Q3 2020 Noodles & Co Earnings Call

October 28, 2020

[music].

So today's noodles <unk> company third quarter 2020 earnings conference call.

All participants are now in a listen only mode.

The presenters remarks, there will be a question and answer session.

As a reminder, this call is being recorded.

I will now introduce news the company's executive Vice President and General Counsel Mr. Heitmann you may begin.

Thank you and good afternoon, everyone welcome to our third quarter 2020 earnings call here with me. This afternoon is defending Hilton, our Chief Executive Officer I.

I'd like to start by doing over a few regulatory matters.

During our opening remarks and in response to your questions. We may make forward looking statements regarding future events or the future financial performance of the company and.

Any such items, including details related relating to our future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act.

Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The safe Harbor statement in this afternoons news release and the cautionary statement in the company's annual report on form 10-K for its 2019 fiscal year and subsequent filings.

With the FCC are considered a part of this conference call, including the portions of each set forth the risks and uncertainties related to the company's forward looking statements.

I refer you to the documents the company files from time to time with the Securities and Exchange Commission specifically the company's annual report on form 10-K for its 2019 fiscal year and subsequent filings that we have made debt.

These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.

During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.

These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measures is available in our third quarter 2020 earnings release, and our supplemental information.

Now I would like to turn it over to Dave any hellmann, our chief Executive officer, Thanks, Mel and good afternoon, everyone. I look forward to sharing with you today. The continued progress the Nielsen company has made since the onset of the call the pandemic and our excitement with the opportunities that lie ahead.

Before I discuss that though I would like to shareholder incredibly proud I am of our team members and partners for their continued commitment to providing delicious meals prepared safely quickly and consistently at our restaurants across the country.

Our team has never been stronger and their dedication has allowed us to navigate through these challenging times and given us confidence our ability to take advantage of the opportunities ahead.

Of course, the health and well being of our team members and guests remains our company's top priority. We continue to actively monitor and follow local and federal mandates related to cope with 19 and are committed to remaining a leader in the past casual space in our health and safety protocols.

We believe that our approach has increased trust and brand equity with our consumers, which is evidenced by our sales recovery as well as improvements and gsts settlements that have occurred during the past several months.

Although there remains servier on the duration severity of coated my team I have never had greater confidence in our opportunity to thrive and accelerate growth in the years to come.

Today, I would like to focus on three key areas of our strategy to take advantage of this opportunity.

First continued differentiation of our concept to appeal to a broad range of lifestyle convenience and dietary needs second activating our brands, particularly through our digital assets and marketing strategy and third accelerating unit growth to take advantage of an operating model. We feel is perfectly suited for post.

Over the world.

I'll start with how we intend to capitalize on unique strengths of the brand.

As you know we are the only national chain delivering world flavors through a core menu focused on noodles and pasta.

The variety inherent to our menu has been and will continue to be a meaningful strength of the brand as we offer favorites from kids to adults healthy to indulgent and flavors both familiar anew.

Aside from the great variety to our menu. Unlike many of our competitors, our food travels extremely well and given our relatively low price point and strong speed of service noodles is particularly well suited to ticket damage to the increased need for convenience from today's consumer.

As we discussed in the past, 60% of our sales were off premise even prior to the Covance pandemic clear evidence of how well our concept and menu meet that need for convenience.

While during the initial stages of the co depend on if we focused on amplifying our core menu, we have sense, which returned to our standard disciplined process for menu innovation.

We believe there remains significant opportunity for us to broaden reach and frequency through menu innovation, while at the same time, simplifying our existing menu and reducing unnecessary execution hurdles for our operations teams.

The itr currently it's just that we're most excited about is our cauliflower, Milky, which we expect to roll out nationally during the first quarter of 2021.

For years, our guests have requested a nokia offering and will we particularly love about the item. We are testing is that it meets all of the flavor and texture expectations. The guests have come to expect from utilizing company. But also offers an additional plant based alternative on our menu, which is low carb low calorie gluten free and contains a fee.

Full serving of vegetables in each regular portion.

The Nokia will be well suited for many of our classic pasta sauces and will be featured with our roasted garlic sauce, which has the highest sales to food score of all sauces on our menu.

We are confident that the call if our Nokia will broaden the appeal of our brand, particularly with our attractive target market.

No. The company's core audience is comprised of individuals who seek great flavors delivered faster than PC.

The brand over indexes with both millennials and generation Z with notable strength with young families.

This overall variety of our menu to ease and quality with which our food travels and our natural appeal to families have been evident during the pandemic, especially as it relates to our dinner sales.

As we reported on October Onest, our company comparable restaurant sales in September return positive with a 1.1% increase.

Despite continued limitations on our dine in capacity our afternoon dinner day parts have been especially strong.

With growth of 4.8% and 7.3% respectively in September.

Our dinner strength gives us increased confidence that we will be well positioned for outsized sales growth as consumer patterns ultimately normalize on a post open world.

While we do expect that there will remain a work from home trend that continues after the pandemic, resulting continued industry pressured launch we're actively working on a refresh of our salad category to position us to capitalize on increased less demand for those who do return from our traditional lunch patterns.

While we do not anticipate our salad category refreshed to be launched until late spring of 2021 in the meantime, we're utilizing the launch of group ordering as well as other digital enhancements to meet the increased needs of those working from home or doing online learning with our children.

As we continue to further differentiate the brand for today's environment I'd now like to move to our second strategy surrounding activating the brand, particularly through our digital capabilities.

Digital sales during the third quarter increased to 151% versus the prior year and accounted for 61% of total sales.

We continued to elevate our digital properties during the third quarter, including the aforementioned launch a per border.

Our digital assets have allowed us to improve the effectiveness of our marketing strategy as we better target our guest and more effectively to gauge with them through our rewards program.

Despite a cluttered social media environment, we have seen a meaningful increase in the open rates of our email communications a decrease in the cost per acquisition of our media spend and improved engagement with our social media content.

While our rewards program has grown over 3.2 million numbers, we still feel we are in the very early stages of utilizing the program to understand and engage with guests at a more personal and targeted level.

We expect the program will be an important catalyst for sales growth over the next few years as we elevate our engagement and form deeper more personalized relationships with our guests.

During the third quarter about half of our digital sales came through delivery with the remainder coming from order had quick pickup and curbside channels.

We continued to optimize all of our digital channels and anticipate technological enhancements to our curbside pickup as well as continued optimization of our digital marketing mix during the fourth quarter we.

Importantly, digital momentum remains strong thus far in October with digital mix at 58% of sales.

With our interest in delivery sales there of course comes increased pressure to the PML through delivery fees.

During the third quarter delivery fee costs was 5.5% of sales an increase of 390 basis points versus the prior year.

Currently we maintained an approximate 7% price premium for guest that are ordering through third parties that was launched in Q4 of last year.

We've not seen resistance to that price premium and are currently testing an additional 5% price premium that we expect to expand nationally by the end of 2020.

As a reminder, we do not currently incorporate a price premium for delivery orders that are made directly through our own digital properties and we continue to optimize to move delivery orders and to our own channels, which spring with an improved guest engagement as well as lower costs.

Although delivery has definitely placed some pressure on our margin we remain pleased with our delivery in digital in general have accelerated brand awareness throughout the country, particularly in markets, where we have less saturation.

New customers are being attracted to the brand as this access has increased.

As an example, our northern California, and Arizona markets, which have nine and five restaurants, only respectively recorded comparable sales of 35% and 32% during September.

The ability to use technology to activate the brand and increase awareness and newer trade areas or less saturated markets gives us even more confidence in our first strategy, which is to accelerate our unit growth.

We continue to believe that there will be meaningful disruption in the real estate environment for restaurants in coming years, and we're excited about the opportunity for us to take advantage of that disruption with a more efficient off premise oriented footprint.

Our new restaurants continue to be our best performing class in the history of the company bolstered by two restaurants opened thus far in October that are performed strongly including one restaurant in Wisconsin that has set new records for sales during the first southern 14, and 21 days of operations.

Like many of our new restaurants. This particular restaurant includes our order ahead drive through pickup window, which has proven very beneficial in the increased need for speed and convenience from today's consumer.

78% of digital orders for this location have been processed through the drive through window and average time is an impressive 62 seconds. Despite their tremendous volume.

We continue to target at least 70% of new restaurants to include the order had drive through window in their construction.

These types of numbers gives us greater confidence not just in a reduced square footage in general, but additionally in a potential to test materially cost effective buildouts that only incorporate off premise and our digital sales.

We are also exploring virtual restaurant or goes kitchen alternatives, which could provide certain high density or infill opportunities that we did not feel revival, even a few months ago.

We are aggressively building robust development pipeline and we've recently bolstered our team with three new hires to advance both our company and franchise development strategy.

We continue to target at least 10 to 15 restaurants opened systemwide during 2021 with a target of at least 70% annual unit growth beginning in 2022.

In the current environment, while it's difficult to reliably anticipate exactly how the recent disruption will influence timing and availability of real estate, we do feel well positioned to take advantage of additional growth opportunities as they arise.

This opportunity is supported by our strong balance sheet during the third quarter, we pay down a significant amount of our borrowings and as of September 29, The company held $8.6 million of cash on hand, net borrowings of $44 million.

The company currently has $52.3 million available for borrowing under our revolving credit facility.

Our net debt of $35.4 million at the end of Q3 was a small increase relative to the end of Q2, but did incorporate catch up on rent and other obligations. After the completion of generally favorable negotiations with our landlords and vendors.

Just as importantly, our growth opportunity is supported by our strong team.

For the past few years, we have invested in building, our pipeline and culture as a competitive strength.

We continue to see significant improvements in our turnover trends and have built a dedicated robust pipeline of future leaders with great tenure and knowledge of the noodles brand.

We have continued this investment in our team through targeted relevant and industry, leading benefits to that end, we recently announced several benefit enhancements, including the availability of free in person and virtual counseling to support mental health supporting team members growing families by offering six weeks of paid maternity and paternity.

Relief as well as providing assistance for surrogacy in adoption.

Our strategies around further differentiation of the concept.

Activation of the brand and accelerated unit growth would not be possible without our tremendous team members that extremely humbled that the opportunity to work alongside them to meet our collective tremendous potential.

Now I'd like to turn to some detail on our third quarter results and expectations for the balance of 2020.

As we pre announced on October Onest, we reported revenue of $106 million, a 10% decline over the prior year.

Comparable sales declined 3.8% system wide for the quarter comprised of a 3.6% decrease at company owned restaurants, and the 5% decline a franchise locations.

Our company comparable sales decline included a 150 basis point negative impact due to closing for the fourth of July weekend.

As noted in our earnings release comparable sales improved throughout the quarter, culminating in a 1.1% comparable sales increase and a 2.4% increase in average unit volumes over prior year in September.

I'm happy to report that in over half of our markets. We continue to see sequential improvements and trends from September through to October despite increasing coal the trend throughout the country.

Comparable sales were roughly flat quarter to date, and we continue to see average unit volume growth versus prior year.

Currently just over 85% of our restaurants are opened for limited in restaurant, finding and while we expect there may be more restrictions in coming weeks and months, we remain very confident in our ability to navigate those restrictions and be positioned for outside sales growth in a postponement environment.

Third quarter restaurant level margin was 15.4% a decrease of 170 basis points versus prior year.

Like comparable restaurant sales margins did improve throughout the quarter with restaurant level margin flat year over year at 16.5% in September.

We are proud of the efforts of our teams to improve efficiencies throughout the operating model.

As that has allowed us to overcome much of the impact of the increased delivery fees associated with digital sales, which as I noted earlier increased 390 basis points versus prior year to 5.5% of sales in the third quarter.

In the third quarter. The company recorded adjusted EBITDA of $7.7 million and adjusted earnings per diluted share were one cents.

Looking to the balance of 2020.

Of course, there remains uncertainty in the current environment and we remain focused on building sales volumes and optimizing our model, while making the appropriate adjustments for cobra related restrictions and capacity constraints.

While we are pleased with our continued momentum we do feel the uncertainty surrounding co that makes it difficult to provide comparable sales guidance for the remainder of 2020.

As a reminder, during the fourth quarter total revenue year over year will continue to be impacted by nine locations that were refranchised earlier in 2020 as well as six restaurants that have closed since the beginning of Q4 of 2019, primarily sites the rat or approaching that lease end and were not well sales.

Weighted to meet the changes changing needs of the consumer trends.

Two additional locations that are located in areas that have been particularly impacted by the point by the restrictions in place remain closed.

Finally, we continue to experience temporary restaurant closures related to the restrictions and the coated pandemic typically only for a day or two as we ensure the ongoing safety of our team members indexed.

Collectively we expect these circumstances to negatively impact revenue year over year by approximately $6 million to $7 million during the fourth quarter.

Of course, as we lap closure and Refranchising activity and ultimately exit the pandemic. These temporary impacts will abate and position the brand for meaningful revenue growth.

As a reminder, averaging in volumes, which normalized for these impacts were roughly flat year over year during Q3, and our ADC fees are growing versus prior year, thus far in October.

From a margin perspective, assuming no meaningful change in restrictions related to the current economic we expect our margins in the fourth quarter to be modestly below prior year with significant improvements in labor and our overall model being offset by the impact of increased delivery fees.

We do feel that we remain well positioned as we optimize our operating model, particularly regarding the delivery channel to have a more efficient and profitable economic model in a post coated world than we did entering the pandemic.

Before we open the call to close the call to questions I.

I would like to reiterate my thanks to our teams throughout the country and my confidence in the future sales and company.

We have a differentiated concept, particularly well suited for short and long term consumer trends.

The digital strength to further activate the brand and the tremendous growth opportunity ahead of us.

While 2020 has certainly been a remarkably challenging year for the country I do feel the Neil's company has risen to the challenge cemented our brand with our team members and our guests and positioned ourselves to be a clear winner for the years to come.

With that Honda Please open the lines for today.

Thank you.

Ladies and gentlemen, as a reminder to ask the question you will need to press Star then one on your telephone.

Well your question press the pound.

Again that star one to ask a question please.

Please stand by while we compile the Q and a roster.

Our first question comes from the line of Jake Bartlett, which rod your.

Your line is open.

Great. Thanks for taking the questions.

Dave My first one is on the October.

Quarter month to date of a flat you mentioned that 50% of the markets are doing better and 50% are doing worse can you give any more detail around that and maybe world. What is common with the stores that are doing worse than that average.

Yes, sure I think it will start from the geographic perspective, So obviously, Jake as you follow the industry and others to follow the industry. The segments of the country are behaving differently in terms of their impact on the restaurant space.

Well known that the northeast, particularly impacted the upper Midwest has been probably right behind the northeast in terms of the impact. The cobalt has had on sales on the where recent restrictions that were implemented in several counties in Illinois. What we are seeing is that we have a large number of our restaurants that are in the upper Midwest States.

Particularly Minnesota, Wisconsin and Illinois.

They continue to lag behind the rest of the country doses were seeing what the rest of the industry I think encouragingly, we are not seeing any change in the trajectory of their business.

From October versus September so that gives us quite a bit of encouragement, where we are seeing particular strength on the other side of the equation continues to be those markets that don't have much brand awareness that people are really beginning to understand discover and gain affinity and loyalty to our brand. So I mentioned, northern California and the fee.

Next markets those continue to be great strong points as our several other areas that we're seeing that brand awareness really start to kick in.

Got it and.

I think as of the last.

Business update.

You gave in early October you mentioned that you would just reopened some company owned stores for indoor dining Im just by the commentary in October it doesn't seem like that's had a huge impact maybe if you could just give us a feel for how the stores have performed as youd reopen indoor dining and I think within that maybe you could frame.

What the risk is if its restrictions come back sure. Yes, ultimately diamonds still only was about 5% to 10% of our sales during the third quarter and we continue to see that thus far in Q4 I think one thing that's important to note is that as.

As we enter the winter months, we already talked about the preponderance of restaurants that we have in the upper Midwest.

Our brand actually becomes less reliant on dine in when you get to the winter months as we see more people shift towards off premise and in July that the food in the comfort of their own homes, we already have significant strength there.

So in a national we've not seen.

A significant.

We've seen some incremental lunch business from the opening of dining rooms, if that potentially where to go the other direction. We feel very comfortable that we are well positioned to actually still maintain some nice improvement in our sales trajectory.

Got it and then last question is really on the drivers of same store sales from here going forward and wondering if you can frame kind of which you think are going to be most impactful whether it's.

Whether its menu innovation with new oaky coming coming on or whether it's kind of finally being able to utilize your customer segmentation in Europe. You grew rewards database, maybe just kind of give us some of the drivers in which you think are going to be most impactful.

Specific to new initiatives I would expect that our marketing channel mix will just continue to improve.

We've had some great success in terms of lowering cost per acquisition and improving our email open rates improving the content engagement, but we're at the very early stages. So there remains quite a bit of upside that I think will carry us through not just Q4 really several years into the future also honestly feel wealthier early early.

The stages of some commentary innovation I think the Nokia.

That apply far Nokia I discussed on the call really can be very meaningful driver for us given its not just health profile, but its taste profile on as a plant based alternative.

That is low card that has locale gluten free full serving of vegetables. So.

I think theres culinary innovation there.

Really across every segment of the business, we continue to see there being opportunity from the digital engagement to culinary innovation.

To even things like reducing some of the friction from our curbside experience.

Great. Thanks, a lot I appreciate it.

Thank you.

Our next question comes from the line of Nicole Miller with Piper Sandler Your line is open.

Thank you very much quicker.

Quick housekeeping and then I'll get a question if that's okay. Please.

Absolutely in the fall.

Hi.

For the system and if I go back and piece together the pre release and then what I heard today.

Thats still imply companies up franchise is down a little.

Not necessarily I mean, there is some geographic impacts as we said the upper Midwest.

There is it is similar kind of company relative to franchise, but the geographies continued to be a challenge on that franchise number as a reminder, we have we have a smaller segment of the franchise restaurants that are in the same store sales base.

A lot of those are in the upper Midwest, but ultimately you can assume that kind of that that comparison of company to franchise is similar.

Okay, Great and then price and mix with bank comp I think you've been talking about those together, it's been running around 3% to 4% has anything changed there.

Yes, yes. This number is one the call that I think for the entire industry.

Has become a bit more challenging to really understand and its lost a little bit of its relevancy certainly like the rest of the industry. We are seeing outsized growth in average check than what you would typically see.

And it remains volatile enough that I don't necessarily think it's appropriate to disclose what the exact numbers are but I do want to provide some texture.

To show, how it's kind of an unusual environment, where the chat mixed dynamics aren't what they normally are delay.

Delivery through third parties.

The 25% of our sales during the third quarter, we have a 10% price premium.

Obviously, there is an effective price increase that is much much more substantial than you'd see in a normal environment. So ultimately, while we don't think that typical mixes as relevant as it hasn't it has been in the past. It is safe to say that we are seeing a significant amount of check growth similar to others in the industry.

Yes that is that is fair and I hear you on that.

Maybe turning to.

Getting ready to re accelerate development I was comparing and contrasting tonight's results in terms of the Hey, you have the run rate 1.987 wasn't that much different frankly to the lack of growth cycle.

How do you expect these new units to come on in terms of the percentage of a mature volume.

What's what's exciting for US is that we are seeing that our restaurants that had been opened in the last two years.

Our actually meaningfully above the company both from a sales perspective as long as the margin perspective, and I attributed to a handful of reasons different from where we were after in the last growth cycle first and foremost would be the concept itself is in a much stronger position in terms of how we've been able to in a pre.

Sales of World really build on average unit volumes build the margin profile. Our brand is I think more clear in our guests' minds and the net promoter scores attest to that.

Additionally, I would add the discipline that goes towards our site characteristics, our economic model there aren't compromises being made through that and you see that in the effectiveness of.

Of those new restaurants that have opened.

Third the model itself, we streamlined quite a bit of the operations, it's easier to train it's easier to operate.

The drive thru pick up windows or a game changer in terms of increasing the amount of convenience as I said that restaurant that.

Set all those daily records that just opened in October very large percentage of their sales are going through that window and only averaging just over a minute per transaction.

But I think.

All three of those are important the fourth one which is the one that gives me. The most excitement if you will is our pipeline.

So Nicole the people the people pipeline the bench strength that we have within our teams is so much stronger than it was during our last growth cycle in terms of an opening these new restaurants with top performers that know the brand our turnover our operation metrics are people metrics at new restaurants are coming.

Our dramatically better than where they were during the last growth cycle and they are actually better than the company average so.

So the combination of a better concept that's easier to run an economic box and an operating box.

As much more suited for consumer trends and then a very very strong people pipeline gives us a lot of confidence that we'll be able to enter this next phase of accelerated growth.

In a much more favorable position.

That actually is very helpful. Thank you last question and I'll meet myself, what can you share on the CFO search front. Thanks, Dave.

Now very very excited we're in the final stages, and we would hope to be able to make that announcement within the next several days.

Alright, Thanks again, congrats to you and your team.

During the call.

Thank you.

Our next question comes from the line of Andrew Strelzik with BMO capital markets. Your line is open.

Hey, David it's actually Dan on for Andrew Tonight.

Thanks for taking the questions.

First.

You talked about the opportunity re accelerate unit growth over the next couple of years and you touched on some of the central real estate opportunities that could emerge moving forward, but I guess I'm. Just wondering are you beginning to see any sort of uptick and real estate opportunities already today and if you are what kind of sites are becoming available and are they properties that work for the brand.

Yes, we are already seeing some nice benefit Dan and very excited with how the pipeline is shaping up.

I do think there is a reality.

A lot of good sites are great great sites are great sites.

Particularly the box that we are very well suited for wishes that small square footage with the drive thru circulation those remain in high demand.

One thing we're excited about is the conversations we're having with developers and landlords around with some of the disruption in the industry how properties will be redevelop to be much more suited.

For that box, which really just fits in the wheelhouse of where news and company does great. So they think there is some time for that to settle out if you will because the availability of the exact type of box we want.

We'll take a bit of time, but we are seeing already really strong green shoots in terms of that that pipeline being able to develop not to mention and we've you know we continue to explore items like the off premise only potentially a ghost kitchen as well and we continue to see some really nice opportunity from those fronts as well.

Got it that's that's actually pretty interesting and and then just.

You touched on noodles rewards program a little bit.

It sounds like you're pretty pleased with how it's it's worked for you during the pandemic.

I guess I was just wondering if there's anything you could share in terms of just maybe more specific learnings from the program so far and anything you're looking at in terms of maybe a change strategically in terms of how you're engaging with customers moving forward.

Yes, I think going forward, what you'll see Dan is quite a bit more customization and personalization and targeted.

Not just communications, but ultimately even the appearance of the menu and how that overall experience from the beginning to end will be more personalized now that's a journey and it will take us some time to get there right now we're focusing much more on reducing friction on some of the things. We're seeing is that the conversion rate of one piece.

We'll go into our web site or through our App for ordering continues to increase we are seeing a lot of people come into the funnel that are new guests again, I kind of come back to some of those newer markets and less saturated markets. We're seeing that group b, particularly instrumental in our sales recovery and then we're seeing our lawyer.

Oil gas increase their frequency meaningfully.

So there still is kind of that swap from the middle where we think is going to be a tremendous growth opportunity for us as we continue to enhance and develop that program.

So what you'll see is I think just our overall strategy become much more targeted much more personalized than it is today weve already made good progress on teams done a very nice job, but we're in the very early innings.

Okay, great appreciate the color and thanks for taking the questions.

Absolutely.

Thank you.

Our next question comes from the line of Andy Barish with Jefferies. Your line is open.

Secondly, if you on mute.

Hi, Andy.

Our next question comes from the line of Mark with Jefferies. Your line is open.

Hi.

I was going down it's going in for Andy I think we have little tuck issue just now but.

So a quick question on Gionee is.

It's about $2 million or so higher sequentially I was just wondering if you guys could break that down and if this is a level of generic should think about going forward at least in the near term.

Yes from a geographic perspective, and we will be part of Q early in the morning, and you'll see some that detail you also see it in our release itself a lot of those were nonrecurring items, particularly from the stock compensation side as well as from the severance line items. You did you did ask nonrecurring expense that occurred.

Kind of quarter over quarter, if that's where you're seeing the comparison will become a normalized for for a normalized basis. If you look to Q2 to Q3, excluding those events.

Actually Q2 to Q3 roughly flat.

Okay, Great and just lastly on labor.

Obviously seeing a lot of efficiencies now.

I believe you said next quarter should be a little lower than last year.

Yes for total margin, but.

But just on labor just wondering if you could elaborate on if you think we could see that same kind of.

Efficiencies next quarter and just what you think going out to next year.

A very modest uptick mesh Marshall as you have dining rooms open there is a little bit more labor.

That does come into the system, but it should be relatively modest because we have been able to find efficiencies throughout all of our processes implement.

Implemented a lot of those really over the last year, even on not just during cold that.

But additionally, when you have 60% of your sales coming through digital channels, you just don't need as much from a house.

As much kind of house presence as we had in the past loans, we expect will continue to carry forward.

In two new World. Additionally, we spend quite a bit of investment in the training of new hires we think thats a very critical part of our success.

As we have seen turnover go down meaningfully over the last really couple of years with particularly in the last several months of coal that we would expect that will carry through as well. So on the Nat labor should be relatively similar Q3 to Q4 as a percentage of sales potentially a little bit of an uptick just to accommodate.

The dining rooms that are reopened.

Got it thank you.

Thank you.

And ladies and gentlemen, Thats star one to ask a question.

Our next question comes from the line of Todd books.

Okay and associates your line is open.

Hey, great. Thanks, guys.

Couple of questions for you one you talked about the northern tier.

Exposure of the brand and that's it's an opposite of a lot of other.

Concepts that have that smile exposure.

The southern States, if you think about the northern tier.

And you think about competing concepts in that market and how much that may have benefited from.

The ability to create capacity.

With outdoor dining as you're looking forward to Q4 in Q1 in those markets do you feel their share that comes back to neutral says other.

Competitors aren't able to service customers via.

Incremental outdoor capacity.

Yes, absolutely so patios, obviously, we have.

Seven amount of patios and those upper Midwest Todd.

But that tends that tenancy that I said that historical trend that I talked about in the earnings call where during the winter months.

We are just not nearly as reliant on dine in business as we are during the other seasons, that's particularly amplified in the upper Midwest and people do shift towards off premise in general so the combination of maybe some of the other concepts, but don't have that off premise capability and then our perfect.

Mueller strengthen it.

Gives us confidence that ultimately that trend is going to reverse we have seen not just ourselves and the industry as a whole that upper midwest be under a bit more pressure throughout the covance pandemic we.

We do feel that we are positioned probably better entering these winter months than most of our competitors.

And given the early reads on.

The benefit of curbside and in those markets and the talk of creating new occasions for customers that don't have to get out of their car.

But want to sharpen graph there and then also a specific time.

Sure.

Yes, I mean, you have on the Incrementality.

Huge incrementality actually we don't expect it will necessarily be an enormous percentage of sales, but all of our analysis has shown that it is a nice driver of incremental.

Versus versus other channels and I think in the upper Midwest you, particularly we'll see it I've, obviously visited a lot of our restaurants, Colorado and the mid Atlantic often are don't behave that much differently, you sometimes have parking lots that.

Of the 15 available parking spots six of them are taken up by snow and that maintains for a significant amount of the season, so continuing to reduce friction for curbside certainly the drive through windows.

As we continue to build those out new restaurants. The the few percent that we'll be able to retrofit from a company side those will all be huge benefits and to put some.

Some tangible aspect about what we'll do with curbside, we have a good program right now Todd that you can order digitally select curbside sales are kind of car you're at but we do have the friction of when you get to the restaurant you actually have to call a number and call. The restaurant that is the types of friction that we are going to be.

Eliminating in the next several weeks.

To allow that that that particular channel in that particular experience to be even more improved than even better than it is today.

Great and then a final question.

You talked about third party delivery fees and the pricing actions that you're taking but the platform.

Platforms being an important source of Newton noodles customers and that's our adoption of the brand.

If you if you look at.

Your digital platforms and kind of coming into.

Maybe outlets hopefully have the second half of the pandemic here, what what are the thoughts around efforts to drive.

These new to brand customers too.

Noodles native digital platforms, our online platform, so that the the service fee burden.

There, what's the trigger duration that you need to see out of that behavior before you try to migrate.

I think we want to migrate them from the second from that from the time that they discover the brand we want to migrate them over immediately.

So what you see is us take the opportunity to message those particular gas in the ways that we are able to we do offer as an example free delivery.

We currently are launching purely through our own channels. So you can do free delivery. If you go to our app or through our web site, but not.

If you go through the third party Aggregators, we do feel of third party Aggregators as I said are extremely important in terms of getting people to discover the brand and there certainly will be gas that thats, how they continue to use.

Restaurant brands for delivery, but the combination of different price premiums.

Different delivery mechanisms or promotions the rewards program itself and just communicating them, we want that process to start immediately.

Well you message more aggressively against it when the premium.

On the menu price becomes greater later this year.

That is not currently part of the plan to to aggressively.

Aggressively promote the price disparity, we don't we don't think thats necessarily the right path to do it.

But they will see significant benefits of just the overall rewards program.

Clearly that I mean, it does show up for those that are that are ordering that there is a a better economic.

Answer for them than going into third party aggregator.

Okay, great. Thanks Stan.

Thank you.

I am showing no further questions in the queue at this time I would now like to turn the call back over to liquidate the Ami Carlson for closing remarks.

I appreciate that Taiwan, I appreciate everybody's time.

I sent to several folks before that I do think as as challenging as 2020 has been.

In a couple of years, we will look back at this from a new as a company perspective, and say, yes, 2020 was challenging yes. It was scary times early on in the pandemic, but it really will become an inflection point and an ability for us to accelerate growth from a brand awareness average unit volume margin.

And unit growth perspective faster.

Faster than we probably would have otherwise and so extremely proud of the team for how they have positioned us to be able to to say that we look forward to finishing off this year and then 2021 and beyond Thank you again for your time.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

[music].

Good afternoon, and welcome to today's noodles <unk> Company third quarter 2020 earnings Conference call.

All participants are now in a listen only mode.

After the presenters remarks, there will be a question and answer session.

As a reminder, this call is being recorded.

I will now introduce noodles and company's executive Vice President and General Counsel, Melissa Heitmann you may begin.

Thank you and good afternoon, everyone welcome to our third quarter 2020 earnings call here with me. This afternoon is Dave bedding sales in our Chief Executive Officer.

I'd like to start by going over a few regulatory matters.

During our opening remarks and in response to your questions. We may make forward looking statements regarding future events or the future financial performance of the company any.

Any such items, including details related relating to our future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act.

Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties.

Safe Harbor statement in this afternoons news release, when the cautionary statement in the company's annual report on form 10-K for its 2019 fiscal year and subsequent filings with the FCC are considered a part of this conference call, including the portions of each set forth the risks and uncertainties related to the company's forward looking.

Statements.

These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.

During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.

These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

A reconciliation of these measures to the most directly comparable GAAP measures is available in our third quarter 2020 earnings release, and our supplemental information.

Now I would like to turn it over to Dave Venting Hellmanns, our Chief Executive Officer, Thanks, Mel and good afternoon, everyone. I look forward to sharing with you today. The continued progress the Nielsen company has made since the onset of the call the pandemic and our excitement with the opportunities that lie ahead.

Our team has never been stronger and their dedication has allowed us to navigate through these challenging times and given us confidence our ability to take advantage of the opportunities ahead.

Of course, the health and well being of our team members and guests remains our company's top priority. We continue to actively monitor and follow local and federal mandates related to cope with my team and are committed to remaining a leader in the fast casual space in our health and safety protocols.

Although there may be some certainty around the duration severity of COVID-19 I.

I have never had greater confidence in our opportunity to thrive and accelerate growth in the years to come.

Today, I would like to focus on three key areas of our strategy to take advantage of this opportunity.

First the continued differentiation of our concept to appeal to a broad range of lifestyle convenience and dietary needs second activating our brands, particularly through our digital assets and marketing strategy and third accelerating unit growth to take advantage of an operating model. We feel is perfectly suited for post over there.

World.

I'll start with how we intend to capitalize on the unique strengths of the brand.

As you know we are the only national chain delivering world flavors through a core menu focused on noodles and pasta.

The variety inherent to our menu has been and will continue to be a meaningful strength of the brand as we offer favorites from kids to adults healthy to indulgent and flavors both familiar new.

Aside from the great variety in our menu. Unlike many of our competitors, our food travels extremely well and given our relatively low price point and strong speed of service Newell's is particularly well suited to take advantage of the increased need for convenience from today's consumer.

As we discussed in the past, 60% of our sales were off premise even prior to the covert pandemic clear evidence of how well our concept and menu meet that need for convenience.

While during the initial stages of the co depend on if we focus on amplifying our core menu, we have sense, which are returning to our standard disciplined process for menu innovation.

The itr currently interest that we're most excited about is our cauliflowers Milky, which we expect to roll out nationally during the first quarter of 2021.

For years, our guests have requested a nokia offering and what would particularly love about the item. We are testing is that it meets all of the flavor and texture expectations. The guests have come to expect from sales and company. But also offers an additional plant based alternative on our menu, which is low carb low calorie gluten free and contains a full.

Serving of vegetables in each regular portion.

The Nokia will be well suited for many of our classic pasta sauces and will be featured with our roasted garlic sauce, which has the highest use of food score of all sauces on revenue.

We are confident that the call if our Nokia will broaden the appeal of our brand, particularly with our attractive target market.

Nielsen company's core audience is comprised of individuals who seek great flavors delivered faster VC.

The brand over indexes with both millennials and generation Z with notable strength with young families.

As we reported on October Onest, our company comparable restaurant sales in September were turned positive with a 1.1% increase.

Despite continued limitations on our dine in capacity our afternoon dinner day parts has been especially strong with growth of 4.8% and 7.3% respectively in September.

Our dinner strength gives us increased confidence that we will be well positions were outsized sales growth as consumer patterns ultimately normalized on a post open world.

While we do expect that there will remain a work from home trend that continues after the pandemic, resulting continued industry pressure lunch. We're actively working on a refresh of our salad category to position us to capitalize on increased launch demand for those who do return from our traditional lunch patterns.

While we do not anticipate our salad category refresh to be launched until late spring of 2021 in the meantime, we're utilizing the launch of group ordering as well as other digital enhancements to meet the increased needs of those working from home or doing online learning with the children.

As we continue to further differentiate the brand for today's environment I'd now like to move to our second strategy surrounding activating the brand, particularly for our digital capabilities.

Digital sales during the third quarter increased to 151% versus the prior year and accounted for 61% of total sales.

We continued to elevate our digital properties during the third quarter, including the aforementioned launch approve border.

Our digital assets have allowed us to improve the effectiveness of our marketing strategy as we better target our guest and more effectively engage with them through our rewards program.

While our rewards program has grown to over 3.2 million numbers, we still feel we are in the very early stages of utilizing the program to understand and engage with guests at a more personal and targeted level.

We expect the program will be an important catalyst for sales growth over the next few years as we elevate our engagement and form deeper more personalized relationships with our guests.

During the third quarter about half of our digital sales came through delivery with the remainder coming from order ahead quick pickup and curbside channels.

We continue to optimize all of our digital channels and anticipates technological enhancements to our curbside pickup as well as continued optimization of our digital marketing next during the fourth quarter.

Importantly, digital momentum remains strong thus far in October with digital mix at 58% of sales.

With our interest in delivery sales there of course comes increased pressure to the PML through delivery fees.

During the third quarter delivery fee costs was 5.5% of sales an increase of 390 basis points versus the prior year high.

Currently we maintained an approximate 7% price premium for guest that are ordering through third parties that was launched in Q4 of last year.

We've not seen resistance to that price premium and are currently testing an additional 5% price premium that we expect to expand nationally by the end of 2020.

As a reminder, we do not currently incorporate a price premium for delivery orders that are made directly through our own digital properties and we continue to optimize smoothed delivery orders into our own channels, which bring with it improved guest engagement as well as lower costs.

Although delivery has definitely place some pressure on our margin we remain pleased with our delivery in digital in general have accelerated brand awareness throughout the country.

Particularly in markets, where we have less saturation.

New customers are being attracted to the brand as this access has increased.

As an example, our northern California, and Arizona markets, which have nine and five restaurants, only respectively recorded comparable sales of 35% and 32% during September.

78% of digital orders for this location have been processed through the drive through window and average time is an impressive 62 seconds. Despite their tremendous volume.

We continue to target at least 70% of new restaurants to include the order had drive through window in their construction.

These types of numbers gives us greater confidence not just in a reduced square footage in general, but addition, and the potential to test materially cost effective buildouts that only incorporate off premise and our digital sales.

We are also exploring virtual restaurant or goes kitchen alternatives, which could provide certain high density or infill opportunities that we did not feel revival, even a few months ago.

We are aggressively building robust development pipeline and we've recently bolstered our team with three new hires to advance both our company and franchise development strategy.

We continue to target at least 10 to 15 restaurants opened systemwide during 2021 with a target of at least 7% annual unit growth beginning in 2022.

The company currently has $52.3 million available for borrowing under our revolving credit facility.

Our net debt of $35.4 million at the end of Q3 was a small increase relative to the end of Q2, but did incorporate catch up on rent and other obligations. After the completion are generally favorable negotiations with our landlords and vendors.

Just as importantly, our growth opportunity is supported by our strong team.

For the past few years, we have invested in building, our pipeline and culture as a competitive strength.

We continue to see significant improvements in our turnover trends and have built a dedicated robust pipeline of future leaders with great tenure and knowledge of the noodles brand.

We've continued this investment in our team through targeted relevant and industry, leading benefits to that end, we recently announced several benefit enhancements, including the availability of free in person and virtual counseling to support mental health supporting team members growing families by offering six weeks of paid maternity and paternity.

Leave as well as providing assistance for surrogacy in adoption.

Our strategies around further differentiation of the concept.

Activation of the brand and accelerated unit growth would not be possible without our tremendous team members that are extremely humbled that the opportunity to work alongside them to meet our collective tremendous potential.

Now I'd like to turn to some detail on our third quarter results and expectations for the balance of 2020.

As we pre announced on October Onest, we reported revenue of $106 million, a 10% decline over the prior year.

Comparable sales declined 3.8% system wide for the quarter comprised of a 3.6% decrease at company owned restaurants, and the 5% decline in a franchise locations.

Our company comparable sales decline included a 150 basis point negative impact due to closing for the fourth of July weekend.

I'm happy to report that and over half of our markets. We continue to see sequential improvements in trends from September through to October despite increasing KOVA trend throughout the country.

Comparable sales are roughly flat quarter to date, and we continue to see average unit volume growth versus prior year.

Currently just over 85% of our restaurants are opened for limited in restaurant binding and while we expect there may be more restrictions in coming weeks and months, we remain very confident in our ability to navigate those restrictions and be positioned for outsized sales growth in a postponement environment.

Third quarter restaurant level margin was 15.4% a decline of 170 basis points versus prior year.

Like comparable restaurant sales margins did improve throughout the quarter with restaurant level margin flat year over year at 16.5% in September.

We are proud of the efforts of our teams to improve efficiencies throughout the operating model.

In the third quarter. The company recorded adjusted EBITDA of $7.7 million and adjusted earnings per diluted share were one cents.

Looking to the balance of 2020.

While we are pleased with our continued momentum we do feel the uncertainty surrounding co that makes it difficult to provide comparable sales guidance for the remainder of 2020.

As a reminder, during the fourth quarter total revenue year over year will continue to be impacted by nine locations that were refranchised earlier in 2020 as well as six restaurants that have closed since the beginning of Q4 of 2019, primarily sites that were at or approaching that lease end and were not well sales.

Weighted to meet the changes changing needs of the consumer trends.

Two additional locations that are located in areas that have been particularly impacted by the point by the restrictions in place remain closed.

Collectively we expect these circumstances to negatively impact revenue year over year by approximately $6 million to $7 million during the fourth quarter.

Of course, as we lap closure and Refranchising activity and ultimately exit the pandemic. These temporary impacts will abate and position the brand for meaningful revenue growth.

As a reminder, averaging in volumes, which normalized for these impacts were roughly flat year over year during Q3, and our views are growing versus prior year, thus far in October.

Before we open the call to close the call to questions I.

I would like to reiterate my thanks to our teams throughout the country and my confidence in the future of Nielsen Company.

We have a differentiated concept, particularly well suited for short and long term consumer trends.

The digital strength to further his activate the brand and the tremendous growth opportunity ahead of us.

While 2020 has certainly been a remarkably challenging year for the country I do feel the meals company has risen to the challenge cemented our brand with our team members and our guests and positioned ourselves to be a clear winner for the years to come.

With that Honda Please open the lines for today.

Thank you ladies.

Ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.

So with all your question press the pound cake.

Again that star one to ask a question please.

I will be comparing the Q and a roster.

Our first question comes from the line of Jake Bartlett with Troy. Your line is open.

Great. Thanks for taking the questions.

Hi, My first one is on the October quarter dealer month to date of a flat you mentioned that 50% of the markets are doing better in 50% are doing worse can you give any more detail around that and maybe world.

What is common with the stores that are doing worse than that average.

Well known that the northeast, particularly impacted the upper Midwest has been probably right behind the northeast in terms of the impact that cobalt has had on sales on the where recent restrictions that were implemented in several counties in Illinois. What we are seeing is that we have a large number of our restaurants that are in the upper Midwest States.

Particularly in Minnesota, Wisconsin, and Illinois.

They continue to lag behind the rest of the country doses were seeing what the rest of the industry I think encouragingly, we are not seeing any change in the trajectory of their business from October versus September so that gives us quite a bit of encouragement, where we are seeing particular strength on the other side of the equation continues to be those markets.

That don't have much brand awareness that people are really beginning to understand discover and gain affinity and loyalty to our brand. So I mentioned, northern California, and the Phoenix markets. Those continue to be great strong points as our several other areas that we're seeing that brand awareness really start to kick in.

Got it and I think as of the last.

Business update.

What the risk is if its restrictions come back sure, yes, ultimately diamond still only was about 5% to 10% of our sales.

During the third quarter, and we continue to see that thus far in Q4 I think one thing that's important to note is that.

As we enter the winter months, we already talked about the preponderance of restaurants that we have in the upper Midwest.

Our brand actually becomes less reliant on dine in when you get to the winter months as we see more people shift towards off premise and enjoy the food the comfort of their own homes, we already have significant strength there. So.

So in a national we've not seen.

A significant.

Got it and then last question is really on the drivers of same store sales from here going forward and wondering if you can frame kind of which you think are going to be most impactful whether it's.

Whether its menu innovation with new we'll keep on coming coming on or whether it's kind of finally began to really utilize your customer segmentation on in Europe. You grew rewards database, maybe just kind of give us some of the drivers in which you think are going to be most impactful.

I think I'll start with what's the foundation and the foundation is our team members and our operational strength, which which we would put up against any in the industry and very happy with our team and how they continue to rise to the challenge specifics and new initiatives I would expect that our marketing channel mix will just continue to improve.

Pages of some culinary innovation I think the Nokia.

The deposit far Nokia I discussed on the call really can be very meaningful driver for us given its not just health profile, but its taste profile has a plant based alternative.

That is low carbon has locale gluten free full serving of vegetables.

So I think theres culinary innovation there right.

Really across every segment of the business, we continue to see there being opportunity from the digital engagement Telenor innovation.

Even things like reducing some of the friction from our curbside experience.

Great. Thanks, a lot I appreciate it.

Thank you.

Our next question comes from the line of Nicole Miller with Piper.

Your line is open.

Thank you very much quicker.

Quick housekeeping and then I'll get to your question if that's okay. Please.

Absolutely in the call.

Hi.

This is Sam if I go back and piece together the pre release and then what I heard today cannot still imply companies up in franchises down a little.

Not necessarily I mean, there's some geographic impacts as we said the upper Midwest.

Harrison of company to franchise is similar.

Okay, great and.

And next we'll go to comp I think you've been talking about those together, it's been running around 3% to 4% has anything changed there.

Yes, yes. This number is one recall that I think for the entire industry.

And it remains volatile enough that I don't necessarily think it's appropriate to disclose what the exact numbers are but I do want to provide some texture.

To show, how it's kind of an unusual environment, where the to check mix dynamics aren't what they normally are delayed.

Delivery through third parties, roughly 25% of our sales during the third quarter, we have a 10% price premium.

So as you see it as an effective price increase that is much much more substantial than you'd see in a normal environment. So ultimately while we don't think that typical mix is as relevant as it as it has been in the past. It is safe to say that we are seeing a significant amount of check growth similar to others in the industry.

Yes that is that is fair and and I hear you on that.

Maybe turning Q.

Maybe turning to.

Getting ready to re accelerate development I was comparing and contrasting tonight's results in terms of the value of the run rate 1.187 wasn't that much different frankly to the last the cross cycle. So how do you expect these new units to come on in terms of the percentage of a mature volume.

[music].

Yes, what's what's exciting for US is that we are seeing that our restaurants that had been opened in the last two years.

Our actually meaningfully above the company both from a sales perspective as long as the margin perspective, and I attribute it to a handful of reasons different from where we were at during the last growth cycle first and foremost would be the concept itself is in a much stronger position in terms of how we've been able to in a pro.

Recall that world really build.

Budgeted volumes build the margin profile, our brand is I think more clear and our guests mind and the net promoter scores attest to that.

Additionally, I would add the discipline that goes towards our site characteristics, our economic model there arent compromises being made through that and you see that in the effectiveness.

Of those new restaurants that have opened.

Third the model itself, we've streamlined quite a bit of the operations, it's easier to train it's easier to operate.

The drive thru pick up windows or a game changer in terms of increasing the amount of convenience as I said that restaurant that.

Set all those daily records that just opened in October very large percentage of their sales are going through that window and only averaging just over a minute per transaction.

But I think you.

All three of those are important the fourth one which is the one that gives me. The most excitement if you will is our pipeline.

So Nicole the people the people pipeline the bench strength that we have within our teams is so much stronger than it was during our last growth cycle in terms of an opening these new restaurants with top performers, but no the brand our turnover our operation metrics are people metrics at new restaurants are coming.

Our dramatically better than where they were during the last growth cycle and they are actually better than the company average.

So the combination of a better concept that is easier to run an economic box and then operating box that is much more suited for consumer trends and then a very very strong people pipeline gives us a lot of confidence that we'll be able to enter this next phase of accelerated growth.

In a much more favorable position.

That actually is very helpful. Thank you last question and I'll mute myself, what can you share on the CFO search front. Thanks, Dave.

Now very very excited we're in the final stages, and we would hope to be able to make an announcement within the next several days.

Alright, Thanks again, congrats to you and your team.

The default.

Thank you.

Our next question comes from the line of Andrew Strelzik with BMO capital markets. Your line is open.

Hey, David it's actually Dan on for Andrew Tonight.

Thanks for taking the questions.

First.

You talked about the opportunity re accelerate unit growth over the next couple of years and you touched on some of the central real estate opportunities that could emerge moving forward I guess I'm. Just wondering are you beginning to see any sort of uptick and real estate opportunities already today and if you are what kind of sites are becoming available and are they property that work for the brand.

Yes, we are already seeing some nice benefit Dan and very excited with how the pipeline is shaping up.

Do you think there is a reality.

A lot of good sites are great great sites are great sites.

Particularly the box that we are very well suited for wishes that small square footage with the drive thru circulation those remain in high demand.

For that box, which really just fits in the wheelhouse of where meals and company does great. So we think there is some time for that to settle out if you will because the availability of the exact type of box we want.

We will take a bit of time, but we are seeing already really strong green shoots in terms of that pipeline being able to develop not to mention we we continue to explore items like the off premise only on potentially of ghosts kitchen, as well and we continue to see some really nice opportunity from from those fronts as well.

Got it that's that's actually pretty interesting and and then just.

You touched on noodles rewards program a little bit.

It sounds like you're pretty pleased with how it's it's worked for you during the pandemic.

I guess I was just wondering if there is anything you could share in terms of just maybe more specific learnings from the program so far and anything you're looking at in terms of maybe a change strategically in terms of how you're engaging with customers moving forward.

Yes, I think going forward, which will Sudan is quite a bit more customization and personalization and targeted.

We'll go into our website or through our App for ordering continues to increase we are seeing a lot of people come into the funnel that our new gas again, I kind of come back to some of those newer markets and less saturated markets. We're seeing that group b, particularly instrumental in our sales recovery and then we're seeing our Lloyd.

Oil gas increase their frequency meaningfully.

So there is still is kind of that swap from the middle where we think is going to be a tremendous growth opportunity for us as we continue to enhance and develop that program.

So what you'll see is I think just our overall strategy become much more targeted much more personalized than it is today. We've already made good progress on teams done a very nice job, but we're in the very early innings.

Okay, great appreciate the color and thanks for taking the questions.

Absolutely.

Our next question comes from the line of Andy Barish with Jefferies. Your line is open.

Secondly, if you're on mute.

Andy.

Our next question comes from the line of Mark with Jefferies. Your line is open.

Hi.

I was going to die filling in for Andy I think we have little tuck issue just now but it's.

A quick question on Gionee is.

It's about $2 million or so higher sequentially I was just wondering if you guys could break that down and if this is the level of generic should think about going forward at least in the near term.

Yes from a geographic perspective, and we will be filing acute early in the morning, and you'll see some I'd tell you also see it in our release itself a lot of those were nonrecurring items, particularly from the stock compensation side as well as from the severance line items. You did you did ask nonrecurring expense that occurred.

Kind of quarter over quarter, if that's where you're seeing the comparison, we think from a normalized for for a normalized basis fuel to Q2 to Q3, excluding those events.

Actually Q2 to Q3 roughly flat.

Okay, Great and just lastly on labor.

Obviously seeing a lot of efficiencies now.

I believe you said next quarter should be a little lower than last year.

Yes for total margin, but.

But just some labor just wondering if you could.

Collaborate on if you think we could see that same kind of.

Efficiencies next quarter and just what you think going out to next year.

A very modest uptick mesh Marshall as you have dining rooms open there is a little bit more labor that does come into the system, but it should be relatively modest because we have been able to find efficiencies throughout all of our processes.

Implemented a lot of those really over the last year, even on not just during calls it.

But additionally, we have 60% of your sales coming through digital channels, you just don't need as much from a house.

As much kind of house presence as we had in the past those we expect will continue to carry forward.

And two new World. Additionally, we spend quite a bit of investment in the training of new hires we think thats a very critical part of our success.

The dining rooms that are relevant.

Got it thank you.

Thank you.

And ladies and gentlemen, Thats star one to ask a question.

Our next question comes from the line of Todd books, with CL King and Associates. Your line is open.

Hey, great. Thanks, guys.

Couple of questions for you one you talked about the northern tier.

Exposure of the brand and that's it's an opposite of a lot of other.

Concepts that have that smile exposure to EBITDA.

The southern States, if you think about the northern tier.

And you think about competing concepts in that market and how much that may have benefited from.

The ability to create capacity.

With outdoor dining as you're looking forward to Q4 in Q1 in those markets do you feel their share that comes back to neutral says other.

Competitors aren't able to service customers via.

Incremental outdoor capacity.

Yes, absolutely so patios, obviously, we have.

Seven amount of patios and those upper Midwest Todd.

But that tends that tenancy that I said that historical trend that I talked about in the earnings call where during the winter months.

We are just not nearly as reliant on dine in business as we are during the other seasons thats, particularly amplified in the upper Midwest and people do shift towards off premise in general so the combination of maybe some of the other concepts that don't have that off premise capability and then our perfect.

Cooler strengthen it.

Gives us confidence that ultimately that trend is going to reverse we have seen not just ourselves in the industry as a whole that upper midwest be under a bit more pressure throughout the covance pandemic we.

We do feel that we are positioned probably better entering these winter months than most of our competitors.

And do you have any early reads on.

The benefit of curbside and in those markets and the talk of creating new occasions for customers that don't have to get out of their car.

But want to shop, the graph there and also on a specific time.

Sure.

Yes, I mean on the Incrementality.

Huge incrementality actually we don't expect it will necessarily be an enormous percentage of sales, but all of our analysis has shown that it is a nice driver of incremental.

As we continue to build those out new restaurants. The did few percent that we'll be able to retrofit from a company side those will all be huge benefits and to put some.

Eliminating in the next several weeks.

To allow that that that particular channel in that particular experience to be even more improvement even better than it is today.

Great and then a final question.

You talked about third party delivery fees and the pricing actions that you're taking but the platform.

Platforms being an important source of Newton noodles customers, that's our adoption of the brand.

If you if you look at.

Your digital platforms and kind of coming into.

Maybe outlets hopefully have the second half of the pandemic here, what what's the thoughts around app.

Efforts to drive these new to brand customers too.

Noodles native digital platforms, our online platform, so that the the service fee burden.

Sure there, what's the trigger duration that you need to see out of that behavior before you try to migrate.

Yes, I think we want to migrate them from the second from that from the time that they discover the brand we want to migrate them over immediately.

So what you see is us take the opportunity to message those particular gas and the ways that we are able to we do offer as an example free delivery right.

We currently are launching purely through our own channel. So you can do free delivery. If you go to our app or through our web site, but not.

If you go through the third party Aggregators we.

We do feel of third party Aggregators as I said are extremely important in terms of getting people to discover the brand and there certainly will be deaf that thats, how they continue to use.

Restaurant brands for delivery, but the combination of different price premiums.

Different delivery mechanisms or promotions the rewards program itself and just communicating them, we want that process to start immediately.

Will you message more aggressively against it when the premium.

On the menu price becomes greater later this year.

That is not currently part of the plan to to aggressively.

Aggressively promote the price disparity we do we don't we don't think thats necessarily the right path to do it but.

But they will see significant benefits of just the overall rewards program.

Clearly that I mean, it does show up for those that are that are ordering that there is a a better economics.

Answer for them than going into the third party aggregator.

Okay, great. Thanks Stan.

Thank you.

Im showing no further questions in the queue at this time I would now like to turn the call back over to liquidate the Ami Carlson for closing remarks.

I appreciate it Thats one I appreciate everybody's time.

I sent to several folks before that I do think as as challenging as 2020 has been.

And unit growth perspective faster.

Faster than we probably would have otherwise and so extremely proud of the team for how they positioned us to be able to say that we look forward to finishing off this year and then 2021 and beyond Thank you again for your time.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

Q3 2020 Noodles & Co Earnings Call

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