Noodles & Company

Good afternoon and welcome to today's Noodles and Company's second quarter 2022 earnings conference call. All participants are now in the 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's Chief Financial Officer, Carl Lukacs.

Thank you and good afternoon, everyone. Welcome to our second 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 meaning 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 in the company's 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 in our second quarter 2022 earnings release and our supplemental information. Now, I would like to turn it over to Dave Benninghausen are Chief Executive Officer.

Thanks, Carl, and good afternoon, everyone. I would like to start today by sharing some of the highlights from our second quarter results, which overall met our expectations despite volatility in the market environment. I would also like to spend some time addressing our confidence level and strategies towards achieving our 2024 accelerated growth objectives. Our second quarter revenue of $131.1 million reflected system-wide comparable restaurant sales of 5.1%, and was highlighted by record average unit volumes of $1.42 million at company restaurants, 18.3% above pre-COVID 2019 levels. After a challenging first quarter due to the impact of temporary closures from the Omicron variant, our restaurants are now staffed above pre-COVID levels, and we recaptured meaningful momentum relative to Q1. including restaurant-level margins of 15.5% compared to 9.7% in the first quarter. As we move to our ongoing strategy, I would like to remind you of our accelerated growth objectives, which include first, $1.5 million AUVs by 2024, second, 20% restaurant-level margin, again by 2024, and finally, at least 10% unit growth commencing in 2023. Let's start with our average unit volume target of a million and a half. The company has made clear progress over the last few years in growing our average unit volume, from 1.2 million in Q2 of 2019 to 1.42 million in the recently completed second quarter of 2022. The brand's ability to meet the needs of today's consumer, and particularly with the variety inherent in our flavorful menu, our digital strengths, and how well our food travels, positions the brand for continued growth in our average unit values. As we've all witnessed throughout the restaurant industry, we experienced some softening in our sales trends during the last part of Q2 and into the beginning of Q3. That said, sales have quickly stabilized and we expect positive comparable restaurant sales in the current third quarter. The stability of our recent sales is encouraging, However, we recognize the near-term economic environment is unstable and difficult to predict. As a reminder though, the company achieved positive comparable restaurant sales during the 2008 and 2009 recession, driven by the strength of the brand's value proposition as well as our ability to be a trade-down beneficiary in a softer consumer environment. This ability to succeed in a more difficult environment is bolstered by the strength of our menu innovation as well as our strong entry-level price point. From our recently introduced linguine offering, which offers 56% less net carbs and 44% more protein than traditional wheat pasta, to our zucchini noodle, to our artisanal sauces, our menu offers great variety that is not easy to replicate at home or at other restaurant competitors. Additionally, we are leaning into the strength of our entry-level price point with increased communication and messaging of seven core dishes that are priced at $7, including popular favorites such as our Wisconsin mac and cheese. This core menu strength and value proposition is further supported by the insights and engagement that we are able to derive from our digital ecosystem and our rewards program, an asset that we did not have during prior economic downturns. Our frequency and guest metrics have improved meaningfully in recent months, and we will continue to leverage the strengthening capability to drive consumer engagement that is personalized, relevant, and develops guest loyalty. In coming months, you can expect us to continue to evolve and fine-tune these areas of the business, streamlining and improving our digital experience for guests, and continue to increase our trial and awareness of Linguini, which we are seeing is associated with higher repurchase, taste of food, and frequency metrics. We continue to believe that Linguini will be a transformative introduction for Noodles & Company, with our focus now shifting from introduction and commercialization to increasing trial amongst new, last, and loyal guests alike. While we are prepared for potential volatility during coming months, as I noted, sales have quickly stabilized and we anticipate positive comparable restaurant sales in the third quarter. Moreover, during the second quarter, 41% of our restaurants achieved our accelerated growth objective of an average unit volume of over a million and a half, with strength from coast to coast and in a variety of different restaurant formats. The average restaurant margin of these restaurants was nearly 21%, which brings us to our second accelerated growth objective, achieving a target for 20% company restaurant level margin by 2024. As a reminder, our preinflation results from Q2 of last year included restaurant-level margin of 18.9%. Clearly, the unprecedented inflationary environment that we are now seeing has led to some challenges thus far in 2022. But with a combination of more normalized commodity markets and execution of our efficiency initiatives that I will discuss further, our 20% target remains in sight. As you know, cost of goods sold has been the most challenging area of the margin story in recent months. Our cost of goods sold in the second quarter was 27.8% of sales, 280 basis points above our target for COGS of approximately 25%. Carl will go into more depth later, but importantly, we are confident that we have reached the peak of our COGS inflationary pressures. Several tea ingredients, in particular chicken and durum wheat, have seen meaningful declines from recent historic highs. Additionally, we are currently rolling out a more efficient cut of our boneless chicken breast with significant cost savings. While our COGS will remain elevated in Q3, given the timing of lower cost items rolling through the system, we expect to exit Q3 and enter Q4 with meaningfully lower COGS than we saw during the second quarter. As we consider our 2024 target of 20% restaurant level margin, we additionally see opportunity in several other areas of the P&L. Delivery fees are beginning to come down as percentage of sales as this area of the business normalizes, and we are also seeing strong leverage on our fixed costs from recent price actions. Additionally, the company is focused on a few key optimization activities to support margin expansion over both the short and long term, including menu optimization to eliminate select higher cost ingredients and better highlight menu items that are both guest favorites and margin accretives. testing of high ROI equipment alternatives to improve efficiencies within our restaurants, particularly focused on our prep activities and our protein preparation, and the introduction of technology within our restaurants to drive consumer behavior and eliminate select current expense items. Importantly, today we announced refinance of our credit facility, which gives us additional flexibility to pursue and implement these and other high return initiatives to achieve our 20% restaurant level margin target. With stronger AUVs and restaurant level margin, we are well positioned to take advantage of our third accelerated growth objective, which is to achieve at least 10% unit growth by 2023, taking advantage of the tremendous white space potential for the brand. It's no surprise that certain external factors, including municipal and landlord delays and supply chain issues, have added challenges to the typical restaurant development timeline. and that's currently reflected in our unit growth expectations for 2022. However, we remain confident in our long-term target. Fortunately, an improving real estate and cost climate has allowed us to shift more resources into the 2023 pipeline, which is the strongest I have seen in many years in Newell's and Company. We already have 20 company deals for 2023 that are either complete or in final stages of negotiation, with a significant number of deals in various stages of LOIs to support our growth objective. The pipeline as it sits today is three times stronger than it was at this point last year in all phases of development. And we see unit growth of at least 10% in 2023. This pipeline is bolstered by improvements that we are currently seeing in much of our development input cost, as well as an overall more favorable real estate environment to execute our lower square footage, off-premise oriented prototype. Moreover, our confidence in achieving our 30% cash on cash return is supported by the success of our recent classes, including our first restaurant in the suburbs of Las Vegas, which is tracking above our million and a half AUV objective. Finally, supporting our unit growth objective is progress we are making in our franchise sales program. We are in the final stages of an agreement for a large area development in the southern part of the United States and have been very pleased with the increase in franchise interest that we have seen in recent months. As I turn it over to Carl, I'd like to reiterate my confidence in how well the brand is positioned to succeed in the short term as well as achieve our salary growth objectives. Our unique brand positioning with strong value offerings allows us to navigate a more challenging consumer environment. Our strong digital ecosystem and guest insights allow the brand to drive consumer engagement. And our improving operating model bolstered by high return, low square footage new units allows us to take advantage of the tremendous white space potential. Now I'd like to turn it over to Carl.