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

Well, 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 first quarter as well as current business environment. And at the end, we'll address any questions that you might have. We'll 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 I referred to in that statement, so those provisions apply to this conference call as well. So with that introduction, all the way, I'll turn the call over to Paul for the financial highlights. Paul?

Thanks, Scott, and I'd also like to thank the attendees for their participation in the call. Revenues of $3.5 million compared to revenues of $3.3 million in the same period in 2021. Net loss of $137,000 compared to a net profit of $827,000 in the same period last year. The company received a loan during the first quarter of last year that was accounted for as a grant of $941,000 through the Payroll Protection Plan in the first quarter of 2021 resulting in limited comparability of the first quarter of last year to this year. Company-owned CPP revenue increased to $2.3 million from $2.1 million for the same period. Company franchising revenue got back to nearly level at $1.03 million compared to $1.05 million in the same period in 2021. Labor shortages, supply chain disruptions, high inflationary pressures and the emergence of Omicron variant had a significant negative impact on both the CPP and franchising venues during January and February of this year, though the influence of these factors has since dissipated significantly. During the first quarter of 2021, the company, as I said, received a Payroll Protection Plan loan of $941,000, which was used to reduce certain qualified expenses during that quarter, which materially affects the comparison of that quarter compared to the same quarter of last year. The revenue from the Craft Pizza & Pub venue was $2.3 million compared to $2.1 million for the corresponding period in 2021. Revenue was increased during the period by the opening of 2 additional Craft Pizza & Pub restaurants, but that increase was partially offset by the impact of the Omicron variant in January and February. Salaries and wages, without the effect of the PPP loan, increased to 28.4% -- or from 28.4% to 31.7%, which was a result of the labor shortage, overall inflation, which have driven up competitive prices for labor. The staffing shortage was dealt with through aggressive recruiting efforts at the time. And the current labor market in the company's trade area is a lot less tight than it was earlier in the year. Additionally, the company's most recent menu price increase is further reducing the negative impact. For example, salaries and wages for the month of March 2020 were back down to 29.0%. Gross margin contribution was also affected as it decreased to 9.9% from 41.7% compared to the same period last year. The reduction in certain qualified expenses due to the company's PPP loan in the first quarter also materially affect the comparison of this margin. In addition, the spread of the Omicron variant in January and February had significant impact, which is now significantly dissipated. Revenue from franchising almost caught up with the prior year as it was $1.03 million compared to $1.05 million. The slight decrease was the result of the closure of several nontraditional locations because of COVID-19 and magnified by the rapid spread of Omicron during January and February. Fortunately, the effects from this have now significantly dissipated. Salaries, wages, trade show expense, insurance and other operating costs remained approximately the same during this quarter in 2022 compared to 2021 after you remove the effects of the reduction of certain qualified expenses by the PPP loan in 2021. The only significant change in those expenses was a reduction in trade show expense and an increase in insurance costs. Gross margin contribution from the franchising venue declined to 55.7% from 67.8% in 3-month period ended March 31, 2022, compared to the same period in '21. The reduction in certain qualified expenses due to the company's PPP loan in the first quarter materially affects this comparison with the prior quarter as well. In addition, the emergence of Omicron variant in January and February had significant negative impact which has now significantly dissipated. General and administrative expenses increased to $540,500 in from $299,000 for the 3-month period ended March 31, 2022, compared to 2021. The reduction in certain qualified expenses of the PPP loan in the first quarter of 2021 materially affects this comparison as well with the prior quarter. The actual increase, unaffected by the reduction of qualified expenses due to the PPP loan last year, remained approximately the same except for a growth in the insurance cost. Interest expense remained almost constant except for interest on the PIK notes which have been adding to the principal balance of the loan outstanding. Despite the negative impact of the rapid spread of Omicron variant during January and February of this quarter, the net loss of $137,000 remained approximately the same as the first quarter of 2021 after the effects of the PPP loan last year. With regard to the balance sheet. The company's current ratio at March 31 was 2.5:1. As of December 31, 2021, it was 2.3:1. Just some people I know are curious is what level we're running on sales for the CPP units. Last week's sales for the CPP units, which was not a stellar week, it was a little off from what had been running in the previous 2 or 3 weeks, with the average was $21,678. Net annualized will be $1,127,268. That concludes the financial overview. Now I'll turn the meeting back over to Scott.

Okay. Thanks, Paul. During our last call in March, I covered a great deal of the challenges that the company faced in January and February, so I'm not going to repeat that coverage again today. If you didn't catch that discussion, you can do so from the year-end press release and from the transcript of the last call which you can find on nrom.info. To get more current to today and beginning in the very end of February, especially March and April, we started to see a fairly rapid retreat of COVID's direct impact on our operations, at least from a quarantine and isolation standpoint that had been such a big problem in January and February. There has been an uptick in cases here in Indiana recently, and we have seen that in our office as well as our restaurants with increased sick leave, but it seems to be receding quite quickly once again. We still had a steady stream of supply chain issues with which to contend and we still do, but they are fewer and often more predictable and require less emergency management time. Many of these supply chain issues are residual effects of the pandemic as well as a product of the current issues with the virus in China. Equipment, parts, raw materials, packaging, paper goods and other items remain in tight supply with frequent disruptions in availability. Inflation is obviously another ongoing issue. You saw the CPI and PPI numbers yesterday and today. Part of the issue is certainly tied to the supply chain problems, but part is also a predictable product of inflationary monetary and fiscal policy. But without question, the inflationary pressures are substantially increased as a result of the supply chain issues coming out of COVID but also certain other current events such as the Ukraine situation. There are other examples such as the shortage of tomatoes from 2021 and the anticipated production shortfall in 2022 due to water shortages rationing in the California growing area. This has caused contract pricing for this year's tomato packing to jump about 20%. Another example is the Avain flu, that started in 2021 in the wild bird population. And actually, Indiana was probably ground 0 for that. But it has now spread to commercial turkey and chicken farms, with millions of birds have -- had to be destroyed already. This has caused dramatic increases in chicken and egg pricing as well as product supply interruptions that we've had to work around, especially for our nontraditional venue where we have a full breakfast menu option as well as several chicken products. Labor is a source of another inflationary pressure. And as we discussed before, we were extremely aggressive in our employee recruiting efforts back in the first part of the year, so we are much better staffed now than many and we have no severe staffing deficits in any company-operated units. But like everyone else, we're having to pay up for that labor. However, the good news is that our hourly labor productivity has increased more dramatically than the wage increase, and that current level of productivity is a direct result of having been aggressive at recruiting hourly employees earlier in the year. They've had time to train and gain valuable experience, rebuilding the task proficiency that was better enjoyed prior to COVID. If you look at our average wage just after the start of the pandemic and you compare it to right now, our average wage for hourly employees has increased by approximately 5% in round numbers. That's a pretty substantial increase. However, if you take sales per nonmanagement labor hour, or SPNMLH, as it is often referred to, that number over the same period has increased by approximately 35%. Sales per nonmanagement labor hour measures the amount of sales generated per hour of labor spent and we can use it as a proxy measure for hourly labor productivity. So the average wage increased about 5%, but labor productivity with that same group is now running up about 35%. This and the menu price increase translated into lower wage expense as a percentage of sales, a trend that began showing itself in March and has continued through April and now into May. However, there has also been a shortage of, and a subsequent salary pressure for, the salaried management tool that actually run the restaurants. Salaries increased for general managers but even more so for assistant managers, who were bigger participants in the labor market exodus during the peak COVID, creating a very tight competitive market for this position. Taking the same pre and post COVID comparison as we just did for the hourly wages, our average salaries have risen about 7.5%. The good news, though, is that through aggressive recruiting, company-owned Craft Pizza & Pub restaurants all have a full complement of management staff at this time, along with a couple of bench staff gaining experienced for upcoming new units. And since we are already talking about metrics for Craft Pizza & Pub, I'll share some interesting data on the consumer side showing how orders are coming to us. This data is all for the most recent 6 months (sic) [ weeks ] this year compared to the same 6 month -- or 6 weeks last year, 6-week time frame. Inside dining was 49% of sales last year and 50% -- 52% this year, 49% last year, 52% this year. Carryout was 34% last year and 33% this year. Third-party delivery was 17% last year and 15% this year. These breakdowns, as you can see, have remained fairly sticky and unchanged except at the margin, at least when measured over several weeks as these numbers do. Given the receding number of COVID cases, we would have anticipated a greater change in this mix, though inside dining is slowly inching back up, and there's actually a much greater variation on a day-to-day basis right now. It is just getting washed out in the data when you view it over a 6-week span. And also keep in mind from our last call that we did complete a renegotiation of rates with all of our third-party delivery vendors. In addition, we were able to move our third-party pricing to in-store pricing plus a premium that covers a substantial portion of the reduced fees, making these sales much more profitable and desirable than before. On the units that have been opened well over a year or more, organic sales, and I define organic sales as total sales less catering and special events, which can distort the comparison, but organic sales are up approximately 11% over the same 6-week period last year. Our average check is up approximately 5% on that same 6-week comparison period from last year to this year, so a significant portion of the sales increase is by way of additional guests. The average check, however, has edged slightly lower in the last few weeks. Whether this is a blip in the data or a result of consumers pulling back slightly in light of overall inflation or whether newer guests are spending less than more established or some mix of all the above, we can't say it with certainty, but obviously it would seem logical that the overall economic environment is having an effect on consumer spending habits at this time. In the nontraditional venue, as we stated in the release, we have recently been able to redeploy staff back to a more concentrated selling and operational support versus the first 2 months of the first quarter when we were dealing with so many emergency staffing and supply chain issues. Due to continued labor shortages and economic pressures across the country, there is still some reluctance with many nontraditional business owners to add Noble Roman's into their business, but there are indications that this resistance is lessening and we're making great progress on that front with a solid pipeline of leads. So far this year through next week, we've sold 14 new franchises and opened 15 locations. This week, for example, we're completing openings in Fayette, Ohio and Frankfurt, Indiana. Next week, we have Huber Heights, Ohio and Plymouth, Indiana as well, with several more coming after that. I do not have anything new yet to add on the discussion from last time concerning finalization of new sites for Craft Pizza & Pub. We're continuing to work those options. As Paul said on the last call, there are many subpar retail vacancies as a result of COVID, but the type of locations we want to secure are in short supply and require time and patience in negotiations. One thing I can tell you, though, is that we're looking at a smaller and easier to operate prototype for Craft Pizza & Pub. We've had this in development now for a couple of months or so. The square footage would be somewhere between 1,800 square feet on the low end and 2,400 square feet on the upper end. Not only would this version be suitable for smaller markets adjacent to the greater Indianapolis market, but it may also open up additional franchising options and faster growth basically due to easier operations, a more limited menu and a smaller investment. We have a lot of work to do yet on fleshing out the final format and operating components, but we will be including this in our search for company-operated units. Okay. Well, with that, that wraps up the presentation portion of the call. Next, Paul and I are going to take questions. [Operator Instructions]

Okay. We're back on, and we'll start taking some questions. [ Roger Reisenberg ], go ahead.

Pretty good quarter considering what the challenge is. I just want to make sure, you talked quite a bit about the problems of January and February dissipating into the end of the quarter. Am I correct that, that dissipation of the severity of the problems have continued through the current time, April and this first part of May?

Yes. So the major impact of the Omicron variant really started in mid-November of last year, accelerated in December. And really, we started seeing some of the initial petering out of those impacts in late February. And that really hasn't been as much of a factor since then. Obviously, it's still a factor. We still have any number of supply chain issues that have to be addressed. But they're not as many. They're not as severe, generally. Many of them are coming on a more predictable basis at this point with some warning ahead of time. So we're not spending as much of our time managing crises and understaffing situations due to COVID vacancies like we were in January and February.

Is the cost -- I'm sorry, go ahead.

Yes, go ahead. I was pretty much done.

Is the cost of sales still running at about 21% of revenue since the end of the quarter? Or is that starting to go up?

Well, at the moment, there is some slight upward pressure in that number. There are going to be a couple of things that we know about that will add to that pressure. I'm hoping that there might be some downward pressure on that number too. For example, cheese today, I believe, closed at $2.30 a pound. And I bring up cheese because it's the biggest component in food costs. That's about, let’s see, what, 10-year running average, I believe, off the top of my head, it's about $1.76, so that would be about $0.54 or what, 30.5%. So cheese right now is about 30.5% ahead of the 10-year average. That's actually down, believe it or not, from a month or 2 ago. And I'm seeing some slight movement continuing downwards on that. So maybe we'll catch a tailwind on cheese. It's hard to say. Tomatoes, as I mentioned in the presentation, there’s a substantial increase coming in the tomato pack for this year which will impact pizza sauce. And that's probably the #2 or #3 cost component in a pizza. So there's still headwinds. But some of the headwinds you've been hearing about, such as the grain costs that are impacted from the war in Ukraine, some of that's already baked into the pie, no pun intended there, but -- so some of that is already factored in. Obviously, we could have additional rounds of increases. But there's not huge upward pressure, just some minor upward pressure.

Actually, [ Roger ], in the last 3 or 4 weeks, our cost of sales has been closer to 20% than 21%. So it's going -- been going down a little bit.

Do you feel a need or have you already instituted additional price increases beyond the 7% you announced earlier in the year? And along with that, and hopefully, the answer to this is no, are you looking for ways to cut back on the price and therefore also the quality of the ingredients that goes into the product?

So no is the answer to the first question. The last price increase was March. And I think we're sitting okay. The way it stands now, I don't see nor desire to have a price increase. The answer on changing anything from a recipe or a topping quantity or topping quality, the answer to that is no. We have no intention of doing that nor have we done so. Everything is entirely identical in quantity and quality to what it's always been. So no change there.

And my last thing is, do I need to be concerned about the balance sheet? Cash at March 31 was down about 35% from year-end. Can you talk about where it is today? And are you trying to refinance the debt or otherwise build up the balance sheet for the upcoming year?

The cash balance today is up over what it was March 31, not great. But remember, March 31 was largely down if you look at the cash flow statement because we paid for a lot of the cost of those last 2 stores. Even though they were completed in 2021, they didn't all get paid for until January, February of 2022. So that was a reduction of cash balance to expand those stores which we had planned on, it just happened that the cash actually went out the door after the first year instead of before.

Yes. And last, and this is, I think, probably pretty minor. The problems with labor shortages, et cetera, did that result in much or any additional shrinkage over the last year or 2?

By shrinkage, are you referring to product shrinkage or what?

Well, employee theft, that sort of thing.

Right. It hasn’t really been -- you always have some of that going on, obviously, but we keep pretty tight control over that through various monitoring and supervision techniques. But there really hasn't been a noticeable change in that category at all. Okay. [ Bill ], go ahead.

Yes, a couple of questions. Other than the smaller size of potential CPP, 1,800 to 2,400 square feet, I think you said, is there anything new on the CPP franchising front, number one? And number two, given the level of the stock price currently, and this may be prohibited by outstanding debt, but have you given any thought to any sort of stock buybacks given the level of the stock price?

Let me answer the last one. We are prohibited by our loan agreements from buying back our own stock. Whether or not we could get approval to do that or not we haven't tried, so I don't know. But I know that, that's still -- even though the stock is extremely low priced, ridiculously low price, I don't think it's the best -- our best interest to use our resources to do that. I think we need to keep continue to use them for what we've been using them for, which is to grow the company and grow the additional. And in the end, we keep doing the right things. They will get through these troubled times. All the restaurants have been having them. And I think we're in a position to continue our growth and continue to have them, and that's what we need to focus on. That's what we need to use our resources for.

Okay. Anything new again on the franchising front for CPP?

No, nothing new. It is simply not been an opportune time to really focus too much efforts on expanding that. Now we know that the -- if after we get a couple of the smaller units done, we know that, that will be a more attractive franchising opportunity because it's a lot less investment. And it's easy -- more importantly, it's easier operationally because we're limiting some of the variability in it. And so -- but all that has to be proven out with a unit or 2, we've been on the market looking for the right location to test that out. And we haven't come across that yet. We've got one site that's looking very interesting. I’ve had some negotiations on. But nothing is finalized and nothing has been agreed to there.

Going back to the large format Craft Pizza & Pub units, the ones that are 3,500, 4,000 square feet, the original intent was to franchise with established multi-unit franchising organizations. And those folks are having all the same problems we've been having with their current operations, which is lack of staffing, supply chain issues and all the rest of it. And they just have not been expanding into or at least the frequency of expansion is down substantially. And we would have to make investments in overhead to support that franchising effort and without a favorable market, it's just a wrong time to push hard in that particular segment. Okay. [ Roger Lipton ].

It sounds very promising in terms of the labor productivity improvements you've been able to make. Can you give us any sort of idea of what kind of improvement that could generate in terms of the labor percentage? I mean because you're talking about 35% more out, but obviously, I don't expect that it's going to go -- that the profit margin at the store level can go up from 10% to 20%. But what's the ballpark in terms of modeling the profitability of the pubs relative to labor?

We think that it’ll get down. As I announced when going through the financial highlights, March was back down to 29% of sales, labor and we've improved on that since then largely through the productivity and increased productivity. And we think that 28% overall average is attainable right now. And hopefully, with more steady time, more or less interruptions with a different variant, we might get it down below that a little bit.

Okay. Okay. And then I know you gave us an outline of the breakdown between dining in and off-premise. What percentage of sales are third-party delivery? I know you haven't promoted that very much, but to what extent do they find you?

Let me jump back to that number real quick. So if you look at the last 6 weeks, [ Roger ], we were at 15% of sales were coming from third-party delivery. That compares to 17% for the same 6 weeks last year. So there's a -- have a slight decrease. I don't even know if you can call that much of a trend given that you're just looking at a 6-week data point.

Okay. And they just show up at the door, right? I mean we don't see the order until the driver shows up with the name to pick up the product.

No. We see an order ahead of time on our electronic tablet order taking system that ties into those various systems. We do have to transfer that over to our POS system ourselves, but we do have advanced notice on those orders. [ Mark ], go ahead.

Yes, my question is similar to, I believe, the first caller in regards to the cash situation. And I'm just hearing as far as I know you have -- and it's great you're in a situation where you said managers are even grooming for new locations. But with just 800,000 on hand and I know with increasing construction costs now, that's about what it costs to open up a new one. How do you balance that? How do you see the future as far as balancing cash on hand and increasing, say, the debt load, which is already growing every quarter with the PIK interest? How do you see that in the long term as far as even the next leg of expansion?

We don't see any additional borrowing. Of course, we'll continue adding the PIK interest to the principal balance of the loan. But beyond that, we expect to do development out of our cash flow. Our cash flow was basically even in the first quarter of this year was kind of a down time and all the disruptions due to the Omicron. But projecting out over the course of the year, we think we'll still have substantial cash flow to do what we've set out to do, and it's built to 2 additional complete 3,400 square foot units. Now we may change that mix around and do 1 and 2 but -- instead of 2. But the near-term cash flow will cover our expansion without increased debt beyond the PIK interest adding...

Okay. And you think that, obviously, in your projections, too, as far as you see -- plan on seeing the loan up to maturity when -- what 2025 or something like that?

Yes, the loan maturity is 2025. Now do I think we will probably not pay all that loan off by that time, we’ll refinance the loan and extend it out to payable over a longer period of time. But we have no problem in our projections, meeting the requirements of the loan document up until then.

Okay. I don't see any additional questions on the board, but we'll stay on the line here for a moment if anybody else has a question. Okay. Well, I don't see any more questions, so we'll call this call off for the day. We appreciate your participation, and we'll talk to you again soon. Thanks very much for joining in.