Good afternoon and welcome to today's Noodles & Company First Quarter 2019 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 will now like to introduce Noodles & Company's Chief Financial Officer, Ken Kuick. .

Thank you, and good afternoon, everyone. Welcome to our first quarter 2019 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I would 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 our guidance about our anticipated results in 2019 and details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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 2018 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 2018 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 first quarter 2019 earnings release and our supplemental information.

And with that, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer..

Thank you, Ken. I would first like to extend our thoughts and prayers to our Executive Chairman, Paul Murphy and his family. Unfortunately, Paul will not be able to join us on today’s call due to an illness in his family.

After a temporary disruption in momentum, due to unusual winter weather, I am pleased that performance strengthened exiting the first quarter resulting the company achieving 3% company comparable restaurant sales growth for Q1.

While our traffic was modestly negative for the full quarter, we returned to positive traffic during the final few weeks of Q1 and have continued this performance thus far in Q2. As a result, we have increased our full year guidance, which Ken will outline shortly.

Our return to positive traffic growth is evidence that our strategic initiatives are resonating with consumers in redefining how they view the Noodles brand. As we have discussed in recent quarters, our initiatives have been holistic and are positioning the brand for sustained enduring growth.

From a culinary perspective, we continue to make great progress, better defining how guests can access Noodles & Company regardless of their dietary preferences.

Choice has always been a great strength of the brand and we continue to innovate and blaze and allow guests to enjoy the world’s flavors they know and love as well as discover new ones with all the benefits of healthier noodle options.

Our introduction of the zucchini noodle last year removed the major obstacles to the brand by providing a low-carb gluten-free noodle alternative for our guest. The zucchini noodle continues to reach new heights in sales bolstered by our limited time Zucchini Shrimp Scampi offering during Q1.

We continue to see a significant opportunity to build up the initial success of our better-for-you platform. And to that end, yesterday, we introduced three exciting new menu items.

The first two are limited time offerings that include a Zucchini & Asparagus with Lemon Sauce dish, as well as the Zucchetti in White Wine Garlic Sauce with Balsamic Chicken, which features a 50-50 blend of Zucchini and spaghetti noodles.

Additionally, we launched a new gluten-friendly pipette shell, which like Zucchini to be substituted to any dish providing the ability to offer a gluten-friendly pairing with our top-selling Wisconsin Mac & Cheese. We believe these new offerings continue to reinforce the variety and choice available to our guests.

Finally, regarding culinary, this week we launched nationwide two aspects of our menu presentation that will further highlight the choice inherent in our menu. First, we launched a new personalized nutrition calculator available on our website and app where users can effortlessly create dishes to meet their dietary lifestyles.

From Keto to Paleo and vegetarian to gluten-friendly and everything in between. Second, we have introduced new menu boards throughout the system which highlight our better-for-you platform, feature significant flavors and make the decision-making process quicker and easier for our guests.

Our culinary efforts have been supported by a strategic and disciplined testing process and we expect further innovation around plant based noodle alternatives to be introduced later in 2019.

As our culinary initiatives continue to provide more choice for our guest, we have also made great strides in providing increased choice around how guest use the brand from a convenience perspective. Off-premise sales continue to grow bolstered by our initiatives to remove friction from the Noodles dining experience.

Off-premise grew to 56% of sales during Q1, a 500 basis point increase over Q1 of 2018. This growth has been led by digital ordering in which inclusive of delivery grew 63% over last year and accounted for 22% of total sales.

Exclusive of delivery, digital ordering sales and quick pickup in the first quarter increased 32% from prior year and accounted for 17% of sales. Further evidence that our brand is particularly well-suited for the off-premise occasion.

While the digital performance of Noodles remains impressive, we also believe there is tremendous opportunity to make the experience even better. During the fourth quarter of 2019, we anticipate relaunching our digital platform providing significant improvements to both the ordering process, as well as our rewards program.

While we expect this initiative will further reduce friction for our guest, we also believe that will be transformative in increasing our capabilities to engage with guest from a marketing perspective and a more personalized targeted and relationship-driven manner.

Separate from our sales to our internal digital ordering platforms, we continue to see significant growth in sales from our third-party delivery partners, which accounted for 5% of sales during the first quarter compared with just 3.1% of sales during the fourth quarter of 2018.

While delivery overall is accretive to earnings, and it certainly offers great opportunity to build sales, we also recognize that it comes with additional cost. As a result, we are currently testing select pricing strategies regarding delivery to ascertain how we can mitigate the impact of delivery piece on our margin profile.

Similar to our culinary initiatives, we continue to believe there is significant runway inherent in our on-premise strategy. As – we anticipated continued increase in digital and delivery sales we also believe there is ample opportunity to expand catering which currently accounts for less than 2% of total sales.

As we discussed last quarter, we anticipate relaunching our catering program toward 2020 which we believe will add to our ability to deliver long-term sustained growth. Finally, our investments in best practices and training continue to drive improved operational execution. Our talented team members are a key strength of the brand.

In an increasingly competitive labor market, it is imperative that we provide the total training to attract and retain talented teams while also identifying opportunities to improve efficiency in our operating model and we are very pleased with the progress we’ve made to-date.

During the first quarter, we launched a new back of the house labor system and we are encouraged by the early impact it has had on our operational efficiency and our employee engagement.

Additionally, we remain focused on executing a new initiative to revisit our back of the house equivalent package and flow to ensure continuous improvement in our efficiencies in 2020 and beyond.

Our positive traffic growth during the close of Q1 and thus far in Q2 reinforces my confidence that Noodles’ opportunity to sustain top-tier performance in the restaurant industry.

We have the right team in place, the right strategy and the inherent brand strengths that will allow us to continue to grow both top and bottom-line results in a consistent reliable fashion. I would now like to turn it over to Ken to discuss our Q1 results, as well as our guidance for the full year 2019. .

we expect total revenue between $466 million and $474 million up from prior guidance of $462 million to $470 million. We expect comparable restaurant sales of between 3% and 5%, up from the prior 2% to 4% expectation. And guidance for the full year includes a two year growth rate of 6.4% to 8.4%.

We anticipate restaurant level margin of 15.5% to 16.5%, a 50 to 150 basis point increase over prior year. We now expect adjusted EBITDA of $37 million to $41 million, up from our prior expectation of $36 million to $40 million. This implies adjusted EBITDA growth of between 11% and 23% over 2018.

And finally, we continue to expect five to nine new restaurant openings system-wide in 2019 including four to six new company restaurants. We expect these restaurant openings to be split roughly equally between the third and fourth quarters and to be offset by approximately five closures of restaurants at lease end.

We continue to work diligently and thoughtfully to return to 5% new unit growth by 2021 and remain excited about the long-term growth opportunity of the Noodles brand.

And in closing, our recent performance reinforces the tremendous upside potential of the Noodles & Company operating model and we look forward to sharing how our top and bottom-line initiatives help drive sustainable, consistent and long-term growth for the brand. And with that, I’d like to turn it back over to Dave for final remarks. .

Thanks, Ken. Noodles & Company continues to execute a strategy that will result in an enduring brand with long-term sustained growth. Our fourth consecutive quarter of positive comparable sales in Q1 despite significant weather disruption, coupled with recent momentum are evidence that our execution has elevated.

We are particularly excited about the initiatives we launched yesterday as well as those that will be implemented later in 2019 and beyond. Over the past two years, the company has made tremendous progress in stabilizing performance, removing obstacles and then building capabilities for future growth.

We have now entered a phase of capitalizing on those capabilities to drive significant top and bottom-line growth through disciplined, effective execution of strategic initiatives. I know we are in the early innings of our strategy and I am excited for 2019 and for the years to come. Kevin go ahead and please open the lines for Q&A. .

[Operator Instructions] Our first question comes from Jake Bartlett with SunTrust. .

Great. Thanks for taking the question. Dave. .

Hey, Jake..

Hi, how are you?.

Good..

Good.

Just to kind of give us a better idea of the underlying same-store sales trend of the business, could you break out what same-store sales were maybe by month in the first quarter? Maybe give us a greater sense as to what you are running quarter-to-date in the second quarter?.

Yes, the challenge with that Jake is, actually because of the Easter shift and some of the holidays.

But from a normalized basis where we were at, which was modestly positive through the second period and then, as we went into the back – the last four five weeks of Q1, that’s where you saw us move to positive traffic and as we disclose some of the menu mix and price, and you can see that it was a pretty solid number that we saw at the end of Q1 and then carried on into Q2.

.

Okay. And then, as I think there is some question about what happens when you lap the launch of Zoodles last year around now.

What did you find in test? I know you tested for a long time that the changes you made to the menu boards, the new menu items, how confident are you that you can stay positive even in the couple of months that you are lapping the Zoodles launch?.

I think, we are extremely confident in the momentum of the business and where the trajectory is headed. Happy with what we are seeing as we lap zucchini, we actually has lapped zucchini this past Wednesday, so about eight days ago, it’s extremely early. We are happy with the results we have seen in that short timeframe.

As we noted, we expect positive price mix and traffic growth in Q2. But we do respect that the comparisons do get more challenging and it does remain pretty early in Q2. But we are very pleased with the trajectory we are seeing in the initial stages of that lap of zucchini. .

Okay. And then, just on the COGS, I would have thought, maybe that you would have some of the benefits or some of the supply chain changes that you have put in place. You also had a decent amount of price. And so, I guess I was surprised you didn’t get a little leverage on the COGS.

Could you share what your inflation was? Your commodity inflation may, what you are expecting commodity inflation to be for the year?.

I think, for the full year of 2019, we still expect that inflation to be pretty modest, roughly flat to just slightly positive. We expect the COGS line is one that will improve over the year as we implement a bit more price during the balance of 2019 versus what we did during Q1.

As for Q1 itself, we did had a little bit of disruption from the closures when you close restaurants, there is certainly significantly more waste. So we didn’t plaque at the amount of leverage that we would expect on the COGS line in Q1, but we are pretty confident that a rebound in our favor later on in the year. .

Great.

And then, lastly, on the five stores you expect to close later in the year, one is, are those company stores? And then, second, is that something we should expect kind of on an ongoing basis or is this still remnant of the store closure plan that you’ve did couple of years ago and just rather than get out of the leases you let them run out, but how much more of that do we have to go?.

Yes, Jake, we think the normal runrate is for any concept our size is probably more typical with one to two restaurants every three to six months.

When we go through of the round of closures that we had two years ago, there were certain restaurants that the lease was going to be expiring in a couple years and we were making rents and we felt that the right decision for the business was to keep those restaurants open.

Those are the five restaurants that we are looking at closing at the balance this year and that was pretty much we had until we get to a more normal runrate. We haven’t really closed restaurants thus far in 2019. So it’s more of those that are in Q3 and Q4 and they are company locations..

Got it. Okay. I appreciate it. Thank you. .

Our next question comes from Andy Barish with Jefferies. .

Good morning, Andy..

Yes, sorry guys. Just on the mix to focus on kind of better-for-you, I guess, how much if you can categorize of the menu, do you think sort of is better-for-you today and what in your consumer research is the customer kind of telling you they want.

What sort of the gap between what you are providing today and maybe, the demand that’s out there, if that’s kind of quantifiable?.

Yes, no, I mean, it’s a great question, Andy again if I started in 2004 which was the height of the [Indiscernible] Clearly, the biggest thing that guests were asking for us as you go back a couple of years ago and over that timeframe, has there something that’s low-carb? And that was what made the zucchini so elegant and such a great solution for us.

While we have not disclosed mix, incorporating the success we’ve had in zucchini as well as what we have had – what we have with our current salad line-up, we are not at the mix level yet of a Mac & Cheese which we have talked about, it’s about 20% of our guests. But we certainly think that there is a potential.

Where we do still see opportunity in terms of what the guests are telling us they like – they do like the plant-based alternatives, we are testing items along the lines of cauliflower.

One reason we launched the Zucchetti, which is a half spaghetti, half zucchini blend is it kind of allows that person that doesn’t necessarily want to go all in, but does want to reduce their overall intake of carb. So, what I would say is that the zucchini really addressed the major elephant in the room in terms of low-carb.

What I guess, you’ll continue to see us innovator on that plant-based side of the menu. .

Gotcha. And then, just on sort of the update with the App and the rewards program.

I mean, what areas you are kind of focusing on as we look towards the end of the year to improve the customer experience?.

We are incredibly excited about this initiative. So, we are – overall, we have a pretty solid program, Andy, in terms of the rewards program, the App, the online experience. There is nothing that’s fairly wrong with it.

That said, we believe this is a brand given our unique capabilities to meet that off-premise occasion and our unique capabilities with the younger generation, a more technology savvy generation where we skew from a guest perspective. We believe we should have a best-in-class type guest engagement platform on par with a company like a Starbucks.

So, that’s why we are looking to launch hopefully at the early phases of Q4 and what we will have to do with that, and particularly as you get to know the guest from a 360 degree view, certainly, the experience to an online user experience should be significantly better.

But at the same time, we want to have the data and be able to be much more targeted than we are today, because our program right now again, it’s solid, but it doesn’t give us the flexibility that we think really is warranted given the potential of this brand. .

Okay.

And then, just finally for me on, all the off-premise growth sequentially came from the two points of improvement in delivery, also, from the 4Q, is that – do you think that’s a factor of just mostly seasonality and the tough weather out there? And how much more room do you there is to go just in terms of the quick pick up and improving that customer experience so you can get kind of both those channels working?.

Yes, I mean, as you look at the math, that’s what we disclosed in the call, 56% off-premise, just some quick math, 22% is the bit of a quick pick up or it’s delivery and then another 2% roughly in catering, which tells you that there is still over 30% of our guest that are coming into the restaurants waiting in line going through the ordering process and then waiting again four to five minutes.

That’s just not ideal. And so, we have seen significant movement in progress. We do think the new App in making it easier for people to order online. We will just continue to make that grow. So, we see, while certainly the one for one, we see delivery went up the same amount is the overall off-premise.

I feel that there is tremendous opportunity just to optimize the experience for that guest that’s currently waiting in line which is a third of our guest. .

Thank you..

[Operator Instructions] Our next question comes from Andrew Strelzik with BMO Capital Markets. .

Hey, thanks for taking the question.

My first one, just was curious if there was an update to some of the work that’s being done by the third-party on kind of the back of the house, the kitchen and the equipment? What have you learned so far? And when should we start to see some of the changes come out of that, come to fruition?.

Yes, so, that’s great question, Andrew. So, thus far, I mean, thorough enough is in, as a reminder for those who may not have followed, we’ve got a party that’s helping us really look at the back of the house and how you can make it more efficient.

We have always perceived there being opportunities in terms of making or tailing a little bit more efficient, as well as when you look at how we use the piece of equipment of the grill and the oven.

The work that’s been done thus far has identified that those are indeed the biggest areas of opportunity, also identified a couple of other smaller opportunities. We are in the processing right now of sourcing that equipment, getting into a mock version, really putting it through pressure tests.

Our intent is to get some of those changes into existing restaurants at some point in Q4. So, again, we don’t expect much impacts in 2019 except for maybe some small wins. But then 2020 and beyond, rolling out those efficiencies. It is way too early to peg what the labor expectation is.

But we certainly think that there is speed and efficiency opportunities from what we are seeing thus far..

Great and then, in terms of the CapEx guidance and pushing out some of the initiatives, what exactly is being delayed and why was that decision made?.

Actually, it’s what we just talked about. So, we – as we see some really nice stuff and potential on that back of the house, there is some things we want to do in the front of the house concerning, making it easier for it to go, making that experience a little bit better.

We do have some outdated restaurants that we know need to be brightened up and brought up to the brand standard.

But as we see some of this potential on the operational initiatives, or the operational efficiency side, we think it’s important to be marrying that back of the house with some of the front of the house activities, which is certainly includes to go.

So, since there has been such a intermingling, if you will, of service and production, in fast casual, as online and quick pickup continues to increase, we felt the most – it’s the right thing to do is to marry those processes which really just shifted the timing a bit more to queue into 2020. .

Okay. And then, my last question, on the restaurant level margin guidance, there was no change on the high-end despite the raise on comps on both ends. So, I was just wondering what kind of was holding back to high-end there. It started out as a relatively wide range to begin with, but not maybe high with the comps.

I am just curious if anything from a cost perspective has changed?.

Yes, sure, I mean, it goes to delivery. So, ultimately, as Ken mentioned, we feel delivery is accretive. It’s great for earnings. Certainly, you see the top-line momentum with it. But as everybody knows with the delivery fees, there does come some flow through pressures. As we mentioned, we are testing some different strategies surrounding price.

We did not incorporate those into our guidance just because it is a bit early. And we just really just got that test going in the last four to five weeks. So, we think it’s a bit – a bit too early for us to really incorporate that potential into our guidance.

But that’s what you are seeing is that, from a margin perspective, the flow through in delivery isn’t quite as high as you see in other areas. .

Great. Thank you very much..

Our next question comes from Greg Badishkanian with Citi..

Hi guys. It is actually Spencer Hanus on for Greg. So my question was just in terms of throughput and kind of menu complexity. You guys, you are bringing on some new products. I mean, you mentioned three products, you guys just rolled out and then more in the back half of the year.

How is that going to impact the overall back of the house complexity? And then, any update on throughput and opportunities there?.

Sure. I think our operations teams have done an excellent job in terms of as we refocus the brand a couple of years ago to be much more laser-focused on operations. They have absolutely held to our word that as we introduce new things, we are also going to be taking away things. So, we’ve gotten the research.

The turf studies necessary, Spencer, that as we’ve introduced these items, there is also a couple that have gone away. And we think that’s the appropriate thing to do to ensure that you don’t increase the complexity overall at the operational level.

Throughput itself, and we have not seen any negative impact of throughput over the course of the last several months in terms of – as changes have rolled out. That’s one reason we do a pretty disciplined late the test. Most items that we have from a culinary perspective have been in test for six months to nine months at least before they go national.

But I promise you, we are very mindful of ensuring that we don’t repeat the sense of the past if you will in terms of expanding the menu too much. .

Okay, great. Thank you guys. .

Yes, and the only other thing I would add just as a follow-up to Spencer’s question is, as we look at that back of the house kitchen and so, this is absolutely one of the aspects we are looking at is how do you increase the flexibility to continue to support further renovation without negatively impacting operations..

And I am not showing any further questions at this time. I’d like to turn the call back over to the management team. .

Well, thank you all for your time this afternoon. As we mentioned, we are extremely excited with where the brand is going, the trajectory that we have seen over the past several weeks. I am excited with the initiatives that we’ve rolled out yesterday and what we have for the balance of 2019 and beyond and again, really appreciate you joining the call.

.

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect and have a wonderful day..