Good day ladies and gentlemen, and thank you for standing by. Welcome to the GEN Restaurant Group, Inc. Fourth Quarter 2023 Earnings Conference call. At this time, all participants have been placed in a listen-only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, March 06, 2024. And now I would like to turn the conference over to Tom Croal, the company's Chief Financial Officer.

Thank you, operator, and good afternoon. By now, everyone should have access to our fourth 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 our growth plans and potential new store openings as well as those types of statements identified in our annual report on Form 10-K for the year ended December 31, 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 annual report on Form 10-K for a more detailed discussion of the risk that can 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. During today's call, we will discuss some non-GAAP financial measures, which we believe can 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. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are available in our earnings press release and our SEC filings, which are available in the investor relations section of our website. Now I'd like to turn it over to our Board Chair and Co-CEO, David Kim.

Thank you, Tom, and good afternoon everybody. During 2023, the company achieved record revenues of $181 million, representing growth of over 10% versus 2022. This was driven by the opening of six new restaurants, including three new restaurants in the fourth quarter. As we look ahead to 2024, we expect double-digit revenue growth driven by eight new restaurant openings over the coming year. Before I get into the details of the quarter, let me remind you of what makes GEN Korean Barbecue truly unique. We are a full-service sit-down, not a buffet casual dining restaurant concept, serving a variety of proteins, including steak, pork, chicken, seafood, and salad across both lunch and dinner all at an affordable, all-inclusive price. Unlike other restaurant concepts, every GEN Korean Barbecue experience provides our guests with an efficient cook-it-yourself at each table model. This eliminates the need for cooks at our restaurants, enabling us to keep our prices low and allows us to provide the best value proposition to our guests. Moreover, our smaller kitchen footprint also provides us with additional space for tables, allowing more guests to enjoy our dining experience. With that background, let's talk about restaurant development. During the fourth quarter, we opened three new restaurants, one in Houston, Texas in October, one in Kapolei, Hawaii in November, and one in Arlington, Texas in December. This gives us a total of six new restaurants for the year 2023. Looking ahead to 2024, we anticipate opening eight new restaurants during February of 2024. We opened two new restaurants, both one in Dallas and one in Seattle. The six remaining restaurants will open throughout the year, with most expected in the fourth quarter. In addition to the eight new restaurants in 2024, we have 10 additional leases in various stages of negotiations that we would expect to become new restaurants in 2025. We are excited and committed to expanding our footprint and growing GEN Korean Barbecue. We believe the growth opportunity ahead of us is substantial. We remain pleased with the performance of our four restaurants from 2022 and early 2023. As we stated on our last call, those restaurants continued to collectively generate annualized average unit volume of approximately $5 million and remain on track for an average payback period of approximately 2.2 years. Within our restaurants, we're currently in a testing phase of new menu items and drinks options that we are in the works of rolling out operationally. During the quarter, we completed the integration of the two operating companies into one. We also completed a switch from U.S. Foods to Cisco. While these operational initiatives involved additional costs above what we were expecting in the quarter and impacted our profitability, I'm pleased to say that both of these initiatives are completed. Importantly, we believe we have a solid foundation to create a great guest experience and drive further growth for GEN Korean Barbecue as we add new restaurants throughout the country. In closing, we believe we have an exciting growth pipeline ahead of us. Not only do we expect to open eight new restaurants, but we are also funding these new restaurants primarily through free cash flow, further demonstrating the strength of our business. Coupled with the attractive new unit economics that are among the best in the industry, we believe we have the necessary foundation to capture the opportunities ahead and enhance long-term value for our shareholders. With that, I would now like to turn the call over to our CFO, Tom Croal to discuss our results.

Thank you, David. For the year ended December 31, 2023, revenues increased 10.6% to $181 million compared to $163.7 million in 2022, driven by new unit openings and a 0.6% increase in same-store sales. For the fourth quarter, revenue increased 10.4% to $45.1 million, compared to $40.8 million in the fourth quarter of 2022, driven primarily by new unit openings. Same-store sales decreased by 1.7% in the fourth quarter of 2023 as compared to the fourth quarter of 2022. Turning to expenses, cost of goods sold as a percentage of company restaurant sales decreased by 20 basis points to 32.6%, 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 90 basis points to 32.1%, due to increases in minimum wage rates in certain markets where we operate, primarily California. Short-term high labor costs in newly opened restaurants as we train staff and management while upgrading the quality of our restaurant managers. Importantly, we believe we have a solid foundation to continue to create great guest experiences going forward and drive further growth for GEN Korean Barbecue. Occupancy expenses as a percentage of company restaurant sales increased by 89 basis points year-over-year to 8.4%, primarily due to 2022 and 2023 new restaurant openings, which include higher rent markets. Other operating expenses as a percentage of company restaurant sales increased 176 basis points year-over-year to 11.2% due to costs totaling approximately 110 basis points for standardized restaurant operating supplies and services across all restaurants, and approximately 40 basis points related to increased utilities, primarily in California. In summary, adjusted restaurant level EBITDA as a percentage of total revenues was 16% compared to 19.3% in the fourth quarter of 2022. As I discussed, the major differences are increased payroll and benefits of approximately 90 basis points, increased occupancy of approximately 89 basis points, increased operating expenses of approximately 176 basis points, partially offset by reduced costs of goods of approximately 20 basis points. Please refer to our earnings release for a reconciliation of non-GAAP measures. We currently anticipate our 2024 restaurant level EBITDA margin will approach the 18% range as we improve labor rates and our operating expenses. G&A during the fourth quarter was approximately $4.4 million or approximately 9.7% of revenue, excluding stock-based compensation. In comparison to the guidance we provided last quarter of $3.1 million to $3.6 million. The increase from our guidance range is due primarily to the addition of new personnel necessary for our increased level of new restaurant development. In addition, we had non-cash stock-based compensation of approximately $760,000 during the quarter. Adjusted EBITDA was $1.6 million, including pre-opening costs. This compares to $5 million for the fourth quarter of 2022. The decrease versus the fourth quarter of last year was driven by higher pre-opening costs as we built additional units, incremental public company costs in the fourth quarter this year, which we did not have last year, and the items I mentioned previously. Without pre-opening costs, adjusted EBITDA would be approximately $2.9 million. Our net loss was $193,000 or $0.01 per diluted share compared to net income of $175,000 in the fourth quarter of 2022. This was driven by the same factors I previously mentioned. Turning to liquidity. As of December 31, 2023, we had no long-term debt except for $5 million in government-funded EIDL loans, and we have $20 million available in our revolving line of credit. Importantly, we maintain a strong balance sheet with $31 million in cash and cash equivalents and have generated strong cash flow, allowing us to self-fund $17 million of capital expenditures in 2023. Turning to guidance. For 2024, we would like to provide the following guidance items; total revenue between $200 million and $205 million, including eight new restaurants and general and administrative expense of $18 million to $19 million, excluding non-cash stock-based compensation expense.

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. Operator, please open the line for questions.

So first question for you. I'm curious, you mentioned in your prepared remarks about testing new menu and drink items. I was just curious if you could give us a little more detail on what that is?

So the new products that we're testing are priced at an incremental $20 per guest. And for that price, they're getting much higher quality meats. So we're testing it right now. Due to the quality of these meats, our supply chain cannot meet the demand or our projected demand. So we just started this about three weeks ago, but they are rolling out slowly. We don't have enough data, but the initial results coming in are very positive.

And just a follow up on that, is it something that, just going back to your supply chain point, is it feasible that if the data continues to come back positively, that it's something you could have that rolled out across the base by mid-year? Or will it take much longer than that?

No, we think that by the end of March or the third or fourth week of March, we should be at a 100% rollout.

Okay. Interesting. And I take it you probably don't want to share the data at this point. Maybe it's too early to share the data or are you comfortable giving more detail on just what you've seen?

All I can say is it is very positive, but it is not enough data yet; we need more restaurants.

And then a couple other questions for you. In your guidance for fiscal year 2024, you said four walls should approach an 18% margin. And I'm just curious, it was 16% in the fourth quarter, and I'm confused. That's a pretty big step up. And so I'm just curious what it is that you're doing to drive another 200 basis points. Because it seems like comp growth should probably be flattish at best. I would think it's still negative in your guidance. So how are you getting to that four-wall margin improvement?

The margin that we missed this quarter was largely due to one-time expenses related to the integration of the two companies into one, and we have invested a lot more in human capital to not only be ready for the stores we're opening this year. We have a lot in the pipeline, which we said that we can probably open approximately 10 next year. But a lot of that 10 next year is actually happening. We are starting processes in terms of drawings and city approvals, a lot of which will probably start opening in the first and second quarters of 2025. So, we are incurring a lot of infrastructure costs, getting ready for that.

And then last question, and then I'll hop back in the queue. Tom, you said, $18 million to $19 million of G&A excluding stock-based compensation, and I'm just curious, can you quantify what your expectation for stock-based compensation is in 2024?

The stock-based compensation should be around $3 million per year for 2024.

Our next question comes from the line of Jeremy Hamblin with Craig Hallam.

So I wanted to just hone in a bit more on the current trends that you're seeing out there. You're kind of more than two-thirds of the way through the March quarter. I imagine you probably have had some negative impact from the heavy rains in your biggest geography. But wanted to see if you could give us an update on where same-store sales are trending and then as a follow-up on that, I know it's kind of a small test case, but whether or not in the markets where you have added the premium menu items, whether or not those stores in the recent weeks have seen comp trends turn positive.

The California stores make up approximately 50% of our total sales. Yes, we have been impacted by the weather. But that is just every year we're going to have Mother Nature in some capacity hit us. January didn't look very good. February was okay, and March we're starting to improve.

I wanted to clarify whether the test locations are experiencing positive same-store sales. It seems they might be down in the mid-single digits, especially given the challenging start in January.

The same-store sales are turning positive. So if it was a double-digit negative, it is now a single-digit negative. Any stores that were single-digit negative are turning positive. So it is going in the right direction.

I want to clarify the timing of your unit openings and your expectations regarding them. You've opened a few locations in the first quarter and are aiming for a total of eight for the year. It seems that the majority of the remaining six will be opened in the fourth quarter. Will you also be opening one or two in the second and third quarters? I would appreciate any additional details you can provide on this.

So this year we've already opened two. We are not sure if we can open at the end of March. Maybe to be safe, we'll be opening one in April, and we probably have the rest of them; we just started construction on two of them. So if you put like a four to five month timeframe, that should finish out in the third quarter. Maybe one more. We're not sure about that. And the rest are all in the city approval stages. So if we can get some more approved this quarter, maybe in the second quarter we might be able to put some more in the third quarter. But we're communicating to the street that we will achieve them in the fourth quarter.

You highlighted a little bit around the premium menu options even at a $20 increase option there. Also, I think you noted in your comments that you are looking at making some changes on your drink mix or in your alcohol mix. Was hoping that you might be able to share a little bit more color on that initiative?

We've rolled out a new initiative. It's a mixed drink with a product called Soju. And that's doing very well. For new restaurant openings, we have decided to roll all of them out except Boston due to liquor licenses because of the footprint of Boston being too small and not having a bar. The cost to get a liquor license is around $300,000 to $500,000, and we can't make those numbers pencil out. But for the rest of them going forward as a company, we will have liquor licenses. We've rolled out some liquor licensed restaurants that don't have bars with new products. And we're seeing some small incremental sales increase in the liquor side of the business.

And then just in terms of thinking about your mix of business. So, I think you have limited menu pricing at this point in time, maybe 1%. But wanted to just understand in terms of the composition of what you are seeing in your check versus traffic and whether or not there are considerations for the existing or legacy locations to take any menu pricing here in 2024.

We remain very concerned that a downturn in the economy could affect our guest experience and their perceived value at GEN. As we expand with new restaurants in different locations, the pricing will be significantly higher than the 50% of our existing restaurants in California. For instance, in Seattle, we opened a store with a dinner price of $34.95, up from $29.95. This indicates our pricing strength in other markets, and we will maintain this trend as we focus on opening the majority of our restaurants outside California. Consequently, the average guest check will naturally increase due to the higher prices in other states.

And then just last one here for me. On California specifically, there are some changes in terms of labor laws really regarding targeted, I think more chain restaurants. But just wanted to get an understanding as you looked at labor performing better than we expected in Q4. That was nice. But in terms of what our expectations should be here, as we get into kind of that April date where there are going to be some changes in the California labor laws, what should we be expecting in terms of impact to your P&L here throughout the remainder of 2024?

We remain committed to maintaining competitive pricing as our competitors' prices are generally 10% to 20% higher than ours. The recent increase in minimum wage doesn’t legally affect us, but it has created a situation where workers at fast food restaurants are being offered $20 an hour. This makes it difficult for us to attract employees who might settle for the minimum wage of $17 or $18. Thus, we are experiencing pressure from the labor market, especially due to the wage demands in the fast food sector, which will have an impact on our operations. We are exploring the possibility of increasing prices on a regional basis since our stores are spread across different areas. Nonetheless, we are focused on finding more efficient ways to reduce our labor costs without raising prices.

Our next question comes from the line of Todd Brooks with Benchmark Company.

Congrats on the first year under the belt here. Well done. Wanted to kick off on the real estate side, and it was good to hear that 2022 and early 2023 opening class, you're hitting those $5 million AUVs, and the payback period is kind of below that two and a half-year hurdle that you had set out, and that's even in some higher cost locations. I guess, David, can you talk to the mix of the openings in 2024 as far as totally new markets versus densifying markets where you're getting some scale like Texas or backfilling in Florida or Hawaii? And then are you getting to enough scale in those markets where you have multiple units now that the economics and how fast those stores mature is likely to improve going forward?

We are opening new stores in existing markets, especially the ones that are doing well. So let's just take Texas as an example, where we will be growing a lot of restaurants there. Our margins are great, and our sales are great. So we will fill in all those markets that we're very comfortable with; we like the labor cost structure, we like the sales structure. So the areas are Arizona, Texas, Florida, New York, and Hawaii. We will be filling those in aggressively, and we have staffing that we've got to ready to take those on comfortably. New areas we have to be ahead of the curve here. So we are testing and going in where we just signed North Carolina. We will go into Tennessee, we are in the works of that, and Seattle, we just opened; we are going to start construction in Oregon, and most likely in 2025, we will start going into Colorado. We are filling in our good markets for sure. Meaning we will open those markets and we will start opening the other outskirts and see how that works. But with the improvement of personnel, the investment that we put in to bring in people for construction and real estate selection has dramatically improved. That is why we're getting more comfortable right now in the expansion phase as of today.

And obviously the talent and resources that you've brought in are a big part of that, but the environment itself, when you get to permitting and landlord works and things like that, are those getting better just because of the talent that you've brought on staff or is that environment itself loosening up to and making you constructive on maybe shorter lead times to get units open as you get to 2025 and 2026?

I think it's both, but I really attribute that to the staff, the people that work for GEN. There’s a saying, the squeaky wheel gets oiled and gets more attention. We have great professionals; they know what they're doing, so that process is getting easier and shorter.

And then the final one on the real estate side. I know that you've laid out the eight units for this year and the 10 leases that are in process for getting locked up for 2025. Thoughts about buffers, are you still feeling the need to build buffers of potential locations given how much more professional that development team's getting for you? And if you're looking towards 2025, is the governor to 10 units more, how fast can you grow the restaurant-level talent, especially when you're going to newer markets?

Perhaps if you can help me define when you say buffer, I don't quite understand.

So, when targeting eight units for this year, it was necessary to have 11 or 12 units in the works for a year to deliver on that. But it sounds like the environment and the team are much tighter. So do you still feel you need to run a couple of units in process at any given time? If one washes out in a given year, you run into a permanent issue? Or just how much less friction are you seeing in the overall construction environment where you may not need that anymore?

We have a much bigger buffer because of our ability that we think we have, thanks to the upfront investment we're making on personnel. We are comfortable having a lot more buffer. Even if we were efficient in getting that 10 built and had more, we are able to take that on as of today. So, we might, for example, this is just an example; let's say we said that we can open 10 in 2025. Maybe we can end up at 15 because the buffers became a reality, right? So, we're comfortable having more buffer because the more efficient we get, those buffers can actually turn into new store openings.

And then one more question. I know distributor switches are never easy on a team and the supply chain pros as you try to accomplish those. As we're thinking about your approaching an 18% restaurant-level EBITDA margin, how should we be thinking about food costs with a full year under Cisco and ramping into that system and also layering in, if you have success from a sales mix standpoint with the premium pricing premium product here, how should we be thinking about food costs with both of those realities potentially playing out over the course of this year?

The switching of a major distributor has to do with the systems that they have and we are getting adjusted while they have to adjust as well. We are constantly meeting with Cisco, at least at the senior level, to improve on that, and it is improving. I actually sit in on these meetings to ensure that late deliveries or missing product percentages drop. In terms of products, it is streamlined very well. We do not have that issue and the food cost is actually stabilizing a lot. Again, I believe on the last quarter call I said we are really not concerned about the increase of food cost; it's very much stabilizing. We are at pre-COVID levels of stabilization.

And then the premium tier products and the premium pricing, is that beneficial to food cost or is the $20 upcharge basically allowing you to hold food cost in kind of that 32% range?

It's soon to tell, but the initial numbers that are coming in suggest it's holding.

Thank you. And we have reached the end of the question-and-answer session. I'll now turn the call back over to management for closing remarks.

We'd like to thank everybody for being on the call. We're excited about completing our first year and our first filing of our 10-K. We are excited for 2024 and look forward to speaking with everybody soon. Thank you very much.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.