Good afternoon and welcome to today's Noodles & Company Third Quarter 2018 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 conference call is being recorded. I will now introduce Noodles & Company's General Counsel, Melissa Heidman.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2018 earnings call. Here with me this afternoon are Paul Murphy, our Executive Chairman; and Dave Boennighausen, our Chief Executive Officer. Let me start by going over a few regulatory matters. I'd like to note that 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 2018 and details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections, and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The Safe Harbor statement in this afternoon's news release and the cautionary statement in the company's most recent Form 10-K 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. Now, I would like to turn it over to Paul Murphy, our Executive Chairman.

Thank you, Mel. We're extremely pleased and excited with our ongoing momentum in the third quarter, as we continue to implement our strategic roadmap. After posting our strongest same stores sales in six years during Q2, we improved upon that mark during Q3, finishing the quarter of comparable sales growth of 5.5% system-wide. The company has made tremendous strides in 2018, executing a thoughtful strategy that capitalizes on the many strengths of the brand. This strategy has been comprehensive, as we address culinary opportunities through the national introduction of zucchini noodles; off-premise opportunities through the build out of quick pickup units and our rewards program; and operational opportunities through initiatives that allow our friendly, talented team members to better engage with our guest. We are pleased that we were able to back up our second quarter results with another strong performance in Q3. And we know there is tremendous opportunity ahead. Earlier this month, we announced the further strengthening of our leadership team to help implement our strategy. We formerly announced the promotion of Melissa Heidman as our Executive Vice-President and General Counsel; as well as the recent hiring of Ken Kuick as our Chief Financial Officer. I'm excited to continue to work with Mel, and look forward to working with Ken as he gets on the ground here in Denver in a few weeks. With the full leadership team rounded out and in place, we look forward to executing on our plan for Noodles to consistently perform at the top of the restaurant industry for years to come. Just as we have executed thus far in 2018, we will continue to focus on a comprehensive strategy that will drive a superior differentiated dining experience for our guests, as well as create value for our shareholders. I'll now turn it over to Dave to discuss our Q3 results and current strategy in more detail.

Thank you, Paul. As Paul mentioned, the company was able to build on our strong comparable sales growth performance in Q2 and achieved an even stronger result in Q3. With system-wide comparable sales growth of 5.5% comprised of a 5.2% increase of company-owned restaurants and a 7.6% increase of franchise locations. At company-owned restaurants, comparable sales include 2% traffic growth, 2.5% of price and 0.7% benefit from menu mix shift. Our positive menu mix shift is our first in several quarters and is attributable to the success of our zucchini noodle introduction. We are particularly proud of our comparable sales momentum in Q3, given the negative impact on comparable sales of recent holiday shifts. As you may recall, in the second quarter, comparable sales benefited approximately 100 basis points from the shift of the Easter and Fourth of July holidays in our fiscal calendar. Meanwhile, Q3 faced a headwind of approximately 50 basis points from the Fourth of July shift, resulting in a total negative combined impact of 150 basis points from the holiday shifts between the second and third quarters. The fact that we were able to increase our comparable sales growth by 20 basis points, despite this 150 basis point headwind is a testament to the momentum from our recent initiatives. Of our 2% traffic increase in Q3, we believe that the benefit has resulted almost equally from our culinary, off-premise and operational initiatives. I'll begin with our culinary initiatives, which of course, have been led by the successful launch of our zucchini noodle this May. For years, the company struggled with the perception that noodles and pasta are unhealthy for you, due to the relatively high amount of carbohydrates in our core dishes. The zucchini noodle has allowed us to address this concern, with a platform that…

Thanks, Dave. I'd like to echo Dave's gratitude towards our team for their accomplishments thus far in 2018. The team continues to execute the hard work necessary to strengthen our foundation and deliver on initiatives that position the brand for future success. Our intent is to build upon our momentum to drive sustained predictable growth for years to come. We continue to believe that we are in the early innings of our strategy. And I'm excited for the balance of 2018 and for the years to come. Bryan, please open the lines for Q&A.

My pleasure. Thank you, sir. [Operator Instructions] And our first question will come from the line of Michael Gallo with CL King. Your line is now open.

Hi, good afternoon and congratulations on the continued momentum.

Thanks, Mike.

Thanks.

Yeah, so just to kind of delve into a little bit on some of the pricing work you're doing, I was wondering if you can update us on where that stands, how we should think about that opportunity, whether you have anything baked into the fourth quarter from any of the potential pricing optimization task, and kind of how we should expect that'll phase in as you hit 2019? Thanks.

Sure. So, Mike, we don't expect that it's going to be hitting nationally until probably the middle of 2019, potentially Q2. What we're doing is we're doing four different test sales, looking at a few different things: looking at the structure of the menu, the layout; how do we better communicate our platforms; also looking at individual line pricing, testing bundles. There are a handful of things that are being involved in the test. I'm very excited how the test is going thus far. We look to expand upon that during Q1 of next year, for then a launch later on in the year. In terms of Q4 of this year, really would have a de minimis impact on the overall results.

Okay. Thank you.

Thank you. And our next question will come from the like of Jake Bartlett with Suntrust. Your line is now open.

Great. Thanks for taking the questions. Dave, could you help us out? You gave us a little bit, but I'm hoping you can be a little more specific with how you excited the quarter on same store sales, what you're saying about the early part of the fourth quarter? Right, kind of excluding the calendar shift in July, it looks your run rate was about 6% for the remainder of the quarter, so I'm just wondering whether that's the number we should think about with your momentum. And then, I also had a question about just helping us, for last year as we think about how difficult the compares get in the back-half of the fourth quarter. But you think you could give us any more detail about how the - what the cadence of the same store sales was in a monthly basis last quarter or last fourth quarter?

Yeah, sure, Jake, so I'll answer kind of the second part first. So as a reminder for everybody from the company perspective, we were negative 3.8% in same store sales during Q3 of last year; that improved to negative 0.9% during Q4 of last year. So we started seeing some of the momentum. And as we see how the brand has progressed over this year, we excited Q3 very strongly, very pleased with what we're seeing thus far during Q4. But the reality is we are going to start facing some tougher comparisons. I mean, particularly we had a very mild December from a weather perspective. And as many of you know, our geographic penetration heavily dominated by the Upper Midwest, the Mid-Atlantic and the Rocky Mountain West. So I want to be pragmatic in recognizing that. We started seeing some of the initiatives take hold in Q4 last year and also seeing - we'll also go against much more difficult comparisons in December. December itself was in the positive low-single-digits last year.

Got it. And then, are you baking in any lift from the delivery of rollout, now that 80% of the system is on DoorDash? Is that baked into the fourth quarter guidance here?

Very modestly, because what we've seen with delivery and the initial restaurants that had it, also with our franchise community, is that it really is a build over time. I mean, what we have seen thus far since we launched, still very encouraging. We're pleased with where it sits. At the same time, we have seen it typically build over time, so not much incorporated into Q4.

Okay. And then, on the margins, you raise your same store sales guidance. You're closing some stores, which I presume were - are less efficient, but you didn't raise the higher end of our margin guidance and then some of your profitability. So just what is the main driver to what's kind of less - what's pressuring the margins that you hadn't expected before?

Well, part of that actually is - even though, we haven't baked a lot into the same store sales perspective for delivery, we do have more delivery that's expected for Q4 this year than what we had originally anticipated. And as many of you know, that's not the highest margin sales growth that you can have. You typically get much more leverage off of other initiatives. That is one component. And also as we look at the marketing spend last year was relatively low marketing spend, about 0.6% of sales. We expect to have a modest increase in marketing expense versus what we had originally contemplated as we continue to pursue, where there is some trial of the zucchini noodle.

Okay. And then, lastly, you commented before about your - the initiatives you have planned for really kind of the May timeframe of 2019. And at that time, before we knew Zoodles was going to do, you talked about how you're more excited potentially about what's happening in 2019 than what you had going on in 2018. Is that still true? And how much visibility do you have on what is to come on 2019 in terms of how far the tests have progressed?

Yeah, sure, so we're very excited for what 2019 has to bring. We're in the kind of the midst of finalizing that overall calendar and plan for 2019. I think as you look at the initiatives, we have around off-premise, some of the refresh work we're doing with the brand, I think from the zucchini noodle perspective that better-for-you platform will continue to have great dividends for us. So still very excited with what we're going to see in 2019. And similar to this year, it's going to be holistic. You're going to see us not just address one aspect and opportunity of the business, but we'll be touching on off-premise operational and culinary initiative. So it's too early to say what we think 2019 as compared to 2018, but I know, I'm pretty excited with what we have in test right now.

Great. Thank you very much.

Thank you. And our next question will come from the line of Greg Badishkanian with Citi. Your line is now open.

Hey, guys. It's actually Fred Wightman on for Greg. I was just hoping, you could give us a bit more information about what you're seeing in terms of adoption for Zoodles specifically. I mean, if you look at some of those trail markets, how is adoption trended as we sort of move along that maturity curve?

Sure. So from a trial market perspective that what kind of like to call back a little bit to how we approach the test. That was primarily operational and we didn't do much marketing and PR, and so we actually went national with it in May. I am very pleased with what we're seeing from the zucchini noodle. It has not seen a diminishment or diminishing in terms of its incident kind of bolstered again as we introduce the zucchini Indonesian Peanut Saute, also introduced zucchini Truffle Mac earlier this month. So from the decay curve perspective, which you'll typically see with the new item, we have not seen that with zucchini, which is one reason why we didn't pivot away from it. We continue to reinforce it during Q4 of this year, and still think there's a lot of legs left in that.

Okay, great. And then, if we look at some of the expanded delivery partnership, you guys talked a few times in the prepared remarks about the sales contribution. But if we think about that from the profitability perspective. Can you just give us a little bit more info as far as what you're seeing in terms of check size, frequency, how much of that you think is cannibalizing, what would otherwise be in short order would be really helpful?

Yeah. I mean, certainly with my background coming up do the finance ranks delivery of something that I approach with healthy amount of cynicism in terms of what's truly incremental versus cannibalized. And encouragingly, we're still seeing that vast majority of it is incremental business, and is overall accretive to overall EBITDA and certainly the sales as well. From a margin perspective in pure percentage, as we said earlier it's not as high of leverage as you would see from other initiatives, but still very pleased with what we're seeing. A bit too early to understand what changes in frequency, how that impacts the overall frequency of the business. And from a check perspective, I think no secret that delivery orders tend to have a higher check average than other order modes, but also believe the delivery tends to be take - tends to be something that lends itself to higher group orders as well anyway.

Perfect. Thank you.

Thank you. And our next question will come from the line of Nicole Miller with Piper Jaffray. Your line is now open.

Thank you. Good afternoon and congrats on a great quarter. I had two quick questions.

Hey, Nicole.

Yeah, thanks. So if you - when you talk about the returns of growth, the opportunity for a smaller footprint. Is this something that's your both company and franchise development? Or do you favor one ownership model and development going forward?

Yeah, I'd certainly love Paul take quick approach to that question. And it's something we're pretty excited about in terms of just the overall opportunity for the brand, both from a company and franchise perspective.

Yeah, Nicole. This is Paul. I think that is going to give us the ability to influence growth really in both pathways, both company and franchise. Given that, we're already over 50% off-premise. So the work that we're doing with a smaller footprint both in the front house and in the back house is how can we meet where we think the buck is going in terms of the consumer from a convenient standpoint. And what we're seeing is not necessarily have the need for as much seating in the front house, you still need it. So with ability to do that and the ability to over time have a lower investment cost is not only attractive to us, but it's attractive to franchises both our current and we believe as our performance continues to improve and our model improves. It will give us the potential to have conversations with new franchises in the future.

And then as you contemplate that return to a more accelerated pace of development. How do you just think about capital deployment in general? What's the right amount of that, I note that net debt to EBITDA is fairly benign, I think the leverage is about 1.5 times right now, but maybe just walk us through that process? Thanks.

So we are certainly taking a disciplined approach, Nicole. If you look back to a few years ago, when the company was building 50 to 60 restaurants a year that's not something that I would see in our near future. So we'll be pretty disciplined with our approach, don't think you'll see us to have substantial increase in debt, actually I think it'll be free cash flow positive in 2019. One reason, I'm extremely excited about how we're approaching development this time is, where we got kind of two paths from the prototype front. The first path as Paul mentioned, we don't need as much square footage in our restaurants. Today, we're much more off-premise, so we'll able to save cost and have a better economic model, just with the current operating systems as they sit today, we'll have a pickup windows in many of our restaurants, which we're excited about. And then the second kind of approach that we're taking is also bringing some third parties to help us from an industrial engineering perspective to really look at that back of the house kitchen. And Nicole, that's where I think there is a tremendous unlock for us in terms of making much more efficient model for our teams to just execute better and still fabulous job. And I think that's going to have a great legs maybe not so much in 2019, but I think it can really drive 2020 and beyond. And certainly as you continue to execute on either one of those paths, you're going to see more and more franchise excitement for the brand.

Thank you very much.

Thank you. And our next question will come from the line of Andrew Strelzik with BMO Capital Markets. Your line is now open.

Hey, good afternoon. So my first question is just a couple for me. My first question is, in the press release you mentioned a number of different cohorts, where you're seeing strength driving the comp momentum. But as you're collecting customer data, is there really any one cohort that stands out that's really driving things more so than the others.

Really there is pretty equal, Andrew. I think, that the zucchini one has been the most powerful to me, because what it allowed us to do is really bring back a lot of lapsed users that really enjoyed the brand, but they felt like they haven't been able to use us for a while. So that's one I think is ultimately the most powerful and redefining the brand. But I don't want to shortchange the impact that off-premise and operational improvements have had on the business. As a reminder, this performance we have had in the momentum we gained, it's really started in Q4 of last year, and we're already pretty healthy on the positive side even before the zucchini launch. So I think the zucchini launch was fabulous about it is, when we did finally launch it we were in a much stronger position to execute. So short answer, I do think the zucchini is most powerful in the long-term. But collectively, I think it's been the power of all those initiatives together.

And on - I thought the - in terms of the pricing test that you're talking about potentially rolling out for next year, bundles was one that really stuck out to me is something that you're testing. And so, I recognize the check growth from this quarter was kind of discrete related to Zoodles. But I'm just wondering how comfortable are you with check growth that you're seeing, is bundles a way that you're thinking about maybe managing the check? And do you think that a bundled offer would attract different customer? Or is that kind of just something incremental for an existing customer?

Actually - this is Paul, by the way. I think the answer is both. We in the pricing test, we're doing work against bundles. And so far, as Dave mentioned earlier, certainly like what we're seeing. But I think it, what it does is it gives people the opportunity to use us in a different way. So I think, people who want to use us that way, they don't can use the brand now. I think, it gives on that opportunity. And then, I think with some of the existing customers they would, I think, skew a little bit more that direction if we give them the opportunity to do that. So - and frankly, I think, it also helps us as we look down the road from a value perception. And - I mean, we're pretty excited about, because I think like you just mentioned, we see that and really helps the brand in two or three areas in terms of choice of how to use us, and also from a value perspective. And so far, I mean, the test is early. We'll be bringing to some of these things to bear on the market in 2019, but we're happy with what we're seeing.

Okay, great. And then the last one for me. There's been a number of things going on in terms of the asset footprint between closures and slowing the growth and all of these things. As you look to start to reaccelerate that. Can you just give us a kind of some early thoughts, but how you're developing that plan. Is that going to be more of kind of back for markets or are you starting to look at new markets? Or just any kind of thought process about how that's going forward relative to kind of a couple of years ago?

Sure, sure. I think, certainly you will see much more infill of existing markets. I love where our footprint sits today in terms of we've established markets and it still have some room to grow and then we also have several markets that we're really not that much penetration. And so, I think as we build those it is well, I think, there is great opportunity. So you'll see mainly in the backfill side.

Okay, great. Thank you very much.

Thank you. [Operator Instructions] And our next question will come from Andy Barish with Jefferies. Your line is now open.

Hey, guys. Just a follow-up on the delivery, it seem like the target was more or like 50% and you're at 80%. Am I missing something there? Or were you able to kind of get a few more DoorDash markets up and running a little bit earlier than expected?

Yeah, part of it, it's actually all of the same. We saw some great results, and then from DoorDash itself saw to the ability to have an expanded footprint. The results that we have had us accelerated just attached. It was very late in the quarter in Q3, so not very much impact there. But ultimately, we like what we're seeing and like the footprint and operational execution from the DoorDash perspective. We did have a little bit more of a modest assumption earlier on just because you are relying on third-party, you are relying on integration, which one to be safe with how we expect - what our expectations were.

Great. And then on the restaurant level margin opportunity for next year, you're sounding a little bit more optimistic. Any sort of one or two key drivers, obviously, beyond continuation of solid comps.

Yeah. It's a pretty holistic approach, and so I see we pointed out a few in the call earlier. Yeah, I think the pricing test is a big one in terms of the structure not just the pricing element itself, but the structure driving people towards more profitable dishes. From a supply chain perspective, very happy with the progress that we're seeing in terms of just revisiting all of our approaches, our discipline of platform. So I think, there's great opportunity there. Back of the house, we're in the midst of testing right now a new back-of-the-house system that will first touch labor and then will ultimately touch food. We see opportunities from a technology perspective, they continue to look for efficiencies. It's a pretty holistic approach, I think, you're being layered in over time. I think, you're going to see it impact turning in the calendar of January 1. But we certainly see a lot of different levers that can be pulled.

Great. Thank you very much.

Thank you. And our next question will come from the line of David Palmer with RBC Capital Markets. Your line is now open.

Thanks. Dave, you have mentioned operations and then operations improvements that you made as being a reason why the comps were improving, even before you had the zucchini noodles. And within that time frame, you had some closed stores. And so, there might have been some coexistence of reasons why the comps were already improving. In fact, it felt like fast casual and general is getting better over that time. But are there things that you can really point to that make you feel like your operations are improving in a way that you can sustain at least a better level of comps than you had in the past, even without these sales layers like delivery and the menu innovation that you're doing? Anything that could help us get our heads around the operations recovery would be helpful.

Yeah, certainly, I mean, I think I'd point to just some of our people metrics. I've seen in our business that the path that you always see the sales growth is that it starts with your people metrics improving. Then you see operational metrics improved, then guest scores within sales. We still see the fundamental foundation of that being people, continue to improve our management turnover, is lower than it's been in many, many years. So continued improvement just in the foundation of the people side, particularly, from that turnover tenure perspective, I feel very good about the foundation we've got. Maybe Paul can add to that as well.

Yeah, David, this is Paul. I think a couple things quite honestly is that it does start with people. It starts with the retaining your people and training your people. And I think we've done a far better job over kind of the last 12 to 16 months of addressing the people needs. We've rolled out a new, basically training and development program that we're seeing. It's having a real impact on - and frankly, the - not only training and develop, but the accountability at the store level for the operational execution of the brand. And so, not only that we're seeing it in our scores, we're seeing it in our - if we kind of look online in the social media. And frankly, we're seeing it in our store visits, not only when Dave is out in the store or Brad West, or the regionals and RDOs. We're seeing a real uptick in the level of execution at the store level and we think that's kind of where everything begins. And we can make brand promises about Zoodles and quick pick up and other things. But it comes out to where we're executing against that to deliver, make sure the brand promise is happening. And then, we still have certainly room for growth at, but I've seen a real growth in the company on that, and basically, a real change in the accountability for executing at the store level.

Yeah, I'd even add to that comment an orthodox metric, Dave. And that is our No Kid Hungry program. So we partner with No Kid Hungry. Our team members at the restaurant level are asking our guests, if they'd like to donate as they take an order. We have always punched above our weight in terms of the amount of donations that we get for our size. And last year we set a pretty high mark at about $1,000 per restaurant. We beat that by about 20% to 30% this year. And when you see the teams engage at that type of a level to where they are all in terms of where we're trying to take this brand from a culture perspective and involving the community and just having an extremely positive experience for our guest, that's an unorthodox metric to be looking at. But I think it's a really good signal for how strong our team is today in the operations side and their level of engagement. They do have great pride in what…

I just want - that's helpful. I just want to ask one more about development as you're contemplating reaccelerating unit growth. You mentioned perhaps some value engineering the box a little bit, maybe getting down towards 2,000 square feet versus where you were before at 2,500 plus and being more off premise in your focus in general might make that better return for you. But are you - is that beyond that format and the size of it? How else are you thinking about growing differently than you did in the past? I think you mentioned infill, is that because you're thinking about getting better density, and therefore, better delivery concentration or getting closer to neighborhoods? Like how are you thinking about it this time differently?

Well, first, tremendous discipline on every site selection that we have. There is no compromising. There is no talking to ourselves into the access or the parking or whatever it could be. So I think that's first and foremost, the critical piece we're doing is quality over quantity. From a market perspective, we have so much opportunity with infill, several markets of ours that we're only at 1 restaurant per 3,000 or 4,000 population. And in our more established markets, we're probably 1 per 80, 1 per 90. So we know there is tremendous opportunity there. Then to your point, that leverages your opportunity to delivery, it leverages your supply chain, leverages your people. It has so much benefit across the board. And the brand awareness will just continue to grow in those markets. So we don't feel it's a need for us to go into far flung new markets. Certainly, there is a time and place where we will be entering that. But we see a lot of runway just in the markets we're in today.

Great. Thank you.

Thank you. And I'm showing no further questions in the queue at this time. So now, it's my pleasure to hand the conference back over to Mr. Dave Boennighausen for any closing comments or remarks.

Thanks, Bryan. We appreciate everybody's time today. I'm really excited with where the brand is going. I think the momentum that the team has been able to accomplish is something we're very proud of. Again, I appreciate your time today. I look forward to the balance of 2018 and talking again early next year.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program. And we may all disconnect. Everybody, have a wonderful day.