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

Well, good afternoon, everyone. My name is Scott Mobley, and I'm President and CEO of Noble Roman's. Also here with me today is Paul Mobley, our Executive Chairman and CFO. Paul?

Good afternoon, everyone, and thank you for joining us on the call. Before we begin, I want 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 these provisions apply to this conference call as well. Back to you, Scott.

Okay. Great. Thanks. Well, with that out of the way, I'm going to change our opening format a bit today. I'm going to assume that all of you have studied the press release that went out yesterday afternoon. So then rather than repeating a lot of that I'm going to go ahead and make some opening observations, adding some color to that information that we've already provided, and then we'll jump right in with your questions. As you saw in the second quarter, when it came out with a net income of $57,000, that included an additional charge of $66,000 to adjust the theoretical value of warrants. We had an operating income for the quarter of $558,000, which brings the 6-month total to just under $1 million. The Craft Pizza & Pub segment saw a same-store sales decline of about 6%, which was heavily influenced by the last 2 months of the quarter and reflects the overall softening in consumer spending. The good news is that the units were back to about even with last year in July, and as of today, for August, they are up from last year in the vicinity of about 5%. So in this market, I hesitate, it's call that a good trend, but it's certainly a positive development. I should point out in that regard that we still have an increased menu pricing since way back in 2022, so those numbers that I gave you are directly comparable. I regularly have the competitive environment monitored for pricing flexibility. And given that analysis and the results others are reporting with price increases, we have held firm so far, no change. I'm taking a real hard look at that, though, for the next quarter, but we'll see where we land on that over the next month or so. Part of why we're taking a good hard look at the pricing is the continued inflationary pressure we're seeing on some of our core costs. On the labor side, we've finally seen our hourly employee wages stabilize, but salaries for management still have strong upward pressure, so we're in the neighborhood of about 5% or so. During COVID, there was an exodus management talent from the industry and much of that has yet to return. That is increasing the competition for people, which is what is driving that increase. Bigger issue really for us right now is commodity price inflation. The core component in making a pizza is, of course, cheese, and it's a good approximation to say that cheese is 50% of the cost of an average pizza. In quarter 2, the market price for cheese averaged just over 20% higher than quarter 1. That's a huge increase, and it's increased more since then. In fact, I think this week, we're looking at almost another 5% increase. And that's a big bite to digest, with cheese alone the cost of making a pizza essentially rose about 10% in the second quarter. We have some other commodity price pressures, namely in sausage and pizza sauce but not as extreme as cheese. Now we've been modulating various product promotions to keep our messaging on value, but we have been careful to keep in mind that we rely on our position as a premium product and service provider. We do not want to damage that perception and impair the brand for future price capability. Now on the nontraditional segment, we saw a 22% increase in franchising revenue in the second quarter compared to last year, making a 32% increase for the first 6 months. Keep in mind, we're using a different accounting treatment this year from last by deferring cash-generating franchise fees for future income recognition. So on an apples-to-apples basis, without that deferral, for the last 6 months, franchising revenue has increased about $825,000 or 38% over last year. Now you're all aware that we signed a 100-unit franchise deal with Majors Management late in 2023. So far, we've opened nearly half of those units, even though they have until late 2026 to complete the process. Obviously, they're running well ahead of that. So far this year, we've opened a total of 47 new locations in general. Many of our individual franchisees finance their openings through cash flows. So given the current economic environment, some have slowed down on their timing a bit, but they're still moving forward. In the following 2 weeks, for example, we have another 4 or 5 units on the opening schedule. We still have a good pipeline of sold but unopened units to work with in an equally strong pipeline of new franchise prospects in the sales process. Now that obviously continues to be a primary focus. The great thing about the nontraditional segment is that with all these openings, we're creating what amounts of a growing stream of annuities in the way of fees and allowances that grow and grow. And we're able to do that without significantly increasing corporate overhead at the same time. So moving on, I'm sure you're all interested in the status of the refinance project, I can say that it's progressing and looking good. But of course, it is only looking good, it's good, good after it's all said and done. I can't get into all the details to give you a specific time line because the process just really doesn't work that way and there are never any guarantees, but that's our #1 strategic focus right now, and we believe it will be accomplished well ahead of time and within the next 60 to 70 days. In the meantime, during the first 6 months, the company has made a principal payment on the current debt of about $500,000, purchased equipment for $44,000 and reduced accounts payable and accrued expenses by $660,000. That's $1.2 million in total while only reducing the cash balance by $71,000. So now before we take questions, let me jump back to the CPP segment again for a moment. I wanted to mention something that I think is exciting. As you know from previous sessions, I've not been happy with our POS company and their ability to keep up with the times after COVID. But over the last few months, we've had all the computer geeks at the POS company working with the computer geeks at DoorDash, who is our primary third-party partner. And after our own additional reprogramming here, we finally have DoorDash fully integrated into our POS system. That is very good news on its own. However, we are now almost done with the same thing with our online ordering, and that's even better news. That should be done within the next couple of weeks, very possibly next week. All of that is to get the really, really good news, which is that within a few weeks after the online part is integrated, we should be able to test launch our own custom ordering app on both Apple and Android platforms. And within a few weeks after that, we should have our loyalty program integrated with the app, as well as an e-gift card solution. Obviously, all of these have great sales potential, not to mention the reduction in time and errors that full integration brings with it. Well, with that, we're concluding the presentation portion of the call. Next, Paul and I will take questions.

[Operator Instructions] Okay. [ Arik ], go ahead.

Congratulations on a very good quarter. We're all impressed. My question was probably be done, but we're curious to know what is left on the principal amount of the loan with Corbel?

About $7,200,000.

[Operator Instructions]

Can I go back to Bobby for just a minute?

Sure.

Keep in mind, we've been adding the terms of that note, have us adding 3% every month to the principal of the note, so that's why it doesn't drop as fast as you would think, but it is going down. That's more than -- it's -- we're paying more than it's adding but it goes down slowly, and that's one big reason we need to get refinanced as soon as possible. Thank you.

Okay. Mark, go ahead.

Just regarding the same-store sales in the Craft & Pub, obviously, down about 6% in the second quarter, but what has turned it positive? What would you attribute that switching to where they're actually positive? And I believe you said 5% in August so far. And do you think you can hold those gains?

Yes. Well, those are good questions. So we've been modulating price value deals throughout the last several months. For whatever reason, sentiment turned south pretty badly with consumers here in the later stages of the last quarter. We had preplanned a pretty significant price promotion starting with -- just before school got back in such -- so that's definitely had a good impact on August. August is typically -- August through the first part of September is typically not the best time of year. You've got all of the back-to-school expenditures, so you've got families doing with that. I think I read Deloitte did a study here just recently and found that the average family spends about $661 per child back to school. So we had preplanned for that with the promotion. Whether we can hold -- continue to hold on to those gains? Well, we hope so. We continue to follow the same sort of strategy, obviously, mixing in different ways of approaching that, so we can keep those offers fresh. Sorry about that, Mark. Go ahead.

Yes, no problem. I will go to -- let's go for non-franchise then. Now according to the original press release on the Majors, obviously, they're being very aggressive. It sounds like you've opened 50, and that's all that was agreed to through December 31, 2024, without -- and I don't know, maybe they'll still stay ahead of schedule, but with maybe some of that drying up. You opened 42 units in the first half of the year. Do you see that tailing off? Or do you have enough new units signed where you might be able to do another 40 in the second half of the year?

We've opened about 47 to date. We still have quite a few signed but unopened agreements sitting on the table. As I mentioned in the opening part of the presentation, there's some of those individual mom-and-pop franchisees are having to operate on a little slower basis than what we'd like, because they typically fund this whole process with cash flow, but they're still going. They're still on the calendar. We've got 5 scheduled for the following 2 weeks. So yes, we're continuing to go. Majors is continuing to open units as well. And I believe that they will continue to push ahead of schedule.

It seems as if your -- the Majors have really impacted sales pretty highly. Are they pretty happy? Are you pretty happy with those openings and the sales that they're generating?

Yes, we're very happy. They're aggressive. They want to do more. They're trying to find ways of increasing their sales even beyond what they are. But yes, they're happy and they're aggressively pursuing ideas, any ideas that we can give them they pursue. We just gave them a couple of promotions that they could do, put the yard signs out in the lots in front of their stores, promoting a pizza in the evening time, and they're doing that. They ordered the banners this week to get started next week. So they're happy, but they're aggressive a lot. They want to do more.

That sounds great. There wouldn't be anything else as far as I know, not necessarily another 100 units, but do you have anything interesting brewing as far as even a 20 units, 40 units where you're in talks with anybody for a larger amount of opening?

Yes. I'm working on an agreement right now for 13 units, but they're interested in talking about the possibility of 100 units down the road. I don't know exactly when they will close on that 13 units, but I was drafting on the agreement before this call and I'll finish sometime this afternoon or tomorrow, but they're -- that's looking like that will happen. And like I say, they have interest in a lot more units after this 13.

Mark, one of the things on the nontraditional is that we keep a lot of falls in the hopper, if you will, all the time from the sales pipeline standpoint, there are groups of a variety of different sizes that we're in constant contact with. And you just keep as many in that hopper as possible because the timing winds up being their timing and then you don't always control over exactly when they come out the other end, but that's one of the keys of keeping that pipeline full.

Yes. It seems like -- I mean, this is a great time to be in that nontraditional. It seems as if I see new gas stations open around here, it's not a matter of if they have food available, a lot of them are even having 2, both chicken and pizza or whatever, so it looks like there are a lot of opportunities out there.

That's definitely true. They're all more or less realizing that they have to have food and pizza is a good choice for them. Okay. Any other questions? Anybody with an additional question? Okay. Well, it looks like we are done with all the questions. Wait, we've got one more here. Hang on. Matt, go ahead.

Sorry for the technical difficulty there. Just curious on the refi discussion, I understand it sounds like you're talking of maybe it's down to a couple of lenders at this point, not too much details you can share. But what are the conversations been on the Corbel side? I know that they're probably looking at this and in their investor committee meetings, they're thinking about like when this comes due, if you don't get something done, there's a big issue here because you're not going to be able to satisfy that note. So I'm just curious what the conversations have been with Corbel? Are they helping you on this refi? Are they one of the potential parties that could actually restructure their deal? Like what are the conversations like with their team?

Well, we're not really approaching that as an option, Matt, because we think that there's a lot better deals to be had. We know that there are better deals to be had and that's what we're working very actively on right now, and I can't go into any further detail beyond that on those that we're working on, but it's making -- like I said earlier, it's making good progress.

Yes. So you're not -- okay, so that kind of answers what I was going to ask, but you're not really talking to other lenders like Corbel, you're talking more to the bank market. Is that right?

Well, again, I can't go into too many specifics, Matt, but we're -- let's just say we're looking at significantly improving the standing of our loan terms. How is that?

Yes. And so you say that and I just want to reference something in the press release because that is kind of why I'm asking this question. Let me pull up the press release and I want to compare the 2 statements between -- made between Q1 and Q2. So give me one second. And that the press release insinuated that you might be speaking more to Corbel again. So the first -- so from Q1 in the 10-Q, the note read, I'm not going to read the whole note, but essentially, as the company reported previously, that's pursuing plans to obtain new financing to repay the Corbel loan prior to maturity in February 2025 and to repay the subordinated notes entirely. Then there's a statement that says there's going to be no assurance, but then it says however, based on credit metrics, et cetera, the company believes that the refi will be successful. And then here's where it differs. In Q1, the note was, the company expects that the new financing would result in a reduction in the interest rate of currently pay in the Corbel loan and to repay the subordinary convert notes with full amortization of this loan over a longer term and a lower rate of interest. So that was Q1. From Q2, it was basically the same statement of the first paragraph and then where it changed was at the end, it said based on terms indicated in ongoing discussions between the company and potential lenders, the company currently expects the refinancing will result in a substantial reduction in this interest rate expense, but it doesn't say anything about paying off the subordinated convertible notes and it kind of leaves open that this refi discussion could be continuing with Corbel, but it sounds like you're saying it's not continuing with Corbel.

It's not -- there's no discussion with Corbel about sending a note with them. I have discussion with Corbel every week. We have a very good relationship, working relationship. There's no difference between those notes that you read. We still intend to pay off the note to Corbel and the subordinated notes, and we expect to finance it over a longer period of time with full amortization over that time, and that is consistent, and that's really all there is to say about that sub.

Got it. No, that's helpful. That's understood. I noticed that difference that I want to clarify.

Any other questions? All right. I'm scanning the board, I don't see any further questions. So it looks like we're done with that. So we're done today. Just don't forget that we do have our annual shareholder meeting here in Indianapolis on the 27th, and we hope to see many of you then. As for now, thanks again for participating today, and have a great evening. We'll be terminating the session connection now. Thanks again.