Thank you for standing by and welcome to the First Watch Restaurant Group Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, the conference call will be open for analyst questions and instructions on how to ask a question will be given at that time. This call is being recorded today, November 7, 2022 at 8:00 A.M. Eastern Time and will be archived and available for replay at investors.firstwatch.com under the News & Events section. I would now like to turn the conference over to Raphael Gross, partner at ICR. Please begin.

Good morning, everyone, and welcome. I am joined here today by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the third quarter 2022 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. Let me first cover a few housekeeping matters before introducing Chris. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, growth strategies, and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the Risk Factor disclosure and its filings with the SEC, including its most recent annual report on Form 10-K and quarterly report on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. And with that, I would like to turn the call over to Chris.

Good morning, and thank you for joining us. First Watch had another fantastic quarter where we experienced positive trends and improvement across several key areas of the business. We achieved same-restaurant sales growth, driven in part by an increase in same-restaurant traffic. We accelerated our new restaurant development, management staffing increased and we benefited from an easing of commodity inflation. Our confidence in the business and the continued momentum we are experiencing with consumers to drive sustainable growth remains higher than ever. This morning, I look forward to sharing our third quarter highlights. I’ll also provide an update on Hurricane Ian’s impact on our Florida business and discuss the national recognition as a beloved workplace that we recently received. Afterward, I’ll pass the call to Mel to dive into our quarterly results in greater detail. In an environment where economic uncertainty and global turmoil dominated the new cycle, First Watch experienced great strength. System-wide sales for the third quarter were up 19.2% year-over-year. We achieved 12% same-restaurant sales growth, driven in part by 3.7% same-restaurant traffic growth when compared to a successful third quarter of 2021. Performance brings our year-to-date same-restaurant sales and traffic growth to 17% and 10.6% respectively. And when we compare our Q3 results to 2019, same-restaurant sales growth was 32.7% and same-restaurant traffic growth was 7%. This brings our geometric three year stat to 36.1% and 10.4% respectively. We know that very few brands out there are generating traffic-driven growth in this environment. In fact, Black Box Intelligence recently reported that September was the industry’s seventh consecutive month of traffic decline. And in Q3, the industry as a whole was down 4.6% in traffic. Though, as you know, First Watch saw the opposite. Our traffic grew 3.7% during the same period. Our continued same-restaurant performance appears…

Thanks, Chris and good morning, everybody. During the quarter, First Watch restaurants realized system-wide sales of $235.2 million, which is as Chris mentioned, a 19.2% year-over-year increase. Total revenues for the company were $186.9 million including sales of $184 million in the company-operated restaurants and $2.9 million of franchise revenues. Total revenues were $29.4 million more than in the same period last year or up almost 19%. The growth in our comp sales and traffic, which Chris also noted was 12% and 3.7% respectively. Overall growth in comp sales and traffic was driven by the continued recovery of our dining rooms, which increased 93.3% in the third quarter relative to our pre-pandemic levels in the third quarter of 2019. Starting in the fifth week of the quarter, sales benefited from a menu price increase of roughly 3.9%. This increase has not affected our dining room traffic and we continued to achieve year-over-year growth in our third-party delivery sales and traffic through the rest of the quarter. As a percentage of restaurant sales, our food and beverage order were 24.2%, which is a 70 basis point improvement from the second quarter. Commodity inflation of our market basket costs topped out earlier in the year and trended down to 11.2% during the third quarter. We anticipate 12% to 14% inflation during the fourth quarter as we lose some benefit of lapping a short-term spike in egg prices that was contained in the third quarter last year. Labor and other related expenses were 33.3% of restaurant sales, which is an increase of 100 basis points from the second quarter. Our management staffing reached a target goal of 2.9 managers per restaurant by the end of the quarter, that’s the highest it’s been since pre-COVID. Over the next several quarters, we are focusing on…

[Operator Instructions] And our first question today will come from Jared Garber with Goldman Sachs. Please go ahead.

Hi, Great. Thanks.

Good morning, Jared.

Good morning, how are you?

Fine, thanks.

Wanted to get a little bit of a sense on the new store productivity. Chris, I think you mentioned continuing to see really strong sort of ramps in new markets on those new units that you opened. I think in the release today, you said you opened new restaurants across, I think nine different states. Some of those presumably are states you already in like Florida, but presumably some are new, as well. So can you just give an update on new store productivity and what you are seeing in the new stores that are opened in the last three to six month in some of those newer markets? Thanks.

So, most of our – Jared, this is Mel, most of our new restaurants now are annualizing at sales of about $2.2 million, which is above the system average.

Great. And then, I guess, anything just in terms of productivity ramps or productivity in new markets versus core markets?

They are performing pretty similar across different geographies and frankly, that’s been the history of the company. There is less about the locations of where they are unless there is some outside of that that has more – in terms of geography but has more to do with the site selection. So that when we observe our site selection principles. They pretty much have a fairly predictable ramp.

Jared, this is Chris. The one thing I’d add there is, for us, we feel like that’s a tremendous advantage for us to be able to balance out where we open a good mix of core emerging and new markets like we talked about in the past. So, we don’t have to weight it heavily more towards mature to get the volumes that we are looking for. We are able to do that, as Mel said, across geographies.

Great. Thanks for that. And then, I guess, just one more on the higher level sort of consumer outlook. Clearly, First Watch is getting its share of traffic, positive traffic share. Just wanted to get a sense if you are seeing anything in terms of check management from diners or guests that are coming in. Maybe there is a little bit of a shift there, potentially lower beverage attach, lower add-on attach, is there anything you are seeing with that respect or maybe not and consumers still continue to spend and trade up at First Watch, just curious what you are seeing there. Thanks.

Thanks. No, actually, just the opposite. I mean, obviously the first measure of that is the growth in traffic, but from a check management standpoint, we are not seeing that at all, not seeing folks manage their check. Our beverage attachment is up. So, all the signs that we are seeing are positive. And we think that’s because of the focus that we place on just delivering a great experience for both our team and our customer during this time. We believe that as we move further into this economic environment that the strong will get stronger. So, we are really focused on within our four walls and making sure that we deliver a tremendous value and an incredible experience and I think performance in our traffic has shown the dividends there.

Great. Thanks so much.

And our next question will come from Andy Barish with Jefferies. Please go ahead.

Hey guys. How are you?

Good morning, Andy. Fine. Great, how are you?

Good. Good. Just two quick ones for me. I mean, one, we’ve been seeing across the industry the other operating expense line, certainly elevated. Any color there relative to, and I guess, probably, primarily utilities but how we can expect that continuing into the fourth quarter? And then, I have one other one after this.

Yeah, so, that line does experience some inflation too and yeah, the utilities are in there. But also, we run repair and maintenance through that line item, as well and our repair and maintenance expenses have, like every contractor expense has been a – has been the product at some inflationary increase, as well. And we got a 35 year old system. So, or nearly four decades now. So, frankly, we are having to get back some of the restaurants where over the course of the last several years, we are visiting those restaurants more time and give – spending more time on the maintenance cost. But it is something that we continue to see some increased inflation rolling through there, but it’s – I think it’s in terms of what I look at going forward, I don’t see any reason to be optimistic that it’s going to come down tremendously. But we’ll continue to manage it.

Gotcha. And then, your comments just on the 4Q start I mean, the guide as at 15-ish for the year implies about 8 in the fourth quarter which is basically what you are running on, I think on pricing. So, maybe where are you now? How much hurricane impact was in there for the first week or two of October, as you mentioned. Do you expect a ramp as the quarter goes on with what’s expected to be a strong holiday season. Any – just any color on that could help us out?

So, generally speaking, we would expect it to improve as we go through the balance of the year. There is – beyond the hurricane cost, there are other fourth quarter cost just to think about, one, we have our national conference that occurs in the fourth quarter. We have a Sunday holiday shift where we – Christmas falls on a Sunday this year. So, that important day our crews were not serving. We have the cost of the shelf registration and then the hurricane during the fourth quarter. So, we are looking for a strong fourth quarter, but I do want to make sure I temper everybody’s results a little bit about the fact that we come into the quarter doing – continuing to deliver on growing traffic and growing sales. But I don’t want people to get too far in front of us on that. And we’ve built all that into our annual guidance that we put out.

Okay. Appreciate that. Thanks guys.

Yes.

And our next question will come from Andrew Charles with Cowen. Please go ahead.

Great. Thanks. Chris, can we just go over alcohol for a second? Just curious that as the last update is on – on the system looking to complete lots all the stores that’s contained with the license by the end of the year. Curious where you guys are with that and that’s still the right target and where you guys are seeing that mix and recognizing that obviously you haven’t started to build awareness this yet, because there is more focus on just implementation. But just early read kind of where is alcohol makes things for you guys?

Yes. Sure. So, I’ll answer the first part of your question. We have alcohol in about 83% of the company-owned – or excuse me, of the system right now. So, on track, if not ahead of the roll out. So we do expect to have that in place by the end of the year at the latest – of next year. And alcohol continues to increase in mix. So, we are getting more and more bolden by the attention that it’s gaining from the consumer. We think it’s a traffic driver and we are really looking forward to innovating around that platform once we get it rolled out.

Super. And then, I just want to come back to the other operating expenses that were a bit elevated. You called out repair and maintenance, is the KDS roll out going ahead of schedule? Does that have any impact there? Is that more capitalized?

No, that’s - most of the KDS system is CapEx for – there is probably, when they get in and they install it, there is probably some cost that they pick up at that time. But for the most part, it’s not driving repair and maintenance and crisis.

Got it. Okay. That’s helpful. Thanks guys.

And our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you. Two questions. The first one just following up on the comp trends. Just wondering, I got the impression that trends improve sequentially through the third quarter. I just want to confirm that. I mean, when you said about a soft start in October, I wasn’t sure that you were talking about the system due to more the broader macro or whether you were purely talking about the hurricane, just trying to get a sense of that and what initiatives you might implement if trends were to slow, which again, make a sense for what you’re seeing that at all, but just trying to get a sense for what leverage you might pull if you saw a slowdown in your business? And then, one follow-up.

Yes. I’ll just answer it directly. Traffic grew sequentially each month during the third quarter and all day parts were up.

And my reference to the slow start was that the hurricane actually hit us that first quarter. I mean, excuse me, in the first week of the fourth quarter.

Fourth quarter, yes.

Got it. But otherwise of the net impact, you are not really seeing any underlying change in trend. But just Chris, what might you do, are there levers that you’d pull from a value perspective? Or do you kind of stick to your kind of core regardless of maybe what the competitors are doing?

Yes, we don’t – we’ve already begun that work a year ago, which is definitely not discounting. We don’t see ourselves going down that path. Again, we are focused heavily on taking care of the customer, innovating around our menu. Just doing what we need to do to make sure that we are a tremendous value to the consumer. I will say this that, our industry research has seen that search is on for example for restaurants. Our down versus 2019, we think consumers are being less promiscuous with their dining dollars and so they are sticking more to what they know and trust. We’ve been called out as a restaurant that people can trust. In fact, we were second in the industry according to Technomic in a consumer ranking on Restaurants That I Trust. So, and our positioning with the more affluent customer. We really just feel like we are well positioned for both the near and long-term.

Understood. And then my follow-up is more on the margin side. I know, you are not giving any guidance per se, looking into 2023, but directionally speaking, it does seem like investors are excited that, sales tend to be holding up and for sure in your case, and menu pricing seems to be outsized and as you mentioned, maybe inflation is easing a little bit. So, would that kind of a trisect there? It seems like there is the potential for significant margin expansion in earnings growth. Just wondering whether that’s all directionally accurate going into 2023? Or are we underestimating maybe the inflation impact or the pricing not being enough to fully offset. Just trying to get your directional thoughts on what could be a compelling or attractive fundamental outlook into 2023?

Well, what I can tell you about 2023 is that we are certainly planning on battling the cost of the inflating prices and that sort of thing. I don’t think that we are going to get a lot, I think the pace of inflation may slow, but I don’t think we are necessarily second to see prices – real prices drop a great deal. I think we still have to continue to share basis points on the business. But we’ll have some good 2023 guidance out there as we get closer and have a better visibility in what’s happening.

Great. Thank you guys.

Thank you.

And our next question will come from Brian Vaccaro with Raymond James. Please go ahead.

Hi, good morning. Thanks for taking my questions. I wanted to ask on the commodity inflation front. You noted moderating inflation. Could you just give a little more color on where you are starting to see some pressure ease some of the puts and takes within that line? And then, I know the royalty turn on dime these days, but any early reads on where food inflation could trend for your business in 2023?

So, Brian, earlier in the year, we were pushing 18% inflation in the – late in the first quarter and in the second quarter we’ve begun to rollover inflated cost last year, now that we are in the end of the fourth quarter. So, we’ve seen some relaxation across the roll over effect. So, if you just think about our largest commodities, beacon, potatoes, avocadoes, coffee, they are all elevated in price, but we are starting to roll over their elevated periods last year, as well. So, I don’t know that we are actually seeing a whole lot of abatement although beacon kind of bounces around from time to time and we probably are getting the better price today than we were earlier. But for the most part it’s a rollover effect that we are seeing.

All right. Thank you for that. And I also wanted to ask about KDS and some of the other changes you are making on the back of the house for sort of a post-COVID reality where your AUVs are north of $2 million, et cetera, but I think you said it’s in 300 units. Could you elaborate how that’s benefiting to see employee or guest experience? And is there any way to maybe parse out the ones that have had it for longer, quantify the lift and benefit to throughput or comps or perhaps any cost savings that might be associated with those? Thank you.

Big question there, but I’ll try to run down some things I know. First of all, the KDS system is still in its infancy in our environment as we are still rolling it out. But it’s also part of a package of things that we do. So, KDS standalone, we are driving out other changes in our – in terms of the effectiveness of our staffing and as well as our allocation to staffing, our organization of the kitchens and that sort of things. So, and KDS sheds a light – sheds light on different elements. So, maybe we are preparing food – pace and need to get it to the tables faster or something like that. So, it shows a lot of – for us, it shows a lot of different opportunities and we are excited about those. What the immediate benefit is, once we roll it out in a restaurant is that, it’s simplifies our – the complexity of operating the restaurants based on a call verbal system or the helms judgment about the time to prepare guests’ orders. And as a consequence, it allows us to – it opens us up to the ability to hire more back of house people who come from systems who already have a KDS and a reader system and they’ve already trained on it. And they become some parcels for it. So, just by increasing the number of qualified applicants that helps us to deal with turnover better or fewer training costs and allows us to improve that – those sort of, they are not sexy things in the back of the house, but they are realities of the restaurant.

Thank you, Mel.

And our next question will come from Nicole Miller with Piper Sandler. Please go ahead.

Good morning. Thank you. Two quick ones. The first, as you exit this year and enter the new year, I think, like 390 basis points of price would fall off and historically, that would be an annual, call it, 2% to 3%. Price opportunity, should we think about that more as a return to normal?

What I’d say here is this, just as we’ve been in the past, we intend to be nimble and thoughtful as it relates to pricing and we will make decisions as needed but we’ll keep our value proposition in mind. We mentioned earlier that we most likely get – be getting back to a normal cadence of the number of times we do it throughout the year. But with our focus on building traffic through trialing and also increasing the frequency with our core customers, we’ve just, as you know been intensely conservative with our pricing. And we will try to continue along that path, hoping that we see some easing in cost and – but from a cadence standpoint, I think as we’ve said before, we will most likely get back to that twice a year.

Okay. I mean, it’s interesting, because price is so sticky, so there is an opportunity, but it doesn’t mean you want to flex it. But to confirm it is usually in 1Q would be a normal period is just a question of how much, is that right?

That’s been our history, Nichole.

Okay.

We don’t really visit it until after we’ve – until we’ve actually adjusted the menu prices. We don’t announce when we are going to do it. But it’s – we will take a close look at the right timing with that value proposition in mind.

And then, thinking of labor, that’s one of your biggest assets especially returning to the – I guess, fully staff levels you are looking for. Can you talk about how you got there? I mean, was it applicant flow? Or better applicant flow? Was it an ability to just take on those applications and process them? And really, what is the cost of labor today, not just from a dollar per hour perspective, but how have you enhanced the total benefits package to be at these staffing levels? Thank you.

Sure. This is Chris. I think the first piece is that even back during COVID times, I mentioned on previous calls that we did not do sign on bonuses or those type of things. We focus on our internal teams being advocates and evangelist for the environment and the experience of working for First Watch and that benefited us well during COVID and it’s benefited since then. I will say that we’ve done a tremendous amount of work around the employee proposition and benefits and other things and I think that’s helping us too. But also, I think being – again, the fact that’s growing a full-service restaurant company in America helps us attract people when the applicants are out there. And so, we think we show up really well and they are looking for jobs and know nights ever add pops up and right in front of them. It’s appealing and we get our fair share of applicants. So, it’s a lot of those things. And it’s – honestly, it’s at a perfect time for us as we continue to ramp up our growth to have the management pipeline that we have in place to support that growth is really important right now. So we feel like we are in a really good place.

Thank you.

And our next question will come from Chris O'Cull with Stifel. Please go ahead.

Thanks, good morning, guys.

Morning, Chris.

Mel, the low-end to high ends of your EBITDA guidance imply a pretty wide range for the fourth quarter. I was just hoping you could help us understand what are some of the key factors that could determine whether you land at the low or high end of the range?

I really was alluding to the same things I mentioned a few minutes ago that we have going through the – that quarter. We know we have some costs that are a little bit unique to the fourth quarter and then we lose the Sunday business, we have shelf registration cost, we have the conference cost, we have the effects of the hurricane which we are in some respects while we know the hard cost associated with the hurricane. We are also evaluating the business flow through and adjust the traffic and that sort of thing in those affected restaurants during some period of time. And so, knowing that and knowing just the risk associated with some of the environmental issues I would say, or the economic issues in the economy we are operating in. There is a little bit of caution that I’ve built into our range there.

Okay. And then, my second question relates to development and I know the company is on track to hit its guidance for the year, but is the company planning to make any adjustments to maybe its approach for development next year given channel and just opening restaurants will probably continue it sounds like next year. And then, I was hoping you could also just give us a sense about how the company’s store pipeline is shaping up for next year?

So, we will be adjusting our development would be the first thing. We have a – we have what I think is a very data-driven and a healthy approach to how we select sites. I don’t think you would expect to see us make any major changes on the way we develop the restaurants and develop sites. You still have to – as I say, kiss a lot of frogs in order to find the ones the sites where you want to open. And I know our development team is working hard to get out there.

Well, Mel, what I was asking more around was just given the delays in permitting, given the delays in construction, are there any other changes you are making in terms of just that process, so that you can assure you get openings on time?

Not – I mean, there are no major changes. I mean, our teams already are very – they work on a schedule and we are very confident in our long-term guidance on growth of new restaurants.

I’ll jump in, Chris, and say that, our ability to deliver on our unit growth, I think speak for itself this year and certainly going into the fourth quarter. And our team has done an absolutely incredible job of what I call seeing around the corner and identifying what those challenges in – whether it’s supply chain or permitting and what not have built the pipeline that’s sufficient for us to reach our long-term goals, which we would account next year and there as well. So, we feel really good about our process from start to finish.

Perfect. Thanks guys.

And our next question will come from Gregory Francfort with Guggenheim Securities. Please go ahead.

Hey, thanks for the question. I have a couple. The first was just, maybe a follow-up to Andy’s question, or I think it was Andy. I am getting that the implied comp for the fourth quarter at a 15 will be something closer to 9 to 10. So maybe if you could just check my math and then I have two questions.

Well, we haven’t really guided directly to the fourth quarter on that. But that sounds as a ballpark.

Okay. And then, just in terms of, I think you made a comment of trying to call back some margin next year. And it feels like the big question is kind of every restaurant company tries to do that is, should you try to run pricing ahead of cost inflation next year and do you need to do that to get margins back higher. And I am just curious how you are thinking about that frame work and as maybe commodity inflation comes down, do you think you should try to run pricing ahead of some of your cost inflation next year? And do you think the consumer is going to allow that?

So, couple things on that point. As long as I’ve been in the restaurant industry, there is always a battle for margin points and clock that cost, right. And so, I think every restaurant company spends a great deal of effort trying to claw back over 29 basis points improvement with more efficiencies or lower cost and that sort of thing. And so, yes, we will be continuing that battle just like we always do. In terms of solving forward at the top-line, it’s not as easier just taking a number and saying we are going to increase it by pricing. So, we are very thoughtful about staying committed to the value proposition that we present to our guests. We think our customers see us as a value. We don’t want to lose that position with the customer. As we think about pricing, timing of pricing, what it will be, what it will be on, where it will be, those – that signs will take place pretty thoughtfully about making sure that we preserve the value proposition with our customer.

Got it. Thanks. And then, maybe if I could sneak one more in. I think, in terms of the changes to your unit growth guidance this year, it skewed a little bit more franchise than even that high end of that range that you had projected earlier in the year. Do you expect the franchise mix of your store openings to maybe pick up in the next couple of years versus where you were expecting before? Is that kind of one-off to this year? Thanks.

I don’t expect to change.

Got it. Thank you, guys. Appreciated.

And our next question will come from Sara Senatore with Bank of America. Please go ahead.

Great. Thank you so much. A follow-up question on mix and then, a separate question if I may. First is just the gap between jack and price is I think a wider this quarter. So actually suggests some more positive mix. I wanted to make sure I am looking at that the right way and also ask what was the driver of that? Was it just more off-premise or other kinds of trade-up or higher price items? I know you mentioned you are not seeing any trade-down, but just trying to sort of disaggregate a little bit what that might be? And then, I thought I a follow-up, a different question please.

Sure. As far as the mix is concerned, I think, again, that’s one of the true benefits of our seasonal menu program where we have menu news out there five times a year, ten weeks at a time. It builds excitement for our staff and our customers and so, you’ll see customers trading into that seasonal menu. I think that’s where we see some of the mix. And then, also, keep in mind as the alcohol continues to roll out, we’ll see a mix impact there as well.

Okay. Great. So it was less about higher average check on delivery which I guess, probably pretty similar to your in-restaurant check in more about – like you said the seasonal menu and some beverage attach.

Yes, the dollars on – excuse me – the transactions on off-premise was pretty much flat. Obviously, the dollar grow a little bit elevated because of the surcharge and the price increase we took.

Got it. Okay. And then, a question, you said that your users are a little bit less promiscuous now. I mean, we often see that when the demand environment gets a little under pressure. People less willing to take a risk if you will on occasions or on concepts that aren’t as consistent. So, I was just curious, is that what you think is driving this change in usage, just people feeling a little tighter per strings or are you seeing something about loyalty, something specific to your – to First Watch that is sort of gradually edging up your frequency, your loyalty among guests?

Yes, I think it’s what we’ve been focusing on, which is delivering consistency and value and an incredible experience during these times. I stand behind what I said that I think consumers, if they choose to dine out less, they are going to go to the restaurants they trust. They are going to go to the restaurants that they know they’ll get a good value. And just as importantly, they know that it will be a consistent experience. They don’t want to risk their dollars when they are being more decisive about where they go. So, that, and the audience that we appeal to the fact that, breakfast and brunch continues to be a growing daypart and it is an experience where people feel like they can splurge a little bit. And they are able to do it in our restaurant at a very reasonable price point. So, all that work that we’ve been doing with being conservative on our pricing. The evolution of our prototypes. The building out of the environment to attract that customer is what we believe sets us up for that.

So, right. So it’s just sort of the core value proposition as opposed to just say, we are getting listeners from our off-premise business. We are able to identify people and market to them directly. That’s still – that’s sort of an opportunity right now, it’s just offering a better experience and time and that’s what consumers really want.

Yes, I think that’s a very important key for us is that recovery of in-restaurant dining which we have seen tick up sequentially. And so, it’s at its highest its been for us for a period and we look to that as a key indicator of driving that in-restaurant traffic and also how we are going about doing it through these steps that we are talking about which is, to your point focusing on the fundamentals and making sure that we deliver what the consumer is looking for at this time.

Got it. Thank you.

And our next question will come from Jon Tower with Citi. Please go ahead.

Great. Thanks for taking the question. Good morning.

Hey, Jon.

Hey. Thanks for making the time. Just a few for me, if I may. First, where you see the traffic growth coming from? Is it concentrated on weekends and you are seeing maybe faster table turns in part due to the KDS? Or are you seeing it spread throughout the week days? I am just curious to kind of get some color there.

Yes. As I mentioned earlier, the traffic growth was sequentially, it grew sequentially across each month of the quarter. But more importantly, I guess, all dayparts are up. So, we are seeing it across the entire business. And in reference to off-premises, we talked about how that’s from a dollar standpoint or excuse me, from a transaction standpoint has remained steady. So, that growth come across all of our operating hours. And so, we talked about in the past, we look at three very distinct dayparts. Weekday breakfast, weekday lunch and then weekend is we just call that brunch. And in all instances, we are seeing that traffic growth. I think what’s important for us is to be able to unlock those peak sales hours where we have unmet demand and that’s the critical nature of KDS and some of the other initiatives that that Mel has talked about. So that we could really unlock that, because our off-premise business pretty much mirrors our in-restaurant dining. So when we are busy in the restaurants, we are busy with off-premise orders. So, that’s why we are so focused on that, that increased throughput during those times.

Got it. So, no, specific period stood out during the third quarter. It’s all pretty much across the board?

Correct.

Okay. Cool. And then, in the model, I know seasonally, or at least hard to tell in the model, but, the labor cost per operating week stepped up sequentially this quarter. And Mel I know you mentioned that, you got some of the management staffing at the stores near or above pre-Covid levels, so – or at pre-Covid levels, excuse me. I am curious, how should we think about that going forward? Is there an opportunity to kind of manage that lower going forward? Or is that aligned where it’s just going to be pretty sticky because of underlying inflation?

I am kind of counting on our 33% to 33.5% that we’ve enjoyed being pretty sticky. Early in the year, we were having – we had signaled that we were dealt like the 34% level was kind of optimal and for us it’s been sort of the kind of a good level of staffing to have in our restaurants. And I think we’ve learned a bit about ourselves and also we’ve taken some price and so I think that 33% to 33.5% is a level I am not expecting to see shift abruptly over a long period of time. That might from quarter-to-quarter we might see some movement up or down, but we want to be little careful about that.

Got it. And then a last one from me, in terms of thinking about CapEx beyond new store growth and obviously this year KDS has been an important piece and I know there will be some more of that rolling through next year, but are there any other initiatives that we should be thinking of in terms of CapEx spend into the next, say, two to three years?

We don’t have anything that we’d be ready to announce right now and we’ll probably give a much better indication of what it will be for next year when we give guidance for next year.

Got it. All right. Thanks for the time.

And this will conclude our question and answer session. I’d like to turn the conference back over to Chris Tomasso for any closing remarks.

Thank you for joining us for this morning’s call and I appreciate it. These results reiterate our strategic positioning as leaders of not only a growing daytime dining segment, but also of the restaurant industry as a whole. We always appreciate the opportunity to share for us watch this progress and as our operators across the nation gear up to lead us through another holiday season, we look forward to closing out a strong 2022 together. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.