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

Good afternoon, and welcome to the Noble Roman's conference call. We appreciate you joining in today. 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. Today, we'll discuss the last quarter of 2021 year-end overall and the current business environment. At the end, we'll address any questions you might have. We will begin today's call with Paul's review of the financial highlights, but first, I'd like to refer you to the safe harbor statement contained in the earnings press release. This conference call will contain forward-looking statements of the kind referred to in that statement, so those provisions apply to this conference call as well. So with that out of the way, I'll turn it over to Paul to discuss the highlights. Paul?

Thanks, Scott. And I'd also like to thank all the attendees for participating. First, it's very exciting to announce that revenues continue to increase and are up 20% this year over last year as the company expansion of Craft Pizza & Pub continues despite the COVID-19 environment. For the year '21, the company reported total revenue of $13.9 million compared to $11.5 million in the corresponding period of 2020. Operating profit before interest and taxes for year '21 was $1.7 million compared to $2.3 million in corresponding period in 2020. However, the 2021 amount is after expensing $471,000 of preopening costs of new openings for additional Craft Pizza & Pub locations. Previously, this had been amortized over a 12-month period. Net income before taxes in 2021 was $382,000 or $0.02 per share compared to a net loss of $4.5 million for the corresponding period in 2020. The 2021 amount was after -- like I mentioned, after expensing preopening costs of $471,000, and the 2020 amount was after recording $4.9 million to reserve for collectibility of long-term receivables from former franchisees. For 2021, total revenue from Craft Pizza & Pub revenue was $8.9 million compared to $6.2 million in corresponding period of last year. Gross margin contribution to the overall company was $1.7 million compared to $1.3 million in the corresponding period last year. This improvement primarily came from the opening of additional company-owned Craft Pizza & Pub locations opening in March, October and November of 2020 and October and December of 2021. We were able to lower the occupancy costs from 15.3% down to 13.3% despite really rapidly-escalating utility costs. The fourth quarter 2021, the utility cost was 4.0% of sales, while the fourth quarter of 2020 was 2.5% of sales. Our overall margin in 2021, however, was 19.2% Craft Pizza & Pub sales, and we will get that margin back in the 20s with a little bit here and a little bit there, and utility cost is one that we're going to have to really work on to control. That was 1.5% of our sales slipped in margin. To provide some understanding of sales in our Craft Pizza & Pub restaurants currently, I would like to call your attention to the last 5 weeks, which coincides with approximately the same time that Omicron variant spread was drastically reducing. Same sales stores for the original 4 restaurants in this category during that period had sales increase or the same weeks last year of 13%. By annualizing the sales from those 4 locations for those 5 weeks indicates an average sale per location of $1.2 million. Annualizing the same 5-week period a year ago would indicate an average sale at that time of $1.06 million. That's a dramatic increase. It is difficult to make the same comparison over the 5 newer stores because, just like the original 4, they opened at a very high sales volume and tapered off after the honeymoon period and then started going back up. All indications are those 5 locations are going to average sales per location of a little more than the original 4. Revenue from franchising venue shows a decrease of $4.4 million from $4.8 million in 2021 compared to the corresponding period last year. This decrease reflects the effects of the pandemic and nontraditional locations, where many units are closed as a result of the different government regulations related to COVID as well as resulting from capitalization, liquidity issues of those nontraditional franchisees. The fourth quarter, however, does reflect the decline in nontraditional, has probably ended, and we anticipate improvement going forward. New growth units in the nontraditional during 2021 were delayed as a result of the labor shortage affecting those business. And just for your information, in the last 2 months, we sold 6 new, nontraditional franchise in those 2-month period. This compares to 24 last year as a total. And the first quarter is always slower -- always has been slower and sales of new nontraditional than the rest of the year. A portion of the decrease in revenue and margin contribution was a decrease in revenue from grocery store take-n-bake. The grocery store take-n-bake had not been a focus of the company's efforts for 2 reasons. First, the company believes the strong economy prior to the pandemic favored nontraditional franchising as a more viable and attractive revenue growth strategy. Second, during COVID-19 pandemic through current time, grocery stores have experienced a significant increase in traffic and a simultaneous decrease in available labor [Audio Gap] issues rather than revenue generator as that require dedicated labor and management time. Gross margin contribution from this venue decreased to $2.6 million from $3.1 million compared to the corresponding period in 2020. The margin contribution was still strong, however, at 59.3% of revenue. The decrease in overall gross margin from this venue resulted in part from temporary closures due to the pandemic [ restructions ] and a delay in new openings from the labor shortage. The uncertainty and disruption in the U.S. economy caused directly and indirectly by the pandemic are likely to continue adversely affecting the volume and resources of both the company's CPP locations and especially that of existing and potential franchisees of nontraditional locations, at least until greater normalcy stabilizes over a significant period of time. This return to normalcy was interrupted during the fourth quarter and continuing into February 2022, with rapidly rising cases attributed to the Omicron variant, which the company believes impacted consumers, employees and supplier behavior. Additionally, rising cost of labor and ingredients as well as other costs associated with managing supply emergencies are likely to persist, although getting better. A menu price increase was implemented in November 10, '21, and an additional increase in March '22 to help mitigate those cost pressures on the company-owned Craft Pizza & Pub restaurants. So far, it appears that the biggest direct impact of COVID is behind us, at least for now, and our biggest concerns going forward is overall inflation and high gasoline prices. Moving on from a corporate standpoint, depreciation and amortization for '21 was $849,000 compared to $382,000 for this corresponding period in '20. The increase was a result of new company-owned Craft Pizza & Pub locations opening in March, October, November of 2020 and October, December of 2021. In addition, expensing certain preopening costs, as I referenced before, in the amount of $471,000, which was forming amortized over a period of 12 months. The company also is currently negotiating for an additional CPP location at this time in an area that we've had targeted for -- ever since we began the CPP program but had been unable to identify a location prior to now. General and administrative expenses were $1.79 million for '21 compared to $1.72 million for corresponding period in '20. The increase reflected general inflation pressures, the addition of independent investor relations service as well as the growth of Craft Pizza & Pub venue. Interest expense for '21 was $1.36 million compared to $1.91 million for the corresponding period in 2020. The primary reason for the difference was the financing that occurred in 2020, resulting in onetime noncash write-offs of the original loan costs of the former bank loan that the company refinanced in the private placement of subordinated debt, which the company paid off, which in the aggregate was $658,000. This, however, was partially offset by the compounding of PIK interest on the senior secured notes. The company's current ratio was 2.3:1 as of December '21 compared to 2.6:1 as of December 2020. That concludes the financial overview. Now I'll turn the meeting back over to Scott.

Okay. Well, thank you, Paul. I'll start by discussing some of the labor, supply chain and inflationary issues we experienced in the fourth quarter since, once again, that kind of absorbed an [ outside ] portion of our time. In fact, the period from about mid-November through mid-February was the toughest period yet to manage as it relates to both COVID and the supply chain issues. The peak problem period within that was just before Thanksgiving through the first week of January. The Omicron variant hit Indiana hard, and it was obviously impacting manufacturing and distribution across the country. In fact, the situation in Central Indiana was severe enough that the Navy and the National Guard both assisted at least 2 area hospitals by providing additional staff and temporary patient facilities. The largest Indianapolis area hospital, for example, is at one point operating at 120% of capacity. So with that in mind, let me just walk you through 2 examples of the types of crisis we are managing to kind of put a face to the issue, one relating to supply chain and one relating directly to COVID. So we'll start with the supply chain case that occurred on Thursday prior to Christmas, we received an urgent call around 3:00 p.m. from our primary distributors saying they were completely out of Noble Roman's proprietary pizza sauce and that a trained railway car from California with some 12,000 bags of Noble Roman's pizza sauce is missing and had not been delivered. By missing, I mean completely lost somewhere. Their delivery trucks at the distributor were already loaded with everything else in Toledo, and they needed to leave to run to Indiana to deliver all the Central Indiana Noble Roman's locations with an hour -- within an hour and they wanted to know what they wanted us to do. So obviously, that was a huge problem on 2 levels. First, we obviously can't make pizzas without pizza sauce. Secondly, taking 12,000 bags a sauce out of commission was a real issue since tomatoes are only harvested and made into sauce once a year, and that's in June. So taking 12,000 bags out of service could have been a real serious problem before we got to June. So our crisis team met, and we quickly created 4 action steps. First sign up with our product development assistant, and I quickly worked to identify the closest possible substitute that the distributor had on hand and had the distributor of that product on the trucks to fill those outstanding orders. It is better to have some sauce even if it was the wrong sauce rather than risk no sauce at all. Second, we went to work identifying any reserves of Noble Roman's pizza sauce at other distributors, and they uncovered about a 10-day supply in Illinois. We were able to divert a truck from Chicago bound for Toledo that same day to make the extra hour trip to the warehouse to load this extra sauce and freight it back to Toledo. For the third step, we went to work locating the missing railcar which we finally were able to locate the next morning, actually sitting in Ohio all by itself on a side spur railroad track. Over the Christmas Eve holiday, we were able to talk the switchyard controller directly into getting a freight engine to move the railcar into the unloading dock, and then we were able to track down a trucking company that was still operating and had manpower to go and remove the sauce from the railcar and haul it off to the distributor. The fourth and final stuff, we got our distributor to drive an additional truck to Indianapolis the following week with the Noble Roman's sauce we'd located, and then they went and picked -- dropped that off and picked up all the substitute sauce that we had delivered previously. So that's just one example of the manufacturing and distribution hurdles we faced. And during this time, there are typically multiple of these supply chain emergencies, similar types of problems that occur each week. COVID was directly an issue during this time as well. Work absences were the highest ever in our restaurants during the pandemic where such events occurred just after Christmas and the entire 3-person management teams at 2 separate Craft Pizza & Pub restaurants became ill with COVID during the same time period. At the second unit, the problem was compounded by a loss of nearly all of the crew as well, and we also had simultaneous equipment failures at the unit. The primary HVAC unit, which is the heat, went down, and 2 of the 3 ovens went down with electronic failures as a result of that. We've been addressing isolations and quarantines with our staff during the pandemic by diverting and sending in our nontraditional field managers as well as volunteer office staff. But all of our field managers were out ill, 2 of our office staff volunteers were out as well. And in addition, our director of operations was also out with COVID. So we were able to shift staff from other units to keep the first unit under full operation, but the second unit presented some insurmountable issues. We were actually closed for about 24 -- not quite 24 hours, and then we operated with Pizza Valet service for another couple of days until we could gear up full service. Parts of the HVAC were backordered for 2 months from China. We ended up having to scavenge the area for the part we needed. And the oven service firms were also hit hard with COVID. So we had a difficult time finding someone to get out to service the oven, but we probably got one of the down oven started on our own. So with 2 of the 3 operating, we're able to get going once again. So that's quite a little bit of time just going through those 2 examples, but I wanted to give you a taste of some of the circumstances that we were dealing with during this time frame when we talked about COVID interruptions and supply chain interruptions. Fortunately, by mid-February or so, both the supply chain and especially the COVID cases, that dropped substantially, and we've been able to return to a more normal operational footing at this point. Staffing at the CPP units is still tight in some areas, but we had been very aggressive with this all along, and we came out in better shape than any in our area. So now with COVID in retreat for the first time in a while and for the time being, we've been able to redeploy our nontraditional field managers and office staff back to nontraditional sales and operations. And we hope to make further inroads on revenue generation this spring, as Paul already outlined. For example, we currently have staff assigned to getting existing royalty paying franchisees to implement price increases. This is a much more difficult task in a nontraditional setting than with traditional franchisees, but success in implementing a price increase both grows our royalties and benefits of franchisees' better margins. We've implemented 2 such price increases now at the company Craft Pizza units, as Paul mentioned, one in November and one in March. These were obviously implemented in response to rapidly rising wage, ingredient and supply costs. The shortage of workers, which remain an issue in the fourth quarter, required higher wages, more over time with existing workers, more time and training and additional costs due to the relative inefficiency of the new -- now newly hired workers. Fortunately, at least as the data seems to indicate at this time, the wage spiral pressure has lessened noticeably as we're talking today, at least for the time being. Commodity costs and the cost of goods generally, however, are still on an upward trend. And that trend is being exacerbated by the situation in Ukraine and the sanctions on Russia. The [indiscernible] costs relating to Ukraine are on wheat and energy, both of which are already running high even before the Ukrainian situation. There are all sorts of hit and indirect cost rising oil prices as well such as skyrocketing fertilizer costs, which are petroleum-based, higher freight costs, higher plastic costs and the list goes on. We've already had to make one emergency switch in a secondary distributor for the Midwest as they became unable to live up to the terms of their contract due to the escalating cost structure they were working with, and we may experience more of this in the time to come. Other commodities are up as well. If you're at the grocery at all, I don't need to tell you that pork, beef and chicken are all up substantially and will likely remain high for the time being. Cheese is the largest contributor to our food costs. And as of yesterday, the market was at $2.21 per pound. It actually closed to $2.24 per pound today, and that's approximately 30% above the 10-year running average. As I see it, this is largely a supply side rather a demand-side issue. As dairy herd, smolt production are not yet back up to normal, flowing significantly to have increases in the cost of feed grain and other variables. At the moment, price increases discussed previously are sufficient to assist in margin management, particularly for able to limit wage and salary increases and increase our overall efficiency. Dine-in sales at Craft Pizza & Pub have been on an upward climb in the third quarter, but they took another dive during the fourth quarter as Omicron spread in the area. Today, our 6-week average is back to 49.2% of sales, and that compares to 44.1% a year ago. I think we'll see a steady climb in that number as long as COVID remains same. And third-party delivery right now stands at 16.2% of sales versus 17% last year, a slight but not terribly significant change. During the fourth quarter, we did successfully renegotiate commission terms with our third-party delivery providers. We reduced our cost structure by another 5 percentage points roughly on those sales. In addition, we obtained the ability to bifurcate our pricing, so we're now on a price plus 10% on third-party delivery. That is pricing to consumers ordering through third-party providers now pay a standard menu price plus 10%. These steps were implemented late in the fourth quarter, so we should have a better impact on that benefit for all of 2022. Additionally, we just signed on our fourth third-party provider, Uber Eats, which has been picking up market share in this area. Our commission rates with them are equivalent to the others. As for new development on the Craft Pizza & Pub side, we have 2 potential franchise units that may develop in the coming months. It's too soon to tell or to give you anything more definitive at this point. One is in site search and the other is in site negotiation. We also, as Paul mentioned, have a site under consideration and negotiation right now for a [ temp ] company-operated unit. I mentioned earlier that the pandemic status has allowed us to redeploy personnel to support the [ sewing ] and opening of franchises in that venue, and we're seeing some fresh signs of interest among C-store operators as we exit the pandemic and enter into the normally stronger spring selling season. We opened 4 new units in the last 3 weeks. We had 3 more new units to open next week. Things are looking up in that area. We sell the other units that are open as well, and as Paul mentioned, many active prospects. Okay. Well, on that note, we're wrapping up the presentation portion of the call. Next, Paul and I will take questions.

[Operator Instructions] Okay. We're back, and we'll start taking some questions here. [ Bill ], go ahead.

This is [ Bill Redpath ]. A couple of questions. How are things looking for more CP&P franchisees or franchise locations? And secondly, do you have some sort of long-range business plan or a long-range vision for the company?

Okay. Well, I'll address the franchise Craft Pizza & Pub locations first. We do have 2 possible locations that could be entering development. As I mentioned in the presentation, it's too early to say any more of anything definitive about those 2 yet. One is in sort of a site search mode and the other is in negotiations with landlord at this point. So we'll see how those turn out. As far as long-range development plan, the development plan is more or less an extension of the plan that we've been following. Yes, we did go through a constant planning and plan revision process here. And the essence of that plan is to continue to develop company-owned and operated Craft Pizza & Pub units, franchise Craft Pizza & Pub units, accelerate growth of nontraditional units. Obviously, those plans were interrupted or changed considerably during the pandemic period. And as I mentioned in the presentation, we were able at this point to kind of redeploy personnel, time back over to some of the nontraditional side so we can get back on a faster development of that venue. [ Michael ]?

How many company-owned stores do you have now?

We have 9 company-owned Craft Pizza & Pub stores, and we have one company-owned nontraditional store.

And did you say you're going to open up 4 stores soon?

No, it will be -- right now, we're working on one site that has just become available in a market that we've had our eye on since pretty close to the very beginning. So that would be the 10th company-operated location, and we will not be doing any additional nontraditional locations.

So I mean it's been rough. All companies have supply issues, COVID issues, work issues and everything, everyone out there. Where do you see yourself in the year if this goes away with the COVID and everything with getting employees and the store revenue going up?

Well, I think as Paul mentioned that the -- if you start looking at the recent results from the Craft Pizza & Pub units, we're seeing some good development there. We are starting to see increased interest in franchising by some of the nontraditional venue operators. From a staffing standpoint, we were extremely aggressive during the entire problem period, and we obviously experienced staffing shortages, but we were able to maintain full operation at all of the locations with the exception of the one day that happened in the fourth quarter that I mentioned in the presentation. That wasn't -- that was partially due to staffing, but it was really due to multiple events happening at the same time. Some COVID-related. Some just -- one was equipment related that caused serious problems at the same time. So I think we'll be able to press forward with development. Supply chain is still an issue. It is less of an issue, and it's a different type of an issue than we had maybe 6 months ago. We deal a lot less right now with inability to move items from one point to another with the exception of the missing railcar that I discussed. But freight issues, they are a lot less, now we're running into certain types of manufacturing issues that relate to raw materials. For example, we have a supply chain emergency this week that we're dealing with. That has to do with the shortage of aluminum, and the remaining manufacturer of aluminum pans for take-and-bake -- pizza take-and-bake has had to cease operations because they've not been unable to obtain supply of raw aluminum. So we're having to do our work around with that. And there are other types of supply chain issues that you run into. For example, procuring equipment for new restaurants is very difficult right now. The insulation for certain types of refrigeration comes out of China, and that process is backlogged. There's a severe shortage of electronic parts, noticeably circuit boards. So anything with the circuit board from a pizza oven to even a refrigerator is lengthening the production time for manufacturers. So these all create issues that have to be worked around. But hopefully, as COVID continues to recede, and hopefully, it does continue to recede, then I think some of these problems will reverse themselves. The problems that deal in commodities and commodity availability could be sticky problems. So there are a number of commodity shortages that we're dealing with right now. There's a shortage of cheese. There's a shortage of tomatoes. And as I mentioned in the presentation, the commodity pricing pressures. Some of those are likely to stick around. But all in all, I think we'll see a receding of both the labor shortage, which is already relieving itself somewhat and of at least a certain portion of the types and supply chain problems that we dealt with several months ago. All right. Do we have any additional questions? We'll hold here for a minute, in case anybody has anything further. Okay, [ John ]?

Yes. Scott, I was wondering, I know in the long range, we were missing this one time before. The likelihood that you might eventually wind up closer to Chicago, one in Chicago, and I wonder if that is still a possibility keeping in mind the supply issues you've been mentioning.

Right. Well, Chicago market, if you're referring to the Craft Pizza & Pub, then you see, the Chicago market itself is a whopper of a market to tackle. It would require a significant number of units to properly penetrate that market from a consumer awareness standpoint. So that would probably take a multiunit -- existing multiunit operator that wanted to step into Craft Pizza & Pub expansion to tackle Chicago proper. But their markets in and around outside of the Chicago market proper that might be easier markets to penetrate. You get up into the -- well, what we would all know is the region around here, which refers to sort of the outside Chicago land area in Northwest Indiana. There would be potential development there that would be easier to tackle, and you have other strong market areas in sort of the northern half of Illinois. Those won't be company-operated markets, at least for the time in the short term as the company would definitely utilize the market penetration that's already evolved here in Central Indiana and kind of work in concentric circles growing out from there, but that does not preclude identifying a franchisee that might be interested in other markets outside of this area. Okay. Any additional questions? Yes, [ John ], you had another question?

Yes. I did, Scott, I was concerned about the possibility that some of the minor operators might have had difficulties enough to put them out of business and whether you could take over some of their spots without too much problem.

So with that question, [ John ], I assume you're referencing the nontraditional venues and some of the problems that those nontraditional franchise operators have had just dealing with the financial [ ramifications ] of the pandemic. And certainly, a wide swath of that franchise group has in fact had problems like that. We're not in a position to take over those franchises, however, because typically what you're looking at in nontraditional franchising is there is some primary underlying business in which the Noble Roman's is located. And that franchisees operating both the underlying business as well as the Noble Roman's concept within the business. So from that standpoint, it would be impractical for us to take over units. It would also be impractical for us to do that simply from a staffing and supervision standpoint because those are spread out all over, not just Indiana and surrounding area, but all over the country, and it would just create an unworkable supervisory structure for us to try to engage in that. The one unit that we have is sort of a special circumstance, and we have no plans at all for doing anything else from a company standpoint with nontraditional.

Of a traditional P&P?

I'm sorry, [ John ], go ahead. Can you repeat that?

Yes. I was asking really about the traditional your Craft Pizza variety.

Those -- I think those folks will come out of the pandemic just fine. They obviously have work to do in their markets, but I don't see them having a long-term issue. I think they came through the pandemic, I'm not going to say, just fine but -- no one came through the pandemic exactly just fine, but they came through the pandemic as well as one could expect. All right. Any last questions. Yes, [ Mike ]?

Three questions. I just want to understand in regards to the preopening costs of approximately $0.5 million that were expensed in 2021, is it fair to say that there are no preopening expenses hanging on the balance sheet at 12/31?

That is correct, and let me tell you why the number. The actual preopening costs for the 2 units we opened in 2021, one in October and one in December, the opening cost -- the preopening costs for those was -- combined was $236,000. Now the remainder of that is from units we opened in the last part of last year, which we were expensing out over a 12-month period. So we had the expenses from those that we were amortizing out plus the 2 that opened this year that we charged off, and there are no preopening costs left on the balance sheet anywhere to be amortized.

Good, good, good. In regards to the 2 CPP franchises that are sort of in various stages of potentially opening, are those new franchisees or the existing partners?

I'd rather reserve going into detail on those maybe until our next call. We're early in that process, and I don't want to disrupt -- they're in active negotiations, and I just don't want to disrupt anything for them. So...

No, understood. That's fair. One final question. So you had good cash flow from operations. You have, I think, $1.2 million sitting on the balance sheet. What are the gate -- and you mentioned you're working on one company-owned CPP new location right now. What's sort of the gating factor here in terms of accelerating some additional company-owned CPP locations?

Well, contrary to what one would think and what would seem to be the condition in the market, sites right now have been the very limiting factor. No do -- I shouldn't say no. Hardly any new shopping centers are being built right now because of COVID and because all kinds of supply issues, labor, interest, et cetera. So there are -- there have been a flood of existing locations come on the market, but that flood is obviously coming from the weakest-type locations out there. But we chose not -- we've been showing a lot of those and chose not to do anything because the location themselves is one of the reasons why they're still available. They're not good locations, and so it's been a limiting factor. Now we are -- say we have one new site under development right now because we have a letter of intent out and we're negotiating the final terms, and that will be coming on board, we think. We're looking for additional sites. We have been all along. We haven't quit looking for additional sites. It's a matter of finding those in a concentrated area, which we have committed to do because we want to use the supervision concentrated to make it more efficient. Also for marketing and awareness standpoint, we haven't been willing to go out of the area and look at additional sites yet. We may expand that area a little bit as we go along, but we're still constantly looking for available sites -- good available sites, and we have been unwilling to take a secondary site just to get a site.

Okay. I don't see any additional calls on the board. So I guess on that note, we'll call it quits for the call today. I appreciate again everybody joining in, and we'll talk to you again soon. Thanks again, and have a good night.