Noble Roman's, Inc. (NROM) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Noble Roman’s conference call this afternoon. We continue to find ourselves in extraordinary times, and I hope you're all doing well despite the circumstances. Today, we'll discuss the second quarter and the company's continuing response to the COVID-19 pandemic as well as other company developments. We're happy to have you on the call today, and your participation is appreciated. My name is Scott Mobley, and I'm President and CEO of the company. Also on the line is Paul Mobley, our Executive Chairman and CFO. We'll begin today's call with a discussion of financial highlights within the backdrop of today's operating environment, which is obviously overshadowed by the pandemic. After the financial highlights, we'll address some of the continued challenges presented by the pandemic as well as other company developments. And after that, we'll open up the call to questions. Before we get started, as usual, I'd like to refer you to the safe harbor statement contained in the earnings press release. This conference call will also contain forward-looking statements of the kind referred to in that. So the provisions of that statement apply to this conference call as well. So with that out of the way, I'll turn it over to Paul and let him discuss financial highlights. Paul?

Thank you, Scott. And I also want to thank the attendees very much for their participation on this call and their continued interest in the company. Net income was $695,740 and $440,700 or $0.03 per share and $0.02 per share for the 3-month and 6-month periods into 2020 compared to $441,136 and $917,396 or $0.02 and $0.04 per share for the comparable periods in 2019. During 2020, in the second quarter and year-to-date was aided by proceeds from Paycheck Protection plan of approximately $700,000, but that was offset by $700,000 in less sales due to temporary closing of various locations as ordered by various governors due to the pandemic. 2020, for the first 6-month period, was also negatively affected by the approximately $800,000, largely consisted of onetime expense resulting from the unamortized loan costs from the old debt on the successful completion of the company's new financing package. The financial performance of the current operations in the second quarter and the 6 months can be summarized as follows: Total revenue was down $500,000 in the second quarter and down $700,000 for the 6 months, which relates to the pandemic in both periods. Total operating expenses were down about $700,000 in the second quarter and the first 6 months. Operating income increased during the second quarter by $200,000 and by $54,000 in the 6-month period. The main driver of operating expenses being down was accounting for the Paycheck Protection plan as a grant, which lowered the operating cost in the second quarter. Interest cost was $300,000 in the second quarter and $1.25 million in the first 6 months. The interest cost in the second quarter included noncash interest of $128,000, and during the 6 months, the noncash interest was approximately $800,000, which, as I said, was largely onetime expense as a result of the unamortized loan costs from the previous debt, which was charged off upon the successful completion of the company's new financing package. Revenue from the company-operated Craft Pizza & Pub restaurants increased about $75,000 in the 3-month period, which was the result of adding Brownsburg to the location, partially offset by not being able to convert all of the inside dining business to Pizza Valet but most of it. During the 6-month period, revenue from company-operated Craft Pizza & Pub locations were up by approximately $27,000, which was the result of adding the Brownsburg location, partially offsetting losing the dining room sales. It took some time to convert all of those dining room sales over to Pizza Valet and third-party delivery, but the conversion rate continually increased as time went by. Since July 1, the 4-base, company-owned Craft Pizza & Pub locations have been down compared to the same periods last year of only 1.99% with our dining room still effectively allowed to use only approximately 50% of their capacity. At the beginning of the year, the pandemic -- or at the beginning of the pandemic period, sales were down about 33%. We built all of that back essentially during the remaining part of the quarter and on through July. Revenues from financing venue (sic) [ franchising venue ] is down about $530 and $650 (sic) [ $530,000 and $650,000 ] for the 3-month and 6-month periods compared to the comparable periods last year. The primary reason, as I've said, was being a significant number of nontraditional franchises were temporarily closed as a result of the virus, such as bowling centers, entertainment centers, some hospitals temporary closed, and other severely limited activity. Included in above numbers is $110,000 decline and $230,000 decline in grocery store take-n-bake for the 3-month and 6-month periods compared to the same periods -- comparable periods in 2019. Since the pandemic spread across the country, grocery store traffic has skyrocketed. However, creating this rush on grocery stores with minimal staff did not have sufficient resources to maintain assembling pizza for take-n-bake. Gross margin in the franchising venue continues to be extremely high, 75.4% and 70.3% for the 3-month and 6-month periods compared to the comparable periods in 2019 of 66.4% and 67.6%. The increased margin reflects the partial reimbursement of payroll costs through the Paycheck Protection plan but also reflects the company's operating structure of minimizing operating costs while still accomplishing our mission. Some of the highlights so far this year are: The refinancing of the company's debt with an $8 million financing package in February; successfully coping with the ever-changing governmental responses for dealing with COVID-19 pandemic; the obtaining of the $715,000 loan under the Paycheck Protection Program. Since the company met all the eligibility requirements to participate in this program, it was probable from the beginning that the borrowings will be forgiven. Therefore, it was accounted for as a governmental grant; the opening of the fifth company-owned and operated Craft Pizza & Pub to record opening sales, which continues to be the leading sales volume unit despite the opening occurring in the midst of the pandemic; the signing of a lease for the sixth company-owned Craft Pizza & Pub location in Greenwood, Indiana, which is expected to open approximately the end of the third quarter. And I might add to that, just yesterday, we got the approval from the state for plans. So we're ready to begin construction. And from that standpoint, we're on -- pretty much on target to have the unit open before the end of the quarter. Also, just recent development, we agreed on a letter of intent, setting out all the main terms of the seventh location, which -- we're working on the lease now. We just sent a draft copy of the lease as I was getting on this phone call. So I'll be reviewing that, and that's obviously going to be plenty of time to get that unit opened yet this year; the avoidance of major financial catastrophe, which could have resulted from the shutdown of the economy due to COVID-19 pandemic. The pandemic and governmental response had a significant impact on the company due to, among other things, governmental restrictions, reduced customer traffic, staffing challenges, supply difficulties, all had to be dealt with through the moments as they were happening through these difficult times. The company is very excited about this report as it was able to overcome some major difficult times and end up where we are today with a balance sheet and forward cash flow to maintain our business plans and to continue growing the company. As of today, we have approximately $1.65 million cash in bank. With reduced cash debt service requirement, the company believes it can now fund its plan for the addition of 2 more company-owned locations yet this year, which makes a total of 3 new ones for the year. The next location is largely in progress with building permits targeted to be opened near the end of the quarter. The third location for the year has been identified, letter of intent signed, setting out the major terms and draft of the lease very soon. The company will now be identifying yet another location to be opened in the first quarter of 2021. The company is being extra cautious, however, in selecting winning sites for that growth. This year has certainly had its challenges with new circumstances never before experienced but we were able to adapt our systems on the go to accommodate the ever-changing governmental actions. I'm very pleased with where we ended up. Our total sales were taken down at the beginning of the pandemic but we've managed to get them back. We were very fortunate to be one of the first users of the Paycheck Protection Program, which worked like it was designed to work for us. It allowed us to retain staff, provide liquidity while we were able to grow the business back. We are now in a great situation for growing the company and the stock value over time. Now I'll turn the meeting back over to Scott.

All right. Well thank you, Paul. I'll start the operational overview part of this call with an update on the subsegment. On our last call, we provided a continuing look at our approach to the pandemic with the adjustments we made going into the stay-at-home orders and the plans for slowly exiting those restrictions. Unfortunately, however, in Indiana, where the company-operated Craft Pizza & Pub units are located, we've taken a long pause in easing of those restrictions. And really, in some sense, we've taken a few steps backwards. Specific dates for the various directives from the governor are in the press release, but suffice it to say on the call that the allowable percentage use of the dining rooms has been paused at 75% for many weeks now with 7 more weeks to go at a minimum. Overriding that, however, the local boards of health have taken the 6-foot social distancing directive and applied that to the dining room seating, making our really usable seating closer to 50% rather than 75% anyway. The boards of health are enforcing this 6-foot distancing factor over and above the governor's dictate for the percentage of dining room usage. Also, a statewide mandatory mask requirement is now also in effect. This already applies to restaurant employees, but it now also applies to customers, who are not physically seated and eating. That and the rise in statewide-confirmed COVID cases after July 4 seem to have had a correlating impact on consumer behavior. We've seen dining room utilization slip several percentage points in recent weeks, while our Pizza Valet service share of business has increased accordingly. Staffing has also increased as an issue since the last conference call, as has the required contingency planning for employees who may have to self-isolate or quarantine from the units. Hiring is being hindered by the mask requirement as no one is really keen on wearing a mask to begin with and certainly not near a 600-degree pizza oven. General anxiety over the virus is no doubt also playing a role as our government policy is disincentivizing individuals from returning to the labor market. All that said, we focused enormous attention and effort on recruiting hourly employees, and we're keeping up at this point. Management staffing, on the positive side, is at 100%. From the perspective of our nontraditional venue, this is still not as much the case, unfortunately. Many of our traditional operators, those in hospitals, convenience stores and others, are struggling greatly to staff at even bare minimums. These difficulties appear to be continuing issues. There might be one set of franchisees with staffing issues this week, a completely different set of franchisees struggling the next. We're not talking necessarily about the ability to staff Noble Roman’s operations specifically but staffing to run the underlying business itself. On top of that, some venues that were forced to close altogether, such as entertainment, attractions, polling centers and the like, are still closed or operating at substantially reduced capacity. While the situation is improving in many areas of the country, some have not yet improved. Some have gone backwards. Overall, the recovery is slower than we would like. We've also experienced additional supply line difficulties in the early part of the quarter. However, the impact was never felt at the consumer level since we've taken precautionary measures to mitigate against such problems by building surplus inventories in our supply chain. Currently, there are no supply line issues, but commodity pricing swings are still a major factor. On July 13, for example, cheese prices on the commodity exchange reached a new all-time high, shattering the previous high from earlier this year by nearly 20%. Prices briefly reached $3 per pound. That's almost double the 10-year long-run moving average. Fortunately, the last 2 weeks have seen a major retreat in cheese prices with price on Wednesday settling at $1.83. And I noticed today, it closed unchanged. We try to be as proactive on these swings as we can. At the last minute, this Tuesday night, for example, we were able to delay a truck loaded with 41,000 pounds of Noble Roman’s pizza cheese from leaving the manufacturer by 1 week. The price is falling, and with our cheese price determined by the average prices on the week it ships, we will now reap more benefits of that significant decline. We estimate the savings on this move could total as much as $8,000 to $10,000 for the Craft Pizza & Pub units over the next 4 weeks. Other commodities like beef and pork also remain extremely elevated, but the supply line seems to be much more secure now than it was several weeks ago. On an even more positive note, since March 31, we signed 14 new nontraditional franchise agreements and opened 10 new additional units. Obviously, both the signing of agreements and the opening of new units were hampered by the pandemic, but we're excited to be making forward progress nonetheless. The new chicken add-on program is also making progress but are not as fast as would be possible in normal times. There are now 9 units on the program and 10 more units committed and in the process of getting started. Many other units have expressed strong interest in adding the program after pandemic conditions eased, and the program has proved decisive in making the final sale on several of those new franchise agreements. As announced previously, another piece of exciting news is that signing of the lease for the sixth company-operated Craft Pizza & Pub in South Greenwood. For those of you that are unaware, Greenwood is a prosperous and growing city just south of Indianapolis. An exciting part of this new location will be the fact that it is the first to utilize the new version 2.1 layout. Prototype layout for 2.1 is about 3,600 square feet. Greenwood will actually be approximately 3,700 square feet. And that compares against the current model that has approximately 4,200 square feet. Despite the decrease in square footage, the inside dining and seating capacity will be approximately equivalent to the old model. Greenwood is going to have a separate outdoor dining patio area as well as a separate Pizza Valet service store. There are also numerous operational enhancements in the production line designed to speed production and better handle peak volumes of online order. As Paul said, this opening should occur sometime close to the end of the third quarter. As we also mentioned, we've made substantial progress on some of the company-operated Craft Pizza & Pub location with a drafted lease just in the house here today. We also have the Kokomo location, which is a franchise location. It's also still on track for opening sometime during the third quarter as well. All right. Well on that note, we're wrapping up the presentation portion of the call. Next, Paul and I will take questions. [Operator Instructions] There'll now be a few moments of silence here as we build the queue, then we'll get started.

Okay. We're back on the line and we'll start addressing some questions. [Operator Instructions]

This is [ Mark ].

Go ahead, [ Mark ].

I guess my first question is on the royalty business as far as between nontraditional and groceries. Obviously, that's working fine. That's great news for the upcoming. What have you seen in the last, say, month? Have you seen them starting to come back online as people are heading back in the gas stations and as grocery stores are leveling off? Are they returning to making pizzas? Or have they stopped?

Well we've never had a problem with the convenience stores. They're setting record sales volumes right now in many of the most, well, aggressively managed convenience stores. It's the ones that have been closed that have been the problem. That's entertainment centers, bowling centers, things that various governmental agencies around the country have not allowed them to be opened. Many of them are coming back online but certainly not all. Also, and the hospitals are still down. Although they're open, they're open with so many restrictions, such as they're not allowing any guests into the hospitals to visit patients, and the staff is restricted to certain sections of the hospital and can't roam freely through the hospital. So that takes away a lot of our nontraditional customers. Now the grocery stores, yes, some of them are assembling pizzas again, but the grocery stores are still very high-traffic right now. People have not gone back to the restaurants in the kinds of numbers that they were doing before the pandemic. So the grocery stores are still heavily attractive, traffic good, based on their normal circumstances and what they've built their models off of. So they're still hampered by staff. And as Scott was saying, a lot of people are hampered by people not wanting to go back into the workforce because of government benefits as well as fear of being in contact with the public. So it's still -- it's getting better, but it's still a struggle to make -- we still have to adapt to changing times every day.

All right. Thank you, [ Mark ]. I currently don't have any other questions in the queue. Would anybody else like to ask a question at this point? Yes. [ Mark ], go ahead. You have another question?

Okay. Yes. Sure. Let's see here. I'm sorry if I -- if you had answered some of the other questions earlier. Once again, I kind of came running in later. I've heard you -- as far as how you're dealing with the cost of goods, one thing that surprised me is I've seen like -- I think even in Brownsburg, you -- when you opened, you happened to have a -- like a buy one, get one free promotion that was pretty readily available to a lot of people, but yet the cost of goods this month looks really solid. I just expected it to be higher as far as this more competitive environment, maybe more discounting than usual. I mean how do you see that going forward?

So the special that you were referring to, [ Mark ], was a promotion that was run through our e-mail club. So that promotion went out to e-mail club members who are here locally. And we sort of tailor the offers that are going through that club based on news, consumer sentiment, sales. And actually, that promotion is a fairly effective one within the e-mail club. It's also real discount is simply the cost of the second pizza. Since you're essentially getting full price, undiscounted on the first pizza and most people typically would be buying only one pizza, then the actual discounted cost is the cost of goods on that second pizza. It's not a promotion that we like to run very frequently because we certainly don't want to devalue the product in the long run by excessive discounting, but it makes a good promotion from time to time. I believe the consumer is somewhat value-conscious. We see that in commentaries we've received back from guests. It's why even in the face of all these commodity swings, we've been hesitant to adjust any pricing at this point, first of all, because we think guests are sensitive to pricing right now, but secondarily, obviously, we're hoping that these commodity swings will start to settle down and will return to somewhat normal levels. After -- just taking cheese, for example, after a high of $3 per pound -- that's cheddar block on the exchange, yesterday, it settled at $1.83, and that remains steady today. But looking at the trading detail, it looks like there's continued pressure on the sell side. There are many sellers with trailer loads of cheese that went unsold today with no buyers, not getting their orders filled. So I think there's still downward pressure on cheese prices. Okay. I think we have another question here. Yes. Go ahead.

It's [ Lee Zimmerman ].

[ Lee ], go ahead.

Yes. I was curious. I didn't quite catch it. You said in July, your sales are running just 1% below where they were a year ago. Is that what you said?

On the 4 existing Craft Pizza & Pub company-owned units, that's what I was mentioning. And that's correct. In July, they were only down by 1% over the same period a year ago, which has come away back up since the beginning of the pandemic, when -- immediately stopped using the dining rooms. That same group of stores was down around 30% to 33%. They've come all the way back up to where they were now down only 1%.

And how is the quarter going in terms of profitability? Do you have a sense at this point? You're not going to get the loans from the grants from the government this quarter, I don't think.

Well we don't know about that, [ Lee ]. One way or the other, I can't speculate on what may happen. I can't really give you a profitability report for the quarter. And after all, we only completed the first month and we don't have a good measurement on that yet. But I know that our trends are all in the right direction. Our cost of sales have been good. Our cost of labor has been good. And even though we got the benefit of that grant, as I explained in the letter, we were also negatively affected by about the same amount in decline in nontraditional sales because the units were closed. So those were kind of offsetting. And then for the year-to-date, we're not going to have a repeat of the onetime charge-off of the old unamortized loan costs for the successful completion of the new financing. So there's probably been more activity negatively affected in the outcome of this year so far than there has been on the positive side from the grant.

Okay. Any other questions this afternoon? Okay. Well with no more questions, we'll call this session to a close. We appreciate everyone participating, and we look forward to talking to you again soon. Thanks again, and have a good evening.