Good afternoon and welcome to today’s Noodles & Company’s Fourth Quarter 2022 Earnings Conference Call. At this time 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 would now like to introduce Noodles & Company’s Chief Financial Officer, Carl Lukach. You may begin.

Thank you and good afternoon, everyone. Welcome to our fourth quarter 2022 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 financial performance of the company. 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 its 2021 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 risk and uncertainties related to the company’s forward-looking statements. I’ll refer you to the documents and the company’s files from time to time with the Securities and Exchange Commission. Specifically, the company’s annual report on Form 10-K for its 2021 fiscal year and subsequent filings we have made. Each document contains and identifies 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 results prepared in accordance with GAAP. A reconciliation of these measures to our most directly comparable GAAP measures is available in our fourth quarter 2022 earnings release and our supplemental information. To the extent that the company provides guidance it did so only on a non-GAAP basis and does not provide reconciliation of such forward-looking non-GAAP measures to GAAP measures. Quantitative reconciling information for these measures is unavailable without unreasonable effort. The corresponding GAAP measures are not acceptable on a forward-looking basis. Now I would like to turn it over to Dave Boennighausen, our Chief Executive Officer.

Thanks, Carl. And good afternoon, everyone. We're pleased with our fourth quarter results as we executed across all three levers of our growth algorithm, resulting in adjusted EBITDA increasing over 100% versus prior year. We delivered strong top-line results driven by a 10.2% increase in company comparable restaurant sales and positive traffic. Restaurant margins increased 280 basis points year-over-year, driven by significant leverage across the P&L, and we successfully opened five new company restaurants. We anticipate the earnings growth trend in Q4 to continue throughout 2023 including a significant reduction in our cost of goods sold line, which given our newly contracted costs should yield improvement of roughly 200 basis points in 2023 relative to last year, equating to approximately $10 million of EBITDA expansion for that line item alone. As we look ahead, we believe that the company is well positioned for significant growth in 2023, driven by continued top-line expansion, supported by strength and digital and loyalty, a normalized cost of goods sold environment, identified efficiencies in multiple expense areas, continued improvement in staffing operations, and our strong unit pipeline. I would first like to start with our strengthened digital and our rapidly growing rewards program. As we've discussed in the past, Noodles & Company’s resonance with the off-premise occasion, combined with our best-in-class digital ecosystem results in some of the best digital metrics in the industry. During the fourth quarter, digital sales grew 11% versus prior year and accounted for over 54% of sales, an increase of 240 basis points versus the third quarter. This momentum has continued into 2023, even lapping the impact of Omicron. As digital has accounted for over 55% of sales year-to-date. This growth in digital has broadened access to the front end, fostered increased engagement with our guests, and supported meaningful growth in our newest rewards program. The Noodles rewards program now accounts for nearly 25% of our sales. And we completed 2022 with 4.5 million members, a 12.5% increase over 2021. We continue to leverage the rewards program to gain valuable insights about guest behavior, become more targeted with our messaging, and develop deeper relationships and loyalty with our guests. We feel there remains significant opportunity in digital and during 2023, we will bolster that strength through both investment and a full 360-degree view customer data platform as well as the implementation of digital menu boards and digital marketing signage throughout the system. From a culinary perspective, the innovation from the past two years, including last year's introduction of the great tasting low carb linguini noodle has resulted in a menu that offers guests a wide variety of fresh craveable major order dishes that meet a broad range of lifestyle needs. Consequently, our focus in 2023 is to leverage our digital assets, both through various channels, as well as through digital menu boards. These will better highlight and showcase the meaningful strengths on the menu and communicate key marketing opportunities. As an example of the potential for digital menu boards, during the holiday season, we leveraged these boards to promote gift cards more actively, resulting in gift card sales at restaurants with digital menu boards that were double those without. Additionally, digital menu boards afforded us the flexibility to quickly implement changes to featured menu items and pricing. As we continue to see top-line expansion, we also anticipate significant opportunities to increase restaurant-level margins in 2023. As I noted earlier, we have entered into fixed cost contracts for the full year for our boneless chicken breast, which accounts for nearly 20% of our overall food spend. These contracted rates are meaningfully below the price that we paid last year and should yield approximately 200 basis points of cost improvement relative to 2022. Additionally, we anticipate continuing to leverage fixed costs throughout the P&L as well as realizing initial benefits from our initiatives surrounding simplification and equipment optimization. Supporting our efficiency initiatives will be the continued strengthening of our people and operations metrics. We remain at full operating hours with staffing at or better than pre-COVID levels. Importantly, during the past four months, General Manager turnover rates have been over 30% better than the same timeframe the prior year. Improved staffing has yielded meaningful improvement in guest metrics such as friendliness, taste of food, and overall net promoter score. While average cup times thus far in 2023 are nearly 45 seconds better than they were just a few months ago. While the strength of our people is essential to maintain momentum at our existing restaurants, they are also critical in the continued success of our recent new restaurant classes. As you mentioned last quarter, our new restaurants continue to perform strongly. Our 2019 and 2020 cohorts, which have entered our cost base, delivered fourth quarter unit volumes above company average, while restaurant level margins exceeded the rest of the system by over 200 basis points. Finally, regarding new unit development, during the fourth quarter we opened five company restaurants. Thus far in 2023, three restaurants have opened, including two restaurants that had to be pushed into early 2023 because of inspection delays related to poor weather over the last two weeks of December. These restaurants have opened exceptionally well, giving us continued confidence in our unit development going forward. We do not anticipate any further openings during the first quarter and currently have seven restaurants under construction for the second quarter. Additionally, from time to time, we will close underperforming restaurants that are near lease end where we believe we're not well-positioned for current customer trends or if they are future relocation candidates. For context in 2022, we closed five locations, which represents a typical year for our center closures. Currently, between sites that are open, under construction, or under lease for 2023, our pipeline remains three times higher than where we were at this point in 2022. Supporting our guidance of 7.5% system-wide gross openings in 2023, inclusive of the two restaurants that were delayed from Q4 into this first quarter. We do expect that our openings will be more concentrated in the back half of 2023 driven by extended development schedules resulting from delayed landlord deliveries and longer permitting cycles. As we look to have more balanced openings in future years, encouragingly, we already have 21 locations under lease or at lease negotiations for 2024. Looking ahead to the balance of the year, we feel that the three levers of our growth algorithm all have meaningful tailwinds. Our comparable restaurant sales continue to be strong as we leverage the core strength of our menu, the ongoing benefit of our digital ecosystem, and the concept’s ability to meet the needs of today's consumer. We anticipate the margin expansion that we delivered in Q4 to extend throughout 2023 on the strength of reduced cost of goods sold, including the benefit of full-year pricing contracts for chicken in 2023 and additional sales leverage throughout the P&L. Finally, our new units are performing above our glide path with a pipeline that continues to strengthen to support accelerated unit growth. I'd now like to turn it over to Carl to share some of our financial highlights from the fourth quarter and our expectations for 2023.

Thank you, Dave, and good afternoon, everyone. During the fourth quarter system-wide, comparable restaurant sales increased 8.7%, including 10.2% at company-owned restaurants and 1.3% at franchise locations. On a two-year stack basis, fourth quarter company-owned and franchise restaurant sales increased 19.7% and 22.1% respectively. Entering 2023 we've continued to see top line strength, even as comparables have become more difficult following the Omicron lap in January. Overall, we anticipate company comparable restaurant sales of high single digits for the first quarter of 2023, driven by the momentum we have in the business and our strong January results. Pricing during the fourth quarter was approximately 9% related to pricing actions taken during the first half of 2022. In February of 2023, we took incremental price of approximately 5% across our core menu, which we expect to result in first quarter pricing just above 10%. We do not anticipate any additional pricing this year unless there is a meaningful change in the economic environment. Our fourth quarter revenue increased 18.9% to $136.5 million compared to last year, driven by strong comparable restaurant sales growth and revenue generated from units opened since 2022. We estimate that revenue was favorably impacted by approximately $9 million related to the 53rd week in the fourth quarter, with the extra week of sales mostly offset by an extra week of costs and expenses. Average unit volumes grew to $1.38 million for the fourth quarter. For the first quarter of 2023, we anticipate total revenues to range between $125 million and $128 million. For the fourth quarter, restaurant level contribution margin was 15.2%, a 280-basis point increase compared to last year. This improvement was the result of meaningful leverage in our labor, occupancy, and operating expenses. While the cost of goods sold increased a hundred basis points versus the prior year on a sequential basis, the cost of goods sold benefited from more normalized chicken prices and improved 120 basis points relative to the third quarter of 2022. Looking ahead, we have contracted the majority of our food baskets on either fixed or formula-based pricing, including full-year fixed pricing contracts for both grilled chicken and parmesan chicken. For 2023, we anticipate our cost of goods sold percentage in the high 25% area driven by 2% commodity deflation, including cost of goods sold in the 26% area for the first quarter. Labor costs for the fourth quarter were 31.2% of sales improving 200 basis points compared to last year. During the quarter, the benefit from labor efficiencies and the rollout from steamers was partially offset by wage inflation of nearly 11%. While wage inflation is moderating, we anticipate elevated levels will continue throughout 2023. As a result, we expect our labor expenses as a percentage of sales in 2023, including the first quarter, to be fairly consistent to slightly higher than the labor costs we saw in 2022. Other operating costs for the quarter were 17.9% of sales compared to 18.4% last year, reflecting strong sales leverage throughout our restaurant expenses. We anticipate that restaurant level expenses will remain relatively consistent versus prior year in 2023. Occupancy expense for the fourth quarter was 8.9% of sales compared to 10.1% last year, driven by sales leverage. We anticipate continued leverage in our occupancy expense throughout 2023 to further support margin expansion. Overall, we expect our contribution margin in the first quarter to be in the range of 12.5% to 12.8%, roughly 300 basis points higher than prior year, driven by improvements in cost of goods sold and leverage in occupancy expense. As a reminder, the first quarter is our seasonally lowest quarter of the year, so we expect higher quarterly margins for the balance of the year relative to Q1. For the full year 2023, we anticipate restaurant level margins between 16% and 17%. G&A for the fourth quarter was $13.7 million, compared to $11.4 million in 2021, with the increase driven by the 53rd week. G&A included non-cash stock-based compensation of approximately $1 million during the fourth quarter, compared to approximately $700,000 last year. For the first quarter of 2023, we anticipate G&A to be up to $13.5 million to $14 million, including stock-based compensation of $1.4 million. This compares to G&A of $11.8 million last year, including stock-based compensation of $1.2 million. The largest driver of the increase is the assumption of an accrued bonus at target, following reduced bonus expense in 2022. GAAP net income for the fourth quarter was $975,000, or $0.02 per diluted share, compared to a net loss of $4.7 million last year, or negative $0.10 per diluted share. Non-GAAP diluted earnings per share was $0.03, compared to a negative $0.05 last year. Please refer to our earnings release for reconciliations of non-GAAP measures. For the full year 2023, we expect adjusted EBITDA of approximately $45 million to $50 million and adjusted EPS of $0.10 to $0.20. Our 2023 guidance is based on a more normalized commodity environment, where we have contracted fixed-rate prices on chicken. The commodity environment alone is expected to support nearly $10 million of EBITDA growth compared to 2022. Additionally, our guidance anticipates continued sales leverage across the P&L, particularly in occupancy. It is also important to note that our guidance assumes no material changes in consumer behavior or broader macroeconomic trends. For further detail on 2023 expectations, please refer to the supplemental information in our fourth quarter earnings release. Turning to the balance sheet, at quarter end, we had cash and cash equivalents of $1.5 million and a total debt balance of approximately $47.7 million. We maintain nearly $75 million of incremental liquidity available for future borrowings under our amended credit facility. For the full year, we expect $53 million to $58 million of capital expenditures, which includes approximately $9 million to $11 million during the first quarter. We anticipate a majority of our capital investment to support new unit growth in addition to continued innovation of our website, mobile app, and digital capabilities. Our capital plan also includes the investment in a full digital menu board rollout and upgraded network capabilities in all of our locations by year-end. With that, I would like to turn the call back over to Dave for final remarks.

Thanks, Carl. We are proud of the progress that we've made in the fourth quarter of 2022, including double-digit company comparable sales, 280 basis points of margin expansion, and a $5 million increase in EBITDA year-over-year. As we look at the three levers of earnings growth, comparable sales growth, margin expansion, and unit growth, we feel confident that each of these has meaningful tailwinds as we've entered 2023, and we look forward to sharing with you our progress throughout the year. Thank you for your time today. Please open the lines for Q&A.

And our first question comes from Joshua Long from Stephens. Your line is now open.

Great. Thanks for taking my question. Exciting to see the momentum in the brand and hear that it has continued thus far into Q1. You mentioned strong January trends. As we work through kind of the high-level thought process of just the pushes and pulls over the last couple of years, is that something that you'd be willing to quantify at this point in time?

I'm sorry, I actually missed the question regarding the push. What was it again, Josh?

Yeah, just trying to get some sense of how strong January was. You called it strong at the beginning of the year? Obviously, you've got some good high single-digit comps on Dec for Q1. Just curious if you would be willing to add a little bit more texture to January trends?

Yes, absolutely. What was, I think, exciting, Josh, is that the faster sales, even as you go back through Q4 was actually pretty consistently strong across the full Q4 from October all the way through December and then into January. What's certainly we've seen in the industry, there was the lap of Omicron, leading to particularly strong results in January. But as we look at the momentum in the business today, it hasn't skipped a beat as we look at February. While it's still premature to say what ultimately the assumptions will be for the balance of the year in terms of economic conditions, we're very pleased with what we've seen, even as we've lapped Omicron, not just in our performance but in the current health of the consumer. I'll tell you a few areas we look at, Josh, from how we expect trends to move forward. Looking at the health of that consumer, we're seeing that the frequency of our guests is stable, if not increasing. Second, we're not really seeing any trade down. As the consumer potentially would be under pressure, we're not seeing any trade down within the menu. In fact, the next trend is actually positive. Even in the consumer channels, another avenue we consider to evaluate the health of the business, even as we lap some of the benefits of Omicron, we continue to see really good momentum across all those channels, including higher price channels such as delivery. So overall, yes, January was a little bit stronger than you saw maybe through the full Q4 as well as in February, but overall the health of the business is extremely strong.

Thanks, very helpful. When we think about kind of the components of the comp, perhaps you mentioned it in your section, Carl, if so I missed it. But could we walk through kind of the price mix? I mean, Dave, you just called out that mix was positive. Can you talk through the price mix components there? What you saw kind of on the traffic piece in the quarter? As we think about the pricing you have in place for, that you're going to take here in February, if you didn't take any more, which is in line with the plans you outlined, how does that pricing flow over the course of the year? Or how does that fall off as we get to the back part of 2023?

Sure, Josh, I'll start with the fourth quarter. So fourth quarter pricing was approximately 9%. Most of that was relative to actions that we took during the first half of 2022. And you are correct, as you pointed out in February, we did take an incremental price of 5%, across the menu. So when you think about the pricing decisions that we made last year rolling off, in the back half of 2023, we expect that to be in mid-single digits from a pricing perspective.

Got it. That's helpful. And then one last one for me. When we think about some of the strength in the new unit performance that you called out, how do you think about that? I mean, is that a function of just knowing where that consumer is, what the sites are that you like? I mean, talk about some of those recent classes and the strengths you've seen there and what you've learned as you have optimized new unit development.

Yes, so as a reminder, what we discussed was that the class of 2019 and 2020, as they entered our comparable sales base, their average unit volumes in Q4 were above company average. Their margin was actually 200 basis points greater than the company average. So what that's done is validated that a lot of the work we were already doing, even before COVID, has now been recognized. Whether it be the smaller square footage, pickup windows, and incorporating digital into many of our new restaurants, all of these adjustments are paying dividends in terms of that overall shift toward off-premise and digital that we were doing even as we entered COVID. As we've now gone through COVID and seen how the brand has demonstrated resilience and showcased its strength, this gives us even more confidence in the learnings we've had. Certainly, you see continually less reliance on office generators and retail generators, more on residential areas. This aligns perfectly with the Noodles Company portfolio and allows us to capitalize on our strengths. So, suburban restaurants, higher-income, and better education with smaller square footage, off-premise-oriented footprints—with most having that order-ahead pickup window—gives us continued confidence that the pipeline we have, which is now considerably strengthened, for the back half of 2023 and beyond, will continue to present a very strong high return on investment class.

Great, thank you.

And thank you. One moment for our next question, and our next question comes from Jake Bartlett from Truist. Your line is now open.

Great. Thanks for taking the questions. I wanted to build on that first one that Josh had and see if I can get a little more out of you. On the trend in February specifically, the commentary in February that it remained strong sounds like January was stronger. But that February remained. If you can contextualize how February's done that would just, I think, help us understand the trajectory here. I think last year you had given us, in fact, what the January, you know, was at 2.7, I think, then it went to 7.5 last year in February. So I don't know any more detail, any more color to help us understand the trajectory in January and February this year would be helpful.

Yes, sure. February remained in the high single digits which is reflected in our overall guidance for Q1. Where I think it becomes a little bit more challenging, Jake, as you look beyond Q1, I mean, Q1 we're very confident with the results we're seeing in the health of the consumer. As you look at exiting Q1 into Q2, we still feel that momentum is there. But just feel it's a little bit premature to make too many assumptions on what the economic conditions will be as you get further into the year. But February's growth was still in that high-single-digit range.

Great. And I just want to make sure I understood the margin guidance. So, you expect about 210 to 210 basis points of restaurant margin expansion in '23, 200 comes from COGS. I think if I heard right, there's a little deleverage on labor. But then you get that back in occupancy and others. Is that right? Am I getting the right pieces?

That's fair to say from the margin guidance perspective. We have a lot of visibility on the cost of goods sold expansion that is embedded in our guidance, because we're in these long-term full-year fixed-price contracts, particularly within chicken and other proteins. So that gives us the confidence in that favorability from the COGS perspective. For the rest of the P&L, you're right; there's probably going to be some leverage as we think about the sales growth within the year down the P&L, particularly in occupancy. On the labor side, we have been seeing some inflation levels persist as we go into 2023. Embedded in that forecast is that this inflation does moderate, but continues into the year. So that's where the guidance on the labor margin as a percent of sales is relatively in line to just slightly worse than last year.

Okay, great. And then I had a question on development. And I wanted to gauge if you could just talk about the visibility you have in the growth in '23. I know that continuing to separate from others are on challenges getting stores open. So, what level of confidence do you have in that? I think the math is roughly 34 openings to get that 7.5%. Just want to know if there's a buffer in there or margin of error if some of these headwinds don't ease? And then the second part of it is just on the net unit growth part? I count by what we're seeing, it looks like, there's been, I think, three stores closed, you're just in the first quarter here. So if you can level set us, make sure we understand what we should be thinking about for net growth in '23?

Sure. So let's go ahead and start with that second question. So actually, two restaurants have been closed; they were nearing their lease term end thus far in 2023. The other one that you're likely referring to, Jake, is one that had to be temporarily closed due to a water main break during a significant cold spell in Wisconsin. That restaurant is going to be closed for a couple of months in order to get it back online. So that is purely a temporary closure. Therefore, what we expect, as we said, is that for a typical year for us, about 1% of our units, as they've approached lease ends after being there for 10 years, we ultimately decide they are not well-positioned for the new post-COVID environment, or they may be potential relocation candidates. That is an appropriate way to look at closures on an ongoing basis. What gives us great confidence in terms of the 7.5% guidance for this year is the fact that even though it is a bit back loaded, where we are from a pipeline perspective in terms of sites that have been signed with leases or are close to lease negotiations, construction has already started. Again, it is about three times higher than where we were at this point in 2022. So those are deals that are already real and being worked on. This gives us more confidence than ever that there is a margin of error. Given the environment, what we are assuming in our guidance is that there isn't an improvement in the overall environment, and we assume that it's going to remain challenging in terms of the delays that you've seen from a permitting perspective and landlord delivery dates. So that is already incorporated into our guidance and our overall pipeline. As you said, we already have 21 sites that are very far along for 2024 openings, giving us even more buffers as we look at ultimately getting to a very balanced pipeline.

Great. I appreciate it. Thank you.

And our next question comes from Andy Barish from Jefferies. Your line is now open.

Good evening, everyone. I'm curious about the labor dynamics for this year and whether the Profitality initiatives you're implementing in 2023 are anticipated to yield benefits in 2024. Any initial insights on this would be appreciated.

Yes, to give perspective on those on the calls, and maybe you're not familiar with the Profitality work. If you go back several years, we instituted a kitchen of the future initiative using a third party called Profitality, which came into our restaurants and looked at every task that's done—500 tasks throughout the day—to identify time-motion aspects of it to understand where there were pinch points, where were opportunities for us to be more efficient. The result of that project was ultimately the elimination of over 10% of our crude labor hours that were necessary inside the restaurant. While that happened, we actually improved taste of food scores, improved temperature, and improved cook times. So, it was a win across the organization. Starting late last year, we reengaged with Profitality, recognizing that versus pre-COVID the shift has been even more toward off-premise. There is a different type of opportunity that we see in terms of what is the kitchen of the future. Where we're at in that process, Andy, it's still too early to quantify. What we have seen is that they have been able to identify the gaps; the work we had done to address certain bottlenecks has indeed solved many of those. Where there are potential opportunities still involve areas around Expo where we garnish foods before delivering, as well as in the protein manufacturing. We will, in the next few weeks, actually receive layouts, design, and recommendations for equipment on how we can activate that both for existing restaurants and new units to even reduce costs out of the build-out. So too early to quantify how many labor hours we expect from this, but it is important to know that embedded in the guidance, we wanted to ensure that it incorporated things we knew we already had visibility on, such as the cost of goods sold expansion based on fixed contracts. We believe that as we move forward with labor improvements, there could potentially be upside, but at the moment our intent is to execute on what we already know.

Excellent. And then just to follow up on the occupancy line, which, you know, is also a driver for the margin expansion this year. I guess it's a little bit difficult to quantify, but how much of what you're expecting is just leverage from sales versus the mix of these smaller units coming in with lower occupancy costs versus the existing fleet?

Yes. From a pure math perspective, the number of new units is such that the leverage you're seeing is almost entirely on the existing fleet. What we saw in Q4, we expect to see a continuation throughout 2023. Where I think it's exciting is that even with that smaller square footage on rent per square foot, you're not really paying much of a premium. So as you look at that class of 2019 and 2020 that was able to hit company average and barely beat it from an AUV perspective, but actually surpass margin, a big part of that comes from the fact that they're just able to get that occupancy leverage. This gives us increased confidence in the overall unit growth opportunity for us, that even in an elevated cost environment, we’re still able to meet those cash on cash return objectives.

Thank you very much.

And thank you. One moment for our next question. Our next question comes from Todd Brooks, the Benchmark Company, your line is now open.

Hey, great. Thanks for taking my questions. Carl, I want to start out; you gave us some G&A guidance for the first quarter in that $13 million range. I look at the other items of annual guidance and they're all as expected, but where do you think the G&A number annualizes to? Can you give us some detail on how much of that is the full accrual of bonuses in your thinking?

Sure. So, Todd, I think that the first quarter is a good indication of a quarterly cadence for the rest of the year when I think about G&A. The largest driver which I mentioned on the call is the accrued bonus at target following the reduced bonus expense in 2022. To a much lesser extent, there is some G&A that is expected due to the increase in our investment in the customer data platform and overall increased technology costs with some of our existing vendors.

Okay, great. That's helpful. Thanks. And then, giving to franchisees, two questions on this front. One looks like a pretty big spread between corporate store performance and franchisee same-store sales performance in the quarter. Thoughts on what that driver of that spread might be? And then if we can talk prospectively about the franchising pipeline. Obviously, the environment's gotten tougher to get deals across the finish line, but as you're thinking about growth going forward over the next few years, how does accelerated franchisee growth figure into that?

Yes, so let's start with the same-store sales spread that you saw in Q4. From a two-year stack basis, actually the franchise group, which was going against an extremely strong Q4 of 2021, was still very high, above 20% on a two-year basis, even above the company average. I think when you look at the overall health of the system it's important to us; even as we look at the quarter-to-date, every single market we have is experiencing positive same-store sales, whether it's company or franchise. This momentum we are seeing is very widespread. From the second part of your question, in terms of the franchise pipeline, we're actually observing some improvement. Now, it has been a challenging environment, contrary to what we first expected when we initiated franchise sales. I expect the first restaurants to open later on this year, very early in 2024 for the California franchisee that we signed as well as for the El Paso, Southeast New Mexico franchisee. We saw an increase in leads, as the environment has stabilized for certain aspects of the economy. Particularly for us, in regard to inflation, the visibility we have that our cost of goods sold is actually going to deflate has led to an increase in overall franchise interest, and we expect that to further progress as we continue to hit the metrics we expect, and we witness the visibility throughout 2023. So, we are seeing some improvement in that environment overall.

Okay. Great, thanks, Dave. And then final one, and I'll jump back into the queue. Digital menu boards, you gave the concrete example about gift card sales being doubled in stores that had them versus stores that didn't. Are there other early learnings that you can point to as far as average ticket list, when you've got the digital menu boards, items per transaction? You're starting to get a little bit of meat now behind having this in a period of stores for a period of time here? Anything else you can share with us on the benefit of this investment? Thanks.

Yes. Other areas we are also seeing, such as our making a meal program, which allows people to get a drink and then a choice of a side or dessert, when we feature that in digital restaurants, we’ve seen about a 50% increase in the uptake of those items, seeing something similar regarding the linguini, because we are able to be much more compelling in how we communicate that messaging. Therefore, across the organization, we feel digital menu boards aren't necessarily new in the restaurant space; it's all about how you use them. For us, we've developed that strong rewards program, that strong understanding of our guests, and the overall digital ecosystem that we see there's tremendous upside for a brand that thrives on variety. We thrive on offering guests customization made to order. Being able to convey all of those strengths to our guests, we feel digital menu boards are just extremely well-tailored for us. Additionally, the increased flexibility they provide from a pricing perspective and testing perspective, etc., leads us to believe that digital menu boards are a transformative investment for us during 2023. Some of the momentum that you already see, whether it's gift card sales, linguini mix orders, or the 'make it a meal' program, as our team continues to evolve and utilize data and do the A/B testing to optimize those aspects, we see significant potential growth.

And our next follow-up question comes from Jake Bartlett from Truist. Your line is now open.

Thanks for taking my follow-up. On the CapEx, how much of that CapEx you're guiding to in '23 is going to be the menu boards or other kinds of digital initiatives that will be temporary in nature? I'm just wondering if there's a way to understand how CapEx would trend after that. And then also, Carl, if you can tell us whether you think that given the CapEx slide, whether you think free cash flow would be positive or negative or maybe flat in '23?

Sure. So, in terms of the CapEx guidance, a majority of this, as you alluded to, is our growth initiatives regarding new restaurant openings and the anticipated investment in the digital menu boards. Maintenance CapEx is around $5 million. The majority here is those investments. As we consider our free cash flow position for 2023, we anticipate that our operating free cash flow is supportive of these capital investments we're making. Having said that, we do feel good about our liquidity position. We have $75 million available to us under our new credit agreement, which remains highly favorable and flexible. So, we feel we are in a good position from a liquidity and capital spending perspective.

And just to be clear, it's the menu board rollout that's happening in '23, is that right? Or is that something that would spread into '24? Just trying to figure out when that goes away, or if there's a way you can help us understand the menu board and how that's impacted CapEx?

Yeah, that's correct. So, regarding the debt perspective or free cash flow perspective, Q1 is naturally the lowest seasonality we experience throughout the year. You can expect there will be some negative free cash flow here during Q1. As we implement the digital menu boards, moving forward, beyond this initial investment, we don't foresee any material type of investment along the lines of digital menu boards, which are in the neighborhood of about $10 million, possibly a little more for 2023. This is intended to be a one-time investment to bring the restaurants up to speed. That said, we believe this investment has a high return based on everything I talked about earlier in terms of flexibility, check optimization, traffic enhancement, and brand reinforcement, as well as it reduces some costs related to physical board changes.

Great. Thank you so much.

And I'm showing no further questions. I would now like to turn the call back over to Dave Boennighausen for closing remarks.

Thanks, Justin. Thank you again, everyone for your time. We achieved strong same-store sales, significant margin expansion outside of the EBITDA growth in Q4. We feel we have strong visibility into continued expansion here into 2023. Combined with a strong needed pipeline, we look forward to the balance of the year and discussing our progress in future calls. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.