Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Papa John's fourth quarter 2019 conference call and webcast. At this time all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during the session you want me to press Star then one on your telephone.
Please be advised the today's conference call is being recorded.
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I'll now turn the call over to Mr., Steve Coke, Vice President of Investor Relations and strategic planning. Please go ahead.
Thank you Candice good morning.
Joining me on the call today, our president and CEO, Rob Lynch in our CFO, 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 risks that could cause actual results to differ materially from these statements.
We're looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our FCC filings.
Please refer to our earnings release any Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in listen only mode.
Now I'd like to turn the call over to Rob lunch for his comments Rob.
Thank you, Steve and good morning, everyone.
Papa John's continued its turnaround in the fourth quarter, delivering a second consecutive quarter positive accelerating sales by executing against our focus priorities.
GAAP sales rose, 3.5%, North America, and 2.4% across international last quarter.
Higher comp sales and unit growth drove a 5% increase in Q4 revenue and adjusted earnings per share of 37 cents compared to 18 cents a year ago.
Long term drivers of our business, including unit level profitability also continued to improve meaningfully as I'll discuss in a moment.
On the Q3 earnings call My first at Papa John's, We set of course to move the company forward and build on our strengths.
We renewed our focus on Papa John's purpose, which I will reiterate here.
We love Pizza Pizza brings us altogether, the world deserves better pizza and we deliver it.
It's purposes, our guiding path moving forward.
Path would be paved by our company's values culture and strategic priorities.
We are laser focused on delivering positive results in the short term, but even more importantly building sustainable long term value for our shareholders franchisees team members and the communities that we serve.
It's a credit to the hard work and dedication of our team members and franchisees as well as their energy and commitment around our new priorities that we were able to finish 2019, so strong and began 2020 with great momentum.
As we announced this morning and will discuss more fully in a moment. Our 2020 plan is for positive full year, North America comp sales between two and a half and 5%.
The midpoint of this range would represent our best performance in North America since 2015.
We expect international comp sales to grow between one and a half and 4% as we see strong strong growth globally somewhat mitigated by the impacts of Corona virus in China.
Strong comp sales will further benefit unit level profitability, both for company owned and franchised restaurants.
Combined with a global unit growth forecast of 102, 140, net new restaurants, Papa John's 2020 plan will deliver the company's best topline growth and several years.
Our plan also achieves the strongest earnings in three years with full year adjusted earnings per share between $1.35 and $1.55 compared to $1.17 just one year ago.
As you can see we expect 2020 to be a great year for Papa Johns and the beginning of a bright future.
We began our 2020 discussion with what we're doing to drive long term sustainable growth in comp sales the number one driver for our business.
Since arriving at the company my mandate for Papa John's product and marketing team has been simple.
Innovate and build on Papa John's premium differentiated brand.
And they are delivering fending off competitive value platforms without us having to deeply discounted.
In November we launched garlic Parmesan Crusted. This was the first time, we've innovated on our amazing fresh dough and are incredibly excited about the possibilities here.
We fundamentally believe that increasing awareness of our product quality with art, though as the star of the show is a key to our success.
Many of our customers and prospective customers still don't know that our original Doe always fresh never frozen made with six simple ingredients and then it contains no artificial colors or flavors.
People have never cared more about what goes into their food and with our product we have a right to win now more than ever.
One way to increase the awareness of our brand benefits and points of differentiation is through our advertising.
As you know Shaquille O'neal and his better day communications have had a very positive impact on our brand.
We will continue to highlight him as a board member store owner and lover of all things Papa John's.
In addition, we also launched a new AD campaign in Q4 called Pizza did that focus is directly on our food.
In it we celebrate the pure joy pizza by filming our food in ways that we never had before.
We believe that by making our food the hero of our communications, we will distance ourselves from our competition.
And it's working.
Garlic Parmesan cross has been a success, helping drive solid comp sales last quarter and delivering profitability back to our restaurants and franchisees.
Earlier this month, we introduce pop ideas, a toasted handheld alternative to sandwiches made with our fresh never frozen Doe and other high quality ingredients for just six bucks.
Again, we are leveraging advertising that brings Papa John's food to life and establishes a distinct unexpected voice for the brand.
We've done extensive testing and pop ideas are compelling new product in enough themselves, but they're also a strategic choice to drive additional transactions incremental profits and improved labor efficiencies during the lunchtime daypart without cannibalizing, our core products or diluting our premium value proposition at dinner.
I'd add that popped a d. as mark another innovation milestone for Papa John's our first new holistic platform that doesn't consist of pizza sides or desserts.
Expect continued innovation to be a key part of our 2020 product and marketing plan proof that a new culture of innovation is taking hold at Papa John's.
We now encouraged and embrace ideas that build on our core differentiated brand proposition and product quality.
Papa John's momentum around product and marketing also reflects changes in our organization.
Under the streamlined management structure that we implemented in November our new chief commercial in marketing Officer, Max Whetsell now overseas marketing menu strategy product innovation and customer experience.
The holistic view, an integrated execution provided by Max and his team are already facilitating faster smarter decision, making.
And Max is first few months with the company he and his team have been focused on three key initiatives.
First we are getting more productivity out of our media spend as a challenger brand. It is imperative that we maximize the value of our media dollars. So they work harder for us as we are outspent five to one by our largest competitor.
We've already identified multiple opportunities to create efficiencies and optimize our media investment and we are deriving the benefits of the of that and prove plan.
Second Max and his team are building out our social media capabilities to maximize the brands influence across our social media channels, we're moving to an always on model and developing engaging creative that is native to each platform. For example, we recently executed a robust snapshot partnership for Valentine's Day, which is one of our biggest.
Sales days of the year.
And lastly, we are optimizing our key our E commerce platform. So that we could unlock the full potential of the great assets that we have already built like our low loyalty program, which is an untapped opportunity with over 14 million members.
Next I'd like to discuss what we're doing to improve unit economics.
As I've said, our brand cannot succeeding grow long term, if our franchisees are not profitably growing their businesses.
While unit economics have been challenged by lower sales over the past two years, we're starting to reverse that trend last quarter median profitability for traditional franchises improves both sequentially and versus a year ago.
We also achieved our lowest level of closures among our traditional franchisees since mid 2017.
I'm confident that we have even more opportunity.
Are we went together investment of $80 million in marketing and financial support for domestic franchisees. During 2019, and 2020 has helped our system weather the storm of lower sales.
Is this program tapers down and concludes this year, we expect rising comp sales and productivity initiatives to improve profitability and then turn support our franchisees long term health and sustained investment in the brand and their businesses.
In addition in under the leadership of Jim Norberg, Chief operating Officer of North America, we've accelerated multiple initiatives to improve efficiencies in quality and company and franchise restaurants. For example, we have green lit a rollout Papa call our centralized order taking system and customer service Center, a cross company right.
Restaurants, this will be completed by the end of Q2.
Extensive testing indicates this should have a meaningful impact driving incremental transactions and increasing restaurant efficiencies as well as improving our customers ordering experience.
Our franchisee rollout is planned for the back half of 2020.
Thirdly in addition to being an increasingly important channel to reach customers our partnerships with top third party aggregators in the U.S. will also support unit economics, driving profitable incremental transactions in markets, where our restaurants or driver constrain.
We're seeing strong results and we will have the top three aggregators integrated into our system wide point of sale platform by the end of Q2.
And lastly, we've identified a number of opportunities to reduce other costs, which are active which we are actively pursuing this year.
These include but are not limited to reducing auto and general insurance cost by leveraging our partnership with drive off city, our driver tracking technology to reduce auto claims.
Building, an indirect procurement team to drive savings across our non food and packaging span.
And more efficiently utilizing our labor, which we continue to improve in 2019, despite rising wages and a very tight labor market.
Next I'd like to discuss how we're moving forward to continue to deliver strong long term unit growth.
I'm very excited to have Amanda Clark joining the executive leadership team is Papa John's New Chief Development Officer mandate comes to Us from Taco Bell, where she was executive Vice president of restaurant experience.
In her role there she oversaw the entire customer experience of Taco Bell 7000, restaurants, including design consumer facing technology merchandising customer marketing, new concepts and company development.
Before that she also served as senior Vice President North America development, and General manager of Taco Bell Canada.
I had the pleasure of working with Amanda both Taco Bell and Procter and Gamble and she has a talented improve in addition to our team.
Amanda will oversee global development for Papa John's driving us towards our unit targets for 2020 and beyond.
Over the coming months, she will partner with international Chief Operating Officer, Jack's ways, one and North America COO, Jim Norberg to develop long term strategies that build on our improving sales and you didn't economics to achieve significant long term unit growth.
In fact, I believed that we have significant new unit potential both domestically and internationally last year. We opened 233 international units, bringing our total number of opened units to over 2100 stores across 48 countries outside of the U.S., including Portugal, and Pakistan, which we.
Entered last year.
This asset light pure franchising business also continues to generate steadily growing operating income $19 million in 2019 up from $14 million the prior year.
Looking forward jacks ways, when recently reorganized the international operations team to improve support for our franchisees.
We've evolved our strategy to better support markets, where we have a strong presence while also ensuring that we have resources to target those geographies, where we see the greatest long term opportunities.
We expect these changes to lead to improved unit economics, and accelerated unit growth outside the U.S. with 1000 units in our development pipeline and significantly more white space for expansion than our competitors Papa John's International future is bright.
Now I'd like to turn to profitability and our outlook for 2020 M. beyond.
In addition to topline growth, we're advancing multiple opportunities to improve margins and drive operating leverage for accelerated earnings growth over the next several years, we're focused on three primary opportunities.
First we have made changes to our restaurant operations supply chain and technology support teams to align with our strategic priorities that we announced back in November. This begins the journey to optimize our support structure and cost.
Second as our turnaround progress is we're focusing our overhead spending more on sales drivers and less on consulting legal and other administrative fees related to the challenges of the past couple of years.
Thirdly, Shane Hudgens, our chief supply chain officer is leading a number of initiatives within his organization to create efficiencies, including optimizing Ralph designs to better utilized drivers and equipment shifting operating schedules across quality control centers to streamline costs and implementing new driver staffing strategies to lower turnover.
Over and the overall cost of delivery.
These and other efficiency driving measures will continue to reduce operating costs in our supply chain.
Thanks to these optimizations, which more than offset an expected return to normalized levels of incentive compensation, we expect to decrease gionee spending year over year in 2020 for the first time three years.
Now I'd like to conclude with our progress building a culture of leaders, who believe in diversity inclusion and winning.
This is an area where the company has been making progress for the past 18 months and it underpins absolutely everything we're doing to build the world's best Pizza company, including our ability to innovate to engage our customers to reduce turnover and to improve efficiencies.
I'm proud of our team, including the leadership of cheap people in diversity officer, Marvin Bouquets, and senior Vice President of Communications and corporate Affairs Madeleine Chadwick for so many achievements in 2019. These achievements include our partnership with Purdue Purdue University to offer first of its kind to wish.
Benefits to all of our employees, our partnership with Shaquille O'neal as board member franchisee and brand Ambassador.
The launch of Papa John's Foundation for building community.
Our inaugural day of service with the boys and girls clubs of America, and the development of a culture, where everyone belongs through the creation and growth of multiple employee resource groups.
I'd like to specifically recognized our LGBTQ employee resource group.
As a result of their leadership and hard work Papa John's recently earned a 90% score on the 2020 corporate equality index for our corporate policies and practices related to LGBTQ workplace equality.
This was actually the first year Papa John's was ranked in the survey and we scored higher than all of our competitors in the pizza category and higher than most in the restaurant industry.
Creating a culture of leaders, who believe in inclusivity diversity and winning means that team members at every level and organization are empowered to bring ideas that make Papa John's a great place to work and that drive our business forward.
On a related note we look forward to publishing our first sustainability report in April which will highlight a number of initiatives under way to help make Papa John's good steward of our resources in our communities and the environment.
In summary, 2020 is shaping up to be a very positive year for Papa John's.
We will continue on for fronts.
The first delivering comp sales growth through product and marketing innovation second improving unit economics at company and franchisee restaurants, third becoming more efficient productive, which will drive corporate margin expansion and accelerated profit growth and fourth building and inclusive winning culture for our two.
Team members to be proud of.
Now I'll ask Joe Smith to address our financial results in the fourth quarter and fiscal year.
Thank you Rob in the fourth quarter of 2019, we reported a loss per diluted share of 18 cents on a GAAP basis compared to a loss per diluted share of 41 cents a year ago. The increase in our earnings per share for the quarter reflects the benefit of positive North America comparable sales.
[music].
Excluding special charges and Refranchising transactions, we reported adjusted earnings per diluted share of 37 cents on a non-GAAP basis compared to 18 cents a year ago.
The special charges incurred during the fourth quarter totaled $25.4 million, which was primarily comprised of support to our North America franchisees through an incremental 20 million dollar contribution to the national marketing fun as well as royalty relief of $5.4 million as part of the way.
We went together franchise support package announced last summer.
Special charges in the year ago period were $25.9 million.
Excluding special charges and Refranchising transactions in both periods pre tax income was $17.7 million compared to $9 million for the corresponding quarter in 2018.
Looking at sales consolidated fourth quarter revenues increased $19.9 million four or 5%.
The increase reflects our positive comparable sales in North America higher commissary revenues related to increased commodity cost as well as higher marketing fond revenues from the increase in the quarter over quarter contribution right.
These increases were partially offset by the Refranchising of 46 restaurants during 2019.
Now turning to business unit results for the fourth quarter.
Domestic company owned restaurants pretax income increased $7.6 million, primarily due to the impact of positive comparable sales favorable insurance costs and the benefit from the expiration of customer loyalty points.
North America Commissary pretax income increased approximately $3.9 million due to the improvement in sales I, just discussed and due to the impact from the recall reclassification in Q4 of 2018 of new equipment incentive costs, which were previously recorded as they pay.
Part of the North America Franchising segment.
North America franchising pretax income was $1 million lower due to the previously mentioned reclassification of new equipment incentive costs in Q4 2018.
Excluding this reclassification the royalties from North America franchise in increased approximately $2 million compared to the same quarter last year.
International pre tax income was in line with the prior year is higher royalties and higher UK commissary income were offset by the settlement of illegal manner.
Unallocated corporate expenses increased $3.3 million, primarily due to an increase in management incentive and executive severance costs as well as legal and professional fees.
These increases were partially offset by decrease of $3.4 million in interest expense due to lower outstanding debt.
Total debt outstanding was $370 million as of December 29, 2019.
Outstanding debt decreased $255 million during the year, primarily reflecting repayment of debt with proceeds from the issuance of series B preferred stock to starboard value.
The effective tax benefit on a year to date basis was approximately $600000 compared to our 2018 tax expense of $2.6 million or 39% a pre tax income.
The tax benefit in 2019 was primarily related to the benefit from equity based compensation and other favorable tax credits.
Additionally, the 2018 full year tax rate included the tax expense associated with the China divestiture.
Our free cash flow, which is a non-GAAP measure that we defined as cash flow from operations less capital expenditures and dividends paid to preferred shareholders was approximately $14 million for 2019 as compared to $50 million for 2018.
The decrease was primarily due to unfavorable changes in working capital items, including the timing of payments associated with our National marketing Fund.
During the fourth quarter, we opened 19 restaurants in North America, and close 27 units, which as Rob mentioned was our lowest quarter for domestic closing since mid 2017 for a net reduction of eight restaurants.
We also opened 19 international restaurants, and close 30 units for a net increase of 60 units.
On a full year basis, we opened 312 restaurants globally and closed 220 units for a net increase of 92 units.
We ended the year with 5395 global restaurants.
We paid a cash dividend of $10.6 million to our common and preferred shareholders during the fourth quarter of 2019.
Subsequent to the fourth quarter, our board of directors declared first quarter cash dividends of approximately $10.7 million to our common and preferred shareholders.
The first quarter common stock cash dividends of 22, and a half sounds per common share were paid on February 21st 2020.
I'll now turn the call back over to Rob to discuss our outlook and for his final remarks before we take human I Rob.
Thank you Joe.
Looking ahead to 2020, our plan is to deliver robust comp sales and profit growth, while laying the foundation for long term value creation.
As I previously said, we expect North America comp sales between two and a half and 5% our strongest and several years.
International comp sales are forecast to be between one and a half and 4%, which reflects an anticipated 50 to 100 basis points impact from the 210 restaurants in China that had been impacted by the krona virus.
We're doing everything we can to make sure that our franchisees team members and the communities that they serve have what they need to get through this challenging time.
We anticipate global unit growth of 102, 140, net units, which is approximately 1.9% to 2.6% growth.
We expect GAAP EPS to be between 60 cents and 90 cents for the full year, including anticipated special charges of $25 million to $30 million, which will largely be assistance to the North America franchise system, including royalty relief and National market Fund investments as we have said.
These planned investments will end in 2020.
We expect adjusted earnings per share to be between $1.35 and the dollar 55, excluding the anticipated 2020 special charges that I just described.
We do not currently anticipate a material material impact to our earnings from krona virus.
Our preliminary tax rate in 2020 on our adjusted earnings is expected to be between 20% and 23%.
Block cheese prices are anticipated to be in the dollar 80 to $1.85 range.
We're planning to invest between 40 and $50 million on capital projects in 2020.
The very exciting time for Papa John's our team members and our franchisees as we all work together to build the world's best Pizza delivery company.
I look forward to providing updates on our product and marketing innovation, improving efficiencies and unit economics, and our long term model for profitable growth on upcoming calls.
In the meantime, we appreciate your continued support I'll now turn the call over to the operator for today.
Yeah.
Thank you.
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First question comes from.
Peter So Lee with B T. G. Your line is open.
Good morning, and congrats on a good finish to a 2019.
I want to ask about.
Same store sales outlook for 2020.
I know you guys talked about you want to have to 5% type comps in North America can you give us a little color on how you think that will progress throughout the year. I know you have some easier compares especially in the first half year and got some new product launches. So any thoughts on you know first shot for second half or any commentary you want to share about.
The first quarter so far.
Hi, Peter This is Rob you know, we're not we're not going to talk about the first quarter performance today, but what I can tell you is it the comp growth that we're going to see a is is really driven by the innovation and the new products that that we've talked about you know, we launched pop ideas and fair.
To be wary, we've got a pipeline full of new ideas that are going to be brought forward throughout the year every quarter is stacked with different opportunities for us to continue to create excitement around great product ideas and great marketing ideas. So the.
Balance the growth.
You know is spread relatively evenly throughout the year comp sales you know we're projecting.
You know comp sales between two and a half a 5% obviously comp sales are a part at least in part a function of you know what you did a year ago. So as you look back on our 2019 performance obviously, our performance improved throughout the year, so our comps get a little bit more challenging, but we continue we believe that we can.
We continue to drive strong sales growth throughout the year.
Can you just comment a little bit on.
Fourth quarter and maybe.
How you're thinking about products going forward in terms of.
<unk> ability to drive transaction worlds first is driving mix or some of the new products designed more for traffic weren't mix growth, where both the now how do you guys think about that.
Yeah, I mean, ideally, we would deliver a healthy balance of new traffic and and and you know ticket growth.
Obviously, we want more customers coming back and more customers coming in so.
We were really striving to the to bring in new customers and increased frequency amongst our current customers, but we're also evolving our strategy to be focused on innovation versus you know chasing some of our competitors down the value path. So there we do anticipate some healthy check.
Growth I mean, when when you're you know relying on your check growth to drive your sales growth and that check growth is being driven by just charging the same customers more for the same products. That's an unsustainable bonnell, but as you continue to bring innovation that people are willing to pig to pay me.
For for and self select into that because they feel like they're getting a good value because it's better products that can be a healthy sustainable check growth a phenomenon. So we're going to continue to strive through our marketing efforts to bring in new customers, but we're also going to.
Create healthy check growth through our premium product pipeline.
My last question.
On franchisee margin I know your comps were held deal a little bit over 3% this quarter, but we still have a fair amount of.
[laughter], especially on the labor side, so give us a little bit color on what you're saying on the franchisee or side, our franchisee margins starting to improve and what are some factors driving that outside of the same store sales.
Yeah franchisee margins are are definitely starting to improve as you mentioned the primary driver of that is improved increasing revenue through comp sales growth, but there's also a lot of productivity improvements as well you know, we we're launching new equipment. We I think last call we talked about the spinners that we were.
Testing, we're now rolling those out into the system. Those are Ah that's equipment that helps us to you know accomplish the most difficult task in the restaurant, which is actually pounding out the fresh dough and preparing it for the make line. So the spenders are gonna help productivity there.
Were improving productivity through our investments in technology, we called out pop a call that is or you know that is rolling out as we speak it will be an all company restaurants by the end of Q2 that will eliminate the need for our people in the restaurants to answer the phones, which can be a very distracting and.
And challenging dynamic eight your busiest time, so to allow us to more effectively utilize our labor and will reduce in a better customer experience in fewer dropped calls because people will not have to be put on hold anymore.
We're also leveraging technology to get more efficient and drive productivity through our use and our partnership with the Aggregators or you know during our busiest times, we really are creating an opportunity to increase our throughput.
By having these this this labor on demand essentially with or aggregator partners and then lastly, we're driving efficiencies in the middle of the piano Ah you know Weve focused our operations team is very focused on creating a culture of safety and our partnership with drive off study is helping us accomplish that and we're already.
Seeing benefits as you'll as you'll see in our Q4.
You know announcements we saw benefits in Q4 through reduced claims and that's really just a precursor of what we expect moving forward as we continue to focus on building a culture of safety at our restaurants, and our company and franchisee restaurant. So all those initiatives are helping to improve the margin in profit.
Ability of our of our and unit economics of our of our restaurants across the system.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Alex Slagle with Jefferies. Your line is open.
Thank you.
Looks like the innovation and created seems to be working to drive in some solid improvements. It wanted to get your thoughts on the importance in establishing more consistency in value and potential for everyday value price platform, whether you see any changes ahead and 2020 on that front to that.
Degree you think pricing on a certainty and consistency is still holding back the brand.
Yeah, well, we've we've actually talked a lot about pricing over the last couple.
A couple of months, we do feel like there is a significant opportunity in the form of having a more consistent revenue management strategy a way to balance the the you know everyday pricing versus our promoted pricing.
On our national programs as well as how we manage our.
He deals and digital price promotion. So I. We believe there is a lot of untapped potential and getting that nailed down in creating consistency in regards to very deep discounted national promotions or to try and drive unprofitable.
Transactions into our busiest times a day that absolutely not in our current strategy. So we you know I really do believe there's an opportunity to improve our value perception amongst our cat customers and <unk> by optimizing how we manage our pricing across our core and promote.
Got it.
Price points, but we're not focused on delivering you know the cheapest pizza that we can make.
Got it and then on the development outlook, how much of an impact is baked in related to temporary conditions in China in Spain, and maybe Russia and then if you have any comments on the potential for closures domestic and international or whether that'll be down here.
A year.
Right now our numbers in our guidance reflect that they will be down the number of closures will be down and we will continue to open at <unk> at the rates that we've opened and the like over the last the course of the last couple of years. We are working you know, we highlighted Russia in Spain as to.
Reasons for a slower develop new unit growth last year versus our expectations. We've worked with both of those franchisees in those geographies to mitigate some of the challenges they were facing that worse was causing them to slow down their development pipeline and we feel like that should start to ramp back up in htwo.
2020 were also excited to open up new markets last year, we opened up a Portugal and and.
And Pakistan, Yeah, Pakistan and we also just signed a big hundred unit deal in Brazil. So we've got a great pipeline you know Amanda our new Chief Development Officer is coming in and has a is bringing a ton of great experience from her time at Taco Bell as you know you as you know they've been one.
Of the fastest developing and growing QSR as domestically in the United States and she's going to bring that expertise to bear on our business and we're very excited about both domestic and international growth moving forward.
Great. Thank you.
Thank you.
Our next question comes from Brett Levy with MKM Partners. Your line is open.
Great. Thank you good morning.
Nice finished the year gentlemen.
If we could talk a little bit more just on the franchise side, obviously sequential and year on year profit growth is is a very impressive thing given the challenges how it externally and internally.
Would you be willing to go into a little bit more detailed in terms of.
What you're seeing in terms of your like your classes. Your your grading. How many are have moved out of the bottom quartile. How many have moved from profitability and I don't need exact numbers, but.
Just and also what are you seeing in terms of their willingness now to be net buyers and net openers as opposed to standing Pat or sellers.
[noise] Good morning, Brett you know I'll answer your second question first we actually still see a fairly strong demand for a units we refranchised over 20 units last quarter to current franchisees and there is an appetite for more.
You know we have franchisees who are excited about growing.
The challenges that they faced over the last couple of years were also right now actively working with some you know new large potential franchisee partners that we think could come in and I'm not only operate you know current restaurants, but build a lot more restaurants domestically. So we see the.
The development opportunity domestically very strong and getting better you know almost every month.
You know on the franchisees that are you know fall into the different segments. You know, we're not going to get into the specifics, but I can absolutely tell you that there are more franchisees today above what we consider to be you know the threshold of of success. If you will.
Our system then there were just three or four months ago. So there continues to be progress both from a a sales standpoint, and a profitability standpoint, and frankly a relationship standpoint, you know our team has focused a lot of energy and resources on building yeah.
We've got a newer team with a lot of change and our team has been focused on building that trust with our franchisees and we just had our franchisee Advisory Council three weeks ago, and I can tell you that the excitement and the partnership coming out of that meeting was as good as I've seen.
And in my history or working with franchisees. So all you know really positive momentum on the franchisee business.
Would you be willing to share a little bit more detailed segmentation wise in terms of sales contributions.
With respect to other newness on your menu value or on the third party side and also how many of you units now have a third party built into their system and then I'll turn it to the queue. Thank you.
Sure Yeah about.
Two thirds of our domestic units are now supported by.
Paul door Dash and Postmates. We are currently completing the integration of luber eats into about the same number of restaurants. So we're seeing about two thirds of our restaurants domestically I'm working directly with and integrating with with the Aggregators platforms and.
We're seeing significant growth on you know on the on the sales that are they aggregators are contributing to our business.
We're we're over 1% now of at about 2%.
And you know that's not a huge amount in totality, but it it but we are seeing it to be very incremental so the aggregators are starting as we continue to integrate and continue to make it a more seamless transaction and more seamless partnership with them, we'll continue to expect.
Ah that growth to be very incremental.
Yes.
Thank you.
Chris <unk> with Stifel. Your line is open.
I cranks.
Hello.
I had a few follow up questions first what would the company like to continue selling stores to franchisees.
I believe that our stores are a great asset on our balance sheet and that give us a lot of flexibility to accomplish our objectives. You know as we continue to see a revenues grow and margins expand.
You know I think it we create a lot of shareholder value by holding on to those restaurants, and and an experience that revenue growth and commensurate amount of profit growth that being said, if we believe that we can create more shareholder value by the disposition of those assets and refranchise.
I think those restaurants, and we are completely open to doing that if we have you know opportunities to bring in new franchisees buy sell it by feeding them with some company restaurants, and they're excited about coming in and signing a development agreement that's going to you know commit them to building out new.
New restaurants, which which expands our footprint.
Footprint and net creates more shareholder value for us through increased royalty streams. Then we're absolutely open to doing that if we have assets that we feel we're not able to as effectively run and operate at for whatever reason, whether it's our footprint or some other.
Our inhibitor of our productivity then well also be open to a refranchising those assets. So the answer to your question is we're not actively out there trying to sell our restaurants, but we are completely open to selling them. If we believe that doing so we'll create more shareholder value then.
Holding on to them.
Yeah good answer.
Also do you expect the new products will be extensions or upgrades of existing menu items or do you anticipate maybe another platform sometime this year.
Yes, and yes.
You know <unk> one other things I'm. Most excited about you know the new products are an outcome.
The actual thing that's happening that's creating those new products is this wave of innovation that is sweeping our company. We have essentially created a culture that has removed the guardrails from innovation across products marketing operate.
And ever every facet of our business and we don't we don't have a not invented here mindset ideas can come from everywhere, our franchisees and their team members have ideas and they send them to us and we believe that they're better than what we're currently doing we are all ears. If you know the aggregators come in with ways.
For us to better utilize their capabilities and partner with them. We we want every idea. So you know it the ideas are really [laughter], it's it's become.
I know a situation, where we're having to get choiceful on what we do because we have so many people bringing their ideas for it. So you know on the product side, specifically, we're going to do both were going to continue to innovate against our core while trying to increase frequency and bring new customers.
And with new platforms.
Okay, Great and then.
You guys mentioned Genie spending is expected to be down in 2020, what's the base amount. We should use for 2019 and then also is the company planning to bear the cost burden of the new call Center.
On a this is Joe Chris on the call Center, you know for the company stores, we will but then for the franchise is obviously there'll be a cost offset where we'll operate that you know at a breakeven basis.
You know again I think on the base level, we've talked about that certain cost will be coming out and then we also have so we'll be lower but you obviously have some with the management incentive cost will add a little bit back to that but you can't expect your DNA taking out the special charges to be.
A little bit lower in 20 as compared to 19 [noise].
Okay, Great and then just one last one Joe how does the preferred stock assumed to be accounted for in the earnings guidance.
It is in the earnings per share you know calculation that you know that we go through.
You know it is it is on the if converted methods. So the the shares are assumed to be converted a Indian you. You know you go through the calculation and see if it's dilutive or not.
Okay perfect. Thanks, guys.
Thanks, Chris.
Thank you. Our next question comes from Lauren.
With credit Suisse. Your line is open.
Thanks, I'm and then you innovation can you just talk about how you're balancing new menu innovation and the impact on operation and then how are you thinking about the pace of new innovation as we think through the rest is here.
[laughter] Hi, Lauren what I would tell you <unk> you know on the innovation. We are focused on delivering innovation that does not negatively impact our operations and the way. We're doing that is we're developing these innovations with a core ingredients pop ideas.
Doesn't use one new ingredient so our supply chain doesn't change how we hold things on the line doesn't change obviously, when you're making a new product you make it differently than you would when you're making a pop idea you make it differently than we don't pepperoni pizza, but from a supply chain and inventory management standpoint in the rest.
Ross nothing has changed so we're focused on that I mean, there will be occasions in instances, where we feel like the upside on a new innovation that does require some new skews and and and new processes may be implemented but right now we've we've got a lot of.
Innovation in the pipeline that does not significantly impact our operations.
And then just on the cadence.
Oh, I'm, sorry, you know I <unk> and it's those those two things kind of tie together because when we deliver innovation that doesn't have big supply chain implications, we can be flexible on the pace in sequence of that innovation. So if we have an innovation that we feel is not.
King it out of the ballpark and we want to continue to promote that and drive that longer than maybe we had originally plan. We have the flexibility to do so if we haven't innovation and hopefully this never happens, but if we haven't innovation that doesn't do as well as we would expect we have the flexibility of pulling it because it won't have a supply chain employ.
Location. So right now you know in 2020, we've we've got between five and six what we would call big innovations that may change. If we have some that we want to extend longer or some that we need to pull quicker and supplement with so that's a that's.
Moving number but you know that what you can think about moving forward is that.
Well, what our target goal will be to launch a new innovation approximately call at once every two months.
Great and then just on the delivery Aggregators, you mentioned opportunities for incremental sales in markets, where the driver network might be constrained.
Flexibility to leverage the aggregator driver network, if you don't have drivers and customers order.
I.
Yes that is one of the biggest opportunities that we see with the Aggregators. Obviously, we feel like we're getting new customers through their marketplace, but we also are leveraging their driver services and they actually have dub them you know das.
Driver as a service as opposed to software as a service and and what that affords us the opportunity to do is when we get into our highest capacity.
Or highest utilization situations call it Friday and Saturday at dinner and we see our service time, increasing because of the order rates were able to leverage a partnership with door dash right now in their their capability door Das drive to supplement our dry.
Overs with their drivers and they can start coming in picking up orders for us and help mitigate those service time. So you know that's part of the rationale why and why we're pushing so hard on these these aggregators, we believe that that gives us a competitive advantage and where the number one pizza company.
The Aggregators and we're going to continue to leverage that partnership to to give us that that that advantage not just on access to new customers, but also on improving the operations and customer experience.
Great. Thanks, so much.
Thank you.
Thank you. Our next question comes from James Anderson with Northcoast Research. Your line is open.
Hi, Thank you for the question and congratulations for great quarter.
Just following up on new product development I was wondering if you'd give us a little bit more detail about how the consumer is using per se. The pump. It do you have the new product and if you're seeing that benefit the lunch daypart and it's going forward new product to go from my target. Some of these day parts that are under utilized to run right for expansion or development.
Hi, Jim I am I'm. So glad that you asked that question because I'm dying to talk about pop at the is you know we couldn't be more excited about this platform. We think this product is just a game changer for US we believe that customers you know.
Lets say try it they love it it's convenient it's delicious it's unique differentiating and so you know it's also very strategic and it's for the reason that you've called out we do see you know pop ideas being consumed throughout the day.
But are disproportionately being consumed during the lunch day part and that was a strategy that we talk to you about that's out was one of the primary goals and objectives of launching this we need to optimize our labor pool, and our fixed asset base by driving more volume into lower.
Demand dayparts and so far we're seeing that and we couldn't be more pleased with the performance of that have that platform.
Just a quick follow up could you remind us of the brick break down between let's say lunch dinner and late night.
Yeah, I mean, we're launch it or our dinner you know obviously is our biggest day part is about 75% of our sales launch is about 20% and call. It afternoon in late night represent between them around 5%, 5% to 10%.
Great. Thank you.
Thank you.
Our next question comes from time with Deutsche Bank. Your line is open.
Hey, guys, Hey, Rob in the prepared remarks, you spoke about potential opportunities capture efficiencies in the North American I'm, sorry business. It looks like margins were up there nicely in the fourth quarter about 7% from full year Wonder if you could help us think about maybe the magnitude of the opportunity there maybe working those go over the next couple of years. Thanks.
Yeah, you know our supply chain is is actually a very efficient model today and and you know we operate that on a and you know it's a very unique part of our business <unk>, yeah, having come here from QSR and and realizing you know seeing that we're.
Vertically integrated across the supply chain.
Was was you know and interesting piece of this business that you don't see in a lot of those other companies and so yeah. We are working but I view it as a big opportunity you know it represent $800 million in revenue and we think that there you know for us and we think that there is an opportunity to get more.
Efficient there you know, it's a challenging marketplace for the same challenges we're facing for drivers in our restaurants, where we're facing.
You know for drivers and the supply chain and so you know Shane and his team have been.
Im working diligently to make sure that we're fully staff that are ingredient show up on time and that we are doing it in the most efficient way possible now that being said that large of an operation. There's obviously a they you know improvements in productivity and you know weve for the last few months, we've been focused on making.
Sure that we've got the utilization rates at each of our 13 factories across the country optimize given the current demand the current sales rates and current volumes that we need to supply our business. So we've been able to pick up some efficiencies there will continue to look at that but.
So right now we're building out what the long term plan is for the supply chain and how we can continue to get a more productivity out of our out of our logistics and manufacturing operation.
Thank you.
Thank you.
Last question comes from Peter Saliq, that's a follow up.
I G. Your line is open.
Thanks.
<unk>.
Fish.
Maybe one fish never ever watch.
That's.
A lot of LTL Kimball off every month through <unk>.
Uh huh.
Clarify on.
[laughter].
Wow.
LTL.
Yeah, it depends on how they perform.
Thanks.
Thanks, Peter Yeah, I guess it depends on what your definition of an L. T. O is I mean in L.P.O. could be a limited time offer that's just the price pointed promotion on a one topping pizza or just you know frankly, just another hot you know a new and different topping on a pizza I mean, we're talking about you know.
When we talk about innovation and we talk about five or six big innovations a year, we're talking about more than just adding a new topping two our core pizza, we're talking about an opportunity to evolve how customers think about our brand and the products that we offer. So you know garlic Parmesan cross was the first.
Time that we'd ever added any type of flavor or texture or anything to our original though I mean that changes the way people experience our product pop ideas as a completely different usage occasion, a completely different you know daypart a completely different.
Platform that you know, we think could continue to offer benefits to our brand in our customers for for a long time and so those products will stay on the menu, we're continuing to sell garlic, parmesan Cros and continuing to sell pop ideas up we will offer innovation that we will.
Bring in for a limited time, and then pulled back out so it'll be a balance you know what we don't want to do is bring so many LTL shows that stay on the menu that all the sudden we have this proliferation of products that create operational complexity and decrease our speed and.
Service that we are able to serve our customers with so well continue to try to strike that right balance between innovation that is you know for a short period of time in innovation that stays on the menu ongoing.
Very helpful. Thank you very much.
Thank you Peter.
Thank you and no other questions in the queue I'd like to turn the call back to Mr. Rob Lynch for closing remarks.
[noise] well I just want to thank everybody for dialing in today it was a great.
Quarter and a great closed the year for our company not just financially, but organizationally, we've got a great team in place it's focused on the future and we're just getting started so with that I just want to ask you all for a favor. Please go out and buys many pop at the as you can and as soon as you can and so that we can.
Come back in April and talk to you about what a great first quarter. We thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a okay.
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