Q1 2023 Papa Johns International Inc Earnings Call
Speaker 1: Good day and thank you for standing by. Welcome to the Papa John's first quarter 2023 conference call and webcast. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone and you will hear a message advising your hand is raised.
Speaker 1: To withdraw the question, simply press star 1 again. Be advised that today's conference is being recorded. I would now like to hand the conference over to Stacey Frohley, Vice President of Investor Relations. Please go ahead. The celebration begins here in the nice classic jazz band Campus with statement in the front
Speaker 2: Good morning and welcome to our first quarter earnings conference call. This morning we issued our 2023 first quarter earnings release. A copy of the release can be obtained on our investor relations website at ir.papajohn.com.
Speaker 2: under the News Releases tab or by contacting our Investor Relations Department at investor-relations-at-papa-johns.com.
Speaker 2: On the call this morning are Rob Lynch, our President and CEO , and Chris Collins, our Interim Principal Financial and Accounting Officer.
Speaker 2: 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.
Speaker 2: 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.
Speaker 2: In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call.
Speaker 2: Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-up. Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram? Ram?
Speaker 3: Thank you, Stacey. Good morning, everyone, and thanks for joining us.
Speaker 3: Overall, we are pleased with our first quarter performance.
Speaker 3: which was consistent with our expectations and resulted in the highest global systemwide sales and company history.
Speaker 3: Our North America comparable sales were in line with our record results we achieved a year ago and supported by 3% growth in our domestic company-owned restaurants.
Speaker 3: Our North America comparable sales were in line with our record results we achieved a year ago, and supported by 3% growth in our domestic company-owned restaurants. In the first quarter, we also opened 59 new restaurants.
Speaker 3: We are extremely proud of our accomplishments over the last three and a half years.
Speaker 3: We've built a unique infrastructure and business model that is designed for sustainable sales growth. We've built an amazing product pipeline with new platforms that keep producing new ideas.
Speaker 3: We have also significantly improved our operations to support our business moving forward. And we have built a company culture that makes us all proud.
Speaker 3: But we know there is more to be done, and we have yet to realize our full potential.
Speaker 3: We continue to see opportunities to get better and create value for our customers, our franchisees, and our shareholders.
Speaker 3: This is why I'm so excited about the future of Papa John's.
Speaker 3: the challenges and opportunities that we have to get better.
Speaker 3: We recognize we are lapping significant costs from 2022 and 2021.
Speaker 3: For the first quarter, our outlook was for flat comps, but that is not our expectations for the year.
Speaker 3: year. We expect to see improvement, especially in the second half as year-over-year comparisons that second quarter. So we expect that the recent
Speaker 3: In the current inflationary environment, we are focused on finding the optimal mix between check and transaction growth.
Speaker 3: Our track record of delivering three straight years positive comp sales gives us confidence that we can deliver on our long-term targets.
Speaker 3: Over the past several years, we have been investing in technology and building an organizational infrastructure necessary to operate an industry-leading CRM platform that is designed to drive brand engagement through relational and step-transactional experiences.
Speaker 3: Today, approximately 85% of our sales come through digital channels, and we have nearly 30 million loyal fee member accounts.
Speaker 3: We have a significant data platform that we must utilize to enhance our brand and make the digital experience for our customers better by offering personalization that drives activation.
Speaker 3: Our focus continues to be on taking care of our customers and driving top line growth.
Speaker 3: I'm happy to say that we announced this week that Mark Shambrea will be joining Papa John as our new chief marketing officer.
Speaker 3: I'm confident that its more than two decades of experience in growing restaurant brands, including most recently at Mod Pizza and Chipotle, will help to drive continued engagement and growth among all consumer segments.
Speaker 3: Our recent investments in digital innovation will only get better with Mark's digital first analytics led approach.
Speaker 3: We look forward to igniting our brand engagement strategy on our marks leadership.
Speaker 3: As I've already stated, we have continued to evolve our menu innovation strategy as we build strong brand partnerships to raise awareness and attract new customers.
Speaker 3: At the end of December , we launched our new Papa Bites platform, which includes small bite-sized snacks and old new flavors utilizing our fresh dough.
Speaker 3: Our Oreo Pop-a-Bites were especially well received by our customers and were highly incremental to our dessert category.
Speaker 3: helping drive higher ticket throughout the quarter.
Speaker 3: We also launched our crispy parm pizza in February , making us the first large pizza chain to launch a thin crust pizza with cheese on all sides of the crust.
Speaker 3: Looking forward, we're excited about our new collaboration with Pepsi in Frito Lake, then inspired our newest proprietary menu offering, Doritos Cool Ranch Papadilla.
Speaker 3: This new offering is covered with bold ranch seasoning and includes Doritos Cool Ranch dipping sauce only available at Papa John's.
Speaker 3: This new offering is covered with bold ranch seasoning and includes Doritos Cool Ranch dipping sauce only available at Papa John's. We're thrilled to roll it out nationwide beginning today.
Speaker 3: We expect this premium innovation will drive both transaction and ticket growth as we target current and new customers.
Speaker 3: With this launch, we're strategically targeting a younger demographic of loyal Doritos consumers.
Speaker 3: With a price point of $799, it's a great value.
Speaker 3: As we previously discussed, our barbell strategy focuses on introducing both premium and core value menu items. On the value side, we continue to see strength in our pop-up pairings offering, which provides consumers with an array of great products and an attractive $6.99 price point.
Speaker 3: In the first quarter, we added our new hot lemon pepper chicken wings to our Papa Perrings platform.
Speaker 3: Papa Pairings will continue to be a platform where we can bring side item innovation to market.
Speaker 3: Great operations is at the heart of everything we do. Our Back to Better Operations initiative, launched in the fourth quarter last year across our corporate restaurants, is helping to further improve execution at the store level while enhancing customer service. These efforts are helping to mitigate inflationary pressures today, and over the longer term, we'll deliver improved unit economics across our system.
Speaker 3: Our Back to Better initiatives aligns our organization on KPIs that provide the best experience for our team members and our customers.
Speaker 3: harnessing what our brand was built upon, a relentless pursuit of better. Our data insights help us drive improved performance in key areas like Alta Doar Times. For the first quarter, our Alta Doar Times and corporate restaurants have improved by more than 25% on a year-over-year basis. Faster delivery ensures that our products are hot when they arrive. Food temperature is the number one driver of product satisfaction for pizza, and I'm going to
Speaker 3: Please to say that our teams in our corporate restaurants have significantly improved overall satisfaction scores in the first quarter compared with a year ago.
Speaker 3: Operational excellence is one of the many topics we discussed at the Papa John's franchise conference in early April . Due to the pandemic, this was our first conference since 2019, and I couldn't have been more energized by the excitement I felt from our franchisees about the future of the brand.
Speaker 3: We had more than a thousand attendees from around the world and there was great optimism for the marketing, operations and development initiatives we have underway.
Speaker 3: This is evidenced by the continued investment they are making in new restaurants globally. However, despite the fact that we have significantly improved sales and unit economics in North America over the last four years, this is not fully translated into the domestic development we want to see based on the white space that we have available. To help expedite development within the United States, increase the cost and improve business Eric the Better, further improve the brains and existing units.
Speaker 3: We are partnering with Franch IDs on providing construction services, including permitting, architectural designs, and general contractor management.
Speaker 3: This allows our franchisees to lower friction points and costs throughout the construction process by utilizing our in-house expertise and leveraging the scale of the Papa John's system. Early response to this program has been favorable and we anticipate more franchisees taking advantage of this opportunity going forward.
Speaker 3: To further enhance our development, we began rolling out our new store design last year, with a focus on creating a great customer and employee experience.
Speaker 3: We also took a hard look at value engineering to mitigate construction cost increases. Our newest store footprint is more aesthetically pleasing, more efficient, and easier to build. Looking forward, all new builds will have this transformational design.
Speaker 3: I also remain excited about the opportunity we have internationally.
Speaker 3: Our opportunity is not just about new unit development, it's about sustainably and profitably growing all of our restaurants globally. We are making significant investments in our international organization and infrastructure to set us up for long term success.
Speaker 3: For example, we are investing in technology and IT capabilities to support sales growth through areas like e-commerce, loyalty, and revenue management. We have spoken a lot about our white space internationally.
Speaker 3: restaurants across the United Arab Emirates, Saudi Arabia, and Jordan.
Speaker 3: They are a seasoned, successful restaurant operator and plan to open 650 new restaurants in India over the next 10 years. We see India as an attractive market for Papa John and this announcement clearly supports our global expansion strategy, which remains on track to achieve our long-term development target.
Speaker 3: of 1400 to 1800 net new units between 2022 and 2025. I'm also pleased to say that we remain on track to meet our current year development expectations of 270 to 310 net new units in 2023.
Speaker 3: which at the midpoint represents a 5% increase in total systemwide units and a nearly 20% increase over last year's net new unit number.
Speaker 3: Looking forward, our global pipeline is robust, and I'm confident the investments and strategies we are executing on today will enable us to capitalize successfully and take advantage of the significant white space we see all around the world.
Speaker 3: Finally, I want to thank our teams for their commitment to having an innovation mindset. I am pleased to announce that we were just named one of the country's most innovative companies and ranked first among pizza companies, and fortunate inaugural America's most innovative companies list.
Speaker 3: We're also identified as one of Forbes' best employers for diversity for the third year in a row. We've built a truly inclusive culture full of diverse ideas and diverse teams. We believe our inclusive and diverse culture is a core strength of Papa John , and we are extremely proud of the progress we continue to make. At this time, I want to welcome Chris Collins.
Speaker 3: who would assume the role of our interim principal financial and accounting officer.
Speaker 3: We're appreciative of Chris taking on this additional role while we conduct a comprehensive search process to identify our next CSO.
Speaker 3: Before I turn the call over to Chris, I want to emphasize that despite near-term challenges and changing consumer trends, our business model is resilient and the underlying demand for our product offerings remain strong.
Speaker 3: We are excited about the challenges and opportunities we have to get better. We are excited about the new product ideas that we have. The improvements we are making in our operations and the significant white space we are pursuing for new store growth domestically and internationally.
Speaker 3: Now I'd like to turn the call over to Chris to provide more color upon our first quarter results. Chris?
Speaker 3: Thank you Rob and good morning everybody. I'm excited to speak with you today and look forward to working with you and the Papa Jones team as I take on this interim role.
Speaker 3: As you read in our earnings release this morning, we continue to deliver top-line growth on top of significant gains over the past few years.
Speaker 3: For the first quarter, global system-wide restaurant sales were 1.2 billion, up 2% in constant currency, and excluding the franchisee suspended restaurants announced last year.
Speaker 3: Net Unic growth, primarily in international markets, contributed to the higher system tanks of important resources to provide specialists that contribute to the right sales???. As CSA students out ???RS headquarters, DGI and DELAC direction a
Speaker 3: For the first quarter, North America comp sales were flat with last year's record first quarter sales.
Speaker 3: a result of a 3% growth in our company-owned restaurants.
Speaker 3: and a decrease of 1% across franchise restaurants who are coming off as strong first quarter a year ago.
Speaker 3: For added color, in the first quarter, we allowed our largest January ever, when customers were staying closer to home to the impacts of Amma Crive.
Speaker 3: On a two year and three year stack, North America cons were up 2% and 28% respectively.
Speaker 3: International comps were down 6% in the first quarter as inflation continued to pressure consumer spending across markets.
Speaker 3: Similar to the fourth quarter, the challenges we faced in the UK market had a significant impact on our international segment results.
Speaker 3: First quarter comms were also impacted in Asian markets due to the Chinese New Year and a loosening of COVID restrictions.
Speaker 4: Strength in our other international markets, especially in the Middle East and Spain, partially offset these pressures.
Speaker 4: Total revenues for the first quarter were 527 million, up slightly from the same period last year when excluding the impact of refranchising a 90-restraunt joint venture in 2022.
Speaker 4: Total revenues for the first quarter were 527 million, up slightly from the same period last year when excluding the impact of refranchising a 90-restraunt joint venture in 2022. Now 30 in the margins.
Speaker 4: For the first quarter, adjusted operating income was 39 million compared with 45 million from the same period last year.
Speaker 4: The year-over-year decline was in line with our expectations as the impact of the significant commodity and wage inflation that occurred throughout 2022 has not fully lapped.
Speaker 4: In addition, higher DNA expense was driven by annual merit increases and performance-based copper crules.
along with higher depreciation and amortization related to our investments in restaurants and technology support.
Adjusted operating margins were 7.4%, a 90 basis point decline year over year, but slightly better on a sequential basis.
Our teams are taking a disciplined approach to managing costs while maintaining our high-performance culture and supporting our strategic growth initiatives.
So let's take a deeper dive into our operating segments. In our domestic company-owned restaurant segment, food basket costs were up 4% compared with the prior year.
Labor costs also remained elevated in the quarter. Together commodities and labor costs represent approximately 200 basis points of a headwind for the domestic company-owned restaurant segment margins year over year. Our strategic pricing action somewhat but not fully offset these higher costs.
Resulting in our approximate 150 basis point decline in restaurant level margins compared with the year ago.
We expect to see further improvement in our domestic, company-owned restaurant margins as our team continues to implement the Back to Better operational initiatives and food costs continue to moderate throughout the year.
We remain focused on factors which are under our control, offering good value to our customers, and running great operations. In our North America Commissary segment, first quarter revenues grew by 1% year over year, driven by higher costs.
As a reminder, our commissary arrangement with North America franchisees enables us to pass through food, labor, and fuel costs on a cost-plus-six margin basis.
As a result, higher costs are slightly accretive to commissary operating income, but diluted to operating margins.
For our International Operating Segment, adjusted operating income was down in the first quarter compared with the prior year.
As discussed on prior calls, the UK is our largest market and the only international market where we own the commissary.
Since this market is more than just a royalty stream, the challenges we are facing have a more pronounced impact on our international profits.
Part partially offsetting the impact in the UK was an 8% net new unit growth in our international markets when compared with a year ago.
Partially offsetting the impact in the UK was an 8% net new unit growth in our international markets when compared with a year ago. Moving on to cash flow and balance sheet.
For the first quarter, net cash provided by operating activities was $41 million, up from $25 million a year ago. Free cash flow increased $7 million to $22 million, reflecting changes in working capital, partially offset by an $8 million increase in capital expenditures. We ended the quarter with ample liquidity.
of approximately $240 million in cash and borrowings available under our revolving credit facility and a gross leverage ratio of 3.5 times.
We also continue to return significant cash to our shareholders.
During the quarter, we repurchased approximately $210 million in shares.
In total, we have repurchased 2.5 million shares and approximately 90 million remains available for repurchase under our current authorization.
We also paid 15 million in cash dividends during the quarter.
Based on our strong balance sheet and positive business outlook, our board is declared a second quarter dividend of 42 cents per common share or $1.68 on an annual basis.
Through prudent management of our cash flows, 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 investments.
cash dividends, and share repurchases.
Now to our outlook. Overall, our growth expectations remain unchanged with a long-term outlook we provided on our fourth quarter call.
Consistent with our long-term guidance last quarter, we plan to grow our North American comms between 2% and 4% annually going forward.
Also consistent with our guidance last quarter, in 2023 we anticipate being at the lower end of this range.
From a cadence perspective, we believe North America comps will improve each border as we launch new menu innovations, activate targeted offerings for our most value-conscious customers, and execute our back-to-better initiatives.
We anticipate our international comp sales will remain under pressure but will improve each quarter as a macroeconomic environment evolves, including within the UK our largest international market.
We expect our adjusted operating margins to be comparable to or up slightly to the level achieved in 2022 as we benefit from several tailwinds, including our Back to Better initiatives, Positive North America comps, and the benefit of the 53rd week in 2023.
All setting these tailwinds are the investments we are making in the UK and higher DNA expenses as performance-based comp ramps back up. For added color, we expect our second quarter DNA expense to be higher due to the return of our franchisee conference after a three-year pandemic pietus.
In addition, while we expect food and wage inflation to moderate over the longer term, it is difficult to predict when and to what extent it will occur in 2023.
Taking into consideration that first quarter share repurchases increased our debt by approximately $200 million, we now expect full year net interest expense to be between $40 million and $45 million.
The increased interest expense is mitigated by the share reduction from an EPS perspective.
Our cap-ax remains at 80 to 90 million.
as we invest in technology innovation and the opening of new company stores. And finally, our tax rate is anticipated to be at the higher end of our 21-24% range.
In summary, we continue driving value for shareholders and setting Papa Johns up for success through our menu innovation, digital enhancement, operational productivity, unit growth, and strategic capital allocation.
And with that, I'll turn the call over to Rob for some final comments. Rob, thanks Chris.
I've set up a four piece of the uniquely special food. It almost always brings friends and families together in some form of celebration, whether it's the Super Bowl or our casual Friday night gathering.
We believe that the world deserves better pizza and that we deliver it, but we remain hungry for better. I'm proud and thankful for the last three and a half years, but I'm most excited about the future of this brand.
With that, I'll turn the call over to the operator for Q&A. Thank you. In a free reminder, we ask that you please keep your questions to one and queue up again for additional questions if needed. Please stand by while we compile the Q&A roster.
And our first question comes from the line of Sara Senator with Bank of America. Please proceed.chu increased your chance to win $ sleeps
Okay, thank you very much. A question and then a clarification about unit growth. So on the on the PJP the agreement for India I know you know predates you Rob but India was a market that Papa John's was in and then left a few years ago and I was just wondering if you could talk a little bit about what's changed whether it's evolution of market or the positioning or just
that are operating capabilities for your partner there. And the clarification was just understanding the help you're giving your franchisees in the US. There's no sort of financial contribution from Papa John's, it's just offering services and sort of the kind of up-and-down.
front help that somebody who might be new to building or franchising might need is that is that correct? Yeah Sarah, hi good morning. So I'll answer the second one first. We have standard incentives that we offer for high levels of development across our domestic
to spur development. We've created some services and some capabilities. What we heard from our franchisees domestically is it's never been tougher to get a restaurant built from a permitting standpoint and construction standpoint. Well, we have great resources to help our franchisees with that, so we set up a model that allows them to tap into our resources to help them.
with their permitting and construction needs. So that's really the only incremental support that we've added to the model. We're really excited about the new restaurant design. Our franchisees are excited about that. Every new model moving forward will look like the new Papa John's. And
I think that's going to have a nice impact on our sales run rate once we give all of those stores a facelift and bring that new model to market. In regards to India, last time, like you said, it does predate me. I wasn't here the last time Papa John's tried to go into India, but I've definitely done my homework a diligence on why this is different than the last time.
The last time we went into India, we didn't do a lot of due diligence prior to entering that market. We went in and tried to operate that market pretty much the same way we go into every market. India is a unique market with different dynamics, different supply chain, different cost structure, and most.
different is kind of the consumer price sensitivity and the consumer needs for a different type of product. We spent about a year and a half working with our franchisee from the Middle East who has done an amazing job building out that region and very successful and they have gone in with them with us.
We're going to go city to city and build scale in each city prior to scattering restaurants all over the market and fragmenting the resource allocation for those individual markets. So it's a very different go to market plan than...
I understand, you know, we went to market in India in the past, and that's what gives us a lot of confidence. Thank you very much. Thank you. Thank you. One moment for our next question, please.
And it comes from the line of Joshua Long with Stevens. Please proceed. Please proceed.
Great, thank you for taking my question. I was hopeful we could dive into some of the back to better operational initiatives that are underway, understanding that we're probably early on, but just curious how those are progressing. Maybe you could share some additional color there. You mentioned time out the door was getting better. I imagine that there's some other early wins maybe at the store level that you could talk about that might inform.
this idea of the guidance or outlined by the guidance in terms of improving sales of the course of the year.
Yeah, thank you for the question. Yeah, it has been transformational in our corporate restaurants. You know, I think I've shared this before, but it's probably not a big surprise to anybody on this call, but during the pandemic staffing, that's so challenging. That literally our restaurants.
So in our operators, we're bringing in everybody and anybody from a labor standpoint to try and mitigate the staffing challenges. And really, the primary focus of every restaurant became staffing. And so we lost a little bit of the discipline on the KPIs. We kind of gave ourselves.
that we had always focused on in the path in terms of make times and out the door times and in two door times. So, you know, as we came out of the pandemic and we looked at, and we brought in some new leadership, we looked at all of the KPIs that have historically been so important to this brand because this brand has always provided itself on operational excellence. And...
And we recommitted our teams to that discipline to make sure that we had, that we were tracking it, we were measuring it, we were reinforcing great behavior, we were addressing outages. And, you know, our corporate teams just rallied around that. That's why we have been able to deliver a 25 percent decrease.
increase in outdoor time and increase customer service commensually. So how does that impact the margin and the productivity moving forward? Well, two ways. One, it gives you.
It gives you greater throughput. You can handle more orders in the same amount of time, but it also gives you better labor productivity as we continue to operate better as it continues to become part of our B&A. We're able to allocate our labor much more efficiently and effectively. And lastly, as we deliver better service, we anticipate frequency increasing as customers
expectations are met or exceeded, we anticipate that they're going to order more often from us. So that's kind of what's baked into our operating model moving forward, and that's why we have confidence in our restaurant margins continuing to improve sequentially throughout the year.
Thank you. Thank you. One moment for our next question.
Any comments from the line of Chris Okol with STIFL? Please proceed.
Thanks, good morning guys. This is Patrick on for Chris. Rob, your guidance obviously seems positive comps for the year, and I'm curious if you can provide any additional color on current trends since we need to see that come up from the flat comp in Q1. So I'm just curious if you're trending towards that now or the lower end of that range at least.
or if you still have ground to make up and it's so, it's a lot of what gives you confidence that you can get there over the course of the year.
It's a great question. It's a question I ask my teams pretty much every day. Obviously, we reiterated our guidance for the year to be positive. Obviously, we were in.
And we're flat in Q1, but Q1 is definitely our biggest comp quarter. It's our highest sales quarter. We were positive last year when all of the competition was negative.
We're flat in Q1, but Q1 is definitely our biggest comp quarter. It's our highest sales quarter. We were positive last year when all of the competition was negative.
You know, we knew this was going to be our toughest quarter. As you look out through the balance of the year, the comps definitely get easier. But that's not the only confidence, the reason that we have confidence in our ability to change the trajectory. I mean, we today, you know, are launching our biggest innovation ever.
We've got malt and Doritos, courant, courant Doritos, Papadilla. We've put a ton of support behind that. We've gotten a ton of amazing food reviews and PR surrounding that over the last week. If we've had a prep for this launch, so we're eagerly anticipating this weekend to see our customers' reaction. But, you know, that's just the first thing.
So, we have a great pipeline of innovation throughout this year. We've got continued improvements in our company operations that we're excited about. And then, you know, I think, you know, our franchisees have a big opportunity as well to kind of tap into some of these resources that we build on our Back to Better initiative corporately. The new
and drive those into their operations. So, that's all upside in the back half of the year, and we fundamentally believe that that's going to deliver, you know, a continued sequential cough improvement.
and drive those into their operations. So that's all upside in the back half of the year. And we fundamentally believe that that's gonna deliver a continued sequential comp improvement. Great, thanks.
Thank you. One moment for our next question, please. Any comments from the line of Alexander's Lagole with a Jeffries? Please proceed.
Thanks. Good morning. I wanted to just ask on franchisee help the North America and the volumes are better and margins are.
down a bit, but where does the average franchise, the EGDA, or profit stand now, verse 2019? I know we asked on this topic and overall cash returns and investment costs before and not something might provide too many details on, but wanted to circle back on it.
or any additional perspective you can provide in the metrics and become more focused for investors to understand and play across the industry that we've gone through such an unusual time in the last few years. And I know you have the back to better initiatives.
kind of rolling out to franchisees, expecting a lot of improvements in on these metrics.
over time, but just wanted to see if you could circle back on any of those metrics with perspectives.
I guess what I would share with you is our franchisee situation over the last four years isn't that dramatically different from corporate situations. We don't disclose our franchisee EBITDA, but we do disclose obviously the makeup of our company. We do not disclose our franchisee EBITDA, but we do disclose our franchisee EBITDA.
prime P&L. So, you know, obviously our margins have come down year over year after an amazing 20-21 in front half of 22 before kind of the inflation really started to take hold. But relative to 2019, our...
that level of sales and flow through definitely create some fixed overhead coverage and definitely create some improved profitability, which has helped us, you know, to mitigate some of this increased inflation that we've seen on both the commodities and the wages. And you know, what I tell everybody about this business is.
If you believe that there is going to be a normalization of commodity costs over the next year, 18 months, then you believe that we can hold on to the pricing that we've taken, which we've seen an ability to do over the last year since we've come out of the pandemic.
There's a ton of upside on operating margin. The commodity inflation that we've seen is unprecedented in this business. Record highs for a lot of the input costs. I fundamentally don't believe that that can stay that way in perpetuity. I believe in efficient markets. I believe that the supply is going to catch up to the demand.
and falling.??
Thank you.
Thank you. One moment for our next question, please. And it comes from the line of Eric Gonzalez with KeyBank. Please proceed.
Hey, thanks and good morning. It sounds like you're reiterating that flat to slightly up off margin outlook for the year. And I believe you said that you expect a large, you know, an uptick in GNA in the 2nd quarter to the convention and a fairly large step up for the full year. So, perhaps you can help us understand where the other offsets might be from that line. And how much commodity normalization you're baking into that outlook. Thanks.
Yeah, I mean, our team has been focused on G&A really since day one this year, and we've been very efficient and productive. I don't think that we're going to have a significant uptick on our...
Think about it on our run rate, GNA. The biggest impact of GNA this year is we take zero bonus last year across our company. You know, we didn't achieve the targets that we had put in place. Obviously that was driven by an unforeseen and unprecedented level of cost coming into our P&L and our corporate restaurant ownership disproportionately impacted us relative to our peer group. But we did the responsible thing and we...
We made sure that we were good stewards of our shareholder value, and so we didn't pay any bonus of last year.
This year we have baked in a return to performance compensation. That's really the big impact on GNA this year. Our actual operating GNA is actually become more efficient. That's how we think we're going to manage.
through some of these challenges. Obviously, Q2, our first conference, but even the conference we were able to come in under our budget and deliver a great conference. So I'm really excited about our team's focus, understanding how we need to tighten the belt while the cost structure continues, and I'm confident that we'll be good stewards of P&L.
to four percent.
sales growth is part of it. The other part of it, I think we've guided to sequentially improving operating margins. Those are kind of two of the big drivers. And then our development, we're going to open up across the system between 270 and 310 net new units. Over 400 units built this year. So between those three...
drivers. I mean that's kind of those are kind of the drivers of our earnings growth. Glad it. Thanks. Thanks. One moment for our next question please. Any comments from the line-up, Lauren Silverman with Credit Suisse, please proceed.
Thank you very much. Rob, the pizza category broadly seems to be facing some slower trends compared to what we've seen elsewhere in QSR. Can you just speak to your review on the pizza category and whether you're seeing any changes in customer behavior signs of trade-down, and then anything you can share in performance between delivery and carry-out would be helpful.
Yeah, great question to Lauren. I mean, you know, the pizza category on average over the last 10 years has been, you know, relatively slow growth category. You know, during the pandemic, obviously, you know, we, the pizza can end just in category outperform all of QSR. So I think as we had in, you know, we're coming out of that.
This is kind of the last quarter for us where there's still a residual big COVID impact. People forget that it was only a year ago that Omicron was kind of wiping out a lot of the labor market and the challenges with that.
People were staying home again last January and February . So, you know, that positively impacted our category, where it obviously negatively impacted a lot of the sit-down and fast casuals. So, if you see these positive comps that a lot of the restaurant industry is coming with this quarter, you need to reflect on kind of what everybody's laughing from last quarter. So, now, once we get past all that, we look forward..
I mean, we believe that we can continue to grow between 2 and 4 percent. And, you know, that will probably outpace the rate it grows for the category. You know, I think that there's going to continue to be pressure on the 40 to 50 percent of the category that the mom and pop segment. The cost structure is really hard for them to make it work. They don't have to scale the drive, they kind of productivity.
don't have the resources and infrastructure to invest in those capabilities. I think that we will be able to continue to take share from some of the smaller players. Then I think we got a great value proposition moving forward relative to the rest of the industry. Our innovation pipeline continues to fill up with
with great ideas. And so, you know, despite, call it low single digit grows from the category, a work offset that will be able to continue to deliver between 2 to 4%.
Thank you. Is there anything you can share on what you're seeing between delivery and carry out?
Yeah, great question. Sorry I didn't get there. We are seeing some shift into carry out. Our carry out business has always been real robust. I know we haven't talked about it as much as maybe some of the other players in the industry, but we have a strong carry out business and as these more challenging economic times and price sensitivity increases.
you are going to see a little bit of a push in the carry out. That's not necessarily a problem for us. We're excited about that. It obviously can help us maybe with some labor and some staffing challenges, but it does reduce the ticket to some extent because of the delivery fee that this goes with along with the delivery purchase.
You know, as a model shifts from delivery to carry out, you're going to have to be able to pick up some savings in the labor side because you are going to see a little bit of a challenge on the revenue side by forgoing those delivery fees. So, but, you know, I think some of our delivery business is, you know, organic delivery is supplemented with our continued growth with the third-party aggregate.
I know that there's a lot of talk about their growth rates slowing down, but they're still outpacing the growth in the core pizza category. So we're getting the benefit from that through our investments with them and our partnerships with them. So our delivery business is probably a holistic delivery business has held up a little bit better than maybe some other folks in the category. Thank you very much. Very helpful. Thanks, Lauren.
Thank you. One moment for our next question, please. And he comes from the line of Peter Salet with BTIG. Please proceed.
Great, thanks and good morning. Rob, I just wanted to come back to the conversation around the commodities. I believe last quarter when you guys gave the full year outlook, you anticipated commodities to be maybe modestly deflationary for the full year.
And at the end of the first quarter, up to about 4%. Are you still expecting commodities to be modestly deflationary? Does it look like we've seen some moderation in some of your input costs? Just give us a little bit more color on that. That would be helpful. Yeah, I mean, I think we did expect it.
see a little bit more deflation already this year, but we're starting, I mean, it's sequentially has continued to improve. I mean, it's just been very volatile. So we do, in our forecast, have continued moderation of commodity costs, even if, you know, Q1 has it fully realized those costs.
You know, when you look at what we're, what we're laughing, Q2 of 2022 was by far the highest input cost environment that we operated in. So plus 18% year over year, average cheese price, you know, per pound was $2.30. So, you know.
The markets today are in the dollar, call it, 80 range. So that's a big change that we're seeing in the current environment, but it's been very volatile, but we do see the full year being modestly deflationary. Great. And then just on unit development, I know you guys reiterated your long-term...
you guys need to open to really get to those development targets that you guys laid out this morning. Thanks.
Yeah, I mean, our current development target, zone incorporate a significant amount of new geographies opening up over the next two years. It's really based on our current franchisees and the current agreements that we have in place. I mean, Asia is a huge growth.
region for us right now. China is probably going to be our biggest unit development growth country for the foreseeable future. We are anticipating new units coming in from India in the back half of this year, or I'm sorry, starting in 2024. We are going to see new units coming in from India in the back half.
two years of India development and it was 650 units over a 10-year period. Obviously, there will be a bit of a ramp there, but that's a lot of units and 24 and 25 relative to the development that's going on elsewhere. So we do believe that we can ramp pretty quickly. We're seeing, especially internationally, we're seeing...
continued strength in a lot of our Middle Eastern and Asian markets. Obviously, we call it outward in the UK where there's some franchise optimization going on there, system optimization, making sure that we are set up for long-term growth.
So that's been a bit of a development source for us over the last four or five years that is evolving right now, but we feel confident that we can make up some of those challenges in some of these other markets.
Thank you. Thank you. Thank you. One moment for our next question.
Any comments from the line of Dennis Gagor with UBS please proceed.
Thank you, Rob. In your prepare remarks, you talked about your industry leading CRM platform and the size of the loyalty program at this point. Just wondering if you could talk a little more about the opportunity there to better leverage that platform. And related to that, I'm curious as it relates to third party, which I don't know how much of that kind of integrates with loyalty or, you know, as part of it is separate. Roarya opportunity program disaster security, perhaps more mera gay
Just curious within that, if that third party business, if you could speak to it, has become a larger, if the mix continues to go higher of your total business. And how you think about that within the context of your internal CRM loyalty platform. Thank you.
Sure. The aggregator business is not tied to our loyalty business. You know, ideally we would bring in new folks from the aggregators and convert them into loyalty members. I mean, the data that we have suggests is what the aggregator marketplace business is between 50 and 50.
80% incremental new business for our business. So that's something that is really part of our strategy. We're bringing in those new customers. They love our products. They love the innovation, the new ideas that we bring. And then they wanna come back because it is more economical to order Papa John's through our organic channels. So that's kind of.
That's the business model. In terms of how much the aggregators represent of our business, yeah, I mean, obviously, if our comps this year are flat and our business with the aggregators is growing, then they are going to continue to grow as a percent of our business.
It's still a healthy amount, but it's not something that is becoming a situation where we're dependent on that business for us to be able to deliver our long-term objectives. It's a healthy growing piece of our business that we'll continue to invest in. It's profitable, but it's not so substantial that we feel like it's...
get built out the capabilities to execute the level of one-to-one marketing and frequency building opportunities that I aspire for that program to achieve. I take accountability for that, but I also get excited about it because it continues to be upside. So what we're starting to do next is looking at hyper bottom so no matter how far that
You know, we just hired a new PMO, Mark Shambura, who is really passionate about that work. And I'm obviously passionate about it as well. And so that will be a big focus for us moving forward. And over the last three years, the tools and capabilities to leverage that set.
huge amount of data that we're getting has changed significantly just over the last three or four years. So we look to tap into that and leverage that to create a lot of value with the forward.
Thanks for taking those rob. Appreciate it.
Thanks for taking those road. Appreciate it.
Thank you. One moment for our next question. Any comments from the line of Andrew Strelzik with BMO Capital Markets? Please proceed.
Hey, good morning. I guess I wanted to just try to tie some comments that you made together and ask about your value proposition, which you said is strong versus the industry. You've talked about the ability to hold on to the price increases, but at the same time, we're seeing some delivery shifts to carry out, which may be attributed kind of to cost and I've talked about better check traffic balance. So...
You know, I guess, how do you think about getting there? I guess on one hand it could just be as simple as not taking as much price this year, but, you know, are you playing the shift here kind of value messaging? Is there more that you think you need to do? You talk about the one-to-one marketing, maybe that plays in. I'm just curious how you think about and reflect on the value efforts you've had so far and your value proposition going forward. Thanks.
It's a great question because we're definitely entering into a period, if we're not already all the way there, where value is going to become more important that has been over the last three years. And so it's critical for us to have a compelling and successful value strategy. I mean, regardless of whether or not we are going to focus on our premium innovation. I mean, that's what we've done over the last three years. It's kind of our positioning in the marketplace.
If you don't have a compelling value strategy, it's really hard to compete in QSR, whether you're in pizza, burger, tacos, whatever. Value is a big part of the business model. Despite the fact that we focused on our premium innovation and that we've continued to drive a significant amount of check growth through trading customers up to products like stuffed crust and New York style, and chacaroni and all these other things.
We've never walked away from value. I mean, we still offer great carry out specials on our app and our website. We still offer great bundles on our app and our website. So we haven't necessarily taken the same approach as some of our competitors with big 50% off promotions and those types of things. That's not necessarily a part of our strategy. That value is a big part of our strategy and we get at it a lot of different ways. I mean, our profit pairings platform is a way for us to bring great value on wings and other side items.
Our carryout specials are tapping into a lot of the drive towards carryout. So, we fully believe that we have to be competitive on value. We just get at it a little bit different than maybe some of the other competitors in the industry. So, we're going to continue to invest on premium innovation. We're going to continue to push our most premium loyal customers into some of our new great products. But we know we have to meet the needs of that core customer and we're focused on doing that.
Great, thank you very much.
Thank you very much. Thank you, Andrew.
One moment for our next question, please. And it comes from the line of Todd Brooks with the Benchmark Company. Please proceed.
Good morning, thanks. Quick question. Taking the the unique growth discussion too.
this year's level. Rob, I know you guys have reaffirmed your targets for net new openings this year. I think you got about 10% of that level opened in Q1. Can you just talk to the opening pace early in the year relative to how you expected the year to track? And maybe just on the 24 international closures, are those concentrated in the UK or are they more broadly spread? Thanks.
Yeah, I mean, we're actually right on track with our forecast for the year in terms of net new openings and the closures that we have seen have been spread throughout our footprint are not concentrated in the US. You know, we did a market transformation in Netherlands and I think that represented.
a big chunk of those closures. And we didn't necessarily have that in our plan for the year, but we were able to actually open restaurants at a higher rate and other geographies to mitigate that. It puts us right on track with where we had planned on being at this point in the year.
As I did mention, though, just for color, I mean, you know, and I think we just close in some of the discussions. We are working on the UK and there will be some market optimization there and there's probably going to be a little bit less development there as an outcome of that. And so, well, but we have been able to fill that gap with upside on a lot of our other geographies and a lot of our other market. I mean, I
The reality is we have some really strong performance and sequentially continues to improve in Asia and Middle East. So, we're doubling down on those markets, which is mitigating some of the market optimization that we're going to have to execute in the UK.
is we have some really strong performance and sequentially continues to improve in Asia and Middle East. So, we are doubling down on those markets, which is mitigating some of the market optimization that we are going to have to execute in the UK.
Thank you. Thank you. One moment for our next question. Any comments from the line of Nick Setian with wet bush? Please proceed.
Thank you. We saw some strength in both the commissary margin and international margin. Just wondering if there's anything sort of one-time in the international margin, for example, that we should be aware of and whether that's sort of – PMER
How should we think about that international margin as the year progresses? And then the reason why the commissary margin shouldn't stay at this level or even go higher as the year progresses.
Well, you know, I'll remind you our commentary margin is a fixed margin. So, you know, on an annualized basis, we have a fixed margin of 4% on a commissary. The reason why it's higher, you are over here is because sometimes there's some timing issues around kind of...
Last year we were chasing the increase in cost with increased prices out to the French IDs for the ingredients. And so we weren't able to make the full margin in Q1 last year this year. It was a little bit of a different dynamic, but for the full year, you should always expect that we're going to deliver.
about a 4% margin on that business. On the international side, it's really about just tightening the belt and making sure that we have the right operating model to operate that business. I think our leadership, you know, we put some new leadership in.
to that business over the last year and they're very conscientious on their performance relative to their cost structure and I think they've just been really great about doing the things necessary to hold costs down. The other piece is consistent with what I just told you on the comms during the US.
We own the commissary in the UK and last year as we saw this kind of hyperinflation, we weren't really able to pass that inflation on to the franchisees as quickly as we needed to. So there was a lower rate of margin.
during Q1 and I think even into Q2 this year, that dynamic doesn't exist. So, we're delivering a higher margin year over year in the UK commissary. So, those are I think the three key drivers.
Thank you. Thank you. And this concludes our Q&A. I will pass the call back to management for any final remarks.
So, thanks everyone for the call today. It's obviously a unique time that we're all working through. So our intent is to be as transparent as possible on the business and on the industry so that you guys can do your jobs. You know, but to summarize.
I just want to say I'm thankful to our teams and our franchisees for continuing to deliver solid performance. We lapped Q1 of 2022, which was our highest sales volume quarter in history, and we lapped Q1 of 2021, which previously had been the highest sales volume of 2020.
So, these are big laughs for us. And the ability to laugh, you know, flat or positive is indicative of the strength of the sales in the restaurants. So, I'm thankful for our team to continue to do that.
continue to deliver these solid results. I'm also confident in and excited about 2023 and beyond. We have forecasted increased comps, forecasted some decreased costs, and we're continuing to be strong developers throughout this system, throughout the globe, despite the communities weounds Raon Koltig nowhere outside. a
some of the challenges that everyone highlights in the industry with development and construction at this point and obviously with kind of the macroeconomic and interest rate environment that's going on. So I'm very bullish about the future. I couldn't be more proud of the team and the way everyone's working together and so I just want to thank you all for your continued support and thank you for your time today.
Thank you. And with that, ladies and gentlemen, we conclude today's conference. Thank you for participating and you may now disconnect.