Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Third Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer; and Benjamin Porten, Vice President of Investor Relations and Business Development. And now, I would like to turn the call over to Mr. Porten.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal third quarter 2022 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today's call, we will discuss certain 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 nor as a substitute for results prepared in accordance with GAAP. And the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jimmy.

Thank you, Ben, and thank you, everyone, for joining us today. It has been a few projects how rapidly and completely our business has recovered since the most challenging days of the pandemic. This has been a year of exploration for Kura. In fact, we’ve gone past near expiration and we are performing better than ever. It's a challenge that COVID presented ultimately turned into an opportunity for us. In March, we were as strong as we have been, it was hard to imagine when we were in the thick of the pandemic, and I'm so proud and grateful for everything that our team members have done to make this possible. Now, I would like to discuss our performance in our most recent quarter and why we think we are positioned for even greater things to come. The strong sales momentum from the first half of our fiscal year has continued into our third quarter, which once again has proven to be a record third quarter for the company. As compared to our pre-pandemic fiscal 2019 results, comparable sales growth in our third quarter was 28.3%. In a single year comparison against our fiscal 2021 third quarter, comparable sales grew by 65.3%. Whether we are looking at last year or about pre-pandemic, our comparable sales growth has been spectacular. Sales recovery in our California market has been especially pronounced with third quarter comparable growth of 95.5%, as compared to our 2021 results, reflecting the sales impact of dining room restrictions during the previous year. During the same period, Texas delivered 33.6% comparable sales growth, as compared to our 2021 results. Additionally, our operating expense revenue in the third quarter was $1.3 million or 3.5% of our sales mix. It's great to see such strong recovery across the board. In spite of ongoing inflationary pressure, consumer sentiment for Kura Sushi remains extremely strong as demonstrated by our recent results. As our typical customers have higher incomes, we offer an excellent value proposition. We are seeing continued strength in their spending and our check sizes continue to grow. Our sales performance as we enter the summer continued to be very strong with June revenue of $12.7 million, while much of the restaurant industry has been facing headwinds in terms of staffing and inflation. I'm extremely pleased to say that we have been largely fair and believe that we continue to occupy a uniquely privileged position to weather these macro pressures. Our COGS as a percentage of sales for the first half of the fiscal year were up 30%, marking an all-time best in corporate history. While we haven't been entirely free from quality pressures, taking pricing in conjunction with smart budgeting practices has allowed us to offset commodity inflation. In fact, COGS as a percentage of sales decreased by a further 30 basis points in our third quarter. As a percentage of sales, labor is running at 31%, representing the sequential improvement of 215 basis points over the prior quarter, driven by superior sales leveraging. While we had previously faced staffing headwinds as a result of Omicron-related staff quarantining during the second quarter, we are pleased to say that we had no such issues during our third quarter and we remain very close to achieving optimal staffing levels. These combined factors have resulted in restaurant level operating profit margin of 22.5%, representing 470 basis points of margin expansion relative to the prior year quarter and 210 basis points, as compared to the same period in pre-pandemic fiscal year 2019. There remains ample opportunity for our full-year restaurant margins to exceed the 20% we historically achieved pre-pandemic. Turning to development, we opened one unit during the quarter in our new market of Watertown, Massachusetts. We are very encouraged by Watertown's early performance, as well as the continued strength of our other fiscal ’22 openings. In terms of upcoming openings, we expect our new restaurant to open in the coming weeks and to close out our fiscal year with a total of eight new restaurant openings. We expect the remaining stores under construction to open early in fiscal 2023. Now I would like to turn to an update on recent initiatives. In past earnings calls, I had mentioned that we planned to complete the systemwide rollout of our robot servers, payment systems, and the touch panel ordering system by the end of the fiscal year. I'm proud to say that we are ahead of schedule and that we completed the rollout as of the end of May. As we previously mentioned, guest response and employee response have been phenomenal. The robot servers are a great addition to the Kura experience and were the focus of our recent marketing campaign. Now that we’ve completed the rollout of these three initiatives, I would like to discuss what we have coming up in our pipeline. We are in the process of upgrading our waitlist system through a partnership with Ivory, which we hope will improve the guest experience and reduce the attrition rate associated with our long waits. We are also in the process of moving our loyalty platform to Punch. Our reward membership base is now approaching 0.5 million members. By moving to the more powerful platform, we believe we can truly begin to unlock the data-driven benefits that our program can offer. We expect to implement these initiatives during the first half of the upcoming fiscal year. As a final note, a price increase of approximately 6% as of July 1st. Although the minor pricing adjustments we took in March were enough to offset inflationary pressure through the third quarter, in light of month-over-month inflation throughout the quarter, including the minimum wage increase in our California market, we believe this 6% adjustment is appropriate considering the excellent value we continue to provide relative to our competitors, especially those in the sushi space. We would also be developing a pricing event as we reach September at which point, effective pricing will be 7.8%. Again, I would like to extend my thanks to all of our team members in our restaurants and support center. The hard work that they put in every day is the reason that Kura Sushi is such a special concept. And with that I will turn it over to Ben to briefly discuss our financial results and liquidity.

Thank you, Jimmy. For the third quarter, total sales were $38 million, as compared to $18.5 million in the prior year period. Comparable sales growth as compared to the prior year period was 65.3% with regional comps of 95.5% in California and 33.6% for Texas. As compared to our pre-pandemic results of the fiscal 2019 third quarter, our comparable sales growth was 28.3% with regional comps of 18.2% in California and 40.5% in Texas. Turning to costs, food and beverage costs as a percentage of sales were 29.7%, compared to 31.7% in the prior year quarter, due to pricing taken at the start of the fiscal first and third quarters and higher food spoilage costs in the prior year, partially offset by food cost inflation. Labor and related costs as a percentage of sales increased to 31% from 8.95% in the prior year quarter, due to the lapping of the employee retention credits recognized in the prior year. Excluding the impact of the ERC and retention of new hiring bonuses, labor-related costs as a percentage of sales in the prior year quarter would have been 36.6%. The year-over-year improvement in labor and related costs as a percentage of sales, excluding ERC, was due to higher sales leverage, partially offset by increases in minimum wage. Occupancy and related expenses as a percentage of sales improved to 7.1% from 10.2% in the prior year quarter, primarily due to higher sales leverage. Other costs as a percentage of sales decreased to 11.5%, compared to 14.7% in the prior year quarter, due to higher sales leverage as well. General and administrative expenses were $5.9 million, compared to $4.3 million in the prior year quarter. Excluding the impact of the ERC recognized in the prior year quarter, general and administrative expenses would have been $4.8 million. This increase was primarily due to compensation-related investments we made in our team to support our accelerated growth plans, partially offset by a litigation accrual in the prior year quarter. As a percentage of sales, general and administrative expenses were 15.5%, compared to 23.2% in the prior year quarter. Operating income was $473,000, compared to operating income of $866,000 in the prior year quarter. Excluding the impact of the ERC and litigation accrual in the prior year quarter, operating loss would have been a negative $4.4 million. Income tax provision was a benefit of $2,000, compared to an income tax expense of $30,000 in the prior year quarter. Note that we expect to continue to incur nominal income tax expense irrespective of our pretax income or loss as a result of the full valuation allowance against our deferred income tax assets and incurrence of minor income taxes payable at state levels. Net income was $477,000 or $0.05 per diluted share, compared to net income of $770,000 or $0.09 per diluted share in the prior year quarter. When adjusting for the ERC benefit and litigation accrual in the prior year quarter, adjusted net loss would have been $4.5 million or negative $0.54 per diluted share. Restaurant level operating profit as a percentage of sales was 22.5%, compared to restaurant level operating profit as a percentage of sales of 5.8% in the prior year quarter. Adjusted EBITDA was $3.2 million, compared to a negative $2.6 million in the prior year quarter. Turning to our cash and liquidity, at the end of the fiscal third quarter, we had $36 million in cash and cash equivalents and no debt. In light of our fiscal third quarter results, I would like to provide the following updated guidance. We expect total sales between $137 million and $142 million. We expect general and administrative expenses as a percentage of sales to be approximately 16.5%, and we expect the opening of eight new units with net capital expenditures per unit of $2.2 million. Now I'll turn the call back to Jimmy.

Thank you, Ben. This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. As a reminder during the Q&A session I may answer in Japanese, before my response is translated into English. Please bear with us.

We will now begin the question-and-answer session. Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead with your question.

Thank you and congratulations on the strong results. I wanted to focus first on your restaurant level margins at 22.5%, I think that is a record for the company, labor down to 31%. And obviously you are doing that in a fairly high food and labor inflation environment. So I wanted to get a sense of the sustainability of those margins? How much of the improvement in labor is a reflection of the price increases versus the use of Kura bots?

Hi, Jeremy. This is Ben, it’s great to talk to you. In terms of pricing, we really use pricing to manage our prime costs of COGS and labor. That's really why we've been able to keep it so consistent over the last three quarters. In terms of the improvement to our restaurant level operating profit margin, that would be a function of greater sales leverage, part of which would be the Kura bot.

Got it. You provided some insight back in April regarding your March sales trends, which totaled approximately $12.5 million. It seems those trends have continued into April and May. Looking ahead to the implied guidance for Q4, it appears there has been an increase in productivity, and typically Q4 has the highest average unit volumes. Could you share what you have observed so far this quarter and how much of the increased guidance is due to the price increase?

Sure. Regarding the results from June, as Jimmy mentioned earlier, we achieved $12.7 million in revenue. If this continues as the run rate for the rest of the quarter, it would represent the lower end of our guidance. Q4 is typically our strongest quarter, and this trend is evident almost every year. We anticipate that July and August will see a significant increase, leading us to expect better results than the $12.7 million we recorded in June, which will help us reach the higher end of our guidance.

Jeremy, please allow me to add some additional explanation, but please allow me to speak in Japanese. Ben will then translate.

To give you some additional granular detail. Historically, the sales improvement in Q4 relative to Q3 has been 5.9% and then we took an additional 6% of price in July. And so that gets us higher up in that guidance range that we have. And then we have a number of other things that are in place, including the Demon Slayer collaboration campaign, which if it proves as successful as we hope it will be, then that will get us to the high end of that guidance.

Got it. That's great color. One last follow-up here. In terms of your average volumes versus kind of pre-pandemic levels, I calculate it's up about 25% in the May quarter versus what you were generating three years ago. Can you give us a sense for the components of that? How much of that is average check change versus transactions?

Sure. So if we look at a three-year stack going back to fiscal ’19, which is our pre-pandemic comparison, the effective pricing is a little over 22%, our comps over that same period are 28.3%. We're still not 100% back to pre-pandemic traffic, and so that offsets a little bit, but the rest of it would be in organic ticket growth just from people eating more plates than they used to.

Got it. Thanks so much for the color guys and best wishes.

Thanks, Jeremy.

Thank you, Jeremy.

Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed.

Hi, good afternoon. I guess I just wanted to follow up on the restaurant level margin, because it was a very impressive metric. And I understand the sales leverage component of it. But can you talk about structurally, do you think there's a change in where your restaurant level margin can settle out now over the next maybe three to five years? And I'd also be curious to hear your thoughts and I'm sorry if I missed this on development for 2023, particularly it sounds like maybe one or two locations might have slipped into ‘23?

Sure. Let me address the second question first. We did adjust our guidance from eight to ten units down to eight units, and we expect to open the remaining two units early in fiscal ’23. We're looking forward to sharing more detailed guidance regarding our unit growth expectations for fiscal ’23 during the Q4 earnings call or the next earnings call. Since going public, we have communicated to the market that we anticipate maintaining a 20% unit growth compound annual growth rate, and we fully expect this to continue in 2023 with that same 20% rate going forward. Regarding expectations for the restaurant level operating profit margin, I can't predict five years into the future, but based on the trends from Q1 to Q3, you can expect a higher rate for our restaurant level operating profit margin. We believe this trend is not a one-time occurrence and should carry into the next fiscal year.

Okay. And then just a follow-up it sounds as if you feel very confident about the cadence of your business and clearly the fourth quarter guidance implies such. Are you seeing any signs of your customer weakening at all? Or anything on the margins that would suggest that the trends you're seeing right now might not be sustainable?

We have an elevated rate for our restaurant level operating profit margin, and we believe this trend will continue into the next fiscal year. In terms of your follow-up question, it seems clear that you are confident about the cadence of your business, especially since the guidance for the fourth quarter reflects that. Are you experiencing any signs of customer weakness or any factors that might indicate that the current trends are not sustainable?

We have been very fortunate as we haven't noticed any decline in consumer sentiment. One of the most encouraging findings was that our March price increase of 1.8% was significantly surpassed by a ticket growth of 4.9% during the same time between Q2 and Q3. This indicates that our guests are not cutting back on their ticket sizes, which suggests we have not reached any point of consumer elasticity. This insight gave us confidence in the 6% increase we implemented at the start of July. Regarding our traffic rates, Q3 performed similarly to Q1, which was exceptionally strong, and definitely better than Q2, which faced challenges due to Omicron. Therefore, we believe we are in a very fortunate position concerning customer sentiment.

Okay. Thank you very much.

Thank you, Sharon.

Thanks, Sharon.

Our next question comes from the line of George Kelly with ROTH Capital. Please proceed with your question.

Hey, everyone. Thanks for taking my questions and congrats on a strong quarter. The first one is, did I hear you right that you're contemplating taking pricing again in September as well?

No. Just to clarify, that was referring to the September of 2021 pricing. We're just mentioning that we'd be lapping that price in two months.

I understand that the environment is challenging with labor and food costs and inflation is prevalent. However, you achieved a strong four-wall margin this quarter. You're implementing another 6% price increase, and it appears that consumers are not showing any signs of hesitation or reaching a limit. My question is more strategic: why continue to enhance margins through pricing? Can you give us an indication of whether we should expect more price increases in the future, or has your perspective on pricing opportunities shifted?

Sure. In terms of our decision for that 6% in July, this is really reflective of the month-over-month inflation that we saw through Q3 and then into June. If you look at our past quarters through fiscal '22, you can see that our prime cost structures stayed very, very stable. And so basically that's to say that our FD&A team has done a tremendously good job in terms of forecasting inflation for the upcoming period and that's what we've done for July as well. The goal isn't to drive margin by taking price, it's really just to keep our labor and COGS consistent. The growth in margin is more from just greater sales leveraging combined with that seasonal boost that we get.

Okay, great. And then last one for me, I think. You mentioned a couple of pipeline initiatives you're working on and expect to implement in the first half of fiscal year ’23. I missed the first one, could you just walk through what that longer-term initiative is, Ben? That's all I had. Thank you.

Sure. So I can walk through that longer-term initiative for you. Thank you.

You mentioned a couple of pipeline initiatives you're working on and expect to implement in the first half of fiscal year ’23. I missed the first one; could you just walk through what that longer-term initiative is, Ben? That's all I had. Thank you. Sure. So

So I think you're talking about the Waitlist improvement? George, is that correct?

Yes, yes, I think that was it.

We have been quite pleased with the Waitlist app; it has performed well for us. However, we recognize that we can enhance the accuracy of our wait times. Our current algorithm is fairly basic and does not consider historical behavior. For example, if we are an hour from closing and the wait time indicates a two-hour wait, many people will choose to leave because they believe they won't secure a seat. Once they exit, the wait time should decrease, but we lose that potential traffic. By incorporating attrition rates, especially during peak times, we believe we can accommodate a few more patrons each day. Ultimately, having more precise wait times will significantly improve the customer experience.

Okay, understood. Thanks.

Thanks, George.

Thank you, George.

Our next question comes from the line of Andrew Strelzik with Bank of Montreal. Please proceed with your question.

Hi. This is Daniel on for Andrew. I just had a question on off-premise, so I was curious where that mix is standing now? And maybe also some information on the driver outlook?

Sure. Off-premises mix was 3.5% of sales in Q3 or about $1.3 million, that's on a dollar basis, very, very close to what we had in Q1. That lower mix is really just reflective of greater revenue totals. In terms of our expectations for the future, we think this is in line. We think this is appropriate. Off-premises is gravy for us, we're basically hitting our kitchen capacity limits. At a certain point, trying to push additional off-premises sales is no longer incremental. In terms of our top line and bottom line growth, the opportunity is vastly greater in just unit growth. And so for the foreseeable future, we're going to be putting our energies as a company into just growing our unit base as opposed to trying to deliver additional off-premises sales.

Got it. And would you also be able to provide any color on where your pipeline is right now?

Sure. So we've got three units that we expect to open in July and August, and then two early in fiscal ‘23. But in terms of any further details on that, I think we're going to wait till the next quarter to give a guidance update.

And our next question comes from the line of George Kelly with ROTH Capital. Please proceed with your question.

Hi, everyone. Just one more quick one for me. Can you remind me when you open a new restaurant like you're doing three here in the last quarter. How much pre-open marketing expense and training and all this kind of stuff like what is it the expense around opening a restaurant?

I think we're going to wait until the next quarter to provide a guidance update. Our next question comes from George Kelly with ROTH Capital. Please go ahead with your question. Hi, everyone. I have just one more quick question. Can you remind me about the expenses associated with opening a new restaurant, like the pre-opening marketing costs and training? What are the typical expenses involved in opening a restaurant?

Looking at our pre-opening marketing fees, they are quite minimal. We do not engage in large advertising expenditures, such as television campaigns or commercials. Our emphasis is primarily on digital marketing and utilizing local media. Thus, the spending is relatively insignificant. Regarding the figures mentioned, Jimmy, did I hear you correctly when you stated it was $2,000 to $3,000 per store or $20,000 to $30,000?

$20,000 to $30,000.

Yes, so $20,000 to $30,000, which obviously is not a very big spend, but just given how strong our openings continue to be in spite of inflation, we think that spend rate is appropriate. In terms of pre-opening labor costs, our operations are very simple and automated as you know. The training period is very truncated, we're able to open pretty rapidly following our final inspections and approvals. So because that training period is short, the pre-opening labor costs are substantially less than a comparable casual dining restaurant.

Okay. That's helpful. Thanks.

Thank you.

Thanks, George.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Thanks for taking the follow-up. So I wanted to get an understanding rather than asking about the number of units on a go forward basis. I wanted to get a better understanding of the type of unit and potential size that you're looking at. I know the Watertown, Massachusetts has been great, I think the San Antonio location has been off the charts and may be challenging for the best unit you have in the system. But in terms of thinking about the square footage and wait times and so forth, are you thinking about having a slightly bigger footprint on a go forward basis given where demand is? Any color you can share on that would be great.

I would like to gain a clearer insight into the type and potential size of the unit you're considering. I understand that the Watertown, Massachusetts location has performed very well, and the San Antonio site has exceeded expectations, making it possibly the best unit in your portfolio. However, regarding square footage and wait times, are you planning to have a slightly larger footprint in the future due to demand? Any information you could provide on this would be appreciated.

Thank you for your comments on Watertown and San Antonio. We couldn’t be prouder of those locations. As we’ve stated in previous calls, the vintages from fiscal ’21 and ’22 have been our best ever, and we’re pleased with their strong performance. If there is significant demand in a market and a larger space becomes available at a grant site within that market, we would consider it. We see our flexibility with box sizes as a major competitive advantage. We don’t have a fixed prototype or square footage; instead, we evaluate the entire country to identify sites that resemble our most successful locations and adapt our concept to those spaces. Additionally, regardless of size, our units can be very successful. A smaller unit might have a lower average unit volume than the system average, but its cash-on-cash returns can be just as strong, if not stronger. Square footage doesn’t always correlate with higher sales. For instance, our port relocation has lower sales than the system average but is among our top three performers. The key factor here is the quality of site selection over the actual square footage.

Got it. Then I can target the question in a slightly different way. In terms of thinking about your occupancy costs, which pre-pandemic were right around 7% I think before you went public, they were closer to 6%. Do you have kind of a target range? Are you looking to be back in that 6% to 7% on a longer-term basis? Or how do you think about that?

So that 6% goes.

So that 6% goes.

So when you think about our units holistically, whenever we do a go/no-go decision with the real estate committee in terms of opening any new site, we evaluate a pro forma of the expected financials for that unit. The single most important metric that we focus on is cash on cash return. There might be a location that has higher rent, but it's in a lower labor market with high earnings or whatever. We look for a unit that can deliver the cash on cash returns that we're accustomed to. Rent is just a part of that, so we don't necessarily have a target for rent; it’s really more our expectations for all the cost items.

Great. Thanks so much for taking the additional questions.

Thanks, Jeremy.

And we have reached the end of the question-and-answer session, and this also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.