Good day, and welcome to the GEN Restaurant Group, Inc. Third Quarter 2024 Earnings Call. Please note that this event is being recorded. I would now like to turn the conference over to Tom Croal. Please go ahead, sir.

Thank you, operator, and good afternoon. By now, everyone should have access to our third quarter 2024 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 quarterly report on Form 10-Q for the period ended September 30, 2024, 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 quarterly report on Form 10-Q 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. 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, everyone. The third quarter marked another period of successful execution as we continue to provide exceptional value and taste to our customers while expanding our footprint to 43 locations nationwide and preparing to open a large slate of new locations before year-end. Overall, we delivered total revenue of $49.1 million for the third quarter, nearly an 8% increase year-over-year, driven by the success of our newer restaurants. We also delivered $0.2 million in net income or $0.01 of diluted earnings per share, and $0.9 million in adjusted net income or $0.03 of adjusted diluted earnings per share, while estimates had us losing money for the quarter. We opened 1 restaurant in the third quarter and opened 2 restaurants in October. We have been very surprised at how well these 3 openings are doing. In fact, depending on how the holiday season goes, one of these new restaurants will be our #1 restaurant in terms of revenue, another one will be in the top 5 and the third will be in the top 10. We do not expect these restaurants to hit these levels. Furthermore, we achieved restaurant-level adjusted EBITDA margin slightly over 18%, meeting our expectations for the third quarter. With the steady profitability of our current stores, impressive revenue growth from our new locations, and our ongoing efforts to optimize costs, we're in a strong position to successfully execute our strategic initiatives for the remainder of the year and beyond. Historically, quarter 3 is a slower quarter across our restaurant industry as quarter 4 benefits from the holiday season. With that, our same-store sales growth declined 9.6% year-over-year. The consumer environment remained mixed, with ongoing inflationary pressures affecting discretionary spending. Additionally, our quarter was impacted by 4 hurricanes that caused temporary disruptions across several of our regions, extremely hot summer weather that we believe kept consumers at home more, and we had some cannibalization in Texas and Hawaii with new restaurant openings this year. However, we have seen improvements in our October and November revenue. We are proactively working to increase our same-store sales. We have been introducing training programs across our restaurants to drive premium menu sales, which we are measuring performance and starting to see improvements. We have also been working hard to drive additional drink sales like the cocktail soju mixes. We're also testing a new concept called GEN Grills, where we go cook for our guests at their businesses or homes. Another test we're doing is participating in outdoor fairs in an effort to gain more sales reasonably. Lastly, we began a gift card program with Costco. As we mentioned previously, it's important to note that the focus of GEN's business model is on expanding our store count to capitalize on the growing demand for Korean barbecue. On a restaurant level, our model is expected to generate an average cash-on-cash return of 40%, with a payback period of approximately 2 to 2.5 years, driven by an average of $4 million to $5 million in annual unit volume and restaurant level adjusted EBITDA margin of 18% to 20%. The 3 new restaurants I mentioned earlier are all substantially exceeding these average unit-level economics. Transitioning through restaurant-level expenses: cost of goods sold decreased by 50 basis points to 31.4% of total revenue compared to 31.9% in the year-ago period. Payroll and benefits decreased by 120 basis points to 30.5% compared with 31.7% in the third quarter of last year. Our general and administrative expenses, excluding stock-based compensation, for the quarter were 9.1% of total revenue compared to 8% in the second quarter of 2024. The increase is in line with our expectations, reflecting investments in our team and infrastructure to support future growth, along with an increase in insurance cost as our footprint has grown. At this point, we're now investing in brand building through our incubator, which includes the gift card program with Costco, and we are also working on additional agreements with large big-box retailers, international expansion, Asian food distribution channels, and GEN Grills. Given this pipeline of activity, we have started a marketing department to push these initiatives forward. Next quarter, we'll give some updates to the initiatives from our brand building incubator projects. We remain focused on completing our goal of opening 10 to 11 new restaurants in 2024 while maintaining a restaurant-level EBITDA margin of approximately 18%. We're well on our way to achieving this goal. Not only are we on track to hit our growth target for 2024, but we're also strongly positioned for even more growth in 2025. In fact, we have 17 additional locations lined up with leases signed or in the process of being signed. We also have 15 to 20 leases in negotiations, which should lead to having 75 to 80 total locations opened by the end of 2026. We're seeing strong momentum in our expansion pipeline and remain highly confident in our ability to reach our long-term growth objectives. Now I want to shift the focus of the call to one of our key incubator initiatives. This quarter, we launched GEN gift cards at Costco. Currently, the gift cards are available at 76 Costco locations, all within a 5-mile radius of most of our restaurants across the U.S. The gift cards have been selling exceptionally well. In fact, our regional Costco representative has reported that we are far and away the best-selling gift card they have seen at these locations. The information we have obtained from the rollout of our Costco gift card program shows that our brand is much stronger than we thought. We're very proud of the initial success we've seen with this initiative, and we look forward to expanding our gift card offerings to additional retailers. We're currently in discussion with Sam's Club for implementations possibly in spring of next year. To conclude, consumer demand for the GEN Korean BBQ experience remains strong, and our new stores are performing well above our expected per unit range. Our operational initiatives are gaining traction, reinforcing our confidence in our ability to deliver consistent, strong, and profitable results for our shareholders. Looking ahead, our promising pipeline of new restaurant openings and lease agreements underscore our commitment to expanding our footprint and reaching our growth targets. With a solid foundation, a profitable operating model, and a healthy balance sheet, we're poised for sustained success and dedicated to creating significant value for our shareholders in the years to come. Thank you for your continued support as we continue on this exciting journey. Now we'd like to hand the call over to Tom for a deeper look at our third quarter financial performance.

Thank you, David. For the third quarter, revenue increased 7.8% to $49.1 million compared to $45.6 million in the third quarter of 2023, driven by the continued ramp-up of newer restaurants. Turning to expenses: cost of goods sold as a percentage of company restaurant sales decreased by 50 basis points compared to the third quarter last year and 150 basis points compared to the second quarter of this year to 31.4%, largely due to our ability to control food costs. Payroll and benefits as a percentage of company restaurant sales decreased by 120 basis points compared to the third quarter of last year to 30.5%. Occupancy expenses as a percentage of company restaurant sales increased by 10 basis points compared to the third quarter of last year to 8.4% due to new restaurant openings over the last 12 months. Other operating expenses as a percentage of company restaurant sales increased 160 basis points to 11.7% compared to 10.1% in the third quarter of last year. This increase resulted from higher utility rates and usage during the hotter summer months as well as increased operating supplies related to our new restaurants. General and Administrative during the third quarter was $4.5 million or 9.1% of revenue, excluding stock-based compensation, compared to $3.1 million or 6.7% of revenue in the year-ago period. The increase compared to the third quarter of last year primarily reflects the hiring of additional personnel to support our new restaurant development and our brand growth initiatives as well as increased expenses related to additional insurance costs as we grow the company. Early in the year, we held back on G&A increases as we were trying to match the growth of new restaurant development. We are now in line with our G&A to be $18 million to $19 million for the year, excluding stock-based compensation, meeting our expectations. In the third quarter, we had net income of $0.2 million or $0.01 per diluted share of Class A common stock compared to net income of $2.6 million or $0.08 per diluted share of Class A common stock in the third quarter of 2023. Adjusted net income, which represents net income plus non-cash stock-based compensation, was $0.9 million or $0.03 per diluted share of Class A common stock. As David mentioned at the onset of the call, these figures are better than the estimates that had us losing money for the quarter. We maintained adjusted restaurant-level EBITDA above 18% for the third quarter of 2024. Total adjusted EBITDA was $3.4 million, net of preopening costs compared to $5 million for the third quarter of 2023. The year-over-year decline was primarily due to increased G&A and preopening costs. Without preopening costs, adjusted EBITDA would be approximately $4.5 million. Overall, our adjusted restaurant-level EBITDA and total adjusted EBITDA for the third quarter were in line with our expectations, and we remain on pace for our 2024 goals. Turning to liquidity. As of September 30, 2024, we had $22.1 million in cash and cash equivalents, and we carried no long-term debt, except for approximately $4.4 million in government-funded EIDL loans, which we had when we went public in June of 2023. We also have $20 million available in our revolving line of credit. GEN continues to produce robust free cash flow, enabling us to fund $17 million in new restaurant development costs and an additional $4 million towards the buyout of our GKBH Restaurant. We don't expect this trajectory to change in the near future as we continue to focus on new restaurant expansion. Lastly, turning to our fiscal 2024 outlook, we are reiterating our expectation to open 10 to 11 new restaurants in 2024, helping us to achieve total revenues between $200 million and $205 million, and a restaurant level adjusted EBITDA margin approaching 18% for the year. 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 you may have. Operator, please open the line for questions.

And our first question today will come from JP Wollam with ROTH Capital Partners.

Could you provide some insight into how the comps performed throughout the quarter? I understand that in the second quarter, you indicated some weakness, but you mentioned today that October and November showed improvement. Was this improvement mainly due to weather issues resolving, leading to increased traffic? Any details you can share would be appreciated.

There are different factors that contributed to the larger-than-expected negative sales in the third quarter. There are some high-volume restaurants that were shut down. Because of a small grouping of restaurants we have, when you have a high-volume restaurant shutdown, it impacts the percentage a lot. We have turned in our claims to our insurance companies, and we haven't realized those insurance funds that are due. We can only book it on our books once we receive them. It was very unusual. When we broke it down to some areas, we had some hurricanes that had hit Texas and Florida. Texas is a big market for us. We had some cannibalization amongst our own restaurants, one in Hawaii and one in Texas, two very high-volume restaurants. Those were all our cannibalization. But if you combine the two restaurants, we do much better than just one. So we're fine with that cannibalization. We had two restaurants where a much larger competitor's footprint came in. So that impacted, but that was more on the lower sales volume. And this weather pattern of extreme heat was not just regular heat. These were very, very, very hot weather patterns that came across Texas and California. That kind of impacted it. What's more important here is going forward. Are we seeing better improvement in sales in October and November for the six weeks? Yes, we do. It's much better than the third quarter numbers. So at least going forward, we're not seeing these larger negative comp sales for the first six weeks of the fourth quarter.

Okay. It seems there are several impressive new units. Could you discuss the factors contributing to their success and also share any insights on how to approach new markets as they emerge?

We are very shocked too. I mean, we project what we think we'll do when we open restaurants, but these three have totally just blown it out of the water. So we are very happily concerned, right? Because these are not numbers we've seen before or experienced lately. So we are very focused on making sure that we don't make mistakes because high-volume restaurants like this, if you don't focus on details, they can go sideways fast. But we're maintaining, which is very shocking to us, and we have all our best management in there now because these three restaurants, if you put some EBITDAs together, you can make up for 10-plus EBITDA stores without any problem. So why are they doing so well? I wish I had a crystal ball. I mean, we have stores that don't do well, so we're working hard on those. There's only one. But in terms of doing so well, we count our blessings, and we just keep focusing on the details. This is just day in, day out in our hard grinding business.

Okay. If I could ask one last question. Regarding some of the additional initiatives, it seems like GEN Grills involves catering and participation in outdoor fairs, and there was mention of an Asian distribution channel. Could you elaborate on the trade-offs related to the investment in labor and staff required for these initiatives compared to the potential revenue or marketing opportunities?

They're not marketing opportunities. They're very straightforward revenue and EBITDA generation. The biggest response we've gotten is from the gift card. Again, we can go into more details if you have more questions on that. But these other launches of, we'll call it incubator projects, are pure increases in sales to us, and we're looking for that. We're not just waiting for customers to come in. We're actually going out there and starting to be on the offense with this. So GEN Korean BBQ brand is very well known now and more than what we expected, so we are actually going and trying these other venues to bring more revenue, so this is purely a revenue project. In terms of the corporate overhead, we're pretty much 90% there. We're doing all this within the same corporate infrastructure that we have now. So it's not like something we're going to be adding a bunch of more people. This is about where we're comfortable in having to tackle these projects, with the way we have our corporate overhead right now.

Our next question today will come from Jeremy Hamblin with Craig-Hallum Capital Group.

I wanted to revisit the discussion about the improved results in October and November, and I would like to know the extent of these improvements. Is it due to increased traffic, a higher mix in the premium menu, or something else? A bit more detail would be appreciated.

I believe that it's a combination of factors. Regarding the reduction in negative performance, we were at negative 9, and I can confidently say we've reduced that by at least 50% so far. The percentage indicates significant improvement, but we are uncertain about the next steps because we are entering our peak season in two weeks, which is when we earn most of our revenue. If this season performs well, we should be in a good position. It remains challenging to predict, but for now, we have moved past the significant negative comparisons from the third quarter.

And then just as a follow-up, in terms of the premium menu, where is that mixing as a percent of total now? And is that improving as this initiative has rolled out, or staying the same, or fewer people? Any color you can share on that?

Sure. It is improving. We saw some efficiencies in our training of our staff to suggest and sell those products. But we have new teams that are actually working very well. It's not improving as fast as we want, but for sure, I can state that it is improving much better than we thought. So it is continuously increasing, and that is helping a lot. What was the second question?

Proportion of total mix. Is it 5%, 6%?

It's around 5% right now. Our goal is to hit 10%. And once we get to that 10% stage, we'll start focusing more on the drinks because the drink sales are a little low, and we think there's a lot more to capture on the drink side.

I wanted to shift the conversation to margin performance. The food costs and labor rates have been impressive, especially considering the tough comparisons. I'm interested in understanding what specific initiatives contributed to the payroll costs decreasing by 120 basis points, despite those comparisons. How sustainable is this trend as we look toward Q4 and beyond? Additionally, on the food cost side, even without menu pricing changes, we've seen a year-over-year improvement of 40 to 50 basis points. Can you clarify if this improvement is due to deflation in food costs or if there are other contributing factors?

In October, we had a company conference, and that caused some disruptions in labor costs. However, we believe we can recover from that. We're focused on maintaining better margins by paying attention to the details in our daily operations. Regarding food costs, I mentioned previously that commodity prices have stabilized, and we're not seeing significant fluctuations, which is a positive trend. One area of improvement is from the gift cards sold at Costco. When customers use these gift cards, they tend to spend more, often opting for drinks and items from our premium menu, which boosts our average guest spend. While we don't disclose specific figures, we are seeing significant sales of gift cards, which may also be positively impacting our margins. It's important to note that gift card sales aren't a major portion of our overall revenue, but they do provide a helpful boost. Overall, our improvements come from multiple small initiatives that we are actively working on every day.

Got it. A follow-up here on Costco. What's the kind of average redemption timeline from purchase to usage? And then, second question is, you mentioned that you're getting a higher spend when using the gift card. Can you quantify that in terms of is it $10 more per check? Or any color you can share on the magnitude would be great.

We are currently gathering data on how much more customers are spending. Our team of junior analysts is working on this, and we hope to provide more information on the next call. Right now, our random checks indicate that customers using the cards are spending more money, with around 7 out of 10 customers buying additional drinks and premium menu items. We will provide more details soon. As for the timing of usage, the redemption rate is currently less than 50%, which is actually a positive sign since industry standards suggest it should be around 80%.

Between 75% and 80%.

Yes, we still have a long way to go, with 75% to 80% completion. Feedback from Costco buyers indicates that gift card sales have significantly improved, as noted in their quarterly call. However, these cards are distributed regionally, only within five miles of our restaurants, and we have fewer locations compared to larger chains like Subway. Costco evaluates sales based on store proximity, and they've informed us that we are currently ranked #1 in this category, which is very encouraging. We are also pleased with the redemption rate. Guests will eventually use up the cards, but the positive aspect is that they tend to want to acquire more afterward. This leads to cash accumulating on our balance sheet, providing us with free cash that doesn't affect our food costs at this moment. We're monitoring some metrics to assess the overall impact further.

This will conclude our question-and-answer session. I would like to turn the conference back over to David Kim for any closing remarks.

Okay. We'd like to thank everybody for being on this call. And as always, we'd love to meet you at any of these conferences that are coming up. We're going to be at the Craig-Hallum Conference in New York on November 19, the Wolfe Small and Mid-Cap Conference in New York on December 4, the ROTH Conference in Deer Valley in Utah on December 12. So hopefully, we'll see some of you there. If not, we look forward to speaking with everybody when we report our fourth quarter and full year 2024 results in March of 2025. And thanks again for joining us, and I hope everyone has a great upcoming holiday season.

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