Greetings, and welcome to The ONE Group Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Tyler Loy, please go ahead.

Thank you, operator and good afternoon. 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 residents or views 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 refer to 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 the substitute for results are paired in accordance with GAAP. A reconciliation of these measures such as adjusted EBITDA, adjusted net income, restaurant operating profit, comparable sales, and total food and beverage sales of owned and managed and licensed units to GAAP measures, along with the discussion of why we consider these measures useful, we 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. Thank you for joining us today, we sincerely appreciate everyone's continued interest in The ONE Group. I would like to begin by thanking our team members who worked so diligently under challenging circumstances during the height of the pandemic, and now continue to work exceptionally hard to the recovery period, as guests seek out our restaurants. It is because of their commitment to operating the best restaurants in the industry that we move forward today with confidence in the long-term opportunity we see for The ONE Group. Today, I'd like to provide some detail on our recent results and strategic initiatives, and then discuss our robust development plans. Finally, I'll turn the call over to Tyler, who'll walk you through the quarterly financials in greater detail. We are thrilled to report that our restaurants continue to accelerate their performance as capacity restrictions have been eased coupled with the focused execution of our sales tracking initiatives. We continue to experience industry leading same-store sales improvements, which for the second quarter resulted in an increase of 38% when compared to 2019. A truly remarkable metric. Same-store sales at STK increased 54.3%, truly impressive considering the already strong performance in 2019. And Kona Grill same-store sales increased 23%, both compared to 2019. In addition, same-store sales increased 59.5% in July, including a 92.8% increase at STK and a 31.9% increase at Kona Grill. All of these compared to 2019. The stellar performance validates our position that guests are looking for the high energy, differentiate experience that our vibe dining offering delivers. As I said earlier, our teams are doing a phenomenal job providing experience and I couldn't be more proud of them. Also impressive, our second quarter U.S. average weekly sales were 288,000 for STK compared to…

Thank you, Manny. Let me start by discussing our second quarter financials in greater detail, and then provide an update on our cash and liquidity. For the second quarter, total GAAP revenues were $70.8 million increasing 324.6% from $16.7 million for the same quarter last year. Included in our total revenues for the quarter as our owned restaurant net revenues of $67.8 million, which increased 310.9% from $16.5 million for the same quarter last year. The increase in revenue is primarily attributable to strong sales momentum at state and local governments, the seating capacity restriction in the market in which we operate along with strong execution of our sales driving initiatives. Domestic consolidated comparable sales increased 38% for the quarter compared to 2019. For STK, comparable sales increased 54.3% versus 2019 and Kona Grill comparable sales increase 23.0% versus 2019. As Manny mentioned, consolidated comparable sales for July increased 59.5% compared to 2019, including a 92.8% increase at STK and a 31.9% increase in Kona Grill. Management, license and incentive fee revenues were $2.9 million in the second quarter of 2021 compared to $0.1 million in the second quarter of 2020. This increase is primarily the result of local governments using seating capacity restrictions in the markets in which we operate, coupled with the opening up STK Scottsdale in January, STK Los Carbos Airport in May, and STK Westminster with two F&B venues in May as well. Owned restaurant cost of sales as a percentage of owned restaurant net revenue were 25.3% in the second quarter of 2021, which were flat to the same quarter last year and in line with the first quarter's numbers. Owned restaurant operating expenses as a percentage of owned restaurant net revenue improved over 2000 basis points to 52.1% in the second quarter of 2021…

Thank you, Tyler and thank you all for your time today. Let me conclude by saying that although COVID-19 is still not fully behind us, I'm very encouraged with our results to-date and our prospects for 2021 and beyond. Our financial position, balance sheet and operating performance has never been better, as reflected by our record revenues and restaurant operating profits. Above all, I'm grateful for 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 want to thank our guests they have continued with us over this past year and are coming back to our restaurants and enjoying the Vibe Dining 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?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good afternoon and great quarter. A couple quick ones. The top line recovery is amazing. Can you talk to that relative to capacity? So where do you stand in terms of any mandated restrictions or even just social distancing restrictions you're placing upon your own stores would be the first question.

I mean, thanks Nicole. I think from a capacity perspective, I would say, for all intents and purposes in the U.S. we're at capacity so I mean, meaning we can use the majority of our restaurant space, obviously, there's still some places where we have to do some social distancing. But in general, we're pretty much where we need to be from a capacity perspective. So, I would say no limitation. Tyler, do you want to give any of the color on that?

Yeah, I think that's right. I think that what we're seeing in most jurisdictions now is a 100% capacity for the time being. And so, we're fully open in most places.

And then also on the top line, just a day part, if you could, thinking about the strength of brunch, right, which now we should take into consideration, I assume, as not only a recovery of AUVs but additional. So, if you could talk about day part or day of week mix in comparisons to total sales or the corporate on July, that'd be helpful as well, or even just the most recent quarter. Thanks.

Yeah, I mean, so the day parts, it's strong and stronger. I mean, I think we've been we're very strong across all the parts all days of the week. I would say that the strongest day of the week for us would be Friday, well, days, Friday and Saturday. So, we see a tremendous amount of demand for our brands, our properties those days of the week. And then Monday through Wednesday, we've been heavily promoting date nights, which seems to have become a significant go out day part. And we continue to leverage that. So, I would say the strength is across. And we've seen, as I mentioned, Saturday, Friday, and actually Sunday is now becoming a very significant day for STK and Kona Grill. And we believe that our emphasis on brunch has really brought that on. So, strength across pretty much all day parts, all days, and we think that we're still early on brunch. We still have a lot of opportunity. And as you know, brunch is habitual. So as more people learn about where we could have a great brunch, they will work on their frequency. So, I think that the game relative to brunch is very big. And then obviously, also, we're continue to be encouraged by takeout and delivery business, we haven't really seen a slowdown whatsoever of that business. As a matter of fact, we look forward to continuing promoting that business. And I think that's still a great layer of business. So, I would say right now, I don't see really anything but strength in all the parts of our business. The only place that there's huge opportunity, and probably not a strength is events. And I think that as we look out into the fourth quarter, we're starting to see a lot of demand for holiday party. So, I do think that in the fourth quarter, that will be the next layer of business that will totally sit on top of the underlying business and will even further drive our top lines.

And then just the last question, we didn't hear too much on beef. And I'm wondering if that's two reasons. I mean, you have some option on cuts, I imagine and even the presentation, but then also a great beverage mix. So, maybe you're getting some help there. Could you speak to that? Thanks.

Yeah, actually, interesting, I would say that our big help on carbs has been our emphasis on the premium product line, like [indiscernible] if you go to our restaurants, we have an incredible quality product, and we are able to get pretty good price on that product. So, we've actually utilized our promoting, if you will, product to really help us offset on that part of the of the many them as you mentioned there, obviously wine liquor and the beverage being in that business really helps you with the overall margins. So, we've offset some of our pressure on commodities too there. We do have, if you will, pricing commitments on these. So, we did have protection from some agreements with our vendors. So, we did benefit from that in the quarter. We do have agreements for pretty much the rest of the year. We obviously have been flexible with our vendors because we don't want them to unnecessarily be put out of business. So, we have given some concessions. I think that's a good partnership and that's how we approach the business. So overall, I think that we've utilized promotions, our p max, we've added a lot of emphasis on toppers for our steaks, if you go to our restaurants, you'll notice that we put a lot of salesmanship around having people add items to the steaks, which we've engineered them to be cost effective to us. So yeah, all in there. And I think overall, we have seen a lot of erratic behavior out of supply chain. But I think for all intents and purposes, we've done a good job of managing through that.

Thank you for your time.

Thank you, Nicole.

The next question is from Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi, guys, a couple of questions for me. The first one that I wanted to ask about was just the off premise. You guys did a great job over the last year and a half or so of driving off premise sales. Can we talk about conversion of these customers to dine in? Are you seeing that? Do you want that? And kind of what trends you're seeing from customers?

Thanks, Mark. Fantastic questions. So we have seen particularly in markets like San Diego - I would consider them to be the mid-size markets. We have seen the takeout delivery platform as being a great introductory price point offering to those markets. And if you look at our menu, we very carefully crafted the takeout delivery menu to be an extension of the in-room or the dining room menu. So, think of things like we offer cassava, that's a short rib, it's exactly the same short flavor of what we have in the dining room. So, we've really done a good job of utilizing the same products at a lower price point on takeout and delivery. So, we believe, and we have some anecdotal and some factual data that people are being introduced to the brand and then coming in and celebrating their birthday or celebrating an anniversary with us because they got introduced to the brand, to the takeout delivery business. So, we do think that takeout delivery business has become a complement to happy hour. Remember that we always use happy hour, under the same strategy of introducing guests to the brand. So, now we do have a one two punch with takeout delivery and happy hour, providing lower price points to introduce people to the brand. And then we're also doing the same thing with brunch. We do have fantastic price points and our brunch menu that also acts as introductions to the brand. So, check the box on that. And then the fourth area where we utilize area for introducing people to the brand is holidays. And I think we spoke about that and I prepared remarks where I continue to add an emphasis on holidays, has really expanded our consumer base. And we're starting to see a lot of people who will try us for the holiday season and then will come back for more regular type of dining. So, I think those are the four areas but as you simply pointed out there, we're very happy with takeout and delivery as another arrow, if you will, on our ability to introduce people to the brands.

Excellent. And then you touched on it a little bit. But have you seen any change in trends yet with business travel, even for restaurants like Las Vegas vacation, travel, anything that's maybe helped sales?

Yeah, I mean, the suits are back. And I was in New York last week. And we started to see people coming in with suits. And so, there's a tremendous - and we're trying to see that coming into the restaurants, but in terms of how we approach our business, our core demographic are women. So, even today, if you go to our restaurants, we have done a fantastic job of driving our dining rooms to be 55% female driven both brands on the Grill and STK. So that has become a big part of our business model. And then also women groups have become a significant part of our business model where historically there could have been more of male groups in for business dining, but now we're seeing a lot more women groups on social occasions, particularly Fridays and Saturday nights it will become a very, very noticeable in our dining rooms. But yeah, business guys are back and ladies are back. So, we're starting to see a lift on that and like as I mentioned on my statements there was trying to see lots of demand for holiday parties and people are wanting big holiday parties. All the inbound requests are for either big buyouts or some really big dollar event. So, I do think there's some big pent up demand for big dollar events coming to fourth quarter.

Okay, perfect. And then you touched on commodities a little bit, but can you talk about any other places you're seeing inflationary pressure, primarily labor and what you're doing to kind of retain and hold on to some of your good labor?

Yeah, I mean, so we mentioned beef. I mean, we could have talked about other commodities like seafood, we saw a little bit of that. And then obviously, labor. I mean, obviously, it's well documented all the challenges in the environments and we're obviously not immune to all those issues. But we have done a very good job through what we call our rapid deployment strategy of being very aggressive in growing, recruiting and bringing employees. And as a matter of fact, I just looked at our statistics, we are at about 100% par on hourly employees and about 105 on salary. So, for all intents and purposes, I'm going to knock on wood. We've done a very good job of keeping our restaurants fully staffed to what we need. That doesn't mean that every restaurant has the ideal number of employees. There are still some geographies where we have some challenges within the portfolio, but those are few than many. So, that's good. So, we can be able to manage within that. In terms of what's happened from an inflation perspective, is all the wages are up. I mean, obviously, demand for particularly back of the house employees is significant. And there's a lot less of those out in the marketplace. So, we've had to roll out what we call the perks, the one perks program. To achieve perk, so we've had to soup up all our benefits programs. And I think in general, those have been very beneficial bringing people to the company. So, all in all, very challenging, toughest, probably environment that we've ever operated in terms of people and getting people on board, but we really have gone hard on strategy. And then at the end of the day, the last thing on people is the best strategy is to retain your people. So, I think I spent a lot of time talking to the management team about making sure that we retain our top talents, and particularly GMs and executive chefs, I think that our track record of retaining those key individuals is phenomenal. And also, at the multi-unit level of operations, we have a pretty intact team there. So, I think the ultimate weapon in this environment is retention and keeping employees around.

Perfect. And then just one last one for me, happy to see some development happening again with Kona Grill. Like, can you give us any rough timeline of when you expect to maybe sign leases or have some openings there?

Yeah, so we have - So the first one I spoke of, in the prepared comments, we do have two additional ones that are literally LOI and getting close here. So, we will have three within the next several weeks that we will begin to design and the one in Salt Lake City, we should go into construction here very shortly, because we plan to open up that location in May of next year. So, we'll be working under a very aggressive development schedule there. So, we're super excited about that. I got to be honest with you. I mean, our intent with Kona Grill was to really work on volume and margin. And I think that the results this quarter got us, frankly above where I thought we would have been. So, our average volume is about 103,000 a week or 5.4 million annualized and our still level margins are starting to get up there. So, 17 plus for the quarter. And I do see a path here to have 20% plus margins for Kona Grill. So, if you start doing the math in all of that, and the fact that the landlord's basically have continue to call us and offer some incredible real estate at some incredible values. So, we're super excited about starting that up again. And again, that brand is super strong. I mean, I think some of the things we've done with the bar program, the music program, the addition of the brunch has been right on because we're in lots of suburban projects where people on the weekends need things to do so we've kind of playing off that. And then we're also leveraging our strategy with patios. And I think that's what you'll see with the future Kona Grill as an emphasis on patios and rooftops. We'd like rooftops on Kona Grill so you're going to see us being able to drive very great economics with a low real estate cost because we will have rooftops and patios and all these locations. So, we're super excited about that.

Excellent. Thank you, guys.

Thanks.

The next question is from Mitchell Sacks with Grand Slam Asset Management. Please go ahead.

Hey, guys. Fabulous quarter, by the way.

Thanks Mitch.

If you could talk a little bit about kind of the opening schedule on the STKs, as you kind of see it rolling out over the next few quarters. And then second question has to do with you talked about the restaurant level margins of the Kona. If you can just kind of talk about what kind of target restaurant level margins you might have at the owned STKs?

So, the schedule, I think we mentioned Dallas is under construction, early construction, but that's under construction. We do have the Stratford also, location is also under construction. That's a managed location. And then we do have San Francisco kicking here very soon. So be a horse race between San Francisco and Dallas, to see who's going to open up there first. And then we do have a couple three other deals that are heavy on lease negotiation. So, think of Dallas, San Francisco and Stratford there within the next, call it three to six months. And then, in terms of the margins for STK, I mean, I think Tyler commented on this quarter, we worked at 27% type of margins, I think that it's pretty reasonable to expect that our target is around 27% to 30% range. I do think that as we get up there on the super high-volume restaurants, we're able to break 30 rather easily. And we have a great cost structure. Our cost of goods is fantastic as you probably saw on the on the financials. And then, just because of the laxity in our chat, labor is becoming a pretty small incidence on the P&L. So our prime costs at STK are probably you know, 45%, which is probably it's an incredible cost structure. So, we're very bullish about that. Our biggest challenge now is open as fast as we can. That's why we're getting Dallas and San Francisco running. And as we mentioned in our prepared comments, Bellevue did over 240,000, really on its first week of being open. And that's without the patio, the patio has another 100 seats. So, and we're still keeping marketing down in that side, because we're getting the operations really lined up for that. So, I think that, with those kinds of revenues, the margins are fantastic. So, I would say that, internally, we'll have a target of 30. And we'll keep pushing for that.

And then in terms of restaurant design, as you do these new restaurants, and you mentioned your nine partners for delivery, designed and delivered differently so that you can do a larger volume of takeout delivery?

Yeah, so that's another great question. So, the Bellevue restaurants was one of the first questions that we designed within the COVID period. So, we did establish a separate takeout delivery area in the kitchen. So, if you go to the back of the house, you'll see that we've also added some technology back there to help them work on it. And then we're also utilizing a second line on the kitchen to take pressure off the main lines for the dining room. So, we're adapting our model to take advantage of that. And then Dallas is going to be the first restaurant that we actually open that will have a takeout delivery area separate from the restaurants. And our rationale there is because a lot of people come to STK to pick up takeout or delivery. And some of them may not be dressed up and they walk into the lobby of the restaurant and in on a Friday or Saturday night, they may not feel as comfortable walking into it picking up takeout delivery. So, we do think that having a separate area within the restaurant dedicated to takeout delivery, it makes a lot of sense. And some of our bigger takeout delivery restaurants we're doing annualized over a million dollars in takeout and delivery, maybe in some cases, a million and a half. In a lot of cases, that's almost the same half volume of casual restaurants. So, we're definitely in the takeout delivery business in STK. So, we need to seriously make sure that our restaurants are able to execute very well.

And final question has to do on alcohol. If you can kind of compare and contrast how you're dealing with alcohol sales prior to COVID? And how you're dealing with it now, and then kind of what you think the opportunity might be, as things go back to some form of normal?

So, I have a mixed feeling about that. So, let me give you a little bit of background. So, we obviously liked the margins on liquor and wine. And historically, if somebody would ask me, I would tell you that we love to encourage people to have the pre and after drink. But right now, the demand for the dining room is so high that frankly, the alcohol mix to us is important. But the way that we have our pricing and our cost structure set up is the advantage of liquor to food is not that much. So and the check is dramatically higher on food. So, as I would have told you two or three years ago, how I would have loved to become really big on wine and liquor, sales were a lot more temperate today, because it's really a table time game, right? Making sure that we're going to get as many customers with a great experience in the least amount of usable time of the table. So, sometimes selling that extra $30 or $40 drink is not on the interest of that table when we can make up hundreds of dollars on the next sitting at that table. So, you'll see us really doing a fine balance now between determining what's the right liquor balance or not? So, what I would have said 35% liquor was ideal a couple of years ago, I would say that somewhere between 25 and 30 is probably our sweeter mix right now. Anyhow, that's echoed that was going to be a long answer, just because, as we continue to have these really high volumes, that's one of the things that we really have to weigh into the business model.

Great. Thanks so much.

Thanks, Mitch.

This concludes our question-and-answer session. I would like to turn the conference back over to Manny Hilario, for any closing remarks.

Yes, thank you, everyone, for your continued interest and support of The ONE Group. And as always, I'd like to thank the incredible teammates and team that really makes it happen here in the company. They're fantastic professionals and one of the best teams in the industry. So, I'm very proud to be associated with them. So, I appreciate that. And then for all other of you, I look forward to running into you at our restaurants. So, see you all soon. Thank you, everyone.

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