Good morning and welcome to the First Watch Restaurant Group Fourth Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Steve Marotta, Vice President of Investor Relations. Please, go ahead.

Good morning, everyone, and welcome. I'm 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 fourth quarter and fiscal year 2022 on GlobeNewswire and filed its annual report on Form 10-K with the SEC. These documents can be found at investors.firstwatch.com. Let me 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 in our filings with the SEC, including our annual report on Form 10-K. 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 it over to Chris.

Thanks, Steve. Good morning. 2022 was another stellar year for First Watch. To start, we continued to outperform the industry in a number of key areas; perhaps most significantly in same-restaurant sales growth of 14.5% versus 2021 and 29.6% when compared to 2019. Importantly, this comp group was led by 7.7% same-restaurant traffic growth versus 2021 and 6.5% when compared to 2019. System-wide sales increased 21.9% year-over-year, growing to $914.8 million and $750.7 million -- from $750.7 million. Total revenues increased 21.5% year-over-year and adjusted EBITDA increased 4.5%. All of our growth metrics are even more noteworthy when you consider that they were achieved amidst the challenging macro environment and during a year when the industry as a whole experienced year-over-year same-restaurant traffic declines of 3% according to Black Box. To us, strong traffic share represents the truest measure of consumer appeal and the overall health of a concept. As the pioneer of the daytime dining segment, our consistent year-over-year traffic growth is yet another indication that consumers recognize the highly differentiated offering that First Watch provides and the continued growing awareness of our brand. It is further evidence that our strategies are driving our desired results and gives us great confidence in our ability to achieve our long-term growth targets. I'm especially proud of what our teams accomplished on the development front, delivering 43 new restaurant openings in 2022. Our 29 company-owned restaurants opened in 2022 are achieving annualized AUVs that are about 7% above our comp group AUV of $2 million and well above their projected first year sales targets. More notably, these restaurants, across all geographies, appear to be building off of those volumes as they continue to mature. What's most exciting to us is that, we are seeing volumes higher than we've ever experienced before. Prior…

Thanks, Chris. I'm going to start by focusing on our fourth quarter performance and expanding on the operational results that we announced on January 9. As we shared then, same-restaurant sales growth in the quarter was7.7%. Total revenues were $185.7 million, which is an increase of 14.2% over the fourth quarter of 2021. As we indicated during our November 7 earnings call, the fourth quarter got off to a slow start as Hurricane Ian temporarily closed 85 of our restaurants. Through the middle of the quarter, traffic picked back up despite some lingering impacts of the hurricane. However, during the last week of the quarter, both Winter Storm Elliott and a holiday shift negatively impacted our traffic in almost all our markets. We estimate that this combination of events reduced our traffic by about 210 basis points or roughly $3.1 million of restaurant sales. Our food and beverage costs were 23.7% of sales in the fourth quarter. We continue to experience inflation of about 7.7% across our market basket, where our top 5 commodities are eggs, potatoes, coffee, avocados and bacon; which comprise about 35% of the basket. Given that eggs has been a hot topic, we believe it's helpful to add a little bit more color about how we address our egg supply. We understand that the industry production is projected to approach full recovery around the middle of this year. As in the prior year, we're again purchasing our eggs and potatoes under a fixed price agreement. These annual pricing agreements serve the company well by securing supply and protecting us from the most severe volatility of the spot market. They also give us reliable line of sight on our costs associated with these two commodities, which together make up about 15% of our food costs. Labor and…

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Andy Barish of Jefferies. Please go ahead.

Hey, guys.

Good morning, Andy.

Good morning, everyone. Can you remind us just on the pricing as it rolls out for the year what you're expecting for the full year 2023?

So historically, we visited price in the middle of the year and in the first quarter. We don't really announce what our pricing plans are for the year until after we have it rolled out.

And then just digging in Mel, a little bit more to the 360 basis point gap between your non-comp and comp unit restaurant level margin that widened from 3Q. Is that a number just given the ramp-up in growth and other things that looks like it's peaking and thus we can see a little bit less drag from those non-comp stores as we move forward?

I think in the kind of the immediate future, Andy that we should expect to see something kind of similar to that. Those restaurants just as a reminder, I think what we've talked about before in the past is that those restaurants are also kind of over-indexing on the margin because they're extremely high volume, so there's more dollars on an average for those 65 non-comp restaurants. And as long as we're continuing to see that sort of outperformance at the top line, I think we may continue to see as long as we're always -- we're trying to grow in that above 10% level every year on a relative basis. I think that spread and the maturity that represents our opportunity. I don't know that we're going to close the gap too much as long as we keep pace with the openings.

And just finally, does a lot of that I imagine show up in labor and I assume some of that is intentional just to get these restaurants off to the great starts that you're seeing obviously. So just flesh that out a little bit for us?

Yeah. We run higher labor in those restaurants as a result of new openings we have. We have more food waste, right? So you have some elevated food costs as well. But you're right, for the most part I think the biggest impact is around carrying heavier labor in those restaurants.

Okay. Thanks guys.

The next question comes from Jeff Bernstein of Barclays. Please go ahead.

Hi. Good morning. This is Parekh on for Jeff. Thanks for taking the question. Appreciate the top and bottom line guardrails you guys have provided for 2023. But I just wanted to touch on restaurant margins and what is embedded into your guidance. And then maybe just on a longer-term outlook like, what is the minimum threshold that you're willing to draw the line, if sales were to be more challenged going forward and inflation remains more persistent than expected? Like what are some of the levers you can pull to kind of protect those margins? What additional pricing may you be willing to take over time? And I guess in a normal year, whatever that means what level of pricing would be needed to keep restaurant margins flat year-over-year? Thanks.

So there's a lot in that one single question. Historically, the company has targeted that 18% to 20% range on restaurant-level operating profit, and our budgets are generally built around those reaching that kind of performance, not only in the comp group, but growing into that with our non-comp restaurants that are newer, if that gets at that detail. And then I think in terms of pricing to offset inflation, which is we tend to try and defend the margins. We'll take a look at that in the middle of the year, again, if necessary. But right now, built into our guidance is, what we think is sufficient assumptions about pricing.

Got it. Appreciate that.

The next question comes from Chris O'Cull of Stifel. Please go ahead.

Thanks. Mel, I believe you mentioned 9% to 11% labor inflation for this year. That seems higher than what we've heard from other restaurant companies. Is that increase primarily related to wages? And if so is the company trying to catch up to kind of the market level wages?

No. Particularly, around our hourly employees, Chris, our hourly employees already make more than the regulatory minimum wages by a good bit. But we do operate in states like Florida, Colorado, Arizona, where the regulated minimum wage is going to be going up by step function each of the next few years, including this year. So I think that's where you're seeing most of our wage inflation.

Okay. And then I think you said labor in 1Q was trending favorably. I was hoping you could clarify, whether you're trending below the first quarter last year, or if we should be thinking about that comment more on a sequential basis from the fourth quarter, I guess?

I was more thinking of it sequentially.

Okay. Okay. Great. Thanks, guys.

The next question comes from Andrew Charles of TD Cowen. Please go ahead.

Great. Thanks. Recognize it's about 8:30 in the morning, but Chris hoping to get an update on alcohol. I know that, it was something that you were planning to roll out to all the stores that could have it by the end of the year 2022. Just curious, if you were able to achieve that, how many stores it is? And also now that, you basically should be running with all the stores that can carry a liquor license, what's the plan in 2023 to market this and bring awareness that you guys do offer alcohol? Recognize in the last 39 years you've been telling your guests that you don't serve alcohol?

Yeah. Happy to talk about alcohol, any time of day, and actually 8:30 in the morning is the best time for alcohol. So it's in about 85% of our restaurants now, which is up slightly from Q3. At the end of Q4 that's where it was. Still, it's sitting around 6.1% of mix in the restaurants that sell it and our team has been working hard on the innovation behind that and some tests and nothing to announce yet, but it's a focus for us. As we said all along once we get it rolled out to the system in those restaurants that we can that's when we'll start to innovate. So I think you'll start to see something there in the later part of this year.

Great. And then Mel one for you, appreciate all the color on eggs. Curious how long is that fixed cost contract in place for? And totally get that the expectation is that you're going to see normalized egg prices in middle of the year. But I guess what I'm wondering is there a period where you're uncontracted where you could potentially see some volatility in egg prices before they fully get to a normalized pricing range?

So our eggs and potatoes are contracted for all of 2023. So we entered this year with the same kind of contract that we had last, year which was a 12-month fixed price contract and because of the fixed price aspect I don't expect a lot of volatility.

That’s great. Thanks for the color.

The next question comes from Gregory Francfort of Guggenheim. Please go ahead.

Thanks for the question. My first one just maybe a clarification. Can you talk about how much the comparisons could get tougher in March just as we think about what you guys are baking into the step-up in comparisons?

How much? Well, there was apparently a lot of spring break with -- trending last year we think during March. So I don't actually know what the amount is. But off the top of my head that any of that we don't break down months within quarters too much, but it was a pretty hefty spring break experience that people enjoyed last year.

Got it. Thanks. And just as you look at development for this year, can you talk about -- it seems like a lot of your competitors have had a tougher time finding sites and equipment and dealing with permitting and you guys continue to open up pretty quickly. Can you talk about what you're seeing on those fronts and what's may be different than the industry?

Yeah. I mean, it's an absolute strength for us and that's why we're leaning into it and why we did what Mel talked about where we took control of the sites earlier, basically took control of the situations that we're facing with anybody who was building anything this past year and took control of the space, took control the timeline. So that's why we were able to stay so tight with our development schedule and why we feel confident in our development schedule for this year too even though it's elevated from last year. And even though it's backloaded into the second half of the year that's merely a function of the pipeline rebuilding from COVID. So we were able to execute a backloaded development schedule in 2022 and we believe we'll be able to do it really well. And not only just get them open, but get them at these high volumes that we're talking about and performing as well as they have been.

Got it. Thanks. And then maybe just a last one on CapEx. I mean, a pretty big step up from this year. Are there going to specific projects maybe on the technology side? Just any help there would be great.

The lion's share is new restaurant openings. The number of projects that will open this year has increased but moreover in order to meet what we expect to be the same long-term growth ambitions that we set forth for next year we'll already be spending into more projects that will open in 2024. So as we get to the back half of the year in order to continue to accelerate, we're seeing a lot of acceleration in the pace of our CapEx investment. And I mean we're happy to do it, because it's part of the pleasure of working for a growth brand. We're growing fast and investing a lot of dollars for great returns.

Thanks guys. Appreciate it.

The next question comes from Brian Vaccaro of Raymond James. Please go ahead.

Hi Brian.

Hi. Thanks. Hey, good morning. Thanks for taking my questions. I just wanted to circle back on the quarter-to-date strength that you've seen and given the Omicron lapse that caused a lot of variability, I was hoping you could help us tease out how you view underlying trends. Could you comment on either the three-year or the year-on-year you're seeing Jan and Feb or maybe even average weekly sales just to tease that out a bit as we move through the months here?

I don't have anything on the three-year in front of me. What we do know is that, at least relative to the industry for casual diners and for full service that our trends are continuing with the sort of the relative outperformance versus those categories. And I'm thinking about we use Black Box data like I think a lot of you guys do and our peers do. So it's pretty much followed that kind of trend but, with our typical outperformance versus the categories.

Okay. Okay. That's helpful. And pricing, I just wanted to make sure our notes were correct on that. I think you said you took the 4.1%, as you lapped 3.9% effectively. So does that mean you'll be sort of in that 8% range assuming, you take no additional until you get into July? Is that sort of your next most significant lap?

What we said was for the full quarter that average price was about 6.9%. So we rolled off the 3.9% that we took in the first quarter -- excuse me the first full week of 2022. And then in the fifth week of this year we took 4.1%. So the average for the quarter is 6.9%.

In that quarter-to-date period is the 6.9%. Is that correct?

For the full quarter, it will average to about 6.9%.

Oh sorry. Okay. Okay. All right, I'll circle back on that. And then, just last one for me. On commodity inflation, you talked it running up I think 4% to 6% is your expectation. Is that relatively stable through the year, or perhaps there's some difference in terms of year-on-year inflation worth noting first half versus second half?

I'm going to speculate a little bit, but I think we're seeing it slow. It's still growing. I mean we're paying more now than we did for the same items last year. But I think it's just growing at a slower pace. And I think that we would hope to see that continue to abate as we go through the year the growth pattern.

Okay. Thank you. I'll pass it on.

The next question comes from Sara Senatore of Bank of America. Please go ahead.

Great. Thank you so much. I'd love to get some insight on to the new units that you've talked about. The volumes are so much sort of materially higher. Is there some color you can give on, is it the footprint's bigger because I know it sounds like that's part of the build cost going up? Are you seeing differences in daypart or off-prem versus on-prem? Just trying to understand, to what extent this is about optimizing the footprint of the restaurant versus different markets versus something else? And on a related note, can you just confirm, it sounds like, the actual transaction or traffic volume is also much higher. I know you don't have a ton of price on the menu but I just wanted to make sure, I was understanding it's not just -- most of that difference is not ticket.

Yeah. On the new restaurants Sara, it's a sum of all parts. I think it's the bigger footprint the more prominent patios all those five kind of key initiatives that I talked about as many of those getting implemented into the new restaurants as possible. These restaurants are high-profile. Again we're a 40-year-old portfolio of restaurants. So as the real estate site selection process has evolved as our operations process improvement has evolved all of those things come to play in the new restaurants. So really we're building the restaurants to accommodate the demand that we're seeing out there. And that's led us to larger restaurants and some of these other attributes; the optimized dining rooms the dedicated to-go pickup areas things like that. So all of it, I mean, it really is there's no one silver bullet. It all those things combined that are driving those volumes.

Great. And then, sorry, just in terms of clarifying, its transaction or traffic presumably as opposed to check that's different, so it's the mix of dayparts or off-prem/on-prem look pretty similar on the whole?

Yes, it's very similar. They're on similar price tiers as other restaurants in their market. It really has to do with busier hours and frankly busier peak hours. So, that's where we've been able to pick up that volume.

I see. And sorry just one more on this and then I'll hand it off. Some of those initiatives you talked about some of the parts are I think applicable even to some of your existing restaurants or your more mature restaurants to the extent that there are sort of operational improvements. Is that the case and could that be a driver of same-store sales going forward as you think through deploying some of this?

Yes, the way we're approaching it is we now have a kit of parts that deliver independently and we size them independently. Not all of those can be applied to all of our restaurants throughout the system as I've mentioned before with some of the physical limitations that we have. However, when it's process improvement new bussing procedures activities around our front of half management system those types of things that we can apply; we are and we do and that's actually been and will continue to be a big part of why the core system even as aged as it is continues to grow both traffic and sales.

Great. Thank you so much.

You're welcome.

The next question comes from Jon Tower of Citigroup. Please go ahead.

Great. Thanks for taking the question. Curious so the EBITDA guidance for the year when backing out the extra week would suggest growth that's below the longer term trend that you've been targeting. So, I was just hoping Mel you could maybe break down what the puts and takes are on that? What's really weighing on it? Are we seeing outsized costs on preopening potentially getting more so than historically?

Yes, when we set the range, we wanted to be sure that we had a bottom in that considered a bit of recessionary backdrop that we're operating under and we're understandably cautious in this environment. But I would say that when we look back at the last few years, there's been some abnormality in the performance, but our growth really has been pretty respectable for the last few years. So, frankly, we've built in a little bit of caution in that range that we put out.

Okay. So, I'll take that as conservatism. My words not yours. But so I'm just curious in terms of the labor inflation, how much does the role specialization that you mentioned I think Chris in your prepared remarks with the back of the house dedicated expeditors and beverage runners or makers. How much is that weighing into the inflationary outlook on labor?

It's not really. I mean it's part of an overall process improvement and time and motion studies and things that we've done. Actually the way we work it is -- I'll use the beverage position as an example. It's keeping the servers out of the beverage alley and out on the front more and this person that's doing the beverages also handles and is the server for the counter and bar area for the community tables and those type of things. So there's really not an incremental expense. It's more again just a specialization of roles.

Got it. So no incremental labor hours just people, I guess, specializing where they should be.

Yes. We get questions about the ROI on KDS, so that's another example where I talked about a dedicated expeditor. By having the KDS system in the restaurants that allows us to free up what we used to call us the helm positions to access that dedicated expeditor. So, again, one of the key benefits to KDS for us is another role specialization opportunity that actually improves our efficiency in the kitchen.

Awesome. And then just the last piece. Chris you had mentioned a bunch of back of house enhancements, I believe to the kitchen; installing second make lines double dishwashers, I think, you'd mentioned double grills and potentially smart ovens. When should we expect some of this stuff to start hitting the stores? And I'm assuming the expectation is speed of service, but is there anything else related to it perhaps on the double grills the ability to cook things that you haven't been able to cook in the past?

Yes. So those enhancements are being made in as many of our new restaurants as possible and as I mentioned earlier we're applying as many of those as we can. A lot of that is contemplated in the increased CapEx that we spoke about earlier some of these enhancements. So it's a little disparate, because not all restaurants can take all elements like I said. So we're looking at those opportunities. And we also have a basically market revitalization program where we go into a market and remodel restaurants and things like that and when we're doing that we consider whatever of those elements we can add at that time as well. So it's going to be a rolling opportunistic rollout.

Great. Okay. I’ll pass along. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Tomasso for any closing remarks.

Thank you all for joining us today and for your questions. Before I close, I do want to formally welcome Steve Marotta, who joined our team as the company's first ever Vice President of Investor Relations and had his first speaking role today. I think he did a great job. Welcome Steve. We're happy to have you.

Thank you.

So this year officially marks 40 years of First Watch. That's 40 years of growth, innovation and operational excellence. We were founded on the premise of Daytime Dining specializing in breakfast, brunch and lunch, without moonlighting as a dinner spot. We were founded on the idea that people can work in hospitality and still be home in the afternoons and evenings with their families. We were founded with the spirit of pushing the limits and daring to be different and those guiding principles continue to serve us well today. Thanks again for joining us.

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