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

Well, good afternoon, and welcome to the Noble Roman's conference call. We appreciate you joining in today. My name is Scott Mobley, and I'm President and CEO of the company. Also on the line today is Paul Mobley, our Executive Chairman and CFO. Today, we will discuss the second quarter as well as the current business environment. And at the end, we'll address any questions 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 referenced in that statement. So those provisions apply to this conference call as well. So with that out of the way, I'll turn the call over to Paul for the financial highlights. Paul?

Thanks, Scott. And I also want to thank each of you attendees for participating in the call. It's an honor to have you with us. The financial results for the 3 months and 6 months ended June 30 include revenues were $3.7 million and $7.2 million for the 3-month and 6-month period ended June 30 compared to $3.6 million and $6.9 million for the comparable periods in '21. The company incurred a loss of $50,000 and $187,000 for the 3-month and 6-month periods ended June 30 compared to net income of $85,000 and $913,000 for the corresponding periods in '21. However, the company received $941,000 which was accounted for as a government grant in February of 2021, which was used to reduce certain qualifying expenses resulting in a limited comparability of the 2 6-month periods. The Craft Pizza & Pub venue had revenue of $2.5 million and $4.8 million for the 3-month and 6-month period ended June 30 compared to $2.3 million and $4.4 million for the comparable periods in '21. The revenue was a result of adding 2 -- the increase in revenue was the result of adding 2 additional locations in the last quarter of '21 and same-store sales increases in existing locations. The company franchising venue had revenue of $1.06 million and $2.1 million for the 3-month and 6-month period in 2022 compared to $1.2 million and $2.3 million for the comparable periods in '21. The franchising revenue was reduced during the pandemic as various nontraditional locations throughout the country had to close due to government regulations and other actions in an attempt to reduce the spread of COVID-19. The revenue has been gradually increasing again in this venue due to the opening of new locations and has been gaining on a sequential quarterly basis. In the quarter ended December 31, the revenue was $1.013 million. The quarter ended March 31 was $1.034 million in the quarter ended June 30 was $1.064 million. Based on activities since last quarter end, that trend upward is continuing and starting to accelerate. Labor shortages, supply chain disruptions, supply inflationary pressures and the emergence of the COVID-19 pandemic has had a significant negative impact on both CPP and the franchising venues. The company has successfully mitigated the effects significantly with regard to the company-owned CPP restaurants. However, the franchising venue was affected more significantly and the franchising revenue has now started to increase again but at a very slow pace because of the economic environment and the labor shortage. The labor shortage and general inflation has resulted in higher costs in a variety of categories. Most of the product cost increases have been offset by menu price increases. However, the labor cost due to general labor market shortages and competition for employees has increased wage costs more than was offset by the menu price increases. In the company-owned CPP locations, the labor shortage and spiraling costs have largely been mitigated by aggressive recruiting and training. The labor cost shortage, however, is making it more difficult to franchise nontraditional locations because the host facilities are not finding enough labor availability to expand their business. Salaries and wages in Craft Pizza & Pub locations without the effect of the PPP loan in 2021 increased only 28.4% to 28.8% for the 6-month period ended June 30. Therefore, as you can see, we were able to absorb most of the increase with menu price increases, driving more efficiency with the use of labor in those company-owned units. That was a different scenario in the nontraditional franchising as those independent operators are suffering from the labor shortage and are having difficulty recruiting employees to expand, which resulted in our lower franchise sales in nontraditional revenue. Gross margin contribution venue in the CPP venue decreased from 14.8% to 12.0% for the 6-month period ended June 30. Most of that decrease, though, came in the months of January and February due to the rapid spread of Omicron variant in November through February. This lowered the margin in January and February down to 7.2% for both months, which is affecting the overall 6-month period. The company-owned CPP units have rebounded well from March through June and continuing on the 6-month period. Just for your information, the actual margin in the CPP unit restaurants for the month of July was back up to 16.0%. A portion of the decrease in margin has been an increase in utility costs, which have increased approximately 30% between the 6 months ended June 30 compared to the comparable periods in '21. The company has implemented extensive additional control procedures to conserve the use of both gas and electric. Gross margin for the franchising venue has decreased from 63.5% to 55% as a result of the lower volume due to closure of several locations in compliance with various state and federal regulations. As stated before, this volume since December '21 has been gradually increasing again due to additional franchise sales and openings, although slowly increasing because of the economic environment and primarily because of the labor shortage affecting those type locations. A portion of that decrease is because of the $941,000 PPP loan in 2021 being treated as a grant and reduced certain qualifying expenses which makes the margin comparison more difficult for the 6-month period compared to the same period in '21. Actual expenses without regard to the reimbursement in 2021 of certain qualifying expenses in this venue have remained consistent. And if revenues continue to increase as they have been doing recently, most of that increase is going to add to the margin in the future. General and administrative expenses increased to $540,000 and $1.08 million for the 3-month and 6-month periods ended June 30 from $482,000 and $780,000 for the comparable periods in '21. Most of that increase in the 6-month period was a result of certain expenses being reduced by the $941,000 PPP loan in February. The only significant increase in the G&A have been the addition of an outside professional investor relations person. Interest expense was $348,000 and $690,000 for the 3-month and 6-month period in June 2022 compared to $339,000 and $673,000 in the same periods in 2021. The increase was the direct result of the PIK interest that will be paid to the Corbel loan. Interest is being added to the principal outstanding of the Corbel loan. The company's current ratio is 2.12:1 as of June 30 compared to 2.3:1 as of December 31, 2021. This concludes the financial overview. Now I'll turn the meeting back over to Scott.

Okay. Well, thanks very much, Paul. And as most of you probably know, we recently held our Annual Shareholder Meeting here in Indianapolis, just a few weeks ago last month. And for any of you that participated that are on the line today, I want to say thank you again for coming. For any of you that were unable to attend, I'd also like to direct you to our shareholder site at nrom.info. The annual shareholder presentation is located there. And there's a great deal of information and data that's still currently relevant, and I'm not going to go over a lot of that again today in detail so you can look at it there. I am, however, going to touch on 3 categories that persisted as management challenges in the second quarter and continue on here in the third quarter that we're in now. That would be supply chain issues, labor staffing issues and inflationary cost pressures. So first of all, supply chain. We still have and have had a steady stream of supply chain issues that we've had to contend with, but they continue to be fewer and sometimes more predictable, and it's requiring less emergency management time on our part. Many of these supply chain issues are effects to the pandemic here in the United States. But actually a lot of the problems are originating in China, where the government has been taking a severe action to prevent spread. These steps that they've taken have impacted their production and shipping and it includes things such as equipment, parts, raw materials, packaging, paper goods and electronics. These are not immaterial types of issues. In the shareholder presentation online, I detailed several examples. But just to cite a couple. At this point, it can take several months just to get a new pizza oven, in fact, a 6- to 9-month lead time. Parts are equally problematic. If we have to repair and provide maintenance on anything electronic or mechanical, it can take weeks to obtain those spare parts. So we found that we have to get creative and strip parts from junked equipment that we locate elsewhere or find other workarounds to get things like air conditioning units back up and running or to make ovens workable for use to sell to nontraditional franchisees. The second category that I mentioned is labor and employment continues to be an issue. During the second quarter, after having been super aggressive in the first quarter in our recruiting efforts, we're back up to something that we could call approaching full staffing on hourly employees. That's still the case today, though we have some of the normal shortages right now that are due to the back-to-school changeover period. That's usually just a 3- to 4-week problem, and it's an annual event, so I don't see a problem once we get through this period. Outside the current season-related changeover, we've been able to stabilize our employment base to a greater degree than in recent pandemic years. We've been reducing turnover and increasing tenure, and we're now focusing on gaining efficiencies that are allowing us greater productivity per hour to help offset some of the wage rate increases. If you're interested in more detail on that, please see that shareholder presentation online, it's detailed in chart form there. Recruitment of salaried professionals for our restaurant management staff, however, continues to be problematic. The professional class of salaried restaurant managers endured considerable stress during the COVID pandemic. They are dealing with hourly labor shortages, government mandates, all the COVID precautions. And the result has been an exodus of many to other professions, even if those non-restaurant careers pay less or had fewer benefits. Just this last week, for example, we lost 1 general manager who is stepping out of the industry and taking a job securing a self-storage facility, has less pay and less benefits, but it also has less stress and no hourly employees to worry about. So that's something we still contend with. The final and third category relates to cost pressures. Inflation is obviously another ongoing issue, both during the second quarter and on into today. There are cost structure increases we just can't get around, labor, wage rates, salary rates, equipment, packaging, various ingredients, commodity prices, for example. However, we're taking action on categories, we can have an impact on. We're negotiating in areas of service providers, for example, such as pest control, linen and credit card processing. Many of these are now complete or virtually so. They're not large areas of savings in any one of those areas, but all combined, they're helpful. Of greater impact is our work renegotiating produce supply contracts, such as things as green peppers, onions, mushrooms, lettuce, eggs and other items used on pizzas and salads. We're well into this process now and may have a new agreement put together by the middle of next week. If that agreement is successfully concluded, our model indicates that this would provide a tailwind on food costs of about 0.5 percentage point. Another tailwind comes from movement in the cheese market. As you can see in greater detail on the chart in that shareholder presentation, the price of cheese has the single biggest impact on the cost of a pizza sold. And the price of cheese has been maintaining well above traditional highs for a considerable amount of time. Recently, however, for a variety of reasons, the cheese market has fallen substantially. As of last Friday, it's down 25% compared to the high. So our primary distributor placed a buy on Friday, and that supply should work its way into our cost structure in about 3 weeks. Our modeling on this indicates that it will reduce food cost pressure by another approximate 0.5 point. Hopefully natural gas prices will also start easing soon. We use natural gas to power all of our pizza ovens. Again, in our shareholder presentation, we outlined how we were taking some steps to control gas usage through staged start-ups and in systematic operation of our ovens. Using our Brownsburg restaurant as an example, in July through these new control systems, we actually decreased gas usage by 28% year-over-year. But unfortunately, the per unit rate for gas from the utility company was up 107%. And also, it's been an unusually hot summer here in Central Indiana so far, and those AC units have been working overtime on high electric rates. Again, hopefully, we'll see some relief in that soon, especially as we move into fall weather here. There are a few other cost categories that may be back on the rise as well. You've probably heard about beef shortages and possibly pork. As we stated in the shareholder meeting, we're not currently considering any additional menu price increases. We're attempting to manage margin stability through better controls, creative usage strategies, revised systems and procedures and price negotiations where we can get them. And then also the favorable movement in the cheese market that I just mentioned. We're still actively looking for corporate CPP sites in several markets. Again, there's a map in the online presentation that shows the specific markets that are under consideration. So I encourage you to take a look at that. I don't have any further updates from that presentation on specific location negotiations right now. As we said last month, we're being very cautious to select only excellent locations with good occupancy economics and we're being mindful of the current economic environment. Also, as we discussed in the meeting last month, we've rolled out new salad bars in all the company-owned Craft Pizza & Pub locations to promote new sales. That rollout process completed in July, and we're now promoting this new feature in social media as well as through on-site exterior banners and other marketing materials. Last week, we sold just shy of 2,000 salad bars during the week, and we still have several units that are in the ramp-up process. By intention, the salad bar appeals to a demographic we don't always see in the restaurants and it is also popular at lunch where we want to build our sales as well. We're also beginning to target our most economically sensitive units with special promotions and offers, units like Franklin, McCordsville, Greenbriar and Fishers are particularly sensitive to disposable income levels and economic news in general, and we're working to try and keep those guests engaged with the concept. Last week, the 5 Craft Pizza & Pub units with the -- with at least 2 years of operating experience had same-store sales up approximately 20.8% over last year, indicating that our efforts are having an impact during this period of consumer uncertainty. I'm not at all suggesting that this is the anticipated run rate going forward. There are a lot of moving variables going on, but it does indicate the receptivity of guests to the current initiatives that we're taking. On the nontraditional front, we've opened several additional locations during the last 4 to 6 weeks and we've invested in more staff time to generate new prospect leads. It's a primary focus. We have a significant number of active franchise prospects at this point. But as we outlined in the press release, owners of the underlying businesses are still very cautious due to the tight labor market and the overall economic environment. Though slower than we'd like, we're seeing a steady increase in revenues from growth in this segment, and we expect that to continue and possibly accelerate. As of today, we've sold 18 and opened 19 new nontraditional units this year, with the latest opening occurring last week in Cortland, Illinois. That is just outside of DeKalb, about an hour due west of Chicago. We have a good pipeline of additional leads and several additional units to be opened that have already signed franchisee agreements. All right. So with that, we'll wrap up the presentation portion of this call. Next, Paul and I are going to take your questions. [Operator Instructions]

Okay. We're back and we'll start with questions here. Go ahead, Roger.

Yes. Scott and Paul, you mentioned that sales have been improving right through the year really, since January and February. Did you make specific mention of July? Obviously, you had mentioned an extraordinary week last week, and that's obviously encouraging. But was July better generally than the -- say, June?

Yes. July was the best month we've ever had in Craft Pizza & Pub. Our sales were up, and our margin was up, like I said in the presentation to 16%, which was the best we've achieved so far. And August is continuing on the same trends so far. As Scott mentioned, last week, the sales were up 20% -- 20.7%. The nontraditional is gaining ground. We opened 3 units just in July, and we've opened 1 or 2 since in August, and the sales have been better than what we expect and better than our average sales in the nontraditional. Like we opened 1 unit in July with just a C-Store with Noble Roman's sales almost $11,000 for that week, and it's continued to stay up there. And the one that he mentioned in Cortland, Illinois last week had a very good opening week and is continuing on this week with good results. So the nontraditional is coming back. It will come back. We have lots of opportunity there. And the number of locations that are available throughout the country, now true, are being held -- like Scott said, being held up with shortage of labor and the economic uncertainty. But those good operators are finding a way to do it, and we're getting some good units opened. And we expect that to both continue in the Craft Pizza & Pub and the nontraditional going in the balance of the year. As you recall, we had a slow end of the year last year in sales because of the rapid spread of Omicron. And so we're going against a period where our year-to-date sales are going to be more easily comped. And I'm expecting -- these are uncertain times, as we all know, and we don't know about the economy and what's going to happen there. But we're gaining traffic, which is a good thing. And with those good sales, we had the last 1.5 months in Craft Pizza. That's with an actual ticket average decrease. And so the gain in traffic is more than that percentage indicates because the sales gained despite some hesitation on consumers' part to spend less money on each visit.

So am I right in my memory that you have not raised prices now in 6 months or so, is that correct?

I don't remember the exact time frame, Roger, but that's approximately correct, 5 or 6 months.

I think we raised prices in November and again in February or March and none since then.