Good afternoon and welcome to today’s Noodles & Company’s Second Quarter 2022 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 would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach.

Thank you and good afternoon, everyone. Welcome to our second quarter 2022 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 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 2020 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 risk and uncertainties related to the company’s forward-looking statements. I’ll refer you to the documents and 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. Each documents contain and identify important factors that could cause actual result 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 on our second quarter 2022 earnings release and our supplemental information. Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl. And good afternoon, everyone. I'd 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 what's highlighted by record average unit volumes of $1.42 million. That 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 on-going strategy, I would like to remind you of our accelerated growth objectives, which include first, $1.5 million AUV 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 unifying target is a million and a half. The company has made clear progress over the last few years in growing [Indiscernible] 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 inherits in our flavorful menu, our digital strengths, and how will our food travels positions the brand for continued growth in our average unit volumes. 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…

Thank you, Dave. And good afternoon, everyone. I'm pleased to share our second quarter results, including our record average unit volume of 1.42 million, which reflects continued recapturing of momentum. In terms of the financial highlights, total revenue for the second quarter increased 4.3% to $131.1 million compared to last year. Comparable restaurant sales increased 5.1% system wide, comprised of a 5.1% increase a company owned restaurants, and a 5.3% increase at Franchise restaurants. Our second quarter revenue was negatively impacted from the January 2022 sale of our California locations, which we estimate was approximately $4.1 million and includes loss revenue net of royalty payments received. As a reminder, that transaction will be EBITDA neutral for 2022 and accretive in future years. Underlying our revenue growth, our average unit volumes were 1.42 million for the quarter, a 5.3% increase from last year and an 18.3% increase versus pre-COVID levels in 2019. As Dave mentioned, we experienced some softening in sales trends during the latter part of the quarter, particularly in June. However, it's worth noting that in June, our average unit volumes were 1.39 million, which represents 15% average unit volume growth from pre-COVID levels in 2019. We are encouraged that AUB growth quickly stabilized at these levels, and have remained at approximately 15% thus far in July. For the second quarter, restaurant contribution margin was 15.5%, which was a significant improvement from the first quarter levels of 9.7%. Restaurant margin did decrease 340 basis points compared to our Q2 of 2021, with the vast majority of that decrease found in our cost of goods sold, which improved 20 basis points relative to the first quarter but at 27.8% with nearly 300 basis points above both the second quarter of 2021 and our historical norm. The cost of chicken remains…

Thanks Carl. As we consider the current environment, we're very confident the brand's positioning, the uniqueness of our menu, our strong value proposition and our digital strengths, all executed by a team of dedicated passionate team members allows us the opportunity to directly engage with guests and be a beneficiary of potential trade down within the industry. Additionally, we remain confident in our accelerated growth objectives as our 2023 unit pipeline strengthens AUV quickly approach the million and a half target and we see a clear pathway and progress to a 20% restaurant level margin by 2024. With that, please open the lines for Q&A.

[Operator Instructions] Our first question comes from Nicole Miller Regan with Piper Sandler. Your line is open.

Good evening and thank you. Can you talk a little bit about the cohort you're trying to speak to with the seven entrees at $7? Wondering specifically, how did you land on $7. And then in terms of maybe income profiles, know how much of your sales come from a lower end household income versus the higher end household income?

Sure, we'll start with the actual price point of $7. What's exciting is that that actually is already Nicole, the natural starting price point for so many of our dishes. So we're able to lean into what already is a great value proposition. To answer your question, in terms of the percentage of our guests that are low income is pretty small. And as we look at the trends that we saw in the business, throughout Q2, one thing that's important to know is that a lot of the traffic trends actually didn't change at all. Our core guests actually remained very strong, no real change in their purchase behavior channel day part, we actually saw their frequency improved throughout the quarter, what you saw is that pull back from that low income consumer similarly across all channels. Now we see that through our rewards program, other third party data we have, that that's the one that we've potentially lost. Now, interestingly, and I think encouragingly we really just started messaging more explicitly on our digital assets and our menu, that $7 entry price point, just about a week ago, and we're already seeing some nice momentum actually, from that particular session, the low income consumer, and we're not seeing any trade down at all, either. So we feel that that's able to address what's not the largest part of our guests we've done, we definitely tend to skew towards higher income. But for that low income guest, just reminding them of the great value proposition that we have a new as a company.

Nicole to add on to what Dave said, about 52% of our guests have average household income over 75,000.

Got you. Okay. And that messaging piece was helpful, too, because I was curious about exactly that. So then can you just quickly touch on a 5% company comp and I think you ran just under 10% price in the quarter. So there's a lot of noise in terms of transaction with both mixing and traffic in there. Can you just validate those numbers if I was spot on? Or help us out? And let me fix it helped me fix that or? And then speak to the the transaction part?

Yes, that is that is correct. So we're just north of 10% on price overall since your sales and just north of 5%. So you did see traffic lead moderate traffic was modestly negative was tracking on the northern side, the higher side of our expected range, closer to flat to slightly positive traffic prior to when we saw that flow down there kind of occurred [Indiscernible] but then quickly stabilized from that point forward.

Thank you so much.

Our next question comes from Andrew Barish with Jefferies. Your line is open.

Hey, guys, it looks like you saw some normalization in in the digital mix. Did that surprise you? Or is that just kind of a normal resumption of guests behavior back into the restaurants and how much do you think that impacted just that that channel impacted the overall, mix numbers as a component of same store sales?

Yes, as we look at the mix over the course of the quarter Andy, it's actually been remarkably consistent. I think there was a little bit of a decline in delivery that we saw at a certain point, but then that quickly rebounded. So it's been actually remarkably consistent. As a reminder, we have always been one of the leaders when it comes to digital sales. And we see that as continuing to be a very sticky channel for us. So still north of 50%, even as we said, thus far, three or four weeks into Q3, still have very similar figures. We also think we're just getting started in terms of as we get more insight into our guest, and continue to be more personalized with our communication, which we think is a great asset as we've had more into a more uncertain environment, being able to hold on to that digital sales, while at the same time dine in is now starting to increase. So you're seeing dine in come back to about 20% of sales during the second quarter still well below where we were pre-COVID, which was closer to 35% to 40%. There's still opportunity for some tailwind as dining returns. But at the same time, as digital remains very sticky it still has some growth opportunity.

Okay, and then on the development pipeline, those, kind of 10 or so units that you took out of this year, how do we think about that next year? I mean, is that make the development pipeline a little more even? Did those units stick around, I imagine. And, then you add on top of that, just give us a little more color on the, the cadence of openings next year, we're, obviously, significantly ramp.

Certainly more even cadence than what we saw here in 2022. And as I said earlier, the 2023 pipeline is stronger than I've ever seen it, is we have actually three times as many sites in the various stages of development. And when I consider there's restaurants that were already leased, and signed, sites that are in lease negotiation, or sites with our LOI out. We are significantly stronger today than where we were at any really anytime I've seen in the last several years. We're also reminded that back in 18 months ago, Andy is when we set out to really accelerate growth, that unit at Noodles & Company. And that is what we are doing in 2022. We will open over 20 restaurants. That's the most that we've opened in several years. Back in two months ago, we didn't foresee that the development environment would have these unusual delays, which is certainly what's caused some of that push into 2023, which also gives us we believe upside to that potential 10% unit growth target.

Okay, thanks for the update guys.

Our next question comes from Todd Brooks with The Benchmark Company. Your line is open.

Hey, thank you. Good afternoon, guys. A couple of questions. One with the relief that you've seen recently in chicken prices and the benefit that you're expecting from the new cuts, what's the status of the chicken surcharge and how long you think that's going to stick around on the menu? Is that based on the response to is that a longer stickier type of pricing upcharge that we're going to be able to harvest going forward even as the commodity corrects?

Sure. So Todd as an update that chicken surcharge, which was reviewed as temporary has rolled off the menu. We rolled off about a week and a half ago. At the same time, to keep pricing consistent, we spread that increase throughout the entire menu. So there really is a neutral effect in terms of overall pricing. So you're right, the chicken improvement has really driven the decision for us to take that pricing off the chicken specifically.

Yes, that's something Todd that Carl mentioned on the call in terms of our overall inflationary basket has been impacted more than many in the industry during the first half of 2022. We firmly believe that we are actually in a position where you're going to start seeing improvement. As we get the rollout of significantly lower market that you're seeing from chicken breast, as well as some of the initiatives around that cut. As Carl mentioned, we see very clearly that's getting worked through the system as we speak, being able to exit Q3 at meaningfully lower COGS than where we are today, and then have nice improvement as you go into Q4 and really beyond. So we feel that there's been kind of an outlier and chicken breast that has caused us to have some particular inflation here in the first half that we are now on the better side of that equation.

Okay, great. Thanks Dave. Second question on the franchise deal that you teased is close to the finish line. Is there anything you'd share with us on type of partner compared to the California deal? Is this another large multi brand, multiunit operator well capitalized that that you're bringing into the fold? And you probably can't give us a sense of scale yet. But I guess where are we in the process as far as being able to get some visibility on what this means towards the pipeline as we get to 24, 25?

Sure, I can share that unlike the California deal. This is not a refranchise it is a new market. We'll share more details as the deal gets finalized. But we're in the final stages of one that's for one of the Southern markets that we've targeted of good size deal. As a reminder and you alluded to it Todd, we target well established multi unit operators. As you can imagine in the uncertain environment, that's increased the lead time of it as they navigate inflation demand in their own businesses. But what we're seeing and we're very happy with the amount of interest we're seeing over the past few months, again, with these type of high quality, well capitalized partners that see the overall potential and future of this brand. So more information to come on that particular that particular deal, but we're feeling pretty good with where the momentum is going from the franchise side.

That's great, Dave. And then finally, on amending the credit facility congrats on getting that done. You talked about some covenant relief without much specifics. I know the old facility, have a covenant prohibiting share repurchase. Can we comment on any covenants regarding share repurchase in the new facility?

Sure. So first of all, thanks for that. We are very encouraged by the closing of our credit facilities, the amendment is highly favorable to us. It provides us with the additional flexibility on the certain covenants, which indeed you pointed out, specifically on restricted payments. So yes, it does provide us enhanced flexibility there. And of course, any type of restricted payment is a topic we discussed frequently with the demand.

Yes, I'm very pleased with the just the work we've seen with our partners continue to have the same lead back bank with U.S. Bank, they've been fat as partners and certainly a favorable outcome in terms of giving us flexibility as we pursue these objectives.

Okay, great Congrats, guys.

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

Great, thank you. And good afternoon. My first question, you had a couple of encouraging initiatives, I guess, that launched during what was a challenging period, the drive sales and LEANguini and the brand building the campaign. Can you just comment obviously, kind of some of the results are obscured by the macro. But can you comment on what you saw as a result of that was in line with what you expected? Are you happy with how that went? Or any tweaks or anything like that?

Yes, great question. And we're very pleased with what we're seeing from both LEANguini launch as well as Uncommon Goodness. With LEANguini as we saw on test, it's associated with higher frequency higher repurchase, the objective right now is really to increase trial. As you know, particularly in this environment, it can be difficult to get people to shift from their familiar favorites. But we see that when they do try LEANguini, they're amazed at the quality that tastes give them interpersonal benefits. So still believe this is very much a transformative introduction from a culinary side. As for Uncommon Goodness, where it's less of a short term traffic driver, more of a long term positioning of the brand, showcasing how we infuse Uncommon Goodness into every aspect that we do. From how we treat our people, to how we actually saute and do real, sophisticated cooking methodologies to the quality of our ingredients. We're very pleased with some of the leading indicators we're seeing, because we track brand regard brand perceptions, seeing nice improvement across all of those, as well as the power of this potentially, not just externally, but internally. So you are correct. There's obviously a lot more talk in the industry around the overall market dynamics and inflation and so forth. But underneath the foundation noodles, we’re very pleased with what we're seeing with LEANguini Uncommon Goodness, and think that is going to be a key factor as we grow to a million finally.

Okay, great. And then I guess I was just hoping you could help frame the different COGS opportunities, because it sounds like there's a lot there. You have the new chicken agreement, you have other commodities that are coming down, you have some cost saving efficiencies internally that you're also working on. I mean, can you frame kind of the magnitudes or the cadence or how quickly maybe you could start to realize some of the commodity decline should they sustain? It just, there's a lot that I'm trying to try to frame the potential impact that it could have?

Yes, we'll let Carl walk through that. But one thing that I think it's important to note is that these are known savings. These aren't one that it's a matter of them just working through the system. As you can imagine, when you purchase chicken this morning, it's not going to the guest plate that afternoon, takes some time to get through the system, but they are known savings that will start realizing in short order. So Carl, maybe we can go on through a few a few of those.

Sure. And in terms of the savings, chicken really is the outlier here. And as Dave alluded to the worst is behind us in terms of the market volatility. There's two major components. The first is purely just the price of chicken, which has come down by over 20% for historical highs. And we're expecting just where the prices are today. That's a 50 basis point run rate and for ruminate on COGS The second is the initiatives that we're executing with our vendors that's about efficiency, it's about reducing waste, and a run rate improvement on that initiative is 100 basis points. So in total 100 and 150 basis points, really adjusting for the lead times and working inventory quickly through our systems. That's where we get the competence in. And there's really that certainty about in fourth quarter, we're going to forecast COGS in the mid to high 20% 26% area.

Got it. Okay, that makes sense. And just one quick last one for me. You said the stores that are at or above the million AUV are doing a 21% restaurant margin, which is already ahead of the 20% target. And then you've got these COGS savings, obviously, coming in on top of that, is there a reason that you would be limited in the in the rest of the system to 20%? Or is that just a nice starting point? And then maybe we start to build from there, even at that 15 AUV? I'm just trying to make sure I understand the different pieces. Thank you.

Yes, you know don't make it premature, given the uncertainties in the environment. But yes, absolutely. And really feel that there is really strong capability to continue to leverage those sales grow the concept itself, fundamentally, historically, and we think in the near future, has a great strength and low cost of goods sold with absolutely improved the labor model to be significantly more efficient. And you see that in those restaurants that are north of million five – being at 20%. So we absolutely believe there could be upside. That said, we recognize there's work to be done, we need to see where the markets ultimately land in certain areas. So we as confident as we've been, in terms of that 20%, less restaurant level margin. As a reminder, just a year ago, we were approaching 90%. So we know the fundamental operating model was actually quite strong.

Great. Thank you very much.

Our next question comes from Mr. Brooks at the Benchmark Company. Your line is open.

Hey, thanks. Just a quick follow up, guys, if I may. You talked about the average unit volumes kind of stabilizing, after the pullback that you saw in June and maintaining that stability, so far in July. Just want to triangulate that to the low single digit positive same store sales guidance. Does that level of AUV that 1.39 type of level, does that support positive low single digit, same store sales? Or do we require a bit of a lift as the quarter progresses to get to the positive low single digit, same store sales? Thanks.

Sure. So first, the way we look at the, the growth, as we looked at third quarter, for average unit volume, there is a normalization for closures. So as we think about the trajectory for the rest of the quarter, and the stability in terms of what we're seeing, so far in July, there will be somewhat of a closure impact. So that would help support the low single digit, same store sales. As a reminder, last year, in the second quarter, I'm sorry, in the third quarter, we saw about 150 basis points from a comp perspective for closures.

Yes. And also to add to it, we're already as we sit today, in Q3, we are in our range for what we're targeting here for Q3. The absolute dollar figure, though, Todd, to your point, there is a little bit more seasonality from we have both the Fourth of July and Labor Day in Q3 relative to what you see in Q2, which doesn't have as much impact. So actually, that 139 mathematically would translate to even higher central sales.

Okay, great. Thanks, guys.

Our next question comes from Jake Bartlett with Truist. Your line is open.

Great, thanks for taking the questions. My first I just want to build on that last one. And maybe if you could explicitly your frame, your sales trajectory in the trend in terms of things or sales kind of in relation to the guidance of low single digits. So did you just say that that essentially in July, you've seen low single digit same store sales? I believe, as of the last call April was roughly 4% if I got that, right, so sounds like it went up and then it came down. You could just help us with the trajectory of the same store sales came five months and just what your what you're running today, or in the last month would be really helpful.

Yes, so as we said, so far here in July, we are in low single digit positive, Jake. And encouragingly, especially as we started to highlight the seven for $7. We're seeing continued stabilization and potentially even a little bit of improvement in some of those underlying metrics. As you bifurcate out Q2, the P6 [ph] or June, I should say fiscal month was actually softer than low single digits for the last couple of weeks, so it actually started off reasonably strong, and then actually saw some deceleration just in the past the last two or three weeks of the quarter, then you saw immediate stabilization, and then now starting to see a little bit of bounce back. Hopefully, that helps a bit. But ultimately, sales were sort of flat in that in that June time, that June, late June timeframe.

Okay. And then, as we think, going forward from here, can you help us understand some of the drivers of sales? So, sounds like you're getting an incremental boost from the marketing of the $7 menu. Anything else you talked about kind of more effectively, are kind of driving frequency or trial with the LEANguini? How confident are you in terms of really material, intangible drivers to offset, some concern about, further weakness on the consumer?

Well, I think part of the confidence just comes from the fact that we've actually started seeing some momentum here in the last week or two, that's showing that a lot of the efforts we've done are having an impact, whether it be LEANguini, which we see continuing to increase in mix week after week. So we feel that that will be continued to be kind of a slow burn, will continue to be a driver of sales as we go as we go forward just into our operations. We are seeing our net promoter score as our guests metrics improved dramatically over the last several months, and our teams are running at better cook times than what they did a year ago. Staffing is back to prior levels, we do see a tailwind as you have more dine in guest come that will help as we as you've seen with the delivery or the digital numbers, we've been able to retain that. So between the digital strengths LEANguini gaining traction, already some momentum, we're seeing some of the really targeted marketing, around seven for seven. We still feel that there's quite a bit of potential tailwinds. Not to mention we will kind of reinforce catering for the first time in a few years, as we go into Q4, there will be some culinary innovation, looking at plant based protein potentially rolling out nationwide during Q4. So we'll have continued innovation pipeline as well to help support that average unit volume growth target.

Great. And then, on the development for 2022, obviously a pretty large decrease to 21 to 23 from 35 new openings. And so, before you would given us that 70%, we're expecting to be company owned of the 21 to 23. How many of those are expected to be to be company owned?

The vast majority, there will only be three or four that are likely to be franchise. They're encountering some of the same challenges that we've seen, and you see it throughout the industry as well. Again, when we set those targets in early 2021, we didn't foresee how challenging the environment would get from the real estate timing perspective, the availability actually is quite strong. It's been the timing. And we hope that we have been able to navigate through that here in 2022. Ultimately, and just to give examples, we've seen things like utility companies not having the staff to turn power on time. We've seen developers with a new development not being able to get asphalt to complete their base building delivery day for us. You've seen permitting take lot longer than historical so much of that has been seen just not by the company, but also in franchise as well. But also gives us confidence that as we see the strength of that 23 pipeline, we see some of the benefit of some of the carryovers of some of these sites have taken longer, though we've got great confidence in that target for 23.

Okay, great. And then my last question is just on pricing. And you mentioned that your pricing in the second quarter was about 10%, you think you think it's going to be about 10% in the third quarter, you're wondering just what when new pricing is come on, when it's when it's rolled off, just in terms of the impact of that $1 surcharge, that's now no longer going to be an impacted just, if you can help us understand when you've taken price too, so we can kind of also have some visibility into the fourth quarter. And then also whether you're open, what if your larger competitors will take in more price. And that's healthy margins. But, what's your appetite for continuing to take any price, even in this environment?

Yes, let Carl answer some of the roll off timing questions, and I'll talk through the overall value proposition.

That's right, so you're right for the second quarter. We have pricing just over 10% and we're expecting the same for the third quarter predominantly because that chicken surcharge which contributed about 3% of price is rolling over towards the core menu. Encouragingly, when we had the surcharge in place, we did not see really any impact in terms of chicken or protein attachment, we didn't see guests opting out of chicken or swapping chickens for other protein, in terms of attachment. So that continues to build our confidence in terms of the price that we have on the menu. When we thought about pushing the surcharge throughout the entire menu, again, we look at this surgically through inelasticity of the dishes. But predominantly, we were preserving $7 entry points still for seven of our core dishes, because that's really critical in terms of an entry point. So even by pushing that price out, we were able to preserve that. And that helps just to underscore the value proposition.

Yes, in terms of additional price, we have some impact on the low income consumer in terms of some pullback. That's I think others have seen similar things. Fortunately, again, for us, that's not much of our consumer. I would say that what is maybe a little bit unique, Jake, is for us, the particular inflation, we believe has peaked. And we are now on the other side of it. So in terms of needing incremental pricing to overcome additional inflation, when you see chicken prices down pretty dramatically for chicken breast. And it’s chicken breast as a reminder, as that comes down dramatically, as you see some of these initiatives roll in, we believe we can absolutely expand margins without having to go to the menu. Not to say we don't have pricing power, we absolutely believe we do. But we feel that there is enough momentum that we can see that we are actually on the rank side of seeing inflation start to come down.

Great, and then I'll just sneak one quick one. You mentioned, 13% wage inflation. I think you start to laugh just industry wide as well as I would imagine, higher wage inflation from the back half of last year. So what is your expectation that wage inflation is going to come into a more historical range? Or are you kind of planning for to remain quite high for the back half of the year.

Embedded into our Q3 guidance is that we continue to see some relatively high inflation. So above double digit, there are signs that you're seeing throughout not just the industry, but kind of throughout the economy, that this is starting to normalize. And similar to many others, we did a lot of investment in our teams during the back half of 2021. So mathematically, we would assume that there's potentially some relief there. But probably a bit premature to kind of guide to what we would expect that inflation number to be into in Q4 of this year.

Thanks. I appreciate it.

Thank you, Jake.

There are no further questions. I'd like to turn the call back over to David Boennighausen for any closing remarks.

Thank you, Michelle. You know, lots of discussion inside and outside the industry on the current economic environment, everything from demand to inflation. But I will tell you from our brands perspective, we remain extremely confident in the business's trajectory and our ability to meet our objectives. Importantly, we're seeing strong signs and we have a clear path toward accelerated unit growth and margin expansion. We feel we're on the positive side of both of those initiatives. And we look forward to sharing with you those progress on our future call. So thank you and stay safe.

This concludes the program. You may now disconnect. Everyone have a great day.