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 true to be an opportunity for us. In March, we strong as we have, was hard to imaging when we are in the sick 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 of third quarter for the company. As compared to our pre-pamdemic 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 comp growth of 95.5%, as compared to our 2021 difference, 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 greater to see such strong recovery across the board. In spite of ongoing…

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 expense 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…

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 Japanse, before my response is translated into English. Please bear with us.

And at this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. Please proceed with your question.

Thank you and congratulations on the strong results. I wanted to focus first on your restaurant level margins 22.5%, I think 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. And then just in terms of, you know, you provided some color on -- back in April on your March sales trends, I think you did about $12.5 million in the month of March. Looks like you had kind of sustained those trends in April and May. But in terms of looking forward here to this kind of implied guidance for Q4, it looks like you've seen some acceleration in productivity typically Q4 has your highest average unit volumes? Can you give us a sense of what you've seen quarter to-date thus far? And how much of the increased guidance is reflective of the price increase?

Sure. In terms of June results, as Jimmy discussed in the opening remarks, we had $12.7 million in revenue that -- if that were to be the run rate for the remainder of the quarter, that would be the sort of the lower end of the guidance. In terms of seasonality, Q4 is certainly the strongest quarter that we have. You can see that effect very meaningfully in pretty much every year. July and August are the -- really when the summer begins to ramp up and so we do expect improvement over that $12.7 million that we saw in June, which is -- what gets us to the higher end of that guidance.

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

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 get. And then we have a number of other things that are in place, [indiscernible], 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 group 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 with --

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 and 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 answer that second question first. So you're right we did tighten our guidance from eight to 10 units to eight units and so those remaining two units we expect to open early in fiscal ’23, we're excited to provide more granular guidance in terms of our unit growth expectations for fiscal ’23 at the Q4 earnings call or next earnings call. But what we can say at this point is that since went public, we've told the Street that we expect to maintain a 20% unit growth CAGR and we absolutely expect the same for 2023 with that 20% as of forward. In terms of the restaurant level operating profit margin expectations, it’s -- I don't have a crystal ball for five years in the future. But just looking at the trends from Q1 and Q3, I think you could certainly expect an elevated rate for our restaurant level profit -- operating profit margin, we don't think this is a fluke -- this should continue 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?

[Foreign Language]

So we've been extremely fortunate and that we really haven't seen any sort of softening in terms of consumer sentiment. One of the things that we found most encouraging was that our March pricing of 1.8% was significantly outpaced by tech growth of 4.9% over that same period between Q2 to Q3. And so we know that our guests are not managing their tech sizes, but I think that's a great indicator that we've yet to hit any sort of consumer elasticity point and that gave us a lot of comfort about that 6% that we decided to take at the beginning of July. And looking at our traffic rates, we're really -- Q3 was pretty much in line with Q1, which was exceptionally strong and certainly better than Q2, which had those Omicron headwinds. And so, yes, in terms of customer sentiment, we feel that we're in a very fortunate position.

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. But we’re just mentioning that we'd be lapping that price in two months.

Okay, got it. And then still on pricing, I mean, I understand that it's a challenging environment as far as labor and food cost. You know your inflation is everywhere. But you just generated such a strong four-wall margin in the quarter. And here you're taking another 6% pricing and I understand that your consumer is showing no kind of signs of hesitation or it doesn't seem like you've hit a ceiling. But I guess the question is just a higher level one, which is why continue to kind of push margin through pricing? And if you can just talk, sort of, directionally about -- should we expect more going forward? Or it just seems like maybe you've changed your thought process on the opportunity around pricing?

Sure. In terms of our decision for that 6% in July, this is really reflective over -- 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 waiver 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 of 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 --

[Foreign Language]

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

Yes, yes, I think that was it.

Okay, great. So just to give you a -- so we've been very happy with the Waitlist app, it served us very well, but we know that we can get to a greater level of accuracy in terms of the wait times. The algorithm that we use is pretty straightforward and doesn't really take historical behavior into account. And so just to give you an idea, let's say, we're an hour before closing, but the wait time says if there's a two hour wait, naturally you're going to have a lot of people drop off, because they think they're not going to be able to get a seat, but then because those people have dropped off, the Waitlist is also -- the wait time should also shrink, but because those people have already left that traffic that we can't capture. And so incorporating these attrition rates around, especially shoulder periods and stuff like that. We think that we'll be able to seat a couple more people per day. And certainly, just having a more accurate time is better for consumer experience.

Okay, understood. Thanks.

Thanks, George.

Thank you, George.

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

Hi. This is [Daniel] (ph) 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 what we had in Q1. And so that lower mix is really just reflective of greater revenue total. 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. And so there's a point we're trying to push additional off-premises no longer incremental. In terms of our top line and bottom line growth, the opportunity is vastly, 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.

Got it. Thank you.

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.

[Foreign Language]

Looking at our pre-opening marketing fees, it's pretty insignificant, we don't do anything like big ad buys, no television campaigns, TV commercials. We focus mostly on digital and then leveraging local media. So the spend could be -- it's pretty insignificant. In terms of -- and we think that -- sorry, Jimmy did I hear you right when you said it was $2,000 to $3,000 per store or $20,000 to $30,000.

Yes, $20,000, $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's spend rate is appropriate. In terms of pre-opening labor costs, our operations are very simple and automated as you know. And so the training period is very truncated, we're able to open pretty rapidly following our final inspections and approvals. And so because that trading period is short, the pre-opening leaders is -- I imagine 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.

[Foreign Language]

So thank you for commenting on Watertown and San Antonio we couldn't be prouder of those locations. We've mentioned this in past calls, but the vintages since fiscal ’21 and ’22 have been the best vintages we've ever put out. And so we’ve been very pleased by their strong performance. If -- there's very strong demand within one of those -- within a given market and there happens to be a larger box that's available in a grant site location within that market. That's something that we would consider taking, but we've always thought of our box flexibility as a huge competitive strength. We don't have a set prototype. We don't have a set square footage. We're able to look at the entire country and just identify sites that mirror our best successes and then fit our concept into those spaces. And that's one of the reasons that we've had such strong unit economics. One other thing is that regardless of the size, our units can be highly successful. We can have a smaller unit that maybe has a lower AUV than the system average. But the cash on cash returns for that unit are going to be just as strong as the system average or even stronger. And square footage doesn't necessarily correlate one to one with higher sales. For example, our port relocation is actually lower than the system average, but it's in our top three performers. And so the bigger factor really here is just the quality of the site selection more than the 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 were 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 you think about that?

So that 6% goes --

Okay. [Foreign Language]

So when you think about our units hoslistically, whenever we do a go/no-go decision with the real estate committee in terms of opening any new site, we evaluate a pro form of the expected financials for that unit. And really the single most important metric that we focus on is on cash on cash return. And so 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. And so, 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. And you may disconnect your lines at this time. Thank you for your participation.