Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Papa John's first quarter 2020 conference call Im webcast. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would not only thing in the conference over to your Speaker Mr., Steve Coke interim principal financial and accounting Officer. Please go ahead Sir.
Thank you.
Good morning.
Joining me on the call today, as President and CEO, Rob Lynch.
And I will have comments about our business and provide a financial update after the prepared remarks, both abbas will be available for culinary arts.
Our discussion today will contain forward looking statements involving risks that could cause actual results to differ materially from these statements are forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included 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.
Now I'd like to turn the call over to Rob for his comments Rob.
Thank you, Steve and good morning, everyone.
First I'd like to say that I hope everyone on this call and their loved ones are so healthy insight.
Entire Papa John's family extends our deepest sympathy to those around the world, who can directly or indirectly impacted by covert 19.
We're also profoundly grateful to everyone working so hard on the front lines to keep a safe and healthy.
I want to begin this morning's call with some detail on the progress we made in Q1.
It provides important context on our company wide transformation and the headway that we're making with our long term strategic priorities both of which have accelerated during the pandemic.
We'll go on to discuss how cobot 19 has impacted our brand our team our franchisees and customers and how we're executing on our strategy in this new environment, staying true to our values and our purpose.
Steve will then provide more detail on our Q1 results before I conclude with closing comments about what we expect for the remainder of the year and beyond.
Let's start with our progress in Q1 before the pandemic began to have a material impact on our overall business.
[noise] inline with our original 2020 outlook comparable store sales were very strong rising 5.3% in North America, and 2.3% internationally January and February were particularly strong in North America, with North America comp sales up 7.6% and 5.4%.
Respectively, driven by successful new product and marketing innovation.
We continue innovating on our signature fresh dough to create delicious high quality menu items that build on our premium brand at minimal complexity to our stores and our incremental versus cannibalistic of our core premium products.
In February we successfully launched pop ideas toasted handheld alternative to sandwiches made with our fresh dough and high quality topics.
Bob ideas or Papa John's first new holistic platform that doesn't consist of pizza size or desserts.
At a $6 price point, there quickly, becoming a favorite with customers and delivering on our strategic objectives, including increased bunch on lunch time transactions and higher ticket.
Along these same lines in the first quarter. We also introduced our new jalapeno poppers rolls nationally spicy jalapeno peppers wrapped in our fresh I went back to order not fried.
Again as with pop ideas, our teams innovation is driving high customer satisfaction and higher ticket without adding material complexity or cost to our stores.
Papa John's marketing communications are also becoming much more impactful.
And in addition to a new creative approach that focuses on our pizza and high quality food, we have shifted a large part of our marketing spend from non working to working by moving dollars out of high cost national sponsorships and into working media were able to reach a broader range of consumers more often we're still working closely with our local search.
Boards partners to activate into our local markets when sports return.
Our ongoing strategic investments in our technology platform, especially our partnerships and integrations with three of the top four aggregators as well as our Papa rewards loyalty program are growing rapidly in fact, a return on these investments has been substantial during the pandemic as I'll discuss in a moment.
Taken together these accomplishments are more proof that a company wide culture of innovation is beginning to drive business results as we build on Papa John's premium differentiated brand, we're fending off our competitors value focused offerings without having to discount deeply.
And turn growth is helping improve unit level economics for the benefit of arc, both our company owned restaurants and our franchisees.
In Q1 media unit profitability to find is profits after food labor mileage an aggregator fees was our highest in over eight quarters in spite of higher pre pandemic commodity costs.
In addition to the benefit of growing comp sales were working very closely with franchisees and management of company stores to reduce complexity and cost while heightening quality.
We continue to roll out pop a call our centralized order taking in customer service center across our system public call allows our stores to focus on making great pizza not answering the phone.
As a result, we're seeing incremental transactions and labor efficiencies.
Not to mention better customer experiences.
With that context, I'd now like to discuss the unprecedented situation, we all find ourselves and today managing the covert 19 pandemic.
Hi, This is well known the pandemic has had a devastating impact on the global restaurant industry.
However, Papa John's has been very fortunate our delivery and carry out model has enabled us to remain open for business and continue serving our customers and communities throughout North America and in many countries around the world.
Beginning with North America, where we're responding to a significant need delivering food to people's homes as they shelter in place.
As we performed this critical service our business is performing at historically high levels.
In North America, Corona virus began negatively impacting our business in mid March as large gatherings in major sporting events were cancelled.
Papa John's Pizza as a favorite food when groups of friends and family get together to watch sports the and see that way basketball tournament in particular typically drives a very strong March for US. In addition, pantry stocking in a surge of families cooking at home was also a factor suppressing sales during this time.
Then in April the first month of our second quarter, we saw a wave of growth in North America with most of the country under shelter in place directives and dining restaurants closed delivery and carry out food businesses became a central services.
Papa John's was prepared as an organization and our team members rose to this challenge successfully delivering 27% North America comparable sales growth for the month of April.
In fact April was Papa John's strongest month in terms of AIU visa and system wide sales in the company's 35 year history.
This was both a huge responsibility and opportunity.
Our loyal existing customers dependent on us more than ever as evidenced by 25% increase in transaction size among Papa rewards customers.
But this surge in demand is also introducing the Papa John's brand, new customers, including more than 1 million, new and lapsed customers in April on our digital channels alone.
Strong planning and execution in North America would not have been possible without the learnings from our teams in other markets around the world, especially China and Korea, where we've been managing the impact of Corona virus since January.
This experience in preparation have enabled us to act quickly both to protect the health and safety of our customers and team members and to ensure that we remain open for business and continue to serve our communities.
Under market conditions, a truly have no precedent, we have relied on our company values to guide our decisions.
A streamlined more nimble organizational structure has enabled us to act quickly in a dynamic environment.
Last fall, we articulated Papa John's five core values.
People first everyone belongs.
Do the right thing.
Innovate to win and have fun.
These values along with the culture of leadership in winning that we've been building have proven to be our compass and the uncertain waters, we're navigating today.
Guided by the imperatives of putting people first and doing the right thing our central focus since the beginning of the pandemic has been to protect our team members and customers health and safety.
In Q1, we reinvested nearly half of our profit growth back into additional benefits bonuses and incentives for corporate team members, helping employees throughout our supply chain and then our restaurants, we've expanded our health and wellness benefits to include free virtual Doctor visits for all employees and their.
Families and increased paid time off policies.
This in addition to existing benefits of no cost mental health support affordable health care plan options and access to Papa Johns team member Emergency relief fund, if and when needed.
We've also worked proactively with franchisees to help them expand their team member benefits.
We've enhanced already rigorous health and safety measures across our system and mid March applying what we learned in Asia, We launched no contact delivery, a complete reengineering of our ordering and delivery processes and technology conceived and executed in less than two weeks.
We were the first pizza delivery company to fully integrate no contact delivery indoor digital ordering channels for a seamless customer experience a testament to our growing culture of innovation.
No contact delivery has been a huge success with customers driving substantial gains in our satisfaction metrics and net promoter scores.
Securing our supply chain, especially the health and safety of our team members in our quality control centers in our Q Cc drivers has been another intense focus since the pandemic began.
Our team has worked diligently to source the difficult to find safety and protective supplies. They've also made sure that there were no disruptions to our ingredients supply chain, so our restaurants to keep up with increasing demand.
Disruptions with me or other key suppliers have not impacted our stores and based on the contingency plans that we have put in place we don't anticipate any disruptions to our business.
We've also been fortunate to be in a position to provide jobs. During this pandemic our national hiring campaign has already resulted in the hiring of thousands of workers displaced by Covance 19.
In addition, our partnerships with three of the National delivery Aggregators, which were already in place have enabled us to scale delivery to more customers. During peak times in fact, our percentage of deliveries fulfilled by Aggregators has more than doubled year over year and our data shows that these transactions are highly incremental and profitable to our bid.
Yes.
[noise] Papa John's commitment to serving our communities includes our neighbors and need as well as our customers since the onset of the pandemic our team members and franchisees have stepped up to deliver free meals to healthcare workers first responders and families and to support organizations on the front lines of this crisis.
The Papa John's family has already provided more than 2 million free slices of pizza since March Papa Johns team members and franchisees are living our values and I couldn't be more proud to be a part of this amazing team.
Now I'll discuss our international business, which is a bit more complicated story given the variability of how countries have been impacted and responded to cope with 19.
International comp sales began the year solidly ahead of our original plan.
Then toward the end of January we began to see an impact from covert 19, as a pandemic spread from China into other markets.
Not surprisingly sales were most impacted where government restrictions forced all restaurants to temporarily closed our worst strict curfews were put in place and China. Many of our restaurants are located in shopping malls, which were temporarily closed by the government.
Some markets in the Middle East in Latin America also faced government closures are heavy restrictions on trade.
However, we also saw other international markets like the United Kingdom, and Korea recognize the importance of carry out and delivery businesses as a central services and those markets performed exceedingly well.
Overall, approximately 300 of our international stores or one out of seven were temporarily closed for some part of Q1.
Impacting comp sales by an estimated 200 basis points.
There's varying dynamic across markets has continued in April.
As I said overall comp sales, including temporarily closed stores were up 1.4% in the month.
Excluding temporarily closed stores, our international comps in April would've been 12%.
Behind that number were strong double digit gains in markets like the UK and Korea.
Also in China, all but 15 of our stores of reopened these trends were offset by approximately 375 stores in other markets that are now temporarily closed.
Well government mandated temporary closures are outside of our control otherwise strong comp sales and quick decisive actions on the leading edge of the global pandemic reflect the strong leadership of our international team.
The insights they have gained in markets like China, and Korea have helped a measurably to drive a coherent and successful global strategy.
I'd now like to turn the call over to Steve Coke to provide more color on our Q1 results before I discuss how covert 19 has affected our outlook for the remainder of 2020 M. beyond Steve.
Thank you Rob.
This morning before providing details on our operating results I'd like to begin by discussing three items.
First our year over year gap earnings second a change in how we are presenting temporary franchise support and third our adjusted earnings reflecting this change in presentation.
So let's start on a GAAP basis.
In the first quarter, we reported earnings per diluted share of 15 cents compared to a loss per diluted share of 12 cents a year ago.
The 27, St year over year increase in our GAAP earnings per diluted share reflects four factors first a 31 cents positive benefit from special charges, a year ago, primarily associated with the Star Board investment.
Second or 14 cents positive benefit primarily driven by strong North America comparable sales in the first quarter of 2020.
Third a four cents negative impact of higher preferred stock dividends in the first quarter of 2020 compared to the first quarter of 2019, when we issued the preferred stock and only incurred a partial dividend payment.
And finally, a 14 cents negative impact due to higher planned temporary franchise support as part of our we went together agreement with franchisees.
Next I'd like to discuss temporary franchise support and how we're presenting it beginning this quarter.
As a reminder, under our we went together program last summer, we made a commitment to our north American franchisees, who are facing a significant contraction in sales with five quarters of scheduled temporary incremental support and marketing and royalty relief.
Previously, we had categorize temporary franchise support as a special charge, reflecting the unique challenges. The company has had to manage over the past two years. However, consistent with the significant progress Papa John's is made with its transformation, including continued improvements in sales and unit economics as well is concerned.
During input from the FCC temporary franchise support will no longer be categorized as a special charge in either prior or current periods as of the first quarter of 2020.
This means the temporary franchise support will no longer be excluded from the calculation of adjusted earnings per share.
With that let's now turn to adjusted earnings.
Adjusted earnings per diluted share was 15 cents in the first quarter of 2020 down four cents from a year ago, reflecting the benefit of higher comparable sales slightly more than offset by higher temporary franchise support and higher preferred dividends as I just described.
Based on the prior way we reported adjusted earnings per diluted share had we continued to include temporary franchise support and special charges adjusted earnings per share would have been stood increased 10 cents or approximately 32 per cent compared to the first quarter of 2019, the incremental five point.
$8 million in temporary franchise support in the first quarter of 2020 represents a 14 cents per diluted share impact year over year.
During the second and third quarters or 2020, we anticipate spending between $15 million and $20 million on temporary franchise support consisting of $10 million and incremental marketing investments and the remaining amounts and royalty relief.
This compares to approximately $42 million, we spent in the last three quarters of 29 team.
Upon the conclusion of the program in the third quarter of this year, we do not expect any further temporary franchise support under the we went together program to be needed in the fourth quarter or next year, especially given our returned to positive comparable sales growth.
Honor Investor Relations website, we have provided a supplemental table reconciling GAAP and adjusted earnings under our new presentation that does not exclude temporary franchise support by quarter since the third quarter of 2018 alongside this we've also provided the amount of temporary franchise support provided each quarter.
To ensure investors can reconcile to our previous presentation.
Moving now to more detailed operating results.
In the first quarter of 2020 pre tax income on a GAAP basis was $11.5 million compared to a loss of $800000 for the corresponding quarter in 2019.
Looking at sales consolidated first quarter revenues increased $11.5 million or 2.9%.
Excluding the impact of Refranchising 46, domestic restaurants, and the quality control center in Mexico in 2019, consolidated revenues increased approximately $23.1 million or 6%.
The increase was largely due to positive comparable sales in North America, and higher commissary sales driven by increased commodity costs, which are passed through to our franchisees.
Now for our business unit results for the first quarter.
Domestic company owned restaurants pre tax income increased $4.1 million, primarily from positive comparable sales of 6.1%, partially offset by higher commodity costs primarily for cheese.
North America franchising pretax income was $1.6 million higher driven by 5.1% increase in comparable sales.
International pre tax income decreased $800000, reflecting lower development fee revenue higher general and administrative cost and the unfavorable impact of foreign exchange rates.
These factors were partially offset by higher royalty revenues from increased units and higher comparable sales.
Unallocated corporate expenses increased $4.6 million as anticipated due to the 5 million dollar incremental marketing fund investment included in temporary franchise support higher variable incentive cost and higher legal fees.
These increases were somewhat offset by decrease in interest expense due to a lower average debt balance and lower interest rates in the quarter.
Income tax expense was $2.5 million for the first quarter of 2020 for an effective tax rate of 21.8%.
Our free cash flow, which is non-GAAP measure that we defined as cash flow from operations less capital expenditures and dividends paid to preferred shareholders was approximately $24 million in the first quarter of 2020 as compared to $3 million a year ago. The increase was primarily due to higher net income and favorite.
Well changes in working capital items, including the timing of payments associated with our National marketing Fund.
We paid a cash dividend of $10.7 million to our common and preferred shareholders. During the first quarter of 2020.
Subsequent to the first quarter on April Thirtyth 2020, our board of directors declared second quarter cash dividends of approximately $10.7 million to be paid to common and preferred shareholders. The second quarter common stock cash dividends will be 22.5 cents per common share.
Papa John's continues to have sufficient cash on hand to support our current operations as evidenced by our $24 million and free cash flow generated in the first quarter.
We also have access to approximately $350 million through our credit facility should we need it.
Lastly, during the first quarter, we opened 16 restaurants in North America, and close 19 restaurants for a net reduction of three restaurants. We also opened 18 international restaurants, and close 32 restaurants for a net reduction of 14 restaurants. These changes in our unit count exclude any temporary closures as a result.
All of covert 19 pandemic.
I'll now turn the call back over to Rob for some final comments Rob.
Thanks, Steve.
Finally to summarize and wrap up.
Papa John's started 2020 with great momentum, which has continued into April our new products and marketing have performed very strong our innovation pipeline continues to produce great ideas that deliver results.
Our franchisees owners of small local businesses are re establishing a strong foundation for future growth and success.
And through it all we've kept our team members and customers safe stay true to our values and continued to deliver safe high quality delicious food.
The covert 19 pandemic has caused deep harman sadness to individuals in communities across the globe.
But it is also inspired heroism from many in response.
Again, I want to acknowledge Papa Johns team members and franchisees because of their tremendous effort. We are meeting our commitment to serve our communities and will emerge from today's challenges a much stronger organization further along our path to becoming the world's best Pizza delivery company for the benefit of all of our stakeholders.
I'd like to thank our shareholders and everyone on this call for their interest in what we're doing and for their continued support with that I'll turn the call over to the operator for today.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Kim.
Giant question past the punky, please standby wildly compound the culinary roster.
My first question will come from Peter Salim with P.T. AG. Please go ahead.
Great. Thanks.
So I'm not on the quarter.
Rob I mean, you bought comp was pretty impressive really impressive at and almost 27% so far.
I'm just curious as to when you're thinking about that is there any way to parse out.
How much of that you feel is coming from stay at home orders, how much of that may be coming from.
But just trying to get a sense of how much of that is more of a sustainable number on what the really underlying run rate.
Figure looks like.
Hi, Peter that's great question, we've spent actually a lot of time thinking about that exact question and you know I just would call your attention too we were tracking at about 7% comps in Q1, a prior to the third week in March where you know we started seeing some slowdown.
Around from the shelter at the initial shelter in place behavior people or pantry loading and people were adjusting.
The sports and shut down people weren't able to have birthday parties. Those types of things sell we saw an initial slow down and we feel like that cost us about 200 basis points and sales in quarter. One so lots of momentum even without you know coven 19 impacting our domestic.
Business, obviously April at 27% has been a very different trajectory and the way. We've we've looked at it as we believe that covert represents probably right around 10% of that sales growth you know, it's consistent with what we've seen in the other.
Delivery restaurants that have stayed open they've seen a similar types of trends, where they didn't have that type of growth prior to April and so that's that's about what we're seeing from from Cove. It and we would expect that to continue a we believe the tail on this thing.
Thing is going to be a maybe a little bit longer than than folks might expect even when you know states in communities open back up we think the consumer behavior will still be conducive to a large demand for delivery business. The other 15% to 17% is really a compilation of lot of things we.
Talked about in the call, we're seeing a huge positive impact from our innovation, we're finding it to be very incremental people or adding pop ideas on top of pizzas, its not replacing a pizza. So we're seeing a lot of check growth from that were also seeing our aggregate.
Peter business has has doubled its now stands at 4% of our business coming in from Aggregators and that continues to be very incremental for us and those are full price tickets others, there's both new customers coming in as well as check growth coming from those transactions and then lastly, you know we.
Got a big drag on the business last year from the relaunch of our loyalty program. There was a lot of cleaning up to do in regards to the amount of discounts in the amount of points that were being used at this point our loyalty program is a huge asset for us we've got over 16 million customers in the program and our.
Our check growth is is very healthy a problem from those transactions. So it's a compilation of all of those things, but I really can't under.
You know understate or overstate, just how much our team has really come together at the restaurants, and we're operating more efficiently our customer service has never been better and and where we're able to staff as with all the new jobs that we've we've hired on and created we're able to start.
Currently and so the throughput in our restaurants is improving as well. So we're seeing kind of the the true benefit or the true output that our restaurants are capable of when we drive the kind of demand for our products that that we have over the last month.
Right.
Oh no on the restaurant level margins you guys had another.
Quarter there.
Panting can you talk about some of the you know initiatives.
I'm pleased to.
No.
Got it.
With the call centers and maybe some discussion around the.
Well I was wondering around insurance so many other initiatives.
[music].
It was restaurant level margins more permanently.
Yeah for sure I mean, we've we have been able to utilize our labor a lot more efficiently in our restaurants through the implementation of both our pop up call Center and a lot of our company restaurants, and then you know we've introduced some some new processes and some new equipment that allow.
How's us to more effectively utilize our labor. So labor has been a pick up for us a we've also worked on the met all the P. and now I'm, we've cleaned up some of the arent M line items, a we're just doing things more effectively more efficiently and and our insurance is improving we've seen.
Being a improved insurance rates, particularly on the company's side really over the last six months as Weve instituted really what I would call a culture of safety throughout our our restaurants.
We have now half technology, which allows us to assist our drivers and driving a more safely and their rewarded for that behavior and were able to track that behavior and really we've just seen claims come down and as a result of that we're starting to see some savings and we would anticipate.
That the reduction in claims should help us on the premium side to moving forward. So we see future benefit on our insurance line items as well, but as you know and and almost all restaurant businesses, you know revenue as a flywheel for for margin and as we as I mentioned in Q1, we are tracking along.
7% comp sales growth that is going to is going to help our our margins across the board and so as we get into April and in Q2 as we see these 27% pump sales growth, you know where where our restaurants are going to continue to operate very efficiently and productively.
Great and then just I'll ask question I'll hop off on on the franchisee side can you just talked about the franchisee health and maybe give us a sense of where their margins are.
And your company on margins are the franchisee margins today mirror the company margins in terms of the improvement that you guys have been seeing in terms of.
Overall margin is trying to understand.
Franchisee Hilton and maybe how that may relate to their appetite to open more restaurants.
Coming cornerstone 10 years.
Our franchisees are incredibly happy right now.
The health of their restaurants is the best it's been in it the last three years and.
We are actively working right now to build.
Plans and incentive structures and other agreements in partnerships with them to accelerate development. We you know as Steve called out in the.
On the call I'm on the release that you know we were moving forward with the we went together.
Franchisee support for the you know Q2 and Q3, that's a commitment we made the majority of that support is in the marketing fund, which really benefits US right now because we feel like we have a lot of great news to talk about both from an innovation standpoint, as well as the great work that our teams are doing out in the coming.
Unity is to take care of people during could you know a shelter in place.
Challenges in so but at the end of Q3, we answer we are in great shape to come out of that we are not planning on any subsidization or or support moving forward and that's because our franchisees are in great shape better shape and they've been in many years.
Thank you. Our next question comes from Alex Slagle with Jefferies. Please go ahead.
You guys think everyone's doing okay. Just wanted to get get your thoughts on the ops and discuss sort of how you've been able to manage delivery times and limit delays both in delivery and carry out turnaround times.
Just any issues with inventory management, given all the the demand volatility I see surprising, but the strong a strong growth this year.
Hi, Alex actually it's kind of the opposite we're actually we're operating better and that's because.
We are able to staff our restaurants I mean, we've we've created thousands of jobs in hired thousands of people over the last six weeks and in doing so we're able to staff the restaurants and make sure that we are able to handle this increase in demand and with any operating business, whether it's a factory or.
Restaurant, you know as as your demand goes up and you're able to at appropriately staffed to handle that demand you just get more productive and you just get better and so you know the institution of.
And the implementation of no contact delivery has really been a well receive platform for our customers and we've seen the power of going above and beyond the take care of our customers and we're seeing you know thousand basis points improvements in our customer satisfaction scores I mean, just from the implement.
Station of that and we're seeing the pride flow through all the way down to our delivery drivers and doing work that's important and so the morale has never been higher in our in our restaurants, you know Jim Norberg, our Chief operating officer has really kept his nose to the grindstone.
A few well he's been out there in the restaurants with the teams you know, making sure that we're meeting their needs and making sure that we're supporting them and they feel like like we've got their back and they feel like they're doing really important work, it's helping their communities. So morale is incredibly high when you see morale very high you see productivity.
You go up on the supply chain side, we got out in front of it I mean, you know we we knew that once we where I'm going to continue to be able to operate that our model would be similar to what we had seen in Korea and so our teams went very quick moved very quickly to secure.
Or incremental inventory and to the point, where you know we went out and got a lot of refrigerated trucks that we could put in our you know our D.C. So that we could hold more inventory and yeah. We got scared because the first two first two weeks of that in March.
Yeah, we saw debt with the pantry loading and we were concerned that you know we may not see that spike in demand that we had seen in Korea and some of the in in in the UK and then April came and we saw it and we were prepared and our team has not only you know bought more inventory, we've secured more suppliers and make sure that we have.
Redundancies in our supply chain to be able to handle what we anticipated to be a bit of a challenging supply environment through this you know these these unprecedented times. So our supply chain is is operating at a high level.
You know, where we have redundancies in place and we feel great about our ability our business continuity moving forward.
Great. That's that's helpful and you could provide some more texture on that that check burst traffic trends in April and what the mix of loyal rewards guests versus new and lapse.
Customers looks like.
Yeah, we feel great about that mix.
The mix is actually about 50 50.
Check and trans and the that the trans our signature ever really attributable to a more customers. Its its its you know the frequency is up a little bit but the majority of of the grow and transactions as new is new customers, we have seen over a million new cuts.
Summers in April come into our brand and you know we haven't seen that along time. It was actually just the opposite we we had lost a lot of customers back and 17 18, even into 19 and so it's great. We're winning back customers you know I I always say adversity makes you better or worse and it's a choice and this adversity.
Has really helped our team accelerate a lot of the cultural you know a development that we will we had called out back in in Q4 of 2019, and and I think the the work that we're doing as a team. The pride that we are you know.
Showing and that our employees have is really helping us to to win back a lot of customers that we may have lost in the past on the check side, it's healthy check growth Weve, taking you know almost no based pricing. It all in 2020, we're really seeing it flow through from a mix standpoint, I'm, we're seeing additional.
Items being added to orders and that's really pop ideas and jalapeno poppers. Those those two initiatives have been very incremental and are driving a lot of check and then as I mentioned, our loyalty program, we're up to about 16 million customers that at this point and and where those checks.
We are increasing as well so you know where we used to have a lot of discounting last year trying to solve some of the the problems that the brand was was facing in Q1 of 2019, we haven't we haven't done that this year. We've we've you know as we stated back in Q4.
Again, we are focused on innovation and focused on our brand delivering better quality and positioning ourselves in the marketplace as such versus kind of commoditizing, the category and and chasing the discounts.
Which which hurt our unit economics, and really are consistent with the quality and investments we make in the brand. So all of those things are driving really healthy check growth and I'm, we're seeing a lot of new customers drive and transaction growth.
Thank you. Our next question comes from Chris Ocull from Stifel. Please go ahead.
Thanks, Good morning, guys Robin the last call you mentioned plans for several new product introductions. This year and I know you launched some earlier this year, but do you still believe product news is necessary or do you believe you can save some of that product news until later in the year next year even.
Chris I don't know if you're listening to our executive team calls or not but that's exactly what we're talking about.
Every day you know, we we have actually already put a hold on some of the innovation here, we were planning it at the outset at a year to have already have launched another new item and we've chosen not to do that we've chosen to focus on our core business. We've chosen to make sure that we are supporting our.
Operations with the increased demand were seeing making sure that were not you know having to distract them to train them up on new products and do those types of things. So weve, it's really been a wonderful situation, where we have the luxury of making sure we're executing our core business as.
As perfectly as we can and while we're doing that we're still developing testing validating new ideas or you know we have a pipeline of innovation ready to go when we see this strategic opportunity to launch it so.
It really is a great position to be in.
I know Rob Theres been a couple of states that have lifted their state owned mandates, including Tennessee, where I'm base. So can you describe how sales may have changed as those mandates had been lifted.
You know, we we we've tracked that closely what we wanted to understand that and we haven't seen sales trends change really in fact, there they're very consistent and yeah that may be a function of some of those states I know a lot of although they are open a lot of the restaurants, particularly that the dine in.
Restaurants have not reopened yet you know as that.
Continues that situation continues to evolve will continue to track and closely but as of right now in states like Tennessee, and Georgia, and Texas, we have not seen a drop off in our business.
Great and then just lastly is the system seeing any interest from outside capital that could help fuel unit growth.
Yes.
[laughter] I mean, I I can expand on that but that's the short answer there's there's actually a lot of excitement around the brand right now and and we'll have an active conversations with you know people that are interested in becoming part of the Papa John's family.
Thank you. Our next question comes from Alton Stump with Longbow Research. Please go ahead, it's Nick you a good morning congrats.
But first quarter and restart heretofore in April.
Steven Rob just wanted to ask 'em, you know as mentioned Rob that you think there's about a 10, we're still percent lift you know from cobot here in April obviously still implies a pretty big step up from.
Okay.
You know.
The 7% growth do so.
The first two months to up mid to high teens, how much of that do you think is new product based versus you know better marketing or any kind of.
You know if were to type you set out how much of that upside do you think <unk> core business is coming from innovation.
You know when I.
That's great question Alton what went when when a restaurant company is hitting on all cylinders.
It's really a a beautiful symphony of all those things.
You know it really takes great great operations are the foundation, if you're not running great operations, it's really hard to execute innovation with excellence and if you you know have when you have great innovation. If you don't let anybody know about it or communicate it in a compelling engaging way that can.
Influence you know behavior and help people change their habits and come in more often than you know you can have all the great innovation the world, but nobody knows about it nobody cares about it and I would I would say that right. Now we spent the last eight months building that model you know Jim came in about a month before I did and that was.
As a blessing for me as a new CEO to have such a great Chief operating officer come in and be here and he has really transform the way we're operating in our restaurants and we are now a great operating company and we are a great franchise or that how is helping our franchisees.
Currently and so when you have that you can really unleashed the innovation pipeline and we're seeing that happened and then our marketing you know we transfer we've transformed that marketing Max what's our new chief operate our Chief commercial officer is has rebuilt a strategy, that's really focused on our food and getting back to the.
Idea of better ingredients and what that really means to our customers not just on our pizza, but in our innovation and so all of our innovation is leveraging all of those ingredients and making us more efficient and productive. So it really is all those things coming together and so you know you can parse it out but you can't really say this is.
Much as innovation in this as much as marketing because they they support each other and they build on each other.
Makes sense, thanks, Robin interest cut back to the last question about you know people that are you know I'm sure asking about.
Investing in the system how quickly do you think that the unit growth.
It was <unk> Oh speaking could turn on obviously I'm sure <unk>.
I'm just kind of you know this year's decreasing demand that we're seeing short term and you're probably not thinking about it and to use at the moment, but is that back half of this your story potentially we're starting to pick up or more kind of 2021 do you think.
You know it's either.
You want to Andrew existing you know people sort and you know what were you Mr system your newest [noise].
Yeah, you know a lot of that is gonna be dependent upon when the government to get back to you know operating in a in a normal way I mean, right now and an absolutely appropriately their focus is on making sure that they're keeping their community safe and making sure that they are doing everything that they.
And to you know protect their citizens and and get through this this pandemic and so as you know you know there. The it's right now development is kind of at a standstill because you can't get permits you can't get all the things.
You need to do to buy real estate and develop real estate. So when that returns when when you know we get through this situation and and returned back to normal operating procedure I think we will be incredibly well position to move forward you as you know, we just hired Amanda Clark.
Who's our new Chief Development Officer, we haven't had a chief development officer in the past she came to us from Taco Bell worse, you know they've done they've built a ton of restaurants over the last five years and you know she's building the plan right now to be ready to activate when we're able to do so so it you know it I'm hopeful that we're able to get back.
Back developing restaurants in in 2020, but it's really going to be dependent upon when the governments are set up to you know allow us to do so.
Thank you. Our next question comes from Brett Levy with MKM partners. Please go ahead.
Great. Thanks, Sara Thanks for all the information Thanks for taking my call and again I hope everyone is well over there.
Three unrelated questions first if you could just parse out a little bit more on the on the comps anything you've seen regionally.
Dave the week Daypart.
Then on the franchise side.
Obviously, there they're static about comp levels, but what have you heard in terms of.
Percentage of the of the bucket Thats going after.
Hi, there out of need or just out of up or cautionary standpoint, and what are their debt levels look like and then just how are you thinking about the investment cycle on corporate side, given that while there's tremendous amount of operational dysfunction out there.
You will seem to be running pretty well and had the cash to really.
Double down on certain technology and innovative.
Things that are off the menu and I'll stop there.
Okay, great. Thanks, Brett you know on the on the comps we are seeing a little bit of.
Variability I mean, there there the numbers you know were double digits pretty much you know during April we are double digits pretty much every every day, but we see a little bit more strength.
Monday, Tuesday, Wednesday, Thursday than we do over the weekend.
We do see that I mean, the thing that we haven't talked about as much as you know 27% comps when we have no sports and we have no birthday parties and we have no you know social gatherings. So a lot of those things are impacting the weekend.
So you know the weekends are still extremely strong but relative to the week days the comps aren't as Greg. So I hope that gives you a little bit of texture.
On the franchise PPP you know.
When this when cobot first started taking hold in North America, and the federal government announced the PPP program you know our sales as a system where declining have given as I spoke you know the pantry loading and what have you in late March and so we were.
Exploring actually programs around PPP as as a company and looking at should we be taken advantage of this if our business is going to be in decline and as we looked at it.
We decided as as a company not to do that and it was a decision we made because we didn't feel like it was in the spirit of of the law. We didn't feel like it was the intent of that plan is to help small business owners survive the challenges that they're facing in this dynamic our franchisees are small.
Business owners and you know they they are independent small business owners and so they each are making the decision on whether or not they're going to take advantage of that program given their individual situations. As you know our system has been challenged over the last.
Couple of years and a lot of the franchisees. When you know in Q1 more just starting to see things turn around and get the comps and the unit level economics, where they needed to be so a lot of them have probably looked at the PPP program as as an opportunity to help get them healthier than they would have been.
Otherwise and so we're continuing to help them think through all that but that's a decision they're going to need to make on their out in terms of their healthiness and their debt levels. As you know as I stated earlier.
Our franchisees are extremely happy the economics of our franchisee restaurants have have are better than they have been in many in many years and we're actively talking to them about growth as opposed to sustainability and and so the dynamic.
That we talked about you know in Q4, where there was still some concern around what's going to happen. When we went together funding goes away. We're not concerned about that at this point and then your last question around our corporate capital allocation in our investment opportunities.
Yeah. We are performing you know it we're in a different situation than a lot of other restaurant companies. We we take that responsibilities seriously and so right. Now we are focused on I'm, taking care of our employees and taking care of our customers and as.
We mentioned you know we've invested half a in Q1, we invested half of our profit growth back into a benefit and bonuses and other types of incentives for our employees to make sure that they know that we are supporting them and make sure that that our restaurants.
They are set up to take care of our customers and they're in the communities in the time in need so that you know right now we're evaluating what that looks like moving forward, but where we're trying to make sure that this year. This unique situation that we're in where we have the ability to help our communities, where we're doing the right thing by our customers in our community.
These with with that the profits that we're making from that.
Thank you. Our next question comes from James Anderson with Northcoast. Please go ahead.
Thank you congratulations on great start to the second quarter pitted question, focusing a little bit more on Frenchmans health, just hoping you could outlined a little bit more how in the royalty relief in the third quarter will flow through the franchisee income statement.
What I'm trying to understand better is how these phones that flowed through what percentage of franchisees have been impacted and how we think they'll come out of this starting 2021.
I can let <unk> hi, Jim how are you doing great.
I could I can let Steve talked to that particular is about how that that funding flows through the personnel. There PNM was but I mean in general.
The subsidization that you know that this we went together.
About 65% of it is marketing investment so.
We are really you know focused on driving growth. The a lot of the funding is going into increased marketing to continue increase comp sales growth, you know less and less than 50% of it is franchise.
Subsidies. So they there are not a lot of franchisees in our system right now who are staying open because of any type of royalty relief that we're giving.
It is it is a nice to have at this point and once again, we made the commitment. So we're continuing to deliver on that commitment, but the revenue growth that our system is seeing far and away.
You know way more impact and positive impact to their PNM filed and then the we went together funding that we have in place. So I hope that answers your question.
It does not just following up little bit more on new unit growth and going into the ended the year rule.
Operators being stronger position to be able to finance their own growth.
Even as these royalty program so start to subside.
Yeah absolutely.
I'm, sorry, Jim I thought your done.
No no that's great. Thank you very much.
Yeah.
Thank you. My next question will come from Lorne Silverman with credit Suisse. Please go ahead.
Thanks, Rob how are you thinking about the broader pizza landscape as a fragmented category, it's probably the largest portion independent mine.
Anything in the competitive.
And then gets that greater consolidation.
Yeah, you know hi, Lauren I hope, you're hope you're well.
Hi, a lot of T to even mom and Pops pizza shop, our delivery businesses than have been able to continue on delivering pizza. So I think a pizza industry in general is it school, especially delivery pizza is doing great I think that what this.
Challenging you know unprecedented situation has shown is that you know the pizza delivery business is is up at the kind of business second persevere through these types of challenges.
And you know our business models are set up with us for for food away from home and as that at behavior continues to evolve as people get more and more use and not having to go out to get there.
You know, we will benefit from that as well the whole industry, both mom and Pops as well as is the delivery are as national delivery players Cal on the you know died inside for <unk> for Pizza I think they're facing a lot of the same challenges as as you know the dine in casual dining and other.
Our dining restaurants, so I'd say if there is consolidation if there is kind of shake out from this and the in a deep industry I would see it being consistent with.
That that player that focus more on dining as opposed to discernment between mom and Pops and national players.
Great and then what portion of this system is covered by third party aggregators as to what extent.
Benefited the comp and then or the opportunity transition.
Directly to Papa John's platform.
Yeah I'll answer your last one first I don't you know I don't know that that's.
Necessary I mean, it's great if they want to come in and be a part of our loyalty program because they're able to do you know, there's obviously benefits that they derive from that but in terms of our economics, we we see the economics associated with a a an aggregator transaction is profitable.
I was kind of our organic transaction. So we can continue to do very well.
By growing on the aggregator platforms in you know we have the opportunity to do that you know were with the three.
Three of the four largest aggregators in United States and all of those three they cover about 70% of our system.
So we have a I think about 70% of our system up and running an integrated with with those platforms. We also leverage and partner with some of the local aggregators. Those are the three national areas that we always talk about but you have other players in New York City and you have other players and.
And you know on the west coast or in in a lot of you know cities specific regionals that they do a lot of business in our franchisees in our company operations in those areas are partnering with them as well in terms of the amount of comps a tribute the amount of the comps that are attributable to the adequate aggregators aggregators.
So were about 4% of our business right now up from a less than 2% same time last year, and we see a significant amount of that being incremental. So you know you get that went that equates to is call it 1% to 2% of our comp growth coming from that aggregator growth, but as that continues to.
That continues to improve and grow we see that is being incremental comp growth opportunity.
Thank you I'm showing no further questions at this time I would now like to turn the call back over to Mr. Rob Lynch for any further than my.
Well I just want to first and foremost. Thank you all for your participation today for calling in and and engaging and the you know the story that that we're we're building with Papa John's I hope that you found.
The the time span a fruitful and I hope that you have.
We continue to to understand our business and understand the the great story that we're building and a I look forward to continuing to connect with with all of you and content in speaking with you again on our next earnings call. So until then best wishes stay say stay healthy.
And thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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