[Abrupt Start] ONE Group Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tyler Loy..

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 and 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?.

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 everyday. 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 STK 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 STK and $5.4 million for Kona Grill remained among the highest in the industry.

In addition to those impressive average unit volumes, we opened STK 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 STK and a 3.6% decrease at Kona Grill.

When compared to 2019, our pre-pandemic base year, consolidated comparable sales increased 45.6%, consisting of an increase of 7.6% at STK and a 22.3% increase at Kona Grill, which shows that we’ve retained the share increases for both brands and that our differentiated fine dining experience is resonating with our guests.

It is important to note that Hurricane Ian had a negative impact on both STK 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 Steak House month with Wagyu specials at STK and Kona Grill. In addition, we celebrated National Tequila Day, National Mac & 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 our 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 STK and Kona Grill and at $3, $6 and $9 happy-hour menu is working well with our guests.

We have put a lot of markets behind this value offering on our social channels and through our loyalty program allow us to capture traffic during our shoulder 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 continued to leverage the important brunch day part with cravable and newsworthy culinary offerings and bottomless mimosas. Lastly, we are seeing our events business come back after 2 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 many 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 STK, we took an approximate 2% price increase and at Kona Grill, we took an approximate 5% increase both midway through the quarter.

Based on the results, I am pleased to say that we saw no noticeable resistance and act as confident that we can take more price during the fourth quarter, which is our strongest 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 we will exercise it. Expectedly, our third quarter restaurant consolidated operating profit decreased from last year. Restaurant operating profit at STK decreased, but it was still a strong 18.5%.

Both brands saw inflationary pressures outpaced 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 Grill Restaurant operating profit to be in the 15% to 20% range.

Despite the cost headwinds, we still delivered over $7 million in 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 STK 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 STK 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 3 virtual locations to a license 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 Bao Yum. 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 remainder of 2022 and first quarter of 2023, one within the next couple of weeks a managed STK in Stratford London U.K., 3 company-owned Kona Grills, Kona Grill in Riverton, Utah, Kona Grill in Columbus, Ohio; and Kona Grill in Desert Ridge, Arizona.

And finally, we plan to open 2 additional license units in partnership with REEF Kitchens and provide takeout and delivery only featuring offerings from Kona Grill and Bao Yum concepts in Texas. Additionally, our remaining 2022 pipeline is strong.

For the second through fourth quarter, we plan to open 7 new units, which include 3 company-owned STKs, one managed or licensed STK and 3 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 opportunities as we believe our units deliver best-in-class returns. For new restaurants, we’re targeting between 40% and 50% ROI for new company-owned STKs and for company-owned Kona Grills.

We foresee a total addressable market of at least 400 restaurants, including 200 STK 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 the new store development. Now I’ll turn the call back to Tyler..

Thank you, Manny. Let me start by discussing our third quarter financials in greater detail. Third quarter total GAAP revenues were $73.0 million, increasing 1.6% from $71.9 million for the same quarter last year.

Included in our total revenue is our owned restaurant net revenue of $69.5 million, which increased 2.3% from $68 million for the same quarter last year. The increase in revenue is primarily attributable to the opening of STK San Francisco in August of 2022. Domestic consolidated comparable sales increased 0.5% for the quarter compared to 2021.

For STK, comparable sales increased 3.5% versus 2021, and Kona Grill, comparable sales decreased 3.6% versus 2021. Versus 2019, the domestic consolidated comparable sales increased 45.6%. STK comparable sales increased 70.6% and Kona Grill comparable sales increased 22.3%.

Management, license and incentive fee revenues were $3.5 million, decreasing 10.8% from $3.9 million in the third quarter of 2021. This decrease is primarily the result of decreased revenues in our managed properties in London, England.

Owned restaurant cost of sales as a percentage of owned restaurant net revenue decreased 120 basis points to 24.9% in the third quarter of 2022 compared to 26.1% in the prior year, primarily due to operational cost reduction initiatives, partially offset by increased commodity prices.

This represents a 90 basis point improvement versus the second quarter of 2022.

Owned restaurant operating expenses as a percentage of owned restaurant net revenue increased 510 basis points to 62.0% in the third quarter of 2022 from 56.9% in the third quarter of 2021 and primarily due to consolidated average wage increases and higher operating expenses.

Restaurant operating profit decreased 400 basis points to 13.1% for the quarter compared to 17.1% in the prior year third quarter. Restaurant operating profit at SDK decreased approximately 410 basis points but was still a strong 18.5%. Kona Grill operating profit decreased 460 basis points and was 6.4% for the period.

Both brands saw inflationary pressures outpace price increases during the quarter. On a total reported basis, general and administrative expenses were $6.4 million compared to $6 million in the prior year.

The increase was attributable to additional investments ahead of growth, increased accounting and legal fees and increased stock-based compensation expense, partially offset by a decrease in performance-based variable compensation expense. In addition, the company experienced increased travel expenses due to rising hotel and airfare costs.

When adjusting for stock-based compensation, adjusted general and administrative expenses were $5.4 million in the third quarter of 2022 and $5.3 million in the same quarter of last year. Interest expense was $0.4 million in the third quarter of 2022 compared to $0.8 million in the third 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 last year. Income tax benefit was $0.3 million in the third quarter of 2022 compared to an income tax expense of $1.5 million for the third quarter of 2021.

Our 2022 annualized effective tax rate is estimated at 15.9%. Net income attributable to the ONE Group Hospitality, Inc. was $0.4 million or $0.01 net income per share compared to a net income of $11.6 million in the third quarter of 2021 or $0.34 net income per share.

Prior year net income included a $10 million gain related to the forgiveness of CARES Act loans.

When adjusting for the gains on CARES Act loans, COVID-19-related expenses and other non-recurring expenses or gains, adjusted net income was $2.1 million or $0.07 adjusted net income per share compared to an adjusted net income of $3.7 million in the third quarter of 2021 or $0.11 adjusted net income per share.

Adjusted EBITDA for the third quarter attributable to the ONE Group Hospitality, Inc. was $7.1 million compared to $10 million in the third quarter of 2021. We have included a reconciliation of adjusted EBITDA in the tables in our third quarter 2022 earnings release. During the third quarter of 2022, we repurchased 500,000 shares of our common stock.

As of September 30, 2022, $6.5 million in share repurchases remained available under the $10 million share repurchase program announced on September 7, 2022. Management will continue to use its discretion in determining the conditions under which shares may be purchased from time to time, if at all. 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 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’d also like to thank our customers that visit and continue to return to our restaurants so that they can enjoy the highly differentiated fine dine experience they have been craving. We appreciate everyone joining us on the call today. Tyler and I are happy to answer any questions that you may have.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Mark Smith with Lake Street. Please proceed with your question..

Hi, guys. First, I just wanted to dig in a little bit more on the Kona Grill.

Can you guys just talk a little bit more about the comps there and what you saw as far as consumer behavior, any insight into traffic versus check or how people kind of use the restaurants during the quarter?.

Sure. So for the quarter, as we had in the prepared statements, Kona Grill was down about 3 points for the quarter, and we were down about 7/8 on traffic and then that was offset by check going up. I think that the check going up is primarily due to more – we’re selling more steak than we historically have.

In terms of consumer behavior, I don’t think that we’ve seen anything significant other than if you look at our comps for Kona Grill on a 3-year stack, they are still pretty significant on that 3-year stack. So I wouldn’t say per se that there is a lot other than we just had a very strong third quarter for Kona Grill last year..

Okay.

And then as we look at the restaurant operating profit for more Kona Grill, did mix have a negative impact? Or was it just inflationary pressure and labor that really push that lower?.

I mean I think as we said in our prepared statements, I think our biggest item with Kona Grill is obviously, we want to preserve market share, and we want to make sure that we look at the traffic in the long-term. So our biggest concern was really about how much pricing we should take.

As you saw in our prepared comments, we did raise, we took about 5 points Kona Grill mid-quarter in pricing. And I think we didn’t see a lot of resistance. I will do another 5 points in the fourth quarter.

So I would say that all of the – what you saw in Kona Grill margin pressure was mostly related to the fact that we’ve been taking that pricing to offset the inflation pressure. As a matter of fact, COGS in general help us pretty good for the whole company.

So it was mostly about not having enough pricing to offset the increases that we saw in operating expenses and labor..

Okay.

And labor, were you staffing pretty heavily in hiring late in Q3 in preparation for kind of a heavy Q4?.

Yes. I mean we were 100% to our par in the quarter. So we kept all our staffing where we wanted to be at. And so the answer is absolutely yes and, of course, having that many employees on board for the – we obviously have to make sure that we’re scheduling them and we keep training and keep them well trained.

So that obviously is always reflected not just this year, but typically on our third quarter P&L just because that’s when we get ready for the big quarter that is usually our fourth quarter..

Okay.

And then any additional insight into the timing of the three Konas for openings and I know that a lot of things can shift here in Q4 that you get those three done here in Q4? Will some of those shift into Q1 of next year?.

Yes. So we just opened Dallas STK, which we’re super excited about that opening Kona Grill Columbus is in its final stage of construction. So we should be able to have access to go into it here in the next week or so.

The one decision that we’re making right now to be honest about it is that I’m trying to win the risk rewards of keeping the training teams in opening mode or just wait maybe until the first couple of weeks in January to open up Columbus.

So really, that’s the decision here that we’re going through is do we want to focus on fourth quarter execution or open up. So really, the answer is we will either open Columbus in the next 2 weeks, and if not well open right away in the beginning of 2023..

Okay. And then the last one for me.

Just as you look at real estate and opportunities as you start to open more restaurants here on STK and Kona, are you seeing anything change really as far as availability? And what kind of sites are you looking at these days and seeing available?.

The availability has been significant for us. We have the largest pipeline we’ve ever had since I’ve been with the company. So we’re super happy about that. We have also seen a tremendous amount of availability of TIs from landlords.

The reality of it is that with the – with COVID and the current economic situations, there is not a lot of local operators getting into real estate.

So that has made the availability of real estate for more organized companies more easily available just because smaller independent chef-driven concepts are not growing because they are really struggling in the current environment. So we certainly have seen the availability of high-quality real estate be very strong for us..

Okay. Great, thank you all, guys. I will back in the queue..

Thanks..

[Operator Instructions] Our next question comes from the line of J.P. Wollam with ROTH Capital Partners. Please proceed with your question..

Just the first one, I think you touched on it a little bit, but if we could talk about kind of the Power Lunch we say, maybe Manhattan is more geared towards that. But can you just kind of maybe comment on the corporate or expense tracked business.

Has that picked up, especially around lunchtime, anything to highlight there?.

Yes. So the suits are definitely back. So if you’re going to our restaurants, in urban centers, you’re definitely seeing a lot more business dine, and we’re also seeing a significant increase and demand for corporate events. So I would say that, that business is definitely back.

But obviously, as I look around, there is still a tremendous amount of vacancy in the city. So I look at that as an upside opportunity. So the business has rebounded there, and I can actually see an uptick. We’re also seeing an increase in convention.

So convention cities like Denver, Orlando, Vegas, we’re starting to see a lot of activity on conventions, particularly that small to midsized convention business is definitely back. So we’re definitely seeing an uptick on that business. And then I think your question was also around lunch specifically.

I would say in markets where we have – in urban markets, we’re seeing an uptick in lunch for different places like Midtown, New York, Atlanta, pretty much anywhere where we have a presence of office space. So I would say lunch business is definitely starting to pick up in big urban cities..

Great, thank you. And then maybe if we could just talk about commodity costs for a minute, anything, I think may be still near-term headwinds, but anything to call out about some of your food inputs? I know you guys do a good job managing the mix of your restaurants.

But anything – any trending moves there?.

I mean I think probably without getting to maybe macroeconomic comments but more about us specifically. I do see a bit of stabilization on the wage side. So I think that’s been – it was a lot more aggressive in the second quarter and third quarter. I mean it started to kind of slow down a little bit on that. But – so that’s at least a positive to us.

In terms of just the core commodities beef, fish, etcetera, I mean, obviously, we’re still seeing a pressure on those commodities. But again, as you can see from our cost of goods performance, we expect that to be an ongoing in the business. So we manage that through our product offerings and promotions that we do.

And I think that’s continued to be super effective. So at least for me, on the short-term for the company is that we will continue to look for relief from our better management for COGS through product mix. And then for the other line items, I think we will take that through the pricing increases that we’re doing.

And as we said in the call, although we’re taking pricing in the fourth quarter, we still think there is a tremendous amount of pricing power in our business model as we look to our prices compared to our competitors. So I still think we have a lot of leeway in pricing half if commodities were to persist into the long-term..

Got it. I appreciate that.

And then one last quick one, just on the Florida restaurants and the impact on Hurricane Ian, is there anything that you can quantify in terms of maybe missed revenue or perhaps kind of how long any restaurants had to close? Anything you can quantify around that?.

I mean I think Tyler mentioned on his comments that the sales base is about 14% of total sales. So it’s not a super big portion of our sales base, but it’s big enough to make a difference. I would say the whole week around the hurricane maybe 4 days before and maybe a week after. So let’s call a total of 11 days.

We saw a lot of – people just weren’t interested to go to the restaurants one, and then two, we’re in places like Disney Springs and Disney basically closed the parks pretty early and decided to keep them close after the hurricane.

So I think, like I said, probably a 10- to 11-day window around the hurricane and as we said earlier, about 14% of our sales base. We also had one restaurant in the Kona Grill portfolio. Our Baltimore restaurant had a garage, park garage next to it that collapse.

So it’s the garage that the restaurant uses and then we lost both electrical and gas for a couple of days. And then we basically were up gas for the majority of the quarter.

Again, we don’t want to get into a whole list of things that cause numbers to be what they are, but we did also have one restaurant that did have several days where they were not able to be at 100% capacity..

Got it. Thank you, guys..

Thank you, sir..

Our next question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question..

Hi guys. This is Abbie on for Nicole. Thanks for taking my question. My first, I guess clarification, and I understand the reiteration on the operating margin line of that 20% to 25%.

Is there anything else we should be thinking about below the line that might be interesting? I know that seasonally, this will be one of your better quarters, but just anything you can provide there..

Yes. So, I mean color on the margin. I think we mentioned it on the call. Third quarter is usually one of our lower seasonal quarter. So, that’s where we will see the margin be a little lower. And then we also do prepare labor for the fourth quarter in the third quarter. I would say that the fourth quarter by far is our strongest quarter for margins.

So, we always have a great margin profile there not only because of the seasonality of sales, but we also do a tremendous amount of promoting around premium items. We always feature either Wagyu or other premium products in the quarter and the way that we price them and frankly, just the demand for the product is super high.

So, that does help us with having a very high margin profile. So, the fourth quarter will tend to be significantly higher to the third quarter in terms of margins. So, that’s where we usually make it up..

Got it. Okay. Thank you for that.

And then second question, can you just high level talk about what you are seeing in terms of supply chain? Are suppliers delayed? I understand there is still commodity pressure, but more to do with what you are getting in the store or I guess in the units?.

I think from a good question from a supply chain perspective. I am not so sure about the – not showing up, but there is a lot more substitution that does happen with your suppliers, which is they won’t have the primary product that you are trying to order. So, they will sometimes go to option B and option C on the alternative items that we use.

But we haven’t seen just trucks not showing up the restaurants, we will tend to see more the vendors submitting the substitute items. And then in the event that the vendors are out of stock in some of the items. We do always have a backup major supply by restaurant that we go to.

So, we have been able to get the product, but sometimes they may not be our primary SKU. And so that’s how we have seen in the environment from the supply chain..

Okay. And then last one for me. I know you talked about holiday bookings are already coming in, and it’s looking good.

Can you compare this to like 2019, at least pre-COVID? Is it beating expectations or in line?.

I would say compared to pre-COVID the biggest trend that we are seeing on the event business is we get a lot of more requests for full venue buyouts, which frankly are very profitable because we were selling the restaurant for the whole day.

And so we are seeing a lot of more companies doing holiday parties, so they don’t want to have their party with other people around. So, there is a lot more demand for that business, which frankly, we looked at as an opportunity as we charge premium prices for buyouts. And so we see that as an opportunity for us.

In terms of just general bookings, we have had – actually, the last couple of weeks due to the convention business, we have seen a lot of bookings in both business and frankly, into the holidays now, we are starting to see corporate demand for holiday parties. So, I would say, all now we have seen an uptick and on that business.

I am not sure we have recovered 100% relative to pre-COVID just because as I mentioned earlier, there is still a significant amount of vacancy in urban markets. But I would say overall, I am pretty pleased, and I think it’s going to be a very good event and business for us in the fourth quarter..

That sounds great. Thank you..

Thank you, Abbie..

[Operator Instructions] Our next question comes from the line of Daniel Imbro with Stephens. Please proceed with your question..

Hi. Thank you for taking my question. I just have a couple of quick ones.

First, sorry if I missed this earlier, did you disclose how much price was in the 3Q comp? How much you expect to carry moving forward?.

Yes. So, on the third quarter, we said we had a 3% effective for STK and about 5% for Kona Grill, and we put it in place mid-quarter. So, I would say that’s 1.5% effective for Kona and about I guess, I am just happing at 2.5% for STK for the full quarter because we put it at midpoint.

And then for the fourth quarter, we are looking at another 5% coming in pricing for STK and Kona Grill and we are putting that effectively at the beginning of November, which is around right now..

Okay. Thank you. That’s helpful.

So, what is your visibility in terms of the basket heading into 2023?.

I am sorry, we lost your question, do mind repeating your question..

Yes.

So, what is your visibility in terms of your commodity basked, how much of its lost heading into 2023?.

I mean our visibility right now is at least from where we stand here. We don’t see any immediate either pressure or release in beef. So, I would say that’s not anything really material shifting there. We have seen some positivity on frozen seafood. So, we have done some buys on shrimp and crab and even I think some lobster.

So, I would say seafood overall, it seems to be becoming a bit favorable, but really no change on beef. And then on the labor side, as I mentioned earlier on one of the questions, we have seen at least a stabilization on the rates in the third quarter. So, we wouldn’t see as much regular increases as we saw in the second quarter for the way.

So, I would say basically a stabilization and a slight decrease. I mean, stabilization of labor in beef and a slight decrease on seafood going forward. How far I mean – I want those two parts. I mean those commodities seem to be very flux these days.

So, I probably would say that my views on that holds for the fourth quarter and perhaps a little bit early first quarter of next year..

Thank you..

Our next question comes from the line of David Kanen with Kanen Wealth Management. Please proceed with your question..

Hi guys. Just a couple of quick questions. When I look at the numbers, it seems like COGS and margins held in pretty nicely for the quarter. So, my guess is with the price you are taking, we will get a little bit of gross margin improvement.

But year-over-year, the item that sits out at me is operating expenses, I think were up $4.5 million quarter-over-quarter. So, could you give us a little more color on that? And is there any like pull-in or we are opening up a lot of stores.

Is there any hiring that we are doing in advance that potentially and also rent expense that we weren’t able to match up with the sales yet from the consuming revenues we are going to get from the new store openings? How much of that was a factor, if you will?.

Yes. So, let me maybe answer the question this way. We did have inflation on COGS. The reason that you don’t see it as obviously as on the other line items is because we did a lot of product introductions and a lot of promoting on other items.

So, things for instance, we promoted things like our pumpkin pasta, which pasta has a much better cost profile than beef or seafood would from a presentation perspective. So, we offset a tremendous amount of inflationary pressure on the COGS side by a lot of promoting and a lot of the products that we did.

We also emphasized the bar business significantly in the third quarter. We weren’t happy with our cocktail program. We have, for instance, the Pumpkin Spice Martini and so forth and Old Fashioned were really successful in the brands and our liquor program carries premium prices. So, that really helps offset pressure on COGS.

The reason you see that the pressure on the operating line is because of the labor inflation, which was definitely double digit on the weight side. And then the other thing that comes out is, for instance, a lot of the operating costs that we have are things like janitorial service, DJ, repair and maintenance work, which usually use labor.

And all of those services in the quarter, you would have seen an increase on the per cost just because of the inflation of the labor that is embedded in those services. Obviously, having very modest pricing in the quarter, it was not enough to offset the impact on those numbers as a percentage of revenue.

So, I would say that as we go into the fourth quarter and this affected more price increases, we got another five points for Kona and five for STK. I think that alone will bring those percentage line items more in line with the historical. So, I would say it’s mostly just a function of pricing and cost inflation being off cycle.

So, I think as we get the pricing and that will get fixed. In terms of investments, into the growth of the company, probably where you have seen a bigger impact of that would have been through the G&A line because we have, obviously, in the advance of opening restaurants we bring in more multiunit leaders.

So, we have been training and developing a class of leaders for multi-units.

But again, if I just have to re-summarize the whole margin and cost for the company is a very nice job on managing costs with product mix management and obviously, our opportunities that we haven’t taken enough pricing to offset operating costs and the growth investments would be more on the G&A side than really on the operating margin side..

Okay.

And then the numbers that you gave on San Francisco kind of surprised me, it’s at a pace much higher than what I would have modeled at that kind of a run rate, north of $15 million, do you hit 20% store-level EBITDA with the inflation that we are seeing, especially in labor?.

Yes. So, good question. So, the value pattern for San Francisco is actually closer to $20 million pace. I think it’s around $17 million, $18 million pace, which frankly, for a brand new restaurant is fantastic, and it’s actually – we sustained it for several weeks and actually we are now on the month basis with that.

So, we are very pleased with that performance about double what we expected for the restaurant in revenue. The restaurant has been incredibly well received in city and the city has been dormant since COVID. So, not a lot of activity in that city. There was not a lot of restaurants that had opened or anything really significant there.

So, the city has really embraced the restaurant, and we are very happy with that. In terms of what that means for margin is that San Francisco does have a higher minimum wage in the city. So, we do have to put up more dollars for labor.

But I think as those kind of volumes, our STK margins are significantly higher, probably the 20% to 25% higher range, if not even higher than that. So, I would expect San Francisco to have a very healthy margin at the volumes that they are running right now..

Okay. Great. Yes that’s – I was being conservative when I said 15%, but it sounded like you were at a run rate of 17.5% or better.

And then with the seasonality and the sort of the tailwind coming from private parties, events, etcetera, new stores and then the seasonality, do we get back to growth in EBITDA by Q4, or do you expect to grow, assuming the economy is kind of status quo with the price we are taking, the new stores and the seasonality do we start to grow year-over-year in EBITDA in Q4 and beyond?.

Yes, I mean, great question. I do think that the price increases that we are putting in the fourth quarter are happening right now. So, we do have a little bit of a full week, if you will, into the quarter that we didn’t have that pricing.

But I would say, as I have said in our – in my prepared comments, I do see STK and Kona Grill margins getting back to where we say it can be. I think we said 15 to 20 on Kona Grill and somewhere between 20% and 25% on STK.

So, I do think that with the pricing that we are putting in right now at the level that we are operating and frankly, the fact that the new stores is a very high-quality class. We have Dallas that we just opened this week. We have San Francisco that we opened up just recently.

And then the class of Kona Grill restaurants that we are opening up, Columbus, Riverton and Desert Ridge, which is in Phoenix, those restaurants are what we consider to be the more margin friendly restaurants with smaller sushi bar placements and stuff like that.

So, those restaurants, we actually expect them to be more margin efficient than the current portfolio of restaurants.

So, we are actually looking forward to the positive impact of the new class of Kona Grill – to the Kona Grill margin profile because they are actually more efficient restaurants the way that we have designed and we plan to operate them.

So, we are – I am pretty bullish on the margin profile for the restaurants into the ‘23 year and the fourth quarter ‘22..

Alright. Thank you. Good luck guys. Have a nice holidays..

Thank you, David..

Mr. Hilario, there are no further questions for us at this time. I will now turn the call back to you..

End of Q&A:.

Thank you. Thanks everyone for joining us on the call today. As I always do, I would like to thank our tremendous team for all their contributions and frankly, hard work in what’s a very challenging environment, but also is very rewarding to see us operate great restaurants in every single market that we are in. So, thank you all of you for that.

And then for all our guests and people who like our brands and love the fine dining that we provide, I look forward to seeing you all in our restaurants. So, everyone has a good one. Thank you..

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..