The ONE Group Hospitality, Inc.

Greetings and welcome to the One Group Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Tyler Loye.

Thank you, operator, and hello, everyone. Before we begin our formal remarks, let me remind you that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and you should not place 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. Please also note that these forward-looking statements reflect our opinion only as the date of this call. We undertake no obligation to revise or publicly release any revisions of the forward-looking statement in light of new information or future events. We refer you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. During today's call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. However, the presentation of these measures or other information should not be considered in isolation or as a substitute for results repaired in accordance with GAAP. The reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales, and total food and beverage sales at owned and managed and licensed units to GAAP measures, along with the discussion of why we consider these measures useful, please see our earnings release issued today. With that, I'd like to turn the call over to Manny Valerio. Manny?

Thank you Tyler and hello everyone. We sincerely appreciate you joining us today and for your interest in the company. Here at the one group, we are committed to executing on our mission to be the best restaurant in every market that we operate by delivering exceptional and unforgettable experiences to every guest every time. Let me thank all of our team members who continue to work exceptionally hard to provide world-class operations and bring our mission to life every day. It is because of them that we have been able to strengthen our leadership position in high-end and upscale casual dining and that we have great confidence moving forward. For the third quarter, our total revenue grew to $73 million reflecting our U.S. average weekly sales of 290,000 at SDK and 95,000 at Kona Grill. On a trailing 12-month basis, we believe our U.S. average unit volumes of 16.5 million for SDK and 5.4 million for Kona Grill remain among the highest in the industry. In addition to those impressive average unit volumes, we opened SDK San Francisco in August, which is averaging over 350,000 per week in sales. Our consolidated comparable sales increased 0.5%, consisting of an increase of 3.5% at SDK and a 3.6% decrease at ConoGrow. When compared to 2019, our pre-pandemic base year, consolidated comparable sales increased 45.6%, consisting of an increase of 70.6 at SDK and a 22.3% increase at Kona Grill, which shows that we've retained the share increases for both brands and that our differentiated vibe dining experience is resonating with our guests. It is important to note that Hurricane Ian had a negative impact on both SDK and Kona Grill comparable sales, as 14% of our sales base resides in the state of Florida. Adding more color to these results, we took advantage of numerous activations to drive buzz at our restaurants. In July, we celebrated National Steakhouse Month with Waigu specials at SDK and Conogrow. In addition, we celebrated National Tequila Day, National Mac and Cheese Day, and National Cheeseburger Day to drive excitement with our culinary innovations and differentiated beverage programs. Lastly, on Labor Day, we offered 50% off for all frontline workers, which was very successful and incredibly well received by local communities. Additionally, we continue to emphasize and enhance our happy hour offerings at both SDK and Kona Grove, and our $3, $6, and $9 happy hour menu is working well with our guests. We have put a lot of market behind this value offering on our social channels, and through our loyalty program allow us to capture traffic during our shorter periods with excess capacity and exposes guests to our brands at approachable price points. We then see many of these guests back in our dining rooms in order to celebrate their special occasions with us. In addition to happy hour at both brands, we are currently running other value-driven programs such as the weekday power lunch, midweek date night offerings, pre-theater menus, and takeout and delivery specials. We also continue to leverage the important brunch day part with craveable and newsworthy culinary offerings and bottomless mimosas. Lastly, we are seeing our events business come back after two years of a pause. As we look to the fourth quarter, our event bookings are building and more expense check-driven business is returning as we have an incredible slate of exciting holiday and seasonal money offerings planned. Moving on to the current cost environment. As you are aware, we are currently in a period of historically high double-digit inflation across our industry. Based on our interest in building market share in the current economic environment, we decided to take modest price increases during the third quarter, a slower seasonal quarter, knowing that we would not offset all the inflationary headwinds. At SDK, we took an approximate 3% price increase, and at Kona Grill, we took an approximate 5% increase, both midway through the quarter. Based on the results, I'm pleased to say that we saw no noticeable resistance, and I'm confident that we can take more price during the fourth quarter, which is our stronger seasonal quarter as guests come to celebrate the holidays and are less likely to notice the increases. Long-term, we believe that we still have significant pricing power in both brands and will exercise it. Expectantly, our third quarter Russian consolidated operating profit decreased from last year. Russian operating profit SDK decreased but it was still a strong 18.5%. Both brands saw inflationary pressures, uptake price increases during the quarter. It's important to remember that the third quarter is historically a lower margin quarter as we make investments to be fully staffed for the busy fourth quarter. Over the long term, after we address the current inflation to price differential, we still expect STK restaurant operating profit to be in the 20 to 25% range and Kona Gros restaurant operating profit to be in the 15 to 20% range. Despite the cost headwinds, we still delivered over $7 million and adjusted EBITDA for the quarter, bringing our trailing 12-month adjusted EBITDA to approximately 41.5 million. Now turning to development. In August, we opened our first company-owned SDK of 2022 in downtown San Francisco on Market Street. As previously mentioned, the restaurant is off to a terrific start, and we could not be more excited about the future of this location. Also this week, we opened SDK Dallas on McKinney Avenue. This restaurant has an elevated dining room with plentiful outdoor space to enjoy great culinary selections, world-famous cocktails, and live music spun by renowned DJs. In July, we opened our first of three virtual locations through a licensed deal with Reef Kitchens in Austin, Texas. Guests in Austin can now enjoy delivery of select menu items from our award-winning dining concepts, Kona Grill and Bal Young. This partnership enables us to further expand and capture a new customer base with limited capital investments. Despite the challenging construction environment, we plan to open during the main of 2022 and first quarter of 2023. One, within the next couple of weeks, a managed SDK in Stratford, London, UK. Three company-owned corner grows. Kona Grill in Riverton, Utah, Kona Grill in Columbus, Ohio, and Kona Grill in Desert Ridge, Arizona. And finally, we plan to open two additional license units in partnership with Beef Clip Kitchens and provide takeout and delivery only featuring offerings from Kona Grill and Die Yum Concepts in Texas. Additionally, our remaining 2023 pipeline is strong for the second through fourth quarter we plan to open seven new units which include three company-owned SDKs, one managed or licensed SDK, and three company-owned Kona grills. As we have long stated, we are early in our growth strategy with significant white space ahead. We are excited about our long-term opportunity as we believe our units deliver best-in-class returns. For new restaurants, we're targeting between 40 and 50% ROIs for new company-owned SDKs and for company-owned Kona grills. We foresee a total addressable market of at least 400 restaurants, including 200 SDK restaurants globally, and at least 200 Kona grills domestically. To conclude, our team is doing a fantastic job providing our guests exceptional and unforgettable dining experiences. Ultimately, our focus on operations and day-to-day execution has proven effective in translating to a strong P&L, and we plan to continue on our current trajectory of industry-leading comparable sales, disciplined cost management, and new store development. Now, I'll turn the call back to Tyler.