First Watch Restaurant Group, Inc.

First Watch Restaurant Group, Inc. Second Quarter 2023 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 instructions on how to ask a question will be given at that time. This call is being recorded today, August 1, 2023, at 8 a.m. Eastern Time. 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 Steve Murata, Vice President of Investor Relations at First Watch, to begin.

Good morning and welcome. I'm 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 of 2023 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. Let me 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 condition 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 risk factors disclosure in our filings with the SEC, including quarterly report 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 to the comparable GAAP results contained in the company's earnings release filed this morning. And with that, I'd like to turn the call over to Chris.

Thanks, Steve. Good morning. First Watch showed continued growth and success during the second quarter. Our top line results were driven by healthy 7.8% same restaurant sales growth and the outside performance from the significant number of new and non-comp restaurants we opened. Bottom line growth was bolstered by easing food and beverage inflation. Our traffic trend improved sequentially throughout the quarter, principally due to more favorable comparisons as we moved past the post-Omicron recovery benefit that we experienced over the prior year. In-restaurant traffic was up low single digits, offset by fewer off-prem occasions, which resulted in an overall traffic decline of 1.2% for the quarter, although we continued to outperform casual dining overall by 510 basis points, according to Black Box Intelligence, highlighting our ability to grow market share in any environment. Encouragingly, when our customers do visit us in the restaurants, and more of them did, they're opting for the full experience. This shift by the consumer back to in-person experiences and social occasions is a really good thing for us. During the time of necessity, we were pleased to accommodate the consumer for their off-prem occasion, and we will continue to do so. But we are even more pleased with the ongoing pivot back to our dining rooms. Simply put, the totality of our in-restaurant service touchpoints generates a significantly better customer impression compared with that of off-prem. We often field questions regarding the current state of our customers. We have seen no indications of check management. In fact, in Q2, we realized positive year-over-year trends in beverage attachment and guest-elected pricing, or MIX, driven by the introduction of new menu items, such as specialty iced coffees and our bacon cheddar cornbread shareable. Seemingly, the single indication of price sensitivity we've seen has been in the third-party delivery channels, where, like many in the industry, we're experiencing fewer occasions. The first and second quarters are typically our highest average weekly traffic quarters and contain several special occasions that people choose to celebrate at First Watch. Mother's Day is our busiest day of the year and this year, as they have in years past, our teams delivered. As a testament to our progress on increasing throughput, we were pleased to see a 400 basis point increase in Mother's Day same restaurant traffic and an 800 basis point increase when we consider dine-in traffic exclusively. Even more, We managed those record traffic levels while improving our customer satisfaction scores year over year. In short, it was the highest sales day in company history, reaffirming that our evolving operating model positions us well to capture more demand and improve the customer experience. As has been the case for many years, we continue to experience success with our new restaurant openings. This is in part due to strategic enhancements we've made, which is resulting in higher profile locations with increased seating capacity, larger and more attractive patios and indoor-outdoor bars, just to name a few. These initiatives have driven average unit volumes that we had not seen previously, and as a result, our new restaurant AUVs continue to exceed the comp group. We continue to innovate with far more room to optimize over the long term, and we're encouraged by the impact we're already seeing. In the second quarter, we opened nine system-wide restaurants, including six company-owned locations. When you consider the number of restaurants we will open this year, and our clearly defined path to 2,200 domestic locations, we expect the long-term growth associated with new restaurant openings and franchise acquisitions to continue to fuel our value creation. Our teams are very proud, as they should be, and I'm excited to see us continue to raise the bar. We remain confident in the opportunity and the growth algorithm that underpins our long-term guidance. We focus on two pipelines to drive our growth, people and restaurants. As we sit here today, we have more than 100 new restaurants in various stages of development, and in excess of 120 promotion-ready managers teed up to lead them. The powerful combination of Firstwatch's proven portability and vast landscape of untapped markets represents a long runway for future growth, and when you couple that with our impressive historical cash-on-cash returns, the potential becomes clear. Finally... we've continued to execute against our strategy to drive long-term value through the acquisition of franchise-owned restaurants and related territories. In the second quarter, as we shared on our last call, we acquired six franchise restaurants in the Omaha market. Most recently, we acquired five additional franchise restaurants in the Milwaukee area, and we expect to close on an additional seven, including one under construction in South Carolina and Georgia within the next 30 days. Following these acquisitions, we will have 12 franchisees who operate 100 restaurants. And of those, 51 are subject to purchase options. As a reminder, our franchise-operated restaurants perform similarly to our company-owned restaurants. So for us, converting franchises to company-owned restaurants is compelling for both the financial and strategic perspective and represents a significant growth opportunity for our entire enterprise. Our impressive second quarter results exemplify our consistent, long-term track record of operational excellence. FirstWatch was built over four decades by keeping our eyes on the horizon while simultaneously focusing on exceptional execution, consistency, delivering value, and driving traffic. I believe we are well positioned to thrive in virtually any economic environment. We are, as always, looking forward to creating and serving more demand. Before I turn it over to Mel, I want to welcome our newest board member, Irene Chang Britt. Irene's deep experience in both operations and corporate governance with food and beverage brands in particular, will be a terrific asset to First Watch, and we're thrilled with her addition. Mel? Thanks, Chris.