Good afternoon and welcome to today's Noodles & Company Fourth 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 introduce Noodles & Company's Chief Financial Officer, Ken Kuick.

Thank you and good afternoon, everyone. Welcome to our fourth quarter 2019 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 our guidance about our anticipated results in 2020 and 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 2018 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that has 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 fourth quarter 2019 earnings release and our supplemental information. Now, I’d like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Ken, and good afternoon, everyone. 2019 was a strong year for Noodles & Company as we built off the success on 2018, improved the overall sustainability and effectiveness of our strategy while positioning the brand to win in today's competitive restaurant environment. With seven consecutive quarters of positive comparable sales growth, significant margin expansion, and trends accelerating thus far in 2020, we have greater confidence than ever in the potential of Noodles & Company to become one of the premier growth concepts in the fast casual space. This includes a disciplined return to strong unit expansion, which I will discuss later, but I would like to start with some perspective on the overall brand strategy and our recent results. As we began to activate our new Noodles Rewards program and enhancements to our app and digital order experience, we saw tangible improvements to our sales results during the last several weeks of 2019, and we ultimately completed the year with comparable sales growth of 2.8% system-wide and two-year growth of 6.5%. Importantly, trends have strengthened even more in 2020 and reflect positive traffic growth, a significant focus of ours that we are very pleased about. Through yesterday, February 25, we have achieved company comparable sales growth of 5.8% year-to-date, meaningfully outperforming the industry thus far in 2020. As momentum has increased to the top line, we also continue to see strong expansion in the bottom line. During the fourth quarter, restaurant level contribution margin increased 200 basis points versus prior year to 17.2%, while adjusted EBITDA increased over 30% to $10.9 million. This allowed us to complete 2019 with a 15.2% increase in adjusted EBITDA and an increase in adjusted net income to $8.1 million versus $1 million during the year prior. We believe that our results for the…

Thank you, Dave. Our results in 2019 reflect the effectiveness of our strategy as both average unit volumes and margin continue to expand, resulting in meaningful growth in the company's profitability. In 2019, total revenue increased 1% to $462.4 million from $457.8 million in 2018, led by system-wide comparable sales growth of 2.8%. Moreover, restaurant level margins expanded 110 basis points to 16.1%. With our continued comparable sales growth and robust margin expansion, adjusted EBITDA increased 15.2% to $38.4 million. As Dave noted earlier, our economic model strengthened throughout the year and during the fourth quarter we achieved an expansion in restaurant level margins of 200 basis points and an increase in adjusted EBITDA of over 30%. Net income in 2019 was $1.6 million or $0.04 per diluted share compared to a net loss of $8.4 million or $0.20 per diluted share in 2018. Adjusted net income for 2019 was $8.1 million or $0.18 per diluted share compared to adjusted net income of $1 million or $0.02 per diluted share in 2018. Adjustments to net income included $4.3 million of non-cash charges in the fourth quarter related to our strategic refranchising activity and non-cash charges associated with the favorable amendment to our credit facility. 2019’s comparable sales of 2.8% were comprised of 2.9% growth at company-owned restaurants and a 2.5% increase at franchise locations. Company-owned comparable sales growth reflected 3.6% growth in average check, offset by a modest 0.7% decline in traffic. As Dave noted, comparable sales growth has accelerated thus far in 2020 and reflects positive traffic growth resulting in year-to-date comparable sales of 5.7% system-wide, 5.8% at company locations and 5% at franchise locations. Our restaurant margin expansion of 110 basis points during 2019 was driven primarily by leverage on higher average unit volume, supply chain initiatives and…

Thanks, Ken. In closing, we’d just like to thank all of our employees for the results being driven by their commitment and dedication to delivering an outstanding guest experience at our restaurants. Our continued success in 2019 and the strength early in 2020 is a direct result of all of their hard work and we look forward to building on the success in 2020 and beyond, as Noodles reaches its tremendous growth potential. Victor, please open the lines for Q&A.

Thank you. [Operator Instructions]. And our first question will come from the line of Jake Bartlett from SunTrust. You may begin.

Great. Thanks for taking the questions. My first questions were about the same-store sales and understanding the cadence in the fourth quarter and then also on quarter-to-date. You did – it sounds like your sales momentum is strong currently, but it was below the low end of the range for 2019. So I just wanted to understand what happened as you kind of – as you turned on to marketing again after the rewards program, whether that was later than you expected, any other kind of factors that might have caused the slight miss in the fourth quarter?

Sure. Thanks, Jake. It’s a great question. And so with same-store sales, during the last earnings call, we had talked about how they were positive leading up to that earnings call thus far in Q4. We anticipated that they would accelerate during the back half of the year. They absolutely did so and particularly strengthen kind of week-in, week-out and got stronger and stronger as the quarter went on. Then the same thing has happened thus far in 2020. And one thing that gets us excited about the numbers that we have seen thus far in 2020 is that we just do continuously see momentum kind of growing on a very regular basis. As it relates to where we fell on guidance, just a touch shy of where we had expected to land in the quarter. Much of that just took a little bit longer for that momentum to really get triggered. But once it did, we’ve been very excited.

Great. And just understanding the quarter-to-date, I believe you were running fairly strong last January and then things like the polar vortex and all the crazy weather you had in Denver hit. But just to help us understand what the year ago comparisons for the kind of the quarter-to-date numbers and if you can kind of frame it correctly?

Yes, absolutely. When you look at the overall comparisons for 2020, certainly we are receiving some weather benefit as it relates to the first couple of months of this year. But I think what’s exciting is that even when we normalize for that weather benefit, we are still seeing quarter-to-date performance at the top end of our guidance for the full year. So weather has been really just a small factor relative to some of the other factors which a lot of that is around the digital engagement.

Got it. And then last questions are about the restaurant margin guidance. And it looks like there’s about 90 basis points of expansion that you’re expecting. Can you help us kind of understand what’s baked into that? One question would be around the delivery. How much of the kind of 1.6% of delivery pressure from the fee there can you reclaim with the new pricing structure? So that’s one part of it. And then the other is how much of the kitchen equipment changes are baked in? Is it just the process, I believe around 50 basis points from the process change that’s baked in or do you have an assumption of rolling out, say, the steamers earlier or anything else that we should think about?

Yes, I’ll touch on the labor side and then if Ken can give some texture on delivery and the balance of our margin expectations. With labor we did institute process changes in late January that we expect will save about one to one and a half hours of labor per restaurant per day, which is a meaningful number that allows us to combat a significant amount of labor inflation. There’s a little bit incorporated into our guidance in terms of benefit that we would expect from further rollout. But as we said in the prepared remarks, it’s going to be pretty disciplined. So whether we’re looking at the capital aspect or the labor savings aspect, we want to ensure that we’re setting the right program in place for us to have a strong ROI and really give us the flexibility for future innovation. In terms of delivery, maybe Ken can give some of those reference points.

Yes. Hi, Jake. It’s Ken. Good to hear from you and great question. We did see a substantial increase in our off-premise occasion during 2019 and that was largely due to delivery. We’d expect delivery to stabilize somewhat near where it is right now. In terms of the margin side going forward, we’ve talked about really four main drivers. One is negotiating the fees with the third party providers. Two is implementing premium delivery pricing, which we did in the fourth quarter. That’s a 10% pricing premium. And then third and I think probably the most impactful is beginning to move guests from third party delivery platforms to direct delivery. That brings out substantially lower fee for us. And then in the longer term, as digital continues to grow, we’ll look at modifying our labor model particularly in front of the house.

Great. Thanks very much.

Thank you. And our next question will come from the line of Andrew Strelzik from BMO Capital Markets. You may begin.

Hi, guys. This is actually Dan on for Andrew. Thanks for taking the questions. My first question is just on the pace of unit openings. And I guess how should we think about the cadence in 2020? Will it be relatively balanced throughout the year or weighted more heavily towards any particular quarter?

Hi, Dan. It’s Ken. Thanks for the question. We actually opened our first restaurant today, so we’re super excited about that. For 2019, the openings will be mostly backend loaded – I’m sorry, 2020 will be mostly backend loaded.

Yes, we’re really happy with where the pipeline is setting up for both 2020 as well as 2021 and beyond, but at the same time do recognize that it’s going to be much more loaded towards the fourth quarter, particularly the first part of the fourth quarter and maybe the back half of the third quarter.

Great. That’s helpful. And then just one follow up. You’ve obviously had a lot of success leaning into the healthy platform with Zoodles and Caulifloodles over the last couple of years. It sounds like innovation within that platform will remain a focus moving forward. I guess I’m just wondering if you’re actively testing additional products right now. And I guess more broadly how large a part of the business that can grow from a product perspective over time without compromising operations or throughput? And then just piggybacking off that, is the 20% to 25% of total sales mix level still kind of the right level to think about in terms of where the healthy side of the menu can grow to over time? Just given how robust the growth has been to this point, is there an opportunity to grow even beyond that?

Yes, so we think there’s significant runway in the better fee platform, the different noodle alternatives, our salad offerings. We do still believe that it has the potential to reach the mix that you mentioned, the 20%-25% of guests, which currently Mac & Cheese is our largest selling platform. Encouragingly, the mix continues to grow. And while Caulifloodles, when we introduced those, that’s intended to meet a different objective. It’s an accessible noodle primarily for existing guests wanting to get more veggies in their diet. It was a great complement to the zucchini noodle. We are in the process of testing additional introductions and innovation around plant-based noodle alternatives. I will say that we’re a little bit early on, so we’ll talk more during upcoming earnings calls. I will answer the question on terms of the impact on operations. We are maniacal about ensuring that as we increase innovation through the system that at the same time we take away things that improve processes to ensure that we don’t fall into actually think there was one of the challenges that we had a handful of years ago is when the menu did get too complex. So it is something with which we are very, very laser focused on making sure that we balance innovation with operational execution.

That’s really helpful. Thanks for taking the questions, guys.

Thank you. [Operator Instructions]. Our next question will come from the line of Andy Barish from Jefferies. You may begin.

Hi. Just a quick housekeeping on the fourth quarter’s same-store sales components?

Yes. Hi, Andy. It’s Ken. Fourth quarter comp sales were 1.5% system-wide. Company-owned sales growth reflected negative traffic of 2.3% offset by 3.8% of price and mix shift. And then as mentioned earlier in the prepared remarks, traffic improved over the course of the fourth quarter and turned positive thus far in 2020.

And are you still anticipating about 3 points a price for '20?

Yes, we’re running a touch higher than that right now, Andy, but we would expect for the full year that we’ll have about 3% of price and then expect modestly positive traffic as well as a little bit of benefit from mix shift as well.

And kind of closing that gap with Stacey coming onboard in the marketing role between the off-premise and the digital engagement, what are a couple of signposts maybe we can look for as we move through the year to kind of convert some of those guests in the digital flywheel, if you will?

Yes, absolutely. I think 2020, Andy, will be a year really around picking up some of the low-hanging fruit in terms of better engagement with our guests, but at the same time just growing the overall program in terms of membership and getting the data set up to where we can really have the tools to become very much more personalized than we are today. You’ll see us as we get more refined with the program talk a bit more around what the membership levels are looking like as well as conversion, but still a bit early there. I think one of the signposts to look for though is just that overall digital ordering. I think our brand and we believe firmly that we’re better positioned than most brands in terms of capturing this enormous growth opportunity. As we said in the earnings call where almost 30% of our sales thus far this year are being ordered digitally, 60% off-premise. This is a brand that resonates for the digital experience, whether it be how we do with younger generation, how the food travels, et cetera. So I’d say in the short term continue to look at the progress around digital growth in total and then we’ll be providing more texture surrounding the program as a whole as we go through the year.

And can you just help us dimensionalize sort of I guess the near-term, medium-term opportunity on labor? How many hours kind of before the equipment changes? And was the January process changes, was that related to prep changes in the kitchens?

Yes, that is correct. It’s actually moving a little bit more prep throughout the day instead of earlier in the day. Those process changes were tested pretty rigorously and we’re happy with what we’re seeing thus far. It’s making the lives easier for the team members as well as giving us again about an hour to an hour and a half of savings. I said in the past that we expect ultimately – the goal would be to get 10 hours of labor out of the system per restaurant per day. That is a long-term goal. We’re very happy with what we’re seeing with the steamers which is really meant to make our sauté noodle line more efficient, hotter temperature food, better quality of food, better order accuracy. That one we expect to rollout more over the course of this year. I don’t want to tag a labor number on it yet, because we haven’t tested it in isolation versus – with the other aspect of our strategy which is more around an oven and how we approach our proteins. That’s the one area that we need to spend a bit more time refining, ensuring we have the absolute right package. So more to come. There’s not a lot that’s baked into the guidance except for the one to one and a half hours that we already are capturing today.

Thank you.

[Operator Instructions]. We have a follow up from Jake Bartlett from SunTrust. Your may begin.

Great. Thanks for the follow ups. One just kind of modeling bookkeeping question. Did you close three company-owned stores in the fourth quarter?

Hold, while Ken’s making sure we got the absolute right number. As you look forward, we’re firmly passed that period of closures that we had in 2017 and '18. As a reminder, a lot of the restaurants that have been closing since have been those that were at the end of their lease life and we just didn’t feel it was the right trade area to continue. On an ongoing basis, closures are going to be much more normalized. So you can expect really about one every six months, somewhere in that ballpark as leases end. You are correct that three did close during the fourth quarter of 2019.

Okay. But so we had I think five closures in '19 in the company. And that’s really the end of the kind of the closure program?

Yes, it will be more just normal close of business just as leases end and we want to relocate our restaurant or the trader has moved.

Got it. And then just another question on the margin, the pieces of the drivers to that. You mentioned around 3% menu pricing. What do you expect for commodity inflation in 2020?

Yes, Jake, this is Ken. Great question. In 2019, we saw inflation of around 1% and we would expect that about the same in 2020, so right at 1%. As a reminder, we contract about 75% of our spend and we’re in good shape for 2020 in that regard. And an advantage that we continue to have is the variety in our menu and in our ingredients and that helps limited our exposure to particular commodity fluctuations.

Yes, I think one thing we’ve been proud of with the success in recent quarters, Jake, is we’ve been able to significantly improve our cost to goods sold but the same time investing significantly in our menu. It started a couple of years ago as we completely re-launched and reengineered our Mac & Cheese sauce, included was zucchini which is a lower margin item, includes the cauliflower. We’ve been able to invest quite a bit in the guest experience at the same time that we’ve been able to identify savings in our processes and how we contract.

Got it. And then last one and you mentioned in the script an evolution of the pick-up experience in 2020. Is this potentially a sales driver? Can you go into a little more detail on what that is?

Yes, with 60% of our food off-premise and 30% right now coming through our pick-up units, they’re functional, they’re effective in many ways but we don’t believe that they’re personalized nor are they necessarily very obvious and they don’t necessarily remove as much friction from the experiences we would like. So what we’re looking at is in most of our restaurants we have three cash registers. As business has moved more digital, we really don’t need that third cash register anymore. So really we’ll be rolling out in many of our restaurants removing that third register and instead incorporating a much more powerful, a bit more personalized pick-up experience that’s also easier for the guests. So when all said and done, it’s really about removing as much friction as possible from that experience.

Great. I appreciate it.

Thank you. And I’m not showing any other questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.