Noodles & Company

Good afternoon and welcome to today's Noodles and Companies Fourth Quarter 2021 Earnings Conference Call. All participants are now in a listen-only mode. After the presenter's remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce Noodles and Companies Chief Financial Officer, Carl Lukacs.

Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2021 earnings call. Here with me this afternoon is Dave Benninghausen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters. During our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including details relating to our future performance, should be considered forward-looking statements. within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections, and actual events or results could differ materially from those projections during a number of risks and uncertainties. The safe harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call. including the portions of each that set forth the risks and uncertainties related to the company's forward-looking statements. I refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's annual report on Form 10-K for its 2020 fiscal year and subsequent filings we have made. These documents contain and identify important factors that cause actual results to material differently from those contained in our projections or board-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2021 earnings release. and our supplemental information. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. 2021 was an important year for Noodles & Company as we made significant progress against our growth objectives, validating the resonance of the brand for today's consumer, as well as setting the stage for accelerated unit growth, which is now underway. For the fiscal year, revenue increased 20.7% compared to 2020, to over $475 million. Comparable restaurant sales increased 22.1% system-wide, and digital sales increased 20%, accounting for 57% of total sales. Restaurant-level margin for fiscal 2021 increased 400 basis points to 15.9%, culminating in a 233% increase in adjusted EBITDA to $38.1 million for the year. As we look back at 2021, one important aspect is the underlying AUV momentum that we have seen throughout the system, evidenced by the record AUVs of $1.3 billion that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges, for the full year, average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020 and an increase of over 11% versus pre-pandemic 2019. We saw strength throughout the country, with particular momentum in less penetrated markets where we were able to accelerate brand awareness through targeted digital efforts. As ADP grew in 2021, we're also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter. The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours as well as improvements in throughput and cook times, which are critical as we face increased demand both at existing and new locations. Finally, during 2021, our newest vintages of restaurants performed at our highest level in company history, validating our strategy to accelerate grills with a proven model that yields 30% plus cash on cash returns. Turning toward recent results, during the fourth quarter, while the underlying business remained strong, the company was significantly impacted by both staffing challenges as well as the surge of the Delta COVID variant, which was concentrated in our most penetrated markets of the Rocky Mountain West and the Upper Midwest. This resulted in a meaningful amount of temporary closures or reduction in operating hours, which we estimate impacted revenues by approximately $8 million for the fourth quarter. The Delta variant's impact on the full quarter's financials were additionally compounded by one-time costs nationwide related to investments in staffing and continued volatility within our supply chain. It's important to note that this impact was particularly profound during late October and through the month of November. Notably, as staffing improved and the Delta variant subsided, the business quickly regained momentum, as evidenced by our strengthening comparable restaurant sales throughout the quarter. From a fiscal period perspective, system-wide comparable sales grew 6.8% in October, increased to 11.9% in November, and then again to 14.7% during the month of December. As the calendar turned to 2022, clearly the surge in Omicron cases has impacted the beginning of the year. But again, we're pleased with how performance has improved as cases have subsided. During our January fiscal period, comparable sales increased 2.7% at company locations and 4% system-wide. Results have accelerated in recent weeks, with comparable sales in our February period increasing 7.5% at company locations and 8.7% system-wide as of yesterday, February 22nd. These results give us confidence that the brand will again prove its resilience and accelerate both sales and margin expansion quickly as own crowd pressures subside. This belief is also bolstered by the brand's strong value proposition. With the majority of our dishes having entry points of approximately $7, we feel this pricing power gives us the ability to enact additional pricing during the second quarter and potentially beyond to mitigate anticipated margin pressures. As we look to the year ahead, we continue to believe that our three primary strategies will have a profound impact on our ability to become a premier growth story in the restaurant space. These strategies remain, first, the continued differentiation of our concepts to appeal to a broad range of lifestyles, convenience, and dietary needs, which will be best exemplified by a particularly exciting new culinary launch in the second quarter. Second, further activating our brand. particularly through our digital assets and marketing strategy, which ultimately will result in the launch of a new brand building platform that will roll out in the coming months. And third, accelerating our unit growth. To take advantage of an operating model we feel is ideally suited for today's environment, driven by our target of 8% unit growth in 2022 and accelerating to 10% next year. Let me provide a brief update on each of these, starting with our culinary strategy and continued differentiation of the brand. Noodles & Company remains the only national fast-casual restaurant bringing fresh tastes on world flavors with a noodles-and-pasta-based menu. Our fresh, flavorful, and made-to-order approach sets the brand apart, and our variety and the fact our food travels so well makes us perfectly suited for meeting consumer needs around convenience, offering our guests real cooking so they don't have to, whenever and wherever they want. In 2021, we showcased the strength of our menu through continued innovation, particularly with the introduction of tortelloni in June, which continues to be the best performing new menu item in our history. We still feel there's a lot of runway in the tortelloni offering and are particularly pleased with the increase in frequency that we're seeing from those who have tried the dish. Our ability to optimize our menu innovation between healthy offerings and new spins on familiar favorites has been a hallmark of our brand and that will continue in 2022. Just last week, we launched two new salads, refreshing the category in advance of upcoming warmer months, while simplifying our operational execution. And throughout the year, we will additionally be completing testing on new menu items for 2023 and beyond. However, the culinary innovation where we are currently most excited about is Lean Guini, which will launch in a few months. Lean Guini has the taste and the texture of a traditional linguine dish, and gets its name from having over 50% less net carbs and over 40% more protein than a traditional lean noodle. The culinary formula for Linguini is proprietary, first-of-its-kind offering that is a result of almost a year of innovation. We feel that Linguini can have a similar impact to what zucchini noodles had on the brain a few years ago, expanding our market reach meaningfully by redefining traditional expectations of noodles and pasta. As our current organization accelerates in upcoming months, so will our second strategy, which is further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. During 2021, our digital sales grew 20% over the prior year, and both for the full year and Q4, accounted for over 57% of total sales. We continue to be impressed by the strength of this channel, which is bolstered again by how well our food travels for off-premise occasions, strength of our awards program and our resonance with younger, more digital-savvy consumers. We continue to enhance the targeting of our marketing, as well as the capabilities of our digital assets. Introducing a higher level of personalization into our guest engagement, thus enhancing the overall guest experience. Of course, one of the biggest tools for driving digital growth is our rewards program, which has now crossed 4 million members. During 2021, we saw significant increases both in our ability to attract new or last guests, as well as convert rewards members to more frequent guests. For example, 65% of new members who sign up for our rewards program return for a second visit within 60 days, which is faster than revisit rates we've seen in prior years. We believe this points to not only the power of the program itself, but also its ability to inform more effective targeted marketing communications Given the disruptions that the industry has seen in recent months, our marketing priorities in Q4 of 21 and into Q1 of 22 have focused on accelerating a brand-building platform that will roll out in the coming months. This increase in marketing activity will capitalize on the strength of our initiatives and increase insights we have gathered from our rewards program. This provides added confidence in the ability for us to accelerate momentum during 2022 with efficient, targeted activation of the brand. While we look forward to culinary innovation and brand activation throughout 2022, perhaps the most impactful strategy is the acceleration of our unit growth profile, which is now underway. As we've discussed before, the restaurants opened in the last three years continue to perform better than any group of new restaurants in our history, averaging at volumes and restaurant-level margins above company average. This momentum has continued thus far in 2022, which is particularly exciting given the openings thus far include our first franchise location in the New Market of South Carolina, as well as the test of a smaller square footage orderhead drive-thru location outside of Madison, Wisconsin, that is almost an entirely off-premise location. We anticipate approximately 35 openings system-wide for 2022, including seven during this first quarter. While the balance of our 2022 openings will be somewhat backloaded given the current development advice, We remain very confident in the opportunity to accelerate unit growth to 10% beginning in 2023 with a proven 30% plus cash-on-cash return model, again, perfectly suited for today's environment. This model, which incorporates our order ahead drive-through windows and an operating model that reflects the progress made over the last few years in terms of labor efficiencies, continues to gain positive attention from the franchise community as well. As we disclosed earlier this quarter, in January, we closed the transaction with an established 150 plus unit multi-concept franchisee to be our exclusive partner for California. This transaction included the sale of 15 existing company owned restaurants, as well as an area development agreement that provides for the opening of 40 new locations over the next several years. This agreement, the recent strong opening of our newest franchisee in South Carolina, and the previously announced franchise deal to expand into West Texas and Southern New Mexico validate the news and company opportunity, and we are pleased with the current quality and trajectory of our conversations with additional prospective franchisees. As we enter this phase of accelerated growth, the importance of our team cannot be overstated. While we have not been immune to the staffing challenges seen throughout the industry in recent months, we're highly encouraged with both the improvement at our overall staffing levels and our ability to retain the key talent that is critical to the execution of our new unit acceleration. Our management tenure remains extraordinarily strong, and we're on track to open nearly 100% of new units with experienced, proven general managers prepared to introduce the brand to new trade areas throughout the country. As always, my thanks to our team for their incredible dedication towards delivering tremendous execution to our guests during an unprecedented time. And I look forward to joining you on the journey as we accelerate all aspects of the company growth story. I'm now turning over to Carl to discuss in more depth our financial results and expectations within 2022.