Good afternoon and welcome to the Red Robin Gourmet Burgers First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Rafael Gros, Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers Inc., First Quarter 2021 Earnings Call. Please note that today's call is being recorded. During today's conference call, management will make 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.

Good afternoon and thank you for joining us today. Here with me is Lynn Schweinfurth, our Chief Financial Officer, who will review our quarterly results after my prepared remarks. Before I provide a recap of Q1, I wanted to welcome Darla Morse, our new Chief Information Officer, and Anddria Varnado as our newest Independent Director. They are both strong additions to the Red Robin family, and we look forward to their many contributions as we execute our transformation strategy and position ourselves for long-term success. We believe our Q1 results are a strong indicator as to where Red Robin is headed, and we have tremendous confidence in the future of our brand. During our previous call, we outlined the significant groundwork we undertook to strongly position Red Robin for an eventual recovery from COVID-19. Now as the recovery begins, we are realizing the benefits of our strategic initiatives, and are very pleased to have delivered a strong first quarter despite our largest markets operating at restricted capacity of 50% or less. Importantly, by the end of Q1, 55% of company-owned restaurants had positive comparable restaurant revenue compared to 2019. We also had 85 comparable company-owned restaurants with no capacity or social distancing restrictions, realizing an increase of comparable restaurant revenue of 5.2% compared to the same period in 2019. While these restaurants are able to operate with no restrictions, several are still operating below 100% capacity due to limited operating hours, due to staffing challenges and COVID exclusions. As of the end of our fiscal fifth period, all company-owned restaurants have reopened for indoor dining with varying levels of capacity, Taking into account jurisdictional requirements, our average capacity is approximately 65%. We are excited to note that this is the first time our system has had all indoor dining rooms open with varying levels of capacity since the onset of the pandemic.

Thank you, Paul. I share Paul's excitement for our future. Our improving dine-in sales trajectory, improved business model, incremental off-premises sales channels and continuation of our transformation strategy together will drive meaningful long-term shareholder value. Turning to high level first quarter results. We experienced a 10% increase in first quarter comparable restaurant revenue, primarily driven by operating our dining rooms at increasing capacity. Compared to the first quarter of 2019, comparable restaurant revenue was down 12.8%. Our average weekly sales performance improved sequentially through the first quarter with comparable restaurant revenue over the final four weeks that were even with 2019. We sustained strong off-premises sales comprising 41.7% of total food and beverage sales, a material increase from 26.3% and 11.6% in 2020 and 2019, respectively. Approximately 80% of our off-premises orders were driven through digital channels. Net cash provided by operating activities was $18.9 million, including the negative impact of a onetime legal settlement of $8.5 million, while cash used in investing activities was $5.4 million. We ended the quarter with liquidity of approximately $107 million, including approximately $22.3 million of cash and cash equivalents and available borrowing capacity under our revolving line of credit. Beyond the end of the first quarter, California and Washington, our largest markets that are operating at restricted dine-in capacities of 50% or less generated positive restaurant revenue versus 2019 in the four weeks ended May 16. We believe further recovery of our West Coast restaurants will provide significant revenue increases as their dining room capacities increase. We are continuing to take advantage of the tax benefits and deferrals as allowed by the CARES Act. More specifically, as of the end of the first quarter, we have deferred approximately $18 million in payroll taxes to be paid back in early fiscal 2022 and 2023, and we currently expect to generate additional cash tax refunds of approximately $16 million during 2021 and net operating loss carry-backs. We are nearing conclusion on our lease negotiations. Combining the success of our lease restructuring work, permanent cost savings initiatives and restaurant closures, we are emerging from the pandemic with a much healthier restaurant portfolio. Additionally, we are confident in the future of Red Robin, and we continue to execute on our transformation strategy and initiatives that we discussed during our Q4 call. We are prioritizing our strategic initiatives that deliver strong financial returns while maintaining our diligence on cost management and liquidity as the restaurant industry begins to recover. We intend to dedicate our free cash flow over the next several quarters to delevering our balance sheet while maintaining flexibility to pursue our strategic growth initiatives. Now turning to some of the specifics related to the fiscal first quarter, Q1 2021 comparable restaurant revenues increased 10%, driven by a 4.4% increase in guest traffic and a 5.6% increase in average check. The increase in average guest check resulted from a 3.7% increase in pricing, a 1.3% increase in menu mix and a 0.6% increase from lower discount. First quarter total company revenues increased 6.6% to $326.3 million, up $20.2 million from a year ago, driven by operating our restaurants at increased capacities in Q1. Total company revenues decreased by 20.2% compared to the same period in 2019. Dine-in sales were down 12.8%, partially offset by off-premises sales growth. Our continued focus on our off-premises service model, technology and incremental sales initiatives allowed us to capture meaningful growth in the channel, which rose 75.5% in the first quarter, representing 41.7% of total food and beverage sales. As I mentioned previously, this compares to pre-pandemic off-premises sales mix of approximately 11.6% in the first quarter of 2019. Restaurant-level operating profit as a percentage of restaurant revenue was 15.7%, an improvement of 690 basis points compared to 2020, primarily due to the following: restaurant revenue increased by 5.7% due to favorable guest counts, pricing and sales mix; cost of goods sold decreased by 170 basis points, primarily driven by favorable commodity costs and rebates; labor costs decreased by 430 basis points, primarily driven by a more efficient management labor structure, staffing shortages and simplifying our menu, resulting in reduced kitchen labor hours partially offset by higher wage rates. Other operating expenses increased by 80 basis points, primarily driven by higher third-party delivery commissions and supply costs due to higher off-premises sales; and occupancy costs reached by 180 basis points, primarily driven by savings from permanently closed restaurants and the restructuring of lease payments and rent concessions restaurant-level operating profit as a percentage of restaurant revenue was 18.3% in Q1 2019, and higher than 2021 by 250 basis points, primarily driven by higher restaurant revenue of almost $82 million that more than offset a more efficient cost structure established during pandemic. General and administrative costs were $22.3 million, a decrease versus the prior year $4.5 million, primarily driven by a decrease in travel and entertainment costs and a reduction in force in 2020, partially offset by higher team member benefit costs. General and administrative costs were $30.1 million in 2019. Selling expenses were $8.4 million, a decrease versus the prior year of $6.4 million, primarily driven by reduced marketing due to capacity limitations and a shift to an all digital marketing strategy, which has enabled us to communicate with our guests in a more compelling and cost-effective way. Selling expenses were $80 million in 2019. We recognized a tax expense of $0.1 million in the first quarter, and our effective tax rate for the quarter was 0.6%. The Company will be able to carry back federal and state net operating losses that are expected to generate approximately $16 million of cash tax refunds during 2021. During the quarter, we recognized other charges of $5.5 million, primarily triggered by the COVID-19 pandemic. These charges included $2.4 million related to restaurant closures, $1.2 million related to restaurant asset impairment driven by the decision to permanently close 10 of the 12 remaining temporarily closed locations; $1.1 million related to litigation contingency; $0.6 million for COVID-19 related costs, including purchasing personal protective equipment for our restaurant team members and guests and providing emergency sick pay to our restaurant team members and a $0.1 million of board and stockholder matter costs. First quarter adjusted EBITDA was $27.4 million as compared to adjusted EBITDA losses of $10.7 million in Q1 2020. Q1 adjusted loss per diluted share was $0.30 as compared to adjusted loss per diluted share of $6.66 in Q1 2020. Adjusted EBITDA was $34.3 million in the first quarter of 2019, and adjusted earnings per diluted share were $0.19. At quarter end, our outstanding debt balance was $164.2 million and letters of credit outstanding were $8.6 million. Guidance for 2021 is as follows: We expect capital expenditures of $45 million to $55 million, including continued investment in maintaining our restaurants and infrastructure with maintenance and systems capital, Donatos' expansion to approximately 120 restaurants, including approximately 40 restaurants in our second fiscal quarter and approximately 80 in our third and fourth fiscal quarters; digital guests and operational technology solutions and off-premises execution enhancements. We also currently expect our full year effective rate to be between 1% and 5%. We expect low single-digit commodity inflation throughout the remainder of 2021, driven primarily by rising protein prices. Before I conclude, I'd like to thank our entire Red Robin team for the results they are generating. We are confident in our ability to deliver long-term value for all of our stakeholders. With that, I will turn the call back over to Paul.

Thank you, Lynn. Let me wrap up things with a few thoughts before we take your questions. The strategy that we developed and implemented last year is now paying dividends as we move into the recovery phase. And we believe that the growth drivers in place will continue providing us with business momentum for the foreseeable future. While Red Robin has always offered a differentiated proposition and unique casual dining experience, our understanding of our guests, how we interact with them, both within our restaurants and through digital channels and what they expect of us from their experience, has never been greater. What we have to offer, 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 is exactly what we can all use right now after the challenges we have faced this past year. We are now able to accelerate our profitability in a manner that was not previously possible, and we are determined to create and grow long-term value for our shareholders. Our great team is, of course, the reason why we've been able to accomplish everything that we have, and I sincerely appreciate their efforts in getting us to this point. Let us now open the call for questions.

We will now begin the question-and-answer session. Our first question today comes from Alex Slagle with Jefferies.

I had a question on the staffing shortages. I know you were preparing and training and hiring well ahead of this. So, it is notable and imagined you're not alone in this, but just kind of wondering if you could talk about kind of where you're seeing the most significant challenges? And has this issue been broadening over the course of the last few weeks? Just trying to think about what the next four weeks would look like? And if it's fair to think that we'll see another step down in average weekly sales similar to what you saw from April 18 to May 16? Or whether the training program changes and the retention efforts that you outlined are going to kick in to offset this?

Alex, this is Paul. You're correct. Part of our ready set reopen plan was geared towards staffing. I don't expect actually to see sales slope up. To give you an average, we're right now looking to add about six more team members per restaurant, combination between heart of the house and the front of the house. So, it's not as dire as maybe you're hearing from some other brands in any form or fashion. Now -- and frankly, part of the impact as you look after the April numbers, not only of the staffing issues, but also, we had an uptick in COVID exclusions that we are now seeing that starting to decline also. So that was really a combination of them both. But as we said a little earlier, I feel very confident that in short order, we're going to get the staffing, put to bed, get it stabilized. The things that we've done, the technology enhancements to really get the on-boarding on quicker, getting people trained and productive inside of two or three days, and then the wage progression are all things that we're seeing already beginning to have an impact on our ability to staff the restaurants.

And Alex, I would just add, we -- as we look out into the future, I think you probably saw in the press release, our West Coast markets are performing incredibly strong. And as we're able to increase capacities in California as we're staffing up, also in Washington, some of the other states, there is really going to be an upward trajectory in our sales as we move forward. And while we're focused on the staffing challenges currently, it's a priority, but we do believe they're temporary in nature.

Okay. That's helpful. Is there an impact on the restaurant-level margin ahead to 2Q that we should think about, just sort of balancing some of the lower labor cost and --

Yes. We did see lower labor costs as a result of some of our staffing challenges. So as you're thinking about modeling the Company, I would increase some of your labor expense line items above the current run rate.

Our next question comes from Brian Vaccaro with Raymond James.

I wanted to ask about the recent sales trends you're seeing. It's obviously very encouraging to be well back into that low to mid $50,000 a week range. And I don't want to be overly nitpick, but I did want to ask about May. I'm just trying to sort through the moving pieces because it looks like average weekly sales still strong but decelerated a bit versus April. And that's despite dine-in capacity increasing and some of the strength you noted in California and Washington, obviously. So is there a normal seasonality or some other dynamic you'd highlight there? Just curious to get your take on the cadence you're seeing in recent weeks and months?

Sure. What I would say, Brian, is in May, we did see a little bit of a down trajectory we attribute that to a few things: One is some seasonality, we believe, affecting our business. And then we did have to reduce some operating hours associated with the exclusions and the staffing shortages, we've been experiencing. And so again, as we start to see capacities open in conjunction with staffing, we think that trajectory will certainly start to improve.

Okay. That's helpful. And on that staffing shortage impact, is there a way to quantify sort of the impact to your operating hours or even your ability to see full sections, if you will, up to the will, up to the capacity limits? Is there any way to quantify that? How much constraining sales to a degree?

Well, I don't think we're prepared to quantify it today, but certainly, there will be an increase in expenses as we move forward, a portion of which is management labor around shift supervisors as well as some of our team members in the restaurant.

Okay. And on the labor inflation, wage inflation front, sorry if I missed it in your prepared remarks, but what was wage inflation in 1Q? And what's your expectation for the rest of the year?

Yes. It was actually fairly modest. We saw wage inflation between 1% and 1.5% in the first quarter. But we also saw the impact of higher off-premise sales, which carries higher wage rates in the front of health. We do expect wage inflation to increase from that point through the balance of the year. And we expect it to fall somewhere in the low single digits.

Okay. Great, great. And then I guess my last one, just on the marketing front, I appreciate the success that you've been seeing in the digital channels. But I'm curious to get your view on what role you think TV and other traditional channels will ultimately play in a post-COVID environment? As you tie it all together, where do you see your advertising or selling costs settling out ultimately versus pre-COVID levels?

Brian, this is Paul. Where we see that going is we obviously, as we stated, very pleased with the results at the digital pivot in Q1 did produce for the Company. We believe that there is a role for broadcast, our national broadcast as we go into the future. More specifically, as we bring Donatos into a market that we would introduce it with some broadcast medium. Just because we've switched to digital doesn't mean that we're not doing video. We're just doing on different mediums where we're seeing basically a higher take rate and it's more targeted. The great thing about the digital approach that we take now that we're able to do it on a quarterly basis, if we need to bring in some national broadcast, we can make that decision and make that happen. I would say that from a selling and expense side, I would see that move forward through the year as capacity increases, especially as the West Coast is able to come online. And we're starting to get some real good indications that by mid-June a lot of the West Coast is going to begin to is ease their restrictions. And so as we mentioned with Donatos, we wait until we could get the capacity. You're going to see the selling costs definitely move up as we move through the years, but still be at a reduced level as we end up the year.

Our next question comes from Jon Tower with Wells Fargo.

I was curious, the off-premise sales mix that you had during the period, very strong and looking good. It seems like you're hitting on all cylinders with respect to the carryout and the third-party delivery and some of the virtual brands. So I was hoping maybe you could break down the mix between those channels, right? The traditional carryout versus third-party delivery of just Red Robin, the legacy brand versus how much of some of the mix today is from these virtual brands that have just come online?

Well, I'll give you some key categories, and then maybe we can touch on virtual brands in a slightly different manner. So our traditional carryout ran about 21% for the first quarter; third party, 17.5%; catering was only 1%, as I think Paul mentioned in his opening remarks; and our last mile category was at about 2%. And we are very early on in our virtual brands. And so at this point, we'd like to see a little bit more experience or time before we start to share results and expectations going forward.

Okay. And I'm sorry, I don't know if you're going to say anything.

Well, John, I think the thing I would emphasize on the virtual brands is that, as I mentioned, 70% of the orders are coming from people who have not engaged from Red Robin in an online ordering capacity before. So, we see that over time being incremental. But as Lynn mentioned, it's very early where we are in the carousel, we'd like to just to see where does that stabilize.

Okay. And just similar questioner line of thinking. In the carryout channel itself, given that you do have, I think its north of 9 million royalty members in the loyalty program. Is there a way to determine how the off-premise customer is switching back and forth to in-store occasion? Essentially, I'm just trying to understand how sticky those customers are in that off-premise channel as these stores reopen? Are you seeing greater frequency of use of both channels from these customers? Or are customers are in that off-premise channel as these pivoting back to stores as the dining rooms reopen?

Yes. I mean, something that we find fairly interesting, at least in our data, is that dine-in guests are actually fairly loyal to dine-in. They don't really cross-pollinate too much to off-premise. However, off-premise guests utilize both dine-in and off-premise and what we have seen is a higher visitation frequency out of our off-premise guests. So that at least from my perspective, it indicates that the off-premise occasion is an incremental occasion to the dine-in visit. And as capacity in the dine-in Arena continues to accelerate for Red Robin, we think it just has a multiplier effect for us.

Got it. And just one last on the virtual brands themselves. Does that extend operating hours for the stores at all? Or are they still within the same existing operating hours for the stores today?

Presently, they're within the same operating hours, kind of an interesting fact out of the virtual brands is, we see them playing really well at least two of the three brands actually playing stronger in the lunch time slide. So if you look at the Fresh Set and the Chicken Sammy's have been more in the lunch, which we are pleased about. The Wing Department does play a little bit more in the late night. So we haven't had to make our adjustment to the restaurant store hours.

Okay. Great. And then just lastly, on the unit growth side of the equation -- unit side of the equation, the 10 stores that are permanently closed, any way to offer insight on how much those stores may have weighed on aggregate store margins? Or how they performed relative to the system, say, in 2019 from an average weekly sales standpoint? And then looking at the rest of the system, do you feel like the Company side of the portfolio is really were optimized for where you want it to be for future growth?

Yes. The restaurants that we've permanently closed were marginal performers for the Company. So you would want to model them lower than the average in 2019. And then, yes, I think we believe our restaurant portfolio is at a place right now where it's very healthy. And we've got these incremental sales channels that we're generating, and we think that will certainly -- the tide will rise for all of the restaurants and, again, a healthier restaurant portfolio as a result.

Yes, John, I believe that the closures that we did and the work we did on the portfolio as a whole from a renegotiating the terms has really set the portfolio up for a strong future and address some of the things that we had mentioned back in January of 2020, we just thought it would take much longer. But obviously, the pandemic offered us the opportunity to have those discussions and frankly get done in a year that may have taken two or three years.

This concludes our question-and-answer session, and I'd like to turn the call back over to management for any closing remarks.

Well, thanks, everybody, for participating in the first quarter 2021 call. Certainly, on our end, we're very pleased with the results. I think it really shows the work that we did in 2020 has set the Company up for a strong future. We thought Q1 really has indicated the things we did were the right things for the brand, and the results are showing it. Lynn and I look forward to speaking with you again on the Q2 call. Have a good rest of your day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.