Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GEN Restaurant Group, Inc. Third Quarter 2023 Earnings Conference Call. Please note that this conference is being recorded today, November 14, 2023.

Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2023 earnings release. If not, it can be found at www.genkoreanbbq.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements within the meaning of federal securities laws, including, but not limited to, statements regarding growth plans and potential new store openings, as well as those types of statements identified in our quarterly report on Form 10-Q for the third quarter of 2023 and our subsequent reports filed with the SEC. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements represent our views only as of the date of this call and are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we currently expect. We refer you to our recent SEC filings, including our registration statement on Form S-1 for a more detailed discussion of the risks that could impact our future operating results and financial condition. Except as required by law, we undertake no obligation to update or revise these forward-looking statements in light of new information or future events. We will file our quarterly report on Form 10-Q for the third quarter of 2023 later today and would encourage you to review that document at your earliest convenience. During today's call, we will discuss some non-GAAP financial measures, which we believe will be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures to the most current directly comparable GAAP financial measures are available in our earnings press release and in our SEC filings, which are available in the Investor Relations section of our website.

Thank you, and good afternoon, everybody. Since the last time we spoke, we've had many accomplishments, including completing our first full quarter as a public company and opening another successful restaurant in Houston, Texas, with 2 more restaurants expected to open by the end of the year. Starting with our new restaurants, we are proud of the results we're seeing from our 4 new restaurants in Chandler, Manhattan, Miracle Mile and Webster. These restaurants are collectively generating annualized average unit volumes of around $5 million and are currently on track for an average payback period of approximately 2.1 years in line with our expectations. Our outlier for us is Fort Lauderdale, as the opening was delayed to the summer months, which is seasonally a slower time in that marketplace. Importantly, while this restaurant opening is slower than normal, it is still better than breakeven today. Let me now provide you an update on our expansion plans. In the fourth quarter, we expect to open 3 new restaurants, including Houston, Texas, which opened in October. For 2024, we currently have 3 additional restaurant units under construction, all of which are expected to open in the first or second quarter of next year. In addition, we have 12 leases signed or in final signing stages for new units and an additional 8 locations in the LOI stage of negotiations for a total of 20 expected future locations. With leases for the majority of our new 2024 locations signed or in final stages of negotiations, we are now in the process of further expanding our unit pipeline as we secure our 2025 and 2026 locations. We remain committed to expanding our number of restaurants and achieving our growth targets. With our unit returns among the best in the industry, we believe the opportunity ahead of us is substantial. Next, I want to touch on our transition to Cisco as our distribution partner. The switch from U.S. Foods is going well, and we are making great progress. The transition is currently approximately 80% complete, and we expect it to be complete by mid-December. We continue to be excited to have Cisco as a partner to support our growth as they will allow us to seamlessly expand across all 50 states while minimizing potential additional disruptions. Once the Cisco transition is complete, we will be introducing new menu items. In addition, we've recently signed a new agreement with Coca-Cola, which will provide co-marketing incentives and consistent pricing. As a result, we will offer new promotional drink products in our restaurants on an ongoing basis. Finally, in the coming months, we will introduce Korean, Capri Soju as a new alcohol option under our new beer and wine licenses. All of these changes will help improve our customer experience. In closing, let me reiterate that we remain focused and steadfast in the long-term trajectory of the company. We will stay on course with our development and growth plans, meeting the expectations that we laid out during our IPO process. Our team at GEN Korean BBQ has already demonstrated our ability to succeed through many different economic environments and regions in the United States, and we believe we can succeed in any macroeconomic conditions. I've never been more certain of our ability to capture the opportunity ahead of us, and we are thrilled to share our story and unique dining experience for years to come.

Thank you, David. For the third quarter ended September 30, 2023, revenue increased 7.4% to $45.6 million compared to $42.4 million in the third quarter of 2022, driven by new unit openings and partially offset by a 1.2% decrease in comparable restaurant sales. The majority of our comparable restaurant sales decrease resulted from the impact of Hurricane Hilary on the West Coast, in addition to weather-related power outages causing 12 days of closure during the third quarter, which is the highest number we've ever had since our inception. In the middle of the quarter, we also instituted a price increase to our menu, benefiting our comp growth by 0.9% in the quarter, allowing us to help offset inflationary pressures while maintaining a substantial value offering to our guests. Turning to expenses, cost of goods sold as a percentage of company restaurant sales decreased by 100 basis points versus the third quarter of 2022 to 31.9%. This is primarily due to more favorable commodity pricing and ongoing negotiations with our vendors. Payroll and benefits as a percentage of company restaurant sales increased by 190 basis points versus the third quarter of 2022 to 31.7%. This is due to increases in minimum wage rates in certain markets in which we operate, primarily California, to short-term high labor costs in newly opened restaurants as we train staff and management, and an increase in managers in training in preparation for our ramp-up in new restaurant development. Additionally, as we work to integrate the 2 operating companies after the IPO, we have faced incremental labor costs to ensure a consistent operation across all of our restaurants. This integration has taken longer than we expected. Adjusted restaurant-level EBITDA as a percentage of total sales was 18.4% compared to 20.3% in the third quarter of 2022. If you exclude our new restaurants, adjusted restaurant-level EBITDA as a percentage of revenue was 19%, in line with our expectations. Please refer to our earnings release for a reconciliation of non-GAAP measures. G&A during the quarter was approximately $3 million, excluding stock-based compensation relative to our guidance we provided last quarter of $3 million to $3.5 million. In addition, we had noncash stock-based compensation of approximately $800,000 during the quarter. Adjusted EBITDA was $5 million, including preopening costs, which is in line with expectations. This compares to $5.9 million in the third quarter of 2022. The decrease versus the third quarter of last year was driven by higher preopening costs as we built additional units and incremental public company costs. Without preopening costs, adjusted EBITDA would be approximately $5.4 million. Net income was $2.6 million this year compared to $2.8 million in the third quarter of 2022, driven by the same factors I previously mentioned. Turning to liquidity, as of September 30, 2023, we had no long-term debt, except for $5 million of government-funded EIDL loans. At the end of the third quarter, we entered into a new loan agreement, which provides a $20 million revolving line of credit. Importantly, we maintained a strong balance sheet with $32 million in cash and cash equivalents and have generated strong cash flow, allowing us to self-fund $8 million of capital expenditures so far this year. We anticipate 2024 cash flow will provide enough funding to cover the development of our new restaurants without significant use of our existing cash. Based on our results to date, we would like to provide the following guidance for the fourth quarter: total sales between $43.5 million and $45.5 million, including 1 restaurant opened in late October and 2 additional restaurants opened in the final weeks of the year. Adjusted restaurant level EBITDA margin in the 18% to 19% range, and general and administrative expenses of $3.1 million to $3.6 million, excluding noncash stock-based compensation expense. I want to reiterate the strength of our company as we have been cash flow positive and net income profitable since inception, except for the impact of the pandemic. We currently generate in excess of $20 million in annual cash flow, with each additional restaurant opening adding to this total. In addition, we have $30 million in cash and a $20 million line of credit, giving us availability of over $70 million to further grow the company. This concludes our prepared remarks. We'd like to thank you again for joining us on the call today, and we are now happy to answer any questions that you may have.

Please open the line for questions.

I've got 2 for you, and then I'll jump back in queue. The first one, congrats on the pipeline of new locations. It looks like you're in good shape for fiscal '24 openings. I think you talked about 3 units under construction already, if I heard that right. How does the cadence look for openings across fiscal '24 as we're just thinking about how to build our models going forward?

So this is David. It is a challenge to open new stores, especially with the amount of square footage and engineering we have to deal with. This is not a simple restaurant to open. For example, in the roadshow, we explained what our concept is. A normal restaurant might have maybe 3 ventilated hoods. You have to look at it as 50-plus ventilated hoods with us because every table has ventilation. So why I'm bringing this up is after COVID, it has been harder to open restaurants, both from the perspective of the governmental issuance of permits and the contractors building these restaurants outside of our core market. Most of the pressure is coming from the governmental side. We have one restaurant that we should be starting construction on soon, but the agency has taken over a year to issue a building permit. So we need to float more restaurants to hedge the risk of delayed openings. But we are steadfast in our projected openings for 2024, anticipating the timeline to align more closely to our plans. However, it is definitely harder in terms of time delays, but it doesn't deter us from adjusting by lining up more restaurants.

That's very helpful, David. And if you look at next year's slate of openings, can you talk about the quality of locations that you're seeing now since coming public and the mix of openings in at least states where the brand is established versus new states?

Yes. We have a good amount of restaurants that we will be opening in Texas, as that is our strongest market. We will have more in Florida, and new states like Washington, Seattle are promising. Portland is drawing interest now, and we are excited about Boston as we're close to finalizing 2 deals. We will also open more in New York due to our success there, and Colorado is another market we will be entering. In addition, we are considering Oklahoma and Utah to further expand our footprint.

Okay, great. My final one, and I'll get back in queue, if you're looking at your consumer and what you're seeing in their behaviors in the restaurant, Tom, you kind of highlighted some one-time headwinds around the power outages and the hurricanes. And I know you've positioned that the volumes are so mature when the stores open, but GEN is not really a same-store sales story. But if you dig down to your consumer level, how does the health of the consumer? How are wait times hanging in there? Average check, I know it would just be really attachment, this is all you can need. But anything you can give us as far as the health of the GEN consumer would be great.

I would say, Todd, so far, what we're seeing is the consumer is consistent. There isn't an uptick in the consumer, and there isn't really a downtick. It's just kind of an even flow with our consumers. I know there's been a lot of discussion around the impact of new drugs like Ozempic, but we haven't seen any impact on our volume of people coming into the restaurants. So as we look into 2024, we see it being fairly stable.

I would like to add to that. We are always looking at what our local competitors are doing in our space and the non-branded competitors, especially in California, the Los Angeles area. We are still hearing that they're down by double digits, but we're not. So we're maintaining our brand and our customer base. We haven't seen a drop yet.

Next question comes from the line of Jeremy Hamblin with Craig-Hallum.

So I wanted to start and make sure I understood the menu pricing that you're carrying today and whether or not you expect to take any menu pricing going forward, given you're priced at about a 10% to 20%, 25% discount to competitors. And then two is just an understanding of where embedded within that sales guidance for Q4, what kind of same-store sales tracking at quarter-to-date and whether or not you've seen any change in the cadence here over the last couple of months?

Yes. Thanks, Jeremy. From a pricing standpoint, we don't have any new price increases on the horizon. The price increase we did after several of our restaurants was only for dinner. We are still in most of our restaurants under $30 for our pricing. So, I'm trying to think if that completely answered your question. Well, and then I just wanted to understand the guidance — the sales guidance range you've provided for Q4. One, if you can provide like a quarter-to-date same-store sales figure? And then two, what is implied by that guidance given that you'd opened one location in Houston, Texas in October, and it sounded like the other 2 locations you're hoping to get opened before the end of the year are in the last couple of weeks of December?

Maybe I can chime in a little bit in terms of the new restaurant we just opened in Houston. As we open each restaurant going forward, we will closely monitor the details of how it's performing. The one that we just opened in Texas is performing as we expected— as good as we expected. So when we announced the $5 million average and the 2.1 year returns, we are hitting some good numbers. New store openings going forward seem to be in very good areas, so we're very comfortable with the guidance. In terms of sales numbers, it was a little soft in October, but we're making it all up in November. So our guidance still stands. Some months, we pick up; some months, we lose. But it averages out. I want to say that as we transition to being one operational company, we're now taking a very good direction that everybody is now engaged. We're not two different operations anymore. We are optimistic about how we will start approaching different programs that we have not shared with the Street this quarter, but most likely in the next quarter, we will start sharing those approaches.

No, it's helpful. It sounds like embedded within the guidance is around flat or maybe even slightly negative comp just based on the math and the timing of those openings. I wanted to just ask one other question here, and I'll hop out of the queue. In regards to your G&A expenses and the commentary around stock comp expense, it was a little over $750,000 in Q3. I was hoping you might be able to provide, is that now that you're a public company, a fairly typical number that you're expecting based on the size of the organization today? Or was that unusual anyway? Anything you might be able to help share color on that would be great.

Yes. Thank you. That amount will be kind of, what I'll say, an ongoing quarterly amount. I think we announced in the last quarter that we had issued RSUs in connection with the IPO to certain employees. And those RSUs vest over a 4- to 5-year period. Therefore, the expense will be recorded over that 4- to 5-year period. So it will be consistent for the next few years.

Next question comes from the line of George Kelly with ROTH Capital Partners.

I lost my voice, so I'll be brief here. Two questions. First, as part of your S-1, I remember that you were targeting 10 to 12 openings per year. I was wondering if that still seems achievable through 2024? And then secondly, in your prepared remarks, you talked about Cisco and the potential for new menu items. I was curious if you could just expand on that.

Sure. We are going to keep our guidance in 2024. As we have said, much of the openings could be towards the fourth quarter because many are in the architectural and building permit stages. We will maintain our guidance on the openings as we move forward.

It was about Cisco.

Cisco, yes. Once we establish and are almost there in getting all the operations to function cohesively, we will now introduce different, better products to elevate our menu and our offerings to keep our products fresh. In the restaurant business, we offer a lot of meat products that have been with us for over 10 years. There are now new cuts that we are exploring and testing. After COVID, the production and product lines were not consistent, but now they are all coming to consistency, meaning we are entering a time where we will not have disruptions in the supply line. We can start looking at better products that will elevate our offerings for our guests.

Okay, understood. And then I guess just one more quick one. Tom, you mentioned that you were talking about restaurant contribution margin, and you mentioned that there was an adjustment or some kind of special item that would have brought it to 19%. Can you just walk through that again? I missed that.

What I said was if you exclude the new restaurants that are ramping up, the adjusted percentage would be 19% instead of 18.4%.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to Mr. David Kim for closing comments.

Well, thank you for being on this call with us, and thank you for having an interest in GEN Korean BBQ. We are continuously going to stay focused on our operations, and we will stay focused on growth. This is a company that generates a lot of cash and profits. It's not exciting, but our everyday focus and execution is what we do very well. So, we'll continue. We call it the boring business, but it's a business that makes money.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.