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

Good afternoon, everyone, 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're going to discuss the third quarter as well as the current business environment. And at the end, we'll take any questions 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 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 the call over to Paul for the financial highlights. Paul?

Thanks, Scott. And I'd like to thank all the people in attendance on the phone for your participation. We're very happy to report that the company-owned Craft Pizza & Pub locations continue to exhibit very favorable sales growth and margin increases. The margin for the most recent 3-quarter -- for the most recent 3-month period ended September 30 was 15.2% compared to 10.6% for the comparable period in '21. Results from the company's franchising venue are also on a favorable uptrend, gradually returning to pre-pandemic levels. On a sequential quarterly basis, the revenue from this venue has shown a steady increase for the last 4 quarters. This venue, especially the entertainment segment, was very negatively impacted by COVID and the resulting difficulties. This segment is typically located in underlying small businesses with little capital and operational flexibility to deal with prolonged adverse conditions. Many were forced to close due to government regulations and did not have the financial capability of coming back. To compensate for this and to again drive revenue in this venue, the company focused a lot of its resources on selling new franchises and opening new units. The company has sold 26 new nontraditional franchises this year prior to October 31. Total revenue for the 3-month and 9-month periods ended September 30 was $3.9 million and $11.1 million compared to $3.4 million and $10.3 million for the comparable periods in '21. Company-owned Craft Pizza for the 3-month and 9-month period was $2.6 million and $7.4 million, respectively, compared to $2.1 million and $6.5 million for the comparable periods in '21. Franchising revenue for the 3-month and 9-month period was $1.1 million and $3.2 million, respectively, compared to the $1.2 million and $3.4 million in the comparable periods in '21. The company reported a net income of $4,000 and a net loss of $183,000 for the 3-month and 9-month periods in September compared to a net loss of $79,000 and net income of $833,000 for the comparable period in '21. The net income for the 9-month period in '21 was the result of the company receiving funds through Payroll Protection Plan accounted for as a grant in the amount of $941,000 in the first quarter of '21, limiting comparability of the results between '22 and '21. Craft Pizza & Pub, as I said, had revenue of $2.6 million and $7.4 million for the 3- and 9-month period compared to $2.1 million and $6.5 million. The revenue increases was a result of adding 2 additional locations in the last quarter of '21 and same-store sales increases in existing locations. The margin contribution from this venue was 15.2% and 13.0% for the 3-month and 9-month periods ended September 30, '22, compared to 10.6% and 22.1% for the comparable period in '21. The margin of 13% for the 9-month period was reduced as a result of the lower sales in January and February because of the spread of Omicron variant. The increase in margin for the 9-month period ended September 30, '21, was the result of certain expenses being reduced by the PPP loan grant, including the reimbursement of $371,000 in favorable costs for the first quarter of '21. The company franchising venue revenue was $1.1 million and $3.22 million for the 3-month and 9-month period ended September 30, '22, compared to $1.18 million and $3.43 million for the comparable period. The franchising revenue was reduced during the pandemic as various nontraditional locations throughout the country had to close due to government regulations and other actions in an attempt to reduce the spread of COVID. The revenue has been gradually increasing again due to the opening of new locations and has been gaining on a sequential quarterly basis and the quarter ended December 31, '21 was $1,013,000, quarter ended March 31 was $1,034,000, quarter ended June 30 was $1,064,000 and the quarter ended September 30 was $1,120,000. Labor shortages, supply chain disruptions, high inflationary pressure and the emergence of COVID pandemic had a significant negative impact on both CPP and franchising venues. The company has successfully mitigated the effects with regard to the company-owned Craft Pizza & Pub restaurants. The franchising was affected more significantly, and the franchising revenue is now increasing again but at a slow pace because of the economic environment and the labor shortage period that we're in. The labor shortage and general inflation has resulted in higher costs in a variety of categories. Most of the product cost increases have been offset by menu price increases. However, the labor costs due to the general labor market shortages and competition for employees has increased wage cost more than was offset by the menu price increases. In the company-owned CPP locations, the labor shortage and spiraling costs have largely been mitigated by aggressive recruiting and training. The labor cost shortage, however, is making it more difficult to franchise nontraditional locations because the host facilities are not finding enough labor availability to expand their businesses. Salaries and wages in Craft Pizza & Pub locations were 27.5% and 29.2% for the 3-month and 9-month period ended September 30 compared to 29.2% and 22.9% for the comparable periods in '21. The 22.9% for the 9-month period in '21 was the result of a portion of the PPP loan grant received in the first quarter of '21, including reimbursement of the $371,000 payroll cost. This demonstrates that most of the labor increases driven by labor shortage was absorbed by menu price increases in the CPP venue. But in addition, the company created more efficient use of labor in the company-owned restaurants. This was a different scenario in the franchising venue as those independent operators are suffering from labor shortages and are having difficulty recruiting employees to expand, resulting in franchise sales being more difficult, even though we're still able to sell 26 so far this year prior to October 31. Gross margin contribution in the CPP was 15.2% and 13.0% for the 3-month and 9-month period compared to 10.6% and 22.2% for the comparable period. The 13% for the 9-month period was reduced by the margin in January and February to 7.2% as a result of the rapid spread of Omicron variant in November through February '22. The increased margin for the months after February '22 came despite the increase in utility cost, which has increased approximately 30% over the previous year. The company has implemented additional control procedures to conserve the use of both gas and electric. The 22.2% margin for the 9 months ended September was inflated by the reimbursement of the various qualifying experiences as a result of receiving the PPP loan grant of $941,000 in the first quarter of '21. Gross margin as a percentage of revenue was 55.4% and 55.1% for the 3-month and 9-month period ended September 30 compared to 58.2% and 61.7% for the comparable periods in '21. The decrease in margin in this venue was a direct result of the decrease in revenue from this venue as a result of the closure of several locations in compliance with various state and federal regulations. As stated before, the volume has, since December, been gradually increasing due to additional franchise sales, openings, although slowly because of the economic environment and primarily because of the labor shortage affecting those type locations. Actual expenses without regard to the reimbursement in 2021 of certain qualifying expenses in this venue have remained consistent. And if revenue continues to increase, as it has been doing recently, most, if not all, of that increase will add additional margin in the future. General and administrative expenses were $518,000 and $1.6 million for the 3-month and 9-month periods ended September 30, compared to $506,000 and $1.3 million for the comparable periods in '21. Most of that increase in the 9-month period was a result of partial reimbursement of certain qualifying expenses through February '21 PPP loan grant. Interest expense was $378,000 and $1.1 million for the 3-month and 9-month periods ended September 30 compared to $343,000 and $1 million in the comparable periods in '21. The primary reason for the increase in both periods was a result of the noncash PIK interest adding to the principal amount of the Corbel loan, and therefore, increasing our interest cost. The company's current ratio was 2.38:1 as of September 30 compared to 2.27:1 as of December 31, '21. This concludes the financial overview. Now I will turn the meeting back over to Scott.

Okay. Well, thank you, Paul. As we summarized in the press release and also in Paul's presentation that he just gave on the financial report, the third quarter saw a significant progress advance in both the nontraditional and the CPP venues. On the nontraditional front, we now have an industry veteran with over 45 years of experience in the foodservice and nontraditional venues spending pretty close to 100% of his time generating sales leads to extend the sales pipeline for Executive Vice President of Franchise. In addition, we just concluded a national convenience store trade show on October for the first time since COVID, and we came back with many additional leads to help fill that pipeline. Our main priority in this venue, as Paul suggested, is to work these leads, increase potential sales flow to execute franchise agreements and then to open additional units. We need to keep the following in mind, however. While there is significant interest in our nontraditional franchise concept, there are those 2 current macroeconomic hurdles that Paul mentioned that can derail or delay the sales process, either before an agreement is signed or after an agreement is signed before the new unit. So that is the general concern small business owners currently have regarding the economic outlook and the fear of a recession and the continued difficult staffing environment these owners face. Nonetheless, we remain optimistic that we'll see continued and even accelerated growth in this venue. As mentioned, so far in 2022, we sold 26 nontraditional franchises. In addition to a significant number of single unit leads we have in the sales pipeline, we also have leads representing new larger chains and some new unit growth that is expected to come from existing chain operator franchisees. During the third quarter, we also initiated a test on a slightly refreshed kiosk display for our nontraditional units. The current design is always well received, but some of the black backgrounds and the darker counter surfaces have been replaced in the test with a brighter white tile and counter look. This keeps the kiosks modern and fresh and helps to further stand out in what could be sometimes a crowded convenience store space. Now turning to the Craft Pizza & Pub side of the business. The third quarter margins were enhanced by a number of factors. First and foremost, we had greater stability in staffing in the third quarter. This allowed us to gain efficiencies in both staffing and labor costs as well as food costs. Less time was required for recruiting and training, and more experienced personnel meant a greater ability to adhere to our topping and portion standards. Obviously, inflationary pressures continue, but a number of additional smaller initiatives that we began in the second quarter helped offset pressures in the third quarter. These are things such as energy consumption strategies, renegotiated credit card fees, pest control contracts and other renegotiated services. The salad bars continue to be a good draw for us. Even though the rollout was not complete until the middle of July, we sold approximately 21,000 salad bar orders in the third quarter. This is a relatively high food cost item on a percentage basis but has a high revenue per ring order, it is usually accompanied also by other food and drink items. It also adds new customers to our base. And recently here in the fourth quarter, we've just launched a new promotion, which is our limited-time-only taco pizza. We're only a couple of weeks into it at this point, but it is being well received. We sold actually 800 approximately taco pizzas just last week, in fact. We're also currently interviewing candidates to take on the role of franchise development for our Craft Pizza & Pub. Although expansion with experienced multiunit operators may still be a little soft in today's environment, we think there are other opportunities that are also viable for franchise growth of Craft Pizza & Pub. So we're taking our time to identify the right person for this effort, and we'll take some time to implement the initiative and generate franchise sales, but we're pushing forward to make things happen. Looking now at some of the consumer metrics on Craft Pizza & Pub. They still remain somewhat unpredictable in this economic climate with greater-than-average variability from week to week, However, one metric in particular that will be interesting, and that I'll point out here, is our percentage of sales that occur in the dining room. Overall, during the last 6 weeks, this averaged about 60%. If you recall, pre-COVID, this number was closer to 80%. Prior to the Omicron outbreak earlier this year, our dine-in had actually climbed above the 60% mark that we're at now, only to drop noticeably during that Omicron outbreak. But it's gradually climbing again over time, and it's well ahead of this time last year. Last year, we -- at this time, we were only running about 45%. What is really interesting about this is the disparity in the Craft Pizza & Pub units that were opened pre-COVID versus those that opened during COVID. The pre-COVID units are running approximately 66% dine-in right now. The others are running approximately 49%, and that's a 17-point disparity. This most likely has to do with the fact that dining rooms are sometimes closed or limited during COVID, so guests at the newer units have less muscle memory, if you will, when it comes to thinking of us for dine-in. This is a significant opportunity, we think, and we're working on some strategies to exploit that. Labor is still an issue for both nontraditional and Craft Pizza & Pub operations. As I mentioned, the availability of hourly staff in the nontraditional venue is having an impact on our growth rate. In the Craft Pizza & Pub in October, we experienced another round of unanticipated staffing shortages in the greater Indianapolis metro area, both in our hourly employee staff and in our restaurant management staff. Hourly staff is back up to somewhat normal levels in most units, but we still face some issues in management staffing, which require constant attention. As far as commodities and supply chain are concerned, these also impact both the nontraditional and Craft Pizza & Pub segments. Supply chain issues are still out there, but they're fewer in number than they were earlier in the year. They're generally more manageable, but they sometimes still require emergency management on our part. Commodities are still high. I don't need to tell you that. Cheese, in particular, is remaining very sticky at over $2 per pound on the Chicago Mercantile Exchange. It's even higher yet this week. And that's about 15% to 20% higher than the 10-year average, which is keeping significant pressure on food cost, as it has been really virtually the entire year. Again, we're working around these pressures, first, with the menu price increases earlier in the year, and then secondly, with better operational controls available through more experienced staff. Okay. Well, on that note, we'll wrap up the presentation portion of the call. Next, Paul and I will take questions. [Operator Instructions]

Okay. We're back on, and we're about ready to take some questions here. Okay, [ Roger ]?

The nontraditional sector is obviously very interesting. Can you give us an idea how many new units have come on stream this year? So far, you said 26 have been sold. Have very many of them opened? Do you have any idea of how many might open, say, in the next 6 months or 12 months, any estimates at all? And also, I'd be interested to know how are the latest nontraditional units doing in terms of sales?

Well, [ Roger ], we've opened -- I don't know the exact number, but I would say we've opened probably 25. Now some of those were units that were sold in '21. Many of those are units that already opened that have been sold in '23. All of -- or '22. All 26 of those that were sold so far this year, we expect to be open in the next few months. They're opening pretty fast after we get the agreement signed. They've been opening at a good clip this year. I was just looking at that last year -- or the other day compared to last year, and the units that we opened in '21 versus the units that we've opened so far in '22, the 22 units seem to be averaging about 40% more volume than those units that we opened in '21.

Thanks, [ Roger ]. [ Bill ]?

Yes, how are things looking for opening more CP&P locations?

Well, we've been doing a lot of procurement on sites. We've been holding off and kind of stretching the process out here the last couple of months or so because of the economic uncertainty kind of waiting to get a little clearer picture on how the economy is going to evolve. We are -- as I mentioned in the presentation part of the time today, we are in the process of recruiting someone to take over the franchising side of Craft Pizza & Pub. So we hope to be able to work towards ramping up unit development on that side as well.

Just adding to that, I've looked at an awful lot of sites this year that's been presented, but it's very slim pickings right now, available sites in the areas that we want to be in. I've been presented with all types of sites that doesn't fit our criteria and that we've rejected. But the sites, nothing new is being built -- or I shouldn't say nothing. Very little new is being built. So it means the availability of sites that we want to look at right now have just not been there. But we keep looking at them as they come along, and we'll find the right ones.

Thanks, [ Bill ]. [ Darryl ]?

Yes. Great presentation. I'm just -- I'm looking at a combination of the Corbel loan and the portion that's not going to be able to be paid in kind and kind of where the cash situation is right now. I mean, are you at all concerned about that? Or are you comfortable with how that's all shaping up?

We're comfortable right now that it's going very well. As a matter of fact, we're generating some positive cash, even with the excessive interest rate charges. Now just to clarify what you said, the PIK interest is only that portion of the interest. We still pay cash interest every month. And the PIK interest is on top of that cash interest, and that is the portion that's added to the Corbel loan and you get interest on top of the interest that way in the next payment.

Yes. I guess, I got that. But for some reason, I was thinking that it was going to go up, the cash component was going to be going up in the not-too-distant future. Or maybe I'm...

Well, the cash interest has taken a little bit of an increase because it's tied to LIBOR, but that increase is probably pretty much over with for the time being. And there is a capital on that as well. So we're not going to see a lot of interest rate spike, I don't think.

Okay. I'm just wondering, I kind of hopped in this without doing a whole lot of research. And then I was out looking at some of the stuff on the message voice. I don't know if you guys have seen any of that or had any thoughts about what's being put out there at all, if you're hearing anything about it.

What we hear all the time...

I mean about the -- like in other words, I mean, what I'm hearing is that you're going to start being hit an extra $35,000 a month starting in February is like going to be -- that's the kind of troubling information that seems to be out there that the economics are going to get strained in the not-too-different -- in the distant future?

Well, that $33,000 a month, there's a principal reduction, which will actually lower interest cost a little bit as we pay down the principal. But all the cash projections out in the future doesn't present that as a problem.

Okay. Well, I just noticed that it went from -- your cash went from $1.26 million to $740,000. And I know that -- I mean, a lot of it is going into opening new things that are kicking in some returns. I just was wondering if you were at all -- how concerned you were about that whole situation.

Well, the decrease in cash that you're talking about is from December 31 to now, and that largely decreased because the units that were opened in November and December of '21 were actually paid for in early part of '22. So that's what most of that decrease in cash was for.

Okay. Well, thanks. We'll take a couple more questions here. Okay, [ Mark ]? Can you hear us, [ Mark ]?

Yes. Can you hear me? I find it interesting that you're looking again for a -- the new manager for developing the Craft & Pub franchises. What have you seen out there that kind of leads you to go ahead and make that investment? And what are you -- kind of what's your goals on that, basically filling up the State of Indiana at this point? Or -- so what do you see that position eventually taking you to over the next year or two?

Sure. Well, there's a lot to that question. But in general, from a timing standpoint, it really just was not good timing to have brought on that type of a person or overhead during the main thrust of the whole COVID situation. So things are obviously considerably more open, there's more economic activity. Some multiunit -- existing multiunit franchise operators are starting to look for expansion opportunities, again, although there's still a lot of disruption in that particular category. But smaller developers, individual developers, individual franchisees is becoming a healthier marketplace. Again, obviously, it's not back to normal, but it's on an uptick. So from a timing standpoint, that's why we're looking now and not, say, a year ago. As to where we would be looking, some of that will depend on the specific prospects that we bring in. If we are talking to individual and unit operators, those will mostly be confined to tap on markets near Central Indiana, Northern India, Southern Indiana, possibly Western Ohio, Eastern Illinois, but within the sphere of our primary Craft Pizza & Pub name brand recognition. We wouldn't want to take an independent operator and pop in the middle of, say, Phoenix, Arizona, for example. On the other hand, if we get a properly financed multiunit operator that was willing to tackle a significant market in a reasonable time frame, then that opens up numerous other possibilities as to where we might look, particularly considering that we have 1 hurdle that companies often have to face, we do not have to face, and that is near national distribution because of the nontraditional side of our business. So the right multiunit operator with the right financial backing and with the right development schedule would open up additional opportunities. As for the timing of growth and so forth, it's a little too early for us to be talking about what that's going to look like. We have to get the right person onboard first, and then we have to sort of formalize the planning process and how we're going to implement that effort. But we'll be coming back to you, I'm sure, with more information on that here down the road.

Okay. Actually, what you -- I know you have a new prototype for Craft & Pub, is that something you would need to really look at? Or is that something that you would think would help sell them then with the smaller footprint?

Yes. We designed that smaller footprint specifically with this effort in mind. For those that may not be familiar with what he's referring to here, that's a roughly 900 square foot smaller unit that is more efficient to operate, easier to operate. Obviously, lower occupancy cost. And that prototype, we anticipate being not necessary for a franchisee to sign on to, but definitely something for a franchisee to consider as an easier to operate facility and a less expensive facility to operate. All right. Any additional questions? We'll give it a moment here. All right. Well, I'm not seeing any additional questions. So on that note, we'll just bring this to conclusion. Until next time. We appreciate everybody that joined in on the call. Have a great evening, and we'll talk again soon. Thanks.