Q4 2022 Papa John's International Inc Earnings Call
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Good day, and thank you for standing by and welcome to the Papa John's fourth quarter 2022 conference call and webcast. 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 this session.
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I would now like to hand, the conference over to your speaker today Stacie Shirley.
Good morning, and welcome to our fourth quarter and full year 2022 earnings conference call.
Good morning, we issued our fourth quarter and full year 2022 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 Dot com.
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.
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.
In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call Lastly.
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 I.
I am pleased to report this morning that we had a strong finish to 2022 for.
For the full year, we reported global system wide sales of $4 8 billion up 3% in constant currency over last year's record sales.
We also delivered our third straight year of positive North America comparable sales, we opened 378, new restaurants growing our system wide footprint by four 5%.
And then 2022, we delivered our second highest adjusted operating income in Papa John's history second only to last year's record and more than four times higher than 2019.
Last year presented our teams and franchisees with one of the most challenging and dynamic environment, we have ever experienced.
I wanted to give a heartfelt thanks to our restaurant supply chain corporate and franchise teams around the world for their outstanding resilience against the headwinds facing our industry.
Thanks to your efforts Papa John's mitigated and successfully navigated the challenges of omicron and increasingly volatile geopolitical environment unprecedented commodities and wage inflation and to top it all off and then avere winter storm that impacted more than 60% of the U S population.
Today, I will discuss Papa John's business performance, focusing on three key priorities to strengthen our competitive advantage and better position us for future growth.
First I will discuss our winning product innovation.
Second I'll provide an overview of our unit level productivity and third I will lay out details around our domestic and international expansion.
Then pass it on to Ann who will walk through our fourth quarter and full year results before opening the lines to answer any questions you may have.
Starting with our product innovation.
At the heart of Papa John's success is our innovation mindset, particularly in the areas of menu and digital innovation.
Over the past three years, we have made purposeful additions to our menu ensuring there are incremental sales layers to drive strong sales growth and capitalize on our premium brand positioning.
This enables us to forgo the blanket short term discounts we've seen elsewhere in the category contributing to more sustainable and profitable ticket growth and most importantly higher customer satisfaction.
We are introducing menu innovations that offer value and variety to our customers.
But they also limit added complexity to our restaurant operations and our supply chain.
Our menu innovation calendar is expansive flexible and differentiate it and allows us to adjust our offerings to customer preferences nimbly, whether that is extending a limited time offer or building upon existing platforms.
2022 was a robust year of successful innovations.
We continue to drive demand and growth on existing platforms like epic pepperoni stuffed crust and pepperoni crusted properties.
In addition, new items like New York style Pizza and Possibles are great. Examples of how we continue to build new platforms around our premium ingredients.
At the end of December we launched pop advice and the reception from our customers has been extremely positive. This.
This new menu platform was inspired by our Jalapeno Papa Rolls, which we launched back in 2020, we've now elevated and expanded this concept to include two additional flavors chicken parmesan and Oreo cookie and we see opportunities to introduce more flavors in the future.
In fact, we just tasted some new flavors last week that I am pretty excited about.
Our promotional calendar is flexible, but our commitment to better is not as.
As I've discussed in previous calls, we view value differently than discounting or.
Our value proposition comes from offering a variety of great products at accessible price points for all of our customers, whether that's from our extra large extra cheesy extra pepperoni chaperoning, our profit pairings, which offers multiple items on our menu for just $6 99 each.
Our barbell strategy balances our menu to offer a premium products along with value options to ensure all of our customers are getting the products they want at great prices.
This strategy contributed nicely to our solid performance in the fourth quarter and we expect this momentum will carry into 2023.
We're also excited by our latest patent pending innovation Christy Parm pizza.
This first in the pizza industry product features are thin crust, but with a blend of parmesan and Romano cheeses on the bottom.
Yes, you get crisp <unk> on the bottom of the crust and your favorite premium ingredients on top.
While it is still early in its rollout the customer response, we have received so far has been fantastic and we expect this innovation to deliver a lift in both ticket and transactions.
We have also applied our innovation mindset to our digital channels and continue to invest in our digital capabilities to deliver a best in class customer experience.
Our website digital App third party aggregator partnerships and Papa call call centers are significant differentiators that promote stronger retention and grow our customer base.
Back in 2001, we were the first in the category to offer online ordering and we're also the first to launch a nationwide digital rewards program. We will stay ahead of the curve by continuing to invest in technology and enhancing our digital capabilities given that today more than 85% of our domestic transactions come through.
These digital channels.
Our Papa rewards loyalty program members are our most valuable customers, representing nearly 50% of sales, but they also provide a robust source of data that helps shape, our business to better serve all of our customers. Our work to attract more loyalty program members through early access to new menu items and exclusive perks and discounts.
Has delivered outstanding results, enabling us to not only sustain our sales coming out of the pandemic, but to grow on top of those record sales.
Today, we have more than 28 million loyalty member accounts more than double the number of registered members just three years ago.
We will continue to explore the additional untapped potential from investing in this channel including opportunities to increase customer frequency and personalization. In addition to continuing to attract new members.
Another solid contributor to our growth has been our aggregator partnerships. These relationships enable us to reach new incremental customers and help us service existing customers during periods of peak demand.
In fact, when staffing shortages were exacerbated by Amazon in 2022, we're able to lean into these relationships to increase our delivery as a service option.
Papa John's leads the pizza industry when it comes to building. These third party relationships and we will continue to further leverage this channel to introduce our brand and products to even more customers in the future.
As we look to 2023, we will continue to improve our capabilities to deliver our customers a best in class experience, regardless of channel our method of delivery.
This brings me to our next key growth driver unit level productivity.
I won't spend much time discussing the economic challenges that we'll continue to place downward pressure on the industry increased key input cost and consumer price sensitivity as the challenges of the global economy are already well documented and broadly discussed instead.
Instead, I will focus my remarks on the proactive steps that we're taking to ensure operational excellence and continued profitability within this operating environment.
We're focused on what we can control.
Becoming better operators to deliver better pizza with better service.
I am pleased to announce that in the fourth quarter, we launched our back to better operations initiatives.
Further sharpening our execution and driving better customer experience.
While we cannot control inflation, our customers budget, we can't control, how effectively we execute superior operations.
As such we're leaning into our corporate owned restaurants, focusing on faster service, while optimizing labor allocation enhancing operational efficiencies and effectively managing margins.
We are realizing early wins with improved product quality faster out the door times and better customer satisfaction, while also optimizing unit margins.
For example, our out the door time for orders taken in our corporate restaurants is now approximately 20 minutes that.
That's nearly 10 minutes faster from where we were a year ago.
This work is being led by our Chief Restaurant Officer, Joe <unk> and his company operations team.
For nearly a year, Joe and his team have been closely evaluating our restaurant operations and introducing introducing a best in class infrastructure to build a model for unit level productivity and operational excellence across all of our restaurants.
These efforts helped to offset some of the macro and operational headwinds that we faced in 2022 and produce positive costs for our corporate locations in the fourth quarter.
We expect these efforts will continue to deliver margin improvement and higher sales over the next several years.
Our focus in 2023 is to leverage these insights to drive similar improvements with our franchisees.
Finally, expanding our domestic and international footprint is a key aspect to our growth strategy.
We believe theres, a significant amount of white space to offer our differentiated premium positioning to more customers globally and within the U S.
This past year, we made good headway expanding our system wide footprint by four 5% with the opening of 378 new restaurants.
This includes the opening of six restaurants in Honduras in the fourth quarter, which was a new market for us at the end of 2022, we were in 48 countries and territories, leaving us with significant white space for further expansion moving forward.
In North America, we achieved record system <unk> of approximately $1 2 million in 2022 versus approximately 900000 in 2019.
And as we mentioned on our last call, we see opportunities for us to implement our winning strategies from our North American playbook and apply them across our global footprint.
Our teams are focused on delivering premium menu innovations enhancing revenue management capabilities and ensuring that we have a strong online ordering presence through our app website, and aggregators and all of our markets.
It will take some time to implement these best practices across all across all markets, but so far we're pleased with the early customer response to our North America menu innovations when introduced internationally.
The underlying long term fundamentals of our franchisee model are strong.
Our franchisee payback and unit economics remain attractive despite near term macroeconomic challenges affecting our industry.
This is most evident in the pipeline we have for new unit openings as we remain a sought after brand for new franchisees on a global basis.
Even as we head into another challenging economic year I am confident that we will open between 270 to 310 net new units in 2023.
At the midpoint of the range. This growth would represent a 5% increase in total system wide unit and a nearly 20% increase over last year's 244 net new units.
We are particularly bullish on the long term opportunity internationally.
Last year, we were pleased with the progress we made in penetrating the middle East and East Asian markets, and we have a robust pipeline for further expansion in Asia in general.
In fact last week, we opened our 49th market with four new restaurants in Jordan.
Our development team also remains in active negotiations to expand our footprint into more new markets in the near future.
Taking all of this into consideration we remain on track to achieve our projected long term development target of 4500 to 800 net new units by the end of 2025.
As a reminder, these numbers are inclusive of the 244 net new units we built in 2022.
Achieving this net new unit goal would result in annualized net new unit growth between 6% and 8% between 2023 and 2025.
I'd like to close my comments by recognizing our teams for the winning culture that we're building at Papa John's for.
For the second year in a row Papa John's was named Bolls Forbes list of world's best employers and best employers for diversity.
We also earned another 100% score on the human rights campaign Foundation's 2022, corporate equality index.
We are proud of our team and their commitment to our brand promise of delivering better which has contributed to the resiliency and achievements of our business as we navigated the challenges of 2022.
Coming out of this year, we are better operators and a stronger company and we are set up to further build on our success in 2023.
Now I'd like to turn the call over to Andy to provide more color on our fourth quarter and full year financial results and.
Thanks, Rob and good morning, everyone from a financial perspective, we are pleased with our 2022 performance given the many macroeconomic challenges our team had to navigate throughout the year.
<unk> mentioned for the full year 2022, we reported increasing system wide sales, our third straight year of positive North America comps and solid net unit growth.
Also increased our annualized dividend rate by 20% in August and bought back nearly 4% of our outstanding shares.
Entering 2023 with a solid financial foundation, enabling us to continue investing in long term growth and returning value to our shareholders through dividends and share repurchases.
Beginning with our P&L with fourth quarter Global system wide sales were $1 2 billion.
Up 3% in constant currency and excluding the previously announced franchisees suspended restaurants compared with the same period last year.
Net unit growth, particularly in international markets, along with positive North America comp contributed to the higher system wide sales.
This growth is a great example of the strength of our brand and franchisees excitement investor Papa Johns.
We finished the year with North America comp sales up one 1% in the fourth quarter. A result of franchised restaurant comp sales being up one 1% and company owned restaurant comp sales up 8%.
The key factor that drove the comp sales growth in the fourth quarter for new menu innovations strategic strategic pricing actions and our enhanced value platform pairing.
Carpet locations also benefited from our back to better operations initiative that was launched in the fourth quarter.
For the fourth quarter menu prices were approximately 7% to 9% higher compared with a year ago, primarily due to strategic pricing actions taken during the first half of 2022.
As anticipated with strategic pricing actions transactions were lower year over year for the fourth quarter, but in line with our expectations.
Looking to 2023, we expect our sales growth to come from a combination of ticket and transaction growth as our strategic pricing actions to get to lap.
International comps were down three 4% in the fourth quarter, it still delivering a three year stack of 20%.
Similar to the prior quarter the challenges we saw in the U K market had a significant impact on our international segment results.
Largely offsetting the UK performance were solid comps from other international markets, specifically the middle East.
Total revenues for the fourth quarter were $526 million up 3% versus the prior year when excluding the impact of our strategic Refranchising over 90 restaurants joint venture in the first quarter.
Turning to margins adjusted operating income, which we believe is a meaningful measure of our operating performance and a metric I will reference throughout my comments today with $38 million in the fourth quarter compared with $42 million for the same period last year.
Adjusted operating margins were seven 3% down slightly from seven 9% last year, but up sequentially from six 6% in the third quarter.
The year over year decline was in line with our expectations and primarily reflects higher food inflation and labor costs in our corporate restaurants.
Which more than offset our strategic pricing actions taken earlier in 2022.
Taking a deeper dive into our operating segments.
For our domestic company owned restaurants segment food basket costs were up 13% in the quarter versus the prior year, driven largely by higher year over year, Keith costs and to a lesser extent by increases in total costs.
Labor costs also remained elevated in the quarter together. These two factors represented approximately 550 basis points of headwind for the domestic company owned restaurants segment margins year over year.
Our strategic pricing actions somewhat offset this record in placement, resulting in an approximate 250 basis point decline in restaurant level margins compared with a year ago.
We anticipate our domestic company owned restaurant margins will improve throughout 2023 as food inflation Decelerates and our team execute on the operational excellence initiatives discussed earlier. Most importantly, we remain confident in our ability to offer good value to customers without sacrificing margin.
Our North America commentary segment revenues grew by 12% in the fourth quarter year over year, driven by the continued acceleration of costs somewhat offset by lower volumes.
As a reminder, our commentary arrangement with North American franchisees enables us to pass through food labor and fuel cost on a cost plus fixed margin basis.
As a result rising costs are slightly accretive to commentary operating income the dilutive to operating margin.
In addition, variances can exist between quarters because of the lag in timing from when costs are incurred when they are passed through with your franchisees, which is why it is helpful to look at commentary margins on a full year basis.
For fiscal 2022 commentary margins were six 7%, excluding G&A DNA and intersegment revenues.
Taking these items into consideration commentary March three 9% comparable with the prior year and consistent with our expectations.
For our international operating segment operating income was down in the fourth quarter compared with the prior year as we previously mentioned the U K is our largest market and the only international market, where we own the commentary.
Since this market is more than just a royalty stream. The near term challenges. We are facing have had a more pronounced impact on international profits.
Sequentially, we saw improved performance within our international operating segment, including the U K.
Additionally, changes in foreign currency exchange rates negatively impacted adjusted operating income in the fourth quarter by approximately 250 basis points.
The cost headwinds, we experienced in our domestic company owned restaurants, and our international segment were somewhat offset by a decline in general and administrative expenses.
Altogether. These factors were an approximate 70 basis point drag on fourth quarter, adjusted operating margin versus a year ago, and an approximate 70 basis point improvement from what we experienced in Q3.
I would like to pause and say how proud I am of our team and a year of significant commodity and wage inflation for the full year, we still produced $157 million and adjusted operating income.
To put this in context in 2020, our adjusted operating income was $96 million and in 2019, it was $34 million.
Needless to say, we've come a long way in a relatively short amount of time, while successfully navigating extremely challenging circumstances.
Continuing to earnings on a GAAP basis diluting diluted earnings per share was <unk> 66 for the fourth quarter versus 67 last year Q.
Q4, 2022 result.
<unk> <unk> per diluted share related to the termination of UK franchisees.
And in Q4 2021 included eight cents per diluted share related to our strategic corporate reorganization.
The termination cost in the U K, our continuation of our commitment to reposition our UK portfolio in a way that ensures our franchisees in this market are aligned to drive above average industry growth over the long term.
Excluding these items Q4 2022 adjusted diluted earnings per share were <unk> 71 down slightly from 75 a year ago.
Moving on to cash flow and the balance sheet for fiscal year 2022, net cash provided by operating activities was $118 million.
After deducting $78 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $39.
This was down from $110 million for fiscal year 2021, reflecting the impact of our overall business performance working capital changes and a $10 million increase in capital expenditures.
We ended the year with ample liquidity approximately $440 million in cash and borrowings available under our revolving credit facility and have a conservative gross leverage ratio of two six times.
We also continued to return significant cash to our shareholders during.
During the quarter, we repurchased $30 million of shares in total we repurchased more than one 3 million shares in 2022 and had $300 million remaining available for repurchase under our current authorization at the end of the year.
We also paid out approximately $55 million in cash dividends in 2022.
Based on our strong balance sheet. Our board has declared a first quarter dividend of 42 per common share were $1 68 annualized.
Through prudent management of our cash flow, we are able to maximize our financial flexibility and our ability to create value for our shareholders in both the short and long term through a combination of organic growth opportunities share repurchases and cash dividends.
Before discussing our outlook I want to provide an update on our UK market and the support we are providing our franchisees as this market continues to face significant inflation and high energy prices among other challenges.
We mentioned on our last call we are committed to supporting our UK 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.
The next step in our commitment includes a variety of support to help our franchisees through this difficult time included targeting marketing initiatives are about $2 million to $3 million.
We are confident the investments we are making today are setting us up for long term success supported by a strong franchisee base.
Now to our outlook.
We remain confident in our positive North America comp sales, which we expect to grow between two and 4% annually going forward.
As we look to 2023, specifically, we anticipate being at the lower end of this range following three straight years of record sales.
Down sequentially as commodity and wage costs remain elevated.
Full year, we anticipate margins to be comparable to up slightly as we benefit from suffer a tailwind, including our operational excellence initiatives, a positive comp performance and the benefit of 53rd week in 2023.
As a reminder flow through margin is higher than the 53rd week as we love her fixed costs, primarily in G&A in DNA, which we estimate will have a roughly 50 basis points benefit to our fourth quarter adjusted operating income margins in 2023.
Upsetting. These tailwinds are the investments we are making in the U K and higher G&A expenses as performance based compensation ramps back up along with the return of our franchisee confidence in the second quarter. After a three year pandemic hiatus. Additionally.
Additionally, while we expect food and wage inflation to ease over the longer term, it's difficult to predict when and to what extent it will occur in 2023.
We expect capex to be between 80 and $90 million as we invest in technology innovation and the development of New company stores.
Full year net interest expense is expected to be between 33 and $38 million and we expect our tax rate to be between 21% and 24%, reflecting an impact from the U K and a lower cost benefit related to equity investing.
Looking at the longer term will continue to drive value through innovation unit growth operational productivity and strategic capital investment as Rob discussed today are marketing teams are aggressively pursuing top line growth through menu in digital innovation, while at a restaurant operations have a renewed focus on productivity coming out of the pen.
Stomach process enhancements are resulting in faster service and improve customer satisfaction, giving us great confidence in our ability to drive future margin expansion.
And with that I'll turn the call over to Rob for some final comments Bronx.
Thanks Sam.
As you can tell from our prepared comments today, we expect 2023 to be another great year for Papa Johns as we execute on our strategic priorities.
We're leaning into and leveraging our barbell strategy of offering both great products and value for our customers.
Or back to better operations initiative is focused on delivering more profitable growth.
And our development teams are accelerating growth in our established markets identifying attractive new markets to enter and attracting new well capitalized franchisees to partner with.
With a continuing combination of insight innovation and discipline, we're confident will drive steady earnings expansion and system wide sales growth for many years to come.
With that I'll turn the call over to the operator for Q&A.
Thank you.
A reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to his draw. Your question. Please press star one one again.
Our first question comes from Brian Bitner with Oppenheimer You May proceed mmm.
Good morning, robbing in I.
I appreciate all the guidance details that you've given us on this call it sounds like you.
You anticipate Thompson 2023 to be at the lower end of this new 2% to 4% longterm range, which is which is solid but you also I think you said you anticipate traffic to be positive in 2023 can you just clarify that is that where you anticipate for the full year.
You anticipate the opportunity to turn traffic positive throughout the year and what have you seen in your business that makes you think that positive traffic can be achieved it might've kind of all the macro pressures, we're hearing out they're impacting the delivery segment in general.
Hi, Brian Great question, what I would tell you is it in Q1, we're seeing strong transactions, particularly in our company restaurants.
Where we've kind of significantly improved.
Our operations, which is creating an improvement in our throughput and we anticipate being able to bring those insights in that discipline to bear across our franchisee networks have already met with many of our largest franchisees and they're starting to implement those those procedures in those processes to make us all.
All.
Run more productively and so the other thing I would tell you and we said this in the past I mean, we have pizza.
<unk> has done really well through tough economic times. It is has a built in value component, we're still very competitive in.
In the marketplace with.
Lower priced offerings that are gonna be you know in more demand as the economy and purr and consumer sentiment continues to evolve. So we have a lot of confidence Q1 is is our biggest laugh ever Q1 was was amazing quarter for us.
Last year and we're really.
Pop confident in our ability to continue the momentum that were.
Where building in Q1 throughout the balance of the year that will help us to continue to drive some strong transactions.
Thank you.
Thank you.
Our next question comes from Saracens.
Bank of America, you May proceed.
Okay. Thank you very much I, just wanted to sort of understand a little bit more about this <unk> and it sorta sounds like we're still perhaps in the process of normalization at the man <unk> kind of the big preferred during the pandemic I guess I ask because the rest of the industry seems to be seeing strong sales. So I was wondering if you could.
Give any color.
Is the right way to think about this sort of like normalize volumes and then we go from here and are you see any difference in years like this the demand coming through the the third party the aggregators versus what you might be seeing in your own ordering platforms and just trying to figure out where like the chefs are coming from it if it's delivered.
Overall or.
Delivering your platforms and whether.
Whether or not we can think about this here shortly with.
With volumes normalized and go out from here. Thank you.
Sure you know our three year stocks right now for for Q4 last year with 26%.
And we delivered one 1% so I would I would absolutely concur with you that the volume is normalized.
And we for a long time during the pandemic. We continue to be asked if this was a pandemic.
You know.
You know a pandemic impact on our business all the sales that we had had garnered and whether that was all going to go away. When we came out of the pandemic, while I'm happy to say that we delivered positive comps last year last year was kind of the year that we came out of the pandemic was a record year for us in terms of sales are third straight year a positive.
Comps in North America, So as we look at 2023.
We.
We're guiding to be positive again, this year, which would deliver another record year and so we are building on the foundation that we that we developed during the pandemic.
Everyone on the call recognizes three and a half years ago. This company was in a very different spot and there were a lot of.
Initiatives put in place and we laid out our strategic priorities and we mentioned that during the pandemic. We didn't change any of that we just accelerated everything and I feel like the pandemic did help this company get a strong flooding and we delivered to amazing record years.
Last year was a very tough year 2022, the cost structure created it really tough P&L year, but we persevered through it and delivered our second highest.
Operating income in the company's history. So this year, we're building on all of that it is much more kind of stabilized normalized gross and we feel like that's going to be the foundation for us to continue to grow moving forward.
And then just tell me ordering channels.
Oh, I'm, sorry, I apologise us. So we are seeing we're still seeing growth and strength and the aggregator marketplace.
Models their growth rates have changed the trend lines of change, but they are still growing.
A solid part of our business both on the marketplace side, where we continue to attract new incremental profitable customers and transactions, but also on the delivery of the service side, where we leveraged their put the partnership to really help us manage through some of our peak times and.
Make sure we don't have to turn off our ordering system. So I know there's a lot in the media a lot that has been written about the aggregators and where they're headed for us it's still very strong partnership and a strong part of our business.
Uh-huh.
Thank you.
Our next question comes from Chris Uncle would seafood you May proceed.
Yeah, Good morning, guys Uhm.
The unit growth guidance for twenty-three implies a pretty large step up in 24 and 25 in order to achieve that 68% to 23 25 grocery guidance, you've given it looks like maybe.
100 units step up or more in those years. So I'm, just wondering which mortgage do you expect to be primarily responsible for that accelerated growth.
And those out years and then if you guys could you just provide an update on maybe domestic franchisee store profitability for the 22 and how maybe it changed you over here that'd be helpful.
So great question, Chris Yeah. It it is a step up.
Last year, obviously was impacted by some of the geopolitical situations.
Across the globe and we had some big markets that we couldn't count on development from this year and mentioned some of the investments we're making in the UK with the UK will be a little softer than than we've been the last few years because of the situation that they're going through but we're making that up.
With strength in China strength in the Middle East.
Strength in Central America, and what we believe will be in a stronger domestic development. This year and into next year. We also is Ann mentioned on here on her comments, we are inactive discussions with partners in large undeveloped.
Countries right now and we look forward to hopefully being able to announce some of those agreements.
Later this year, which will then have relatively significant impact on 2024 and 2025 so.
It really is a combination of some of the some of the current markets really performing well as an mentioned.
If you take the UK out of our international business, who was positive last year and we have some really bright spots.
Across the globe with our current franchisees that we are counting on an an R. C.
Strong commitment to ongoing development and then with the addition of the new market that those two things give us a lot of confidence in our ability to hit that range.
And then on the domestic restaurant margin and if you want to comment on that yeah, I mean, I think certainly [noise].
The domestic Ah restaurant margin was under pressure for the current year.
But we're still holding onto the avs as Rob talked it out and actually grew the AZ slightly so when you look at the dollar profit that's being thrown off by these units you know, it's still very healthy profit, particularly when you look at historically still at record highs, which gives us great confidence.
Kind of moving forward and if you look at our outlook for 2023, you know we would expect to improve the unit economics from there in 2023.
Perfect. Thank us.
Thanks, Chris.
Thank you.
Our next question comes from Americans honest with Qbank capital markets. You May proceed.
Hey, Thanks, Good morning, and maybe a quick clarification and then my real question.
You said northern our confidence in the first quarter, you expect them to be comparable with the one the first quarter record sales in 22 is that to mean flat comps.
Where were you talking about the growth rate versus last year and then the real question is really that the labor market and and if you could give us an update on the status of the labor market as it pertains to the pizza category.
You're still losing sales due to delivery driver shortages.
Or the stores are fully staff right now.
So Eric Thanks for clarifying question I was meaning that we expect comps can be roughly flat.
And Q1, and then grow from there.
Great. Thanks.
Yeah. So on the delivery driver staffing, we really haven't talked a lot about.
Our sales being negatively impacted by delivery driver staffing I think that's been a lot of the commentary and throughout the earth with our competitors, but we've been able to mitigate some of those staffing challenges with our partnerships.
The delivery.
Delivery of the service. So we are seeing staffing stabilize we are seeing improvements in our staffing models and and a lot of the operational improvements that we talked about that we started to see early in the back half of last year and significantly here in Q1 are helping us leverage our <unk>.
Labor to a greater degree and make sure that we are able to.
[noise] service, our customers I mean, I I mentioned in the comments that are out the door times have gone down from 29% to 20 minutes versus a year ago. You don't do that if you have a staffing deliver.
Delivery staffing problems right. So we feel confident that we have what we need to continue to drive operational improvements and that's why you know and.
<unk> talks about her comments that we expect.
Some operating margin improvement in our restaurants through the balance of the year.
Great. Thanks.
Thank you.
Our next question comes from Lawrence Silverman was credit Suisse. You May proceed.
Hey, Thanks, so much I wanted to ask about the operating margin.
Four I guess slash slightly up for the year can you just talk about what are the contribution is from the gymnastic corporate portfolio <unk> understanding some of that.
With the TNA and then you can just help us understand what the implied guidance for EPS I think that'll be very helpful. Thank you.
Sure. So I'm looking forward as I said in my remarks, we expect margins operating margins for the total company to be relatively flat year over year. So as Rob talks about nine mentioned kind of already we do expect expansion in the corporate restaurants, but that will be offset [noise].
Excuse me by investments that we're making balls in international and and G&A. So as we look specifically at the carpet restaurant margins, we expect those to improve.
Reflecting some deflation in commodities cost labor efficiencies from our back to better initiative that robbed talks about as well as the benefit of fixed costs coverage on comp sales increases.
G&A will be a headwind year over year as we ramp up a ramp back our performance based compensation and bring back our franchise. The conference to give you. Some you know additional color. There you know there was a lot of noise in 2022. So I'd go back to 2021 use that as your base you know add in some.
<unk> and then a couple of million dollars for the franchisee conference and that will get you close international we talked about will be pressured reflecting a combination of the investments, we're making wish I did quantify of between $2 million to $3 million and then you know a bit of near term sales pressure coming from the U K.
So I think those pieces kind of can get you.
To where you came back into what you think the corporate restaurant margins would be as far as EPS, we're not providing specific guidance lauryn, but we did in my remarks.
<unk> some specifics around interest expense.
And the tax rate and so I think there's enough there for you to kind of get to the EPS estimate on your own.
Alright, Thank you guys.
Thanks, Laura.
Thank you.
Our next question comes from Joshua alone with Stevens you May proceed.
Great. Thank you for taking my question I imagine, there's more to come and given though knew the back to basics operations operational plan is there's probably more to come here and I'm just curious if <unk> at a high level of if you could share some of the early learning some maybe some of the focus points of how that might flow through I realize.
Much to be shared so probably.
Learned at the store level as you work through it but just curious in early learning so they've got new enthusiastic about ruling out this program a bit more.
Yeah. Great question, you know a couple of things I'll tell you that one.
For two years during the pandemic it was really about staffing the restaurants, not just drivers staffing, but staffing in general we we're doing everything we could and our operators are doing everything they could to keep the restaurants save keeps a restaurant's open.
And you know I think during that time.
We lost a little discipline, a little focus on some of the K P. I is that <unk>.
Track and monitor to make sure you are running great operations, well, we brought in some new leadership.
They have kind of restored that focus and that measurement and that discipline and frankly to follow up on whether or not we're hitting the kpis.
Watching the right performance indicators and hitting the objectives that we all that we have in place and we changed some of the GM cough model do include operations metrics not just the financial metrics. So there's there's things that we've done really kind of blocking and tackling to make sure that we are tracking the right things.
And.
Following up on those things some other more kind of functional things, we've approved or make light of efficiency through some.
Optimizations and then we've also.
Worked really hard to make sure that we have a great operating model when it comes to our driver dispatch utilizing both our company employees and drivers and our deliveries of service partners, making sure that we are optimizing that models or.
For awhile, there was some kind of.
Some of our operators of some of our restaurants weren't as efficient as they needed to be and how they utilize their their driver labor pool, and we've cleaned up a lot of that so it's not really any rocket science that we've that.
We've incorporated it's not like we wrote some new piece of software that is changing everything it really is about leadership. It really is about measuring results and you know I think it is just getting back to being great operators, which is effectively what made this company great in the first place. So that's really the focus areas right now.
Thank you.
Thank you.
Our next question comes from Peter suddenly would be T. I G. You May proceed [noise].
Great. Thanks.
It seems like the the challenge right now is is really getting traffic back in this since the stores.
Can you just talk about what do you think is the top one or two lovers you have at your disposal to to drive traffic is it really leaning harder on menu innovation is it more on operations.
Doesn't sound like it's labor based on your prior comment so just trying to understand what you think the the major levers are to drive traffic in 2023.
Yeah, I mean so.
We've already seen some improvements in our transaction trends versus year ago here in Q1, So we're already see.
Traffic improvements and a lot of that has to do with some of the throughput and the company restaurants, where we've seen the most impact but a lot of it also has to do with some of the innovation, we've already launched pop up ice and crispy Parm pizza have done extremely well they are bringing in new customers they're driving.
Trial of of of the brand.
And they're also adding check while we're driving those transactions because they're crispy parm as a premium pizza Papa bites are being added to existing pizza order. So.
Innovation is gonna play a big part we've got a full pipeline of new products lined up to go this year, we're really excited.
If they.
We're lucky enough that all of them do as well as crispy farm is doing then I think we'll we'll be in really great shape.
Product innovation, and then frankly, just just the throughput that's being when you reduce your out the door times.
You are able to take a lot more orders and you know order loss at the restaurant level is is always.
A challenge on a on a peak times and we're seeing a lot more orders just being loss or a lot less orders just being lost.
Through our improvement in operation. So that's gonna drive transaction growth itself. The last thing I'll say is <unk> almost 28 million.
Loyalty members at this point.
We started talking about the loyalty program three years ago, we were 12 or $13 million loyalty members. So that's just a lot more people that we continue to add to our loyalty program that gives us the ability to send.
Personalised incentives in one to one marketing.
Opportunities to kind of increased frequency throughout the pandemic. We've said this before throughout the pandemic we.
We drove brought in a lot of new customers, we really didn't move the needle on for frequency. When there is a lot of discussion around.
[noise] fatigue, we weren't seeing that we weren't seeing people come back a lot more often we're just getting a lot more people. So I do think that there is a lot of upside opportunity for us to increase the frequency with our best customers that are loyalty platform is the best way to do that.
[noise], Great and then just.
Lastly, your menu pricing I believe in the fourth quarter was in the high single digit range. How do we think about carryover pricing and twenty-three what would the impact on the copy and do you plan on taking any additional price or do you feel like more discounting is is in the cards just any thoughts.
That would be helpful.
Yeah, I mean, we started taking that pricing last year about this time, so we're kind of just starting to lap.
The the the impact of that pricing, we don't have.
Much pricing plan for.
For 2023 is an mentioned we are we do believe that there is going to be some.
Relief and and the commodities cost it impacted us such a such a huge extent in 2022.
So that should help with with some of the restaurants operating margins as an mentioned and therefore, we're not planning on taking nearly as much pricing as we did last year, because we don't believe we will need to.
[noise] great. Thank you very much.
Thanks Pete.
Thank you.
Our next question comes from Alexander Schlegel was Jeffries you May proceed.
Hey, Thanks, good morning, Congrats crushed.
Question on UK and just additional thoughts on what you think you need to do ultimately to resolve the challenges in this market and if it's just as simple as driving more awareness and brand boy Sir.
See this more as it first desk, while you evaluate additional portfolio repositioning work or other support just thoughts there.
Yeah, that's a great question and I would tell you it's not as simple as that I mean.
There is a lot of work that needs to be done in the UK I mean fundamentally we believe that the UK is going to be a great market for Papa Johns with guys are second largest market outside the U S.
You know we have brand awareness there we have scale, we have great operate you know a great supply chain, we have the infrastructure.
We need to get better at operations I need to make sure that you know that the challenges that have.
Market is facing dealt.
Lead to a significant decline in our ability to take care of our customers, we've got a new <unk>.
Team and the UK leadership team that is focused on operations focused on a lot of the things that we've talked about here improving our corporate restaurants. It really is a back to basics back the better model over there, where we're making sure that we've got great operators that can take care of our customers and then once you've got that in place.
Then you do try to create more awareness more.
Opportunities to bring new customers in where where right now building out new digital capabilities, our website or application over there isn't as robust.
As we have in the U S R conversion rates of customers coming into those digital platforms.
Significantly lower than it is in the U S. So we're.
We're making investments there to optimize those platforms and get more customers through the funnel. We're also leveraging the innovation that we're developing here in the U S.
To be able to bring excitement in new items to that market. It's not it's not just a hey, whatever we do in the U S. Let's put it in the UK, we're still making sure that there.
Consumer demand and excitement around with those items, but we're doing a lot more cross pollinating than we ever have so we.
We have a lot of confidence obviously, we've called out here that is not something that we're going to fix overnight or not maybe not something that we're gonna fix even in the next quarter or two but it's definitely a market that we are committed to and that we believe can be as strong growth market for us in the future.
Great. Thank you.
Thank you.
Thank you. This concludes the Q&A. So soon I know I'd like to turn the call back over to rub balloons for any closing remarks.
So I'd like to thank everyone on the call.
For your time this morning and for your continued support of pop pop jobs.
To summarize we're confident about the long term opportunities for Papa Johns progress thus far.
It is often said that it's easy to look good during good times, but it's a challenging times that reveal the true potential of a company.
I couldn't be more proud of how our team is navigated the most challenging year that we've experienced together.
Entering my fourth year with the company I continue to be excited about the potential for this differentiated brand we have a solid foundation great momentum.
[noise] focused on executing our strategic priorities to continue to build sustainable long term value for all of our stakeholders. So thank you very much for calling in and I look forward to speaking with many of you later today.
Thank you. This concludes today's conference call. Thank you for participating you may know disconnect.
The conference will begin to T. Two reason <unk> you can dial 911.
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The conference will begin to P. Two ways and Lily Johan <unk>, you can dial 911.
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