Good afternoon, everyone, and welcome to Red Robin Gourmet Burgers, Inc. Second Quarter 2021 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 second quarter -- its fiscal second quarter 2021 earnings release and supplemental financial information related to the results on its website at ir.redrobin.com. And now, I would like to turn the call over to Red Robin's CEO, Paul Murphy.

Good afternoon, and thank you all for joining us today. Here with me is Lynn Schweinfurth, our Chief Financial Officer, who will review our second quarter results in detail after my prepared remarks. But first, let me briefly recap recent sales trends before updating you all on our strategic progress across the business initiatives that position Red Robin for long-term success. While we did not meet our own expectations in the second quarter, we generated sequential improvement in average weekly net sales in each period during the second quarter, despite operating under varying jurisdictional restrictions and reduced operating hours throughout the majority of the quarter. We believe these issues are timing related, not brand-related and are temporary in nature. Our largest West Coast markets where we operate 105 of our 430 corporate-owned locations were subject to jurisdictional capacity restrictions and were not lifted until mid-June to early July during the last fiscal period of the second quarter. As a result of these capacity limitations, we utilized a more targeted marketing approach during the second quarter at reduced spending levels. To ensure a quality guest experience and to build loyalty beyond the pandemic, we have been operating at reduced hours due to staffing shortages. This disciplined approach was taken to also support team member and restaurant management retention. Staffing is our #1 priority, and our plan is to achieve staffing levels above 2019, supporting elevated demand compared to 2019. As we make progress and achieve those targets, the results are strong. By the end of the second fiscal quarter, restaurants that were able to operate at 100% indoor dining capacity and with full hours delivered a comparable restaurant revenue increase of 7% compared to 2019 and restaurant margin of 19.5%, representing an increase of 1.8% compared to 2019. We have supported…

Thank you, Paul. I share Paul's excitement for the future, improving dine-in sales trajectory improved business model, incremental off-premise sales channels and continuation of our transformation strategy together will drive meaningful long-term shareholder value. Turning to high-level second quarter results. The 66.3% increase in second quarter comparable restaurant revenues was primarily driven by operating our dining rooms at increasing capacities. Compared to the second quarter of 2019, comparable restaurant revenue was down 2.4%. Importantly, sequential average weekly sales continue to build each period through the second quarter and into the first fiscal period of the third quarter. We continue to deliver strong off-premises sales comprising 32.8% of total food and beverage sales compared to 63.8% and 12.5% in 2020 and 2019, respectively. Notably, total sales driven through digital channels represented 85.3% of off-premises sales. As a percentage of total off-premises sales, third-party delivery represented 49.3%, to-go represented 42.7% and catering and Red Robin Delivery each represented 4%. Net cash provided by operating activities was $37.2 million, while cash used in investing activities was $10.8 million and cash used in financing activities was $16.9 million. We ended the quarter with liquidity of approximately $117 million, including approximately $25.6 million of cash and cash equivalents and available borrowing capacity under our revolving line of credit. As Paul mentioned, at the end of the second fiscal quarter, restaurants that were able to operate at 100% indoor dining capacity and with full hours delivered a comparable restaurant revenue increase of 7% compared to 2019 and a restaurant margin of 19.5%, representing an increase of 1.8% compared to 2019. Additionally, we are confident in the future of Red Robin as we continue to execute on our transformation strategy and initiatives. Our plan prioritizes strategic initiatives that deliver strong financial returns while maintaining our diligence on…

Thank you, Lynn. Let me wrap up things with a few thoughts before we take your questions. The growth and profitability drivers that we have articulated over our past several calls are firmly in place, and a foundation upon which we can create and grow long-term value for our shareholders. Despite increased staffing and retention costs and other inflationary pressures, we remain confident that the business recovery will continue and that our diligent focus on our robust business model will deliver more than 100 basis points of enterprise margin improvement as sales reach 2019 levels. Of course, our expectation of greater normalcy over the next few months as more adults return to their workplaces and children return to school in person assumes that the Delta variant does not dramatically affect or force a return to mandated restrictions and thereby impede our current trajectory. Red Robin's positioning as a playful family-friendly atmosphere, enabling people to connect while enjoying gourmet burgers and other mainstream favorites or enjoying our great food outside of our restaurants resonates so well today. This is because the need to be with others and spend quality time with them will endure as people reflect on what they have been through over the last 18 months. Importantly, our understanding of our guests and what they expect from a Red Robin experience has also never been greater. And while we have already made great progress in elevating our level of engagement, there is still greater opportunity for us to do so, particularly through digital channels as we augment our online presence. Let me wrap up by expressing my appreciation for our great team and all of their accomplishments, their passion for the brand and know-how or why I am so bullish on Red Robin's future. And I thank them profusely for all that they do on our behalf. But it's now open the call for questions.

. Our first question is from Alex Slagle with Jefferies.

I might have missed it. Do you provide any July or August in-store sales trends for the whole system versus '19? I know some of the industry data we've been looking at and some peers are noting some choppiness into August?

Yes. What we did provide is an indication that our fiscal eighth period did see sequential improvement off of our Q2 trend.

Okay. And that was average weekly sales?

That's correct.

Okay. And then the strong metrics that you mentioned recorded at the end of the quarter, specifically, what period was that, the one where the full indoor capacity were generating 7% comps versus '19?

Yes, we saw a sequential improvement throughout the quarter. And during the seventh fiscal period, we were opening several western jurisdictions in terms of indoor dining. So we definitely saw momentum through the entire quarter, certainly with the strongest performance in the last period.

Okay. And then on labor, maybe you could kind of help me out, kind of walk through some pieces here. It's a little higher than we expected, but realize there's just a lot going on there with additional hiring and training and overtime and then the limited operating hours. So maybe you could just kind of walk through those various dynamics a bit more. And kind of curious what labor as a percentage of sales would have looked like if you had full staffing and operating hours?

Yes. So what we did provide is we did isolate the incremental hiring and training costs that were nonrecurring in nature during the quarter of $1.6 million. Our wage rates had a couple of things go on. By the end of the quarter, we were generating mid-single-digit wage rate inflation, but that inflation was partially offset by the increased mix of front-of-house hours. And yes, we did see benefits associated with some staffing vacancies during the quarter.

Okay. Then just finally on Donatos. The outperformance of those stores was very nice in the second quarter, good reacceleration. As you dissect that improved performance just relative to the first quarter. Is all that sort of marketing support? Or do you see some other factors behind that driving the performance?

Well, I think it's a combination, Alex. I do think it's -- we did elevate some marketing support, especially in the back half. I think what I'm especially pleased with is as we look at the Donatos restaurants that are in their second year performance, we've seen the growth year-over-year that incrementality of, I think, was roughly 4.2%. And I think that's something that really speaks to our commitment to the growth of that. Also, quite honestly, one of the drivers of mix in our was an increase in appetizer sales and the Donatos Pizza plays well from a dine-in perspective in terms of appetizers. So very pleased with the performance of the restaurants that had it. Pleased to see that year-over-year that we're seeing growth and that versus our initial modeling is performing at about 250 basis points better than we originally thought the pizza would.

Our next question is from Brian Vaccaro with Raymond James.

I was hoping to circle back on the sales cadence. And would you be willing to provide sort of a sense of monthly comps versus '19 that you saw through the period? Just given how significant the West Coast is to your system and the capacity restrictions that is very late in the period? I'm just trying to get a sense of the magnitude of improvement that you saw kind of moving through the period.

Sure, Brian. Our comps compared to 2019 started at down 3.7% in the first period of the quarter and ended the quarter at a positive 2.2%.

Okay. Great. And that positive $2.2 million would be the ?

Correct.

Okay. Great. Great. And the units that you highlighted at full capacity and hours, that was up 7% and nearly 20% margin units. How many units are in that bucket, how many units we’re talking about there?

About over 150.

Over 150. Okay. Okay. Great. And then just thinking about the commodity inflation outlook. Lynn, I'm sorry if I missed it in your prepared remarks, but -- where do you expect -- what was commodity inflation in the second quarter? And what are your expectations for the second half of the year?

Yes. So commodity inflation, we've actually -- maybe I'll point to 8% of restaurant sales in terms of food and beverage costs, and we did see improvements compared to the prior year, certainly in the first quarter, which carried forward in the second quarter. However, we do believe that increasing beef costs through the second half of the year will greatly offset the benefits we saw in the first half of the year. And we're currently expecting approximately 50 basis points or better compared to 2019 for the full year.

Okay. 50 basis points or better versus the low 23% range in 2020?

Correct.

Okay. Great. Great. And then on the labor, Lynn, I appreciate the $1.6 million that you called out. I'm curious, just give us a sense of where average staffing levels are versus pre-COVID levels? Or perhaps how many additional employees you need to hire to hit your targeted levels? And then I'm sorry if I missed it, but how much was overtime up versus normal in the second quarter?

Well, a lot of questions inside that one question. But given the strength that we are seeing in the stickiness of the off-premise at the about 30%, 32% level versus 12% in the same quarter last year. Our goal is not to only get to 2019, but to get above 2019 in the staffing levels. We'll be continuing to hire and train and have some costs against that continuing into the third quarter. But on average, I'd say probably, I think it's 5 more per restaurant. So roughly about another 2,000 people that we would need to bring on board to get to elevated above 2019, which is the goal.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and this will conclude today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.