway ahead of us. We're executing well against our strategic plan and are benefiting from growing consumer demand, particularly in the daytime dining segment, of which First Watch is the clear leader. We still have relatively low brand awareness, yet impressive guest satisfaction scores, creating an ideal opportunity as we move forward. Consumers are still discovering us, and we're in a great position in our brand lifecycle as we grow toward our long-term potential of 2,200 restaurants in the U.S. We continue to open restaurants that are delivering tremendous results and returns while we reinvest in our brand to ensure long-term relevancy. At the same time, our teams are definitely handling the staffing and supply chain challenges facing our industry as a whole and have managed the volatility in the middle of the P&L extremely well. We've been able to defend our margins, enhance the customer experience, improve our value and attract new customers. Given those factors, coupled with our significant outperformance in the first two quarters of the year, we're raising our guidance, which Mel will speak to shortly. This is a tough environment, and despite a backdrop of macroeconomic uncertainty, FirstWatch is well positioned as we move forward. Now I'll pass the mic to Mel to review our second quarter financial results in further detail.