Q4 2022 Noodles & Co Earnings Call

March 8, 2023

Thus far in 2023, three restaurants have opened including two restaurants that had to be pushed into early 2023 because of inspection delays related to poor weather over the last two weeks of December .

These restaurants have opened exceptionally well, giving us continued confidence in our unit development going forward.

We do not anticipate any further openings during the first quarter and currently have seven restaurants under construction for the second quarter.

Additionally from time to time, we will close underperforming restaurants that are at or near their lease side, where we believe we are not well positioned for current consumer trends or their future relocation candidates.

For context in 2022, we closed five locations, which represents our typical year for lease out of closures.

Currently between sites that are open under construction or under lease for 2023, our pipeline remains three times higher than where we were at this point in 2022 supporting our guidance of seven 5% system wide gross openings in 2023 inclusive of the two restaurants that were delayed from Q4 into this first.

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We do expect that our openings will be more concentrated in the back half of 2023, driven by extended development schedules, resulting from delays landlord deliveries and longer permitting cycles.

As we look to have more balanced openings in future years Encouragingly, we have already 21 locations under leased or in lease negotiations for 2024.

Looking ahead to the balance of the year, we feel that the three levers of our growth algorithm all have meaningful tailwind.

Our comparable restaurant sales continued to be strong as we leverage the core strengths of our menu the ongoing benefit of our digital ecosystem and the concepts ability to meet the needs of today's consumer.

We anticipate the margin expansion that we delivered in Q4 to extend throughout 2023 on the strength of reduced cost of goods sold including the benefit of full year pricing contracts for chicken in 2023, and additional sales leverage throughout the P&L.

And finally, our new units are performing above our glide path with a pipeline that continues to strengthen to support accelerated unit growth.

I would now like to turn it over to Carl to share some of our financial highlights from the fourth quarter and our expectations for 2023.

Thank you, Dave and good afternoon, everyone. During the fourth quarter system wide comparable restaurant sales increased eight 7%, including 10, 2% at company owned restaurants, and one 3% at franchise locations.

On a two year stack basis fourth quarter company owned and franchise restaurants sales increased 19, 7% and 22, 1% respectively.

Entering 2023, we continued to see top line strength, even at comparable had become more difficult. Following the Abercrombie lapped in January overall, we anticipate company comparable restaurant sales of high single digits for the first quarter of 2023, driven by the momentum we have in the business and our strong January results.

Pricing during the fourth quarter was approximately 9% related to pricing actions taken during the first half of 2022.

In February of 2023, we took incremental price of approximately 5% across our core menu, which we expect to result in first quarter pricing just above 10%.

We do not anticipate any additional pricing this year unless there is a meaningful change in the economic environment.

Our fourth quarter revenue increased 18, 9% to $136 5 million compared to last year, driven by strong comparable restaurant sales growth and revenue generated from units opened since 2022.

We estimate that revenue was favorably impacted by approximately $9 million related to the 50 <unk> week in the fourth quarter with the extra week of sales, mostly offset by an extra week of cost and expenses.

Average unit volumes grew to $1 three 8 million for the fourth quarter.

For the first quarter of 2023, we anticipate total revenues to range between 125 and $128 million.

For the fourth quarter restaurant level contribution margin was 15, 2%, a 280 basis point increase compared to last year.

This improvement was the result of meaningful leverage in our labor occupancy and operating expenses.

While cost of goods sold increased 100 basis points versus the prior year on a sequential basis.

Cost of goods sold benefited from more normalized chicken prices and improved 120 basis points relative to the third quarter of 2022.

Looking ahead, we have contracted the majority of our food basket on either fixed or formula based pricing, including full year fixed pricing contracts for both grilled chicken parmesan chicken for.

For 2023, we anticipate our cost of goods sold percentage in the high 25% area driven by 2% commodity deflation.

<unk>, including cost of goods sold in the 26% area for the first quarter.

Labor costs for the fourth quarter were 31, 2% of sales improving 200 basis points compared to last year.

During the quarter the benefit from labor efficiencies and the rollout from steamers was partially offset by wage inflation of nearly 11%.

While wage inflation is moderating we anticipate elevated levels will continue throughout 2023.

As a result, we expect our labor expenses as a percentage of sales in 2023, including the first quarter to be fairly consistent to slightly higher than the labor cost we saw in 2022.

Other operating costs for the quarter were 17, 9% of sales compared to 18, 4% last year, reflecting strong sales leverage throughout our restaurant expenses we.

We anticipate that restaurant level expenses will remain relatively consistent versus prior year in 2023.

Occupancy expense for the fourth quarter was eight 9% of sales compared to 10, 1% last year driven by sales leverage we anticipate continued leverage in our occupancy expense throughout 2023 to further support margin expansion.

Overall, we expect our contribution margin in the first quarter to be in the range of 12 five to 12, 8%.

300 basis points higher than prior year, driven by improvements in cost of goods sold and leverage and occupancy expense.

As a reminder, the first quarter is our seasonally lowest quarter of the year. So we expect higher quarterly margins for the balance of the year relative to Q1 for.

For the full year 2023, we anticipate restaurant level margins between 16% 17%.

G&A for the fourth quarter was $13 7 million compared to $11 4 million in 2021 with the increase driven by the 50 <unk> week G&A included noncash stock based compensation of approximately $1 million during the fourth quarter compared to approximately 700000 last year.

For the first quarter of 2023, we anticipate G&A of 13 $5 million to $14 million, including stock based compensation of $1 4 million.

This compares to G&A of $11 $8 million last year, including stock based compensation of $1 2 million.

The largest driver of the increase is the assumption of an accrued bonus at target following reduced bonus expense in 2022.

GAAP net income for the fourth quarter with 975000 or <unk> <unk> per diluted share compared to a net loss of $4 7 million last year or a negative <unk> 10 per diluted share.

non-GAAP diluted earnings per share was <unk> <unk>.

Compared to a negative <unk> <unk> last year. Please.

Please refer to our earnings release for reconciliations of non-GAAP measures.

For the full year 2023, we expect adjusted EBITDA of approximately $45 million to $50 million and adjusted EPS of <unk> <unk> to <unk>.

Our 2023 guidance is based on a more normalized commodity environment, where we have contracted fixed rate prices on chicken.

Commodity environment alone is expected to support nearly $10 million of EBITDA growth compared to 2022.

Additionally, our guidance anticipates continued sales leverage across the P&L, particularly in occupancy.

It is also important to note that our guidance assumes no material changes in consumer behavior for broader macroeconomic trends for.

For further detail on our 2023 expectations. Please refer to the supplemental information in our fourth quarter earnings release.

Turning to the balance sheet at quarter end, we had cash and cash equivalents of $1 5 million and a total debt balance of approximately $47 7 million, we maintained nearly $75 million of incremental liquidity available for future borrowings under our amended credit facility.

For the full year, we expect $53 million to $58 million of capital expenditures, which includes approximately 9% to $11 million during the first quarter we.

We anticipate a majority of our capital investment where support New unit growth. In addition to continued innovation of our website mobile app and digital capabilities are.

Our capital plan also includes the investment of a full digital menu board rollout and upgraded network capabilities and all of our locations by year end.

With that I would like to turn the call back over to Dave for final remarks.

Thanks, Carl we're proud of the progress that we've made in the fourth quarter of 2022, including double digit company comparable sales 280 basis points of margin expansion and a $5 million increase in EBITDA year over year.

As we look at the three levers of earnings growth.

Comparable sales growth margin expansion and unit growth, we feel confident that each of these have meaningful tailwind as we've entered 2023 and we look forward to sharing with you our progress throughout the year.

Thank you for your time today and please open the lines for Q&A.

And thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And one moment, Bob first question.

And our first question comes from Joshua Long from Stephens. Your line is now open.

Great. Thanks for taking our question.

Sighting to see the momentum in the brand in here, but it has continued thus far into <unk> into <unk>, you mentioned strong January trends and just as we work through kind of.

The high level thought process of just the pushes and pulls over the last couple of years is that something that you'd be willing to quantify it.

At this point in time.

Im sorry, I actually missed a question to push the wet Josh Yes, just trying to get some sense of how strong January was you called out the strength into the beginning of the year and obviously you've got some good high single digit comps on deck for <unk>, just curious if you'd be willing to add a little bit more texture to January trends.

Yes, absolutely I think exciting Josh is that the same store sales even as you go back through Q4 was actually pretty consistently strong all the way across the full Q4.

October all the way through December and then into January .

Certainly we've seen it through the industry that there was the lap of omicron, which led to a particularly strong results in January but as we look at the momentum in the business today.

Haven't skipped a beat as we look at February and while it's still premature to say what ultimately the assumptions will be for the balance of the year in terms of economic conditions were very pleased with what we've seen even as we've lapped over mccur on not just in our performance, but in the current health of the consumer and I'll tell you a few areas.

We look at it Josh from how we expect trends to go forward looking at the health of that consumer we're seeing the frequency of our guests.

Stable if not increasing.

Second we're not really seeing any trade down.

So as the consumer potentially would be under pressure, we're not seeing any trade down within the menu and <unk> mix is actually positive and even in the consumer channels. Another Avenue, we look at to see the health of the business, even as we lap.

Some of the benefit of <unk>, we continue to see really good momentum across all of those channels, including higher priced channels such as delivery. So overall, yes January was a little bit stronger than you saw maybe through the full 2000, <unk> Q4, as well as in February but overall the health of the business is extremely strong.

That's very helpful. I appreciate that color when we think about kind of the components of the comp perhaps you mentioned it in your section Carlos I missed it but can we walk through kind of the price mix.

David just call that that mix is positive, but can you talk to the price mix components. There. What you saw kind of on the traffic piece in the quarter and then as we think about the pricing you have in place for you to take care in February if you didn't take anymore, which is in line with the plans you've outlined how does that pricing flow over the course of the year how does it fall.

As we get to the back part of 2023.

Sure Jonathan I'll start with the fourth quarter, so fourth quarter pricing was approximately 9%.

Most of that was relative to actions that we took during the first half of 2022 and you are correct. As you pointed out in February we did take an incremental price of 5% across the menu. So when you think about the the pricing decisions that we made last year in that rolling off.

The back half of 2023, we expect that to be in mid single digits from a pricing perspective.

Got it that's helpful. And then one last one for me when we think about some of the strength in the new unit.

New unit performance that you called out how do you think about that I mean does that have.

Function of just.

Knowing where the consumer is what the sites are that you like.

What about some of those recent classes the strength you've seen there and what you've learned as you have optimized new unit development of the grant.

Yes, so as a reminder, when we discuss was that the class of 2019 and 2020 as they've entered the same store sales base. Their average unit volumes in Q4 were above company average their margin was actually 200 basis points below or above I'm, sorry above the company average so what that site is it's validated that.

Lot of the work we were already doing even before pre COVID-19 before COVID-19 environment, whether it be the smaller square footage pick up windows, incorporating digital into many of our new restaurants.

Those are all paying dividends in terms of that overall shift towards off premise and digital that we were doing even as we entered COVID-19 as we've now gone through Covid and seen how the brand has been able to be resilient and showcase its strength actually give us even more confidence in terms of the learnings we've had certainly see.

Continually less less reliance on office generators on retail generators more so on residential and Thats right in the heart of where the noodles <unk> company portfolio is and where our strengths are so suburban restaurants higher income little higher education with that smaller square footage off premise.

<unk> oriented footprint, most of which have that back order had pickup window.

As his continued confidence that the pipeline that we have which is now considerably strengthening for sites for the back half of 'twenty three and beyond we will continue to be a very strong high return on investment class.

Great. Thank you.

Yes.

Thank you.

And one moment our next question.

And our next question comes from Jake Bartlett from <unk>. Your line is now open.

Great. Thanks for taking the questions I wanted just to build on that first one that Josh had and see if I can give a little more out of you.

On the trend in February systems, there's something we've been commentary in February remains strong so.

January was stronger.

February remain if you can contextualize how February has done.

Can you help us understand the trajectory here I think last year, you had given us.

Perfect.

What the January 270 thing, though which is seven five last year in February so.

Any more detail more color to help us understand the trajectory in January and February this year would be helpful.

Yes sure February remained in the high single digits, which is reflected in our overall guidance for Q1, where I think it becomes a little bit more challenging Jacobs as you look beyond Q1, I mean Q1, we're very we feel very strong with the results. We're seeing the health of the consumer as you look at exiting Q1 and into Q2, we still feel.

That momentum is there, but just feel it's a little bit premature to make too many assumptions on what the economic conditions will be as you get further through the year, but February has growth was still in the high single digit range.

Great and then I just wanted to make sure I understood the margin guidance.

The restaurant level margin guidance.

We expect about 210 to 210.

Basis points of restaurant margin expansion in 2003 200 comes from Cogs I think if I heard right, there's a little deleverage on labor.

But then you get that back in occupancy and the other is that is that right is that did I get the right pieces right there.

That's fair to say from the margin guidance perspective, we have a lot of visibility on the cost of goods sold expansion networks. That's embedded in the guidance because we're in these long term full year fixed price contracts, particularly within chicken and other proteins. So that gives us the confidence in that favorability from a cogs perspective.

For the rest of the P&L, you're right there is probably going to be some leverage as we think about the sales growth within the year down the P&L, particularly in occupancy and on the labor side, where we have been seeing some inflation level persist as we go into 2023.

Our fourth are embedded in that forecast is that that inflation does moderate that does continue into the year.

That's where the guidance on the labor.

Margin as a percent of sales is.

Is relatively in line just slightly worse to last year.

Okay, Great and then I had a question on development.

And then wanted to gauge and.

David If you could just talk about the visibility you have in the growth in 'twenty three I know that.

Continuing to separate as Theyre, all others are on chat.

Challenges getting stores open.

<unk>.

What level of confidence you have in that.

The math is roughly.

Roughly 34 openings to get that seven 5%.

Just wanted to kind of is there a buffer in there or is there a kind of a margin of error if some of these.

These headwinds don't means and then the second part of it is just on the net unit growth part.

Yes.

I count by by what were seeing it looks like.

I think three stores closed just in the first quarter here. So if you can just level set us make sure we understand what we should what we should thinking about for net growth in 'twenty three.

Sure. So let's let's go ahead and start with that second question. So actually two restaurants have been closed there were nearing their lease term and thus far in 2023, the other one you're likely referring to.

Jake is one that when there is a significant cold spell in Wisconsin.

There was a water main break that ultimately that restaurant is going to be close for a couple of months in order to get it back online. So that is purely a temporary closure.

So that is one aspect just to clarify what we expect as we said is that a typical year for us it's going to be about 1% of our units that as theyre approaching lease and they've been there for 10 years and ultimately we see that trade area has shifted maybe it's not as well positioned.

For the post Covid environment, which is a little bit difference or are there potential relocation candidates that is an appropriate way to look at closures on an ongoing basis, while it gives us great confidence in terms of the seven 5% guidance for this year, even though it is a bit back loaded where we're at from a pipeline perspective.

In terms of sites that have been signed with leases, where we're close to these negotiations construction has already started again, it's about three times higher than where we were at this point in 2022. So those are deals that are already real they're already being worked on and so that gives us more confidence than ever that there is a mark.

Are given the environment, what we are assuming in our guidance is that there isn't an improvement in the overall environment, we assume that it's going to remain challenging in terms of the delays that you've seen from a permitting perspective and landlord delivery date. So that is already incorporated into our guidance and into our own.

Raul pipeline.

As we said we've already got 21 sites that are already very far along for 2024 openings, giving us even more buffer as we look at ultimately getting to a very balanced pipeline.

Great I appreciate it thank you.

And thank you.

Okay.

And one moment our next question.

And our next question comes from Andy Barish from Jefferies. Your line is now open.

Good evening guys.

Wondering if I understand the dynamics on labor this year.

Wondering if <unk>.

<unk> stuff that Youre working on.

In 2003 is expected to drive some benefit some 24%.

Any early learnings on any of that would be helpful.

Yes, it's against perspective on those on the call that maybe are not familiar with profitability work.

You go back several years.

We instituted a kitchen of the future initiatives using a third party called profit <unk>, which came into our restaurants and looked at every task. That's done 500 path throughout the day and identified time motion aspects of it to understand where we are there pinch points wherever there are opportunities for us to be more efficient the result of that.

That project was ultimately the taking out of over 10% of our crude labor hours that were necessary inside the restaurants, while that happened, we actually improved taste of food scores were improved temperature, we improved Cook times. So it was a win across the organization.

Starting late last year, we re engaged with profitability recognizing that versus pre COVID-19. The move has been even more to off premise. There is there is a different type of opportunity that we see in terms of what is the kitchen of the future where we're at in that process.

Sandy still too early to quantify what we have seen is that they have been able to identify that yes. The work we had done to get rid of certain bottlenecks, particularly like the soft tailoring that has been solved where there are still potential opportunities.

Involves ordinary is around Expo, where we garnish the food and then deliver it as well as in the protein manufacturing where we're at in the process as we will in the next few weeks actually received the layouts. The design the equipment recommendations on how we can then activate that both for existing restaurants.

As well as for new units to even reduce the square footage, even further and reduce costs out of the buildout. So too early to quantify how many labor hours do we expect out of this but it is important to know that embedded in the guidance. We wanted to ensure that that guidance incorporated things that we knew we had great visibility on such.

As the Cogs expansion from those fixed contracts, we believe that as we go forward with labor.

There could potentially be upside, but at the moment, our intent to execute on what we already know and then ensure that as we enter into 2024 and look at the long term potential of the brand that we'll be able to capitalize on opportunities such as what profitability percents.

And then just a follow up on.

The occupancy line, which.

There is also a driver to the margin expansion this year.

Yes.

It's a little bit difficult to quantify but how.

How much.

What youre expecting as just leverage from sales versus the mix.

Smaller units may be coming in with <unk>.

Lower occupancy cost versus the existing fleet.

Yes from a pure math perspective, the number of new units is such that the leverage youre seeing is almost entirely on the existing fleet and what we saw in Q4, we expect to see a continuation throughout 2023, where I think it's exciting is that while we are seeing is that even with that smaller square footage.

On a rent per square foot you are not really paying much of a premium.

So as you look at that class of 19 in 'twenty that was able to hit company average and just barely and beat it from an <unk> perspective, but actually surpassed margin a big part of that is the fact that they are able to get that occupancy leverage because that gives us even just increased confidence in the overall unit growth opportunity for us that even in Enel <unk>.

<unk> cost environment were able to still meet those cash on cash return objectives.

Thank you very much.

And thank you.

And if you would like to ask a question that is star one one again it is star 111 moment our next question.

And our next question comes from Todd Brooks The Benchmark Company. Your line is now open.

Okay, great. Thanks for taking my questions.

Carl I wanted to start out you gave us some G&A guidance for the first quarter and that $13 million range.

Look at the other items of annual guidance and Theyre, all kind of as.

As expected, but where do you think the G&A number annualized is two and can you give us some detail on how much of that is.

The.

The full accrual of bonuses in your thinking.

Sure. So I think that the first quarter is a good indication of our quarterly cadence through the rest of the year when I think about G&A.

The largest driver, which I mentioned on the call is the accrued bonus at target following the reduced bonus expense in 2022.

To a much lesser extent there is some G&A that.

As expected due the increase in our investment in the CDP platform the customer data platform and overall increased technology costs with some of our existing vendors.

Okay, Great. That's helpful. Thanks, and then.

Turning to franchisees to questions on this front one looks.

It looks like a pretty big spread between corporate store performance in franchisee same store sales performance in the quarter.

Thoughts on what that.

Driver of that spreads might be and then if we can talk prospectively about the franchising pipeline.

Obviously, the environment's gotten tougher to get deals across the finish line, but as you're thinking about the unit growth going forward over the next few years how does.

Accelerated franchise fee growth figure into that.

Yes, so let's let's start with the same store sales spread that you saw in Q4 from a two year stack basis actually the franchise group, which was going against an extremely strong Q4 of 2021. They actually were still very high up north of 20% on a two year basis, even above the company.

Look at the overall health of the system, what's important to us even as we look at quarter to date every single market. We have is positive same store sales, whether it's company or franchise and this is an organization that were in 29 states as it is so the spread of success and the momentum we're seeing is very widespread.

From the second part of your question in terms of the franchise pipeline, we're actually seeing some improvement now it has been a challenging environment versus what we first expected when we launched kind of a franchise sales.

We expect the first restaurants to open.

Later on this year or very early in 2024 for the California franchisee that we signed as well as <unk>.

The El Paso, Southeast, New Mexico franchisee.

Seeing there has been an increase in leads as the environment has stabilized for certain aspects of the economy, and then particularly for us in regards to inflation. The visibility we have that our cost of goods sold is actually going to deflate.

<unk> led to an increase in.

An increase in overall franchise interest and we expect that to even further as we continue to progress in.

To hit the metrics, we expect that we are seeing the visibility and throughout 2023. So we are seeing some improvement in that environment overall.

Okay, great. Thanks for taking my final, one and I'll jump back into queue digital menu boards.

You gave the concrete example, about gift card sales being double in stores and they've had some versus stores.

Are there other early learnings that you can point to as far as average ticket lift when you've got the digital menu boards items per transaction.

Trying to get a little bit to meet now behind having this in a period of stores for a period of time or anything else you can share with us on on the benefit of this investment. Thanks.

Yes, so in areas that we're also seeing increases such as our make it a meal program, which allows people to get a drink and then a choice of a side order dessert, where we featured that in digital restaurants have seen about a 50% lift in the uptake in those.

And those items seeing something similar in terms of Linguine, because we're able to be much more compelling with how we communicate that messaging so across the organization, we feel certainly digital menu boards aren't necessarily new in the restaurant space. It's all about how you use them and for US we had developed that.

Strong rewards program, a strong knowledge of our guests as well as the overall digital ecosystem that we see there is tremendous upside for our brand that thrives on variety and that drives an offering gas customization made to order us being able to note.

Really.

Message all of those strengths to our guests we fill that digital menu boards are just extremely well tailored for us not to mention the increase in flexibility that they gave you from a pricing perspective of testing perspective et cetera. So we feel that the digital menu boards are really transformative investment for us for 2023.

And some of the momentum that you already see whether its gift card sales linguine and mix.

Or make it a meal as our team continues to evolve and these data in <unk> testing to to really optimize those we feel there is a nice tailwind that we can have some navy perspective as well as profit.

Okay, great. Thanks to you both.

And thank you.

And one moment for our next follow up question.

And our next follow up question comes from Jake Bartlett from <unk>. Your line is now open.

Great. Thanks for taking the follow up a quick one here on the Capex, how much of that Capex, you're guiding to in 2003 is going to be the menu boards or other kind of maybe digital initiatives thats going to be temporary in nature, and just kind of wondering just trying to figure out how capex would trend after that.

And then also I don't know Carl if you can tell us whether you think that.

Given the Capex guide, whether you think free cash flow would be positive or negative maybe flat.

In 2003.

Sure. So in terms of the Capex guidance a majority of this as you alluded to is our growth initiatives regarding the new restaurant openings and the anticipated investment in the digital menu boards maintenance Capex is around $5 million. So really the majority here.

It is those investments as we think about our free cash flow position for 2023, we do anticipate that our operating free cash flow is supportive of these capital investments that we're making.

And having said that we do feel very good about our liquidity position, we have $75 million available to us and liquidity with our new credit agreement that remains highly favorable favorable and flexible to us. So we feel like we're in a good position from a liquidity and capital spend perspective.

Got it and then just.

Because it would be the menu board rollout thats just happening in 'twenty three is that right or is that something that would spread into 'twenty four im just trying to figure out.

When that goes away.

If theres a way you can you can help us understand what the menu board how thats impacted.

Capex, yes.

That's correct. So what what can you expect from a debt perspective, and a free cash flow perspective, Q1 actually has the lowest seasonality that we have throughout the year. So you can expect that there's going to be some negative free cash flow here. During the Q1 and then as we implement the digital menu boards as we go.

Forward beyond that the investment in digital menu boards, we don't foresee any material type.

Type of investment along the lines of the digital menu boards, which are in the neighborhood of about $10 million, maybe a little bit north of that for 2023, it's kind of a onetime investments really bring the restaurants up to speed that said that investment. We feel has a high return based on everything I talked about earlier in terms of our ability to be <unk>.

Flexible to be able to drive check to be able to.

To drive traffic and brand regard as well as it does reduce some costs some savings some costs in terms of the physical menu boards and all of the investment that occurred every time of year due to a physical menu board layout unchanged.

Great. Thank you so much.

And thank you.

And I am showing no further questions I would now like to turn the call back over to Dave <unk> for closing remarks.

Thanks, Jess and thank you again, everyone for your time, we achieved strong same store sales significant margin expansion outside of EBIT growth in Q4, and we feel we have strong visibility into continued expansion here into 2023 combined with a strong new unit pipeline, we look forward to the balance of the year and discussing our progress.

In future calls have a great day. This concludes today's conference call. Thank you for participating you may now disconnect.

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The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good afternoon.

Noon and welcome to today's noodles <unk> company's fourth quarter 2022 earnings conference call. At this time 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 would now like to introduce noodles <unk> company's Chief Financial Officer.

Carl Lukach.

Maybe yes, thank you and good afternoon, everyone welcome to our fourth quarter 2022 earnings call here with me. This afternoon is Dave bending hasn't 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.

<unk> events or the future financial performance of the company any such items, including details 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 statements in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for 2021 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward look.

<unk> 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 2021 fiscal year and subsequent filings we have made.

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 our most directly comparable GAAP measures is available in our fourth quarter 2000.

<unk> earnings release, and our supplemental information.

To the extent that the company provides guidance. It does so only on a non-GAAP basis and does not provide reconciliations of such forward looking non-GAAP measures to GAAP measures.

Quantitative reconciling information for these men is unavailable without unreasonable efforts the corresponding GAAP measures are not acceptable on a forward looking basis.

Now I would like to turn it over to Dave betting housing, our Chief Executive Officer.

Thanks, Carl and good afternoon, everyone. We're pleased with our fourth quarter results as we executed across all three levers of our growth algorithm, resulting in adjusted EBITDA, increasing over 100% versus prior year.

We delivered strong topline results driven by a 10, 2% increase a company comparable restaurant sales and positive traffic.

Restaurant margins increased 280 basis points year over year, driven by significant leverage across the P&L.

And we successfully opened five new company restaurants.

We anticipate the earnings growth trend in Q4 to continue throughout 2023 <unk>.

Including a significant reduction in our cost of goods sold line.

Which given our newly contracted cost should youll Cogs improvement of roughly 200 basis points during 2023 relative to last year.

Equating to approximately $10 million of EBITDA expansion for that line item alone.

As we look ahead, we believe noodles <unk> company is well positioned for significant growth in 2023.

Driven by continued top line expansion supported by strength in digital and loyalty our normalized cost of goods sold environment identified efficiencies in multiple expense areas continued improvement in staffing operations and our strong unit pipeline.

I would first like to start with our strength in digital and our rapidly growing rewards program.

As we've discussed in the past noodles <unk> company's residence with the off premise occasion combined with our best in class digital ecosystem resulted in some of the best digital metrics in the industry.

During the fourth quarter digital sales grew 11% versus prior year and accounted for over 54% of sales an increase of 240 basis points versus the third quarter.

This momentum is continuing into 2023, even lapping the impact of all Macrame as digital has accounted for over 55% of sales year to date.

This growth in digital has brought the access to the brand fostered increased engagement with our guests and supported meaningful growth in our new those rewards program.

The newest rewards program now accounts for nearly 25% of our sales and we completed 2022 with $4 5 million members, a 12, 5% increase over 2021.

We continue to leverage the rewards program to gain valuable insights about guest behavior become more targeted with our messaging and develop deeper relationships and loyalty with our guests.

We feel there remains significant opportunity in digital and during 2023, we will bolster the strength through both investment and a full 360 degree view customer data platform as well as the implementation of digital menu boards and the digital marketing side of it throughout the system.

From a culinary perspective, the innovation from the past two years, including last year's introduction of the great tasting low carb meaningfully noodle has resulted in the menu that offers guests a wide variety of fresh craveable major order dishes that meet a broad range of lifestyle needs.

Consequently, our focus in 2023 is to leverage our digital assets, both through web and App channels as well as through digital menu boards to better highlight and showcase the meaningful strengthen our menu as well as communicate key marketing opportunities.

As an example of the potential for digital menu boards during the holiday season, we leverage these boards to promote gift cards more actively resulting in gift card sales of restaurants with digital menu boards that were double of those without.

Additionally, digital menu boards afford us the flexibility to quickly implement changes to featured menu items and in pricing.

As we continue to see top line expansion. We Additionally, anticipate significant opportunity to increase restaurant level margins in 2023.

As I noted earlier, we have entered into fixed cost contracts for the full year for our boneless chicken breast, which accounts for nearly 20% of our overall food spend.

These contracted rates are meaningfully below the price that we paid last year and should yield approximately 200 basis points of Cogs improvement relative to 2022.

Additionally, we anticipate continuing to leverage fixed costs throughout the P&L as well as realizing initial benefit surrounding our initiatives are menu simplification and equipment optimization.

Supporting our efficiency initiatives will be the continued strengthening in our people and operations metrics.

We remain full operating hours with staffing at or better than pre COVID-19 levels and importantly during the past four months general manager turnover rates have been over 30% better than the same timeframe in the prior year.

Improved staffing has yielded meaningful improvement in guest metrics, such as friendliness taste of food and overall net promoter score.

While average Cook times, thus far in 2023 are nearly 45 seconds better than what they were just a few months ago.

While the strength of our people is essential to maintaining momentum at our existing restaurants. They're also critical of the continued success of our recent new restaurant classes.

As we mentioned last quarter, our new restaurants continue to have strong performance.

Our 2019, and 2020 cohorts, which affected our comp base delivered fourth quarter unit volumes above company average while restaurant level margins exceeded the rest of the system by over 200 basis points.

Finally on the new unit development.

During the fourth quarter, we opened five company restaurants.

These restaurants have opened exceptionally well, giving us continued confidence in our unit development going forward.

We do not anticipate any further openings during the first quarter and currently have seven restaurants under construction for the second quarter.

Additionally from time to time, we will close underperforming restaurants that are at or near release and where we believe we are not well positioned for current consumer trends or their future relocation candidates.

For context in 2022, we closed five locations, which represented a typical year for at least some closures.

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We do expect that our openings will be more concentrated in the back half of 2023, driven by extended development schedules, resulting from delays landlord deliveries and longer permitting cycles.

As we look to have more balanced openings in future years Encouragingly, we have already 21 locations under leased or in lease negotiations for 2024.

Looking ahead to the balance of the year, we feel that the three levers of our growth algorithm all have meaningful tailwind.

We anticipate the margin expansion that we delivered in Q4 to extend throughout 2023 on the strength of reduced cost of goods sold including the benefit of full year pricing contracts with chicken in 2023, and additional sales leverage throughout the P&L.

And finally, our new units are performing above our glide path with a pipeline that continues to strengthen to support accelerated unit growth.

I would now like to turn it over to Carl to share some of our financial highlights from the fourth quarter and our expectations for 2023.

On a two year stack basis fourth quarter company owned and franchise restaurant sales increased 19, 7% and 22, 1% respectively.

Entering 2023, we continue to see topline strength, even at comparable to have become more difficult. Following the abercrombie lap in January overall, we anticipate company comparable restaurant sales of high single digits for the first quarter of 2023, driven by the momentum we have in our business and our strong January results.