BJ's Restaurants (NASDAQ:BJRI) Q2 2020 Earnings Call

0:00 Good day, ladies and gentlemen. Welcome to the BJA's Restaurants, Inc. Second Quarter 2020 Earnings Release and Conference Call. Today's conference is being recorded. At this time, I turn the conference over to Mr. Greg Trojan, Chief Executive Officer. Please go ahead, sir. Thank you, Operator, and good afternoon, everyone, and welcome to BJA's Restaurants Fiscal 2020 Second Quarter Industrial Conference Call and Webcast. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our President and Chief Financial Officer. We also have Kevin Mayer, our Chief Marketing Officer, on hand for Q&A. After the market closed today, we released our financial results for the second quarter of fiscal 2020, which ended on Tuesday, June 30th. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

0:52 Our agenda today will start with Ronna Sharma, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. And I'll then provide an update on our business and current initiatives, and then Greg Levin will provide some commentary on the quarter and the current environment. After that, we'll open it up to questions, and we expect to finish the call in about an hour. So, Ronna, go ahead, please. Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements have not guaranteed the future performance and that undue reliance should not be placed on such statements.

1:51 Our forward-looking statements speak only as of today's date, July 23, 2020. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission. Thanks, Rana. Good afternoon, everyone. While it's only been 11 weeks since our last call, it seems like we've lived through an equivalent of at least three business cycles in that short a span of time. I'm proud to report that our teams have quickly and effectively adapted our concept, business model, and practices over the last four to five months to respond to the many challenges and frequent and sometimes sudden changes in our operating environment.

2:51 Throughout it all, the pandemic has served to confirm much of what we thought we knew about our guests and our concept. The appeal of BJ's to satisfy the basic human desire to dine and socialize with friends and family and an environment like ours continues to be quite powerful despite all the barriers presented today. But they also taught us new things and new ways to address evolving priorities and needs of our guests, many of which we believe will stay with us long past the demise of the virus. So as we begin today's call, I'd like to acknowledge the entrepreneurial spirit of the leaders in our restaurants and here in our support center who are driving our flexibility and adaptation so BJs can stay ahead of today's changing environment.

3:39 I will share a few of our learnings as we have navigated the evolving landscape of coronavirus, and Greg Levin will follow with more detail on the second quarter and the early trends as we begin Q3. Thus far, there have been three distinct chapters in this story we're all navigating through. The first, of course, was mid-March through early to mid-May, when all of our dining rooms were closed and we were limited to takeout and delivery. During this period, our primary objectives were to operate as leanly as possible while maximizing off-premise sales in order to keep as many restaurants as possible open and have as many of our team members working as we could, and to maximize our cash flow position to allow us to prepare for the unexpected and and take advantage of the opportunities we see coming out of the pandemic.

4:32 We established new safety and sanitary procedures to create the safest environment we could for our team members and guests. And we greatly reduced the complexity of our menu from about 145 items to around 85, which enabled our managers to run our restaurants as efficiently as possible at greatly reduced sales volumes. We added new off-premise friendly menu items at attractive price points and design new procedures both online and in our restaurants that make it easier and safer to access our food and beverage offerings. During the course of this phase, we tripled our average weekly off-time of sales to the low $30,000 a week range and generated sufficient variable cash flow that we were able to keep all but four of our locations up and running.

5:21 Our teams accomplished this pivot from regular operations in the span of about two weeks. The second chapter, which began in early to mid-May, saw the steady reopening of dining rooms, which by the third week in June had resulted in over 190 of our 208 restaurants serving guests in our dining rooms, albeit at reduced capacities to allow for proper social distancing. Coincident with these phased openings, we returned some of our more popular center-of-the-plate, protein-centric items to our menu, Such as our Slow Roast Tri-Tip, Double Bone-In Courtsop, and Atlantic Salmon. Not surprisingly, despite the continued uncertainty of the world in which we live, people demonstrated the fundamental human desire to begin to return to a new type of normal, including gathering and sharing great food and drink alongside friends and family.

6:19 By the way, they appreciated and demonstrated a desire to go along with all the safety measures and precautions that we have put in place in these extraordinary times. The size of our dining rooms and available outside space, along with the pent-up demand for some of our best-selling items, served us well, as we reached weekly sales levels in the mid-to-high $70,000 range towards the end of June. Our off-premise business continued to be strong during this period. helped by the addition of our new family bundles, which featured our craveable proteins such as slow roasted ribs, Parmesan chicken, Atlantic salmon, and ribeye steak at fantastic price points. Off-premise sales remain more than double pre-COVID levels, while our dining rooms trended to approximately half of normal sales levels by the end of June, despite the significant capacity limitations, our reduced operating hours, and no operating bars.

7:21 The strength of our off-premise operations and the other changes I just referenced has established sustainability for this revenue stream and continues to be an important driver of our overall performance. Our current reality and third chapter in all of this is characterized by dining rooms closing again in several states, but most notably in California with increased capacity restrictions in many other markets. As a result, we are currently operating indoor dining rooms in about 70% of our restaurants as compared to the peak of 95% in late June. Fortunately, we had already begun adding and expanding outdoor dining in many of our restaurants prior to dining room reclosures as we recognized that many guests felt safer and preferred BJ's outdoor dining experiences.

8:15 We have added or expanded outdoor dining spaces in approximately 90 of our restaurants. We partnered with landlords, local municipalities, and liquor license authorities to obtain space and proper permitting to open and operate expanded outdoor dining at breakneck speeds. We now have a total of 150 locations that can provide outdoor dining for our guests. Our operating team undertook this endeavor with incredible entrepreneurial enthusiasm and as a result last week we drove approximately $26,000 per restaurant in incremental sales where we recently closed dining rooms or added or expanded patios. Together with strong off-premise growth we have average weekly sales in the low to mid $60,000 range inclusive of dining room reclosures in California and several other localities.

9:12 Maximizing safe dining experiences where we can, along with continued growth in our off-premise revenue, remain our highest sales growth priorities at this time. Soon, we will have exciting menu news to help fuel these efforts by way of reintroducing more of our best-selling items. Our current plan is to bring back our popular prime rib for both dine-in and take-out in mid-August. We're also building upon our family bundles with our very popular slow-roasted tri-tip, that we recently added back to our menu and we're in the process of developing single serve catering options which will address the need to provide larger groups individually wrapped meal solutions for party sizes of eight or more. We know that in this environment constant innovation and flexibility is our best strategy for maximizing sales and there are still a large number of workplace and social interactions which are looking for an affordable solution to these kind of occasions which we can address.

10:14 In addition to our outstanding dining reconfigurations, health and safety initiatives, ability to leverage our large restaurant footprints for social distance in restaurant dining, and our variety in menu advantages, we continue to press our proprietary and internally developed technology capabilities to address new opportunities both in our restaurants and with off-premise. We were among the first to utilize QR code technology for both menu browsing and mobile payment to provide a touchless experience while dining at BJ's. And mobile payment is now used for approximately one quarter of all our dine-in transactions, further amplifying for our guests BJ's commitment to health and safety.

11:02 While one of our earliest initiatives was to offer disposable paper menus, the majority of our guests are now using their mobile devices to peruse and order from our menu. Soon we will enhance the menu experience to transition from the current PDF form factor to a dynamic HTML version, which will permit color and pictures to be followed quickly by dynamic promotions and guest-driven navigation. In addition, we have implemented an online reservation solution to accommodate a better limited capacity dining experience. We also improved the quality and frequency of our off-premise order status and are in-market testing two-way texting capabilities to further enhance the convenience of our guests' take-out order experiences.

11:56 We anticipate permanent changes in consumer expectations and behavior now that guests are accustomed to a digitally enhanced, more convenient dining experience both on and off premise. BJ's has been a consistent early innovator of dining room and digital consumer tech, and our investments and capabilities in these areas are paying dividends during this period of accelerated change. Speaking for our entire management team and all of our stakeholders, We want to send our sincere gratitude to our team members on the front lines in our restaurants and in our support center for their dedication and sales-building mindsets during these challenging times.

12:44 As previously reported, we were forced to temporarily reduce staffing levels across our business when dining rooms shut in late March, and this impacted approximately 16,000 team members. As a number of dining rooms have reopened and sales have grown, we are glad to report that we have now brought back over 10,000 of the impacted team members. We look forward to inviting even more of the team back to support the business as we move forward to regain sales levels commensurate with the pre-COVID environment. At the end of the day, we continue to be focused on the same objectives when the pandemic became an unwelcome reality to all of our lives in early March. Maximize our sales by utilizing our unique strengths.

13:30 The distinctiveness of our brand, concept, and iconic food and drinks, the flexibility of our varied menu, the size and layout of our physical spaces to accommodate safe social distancing, our technology infrastructure and innovation that supports on- and off-premise sales growth, and the trust we have earned from our guests to do the right thing and Never Sacrifice Quality, and most of all, our amazing team members. As I noted when we started the call, we are leveraging our flexibility to address the current environment. And based on what we've accomplished with the challenges we've faced, I'm confident that these days will be one of the true winners in our sector as the country and the world overcome this wicked virus.

14:18 So, Greg? Thanks, Greg. As Greg pointed out, there are three distinct chapters of this story so far, and our results from the second quarter reflect the first two chapters of this story regarding the closure of all of our dining rooms in late March and then making great progress methodically reopening dining rooms in 95% of our restaurants by the end of June. We are currently going through the third chapter here in July with the recent state and local restrictions rolling back dining room reopenings and the fast action of our teams to help mitigate the sales impact of these restrictions by expanding patios in many locations.

15:04 As such, my commentary on Q2 and Q3 to date are really a reflection of where we are in the ever-changing national state and local restrictions regarding dining room limitations. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the FCC. From a Q2 perspective, as we noted in today's press release, our comparable restaurant sales were down 57.2% and we reported diluted net loss per share of $1.38 on the GAAP basis. During the quarter, we took a non-cash impairment charge of $10.9 million, of which $9.7 million was related to three restaurants and $1.2 million was related to a reserve for beer spoilage due to the sudden decrease in draft beer sales caused by the restrictions in our dining rooms.

16:01 Excluding these charges, our diluted loss per share would have been 99 cents. Our comp sales improved throughout the quarter. They were down 74% in April, 63% in May, and 40% in June. By the end of June, approximately 95% of our restaurant dining rooms were reopened with capacity limitations, and our weekly sales volumes improved to the mid-70,000 a week range and nearly 80,000 in the week that included Father's Day, demonstrating there continues to be a strong demand for sit-down dinings. Additionally, our off-time sales, which grew to over $30,000 a week in April when our dining rooms were closed, maintained about 80% of that business in June when the majority of our dining rooms reopened.

16:52 From a cost and margin perspective, the significant decrease in the sales deleveraged our Q2 margins. Looking at a few highlights, cost of sales in the quarter came in at 25%. We experienced higher cost of sales in April, and that was in the mid-25% range, as we transitioned our business to off-premise only and worked through excess inventory in the restaurants. After we worked through the excess inventory, cost of sales for both May and June were in the mid-24% range, primarily due to menu mix from our limited menu, which focused heavily on our deep dish pizza and our family feast menu offerings, Offset by lower alcohol sales. As we look out towards the balance of July and the rest of the quarter, I'm expecting cost of sales to be slightly higher in Q3, probably in the low to mid-25% range, as we have seen an uptick in commodity costs, especially in proteins.

17:53 Labor came in at 40.2%, and there was significant deleveraging of the fixed manager labor costs and benefits, Derived from the lower sales volumes, and this was offset by less dining room and kitchen hourly labor as the majority of our sales moved to the off-premise channel, coupled with the efficiencies from our limited menu. In April, when all of our dining rooms were closed, hourly labor for BJ's was in the mid-teens range as a percent of sales. By June, with the majority of our dining rooms reopened, hourly labor was in the 20% range. which was still 300 basis points below last year's June hourly labor run rate.

18:38 Operating occupancy cost per week decreased by about 30% as our teams focused on managing costs. This was done despite incurring approximately $500,000 related for personal protective equipment and additional cleaning supplies necessary for our team members and our guests to dine safely in our restaurants. Following our sales trends for the quarter, our restaurant-level operating margin also improved sequentially throughout the quarter. The margin was negative for April and May due to the deleveraging mentioned earlier in my remarks, but turned positive in June. We reached a 13% restaurant-level margin in June, showing the amount of cost management and leverage we were able to deliver with sales still well below pre-COVID levels.

19:30 Echoing Greg, I really admire our operators who did an excellent job in driving sales by pivoting to an off-temps only business and then shifting back to dying in business with limited capacity while at the same time managing our costs. What we are describing to you this afternoon in our very short commentary radically understates the effort, commitment, innovation, and tenaciousness of our teams and these qualities will serve us well as we continue to adapt to the changing environment and, as importantly, in the future as the nation overcomes the pandemic. For the quarter, our restaurant-level cash flow was basically flat, which is significantly better than what we were expecting earlier in the pandemic despite comp sales starting the quarter down 74% in April.

20:19 As a result, we finished the quarter with $86.7 million of cash in our balance sheet with another $50 million of availability. and others should be needed on our line of credit. This gives us over $136 million of access to capital to manage, protect and grow our business. As a reminder, during the second quarter, we took decisive action to bolster our liquidity position by raising $70 million through a common equity offering and extending the maturity of our line of credit to November 2022. Shifting forward to today, as Greg Trojan mentioned, the entrepreneurial spirit of our restaurant operators has resulted in the opening and expansion of approximately 90 patios around the perimeter of our restaurants under large and lighted tents in our parking lots. In total, we have 150 patios available to our guests.

21:12 These new seating accommodations have allowed us to continue to serve our guests in locations where indoor dining is not currently permitted, while increasing our seating capacity in markets where dining capacity is limited. Additionally, our teams are continuing to make off-premise sales as easy as possible with new family bundles, contactless curbside pickup including new SMS texts, and email technology keeps the guests informed of their menu order and allowing the guests to notify the restaurant when they arrive. Reflecting these factors, and most importantly, the significant short-term rollback of open dining rooms, Our sales for the first three weeks of July are at about 60% of last year's sales levels. To put that in perspective, in last year's Q3, we averaged approximately $104,000 a week in sales.

22:04 If we maintain this current run rate, our average weekly sales would be approximately $62,000 for the current quarter. At this sales level, I would expect our cash burn rate, inclusive of Restaurant Level Manager bonuses, Rent, Interest Expense, and CapEx to be in the range of $500,000 to $1 million a week. Our CapEx for the quarter is expected to be around $5.5 million, which includes adding glass booth dividers to the majority of our restaurants to increase seat counts in our dining rooms once they are permitted to reopen, and CapEx to complete the construction of our restaurant in the Cleveland Market in the Orange Village, Ohio, which is scheduled to open later in the fourth quarter.

22:49 as well as some CapEx for other sales and productivity initiatives. We have the flexibility to pull back on these cash expenditures based on the operating environment as a significant amount of these expenditures are discretionary and are variable. So to reach out before we turn it over to questions, the hard work and problem-solving creativity of our team members remain key competitive advantages today and will be drivers of the future success as we reconnect with our loyal guests and introduce new guests to our fantastic food and beverages, whether in our dining rooms, our outdoor seating areas, or in the comfort of their homes with our takeout and delivery services. From a balance sheet and income statement perspective, we have taken appropriate measures to further strengthen liquidity as we entered the pandemic already possessing one of the industry's strongest balance sheets and have modified costs, operating practices, menu items and other factors to optimize sales and cash flows during this time. Our leading edge investments in technology have enabled us to provide our guests with digital check-in, digital menus, and digital payment options and other contactless optionality, but have not reduced the service level guests expect from BJ's.

24:08 While the current environment has brought unprecedented challenges, BJ's has proven its ability to maneuver and maneuver quickly to preserve the food, drink, and dining experience our guests have come to know and love while adapting our business models and practices to drive cash flows during this time. For these reasons, we remain confident that BJ's employees will take advantage of the opportunities to prosper in the casual dining industry for years to come and deliver shareholder returns that reflect our industry's leadership, brand strength, and incredible teams. With that, operator, we're finished with the formal remarks, and we will open it up to questions. Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

25:01 Again, star 1 for questions. We'll pause just a moment to assemble our queue. We'll take our first question from Jeffrey Bernstein with Barclays. Please go ahead. Great. Thank you very much. Two questions. First one, just thinking, kind of dig a picture. We're trying to find a silver lining here in a very difficult time, but it does seem like you're getting a benefit from accelerating technology introduction, maybe consumer adoption to it. I'm assuming there'll be some potential real estate availability benefits. I'm just wondering if you would see it similarly and maybe what you think has been the most favorable to your business or maybe what do you believe will be the greatest sustainable driver to long-term market share gains coming out of this crisis?

25:46 I'm going to add one follow-up. Sure, Jeff. This is Greg Trojan. Look, I don't say this necessarily totally happily, but I think the biggest benefit is going to be the fact that from a capacity perspective, I think we're going to see meaningful and real reduction in the number of of restaurant seats coming out of this. So I put that as the number one driver of sales and market share opportunity. But, you know, within the dynamics of the business, I think the, as you mentioned, the acceleration of adoption rates around, you know, technology, which will, I think, you know, and many more.

27:01 Thank you very much. I think, you know, higher quality sites and availability across even, you know, some of the tougher markets historically defying quality real estate. I think, you know, there's going to be some vacant space to take advantage of even in tight real estate markets like the Northeast, et cetera.

27:47 I mean, you mentioned the real estate. I'm wondering whether there's perhaps a different approach to your, as you think about new restaurant real estate, I know you're not doing much this year, but between real estate and design as you still think about doubling your unit count in this new world. Is there different real estate you'd be looking for or different designs? You know, how would you change things as you look to the second half of your kind of growth story? Yeah, no, that's a good question. Clearly, accommodating, you know, we were already thinking about this and had made some investments in off-premise and making that easier to execute and more accessible to our guests. But, you know, I think this has taught us some things and have us thinking about doubling down in terms of true convenience and in terms of off-premise sales and curbside, et cetera. So I think that's where you'd see some of the bigger changes.

28:47 I think, Jeff, as everybody was getting used to delivering off-premise, there was a lot I think as Greg mentioned, it's now going to be how do you make it more convenient to bring food out to them curbside. So that's a subtle difference there, but it does become a difference in the way we're thinking about designing restaurants in the future. where really the guests no longer are going to be coming out of their cars to pick up their food. I think the technology that we worked on was a big help from that perspective and in thinking about where you want to position maybe the stalls for the cars to pull into. Maybe you actually even think about it as a kind of a drive-through type setup in regards to giving the food.

29:38 So there's definitely changes already becoming, I think, within DJs. and probably others within the industry as they think about how to really optimize the off-time as part of the business. And just lastly, Greg Levin, I know you talked about the June comp versus margin, which I thought was quite impressive. I think you were saying your comps were down 25% to 30%-ish and yet your restaurant margin was up 13%. So I'm just trying to assess whether it's which line items generated that type of favorability or as we think of the back half of the year maybe. if your comps are currently down in the 40%-ish range, how do we think about the margin for the third and fourth quarter based on that very impressive result you did in June? Thanks. Well, it's a great question, Jeff. I think June gets the benefits still with some father days and graduations and things like that that help drive that weekly sales average up from that perspective. I do think, though, as we look at that, the benefit that we get in June and thinking about this business going forward is one we were still doing and continue to do a large portion of your business in off-premise.

30:46 So off-premise really allows you to leverage your labor. And as I mentioned in our call, when you think about those margins, I did say that our labor in June, hourly labor, was 300 basis points better than it was a year ago. So that's kind of one of those leverageable areas in our business. I think our menu mix at the time still kept cost of sales relatively low. in addition to that. And then as we're continuing to do a lot of business off-premise, you just have less what I would call daily controllable costs within the four walls of the restaurant. So that gives you the biggest benefit there. The challenge that we have in even trying to think about margins and getting some guidance for you and everybody out there and even for our business internally is it really comes down to consistency.

31:34 So as we go start of July here and all of a sudden had to go back to an off-premise business, That's a challenge for us. It almost becomes a little bit like early or late March and early April, where we set our queues back up to take care of people within the dining rooms, and then 62 of our dining rooms get closed down in California, and we have to absorb some of that cost and work our way through it. So when I think about our business, if we stayed in a steady state, I think we can optimize our margins. I don't know if they'd necessarily be where June was because of where our sales levels were, but that's the challenge is really the up and downs that go on in regards to the dining rooms and you need that consistency. So I don't know if that helped you, Jeff, or confused you more but really it comes down to the ability to be consistent in regards to how the sales come in because then we can think about really how you optimize the business.

32:30 Understood. Good luck with that. Thank you. Thank you. We'll take our next question from John Glass, Morgan Stanley. Thanks very much. We're going to follow up maybe on that theme on a longer-term basis. How do you think about, going through this process, how much cost you have permanently reduced or eliminated for the business? If you think about, if you normalize your EVs over time, do you think restaurant, how much better, or do you think restaurant margins are permanently better and by how much? Some of your competitors have talked about rethinking things structurally, permanent reduction in revenue, not just temporary. How do you think about those topics? John, I can tell you there's, I think the significant benefits, if you will, of tailwinds going forward is one you mentioned is, you know, and I've said this early on since the rise of the pandemic here is, you know, it's extremely unlikely and certainly not our objective to end up at the same and a couple of other items that we started that we had in January and February.

33:41 And we're being very careful about what we bring back and when. And that, you know, I think particularly for us where, you know, clearly our varied menus are a really important part and a great part of our concept. The benefit of us taking that next level jump, if you will, into complexity reduction, I think is truly, truly significant and something, honestly, we're excited about. I think the other element here is, again, it's a function of other parts of the economy that are not so great, but is I think the amount of labor rate pressure in the industry and in our business is going to be very different and less than it was going into all of this for quite some time.

34:41 And I think what Greg was talking about, the mix between off-premise and on-premise is going to be another mix advantage here that will help We're expanding the number of occasions that people are willing and are going to continue to use casual dining for. That's a good thing. and as happy as we are about this, I don't want to lose sight of the fact that the core of our business will still remain dine-in, social experiences, like where we're most differentiated. Not that we can't be great at off-premise, but the fundamental, as I said in my remarks, kind of human need to gather with friends and family is our physical four walls of our restaurants and restaurants and the vibrancy of how our bars interact with the rest of our restaurant seating, you know, that feel, that emotion that folks have when they're in our restaurants is something that's still going to be a towering strength of our concept. So, you know, I think we all look at today's business and in many ways, you know, we view it as a positive and an off-premise and we certainly do.

36:09 and I don't want to lose sight of fundamentally we're in the sit-down social experience business of dining in, you know. Yeah, thank you. And maybe just to that point, when you consider the additional patios that you've added, you know, the dividers that you're going to put in the restaurant, what percent seating capacity does that represent? What is the incremental seating capacity that you're being able to add to those two pieces? Yeah, the dividers, Great question. So putting dividers in our restaurants, in a way I have to preface it a little bit, John, is it really comes down to once ordinance allow dining capacity to be greater than 25%. That seems to be kind of the benchmark. So when somebody says you're allowed to seat up to 50% or 75%, they're still to some degree managed by the six feet of social distancing.

37:06 So dividers in our restaurants actually should get us somewhere in the neighborhood of 12 to 17 tables on average. So it's actually a nice increase there. And that would probably get us close to 75% capacity of being able to actually seat in our restaurants, where with six feet of social distancing, we're limited probably closer to 50 to 55%. On the patios, we're getting... probably we'll probably get about 45 seats on the added patio that we've been able to put on there. Looks like here are some 12 to 16 tables depending on if they're two tops or four tops.

37:51 So you're somewhere in the 45 plus in the amount of seats that you're getting. Okay. Thank you. We'll take our next question from Chris O'Call with Stiefel. Thanks. Good afternoon, guys. I had a couple of questions. One, Greg, how much deferred rent are you carrying on the balance sheet right now? And can you give us a sense of when maybe deferred payments will start to become due and how long you will have to repay any of those payments? Yeah, it's a great question. I think on the balance sheet there's two months' worth, which is probably two to three months, so somewhere in the $10 million-plus range on the balance sheet. We made full payments or whatever we negotiated with our landlords here in July. So we're paying rent going forward.

38:46 It's a combination of different payment plans on our different properties there. So I would tend to tell you that, you know, starting in July going forward, we are paying rent, and some are being amortized this year. Some will be amortized next year. Some will be amortized 12 months, 18 months. It's across the board. Does the 13% cash margin in June, does that include the actual cash rent payment you made, or is it the normal straight line rent expense that you would typically book an occupancy? It is a 13%, a GAAP 13%. So under generally accepted accounting rules, we're expensing rent every single month, whether we pay it or not. So that 13% is not necessarily a cash number if you think about it from a pure cash standpoint.

39:36 if they generally accepted standard accounting practice from that standpoint. So rent's expensed in there and accounted for like we would account for our margins last year or any other time. Okay. And then just given the big shift in business with the closed California dining rooms, can you provide an update on cash burn rate assuming those stores remain closed and then maybe if that changes? Sure. Yeah, I did on the formal remarks. I said our cash burn rate in assuming we maintain a 60% of historical sales, so kind of a negative 40% comp. Last year in Q3, we did 104,000 in our weekly sales average.

40:25 So we're basically averaging, let's call it 62,000 a week in sales today. At 62,000 a week in sales today, we're going to be burning cash Anywhere from a half a million to a million a week, really depending on our CapEx, because we want to put those big dividers in. We think they have the ability, as we just said, to increase sales dramatically for us. We could take our sales numbers up, so have a high ROI from that perspective. And that also includes the manager bonuses and other things that we're putting back into our business to continue to drive sales and move ourselves forward. Great. Thanks. Appreciate it. You're welcome. We'll take our next question from Drew North with Baird.

41:10 Thanks for taking the question. I was hoping you could elaborate a little bit on what you're seeing in markets specifically that have reclosed iron neurons in states like California. How have consumers reacted following the second shutdown in a given market? How is it different than the first time around, if at all? and I assume there's a wide disparity of recent trends depending on the market. So just any regional color you're willing to provide related to your recent trends or consumer behavior would be interesting. Thanks. So, Drew, a couple of things to note there because it is interesting, second time around, and we're largely talking about California, right? So there's a few other... and many other municipalities here and there, but the lion's share of second-time-around dining room closures is by far California for us.

42:00 And the biggest thing that's different is we're allowed and we're prepared in advance, as we've mentioned, to provide outdoor dining capability for folks. and I can tell you, you've probably seen the pictures on the news, etc. People are taking advantage of outdoor dining and going back into spending their lives inside in their homes is not what people have on their mind. You will see if we end up with that being legislated or not. People are out and about. They're being very careful as they do that in our restaurants, but outdoor dining is a big difference.

42:48 And then just the routine of off-premise, people are understanding the convenience more and more, and that is already at a higher level than when we started all of this at $10,000 a week. I think the other thing of note that I think you're asking, but I'll answer regardless, is We're not seeing, at this point, a softening of sales in other states that, you know, in some cases have increased their restrictions in terms of social distancing or whatever, but just even the, you know, the mental and so forth. So, you know, we're on the right path and opening more than going back to closing some restaurants.

43:47 That had not yet impacted sales levels in states like Florida and Texas. We're still seeing Again, that fundamental desire of people wanting to dine and eat each day's food. Thanks for all the time. Okay. We'll take our next question from Matthew DeFrisco with Guggenheim. Hi there. I had a couple of quick questions. One, it seemed like there was, either I'm reading the transcript wrong or there was a contradiction here, where it was June... June was basically about 70% of a year ago volume, but I think I even said in the formal remarks that I gave comps by quarter, so...

44:48 I have to pull up my formal remarks starting at 74. I think you said June we were down about 40% in comps. And what we were saying, though, I'm sorry, Matt, just not to cut you off. I think what we were talking about there is we went from 74 negative comps to negative 63 to negative 40. What we were talking about is by the end of June, when 95% of our dining rooms were open, is when we started to move ourselves closer to 70%. of averaging the volumes. So throughout the month of June, as you'd expect, comp sales got better. So is the 13% restaurant margin associated with the down 40 comp, or is it with the 75K average we can sell? It's a down 40%. It's the entire month of June.

45:35 And you're doing a down 40 now in July, correct? Right. But July is, again, July is going to be lower sales. because it's going to be, don't forget to think about your ability to leverage your fixed costs, whether it's managers, whether it's rent. The other thing that I was saying earlier is we can maximize margins, and any company can maximize margins, when you get the consistency and predictability. When all of a sudden on July 2nd somebody comes out and says your dining rooms are now shut, That's going to take a little bit for us to absorb in the first couple weeks of July before we get back to being able to be a little bit more ability to be able to optimize our business a little bit better.

46:24 I mean, Matt, another way to think about it is the mid to late June, just forget about the comps and think about the sales dollars, right? Is in mid to late June, we were... driving sales every week and reaching a level, as we said, in the last couple of weeks of about $75,000 a week as a company. And now we're talking about being in the low 60s. So forget about the comp sales. Think about the actual dollars. That might help you. Well, I understand. Okay. But then the 75 isn't what you were referring to. You were saying a 40% down comp, which is lower than 75 from the year-ago levels. But I could call you offline on this. I'll just walk through it a little more, I guess.

47:10 With respect to June, did that benefit, though, also from when the dining rooms opened or viewed your menu with the bundling? It looks very appealing. Are consumers migrating from delivery and doing more pickup? Is that having a natural effect to your margins as well or a benefit, assuming if you look at sort of the three buckets? The best margin, restaurant margin, would be I order ahead and pick it up. Then would be dining in, and then would be delivery. So are we seeing delivery coming down from those high levels? It's not coming down, but in terms of rate of growth, we're seeing a lot more growth coming from takeout than we are delivery, but delivery is growing as well. But the fundamental answer to your question is yes and yes.

47:56 That's helping our margins. We're seeing the highest growing element of off-premises take out, and then obviously the added sales volumes of dine-in is helping leverage the fixed cost, what we saw in June. You got it. What would be a benchmark for delivery in your current 62K average weekly sales? It's probably about a quarter. Thank you. We'll take our next question from James Rutherford, Stevens, Incorporated. Hey, good afternoon, and thanks for taking the questions. First one is on comp trends. You talked about that run rate of 62,000 of average weekly sales here quarter to date in July, which is a comp of about negative 40%. I was curious if you could share the average sales levels for those units that are closed for indoor dining, so basically California, so the thing is about 60 units, and did the off-premise sales take back up to a higher level again when those units closed indoor dining there for the second time?

49:06 Yeah. James, we don't go through and give kind of the unit-by-unit sales averages from that standpoint. But what I would tell you is absolutely what you just said in the second part is as the dining rooms close down a little bit, you do see an increase in the off-premise side of it from that point. I would generally say, you know, California, where we did get the shutdown, obviously we got the most brand recognition. We got a significant amount of loyal guests. So they tend to do some really good off-premise volumes as well. And people here in California, with the weather the way it is, are enjoying our patios. So we were able to actually move a lot of those guests to the patios.

49:56 Sure. Okay, great. And then at the end of June, you had regained around 70% of your prior sales volumes, according to what you just said. And that's with 95% of units open again for dine-ins. Just holding aside the second closure of kind of the California indoor dining for a moment, I'm curious what it will take to get back from that 75,000 average weekly sales to something over 100 again. It doesn't sound like capacity restraints are maybe the biggest factor given the size of your restaurant. So is it a specific day part or is it just kind of generally lower demand given the change in consumer behavior? And what do you think can be done to recover those kind of lost sales? There's a couple things there. It's a good question, James.

50:46 Keep in mind, capacity is a constraint. I mean, when we were in those last weeks of June in the 70s, we were, think about it, our average dining sales line was still about half of what it is normally, right? So Even though we were down, these are very broad numbers, as we said, about 30% in comps, you know, in those best weeks. It was the growth in off-premise overcoming still about 50% traffic numbers from dine-in. So, yeah, we need more effective capacity, even in a world of, you know, virus threats. Putting up the barriers and increasing the effective capacity of our restaurants is going to be a near-term help, aside from restrictions, right?

51:38 But the other big thing that needs to happen is we are operating without any late-night business. I mean, one of the great things about our concept is we run busy restaurants from 11 in the morning to 11 and 12 at night, right? and we totally lost that late night aspect of our business, A, and B, the alcohol-centric element occasions of our business that rely on bar business in and of themselves have been greatly compromised along with that, right? So I would say overall capacity but in particular those shoulder periods, particularly late night, are going to be really important.

52:25 And then last but not least is the return to sports in America is going to be helpful for lots of reasons, mental health among them, speaking personally, but I do think the occasions to gather and safety to be able to gather in groups and go see You know, games and other events is going to be a part of the puzzle for sure. Okay, that's very helpful. Thank you. You're welcome. We'll take our next question from Sharon Zaksia, William Blair. Hi, good afternoon. Actually, just to follow up on that last comment, I know you've got the family bundles and they've been around for a few months.

53:12 Is there a thought about doing something for Off-Premises Game Day bundles. I think we've done some promotional thinking, and we have plenty like our wings. We may not label them as such in particular, but we have been thoughtful about Really using the wide variety of appetizers and pizza, for instance, to satisfy those kind of occasions. I think one of the bigger opportunities, Sharon, might be, just because it may have gotten lost in my remarks, that's similar, not exactly what you're asking, is individualized large group orderings, right? So think about catering coming in half-pans, right?

54:07 and being scooped and shared by 10, 12, 15 people. There are a lot of occasions that that's not going to be appropriate as it was just a few months ago. So whether it's a family gathering or an office event or et cetera, it's going to – the need for individual portions, versions of group gatherings is something that occurs to us as being – Thank you very much. with pictures of our deep-fish pizza, the pizzeria, our beer, everything that travels really well. So we're not letting open day go for naught.

55:11 Especially since the Dodgers are part of the ceremony. I guess a question on the patios and the outdoor seating that you've implemented. I know you said you have about 150 locations now that have those. Not all of us live in Southern California, so I'm just curious kind of what number of those would you consider kind of seasonal, whereas the fall comes or starts to get colder, it's not as relevant. And then Greg, are you still comfortable with what you had said on the last call, which is I think 65,000 in average weekly sales for corporate break-evens? Yeah, so let me take the second part first here. I've got to think about our patio for a second.

56:00 I still do. I think the real change, actually, I'd almost argue that that number could have come down a little bit, but we decided to be, at least at the time, aggressive at least during the quarter about putting up the dividers, putting up the glass dividers, investing in patios and some other things that we think would really drive sales. And as a result of my, you know, formal remarks, I kind of said that We have the optionality on this part of our business to pull back if we need to to kind of manage our burn rate and maybe bring it down a little bit. But I still think it's around $65,000 from that standpoint. And again, as I said in the formal remarks, if our business goes a different way and we don't like where we're going, we have that ability on certain variable costs and CapEx costs that we would pull that back and manage accordingly.

56:54 So let me follow up on that while you're thinking through the matter. A lot of them are in California, thank goodness. But Sharon, just to reinforce a little bit what Greg said, because there's really two different things, and it's good to clarify this, is I think our break-even sales rate, if anything, as Greg said, might be a little lower than what we anticipated before in a pullback every, you know, most if not every discretionary expense, right? So what's, I don't know, I wouldn't say different, but what I'm anticipating, I'll give you a prime example, is we really anticipate paying our managers bonuses in Q3.

57:45 They're working hard, the key to our success here. And in the original $65,000 break-even, it does not contemplate variable labor expense, right? So our actual break-even is somewhat something a little bit higher than $65,000 when you incorporate increased level of capex coming from partitions, manager bonuses, etc., but from a, if we have to pull back, it's probably gotten a little lower than 65 but our anticipation in terms of expense rate sitting here today is probably something somewhat higher than that, if that makes sense.

58:35 And then on the patios, We've got over 50% of our restaurants are in California, Texas, and Florida. A little bit more mild weather states in that regard. I think we have about 110 patios that are in our original build-out in our restaurants. Generally, when we build those patios out, they are going to be more of an all-season patio in that regard. So when we talk about 150 patios in total, we probably added 40 additional patios, and then on the current 110, we continue to expand those ones by putting tents out in the parking lot and other areas.

59:22 So I think we've got, I don't know the exact numbers here from patios at each location, but I think we've got, you know, maybe somewhere around 50% of our 200 restaurants that at least have what I would consider patios built with a restaurant with harder lids, and so forth that could be used a little bit more year-round. Okay, thank you. We'll take our next question from Nicole Miller, Piper Sandler. Thank you. Good afternoon. I appreciate the update. I wanted to go back to the commentary around pizza. It sounded like you had what was a fairly material COGS benefit. Can you talk about what pizza mix was? I think you said the May-June timeframe. and then it's just so reminiscent to the core DNA of the brand and seriously has serious marketing implications. I understand that CJ's has become much bigger and broader, but how do you think about that return to the core, if you will?

1:00:23 Yeah, I'll take a stab at that, Nicole. First of all, we love And I've always considered pizza part of the core. I think in times like this where, you know, I think it's hard to argue that value isn't and is not going to be, you know, more important than ever. Pizza gives us, you know, a great ability to deliver amazing, amazing value to our guests. And when we went sort of above and beyond and doubled down with half-off large pizzas, I've said this I think on a prior call around we consider we're going to continue that offer on an off-premise basis for the foreseeable future. It's been one of the stars of off-premise sales growth along with our $6 entrees and our family feasts and bundles. So we love that.

1:01:20 We love the value our pizza brings to our guests and I think we've been If anything, improve that value and are definitely in the forefront of our mind is what else can we do even in a world where all of our dining rooms are open to continue to leverage pizza even in a bigger way from a value perspective. But having said that, keep in mind, you know, we're making this point again on the last call is we're not managing percentage margins, we're managing dollars. And and there's no question either that when we brought back our center-of-the-plate proteins as part of our menu in what we call our Phase II menu, mostly in June and whatever, that had a huge impact on check and dollar sales as people were, you know, dying for things like our tri-tip and consistent salmon dishes in our restaurants.

1:02:19 So it's not an either-or, but to your point, Again, we really love the fact that pizza is part of our arsenal, particularly in value-sensitive times. We definitely wouldn't want to lose sight. I think that's very important, the dollars versus the percentages, because we took the dollars to the bank. Can you just share as a follow-up how it moved in terms of mix? I mean, did it really move the needle? It seems like it must have. Yeah, I mean, it doubled as a percent. Again, we went from 145 items down to 80 items, really emphasized it and so forth. So the mix as a percent of sales doubled from that perspective.

1:03:05 All right. Thanks, guys. Appreciate it. You're welcome. We'll take our final question from Todd Brooks, CLK & Associates. Just one question to wrap it up. I'm trying to think about, and it takes capacity restrictions out of the discussion a little bit, but if you look at the $104,000 of average weekly sales Q3 last year, if you remove kind of that late night piece of the mix and the bar piece of the mix, what's the right bogey that we should be looking at? If you're performing as well as you can against the available opportunity, is Are we looking at 85,000 in average weekly sales without those two opportunities?

1:03:51 And if we're getting back to the mid-60s, we're really three-quarters of the way back in the addressable periods that we're able to serve customers in? It's a mixture. I mean, Greg will think on the actual day part of it. Your question, Todd, is a good one. But it's also, we need It's part day party and it's part bars being open in occasions that are more alcohol-friendly, I'll call it, right? So even at 6 o'clock in the evening when our dining rooms were open, we weren't doing the same alcohol-driven traffic. Now, interestingly, alcohol mix in incidents was higher than pre-COVID. and I attribute that to just like people gotta drink in this time like today.

1:04:45 So when they were in our restaurants, they were drinking more. But it wasn't, again, the traffic around the bars and the occasions to see sporting events, et cetera, weren't there in the same element. So again, the dollars of alcohol spending weren't there. But yeah, we need both, obviously, to drive ourselves. I don't know, Greg, if you have a guess on I don't. I mean, I think you could, you know, factor probably 12% for late nights by itself because, you know, that part of our business is purely dropping off. But to Greg Trojan's comment, and he's absolutely right, it's the fact of having people come into the bar in the middle of the afternoon and other types of events coming in that drive your capacity up in your restaurants.

1:05:41 So if you want to take the 104 and multiply it by 90% or something, you can kind of say, okay, 90,000 is the bogey, just lopping off that part. But there's still a lot of middle afternoon and other things that drive people into the business that you're just not getting today that you would get in a pre-COVID environment. But it's just intuitively without, you know, Looking at numbers, I think you're in the ballpark there. I think if you thought about us doing low to mid-70s in that June time period, you're probably somewhere in 80,000 to 85,000 a week without those things in terms of ultimate full utilization in a compromised way, if that makes any sense.

1:06:32 You're probably not far off. Thank you both very much. Welcome.