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

Good afternoon, and welcome to the Noble Roman's conference call. My name is Scott Mobley, and I am President and CEO of the company. Also with us is Paul Mobley, our Executive Chairman and CFO. Today, we'll make some brief comments on the second quarter as well as the 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 referred to in that statement. So those provisions apply to this conference call as well. With that out of the way, I'll turn the call over to Paul here in just a minute to discuss the financial highlights. But first, one additional announcement. If you did not see it yet, a press release was sent out around 3:00 p.m. Eastern today, announcing that federal court has denied BT Brand's motion for a temporary restraining order and preliminary injunction. The court noted that BT Brands' nominee was disqualified by the application of a long-standing openly known bylaw. Therefore, our Annual Shareholder Meeting will be held as scheduled tomorrow, August 10. That's at 10:30 a.m. here in Indianapolis. You can read that full press release at nrom.info. Okay. Paul?

Well thanks, Scott. And I want to thank the attendees very much for their participation on this call. The company reported net income of $326,000 or $0.02 per share and $1.2 million or $0.05 per share for the 3-month and 6-month periods ended June 30, compared to a net loss of $50,000 and $187,000 for the comparable periods in 2022. The net income for the 3-month period largely reflected the growth in the franchising venue and was unaffected by the Employee Retention Tax Credit refund. However, since that credit was recorded in the first quarter, it is reflected in the results for the 6-month period. The company generated approximately $539,000 in cash from operating activities for the 3 months ended June 30, compared to approximately $151,000 for the comparable period in '22. Results from the company's franchise and venue have seen a significant increase in both revenue and margin. The company refocused its development plans towards selling more nontraditional franchises as a result of the pandemic and its after effects coming to an end, and the determination that owners of nontraditional locations would be more willing to look at expansion options and [ their ] willingness to invest in their growth. With the sales effort in the first 6 months of this year, the company generated 43 new franchise units available for opening. And during the first 6 months of 2023, the company opened 22 new locations, with the remaining balance of locations sold not yet opened in various stages of development to be opened. In addition, the company has a significant pipeline of leads and prospects for future nontraditional franchise sales. The company believes this growth points to an attractive opportunity for the coming months as the remaining new units already sold become open, and given the number of interested prospects for future franchise sales that the company has identified. During the first quarter of '23, the company determined that it was entitled to an Employee Retention Tax Credit of $1 million -- of $1.718 million, and submitted amended federal Form 941 returns for the last 3 quarters of 2020 and the first 2 quarters of 2021 for both Noble Roman's and its wholly-owned subsidiary RH Roanoke, Inc., claiming those refunds. The company recognized the ERTC refund of $1.46 million, net of related expenses of $258 million in the first quarter of '23. And during July, the company has received refunds for Roanoke for all 5 quarters. And Noble Roman's received all 3 quarters of 2020 and the second quarter of 2021. In total, the company received payments of $1.16 million plus interest. If the company receives the amount applied for, for the first quarter of 2021, as it has all the other quarters, Noble Roman's will have received $1.54 million net of commissions, or about $80,000 more than the amount accounted for in the first quarter. The intent of the Employee Retention Tax Credit when created as a part of the CARES Act, was to reimburse companies that suffered extraordinary expenses and losses of revenue as a result of government action related to the COVID-19 pandemic. The company-owned CPP locations continued to exhibit very favorable results, with margin contribution of 14.7% and 11.8 (sic) [ 11.7]%, respectively, in the 3-month and 6-month periods ended June 30, compared to 13.8 (sic) [ 13.6 ]% and 11.8%, respectively, for the comparable periods in '22. This is despite considerable inflationary pressure on ingredients and labor over the last year. Depreciation and amortization expense was $95,517 and $191,033 for the 3-month and 6-month period, compared to $112,687 and $225,439 for the comparable periods in '22, respectively. The decrease in depreciation expense was a result of not opening any new corporate-owned locations to date in 2023. General and administrative expenses were $526,000 and $1.045 million for the 3-month and 6-month period ended June 30, compared to $540,000 and $1.080 million for the comparable periods in '22. This reflects the company's focus on minimizing costs, while growing revenue through franchising. Operating income was $704,000 and $2.230 million for the 3 months and 6-month period ended June 30, compared to $281,584 and $440,727 for the comparable periods in '22, respectively. This increase in the second quarter of '23 over '22 was a result of growth in the franchising venue while maintaining Craft Pizza & Pub profitability, while keeping overhead and other expenses under control. The 6-month period results also benefited from the recognition of the ERTC of [ $1.4 million ] in the first quarter. However, that was not affecting the second quarter. Interest expense was $379,000 and $762,000 for 3-month and 6-month periods ended June 30, compared to $348,000 and $690,000 for the comparable periods in '22, respectively. The primary reason for the increase in both periods was noncash PIK interest, which adds to the principal amount of the Corbel loan outstanding. However, that is now being offset by the principal payment each month of $83,333 plus an application of a portion of the ERTC reimbursed (sic) [ reimbursement ] received to the early retirement of a portion of the long-term debt. That concludes my financial overview. Now I'll turn it back to Scott.

Okay. Thank you, Paul. Today, we'll start our business review with the nontraditional segment. As you know from previous calls and releases here recently, we refocused a considerable amount of company development effort towards expanding the number of nontraditional franchises this year. During the COVID and post-COVID periods, this segment was under a lot of pressure, not in all locations or locales and venues, certainly. But certain venues, such as the entertainment venue, were especially hard hit with lockdowns. And certain states, like California, were very restrictive regardless of the venue that we're talking about. However, with the post-pandemic scene quieting down quite substantially, we determined that nontraditional operators, particularly in the convenience store venue, were more open to making investments to grow the revenue and profit potential of their businesses, hence the sales focus. As a result of the efforts begun this year in the first 6 months of 2023, the company has generated new franchises totaling 43 units that we can now work to bring online. In fact, during the first 6 months, the company has already opened 22 new locations, as Paul mentioned. We continue to project -- to project-manage the remaining sold but unopened units into the now open category. For example, in the last couple of weeks, we've opened locations in Hicksville, Ohio; Decatur, Alabama; Richland, Mississippi; Upper Green Hill, Alabama and here in Indianapolis. In the next 7 to 10 days, we'll be opening locations in Eagar, Arizona; Beltline, Alabama and Demopolis, Alabama. Some of the sold, but as of yet unopened units are simply retrofitting Noble Roman's into their existing facility. And depending on the complexity of that remodeling, they'll move a little faster to the opening stage. Others are going into new facilities and will take longer. But again, focusing on managing these projects into the open status is a key priority at this time. As we pointed out in the press release, and reiterated by Paul a moment ago, the story of the nontraditional side of the business appears very attractive looking forward, given the number of new royalty producing units that will come online and given that we're continuing to grow our pipeline of interested prospects for future franchise sales. Okay. Well, let's turn now to the Craft Pizza & Pub segment. The story there continues to be how to manage around the high cost of goods and high-cost of labor, that has continued to escalate over the last year. And of course, to manage that without devaluing the consumer experience with less ingredients or less service. Coming into the first quarter especially, we were presented with widespread price increases on renewing contracts and on pricing agreements that had commodity price triggers. To further complicate matters, we determined that a menu price increase would not be sustainable or advisable, both due to the competitive environment and even more because of the fragile state of consumer spending. So we began working on several initiatives. First, we started competitive bidding on several key ingredients. We were able to get 1% here or 2% there in terms of reductions. Nothing major, but it set a new tone and prevented several additional increases. Second, we devised a new approach to our portioning system that reduced waste and overuse of ingredients without decreasing the recipe specifications. Third, with the hourly labor market improving in terms of applications received, we started working on shifting operating positions from higher-priced management to lower-priced hourly employees. And fourth, we developed a very creative nonindustry standard approach on how we staff for peak hours. Allowed us much greater efficiency. Most of these initiatives were finalized and implemented by mid- and late-March. So most of the full benefit was available during the second quarter. And as you can see, the margin contribution went from 8.4% in the first quarter to 14.7% in the second. We also benefited in the latter part of the quarter with reduced commodity prices on cheese, which makes up the largest percentage of pizza costs. However, that trend has unfortunately reversed itself in a serious way, and cheese prices have risen about 45%. In June, sensing some increased consumer hesitancy, we implemented a consumer special consisting of a price promotion, which also worked out quite successfully. The pre back-to-school period in July is always an uphill battle from a promotional standpoint, since family budget gets stretched with school clothes and supplies. But now that school is back in session, we're implementing a new promotion, which is going into effect now. I mentioned a minute ago that the availability of hourly employees has improved substantially here in recent months. This is certainly a great development and has given us the opportunity to both slow the growth in wages and increase our productivity. However, the same is not true of salaried management. That labor pool continues to be in very short supply, and it is harder within that supply to find good candidates. This is an issue that is requiring a great deal of time and effort to manage. But hopefully, that will reverse itself sooner rather than later as well. Okay. Well, with that, we're wrapping up the presentation portion of the call. Next, Paul and I will take questions.

[Operator Instructions] Okay. We're back on and ready to just take some questions. Matt?

Scott, I apologize. I did miss the first -- really the majority of your presentation. I dialed in about 4:15. I think 2 quick questions. Well, one, congratulations on the quarter. It looks like some really nice progress has been made based on the press release and everything. I am curious, I understand -- 2 questions. One, I understand there's probably some legal fees that were accrued or paid in the quarter. Were those in the SG&A, the legal fees related to the, any costs you had with attorneys related to the BT Brands situation? What were those legal fees? And are those in the quarter so far?

Did you have another question in addition, Matt?

Yes, I did. So the second question is just around any progress that has been made around the refinancing discussions.

There's no legal fees in the second quarter relative to the subject matter you're talking about. There was a small amount of legal fees, but it's not significant enough to even talk about, that will occur in the third quarter. The progress on financing is going well. It got hung up because of these lawsuits and orders for preliminary injunctions, et cetera, while the judge was listening or hearing all that, but it got delayed a little bit, but it's still active. We have 5 companies seriously looking at it, and we're moving forward with progress, and we now look to move forward much faster. Mark?

Congratulations on a great quarter. My first question, I've got a few, if that -- would be the nontraditional. It went from negative 3% in the first quarter to 29% positive in the second quarter. And that's just kind of -- I mean, how would -- even with 22 additional units, those would have to average like $15,000 a week to get that additional $300,000 in sales. Did you have new other units reopening that were maybe closed for a while? Or how can you explain an additional $300,000 in sales in that segment?

There's two ways for that to happen, Mark. First of all, we do get franchise fees upfront, which raises the level of revenue. And while we opened 22, we sold 31. That's number one. Number two, we did have some units reopening that had been closed. It's just -- and then there's a lot of activity going for momentum in the nontraditional because -- it was held back dramatically because of the pandemic. And once that started easing and people started looking at it differently, there's a much better appetite out there for growing that part of the business. So it was just all those things coming together. And I see it progressing on from here, because we're still having an awful lot of interest.

Sorry, Mark, did you say you had a second question?

Yes. A couple more, and that's great to hear that explains that. As far as you mentioned the other 2 questions on the early retirement of long-term debt, what was the amount on that? And then number 3 would be your Craft & Pub, still down about 5%. Do you think that's -- even though you've had price increases, do you think that's negatively impacted your stores? And what do you think you need to do to get those where those are in a positive direction in future quarters?

They're really already in a positive direction, Mark. The decrease, as I explained in the Q from the gross sales, but the margin went up. The gross sales fell off somewhat because of the late openings in the late part of 2021. We opened some stores right toward the end of the year and they got a bump in the first half of 2022 because a natural bump from the new opening that we normally get, and then it levels off again. We went through that experience, and there's been no decline in the ordinary growth of those stores and our margin's going up all the time. [ Darrell? ]

Yes. I might have missed the answer to the last guy's question. How much debt did you guys pay off out of this last monies you guys got?

I don't have the exact number with me, but it was around $600,000 of the long-term portion, and we will be paying off more as soon as we get the additional quarter refund.

Yes. You guys did a fabulous job this quarter. I just wondered if you increased your salaries to benefit yourselves?

No. Any other questions?

Matt?

Yes, Scott. That's just -- the question about the financing reminded me about payoff. Are there any plans from this quarter's cash flow to use those dollars to pay off principal?

Not specifically for those dollars, we didn't look at it that way. The overall dollars, and we paid off -- like I said, around $600,000, I don't have the exact number, of long-term debt, when we got the ERTC money that we've gotten. And we plan on paying off more when the other quarter comes in. But we haven't specifically aligned these dollars to any other dollars.

Roger?

Nice quarter. I'm not sure if I missed a number here or not. You gave the number of new franchises signed for the first 6 months. Has there been a follow-up in sales in the 1.5 months since then, through the last few days?

Let me clarify that. Out of -- 43,000 was not all signed in the first 6 months. That included some signed right at the end of last year, and hadn't been opened yet. So we had 43 available to open, out of the 31 we signed this year plus whatever we had at the end of last year. Yes, the trend is continuing. We have signed up more. I don't have the exact number on that. I haven't had time to follow that as closely as I would, because of all the other issues going on. But the sales are continuing to come in. We are expecting more even this week. And with next week, we'll expect more. So the sales of nontraditional are continuing.

And are you still talking to that one chain of a very large potential sign-up, or...

Yes. In fact, they had a person here in site today, studying the operations and becoming more familiar with it so they'd be ready to go. They're already operating 6 or 8 stores. And they're continuing that Eagar, Arizona that you mentioned. That's one of their units, which will be opening next Monday, I believe. And they are very interested. We had Troy Branson, which most of you know, was down at their office this past Monday, going through all the program with the different operations people, and then they had their Chief Food operator on site here today, reviewing all the operation. And that is progressing, and I think will be happening before too long.

Okay. Thanks again for a nice quarter.

You're welcome.

Mark?

Just one other thing, and I know there's a lot going on right now, so -- but just maybe in the future, I think as far as some shareholders have had interest as far as, you used to include exactly how many locations you have open. I know COVID kind of wrecked that and I think it probably got -- because you can't really tell who was open, who wasn't. But if you could possibly like in November, whatever, just -- I don't know if it would be possible to do a reset and say, okay, we currently have, whatever, 500 nontraditional units opened. It would just add a little more color on to when you're opening, say, 50 to 60 in a year, exactly the impact of that many openings. I don't know if that's possible or not?

Yes, we'll look into that for the next time around.

Matt, you had another question?

Yes, apologies, Scott. Actually, the gentleman who asked about the [ keys to the other docs that are small ] and looking forward to the next couple of quarters, that was really my question. So I'll skip.

All right. Well, that looks like all of the questions today. Thanks to everyone for being on the call and participating, and we'll talk to you again soon. Thanks a lot.