Greetings, and welcome to the Portillo's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Barbara Noverini, Portillo's Director of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our fiscal second quarter 2023 earnings call. You can read through the results we announced this morning in our earnings press release and supplemental presentation at investors.portillos.com. With me on the call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. Let's begin with a reminder that any commentary made during this call about our future financial results and business conditions constitute forward-looking statements, which are based on management's current business and market expectations and are not guarantees of future performance. We do not undertake to update these forward-looking statements unless required by law. Our annual report on Form 10-K and our Form 10-Q, both include discussions of risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call should not be considered as an alternative to GAAP measures. We direct you to the materials we released this morning for the reconciliations of these non-GAAP measures to the most comparable GAAP measures. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now let me turn the call over to Michael Osanloo, President and Chief Executive Officer.

Thank you, Barb, and good morning, everyone. We're glad to have you with us for our second quarter 2023 earnings call. I'm proud to report that we delivered another quarter of double-digit revenue and restaurant level EBITDA growth, results that highlight the durability of our brand. We grew total sales by 12.3% and achieved restaurant-level margins of 25.3%. We generated this level of profitability even under the weight of adding six new restaurants since Q2 of 2022. Michelle will detail our financial performance in a moment. But first, let me walk through the main drivers of this momentum that we have. To continue this positive -- sorry. First, we feel great about our class of 22 restaurants and their overall contribution to our financial performance. While it's still early, this class of restaurants continues to outperform our underwriting expectations. And I know we've talked a lot about The Colony, but year-to-date, this restaurant has already done over $8.5 million in sales. That's not an annualized number. That's a year-to-date number. That's feeding a lot of happy Texans. Tucson and Gilbert are already generating average weekly sales comparable to our mature Arizona restaurants, and Schererville, Indiana is cruising, generating Chicago like AUVs. To continue this positive trajectory, we heavily emphasize quality and execution so that we deliver an outstanding experience for both team members and guests. New restaurants tend to have lower margins early on because we invest additional resources to ensure great performance. But what's really exciting is that the class of 22's margin drag has been lighter than expected. That's a testament to both the operating strength of that class and the fact that they're overachieving on the top line. Which brings me to my next point, we've earned the right to grow because of the strength in our…

Great. Thank you, Michael. In Q2, we saw strong top line revenue growth. Revenues were $169.2 million, reflecting an increase of $18.6 million or 12.3% compared to the second quarter of 2022. This increase in revenues was primarily due to the opening of new restaurants in 2022 and 2023 and an increase in our same-restaurant sales. Same-restaurant sales increased 5.9% during the second quarter, which was attributable to an increase in average check of 7.1% and a 1.2% decrease in transactions. The higher average check was driven by an approximate 9.9% increase in menu prices, partially offset by a change in mix. We are experiencing expected cannibalization from some of our recently opened restaurants. We estimate the impact this quarter to be approximately 60 to 80 basis points. As we build more locally in Illinois this year, we do expect some additional cannibalization to occur. The incrementality of the new restaurant revenue and margin is very attractive and well worth the short-term cannibalization. Total revenues are in line with our expectations, and we remain committed to delivering on our long-term growth algorithm of high single to low double-digit revenue growth. Food, beverage and packaging costs as a percentage of revenues decreased to 33.2% in the second quarter of 2023 from 34.4% in the second quarter of 2022. This was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by a 5.5% increase in commodity prices. We continue to expect that overall commodity inflation will ease in the back half of the year and estimate mid single-digit commodity inflation for the full year. We have locked in pricing on 64% of our commodity basket for the remainder of fiscal 2023. Labor as a percentage of revenues increased to 25.5% in the second quarter of 2023…

Thanks, Michelle. Before we open for questions, I'd just like to reiterate how excited I am about our future. Portillo's may be a 60-year-old brand, but we're a growth company with a lot of white space. Still, we know we have to continuously earn the right to grow by delivering to each of our core constituents, our team members, our guests and our shareholders. Looking through the lens of development, our team members gained valuable career growth as they open new restaurants for Portillo's fans across country. It's incredibly important to open these restaurants well so that our guests find value in the amazing taste and quality of our food, the vibrant and fun experience at our restaurants and our great prices. New restaurants that opened well ultimately strengthen our earnings power, which drives shareholder value. And then we get to do it all again over and over, compounding growth. We can't wait to share more on that with you at our development Day in Dallas on September 19. Thank you. And with that, let's turn to Q&A. Operator, please open the line for questions.

[Operator Instructions] And the first question comes from the line of Sharon Zackfia with William Blair.

I wanted to come back to development. And I know that there is a team working on ways to kind of bring down the cost of the box. Is that anything you can share kind of the progress about or do we have to wait until September? And then on cannibalization, is that something, Michelle, where we would expect that to ramp as the year goes on, considering the comments you made about Chicagoland? Or is the 60 to 80 basis points kind of a good level to stick out?

Yes. No, good question, Sharon. So I'll start with the question on the new restaurant prototype. So Michael mentioned Kitchen 23. So that's part of the evolution as we move towards what we're calling restaurant of the future. And so I think in the short term, what Michael said is true, which is we're representing some Chicagoland restaurants. And then the new builds that you'll see as part of the Class of 23 will have elements of restaurant of the future in those. And so as we've mentioned before, we do expect some efficiencies in those kitchens, both in the short term and as we move forward. And then in terms of restaurants, it's the future, which, again, is that smaller prototype we will share more with you at Development Day. So whole tight for that, and we'll share more with you then. And then from a cannibalization standpoint, I think for this year, that's a pretty good number, Sharon, because as the Chicago restaurants, the three come online as part of the Class of 23, you'll see more of that impact, I think, come later on. And so for right now, the 60% to 80% is a fairly decent number to use in the near term.

And Sharon, on the cannibalization point, let me just reiterate something that I think Michelle mentioned. But it only happens really in the markets where we have some scale and density. So, I think Chicagoland and a little bit in Arizona. But it's really smart cannibalization, right? The incrementality of the revenue, the incrementality of that margin is so attractive that it's well worth doing for the short-term little bump on cannibalization.

And the next question comes from the line of Andy Barish with Jefferies.

Just wanted to level set on the commentary around second half margins. If you can give us more color, I know we're expecting a move down from the highest seasonal 2Q levels. But can you contextualize that a little bit more maybe sequentially or year-over-year, Michelle?

Yes, Andy, we're -- I don't want to get -- and you know this. I don't want to get in to happen of given the margin guidance. But I will tell you this that the comments that we made on both COGS and labor, I think, can help you contextualize where we see margins going. And as Michael mentioned, Q2, we see as the high watermark for the year, similar to what you saw last year. So I don't expect us to hit the highs that we saw in Q2 and the wage investments that we made in Q3 will definitely have a little bit of impact as we get into Q3, and then you'll see the full impact of those wage increases come into Q4 because we put the increases in midway through July. And so it's not a full impact in Q3. So you'll see the full impact come through in Q4. And that's where you'll see the primary pressure points come in is on that labor line in the back half of the year.

Got you. And then just wanted to circle back also on the new restaurant opening inefficiencies, which have been better than expected. Are you doing anything differently in terms of opening the restaurants? Or is it really purely that the top line is exceeding your expectations so you're able to cover some of those extra costs around opening?

Yes. It's a lot -- the answer is, yes to all of that. So there's certainly -- I mean, there's certainly an element, the -- in general, the Class of 22 is exceeding our expectations on the top line and the marginal revenue flows through really well. So that's obvious. But we've done a lot of things differently in how we open restaurants and our new NRO processes, which allow us to get to what I describe as steady operations faster. So we are training smarter, more efficiently and for a shorter period of time. We're pulling out extra resources a little bit more quickly because the teams that are there are much more capable of running the restaurant themselves. We have gone away from doing huge big bang openings, so more steady state opening, which allows the team to get their legs under them. And we're being very thoughtful about turning on additional channels until those restaurants really are able to handle it. You may recall, like in Orlando, for example, we did not turn on off-premise, -- any of the off-premise channels for a year because the restaurant was performing well, the restaurant needed to get its legs under it. And so that -- all those things contribute to an improved margin profile early.

And the next question comes from the line of Brian Mullan from Piper Sandler.

I was just hoping you could speak to that entree count stats that you've been disclosing, which perhaps I think you said, is a better way to think about traffic. And somewhat related to that, it sounds like from the prepared remarks, you haven't decided yet on price in terms of taking any additional pricing actions towards the balance of the year. But can you just speak to the primary considerations that are front and center in your minds right now as you do weigh any decision?

Yes. So the entree count is actually getting really close to the combination of mix and transactions. So it's -- they're both around negative three-plus percent. So -- and I think that as our channel shifting stabilizes, Brian, we're likely to just talk about the transaction mix component. It's probably the cleanest number now that we have more standardized and stable transaction mix. But so I'm not alarmed by that. And in fact, I think Michelle would say that in the last three quarters, the aberration of the first quarter aside, which we're lapping almost on, we're actually seeing some of the better trends on that combination of transaction and mix. So we feel reasonably good about that.

Yes. I think obviously, Brian, the macro environment is what it is. But when I look at the combination of transactions and mix and to Michael's point, when you throw aside Q1 because of we were rolling over Omicron which, as you know, in the entire industry, we saw improved transactions. We've actually seen improved combined transactions and mix going back to Q2 of last year and then going into Q2 in this year. So to Michael's point, I think we like where those trends are going. And we like the fact that when we look at the underlying metrics of the business, which Michael mentioned, guest satisfaction scores, order accuracy, speed of service, value perception, those all look really good, which for us is a leading indicator. So we feel good about the business. And then on the pricing front, yes, we have made no decisions on what we're going to do in the remainder of the year. We do know that we have about 3.4% pricing that's going to drop off at the beginning of Q4 in October. And so we have made no decisions on what we're going to do there. But we'll -- as I mentioned, we'll remain flexible in our decisions.

Yes. And Michelle alluded to this, Brian, but I think it's worth reiterating. We feel really good about where we are on pricing with the consumer and with vis-a-vis our competition. We're still getting -- we're getting some of our best guest satisfaction metrics scores we've ever gotten. In terms of total guest satisfaction, speed of service, accuracy and very importantly, we're getting great scores on value perception. So that's really important. And we're constantly monitoring how our most popular bundles compare with competitors' most popular bundles and in a suite of six, seven different high-quality fast casual restaurant chains, we're anywhere from $1 to $6, $7 less than their most popular bundles. So we feel great about where we're priced. And we -- and if needs be, we feel like we still have pricing power that we -- I prefer not to take. But if we have to take because of commodity or labor increases, we're well positioned to do that.

And the next question comes from the line of Sara Senatore with Bank of America.

Couple of follow-ups, if I may. The first on the wage investments. Just trying to understand, were those unexpected or rather just decided on more recently as opposed to maybe at the beginning of the year versus just being consistent with the kind of continuous over time increases may -- raises, things like that? And if so, what may have prompted the decision to make some of those labor investments? So that's the first question, and then I have one more, please.

Okay. Sarah, no, those are always contemplated. The timing of it was a little up in the air. And it was a little bit more complicated to roll out than maybe some previous years. We -- as minimum wages have continued to increase across the country, we saw a tightening of wage differences between our veterans and some of the newer team members. And we wanted to make sure that we were taking good care of our veterans. And so we went through a relatively thoughtful process of allocating the wage dollars so that veterans who've been with us for 10, 15, 20 years, we're getting an appropriate raise and that we're -- they tend to be very productive, great team members, flexible, et cetera. So that's all it was. And so it's not a standard spread like peanut butter, X percentage increase across the board. Some people saw double-digit weight percent increases. Some people saw low single digit. And it just took a little bit of time to implement and communicate to the field.

Got it. And then I just wanted to clarify what you were saying about the mix plus transactions. So both of those numbers I think were negative this quarter. To your point, 1Q is maybe exceptional in the sense that you have Omicron. But in the context of those, I guess, entree declines or however you want to characterize it, the 9.9% pricing, you talked about the relative value still being very strong. but do you see anything that would suggest that as your pricing is a little bit higher, thought negative on-trade count also gets more negative? Just kind of trying to understand the dynamic between price and then potentially losing similar entrees.

Yes. I think Michael mentioned this, Sara. As we continue to look at our value scores, right, we continue to see those be it multiyear highs and benchmarking the bundles. And so I look at those as, do we see a sign of pushback and guest satisfaction scores, those value perception scores. We're not seeing that pushback and we monitor pricing and what other brands are doing. And there's a lot of brands too that are carrying over a decent amount of price. So I don't feel like we're out of line in terms of how we're approaching pricing from that respect. And we've talked about is we've seen the mix component, which is generally lower items per transaction, lower attachment to some of the orders. We continue to see that in the size category, I'd say, when you look at fries, cheese sauce, things of that nature. That's where we continue to see some of the impact, I would say, of the macro environment, more so than our pricing action.

And I think underlying your question, Sarah, is are we concerned? I mean, I don't want to sound glib, but when we look at the underlying trends of our business, we look at guest satisfaction. We look at the execution and how we're doing it. Everything that we look at from a -- everything that would be a leading indicator of our business gives us a lot of confidence that we're on a good path.

And the next question comes from the line of Gregory Francfort with Guggenheim.

I've got a couple of lists. The first one is just -- I know that you guys have -- it's a little smoother than this in terms of the classes, but you guys are going to open up, I think, 11 or 12 restaurants this year. How much of that is -- how much is that dragging the margins this year versus last year and maybe versus what might be more steady state like 10%, 11%, 12% unit growth?

Yes. I don't think we actually talk about that number, Greg. I mean it's a great question. It's like what we have -- and you're right, by the way, the number, I think, with four hangover from the Class of 22 and the eight from this class, so we will have opened 12 this year, which is a very high number for us. And obviously, right, when you open a brand-new restaurant, the first six to nine months, they tend to be lower margin than a steady-state restaurant, especially when you look at our margins in general. So there does tend to be a little bit of a margin drag. We're just not seeing it as much as we have historically. A lot of that is because they're overachieving on revenue, but a lot of that is also because we are executing just better in how we open, what we do, how much support we need to provide and how quickly these restaurants get up to a steady state. So I don't think we've quantified that number.

No. No, we have not.

And Michelle shaking her head vigorously, so don't try. But there's an undeniable margin drag with new restaurants in the first, call it, 6 to 12 months of their existence. But it's not as bad as we had thought.

Okay. Great. And maybe just -- can you just update us on where turnover stands, what you're seeing in the labor market or -- I don't know how else you want to frame it, but what's the critical thing on that?

Yes. We -- look, if you look at us, especially versus black box and the competition, we're continuing to perform exceptionally well. We're probably 20, 30 percentage points better versus everybody else from an hourly standpoint, and we're probably another 15 to -- 15 percentage points better on a management standpoint. Obviously, look, we -- you get it, like there's clear hard costs associated with elevated turnover. You're spending money to hire new people, et cetera. But there's probably even more soft cost, like lost productivity, just people who aren't quite aligned with how we're doing things, they don't know when to help out each other. So improving turnover continues to be a very important tactic for us, maintaining a highly engaged, happy workforce is a huge initiative for us, and we'll continue to work very, very hard to make sure we're doing that.

And maybe the last one for me is just, Michael, I think you're opening up another small box like Joliet, I think it's later this year. Can you talk about what you might be changing in the format? And is the square footage smaller, drive-thru, any different? Just what changes you're taking from Joliet to the new box?

Yes, yes. The new one is at Rosemont, Illinois, which is just outside O'hare. It's a dining and hotel corridor. It's right near where all the car services park for O'hare in front of a large hotel. So it's a great location. We're super excited about it. Joliet, as I think I've mentioned before, we would describe as a fantastic success. It's exceeding our expectations. But being continuous improvement kind of people, we identified everything we didn't love about the Joliet build. We probably overbuilt it. We probably did not have enough room for people coming in to pick up the food themselves who wanted to walk inside. So we've tweaked it. It's a smaller kitchen, it's a smaller footprint. We're still going to have a very, very, it should cost a little bit less to build, and it should still generate plus size revenues. So we're super excited about it, Greg. I think it's a version 2.0 of the Portillo's pickup. I have no doubt that we will make -- it will be much better than Joliet in terms of functionality and operational ease. But I have no doubt that Version 3.0 will be better still. And then I think we might be at a place where we can mass produce them.

And the next question comes from the line of Chris O'Cull with Stifel.

I had a follow-up question related to cannibalization and then a question on development strategy. And I apologize if I missed this, but is the level of cannibalization in line with the Company's projections when they selected the site?

Yes. Yes, Chris, those are in line. And we knew as we put Schererville, Indiana in place, we knew as we put Gilbert in place, there was going to be a little bit of cannibalization, and that's where we're seeing that. And which is why we've kind of introduced this concept, and we've talked about this before. But I wanted to make sure as we have three Illinois restaurants coming online later this year that you all understand that, yes, we do expect some level of cannibalization. However, to Michael's point before, the incrementality of the revenue that we're going to generate clearly is well worth that. And we're very comfortable with that, and it was absolutely expected.

Okay. And then, Michael, I'm wondering if the success of the new -- of the recent new openings in these high-profile locations that obviously cost more to build, but drive higher volumes, has caused you to reconsider, rethink the Company's development strategy. I'm just wondering if -- I mean, it doesn't seem like building brand awareness with backfilling is really necessary which may allow you to, I guess, pursue more new markets sooner?

I think that's a great challenge for us. I mean, here's the flip side of that. There's an undeniable benefit to our business when we achieve local scale. So getting to six, seven, eight restaurants in a metropolitan area, you just see the benefit on the bottom line. We've shared that example, particularly with Arizona, where going from two to four restaurants improve by ---

We had 70 basis points.

Yes. Just going, Chris, two to four restaurants, we improved margins 370 basis points in Arizona. So for us, there's an undeniable benefit to getting to density and to scale in markets. There's also a challenge when you're opening in a new market, it does -- the first in a new market is a particularly challenging operational move to open, to execute, et cetera. And so we're huge believers in derisking how we invest money and making sure that those investments work out really well. So our cadence is essentially one new market every year. This year was Dallas. I love the fact that we built the Colony. It's doing exceptionally well. We have three more coming online in the second half of the year here in DFW. Feel great about that. I think we've openly said that next year, we're going into Houston. It's still Texas, but Houston is a very different market, geographically, pretty far away, requires different level of resources, et cetera. And so I think that it's very viable for us to keep building -- entering one, maybe two new markets in a given year and achieve density quickly so that both from a revenue and margin profile, those restaurants get to our very high internal expectations as soon as possible.

Okay. And then just lastly, I think one of the benefits of having several sales channels would be the opportunity to raise menu prices in different channels. And I'm just curious if you could kind of share with us what the in-restaurant or drive-thru restaurant pricing is. I'm just wondering if you're taking more pricing maybe in catering or other channels that may be less sensitive to price?

Yes, it's a great question. And so when we do pricing, I think that's a great question. Let me explain how we do pricing. First of all, we have a number of pricing tiers. We're at eight different pricing tiers, and those pricing tiers are a reflection of what that local market cost structure is. So if a municipality has, say, minimum wages at $15, $16 an hour, it's going to have a different cost -- that's a different cost structure for us than municipalities that might have different minimum wages. So we price differently there. When we do price, we don't price like peanut butter and spread the 3% we did in May wasn't 3% across the board. We go and get it, and we look very carefully by channel and by item for where we can price effectively. So we might price in one situation recently, we just priced catering and third-party delivery. We said that, look, there's a big gap between where we are from catering standpoint and how we price via third-party delivery, we're going to price those two to get our x percentage of pricing. We're not pricing the in-restaurant experience. So we're very thoughtful and careful about how to get the pricing we need and to look at it both by mix, by channel, by product line, to generate that pricing and what we think is the least transaction impactful way. Did that make sense?

And the next question comes from the line of Dennis Geiger with UBS.

Michael and Michele. I want to start off with one question, higher level, and I know you spent a lot of time sort of addressing this. But Michael, if you could kind of speak a bit more to some of the learning from new openings over the last several years and how much better or more efficient those openings have been given sort of the strength of, let's call it, a reasonably new team ramping up on the brand, et cetera. And just how much better as you've observed it that the team has gotten and sort of maybe what that means on the go forward, just kind of adding to your confidence in the development story, even adjustments to make the story even better. Just at a high level, if there's anything extra to add as we think about that impact on the development story.

Yes. Great question, Dennis. I mean, I'll tell you a couple of things that are probably sound like motherhood and apple pie. But the first one is we only open new restaurants now with an experienced Portillo's General Manager. And that's a big deal, right? So the eight restaurants we're opening this year, all experienced Portillo’s GMs. The ones we're targeting for '24, all experienced Portillo's GMs. Those GMs know how Portillo's is supposed to function. We had the benefit that every one of the restaurants we're opening this year also has an experienced assistant general manager. And I think 60%, 70% of the other managers, our typical restaurant has a general manager and assistant general manager and a typical one has about five or six managers. 60% to 70% of them are also experienced Portillo's people. That is huge because you're not going to be able to move around hourly team members to run new restaurants, but you can have leadership there who knows what a Portillo's is supposed to look like, how it's supposed to operate. They understand what our culture is supposed to be. And those are the things that make a smooth running operation So I would tell you that's the single biggest thing to derisk and opening is to have experienced leadership in those restaurants. And we now have -- we've worked really hard from a people pipeline to have a pipeline of talent that we know, people that we know want to be promoted. We're training them. We have the training programs in place. So we've done -- there's just been a lot of heavy lifting over many -- over the last two or three years really to get us in that position. So that's one big thing. We learned to train folks on…

Very helpful, Michael. I appreciate that. Then Michelle, curious, again, sort of at a high level, anything additionally you could add sort of on the net effect of some of the margin pressures that you spoke to with respect to wage and some of the new opening dynamics relative to pricing expected, pricing that could potentially come. Just framing up maybe kind of full year how your expectations on margins have changed. Obviously, we can roughly do the math to some extent. But without putting numbers on it, is there -- relative to the last quarter, anything sort of net that you could speak to high level on change in how you think about margins this year versus the prior quarter?

Yes. I think, Dennis, really, when I think about the commodity outlook, it's coming in roughly where we thought it was, right? We're still planning that mid-single digits I think as we look at labor, I mentioned still for the full year, we're expecting mid-single digits on labor inflation for the full year. So I wouldn't say there's a change in my outlook in the back half of the year at all. What I would say is we don't know what we don't know in terms of some of the outlooks on the commodities. As I mentioned, we are 64% locked in the back half of the year, but we're still floating with some items there. So we still got some exposure there. And Michael said it, too, look, we don't want to take price again this year, but we're not going to be as firm to say we're not going to because we need to have that flexibility to pull that lever as those input costs move. And so with the wage environment, I think we have a fairly good outlook on what's going to happen in the rest of the year. But there's still a little bit of unknown if markets start to move. But no, I would say there's no change to my outlook in the back half of the year versus sitting here during the first quarter discussions.

Very helpful. One more, if I may, please. You commented on the strength in the satisfaction scores across a whole bunch of metrics, which is encouraging. I think as you kind of commented on the number of items for order changing is really maybe one of the only observed changes in customer behavior. But any other behavior changes, whether it's day part, day of the week, off-premise versus on delivery. Anything else there that's changed. It's been an interesting observation. I appreciate the questions.

No. Nothing that I would call out, Dennis. I think just what I called out before is we're still seeing the lower items per transaction. And when we look at, again, Michael mentioned, when we look at the combined metric of transactions and mix, we feel comfortable with where we're at, especially when we look at the industry and we compare to back-box in our performance there versus the industry as a whole, I think we feel very good about that. So no, nothing I would call out.

I would just reiterate what Michele said, but be a little bit more specific that it does seem like channels have really stabilized over the last six months for us. So our channel mix of drive-thru inside delivery, catering, et cetera, et cetera, has had very, very little movement over the last six months. It seems like we're at some level of new normal.

And the next question comes from the line of David Tarantino with Baird.

A couple of questions here. First, Michelle, as we think about building our models for the second half of the year, and really, I think we know what your pricing contribution would be if you didn't take any more. But what I'm really asking about here is on the traffic and mix component. Is there anything unusual to think about for the back half of the year relative to maybe the most recent quarter that we should factor in when we're making our assumptions for those metrics?

Yes, David, I'd say from a pricing standpoint, we were -- based on the timing of when we took pricing in Q2, we were a little bit higher, so we were at the 9.9% expect Q3 to be around nine-ish percent price versus the 9.9% we saw in Q2. And then I'd say when I look at the trends, I will just tell you, again, Q1 aside, but when I look at the combined transaction mix trends, Q4 of '22, we were at just over 4%, so 4.2%. In Q2, the numbers we just released today were at 3.9%. So call it four-ish percent. When you combine those two, I don't really see any changes in the back half of the year to those trends. I don't see the environment all of a sudden getting extremely better. And so to me, I don't expect a material change in those trends that we've been seeing on those two line items combined. So that's how I would think about it, David, and then you already know the pricing component.

Yes. Great. That's very helpful. And then Michael, just maybe a question on development. It seems like last year was extremely backloaded and you had some slippage into this year and this year again, is very backloaded in terms of when the openings occur. I guess, is 2024 going to be similarly backloaded? Or I know you'd ideally like to have it a little more evenly spread across the year. So any update on the progress to getting it more even loaded?

Yes. It's not fun to be this backloaded, so I'm not going to lie about that. We have a much better pipeline for '24 than we did this time last year for '23 or this time two years ago for '22. So we're much, much better in terms of the pipeline of deals that we're actively working and finalizing. We have more signed deals for '24 right now than we have -- we're way ahead of the game. But '24 will still not be perfect in terms of timing. It will still -- we'll definitely have more in the front half of '24 than we did this year or in '22. But my hope is that by '25 is when we will see -- ideally, my perspective, I prefer not to open any new restaurants in November and December. I prefer to open all of our new restaurants in the first 10 periods of the year. November, December seasonally for us are very, very busy. It's just an extra heavy lifting to open them in November and December. So that's my goal is that by '25, we're not doing that. Undoubtedly, we'll still have some second half openings in the class of 24, but my fervent hope is that it's a lot better than what it is this year.

And the next question comes from the line of Brian Harbour with Morgan Stanley.

Could you just comment on the food side, what's primarily locked? And I guess, more generally, do you think there'd be similar kind of improvement in food cost in the second half or maybe, in fact, better?

Yes, Brian. So most of what we have locked is going to be on our beef [indiscernible] and on that beef line item in the back half of the year. We have some locks and some other smaller items. But as you know, beef is 30-plus percent of our overall basket. So most of the lock is going to come in, in that form. We've taken some positions on the flat into Q1 of '24, but for the back half of the year, it's mostly on that line item. And so, as I mentioned, 64% the rest of the year. And so we're feeling good about where we sit there. And when I look at the trend, -- you can -- as you know, Q1, our inflation on commodities was up 8.9%. We saw that paper down to 5.5% in Q2. I expect a little bit of tapering down from what we saw in Q2 and the back half of the year, but to get us to that mid-single digit. So I do expect a little bit of tapering in the back half versus what we saw in Q2 to get us to the mid-single digits for the full year.

Okay. Got it. Just in terms of the kind of margin impact of new stores, is there less of a drag from Chicago stores versus some of the other markets?

Yes. And it's a great point. It's -- the Chicago stores just opened up with very high revenues and the margin profile because they're opening up in a place where we already have scale benefit. So they open up with higher revenues and they open up with better margins. And that's why that little bit of cannibalization is well worth it because those are not -- Chicago restaurants tend to be much less of a margin drag.

Ladies and gentlemen, there are no further questions in the queue, and that concludes the question-and-answer session. That also concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.