Q1 2022 Papa John's International Inc Earnings Call
Hello, Thank you for standing by and welcome to Papa John's first quarter 2022 conference call.
Time, all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today.
Chris Collins, Vice President of Treasury and tax taxes. Please go ahead.
Yeah.
Thank you good morning, joining me on the call today are president and CEO , Rob Lynch and CFO Ann Gugino, Robin 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 these statements forward looking statements should be considering in junction 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 website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask that any members of the media be in listen only mode now I'd like to turn the call over to Rob Lynch for his comments Rob.
Thank you, Chris and welcome everyone to our first quarter 2022 earnings call.
I'm proud to say that Papa Johns delivered another quarter of outstanding results in Q1 in spite of an unpredictable operating environment that went from one unprecedented global challenge to the next.
The Papa John's system continued to grow lapping last year's record Q1 sales and outperforming the pizza industry for a 10th consecutive quarter.
I continue to be amazed by our team members and franchisees dedication and hard work serving great pizza at our millions of customers worldwide I'm grateful for their commitment to building this brand and creating the best Pizza company in the World.
For me our Q1 results are a testament to the power of incredible execution, winning innovation a values based culture and our differentiated brand.
Together these strengths continue to fuel Papa John's impressive sustainable growth trajectory.
Morning, I'd like to discuss three key topics.
First our Q1 results and the extraordinary business environment that we are navigating.
Papa John's differentiated strategy and how we're leaning into it to drive sustained outperformance in a constantly changing environment.
And third our outlook for the remainder of the year and beyond based on current macro trends and continued execution of our strategic plan.
And will then provide further color on our financial results and outlook, especially on margins and the bottom line.
Beginning with our strong Q1 results.
Q1 started with great momentum coming off a record fiscal 2021, when we were already navigating a continued tight labor market and accelerating commodity inflation in the back half.
In January of this year omicron exacerbated labor shortages across the economy and our restaurants were at their lowest staffing levels since the beginning of the pandemic.
Then in February as Omicron decline in staffing levels began to recover to end of year levels. The conflict in Ukraine shocked the global system, triggering an acceleration in commodities and fuel inflation.
By March businesses across the industry and globe, including Papa John's based yet another new normal.
Despite these challenges and as we've done since before the pandemic Papa John's continued to consistently grow and outperform last quarter against the challenging backdrop.
In Q1, we delivered solid growth building on our record first quarter last year, when we introduced our biggest innovation ever and epic stuffed crust and also benefited from government stimulus programs.
Global system wide sales rose five 3% in constant currency to $1 3 billion.
On top of 26, 6% gains a year ago.
Comparable sales were up one 9% in North America, and up <unk>, 8% internationally lapping prior year gains of 26, 2% and 23, 2% respectively.
We achieved these results despite the challenging staffing environments in our restaurants I'll elaborate on this and other key drivers in a moment.
Our development program a critical part of our growth engine also continued its momentum fueled by the brand's strong of UBS and unit economics.
Last quarter, we opened 62 net units worldwide.
Accelerating unit growth over the past year contributed approximately half of our system wide sales game.
I'm also proud that thanks to our strategic pricing actions and agile supply chain and disciplined financial management, we're able to grow EPS and sequentially improve operating margins in line with the view that we shared in February .
For yet another quarter, we demonstrated how Papa John's team members and franchisees executing our differentiated strategy are driving sustainable growth and delivering great value for our customers franchisees and shareholders in a constantly changing world.
Now I'd like to speak to key components of our growth strategy and how we're addressing the opportunities and challenges in the current environment.
Our multifaceted menu innovation strategy continues to be the cornerstone of our brands differentiated premium position and a key driver of last quarter's continued comp sales gains against the backdrop of last year's record sales.
New York style Cross was our big product launch in Q1, and it exceeded our expectations. It is proven to be popular and incremental both in terms of transactions and ticket as it appeals to a distinct segment of pizza lovers, who appreciate largest slices in a thinner stretched cross.
We also saw continued strength from epic stuffed crust for a fifth consecutive quarter, despite not being a national promotion.
This demonstrates how our strategy of building new menu platforms creates sustainable incremental sales layers in our business.
Two weeks ago, we launched epic pepperoni stuffed crust and exciting L. T O, which we expect to be a Big addition to our epic platform over the summer peppers.
Pepperoni is our most popular topic and as the name says epic pepperoni stuffed crust hand, stuffs pepperoni and cheese into our fresh never frozen original cross the results to date are extremely promising, especially with our loyalty members.
For the remainder of the year, we have a number of other significant L. T O and long term platform launches lined up as we leverage menu innovation to engage and create value for our customers driving both long term ticket and transaction growth.
Digital innovation is another lever, we're pulling to drive sustainable comp sales. This year, we have leaned into our loyalty program Papa rewards and are investing significantly in our personal lives targeting capabilities to drive frequency and lifetime value with our loyal customers. We continue to actively expand the program we promoted X.
Lucius members only access to epic pepperoni stuffed crust before its launch successfully adding nearly 150000 new members during the one week early access period.
As of last week, we have over 24, and a half million Papa rewards members.
Also on the digital side, our deep aggregator partnerships and integrations continue to drive incremental and profitable transactions. As we have previously discussed aggregators provide another channel to meet our customers where they are not to mention additional delivery capacity at peak times aggregator marketplaces have also become important venues.
For consumers to discover brands, we continue to be bullish on these growing partnerships as we execute on additional opportunities to reach new customer segments.
Papa John's premium brand positioning has been critical to the brand's outperformance over the past two and a half years as we've been nimble and adapted our strategy to a constantly changing environment.
It's no less important today as we adjust to a new more inflationary uncertain environment with rising costs and consumers increasingly seeking out value.
As consumer sentiment continues to soften I'd point out that pizza offers tremendous value relative to other Q S ours.
Casual dining casual dining concepts.
For this reason the segment has been historically resilient through past economic cycles.
Because we invest in better fresh ingredients toppings, and Doe consumers recognize the superior value of Papa John's Pizza already at Papa John's you can feed a family of four a delicious premium meal with a pizza N aside for under $7 per person.
Papa rewards is also a very important tool we are using to target more price sensitive customers with high value promotions at.
At the same time, we will continue our successful strategy of letting our customers, especially those who are less price sensitive to self select into our premium priced innovation.
All of that being said with its unprecedented inflation, we've begun to take some pricing.
This is helped offset higher food labor and fuel costs, and our supply chain and restaurants.
As I've said before unlike most of the U S. Our industry, where ticket growth over the past couple of years is largely largely come from pricing Papa John's ticket growth is predominantly come through new premium products and add them.
This has afforded us more room to strategically raise prices in this inflationary environment.
Furthermore, Papa John's has unique pricing flexibility given our value proposition is focused on delivering premium value not hitting specific low price points.
Last quarter, we were able to successfully raise prices by approximately 7% on average in our corporate stores to offset inflation of our food basket.
This contributed to higher ticket as did the continued mix benefits of premium innovation like New York style crust well.
While higher pricing marginally impacted transactions last quarter, we will continue to pursue a balanced approach weighing short term margin optimization against the retention of the significant customer base and momentum that we have built over the past two years, which is key to our brands long term success.
Overall I feel we're in good spot today, and well positioned to sustainably grow ticket and transactions through innovation, while using our pricing power to manage margins over the long term.
Now I'd like to comment on staffing and operations.
Of course, we could never have achieved last quarter's solid results without the tremendous hard work and commitment of our team members and franchisees.
That said staffing is always a challenge in our industry and continues to be so.
In addition to our integrations with the aggregator marketplaces are nationwide integrations with delivery as a service providers have been a key tool, allowing us to continue to serve our customers during peak times.
Though these delivery as a service transactions are slightly lower margin versus our using our own drivers. They are incremental profitable orders that otherwise may have gone unfulfilled.
Papa call, our centralized order, taking and customer service Center is another example of our long term investment to make our team members productive and help them focus on making and delivering great Pizza. We will continue to invest capital in technology innovations that can make our teams more productive.
Looking ahead, we remain focused on continuing to hire great employees, and reducing turnover by providing competitive compensation, a great working environment and benefits and compelling career paths.
Our goal is to be the employer of choice in our industry and we've taken many actions to create a strong culture and support our people.
Earlier. This week released our 2021 corporate responsibility report outlining our progress against our priorities to create a positive impact on people pizza and the planet It sets us up for long term success.
I'm proud to say that this year Papa Johns was the first major publicly traded pizza chain to announce that our executive compensation plan now includes ESG metrics.
We also continue to add experienced talent to our team. We're excited to have Joe C V join our team this week as our new Chief restaurant Officer.
Joe brings deep experience in the pizza industry as an operator himself and his senior brand executive as well as the Q S. Our development leader.
We're looking forward to accelerating the great progress, we're already making with staffing and operational excellence in our corporate and franchise restaurants with Joe's leadership.
Now turning to Papa John's strong development results and accelerating unit growth.
We are very pleased with the 62 net new units, we opened in the first quarter when development is seasonally added slowest.
Last quarter, we also announced the strategic Refranchising of our 51% stake in Star pop at 90 restaurant joint venture in Texas to Sun Holdings.
This was a follow on to the historic development deal, we signed with Sun Holdings last summer for them to open 100, new restaurants across high growth markets, primarily in Texas.
Refranchising is a very attractive strategic option for us it allows us to attract well capitalized sophisticated operators and offer them a significant operational scale they need to quickly accelerate their growth in the Papa John's system.
This refranchising deal with Sun Holdings is a perfect. Perfect example of this strategy.
I'd now like to spend a moment discussing our international business, where Papa John's has its biggest long term white space and growth potential.
I'm very excited that our Chief development Officer, Amanda Clark is expanding her role to now also lead our international operations as Chief International Development Officer.
Working with Liz Williams, who has been promoted to Chief International Operations Officer, Amanda will enhance the integration between our North American and international businesses, which will be critical as we look to accelerate growth and create efficiencies globally.
I also want to thank Jack's Waveland, our chief operating officer of International who is retiring after 16 years.
Papa John's would absolutely not be the global brand, we are today without jacks energy dedication and hard work.
I'd like to wrap up with a few comments on Papa John's outlook for the remainder of 2022 and a long term.
As I have discussed this morning, while the global operating environment and economy is currently volatile and challenging for many industries.
I'm as confident as ever that Papa John's is well positioned to sustain our industry outperformance in the short term and continue moving forward to realize our full growth potential and goals for the long term.
In the short term given strategic pricing actions to offset higher commodity costs and continued innovation to engage and deliver value to our customers. We expect North America comparable sales to be slightly positive in Q2 and to continue to be positive in the second half of 2022.
For the full year, our outlook is for positive comp sales on top of a record 2021.
There's a sign of our confidence in the resilience of our strategy and our ability to execute that this outlook is consistent with the view that we laid out last November under very different macroeconomic circumstances.
Our strong unit growth results for Q1 give us even more confidence in our accelerating development outlook.
As a result, we are raising our outlook for unit growth in 2022 to 280 to 320 net units from 260 to 300 previously.
This is a 7% increase at the midpoint.
Even more significant we're also excited to provide a new multi year development goal based on the strong pipeline of current deals as well as new markets, where we are actively in discussions our goal is to grow global net new units by 6% to 8% annually for fiscal 'twenty twenty-three through 2025, continuing the ax.
[noise] celebration, we saw in 2021 and expect in 2022.
Combined with our raised 20 twenty-two outlook equates to a goal of 1400 to 1800 net new Papa John's restaurants worldwide by the end of 2025.
And this is just the beginning.
Beyond this goal fast development white space still remains for us.
I'll now turn the call over to Ann to discuss our financial results as well as provide some more color on our outlook and.
Thanks, Rob and good morning, everyone. Papa John's began 20 twenty-two solidly while navigating significant headwinds we continued our outperformance and grew on top of last year's record first quarter.
In addition to sustaining our top line growth and the brand's strong momentum. We've also taken decisive steps to protect our margins and earnings in the face of increasing inflation as I'll discuss in more detail. This morning.
Beginning with our P&L for the quarter system wide sales were up five 3% excluding FX <unk>.
Accelerating net unit growth contributed approximately half of our system global growth. In addition to solid sustained comp sales.
In North America comp sales were up two 8% cross franchise restaurants, and down one 2% and company owned restaurants.
The difference largely reflects localized differences in the economy and labor market exacerbated during the omicron weighed in January .
In markets with both franchised and company owned stores, we saw similar performance.
International comps were up <unk>, 8% this quarter, reflecting solid performance in Asia and Latin America. This was partially offset by softer results in Europe related to regional short term supply chain and inflation headwinds.
The impact was strongest in the U K, which is our largest international market and where we also own and operate the commentary.
Consolidated revenue rose, 6% to $542 7 million driven by positive comp sales and unit growth as well as higher commentary revenue tied to higher commodity costs.
Turning to margins Q1, 2022 operating income on a GAAP basis was $14 4 million net of $30 8 million in pretax special items. These included.
First a one time noncash charge of $8 4 million associated with the strategic Refranchising of our interest in the Star Papa J D to Sun Holdings.
Second is $17 4 million in one time noncash impairment expenses related to the conflict in Ukraine and subsequent international sanctions.
And third a five.
5 million charge for a legal settlement.
These results compared to GAAP operating income of $46 9 million a year ago, which included $3 9 million of special items related to the company's strategic reorganization.
Excluding these items adjusted operating income for the quarter was $45 2 million compared to 57 a year ago.
Q1, adjusted operating margins were up sequentially from Q4 to eight 3%, but below our record nine 9% margins a year ago.
I am proud that these results are in line with the outlook, we provided in February and a less challenging commodity environment before the uptick in inflation we saw in March.
The year over year change in margins was driven primarily by the domestic company owned restaurants segment, which were impacted by a 15% increase in food basket costs year over year.
Labor costs, including those associated with increased third party delivery usage are also up in the corner.
Together. These factors represented approximately 600 basis points of headwind for segment margins year over year.
On a consolidated basis. These factors were an approximate 200 basis point drag on Q1 corporate operating margins.
Strategic pricing actions successfully mitigated the impact of inflation on a per transaction level, but we also saw reduced fixed cost coverage given the modest decline in transactions.
I want to reiterate Rob's point made earlier.
When it comes to pricing we are committed to taking a balanced approach we will surgically use pricing to manage the short term margin impact of higher commodity costs, while being mindful of retaining the strong customer base and momentum we built over the past two years.
[noise] commentary revenues rose, 13% in Q1, driven by higher commodity and labor costs. As a reminder, our commentary arrangement with North American franchisees generally speaking passes through.
Food fuel and labor cost on a cost plus fixed percentage margin basis.
This means that rising commodity costs are slightly accretive to commissary operating income, but dilutive to consolidated operating margin.
This quarter this factor negatively impacted consolidated adjusted operating margins by approximately 35 basis points.
Continuing to earnings for the quarter on a GAAP basis earnings per diluted share were 29 cents versus 82 cents in the prior year period, including 66 cents and nine cents and special items this year versus last.
Excluding these special items in Q1 adjusted earnings per diluted share relative to 95 cents from 91 cents a year ago, primarily reflecting the positive impact of last year's investment to repurchase and convert the series B convertible preferred shares as well as the X.
The tax benefit from vesting of equity awards, partially offset by lower operating income and higher interest expense this quarter.
Now turning to cash flow and the balance sheet cash flow from operations was $25 4 million in Q1 compared to $63 2 million in the prior year period, reflecting unfavorable working capital changes, primarily due to timing of interest payments and franchise royalties.
As we announced last quarter, we continue to scale our investments in high return growth opportunities in line with our strong outlook capital expenditures were $10 2 million up from $7 1 million a year ago.
Reflecting lower timing related cash flow from operations as I, just discussed free cash flow for the quarter was $15 2 million compared to $52 7 million in 2021.
We ended the quarter with strong liquidity over $545 million in cash and borrowings available under our revolving credit facility and continue to have a conservative gross leverage ratio of 2.2 times.
We also continue to return significant cash to our shareholders, we repurchased $32 $7 million in shares with an additional $23 million repurchased after the quarter as of April 29th.
In total we have repurchased over a half a million shares since the beginning of the year. We also paid out $12 6 million in common dividends during the quarter.
I'm so proud of our team in a constantly changing environment Papa John's continues to deliver solid operational and financial results.
Now to expand on Rob's comments about our outlook.
Coming off positive topline performance in Q1 against record prior year comps, we continue to have a positive outlook for the remainder of 2022 as Rob outlined.
With the launch of epic Pepperoni stuffed crust modest price increases and a continued focus on delivering innovation and value to our customers. We expect Q2, North America comp sales to be slightly positive.
And continue to be positive in the second half of the year.
As for International we expect Q2 comp sales to reflect continued softness in the U K related to the regional headwinds we saw accelerate in March which are expected to impact the full quarter.
Our current outlook for the food basket is for cost to be modestly higher in Q2, reflecting the full impact of march's acceleration of inflation and rise to 12% to 14% for the full year based on this outlook, we expect adjusted operating margins in Q2 to decline sequentially.
In line with higher anticipated food cost for the corner and recover sequentially in the second half of the year.
For the full year, we currently expect operating margins in line with Q1.
We continue to target fiscal 2022, capex of between 75 and $85 million as we invest in technology innovation and the development of New company stores.
Full year net interest expense is expected to be between 23, and 25 million based on a moderately higher borrowings to invest in growth and return cash to shareholders as we laid out last quarter.
We expect the tax rate for the remaining quarters to range between 20, and 22% and for the full year to be between 18 and 20%.
To wrap up my comments I'd like to zoom out beyond short term headwinds and reiterate Papa John's long term opportunity, which is to drive steady earnings expansion by sustainably outperforming in an attractive global market that offer significant white space.
As we've discussed on this call and previous ones. We continue to demonstrate a Papa John's has built a model based on our differentiated positioning winning innovation and compelling value proposition for sustainable comp sales growth.
With strong au vs and a robust pipeline our development outlook has never been stronger as confirmed by our raised to 2020 to outlook for 280 to 320, net new units and our new multiyear outlook for 6% to 8% growth through 2025, Papa John's long term potential.
Very exciting I'll now turn the call back over to Rob for some final comments Rob.
Thanks Ann.
Since its founding Papa John's has been the better ingredients better Pizza company.
Two and a half years ago, we laid out our purpose values and strategic priorities, which have sparked an incredible transformation of our company.
Today in a very different world Papa John's differentiated positioning innovation culture and focused strategy are still the secret sauce, driving our outperformance and long term outlook.
As we've done for the past two and a half years, we will continue to carefully manage short term opportunities and challenges always with an eye toward the brand's long term potential.
Today, our system is healthy and strong and I'm more confident than ever about the future.
As always like to thank our shareholders and everyone on this call for their interest in our company and for their continued support.
With that I'll turn the call over to the operator for Q&A.
Uh huh.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question first of all Keith Please limit yourselves to one question. Our first question comes from Eric Gonzalez with Keybanc you may.
Proceed with your question.
Hey, Thanks for the question Robert I want to talk about labor availability for a second more than one of your competitors called out driver shortages and we're also hearing it from the rideshare companies in the third party delivery Aggregators.
Opinion has the issue gotten worse in the last several weeks clearly Papa Johns being the only large change really embraced the third party order fulfillment has had a competitive advantage and its ability to satisfy demand, but I'm wondering if given the third party channel is becoming a less reliable solution. If there arent enough gig workers to supplement the first party networks and maybe if you could touch on how that third party mix, whether it's <unk>.
Liberty as a service or the marketplace orders, how that mix has trended over time. Thanks.
Thanks for the question Eric.
I would tell you that our staffing in particular, our driver staffing has been a challenge for us for over.
Over a year now omicron in January exacerbated that challenge more so than we had ever experienced it but I would tell you right now we feel pretty good about staffing we feel like.
Our investments and productivity tools for all of our employees, both our inside employees as well as our drivers and our partnerships with the Aggregators both on the marketplace side as well as the driver of the service have afforded us what we need to meet the needs of our customers do we think that our comps could be even higher if we had more.
Staffing absolutely do we think that we're gonna be unable to deliver on what we have laid out here as a result of staffing no adult we we're confident in our ability to take care of our customers and I can tell you you know one of the things as we thought a lot about this as I've read the competitors.
No to the last week or so our model is a little different you know our premium positioning.
It is a different model than the folks who are talking about staffing such a challenge I mean their their staffing challenges or exacerbated because their model is low price more transactions, where premium price, we don't need quite as many transactions and therefore were less impacted by the staffing challenges that we're all seeing.
So I hope that gives you you know confidence in our ability to continue to staff, our restaurants and continue to meet the needs of our customers.
Thanks, that's a really good point thanks.
Thank you Eric.
Yeah.
Thank you. Our next question comes from Brian Bittner with Oppenheimer. You May proceed with your question.
Thanks, Good morning, congratulations on impressive results and an outlook and this obviously difficult operating environment.
And I wanted to go back to your comments your margin commentary suggested for the full year is still pretty strong margins given the inflation, but maybe 50 basis points lower than what your previous outlook was if you could just maybe confirm that more importantly, the question is do.
Do you still believe despite the inflation that you have the tools to drive the EPS growth of the company in this kind of mid to high single digit range that you that you laid out last quarter.
Sure.
So you're getting the numbers right.
You could recap them for me.
So certainly you know, we're very pleased with our margin performance in the quarter.
And the fact that we were able to deliver those results in line with the outlook. We provided in February before you know the increase in the commodity environment that we saw in March.
So you are getting you know kind of the numbers right in terms of the pressure that we're seeing so looking for where that incremental headwind. We are calling the margins down slightly versus prior year. So that 50 basis points is in the right neighborhood in terms of EPS growth. You know, we do have the step up in interest expense.
Because of the refinancing, which you know gives us great optionality and flexibility in it.
At a great rate, particularly as we look out at the interest rate environment, but because of the unwinding of the swaps there was a little bit more interest rate pressure in the current year. So I do think for the full year, our EPS will be down slightly versus prior year.
Okay. Thank you for the color.
Thank you. Our next question comes from Chris <unk> with Stifel. You May proceed with your question.
Thanks.
Rob it's encouraging to hear that you expect second quarter comps to be slightly positive. We've heard many peers talk about a weak start to the second quarter. So I was just wondering if your guidance assumes comps will improve through the second quarter or is the system kind of running at this level today.
So what I would what I would tell you is that April was a challenging month.
Month in terms of you know the business environment in general both on the cost side and the cost side, but I highlighted in the in the you know in our in our notes that the launch of epic Pepperoni stuffed crust has gone extremely well and it gives us a ton of confidence.
And our ability to guide to positive comps in Q2.
Great and then.
Several competitors haven't been utilizing the three key drivers is the service as kind of a relief valve I guess when they're struggling to meet demand how much has that helped.
Papa John's keep up with demand this quarter.
It has helped a lot and it has helped significantly you know January .
January was the most difficult operating environment I've ever I've seen since I've been in this industry.
You know we had.
For the first time, we had multiple members.
Members in almost every restaurant out at the same time, which created a real challenge for us to be able to meet the demand that was on the business. If you recall I mean, that's when we launched New York style, we had a lot of demand and it was really challenging and so we leaned heavily into our partnership with door dash.
Dash, particularly on the delivery of the service side and it was it you know it it saved us and so you know as a team.
We look back on the decision you know three years ago to make the investment in wholly integrating with you know door dash and the delivery as a service capability as one of a very pivotal.
Decisions that we've made as a team it is absolutely well with no one expected or foresaw the staffing challenges that we have we're going to have over the next three years that decision has definitely helped us to outperform.
Yeah.
Great. Thanks.
Thank you.
Thank you. Our next question comes from Peter salary with P.
<unk> you May proceed with your question.
Great. Thanks, and I appreciate all the color on the call Rob.
Rob you guys picked up a little bit.
You know development guidance for this year and stated for 23% to $25, 6% to 8% can you give us a little bit of a sense on how that breaks out, especially.
Especially in the out years in terms of development between domestic and international development.
Yeah, I mean I P M.
This year, you know, where we're targeting our mid point is right at 300.
And about two thirds of that a little more than two thirds of that are going to be international and we don't see that ratio changing dramatically in the out years.
International obviously is where most of the white spaces, but we are building momentum domestically as well. So you know the growth rates on both of those businesses will be you know comparable but the absolute number of.
Domestic units opening is always going to be in that call. It 25% to 35% of the total is kind of what we're projecting.
Yeah.
Great and then I think you guys mentioned Papa call can you give us an update on where you stand with Papa call how many stores.
And the benefit that you may have seen from that call center in the quarter.
Yeah. So all of our company restaurants are on Papa call and as a domestic system a little more than half of our total restaurants are on Papa call.
And you know, we anticipate that number continuing to go up as highlighted on this call and the competitors called blast over the last week staffing you know continues to be a challenge and as we continue to invest in tools to increase productivity in our restaurants.
And as you know labor becomes more expensive those tools become more valuable. So I you know our goal is for our entire system to be on Papa call. You know at some point. So you know it's it's it's definitely a tool that's helping our restaurants operate at a higher level of productivity.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Lauren Silberman with <unk>.
Credit Suisse. You May proceed with your question.
Thank you very much I wanted to ask about price I think he said he took 7% and corporate stores during the corner. When did you take the price and how does that compare to what franchisees are running and then I think you had mentioned the price increase marginally impact the transaction can you just sort of contextualize, how the elasticity to price compares to what you've seen historically.
Sure Lauren.
You know franchisees got out in front of price a little bit faster than we did that's.
And part explanation for why we saw some disparity in their comps in the back half of last year relative to our comps and even that even into Q1.
But at this point I think our price increases are pretty comparable to say at the same rate as where franchisees are we're seeing about the same rate of growth there.
And then the <unk>.
Second part of your question.
Can you remind me what the second part of your question, Yes sure.
Yeah exactly yeah.
Being a little bit of a change and they in the curves you know we we we've spent a lot of time recently over the last year building out our revenue management capability and so we have a ton of data as you know given our E. Commerce model. So we track every transaction and were able to really you know leverage all of that data.
To build a very high level analytical tool.
Revenue management capability to understand elasticity at the market level, even down to the store level and we are seeing that curve get a little bit we have seen that curve get a little bit steeper over you know in 2022 than it was in 2021, I think pretty consistent with the changes in consumer sentiment and some of the other.
Macroeconomic dynamics.
Thank you very much.
Got it.
Thank you. Our next question comes from Alex Slagle with Jefferies. You May proceed with your question.
Hey, good morning Congrats.
Just wanted to follow up and get your views on consumer sentiment and any potential changes you are seeing the lower income consumer habits. If you have ways to slice.
Slice and dice your consumer and transaction data that you have a lot of it and look at frequency and check dynamics and maybe you didnt.
Rebids and how much the trends have been impacted by stimulus in the past.
Yeah.
Alex I think I think the stimulus did have and obviously have an impact in Q1 last year, you know were up over 26% last year and Q1. So that you know a lot. Some of that obviously was our innovation when we launched epic stuff cross, but there was definitely some some tailwind there.
We look at this quarter and into Q2, though I will tell you both of our.
Oh, you know innovations that we've launched this year have been premium priced elevate innovations.
New York style was at $13 and epic Pepperoni is at $14. Those are both higher price points that our average price per pie in our business. So and we're seeing great pick up on those products. So we have not seen a transfer into you know that the value segment.
Many of our menu, we're still seeing strong.
Adoption of our premium priced innovation that being said, we are making a concerted effort primarily through our loyalty programs to deliver.
The liver targeted value propositions to what we have identified as our most value sensitive customers. So we do use that data to segment our customers based on their.
Price sensitivity and we are being pretty surgical in making sure that we're still giving incentives to the more price conscious customers to come back.
More often.
That's helpful. Thank you.
Got it.
Thank you. Our next question comes from Dennis Geiger with UBS. You May proceed with your question.
Great. Thank you wanted to ask Rob about the category, you're looking ahead, it sounds like you're pretty positive on the category.
Things stand today, and even if consumer spending rolls over just the value in the category. It seems like you kind of view that.
Favorably I'm curious if if any change in kind of how you see the category.
This year now versus a few months back or or six months back, let's say and I guess more importantly, as you think about category share gains you know given what we've seen from you folks over the last several years, but given the new product.
Lineup.
Pipeline that you have the third party aggregator working in all the work you've done with the brand. How you think about category gains from here can we continue to see gains given the multi year gains that we've already seen from a share perspective, just curious if you could kind of provide some context around that thank you.
Great question status you know.
I don't know if we have here at Papa John's or just like perennial optimist or what but you know theres a lot of Doom and gloom out there right now obviously, there's a lot of.
Changes happening both in the economy as well as the geopolitical environment, but we are bullish we feel great about the model that we've built over the last couple of years.
We feel like there's a lot of demand out there for our products and for the category.
And so you know we're continuing to invest we have invested more capital over the last six months than we've invested you know ever before we're continuing to double down on our innovation as I highlighted in the call you know, we've got more big products coming throughout.
Throughout the balance of the year. So we do see a lot of upside left in this category and and you know obviously, we're not naive the inflation area environment that we're all dealing with definitely challenges the bottom line, but.
But we just lapped a 26 two with you know positively and in one of the most challenging operating environments that we've ever operated in so we are bullish on the category in terms of share you know we've taken some share over the last 10 quarters with 10 straight quarters of outperformance, we don't we don't see any real.
Reason why that's not going to continue we have a lot of respect for our competitors, but we do feel like we've built a model that differentiates us and is going to afford us more flexibility as we go into some of these you know more cyclical economic situations.
To take pricing as well as to continue to innovate.
And and and take more share. So that's how we're that's how we're thinking about it and then lastly, I would tell you Dennis.
Our unit growth is accelerating and so part of the share in this category, obviously driven by comp sales, but just as much of the share is driven by development and we are accelerating both our domestic development as well as our international development. So we we think there's a lot of share for us to garner.
That's great. Thanks, Rob and if I could ask just a quick follow up just on the operations and staffing drivers you spoke to it quite a bit already but just as far as anything specific from from here.
You know that.
You folks feel maybe you need to do.
Are you going to put in a place where you don't have to sort of turn the.
The model or kind of how you look at hiring as a system upside down or are there bigger changes needed from a staffing driver perspective would be that wages total compensation or otherwise to to address the challenge. If you have any thoughts there. Thank you very much.
Welcome.
We are.
We're in a better place today than we were last month.
And a much better place than we were four months ago from a staffing standpoint that being said were.
Not in an ideal place. So we're not we're not necessarily turning everything upside down, but what I will tell you is we're investing in technology, both to help recruit and retain employees primarily drivers we've invested a lot in applications that are going to help our drivers.
Become more efficient and make more money as a result of that efficiency. So more to come on that as we get further down the path, but our plan is to leverage technology to help our drivers make more money, which will then increase the rate at which we can retain them.
Thank you.
Thank you. Our next question comes from Brian Mullan.
With Deutsche Bank.
Proceed with your question.
Thank you.
Rob I'd be curious to get your thoughts on how other large pizza competitors, you know potentially partnering in.
In a bigger way with younger readers could impact your business going forward if at all.
Specifically just curious around competition for your brand placement in those marketplaces and if there would be anything you could do in response and you know I don't mean to insinuate.
And any way that you know the stealing sorts of your success you know to the country youre firing on all cylinders clearly, but just curious to hear your thoughts because these are large.
Competitors it seems like a dynamic situation that could be changing.
No. That's a great question, Brian that we think about on a regular basis you know Papa Johns was the first brand to launch online ordering over 20 years ago and now everybody. Obviously has online ordering I mean, we we pride ourselves and the decisions we've made to move in the direction. We moved in I think it's.
You know a big part of why we have gotten.
Yeah why are we have delivered outperformance.
I I I never understood why some of these brands we're doing what we were doing you know if they make that decision to change their strategy. You know, we just got to stay focused on staying out in front, we've got a three year head start we've.
And a lot about how to work most effectively and productively with these aggregators you know it's not a perfect relationship. There's a lot you know there was some some bumps along the way that we had to work collaboratively with them to iron out to get to an operating model of the customer service level that you know allows us to continue to leverage it.
The scale that we do so I think we've got a head start I think we've got a great partnership with all of the Aggregators and we need to continue to invest in those partnerships to stay out in front of the competition.
Thank you.
Yeah.
Thank you and as a reminder to ask a question you will need to press star one on your telephone.
Please limit yourself to one question. Our next question comes from Brett Levy with MK Partners. You May proceed with your question.
Yeah.
Your line is now open.
It would help if I didn't hit mute.
[laughter].
Just a couple of little tick.
The strategic one would you be willing to share any color in terms of what percentage of your transactions are coming from your partnership with the Aggregators.
And non Papa John's drivers.
In addition to that could you share any color on any.
Any more incrementally on from a health of the consumer basis, what youre seeing in terms of kickoff and kicked up tick up a tick down in check add ons just numbers of items per transaction and then just with respect to your technology.
What kind of Incrementals should we expect over the rest of 'twenty, two and into 'twenty, three and what kind of productivity enhancements do you think you can generate.
So Bret I'm. Unfortunately, we feel like there's a disclosure of some of those data points would be revealing some of our business to our competitors. So we're not disclosing what percentage of our business are aggregators or how the composition of our of our check in.
And transactions are in detail. So I apologize that we're not going to share that but I will tell you is that you know looking forward, we need to find the right balance of pricing and productivity to get us through these are these challenging hyper inflationary times and.
Where we're investing in technology to drive both of those frankly are revenue management capability continues to get better to get smarter, allowing us to be more surgical with our pricing decisions.
We're working to not just at the macro level, but to build out the capabilities such that we can help our franchisees with their pricing decisions and not just at the you know DMA or a regional level, but at the store level. So we're going to get better and better at pricing, we haven't taken a lot of pricing over the last few years or so.
We're kind of sharpening that that that skill set as we speak and we think theres a lot of value to be had there and then on the productivity side as I as I just mentioned, we're investing in technology to help our drivers being more efficient and more productive not necessarily from like a labor savings standpoint.
But from a the more deliveries the more productive they are the more efficient they are the more deliveries. They can make the more time they spend on the road the more money. They make so we are investing a significant amount of capital into technology solutions that are going to help us to retain more drivers by allowing them to make more money. So that's that.
That's our strategy.
Thanks, I had to try on the granular question.
No I respect that I really do it's a these are you know its interesting times the business model for.
For US has continued to evolve over the last three years and I I've just blown away by our team's capability to continue to adjust on the fly to you know to meet the challenges that we face or take advantage of the opportunities and so.
You know, where we're at where we're going to continue to be flexible who knows what's right around the corner. These days and and you know I think we've proven our team's proven that they can persevere.
Persevere through these challenging times.
Yeah.
Thank you and our next question comes from Nick Sutton with Wedbush Securities. You May proceed with your question.
Thank you I just wanted to revisit some of the Internet commentary.
Thank you said you expect some softness to continue is there any way to quantify that in terms of comp like you did with North America.
And then.
Just you know when you when you kind of thinking about the acceleration in unit growth from the international side.
Where what markets acceleration coming from and where do you continue to see strength.
Yeah, our international businesses continues to become a bigger part of our holistic business you know as.
And as we continue to build.
You know 304 hundred plus restaurants internationally per year that's.
That's going to mean that we have to have.
Solid foundation for for that part of our growth strategy.
So right now we've got it is it.
It's 50 different markets all of them have different dynamics going on but what I will what I will call out is we have some really strong markets right now Latin America, the middle East.
<unk> are great markets for us our biggest market internationally as he is the U K are.
The U K is coming off a plus 40 last year.
And so we're seeing some some real challenges there with some of the changes there and I think their economy.
As you know is being challenged right now by some of the same things that obviously the U S is and we.
We one of the reasons for us to make the changes that we made in the international team. Obviously, you know Jack retiring kind of triggered it but we feel like we've got a lot of tools here in the U S that could really benefit the U K and the rest of our international markets and we probably and I take accountability for this we probably haven't been as.
Good about sharing.
Sharing those those tools across the globe and so the change that we announced this week with with a mandate taking over is really all about creating more collaboration between our U S business, which you know we've developed a lot of productivity capabilities and our international businesses. So we can.
The effect of the types of things that we're doing here in the U S and bring those to the rest of the globe. So I do see a lot of strength in our international markets, they're really kind of at that comp is depressed by one market, which is the U K and we're very focused on the challenges that were.
Pacing, there and rectifying that situation here in the near future.
Yeah, I think the only color.
Quantitatively, while we do feel like Q2.
We called out some pressure in my comments for the full year, we do expect to be slightly positive similar to the U S.
For the year and comp sales and then you add that with the unit growth like Rob talked about in our international business will have system wide sales growth.
High single digit low double digits.
Got it thank you very much.
Thank you. Our next question comes from Andrew <unk> with BMO. You May proceed with your question.
Thanks for taking the question I wanted to dig in a little bit on the.
Expectation for the margin recovery in the back half of the year relative to the second quarter and maybe some of that has to do with what you just touched on internationally, but I'm just interested the drivers there is that.
Food inflation cadence U K recoveries or something on pricing.
Or something else and just how much visibility or confidence do you have in that outlook and the margin trajectory. Thanks.
Sure. So I'll start by saying when you talk about the level of confidence you know a lot can change in 90 days.
So you know given where we are today and the outlook based on you know the intelligence that we have it's a little bit of all three things that you mentioned, so we do expect.
Called out 15% food cost inflation in Q1, but 12% to 14% for the full year. So we are expecting some relief in the back half of the year, particularly in cheese and so there is some relief in food cost I think the other thing that Rob talked about in his script is just our continued excitement about menu.
<unk>.
And so we expect that to continue to drive.
The comp sales so I would point to those are kind of two drivers as well as the international commentary that we just had as kind of the main reasons that we're optimistic about margin improvement sequentially in the second half of the year and potentially a little bit of pricing.
You know we as I mentioned, we can we feel really good about our ability to take the right amount of price without significantly impacting transactions. So those three things.
Yeah.
Great. Thank you very much.
Thank you.
Thank you. Our next question comes from Todd Brooks with the Benchmark Company. You May proceed with your question.
Hey, good morning, Thanks for the questions. One following up on Lauren's question did you answer the question on the timing of when you took the 7% price increase in the quarter.
So we we began taking pricing really in Q4 of last year as we started seeing the.
Inflationary pressure, we accelerated that and in the in Q1 and it really has been most of that came in the first six weeks of Q1.
So you know and we haven't really taken a lot of pricing here in the last you know.
12 weeks as we've kind of.
<unk> continued to see that business pick up and and and see the impact of the pricing flow through the P&L.
That's helpful. Thanks, and then.
Rob you talked about just some signs of elasticity I'm just wondering how it's manifesting itself as it.
Is it in attach so things like pop a deal, which really works well as an attachment to an order do you see those dropping out of orders is the signs of elasticity or is it more purely on kind of frequency of order.
Yeah, It's it's it's just transactions our order or items.
Items per order and our you know ticket have all been very strong. So it really is just some transaction softness.
And it's it's a you know in that frequency line. We don't we haven't as we called out we've actually increased our loyalty program pretty dramatically already this year. So it's not like we're losing are our most valuable customers. It just has been a little bit of frequency driving some transaction softness.
And then finally, you've talked about personalized offers through the loyalty program as a way to maybe reactivate more value.
Oriented customer.
Can you talk to early success, I mean, you've talked about identifying elasticity.
Is that a tool working or do you pick the frequency up fairly quickly just trying to point to how effective personalization and these offers are to reactivate somebody that's more value centric.
Yeah, I mean, we you got to where we are we've been very happy with the response to the loyalty program offers that we put out there as I mentioned, it's kind of a holistic strategy, it's not just sending.
Coupons, although you know those offers are part of it it really is about engaging them and make making sure that they continue to think of Papa John's when they think about ordering pizza and so as we mentioned we picked up a 150000 new customers just from offering.
Pepperoni exclusively to our loyalty members so things like that are really helping to bring in new loyalty members and then we leverage their their purchase data and it takes a little bit of time.
You know to get to get a real good sense of what they're going to purchase it doesn't happen right out of gate you know purchase cycles like once every few months. So as we continue to bring in those customers and learn what their behaviors are in their purchase habits are we'll continue to refine that model in and get better at it.
Okay, great. Thanks.
Thank you. Our next question comes from James Sanderson with Northcoast Research you May proceed with your question.
Hey, Thanks for the question just wanted to follow up a little bit on the commentary about driving steady earnings long term wanted to talk a little bit about how you see G&A your overhead spending if that line item is going to be managed to really lag revenue growth or if you're really foresee having to step up that investment to support the <unk>.
Acceleration in unit growth if that.
And I'm just going to slowly.
To the margin expansion going forward. Thanks.
Yeah, we absolutely believe it will be a contributor to the margin expansion going forward. So you know one of the things that we've been doing over the last couple of years is really about investing in our development.
Capabilities investing in technology and.
In different areas for growth, but at the same time, it's driving the sales growth and so we are able to grow at slower than the top line.
And create leverage even in the current quarter. We did see if you take out the special items, our G&A was flat year over year, and we got about 10 basis points of improvement relative to system myself. So we are going to continue to challenge ourselves to find ways to be more efficient and productive and would expect that to be a driver for them.
Margin expansion in the future.
Okay, and just to just to follow up a little bit should we expect is that the basis point improvement should that continue to grow over time is that the right way to look at it.
Yeah.
Alright, thank you.
Thanks, Jim.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Rob Lynch for any further remarks.
Well, thanks, again to everyone for joining us and for your questions. This morning, we hope that you are as excited about the future of Papa John's as we are thanks.
Thanks to our terrific team members and our franchisees, we continued to deliver solid results and industry outperformance.
As excited as I am about 2022 I'm, even more excited about the long term potential that we're building for this company we.
We look forward to reporting back to you on our continued momentum and outlook. Thank you.
Thank you.
Today's conference call. Thank you for participating you may now disconnect.
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