Papa John's International Inc (PZZA) 2002 Q4 法說會逐字稿

Good morning. My name is Tina and I will be your conference facilitator today. At this time I would like to welcome everyone to the Papa John's International fourth quarter earnings 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 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. Flanery you may begin your conference.

Thank you Tina. Good morning, I am David Flanery, Senior Vice President of Finance, and with me on the call today your John Schnatter, Founder and CEO, Robert Wadell, Papa John's Chief Operating Officer and President of PJ 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 been taped and replay will be available for a limited time on our website.

For the fourth quarter of 2002 we had revenues of $236.1m, a 3.2% decrease from the fourth quarter of 2001. Net income was $11.1m, a 7.4% decrease from pro forma net income of $12m for the fourth quarter of 2001. Diluted earnings per share were $0.59 a 11.3% increase over pro forma diluted earnings per share of $0.53 for the fourth quarter of 2001. The pro forma 2001 results reflect the elimination of goodwill amortization as a result of our adoption of FAS 142 affective as of the beginning of 2002. For full year 2002 revenues were $946.2m representing a 3.0% decrease from 2001. Net income was $46.8m, a 4.5% decrease from pro forma net income a $49.0m for 2001. Diluted earnings per share were $2.31, a 7.4% increase over pro forma diluted EPS up $2.15 in 2001. The two primarily reasons for the year-over-year decrease in fourth quarter and full year revenues or a decrease in restaurant sale due to fewer equivalent company owned restaurants as a result of both units closed and sold to franchisees, and reduced commissary sales due primarily to lower pricing in the fourth quarter and to a combination of lower volumes and lower pricing for the full year.

During the fourth quarter 25 restaurants were opened, 28 were closed, and 13 Perfect Pizza units were converted to Papa John. For the full year 115 restaurants were opened, 101 closed and 45 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 year there were 2792 Papa John's restaurants operating in 49 states in nine international markets, and an additional 144 Perfect Pizza restaurants in the United Kingdom. System wide domestic comparable sales decreased 2.0% for the fourth quarter consisting of a 0.4% increase at company-owned restaurants and a 2.8% decrease at franchise units. Year-to-date, domestic comparable sales decreased 1.3% consisting of a 0.2% increase at company-owned units, and a 1.8% decrease at franchised units.

Achieving consistent positive comparable sales trends, continues to be challenging as January 2003 comparable sales increased 1.8% consisting of a 0.9% increase at company-owned restaurants and a 2.1% increase at franchise units followed by February comparable sales decreased 10.6% consisting of 9.2% decrease at company-owned restaurants and 11.1% decrease at franchise units. Factors negatively impacting the February result include the timing of Super Bowl and the timing of our Anniversary Promotion. 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 now. Restaurant operating margin at our domestic corporate restaurants was 19.6% in the fourth quarter, compared to 19.1% for the same period in 2001. Substantially lower commodity cost mainly cheese was partially offset by increased labor and advertising cost resulting in the net margin improvement. The labor increase resulted from the quarter three across-the-board base pay increase and higher bonus payoffs in quarter four for General Managers and Assistant Managers. The advertising increase was primarily the result of unusually low advertising levels in the fourth quarter of 2001.

The full year 2002, restaurant operating margin was 20.9% versus 18.6% in the prior year, driven primarily by lower commodity cost and a higher average sales price point, partially offset by the impact of the quarter three across-the-board by pay increase and a higher bonus payoffs throughout the year for General Managers and Assistant Managers. Commissary, equipment, and other margin was 9.9% in the fourth quarter versus 8.3% for the same period in 2001, as a reduction in cost of sales due to lower cheese cost and a shift from lower margin equipment sales to sales of higher insurance services with partially offset by an increase in other operating expenses due to the expanded insurance related services provided to franchisee and the loss of fixed cost leverage due to the decrease in commissary sales. Year-to-date commissary, equipment and other margin was 9.9% versus 10.1% in the prior year, as cheese cost were relatively consistent between years on a full year basis and with a minimal full year net margin impact of the other factors previously noted for fourth quarter. International revenues were relatively flat for both the fourth quarter and full year as compared to the prior year period, as lower development fees due to reduced unit openings were substantially offset by higher royalties due to an increase in the number of average units and the favorable impact of exchange rate differences.

International operating margin with 18.1% in the fourth quarter compared to 21.2% for the same period in the prior year, and 16.2% for the full year versus 16.4% last year. The decrease for both periods is primarily the result of increased food and operating cost associated with the UK commissary operation. General and administrative expenses were $17.1 million or 7.2% of revenues in the fourth quarter of 2002, as compared to $16.5 million or 6.8% of revenues in the same period in 2001. For the full year, G&A expenses were 72.4m or 7.7% of revenues as compared to 69.5m or 7.1% of revenue in the same period of 2001. The primary components of the increase is for both period or additional corporate and restaurant management bonuses and cost related to several quality initiatives, which John will discuss in more detail in few minutes.

A provision for un-collectible franchise notes receivable with $610,000 in the fourth quarter of 2002 and 2.8m for the full year based upon an evaluation of our franchise loan portfolio. At year-end $14.1m of notes receivable were outstanding, net of $4.4m reserved for un-collectible amount. Pre-opening and other general expenses were 2.3m in the fourth quarter and 7.1m year-to-date. The primary components of these amounts were restaurant pre-opening and relocation cost of 70,000 for the fourth quarter and 746,000 for the full year. Disposition and evaluation losses for restaurants and other assets of $430,000 for fourth quarter and 3.2m for the full year; $900,000 recognize during the second and third quarters related to refurbishment of our heated delivery bag systems and $1.7m of losses related to advances made to a relatively new vendor who was unable to obtain outside financing by the required fourth quarter-to-date. At this time we do not expect future losses related to the heated delivery bag system or the terminated vendor relationship.

Depreciation and amortization was relatively consisting year-over-year for both fourth quarter and full year after adjusting the 2001 amount for the pro forma impact of the adoption of SFAS No. 142 as previously noted. Net interest expense was $200,000 higher in the fourth quarter and $300,000 lower for the full year as compared to the same periods in the prior year. As lower rates and reduced franchise notes receivable for the year were off set by higher average debt levels in the fourth quarter. Cheese cost for the Papa John's Systems were substantially lower in the fourth quarter than the unusually high-cost incurred during the fourth quarter of 2001 and were relatively consistent on a full year basis. A table comparing year-over-year equivalent [Inaudible] prices by quarter is included in the earnings release. Based on upon the current cheese market outlook it appears that 2003 actual block market prices will be below historical averages. Additionally the cheese purchasing program initiated by the Papa John's franchise advisory council has generated a cash surplus of approximately $17m as of year-end, which will reduce system wise cheese cost relative to future actual block market prices, with company owned units receiving approximately 25% of this future benefit.

The company repurchases nearly 1m shares of common stock during the fourth quarter and 4.5m shares for the full year. Subsequent to year-end, we have repurchased an additional 150,000 shares. Cumulatively, we have repurchased approximately $350m of the $375m of existing 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. We are reaffirming previously announced 2003 earnings per share guidance of $2.40 to $2.48 and updated assumptions underlying this guidance are presented as an attachment to the earnings release. In summary, minimal net unit growth and the very competitive sales environment are expected to produce relatively flat revenue for 2003 as compared to 2002. When these revenue projections are coupled with higher expected insurance costs and incremental costs of our various restaurant initiatives operating income is expected to be 3% to 6% lower than 2002 results. We expect our continued strong free cash flow to enable us to complete the authorized level of stock repurchases during 2003 while maintaining conservative debt levels, thus producing 4% to 7% EPS growth even considering the expected decline in operating income. That concludes the financial update and now I will now turn over the call to John Schnatter founder and CEO. John.

Thanks David, by any standard 2002 was a tough year. According to press data 2002 marked the fourth consecutive year of slowing sales growth for the restaurant industry. Consumer confidence continued to decline in 2002 contributing to weaker traffic. In this very difficult environment, I am proud that our corporate restaurant seems (ph) and they were able to achieve slightly positive comp sales during 2002, a testament to their commitment to product quality and customer experience. Our franchise family also seems to be getting the metrics. Although, February comps were lower than expected, I don't view them as indicative of the many positive things I have seen in the restaurant.

Over the last several weeks, Mike, Rob, and I have toured over 30 restaurants and I am proud to say that we are making great stride in the customer experience in making great people. Well, another positive note, as recorded in the Wall Street Journal last week for the fourth consecutive year, Papa Johns is rated number one in customer satisfaction among all of national fast food restaurants. Consumers rated Papa Johns three points higher than the average store of other national Pizza chain in five points higher than the overall restaurant investors related average. Our customer sales were satisfying them compared to the competition, we know we can do better. For example in spite of the current Papa colony in an intense competitive environment, we've continued invest in the three most critical areas of our business. Our people, our product and our service. This includes various restaurant initiatives we announced last year to help us better evaluate and monitor the quality and consistency of the customer experience; including increased pay and bonus opportunities for our restaurant General Manager and Assistant GM, resulted in 50% of our GM's now being at the 75 percentile in total cash compensation in the peer group, [Inaudible] are at above 90 percentile. While this is very painful for short-term EPS to true gut test if you will, it is truly the right thing to do for the health of the franchise.

Most recently, we realigned our field management structure for our company-owned restaurant. We have established a new Director of Operations position replacing the previous Area Supervisor and District Manager position with responsibility for an average of seven restaurants, the DO is better able to supervise day-to-day operations ensure our restaurants provide a world class customer experience and build a strong presence in the communities, which we operate. The entire $4.5m cost savings resulting in the field management realignment is being invested back into company's restaurants in the form of increased labor or better staffing our restaurants and greater bonus potentials for our General Managers and Assistant GM.

I believe the numerous investment initiatives we have taken in our people, our product, and our service over the last 20 months are starting to pay off in improved operational results both in product and service. Assuming the category stabilizes, we believe it is just a matter of time before these initiatives translate to higher comp sales. Eventually, the economy will strengthen and the pizza category will gain help. In the meantime, it is our job to stay the course and remain focused on living up to our brand promise. Quality is the mole that protects the Papa John's castle. We will continue to fortify the so when the company turns; we are well positioned for much success. We are happy to answer any questions.

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

Good morning guys. Wanted to ask a few quick questions about your new stores. How much investment per store are you making and what is the return on invested capital and pay back period that you guys are looking at?

Our average unit investment cost continues to be right around the $250,000 level and as far as the average pay back on that, that can really vary depending on what market it is in and so on. We continued to have very strong overall unit economics within our corporate system.

And what is the -- in order to get up to kind of company average? How long does it take?

This is Robert Wadell, David. Typically again to David's point, it somewhat depends on how much through the market is and establish the Papa John's brand in to that market but we [Inaudible] like to see things within the first three to six months and certainly by [Inaudible] the full year, the new store opening to be up to our company expectation.

Okay. Thank you.

Your next question comes from Dennis Joe.

Good morning gentleman. [Inaudible] you give a little color on that February comp up. How much of it was heard from the timing of the promotion and then also how much was heard from the -- whether there is any impact from the [Inaudible].

Dennis, I will start and then Mike and Robert and other folks can jump in. You know we -- It is easy to calculate like a Superball how much the impact of a single event like that and we estimated that was about 1%. It is a lot more difficult when you are looking at promotions because any individual promotion can vary anyway. We do know obviously if we had national PV last year and didn't have it this year. It is an impact but we don't try to exactly quantify that impact. I think it is safe to say that the impact wasn't 9%, the difference between the ten and the one but we know it did have some impact.

This is John Schnatter. Also in February of '02, we had almost -- we had over 15,500 PSAs, so we landed up against the extremely strong February of '02.

Okay and then I know, you are advertising expenses came up a bit in the fourth quarter, I know, really from the timing of the promotions. But, what's the advertising strategy for '03, are you looking at maybe four or five nation-wide promotions? And then how much is it going to cost as a percentage of revenue?

Again, I will start out the, Dennis, you are right, the - last year in fourth quarter of 2001, we just had fairly low levels of advertising, in fourth quarter this year we went back to more normal level. Our advertising for '03 will be back in kind of that normal 8.5% to maybe 9% range. We don't necessarily talk specifics about how many national flights we are going to have. We did mention, I think back in October, that we've increased the amount of contribution into our national fund, although, for competitive reasons, we don't want to give many specifics on that.

Okay, just one last question. I noticed that the number of franchise stores that you actually opened in '02, is this just a little bit lower than what you were previously guiding towards, was that somehow related to the difficult franchisee environment, franchisee financing environment?

A year and a half ago, I would have said yes that it's the financing environment. I think it's more just the general economy and sales trends and so on, more so than ability to fund at this point, we are seeing a little bit of easing in the financing, it's still somewhat high. But, I think it's more just general, you know, people just being careful with the economic conditions and so on.

Okay, thank you.

Your next question comes from Barry Stouffer.

Good morning, two questions. Could you talk in more specific terms about management turnover and employee turnover trends and then also the change average price point in the fourth quarter?

Well, this is Robert. Barry, I can say that as far as the turnover and that was one of the things that, you know, we are really started focusing on little over a year ago and as John mentioned in his statements the increases to our general managers pay. But we saw significant improvements throughout all of our team retention in 2002, improvements - great improvements specifically, in our system manager, retention improved around 21%, manager turnover improved around 6% and overall team member retention improved significantly. So, we feel like we are addressing the wide step with the increased pay and the improved bonus program that we have.

Can you give the specific turnover numbers for the fourth quarter?

For the fourth quarter specifically?

Yeah, like manager turnover was 50% or it [Inaudible]?

For the year 2002, Barry, it dropped below the 50% range for the first time and about three years. So we're encouraged with the trends that we're seeing in that retention.

And how about for the crew?

For the team as a whole, we dropped in 2002 from over 200% down to around a 170%.

Okay.

Okay.

Your next question comes from Mike Smith.

Good morning. I wonder if you go over a couple of things. CAPEX for 2003 would you expect there as break-up between maintenance and new units. And if you could go into another [Inaudible] the press release you said that you had 375m authorized, you have about 30m less to go there, would you expect the board to increase the authorization, and or will you slow down the repurchase from the 4.5m pays last year?

Mike, on the CAPEX, we're giving guidance that it would be in the 25m to 30m range. We will be opening a relatively small number of corporate stores. So, most of that I think is safe to say is maintenance capital with the majority of it within the restaurant business segment, and then some maintenance capital within our [compensory] system too. But, most of that would be considered maintenance capital. As far as the share repurchase, at this point we cant anticipate exactly what our board may or may not approve, but at this point they have approved increases in net authorization as they believe the situation merits. So, I say that the possibility based on cash flow, debt levels and so on, so I would say that it is a possibility, yes.

Are you, kind of a sticking to the, you are keeping your borrowings at what it was a 1.4 to 1.5 times EBITDA?

What we kind of said is that, we would, will be comfortable in the $140m to $150m range, which is probably a little less, may be one two to one three, one four times EBITDA. So, yes I think that's what we've said.

Thanks.

Your next question comes from Paul Stalls.

Hi guys. On the third quarter call, you all talked a little bit about comparable store sales, and sort of a 80-20 rule with 20% of the stores being responsible for the majority of the down trend. Is that something that you guys on the fourth quarter in January and February as well?

While Paul, while we sorry don't have specific info to talk about on that. I think that's a safe, a safe bet that the stores that are performing well are performing well, and then there is a block of stores that are performing less than our expectation. I think that is thats expected to be continuing.

There are no questions at this time.

Thank you. Thanks Tina.

Sir, you have a question from Barry Stouffer.

Barry.

Yeah. The question I had about average price point was not answered, I got cut off.

Okay. Basically, we saw very slight increase in average sales price point in fourth quarter and it's really kind to difficult to even analyze that because of the mix, the promotion, the bundling, and the fact that we did introduce the chicken strip in August. So, the mix of products impact that, but basically it was pretty slight in the fourth quarter year-over-year.

Then, less than 0.5%?

Excuse me?

Has it been less than 0.5%?

Yeah, yes. I think it was. It was very slight.

Okay. Thank you.

You have a question from David Kelley.

Hi, I am actually not as familiar with the story. What was the ballpark figure for the average price and then also what are the results looked like in terms of duration and what you're paying for a square footage?

David, we probably have not given real specific information on price point. We look at ticket averages and the pricing of an individual pizza, we try to look at how it's bundled and what's the promotion is. Ticket averages, I think we have said publicly, -- are in the $14 to $15 range. But that's not the price point of a pizza, that is, -- the ticket average itself with a bundled promotion or whatever. On leaseholds, generally we have, I think,-- 5-year leases with renewable 5-year terms, square footage pricing can range depending on the part of the country we are in and we will generally be in about 1500 square foot, -- probably in-line stores. It's probably in the, about $15, $12 to $15 a foot. I am looking at the operations. David, I'll verify that, but I think it's again, that can vary a lot, but $2000 a month would be a, probably a reasonable least cost for typical store.

Great. Thank you.

Your next question comes from Rod Rossick.

Yeah, hi guys. I just had a couple of follow-up questions, a couple of questions earlier, the February comp number, someone has asked about color for that, I guess my question is the guidance, assuming that your comp is zero to plus 2.5%, if averaged still January and February, it looks like you are, a kind of down 4.5% so far, it doesn't look like that the [Inaudible] is still getting easier, I am wondering how you're expecting to make it back or make it up to that zero to 2.5% for the year?

I'll start out. In think, it's just very early in the year and clearly, we will be responsible for updating guidance if we think it requires updating. But at this point, we have some, you know, positive expectations about some of the things we have coming up. So, it's a little too early for us to try to re-address our guidance. We are pretty comfortable still with the 0-2.5 and [Inaudible] want to add to that, but--

Are there specific positive things you can sort of point to or talk about a little, that you have in the pipeline or...?

For competitive reasons, we would prefer not to get into, you know, specific promotional items. So, but we are comfortable we have some opportunities coming up.

Okay. And the second question was kind of a follow-up to what someone else mentioned about the 80-20 rule applying here. You know, I was surprised by the February number and I guess I'm just wondering, you know, if that's a specific promotion, then it would probably impact everybody, for all the stores system-wide. I am wondering if it's really that or is it maybe the 20% of stores that were comping negative last time are now comping much more negative. If you could give me some sense of what's really going on kind of within the system, within different regions, that will be helpful?

I think generally, that's more of an across-the-board type of issue and [Inaudible] Robert I don't know if you want to talk specifically on the corporate side, but...

You know, we've had some situations within our corporate markets where there was some [Inaudible] business. Certainly, we've had some stores that had been impacted by the military situation, stores that are close to the bases and so forth, and the general effect of the economy, some markets more significant than others. But today at this point, you know, we are focused on our operations and our measurements in place are showing improvement and some of the promotions that we have planned for the reminder of the year, we are confident that our expectations will be met.

Right. Okay and the final thing was, in response to that question, somebody had mentioned that you are running against the strong February '02 and I got to mention PSA, I wasn't familiar with what that means, but if could maybe explain that again, it'll be helpful.

PSA is per store average per week.

Okay, thank you.

You have no further questions at this time.

Thank you.

This concludes the conference. You may now disconnect.