Papa John's International, Inc. (PZZA) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Papa John's third-quarter 2015 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Lance Tucker, Chief Financial Officer. Sir, you may begin.

Thank you, Vickie. Good morning. Joining me on the call today are Founder, Chairman and CEO, John Schnatter and our President and COO, Steve Ritchie, as well as other members of our senior management team. After a financial update, John and Steve 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 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 press release and the risk factors included in our SEC filings. And all statements made on this call are as of today. Please refer to our earnings press release in the Investor Relations section of our website for a reconciliation and other disclosures related to our discussion of non-GAAP financial measures on this call. Unless otherwise noted, all comparisons are versus the comparable period from a year ago. This call is being taped and a replay will be available for a limited time on our website and in downloadable podcast format. Now onto a discussion of our third-quarter operating results. EPS in the third quarter was $0.45, up 15% with good domestic and international comp sales growth and favorable commodity trends. This EPS performance was despite higher insurance costs of $4.5 million due to adverse automobile insurance claims which I will address in more detail shortly. Overcoming this significant charge to post 15% year-over-year growth is a clear indicator of the underlying strength of the business. Our third-quarter revenues were down slightly versus prior-year, as comp sale increases of 3% for North America and 8% for international were offset by lower FOCUS equipment sales and lower cheese block prices which reduced PJ Food Service revenues. As a reminder, neither FOCUS nor PJ Food Service revenue decreases that are tied to lower cheese prices have a significant impact on profitability. We opened 52 net global units in the third quarter, with 37 net international openings and 15 net North America openings. We have now opened 123 net global units in 2015. On a business segment basis, operating income for domestic company owned restaurants was relatively flat in the third quarter, due primarily to 4.7% company owned comparable sales increases and lower commodity costs offset by the restaurants piece of the incremental non-owned auto insurance costs of $2.9 million. Operating income for the North America franchising segment was also relatively flat as the increase from comparable sales of 2.4% was substantially offset by higher royalty incentives. Operating income for our domestic commissaries segment increased by approximately $1.3 million, due primarily to higher restaurant volumes and a higher margin, partially offset by the QCT portion of the incremental automobile claim cost of $1.6 million. Operating results for our international segment increased approximately $1.7 million, due primarily to 8% comps and a higher number of units opened on a year-over-year basis, partially offset by negative foreign currency exchange rates. Also 2014 included a $700,000 impairment charge related to underperforming China restaurants. Our unallocated corporate expenses increased $1.2 million, due primarily to higher health insurance costs. As expected, G&A as a percentage of revenues was 9.3%, significantly reduced versus the first half of 2015. Our effective tax rate was 27.7%, down 2.2% from 2014, due primarily to benefits from various tax deductions and credits as well as higher than normal manufacturing deductions. We repurchased approximately $28 million of stock during the third quarter and have approximately $161 million of remaining share repurchase authorization. Our free cash flow, a non-GAAP measure we define as cash flow from operations less capital expenditures, was approximately $93 million for the first three quarters of 2015, up over $46 million versus the prior year. Our net debt position, defined as total debt less cash and cash equivalents, was approximately $215 million at the end of the third quarter. To spend a moment on insurance, automobile insurance claims activity at both our domestic company owned restaurants and domestic commissaries was unfavorable in the third quarter. The independent actuarial estimates on which we base our reserves were increased $4.5 million in the third quarter, primarily due to several large claims that were initiated or approved during the quarter and the related actuarial growth in other claims that comes with this claims experience. We have considered the full year impact of insurance in our guidance. We will continue to focus on safety efforts and programs for all of our team members and would expect our claims activity to improve over time. We will announce our thoughts around 2016 earnings in late February, but relative to 2015, we currently expect insurance to be neither a significant headwind nor tailwind in 2016. Moving onto guidance. Despite our higher insurance costs as noted, we still expect to be within our guidance range of $2.04 to $2.10, excluding the $0.20 impact of the legal settlement, but we do expect to be around the low end of the range. We also expect to be closer to the low end of the range on our net unit openings guidance of 220 to 250 units. All other guidance is reaffirmed including comp sales guidance of 3% to 5% for North America and 6% to 8% for international. So now I would like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John?

Thanks, Lance and good morning, everyone. Thanks for joining us on the call today as we discuss our third-quarter 2015 results. As you know from decades of experience, our Better Ingredients, Better Pizza tagline is more than a slogan. It's a way of life. And for almost 31 years in a row, Papa John's continues to deliver on our Better Ingredients, Better Pizza promise. Thanks to our discipline and focus on the fundamentals of what it takes to be a successful global pizza brand, customers continue to reward us not with their business, but more importantly their loyalty. We are committed to our customers. And thanks to that commitment, they continue to believe in our food, our service, our people and the Papa John's experience. A few highlights from the quarter include the following. First, we delivered North America comp sales of 3% in a very competitive market. That keeps us on track for our 12th consecutive year of positive results in comp sales. The reason for our success is simple, our unrelenting commitment to making the best pizzas and delivering the most enjoyable customer experience possible. Second, we enjoyed sustained growth in our online sales mix during the quarter, again coming in at over 50% of all North America sales. Third, our international business continues to perform with 8% comp sales in the third quarter, including double-digit comps in the U.K. market. Our brand and underlying reputation continues to become well-recognized and well-respected globally and our success around the world is indicative of that. Finally, we delivered strong EPS of 45%, representing a 15% plus growth over 2014. Through our effective leadership and a focus on the principle of constant improvement, we delivered another quarter of considerable growth. None of this financial momentum would be possible however, without our commitment to deliver the best possible pizza. Our exceptional product and our great people are our biggest strengths. Being the best is our corporate mission and my personal commitment. Our success depends on a belief in better, from better ingredients, to better baking, to even a better box. We are prepared to pay more to deliver on better. But instead of hurting our bottom line, we have been rewarded for it. This commitment to quality, including our clean label initiative, is something we have focused on for many years. Customers really value this effort and are responding, especially the millennials, a key pizza demographic. We are proud to say that our ingredients have no MSG, no trans fat and we were the first national pizza brand to remove cellulose as an anti-caking agent from our mozzarella cheese. Papa John's is the category leader and we will continue to build on the success we have already had to make our pizzas even better. I am excited to share, by the end of 2015 we expect to eliminate all artificial flavors and colors from our foods with the exception of soft drinks. To our knowledge we will be the first in the pizza industry that can make this statement. Finally, staying on the subject of better ingredients, our fresh packed pizza sauce is now in the can for 2016. This is a big deal. A tomato is only ripe once a year. We pack for 65 days and then they shut the factory down for 10 months. Our vine ripened fresh packed sauce truly sets Papa John's pizza apart from our competitors. Again, Better Ingredients, Better Pizza. It's just not a slogan. It's our mission. Through our commitment to better we will grow our brand, enhance our reputation, boost our sales and earn our customers' loyalty. This is not a corporate social responsibility campaign or a public relations stunt. It's at the foundation of our business. Those of you who know me personally know that when it comes to quality, there is absolutely no compromise. No compromise ever. But quality's not the only thing that sets Papa John's apart. Technology and the embrace of innovation remains a key differentiator. And we will continue to make the ordering process as easy as possible regardless of how our loyal customers choose to order. In the third quarter, we launched the redesign of our digital platforms and have several additional upgrades on the way. As I wrap up, let me talk for a moment about yet another differentiator for Papa John's, our culture. For us, as a matter of principle, good companies must be good corporate citizens. We have built a remarkable culture of commitment and collaboration across the organization that helps drive our operators and staff to deliver on better results. We are making a difference in people's lives not only of our team members but also in the communities we serve. We believe in hiring great people, rewarding and inspiring them and then tapping into their entrepreneurial spirit to drive success and create opportunities for all our team members. This culture has helped us grow the business for many years and drives real value to our customers, our employees, our suppliers and our shareholders. So you can tell I am excited with where we are as a business and what the future holds. Indeed, good things lie ahead for this great company. And with that, I will turn it over to Steve for his remarks. Steve?

Thanks, John and good morning, everyone. Very proud of our franchisees and operators around the world for continuing to deliver great performance. We once again produced solid results by maintaining our commitment to our customer first strategy, amplified by our team member first approach. As John stated, our relentless focus on high-quality clean-label ingredients, operational execution of the fundamentals and leverage of our technology investments are enhancing the customer experience and producing consistent results quarter after quarter. In fact, the third quarter marked our 20th consecutive quarter of positive comp sales in the U.S., demonstrating the sustainable strength of the brand. On the people front, I am pleased to welcome two new members to our executive leadership team, Robert Thompson, SVP of Marketing and Edmond Heelan, SVP of our North American Operations and Global Operations Support and Training. They have 31 combined years of Papa John's tenure, providing the experience and expertise to continue leading and driving our current brand strategy. Now on to the current state of the categories. Lower commodity seemed to have driven a slightly more aggressive pricing environment than we have seen in several quarters with a number of very aggressively discounted promotional offers across the value segment of the industry. Generally the Papa John's system has remained on our promotional strategy, maintaining our focus of being a superior quality pizza provider within the category. This brand strategy is on track to produce another year of exceptional sales and profit growth for both our franchise and corporate restaurants. John discussed our digital performance for the quarter and our successful launch of our new digital platform. Our platforms now use responsive web design technology to deliver a better customer experience regardless of which digital channel they utilize. We also recently enhanced our loyalty program, Papa Rewards, by providing the customer with more value and variety. Customers can still earn their free pizzas, but now they can also enjoy some of our delicious sides and desserts. As John noted, expect us to continue making steps to drive our technology advantage, making investments in innovation that customers desire to increase market share, order frequency and our overall store level profitability. On the development front, we have now opened 123 net units in 2015, most of which have come on the international side of the business. We also just successfully opened our 40th country in Bolivia and are fast approaching 1,500 international stores. Our third-quarter international comps were 8%, representing our 23rd consecutive quarter of positive comp sales. As John mentioned, our United Kingdom market continues to lead the way with a third consecutive quarter of double-digit comp growth. The overall portfolio is strong with good results across most of our markets. As noted in our press release and 10-Q, we have decided to refranchise our 46 stores in the Beijing and Tianjin markets and are actively seeking a high quality franchise partner. There have been improvements in the Beijing's financial results in 2015, but we feel this market will strategically be the most successful long-term in the hands of a strong franchise partner. To sum up, another strong quarter is in the books and we are looking for a strong close to 2015. As Lance noted, we expect to remain within our guidance range, producing a strong 16% to 20% EPS growth in spite of the insurance and currency translation headwinds and remained well positioned to continue our momentum into 2016. I will now turn it back over to Lance for questions. Lance?

Vickie, I think we are ready for questions, please.

Thanks. A question on the development. Just what are the biggest drivers of the decision to take that down to the bottom end of the range? Is it a timing issue? Or other macro worries holding the international franchisees back?

Yes. Thank you, Alex, for the question. It's Steve. When you think about the initial 220 to 250 budget, we have continued to see a little bit more pressure in the domestic side of the business as it relates to closures, slightly above our initial budgeting and against our forecast. We are really not seeing any kind of decrease in the international side of the business in terms of the overall growth or the closures. It's just a little bit more closures on the domestic side of the business. Interestingly, a good portion of those closures that weren't expected are on the nontraditional side of the business. As you may know, some of those are contractual agreements that we must enter into that have leases that tie up to it. So not an indication of any poor performance happening across our domestic or international business, just really some of the continued headwinds that we experienced related to commodities from the last couple of years and just kind of coming to the tailwind of the investments that we made to our new POS system, FOCUS.

Thanks. And one follow-up on the claims discussion. Just thoughts on how we should think about the increases in the auto claims cost, the higher healthcare insurance claim costs? Just seems like a common theme in the industry this year. Just trying to figure out what the underlying driver of all this is.

Yes. Alex, this is John. I will hit it at a high level and let Shane, who runs our distribution company, talk a little bit about some of the things we are doing with truck safety and then maybe still Steve will hit this a little bit at store level. The insurance situation is one that our competitors have taken a position that's a one-off. I would be real careful treating this as an absolute. I think when you do your modeling you might want to be a little bit more flexible. That's kind of the bad news. The good news is, that we are all in this together, all the folks that deliver are having the same headwinds with regards to insurance. And market dynamics will provide all of us the ability to charge more for pizza as insurance costs go up. Shane, you mind hitting a little bit about what you are doing with the trucking?

Sure. Thanks, John. Alex, we did in the third quarter just complete our rollout of active safety systems on all of our tractors. So that's lane departure warning, following too close warning systems and event recorders through all of our tractors in the U.S. And it's early, but we are pleased with the results. That's one of many initiatives that we have got around that to just continue to enhance our safety out in the field.

Yes. Thank you, Shane, for that comment. And Alex, it's Steve again. Just to comment on the restaurant side. So it's the good and the bad. So we have had three year growth on the corporate side of the business of 20%. So clearly that means there's more deliveries and more drivers out on the road. Our priority number one is the safety of our delivery drivers and our team members. So recently we have made enhancements to our training programs to increase the safety side. I think the good part of this is, we will, as John alluded to, continue to manage through some of these things. I think what we are seeing at a high level in 2015, as Lance alluded to, in 2016 we are looking to similar kind of levels and we have plans in place to manage through that.

Yes. Alex, it's John again. Furthermore, our pizza scores and our service are probably the best in the history of the company. And with our Better Ingredients, Better Pizza positioning, we are in the best place possible to take price.

That's great. Thank you.

Our next question comes from the line of Peter Saleh with BTIG. Your line is now open.

Great. Thanks. Just a question on the domestic same-store sales guidance. I appreciate you guys reiterating the commentary and the guidance this morning of the 3% to 5%, but it does imply a fairly wide range for fourth quarter and I know we have heard lots of mixed reviews so far on the start of the quarter in terms of where same-store sales are trending and some weakness into October. I was hoping you guys could comment a little bit, maybe frame up a little bit maybe the fourth quarter, in terms of what you guys are seeing and just give us a little bit more color. That would be helpful.

Yes. Peter, it's Steve. I will start. So I think the important thing is always to look at the business long term. You think about our business, over the last 16 quarters we have had nine of those quarters that have been above a 4% comp, seven of those that have been below a 4% comp. But if you look at the last five years of our business, we have not had a year in the corporate side of the business that's been below a 4% and we have produced a 3.6%, a 3.8%, a 4.2% and 6.8% last year and as you saw, we are at a 5% comp year-to-date. Our initial guidance was a 3% to 5% comp. Coming off a 3% quarter, I can tell you that obviously we are not expecting to produce over a 5% comp or we would have considered increasing our guidance. However, we feel very confident on the momentum that we have in the business. I think the important thing, as I stated in my opening comments is, we did see more aggressive pricing activity in the summer. I don't want to get into the cadence of the overall comps within the quarter. However we did see some unpredicted, very aggressive pricing activity happening from some of the nationals, regionals and even some of the independents within the category that gave us a slightly lower than anticipated comp for the quarter. Still pleased with the 3% comp, but it's slightly lower than anticipated. As the official partner of the NFL, clearly getting back into the fourth quarter in the NFL season, we feel very confident in coming within that guidance and certainly are hoping to come closer to the higher end of that guidance in North America.

Can I ask, has the promotional cadence, has it declined at all in the overall environment in the fourth quarter? Or was that predominantly a third-quarter issue? And has that changed?

Peter, this is John. The P10 promotion mixed very healthy. Robert, you want to comment on that at all?

Sure. Peter, it's Robert. So coming out of the gate, starting our fourth quarter, we were very pleased with the promotion. It gave us great momentum and consistency as we roll into the other promotions for period 11 and period 12. So we feel very confident where we are going to land for the quarter.

Great. And then just one question on the insurance. Lance, how should we be thinking about the insurance in terms of modeling it? Will we see more of these insurance reserves in the fourth quarter? And has that been taken into consideration for the guidance? And how should we be thinking about it for next year, especially given that it's been pretty choppy? I mean, we saw it last year in the fourth quarter and now we are seeing it in the third quarter. Is this more a back-end of the year type issue? Or could we be seeing this in the front end of the year as well?

Peter, I will jump in on that one here. It's Lance. First of all, for 2016, we will give our guidance in February. But with that said, we expect 2015 and 2016 overall to look pretty consistent as far as the dollars going through the P&L. Hopefully it will look a little more even than you have seen this year, because the way we build our reserves, without going into tremendous detail, the way we build our reserves is looking at what the history has been this year and then we attempt to build that in, in a fairly even way throughout the year. So you should see 2016 look pretty similar to 2015, probably be a little bit more evened out. That is all, of course, based on what we know today.

Yes. Peter, this is John. We also, in 2014, ran the actuaries twice a year. This year we ran it three times to make sure that something like this, we will catch it if it happened, we would find it out quickly and we did. It doesn't make it any less painful, but the point there is, we are all over this.

Peter, the last part of your question, I believe you asked about the remainder of this year. It is, in fact, incorporated into our guidance for the remainder of 2015.

Great. And then just last question. So you ran the actuaries two times last year, three times this year. Will it be jumping up next year? Will you have more of those checks in 2016?

It will either be more times or more detailed when we do it, one or the other.

Got it. Thank you very much.

Our next question comes from the line of Chris O'Cull with KeyBanc. Your line is now open.

Steve, can you give us some examples of what discounts you saw in the quarter that created some of the issues?

Yes, Chris, it's Steve. I think some of the better examples are probably of some of the larger players. The largest player, in fact, has gone to more significant discounting. Clearly, they have continued to struggle from a sales growth standpoint, but they have seen some pickup. Some of that pickup has been driven through extreme value. I think the good thing for the Papa John's brand, we are much less reliant upon extreme value seekers in the deep discounting part of the segment. However, we do have a small percentage of our consumer base that is looking for that value and variety. But interestingly, we did see a lot more regionals and independents that were going towards the deeper discount inside of, you think about a $5 and $6 pizzas on larges across the industry. Little Caesar's sells $5 pizzas, Domino's sells $5.99 medium pizzas and Pizza Hut has been selling $6.99 medium pizzas. And you are starting to see a lot of independents and regionals trying to follow suit to stay competitive. The good thing is, we didn't make any change to our strategy in the quarter and still produced 3% comps.

So is it that $6.99 pie from Pizza Hut that's been the new promotion or new discount in the category that's created that issue?

I think it's one of the factors, Chris. I wouldn't say that it was the factor in total, but certainly with their media buys and good visibility to that offer, I suspect it's driving some additional traffic into their brand and that's taken away from, again, some of those folks that are on the value side.

Okay. And then, John, have you guys conducted research that shows consumers will value a more clean label when they buy Papa John's pizza?

Good question, Chris. At the end of the day, quality always wins. It won last quarter, despite our competition doing some pretty aggressive promotions. The wonderful thing about high commodities is it forces our competition to use cheaper ingredients or put less on. The situation right now, where commodities are fairly reasonable, they are still having to discount their product to a point where they are going to have to continue to cheapen and put less on. And we are definitely seeing a decline in the product quality attributes of some of our big competitors. Clean label, we started this initiative four or five years ago. It was more defensive. We felt like from an integrity point of view and really building a big, wide, deep moat around Better Ingredients, Better Pizza, the clean label was the way to go. We had no idea that four years later, it would actually be an offensive play where folks really like clean label. The millennials like the fact that we put more natural ingredients on our ingredients and less chemicals. We have not promoted that as much as we probably will in the future, but more on that later.

Could it potentially be a national message for the brand?

This is Robert. There's always the potential, as we evaluate the right timing to get that communication out to those consumers who want that Better Ingredients, Better Pizza messaging. So we will continue to evaluate and see where that plays out.

Okay.

Chris, this is John again. I have been doing this for 39 years, which is kind of embarrassing, but I have been doing this for 39 years. I can tell you the clean label makes a better product. It better.

No. That's fair. And Lance, can you give us some color on how the technology platform's going to be enhanced?

Yes. Chris, I will jump into it and answer that one. So the piece that I had spoken to in my opening comments was around our new responsive web design, that's the piece that adapts to the mobile, it adapts to the tablet, it adapts to the desktop. We all have now one look and feel and the adaptability of that for the consumer, which we have seen improvements in terms of the overall experience and some of the financial metrics that we track as well. We recently did a relaunch of our iOS app and we continue to make some enhancements in that area. The other area I had spoken to as it relates to technology was the Papa Rewards enhancements that we recently made to add more value and variety to that side, where previously it was just a pizza, 25 points to redeem a large pizza. Now we have got value options on there that allows you to redeem sides and desserts for as low as 10 points. We also added some of our specialty pizzas where that you can now redeem for 30 points. There's other things, clearly, Chris, that we don't want to get into from a competitive standpoint that we are working on, from an innovation, look to see some things coming up as we get into 2016.

Okay. And then, I know you guys aren't providing 2016 guidance but Lance, are there any significant headwinds we should be considering for next year?

Chris, at this point in the game, I don't see anything big one way or the other that I would point out. But certainly we will give you more detail when we talk early in 2016. But if you look at commodities, insurance we have already hit on, some of the things that tend to pop up more often don't look like they are going to go significantly one direction or the other next year. We will let you know if that changes.

Okay. Great. Thanks, guys.

Our next question comes from the line of Mark Smith with Feltl and Company. Your line is now open.

Good morning, guys. First off, can you guys talk at all about this pending acquisition of 19 restaurants in the Southeast? Maybe where they are at and what led to this deal?

Sure, Mark. It's Steve. I can tell you, just I don't want to get too specific into the geography of it, but it is in the state of Florida, where we currently have a very strong base of corporate restaurants. As you well know, we always opportunistically look at the acquisition of restaurants. Last time we did this was back in 2012, I guess it was, of Minneapolis and Denver. So it has been a while since we have done a larger acquisition. There are, at time to time, some onsie, twosies that we pick up if they are in alongside the current TMAs. But this one just worked quite well for us. Obviously we are looking at things that have a strong growth potential. This is not a turnaround market type of situation, but it is something that has a very high ceiling. We feel by leveraging a lot of our current infrastructure, our financial models show that the internal rate of returns will be very good for this acquisition.

Mark, this is John. Furthermore, we have found that the franchisees, to be a leader, you have to run stores and own stores. We think it's very powerful. We are in the process now of weeding out the franchisees that are not engaged. That's why the store closure is a little bit high. But if folks are not engaged and they don't want to run the business the Papa John's way, then they probably need to become a customer, frankly. And so we have a little bit of that going on. But four years ago, our corporate stores made about $24 million. This year, under Edmund and by the way, the operators are in town this week, so I get to brag on them a little bit, they are going to make over $50 million. Florida's a very good market for Papa John's and we feel good about this buy.

Okay. Great. And then, second, just looking at selling the operations in China. Can we assume that you guys think that you will get at least what you are carrying that at on the books, $9.5 million, $9.6 million or so, in a transaction?

Mark, it's Lance. I am not going to get into the exact pricing. I think it's probably safe to say we don't expect significant gain or loss either way, but we will let you know how that develops as the process continues.

Okay. Excellent. Thank you.

[Operator Instructions]. Our next question comes from the line of Charles Temel with UBS. Your line is now open.

Good morning. John, you have spent a fair amount of time talking about the new tomato sauces here and I was wondering if you could just, why is that so important?

40% of your flavor, Charles, comes from your fresh-packed sauce. So that's one area that you don't want to cut corners on. We have been using the same recipe in our fresh-packed sauce now for 31 years. The factory, it's probably a $100 million factory at which we pack the sauce. It sits idle for 10 months. And then when the tomatoes' ripe and has the right characteristics, the right bostwick, the right acid/sugar ratio, we pack it for 60 days. And so that 60 day period, I am in contact with our tomato folks out at, our fresh-pack folks out at Stanislaus, to make sure that we get that sauce packed. So once we are 60%, 70% in the can, I know that we have got enough sauce to get through the next year. So that's why it's a big deal, because tomatoes only ripe once a year so you can only pack it once a year so we want to get that packed in the can and get it ready for the next year.

And that's your only source of sauce?

We have two plants out in California that make it and we are looking to do some things in Portugal and also in the southern hemisphere. We don't like a lot of different suppliers, Charlie, because I can't keep my eye on them. We have basically one supplier that has two plants that does, for example, 95% of our cheese. If there's a problem with the cheese, I pick up and I called Jimmy Leprino and say, what's up with this? The two plants that make our sauce, if we have an issue with the sauce, I pick up and call the Cortopassi family and say, what's up with the sauce? So I can't watch 100 different suppliers around the world. So we keep it very consistent with a few.

Thank you.

[Operator Instructions]. Our next question comes from the line of Kieran McCabe with Sidoti. Your line is now open.

Yes. Thank you. I just had a question on the China refranchising. I guess, at the end of last year, you had 183 franchise units in China. Is there any kind of learnings or operations of those franchises that may be beneficial to or be blended over to how these refranchise units will do? And I guess also, what's their performance of those versus the company owned? And finally also, have performance of those franchise units been about the same as the company owned? Or a bit better? If you can comment on that, I would sincerely appreciate it. Thank you.

Kieran, this is John. I think it's fair to say the Asian-Pacific region is pretty tough on all fast food right now, all restaurants. Fortunately for us, we don't have very many eggs in that basket. Have we figured out China yet? I would say it's fair to say, no. But remember, five years ago, we didn't have Russia figured out, we didn't have Latin America figured out, which we do now. We didn't have the U.K. figured out, which we do now. So we will keep chipping away at it. We will keep learning. We will keep trial and erroring and eventually we will figure that part of the world out and hopefully when we figure it out, it will have more of a recovery to it. Steve?

Yes. Thank you, John. Kieran, it's Steve. So to reiterate, 236 stores in all of China, which is less than 5% of our global portfolio, doesn't make it unimportant. Because of the growing middle class of 300 million and growing to potentially up to 600 million in the middle class, in the consuming class over the next five to six years is an important market for the Papa John's brand. With that being said, ever since the OSI incident in July of last year, there's been significant headwinds throughout the entire industry on the Western brand side of things. Clearly, you don't have to look too far from Yum! to understand some of those headwinds and pressures. Our franchise business has experienced some of the same challenges that we have experienced on the corporate side of the business. The differences and similarities. Differences is, we have a different model and about half of our restaurants have spoken to this in the past. We have a delco business, delivering and carry-out, in a number of our restaurants, where our franchise business in East and South China is predominantly a casual dining model. So you will see very similar performance in the casual dining side of our franchise versus our corporate, but our delco business has actually been performing pretty well this year in terms of overall traffic and sales growth. So I think there's going to be a lot of synergies that we can apply. We have been in the process of working on our marketing, our menu, our model and our customer journey and experience. We will continue that work. We have completed a significant amount of research as it relates to the design and the menu, so now it becomes around implementation of that work as we work parallel to source and find a very high-qualified franchisee to run these 46 restaurants in Beijing and Tianjin.

That's great. Thanks very much for the color. I really appreciate it.

Thank you, Kieran. Thank you.

[Operator Instructions]. We have a follow-up question from Peter Saleh with BTIG. Your line is now open.

Thanks. I just wanted to circle back on the insurance reserve. I know there was about $1.6 million, if I am correct, through the commissary. Is that portion the company's portion? Or is that the system portion? Are the franchisees bearing any of the cost of that insurance reserve through the commissary?

It's Lance, Peter. That portion that is allocated to the commissary is actually the portion related to incidents involving commissary vehicles and it is something that will be spread across the entire system, which is what the commissary serves.

Okay. Thank you very much.

I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Lance Tucker.

Lance to summarize. I think we had a very good quarter, $0.45, that's a headwind of $0.06 of insurance and $0.02 of foreign currency, so hopefully we will get a little break in the future on insurance and currency. It would have been a $0.53 quarter. Thank you.

Thank you all for being on the call.