Noodles & Company

Afternoon, and welcome to today's Noodles and Company's first quarter 2022 earnings conference call. All participants are now in a listen-only mode. After the presenters' 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 Company Chief Financial Officer, Carl Lukacs. You may begin.

Thank you, and good afternoon, everyone. Welcome to our first quarter 2022 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 means of the Private Securities Litigation Reform Act. Such statements are only projections, and actual events or results could differ materially from those projections due to 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 2021 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 2021 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-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 measures is available on our first quarter 2022 earnings release and our supplemental information. Now, I would like to turn it over to Dave Benninghausen, our Chief Executive Officer.

Dave Benninghausen Thanks, Carl, and good afternoon, everyone. I'm excited to share with you our results for Q1, which included a recapturing of the momentum we had gained through the majority of 2021, as well as a positive inflection point in our unit growth trajectory. Noodles & Company has made significant strides over the past few years. and with the temporary disruption of COVID-related closures seemingly behind us, we feel the company is well-positioned to accelerate growth meaningfully through the balance of 2022 and beyond. While the first two months of Q1 were impacted by both our historical seasonality as well as temporary closures due to the Omicron COVID variant, the company quickly regained momentum as we entered March, culminating in average unit volumes for the March fiscal period of $1.35 million, $170,000 above pre-COVID 2019 levels. This momentum has continued thus far in Q2, with quarter-to-date average unit volumes cresting $1.4 million. As our restaurant base has regained momentum, we also are excited at the success of our new units and the unit growth opportunity ahead. We opened seven restaurants system-wide during the first quarter, the largest number of new openings in a quarter since 2016. More importantly, these restaurants as a class are already exceeding our internal projections and performing well above company average. As a reminder, our target is to achieve a 30%-plus cash-on-cash return at new company locations, supported by our smaller square footage, off-premise-oriented prototype, the majority of which include our order-ahead drive-through pickup windows. Our classes of 2019 through 2021 continue to track towards these return objectives and the class of 2022 thus far has been even stronger. Looking at their initial performance and accounting for typical honeymoon patterns of prior classes, we anticipate these restaurants will settle above $1.5 million in average unit volumes. Ultimately, we believe that Noodles & Company has the potential for at least 1,500 units nationwide. We continue to be a differentiated category leader with proven mass appeal in a wide variety of trade areas. both urban and suburban, as well as strong residents in both college and small towns. We feel this growth opportunity is supported by our proven success in a wide variety of geographies, with our top 30 restaurants spanning coast to coast amongst 20 different MSAs, with representation from urban, suburban, collegiate, and small town locations. Additionally, as we exit the temporary disruption of COVID, we expect nearly 40 percent of our restaurants to meet our long-term target of $1.5 million of AUV during the second quarter. With significant opportunity in both infill and new markets, this mass appeal broadens our unit growth opportunity, increases attractiveness to franchisees, and mitigates risk in our growth strategy. We continue to make progress towards increasing the franchise mix of our business, as evidenced by the recent re-franchising of California with the agreement calling for 40 new locations to be opened during the next several years. Finally, the variety inherent in our menu, our strength in off-premise, and low entry-level price point gives us the ability to win in a wide variety of consumer occasions and environments. While we can't ignore the near-term impact of the inflationary environment, which Carl will discuss shortly, simply put, I've never been more confident in the growth opportunity ahead of us. This confidence is bolstered by the effectiveness of our strategies around menu innovation, guest engagement, and operations. From a culinary perspective, over the past several years, we have executed a robust pipeline of menu development, resulting in additions such as zucchini noodles and tortelloni that have increased both the reach and frequency of our brand. As an example of the effectiveness of these introductions, healthier items now represent 13% of mix, up from just above 10% a few years ago, while Tortelloni continues to perform very strongly at 7% of guest mix. Noodles & Company's ability to redefine traditional expectations of noodles and pasta has allowed the brand to resonate with a wide variety of audiences. And we feel our upcoming introduction, Linguini, is a particularly powerful representation of how our menu can meet several dietary preferences without sacrificing taste or flavor. Linguini has the taste and texture of traditional linguini noodle and gets its name from having 56% less net carbs and 44% more protein than a traditional wheat noodle. The culinary formulation for linguini is a proprietary, first-of-its-kind offering that is a result of over a year of innovation and exclusive to Noodles & Company. Guest response has been fantastic. and we're excited to launch Linguini nationwide next week. While Linguini will be featured with our new light lemon parm sauce, with our made-to-order approach to culinary, it can be substituted into any one of our dishes, allowing guests to have the same great flavors they've come to love from Noodles & Company with significantly fewer carbs and much higher protein. We believe Linguini could be a transformational new menu introduction that could significantly expand our reach, encourage more repeat visits, and provide a great option for the growing lunch occasion. As we did with Tortelloni, we will leverage our guest engagement program to give rewards members an exclusive opportunity to try Linguini before being available to all guests beginning on May 18th. Our rewards program remains an important pillar in our overall guest engagement strategy. And with over 4 million members, which compares favorably on a per-unit basis with competitors, we continue to garner greater insights to foster more personalized relationships with our guests. Noodles Rewards continues to be supported by a top-tier digital ecosystem, with digital sales accounting for 58% of sales during the first quarter. As our rewards program and digital assets strengthen, we will also soon be launching our new brand positioning, Uncommon Goodness. Through uncommon goodness, Noodles is bringing its purpose to life by elevating the uncommon goodness that has been core to the brand for more than 25 years. From how we treat our team members and create a unique guest experience, to how we carefully select ingredients and positively impact the communities we serve, Noodles infuses uncommon goodness into everything we do. At the core of this brand positioning are operations and people. and I'm incredibly proud of how our team has navigated the recent environment. Staffing has improved dramatically over the past few months, with nearly all of our restaurants now returned to full operating hours. Importantly, as we have navigated this environment, we have also gained efficiencies in our operating model through equipment and operational initiatives, resulting in significant improvements in throughput, as well as a reduction in the labor hours needed to provide a great guest experience. We've seen a 30-second reduction in cook times at our restaurants through these initiatives, as well as an over 15% increase in sales per labor hour since their implementation. These efficiencies will be particularly advantageous as we navigate the current inflationary environment. Again, Noodles & Company as a brand has never been better positioned to accelerate growth. Over the past few years, we've made tremendous strides in nearly every aspect of our business. From menu innovation and guest engagements, to new unit economics and bench strength. As I look at the balance of 2022, I feel we have an incredibly strong slate of initiatives, headlined by the launch of Linguini and our new brand positioning. Combined with the strength of our team and new unit pipeline, I'm confident that we have not only regained the momentum that was interrupted by the Delta and Omicron variants, but we are also approaching an inflection point in realizing the company's immense potential. I'll now turn it over to Carl to discuss in more depth our financial results and expectations within 2022.