Good afternoon and welcome to today’s Noodles & Company’s Fourth Quarter 2021 Earnings Conference Call. All participants are now in a listen-only mode. After the presentation – presenters’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach.

Thank you and good afternoon, everyone. Welcome to our fourth quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I’d like to start by going over a few regulatory matters. During our opening remarks in response to your questions, we may make forward-looking statements regarding future events, or the future – financial performance of the company. Any such items, including details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections, and actual events or results could material – could differ materially from those projections during a number of risks and uncertainties. The Safe Harbor statement in this afternoon’s news release and the cautionary statement in the company’s annual report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risk and uncertainties related to the company’s forward-looking statements. I refer you to the documents the company files from time to time with Securities and Exchange Commission, specifically the company’s annual report on Form 10-K for its 2020 fiscal year and subsequent filings we have made. These documents contain and identified important factors that could – that cause actual results to material differently 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 measure is available in our fourth quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl and good afternoon, everyone. 2021 was an important year for Noodles & Company as we made significant progress against our growth objectives. Validating the resonance of the brand for today’s consumer, as well as setting the stage for accelerated unit growth, which is now underway. For the fiscal year, revenue increased 20.7% compared to 2020 to over $475 million. Comparable restaurant sales increased 22.1% system-wide and digital sales increased 20%, accounting for 57% in total sales. Restaurant in the margin for fiscal 2021 increased 400 basis points to 15.9%, culminating in 233% increase in adjusted EBITDA to $38.1 million for the year. As we look back at 2021, one important aspect is the underlying AUV momentum that we’ve seen throughout the system. Evidenced by the record AUVs of $1.3 million that we achieved in Q3 prior to the staffing and Delta variant challenges of the fourth quarter. Even with the impact of Delta and staffing challenges, for the full year average unit volumes reached an all-time high of $1.3 million, representing approximately 22% growth over 2020 an increase of over 11% versus pre-pandemic 2019. We saw strength throughout the country with particular momentum in less penetrated markets where we – where we were able to accelerate brand awareness to target digital efforts. As AUV grew in 2021, we’re also proud of the efficiencies gained throughout our labor model, particularly with the implementation of steamers that will be completed nationally this quarter. The gains from these efficiency initiatives will manifest themselves throughout 2022, both to reduce labor hours as well as improvements and throughput in tough times, which are critical as we face increased demand, both in existing and new locations. Finally, during 2021, our newest vintages of restaurants performed at our highest level in company history, validating our…

Thank you, Dave and good afternoon, everyone. We are very proud of our full year financial results, which represents strong upward momentum towards our accelerated growth objectives even with a challenging market backdrop. For the full year, total revenue in 2021 was $475 million and nearly 21% increase compared to last year. Underlying our revenue growth, our average unit volumes were $1.3 million for the year, a 22% increase from last year and in a 11.3% increase versus 2019. More specifically on the fourth quarter, total revenue was $114.8 million, an increase of 7.1% compared to prior year. Comparable restaurant sales increased to 11.2% system-wide, comprised of a 9.5% increase at company-owned locations and a 20.8% increase at franchise restaurants. Average unit volumes for the fourth quarter were $1.31 million, representing 14.9% growth compared to 2020 and a 10.8% growth rate compared to 2019. And the reminder average unit volumes is adjusted for restaurants that have been temporary – temporarily closed for a full day, but is not adjusted for temporarily reduced hours. As Dave noted, while the business regained significant momentum during the latter stages of the fourth quarter, October and November were particularly challenged first by staffing issues, and then the prominence of the COVID-19 and Delta variant in our most penetrated markets. This led to an increase in both temporary closures as well as reduced operating hours, which we estimate negatively impacted the fourth quarter by approximately $8 million in revenue. This increase in temporary closures combined with one-time staffing incentives also impacted our restaurant level margins during the fourth quarter. Restaurant contribution margin for the fourth quarter was 12.4% compared to a 13.6% margin during the fourth quarter of 2020. For the full year, contribution margin increased 400 basis points versus prior year to 15.9%. Cost…

2021 was an extremely successful year for Noodles & Company, despite the well documented industry challenges related to COVID, staffing challenges and increases in inflation. Well, there are means and ways as we enter 2022, the fundamental business has never been stronger, with significant improvements in our culinary innovation, digital and marketing capabilities, not renovated model efficiencies, all bolstered by our value proposition that allows us to mitigate the current inflationary environment. Most importantly, the brand is now embarking on accelerated unit growth with a model perfectly suited for today’s environment. But despite the strength of recent classes, the expected opening of 7 system – 7 locations system-wide this first quarter, and increased momentum [technical difficulty]. Noodles & Company is well positioned to be one of the premier growth stories in the restaurant industry. Now look forward to sharing our success with you in 2022 and beyond. With that, Alexander, please open the lines for the Q&A.

Thank you. [Operator Instructions] We have your first question from Jack Corrigan with Truist Securities. Your line is open.

Hey, guys. Thanks for – for taking the question. And my first one is just on what’s implied by your same-store sales guidance with mid-single digits in the first quarter? You know, if I’m doing the math, right with 2.7% in January and 7.5% in February, you’re sort of already at mid-single digits. So does that imply just mid-single digits in March? And I guess why wouldn’t we see an acceleration from here?

Yeah, Jack, we certainly think that there’s opportunity for acceleration from here, the only aspect that we – that we like to keep in mind is – is the weather. I mean, we saw that the Upper Midwest competitors or restaurants in the Rocky Mountains, they have an impact on the business. And just knowing the volatility and weathers want to respect that has the potential to impact March as well.

Great, thanks. That’s helpful. And then I guess, the second question is on your staffing levels. And is there any way you can quantify where your staffing levels are currently versus – you know maybe versus ‘19 or versus what do you think full staffing would be at this point for these volumes? Like how much is that limiting your sales – sales still currently?

Yeah, we think that limiting on sales is very minimal. So it’s a very small percentage of our restaurants that are now currently short staffed, not out of the woods yet by any stretch, but at the same time, the momentum has been extraordinary and the retention of the team has been great. I think one thing, Jack that we point to, that we’re particularly proud of, and as you look at that recovery from a staffing side, our cook times actually thus far at 2022 are the best they’ve been in the history of the company. So we not only have got staffing to a much higher level, but we’re executing at a very high level. Part of that has to do with the steamer initiative, for sure. But a big part of the staffing coming not quite to where we’re at 100%, we’re getting much closer.

Great, thanks. That’s – that’s really helpful. And then just last one on development. Yeah you had elevated store closures in ‘21. And you said you expect too in the first quarter? Is that the only closures you expect for all of ‘22 –

Yeah we are – sorry, go ahead, Jack.

No, you go ahead, sir.

Yeah, we’re finally at the malls. So there were some signs that from a finance perspective, it made sense for us to wait until the lease was over, before we ultimately close it. We’re now at the end of that. So as there’s highest potential for one and two where either the developer has something happen or we see it or we see a different opportunity to consider a relocation or something like down the road like that. That’s always possible. We’re finally now at the end of all those closures that were related to really just the review of the portfolio and how trade area dynamics and the consumer need to change. And as we noted, one of those locations as example was the mall location that we expect to close here in Q1.

Great, thanks for the questions.

We have your next question from Andrew Strelzik with BMO Capital Markets. Your line is open.

Hey, good afternoon. My first question you mentioned some of the inefficiencies as well as some one-time expenses in the quarter. Can you quantify how much the one-time stuff was in the quarter? And then is there any assumption for 1Q and the guidance you gave as well were kind of not from the costs?

Sure. For the quarter, the one-time impact that we had, which particularly showed up in our labor margins was $1.1 million, that was related to one-time staffing, such as the retention bonus, sign on bonuses, but also related to the COVID related sick pay or vaccine pay. From a go-forward basis in our Q1 guidance, there is no expectation for any of those to continue, no more one-time charges. We don’t anticipate that to be throughout the duration in next year – sorry, this year.

Yeah, got it. Okay so that’s helpful. And then obviously understand the – the kind of regional pressures in some of your key areas in the Upper Midwest and the Rockies. I guess I’m just curious you know what are the trends look like in maybe the rest of the country? I mean, did you see just as we’re kind of thinking about understanding how to you know, temporarily this isn’t those types of things, just kind of maybe more durability in some of the other regions? Could you speak to some of those trends, please?

Yeah, absolutely. So as you look at the Mid Atlantic, you look at sort of the Southwest, those markets that were not impacted by Delta, one you know it was encouraging that they carry over the momentum manager from what we’ve seen in Q3, pretty much throughout all of Q4. And so they didn’t actually start seeing the impact of their business until here I mean that directly push to our 2022 with Omicron, which gives us that added confidence in terms of the overall trajectory of the business that are drawing momentum.

Got it, okay. And then my last question is just on the menu. So, recently here just announced some of the new salads going on the menu. You talked about linguini. Recently, we’ve seen Truff Mac, and it just feels like the menu news. Pace is kind of accelerated here. Is that right? Is that intentional you know maybe some holdover from the last 24 months or maybe that you know, the environment wasn’t as conducive? I’m just kind of curious how you’re thinking about further opportunities across the menu as well kind of rolling forward here? Thanks.

Yeah, I mean, let’s just start with just the overall power of [technical difficulty] and we think that one has just great potential similarly [technical difficulty] and for the brand in terms of expanding the overall reach into so many different – different types of occasion in guest profile. That’s what has been in touch for a long time. Salad was something that we’ve been tested for a while as well. This is ultimately a pre-deliberate discipline process where we have lots of – lots of different items in tests. And you can expect to continue to see that type of innovation really for the foreseeable future and in terms of every three or four months that plus having some good menu news as we do it, we take things off the menu as well, to ensure that we don’t sacrifice I mean that operational complexity. But I will say they will – they will be pulp like celery, fresh category we’re excited about that certainly is the one that as we look at 2022, it will be the great driver and another reason we have such great confidence that will gain momentum throughout this year.

Got it, thank you very much. I’ll go ahead and pass it on.

We have your next question from Andy Barish with Jefferies. Your lines open.

Hey, guys. Wanted to just get a sense – excuse me, on the marketing side. To clarify, did you say with – with the COVID surge that you actually kind of pulled back on what you would have expected from a marketing side? And then, I think it’s the – the messaging and the creative supposed to evolve a little bit in ‘22? Can you kind of let us know how that you know kicks off in the – in the 2Q beyond just you know product news?

Yeah, if you’ll see – you’ll see things shift from being more transactional, which is what we saw during the first part of COVID. And then and you’re correct, it wasn’t that we pulled back significantly from a marketing perspective. But there was a little bit of a muted nature to it, given all the staffing challenges that you saw you know throughout the industry, as well as – as well as the impact of Delta, a little bit of Omicron. What you will see as we look into 2022 as, us, harness that full power of all the data insights we’ve had, the – these improvements we’ve made to the digital assets, which you’ll see those continuing to evolve and improve as well. In general, just making the brand more visible, pointing out to all those great aspects from our cooking methodology to how we approach people, to service, to the value proposition, to the variety of food. This brand has so many great attributes and elements to it, that we still feel we’re just scratching the surface in terms of consumers really truly knowing that and what’s great about the data that we’ve got and the improvements we’ve made throughout our – our guests engagement as well as our orders platform is we’re so confident that the activation is going to be as effective and efficient as well.

Got it, thanks. And then Carl, on the – on the G&A side of things, I guess, is that $12 million you talked about in the 1Q a pretty good run rate. And – and do you get any – any noticeable savings from you know California now being – being franchised you know with that market kind of probably needing some regional support out here, given it was you know it was not contiguous to some other areas?

Yeah, that’s right. So – so first from a runway perspective, I would assume that it’s – it’s a somewhat lower quarter than the full year if you think about analyzing the quarters, just given some of the cadence of our historical spend. So I would anticipate that Q1 and beyond we see a little bit elevated G&A expense. In terms of California, there is a death benefit there certainly. So I would expect that, that is baked into our number. It does help us streamline some of the operations.

Okay. Thanks, guys.

We – we have your next question from James – Rutherford with Stephens Inc. Your line is open.

Thanks for taking the questions. Hey, Dave and Carl. I wanted to dig – dig in a little bit on the margin guidance for the 1Q and most importantly, the ramp through into the back half of the year. Starting on the COGS side of it, I think I heard you say that you’re expecting 28% to 20% COGS margin in the first quarter, then back to 25% in the back half of the year. We know your menu price assumptions for each quarter. What are you assuming on the commodity inflation front to get you back to that 25% COGS margin by the back half of the year?

Sure. James, let me walk you through a little bit. So, first of all, we are continuing to see this inflation pressure on our cost of food. It’s really driven by the commodity price volatility, staffing pressures, and as I mentioned, particularly protein. In the first quarter, we do see elevated levels of inflation. What we’re estimating right now is around 18%. These challenges we’re seeing ongoing, and we’re still seeing some elevated pricing even at – at where we are today, particularly in protein. In terms of the go-forward, there’s really two elements here. First, it’s the pricing action that we’re anticipating to take, we’re looking to take about 2 – sorry about 3% to 4% pricing action in the second quarter. So that’s going to be a key offset. But in terms of what getting back to normal looks like in the second half, you can imply about mid-to-high single digit levels of inflation just in the second half. That’ll get us back to normal levels.

Okay, thanks for that. Flipping over to the wage piece of it. If I have my notes correct, I think wage inflation was around mid-single digits last quarter. I think you said high-single digit 9-ish percent this quarter and then guided low-double for the first quarter, correct me if I’m wrong on those numbers. But, where do you think we find the top end of that? It sounds like most of your restaurants are fully staffed based on what Dave was saying earlier. What are you predicting for wage inflation? How that progresses through the year?

So first of all, you’re correct on those assumptions. That’s what we’ve seen so far. And that’s what we’re anticipating in the first quarter. We are anticipating that wage inflation for the most part continues, there will be some relief as you go throughout the year. But we’re anticipating that that remains at elevated levels. A lot of that is due to rehire rates, in addition to increasing our wage band as we remain competitive in each of these markets. And then thinking about what’s going to get us back to that 30% target by the second half of the year, it’s really three things. First, it’s ongoing efficiencies that we’re now anniversarying and having in full run rate, particularly our steamers, which are going to complete in this quarter. The second is, there were some one-time associated costs with our labor force in 2021 that we are no longer going to be anticipating this year. And then finally at our sales leverage, as we look at you know the continuing growth in traffic and pricing, we’re anticipating sales helping to drive that 30% target cost for labor.

Very helpful, thank you. If I could slip in one more. Dave, on the – the unit growth expectation for next year, which I think is still 10%. You know conceptually what kind of mix do you think and you know it’s probably like numbers, but between kind of company-owned and franchise and what sort of visibility do you have into – into that growth acceleration?

Yeah, visibility continues to strengthen. We’re really encouraged by the sheer number of quality that we’re seeing through the pipeline, making obviously, the development environments a little bit volatile, but we’re very pleased with what we’re seeing there. The overall mix but it’s still going to be a little bit dependent upon you know how we see that the franchise community changed their solid rate of growth as we’re seeing momentum there. We would expect the majority of openings in 2023 to be company-owned and then shifting in 2024 and beyond to be closer to 50:50 mix in terms of company-owned and franchise of the mix.

Excellent. Thank you guys, really appreciate the help.

Thank you.

We have – we have your next question from Nicole Miller with Piper Sandler. Your line is open.

Thank you, good afternoon. Just super quick on 4Q. Was the $1.1 million labor investment you’re talking about was that all in 4Q?

That’s correct.

Okay. And so the question is then on the $8 million of sales impact from Omicron. Is the only store level margin impact at $1.1 million or did that hit other areas of the store level margin?

So first, the $8 million was actually related to Delta. So Omicron has more of an impact that we saw in the first quarter, particularly January into February, but Delta was the impact in the fourth quarter. So, to your question, it was – it was both the $8 million and then the associated flow through in addition to labor inefficiencies for restaurants that were operating at partial hours, plus the $1.1 million, so there was certainly a compounding margin impact.

So the $1.1 million translates to a 100 basis points. So if you didn’t have these COVID variants, you know store level margin would have been 13.4% instead of 12.4%. Just to put a finer point on it, you’re saying there’s – there’s other things to take into consideration and would have been even better than 13.4%?

That’s right, Nicole. So for that $8 million of revenue impact that were related to partial closures, both full day closures and partial day closures. There’s – there’s labor inefficiencies associated when you’re – when you’re operating just a day part or having to close intermittently. So, I agree there is – there were other factors impacting labor as a result of those temporary closures.

Okay. I mean, I’m sure it’s difficult to tease out. But if there’s a number to throw out you know let us know. And what was the percent marketing in 4Q?

That for our fourth quarter marketing is just around 1% which is consistent with what we saw - in what was seen in prior quarters as well, a little bit lower in terms of absolute dollar strength versus what we’ve seen partially you know as we saw the impact on the revenue side of Delta.

And I asked that then in the context of coming forward to 1Q with all the conversation and guidance you’ve already – addressed at this point, and assuming the marketing isn’t changing too much in the operating line, then, the store level margin in total for 1Q is barely going to be double-digit. I just want to make sure we’re all on the same page before we hang up here. Is that – is that the indication? Because you didn’t really address occupancy and other operating costs.

Yeah, Nicole, that’s about right.

Yeah, that’s correct. So we – we actually guided 7% to 9% in terms of Q1 margin. Do you want us to give the –

All right, thanks –

Do you want [technical difficulty] everybody in the historical seasonality we have in our brand –

Okay.

In terms of this you know 100 basis points lower for margin perspective then what you could see through the balance of the year. So as we talked about on the call, that Q1 margin guides, it incorporates not just a pretty meaningful seasonal impact that we have – that we’ve always had, but also kind of that elevated element that we’ve seen inflation perspective and the impact of Omicron. But you know as we said, we expect this is going to materially improve throughout the course of 2022. We expect that will be approaching 20% restaurant level margins present back half of the year here.

Just one more last question on the subject. And I realize it’s a very challenging question. But you know if we couldn’t absorb all the detail and just back up high level and say, gosh you know you’re making a little bit less here than in any other period you know if you want to pick the same quarter or different quarters, but for the same or different reasons, right, it’s a little bit of a question mark. Is the Delta between like Omicron market or let’s say COVID market conditions? I think the Delta then is just the – the commodity inflation. Can you slice and dice it that way and say, okay, that 7% to 9% store level margin should be this if demand had been normalized if like you know and it should be this, if commodities, if you could keep pace with price action?

Yeah. When I think how we articulated that is that COGS we expected in the normal environment is around 25%, and due to inflation we expect that to be 20% to 29%. So significant inflation here during the first part during Q1. Now when we alleviated that, not just through, we expect some improvement in the inflation over the course of the year, but also through the price action that we’re taking from a labor perspective, again, our expectation is between 33% to 34% always have been higher if you want, again, from the seasonality perspective. So, this one is more related to just some of the inefficiencies through Omicron, we would expect that labor line to have some meaningful opportunity to actually have leverage over the course of the balance of just ‘22.

And just – very last question. It could be a little challenging for franchisees with the sales being inconsistent and commodities being up like this. What kind of conversations are you having with the current potential franchisees and how are you lending support?

Yeah, very positive actually. They understand the impact that also has had on the business as well as own product inflation. These are just tiny multi-ended operators that they’re encountering all of this on their – on in their business as well. And they’re attracted to us because they see that pricing power and the value proposition. Most importantly, they see the track record of 30% plus cash on cash returns from our most recent classes, that’s even before we’re able to implement some potential cost savings. So, they’re encountering the same challenges in their markets that we’re seeing throughout the industry. And you know when you look back at 2021 as a whole, extremely strong year for us after a margin expansion as well as the expansion perspective. And we see the cadence bridged us ‘22 being remarkable as well and there remains tremendous confidence from that side.

Thank you.

[Operator Instructions] We have your next question from Todd Brooks with The Benchmark Company. Your line is open.

Hey. Good afternoon, guys. Thanks for the questions.

Hey, Todd.

A couple of – couple of questions here. One, you’ve bumped the AUV goal for fiscal ‘24 by another $50,000 here. So $1. - $1.5 million. Can you talk about what percent of the current base is above that hurdle already? And what the restaurant level operating margin profile of those stores look like that are above $1.5 million?

So Todd, the – we have of our existing restaurant base, I would say anywhere from 30% to 35% that’s already above that level. And they’re operating certainly above the 20% contribution margin. When we were looking at this at $1.4 million or $1.5 million on prior targets, you know over 40% of our current locations were at that current level also. And again, operating at 20% contribution margin or above.

So with the increase in the AUV goal, does the 20% goal continuing for contribution margin just reflect inflationary realities or because that it sounds like the base that’s already north of the $1.5 million is above the 20% target?

I don’t know if we could say realities versus uncertainties in terms of we feel that this concept has the ability to expand margins meaningfully not just even through this year, but beyond. But just want to reflect there is uncertainty in terms of what the overall inflation environment looks – looks like in 2023 and beyond. So really reflects that in terms of the overall cost as well, that the brand can lever beyond 20% its size ever.

Okay, great. And then can you share with us the proceeds to the company from the sale of the 15 units to Warner Foods?

Now something that we have – that we will be disclosing, as Carl mentioned in terms of the overall impact on the business from either perspective, relatively not negligible for 2022 Well we’re excited about in terms of this transaction is such a great established partner, and as they build up that territory, will be meaningfully accretive. I’m kind of across the Board for our P&L, the proceeds very solid deal but at the same time, not material enough to having to move the needle significantly in terms of the overall balance sheet.

Okay, great. And then finally on the franchising pipeline. Just you talked about maybe a little bit more of a corporate store next to the 23 openings before getting to 50:50 now and ’24. Is that just reflective of some lost momentum with discussions due to Omicron? Or how would you – how would you talk through that pipeline and the momentum that you would have around initial additional announcements here in the near-term?

Yeah. Actually that was always our expectation, just given the realities of as we sign on these new transactions that are over and maybe 1 in 2022, 2 or 3 in 2023 as you build more and more momentum, there’s a waterfall effect that ultimately that gets to you know roughly 50:50 split, which is the math behind it, it doesn’t really happen until 2024. So that was actually always the expectation was that we were not going to be able to kind of get 50:50 split for the new growth perspective until 2024.

Okay. And do you feel like Omicron slowed down the ability for us to see more announcements in the – in the near-term? Or is it just pushing out kind of closing deals for reality that everybody had to operate through?

We don’t think so. I – we certainly you know recognize that during the staffing crisis, we talked about and I think we saw more of it then. Because during the staffing crisis, Todd, our operating partners and we were talking about they were talking with this prospective franchisees, they would typically have their own concepts during – during that staffing crisis, they want to make sure that they had under control. Omicron is a little bit different in terms of it’s been relatively short in terms of its impact. We saw a significant spike clearly throughout the industry in January, and that come down materially and almost completely subsided here in February. So that impact has been very minimized. People would pass that frequently. So momentum we feel actually has been pretty strong.

Okay, great. Thanks for the questions.

I am showing no further questions at this time. I would now like to turn the conference back to Dave for any closing remarks.

Now, Thanks, Alexander and appreciate everyone’s time today and hope that you have a great evening. Thank you very much.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.