Q2 2020 Papa John's International Inc Earnings Call

Welcome to public on second quarter 2020, <unk> cap my name is sapia not be operator for today's call.

At this time all participants in that that's the only mode. Later, we'll conduct a question and answer session.

Trying to question answer session. If you have the question. Please press Star then one and you touched on.

I would now kind of color right to keep <unk>, Vice President Investor Relations. Please try to keep steep you may begin.

Thank you and good morning.

Joining me on the call today, as President and CEO, Rob Winch Robin I will have comments about our business and provide a financial update.

After the prepared remarks, we will be available for Q and hey.

Our discussion today will contain forward looking statements involving risks that could cause actual results could 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 in our SEC filings.

Please refer to our earnings release any Investor Relations section of our web site for a reconciliation of non-GAAP financial measures and details about temporary franchise support discussed on this call. Finally, we ask any members of the media to be in listen only mode.

Now I'd like turn call over to Rob lunch for his comments Rob.

Thank you, Steve and good morning, everyone.

I'd like to begin by saying that I hope everyone on this call and their loved ones are healthy and safe.

Backing those who are out of frontline to this pandemic working so hard across the globe they get up through this unprecedented situation.

In Q2, we have all have to persevere through extremely challenging circumstances.

Ralph a pandemic, we have work to do our part by staying committed to delivering safe high quality food.

We have put the safety in support of all Papa Johns team members and customers at the forefront of our efforts and we have been able to help our communities and they're kind of me.

At sweeping protest call for social tanks in the United States. We have worked at least that change within our company and have rapidly advance our efforts began over 18 months ago towards creating a company and a culture that value diversity equity and inclusion for all.

We have lifted our core values, including people first everyone belong and do the right thing those statements me more now than ever we recognize I'll try and I've talked for many of our colleagues. The neighbors. We have popped yards are committed to being a horse for positive change as we pursue our core purpose of bringing the well together by delivering better pizza.

While these packer certainly challenging an unprecedented Papa John's delivered outstanding performance in the second quarter as reported this morning, North American same store comparable sales for US a record, 28% last quarter, reflecting the hard work and dedication of our team members and franchisee in service to the millions of new.

Returning Papa John's customers, who have relied on assets safely deliver high quality food at our house throughout the pandemic.

We estimate that roughly half of last quarter's comp sales growth can be credit. It's a long term sustainable impact our strategy and the remainder reflecting favorable pandemic related changes in customer behavior, which also presents long term growth opportunities.

Great responsibility and opportunity for us during this pandemic has been to start millions of customers new incorrect, we have turned to safely deliver delicious food during the second quarter. We've added over 3 million new customers over digital channels alone. We also saw higher attach and repeat rates. Among this segment, which suggests that not only our new.

Customers coming to Papa John's they are returning.

We saw similar dynamics internationally were comparable sales rose, 5.3% the results strong double digit gains in markets like the UK in Korea, where delivery based businesses continued to support their communities offset by temporary government mandated closures in other markets of our approximately 2100 internet.

National franchise stores at quarter end, approximately 225 were temporarily closed to resolve cobot 19, mostly in parts of Europe and Latin America.

Excluding the impact of those temporary closures international comp sales would have been up over 13% second quarter.

Q2, adjusted earnings per share tripled from 16 to 48 cents driven by topline growth and accelerated by operating leverage.

Strong earnings year to date have generated $67 million and free cash flow compared to just $9 million over that same period last year, and we've reduced our net debt by almost $80 million from a year ago.

As we reported this morning July sales indicate that our strong momentum continues into the third quarter domestic comparable sales were up over 30% in July in North America acceleration in our growth compared to June.

International comp sales were up 14% a record for our international business, excluding temporary closure international comp sales would have been up 17%.

As of today, we have approximately 160 stores temporarily closed in our international markets clearly strong sales drivers from Q2 have remained intact.

We are leveraging our loyalty platform and one to one marketing capabilities to ensure that we keep these customers long after the pandemics size.

As I said these strong results are an outcome of two facts.

The first the benefit that we are deriving from the changing dynamic in the restaurant industry driven by the pandemic and second the positive impact the progress that we have made against our strategic priorities established in Q4 of 2019.

As we discussed last quarter those five strategic strategic priorities are while building a culture that is focused on diversity inclusion and winning to improving unit economics, three reestablishing the superiority of our products through commercial innovation for building a technology infrastructure that supports our business platform.

And lastly, expanding our footprint domestically and internationally.

I'd like to begin by talking about the progress that we have made and building a diverse and inclusive culture that is focused on winning.

Our ability to connect Papa John's values with how the country our customers and our employees are feeling right now has helped improve settlement for the brand.

Communications has played a big role here our campaigns for NEP contact delivery in March and April recognizing our frontline workers and customers in may and for the Chaperoning in July have all leaned into Papa John's core values, we've seen significant positive impact on consumer sentiment towards our brand as a result.

At this time of great need for many of our neighbors, we've increased our investments through the Papa John's foundation into non profit organizations that serve our communities.

We've provided millions of free slices of piece at a healthcare workers first responders and organizations on the front line. This crisis.

We've also launched our first fundraiser for the Papa John's Foundation for building community, which I will talk about more in a minute.

To address our surging need for team members, we launched a national recruiting campaign and have hired over 20000, new restaurant employed many of whom had lost jobs because of the pandemic.

Last week, we extended our earlier campaign and aesthetical hiring another 10000 restaurant team members over the next few months to help us meet sustained customer demand.

We also announced that we've made our best in Class College tuition program doesn't decrease even stronger with two new University partners.

All eligible team members and their immediate family members have access to an affordable online College education, which is even more important with the economics trains. Many are feeling right now and the uncertainty around returning to in person school in the fall.

I'd now like to turn to the progress that we have made in our restaurants and the impact that we are having on unit economics across our system.

As we've previously discussed our top priority has always been the health and safety of our team members and customers, especially now given the uncertainties associated with Covance IP.

From the beginning of the pandemic, we have taken decisive actions to protect our team members and customers, we enhanced already rigorous hygiene and food safety protocols, we provided special bonuses and incentives for many of our frontline employees and we increased our health and wellness benefits for all team members and their families.

We also quickly renamed engineered are ordering and delivery processes and technology to seamlessly integrate no contact delivery into our channels and customer experience.

No contact delivery has been a huge success with customers and team members.

We have secured our supply chain, reviewing our sourcing relationships and protecting the health and safety of our team members at our quality control centers to ensure that there are no disruptions to our business or ability to serve our customers.

As a result of these actions in the perseverance of our team members of franchisees Papa John's record sales dynamics are transforming the profitability of our corporate stores and our franchisee stores and then turn have further strengthening our long term outlook for store growth.

Continuing.

First quarters positive trends and despite record high cheese prices second quarter in North America unit profits and margins were the highest that we have seen at several years strong unit economics will be the foundation for strong development moving forward.

Next I'd like to address how successful innovation has re establish a superiority of Papa John's products over the past three quarters contributing to accelerating positive sales comps.

Across the company and our system, we're very excited about the marketing product and E. Commerce progress that we have made and the commensurate impact that our innovation mindset is having on our business.

Our menu innovations, including garlic, parmesan crop toasted handheld pop, India, and jalapeno poppers roles continue to be popular and successful with customers and our bottom line.

These new products, all buildup Papa John's signature crop and better ingredients better pizza brand positioning to drive higher ticket and traffic across dayparts without cannibalizing core premium products or adding cost or significant operational complexity to our stores.

This innovation strategy has helped to minimize our need to offer discounts to give customers incentive to order from us and as a result is driving both sales and profitability.

The product innovation pipeline continued into the third quarter last month, we launched our new Schacher on a pizza and collaboration with Shaquille O'neal Papa John's Board member and restaurant owner.

The chaperoning as an extra large pizza made with our signature Doe top of extra cheese and extra pepperoni to the edges and cotton into Papa John's largest slices ever.

As part of the launch we're donating one dollar from every chaperoning sold through August Twentyth are to the Papa John's Foundation for building community, which benefits Cobot 19 relief efforts and organizations like the United Nigro College style and boys and girls clubs of America.

Support communities working together for equitable opportunities for long.

The shaft running it had a huge star already selling over 2 million pieces and raising more than $2 million to support our communities.

Clearly this reflects the appeal and quality of the product as well as a positive message and advertising campaign that really resonates with consumers and the current environment.

We look forward to investing the funds raised from our foundation back into our communities to continue to support covered relief in the fight against ratio on Justice.

As you know technology as a big part of everything that we do.

Station of our loyalty in one to one marketing platforms is accelerating our growth.

But how we leverage technology does not stop at our front door with built strong relationships with external technology companies that allow us to meet the needs of more customers than we could alone.

Papa John's robust partnerships with three of the four top delivery aggregators already in place before the pandemic have further enabled us to meet surgeon customer demand, especially during peak times when our delivery teams are working at full capacity.

In fact, a percentage of our transactions delivered by Aggregators was up more than 100% in Q2 versus Q1.

These transactions are highly incremental and profitable to our business as we have said repeatedly Papa John's strategy is to win by providing our customers with better pizza wherever they are and however, they choose to order.

Lastly, I'd like to discuss our new store development another focus area for our long term growth.

With permitting suspended by most local governments during the pandemic new store openings pause as expected during the quarter.

However, strong sales and profitability reduce closures of traditional North America franchises to the lowest rate we have seen in 10 years.

After managing through significant challenges in 2018 in 2019, Papa John's domestic franchisees are in a stronger position today than they've ever been.

Strong sales and improving margins provide a strong foundation for our new development strategy in the us and internationally, even before this quarter Papa John's offered franchise investors one of the fastest paybacks in our industry. This compelling investment opportunities now even more compelling given three significant changing dynamics in our industry.

The first our E commerce and delivery model B is set up to succeed in an environment, where communities are apprehensive about sit down time.

The second the expected availability of many attractive retail real estate opportunities in the months ahead also provides room for expansion that may not have been available just six months ago.

And lastly, our company's transformation is creating a brand that we can all be proud off both prospective franchisees and top performing team members.

To take advantage of this opportunity we have ramped up our development efforts with new leadership and resources to drive our franchisees success. We are focused on delivering significant unit growth moving forward.

I'd now like to turn the call over to Steve Coke to provide more color on our Q2 results before I deliver our closing comments Steve.

Thank you Rob.

Im going to start today by walking you through our year over year earnings followed by some highlights from our second quarter operating results in.

In the second quarter, we reported earnings per diluted share on a GAAP basis of 48 cents compared to 15 cents a year ago.

Excluding a one cent impact from special charges in the prior year adjusted earnings per diluted share rose from 16 cents a year ago to 48 cents. This year. The 32 cents year over year increase reflects a 37 cents positive benefit from improved operating results primarily driven by our.

Record North America comparable sales.

This was slightly offset by five cents negative impact from the allocation of undistributed earnings to participating securities primarily the series B preferred shareholders.

Undistributed earnings are defined as net income less dividends paid the allocation of these earnings as determined by the percentage of total outstanding shares that the participating securities would represent on an as converted basis.

In prior quarters, there were no undistributed earnings to allocate to these participating securities. However, based on the company's performance in the second quarter Undistributed earnings were available for the quarter to date and year to date earnings per share calculations.

We also provided $5.1 million or approximately 12 cents per share in scheduled royalty relief as temporary franchise support under the formal we went together program.

This compares to $5 million also approximately 12 cents per share provided in the second quarter of 2019, which was comprised of both incremental marketing fund investments and royalty relief.

This temporary franchise support provided under we went together will conclude in the third quarter with $10 million, an incremental marketing investments and to a much lesser extent royalty relief.

After the formal relief concludes in the third quarter, we do not expect to provide additional temporary franchise support under the we win together program in the fourth quarter or next year. This anticipated spending compares to the $37 million. We spent in the last two quarters of 2019.

Moving now to more detailed operating results.

In the second quarter of 2000, Tony pre tax income on a GAAP basis was $26.9 million compared to $10 million for the corresponding quarter in 2019.

As I've described consolidated second quarter revenues rose, 15.3% or $61 million.

Excluding the impact of Refranchising 46, domestic restaurants, and the quality control center in Mexico in 2019 consolidated revenues increased approximately 18.3% or $71.1 million. The increase was largely due to positive comparable sales in North America, which drove high.

Higher sales for domestic company owned restaurants, North America franchise royalties in North America commentary revenues.

Now for our business unit results for the second quarter.

Domestic company owned restaurants pre tax income increased $9.2 million, primarily from positive comparable sales of 22.6% and operating leverage partially offset by higher labor and bonuses.

North America Commissaries pre tax income increased $800000, primarily driven by higher profits from higher volumes.

North America franchising pretax income was $4.3 million higher driven by 29.7% increase in comparable sales, partially offset by higher royalty relief under the temporary franchise support program.

International pretax income decreased $800000, primarily due to targeted royalty support provided to certain franchisees and the unfavorable impact of foreign exchange rates.

These decreases were partially offset by lower travel costs due to cobot 19 restrictions and higher royalty revenues and UK commissary income from increased units in higher comparable sales.

All others pre tax income increased $3.2 million, primarily due to higher online revenues related to strong North America comparable sales.

Unallocated corporate expenses decreased $1.1 million, primarily due to a $2.5 million incremental marketing fund investment in the prior year quarter included in temporary franchise support savings from the cancellation of our annual operators conference and reduced travel as a result of coven 19.

As well as lower professional and consulting fees and lower interest costs.

These decreases were partially offset by higher projected management incentive costs.

Income tax expense was $5 million for the second quarter of 2020 for an effective tax rate of 18.4%.

Now turning to cash 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 $67 million in the first half of 2020 as compared to $9 million a year ago.

$58 million increase was primarily due to higher net income as well as favorable changes in working capital items, including the timing of payments associated with our marketing fund.

The company has a secured term loan facility with an outstanding balance of $350 million.

The outstanding debt is 100% fixed with swaps at favorable interest rates.

With a low fixed rate and current leverage ratio of 2.9 times EBITDA, we continue to believe maintaining our cash balance during this uncertain environment is appropriate.

Additionally, borrowings of up to an additional $400 million are available under a secured revolving credit facility should we need it.

Both facilities mature in August 2022.

We paid a cash dividend of $10.7 million to our common and preferred shareholders. During the second quarter of 2020.

Subsequent to the second quarter on July 30, Onest fine tuning our board of directors declared third quarter cash dividends of approximately $10.8 million to be paid to common and preferred shareholders. The third quarter common stock cash dividends will be 22.5 cents per common share.

Lastly, during the second quarter, we opened nine restaurants in North America, and closed 10 restaurants for him that reduction of one restaurant.

As Rob noted, while new restaurant openings have been slowed during the pandemic last quarter's North America closures included only three traditional restaurants, which was the lowest rate we have seen in a decade.

Internationally, we opened 25 restaurants, and close 55 restaurants for a net reduction of 30 restaurants. The majority of international closures were associated with a strategic franchise realignment in a single market.

We expect to reopen most of these restaurants under a new franchisee.

These changes in our unit count exclude any temporary closures as a result of the cobot 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.

In a very difficult environment for many businesses, especially in the restaurant industry Papa John's to show tremendous strength in the second quarter and as we disclosed this has continued into July.

Our transformation in the values and purpose upon which it is base have enabled us to respond to an unprecedented situation protecting the safety of our team members and customers, while keeping our doors open and continuing to serve our communities.

Our new products and marketing continue to perform very strong our innovation pipeline continues to produce great ideas that bringing new customers engage our current customers and deliver results. Our franchisees owners of small local businesses are realizing unprecedented profitability that will allow that to invest in growth as.

Well and through it all we are building an organization that we can all be proud off.

Like everybody, we wish for the end of the pandemic, a speedy economic recovery and a return to normal for all of us, but given the ongoing challenges and uncertainty related to covert 19, we expect that social distancing, both voluntary and enforce we'll continue to drive consumers toward delivery and carry out.

Businesses like ours for the foreseeable future.

We will continue to put the health and safety of our team members and customers at the forefront as we continue to serve our communities.

We will also continue to optimize our work streams in response to the ever evolving changes in the business conditions and end customers any customer needs, but we will always stay true to our values and purpose, which had been our guideposts as we have navigated these uncertain times.

We remain focused on our long term goals confident that our actions today are creating a foundation for a strong brand and profitable growth long after the pandemic subsides.

I'd like to thank our shareholders and everyone on this call for their interest in our company and their continued support with that I'll turn the call over to the operator for QNX.

Thank you we will now begin the question and answer session he'd be happy question. Please press Star then one and you touched temp bone isn't each speaker phone you may need to pick up. Thank you nice before passing the membranes.

Once again you have next question. Please press Star then one.

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And our first question comes from Peters belief and BTI.

Great. Thanks for taking the question.

And congrats on the quarter.

And the results.

Just wanted to ask Rob on the.

Thank you said on the call.

You guys ramped up you're ramping up development efforts.

Can you elaborate a little bit on that I know the closure rate was.

Rather low in the quarter and any reason that closure rate.

Can't continue going forward.

Morning, Peter.

Yes development is probably my number one priority right now I feel like we built a very strong foundation.

From our on our commercial business in North America, We've got great innovation and great marketing support the next phase of the turnaround of vis vis company it getting development.

Ramped up and going again to that end.

Earlier this year, we hired a new Chief Development Officer, We previously had not had a chief development officer.

We brought her end to really get a best in class infrastructure built to facilitate.

Development moving forward and Weve put some very aggressive goals in place for ourselves heading into next year and beyond so.

Right now we are building the infrastructure to be able to support that said we're building in our best in class capabilities that frankly, we didn't have before in terms of how we think about.

The territories, both domestically as well as internationally and there's a ton of white space for US we've got app as many restaurants as our competitors in North America and way less than that internationally. We operate in 47 countries internationally, which is about half of our top two competitors. So.

We feel like there is a huge development opportunity here, we have a significant amount of excitement both with our current franchisees who have.

Cash flow at this point capital that they want to reinvest in the growth of this business. We're also being contacted from by many large sophisticated owners of other concepts, both domestically and internationally, who want to be a part of the piece of business is as it's proven to be very success.

Full during these challenging times and a lot of people believe that our model, which is unique in the marketplace in ecommerce already build out ecommerce in delivery model is something that they want to building into their platforms. So development is a huge focus for us we see a huge amount opportune.

In terms of closures.

I don't see why anyone would close of Papa Johns and for the foreseeable future.

Yeah Thats a margin structure is great. The revenues are great, where we're hiring team members. We're finally getting to a point, where our restaurants, our staff which take.

The burden off of off the operators, so I foresee our closure rate the.

Very low for the foreseeable future.

And then can you just talked about the advertising budget annual coming into this year.

Nobody really expect these types of comps and so therefore I'm sure. Your AD budget is kind of balloon.

How do you plan to spend the I guess to incremental AD dollars that you have in your pocket now versus initial plan and is there any opportunity to roll some of that and to 21, and if you don't seem to need it and and this year.

As a great question when I came into this business obviously my background in marketing one of the concerns that I had was we had.

As we went together program, which was a great program hopping our franchisees through these challenging times the challenging situations that they were facing and about half of that support was in the former marketing spread out over 2019 in 2020, and so as we looked at 2021 my concern was that our marketing budget with Dick.

Klein relatively precipitously given that if we were ending that level support. These sales have mitigated that issue our comp sales. This year as you know our our marketing budgets are a function of our sales growth our us our net sales and so as our sales have gone up.

Filled the marketing bucket for us and yes, we have the flexibility and capability to move funding of marketing funds from one year to the net so we are currently exploring though what the best strategy is to do that at a call about it yesterday, so absolutely we will.

Make sure that we continue the momentum that closed 2020 strong that were absolutely looking at the opportunity to make sure that we get off to a fast start in 2021, leveraging our marketing dollars most productively.

Excellent. Thank you very much.

Thank you Peter.

Our next question comes from Alex Slagle from Jefferies.

Hey, guys good morning.

I'm wondering LLC the business doing so well and yes, making an impact.

On the in thinking about the digital platform and data analytics and that the consumer facing technology winter rainy see the next opportunity for the brand to raise the bar to the next level and if theres any low hanging fruit you'd call out at this point.

Great question.

So as we mentioned we've brought in the last three months over 3 million new customers over our dose are down digital channels and.

One of our top priorities is making sure that those customers stake we want to make sure that we take care of them from an operating standpoint, and give them best the best serve as possible and make sure that we're serving them the best products that we keep Canada timely manner, but we're also working very hard to make sure.

Our that that our digital platforms are the easiest in most functional platforms to order our products from and that they provide the best customers experienced possible so people keep coming back.

Our loyalty program as we mentioned last quarter, we revamped it in 2019, we're starting to see the dividends in 2020 with.

Higher ticket averages as as as we are better able to target incentives more appropriately to the right customers.

And our one to one marketing capabilities, leveraging all that data and our loyalty programs are really starting to take off so we're making big investments into our loyalty in one to one marketing capability.

Right now so that we can make sure that these customers that are coming in driving a lot of this transaction growth that we're seeing are going to stick around and that we take care of them. So from a from a commercial standpoint. That's those are big investments from US. In addition to that were also up optimize.

Hi, Dave how we work with the Aggregators they become a little over 5% of our business at this point I think you all are aware of their growth during a pandemic and we've grown with up.

We're probably one of the largest.

You know suppliers on on on on their platforms because were delivery business that we create trips for them. So.

We're working with them to make sure that we can continue to deliver great customer service.

Through their platforms and that we create long term model that that supports both of our businesses, where we can both be profitable and continue to take care of our customers. So between our loyalty program and the Aggregators, that's where a lot of our technology focus is up I guess.

That's helpful. If you can help us think through core DNA growth, excluding all the special charges last couple of years. It's as you look back to 2017 or so it was closer to 150 860 million, but that's going today, you you own fewer restaurants in the new apps and international so.

Commissaries, yes, but same time, you you're investing a rebuild the business prepare for an acceleration of growth. So you could just help us balance these thoughts in level said on.

How we should think about DNA going forward you, perhaps if you had the view on target DNA as a percentage of system sales.

Yeah, I mean, this year going into 2020. It was the first year, where we had actually build a plan that decreased DNA in the last three years. So we are very focused on DNA. We are hyper focused on being as productive as possible. This is going to be a little bit of unique year in terms of absolute DNA.

Because as you know our sales and profits continue to rise we will see a change from last year, where we had very minimal management's as to this year. We will have a relatively significant management incentive program payout. So our DNA will be a little bit skewed this year by that but our focus.

And our targets are to continue to reduce gionee year end and year out and you know we were making a lot of progress towards that these unique dynamics are going to change that a little bit this year.

Makes sense. Thank you.

Hi, following question comes from Chris Ocull from Stifel.

Hey, good morning, guys.

Hi, Chris.

Rob can you elaborate on how the company has been able to disaggregate the comp performance between the pandemic in company specific initiatives.

Yeah I may as you know, Chris we were we were tracking at about 7.5% in the first quarter.

Prior to the onset of the pandemic and we actually dipped down for the first two weeks and then we can you know as people pantry loaded and kind of locked themselves down then we started coming out of that and we saw obviously an increase in sales and we saw.

You know our comps go up dramatically. So we continue to track that progress we continue to look at that consistent.

Drivers of our business like our innovation pipeline, what the mix on those products looks like with the Incrementality. We believe can be attributed to those products. We're also looking at the competitive environment. If you look at hit other releases of some of the other larger large national Dilip Pizza delivery company.

They are tracking in at 15% range on their delivery pieces of business and prior to the pandemic both of our competitors were in the kind of flat to 1% growth.

Growth.

Spot. So we're looking at how much they've grown as a result, a pandemic, which is pretty consistent and then we look at how much we grow and and so we look at the things that we've got uniquely.

That are contributing a lot of opportunity for a lot of growth for us. So our partnership with the Aggregators such as a unique decision we made to partner with a large major aggregators. We think we're benefiting from that we will continue to benefit from that versus the rest of the industry as long as a strategy remain intact our.

Innovation and the Incrementality that we're able to us that based on we have all purchase data across all of our digital channels, we can understand.

How incremental that is we're seeing our size per order go up dramatically since we launched pop. It. It has nothing to do with the pandemic that has to do with our strategy chaperoning extra large piece of that we're selling and donating a dollar to charity. Yes, we don't typically sell a lot of extra large pieces that this is the.

Unique innovation is now mixing higher than we anticipated in and is generating a lot of repeat business for us. So those those types of things, where we can track and measure.

Specific explicit actions that we have taken that are different than at the general growth of the marketplace is how we discern between the pandemics impact versus the impact of our strategic priorities.

That's helpful and.

And then do you expect the marketing fun to be up year over year in 21 without the company, making a contribution to the National AD Fund.

Yes, we do.

Okay, Great and then once you have the infrastructure in place what do you think are going to be the greatest challenges the company needs to overcome in order to restart we're see franchise development accelerate.

You know part of his on us, Chris and that's exciting because we control our own destiny, we havent.

Had some of the capabilities that are that are critical for us.

Best in class development around some of the new technology is around you know drawn up trade areas and mapping capabilities, we havent had some of the infrastructure.

To really support franchisees.

A lot of our franchisees over the last four or five years have been individual franchisees with one or two units.

We have not had an infrastructure in place to go out and and really build our proposition for the larger more sophisticated better capitalized.

Franchisees that already.

Own and operate in other concepts, we have a huge opportunity there and we're focused on it and there's a lot of interest. So it really is something that's within our control because the economics make unbelievable sense I mean, when you look at 300000 dollar cost to open Papa John's Pizza restaurant.

And so yeah, we are making sure that we are ready to come out of this situation and domestically.

And half partners in place that want to invest their capital in our brand and we're going to have the resources in place to support that internationally. We have huge geographies that have not been opened it we don't have any restaurants in Australia, the huge QSR and pizza market. We don't have any restaurants and Africa. We don't have any you know we are in half the countries.

Most of our our competitors and even in the countries that were in like China. Yeah. We have 200 restaurants, our competitors have thousands so huge amount of white space, it's about us putting the resources in place to take advantage of that and we're making those investments right now so we're prepared when we come out of this.

Turning to really accelerate that growth.

Perfect. Thanks, I appreciate it.

Thanks, Chris.

Our next question comes from Brian Bittner Oppenheimer.

Thanks, Good morning, Robin Steve you know this outlook for improving unit growth is definitely a new important.

Theme at Papa Johns and you just touched on on it a bit with christine's question, but.

When do you.

You know from a timeline perspective really expect to see new unit openings.

Start to really positively impact the growth of the business I mean is it going to be you know right on the other side of this virus is it going to be you know by the end of this year just some color around the insights you have on the timing of this new unit growth being.

Yeah, Hi, Brian good to hear from yet barring unforeseen circumstances, and you know that used to be a cop out but these days is completely irrelevant barring unforeseen circumstances, we are targeting I'm a significant growth in unit.

2021, so we are building the infrastructure right. Now we are you know working to make up for last round that we're losing right now given the challenging dynamics around getting restaurants, bill, but we think we think there's going to be a big opportunity you know we haven't yet.

At this early seem to shake out from the pandemic yet on the real estate market. I think you know this thing continues to labor there will be a shake out there will be real estate. It becomes available that wasn't available before and we want to take we you know we want to be able to take advantage of that and lever.

That opportunity and then in the near term. So like I said, we are we are building right. Now we are preparing right now we're ramping up right now how long that is going to take before it really gets up and running it's probably more dependent upon you know how the pandemic continues to impact.

Development more so than that then our individual action plan.

Okay.

Thanks for that in my follow up just July same store sales, obviously accelerating in June.

You know what's happening at a time when we're seeing sales improved for more traditional restaurants, I guess, meaning the pandemic, becoming less of a drag in July for traditional restaurants.

So you know you've been able to actually improve the momentum.

The time, where I guess logic would say the positive impacts from the pandemic are becoming less.

For your business. So does that mean some of the core underlying drivers of your business were actually really accelerating and you're kinda seem to pandemics impact.

Then as we move into July or how would you frame that up.

Yeah, I think you're right I mean, as I mentioned, our goal right now and to maintain the customer that we have picked up over the last three months to keep those folks coming back at Papa John's So far so good as I mentioned, our repeat rate are improving.

Our customer service scores or through the roof I mean, I got I have to give credit to our operating teams both company as well as franchisees you know we've seen it we've seen a double digit increase in transactions in our business and our restaurant not only handled that seamlessly.

They actually improve customer service metrics. So we are built to be able to handle these it these increases and and but it if we don't maintain those customers. If we don't keep them and have a one and a thing and I think that's what a lot of the modeling.

Has as an eight or the impact across a virus, everyone locked down and can't go to other restaurants, but what needs to be model than what needs to be baked into our <unk>. You know the forward looking vision for this business is these customers that are coming in we're keeping them.

They didn't come in because the Corona and then they're going back yeah, I think there's a there's a tail for the behavior that drove them here and then I think we're taking better terrorism than expected and our food quality is better than they may have had with some of the other pizza you know companies and so they're they're starting to see that hey.

This is a brand. This is this is a a company that I want to I want to buy from not just while I'm kind of in core team, but you know ongoing so I think there will be sticking it and we can exacerbate that an increase that with the work that we're doing on our loyalty program in or one of the one marketing platforms I mentioned it back in Q4 and again in Q.

The one that we work we had so much untapped opportunity we had about call. It 12, and a half million names in our loyalty program back then we have six or approaching 16 million today and so that's it.

Talk about that had been fully leverage we had all these great people with purchase behavior and understanding around them, we hadn't tapped into that yet we're tapping into that now and we're just kind of just getting started there to a huge opportunity to maintain customers and drive increased frequency ongoing with leverage.

During that loyalty program. So I think we're going to see that this tail for us continue on for quite some time.

Thanks, Rob.

Thanks, Brian.

I probably question comes from Orange Silberman from credit Suisse.

Thanks, Congratulations on a great quarter, you're talking about appetite for new unit growth from both new and existing franchisees. So with that so what that could re franchising play a role and accelerating unit new unit growth, particularly in North America and to what extent the affect me unit growth to come from new versus existing franchisees.

Well you know we are to a great situation with that we own almost 20% of the restaurants domestically, which does give us and asset base to see new new franchisees with new unit growth, Florida. As you know this industry you know big play.

I don't want to come in and start from zero they want to come in and have a base of operations that they can spread there there their overhead across and then start building. So we are an active talks with large franchisees right now about that opportunity so its definitely.

An advantage for us having as many restaurants as we ask that being said I would also tell you that the ROI see on these things is so great right now that we're also thinking there could be unit growth from US you know what we're in a better capital situation with very little levels of debt lots of cash flow right now we're exploring how we're going to leverage at cash.

Cash flow, we want to make sure that it's invested in a way that maximizes shareholder return and right. Now you know building some restaurants and some of these markets may not be necessarily the worst thing to do either so we are exploring all opportunities both refranchising to see ongoing significant growth.

In unit development, but also potentially investing some of our own capital into some of these markets, which will build out these markets and potentially make them, even even more appealing for re franchised and so when you talk about the the balance between current franchisees and new franchisees one of the outages when this system.

The last five years has been very low levels of development with current franchisees one of the biggest motivators for car franchisees to develop new franchisees. So I think that we will see a pretty good balance moving forward from both new franchisees as well as our franchisees.

Great and then how cool thing about the composition of unit growth over even next year and older back three years between North American International.

You know international as it is probably going to outpace domestic for the foreseeable future just because there is so much white space left.

We have so many geographies that are still underdeveloped and we have you know we do have a model internationally, where we have master franchisees that are well capitalize on other concept and are set up to develop the domestic franchisee base and the domestic development you know we need to do.

So we need to do some work there and part of that work is is kinda mapping that I talked to you about making sure that we have the appropriate trade areas that up when we have set our current franchisees up with opportunities to go and bill. So I you know I would see that ongoing we are international development is still a bigger contributor to.

Our total development, but the ratios will change and domestic will become a bigger part just but international will continue to be the driver.

Great and then just as it relates to your delivery versus carrier business can you give any color on the relative performance in the quarter into July and then how do we think about that relative profitability at each channel maybe delivery to your own systems are aggregators, and then carry out or they'll replace R&D thing.

You know it's interesting we haven't seen as much of a pickup in the delivery business. As we may have car our ratios have not changed that much I think that speaks to customers. Despite the onset of contact no contact delivery people still feel and believe it or not you know coming.

Not at our house in their own car getting the food and putting it in their own car and taking at home is still something that people want a so our ratios have not changed that much. Obviously you know our our carry out business is it a bit more profitable, but it's not as well.

Much more profitable than there is talk about because you're gonna have in our business you have to happen delivery drivers on hand, so the labor there whether someone is coming to pick it up and you know the variable cost associated with the delivery is covered from the delivery fees. So we don't really look at you know carry out and deliver a bad.

Differently from a profitability standpoint, and frankly, we don't look at the aggregator model that differently from a profitability standpoint, either because of the terms that we negotiated with them and how the cost structure without channel stacks up against our delivery channel. So you know all of them right now are very productive very efficient you know these mom.

Hello. This is you know QSR the volume solved a lot of else we have to have delivery driver there to support potential demand and right now the demand coming through so we're making the most used to that labor investment. So I'm, we're very happy with the margin expansion that we've seen.

Fantastic. Thank you so much.

Pete.

I probably question comes from always come from Longbow Research.

Great. Thanks, Good morning, and congrats Robin Steve I'm, a great results. So just wanted to ask a two questions first off you know kind of going to Brian's question closer to what complex already. We're certainly you know it was a surprise given the market dynamics or how much of that do you think was due to check Rooney that was out of the big New product in July you know you know.

Cut to the point, a you know how much of that incremental uptick in July was due to average ticket versus traffic.

So great question, you know what we don't haven't really talked about that much is that in June we had no media. We had no national media that was part of our plan heading into the year as a pandemic hit you know April we didn't we didnt it wasn't sufficient for us.

To go out by spot media to support the business grow. So June June sales are in the change in the rate of sales is at least in part driven by the fact that we turned off the national media that we have felt it's been so successful for us.

In Q1, and so as we went back into into July, which Apple watches Chaperoning, we hit full force with a great products that had a lot of PR excitement by leveraging the shaft a component of it fully supported with a large amount.

National media support and tailored to a very relevant and it would have it with a lot of raveled relevancy to the current situation, where we added the charitable component of the program. So I think chaperoning is it's more than just a new product innovation it.

It's really the incarnation of our innovation mindset around product marketing technology, all of those things coming together and showing what we can do when we do things smart on the commercial side of the business. So yes. The answer is yes, it was chaperoning, but not just be.

Because it's a shack pizza, it's because we turned on the National media, we leveraged a PR machine around it and we were very relevant and timely with you know the charitable giving piece of it so hope that answers your question.

Yeah, I know it does thanks for calling US you know you know enriched exactly you know kind of asked a question about you know as you're starting to build you know you to more company or Edward franchise, you know kind of following old adage that when times are good want to go company owned stores that you want to you know, it's all about the franchisees, but you know given that or is there any preference you've got to choose between you know adding more stores.

On a couple mills running persona franchisees or is it you know all options are being export equally curlin [noise].

Yeah I mean.

We've talked about because I've got here that you know I really like the optionality of owning restaurants, and and leveraging our balance sheet to create shareholder value I will tell you that our bias is absolutely to refranchise restaurants, and see great new franchisees with development opportunity.

So every opportunity that where we can do that we are exploring it very diligently at something that we see as part of our future. So so refranchising to see development is probably a priority over or any build out of company restaurants.

Got it thanks, Rob Stewart.

I felt lean question comes from Brett lobby MCM partners.

Great. Thanks for taking my question a couple of questions first if you could build off of Brian's question earlier about what your learnings from your consumers are just given all of this robust data you've been able to subtract and acquire from full your digital and loyalty programs. What have you really learned about your customer.

A second.

When you think about the back half of the year and into 2021, how should we think about.

Level of campaigns frequency of campaigns integration of newness on the menu in court and then just for a for you Rob you know you're coming up on a year, obviously, you've had really for different tranches of experience. What do you think it has changed most.

In your plan and your approach over that timeframe excluding.

The shift to a contract lets society and I'll stop there. Thanks.

Well those are all incredibly interesting questions. Thank you for recognizing my one year anniversary.

I was expecting a kick from the team today and if it happened, but it had been if it had been a really interesting year. You know these challenges that face our country are you know our society and the restaurant industry could not have been foreseen and.

I would tell you and this may sound really crazy, but it's true.

Nothing has really changed for us because of their pandemic and the other challenges that we face other than we're working remotely pretty much everything that we were building in Q4 and Q1.

Is consistent with what we're doing today, it's just all that accelerated.

The work around improving our company and our culture and how we're going to treat each other how we're going to act has been something that has been absolutely accelerated over the last two month. Our innovation pipeline has been accelerated our you know work operate operational improvements have been accelerated to be able to.

Deal with the increased demand our technology infrastructure investment has been accelerated and now our focus on development coming out of all this has also been accelerated so you know what's changed the most what's changed the most is just the rate of change [laughter].

No we came in and we changed out some key members of the leadership team, we instituted our strategic priorities. None of that has changed we got the right team focused on the right thing, we just got more resources up against it and we're accelerating all of those initiatives in terms of next year and a frequency of our campaigns you know we came into the.

This year looking at about probably about six innovations we were kind of looking at each one of our L. T. O last thing about two months or two period and that has changed that is that as evolve with with the needs of the business. We wanted to make sure doing a pandemic. While we saw this increase in transactions that are operator.

Patients could handle the increase in demand and so we focused on our core business as opposed to bring a lot of new innovation Shack Chaperoning was the only new innovation innovation, we've launched since I'm hopping ideas, but that doesn't mean, we stopped working on the innovation. We have continued to test and bill ideas out and.

We have a whole closet full of great ideas that are essentially ready or to go and hit the market, but we'll we'll roll those out as we see fit a as we see where we can get them both punch for each one of those launches and and where we can make sure that we're doing in a way that did not increase complexity and compromise our.

Ability to execute great operations and then you know lastly, your last question around learning about our customer you know what we have seen in terms of the new customers coming in has been a you know that's the ability to keep them and they were seeing repeat amongst new customer repeat rates a month or new Cup.

Significantly improved versus what are repeat rate was prior to this this environment and part of that is because we fixed our loyalty program and when they and we fixed our digital platform and so when they come in they have a great Syria and because we're so busy believe it or not our customer service is getting better because we have weakened.

For more labor, we're putting more drivers out there we're maintaining service time, no contact delivery looks like we're going above and beyond for them. So the stickiness of our new customers as it is one of the things that we weren't sure about that we're learning there is a big opportunity there amongst our current customers. The biggest change has been.

The change in the ratio pieces to size. So our pieces has stayed about our pieces per order have stayed relatively flat our site for order off dramatically. So that's that indicate that that's that's a function of adding pop ideas and jalapeno poppers roles to order pizza orders.

They were already going to me and that's driving a lot of ticket growth for us we've taken almost no pricing this year and yet our ticket is up significantly. So that's a very healthy ticket growth. That's a function of people, adding their their desire to add things to their pizza orders. So we're going to continue to leverage that we're going to continue to bill.

That indoor innovation pipeline to take advantage of that.

Oh that answered all three of your questions.

Thank you.

We have time for one more question. This morning. Your last question comes from Frank I, just kind of in from Wolfe Research.

Hey, guys. Good morning, it's actually Fred Whiteman on for Greg Just wondering if you could break down the July performance, a little bit across geographies are you seeing any divergence in terms of states that are farther along in terms of reopening or subsequently ones that are seeing a uptick in infections.

No we're not I mean, we're seeing growth across all of our geography, then and even.

In markets like New York City, where their rates have come down dramatically and a change in dynamic from where they were our sales continue to exceed far exceed our expectations and there has not been a real regionality to our growth, which you know it initially we thought there would be.

Be and ethical in our last call we talk about how the York in some of these other more urban markets that were impacted integrator way. We're outpacing in terms of sales growth. They still are but that hasn't changed. So it gives us a lot of confidence that you know what we're doing is not absolute.

At the holding to the dynamics that are impacting each of these markets it differently.

Great and then just one final one on the development from a lot of positive commentary as far as unit growth into next year, but when do you think that will start to see those development pipeline statistics increases that something that will be next quarter or a little bit longer down the road.

Yeah, I mean, if I could leave you with with one thing it would be we're just getting started.

So I realize that you know in the last year, we've had a very solid.

Stock performance and very solid business performance, but I think.

We we wouldn't be you would be ILS serves to believe that because of the like the pandemic that this is kind of the peak of where Papa John's is gonna be we have so much upside left and attack and that upside is a function of bulk comp sale and a function of development and the development.

Opportunity I would argue is even bigger than the comp sales opportunity because it really hasn't existed for the last few years and you know the closures that happened in the last few years those those sites now can support restaurants. So we're just getting started on the story.

But it's not going to happen overnight be you know we have to build a development capability that can support the amount of growth that we foresee so I wouldn't tell I I'd be lying if I told you. The Q3 was all this I'm going to have a big Spike in development I will tell you that we are planning right now for 2020.

One and we are focused on large a large growth rate in development 2021.

Great. Thank you.

At this time of what kinda called over to Brian Lynch for closing remarks.

[noise] well. Thank you all for joining US you know we hope that your as excited about the future of Papa John's is we are the investment I hope you you'd realize from this call and culinary the investments and strategic choices that we made at the end of 2019 and into Q1 of 2020 have physician Papa.

John to continue to thrive both in our current environment and for the long term you know as I mentioned, we're just getting started with this story, where a year in we see a huge amount of runway. The brand is strong but all of our metrics are moving into right direction, we're gaining new car.

Customers at a highly accelerated rate and we're keeping them and were there were repeating it a higher rate. Since then our core customers used to so all of those are metrics that bode well for a very bright future.

So we look forward to reporting back to you on our continuing the momentum and a I wish you all.

It will be well and stay safe and well, we'll talk to you again soon thank you.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.