Good afternoon, everyone. And welcome to the Red Robin Gourmet Burgers, Incorporated Third Quarter 2023 Earnings Call. This conference is being recorded. During management’s presentation and in response to your questions, they 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 company’s SEC filings. Management will also discuss non-GAAP financial measures as part of today’s conference call. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles but are intended to illustrate alternative measures of the company’s operating performance that may be useful. Reconciliations 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 third quarter 2023 earnings release on its website at ir.redrobin.com. Now I’d like to turn the call over to Red Robin’s President and CEO, G.J. Hart. Please go ahead.

Good afternoon and thank you all for your interest in Red Robin. I’m joined today by Chief Financial Officer, Todd Wilson, who will review our financial results for the third quarter and annual financial guidance after I conclude my opening remarks. A little more than a year ago and after having served on Red Robin’s Board for two years, I agreed to take on the President and CEO roles because I believed and strongly believed today in the great potential of this iconic brand. And in January, we articulated our North Star plan to restore Red Robin to growth and align and enable all key stakeholders to measure our progress against these strategic priorities. I’ll provide an update on each of the five pillars of our plan in a moment and what we have accomplished so far. But to begin, we need to revamp our leadership team, bringing on human capital that shares my own passion for Red Robin and has the experience and skillset to nurture a stronger brand, create a better future, and build long term and substantial shareholder value. We now have new leaders in place across every discipline of our leadership team. Additionally, we have highly experienced and capable Board of Directors and recently welcomed Nicole Miller Regan as our newest Director, someone I am sure many of you already know from her many years covering the industry. Across the organization, we have blended very talented and long tenured Red Robin team members with new talent from across the industry. This combination of internal and external talent provides tremendous expertise to Red Robin and positions us well to establish ourselves as the most loved restaurant brand within the communities that we serve. As I shared in January at the ICR Conference, we have identified course corrections…

Thank you, G.J., and good afternoon, everyone. I will begin with a recap of our third quarter financial performance and then discuss our financial guidance for 2023. Total revenues were $277.6 million, a decrease of $9.2 million versus the third quarter of fiscal 2022. The decline in revenue was led by a decrease in comparable restaurant revenue of 3.4% due to moving away from the deep discounting marketing promotions and elimination of virtual brands that G.J. discussed earlier. Dine-in sales increased 0.5% as compared to the third quarter of 2022. The dine-in experience is where guests experience all of the hospitality and food investments we have made. We believe the continued sales growth and relative strength of the dine-in business is another data point confirming the changes and investments we have made are right. As a percentage of restaurant sales, dine-in represented 75.6% of sales in the third quarter, up from 72.4% in the same quarter last year. This consumer shift back to dine-in is a broad trend experienced by many in the industry and is accentuated for Red Robin as we discontinued virtual brands that were only available for off-premise consumption. Off-premise sales declined 15.1% as compared to the third quarter of 2022. Approximately half of that decline is due to the elimination of virtual brands. We have launched initiatives to enhance the off-premise guest experience and promote this offering to become more prominent and visible for those guests looking for a pickup or delivery option. Within off-premise, catering remains a bright spot increasing 27% as compared to the third quarter of 2022. Catering is a fast growing segment and the team is doing great work to capture this opportunity. Restaurant level operating profit as a percentage of restaurant revenue was 11.1%, a decrease of approximately 150 basis points…

Thank you, Todd. As our North Star plan implementation rolls on, Red Robin's comeback will advance. In summary, we are executing against our strategic vision with an enhanced guest experience through investments in labor and food are expected to drive long-term traffic growth. We are taking action to improve our margin structure to reduce discounting and smart cost savings that will benefit our profitability in 2024 and beyond and we are strengthening our balance sheet with adjusted EBITDA far exceeding 2022, allowing for debt reduction and incremental free cash flow to reinvest in the business. We are truly eager to continue on this journey, build an incredible brand history that goes back more than five decades and ensuring that we will have a successful and sustainable business for many years to come. I feel very fortunate to be leading this incredible group of dedicated people who are committed to serving our guests and enhancing long-term value for our shareholders. We would now be happy to take your questions. Operator, please open the lines.

Thank you, sir. [Operator Instructions] Our first question is from Todd Brooks of Benchmark Company. Please go ahead.

Hey, good evening, everyone. Thanks for taking my questions. Two questions for you, if I may. One, I'm just thinking about the pressure that the Full Service Group saw from a traffic standpoint in August and September and lapping some of the post-Omicron strength from the prior year. If I put that headwind together with that kind of 500 basis points that you talked about for lapping the $10 meal deal and then a couple of hundred basis points from the exit of the virtual brands. I know we're not seen traffic increases, but do you believe that you're seeing traction from your initiatives that muted what, if the industry slowdown has been mirrored at Red Robin, probably would have led to lower numbers. My sense is there may be traffic improvements that are hidden in the reported numbers for the quarter.

Hey, Todd. Todd Wilson here. Good to talk to you. We have the same broad interpretation. We tried to call out through the prepared comments, the headwind of the virtual brands discontinuation and we had talked, as you mentioned about the $10 meal deal lap, both the offer itself being such a discount as well as all of the marketing activity that supported it last year as a 300 basis point to 500 basis point headwind. So we interpret it the same way. And part of the internal analysis that we've done, we evaluated Q2 trends to Q3 trends and we walk away very comfortable with the track that we're on encouraged with the improvements that we're seeing in guest satisfaction as well as what we interpret as the underlying traffic trend. So yes, I think you call it spot on. There are very intentional decisions that we've made that are right for the long-term of the business that are resulting in these figures. But we think it sets us up very well as we turn the corner, both in Q4 and turning the corner into next year.

That's great. Thanks Todd. Then my second question and I'll get back in queue. You talked about keeping your powder dry on the marketing side of things and now having the platform and the menu expansion, the ingredients on 85% of the items where you want them in the service model, right? When do we start seeing more aggressive efforts on the selling expense side when we're looking at Q4 here is across the holiday window, when you guys are thinking that you'll start to really go and start to push on messaging the new experience at Red Robin? Thanks.

Hey, Todd, it's G.J. here. Look, first of all, when you make this many changes, you want to make sure that execution is at a high level. So it takes a little bit of time. And so what I would say to you is that we'll be ramping up that investment throughout the quarter. And I wouldn't say that it's heavily back loaded towards the holiday season. I would tell you it's sooner than that. But we wanted to make sure that that we were executing at a high level and get comfortable with that. Is that helpful?

Yes, that is. Thanks, G.J. I'll go back into queue.

Thank you. The next question is from Alex Slagle of Jefferies. Please go ahead.

Thank you. I appreciate all the details and color you guys gave in the prepared remarks. That was very helpful. Trying to look through things. One thing I wanted to clarify was maybe walk through the areas of incremental year-over-year investment and the guess experience in the quarter. I think you mentioned $8 million number and maybe talk about the expectations for the 4Q, what that looks like. I don't know if this time line has evolved at all? And then on the other side, the incremental cost benefits you realized, it sounds like the quarter it was maybe a $3 million incremental benefit or so. And I guess if you could just kind of clarify what the outlook is, the time line for getting to that $20 million savings run rate, sort of what the cadence looks like on that end?

Yeah. Hey, Todd here. Alex, good to talk to you as well. I'll start with the first part of your question on the investment itself. The $8 million at this point, we view as a wholesome run rate. We may make tweaks here and there. But I think as you think about Q4 and then we have some of that investment baked into the first part of 2023 that will lap next year. But the $8 million, you can think of as effectively fully loaded, so we would expect plainly – we would expect probably another $8 million in Q4. The investment itself, the bulk of it, I would tell you is in labor. There's a meaningful investment we've made in food but we're also seeing things like the cost saves that I'll get into next, right? We're making investments in food, but we're also able to make some pretty significant upgrades to our food like the chicken that G.J. talked about as well as saving money. So there is some net investment in the food, but it's the minority of that $8 million. As it relates to the cost saves, just to ensure clarity, we measure about $4 million on the quarter. We had talked about $7 million year-to-date and $3 million year-to-date through Q2. So on the quarter, it was about $4 million. We do expect that to step up in Q4 to about $5 million that gets you to the $12 million for the year. The big initiative that gets us there, that that incremental step-up is the chicken change that G.J. talked about. That is already partially implemented through the system and just working its way through the supply chain. So obviously, a high degree of confidence that will capture that save. The last part of your question, I think, about the $20 million, I think maybe I'd frame it this way of – of all of the things that we'll implement this year, a full 12-month run rate would be $20 million. We think we'll capture $12 million of that this year, which leaves an $8 million benefit that we would expect to capture in 2024 only from the things that we've implemented this year. Obviously, the team is working and will have a pipeline to plus that up further. But that's the way to dimensionalize the run rate of what we've done this year.

Perfect. That clarifies it greatly. Also, a question on labor and sort of how we think longer term about getting, back towards historical run rate, labor as a percentage of sales and what would kind of need to happen? I'm sure a lot of that is really just driving traffic, but thoughts there, what that might look like? And then any thoughts on the California minimum wage rules, although not directed at casual dining could have an impact in sort of implications you would see for inflation or pricing next year related to that?

Yes. I’ll start and G.J. may chime in as well. The labor side itself, we’ve been 37% to 38% between Q2 and Q3. And I think in the near term, that’s a fair way to think about our near-term run rate. In time, we certainly expect that to get back to the 35% to 36% range in part with traffic growth and leveraging those sales. But quite frankly, there’s near-term opportunities there. One, we’ve brought on a number of new team members as they gain experience and mastery of their jobs. We certainly expect that there would be efficiency there. And two, we’re looking at things like overtime where we want our restaurants to have the right amount of labor. And so it’s not an hour reduction. But saving that halftime of pay is a meaningful number for us. And so there are things that we can do in the near term to manage that number appropriately while still giving a great guest experience on our way back to that 35% or 36%.

So anything on the California?

Yes. I’ll take that. Look, at the end of the day, the California situation there will be some of that affects us. We’re not quite sure how much of that yet. We’ve obviously sized that up. Candidly, we’re going to have to really evaluate that if we need to take additional price in the state of California or not, which we’re not alone in that. But – so we’re watching it very close, and we do expect a little bit of creep.

Got it. Thank you.

Thank you. The next question is from Andrew Wolf of CJ King. Please go ahead.

Hi. Thank you. CL King actually. Just wanted to – on the same store on the traffic improvement you’ve had so far in this quarter, the 300 basis points in traffic is that, did check hold the same. So that also could we also assume that the same-store sales sequentially from September to October improved about the same 3%?

Andy, that’s a fair way to think about it. We’re very focused on traffic internally, and so that’s part of the reason we framed it up that way. But that’s the right assumption is both traffic and sales have seen the improvement.

Okay, thank you. And I don’t know if you went over this, but in terms of like cadence, how would that 3% compare to the numbers you gave us? The very detailed information you gave on the quarter? In other words, was September much lower or similar to the quarter? So we could try to translate that to sort of what your comp is running at.

Yes, I think I’d frame it this way, Andy. Within Q3, the – G.J. referenced it. The back half of the quarter was the softer part of the quarter.

Yes.

As we look at that 300 basis point improvement, that has us better than the Q3 result. And we are very optimistic when we look at especially the multi-year trends of where the quarter could end up. I imagine that the group can triangulate what we think from Q4 from some of the guidance figures. But we think that there’s a path to flat to potentially even positive same-store sales within Q4.

And that would be somewhat the comparisons against last year’s promotionality easing and also, obviously, all the changes you’ve done for the guest experience?

That’s right. The comparisons versus 2022 are lighter. When we look at the comparisons versus 2019, we feel very comfortable with that track there. And then you add on the incremental investment, the sequential investment from Q3 to Q4, all of those, we believe, point to that type of outcome.

Kind of last thing I just wanted to ask was focusing on the selling expense. And I’m not saying in a guidance way because we’re in not a great period for the industry. But if we were in a normal period, what are you guys thinking about for like a normal selling expense annualized? Or do you like where it’s at or do you think there’s more – should it be higher in a better environment where you can fund it internally? Or I guess option three is are you going to find out as you sort of test things in the market?

It’s really option three. And sorry to be that way about it. But we’re going to learn here and we definitely need to get our news out there in a creative way and to be able to generate some excitement. So we’re going to learn here and we are going to test different ways and different levels to really see what makes the most traction and the most success for us.

Okay. But – I mean clearly you’ve come to the judgment I mean, you’ve said this, but I just want to underline it that a lot of the prior spend was just ineffective. You’re not just sort of looking at a big bucket of cost savings with wide eyes about this, right?

No, that’s a great point. I mean as I pointed out, it’s just being a lot more focused and making the dollars go a lot further. And we’re already seeing some progress there and a lot of learnings. So we are very hopeful that we’ll continue to be way more efficient than what was done in the past.

Thank you.

Thank you very much. We have no further questions at this time. And I would like to turn the floor back over to G.J. Hart for some closing comments.

Thank you all for joining us. We appreciate your interest in Red Robin. We’re excited about our future and look forward to talking to you next quarter. Take care.

Thank you, sir. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.