Q1 2021 Papa John's International Inc Earnings Call

Good day, and thank you for standby and welcome to the Papa John's first quarter of 2021 conference call and webcast. At this time all participants are in listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Lots of question during the session you will need to press star one of your telephone.

Be advised at today's conference is being recorded.

If you require any further assistance please press star zero.

I'm now turning the call over to Mr. Steve Coke Senior Vice President of financial operations accounting and reporting.

Thank you.

Morning, everyone.

Joining me on the call today are president and CEO, Rob Lynch, and our CFO Ann Gugino.

Robin and will comment on our business and provide a financial update.

After the prepared remarks, both will be available for Q&A.

Our discussion today will contain.

And it's involving risks that could cause actual results to differ materially from these statements forward looking statements should be considered in conjunction with the cautionary statements of our earnings release and the risk factors included in our SEC filings.

Please refer to our earnings release, and the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call.

And Lee we ask any members of the media to be in a listen only mode.

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

Thank you Steve.

And welcome everyone to our 2021 first quarter earnings call.

One year ago, none of us could have foreseen the challenges of head and the hard work that would be required to persevere through a global pandemic.

Today, we are more grateful than ever for the tremendous effort and sacrifices that our team members and frontline workers have made to take care of their communities and their time of need.

And is through their hard work and determination and Papa John's delivered one of the best years, and the company's history and 2020.

I'm pleased to report today that we have continued that momentum into 2020, one with a very strong start to Q1, delivering our sixth straight quarter of comp sales outperformance versus the pizza industry and a seventh straight quarter of positive global sales growth.

In addition, our unit growth has accelerated and our adjusted earnings per share grew 500 per cent.

The company purpose core values and strategic plan and we put in place late in 2019.

And provided the continued direction and the foundation that underscores Papa John's industry outperformance and positive long term outlook.

I'd like to cover three items this morning.

First I'll discuss our first quarter results and their drivers.

Second I will comment on how the dynamic market environment and evolving consumer behavior position Papa John's favorably going forward.

And third I will provide some comments on Papa John's strong near term and long term outlook as we continue innovating against every facet of our business and executing our strategy with excellence.

I'll, then turn the call over to Ann to discuss our financial results and more detail and provide some additional color on our near term outlook.

Papa John's and system wide sales continued climbing and Q1 driving of nearly 25 per cent increase and revenue to $512 million.

And North America, Q1 comp sales rose 26, 2%.

Over the same period, one year ago, we recorded comp sales growth of five 3%. So on a two year basis, North America comp sales were up over 31% last quarter.

This strong year on year performance is indicative of how our business continues to build momentum and gives us confidence and our ability to successfully copp our comps moving forward.

Internationally comp sales were up 23, two per cent building on a 2.3 per cent increase a year ago four of 25, 5% two year comp.

Our international business continues to exceed our expectations across most geographies regardless of how they are currently dealing with the pandemic.

Strong operating leverage on higher sales and the conclusion of temporary franchise support last year helped us grow adjusted EPS from 15 cents and 90 cents excluding special items.

And the quarter, we generated $53 million of free cash flow defined as operating cash flow less capital expenditures and dividends paid and preferred shareholders.

With excellent cash flow generation further strengthening our balance sheet Papa John's games, more optionality and opportunities to create shareholder value ongoing.

And as I previously indicated Papa John's Q1 comp sales in North America and across our international footprint significantly outpaced our larger pizza industry peers.

These results continue a pattern of top sales outperformance and outpaced earnings growth.

Over the last 18 months, our strategy, which is focused on innovating up against all of our business platforms, including our culinary offerings and our consumer facing and back of house technologies, our customer experience and our delivery capabilities and it's been a significant contributor to our same sustainable long term comp sales and margin growth.

Yes.

And regards to culinary innovation and I would like to start off by sharing that epic stuffed crust has been a phenomenal success since its launch and North America at the end of December It has exceeded our expectations and again demonstrated the power of Papa John's New innovation mindset and stuff.

Of course lovers of our ultimate Pizza same and epic stuff crosses both deepened our offerings for our existing customers as well as attracted a new sub segment of pizza customers and.

In fact epic stuffed crust customers are significantly more likely to be new customers.

Culinary innovation is also positively impacting our international business and we're starting to leverage our worldwide scale by sharing successful ideas across our network.

After the successful launch of Papa D. As in North America, and early 2020, we decided to launch property is and twenty-five international markets early this year I.

I'm pleased to say that they're now global favorite and a platform that we will continue to innovate against because.

And as we've seen since watching them and the U S. A year ago, there often and add onto orders generating incremental value without cannibalizing our core business.

Like epic stuffed crust Papa D. As are built on Papa John's premium dough and better ingredients better pizza positioning.

Its premium positioning means we rely less on discounting to engage our customers we have been able to drive a large increase and new customers without having to give our food away.

This has significantly contributed to higher margins and better unit economics.

Now, let me turn to our innovation around our digital platforms.

Over the past 12 months, we've added nearly 11 million new customers on digital channels allow these are incredibly valuable customers as we are able to engage them with targeted offers and drive incremental ticket, which drives higher margins and more transactions through higher frequency.

And 2001, Papa John's was the first national Pizza delivery brand to launch online ordering and all of our restaurants.

We have seen consumers migrate towards digital channels steadily over the past 20 years.

This dynamic has accelerated over the past year as consumer behavior has evolved throughout the pandemic.

Last quarter, our percentage of digital orders rose above 70 per cent compared to just 62% two years ago.

Digital channels naturally facilitate high impact of loyalty programs, we continue to see a growing share of transactions now nearing 50% come from Papa rewards loyalty members and.

In addition to higher transaction sizes, and gross margins associated with better targeting of offers and promotions and loyalty members are also more engaged and much more likely to be repeat customers.

Another way that we are leveraging technology is through our integrated partnerships with the major third party delivery Aggregators and the U S, which provide incremental and profitable transactions.

In fact, our sales through Aggregators increased over five times year over year, and Q1, contributing a sizable and accelerating portion of profitable comp sales growth and North America Papa.

Papa John's strategy with respect of channels of simple, we wanna be where our customers are.

This philosophy was beside behind our decision to go digital 20 years ago and to partner with Aggregators two years ago.

Aggregators provided important value proposition for many consumers, especially around convenience and discovery and we want to help facilitate their needs regardless of where they order.

In addition to double digit comp sales last quarter, we also experienced a significant acceleration and unit growth.

This is a testament to the fact that Papa John's unit economics are becoming more and more attractive for current and new franchisees and therefore, they are growing and their excitement to invest their capital.

80, new restaurants opened last quarter, our best first quarter for new unit growth and 20 years.

And with openings last month, and new countries for the brand like Cambodia, and Germany Papa John's is now in 50 countries and territories.

As we've discussed previously we spent 2020 rebuilding our development function from the ground up with new leadership and resources and a more focused strategic plan oriented around supporting existing and new franchisee partners with new data and development tools to help them invest and grow.

In parallel with this work Papa John's unit economics have been transformed over the past year and a half.

As we reported at year end average annual unit volumes broke the $1 million level, and North America, and 2020 a record for the company.

With the sales growth at the brand experienced in Q1 weekly per store average sales continue setting New records and North America.

Strong unit profitability not only lead the current and new franchisees opening new restaurants at also results and lower closures and.

And Q1 closures in North America were the lowest of century with only three.

As we discussed on our last call and improves our ROI and new units also presents a great opportunity for Papa John's too and that's our capital and to building New company owned stores and.

In fact, we were planning to opened 20 to 30, New company restaurants in 2020 one.

This will help us grow both top and bottom line results moving forward, but it will also create more optionality as we seek out perspective, and current developing franchisees to open new territories and accelerate our system's holistic growth.

Closing out the discussion on development I am happy to say that we have started 2021 and a very positive note with some of our largest franchisees expressing interest and growing their footprint, both domestically and internationally as well as new investors looking to sign development deals.

Our current robust pipeline of deals not only reflects the early benefits of our investment and the new development approach, but it also emphasizes the renewed strength of our brand and improving unit economics.

We are confident that this momentum will lead to strong unit growth in 2020, one and beyond.

Moving to operations. We are excited about the improved company restaurant operating margins. This improvement is a function of both operating leverage resulting from higher sales volumes and continued investments and operating efficiencies that have helped restaurant level margins expand dramatically.

For example, last year, we made a big investment and Papa call. Our order taking capability that allows our store based team members to focus on making and delivering pizza and instead of answering phones.

Papa call as both of labor savings and revenue opportunity delivering significant incremental average tickets compared to orders taken in store as well as reducing the number of dropped calls resulting from putting customers on hold.

We will continue to explore innovative opportunities to make our restaurants and our franchisees restaurants more productive.

I would be remiss, if I did not highlight the progress that we're making towards our goal of becoming an inclusive and diverse and winning company.

As I stated in the past this culture of the foundation for the innovation that is driving all aspects of our strategy.

We were especially honoured to be recently recognized by Forbes as one of America's best employers for diversity.

Another critical element of the values based company and culture that we're building is our commitment to being a responsible corporate citizen and.

And 2019, we accelerated our journey to integrate corporate responsibility initiatives and do our everyday practices.

Building on our first corporate responsibility report a year ago today, we released our 2020 update which outlines our continued progress towards setting clear corporate responsibility goals and providing transparency around our business.

I encourage our shareholders and all stakeholders to review the report which is available on our website.

And I just described our successful innovation execution and Papa John's brand wide transformation of all contributed to our share gains over the past six quarters.

But there's no question that over the last year of changing consumer behavior and industry dynamics as a result of the pandemic have been a tailwind for pizza delivery and food delivery and general helping accelerate our growth and transformation.

As a result of last year's pandemic related lockdowns millions of consumers have turned of food delivery and off premise dining which has been facilitated by digital ordering.

Even as individual markets and states reopened the dine and eating demand has remained high.

[noise] ahead, we're increasingly confident that these changes are sustainable and the long term and at the total addressable market for delivery and Carryout has grown substantially.

Growing consumer demand for food delivery has been met by the industry. The shift that's been underway for the past couple of years, partly facilitated and subsidized by the large aggregators, but it really took hold and the second half of 2020 is dine in restaurants of all formats from quick service and fast casual to full service and traditional.

Pivoted to offer Carryout and delivery options.

This industry shift is not likely to revert as key players double down on their delivery and carryout capabilities reinforcing the shifting consumer preferences and behaviors.

But I'd also point out that Papa John's has been competing well and this broader larger market and.

In fact, I believe we stand to benefit from the inherent advantages of pizza as food that delivers extremely well.

We also have a big head start when it comes to digital ordering and last mile delivery relative to the broader <unk> industry.

As we look ahead, we are not yet returning to providing full year guidance on sales or earnings given continued uncertainty about the trajectory of the pandemic and associated government restrictions that impact our business across the globe.

However, we do want to provide some insight into what we foresee given today's current situation.

Based on our strength and Q1 and continued strong April sales, even as markets begin to reopen and we lapped double digit comps from a year ago, we're increasingly confident and delivering year on year flat to slightly positive comp sales growth and North America and Q2.

As for development, we have gotten off to a fast start and are seeing a lot of interest from existing and new franchisees looking to invest and the brand.

That being said Q1 was a faster than expected recovery from last year's law and development for fiscal 'twenty 'twenty. One. We currently expect the opened between 140 and 180 net new restaurants globally, which is of tremendous acceleration from last year and.

And also emphasize that we're focused on opening profitable restaurants set up for long term success, not just on driving unit growth.

And we'll discuss this in more detail in a moment.

Most importantly every quarter of strong results gives us more clarity around Papa John's multiyear growth trajectory.

We're building a plan to achieve solid system wide sales growth driven by a good balance of comp sales and unit growth with strong operating leverage and free cash flow generation.

We look forward to providing more color on these targets and the plan behind them over the course of the year.

And now I'll turn the call over to Ann to discuss our financial results and near term outlook in more detail at.

And.

Thank you Rod and good morning, everyone.

The excitement continues at Papa John's and our financial position and further strengthened with another quarter of robust operational performance and increased cash flows and a very healthy balance sheet.

This morning, I'd like to discuss each of these areas beginning with our financial performance.

As Rob discussed the record momentum and 2020 continued and the first quarter of 2021.

Our innovation strategy and favorable changes in consumer behavior as well at some benefit from stimulus payments drove strong top line growth.

This combined with the conclusion of temporary franchise support last year contributed to a 600 basis point expansion and adjusted operating margin, yielding a 35 million or more than a threefold increase and adjusted operating income.

And our segment basis, all of our strategic business units contributed meaningfully.

Top and bottom line growth as Mr past half a billion dollars and revenue for the first time and a quarter.

Operating income growth was driven by domestic company owned restaurant, North America, franchising and international all of which achieved significant margin improvement.

And North America, the reduced franchise support provided for and effective royalty rate increase of 120 basis points from the prior year.

We are extremely proud of our restaurant operators, who continue to execute at a very high level driving solid restaurant profitability and great easy and both North America and across international.

And our company owned restaurant segment margins Rose 240 basis points benefiting nicely from higher order sizes and transaction due largely to strong operating leverage and expense control, including and our supply chain.

Continuing with the P&L.

On a GAAP basis earnings per diluted share increased to 82 cents compared to 15 cents a year ago.

This includes a reduction of approximately 10 cents per diluted share in the current quarter due.

Due to income attributable to participating securities, primarily our series B preferred stock.

In addition, current quarter results include costs related to our strategic corporate reorganization and new Atlanta Office plans, we announced in September 2020.

Excluding $2 6 million or eight cents per diluted share and net reorganization costs adjusted earnings per diluted share rose from 15 cents a year ago to 90 cents this year.

For the remainder of the year, we expect to incur approximately $5 million to $10 million and further one time cost.

This is the remaining portion of the approximately 15 to 20 million and total expenses, we previously announced at.

As we've said we see these costs as an investment in both the company is innovation and topline growth as well and then our long term corporate efficiencies.

Now I'd like to turn to cash flow and balance sheet strong earnings contributed to a dramatic increase and cash flow from operations from 34 million a year ago at 63 million during the current quarter.

Capex at 7 million and Q1 rose only modestly, but I would like to reiterate my comments from the last call and our expectations for capital expenditures.

Leveraging the strength of our balance sheet, we continue to expect full year capital expenditures and <unk>.

$65 million to $75 million focused on new store development, new technology, and productivity and our restaurants and across the system.

Free cash flow jumped 53 million versus 24.002 million 20.

As a result of strong free cash flow over the past four quarters. We ended Q1 with net debt of only $179 million down at $150 million from a year ago, our debt to EBITDA leverage ratio at quarter end was two time, indicating the strength of Optionality and security provided by our balance sheet.

And.

Papa John's cash flow generation, which isn't inherent aspect of our franchise business model and strengthening our balance sheet and positioning us to invest and long term growth, while continuing to return cash to shareholders.

During the first quarter, we paid a cash dividend of $10 8 million per common and preferred shareholders.

Subsequent to the first quarter on April 29, our board of directors declared second quarter cash dividends of approximately $10 9 million to be paid to common and preferred shareholders. The second quarter common stock dividend is 22, and a half cents per common share.

And the first quarter, we opportunistically repurchased 15000 shares of common stock for $1 3 million or $84 and 63 per share under our previously announced $75 million share repurchase authorization.

A total of 47000 shares had been repurchased under this authorization with an aggregate cost of 4 million and and average price of $84.13 per share.

As I've said previously one of our top priorities is to align our long term capital allocation return priorities with the business's growth cash generating potential and strong balance sheet to maximize shareholder value.

As of long term strategy and direction of that business at all on a positive trajectory. We have spent a good amount of time digging into our balance sheet and scenarios to optimize our capital structure, while retaining strategic Optionality and security.

We remain committed to returning cash to shareholders, including fully utilizing the current share repurchase authorization over the upcoming quarters.

At the same time, we're developing a comprehensive long term capital allocation strategy that supports this momentum.

We expect to have more of a share later this year.

I'd like to wrap up by providing a few points to rob's comments, and our long term goals and outlook for the market.

Given continued uncertainty about the pace of reopening across the world. We continue to wait before providing detailed short term revenue and earnings guidance.

However, based on the results so far and Q2, the strong sales momentum experienced at the launch of our ethics stuffed crust and Q1 has carried well into the current quarter.

Accordingly, as Rob indicated we feel confident about delivering flat to slightly positive comp sales growth and North America and Q2, even as we lapped last year's positive 28% comp sales.

We also continue to expect year over year margin improvement, however, given the commodity pricing outlook and the timing of certain expenses Q2 operating margins are not expected to surpass Q1, all time record revenue and operating leverage.

And the latter half of the year of course, we'll be lapping a strong prior year results.

Also as temporary franchise support concluded at the end of Q3 last year I would remind you that year over year, and we will not have that benefit in Q4.

Also in Q4, we will incur expenses for annual franchisee conference, which was not held last year due to the pandemic.

Before I hand, it back to Rob I want to emphasize again, our excitement about Papa John's near and long term outlook.

The benefit of our teams work to create an inclusive of innovative company are reflected in our first quarter results.

It sets us at very solidly for the remainder of 2021 and thereafter, we are very excited about our future and look forward to updating you on upcoming calls I'll now turn the call back over to Rob for some final comments Ryan.

Thanks and I.

I couldn't be more proud of our team and the great start we've made in 2020 one.

Even as we begin to lap some very significant prior year comps and the remainder of the year I am more bullish than ever the Papa John's innovation strategy, which has consistently driven share gains and favorable changes in both consumer behavior, and the delivery and carryout market position Papa John's very well for long term growth.

With that I'll turn the call over to the operator for Q&A.

Thank you as a reminder to ask a question you will need to press star one of your telephone to withdraw your question press the pound key.

To give all of our analyst a chance to ask at least one question, we're asking participants to limit themselves to one question and then return to the queue for their follow up.

Our first question comes from Brian Bittner with Oppenheimer. Your line is open.

Thank you good morning, Rob and Steve.

And congratulations on the business momentum and and the transformation you guys continue to drive.

Question first question just on the same store sales trend.

I appreciate the comments on Europe.

Your outlook to at least have flat comps and the second quarter I know April is giving us some good insights overall to help build this optimism into this tough lap cycle, particularly with what youre seeing and reopened markets but.

Other than the April trends can you just talk a little bit more about what specifically drives your confidence that there won't be a step back during this period of difficult comps do you have some more menu catalyst that youre excited about moving forward. You can talk about are you just seeing a lot of stickiness as you scrape the data on your cut.

And your business.

What's surprising you just any additional color there would be great.

Hi, Brian.

Yeah, it's kind of all of those things.

Epic stuffed crust has continued to bring in new customers.

We have been promoting at now for over four months and we continue to see growth and that business and we're going to continue to double down on it and continue to invest behind it and so that over performance in Q1 gives us confidence.

And then it's going to continue to drive incremental sales that we hadn't had and our initial forecast and Q2.

Also very excited about.

The growth and our loyalty platform. We're now at 20 million loyalty members. If you recall two years ago, we were around 12 million. So we've added about 8 million loyalty members and those are our most valuable customers, they're driving higher ticket averages and at higher frequency and so.

As we continue to leverage and we've gotten a lot better at leveraging our data and leveraging that resource.

We have taken up some of the frequency that we believe we're going to get from those customers. So really get at that customer engagement as well as at the innovation of the two things that really give us confidence that we're going to continue to drive top line revenue growth despite lapping at 28% comp from a year ago.

Thanks for that and a longer term question on your optimism towards the long term outlook, particularly on.

Unit growth and thank you Rob again for the color on the unit openings. This year, we're obviously able to see your improving pipeline sitting at 650 units very impressive and I think 250 of these are in North America. The rest of internationally what is your outlook for that pipeline and north.

America, what do you think the unlock there is now that franchisees are at all time high unit economics gotta be feeling really good how do you want us thinking about how that North America pipeline build throughout this year and next.

Yes.

And believe that we will see a significant increase and that pipeline. We our development team is currently meeting with almost every single one of our top 25 franchisees and talking about the markets that they're in and where the opportunities reside so that pipeline does not really reflect.

Those discussions yet and there has never been more since I've been here I would say there is and there hasn't been more excitement there and there is right now regarding the opportunity that still exists and North America and in regards to holistic pipeline.

As we mentioned and the.

On the call.

And we just opened up two new countries. So those are going to start developing at scale and and we have a lot of interest coming in from the white space. If you recall we are in 50 countries. Our competitors are in 100 countries. So we have a huge amount of white space and where we're at.

Entering into discussions with really sophisticated large scale.

Restaurant franchisees and geography that we don't currently compete and to build out those countries. So we're.

And we're very bullish at that pipeline will grow over the next 12 to 18 months and a significant way.

Great. Thank you congratulations and thank you Brian.

Which of course one P.

P I G online.

Oh, great Thanks, and congrats on the quarter.

Rob I wanted to ask about new customers versus existing customers at that sound like the epic stuffed crust pizza drove a lot of new transactions are new customers to the brand can you give us a sense on how much of your you think the comp and the first quarter came from new customers.

Outside of of loyalty program has remained relatively flat or frequency amongst our loyalty program customers has increased and a lot of new customers. So that's really the breakdown of how the comps of been generated and and Q1.

Great and then just owned the advertising budget I know last year and you know obviously of sales balloon more than you anticipated and clearly it looks like.

That's continued at least into so far and to 2021.

Can you give us a sense of on how much of the AD budget.

From last year that rolled into 2021 has already been spent and how much of you guys still have and your back pocket to utilize for the balance of the year.

We obviously, 26% comps drive a lot of advertising revenue.

So that we weren't necessarily budgeting for that and Q1. So there is a surplus.

Of of advertising dollars that we're going to be able to reinvest back into the business and last year. We did have a pretty significant surplus despite aggressive investment and I mean, if you recall when we were talking Wow must of been body about a year ago. We were concerned about a lot of questions I was getting are around when the.

Franchisee, we went together program went away and the marketing subsidization went away where we concerned about the.

The ability to drive growth and I was it was one of the things that kept me up at night when I first got here, we have more than offset that lack of company investment and the national marketing fund with sales growth and we're running a large surplus right now that we're and.

Reinvesting back into the business.

And of very accelerated rate so.

All of this sales over delivery is generating more and marketing dollars and we had and our plan and we're reinvesting that back into the business.

Thank you very much.

Got it thanks Pete.

And the next question to each one and my room.

And what you think you want something.

Okay. Thank you.

Question around the plans of Bill 20 to 30 company owned stores. This here Uhm and I think everyone on the call understand why you claim to build those stores and makes a lot of sense, but per perhaps you could explain how you were choosing where to build those company owned stores and see your and your strategy as you choose locations and then related to that should we expect company owned.

Store building to be a multi your endeavor kind.

The bridge and the gap too of time, when maybe it is almost entirely furniture of you would at some point and the future.

Thanks Bye.

Right.

Here's here's the.

And the restaurants, he said well you know.

Our maps are all filled up and I said, well, we need new maps and we did we went and built of technology to build new maps Amanda Clark came in from Taco Bell and she's built and amazing team and they are.

Re mapping the entire country. So we need to work with our franchisees to build out their markets and yeah. Once we built that model is there and opportunity for us to.

<unk> eyes company restaurants, and get to a more of a franchise model domestically.

That's definitely a possibility where continue to leverage the optionality, we have with our company restaurants, when it makes sense for us to seed franchisees, who want to come in and development.

Okay. Thanks, and then just pivoting just a question for you and the UK business could you just speak to have that business of doing today and in addition of would be great to get your perspective on where the market is and it's you and the growth lifecycle. It's been a very solid unit grower for a pub of drugs for many years, you know, maybe and baseball terminology like waiting.

And you think you are there and ZIP code and then poured working.

At the UK is our best market right now hands down.

The UK.

At our highest comps last year and has our highest cops this year. So.

That market is just absolutely at fire and we still see of significant amount of development growth. We think we can probably build two ex the number of restaurants and the UK that we have today so not only.

Do we believe and the continued cough performance, but we also believe there's a lot of opportunity to build.

Primarily outside of kind of of London, and and northern parts of the country, where we're relatively undeveloped.

Still a lot of opportunity there.

Thank you.

Thank you.

Thank you have a online.

And to give all analysts okay and.

Just one question what else can and participants to limit themselves to one question and number cute and turned into the queue for follow at our next question comes from Alex Legal Jeffries John is open.

Good morning, and congrats good to see the momentum had a question just on one of the people side I mean, he's higher number 30000, new team members system wide.

<unk> and.

Probably came from other industries, and we're temporarily I COVID-19, but now we see a lot of these industries scrambling to read year hire people back with bonuses to get them and the staff back and I know you've been very generous with rewarding your staff during the pandemic, but interested to get your perspective on the system's ability to continue high.

Hearing and retaining team members at the rate necessary and and these record sales volume says the labor battle sort of heats up here.

Oh, that's great question Alex.

There's no question at labor.

Limited.

And limited supply at this point across most industries not.

And not just ours, but as you as you mentioned, we have done our best to maintain.

To be an employer employer of choice for.

All of our employees both of at the corporate level as well as and the stores and we've been working with our franchisees very closely too.

Help them.

Support B and employer of choice as well and.

It starts with the higher.

Sales at the restaurant I mean.

Frankly, the primary gap and labor and.

Is that with the drivers and but the more volume youre doing at every restaurant the more money each of those drivers can make so.

That is has been been of good retention tool for us simply our growth and the increased.

You know pay that debt our employees ploys are making our drivers makes.

Significantly more than than the.

Of the average minimum wage and and whatever market you look at so we've been able to kind of.

Retained drivers through that and we've also offered incremental benefits.

Around healthcare all of our employees receive telehealth paid for by our company.

We've given and some special frontline bonuses to a restaurant workers. So we are going to continue to be an employer of choice and treat our employees of way.

That is consistent with maintaining them in terms of going out and getting more I mean, we are we are hiring we could we could hire 10000 more employees right now.

So we're always looking for great talented people, who want to come and be a part of something that's growing and something where we have been taken care of these communities for the last year.

You know his regrets of great quarter of you know just.

Wanted to ask as far as your comments about new franchisees versus existing opening stores and kind of ballpark.

Did you give us as to what percentage over.

A couple of years do you think of new builds here at North America will come from new versus existing franchises.

Yes.

Hi.

We want to win with our existing franchisees and then our goal would be to get our existing franchisees to fill up all of these markets open up white space and you know and it would be the ideal scenario that we'd never have to go outside of the system.

To achieve the unit growth that we believe we are capable of achieving.

And where there are opportunities where for whatever reason of franchisee and our market is non interested in developing we are actively.

Now pursuing other franchisees and we over the course of this year, we are going to make some big announcements we're already in late stage discussions with with respect of franchisees to come in and open up new territories, and and build out territories, where we think there's a lot of opportunity. So.

I think the ideal scenario is probably about an 80 20.

We're about 80% of our growth is coming from current existing franchisees, but theres a lot of demand to get into our system right now externally and if if if we are unable to achieve our development objectives with our existing franchisees and we'll start opening up more opportunities for and prospective new franchisees to come in.

Thank you. Our next question comes from Eric and Dallas with Keybanc Capital. Your line is open.

Hey, Thanks, good morning, and congrats on the really strong performance I think you said three quarters of your business at delivery your largest competitors talking of Carryout as an opportunity since it had underperformed delivery over the last year.

We can all agree that the overall shift toward convenience and not going to change, but do you think you're low carryout mix might actually be of relative disadvantage going forward given the low carryout mix.

Opportunities you continue to build out of footprint.

Yeah, I don't know I mean, why that would be of disadvantage I mean, the aggregators are growing at a 100%.

Delivery is becoming a much bigger part of of the.

And the industry and and we're one of the top delivery operators and the country. So.

We offer carryout.

And we.

And we support our Carryout business, but we are not pushing customers and to carry out by discounting our carryout business. I mean, that's that's really the biggest difference is not like we don't offer.

Offer the same level of service of Carryout as everyone else, we're just not going to discount our product.

We have and focused on.

Growing our sales by allowing customers to self select into.

Better ingredients, better pizza, and our core business and all of our new innovation, we've significantly reduced the amount of discounting and this business and so when I think whenever when other people talk about driving their carryout business, they're going to give incentives to do that that's not in our strategy and I don't see that at a disadvantage at all.

Thank you. Our next question comes from Dennis Geiger with UBS and I was okay.

Great. Thanks for the question.

Robyn and I appreciate the commentary and the detailed targets on development for the year. Just wondering if you could talk a bit more about <unk>.

Some of the puts and takes there for the year and then I guess more importantly, looking ahead of you know it sounds like the pipeline is obviously strong and in the U S and international markets.

Trends are clearly opened to the right and the right direction. Just curious as we think about the timing of those opened how much of it and it's sort of the macro uncertainty and international markets, maybe has an impact over the over the medium near to medium term and even in the U S. Despite the strong results and and the benefits and the tailwind you've seen over the last year.

How much of of the uncertainties around wages and other factors, maybe kind of play into as against some of the near to medium term decisions that your franchisees are going to make thank you.

Yes, we have.

We gave some color around what we think we can do this year 140 to 180, new units are net new units and that's a combination of both new openings as well as how many we clubs and one of the greatest signs of the health of our system right. Now is a complete lack of closures and Q.

One we closed three restaurants that we haven't done that.

And and over 20 years. So we believe that we are going we are opening restaurants today, we have the technology and ability to choose sites and model out what we believe the sales are going to look like so that we are opening up good profitable restaurants, and so we will need.

Need less openings.

And then historically to deliver the same net new unit growth, if we have less closures and so that's what we're focused on so we may not go out right away and opened up 400 restaurants and closed 200 for a net 200, but we are going to go out and open up.

Between 140, 880 restaurants, while we're closing very few restaurants, and so it's going to be a more stable growth rate.

But I see at growing year on year for the foreseeable future. There is not like kind of a cap on where we think we can go in terms of the number of restaurants per year. It's really just about US work one of our franchisees to find real estate and build out of model that's sustainable.

Better utilization of capital doesn't have anyone good open up and unsuccessful restaurant. So we are going to have a more steady growth rate than maybe in years past.

But we see at.

And we think we can do a 140 to 180 this year and that's going to grow next year.

And we don't have a lot of concern about the instability of the markets driving development down below what we think we're going to do.

Thank you. Our next question comes from Chris of alcohol.

And as okay.

Hey, Thanks, good morning, guys.

Rob how are you thinking about product innovation for the balance of the year. I mean do you expect to just continue extending innovation around the epic crushed and Papa He is or is there an opportunity to introduce another new platform of category to the menu.

Yeah that and that is a question that we have and the team almost every week.

And epic stuffed crust has done well.

Way better than we had forecasted we had already.

Planned two of launched new innovation already this year, but.

And when you're doing the kind of sales that we're doing and it's being driven by an initiative that you are promoting you can't it's really hard to take that thing off of promotions. So we are looking at a lot of different models.

Whether it is bringing in new item and the short term or launching of new platform over a bit of of longer term or potentially.

And moving into a space, where we haven't really been before where we're promoting two items at once so.

We have the innovation, it's ready to go we're very excited about it but to pull the plug on something thats doing as well as FX stuffed crust just doesn't seem like the right strategy right now, but we have built at really affords us the greatest luxury of continuing to build the innovation pipeline without needing it. So we've got a lot of great things and.

Hopper that are ready to go and we're definitely going to have some new stuff coming.

And this year, but right now and I can't disclose exactly when that's going to come.

Thank you. Our next question comes from Brett Levy with Infineon and partners. Your line is open.

Great. Thanks for taking the call kudos on the on sales.

You mentioned a few different items on the G&A front convention and.

And the headquarters move can you walk through how youre thinking about the puts and takes and whether it's the stepped up and stepped up investments.

The return of certain costs, and where your leverage opportunities exist for this year and also any early thoughts and into 'twenty two.

Sure so at <unk>.

Certainly there is some noise and G&A and we talked about in particular this year, we have the restructuring costs at about $4 million and then that's offset by reductions and that we win together program from last year.

So as I mentioned in my remarks, we still have about $5 million to $10 million.

Of incremental costs associated with the Atlanta headquarters opening.

And we will experience that for the balance of the year, what I would say, though if you take out that noise at the underlying.

End of phase III of G&A is growing and that low single digits, which is really just kind of merit inflation. So I would use that kind of at your baseline and then layering on the <unk>.

In terms of timing, what we're pointing out there and just a reminder, that the we win together program and the benefit that we're seeing from last year that really takes us through Q3.

And so we don't have that benefit in Q4, and then in addition to that and we are bringing back our franchisee conference and Q4 of which will be and incremental expense year over year, because we didn't have that last year from the pandemic and that's about.

And two to two and a half million dollars.

Thank you. Our next question comes from Jim Sanderson with Northcoast Research. Your line is open.

Hey, Thanks for the question and congratulations on a fantastic quarter.

And to dig in a little bit more following on to the discussion of international development, maybe if you could talk of about the development, taking place and Germany I think that's about 250 units over seven year term.

And if that.

And will eventually lead to strengthening of development and some of the other top European markets and maybe you can compare to yours youre expecting out of Germany compared to what we see and the U S.

Yeah.

And so we have three units that have opened in Germany and there.

<unk> opened by our our franchisee that has really built out and Russia. So it's a gentleman who knows how to build out of new territory.

And we have a lot of confidence and his ability to come in to Germany and be successful Continental Europe is a huge opportunity for us as we discuss the U K is performing extremely well over the last five years, we've got out of Spain, but really outside of.

The U K, and Spain, and restaurants, and and Luxembourg, We really have a lot of white space opportunity and France, Italy and.

Big geographies that we haven't tapped into yet so we.

We think that there is a lot of opportunity and and being successful and Germany, which we have a lot of confidence and we'll then cede our ability to either move into those other countries with those franchisees or bring in new franchisees that are already operating restaurants in those countries to open our Papa John's.

And lots of upside and Continental Europe.

Still have a lot of upside and markets that.

Our competitors are fairly penetrated and we don't have any restaurants, and Australia, yet we see that as a huge opportunity. We don't have any restaurants in Brazil. So big markets that can support the numbers like you're talking about 200 to 250 restaurants that we still have yet to move into so all of that is up.

Side of the the pipeline numbers that are currently and the and the forecast and.

Just a quick clarification should I expect those unit volumes to be comparable to what we've seen in the United States.

You know our international unit volumes fluctuate dramatically our highest AUR.

He actually is in Chile, where we are.

Performing at an extremely high level, but you have markets that do significantly less but they they don't need to do as much because the labor environment is different the real estate environment is different so it really is a market by market.

Dynamic on an AAV and international <unk> is almost a misnomer because every market has very unique dynamics and Germany, where you have relatively.

High real estate and relatively high labor, yes, I mean for us to be successful there and we're going to need to have a vs that are in the range that we're seeing and the United States.

That's what we will need to be successful.

Thank you. Our next question comes from non so none of that.

Your line is open.

Thank you and congratulations on the great results just a quick follow up on labor to what extent are you and could you elaborate your partnership with door dash to complement your of delivery driver fleet or whether it's through direct pop Downs channel and then my primary question and it's about the franchisee relationship Rob you've been at the company of little over 18 months and transform the strat.

And he economics interest free.

And put up of incredible results and so can you speak to how franchisee sentiment and communication and your relationship has evolved and when you started to where we are now.

Yes, so to your first question and Hi, Laura and it's great to hear from you.

First question is.

Yes, we are absolutely partnering with our aggregator partners to leverage their labor force, that's one of the core.

Pieces of rationale for us to have integrated them, so tightly into our system. So low.

A lot most folks are familiar with the capability of Jordan asked drive we have full integration with with that capability and and I think we are a top five customer per door dash now and leverage them.

And two are two of huge extent, so that is part of our plan.

And at Couldnt comment on at couldn't come at a better time. So when we are running short on labor, particularly on a Friday or Saturday night, and our peak periods, we are leveraging door dash drive and a big way.

And we will continue.

And the franchisee relationship I can honestly say this is the best.

Collaboration I've ever seen and I've seen some really good collaboration with great franchisee partnerships at some of my previous company.

But right now, we've got and Pat that honeymoon stage, where we're trying to build.

Build build trust there's all of these as always it takes a long time to build trust and a short time to lose at so I'm not saying that when it is still not focused on on that type of relationship, but I would tell you that the franchisees are bought into our plant.

You know their units are generating more revenue and more cash flow than they ever have so that helps.

And at and they deserve at because they made it through some really tough times of couple of years ago, but that is the foundation, but its more than that I mean, we are partly partnered with them through the pandemic to help.

Worked through challenges that we had never seen before and help them understand what the government.

Regulations that were coming down we're in and how to and will help them keep their employees stat and our restaurant staff and their employees taken care of so the pandemic really helped bring our system together and and the success that we've had as a result of some of the initiatives that we've put in place as it is.

Really can congeal of that relationship and created a situation now where when we meet at our franchisee.

Advisory Council meetings.

We're talking strategy. There is a lot less debate about one off things, we're talking about high level things and how we can all grow together moving forward. So the franchisee relationship is as good as I could have hoped 18 months ago coming on.

Thank you. Our next question comes from Todd Brooks with CL, King and Associates. Your line is open.

Hey, Thanks for taking my question and congratulations on the momentum and the business.

And I know I know you spoke about kind of details about capital allocation.

Further details coming later this year, but.

Good could you or Rob speak to just the philosophy around the model of the highly franchise nature of it you did mentioned that leverages down to.

The two times, so just thoughts on.

Kind of additional thoughts on.

What type of leverage you can see this business carrying the fuel whatever pivots and new programs you are looking to make from a capital allocation standpoint that would be helpful. Thank you.

Sure I mean, our cash flow generation just continues to strengthen our balance sheet position, which day it at that flexibility to invest in long term growth and also continuing to return cash to shareholders. So we're still planning capex and the range of 60 to 75 million to ex tolerate our momentum in at.

Really in three key areas, we talked about the new store development technology to continue to drive innovation and then capabilities to drive additional productivity. So we expect to generate good returns on these investments and that would be our top priority and we've stated previously is to deploy capital for high return.

We can get to 1000 restaurants and China.

So when you start thinking about some of these markets that big markets that we're still underpenetrated and we're definitely working with those franchisees too.

To move faster and and grow those markets and as well as opened up new markets. Now one thing I will tell you that is really interesting of really interesting dynamic that has happened as a result of of the pandemic.

And and markets like China, the operators used to believe and a lot of the middle East countries. The operators used to believe that they needed opened big restaurants, with big dining rooms, because of the cultural norms and those markets.

And that obviously cost more than our delivery based more restaurants here and the us that dynamic is changing rapidly so.

And.

Now and almost every market, our franchisees or opening delivery delco units almost exclusively and with that is going to do is Rick going to reduce the amount of capital necessary to opened new stores and so we are more bullish today than ever.

On the rate of development internationally give and especially in the market that used to really focus on those diamond units moving too of Delco model. They.

They can open a lot more restaurants for the same amount of capital and that's kind of benefit everybody and do similar similar revenues with the change and the behavior of the consumers.

Thank you and and I'd like to end the call back over to Rob much for clothes at Walmart.

Well. Thank you all for joining us again and for your questions. This morning.

And we hope that all of your of excited as we are about the future of Papa John's.

This first quarter was a very important quarter for our brand.