Kura Sushi USA, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, April 14, 2020. On the call today, we have Hajime Uba, President and Chief Executive Officer, Koji Shanohara, Chief Financial Officer, and Benjamin Porten, Investor Relations Manager. And now, I would like to turn the conference over to Mr. Porten. Thank you. Please begin.

Thank you, Operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second quarter 2020 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in an 8K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussions today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results in financial conditions. Also during today's call, we will discuss certain non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation nor is a substitute for results prepared in accordance with GAAP. And the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jimmy.

Thank you, Ben, and thank you everyone for joining us today. Before we get started, I would like to say that I hope all of you on the call, your families and your friends are healthy. And to those of you who have been impacted directly by COVID-19, I hope for a speedy recovery for you or your loved ones. Today's call was scheduled for what would normally be a discussion of our fiscal second quarter financial results and the ongoing operating initiatives. Yet as you know, these are not normal times, so I'll touch only briefly on the second quarter before moving on to a review of our current operations. Our second quarter earnings release contains specific information about the quarter's results, and of course, we will be happy to entertain any questions about earnings during today's Q&A. We were pleased with our second quarter results, which included revenue growth of 28% Thank you very much. As news about COVID-19 began to spread, we started to see a slowdown in sales across the system, particularly in our West Coast restaurants. Our initial focus was to manage store labor hours. But as an increasing number of state and local governments issued new guidelines for public activities, it quickly became apparent that business as usual was a thing of the past. As these guidelines switched to mandatory shutdowns of non-essential business, we made the difficult decision on March 18th to close all our restaurants system-wide. While many full-service restaurants have moved to take-out and delivery services, we believe our technology-enabled concept with a revolving sushi service model and distinctive multi-sensory dining experience would be impossible to replicate, and so it has not been an avenue we have pursued. Since then, our primary concerns have been the ongoing welfare of our team, our liquidity, and our ability to quickly and efficiently resume operations when the time is right. While we are currently unable to predict when that might be, I would like to provide some insight into our recent activities to give you an idea of how we are currently addressing the impact of COVID-19. The closing of our restaurants has forced some difficult decisions. While we were able to continue to pay hourly employees up until April 4th through the employee emergency relief fund that we established, they are currently followed. Our kitchen staff is the exception as they will remain on payroll. We made this decision because we believe the near-term expense of retention will be less than the cost of retraining staff and lost sales from delayed re-openings. To support our team during this difficult time, we are paying the full cost of health insurance for all of our fathered employees. In addition, they will have the right of first refusal to occupy their previous positions when we re-open. And we also plan to offer return bonuses to help ensure the continuity of our restaurant teams. With regard to our storable expenditures, we have also been in active discussions with all of our landlords. We hope to apply for a giveable SBA loan fund towards our April and May rent obligations. Given the overall fluidity of the situation, we will continue to evaluate our occupancy obligations on a month-by-month basis with our landlord partners. On the corporate support side of our business, We have reduced non-essential operating expenses, including the furlough of a modest group of support staff. With regard to our corporate operations, our thought in the near term is to be prepared to ramp our business up as quickly and efficiently as possible once we feel it is safe to do so. From a development standpoint, we had previously guided to six new restaurants in fiscal 2020 which represented the majority of our capital expenditures for the fiscal year. Two of those restaurants, KD Texas and Glendale California, opened during the fiscal Q2 prior to the temporary shutdown. Additionally, we had four new restaurants under construction in mid-March, Fort Lee, New Jersey, Koreatown in Los Angeles, Washington DC, and Sharma Oaks, California, which are currently in a holding pattern also is largely completed. While our new store development is generally on hold, I would note that some local governments are allowing construction work to continue with certain restrictions, so we are currently reviewing our options. We are also looking at the possibility of pursuing some renovations during the downtime created by store closures while adhering to local and federal regulations and recommendations regarding Safety and Social Distancing. Finally, I have two additional items to note. First, we have applied for a Payroll Protection Plan Loan under the CARES Act, which, if successful, we would apply largely to payroll costs. Under the terms of the plan, we plan to spend the loan funds on expenditures that would maximize forgiveness. And second, last week, Kurasushi Japan, our parent company, agreed to make available to us a $20 million revolving line of credit over a four-year term. Please note that we have not borrowed any amount against the revolving credit agreement and we have no plans to do so in the immediate future. We very much appreciate the support of Kura Japan and their confidence in the long-term success of our business. Overall, we are very fortunate to have entered this unique situation with a strong capital position. As of today, we have approximately $24 million in cash on hand and no debt. With all of our restaurants closed, we estimate a near-term cash burn rate of approximately $1 million per week. Keep in mind that the above cash outlay includes capital expenditures and minimal rent relief. As you are well aware, the duration of our system-wide shutdown is difficult to predict at this time. However, we are confident that we have more leverage to prove in the event that this crisis lasts for an extended period of time. One final reminder due to the uncertainty driven by COVID-19, we withdrew our previous financial guidance for the fiscal year 2020 and will not issue any update at this time. Thank you again for joining us this afternoon and for your interest in Sushi USA. Despite the ongoing uncertainty, We believe we are well equipped to weather this storm. Even as our stores are closed, our store managers are undergoing re-training. We are working on implementing crunch time, our new back of the house platform, and we are engaging with third parties in order to improve our store development and maintenance capabilities after reopening. Additionally, we are continuing the development process for our previously mentioned technology initiatives. We were extremely excited about the potential of our business before the threat of COVID-19, and we remain equally confident that when this crisis passes, we have a long runway of opportunity ahead of us. Before we open the line for questions, I would like to thank all of our team members for their hard work, flexibility, and support as we navigate this uncharted territory. This concludes our prepared remarks. We are now happy to answer any questions you have. As a reminder, during the Q&A questions, I may answer in Japanese before my response is translated into English. Please bear with us. Operator, please open the line for questions.