Good afternoon and welcome to today’s Noodles & Company's First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Noodles & Company's Chief Financial Officer, Carl Lukach. Please go ahead.

Thank you and good afternoon, everyone. Welcome to our first quarter 2023 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 2022 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 2022 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 our most directly comparable GAAP measures is available in our first quarter 2023 earnings release and our supplemental information. To the extent that the company provides guidance it did so only on a non-GAAP basis and does not provide reconciliation of such forward looking non-GAAP measures to GAAP. Specifically, forecasted adjusted EBITDA, adjusted EPS and contribution margin are forward-looking non-GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable effort. The corresponding GAAP measures including net income, earnings per share and income or loss from operations are not accessible on a forward-looking basis and such information is likely to be significant to an investor. Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl. And good afternoon, everyone. During the first quarter, Noodles & Company delivered strong results with comparable restaurant sales of 6.9% and a 400 basis point improvement in restaurant level margin versus prior year, culminating an adjusted EBITDA of $7 million, a $4.8 million increase and more than triple our results from Q1 of 2022. Our results in the first quarter are a testament to the continued strength in restaurant level execution and our ability to take advantage of a more normalized and favorable expense environment than we previously anticipated. I'd like to start today's call by discussing our initiatives to improve restaurant level margins. These initiatives were instrumental in driving the 400 basis point improvement we saw in the first quarter. Last year, at this time, we were seeing unprecedented inflation in the cost of many of our core products, particularly our high-quality, all white meat boneless chicken breast. Combined with continued pressure on wage inflation, we encountered the most challenging expense environment that we have seen in decades. During 2022, the company has definitely reacted to these pressures through several cost savings and productivity initiatives. We work with our vendor partners to optimize the production of certain items, maintaining the same quality ingredients while improving efficiencies. We carefully monitored our primary commodities and during the fourth quarter, entered into a fixed contract on chicken for the full year 2023 at very favorable rates compared to 2022. We tested a simplified menu. We're moving approximately 10% of our menu items, which yielded strong guest and operational metrics and was expanded nationwide during the first quarter. We began the rollout of digital menu boards nationwide, which affords us the opportunity to reduce trip testing costs and gives us more flexibility for executing real-time marketing and pricing strategy. And we…

Thank you, Dave, and good afternoon, everyone. I will provide details on the quarter and some forward-looking views. During the first quarter, total revenue increased 12% to $126.1 million compared to last year, driven by strong comparable restaurant sales growth and revenue generated from units opened since 2022. Average unit volumes were $1.34 million during the first quarter, representing a 7.5% increase from the first quarter last year. System-wide comparable restaurant sales during the first quarter increased 6.4%, including 6.9% at company-owned restaurants and 4.1% at franchise locations. We benefited from positive traffic growth during the first several weeks in the first quarter, similar to the positive traffic growth we saw during the fourth quarter of 2022. However, as Dave mentioned, comparisons became more challenging throughout the first quarter, resulting in sequential traffic declines that continued into April. These declines have since stabilized, and we are encouraged by our recently launched traffic driving marketing initiatives, which feature our most craveable menu offerings at attractive entry price points. Pricing during the first quarter was just above 10%, driven by a 5% pricing increase taken across the core menu in mid-February. At its height, we were carrying 13% of price during the back half of Q1 and the early portion of Q2. Since then, we have lapped our primary pricing activity from last year and expect to run meaningfully lower price through the remainder of the year. Additionally, our marketing promotions will include selective pricing reductions across our core menu to maintain several entry point entrees at $7. This pricing reduction is supporting the relaunch of our 7 for $7 marketing campaign, which was extremely effective last fall in driving value perception and traffic. Turning to the P&L. For the first quarter, restaurant level contribution margin was 13.7%, a 400 basis point…

Thanks, Carl. We're proud that the first quarter of 2023 continued the momentum that we saw in the fourth quarter of 2022 as we make progress toward a significant improvement in our baseline adjusted EBITDA. While navigating the current economic environment and the related consumer sentiment can be challenging, we believe our improving margin profile, which in turn gives us the ability to be more aggressive with targeted promotions, the expansion of our rewards consumer base, new restaurant growth and the simplification of our menu should all combine to support meaningful earnings growth in this year and beyond. While it's early, we are already seeing a positive response to our marketing strategy and look forward to sharing with you progress over upcoming quarters. Thank you for your time today. And with that, please open the lines for Q&A. Operator?

[Operator Instructions] And our first question comes from the line of Joshua Long of Stevens Inc. Your line is open.

Great, thanks for taking my question guys. Curious if we can revisit your guest mix or by cohort however, you want to talk about it there it feels like you've got some strong trends among your more loyal rewards, guess we have more connections and more visibility. And then you talked about maybe some softness there on the pricing side with maybe your lower more mid-tier guests? So just - can you remind us kind of what the overall profile of the Noodles customer looks like? And then secondarily, as you start to work some of these more value-oriented price points into the business, how do you communicate that and maybe get some of those guests that you lost along the way back into the store and reengaged?

Certainly, Josh. We certainly skew a bit more towards higher income cohorts. And again, that's an area that we are not seeing as much price resistance where the price resistance we're seeing is in those - that percentage of our gas that tend to be a bit lower, middle income, particularly that delivery guest. That's where we're particularly seeing the price resistance. When it comes to the seven for seven deal, which we're extremely excited about as well as the Mac & Cheese meal deal, you're going to see a very integrated marketing campaign. Certainly, we'll be touching our rewards guests, which we've been very successful with. But additionally, you'll see a little bit more enhanced media, with more social presence inside restaurants and actually utilizing some efforts inside the restaurant to actually share a friend, do bounce back type opportunities to continue to spread the word. And we're very encouraged with what we're seeing so far in terms of returning that lapsed guest back into the Noodles family.

Very helpful, I appreciate that context. On the simplified menu test, that sounds interesting and exciting. Can you talk to us about what you learned and maybe this is the first initial phase of it, but are there opportunities to do another round. Just any sort of early learnings and how you're kind of integrating or digesting what you've seen thus far on that side?

Yes, absolutely. What we feel is ultimately the brand's menu itself today, Josh, is very well positioned to meet the needs of today's consumer. Clearly, we feel that there's opportunity from a value perspective. And what you'll also see is we're leaning into the customer favorites, which in today's consumer environment, we are just seeing guests gravitate towards. Hence, when you look at the promotions around Mac & Cheese, around Rice Crispies some of our most favorable item - or most craveable items. For the menu simplification test -- what we're seeing is we've been able to identify through all of our data from the rewards membership program as well as other third-party sources that there were certain items that were potentially a little bit more difficult to execute from the operational side as well as had clear substitutes from the existing menu. As an example, one of the dishes that we removed was our orange chicken. And even as we reduced an item on that category or the Asian category, our mix in the Asian category remains the exact same. We were able to move all of those people into our Japanese Pan noodle, our Korean beef or our pad Thai. We found all of that through testing. And importantly, from the operational side, we saw significant cook-time improvements. We saw better 90-day retention rates as people were able to be trained easier. From a new restaurant perspective, significantly easier to train new guests as well. So, we're seeing better operational metrics from our most recent few openings. So, there were great learnings in terms of just how we can improve the efficiency and effectiveness inside our restaurants, give a better guest experience and at the same time, not have the concern that we could potentially lose guest. Because we are seeing them shift to items that we know - they'll love and they'll come back time-and-time again for it, so continue to believe there is still opportunity in there. We like what we're seeing thus far from the changes we've made, and it's something we'll continue to evaluate.

Super helpful, I appreciate it. And one last one from me, Carl you mentioned a couple times that 2Q was kind of come in below your internal expectations. You might have shared some of the points, and if you did, I missed it, and I'll go back to the transcript and pull it, but are there specific items that you'd point us towards that within the context of maybe a softer 2Q, but then the overall annual guidance for the year being reiterated?

Sure. So I'll start with - we did reiterate our full year guidance particularly the contribution margin of 16% to 17%. And we are happy with our new traffic driving marketing initiatives thus far, and that's factored into the guidance. In terms of the cadence throughout the year and what we were indicating for second quarter, this will be the most challenging quarter for us. As with the rest of the industry, you've seen a shift from average check driving comp and margin to traffic being the driver again. And that's what's underlying all of the marketing and traffic driving initiatives that we have in place.

Thank you.

Thank you. One moment please. Our next question comes from the line of Andrew Barish of Jefferies. Please go ahead.

Hi thanks. Hi guys, are you willing to share what April comps wound up being or at least some tied or range?

Yes. Ultimately, Andy, we don't believe that what we've seen thus far in the quarter is very indicative of what you're going to see for the full year - for the full year of 2023 as well as even Q2. As you've heard from others in the industry, there is some noise in the calendar. I think more importantly for us, in particular, the comparisons become meaningfully softer as we get past mid-May. So, we're already seeing some nice momentum from the - marketing activities that we've been doing. But ultimately, we feel like the quarter-to-date numbers aren't really indicative of what we would expect for the full quarter.

Got you. And then just a clarification, did you say - I mean there have been some items on the seven for seven that have moved up and you're actually taking some menu price reductions on some things. I've never heard of anybody doing that, I don't think?

Yes. Actually, so in August of last year, Andy, we introduced a seven for seven menu, which has seven of our most popular dishes, including our Mac & Cheese, our Japanese Pan Noodles, our Pesto Cavatappi. And at that time, those were actually not - they were not - it's not a price change. Those were already items that on the whole averaged $7. When we did this most recent price increase in February, which again, we feel it was the appropriate approach given the importance of preserving margins and expanding margins as we ultimately saw. But we had not foreseen necessarily. The consumer sentiment being a little bit softer than we've potentially expected for the industry as well as the overall expense environment being as favorable as it was. So those were items that had temporarily kind of shifted above $7. We're returning them back to $7, might not be permanent, Andy, but this hits about 50% of our guests is not a meaningful change in terms of the overall pricing of the system. But we feel it creates an incredibly attractive price point between the $7 price point for those core very strong dishes, combined with the $10 price point for the bundle that includes that famous Rice Crispy treat and the drink, we feel we're going to be in a very attractive price point for what the guest is looking for today.

Understood, thank you. And then finally, just understand the dynamics in delivery. First of all, do you think some of it is seasonality or the way you slice cohorts, it does appear to be some price resistance. And then with the lower percentage, is there a benefit you're seeing up in paper and packaging as well as in lower delivery fees and other operating expense?

Yes, absolutely. And some of those, I think, and one reason why we can't give too much action into Q2 is because how those delivery trends change. One benefit of it is people are shifting to more profitable channels for us. We're pleased with the overall delivery program. We think it is additive absolutely to the business. When you look at the declines though, Andy, we're looking year-over-year. So from a year-over-year perspective, so it kind of removes seasonality. You are correct seasonally typically a Q1 and a winter would have higher delivery seasonality, but this is purely looking year-over-year. We've been seeing that shift. Again, we think part of it has to do with price. But additionally, there is a larger macro trend around people just shifting towards more on-premise occasions, which again for us are more profitable. So that is a trend that we think the whole industry is seeing and we're seeing as well.

Andy, what I'll add to it, just on your comment for the expense environment, we're seeing a favorable expense environment. The paper and packaging costs yielded to are also supporting the COGS favorability. A lot of that is also just our cost of food, which we're seeing lower inflation than anticipated. So these tailwinds on the expense environment are affording us the ability to take these traffic-driving marketing initiatives.

Understood, thank you guys.

Thank you. One moment please. Our next question comes from the line of Todd Brooks of The Benchmark Company. Your line is now open.

Hi thanks for taking my questions. Just a follow-up to Josh's question to begin with, can you bucket high income, maybe 100-plus households versus how are you define mid-tier versus low so we can get a sense of that customer mix?

Yes. I'll tell you that how we look at those particular cohorts Todd, is a little bit dependent on the market. So when you look at Noodles & Company, which tends to be a more suburban concept, not coastal, we look at ourselves relative to the market median. And from that perspective, we skew more towards higher income than most of our fast casual brethren. That said, it is the restaurant space we have broad appeal. And so, you still do see a meaningful number that does exist in that lower middle income tiers.

That's right. And Todd, just to put some context on the numbers about 55% of our guests are over 100,000 annual household income and the remaining 44% are under. So that's how we look at it in terms of our distribution.

Okay, great thanks Carl. And then the second follow-up there, you talked about really returning to some pricing value messaging, especially to the rewards database. But then I think you also said that rewards frequency, it's only down a few percent. So I guess, how do we broaden the messaging around value at Noodles out beyond just marketing to the rewards customer to maybe that customer that never got over the rewards hurdle that's leaked out from a frequency standpoint, how do we get them back in the restaurant?

Yes. I think that's one thing that's incredibly exciting, Todd, is we do have just a much more dialed in program in terms of getting very effective media out there. We do expect marketing spend to increase modestly from Q1 to Q2, probably about 1.5% to 2%. That includes a heavy up and particularly focused on new and less guests. We're able to target those guests specifically. And while traditionally, we might have 70% of our media spend. And when you think of media, you think of web, you think of social, you think of connected TV. Traditionally, it is about 70% of our spend that went towards people that were existing guests. And that obviously has been very successful. So you only had about 30% that was targeted towards newer guests, look like guests to - our most loyal, so look like that would be new as well as lapse. We have now shifted that towards 70% of our spend, is going towards that environment. Additionally, as you look at that, the messaging itself is very much around value. It's very much around the seven for seven. It's around the $10 Mac & Cheese meal. So you will see more media spend. And you'll just see, in general, the brand become a bit more visible and we'll be able to do it in just a much more efficient way as well. So it's not as if we have to make a tremendous investment in terms of our overall marketing spend, just a modest investment, shifting the mix of spend will yield tremendous results.

That's great thanks Dave. And my last one, Carl, for you, can you walk through kind of the next three quarters, what the pricing waterfall looks like as you start to roll off some of last year's increases? And then - can you talk to what the negative mix impact would be the rollbacks and focus on promotion relative to what the raw price increase is into Q2? Thanks.

Sure. For the first quarter, we were just over 10% in price. It peaked at the end of the first quarter at around 13%, and we're carrying that through April. However, we're rolling off some significant pricing actions last year at this time which, are rolling off in May. So you'll see a reduction in price beginning in May of this year to about mid-single digits, and that's where we would expect this to continue throughout the rest of the year with no further pricing actions. As a reminder, last year, the last pricing action we took was in May of '22. So, we're not going to roll off anything else beyond that action last year. And then in terms of the marketing initiatives, this is going to be dynamic. There's going to be a portion of this that as Dave mentioned, will be some spend to get the message out more broadly. That's going to be social media and costs that are around these initiatives. But also there will be some pricing reduction as we learn the guest purchasing these specific items. So it's too early to tell what that pricing reduction may be, but it could be 1% or 2%.

Okay great, thanks guys.

Thank you. All right. Our next question comes from the line of Jake Bartlett of Truist Securities. Your line is now open.

Great, thanks for taking the questions. Mike [ph] it sounds like you're not giving specific second quarter same-store sales guidance like you had in the first quarter. I understand how dynamic it all is. But I wonder if you could help us out whether you expect it to be positive or negative, maybe just to make sure we're in the right zone for same-store sales?

Yes. I think again, ultimately, Jake, we just feel it's ultimately too early. I mean I can share that what we saw during the first quarter was that in March, same-store sales remained positive but traffic turned negative during that back half of Q1. We did see sequential declines then into the first part of Q2. But encouragingly, as we quickly pivoted to that value marketing messaging, we immediately saw some very nice results in terms of some of the changes in traffic trends and even in terms of sales as we lapped on the price increases from prior year. But ultimately, it feels a little too early for us to be giving kind of clear expectations of what we'd expect Q2 comp to be because it's very early on in terms of those promotions.

Okay. And throughout earnings season for the bunch of companies, some restaurants have reported. And we haven't heard commentary that the consumer, even on the lower end, there's some commentary of some check management. But what you're describing seems much more intense than what really I've heard from any of the other companies I cover. So my question is whether your markets are different? I know you're in a lot of kind of smaller markets, maybe it's regionally, but do you think there's anything about your consumer and where your stores are located that make it more sensitive to the macro environment? Just it feels like what you're describing is a, sensitivity to the macro environment that I'm not hearing it from others?

Yes. I wouldn't say it's significantly different from others and I believe there are several folks that have showed that there is a little bit of softness that they're seeing from the lower and middle income consumer, where we're particularly seeing the resistance though, Jake, I think is in that delivery platform, which is unique, because it has that 25% price premium attached. What we had seen during prior price increases was we didn't see a change in that delivery channel. We did see a change in overall menu mix. So as you look at menu mix, when you see a decline in delivery that, also ultimately result from a decline in check. And that's what we're seeing at the moment is that, that delivery channel is the one that we're starting to see more resistance. Now I would layer into that that from a geographic perspective, while I don't necessarily think its value, what we are seeing is that there are some changes in terms of how work from home has evolved for that group versus others. We tend to be a bit more, smaller town oriented, we tend to be a bit more suburban oriented. We are seeing from a pure year-over-year perspective, there is less work from home in those environments, which again, we think is impacting some of the delivery aspect. Our most positive restaurants are certainly urban, which is not a large part of our percentage. But I think as you see this kind of temporary shift of the lapping of Omicron. Those restaurants particularly are doing extremely strong. And then you're just not seeing the delivery sales that you had typically seen from some of those smaller, more suburban areas, which I believe are coming back to a more normal work from home environment.

Okay great. And then last question is on your development. In the past, you've talked about how many signed leases do you have? It's encouraging to hear the 6 to 7 you expect in the second quarter. I see 9 as coming soon on the website. So that's encouraging. But any other metrics you can share that just give you the visibility, give you the confidence that you're going to hit your targets in '23?

Yes, absolutely. So as you mentioned, we have two sites that are actually opening this Friday. We have additional six that are under construction. And then as you look at the vast majority of the rest of the restaurants, the leases are signed and the environment remains fluid from a landlord delivery perspective, in particular, of what we control, we're well ahead of where we need to be. We have a pipeline that can support kind of continued challenging environment can support that fallout -- and still achieve that 7.5% target. So as we had already always expected, it was going to be a bit back loaded, and that does seem to how it's going to play out. But significantly, we have the leases signed. We have the restaurants under development in order for us to hit that objective.

Great, I really appreciate it.

Thank you. I am showing no further questions at this point. I would now like to turn the conference back to management for closing remarks.

Thank you, Benny. Again, we're pleased with our Q1 results and the underlying margin momentum at Noodles & Company. While there remains an uncertain macro environment, we're excited at the initial response that we're seeing from our targeted value messaging activities. And we continue to expect that ultimately, everything is going to culminate into a full year 2023, that's going to be a year of meaningful margin and EBITDA expansion. We really look forward to sharing our progress as we go forward in upcoming quarters. Thank you very much for your time today. Have a great evening.

Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.