Q2 2023 Papa John's International Inc Earnings Call
Good day and thank you for standing by welcome to the Papa Johns second quarter 2023 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 the session you will need to press star one on your tele.
Phone you will then hear an automated message advising that your hand is raised.
Your question. Please press Star one again, please be advised that today's conference is being recorded I would now like to hand, the call over to your speaker today Ms. Stacy for Lee you may begin.
Good morning, and welcome to our second quarter earnings Conference call. This morning, we issued our 2023 second quarter earnings release.
Copy of the release can be obtained on our Investor Relations website at IR Dot Papa John's Dot com under the news releases tab or by contacting our Investor Relations Department at Investor underscore relation at Papa John's Dot com.
On the call. This morning are Rob Lynch, our president and CEO Ravi thought of Wala or do you see it Chief Financial Officer, and Chris Collins, who previously served as our interim principal financial and accounting officer.
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.
These statements may involve risks and uncertainties that could cause actual results to differ materially from these statements.
Forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings.
In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call.
Lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow up Rob.
Thank you Stacey good morning, everyone and thanks for joining us.
Before we get started I want to take a moment to welcome Ravi to the team.
Look forward to leaning into his vast experience in finance and operations with global consumer brands as well as international expertise.
Most importantly, his passion for fostering collaboration and building high performing teams. It makes him a great addition to our leadership team.
I also want to thank Chris Collins for stepping up and leading our financial team and being a strategic thought partner during this period of transition. Thank.
Thank you Chris.
As you read in our earnings release. This morning, we are pleased with the solid execution that our teams have demonstrated in what continues to be a challenging operating environment.
We know that we cannot control inflation or our customers' spending behaviors, but we can't control, how we execute our operations to drive a better customer experience and better margins, how we create and introduce new menu innovation to expand our customer base and increase frequency and how we utilize our data to drive insights and revenue management strategies.
To optimize all sales channels.
I'd like to particularly call out our domestic company restaurant performance as we focused on faster service enhancing operational efficiencies and effectively managing margins coming out of the pandemic.
These efforts combined with the continued success of our menu innovation and advancements in our revenue management capabilities are producing results as our company owned restaurants achieved 2% comp sales growth in the second quarter and year over year margin improvement above and beyond the benefits of moderating food cost.
The level of discipline that our teams and franchisees are implemented into our operations over the past year is remarkable.
We're also receiving external recognition for these efforts as the American customer satisfaction index scores recently ranked Papa John's is number one and guest experience in the pizza category and in the top five for all fast food restaurants.
This recognition is further evidence that the operational improvements that we're making are building a solid foundation that is paying dividends today and will continue well into the future.
However, the solid performance by our company owned restaurants was not enough to offset the lower than anticipated comps our domestic franchisees experienced during the quarter.
Our teams have been partnering with our franchisees to find ways to drive business improvements in an ever changing consumer environment.
We have identified three core areas of opportunities for our franchisees, including modifications to the revenue management strategies, leveraging best operating principles and deploying marketing optimizations.
Our franchisees work to make the appropriate adjustments and they saw sequential improvement throughout the quarter and delivered positive comps by the end of June .
More importantly, these positive trends have accelerated into the third quarter in both our company owned and franchise restaurants, giving us confidence will produce positive comp sales in the back half of 2023 and over the longer term.
Now, let's dive a bit deeper into some of the key drivers of our improving north American sales trends and restaurant level margins.
I'll start with menu innovation.
A key component Papa John's strategy, as our winning menu innovation pipeline.
In May we launched our new proprietary menu offering doritos cool ranch property and.
In partnership with Pepsi and Frito lay.
And where the 799 price point it is a great value.
This launch generated a significant amount of buzz and additional traffic to our digital channels and in fact, we saw double digit growth in digital sessions at the start of the promotion.
Following the successful launch our franchisees experienced improving weekly transactions, while ticket remained consistent with the prior year.
Several weeks after introducing to read as cool ranch property, we brought our barbell strategy to life by also promoting our popular extra large New York style pizza at an attractive 12 99 national price point.
This layered approach to our national promotions contributed to the positive franchisee comparable sales that we began to see by the end of the quarter and to our overall higher sales this past month.
Continuing with our menu innovation, we recently expanded one of our most popular pizza platforms stuffed crust.
Our new limited time, garlic epic stuffed crust pizza, which launched nationwide. This week. This week is another example of how we are leveraging our brand equity a better ingredients better pizza.
Garlic epic stuffed crust is layered with garlic, one of the ingredients for which Papa John's is best now in three different ways.
The crust.
Top of the crest and on the side with our signature garlic dipping sauce.
We're also taking this off offering up a notch with the introduction of spicy garlic epic stuffed crust at the end of this month to keep the momentum going.
Another key driver of our improving sales as our back to better operation strategy, which focuses on them <unk> best in class unit level productivity and operational excellence initiatives across all of our restaurants.
Faster out the door times at our company owned restaurants were an early win for us and they continue to improve down more than 25% from where we were a year ago.
As I previously mentioned faster delivery ensures our products our heart when they arrive which is the number one driver of product satisfaction for pizza.
Our company owned restaurants were also reducing make times, while delivering continuous improvement in product quality order accuracy and labor allocation.
These efforts are not only driving comp sales, but are also increasing restaurant margins.
Finally, our revenue management team remains focused on driving incremental sales by offering every customer the right product at the right price at the right time and the right channel.
During the second quarter, our GAAP remained between the performance of our company restaurants and that of our franchisees over the past year, our franchisees have been increasing their prices at a faster rate than our company owned restaurants in an effort to preserve margins. During this highly inflationary period.
As a result, they have experienced a larger decline in transactions relative to our company owned restaurants this past quarter.
We've been performing ongoing business reviews with each franchisee utilizing cross functional teams to enhance their business operations, along with identifying opportunities to optimize their pricing and promotional models.
This surgical approach is delivering sequential improvement in transactions and higher customer satisfaction rating system wide.
With the progress we have made to date and with more than 85% of our transactions taking place through our digital channels, we see additional opportunities to close the gap by leveraging the data and consumer insights at our disposal to optimize our pricing strategies across the system.
One more area of growth that I would like to highlight today is our aggregator model and its channel offerings.
To give you some history, we were the first national Pizza chain to Holistically partner with a leading aggregators, giving us significant experience deep expertise and strong capabilities in this channel today.
Today, we remain competitive on price, while still garnering margins comparable to our organic delivery business.
Maintaining a strong value proposition in what is an increasingly competitive consumer environment and these marketplaces has consistently delivered growth quarter after quarter.
We feel good about the opportunity to continue leading in the aggregator channel as our entire system embraces the model is a key driver of transaction growth.
Going forward as these marketplaces bring on additional offerings, attracting even more customers. We're excited about the broader opportunity presented the Papa Johns to continue to capture new demand.
We expect to deliver positive North America comps in the back half of 2023.
But do not believe it will be enough to offset the softness already experienced by our franchisees in the first half of the year.
As a result, we're adjusting our fiscal 2023, North America comp expectations to flat to up 2%.
On a longer term more normalized basis, we remain confident in our ability to grow North America comp sales between 2% and 4% annually and theyre not changing that long term guidance.
In our international business comps were down 1% from last year, which primarily reflects declines in the UK our largest international market.
However, we are pleased with the improved relative performance in the second quarter in the U K as we implement best practices developed within our domestic market, including marketing investments specifically in the aggregator channels menu innovation and operational improvements.
Excluding the UK, our international comp sales for the second quarter were positive driven by strength in our Asia and middle Eastern markets. This strength is also translating into accelerated unit development as we have announced significant long term development agreements within both of these markets.
In June we established a company owned restaurant portfolio in the UK with the acquisition of 91 restaurants.
We also recently acquired 27 additional locations in July , bringing our total ownership in the U K to 118 restaurants.
I recently visited these locations and after meeting with our leadership team and those in the field I'm excited about the long term growth potential of these restaurants and the holistic U K market.
We continue to make strategic investments across our international organization and infrastructure.
Take some time, but our investments in <unk> to support sales through improved capabilities like E Commerce loyalty and revenue management are setting our global franchisees for sustainable long term success.
Which brings me to the final topic I'd like to discuss today unit development.
Between 2022 and 2025.
This implied global net new unit growth between 6% and 8% for fiscal years 2023 through 2025.
Since we put these targets in place we have experienced many unforeseen circumstances, including but not limited to an extended worn Ukraine material inflation around the globe permitting and construction delays within North America, and higher financing costs due to the interest rate increases.
Despite these various challenges we continued to remain confident in our ability to meet our long term expectations as our global pipeline continued to grow.
This was supported by our most recent announcement of 650, new restaurants in India over the next 10 years.
We know that the investments, we're making and strategies, we're executing today unable to capitalize on the significant whitespace, we see all around the world.
But we also recognize that there are still some near term headwinds that continue to persist and therefore, our rate of growth may be slightly lower than our initial target <unk>.
As a result, we're resetting our longterm net new unit growth rate from a range of 6% to 8% to an annual range of 5% to 7% going forward.
Which remains at a very healthy level.
This new guidance would imply a net new unit range of 1100, and 50 to 1400 units between 2022 in 2025 compared with the original guidance of 1400 to 1800 net new unit I mentioned earlier.
Ongoing we will continue our rapid pace of development to take advantage of the global White space that we see.
Before I turn the call over to Robbie.
I wanted to reiterate the strength of our business model is demand for Papa Johns remains high.
Driven by our innovative pipeline and are better ingredients better pizza brand positioning.
Although 2023 will once again be a record Europe's system sales, we have seen some near term challenges in the first half of the year driven by macro pressures and difficult comparisons.
Despite these challenges we are confident heading into the second half of 2023 and over the long term.
Or back to better strategy, coupled with our product offerings and our strong unit growth plan, both domestically and internationally positions as well for the future.
We have an extremely strong team in place to execute on our strategy in the future is bright.
Now I'd like to turn the call over to Robbie.
Thank you Bob and good morning, everyone.
I'm excited to have the opportunity to talk with you today.
While I've only been here for a couple of weeks I'm pleased to be able to say that what I saw from outside the company is being validated with every conversation I have.
Papa Johns is that differentiated brand.
A robust pipeline of menu innovation and significant amount of white space for new store growth, both domestically and internationally.
I'm excited to partner with our marketing and inside the team to activate the vast amount of data we have to incentivize consumer behavior.
With more than 85% of our transactions occurring through the digital channels. We are in a unique position within the curious are space to quickly identify and adjust the change in consumer trends.
Allowing us to optimize their experience each time the order from Papa Johns.
I'm also excited to work with and support our franchisees.
I grew up in a franchising family experiencing firsthand, how the franchise model great opportunities for so many people.
I've also realized through my professional career, how attracting experienced partners to equate brand the great products can enable a company to localized and scale quickly and new markets.
I want to thank Chris Anna finally.
For their leadership and support during this period of transition.
You've done an amazing job supporting the business and delivering value to all stakeholders accurate and timely financials disciplined financial analysis and collaborative business partnerships.
I also recognize how important it is for me to get to know all of you in the financial community State.
Stacy is in the process of setting up a schedule to meet with many of you in the next few weeks I'm looking forward to those meetings and hearing your thoughts firsthand.
Now like to turn the call over to Chris to cover the financial portion of today's call Chris.
Okay.
Thank you Robbie and good morning, everyone. It was a great pleasure serving in the interim rule and I look forward to working closely with Robbie as he steps into the CFO Rahall at Papa Johns.
For the second quarter Global system wide restaurant sales were 1.22 billion of 2% in constant currency from the prior year.
Net unit growth, primarily in international markets contributed to the higher system wide sales.
North America Com sales were down 1%.
A result of 2% increase in our company owned restaurants, offset by a 2% decrease in franchisee restaurants.
For the quarter or domestic company owned restaurants, so year over year ticket and transaction growth, while franchisee ticket growth was offset by lower transactions.
A variety of factors have impacted transaction growth in the short term, including the timing of national promotions relative to the prior year.
And franchisees prioritizing margin over transactions.
As Rob highlighted both franchisee and company owned restaurants.
Transaction improvement month after month during the quarter, resulting in positive North America comps for the month of June .
And we maintain that positive growth into the third quarter.
International comps were down 1% in the second quarter is inflation continued to pressure consumer spending and our UK market strength and other international markets, especially in Asia, and the middle East largely offset these pressures.
In the second quarter, we completed the purchase of 91 formally franchise restaurants in the UK.
These restaurants begin operating as an international company owned restaurants effective June 2nd.
Therefore, our second quarter results include royalty revenues for these restaurants for the period until June 2nd and the restaurants are consolidated after this date with the results reflected in international revenues and expenses.
This transactions impact on adjusted operating income in the second quarter is nominal and neutral two EPS.
Total revenues for the second quarter, where $515 million down $8 million from the second quarter last year.
Excluding the purchase of the UK restaurants, total revenues were down 10 million versus the prior year.
Decreased in your every year revenues is largely related to our North America Commissary segment.
Revenues for this segment or down due to lower sale volume sales volumes at our franchisee restaurants, and lower commodity prices, partially offset by the comparable sales growth we saw at our company owned restaurants.
Turning to profits.
Just it operating income for the second quarter was $37 million compared with $40 million for the same period last year.
Adjusted operating margins, where 7.2% a 50 basis point decline versus last year.
Or back to better strategic initiatives higher restaurant level margins at our domestic company owned restaurants to hire comp sales and labour efficiencies, which I'll discuss in a moment.
These improvements were offset by anticipated higher G&A expense do the return of our franchisees conference in April for the first time since 2019.
And higher variable compensation expense when compared with the second quarter last year.
In addition, there was higher depreciation and amortization expense related to our continued investments and restaurants and technology support.
For modeling purposes, we anticipate depreciation and amortization expense to be between $60 million and $65 million in 2023.
So, let's take a deeper dive into our operating segments.
And our domestic company owned restaurants segment food basket costs improved 50 basis points compared with the prior year is we're beginning to experience meaningful relief from prior year peaks, especially and cheese and poultry.
Labor costs improved more than 100 basis points during the second quarter.
Reflecting continued improvements to our labor modeling and adherence to labour scheduling guidelines.
These efforts have increased our throughput and reduce or overtime spend supporting our continued margin improvement in our restaurants.
On a combined basis commodities and labor costs represented more than 150 basis points of margin improvement year over year, and our domestic company owned restaurants segment higher than anticipated health insurance claims largely offset these improvements resulting in.
Approximate 20 basis points increase in restaurant level margins compared with a year ago.
As we look towards the second half of the year, we expect to see more improvement in our domestic company owned restaurant margins as food costs continue to moderate and our team continues to execute on our strategic initiatives.
And our North America commentary segment second quarter revenues declined by 6% year over year, driven by the lower volumes and lower commodity pricing I mentioned earlier.
Adjusted operating margins remain consistent with our cost plus fixed margin model.
For International operating segment adjusted operating income was down in the second quarter compared with the prior year.
As mentioned earlier, the UK is our largest market and it is the only international market, where we own the commissary.
Given that our UK markets revenue streams come from royalties and our commentary sales.
The challenges we are facing having more pronounced impact on our international profits.
Partially offsetting declines in our UK market as our continued development and diversification into other international markets.
As of the end of the second quarter, we have seen an 8% increase in net new unit growth within our international markets when compared with a year ago.
Moving onto cash flow and balance sheet.
For the first six months of the year net cash provided by operating activities was $94 million up from $46 million a year ago.
Free cash flow increased to $59 million, reflecting favorable changes in working capital, partially offset by a 4 million dollar increase in capital expenditures as we continue to invest in the development of new domestic restaurants and technology innovation.
We ended the quarter with ample liquidity, which totaled approximately $270 million in cash and borrowing available under a revolving credit facility and a gross leverage ratio of three four times down from 3.5 times at the end of the first quarter.
Based on our strong balance sheet and positive outlook I'm pleased to say that our board has declared a 10% increase in our 2023 third quarter dividend to 46.
Per common share or $1.84 on an annualized basis.
Our capital structure provides us with substantiating operating flexibility will continue to take a disciplined and balanced approach to managing our cash flows creating value for our shareholders through a combination of organic growth investments cash dividends and share repurchases.
Now to our outlook.
As Rob previously announced we are adjusting our 2023, North America comp guidance to arrange a flat two plus two per cent.
We do expect to see positive counts for the second half of the year driven by new menu innovations.
Execution of our back to better strategic initiatives and continuous improvements in our revenue management capabilities.
Furthermore, we are reiterating our expectations of growing or North America comps between 2% and 4% annually over the longer term.
For the full year, we anticipate international comps will remain under pressure as challenges within the UK continue to persist, but will improve each quarter as our new UK restaurants are integrated into our corporate organizational structure and other international markets continue to perform and grow.
We expect our adjusted operating margins to be comparable to up slightly to the level of <unk> in 2022 is.
As we benefit from several tailwind, including our back to better initiatives positive North America comps and the benefit of a 53rd week in 2023.
Offsetting these tailwinds are the investments we are making in the UK, including the creation of some operational in back office infrastructure to support the recent acquisition of restaurants and higher corporate G&A expenses is performance based comp.
Ramps backup versus the prior year.
I want to emphasize that we expect longer term margin benefit from a recently acquired UK restaurants. Once they are fully integrated into our corporate structure, but there will be some near term pressure as we integrate these stores and.
And for modeling purposes, remember that the third quarter is typically our lowest margin quarter due to seasonality of sales.
Finally in terms of non operating expense items, we expect our net interest expense to remain between 40 and $45 million.
Capital expenditures to remain between 80 and $90 million and our tax rate to remain the higher end of our 21% to 24% range.
All non operating expense items are in line with previous guidance.
As we look forward, we remain focused on driving growth and profitability at Papa Johns to deliver shareholder value.
We have numerous initiatives in place to help us achieve our objectives, including menu innovation digital enhancements operational productivity improvements unit growth and strategic capital allocation.
We remain confident in our ability to capitalize on our position of strength and.
And to execute our long term strategy driving value for our customers are franchisees and our shareholders.
And with that I'll turn the call over to Rob for some final comments Rob.
Thank you Chris.
As I mentioned at the beginning of the call we continue to operate challenging environment to.
Despite a challenging start to the first half of the year improving trends throughout the second quarter and solid start to the third supports that we're on the right path forward and that consumer demand for our products remains strong.
The foundation of our success has been and will continue to be the solid execution against our strategic priorities.
They are building a culture of leaders, who believe in diversity inclusivity winning improve.
Improving unit level profitability of our operations in franchisees.
Establishing the superiority of our pizza through our commercial platforms building, a technology infrastructure that enables our business operations and expanding our footprint domestically and internationally.
We're excited about the opportunities available to us and have confidence in the sustainability of our progress.
At this point, we'd like to open the call up for any questions you may have.
Certainly as a reminder to ask a question. Please press star one one on your telephone and.
<unk> wait for your name to be announced to withdraw your question. Please press star one one again, please stand by while we compile the Q&A roster.
Moment for our first question.
And our first question will come from Brian Bitner at Oppenheimer. Your line is open.
Good morning, as it relates to the same store sales Rob can you just talk a little bit more about what specifically surprise you.
In the second quarter relative to the update you gave us in early may at the time I think you expected comsys sequentially accelerate through.
The year.
And you know.
<unk> what do you believe secondly is bending the trend back in the right direction in June and July is there.
No you've talked a lot about a lot of different things on the call related sales drivers for you based on your insights what specifically driving this improvement back to kind of <unk>, where you thought you'd be thanks.
Thanks for the question Bryan. So April was the worst month that we've had since I've been at Papa Johns in terms of performance.
That was kind of where we really discovered.
And and spend some time talking about some of the pricing that had gotten out of front out in front of where the consumer was willing to spend and so that's why we really dug in on the revenue management side with our franchisees, making sure that they understood kind of where we were headed from.
You know when I met with a lot of analysts and investors and May My bullishness on the quarter was really focused on the innovation that we were about to bring I knew we had to read those pop a D. A and then.
More recently garlic stuffed crust.
I had a lot of excitement about that also just the work that we were doing in our company restaurants, we were seeing.
Consistent sequential margin improvement regardless of some of the challenges on top line sales in the month of April and over the quarter. We did see both improvement in sales and margins throughout the quarter and that's why we've given some color in the queue three as well because Q3 has continued that momentum and actually accelerate.
<unk>. So we do believe that the innovation that we brought the operational improvements that we're making are driving bowls top line am bottom line results for our company restaurants, and we are laser focused on working with our franchisees we continue to outpace.
Franchisees in terms of of comp growth and our company restaurants, and a lot of that growth is transaction growth and that gives us even more confidence because we're not just winning by taking pricing or increasing you know our our revenues, it's about bringing more customers and so there was a <unk>.
<unk> for our products and that's what gives us a lot of confidence in the back half of this year and moving forward.
And can I know, it's just one question, but I have to follow up on that specifically because you did identify that there's this pricing variance between franchise stores and company owned stores and that being a big driver of the traffic issues, you're seeing in franchise stores relative to the company owned and obviously the franchise.
And how they perform from my perspective is very important for the company.
Can you talk about how meaningful.
<unk> was that that led to the traffic bifurcation enfranchise stores and again what are you doing.
Civically to correct. This issue and help franchised stores restore kind of the price value equation.
Yeah, So I mean.
We've talked about it in the past you know this is a relic relative to most traditional <unk>. This is a relatively complex revenue management.
Segment of the <unk> industry and Q S. R. When you pull into a drive through and you look at the menu board with the price that's on the menu Board is what you pay.
You know this model that we deal with here in Pizza is more of an E. Commerce motto, where it's planned ahead and their shopping that goes on you know so as customers come into the storefront, which is essentially our digital channels.
They are looking at what is being offered both from a new product standpoint, as well as a special slash discount standpoint, and in this segment of the industry. There's typically.
20 per cent discount applied on average to each transaction so.
Management standpoint, it's not as simple.
It just saying Hey, we're gonna take our menu prices out, but we're gonna take our menu prices down how long menu prices interact with the specials that we offer with the promotions that we're running a national at the local level is all kind of an algorithm that have to work together so as we work with our franchise.
Not just going in and saying Hey, you have to take it places down on the regular menu.
Italian show up in pricing.
It's having.
Execute.
He deals in the discount that they offer on the digital channel. All of that is is in play he didn't carry out special. This is some volume shifts a little bit and delivery and to carry out making sure you have to lay off right. Now. So we're working with nah just to come in and tell them how they can maximize.
Margin is really out of it.
And can build a successful long term relationship between all those different backup.
Thank you so much.
Got it Brian Thanks for the question.
And one moment for our next question.
And our next question will come from Joshua along.
Stevens your lines open.
Great. Thank you for taking my question following up on that when we think about some of these opportunities Rob and then also the improvement today. It seems like there's a lot of runway in terms of thinking about those three initiatives you outlined in terms of particularly the revenue management in the comments you just shared when you think about that improvement to date, how much of that is being.
[noise] driven by some of these focus points that you've outlined in the <unk> I mean, we look back in the model you comparisons duties or do you think about three two versus last year. So.
How much of that is just maybe the environment normalizing a little bit after you move past April and or you know what kind of context can you offer up in terms of just.
What you're eating or kind of the the process of rolling out some of these would seem to be longer term meaningful initiatives in terms of the.
Top line profitability execution at the store level.
[noise] extra question, Josh I would I would tell you is that our company restaurants right now are executing an extremely high level from an operation standpoint from a revenue management standpoint, you know from on advertising and promotion Stan.
Point, so the way our company restaurants are performing gives me a C. A high degree of confidence in our ability to take advantage of the runway that you that you highlight the model really hasn't changed I mean, we're still focused on driving innovation, both on the product side as well as the technology.
Side, making sure that we're unlocking the white space that we have both domestically and internationally and making sure that we are helping making sure that our restaurants are running at an at an economic model that will warrant continued investment new store. So we're seeing that.
In the company side, probably stronger you know obviously you have the pandemic period, where there was some artificial inflation and demand given the the situation that we were all faced with but in in regards to kind of a normalised run rate, which I do feel like we are kind of entering into.
Q2 is probably the the the quarter, where we kind of broke from a lot of kind of the pandemic lapping in comparable where we're entering into a much more normalised run right.
And this is about as strong of an operating models I've seen in our restaurants to date. So our goal is to make sure as Brian highlighted that our franchisees are setup to deliver them as strongly moving forward and all the fundamentals of their I mean, we're selling the same food with the same business model, we just have to tweak.
Some of the some of the capabilities and how it's being executed at scale across our franchise system. So we have we have the ability to do that we're focused on it we know where the challenges in the gaps are and and that's what gives us so much confidence moving forward.
Great. Thank you I'll hop back into the queue.
One moment for our next question.
Our next question will come from Sarah <unk> Bank of America and your line is open.
Oh, thank you.
I was interested to hear about your your comments about the aggregator at Martino and and how you.
<unk> <unk> early to that.
<unk> 2.2 part question one is <unk>.
Can you talk about if there any differences in a competitive dynamics online versus offline. Yeah, I think there's a general view that.
That's been articulated that.
Aggregate of customers are less value seeking and then perhaps at people, who who are offline uhm.
Curious to the extent that you talked about the importance Italians, maybe yeah that was the wrong perception and then.
A related question.
Faster out the door time, now Uhm, a company stores sounds like perhaps hiring and productivity issues. There are behind you would you contemplate.
<unk> delivery peace in house as opposed to the delivery of the service component that thank you.
<unk> <unk> <unk>.
Thanks, Sarah you know when we talk about.
The competition online versus offline I mean, everything that we do is online essentially you know 85% of our business comes across digital channels and 15% that goes into.
You know as as our phone calls now go into a centralized call center and then come in digitally so everything that we do is online now that the the differences between our organic online and our aggregator online and so I think that's where where you're driving the question and I think historically you have.
Scene, Aggregators have less price sensitivity and be less value seeking I think as the aggregators have scaled and as the aggregators.
Become a larger population you're seeing their behaviors and their affinities be more more similar to kind of the macro more to the general population, but what I will tell you is that.
We are focused and have been able to create a a dichotomy where our organic channels.
Offer are repeat customers a better value primarily through the loyalty program that we offer a pop rewards program I mean, it's gonna be really hard for someone to go on to one of the Aggregators and get a better deal than we can offer them through our organic channels. So what you see is a lot of the Agra.
Gater volume is incremental because the.
The people that are best customers are typically buying through our organic Papa Johns website or app mobile app. So so.
I I don't know that the consumer price sensitivity is significantly different across the channels. At this point I think it was early on as you had early adopters coming in I think that has been a bit more streamlined and more consistent with rap pop, but we are always gonna offer will always aspired offer a better value than.
They can and our organic channels in regards to your second question and in our approved operations and improved staffing, yes, our goal would be to service.
All of our transactions with our organic drivers that being said.
There are different situations and different markets that that still require a pretty heavy usage door dash drive if you think about particularly on the west coast, where the cost of labor and the accessibility of labor has been really challenged we find our franchisees out there leaning more heavily.
<unk> drive and the markets, where we have been able to staff up in the markets, where we have been able to you know <unk>.
Productively leverage our own labor you see lower rates, so I don't see door dash drive of her going away I think it you know labor on demand is a is a great asset that we've leveraged for a long time, but optimally we would be able to leverage our organic drivers to a larger extent moving forward.
Anderson.
And your appointment on.
<unk> it sounds like when I talk about online.
<unk> can see literally on the same screen, but it sounds like there isn't that much distinction any more between you have competition <unk> into your point.
<unk> I'm looking at your proprietary.
Ordering and and maybe in you know.
Isolation persons comparing you directly to competition. The same survey damages prevail on the Aggregators I'm thinking elsewhere.
Yeah, you know I would tell you that like the the shopping behavior.
Is pretty similar I you know obviously by definition aggregator me, obviously, they're aggregating all of them in the one site, but even even on the organic channels I mean, they're still shopping multiple sites. So it's just as easy to have.
Four apps side by side Little Caesars, Papa Johns Pizza hut and dominoes sitting there on your phone is it is it going door dash and see them all stacked up an inside their platform. So I think that competitive shopping dynamic that exists in both of those channels.
Thank you very much.
Got it.
One moment for our next question.
Our next question will come from Chris Oh Cool <unk>.
Stifle your line is open.
Great Thanks, and good morning.
Rob I know you've said in the past that much of the transaction growth from the pandemic period came from capturing incremental customers and that average frequency hadn't changed much over that period. So I'm just curious with some of the operational changes that you've made particularly in company stores, whether you're making any progress on increasing average frequency among your existing.
<unk>.
Yeah, I mean that is absolutely the long term goal right. So as we continue to improve service levels, we will create more loyalty and therefore more frequency so.
<unk> as we called out earlier, one of the things we're really proud of US that we were just recognized by the C. I as number one and service in this in this industry, which is a huge external validation of all the back to better work that we're doing I mean fundamentally I.
Believe that this business and all restaurant businesses are off you know live and die with operations. If you can't deliver a great customer experience it doesn't matter how fancy your product innovation is or how fancy your marketing is and that's what we've been focused on really for the last year year and a half I mean during the pandemic.
It was all about keeping you know just keeping the stores open keeping people safe and everyone was scrambling to try and make sure that we were doing that at a staffing challenges that everyone is talk incessantly about now as we come out of the pandemic and staffing improves and you know we had to clean up some things you know, we we had lost some discipline and now.
We have reinstituted that discipline, we've got great operations leadership, that's driving.
The kind of behaviors that we want and so yes, I mean, our our goal longterm as to significantly increase frequency. We think it's a huge untapped or a huge opportunity for our business and we will continue to kind of share out with you as we make more progress there how that's transpire.
Hearing you know today.
We're still in the early throes of that so we had we were not necessarily sharing that date of it moving forward, we'll be able to talk more about how frequency evolves as our operations improve.
Alright, thanks, guys.
Thanks, Chris.
Moment for our next question.
Our next question comes from Eric Gonzales Keybanc your lines open Eric.
Alright, Thanks for the question questions about the cost outlook and the prepared remarks, he talked about margin improvement above and beyond the benefits of modern flu cough cough in the second quarter. It sounded like you expand margins and the company's stories, a much faster rate than it would seem due to some health insurance claims. So I'm wondering if you could comment on your expectations for the company Martin in the back half.
I'll also take into account the fact, the cheese prices have spiked a bit in the last few weeks.
And relative to those expectations does expectation relative the second quarter and I didn't hear the symptoms and the prepared remarks, but should we still assume that flat operating margins. This year. Thanks.
Alright sure I mean, we've we've been talking about sequential improvement in our restaurant margins in 2023, I think we've we've shared that in our first call. The year that we did expect to see that I think we have even more confidence and that happening as we look towards the.
The next couple of quarters and the improvements we've seen in our company restaurants, Yeah with you. The last couple of weeks of cheese prices. Yeah. We we were really excited about the cheese prices that we saw over the last three months.
You know significant improvement and we have seen that flow through it has in our on our company margins have some of that has been mitigated through some of these kind of health claim health insurance claims you know, we're a self insured company and we had some claims that we weren't expecting.
And so you know that's.
That's not something that we would you know expect that to continue on and so if we can maintain that continued improvement and run rate and efficiency and productivity in our restaurants, we should <unk>, despite seeing a little bit higher cheese prices come back through the last few weeks, we should continue to see.
Sequential improvement in our restaurant operating margins.
Is the flat year over year up margins still the right way to think about <unk>.
Yeah, I'd say that we're still we're still tracking towards that.
Okay.
One moment for our next questions.
And our next question will come from Alexander cycle of Jeffrey to your line is open.
Thanks, Good good morning wanted just touch on the development wrapping your confidence in this path to the twenty-three guidance he reiterated.
And it seems like the the first corner of second quarter openings were below the typical pace, we would expect to get there and realize the external environments certainly not typical but.
Be helpful to gain some more color on what investors can hang their hat on here as it seems.
Like developments become more difficult for a number of franchise brands given the backdrop, so any any perspective that'd be helpful.
Yeah, I mean development has become significantly more difficult domestically and you know [laughter] I I am focused on increasing our domestic development, but one benefit of.
Being disproportionately global con contributing to our development is that it's not as difficult globally. We are seeing really strong global development. We have a significant pipeline that gives us a lot of confidence in our ability to deliver.
Or the number that we have signed up for you know <unk>.
Obviously with the the number of units we've seen in the in the front half we're gonna have to accelerate in the back half you know our team has a lot of confidence that they're gonna be able to to to to see that pulled through so you know that's why we're we've reiterated that guide you know I.
Think.
Despite the macro challenges are still a lot of.
White space for Us and a lotta drive, particularly in our international markets to fill up that white space. So we have a lot of confidence in our ability to to get between 270 310 for the year.
Thanks, Rob.
Sure.
One moment for our next question.
Okay.
And our next question will come from Andrew Strauss Ache have BMO capital markets. Your line is open.
Hi, Good morning, Thanks for taking my question the discussion around value is more kind of revenue management focus, but I'm curious are you thinking about the approach on more overtly communicated value in those on the area of the brand tends to be particularly aggressive with but.
With the deflation in the margin improvements you've talked about you see an opportunity to read it more I didn't think about balancing that and I guess.
You talk about some of the value dynamics have you seen any change in your customer value perception schwarzenegger around the metrics.
Sure Yeah, I think I think you know our sequential improvement in our comps.
<unk> and and the company restaurants are indicate indicated indicative of our ability to deliver value in a compelling way. So you know, although we don't come out and do a lot of like 50 per cent off discounts I mean, when you're selling an extra large one topping pizza.
For 12, 99, that's a great value.
You know a 799 price point for our property is a great value, our Papa pairings, which we promote everyday on our.
Digital channels at 699 is a great value. So we are 100 per cent committed to delivering value and I think the amount of transaction growth.
Our system is experiencing right now and has been really for the last three periods I'm getting better you know essentially every period.
Is indicative of our ability to be very competitive and is value oriented environment.
Mmm.
One moment for our next question.
And our next question will be coming from Brian Milan Piper Sandler your lines open.
Hi, Good morning. This is aisling on for Brian I wanted to ask about the recently acquired UK stores I was wondering if you could expand on your thoughts for your initial plan on the stores do they need a lot of TLC to get from the levels you want internally and I kept separately what does the remaining franchisee health.
Like in the UK. Thanks.
Sure.
I mean, when you say T. L. C. I would say, yes from an operating standpoint, but we're not planning on having to invest a ton of capital they'd all I'll need to be remodeled I mean, we have great you have a great operating footprint with the stores that we bought we've had to build out a bit of a obviously a field operations.
Sure and and the support that goes behind that some HR finance those types of things. So those are the costs.
You know we've had to put in to that investment above and beyond just the purchase of the assets, but you know the rest of the franchisees.
<unk> with 118 restaurants, we know almost a quarter of the UK market.
And we are leveraging that that asset base to make sure that we fully understand how to optimize that model similar to what we're doing in the U S. And then scale those optimizations in those improvements across the franchisee base.
And the franchisees that are gonna win are the ones that are gonna adopt those principles were already partnering with multiple franchisees in that market to do some consolidation not not on our part, but helping them to consolidate some restaurants with with you know franchisees that we bill.
Leave will be the best operators moving forward. So yeah. There may be some some changes that happened over there, but you know I think that the the the model that we're building is going to scale pretty pretty rapidly and our intention is for those restaurants.
To become more profitable and we may choose to operate those for the longterm. We may find franchisee partners, who can come in and grow with us and Refranchise. Some of those assets. We have a lot of optionality over their dependent upon what the right situation is to make sure we were setting that system up for long.
<unk> success.
Alright, Thank you for the call.
You got it.
Yeah.
I would now like to turn the conference back to Rob for closing remarks.
Thank you so I would like to sincerely. Thank you for your time. This morning, and your continued support of Papa Johns.
And I'd also like to thank our team members of franchisees as we mentioned it's been a challenging 12 months with some of the macro challenges that we've all faced and they've shown unbelievable resiliency and agility.
During these unique time, so I'm incredibly proud of both our company employees in restaurants, and our franchisees for how they work together to persevere through these challenges and is highlighted on the call today, we have a lot of confidence both in the back half of this year and moving forward. So thank you very much for your <unk>.
Time and all the best.
This concludes today's conference call. Thank you for participating you may now disconnect.
Mmm.
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