Good afternoon, and welcome to today’s Noodles & Company Third Quarter 2020 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I will now introduce Noodles & Company’s Executive Vice President and General Counsel, Melissa Heidman. You may begin.

Thank you, and good afternoon, everyone. Welcome to our third quarter 2020 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I’d like to start by going over a few regulatory matters. During our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including details 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 2019 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company’s forward-looking statements. I refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company’s annual report on Form 10-K for its 2019 fiscal year and subsequent filings that 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 third quarter 2020 earnings release and our supplemental information. Now, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Mel, and good afternoon, everyone. I look forward to sharing with you today the continued progress that Noodles & Company has made since the onset of the COVID pandemic and our excitement with the opportunities that lie ahead. Before I discuss that though, I would like to share how incredibly proud I am of our team members and partners for their continued commitment to providing delicious meals prepared safely, quickly and consistently at our restaurants across the country. Our team has never been stronger and their dedication has allowed us to navigate through these challenging times and gives us confidence in our ability to take advantage of the opportunities ahead. Of course the health and well-being of our team members and guests remains our company’s top priority, we continue to actively monitor and follow local and Federal mandates related to COVID-19 and are committed to remaining a leader in the fast casual space in our health and safety protocols. We believe that our approach has increased trust and brand equity with our consumers which is evidenced by our sales recovery, as well as improvements in guest sentiments that has occurred during the past several months. Although there remains uncertainty around the duration and severity of COVID-19, I have never had greater confidence in our opportunity to thrive and accelerate growth in the years to come. Today, I’d like to focus on three key areas of our strategy to take advantage of this opportunity. First, continued differentiation of our concepts to appeal to a broad range of lifestyle, convenience and dietary needs. Second, activating our brand, particularly through our digital assets and marketing strategy, and third, accelerating unit growth to take advantage of the operating model, we feel is perfectly suited for a post-COVID world. I’ll start with how we…

[Operator Instructions] Our first question comes from the line of Jake Bartlett with Truist. Your line is open.

Great. Thanks for taking the questions. Dave, my first one is on the October quarterly or month-to-date of flat and you mentioned that 50% of the markets are doing better and 50% are doing worst. Can you give any more detail around that? Maybe what is – can you comment with the stores that are doing worse than net average?

Sure. I think, we’ll start from the geographic perspective. So, obviously, Jake, as you follow the industry and others who follow the industry, the segments of the country are behaving differently in terms of their impact on the restaurant space, well known that the northeast particularly impacted. The upper Midwest has been probably right behind the northeast in terms of the impact the COVID has had on sales and there were recent restrictions that were implemented in several counties in Illinois. What we are seeing is that we have a large number of our restaurants that are in the upper Midwest states, particularly in Minnesota, Wisconsin and Illinois. They continue to lag beyond the rest of the country just as we are seeing with the rest of the industry. I think encouragingly, we are not seeing any change in the trajectory of their business from October versus September. So that gives us quite a bit of encouragement. Where we are seeing particular strength on the other side of the equation continues to be those markets that don’t have much planned awareness that people are really beginning to understand, discover and gain affinity and loyalty to our brands. So I had mentioned Northern California and the Phoenix markets, those continue to be great strong points as our several other areas that we are seeing that brand awareness really start to kick in.

Got it. And I think as of the last business update that you gave in early October, you mentioned that you would just reopen some company-owned stores for indoor dining. Just by the commentary in October it doesn’t seem like that had a huge impacts, maybe if you could just give us a feel for how the stores have performed as you’ve reopened indoor dining? And I think within that maybe you could frame what the risk is if restrictions come back?

Sure. Ultimately, dine-in still only was about 5% to 10% of our sales during the third quarter and we continue to see that thus far in Q4. I think one thing that’s important to note is that, as we enter the winter months, we already talked about the preponderance of restaurants that we have in the upper Midwest. Our brand actually becomes less – on dine-in when you get to the winter months as we see more people shift towards off-premise and enjoy the food in their own homes. We already have significant strength there. So, and I am not sure we’ve not seen a significant – we’ve seen some incremental lunch business from the opening of dining rooms if that potentially were to go the other direction, we feel very comfortable that we are well positioned to actually still maintain some nice improvement in our sales trajectory.

Got it. And then, last question is moving on the drivers of same-store sales from here going forward. Wondering if you could frame kind of what you think are going to be most impactful. Whether it’s menu innovation with gnocchi coming on? Or whether it’s kind of finally be able to really utilize your customer segmentation in your rewards database? Maybe just kind of give us some of the drivers and what you think are going to be most impactful?

Yes. I think, I’ll start with what’s the foundation and the foundation is our team members and our operational strength which we would put up against any in the industry and very happy with our team and how they continue to rise for the challenge. And specific to new initiatives, I would expect that our marketing channel mix will just continue to improve. We have had some great success in terms of lowering cost per acquisition and improving our email open rates, improving the content engagement. But we are at the very early stages. So there remains quite a bit of upside that I think will carry us through not just Q4, really several years into the future. Also honestly feel we are in the early stages of some culinary innovation. I think the gnocchi that the cost for our gnocchi I discussed on the call really can be a very meaningful driver for us given its, not just health profile but its taste profile as a plant-based alternative that is low carb, that is low cal, gluten free, full serving of vegetables. So, I think there is culinary innovation there really across every segment of the business, we continue to see there being opportunity from the digital engagement to culinary innovation to even things like, reducing some of the friction from our curbside experience.

Great. Thanks a lot. I appreciate it.

Thank you. Our next question comes from the line of Nicole Miller with Piper Sandler. Your line is open.

Thank you very much. A quick housekeeping and then, I’ll get to a question if that’s okay please?

Absolutely, Nicole.

On October flat for the system, if I go back and piece together the pre-release and then what I heard today, can that still imply company is up and franchise is down a little?

Not necessarily. There is some geographic impacts. As we said the upper Midwest. It is similar kind of company relative to franchise, but the geographies continue to be a challenge on that franchise number. As a reminder, we have a smaller segment of franchise restaurants that are in the same-store sales base and one of those are in the upper Midwest. But ultimately, you can assume that – kind of that comparison of company to franchise is similar.

Okay, great. And then, price and mix within comp, I think you’ve been talking about those together. It’s been running around 3% to 4%. Has anything changed there?

Yes. This number is one Nicole that I think for the entire industry has become a bit more challenging to really understand and it’s lost of a little bit of its relevancy certainly like the rest of the industry, we were seeing outsized growth in average check than what you would typically see. And it remains volatile enough, but I don’t and I fairly think it’s appropriate to disclose what the exact numbers are. But I do want to provide some facts here. To show how it’s kind of an unusual environment where the check mix dynamics aren’t what they normally are. Delivery through third-parties, roughly 25% of our sales during the third quarter, we have a 10% price premium. Certainly see this is effective price increase that is much more substantial than you see in a normal environment. So, ultimately while we don’t think that typical mix is as relevant as it has been in the past. It is safe to say that we are seeing a significant amount of check growth similar to others in the industry.

Yes. That is fair and I hear you on that. Maybe turning to getting ready to reaccelerate development, I was comparing and contrasting tonight’s results in terms of the AUV runrate 1.187 wasn’t that much different frankly to the last growth cycle. So, how do you expect these new units to come on in terms of the percentage of a mature volume?

What’s exciting for us is that we are seeing that, our restaurants has been opened in the last two years are actually meaningfully above the company, but from a sales perspective, as well as a margin perspective. And I attribute it to a handful of reasons different from where we were at during the last growth cycle. First and foremost would be the concept itself is in a much stronger position in terms of how we’ve been able to in a pre-COVID world really build average unit volumes still with a margin profile. Our brand is, I think more clear in our guest mind and the net promoter score is a test to that. Additionally, I would add the discipline that goes towards to our site characteristics, our economic model. There aren’t compromises being made through that and you see that in the effectiveness of those new restaurants that has opened. Third the model itself, we streamlined quite a bit of the operations. It’s easier to train. It’s easier to operate. The drive-thru pickup windows are a game changer in terms of increasing the amount of convenience. As I said that restaurant that set all those daily records were just opened in October, very large percentage of their sales are going through that window and only averaging just over a minute per transaction. But I think, all three of those are important. The fourth one, which is the one that gives me the most excitement, if you will is our pipeline. So, Nicole, the people - the people pipeline. The bench strength that we have within our teams is so much stronger than it was during our last growth cycle in terms of – and opening these new restaurants with top performers that know the brand. Our turnover, our operation metrics, our people metrics at new restaurants are dramatically better than where they were during the last growth cycle. And they are actually better than the company average. So, the combination of a better concept that’s easier to run an economic box and an operating box, that is much more suited for consumer trends. And then a very, very strong people pipeline gives us a lot of confidence that we’ll be able to enter this next phase of accelerated growth in a much more favorable position.

That actually is very helpful. Thank you. Last question and I’ll mute myself, what can you share on the CFO search front? Thanks, Dave.

That I say we are in the final stages and we’ll hope to be able to make an announcement somewhat in the next several days.

Alright. Thanks again. Congrats to you and your team.

Thank you, Nicole.

Thank you. Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Your line is open.

Hey, David. It’s actually Dan on for Andrew tonight. Thanks for taking the questions. First, you talked about the opportunity to reaccelerate unit growth over the next couple of years and you touched on some of the potential real estate opportunities that could emerge moving forward. I guess, I am just wondering, are you beginning to see any sort of uptick in real estate opportunities already today? And if you are, what kind of sites are becoming available? And are they properties that could work for the brand?

Yes. We are already seeing some nice benefit, Dan, and very excited with how the pipeline is shaping up. I do think there is a reality of – good sites are – great sites are great sites and particularly the box that we are very well suited for which is that small square footage with the drive-thru circulation. Those remain in high demand. One thing we are excited about is the conversations we are having with developers and landlords around where some of the disruption in the industry, how properties would be redeveloped to be much more suited for that box, which really just fits in the wheelhouse of where Noodles & company does great. So, they think there is some time for that to settle out, if you will, because the availability of the exact title box we want will take a bit of time, but we are seeing already really strong green shoots in terms of that pipeline being able to develop, not to mention we continue to explore items like the off-premise only, potentially at those kitchen as well. We continue to see some really nice opportunities from those fronts as well.

Got it. That’s actually pretty interesting. And then, just you touched on Noodles rewards program a little bit. It sounds like you are pretty pleased with how it’s worked for you during the pandemic. I guess, I was just wondering if there is anything you could share in terms of just maybe more specific learnings from the program so far and anything you are looking at in terms of maybe a change strategically in terms of how you are engaging with customers moving forward.

Yes. I think, going forward, what you’ll see, Dan is, quite a bit more customization, personalization and targeted, not just communications, but ultimately even the appearance of the menu and how that overall experience from the beginning to end will be more personalized. Now that’s a journey and it will take us sometime to get there. Right now, we are focusing much more on reducing friction. Some of the things we are seeing is that the conversion rate of when people go into our website or through our App for ordering continues to increase. We are seeing a lot of people come into the phone that are new guests and again I come back to some of those newer markets and less saturated markets. We are seeing that growth be particularly instrumental in our sales recovery and then we are seeing our loyal guest increase their frequency meaningfully. So there still is, kind of that swap in the middle where we think it’s going to be a tremendous growth opportunity for us as we continue to enhance and develop that program. So, what you’ll see is, I think just our overall strategy become much more - targeted much more personalized than it is today. We’ve already made good progress. And the team has done a very nice job and we are in the very early innings.

Okay. Great. Appreciate the color and thanks for taking the questions.

Absolutely.

Thank you. Our next question comes from the line of Andy Barish with Jefferies. Your line is open. Check that if you are on mute. Andy? Our next question comes from the line of Marshall Pittman with Jefferies. Your line is open.

Hi. How is it going? It’s for Andy, I think we had a little tuck issue just now. Got a sort of quick question on G&A, it’s about $2 million or so higher sequentially and I was just wondering if you guys could break that down and if this is a level of G&A we should think about going forward at least in the near-term?

Yes. From a G&A perspective and we will be filing the Q early in the morning some of that detail. You also see it in our release itself. A lot of those were non-recurring items, particularly from the stock compensation side, and as well as some of the severance line items you did have some non-recurring expense that occurred kind of quarter-over-quarter, if that’s what you are seeing in the comparison. But from a normalized - so from a normalized basis, if you look to Q2 to Q3, excluding those events, actually Q2 to Q3 roughly flat.

Okay. Great. And just lastly on labor, obviously, you are seeing a lot of efficiencies now and I believe you said, next quarter should be little lower than last year for a total margin. But just on the labor, just wondering if you could elaborate on, if you think we could see the same kind of efficiencies next quarter and just what you think going out to next year?

Very modest uptick, Marshall, as you have dine-ins open. There is a little bit more labor that does come into the system. But it should be relatively modest, because we have been able to find efficiencies throughout all of our processes, implemented lot of those really over the last year even just during COVID. But additionally, we have 60% of your sales coming through digital channels. You just don’t need as much front house, as much front house presence as we had in the past. Those we expect will continue to carry forward into a new world. Additionally, we spend quite a bit of investment in the training of new hires. We think that’s a very critical part of our success as we have seen turnover go down meaningfully over the last, really couple of years, but particularly in the last several months of COVID. We would expect that will carry through, as well. So, on the net labor it should be relatively similar, Q3 to Q4 as a percentage of sales, potentially a little bit of an uptick just to accommodate the dining rooms that are reopened.

Got it. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Todd Brooks with CL King & Associates. Your line is open.

Hey, great. Thanks guys. Couple questions for you. One, you talked about the northern tier exposure of the brand and it’s an opposite of the lot of other concepts that have that small exposure through the southern states. If you think about the northern tier, and you think about competing concepts in that market and how much that they have benefited from the ability to create capacity without door dining. As you are looking forward to Q4 and Q1 in those markets, do you feel there is share that comes back to Noodles as other competitors aren’t able to service customers the incremental outdoor capacity?

Yes, absolutely. So, patio is obviously we have, significant amount of patios in those upper Midwest, Todd. But that has that – Tennessee that I saw the historical trend that I talked about in the earnings call where during the winter months we are just not nearly as reliant on dine-in business as we are during the other seasons. That’s particularly amplified in the upper Midwest and people do shift towards off-premise in general. So the combination of maybe some of the other concepts that don’t have that off-premise capability and then our particular strength in it gives us confidence and ultimately that trend is going to reverse. We have seen, not just ourselves in the industry as a whole that upper Midwest be under a bit more pressure throughout the COVID pandemic. We do feel that we are positioned probably better entering these winter months than most of our competitors.

And do you have any early reads on the benefit of curbside in those markets? And the thought of creating new occasions for customers that don’t have to get out of their car. But want to fill up and grab their noodles at a specific time.

Sure.

What you have on the increments salary?

Huge increment salary, actually. We don’t expect it would necessarily be an enormous percentage of sales. But all of our analysis has shown that it is a nice driver of incremental versus other channels. And I think in the upper Midwest, you particularly will see it. I’ve obviously visited a lot of our restaurants. Colorado and the Mid-Atlantic often aren’t – don’t behave that much differently. Eastern has some parking lots that of the 15 available parking spots, six of them are taken up by snow and that maintains for a significant amount of the season. So, continuing to reduce friction for curbside. Certainly, the drive-thru windows as we continue to build those out in new restaurants, the few percent that we’ll be able to retrofit from a company side, those will all be huge benefits. And to put some tangible aspect by what was it was curbside, we have a good program right now, Todd, that you can order digitally, select curbside, say what kind of car you are at. But we do have the friction of when you get to the restaurant, you actually have to call a number and call the restaurant. That is the type of friction that we are going to be eliminating in the next several weeks to allow that that particular channel and that particular experience to be more improvement and even better than it is today.

Great. And then a final question, you talked about third-party delivery fees and the pricing actions that you are taking. But the platform is being an important source of Noodles customers and that’s a reduction to the brand. If you look at your digital platforms and kind of coming into maybe, let’s hopefully have the second half of the pandemic here, what are the thoughts around efforts to drive these new to brand customers to Noodles native digital platforms or online platforms? So that the service fee burden is there. What’s the trigger duration that you need to see out of the behavior before you try to migrate them?

Yes. I think we want to migrate them to the second – from the time that they discover the brand, we want to migrate them over immediately. So, what you see is, take the opportunity to message those particular guests in the way that we are able to – we do offer, as an example, free delivery. We currently are launching purely through our own channels. So, you can do free delivery if you go to our App or through our website. But not if you go through the third-party aggregators. We do feel those third-party aggregators, as I said are extremely important in terms of getting people to discover the brand and there is certainly will be guest, but that’s how they continue to use restaurant brands for delivery. But the combination of different price premiums, different delivery mechanisms or promotions, the rewards program itself and just communicating them, we want that process to start immediately.

Will you message more aggressively against it when the premium on the menu price becomes greater later this year?

That is not currently part of the plan to aggressively promote the price disparity. We don’t think that’s necessarily the right path to do it. But they will see, significant benefits of just the overall rewards program. And clearly that, I mean, it does show up for those that are ordering that there is a better economic answer for them than going to the third-party aggregator.

Okay. Great. Thanks, Dave.

Thank you. I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Boennighausen for closing remarks.

I appreciate that Suwanda. Appreciate everybody’s time. I said it to several folks before that I do think as challenging as 2020 has been, in a couple of years, we will look back at this from a Noodles & Company perspective and say, yes, 2020 was challenging. Yes, it was scary times early on in the pandemic, but it really will become an inflection point and an ability for us to accelerate growth from a brand awareness, averaging its volume margin, unit growth perspective, faster than we probably would have otherwise. And so, extremely proud of the team for how they positioned us to be able to say that. And look forward to finishing off this year and then 2021 and beyond. Thank you again for your time.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.