Papa John's International, Inc. (PZZA) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Papa John’s First Quarter Earnings 2012 Conference call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over Mr. Lance Tucker, Senior Vice President, CFO, and Treasurer. Sir, you may begin.

Thank you, Chuck. Good morning. With me on the call today are our Founder, Chairman and CEO John Schnatter, EVP of Global Operations and President PJ Food Services Tony Thompson, Chief Marketing Officer Andrew Varga, and other members of our senior management team. After our brief financial update, John will have comments about our business, and the management team will then be available for Q&A. Our discussion today will contain forward-looking statements that involve risks and uncertainties related to future events. Actual events may differ materially from the projections discussed today. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release, and the risk factors included in our SEC filings. All statements made on this call are as of today and we undertake no obligation to update the information on this call, in the event facts or circumstances subsequently change. In addition, certain financial measures we use on this call are expressed on a non-GAAP basis. Our GAAP to non-GAAP results reconciliation can be found in our earnings press release available on the Investor Relations section of our website. Unless otherwise noted, all comparisons are versus the same period a year ago. This call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format. As previously announced and described in our press release, during the first quarter the company received a marketing incentive contribution related to a new multi-year supplier agreement. The impact of this transaction was a $3.7 million net expense to the company in the first quarter, comprised of a $4.7 million expense in the other general expenses line of our income statement, and a $1 million benefit to the advertising and related cost line of our income statement. Our first quarter 10-Q provides a more detailed explanation of this transaction. We are very pleased to have gotten off to a strong start in 2012, with diluted earnings per share of $0.69 in the first quarter. Excluding the negative $0.10 impact of the marketing incentive contribution, diluted earnings per share were $0.79, up 23.4% versus 2011. Our first quarter 2012 revenues increased 6%, primarily due to comparable sales of 1.1% for North America and 8.4% for international. In addition, the increased revenues were driven by higher volumes at PJ Food Service, and a 6.7% increase in the number of units operating globally on a year-over-year basis. We opened 50 net worldwide units in the first quarter, continuing our strong unit openings momentum. On a business segment basis, operating income for domestic company-owned restaurants, excluding the impact of the marketing incentive contribution, increased approximately $400,000 in the first quarter. This increase was primarily due to increased comparable sales of 3%. Operating income for our Domestic Commissary business segment, increased $1.6 million for the first quarter, due mainly to the higher volumes and the higher number of units previously mentioned. Operating results for our International segment improved approximately $1.1 million in the first quarter. These results were primarily due to an increase in royalty of revenue from the increase in units previously noted, and our strong 8.4% comparable sales. Our effective tax rate was 33.4% in the first quarter of 2012, and our effective tax rate may fluctuate for various reasons, including settlement or resolution of specific federal and state issues. We repurchased approximately $13.8 million of stock during the first quarter. The company had approximately $47.8 million of remaining share repurchase authorization as of April 25. Our free cash flow, a non-GAAP measure, we define as cash flow from operations less capital expenditures was $37.7 million for the first quarter of 2012, and $87.5 million for the trailing 12 months. This represents a free cash flow yield of 9.1%, based on 24.4 million average diluted shares outstanding, and yesterday’s $39.49 closing market price. Based on our strong start to 2012, we are increasing our 2012 earnings per diluted share guidance by $0.07 from a range of $2.33 to $2.43 to an updated range of $2.40 to $2.50. These ranges include the negative $0.08 impact of the one-time marketing incentive contribution, and also the positive impact of the 53rd week of operations in 2012 of $0.08 to $0.10. We are also increasing our international comparable sales guidance from a range of 1.5 to 3.5% to a new range of 2.5 to 4.5%. All other guidance is reaffirmed at previously announced levels. And now, I’d like to turn the call over to our founder, chairman and CEO John Schnatter.

Hey, thanks Lance. I’d like to start off by congratulating our shareholders and our franchisees and corporate operators on an excellent quarter. It’s an exciting time to be part of Papa John's and our system is all over the world, both North America and internationally. And I believe we are well aligned to continue our positive momentum going forward. Our system delivered solidly comp sales results in the first quarter rolling over a very strong Q1 of 2011. And this resulted in a 2-year combined Q1 comp sales of 7.2% in North America, which we believe is the highest in the category, and 14% internationally. Now let me turn to our continued strong restaurant growth in North America and throughout the world. As interest in joining and growing within a winning Papa John's system and team, is very strong and very solid at this point. During the first quarter, we had 50 worldwide net openings, which I believe is the most net openings in a first quarter since 2000. So the year is definitely off to a strong start. This brings our total store count to more than 3,900 restaurants in 33 countries. And we continue to project worldwide net openings of 240 to 280 for full-year 2012. The development pipeline is quite robust with signed development agreements of 1,500 restaurants scheduled to open over the next 6 years, very healthy. We also recently announced the acquisition of 50 franchise Papa John's restaurants in Denver and Minneapolis. They’re going to be run by our fantastic corporate operators. We have a strong corporate operations, we have a strong corporate operations team, and of course we have the ability to invest, so we look forward to growing these markets to be very successful. Next let me spend some time on our marketing front. During the quarter we concluded our third successful year with the National Football League, highlighted with our Super Bowl coin toss promotion featuring Peyton Manning and Jerome Bettis. The creative message was very well received and helped us continue to attract new members to our Papa John's rewards loyalty program. More on that later from Andrew. Additionally we are pleased to keep our pricing at somewhat of a premium to the competitive set as consumers continue to recognize that our better ingredients, better pizza is worth just a little bit more. This has been a conscience initiative on our part to establish and to succeed as the premium player in the pizza category among significant amount of continued discounting by our competitors. Internationally the momentum continues with strong operations and a strong fourth quarter. In Q1 our quality position let our international operators to continue to produce great positive results with comp sales over 8%. In the face of strong competition around the world, the Papa John's brand continues to do quite well. We are exceptionally pleased with the success of our operators in our largest markets. They continue to produce great pizzas with great service, and of course, that leads to increased sales. Again it is an exciting time to be part of the Papa John's system. I’m proud of our operators around the world for their continued work and delivery on our better ingredients, better pizza brand promise, with them supporting quality pizza and superior quality service to our competitors - or to our customers. And with that, I’ll turn that back over to Lance for questions.

Chuck, I think we’re ready for questions.

[Operator instructions] And our first question comes from Mr. Peter Saleh with Telsey Advisory Group.

My first question is on the same-store sales, domestically, it seems like there’s a fairly wide gap between the company owned and the franchises in the first quarter. You know, last quarter, first quarter, it was much, much closer than that. So maybe you could talk to that a little bit and just explain why such a difference?

Yes, it’s - Peter, it’s Steve Richie. I’ll take a stab at that one and Lance might have some comments or Andrew as well. But I think from a quarter-to-quarter standpoint, you are going to see some volatility in the corp versus the franchise. I’d first like to kind of congratulate our corporate operators. I’m very, very pleased with the success led by our Corporate VP Rick Thompson; 3% comps in the first quarter are just tremendous. I think on the corporate side of the business, leveraging the talent that we have within those - the corporate side of the business has been huge. Certainly 6 out of the 7 - last 7 quarters, we have seen a slight better comp performance in the corporate side of the business versus the franchise, but as a whole, we like to look at the business on a 3-year basis. So you’re going to see very close performance in the corporate versus the franchise. And again we just continue to share conceptionally the strategies and tactics on the corporate side of the business that bleeds into our franchise side and really makes us strong as a whole, as an organization.

And Peter, this is Tony. Obviously, you know, our corporations is leading the charge for our brand, and pretty much across the board our corporate team excels at almost every key metric across the board relative to our franchisees and we just see that as a really, really big opportunity for us still domestically here within our franchise organization.

Peter, it’s Andrew. I would add one other thing. Our corporate stores consistently are at the top of their game with local store marketing and have really set a great example for our franchise system to get on board much more than they have been with local store marketing. And so the great thing is, is that their solid example is really helping the entire system get better. It’s something that we think is very important to drive in our business results.

So are the franchisees going to doing I guess, more local marketing this year similar to what the corporate stores have been doing?

It’s a comprehensive approach, but they are certainly more active in doing the things that the corporate stores have done for years and it’s really starting to pay off.

Anything on the regional returns between - anything different between on a regional basis between you and the franchisees?

I think comparably speaking from a region to region, you are seeing it pretty close. Obviously, we do have geographically positioned our corporate restaurants more heavily penetrated probably in the Midwest and the East, so the West is more franchise-driven. So you are going to see some differences from region to region just based on store count from a geography standpoint.

And this is Tony. Our focus here is closing that gap.

And the acceleration in the international comps, you know, some of your peers in QSR and we talked about, you know a slowdown in Europe. I don’t know, it seems like it’s looking like that in your results. Are you seeing any kind of slowdown anywhere in Europe?

Tom, do you want to take that?

We continue to have great momentum in all parts around the world and we’re proud of our UK team that continues to deliver quarter after quarter of positive results. That is a franchise-driven market through the UK and our European business does very well. So we’re proud of the team and the results that we’re generating and continue to drive the momentum throughout Europe.

And this is Tony. I think probably a good way to look at it, and the way we look at the business is we’re managing our business and the engine of the business is operating well on all facets. And if you look at domestic comp sales, unit growth, international comp sales, unit growth, we definitely know international is a great opportunity for us into the future. But we also see - understand that domestically and winning on the home port, I’ll call it, is really important as well and I think there’s still a lot of opportunity for us domestically. So we look at it comprehensively and are feeling really good about our strategy.

This is John. There’s no doubt we have to be successful in the Asia Pacific region with China and India. With that being said, we don’t want to put all our eggs in a basket that could bust. China does look like a bubble. I would hate to have all, again, all our eggs in the China basket. So to Tony’s point, we believe international has got a bright future and we believe here in the U.S. in the states, we have a bright future.

And one more thing while we’re on that - talking about international, you know, we’ve been - we focus on consistent steady growth and I think we say that probably every quarter. That’s a key part of our strategy. Being a global brand, we’re also very focused on the Papa John’s way and how we operate and that’s back to our corporate domestic team leading the charge domestically. And really, that model globally. So as we look to international, we’re focused very, very laser-focused on making sure the model is the way we want it for the future and there’s been a lot of emphasis on that specifically in China. So we’re bullish on international and specifically the emerging markets and there will be more to come on that.

Okay, and then just 2 more and then I’ll hop off and let somebody else come on. The Coin Toss promotion in the first quarter, how did that impact profitability and what do you think the benefits are a go-forward basis from that promotion?

This is Andrew. I’ll go ahead and comment on that. It certainly provided great visibility for the brand and significantly improved positive awareness with consumers. And as you would expect, in the early stages of our popular awards development, it really helped us gain some more enrollees. You know, we’re obviously not going to comment for competitive reasons on what it did to sales but it was a nice promotion and we’ve got to just keep chugging along on that one and see if we can’t get additional activities around it to really learn more first and then hopefully be able to harness more power from that program.

Great. And my last question is, on the cheese prices, usually you have a projection in the Q. I don’t know if I missed it or if I just didn’t see it in the Q this time. I don’t know if you guys could point me in the right direction, maybe it’s in there maybe it’s not?

Peter, this is Lance. You know, I think actually we left that out of the Q this time but I can tell you, our projections are in the low $1.60s for the year for cheese right now on the block.

[Operator Instructions] Our next question comes from Mark Smith - Feltl and Company.

A handful of questions this morning. First, can you talk about the acquisition of these 50 restaurants, how they’re doing today and maybe your long term plans for those units?

Mark, it’s Steve Ritchie. Obviously, as you probably saw we just acquired the restaurants officially on April 23rd, so we’re only about a week in on the corporate side of the business with the acquisition. I certainly think there was some upside potential in those markets once again leveraging our talent that we have on the corporate side of the business and really sharing a lot of the best practices what we’ve been able to create in the last several quarters corporately, so certainly thinking a lot of upside but still digging into from an analytical standpoint on all the strategies that we intend to put into those markets, but feel optimistic.

Mark, this is Lance. I’m going to jump in real quick. We look at either acquisitions or divestitures on a situation by situation bases, so we’ll hold onto these and see what happens and make a determination in the future.

Mark, this is John. If we didn’t believe in the markets and didn’t believe we couldn’t run them well, we wouldn’t have bought them. We think they’re both very good markets. We think there’s a lot of potential, and we got them at a very good price frankly.

Well Dave delivered my Pizza here in Minneapolis, very well here this last week.

I think you’re going to see a big change in Minneapolis when it comes to Papa John’s, so stay tuned.

Have you seen any change in your online mix, and where does that stand today as far as orders?

Hi, this is Andrew. I’ll go ahead and take that. As you would expect, online continues to be a major focus for us. And as we’ve said in the past we continue to do well. We’re now in excess of 35% of our sales, and I would just give a shout-out to our franchise system who have really done a great job embracing online really over the last couple of years, and is making great progress.

And just looking competitively you guys talked a little bit about this, but are you seeing more maybe price competition from mom and pops and smaller regional chains with cheese prices being a little more favorable?

This is Andrew I’ll go ahead and take that. I think there’s a little bit more aggressiveness on that side, and I think that’s a natural reaction to I would say the aggressive discounting that we’ve primarily seen from some of our TSR competitors. But it really hasn’t been much of an impact on us. We continue to execute our plan, drive our quality messaging, and continue to build momentum.

And last question, maybe for Lance. You took up your guidance here for International same store sales, but is there a level of, I guess conservatism in giving you 8-4 [indiscernible] over a 5-6, and it's about to get a little bit easier, still difficult, but a little bit easier through the rest of the year?

Mark, I think what I’d say to that is as we’ve talked about, our goal is to top rate this thing long term, and continue to try to grow it consistently and steadily. We’re comfortable with where we’ve moved it at this point, and it’s early in the year. We’re going to see how things shake out a little bit before we look at other changes.

Mark, we’re probably a little bit more aggressive with the fact that it’s so competitive and the economy we’re still not sure where it’s headed. We’d like to watch cheese a little bit more since its 35 or 40% of our cost on how worldwide demand affects the price of cheese. And the last thing you want to do is miss your number, miss your quarter. So, we probably tend to err on a little bit side of conservative, but not over conservative by any means.

Our next question’s from Mr. Michael Halen with Sidoti & Co.

Could you please give me some collar on where you think industry discounting is going in 2012? If you think that the trends on deeper discounting are going to continue, and how you think Papa John’s 2012 promotional activity is going to compare to what you did in 2011?

A lot in that question, so let me try to take it piece by piece. I think what we’ve seen really in the last 2 years, Michael, is sort of a shakeout in the category where you’ve had Little Caesar’s down at the $5 dollar price point, then you have Dominos right above them. Pizza Hut is sort of in the middle and then Papa John’s above all of them and we continue to believe that that’s kind of where we're all going to play. You can’t continue to do those sorts of things with pricing over a long period of time and not expect that it’s not going to have an impact one way or the other whether you’re trying to be the premium player or the discount player. So we tend to obviously watch it very closely. We pride ourselves on pricing management ads and expertise that we have, to make sure that we stay on top of not only what we’re doing, but what the competition is doing. Obviously, there’s so many other factors that influence price, what’s going on in the economy, what other factors are out there for other TSR categories that we evaluate. You know, we really feel good that that’s kind of how this thing is shaking out and we like our position.

Hi Mike, this is John. Everybody wants to own our position or a [indiscernible] play position, a quality position. The problem with owner quality, it takes time and it costs money, and most companies aren’t willing to do that. At Papa John’s we’ve taken the time, we have spent the money, and by all key measurements outside of the company our brand perception is very, very good. Being Derby week, we’ll do a horse metaphor, this is not a game of jockey’s this is a game of horses, and we have the best horse.

One more comment I’d like to make, this is Tony, is we’re very tuned in to what’s going on competitively, economically. But, I think if you look at what we’ve been talking about quarter to quarter, we’re very focused on our plan, our strategy to brand equity that we have and I think we’re managing to our playbook. And kind of really in spite of what’s going on around us, so we’re feeling really good about that.

My only other question is in regards to the Super Bowl promotion. Did all the cost associated with it hit in the first quarter?

Yes, Mike, this is Lance. Everything is through in the first quarter.

Thank you. At this time I’m showing no further questions. I would like to turn the call back over to Mr. Lance Tucker for closing remarks.

All right, great. Chuck, thank you, and thanks to everybody for being on the call, and we’ll talk to you in a few months.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program, you may now disconnect. Have a great day.