Q3 2022 Papa John's International Inc Earnings Call

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Okay.

Good day, and thank you for standing by and welcome to the Papa Johns third quarter 2022 conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll 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, Stacy <unk> Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our third quarter earnings Conference call.

This morning, we issued our 2022 third quarter earnings release.

A 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.

Forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings and.

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 up Rob.

Thank you Stacey good morning, everyone and thanks for joining us today.

It has been three years since my first earnings call, where we established our company purpose and values and reaffirmed our commitment to our five strategic priorities.

Those strategic priorities remain the same today.

Build a culture of leaders, who believe in diversity inclusive and winning it.

Proved unit level profitability of our operations and franchisees.

Tablets, the superiority of our pizza through our commercial platforms build a technology infrastructure that enables our business operations and expand our footprint domestically and internationally.

Over the past three years, we haven't wavered from these priorities. Despite the many challenges our team members and franchisees have faced.

This positive momentum would not have been possible without the culture that we've created one of innovation diversity and inclusion.

And for the second year in a row, we're proud to be named to Forbes world's best employers and best employers for diversity list.

Before we get into our company's Q3 earnings results I would like to highlight the significant growth our system has seen over the past three years.

2022 will be the highest sales volume in our brand's history, and we continue to grow on top of our post pandemic highs.

Put it in perspective in June 2019, we implemented our we win together program and $80 million multi quarter package that provided our franchisees with royalty relief and other financial investments during a distress time for our business.

At the time system wide average unit sales in North America were less than $850000.

Now our North American average unit volumes are over $1 $1 million and continue to grow.

System wide comparable sales in North America have increased 30% on a three year stack outpacing our peers.

This top line growth has largely been driven by successful menu innovations a key part of our differentiation strategy with products such as property is an epic stuffed crust, becoming exciting new menu platforms on which we continue to innovate.

Our continued investment in our proprietary technology stack is evident in our digital innovation.

Including personalized consumer communications made possible through enhancements to our marketing tech data analytics and CRM capabilities, our integrated partnership with third party Aggregators and our loyalty program Papa rewards, which has grown to more than 26 million members today doubling the membership over the past few years.

We believe these investments will unlock long term growth opportunities across our entire system.

Our development activity continues to steadily increase coming out of the pandemic nearly all of our top 25, North American franchisees now have development agreements in place up from only three 2019.

Internationally, our teams are laying the groundwork for the future by accelerating growth in our established markets identifying attractive new markets to enter and attracting new well capitalized franchisees to partner with.

Over the past three years, we assigned some of the largest long term development agreements in Papa John's history, and those agreements will result in approximately 3000, new units being built globally.

I'm extremely proud of our team members and franchisees and everything we have accomplished so far.

More than ever I feel that we have a solid foundation and are well positioned to withstand any near term headwinds as we move closer towards becoming the best Pizza company in the world.

With that context, I'd now like to discuss our third quarter results.

In the third quarter global system wide sales in constant currency were up 5% year over year to $1 2 billion. This was on top of 11% growth in the prior year.

As anticipated operating income and EPS were down in the third quarter when compared with the same period last year and strategic pricing actions, only partially offset higher food and labor costs.

We also continued to face headwinds internationally, particularly in the U K market.

While we are never satisfied when the results fall short of our expectations. We do recognize that market conditions have significantly changed food and labor costs remain at all time highs. The return to seasonal travel trends has been amplified coming out of the pandemic and the VAT tax holiday in the U K has lapsed.

We will continue to navigate this dynamic environment with a balanced approach of optimizing 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 costs normalized which we're already beginning to see in certain categories of commodities.

Our north American comparable sales for the third quarter were down less than 1%. Following a record sales. The last two years as high inflation continue to weigh on consumer demand, we saw increasing price sensitivity, especially around food throughout the third quarter.

While we saw competitors undertake aggressive discounting we continue to take a balanced approach, providing the right promotions to our value oriented customers without risking the erosion of our branded pricing integrity on our more premium offerings.

Alongside our targeted loyalty offers we launched a national value message, but did it in a way that is uniquely Papa John's pop.

Harper pairings is a national deal, where you can buy two or more items from a limited menu selection for the value price of 699 each.

Since its introduction in September this offering has been successful in driving incremental transactions from our more value oriented customers by engaging them with an accessible price point.

International markets are also experiencing inflationary and macroeconomic pressure.

Third high inflation in many countries rising interest rates, a looming European energy crisis, and continued COVID-19 related lockdowns in China have all contributed to a more difficult international operating environment.

In the third quarter, our international comparable sales were down 10% still.

Still delivering a three year stack of 19%.

The current environment in the UK disproportionately impacted our international segment's overall results with increased energy costs rapidly accelerating inflation and the lapsing of the VAT tax holiday, our UK franchisees are navigating an unprecedented operating environment.

Our other international markets continued to perform well, but since the U K currently represents more than 20% of our international sales. These headwinds will result in international comp sales being down mid single digits for the full year.

We expect these challenges in the U K market to continue into 2023, we're committed to supporting our U K franchisees with the needed operational adjustments and investments to manage through the current environment and reposition our UK portfolio to drive above average industry growth over the long term.

In addition to the development potential of our international business. We're also excited about the opportunities to drive international Aav's across all of our international markets as.

As we've previously discussed we see opportunities to implement the operating model enhancements, we have developed and refined in the U S.

Including our revenue management capabilities product and technological innovation and third party relationships.

To achieve gains in both sales and restaurant level profitability in our international markets.

I would now like to discuss the product and technology innovation that continues to differentiate Papa John's in August we unveiled our first ever Crestwood menu innovation Papa bowls, featuring everything our customers love about Papa John's Pizza, just without the crust.

As we have explained on previous calls when considering new innovations. We look at how these products can add sales layers to our system and serve as an opportunity to bring new news to our customers.

Our consumer research showed that when it comes to ordering food there can sometimes be that one veto vote in a household who is looking for something other than pizza Papa bowls allows us to be back in the consideration set and high as highly complementary to pizza sales. We're pleased to see possible is performing well and in line with our expectations.

Additionally, a few weeks ago, we brought back fan favorite chaperoning, our pizza with a purpose and also launched a limited time pepperoni crusted property posted with even more cheese and pepperoni on the outside.

For the third year sales of the Chaperoning will benefit the Papa John's Foundation for building community the marketing message, calling this promotion shacks relation, which highlights the expertise and extra pepperoni toppings Papa John's adds this extra large pizza when other brands or cutting back on ingredients and portion sizes is resonating with consumers in general.

Some great media Buzz.

While we are focused on menu innovation is important to not lose sight on our investments in digital innovation to identify new ways to engage and understand our customers' evolving needs by using data and analytics to deliver a differentiated customer experience.

Our marketing Tech and data analytics platform is enabling us to segment analyze and activate our customer base in ways that we have not been able to do in the past in the third quarter. We made additional investments in marketing automation and AI and as a result every month, we are gaining better customer insights and are putting this knowledge to work to activate and engage different segments.

Of our customer base.

We've always said that our mission is to meet our customers, where they are through carryout options, our own delivery drivers or through our partnerships with third party aggregators. We offer these different channels to address customers particular needs whether that are seeking greater value speed or convenience. This allows us to service customers across those.

<unk> economic categories, whether they are looking to save by picking up the piece of themselves are willing to pay a premium to order through their favorite marketplace.

We will continue to be nimble throughout this challenging macroeconomic environment to adjust to consumers' changing needs without the integrating our premium position.

However, as I've said before pizza has traditionally performed well during a recession because it is an affordable meal choice that is consistent with our solid start to the fourth quarter and our continued expectation to finished part with positive comparable sales in North America.

Now turning to development.

Year to date, we have added 127 net new units globally in Q3, our net new unit growth of 18 units was less than anticipated primarily due to the delay of some global openings being pushed into the fourth quarter. Some north America openings pushed due to permitting delays and the closing of 20 stores in Belarus due to the conflict in eastern Europe .

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As others have referenced this quarter permitting delays within North America are making it difficult to identify exactly when a location may open in the future. It's important to emphasize this isn't a matter of if a location will open its simply a matter of win.

Based on our recent experiences with permitting delays in the U S and store closings and Belarus, we're reading, reducing our 2022 guidance to between 240 and 260 net new unit.

We believe the items impacting our 2022 guidance, our short term market specific situations and do not impact our confidence and our ability to achieve our multi year development goal to grow net new units by <unk> hundred to <unk> hundred units between fiscal years 2023 and 2025.

As an example of the continued potential growth in new markets I would like to highlight Honduras, a new country for us where we had two very strong store openings in the fourth quarter, we anticipate opening at least 25 stores in this market over the next three years. We also recently signed a deal with Levant, our third largest global franchisee to add too.

New countries and 100 more restaurants, bringing their overall commitment to operate more than 335 stores in four countries by 2030.

One of those new countries will open in the fourth quarter and the other in 2023.

As I've said before there are significant white space for Papa John's both domestically and internationally. This white space combined with our attractive unit economics gives us confidence in our ability to continue attracting new well capitalized franchisees contributing to our steady development pipeline.

To summarize as we drive continuous improvements across our business, we will leverage the competitive differentiation of our brand the quality and innovation of our products and our data driven customer insights to navigate the ups and downs of the market, while continuing to grow strategically and sustainably with.

We've accomplished a lot over the past three years and there remains even more opportunity ahead of us.

I'll now turn the call over to Anne to provide more color on our financial results and.

Thanks, Rob and good morning, everyone for the third quarter Global system wide restaurant sales were $1 2 billion up a half a percent in constant currency net unit growth, particularly in international markets contributed to the higher system wide sales, but was largely offset by the lower global comparable sales Rob discussed earlier.

Okay.

I'd like to take a moment to provide a little more color around our long term north American comp trends and outlook relative to our third quarter results, which were more reflective of short term headwinds and trends.

First we continued to see a return to more normal seasonality in our business post pandemic. The third quarter is typically our slowest quarter due to summer travel, which means our customers are spending less time at home or in the office and ordering less pizza delivery. This year travel demand was even higher especially in July and August coming out of the pandemic.

It has been my experience over the years to be careful to not overreact in short term in ways that could negatively affect the customer experience and perception of value.

While we never like to see a decrease in comps and operating income our teams did a great job staying committed to providing quality products and maintaining our pricing integrity, which is what leads to sustainable value creation for all stakeholders.

Entering the fourth quarter, our North American comp sales have returned to their positive growth trajectory.

Consolidated revenues for the third quarter were $511 million down less than 1% from the third quarter and 2021 <unk>.

Excluding the impact of our strategic Refranchising of a 90 restaurant joint venture earlier. This year total company revenues increased 3% versus the prior year.

As a reminder, the year over year impact of the strategic Refranchising is most pronounced in revenue as revenues from the joint venture are no longer consolidated in restaurant sales revenue and instead are recorded in royalties and commissary sales its impact on adjusted operating income is nominal and neutral to EPS.

Distant with our previous announcement.

Turning to profit adjusted consolidated operating income for the third quarter was $34 million compared to $42 million for the third quarter of 2021.

Consistent with our expectations adjusted consolidated operating margins were six 6% down from seven 9% last year and down sequentially from seven 7% in the second quarter.

This reflects near term pressure from our lower U K contributions and continued inflation in our corporate restaurants.

For our corporate restaurants, food basket cost were up 18% in the quarter driven largely by a year over year increase in cheese.

Labor costs also remained elevated in the quarter together. These factors represented approximately 600 basis points of headwind for the corporate restaurant segment margins year over year.

Strategic pricing actions reduced the impact of this record inflation, resulting in a 300 basis point decline in restaurant level margins year over year.

Since the beginning of the year menu prices on average at Papa John's have risen approximately 8% to 9% system wide.

<unk> revenues rose, 14% in the third quarter, driven by the continued acceleration of costs and somewhat offset by lower volumes. As a reminder, our commentary arrangement with North American franchisees passes through food labor and fuel cost on a cost plus fixed margin basis.

Rising costs are slightly accretive commentary operating income, but dilutive to consolidated operating margins.

In addition, variances can exist between quarters as a result of a lag in timing from when costs are incurred and when they are pass through to franchisees the lower volumes in the third quarter resulted in slightly lower margins for the segment, but we still expect full year margins to be consistent with the prior year.

International operating income was down in the third quarter due to lower U K contributions recall, the UK is our largest market and the only international market, where we own the commentary since this market is more than just a royalty stream near term challenges are having a more pronounced impact on international profits.

Additionally, changes in foreign currency exchange rates negatively impacted adjusted corporate operating income in the third quarter by approximately three percentage points.

The cost headwinds, we are experiencing in the corporate restaurants and internationally. We're also somewhat offset by a $7 million decline in general and administrative expenses, excluding special items.

Altogether. These factors were an approximate 140 basis point drag on third quarter adjusted corporate operating margins slightly improved from what we experienced in Q2 and in line with our expectations.

Continuing to earnings on a GAAP basis diluted earnings per share was 23 for the third quarter compared with 79 cents last year, including 31 cents and <unk> and special items respectively.

Included within the special items are a $10 million or 28% accrual for certain legal settlements and a $4 million or <unk> <unk>.

Noncash impairment charge related to the termination of our second largest franchisee in the U K.

The impairment charge was incurred as an initial step forward in our commitment to reposition our U K portfolio in a way that ensures our franchisees in this market are aligned to drive above average industry growth over the long term.

We will keep you apprised of the progress going into 2023 and are confident in our long term growth potential of our international business.

Excluding the impact of special items, the third quarter adjusted earnings per diluted share for the quarter was 54.

Down from 83, a year ago breaking.

Breaking down the year over year change further operating results accounted for half the decline with the balance coming from interest and to a lesser extent taxes.

Moving on to cash flow and the balance sheet for the first nine months of the year net cash provided by operating activities was $77 million.

After deducting $48 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $28 million.

This was down from $146 million from the first nine months of 2021, reflecting the impact of our overall business performance working capital changes and a $7 million increase in capital expenditures.

We ended the third quarter with ample liquidity approximately $480 million in cash and borrowings available under our revolving credit facility and have a conservative gross leverage ratio of 2.24 times.

We also continue to return significant cash to our shareholders.

During the quarter, we repurchased $19 5 million shares in total we have repurchased more than 980000 shares since the beginning of the year. We also paid out approximately $15 million in cash dividends during the quarter.

In addition, based on our strong balance sheet. Our board has declared a fourth quarter dividend of 42 per common share, bringing the annual dividend rate to $1 68.

<unk> capital structure provides us with substantial operating flexibility.

We will continue to take a disciplined and 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 regarding adjusted operating margins, we continue to expect near term pressure from lower U K contributions and ongoing commodity and wage inflation against prior year consistent with our expectations at the end of the second quarter, we expect full year food basket cost to be up between 15 and 17%.

We also expect consolidated operating margins to be down between 100 to 150 basis points when compared with 2021.

Looking at the longer term, we will continue to drive long term value through innovation unit growth operational productivity and strategic capital investments. Our marketing teams are aggressively pursuing top line growth through menu and digital innovations, while our restaurant operations have a renewed focus on productivity coming out of the pandemic Prost.

This enhancements are already resulting in faster service and improved customer satisfaction, giving us great confidence in our ability to drive future margin expansion.

We expect 2022 capex to be between 75 and $85 million as we invest in technology innovation and the development of New company stores full.

All year net interest expense is expected to be slightly above $25 million.

While our tax rate was higher in the third quarter due to timing for the full year, we remain within our current guidance range of 18% to 20%.

Before I turn the call back over to Rob for some final comments I want to thank all of our team members and franchisees for their commitment to Papa Johns as we navigate these near term challenging times together their hard work and dedication is a testament to our culture and I'm proud of the organization. We are building together I'm excited for the future Papa John's and our ability to drive.

Steady earnings expansion and sustainable comp sales for many years to come and with that I'll turn the call back over to Rob for some final comments Rob.

Thanks and.

As you've heard from US today. The last three years have been extraordinary for this company and the core fundamentals of our business are strong we are fully committed to executing against our strategic priority is to be the world's best Pizza company and in turn provide strong returns for our shareholders.

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

Thank you as a reminder to ask a question press Star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Eric Gonzalez with Keybanc. Your line is open.

Hey, Thanks for the question and good morning.

Your competitors out there cautioning that the delivery business is vulnerable to consumer shifts towards dine in and it's also more sensitive to inflation. So have you seen any have you seen any relative weakness where consumer shifts away from the delivery business that might be worth calling out and unlike your competitor you do participate in three channels within carryout delivery in the marketplaces. So perhaps you could touch on the relative performance of each channel.

And maybe speak to your expectations for each and whether you anticipate any shifts in the future. Thanks.

Thanks, Eric.

We have seen over the last few months a bit a little bit of a shift into our carryout business. We do have very strong carryout business, even though we don't market and significantly discount that business. It is something that we anticipate being a general trend as we go through these.

Low consumer sentiment.

Times, it's not something that we are necessarily pushing because we haven't seen.

Significant softness in our delivery business, there is a shift but it's not like our delivery business isn't.

Operating at a high level and very productive and when I talk about our delivery business I talk about it both in the context of our organic channels, which obviously.

Our.

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Our preferred method of getting our product to our customers with 26 million loyalty members. We definitely there are.

Valuable customers, we definitely want to see them come through our loyalty channels and get the best deal. They can from Papa John's in and make sure we get all of that information. So we can service their needs in the future, but we're also seeing continued strong performance from our marketplace partners across all <unk>.

Four of the National partners that we have now integrated with them.

I know theres been a lot of talk about the aggregators in some of their challenges in some of the ways Theyre trying to shore up their business as we head into some of these more challenging times, but our business has remained strong with them. They continue to deliver incremental profitable transactions for us. So.

It definitely is a good.

Mix of business for Us, we don't disclose what percentages of the business each of those make up for competitive reasons, but I can tell you that were happy.

With each of them and it's part of the reason why we have enough confidence to be able to kind of.

Doug to guide to positive comps in Q4, as Ann mentioned and I talked about we have gotten off to a good start in Q4, and we feel like we are going to be able to deliver a positive Q4 and a positive 2022.

Thanks.

Thank you.

Yes.

Thank you and our next question comes from Brian .

<unk> with Oppenheimer. Your line is open.

Thanks, Good morning, Robin and then I have a question on development.

Theres just a lot of uncertainty that business owners are feeling out there regarding the economy and of course, they're in.

Absorbing a lot of inflation as well so Rob I'd love for you to just highlight exactly what is reinforcing your confidence in that multiyear development outlook getting to that 6% to 8% growth because I don't think a lot of investors at this point, our underwriting that actually occurring.

And can you also remind us how you expect the build this algorithm to unfold over the next few years.

Sure.

Brian So our confidence is driven by the fact that we continue to open restaurants.

Especially internationally, we really where we're pretty much right on our target on openings. The challenge with the net development number that we disclose each quarter and that we kind of sign up for in our guidance every year.

<unk> had more closures.

Internationally and some of those closures are a function of the conflict in eastern Europe , Belarus, as a market had to close the whole market.

Which was 20 units for us this year.

And in the U K the.

The U K right now.

Talk a lot about it in the script the U K, we are actively working with our international and UK team with our UK franchisees to really paint the path forward, what what does it look like so we had a franchisee or second largest franchisee that was underperforming.

<unk> wasn't necessarily meeting kind of the.

The standards that we hold for our franchisees and so we made a we had to go in and make a change in and work with them to do that and so that's just kind of the beginning of a holistic effort to make sure that the franchisees that are set up for long term success are going to be.

You know continue to be able to operate.

And deliver profitable sustainable sales growth and that's going to lead to a return to <unk>.

Unit growth and less closures over the long term, but there may be some short term.

Changes in short term work that needs to be done there in the U K domestically.

It's getting harder now it's been harder, it's really not a capital issue at least our franchisees haven't shared that with us yet it's really about permitting.

You know it it has never been harder to get permits a lot of the government agencies in the U S are still shut down.

You know from from pandemic and it's just a really challenging time.

To build so as we called out in the script, it's not a matter of if these restaurants are going to open its really about when these restaurants are going to open and then the last piece I'll share with you that gives us a ton of confidence it we're still signing agreements we highlighted in the in the you know and are caught in the call.

That yes.

We signed a lot we're opening we're signing agreements to open new countries. So it's not even just people doing what they already know in their own markets people have enough confidence in our global development right now to go and open new countries and we're seeing really positive shoots within those new countries. We highlighted Honduras, we had two openings.

Last month that were a record openings for the system not just for that market, which is a new market for us. So.

All of those things make us feel really confident in the long term.

The ability and development is a long term investment it's not you know obviously access to capital and those types of things can can impact the short term run rate, but it's a long term investment when they signed these agreements. They are signing up 10 year agreements 10 to 20 year agreements. So our franchisees believe in the brand.

The unit economics are still very strong so we're not seeing any slowdown in the agreements that were bringing into the system.

Great. Thank you Rob.

Thank you Brian .

Yes.

Thank you and our next question comes from Chris <unk> with Stifel. Your line is open.

Great. Thank you this is Patrick on for Chris Good morning, Rob.

Rob in the past the company has indicated that there wasn't a need to promote low price points on a national level and I know you mentioned the pop up pairings offer you launched it at 699 price point. So I'm just curious if you experienced significant sales weakness at some point during the quarter that caused you to change your thinking there to pivot and then we noticed saw from the App, but we havent seen it overtime.

On television or at a national level. So is there.

Is there an approach that you are thinking about where you might bring that more to the forefront in order to drive additional traffic.

Okay.

So the first piece around the national promotion.

Or are we did absolutely state in the last call that we thought about valued differently than maybe some others in the category and that's why our national promotion isn't a large 50 or 40 or 30% off every item we strategically.

Decided on this promotion because it is.

A great price point to be able to put out on national TV.

At $6 99, but it's actually Papa pairings you'd have to buy two so it's a $14 transaction.

To actually execute against this value program and we're actually seeing the checks that include this program higher than our average check.

So we thought about it a lot differently than just a pure discount off of the purchase and so I think that's primarily what we were highlighting that is not necessarily consistent with our strategy. This this is a definitely a challenging economic time for our customers and consumer sentiment.

It has continued to decline and we are always trying to strike the right balance between continuing to deliver our premium innovation to meet the needs of our.

Customers that that that once things like epic pepperoni stuffed crust and in some of our other more premium priced innovation, while also making sure that we're meeting the needs of our customers that are more value conscious, particularly and its value oriented time period.

Great. Thank you.

Thank you Patrick.

Thank you. Our next question comes from Andrew <unk> with BMO.

Your line is open.

Hey, good morning, Thanks for taking the question.

I was hoping you could talk a little bit about your innovation pipeline.

And kind of where it sits now or are there more platforms that youre thinking about.

The way that you've done in prior quarters or.

Shifting maybe a little bit more to an iterative.

Kind of product innovation process, and do you prioritize I guess differently. The types of innovation that you think about in this environment. Just as you think about price points managing check et cetera.

Yes, we absolutely think about our calendar in a way that's going to be balanced and continue.

Continue to meet the needs of all of our customers across a different spectrum of their price sensitivity or their appetite for premium versus value. So, but we are always focused on innovation at Papa John's both product innovation as well as technology innovation.

It's the two things it's part of our DNA here aren't you know your question is specific to the product innovation sales and I'll speak to that we are definitely working on new platforms, both across our core pizza as well as new items that can complement our pizza.

<unk> a pizza.

Okay. Our next question comes from Todd Brooks with benchmark.

Of your line is open.

Hey, Thanks for taking my question.

Not wanting to talk about forward sales trends other than the commentary of getting back to positive but.

Can we talk Rob about maybe what the trend was like across the third quarter. So that outsize travel impact in July and August and then maybe if you could size any sort of rebuy.

Rebound magnitude that you saw on September with Ah Ah return kind of back to school back to work as well as the the launch of the Papa pairings and having a more over value offering out during that period. Thanks.

Thank you for the wonderful question I couldn't be more excited to tell you that we did see sequential improvement throughout the quarter and it we did see and a a definitely a.

Noticeable improvement in our transaction right with our lodge of Papa pairing. So it's part of the reason why we have a lot of confidence and you know our our positive guide for Q4, and frankly for 2023 I think we I think we understand you know, we obviously are cognizant.

Of the changing dynamics in the industry and the changing needs of our consumers and in accordance with those dynamics and so I feel like we've we've you know started to strike.

Yeah, we talked about and prior calls leveraging our 26 million loyalty members to try and drive frequency and try and make sure that we're giving them the right incentives on the right product at the right time, but I also think there is a need for us to continue to have more broad based.

No strategic value offerings for our customer base across the industry that is definitely becoming more price sensitive and and with consumer sentiment going down I mean, I <unk> I think I set out on the last call.

We we position ourselves as a premium player in this in this segment with premium innovation, but if you're in Q S. R. And you don't have a value strategy you can't win so we've always had a value strategy and I think that value strategy continues to evolve as the customers you know appetite.

For for.

You know the industry or segment continues to evolve as well, we've obviously seen across pizza.

A decline in transactions and so we need to make sure that we are doing our part for our customers to meet their their needs in the current environment in which we're competing it.

That's great. Thank you ma'am.

Thank you.

Thank you we have a question from Lauren Silverman with credit Suisse. Your line is open.

And can you hold <unk> uhm I wanted them to follow up on unit development has anything to 2023 is your expectation that you're in Netflix eight per cent.

Target over the longterm just get in the near term headwind trying to understand how to think about the kittens and then my actual question as as you pointed out over the last two years and that economics meaningfully improve your franchisees.

Cost pressures now that can you talk about where you see the biggest opportunity striped incremental fault for wall returns for franchisees. Thank you.

Sure Yeah, we do have confidence and being able to deliver development consistent with with our longterm guidance over the long term and it you know it may be.

You know it may it may vary from year to year, but that's always right around where we are targeting once again, we are signing agreements right. Now this year in those agreements include new stores for next year, we haven't seen any type of indication lead indicators <unk>.

In most of our international markets outside of the U K that that those development agreements are not gonna be upheld in those agreements are not going to be executed.

Domestically once again, we've we've gone from frankly zero domestic development I think if you look back over <unk>.

17, 18, 19, you know, we had net negative restaurants or right around there in 2020, even with a great ear a cop sales, we still only delivered seven net new restaurants globally. So our domestic development is something that we can we continue to.

To focus on it has grown at a <unk> at a high rate over the last two years.

But if there's you know right now is a tough time to open restaurants, not from Ah confidence in the ability for those restaurants to produce the kind of returns that warrants the investment that more from the you know that the challenges associated with just getting you know the permitting and all the other stuff that need.

To go into opening a restaurant done so.

It may continue to be that way as we look into 20 twenty-three our hope is that our the the permitting process in the construction process does does get back to normal and 20 twenty-three, but that's something that's kind of out of our control in terms of improving the four walls.

You know the Union economics, our operations team is is completely focused on two things one is driving productivity. One is driving customer service and you know as as we talked about during the pandemic. We're focused on just keeping restaurants open and doing everything we could to get as many people in there to staff.

Against the demand as possible, we still have obviously have a lot of demand, but where where now coming out of the pandemic. We've kinda shifted our focus to making sure that we are.

Managing our labor appropriately, which allows us to deliver great productivity and improve customer service, we're seeing our customer service Kpis go up right now behind some and initiatives we have in our in our stores and ideally you know improved customer service is gonna lead to improved loyalty and an increased frequency and that.

Is the best way to grow unit economics is by Gronk topline sales through through you know transaction. So that's that's what we're focused on that's what our operators are currently activating against and we're making a ton of progress we made a ton of progress in a very short time.

Thank you very much.

Thank you Lord.

Our next question comes from Alexander's cycle with Jeffrey Your line is open.

Okay. Thanks, Good morning, just want to get a little more color on the U K the headwinds you're seeing their portfolio repositioning actions and just any specifics around the different kinds of.

Court or like a franchise decent port you're considering maybe just how we might see this play out in the financial growth matrix next year.

Yeah, you know we need to make sure that that market is set up to be able to weather a storm that we see continuing for the foreseeable future.

That means that we need to have franchisees and restaurants that can continue to deliver strong EBITDA cashflow take to get through these times. So we're we're we're evaluating that with all of our franchisees. We're looking at the whole system, where we can make strategic investments.

To continue to drive both you know sales as well as profitability for the the restaurants that are gonna you know.

Be here for the for the long term yeah, we've had.

Yeah, 12 restaurants in the UK close as a as an outcome of the transit of the work that we just did with you know.

We highlighted with our second largest franchisee over there right now we're working with all of our franchisees to you know figure out with the right way to support them is we haven't we haven't finalized those plans. So we're not that not not disclosing any specifics, but we will definitely have you know a very.

<unk> big update on that and our and our next call.

Alright, thank you.

Thank you.

Our next question comes from Joshua along with Stevens Your line is open.

Great. Thank you for taking my question just curious if you could talk about the human capital and labor pipelines. It no that you called up your system inflation, there, but just curious if you could talk about the stability the applicant flow and just you know with with the store level operations or like now that we've maybe a little bit further away from some of the peak pressure.

<unk> and your commentary around being able to focus on productivity initiatives at the store level.

Yeah definitely definitely continued challenge in staffing, but they are getting better and part of it part of it getting better or some you know return to the workforce, but part of it is that the changes I've already articulated around our labor management, we had a we were making sure that we have labor in the store when we need the labor and not.

Necessarily just labor at all costs, if you will and that's actually made us more productive more efficient while also making sure. We're we're better staffed cause we're utilizing the labor in a more efficient way also as as we've talked about you know our partnership with the Aggregators does help US you know we have the.

The delivery is a service capabilities. So as we get to capacity on Friday Night Saturday night Sundays during football season.

Definitely able to leverage those partnerships in those strategic integrations that we've done with them to offset any you know some of the labour challenges that we face on an ongoing basis basis. So that we're getting better at that you know it's been three years now since we really started going full steam on on building out those par.

Ship, so we feel like we're really good at it we're optimizing how we use that that that capability strategically. So you know right now staffing staffing is always a challenge, but I feel like we're managing it relatively well Halloween you know it was always a crazy Crazy time, we just had.

A crazy Halloween on Monday, but we got through it great and and you know our restaurants are excited about you know, our our positive sales and continuing to grow.

Thank you.

Thank you. Our next question comes from Tim Sanderson with North Coast Research. Your line is open.

Hey, Thanks for the question could you, let us know what Papa Johns market share is in the U S relative to our peers and if that is slipping her stable where do you think that the sheer was going.

So you know we had up until this quarter, we had 12 straight quarters of same store sales outperformance.

So when you think about it that way, obviously on growing share of each.

Of of our current restaurant base, we absolutely gainshare over the last three years.

Some of our competitors.

Have built more restaurants in us domestically and therefore, you know that factors into an overall volume share as well so we're not building as many restaurants.

There's there's more volume from new restaurants going to our competition, but in terms of our ability to outperform.

Outperform on sales, we've definitely gained share over the last three years.

Obviously this quarter with Dominos Pizza hut, both reporting prior to us. They have both had you know small positive comps we have a small negative calm.

So you know that would obviously change that dynamic in the in the in the quarter, but for the year. You know we we are confident that we're gonna be able to deliver sent you know positive same store comps. We don't think that's going to be consistent with others in the in the industry given the results that have already been delivered and we're delivering positive same store.

Cops on top of higher cops, a year ago than anyone in the industry. So we feel really good about our our share gains over the last three years.

Just a quick follow up any concern with uncompetitive promotions.

Starting to look a little bit similar and what I'm talking about is the 690.

Price point, and then now we've got Pizza hut with I think something that looks like a.

<unk> just the concerned with the differentiation is becoming a little bit murky.

Yeah, I mean that just as a I I couldn't agree with you more but that is just motivates us to continue to innovate and find new ways to differentiate yeah. I mean, you know I think on the promotion front I don't you know I don't know that it's necessarily necessarily a negative thing for us.

That the 699 price point is now kind of the the price point some of our competitors were promoting lower price points in the past. So I feel like that gives us a bit more of a a level playing field, because that's where we have been and it's been a little bit higher price and now we're more competitive in that regard on the innovation yeah.

I I you know I think that they're they're definitely have been some recent entries and in the market that are consistent with what others are doing including us but that once again, it's just more motivation for us to go out and <unk> and create new items that are gonna stand out.

And Ah and potentially some of the more.

Some of the redundant innovations that if that had been launched recently.

Alright, thank you.

Sure.

Thank you and I'm showing no further questions in the queue I'd like to turn the call back to Rob for closing remarks.

So I just want to thank everybody for being on the call today.

Obviously.

We are going as an industry through some some challenging times, but I just want to remind everybody pizza.

Is a great value through challenging times.

You know and it is it a great industry for we're excited about being a part of this industry heading into 20 twenty-three. We're excited about the innovation that we're gonna bring to the industry to continue to grow comp sales, while we continue to build more restaurants or bring Papa Johns to more P.

<unk> across the globe. So as you can tell from our comments today, we have a lot of belief and then and then and 20 twenty-three, but even put her even more excited about the long term for this brand in the white space that we can go and tap into so I'd like to thank our shareholders and everyone on this call for their interest in our company.

And for all of your continued support thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin to T to raise your hand during <unk> you can dial 911.

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