Q2 2019 Earnings Call
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then during your Touchtone telephone.
As a reminder, this conference is being recorded I would now like to introduce your host for today's call Mr., Steve Koch Vice President of Investor Relations and strategy Mr. Cook you may now be it.
Thank you Sri.
Good afternoon.
Joining me on the call today are president and CEO , Steve Ritchie interim CFO Joe Smith.
Steven Joe heel comments about our business and provide a financial update.
After the prepared remarks, Steven Joe will be joined by Mike metals, Our Chief operating growth officer for Queuing day.
Our discussion today will contain forward looking statements involving risks that could cause actual results to differ materially from these statements forward looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our SEC filings.
Please refer to our earnings release on the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in listen only mode now I'd like turn the call over to Steve Ritchie for his comments Steve.
Thank you, Steve and good afternoon, everyone. Papa John's second quarter was marked by good progress against our five strategic pillars as we delivered results in line with our fiscal 2019 plan.
I'll begin with an update on key results in the second quarter, North America comp sales were down 5.7%.
Versus a decline of 6.9% in the first quarter.
This was our third quarter of sequential improvement in comp sales.
Negative, but improving comps sales reflect the consumer sentiment challenges that the brand has faced over the past 12 months, which are now in the early stages of stabilizing and turning around as we refocus our organization around people and our brand for the second half of fiscal 2019, we expect further improvements in North America comp sales as we anniversary the events of July 2018, and begin to see the benefits of our strategic turnaround.
Consequently, we are raising the bottom end of our guidance for North America comp sales the negative 1% to negative 4% for the full year.
And our strong and growing international business comp sales swung to a positive 0.3% in the quarter driven by a return to positive comp sales growth in the UK and continued strong positive results in the middle East as a result, we are reaffirming our guidance for international comp sales of flat to positive 3% for the full year.
Now I'd like to provide more detail on our progress in the quarter beginning with some more color on our June announcement that we are increasing investment in marketing and brand initiatives, while providing additional schedule financial assistance for North America franchisees that will expire in 2020.
When Star Board made a strategic investment in Papa Johns in February we said that we intended to use up to half of the initial proceeds or $100 million to advance our strategic priorities of which strengthening our brand and improving unit economics to support our franchisees health are at the top.
Oh this amount, we announced we're investing an additional $40 million in marketing.
Approximately one half will be spent in the second half of 2019 and the other half in 2020.
Coupled with a 25 basis point increase in the National marketing fund contribution rate to 5% of restaurant sales in 2020.
This will provide six quarters of increased marketing dollars to amplify our differentiated market position and establish a strong national platform for our new brand ambassador as I'll discuss here in just a moment.
The other element of our June announcement was a $40 million investment in six more quarters of tapered royalty relief for our North America franchisees allocated into three areas number one system wide relief available to all North America franchisees, who agreed to some customary terms and the move on from the past events number two system wide incentive base royalty relief around guest service targets and number three additional needs based royalty relief for targeted franchisees.
By providing franchisees with certainty in transparency on the structure and schedule a remaining royalty relief. Our goal is to help them succeed in the short term, but also the plan and manage their business into the future.
The program titled we win together well supported by franchise leadership and it has been well received by the franchise system as nearly 100% of our franchisees opt in by last week's deadline.
Of this additional 40 million dollar investment and total royalty relief, we estimate spending will be roughly split between the remainder of fiscal 2019 and fiscal 2020.
These incremental investments are reflected in our updated guidance for special charges, which Joe will discuss here in just a moment.
The process by which we arrived at this package announced announced it and then roll it out to our North America franchisees reflects the new Papa John's and our commitment to winning together with our franchisees in late spring our team led a series of intensive discussions with key franchisee representatives, but how we continue the significant progress we have made together over the past six months what emerged was a plan to help our franchisees mace manage recent sales declines as well as our shared responsibility to reinvigorate the brand and consumer sentiment.
Next I would like to discuss what we are doing to amplify our brand differentiation, which is the primary strategic goal of the we win together program.
As we have said Papa John's partnership with Shaquille O'neal is an important element of our strategy to reconnect with consumers around are truly differentiated market position.
Since you joined the board of directors in March we have finalized the other major elements of our partnership including has investment and nine Atlanta area restaurants, and the details of his multiyear roll as Papa John's brand Ambassador.
Given the excitements accused creating among the Papa Johns team, we have no doubt that he will help drive positive sentiment among consumers as well. So we're very excited to get them off the bench and into a new national advertising campaign coming up this fall.
The additional $40 million in the marketing budget will help us amplify that campaign.
Now I would like to give an update on our strategy for creating accessible value. The other key element of our customer proposition and a strategic pillar for the company.
As we've discussed last quarter, we have been testing a number of value and menu constructs combining our premium specialty pizzas alongside more accessible price points that bring consumers into the brand.
Under our new CMO Carlin Hearts leadership this quarter, we enhanced our testing methodologies and are now evaluating several different accessible value constructs and approximately 25% of our U.S. restaurants based on our work to date, we're optimistic that these tests will yield an effective national promotion to be rolled out in the future.
Moving on to our progress advancing our technology strategy last quarter.
With respect to Aggregators, which are a big focus in the industry Papa John's strategy remains the same test and learn whenever we have the opportunity to reach guest including through Aggregators Aggregators still constitute only a small portion of our total orders, but we continue to explore potential opportunities, where we believe aggregators represent an incremental sales channel. We continue to invest in our own technology to support an improved direct to customer delivery experience through our partnership will drive our city, we lead our pizza delivery competitors with GPS enabled delivery tracking which is now in over 1000, new rest restaurants up more than double from last quarter.
Finally, I'd like to provide an update on our loyalty program Papa rewards, we're more than six months into the relaunch of the program and we've seen stabilization of ticket and positive team member sentiment around the flexibility and ease of use of that new structure provides we're pleased with these results and are preparing to scale. The new capabilities provided by the underlying loyalty technology to expand our one to one targeting of promotions and personalized experiences.
Prioritizing people is another of our strategic pillars and I'd argue the most fundamental to the profound positive changes happening here at Papa John's.
Building on the all star additions to our board and executive team over the past several quarters last quarter, we successfully recruited a seasoned operations leader Jim Norberg to the joined the company as SVP Chief of restaurant operations, overseeing all Papa John's corporate and franchise restaurants throughout North America.
Jim has an unmatched track record in the QSR industry, starting his career as the Fraga heroes to EVP and Chief operating officer for Mcdonald's 14000, U.S. restaurants, not only as Jim a highly effective business leader. He is a champion for franchise owners team members and our guest is values and approach truly aligned with our commitment to prioritizing people, we expect him to play a critical role maintaining the momentum from the operators conference, helping franchisees as well as our company operator succeed by delivering an outstanding total guest experience.
On top of recent additions of Marvin bouquet, as our Chief people Officer, and Carlin Lenhart as our Chief marketing Officer. This completes the leadership team, which I believe is the most talented team Papa John's has ever had.
Last I'd like to provide an update on our international business in the second quarter, our international business again showed its promise as a driver of long term shareholder value.
Total sales grew nearly 10% as we produced over $5 million of pre tax income for the second consecutive quarter also during the quarter, our United Kingdom Operation, which now comprises 425 restaurants continue to improve its sales results.
The management team that came in over a year ago has been working with our franchisees focusing on improving our marketing efforts for example during the quarter.
Papa John's UK introduce a popular new hot dog pizza as well as our successful deconversion too and this month generate a lot of buzz with a new bee Sting pizza.
We continue to have solid results from Latin America, and the middle East, while the European European business undergo some normal growth challenges, we remain very optimistic about a bright outlook for the long term growth in this region.
Finally, our franchisee in northern China, who purchased the Companys operation there a year ago and our master franchisee in Korea are both having very good years with strong comp sales and unit growth.
In summary, Papa Johns had a very solid second quarter, while we still have a lot of work to do we made good progress against our strategy and delivered results in line with our fiscal 2019 plan, we announced a significant multi quarter investment in the brand and our franchise system with the strong support of our franchisees. We can move forward rebuilding our differentiated brand and providing a platform for Shaquille O'neal as our new brand ambassador coming up this fall, we and our franchisees will now focus on delivering our great products to our guest meeting and exceeding their expectations. So that we can all win together.
As always we remain focused on people and pizza speaking on behalf of Papa Johns team members and franchisees I am as excited as ever about the opportunities ahead, let me now turn the call over to Joe to discuss our financial results for the second quarter in more detail Joe. Thank you Steve.
In the second quarter, we reported earnings per diluted share of 15 cents on a GAAP basis compared to diluted earnings per share of 35 cents a year ago.
The decline in our earnings per share was primarily attributable to lower North America comparable sales and special charges.
Excluding special charges in the current quarter and certain onetime charges in the prior year quarter.
We reported adjusted earnings per diluted share of 28 cents on a non-GAAP basis compared to 48 cents a year ago.
The special charges incurred during the second quarter totaled $5.4 million.
Approximately 2.5 million included support to our North American restaurants through short term royalty relief for franchisees.
In addition, we contributed an incremental $2.5 million to the pop Papa John's marketing fund for increased marketing and promotional activities.
Our second quarter pre tax income on a GAAP basis was $10 million.
Excluding the impact of the previously discussed special charges, our second quarter pre tax income was $15.2 million compared to $21.2 million for the corresponding quarter in 2018.
Looking at sales consolidated second quarter revenues decreased $30.3 million or 7.1%.
Excluding the impact of special items, including the Refranchising of 62 company owned restaurants in North America, and our China operations during 2018.
Consolidated revenues decreased $14.3 million or 3.4%, primarily reflecting lower comparable sales for North America.
Which impacted company owned restaurant revenues royalties and North America Commissary sales.
Now turning to business unit margins for the second quarter.
Domestic company owned restaurants operating margin decreased $1.8 million, primarily due to the impact of lower comparable sales somewhat offset by the favorable impact of current year promotional activities with lower food costs.
In addition, we have experienced favorable insurance costs during this quarter.
This contributed to the improvement in operating margin of 0.9% as a percentage of related revenues.
North America franchise royalties and fees decreased $4.2 million or 17.4% as a percentage of related revenues as compared to the prior year quarter.
Primarily due to negative comparable sales of 5.3%.
The previously mentioned royalty reductions as part of the North America franchise assistance program and an increase in targeted royalty waivers.
North America, Commissary operating margin increased $200000 or 0.4% as a percentage of related revenues as the price as the impact of lower North America sales volume was more than offset by lower operating costs, including labor.
The international operating margin improved 5.3% as a percentage of related revenues due to the Refranchising of China company owned operations.
Excluding the impact of Refranchising, our international operating margin was in line with the prior year as the higher royalties from include increased equivalent units was offset by the unfavorable impact of foreign exchange rates.
For the second quarter DNA costs increased $9.7 million, primarily due to the previously mentioned $2.5 million contribution to the Papa Johns marketing funds included in special charges.
A shift in the timing of our operators conference from the third quarter of 2018 to the second quarter of 2019.
Higher professional and consulting fees and an increase in management incentive costs.
Net interest expense decreased $1.5 million due to lower outstanding debt, partially offset by an increase in interest rates as compared to the second quarter of 2018.
Total debt outstanding was $384 million as of June Thirtyth, 2019, including $11 million associated with the Papa Johns marketing fund.
Outstanding debt decreased $241 million from our 2018 year end balance primarily due to funding from the issuance of series B preferred stock to Star Board.
The effective income tax rate was 12.9% for the second quarter in comparison to 36.8% for the corresponding quarter in 2018.
The lower tax rate, primarily reflects the impact of Refranchising, our China operations during the second quarter of 2018.
Our free cash flow, which is a non-GAAP measure we define as cash flow from operations less capital expenditures and dividends paid to preferred shareholders was approximately $8.9 million for the first half of 2019 as compared to $51.9 million in the first half of 2018.
The decrease was primarily due to lower net income and unfavorable changes in working capital items, including an approximate $20 million of unfavorable timing related impact from the Papa Johns marketing.
During the second quarter, we opened 18 restaurants in North America and closed 35 units for a net reduction of 17 restaurants.
We also opened 34 international restaurants and closed eight units for a net increase of 26 units.
On a year to date basis, we have opened 128 restaurants globally and closed 86 units for a net increase of 42 units.
We ended the quarter with 5345 global restaurants.
We paid a cash dividend of $10.5 million to our common and preferred shareholders. During the second quarter of 2019.
Subsequent to the second quarter, our board of directors declared third quarter cash dividends of approximately $10.5 million to be paid to common and preferred shareholders.
The third quarter common stock cash dividends will be 22, and a half cents per common share.
Looking ahead to the remainder of 2019.
As Steve mentioned, the recently announced we win together program provided investments into marketing and support for the North America system, beginning in the third quarter of 2019 and continuing through the fourth quarter of 2020.
We expect to incur approximately 50% of this investment in 2019 with the remainder in 2020.
As a result of these investments we are updating our guidance for the following.
Our GAAP loss per diluted share is now expected to be negative 10 cents to negative 40 cents, reflecting an increase in special charges, which are now expected to be 50 million to $60 million for the year compared to prior guidance of 30 million to $50 million.
The updated guidance of 50 million to $60 million for 2019 includes the impact of the we win together program.
Also we are narrowing the guidance range for the fall.
North America comparable sales are now expected to be negative 1% to negative 4% from the previous guidance of negative 1% to negative 5%.
Our net global unit growth is now expected to be 100 to 150 units from the previous guidance of 75 to 150 units.
I'll now turn the call back over to Steve Ritchie for his final remarks, before we take Una Steve.
Thank you Joe So Papa John's maintained a strong pace of day to day progress and incremental improvements in the second quarter.
While we also drove further positive change in the foundations of our business our brand our franchisees and our people.
I'd like to reiterate that the we win together agreement developed in close collaboration with Representatives of our North America franchise system and now receiving the support of almost all of our franchisees is a major milestone for the company.
It allows us to move forward together constructively and positively focused on the future justice significantly the agreement and discussion around it embody the shared responsibility we all have for the brand, which at the end of the day comes down to delivering great pizza, great value and great guest experiences I want to thank our fantastic franchise partners as well as all of the team members in the Papa Johns family, who work together every day. So that we can win together I look forward to providing more updates over the course of the year as our progress accelerates as always we appreciate your continued support ill now I will turn the call over to the operator for Q and a.
Thanks.
Question on the guidance you raised your same store sales guide on the low end as you mentioned, implying I think positive low single is at least in the back half. So I'm wondering if you're still expecting that continuation of improvement as we work through the year as we sort of talked about the past couple of quarters.
And what could you talk about are willing to talk about rather in terms of what that means or how you feel about how you lapped over the comments.
From mid July of last year.
Sure well, it's Steven Thanks for the questions. So.
So yes, we did we did raise up the bottom end of that guidance just to indicate that we do have some some real real confidence.
Around our ability to continue to improve sales. So I think a lot of what we've been doing over the last four or five months here since the investment from star aboard the new construct of the executive leadership team the new construct of a new board, obviously getting Shaquille O'neal onboard here and so many many so many of the many things we've been doing to improve overall consumer sentiment.
The new executive leaders have been working on the new brand campaign.
That obviously will coincide with the work that we're going to be doing with shell Shaquille. In addition to that we've got multiple value platform tester in the marketplace I give you that backdrop because those are the things that the we win together 40 million dollar investment about half of that 40 million is going to be going into 2019. Those are what drive some optimism for us to know that the back half of the year is going to be getting back to growth as I've said the back half of the year. We do expect back to positive sales I'm not going to get into a cadence of break down on a per period borchert per quarter. What I will say is that was our third quarter of sequential comp sales improvement there are going to be continued.
Sequential improvements on a quarter to quarter, but it's going to be much more significant than what you've seen in the last three quarters, obviously indicated by our new updated full year guidance. So so we're excited about what's what's to come here as we close out the back half of 2019 is.
Significant transformational year for the brand and back in 2020, we're going to get back to better.
Got it and one more quick one on on value if I could it sounds like you have a lot going on there in terms of tasks and various markets. So wondering if you could talk a little bit more around your plans there if a lot of it revolves around that thanks.
Price point that you've tested.
In numerous markets in the past or if we should think about value taking a different approach.
So we'll it's Steve again.
And Mike might have a comment as well, but I won't cover cover the ground here. So.
Yes, I mean, you know.
Value is something that Weve is all but always been important to the Papa John's brand. Certainly we are the brand is known for quality being better ingredients better pizza and having the best overall pizza in the industry, but value is an important part of what we do it's not about the price you pay it's about the experience that you receive but we also know that we have to have better overall promotional options out there for the consumer to provide that accessible value that we talked about so the $6 medium price point has been one that we've had out throughout the first part of 2019, there are various different value constructs that we're testing in the marketplace.
At various different pizza sizes, various different sides as part of that equation.
We've got some new menu items that are out there in test and those being also part of a promotional test.
But there is there's a lot of also different methodologies on how we're doing this as well on how we read test because we've done things in the past with test, but I will tell you that Mike and our new CMO are bringing a lot to the table. So I think it would probably be helpful to give some color Mike to how we're kind of reading some of these things yeah sure. Thanks, Steve and I will so the short answer I think to your question is we are way beyond just testing a single product single pipe promotion at $6. We started with that really wanted to kind of fill out the market space used to medium as part of that offer that seems to be fairly typical in the industry, we've expanded beyond that rather dramatically.
We're really experimenting with what I'll call, a multi tier price point value construct where we actually offer three different sizes of pieces like Steve said at three different value price constructs all of them being one top with an up sell engine capability to allow us to quickly add multiple toppings on it to try to get to something that quite frankly in the old days may have been like a 10 dollar three top we can do that with a multi vendor.
Suddenly start to realize you know I really want something a little bit better and then you start to trade up through the tiers. So we're having a lot of success with that in the early stages.
Different models in different places observe into the brand you might actually find markets out there that are participating in that right now as Steve said, we have that up and operating in some flavor. Another several hundred locations.
But at the same time the testing methodology. We are doing is very driven on test and control. We've lined up every single store with lookalike stores around the country.
And even with lookalike customer profiles and purchasing behavior and then we're able to do really refine testing to be able to say hey that work that worked a little bit better, let's keep tweaking it lets tested again over and over again and we're not in test.
Forever mode, we are looking to deploy some of these things within.
A short timeframe, but at the same time, we can do so with some project ability and predictability about the outcome as opposed to hey, let's just throw that on the wall and see if it works so very happy with how the team is using all the data investments we've made in the last year, particularly around understanding customer behavior and tracking customer behavior to really try to inform some very big differentiators for the brand and something we can feel very confident about how the performance will be prior to actually launching it.
Yep, So Ellen and thank you Mike So I just I think it's important to understand the sophistication mine are testing methodology as we continue to make enhancements based on not only the data, but also the technology in the analysis and the real talent that we have capability wise, but at the end of the day, it's all about transactions, but it's also it's most importantly about incremental transactions.
But three key things for success in these tests as we look at these value platforms, that's incremental sales incremental transactions and incremental profitability. Our franchise unit economics is absolutely critical to our growth. So they continue to reinvest in the business. So spent some time on that one because that's obviously a critical component of some of the investment dollars that we're going to be putting into the marketing world with the.
The $40 million that we've got coming on the marketing side that will also not only support the Shaquille O'neal brand campaign, but also new promotional campaigns.
Great Thanks for that.
Thank you. Our next question comes from Peter Saleh with BTG.
Great. Thanks for the question.
Steve I just wanted to be.
We are on the guidance the topline guidance same store sales change.
A reflection of what you're already seeing in the current quarter or is this a function of what you expect to see.
Post the.
Shacked campaign launch.
So Peter Steve and thanks for the question. So I think what we have to do obviously until you get these things in the marketplace. There is a level of uncertainty, but what we we obviously.
The marketing team and the finance team did a lot of analysis and predict predictions around how do you model out the investment levels that were going to put into the marketplace winner those things coming in what are we putting them against in terms of a branding initiative, obviously tied with Shaquille O'neal, which we're very excited about but also the value platforms when those things might come into the world.
And what kind of impact they may have it's still early with some of the testing, but we did have enough confidence to know that the bottom end of the guidance needed to come up from a five to a four.
We didnt take the top end up because there's still a level of uncertainty around where we are in the overall business clearly with the first couple of quarters in the year, we have a significant level of improvement.
To get to that top end of the full year guidance, but theres theres lot of things are very exciting.
We have plan here in the back half of the year.
All right and then just on the.
Yes, I think you said you plan to spend 50% of the 80 million dollar investment.
2019 that implies $40 million.
Given.
On the on the royalty assistance the franchisees this kind of implies.
You guys will be spending about $30 million.
On marketing and back end of the year is that correct.
Well, we what we called out Peter has about a 50 50 split so to your point, 50% of the $80 million is going into 2019 of that $40 million, 50% is towards royalties and the other 50% towards marketing.
And those are approximates to the dollar because we're still going through the final planning stages more specifically on the marketing side. The royalties are pretty locks and obviously, they're only impacted by revenue changes but.
Yes, a significant amount of marketing dollars are going to come in.
You're in the back half of the year.
Okay. My last question.
What kind of comp.
In this environment with the assistance that you're providing.
Holding margins flat their restaurant level margins.
It's Stephen it's certainly going to vary by market on because there's obviously a lot of puts and takes out there in the marketplace.
Geographically and on the competitive side, there's different pricing variations that different from market to market. So different levels of comp are required to decide to stabilize the overall unit economic model, which is why we didn't just do broad brush royalty relief and support across the board. There is a level of targeted support for franchisees and different marketplaces that are more challenged than need more sales lift.
To get there there are model a little bit more little healthier so.
It does vary a bit we know our margins are going to be backwards until we get back to positive sales is the bottom line, which is what we expect to do in the back half of this year.
Get back to positive sales and and get back to the kind of growth that we expect for this brand that we we produced 14 consecutive years of flat to positive sales growth in North America. So we know the brand is capable of doing that we just got to get.
The business stabilized here, which is these as you probably know these types of situations have a tendency to have about an 18 month turnaround we're right about the 12 month.
Point here just last month, so what we're trying to do everything in our power is to accelerate that 18 month turnaround and getting back.
To growth.
Great. Thank you very much.
Thank you Peter.
Thank you. Our next question comes from Alton Stump with Longbow Research.
Great. Thanks for taking the questions.
Just first on for Joe just as far as raising the lower ad of.
Global unit growth guidance, you gave some color.
Is that us or is international.
As the press was closed and you thought here domestically ACA, what's driving.
Course at lower end coming up to 100 units.
Yes, Brian This is Joe again, probably most of that is just our closings as you can see for the first six months of.
Have improved even over last year and better than prior to our original forecast. So it has mostly to do with the domestic side of the business and I think that shows.
With some of the targeted a royalty relief and also the other assistance, we've given that we've been able to keep closings down domestically than from our original forecast I think that's a that's a great point, Joe and because it's the programs that we introduced and we have the operations conference up a lot of this is also just about confidence in the future the ability for the management team to get the business moving back in the right direction has the ability to mitigate some of these closures. So we are pleased to see its mitigated we don't like any closures I hate to see a single closure, but the very fact that we are seeing lower closures than we initially expected based on the sales pressure I think is very positive and I think Joe and the team did a great job at really modeling out what level of support that we need to provide across the board to the REIT franchisees.
Okay, and then follow up.
Yes.
If you will of course, they are quite over.
Hi, rich.
I think you were the first one to do in industry.
How's it going so far it's awfully early but are you seeing any metallic.
As we use that third party provider.
Hey, Chris I'm, sorry, you broke up a little bit, but I think your question.
And I'm sorry, I think your question specifically was about Aggregators is that what you were asking yes.
Okay. So we've been as you know we've been in a partnership with door dash for well over a year and with Postmates now almost as long, it's actually going very well for us.
I wouldn't say, we're 100% deployed we've got a few challenges that were left to finish deployment to all of our stores and certainly there is some geography.
Where some of these.
Some of these large aggregators play better than others. It does represent a substantial.
Part of.
Of our growth for the future when we start to look at it right now, it's a pretty modest impact overall to sales.
But weve noticed some things part of the deal that we've actually done with these large national Aggregators is make sure that we take a hard look at that customer data again, and what we see are there's a outsized portion of these customers that are new to the brand new to US we are able to tell that we've not seen them before which really is in keeping with our strategy of being where the customers want us to be so that we can remain accessible to them regardless of how they choose to place orders for the product. We do have plans to continue expansion with this we actually are looking and talking to a number of other large national Aggregators and we see this as a future growth opportunity for us.
Not just as a new customer acquisition channel, but the ability to market to customers through those captive channels.
And continue to service them in the means that they they prefer as opposed to having all of them have to come to the Papa John's brand with our loyalty program and with our other digital strengths, we really believe that still going to be the lion's share where we see the activity, but it's certainly a growth opportunity for us and we want to make sure that we leverage it appropriately.
Great Thats helpful. Thank you legacies.
Thank you Bill.
Thank you. Our next question comes from Chris Ocull with Stifel.
Hi, good afternoon guys.
Great.
First and Jim you mentioned about half of the 80 million investment would be incurred during 19, how much of that is the targeted needs base release.
That's a small part of it.
Again, but on the special charge, we don't include that as.
That's that's separate from from that because we don't include targeted relief as part of the special charge, but it is a part of the of the half of the relief that we will give Chris.
Okay, and then does the royalty relief come with the condition that franchisees will need to participate in whatever value construct you guys choose to promote.
No. It does not so just to go ahead, well, it's yet to inch interesting question, Chris So any national promotion all franchisees have to honor our national promotion. So if it did if one of those value constructs became a national promotion that is just part of our normal agreement that we have with our franchisees and frankly.
That's something that they traditionally agreed to do because it's obviously going to be more impactful. If we can all aggregate our dollars and support the same promotion. The only thing that was tied to the agreement for the relative release was a general liability release for our franchisees.
Okay, and then I know in the past franchisees are really focused on margin percent.
When they look at.
Offers and promotions. So does the new value can construct require them to think differently about the margin in terms of maybe focus more on transaction margin dollar growth rather than the margin percent because some of the ones I've seen in test seem to be pretty aggressive discounts relative to what you guys have historically done.
Sure Chris its Steven.
Our franchisee as well and technically I guess the company has the largest franchisee as we own a lot of the stores. So we're able to kind of balance and understand.
As we look at things as we call profit after FL and profit after food labor mileage, so incremental sales and that drives the incremental profitability that being driven by transactions, but as I said in my earlier remarks, there's three different really key criteria for success of the test its driving incremental sales incremental transactions and incremental profitability versus as Mike talked about the more sophisticated testing methodology on looking at the right control groups on like for likes and also comparing against the system. So.
We are we're enhancing the way that we're thinking about this I think all of our franchisees understand the importance of value in what it plays.
The promotions have to be effective to drive traffic growth.
Certainly from market to market theres different desires to promote different things, but we have to take the power of one national brand.
And we really believe if we can get our arms around that and do it effectively that really will extract a tremendous amount of traffic growth for the brand. When you combine it with the brand enhancements, we're going to be making and the new campaign will be coming out later this year.
Okay and then.
How much did the impact.
Shifting the timing of the operation.
Evan DNA this quarter and should we.
I think that kind of benefit to third quarter comparisons.
Yes.
Chris that's roughly a couple of million dollars and you're right that is it should come back and benefit Q3.
Okay, and then just lastly, I know you guys in the past and help the contributed to.
The UK that honor I believe you have does that continue.
Yes, we continue to work with the.
With the UK team and you see some of the improvement they've had and again weve. We as you said over the years, we have continued to make.
Various contributions to that and that is just part of the regular operations. It's something we continue to look at every year and make.
Various amounts of contributions depending on the business and some of the activities that we have and Thats something were continuing to do this year.
Yes, Chris and you know Thats fair, we always support all of our franchisees around the world in the international business.
The UK is different as you know because we also are on the the quality control center and we are the master franchisee for all the franchisees in the UK. So certainly some additional revenue streams coming in there. So there is the return on investment models work in various ways in the UK, but a very successful market for us in our largest market.
Not only in terms of stores, but in terms of royalty revenues coming in at very very key market and as I said my opening remarks were very excited to see the UK getting back to positive comps in the quarter and we've got a fantastic new operations director lives Williams in the UK that is leading those efforts and really doing some tremendous work. So we'll always continue to evaluate how we can invest behind that market to continue sustainable growth.
Great and then lastly, I knew this segment when you look at the segment profit the comment in the North America Commissary operation.
He has been under some pressure and.
Largely because of just the transaction declines in the next call.
Each of the business.
Due to right size that segment in terms I mean, because I know you build that capacity over the years anticipating a lot of growth and now that load domestically is there anything you can do to it.
Agendas and some of the six assets or at least downsize that that segment.
Yes, Joe I'll start and Steve can add in but I think our team does continue to look at different things. So maybe production schedules used to be six times, our six days a week and now they're going to four for as an example.
You did with the addition, you did improve some delivery costs.
I think Thats why you see we saw some improvement as I mentioned about in labor costs as we continue to as you say rightsize the business with.
Based.
On on the amount of volume that we have you do obviously have trade off.
Because you have to have pccs close enough that you keep your delivery cost down. So our team continues to look at that challenge the level of.
You know how many days of production. They also look at the best way to deliver and they're all always challenging the cost to try to reduce things. So we are doing that yes, now generally I mean, you hit you hit some of the good ones in the in the short term what we can do to offset that so we have to think about this business. Obviously in the long term. So this this is a brand that has been impacted by.
Some extraordinary things so we're in the midst of a turnaround the Q Ccs have been very healthy business model for the cost of capital is very low there. They produce a lot of income for isn't a great for our franchisees because they provide not only quality. They provide consistency. So we built that 11 QC see down in Georgia.
Two years ago for good reason, because we're building for the future and we are going to turn this thing around so we've got 11, Q Ccs that can support the future of this brand and are not going to make short term decisions that negatively impacted but at the same time Joe's hitting good points are always trying to find out ways to be more efficient as long as they do not at all if any risk of stunting our ability to re stimulate the growth that is absolutely necessary for our brand.
Great. Thanks, guys.
Thank you. Our next question from is from the line Silverman with credit Suisse.
Hi, Thanks for the question you indicated consumer sentiment challenges are in the early stages of stabilizing and turning around can you expand on that commentary any metrics. You can provide that gives you confidence in that stabilization and then just related to that could you give any color on how same store sales and traffic trended throughout the quarter.
I'll get the second part buyer can you get the first part, yes, hi, Lauren it's Mike.
As Steve said I'll try to grab the customer sentiment piece first so we use a number of diagnostic tools to measure that.
One of the objective measures we use as you go you Gov is their brand index and a number of other different measures.
Pretty pretty standard in our industry. So we're able to track that almost on a period by period basis, it's not absolute but its certainly directional and what we've seen is a remarkable.
Constant steady improvement.
Over the last periods 12 period since last year in particular, we can also definitely see when the Papa Johns Foundation makes a major.
Endowment or we have other positive publicity the yoga brand sentiment index tends to trend upward as well so a lot of our internal work at just being better corporate set of citizens out of our foundation work a lot of our.
Work internally and externally on really cultural improvements and trying to enhance.
Our diversity and our inclusiveness have really started to be noticed I think buys customers in general and then finally, maybe more subjective on the inside we have a wonderful loyalty program that we launched last year that gives us tremendous amounts of insight in guest behavior and it's viewing mostly in looking at their number of repeat visits or their repurchase intent, we see that in terms of their willingness to come back to the brand their willingness to build more loyal to us as a brand and quite frankly, giving us credit for some of the outstanding work that our operators are doing and trying to serve a better product deliver a better product and give us better scores around overall satisfaction as a result of it. So we take all of those metrics together and it's a pretty resoundingly things are improving doesn't mean, we're where we want to be yet we've got lots of opportunity in headroom to continue improving but a lot of our work effort starting to be rewarded as customers come back to the brand.
Yes, I think Mike hits, all the key points on sentiment I'd say, we're close to where we were last year at this time, but we had a drop that started in the fourth quarter 2017. So we have some additional work to go we believe some of the work that we're going to be introducing later this year will continue to show improvement in that area and executing at a high level. So that we get great guest experience with our new Chief restaurant operations officer in the work that Jim is going to be leading also plays a key part and overall consumer sentiment. So the other question Lauren just on cadence of comps throughout the quarter I going to get into specifics, but I can tell you that we had the same.
Price promotional price point of $12 for three different versions of specialty pizzas. So there wasn't any kind of significant kind of difference in the promotional side and there wasn't any real disparity in our level of marketing investments across that as I stated earlier. It really was a bridge kind of quarter that were just trying to put some things together as were building the plans for the future.
Stabilize the business as best as possible rubber really building robust plans to get back to the growth that I continue talking about here, but nothing really significant to call out.
Great and then just bigger picture any thoughts on how the pizza segment overall is being impacted by the strong growth of the third party aggregators.
Sure ill start learning, Mike if you got a comment jump and Theres Theres no doubt.
We obviously track market share data.
On a monthly basis around here through various different third party research groups. There is some impact that's happening within the overall category that impact of the to the category.
It is really a share shift and that we're seeing some of the lift within the ship share side happening within the dependence, which have obviously been a share donor for the last seven or eight years.
To the national players within the category because of the digital and technology and also the economies of scale on the marketing spend.
Whether that's long term or sustainable I'd say, it's probably too early to tell.
But for our business, specifically, which I like what we've done here with our partnerships as Mike had spoken to the incremental lift that we're seeing through our partnerships with the Aggregators really that's offsetting the impact that is having to the the national players when the category. So in general we're at a wash whatever impact the modest impact we're having on the comps we're offsetting that with a modest increase we're getting with the game. So.
It's something we're going to continue to monitor to see if this is a continuation with the independents. My belief is that the national players will regain growth longer term in the future here because there's a lot of marketing investment thats happening within the aggregator space, that's driving some visibility and there's a lot of learnings that I can tell you we're getting in real time on how will promote and partner with the aggregators in various different ways beyond just promotional activities.
Thank you very much.
Thank you Lorne.
Thank you and we do have a follow up from Peter Saleh with BTG.
Great. Thanks, Steve just Chris.
Question on.
Value participate.
To support the value if any.
Later this year.
Nothing of any kind of significant material that's material Peter.
On some of these value tests are tied to some as I said some menu items are our new product introductions, but we don't have anything that we're looking at here, that's any kind of significant investment required for our franchisees.
Great. Thank you very much.
Thank you.
Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to management for any closing remarks.
So I just want to thank you everybody for your continued support and then just reiterate our excitement around the future for the Papa John's brand certainly the first half of the year, a tremendous amount of change management and transformation within the organization now it is our job and our responsibility and we are excited to do the work that is necessary to get this brand back to growth. So we look forward to talking to you. After our third quarter results are to be reported have a great evening.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may all disconnect and have a wonderful day.