Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Papa Johns third quarter, That's 19 conference call them webcast.
At this time, all participant lying turned <unk>.
After the speakers presentation there'll be a question answer session.
Sounds good question during the session you many depressed start one on your telephone.
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90, and the call over to Steve Coke, Vice President of Investor Relations and strategy. Please go ahead.
Thank you Michelle.
Good morning.
Joining me on the call today, or president and C.E.O., Rob lunch.
He about Joe Smith.
Robin Joe will have comments about our business and provide a financial update after the prepared remarks, both will be available for culinary.
Our discussion today will contain forward looking statements involving risk that could cause actual results to defer materially from these statements forward looking statements should be considered in conjunction with a cautionary statements in our earnings relief and the risk factors included in R.S.C.C. filings. Please refer to earnings release, any Investor Relations section of our website for a.
Non get financial measures discussed on this call. Finally, we ask any members of the media to be an illicit look only mode now I'd like to turn the call over to Rob Lynch for his comments Rob.
Thank you, Steve and good morning, everyone.
Today is a very exciting day for me speaking to investors, an analyst about Papa Johns progress and our future.
The company C. on President.
I want to think every one for joining.
Papa Johns had a strong third quarter in line with our fiscal 2000 in 19 plan.
Just as importantly, we have a clear path to as much stronger future.
Reported this morning domestic calm sales were positive one per cent last quarter.
As marks are first positive year over year sales growth in eight quarters.
After a great amount of effort and dedication from our team the work to stabilize and rebuild the brand and consumer sentiment is gaining traction.
We've begun to turn the corner on last year's challenges.
International sales grew at a healthy 10 per cent right.
As we continue to add new restaurants and have positive cop sales growth.
In addition, we open our first restaurant in Portugal and are now operating in 49 countries and territories worldwide demonstrating the strong global appeal Papa Johns Pizza.
Joe will discuss Q3 in more detail in a moment, but first I want to report what I've learned in my first two months as a member of the Papa Johns team and share with you how we will realize the strong potential of our brand and our company.
Since joining the company my top priority has been to listen and learn from the many Papa Johns stakeholders.
I visited a number of our U.S. markets and I've met with many of our franchisees large and small.
I've enjoyed spending my days in our restaurants across the country, especially the time spent making peaches and work in the oven.
I've talked to many of our largest shareholders and ourselves side analysts and I appreciate the insights into support that I've received.
I've met with some of Papa Johns key community partners, including the boys and girls clubs of America to hear about how Papa Johns can continue to support invest in the communities that we work conserve.
And of course, I've spent many hours meeting and learning from our board of Directors Senior leadership team and Papa Johns team members in Louisville and across the country.
Here, a few things that I've learned.
First Papa Johns needs to get back to what made the brand great.
All pizza is not created equal.
Let's see of Pizza sameness, we have better ingredients better pizza.
We must share our story with the many pizza lovers of the world and it differentiated and compelling way.
Second we must embrace innovation from the ground up not discourage it from the top down we will focus on building and innovation culture that is constantly looking for ways to improve on every front.
Require us to empower energetic and creative teams to deliver ideas to truly breakthrough.
We also must give them the resources to bring those ideas to life.
Third in today's market place superior products require superior service that means that we must create a culture inside of each and every restaurant that inspires our team members to deliver the best service in the industry.
Comes from a dedication to development and training in a commitment to not only making the best pizza, but creating the best environment for our workforce.
One example of this over the <unk> is over the last year, we have created a tuition reimbursement program, that's helping our team members receive the education that they need to fulfill their dreams. We believe that these efforts and others like them will help us to attract and retain great team members, giving us a competitive advantage in the in an industry that has experienced a shortage of great.
Candidates due to new competition for talent.
Lastly, and perhaps most importantly, I fundamentally believed that the Papa Johns brand to not succeed in the long term if our franchisees do not succeed to wear reef focused on improving unit level economics, improving sales will help but I'm convinced that we can do much more than we've been doing to take costing <unk>.
<unk> out of our restaurants.
This will need to be done without compromising our superior quality or service.
I'm energized by the work that lies ahead.
Most excited by the dedication drive and talent Papa Johns team members.
We're all focused on the things that will drive Papa Johns growth and success.
To that point and based on my past experience successful brands and the best teams began with a strong sense of shared purpose.
Papa Johns our purpose is simple and straightforward.
We love Pizza It brings us altogether the world does that deserves better pizza and we deliver it that's our purpose.
With norstar, we upset with this norstar, we have set five strategic priorities for our organization and have already begun identifying and executing on key initiatives to advance each.
The first strategic priority, we will build a culture of leaders who didn't believe in inclusivity diversity and winning.
We believe pizza brings people together building a culture Papa Johns where everyone belongs helps us attract and retain talent in a highly competitive environment. It helps us drive innovation that reflects and resonates with the increasing diversity of our customers domestically and globally.
Culture of leaders, who won in our in power to win means a team members at all levels in the organization take pride and ownership in their contribution to the company and stepped forward to do the right thing.
Second we must improve unit level profitability across our system.
Stated healthy restaurant economics are critical to the success of Papa Johns, we're working hard to improve our restaurant P.N.L.
I believe that there are opportunities to improve efficiencies and reduce costs in our operations, while protecting our industry leading quality. We've also started testing ways to address the driver shortage. Another factor impacting restaurant profitability and will continue to work with third party aggregators as our partners.
Papa Johns third strategic priority is to establish the superior to superiority of our pizza via commercial platforms.
Say it again not all pizza is created equal Papa Johns purpose is to is to deliver the best and let customers know about it this requires new holistic thinking about our products menus marketing apps and digital channels.
My first few weeks on the job I've challenged our team to move beyond long held assumptions in constraints.
Deliver significant product innovation and communicate it through a marketing campaign to match.
Sure enough earlier this week, we introduce garlic parmesan crust pizza baking, our signature garlic sauce into our crust and finishing it with crispy parmesan cheese.
This is the first time and the company's history that we've innovated on our fresh original Doe, which is the foundation of our brand.
We've launched this new product with an innovative marketing campaign that uses cutting edge photography to get you almost inside the pizza and beneath its crispy crust.
There's no advertising like it in the category.
And I believe it really brings our quality ingredients and better pieces to life.
This new push on product focus marketing as a compliment not a substitute for compelling brand marketing or better day campaign was Shaquille O'neal, which we launched in September is showing great potential to positively influenced brand perception and brand equity across customer demographics.
Next are for strategic prior to his to leverage our technology infrastructure to enable our business operations to win.
Johns first and foremost is a food company and we always will be.
But we also have a long history of technology leadership, and the pizza delivered delivery industry, and we know technology will continue to enable us to better serve our customers improve operational efficiencies and inform our decision making.
Among multiple initiatives to reach more customers and address the driver shortage, we continue to expand our relationships with the Aggregators as I mentioned earlier.
Last month, we finalize our third aggregator partnership with <unk>.
This along with our existing deals with door dash and Postmates means we now work with a three what three of the top were aggregators in the U.S.
Are fit and last strategic Prydie priority is to expand our footprint both domestically and internationally.
Restaurant openings, both domestic and international are the lifeblood of a growing brand.
Papa Johns will continue to open profitable new restaurants.
We all cheap lists in three ways.
First we're focused on improving unit economics for domestic and international franchisees positioning them to invest in the long term growth of the brand.
Second we will explore ways to reduce construction, thereby increasing new store our allies in third we're developing an international supply chain strategy to better cater to local taste and become more efficient supporting the strong franchise interest we're experiencing internationally.
To summarize where we stand today.
We have to find our purpose unlocking the potential of a completely aligned organization. We've also identified a strategic priorities, which will focus organization on the biggest opportunities and increase our impact and productivity.
We're building an organization that is focused on innovation in ideas and organization focused on building our best future.
Has announced this morning, we have taken a significant step to realign Papa Johns organization with our new road map by strengthening and streamlining the senior leadership team.
[noise] clearly defined responsibilities and priorities won't power, our senior leaders to make better <unk> to make better decisions more quickly.
Elaborate more effectively and focus on the key drivers Papa Johns.
Success.
We're very fortunate to have Max Whetsel, joining the company as our new cheap commercial and marketing officer.
Maxwell lead the company's efforts to reestablish the superiority of our pizza with consumers across our customer platforms. He will oversee marketing menu strategy and product innovation customer experience and we'll be building a new project management office.
<unk> is a proven marketing and business leader, who am I know in respect from our time working together at the H.J. Heinz company.
This morning, we also announced that R.C.F.O.s, Joe Smith will be leaving the company next spring following the fiscal 2000, a 19 year n.
We're very grateful for the many rolls Joe has served during almost 20 years, what the company and first commitment to ensuring a smooth transition.
He got a search for a new C.F.L. and expect to have someone in place prior to Joe's departure.
In addition to Max and Joe the members of our new executive leadership team are detail than this morning's announcement.
Very excited to be working with this team and grateful for their hard work and input which have been invaluable as we set the company's road map forward.
There's still a lot of work to do to advance our strategic priorities, but the work and momentum have definitely started.
Where in a turn around.
But we have them motivated team that is ready to do what's necessary to take this brand new heights never achieve before.
It's an exciting time to be a part of Papa Johns.
With that I'll turn the call over to Joe to discuss the quarterly results in detail. Thank you Rob.
And the third quarter, we reported I lost per diluted share of 10 cents on a gap bases compared to a loss per diluted share a 42 cents a year ago.
The improvement in our earnings per share was primarily attributable to prior your special charges and the benefit from positive North America comparable sales for this corner.
Excluding special charges and re franchising transactions, we reported adjusted earnings per diluted share of 21 sense on a non gap basis compared to 19 cents a year ago.
The special charges incurred during the third quarter totaled $14.2 million, which was primarily comprised of support to our North America franchisees through all to relief and an incremental 5 million dollar contribution to the national marketing fund par or the incremental investment in marketing and franchise support we announced.
This summer.
Special charges in a year ago period were $24.8 million.
Excluding the impact of special items in both periods pretax income was 13 was $13.1 million compared to $4.6 million for the corresponding Porter in 2018.
Sales consolidated third quarter revenues increased $18.5 million or 4.8%.
The increase occurred due to our positive comparable sales in North America, and with our commissary sales, reflecting higher price in from inquiries commodity cost.
Now turning to business unit results for the third quarter.
Domestic company owned restaurants pretax income increased $7.6 million, primarily do the impact of positive 2.2% comparable sales.
Bubble insurance costs annex firing customer loyalty points.
North America Commissary pretax results increased approximately $600000 due to higher pricing, partially offset by an increase in new equipment incentive costs, which were previously reported in the North America franchising segment.
North America franchising pre taxing crumb improved $1.2 million due to positive 0.6% comparable sales.
Favorable G.N.A. cost and the previously mentioned reclassification of new equipment incentive cost, partially offset by reduction in equivalent units and an increase in targeted royalty relief to franchisees.
As Rob just described international sales rose, 10%, excluding the impact of foreign exchange as we continue to add new restaurants and recorded positive calm sales growth of 1.6%.
However, pretax income and the segment decrease $324000, primarily due to the impact of foreign exchange rate and an increase in support costs, partially offset by <unk> from increased equivalent units.
We continue to be pleased with a sustained financial an operational improvements in the United Kingdom and the middle East during this quarter.
However, this was partly offset by slow down in com sales and new restaurant openings in Spain, and Russia, where after three years of tremendous growth are franchise partners or focused on improving their back end operations inefficiencies.
That said, we remain very confident in our ability to drive both international sales and units as evidence bar consistent international pipeline containing over a thousand units.
The all other business unit, which includes or online and mobile ordering business and our North America marketing funds improve $1.9 million, primarily due to higher online revenues and the time in a marketing spend.
On allocated corporate expenses increase $2.4 million due to an increase in management incentive cost and professional fees, partially offset by a shift in the timing of our operators conference from the third quarter of 2018 to the second quarter of 2009 thing.
That interest expense decrease $1.8 million due to lower outstanding debt.
Total debt outstanding was $378 million as of September 30th 2019, including $9 million associated with the Papa Johns marketing fun.
The effect of tax write on a year to date basis is 25.7% compared to 21.2% in 2018.
It should be noted that the third quarter 2018 tax rate included a benefit of $2.4 million or eight cents per share dude or the remeasurement of our net deferred tax liabilities in connection with the 2017 tax cuts and jobs that.
And the third quarter, we <unk>, we Refranchise 21 company owned restaurants, including 19 restaurants in Georgia for $5.6 million.
Subsequent to the third quarter. The company completed the Refranchising 23 company owned restaurants in Florida for $7.5 million.
Are free cash flow, which is a non get measure that we define as cash flow from operations less capital expenditures and dividends paid to preferred shareholders was approximately $16 million year today as compared to $74 million for the same period in 2018. The decrease was primarily due to an favorite.
Changes in working capital items, including the timing of payments associated with our National marketing Fund.
During the third quarter, we open 15 restaurants in North America, and close 38 units for a net reduction of 23 restaurants. We also open 60 international restaurants enclosed 39 units for a net increase of 21 units.
On a year to databases, we have opened 203 restaurants globally and close to 163 units for a net increase of 40 units.
We ended the quarter with 5343 global restaurants.
Our board of directors declared attached dividends on $10.5 million during the third quarter of 2019 payable to our common and preferred shareholders. Subsequent to the third quarter aborted directors declared fourth quarter cash dividends from approximately $10.6 million to be paid the common in preferred shareholders.
Fourth quarter common stock <unk> dividends will be 22, and a half cents per common share.
Now looking ahead to the remainder of 2019, we're narrowing the guidance range for comparable sales and revising our expected global unit growth North American comparable sales are now expected to be negative, 1.5%, a negative 3.5% tightening our previous guidance of negative 1% to negative 4%.
International comparable sales are not expected to be flat to 2% from the previous got into fly up to 3%.
As a result of a temporary slowing of international openings in Russia, and Spain. As described earlier Arnett Global unit Grove is now expected to be 85 to 115 units from 100 to 150 minutes.
Now turn the call back over to Rob for his final remarks before we take you an eye Rob.
Thank you Joe.
Well in my comments by reiterating gratitude for the warm welcome and honest conversations I've had with so many of Papa Johns stakeholders last two months of confirmed the reasons why join this team and why I think Papa Johns can be the best Pizza company in the world.
As last quarter's results demonstrate we are moving in the right direction.
We have a lot of work to do over the coming months as we prepare a budget for fiscal 2020 welcome to new team members of our leadership team and start moving forward to the critical workstreams outlined by our strategic priorities.
That being said the Papa Johns team empowered with clear purpose and priorities is ready to deliver.
I look forward to providing a full update on her strategy and outlook on our year end call.
Always we appreciate your continued support.
I now turn the call over to the operator for Q. and <unk>.
As a reminder, task a question you have any depressed star one on your telephone.
Withdraw your question press the pound key.
Please stand by why the compiled a cue and they roster.
Our first question comes from Peter So laugh P.T.I.G. airline is open.
Alright.
To come back to.
Core pillar of improving.
Particularly for the franchise.
Okay.
On.
Oh.
<unk>.
Right.
Just some detail.
You know France.
Ah struggling after a couple of years of declining sales.
Yeah, Great question, Peter you know what I would tell you as our franchisees are more positive than I would have expected them to be given the challenges that they have faced over the last few years. They still believe in this brand. They still believe and you know are.
Our place in this industry and they have shown great confidence and are as we've shared our plans for the future with them in regards to the unit level Economics. You know, we're very fortunate to have Jim nordberg come on as our chief restaurant.
Officer, a few months ago, and he's doing an amazing job and we just made him our chief operating officer for North America, and he is leading that effort and he has been working both with our company restaurants as well as our franchisees to implement.
Number of tests on on things that are going to.
Improve the productivity of of our restaurants now that's both the production of our pizzas as well as a lot of the opportunities that we're seeing in in in increasing productive productivity with our delivery services. So Jim owns those workstreams and is making a lot of progress.
And you know, we we are absolutely counting on some of the output of the of that testing to improve a unit level economics, and 2020 and beyond in regards to your question regarding revenues Yeah <unk>. It absolutely is both it's a both and we need to.
You and and prove revenues and that will definitely improve operating margins, but we feel like we can accelerate bottom line profitability by also improving productivity of the restaurants, while we increase the revenues and transactions coming into those restaurants.
Mhm.
Innovation.
Especially on the cross.
This week.
<unk>.
<unk>.
<unk>.
Just.
Products.
Or you're gonna stick.
Pizza.
Around that would be helpful.
You know as I outlined in the call we have literally take in the guardrails off the innovation team.
This team has an unbelievable amount of late and creativity and similar to some of the work that we did right out of the gate at Arby's, we are pushing the limits on what we can do from a food standpoint, both from a core menu as well as L.T.O. than another.
You know innovative offerings and that stretches both across pizza and our other items. You know this this first product launch, we we really brought to market and less than two months that you know this wasn't on the plan two months ago and it. It really is a is is something that we're all.
We all feel great about not just because we think it's a great product, but it's indicative of where we're going as I mentioned in in in that earlier. The Doe has been something that this team was never really permitted to to to innovate against in the past and we feel like that is our core.
Pointed differentiation from our competition and so bringing out a new innovation that that highlights or Doe and makes our Doe. The hero of our product is is is really a signal to the types of things that were in the way we're going to stretch what's been done in the past moving forward.
[laughter].
Last question for me and I'll pass it on.
[noise] you talk a little bit about the sales.
<unk>.
Shot campaign didn't really big.
September .
<unk>.
<unk>.
<unk>.
Campaign perform.
You know, we don't typically talk about how the sales flowed through the quarter, but what I can tell you is that we're very happy with the shot campaign. You know this brand is in a unique situation, where we not only need to highlight the the great quality of our.
Food and how good our food and our services. We also have to convince people that were great company and with great people and that they can feel good about you know being our customer and that's that's unique you know our our <unk> competitors don't have to do that so we we have made investments in doing that that's.
What the Shaq campaign is all about.
And we're very happy with the performance we have seen since launching that campaign of positive movement across almost all of our consumer sentiment metrics that we track.
You know that's a long term investment that we've made in the health of the brand and that's an investment we're going to continue to make alongside continuing to advertise in promote the innovation in the products that that that we're working on currently.
Thanks very helpful.
Thank you Peter.
Oh next question comes from Brian Bittner Oppenheimer accompany airline is open.
Thanks, Good morning, <unk>, congratulations rub on the new row, and and Joe Congratulations to you on 20 years of success with Papa Johns I want to ask a question regarding the changing of the chief marketing offers for rural Rob how does it impact or alter the existing strategy, which seems to be worse.
<unk>.
Helpless better understand this change a little bit better and I have a follow up.
Sure.
This will not alter our strategy, we are committed to bringing to life. What I just laid out for you and and really bringing making our our pizza the in our food the hero and bringing that to life across all of our commercial platforms. This change is really in debt.
Could have of our efforts to create a holistic go to market strategy, we are bringing collen airy, our our consumer facing digital platforms in our traditional marketing efforts altogether underneath one leader and that's that's Max Whetsel and you know Max.
Has I've I've had the opportunity to work with Max in the past and see how he thinks about business challenges and how he operates and I've watched his career over the last you know 10 years, where he's continue to progress in in really become a transformational leader and I think Max is.
Uniquely well equipped to to take on that challenge and to make sure that our product innovation and calling area efforts are in sync and being delivered in the most compelling way through our both our traditional and digital marketing channels. So that's really the impetus behind the changes.
Is on the marketing side.
Understood and just.
Rob for you again, you know two months at the company you've traveled a lot you've met with a lot of people you got your hands dirty in the business.
You talked a lot about the opportunities to improve the business from better highlighting better ingredients better pizza the menu innovation improved operations, but.
What's the most obvious low hanging fruit to you after two months of diving in that you're most excited about about over the next 12 months, if you could pick one and pick the lowest thing for what is it.
[noise] [noise] I believe the work that we're doing to establish.
Relationships and partnerships with the Aggregators is probably the lowest hanging fruit they already have their delivery networks in place. They are already servicing customers that we are not reaching today and so we are integrating those platforms into all of our our techno.
Allergy and P.O.S. systems, and so once those are integrated both our company restaurants as well as our franchised restaurants will be able to take advantage.
Data integration and be able to seamlessly except orders profitable orders that are coming through our aggregator park aggregator partnership so of all the things I think that that is probably the lowest hanging fruit.
I think the work that that Jim is doing on the operation side, we've seen a lot of progress and a short amount of time and and so I do think that we will we will benefit from those efforts as early as as 2020 as well.
Very interesting Super helpful. Thanks.
[noise] aren't next question comes from outside and stuff.
Long, but research your line is open.
Great. Thank you for the color and you know sort of good jumping a quarter for me as well and you know Joe you know for 20 years of the company you know do you want to ask about you know.
The range of if you don't want to have to three and a half an hour with broken cops that implies off we you know you know.
You know for a wide range your fourth quarter behind that.
Or you know you know it'd just be conservative, but you know how big of.
You don't have a range and if we're to point to the upside down it's like Oh that number do you think.
You know here before quarter based on what you're saying so far.
Yeah, I I think our guidance guidance is consistent with you know where we've been over the last couple of quarters I can tell you that you know this in in November and December we are launching a new product that we've never launched before and so you know we obviously believe at.
That it's going to be beneficial to our system, but that's probably a driver of that 200 basis points and and and the range, but you know very consistent with where our guidance has been in the last couple of quarters.
<unk>.
A couple of things to think about last year, we did introduce the pop or rewards programs. So you know, we're gonna HAFTA hurtle over that and we'll have to see how that goes so there's.
There was just a couple of things like that that that's why we left it as as we did.
That's a couple of Brooklyn, following all you know what's hot back into Q. here, but just you know it's kinda think about.
You know always changes going on I was new products coming out you know Mr. Marketing strategy. What do you think is you single most important driver Rob head against the 2020 behind good to comes back.
Without a doubt we got we have to make our restaurants more productive I mean, we we have to make sure that as we turn the corner on sales that every dollar and sales that we're delivering his driving more profitability far restaurants in our franchise.
<unk> so.
I I can't.
Overemphasized.
The focus that we have on that and the focus that Jim and his team are putting up and the resources the gym in his team or putting up against those efforts and some of the like I said some of the initial testing on some of the platforms that that the team is working on are showing some really strong results and our franchisees.
Excited the ones that have been in the test markets with US testing. Some of these ideas can't wait for us to start rolling these out and scaling these opportunities nationally.
Great. Thank you Rob Joe.
Thank you all.
Our next question comes from will Slide Bar, Steven think airline is open.
Great Thanks and.
John <unk> a question for you how are you thinking about approaching value.
Papa Johns and.
Give us your thoughts on the value.
A few different trials going into the.
Out there currently so.
If we should expect more tests or something completely different before eating as launch.
So will you know I in my experience in the in the restaurant business.
Value is obviously a key component of of.
The restaurant, you know industry, but sometimes value gets you know interchange freely with with low price and that's not always the meeting a value right. You know I believe the values a function of delivering a fair price for what you're selling and.
As we call it out earlier here Papa Johns we don't believe that all pizza is created equal.
And we don't believe that were commodity in the marketplace and that we can only compete on price. So we will continue to explore price pointed offerings that we think are going to allow us to profitably grow our business you know, but that's one tool and there are.
A lot of ways for us to generate sales and we are focused on driving profitable sales for our franchisees. So we're not going to rely exclusively on that tool and we're not going to chase our competitors.
Down down that that road once again, if it makes sense and we believe we can profitably grow than that that's definitely something that will continue to explore but we spend a lot of money on and invest a lot of dollars in the quality of our ingredients in the quality of our items and we feel like this.
That.
Gives us a reason to be preferred versus our competition and garner price points that are commensurate with the quality of the product that we're serving so innovation is where we're focused right now making sure that we're continuing to differentiate ourselves from our competition as I mentioned you know we're food company.
And and we're going to focus on the food and we'll use low price points strategically when it makes sense.
Is a tool to drive trial amongst <unk> prospective customers and drive greater frequency with our current customers, but we're gonna rack and stack that up against the other other opportunities at our disposal.
In in regards to specific test that we've run over the last year, we have seen some positive results in those tests in some of those markets and will continue to evaluate how those opportunities and those validated programs can benefit our business relative to the other things that were also working on.
<unk>.
<unk>.
And on the Aggregators, which is.
Different than what many of your competitors, especially.
We're saying so.
<unk>.
Orders might be handled in store in terms of.
Driver might take.
So just the operational complexity of that and then also around.
And the impact.
Incorporate these these partners.
Yeah, I, we don't see operational you know significant operational challenges partnering with the Aggregators. That's why we're integrating their systems with our system. So that those orders can come in seamlessly and show up specifically as a door dash or or ooh burrito or postmates.
Order and we've found that for the most part they're driver show up in a in a timely manner and deliver our products.
In a way that's consistent with how we would hope our drivers deliver our products now it's not all the way to bright but we're early it's early days and so we're working with them to make sure that they're meeting our standards in that we are are operating in a in a productive way together, where we both benefit in regards to data sharing.
The reality is is that.
About 85% of our customers have a aggregator app on their phone already and so the the the the idea that that the only way the aggregators are going to get our customers data is through seeing what our customers are ordering frankly.
Doesn't doesn't ring true for us, they're already getting that data and you know you look out two years three years from now <unk> <unk> almost everybody will have an aggregate or apple on their phone. So we don't believe that that.
You know that that idea of they're stealing our data and they're going to use it against US is is is what's gonna transpire in the future. We believe that there's an opportunity for us to partner with these aggregators and and for us to mutually benefit from this relationship and that's why we're investing in.
These integrations and that's why we're working with them at the most senior levels and make sure that we're supporting each other in these efforts.
Thank you.
And next question comes from Alex legal of Jeffrey's Your lines open.
[noise]. Thanks for the question just an update on a follow up on the previous questions. If you could give us an update on this story just the number of stores. He sort of partnered with that are partnered up with the delivery service providers at this point.
In any any color on the magnitude of the contribution to calm and the third quarter.
I would tell you that we have a large number of our restaurants and our franchisee restaurant franchisee restaurants already working with aggregator partners, obviously, expanding with Hooper eats in the footprint that they offer well well just allow that to grow I.
Will tell you that it's still relatively small part of our business and I would not a tribute you know our disproportionate sales growth. This quarter, you know to to to those partnerships. We're investing for the future we think that they can.
Helpless Big Big Bowl through customer acquisition, as well as productivity and throughput during our highest peak periods as they offer more drivers to be able to take our orders, but this quarter was not driven by those partnerships.
That's helpful. Thanks, and then on the re franchising if you could offer some perspective, there should we read the the recent transactions as just opportunistic or.
Present as strategic shift in the company's longer term approach maybe toward being more of an asset like model and.
If you had any metrics on the company units that were sold their.
Yeah, you know I believe that our our balance sheet.
Provides us a lot Optionality I you know, we we obviously you know we own around 600 restaurants, and you know I look at that as an asset that we can use to both help us move our initiatives forward within the system, but also as an opportunity to seed market.
For a new franchisees as an opportunity to help us make franchisees that are currently in the system more productive through you know refranchising restaurants back back to them. So I believe that we will continue to look at opportunistically at how to.
Marriage, our portfolio of restaurants to most productively drive profitable sales throughout our system.
Great. Thank you.
Thank you.
Our next question comes from Chris <unk> of the full your line is open.
[noise]. Thanks, Good morning, guys, Rob the the company laid out a signal significant investments in the former rule to relief and advertising contributions for this year next first do you believe these investments are at the appropriate but the appropriate levels in in what level of improvement do you think you need to see a franchise profitability.
For the company to be able to avoid making similar types of investments after 2020.
Great <unk> question, Chris you know I'm coming onto this business about two months ago right. After these investments were made you know one of the first things that I thought to understand was why and how impactful those investments have been and and I give a lot of credit to our board and.
To the management team for making that decision and showing their commitment to the success of our franchisees I can tell you having been out in the market place with our franchise partners that that commitment to their success is appreciated and is helping them you know over the next 12 months it's imperative.
That we continue to improve the the profitability of of our restaurants, both through increased sales and revenues, but also through more productive operations and so we'll be focused on that over throughout the course of 2020 as you know these these agreements.
And it it the conclusion of 2020 and our goal is for our franchisees and their restaurants to be a viable and sustainable at the conclusion of these these agreements without us having to extend these agreements.
<unk> <unk> for perspective, when when you think about the the improvement that you you think you need to see does the company expect to provide guidance for next year that would implicitly assumed that the sales growth would be targeted to be able to take you off though.
I agree or that that that investment in after 2020.
[noise], Yeah, I mean, we'll be obviously, providing are 2020 guidance at the conclusion of fiscal year 19, and late February and that guidance will be consistent with where we think the business is going and I can I can tell you the our goals are too.
To take set the strategic priorities that we've laid out and improve the business to a point where are you know our franchisees or in a great situation and and are are happy about you know what the future holds.
Okay Fair enough and then you've obviously had some experience working with a franchise system that's fairly to suppress distressed in your previous role how does the health of the Papa Johns franchise system in their franchisees willingness to either try new initiatives or invest in their system compared to your prior experience.
I, Chris I I can't emphasize this enough I am blown away.
By the the positivity and the commitment that these franchisees have shown I've spent.
Kind of time out in the markets with some of our largest in some of our smallest franchisees I recently went down for a meeting with over 80 of our franchisees and spoke with them and shared with them. The vision that we have for where we're taking the business and how we're gonna get there and I was.
100 per cent transparent about my thoughts on that the current situation that we're in and and how we're going to improve that situation and I can tell you that they were very energized very excited and very committed to working with us collaboratively who to get this this.
The system, where it needs to be I <unk> in relative to you know my experience in the past I will tell you that it's a similar situation, but I think we're starting here from a position of strength in regards to the franchisees being collaborative and really.
Wanting to work with us to to get where we need to go collaboratively.
Okay, and then just lastly, I apologize if I Miss this in your five priorities, but are there any considerations in identifying G.N.A. savings or even considering strategic options maybe for the commissary segment.
Yeah, I think they're you know any responsible leadership team is gonna constantly challenge themselves to get more productive were absolutely doing that I think some of the realignment that we just announced today is is intended to do that we have moved from a much larger leadership team that was in place to a much more.
More refined leadership team with with refined priorities and by doing that we should be able to focus our efforts up against the biggest opportunities and that should make us more productive. So I think G.N.A. I do think there are G.N.A. opportunities.
But it it primarily gonna come from you know our strategic priorities and choosing what not to work on that may not be as as impactful with some of the things that we need to work on so that's how it frame up the G.N.A. discussion.
[noise] brain thanks, guys.
Next question comes from Brent Levy of M.K.M. partners.
Is open.
Great. Thank you for taking my call if you could share a little bit on what you're seeing within the competitive landscape. Obviously, a nice step up in in sales Oh, you've seen that from new customers lapsed customers or is this a greater frequency and then also.
Could share a little bit on.
Talked a lot about innovation and newness, how should we think about that in terms of a cadence in terms of frequency. The number of items. When we should really start to see the meat of that and then I have a follow up.
[noise] so our growth.
<unk> is a good balance of <unk>.
New customers frequency as well as ticket average, where we're happy with the rate of growth across all of those.
All of those components, obviously as we continue on our journey launching new products and marketing and and a compelling engaging way, we definitely want to increase the number of customers that come to us and we want to increase the frequency with which they come so that you know.
Right now I think that there's an opportunity for us to continue to focus on the things that are driving the business today as as we look forward will continue to explore you know new opportunities to to bring a new customers.
When you think about.
When you think about the.
Between company Enfranchise, what do you think where the the major driving forces was there anything geographic you were saying anything from your direct major competitors and then also you share a number for war members out there and extended trip and a quarter. Thank you.
Yeah.
So the the difference between you know.
Our our franchisee rate of growth in our company ready to grow.
It's there's not significant differences between the operating motto or how they're running the business and how we're running the business. You know there are some unique geographical challenges, obviously with wage inflation.
And and some of the the other things that face specific markets you know that requires those markets to manage their pricing and their their.
The <unk> their their promotions, a little bit differently and that could that can be having an impact on on some of the sales growth percentages, but fundamentally the franchisee businesses and our company operations are very consistent and and operating on the same same level the the.
Award.
Details you know we're not currently sharing all the specifics associated with that you know as you know we launched a new reward program. This year, we're happy with the benefits that we're seeing from that reward a program that loyalty program I think that that you we will need to continue to optimize that.
As as one to one marketing and other you know data driven initiatives become a bigger part of the the go to market strategy and we're continue to focus on that I don't think I answered. Your question on competitors you know obviously, we we think that the competitive environment.
Is is is very aggressive you know, we we we track it very closely.
Obviously, our our strategy and partnering with the Aggregators is very different than some of the other industry leaders, but we we love our we love our positioning and it's marketplace. We love. The fact that we are focused on our food that we believe that through better quality food we can't.
Differentiate ourselves and continue to succeed and we're going to focus on food and delivering great service and we're going to support those focus areas with our technology platforms.
If I could steal time for one more on the franchise side, we've heard some of the Burger chain shared a little bit more in the unit economics in terms of.
Flash or growing monthly yeah <unk>.
Can you call at at all the the magnitude of their improvement or if they're just seeing leveled off a franchise level profitability and then alternate thanks.
[noise].
I'm sorry, Brad can you can you clarify that question a little bit I don't think we gotta clearly.
Sure what I was saying is we've seen so the burger chains have shared what there.
Unit level profitability is at the franchisees not actual numbers, but like magnitude of.
One of them talked about seeing nearly a year's worth of monthly growth of their franchise level profitability and other talked about how they had flat profitability last year.
Would it be possible to share what you're seeing in terms of your franchisees.
Stability has it stopped declining are they leveling off are they seeing sequential improvements.
Hi, there on a core or including the benefits you're giving them. Thank you.
Yeah, I don't think I can speak to the specifics of our franchisee profitability, but what I can tell you is that obviously as our revenues grow and we get more productive inefficient in our operations their profitability will absolutely be positively impact.
Our next question comes from Lauren Silberman of Credit Suisse. Your line is open.
Hi, Thanks for the question and Rob's Congrats on the new role so on the delivery Aggregators is the profitability of a delivery transaction through an aggregator party with a direct delivery transaction I'm, assuming you're not or you're not offering that promotion.
Graders.
I wouldn't say, it's exactly the same but I would say that we're very happy with the profitability associated with the aggregator orders.
Okay, and then on the delivery driver shortage is is more reflective of a broader macro challenge or specific to the company and should improve over time.
However.
[noise] I would I would say, it's much more broader macro issue, but I also think as we continue to improve you know the revenues and we continue to grow transactions, which is absolutely. Our focus we will be able to give more incentive to do.
I wouldn't be able to drivers will be able to make more so I think it's it's both right now it's it's the macro factors that are primarily impacting us, but I think our business improvement will also help us a attract and retain drivers.
Okay, and then as I finally on company restaurant margins on that a lot of improvement there any color on what's driving that improvement whether cancer cells cost savings there anything one time, we should be aware of.
Hey, Lauren This show Smith, a you know there's a couple of things as you look at it you know last year, obviously, we had the events of the third quarter kinda impacted our sales and it took a while for operations team to adjust both staffing and some operations. So it was a little bit lower you know as you look at this year you know we do get the benefit.
It up 2.2% comparable sales so you get more efficient and I think as you've seen throughout the year. Our operations team is really focused on improving some efficiencies with the labor costs. So I think you see the benefit of that as you get the or improve sales or advertising was a little more efficient.
This quarter and also we didn't get some favorable insurance cost, which again, it's been one of the initiatives that we started the year ago and hopefully starting to see some benefits from from some things that we can do to keep our insurance costs are lower than we've historically seen.
Great. Thank you.
Our next question comes from Jim Sanderson of Northcoast Research. Your line is open.
Hi, Thank you for the question just want to get a better sense of what you think has been working best to improve same store sales in the back half of the year and onetime hunting for he's trying to understand how the consumer has changed the way they use Papa John's today versus the the earlier how for the year, what's driving that.
Improvement.
[noise] so.
Thanks, Jim for the question you know what I will tell you is.
We have you know we have this we've had to overcome this reputationally issue as well as you know focused on our food and and I think that you know I do think that the shack campaign and the efforts that we've made in our communities through our diversity efforts at you know last year, we create.
Got it diversity equity it inclusion capability here at Papa Johns and I think that that team has done a lot of great work to help reinforce yeah that the company and what we stand for and the kind of company. We are in the kind of people that work here and then the shack campaign is kind of the comedy.
None of that and so I do think that there were starting to turn the corner on some consumer sentiment I also think that you know some of the changes that were making on the operation side are helping us handle our customers' orders a bit better and and and we'll continue to strive to do that but yeah. The.
A more the better we can get from an operation standpoint, the more focused we are on both.
Reputation on management as well as food innovation and marketing the more customers were going to get back.
Just a quick follow up is there anything related to some of the price point promotions you've had in the marketplace in the back half that have stood out has been exceptionally well performing or were disappointing didn't seem to resonate with the consumers will.
12, 99 extra large promo two for every dollar that Doug.
Yeah, I would tell you that you know we haven't done any super aggressive price pointed promotions at scale I think we've we've added as the team's been working on testing some of these.
National programs, we we've kind of run some you know more traditional value programs locally so I wouldn't attribute a lot of our sales growth to any type of value programs that have been overly successful.
Very good if I could just follow up with one brief question just wanted to clarify for the third party delivery Aggregators do they or do they not are they able to market the promotions and discounts that you see through digital marketing campaigns or is it just full price menu pricing that they offer today.
They don't offer our discounts they do offer their customers discounts through their channels. So our digital yeah, our digital promotions and discounts are not reflected in there and their orders.
Do you plan to change that or is that the.
Status quo.
Right now we believe the model's working pretty well, we're continuing to work with them to optimize that but you know we're not currently pushing our discounts and offers through their channel.
Alright, Thank you very much.
Thank you Jim.
Our next question comes from Todd books of C.L., King and Associates. Your line is open.
Hey, Thank you and congrats on the progress this quarter.
One question with two parts.
The first on the deep out the $80 million of franchisees support that was announced.
The cadence was implied that 50% of that would be.
Used in support and the second half of 2019 and the balance in.
2020 does that cadence of supports still hold and if that's.
So with only 5 million of incremental contribution to the marketing fund in Q3.
Does that imply that there is a a larger bolus of marketing funds being contributed in Q4.
Possibly across three months of a branding campaign with shock or the launch of the campaign around the Newcrest variation.
Sure as you recall that $80 million 40 million of it was marketing.
So 50, 50, and each year would be $20 million and as you call out we spent $5 million in Q3. So that would you know staying on track to deliver that plan that would leave us with approximately $15 million in Q4, now that being said, that's not necessarily a 15 million down.
Dollars more year over year. That's you know that that you have to take kind of what we had already had in the plan plus what we're layering on top so to answer. Your first question. Yes that that ratio is is still in place it may not be exactly 50%, but it'll it'll be very close.
But that shouldn't imply that we're gonna have $15 million necessarily on top of what we spent last year.
This is reminder, last year, we also $10 million Mark contribution.
The plan or so.
Good.
Okay. Thank you and then secondly, after the initial launch of the shot campaign in September thoughts on how his uses a spokesperson will evolve going forward over the next couple of quarters here because he is such a large personality universal marketing.
Yes.
So you know as I mentioned earlier, we're very happy with the impact that the shack work has had on the brand and we will continue to to market that partnership and continue to leverage him and the best ways possible that could include ongoing.
Thank you know reputation all work, but it also could mean that he shows up in some of our more product focused and and promotional work as well. So we're going to continue to explore ways to to bring that great relationship to life for our brand.
Okay, great. Thanks, <unk>, thanks for the questions.
There are no further questions like to turn call back over to Rob Lynch for any closing remarks.
So thank you to everyone who participated on the call. Obviously my first earnings call and I'm extremely excited for the results that we've been reported a reporting.
I'm also I would also be remiss if I didn't once again, thank Joe Smith on behalf of.
All of our management team on behalf of our board of directors on behalf of the company for everything that he's done here Papa John's over his 20 years. He stepped up you know a couple of years ago into his current role and it was a challenging time for this company with a lot of transition and a lot of change.
And he was a a guiding force he's a man of great integrity and I'm grateful for his commitment to help us through this transition and I wish him all the best in all of his future endeavors is I know, we all do so thank you Joe. Thank you and thanks to everyone for participating call I look forward.
To just speaking with you soon and that concludes our call today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.