The ONE Group Hospitality, Inc.

Greetings and welcome to the one group second quarter 2023 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 today. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Tyler Loy. Please begin, sir.

Thank you, operator, and hello, everyone. Before we begin our former 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 these forward-looking statements 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 prepared in accordance with GAAP. For reconciliations of these measures, such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales, and total food and beverage sales in 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 Hilario.

Thank you, Tyler, and hello, everyone. We sincerely appreciate you joining us today and for your interest in the one group. First off, let me begin by thanking all of our team members for their hard work providing world-class operations as we build a strong portfolio of restaurants with industry-leading returns. We recently opened a new corner grill in Riverton, Utah, and the restaurant is off to a strong start. This marks our second corner grill opening this year and the seventh venue opening in the last 12 months. And we will only be accelerating the space. We've been diligently preparing and building our construction pipeline and it's finally primed and we anticipate a new venue opening every four to six weeks for the foreseeable future. In addition to the strong start at our Riverton location, our other new store openings continue to perform above our investment model. Colonial Columbus average approximately 100,000 per week, and our SDKs average approximately 250,000 per week during the quarter. For the SDKs, this is significantly above our new store sales target of 154,000 per SDK. Turning now to the second quarter, comparable sales faced tough post-Omicron comparisons from last year, especially at STK. As you may recall, our STK same-store sales volumes as compared to the pre-pandemic baseline were positive 82% during the second quarter of 2022 and significantly above industry averages for this benchmark. To put this in perspective, the fine dining segment has increased 20% to 30% versus 2019, and the SDK is up 70% versus the pre-pandemic baseline. While we believe we could hurdle this incredibly robust performance, our comparable sales face greater macro pressure than anticipated. That said, We are maintaining our share gains from the last few years, and our SDK average unit volumes continue to be over 16 million. Importantly, we did see accelerating comparable sales throughout the quarter, and Kona Grill sales in particular are gathering momentum going into the back half of the year. Moving on to restaurant operating profits. We continue to show best-in-class performance relative to cost of goods sold, as we posted our third consecutive quarter of 24% cost of goods. While we continue to see more moderate year-over-year inflation, much of the basket seems to be flattened compared to where we've been over the last 12 months. As discussed earlier, because of the macro pressure on sales, we invested greater in digital marketing, where we drove more than 10% increase versus the first quarter in social media impressions. In addition, we invested in restaurant staffing to ensure strong guest loyalty for the long term and to replace the high-quality talent that we moved into our opening teams. We are happy with our current guest loyalty metrics, and we believe they bode well for future performance. Lastly, we carried some additional manager headcounts in order to support our growth initiatives, and they are being deployed to our new store openings for the balance of the year. Macro pressures on sales coupled with our strategic investments in brand awareness, guest experience, and staffing ahead of our robust development pipeline impacted our adjusted EBITDA year over year. Based on these factors, we have adjusted our guidance, but believe we have actions in place that will deliver positive comparable sales and increased margin versus the prior year for the back half of 2023. Looking ahead, we are committed to robust growth and margin expansion. Our strategic focus is as follows. One, driving the in-restaurant experience at both brands by making sure that we are delivering exceptional and unforgettable experiences to every guest every time. This is fundamental to our operating model, and that's what sets us apart from our peers. We have an amazing, talented group of restaurant teams, and we'll be leveraging them to upsell our premium menu items and high-margin add-ons. Two, continued investment in digital marketing, especially focused on our value offerings. It's imperative that we keep the brands accessible to our entry-level price points. Our brunch and 3, 6, 9 half-hour offerings are especially relevant in the current economic environment and some of the best values in the industry. In addition to our value layers, our takeout and delivery business continues to grow in dollars and percentage of total revenue, and that's another area where we will continue to invest. Three, taking targeted price increases as we have lacked our peer group and the industry in the amount of pricing we have taken during this highly inflationary period. Based on our peer comparisons and our guests' satisfaction levels, we believe we have additional pricing opportunities that we plan to take. Four, committed to opening a new restaurant every four to six weeks for the foreseeable future. And five, right-sizing labor and other operating costs for post-initial investment and growth. We've talked about the increased managers that we've carried in order to support our growth initiatives, but we have additional opportunity to scale our scheduling in order to drive sales and increase labor efficiency. In addition, we have launched several initiatives to reduce costs that do not impact sales, such as system-wide optimization of our paper supplies credit card processing fees, and various outside services. Year to date, our store level margin is 15.7%. We anticipate to finish in the year in the 17% range. We believe these strategic initiatives are paramount as we look to drive positive comparable sales and margin improvement during the back half of the year. Moving on to our development pipeline, we expect to open 8 to 12 new venues in 2023, and we plan to open a new venue every four to six weeks for the foreseeable future. Already this year, we opened Kona Grill in Columbus, Ohio, two Reef Kitchen licensed locations, and a Kona Grill in Riverton, Utah. In addition, we added a rooftop at the SDK in Scottsdale, Arizona. By the end of the year, we are on track to open one to two additional Kona Grills in the following cities, Phoenix, Arizona, and Tigard, Oregon. and three to four new company-owned SDKs in the following cities, Charlotte, North Carolina, Washington, D.C., South Lake City, Utah, and Boston, Massachusetts. And finally, we plan to add one managed or licensed SDK. Over the long term, we view our addressable market as 200 SDK restaurants globally and 200 corner grills domestically with best-in-class ROIs of between 40% and 50%. There is clearly a long runway of opportunity ahead of us that we are just beginning to actualize. Now I'll turn the call over to Tyler.