Good afternoon and welcome to today’s Noodles & Company’s Third Quarter 2022 Earnings Conference Call. All participants are now in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to hand the call over and introduce Noodles & Company’s Chief Financial Officer, Carl Lukach. You may begin.

Thank you and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I’d like to start by going over a few regulatory matters. During our opening remarks in response to your questions, we may make forward-looking statements regarding future events, or the future financial performance of the company. Any such items, including details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Such statements are only projections, and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The Safe Harbor statement in this afternoon’s news release and the cautionary statement in the company’s annual report on Form 10-K for its 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risk and uncertainties related to the company’s forward-looking statements. I’ll refer you to the documents and the company’s files from time to time with the Securities and Exchange Commission. Specifically the company’s annual report on Form 10-K for its 2021 fiscal year and subsequent filings we have made. Each documents contain and identify important factors that could cause actual result to differ materially from those contained in our projections or forward-looking statements. During the call we will discuss non-GAAP measures which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our third quarter 2022 earnings release and our supplemental information. Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl. And good afternoon, everyone. I'm excited to share with you today the momentum that we've seen in our sales trajectory, as well as our outlook concerning the state of today's cost environment relative to just a few months ago. I would like to start by sharing some of the highlights from our third quarter results, which were punctuated by accelerating sales trends through the quarter, and improvements in some of our key input cost, notably chicken that will manifest themselves in improved cost of goods sold during upcoming quarters. Importantly, we are finalizing a fixed cost contract for chicken for 2023 that we expect will yield approximately 200 basis points of savings relative to Q3 of this year. Our third quarter revenue of $129.4 million was above the high end of our guidance range, reflecting company comparable restaurant sales of 3.4% and nearly 70% growth and company average unit volumes relative to 2019. Company comparable restaurant sales as well as our three year average unit volume growth accelerated through the quarter, including comparable restaurant sales of 6.8% during fiscal September. This trend has continued thus far during fiscal October with comparable restaurant sales of 10.5% and three year AUV growth of nearly 18% through the end of October. Of note we expect comparable restaurant sales to moderate modestly through the quarter as we last the height of Delta Variant related closure activity last year. Still, we expect continued momentum in our three year AUV growth and comparable restaurant sales to remain strong in the high single digits for the full fourth quarter. Our accelerated sales trends are a testament to the great value and extensive variety that we provide Noodles & Company. With regard to value we've been highlighting seven offerings for $7 featuring the entry level price…

Thank you, Dave. And good afternoon, everyone. I'm pleased to share our third quarter results, including the continued momentum in our average unit volumes and the progression towards a more favorable commodity environment. In terms of the financial highlights, comparable restaurant sales, increased 2.1% system wide, comprised of a 3.4% increase at company owned restaurants, and a 3.8% decrease at franchise restaurants. Our third quarter included our most challenging comparisons of the year, particularly at franchise locations. On a two year stacked basis third quarter company restaurant sales increased 18.7% and franchise restaurant sales increased 17.2% underlying the overall strength of both company and franchise momentum. As Dave noted, comparable sales growth during the fiscal October has accelerated to 10.5% at company restaurants and 4.8% at franchise restaurants. Our third quarter revenue increased 3.4% to 129.4 million compared to last year with meaningful growth from both comparable restaurant sales and new restaurants that have been opened since the third quarter last year. This growth was partially offset from the January 2022 sale of our California locations, which reduced revenue by approximately $4.5 million and includes a loss revenue net of royalty payments received. Underlying our revenue growth our company average unit volumes were 1.3 9 million for the quarter, a 16.8% increase versus pre-COVID levels in 2019. For the third quarter restaurant contribution margin was 14.4% a 370 basis point decrease relative to the third quarter of 2021. This decrease was primarily seen in cost of goods sold which increased 300 basis points relative to the prior year to 28.1%. During the quarter the cost of chicken remained the most material driver of inflation as over 50% of our guests choose boneless all white meat chicken breast as an add on to their noodle dishes. Chicken prices rose to unprecedented…

Thanks, Carl. With accelerating sales trends and improving commodity environment and a strong pipeline for new unit growth at attractive returns we remain extremely confident in the earnings potential of Noodles & Company and our ability to ultimately be a premier growth story in the restaurant industry. Our brand has proven resilient in the face of a challenging economic environment. Our innovation has resonated with guest, and our investments in technology and labor efficiency initiatives have the potential to yield tremendous upside to both the top and bottom line as we accelerate year growth. Thank you for your time today and please open the lines for Q&A.

[Operator Instructions] And our first question will come from Joshua Long of Stephens. Your line is open.

Great, thank you for taking the question. And apologies the audio on my line got a little garbled there the answer if you repeated some of this, or you already talked about this, just let me know what I can grab it on the transcript. But as we think about the trends through the third quarter sounds like you talked about acceleration there and then into some particularly strong October trends. Could you provide some context there? I mean, what's driving that strong, particularly on the company side? Those strong trends, and you talked about some moderation there perhaps from some year-over-year comparisons, any sort of context or color you could offer there as we think about that high single digit guidance for the 4Q period?

Sure, I think Joshua, particularly exciting is as we look at that sales trajectory, first off the momentum we gained during the end of Q3. So as we talked about north of 6%, same store sales, this was occurring, despite price actually being less than it was in the beginning of the quarter. So even as we lacked some pricing, we were able to gain significant momentum exist in Q3. I think what's additionally exciting is we did start to lap some of the COVID related closures, Delta related closures of Q4 even as we lapped that particular impact, we continue to see strengthening in same store sales, as well as strengthening average unit volume growth versus 2019. So very steady, consistent growth. Certainly there's an element there that has been related to overall price as well as lapping closures. But when we look at our gap relative to the industry from a three year growth, as well as from a same store perspective, we feel very strongly that first our values resonating as you see with the seven for seven offering second our guest engagement just continues to improve from our rewards program to our digital sales continuing to be a 50% and third just our teams are executing well. We continue to see great operations metrics. Our employee metrics are some of the best in the industry. So we feel there's a lot of things clicking strong tailwinds that will allow us to continue to have that strong momentum. Now as we do lap we have lapped those the most significant closures. We do believe that there's potential for a bit of a moderating in the one year stage for sales. And that's reflected in the guidance, but we do see three year average unit buying growth, normalizing for that impact to continue to strengthen through the quarter.

That's very helpful. Thank you. And shifting gears, maybe to the input cost side, it seems like chicken was maybe persistently more inflationary than was expected. Can you provide additional color there and just housing shaped up understood that we get some benefit heading into next year. But it seems like at least from my notes, we might have expected to see some of that come. Some of that materialize that benefit materialize a little bit sooner is that right? And what kind of visibility do you have in terms of that cost trajectory, now heading into the fourth quarter?

Sure. So for the third quarter COGS as you noted, were 28.1%, which was really what we imagined to be the peak of our COGS performance. And as we forecast for the fourth quarter, we're looking at the high 26% area, in terms of the third quarter performance, specifically, it was generally in line with our expectations. We have thought about 150 basis points of chicken benefit 100, coming from chicken strips, we are seeing that that is again, just moving the chicken through our distribution system. So we feel very confident that that benefit we are getting. The 50 basis points we talked about last quarter was for market pricing. And we're seeing that continue to drive forward sequentially throughout the quarter, but more predominantly and seen in the financials for the fourth quarter. So generally in line with our expectations, it was just moving the product through the distribution center.

Yes, and I'd say that visibility, as we look at the balance of this quarter, as well as into '23 is extremely high. Because now we're entering toward the chicken strips through the system, and then getting into a fixed cost contract gives us that price a surety that from this most volatile ingredient, we're actually going to be considerably favorable. So that 200 basis point roughly impact that we expect to see as we go to '23 we feel there's very strong visibility to that.

Got it. That's helpful. And then maybe one last one for me before I pass it on when we think about the digital menu boards seems exciting as an opportunity for both top and bottom line, as you mentioned. Can you talk about timing? And then do you think about this maybe early on the impact in digital menu boards, more so than not on one side of that either sales driving or just the operational flexibility or efficiency that it offers? How do we think about that from a store level execution or maybe a consumer experience perspective?

Yes, I think it's going to be particularly strong on the consumer perspective and allowing our marketing team to really capitalize on all the great guests insights that we've been able to glean and learn through our guests engagement ecosystem over the past couple of years. One important note with digital menu boards, it is so impactful for us primarily because extensive variety is a strength of our brand. So being able to communicate in a more flexible way, with our guests based on date part, based on trade area dynamics, based on new introduction has been able to really talk about here's the 50% less carbs, 50% more protein with linguini. This is particularly impactful for us. It gives us more flexibility across the board for messaging communication, to testing, to pricing, you name it; there's a lot more flexibility that you get when you come into a digital menu bar ecosystem. We expect this to be rolled out over the next six to nine months across all company restaurants. And we're extremely excited about it. For our brand in particular, we think digital menu boards can really allow us to capitalize and be an unlock on all that great guests engagement that we have within our ecosystem.

Very helpful. Thank you.

One moment. And our next question will come from Nicole Miller Regan of Piper Sandler. Nicole, your line is open.

Thank you. Good afternoon. Can you talk about the marketing spend in the period and what it was versus the prior year? Either percentage or dollar terms whatever you have?

Sure. From a spend perspective, it was 1.4% in the quarter, Nicole, and that compares to 1.3% last year. So relatively in line.

And when you think about the commentary around you talked about value proposition, but also affordability and you gave some average check figures and whatnot. Can you also walk us through for the quarter, the 3.4% company comp what are you rolling in terms of price, and how does that roll into 4Q? Maybe a little on traffic and mix if you have it too?

Sure. So in terms of the third quarter, so price was just north of 10%, which is an area that we've been at for the second quarter as well. In terms of traffic was I'll let Dave talk a little bit more about the traffic case. But traffic was still a headwind and offsetting some of that price increase. As we think about what we're lapping. In August we did lap a 3% price increase last year. So as Dave pointed out earlier, we did see a step down in price sequentially throughout the quarter, which did give us more encouragement at the comp level we saw heading into September and October.

Yes, I think from a mix perspective, and I think this is a good sign of the value proposition, Nicole, typically when you see price increases, you would often see a menu mix become a negative shift as people trade less expensive. We're not seeing that it's actually been negligible if not a little bit positive. From a pure traffic perspective, it was mostly negative during Q3. But as you look at that October fiscal period, running at about 10% price running also just north of 10%, same store sales, you see was definitely turning the corner, in terms of some of the traffic trends that has been the driver of the improvement that we've seen over the last few months has been improvements in that traffic line.

So when you put that all together, do you kind of think about a very lowest of low however you slice and dice the pie of income cohorts? They are going to follow it anyway. I mean, really, if you took prices up to prices down to have energy problems, rent problems a list of problems. And then everyone else is willing to come there's underlying demand and pay what they need to pay, or is that too, too simplified?

It's not too simplified. I'll tell you what we're seeing from medium income and higher income cohorts, we've seen a significant increase in frequency. That's been extremely encouraging. It not only has that consumer been pretty stable for these inflationary challenges they've actually increased their frequency with Noodles & Company. From the low income consumer, I think there's no question that they're still facing the [indiscernible] from an inflationary perspective. We see it in our guidance, incorporating utilities. I mean, there is that element there. So the good news for us is that, especially as we lead into that seven for seven, which is our normal entry level price point, for those dishes, we saw that the resistance or if you will, the impact from the low income consumer was mitigated pretty meaningfully. They were able to see us vis-à-vis our competitors and see that this is what happened with value. And so that's what we're going to continue to lean in for the next few months to be able to maintain as much of that consumer as possible. So long and short of it is middle income, high income consumer, we think is very, very solid relative to maybe people's expectations. For us specifically, we're seeing increases in frequency. And we're being able to hold on to that lower income consumer I think better than we were. Let's call it a few months ago.

Great, thank you for that. I appreciate it.

[Operator Instructions] Our next question will come from Andrew Strelzik of BMO.

Hey, good afternoon. Great, thank you. I guess if I could start on the pricing side, my line also got a little jumbled there right when you were talking about the pricing dynamics and so what it sounded like to me was no pricing since May, no incremental pricing in 4Q and now you have an easing inflation environment on the horizon. So I guess how are you thinking about or what's the governor on pricing decisions moving forward into '23?

I think the governor's certainly feel very, very strongly about our value proposition. We feel there's dry powder, there's pricing power there, Andrew, the governor fuels probably on those other inflationary items. We feel pretty comfortable where commodities are at, aside from chicken, you're seeing durum wheat come down. There are some increases in produce and other areas but overall commodities that are extremely strong. That said the labor environment while it's stabilizing, it's not quite as high as it was. It's still pretty meaningful. We still see inflation and utilities and other areas. We want to see how that settles out a little bit. Again, this is one of those benefits of digital menu boards though. We're going to be able to respond much more quickly and do much more testing, as we see that inflationary environment which regardless, I think we all agree that it's going to maintain volatility, that it might go up and like the down what the magnitude is, we don't know. But it will be volatile. And our ability to maintain that pricing power, then be able to act more quickly, I think is a great opportunity for our brand.

I guess so then should we think with those kinds of cross currents on the different line items in the restaurant? Should we think about kind of a normalized level of pricing? Or do you think you might need to still, keep the foot on the gas pedal a little bit? I guess, if you just put it all together? How should we think about that?

Yes, I will tell you when you look at 2023 from a pure rollover perspective, assuming we don't have any incremental price, the balance of this year, we will ultimately roll over a weighted average effective price increase of about 3.5% . So really, what you're looking at is what would you go above and beyond that, based on the existing environment? Again, we have not touched the core menu since May. So we certainly believe there's power, and there's potential that we would raise prices a bit in 2023. I don't believe it would be near the levels that we saw in 2022.

Got it. Okay. And then the mix commentary was certainly encouraging and just kind of the implications for the consumer receptivity to the brand. I guess I'm just wondering about the $7 price point that you've been highlighting on the menu. I mean what was the impact of that? Did you see migration there? And how does it inform or not inform, I guess how you think about value or other similar types of things as you become a little bit more dynamic, I guess, with the digital menu boards going forward?

Yes. I think one thing that's fascinating is you look at our digital sales, and again, about 50% of our sales being digital when you go to the Noodles website to order, the seven for seven is one of the categories you can choose from. It quickly became the second most clicked upon category, as people were beginning their order flow. Ultimately, interestingly enough, the mix did not change much like we did not see people have less add ons. We saw them shift a bit towards those items, but not a lot. I think what it did, in general and keep in mind, the seven for seven include some of our most popular dishes. So it's not that we're putting underperforming dishes that maybe don't resonate as well. Our entry level price, but it has always been around $7 for Mac & Cheese. So it's just reminding people that the core value, at Noodles & Company is extremely strong. So we're seeing great data there that actually denies much you're seeing it mix but just an overall [indiscernible] and an overall reminder and reinforcement of that value proposition.

The one thing I'll add is the seven dishes excluded a protein attachment. But what we noticed from the guest is even though they click through that area of the website or the app, many of them customize their dish and did add a protein ultimately. So our protein mix takes point remain fairly stable also, which was something we were keenly watching to see if the guest is going to change that attachment behavior.

Okay, great. Thanks for the color.

Thank you. I'm showing no further questions. I would now I'd like to turn the conference back to Dave for closing remarks.

And thank everybody I know it's a very busy time in the earnings calendar season. I'll tell you that we feel just extremely excited as we look at the setup. As we enter 2023. The commodity environment, particularly chickens becoming significantly more favorable. We have great visibility into that. Our new restaurants performing extraordinarily well. As you can see the sales momentum, what we're seeing from the brands and how it's resonating with consumers, the resiliency has been extremely strong. Additionally, as we look at the strong innovation on tap from the digital menu boards, we discussed some of the labor efficiency models within this great opportunity to drive top and bottom line I look forward to sharing with you all of the progress we're making those steps over the course of the next year and over the course of next quarters. Thank you very much.

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