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Edited Transcript of NDLS earnings conference call or presentation 14-Mar-19 8:30pm GMT

Q4 2018 Noodles & Co Earnings Call

Broomfield Mar 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Noodles & Co earnings conference call or presentation Thursday, March 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Boennighausen

Noodles & Company - CEO & Director

* Ken Kuick

Noodles & Company - CFO

* Paul J. B. Murphy

Noodles & Company - Executive Chairman

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Conference Call Participants

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* Andrew Strelzik

BMO Capital Markets Equity Research - Restaurants Analyst

* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Dennis Geiger

UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants

* Kevin Deshawn Robinson

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to today's Noodles & Company Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now introduce Noodles & Company's Chief Financial Officer, Ken Kuick. Sir?

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Ken Kuick, Noodles & Company - CFO [2]

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Thank you, and good afternoon, everyone. Welcome to our fourth quarter 2018 earnings call. Here with me this afternoon are Paul Murphy, our Executive Chairman; and 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 anticipated results in 2019 and details related 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 2017 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 2017 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 2018 earnings release and our supplemental information. And with that, I would like to turn it over to Paul Murphy, our Executive Chairman.

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Paul J. B. Murphy, Noodles & Company - Executive Chairman [3]

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Thank you, Ken, and good afternoon. Solid comparable sales momentum in the fourth quarter capped a strong year for Noodles & Company, as we continue to implement our long-term strategic road map. In 2018, the company made significant progress in several key areas. First, through the introduction of the zucchini noodle, the company took an important first step in redefining how the brand resonates from a health perspective. As we have discussed over the past few quarters, the zucchini noodle has addressed the perception that our traditional noodles and pasta are unhealthy due to the relatively high amount of carbohydrates in our core dishes. Even with our early success, we believe we still have significant opportunity to build awareness for the Zoodles and expand our better-for-you platform in its entirety through continuing innovation, a significant focus of 2019.

Second, during 2018, the company began to more effectively capitalize on the brand's inherent strengths with off-premise. Through the implementation of quick pick-up shelving units and the continued evolution of our online ordering app, off-premise grew to 54% of sales in Q4 of 2018. Third, and perhaps most importantly, I feel strongly the company made the strides necessary both in our discipline and in our leadership effectiveness to sustain our momentum for years to come. In my career, I've come to believe the best way to build shareholder value over the long term is the combination of a strong leadership team and the organizational discipline to build a continuous pipeline of sales and profit-building initiatives. In 2018, the company made tremendous progress in building this pipeline. Examples include our best practice quest to continuously improve our operational execution, disciplined testing around culinary innovation and menu pricing and solidifying our leadership team through several key hires. I am extremely proud of the work and results that our teams throughout the country accomplished in 2018 and even more excited of what 2019 will bring. I will now turn it over to Dave to provide more perspective on our 2018 results as well as our strategic initiatives for 2019.

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Dave Boennighausen, Noodles & Company - CEO & Director [4]

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Thank you, Paul. As Paul mentioned, we are pleased with our sustained momentum and comparable sales growth during the fourth quarter of 2018, which grew 4% system-wide comprised of the 3.7% increase at company-owned restaurants and a 5.3% increase at franchise locations. Our sales growth in the fourth quarter is further proof that our strategy is working and was once again consistent across several key areas of the business, including across the vast majority of our geographies and dayparts. For the full year 2018, company-owned restaurant average unit volumes increased $47,000 to $1,119,000; and meanwhile, restaurant-level margins increased 80 basis points to 15%. While we are pleased with the progress that was made in 2018 across several key financial metrics, we also believe that given the brand's strengths from a culinary, off-premise, operational and people perspective, the company has significant opportunity to expand our earnings profile through the continued execution of our strategic initiatives. I want to start with our culinary strategy, which centers on a platform-based approach to affirm our authority on noodles in the restaurant space and provide the variety and choice that is inherent strength of the brand.

As Paul noted, we believe, we have significant opportunity to build added awareness for our zucchini offering. We began this process earlier this quarter through the introduction of a Zucchini Shrimp Scampi limited time offering. Furthermore, during our second quarter menu board refresh, we will further highlight our zucchini offerings as well as the ability to substitute into any one of our dishes. It's important to note that our zucchini mix today is actually higher than it was during Q2 of last year when we launched the product.

Moreover, we are currently testing the next evolution of our better-for-you platform, and anticipate that later in 2019, we will be introducing a new vegetable-infused noodle to our menu. Looking more holistically at the menu, over the past several months, we've been testing a new menu format and pricing structure, that we believe can unlock both value and check-enhancing opportunities for the brand. Over the past few years, the company has taken only modest price increases. We felt hampered by our modified line pricing structure, which makes it difficult to differentiate between menu offerings from a pricing perspective. Our menu testing has been comprehensive and includes the following: a move to individual item pricing, which we believe better defines value for our guests through differentiated pricing between our dishes; categorization within our menu amongst our culinary platforms, which helps clarify the brand offering, while making it easier for guests to use of our menu; testing of a make-it-a-meal offer, which helps drive average check and value perception; and finally, highlighting both our signature flavors as well as our zucchini. We've been very pleased with the results of this menu test and anticipate launching the new menu format nationwide by mid-May of 2019. From a pricing perspective, while we currently are running roughly 2.5% of price, we expect an increase just north of 3% when the menu boards are refreshed. While we anticipate that our culinary and menu initiatives will continue to drive traffic and average check in 2019 and beyond, we also continue to innovate around our off-premise strength. As Paul mentioned, off-premise grew to 54% of sales during Q4, a 400 basis point increase over Q4 of 2017. I want to start with the strategy surrounding online ordering, which increased to 16% of sales during the fourth quarter 2018, a 450 basis point increase over the prior year. We are pleased with this growth, but we also believe there's tremendous opportunity ahead. During 2019, we will begin testing improvements to eliminate friction for in-restaurant pickup off online orders. We also are working towards relaunching our rewards program and online ordering experience by year-end to continue to meet the changing needs of guests, while allowing for improved capabilities to engage our guests from a marketing relationship perspective. As we continue to capitalize on the strength of our off-premise business, we also see additional off-premise occasions that are significant growth opportunity. One of these occasions is delivery, which we will soon be offering in 95% of our trade areas. During the fourth quarter, delivery accounted for 3.1% of total sales and continues to grow. While delivery certainly offers great opportunity to build sales, we also recognize the significant costs associated with it. We'll be testing different pricing strategies with regard to delivery over the coming months to ascertain how we might mitigate the material impact of delivery fees on our margin profile.

Just as we see opportunity to increase our delivery sales, we also believe there is significant opportunity to expand catering, which currently accounts for less than 2% of our total sales. We've begun the work necessary to relaunch our catering program, which we anticipate during sometime in 2020. Finally, with regards to off-premise, we plan to incorporate pickup windows in select models of restaurants during the year and also are targeting approximately 75% of our new units to include pickup windows. In the limited number of restaurants that currently have windows, we've seen great adoption and appreciation from our guests to be able to pick up their order without having to leave the car. While we anticipate the culinary and menu and off-premise initiatives will be critical to the company meeting our long-term objectives, we also recognize that our success is reliant on our ability to continuously improve our operational execution and our position as employer of choice. The friendliness and engagement of our 10,000 team members is a core strength and focus of the organization. And in 2019, we will continue to invest in training, best practice class, select benefit enhancements and technology to improve our execution and making Noodles one of the best places to work in the restaurant industry. Again, I am proud of the accomplishments of the team in 2018 and I'm more confident than ever in Noodles' opportunity to sustain top-tier performance in the restaurant industry. We have the right team in place. We have the right strategy, and we have the inherent brand strengths that will allow us to continue to grow both top and bottom line results in a consistent and reliable fashion. I'd now like to turn it over to Ken to discuss our Q4 results as well as our guidance for 2019.

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Ken Kuick, Noodles & Company - CFO [5]

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Thanks, Dave, and it's nice to join everyone. I've now been with Noodles just over 3 months, and I'm extremely excited about the opportunities we have ahead of us and look forward to working with Paul, Dave and the team on implementing our strategic road map. As noted in today's press release, we had another strong quarter with comparable sales growth of 4% system-wide, lifting full year 2018 comparable sales to 3.7%. Our performance in the fourth quarter throughout the P&L fell solidly within our expectations, and we are pleased with the momentum that was carried into 2019. For the fiscal year 2018, we generated a 9.1% increase in adjusted EBITDA to $33.4 million on revenue of $457.8 million, roughly flat versus the prior year as comparable sales growth was offset by a reduced store count relative to 2017. Our fourth quarter comparable sales of 4% system-wide was comprised of 3.7% growth at company-owned restaurants and a 5.3% increase at franchise locations. Our company-owned comparable sales growth reflects price of 2.5%, a product mix benefit of 1.2% and roughly flat traffic. From a term perspective, our comparable sales were consistent across geographies and dayparts, continuing the trend that began in the second quarter of 2018. While every month in the quarter was positive, we had more strength in the October and December time frames, partially due to winter weather in much of the country in late November. Cost of goods sold during the fourth quarter of $26.9 million -- I'm sorry, 26.9% was 10 basis points above prior year. This reflects the benefit of modest pricing, offset by the ongoing success of our zucchini noodle, which carries a higher food cost than other noodles. Labor during the fourth quarter of 33.4% was in line with the fourth quarter of 2017 as leverage from our comparable sales growth was offset by wage inflation of approximately 4%. Occupancy expense during the fourth quarter decreased 70 basis points from the prior year to 10.6%, reflecting leverage on our growth and comparable sales as well as the closing of select underperforming units throughout the year. Other operating expense of 13.9% in the fourth quarter was below our expected range yet still 50 basis points above prior year. Leverage, driven by our comparable sales growth, was more than offset by third-party delivery fees, which were nearly 0.7% of sales in the fourth quarter. General and administrative expenses in the fourth quarter increased 60 basis points to 9.4% of sales, due primarily to higher incentive compensation. Just as we did throughout the year, we strengthened our balance sheet during the fourth quarter. Long-term debt at the end of 2018 was $46.6 million, a $12.2 million decrease from the beginning of the year. And cash on hand at the end of 2018 was $4.7 million. Now I would like to provide our earnings guidance based on current information for the full year 2019, including some of our key financial metrics. We currently expect 2019 adjusted diluted earnings per share of between $0.06 and $0.15. Our full year guidance is based on the following assumptions. We expect total revenue between $462 million and $470 million. We expect comparable restaurant sales of between 2% and 4%. As noted in our press release, comparable restaurant sales remained positive thus far in 2019, despite significant disruption from weather throughout most of the country. As a reminder, more than half of our restaurants are situated in cold weather markets, with meaningful concentrations in the Upper Midwest and Rocky Mountain West. While we regularly experience winter storms during this time of the year, beginning with the polar vortex in late January we have experienced historically poor weather in many of our markets in the early part of 2019. In fact, Minneapolis had its snowiest February ever, and February was one of the snowiest and coldest month in years in our home market of Denver. This weather continued through yesterday's bomb cyclone in Colorado, which caused the closure of all 60 restaurants in this state. As a result, although prior to the polar vortex we'd been running comparable sales growth of 4.1%, we ultimately anticipate first quarter comparable sales of between 1% and 2% system-wide, resulting in first quarter revenue of between $108 million and $110 million. Importantly, in recent weeks, when we have seen more normalized weather, comparable sales have returned to the 4% range. Turning back to the full year, we expect restaurant contribution margin of 15.2% to 16.5%. Underlying our expectations are the pricing actions that Dave discussed, continued progress in initiatives related to supply chain management, the recent launch of a new labor management system and, finally, the testing and implementation of increased pricing for delivery orders to offset our third-party delivery fees, which we anticipate will be between $4 million and $5 million in 2019. We expect growth in adjusted EBITDA of 8% to 20% to a range of $36 million to $40 million. These expectations for the full year 2019 reflect the poor weather thus far in 2019, which will challenge the first quarter from a margin and EBITDA perspective. We anticipate first quarter margins between 11.5% and 12.5% and adjusted EBITDA between $4.3 million and $5 million. For the full year, capital expenditures are expected to run $24 million to $30 million. And finally, we expect 5 to 9 new restaurant openings system-wide in 2019, including 4 to 6 new company restaurants. We are bolstered by the success of our most recent class and are excited about the 2019 pipeline. We continue to see tremendous white space for the brand from a unit perspective and are working diligently and thoughtfully to return to 5% new unit growth by 2021. And one final reminder. Please note that as the Easter shifts from the first quarter of 2018 to the second quarter of 2019, there will be an approximate 50 basis point benefit to comparable sales in the first quarter of 2019, offset by a 50 basis point negative impact in the second quarter. Additionally, New Year's will shift for us from a fiscal calendar perspective, resulting in a 20 to 40 basis point benefit during the fourth quarter of 2019.

And with that, I would now like to turn it back to Dave for final remarks.

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Dave Boennighausen, Noodles & Company - CEO & Director [6]

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Thanks, Ken. 2018 was a watershed year for Noodles & Company in terms of returning to meaningful growth and average unit volumes and in profitability. Last year, we eliminated a major obstacle for the brand with the launch of our zucchini noodle. We crossed 50% of sales for off-premise for the first time, and we developed the disciplined and initiative pipeline necessary to sustain our momentum over the long term. Although we saw a temporary disruption to our momentum due to historically poor weather thus far in 2019, we remain extremely confident in the strength of our strategy and the underlying trends of the business. We continue to believe that we're in the early innings of our strategy, and I'm excited for 2019 and for the years to come. Lauren, please open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Nicole Miller with Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [2]

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Very impressive top line trend. I was curious to know how your store-level employees are doing. And it's been a while I think since we've asked about the store-level goals and incentives. And I'm just curious if there is any bonus related to the incremental off-premise sales or maybe more make-it-a-meal suggestive sign or anything like that?

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Dave Boennighausen, Noodles & Company - CEO & Director [3]

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No, sure. Thanks, Nicole. From an off-premise perspective and basically any of our initiatives as we come through with them, what we tend to do, such as make-it-a-meal, is make it more gamification-related, Nicole. So they tend not to be the part of the base program, which is a bit more sales and profit oriented. With those things, people development we certainly use gamification more than anything else. From a people perspective, we are stronger than ever, Nicole. I think the team is really all rolling in the same direction and very confident with the strategy that we have ongoing and what we've been accomplishing thus far in 2019 and what we did last year. Point out that we see it in the turnover in the tenure numbers. In the 15 years I've been at Noodles, tenure is, honestly, the most correlated thing we see with same-store sales results. And our tenure at the management level, in particular, increased dramatically from 2017 to 2018. Turnover also on the downside -- on the benefit in terms of going down, particularly the shift manager and area manager levels. So I'm proud of the team. I'm excited with the team we have as we move forward, excited with the leadership team. I think we're in a great place there.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [4]

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Great. And then just a second and last question. Can you walk through, please, the pieces of the CapEx? It will be very beneficial to understand CapEx maybe from new units, maintenance, if there is something specific to technology and any other bucket?

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Ken Kuick, Noodles & Company - CFO [5]

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Yes, Nicole, it's Ken. Appreciate the questions. We are going to see a bit of an increase in CapEx this year. With the strong performance in 2018, we've seen quite a bit of strength built into our balance sheet over the 12 -- past 12 months. And that gives us flexibility, frankly, to invest in the proper spots of the business. So the significant investments in 2019, certainly will include new restaurants and also investments in technology. And then we're also testing elements in our existing restaurants to better communicate the brand and facilitate our off-premise platform. From a technology perspective, that will include rewards program, as an example.

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Paul J. B. Murphy, Noodles & Company - Executive Chairman [6]

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Nicole, this is Paul. I would also mentioned that we are doing work against our app in terms both of the rewards program. But just frankly, the ease of ordering through it, we think that will continue to help us build the off-premise business and through the online ordering and pay ahead. So from our perspective, the investment against really just increasing the usability of the app certainly not only helps with the rewards program and driving that and loyalty to the brand, but then also we think in the frequency usage of driving the off-premise as it becomes easier to use. And we think in the long run it's going to help with throughput as more and more people use the app. So I mentioned due to the order online, pay online and then take advantage of our quick pick-up program that we're also investing in 2019 to make it easier to use, a bit more intuitive when you come into the store so that, frankly, it's a 30-second experience coming in, picking up your bag and taking off. We see that freeing up, frankly, transaction capability for the dine in at the Noodles that we have today.

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Operator [7]

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And our next question comes from Andy Barish with Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [8]

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First one on just a wide range of the margin guide, 20 to 150 basis point improvement. I guess, how much of that is sort of tracks the sales and same-store sales range you guided to for '19 versus maybe some cost initiatives that you're aware of and quantifiable, any color on that would be helpful?

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Dave Boennighausen, Noodles & Company - CEO & Director [9]

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Sure. This is Dave speaking. From the cost initiative perspective, we're feeling really good that we've identified several opportunities for us to improve, especially on the supply chain and labor side. So a lot of the range actually reflects just the cadence of how those will ultimately roll into the system, Andy. From a labor management perspective, just rolled out a new back-of-house labor system, just in the last several weeks. So we're just in the early phases of that. Similarly from a supply chain perspective, we have several contracts that we'll be ending over this year, and we'll be entering into new contracts. So reflect a little bit of timing from that perspective. Additionally, I would point to the delivery fee pricing test that we're just now implementing. So we're testing various scenarios that have us recouping different levels or percentages of that delivery fee. The range somewhat incorporates the fact that, that test is very much early on; and by the time it would become more national in scope, that would be later on in the year at the earliest.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [10]

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Okay. And then on the menu board rollout, you're implying sort of maybe 50-plus bps of incremental pricing from where you've been running. Is that kind of the way to think about it. And if so, do you believe there is also an ability to drive mix through your organization of the menu and featured items, signature items and, obviously, bundling and things like that?

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Paul J. B. Murphy, Noodles & Company - Executive Chairman [11]

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Andy, this is Paul. Really, in terms of pricing, we think that -- you're right, we should minimally get 50 bps more than we kind of have historically done. But between the new menu structure and the item-level pricing that we're rolling in May with the new menu, from my perspective it gives us the ability to be more strategic and surgical with our pricing. And then really what that's going to allow us to do is to begin to establish a cadence of more modest pricing but more often, I think with the outcome of our effective pricing actually being higher in the long run. With the line item pricing that we've had before, we typically have had kind of 1 price increase. And when you do more specific item-level pricing, you can, frankly, take more bites at the apple on a regular cadence either 2 or 3x during the year. So I think that the short-term and the long-term impact is going to enable us to effectively take more price than we do today in a much more effective manner without having to touch everything on the menu.

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Dave Boennighausen, Noodles & Company - CEO & Director [12]

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Yes, I'd add from a menu mix perspective one thing we'd really like with the testing that we had done, Andy, was the increased that we saw from the add-on perspective with the make-it-a-meal, increasing the check perspective as well from zucchini being highlighted more. So that was a nice win from that. And I think the signature flavors is an aspect of the menu that we're also incorporating into the May launch. That helps us from a check perspective. It also features some of our highest volumes as well as more profitable dishes. So very excited with what we in the test and excited to get that out nationally in the next couple of months.

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Operator [13]

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Our next question comes from Jake Bartlett with SunTrust Robinson.

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Kevin Deshawn Robinson, SunTrust Robinson Humphrey, Inc., Research Division - Associate [14]

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This is Kevin Robinson on for Jake. The question I have is, in the third quarter you guys highlighted plans to revisit many of your existing contracts throughout the supply chain. And wanted to know where you guys are in terms of doing that? And also, you mentioned -- I apologize I have a cold -- the launch of like a new back office system for labor and food. So if you could just provide some color on that and that'll be very helpful?

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Ken Kuick, Noodles & Company - CFO [15]

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Yes. Thanks, Kevin. This is Ken. A great question. From a supply chain slide, we continue to work on contracts. In the fourth quarter of '18, we signed a new contract out for our produce distribution. We've seen good cost savings from that. Starting in Q1 of '19, we've entered into a cleaning contracts. We expect to see some good savings from that as well. We'll continue this throughout the system. We feel confident that as we roll through these contracts between an RFP process and some blocking and tackling we can continue to see some cost savings. And then you touched on the back-of-house system, very important for us here. We've fully implemented now here at the end of first quarter. From a labor perspective, our labor improved from the third quarter to the fourth quarter. It continues to improve into the first quarter of 2019. And we're excited about what 2019 is going to have to offer.

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Dave Boennighausen, Noodles & Company - CEO & Director [16]

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Yes, and if I could, Kevin, I wanted to touch a little bit about our overall strategy on labor. Obviously, wage inflation is one of the biggest stories in the restaurant industry these days. First and foremost, we certainly think that training, coaching, developing, hiring the right talent within our organization and continuing to increase tenure and reduce turnover is critical. At the same time, the back-of-house labor management system was really one of the first steps in us taking a totally different approach to our overall labor model. At the same time over the last couple of months, we have engaged a third party to help us really evaluate the overall flow of the kitchen, the overall equipment package, how things are setup, how things are deployed. Don't expect much benefit from that necessarily in 2019, maybe a few small wins. But certainly 2020 and beyond, we expect that there could be some nice benefit to our labor model. I would also add that it dovetails a bit into Nicole's question earlier on a capital perspective is that capital expense range gives us a bit of flexibility as we start testing out some new equipment to potentially improve the labor model, wanted to give ourselves some flexibility there.

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Operator [17]

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The next question comes from Andrew Strelzik with BMO.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [18]

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My first question, I guess I was a little surprised to hear you say that the awareness of the zucchini noodle was maybe not as high as you would like it to be. I guess I'm wondering why you think that's the case, and any work that you've done behind that to prove that out. And then, as you launch the next iteration of the better-for-you menu to raise that awareness, is there any plan to change maybe the go-to-market strategy to raise that awareness?

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Dave Boennighausen, Noodles & Company - CEO & Director [19]

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I think actually the biggest challenge that we saw, Andrew, was we feel like we could have done a bit better work in terms of how we communicated the offering both from an online perspective and then inside the restaurant itself. I think especially when it came to the substitution capability of the zucchini noodle it was a bit too challenging as you look at the menu that's in most of our restaurants today to really understand how versatile that noodle was and how you could incorporate it into any dish. So that's where we saw opportunities. One of the reasons with our test, we decided to incorporate it a bit more obvious, and we're very pleased with the results that we saw. So we feel very good with that, and as we look at the main menu, it's absolutely repositioned to better articulate that zucchini noodle. We're seeing in our research that while we did a great job of PR, I think our teams did a fabulous job with it, it's still was just not as obvious to guests on what that opportunity was. So as we look into the future, the menu board as well as online ordering, how we just feature that offering I think it's some basic blocking and tackling, but we know there's good opportunity there.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [20]

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Okay. And I'm sure there aren't that many units that have the pickup windows yet, but a number of your limited service peers talk about the AUV differential between units that have, call it, drive-thrus and those that do not. Do you observe a similar type of differential? Any color that you could provide just in maybe even the limited number of stores that might have it?

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Dave Boennighausen, Noodles & Company - CEO & Director [21]

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Yes, the sample size is relatively small; it's only a handful. But we typically hear that it's in the neighborhood of 20% to 25% that people see. And certainly as we look at remodels and even, more importantly, I think at the new restaurants, we would expect that we would be in that ballpark as well.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [22]

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And if I can squeeze one more in there?

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Dave Boennighausen, Noodles & Company - CEO & Director [23]

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Absolutely.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [24]

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How big do you think the online sales mix can get for you guys? And is there a point at which the mix gets to a level where maybe it changes the way you think about the operations within the 4 walls at all?

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Dave Boennighausen, Noodles & Company - CEO & Director [25]

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It's -- there's a lot there. I'll actually start with where we think the overall off-premise business can go, which we believe certainly is something in the 60% to 65% range and potentially even north of that. As you look at our business today, roughly 1/3 of our sales are coming from people that are coming into the restaurant, waiting in line, then, Andrew, they go through the ordering process and then they wait again. That's not optimal experience for us. So we know just shifting those people over to the online pay ahead, pick-it-up-and-you're-gone type approach can lift that 16% of sales up dramatically. So we think there is absolutely tremendous upside there. We are fortunate in that the way that our restaurants are designed, for the most part, the system doesn't need to be changed from a second line perspective or things along those lines. But at the same time, this third-party group that's looking at the overall flow of the kitchen, I promise you that it is one of the key things that they are really focused on is recognizing that, that business just continues to move more and more towards online and more and more towards off-premise, so it's absolutely a piece of that puzzle.

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Operator [26]

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(Operator Instructions) The next question comes from Dennis Geiger with UBS.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [27]

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Guys, wondering if you could comment a bit on -- a bit more on Zoodles and really the platform extensions or the better-for-you platform. Wondering if that's in test anywhere yet. Anything that you can kind of share there to further support some of the enthusiasm here? And then I guess if not, on a higher level how are you thinking about the potential contribution there? Seems like there's a lot of extension possibilities here. In your mind, can this be as significant as the zucchini, the first time around people, as we think about lapping some of that? Just high-level thoughts. And maybe it's a bit early, but how you think about that better-for-you platform?

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Dave Boennighausen, Noodles & Company - CEO & Director [28]

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Yes, I'm actually going to -- first, one of the questions you had, Dennis, I think, it's an important one in terms of as we lap zucchini, just what our confidence level is that we'll be able to maintain that momentum. I point out we were already running probably about positive 3% prior to zucchini launching. The better-for-you platform, we know there's awareness opportunity. When you look at zucchini mix itself, it's actually reasonably higher than where it was in June and July of last year. So it just continues to build. No, the better-for-you platform of the healthier items, they're not at the mix of a mac and cheese yet, but we certainly think that the potential is there. Things that we're testing right now, honestly, it's a pretty disciplined approach. And so there's 5 or 6 different items that will be in restaurants during parts of Q1 and Q2 as well as some items that we will launch in May that will be still a little bit more oriented towards zucchini, a little bit more oriented towards gluten free. We feel there is some good news there as well. So when you lap zucchini, you still got so much opportunity -- you got so much opportunity with the better-for-you platform in totality. But then you layer on top of it the underlying momentum that we already had even pre-zucchini, delivery really wasn't expanded until Q4 of last year, I think our execution from an operational off-premise and people perspective just continues to get better. The better-for-you platform is one that we talked about probably more than any other. But we certainly feel that there's several levers that are headed in the right direction.

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Dennis Geiger, UBS Investment Bank, Research Division - Director and Equity Research Analyst of Restaurants [29]

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Great. And then just one more. As you think about a lot of the benefits that you've made across menu operations, off-premise, et cetera, just wanted to touch on guest frequency and traffic, which I think you mentioned about flat in the fourth quarter. How do we think about the latest as it relates to frequency or even contribution from maybe 3 buckets existing guests, return of lapsed users, trial from new users? Just wondering, I guess, if you can identify how -- where the biggest kind of contribution has come from, from those buckets? And then just how we think about '19 and beyond or how you're thinking about traffic and kind of where it's coming from those cohorts, if you've got any insight into that?

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Dave Boennighausen, Noodles & Company - CEO & Director [30]

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Yes. There's lot there as well, Dennis. And I think they're great questions. So what we saw, specifically with zucchini, the big benefit we started seeing there was with lapsed users. So folks that had not been using the brand for a long time and forgotten about us based on some perceptions around the healthiness of our menu, that's where we saw a lot of the pickup towards the middle of last year. From the off-premise perspective, what we're seeing is increasing frequency because those guests that love us and used to come to us are now coming much more frequently because it's just so much easier to just order ahead, pick it up and you're on your way. From a new user perspective, I think that's an area where we believe there's significant opportunity. And as we look at the guest engagement platform and how we go to marketing and how we digitally interact with folks, that something we expect to make some tremendous strides on during the back half of this year and certainly a significant focus of 2019. I certainly would like Paul to weigh in as well on his perspective.

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Paul J. B. Murphy, Noodles & Company - Executive Chairman [31]

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Well, I think an interesting way to look at it was -- certainly before all the weather hit, we were a little bit over 4% on our comp store sales going into 2019. And at that moment, we were carrying right at or just below 2.5% in price. So even if you apply a run rate of mix to it, which the brand hasn't had as much as some other brands out there, it would imply positive transactions and transactions that, frankly, were growing from Q4. Obviously, the turn in the weather in our major markets, we felt that more than some other brands that, frankly, are maybe a bit more spread out geographically. But as I think Ken mentioned in his remarks, that as the weather has begun to normalize in the last couple of weeks, taking out kind of yesterday and today and that bomb cyclone thing, that we've seen the overall sales return. And then we're still only carrying just below 2.5% of price. So I think it gives you a nice feel for where the transactions can be and that they're are on the positive side of the ledger, and we would continue that to -- continue to expect that to hold throughout the year.

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Operator [32]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to Dave Boennighausen for any closing remarks.

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Dave Boennighausen, Noodles & Company - CEO & Director [33]

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Well, thanks, Lauren. Just appreciate everybody's time this afternoon. Clearly, 2018 was a -- it was a fabulous year for Noodles & Company with a lot of achievements and a lot of results that were borne out of strategies that were really focused on the brand strengths. And as you look from a culinary perspective, the uniqueness and differentiation of our brand, look at how long the food travels and our kind of unique position to be able to win it off-premise and just that continued focus on people and operational execution, we're feeling very good about the underlying momentum in 2019 and even more excited about where we go from here. So thanks again very much, and have a wonderful evening.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.