Q2 2021 Papa John's International Inc Earnings Call
Sales in 'twenty, 1 conference call and webcast at the time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need to press star 1 on your telephone. Please be advised the today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Mr. Steve Coke Senior Vice President of financial operations accounting and reporting. Please go ahead.
Yeah.
Thank you good morning, everyone join.
Joining me on the call today are president and CEO of Rob Lynch, and our CFO Ann Gugino.
Rob at Ann 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 forward looking statements involving risks that could cause actual results to differ materially from the statements 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 in the Investor Relations section of our.
The website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, 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 second quarter earnings call Q2 was very strong quarter for the Papa John's system. Despite ongoing uncertainty regarding COVID-19, and the global pandemic.
This has been a very challenging time for all of us.
Surges vaccinations and now new variants continuing to create a dynamic situation that requires continuous evolution of our business of every business model across the globe.
Despite this environment Papa John's of stay focused on the same set of core priorities, keeping our team members and customers safe delivering operational excellence driving innovation across everything that we do and accelerating global development.
We remain hopeful that this pandemic of the terrible impact of Tad on people and communities everywhere will come to an end soon.
But we are more confident than ever of the Papa John's will be able to continue serving our customers and outperforming our industry regardless of the challenges that we face ahead.
I am proud to announce that we have now delivered 7 straight quarters of global comp sales outperformance coming out of Q2, when we had the lap of the initial global shutdown and commensurate surge in our business. We firmly believe that the foundations on which we have built this turnaround are built to last.
Looking systemwide global restaurant sales in Q2 rose, 12% to $1.2 billion.
On a trailing 12 month basis, Papa John's global restaurant sales exceeded $4.5 billion.
North America comp sales rose 5.2% in the second quarter as we lapped last year's record of 28% in Q2.2020.
In particular at the continued strength of epic stuffed crust combined with the launch of Parmesan Crusted top of D. S. In June drove strong customer acquisition and helped us retain many of the new customers that we acquired in 2020.
Our innovation pipeline continues to be very incremental to both sales and profits.
International comp sales were up 21, 2% on top of last year's 5.3% gain.
We saw continued momentum in the UK, which is our largest international market, but we also gained across multiple other markets as we lap temporary closures caused by pandemic related restrictions a year ago.
At a measure of the brand's long term growth trajectory comparable sales rose, 33% in North America at 27% internationally on a 2 year basis.
<unk> continue to rise now beyond the $1 million level of North America with much of that top line growth flowing through to the unit profitability.
The brand has never been stronger our strategy of sustainably impacting every area of our business.
John's brand at highly attractive unit economics are generating increasing interest in accelerating restaurant openings, among both new and existing franchisees.
We added 55 net new units in Q2 on top of the 68 net new units that we added in Q1. The first half of 2021 was our strongest for net new unit growth in the brand's history.
With 176, new units added to our system over the past 12 months unit growth is becoming a bigger part of Papa John's systemwide sales growth and with strong development deal flow as I'll discuss at a moment, we're on track for accelerating system wide sales growth in the future.
Quickly reviewing our financial results operating leverage on nearly 12% revenue growth gross drove substantially higher margins profit and free cash flow in Q2.
Adjusted EPS nearly doubled to 93 sets of share from 48, a year ago.
We generated over $100 million of free cash flow in the first half of 2021 defined as operating cash flow less capital expenditures and dividends paid the preferred shareholders.
This was up 50% from a year ago, even as we increased strategic investments in our growth.
We're committed to implementing a balanced capital allocation strategy, our priorities are investing in growth, maintaining a strong and flexible balance sheet and returning cash to shareholders to enhance returns.
Last quarter, we completed the transaction to repurchase and convert all of our series B preferred stock. The transaction was a milestone of Papa John's transformation since 2019, when those shares were issued this.
This transaction was possible because of our strong financial performance over the past 2 years.
Now with a more simplified and optimized capital structure, we are able to create even more value for our shareholders as demonstrated by the 56% increase in our dividend that we announced this morning.
And we'll discuss our progress in all areas of our capital allocation strategy in a moment along with more detailed financial results.
But now I'd like to spend a moment, providing an update on our strategic plan and outlook.
Papa John's innovation strategy touches all aspects of our business menu technology customer experience delivery and development.
Through careful execution, we are successfully achieving consistent share gains in comp sales outperformance, expanding our customer base and growing our global footprint.
Each quarter of positive result adds to the brand's momentum at our optimism about op of John's near and long term growth outlook.
With regard to our menu we continue to see the long term benefits of our strategy around creating premium differentiated new menu platforms carefully balanced with investments in quality on our core menu items and compelling <unk>, our new innovation platforms like Papa D. As in Epic's best price are built at <unk>.
Sustainably grow our business.
Nearly 8 months after its launch Epic's best price continues to be a huge success with customers and average piece of buffers average pizza levers in particular.
Our biggest new product platform ever epic stuffed crust drove a significant increase of ticket and customer traffic in both Q1 end Q2.
In June we launched parmesan pressed the pop ideas, which are premium items priced at $7 compared to original pop of the at $6. The segmented pricing strategy allows consumers to self select into our premium products, while still maintaining the value proposition that the original Papa via offers.
As we have said in the entire company is platform has proven to be largely incremental to our core piece of sales property as are often purchased as an add on to what would traditionally be of pizza only order without adding much complexity to our stores.
In the second half of 2021, we expect epic stuffed crust and pop of years will continue to be a foundation for a sustainable growth plan.
Turning to our digital innovation lab.
The last quarter, our Papa rewards loyalty program reached a major milestone.
Rowing the over 20 million members.
This is an increase of more than 5 million members since Q2 of 2020.
Papa rewards members now represent approximately half of all sales.
This is a very valuable segment of our business, we are able to directly engage these loyal customers with targeted personalized offers the drive higher frequency higher ticket and higher satisfaction.
As a result, they are significantly more profitable than non loyalty customers.
Papa rewards members continue growing as we now give our customers even more reasons to join our loyalty program like early access to new products.
The launch of epic stuffed crust and parmesan crusted pop of the as we're both preceded by member only access acquisition programs and we saw significant increases in sign ups since the beginning of the year. We have added nearly 500000, new Papa rewards members per month.
Papa John's was the first national Pizza brand to offer online ordering and we have maintained a long history of innovating around our customers' digital experience our category, leading partnerships with third party delivery Aggregators is 1 key aspect of this strategy.
In June we integrated grubhub into our system, adding to our existing national partnerships with Uber eats door dash and postpaid.
Our goal has always been the make our products available wherever our customers want to purchase of them. This continues to be a winning strategy with respect to aggregators as these partnerships bring additional customers to the brand they drive incremental and profitable transactions. Our partners also benefit as we provide substantial substantial scale and order flow for there.
The platforms.
Our domestic sales through these channels grew almost 50% in the past 12 months.
These great results directly benefit our unit level economics as I previously indicated aep's of grown above $1 million in North America on a trailing 12 month basis.
It has been reported widely at the restaurant industry faces headwinds from commodity inflation, we have seen this in our business as well, but we believe Papa John's has 2 advantages and our ability to manage these input cost first we operate a vertically integrated supply chain, which allows us to continue to find areas of productivity and reduce costs second.
We believe that our premium brand positioning gives us more pricing power should we determine we need to take that path, both give us more room to manage an offset of external cost pressures, while continuing to deliver quality and value to our customers.
Papa John's unit growth and development activities are taking hold.
In 2020, we consistently stated that we were building the foundation to significantly accelerate development growth in 2021 and beyond.
Today, we are pleased to announce that in Q2, our global New unit growth set a company record.
Our new development team and infrastructure have moved quickly to meet the dramatic rise in interest from well financed and experienced franchisees both current and new are.
Our franchisees are focused on investing capital back into the Papa John's system and the development strategy, we put in place last year is bearing fruit.
This morning, we announced an agreement with our largest international franchisee Drake foodservice as international to open over 220, net new stores by 2025 across Latin America, Spain, Portugal, and the UK Dragons.
<unk> is a valuable and respected franchisee and we are happy that this agreement will double their footprint by 2025.
We're very excited about a number of upcoming domestic and international deals with new franchisees, who bring deep financial resources and operating experience.
We see this as another important validation of the brand's promise and potential, especially given our enormous global development White space.
Now I'd like to address the current labor market an area, where we continue to act deliberately guided by our values to become the employer of choice in our industry through the compensation benefits opportunities and culture that we offer.
In July we announced new hiring refer on appreciation bonuses for frontline corporate team members. We also made permanent the expanded health wellness paid time off and college tuition benefits, we rollout during the pandemic.
Our franchisees are equally committed to supporting and appreciating their team members after hiring more than 30000, new positions last year. We continue our aggressive hiring plans to meet the needs of our growing business and customer base. Later. This month, we're sponsoring of national hiring week with resources for our corporate and franchise teams to showcase our unique culture.
<unk> and of fun way of welcome new team members.
We're very excited about continuing to grow the Papa John's family.
Based on the strong results, we've announced today, our ability to execute our strategy and our optimism about the business we want to provide some color on our outlook for the remainder of the year and beyond.
For the second half of 2021, we currently expect to deliver low mid single digit comparable sales growth on top of very strong prior year results with year over year gains in earnings at.
As for development, given last quarter strong performance and accelerating interest from existing and new franchisees looking to invest in the brand. We are raising our global unit growth outlook to approximately 220 to 260 net new units this fiscal year.
And we'll discuss our outlook of more detail in a moment, but at the topline rationale for our confidence in our 2021 outlook is twofold.
After achieving record sales and acquiring millions of new customers over the last year. We have successfully held on to those new customers and anticipate more growth in the back half of 2021.
The second after rebuilding our development team in achieving healthy <unk> and unit economics over the past 6 quarters, New unit growth and deal flow accelerated dramatically in the first half of 2021, and we see the momentum continuing for the rest of the year.
With our optimism of Papa John's opportunity building every quarter, we are focused on ensuring that we of the team capabilities and infrastructure to sustain our growth for the long term.
I'll now turn the call over to Ann to discuss our financial results and outlook in more detail and thanks, Rob and good morning, everyone. As Rob described Papa John's consistent positive trajectory since late 2019 has affirmed our confidence and the comprehensive transformation that we're executing at the same.
Time at has significantly strengthened our financial position and long term outlook.
And then David on my first earnings call of the company last fall 1 of my top growth had been to outline our balance sheet and long term capital allocation priorities with the businesses improving growth trajectory cash generation potential and investment opportunity.
Our capital allocation priority of they're straightforward first to invest in strategic accretive opportunities to grow the brand and its long term profitability.
To maintain a strong and efficient balance sheet that provides optionality and security and third to enhance long term shareholder returns by returning capital exceeding the needs of our other priorities.
I'm pleased with the progress we've made against all 3 areas.
As of January we have substantially increased our growth investments into start of elements. We expect our first tranche of company owned restaurant to open in September with more expected in the fall at.
As we have discussed not only at company owned stores high return investments in themselves. They also create optionality and we seek out perspective and current developing franchisees to open up in new territories and accelerated our development growth.
Our strategic growth investments have also included new customer facing technology as well as our long term innovation and development capabilities, including our new office in Atlanta, which we expect to open this fall.
We have maintained the strong balance sheet. This has provided an essential foundation as we navigated the pandemic, ensuring we have the liquidity and cash necessary to meet the strong surge of demand.
In May we simplified our balance sheet by retiring all of the shares of our series B convertible preferred stock.
The transaction lowered our cost of capital and benefit at long term free cash flow and earnings while only minimally increasing our leverage.
We have continued to return significant capital to shareholders. In total we have invested nearly $240 million and dividend share repurchases and retiring the series of feedstock over the past 4 quarters.
As part of the series D transaction, we also repurchased approximately 1 third of the share on an as converted basis further enhancing long term earnings and equity value for our common shareholders.
At the next step today, we announced we are raising our annual dividend from <unk> 90 to $1.40 per share of <unk>, 56% increase.
After another quarter of outperformance.
Taking this action consistent with our confidence in Papa John's future as well as our commitment to a balanced approach to enhancing shareholder return.
I point out at the implied cash outlays.
Of the increased dividend are funded largely by the elimination of the series the dividends and a $1.40 per share Papa John's dividend yield is now in line with the median for the S&P 500.
Looking ahead with our bank debt maturing in nearly a year. We are beginning the refinancing process, which is a natural catalyst for us to continue to look at ways to optimize our capital structure.
Our goal is to maintain an efficient cost of capital with dry powder for flexibility to fuel future growth.
To summarize we continue to be very intentional in our approach to capital allocation and the balance sheet.
Or in the past per quarters, we've taken substantial actions to invest in growth optimize our balance sheet and enhance shareholder returns.
We look forward to taking further steps to evolve our capital structure to align with our priorities and outlook.
Now, let me turn to our financial results for the quarter.
As Rob discussed our record momentum continued in the second quarter of 2021.
Our innovation strategy, which is helping us retain customers and drive ticket growth as well as the benefits of accelerating unit growth contributed to strong top line growth.
Topline growth of 11, 8% operating leverage and the expiration of temporary franchise support versus the prior year more than offset commodity and labor pressures.
Adjusted operating income rose, 55% year over year end margins expanded almost 300 basis points.
On the segment basis, all of our strategic business units contributed meaningfully to top line growth as we surpassed the half of $1 billion in revenue for a second consecutive quarter operating income growth was driven by strong revenue on higher comparable sales and year over year unit growth domestically and internationally.
In North America reduced franchise support provided for additional royalties of $5.1 million compared to the comparable period in 2020.
Our restaurant operators continue to execute at a very high level driving solid restaurant profitability unhealthy a lease in both North America and across international.
And our company owned restaurant segment margins were relatively consistent with the first quarter the down slightly versus Q2 of 2020, reflecting higher commodity and labor related costs.
Continuing with the P&L on a GAAP basis, we recorded a loss per diluted share of $2.30 in Q2.
This included 1 time cost of $3.15 per diluted share related to the repurchase and conversion of the series D preferred stock, which I just discussed.
In addition, we incurred net cost of $3.3 million pre tax or <unk> <unk> per diluted share post the tax related to our strategic corporate reorganization and new Atlanta Office plan, we announced in September 2020.
Excluding these special items adjusted earnings per diluted share grew from 48, a year ago to 93 in Q2.
For the remainder of the year, we are on track for the cumulative 1 time costs related to the corporate reorganization to be within our previously communicated range of $15 million to $20 million.
As we've said we see these costs of an investment in both the company's innovation and topline growth as well as in our long term corporate efficiency.
Now I'd like to turns of our cash on balance sheet strong earnings again contributed to a dramatic increase in cash flow from operations in Q2 from $54 million a year ago to $65 million.
Free cash flow in the first half of the year of relative to 100 million versus $67 million in 2020.
We ended Q2 with net debt of only $329 million up $54 million from a year ago, reflecting cash of liquidity to fund the series B retirement, mostly offset by free cash flow.
During the second quarter, we paid a cash dividend of $10.4 million to our common and preferred shareholders.
Subsequent to the end of the second quarter on August 3rd our board of directors declared a third quarter of cash dividends of approximately $12.8 million to be paid to common shareholders.
The third quarter common stock dividend at 35 cents per common share in line with the dividend increase I just described.
In the second quarter, we opportunistically repurchased 68000 shares of common stock for $6.9 million or $101.20 per share under our previously announced $75 million share repurchase authorization.
Through the end of Q2, a total of 116000 shares have been repurchased under this authorization with an aggregate cost of $10.9 million and an average price of <unk> 90 per $1.20 per cent per share.
I'd like to wrap up by adding a few points to rob's comments on our goals and outlook.
Based on our strong sales and operation of momentum so far in 2021, we feel confident about delivering low mid single digit positive comp sales growth in North America in the second half of this year.
We are also raising our outlook per unit growth to 220 to 260 net new units in fiscal 2021.
In the second half of the year, we expect to continue to deliver of year over year margin improvement as we saw in the first half the slightly moderated by 3 anticipated factors first we expect commodity and labor headwinds to continue in the near term.
Second Q4, we'll lap at the end of temporary franchise support last year. So we will not have that year over year benefit.
And third in Q4, we will also incur expenses for our annual franchisee conference, which was not held last year due to the pandemic.
And the sequential basis, I'd remind you that margin in the second half of the year are typically lower than the first half due to seasonality in demand and input costs. We expect a similar pattern this year as well as the impact of the factors I just mentioned.
The full year basis in fiscal 2021, we expect to deliver operating margin improvement between 2 and 300 basis points over fiscal 2025, 2% for.
For the longer term, we are well positioned to continue to drive margin expansion.
This year, we remain on track for annual capital expenditures of $65 million to $75 million focused on new store development as well as new technology and productivity enhancements in our restaurants and across the system.
I want to close by saying, how very proud of half of the progress that Papa John's team has made unlocking the brand's growth and delivering long term value per shareholders. 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 Rob.
Thanks, Dan.
For another quarter I couldnt be more proud of our team and what we're achieving as I said last quarter was the milestone for Papa John's on a journey of transformation that began 2 years ago.
1 of very different position today as demonstrated by 33% 2 year comparable sales growth in North America, and 27% internationally and by record unit growth in the first half of this year.
But the strategy values and mission behind that growth haven't changed. This is what gives us all such confidence in the sustainability of our progress and optimism about Papa John's long term outlook.
With that I'll turn the call over to the operator for Q&A.
As a reminder, task of question you will need to press star 1 on your telephone to withdraw your question press. The pound key we ask that you. Please limit yourselves to 1 question. Please standby, while we compile the Q&A loss share.
Our first question comes from the line of Alex Slagle from Jefferies. Your line is now open.
Thanks.
Congrats.
You know, what's your North American volumes now of 33% 19, and I guess, even more growth ahead, just wanted to get your latest thoughts on the potential need to add additional quality control centers in the next couple of years and then separately at the store level or are you happy with the current levels of execution and speed.
In the restaurants and with the delivery times.
Anything you'd like to simple by or speed up the sort of other ways you can further leverage technology or the best practices debt.
Kind of materially stepping that up.
Further.
Alex It's Rob Thanks for the question, we actually have a fair amount of cash.
The remaining at our <unk>.
We had built capacity prior to call at 2018, and then with the.
The change in the run rates on the business, we had a lot of excess capacity, which made the supply chain less efficient as the volumes have increased our supply chain has gotten a lot more efficient, creating a lot of value for both us and our franchisees is our cost structure.
<unk> has improved because of the leverage and the fixed cost coverage. So.
We're in great shape right now from the supply chain standpoint, we don't anticipate any large capital investments necessary to continue to support this rate of growth in regards to the restaurants, we are investing a lot in the restaurants I mean, you know over the last 2 years, we've made significant investments into our company restaurants and have brought on.
The franchisees along we if you recall, we invested in a couple of pieces of equipment spinners, and cheaters, which are ways for us to make our DAU and end pound out our DAU much easier at faster, which has increased our throughput allowed us to be able to service. These increased.
Unit volumes and then we've also.
That's it in things like Papa call, which allow us to make sure that we answer every call of a big problem in the business model used to be on a Friday night when you get busy.
You know you're putting people out of all of that you lose those calls we now have a I'll call center. The the answer is every 1 of those calls of no calls get dropped at allows our team members of the restaurants to be able to focus on making pizza, but we are looking at a lot of technology investments ways to optimize our delivery capabilities ways to optimize.
How are how we interact with our customers and we're looking at automation at a lot of other things day to continue to increase productivity and helped us mitigate some of these challenges that we're seeing in the in the current business dynamics.
Great. Thank you for that.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Eric Gonzalez from Keybanc. Your line is now open.
Hey, Thanks for the question Yeah Congrats.
Congrats on the on the really strong belt the numbers in the first half of the year. It really it looks like youre on the nice trajectory in terms of the accelerating that growth.
The strike foodservice the arena it seems like it's the major step in the direction. So should we expect to see more of these types of partnerships in the months ahead do you have anything of the pipeline that you're excited about or anything you could share on that front and then just regarding your deal on the outlook can you split that out between North America International and with the uptick in your guidance how much of that is driven by U S versus international.
<unk>.
So on your first question.
Yes, we do have a lot of conversations happening right now both with domestic and international current and prospective franchisees, we're not going to disclose specifically what that means in terms of growth.
The numbers going forward, but.
What I can tell you is at 2 years ago, almost none of our domestic franchisees, we're talking about development and now almost all of the law and you know if you recall.
Last year, we talked a lot about building the infrastructure to support.
A sustainable significant amount of unit growth as part of of what 1 of our key initiatives and we built that infrastructure last year, we didn't build a lot of restaurants, because we were busy making sure that we have the tools that we need at a significantly.
Increase the not just the number of restaurants that we're building, but the number of net new restaurants. So why don't make sure that the the units are going into the right places at our successful I think you know this brand had fallen a little bit into a behavior, where we'd opened a fair amount of restaurants, where he'd also close of lot of restaurants with.
With the improved unit volumes as well as our ability to identify better sites in real estate and help our franchisees.
The restaurants, we're anticipating a lot less closures of moving forward, which will allow us to sustain.
The only in their markets and a productive and profitable way.
Thanks, and congrats again.
Thank you are next.
Thank you. Our next question comes to the the line of Peter's Tyler from V. T. I G. Your line is open.
[noise] great. Thanks, Thanks for taking the question.
I wanted to ask about the same store sales outlook you guys gave low sing all of them to Ms single-digit same store sales growth.
The contemplated any impact from the new variant are you seeing any sort of impact from the Ah recognize it's early days, but any sort of changes in consumer behavior as the very and has spread a little bit.
The great question.
Would have been very villages and trying to.
Get granular on the impact of.
The.
Pandemic on our sales obviously of Q2 Q3 last year, we had a huge surge of goodness and that was primarily the result of.
The pandemic and the the the dynamics associated with that but over this year at what you've seen market the open up to the <unk>.
Next day, we haven't seen a lot of drop off in our business.
So.
We measure every market very closely to try to assess what the impact of going to be when.
Things kind of quote unquote get back to normal so when the Delta very entertainment the play.
We are measuring those those markets as well and we're just not seeing significant disparity between open and kind of more restrictive market. So that's what gives us a lot of confidence that when we do come out of this whole scenario and the dynamic that we're gonna be able to continue at.
And the loyalty members of the amount of digital orders, if we get allow us the track very closely the behaviors of our customers and we've been able to retain the customers that the brought in during the pandemic and with the launch of epics of breath withdraw on it of a lot of really.
Heavy piece of users in this category and we're seeing their frequencies and the ticket higher than what we've seen in the past of all of that gives us confidence that regardless of what the pandemic situations looks like of the mood board, we're going to be able to continue straw to deliver strong results.
Great. Thanks for that and then just on the labor market.
I know there's been many stays about half the states maybe even more at this point that of.
Of cancelled or the.
Limited the federal unemployment benefits has that had on the impact on your ability to hire Where's the labor market News day, it's still pretty tough as well.
The the labor markets are cup everywhere, we have seen.
A little bit of of improvement and application flow of hiring over the last 2 months at some of the state of change their policy.
But it's still a challenge so what I can tell you is that we have been able to mitigate some of that labour challenge by utilizing our partnerships with the aggregators.
We have.
In markets, where we've had a real tough time, particularly filing drivers we've been able to offload some of our orders of.
To our aggregate of partners, which is really helped us to be able to deliver the kind of customer service that we needed in the areas, where we just haven't been able to hire enough drivers. So that's been a really helpful part of our partnership with the with the Aggregators.
Great and congrats on the quarter.
Peter.
Thank you. Our next question comes from the line of Lauren Silverman from Credit Suisse. Your line is now open.
Thank you so much and congrats.
Wow, that's great to hear about all of the interest from the franchise.
Rather than your conversations at new franchisees, how did they look at the investment opportunity at Papa John's perhaps.
Their franchise brand.
Of your conversation current franchisees can you expand on what you're hearing from that and how interested they are at.
[noise] stolen opportunities.
Market.
Thanks for.
The new franchise fees are really excited about Papa Joe the opportunity of Papa John's for a lot of reasons wanted frankly, there just aren't a lot of opportunities at other national peace of fire. So if they wanted me at the pizza business and today, they're of the the sandwich business or some other <unk> concept.
Domino's Pizza hut at a lot of restaurants and most of their territories are are are accounted for we have about half of the number of units are larger competitors. So there's a lot more white space that we can develop and so for franchising that 1 of the piece of business, where the best option and.
With the unit economic the.
Economics that we're delivering in the flow through that we're seeing.
From the the growth in the top line and then the productivity we've been able to create in the supply chain are EBITDA margins are of science I've ever been at the restaurant level. So.
Really excited about the level of of interest and the new in the prospect the franchisee marketplace, and we will be bringing more of that.
Context and information here over the next couple of quarters as we closed some of these deals and the current franchisees as I as I referenced earlier.
With 2 years ago, almost none of our franchise the top 25 franchisees half the development agreements in place and almost none of them were building today.
Having conversations with all of them and we're going into each of the respect that market at where where leveraging the analytical tools that we build the really fine the opportunities for them to go in the the bill in their current markets and create more saturation, there, which will allow us to reduce drive types, which will allow us to provide better.
Customer service and allow us to.
It takes share of the market so the.
There's a lot of excitement both with respect the franchise needs as well as our current franchisees.
Great and if I guess, you'll follow up on the aircraft Guy John J.
The 20th.
Now.
The levels as you look out over the next few years any color on how you see that.
In terms of the magazine.
Alright, I'm, sorry, I'm, a little bit of trouble here day for these repeat the question.
Sure. So on the net new units of 200 to 215 pretty much at historical levels. So as you look over the next few years any color on how you see that ramping up in terms of magnitude.
Yeah, I think there is the <unk>.
Definitely an opportunity for us to increase the outgrown ready.
We still have a lot of untapped market internationally, we have and frankly.
The developed in markets that were already in my of China.
And even in the UK, our largest international market. So we would we would be looking into the continue to grow.
The number of restaurants that were able to open up over the foreseeable future.
Great. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of <unk> down from Longbow Research. Your line is now open.
Great. Thank the good morning, you just wanted to ask you.
I believe the front, Rob you of the U S.
Presume the total even.
<unk> appointment the difficult to open new stores, you know kind of how do you see the pace of that playing up over the the rest of the of Europe.
It's a total where you know hopefully we'll see a bit of the loosening of labor market and you could help the drive the external.
The growth.
I do the fries.
Yeah, absolutely I mean.
The.
We would hire as many people with with find running out of the market. The Mark Hi, later markets are absolutely of part of the constriction of our ability to deliver the.
The the kind of customer service that we're hoping to deliver.
We have an operational standards and the big are kind of operation has done a great job throughout the pandemic and and through the tight labor market, but I think at the labor markets open up at well of 4.
All of these delivery company the ability to deliver by the better customer service and therefore, David of increase the throughput and.
And contribute to our growth ongoing.
Great. Thanks, so much.
Thank you all day.
Thank you. Our next question comes from the online of Dennis Skeeter from you be at your line of now.
Great. Thank you Rob I wanted to ask first about the market share gains that you've seen in a few of any sense on kind of weird that's been coming from for the last many quarters.
Is it coming from sort of the the larger brand of it coming from the independent pizza chains or they're just continuing to be more pizza category of occasions do you have a sense for the interior.
I'm curious how you see that opportunity going forward I'm sure you'll teacher wherever you can get at but just if there's any any thoughts from you on that front.
Yeah, I think I think our business growth of this come from a lot of different places not even adjusted the pizza industry I mean.
Excuse me as as we've looked at the business, Connecticut now coming.
Hopefully out of the pandemic.
A lot of our businesses has been driven by a shift from going obviously dine added to the to the delivery and e-commerce and lack of all the leathery the consumer behaviors and dynamics that we think benefit at at an ongoing basis, but within the.
Piece of market and with industry, we've seen that we've taken share.
At almost everybody.
All of our car sales of growth faster than our competitors. Obviously, we're driving dollar share and then I think the predominant has come from the amount of the cops more so the international J.
I think we've been able to grow faster the most people in the marketplace.
Got it.
And then maybe just 1 more as it relates to anything else you can share on the sort of the the exciting new customer acquisition and retention that you highlighted if.
Anything additional on those new customers on the you've acquired relative to their purchase behaviors I think you've called at epic stuffed crust, but beyond that any other initiatives are opportunities that are kind of most critical to retaining and kind of continuing to attract those new customers. Thanks, Yes, we have a robust innovation.
By the time that we're going to continue the launch.
And it's been really exciting to see habits innovations pipeline is rolled out.
It's not.
The model the necessarily employed RV the Taco Bell of my previous life, where we are a couple of days out of every month I mean.
This is more of a foundation of innovation.
Platform the that we continue to launch the points step cross the path of the year I mean, these aren't going anywhere so they brought in a lot of customers.
At a higher tickets because a lot of this is additive right as it used to be a traditional piece of the transaction now has the.
Added $3 more for herself prostatic $6 more for of Papa DSO, our tickets growth has gone up dramatically without us having to take really any pricing on our core items are increasing our delivery fee. So.
That's that's really implemented of our business and that's how we're we're thinking about the the innovation pipeline moving forward and we've got a lot of stuff that is ready to roll out here at the back half of 2021 and the 2022.
Great and congrats on the corner.
Thank you.
Thank you. Our next question comes from the line of Brian momentum Deutsche Bank. Your line is now then.
Okay. Thank you Rob just the follow up to some of your comments to current question.
In comparison to say about 6500 Domino's unions today at about 6500 Pizza you of it.
The.
In North America is there a reason Papa John's couldn't get to that level of 1 day, perhaps the weeds or too big or too penetrated or in your <expletive> out there I don't know just wondering how you think about that long term domestic potential is there a ceiling, we should be thinking about just in terms of online.
Yeah.
I think you nailed it I mean, that's how that's how I talk about of in our franchisees. That's how I talk about at within our company at.
The fact of Dominos pizza half almost 2 ex the number of units that we do domestically. There's no reason why we can.
Get there as well.
I think this with this brand hasn't had a very strategic Conservatives development strategy of the past we have a lot of 1 of these use the franchisees who came in they could find out of us fast they liked it at whether around other Papa John's.
You could open of our jobs and we had a lot of situations where at restaurants were closing and if the rewards set up for success. What we've spent the last 18 months doing is building of development capability that will.
The setup for success, both from the kind of franchisees that we're looking for that our experienced the well capitalized. The also the tools that we afford the end of the forms of finding great real estate in construction of capability. So we are very bullish on.
Domestic development end, our franchisees are really starting to engage in we're starting.
The development agreements right now, we just signed the development agreement with our largest privately owned franchisee. This year at the first development agreement. He has done in quite some time and he's very excited about it we've got more lined up so I would expect that our development pipeline accelerated pretty dramatically here of the.
The next 12 to 18 months.
That's great and then just the follow up can can you talk about the business in China, maybe reminders has been doing do you have the right unit format has the relationship of the partners now that you've spoken to an ability to add a thousand units. There overtime is that a medium term goal cause I would think it could be even more than that over the long term. So just wondering if you could have the the.
On that margin.
I'm in China is the huge opportunities you know our competitors at very develop a of sit there and we have we have about 2 other units there the.
The problem is similar to kind of of the dynamic of just share with you. We we continue to open the units, but a lot of them close. So we're working with our Chinese partners to really build a model of that can be able to sustain.
Both ongoing and Keith Oh, no interest the opening new restaurants, the keep them open at helpful. Those franchisees be successful at an ongoing basis. So there's no reason why.
While we can't get through of thousand units in terms of at the time horizon on that depends on what we've gone with the midterm or long term, but.
We think of that's what really achievable.
Thank you.
Thank you. Our next question comes from the line of grant money from M. K end partners. Your line of South then.
Great. Thanks for the call. Thanks for taking my question.
Just the first couple of clarification did you say low mid single digits does that mean the.
The bottom half of the 4 to 6 it's not low single digit in mid single digits. And then also you've talked about the improving profitability in the unit economics care to share anything in terms of either absolute restaurant level of EBITDA for your franchisees or.
Just magnitude of increases that you're seeing there and.
Then just finally.
On the Labor front you at.
Obviously had a successful year of you guys were among the earlier to go out and hire and you continue to supplement at what are you seeing in terms of your retention the turnover.
How much of this hiring is proactive to.
Just help system.
Support the growth that you have and how much of it is a need to just keep everything afloat. Thanks.
So on our first question regarding the low to mid I think that you were thinking about at the right way.
That's about how we're thinking about it.
The the definition of low of the definition of embedded the definition of high of it.
Oh.
So I think they're thinking about at the right web in terms of EBIT the percentage of the unit level.
All of that information for company or.
Our franchise restaurant so.
We're going to be able to give you the exact EBIT of percentage margin right, but on the labor side I think at fault I think that we're definitely challenge.
Q S or the.
And the look.
Mhm at minimum wage.
And any time of year of competing for entry level workers in the minimum wage workers you are going to have a lot of turnover. We tried to do things that will help us to retain those workers. We've we've we offer now telehealth to everyone.
The we have free college benefits the Oracle is related the the employer of choice in this marketplace of be able to increase retention of across our hourly workforce in terms of our.
Salaried workforce at our general manager that are above restaurant level of management, we've had at a stronger attached we haven't a.
Significantly higher amount of turnover despite the the labour challenges.
And I think part of that is the success of the restaurants, when the restaurants are making or driving sales high sales.
Our managers are making the salaries and bonuses. So we tried to do everything we can to.
The increase retention and we've been pretty happy despite the challenges the.
Everyone in the face across the labor market of industry.
As a reminder, task of question you want need the press star 1 on your telephone to withdraw your question press. The palanquin, we ask that you. Please let me yourself to 1 part question.
Our next question comes from the line of Chris Oh Cool of course people. Your line is now open.
Great. Good morning, guys. This is Patrick on for Chris I, just wanted to touch a little bit on what you're seeing in terms of day parts of occasions with the with the ounces calm strength that you've seen in particularly if there's an outsized portion of that coming from any particular time of day under the poverty of platform. Additionally, the AD on has boosted the lunch business that you mentioned in the past but.
Also with the return of sports and just general return of consumer mobility. I'm wondering if you are seeing large party ordering coming back to maybe pre COVID-19 frequency levels or something approaching that thanks.
Thanks, Patrick Yeah, we haven't seen of significant shifted of day Park.
The loss of pop of the as it was intended to go and compete for that lunch day part with sandwiches and we started seeing some movement there and subtraction there prior to the pandemic and net obviously people will start at work from Halloween at all.
Dynamic shifted but really what we've seen at chip outpaced share of growth.
At early dinner and later that day.
The park now in terms of the large size of the orders.
We have a lot of that.
Happens at the sports and the will look at the few 3 day, taking the the asking to be a return to that I haven't seen quite the return the yet but the football season is coming up in the I think back at school. This year hopefully a lot of our operators service a lot of schools and the.
His head back at school. This year you also see of pick up an average price per order of that.
A bit more of a return to where we were before.
Thank you. Our next question comes from the line of Andrew <unk> from BMO. Your line is now open.
Great. Thanks. Good morning, I was just hoping you could give some color on what you're saying internationally in terms of consumer behavior in the drivers of of the strong growth there at the operating environment seems like it's been pretty volatile with restrictions and the and the changes there. So it would just love to get your perspective on what you're saying and your key markets internationally.
Yes, we are expanding almost all of our markets over the back up.
You know the markets that we operate at actually stayed over at through the Delta area of UK at our largest the international market.
And UK has been of a strongest at at at the market, but at the South America has been a bit of fluid.
Delay has been of great market for us over the last year, but Peru has been up and down with its closures and restrictions the.
Middle East, obviously has had some some variability as they've closed and put in per accused the overall.
Really seeing strong performers slowly.
Any of the Big Challenge, we've seen as bad I think in Russia with some of the uncertainty there at how they end of the pandemic of across the globe.
We're back operating and performing at a high level.
Thank you. Our next question comes from the line of Brien sitting there from Oppenheimer and company your line now okay.
Thanks. Good morning, just the big picture of question when I do have a quick follow up on the on the guidance. The bigger picture. These company..1 day you vs or about 25, 30% higher than your franchise system at <unk> in North America can you just walk through what the main drivers of of this difference is between.
The 2 businesses the company owned stores, just some better markets or do you believe the actually represent some type of upside where the franchise <unk> could go as you potentially close that gap.
Yeah, I think I think it's a little bit of both I mean, obviously as the as the company has sold off market the.
Market that were sold off of proud of free of of the lower perform a market of the market that were held onto were of battery performing market.
So our per our company footprint is kind of at our.
Cannibals more of the <unk>.
Grand scarred of it really the Midwest down through the south eastern So those markets free late performed well for us.
As opposed to.
The the east and West Coast now throughout the pandemic, whereas some of the <unk>.
Margaret's happen those coastal say in the New York City was.
1 of our fastest growing markets as well as kind of the west coast. So we're starting to see half the discussion that actually see some development.
Excitement at taking place in the market. So I think it really is a function of kind of the.
The penetration of of the company markets relative to the franchise the market now as those as we build more of a restaurant in the those market to that generates more marketing dollars I think you'll be able to we'll see more of a balance between the company and franchise.
Creating the follow up on on the guidance is on the back at the same store sales guidance still very impressive low mid single day, just give them. What you achieved last year. It does suggest of salt swimming in the 2 year trend that you've been executing in the first half that you've been referencing and.
The first half so is there something you're specifically C in the business or the industry that would drive that change and kind of of the 2 your trends in the business or.
Is there some dose of conservatism built into the outlook just because of how strong your first half was in the menu of innovation in the first half was.
Yeah.
I would say really.
It's driven by we had a stronger back half of 2019 at 2019 so.
R R comps last year and the back half, particularly in queue for.
Or lower than at our cough and Q2 Q3 because of the carbon bend. The number. So if you would call back of of the first half of 2019.
The brand was really struggle Q1, 19 -7 per cent Q2, 19 -6%. So as we call at those in the queue..1 2 of 2020, we kind of at.
Yeah, just call of what it is easier comps will get into some tougher cough now in the back half, but we're very excited.
Out of the continued sales of momentum of I mean.
Day in the back half or.
Are relatively consistent in the.
Part of that.
7 the news grading, where we have some seasonal divide every year Q3 end, obviously of our lowest sales border but.
I wouldn't say that we're making of conservatism I'd say, we'll see.
A bit of the sequential slowdown into your cost of at at.
I don't think of.
I don't think that you should be planning for 33 per cent to your thoughts on the other day. So we will see to your accounts around the slowdown, but we're still are full of always to outperform the industry at large and we think that we can continue to do that.
Thank you.
Extra.
Thank you. Our next question comes from the line of change of leather for from Stephen. Thank your line is now open.
Great. Thanks for getting me and I wanted to ask Rob on the company store opportunity you you previously guided the opening 20 to 30 net new company location of this year, if I got that correct.
Clearly you're sitting on a lot of companies stores in the <unk> as we just talked about quite a bit higher than the average franchise location.
What are your thoughts toward Refranchising of portion of those to incentivize some of these big.
Operators out there to get into the system and kind of put a stake in the ground with with Big development agreement. Thank you.
Yeah, Great question, we've talked a lot of out that over the last couple of years and I think our answers is pretty good and I mean, when we see opportunities to do that and.
Kind of in bad of budget of new franchise of the year, even the current credit.
The develop a market of scale, where absolutely willing to look at divestiture of some of our portfolio. So we of maintaining optionality throughout the last 2 years and in regards to the filling end market building restaurants without the selling restaurants at the opportunities because as of stuff but.
Absolutely not selling restaurants at the cello there at the half of the.
The trades action against the come along with the Big development agreement, where whereas some of those discussions right now.
Great. Thank you.
Thank you. Our next question comes in the lineup Todd broke the C. L King and that's M. C. At your line is now open.
Hey, good morning, everybody just a quick question if you're looking at the back kind of thought well can you talk.
I guess, you're inflation outlook as far as maybe key commodity classes or the labor, where you're expecting to see inflationary pressures maybe accelerate end.
Robert <unk>, you touched on pricing of the the company's achieved.
Kind of ticket gains with new product introductions, but the you've talked at the brand has real pricing power can we just talk about thoughts on what you would need to see the maybe pulled the pricing lever here in the back half as well across maybe some of the broader.
Product portfolio. Thanks.
Sure I'll at and speak the kind of our perspective.
Inflation and that I can give you some sort of color on our thoughts on pricing.
Yeah. So we are as it relates to the specifics on the back half we continue to expect some margin pressure on the food basket, there will be favorability and cheese because it was at.
Very high last year, however, that'll be more than offset by in place of network seeing and at other categories like soybean I'll need at cardboard in the boxes. So in total.
We are expecting to see some [noise].
And the food costs in the back half of the year at similar story with labor.
Just as we've been talking about the tightening market end competing for talent.
But I think the thing I would highlight is why do we will see 7 at cracker at our margin come down from the first half the still expect year over year too.
To continue.
Continue to improve margin.
So if we do see significant inflation and we need to pull the trigger on the pricing we feel confident that it will be able to do that.
We've we've held off on that I mean when when.
What what kind of kicked off of thing 2 years ago..1 of the biggest challenges we had at that our value of reception relative to our competitors with with.
Was way off and so over the last 2 years, we have been very focused on driving growth through innovation versus driving ticket growth through the price. It. So we've taken almost no pricing.
And I think at that has helped the reset R. R.
Our value perception relative to our competitive debt and balanced at a little bit. So as we move forward. We can continue to deliver innovation of consumer self selected and that mitigates the impact of inflation will continue to do that but we're also testing multiple different scenarios where.
We could potentially take pricing of of some of our items through some delivery fee. The other ways to mitigate the cost of the increased cost so we'll be prepared either way.
Great My Trump.
Q.
Thank you at the time I'm showing no further questions I would like to turn the call back over to Rob Lynch for any closing remarks.
Well, thanks to everybody for joining us today and for your great questions. This morning.
We really hope that you are as excited about the future Papa John's as we are obviously the comp sales growth has been an ongoing story.
But I think the.
The really big news here today, the development growth the.
The development of franchise HIV willingness to invest capital into the system is 1 of the biggest indications of the health of that system of it we've been promising at for quite some time and and we feel like we are on the on the cusp of of the liberation of really outpace the development growth. So we're really excited.
We hope you're excited as we are I hope and wish at all of you stay safe and wish you all well look forward to talking to you again soon thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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