Good afternoon, and welcome to today's Noodles & Company Fourth quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Noodles & Company's Chief Financial Officer, Carl Lukach. You may begin..

Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2020 earnings call. Here with me this afternoon is Dave Boennighausen, 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 related 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 statements in the company's annual report on Form 10-K for its 2019 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 2019 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 fourth quarter 2020 earnings release and our supplemental information.

Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer..

continued differentiation of our unique brand strengths, activating the brand through our digital and marketing channels, and accelerating unit growth, the importance of our team cannot be overstated. During the past few years and through the pandemic, we have continuously invested in building our people and culture as a competitive strength.

Our management turnover has improved from 41% to 27% in the last two years alone. While our total team member turnover has improved 31 percentage points and is now meaningfully below industry average.

We have built a dedicated, robust pipeline of future leaders with great tenure and knowledge of the Noodles brand, who will be instrumental in helping us achieve our targeted goals for 2024.

With the rollout of vaccines and the progress the country is making and reducing the impact of the virus, I am cautiously optimistic that the environment will normalize at some point this year.

While we certainly recognize that we're not completely through the pandemic, I have never been prouder of our team nor more excited of what the future will bring. With that, I'd like to turn it over to Carl to walk through our financials. .

Thank you, Dave, and good afternoon, everyone. As Dave mentioned above, we are pleased with our fourth quarter performance in light of the challenging market conditions related to a resurgence of COVID-19 volatility.

During the quarter, total revenue decreased 5.9% to $107.2 million, of which half of the decline was related to temporary COVID-related restaurant closure days for health and safety. As we begin to lapse closure-related activity, these temporary impacts are expected to abate.

Our average unit volumes, which normalized for closures, were $1.15 million during the quarter and represent a 2.6% year-over-year decline from prior year. And as Dave mentioned, we have been encouraged thus far in January and February with our trends relative to fourth quarter of 2020.

From a comparable restaurant sales perspective, we saw a 4.7% decrease system-wide during the fourth quarter, including a 4.2% decrease for company-owned restaurants and a 7.9% decrease for franchise restaurants.

In January, we saw sequential improvement and posted a 1% comparable restaurant decline relative to 2020, which represents a positive two-year stacked comp of 2.4%. We currently anticipate that our first quarter comp will be in the positive mid- to high single digits as we begin to lap the initial impact of the COVID pandemic.

On a restaurant contribution basis, our restaurant level margins were 13.6% in the fourth quarter compared to 17.2% last year. Sales deleverage represented more than half or 210 basis points of the decline.

For the remainder of the margin variance, efficiencies made to our labor model throughout the year did not fully offset the increase we saw in delivery fees, which increased 370 basis points versus prior year.

As Dave touched on, delivery remains an important channel for us, which drives brand awareness and overall sales and profitability, but we will continue to optimize the margin impact of delivery to our labor model and price optimization as we did in fourth quarter. Reviewing these margin drivers in a bit more detail.

For the fourth quarter, our cost of goods sold was 25.2%. This represents only a modest increase from last year despite a meaningful increase in our off-premise packaging costs, as we continue to drive strict management of commodity price inflation and optimize our promotional activity around discounts.

We also saw some increase in waste during the fourth quarter, given temporary closures. So as the closures days improve into the new year, we expect to show some modest improvement in cost of goods sold. For fourth quarter, labor was 32.1% of sales, a 50 basis point improvement from last year despite offset in both wage inflation and sales deleverage.

This improvement was primarily driven by the labor model efficiencies realized through our Kitchen of the Future initiatives, which was initiated in 2018 and had been targeting a long-term reduction of 10 hours of labor per restaurant per day. We are pleased with the overall results of this initiative.

And thus far, in the past 2 years, have achieved approximately 7 hours of labor savings per restaurant per day from our system, including 5 hours that were realized during 2020.

In 2020, we executed several staffing initiatives, including reducing the front of house team, optimizing our food prep assembly and dynamically modifying schedules based on real-time sales forecasts. For the quarter, this 5-hour labor reduction represented a 200 basis point improvement to our overall labor as a percentage of sales.

As we look to future labor efficiencies, we continue to research and test new kitchen equipment. This year, we plan to roll out steamers in all of our restaurants, which we began testing last year.

Our tests have performed very well, not only in the reduction of cook times and the improvement of overall labor hours, but guest feedback has also been positive on overall taste of food.

Next week, we will begin the phase national rollout of steamers into restaurants and expect to complete the rollout for our entire restaurant base by the end of the year.

Based on tests, we estimate that an additional 2 hours of labor will be reduced as a result of the steamer rollout, which will ultimately result in an additional 80 to 100 basis point benefit to our labor expense on a run rate basis upon completion.

Other operating costs for the quarter were 18.4%, a 400 basis point increase from last year, due primarily to higher delivery fees in the quarter.

As Dave mentioned, to help improve the economics on this premium access point, we implemented an additional 5% pricing premium to our menu, solely through the third-party channel, which brings the total third-party pricing premium to 15%.

While the benefit to fourth quarter was minimal, assuming delivery sales hold as a percentage of sales, we expect this action will have an ongoing 50 to 70 basis point benefit to our overall restaurant-level margin. G&A for the quarter was $11.5 million, a 4% increase over last year.

This increase is related to continued marketing investments within our digital channel, which was critical for our business in what was nearly a fully off-premise business model during the quarter.

These digital investments include a frictionless curbside pickup enhancement on our Noodles app and the ongoing investment in our loyalty program to drive guest engagement.

For 2021, we anticipate a modest increase to G&A dollars relative to 2020 as efficiencies gained to our organizational review during the COVID pandemic are offset by our investment to support our unit growth strategy as well as a more normalized incentive compensation.

Our adjusted net loss, which excludes the impact of impairments, divestitures and closure costs, was $1.6 million or $0.04 loss per diluted share compared to an adjusted net income of $3 million or $0.07 earnings per diluted share. The uncertainty of COVID continues to make it difficult to provide our typical full year 2021 guidance.

However, we are optimistic heading into the year based on our brand fundamentals and an early read on year-to-date performance. As I mentioned previously, we anticipate the first quarter same-store sales in the positive mid- to high single digits.

Additionally, we continue to anticipate 10 to 15 new restaurant openings, system-wide, in 2021, including 8 to 11 new company restaurants. We expect full year capital expenditure to be $20 million to $24 million.

Finally, I would like to note that we have completed a thorough review of our unit portfolio as it relates to expected long-term consumer trends. We are very confident that outside of a small number of exceptions, our real estate portfolio is overall well positioned, although we do anticipate roughly 5 closures during the first quarter.

These sites are primarily ones that are approaching their lease end or are heavily reliant on office or government generators that we feel will be hampered in the long term. Turning to the balance sheet. We feel very good about our current liquidity position.

At year-end, we had cash and cash equivalents of $7.8 million and a net debt balance of approximately $36 million. Our current debt levels are in line with our balance sheet last year prior to the pandemic and reflects a nearly 0 cash burn.

During 2020, our capital investment spend was approximately $12 million, which, as Dave pointed out, was primarily on new restaurant openings and our digital platform.

We anticipate that we will produce positive free cash flow during 2021 and our ability to maintain strong liquidity through the pandemic has positioned us to maintain the flexibility to meet our growth objectives in the years to come.

Before I turn this back over to Dave for final remarks, I wanted to express my gratitude to the Noodles family for welcoming me into the business this year. This is a fantastic team with tremendous passion for our guests.

I'm energized that a strategic plan Dave presented and committed to working alongside with him and the entire Noodles' team to achieve our accelerated growth objectives. With that, I'll turn it back over to Dave. .

Thanks, Carl.

As I noted in my earlier remarks, while 2020 was a challenging year throughout the industry for so many of us, personally and professionally, we do feel the resiliency of the brand and the progress made on culinary, marketing and operational initiatives have positioned Noodles & Company to be a clear winner in the post-COVID environment.

There will likely be some volatility ahead over the next few months. However, we are more confident than ever at our ability to meaningfully accelerate unit growth, both through company and franchise locations as well as execute a strategy that results in meaningful expansion in both our average unit volumes and restaurant-level margin.

Before we open the call to questions, I would like to reiterate my thanks to our teams throughout the country. I continue to be humbled at the opportunity to work with them and look forward to taking the next step of our journey together.

With that, John, could you please open the lines for Q&A?.

[Operator Instructions] The first question is coming from the line of Andrew Strelzik from BMO. .

This is actually Dan on for Andrew today. You put out that release last week talking about your growth plans in the southern and southwestern markets and some of the growth will be coming from company-operated locations, some is coming from franchisees. I know the same is true, obviously, for 2021, as you have the release today.

So I guess my question is, just how are you thinking about franchise growth as a lever for the business longer term? Where do you see that franchisee mix settling over time as you get closer to that, that ultimate 1,500 unit goal? And maybe near term, what does the franchisee demand look like right now in terms of the desire to open new locations, expand footprints, what have you?.

Yes. Sure. There's lots of impact there, Dan. But, you know, I would talk -- we are extremely excited about the franchise opportunity.

We have got the brand in a great place, people in a great place, the economics in a great place that we feel accelerating growth there are so many markets where we do not have Noodles & Company yet that we think it will just be a larger and larger part of our future.

Realistically, in the short term, we do expect that most of the growth will come from the company side as we develop that franchise pipeline. It's probably a bit too early to say what that ultimate mix will shake out at. But we do feel that you will see us move in a direction where franchise would be a larger part of the organization.

And from the question about the existing franchisees, they have done extremely well, very proud of how they've navigated the COVID pandemic. So you will also see some growth that comes from our existing franchisees as they continue to build out their ADAs. .

Got it. No, I appreciate that color. And then just maybe shifting gears a little bit. You guys have obviously laid out a pretty robust growth plan here, which is exciting. And I appreciate the commentary you gave on G&A for this year. But just kind of in thinking about that line longer term.

Is there any additional color you can add on maybe just the pacing of that in terms of supporting the business through this acceleration in growth? Maybe just some more color on what some of these specific areas you might look at in terms of adding investment that might impact that line.

And just as we're thinking about kind of like the longer-term progression of that over the next few years, how we should think about that moving forward?.

I think we feel very comfortable, Dan, with the current structure of the organization.

We filled out the final elements of the leadership team with Carl's hiring as well as John Ramsay, our Head of Franchise Sales, who came on board late last year as well as 2 real estate directors that are already having some great success in building out the company pipeline.

So again, given the volatility and what you're seeing throughout the environment.

It's probably a bit too early to say what does that ultimate cadence look like from a G&A growth perspective, but we certainly feel that the structure as it sits today is well situated to have nice leverage on that line item consistently year-over-year after the pandemic subsides. .

Got it. Appreciate the question. .

Next question is coming from the line of Josh Long from Piper Sandler. .

Great. Thanks for taking the question. Excited to hear about the unit growth in fiscal '21 and then into '22 and beyond, to a certain extent, a nice continuation in building from conversations we've been having over the prior quarters. But just curious if you could talk about the real estate pipeline, how that's set up now.

I know Carl mentioned that you've done a thorough review and feel good with where that's set up. But just as you guys transition back into growth mode, if you can talk about some of the pushes and pulls there and the team that's in place and how you're going to be able to execute that going forward. .

Yes. We have always thought that there's 3 triggers, Josh, that have to be in place for you to accelerate unit growth. First is certainly the concept and the brand itself and how well it resonates with guests, which we feel the resiliency of the brand really has been proven and evidenced through the COVID pandemic. The second is the people structure.

When we look back in the past of times where if there was a success or a failure, and when you looked at the postmortem where you could have done better, it's often on the people-front and our people metrics are some of the best in the industry right now. So we have a pipeline that is excited and ready to go from a growth perspective.

Third and most important is the economic model itself. As we said, the most recent class of restaurants, including a couple of that have opened on the franchise side are the best-performing in the history of the company. So we feel like we have all 3 of those levers really in place. The pipeline for 2021 and beyond is coming together very well.

We will be primarily infill of existing markets as well as some growth in some of the really hot on-trend developing markets that have really been shining through the pandemic, such as the Arizona market. So it will be relatively low risk, primarily infill from the company perspective.

We will have a new market that opens on the franchise side here in South Carolina in a few months. So we're excited to bring that new partner on board as well. But ultimately, we feel the pipeline is in great shape, pragmatically, given how COVID impacted some of the development time lines.

There will be a bit of a backload nature to the pipeline in 2021. But overall, availability of real estate looks good and the concept itself is just really well positioned. So we're feeling very excited about the pipeline ahead..

Great. And then thinking about some of the longer-term targets that you offered, specifically that $1.45 million AUV. Excited to hear about that. I'm curious what you can share. Imagine there's still a lot to be debuted and worked through there.

But as you think about kind of the composition of your sales now or maybe in historical period and then looking forward to that achieving and then moving past that $1.45 million target.

What does the, either the Noodles experience, the structure, the kind of the composition of that revenue base look like? And just how we should be thinking about that going forward?.

Sure. I mean, we talked about 65% of our sales year-to-date is currently coming from digital. And as a reminder, we already had a very strong off-premise, very strong digital program, even entering the pandemic.

What we are seeing and as we talked about on the call, is that for those trade areas, those markets, where people are starting to return to habits, I mean, we're not naive. So we know that nothing will necessarily normalize. There will be differences in the new environment, and it will be, we believe, heavily off-premise, heavily digital.

We feel we're really well positioned. And those restaurants that are situated in areas where you're starting to see more normality, they are performing uniquely above the balance of the company.

So we are seeing that, that digital growth looks like it's going to be meaningfully long-standing and talking about those more markets that are gaining brand awareness, and we've seen an acceleration in their performance and the typical trajectory that we had ultimately expected for those markets has really been accelerated through the pandemic.

So as things do become more normal, we expect we will benefit from the brand awareness that has been gained through the last 12 months. And those digital sales, we think is a significant part of that will be longstanding. And not to mention, we are very excited about the culinary innovation.

I think this is probably our best year of culinary innovation. We've got on tap that we've had in a long time. So between the cauliflower gnocchi and the tortelloni, we're seeing really nice results from both of those.

And so we think all the levers in terms of the menu itself and the culinary innovation, continued marketing effectiveness and progress we're making along all of those fronts.

And then just continued operational execution, which anybody that's been in the restaurant space for a long time will tell you the most correlated thing with why restaurant performs better than another. It's going to be tenured manager, and we are very excited with what we're seeing there.

So the makeup overall would be probably more digital heavy and probably a bit more in some of the new items we're introducing, but feel very well positioned. .

Next up is Andy Barish from Jefferies. .

Guys, a couple, just following up on Josh there. The CAGR to get from current AUVs to $1.45 million is about 6% annually.

We know the unit growth is going to ramp up, but is that primarily same-store sales and a little bit of higher new unit average volumes? Or how should we kind of think about that progression from today to the end of 2024?.

Yes, I think mathematically, Andy, it will be more from the comparable restaurant sales growth and AUV growth of our existing fleet. The new restaurants are performing extremely well. So they will be, we certainly believe accretive to that overall average unit volume.

But until you start reaching that 10%-type annual unit growth, which we will get to in reasonably short order. But until you get to those levels, the new restaurants just mathematically don't have as much impact as that comparable restaurant sales aspect will.

But I think the performance that we're seeing for the resiliency of 2020 and into this year and some of that performance either to Josh gives us pretty good confidence that we're positioned in a post-COVID world to have some significant acceleration on the AUV for the existing fleet. .

Okay. And for the new stores, just, I know it's early in the ramp, but the recent success. Historically, new stores opened at a fairly noticeable discount to the system average.

Do you expect that to narrow or actually flip and potentially see some classes that are at or above the system average?.

We expect that it will continue to be above the system average, like we're seeing in this most-recent class. And one of the main reasons I would say for that is the order ahead drive-through window. It has been such a hit with our guests, such an easy execution for our teams. It gives our guests just the new way to access the brand.

You combine that with the fact that I think we've gotten sharper and better with our overall real estate selection process and just the brand itself is sitting on so many better cylinders from people, operational execution, marketing perspective.

I think all the levers we need to see in place to expect that we'll have strong performance from the new restaurants are there..

Okay. And then just kind of tracking again on the longer-term margin outlook, sort of north of about 100 bps a year of restaurant-level improvement. You list a couple of items in the release, supply chain, ops and back-of-the-house equipment. Obviously, sales leverage is going to help a lot.

But is there a logic in terms of order of magnitude and that listing of some of the other margin improvement opportunities? Or how should we kind of think about those three big buckets?.

Yes. I want Carl to give a bit of texture on this one as well, but I'll start off by saying, I think we feel the progress we've made on our prime cost, when you look at our cost of goods sold as well as a lot of the efficiencies we've gained in labor, which we still think there's room to go there, really give us a lot of confidence.

And as we build those AUVs, having a very fair percentage of that go down to the bottom line. So I think the leverage that we're going to be able to achieve, we feel very confident in. But for some of the more detail, I think, Carl could probably add a little bit of texture..

Yes, the sales leverage is going to be a big driver there. When you look at the other buckets, like labor and cost of goods sold, so labor, we referred to the 200 bps of labor efficiencies that we got from the 5-hour labor reduction, that was a bit hidden in the margin.

So once sales leverage becomes a factor here, that's going to really illuminate and continue to drive the labor efficiencies. And as we mentioned, there's more to come. So we have another 2 hours that we're bringing out of the system this year, which should be around 80 to 100 additional basis pits.

So labor is going to be a material driver on that road map as well. From the cost of goods sold perspective, really, there's consolidation among vendors as we think about some of our major products within sauces, within proteins.

So this consolidation will help drive efficiency on pricing, efficiency on redundancy within our system that we think is going to offset continued costs. And this is going to, in turn, help also impact any inflationary pressures that we could see on cost of goods sold or on labor..

[Operator Instructions] Next up is Todd Brooks from CL King & Associates..

A couple of questions for you. One, and thanks for the long-term kind of framework for what you think the company is going to become. If I remember correctly, there's a fairly big spread in performance within the Noodles store base.

Could you maybe comment on -- is there a percentage of the existing base that's already north of those $1.45 million AUVs? And if so, is the margin structure already there above the 20% goal for that subset of stores?.

The answer to both of those is yes, in that there's a significant percentage of restaurants that are above the $1,450,000 and the margin structure is certainly north of 20%. One thing we've disclosed in the past is that top 10% of restaurants pre-COVID average amount $1,670,000 in average unit volume.

So we know that there is a significant opportunity from just a capacity perspective and brand acceptance perspective to reach those targets. I think one aspect, Todd, over the last 12 months that's been particularly exciting is, to your point, historically, there has been a bit of dispersion within our overall portfolio from a volume perspective.

The largest factor in what has driven a larger volume market versus one that's not has been brand awareness. And what -- the benefit we're seeing through the COVID pandemic, and I'll use Phoenix again as an example, is that is a market that was typically in a pre-COVID environment.

On the way up it is gaining acceptance, it is getting improved average unit volumes, but we're still reasonably below the company. Now it is 1 of the 2 or 3 highest volume markets for us on an average unit volume perspective.

So what this COVID pandemic has done and certainly, again, recognize that it's been painful and tough for the industry, but it has really accelerated that major -- if you'd say one of the benefits of Noodles long-term is our differentiation.

It also makes it difficult to really gain awareness in a new market, that's been proven to be able to be accelerated versus the pre-COVID world.

So I think it's exciting that not only do we have a good amount of our restaurants that are already above those targets, particularly in a more normal environment, but additionally, we're seeing the dispersion between restaurants from the brand-awareness perspective really narrow. .

That's great. Very helpful. And then just more of a block-and-tackling-type question.

When you look at the corporate unit growth for this year, do you have a sense, and I know it could change with COVID and such, but with the 5 closures in Q1, do you have a rough idea of how the new openings are going to flow cadence-wise through fiscal '21?.

Sure. We have a couple that are already under construction or pretty far along in construction that we'll open up here in Q2, expect to come more in Q3, but then the balance of the company restaurants will be in that fourth quarter of the year. .

We don't have any questions at this time. I'll turn it back to the Noodles' management. .

Thanks, John. I just want to, again, appreciate everybody's time for joining us today. Very excited to lay out these accelerated growth objectives, very proud of our team in terms of how we positioned ourselves to succeed in the post-COVID environment, and really look forward to sharing our progress in the quarters and years to come.

I'm very excited with where we are at. So thank you, again. .

This concludes today's conference call. Thank you, all, for participating. You may now disconnect..