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 on the line is Paul Mobley, Executive Chairman and CFO. Today, we'll provide some comments on the third quarter, some subsequent events in the current business environment. At the end, we will be happy to take some of your questions. We'll begin today's call with Paul's review of the financial highlights. But first, I want to refer you to the safe harbor statement contained in the earnings press release. This conference call will contain forward-looking statements from the kind referred to in that statement. So those provisions apply to this conference call as well. With that, I'll turn the call over to Paul.

Thank you, Scott. And I want to thank all the callers who are joining us today. And I'd like to start by giving you a brief perspective of the last few years as it relates to our strategic focus. During the various stages of the pandemic, the market shifted dramatically, so the company had to change a synthesis to keep up with the changing environment. In 2017 and '18, the company created Craft Pizza & Pub to grow simultaneously with, and in addition to growth for non-traditional locations inside other host businesses with existing traffic. When the pandemic became official in the spring of 2020, non-traditional and traditional were both compromised, but the primary opportunity at that time was growth through company-owned CPPs, so that is where we place the company's emphasis, as franchising opportunities did not exist at that time. In fact, revenue from franchising declined nearly $1 million a year as host facilities relating to recreation and entertainment were forced to close by government regulations for almost 2 years. Now after the pandemic, the CPP saw unstable consumption patterns due to softening consumer spending, resulting from an increase in credit card debt, increase in gas prices and overall inflation of products and services in general. Nearly at the same time, host facilities for non-traditional franchise prospects recognize the need for quality food operations as an avenue for them to increase revenue, increase their margin, which led to a great growth opportunity for Noble Roman's in convenience stores and travel plazas. The company recognized that trend and shifted its internal emphasis away from expanding company-owned CPP restaurants to focus on growing the non-traditional franchising without increasing its overhead. As a result in the latter part of 2022 and the first 9 months of '23, the company generated 54 new franchise locations for opening and opened 40 of them during that period. This focus also allowed selling more non-traditional franchise locations with higher average potential volumes. This trend is continuing, and we still have a significant backlog of prospects to expand the franchise locations. In addition to that trend, on October 27, the company entered into a development agreement with Majors Management, LLC for 100 additional locations to be developed over the next 3 years, and Majors has plans to develop many more than the 100 locations now signed for. The signing of that development agreement was written up in convenience store news publications and has created franchising interest among other companies as well. So in summary, changing market conditions have dictated our focus. During COVID, non-traditional and tradition were both compromised, but the primary opportunity was in company-owned CPP growth. The post-COVID economy has been tougher on CPP market, but has allowed much more vigorous growth in the nontraditional segment. These factors explained the focus shift, we have had from the one period of time to the other. Now for the financial review, the company reported net income of $154,516 or $0.01 per share and $1.35 million or $0.06 per share for the 3-month and 9-month periods ended September 30. Compared to a net income of $3,852 and a net loss of $183,105 for the comparable periods in '22. The net income for the 3 month period, largely reflected growth in 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 9-month period. The company generated approximately $1.06 million in net cash from operating activities for the 9 months ended September 30, compared to approximately $23,000 for the comparable period in 2022. The largest contributor to the improvement in results has been the continuous growth in the non-traditional franchising segment, which has a net contribution of $3.7 million towards overall earnings for the 9 months in '23 compared to $1.8 million in 2022. This is primarily the result of continued growth in non-traditional franchising, and is expected to expand even more and more quickly with the signing of the development agreement with Majors Management on October 27 for 100 new locations. The development agreement requires Majors to have 31 locations opened by June 30, '24 and 50 by December 31, 2024, and the remainder of the 100 open on or before September '26. The development agreement allows for locations to be developed throughout the 48 contiguous states but the major concentration of the locations will be in Texas, Alabama, Georgia and Tennessee. Total revenue for the 3-month and 9-month periods ended September 30 were $3.7 million and $11 million respectively, compared to $3.9 million and $11.1 million for the comparable period in '22. Franchising revenue for the 3-month and 9-month period was $1.3 million and $3.7 million compared to $1.1 million and $3.2 million in the comparable periods in '22. Company-owned Craft Pizza & Pub revenue for the 3-month and 9-month period was $2.2 million and $6.6 million compared to $2.6 million and $7.4 million for the comparable period. The revenue for the periods in 2022 reflected relatively high brand opening sales from a few locations that opened late in the previous year, which disrupts their comparability. In addition, same-store sales declined during this period due to a softening of consumer spending, resulting from an increase in credit card debt and increase in gas price and overall inflation, resulting in less disposable income for the ordinary consumer. Even though the company-owned CPP locations had a sales decline in the third quarter, they continue to make significant margin contributions to the overall profitability of the company. The margin contribution for the first 9 months of '23 has been nearly $750,000 despite considerable inflationary pressure on ingredients and labor over the last year. The company has not implemented any menu price increases in CPP operations in over a year. Having determined from its extensive set of daily consumer data that has slowed down and guest spending due to economy might be -- might be a likelihood, which was, in fact, experienced in the third quarter. Depreciation and amortization expense were $95,517 and $286,550 for 3-month and 9-month period compared to $112,555 and $337,994 for the comparable periods in '22. The decrease in depreciation expense was a result of not opening new corporate level locations to date in 2023. General and administrative expenses were $519,291 and $1,564,433 for the 3-month and 9-month periods ended September 30, and compared to $518,466 and $1,598,689 for the comparable period in '22. This reflects the company's focus on minimizing cost while growing revenue through franchising. Operating income was $513,947 and $2,744,056 for the 3-month and 9-month periods compared to $381,860 and $822,587 for the comparable periods in '22. The increase was a result of growth in the franchising venue with a slight decline in Craft Pizza & Pub profitability while actually obtaining a smaller reduction in administrative expenses. The 9-month period also benefited from the recognition of the ERTC in the first quarter of 2023. Interest expense was $359,431 and $1,121,505 for the 3-month and 9-month periods compared to $378,008 and $1,067,605 for the comparable periods. The interest expense was reduced by the monthly principal payments required by the loan agreement, but in addition to voluntary payments to reduce principal totaling $578,897. The company's current ratio was 1.8:1 as of September 30 compared to 1.3:1 as of December 31. That concludes the financial overview. Now I'll turn meeting back over to Scott.

Okay. Well, thank you. Today, I'm going to start a business review with the nontraditional segment. As you know from previous calls, and the helpful summary Paul just went through at the beginning of this section, we really focused a considerable amount of company development effort towards expanding the number of non-traditional franchisees this year. As a result of that effort, the company generated new franchises totaling 54 units through the first 9 months of 2023 and that we can now work with to bring online. And in fact, as already mentioned, 40 of those locations have been opened. We continue to diligently manage the remaining sold but unopen units into the now opening category. For example, in the last couple of weeks, we opened locations in Jacksonville, Florida; Port Arthur, Texas; Red Rock, Texas; Cypress, Texas; Folkston, Georgia and one locally here in Indianapolis. Coming up in the next couple of weeks, we are starting the opening of the initial group of 11 units from the development agreement with Majors. The first several of those are going to be in Tennessee and Georgia, and we anticipate that those initial openings will start happening immediately after the Thanksgiving weekend. As we pointed out in the press release and reiterated by Paul a moment ago, the non-traditional side of the business is progressing in a very attractive way, given the number of new royalty producing units that have and will continue to come online. And given that we are growing our pipeline of interest and prospects for future franchise [ sales ]. Of course, the recent 100 unit development agreement provides another big boost to that growth trajectory. So now let's turn to the Craft Pizza & Pub segment. A significant consideration here continues to be managed around the high cost of goods and the high cost of labor that has continued to escalate over the last year, and to manage that without devaluing the consumer experience by resorting to less ingredients or less service. We continue to believe that a menu price increase would not be sustainable, both due to the competitive environment and even more because of the fragile state of consumer spending, which proved to be a bigger issue in the third quarter. We've not had a menu price increase down over a year. So we have had to get very creative on ways to gain cost advantages and negotiations, and for systems and procedure improvements. Controls remain relatively good in the third quarter, but we do have a headwind with renewed escalation in cheese prices. As we've been noting for nearly a year, gas purchasing patterns have been unstable, and consumer spending became a problem for us fairly early in the third quarter. The CPPs are at the more premium end of the pizza scale, not at the commodity end occupied by price competitors like Papa John's and Domino's. Trying to play that same pricing game with our existing product runs a very significant risk of devaluing the perception of the brand and the concept as a whole, with long-lasting risk beyond the current economic environment. We did run through a couple of promotions, but without significant traction, while we've worked on development of a value-oriented product that we could promote that was both in line with our reputation and without the risk of devaluing our current menu. That is the origination of the new oversized XL pizza, that was discussed in the press release, and which was introduced last Thursday and Friday. To recap, the oversized XL pizza is a high-value quality pizza with the starting menu price of just $9.99 for a cheese only version, with toppings running at $2.50 each. The oversize rectangular pizzas baked on an 18-inch by 13-inch half sheet pan baking tray, using our traditional dough recipe and it's approximately 40% larger than a round 14-inch large traditional pizza. It is modeled loosely on what is done on the East Coast as beach pizza or bakery pizza sometimes. The XL Pizza has more cheese and toppings per square inch than those, however, better fitting Midwestern and CPP guest expectations. The XL Pizza is a totally different pizza from either our traditional hand toss style or our Deep-Dish Sicilian. There are great many complexities involved in this type of product development, but we've pushed it through very quickly, and it gives us the ability to promote on a limited time-only basis without value risk to our regular menu. During the first weekend of the promotion, our expectations were substantially exceeded, having sold approximately 750 XL pizzas in the 9 company-operated units. Social media and online advertising began the first full week this week. So changing subjects with [indiscernible] sales still exceeding pre-COVID norms as a percentage of our business. We also sought to increase the WOW factor of that segment with 3 new service enhancements, they are: one, free drink while you wait; two, pop the box; and three, free breadstick for the ride. When guests are in-store waiting for a carryout order, we now offer them a free self-serve soft beverage while they wait. With Pop the box, we open every carryout box for each guest and have them visually inspect the order before they leave. And then the third item, we offer all carryout guests a free hand-rolled breadstick and mini cheese dip to enjoy on the ride home. Obviously, all 3 services are well-received by guests, and they create a value enhancement for the brand. On the labor front, the availability of hourly employees has continued in an improved state here in recent months, which has allowed us to slow the growth in wages and to increase hourly productivity. However, the same is not true of [ salaried ] management. The labor pool continues to be in very short supply, and it is harder with the existing supply to find good candidates. This is an issue that continues to require a great deal of time and effort to manage, post-COVID a sizable number of talented restaurant management professionals have exited the industry and have yet to return. Upward pressure on salaries is the result. And I think this will be a continuing challenge for CPP as well as the industry as a whole. Finally, from an operational standpoint, our 60-day rolling Google star rating for online company-operated restaurants combined has climbed to an average of 4.8 out of 5, which we're very pleased with. Last time we computed it directly, I think this compared to something in the mid-3s for some of the national pizza concepts operating in this market on the more commodity side of the pizza marketplace. Okay. Well, with that, we're concluding the presentation portion of the call. Next, Paul and I will take questions. [Operator Instructions]

Okay, we're back and ready to answer questions. Like before, when you're called on, please keep it to one question, we'll answer that after we have you offline. [Operator Instructions] Matt?

[ Matt Frank ] out here. Couple of questions, but I'll start both operationally and on corporate. I guess I'll start with operations. How much revenue from the Majors, the 100-store deal was captured, the upfront fee was captured in this quarter's financials? What percentage of the 100 stores?

That's not -- that transaction occurred in October, so that would be reflected...

Yes. That's right. Okay. Got it. And then I'll just get to the core question real quick, and I have a couple of others. But today, I'm sure some of the shareholders saw there was a -- and I'm sure you have seen, there was a PCAOB notice that was sent out, sanctions on your auditor, on Somerset for your audit for 2019, '20 and '21, I believe. I haven't read the whole release yet. It appears that Somerset was fined $230,000, and that was split between the fine for the firm and then 3 individuals on the audit team that were fined and disbarred. Can you -- and obviously, Somerset has been since acquired by CBIZ. Can you comment on this? And a, are you going to be releasing an 8-K about it? Two or b, does this affect any potential financing agreements that you're looking to do to refi? And then I guess, c and d on the financing side, does this trigger anything with Corbel? And then d, I'm assuming this makes it a lot harder to get a new auditor in there, because they're going to want to go back several years, and that's going to be very costly. So a lot there, but can you comment on that, please?

I can't comment on a lot on it, because I don't know anything about it. I knew that, that was going on. It wasn't just on Noble Roman's. They were censured because of a number of things is my understanding. And 2 or 3 partners were involved personally. They got fined. None of that has any effect on Noble Roman's. It does not have any effect on Noble Roman's financials. I don't think it has any effect on Noble Roman's financing ability or any effect with Corbel. It was strictly on the auditors, it was not anything to do with misstatement of facts in their reports. It was about their audit work papers and their lack of support is my understanding.

Okay. Mark?

Yes. Just a couple of questions on non-traditional. First of all, in addition to the 50 units for Majors that signed between now and December 31, 2024, you mentioned a backlog of other units. How many do you be able -- do you anticipate being able to open, say, by that same time December through 2024.

Well, we'll continue to open all of the existing units that have been sold but not open that we went over in the summary. In addition, we're continuing to solve franchises, and we'll continue to open those as the franchisee is able. Some of those agreements that come in, Mark, setting the Majors aside for a moment. But some of those agreements that come in, will come in 2 or 3 different stages of readiness in terms of the franchisee. Some of those franchisees are building new units, new convenience stores or travel plazas from the ground up. And obviously, in that situation, we're completely beholden to the overall project schedule in terms of timing and how long it will take to get it open after the franchise agreement is sold. Others are existing convenience stores and it's a matter of getting some minor remodeling schedules, getting the equipment purchased and getting the rest of the project, manage to get them open. And from our standpoint, that could move extremely fast, oftentimes a little quicker maybe than the franchisee is able to. But we intend to continue selling full force and opening those as they come in, in addition to handling the Majors' development. Looking for other calls. Darryl. Go ahead, Darryl.

Yes, my question was kind of potentially answered. So your auditor was acquired by another company and now you guys are doing business as usual with the acquiring auditor. You don't have to go out to look for another auditor or anything like that? Is that what...

We have been told by the firm that acquired Somerset that they do not do audits for issuer companies. And therefore, they will not be able to do our audit. So we're talking with and interviewing with other auditors for that assignment beginning with this year-end.

Mark, you had another question? Sorry there, Mark. I lost you briefly. Are you there?

Okay. Yes. Yes, I am. I know there's a wide range and a lot of variables to it. But could you put a number on what an average sales would be for a non-traditional unit in its first year, what it would expect?

No. We do not give out those averages. I can tell you that there's quite a range. We have units that are designed, located to receive primarily the grab-and-go business that it comes in their C-store, and you would expect them to start off with $2,500 or $3,000 a week. And there's a unit like we opened in Florida this last week with a raceway, and their first 7 days ended yesterday, and they did about $12,000. So it's -- and it's -- that's not uncommon either. We had one in here, Arizona a few weeks ago that started out over $10,000. So we got quite a mix. The non-traditionals use the Noble Roman's for different reasons. Some of them are strictly profit motivated and they want to find the locations, and they want to market to not only receive the grab-and-go business, which they're good at, but they also want to receive the large pizza business, which we do quite well with as well. So it depends on the needs and the desires of the franchisees, but they range a wide range anyplace from around 2,500 a week to 12,000 a week.

And sometimes even more than that, but just to draw on what Paul was saying, there's a lot of flexibility that's left to the franchisee as we're discussing the franchise sale with them on what their overall objectives are, and how extensively they wish to implement the concept. There's a basic core menu that they're all required to have, and that feeds into the grab-and-go business. And then there's several menu extensions and daypart extensions that they can add on to it, which greatly increases the sales capacity and increases their responsibility in terms of operating the unit as well, but it does increase their overall sales potential, particularly when they're in a small town where they have the opportunity to not just feed off of the traffic relating to the convenience store or travel plaza, but where they can serve the greater community as one of the primary pizzerias in town as well. All right. Any other questions?

Yes. Once again, last couple is as part of the deal with Majors, was there a large upfront fee with that? And would, if so, would that in any of the $507,000 left on the tax credit receivable be used to retire some more debt early?

There was significant upfront fee they had to pay the franchise agreement upfront to tie up to territory. And so that -- that upfront fee though is -- yes, it's additional cash now but it also comes with additional services that the company has to provide. So that's not all free cash to be used to pay on debt or whatever. Now so far as the additional credit coming through from ERTC, I'm anticipating paying another $200,000 to $225,000 down on our long-term debt with part of those proceeds.

Yes. I just was wondering if you were going to file an 8-K or if you don't think it's necessarily on the auditor...

For the what?

Auditors.

We already filed an 8-K about a change of auditors. And that was done and agreed to with the auditors and said in that there was no conflict or no disagreements with the audit and everything was normal. That 8-K was filed some time ago.

Okay. I don't see any other questions. We'll give it a moment here. Matt, go ahead.

Yes, this is Matt again. I think he was asking -- I think he was asking about, is there going to be an 8-K on the PCAOB notice this morning, which I encourage you guys to take a look at that base app because that's pretty big news. I guess on the operations side, just a question on the Craft Pizza & Pub. I mean, obviously, and I talked to Paul about this a lot, but great news on the non-traditional side, congrats on all that. But the CPP side, I do feel like we're not seeing other restaurants citing consumer spending behavior and inflation anymore as much as they were. I think you're right, there is consumer spending risk in the upcoming quarters, but not so much in the previous several quarters. And if you look at the same-store sales compared to other publicly traded restaurant companies, it's just I don't -- I'm not seeing the kind of decline that we're seeing here. And so what my question is, who's really focused 100% of their time, leadership on the CPPs, and what other changes are being potentially contemplated like service, like actual table service. I just -- I think that the -- I think that we're missing a lot of low-hanging fruit on the CPP side. So final comments around that.

Well, I devote 100% of my time on the Craft Pizza & Pub and 100% of my time on the non-traditional both. I spend a lot of hours in Craft Pizza & Pub units. I've been in the stores every week, multiple visits each week, every Friday evening after office hours here, leaving here maybe a little early on Friday, we go around 5:00 and then I go out and I visit Craft Pizza & Pub restaurants. And then I usually make several visits during the middle of the week if time allows as well. So I have a pretty good feel of where we're at on that. And our Google score of 4.8 here in the last 60 days, I think says that we're doing a fairly good job there. I think you also have to keep in mind that we are on the -- we're on the sort of the luxury side of the pizza market, which is a little bit different, and that's one of the reasons -- the major reason why we made a -- or invested a lot of time in this new product that we've come out with in the XL Pizza that allows us to compete more on price, which is not an area that Craft Pizza & Pub normally competes on. And we've resisted trying to devalue our menu by just price promoting existing items. The good news is that we've sold a tremendous number of those XL pizzas over the weekend, and way more than we were anticipating. I'll also tell you that on a same-store sales basis for starting with Sunday in the last 3 days that we've exceeded last year's sales on a comp basis. 3 days isn't a trend, but hopefully, it's a start of a trend. We'll have to see where that goes. But I think that this -- this new product allows us to have a limited time offering that puts it in a very price-conscious category for people. And I think that at least initially, people are showing that they're very welcome to that. So we'll continue to work hard on the Craft Pizza & Pub, controls have been there and in place. They continue to run fairly tight, and we'll go from there. All right. I don't see any additional calls, anybody with last question? Okay. I don't think we have any more call -- questions, so on that, we'll call today over. We appreciate your participation today. And we'll be talking to you all again soon. Thanks for joining in on the call.