Papa John's International Inc (PZZA) 2002 Q3 法說會逐字稿

Good morning. I'm Sandra and I will be your conference facilitator today. At this time I would like to welcome everyone to the Papa John's International conference call. 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 want to ask a question during this time, press star then number 1 on your telephone keypad. If you would like to withdraw your questions, press the pound key. Thank you.

Mr. Flanery, you may begin your conference, sir.

Thank you, Sandra.

Good morning. Welcome to our conference call and webcast. I'm David Flanery, Senior V.P. of Finance. As a reminder to view the slide show, please log on to you our website at www.Papa John's.com.

We'd like to take this opportunity to not only report third quarter results, but also provide an update on our key business units and take our first look at earnings guidance for 2003. This presentation contains forward-looking information, which may impacted by certain risks and uncertainties as more fully described in our 10-K and 10-Qs.

Our senior management team is on the call this morning and you'll be hearing from several of them throughout the presentation. Our agenda will start with a review of our third quarter results, followed by remarks by John Schnatter, the founder, Chairman and CEO of Papa John's. Mike Cortino, our Senior V.P. of Corporate Operations will review strategic goals and progress made by our corporate-owned restaurants. Mary Ann Palmer, our Chief Resource Officer, will review our franchise restaurant operations. Robert Wadell, our Chief Operating Officer and President of our Papa John's Food Service subsidiary, will review the competitive environment, discuss our marketing and product strategy and provide an overview of our P.J. Food Service Quality Control Centers and quality initiatives. Chuck Schnatter, our Chief Development Officer, will review our international operations. Julie Larner, our Chief Administrative Officer, will review our technology initiatives and our efforts to continue to control our GNA costs. And finally, we'll review our fourth quarter outlook and initial guidance for 2003.

Now let's look at our Q3 and year-to-date performance. We had solid financial results for the third quarter, even considering the difficulty sales environment. Revenues were $227.9 million for the quarter, a 5.6% decrease from the third quarter of 2001. The decrease is do you a combination of fewer corporate-owned restaurants, negative corporate and franchise comparable sales, lower commodity costs, which impact the sales dollar volumes at commissary subsidiary, and fewer new unit openings, which impact both development fees and the sales of new equipment packages from our equipment services subsidiary. However, net income was $10.5 million for the quarter, essentially the same as that reported in 2001, and only 3.9% less than the pro forma 2001 amount after adjusting for the elimination of goodwill amortization as called for by financial accounting standards board statement number 142.

Earnings per share were 53 cents for the quarter, a 10.4% improvement over the 48 cents earned on a pro forma basis in the the third quarter of 2001. This EPS improvement came about as a result of the impact of our share repurchase program, average shares outstanding on a fully diluted basis were $19.9 million during the third quarter of 2002, as compared to $22.7 million for the same period in 2001. We'll talk more about the share repurchase program a little later in the presentation.

Domestic systemwide comparable sales decreased 2.5% for the quarter, a 7/10 of a percent decrease at company-owned restaurants and a 3.0% decrease at franchised units. A total of 27 Papa John's restaurants were opened during the quarter, four corporate-owned and 23 franchise units. Additionally, 22 restaurants were closed, mostly Papa John's franchised units and 12 franchise Perfect Pizza restaurants were converted to Papa John's during the quarter.

At the end of the quarter, we had a total of 2,939 restaurants in the system, 2,782 Papa John's and 157 Perfect Pizza units. Approximately 21% of the Papa John's units are corporate-owned while substantially all of the Perfect Pizza units are franchised.

Corporate restaurant margins improved 3% year-over-year, as much lower food costs were partially offset by higher labor costs. Other costs categories were relatively consistent, between quarters. The lower food cost percentage resulted from lower cheese and other commodity costs and the impact of higher average sales price point. The higher labor costs reflected the across the board salary increase given to General Managers and Assistant Managers, as well as other general compensation increases.

Operating margin for our commissary equipment and other operating units decreased 4/10 of a percent year-over-year primarily as a result of reduced fixed cost leverage on the lower commissary sales. Additionally, operating costs reflected a shift away from cost of sales into salaries and benefits and other operating expenses. This shift was due to a combination of lower commissary food costs, the loss of fixed cost leverage noted above, and a change in sales mix as low margin equipment sales decreased and sales of higher margin insurance-related services increased.

International results were fairly consistent year-over-year, as revenues decreased 2.1% to $8 million due to lower corporate-owned restaurant sales. And operating margin decreased to 15.6% from 17.6%, or about $157,000 of reduced margin, primarily due to a logs of leverage on the lower sales volume. GNA costs were $18 million or 7.9% of revenues for the quarter, and $1.2 million higher than the same quarter in 2001, primarily as a result of higher corporate and restaurant management bonuses and costs related to the restaurant quality initiative program, partially offset by salaries and travel costs savings. A provision for uncollectible franchise notes receivable of $759,000 was recorded in the third quarter, about half of which relates to a restructured loan for which certain payments have been deferred.

Pre-opening and other general expenses were $1.3 million for the quarter, $558,000 of which related to restaurant valuation and disposition costs and $400,000 of which related to additional costs we've agreed to bear on behalf of our franchisees as part of the heated delivery bag refurbishment program.

Year-to-date revenues were $710.1 million or 2.9% less than the prior year for the same reasons for the same reasons as previously noted for the third quarter. Except that cheese costs were substantially higher than the first two quarters of 2002, than the same period in 2001. So the decrease in commissary sales is much less on a year-to-date basis than for the third quarter alone. Net income was $35.7 million for the nine months, essentially the same as that reported in 2001, and 3.5% less than the pro forma 2001 amount. Earnings per share were $1.72 for the nine months, a 5.5% improvement over the 2001 pro forma results. Average diluted shares outstanding were $20.8 million for the first three-quarters quarters of 2002, as compared to $22.8 million for the same period in 2001. Domestic systemwide comparable sales decreased 1.2% for the first nine months of 2002, a 1/10 of a percent increase at company-owned restaurants and a 1.7% decrease at franchised units. A total of 90 restaurants were open during the first three-quarters, nine corporate, 79 franchise Papa John's units and two Perfect Pizza units. Additionally, 73 restaurants were closed during this period, 15 corporate and 52 franchised Papa John's, and six franchised Perfect Pizza units, and 32 Perfect Pizza units were converted to Papa John's.

Corporate restaurant margins improved 2.9% year-over-year as all cost categories were lower as a percentage of sales in 2002 than in 2001, even in light of the decreased level of sales.

One reason for this margin improvement is an emphasis on underperforming restaurants that Mike Cortino will discuss in more detail. This program is getting results. As 64 net corporate restaurants that lost money during 2001 have been profitable for the first nine months of 2002. And this number could increase by year end, since fourth quarter is generally a more profitable quarter.

Additionally, Mike and his team have focused on overall restaurant portfolio management and eliminated another 64 unprofitable restaurants through sale or closure. In total, corporate operations has reduced unprofitable restaurants by 63%, from 204 units in 2001 to 76 units thus far in 2002.

Operating margin for our commissary equipment and other operating units decreased 8/10 of a percent year-over-year for the same reasons as mentioned for the third quarter. Additionally, the fixed dollar markup on higher cheese costs during the first two quarters of 2002 impacted cost of sales for the nine months, to a greater degree than for the third quarter alone.

International revenues increased 1.8% to $23.7 million for the nine month period due to increased commissary sales. Operating margin increased to 15.6% in 2002, from 14.7% in 2001. Or about $203,000 of increased margin due to improved commissary results. GNA costs for $55.3 million or 7.8% of revenues year-to-date, and $2.3 million higher than the same period in 2001 for similar reasons as previously noted for the third quarter A provision for uncollectible notes receivable of $2.2 million was recorded for the nine month period of which $990,000 related to a specific restructured loan. Pre-opening and other general expenses were $4.8 million year-to-date with a major component $2.8 million of restaurant disposition and valuation losses and $900,000 related to the heated delivery bag refurbishment program, and $523,000 of restaurant relocation costs.

During the first nine months of 2002, we've repurchased $3.5 million shares of our common stock for $102.2 million for an average price of $29.10 per share. We've also received $8.5 million in stock option exercise proceeds so our cost of net shares repurchased in 2002 is $93.7 million. We fund our stock repurchases from cash flow and where necessary, advances under our bank line of credit. The outstanding balance under our line of credit increased $24.7 million during the first nine months of 2002, and at the same time our cash and cash equivalent balances decreased $7.2 million during this period. So we've been able to fund about $61.8 million of stock repurchases from free cash flow during the first nine months of this year. We have approximately $19 million actual shears outstanding at the end the third quarter or $19.2 million on a fully diluted basis.

Now I'd like to turn the call over to John Schnatter, our founder and CEO. John.

Thank you, David.

The environment is disturbing right now, as the pizza category remains intentionally price competitive. In spite of the heavy discounting and product giveaways by our two largest competitors, category has basically been flat to negative over the last 12 to 18 months. For the first time in recent memory, or every for that part, all three of the largest pizza chains, Pizza Hut, Domino's, and Papa John's, all ran negative comps in the third quarter.

That being said, things will eventually turn around. The economy will strengthen and the pizza category will get healthy again. We want to ensure Papa John's is position for continued success. In the interim, our job is to stay the course.

Residents within our energy and other resources on things beyond our control or diverting our attention to other concepts we've made the decision to stay focused on perfecting the Papa John's system. For example, we've included $6 to $7 million in incremental dollars in the 2003 budget for continued investment spending in the areas we think matter most. Our people, our product, and our service at our restaurants. This includes $2 million to improve our quality initiative program to help us keep our better ingredients, better pizza promise to customers it also includes$4 to $5 million for increased based pay and bonus potential for restaurant managers in the assistant managers. We think reduced turnover of GMs and assistant GMs on bonuses tied to product quality and sales improvement will result in consistently better products out the door. To allow this type of continued investment spending in this difficult operating environment, we've continued to look for ways to tight on our belt at corporate and control our GNA expenses. Julie Larner will discuss our cost control efforts later in the presentation.

Over the past 17 years we've worked hard to deliver on our brand promise of better ingredients, better pizza. Everything we do is built around the core covenant this is the moat that protects the Papa John's castle. Now more than ever we'll stay focused on quality in the customer experience, qualities who brought us to the dance and who we will keep dancing with.

At this time, I'll turn it over to Mike Cortino, our Senior Vice President of Corporate Ops. Mike.

Thank you, John.

We developed a simple three-tiered operations plan to easily communicate to our 14,000 team members in the field what our goals are for the next 24 month. And they are: Become the number one neighborhood Pizzeria, which is the best place to work, where we all make money together, a series of specific strategies and action steps having developed supporting each goal, which will tell our team members where we're going, how we're going to get there and what's in it for them.

Being the number one neighborhood pizzeria means owning the community. It's about becoming a part of the neighborhood and delivering a great product when we say we will.

Most recently, on the 9/11 anniversary, we voluntarily without fanfare donated and delivered thousands of quality pizzas to the local firefighters, police, and EMS teams. Not for publicity, because our managers embrace their communities.

Everyone wants to be the employer of choice. We just want to be the best place to work in the neighborhood. We want great people who enjoy and understand the responsibility that comes along with being a member of their community. We want folks who take personal pride in serving a great product. And we will do this by developing a life long relationship with our team members, ensuring they have an opportunity to learn and grow as responsible members of our community.

This is a place where we make money together. That's right, together. We understand that in order to continue to build a great company, and win with a great team we must share in our successes as a team. When we work efficiently, control costs, reduce waste, and grow sales, we want our team to share in those wins. Our bonus program, which I'll mention in more detail later, reflects this.

We put in place a 24-month plan to incorporate the strategies we felt were important in obtaining these goals. Again, being the number one neighborhood pizzeria, which is a great place to work, and we all make money together.

So how are we doing?

We're 10 months into the plan and we've seen good progress. We developed a number of local marketing as to to help us work within our communities such as a Neighborhood of the Week program, and our Neighborhood Customer Call Back program. We're consistently reviewing our trade areas to ensure we're providing the best possible service. We implemented or your in-house mapping system that feeds up-to-date household information right into our proprietary POS system, and as a result we have seen improvements in our service to the door. We've develop a number of operational assessments to provide feedback to our team on service and product quality, through our product quality initiative that John mentioned, and we're pleased with the improvements we've seen.

Our goal here once again is to build life long relationships with our team. We want our managers to stay with us. We know when managers stay, performance improves. It's that simple.

We've seen improvements in General Manager turnover in the past year but we still have a way to go before we're satisfied.

This past year we introduced our General and Assistant Manager bonus plan. Our goal was to build a simple plan everyone could understand, and that was achievable in a monthly basis. One of the unique features of the plan was a focus on underperforming restaurants. We call it the Improvement Plan. We pay a General Manager 25 cents of every dollar of improvement in profit over the prior year, we've cut the under performing number of restaurants in half.

We also implemented the Longevity Bonus Plan this year at the start of the new year we'll hand out a bonus check ago a thank you for being part of the team. The amount of the bonus is tied to the General Manager's continuous tenure and financial performance of the market. This is above and beyond the monthly bonus plan.

We're focused on recruiting and selection processes to get the right people on the team. Corporate operations has taken a more active role in the training process by driving the development of Training General Manager Program by training a realistic environment this program better prepares our managers for day-to-day operations. We're developing a continuing education program for our team that goes beyond their initial operations base skills training to provide them with leadership skills. We know great leaders produce great results.

We streamline our financial reporting as it relates to our goals, adding new indicators and removing unnecessary information. As John says, "What gets measured gets done."

We set expectations and challenged our teams to find ways to become more efficient and reduce potential losses. We also implemented an automated commissary ordering system based on trends and forecast from each restaurant, this keeps our inventory on target and ensures the freshest possible products in our restaurants at all times.

Finally, we've worked with our franchisees to develop a program that reduces the volatility of cheese costs to the restaurants. This allows for greater food cost predictability and assists in establishing promotional price points on a timely and confident basis. And importantly, since bonus programs for our restaurant managers are generally tied to unit profitability, this program also reduces the volatility in their compensation.

That's our company operations update. Now I'd like to turn the presentation over to Mary Ann Palmer, our Chief Resource Officer, who will discuss our franchise operations.

Thank you.

We've changed our Franchise Operations division to refer to as Franchise Performance. We have a new V.P. of Franchise Performance and it's not just a title change. What we're trying to do is improve the -- or maximize the performance our franchise system. Our area franchise directors no longer police our franchise system. What we want them to do is partner with our franchise system to improve performance. We've also taken steps that allow our franchise performance team to consult with franchisees on a proactive basis. Rather than being reactive only after negative performance trends we don't wait for the serious business issues we try to be proactive and take steps early on to assist the franchise improving performance. We've developed systems to monitor and measure the financial and operational aspect of our franchise business. This allows us to benchmark their performance and which we see something unusual, partner with the franchisees to address any issues.

Our teams look at the business from both a financial perspective as well as an operational perspective. We take a team approach to supporting franchise performance. We have training and marketing specialists who work with various groups to develop performance improvement plans. The plans address performance in the areas of people, operations, marketing and finance, and are reviewed regularly with the Area Franchise Directors.

Through September, comp sales for domestic franchise system decreased 1.7%. However, comp sales were almost 2% positive during this period, to form our top 80% of our franchised restaurants.

The majority of our franchisees understand and believe in the Papa John's system and are having success executing the system effectively. Those groups are the ones we study and use as role models to work with our underperforming franchisees.

We understand that our corporate stores must lead by example in terms of customer service and product quality and Robert, Mike and the corporate operations team are committed to doing just that. As you heard Mike say a little while ago, there have been improvements in the training and marketing and those operational changes, training and marketing changes, are being shared with our franchisees. We're focusing on product quality and development of strong operational teams. Although we can't dictate compensation levels for franchisees, nothing sells like success. We believe our franchisees will take note once we demonstrate reductions and turnover and performance improvement tied to our GM and Assistant Manager compensation strategies.

As we continue to plan for 3300 domestic units, our last territories are the west and northeast. The markets in these areas represent challenges for us in terms of pricing, penetration, and competitiveness. Certain similar issues exist in these areas such as higher real estate, and labor costs, and a difficulty of building brand awareness. Advertising is very expensive and the ad clutter is very dense in these markets.

Certain unique issues also exist such as in northeast the large number of mom and pop pizzerias. We must continue to help them penetrate the markets and develop brand awareness, just as we successfully face challenges when we enter previous new markets. And of course, just like others in our category, our franchisees are impacted by the overall economic and competitive environment.

I'd like to turn the presentation over to our Chief Operating Officer, Robert Wadell, who will discuss this environment and how we're responding to it. Robert.

Thank you, Mary Ann. At Papa John's our goal is simple, to build the strongest brand loyalty of all pizzerias in the world. To accomplish this goal we must consistently provide our customers the superior quality pizza and world-class customer experience. In fact, research shows 80% of brand loyalty comes from the customer experience. With Papa John's, better ingredients, better pizza is more than a slogan. It's the passion for quality and commitment to our customers that we work hard to deliver on every single day, one pizza at a time.

The QSR pizza category has turned slightly negative during the last 12 to 18 months. While the spring quarter showed some rebound, the latest results were summer 2002 were flat for dollar sales, with customer traffic down 2.7%. Our results at Papa John's were in line with the overall category trend. As we followed up a fairly strong spring quarter, with the somewhat soft summer quarter.

The pizza business continues to be extremely competitive. Our competitors continue to battle for market share by slashing prices. In January of this year, Pizza Hut rolled out the P-Zone, a calzone type pizza for $5.99 supported by a $70 million ad campaign, this promotion invites the consumer to trade down from an $11 and $12 pizza to a $5.99 calzone. In October, Pizza Hut continued its strategy of in-and-out products, by rolling out a new Chicago Style Deep Dish Pizza backed by another $70 million national advertising promotion. The promotion is a three topping medium for $11.99.

For the NFL season, Pizza Hut is promoting its 16-inch one topping, with a free two liter for $8.99 on game days. Most recently in certain markets, Pizza Hut has offered the Chicago Style product on a buy one, get one free bases, with a one topping medium for $11.99. We're not sure we understand the logic behind this promotion, but we do know that it's an incredibly aggressive deal.

Domino's has done similar things with their Two for Tuesdays and three medium, one topping pies for $13.99. In the spring and summer of this year, they offered free Cinnasticks or Cheesy Bread with the purchase of a large pie for $9.99. Recently, Domino's introduced Buffalo Chicken Kickers, a 10 of piece chicken strip side dish for $5.99. They're currently offering a large one topping pizza at $9.99 with free Cinnasticks. They also started promoting their own buy one, get one free offer on Sundays, Mondays and Tuesdays.

It would be easy to chase these guys down the price rat hole. But we think driving transactions at all costs is bad business. Little Caesars, Taco Bell and K-Mart have all demonstrated that it's unhealthy. Unless you build your company with a cost structure like Wal-Mart or Southwest Airlines, which we haven't, in fact, we may more for our ingredients than the other guys, playing the price game could be a recipe for disaster. While it may build short-term sales, it runs contrary to our long-term way of thinking and building our brand.

We do sometimes run limited promotions to generate trial. As an example, early this year, we tried free cheesesticks with a $9.99 pizza to evaluate and we were real busy making cheesesticks. But our focus for the long run will continue to be better ingredients. While pizza hut and Domino's, our largest competitors, there are others we must compete with everyday including local and regional chains.

In addition, [INAUDIBLE] continues to expand its presence with support from McDonald's capital, but they appear to continue to focus on a dine-in occasion. Most recently, the company announced international expansion plans. The take and bake sector, frozen pizza and grocery store deli sections are all increasing the competitiveness of this category.

In March, we introduced two new specialty pizzas, Spinach Alfredo and Six-Cheese at a $10.99 price point. In August, we introduced our new chicken strips, side product. Six chicken breast strips for $4.99 and based on customer feedback we recently increased the portion size to seven strips, still at the $4.99 price point but most often to be sold as part of a bundled deal such as a large one topping pizza with chicken strips for $13.99. We've been successful at launching these limited new products this year.

In March, we saw results with a $1.9% comps, 3.2% at company-owned restaurants picture a 1 1/2% at franchise units. In September, nearly one in every four orders included chicken strips. These products a win for our system because they are easy to execute and they don't complicate the simplicity of our restaurants. These criteria are a must for any addition to the Papa John's system.

While we're still not getting the pizza right as often as we would like, consumers continue to give us good marks in the areas of quality and customer satisfaction. For the sixth consecutive year, Papa John's has again received the highest quality ratings among all national pizza chains and the most recent restaurants and institutions choice and chain survey. In January, consumer reports rated both our traditional and thin crust pepperoni pizzas the best among national pizza chains. And as reported in the "Wall Street Journal" in February, Papa John's was again ranked number one in customer satisfaction among all national fast-food restaurants in the American customer satisfaction index. This survey was conducted among 16,000 consumers throughout the country during the fourth quarter of 2001. This marks the third consecutive year that Papa John's has ranked number one in customer satisfaction.

Today, the pizza category is roughly a $24 billion category. At this graph shows, Papa John's is the only national pizza chain to increase its share of a category over the last eight years, growing from one half of 1% in 1992 to 7% in 2001. During the same period in the midst of a growing and healthy category in the 1990s, Pizza Hut lost 3 1/2 points of market share. Domino's lost a point and Little Caesars lost almost six points of market share.

In our most mature markets, in the midwest and southeast, Louisville, Lexington, Indianapolis, Nashville, Atlanta, and Orlando, we believe Papa John's has become the market share leader. Our goal is to expand this leadership position throughout the entire United States.

In order to regain and continue to build on our market share momentum, we made a couple strategic moves. After an extensive proposal process, we recently selected Austin Kelly as our new advertising agency. We believe this change will provide needed spark to our marketing materials and promotional campaign. For example, our upcoming national promotion beginning November 4th is a tie-in with the release of the movie "Ice Age" on video and DVD. This marketing includes creative, which is unique from anything we have used in the past. And while our advertising focus remains at the neighborhood level, we understand the importance of a national advertising presence, especially for our new markets, where we're able to leverage that exposure in gain brand awareness.

Beginning in 2003 our system has voted to raise the production fund contribution rate. And some cases, this may merely represent a reallocation of the marketing dollars. However, in many instances, we believe this will result in incremental dollars, especially for our franchise markets. While this will represent a sizable increase in our national marketing funds, keep in mind our major competitors contribute a higher percentage of sales to their national funds.

Now I'd like to discuss the support structure that ensures the better ingredients that are the foundation for our better pizza.

Our 11 domestic quality control centers have been strategically placed to provide a high caliber, cost-effective service across the country. We also own and operate a quality control center in Gaily Park, England, supporting our expansion in the United Kingdom and certain other international markets. We distribute cheese substantiationally all other food product needed by our restaurants in these quality control centers. We also produce and distribute our fresh dough from the facilities. These 11 facilities give us the infrastructure to support up to 3300 planned restaurants in the United States. So we have plenty of opportunity to leverage fixed costs as we continue to develop new restaurants domestically. The only significant cost we expect to incur in our QCC system are the potential replacement of one or two of the older facilities and the the possible development of a small number of satellite facilities to help mitigate transportation costs and less densely developed areas of the country. Also may incur capital costs if we bring production in house for certain items we're currently purchasing from vendors. However, we would only take on this additional production if we can ensure a good return on our capital investment and lower product costs to the Papa John's system.

Papa John's quality control centers accomplish one objective, to ensure every Papa John's restaurant gets the better ingredients it needs to produce a better pizza for our customers. QCCs allows us to maintain our competitive advantage by controlling procurement and distribution costs. We have improved the quality and consistency of our manufactured fresh dough products through some of the most advanced production techniques in the bakery industry. We're able to maintain these standards in our QCCs and our restaurants with the efforts of our quality assurance and R&D teams, who monitor the consistency and quality of our ingredients.

New ingredient or potential new products also undergo rigorous research and testing to ensure our promise of better ingredients. Additionally, new product execution is tested to ensure it doesn't complicate store level operations. Keeping the focus on the main thing, a better pizza.

Now I'd like to turning the preparation over to Chuck Schnatter, our Chief Development Officer, to provide an update on the international operations. Chuck.

Thank you, Robert.

We began our international effort in Mexico and Puerto Rico in 1998. Since then we've added restaurants in Venezuela, Costa Rica, Guatemala, Honduras, Saudi Arabia and Canada.

In September of 2001, we hired Bill Van Epps to head international division. Bill has many years of experience, including working with Frand Carney at Pizza Hut, running the international business for AFC Enterprises, and most recently at Yorkshire Global Restaurants. Bill spent his first year with us building his team and working with our franchisees. We have directors of training and marketing in place as well as several new business managers. The managers are now based in our countries of responsibility as opposed to being based in Louisville.

In late 1999, we purchased the 205 unit Perfect Pizza chain. To date we've opened 18 new Papa John's in the U.K and have converted 47 Perfect Pizzas to Papa John's. This purchase gave us immediate access to a large number of good sites which would have been nearly impossible to secure on a start-up basis. This business continues to generate growth and commissary sales and profits as we go through the conversion process.

Year-to-date through the end of September, Papa John's U.K. franchise restaurants had 8.6% comparable sales growth, versus 2.2% comparable sales growth for franchised Perfect Pizza restaurants for the same period. Papa John's franchise restaurants converted more than 12 months ago are comping a full five percentage points better than those converted within the last 12 months. However, we have seen a softening of comp sales in recent months and are working on marketing and operating plans to address this. We expect to continue to convert 20 or more Perfect Pizzas per year over the next few years until we're operating as a single brand in the U.K., which we expect will result in additional benefits.

As of September 29, 2002, our international franchise Papa John's restaurants consisted of 85 restaurants in Latin America, 25 units in North America, and 14 units in the Middle East. Additionally, we had 7 corporate-owned Papa John's and 58 franchise Papa John's units, and 157 Perfect Pizza units in the U.K. This makes a grand total of 346 restaurants under management by the international group.

We're now focusing a lot of our energy on signing new development agreements. We recently signed agreements for Asia and Europe and will continue to pursue opportunities in these areas as well as the Americas. Our current international development pipeline consists of a total of 522 units, in 14 markets, to be developed over a nine-year time frame.

As we continue to expand internationally we see the potential for 1500 restaurants over the next 10 years or so. Our two biggest competitors have a tremendous presence internationally with over 6,600 stores combined. So we believe our potential is somewhat conservative. They have paved the way for us to launch Papa John's on a global scale. We are still relatively new in the international arena. We've made our share of mistakes and hopefully learned from them. The international growth is very challenging and we're excited about the challenge.

I'd like to turn the presentation over to Julie Larner, our Chief Administrative Officer, for an update on our technology initiatives and an overview of our continued efforts to manage GNA costs in relates to our business growth. Julie.

Thank you, Chuck.

We have several important technology initiatives currently underway. The more significant of these are an update to our proprietary point of sale systems, our profit system 6.0. The development of a marketing data warehouse, the implementation of an enhanced operations reporting tool, and the continued management and growth of our online ordering business. We believe we are somewhat unique among large franchise systems in that we have a common point of sale technology and all of our restaurants.

The profit system has served us well and we're excited about the new functionality that version 6 will support. It's currently field tested and should be deployed within our corporate restaurants by the end of Q1 2003. Followed by our franchise restaurants throughout the year. Among the benefits of version 6 are the migration to a more modern software development platform, which allows us to preserve the value of our investment for several years to come. The ability to support international growth, be it multi-currency, multi-character capabilities, and the ability to support future functionality such as touch-screen order entry and credit card integration. And the benefits of the new version can be realized with minimal user disruption or training.

We're also developing a comprehensive marketing data warehouse. We've always had detailed customer and transactional information within our individual restaurant profit system files. However, it was very difficult to compile and analyze this information on a centralized basis. The database under development will allows to aggregate and dissect the large quantities of customer data in a more efficient and effective manner. We hope to use the information gained to better understand our customers' buying patterns to produce marketing and promotional programs more in line with their wants.

For example, we can integrate the increased customer data into our direct mail program and provide targeted marketing materials that should be more effective and efficient. Analysis of this database information will also allows to better evaluate the effective of a particular off or product during a promotional period.

We're also work to go enhance the reporting tools available to our corporate and franchised restaurant management team. These enhanced tools will provide daily information on sales and operating data in a dynamic format so that management can view and analyze the data as they deem necessary. This should help management identify specific issues within certain restaurants in their district and also help identify best practices for bench marking purposes. The enhancements also assist in identifying out of bounds conditions, which may indicate a need for training or stronger controls within a given restaurant.

We continue to make progress with our online ordering initiatives. Online transactions are increasing steadily, although they still represent a relatively small percentage of all transactions. However, this transaction level has been achieved with essentially no market support, other than our low cost low profile approach where we include the website address on box toppers and other marketing materials. We want to ensure that technology is sound and we are now comfortable with the operational integrity of the system. We are working to improve the flexibility of the online system to support new products, regional local toppings, and bring the pricing methodology in line with regular profit system pricing.

We have also focused on managing the cost of the online operations, and we expect to achieve a break-even result for 2003, while at the same time lower the transaction fee for our restaurants. And we're working on certain back office projects, such as online credit card acceptance to provide even more convenience to our online customers. We believe this technology will ultimately provide us with a customer service advantage, although we're going to proceed with this development and promotion in a deliberate, disciplined manner.

As our unit growth and comparable sales growth has slowed, we have been challenged to manage our corporate support activities in order to keep our GNA costs in line with our revenue growth. This challenge has been made even more difficult by the recent cost environment, particularly in the healthcare and insurance areas.

We have recently completed a review of the support functions throughout our organization, and have identified opportunities to reorganize certain activities and reduce costs related to those activities. The reductions were identified in many areas of our organization. For example, our new unit development activity has slowed, so we restructured our real estate and development group. We have begun to outsource certain functions we had previously managed internally, such as the equipment ordering process for new unit development.

And other support functions, such as information systems, have implemented changes to streamline functions. In total, we have implemented changes to result in $2.6 million of GNA and operating cost savings, which will help offset the impact of increasing costs mentioned previously, salary increases for restaurant management team members, and the incremental costs of the restaurant quality initiatives in 2003.

Now I'd like to turn the presentation back over to David for our outlook for fourth quarter 2003. David.

Thank you, Julie.

Preliminary October comparable sales decreased 3.8%, a 2.9% decrease at corporate-owned restaurants and a 4.1% at franchise units. And year-to-date comparable sales through October decreased 1.4%, a 2/10 of 1% decrease at corporate-owned units and a 1.8% decrease at franchised units. Even after considering these lower than expected comp sales to begin the quarter, we are re-affirming our full-year comparable sales guidance of minus 2% to flat, and our previous fourth quarter earnings guidance of 58 to 61 cents. Our full-year guidance is $2.30 to $2.33. Revised from the previous $2.28 to 2.33, after considering actual earnings results of 53 cents for the third quarter.

We believe that favorable commodity costs and the impact of our stock repurchases to date will substantially offset the impact of the competitive sales environment, slower unit growth, and the incremental costs of various restaurant initiatives on fourth quarter earnings. We've announced 2003 earnings guidance in the range of $2.40 to $2.48 or approximately 3 to 8% higher than the anticipated 2002 results. Key assumption underlined this earnings range, include essentially no net unit growth, as the projected 75 to 100 new unit openings are offset by a comparable number of anticipated unit closing. Flat to positive 2 1/2% domestic systemwide comparable sales growth is projected as the competitive environment is not expected to ease in 2003. As Robert noted previously, we have increased the 2003 contribution rate for the national production fund, and we believe this will produce some incremental marketing dollars, which should help drive sales.

Corporate restaurant operating margins are expected to be in the 19 1/2 to 20% range, slightly lower than the projected 2002 results, due to the costs of the General Manager and Assistant Manager compensation increases, which are not expected to produce immediate financial improvement at store level and potential from commodity cost increases in 2003. We already have seen flour costs increase dramatically in the last few weeks and other commodities at low levels throughout 2002.

Cheese is the one exception, where based upon futures prices it appears as if 2003 average prices could be lower than the 2002 costs. Commissary equipment and other margin is expected to be comparable to 2002 results. GNA expenses are also expected to be comp to 2002 projections, but only after aggressively challenging various support functions as Julie previously mentioned.

Capital expenditures for 2003 are expected to be in the $30 to $35 million range, mostly related to relocation and remodel costs for existing restaurants and modernization of certain older QCC facilities. We expect 2003 net interest expense to be in the same $6 to $7 million range, as the 2002 projection. This assumes subject to board authorization the repurchase of approximately $1 million additional shares of stock throughout 2003, with our cash flow, as opposed to using that cash flow to reduce the outstanding balance under our line of credit. The impact of these projected share repurchases on weighted average shares outstanding has also been considered in the EPS guidance.

That completes our high level overview of guidance for 2003. Now a couple of final notes.

First, you may have noticed that our line of credit balance is still reflected as a current obligation in our third quarter balance sheet. We're in the process of renewing our line of credit with our existing bank group. The new line will extend through the end of 2005, and will have a $175 million capacity with the ability for us to request an increase up to $225 million, if needed. We do not anticipate any issues with finalizing this renewal prior to the end year and would reflect the outstanding balance as a long-term rather than current liability at that time.

And finally, I'd like to comment on the reliability of our financial information in light of events in the corporate world over the last year or so. We are a simple business we sell pizza and the cash register rings. We do not engage in significant complex transactions as a general rule. We have adopted what we believe are conservative accounting policies and have procedures in place to ensure our disclosures are accurate and complete. We do believe that the entity established by our advisory council to moderate the cost of cheese throughout our system, BIBP Commodities Inc., meets the definition of a special purpose entity.

Under existing rules, BIBP and is not consolidated with Papa John's. Under proposed rules, we believe BIBP and in its existing form would have to be consolidated with Papa John's results beginning in 2003. We do not want to accept that result, so we're working on alternative ways to address this issue, while still achieving the operational benefits that we currently receive from BIBP.

That concludes our financial update and also concludes our management presentation. At this time, we'll be glad to answer any questions. Sandra.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Tim Rice of Rice Faulkner.

Good morning. I was wondering if you could comment on the provision fund collectable notes receivable. I notice in your release you had a slight increase there, and referenced a franchise loan restructuring. Can you elaborate on that any further?

Yes, this is Dave Flanery. Basically, that reserve we analyze our portfolio, and record whatever reserve we deem necessary, that restructured loan is now heading into its period coming out of the restructuring. And we don't at this point see any further issues with our portfolio.

Could you also comment on the -- I know you don't like to address individual markets, but just as a general comment, I know the opening, the franchisee openings are exceeding the franchisees closing but could you comment on -- are the -- is the number of franchisee expanding when you have these closing, does that essentially take your franchisee out of business or is it a franchisee closing a store or two in a given market or can you give any more color on that?

This is Chuck Schnatter. On that point, I think the majority of the closings come from franchisees come closing one or two stores and we have had instances where the franchisee did result in the closing did result in the franchisee leaving the system. The majority more on the existing franchisees closing on or two stores.

And one last quick one, a reference that there had been a slight increase in the effective royalty. Could you explain what that meant?

There's a couple of quick reasons for that. Basically, some of it just has to do with the timing of how our franchisees report sales to us. They don't always use the exact same accounting period we do and that is part of the reason. The other reason is that occasionally, infrequently we do have some abatement, royalty abatement type procedures in place, and that can fluctuate. But that's a very minimal amount.

Thank you very much.

Your next question comes from Tony Cambo of Dorsett Management.

Good morning, gentlemen. Thank you very much for a very comprehensive review. I have a couple of -- maybe a question and statement to get a response. My question was, I guess in the New York and Buffalo, a franchisee basically may have gone out of business and my question is, was this new franchisee program in place to this guy or is this sort of a something that's in reaction to this guy going out of business? Because I believe he closed quite a few stores.

Again, this is Chuck Schnatter, this is a case where the franchisee had several stores in Albany, Syracuse and Bingham area. To date, he's only closed the Albany market. We have been working with this group for some time their strategy is to exit the system that I think there are some -- issues with operational and marketing as well.

If I can add to that, this is Mary Ann Palmer. We have -- your question really points to what the new franchise support, we're hoping to as we said earlier target certain franchisees who have issues ahead of time so we can fix those. And we do have some franchisees who probably need to leave the system so there may be a little positive turnover over the upcoming year.

Okay. And then I guess, this is more of a kind of an observation, you guys have spent $300 million buying back the stock, which I guess has prevented the stock from going down a tad. But why don't you spend $100 million in the business?

And then create a bunch of new products and promo, et cetera. It seems to me that the stock repurchase program is kind of -- I mean, I as an investor I'm looking for growth and I don't see it here. And frankly, I'm quite worried because while it's well and good to spend the money buying back the stock and I'm all for shareholder enhancement, where's the growth?

And if it isn't in the pizza business, let's try another concept or -- because you're in the restaurant business.

I'll start that answer. We made a strategic decision not to try to force growth in this current environment. We believe three to four years ago we made some mistakes by trying to force growth. And we aren't going to repeat those mistakes. So at this point, as we view our cash strong cash flow and we look for opportunities where we think we can provide the most long-term shareholder value and at this point we believe buying our stock back is the best way to do that.

Well, good luck.

Thank you.

Your next question comes from Dennis Joe of Fidaty and Company.

Good morning. Just a follow-up on those share repurchase questions. What are your thoughts on the share repurchases for next year since you're nearly reaching the amount authorized?

Will you be using it to pursue additional share repurchases or are you going to use that to pay down some of your debt?

What we've kind of said, Dennis, is clearly that is subject to our board making some decisions, which we don't have the answer to that yet. So I think it's possible that we would continue the repurchase program into next year. As you can see, our guidance assumes that we would continue the repurchase program into next year. But we may not necessarily do that, depending upon our board authorization.

Okay. Now, did I hear correctly that 80% of your top performing stores had positive comps in the third quarter?

What time frame were you referencing?

That is year-to-date. That's a year-to-date number.

Okay. So does that imply that the bottom 20% have been down significantly?

Yes, that would imply that.

Okay. Regarding, though, that 20%, that 20% -- are those stores, are they improving, are you looking for an improvement there, or are you moving more towards closing those stores?

This is Mary Ann Palmer. I don't anticipate us closing the stores. We're looking to improve the performance of those franchise groups.

Okay. And just one last question, how is the testing of the deep-dish pizza going?

This is Robert. We have a test we've had out in place now since about April. And we continue to work to improve the product. We're still evaluating the results of that test. And based on those results, we'll determine the next steps with that. We've been [INAUDIBLE] fairly heavily by Pizza Hut in the campaign, and markets we've gone into, so we think we have some of our competitors' substantial.

When do you think a decision might be forthcoming?

Regarding whether you're going to roll it out nationwide or not.

We're not prepared to discuss that -- address that at this time.

Okay. Okay, thank you.

Thank you.

At this time, there are no further questions. Mr. Flanery, are there any closing remarks?

No, Sandra. Thank you very much.

This concludes today's Papa John's International conference call you may now disconnect.