Executives: Dave Boennighausen - Chief Financial Officer Kevin Reddy - Chairman and Chief Executive Officer Keith Kinsey - President and Chief Operating

Officer
Analysts: Sam Beres - Robert W. Baird Joe Buckley - Bank of America John Glass - Morgan Stanley Jeffrey Bernstein - Barclays David Palmer - RBC Keith Siegner - UBS Andy Barish - Jefferies Joshua Long - Piper Jaffray Nick Setyan - Wedbush

Securities
Operator: Good afternoon and welcome to today’s Noodles & Company First Quarter 2015 Earnings Conference Call. All participants are in a listen-only mode. After the presenters’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded.

I will now introduce Noodles & company’s Chief Financial Officer, Dave Boennighausen. You may begin.

Dave Boennighausen: Thank you, Latoya. Good afternoon, everyone and welcome to our first quarter 2015 earnings call. Here with me this afternoon are Kevin Reddy, Chairman and Chief Executive Officer and Keith Kinsey, our President and Chief Operating Officer.

Let me start by going over a few regulatory matters. I would like to note that during our opening remarks in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items including targeted results for 2015 and details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. I refer you to the documents the company files from time-to-time with the Securities and Exchange Commission, specifically the company’s Annual Report on Form 10-K for its 2014 fiscal year.

This document contains and identifies important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Now, I would like to turn it over to Kevin.

Kevin Reddy: Thanks, Dave. We appreciate that you have joined us today to review our Q1 2015 results as well as the opportunity for us to share what we are focused on to build sales and long-term value. We completed Q1 2015 with system-wide comparable sales of 0.9% and adjusted diluted earnings per share of $0.03.

Q1 finished with positive momentum in March while rebounding from severe weather in February at a time when much of the industry saw a deceleration. I would like to begin discussing strengths of the Noodles brand in terms of the consumer and system strength within the industry. I will then touch upon key initiatives we are driving to return to our historical range of comparable restaurant sales results before turning comments over to Keith Kinsey, our President and COO. First, Noodles & Company will celebrate 20 years of serving guests this fall. And we also anticipate this anniversary will mark the 20th consecutive year of consistent double-digit organic unit growth, clearly a rare and significant milestone.

Our predictable and reliable growth can only happen with considerable infrastructure strength, strong relationships with developers, and a differentiated consumer experience. Over the past 20 years, we have seen success in markets across the country in diverse trade areas. In fact, our top 20 highest revenue restaurants span 13 different geographical markets. Most recently, we experienced exceptional openings in new markets of Phoenix, Orlando and Montana. This substantial unit growth fuels double-digit revenue growth, validates consumer engagement and supports the ability to meet our long-term unit growth expectations.

Another strength of the brand is Noodles’ ability to resonate with guests of all types through our distinct approach to craft cooking, our service model and most importantly, the quality ingredients and flavors offered in our menu. The fresh vegetables we prep throughout the day, our quest for real ingredients, clean labels and cooked-to-order meals meet the discerning desires of guests today. Continuing to communicate these strengths will enhance guest perception and loyalty. Third-party recognition by Parent Magazine and Health Magazine are further evidence of our ability to meet these discerning needs. As the brand matures within markets and reaches levels of brand awareness, we continue to see strong guest attachment.

For example, our central region, our largest region and the one with deepest densities, continues to perform well and is at historical norms for comparable sales growth. In fact, the majority of the system actually performed above our long-term comparable sales targets in the first quarter. Excluding softness that we have seen in markets in three areas of the country, Colorado, the DC Metro area and Austin, comparable sales were up 3.2% companywide for the quarter. We are confident that we understand our opportunities in these markets and are aggressively working on returning them to the success that we are seeing in the balance of the country. On the people front, our season team has managed and led through many phases of the restaurant industry.

And we continue to attract and hire successful, competitive leaders throughout the organization as we grow. Finally, our internal and external consumer metrics indicate strong operating and guest sentiment. Reinforcing the brand continues to resonate with guests as we move from initial trial to regular user. Now, I would like to shift my focus to a few areas important to accelerating sales and our growth. As operators, we always start with how to improve the in-store execution.

In particular, we are making progress on our throughput and deployment initiatives that we believe can improve the overall guest experience significantly. We are in the final phase of testing. And we will begin rolling these changes to the system beginning in July of this year. And Keith will touch on these in greater depth. Our catering program has continued to grow and we have added the ability of guest to order à la carte dishes to meet the needs for smaller groups, requiring greater flexibility.

Recent sales are north of 1%, momentum is positive and we expect catering to contribute additional sales well into the future. On the culinary front, we will continue to introduce dishes that highlight our seasonal ingredients cook to order. Currently we are featuring our BUFF Bowls, four versions of current favorites packed with vegetables and protein and low on carbohydrates. We feel that BUFF Bowls have great potential in increasing our frequency with existing guests and broadening our reach to new customers. It’s too early to assess the potential long-term impact, but we are encouraged with guest and team member initial response.

In terms of development, we continue to be pleased with our performance in new markets and feel that these investments will benefit our long-term objectives. That said, we are shifting the pipeline to a greater mix of building out our substantial footprint in existing markets. This will aid overall brand awareness with the mix shift beginning with 2016 openings. We have also made investments in technology especially in the development of successful mobile order pay application and online systems. We will expand those technology efforts, particularly in guest segmentation and guest targeting.

Additional insight into guest behavior will allow us to better engage and deploy relevant marketing campaigns. Finally, our branding, marketing and promotional work with Barkley will begin activation in the second half of the year. The messaging will include brand strengths such as our cooking to order, real ingredients and our strength with parents and families. We will be more active in media spend, social digital presence and promotional activity than ever in the past. I am very pleased how this work has progressed and believed it to be a critical addition to our differentiated offerings and core operating strengths.

At this time, I would like to turn it over to Keith.

Keith Kinsey: Thanks Kevin. As Kevin mentioned, our new restaurant pipeline remains excellent and we continue to be pleased with the performance of new markets. In recent weeks, we opened our first restaurants in Montana, Arizona as well as our third restaurant in the Orlando market, all of which have opened well above company average. We opened 13 company-owned restaurants and three franchised locations during the first quarter, completing the quarter with 455 restaurants system wide, 399 of which are company-owned.

We continue to anticipate 50 to 60 openings system wide in 2015, representing a 12% to 14% unit growth. We anticipate that 2015 will mark our 20th consecutive year of double-digit percentage unit growth and are excited at the potential to approach 500 restaurants at the end of the year, a milestone that very few concepts are fortunate to achieve. As mentioned in prior calls, we expect that our 2015 openings will be skewed more towards newer markets, including our first opening in Toronto early this summer. A skew towards new markets does result in some additional investment in certain line items, particularly labor, pre-opening and general and administrative expenses, but it positions us well to gain leverage in 2016 and beyond as well to begin to fill in these markets with additional openings in the future. Our total non-comparable sales base achieved sales at 87% of company average during the first quarter.

As we have discussed in the past, whenever you have a significant amount of new markets, you see more variability as you build brand awareness in these areas. We did see some of that impact because of this in the quarter one, but we are very confident in the real estate selection and the consumer acceptance we have seen in these new locations. On the people front, we continue to strengthen our operations and field support teams. We have recently created a new position, Director of Field Talent with their focus on assisting this field in identifying, hiring and developing future leaders within our restaurants. This individual brings a significant amount of industry’s experience and has hit the ground running.

We have also hired two new operations executives, one in the franchise side and the other in the company operations, both from brands well respected in the industry. Moving on to some of our operational initiatives, we continue to work on simplification and streamlining of some of our kitchen design, deployment and cooking procedures to help enhance throughput. Our overall throughput remains on par or better than much of the fast casual, a significant achievement given that every dish is cooked to order. Still, we believe it is important to continuously identify opportunities, particularly at the height of the lunch revenue period. We have begun the process of expanding several of our improvements that we began testing late last year, including modest recipe standardization and tweaks to our cooking methodology on a couple of our critical dishes.

Combined with the continued benefit that online ordering provides and increased focus on deployment during the peak hours, we feel we can have a meaningful impact for that guest who is particularly pressed for time resulting in a significant long-term growth opportunity. On the ingredient front, we are excited to announce that by the end of the third quarter of 2015, we anticipate removing all artificial colors, flavors and preservatives from every one of our soups, sauces and dressings. We also continue to test naturally-raised, antibiotic-free chicken in our restaurants and are working with our suppliers to potentially expand this nationwide over the rest of 2015 and into 2016. Now, I would like to turn the call over to Dave to discuss at more length our financial performance during the quarter.

Dave Boennighausen: Thanks, Keith.

Revenue in the first quarter increased 18% to $105.8 million due to increase in the number of restaurants, including our acquisition of 19 franchise locations during the second half of 2014 as well as a modest increase in comparable restaurant sales. For the first quarter of 2015, we reported adjusted net income of $900,000, or $0.03 of adjusted diluted earnings per share. Adjusted EBITDA increased 5% to $8.8 million during the quarter. In the first quarter, comparable restaurant sales grew 0.8% for company-owned restaurants, 1.4% for franchise restaurants, and 0.9% system-wide. To provide some texture into Q1 sales cadence, if you recall during our last earnings call, we noted system-wide comparable sales of 1.1% quarter-to-date through February 18.

We ultimately saw a negative impact from weather in the last half of February before rebounding in March, which was our strongest month of the quarter. We are seeing positive sales growth continue into Q2 and we are excited about the progress through the initiatives that Kevin discussed earlier in the call. Our restaurant level margin of 16.2% in the first quarter was 110 basis points below prior year. The decline in restaurant margin was primarily due to de-leverage on lower average unit volumes due to immature restaurants, which we have seen through a few line items on the P&L. As a reminder, due to our geographic penetration and seasonality, the first quarter traditionally has meaningfully lower margins than other quarters throughout the year.

So, it is not necessarily indicative of our full year results. Our cost of goods sold of 26.5% in the first quarter was a 50 basis point improvement relative to Q1 2014. This improvement was primarily the result of many pricing taken in Q4 2014, outweighing commodity inflation during the first quarter. We continue to anticipate approximately 1.5% to 2% in commodity inflation during 2015, primarily due to increases in the durum wheat market affecting the cost of our pasta. This increase is in line with our prior projections and I would like to reiterate that we are fully booked for our durum wheat needs through 2015.

In the first quarter, labor cost increased 70 basis points versus prior year. As discussed in prior calls, our health plan functions on a July to June plan year and we anticipate 30 to 50 basis points of labor pressures beginning in the third quarter due to the implementation of the Affordable Care Act in our restaurants. This equates to roughly $500,000 in additional expense per quarter. During the first quarter, operating cost and occupancy cost increased as a percentage of sales by 20 and 50 basis points respectively. Marketing spend for the first quarter was 0.7% of sales, a 10 basis point increase over Q1 of last year.

As previously mentioned, we anticipate investing in incremental marketing for the balance of 2015. Consequently, while marketing expense will remain somewhat muted during much of Q2 we anticipate an increase to between 1.5% to 2% of sales during the final two quarters of this year. This investment equates to an approximate $1 million spending increase over prior year for each quarter. General and administrative expenses of 8%, was a 20 basis point increase over Q1 2014. We anticipate that G&A as a percentage of sales will be roughly flat in 2015 versus 2014 as leverage on increased revenue is offset by investment supporting our new markets and our marketing initiatives.

While Noodles & Company has had very few impairments over the years, GAAP results for the first quarter of 2015 included non-cash impairment charge of $5.9 million related to eight restaurants. Progress at these underperforming restaurants during the first quarter was below expectations as they trended below the rest of our asset base. Importantly, there were generally outliers from a development cost perspective meaning that their asset cost was too high relative to their sales potential. We feel confident that we now have the right people, processes and procedures in place to significantly reduce the risk for additional development cost outliers on an ongoing basis. Our tax rate for the first quarter on a GAAP basis was 39.5%.

For the balance of the year, we anticipate an effective tax rate of between 39% and 40%. As of the end of the first quarter of 2015, the company had $22.5 million in debt outstanding on our credit facility, which has a borrowing capacity of $45 million. Cash on hand was $1.6 million. Kevin and Keith outlined the strength of our pipeline and our operating cash flow and borrowing capacity is more than sufficient to meet our development plans. 2015 does contain incremental cost wins such as the rising durum wheat costs and the implementation of the Affordable Care Act.

More importantly though, we are investing in the initiatives that Kevin discussed earlier that we feel have short and long-term benefits to our strategic objectives. While some of these investments are already in place and improving our trajectory, we also recognized that others will need time to reach their full potential. Thus, given our first quarter results, we revised guidance for full year 2015. We currently anticipate 12% to 14% unit growth, low single-digit comparable sales, 18% to 19% restaurant level margins and approximately flat adjusted diluted earnings per share growth. Before I turn it back to Kevin, I do want to provide a bit of more texture into that guidance for flat adjusted EPS growth.

As a reminder, in our prior earnings release, we introduced that each percentage point change in comparable sales impacts the full fiscal year by approximately $0.04 of earnings per share or $1.2 million of net income. Consequently, this guidance for full year 2015 incorporates our first quarter sales trajectory with a modest benefit in the back half of the year from our activation of our marketing strategy. I would now like to turn it over to Kevin for final remarks before we go to Q&A.

Kevin Reddy: To summarize, I would like to emphasize the following points. First, we remain a high-growth concept that has laid an initial footprint in over 30 states with the ability to expand approximately 5 times our current size while gaining economies of scale.

Second, our success is coast-to-coast. High growth always comes with risk and our growing pains are primarily associated with three markets that we are approaching aggressively to return to the success of the balance of the country. The remainder of the system is gaining momentum and ran over 3% comparable restaurant sales in the first quarter. Third, we will be building brand awareness both through real estate and marketing in the months and year ahead. In the 40 markets our system competes in, we only have six with 20 or more restaurants.

The upside from our brand awareness initiatives should be meaningful. And lastly, our operations, people and marketing initiatives are very specific and we are intently focused on daily execution, both of which are important to propel us into the next phase of our growth cycle. Thank you for listening and your valuable time. And Latoya, if we can please open the line for questions.

Operator: Thank you.

[Operator Instructions] And the first question is from Sam Beres of Robert W. Baird. Your line is open.

Sam Beres: Hi, good afternoon. And thanks for taking the question.

First, I would maybe like to ask a little more – for a little more perspective on the three markets you mentioned that have been weighing down comps side here in Q1. And I think we heard about the Metro DC market a little bit before, but may be update on that as well as maybe a little more color on what exactly happening in Denver and Austin as well?

Kevin Reddy: Sure, Sam. This is Kevin. In Austin, Austin is a strong independent restaurant market. We have reached eight restaurants in that Austin area, which now I think we have to become a more active member in those communities now that we have a base.

We have introduced a field marketing specialist to help us focus on getting outside the four walls and more involved in the communities to help and partner with us. And we have also added a second multi-unit manager there, who lives in Austin, grown up there and has demonstrated success with other concepts. So I really think it’s the time in nurturing to become kind of a local, by local concept we need for overcome the resistance of a national brand. In DC Metro, that’s been a part of the country that we have seen softness not just across the industry, but what we have been focused on. Our earlier challenge stemmed from opportunities, I think internally in staffing and operations.

We feel that, that has been much improved today and we can now start moving beyond the functional components of the dining experience. We are at a point because of reasonable restaurant densities, we will be able to deploy I think all facets of the marketing activation plans that we have been working on with our agency at this point. And then that’s really where the level we are at. Turning to Colorado, Colorado was a strong market in general. It’s a strong macro brand awareness market for us.

There is really two influences that I think are worth mentioning. The first is that there has been a lot of growth in fast casual expansion over the years from a lot of concepts. And that as it relates to us we have to be probably more aggressive in our competitive counter marketing plans against those openings. The other implication of what we have seen in those densities of penetration is that we have some older restaurants here that we have just got to refresh. We have to be little more aggressive in our remodeling.

And then one of the nice things about Colorado is because of our densities and brand awareness, we think it’s a great market at least to deploying some of the larger market media activation plans that we are working on with Barkley. The other aspect of Colorado that is influencing the numbers in the near-term is really our own growth. We have been fortunate to acquire strong fill-in trading areas in a very maturing market. These are excellent long-term locations, but they come with some short-term cannibalization. I believe we are probably reaching maybe one restaurant for 70,000 people in Colorado, well below with deeper penetration than our longer term plans.

But very good locations, we are glad to have them. We are glad to keep competitors out.

Sam Beres: Thanks. And then maybe just a follow-up on the current comps trajectory, David, you mentioned positive comps here so far in Q2, so maybe provide exactly a little perspective what that means, maybe even addition relative to the level you saw in March. And then also maybe a little perspective on exactly what level of acceleration you are expecting in the second half of the year and the full year guidance?

Dave Boennighausen: Sure, absolutely Sam.

We are really at positive comps right now. We don’t want to disclose the exact number. We are so early into Q2. When you look at the marketing calendar, weather and potential other influences, we think it would be a little too early to be discussing the actual number thus far in Q2. When it comes to the guidance, we talked about the change that we have in our guidance really takes the trajectory that we saw during the first quarter and does have some modest improvement in that second half.

The guidance is for low single-digits. So as you can imply maybe a little bit closer to the 2% to 3% range during that back half.

Sam Beres: Great, thank you.

Operator: Thank you. The next question is from Joe Buckley of Bank of America.

Your line is open.

Joe Buckley: Thank you. I guess I would like to revisit the three problem markets again, because in Colorado your original market, maybe your longstanding market and I think DC has been established for a long, long time. Austin I think is relatively newer. But is there any common thread between the three that you kind of mentioned like a series of issues potentially for each one, but is there any commonality in terms of the problem areas?

Kevin Reddy: Joe, this is Kevin and others can chime in.

When we really looked at the distinct reasons that’s influencing each, I think they are different. Austin, like I said you are 100% correct, it’s a newer market and it really is one that has tremendous loyalty to local independents and you have got to earn your way into that and we are in the process of doing that. Colorado still a strong market for us and we are running positive same store sales with the challenges we are impacting. When we open a restaurant and Noodles opens closer to another Noodles, it’s greater impact than anybody else that opens near us. In some cases, we actually get positive synergies when competitors open.

We tend to impact ourselves, but we look at new returns and there are smart decisions, so we continue to do that I just think with all the growth that you got always to have your A game both in operations and marketing and we have got some spotty areas that are a little bit dilutive on that and the good news as we go 13th month against our own openings which is positive.

Dave Boennighausen: Yes. I would also add to that Joe, this is Dave speaking. When you look at the investment in marketing that we are going to be doing in the back half of the year, these are three markets that we think we will respond very well to it. From a DC Metro and Austin perspective even though we have been in the DC Metro area long time brand awareness is still relatively low given how spread out the geographies are.

Austin, we are relatively new and as you mentioned. And with Colorado, it’s really the top of mind awareness bringing people in to see all the exciting and new things. We had been in Colorado now for 20 years. We probably that’s that as much we potentially could in terms of bringing more top of mind awareness to the brand.

Joe Buckley: Just two other quick ones, with the [indiscernible] that you impaired with a – in those three markets?

Dave Boennighausen: There is a couple – there are a few restaurants that we are in those markets, but ultimately the impairment was in a mix of markets that were both new and old.

We did have a few outliers in the newer restaurants that were really from an outlier perspective on the development costs sides that’s where we saw that.

Joe Buckley: Okay. And then just one more question did you guys kind of enhanced dinner service I guess I would call probably not going for right thing that you were pretty focused on I think maybe you put it on hold while you rolled that catering, could you update us on the status of that, is that still being expanded into new markets?

Kevin Reddy: Yes. Hi, Joe this is Kevin. We have – you are right we put it on hold.

We want to focus on catering. We have not really moved to back to the top of the list yet primarily because we want to stay intently focused on specific action plans. And we are also waiting to see really from a total brand positioning where we end up with our ad agency and the work we are doing jointly together, because it might have some influence on design. So we don’t want to spend money in advance of that that we may make tweaks to that. So, we just think keeping it on pause right now is the appropriate thing to do.

We have got several things we are working on that are very important it should work. We still absolutely believe it has long-term differentiating and upside impact for us. It’s really a matter of team execution and when you slotted it.

Joe Buckley: Okay, thank you.

Kevin Reddy: Thanks, Joe.

Operator: Thank you. The next question is from John Glass of Morgan Stanley. Your line is open.

John Glass: Thanks. First, can you just talk about your early thoughts on ‘16 development and you talked about going back to some of the existing markets.

So, how big is shift do you think this will be percent wise versus say ‘15 in existing versus new markets and has there been consideration yet or at what point do you need to seize evidence that you would suggest using it to slow down overall unit growth as you sort through some of these issues?

Keith Kinsey: Yes, hi, this is Keith. From a standpoint of 2016, it’s in the high 60s right now as to where we will be doing more of the stronger markets, existing markets versus the new markets in 2016 pipeline. We are still building that out, but early read is in that probably north of 65 and maybe into the low 70s as a percentage of where those restaurants are going to be and we feel pretty good about that. As far as slowing down, we still even looking at some of the impairments, we still feel really good about the real estate that we are selecting, the process of the infield that we are doing, the markets that we are going to into the future and really it’s about making sure that from the other side of the equation to cost side that we feel really good that the team we have got in place right now is going to be able to achieve those numbers that we have built into the model and won’t have that pressure on the development side that forces some of the recognition we did this quarter.

John Glass: And where the – go ahead.

Kevin Reddy: John, I am sorry, this is – I apologize, it’s Kevin. I will just say we have never really chased a number to hit a number at any cost. It’s really been about trying to make sure we are making the right individual real estate decision for the long-term. I think we feel that the actual shifting in the mix that we have already been working on in the pipeline, because obviously the impact of 2016 openings knew that pipeline we started working on 9 months ago to a year ago. We think that actually will take some pressure off ops and people, because it’s really when you open your first restaurant in a new market and you are setting up supply chain distribution centers, new teams, potentially relocating people, that’s a little more stress and disruption to the team when you – as move back towards really building out the footprint that we have, I think that will take some pressure off our ops team and we are looking at how we balance that out.

So, one market doesn’t get overloaded. So, I think it’s a good question. It’s one we look at every time we sit out and talk about strategy from new markets and it’s one we look at every time we approve a deal within the market.

John Glass: When you mentioned the impairments somewhere in newer markets when some are older, when were the stores built generally, how old are the stores that you impaired?

Kevin Reddy: It’s really a mix John of older restaurants and newer restaurants. I mean, some of them would have been even as old as almost 10 years.

The newer restaurants had a few more, but those are again really development cost outliers. As a reminder, our net cash investment is generally $750,000 to $775,000, that’s net of TI. These outliers were really north of $1 million in terms of their construction cost. Again, we feel we have got the right processes to reduce the impact – the potential of those happening in the future. Those are where you saw the newer restaurants, was really the development cost side.

John Glass: And just final question, you talked about Colorado being a weak market, it is surprising because brand awareness really is that’s your strength in there and one of the issues you highlighted early on was weak brand awareness is being an issue. So, when you compare – I mean, if you compare Colorado to the other dense markets, are you seeing any signs of weakness there, Chicago area, Minnesota, Wisconsin, whatever the top three for the big markets. Are they all appreciably better? Are they closer to that 3% and Colorado is a one outlier in the mature markets or is there some signs or maybe some of those issues are bleeding into some of those other markets as well?

Kevin Reddy: No, we are not really seeing that. We do have good brand awareness from restaurant densities. But I would tell you with all the new concepts and the new shiny toy and all the additional marketing that comes with that, the top of mind awareness for the occasion, we can be a little more aggressive in John.

We have positive same-store sales. I would say our same-store sales would be almost double what they are running if we weren’t impacting ourselves as well. So, it really – I called it out just because of the fact that it’s a mature market that we are continuing to build in and we are happy with those sites, but impact on our sales is greater. Actual guest scores operations, food wise, remain really strong. We see a few comments that we are getting a little long in the tooth in dinning room, but nothing that concerns us that this is a issue with the mature market and actually in some of our markets that are owned was just as old.

They are already running and continue to run now. They are back to historical norms. So, I don’t see a broader issue other than mostly our own impact and the ability to focus a little more in Colorado.

Keith Kinsey: Yes, I would also add John to that. I mean, we all know that Colorado is a pretty competitive marketplace with fast casuals.

In the past, we have introduced – we have talked about how the average fast casuals that’s in the top 10 in terms of system wide sales spent on average over $12,000 a year per restaurant in 2014 in traditional media, we were below $1,000. So, there is a pretty significant gap there. In Colorado, that gap is actually just as large and if not larger even with the amount of restaurants we have. So, there should be a significant potential upside as we begin to get more top of mind awareness in that particular market.

John Glass: Okay, thank you.

Operator: Thank you. And the next question is from Jeffrey Bernstein of Barclays. Your line is open.

Jeffrey Bernstein: Great, thank you very much. Just one follow-up on that one and then a couple of questions.

The comment on Colorado, I think you said couple of times, but it’s still comping positive there, but I know you highlighted that the overall comp for the company operated stores were at the 0.8 and I guess the other markets, the non-three challenge markets were comping up north of 3. So, I am surprised that Colorado could still be positive if that’s one of their weaker ones and the overall comp is only at 0.8. So, are the other two markets severely negative to better drive that average or just trying to figure out the disparity between those three challenged markets?

Keith Kinsey: Sure. No, I apologize for that, Jeff. The actual Colorado is running slightly negative.

It’s not running positive same-store sales at the moment.

Jeffrey Bernstein: Okay. And the other two, are they running…

Keith Kinsey: The associated markets are all running slightly negative same-store sales year-to-date.

Jeffrey Bernstein: Got it. Thank you.

Alright. And then my other – my two main questions. One I am just wondering, I think you gave reference last quarter to tests in San Francisco around throughput and Keith, I think you mentioned something about the recipe and cooking technique changes being rolled out this summer to maybe improve throughput. Just wondering if there is any insight you can offer there that I know you mentioned would help the time start for consumers. So, what should we expect in terms of that rollout?

Keith Kinsey: Yes, I mean, what we are looking at is we are beginning to rollout here in May.

We are going from kind of seating additional restaurants across this system. We are doing that additionally with some of our new playwear that we are doing at the same time. So, it’s going to get into a lot more focus beginning in this summer and hopefully by the end of the quarter or October kind of fourth quarter time we will have it pretty much rolled out across the system.

Jeffrey Bernstein: What actually is it that’s going to – is it just pre-cooking some of these things or not using ingredients or?

Keith Kinsey: Yes, one is standardizing some of the ingredients. So, it’s easy for the prep size.

In some of the recipes we had just minor differences as to the weight on some of the vegetables and some of the sauces. So, what we did is standardize that, so it is much easier to train and much more consistent as to what you do prep in the morning. So, that helps from a consistency and flavor profile on the recipes and also training. The second piece is we have kind of accelerated some of the process relative to heating up as the person orders the dish, we just – we do what we call our dunk method, which helps heat up the noodles faster and then goes on to sauté. So, that takes time because we don’t have to keep it on the line as long as sauté.

We can caramelize it quicker and that helps speed up the whole process in the kitchen side of the business.

Jeffrey Bernstein: Got it. And then my last question is just a clarification on what you said earlier, I know that I think you last reported the fourth quarter in the back half of February and I think you said that the weather I guess in the back half of February then got worse, but then may got I guess materially better. So, I am just wondering what surprised you in those couple of weeks maybe on February that led to such a sharp earnings revision to the downside. It would seem like as of – looking back as of Feb 19, the earnings growth was still reasonable to assume 20% and March seemed to be okay.

So, I am just wondering it just seem like a sharp reduction?

Kevin Reddy: Sure. As we noted we are 1.1% for the company same-store sales through February 18. We ultimately at that time felt it was a little too early to be concerning that the overall trajectory. Ultimately, it was February the last two weeks in particular in Colorado we saw a lot of snow. This February actually ended up being the snowiest February in the history of the state.

As we – excuse me, as we look at the full quarter, those numbers in just those two weeks had a pretty significant impact, but ultimately even though March rebounded, it was still a bit softer than we had expected. We didn’t want to make too early of a call that quickly into Q1, but we didn’t have the trajectory that we had expected.

Jeffrey Bernstein: Got it. Thank you.

Operator: Thank you.

And the next question is from David Palmer of RBC. Your line is open.

David Palmer: Thanks. Good evening, I wanted to ask you about the food investments, it seems to be that there are two ways to invest in food, one is cleaning up the labels and the other is to simply give more larger spec of protein, for instance. It sounds like Noodles is testing or introducing new things, new – both ways of increasing the food value with the artificial ingredients removal, antibiotics-free and then also the introduction of BUFF Bowls, what seems to be working and at the end of this journey, do you think you will have a significantly higher food costs? Thanks.

Kevin Reddy: This is Kevin and I will let Keith jump in as well. Okay. I think the quality of ingredients non-processed are very, very important. So all the work that our supply chain team has done and continues to do I think just support a strong story and positioning about ingredients that still is a differentiator today. And I think just more and more companies as well as the agricultural system will move in that direction.

So that is working. We still wanted – we don’t think we get enough credit for all the things we are doing today and we will focus more on that. The – really the BUFF Bowls, I think innovation in the culinary supply chain is really about highlighting that we cook to order, that we bring in fresh, seasonal ingredients. So BUFF Bowls are really just another way to eat for favorites that happened to be focused on highly nutritious, lots of vegetables, high protein and we have a pretty good lineup of proteins between our organic tofu, antibiotic free chicken, naturally raised pork and so forth. So I think they both resonate and they resonated sometimes different consumer groups, but both are equally important.

Keith Kinsey: Yes, this is Keith. One other things, that I think Dave has talked about in the past too, is the fact that we have such a broad basket. If you look at the pasta and the grains and you look at the proteins and the different meats and beef and pork, I mean I think that the creams and the cheese, what’s been very successful has been our team’s ability to kind of balance out that basket and kind of take the seasonal highs with some of the opportunities on some of the seasonal lows. And yes, there can be at times pressure on some of the price like Dave talked about the durum wheat, but I think given the fact that even with that, we are still able to stay within that 1.5% to 2% range. I think that’s a consistent parameter for us in the future and even as we improve our ingredients, they are still in that same basket that we will be able to keep our COGS under control.

David Palmer: And the way I am going with this is in those markets like a DC or a Colorado, and you have that competition perhaps those other fast casual chains are reframing your food value and they are giving literally more food cost as a percent of sales and you might be and in addition to doing those things, to market to that ingredient quality and I wonder if this is all about that food value equation?

Kevin Reddy: We have not – we have done a much fair amount of research and that we really haven’t seen that come through in the research. It is something that we constantly monitor on a fairly regular basis. We think our portion sizes are pretty good, pretty accurate in terms of what we hear back from the guests. We do have a favorable food cost on our P&L to other contest, but I think that’s more of management back of the house, not necessarily price value related to the guests.

Keith Kinsey: No, we do a lot of value-added.

When you think about our process and the way we pull things together, we get a lot of raw ingredients into our system and then we add a lot of value added to it, and I hear from some of others who just assemble to order. So I think that’s the other piece. Our labor is higher and it’s because we do that other piece that brings the dishes together. So I think if you look at them in total, it’s pretty much in line with everybody else and it’s still special things we do that with the ingredients that makes it a different dish when it comes out.

David Palmer: Thank you.

Operator: Thank you. And the next question is from Keith Siegner of UBS. Your line is open.

Keith Siegner: Thanks. Just a high level question, kind of stepping back for a minute and thinking about the restaurant level margins over the last couple of years and they have come under pressure pretty consistently since 2012, even in some years when you are kind of on target in terms of comps.

As we think about that restaurant level margin going forward, and you highlighted things like competition and having more fast casual competition and the last question actually dug into this, too. We have talked about certain parts of marketing needing did we spend more. If we think about this trade-off between say, traffic growth and margins going forward what are your targets for restaurant level margins out the next couple years, is it to hold them and stabilize while growing traffic or is it to return that margin up to something more like 21, how should we think about the high level plan there?

Keith Kinsey: Sure. I will answer that one, Keith. I think priority one is actually to hold them and stabilize them.

When you look at our overall margin make up, we have always talked about it need to be at about that 2.5%, 3% of same store sales in order to maintain margins. Clearly, the initiatives that Kevin spelled out is clearly to address that. The second thing I would note is just the overall impact of the immature restaurants. The 2.5% to 3% target that we talked about in terms of maintaining margins, that’s predicated on about 12% to 13% unit growth in which case you have the same store sales leverage overcoming the dilution of the immature restaurants. During the past couple of years, we have had higher than that growth.

We have been closer to 15% to 16%. On top of that, a couple of acquisitions that were a little bit dilutive as well. So, you have had some exogenous factors that have impacted it and put the margin under pressure. So I do think the first priority is to stabilize and hold might get in that same store sales number back up towards 3%. From there, we feel very comfortable that the concept can leverage margins again to get back to north of 18 and 19 and back to where our historical numbers were.

Keith Siegner: Thanks.

Operator: Thank you. The next question is from Andy Barish of Jefferies. Your line is open.

Andy Barish: Hey, guys.

Can you give us a little more color as we get closer to the launch on the marketing plans sort of what medium is, is it going to use I take multiple, but any insights into sort of the focus of the campaign and are you going to cover the three markets you mentioned that are currently challenged?

Kevin Reddy: Yes. Andy, this is Kevin. I don’t want to get too far into it because we haven’t finalized and announced the specifics even internally yet. We are still working closely with our partners, the ad agency. From what I can tell you, though is that we know we have strong brand equity with parents and millennial parents and families.

So we believe that will be one of the primary targets of what we do. We also know we have a strength in terms of just the fact that we do real cooking. We have this craft around this French method of sauté. I think we don’t get enough credit for the wonderful things we are doing in supply chain. So those will be themes that I know will be a part of the creative and execution that we bring to life.

The three markets that we talked about will be all targeted and impacted by those. Clearly DC and Colorado allow us a little broader range of median where you will see social, digital and some traditional areas such as billboards, possibly print, possibly radio. You are not going to see us on TV, but clearly using some more market wide activities. And I think in the small markets like Austin, we will look for ways to get outside the four walls. We will look at billboards.

And then we will have some smaller markets that actually are very favorable for billboards or buses or whatever that we will use. So we are looking at both the needs of certain markets. And we are looking at what markets may have strong ability to exploit different media channels.

Andy Barish: Thank you.

Operator: Thank you.

And the next question is from Joshua Long of Piper Jaffray. Your line is open.

Joshua Long: Thank you. Want to see if you can talk to the components of the first quarter comp, I appreciate the breakout between company and franchise, but any sort of additional detail you can provide on pricing or mix shift that you saw during the quarter?

Dave Boennighausen: Sure, Josh. Mix interest rate rolls pretty much flat.

Price was at that 2% level that we have been running in the prior quarter as well. So, you did have just modestly negative traffic incorporated.

Joshua Long: Thanks, Dave. And as we look out over the rest of the year, you have got some visibility into the commodity side. It seems like that’s more or less playing in line with the script that you had been thinking about earlier in the year.

How are you thinking about pricing? And has that changed at all with kind of the plans around marketing to come in the back half of the year?

Dave Boennighausen: Yes, sure. As a reminder, we overlap our most recent price increase as we go into Q4 of this year. It’s a little too early. We haven’t decided if we are going to accelerate that or if we are going to make any changes to that particular structure to have 2% again or not. You can imagine it will be in the ballpark.

We will certainly keep you posted if that changes.

Joshua Long: Got it. And then Keith thinking about the throughput initiatives that you discussed in your prepared comments, I was curious if there is additional items that you will be working on these to go throughout the year, if the focus is really going to be around kind of ongoing standardization of the recipes and working through kind of throughput in cooking items. Just didn’t know how many more initiatives there might be on the list to work through the back half of the year?

Keith Kinsey: Yes, Josh. The big ones are those.

I think we will implement those and as we said and we talked about, we will continue to look at other opportunities whether we bundle some of the jobs and look at how we bundle some of the ingredients, but we do really feel that if we can get these couple of things in, they are going to help us out to a level that, then we can build on that afterwards, but these are very, very I think effective ways to get some time taking off the process of cooking, but without hurting the recipes or the dishes themselves. So, we will stay focused on these two.

Joshua Long: Understood. And then last one for me, I think it was mentioned during the prepared comments about becoming more active with promotional activity as we get into the back half of the year and leverage the relationship with your marketing partner. I was curious if that was just a bit more as you will have more leverage or more ability to get the message out there or if that was actually indicating a change in how you might look at LTOs or just more traffic-driving initiatives?

Keith Kinsey: Yes, not really a change in LTOs.

I think what you will – what we are already beginning to do is we were pretty good at utilizing social and digital in the past. We are really trying to be more active to boost some of that, boost some of our catering, our search. We are trying – we will be I think deploying a little more targeted data with the people in our e-mobile database. So, our technology is going to allow us I think to be more segmented and reach people through technology a little bit better. The broader issue on promotion, it is a channel that Barkley is working on with us, whereas we have done that 100% internally in the past.

Joshua Long: Understood. Thank you.

Operator: Thank you. And the final question comes from Nick Setyan of Wedbush Securities. Your line is open.

Nick Setyan: Thank you. Can you just kind of tell us how many stores exactly we are talking about in those underperforming markets or what percentage of the comp is we are talking about?

Dave Boennighausen: Yes, it’s roughly 30%, Nick.

Nick Setyan: 30%, okay. And when we talked about kind of Colorado for the first time at least is what I have heard, is that like a new phenomenon in terms of divergence or has it – has that kind of divergence existed over the past few quarters? I mean, has cannibalization and some of the other things we have talked about is that a new phenomenon or has that been the case for the past few quarters?

Dave Boennighausen: Sure. Colorado, again all of our approved markets, I think the question was asked John earlier – by John earlier in terms of what we are seeing with our more penetrated markets outside of Colorado.

And generally, we are seeing strength. Colorado was performing slightly below the company average, but still positive. And actually in Q1, they were closer to flat. It’s really the magnitude of the number of restaurants that we have in that market that has such a significant impact, but it has been just slowly a little bit lower than expectations. This quarter a little bit more impacted partially by the weather that we saw in late February, but it is somewhat of a newer phenomena for us.

And the cannibalization that Kevin mentioned, a lot of that has to do with two or three restaurants that were introduced into the system in 2014.

Nick Setyan: Got it. So, I mean, just kind of backing out a little bit, but 30% of the comp we are talking about, we are talking about close to negative 5% if the rest of the comp is running 3.2 or so. I mean, so are Austin and D.C. just that bad relative to Colorado?

Dave Boennighausen: Yes.

DC is performing worse than Colorado in total.

Nick Setyan: Alright, thank you.

Operator: Thank you. Ladies and gentlemen that concludes today’s conference. Thank you for participating.

You may now disconnect. Good day.