Noble Roman's, Inc. (OTCQB:NROM) Q2 2014 Earnings Call August 11, 2014 4:30 PM ET
Brett Maas – Hayden, IR
Paul Mobley – Chairman and CEO
John Rolfe – Argand Capital
Good day and welcome to the Noble Roman's Inc. Second Quarter 2014 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Maas of Hayden IR. Please go ahead.
Thank you. The call today will be hosted by Paul Mobley, Chairman and CEO. Following his discussions, there will be a formal Q&A session open to participants on the call. Before we get started, I'm going to review the Safe Harbor statement. This conference call may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements and in reports and other periodic reports the Company has filed with the Securities and Exchange Commission. All statements which address the Company's expectations, the sources of capital or to address the company's expectations for the future with respect to financial performance or operating strategies can be defined as forward-looking statements.
As a result, there could be no assurance the Company's results will not be materially different from those described herein. Forward-looking statements may be identified by such word as belief, anticipate, estimate or expect with respect to current views of the company or expected future result or events. We caution listeners that the -- these forward-looking statements speak only as of date hereof.
The company hereby expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any such statements to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which these statements are based.
Paul, the floor is yours.
Thanks Brett. I thank all of you for joining us today on this earnings call. Our net income for the quarter was $503,000 or $0.03 per share compared to $431,000 or $0.02 per share for the second quarter last year. Net income was $942,000 or $0.05 per share compared to $874,000 or $0.04 per share for the six months ended June 30 compared to cross funding period last year.
Since the company will pay no income taxes on approximately the next $25 million net income due to its available deferred tax credits. I think it is important to look at net income before income taxes as well. Net income before taxes was $808,000 or $0.04 per share compared to $754,000 or $0.04 per share for the second quarter compared to second quarter last year.
Net income before taxes was $1.53 million or $0.08 per share compared to $1.45 million or $0.07 per share for the six month period ended June 30 compared to the comparable period last year. Noble Roman's continues to make progress at in-store stated business strategy to grow via three complimentary and aligned targeted venues for growth.
I'm encouraged by our progress to-date and I'm excited about recent activity in all three targeted growth venues and this should results in substantial growth over the next few years. Our overall strategy, just to review has expand revenues through our three targeted growth venues that being non-traditional franchising license, grocery stores take-n-bake and the stand-alone take-n-bake.
We will leverage the results of our research and development advances to add new products, new preparation methods and the make the Noble Roman's products more attractive in all three targeted venues. We are aggressively communicating and marketing our advantages to our targeted markets.
In timely, we continue to increase our revenue while maintaining our expense nearly constant. The company anticipates continued growth in achieving our overall strategy of growth in all three targeted venues for the remainder of 2014 at even greater revenue growth in future years, while maintaining nearly constant operating expenses.
As has been the company's history for the past several years. Thus far in 2014, the company has signed 24 additional new franchise license agreements for the non-traditional locations other than grocery stores on discussions with numerous other convenience store chains and entertainment facilities for additional non-traditional locations.
And currently we are scheduled to open 16 to 19 more non-traditional locations in the third quarter. The primary source of growth in this segment comes from existing franchisees and exhibiting in various industry trade shows including the National Association of Convenient Stores, Western Petroleum Marketers Association, International Association of Amusement Parks and Attractions and selected state convenient store association shows.
During the second quarter, we signed agreements with a chain of approximately 300 convenience stores for six locations. All of which are to open in August and early September, 2014. The chain has started in 21 additional locations, which has intent to sign agreements for shortly after the six are opened with development continuing after, until they have put Noble Roman's Pizza in nearly all of their locations.
Interest in the grocery store take-n-bake locations has increased very significantly. After displaying new packaging, new products of at the National Grocery Association show in February. The International Dairy-Deli Bakery Association show and the Food Marketing Institute show in June and various distributor shows.
We are currently in ongoing discussions with 14 grocery store chains representing nearly 6,000 grocery store locations. There can be no assurance, but we are very close to signing agreements with all chains representing more locations than we currently have opened.
The grocery store take-n-bake features are now displayed in bakeable, treated aluminum pans with a clear plastic top. Consumers may bake the pizzas in these pans and the anodized treatment on the bottom is designed to increase home baking performance, drawing in more heat to make the pizzas crispier on the bottom, but soft in the middle.
The clear plastic top allows the entire pizza to be visible and appealing. The new products include gluten-free crust designed to appeal to a growing segment of the population and three varieties of 14-inch mega-topped pizzas designed for tremendous value appeal, which are called Mile-High Extra Meat Pizza, Extra Cheese Four Cheese Pizza, Double-Topped Pepperoni Pizza.
The interest shown at these shows by larger grocery chains and some new distributors is a very positive indication of future revenue growth from this venue for the remainder of 2014 and even greater financial impact on 2015.
The company has entered in agreements for 61 stand-alone take-n-bake locations and is currently in discussions with several other prospects. The company continues to tightly screen all applicants for the stand-alone take-n-bake franchise and decline the high percentage of the applicants.
Our stand-alone take-n-bake development is still relatively new; we are continuingly to look at further enhancements to improve sales and to make the operation more appealing. During the second quarter, we added an in-store baking service called You Bake or We Bake, which is resulting in improved sales.
In addition to broadening consumer appeal in general, this service has expanded our take-n-bake day part earlier into the day, as we now offer hot pizzas and other menu items for lunch. The new baking service requires no substantial change in unit layouts, square footage or labor requirements, and can easily be incorporated into existing operations as well as new ones.
Approximately 50% of existing franchisees have added that service and others are considering adding the service and this service is part of the concept for all new locations going forward. Also, during the second quarter, we made the decision to focus our efforts on adding new locations in markets where existing franchisees have already been sold to aid in market penetration for more affordable mass-marketing efforts which should further increase unit volumes.
Further enhancements to this venue will be ongoing. Our marketing initiatives to attract potential take-n-bake franchisees continues to be successful in generating a significant number of leads, however we are being highly selective in the approval process.
Currently, we are scheduled to open four stand-alone units in the third quarters. The process we had made today and the interest we continue to see from all three targeted venues confirms to me the strategy is working, will help us to significantly revenue while maintaining expenses nearly constant.
Resulting in a meaningful increase to our bottom line. During the quarter, our total revenue grew to approximately $2.1 million while our operating margin expanded to 40.9% of total revenues for the quarter and just as importantly the interest created in all three targeted venues continues to rise indicating the at potential for additional growth.
At the end of 2013, we had 2,029 franchise licenses in operations since then this number has increased to 2,055 as of June 30, with minimal in the backlog to open. Royalties and fees, upfront fees increased to $1.85 million from $1.62 million last year. The breakdown of royalties and fees less upfront fees for the second quarter compared to a year ago are as follows; royalties and fees from non-traditional franchise other than grocery stores increased to $1.19 million to $1.11 million.
Fees from the grocery stores venues were essentially flat at $373,000 and royalties and fees from the stand-alone take-n-bake locations increased to $221,000 from $53,000 reflecting the increase in the number of stand-alone take-n-bake locations in royalties and fees from traditional locations were $74,000 compared to $81,000 last year.
Upfront fees which are franchise fees and equipment commissions decreased from $242,000 to $116,000 this year compared to last. Primarily as a result of aggressively screening prospects for franchising our stand-alone take-n-bake franchise.
Total operating expenses plus interest was $1.28 million compared to $1.23 million last year. We continue to prudently manage expenses while increasing revenues and pursuing additional growth opportunities. As previously stated, our net income increased to $503,000 or $0.03 per share from $431,000 or $0.02 per share in the year ago period, and net income before taxes was $808,000 or $0.04 per share compared to $754,000 or $0.04 per share.
Turning to results for the six months period, operating income for the six months grew to $1.63 million from $1.55 million in the year ago period or 40.8% in total revenue compared to 40% in total revenue last year.
Royalties and fees plus upfront fees increased to $3.62 million from $3.27 million last year. The breakdown of royalties and fees, upfront fees year-to-date compared to a year ago are as follows. Royalties and fees from non-traditional franchises other than grocery stores increased to $2.36 million from $2.27 million.
Fees from the grocery store decreased slightly from $771,000 for six months of 2013 to $717,000 in the first six months of 2014. Royalties and fees from stand-alone take-n-bake locations increased to $400,000 from $77,000 in the year ago period and royalties and fees from traditional locations were $146,000 compared to $158,000 last year.
Upfront fees, which were franchise fees and equipment decreased from $365,000 to $166,000 in the current period, primarily is a result of more stringently springing prospects for stand-alone take-n-bake franchise.
Total operating expenses plus interest plus $2.47 million compared to $2.43 million last year. A minimal increase compared to the increase in total revenue. As previously stated, net income increased to $942,000 or $0.05 per share from $874,000 or $0.04 per share in the year ago period.
Net income before taxes increased to $1.53 million or $0.08 per share compared to $1.45 million or $0.07 per share last year. We continue to focus on growth from the third primary venues. Non-traditional franchises and licenses. Other than grocery stores, sales of our take-n-bake pizza grocery deli departments and our stand-alone take-n-bake franchise locations.
Behind the expansion of footprint in increased sales is a significant investment of time and effort in creating a competitive advantage through our products and systems. A quality of our products created through a simple production process and service system and offered at a reasonable price point a strategic strength and a key driver for our future growth potential.
Every ingredient in process has been designed to support our diverse modularized [ph] venue offering and deliver superior results. Our ready to use warm and take-n-bake concept both delivers products that are great tasting, quality consistent and easy to assemble. A low food cost, minimal labor involvement and a speed from raw ingredients to prepared products, sets us apart from our competition.
We carefully select both our third party manufacturers and distributors allowing us to contract for production of proprietary products and services with higher efficient suppliers that can keep cost low compared to competitors that own, operate and distribute systems all within their own corporate structure.
Leveraging the results of our product process and systems will continue to drive competition, drive a competitive advantage and as a key linchpin in our business strategy. Coupled with our strong product in systems development is communicating our advantage in weighing a high quality products to prospective franchisees and licensees to our marketing efforts.
We utilize several strategies to accomplish this and have found that conducted live demonstration of our systems and products as selected trade and food shows across the country allows us to demonstrate advantages that can otherwise be difficult for potential prospects to visualize.
There is no substitute for tasting our products to truly understand the quality, we deliver. We carefully, select trade show based on the existing relationships as well as potential for fruitful lead generation based on our prior experience.
These shows allow us the opportunity to demonstrate the superior quality and taste of our product the broad based of prospects at one-time. Our execution is solidly aligned with our business strategy, as we remain focused on growing revenues for maintaining constant total expenses to drive margin expansion.
We will further refine enhance our products packaging, communications and marketing as we move through the remainder of 2014 and beyond that our mission and our focus remains the same. Let me now briefly describe our capital structure in balance sheet. Total current assets were approximately $4.4 million and current liabilities totaled approximately $2.1 million as of June 30.
Compared to total assets of approximately $3.5 million and current liabilities of approximately $2 million as of December 31, 2013. Stockholders' equity of June 30, was approximately $12.67 million compared to $11.70 million as of December 31, 2013.
And finally, we iterating our 2014 revenue outlook for the full year, we expect revenue growth of 5% to 7% on royalties and fees from non-traditional franchises and licenses. Revenue growth of 10% to 15% on royalties and fees from grocery store take-n-bake locations.
Revenue growth of 300% to 350% on royalties and fees from standalone take-n-bake franchises. Operator, I would now like open the conference up for questions.
(Operator Instructions) we will take our first question today from John Rolfe with Argand Capital.
John Rolfe – Argand Capital
Hi Paul, I guess to start, could you give us the quarter end breakdown of the 2,055 total franchised and licensed just into traditional, non-traditional grocery and stand-alone?
Yes, I can John. Quarter end breakdown was 750 non-traditional franchise license, traditional 37, stand-alone take-n-bake 22, grocery licenses 1,239 for total of 2,055.
John Rolfe – Argand Capital
Okay, so it look like there was a slight decrease in non-traditional from last quarter, but you signed a number of agreements, sounds like so far this year. I mean, where would expect that to kind of be by year end. How many of those that you've signed, do you think will be open this year the non-traditional?
Well, non-traditional so far this year, we have opened 15 and we expect to open between, that we've scheduled to open between 16 and 19 in during the third quarter and I expect to open another 15 to 18 in the fourth quarter.
John Rolfe – Argand Capital
Presumably, there have been closures as well so far this year.
Yes, there have been some closures and we have closures all long in the non-traditional because of merger buyouts, change of ownership, etc. but non-traditional we have closed 16 this year.
John Rolfe – Argand Capital
So I mean, on a net basis do you expect the non-traditional to grow from, I think you were at 760 at the end of last year?
We were at 758 at the end of last year and yes, yes I would expect, it looks at this point like we're going to open about 66 in the non-traditional this year and we've had 16 closures, I'll be surprised if we have more than two or three more. So we'll maybe have closures of at the high side 20 and about 66.
John Rolfe – Argand Capital
Okay, that's great. Thank you. Could you give any additional color on where you're on in the process with some of these large potential grocery distributors with respect to sort of what hurdles remain in your mind, in order to get some of them to sign on the dotted line and come on board?
Okay, let me talk first about the 14s I mentioned in the presentation. If we get them signed, well more than, will represent more units than what already have opened. The largest of those chains, I met in June at IDDBA show. I've numerous times sensed, we made a presentation to their corporate office, I forget the exact date is little over a week ago.
Their staff count, is they're ranging meaning for all of their corporate district managers and supervisors each one controlling about 15 to 20 stores and we will make a presentation to them coming up in the next week or so and they're ready to depend on the enthusiasm by which, district manager are ready to initially start with few groups or few district manager stores.
So if that's four or five district managers that would be about, it'll take our 15 to 20 each, there could be up to 100 stores and they're probably ready to execute and sign, shortly after that presentation to their district managers.
John Rolfe – Argand Capital
So each of the district managers is sort of an independent decision point. I mean?
No, that's the decision is made at corporate level, but each of – what they're trying to do there is just have a presentation get a buy in and enthusiasm built by the district managers. So they have their support in opening and I will choose three or four, the most excited district managers in that process to open first, just to build that enthusiasm within the company, that one chain.
We have another chain that's about ready to sign. Again, I met one of IDBBA show and we've had numerous conversations since then, we've been out and made a presentation to their corporate staff and we are currently – they were all excited about it, but we are currently scheduled to meet and present to their Board of Directors on the 25 and I don't think the Board of Directors is going to have any final say in.
And I think its operational decision that the corporate staff will make again, they want the buy in by the Board of Directors and so we'll make a presentation them on the 25 and I expect to have that agreement signed shortly thereafter.
We have one in another chain, its 155 or 160 and that chain is already signed for one agreement. They're opening that unit about a week and that's just to whet your appetite and definitely in April, they intend to sign for their whole chain very shortly thereafter.
We have another chain that's already signed for 102, but they've got a little over 300 altogether. Out of that 102, during the process of opening four in one town, next week and they'll keep those forward to any problems they have with their staff etc. and will send them some pizza, etc. Then they expect to immediately open the rest of the 102 and our indications are they'll trying the balance of the 300 sum.
Okay, we have another chain 150 that's I didn't include in that, but they're I think they may be signing anytime. I didn't include them in the four, but I think they're about ready to sign as well.
John Rolfe – Argand Capital
Okay, great, that's helpful. Last question for you, just in terms of the decision to sort of increase how stringent you're being on the stand-alone potential franchisees. Can you explain a little better sort of why that decision has been made, have you had any issues with the existing franchisees?
Do you just find that your, that whatever sources you're using currently or turning up too many unqualified franchisees, is there any additional color you could give would be helpful?
Okay, this is based on experience of franchising many years in one form or another, but also the experience of the initial franchisees. One of those, we've had three units closed. One of them, is definitely a one should have been screened out of front, after we analyzed it in the back because their financial resources were not great enough to self-observe or manage through slower, start off period than they anticipated and their operational experience was not that good, either.
Then we have another one that closed, he had plenty of capital. Capital is not their issue, there is plenty of capital. We wouldn't screened in because of capital, but the nature of the individual and he doesn't want, he bought the franchise, but then he wanted to create his own franchise, with that and it was a constant battle.
And the last one we closed, was not a screening process, it was simply a matter of I'd say bad luck. He's an experienced food person, he was former Jimmy John's franchisee successful. He was starting up in a small town, but didn't knew that he had a building process to build up the base and he was also kind of resort area where the population is about a third and the winter it is, during the spring, summer and fall, but he unfortunately got diagnosed critical lung disease and doctors were only giving him few months to live.
So he couldn't continue to try to build the business, but that was three on closures, but in answer to your questions. Some of the others, even though they stayed upfront and we drove on the fact that, this is to get these started and building the market place. You got to go out and do a lot of marketing, you got to do a little hanging and they all agreed to that, but some of the lesser experiences ones, just don't simply understand what that means and I didn't know they were signing up for that harder work.
So they're still doing okay and we are still working with them, but this is just made us very, very careful, cautious. We still think that stand-alone has tremendous potential of course down the road, but we want to make sure that we've got a good base and the other reason that the slowdown besides the screening, is we are focusing purely on the markets that we've already sold franchises in to get market penetration.
We are not looking to expand and other and last, I mean we are still adverting cost potentially and if we have a good multiunit prospect coming along in the market that we are not already in, certainly we'll look at that, but our real focus on our adversity right now is in the markets, but we have already sold one to build penetration to create a stronger base.
John Rolfe – Argand Capital
Did I answer your questions?
John Rolfe – Argand Capital
Yes, you sure did.
(Operator Instructions) and next from [indiscernible] Capital Management. We will move to Marcel [ph] [indiscernible].
Congratulations on a very good quarter and great progress, you're making with the -- on grocery chain. First question on stand-alone take-n-bake locations. Could you give us the quarter end numbers for sign ups and backlog?
How many we had signs at quarter end?
Yes, how many did you signed in the quarter as well as what's the backlog and I didn't catch you said, how many are open right now, I didn't catch that.
Okay, the end of the quarter we had 61 signed. The end of the quarter, we had opened 25, but we had those three closures, so we had net 22 opened at end of the quarter and in the backlog to open are under construction right now, scheduled to open this quarter, our four additional units.
Okay, great and what were the average units opened in the quarter?
Average units opened in the quarter, 21.69.
21.69. Okay and regarding the stores that have implemented the You Bake or We Bake program. I realized, it's early in the game, but so far what kind of revenue increase as they seeing?
Well, it depends on again, how good a job they do in the local marketing in promoting that. Well we have seen 30%, 35% and some stores and we have seen 10% or 15% in some stores, but the others in between there. So really, it's still blows down to the franchisee's role in this and ability to get out in local market.
Now recognizing this and we know that this marketing is going to be an issue well that's the reason we changed some of our focus to developing more units in markets which already been sold and where they're trying to build up a few good, few markets and that's the reason.
So that's, plus we have also developed some advertising for radio and for Advil [ph] which is a marriage mailer, goes by different names, that's stating my age, when I called Advil [ph] because they have been on business for a while, [indiscernible] is the new name, but we designed a little more mass marketing and the idea is to make it less dependent on the local marketing because we know it's going to be a constant battle to get them, franchisee's to do the local marketing, when they should do.
So with more units, we developed each individual market. Now we implemented in one well Central Indiana market implemented radio starting last week. So it's too early to tell, plus that's going to contribute to it and we're running a pretty good schedule of radio in Central Indiana market and that's going to be followed with some [indiscernible] drops and I'm expecting to see some significant growth from that after the marketing has timed to work for a one week or two weeks.
So given the incremental boost from that markets in as well as the, You Bake or We Bake program. What do you think it's likely that we'll see the average royalties per store go back to the $11,000 to $12,000 range in Q3.
I think, we have a good start going back to $11,000 in Q3, whether it goes to $12,000 in Q3. It probably is going to take a little longer than that, but I think there is a very good chance of going $11,000 plus in Q3.
And what are your current expectations for full year Take and Bake store openings and sign ups?
Well, so far this year we opened six in the first two quarters. We've got four scheduled opened in third quarter. I would expect to open another possibly four stores or five stories in the last quarter.
Signups, as you know, we went up to 57 pretty quickly and that was about the end of the first quarter and we are now up to 61, as we've been really screening tightly. We're modifying that advertising a little bit, we are dropping some of the portals that we have been advertising in, that's bringing us what we think is a lower level of applicant.
And we are going to increase direct advertising on the internet and into conjunction with that. we are currently in the process of redoing our entire Word Page, website and that will be done by between September 1 and 8, that schedule will be completed.
However, we are working on a new stand-alone page, landing page for franchising information for the stand-alones and that should be completed within the next few weeks and so all of this information in video, tends to make that more exciting and to draw stronger applicants from direct advertising on the internet instead of totally reliance on the difference portals we have been in and we believe that will stimulate a stronger basic prospects and advertising wise, dollar expense wise.
We are pretty much trading dollars, we are cutting out some things, adding some things. So in our expense on advertising will be modestly up with that two approach but very significantly.
Okay, thank you.
We have no further questions at this time. Mr. Mobley, I will turn it back to you for any additional or closing remarks.
Well thank you very much for all your time and interest today and for joining the call. As we continue to grow our top line will remain our focus in all three targeted venues for growth. While we prudently manage expenses to take advantage for considerable operating leverage. We look forward to open, meeting you in [indiscernible] to make progress. We pursue our plans and stay focused on our objectives. Thank you again.
Once again, that does conclude today's conference. We thank you for your participation.
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