Greetings, and welcome to the ONE Group Second Quarter 2022 Earnings Conference Call. . As a reminder, this conference call is being recorded. I'd now like to turn the conference over to your host today, Tyler Loy. Please go ahead..

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 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 at owned, managed and licensed units to GAAP measures along with a 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.

Manny?.

One in Dallas and one in San Francisco, a managed STK in Stratford London, U.K.; three company-owned Kona Grill, one in Riverton, one in Columbus and last but not least, in Paradise Valley, Arizona.

And finally, we planned to open 2 additional license units in partnership with these kitchens, which will provide takeout and delivery only offerings from our Kona Grill and Bao Yum concepts. As we have long stated, we are early in our growth strategy with significant whitespace 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 STKs and company-owned Kona Grill.

We foresee a total addressable market for at least 400 restaurants, including 200 STK restaurants globally and at least 200 Kona Grill domestically. Moving on to the current cost environment. As you are aware, we are currently in a period of historically high inflation across our industry.

That said, I'm pleased that we were able to deliver cost of goods sold at 25.8%, only slightly higher than the first quarter. We were able to accomplish this through product mix engineering. Selling high-margin additive shack items such as stoppings and sides and committing to our beverage and bar programs.

Turning to labor, we see noticeable increases in average wage year-over-year in both manager and hourly workforces. In addition, we have made investments to hire, train and retain the best talent in the industry. And we believe these strategies have allowed us to keep the significant market share we've captured.

We're committed to remain fully staffed in order to support our new unit growth and sales driving initiatives. Lastly, we have taken modest price increases this year. With our strong traffic performance during the second quarter, along with our great value proposition for both brands.

We believe we have significant pricing power and we'll strategically pick some price increases in the back half of the year. 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 our current trajectory of industry-leading comparable sales, disciplined cost management and new store development. Now I'll turn the call back to Tyler..

Thank you, Manny. Let me start by discussing our second quarter financials in greater detail. Second quarter total GAAP revenues were $81.1 million, increasing 14.6% from $70.8 million for the same quarter last year.

Included in our total revenue is our owned restaurant net revenue of $76.9 million, which increased 13.4% from $67.8 million for the same quarter last year. The increase in revenue is primarily attributable to strong sales and momentum resulting from the execution of our sales initiatives along with the opening of new units.

Domestic consolidated comparable sales increased 12.8% for the quarter compared to 2021. For STK, comparable sales increased 19.8% versus 2021 and Kona Grill comparable sales increased 3.7% versus 2021.

Versus 2019, domestic consolidated comparable sales increased 53.5%, STK comparable sales increased 81.9% and Kona Grill comparable sales increased 27.6%. Management license and incentive fee revenues were $4.2 million, increasing 44.1% from $2.9 million in the second quarter of 2021.

This increase is primarily the result of the strong execution of our sales initiatives, capacity restrictions being lifted and an increase in the number of venues.

Owned restaurant cost of sales as a percentage of owned restaurant net revenue increased 50 basis points to 25.8% in the second quarter of 2022 compared to 25.3% in the prior year primarily due to increased product costs and partially offset by operational and venue management initiatives.

Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 550 basis points to 57.6% in the second quarter of 2022 from 52.1% in the second quarter of 2021, primarily due to consolidated average wage increases.

We are particularly pleased this quarter with the restaurant operating profit of 21.9% at STK during this very challenging environment. On a total reported basis, general and administrative expenses were $7.3 million compared to $6.1 million in the prior year.

The increase was attributable to increased professional fees and increased travel expenses due to rising hotel and airfare costs. When adjusting for stock-based compensation, adjusted general and administrative expenses were $6.4 million in the second quarter of 2022 and $5 million in the same quarter of last year.

We incurred approximately $0.2 million of direct costs related to COVID-19 during the second quarter. COVID-19 related expenses are composed primarily of sanitation, supply and safety precautions taking to prevent the spread of COVID-19. This compared to $1.1 million of similar costs last year.

Interest expense was $0.4 million in the second quarter of 2022 compared to $1.2 million in the second quarter of 2021. The decrease was driven by lower average outstanding balances and lower interest rates driven by the refinancing of our credit facility in August of 2021.

Income tax expense was $0.9 million in the second quarter of 2022 compared to $1 million for the second quarter of 2021. Our 2022 annualized effective tax rate is estimated at 19%. Net income attributable to The ONE Group Hospitality, Inc.

was $4.3 million or $0.13 net income per share compared to a net income of $13.8 million in the second quarter of 2021 or $0.41 net income per share.

When adjusting for COVID-19-related expenses and other nonrecurring expenses and gains, adjusted net income was $4.9 million or $0.15 adjusted net income per share compared to an adjusted net income of $6.5 million in the second quarter of 2021 or $0.19 adjusted net income per share.

Adjusted EBITDA for the second quarter attributable to The ONE Group Hospitality, Inc. was $10.4 million compared to $12.9 million in the second quarter of 2021. We have included a reconciliation of adjusted EBITDA in the table in our second quarter 2022 earnings release. I will now turn the call back to Manny..

Thank you, Tyler, and thank you all for your time today. Let me conclude by saying that our business remains very solid despite the obvious headwinds. We are in the early stages of our long-term growth strategy as we continue to build a portfolio of high-volume, high-margin brands with compelling returns.

Above all, I'm grateful to all of our teammates who bring our mission to life every day to be the best restaurant in every market where we operate. They do this by delivering exceptional and unforgettable guest experiences to every guest every time.

I also would like to thank our customers that visit and continue to return to our restaurants so that they can enjoy the highly differentiated Vibe Dining experiences that they have been craving. We appreciate everyone joining us on today's call. Tyler and I are happy to answer any questions that you may have.

Operator?.

. And the first question comes from Nicole Miller with Piper Sandler..

Super update. Just a couple of quick questions.

The first one, very high level, how is Europe? How are you managing through? What are you seeing with consumer trends? How are things coming along?.

This is Manny, by the way. So Nicole, I mean our London stores continue to do well. I mean, we have not seen a major slowdown, but there's clearly a lot more noise in Europe in general economy. So there's definitely lots of noise.

We really haven't felt any significant impact out there, but that doesn't mean that it won't change anytime soon because there's a lot of noise in the market..

Looking at MLI is up quarter-over-quarter dollars or -- well, I guess, year-over-year for sure. Sorry, I don't have the quarter-over-quarter in front of me. But i mean there's more units you operate in MLI as well. That's how I was just kind of trying to figure out any pattern there..

No. Yes, we haven't seen any significant difference. But as a matter of fact, they held up pretty well in the second quarter. So -- but again, there's just a lot of noise out there right now and we'll look through it..

And then this is just very curious about seasonality. So everybody knows how 3Q slows seasonally. Just any general comment outside of seasonal patterns you want us to consider that would mostly be on store level margin. But at the same time, 4Q becomes a big part of the year.

And it's just so fascinating how you're holding on to all of these different types of customers at different occasions. So can you talk us through the scenario analysis or I should say, planning maybe you're doing for the fourth quarter, good holiday, neutral holiday, bad holiday.

How are you kind of wrapping your minds around what may come?.

Number one is events, and we're actually starting to see a pretty decent amount of fourth quarter events, particularly in December. So I would say that, that's actually a good leading indicator. And then relative to us, in the fourth quarter, if you think about December last year, we did have the beginning of Omicron.

So we actually think that relative on the lap, actually, the fourth quarter is a good lap for us. So I would say that we have a good comparative or lap to go against. And I think that the leading indicator on events is actually very good for the fourth quarter right now.

But again, remember, last year, we only saw the rebounding -- slight rebounding on events. So that's why the pipeline relative to last year and events looks way better than we had last year..

And just a last one.

The way you talked about the promotions you're running, and offering both affordable options and just the total value proposition, how are you slicing and dicing your consumer data to these days? And what is it telling you meaning, is there something happening? It could be any -- which way by income, by geography, what are you seeing underlying these strong trends, please?.

Yes. So I mean -- so we do see a very positive trend in a happy hour. We did launch our 369 price point happy hour. So we are seeing a lot of velocity in the earlier time periods. But then also interesting enough, because we do have a pretty good amount of high-end consumers. Our high-end products continue to do extremely well.

As a matter of fact, they were doing so well that we decided to extend our Wagyu promotion to the whole month of July. So we definitely see value bringing people in there, so we're marketing values, if you look at our digital marketing. So we're utilizing the value messaging to drive people in.

But interesting enough, particularly at STK, we have seen a pretty large intent by consumers to trade up. So I would say that, that consumer is holding up, frankly, rather well. And then Kona Grill, obviously, the demographics are a little bit maybe not as high end as STK relative to household income.

But there, we have supplemented our value messaging with a $7.99 cheeseburger for lunch and that's doing extremely well. But what we saw there, though, is although we're offering a low entry price point on the cheeseburger, we have a $5 french fry option and bacon option and the take rates on those is actually extremely high.

So we're actually seeing the consumers, although they're coming in for the low price points, I think, that in-store, we're doing a nice job of trading them up. So again, it's interesting -- and by the way, the value that we have is every day value.

We've always been committed to value, but as we've always said in the past is that if need be, we would switch our marketing to value, which is what we're doing right now is really promoting the entry price points.

But I would tell you right now, I do see customers coming in for that, but they're actually going to the regular price points when they get to the restaurant. I have not seen any material trends where people are actually trading down or taking less items on the menu..

So in conclusion, now that you have a more normalized comp because they've just been through the roof.

Can you talk about what price is in there? And then I think you're counting on trades at least on the STK side, right, for comp? Can you talk to, however you're calculating transaction traffic entree essentially to understand that measure?.

Yes. I mean we use -- actually both -- we use measures of checks and an absolute use measure of heads for or entree for STK. We actually use both. And we were up both in STK as well as Kona Grill. So the metrics held up pretty well.

What am I thinking from a trend perspective is that really the metric that we use is the 3-year stack looking against 2019, which is our base here and making sure that we're holding up.

So as you probably saw from the press release is that that's kind of our health metric, if you will, at least for a couple of more quarters until we get to more normalize. I'm not really sure there's such a thing as a normalized comp anymore. But we look at that baseline as a way of giving us some level of assurance as to how the business is doing.

Relative to price, we have very little price in both STK and Kona Grill almost insignificant. We held off from taking more price in the second quarter because we wanted to measure how transactions and how consumers were behaving.

We're now feeling a little bit more confident that we can take advantage of our pricing power, and we're taking price this quarter at Kona Grill, and we may do some minor touch-ups at STK, but we do believe that there is actually room for pricing for us in the third quarter.

That should actually help our margins significantly, particularly at Kona Grill..

And the next question comes from Nick Setyan with Wedbush Securities..

So did you guys expect over 500 basis point uptick in operating expenses in Q2 versus last year? And if not, where was that difference? And then just give us if you can, just some more details around what exactly to aspire in the quarter for us to see that kind of an uptick in expenses?.

Yes. So the uptick on expense, I think Tyler mentioned this on his prepared statement is mostly, if not all, associated with average wage for hourly and manager labor that has been the pressure point relative to that line item. And then, of course, we have chosen to keep our staffing at the restaurants at par.

So we've kept all our restaurants fully staffed throughout the quarter. So the pressure point there is the fact that we're frankly just have head counts in our business model and the wage has gone up. So in hindsight, probably the thing that we could probably have taken on a little earlier was pricing because we did not take pricing in the quarter.

But no, I mean, other than the labor, there is nothing really other significance on the P&L. Although, if you also think about it any kind of service that is labor-intensive like janitorial, DJs and stuff like that, they also have exposure to labor rates, that's probably what I would say the pressure was on.

In terms of other expenses, I think everything was pretty much in line with what we thought it would be..

And so going forward, like Q3, Q4, how should we think about margins in light of the incremental pricing you're taking?.

So I mean, I think for Kona Grill, we're thinking about 4% to 5% on price. So that should have a substantial impact on the Kona Grill margins and then SDK, we're thinking maybe one or two points, very select items. So I think those items will help the margin. Obviously, looking at the STK margin is still in the 21-plus range.

So that 1% to 2% increase, we should put it back into the 22-plus range on the margin. And then the pricing at Kona Grill should bring it back up to the mid double digit, right? So kind of 14%, 15% range..

Okay. And then just a final question.

Can you talk about just sales trends as the quarter progressed and maybe into July? And whether you've seen any kind of slowdown in June or July?.

I didn't see it. So April and May, with the holidays, we did extremely -- we saw very robust trends around the holidays. June was a different month. It wasn't so much that it was slowing down, but it was choppy, where you would have some really strong days and some days that weren't as strong.

So it was a little bit more of a just choppy trend, if you will, in June, arguably, a little bit softer than May. So of the 3 months in the quarter, that probably was the more slower of the 3 periods.

July is an interesting month because you start off with the 4th of July holiday, and it's seasonally a very slow month for -- particularly for urban downtown restaurants. So it's an interesting read, but we were relative to the 3-year trend. We thought July held up pretty good.

So that's kind of, as I mentioned earlier with Nicole, is that's ultimately the trend that we see is that a 3-year comp, as you can see from our prepared comments, it's very, very strong. And we continue to believe that, that's going to hold up reasonably well in the third quarter.

Again, visibility is kind of -- is the million-dollar question with all the noise and the news and stuff. So that's just the big and known here. But as we've gone through the first couple of weeks of the quarter, things are shaping okay relative to the 3-year trend..

And the next question comes from Mark Smith with Lake Street Capital Markets..

I want to dig in just a little bit deeper just as we look at the 4-wall margins. Can you just give us any insight, Kona Grill looked like had a tougher time on kind of restaurant level margins.

Walk through any puts and takes that maybe impacted Kona more than your STK units?.

So both were impacted on wage, hourly wage. And then the only meaningful differential between Kona Grill and STK is tuna prices in the quarter were much higher and tuna because of it's sushi component, uses more tuna. So I would say that, that's the bigger difference between the margins on the 2 brands.

And again, as I said on my previous answer, is that we didn't take pricing and we do plan to take pricing now. So I think that's going to help bring the Kona Grill margin back to the mid-teens..

Okay.

And did I hear you right, as you look at the 2 different consumers, the STK customer versus the Kona Grill customer, did you see more change in behavior with inflationary pressure on that Kona consumer than you did on STK?.

I would say that the answer would be that the STK consumer appetite for premium items is unchanged. So we see a tremendous amount of trade-up on the STK. So we didn't really see any meaningful, if any change at all.

And then Kona Grill, we really -- to be frank about it, we have not seen any discernible predictable trend on either trade downs or people taking less items per check. So -- but again, a lot of it -- we don't see it because we're doing a tremendous amount of promoting. We have lots of activity going into bar, as you know, from the 369.

So a lot of our marketing activity helps offset maybe some of the macro trends. So perhaps the reason that we don't see it has more to do with the fact that we have these promotions more so than what's really the consumer is doing, particularly at Kona Grill..

Okay. And then the last question for me.

Can you just talk about your noncomp restaurants and how those units are performing?.

Noncomp restaurants would be -- for instance, Bellevue. Bellevue is doing great. It's doing the $200,000 average weekly volume. What are the noncomps do we have in there. I think everything else is pretty much on the comp..

Yes. Okay. All right. So no changes.

But I guess as you look at new restaurants, is that what gives you some of the confidence in the -- I think you target now 40% to 50% ROI on new units?.

I mean the new restaurants for us is really a function of the real estate. The real estate is fantastic. I think all the locations that we have planned out are a type of locations. So I think there's a significant value in the quality of the real estate.

So I mean, if you think San Francisco, which, by the way, is opening very shortly here, we're looking at 30 Mission, which is a great part of San Francisco. And then also Dallas is a fantastic, high-quality real estate and Riverton and Columbus. So Again, I would say that it gives me confidence in the quality of the real estate.

And all these places are -- have very favorable indicators going forward. For instance, San Francisco, you're starting to see more office population in the city, and more population is better than 0, which was the historical number. So you're starting to see a lot more people in the city and you did see a little bit more traveling there.

And if you go to San Francisco, and benchmark these days, particularly on busier nights like Thursdays and Fridays. You're starting to see a lot of the inventory of restaurant seats being taken. So I think the indicator there is very, very good.

And in Dallas, we put out ads for employees and the demand for that property is very high as validated by how many people want to join the team there in my opinion. So I do believe that the real estate will do very well for us in the next set of restaurant openings..

And the next question comes from JP Wilhelm with ROTH Capital Partners..

If we could start briefly on brunch. I was just curious kind of what the dispersion looks like.

Is most of brunch concentrated in a couple of locations? Are you seeing activity across all the STK locations? And then kind of as a follow-up to that, how are you guys thinking about driving further growth in that brunch segment?.

Yes. So good question. So our performance in branches is pretty even across the board. We do have some locations that overindex just because of where they're at. So think of Vegas has a tremendous brunch on Saturdays and Sundays. But overall, I would say that it's a pretty well balanced on the brunch daypart on a per-restaurant basis.

And then in terms of the growth opportunity there, we still think it's significant. And it's a matter of continue promoting it and just driving frequency with the guests. So far, we've been pretty happy with how that does in terms of growth and -- but we're early brunches, we're probably in -- on step 1 of step 10 of what we can do with that program.

We are looking at elevating the drink programs, adding some new features on products. So there's a lot of promoting and activities that we plan to really add interest to the daypart.

Remembering that any brunch program that offers quality alcohol programs, is doing very well with the consumers, I think, right now, and it's a fun day to go -- particularly Sunday brunches is a very high time that people like going out.

So we feel pretty good that -- we still have a lot of runway on brunch and promoting and product will be, if you will, the two things that will help us elevate that daypart..

Great. And just sort of as we start thinking about 2023 and without asking you to guide to anything. When we think about revenue growth, I guess, would you guys be disappointed seeing same-store sales flat or kind of unit growth on par with this year.

Is there any way we should be thinking about that out next year?.

So I mean, at this point, just getting through the third quarter and visibility out is, as you know, it's challenging based on all the noise in the news and everything else out there, but again, I think as the way we -- so any time we don't have positive comps, which we -- I can't really remember in a long time for our company since I've been around.

But -- it's something that we obviously try to stay away from. But here's the reality. The reality is, as we did during COVID is whatever the hand is, we'll play the best we can within those circumstances of the environment.

So I have a very strong confidence on the team's ability to be flexible and to pivot to areas that are still successful within the cycles. Now again, when you have different economic cycles, not everything is bad. There's some places where you could still grow business, the higher end consumer trading up all kinds of other strategies.

So again, it's just really about being flexible pivoting and making sure that the team stays focused on our culture of always overperforming, over-indexing to the industry..

Perfect. And then just one quick last one for you guys. Just on about development time lines. I know we've talked in the past inspections, municipalities kind of seeing a little bit of delays there.

Are any restaurant openings kind of slipping later than expected?.

Yes. I mean I think the jurisdictions is certainly a challenge. I think one of the other challenges in -- just in general relative to construction more recently is just mobilizing labor. I think there's the ability to get more labors and just a labor in construction is a little bit more challenging than it's been historically or as I remember it.

But again, we don't see anything insurmountable there. It's just -- we're just going to have to be more flexible and how long it takes to open these -- the restaurants and build them. Obviously, STKs are big restaurants with a lot of moving pieces.

So we just need to make sure that we give ourselves plenty of time to build the project with quality without overdriving the cost to get that done. So that's always the balance of cost and how to get these things built up. But in general, as I mentioned earlier, San Francisco was pretty much in its comp stretch to open.

We actually have all our employees training in San Francisco this week. So it's looking pretty good. And then Dallas it's going to come immediately thereafter, and it's looking pretty good in terms of where we're opening that one too. So we're looking forward to continue opening these things..

And this concludes the question-and-answer session. And now I'd like to return the call to Manny Hilario for any closing comments..

As always, I appreciate everyone's interest and support of The ONE Group. And as always, conclude our call here, none of our success and what we do is possible without the incredible work of our team.

I'm very honored of being part of one of the best teams in the industry, and I appreciate that, and I look forward to seeing all of you out in our restaurants..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines..