Q2 2022 Papa John's International Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yes.
Good day and thank you for standing by welcome to the Papa Johns second quarter 2022 conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone please.
Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.
See roll you may begin.
Thank you good morning, and welcome to our second quarter earnings Conference call. This morning, we issued our 2022 second quarter earnings release.
Copy of the release can be obtained on our Investor Relations website at IR Dot Papa John's Dot com under the news releases tab or by contacting our Investor Relations Department at Investor Underscore relations at Papa John's Dotcom.
On the call. This morning are Rob Lynch, our president and CEO and Ann Gugino, our CFO .
Before we begin I need to remind you that comments made during this call will include forward looking statements within the meaning of the federal Securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from these statements.
We're looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings.
In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call.
Lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow ups Rob.
Thank you Stacey.
Everyone and thanks for joining us.
Before we begin I'd like to welcome Stacy to our first Papa John's earnings call since joining the company in May.
Many of you have already met with her or will have the opportunity set as we ramp up our outreach and shareholder engagement over the coming year.
She has a very strong finance and IR background and we're excited to have her as a part of our team.
This morning, my remarks are going to focus on Papa John's topline sales growth, how we're navigating this dynamic environment and our continued development momentum.
I want to start off by saying I'm, So proud of our team members and franchisees.
Thanks to their hard work and dedication we delivered our 12 consecutive quarter of positive comparable sales in North America building on our significant gains over the past two years and.
And we delivered these results despite an increasingly difficult macro environment.
This proves the resiliency of our differentiated brands product innovation digital capabilities and winning culture.
In fact weekly per store average sales across every one of our markets are higher today than they were before the pandemic and our franchisees continue to grow and prosper.
That being said accelerating commodity and labor costs impacted unit economics margins and operating income in the second quarter.
With continued strategic price increases and a strong performance from our premium priced menu innovations, we were able to partially but not completely offset these higher costs.
As consumer sentiment continues to soften I'd like to reiterate a point I made before.
Pizza offers tremendous value relative to other <unk> fast casual or casual dining concepts.
For this reason the segment has been historically resilient through past economic cycles.
Because we invest in better ingredients consumers recognize the superior value already offered by Papa John's Pizza that can feed their family of delicious high quality meal very affordably.
As we have discussed in the past our loyalty program and one on one marketing capabilities offer more price sensitive customers compelling incentives to order our high quality pizza at great value.
At the same time, those customers, who are less price sensitive are targeted with opportunities to self select into our premium innovations bifurcate, our customer base and maximizing profitability for our restaurants.
We're navigating this dynamic environment with a balanced approach to optimize short term results, while investing for our future.
This positions us even better for long term growth and margin accretion when the commodity cycle reverts and cost eventually normalize, which we expect heading into 2023.
Our long term perspective, and optimism are also reflected in our franchisee development activities. We continue to open new stores and signed significant new development deals further validating in supporting the brands long term potential.
In the second quarter, we delivered positive sales growth on top of best in class growth over the last two years comparable sales in North America rose, 1% contributing positively to a three year stack of 34%.
Driving these positive comps where premium menu innovations technology integrations with third party Aggregators and our revenue management capabilities, which allowed us to strategically execute pricing actions, while maintaining demand.
Our brand's unique promise of better ingredients better pizza combined with our menu innovations and Papa rewards loyalty program enables us to provide strong value to each customer segment at the right price.
In the current environment, there's always temptation to chase transactions through aggressive discounting.
As we evolve our revenue management capabilities, we have instilled a disciplined approach to provide the right promotions to the supervalu oriented customer without risking the erosion of our brand our pricing integrity.
Since the beginning of the year menu prices on average at Papa John's have risen approximately 7% to 8% system wide.
From a menu innovation standpoint, our epic pepperoni stuffed crust pizza introduced in April has been a huge hit with customers.
Strengthening our stuffed crust menu platform, which is driving orders and some of the highest percentages of customers expressing an intent to repurchase that we've ever seen.
We're also excited about our innovation pipeline for the second half of the year as we balance the introduction of new innovations with bringing back fan favorites.
Additionally, our efforts over the past few years to build strong partnerships with each of the nationwide third party delivery Aggregators continues to be a strategic differentiator for us where.
We are dedicated to meeting our customers, where they are and these partnerships provide us with a new opportunity for consumers to discover our brand through an incremental sales channel and an ability to leverage their incremental delivery capabilities, particularly at peak times.
In our international business comps declined 8%.
Still delivered a three year stack of 19% these.
These results primarily reflect declines in the UK, our largest international market, which is experiencing some of the same challenges that we're facing here in the U S and some unique to the U K.
I've seen record high inflation, the lapping of government stimulus the VAT tax holiday and the lifting of Covid restrictions, which may have disrupted normal industry seasonality last year.
As we mentioned on our first quarter call, we have strong leadership overseeing our international business and the U K. This team is focused on differentiating the brand from our competitors growing our share in existing markets and efficiently scaling and new markets.
Excluding the UK, our other international markets remained healthy in the quarter lapping two strong years of positive comp growth.
In the UK, specifically and our international markets more generic generally we see enormous opportunities to apply the model. We have developed in the U S, including our revenue management capabilities product and technological innovation and third party delivery relationships.
To achieve significant gains in restaurant level profitability in the future, which will help fuel further development acceleration outside the U S.
After two years of double digit comp growth when our top priorities, we're keeping our employees and customers safe and meeting customer demand today, we're operating in a very different environment.
This is providing the impetus to focus our innovation mindset on our operations to improve customer service and delivery capabilities and efficiencies, which will grow long term restaurant profitability across the system.
To optimize labor, we're evolving our management tools and systems to improve execution.
Over the last few years, we've made significant operational changes we introduced centralized call centers partnered with third party Aggregators and improved efficiencies through equipment innovation with these and more improvements underway. We're currently working to build new labor optimization tools to increase restaurant profitability moving forward.
We're extremely excited about our new unit development growth story is there a significant market expansion opportunities in North America and internationally, we already have development agreements in place with nearly all of our top 25, North American franchisees versus only three in 2019, and we are actively pursuing new deals with highly <unk>.
Experienced well capitalized franchisees around the globe.
In the second quarter, we opened 47 net new units consistent with our expectations and plan to open between 280 and 320 net new units for the full year 2022.
We continue to sign new deals, which further reinforces our confidence in our multiyear development goal to grow global net units by 6% to 8% annually for fiscal 2023 through 2025, continuing the acceleration we have seen over the past year.
When franchisees opened up new Papa John's restaurants, or sign a new development deal Theyre, making a long term investment decision.
Q2 solid development activity and new deals are a strong indicator of our brands long term momentum in profitable growth potential.
Now I'd like to turn the call over to Ann to discuss our financial results in greater detail and.
Thanks, Rob and good morning, everyone as you read in our earnings release. This morning, we continue to deliver top line growth on top of significant gains over the past two years.
For the second quarter Global system wide sales were $1 2 billion up two 6% in constant currency.
Accelerating net unit growth, particularly in international markets contributed to system wide sales growth in the second quarter. In addition to our sustained positive North America comp sales.
As Rob just mentioned this growth is a great example of the strength of our brand and our franchisees excitement to invest in it.
Comp sales in North America were up one 4% across the franchise restaurants and down one 5% and company owned restaurants.
Like the first quarter the difference largely reflects localized differences in the economy.
End markets with both franchised and company owned restaurants, we saw similar performance in the quarter.
International comps were down 8% in the second quarter, reflecting the continued softness in the U K, Rob mentioned earlier.
Partially offsetting the UK performance were solid comps from our other international markets, including the Middle East and Latin America.
Consolidated revenue increased one 5% to $522 7 million in the second quarter, largely driven by commentary revenues tied to higher commodity costs.
Excluding the impact of our strategic Refranchising of a 90 restaurant joint venture in the first quarter total company revenues increased five 2% versus the prior year.
The year over year impact of this strategic Refranchising was most pronounced in revenue as revenues from the JV were no longer consolidated in restaurant sales revenue and instead recorded in royalties and commentary sales.
Its impact on adjusted operating income was less than $1 million and neutral to EPS consistent with our previous announcement.
Turning to margins adjusted consolidated operating income for the second quarter was $40 4 million compared with $48 million for the second quarter of 2021.
Adjusted operating margins were seven 7% down from nine 3% last year and down sequentially from eight 3% in the first quarter.
As we discussed on our last call we expected adjusted operating margins to decline sequentially due to the acceleration of inflation, we were seeing in our company owned restaurants.
Inflation was even greater than initially anticipated.
Food basket cost were up 18% in the quarter impacted by accelerating cheese costs labor costs also remained elevated in the quarter.
Together. These factors represented nearly 800 basis points of headwind for corporate restaurants segment margins year over year.
Strategic pricing actions reduced the impact of this record inflation, resulting in a 400 basis point decline in restaurant level margins year over year.
The cost headwinds we experienced in the corporate restaurants were also somewhat offset by a $7 $2 million decline in general and administrative expenses Commissary revenues Rose 17, 5% in the quarter driven by the continued acceleration of costs remember since our commentary arrangement with north.
Can franchisees passes through food labor and fuel cost on a cost plus fixed margin basis rising costs are slightly accretive to commissary operating income, but dilutive to consolidated operating margins.
Altogether. These factors were an approximate 160 basis point drag on second quarter adjusted corporate operating margins in line with the reduction we experienced in Q1.
Going forward, we expect commodity costs in particular cheese and wheat will remain elevated in the near term before beginning to moderate towards the end of the year.
Longer term, we expect to fully offset the impact of increased food and labor costs through strategic pricing actions and productivity initiatives.
However, as we saw in Q2. These cost pressures are immediate and strategic pricing must be executed carefully as to not significantly impact demand.
We will continue to take a surgical approach being mindful of retaining the strong customer base and positive momentum we've built over the past three years.
It's important to understand that the decisions, we are making focus on optimizing results in the near term while leaning into our differentiated strategy and securing our growing market share position for the long term. We are confident that when the current headwinds normalize we will be in an even better position for long term growth and margin accretion.
Continuing to earnings for the quarter on a GAAP basis diluted earnings per share were <unk> 70 cents versus a loss of $2.30 last year, including <unk> and $3.23 and special items respectively.
Recall included in the 2021 special items was a one time cost of $3 and 15th.
Related to the repurchase and conversion of the series B preferred stock.
Excluding these special items, the second quarter adjusted earnings per diluted share was <unk> 74 down from 93, a year ago, primarily reflecting margin compression in our corporate restaurants, and the lower international performance, which included approximately a penny and a half with headwind from year over year foreign.
Exchange rates.
Now turning to cash flow and the balance sheet for.
For the first six months of the year net cash provided by operating activities was $45 6 million after.
After deducting $30 7 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $14 8 million.
This was down from $100 1 million from the first six months of 2021, reflecting the impact of our overall business performance working capital changes and $9 million increase in capital expenditures.
We ended the second quarter with ample liquidity more than $500 million in cash and borrowings available under our revolving credit facility and have a conservative gross leverage ratio of two three times.
We also continue to return significant cash to our shareholders last quarter, we repurchased $42 8 million in shares with an additional $20 million repurchased after the quarter as of July 28 and <unk>.
Total we have repurchased more than 975000 shares since the beginning of the year. We also paid out $12 5 million in common dividends during the quarter.
In addition, based on our strong balance sheet and our positive outlook. Our board has declared a 20% increase in our 2022 third quarter dividend to <unk> 42 per share or $1 68 annualized.
Our capital structure provides us with substantial operating flexibility.
We will continue to take a disciplined and balanced balanced approach to managing our cash flows to maximize value for our shareholders through organic growth opportunities share repurchases and cash dividends.
Now to our outlook with new menu innovations the return of a fan favorite strategic pricing actions and targeted offerings for our most value conscious customers. We expect North America comp sales to continue their three year positive trend for the second half of the year.
As for international we expect softness in the UK to continue into the second half of 2022, and then improve into 2023, our strategic initiatives are executed.
Since the U K currently represents more than 20% of our international sales.
These headwinds will result in international comp sales being down for the full year, but up high single digits on a two year stack.
Regarding adjusted operating margins, we expect near term pressure to continue from lower U K contributions and while commodity costs remained elevated and wage inflation continues for us.
The full year, we now anticipate a decline in consolidated operating margins between 100 to 150 basis points when compared with 2021, we do expect to see margins improve heading into 2023 as operational productivity initiatives are executed and costs begin to normalize.
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 approximately $25 million.
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%.
I want to close by saying, how proud I am of our team and their ability to evolve and adapt to every possible scenario that has been thrown their way over the past few years.
We operate in an attractive global market that offer significant white space with strong <unk> and a robust development pipeline I'm confident our long term development opportunities and our ability to drive steady earnings expansion through sustainable comp sales growth will continue to deliver significant value for our franchisees are.
Team members and our investors.
I'm excited for the future of Papa John's and with that I'll turn the call back over to Rob for some final comments Bob.
Thanks, Dan.
As you've heard from US today, we continue to drive growth by executing on our strategy of being agile in the current environment and sensitive to the additional pressures our customers are facing.
We are a company with a proven brand loyal customers and solid underlying cash flows that can be used to support value enhancing initiatives and future.
Our system remains healthy and strong and I'm more excited than ever about the future.
With that I'll turn the call over to the operator for Q&A.
Certainly.
As a reminder to ask a question you will need to press star one on your telephone please limit yourself to one question. Please standby, while we compile the Q&A roster.
Yeah.
Hello, Matt.
And our first question will come from Chris <unk>.
Stifel. Your line is open.
Thank you good morning, guys.
Had a clarification on the outlook and then a question and did you say that you expect north American comps to remain positive for the balance of the year, where did you give more specificity specificity on that.
Yeah that was the guide was that we expected north American comp sales to be positive in the back half of the year.
Okay. Thank you and then Rob it appears the larger chains are starting to promote price point value and discounts for limited times.
I know you said that Papa John's is not going to lead with price point value and discounts, but as consumer spending slows can you elaborate how the company's marketing strategy could evolve and then how does the company determined the level of transaction declines it's willing to accept to avoid that discount type strategy.
Hi, Chris.
No.
We have said that we've been pretty consistent in the past that we're not going to promote national.
Deep discounts and I think we're pretty much the only pizza player that's delivering positive comps. So I think that theres something to being able to deliver a positive.
Positive comp sales and part of it and better transactions without having to go in and race to the bottom for the lowest price points that being said, we absolutely deliver value. We have you know we deliver value locally.
Discount in San Francisco's then it's different than a discount and Atlanta.
Ohio, So our co ops all have funds that they contribute into that they can use to manage their markets. The way they need to manage them dependent upon the price sensitivity of their customers in that region. So it's it's not actually accurate to say that we don't.
Have value platforms and promote value. We just don't do it at the national level and kind of peanut butter it across the country. The other way, we're really focused on delivering values through our loyalty program. I mean, we we have 25 million loyalty members at this point and we're able to surgically deliver incentives that motivate.
People in different ways to drive transactions. So we have a very robust value strategy. It's just not the same as everyone else going out and putting the lowest price point on national TV.
Excellent. Thank you.
And our next question.
Okay.
Will come from Eric Gonzales.
Your line is open.
Hey, Thanks, Good morning, I wanted to ask about the U K because it seems like the consumer might be deteriorating at a faster rate than the U S. So.
Just wondering what the strategic plan is for that market. I think you mentioned doing something in 2023, Orlando groundwork for 'twenty 'twenty, three but how might that plan differ from what you might do in the U S should the domestic economy deteriorate more rapidly.
Thanks for the question Eric you know the U. K is is is very unique I mean, the VAT tax implications I think it was called out in some of the other calls have had a big impact on the comps.
Their their pricing structure and their tax where taxes are reflected in their prices in and the revenue streams quite different than how we do it here in the states. So the VAT tax implications are are unavoidable and I think everyone's kind of pointed to that but in regards to the base business.
We haven't necessarily built the same type of capabilities in the U K or frankly, we havent transferred the capabilities. We've built in the U S. Yet to the U K. So I'll point out specifically our revenue management function here in here that here in the U S. I mean, we we get the purchase data from almost every transaction that that flow.
Through our restaurants, and we understand because of our loyalty programs who's buying what how and when and we leverage all of that to make sure that we understand the elasticities you know very closely and we're managing that both of our company restaurants, but were also leveraging that expertise up against our franchisee operations in.
The U K, we haven't done any of that yet so I used that is only one example of a capability that we have here in the U S that can easily be transferred into different markets. The UK being our biggest and most important international market, but we're going to overlay that across all of our geographies. So.
We're doing a lot of work on operations and how we run our restaurants better we're doing a lot of work on how we buy in and utilize media to to advertise so all of those things that we're developing here in the U S have not yet been transferred into our other markets and I feel like that is going that provides a lot of upside.
Good possibility and potential on the comps and the PSA has in those markets. So we talk a lot about international representing a huge white space opportunity for development, we're where we're getting more and more confident that the tools that we have here in the U S. Once transferred over to these other markets can also drive a significant amount of.
Comp sales in Psa growth.
Yeah.
Thank you.
Thanks, Eric.
Yeah.
Hi Mama.
And our next question comes from Brian Bittner Brightener of Oppenheimer. Your line is open.
Thanks, Good morning, good morning Robin Van.
The fact that you did key North America comps positive in the second quarter. It was actually very impressive.
It represented actually an acceleration on a three year basis.
It is also impressive and that I think you said you anticipate the three year trend to continue in the second half of the year I think I heard you correctly. So this result, and this outlook is happening despite a lot of mixed messages that we're getting on how the consumer's behavior more recently.
A lot of people are talking about weakness at the lower end are you seeing any noteworthy changes in behavior within your own business and.
Rob what levers do you believe the brand has to pull if we do enter a much more decisive slower spending environment.
A great question Brian .
One consumer changed behavior change that I would point out that's absolutely having an impact is the return to travel I mean.
As our.
Traditional <unk> I think is pretty neutral.
Neutral to people going on vacation because a lot of those folks are in their cars driving on the highways and pulling through drive throughs, we already planned dinner purchase and when people go on vacation it impacts our business, we've always had seasonality in our business, particularly in the summer months, while people go on vacation the last two.
Two years, that's been muted the last two years as people haven't gone on vacation as readily as people haven't enjoyed international travel.
We haven't seen that seasonality this year, we absolutely are seeing it.
We were tracking even higher on comp sales coming into June we were very bullish on our ability to really exceed expectations, both ours and everyone else's and then in June we saw a bit of a slowdown.
Which we attribute it to.
The travel behaviors that are that are returning and we evidenced that by.
Looking at travel markets, where you know, there's a lot of people going to like Florida.
Where where our business is up significantly. So I think there is a return to some of the seasonality that we've seen in the past and that's why.
You know, where where we're really bullish on the back half once we get through this these tougher comps in the summer months.
We see an acceleration in our business so.
And then in terms of the value piece, we can do value I mean like I said, we we already do value we offer an eight dollar carryout special in almost every market for a large pizza. So it's not like we don't have low price points, we just do it in a different way.
You know 75% of our business is E. Commerce. So are our customers are going on the apps going on the web and looking at our price points in our localized offers are available readily available.
Everyone, everyone going on those digital channels. So.
We absolutely can compete for that value customer, we're just doing it in a different way and I think so far we've been you know differentiated in that end and have been able to outperform as a result.
Great. Thank you.
Thanks, Brian .
Okay.
And our next question will come from Alexander Slagle from Jefferies. Your line is open.
Thanks, Good morning.
I had a question on people and you know I guess the company stores and franchise stores that known and can you kind of comment on retention and wage levels and hiring activity.
I'm, just trying to get a sense for how the improved people culture and all the efforts around purpose and values and initiatives to take care of your employees is permeating further through the system and perhaps helping on a relative basis I know, it's still a very difficult environment out there hiring and keeping people in.
I'm wondering if you could talk to that.
Thanks for the question, Alex Yeah, I mean staffing has been.
There's always a challenge in this industry. It has been our number one challenge for the throughout the pandemic for obvious reasons.
So.
Our restaurants for two years, we're focused on doing everything they could to get as many hours in the store as possible and so.
You know there really wasn't a lot of concern around productivity or over time or.
Any of these other kpis. It was really just about making sure that we had people in the restaurants to make pizzas and deliver pieces.
Nothing has actually improved over the last few months, we've seen our recruiting and retention levels improve.
Which gives us a lot of a lot of excitement. However, as Ann mentioned are our labor costs have gone up both as a function of wage inflation, which we do expect to to normalize to a certain extent moving forward, but also.
As a function of some of our behavior over the last two years of just every hour every hour we can in the restaurants. So our team we have a new some new leadership in our in our U S operations group and they're focused on making sure that we can not only staff and recruit and make sure we have the people to run.
The restaurants, but we do it in the most optimized and productive way and we've got a lot of great talent working on that and it's not just going to benefit our company restaurants in our corporate P&L. The insights that we're garnering in the the the the methods that we are developing the processes that we're going to develop are going to be able to then transfer to all of our franchisees.
These and make them better managers of their labor moving forward, which should improve productivity and margins, which should help us continue to spur domestic development.
Got it thank you.
Thanks, Alex.
Thank you.
And our next question will come from Lauren Silberman of Credit Suisse. Your line is open Laura.
Thank you so much Rob you spoke to the challenging consumer environment, you're lapping over some pretty tough comps in the back half, especially when including 2019. So can you talk about the most meaningful drivers of comp and it sounds like you're embedding an acceleration through the quarter. So just want to confirm that and then just related you highlighted the value opportunity from.
Our loyalty where are you guys in your journey with respect to personalization and your ability to offer a specific promotion more value oriented consumers. Thank you.
Thanks, Lauren Yeah. We are we are confident in the back half of the year.
We're confident for a couple.
Primary reasons, one is we've got some new innovation coming.
Early in the back half coming here in the next couple of weeks and then we've got.
More innovation layered in through the balance of the calendar.
Great new items that we feel can complement the huge success that we've seen on our stuff cross platform I mean stuffed crust. We launch obviously last year and really kind of created a whole new sales layer lifting our <unk> and that hasn't left and then when we launched epic pepperoni.
We saw that very incremental both.
On the on the revenue side and the margin side.
But here we are you know looking at the back half and we've got some new ideas that I think are going to complement that so we're really excited about our innovation, but we're also.
And I'll I'll I'll tie that tie the second piece of why we're excited about comps to the loyalty piece, we're just becoming better and better with our data I mean, we we have.
So much data here given the E. Commerce, you know nature of our business and all of the transactional data that we get and our teams.
Over the last two years have been mining and enriching that data and we continue to get better and better at it and now given our strategy on how we're going to become.
You know a great player in this value mindset in this industry, it's accelerated and we're even more confident with the the ways. We're using that data to really reach out both through our organic channels, but also through paid channels I mean, we're leveraging paid media.
To directly target across digital channels, you know customers that we have determined have the highest propensity to buy our products and we're targeting lapsed users we're targeting a light users to come back to the brand through both organic and paid media. So we.
We are confidence is really driven by the revenue side of the business and the comps that we feel but we're also making a lot of enhancements on the margin side of the business too. So it's not just about delivering those positive comps it's about doing it in a profitable way and that's part of the reason why we're not going out and just.
Layering in peanut buttering large discounted national price points.
Thank you very much.
Thanks Laurent.
Hello, Matt.
And our next question will come from Brian Mullan of Deutsche Bank. Your line is open.
Hey, Thank you just a question on development I know, it's a bit early here, but as you think about the guidance range of 6% to 8% over the next couple of years as you start to think about 2023, what are the factors that might cause you to come in towards the lower end or the higher end of that is there anything you're monitoring either optimistically or cautiously.
Just outside of like equipment, permitting delays, which we all understand can create hiccups just.
Really any color on how you're feeling about that multi year ramp.
So we continue to sign agreements and feel really great about the franchisee.
Excitement around this brand globally, both in our markets that we're currently in but attached but underpenetrated as well as new markets.
No to answer your question I would tell you. The only thing that is unforeseen right now as you know some of the conflicts you know the conflict in that we're seeing in the Ukraine continues on and that impacts that region and so we're continuing to watch the global environment and make sure that we can support.
Our franchisees and our development capabilities.
Despite any of that.
Thank you.
One moment.
And our next question will come from Peter slot <unk>. Your line is open.
Great. Thanks, I wanted to come back to development and just ask it a different way.
I guess, given the softness that you're seeing in the UK and in international.
Does that have any impact whatsoever on on the goal of getting to 6% to 8% annual growth starting in 'twenty. Three are you seeing any pushback or any pull back from franchisees.
Nationally and then secondly can you just talk about.
What you expect on company unit development this year and maybe on a go forward basis. Thank you.
Thanks Pete.
So.
We are actually having a very solid year outside of the U K for our international business, we have incredibly bright spots like the middle East.
And and and even Spain in Continental Europe , which has been a challenging market for us to really get a foothold in is up significantly this year and so we're positive and almost every market outside of the U K So theres not.
Theres not a lot of concern around the globe on development in the U K, although being our largest developed market in a big contributor to our current results represents a relatively small percentage of our international development opportunity. So.
That you know that being said, we're what as I mentioned in the in the last question we're watching everything.
Obviously they are.
Volatile global environment right now, but.
We're as confident as we've ever been on the excitement around this brand internationally.
Any development you know we continue to evaluate that we've built I think 12 restaurants. This over the last.
12 months.
And you know we're looking at the performance of that obviously, we're using that as a proxy for kind of this the strategy of of of going in and enter these penetrated markets and being able to to carve them up that's a longer term strategy.
And so we're watching how those mark how those restaurants perform.
I'll also just tell you you know in the environment, where we open these restaurants.
A lot of them opened up in Q4 last year, and we went into Q1 and it was hard to staff. These new restaurants. So we're really trying to take a more.
Long term approach and try to make sure that we have set these restaurants up to be as successful as possible and evaluate them on their contribution to the to the markets in which they we put them in over the long term so.
Over the next year you know, we're we're still planning on opening company restaurants, but you.
You know in the double digits, but where it's going to be dependent upon whether or not we feel we're going to be able to open them up in the way that they need to be open to be able to give them the best chance of success.
Yes.
Thank you.
Thank you.
Great.
And our next question will come from Andrew Strauss Nick.
Your line is open.
Hey, good morning, Thanks for taking my question I actually wanted to ask one on the commentary profit dollars.
And you mentioned the impact of inflation has on that but we're not really seeing that come through this year. So can you just kind of walk through what's going on there or is that just a timing dynamic and has your outlook for profit commentary profit dollars changed for this year and maybe you can frame.
The impact that's having on the on the operating margin change in terms of the outlook. Thanks.
Sure. So the impact on the operating margin is really more from a mix perspective, just because you're seeing such a large sales increase.
Because of the commodities inflation and you've got you know that relatively lower margin.
You know generally speaking as I talked about we pass through those costs on a fixed margin basis and so we do believe on us on a full year basis.
That will translate into increased commentary operating income dollars year over year, we still think that's going to be in the high single digits.
We didn't see the year over year accretion in Q1, given the acceleration of costs and just the timing to recapture we definitely caught up a bit here in Q2, but we definitely have more to come in the back half. So yes, we're still confident that.
And that will deliver the.
You know.
High single digit operating income increase in the <unk> line.
Okay.
Moving forward.
Our next question will come from Nick <unk> of Wedbush. Your line is open.
Thank you I think there was a comment about 7% to 8% menu pricing year over year. When we look at the second half where do we think the incremental pricing.
We will get US there we will go get co pricing too high in terms of year over year.
That part of the accelerating comp.
Equation in.
In the second half.
Great question, Nick we are planning some pricing here in the near future.
A couple of hundred basis points.
That being said it is not that is not what we believe is going to drive.
The comps in the back half and frankly, we we believe that there will be some normalization of this cost structure.
We're starting to see a little bit of that very preliminarily and and we think that that.
Will mitigate our need to continue to take pricing.
We didn't take heart, we took almost no pricing.
During the pandemic.
All of our check growth was driven by innovation that allowed our consumers to trade up and and and you know we're not we're not.
Trying to drive sales with with pricing, we're just trying to mitigate the cost so.
We will take as little pricing as necessary, while still delivering and getting back to the margins we need to get to and that's that's a very important focus for us is making sure that we're getting back to the margin structure that we believe is commensurate with the health of this business and that's going to be more I think driven by normal.
<unk> of commodities than necessarily our need to take significantly more cost and you're right on that 7% to 8% number that is what we've taken year to date.
Thank you.
Hi.
Hello, Matt.
Okay.
And our next question will come from Jim Sanderson of Northcoast Research. Your line is open.
Hi, Thanks for the question I just wanted to follow up on the issue of pricing is that.
Second half menu price increase and does that also does.
Is that also baked into the <unk>.
Operating margin declined on a year over year basis, 100 to 150 basis points, what are the puts and takes to getting that operating margin maybe to be.
Hydro range of your guidance for the back half of the year. Thank.
Thank you.
Yeah, the pricing would be baked into that guide I'm not 100 to 150 basis point decline year over year, just to add a little bit of color. There you know we've talked a lot about the inflationary pressure.
In both wage and commodities that we expect to continue in the corporate restaurants. So when you look at it by segment. We would expect you know the year over year margin pressure to be a little bit more pronounced there.
Outside to outperform that to Rob's point would be.
You know our continued.
Using a commodity prices you know, we also talked about a number of investments that we're making in wage and productivity, which as Rob pointed out has not been a huge focus for us during the pandemic, where we were really more focused on that surge in demand meeting the demand and keeping people safe so as those initiatives start to <unk>.
Hold that could provide some upside you know we'll continue to see pressure.
Internationally as a result of the U K.
But offsetting that as we've talked a lot about is the positive comp sales growth not just in North America, but as Rob pointed out you know internationally outside of the U K and then we also expect G&A to be down year over year in the second half as we continue to take a disciplined approach to cost management. So those would be kind of the.
The high level insights I would provide.
Okay.
Thank you.
And our next question will come from Todd Brooks of Benchmark Company. Your line is open.
Yeah.
Okay.
Okay.
Sure.
Your line is open.
Okay.
Okay.
Yeah.
And I will now remove Todd Brooks from the queue.
I'm here I didn't hear that I wasn't I'm, sorry about that.
No problem your line is open.
Great just two quick follow ups, if I may one on the international I know you just talked about expecting positive same store sales growth in the second half excluding the UK was international positive in the second quarter. Excluding U can is there any way you can size, maybe the drag from what youre seeing in the UK.
Yeah.
So yes, the other international markets, excluding the U K were positive in Q2 in terms of size I think that what I would offer is that the U K in terms of percent of international system sales is about 20% so.
So that would be kind of the the guidance there and we were definitely down double digits in the U K.
Okay, Great and then one other quick follow up Rob you talked about better success with staffing in the last few months, if we parse it out specifically to driver staffing have you seen the type of staffing improvement there in that specific function.
Slowly, but surely I don't mean to imply that we are fully staffed we're nowhere near where we want to be but leveraging our partnerships with the third party aggregators, coupled with a bit of improvement in our organic driver recruiting and retention.
<unk> has definitely helped ease some of the strain on the restaurants, we still have a long way to go.
But it's definitely moving in the right direction relative to where we were throughout the pandemic and especially you know.
Where we were in December and January when Omicron was was really impacting our staffing.
Okay, great. Thank you Brook.
Sure. Thank you Todd.
I would now like to turn the call back to Rob Lynch for closing remarks.
Yeah.
Well, thanks again, everybody for joining us and for your thoughtful questions. This morning as you can tell from our comments today, we're incredibly proud of what our team members and franchisees achieved this quarter and over the past few years.
It's been a remarkable three years for this company.
And over the last couple of months, we have moved very nimbly guided by our customers to navigate an incredibly volatile and challenging environment. We stayed true to our values continuing to innovate and leaning into what makes Papa John's unique.
Going forward, we will continue to carefully manage short term opportunities and challenges with an eye toward our long term potential we.
We hope that you are as excited about the future of Papa John's as we are as always I'd like to thank our shareholders and everyone. On this call for their interest in our company and for their continued support thanks and have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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