Q4 2023 Papa John's International Inc Earnings Call
Okay.
Operator: Good morning, and thank you for standing by. Welcome to Papa John's fourth quarter and full year 2023 Earnings Con webcast. At this time, all participants are in a listen-only mode.
Good morning, and thank you for standing by.
John Sport quarter, and full year 2023 earnings call and webcast at this time all participants are in a listen only mode.
Operator: 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 1-1 on your telephone. You will then hear an automatic message advising that your hand is raised.
After the speaker's presentation, there will be a question and answer session. Just a question during the session you will need to buy stock.
One one on your telephone.
Automatic magic Spicing Johanning space. Please.
Operator: Please note that today's conference call is being recorded. I would now like to turn the conference over to Stacy Frole, Vice President of Medical Relations. Please go ahead.
Note that todays conference call is being recorded.
I would now like to turn the conference over to Stacy probably Vice President of Modulations. Please go ahead.
Stacy Frole: Good morning, and welcome to our fourth quarter and full year 2023 earnings conference call. This morning, we issued our fourth quarter and full year 2023 earnings release. A copy of the release can be obtained on our investor relations website at ir.papajohns.com under the news releases tab or by contacting our investor relations department at investor_relations at papajohns.com.
Stacy: Good morning, and welcome to our fourth quarter and full year 2023 earnings conference call.
Stacy: We issued our fourth quarter and full year 2023 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.
Stacy Frole: On the call this morning are Rob Lynch, our President and CEO, and Ravi Thanawala, 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 federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from those statements.
Stacy: On the call. This morning are Rob Lynch, our president and CEO and Ravi thought of Waller, our Chief Financial Officer.
Speaker Change: Before we begin I need to remind you that comments made during this call will include forward looking statements within the meaning of federal Securities laws.
Speaker Change: These statements may involve risks and uncertainties that could cause actual results to differ materially from these statements.
Stacy Frole: Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filing. 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?
Speaker Change: Forward looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings.
Speaker Change: In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call.
Speaker Change: Lastly, let me. Thank you in advance for asking only one question and getting back in the queue for more follow up Rob.
Robert M. Lynch: Thank you, Stacy. Good morning, everyone, and thanks for joining us. Before we get into our 2023 results and our 2024 strategic initiatives, I'd like to take a moment to briefly reflect on the progress that we've made over the last five years. When I joined Papa John's in 2019, system-wide sales, North America units, and operating income were rapidly declining. Since then, our team and franchisees have worked incredibly hard to rebuild the brand and regain consumer loyalty. Their focus and diligence during some of the most dynamic times in our industry have strengthened Papa John's and positioned us for sustainable growth in the QSR space. To our team members and franchisees, thank you for your commitment and dedication to our customers, our values, and our brand and for playing a key role in our success.
Speaker Change: Thank you Stacey good morning, everyone and thanks for joining us.
Robert M. Lynch: Before we get into our 2023 results and our 2024 strategic initiatives I'd like to take a moment to briefly reflect on the progress that we've made over the last five years.
Robert M. Lynch: When I joined Papa John's in 2019 system wide sales North America units and operating income of rapidly declining since then our team and franchisees have worked incredibly hard to rebuild the brand and regained consumer loyalty.
Robert M. Lynch: Their focus and diligence doing some of the most dynamic times in our industry has strengthened Papa John's.
Robert M. Lynch: Positioned us for sustainable growth in the <unk> space.
Robert M. Lynch: So our team members and franchisees. Thank you for your commitment and dedication to our customers our values and our brand and for playing a key role in our success.
Robert M. Lynch: Because of these efforts, today we are reporting another year of record global system-wide sales, and our fourth consecutive year of positive North America comps. Accelerating North American Unit Growth and Adjusted Operating Income with a 5-Year CAGR of approximately 12%. More importantly, we made foundational improvements to our restaurant operations, grew our global restaurant footprint, improved our menu with innovative new products, and advanced our digital and marketing platforms to support the evolution of our business model for our next chapter of growth. Our product innovation, rooted in our brand promise of better ingredients and better pizza, continues to be at the heart of our success. In 2023, we expanded some of our most popular platforms with the Garlic Epic Stuffed Crust Pizza, Doritos Cool Ranch Papadillas, and New Papa Bites, including Oreo and Twix flavors. We also introduced new innovations like our crispy parm pizza, becoming the first large pizza chain to put cheese on the bottom of the crust, and brought back fan favorites like our shakaroni pizza.
Robert M. Lynch: Yeah.
Robert M. Lynch: Because of these efforts today, we are reporting another year of record global system wide sales, our fourth consecutive year of positive North America comps accelerating North America unit growth and adjusted operating income with a five year CAGR of approximately 12%.
More importantly, we made foundational improvements to our restaurant operations grew our global restaurant footprint improved our menu with innovative new products and advanced our digital and marketing platforms to support the evolution of our business model for our next chapter of growth.
Robert M. Lynch: Our product innovation rooted in our brand promise of better ingredients better pizza continues to be at the heart of our success at.
Robert M. Lynch: In 2023, we expanded some of our most popular platforms with the garlic epic stuffed crust pizza Doritos cool ranch pop ideas, and new pop up bites, including Oreo and twigs flavors.
Robert M. Lynch: We also introduced new innovations like our crispy par pizza, becoming the first large pizza chain to put cheese on the bottom of the crust and brought back fan favorites like our chaperone eat pizza.
Robert M. Lynch: We also executed on our Back to Better 1.0 initiatives, driving operational improvements to deliver better pizza with better service. At our company-owned restaurants, we've reduced our out-of-the-door times by nearly 25% to average under 20 minutes today, and we've seen our overall customer satisfaction scores continue to improve. This great work has earned us the number one ranking in customer service for the pizza category on the American Customer Satisfaction Index in 2020.
Robert M. Lynch: We also executed on our back to better one point, our initiatives driving operational improvements to deliver a better pizza with better service.
Robert M. Lynch: At our company owned restaurants, we've reduced our out the door times nearly 25% to average under 20 minutes today and we've seen our overall customer satisfaction scores continue to improve.
Robert M. Lynch: That's great work has earned us the number one ranking in customer service for the Pizza category on the American customer satisfaction index in 2023.
Robert M. Lynch: We also continue to lean into our domestic third-party aggregator partnerships as sales through this channel reached another high in the fourth quarter, growing more than 10% sequentially and up more than 50% from a year ago. As we've mentioned on past calls, there continues to be a lot of room for category expansion in this channel. We have seen that new competitors entering the marketplace do not necessarily lead to significant volume loss for a brand like ours that has been thriving in this space for years. Our quarter-to-date trends have continued to increase relative to our fourth quarter run rate, and we have increased our market share in this channel. In early January, we announced Back to Better 2.0.
Robert M. Lynch: We also continue to lean into our domestic third party aggregator partnerships our sales through this channel reached another high in the fourth quarter growing more than 10% sequentially and up more than 50% from a year ago.
Robert M. Lynch: As we've mentioned on past calls there continues to be a lot of room for category expansion. In this channel we have seen that new competitors entering the marketplace does not necessarily lead to significant volume loss for a brand like ours that has been driving in this space for years are quarter to date trends have continued to increase relative to our fourth.
Robert M. Lynch: Order run rate and we have increased our market share in this channel.
Robert M. Lynch: In early January we announced back to better to point out. These initiatives are designed to drive best in class Pizza U S. Our unit economics through higher sales higher restaurant level margins and higher return on investment on new domestic restaurant openings, our largest and most profitable market.
Robert M. Lynch: These initiatives are designed to drive best-in-class pizza QSR unit economics through higher sales, higher restaurant-level margins, and higher return on investment on new domestic restaurant openings, our largest and most profitable market. As part of our efforts to enhance our domestic national marketing investment and effectiveness, we went through an extensive advertising and media review process aimed at sharpening our analytics-informed approach to marketing and consolidating and optimizing our partners at the national level to drive scale. As a result of this process, we have shifted to a more productive, nationally-focused marketing model. We're increasing the per store investment in the National Marketing Fund from 5% to 6% of sales beginning in the second quarter of 2020, while eliminating the 3% required local spend. The required marketing contribution rate decreases from 8% to 6% and brings the added benefit of an immediate 200 basis points of margin at the restaurant level along with a bigger impact from their marketing spend.
Robert M. Lynch: As part of our efforts to enhance our domestic national marketing investment and effectiveness. We went through an extensive advertising and media review process aimed at sharpening our analytics informed approach to marketing and consolidating and optimizing our partners at the national level to drive scale.
Robert M. Lynch: As a result of this process, we have shifted to a more productive nationally focused marketing model.
We are increasing the per store investment in the National marketing fund from 5% to 6% of sales beginning in the second quarter of 2024, while eliminating the 3% required local spend.
Robert M. Lynch: They required marketing contribution rate decreases from 8% to 6% and brings the added benefit of an immediate 200 basis points of margin at the restaurant level, along with a bigger impact from their marketing spend.
Robert M. Lynch: I am thankful for the overwhelming support we received from our franchisees on this channel. More than 90% of the system voted in favor, highlighting the confidence our franchisees have in our go-forward marketing strategy. This includes improved audience selection, improved return on ad spend, sustained loyalty, and increased cultural buzz. Our new partners are ramping quickly, and we look forward to sharing how our marketing programs are evolving on future calls. Additionally, we are optimizing our investments in data science and marketing technology to enhance our consumer value perception driven by occasion, day part, and brand. Part of our success in driving positive sales over the past several years has been our ability to strike the right balance between ticket and transaction growth. This is accomplished through our barbell strategy that offers premium innovation while delivering on the needs of our value customers.
Robert M. Lynch: I am thankful for the overwhelming support we received from our franchisees on this change more than 90% of the system voted in favor highlighting the confidence of our franchisees have in our go forward marketing strategy.
Robert M. Lynch: This includes improved audience selection improved return on AD spend sustained loyalty and increased cultural bus.
Robert M. Lynch: Our new partners are ramping quickly and we look forward to sharing how our marketing programs are evolving on future calls.
Robert M. Lynch: Additionally, we are optimizing our investments in data science and marketing technology to enhance our consumer value perception, driven by occasion day part and brand.
Robert M. Lynch: Part of our success in driving positive sales over the past several years has been our ability to strike the right balance between ticket and transaction growth.
Robert M. Lynch: This is accomplished through our barbell strategy that offers premium innovation, while delivering on the needs of our valued customers.
Robert M. Lynch: We're focused on delivering value in every segment of our business, whether that is through promoted price points, our core menu, or premium innovation. Moving on to unit development and how we are incentivizing our franchisees to grow. In November, we launched a new development incentive to improve the return on capital investment of new domestic restaurants by waiving National Marketing Fund contributions for the first five years. This equates to 600 basis points of annual cost savings in their restaurant P&Ls for the first five years, or an approximately $360,000 total benefit that will significantly improve the cash-on-cash payback for our developing franchisees who open new units in 2024. This incentive will now extend into 2025, offering three years of National Marketing Fund relief or an approximately $216,000 average benefit for new units opened in 2025. Currently, in North America, we have more than 100 units in our pipeline at various stages of development.
Robert M. Lynch: We're focused on delivering value at every segment of our business whether that is through a promoted price points, our core menu our premium innovations.
Robert M. Lynch: Moving to unit development and how we are incentivizing, our franchisees to grow.
Robert M. Lynch: In November we launched a new development and set out to improve the return on capital investment of new domestic restaurants by waiving National marketing fund contributions for the first five years. This equates to 600 basis points of annual cost savings in their restaurant P&L for the first five years or an approximately 360000.
Robert M. Lynch: Total benefit that will significantly improve the cash on cash payback by developing franchisees, who opened new units in 2024.
Robert M. Lynch: This incentive will now extend into 2025 offering three years of National marketing fund relief or an approximately $216000 average benefit for new units opened in 2025.
Robert M. Lynch: Currently in North America, we have more than 100 units in our pipeline at various stages of development. We're confident that this incentive program, which delivers best in class cash on cash returns coupled with improved restaurant margins customer service levels marketing efficiencies and technology and analytics platforms.
Robert M. Lynch: We are confident that this incentive program, which delivers best-in-class cash-on-cash returns, coupled with improved restaurant margins, Customer Service Levels, Marketing Efficiencies, and Technology and Analytics Platform, will drive sustained development momentum for Papa John's. Furthermore, given the business model changes associated with Back to Better 2.0, these restaurants built in 2024 have the potential to be some of the most profitable restaurants in our system. All of these strategic actions are designed to drive strong top-line sales and more volume, which in turn makes our supply chain more productive. We are evolving our commissary business and increasing our fixed operating margin to drive profitable growth for our company, while improving supply chain productivity and delivering long-term cost savings for our system. For example, our franchisees can now earn annual incentive-based rebates as they increase volume and open new restaurants.
Robert M. Lynch: Well drive sustained development momentum for Papa Johns.
Robert M. Lynch: Given the business model changes associated with back to better to point out. These restaurants built in 2024 have the potential to be some of the most profitable restaurants in our system.
Robert M. Lynch: All of these strategic actions are designed to drive strong top line sales and more volume, which in turn makes our supply chain more productive way.
Robert M. Lynch: We're evolving our commentary business and increasing our fixed operating margin to drive profitable growth for our company, while improving supply chain productivity and delivering long term cost savings for our system.
For example, our franchisees can now earn an annual incentive based rebates, if they increase volume and open new restaurants.
Robert M. Lynch: The incremental volume driven by increased marketing and additional development will reduce the shared supply chain costs across. We are excited about these initiatives and the value that they will create for Papa John's and for our North America franchisees, not only as they ramp up in 2024 but over the next several years. Now to our international business. Over the past 10 years, we have more than doubled our international footprint and now operate in 50 countries and territories.
Robert M. Lynch: The incremental volume driven by increased marketing and additional development well reduce the shared supply chain cost across the system.
We are excited about these initiatives and the value that they will create for Papa Johns and for our North America franchisees not only as they ramp up in 'twenty 'twenty four but over the next several years now.
Robert M. Lynch: Now to our international business.
Robert M. Lynch: Over the past 10 years, we have more than doubled our international footprint and now operate in 50 countries and territories.
Robert M. Lynch: As we pursue our next phase of international growth, we're evolving our business model to deliver an enhanced value proposition to our customers and franchisees, ensure targeted investments and efficient resource management, and better position our largest markets for long-term success. Beyond new unit development, it's about sustainably and profitably growing all of our restaurants globally. This past year, we made significant enhancements to our international organization and infrastructure. As part of these efforts, we established international regional hubs and key target regions. Asia Pacific, EMEA, and Latin America.
As we pursue our next phase of international growth, we're evolving our business model to deliver an enhanced value proposition to our customers and franchisees and sure targeted investments and efficient resource management and better position our largest markets for long term success.
Robert M. Lynch: Beyond New unit development, it's about sustainably and profitably growing all of our restaurants globally.
Robert M. Lynch: This past year, we've made significant enhancements to our international organization and infrastructure.
Robert M. Lynch: As part of these efforts, we established international regional hubs and key target regions Asia Pacific EMEA and Latin America. These hubs are led by experienced general managers, who are partnering with franchisees to create holistic strategies to drive profitable sales in their markets.
Robert M. Lynch: These hubs are led by experienced general managers who are partnering with franchisees to create holistic strategies to drive profitable sales in their markets. Our teams are now aligned at the corporate and local levels to execute global best practices in operations, marketing, and technology to accomplish our long-term objective of increasing market share in key markets around the world. To support our international teams and franchisees, we are investing in consumer-facing technology, digital infrastructure, and enhanced financial and operational reporting. By investing in expanded ordering capabilities through our website and app and leveraging analytics, we expect to improve conversion, increase customer retention, and deliver faster consumer insights to our franchisees. This playbook is similar to what we have successfully implemented within the U.S. over the past few years, and we expect it to be equally successful as we expand this investment strategy globally.
Robert M. Lynch: Our teams are now aligned at the corporate and local levels to execute global best practices in operations marketing and technology to accomplish our long term objective of increasing market share in key markets around the world.
Robert M. Lynch: To support our international teams and franchisees, we are investing in consumer facing technology digital infrastructure and enhanced financial and operational reporting by.
Robert M. Lynch: By investing in expanded ordering capabilities through our website and app and leveraging analytics, we expect to improve conversion increased customer retention and deliver faster consumer insights to franchisees.
Robert M. Lynch: Playbook is similar to what we successfully implemented within the U S. Over the past few years and we expect it to be equally successful as we expand this investment strategy globally.
Robert M. Lynch: We are also making progress on our repositioning efforts within the UK market and expect to improve in profitability during 2024.
Robert M. Lynch: We're also making progress on our repositioning efforts within the UK market and expect to improve in profitability during 2024. In 2023, we supported the transition of 61 underperforming UK franchise restaurants to other, more proven UK franchisees. We have seen a significant improvement in the performance of these locations, with their fourth quarter comp sales finishing well ahead of the other restaurants within the UK market. In fact, the fourth quarter was the second consecutive quarter of positive comp sales for our UK franchises. If you'll recall, in June, we announced the transition of 118 UK franchise restaurants to company ownership. As anticipated, these new company-owned U.K. restaurants were dilutive to 2023 adjusted operating income by approximately $9 million, which takes into consideration the restaurant's current-year operating loss and the foregone prior-year royalty.
Robert M. Lynch: And 2023, we supported the transition of 61 underperforming U K franchise restaurants to other more proven U K franchisees.
Robert M. Lynch: We have seen a significant improvement in the performance of these locations with their fourth quarter comp sales, finishing well ahead of the other restaurants within the UK market.
Robert M. Lynch: In fact, the fourth quarter was the second consecutive quarter of positive comp sales for our U K franchisees.
Robert M. Lynch: If you'll recall in June we announced the transition of 118 U K franchise restaurants to company ownership.
Robert M. Lynch: As anticipated these new company owned U K restaurants were dilutive to 2023, adjusted operating income by approximately $9 million, which takes into consideration the restaurants current year operating loss and the foregone prior year royalties.
Robert M. Lynch: Similar to the other U K restaurants that transitioned to new owners, we're seeing sequential improvements in the performance of our company owned restaurants together, our company owned restaurants and franchise locations in the U K are reporting positive comps to start 2024, and we continue to explore options to maximize the value and cash flow.
Robert M. Lynch: Of our UK portfolio, ensuring alignment of the region and its performance with our long term strategy.
Robert M. Lynch: We have also made the decision to close approximately 50 underperforming company owned restaurants in the second quarter of 2020 for these restaurants accounted for roughly two thirds of our operating loss in the U K in the fourth quarter.
Robert M. Lynch: Similar to the other U.K. restaurants that transitioned to new owners, we are seeing sequential improvements in the performance of our company-owned restaurants. Together, our company-owned restaurants and franchise locations in the UK are reporting positive comps to start 2024, and we continue to explore options to maximize the value and cash flow of our UK portfolio, ensuring alignment of the region and its performance with our long-term strategy. We have also made the decision to close approximately 50 underperforming company-owned restaurants in the second quarter of 2024. These restaurants accounted for roughly two-thirds of our operating loss in the UK in the fourth quarter.
Robert M. Lynch: We'll continue to evaluate our remaining portfolio as well as our franchisee locations focusing on sales trends overall profitability and their lease and loan obligations.
Robert M. Lynch: Through this process additional strategic closures could occur as we look to drive improved profitability for our remaining stores optimize trade zones and striking a franchisee base within this important market.
Robert M. Lynch: And this dynamic global environment, our industry is facing challenges from the potential impact of geopolitical events. We are closely monitoring these situations and we'll maintain flexibility with our operations in those impacted regions. We're committed to our international transformational initiatives as we believe they best.
Robert M. Lynch: We'll continue to evaluate our remaining portfolio, as well as our franchisee locations, focusing on sales trends, overall profitability, and their lease and loan obligations. Through this process, additional strategic closures could occur as we look to drive improved profitability for our remaining stores, optimize trade zones, and strengthen our franchisee base within this important market. In this dynamic global environment, our industry is facing challenges from the potential impact of geopolitical events. We are closely monitoring these situations and will maintain flexibility with our operations in those impacted regions. We are committed to our international transformational initiatives as we believe they best position us to realize our next phase of global growth and set our largest markets up for long-term success. Now, I'd like to turn the call over to Ravi to cover the financial portion of today's call. Ravi?
Robert M. Lynch: They showed us to realize our next phase of global growth and set our largest markets up for long term success.
Robert M. Lynch: Now I'd like to turn the call over to Ravi to cover the financial portion of todays call Ravi.
Ravi Thanawala: Thank you, Rob and good morning, everyone.
Ravi: Start I'd like to Echo Rob's sediments and thank the entire Papa John's system for their focus and commitment to driving forward our strategic priorities during the past year towards our ambition to become the <unk> brand of choice for consumers and franchisees around the world.
Ravi: Now for a closer look at our fourth quarter financial results.
Ravi: Global Systemwide restaurant sales were $1 $34 billion up 11% in constant currency from the prior year fourth quarter.
Ravi: The increase was largely attributable to the shift in our 2023 fiscal calendar to include a 14th week in the fourth quarter.
Ravi Thanawala: Thank you, Rob, and good morning, everyone. To start, I'd like to echo Rob's sentiments and thank the entire Papa John's team for their focus and commitment to driving forward our strategic priorities during this past year towards our ambition to become the QSR brand of choice for consumers and franchisees around the world. Now for a closer look at our fourth quarter financial results. Global system-wide restaurant sales were $1.34 billion, up 11% in constant currency from the prior year fourth quarter.
Ravi: Ping, an approximately nine percentage points of growth.
Ravi: Outside of the extra week global system wide sales were up approximately 2% in the quarter driven by new restaurant openings and higher North America comparable sales.
Ravi: Our 2% increase in North America comp sales was the result of increases in transaction and ticket growth for both our domestic company owned restaurants and franchise restaurants.
Ravi: We continue to see higher transactions driven by our aggregator channel while our ticket growth is supported by the work our teams are doing to enhance customer value perception.
Ravi Thanawala: The increase was largely attributable to the shift in our 2023 fiscal calendar to include a 14th week in the fourth quarter, resulting in approximately nine percentage points of growth. Outside of the extra week, global system-wide sales were up approximately 2 percent in the quarter, driven by new restaurant openings and higher North America comparable sales. Our 2% increase in North America comp sales was the result of increases in transaction and ticket growth for both our domestic company-owned restaurants and franchised restaurants. We continue to see higher transactions driven by our aggregator channel, while our ticket growth is supported by the work our teams are doing to enhance customer value perception. International comparable sales decreased approximately 6% in the fourth quarter, of which approximately 4% was related to the ongoing conflict in the Middle East.
Ravi: International comparable sales decreased approximately 6% in the fourth quarter of which approximately 4% was related to the ongoing conflict in the middle East. The remaining 2% was the result of continued pressure across multiple markets somewhat offset by a 1% positive comp performance for.
Ravi: Our U K franchisees.
Ravi: Total revenue for the fourth quarter were $571 million up 9% from a year ago.
Ravi: And while the increase was largely driven by the additional week of operations in 2023, and the consolidation of the UK restaurants, we don't want to lose sight of our positive North America comp sales, which also contributed to our revenue growth in the quarter.
Now turning to profits.
Ravi: Adjusted operating income for the fourth quarter was $47 million up from $38 million a year ago. The key drivers of our fourth quarter growth include a roughly $8 million benefit from the extra week of operations in 2023, an approximate $6 million increase from our domestic company.
Ravi Thanawala: The remaining 2% was the result of continued pressure across multiple markets somewhat offset by a 1% positive comp performance from our UK franchisees. Total revenue for the fourth quarter was $571 million, up 9% from a year ago. And while the increase was largely driven by the additional week of operations in 2023 and the consolidation of the UK restaurants, we don't want to lose sight of our positive North America comp sales, which also contributed to our revenue growth in the quarter. Now, turning to profits. Adjusted operating income for the fourth quarter was $47 million, up from $38 million a year ago.
Ravi: Owned restaurant, driven by higher sales lower commodity.
Ravi: And labor costs.
Ravi: Lower insurance expense related to improving auto and workers' compensation claims experience leveraging the on demand labor that aggregators provide through their delivery as a service model and a continued focus on cost discipline, while still pursuing strategic growth initiatives.
Ravi Thanawala: The key drivers of our fourth quarter growth include a roughly $8 million benefit from the extra week of operations in 2023, and an approximate $6 million increase from our domestic company-owned restaurants driven by higher sales, lower commodity, and labor costs. Lower insurance expense related to improving the auto and workers' compensation claims experience, leveraging the on-demand labor that aggregators provide through their delivery as a service model, and a continued focus on cost discipline while still pursuing strategic growth. This growth was partially offset by... an approximate $5 million year over year impact related to our UK acquisition when taking into consideration a fourth quarter 2023 operating loss and a fourth quarter 2022 franchise royalty. Higher G&A expenses, as anticipated, due to higher performance-based compensation expense when compared with the fourth quarter last year, and higher D&A expenses as we continue to invest in our restaurants and our technology support, along with the consolidation of the acquired UK restaurants in 2022. Adjusted operating margin for the fourth quarter was 8.3 percent, up from 7.3 percent a year ago, largely due to the additional week in 2023. Excluding the additional week, the adjusted operating margin was up approximately 20 basis points compared with last year.
This growth was partially offset by <unk>.
Ravi: An approximate 5 million dollar year over year impact related to our U K acquisition, when taking into consideration a fourth quarter 2023 operating loss and a fourth quarter 2022 franchise royalty fees.
Ravi: Higher G&A expenses as anticipated due to higher performance based compensation expense when compared with the fourth quarter last year and higher D&A expense as we continued to invest in our restaurants and our technology support along with the consolidation of the acquired UK restaurants in 2023.
Ravi: Adjusted operating margin for the fourth quarter was eight 3% up from seven 3% a year ago largely due to the additional week in 2023.
Ravi: Excluding the additional week adjusted operating margin was up approximately 20 basis points compared with last year.
Ravi: To provide you a little bit more color on our fourth quarter domestic company owned restaurant level margins.
Ravi: Overall these margins improved by approximately 330 basis points compared with the prior year fourth quarter, when excluding the 50 <unk> week of operations.
Ravi: Driving the improved margin was approximately 170 basis point benefit from lower food basket cost as we continued to see relief from prior year peaks and proteins cheese and Dell.
Ravi: Labor costs also improved by approximately 90 basis points during the quarter as our restaurant teams continue to do an excellent job executing our service and productivity initiatives.
Ravi Thanawala: To provide you with a little bit more color on our fourth quarter domestic company-owned restaurant-level market. Overall, these margins improved by approximately 330 basis points compared with the prior year fourth quarter when excluding the 53rd week of operation. Driving the improved margin was approximately 170 basis points of benefits from lower food basket costs as we continued to see relief from prior year peaks in proteins, cheese, and dough. Labor costs also improved by approximately 90 basis points during the quarter as our restaurant teams continued to do an excellent job executing our service and productivity initiatives. Moving on to cash flow and our balance, for fiscal year 2023, net cash provided by operating activities was $193 million, up from $118 million a year ago.
Speaker Change: Moving onto cash flow and our balance sheet.
Speaker Change: For fiscal year 2023, net cash provided by operating activities was $193 million up from $118 million a year ago.
Speaker Change: After deducting $77 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $116 million.
Speaker Change: This was up from $39 million generated in 2022, reflecting the positive flow through of our overall business performance and higher accrued expenses.
Speaker Change: We ended the year with ample liquidity $277 million in cash and borrowings available under our revolving credit facility and a gross leverage of three two times.
Ravi Thanawala: After deducting $77 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $116 million. This is up from $39 million generated in 2022, reflecting the positive flow-through of our overall business performance and higher accrued expenses. We ended the year with ample liquidity, $277 million in cash and borrowing available under our revolving credit facility, and a gross leverage of 3.2 times. We also returned significant cash to our shareholders in 2023. In total, we repurchased 2.5 million shares, or $210 million, and paid $59 million in cash dividends.
Speaker Change: We also returned significant cash to our shareholders in 2023 in total we repurchased two 5 million shares or $210 million and paid $59 million in cash dividends.
Speaker Change: We have approximately $90 million remaining for repurchase under our current share repurchase authorization.
Speaker Change: Our capital structure provides us with substantial operating flexibility.
Speaker Change: 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.
Speaker Change: Cash dividends and share repurchases.
Speaker Change: Turning to development.
Speaker Change: In the fourth quarter, we added 36 net new units in North America, bringing our total North America net new units in 2023% to 57.
Ravi Thanawala: We have approximately $90 million remaining for repurchase under our current share repurchase authorization. Our capital structure provides us with substantial operating flexibility. We'll 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 repurchase. Turning to development,
Speaker Change: More than 50% increase over last year's net new unit growth.
Speaker Change: We now have 3433, North America restaurants, and we continue to be pleased with the performance of our newly opened restaurants, and we will prioritize our North America development efforts.
Speaker Change: Internationally, we opened 53 net new units in the fourth quarter, bringing our full year International development to 151, net new units and our total international restaurant count to 2473.
Ravi Thanawala: In the fourth quarter, we added 36 net new units in North America, bringing our total North America net new units in 2023 to 57, a more than 50% increase over last year's net new unit growth. We now have 3,433 North American restaurants, and we continue to be pleased with the performance of our newly opened restaurants, and we will prioritize our North American development efforts. Internationally, we opened 53 net new units in the fourth quarter, bringing our full year international development to 151 net new units and our total international restaurant count to 2,473.
Speaker Change: Now to our outlook.
Speaker Change: As we looked at 2024, we are well positioned to continue driving forward, our long term strategy and we expect to deliver our fifth consecutive year of positive North America comp sales growth.
Speaker Change: However, a more cautious consumer is placing more pressure on transactions through our organic delivery channel.
Speaker Change: Even as our domestic third party aggregators sales continue to accelerate.
Speaker Change: This is led to comps being down approximately 1% for the first eight weeks of the quarter.
Speaker Change: As we've discussed today, we're excited about the work our teams are doing to leverage our robust consumer data platforms to influence our media pricing and menu strategies.
Ravi Thanawala: Now to our outlook. As we look to 2024, we are well positioned to continue driving forward our long-term strategy, and we expect to deliver our fifth consecutive year of positive North America comp sales growth. However, a more cautious consumer is placing more pressure on transactions through our organic delivery channel, even as our domestic third-party aggregator sales continue to accelerate. This has led to comps being down approximately 1% for the first eight weeks of the quarter.
We continue to take a balanced approach in this environment provide.
Speaker Change: Providing the right promotions to our value oriented customers.
Speaker Change: Without risking the erosion of our brand our pricing integrity and a more premium offerings.
Speaker Change: We have great confidence in our ability to accelerate North America comps in Q2, and the back half of the year.
Ravi Thanawala: As we discussed today, we're excited about the work our teams are doing to leverage our robust consumer data platforms to influence our media, pricing, and menu strategies. We continue to take a balanced approach in this environment, providing the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings. We have great confidence in our ability to accelerate North America comps in Q2 and the back half of the year. As such, we expect to deliver 2024 full-year comps at the lower end of our long-term target of 2-4% growth.
Speaker Change: As such we expect to deliver 2020 for full year comps at the lower end of our long term target of 2% to 4% growth.
Speaker Change: Internationally I'm pleased to report that quarter to date, we have seen a moderate sequential improvement in international comps.
Speaker Change: Positive performance at our U K company owned and franchise restaurants, along with solid sales and other international markets are offsetting the impact from the middle East conflict.
Speaker Change: We are in a dynamic environment and continue to maintain a cautious outlook on international comps in 2024.
Speaker Change: As a reminder, our international segment is the smallest of our operating segments generating approximately 12% of our adjusted operating income and approximately 7% of our total revenues in 2023.
Ravi Thanawala: Internationally, I'm pleased to report that quarter to date, we have seen a moderate sequential improvement in international com. Positive performance at our UK company-owned and franchised restaurants, along with solid sales in other international markets, are offsetting the impact of the Middle East conflict. We are in a dynamic environment and continue to maintain a cautious outlook on international comps in 2024. As a reminder, our international segment is the smallest of our operating segments, generating approximately 12% of our adjusted operating income and approximately 7% of our total revenues in 2023. Currently, we anticipate adjusted operating income in 2024 to be between $153 million and $163 million.
Speaker Change: Currently we anticipate adjusted operating income in 2024 to be between $153 million and $163 million at the midpoint. This is an approximate 6% increase from 2023, when excluding the favorable impact of the 53 week year.
Speaker Change: Over year tail wins include the increase to our fixed commentary margin.
Speaker Change: International transformation initiatives, including the closure of approximately 50 underperforming company owned UK restaurants in the second quarter and an increase in North American sales as we accelerate development and deliver another year of positive comp sales.
Speaker Change: Setting these tail winds will be higher G&A expenses as performance based compensation ramps back up in a higher D&A expense, which is expected to be between 70 and $75 million in 2024, resulting from the higher tech investments over the last three years.
Ravi Thanawala: At the midpoint, this is an approximate 6% increase from 2023 when excluding the favorable impact of the 53rd week. Year-over-year tailwinds include the increase to our fixed commissary margin, our international transformation initiatives, including the closure of approximately 50 underperforming company-owned UK restaurants in the second quarter, and an increase in North America sales as we accelerate development and deliver another year of positive comp sales. Offsetting these tailwinds will be higher G&A expenses as performance-based compensation ramps back up and higher D&A expense, which is expected to be between $70 and $75 million in 2024, resulting from higher tech investments over the last three years. In terms of other non-operating expense items, we expect net interest expense to be between $40 million and $45 million, our capital expenditures to be between $75 million and $85 million, and our tax rate I should note that our first quarter tax rate will be higher due to an anticipated shortfall from the vesting of long-term equity plans, resulting in an additional tax expense of roughly $2 million in the quarter when compared with the prior year period.
Speaker Change: In terms of other non operating expense items, we expect net interest expense to be between 40 million and $45 million, our capital expenditures to be between $75 million and $85 million and our tax rate to be between 23% and 26%.
Speaker Change: I should note that our first quarter tax rate will be higher due to an anticipated shortfall from the vesting of long term equity plans, resulting in an additional tax expense of roughly $2 million in the quarter when compared with the prior year period.
From a development perspective.
Speaker Change: North American market is the most attractive development for Papa Johns and we remain committed to accelerating our domestic footprint moving forward in.
Speaker Change: In 2024, we expect net new unit growth for North America to increase more than 20% relative to 2023 net unit openings.
Speaker Change: From an international perspective over the last two years conflicts in the Ukraine, and the Middle East combined with an overall dynamic geopolitical environment has changed our run rate of new international restaurant openings for 2024.
Speaker Change: As a result, we are taking a cautious approach and expect gross openings between 100 and 140, new international restaurants.
Ravi Thanawala: From a development perspective, the North American market is the most attractive development for Papa John's, and we remain committed to accelerating our domestic footprint moving forward. In 2024, we expect net new unit growth for North America to increase more than 20% relative to 2023 net unit opening. From an international perspective, over the last two years, conflicts in Ukraine and the Middle East combined with an overall dynamic geopolitical environment have changed our run rate of new international restaurant openings for 2024. As a result, we are taking a cautious approach and expect growth openings between 100 and 140 new international restaurants.
Speaker Change: We will also not hesitate to make additional strategic restaurant closures to improve market based health or exit unprofitable restaurants.
Speaker Change: As such.
Speaker Change: Anticipated openings could be offset by the closure of underperforming company owned and franchise restaurants to enhance long term profitability.
Speaker Change: Over the long term, we have great partners, who want to grow and are committed to reaching our long term development target of 5% to 7% net new units annually.
Speaker Change: In summary, the Papa John's team has delivered a solid fourth quarter and full year 2023.
Speaker Change: We're focused on executing our long term growth strategy and implementing our back to better to point out an international transformation initiatives.
Ravi Thanawala: We will also not hesitate to make additional strategic restaurant closures to improve marketplace health or exit unprofitable restaurants. As such, our anticipated openings could be upset by the closure of underperforming company-owned and franchise restaurants to enhance long-term profitability. Over the long term, we have great partners who want to grow and are committed to reaching our long-term development targets of 5 to 7% net new units annually. In summary, the Papa John's team has delivered a solid fourth quarter and full year 2023.
Speaker Change: I am proud of the Papa John's teams and our strategic plans to deliver growth.
Speaker Change: Now I'll turn the call back over to Rob for some final comments Rob.
Thank you Ravi.
Robert M. Lynch: At Papa John's commitment to our values is top of mind, and we are steadfast in creating and nurturing our culture of putting people first.
Robert M. Lynch: Capping off an incredible year, we were recognized by Forbes on their list of world's best employers for the second year running while also included in the Forbes list of best employers for diversity ranking first among pizza companies.
Robert M. Lynch: As we continue to advance our strategic priority of building a culture of leaders, who believe in diversity and inclusivity and winning we will continue to support our communities team members and franchisees.
Ravi Thanawala: We're focused on executing our long-term growth strategy and implementing a back-to-better 2.0 and international transformation initiative. I'm proud of the Papa John's team and our strategic plans to deliver growth. Now, I'll turn the call back over to Rob for some final comments.
Robert M. Lynch: I'm incredibly proud of the work that the entire Papa John's system is doing to drive forward, our strategic long term plans.
Robert M. Lynch: Our North America business is prime for growth as we execute on our back to better to point O initiatives.
Robert M. Lynch: We are continuing to expand our share within the domestic third party aggregator delivery channel, we are introducing new menu innovations and we are optimizing our profitability by leveraging our robust consumer data platforms.
Robert M. Lynch: Thank you, Ravi. At Papa John's, commitment to our values is top of mind, and we are steadfast in creating and nurturing a culture of putting people first. Tapping off an incredible year, we were recognized by Forbes on their list of the World's Best Employers for the second year running, and we were also included on the Forbes list of Best Employers for Diversity, ranking first among pizza companies. As we continue to advance our strategic priority of building a culture of leaders who believe in diversity, inclusion, and winning, we will continue to support our communities, team members, and franchisees. I am incredibly proud of the work that the entire Papa John's system is doing to drive forward our strategic long-term plan.
Robert M. Lynch: Additionally, our improving supply chain productivity and accelerating North America development will deliver improved bottom line economics system wide.
Robert M. Lynch: In summary, Papa John's has proven that its business fundamentals performed well through all economic cycles. Our leadership team has the experience and vision required to move our company forward and drive results.
Robert M. Lynch: Our brand equity is stronger than ever and our brand awareness continues to grow globally, we have ample development opportunities to drive sustainable profitable expansion and significant earnings potential.
Robert M. Lynch: All of this means that we are well positioned to deliver shareholder value for the long term.
Robert M. Lynch: Our North America business is primed for growth as we execute on our Back to Better 2.0 initiative. We are continuing to expand our share within the domestic third-party aggregator delivery channel. We are introducing new menu innovations, and we are optimizing our profitability by leveraging our robust consumer data platform. Additionally, our improving supply chain productivity and accelerating North America development will deliver improved bottom-line economics system-wide. In summary, Papa John's has proven that its business fundamentals perform well through all economic cycles.
Speaker Change: At this point I would like to open up the call for questions.
Speaker Change: Thank you.
Speaker Change: And gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question you May Press Star one again, please standby, while we compile the Q&A roster.
Speaker Change: And our first question coming from the line of Sarah <unk> from Bank of America. Your line is now open.
Sarah: Thank you.
Sarah: A quick clarification and then a question.
Operator: Our leadership team has the experience and vision required to move our company forward and drive results. Our brand equity is stronger than ever, and our brand awareness continues to grow globally. We have ample development opportunities to drive sustainable, profitable expansion and significant earnings potential. All of this means that we are well positioned to deliver shareholder value for the long term. At this point, I would like to open up the call for questions. Thank you. Ladies and gentlemen, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced.
Sarah: Thanks, Sarah So what I would tell you is that and I think we stayed at this in the past that about.
Operator: To withdraw your question, you may press star 1 1 again. Please stand by while we compile the county roster. And our first question comes from the line of Sarah Senatore from Bank of America. Your line is open. Oh, thank you. Just a quick clarification and then a question. You mentioned that aggregator sales grew more than 50% year over year in the quarter. And I think, you know, given what you said about quarter to date in the first quarter, it sounds like, you know, that gap remains pretty wide with your proprietary channels. I think you were sort of suggesting that it's a response maybe to more promotional intensity that may be affecting the proprietary channels and perhaps less so the aggregator. So I just wanted to make sure I understood that correctly. And then the question was about international unit growth. To what extent is the Middle East the primary driver?
Sarah: Right now the aggregator channels, we believed to be about 50% incremental to our core channels. So you know 50% of that growth would be coming from our core.
Sarah: Business, obviously, we have initiatives in place to try to mitigate the the <unk> any of that shift in volume from our core business to the aggregator. So it's not a one for one transfer but 50 per cent of the aggregator volume comes from our core channels and in regards to the.
Sarah: Middle East the Middle East has actually become a bigger part of our international footprint. We have about 2400 units internationally and the middle East represents about 400 of 450 of those units. So it's it's become about 25 or I'm, sorry about 12.
Sarah: Two per cent of our.
Sarah: International footprint, and so and it is one of our fastest growing developing regions and so we did see a pretty significant impact in queue for to our global development number.
Robert M. Lynch: I think it's a relatively small share of your total international store base versus perhaps what you're seeing in other markets and the extent to which those are more market specific. Thanks.
Robert M. Lynch: So what I would tell you is that, and I think we've stated this in the past, that right now, the aggregator channels we believe are about 50% incremental to our core channel. So, you know, 50% of that growth would be coming from our core business. Obviously, we have initiatives in place to try to mitigate any of that shift in volume from our core business to the aggregator. So it's not a one-for-one transfer, but 50% of the aggregator volume comes from our core channel. And in regards to the Middle East, the Middle East has actually become a bigger part of our international footprint. We have about 2,400 units worldwide, and the Middle East represents about 450 of those units.
Sarah: And and and that did definitely impact that number in 2023, we had 68 new units.
Sarah: And in that region in 2022 alone so.
Sarah: It is something we're watching closely we have great franchisees there they have built and been excited about building and it has rapidly grown in their development agreements in the region. So it is something we're watching closely and we'll have a we'll have a short term impact as it is called out in the call.
Sarah: On the on the 2024 numbers.
Speaker Change: Thank you very much.
Speaker Change: Thank you one moment.
Speaker Change: My next question.
And next question coming from the liner Peter.
Peter: Peterson P.
P P I G line or something.
Robert M. Lynch: So it's become about 25, or, I'm sorry, about 20% of our international footprint. And it is one of our fastest-growing developing regions. And so we did see a pretty significant impact in Q4 on our global development number, and that will definitely impact that number in 2023.
Peter: [noise] yeah, great. Thanks, So I was hoping maybe you guys could elaborate a little bit on the [noise].
Peter: On the same store sales trends that you're you're currently see it seems like you guys ended the year on a on a positive note, but starting to your on on a negative note, but we're also seeing some strength in that aggregated Chan also I mean, maybe just coming back a little bit more of the sounds question can you just give us a little bit more color on on the same store sales and maybe.
Robert M. Lynch: We had 68 new units in that region in 2022 alone, so it is something we're watching closely. We have great franchisees there. They have built and been excited about building and have rapidly grown their development agreements in the region. So it is something we're watching closely and will have a short-term impact, as called out in the call, on the 2024 number. Thank you very much.
Speaker Change: What's changed <unk>. Thanks.
Speaker Change: Yeah, I mean, I think I think the consumer just changed a little bit I think we're seeing some softness in general in the industry, particularly in January we have seen some some strength in February we were the number three brand ordered on Ubereats for.
Robert M. Lynch: Thank you. One moment for our next question. And our next question, coming from the line of Peter Saleh with BIT, EIT, and Elan, is open.
Speaker Change: The superbowl, so you know despite some challenging.
Speaker Change: Situations and in in January we've seen some some resiliency, but what I will tell you. Peter is we always knew that Q1 was gonna be our toughest quarter coming into this year all of the things all the plans that we have built to deliver strong comp sales growth. This year really take effect in queue.
Robert M. Lynch: Yeah, great. Thanks. So, I was hoping maybe you guys could elaborate a little bit on the same store sales trends that you're currently seeing. It seems like you guys ended the year on a positive note, but you started the year on a negative note, but we're also seeing some strength in that aggregator channel. So, I mean, maybe just coming back a little bit more to Sarah's question, can you just give us a little bit more color on the same store sales and maybe what's changed quarter to date? Yeah, I mean, I think the consumer has changed a little bit. I think we're seeing some softness in general in the industry, particularly in January. We have seen some strength in February; we were the number three brand ordered on Uber Eats for the Super Bowl. So, you know, despite some challenging, you know, situations in January, we've seen some resiliency. But what I will tell you, Peter, is that we always knew that Q1 was going to be our toughest quarter coming into this year.
Speaker Change: Two so we're about four weeks away from you know 20 per cent increase in media Ah New advertising campaign heading and we've got great New innovation coming in April as well, so and those those impacts are gonna sustained through the balance of the year. So we are really excited about two to three.
Speaker Change: Four because of all the back to better 2.0 things that we announced back in January So we definitely see strong sales momentum you know looking forward, despite a little bit of a soft start here and and in January.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question coming from the liner.
<unk>.
Robert M. Lynch: All of the things, all the plans that we have built to deliver strong comp sales growth this year really take effect in Q2. So we're about four weeks away from, you know, a 20% increase in media, a new advertising campaign hitting, and we've got great new innovation coming in April as well. So those impacts are going to sustain through the balance of the year. So we are really excited about Q2, three, and four because of all the Back to Better 2.0 things that we announced back in January. So we definitely see strong sales momentum looking forward, despite a little bit of a soft start here in January. Thank you. Thank you. And our next question, coming from Delina, Lauren Silberman from Deutsche Bank, Elan Esso. Thank you very much. I wanted to ask about the recently announced new development incentives in the U.S. Can you just talk about your early conversations with franchisees, any inflection and inquiries, commitments, and franchisees trying to pull forward openings into 2024? Thank you very much.
Speaker Change: I'd like to thank your line or something.
Speaker Change: Thank you very much I wanted to ask about that recent.
Speaker Change: Announced new development incentives in the U S. Can you just talk about your early conversations with franchisees any infection and inquiries commitment uhm franchisees trying to pull forward openings into 2024.
Speaker Change: Thank you very much.
Speaker Change: Yeah, there's definitely a lot of excitement we've had a lot of conversations you know last year and 2023, we delivered 57 net new units in North America, we're gonna grow that by at least 20% in 2024, you know, but we're working.
Speaker Change: Diligently with our franchisees to help them accelerate that being said, we also have extended that development incentive into 2025 at this point, it's not exactly the same the if they get them built in 2024, it's five years of National marketing Fund relief, if they get them build in 2025.
Speaker Change: It's three years of relief. So we wanted to make sure that all of the franchisees that are coming to us, saying, Hey, I want to take advantage of this but you know I'm not far enough into the development cycle that these stores might you know move into Q1 next year wanted to make sure that they had.
Robert M. Lynch: Yeah, there's definitely a lot of excitement. We've had a lot of conversations. You know, last year, in 2023, we delivered 57 net new units in North America. We're going to grow that by at least 20% in 2024. But we're working diligently with our franchisees to help them accelerate. That being said, we have also extended that development incentive into 2025. At this point, it's not exactly the same if they get them built in 2024. It's five years of national marketing fund relief if they get them built in 2025. It's three years of relief.
Some incentive to do that so we are definitely seeing excitement, we're definitely uhm leveraging that incentive but I will I will tell you beyond the incentives you know pop.
Speaker Change: Papa Johns is set up for long term development growth. It's not just 24 and 25, we're really trying to kick start. This this engine, but we have great returns on new store development <unk> have gone up from 850000 on average $1.2 million.
Robert M. Lynch: So, you know, we wanted to make sure that all of the franchisees that are coming to us saying, Hey, I want to take advantage of this, but I'm not far enough into the development cycle that these stores might move into Q1 next year. We wanted to make sure that they had some incentive to do that. So we're definitely seeing excitement.
Over the last five years. So at the same time, we've been really good about managing restaurant profitability as evidenced by you know 330 basis points of year over year growth in a restaurant margins in queue for so uhm. This incentive is definitely a trigger but this isn't the reason why.
Speaker Change: People are gonna develop Papa Johns, they're gonna develop Papa Johns because it's a long term commitment 10 20 year cycles of business that they believe will continue to deliver returns foreign to the future beyond these incentives.
Robert M. Lynch: We're definitely leveraging that incentive, but I will tell you something beyond the incentive. You know, Papa John's is set up for long-term development growth. It's not just 24 and 25.
Speaker Change: Thank you.
Speaker Change: Thank you next question coming from the liner.
Speaker Change: <unk> Oppenheim any line or something.
Oppenheim: Thanks, Good morning.
Oppenheim: You announced today that you will be closing 50 of the U K company operating unit, but at the same time you gave some positive commentary on trends in the U K <unk>.
Robert M. Lynch: We're really trying to kickstart this engine, but we have great returns on new store development. Our EUVs have gone up from 850,000 to, on average, 1.2 million over the last five years. So, at the same time, we've been really good about managing restaurant profitability, as evidenced by, you know, 330 basis points of year-over-year growth in our restaurant margins in Q4. So, this incentive is definitely a trigger, but this isn't the reason why people are going to develop Papa John's. They're going to develop Papa John's because it's a long-term commitment, 10, 20-year cycles of business that they believe will continue to deliver returns far into the future beyond these incentives. Thank you. Thank you. Now, the next question coming from the line of Brian Bittner with Oppenheimer, your line is open. Thanks. Good morning.
Oppenheim: Sequentially, improving trends comforter positive two arguably a better UK outlook for these restaurants are closing or are they just in your mind kind of a lost cause or can you help us understand the decision to close.
Stores, rather than continued to try and get the benefits that come from turning them around.
Speaker Change: Yeah for sure. Thank you for the question Bryan The U K has been something that has been a bit of Le L. A labor of love over the last 18 months, we believe in the long term viability of that market. We have great franchisees, who are running great operations, but we also have we've all.
Speaker Change: Also had some stores that have not been operated as well and so that's both in the company portfolio that we took over as well as in the franchisee base at large so as we stated earlier, we have been working over the last year to get a lot of the restaurants that we see.
Robert M. Lynch: You announced today that you will be closing 50 of the UK company-operated units. But at the same time, you gave some positive commentary on trends in the UK, you know, sequentially improving trends, comps are positive, to arguably a better UK outlook. So are these restaurants closing? Are they just in your mind kind of a lost cause?
Speaker Change: See having longterm potential, but maybe not operated in the most effective way transition from their former franchisees to new franchisees that are in the air current franchisees in the system that run better operations and we've seen a lot of benefit.
Speaker Change: And those restaurants and improvement both on the top and bottom line from those transitions. The 50 restaurants that we're talking about closing our company stores that we believe will not benefit simply from better operations. They have you know locations, where the the trade zones of mood.
Robert M. Lynch: Or can you help us understand the decision to close these stores rather than continue to try and get the benefits that come from turning them around? Yeah, for sure.
Robert M. Lynch: Thank you for the question, Brian. You know, the U.K. has been something that has been a labor of love over the last 18 months. You know, we believe in the long-term viability of that market. We have great franchisees who are running great operations, but we've also had some stores that have not been operating as well. And so, that's both in the company portfolio that we took over, as well as in the franchisee base at large. So, as we stated earlier, you know, we have been working over the last year to get a lot of the restaurants that we see having long-term potential but maybe not operated in the most effective way, transition from their former franchisees to new franchisees that are current franchisees in the system that run better operations. And we've seen a lot of benefit in those restaurants and improvement both on the top and bottom line from those transitions. The 50 restaurants that we're talking about closing are company stores that we believe will not benefit simply from better operations.
Speaker Change: Or other challenges that frankly will not be easily mitigated to get them to profitability. So we will still own about 68 restaurants in that market. Our objective is to continue to optimize that portfolio, which may include refranchising some of those red.
Speaker Change: Franz to great franchisees, but the ones that were closing, yes, exactly what you said those are restaurants that aren't gonna be able to you know get the profitability anytime soon and hence our decision to to close those.
Speaker Change: Okay. Thank you.
Speaker Change: Thanks, Brian.
Speaker Change: Thank you and our next question coming from the line up and can finalize with Keybanc your line or something.
Keybanc: Thanks, Good morning, I have a two part question if I may and it's on the back of better two point ownership you've made it clear that national advertising is significantly more efficient and regional or local but I think there is some skepticism scheduling the out there about the impact of going from 8%, 6%. So is there anything you can tell us to reassure investors that the increase.
Keybanc: That's a point of national can more than offset those two points that you're giving up on the local side. That's the first part and the second part is your conversations with your franchisees you get the sense that they're going to abandon the local marketing entirely or do you think that the majority will keep spending at or near the prior year levels I would think that into your one of the program where the Commissary Commission is just starting to be phased it at a higher rate that the.
Robert M. Lynch: They have, you know, locations where the trade zones have moved or other challenges that, frankly, will not be easily mitigated to get them to profitability. So, we will still own about 68 restaurants in that market. Our objective is to continue to optimize that portfolio, which may include refranchising some of those restaurants to great franchisees. But the ones that we're closing, yes, exactly what you said, those are restaurants that aren't going to be able to get to profitability anytime soon, hence our decision to close those. Okay, thank you.
Keybanc: Already a operators will continue to spend the local markets is there is there any way that you can be quantified to that effect of all that.
Speaker Change: Yeah, Great question.
What I would say is that.
Speaker Change: There's a lot more consistency on the returns on advertising span at the national level than there are at the local level.
Speaker Change: Some franchisees, we're able to invest their local dollars and productive ways a lotta franchisees.
Speaker Change: We're not using those dollars as productively and not necessarily because.
Speaker Change: They chose not to it's just because the funds were not at a scale, where they could buy media in their markets that was as productive and efficient as we can buy at the national level. So when we look at the return on advertising span yeah, we're seeing over 25 per cent improvement at the.
Robert M. Lynch: Thanks, Brian. Thank you. Thank you. Good morning.
Robert M. Lynch: I have a two-part question, if I may, and it's about the Back to Better 2.0 initiative. You've made it clear that national advertising is significantly more efficient than regional or local, but I think there is some skepticism out there about the impact of going from 8% to 6%. So, is there anything you can tell us to reassure investors that the incremental point of national can more than offset those two points that you're giving up on the local side? That's the first part.
Speaker Change: A national level versus the local level. So if you think about it <unk> net net we were comparing apples to apples were reducing the total advertising investment by about 25% and you're getting a 25% pick up on on that so that's why we think it's at least.
Robert M. Lynch: And the second part is, in your conversations with your franchisees, do you get the sense that they're going to abandon local marketing entirely, or do you think that the majority will keep spending at or near the prior year levels? You know, I would think that in year one of the program, when the Commissary Commission is just starting to be phased in at the higher rates, the majority of operators will continue to operate in the local markets. Is there any way that you can, maybe, quantify the net effect of all that? Yeah, a great question.
Speaker Change: <unk>, but then when you layer in the tools that we have just developed you know with art. We brought on a new media partner, who is working with us to develop better analytical tools that allow us to target more efficiently allow us to deploy media more efficiently all of that at the national level will become more effective in those are.
Oh is that we have we have evaluated in the past. So we have a lot of confidence that despite going from eight to six we're gonna see significant improvement and impact of that 6% on your second question or I will say the second part of the first question because we're only allowing one question you know [laughter].
Robert M. Lynch: You know, what I would say is that there is a lot more consistency in the returns on advertising spend at the national level than there are at the local level. You know, some franchisees are able to invest their local dollars in productive ways. A lot of franchisees were not using those dollars as productively, and not necessarily because, you know, they chose not to; it's just because the funds were not at a scale where they could, you know, buy media in their markets that was as productive and efficient as we can buy at the national level.
Speaker Change:
Speaker Change: [laughter] [laughter] the <unk> [laughter], we do believe that you know <unk>. Some franchisees will continue to spend above that six per cent level, especially in the first two years, primarily because they have entered into agreements with local sports.
Robert M. Lynch: So when we look at the return on advertising spend, you know, we're seeing over a 25% improvement at the national level versus the local level. So if you think about it, net-net, if we were comparing apples to apples, we're reducing the total advertising investment by about 25%, and you're getting a 25% pickup on that. So that's why we think it's at least comparable.
Speaker Change: Teams in their markets that they are contractually obligated to continue with but I see some of our franchisees and frankly some of our company markets that we own we will continue to spend at you know at higher than six per cent levels because of those partnerships. Yeah. I'll give you. An example here in Atlanta, you know we are partner.
Speaker Change: With the Braves and the Hawks, and we activate with them and we we see great returns when we do that so we will continue to invest in those partnerships and I think our franchisees who leverage those types of partnerships in their markets will continue to invest as well.
Robert M. Lynch: But then when you layer in the tools that we have just developed, you know, we brought on a new media partner who is working with us to develop better analytical tools that allow us to target more efficiently, that allow us to deploy media more efficiently. All of that at the national level will become more effective than those ROIs that we have evaluated in the past. So we have a lot of confidence that despite going from eight to six, we're going to see significant improvement and impact from that 6%. On your second question, or I'll say the second part of the first question, because we're only allowing one question, you know better.
Speaker Change: [noise]. Thank you.
Speaker Change: Sure.
Speaker Change: Thank you and.
Speaker Change: And our next question coming from the liner Bryan moment with five per cent on your line or something.
Bryan: Thank you just a follow up on the on the UK business as you go through this strategic restructuring process, which Robyn <unk> you might Refranchise remaining 60, a company owned stores, but I'm just wondering what happens to the <unk> business over there is that something you want to continue to own longer term.
Robert M. Lynch: We do believe that, you know, some franchisees will continue to spend above that 6% level, especially in the first two years, primarily because they have entered into agreements with local sports teams in their markets that they are contractually obligated to continue with. But I see some of our franchisees, and frankly, some of our company markets that we own, we will continue to spend at higher than 6% levels because of those partnerships. You know, I'll give you an example here in Atlanta. We are partners with the Braves and the Hawks, and we work with them, and we see great returns when we do that. So we will continue to invest in those partnerships, and I think our franchisees who leverage those types of partnerships in their markets will continue to invest as well. Thank you. Thank you. And our next question comes from the line of Brian Mullan with Piper Sandler. Your line is open.
Bryan: Courtney strategically for you to own interest any thoughts on that part of the business.
Courtney: It is not important for us to strategically on it if there is a there are business models that we are exploring that would look very different than the model that we employ today. We we have been very happy with our ownership there are teams who run the supply chain.
Courtney: Do a great job and manage it very effectively and productively. So we're happy with that but you know we're exploring every strategic option and if we have opportunities to create more productivity and drive more profitability with less risk.
Operator: Thank you. Just a follow up on the UK business, you know, as you go through this strategic restructuring process. Thank you so much, Rob. I think you might re-franchise the remaining 68 company-owned stores. But I'm just wondering what happens to the commissary business over there. Is that something you want to continue to own longer term? Is it important strategically for you to own it? Just any thoughts on that part of the business. It is not important for us to strategically own it.
Courtney: We will definitely explore those opportunities.
Courtney: The closure of these restaurants I just wanted to make it clear the closure. These 50 restaurants will be immediately accretive to our income I mean, they usually when you close restaurants. It's a bad thing you know the the royalty revenues go away or the EBITDA from the restaurants go away. These are all you know negative profit restaurants.
And we <unk> to.
Courtney: Brian question, we don't see them turning profitable in the foreseeable future. So these restaurants need to close their low volume, obviously, if they're unprofitable, they're low volume restaurants or the impact of the supply chain in the short term.
Robert M. Lynch: If there is a there are business models that we are exploring that would look very different than the model that we employ today. We have been very happy with our ownership. There are teams who run the supply chain, do a great job, and manage it very effectively and productively. So we're happy with that. But, you know, we're exploring every strategic option. And if we have opportunities to create more productivity and drive more profitability with less risk, we will definitely explore those opportunities. You know, the closure of these restaurants, I just want to make it clear, the closure of these 50 restaurants will be immediately accretive to our income, to Brian's question. We don't see them turning profitable in the foreseeable future. So these restaurants need to close. They're low in volume.
Courtney: We all we will not be as significant as closing you know a lot of profitable productive restaurants. The other thing I just wanted to make clear we do anticipate sales transfer. So by closing these restaurants, we actually make the other restaurants in the UK system.
Courtney: Higher volume and more profitable. So there is there is a benefit to.
Courtney: To the to the balance of the system and some of that volume loss from closing these restaurants will be mitigated by that sales transfer to the restaurants that roommate.
Speaker Change: Thank you.
Speaker Change: Thank you Brian.
Speaker Change: Thank you.
Next question coming from the liner, perhaps with a bench my company line or something.
Speaker Change: Hey, good morning, Thanks for taking my question, Rob you highlighted at the start of your.
Robert M. Lynch: Obviously, if they're unprofitable, they're low volume restaurants. So the impact of the supply chain in the short term will not be as significant as closing, you know, a lot of profitable, productive restaurants. The other thing I just want to make clear is that we do anticipate sales trends. So by closing these restaurants, we actually make the other restaurants in the UK system higher volume and more profitable. So there is a benefit to the balance of the system, and some of that volume loss from closing these restaurants will be mitigated by that sales transfer to the restaurants that remain. Thank you. Thank you, Brian.
Speaker Change: Remarks, this morning, but.
Speaker Change: <unk> has been at the heart of the success, you've driven and I know, there's a lot of focus on back to better 2.0, as we're looking to 24, but can you talk to.
Speaker Change: Innovation pipeline, and if 24 setting up as more of a <unk> of a product line extension year on existing offerings or or this novel platforms or or products coming down the line, but you think could be beautiful voice as well.
Speaker Change: Thank you yeah. So you know what I think of any <unk> I'll I'll speak to your specific question around product innovation, but when I think of innovation I think about innovation across all of our demand driving capabilities. So product loyalty marketing, we've already talked a lot about marketing and the advancements that we're making.
Robert M. Lynch: Thank you, and our next question comes from the line of Todd Brooks with the Benchmark Company. Your line is open.
Speaker Change: <unk> through our you know more efficient media capabilities and targeting capabilities and you know the the the innovation in our brand positioning as we launch our new campaign with the Martin Agency you.
Robert M. Lynch: Hey, good morning. Thanks for taking my question. Rob, you highlighted at the start of your remarks this morning that product innovation has been at the heart of the success that you've driven, and I know there's a lot of focus on Back to Better 2.0 as we're looking to 24, but can you talk about the innovation pipeline and whether 24 is setting up as more of a product line extension year on existing offerings, or are these novel platforms or products coming down the line that you think could be needle movers as well Thank you.
Speaker Change: You know another one I'll talk about his loyalty.
Speaker Change: You know our loyalty program has been very effective for us over the last five years. We've gone from 12 members to over 32 12 million members to over 32 million members in five years.
Speaker Change: But it's not just the sheer number it's the way we've leveraged the platform both to send you know both to deliver incentives to our most valuable customers, but also to create a sense of hospitality with our branch to make sure that people feel special when they come to our organic channels. I mean, we do things like grant early access to.
Robert M. Lynch: Yeah, so you know, when I think of innovation, I'll speak to your specific question around product innovation, but when I think of innovation, I think about innovation across all of our demand-driven capabilities. So product, loyalty, marketing, we've already talked a lot about marketing and the advancements that we're making through our, you know, more efficient media capabilities and targeting capabilities, and, you know, innovation in our brand positioning as we launch our new campaign with the Martin Agency. You know, another one I'll talk about is loyalty.
Speaker Change: Our new product innovations in and and you know give them access to Papa Johns gear for for our favorite fans and and and different surprise and delight things that we do for those loyalty members. We can get better at that we are currently working to drive some optimization into our loy.
Speaker Change: LT platform to enhance both the hospitality component that it provides but and also the incentive component and how we manage our pop a doe and and the incentive so there's a lot of innovation on the marketing side the loyalty side on the product innovation side, you know we've been very.
Robert M. Lynch: You know, our loyalty program has been very effective for us over the last five years. We've gone from 12 members to over 32, 12 million members to over 32 million members in five years. But it's not just the sheer number; it's the way we've leveraged the platform, both to deliver incentives to our most valuable customers but also to create a sense of hospitality with our brand, to make sure that people feel special when they come to our organic channels. We do things like grant early access to our new product innovations and give them access to Papa John's gear for our favorite fans and different surprise and delight things that we do for those loyalty members. We can get better at that.
Speaker Change: [noise] innovative or the last three years, we've launched things like pop a D. As we launched things like Papa bites, it's been a challenge for us to really advertise those great things our customers tell us that they love it but you know in this business you have to make sure your advertising pizza otherwise you take a lot of checks degradation. So we're gonna get innovative even on <unk>.
Speaker Change: How we promote our products. We're gonna launch you know in April with a new innovation that we will be sharing here shortly but that innovation will be across multiple platforms it'll be across pizza it'll be across pop a D. As in it'll be across our bites and we will advertise those holistically. So we're create.
Robert M. Lynch: We are currently working to drive some optimization into our loyalty platform to enhance both the hospitality component that it provides and also the incentive component and how we manage our Papa Dough and the incentives. There's a lot of innovation on the marketing side, the loyalty side. On the product innovation side, we've been very innovative over the last three years. We've launched things like Papa Diaz, and we've launched things like Papa Bites.
Speaker Change: <unk> awareness of other products that we have to have less household penetration less attachment than our core pizza. So it's not even just that unique ingredients that we're creating innovation around it's how we're promoting things Howard driving our entire holistic menu to drive both you know drive our pizza business, but also drive or.
Robert M. Lynch: It's been a challenge for us to really advertise those great things. Our customers tell us that they love them, but in this business, you have to make sure you're advertising pizza; otherwise, you suffer a lot of check degradation. We're going to get innovative even in how we promote our products. We are going to launch in April with a new innovation that we will be sharing here shortly. That innovation will be across multiple platforms. It'll be across pizza, it'll be across Papa Diaz, and it'll be across our Bites.
Speaker Change: [noise] attachment. So yes, we do have new platforms coming and we also have new ways in which where I'm gonna advertising create awareness of those platforms.
Speaker Change: That's great. Thanks, Rob.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Next question coming from the liner Alex <unk> with Jeffrey stay on line or something.
Alex: Hey, Thanks, good morning.
Alex: Just wanted to ask on the international development piece in the slow down the E. C. In 24, and I know a lot of that has to do with specific challenges.
Robert M. Lynch: We will advertise those holistically. We're creating awareness of other products that we have that have less household penetration and less attachment than our core pizza. It's not even just the unique ingredients that we're creating innovation around. It's how we're promoting things, how we're driving our entire holistic menu to drive both our pizza business and our loyalty. Yes, we do have new platforms coming, and we also have new ways in which we're going to advertise and create awareness of those platforms. That's great. Thanks, Rob.
Alex: Charges, and you can't Middle East, but.
Alex: Trying to think about how how quickly things could reaccelerate you know in the 25, I mean, obviously a lot of different.
Alex: <unk> for those markets, but are there other regions that you think could be an acceleration and gross to help her.
Alex: Bring that that international gross development number back up over 200 like kind of where you had been or what have you and dissipate a longer period of time.
Alex: Time to get that back up just trying to get a sense for how quickly things can turn it back on that phone.
Robert M. Lynch: Thank you. Thank you. And our next question comes from the line of Alexander Slagle with Jeffrey Thiel and his... Hey, thanks. Good morning.
Speaker Change: So great question, Alex what I would tell you is that.
Speaker Change: Uhm.
Operator: I just wanted to ask about the international development piece and the slowdown that you see in 24, and I know a lot of that has to do with specific challenges in the UK and Middle East. Trying to think about how quickly things could reaccelerate, you know, into 25. I mean, obviously, a lot of different things.
Speaker Change: And I'll I'll get to your specific question, but we are hyper focused in 2024 on our domestic development business. So when you ask about where the upside is to may be close some of that gap I'm hopeful that that upside is domestic and I Wanna make you know I want to make sure that we have been as transparent.
Speaker Change: As possible and letting everyone know that one domestic restaurant opening is equivalent to four international openings.
Robert M. Lynch: Scenarios for those markets, but are there other regions that you think could sort of be an acceleration in growth to help sort of bring that international gross development number back up? You know, over 200 like kind of where you had been or or do you anticipate a longer period of time to get that back up? Just trying to get a sense for how quickly things can pivot back on that. So great question, Alex, what I would tell you is that, um, And I'll get to your specific question. But we are hyper focused in 2024 on our domestic development business. So when you ask about where the upside is to maybe close some of that gap, I'm hopeful that that upside is domestic. And I want to let you know, I want to make sure that we have been as transparent as possible.
Speaker Change: Okay. So we you know our royalty rates internationally are typically lower because of our master franchisee agreements than they are in the domestically and or a you vs are about half the size on average so that's everything that we're doing right now around back to better 2.0, driving this development.
Speaker Change: <unk>, we rebuild our internal development team across construction real estate Uhm administration. Every every facet of the development pipeline is really to get this this domestic development engine rolling and there'll be huge amount of value creation over the next five years from doing.
Speaker Change: Okay. So I just want to make that point then to speak directly to your international question. There's really three markets that are impacting our openings over the next couple of years. One is the U K. The UK has been a strong development market for US we've been opening about 50 units a year in the UK for the last couple of years the.
Robert M. Lynch: And letting everyone know that one domestic restaurant opening is equivalent to four international openings. Okay, so we, you know, our royalty rates internationally are typically lower because of our master franchisee agreement than they are domestically, and our AUVs are about half the size on average. So, everything that we're doing right now around Back to Better 2.0, driving this development incentive, we've rebuilt our internal development team across construction, real estate, administration, every facet of the development pipeline is really to get this domestic development engine rolling. And there will be a huge amount of value creation from doing that. Okay?
Speaker Change: Problem is those restaurants haven't always been.
Speaker Change: The best restaurants, My hands, you know why we're we're choosing the clothes some of them. We have moved away from a strategy of open restaurants at all costs and give franchisees the ability to open restaurants at all costs like we are making sure that the restaurants that are opening moving forward internationally are looked at with the same scrutiny.
Speaker Change: Then we have domestically you know someone's submit a site domestically we go out and check the site make sure. It's a good site, we do all the analytics to make sure that this restaurant has the greatest chance and probability of success, we haven't been as disciplined internationally. So we are implementing those capabilities and in that oversight. That's why we put three business unit.
Robert M. Lynch: So, I just want to make that point. Then, to speak directly to your international question, there are really three markets that are impacting our openings over the next couple of years. One is the UK.
Speaker Change: Build three business units and in the regions, where we want to grow to be able to give some of that uhm infrastructure and support to these markets. So the U K, Russia and the Middle East are the three markets, where we have been really successful at developing over the last five years and have been <unk> <unk>.
Robert M. Lynch: The UK has been a strong development market for us. We've been opening about 50 units a year in the UK for the last couple of years. The problem is, those restaurants haven't always been The Best Recipe, and why we're choosing to close some of them.
Robert M. Lynch: We have moved away from a strategy of opening restaurants at all costs and giving franchisees the ability to open restaurants at all costs. We are making sure that the restaurants that are opening moving forward internationally are looked at with the same scrutiny that we have domestically. If someone submits a site domestically, we go out and check the site and make sure it's a good site. We do all the analysis to make sure that this restaurant has the greatest chance and probability of success. We haven't been as disciplined internationally.
<unk> over the last couple of years and more recently in the middle East. So so those are the openings challenges, but this number that we put out today is really a function more of closures than it is a lack of openings. We're closing we are strategically closing. These 50 units that takes the you know the number down from where are <unk>.
Speaker Change: Run right right out of the gate and then we're also working with franchisees to help them optimize their portfolio of restaurants franchisees are spending resources running restaurants that are never gonna be profitable that's taken away the resources from the restaurants that they should be focused on growing N N and building new restaurants, it can perform better.
Robert M. Lynch: So we are implementing those capabilities and that oversight; that's why we put three business units in the regions where we want to grow to be able to give some of that infrastructure and support to these markets. So the UK, Russia, and the Middle East are the three markets where we have been really successful at developing over the last five years and have been impacted over the last couple of years, and more recently in the Middle East. So those are the opening challenges.
Speaker Change: <unk> then the Suboptimized restaurants that are already operating so we have baked in strategic closures globally into that number that we shared today. So once we get through that that optimization of the global footprint and you know assuming that some of the geopolitical.
Robert M. Lynch: But this number that we put out today is really a function more of closures than it is a lack of openings. We are closing, we are strategically closing these 50 units. That takes the number down from our run rate right out of the gate.
Speaker Change: <unk> situations change, we have every belief and confidence in our long term international growth rate in development.
Robert M. Lynch: And then we're also working with franchisees to help them optimize their portfolio of restaurants. If franchisees are spending resources running restaurants that are never going to be profitable, that's taking away resources from the restaurants that they should be focused on growing and building new restaurants that can perform better than these sub-optimized restaurants that are already operating. So we have baked in strategic closures globally into that number that we shared today. So once we get through that optimization of the global footprint and assume that some of these geopolitical and macroeconomic situations change, we have every belief and confidence in our long-term international growth rate and development. All right. Thanks for that. Thanks, Alex.
Speaker Change: Alright, thanks for that.
Speaker Change: Thanks, Alex.
Speaker Change: Thank you next question coming from the liner Andrew sounds like with BMO capital markets The Lettuce Avenue.
Andrew: Hey, good morning, Thanks for taking my question I, just had a clarification and then a question on the acceleration or the increase in the U S. Open's is that growth gonna be back up we'd given the timing of the incentives and both times and things like that so that's just a clarification and then.
Andrew: My question is about the the international transformation initiative, you talked about the hubs UK optimization I'm just curious what's next on the checklist within that transformation or what are the next milestone kind of thinking maybe more from an operational perspective than the footprint. Thanks.
Operator: Thank you. Now, the next question comes from the line of Andrew Strelzik with BMO Capital Markets. Hey, good morning.
Speaker Change: Oh, great questions. I mean development is always kind of back have waited Q4 is always the biggest development quarter. So that is that's kind of the normal cycle of development that being said, yes, I would expect that you know the upside potential of the development incentives that we've put out.
Operator: Thanks for taking the question. I just had a clarification and then a question on the acceleration in or increase in U.S. Opens.
Operator: Is that growth going to be back halfway, given the timing of the incentives and bill times and things like that? So that's just the clarification. And then my question is about the International Transformation Initiative. You talked about the hubs, and UK optimization. I'm just curious what's next on the checklist within that transformation?
Speaker Change: There would come to fruition later in the year given the you know if if they're just starting some of these projects in Q1, it's gonna take you know.
Speaker Change: Seven to nine months for those to come to fruition. So so yes is the answer.
Robert M. Lynch: Or what are the next milestones? I'm kind of thinking maybe more from an operational perspective than the footprint. Thanks. Great questions.
Speaker Change: On the international side building. These these <unk>. These these teams.
Robert M. Lynch: I mean, development is always kind of back-weighted. Q4 is always the biggest development quarter, so that is kind of the normal cycle of development. That being said, yes, I would expect that the upside potential of the development incentives that we've put out there would come to fruition later in the year, given that if they're just starting some of these projects in Q1, it's going to take seven to nine months for those to come to fruition. So yes is the answer.
Speaker Change: Yeah, we still have markets internationally that don't have digital ordering.
Speaker Change: Mean that that's that's you know that every market and every you know every restaurant in every market globally does not look like the Papa Johns model that you see here in the U S.
Speaker Change: There are markets that aren't necessary submarkets use aggregators it at scale almost exclusively some markets have really not yet tapped into the aggregator motto. Some markets have not been leveraging product innovation to drive their business I'm Mark you know, there's a lot of different things. These hubs that we've been.
Robert M. Lynch: On the international side, building these teams, we still have markets internationally that don't have digital ordering. I mean, every market, every restaurant, every market globally does not look like the Papa John's model that you see here in the U.S. There are markets that aren't necessary. Some markets use aggregators at scale almost exclusively.
Speaker Change: Built in APAC EMEA in Latin America will be will all have marketing technology and operational resources <unk> to guide their future path and drive not just new store development, but profit comp and profit growth in the stores that already exist I mean, if we.
Speaker Change: We were able to <unk> to increase the international Au vs. Just to 75 or 80 per cent of what we have in the U S. I mean, the the amount of income grows for our franchisees and royalty growth for us would be worth two to three years of new store development. So we really fundamentally believe.
Robert M. Lynch: Some markets have not really tapped into the aggregator model yet. Some markets have not been leveraging product innovation to drive their business. You know, there are a lot of different things.
Robert M. Lynch: These hubs that we've built in APAC, EMEA, and Latin America will all have marketing, technology, and operational resources to guide their future path and drive not just new store development but profit comp and profit growth in the stores that already exist. I mean, if we were able to increase the international AUVs just to 75% or 80% of what we have in the U.S., the amount of income growth for our franchisees and royalty growth for us would be worth two to three years of new store development. So, we really fundamentally believe that we can help these franchisees significantly accelerate their comp and profit growth through the investments we're making in these regional hubs. Thank you. And our next question comes from the line of Dennis Geiger with UBS. Your line is open. Great, thank you.
Speaker Change: Leave that we can help these franchisees significantly accelerate their comp and profit growth through the the investments we're making in these regional hubs.
Speaker Change: Thank you and our next question coming from the liner Dennis <unk> E V S. The line or something.
Great. Thank you Rob I was wondering if you could talk a little bit more about your comment on the on the consumer changing a bit as the calendar returned it certainly we've heard this from others. This earnings season, but can you highlight you know anything more on what that means and what you've observed with with your customer or whether it's ordering or spending patterns and more importantly on that.
Speaker Change: You talk to the barbell strategy, but could you speak a little more to your value efforts. You know, maybe we're value scores already sort of how you're thinking about promos and value and what looks like an increasingly promotional category right now. Thank you.
Speaker Change: That was a great great question, Dennis and I think I think you nailed it.
Speaker Change: No.
Robert M. Lynch: Rob, I was wondering if you could talk a little bit more about your comment on the consumer changing a bit as the calendar turns. And certainly, we've heard this from others this earnings season, but can you highlight anything more on what that means and what you've observed with your customers, whether it's ordering or spending patterns? And more importantly on that, you talked about the barbell strategy, but can you speak a little more to your value efforts, maybe where your value scores are and sort of how you're thinking about promos and value in what looks like an increasingly promotional category right now? Thank you. No, it's a great, great question, Dennis.
Speaker Change: We have seen across this industry and across retail and across a lot of industries, just a little bit of of consumer spending softness I don't think it surprises any of us given.
Speaker Change: Where the the credit cards are at and some of the other macroeconomic dynamics at play that being said I.
Speaker Change: I have continued to reinforce and it's based on historical data that are segment of this industry is well positioned to to persevere and grow through tough challenging consumer and economic times I mean that that's what we've seen in the past we <unk>.
Robert M. Lynch: And I think you nailed it. You know, we have seen across this industry, and across retail, and across a lot of industries, just a little bit of consumer spending softness. I don't think it surprises any of us, given where the credit cards are at and some of the other macroeconomic dynamics at play.
Speaker Change: Being pizza offer an amazing value relative to the other segments of the industry, whether it's it's fine it whether it's you know dine in or other Q S. R and I would argue that the gap has never been greater you know I think that you know pizza and <unk>.
Robert M. Lynch: I have continued to reinforce, and it's based on historical data, that our segment of this industry is well positioned, to persevere and grow through tough, challenging consumer and economic times. I mean, that's what we've seen in the past. We, being pizza, offer an amazing value relative to the other segments of the industry, whether it's fine, whether it's, you know, dine-in or other QSR. And I would argue that the gap, has never been greater. You know, I think that, you know, pizza in general has taken less pricing than a lot of the other QSR segments, and I think as we, if we believe that there is going to be some consumer challenges over the, you know, mid to long term, pizza's going to benefit from that, and so we have definitely worked really hard to balance that barbell of premium and value heading into 2024, and, you know, as evidenced by right now, we're running a national promotion, which is $8.99 large one topping, which is the hottest deal we have run since I came to Papa John's.
Speaker Change: <unk> has taken less pricing than a lot of the other Q S are segments and I think as we if if we believe that there is going to be some consumer challenges over over the you know mid to long term pizza is gonna benefit from that and so we have definitely worked really hard to.
Speaker Change: To to balance that barbell of premium and value I'm heading into 2024, and you know as evidenced by right now we're running a national promotion, which is 899 large one topping which is the hottest deal. We have run since I came to Papa Johns we've never done anything like that.
Speaker Change: And so you know we've got a competitive category, we've got competitors out there with more scale than we do who had been very aggressive on promoted pricing and so we you know we're battling for transactions with them and so we have to have a good value prop out there and and I've always said that we do given you know we've always had a low.
Speaker Change: Carry out special and other specials on our menu, but we've never nationally promoted them. So we've done that the last couple of weeks and to battle for those transactions, but we're not moving away from our strategy I've always said, we can't beat our competitors by trying to be our competitor. So we will continue to deliver premium innovation that.
Robert M. Lynch: We've never done anything like that before, and so, you know, we have a competitive category. We've got competitors out there with more scale than we do who have been very aggressive on promoted pricing, and so, you know, we're battling for transactions with them, and so we have to have a good value proposition out there, and I've always said that we do, given, you know, we've always had a low carryout special and other specials on our menu, but we've never nationally promoted them, so we've done I've always said we can't beat our competitors by trying to be our competitors, so we will continue to deliver premium innovation that, you know, balances out the other side of that barbell while we continue to evaluate our need and desire to launch, to, you know, fight for that value customer as well. So I feel like we've got a balanced strategy moving forward. I feel like we've been very competitive in Q1, and, like I said earlier in the call. The full force of Back2Better 2.0 marketing initiatives, new agency, new media, and 20% increase in national investment were all hits in Q2.
Speaker Change: You know balances out the other side of that barbell, while we continue to evaluate our need and desire to launch to you know to fight for that that valued customer as well. So I feel like we've got a balanced strategy moving forward I feel like we've been very competitive in in Q1, and like I said <unk>.
Speaker Change: We are in the call.
Speaker Change: The full force of back to better 2.0 marketing initiatives, New agency, New media 20 per cent increase in national investment all hits in queue too so and that continues throughout the balance of the year. So I think we're gonna be right there being able to continue to be very competitive in this marketplace.
Speaker Change: <unk> at regardless of what the macro economic environment looks like.
Speaker Change: Thank you and ladies and gentlemen, that's all the time, we have a question and answer session I'll now turn the call back on back to Mr. <unk> Finally closing remarks.
Speaker Change: Well thanks, everyone for your time this morning and for your continued interest in Papa Johns I think as you can see we have continue to you know <unk>.
Speaker Change: Persevere through some challenging international environment, we have shifted some of our focus to driving are very profitable and accretive domestic development and we're very excited about the balance of 2024 and seeing the impact of the marketing and product initiatives that we have.
Robert M. Lynch: And that continues throughout the balance of the year. So I think we're going to be right there, being able to continue to be very competitive in this marketplace, regardless of the macroeconomic environment. Thank you. And, ladies and gentlemen, that's all the time we have for the question and answer session. I'll now turn the call back over to Mr. Rob Lynch for any closing remarks. Well, thanks, everyone, for your time this morning and for your continued interest in Papa John's. I think, as you can see, we have continued to, you know, persevere through some challenging international environments. We have shifted some of our focus to driving our very profitable and accretive domestic development, and we're very excited about the balance of 2024 and seeing the impact of the marketing and product initiatives that we have underway. So, I look forward to speaking with you at our annual meeting of shareholders on May 2nd and then sharing our first quarter 2024 results with you as well. I'd also like to take this opportunity to thank our team members and franchisees. They continue to show unbelievable resiliency and agility during these unique times.
Speaker Change: Under way so I look forward to speaking with you at our annual meeting of shareholders on May 2nd and then sharing our first quarter of 2024 results with you Uhm as well I'd also like to take this opportunity to thank our team members and franchisees. They continue to show unbelievable resiliency and agility.
Speaker Change: During these unique times so thank you everyone.
Speaker Change: And you sent gentleman that doesn't talk conference for today. Thank you for your participation you may now disconnect.
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Robert M. Lynch: So, thank you, everyone. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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