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

Well, good afternoon. My name is Scott Mobley, and I am President and CEO of Noble Roman's. Also here is Paul Mobley, Executive Chairman and CFO. Today, we'll provide some comments on the year end of 2023 as well as some information on the subsequent current time frames. At the end, we'll be happy to take any of your questions. We'll begin today's call Paul's review 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 that 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'd like to again thank all the callers for joining us today. It's a pleasure to have you with us. The financial results for 2023 were excellent compared to the period coming out of COVID. As we have said before, COVID had a large detrimental effect to our nontraditional franchise revenue because a number of the locations, which had before in the entertainment facility got shut down by government regulation to what the government perceived to prevent the spread of COVID. In many areas around the country, they shut down or lasted over for over 2 years. And most of those entities were not well enough capitalized to withstand that financial drain. The greatest news is that COVID was receding, we shifted our focus to obtaining additional franchises in the nontraditional venue and found that the convenience store truck stop business was ready to expand as a means of increasing their margins and increasing their revenue. As a result, we added several new nontraditional franchises to those venues, which we -- which are much better capitalized than what we lost in the entertainment area. In addition, in October, as we announced before, we signed a major development agreement for 100 units with majors Management LLC. The agreement calls for the development of 100 new franchises franchise locations by September 30, 2026. They are well on their way as they have opened 40 locations as of last week, and they have 2 additional locations opening this week as well. I do want to remind everyone that the upfront fees we obtained from selling new franchise locations do not go into income currently. It increases the deferred income, which is then amortized into income over the term of each franchise agreement. Likewise, certain expenses for obtaining those franchises go into the deferred contract costs, which is recognized as cost over the term of each franchise agreement. Since we established our upfront fees to cover the cost of getting the location open, approximately 85% of the upfront fee gets deferred as deferred contract costs. That's all of the franchise fee gets deferred and amortized and about 85% of this expense related there, too, gets deferred to contract costs. As a result of the growth in nontraditional, especially late in the year, our franchising revenue went from $4 million and $22 million to $4.7 million in '23. Net income for '23 was $1.5 million or $0.07 per share compared to a net loss of $1.3 million or a loss of $0.06 per share in '22. Net income to '23 also reflected $168,000 in legal costs to defend against their frivolous and unsuccessful lawsuit filed against the company and its directors by shareholder. Operating income was $3.4 million in '23, compared to $428 million in '22. Total revenue was $14.4 million in '23 compared to $14.5 million in '22. Revenue from the company-owned Craft Pizza & Pub restaurants declined from $9.7 million to $8.7 million. This decline was significantly offset by the nontraditional franchising revenue increasing by $665,000. Scott will speak more about the CPP venue shortly. I understand we had previously reported $1.8 million of net income of $0.23 or $0.08 per share basic and $0.07 per share diluted. This had to do with the last-minute determination that a warrant value of $540,650 had to be recorded an estimated increase in warrant value of $235, interest expense of $90,000 and increased amortized cost of $187,000. We have previously considered we did not have to record a warrant value at this time, because the warrants themselves require the value of the warrant to be paid in cash prior to exercising warrants, and therefore, no value until that condition had been met. The way the warrants are written in the senior secured note and warrant purchase agreement requires Corbel to pay at least $630,000 to the company in order to exercise those warrants if and when they choose to exercise them. That concludes my financial overview. Now I'll turn the meeting back over to Scott.

Okay. Well, thanks, Paul. So today, we're going to start our business review of the Craft Pizza & Pub. As we noted in our last together, consumer spending was an issue for sales in the latter half of 2023, which continued into the fourth quarter. The primary areas contributing to this were: one, a decrease in the average check; two, a decrease in third-party delivery; and three, a decrease in weekday sales versus weekend sales. In fact, the decrease in the average check accounted for about half of the total. These three areas are all indications that consumers had cut back on discretionary spending. We had people spending less on each visit, cutting back on more expensive channels like third-party delivery, and people keeping their weekend leisure spending intact while cutting back on weekdays. If you watch any television, you will have seen that deep discount offers have been proliferating in the pizza space, 50% off deals, buy one get one free deals and so forth. We occupy a different, more premium segment of the market, focusing on quality and experience rather than commodity-like pricing. So we need to be careful about discounting for the short term, so it's not to damage the brand reputation and our pricing capability for the long term. Our approach instead, as discussed on the last call, was to develop from scratch a new product that we could sold at very attractive pricing without altering the perceived value of our existing products. That new product was the XL pizza, which we launched in November. December sales as a result of the efforts behind this new product were actually up about 0.5% over the previous year. Now first quarter sales in 2024, however, were down about 4.8%. Importantly, though this is influenced by localized bad weather, primarily on weekends in the months of January and February. In the winter, while schools in session, sales are heavily skewed towards the weekends. So bad weather at that time is basically bad news. The weekend beginning Friday, February 16, was the worst. And on that day, heavy snow essentially shut down operations that evening. If we separate out January and February, though, where the data is unreliable due to the weather. And then we just look at March, sales were off by about 1.7%. That's kind of a more accurate read of the consumer at that point in time. Interestingly, our check average was down about 4%, which was more than the sales were off, which means our guest count was actually up in March. This is probably a good point to remind everyone that we had not had a menu price increase since 2022. Despite the continuing cost pressures, I believe the supply demand curve is highly elastic right now, especially in the premium category where we reside. I've heard others reporting a bad capture rate of price increase relative to average check. For example, reporting, say, a 6% price increase and only getting a 2% increase in the check average. That means we're at the point where price increases are scaring [indiscernible] in general and causing them to purchase loss. We did a thorough pricing comparison review towards the end of March and opted to keep prices where they're at, but we'll continue to look at it for the right opportunity to take an increase down the road. Having said that, we did put advertising on the XL Pizza on hiatus for a period of time in the first quarter, so we could move from the introductory pricing to a more everyday value price, which is now in place, it's still very attractive value pricing. We're actually promoting the XL pizza on a low sustained TV campaign on local cable TV and streaming services. However, we've been back on social media advertising with salad bar and breadsticks as they move into spring with an opportunity for boosting add-on sale of an average check. By the way, if you do want to see that TV commercially, you can do so at this website, it's at nrpizzapub.com/nrtv that's in our pizzapub.com/nrtv. Finally, as it relates to Craft Pizza & Pub, our Google ratings remain strong. We're running on average between 4.6 and 4.8 over the time frame we've been discussing with the current 30-day average at about 4.8. All right. So let's turn now to the nontraditional segment. Overall, we opened 61 new locations in '23, which is nearly double the 31 we opened the year previous. As Paul just reminded everyone. The Majors Management agreement calls for the last of their 100 units to be opened by September '26. They already are ahead with 40 of those locations opened as of last week. And in fact, as Paul mentioned, we have 2 more opening this week. And as a further example of the opening schedule for new nontraditional units, the 2 units from Majors that will open this week are in addition to 2 non-Majors openings this week for a total of 4, and there are 4 more units on the schedule to be opened next week. We continue to have a good backlog of sold but non-open units and the selling process for new nontraditional units continues as well. So far in 2024, we've sold 19 new franchise agreements. New locations have been opening in several states, including Indiana, Michigan, Mississippi, Tennessee, Alabama, Georgia and others. The focus for us in this segment is obviously pushing for new units and getting sold units moved into the open column in a professional and successful way. We did, however, just finished R&D project to introduce new items into this segment and it's going to be a mozzarella stuffed breadstick with marinara sauce. The R&D project process is now finished, and it's in the manufacturing and distribution phase before franchisees will be able to offer it. It should provide some good additional sales potential for operators. And a brief concluding note here on inflationary pressures, we were lucky to have a bit of a tailwind in the latter part of 2023 and into the first quarter of '24, which he's which is the main driver of the cost of a pizza. Unfortunately, that's reversed recently, and cheese is back up about 30% now versus about a month or so ago. On the labor front, upward pressure has dropped somewhat on hourly wages, but remains an issue for management salaries. And obviously, general inflation is still an unfortunate factor, but less so now than a year ago for a variety of reasons. Many price increases come through towards the beginning of the year, but we had less cost pressure at the start of '24 than compared to '23. Okay. Well, on that note, we are concluding the presentation portion of the call. Next, Paul and I will take questions.

[Operator Instructions] Okay. We're back and ready to get started here. Roger, go ahead.

Yes. Of the 40 units opened under the Majors agreement, can you tell me how many of those were opened in 2023 and how many have been opened so far in 2024? And then I have a second quick question.

I believe 17 of them were opened in 2022, but right at the end of the year.

'23 you mean.

Have been opened in '23 -- '24. I'm sorry, I have my dates wrong.

Okay. And my other question is, the auditors seem to have delayed this 10-K for quite a while, and it doesn't look like there was much of significance found. Is there going to be much of a delay before the 10-Q can be filed?

Not, I'm planning on, Roger. I hope that we will get it filed very quickly now.

Go ahead, Todd.

Congratulations on -- I think it was your fourth consecutive quarter of a positive net income. Regarding the Majors Management deals, can you kind of go over the share of revenue and any royalties that are done in each of those convenience stores?

Yes. We get a solid royalty of 7% of their sales that they do in the stores that they open, 7% of the Noble Roman's sales that they do in the stores that they open. However, we earn other allowances and promotional [indiscernible] which generally amounts to about 3% of sales. So in effect, we're -- every time they or any other franchisee opens a location, we get approximately 10% of the sales they do in the Noble Roman's products. And that really compounds rapidly when you think about it, Todd, because just pick some arbitrary numbers, like 20. If we opened 20 stores this quarter, we get the revenue of those 20 additional stores, but only for half a quarter. But in the next quarter, we get the revenue from the full 20 additional stores. And if we open 20 additional stores that quarter, we'd get revenue from 10 more. So between the 2 quarters, that pubs are revenue base up by 30 units. And that's a lot of sales, a lot of revenue when you compound that throughout the course of the year. And our overhead really isn't changing any based on those openings.

It's basically an annuity that compounds pretty quickly.

Okay. That's great to hear. And given that the majority of the Majors stores will be opening in the next -- in 2024 and 2025. I think all 100 will be opened by September '26. And given that you've been profitable each of the last 4 quarters, and I think you were in $0.07 or $0.08 last year, I mean, is it safe to say that with these compounding of the revenues that you can earn $0.15 to $0.20 a share this year?

Well, I never project any earnings per share. I never project any earnings ahead of time, Todd. But it's safe to assume that earnings would go up quite a bit because the compounding of that nontraditional revenue adds up quickly when our expenses are not changing.

Okay. That's great to hear. Really nice to see the progress and congratulations on such a successful 2023.

Thanks.

Thank you, Todd.

I'll probably just add something to that last 2, it's important to note also that we have other non-Majors units opening simultaneously. For example, this week, we have a total of 4 units opening, 2 are not Majors, 2 are Majors. So we have additional units coming along and so. Okay. Mark, go ahead.

I've got a few things. First of all, great work on the crafts and pubs. I mean I think in third quarter, we were looking at like negative 14% sales. And to see that all the way down to minus 1.7% in March from what you said, it sounds like that's definitely headed in the right direction. My first thing would be, could you do an update? You provided that press release in mid-December about potentially -- it was very aggressive as far as potentially opening 40 units in the first quarter of this past year. Did that happen? Or how close were you to that?

We're reasonably close, but I don't think we exactly hit the 40, but we were reasonably close to that.

Okay. And I know that's kind of not necessarily even your fault, too, as far as the kind of a combined effort for them to also be ready and getting those stores going. The question I had is like on nontraditional or, I guess, let's just call it royalties, I believe Q3, you went all the way up to like $1.3 million, which was pretty amazing. But then you didn't really break down the Q4 numbers, but that looks like that might have been a hiccup there where that might have dropped back down to like $1 million. Is there -- what would be the reasoning behind that?

Well, the third quarter, number one, there's a logical seasonal reading behind that. The third quarter is a very good quarter for those kind of sales. A lot of people are out traveling moving around and it's good atmosphere for that business. Second of all, the winter months, it slows down very quickly. And especially in December around the holidays of Thanksgiving in December and Christmas and then starts picking back up again. So I don't call it a hiccup. It's kind of a natural trend. And our royalties are going up very well. As I said, overall for the year, they went up from -- our fees on the nontraditional went up revenue went up from $4.0 million to $4.8 million (sic) [ $4.7 million ] that I mentioned before. So we had a very nice growth, and we'll have a much bigger growth next year because of the backlog of unopened units we have right now. And as they opened, they compound very quickly, as I gave the example to Todd, a while ago.

Yes. Okay. Sounds good. I guess the last thing would be, I know you pointed out your cash position has been greatly increased. And I believe at least on the Q4 numbers, it doesn't even account -- it still accounted for like $500,000 that you haven't received yet. Is that something that you might retire some of that alone early once you receive all those payments?

Well, we retired it quite a bit early last year, and we will do the same as we have excess cash, we will pay down on loan. That's our method of operation right now. We're not spending it on capital investments. We're putting it back on paying down our debt. Our loan agreement called for payments last year of a little less than $1 million, and we actually paid down on the debt $1.5 million. So we paid about $500,000 extra on the debt in '23. And we will look to do the same in '24 as we do that was our big interest and our big push is we want to refinance debt as soon as we can and get it on a full amortization with much more favorable interest cost, and we're having good progress towards that end.

Okay. Any additional questions. All right. We don't seem to have any additional questions. We'll go ahead and call it over for this session. We appreciate everyone who joined in on the call today and for the good questions. And we will get back with you all again soon. Thanks a lot, and have a good evening.