Noble Roman’s, Inc. (OTCQB:NROM) Q1 2019 Results Conference Call May 16, 2019 4:00 PM ET
Scott Mobley - President and CEO
Paul Mobley - Executive Chairman and CFO
Conference Call Participants
Good afternoon, everyone, and welcome to the Noble Roman’s Conference Call. Today, we will discuss First Quarter Results and other Company developments, and your participation is greatly appreciated.
My name is Scott Mobley and I'm President and CEO of the Company. With me is Paul Mobley, our Executive Chairman and CFO. We're experimenting with the new conferencing system today, one that should improve the quality of the call while at the same time keeping our overhead cost to minimum. And that's always a high priority of Noble Roman’s.
We'll begin today's call with the recap of the financial highlights, then move into a brief discussion of other developments. Following the presentation, we’ll open the call up to questions.
Before we get started, I'd like you to refer to the Safe Harbor statement contained in the earnings press release. This conference call may also contain forward-looking statements of the kind referred to in that statement. So, provisions of that statement apply to this call as well.
With that bit of housekeeping out the way, I'll turn the call over to Paul and he'll discuss the financial highlights.
Good afternoon and thank you all for attending. The good news is that we had a great quarter despite the highly unusual severe winter weather in January and February for Indiana, which is the home of the Company-owned Craft Pizza & Pub locations, and a significant concentration of nontraditional locations.
I also want to let you know that if you want to receive future press releases direct, please send me that request by email to email@example.com and I will add you to a list that goes out direct, so you do not have to receive it over the wire services.
Now, I do not intend to go through the entire press release, as I assume you all received it, have read it. Now, I'll hit the highlights here and will be available for questions later in the agenda.
I want to also acknowledge that there was a typo in the comments in the press release on page two under the chart that calculates the margin contribution from the Craft Pizza & Pub. It says 1 to -- 1.4 from 1.1, and it should have read $1.14 from $1.11 million. However, the chart above gives full detail of actual numbers. So, I hope that everyone referred to the chart.
The contribution margin on Craft Pizza & Pub took the worst hit from the severe weather as it dropped -- excuse me, just a minute. I need to back up. First, the net income was $476,000 or $0.02 per share compared to $402,000 a year ago. And net income before taxes was $627,000 compared to $539,000. This is important, since the Company will not pay any income taxes on the next $15 million in taxable income due to its deferred tax credits. These results were after incurring a noncash expense of $51,940 due to the adoption of the new accounting rules regarding leases that became effective January 1, 2019 for publicly traded companies.
It would also -- it should also be noted that in several years in the future, as these leases move toward maturity, the expense will actually be less than the cash outlay, but for right now, it's in reverse.
The contribution margin for Craft Pizza & Pub took the worst hit from the severe weather as it dropped from $243,000 to $132,000 or to 11.5% of its revenue from 21.9%. However, while the margin contribution was 4.0% in January, 10.8% in February, it came back to 20.5% in March, still with winter weather but more normal winter weather. We have initiated the Pizza Valet Service for carry-out customers and partnered with DoorDash for delivery in an attempt to blunt that effect in future years.
A very -- if you go back also on the revenue, the total revenue in Craft Pizza & Pub increased dramatically from January, February on into March. A very bright spot in the results from the last quarter was the margin contribution from nontraditional franchising venues, increasing to $1.1 million, or 69% of its revenue for $900,000 or 59% of its revenue. Total revenue from this venue grew to $1.6 million from $1.5 million. Our revenue from nontraditional franchising increased to $1.3 million from $1.1 million, while fees from grocery store take-n-bake decreased to $300,000 from $400,000, reflecting the Company's decision not to focus on that venue at this time as it tends to be countercyclical in nature. So, the company made the decision that efforts would be more productive on franchising during a good economy.
In addition to increasing revenue from this venue in January, the Company, after a thorough review, eliminated approximately $150,000 of expenses in this quarter, including approximately $70,000 in salaries and wages. The Company is continually examining ways to reduce costs as it increases revenue. The cost reduction should apply to future quarters as well.
General and administrative expenses increased to $416,000 from $382,000. Because of an increase in audit and other professional expenses, increased by $34,000.
I also want to speak briefly about the balance sheet, because I'm sure you've noticed the assets and liabilities on the balance sheet because of the new accounting rules for leases have been grossed up by approximately $4.5 million. I also want to call your attention to other assets which increased by approximately $240,000, which was made up of $100,000 in legal costs $30,000 cash value of insurance, the cash -- the premium payments are now less than the cash value is increasing. And there was approximately another $70,000 in early terminations, which, according to the franchise agreements, all becomes due and payable.
In previous years, we have added a reserve against these receivables of approximately 50% of the receivable value to any uncollected portion, so any uncollected portion, these receivables will be charged against that reserve.
I will now turn the call back over to Scott.
All right. Thanks, Paul.
I'm going to go ahead and discuss a few recent developments that pertain to the business. First, we now have 13 nontraditional locations opened so far this year with the last one occurring Tuesday in Muncie, Indiana. For those of you that aren’t aware Muncie's college town, about an hour northeast of Indianapolis.
A couple weeks prior to that, we opened the 12th location of the year in a town near Rockford, Illinois, which is northwest of Chicago. This particular opening is of note because it's the seventh Noble Roman's location for that franchisee, the Kelley Williamson incorporation. They're recognized as a leader in the industry as rather forward thinking when it comes to convenience store operations. They’ve been around since 1926 and a lot of other convenience store operators keep their eye on what they do. So, it’s great to be partnering with them. In fact, they now have an eighth location that they’re planning with us that should be opened in about 30 days or so.
As we’ve stated before, we’re focusing a lot of attention this year on nontraditional development. In addition to the openings, we have significant backlog of franchise agreements that are sold and will be opening at various points throughout the year.
We also have a strong pipeline of sales leads which we hope to convert to signed agreements. This process is constantly ongoing. In addition to sales, executing strong opening has been a focus this year as well. We’ve changed both our project management system and the personnel involved in that process. As a result of those changes as well some upgrades in the program trade shows [ph] and our marketing, our openings have seen stronger sales out of the gate.
We have some new product introductions planned soon for the breakfast daypart, which is the strong performer in the non-traditional venue, especially the convenience stores. That should help keep things fresh and exciting for non-traditional franchisees and their customers.
As far as the Craft Pizza & Pub is concerned, exciting news there is the grand opening of our first franchise location, which is in Lafayette, Indiana. The opening has been absolutely tremendous. The unit did over $55,000 each week during its first 14 days lots of operations, which is just absolutely incredible.
We’ve had a full corporate team on site working with the franchisee and their staff, and it’s been going very well. They still need our assistance but they are coming along and they should be self supporting very soon. Patrick and Holly O'Neil are the franchisees and they are very experienced Dairy Queen operators and they’ve some assembled a strong team for the opening. Of course, there is a lot of differences between Craft Pizza & Pub and Dairy Queen but the management skills are easily transferrable.
In fact, on the heels of the terrific opening in Lafayette, they have now signed a second franchise agreement, this time for unit in West Lafayette. West Lafayette is located across the river from Lafayette, and it’s home to Purdue University. And for those of you who don’t know, Purdue is the second largest university campus by enrollment in the state. So, it’s a great opportunity when you think that the potential West Lafayette is similar to that of -- as Lafayette. So, it’s very exciting to get into the planning stages for this restaurant. Real estate sourcing can be challenging in West Lafayette. So, it’s hard to predict the timing for grand opening but we certainly hope it’ll happen this year.
Turning to a couple of the projects we mentioned a few weeks ago in the last call. We now have online ordering available in all of our company Craft Pizza & Pub locations. And we’ll be promoting this service more heavily in coming weeks. We feel that the service will be particularly appealing to customers in their 20s and 30s, because they’re very orientated towards buying just about everything online.
We also continue to advance with our R&D on new sandwiches and side items to enhance our lunch offering ahead of the summer months. Based on previous consumer panels, we made some recent alterations to the product formulations. And we just had a second consumer panel just a couple of weeks ago and it was overwhelmingly positive. So, based on that, we’ll be moving to a rollout soon.
And since we’ll be producing new menus and support material for that launch, we’ll use the opportunity to clean up the few menu items to switch on to specialty pizzas. We’ll be introducing our newest specialty pizza, which we’re calling She's No Sour Grape, features rosemary-infused olive oil, mozzarella and Muenster cheese, Italian sausage, red seedless grapes and then a layer of Gorgonzola cheese on top. It’s really fantastic.
As we also mentioned previously, we’ll be introducing our new crispy carol [ph] pepperoni to our toppings list. This will be in addition to our traditional pepperoni. Pepperoni is most commonly purchased pizza topping, so we think this will be exciting for our guests. And we’ve already narrowed the process, two formulations. So, I anticipate it’ll be introduced at the same time as the other changes.
We’re also going to use the opportunity to potentially move towards split pricing in our two pizza crusts. We are going to experiment small premium for our signature deep-dish Sicilian since our experience and analysis shows it’s perceived as a premium product, and somewhat demand resistant to pricing within the reasonable tolerances. We don't have the timeframe on all these menu changes at the moment. This moves from R&D into project management next week. But, I'd estimate the timeframe to be about four to five weeks.
Okay. So, that will wrap up the presentation portion of the call. Next, Paul and I will take questions. [Instructions] All right, we'll begin here. Please go ahead.
Q - Unidentified Analyst
Hey, Paul and Scott, how are you doing? Thanks for taking my questions. I wanted to ask about the non-traditional business. Can you just talk about maybe how much of the year-over-year growth in non-traditional royalties, and that's excluding the upfront and initial fees. Just referring this royalty, how much of that growth year-on-year was driven by a higher unit count versus like higher same-store sales or I guess, I should say higher average unit volume at each location? Thank you.
I don't have an exact breakdown of it. But, I can assure you that there is a higher unit sales level, because a lot of the new stores have been opening it because of the focus we've had on how they open and the new kiosks in the store are opening at a higher volume, maybe by 25% to 30%, then what older stores are averaging. The unit count is up by about five stores in net, but that is misleading because that doesn't mean five for the whole quarter; that means five by the end of the quarter.
How are things going in terms of finding other franchisees? I would imagine, there's some interest from other people other than the O'Neils, I would imagine, and just wondering how recruiting of other franchisees for the Craft Pizza & Pub is coming along?
We have not, at this point, done much solicitation to attract other franchisees we are waiting till after the first franchise got open, and we have a little larger base and some testing outside of the Indianapolis market. However, I probably have about 150 inquiries and the franchise, the Craft Pizza & Pub. I can't tell you how many if any of those are real prospects. I know some of them are qualified prospects, but I don't know what their interest level is at this point because we're not that far along in the process of talking with them.
Hello. This is Harry Venezia [ph] calling. I wanted to ask Scott and Paul, I know there's a lot of focus right now on the franchising, the craft pizza and beer concept. Are there any thoughts or desires to open any more company-owned stores or will this be primarily a franchised operation, similar to your nontraditionals?
Thank you, Harry. We have plans for opening additional company on stores. Those plans are kind of on hold until we obtain additional financing. We do want to get commitments out front of our financing. But, we would like to open another five company-owned stores over the next 18 months or so. And we're currently in process of discussions and talks with firms, investors who are interested in that financing, but we -- I can't tell you which ones or what will happen at this point. But, that's progressing well and that will debt financing, not equity financing.
Hi. Congratulations to both of you on a nice, clean quarter, in addition to a great quarter when you take into account a terrible winter. My main question was just covered regarding the rollout of more company-owned Craft Pizza & Pubs. I guess, I was wondering if you can start by -- is any of that financing out of cash flow rather than waiting for debt?
By the end of the year, Roger, we should be able to start accumulating some cash, which could be rolled back into the new units, but not at this time. We don't have the funds. We’re starting to develop a good cash flow but we don't have an accumulation yet that would allow us to go out. And being very conservative, I don't want to stretch us then on commitment until we know that we have the proper financing at the right cost in place.
Hello. This is Roger Lipton. [Ph] Do you hear me or not? Sorry. I didn't know whether I’ve been prompted. Yes. You mentioned in the Q that the sales have improved nicely from January through March from $337,000 to $450,000 in March. Can you give us any indication, what's going on in April and even early May?
Yes. We report everything on a calendar month basis, which gets a little distortion by the calendar. But, if you take the four full weeks in March compared to the four full weeks in April, April’s totals are going to be up. Yet, this absolute total for April will not be as good as March, because, number one, March has 31 days and April has 30. Plus, we had Easter Sunday in April, which we did not have in March. And the extra days on top of the four full weeks in April were Monday and Tuesday where April -- where March was on the weekend. So, that's a big difference between the two extra days being April and May than if the two extra days would have been a weekend days. In May, thus far because we only halfway through, but at this point, the weekly numbers, that the full weeks, have been up over the full weeks in April. And we have 31 days and we don’t have the Easter holidays. So, all indications are our sales will be up quite a bit in May over it.
Hi. Congratulations on a great 4.5 months so far in 2019, great quarter. My question is Evansville. I know you talked a little bit about that. Where are they at, you have the franchise fee, is that one coming along as well or what can we expect on that?
Well, I’ve indicated -- and those are things that are currently not in there. But, we anticipate a fall opening for that location. He’s had a little bit of difficulty in obtaining the proper site. He’s had couple picked out but didn’t work out for one reason or another. And I’ve helped him in trying to focus his attention on some different areas of Evansville that I think are better than what he was even looking at and he does have a site picked out in one of those areas which we have approved but is still subject to final negotiations as the terms.
But, if that continues to go as expected, we should have a fall opening.
Okay, great. Thank you.
Okay. Roger, go ahead.
Yes. Just as a follow-on to what we were talking about financing. You indicated cash flow will be picking up by year-end but you also indicated you think you would like to open another five company-owned units in 18 months. Does that sort of imply you’re pretty far along in your financial negotiations?
It implies that we do not have a commitment yet. That was my plan, if we get, subject to proper financing. Now, I’m in conversation with a number of parties that have expressed interest, signed non-disclosure agreements and have been collecting a lot of information. That’s a lengthy process, and it will take another few weeks before I know the end result of what that shakes out to. Yes, we’re making good progress.
Okay. Thank you.
Just to follow up on the nontraditional unit plan, can you refresh my notes for the number f nontraditional units that are opened now, and what range of net addition do you expect this year? I think, I heard you say that you opened 13 netted 5, so far in the first quarter or so far through mid-May. What kind of range do you think we could expect them to grow this year?
I don’t have the exact number of total nontraditional opened. If you call the nontraditional is the franchise and licensed units, it’s little over 600. If you include all the grocery stores that have signed license agreement, you’re up to about 2,900. But, we don’t know how many of the grocery stores are selling pizza at in one time, because we don't have direct communication with them. We've opened 12 so far -- 13 so far this year, as Scott mentioned in his presentation, nontraditional. And I would expect that number to grow to at least 40 or 50 by the end of the year.
Yes. I guess, it’s back to me. Relative to your margins in the pub, you mentioned that back to 20.5% in March, obviously with the season. Where do you think conservatively that EBITDA margin at the pubs could get to when we get into the season or for the full year? Obviously, last year was well into the 20s. What do you think?
23 last year, and I believe that we will -- and that was based on some fewer stores. With all the stores merged together, I think that number is going to be north of 20%. But I would say, maybe 21%, in that range, 20% to 21% for the full-year.
Just a follow-up question on the Craft Pizza & Pub, in the press release, where you give the breakdown of operating expenses by line item. Can you just describe what's the -- I think it's roughly $100,000 increase year-over-year in other operating expenses for the Craft Pizza & Pub venue?
I cannot detail that off the top of my head. But, I can certainly get back to you. If you just send me an email with that question, I will be sure to detail it and respond to it.
Hi. Yes. My question would be, as far as on the company stores, I see such a great response when you introduce your concept to a new area in Lafayette. Would you plan on the next company stores being closed in the northern Indianapolis region again, or are you thinking of opening it into a new region and trying -- and seeing if you get a better bang for your buck? I've been to the -- I know, like when you added the store was Carmel, and I've been there a few times and they do a great job, but it just seems that there's maybe then some cannibalization of sales. Would you move out of that area?
Okay. Well, there is perhaps some marginal cannibalization on our side, but really our customer traffic studies show that it's minimal, especially Whitestone and Fischers. There is a little bit of trade over between Westfield and Carmel, particularly with the Grand Park traffic which tends to locate in between the two locations, for special events. We will continue to look at areas adjacent to the areas that we have now for the first unit or two that we add on simply from a supervision and management standpoint to make the best use of that time and those dollars. But, we have a number of markets here in Central Indiana and then looking into Southern and Northern Indiana that will make excellent markets for Craft Pizza & Pub. So, there'll be no shortage of, I think, excellent sites to get to.
Okay, everyone. We don't appear to have any other questions. So, on that note, we are going to end the call for this quarter. Thanks again very much for participating. And I hope you have a good evening. We'll be terminating the session connection now and we'll see you again next quarter. Thanks.