| A. Mobley | executive |
| Paul Mobley | executive |
Good afternoon, everyone. My name is Scott Mobley, and I'm President and CEO of Noble Roman's. Also here with me today is Paul Mobley, our Executive Chairman and CFO. Paul?
Good afternoon to everyone, and thanks for joining us on the call.
Before we begin, I want to refer you to the safe harbor statement contained in the earnings press release. This conference call will contain the same forward-looking statements and business assessments of the kind referred to in that statement.
So those provisions apply to this conference call as well.
Okay. With that out of the way, we'll get to the substance of the call. I assume that all of you have studied the press release that went out yesterday afternoon. In summary, the third quarter finished with a net income of $193,000 and the third quarter operating income of $416,000 and a 9-month operating income of a little over $1.4 million.
As you may recall, our previous auditing firm had us changed the recognition of franchise fee income and opening expenses to a deferral and amortization system. If we had used the system in place prior to that, our net income for this quarter would have been higher by approximately $160,000.
Our new auditors agreed that our previous way of recognizing income and expense was appropriate based on the terms of our franchise agreements, and we're evaluating before the end of the year whether to return to that previous methodology.
So now looking at the Craft Pizza & Pubs, we had same-store sales increase of about 1%. In that regard, we're seeing a payoff in a number of efforts, including our continued focus on service. That's kept our 30-day Google rating at 4.8.
Our overall focus on maintaining a WOW experience for our guests and the positive reception of our value-oriented XL pizza.
As you may recall, earlier this year, we implemented what we call the 3 carryout WOWs. Those were new service add-ons to elevate the carryout experience.
So late this summer, we introduced a new hourly position we're calling service lead, which is an added position we staff in the restaurants on Thursdays through Sundays to provide extra guest service in the dining room as their sole job responsibility. Again, our goal operationally is to ensure that we're focused on the guest experience and exceeding guest expectations.
Speaking of labor, you'll see that we reduced those costs in the third quarter on a percentage basis despite the extra service position and despite the pressures from increased management salaries. I'll refer you back to our presentation from the annual meeting. There's a chart there that shows how average salaries at that time were up nearly 6.5% over the previous year.
Our management team has done a good job managing labor scheduling, but I've also directed some subtle changes in task responsibilities. This has moved hours from expensive salary management to less expensive hourly labor in a cautious way, but in a way that allowed us to reduce some labor costs on a marginal basis. Cost of sales is more of a battle this quarter, and there are really 2 primary culprits for this.
First, we're promoting the value-oriented XL Pizza, that has a higher percentage cost basis.
The second, we are faced with exorbitant cheese prices, and that makes up 50% of the cost of pizza.
If you look at the midpoint in the quarter, the market price of cheese was elevated about 25% over the long-run average.
Fortunately, that's come down a lot here recently and very fast. Last week, we ended up right around the long-run average, and it's a bit below that today. It will take a bit of time for that to work through the supply chain.
Our primary distributor buys about every 3 weeks, and they work through about the same amount of underlying inventory.
So lower cheese prices at our restaurants are probably roughly 4 weeks out.
Our online digital process is progressing, but not without quite a few technology hurdles that we run into. I am pleased to announce that we're now fully integrated between our POS system, our online ordering system and our primary third-party delivery provider. That is a really huge thing for our operations staff as well as for guest satisfaction.
Currently, our ordering app is progressing in development, but our loyalty program provider was just recently acquired, and that has slowed their integration process, and we really want to introduce the app with integrated loyalty at the same time.
On the nontraditional franchising side, business continues to progress well. Franchising revenue increased almost 10% for the third quarter and 17% for the 9 months. Keep in mind again that the comparisons here are thrown off with that change in the accounting method where we defer franchise fees received in cash for new units and amortize them over the life of the franchise agreement.
If you look at just the royalty income part of the revenue for the 9-month period, you're looking at an almost 23% increase. We've opened 53 new locations so far this year, and the remaining weeks of the current quarter look very busy on the opening schedule. Plans for about 20 more by year's end.
For example, we just opened a Majors location followed by 1 next week that we'll be doing in Tennessee and 4 more before the end of the year. And we just opened a non-Majors location in Missouri this week, and we have 2 more such locations opening next week as well.
In other nontraditional news, we recently concluded a great trade show experience for the annual convenience store operators in Las Vegas. We placed a lot of time and energy in this year's show, and we've accumulated a significant number of great new leads to add to our sales pipeline. Both the sales pipeline and the pipeline of sold and unopened units is very healthy at this point.
Okay. Well, I'm sure you're all once again very interested in the status of the refinance project, it is still proceeding. It's very active, just does not always move at the pace we want it to. There are lots of moving pieces involved in making it happen, significant parts of which are not under our control, and so it does not always move at the pace we prefer. But the progress is there, and it will get concluded as soon as it possibly can.
In the meantime, during the first 9 months, the company has made principal payments on the current debt of $750,000, purchased equipment for $67,000 and reduced accounts payable and accrued expenses by $820,000. That's over $1.64 million in total with only about a $320,000 reduction in cash balance.
So the company is generating significant cash.
Now circling back around to the big picture on the CPP segment before we get to your questions. I've followed the third quarter commentary coming from a few companies as I've had time, and I thought 2 were illustrative of why we've been following the path we're following. I won't name names, but you can easily figure them out.
On the one, we had a major pizza chain on the commodity end of the pizza spectrum that reported company sales down 7%. In their commentary, they focused on the path forward requiring a better commitment to price value. And I think that is exactly right. That is what consumers of that niche expect. They're not expecting the best pizza in the world, but they are looking at convenience and they're looking at price.
The other company of interest is not in the pizza business, but in the coffee business. But rather than being on the commodity side, they are more on the premium side, similar to what we would be in the pizza market. They also reported a 7% sales decline, but their commentary was very different. Instead of deciding to offer more price discounts on their menu, their management is decreasing the discounting and instead focusing on the guest experience again. And I think that is exactly the right strategy for the niche and for ours.
Focusing on the guest experience is what we've committed to, and I think that is the right move for our niche in the market.
Over the last few years, we have steadfastly refused to decrease portions to decrease quality or to discount our regular menu. Instead, we've made that quality while doing everything we can to deliver better and more service and to add more WOW to the experience.
I think that is paying off, and I think it will continue to do so.
Okay. Well, with that, we are concluding the presentation portion of the call.
Next, Paul and I will take your questions.
Roger, go ahead.
It's [indiscernible].
You may have answered the question. I'm not quite sure. Of the 20 additional franchise locations you're opening by year-end, a, how many of those will be for Major? And b, when do you think all 100 Majors will be opened?
Well, 5 of those 20 will likely be Majors locations with the others being nonmajors. The next Major location will be next week, and that will be in Tennessee.
As for when all of the rest of the 100 will be open, well, I guess the quick answer is to say within the guidelines and the development agreement that we have, I think they'll be running well ahead of that. But we don't have a specific time frame within that when each individual one of their units will open.
The development agreement calls for the 100 to be opened by September 26.
Lee, go ahead.
In your nontraditional stores, the first quarter, you did $1.425 million.
Second quarter, you did $1.435 million and then third quarter, $1.437 million.
While this is way above last year, there's not a ton of growth in the numbers for the first 3 quarters. I wonder if you could talk about that.
And then your first 2 quarters, you talked about redoing your debt and you talked about significant interest rate savings.
You tempered that a little bit in this quarter. I wonder if you could comment and give us any other color on the loan refi.
First of all, the growth, as Scott pointed out in his presentation, the growth in nontraditional, if you look at the ongoing royalty, it was around 20%, 23%. And that...
Year-over-year?
Year-over-year. But that's continuing to grow. And if you -- if I had that information in front of me, it would be the same pattern for quarter-over-quarter as well. The difference that's not growing as much is because we don't have near the upfront fees because all of those that we've been selling have gone into deferred income. That will be recognized in the future. We've got $1.5 million of that setting out in deferred income, that will be recognized in future years. But we've already got the cash. We're using the cash and we're getting more cash because we're selling more franchises.
I think we've sold 3 this last week. And -- but those -- it doesn't change our income when we do that because it goes into deferred.
Now the part about the financing, moderated the language on the interest because we simply don't know. We don't know what we're going to have to pay yet. That's still in negotiations. We thought we would be able to get bank financing at this point because the credit metrics and some of the banks we've been approaching are still very interested in saying they're willing to do it and they're going to do it, but they haven't come forward with a written document.
So I've been looking at other alternatives, and we have other alternatives.
We have other alternatives very far along.
In fact, we had some people in here this week, Tuesday of this week and spent the day with them, and they left very excited about going forward. And I think we will move that forward very quickly. But I don't know what the rate is going to be. That's subject to negotiations yet. But we will have savings, and we will not have any dilution by options, warrants or any other type of equity give up.
Mark, go ahead.
Just a couple of questions. One, on the last call, you mentioned you're drafting a 13-unit deal with a large operator on the August call. Has that -- is there any progress on that?
We have not signed the 13-unit deal, but they are individual -- buying individual units, and they're progressing on that, but we haven't signed for the additional 13.
Okay. And my other question is the ERTC, that is still in a receivable. Did you expect it to be in a receivable that long? Is there any cause for concern on that?
There's no concern on it. I've talked to IRS 2 or 3 times myself. And the -- what happened, first of all, there was a lot of fraud and a lot of erroneous filing going on. And we had already received all of the Roanoke 5 quarters and we've received 4 of the 5 quarters for Noble Roman's. But at that point in time, the IRS, I don't know whether it's at their direction or direction of our administration, but somebody put a hold on continuing to process those claims until they got that under control.
Now that supposedly has been under control for a few months now. And the last I talked to IRS agent was about a month ago at this point. And they assured me that our claim had been processed, had been reviewed. It was in the stack when they got to it.
So I don't really know. I don't have any concerns about it because we have a valid claim. We didn't cheat as a lot of people did. We filed it. I had it reviewed by a law firm in Washington, D.C. that was supposedly the #1 authority on this law in the country.
And it was headed by a lady that used to be a tax partner with E&Y or whatever they were called at the time. And she's well versed. I've got about a 48-page opinion letter from her that everything is in order. And I'm not concerned about it. I'm concerned about because they're holding our money. It's $500,000, but I'm not concerned about eventually getting it.
My guess is some of the things that's been going on is they are on a cash -- as you know, I -- the government is on a cash basis. They're running a huge deficit, and they're trying to make that look as good as possible.
And so they're holding up on paying out refunds to -- because there's several millions, billions of dollars still unpaid out in that program that have been approved, result -- they're in the stack to be processed.
Any other questions? I'll keep it open here for a second. All right.
Yes, Michael.
I was just curious on the last shareholder presentation and the one last year, on a follow-on strategic objectives, there's a note there about promoting the company and its stock. I haven't seen any of that. Is that something you are still wanting to do? And are you maybe waiting for the refinance to happen first...
Yes. I have spoken with several people about potential ways we can proceed with promoting the company and the stock, but we are waiting until we complete that financing because that would obviously be the main topic of discussion after the presentation.
All right, any other questions? All right. Well, I don't see any other -- here we've got one. Bill, go ahead, Bill.
Yes. Why were the latest auditor change to Sassetti from Assurance Services or I might not have the names quite right. Why did that occur?
Well, you got -- you were pretty good there on the names.
So Assurance was holding themselves out as a national auditing company, which, in fact, they were attempting to do. But they were doing all of their work remotely.
All of that was being done out of Tampa. We were expecting to have some personal interaction and ability to work together here in our offices, but instead, it turned out to be entirely remote.
And that just -- as you noticed from some of the filings, that was just really slowing the process down dramatically, and we just didn't feel that, that was long-term a workable solution, whereas Sassetti is located in the Chicago area.
So they had people here on site.
As a matter of fact, the managing partner of the firm was here on site for a full day.
So that really helped us move things along very rapidly this quarter, and that part of it has worked out very well.
And they've audited in the year 2023. This is Assurance Dimensions now. They audited year 2023. And in the first 2 quarters of 2024, and I have never seen one person from that firm. I've talked to a lot of the firm members on the phone, but I don't know how you can conduct an audit and review and speed things along when you don't at least make a visit here, know what the people are, now that we've actually got an office and we're located here, and we do business here.
Any other questions? All right. I don't see any more questions.
So on that note, thank you all for participating and joining in on the call. And have a good evening, and we look forward to talking to you soon. We'll be terminating the connection here now. Thanks a lot.