Q3 2023 Papa John's International Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Papa Johns third quarter 2023 conference call and webcast. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one.
On your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to introduce your host for todays call Stacie Shirley Vice President of Investor Relations. Please go ahead.
Okay.
Good morning, and welcome to our third quarter earnings Conference call.
This morning, we issued our 2023 third quarter earnings release, a copy of the release can be obtained on our Investor Relations website at IR Dot Papa John's Dot com under the news releases tab or by contacting our Investor Relations Department at Investor Underscore relations at Papa John's Dotcom.
On the call. This morning are Rob Lynch, our president and CEO and Ravi <unk>, our Chief Financial 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 statements may involve risks and uncertainties that could cause actual results to differ materially from these statements.
Forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings.
In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call Lastly.
Lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow up Rob.
Thank you Stacey good morning, everyone and thanks for joining us.
I'd like to start out by thanking our team members and franchisees for their hard work and dedication to delivering the best experience and value proposition for our customers.
Our sales and transaction growth will speak to today are the direct result of their solid execution as they drive our business with agility and adjust to changing consumer purchasing behaviors.
As you read in our earnings release. This morning, the positive North America comp sales and transaction growth that we discussed at the end of the second quarter continued throughout the third quarter at both our company owned and franchised restaurants.
Together, we delivered a 3% increase in North America comp sales by remaining focused on what matters to our customers product innovation operational excellence and a strong value proposition.
We're particularly pleased that our growth in the quarter was driven by higher transactions reaffirming the strength of our brand and the continued demand for our products.
Our company teams remained committed to providing quality products, a winning customer experience and great value, which led to a 6% comp sales growth at our company owned restaurants.
This transaction driven growth combined with lower food costs resulted in improving restaurant level margins in the quarter.
Despite the strong sales growth in North America, our company's adjusted operating income was just in line with the third quarter last year due to the dilutive impact of our recently acquired restaurants in the U K.
Today I will focus on the key drivers of our North America business.
Updates to our U S commissary operating model and provide an update on our recent acquisition of the UK restaurants.
I will then pass it onto Ravi who will walk you through our third quarter financial results in more detail along with an update on our fiscal 2023 and long term guidance before opening the lines to answer any questions that you may have.
First our North America business.
Our corporate teams continue to work closely with our franchisees to deliver our product innovation with excellence and create strong customer value through our revenue management capabilities.
This has resulted in an increase in unit level profitability, while preserving customer counts.
And the current inflationary environment, we have watched as many restaurant brands have increased menu prices. We have found other ways to drive restaurant profitability and have executed a thoughtful approach to managing price and promotions.
As a result, we believe that our products offer an attractive value proposition to consumers compared with other <unk>.
This was a key driver of our transaction growth in the quarter and we expect it to continue as many Q S ours continue to take more price.
To put the current pricing gap into perspective at Papa John's. If you were looking to feed a family of four in order to large one topping pizza and a two liter soda for Carryout on average it would cost you approximately $22.
This ticket is well below what it may cost to feed that same family of four at many U S. Our drive throughs, where the ticket is likely to run more than $40 on average in.
In challenging economic times this should lead to continued transaction growth.
However, I want to emphasize that our goal is not only to provide pricing value, but a high quality premium offering. This is ultimately what sets Papa John's apart from others in the pizza category and while we're on the path to achieving our fourth consecutive year of positive North America comparable sales growth.
Our consistent annual sales growth is driven in large part by our menu innovation, which has been a strong sales and engagement driver for us.
No one in the pizza space Innovates like we do we have repeatedly delivered sales driving craveable new products and.
In the third quarter, we continued our innovation by expanding our popular epic stuffed crust pizza platform.
Our new garlic epic stuffed crust pizza was a direct response to the love that our fans have shown for our epic stuffed crust and our iconic special garlic sauce.
The Pizza launched in July for a limited time at a premium price point of $30 99.
We then turn the heat up even more with our spicy garlic epic stuffed crust, which followed in August.
We also launched new all white meat boneless wings.
Boneless wings were introduced as another great option within our nationally advertise Papa pairings program, where customers can select two or more menu items for just $6 99 each.
Providing products such as garlic epic stuffed crust pizza at $13 99, and boneless wings at 699 demonstrates our commitment to our barbell strategy as we look to provide value to our customers across a broad range of price points and product offerings.
Last week, we announced the return of our shack around pizza.
Pizza with a purpose donate one dollar from every Schacher Roni pizza sold to the Papa John's Foundation for building community.
Our perennial fan favorite we expect it to help close 2023 on a positive note.
We also expanded our Papa bites platform with the limited time, new dessert TWX Papa bites served with a caramel dipping sauce.
I highly recommend that you place an order or two as part of your Papa John's research.
Another foundational component of our motto is the continual evolution and improvement of our digital platform. We've been an industry leader in digital as technology has made it easier for us to engage and service our customers from any device.
Our years of leadership in digital give us a competitive advantage.
Over other <unk> entering this space as more than 85% of our transactions already occur through digital channels.
Regarding us with a significant amount of insights to drive differentiation through better innovation and ongoing digital product improvements.
Today, I would like to share an update on three components of our digital universe E Commerce Aggregators and loyalty.
Recent enhancements to our e-commerce platforms have focused on highlighting value for our most price sensitive customer segments.
Driving improved website and app conversion rates.
We're also focused on simplifying our digital ordering journey by offering clear fast and easy to understand navigation paths into the menu, which can increase attachment rates.
When it comes to third party Aggregators Papa John's has been a leader in aggregate are integrations since 2019.
We are excited about the partnerships that we have built over these four years and continue to grow rapidly in this space.
We remain committed to meeting customers, where they want to order from us and giving them high quality innovative products, providing great value and delivering excellent service, regardless of the channel in which they order.
Currently approximately 85% of our sales take place in our organic carryout and delivery channels with carryout mixing slightly higher when compared with the same period last year.
The other 15% comes from third party Aggregators.
Additionally, as new National Pizza chains arrive on the aggregator platforms. The pizza category has continued to expand its share of the overall aggregator market.
It turns out pizza is a great product for home delivery.
Since the first day that we entered this platform we have been competing with thousands of hometown pizza shops.
Over the last three years Pizza hut and little Caesars also entered this channel and despite the increased national Pizza chain competition, our door dash sales have grown more than 150% over that same time period.
There continues to be a lot of room for category expansion, indicating that competitive entries do not necessarily lead to significant volume loss for brands that have been thriving in this space for years.
Lastly, we are excited about the opportunity that this business model provides for us to increase our volume in the lunch and late night day parts, which today are a smaller segment of our business, but represent opportunities for significant future gains.
Historically, it has been challenging to execute our delivery model at launch in late night due to the lack of consistent ordering patterns and commensurately the ability to accurately forecast the labor necessary to meet the variable demand the on demand labor that the aggregators provide through their delivery as a service model solve this challenge for us.
We know that we can be best in class in this channel and garner more than our fair share of the transactions because we believe that our product innovation premium positioning coupled with great value is a unique combination of category attributes that give us an advantage over the competition.
The aggregator marketplace dynamic makes it more difficult to win on low prices alone as the incremental fees reduced the ability to offer steep discounts.
In turn this enhances the value of our premium and innovative products.
Complementing this growth is our core business, where we will continue to innovate and deliver targeted promotions to our most valuable customer base, our Papa John's rewards members.
Our goal is to be able to offer our rewards members attractive incentives to order through our organic channels.
This will ensure that they continue to have higher frequency and higher tickets.
We're currently working to enhance our loyalty program and anticipate even better program performance in 2024 and beyond.
We will also benefit from the improved productivity that we expect from the advertising and media review process that we are currently conducting.
Turning to our commissary business, which we do not always talk a lot about we have some exciting news to share.
Although this segment of our business operates at a lower margin and is a consistent way to provide our system with a fresh ingredients necessary to deliver the level of quality that our customers expect.
We are relatively unique in the U S. Our industry with a vertically integrated supply chain and distribution network that operates on a fixed operating margin basis, which is currently set at 4%.
This business is our largest source of company revenue and as our business continues to scale. We continue to evolve our approach with our franchisees to increase investment in our supply chain infrastructure.
These efforts will ensure that we continue to deliver high quality ingredients to our restaurants and support our system growth as well as incentivize our franchisees to grow <unk>.
Beginning in 2024, we will increase the fixed operating margin that our U S. Domestic commissaries charge by 100 basis points in each of the next four years moving from 4% today to 8% in 2027.
At the same time, we are offering new opportunities for our franchisees to earn annual incentive based rebates as they increase volume and open new restaurants, which will drive even more continued productivity for our system.
The incentive based rebates will provide the opportunity for our franchisees to earn a reduced effective supply chain right as they continue to grow on an annual basis.
Finally, I'd like to briefly touch upon our U K market.
As previously discussed we have been making targeted investments in our international organization setting us up for long term success in this growing segment of our business.
Our efforts over the past year have also focused on repositioning our UK portfolio in a way that ensures our franchisees in the total market will drive healthy growth over the long term.
This has led to the rotation of some franchise entities to other more proven franchisees.
These efforts are paying dividends as we continue to see improved performance from these locations quarter after quarter.
Lastly, as you recall in June we announced the purchase of a portfolio of franchise restaurants with the goal of helping to realign this market for long term profitable growth.
Although we expected and communicated that these stores would be dilutive to earnings during our first year of operations. They are slightly more dilutive than we anticipated as evidenced in our third quarter results and they will continue to be a drag on profits in the fourth quarter and into 2024.
However, we anticipate sequential quarterly improvements in profitability and we are making the necessary investments to improve their sales and profitability with a focus on labor optimization product innovation and E Commerce enhancements.
We continue to be confident in the long term potential of the UK market.
Now I'd like to turn the call over to Ravi to cover the financial portion of todays call Ravi.
Thank you, Rob and good morning, everyone over the past few months I've had the chance to get to know many of you within the financial community and I've enjoyed listening to and learning from you.
Furthermore.
Been able to dive deeper into all aspects of our business working alongside our finance team and our executive leaders.
A gain a better understanding of Papa John's long term potential.
My conviction and the company has only grown stronger.
Maybe your system wide sales.
This continued growth demonstrates the strength of our brand and the opportunity to develop more restaurants.
As Rob mentioned earlier are three per cent increase in North America comp sales was the result of a 6% increase in our company owned restaurants, and a 2% increase in our franchise restaurants.
Higher transactions drove this growth as we saw an increase in sales or aggregated channels, along with improved year on year conversion rates through our own digital channels.
Observing the quarter our year over year sales comparisons remain positive R. F. P&A in revenue management teams continue to do a great job analyzing daily and weekly trends to ensure our business models are evolving with the latest consumer trends ultimately, enabling us to continue optimizing revenues and maximizing long.
Term profitability.
International comps, which were down less than 1% in the third quarter has sequentially improved throughout 2023 for.
For the third quarter positive comp sales in the middle East and our turnaround efforts in the UK. We're all set by softening sales within our Asia and Latin America markets.
Total revenues for the third quarter, where $523 million up 2% versus the third quarter last year driven by growth in North America sales and the consolidation of the hundred and 18 restaurants, we acquired in the U K.
This growth was somewhat offset by lower commissary revenues due to decrease come commodities prices.
You'll recall in June we completed the purchase of 91 formally franchise restaurants in the UK and in July we acquired 27 additional locations.
The results of these restaurants are now reflected in our international revenues and expenses.
Excluding the impact of these acquisitions total revenues were up 1% year over year.
Turning to profits.
Justin operating income for the third quarter was $34 million.
In line with the prior year period, while adjusted operating margins was $6, 4% down slightly from a year ago.
As Rob mentioned, we're pleased with the progress in in North America business, driving com sales, improving corporate restaurant margins of 130 basis points.
However, as we're in early earnings of our UK turn around the recently acquired company owned restaurants, where diluted to our profitability.
Or back to better strategic initiatives led to higher restaurant level margins at our domestic company owned restaurants through higher comp sales and labour efficiencies, which I will discuss in a moment.
These improvements were somewhat offset by anticipated higher G&A expense due to higher variable compensation expense when compared with the third quarter last year, along with higher health care costs.
In addition, there was hired depreciation and amortization expense related to our continued investment and restaurant and technology support along with the recently acquired UK restaurants.
For modeling purposes, we expect depreciation and amortization expense to be at the higher end of our guidance of $60 million to $65 million in 2023.
Our teams continued take a disciplined approach to managing costs, while supporting strategic growth initiatives.
As we look to 2024 higher variable compensation insurance costs, along with the full year impact of are you gay acquisition will continue to be a headwind per year on year comparisons.
So, let's take a deeper dive into our domestic company owned restaurant level margins.
For the third quarter food basket cost at our company owned restaurants improved 290 basis points compared with the prior year as we experienced meaningful relief from prior year peaks, particularly and cheese and proteins.
Labor costs improve 60 basis points during the quarter as our restaurants teams are doing a great job executing are back to better initiatives.
On a combined basis commodities and labor costs contributed approximately 350 basis points of margin improvement year on year in our domestic company owned restaurants segment.
Somewhat offsetting that 350 basis point improvement was a lower average ticket is clear yet and third party aggregated mixed with ice.
Overall company owned restaurant operating margins improve by approximately 130 basis points when compared with the same period a year ago.
Moving onto cash flowing balance sheet.
For the first nine months of the year net cash provided by operating activities was $127 million up from $77 million a year ago.
After deducting $51 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generally to free cashless of $76 million.
This is up from $28 million in the first nine months of 2022, reflecting the positive impact of our overall business performance lower performance compensation and working capital changes.
We ended the quarter with a healthy liquidity position, which total approximately $260 million in cash and borrowings available under a revolving credit facility and a gross leverage ratio up 3.4 times.
Based on our strong balance sheet and positive free cash flow outlook aboard is declared a fourth quarter dividend of 46 cents per common chair, which is $1.84 on an annualized basis and in line with the third quarter payment.
Capital structure provides us with substantial operating flexibility.
We will continue to take a disciplined and balanced approach to managing our cash flows creating shareholder value through a combination of organic growth investments debt repayments cash dividends and share repurchases.
Turning to development.
And the third quarter, we added eight net new units in North America, bringing our total North America counts to 3397 units. We currently have 45 units under construction and most are expected to open in the fourth quarter.
To date, we have been pleased with the performance of new restaurants.
Internationally.
Opened 37 at new units in the quarter, bringing our international account to 2428 units and our total system wide restaurants to 5825 units.
Consistent with prior years, our system wide development is weighted towards the second half of the year with the largest number of openings expected to occur in the fourth quarter.
Now to our outlook.
We are narrowing of 2023, North America comp guidance to a range of flat plus one.
Furthermore, we are reiterating our longterm expectations of growing or North America comps between two and 4% annually.
This growth will be driven by new menu innovations enhances tour digital experience and execution of our back to better strategic initiatives.
We anticipate international comps will remain under pressure for the fourth quarter sales headwinds within our Asia markets are expected to persist and the geopolitical uncertainty related to the evolving middle East conflict waves on our results were.
We are confident in the success of our international markets over the long term, but approaching the remainder of 2023 and 2024 with appropriate caution given the ongoing dynamic environment globally.
We now expect our adjusted operating margins in 2023 to be down when compared with 2022, primarily driven by the recent acquisition of the UK restaurants. This headwind well I'll set the benefit of the 53rd week and positive impact of our operational excellence initiatives within our domestic company owned rest.
Drops.
In terms of our non operating expense items, we expect a net interest expense to remain between $40 million and $45 million and a capital expenditures to remain between 80 and $90 million and our tax rate to be between 22 and 24%.
Finally from a development perspective in 2023, we expect to open between 245 to 260 that new units, which is strong growth, but below our prior guidance of 270 to 300 net new units.
This new range reflects a higher degree of uncertainty in the middle east potential closures in the UK and a more cautious outlook in Asia for the remainder of the year.
We're focused on thoughtfully, expanding and our most important markets and entering new markets.
With that said, we do expect that our 2024 development will be lower than our longterm guide of 5% to 7% system wide annual growth.
This assumes the same challenges, we anticipate and during the fourth quarter continue into 2024.
As I mentioned before we are pleased with the performance of a recently opened restaurants in North America and expect net new unit development for North America to increase in 2024 relative to 2000 twenty-three net openings.
Recall development in the United States is our most profitable development given the higher <unk> these restaurants produce.
I'd like to close I. Thank you all of our team members, who have proven their agility to operate through dynamic environments. While also staying focused on our long term strategy.
Their commitment to better helps to drive our strategic growth initiatives forward and further strengthen our business model.
Thank you.
And with that I'll turn the call over to Rob for some final comments.
And we are now alive.
Thank you Robbie.
In closing or North America business remains strong in our system wide sales continue to grow despite some near term challenges that we face in this global macroeconomic environment.
Are healthy performance in the quarter was driven by menu innovation revenue management enhancements and continued growth and our third party aggregator channel.
We are on track to report our fourth straight year, a positive cops in North America, and the structural changes that we announced today in our commissary business will significantly improve our company's longterm profitability.
We recognize that our international markets will remain under pressure temporarily but we see a long runway ahead in terms of development and I'm confident that we have the right strategies in place to achieve success.
We are also pleased to see our UK cops turned positive this quarter as we reposition this market and expect to seek sequential improvement looking forward.
Are targeted investments across our business will enable us to improve our sales and profitability as we focus on product innovation Labour optimization operational excellence through our back to better initiatives and digital enhancements.
This quarter has been a great example of how our back to better initiatives resulted in strong performance on the top and bottom line far North America business.
Finally, I am so proud of the culture, we've created within Papa Johns and our efforts continue to be recognized externally as Forbes recently named Papa Johns one of the world's best employers for a second year in a row.
I remain excited about the growth opportunities in earnings potential ahead.
At this point I would like to open it up for questions.
And thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.
<unk> will be compiled the Q&A roster and we please ask that you limit yourself to one question.
And <unk> one moment five first question.
And our first question comes from Chris of a call from Stifel.
Yeah, Good morning, guys.
Hi, Chris I guess.
You know I I.
I guess I'll start out with a question just on.
What's going on with the category. The largest player has been very aggressive with promotional offers in the current quarter with the launch of the new loyalty program and some other things and I'm just wondering.
Whether this is impacted the business in the near term and if so how do you think you need to respond or whether you think you need to respond.
Thanks for the crest clutching, Chris you know I mean, they the largest competitor has been running 50 per cent off discounts for the last couple of years that hasn't been a strategy that we've chosen to employ.
And you know they have gotten even more aggressive, but I think evidenced by the quarters topline sales results that's not necessarily the strategy that is delivering gross right now in this category three per cent cops in North America six per cent cops at the company restaurants, we feel like we have the right <unk>.
And place we continue to offer premium innovation, while delivering on that the needs of the value customer through our barbell strategy. So we're delivering value really every segment of our business, whether it's R. L. T O promotions are core menu or in the aggregators in that.
What's driving or grow so we feel great about that strategy in or can continue to leverage that moving forward.
Great I'll stick with one question.
And thank you.
And one moment my next question.
And our next question comes from Brian Bittner from Oppenheimer accompany your line is now open.
How're you doing.
Good morning, guys can you just talk maybe a little more specifically about what drove this.
Big improvement North American comps from where you are trending in the last quarter could improve both obviously on a one year baby could also improve.
Improve pretty meaningfully on a on a kind of burst 19 basis and.
Follow up to that.
You have this guidance narrowed to zero to 1% for the year for North America comps. It does imply a pretty wide range for four Q I mean mathematically anywhere from down slightly to up 3%.
Not sure if you're kind of.
Narrow the fourth quarter for us that'd be helpful. Thanks.
Yeah, So Brian.
We have been focused on making sure that we are nailing, our innovation or garlic epic stuff crossed with a with a big success for us.
We sold a lot of those incrementally to our core epic stuff Cross platform. So innovation was a big part of the quarter, but it's also just a continued commitment to delivering digital excellence across all of our platforms organically we were able.
To drive you know our transactions across the system and our aggregator partners have been a big part of our growth story and I know, there's a lot of talk about how the aggregators are going to impact you know impact this business longterm, we continue to see the.
Pizza segment within the aggregator channel continue to grow and take sure. So you know I think folks are starting to I I kind of joked about a little bit in the script that pizza is built for delivery and so the quality that you get when you order a pizza for delivery is.
Be significantly greater than a lot of the you know other things that are being offered through the <unk> channel at this point. So pizza is going to continue to grow in that category. We feel like we are well positioned to continue to lead that growth. Despite some of the competitive challenges in entries that we've seen over the last couple of years. So.
That's the driver of our of our growth right now the organic business and the value and the innovation that we're offering in the aggregator channel that we continue to leverage.
Okay in terms of the cops Q4, I'm sorry, your second piece in terms of the cops Q for yeah. I mean, we've got it positive in the back half and you know where where you know.
Our belief is that we're gonna be positive in queue for as well.
Great. Thank you.
And thank you.
And one moment for our next question.
And our next question comes from Sarah Senate Tour from Bank of America. Your line is now open.
Mmm. Thank you very much could you just talk about at Yeah economics.
Economics and <unk>.
And you mentioned Mmm Netgear Atkins kind of being in from my end of the range I understand the person and.
<unk> background, or perhaps getting restaurants set up I just trying to understand.
Confidence in accelerating back at five seven over time, and whether or not that has underpinning instead of perhaps.
Proved you know economics for franchisees.
Yeah, I mean Ah cross our system. The Union economics have improved our company restaurants have improved every quarter sequentially for the year. So we continue to leverage both the sales, but also some of the efficiencies that we built in our back to better operations initiative across the system.
You know we have talked about our revenue management capability, we're making big investments there on optimizing that even further trying to make sure that it takes into account all the different channels in which we compete to ensure that we're offering the right level of value to optimize the mix of our business across the channels and.
Which we operate so.
We have not guided lower in 2024 from a restaurant margin standpoint.
So we we got it a bit lower on development and really frankly that is just because of the uncertainty that we see right now in the middle East and N. As in some parts of Asia. We just wanted to make sure that we're not misleading anyone on the on the growth trajectory, we still have great partners.
<unk> and all of the regions in which we compete we have agreements in place and continue to sign new agreements. So there's lots of commitment there's lots of excitement about growth I think the macroeconomic environment in some of these big market is just concerning for some of our franchisees and we wanted to make sure that.
They're opening restaurants that they want to open that they are economically equipped to do that and invest in them the way they need to for that to make sure that they are successful in the long term.
The other thing I would tell you Sarah is in North America continues to be strong and we see development growing in North America. This supply chain initiative that we are putting in place is really focused on giving incentive. It's one one tool that we're using to give them.
Sign up to our franchisees to grow we have other incentives that we are contemplating and discussing with franchisees right now, but I am laser focused in this global volatile global environment laser focused on making sure that we deliver in over deliver on North America development. So we're.
Making a lot of investments that we're working on our franchisees to make sure that we have a model in place that takes advantage of these improved unit economics.
Alright, thank you.
And thank you.
And one moment for our next question.
And our next question comes from Andrew <unk> from BMO capital markets Your lines now open.
Okay. Good morning, Thanks for taking my question I wanted to ask about the decision to increase the the commissary margins over the next several years and how you thought about that opportunity and balancing universe is the franchise economics dynamics and what you intend to achieve from from a unit growth perspective why.
Alright, I guess, what's the feedback been so far for French IV franchisees Y as kind of eight per cent the right place to end up in and maybe.
Where do you expect the realized margins to land with the incentives. Thanks.
Yeah, Great question. So the 8% is really a function of a benchmarking study we did for similar business models not not.
Necessarily exactly the same as ours, because there's really only one or two exactly like ours, but you know we are vertically integrated both manufacturing and distribution. So we looked at the margin rates on manufacturing partners for Q S. R. As well as distribution partners for Q S. R and we actually chose to land on.
The low end of what the average margins are from that as a result of that benchmarking study.
If you think about this part of the business you know every hundred basis points of this equates.
Equates to approximately 30 basis points of cost and food food costs, because food cost on average represents about 30% of the P&L. So the 400 basis points. We're talking about is really somewhere between 100 120 basis points of impact on a restaurant P&L, but the program that we put in place has <unk>.
<unk> based rebates that allows franchisees to earn <unk> reductions in those rebate so for franchisees that are growing.
At certain levels, they have the opportunity to mitigate the impact of this increase in cost. In addition to that as I mentioned, we're also looking at other business model enhancements that will actually reduce the cost and the fee structures across different components of the business for France.
<unk>. So we see when you compile all of these opportunities we actually see margin improvement at the restaurant level. So we're giving incentives to drive volume growth Bowl through transactions as well as development. We're also decreasing the overall cost of.
<unk> through some of these fee structure modeling that we're doing with franchisees.
Great. Thank you very much.
<unk>. Thank you.
And one moment for our next question.
And our next question comes from Peter <unk> from B T. I G line is now open.
[noise] great. Thanks, Rob I, just wanted to kind of focus a little bit more on this [noise] supply chain changes, it's pretty meaningful I think in the past you guys have had a higher supply chain margin and that's come down over time and I know many of your peers have a higher margin.
Margin I'm just curious.
How do you think this impacts the the store base at least in the next year or two do you anticipate that some of the smaller franchisees may Wanna sell to some of the larger franchisees.
Do you think the initial impact here is just slower development before the people digested this new franchisees Digesters, how do we think about this maybe in the context of 2024 and development as we get into 2024 and 2025.
Thanks for the question Pete I Wanna make it very very clear this.
Supply chain change will not be a material impact to the restaurant profitability and when coupled with other programs that we are putting in place.
Heading into 2024, there will be a net increase and improvement and restaurant profitability. The other piece I Wanna also make everyone during.
During our <unk> and our supply chain, we're always looking at productivity. So when you think about the impact of the restaurants of call at 30 basis points across the entire P&L from this change on an annual basis, our goal will be to mitigate.
A lot of that through productivity in the supply chain. So that this becomes even less material and once again.
With the volume based incentive that we're offering there you know that this is this will not be a material impact too of restaurants, I mean, we own 500 restaurants. Our goal in this system is to create the most profitable restaurant model for all of our France.
E as as well as our company restaurants, and so we do not anticipate this having any impact on franchisees closing or development moving for once all the program components are implemented across the piano.
Thank you.
And thank you.
And one moment for our next question.
And our next question comes from Joshua along from Stevens Ain't. Your line is now open.
Great. Thank you for taking my question was curious if we could talk about the back to better initiatives now that they've been across the system for a little while you're early learnings from that and I imagine that both have some tailwinds to them, especially as you need to put a great results like you did this morning and then.
Secondarily on that same note as you think about the back to better approach and then.
Simplifying or at least optimizing operations and what that does in terms of a unlocked it support your menu innovation initiatives and then a go forward basis. Thank you.
Sure Yeah, I mean right now we are in a a very quickly evolving operating environment. So as the business evolves to incorporate our aggregator partners in the aggregator channel as any balls to you know a high.
[noise] proportion of carry out business, we really need to optimize how we schedule deploy and manage labor across all of those channels. So labour optimization is a big opportunity as you think about our business model leveraging external.
<unk>.
So our back to better is is is not just about becoming <unk>.
More efficient in terms of our out the door times and those other metrics, which by the way have improved dramatically and that you know as a highlighted we moved are out the door times in our company markets from around 28 minutes to below 20 minutes at this point, which is transformational from our customer service and throughput standpoint.
But.
It's also about leveraging technology to make sure that we have the right labor and the right restaurants at the right time, and that's Gonna also make our restaurants more efficient more productive improve the p&l's and drive more franchisee profitability.
And thank you.
And one moment for our next question.
And our next question comes from Eric Gonzales from Keybanc. Your line is now open.
Hi, Good morning, Thanks for taking the question my questions about the North America store Little margin I think you said food costs for 290 based on one's better and that Delevered labor by about 60 basis points. I'm curious if you can help bridge the gap to the 130 basis points of improvement in terms of how much of a drag that increase in third party mix was and what does it say about the profitability that channel.
Really what's driving that increase in in third party mix this quarter.
Thanks for the question Eric couple of thoughts there. The first is like our focus is on making sure. We're serving the consumer on where they want to get Papa Johns and that's across both their party aggregators as well as our organic digital channels.
When we think about the impact of the change in sales mix across carry out delivery and third party aggregators. It was about 150 basis points of compression in the quarter. What's important to note. There is like in the aggregate who says Rob mentioned were leaning in further into the lunch and late night <unk>.
Is this the shape of those transactions and what the consumers purchasing those parts of the day part are just different than dinner and that's yielding one a positive incremental <unk> opportunity for us but to it does have some compression on the ticket.
Yeah, they're just smaller orders, which is going to drive lower ticket, it's not necessarily cannibalization of our core dinner day part, it's adding new day parts that have different ticket composition.
Is there a way you can maybe frame it like in terms of how much of the comp was driven by that part of the business.
Yeah, I don't know that we're necessarily breaking it out that way at this point Uhm, Eric Okay fair enough.
I thought I'd try [laughter].
Thanks for the question.
And thank you.
M. One moment for our next question.
[noise] Alex <unk>.
Your line is now open Alex legal from Jeffries your lines now open.
Alright, thanks, good morning.
I wanted to see if you could just talk to the path to improvements from the revenue management optimization work with franchisees and sort of how how far you've gotten there how long you think it takes to get everyone on board and where you want to get too.
Yeah. Great question. We this is one of the more complex revenue management models in the industry and the reason why I say that is because.
You know we have.
Regular menu prices, we have specials and discounts that are promoted across all of our channels and we have the you know the aggregator pricing we have a lot a lot of different moving pieces when you drive through a drive through when.
When you look at the menu board whatever the price is is what you're gonna pay right and you're not you're not looking for a special deals when you go into our channels and our digital platforms, you're looking at not just our regular menu price, but you are looking at the promotions you're also looking at all the specials in deals and those can vary from different market.
Even by different stores within a market. So as we think about revenue management. There really is a a huge number of you know things to take into consideration to optimize every unique stores individual profitability and so we are we have been working on that.
For really the last couple of years, we are about to enter into a big revenue management project with some external partners to be able to digest all of our data and our franchisees data and really give us that optimize model at a more local even store basis.
You know, it's really hard for us to do with 3400 restaurants with our internal infrastructure. So we're bringing in a partner that's going to help us do that even more you know.
<unk> and so it it really just kicking that project the off so I think that that can pay a lot of dividends here and in 2024.
Alright. Thanks.
And thank you.
And one moment for our next question.
M. Our next question comes from Brian Mullen from Piper Sandler Your line is now open.
Okay. Thank you and the prepared remarks, you spoke to enhanced.
Enhancing the loyalty program potentially having even better performance next year could you just elaborate on that a little bit or their consumer facing changes to the program and <unk>, maybe just about developing better internal.
Capabilities to use the data with the current program you already have just you know any color you could add would be great.
Right I I would say all of the above I mean, I view, our loyalty platform as a strategic tool for us to make sure that we hold onto our most valuable customers. You know our loyalty members are our most frequent and highest ticket customers and so you know we don't get too.
To market to them and reach them in the same way through our aggregator channel. So we need to make sure that we have shored up our loyalty platform both from a value standpoint, but also from an incentive standpoint, the offerings that we provide the the incentives that we give them to order from us versus other channels. So.
With that work is all underway, right, now and and and and so our intent is for that to have an impact and be realized both externally as well as the benefit internally when we continue to leverage the data that we get from all of those transactions. So that that's gonna come to fruition here.
In 2024.
Thank you.
And thank you.
And one moment for our next question.
And our next question comes from Laurence Silberman from Deutsche Bank. Your line is now open.
Thank you very much I wanted to ask about the expectations for 2024 in northern <unk>, how you're thinking that the competition between traffic in price and then Rob if I can follow up on your commentary on the strong value proposition for our family.
<unk> I mean, even the pizza category in general is getting the credit it deserves value is there more that you can do to better communicate that.
Yeah, I think we're doing a pretty good job of communicating it. That's why we drove you know the most most transactions last quarter I must highest transaction growth last quarter and the segment. So you know we can always get better and we're continuing to learn through all of the data that we get from all of our channels, but.
We're gonna be focused on the same strategy that has delivered four consecutive years of same store sales growth and I think the only one in the in the pizza National Pizza category to do that so we're gonna deliver premium innovation and we're gonna continue to offer values you can still get you know a large.
One topping pizza Papa Johns carry out special under $10 and and and all of our company restaurants. So I think we do offer a lot of great value for the customers that need it that's just not what we advertise because we're focused on delivering premium premium innovation.
The delivers groups topline sales growth. So that's that's strategies in place we got it next year, we still feel great about our two to four guide longterm, we guided towards the lower end for next year, you know that that composition, we don't see changing materially versus what we're gonna what we've dilly.
Ever this year, we have a lot of momentum continuing to drive transaction growth ideally, we'd be able to incorporate some pricing into there to mitigate any cost inflation that we see right now we're not anticipating significant levels of inflation similar to what you know.
Which is a departure from what we've seen over the last 18 to 24 months. So it's gonna be a balanced approach that I think I will deliver that positive same store sales growth.
Thank you very much.
And thank you.
And I am showing no further questions I would not have to turn the call over to Rob Lynch for closing remarks.
Well, thanks, everyone for participating on the call I Hope you agree it was a a really strong quarter, particularly far North America business and despite the the volatility that everyone is talking about on the in the international market. We continue to see positive growth ahead.
For for the brand.
Like to thank everyone for your continued interest in Papa Johns I'd also like to thank our team members and franchisees. They continue to show <unk> unbelievable resiliency and agility. During these these are unique times for all of US. So I look forward to connecting again and sharing our 2000 twenty-three results with you.
February thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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