Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers, Inc. Third Quarter 2020 Earnings Call. Please note that today's call is being recorded. During today's conference call, management will be making forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the safe harbor discussion found in the company's SEC filings. During today's conference call, management will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal third quarter 2020 earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investor Relations section. Now, I would like to turn the call over to Red Robin's CEO, Paul Murphy.

Good afternoon, and welcome to our quarterly conference call. It is my hope that you and your families have been safe and healthy since our last business update. Joining me today is Chief Financial Officer, Lynn Schweinfurth, who will review the financial results after I wrap up my prepared remarks. Today, we are extremely encouraged by the continued strengthening in the trajectory of our business. This is reflected in the progress we achieved during the third quarter in 4 key areas: sales momentum, margin improvement, liquidity, and our transformation strategy. In terms of sales, we experienced improvement of our comparable revenue, both when compared to the previous quarter and within the third quarter itself. Third quarter comparable restaurant revenue improved 16.3% from down 41.4% in the second quarter to down 25.1% in the third quarter. As of late, and excluding shifts related to the timing of the Halloween holiday, comparable restaurant revenue has improved to approximately negative 13% to 14% with comparable restaurant revenue at locations with open dining rooms down 10% to 13%. Notably, we are closing the traffic app with our casual dining peers despite having a restaurant footprint with a large West Coast presence, where regulations have slowed the expansion of seating capacity. The main driver of this progress is the increase in sit down capacity, both outdoors and in our dining rooms. Outdoor seating options now extend beyond our small patios to include tents, all-weather tents and extended seating where available. Partitions are also currently being installed in all of our dining rooms to safely optimize and expand indoor seating, enabling us to achieve approximately 70% capacity as we enter the colder weather. These capacity enhancements are coupled with digital marketing, which drove traffic in dine-in and off-premise occasions. Benefiting from our focus on consumer segmentation…

Thank you, Paul. Before I review our third quarter financials, I wanted to begin by reinforcing that in spite of the fact that the resurgence of the pandemic has recently resulted in the temporary closure of dining rooms located in markets where hot spots have been identified, we remain confident in our ability to effectively manage our business in the short and long term. Importantly, we have experienced many positive trends, as you can see from our press release issued this afternoon. First, average weekly sales per restaurant has improved each of the last 4 fiscal periods, and we are closing this traffic gap versus our competition due to several factors that Paul outlined: outdoor seating expansion, restoring restaurant operating hours, our growing dine-in business, including the gradual opening of dining rooms in California, continued strong off-premise sales, operational execution and marketing efforts. In the most recent fiscal period ending November 1, these factors more than offset the negative dollar impact of recently reduced dining room capacity due to the resurgence of the pandemic and the impact of Halloween, which occurred on Saturday this year. Overall, as our dine-in business continues to grow, we are flowing more dollars to the bottom line. Our comp PPA growth has been positive since the beginning of the fourth fiscal quarter, generating higher sales due to enterprise level pricing of approximately 1.5%, new laminated menus that are positively impacting sales mix and profitability, and increased on-premise dining capacity. We will complete the rollout of booth divider panels by Thanksgiving, which will maximize indoor seating capacity in all locations. At our restaurants that have added booth divider panels, we are seeing a meaningful sales lift on the weekend during peak dinner hours. We are also strategically adding all-weather tents to certain locations that will further…

Thank you, Lynn. Let me conclude with a few key takeaways before we open the line for questions. The third quarter was a pivotal quarter for Red Robin, one we view as an inflection point for the business. Any liquidity concerns are behind us, driven by our improving business performance, coupled with the $49.4 million tax refund recently received. We resumed the expansion of Donatos, a proven growth catalyst, both top and bottom line, which we will bring to bear on the business over the next 2 to 3 years. Comparable sales grew from negative 41.4% in the second quarter to negative 13% to 14% exiting the third quarter with PPA turning positive, closing the gap on our competitive set. We have structurally improved our restaurant level and enterprise level margins and expect a full percentage point of improvement when sales normalize to pre-COVID levels. Our improving margin performance, together with strengthening sales gives us the confidence to reiterate our projection of generating neutral to positive free cash flow in the fourth quarter. And as we contemplate controlled capital spend, our focus will be on profitable revenue generation and key guest-facing technology improvements. And finally, all of our great work and optimism for the future would not be possible without the incredible efforts and accomplishments of our Red Robin team members. We cannot thank them enough for what they do on behalf of our company and the communities we serve. Let us now open the call for questions.

[Operator Instructions] And we have a question from the line of Daniel Docherty with Raymond James.

This is Dan Docherty on for Brian Vaccaro. Question on store margins. Lynn, since sales improved pretty meaningfully through the period, would you be willing to give us a sense where store margins were exiting 3Q or perhaps quarter-to-date with average weekly sales in the low 40,000 range?

Well, I think what I had mentioned in my opening comments was that margins did improve throughout the quarter and that for the fourth quarter, we are expecting low double-digit restaurant level margins as a percentage of restaurant sales.

Okay. Great. And then circling back on the expanded outdoor dining initiatives, could you help frame what percentage of sales you're generating outdoor at this time?

This is Paul. Right now from the outdoor seating, which is basically tents and the tables and umbrellas that we're putting out there. We think that it's increasing capacity by about 10% to 15% and driving comps in the 4% range.

[Operator Instructions] We have a question from Alex Slagle with Jefferies.

On the 100 basis points of higher enterprise margin that you're sort of talking about as the outlook versus '19 as the sales recover. I guess, what mix of dine-in versus off-premise, does that consider, I guess, it does consider a higher bit of off premise? And then what should we think about in terms of which line items are most impacted, whether it's cost of goods or labor or G&A?

Yes. So in a normalized sales environment, probably beyond 2021, we are currently modeling 25% off-premise. And in terms of particular P&L line items, we do believe administration on the labor line will be better based on our new management structure. We do anticipate higher wages, and that's a combination of certainly wage inflation and the mix in terms of non-tip credit hours being applied with higher off-premise volumes. We are anticipating better occupancy costs and better G&A.

Okay. And then on the California source. I wonder if you could quantify the magnitude of California dining room restrictions on your comp and EBITDA. I know these are high-volume restaurants and a big contributor to your revenue. But obviously, at some point, they're going to open up, hopefully, sooner than later, but curious if you have any metrics on that?

We have some. And obviously, every day is a little bit different, but I would say, of a round number, about 5 percentage points of comp is what we've at least quantified in terms of the capacity restrictions, especially when we had more restaurants closed.

Our next question is from Gregory Francfort with Bank of America.

Thanks for the question. I had a couple. The first, I think you talked a little bit about adding all-weather tens to some of the restaurants. I guess I'm curious, is that going to be most of them? Or can you frame up maybe what the plan is in terms of rolling that out? And then what the -- if you've rolled them out so far, what the customer feedback is between outdoor dining versus the old weather tents and if it's materially different. And any early thoughts would be great.

Well, this is Paul. And kind of answer it in order. We are almost complete with that. That will be in 150 of our restaurants out there, about 38% of the system. The all-weather tents, basically, obviously, in the more than northern tier of the country, especially in markets like Seattle. And then we are adding -- it wouldn't be all weather, but we have been adding tents in the kind of the southern belt as the temperatures down there have moderated. We're seeing that people are now dining outdoors a bit more in the southern tier. So far, the feedback actually has been very good with the all-weather tents. But it's really in conjunction with the partitions that we've been adding to the stores. We'll have them in every one of our locations before Thanksgiving of this year. So it really gives people the opportunity to either dine-in because partitions enable us to push the indoor capacity closer to the 70% range. But the people who do not want to dine-in doors they so far have been very pleased with the tents and having heaters, having lights out there. We have the same service model. So knocking on wood, it's really performing well right now.

That's helpful perspective. And then I just had 2 others. The first is on the lease restructuring, I think you said you've done that at 50% of the restaurants. How much does that help, I guess, your expenses on either an annualized basis or a quarterly basis? And is that deferrals or is it permanent changes? And then the other question I had was just on national advertising and your advertising spend is down a lot. I'm curious what the plan is in terms of how much of that is permanent versus what you might bring back? And that's it.

Okay. Greg, well, I'll start by answering your question around rent. Yes, as of the end of the third quarter, we had negotiated and completed all the legal requirements around amendments for 50% of our leases. Our discussions and negotiations continue. As I mentioned in my opening comments, I'm just really thankful for the landlords that we're working with and really their longer-term perspective as we enter into these discussions and get to agreements on our leases. That being said, I'm probably not comfortable sharing what we're expecting until we really get to conclusion on more leases. But I think in the upcoming quarter, we'll be able to share more information at that time.

Yes. I'll answer the question on the marketing. Certainly, as other brands did, we pivoted once the COVID-19 hit and went far more towards the digital area out there in the social. However, we haven't been doing any national TV or local TV, but in about 2 weeks, we will do our first TV flight, our first campaign. And it's really a bit of a test. We are balancing how that media is put out there during the week or presented, much more balanced approach, looking to drive business into the less capacity constrained kind of Monday through Thursday time frames in the restaurants, see how that works and how it could be potentially applicable to our media strategy for 2021. So excited about that. Look forward to it. As I said, it will be the first time we've been on since Q1 of this year.

[Operator Instructions] We do have a follow-up from the line of Daniel Docherty with Raymond James.

Just a follow-up on advertising. Could you talk a little bit about how you're thinking about bringing back advertising as sales recover and how that mix might differ versus pre-COVID as we exit COVID? And then Lynn, any chance you could help us with some guide rails on modeling that line for 4Q so we're on the same page.

I'll start off with how we're looking at it moving forward. As I just mentioned, I wanted to -- the media that we're about to run that launches the 16th of this month. We're really taking a hard look at how does TV impact the restaurants when there are some capacity constraints in them. We've been very pleased with the digital and social media efforts and the ability of us to access our guests through -- we have over 9 million members of our loyalty program. So that's, we think, given us a strong ability to message. So out of this test, we'll be able to say, what should the mix be in 2021? And how should that -- frankly, the amount of dollars be spent on that. But we will continue to spend more and more money on the digital social media aspect because we're very happy with how the results of that have been.

And then just in terms of our spend for the fourth quarter, we are anticipating spending about $5 million more than what we spent in Q3, so about $11 million.

[Operator Instructions] And there are no further questions registered at this time. That does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.