ONE Group Hospitality Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 9 speakers on the call.

Operator

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.

Operator

Please begin, sir.

Speaker 1

Thank you, operator, and hello, everyone. Before we begin our formal remarks, Letwin reminds 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 of the date of this call.

Speaker 1

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 and 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.

Speaker 1

With that, I'd like to turn the call over to Manny Hilario.

Speaker 2

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 Kona Grill in Riverton, Utah, and the restaurant is off to a strong start. This marks our 2nd Kona Grill opening this year and the 7th venue opening in the last 12 months, and we will only be accelerating the space.

Speaker 2

We've been diligently preparing and building our construction pipeline, and is finally primed and we anticipate a new venue opening every 4 to 6 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. KonaBrook Columbus averaged approximately $100,000 per week and our STKs averaged approximately $250,000 per week during the quarter. For the STKs, this is significantly above our new store sales target of $154,000 per STK. Turning now to the Q2, comparable sales faced tough post Omicron comparisons from last year, especially at STK.

Speaker 2

As you may recall, our STK same store sales volumes as compared to the Pre pandemic baseline were positive 82% during the Q2 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 STK is up 70% versus the pre pandemic baseline. While we believe we could hurdle this incredibly robust Our comparable sales face greater macro pressure than anticipated. That said, We are maintaining our share gains from the last few years, and our STK average unit volumes continue to be over 16,000,000 Importantly, we did see accelerating comparable sales throughout the quarter and Kona gross sales in particularly and are gathering momentum going into the back half of the year. Moving on to restaurant operating profits.

Speaker 2

We continue to show best in class performance relative to cost of goods sold as we posted our 3rd 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 Q1 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.

Speaker 2

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 twenty twenty three. Looking ahead, we are committed to robust growth and margin expansion. Our strategic focus is as follows: 1, driving the in restaurant experience at both brands by making sure that we are delivering exceptional and unforgettable experiences to every guest This is fundamental to our operating model, and that's what sets us apart from our peers.

Speaker 2

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. 2, continued investment in digital marketing, especially focused on our value offerings. It's imperative that we keep the brands Our brunch and 3, 6, 9, half the 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 3, taking Target price increases as we have lagged 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.

Speaker 2

4, committed to opening a new restaurant every 4 to 6 weeks for the foreseeable future and 5, Rightsizing labor and other operating costs for post initial investment and growth. We've talked about the increased management that we've 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 finishing the year in the 17% range.

Speaker 2

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 4 to 6 weeks Already this year, we opened Kona Grove in Columbus, Ohio, 2 Reef Kitchen licensed locations And the Kona Grove in Riverton, Utah. In addition, we added a rooftop at the STK in Scottsdale, Arizona. By the end of the year, we are on track to open 1 to 2 additional Kona Grills in the following cities: Phoenix, Arizona and Tigard, Oregon And 3 to 4 new company owned STKs in the following cities: Charlotte, North Carolina Washington, D. C.

Speaker 2

South Lake City, Utah and Boston, Massachusetts. And finally, we plan to add 1 managed or licensed SDK. Over the long term, we view our addressable market as 200 STK restaurants globally and 200 Kona Grills domestically with best in class ROIs of between 40% 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.

Speaker 1

Thank you, Manny. Let me start by discussing our Q2 financials in greater detail. Total GAAP revenues were $83,400,000 increasing 2.8% from $81,100,000 for the same quarter last year. Included in our total revenues is our owned restaurant net revenues of $79,900,000 which increased 3.9 percent from $76,900,000 for the same quarter last year. The increase in revenue is primarily attributable To the opening of STK San Francisco in August of 2022, the opening of STK Dallas in November of 2022 And the opening of Cote d'Gro Columbus in January of 2023.

Speaker 1

This was partially offset by a 4.7% decrease in comparable sales. Consolidated comparable sales were 46.5% compared to 2019, our pre pandemic base year. Management license and incentive fee revenues were $3,500,000 during the quarter and $4,200,000 in the Q2 of 2022. This decrease was primarily attributable to lower profitability at our managed STK Restaurants in North America and decreased revenue at a managed property in London, England. Owned restaurant cost of sales as a percentage of owned restaurant net revenue was better by 180 basis points to 24% in the Q2 of 2023 compared to 25.8% in the prior year, primarily due to menu mix management, Pricing and operational cost reduction initiatives.

Speaker 1

Owned restaurant operating expenses as a percentage of owned restaurant net revenue Increased 3 40 basis points to 61 percent in the Q2 of 2023 from 57.6% in the Q2 of 2022, primarily due to staffing ahead of growth, increased marketing expenses and general operating expense inflation. This was partially offset by single digit pricing taken in the back half of last year. In August, we will be taking an approximate 4% price increase at Kona Grill, reflecting our current confidence in the performance of the brand. Restaurant operating profit was 14.9% in the Q2 of 2023 Compared to 16.6% in the Q2 of 20.2, restaurant operating profit at STK was 18.9% And Kona Grill operating profit was 9.9% for the quarter. We anticipate restaurant operating profit to increase year over year as a percentage of revenue during the back half of the year.

Speaker 1

On a total reported basis, general and administrative expenses were $8,000,000 compared to $7,300,000 in the prior year. The increase was attributable to increased stock based compensation expense and additional investments required ahead of new restaurant openings. When adjusting for stock based compensation, adjusted general and administrative expenses were $6,800,000 in the Q2 of 2023 at $6,400,000 in the same quarter last year. Preopening expenses were $1,600,000 compared to $800,000 in the prior year. This increase was primarily related to Kona Grill Rivergen, which opened in July 2023 and STK and Kona Grill restaurants currently under development.

Speaker 1

Both years include non cash pre opening rent required for U. S. GAAP. Interest expense was $1,600,000 in the Q2 of 2023 compared to $400,000 in the Q2 of 2022. The increase was driven by increases in our outstanding balance and benchmark rates year over year.

Speaker 1

Income tax expense was nominally beneficial in the Q2 of 2023 $900,000 in the Q2 of 2022. Net income attributable to The ONE Group Hospitality Inc. Was $600,000 or $0.02 net income per share Compared to a net income of $4,300,000 in the Q2 of 2022 or $0.13 net income per share, Adjusted net income was $1,800,000 or $0.06 adjusted net income per share compared to an adjusted net income of $4,900,000 2nd quarter of 2022 or $0.15 net income per share. Adjusted EBITDA for the 2nd quarter attributable to The ONE Group Hospitality, Inc. Was $8,500,000 compared to $10,400,000 in the Q2 of 2022.

Speaker 1

We have included a reconciliation of adjusted EBITDA and adjusted net income In the tables in our Q2 2023 earnings release. During the Q2, we repurchased approximately 500,000 shares of our common stock. In total, we have purchased 1,700,000 shares or approximately 5% of our outstanding shares under our buyback program. We have approximately $3,700,000 in share repurchases that remain available under our $15,000,000 share repurchase program. We will continue to use discretion in determining the conditions under which shares may be purchased from time to time, if at all.

Speaker 1

Now I'd like to provide some forward looking commentary regarding our business. This commentary is subject to risks and uncertainties associated with forward looking statements As discussed in our SEC filings, we always remind our investors the actual numbers and timing of new restaurant openings For any given period, it is subject to a number of factors outside the company's control, including weather conditions and factors under control of landlords, Contractors, licensees and regulatory and licensing authorities. Based on the information available now and the expectations as of today, We are updating the following financial targets for 2023. Beginning with revenues, we project our total GAAP revenues of between $350,000,000 $365,000,000 Embedded in this top line range is our expectation of flat consolidated comparable sales for the Q3 versus 2022 and positive 4% to 8% in the Q4 when compared to 2022. Managed license and incentive fee revenues are now expected to be $15,000,000 $15,500,000 due to lower revenues on our properties in London.

Speaker 1

Total Owned operating expenses as a percentage of owned restaurant net revenue of 83% to 82%. Total G and A, excluding stock based compensation of approximately $27,000,000 to 29,000,000 We now expect adjusted EBITDA of $45,000,000 to $50,000,000 which represents an approximate 10% to 20% increase compared to 2022. Restaurant preopening expenses between $5,500,000 $6,500,000 an effective income tax rate of between 5% 10%, Total capital expenditures net of allowances received from landlords of approximately 2.5% of company owned revenue Approximately $3,000,000 to $3,500,000 per company owned venue. And finally, we plan to open 8 to 12 new venues in 2023, including adding 1 managed or licensed SDJ restaurant. I will now turn the call back to Manny.

Speaker 2

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying that we are in the early stages of our long term growth strategy as we continue to build a portfolio of high volume brands with compelling returns for our shareholders. Thank you all for your interest in The ONE Group. As I always say, none of this would be possible without the fantastic support of our teammates We'll bring our mission of great execution to life every day. We have some exciting times ahead and we'll be opening a lot of restaurants in the near future, And I look forward to seeing you all out there.

Speaker 2

We appreciate everyone joining us on the call today. Tal and I are happy to answer any questions that you may have. Operator?

Operator

We will now begin the question and answer session.

Speaker 3

Great. Thank you for taking the question. Good afternoon. I was wondering if you could talk through the trends that you saw Through the quarter, in terms of understanding that there's certainly some substantial year over year comparisons that you were lapping up against. But underlying that, Did you see any kind of pushes and pulls that things progress through the quarter?

Speaker 3

What can you tell us there? And then when we think just broadly about The consumers demand and overall appetite for experiential dining, which your portfolio embodies, what are you seeing there? And how should we be thinking about that in the back

Speaker 2

Josh, this is Manny. On that question, I would say that the softer Part of the quarter was probably earlier in the quarter and the reason was with Omicron many conventions Got deferred and pushed into the Q2. So there's a little bit of a shift on convention business. So we did benefit Last year, early on with the convention business of just people accelerating the conventions at that point. So I would say that probably was In the in quarter, big comparison year over year, it was lapping over just to catch up on conventions.

Speaker 2

And then I think That as we've gotten back closer to today, I think the sales momentum has Not the momentum, but I would say the lapping has become easier for us. And in terms of trends and what we see in the environment, Not anything different from what we've seen earlier, which is we do see a continued interest on Friday, Saturday business in the 6:30 to 8:30 time frame. So the dinner hour on the weekends continues to be very strong. And then we do have A slight drop off in the late hours in terms of demand for dining and then on weekdays, As I mentioned earlier, because we were getting the benefit of conventions and convention traffic, we do see a slight impact On Monday, Tuesday and Wednesday. By the way, that is STK.

Speaker 2

In relation to Kona Goro, Actually, I think the momentum on Kona Guro is very strong and it's actually on the year over year lap. We have seen Very strong performance in June July. As a matter of fact, as Tyler mentioned in his prepared statements, The momentum has been strong enough that we feel pretty confident in taking pricing without impacting transactions as we've spoken in the past. Preserving traffic is paramount for us because we view that as our long term strategy of keeping market share. So we feel really good about the trends with kind of growth.

Speaker 3

That's helpful. And Tyler, in your prepared comments On the forward look, you offered some context on 3Q and 4Q. I'm curious, is that at the kind of the total combined level? Can you provide any sort of additional color there by FCK or Kona as we think about either the pricing or other menu initiatives that you might have replaced?

Speaker 1

Yes, Josh. Thanks for the question.

Speaker 4

I think that's on a definitely on a combined basis. Manny touched on conogrel and the strength that we're seeing there along with that pricing that we've taken. I think from You can kind of see the patterns in the lap relative to we were lapping kind of an 82 versus in the second quarter kind of goes to 70 in the third and then 61 down in the 4th quarter. So I think that's where we're How we're kind of modeling that is we were 70% above 2019 in the Q2 and so you

Speaker 2

can kind of see a little

Speaker 4

bit of pattern there in the

Speaker 3

Got it. That's helpful. And then last one for me. Just when we think about the strong unit growth potential here, can you talk about some of the investments you made And you have made or will continue to make to support that. I mean, the opening one opening every 4 to 6 weeks is very impressive, especially within the backdrop of just Others in the industry continuing to talk about permitting, more so permitting delays that are facing you're kind of providing a headwind there.

Speaker 3

Can talk about some of the efforts and maybe the blocking and tackling that you're doing with your team to address that and be able to reach your impressive unit growth targets?

Speaker 2

Yes. So I mean, 2 things come to mind right away. Number 1 is we have had to carry a significant amount of extra managers. And the reason is, particularly for STK, we have made a decision to open up the restaurants with employees who do know the brand. So We're training in existing restaurants, which then puts pressure on the restaurant margin at STK.

Speaker 2

We want to start off The new operations with a minimum of 2 managers who've already been in the system. So right now, we've been carrying, as I mentioned earlier, about 15 to 25 Extra managers just to support that strategy. And then the second item is that, as we put together Our training team, which to open them number of restaurants, we have a team of about 25 to 30 individuals. And those individuals were some of our best employees in the restaurants. So we have to backfill those positions in the restaurants.

Speaker 2

So We're investing in the restaurants as well because we now are replacing top talent with additional headcount. So really where you see The pressure of that line is on labor, of course. And so and really the commitment there is that 5 dining requires a very high level of execution in the restaurants, and that's one of the things that we're very proud about. In the Q2, although we didn't talk about it, it's just the quality of operations and our feedback from So frankly, that's really good for the long term when you're able to work on experience and get yourself ready for the growth. So I think the mention was accomplished there to keep quality while you're getting ready for the growth.

Speaker 2

I think just Relative to permitting, I think the permitting environments, I'm sure you've heard from everybody, is tough. I mean, there's a lot of competition With lots of big projects in every big city going on right now and the permitting licensing Establishment just does not seem to be organized. I mean, we have restaurants that have been in permitting for 9 months. And in some cases, Some of them even nearing a whole year in terms of getting them cleared in the process. Obviously, our restaurants are big, have a lot of mechanical and a lot of complexity in the build out.

Speaker 2

So it does take a little bit of time to clear it out through the governmental agencies. But I would say right now, the concept here is that we have a tremendous amount of real estate that we signed on, And it's a little bit like priming a pump. We've kind of primed it up with locations where that permitting Time is no longer an issue, if you will, because we have a lot of backlog now in terms of available real estate to build. So now it really gets back down to it's a training and getting the training teams in and out of the restaurants and get the operations to go. So that's how I view the growth and the investments that we've made is really labor and preserving the quality of the experience in the long term, which is, as you know, very important to us.

Speaker 3

Appreciate the context. Thanks so much.

Operator

Our next question is from Nick Setyan with Wedbush Securities. Please proceed.

Speaker 5

Thanks. Just to clarify, the flat comp in Q3 and then 4% to 8% in Q4, is that consolidator or is that in reference to a specific brand?

Speaker 4

Yes, Nick, this is Tyler. That's on a consolidated basis.

Speaker 5

Can you tell if you can break it up by brand?

Speaker 4

Yes, I think that kind of the what I was alluding to regarding Josh's Question, I think, STK is kind of running at plus 70 versus 2019. And if you look at what they're lapping last year, it's kind of plus 70 and then plus 62 For the Q3 and the Q4 of last year and then with Kona Grill, I think Manny just kind of touched on it. I think we are seeing Some strong results from the Conan Grow brand right now, enough that we feel pretty confident taking some additional pricing here this month.

Speaker 5

That basically implies like flattish comps at STK and then up in Q4 and then Kona actually up in Q3?

Speaker 2

I mean, right now, I mean, as I think I said on the this is Manny, by the way, not Tyler anymore. But Our performance at Cunegro is really strong right now. So and again, there has been A lot of work that we've done there. So I do think that it's just executing high level. So I'm very Feel very good about the same store sales for Kona growth this year, particularly for the back end.

Speaker 5

Got it. And then the 17% margin exiting the year, is that For the full year 17% or Q4 17%?

Speaker 2

It's a full year version and I think that the 4th quarter First, this year will be a very good margin quarters. We will have a lot more SDKs in operation this Q4. So I think that bodes very well for the margin in the Q4.

Speaker 5

Okay. And I think you guys have said for Q1, there was about 6% pricing and 2% to 3% mix for both brands. What was the pricing and mix in Q2?

Speaker 2

So pricing is still running around 6 points positive for both brands and mix Is it around plus 2 to 3, right, Tyler?

Speaker 4

Yes, I think mix shifted down just slightly.

Speaker 2

I'm sorry, right, down 2 to 3.

Speaker 4

Yes, for the quarter.

Speaker 5

Okay. So down to the 3?

Speaker 3

Yes, that's correct.

Speaker 5

Okay. Okay. Thank you very much.

Operator

Our next question comes from Mark Smith with Lake Street Capital. Please proceed.

Speaker 6

Hey, guys. Just curious, just big picture here as you look at the consumer, are you guys seeing any different trends from kind of Metro versus suburban, as we look at maybe Kona versus STK or even some of your STK Strauss, are you seeing any trends that way in kind of consumer trends? Or is there anything else big picture that you see as far as changes in behavior during the quarter?

Speaker 2

I mean, I think just right now, I would say that the Predictability in the suburban is better. So I would say that suburban sales seem to be More consistent and with lots more visibility. I think urban sales continue to be A little bit less visible just because of the business and convention business. I would say that Right now, the consistency is more on those suburban locations. Also, On smaller cities, I do see a little bit more strength than perhaps in the bigger cities.

Speaker 2

I think the bigger cities That benefit a lot from tourism. Last year, I think there was a lot of U. S. Tourism, where this year, You're seeing more of a global tourism business. So I do think the big cities with lots of tourism exposure are a little tougher this year.

Speaker 2

But again, I would just say that province of Webroot Runaan is really where the strength is.

Speaker 6

And then as you guys are taking price, are we going to see most or all of this at Kona? Or do you have plans To take any pricing in the second half here at STK?

Speaker 2

So right now, we our planned pricing that Tyler mentioned is going to grow, And that's going in here in the next couple of weeks. STK, we always look in November, and so we will take another look In the Q4, mid Q4 and take a look and see where the opportunities may be. Again, I think that As we've said in the past, the pricing strategy always has to be really thoughtful because obviously you always get the short term Margin bump ups when you do that, but then I always think about the longer term. So you're sometimes trading short term margin for long term Traffic and market share, and as you know, we're a market share long term driver of sales, and we try to protect Our pricing position and keeping much pricing power because I think that's good for the brands in the long term, Allows you to do the right decisions for the brand and really work on the experiences.

Speaker 6

Okay. And then last one for me. Just looking at restaurant cost of sales here, You've been around about 24%. Anything that you see that changes that? Any changes in commodities?

Speaker 6

Anything Call out either good or bad, this is kind of near term or on the horizon.

Speaker 2

I mean, I think for us, Commodities is kind of particularly on food items and beverage items. I mean, our performance On cost of goods, I couldn't be happier with that. I mean, that's usually one of the big hardest areas that is hard to control in hyperinflationary or high I think we've done a really good job. We're in the 24 range, which is kind of on the low end of our Long term guidance range for that item. So we feel pretty good about that.

Speaker 2

I think that the pace Increase on commodities has softened, so that's good. So I think we see a slowdown there. For us, and I think we keep repeating this is, We did have wage inflation that's clear on our numbers, but really the bigger area of margin, if you will, pressure for us was our Decision to continue to invest on labor in advance of the restaurants. And as I mentioned earlier, we do want to start these new restaurants with High quality management and crew staff to frankly go out the blocks really strong with revenues and maximize Profitability for us in the Q4, I mean, that's really our big quarter, and that's the time that we will show up with Very strong margin and profitability results.

Speaker 6

Excellent. Thank you.

Speaker 2

Thank you, Mark.

Operator

Our next question is from JP Willam with Roth. Please proceed.

Speaker 7

Great. Hi, guys. Thanks for taking the questions. If we could start just STK, I think you've been pretty clear that you're lapping some big conventions in 2022 that may have been delayed. But Maybe if we could just talk a little bit more about what you're seeing at STK in terms of the different Groups of customers and maybe it's relative to your expectation instead of a sort of comp basis, but I'm just wondering if you could provide a little more clarity about where you're seeing Some trouble or some strength between, let's call it, the convention groups, maybe the expense tractor, the suits And then social dining, if you could just kind of frame each of those relative to maybe where you thought you'd be at this point in the year?

Speaker 2

I mean, we'll start off with the suits or the business type of consumer. And this is STK now. So for that brand, I think the tough lap has been on this is not It's really the lap is that less traffic from some of these conventions into restaurants. And so I think that's probably Monday, Tuesday, Wednesdays. On Fridays Saturdays, I think that the Consumers, it comes to social occasion is still strong, and there's still appetite to go out and celebrate and Experience an elevated experience.

Speaker 2

The overall industry dynamic though is that there are some restaurants that do have capacity now in the 6 30 to 8:30 time frame. So the consumer is now wanting to book 9 and 10 o'clock reservations since they have Choice is to go pretty much anywhere else earlier in the day. So on the social occasions, particularly on Fridays and Saturdays, you're seeing A really strong first turn for us. And then on the later hour, you do see Less dual dining traffic and the way that we're fighting or adjusting for that is We have launched late hour, happy hour in every single one of our restaurants. And so we are starting to see the post-ten o'clock business coming back and that's actually been a very good add in most of our restaurants and we're starting to see that business building in.

Speaker 2

So I would say that's kind of been the kind of the SDK consumer view. I do see A little bit more of product sharing in the restaurants. So I do see and I think Tyler mentioned earlier that our check The mix is down is because we do see a lot more sharing in the restaurants that we used to see before. But again, It's not that dramatic, but you definitely do see it a little bit in the restaurants now.

Speaker 7

Great. Thank you. Moving over to Kona Grill, Something I think we've kind of been looking for a little while and just curious if there's any updates, but Can you just share or maybe quantify at all kind of the Columbus Kona Grill, if you prefer and have numbers from Riverton, that's great, but I imagine it's early. Just kind of anything to point to how much better On maybe margin side, the kind of remodeled Columbus Kona Grill is relative to the average?

Speaker 2

Yes. I mean, I wouldn't call it remodeled because we actually built a brand new restaurant in the same property we did. If you go there now, you won't even recognize it's the same restaurant. But in context of that question though, I would tell you that That restaurant with a new look, feel, design layout is up over 30% volume. And this is actually a really good test because we took the same real estate.

Speaker 2

We just put in there the new platform, new look, feel And we gained over 30% sales per week. So to me, that was a really good task to really tell me How good, if you will, the revised brand is. So we do know that there's a lot of power in the new menu and the new service style and a little bit more energetic environment to put in there. So check the box on that. I'm super excited about that.

Speaker 2

And that tells me really that some of the stuff It gives us some directional look that we've done the right things in terms of what we're doing with the brine. In terms of Riverton, it's obviously Very early, but I would tell you that we opened that project frankly with no real marketing. We just opened the doors And we're already above system average on the weekly volume for that restaurant. And that's just even without doing any of our Marketing strategies there. And it's frankly, that restaurant is a phenomenal project.

Speaker 2

It's a great Senegal project, and again, the real estate is fantastic and it's a beautiful restaurant. If you go out there and look at The videos that people have been posting from us, we do get an incredible score in our benchmarks with the customers relative to look and feel and the experience, and it's really good. So I would say the 1, 2 punch coming out of Kona Grill is We're really excited about same store sales momentum. I think that the new store venue, The new revenues are fantastic coming out of the new units. And obviously, the 3rd item here that we We'll work on and get strong results is in the margin side because when you go to the new restaurants, you'll notice that the kitchens are smaller, Just because the labor costs are dramatically lower because we do not have 2 kitchens in the restaurant anymore.

Speaker 2

We have One kitchen with a sushi extension and that will save us several points in margin. And the last thing I would say about the new Kona Grill Prototypes is we've invested in kitchen technology. So a lot of our well, not a lot, all of our new restaurants that we're building has Efficiency, efficient equipment packages that require less people to operate the kitchen and Provide better quality products. So we're hitting both quality and cost in the long term with the new kitchen layout and equipment packages.

Speaker 7

Great. That's very helpful. One last one, if I could squeeze in. In terms of some of the digital marketing, anything you can kind of point to that you're really seeing The success from it that you're it's worth it, it's helping, it's driving traffic. Anything you can kind of call out or point there?

Speaker 2

Yes. I mean, as you know, we've always talked About digital marketing being the backbone of the company and we measure it with the click throughs And the end results in reservations and frankly, it is a bit variable for SDK, and so we're super excited about that. That's one of the reasons why we took on more digital. I think our digital model is also evolving from what we used to do, which I'm happy with. We're going more into the influencer.

Speaker 2

And frankly, we want to gain a market advantage in our influencer. So if you look at a lot of our stuff that we do digital, We've gone away from just specifically hitting on the ads on Instagram and Facebook and I think that everybody already does that. And our emphasis now is in building integrated influencer networks. And so you'll see us Continue to evolve that strategy and we're very excited about that. We actually did very well with That network with our solstice parties, which was Off the charts successful, so we're super excited about some of the things that we're doing with the new evolution of digital And again, that's super efficient.

Speaker 2

The cost is very measurable. We can track what's actually Getting returns and we're super committed to continuing investing in digital.

Operator

The next question comes from David Kanan with Kanan Wealth Management. Please proceed.

Speaker 8

Hi, guys. Thanks for taking my questions. First one is in regards To the second half of the year and your guidance, what are the levers or the initiatives that You're deploying to grow same store sales that you referenced in the prepared remarks. And then What are the initiatives that you have underway to drive up restaurant level margin on the cost front?

Speaker 2

So probably three things. 1, I think as Tyler mentioned earlier, the lap is way easier In the Q3 and easier in the Q4 relative to where we've been. So I think there's less Swimming upstream relative to traffic. So I think that's a favorable item for us. Number 2 I think as I just mentioned earlier, our continued emphasis on digital and particularly emphasis in influencer Networks and driving that strategy is going to help with same store sales.

Speaker 2

I think we also Are evolving and we're launching our Neighborhood Perks program, which is basically a digital app where we Doing all our local store marketing through digital. So that's another layer of newness that we didn't have in the past. So I think that's going to be a net add to our business. And then I think from a margin perspective, Just opening the new restaurants right off the chutes, we're moving a significant amount of managers off the restaurants to the new boxes. So that's going to we're going to benefit on sales with and the labor is already loaded in.

Speaker 2

So we will get A lot of relief on the margins on the labor side for managers. And then again, just the fact that we've now have rebuilt The talents that we took and put into the training teams, that dramatically helps. And I think Thalo mentioned that we're doing operating costs Initiatives in everything from paper, we're changing the paper products in the restaurants. I think that will be an important initiative to save costs. I think Tyler mentioned credit card Processing fees, we're doing certain things there to help with those costs.

Speaker 2

And then we also have some contract and vendor costs We're just going to probably start using outside companies and do the work ourselves. So I think just the Combination of those items will help, but make no mistake that labor and just the number of bodies on the existing stores And moving into new restaurants will make the most dramatic part on the margin. Also remember that Kona Grill now with Same store sales and pricing will also help the margin for us on the back end. And I We believe that the new restaurants with the more efficient kitchen and less fixed flavor on them will impact That aligns pretty well. Remember that 3 new units in Kona Grill, which we're about ready to open the Phoenix 1 year soon is Over 10% unit growth for the brand.

Speaker 2

So we're bringing in very effective new restaurants with great labor model, not to mention that the lease Costs on these new restaurants is better than the existing portfolio. So we're going to get a margin benefit from having better rents in addition to better labor out of these restaurants. So I'm pretty comfortable that we have enough Items in the margin to bring it back up.

Speaker 8

Okay. That makes sense. And then year to date, You spent $24,000,000 on CapEx. You have an aggressive growth plan for the second half of the year. What do you expect the incremental CapEx to be in second half twenty twenty three?

Speaker 2

Yes. I mean, so that $24,000,000 reflects investment already in a lot of restaurants opening even on the Q4. And in some cases, we paid for some things already in the Q1 of next year development because we pay for architectural And permitting and other, we ordered leads items much earlier now because some of these Items now take 6, 9, 12 months to get in there. So we do a lot more of the capital investment upfront. I think Tyler, On the capital guidance, what are you thinking for the year, the range on the capital?

Speaker 4

Yes, David. So I think the guidance implies something between $35,000,000 $40,000,000 net. And remember, the 23

Speaker 1

It's a gross number, so

Speaker 4

it does not include TI that we've received from landlords, which is several $1,000,000

Speaker 8

Okay. So the back half of the year, we'll spend $10,000,000 to $16,000,000 versus roughly $24,000,000 in the first half of the year. So therefore, we will generate more significant free cash flow in the second half of the year. Is that safe to

Speaker 5

say?

Speaker 4

Yes, I think that's right. And just from the math on the CapEx, I think that's right. Remember, That's a net number. And then from a free cash flow perspective, we do expect positive free cash flow for the backup. Yes.

Speaker 2

Also just from An analysis perspective, we do provide in our 10 Q a table that shows the TI amounts by quarter, so we can get A perspective on what the actual net investment is on the new restaurant, so you can always get down on the net number on that.

Speaker 8

Okay. And then in your revised guidance, the first half of the year was 19 point $6,000,000 of EBITDA. So the revised guidance is that you'll do $25,000,000 to $30,000,000 between $25,000,000 to Roughly a little over 50% if you hit the high end of EBITDA in the second half of the year, Which is good. That's encouraging. My question is exiting the year with the new stores already stood up, The better margins, some of the cost initiatives, what will be the run rate before I know you're going to probably do another 10 stores next year, But exiting the year, what do you think the run rate is before adding another 10 Stores in 2024?

Speaker 2

I mean, I think, again, depending how they all come off the chutes, but I would say our run rate is north of 50 5,000,000, anywhere from 55,000,000 to over 60,000,000 depending on the new units come in. If they come at model closer to 5, it's their above model, lack of experience with the new FTKs, probably closer to 60. Again, we didn't provide formal guidance And there, Budd, it's a number closer to $55,000,000 to $60,000,000 coming out of run rate.

Speaker 8

Okay. And is that reasonable to do another 10 stores next year in 2024 or is that too aggressive?

Speaker 2

Well, we have 18 leases, right? So we and of those 18, we have 12 already Under some level of design construction are almost done. But again, we will have optionality, obviously, as we get In the middle of next year, we can always do an audible if we continue the accelerated pace or not. But everything that we see right now is that The new restaurant volumes have been consistently positive and above model. We're Again, you always have to knock on wood when you talk about those things, but we've been above model in the restaurants that we have opened.

Speaker 2

So you can't always anticipate That will go forever because that's not a reasonable expectation. But if you look at the quality of the pipeline, these are all Super high quality sites, I mean, we're talking about Boston, Washington, D. C, Charlotte, Aventura Mall, Topanga. I mean, we're talking some really incredible strong real estate. And with the Kona Grill, it's exactly the same thing.

Speaker 2

We got Another great project coming in Desert Ridge in Phoenix, which is a world class mall. We have Tigard, Oregon, which is another I'll tell you the number one thing that I'm super pleased about is that For Kona Grill Developments, the 95% of the sites that we have is all landlords. Our landlords 1, Kona Grill. So you're starting to see a very strong trend here where some of the super high quality landlords View the new prototype and they view what we do with Kona Grill as a definite plus for their projects. So it's really encouraging.

Speaker 2

It's a very strong pipeline. And once again, it's primed we have a log of restaurants now ready to go. And it's just a matter of getting the training teams through them now and getting them open.

Speaker 8

Okay. It sounds like the prospects for the long haul are very positive. Now based on CapEx Being less in the second half of the year, EBITDA being higher, you'll generate significant free cash flow. You have 38,000,000 However, there's only about, I think, just under $4,000,000 left, maybe $3,700,000 And the stock, I'm looking, I don't know if this will sustain itself into tomorrow, but when I look at the stock right now Based on the headline, it's trading down to like $6 Given the prospects that you're articulating, the free cash flow, Is it safe to say that you will be more aggressive in retiring shares in the back half of the year if the stock continues To be weak like this, getting down to $6 or you'll probably kind of move at the same pace And just increase the buyback slightly.

Speaker 2

Yes. I mean, I think probably the way for me to answer that question is We'll continue focusing on growth and

Operator

The speaker line back at this time and this does end the question and answer session and the call for today. I would like to thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
ONE Group Hospitality Q2 2023
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