Noodles & Company

Good day and thank you for standing by. Welcome to the Noodles and Company's third quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mike Hines, CFO. Mike, you have the floor.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2023 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 remarks, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items should be considered forward-looking statements within the meeting 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, including those referred to in this afternoon's news release, and the cautionary statement and the company's annual report on Form 10-K for its 2022 fiscal year and subsequent filings with the SEC. 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 third quarter 2023 earnings release. To the extent that the company provides guidance, it does so only on a non-GAAP basis and does not provide reconciliations of forward-looking non-GAAP measures, specifically, forecasted adjusted EBITDA, adjusted EPS, and contribution margin. Quantitative reconciling information for these measures is unavailable without unreasonable effort. The corresponding GAAP measures are not accessible on a forward-looking basis, and such information is likely to be significant to an investor. Now, I would like to turn it over to Dave Finienhausen, our Chief Executive Officer.

Dave Finienhausen Thanks, Mike, and good afternoon, everyone. During the third quarter, Noodles & Company gained meaningful traction improving our financial performance, culminating in adjusted EBITDA of $11.7 million, nearly 20 percent above the third quarter of 2022. This growth can primarily be attributed to restaurant-level margin improvement of 200 basis points relative to prior year to 16.4%. Compared to the second quarter of 2023, adjusted EBITDA grew 26% and restaurant-level margin improved 160 basis points. During the third quarter, we were able to take advantage of continued favorability in the expense environment, the benefit of labor efficiency initiatives, and realized savings from our focused G&A restructuring that occurred earlier this year. After a challenging second quarter, I'm encouraged by the progress that we made in margin expansion and EBITDA growth. From a top-line perspective, total revenue decreased 1.2% in the third quarter versus prior year to $127.9 million, driven by a 3.7% decline in system-wide comparable restaurant sales. Thus far in Q4, sales are trending similarly to Q3, with a modest deceleration in comparable restaurant sales, but an acceleration in two-year growth. As we discussed at our last earnings call, we are focused on five initiatives to drive our sales performance through the balance of the year and beyond. First, price optimization with a balance of appropriate discounting and promotions. Second, advancement in our technology platforms to increase guest engagement and analytics. Third, leveraging the recent introduction of a highly recognizable consumer favorite into the fast casual world, chicken parmesan. Fourth, a complete evaluation and assessment of our culinary offerings, including our approach to our menu layout, utilizing a leading industry third-party consulting firm. And fifth, a significant expansion of our catering program. The first area that we've been actively addressing has been around value and optimizing our pricing strategy. Clearly, in today's environment, value is increasingly important, and we believe we have an opportunity to address the price of our proteins, which are added to their dish by 80% of our deaths. During the third quarter, we began testing pricing strategies to address this opportunity, as well as partnering with third-party research firms to better understand the elasticity of our pricing both at a dish and trade area level. We are encouraged by the initial results of this work and anticipate both broadening our test as well as introducing more surgical pricing tiers within our menu and across trade areas in future months. Our second area of focus is the improvements that we have made to our technology and data platforms. Nearly 50% of our guests experience the brand in restaurants, including dine-in and orders to go. In 2023, we've been installing digital menu boards across all of our company restaurants, which will allow us to quickly incorporate insights from our current pricing and extensive menu research across the system. Digital menu boards have now been installed in over 75% of company restaurants, and we anticipate being fully rolled out by the end of the year. As an example of the benefit of digital menu boards, our primary messaging has been around chicken parmesan and rice crispy add-ons at digital board restaurants. And in those units, in-restaurant sales of those items were meaningfully higher than those restaurants without digital boards. While the in-restaurant guest experience improves with the implementation of digital menu boards, we also continue to meaningfully enhance our ability to engage with guests through a better understanding of their behavior with our recently implemented customer data platform, as well as through our rewards program. We're excited to announce that Noodles Rewards just recently welcomed its five millionth member. As an example, we have now introduced nationwide a product recommendation engine on our website and app driven by machine learning. This has led to a 45% increase in the likelihood of a digital guest adding a recommended item and ultimately an approximate 1% lift in average check on our digital platforms. We have a very strong technology foundation to build from. And with the completion of digital menu boards, increased learnings from our customer data platform, and third-party work around optimizing our menu pricing and layout, I'm excited at the potential to positively impact the business, both in the short and long term. Another example of this strength can be seen with our third focus area, leveraging our recent introduction of Chicken Parmesan. As we introduced Chicken Parmesan, we were able to tailor messaging and imagery to guests that had previously added chicken to their entree. This more personalized approach led to a meaningful increase in message engagement, as well as increased trial of Chicken Parmesan for those guests when compared to guests who did not receive specific messaging. We're very pleased with the guest response thus far from Chicken Parmesan. Since launch, it has consistently been one of our top three selling dishes, has one of our highest Taste of Food scores, And we saw a 33% increase in rewards program sign-ups during the two-week rewards exclusive period prior to full launch. Encouragingly, we have seen the dish appeal primarily to young and lower income cohorts, which are the most price sensitive in today's environment. We are only two months into the launch of Chicken Parmesan, and given its broad appeal and attractive price point, we believe we continue to have significant runway for the product to drive traffic from loyal last, and new guests alike. We believe the introduction of Chicken Parmesan is an integral step in advancing our menu, which will be further transformed by our fourth focus area, a comprehensive review to enhance and optimize our current menu, supported by an industry-leading third-party culinary consulting firm. While we're still relatively early in this partnership, we're very excited at the progress and potential from their areas of focus. and look forward to integrating their work into our operating model and menu strategy over the course of 2024. One of the areas of our menu we're optimizing is our fifth focus area, our catering program. During the third quarter, catering grew 35% over prior year, and we continue to believe the opportunity is much larger. The variety inherent in our menu, which eliminates the veto vote, combined with how well our food holds for the catering occasion, provides the opportunity to substantially grow this part of our business. As we enter the holiday season, we feel well positioned to further expand the program, and I look forward to sharing in future updates our progress in catering, as well as our other sales driving initiatives. Clearly, building sales remains a top priority. That said, as we discussed on our last call, we're focused on strengthening our financial performance in its entirety. I'm pleased with the progress we made in the third quarter, leading to significant margin and even expansion, and we'll now turn it over to Mike to discuss our results and expectations in more detail.