Noodles & Co (NDLS) 2016 Q2 法說會逐字稿

Good afternoon and welcome to today's Noodles & Company second quarter 2016 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 general counsel, Paul Strasen.

Thank you and good afternoon, everyone, and welcome to our second quarter 2016 earnings call. Here with me this afternoon is Dave Boennighausen, our CFO and interim chief executive officer. Bob Hartnett, our new chairman of the board, will also be with us for a portion of today's call.

Let me start by going over a few regulatory matters. I would like to note that during the opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the Company. Any such items, including our guidance about our anticipated results in 2016 and details related to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The Safe Harbor statement in this afternoon's press release and the cautionary statement in the Company's most recent form 10K are considered a part of this conference call.

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 10K for its 2015 fiscal year. This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Now I would like to turn it over to Dave.

Thanks, Paul, and good afternoon, everyone. I'd like to first discuss briefly the agenda for today's call. I will review recent announcements, the state of the business, as well as the second quarter financial results. I will then discuss our current priorities to increase shareholder value.

Before I begin those remarks, though, I would like to introduce Bob Hartnett, chairman of the board. I am very excited to have Bob join the team, as his broad array of skills and within the restaurant industry will be a tremendous asset to the board and the Company as a whole. I look forward to working with Bob over the coming months as we implement our strategic plan. Bob can only join us for a portion of the call but I would like to turn it over to him to say a few words.

Thank you Dave. Hello, all. My name is Bob Hartnett. Some of you know me, and for those who don't, I have been in the industry for 45 years, starting as a dishwasher while I was in college at Steak and Ale. I was fortunate to spend 19 years at Steak and Ale under the umbrella of Norman Brinker and also under the guidance of a lot of other industry veterans you probably all know.

The last thing I did there, I was president of Bennigan's in the late 80s. I then became a Boston Market franchisee and an Einstein's Brothers franchisee in the state of Florida. I opened and operated about 100 Boston Markets and about the same number of Einstein's.

In 1998 I became chairman, CEO and president of Einstein's Brothers here in Denver. For the last 15 years I was CEO and president of Houlihan's Restaurants, where we operated three different brands, Houlihan's, a polished casual brand, Devon's Seafood Grill and Jay Gilbert's, which was an upscale steakhouse. We sold and closed that transaction last December, at which time I left.

I first experience Noodles & Company restaurants 18 years ago while I was living here in Denver and fell in love with the concept and the food. I have followed the evolution of the concept and the menu and am still a fan today, so I am really excited to join the Noodles team.

After spending the last three days here in Denver, I can say there is a talented and passionate group of people who are committed to the brand. I am sure that talent and passion extends to the field organization as well. I look forward to working with Dave, the board and the Noodles team to improve our overall performance, which I am confident we can do.

One other comment before I turn it over to Dave. As we said in our July 25 press release, we have initiated a search for a permanent CEO, and we will evaluate both internal and external candidates. The search is in its early progress and the Company will be able to update you on that search as it progresses. Thank you all, and I will turn it back over to Dave.

Thanks, Bob. I'd first like to take the opportunity to discuss how I see the Noodles & Company brand and our path forward. I have been fortunate enough to work at Noodles for over 12 years now and I have seen the brand grow from 70 restaurants in 2004 to over 500 restaurants today.

I have seen the brand go through a few cycles over the years, seen the Company go through rough patches and come out stronger than it was before. I have seen the Company go through a tremendous run of continuous growth and comparable sales, margins and earnings. I've seen the Company make the necessary adjustments to our menu, people and operational strategies to succeed in an increasingly competitive environment.

Over the past couple of years, I have seen the Company perform at a level that we are not accustomed to, resulting in a decline in averaging volumes and in earnings. However, while I have seen a lot of change over the past 12 years, two things that have endured are the unique differentiated and special way in which Noodles & Company resonates with our guests, as well as the foundation of caring, passionate individuals who tirelessly work to create a dining experience that we can be proud of.

I know that some of the past decisions that we've made may not have come to fruition the way we envisioned. But I also believe that the team knows both the strategic and tactical improvements that are needed for us to right the ship and return to sustainable profitable growth.

Earlier today, we reported an adjusted net loss of $0.03 per diluted share on the previously released comparable sales decline of 1% systemwide. The three main areas impacting recent results have been declining comparable restaurant sales, lower sales from our newer restaurants, and significant margin degradation.

In my current leadership role, I'm working aggressively with our team to make the changes necessary to stimulate improved performance. I will be speaking to our plan to address each of these three metrics during this call.

I would first like to address the large pressure on our margins and earnings, which has been underperformance in newer classes. Our restaurants that are not in the comparable restaurant base currently are averaging about 80% of Company average sales, compared with the range of 85% to 90% that we had typically seen in the past.

On top of that, we had the added inefficiencies of often being in new markets without the economies of scale. We still feel confident in our real estate selection in these units and the brand ability to resonates in these trade areas, but I believe we have lost some of our consistency and execution during our last few years of high unit growth. We will be aggressively working on taking our learnings from prior units' success stories and incorporating them into these underperformers.

Through a combination of superior operational execution and targeted marketing, I am confident that we can bring these restaurants back towards Company average. However, in the short term, these restaurants have led to increased levels of impairment as well as significant margin dilution.

As we focus on improvement in our underperforming restaurants, we'll continue to slow our unit growth rate. After opening 49 Company-owned units in 2015, we expect to open between 35 and 40 Company [opened] restaurants this year.

We plan on slowing down growth again in 2017 to approximately 10 to 15 Company openings. These restaurants will be centered in markets where we continue to see strong new restaurant performance and can gain advantages in scale.

We have tightened our real estate screens considerably to target only A+ locations with reasonable lease terms in order to mitigate risk in the portfolio. We have also signed an amendment to our credit facility that we will include with our 10-Q later this week. This amendment allows us the flexibility to continue to make the decisions necessary to execute our strategic plan.

As the Company continues to slow down growth, we are also taking the appropriate steps to recalibrate our corporate overhead. This past week we completed our restructuring which better aligns our organizational structure with our unit growth, as well as our ongoing operational strategy.

This restructuring is essential in improving our business model and will reduce our G&A labor overhead by over $2 million annually. As part of this restructuring, Mark Mears, our former CMO, has left the Company. In the short-term, his duties will be absorbed by our strong and capable marketing team.

While we will be executing an aggressive plan to carry best practices to our under-performing units, we also recognize the need to revisit our labor model system wide, especially as increasing labor pressures affect our entire industry. For our second quarter, wage inflation remained at 5%, and labor as a percentage of sales increased 180 basis points from the prior year.

We have prioritized three potential opportunities to improve our labor efficiency and execution. First, our preparation and cooking procedures. Second, our [gut busting] model. And, third, a selective streamlining of the menu to reduce operational complexity.

We believe these efforts can make our labor significantly more efficient, while also improving consistency in our execution. Leading the charge on our efforts to deliver excellent operations will be Victor Heutz, who started as our chief operating officer earlier this week. I am excited at the skills, experience and passion that Victor will deploy in bringing our operations initiatives to life.

While we execute these operational initiatives, we also are making the appropriate adjustments to our culinary and marketing strategies to help the brand better resonate with today's consumer. Noodles' World Kitchen positioning is unique in the restaurant space. Yet too often consumers are unaware of the variety inherent in our concept and the strong global flavors that we offer.

For global variety and flavors, we will continue to innovate and build on the success of our recent menu introductions, such as the Chicken Veracruz Salad and the Korean Beef Noodle. But we will also be taking a hard look at underperforming dishes to either improve their taste profile or to eliminate them from the menu.

We will also become more clear and consistent in our communication of our brand promise, reducing the number and types of messages inside and outside of our four walls. As we discussed in the past, in the back half of 2015 we began initiating an integrated marketing plan designed to build brand awareness and increase traffic in our restaurants.

Marketing spend during the second quarter was 2.1% of sales, a 130 basis point increase over the prior year. We will continue to invest in certain markets and channels that we've seen the most success in, but as we focus on our operational and culinary initiatives outlined earlier, we anticipate marketing spend to decline to approximately 1.5% to 1.75% of sales during the balance of the year.

Much of our marketing spend in the balance of the year will be centered around digital efforts, such as paid search and the promotion of our off-premise offerings. We feel strongly that we have gained important learnings from our marketing efforts during the past 12 months that we'll be able to apply effectively and efficiently in these efforts.

As we continue to capitalize on the strengths of the brand, one aspect of our strategy that will remain is our initiatives to support the growth of the off-premise dining occasion. In particular, we are focused on offering a better experience for the 43% of guests already using the brand for off-premise occasions. While we will continue to make every dish to order, online ordering serves as a throughput equalizer for our teams and our guests.

We will be testing various design elements to make the carryout experience more seamless for our guests as well as incorporating online ordering more into our marketing communications. We have also recently expanded our tested delivery through OLO, our online delivery provider, and while early we still believe there is great potential in the delivery occasion.

We also believe that catering as a significant opportunity for the brand has not yet been tapped. We would like our team's focus, though, to be on the initiatives discussed earlier in the near term and so we will be spending the next few months ensuring that we have the right offering and continuing to test more dedicated sales resources.

Finally, we will continue our effort to capturing more business with millennial families. This segment is one of the fastest growing in the restaurant industry and one we have a natural strength in. Last fall, we introduced a kids meal as well as a partnership with No Kid Hungry to help fight childhood hunger in the United States. We are happy to renew that partnership, and later this month we will announce some exciting program to further that commitment.

Noodles & Company has been, is, and will continue to be a strong national brand. We are confident that the initiatives we are working on will return us to sales, margin and earnings expansion in the quarters ahead, but we also recognize that the macroenvironment is challenging and improvement will not happen overnight.

This resulted in the revised guidance that we disclosed in our press release earlier today. We have already taken important initial steps to address our near-term issues, and we are confident that we have the plans in place to support sustainable, profitable, long-term growth.

Caitlin, will you please open the lines for Q&A?

Nicole Miller; Piper Jaffray

Thank you. Good afternoon. I had two quick questions, please. First, Bob, just given your background in the opening statement, what is your perspective on the current consumer environment?

Hi, Nicole, this is Dave, unfortunately, Bob did have to leave.

Okay, I will take yours, your view.

The personal view of the consumer environment, clearly, when you look at the results that have been released, as well as ours, it is a challenging consumer backdrop. It seemed like that started towards April and has been continuing onward.

What we are seeing thus far in Q3 is a similar type of trend in terms of it is just a competitive eating and drinking out environment. The consumers got some uncertainties from the election and everything that has been going on in the world. We don't expect that to change anytime soon.

We do still feel very confident that the brand itself can resonate in good times and bad. Some of our best performance has been during challenging consumer environment. So we feel good that we have the path to move forward.

Then I did want to ask you, in the past you talked about more marketing, now you're talking about less. Maybe give us a little more color. You also talked historically about empowering the field-level team members, and how is there optimism in that? Are they still a critical component to changing the trends?

Sure, absolutely. The two questions are surrounding marketing and branding awareness and how we're approaching that in the spend level, as well as how are we empowering our team. Start off with the marketing question. We did see a lot of success in several the marketing initiatives that we had done, particularly in the DC Metro area.

Some other markets where we had penetration did not have high brand awareness. We know brand awareness means a significant opportunity for our brand. That said, the initiatives that we talked about, whether they be more execution of the World Kitchen positioning, streamlining some of the menu, working on some of the operations pieces, we need to focus on that, Nicole, and that is what our focus is going to be over the next several months. There will still be some marketing because we are seeing some good success in certain channels, certain markets, but we are going to be taking a little bit of a breather from that spend.

As it comes to empowering the field level, I think we just have an amazing team out in the field. I think they are a team that as we have expanded the menu a bit, as we have had a high percentage of unit growth that we have had over the past two years, we put some pressure on the teams and made it a little more challenging to execute the concept. I feel very good that with Victor's leadership with the things that were outlined today in today's call that we are going to be focused on that this team is just going to get on fire and do some amazing things in the upcoming quarters and the upcoming years.

Thank you and good luck.

Joe Buckley; BofA Merrill Lynch

A couple of questions as well. When you talk about changing the labor model for the dine-in business, will there be changes in terms of how you service the guests?

That's absolutely one of the things we're testing, Joe. Those of you that might not be as familiar with the brand, what we do is we serve the food on real china to your table then we currently also bus our guest table as well. Over the past 20 years as fast casual has evolved, what you are seeing is that most fast casual concepts have evolved more to a system where the guests have the opportunity to bus the tables themselves.

What we have seen is that as consumers have been trained they are in our restaurants, even in our more established restaurants, and looking for that opportunity when they are done to be able to bus their own table. What is important for us, Joe, is as we introduce self-busing into our restaurants and start testing that more expansively, it is a great opportunity for our team members to not just execute a cleaner dining experience but also engage our guests better. If they have more time to be able to talk to our guests while they are out in the dining room versus being focused purely on busing the table, I think that is actually a win-win for the labor model as well as a win-win for the guest experience.

Do (inaudible) communicate to the guests that they should bus themselves?

Sure, so that is something we will be working on as we test. It is still in the early stages, Joe. A lot of it, they have been trained in most concepts in fast casual, whether it be Panera or others. They been trained in a way that that is the typical fast casual experience. Certainly, it will require team members. They are still going to be out there busing tables. They are still going to be out there wiping, making sure that they are clean. But we do believe that with a station that has some clear signage and is designed well, it might take some time but we will be able to evolve that and improve the cleanliness as well as that guest experience.

Okay Just wanted to on the unit expansion, slow the unit expansion and obviously [there's been] some impairment charges. Is there a regional focus in terms of the markets where you are still open and was there a regional focus in terms of the stores where you took impairments?

Not as much a regional focus of the impairments. What they often had were -- they were underperforming restaurants that often we didn't execute correctly on the operation side as we introduced the concept. Often they have a higher net book value for various reasons.

As we go forward, and you look at the restaurants we will be opening, those will be primarily in markets where we continue to see great success. We feel very comfortable that the teams are executing our operations at an incredibly high-level, and there are ones that we will gain more brand awareness, more economies of scale as we go in with additional restaurants. So we feel we mitigated the risk as well as we can with restaurants that will be opening in 2017.

Okay. Thank you.

Andrew Strelzik; BMO Capital Markets

I wanted to ask in the context -- I think there's a couple of quarters now where you've taken some impairments on the new units. And a couple of quarters ago you did close some units. Would you look more broadly or do you feel like there's a need to look more broadly at the unit base right now, potentially some closures in some markets, anything like that that would be on your radar?

It is certainly on our radar. As we take a fresh look at the portfolio, we will be evaluating if there are restaurants that are good candidates for closure. Nothing has been determined necessarily as of today, Andrew.

Okay. You went through a number of initiatives that are at the forefront here of the strategy. One that you didn't mention was the remodels. I know that was something you guys were looking at in Colorado and potentially expanding. What is the thought process around that? Is that still a component of the strategy?

One thing we like about the remodels, Andrew, is we are actually seeing some nice results from the restaurants where we have done remodels. We are seeing some good results when we've put exterior signage into some of the trade areas that maybe we don't have good brand awareness or people don't know the brand as well. We have seen successes there.

That said, a lot of the initiatives that we talked about on today's call, whether they are improving our communication of the World Kitchen positioning, changing the labor model up a bit, making the design more friendly for to-go, we want to make sure that we have given those tasks and those initiatives the opportunity to germinate a little bit so that when we do go in and remodel, we have learned from those initiatives as well as from the remodels that we have done over the past six or seven months. I do still think remodels are an opportunity. You just won't see us be very aggressive with them over the balance of this year.

Then my last question. Obviously, the focus on stepping up the marketing over the last couple of quarters, it seemed like there was some progress there. Number one, did those markets actually hold up better this quarter? Number two, can you reflect back on that decision and now stepping down the marketing, reflecting back on that decision. Then also with the strategy that you are going with and the levels of marketing that you are going with, going forward, what gives you the confidence that that will resonate at this stage?

Sure, so we had seen, the markets that we had seen the most success with marketing, such as the DC metro area, Indianapolis where we started as well, we will continue to do that. They held up very well during the second quarter. DC continues to run in that low to mid single-digit positive comparable restaurant sales. What you will be seeing is us shifting the resources that we had been putting towards marketing towards the channels and the markets that are like a DC or Indianapolis, where we believe we can have the best return on our capital.

Where there is some reduction, though, is we did see struggles in Denver. That is a market that we've talked about in the past. Very competitive from the black box perspective. The industry is seeing significant struggles here as well, so we're certainly not alone. But that is one where the marketing is not necessarily able to cut through the clutter.

What you will see is us shift more towards the markets that we have seen the best performance in, the channels that we've seen the best performance in. Often that is in digital. I think you will also see us put a little more emphasis on those underperforming newer restaurants where the trade area is good, the real estate is good, the operations improves and gets stronger, and then we can turn on marketing to help those restaurants get back on the maturity curve.

Great. I really appreciate it.

Mary McNellis; Robert W. Baird

You mentioned a focus going forward on streamlining the menu to -- and some opportunities - to reduce operational complexity. Can you elaborate on that and how you might be approaching the opportunity there and how much opportunity there is?

Sure. I think a significant opportunity in a few different places, Mary. One, is from the operational side. We currently have a significant amount of menu items that our teams have executed on a daily basis. I do believe in the 12 years that I've been here we have maybe stretched the menu a bit too far. So that increased the complexity for those operations teams.

I think there's opportunity -- I don't have a number on how many items that ends up being -- but I do think there's good opportunity there. I also think there's opportunity from the guest experience. Often, we find that guests can get a bit overwhelmed at the variety and the breadth of the menu. Also we are not able to execute the food is consistently is we would if we had a little bit more of a streamlined menu.

I think it can be a great opportunity on several fronts, from a labor execution, a consistency of operations, team member engagement, as well as the guest experience. I do also think though -- and this is important, Mary -- that even as we streamline the menu, I feel very confident that we will be able to maintain our World Kitchen positioning and have those global flavors and the variety that really is the hallmark of this brand.

That's great. That is very helpful. Thanks for the question.

I am showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.