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

Well, good afternoon, and welcome to the Noble Roman's conference call. My name is Scott Mobley, and I'm President and CEO of the company. Also with us is Paul Mobley, our Executive Chairman and CFO. Today, we'll discuss the first quarter of 2023 as well as the current business environment. At the end, we'll address any questions you might have. We'll begin today's call with Paul's review 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 on the kind referred to in that statement. So those provisions apply to this conference call as well. So with that housekeeping out of the way, I'll turn the call over to Paul and have him to discuss the financial highlights. Paul?

Thanks, Scott. And I want to thank all the attendees for their participation on this call. The company reported net income for the 3 months ended March 31 of $868,270 or $0.04 per share on revenue of $3.3 million. This compares to a net loss for the comparable period in '22 of 136,696 or $0.01 per share on revenue of $3.5 million. The income before taxes for the 3-month period was $1.1 million, which is important since we have deferred tax credits to offset any tax due for the approximately the next $12 million in net income. The employee retention tax credit is a refundable tax credit that business can claim on qualified wages paid to employees. The program was introduced on March 27, 2020, in the Coronavirus, Aid, Relief and Economic Security Act, commonly called the CARES Act to incentify employees -- employers to keep employees on their payroll during the pandemic and to reimburse them for losses due to the economic shutdown. The credit applies to all qualified wages, including certain health plans, expenses paid during the period in which the operations were fully or partially suspended due to a government shutdown order where there was significant decline in gross receipts. During the first quarter of '22, the company determined that it was entitled to a tax credit of $1.718 million and submitted amended federal Form 941 returns claiming that refund. The tax credit refund is treated for accounting purposes as a government grant and recognized in the first quarter of 2023 as reducing approximate expenses for $1.7 million less expenses of applying for the refund of $258,000 for a net benefit of $1.46 million. The intent of this tax credit when created as part of the CARES Act was to reimburse companies that suffered extraneous expenses and losses of revenue as a result of government actions relating to the COVID-19 pandemic. The revenue from Craft Pizza & Pub was $2.1 million for 3 months compared to $2.3 million for the corresponding period in 2022. The primary reason for this decrease was that 2 restaurants that opened in very late '21 were -- still had sales as a result of the benefit from their opening period in early '22. To a lesser extent, the decrease was a result of a decline in third-party deliveries, which was not totally almost though made up or offset by an increase in dine-in or carryout sales. Cost of sales or CPP increased from 21.6% to -- increased to 21.6% from 20.66% in the comparable period. This increase was a result of the inflationary pressure on essentially all products purchase partially offset by more strict controls as a result of more experienced employees and menu price increases. Salary wages decreased to 29.5%, 3-month period compared to 31.7% for the comparable period in '22. This was a result of more efficient use of labor because employees had been there longer and more strict controls, which offset the salary and wage increases caused by the overall labor shortage. Gross margin contribution decreased to 8.4% compared to 9.9% for the comparable period last year, which was primarily a result of a decrease in revenue, as I explained above. The revenue from franchising decreased only slightly for the 3 months ended March 31, 2023 compared to the corresponding period in '22. This decrease was a result of closure of several of the nontraditional locations located in recreational and entertainment centers, which were required to be closed for a significant period of time due to the pandemic, and many of those franchisees did not have the capital to survive and were unable to reopen. However, the good news is that most of the closed locations have now been offset by opening of additional locations and improved sales. This venue is now continuing to grow again, as Scott will discuss later in his part of the program. Salaries and wages increased to 22.5% from 18.7% for the comparable period, primarily a result of adding additional staff to add renewed emphasis on growth in this venue as most of the COVID restrictions have now been minimized. As a result of recording or reducing expenses by recording the tax credit, approximately $1.38 million, gross margin contribution increased to 188% from 55.4% for the quarter compared to the comparable period last year. The reduction in other operating costs was a result of recording the tax credit in the first quarter of this year, although the extra expenses and lost revenue, which this program was designed to reimburse the company for occurred primarily in 2020 and 2021. Gross revenue from our company-owned nontraditional period located in a hospital was $223,000 compared to $133,000 last year. The primary reason for this increase was the lifting of the restrictions placed on the hospital as a result of COVID-19 pandemic, whereby the hospital was restricted from having outside visitors and staff inside the hospital going from one place to another. I might add, this has now returned to a very high volume unit for us. Total expenses were reduced to $122,000 in 3 months ended from $133,000 in comparable period last year. However, $83,000 of that reduction was a result of the reporting ERTC in quarter 1. The program was designed to reimburse the company for extra expenses and lost revenue due to the severe limitations of operating in the hospital due to the pandemic. General and administrative expenses decreased to $519,000 from $541,000 for the period in the '23 compared to same period in '22. The primary reason for the decrease was tighter control on expenses. Interest expense increased to $388,000 -- or $383,000, I'm sorry, from $342,000 for the 3-month period ended March 31, '23 compared to the corresponding period in '22. The primary reason for the increase was the result of adding the noncash PIK note interest, which accrues every month to the principal balance of the senior note and was partially offset by beginning principal payments on the senior note in February. That concludes the financial overview. Now I'll turn back over to Scott.

All right. Well, thank you, Paul. So today, we'll start our business review again with the nontraditional segment, and I'll try not to repeat too much of our discussion from a few weeks ago. But after lots of diversions during and after the main COVID disruption, we've been pretty successful in our plans to reassign and add additional staff towards the goal of expanding our nontraditional venue more quickly. As I stated on our last call, new unit development in 2022 surpassed the previous year by 30%, and 2023 should well surpass 2022 at the pace we're growing now. So far, in fact, this year, we have signed an additional 26 franchise agreements, and we've already opened 14 new units. And that list of new units includes several opened in the last couple of weeks or so, including Diboll Texas, Trotwood, Ohio, Medina, Ohio, Bedford, Kentucky and Fairfax Indiana near Lake Monroe. All are smaller towns with less competition, which are ideal circumstances for a nontraditional unit. Plus, we have about 22 units in the queue that have already been sold or in various stages of preparing to get open, including 4 more units that are likely to open yet this month. As mentioned in the press release, we now have agreements for 6 units with a major multiunit C-store operator, and we're currently in negotiations to work out a potential multiunit agreement that would call for numerous additional units under our development schedule. We'll continue to keep you updated on this prospect as the situation unfolds. As far as concerns for the nontraditional venue, we should note that labor supply is still an issue that crops up of concern with operators. As we mentioned during the last call in April, that concern is significantly less than what it was previously, and it is spottier in nature. And obviously, many operators have concerns about making investments in new programs given the current economic and financial climate, especially with the banking news and tighter lending. That said, however, as you can tell, the strategy is generating pretty solid interest, and we feel optimistic about the progress of franchise sales. Turning to the Craft Pizza & Pub segment. I'll repeat myself a lot again from April. Starting immediately after the Thanksgiving holiday in 2022, guest buying behavior became more erratic from a trend predictability standpoint. In addition to the issue itself, this put significant pressure on store level management from a labor cost control standpoint since greater stability allows us to schedule more efficiently, indeed stabilize trends requires reactionary management response on the fly, and that is always much more difficult to do and to do accurately. This destabilization of normal trends has continued during the first quarter of 2023 and through on today. Another trend we've been observing since we moved into 2023 is weakness in some types of consumers ending behavior. In general, that applies to off-premise consumption and more specifically to third-party delivery sales on platforms like DoorDash, Grubhub and UberEats. Now that is not entirely surprising given the current economy, the fact that third-party delivery is an expensive way to consume given the level of fees paid by the consumer. It's just expensive. Compared to a year ago, dining room sales now continue to show improved strength standing at about 57.5% of sales. And surprisingly, given the economy, the average check continues to hold steady as well. Of course, we still have a long way to go to hit that pre COVID a dine-in rate of nearly 80%. I updated you last call on some ongoing projects for Craft Pizza & Pub, and I'll add a few more current notes to that. First, based on some reports we've studied, we're in the process of testing pricing parity for 2 restaurants with DoorDash. Pricing parity is where we advertise that the DoorDash menu pricing, not including the DoorDash fee, is exactly the same as in restaurant price. Normally, we would charge a 10% premium to help cover our DoorDash fees. DoorDash has various algorithms in place to govern the order of the listings for restaurants on their website. And pricing parity should have a strong impact on those algorithms, moving us up on the list, which should in turn increase sales. That's obviously a test. We're in week 1 of that test, and we'll run it for about 5 weeks. It will take that time for this process to adjust and for us to get some clean data on the results. The second step we are taking is the rollout of delivery on our own website, which delivery function will be fulfilled by DoorDash. Now this is different than the regular DoorDash system that I was just discussing and that orders originate on our own, so to speak, by Noble Roman's rather than DoorDash. In this system, we take the order rather than occurring on DoorDash's website, but DoorDash delivers the order for us for a flat fee, which we will be charging the guest as a delivery fee, just like most pizza delivery companies do. The DoorDash does not charge a commission or a separate guest fee on these transactions. This allows us to advertise delivery while staying out of delivery management, and it is much more cost effective than regular DoorDash orders for both us and the guests. We've had this in one restaurant basically unadvertised so that we can work out the technical aspects since our POS system does not communicate directly with the DoorDash. However, full implementation across all units is now in process, and will take about a week or 2 more to complete. And speaking of POS systems, we are still in the process of vetting 3 new options. We have this on hold while we push through the implementation of the projects I just mentioned. And same with our new app, which we will return to as the #1 priority after the current implementations are complete. Finally, one quick update on commodities, which affects both nontraditional operators and Craft Pizza & Pub units directly. [ Teas ], the biggest component of food cost has been running well ahead of the 10-year average. But is very recently here in the last 2 weeks, taking a fairly sharp downward trend to more historically normal levels. If this holds, it could provide a little tailwind in our effort to improve total cost of sales performance. Okay. Well, on that note, we are wrapping up the presentation portion of the call. Next, Paul and I will be taking questions.

[Operator Instructions] Michael, go ahead.

I just open this up. You made $0.04 for the quarter.

Yes.

All right. Now did that include -- you had employee retention, I think a -- after fees $1.460 million?

That's correct.

Is that -- that's a credit. So is that in the $0.04 of profit?

It is. But remember, the $0.04 also takes out income tax, which is a noncash expense. So that $0.04 does include that credit, but it also includes the expense of income tax, which we don't pay in cash.

All right. Thank you, Michael.

So it would have been most likely we're going to lost money for the quarter. Am I correct?

Possibly. It's hard to decipher that exactly, but yes, that's a pretty good assumption.

All right. And what do you see...

I'm not showing any additional questions at the moment. Anybody else have a question? Roger, Jon?

Yes, those -- you opened 6 new units to one large operator. Can you tell us what the economics are of a typical additional...

Not 6 open. We opened -- we signed 6 agreements, but not all 6 of those were opened.

Right. I'm just wondering about the economics of a typical of -- the ones you have been opening in the last year or so, what the typical economics besides the upfront franchise fee might be in the royalties an annual basis, something like that?

Okay. Let's take the first of that 6 that they opened, which was in Southeastern Georgia. They spend about on the -- including franchise fee and equipment, they spent somewhere between $35,000 and $40,000. They're doing an average volume since they opened of, we'll call it $5,000. They've been as high as 62, as low as 48, but it's -- we'll call it an average of $5,000. We get -- they pay us 7%, and they have food costs over 44% and they have minimal additional labor because they already have a staff there. They just dedicate one of the existing staff to running the Noble Roman's. So it's very good economics for them. It's very good economics for us because we've got -- our overhead is pretty much covered. So we get a 7% royalty on that, call it, $5,000 a week.

Okay. Harry?

Scott and Paul. I don't know if you could shed any light or want to as to what the future plans could be for this multiunit convenience store operator, not necessarily all the units they have, but how many you or they believe could benefit from a Noble Roman's in that?

Well, Harry, that number is kind of unknown to us at the moment. I can tell you that they are operating today about 600 convenience store, truck stop locations throughout the country. They just meet an acquisition of 100 -- it's not closed yet, but we'll be closing in the next month. They made an acquisition of 196 truck stops, mostly in Georgia, Alabama, some in Florida, in [ Aladdin ], Tennessee, which is very good markets for us. We're pretty well known in that area in the convenience store, truck stop business. And the development agreement that we've been working on, now this is back and forth on e-mails and telephone calls, et cetera, until last Thursday. In last Thursday, the gentleman in charge came to in Indianapolis and spent a better part of the day with Scott and I and Troy Branston and one of the Craft Pizza & Pub stores and the development agreement that he's proposedly working on is for 100 units now over a development schedule of about 2.5 years, although it could develop into a lot more than that because they have a lot more potential operations. So that could be a very sizable nontraditional development. over time.

Okay. Mark?

Let's start with -- at the last call, you said there's 2 potential large franchises. Is that still accurate? Is there still another one that I think you said there was one look like...

No, one that we have opened that has close to 100 units, and we've opened 2 with them so far, potentially interested in a lot more. They move a little more cautiously. And timewise, it will be a little slower.

And then you mentioned that you're going to be sent somebody to the Las Vegas show. Is there anything interesting come out of that in terms of the Craft Pizza & Pub?

Not much.

It's a fairly small show for -- it includes a lot of retail in addition to restaurants. So we thought it would just be a good way to get started since it had popped up on the screen, and we are ready to also -- we did have 2 people down there for that. We got a couple of things to follow up on, but it's not the biggest show in the world. So we'll be expanding our effort on that. Bill?

A couple of questions here. First of all, will there be a shareholders meeting coming up this summer sometime?

Yes, July 6. You will get a proxy statement sometime soon. It would be in the next 2 or 3 weeks.

Okay. July 6, that is a -- that's a Thursday, I believe. Is that correct?

That's correct.

Okay. The other question is, I was at the shareholders' meeting last year, there was a part of the presentation was, I believe, sort of a 5-year plan for Craft Pizza & Pub. And I could be wrong. It's sort of envisioned over the next 5 years. I thought it was basically doubling the number of Craft Pizza & Pubs around the state of Indiana. That's my recollection anyway. Since then, there has not been an opening of a new CP&P, do you still think you're on track for that sort of expansion of Craft Pizza & Pub?

Thanks for the question, Paul. I think what you're referring to was a diagram that showed potential expansion areas within the current trade area of our existing footprint. And then we spent some time talking about how we could latch on over time and into the future how we could latch on additional markets adjacently, and we talked a little bit about how we could look at various places across the country for established multiunit operators with multiunit operating experience. whereas if we were looking at a potential individual operator, we would want them definitely not to be in a major market away from our current footprint, but to somehow latch on into this particular area.

So -- but do you think -- but I guess if my recollection was correct, I mean, do you still think you're on track? I believe it was over a 5-year period to have that sort of expansion?

Yes, we have the basis for that, and we're on track to accomplish expansion in that neighborhood over a 5-year period, but we don't have any solid numbers to share with you at this time.

Roger?

Yes. And that major development agreement that you're talking to is the company with 100 units, would they be getting a discount on the upfront franchise fee of $7,500 per unit.

They'll be getting a little discount on that because they would pay for all of those units upfront.

I see. And another question, the BT Brands people that have been in contact or have filed that there are new, I think, 8% owner of the company. Our -- since we last talked, are you and they talking at all? Or are you both sort of just going along and nobody is talking to anybody?

Nobody is talking to anybody that I know of. I've never spoken to these people in my life. I invited them to come here twice, but they declined, they didn't respond. And to my knowledge, there's no conversations whatsoever going on.

Let's see. Bob?

Yes. Bob.

Yes. Go ahead, Bob.

I like what you're doing with DoorDash, much better than the not having that. So that was good. I wanted to say that what I'm still curious about is what's the ratio of sales that's going through the curbside pickup?

So well, that's a good question. We will see normally that's very seasonal in terms of the percentage of sales that it makes up. During the summer months, we see a lot of conversion from curbside pickup where people are waiting in their cars, to people coming in and doing their pickup inside the restaurant. Currently, it's running at around -- and this is a rough number. I don't have the exact number in front of me, but it's approximately 20%. That's really now into a little bit of the spring switchover. Now where that really comes in -- that service really comes in handy in the summertime in the spring time, however, is any inclement weather. And obviously, at that point, people reconvert from getting out of their car and going into the restaurant to getting their pizza delivered curbside. Mark, you're back on.

Yes. Just is there any update on what are you feeling on the loan? Is it just -- is there talks of Corbel to renegotiate that? Or is it just basically paying off the principal every month?

Well, right now, we're paying down on the principal every month. But yes, there is a thought, a plan and a process for refinancing that debt over a little bit of time into a longer term and freeing up more funds that we're generating to use for expanding the business.

Okay. I don't see any other questions. Are there anybody else have any other questions they'd like to ask. Michael, you're back on?

Yes, just looked up BT Brands, they a own almost 6% your company that you haven't even talked to them once?

No. That's right.

Don't see any additional questions. All right. Well, thank you, everyone, for participating in today's call. And I'm glad to have had some good questions today, and we'll be terminating the connection now, and we'll talk to you next time. Thanks very much.