Papa John's International Inc (PZZA) 2002 Q2 法說會逐字稿

Good morning, my name is Crystal, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Papa John's investor relations conference all. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. David Flannery, you may begin your conference.

Thank you. Good morning. I'm David Flannery, Vice President of finance, and with me on the call today are John Schnatter, our founder and CEO, Robert Waddell, Papa John's Chief Operating Officer and President of PJ's Food Service, and several other members of our management team. Our discussion today will contain forward-looking statements which involve risks and uncertainties relating to future events. Actual events may differ materially from the projections discussed today. The call is being taped and the replay will be available for a limited time on our web site. For the second quarter of 2002, we had revenues of $236.6 million, a 1.6% decrease from the second quarter of 2001. Net income was $12.4 million, a 4.3% decrease from pro forma net income of $12.9 million for the second quarter of 2001. Diluted earnings per share were 59 cents, a 3 and-a-half percent increase over pro forma diluted earnings per share of 57 cents for the second quarter of 2001. Pro forma 2001 results reflect the elimination of goodwill amortization as a result of our adoption of FAS 142 effective as of the beginning of 2002. For the first six months of 2002, revenues were $482.2 million, representing a 1.5% decrease from the same period in 2001. Net income was $25.3 million, a 3.4% decrease from pro forma net income of $26.1 million for 2001. Diluted earnings per share were $1.19, a 3 and-a-half percent increase over pro forma diluted EPS of $1.15 in 2001. The two primary reasons for the year-over-year decrease in second quarter and six month revenues were a decrease in restaurant sales due to fewer equivalent company-owned restaurants as a result of both units closed and sold to franchisees, and reduced equipment sales due to fewer franchise unit openings. During the second quarter, 35 restaurants were opened, 26 were closed, and 11 Perfect Pizza units were converted to Papa John's. Year-to-date, 63 restaurants opened, 51 closed and 20 Perfect Pizza units were converted. Net unit growth continues to be challenging due to overall economic conditions and the competitiveness of the pizza category. At the end of the second quarter, there were 2,763 Papa John's restaurants operating in 49 states and 9 international markets, and an additional 171 Perfect Pizza restaurants in the United Kingdom. System wide domestic comparable sales increased 2/10 of one percent for the second quarter consisting of a 2.3% increase in company owned restaurants and a half a percent decrease in franchise units. Year-to-date domestic comparable sales decreased 8/10 of one percent consisting of a 4/10 percent increase in company-owned units and 1.2% decrease in franchise units. The comparable sales discrepancy between company owned and restaurants continued into period seven as preliminary comparable sales results for July indicate a system wide decrease of 3.1%, but consisting of 2.2% decrease for company-owned units and a 3.4% decrease for franchised units. These differences are a result of a lower percentage of underperforming company-owned units. The corporate operations management team has been more successful in addressing underperforming units than has the franchise system at large. For example, for the first six months of 2002, the franchise restaurants were 76% of the domestic comp. base, yet they comprised 89% of the 10% of total units with the lowest comparable sales results. Average weekly sales information for the comp. and non-comp. company-owned and franchise restaurants is included in the earnings release, and I won't repeat those details here on the call. Restaurant operating margin in our domestic corporate restaurants was 21.8% in second quarter, compared to 19.2% for the same period in 2001. Lower commodity costs in utilities, labor efficiencies reduced advertising costs and a higher average sales price point were among the factors contributing to the margin improvement. Year-to-date restaurant margin was also 21.8% versus 19.0 in the prior year with the same factors contributing to the year-over-year improvement. Commissary equipment and other margin was 10.4% in the second quarter of 2002, versus 10.7% in the same period of the prior year as a reduction in cost of sales due to a shift from lower margin equipment sales to sales of higher margin print products and insurance services was more than offset by an increase in other operating expenses due to the expanded insurance-related services provided to franchisees. Year-to-date commissary equipments and other margin was 9.9% versus 10.9% in the prior year as higher first quarter cheese costs resulted in increased cost of sales in addition to the increased other operating expenses similar to those noted in second quarter. International operating margin was 15.7% in the second quarter, compared to 14.7% for the same period in the prior year, and 15.6% year-to-date versus 13.2% last year. The improvement for both periods is primarily the result of increased commissary margins in the United Kingdom. General and administrative expenses were 19.0 million or 8% of revenues in the second quarter of 2002, as compared to $16.9 million or 7% of revenues in the second quarter of 2001. The primary components of the $2.1 million increase were $1.2 million in additional corporate and restaurant management bonuses, $500,000 of additional legal and insurance costs, and $235,000 related to a quality initiative program that we will discuss in more detail in a few minutes. Year-to-date G and A expenses were 7.7% of revenues and $1.1 million greater than the prior year amount, as year over year savings as a result of the Macment restructuring that was still in process during the first quarter of 2001 substantially offset the noted second quarter increases. A provision for uncollectible franchise notes receivable was 756,000 in the second quarter and $1.5 million year-to-date. About 1/3 of these provisions related to a restructured franchise loan and the remaining 2/3 related to our ongoing evaluation of collectibility of the overall loan portfolio. Pre-owned and other general expenses were $1.4 million in the second quarter and $3.5 million year-to-date. The primary components of these were disposition and valuation losses for restaurants and other assets of $533,000 for second quarter and $2.2 million year-to-date, and 500,000 of estimated refurbishment costs for our heated delivery bag systems recognized during the second quarter. Depreciation and amortization was relatively consistent year over year for both second quarter and year-to-date after adjusting the 2001 amount for pro forma impact of the adoption of FAS 142 as previously noted. Net interest expense in 2002 was relatively consistent year over year for second quarter and about $600,000 lower year-to-date as a result of both a lower average outstanding debt balance and lower interest rates during the year-to-date period. the actual block market price of cheese has fallen dramatically of late, third quarter costs will only be slightly favorable versus the prior year as a result of the program in place to reduce cheese cost volatility. It is expected that fourth quarter cheese costs will be substantially lower than the unusually high costs incurred during the fourth quarter of 2001. A table comparing year over year equivalent block prices by quarter is included in the earnings release. The company repurchased nearly 800,000 shares of common stock during the second quarter and 2.1 million shares for the first six months of 2002. Subsequent to second quarter, we have repurchased an additional 634,000 shares. Cumulatively, we have repurchased approximately $297 million of the $325 million total board authorization, and given the current economic environment, we continue to believe that investing in our own company is the best use of our cash flow and borrowing capacity. The company is increasing its earnings per share guidance for 2002 based upon actual year-to-date results of $1.19 through second quarter. The original guidance for Q3 of 51 to 53 cents and for Q4 of 58 to 61 cents is not being revised. This results in a revised full year guidance of $2.28 to $2.33. The favorable impact of share repurchase activity and lower than expected commodity costs on third and fourth quarter earnings per share is expected to be substantially offset by the costs of certain restaurant initiatives that John will discuss. Finally, I'd like to briefly discuss an issue currently receiving a lot of attention in the news accounting for stock options. Papa John's had elected to follow the old rules in accounting for stock options as had most other companies. We have not recognized compensation expense for options awarded in the past, since they were granted at then current market prices. At this time, we are announcing our decision to expense any future option awards in accordance with the fair value method contained in FAS 123, and had we followed this guidance in prior years and recorded the fair value of options at the date of grant to compensation expense over the vesting period, our 2001 earnings per share would have been reduced by 4 cents. Because of the relatively small number of options we granted during 2000 and 2001, about 200,000 each year and the fact that we have not granted any significant options thus far in 2002 less than 20,000 options, this pro forma diluted impact is projected to be 4 cents or less in 2002 and would be expected to decrease in subsequent years. In the near term, we do not expect to grant additional options in any significant numbers. We expect that performance based cash incentive plans will be the principal form of incentive compensation available to be earned by management in the future. That concludes the financial update and now I'll turn the call over to John Schnatter, our founder an CEO. John?

Thanks, Dave. As I look in the first half of the year, I believe the Papa John's team did an effective job managing our business in a very interesting operating environment. For the second quarter, in the face of an uncertain economy and what continues to be a very competitive category, our system was able to run slightly positive comp. and come in slightly above EPS guidance we gave at the beginning of the year. A few items worth noting, commodity costs have trended favorably allowing our corporate operators to deliver a 21.8% operating margin on lower than budgeted sales. We also expect a good commodity environment for the balance of 2002. We continue to aggressively buy back our stock in what we believe to be fair prices. Year-to-date we returned you roughly $80 million to the shareholders by repurchasing 2.7 million shares shrinking our base of outstanding base by 12% since the beginning of the year and roughly 36% since initiating the buyback program in 1999. We continue to believe this is a good use of our capital in this environment. While our share and repurchase program is very accretive to EPS, we plan to invest a good portion of the increased EPS back in our business as I will discuss in a moment. The category remains very competitive as expected, personally due to the timing of our national promotion for third quarter is off to a slow start with July system-wide comps down 3.1% over July of last year. We still expect to run flat to 2% positive comp. sales as assistance for the full year 2002. As discussioned in our last call, our Papa John's continues to win quality and customer satisfaction awards throughout the country. We're not as good as we could be. If we're going to promise a better pizza, we have to deliver. So as I mentioned in the press release, we're investing in a broader initiative program that will allow us to better evaluate monitoring and improving the consistency of our products and most important, customer experience. One element of this program is refining our CIT, cost and improvement team, measurement from 200 criteria down to 80. What gets measured gets done, but sometimes you have to measure fewer items to keep the team focused on what's most important. We will continue to narrow the focus of what we measure at our restaurant to emphasize what's most important, good people, clean restaurants, good service and overall customer experience. We believe another part of the puzzle is reducing turnover among our restaurant managers. We will not improve the customer experience until we figure out how to slow down the revolving door at restaurant level with GMs. So we've approved a 10% across the board increase in general manager and assistant general manager salaries to begin the third quarter. Operators will also continue to be eligible for cash bonuses based on achieving comp. sales, profit and other performance targets. We believe these initiatives will pay off. If they don't, we will continue to vest up in our people, our product, and our restaurants until we get it right. Since our corporate restaurants lead in both comp. and PSA, hopefully our franchisees will follow our lead. If our franchisees work to improve their business and stick to the fundamentals in running their restaurants, the mark place will reward them. One final thought before we open it up for questions. While we still have a lot of work to do in improving both our underperforming corporate and franchise restaurants, our brand performs well even in tough sales environments when we execute the concept properly. Thanks, and now we'd be 00:15:31 happy to take any questions.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Howard Penny.

Thanks very much. I know you said you expect comps to be zero to two for the full year. What does that imply in the second half or what's in your guidance for the second half, and John, for the lack of a better analogy to use the, you know, baseball analogy, what inning do you think you're in in the turnaround of Papa John's? Thanks.

The first part of that, Howard, from just the math part of it, we were 8/10 of a percent negative in the first six months, so we're basically saying that we think we can run a minimum of 8%, 8/10 of a percent positive the last half, that would give us flat, so somewhere I think in the fundamentals of our restaurant, running them at our standards, which are higher than the competition, but I'd say we're probably earlier in the game, probably the second or third inning on the turnaround.

Your next question comes from Dennis Joe.

Good morning, gentlemen. I was wondering, I know the comps were down 2% in June despite the favorable timing of the national summer promotion. What effect, in any, do you think the promotion had, and do you think the promotions message isn't reaching the consumer?

On the summer promotion, in the June, we had the national television and when we were on TV, we had 2 to 3% positive comp. system wide so I think we are reaching the consumer. The problem is the lack of national television year round and the need to improve our product and do a lot more on the local level and inbetween our national promotions.

Okay, and I was wondering, what are the comps being for the stores that have been testing some of the new products in the second quarter? I believe you startEd testing in the deep dish pizza in June?

We don't give out any specifics, but they've been very good.

Okay, and just one other question. Any thoughts to ramping up international expansion?

We continue to build the team and build our internal instructure for the international side. We're still fairly early in that development but we're talking to a lot of different groups, and this will continue to move along in a hopefully very controlled, you know, we want to continue to grow the international but we want to do it in the controlled way and make sure we get the right franchisee.

Okay, thank you.

At this time, there are no further questions.

Thank you.

Thank you for participating in today's conference call. You may now disconnect.