Good afternoon. My name is Todd Brooks. I'm the restaurant and packaged food analyst at The Benchmark Company. I'm pleased to be hosting today's Fireside Chat with the team from Potbelly. We've got joining us from Potbelly, CEO Bob Wright and CFO Steve Cirulis. So, Bob and Steve and their entire team have really driven an impressive brand transformation over their several years that they've been with the company. The company is generating category-leading traffic growth, and we got more evidence of that today. So congrats on that on the pre-release and improving shop level productivity, all of which is fueling momentum behind a franchising effort that we'll get into during the questioning. So thank you both for joining us today. Happy to be here. Sure. Yeah. Bob, I'd love to kick off the conversation, maybe level set for people what the team inherited when- Uh ... when you joined Potbelly and just going through the work that's been done to really position this brand now to grow 10% a year through franchising. Yeah, I mean, look, the number one thing this team inherited was a fantastic brand with a great history and 47 years of staying power. We inherited a nationwide footprint, our presence in several states. We inherited a lot of brand love with our consumer and candidly a lot of great people in the shops. We also inherited a years'-long decline in traffic driven by some value degradation that was, I think, you know, should have been seen. We inherited some failed restaurant-level development, unit development with the company funds that were procured when the company went public. And we had inherited a rather significant talent drain, especially at the director, officer, and senior leader level of the organization. I think we suffered from a lack of confidence as well. Our customers were wondering we're ever gonna grow again. Our employees were, you know, thinking about their future and what that might look like and what it meant. Of course, the investor community, frankly, had kind of lost interest in paying close attention to what we'd done as a public company. And obviously, in the middle of the pandemic, we inherited the, you know, unique circumstances of that. Pre-pandemic, we were a debt-free public company, but with 60% sales losses, significant profitability losses, and cash flow bleeds that were the first effort that Steve and I undertook. Mm-hmm. It's a tremendous brand that needed to be polished and burnished and really unpack and re-energize the core brand equities that were always there. I thought you were gonna say we inherited a pandemic. Yeah. Uh-huh. Which we did. In a way. Yeah, right. Inherited the impact of it, right? Yeah, absolutely. Thanks for that. Steve, if we can pivot to the margin improvement that this team's been able to drive, by our estimate, up probably a little over 300 basis points, within 200 basis points of the 16% goal- Mm-hmm ... at the shop level that was laid out. Can you kind of walk people through the bridge? I know it's not one or two easy answers, but walk us through how we go from 14% this year to 16% in 2024. Sure. Thanks for acknowledging the momentum. You know, when we started here, getting to 16%, I think, was one of those challenges where we kind of looked up and said, "Okay, we'll take it on. It's gonna be tough." But some of the momentum has certainly helped us. I would try to make it simple for everyone, break it into a couple of categories in terms of the bridge, right? So we'll have things that propel us forward and things that'll pull us back. Those things that push us forward on the bridge are going to be sales leverage, right? And sales coming from some price. We've raised price like everybody else has, certainly under the pandemic, but in 2023, you know, kept it to low single digits. We kind of expect that same idea going forward as our strategy is to really just push price to offset inflation. So you got some price, and we continued to build traffic, right? We made the announcement today that a large part of our performance is due to traffic growth, and we expect to continue to push traffic. So price plus traffic gives us some of that leverage on the top side. In that traffic bucket, if I double-click into that part of the bridge, you've got some of our initiatives that are going to help us, right? So our media spend up to 3%. We had been below that, as low as 0.5% when Bob and I started, now up to 3%. Our... We believe we've got room in catering, right, which provides some of that expansion, as well as our perks program, which I know we'll talk about in a minute, but that's been a crown jewel for us in terms of our current growth and our expected growth. Then we've got some things on the menu, which we don't, you know, discuss in too much detail that also will push some of that traffic. And then we've got some things on the initiative side, which hit more directly on some of those items that can lever. So we'll push occupancy with work on leases. We've had some good progress there, and we continue to push that all the time. About 20% of our leases turn over every year, and it's another opportunity to talk to landlords, and get you know a deeper partnership than we already have. Also, on the labor side, continue to make progress. Our COO does an excellent job of really trying to optimize the labor within the shops. Attendant to that is our PDK initiative, our Potbelly Digital Kitchen, which is a productivity enhancer as well as a labor enhancer. And so those are the key elements, along with some supply chain savings that we will get. And there are headwinds against that bridge if we're gonna build it. We've got some inflation that comes in, we talked about that, and some traffic loss when you raise a little bit of price, but we'll get to that 16%. That's what we're pushing for. That, that's great. And I think where we take this now is the success in repositioning the operating model. T he enhanced returns that you're driving at the shop level are really allowing Potbelly to turn into a franchisee-driven- Right Unit growth machine. And really, zero to a hundred isn't the right way to put it, but just an acceleration next year to—and with today's announcement, it looks like really good visibility on hitting the 10% franchisee growth in 2024. Yeah, we feel good about it. You know, it's interesting, even the 16%, we could see what must be true when we started back in the 2020, 2021 year. You know, one of the major things that attracts franchisees is an economic model that's sound, both on the investment side and the ops, the ops economic side too, and that's a really healthy margin for them, even after royalties. So in the acceleration, we've really focused on two elements of the franchise unit growth acceleration, and one is on the sales side. One of our big announcements to my leadership team last year was hiring Lynette McKee to run Senior Vice President of Franchising. She has responsibility for all of the sales functions, so recruitment, franchise selection, franchise selection criteria. She manages the process that people go through, and she's our closer. She also structures the deal to match the size and capability of the franchisee. She does not keep responsibility, like, you know, you see in a lot of organizations, including those I've been involved in, where the remainder of the development responsibility of engineering, construction, and so on, that belongs to a different leader. Adam Noyes, our Chief Operating Officer that Steve just mentioned, he runs that. It's a very execution-centric set of development responsibilities. So if you think about it that way, most of 2024 now is relying on the sales that have been done and the execution against those sales by a different team. Mm-hmm. So that sales team can stay focused on sales all the way through this year. Now they're selling for 2025 and 2026, and the ability to scale the execution side of things is very clear to us of where we are and what we need. Look, I love working with franchisees. I have for over three decades, almost four. Franchisees are wonderful and rational people. They want to be a part of a brand that they're excited about. They want to be a part of a brand where they see potential. They definitely want to be a part of the winning team, and they need the economics to work well for them. As they get closer and start to examine whether or not they might choose to work with a particular brand, they're going to look at a level of detail that either breeds more confidence in the future or gets them a little shaky. Things that get kind of boring to, you know, to the broader audience are incredibly interesting to franchisees. The details around our operations systems, the details around our development systems, why we believe what we believe about marketing. You know, once they're in under the NDA, they're looking at things very closely. Candidly, the feedback from our franchise candidates and all those that have signed deals with us tell us that they very much like what we're doing. Mm-hmm ... and how much we're investing in setting them up. The last thing I'll add, because I think it's a big responsibility for us as a franchisor, given that we still are our largest franchisee, we own and operate more units than anybody else, is we've got to walk the talk. So, it was 2021 when we started to morph our unit-level P&L. It looks exactly like a franchise P&L, but for the royalties. So we're living the, the life that we expect them to live, and, and they have a great appreciation for that. One follow-up on the franchise growth initiatives here. You had an announcement today, along with your positive sales announcement, where your pipeline grew from 150 units two months ago to 192. Yeah. What was announced today. You start to annualize that type of growth, and the visibility into that 10% type of annual unit growth just becomes more, more tangible for investors here. Yeah, it does, and I think the key to how we're developing is, you know, we did this market holding capacity study early when we weren't in active sales mode to try to understand... That's the basis of that 2,000-unit target that we have. 2,000 units in the US in the next eight to 10 years. Of course, that's now the next eight or so years. Mm-hmm. So the compound annual growth rate necessary to achieve that is north of 10%. So 10% is our goal this year. We know that we have to accelerate through that and continue unit development growth that's even beyond it. So by selling franchise development territories in those, you know, high single, low double-digit unit count areas, we spread the responsibility and diversify the risk of not achieving those targets because we have so many franchisees that are developing. We have signed a couple of deals, a little bit on the larger side, but for the most part, they're in that mid-size range. We love the idea of franchise operators that want to have multi-unit development territories. They want to build a decent-sized business for their family and their partners, but also are close enough to the business that they really understand how to operate it and lead it. It's, you know, it's how a lot of brands have grown that way. So to that point that you just made, it looks like you have a bunch of a lot of de novo type of franchisees, new to the brand, have seen the improvements that you've made, have seen some of the refranchising, refranchising deals that you've announced. Yeah. But with these new-to-brand franchisees coming in and helping to build this pipeline, can you just spend a minute on your overall refranchising goals? I think you talked about maybe 100 units over a three-year window. I think you accomplished a third of that this year. Yes. Does anything change with those efforts? Yeah, I think so. I mean, the short answer is it probably slows down a little bit, but the more important part of the answer is the reason why. We said we'd be willing to sell up to 100 units for the purposes of catalyzing growth. If you go back to my comments about the brand, 33 states, coast to coast, 450 units at the time, 430 as we ended the year. There's a lot of under-penetrated markets, and if we know we're not gonna deploy our own capital to finish building those markets, we need to at least be willing to let go of some company units to someone that will. Central Ohio is a great example. As part of the Royal Restaurant Group announcement that we had, they bought four locations in Columbus. They're gonna build 17 more in Columbus, Ohio. We weren't gonna build those 17, and they are far better off with the four as their base of operations. They also signed up for Palm Beach County and Sarasota, Florida, too. Really experienced group. Largest deal we did last year, too, by the way, and probably will be a high watermark for that. But yeah, those are the, those are the types of, of units that we'll build. In terms of scaling it, we haven't really guided to the number of those that we would refranchise, but the, the only reason we would is for the growth. I'll be honest with you, we get a lot of franchisees that approach us wanting to buy a bunch of company units because that happens a lot in the industry. They want to buy the earnings and then operate it as well as they can, and then maybe someday monetize the value accretion that they have on the acquisition, and that's great. That's just not our model. There's not a lot of benefit that flows to us as a company by making that transaction. Mm-hmm. We want the growth. Otherwise, we like the earnings. You know, the primary basis of our valuation as a company is rooted in our earnings, so we want to be a little more stingy about letting go of it. Great. Shifting gears to talk about digital sales mix. About 40%—we're approaching, I think- Yeah. 40% of the business. Very close. Can we talk to the composition of that mix, and then also within that, the flywheel of the Perks loyalty program behind that, and how meaningful of a driver that is to company-specific traffic growth as we're looking forward? Sure. I think I'll start with that number, the near 40% of digital sales. And we think of digital sales as any order that comes through our web or our app, and some of that includes some catering orders that come digitally for us as well. But when I started at the brand, kind of it was 10%, sub 10% digital sales, and we've seen that grow to almost 40%, largely incremental, which has been a boon to the brand for sure. And what Bob was... And we were all able to speak to, starting last quarter, was that more than half of our digital sales come through our own channels, right? There was, I think, early in the pandemic, right, a lot of reliance on DSPs. They had the scale, they had the ability to really reach a lot of folks. And so, you know, we've seen folks migrate back into, back into our channels and, and, you know, where that has shown up is really people taking orders that might have gone to a DSP and really placing them in our, in our mobile pickup. That's where we've seen the most decline is in DSP digital, and the most increase has been in our, in our mobile, mobile pickup. And that's great too, 'cause it's, it's, it's flexible for us, right? And the customer. It's certainly a high-margin transaction for us. Mm-hmm. But also what it does is it gives the customer flexibility, where, they might order it and take it and go to their car, go home, or wherever they're on their way, but they also, we've seen a lot of people use that platform to order. Either skip a line at a high, you know, at a peak time or, take it and sit down and eat, right, in one of our great shops. So we're really excited about the way that our digital business has evolved, and we expect it to continue to be strong. We don't peg a target. You know, we're looking for... We're at 40, we want to be to 50. We're not really looking at it that way, because we always want to be a brand that is accessible to the customer however they want to use us, right? If they want to dine in, fantastic. If they want to take out, great. If they want to have it delivered, that's also that's great. We want to have the right kind of technology and digital experience, which is evocative of the experience that our customers would get if they come into one of our shops. And the other sort of piece of information which is helpful along this is over half of our, you know, transactions cross the threshold, right? Meaning folks have to come into our shops to either order at the counter or they order to pick up their mobile order. We've got, you know, a lot of opportunity to really delight the customer. Perks is a kind of side driver of this digital mix and what those customers mean to Potbelly. Any detail you can give us around frequency or- Yeah, I'll let Bob... It's the biggest engine, right, that we have on digital, but- We are so excited about where we are with our Perks loyalty program. I think it's reflective of the pent-up brand love that existed and exists for the brand. So a loyalty program only works as well as there truly can be loyalty that's built and developed, and a lot of it was there. So in 2021, we rebuilt the tech stack with a new app, new web, a new order integration engine, a new loyalty engine. We didn't change the face of Perks at the time, but we invested in the operating system that supported it, which gave us a lot more flexibility in how we targeted our marketing to those folks, how we segmented those customers. And then, we also changed our payments program to make it more secure- Mm-hmm. and let us sleep at night. So, we did all of that. Since then, our efforts with Perks have been twofold. One is direct to our Perks consumers, so the things that we do to communicate to a Perks customer that's a Perks customer. But just as important, if not more so of late, is all things that we do in terms of digital marketing, we continue to point back to Perks as the best version of that occasion. So, for example, our holiday BOGO, which is a bit like a customer appreciation day that we did, right over the holiday break- Mm-hmm ... was only available for Perks members... and still one of the highest performing BOGOs that we've done. And so we advertise that these things are very special. If you're gonna come in and get a free Red Velvet Cookie on Valentine's Day, you're gonna do it because you're a Perks member. But we don't only talk to the Perks members about that, we leverage the things that would be enticing for someone to use the brand regardless, and let them know the best version of that is just join the Perks program. I think it's a big reason that we talked about the majority of our shift to our own channels back last quarter. We look forward to talking about that too. And look, awareness driving is important for us. It's part of what we get out of our paid media placement. We've enjoy a very successful level of advertising for awareness, more towards the top of the funnel than you would think for a brand like ours that's connected to people that are familiar with us, but kind of forgot to use us. Mm-hmm. Then with Perks, that's our driving engine. The frequency of a Perks loyalty member is meaningfully higher than a non-Perks member, even if they're a relatively engaged user. And so that's the other announcement we made in Q3, which was year-over-year, our Perks acquisition grew by 60%- Mm. in Q3. We'll share Q4 soon. And, you know, we. I think we're okay, given the time. Yes. We'll have some very big news here in a short period of time on what's next with Perks for us. Great. I told you we invested in the operating components of that, but we think there's a lot more we can do in the customer-facing elements of the Perks program that can make it a lot better than what it is today. That's great to hear. It's very exciting. Excellent. If I may, just one thing. Yeah, one of the great things about Perks, if you're, if you're on it, on our app in particular, I see this great image of our, one of our sandwiches. This is. It's the Lucky 7. I see the number. Yeah. That is what is on our Underground Menu, and you can only access this special menu using our app. You can order it in the shop, but you have to know to order it, and it's not on any menu board. And it's one of those things that layers on top of that, you know, dose and response loyalty platform that creates the unique stickiness, if you will, and creates that, that kind of brand affinity that we so love. And that's a challenge, that sandwich. I mean, that's a full Italian and a full Wreck worth of meat. Mm. We have many other great items and unique things that are really evocative of the brand online, which is hard to do in a digital space. It's really hard to take a brand like ours and really convey that, we call it vibe, right? Digitally. And Perks is a perfect platform for that for us. That's great. Thanks. I'd be remiss if we didn't talk about Potbelly Digital Kitchen a little bit. Yeah. I think target for the end of the year was the first 100 units. Yeah. Can we talk about future rollout pace and maybe highlight for people the unlocks that the platform brings to the shop? Yeah, if you get me the most excited, you'll take me back to my operator roots because, working the back line. Now, Potbelly has always had two lines. We were fortunate that they were all built with two lines. There's a front line and a back line. The back line was traditionally built to support catering. When Steve and I and the team started working together, candidly, most of those back lines had been mothballed. And we saw this effort to digital went hand in glove with the ability to further leverage that back line. So we immediately started sending all of our digital business to the back line. We also, around the same time, rolled out a new labor guide that allowed us to properly staff each of our shifts and new positioning guidelines that meant we knew we were putting people where they needed to be. Now, that's great, except all that digital business is still coming in, and the last mile, if you will, the last moment of the digital delivery to our staff is done in an analog fashion. I would not put you on the back line in the middle of a peak rush on a. Appreciate that BOGO day, because the receipts are printing and we've done with the back line what restaurants have done with kitchen video displays and computer feeding of the orders that everybody's done. We have a large number of digital sources for our ordering, and every digital customer has no idea where they are in the line. So what our PDK does for us is it sorts all those orders, it feeds them to the back line according to how big they are and how much time might be necessary to make that order. If I order my $150 order an hour in advance, but you ordered your lunch three hours in advance, the computer today in a non-PDK shop, they're both gonna print when we order. Mm-hmm. They're constantly being manually redone. So you kind of get the idea of how efficient that is. What does it do for us? It creates labor efficiency on the back line. It's worth about seven hours of labor a week to take that out, and even then, it's still more efficient. It allows us to produce our orders on time, but not too early. Our order ready on time scores from our customers go up for those digital PDK shops, our food quality scores go up in PDK shops, and our accuracy scores go up in PDK shops. But wait, there's more. PDK also includes what we call an iLOT. It's an in-line order taking tablet. You see it all over the place in food, especially in drive-throughs that are pushing the limits of their capacity in drive-throughs. So that's for capacity-constrained locations. Even on the front line, we can go deeper into the line, take the order of the customer in the front line, and unlock additional capacity on the front line too. So, we're very excited about it. We are gonna continue to expand it and roll it out. It is standard in all new openings now, and it will be standard across the system when- Great We finish retrofitting. Great. Maybe a final one for you, Steve. A lot of interest in your balance sheet. You're in a net cash position. You've got some high-cost debt that I think there are some important dates coming up to, to potentially at least unlock the ability to address it. Sure. And anything you could share with us around future plans for the balance sheet, and then just the thought of how much better operations are, if you have a hope and dream for what you can achieve for savings on a refi of an interest rate on a facility? Yeah. Well, first of all, I spend a heck of a lot of my thinking hours on the capital structure of our business, and what a difference a year makes, right, in terms of the capital markets, which is when last year at this time, we were going out to shop our debt, and it was tough, right? We hadn't laid enough track yet, I think, to satisfy a lot of lenders. And frankly, the interest rate environment was crazy, as we all know. That's somewhat settled down. So yes, you know, I'm working on what's next for us as it relates to our credit and our debt. We are coming up on the first year anniversary of that term loan that we put in place, and we have some options to change things, you know, once we hit that anniversary date. And then I think what you know our goal would be is to you know free up some of that cash that now currently goes to interest payments, and then we can use that to you know reinvest in growth. Some of the things that we've discussed here, some things we can't yet share, but giving us that financial flexibility with a different capital structure is going to be another one of those weapons that we can start to deploy in later in 2024. That's great. So with that, we're running out of time here, but I think if my notes are right, you guys are hosting another breakout session in the Palazzo B at 4:00 P.M. We are, yes. Okay, perfect. Yeah. Thanks for joining and presenting. Yeah. Good time. Thanks for being with us. Thank you. Pleasure to be here.