Operator: Good afternoon and welcome to today's Noodles & Company's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to introduce Noodles & Company's Chief Financial Officer, Carl Lukach. Lukach, your line is now open. Go ahead.

Carl Lukach: Thank you and good afternoon, everyone.

Welcome to our second-quarter 2021 earnings call. Here with me this afternoon is Dave Boennighausen, our Chief Executive Officer. I'd like to start by going over a few regulatory matters. During our opening remarks and in response to your questions, we may make forward-looking statements regarding future events or the future performance of the company. As such, any such items, including details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Such statements are only projections and actual events or results could differ materially from those projections due to a number of risks and uncertainties. The safe harbor statement in this afternoon's news release and the cautionary statement in the company's annual report on Form 10-K for 2020 fiscal year and subsequent filings with the SEC are considered a part of this conference call, including the portions of each that set forth the risks and uncertainties related to the company's forward-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 2020 fiscal year and subsequent filings we have made. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.

These measures should not be considered in isolation or as a substitute for our financial performance prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second-quarter 2021 earnings release and our supplemental information. Now, I would like to turn it over to Dave Boennighausen, our chief executive officer.

Dave Boennighausen: Thanks, Carl and good afternoon, everyone. I'm excited to share with you today details of our strong performance in the second quarter and the momentum that we see in the business.

For the quarter we reported total revenue of $125.6 million, a 57% increase versus the prior year. Our performance was fueled by record level company average unit volumes for the quarter of $1.35 million, which reflected a 12.3% increase versus the second quarter of 2019. I'm pleased to report that the strong performance has continued thus far in the third quarter as well, where we've seen sales acceleration relative to 2019. In addition to our strong sales performance, our restaurant level margin during the second quarter was 18.9% our highest quarterly restaurant level margin since Q4 of 2014, and a 180 basis point increase versus the same quarter in 2019. With significantly stronger restaurant level volumes and profitability and a long runway of unit growth, we continue to be extremely excited with the opportunity ahead of us.

To capitalize on this opportunity, we remain focused on three main strategies. The first is the continued differentiation of our concept to appeal to a broad range of lifestyles, convenience and dietary needs. Second, further activating our brand, particularly through our digital assets and marketing strategy, and third, accelerating our unit growth to take advantage of an operating model we feel is ideally situated for post-COVID world. As we think about the differentiation of our brand, I'd like to start with a discussion of our ongoing success and executing a discipline strategy of countering innovation that's on trend, resonates with guests, and builds brand loyalty. Noodles & Company remains the only national chain offering global flavors through noodles and pasta, and our menu is perfectly suited to meet the needs of today's consumer.

As we've noted in the past, our food travels extremely well. We execute an elevated approach to culinary and we have a considerable strain with a variety of our menu. As we offer favorites from kids to adults healthy to indulgent, and flavors both familiar and new. Well, menu innovation around healthier alternatives has been a key priority for us, exemplified by the launch of Cauliflower Gnocchi earlier this year, we also lean into the strengths of our core menu. During the second quarter, we launched our Tortelloni offering, which has already achieved many minutes higher than any prior launch of noodles and company.

For years stuffed pasta has been the most requested item from our guests. And we're extremely excited to meet that request through our 3-Cheese Tortelloni with specialty ingredients like carmelized onions, and a blend of ricotta mozzarella and parmesan cheeses. While it's still too early to determine the ultimate sales driving impact the Tortelloni will have on the business we have been very pleased with the initial results we're seeing, particularly on the frequency of our core guest. As we continue to differentiate the brand for today's environment, I would like to discuss our second strategy, focusing on further activating the brand, particularly through our digital capabilities and improved marketing effectiveness. Noodles & Company's ability to meet and surpass guest expectations for a variety of occasions, has allowed us to recapture over 70% of pre-COVID in restaurant sales during recent weeks, while retaining over 90% of our digital sales.

Consequently, even within restaurant sales returning digital sales continue to account for 56% of sales during the second quarter. While we've made great progress, we continue to believe that we're still in the early innings of more effectively utilizing our digital assets and data to better engage with our guests and develop deeper relationships and insights into their behavior. One of our best tools to engage with our guests is our news rewards program, which has grown to 3.8 million members, which compares favorably relative to the industry we're normalizing for restaurant count. We saw significant growth in our rewards program during the second quarter, aided by our Tortelloni launch, which we introduced for the first two weeks as an exclusive rewards member offering. This allowed us to garner a significant increase in reward signups at launch, as well as differentiate the value of the company's rewards program relative to the industry.

As we bring an increased number of new guests into the brand, we continue to leverage insights for our loyalty program to help drive frequency and brand loyalty. Our communication continues to become more personalized and our utilization of tailored offers to drive specific buying behaviors has resulted in a meaningful increase in frequency amongst our core guests. Ultimately, we feel the strength of the brand, along with our continued focus on targeted and personalized marketing has created a powerful combination to engage guests at all points in the customer journey. These marketing capabilities are particularly important as we consider our third strategy, which is to accelerate unit growth. We continue to believe in our opportunity to ultimately operate at least 1,500 restaurants domestically supported by at least 7% system or unit growth in 2022 and soon thereafter reaching an annual growth rate of at least 10%.

During the second quarter we open three restaurants system wide, two company and one franchise location. I would like to share a bit of insight into two of these locations as I think they represent the breadth and the depth of the Noodles & Company's growth potential. One of the company locations that opened during the second quarter was our first ghost kitchen. This location open to the dense residential part of Chicago is already providing great insight into the opportunity to build the brand in a low cost efficient manner. Just as importantly, this ghost kitchen is allowing us to sharpen our digital marketing for an urban delivery focused landscape.

And moreover, due to its small footprint, we're learning ways to be more efficient throughout all of our labor and food operations. We are encouraged by the momentum we are seeing in this location and look forward to our second ghost kitchen, which we anticipate opening in San Jose later this year. The second opening I'd like to focus on is actually a franchised location in a more rural setting in North Dakota. Due to construction delays, this restaurant opened with sales transactions solely coming through our order had drive-thru window. Despite this limitation, this restaurant has been posting annualized AUBs of $1.6 million since opening further evidence of the power of our off premise capabilities in general, and our drive-thru windows in particular.

While the return we are seeing in restaurant sales for the overall system does indicate that in restaurant dining will continue to be an important aspect of the overall dining experience. These types of successes give us even more confidence in our ability to accelerate growth with a flexible, lower square footage more off premise oriented operating model. While we expect the balance of 2021 openings will be a bit back loaded. The pipeline for new restaurant development for 2022 and beyond looks very strong, both from a company and franchise perspective. We also continue to expect that at least 70% of these locations will feature our order ahead drive-thru windows.

The performance of newer units, combined with a more productive economic model from top to bottom, and complemented by franchise growth in new territories will be a powerful engine for unit growth and earnings growth for several years to come. As we said before, for each of our three strategies, continued differentiation of our unique brand strengths, activating the brand through our digital and marketing channels, and accelerating unit growth. The importance of our team cannot be overstated. As we all know, hospitality workers in general, and restaurant workers in particular, have been some of the true heroes of the past year and a half. I could not be more proud of our team.

During the second quarter, this team proved once again, that you can have a culture dedicated to caring for each other and caring for your fellow human beings, while at the same time delivering incredible growth and financial results. Our industry leading benefits from mental health to adoption assistance to enhanced maternity leave, have provided value and assurance to team members in an uncertain world. Our best in class training and development programs from the use of cutting edge technology to consistent and restaurant standard validation to formal development programs demonstrate our commitment to team members that when they join Noodles & Company, they have the opportunity to grow career. And finally, our steadfast commitment to simply providing a great experience for team members and guests alike, from enhance food and safety protocols to greeting each other with a smile have allowed us to become even stronger than ever, and position the brand to be a clear winner in the years to come. I'm incredibly excited for the balance of 2021 and beyond in Noodles & Company.

And with that, I'd like to turn it over to Carl to walk through our financials from Q2.

Carl Lukach: Thank you, Dave. And good afternoon, everyone. In terms of the financial highlights, total revenue for the second quarter increased 57% to $125.6 million compared to last year. Comparable restaurant sales versus 2020 increased 56.8% system wide comprised of a 55.7% increase at company owned locations and a 63.8% increase at franchise restaurants.

Average unit volumes for the second quarter were $1.35 million, representing a 12.3% growth rate compared to the pre-COVID second quarter of 2019. As Dave noted, we have been encouraged by the continued momentum into July, where we have seen our sales trajectory accelerate relative to 2019. Total revenue was partially offset by temporary COVID related restaurant closure days. These closure days improved significantly throughout the quarter and have remained at lower levels through the third quarter to date. I will note however, that uncertainty still exists with the potential impact of the COVID-19 Delta variant and we will of course prioritize the health and safety of our guests and employees.

We continue to follow requirements by local jurisdictions with regards to social distancing and mask wearing. On a restaurant contribution basis our restaurant level margins were 18.9% in the second quarter compared to 6.7% last year. Relative to the second quarter of 2019 which we believe to be more relevant comparison, contribution margin increased 180 basis points from 17.1%. We are proud of our achievements in contribution margin, particularly around labor efficiencies and managing our food costs, which have now fully offset the expense related to third party delivery fees. Our performance gives us further confidence in our ability to meet or surpass our accelerated growth objectives of 20% companywide contribution margin by 2024.

Reviewing margin drivers in a bit more detail. For the second quarter, our cost of goods sold was 24.9%, which represents a 10 basis point improvement from last year and a 70 basis point improvement in 2019. Improvement was due primarily to menu pricing and efficiently managing our promotions in addition to lower contracted food costs. During the quarter, we saw minimal financial impact as it relates to commodity inflation. And I've been particularly encouraged at our ability to navigate a challenging supplier environment.

Having said that, as we head into the third quarter, we are not alone in navigating industry, wide inflationary pressures, and overall staffing shortages with our food vendors and other suppliers. In light of these headwinds, we are taking an additional 3% pricing increase to our core menu beginning next week. At an average per person spend of just over $10 Noodles continues to provide a tremendous value proposition to our loyal guests which affords us with pricing power to offset the future costs. Our anticipated 3% pricing increase would take our year-to-date pricing to 5.5% which we expect to offset the expected commodity inflation we are forecasting for the back half of the year. Keep in mind, this offset will be on $1 basis.

And we would expect to see an impact to our normalized cost of goods sold margin by an additional 60 to 80 basis points. We will continue to track the financial impact closely and make changes to our business as appropriate. Labor costs for the quarter were 29.8% of sales, a 410 basis point improvement from last year and a 290 basis point improvement from 2019. Our performance was primarily driven by realized labor model efficiencies through our kitchen of the future initiatives, particularly a reduction in front of house hours in addition to sales leverage. These drivers more than offset an increase in restaurant level incentive based compensation given our sales outperformance this quarter.

Overall, we are pleased with our continued execution against our labor hour’s management and remain encouraged by turnover trends, which have resulted in lower training costs compared to last year. A further driver of labor efficiency continues to be the rollout of our steamer equipment, which we are targeting reduction of approximately two labor hours per restaurant per day. We have completed 162 installs to date, which represents 43% of the company and we expect over 90% of steamers to be rolled out by 2021 assuming no further supply chain disruption. We remain encouraged by the positive results demonstrated by improved cook times, reduced labor hours and better taste of food scores. Operating costs to the quarter were 17% of sales compared to 19.7% last year, due primarily to sales leverage.

Operating costs was 280 basis points higher than 2019 due to an increase in third party delivery fees, as this channel remains a critical avenue to drive brand awareness for new guests and ultimately convert guests into brand loyalists. Our guests are returning to in-restaurant orders and dinning which has now increased to 73% of pre-COVID levels. Even with the growth we're seeing in the restaurant channel, we remain encouraged by the strength of our off-premise and digital business, which has performed consistently on an absolute dollar basis through the second quarter and into July. As a result, we expect other operating costs to be in the mid 17% area for the second half of the year and as absolute delivery fees are expected to remain somewhat flat going forward even as the growth as in restaurant ordering has evolved our overall digital next. G&A for the quarter was $13 million compared to $10 million last year.

As a percent of total revenue G&A decreased 220 basis points compared to last year. The growth in G&A dollars was driven by investments to support our growth strategy, in addition to a more normalized compensation structure, including an increase in bonus accruals relative to 2020. G&A includes non cash stock based compensation of $1.6 million during the second quarter compared to $1.1 million last year. We anticipate that stock based compensation going forward will be approximately 1 million per quarter. GAAP net income for the second quarter was $5.7 million or $0.12 per diluted share compared to a net loss of $13.5 million last year, or $0.30 per diluted share.

We also report our net income on an adjusted basis which normalizes for a statutory tax rate, because our effective tax rate is impacted by our valuation allowance on deferred taxes. Additionally, our adjusted net income normalizes for the impact of impairments, divestitures and closures. On an adjusted basis, our net income was $4.6 million, or $0.10 per diluted share, compared to a net loss of $8.1 million or $0.18 per diluted share. Going forward, we estimate that our statutory tax rate used in our adjustment to net income will be between 25% and 27%. And as a reminder, at year end 2020, we had approximately $115 million of federal NOLs and federal tax credits.

As such, no federal tax payments are expected in the near term by cash basis. Switching to the 2021 outlook, we remain very encouraged by our sales performance through July. For the third quarter of 2021, we anticipate total revenue of around $122 million to $126 million which would assume a similar trend in average unit volumes that we saw in the second quarter when compared to 2019. From a unit development perspective, our real estate and construction teams continue to do an excellent job of building our pipeline for the remainder of the year and beyond. We continue to anticipate 10 to 15 new restaurant opening system wide 2021 including 8 to 11 new company restaurants.

Although we anticipate that some of our 2021 new restaurant openings could push in the earlier part of 2022 driven in part by landlords’ delays. We remain optimistic about our 2022 pipeline, in which we expect at least 7% unit growth on a system wide basis, quickly accelerating to 10% thereafter. From a capital perspective, we continue to expect full year capital expenditures of approximately $20 million to $24 million. Turning to the balance sheet. We feel very good about our current liquidity position.

At quarter end, we had cash and cash equivalents of $17.3 million and a total debt balance of approximately $37.3 million. Our net debt of $19.9 million was $14.3 million below our net debt balance at the end of fiscal 2020. We anticipate that we will produce positive free cash flow through the remainder of 2021 and our ability to maintain strong liquidity will provide ample room to meet our growth objectives. With that, I would like to turn the call back over to Dave for final remarks.

Dave Boennighausen: Thanks, Carl.

Well, there are many challenges and uncertainties in the current environment, particularly regarding the impact of the Delta COVID variant, our performance the past several months and in particular, our off premise digital and menu strengths just bolsters our confidence Noodles & Company's ability to navigate and thrive in any environment. The brand remains differentiated with a menu that is on trend and resonates with a wide variety of guests and needs dates. Our digital and off premise strengths are perfectly suited for today's consumer environment, and continue to improve as we establish deeper engagement with our guests. And our operating and economic model continues to strengthen as we capitalize on the significant expansion opportunity, both for company and franchise development. I'd like to reiterate my thanks to our teams throughout the country.

Their tireless efforts have allowed the company to set new internal records in the short term, but more importantly, create an incredibly powerful culture and economic model to drive outsized growth for the years to come. With that lead, please open lines for Q&A.

Operator: Certainly. Thank you. [Operator Instructions] And your first question comes from the line of Jake Bartlett from Truist Securities.

Your line is now open.

Jake Bartlett: Great, thanks for taking the question. And congratulations on the momentum the business. My question was about the same store sales and how they trended throughout the second quarter and maybe if you can get more specific on what kind of momentum you're seeing in July. My notes are that I think your April thing for sales were up 13% versus 19.

Looks like it might have decelerated from that but if you can just give us the cadence throughout the quarter more specific on the trend in July. And then I think that last comment or towards the end of the script was that you expect you have similar trends in the third quarter versus the second quarter. Yet you also made the comment that momentum has accelerated in July. So maybe if you can square that for us.

Dave Boennighausen: Yes.

Absolutely. I mean, I think we're excited to report check that actually, we saw momentum increasing from a two year growth perspective as we exited Q2, as well as thus far during the third quarter. From an average unit volume perspective one reason why still talking about that million 3-5 is from a seasonality perspective, you do have two holidays that fall into the third quarter, the Fourth of July, as well as Labor Day. And those tend to be seasonally a little bit lower for us. So we actually do expect to see some momentum coming over our growth relative to 19.

While energy volumes, might stay a little bit consistent, or increase a bit, but we're very excited overall with the momentum that we saw, both as we exited in June as well as through thus far in July, and then ultimately into the beginning part here of August.

Jake Bartlett: And then also if you could talk about just what would you expect to be the primary drivers of same store sales in the back half of the year? There was the stuffed pasta was a big hit. Have you anything more that we should expect from the food news perspective? And then whether there's any kind of more specific marketing plans you have? What should give us confidence that you can accelerate from where we are today?

Carl Lukach: Yes I mean, I think just the momentum that we're seeing, actually, in the last few weeks gives us good amount of confidence Jake but Tortelloni just getting started really just launched nationally in June. So you didn't really get to see the momentum impact to Q results very much. So as we've looked at the momentum, we've kind of gained an end exiting Q2 and going into Q3, feel like Tortelloni, we're seeing a particular Jake a lot of increase in frequency from the core gas, super early.

So it's hard to really put the finger on exactly what that impact could be. But we're very bullish on what the overall opportunities with Tortelloni. Mathematically the price increase that Carl mentioned, we'll be layering on 3% of price here later on this month. So that should have a nice benefit as we look through the balance of the year from a sales perspective. And actually still a lot of runway overall on digital and marketing in totality.

I mean, we're seeing some great results from all of our metrics, whether it be engagement with our gas from a social media perspective, to email open rates to just overall engagement with the brand. And we still feel like we're just getting started and you'll continue to see us make the brand even more visible than it is today. So between some mechanics around the price increase, but also still a significant amount of runaway from both the Tortelloni perspective as well as marketing. We feel very confident with what we're going to see the back half of the year.

Dave Boennighausen: Jake one point I just want to add.

Sorry, Jake, if I could just add one point on the day trend we've seen outperformance in dinner through the past several quarters. We're beginning to see outperformance in lunch as well. We're narrowing the gap. Lunch was, there was a wider variance versus 2019. And we're beginning to see that business come back.

So that's an additional revenue driver we can look for.

Jake Bartlett: Great, great, that's helping them. And then last question, just some just want to clarify the comments on margins for the back half of the year. The comment on COGS being down as a percentage of sales and what 68 basis points was that versus the first half of the year? Or was that kind of versus 19? Just want to make sure I understand that. And then I think you did give us what you expect for the other restaurant operating expenses.

But I think the missing piece here is labor. And what do you expect to on labor for the remainder of the year, in terms of leverage or deleverage? Or will that price increase again, fully offset the wage inflation or how should we think about labor for the remainder of the year?

Dave Boennighausen: Couple of things. So on the cost of goods sold side, the 60 to 80 basis point is a comparison to the first half. So when we think about the normalized level of cost of goods sold around 25%, we could see that from 60 to 80 basis points higher in the back half, due to some of the expenses we are offsetting. And again, that would be offset from $1 perspective from our 3% price increase.

But you will see the impact on the margin side. In terms of labor, a driver of labor has been on the sales lever side. So we're going to continue to see that flow through down on a labor margin. We're feeling very encouraged by this. And keep in mind I did mention that the second quarter there was a partial offset by incentive compensation relative to our outperformance in the second quarter.

So that's just one area that going into the second half, we would expect to see as a potential opportunity with respect to the margin.

Jake Bartlett: Great. I appreciate it. Thank you.

Operator: Thank you.

Your next question comes from the line of Nicole Miller from Piper Sandler. Your line is now open.

Nicole Miller: Thank you. Can we go back and revisit I guess, dinning to go versus digital business? So I think retention was 70% and 90%. How did that compare I think last quarter, I did it in dollar amount to tell you the truth.

So I'm wondering what the basis like so when we want to factor are tied to the 1.35 million AUV in dollars, kind of how to think about the base for the digital and non-digital to kind of reconcile that.

Dave Boennighausen: Sure. So for the breakout of the digital and in person. The digital mix for the quarter was 56% total digital and that would represent about 750,000 on total AUV and the in person was about 44% mix of the total, that would represent about 600,000 total AUV for a total of 1.35 million.

Nicole Miller: Then we come back in from the retention to what the base was.

So that's helpful. Thank you. But on the ghost kitchen I don't think I've asked when you look at future development, how many ghost kitchen stores are there and is there anything we need to understand from a CapEx requirement or a unit level economic model point of differentiation that we should take into consideration?

Carl Lukach: Yes. Still ultimately, Nicole very early. And as we look at the overall earnings growth algorithm for Noodles & Company we're not relying on the ghost kitchens to be a meaningful contributor to that overall accretion? Well we do like about the ghost kitchens you can generally get in to a new site for less than $100,000.

What you miss certainly is that you don't have as wide of an audience to draw from it. Primarily a delivery only type of building. It's still early enough that we don't want to put a target on how many we think they could be. We'll know a little bit more as we open the second one in San Jose later this year. What we do love about it, though, is we're learning so much about how do you be more efficient with labor, with food, how do you market in a very targeted way in a more urban fashion? So still a bit early, it's not necessarily part of our overall algorithm.

But we're pretty excited with what we're seeing in the last few weeks in particular, in terms of momentum.

Nicole Miller: And then just last question, I was in some stores, this, I guess, recently, and the steamer I think, is pretty promising to fewer labor hours per unit per day. I think, if I've done some math properly, can save like 30 seconds off ticket time. Is that the point? I mean does it unlock throughput? Does it help with labor and hiring? And I guess that would be the operational like, employee point of view. The second part would be from the consumer point of view I could also imagine like people coming back, and being willing to kind of sit and linger.

But maybe this can speed up the off premise for those that can continue to consume that way? Thank you.

Dave Boennighausen: Yes. Absolutely. We've got the core operating model, Nicole already hit most of the guests’ needs states in terms of speed, and throughput, and so forth. However, given the increased volume, given further opportunity in urban settings, whether it be nontraditional, still want to make sure that the concept gets faster where we can.

So the steamers for those that don't know, what allows us to do is for those dishes that are sautéed, which is majority of our dishes, allows you to bring them up to temperature quicker through the utilization of the steamer before you put it into the sauté pan. So you still get that same quality, that same taste that same texture if people know and love, millions of company just comes a bit quicker. The benefit is, as you noted, Nicole amounts about right in terms of about a 30 improvement on cook times, it does take less labor to go to go through it. And by virtue of being faster, the food's actually hotter. So you actually get a better experience from the guest perspective.

Additionally, you can particularly appreciate this, given the current labor environment. Our approach to cooking and everything being made to order is much more complex than a lot of other concepts. And we have done I think a very strong job from our team of simplifying that and making consistency the hallmark of our brand. What this allows you to do with the steamers is instead of potentially a 17 year old, 18 year old, who is there on the sauté line, having to learn what all set means or having to learn to see when the liquid bubbles, that type of methodology, we don't sacrifice any other when we go to a steamer. But a steamer allows it to be 100% consistent.

You don't end up having that human judgment that can ultimately lead to training challenges and can lead to inconsistency. So one reason we love, the reason we love the steamer so much, very high ROI from a labor savings perspective. So labor savings is a big piece of it. But there's throughput, there's temperature of food, there's training, there's consistency. It really is one of the best industries I've seen in my years of Noodles & Company that really hits everything you would want from a team member perspective, a financial perspective as well as a guest perspective.

Nicole Miller: Thank you.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Andrew Strelzik from BMO Capital Markets. Your line is now open.

Andrew Strelzik: Great, thank you.

Good afternoon. My first question I wanted to ask about the 20% restaurant margin target. And I apologize if I'm parsing your words too closely. But I think you said either getting there sooner or meeting or beating that level now. So it sounds like you're getting a little bit more optimistic about the pathway and the potential of the margins there.

So I'm just curious, what about kind of the margin method is that you're getting more optimistic, maybe which line item what it is specifically that you're seeing that's driving that increased optimism?

Dave Boennighausen: I think more than anything, and Carl should weigh in as well. Andrew it's just the sales and the average unit volume increases we're seeing. So as a reminder for everybody, during the February earnings call, we laid out accelerated growth objectives to meet a million 450 averaging and volumes 20%, restaurant level margin, and then 7% unit growth in 2022 quickly go into 10% in 2023 and beyond. As we see today, versus what we saw in February, clearly a significant amount of momentum. As that momentum has occurred on the buying side, we're seeing the flow through that you would want and need in the margin level as well.

So as we look at 2024, it's still early, I mean, it's still an uncertain environment. So we're not going to revisit necessarily those long term targets yet, Andrew, but we're seeing that average you're buying going to a million 350 and what we see as continued expansion opportunity there in the short term, medium term and long term with the associated flow through that gives us a ton of confidence in the overall meeting and surpassing of those numbers. Additionally, we're continuing to do continuous improvement when it comes to looking at kitchen design, looking at operations procedures, looking at how we bring food into our restaurants. There is still opportunity beyond just sales leverage for us to continue to improve that economic model. So really, on all fronts, we feel like the momentum we've seen between February and where we're at today gives us great confidence and not only to mention, the sheer percentage of restaurants we already have, 300 million, 450 or the 20% restaurant level margin.

It's a significant portion of the population already. So we absolutely know that we can do those.

Andrew Strelzik: That's helpful. And then a question on the pricing and the food inflation. So what level of food inflation Are you expecting now in the back half of the year? Maybe if you can compare that to the front half of the year, the second quarter, however you want to do that? And then why is 3% price the right level? Where would that puts you for the back half versus where you've been? I think you gave a year-to-date number.

And it sounds like maybe you're open to more pricing. I don't know if that's this year or beyond maybe to recover the full extent of the margin percent. So if you could just help pop on some color on that that'd be helpful?

Dave Boennighausen: Yes, let me touch on a little bit more of a price increase and then Carl can weigh in on the overall inflation numbers. So 5.5 % what we're targeting today, inclusive once we have 3% price incorporated. Keep in mind, the vast majority of the price that we've seen thus far this year, has actually been in third party.

So that's where we've got about a 17% price premium for those that are going through a third party. We don't necessarily have plans to revisit pricing and to have further price increases during the balance of this year endure. But we do feel that we have left, we have some dry powder left that we still have several amount of pricing flexibility if we needed to flex it. But we don't expect to, we don't necessarily expect. There is no plans to do so anytime in the near future.

Carl Lukach: And on the inflationary side, I would start off by saying we have a very strong network of suppliers. We've been working with them very closely, primarily to ensure that our restaurants are able to meet the demand of our guests. But there is no doubt in inflationary pressures and challenges in the industry despite these factors, we feel very good about our supplier relationships, our ability to manage these costs, and to maintain supply in the restaurant. So more specifically on the inflationary pressures, we're seeing it in our business on protein and on to go containers. For the most part we're maintaining our contracts with our suppliers.

We have them in place to the remainder of the year. In some cases, we've had to move away from a particular producer or supplier, but we've been able to secure the supply.

Dave Boennighausen: That's from an overall inflation perspective, we expect the high point will actually be additive in Q3. So that's where you potentially see 4% to 5% overall inflation, but we're expected to hopefully moderate from that point forward.

Andrew Strelzik: If I could maybe squeeze one more in just on the development pipeline, how far out are you now? I guess I'm just curious about the visibility.

And then if you could just kind of describe how the conversations with the franchisees and how that program is going as you want to accelerate that piece of the development pipeline. Thank you.

Dave Boennighausen: Sure. On the company pipeline, we are very happy with where we're seeing the pipeline develop. Right now we're working through primarily deals for 2022 and working kind of the back half of the year deals for 2022.

But feel very comfortable. There will be at least about 7% overall unit growth. From the franchise side, I'm pretty excited with what we're seeing both from our existing franchisees who have just thrived through the last several months. And they're very excited with the economic model, the drive-thru window, as I mentioned, that restaurant might not, which is a franchise in North Dakota, which is a franchise location. So we're seeing good momentum from our existing franchisees who are looking for deals.

From the new franchisee perspective, very strong pipeline we're very selective. And we weren't partners that will be with us and grow with us for decades really. So it's a pretty diligent process. But I think you'll see some good news on that as we go through the rest of this year in terms of building out some of those new ideas.

Andrew Strelzik: Great, thank you very much.

Operator: Thank you. Your next question comes from the line of Todd Brooks from CL King & Associates. Your line is now open.

Todd Brooks: Good afternoon, everyone. Just a few leftover questions here.

On the unit side, there was a comment and I may have misinterpreted earlier on the call just talking about the development calendar looking a bit back end loaded. Is that the 21 calendar? Or is that how the 22 calendar is shaping up? And what should we think about for cadence of openings in 22?

Dave Boennighausen: Sure. So it is referring to 2021. I would estimate that at the same time, Todd, that some of the challenges that we're currently seeing from an actual control of the timeline and to put some perspective behind this we're finding great sites. We're finding great deals that we feel very comfortable underwriting that are going to be great news and companies, restaurants for 20 plus years.

So the pipeline itself is getting full very quickly. And we feel good about that. What we are seeing that's a little bit unique versus prior years is the inflation that you're seeing in lumber, the availability of steel and other raw materials, we are seeing the timeline from when we approve a deal and start working on release to when we actually get delivered the site that has been longer than what we have traditionally seen. So that has caused a few instances here in 2021, that pipeline to be a little bit back loaded. 2022 the way the pipeline shapes up today looks like it would be more balanced.

But pragmatically think there's still a bit of time before we get to a more normal developer cycle, if you will. So want to be a bit cautiously optimistic as we talk about the balance from a timing perspective of 2022.

Todd Brooks: That's helpful. And as we start to look out to 22 you talked about 70% of the units having the pickup window but what are you doing as far as footprint with that class? Is this, that progression from 2600 square feet down to 2000 kind of cost of construction and what you think returns of that opening class here will be based on maybe a more efficient box.

Dave Boennighausen: Sure.

So if you think of 2019, and up to the restaurants that we built them thus far this year Todd we're hitting that 30% restaurant level margin, or 30% cash on cash return, I apologize even with development costs that didn't necessarily incorporate some of the savings opportunities that we've identified the lower square footage, etc. So it's been caught your point some of the phased movement towards our ultimate prototype. As we maintain the same type of volumes, and restaurant level margin for future classes, which we absolutely intend to do, we expect to be doing that off of a reasonably smaller development cost. So instead of the $850,000 to $900,000, that we average from 2019 up until the first restaurant or first year restaurants this year, we would expect that to get into the mid seven hundreds. And you see the cash on cash return capabilities there, we feel very comfortable with it.

Those are sites that would be 2,000 square feet. The drive-thru window itself, since we're not doing true ordering through their its digital order had impact on development costs is de-minimis. So we're feeling very excited about the overall cash flow cash return profile of that new class, which will be smaller square footage more off premise oriented, and incorporate a lot of the savings opportunities that Carl and the team have found from the construction site.

Todd Brooks: That's great. And then one final one for me.

I know, Carl, when you were talking about just some of the inflationary pressures and talking about hiring pressures up the supply chain, I wonder if you or Dave can talk about staffing levels at Noodles and tie it to kind of the culture that you've been building out of the additional benefits that you've laid in the better retention? How are you feeling staffing wise relative to this continued spike in demand that you're seeing at the restaurant level?

Carl Lukach: The reason, Todd, I'm glad you asked that question that I've been with this industry, as long as I have is the impact that restaurants have on not just our guests, but our team members. I think over the last year and a half through COVID restaurants are really shown how important they are to the fabric of society and how many important things happen over a meal. Similarly, at the restaurant level itself, you can have a great career, as you started with middle as a company, just from the restaurant industry in general. And our initiatives over the last few years really it's been for a long time around paying fairly first and foremost. We're at a point where our typical team members tips around $15 on average, putting groundbreaking benefits in terms of enhanced maternity leave, surrogacy you name it mental health, as well as just having a culture of people that care for each other.

And realize that standards, and coaching and development and accountability as part of personal growth. We've got a heck of a team right now. And we shared with it on prior calls, and it continues today. Our retention and our turnover metrics relative to the industry is something we're extremely proud of. One of the metrics we're most proud of, over the last couple years.

It's allowed us to navigate this hiring environment, much better than we feel many others probably have had to deal with what they've had to deal with. And we did see a hop and turnover, early part is starting to come down. So we feel that the worst of the staffing challenges are definitely behind us. The team is still laser focused, laser focused on providing just an excellent environment, making sure that everybody is really focused on hiring the right people, training, coaching, developing them through their career as a company. So we've navigated pretty well, they're still tough environment to play, but very happy that we've seen very-very little disruption in our restaurants relative to some of our competitors.

Todd Brooks: That's great, that's good. So it's not that same situation where you're still looking to hire thousands of people to meet the demand. If you've got the peanuts or you want it, you're retaining them and really no operational hiccups from staffing them?

Dave Boennighausen: Yes. It's the restaurant space. So you're going to have a natural level of transients in the industry itself.

So you're always hiring. And we're very happy with the applicant flow that we're seeing. And fortunately, we didn't start this staffing challenge or prices that we like to name it, we started from a better position than I think we would have otherwise due to that culture and our training and development. So yes, we're still hiring all the time. We still are very-very focused on it.

But I think we're in better shape than many than we could have been.

Todd Brooks: Thanks, Dave.

Operator: Thank you. Your next question is a follow up question from Jake Bartlett from Truist Securities. Your line is now open.

Jake Bartlett: Great. Thanks for taking the follow up. I just wanted to make sure I understood the dynamics of menu pricing and the food cost inflation on. I think, so if you're adding about 3% price, and I think just from the commentary, you're roughly 2.5% before. So you're for the full quarter, I think you'd be roughly what 4% or 4.5% on pricing for the third quarter.

If we expect deleverage of 60 to 80 basis points. My math is that food costs inflation would be up near the kind of the 7% - 8% your range and so that doesn't, I don't think jive with what Dave comment about 4.5% to 5% 5%. So just run through again what you specifically expect for pricing in the third. And hopefully even the fourth quarter would be helpful, maybe assuming no additional pricing just so we understand what's rolling off and what you keep. And then really what just specifically what you expect for food costs inflation in the third and fourth quarter?

Dave Boennighausen: Yes.

The other aspect of costs, which isn't necessarily incorporated into that inflation number is actually the to go packaging. And just the sheer amount of it given that we're still have an off premise dominated society as well as we continue to serve in our restaurants, in premise restaurant dining, integral packaging. So that's the other element that I wouldn't necessarily captures. Inflation, that we are seeing some inflation those areas as well. So that's part of the gap.

Carl, if you can kind of clarify on some of the pricing side of the equation.

Carl Lukach: Yes. For the pricing, we've taken that 2.5% year-to-date. So the additional 3% would take us at 5.5% year-to-date, total pricing, we're taking the 3% next week. So we're going to see that impacts for the rest of the third quarter.

Jake Bartlett: And nothing rolls off in the fourth.

Carl Lukach: No plan for the fourth quarter pricing increase right now.

Dave Boennighausen: There will a little bit off actually in early December on the delivery. So as a reminder, we went from 10% per product delivery price premium to 15% last December. So that will roll off.

So that's roughly a percent of price.

Jake Bartlett: Got it. And then the last quick question is the mix of your in app and online, have white label delivery versus third parties. And I think that should try to see if that is increasing, it should be helping that other restaurant operating expense line but it doesn't seem to be or at least exploitation is not in the back half of the year. But how is that going in terms of trying to migrate your consumers to your channels versus a third party?

Dave Boennighausen: We still see opportunity there.

I mean, candidly, it's not moving as quickly as we would like to see it move. We'd like the third parties in terms of it's certainly brought a lot of people into the brand. It's a lot of people have been introduced to company, particularly in some of our last penetrated markets. But we still have a lot of movement that can be done in terms of bringing the percentage of delivery that's through our native channels. It still is just in that kind of 12%, 13% range.

It's kind of modestly seen some benefits. We did Tortelloni because we did create some exclusivity with rewards program. We've brought more people into our own channels. We are starting to see some movement here in the last couple months. But Jake to your point, we consider that a good upside opportunity as we continue to engage that guests in a little bit better way to get them to move towards our new channels.

Jake Bartlett: Great. Thanks a lot. Appreciate it.

Operator: Thank you. I am showing no further question at this time.

I'd like to turn the conference back to Dave for any closing remarks.

Dave Boennighausen: And I appreciate everybody's time today. And still a lot of uncertainty throughout the world. But I think Noodles & Company's performance, particularly in the last three months, but even throughout the last 15 to 18 months, we have so much confidence in our ability to navigate this environment and continue to thrive. As we said earlier, with record level average unit volumes, margins and our best place since 2014 and a significant year growth opportunity ahead of us.

We're just extremely excited for 2021 the balance of it as well as beyond. So appreciate your time and everybody stay safe.

Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

You may now disconnect.