Executives: Melissa Heidman - Noodles & Co. Paul J. B. Murphy - Noodles & Co. David James Boennighausen - Noodles & Co.

Analysts: Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc. Nicole Miller Regan - Piper Jaffray & Co. Ryan Royce - BMO Capital Markets (United States) Andrew Marc Barish - Jefferies

LLC
Operator: Good afternoon and welcome to today's Noodles & Company First Quarter 2018 Earnings Conference Call. All participants are now in a listen-only mode. After the presenters' remarks, there will be a question-and-answer session.

As a reminder, this call is being recorded. I will now introduce Noodles & Company's Acting General Counsel, Melissa Heidman. Melissa Heidman - Noodles & Co.: Thank you, and good afternoon, everyone. Welcome to our first quarter 2018 earnings call. Here with me this afternoon are Paul Murphy, our Executive Chairman; and Dave Boennighausen, our Chief Executive Officer.

Let me start by going over a few regulatory matters. I'd like to note that during our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future financial performance of the company. Any such items, including our guidance about anticipated results in 2018 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. The Safe Harbor statement in this afternoon's news release and the cautionary statement in the company's most recent Form 10-K and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward-looking statements.

I refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's Annual Report on Form 10-K for its 2017 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Now, I would like to turn it over to Paul Murphy, our Executive Chairman. Paul J. B.

Murphy - Noodles & Co.: Thank you, Mel, and good afternoon. I'm very pleased with our performance during the first quarter as we continue to build momentum through the implementation of our strategic roadmap. I'm also proud of the organization and the significant and continuous progress we are making in strengthening our foundation, evidenced by the sequential improvement in both top and bottom line results. Our strategic focus has been comprehensive, including operational improvements, capitalizing on our strength in the off-premise occasion and evolve in how we connect with our guests. Dave will soon discuss recent results and our initiatives for 2018 in more detail.

But I would first like to briefly discuss the overall intent of our strategic roadmap. We believe Noodles has all of the core strengths to be an enduring brand, and one of the top performers in the restaurant industry. While we are pleased with the current trajectory of the business, we also know that there's tremendous opportunity ahead. I believe firmly that our transformation strategy will allow the brand to evolve to meet the changing needs of today's consumer in a manner that provides sustainable and consistent value creation. While the steps that we've taken in the past several months have been meaningful, the company is currently executing on a number of areas to make significant strides in 2018, including the game changing national launch last week of the Zucchini noodle or Zoodles, which Dave will discuss in more detail.

The team is also looking to the future, working diligently on innovation and continuous improvement that will benefit the company and drive results in 2019 and beyond. Redefining the brand experience and affirming our position as the authority on noodles and pasta, broadening our scope with Zoodles, investing in opportunities to provide added convenience for our guests, including quick pick-up, online ordering and delivery, refining our economic model, and developing future leaders throughout our organization, all of these efforts together will allow Noodles to ultimately become one of the premier concepts in the fast-casual space. As I stated earlier, I am very proud of our accomplishments to-date. During the past several quarters, the company has been intensely focused on strengthening the foundation of the brand, and we are succeeding. As a result of these activities, we have seen improved performance in nearly all of our key metrics.

From financial metrics, such as comparable sales, restaurant level margin, and adjusted EBITDA to operational metrics, including turnover, guest satisfaction scores and employee engagement. I am now more confident than ever in our ability to execute against the opportunities we have to grow the Noodles brand. I will now turn it over to Dave to discuss our Q1 results and 2018 strategy in more detail. David James Boennighausen - Noodles & Co.: Thank you, Paul. I would first like to give a brief update on our search for a permanent Chief Financial Officer.

We've been pleased with the candidates that we've been able to attract and hope to be able to make an announcement soon. Now I'd like to return to some of the highlights from the first quarter of 2018. First quarter total revenue decreased 5.3% year-over-year to $110.5 million. The decrease was primarily due to the impact of closing 55 underperforming company-owned restaurants in the first quarter of 2017, offset by additional restaurant opening since the beginning of last year. As Paul discussed, we are very pleased with our performance during the first quarter.

We continue to see significant and sustained improvement in our comparable restaurant sales. Comparable restaurant sales were nearly flat during the first quarter, which represented a 70-basis-point improvement over our fourth quarter results and a 330-basis-point improvement over our results in Q3 of 2017. Our comparable sales were comprised of a 0.3% decline at company restaurants, partially offset by a 0.9% increase at franchise locations. Notably, our Q1 comparable sales results were negatively impacted approximately 50 basis points by the shift in the Easter holiday, which will benefit us during Q2. And as a result, comparable restaurant sales would have been positive without the impact of the Easter shift.

Comparable company-owned restaurant sales included a 2% price increase and a negligible negative menu mix impact on per person spent. We anticipate running approximately 2% of the price during the majority of 2018 as well. Comparable restaurant sales in the first quarter were negatively impacted by harsh winter weather in many of our largest markets, particularly in the Upper Midwest especially in February. As a result, we're happy with the growth in comparable restaurant sales overall. On the whole, underlying trends did improve and we continue to expect meaningful sequential improvement during the second quarter of 2018.

Comparable restaurant sales returned to positive territory during March and have remained positive thus far in Q2. We project comparable restaurant sales system-wide for the second quarter of between positive 1% and positive 3%. Restaurant contribution margin the first quarter was 12.9%, a 190-basis-point improvement over the prior year. We did see a significant benefit from last year's restaurant closures, but additionally we saw a 20-basis-point margin expansion at our core restaurant base in the first quarter. This expansion was related to the implementation of labor savings initiatives during 2017, and it gives us continued confidence that our focus on our existing portfolio is having a positive impact on the trajectory of the business.

As comparable restaurant sales and restaurant-level margin have improved, we have also seen continued improvement in our bottom line during Q1. Adjusted EBITDA increased 46.3% versus the prior year to $5.6 million. During the first quarter, we opened one company restaurant. While we anticipate only modest unit growth in the near term, with only one to five anticipated openings system wide during 2018, our most recent openings continue to outperform prior classes. This gives us confidence in the ultimate unit growth potential of the brand.

I would also like to note that yesterday we closed on a new credit facility. The terms of this agreement will be included in our 10-Q filing. We're very pleased with the terms of this facility, which, amongst other things, allows the company the flexibility needed from a capital expenditure perspective to execute our strategic roadmap. In light of the new agreement and continued momentum in our core business, we will be re-evaluating our development strategy and will provide new estimates on capital spend on our next earnings call. Now as we look to the remainder of 2018, I am extremely excited of the initiatives that we've already launched and will be launching in coming months.

Perhaps, the most important of these initiatives is the launch of our Zucchini noodle, which was introduced nationwide just this past week. This offering features our Zucchini Romesco, which includes a pasta-style roasted red pepper sauce with almonds, sundried tomatoes and garden vegetables. Zucchini noodles, which are spiralized in-house by our teams daily, can also be substituted for traditional pasta into any of our guest-favorite dishes. We are really thrilled and proud to be the first fast-casual restaurant to launch Zucchini noodles nationwide. We're excited about several aspects of the Zucchini noodles, aside from tasting great, the Zucchini noodle also addresses the largest gap we have in our culinary offering, which is for a low-carb, low-calorie option.

What's particularly important is that Zucchini noodles address the issue in a manner that strengthens the brand and it affirms our position as the authority on noodles and pasta in the fast-casual space. Moreover, Zucchini noodles have the opportunity to begin a separate platform for the brand, as many different vegetables or even fruit can be spiralized. It's too early to determine the overall impact of Zucchini noodles, but we've been very encouraged during our testing process and the initial several days since launch with the offerings resonance with loyal guests, last users and new users alike. We have found that the Zoodles maintain the heritage of the brand, while eliminating the veto vote that has been a challenge for our concept. In addition to the introduction of Zucchini noodles, we are also seeing the results of making important investments in building our off-premise business, which increased 310 basis points over Q1 of 2017 to 50% of the sales this first quarter.

As it is with our overall strategy, our approach to off-premise is a holistic one. For example, our rewards program heavily influences our online ordering. As a result, ongoing emphasis on our rewards program has been a key driver of online orders, which increased 460 basis points year-over-year in the first quarter to 13% of sales. We are thrilled with the traction that our rewards program is having thus far and believe it presents a substantial opportunity to develop more targeted relationships with our guests. We've also installed quick pick-up shelving units at all of our restaurants nationwide, which improves convenience in our restaurants by making it more seamless for guests to order ahead and pick up their orders at our restaurants.

On the delivery front, we have initiated further tests with third-party providers and anticipate that delivery may be available at nearly half of our system in the near future. Finally, in regards to off-promise, we have made important adjustments to our labor and deployment models, reallocating resources to improve our execution of the off-premise occasion with a particular focus on speed and order accuracy. As we've noted in the past, we believe that the variety inherent in our menu, our resonance with families and how well our food travels, provide a competitive advantage in off-premise that we intend to capitalize on in 2018 and beyond. We will continue to innovate around this tremendous opportunity for the brand. Operationally, we continue to implement changes that provide better experiences for our team members and our guests.

Coinciding with the launch of Zucchini last week, we've also implemented a new look and feel to our menu boards, Welcome Wall and digital ordering platforms to make the experience easier to navigate, while introducing new colors and design elements that bring energy back to the brand. We've also instituted new plate wear that elevates the value perception of our food while making it easier for our teams to serve our guests. Now turning to our outlook for the year, based upon our current assessment following first quarter results, we are reiterating our guidance for full year of 2018. Our guidance for 2018 reflects underlying momentum in the business' top line trends offset by anticipated wage and commodity inflation and investments in marketing and off-premise initiatives. As a reminder, as we entered the second quarter, we have now lacked the impact from last year's store closures from the first quarter of 2017.

Consequently, we anticipate that our restaurant level margin will be similar to the prior year during the balance of 2018. Guidance for full year 2018 includes total revenue of between $440 million and $450 million, modestly positive comparable restaurant sales, restaurant contribution margin of 14.5% to 15% and adjusted EBITDA of $31 million to $33 million. As we enter the next phase of our transformation effort, through the launch of our Zucchini noodles, further enhancements to our rewards program, off-premise capabilities and continued operational improvement, I am confident that we have the right strategy, the right focus and the right team to drive sustainable comparable sales and margin growth for years to come. I would now like to return to Paul for final remarks. Paul J.

B. Murphy - Noodles & Co.: Thanks, Dave. With the launch of our Zucchini noodles or Zoodles, as well as several other initiatives around our off-premise and operational capabilities, we have now entered what we believe will be a special time for Noodles & Company, as we transition from fundamental blocking and tackling to truly bringing the brand to life. These initiatives represent a new phase in our transformation strategy that we feel will result in a sustained, predictable success in both the short and long terms. We are confident in our strategy and excited for the balance of 2018 and the years to come.

Aiyala, please open the lines for question-and-answer.

Operator: Thank you. Our first question is from Jake Bartlett with SunTrust. Your line is now open. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Great.

Thanks for taking the question. My first one was on the guidance for the second quarter, the 1% to 3% same-store sales. How much of that is what you've seen so far in the quarter or how much is that is what you expect Zoodles and the other changes that you've made to help results?
David James Boennighausen - Noodles & Co.: Yeah. Ultimately, Jake, I think it's just the sequential improvement that we've continued to see not just thus far this quarter, but also in the latter parts of Q1 as well. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Okay.

So, in trial traffic or what have you you're marketing around the Zoodles could be incremental to that, is kind of what I'm hearing?
David James Boennighausen - Noodles & Co.: Yeah. Although I would keep in mind that for the first couple of weeks we have Zucchini noodles in place. We're really not doing significant marketing around it. I want to make sure that our teams from an operational perspective are extremely comfortable with executing the Zucchini noodle. I want to make sure that that is 100% execution before we pull more of the marketing triggers.

Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Okay. And then remind me how extensively you tested Zoodles? I don't have to get used to saying that word, but how much you've tested it in the markets before? How many markets have you tested it?
David James Boennighausen - Noodles & Co.: So, we tested it – it's almost been nine months since we've been testing the Zucchini noodles, which started as an operational test, ultimately moving to a consumer test and then as we introduced the Zucchini Romesco earlier this year. We ultimately had one of our major markets, Baltimore, and then two or three smaller markets as well that were part of the test. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Okay. And can you share what the results of those were? I know strong enough to roll it out, but just to frame the potential upside to the model here?
David James Boennighausen - Noodles & Co.: Yeah.

I mean, I think it's a little bit difficult to disclose the entire impact that we saw from a test perspective, but what was extremely exciting with what we saw is without much marketing support, really nice lifts in traffic from those particular restaurants. And it was being driven by frequency. So, we took advantage of the opportunity we have with our rewards program and the information that we received from that program and seeing that even our loyal guests were coming more often due to the Zoodles introduction. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Okay. And then, is this what you expected when you gave prior guidance? I know you reiterated guidance, but looks like the sales trends are fairly strong.

Is this what you would expect? I'm just trying to understand, I know we're kind of – the terminology is the same for modestly positive same-store sales, but seems like it's more than modest right now. I'm just trying to understand why the rest of the guidance was maintained, whether that's just conservatism?
Paul J. B. Murphy - Noodles & Co.: Jake, this is Paul. We, obviously, are very happy with the sequential improvement that we've been seeing quarter-to-quarter.

Very pleased with the lift we've seen entering into Q2, which really began in P3 of Q1, from a strengthening standpoint. Certainly remaining somewhat conservative because we just frankly launched the Zoodles eight days ago, so we just felt like it's early to make any changes until you just get a little bit more time under your belt to make sure that the things that we saw in test prove out on a national basis over a period of time. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Great. And then lastly, you mentioned looking at your development plans going forward. But can you share whether your pipeline, you've been actively building your pipeline for new units or is that kind of far off in light of kind of the more recent improvement in results? I'm just trying to gauge how that's trending in terms of your pipeline, what we might be able to expect?
David James Boennighausen - Noodles & Co.: Yeah.

Well, certainly as we've seen strengthening in the core business as well as the – the new restaurants that we opened in 2017, we've spoken about in the past, has been our strongest class since early 2009. So a lot of confidence in the underlying momentum of the business as well as what we're seeing in our new restaurants, so a lot of confidence there. 2018, from that perspective, Jake, certainly too late to impact, but we certainly will evaluate what 2019 looks like in terms of potentially a significantly increased growth rate. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Great. Thank you very much.

Operator: Our next question is from Nicole Miller with Piper Jaffray. Your line is now open. Nicole Miller Regan - Piper Jaffray & Co.: Thank you very much. Good afternoon. Two questions please.

First, what does a positive 1% to 3% or just call it low-single-digit comp translate to in terms of store-level margin? And related, albeit separate, what does it take to return back to the 18%? I really can't believe I'm asking this, this final way in terms of cutting costs, because I know it's a top line leverage story and as it's certainly suggesting it, but is that also what is needed in combination with a low-single-digit comp?
David James Boennighausen - Noodles & Co.: Yeah, I mean, I think, with modestly positive comparable restaurant sales, which would probably be on the low end of that, low-single-digit, we expect margin to roughly stay flat, Nicole. As we continue to get same-store sales above that number, we would certainly expect a pretty significant leverage that's something that this brand is capable of doing. In terms of the 18% number, as a reminder for those that are – maybe not followed the story as much, this brand has had the potential to be above 20% in the past and we certainly know there's upside to come. Certainly volume is the biggest driver, but I think supply chain is one area where we're particularly confident that we have the ability to really make some tremendous improvements, which should help that margin get closer towards that high-double-digit range. Nicole Miller Regan - Piper Jaffray & Co.: Okay, great.

And then my second and last question, how are your guest satisfaction scores, is it trending (21:35) up or down? And then if these are the important pieces and there may be other that I just don't recognize, what are consumers saying about bussing themselves or that being done for them, what are they saying about the loyalty program and is Zoodles the right answer to maybe what otherwise was a lot of pasta, is that something that's still an issue or lessening? Thanks. David James Boennighausen - Noodles & Co.: Yeah, I think Paul used the word game-changing and I think that's what we've been seeing echoed from a consumer sentiment perspective over the past few weeks, which has been extremely exciting. What we're seeing is guests that either straightaway from the brand, because of the carbohydrate issue or maybe they haven't tried it, they're speaking very vocally in a very positive way in a social media perspective as are our most loyal guests, whom we're seeing come more often. From a guest satisfaction perspective, we're certainly higher than where we were year-over-year and I think something that's extremely exciting is a lot of that is coming from just the service our teams are doing, I think our execution on an operational level continues to improve. And so we're continuing to get more and more positive feedback from the operational side.

On guest bussing, I do want to address that one specifically, what we've seen and this one has been in test for significant amount of time, Nicole, what used to happen at Noodles & Company, where we bussed every single table. What ultimately happened is the amount of steps to take to buss a table, bring it to the back of the house and then come back to the dining room, we ultimately weren't able to keep up with that demand. So something that we should have gotten credit for from a cleanliness perspective, we were actually getting dinged by guests and consumers for. So what the bussing stations do, we are still absolutely out in the dining room and bussing tables, particularly focused on families, we are very, very keen on ensuring that the tables are bussed, but our team members now, Nicole, only have to take a few steps in order to buss that table and then back to reengage in the dining room. So we saw very nice improvements, not just in our team member engagement when we introduced self-bussing station but actually what the guests were saying about the overall atmosphere and cleanliness.

Nicole Miller Regan - Piper Jaffray & Co.: Great. Thanks for the update.

Operator: Our next question is from Andrew Strelzik with BMO Capital Markets. Your line is now open. Ryan Royce - BMO Capital Markets (United States): Hey.

Good afternoon. This is actually Ryan Royce on for Andrew. Just two questions for me. First one, on delivery, I believe you proved – on the last call you said it was in roughly 15% of the units, is that roughly in the same ballpark or has it expanded to additional markets? And what learnings have you had since it's been in test for a few quarters now, and what do you want to see before you expand that further?
David James Boennighausen - Noodles & Co.: Yeah. I mean, I'll start with the learnings perspective, Ryan, which is it does appear to be incremental, so it does – absolutely there's a demand for it, which I don't think is a surprise as those that follow the industry now.

But there's also the challenge of economics and we feel it's important that the operations are seamless, that it's integrated into our overall execution to where it's easy for our teams to execute the order correctly. So it has not expanded beyond 15%. That said, we are very close to instituting additional tests with two additional delivery service providers that the coverage of those two providers could get us up to 50% in relatively short order. Ryan Royce - BMO Capital Markets (United States): Great. Thanks.

And then just one more for me, your performance is, obviously, getting better from a top line perspective, but we've also seen the industry get better as well, so maybe can you just give some color on what you're seeing from the consumer or in the broader fast-casual competitive environment?
Paul J. B. Murphy - Noodles & Co.: This is Paul. I mean, we're seeing a bit of a rising tide out there, but while we recognize that, we think it's partially the consumers is just kind of settling in a little bit. In terms of noodles, we really believe that the work that we've done operationally over the last six to nine months, the work that we've done on the brand presentation, work that we've done on the menu, we addressed some things that we saw in our metrics that maybe we were a little bit deficient on with the guest out there and we think that the majority of the movement we've made from being kind of running negative 3% to negative 4% to now, as Dave mentioned, looking at Q2 and expecting between a positive 1% to a positive 3% that's significantly greater movement than you're seeing broadly across the industry.

So maybe part of it's attributable to a rising tide, but I think most of it's attributable to the strategy that we've implemented and are executing against and we'll continue to execute against as we move through 2018 into 2019. Ryan Royce - BMO Capital Markets (United States): Great. Thank you very much.

Operator: Our next question is from Andy Barish with Jefferies. Your line is now open.

Andrew Marc Barish -

Jefferies LLC: Hey, guys. Just a quick numbers question and then a second one after that. On operating expenses, I mean, that was the only line item that went the other way versus the leverage you saw in the 1Q. Was there anything discrete in there or anything to call out in that line or is that where some of the investments spend is taking place?
David James Boennighausen - Noodles & Co.: It's a combination of two things, Andy, one is increased utility expense, particularly in the Midwest, because of just the amount for heating. The second thing was some investments on the off-premise occasion in particular on technology that was the other avenue that we had a little bit more investment in.

Andrew Marc Barish -

Jefferies LLC: Okay. And then Paul, in the past on some brands you've worked on, I mean, putting the basics and the people back in place is, obviously, a key to then kind of building off of additional programs or marketing. I mean, do you see marketing as something that is eventually an important part in Noodles or the physical plan; I know you've made the changes with the pick-up shelves but are there future (28:08) looks underway at what the box may look like?
Paul J. B. Murphy - Noodles & Co.: Andy, the answer is yes to both really.

We continue to refine the brand position and then think really all aspects of the brand should come together, whether it's messaging to marketing, not only digital, but some traditional then, obviously, your in-store and then, obviously, the look and feel of the store that all those together need to be aligned and supporting the brand position. And I think ours had maybe become a bit disparate here at Noodles and we're working very hard to bring all that together. And I think you will see more iterations of that over the coming 12 months of work that we're doing. Once again taking a holistic approach where all aspects of the business ladder up and support one another to drive the brand promise and the brand position, the experience has to match it. Andrew Marc Barish -

Jefferies LLC: Thank you.

Operator: We have a follow-up question with Jake Bartlett. Your line is now open. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Thanks. I had a question about the margins and some of the moving pieces, and just in the context of you giving guidance that we're going to be kind of flat year-over-year for the rest of the year. I thought that there were some supply chain savings, I'm wondering whether that was – how much of that drove the 100 basis points lower COGS in the first quarter, but why that wouldn't continue throughout – through the rest of the year? And then also kind of on that front, I believe there's some laboring issues that should continue to be a benefit and then I'm wondering whether marketing then offset some of that.

So, just those three moving pieces would be helpful. David James Boennighausen - Noodles & Co.: Yeah, I will start from a COGS perspective, which we did have some commodity benefit year-over-year and we expect a lot of that will hold. That said, we're about 80% – little bit over 80% booked right now and there's just still enough there that's moving in the market that we think we should be relatively conservative with how we think COGS will ultimately play out. From a labor perspective, I want you to (30:35) keep in mind as we talked about Q1 and the outsized impact that the closures of underperforming restaurants had, certainly you see that in the labor line pretty significantly. So now that we have lapped those closures, you'll see labor come much more similarly in line year-over-year and we'll also lap a lot of those initiatives, so those may recall that we introduced some processes and procedures such as the chopper that helped us from a labor perspective, we'll be lapping that.

So we think from an inflationary component, we'll be hard-pressed just to combat inflation from the labor side of the equation. On a marketing front, we have always from the initial outset in terms of our guidance and our expectations for 2018 knew that from a cadence perspective, we would have more marketing spend during the second half of the year. So Q1's marketing spend was about 1.1% of sales. We think that upticks to between 1.5% and 2% over the balance of this year. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Great.

Including the second quarter?
David James Boennighausen - Noodles & Co.: Correct. Jake Rowland Bartlett - SunTrust Robinson Humphrey, Inc.: Okay. Thank you.

Operator: I'm showing no further questions. I would now like to turn the call back to Dave Boennighausen for any further remarks.

David James Boennighausen - Noodles & Co.: Thank you, Aiyala. I just want to thank everybody for their time today. We're extremely excited with the sequential improvement that we're seeing in the brand, very excited for what's to come in 2018 and I look forward to catching up with you shortly.

Operator: Ladies and gentlemen, this does conclude today's program. Thank you for participating in today's conference.

You may now disconnect. Everyone have a great day.