Papa John's International Inc (PZZA) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Papa John's second quarter 2005 earnings conference call. OPERATOR INSTRUCTIONS Mr. Flanery, you may begin your conference.

Thank you, Tonya. Good morning.

With me on the call today are our Executive Chairman John Schnatter, our CEO and President Nigel Travis, Chief Operations Officer Bill Van Epps, and other members of our executive management team. After a brief financial update, Nigel will have a few comments about our general business trends and the status of our strategic planning process. The management team will then be available for Q&A.

Our discussion today will contain forward-looking statements that 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 website. As you may have noticed, we've streamlined our earnings release format. More detailed information is available in our Form 10-Q now filed on a concurrent basis with the earnings release.

Additionally, going forward, we expect to conduct conference calls each quarter in conjunction with the quarterly earnings releases.

All of the financial results we will discuss are prior to the impact of the consolidation of the BIBP franchisee owned cheese purchasing entity. The BIBP consolidation reduced the second quarter 2005 earnings per share by $0.01, and reduced the 2004 earnings per share by $0.66. Excluding BIBP, current year earnings per share for the quarter was $0.65, as compared to $0.51 for the prior year, an increase of approximately 27%.

These financial results were driven by strong sales for the quarter as company-owned restaurants led the way with a 7.6% comparable sales increase, and franchise units recorded a solid 5.6% increase, for a domestic system wide increase of 6.1%.

We have previously announced that approximately 460 of our company owned restaurants implemented a delivery charge effective in June, joining a majority of our franchisees that had implemented such charges over the last two to three years. Because of the large number of units implementing delivery charges in June, we expect these charges to have a low to mid-single digit favorable impact on comparable sales for any given period, until we lap the implementation in June of next year. The impact on second quarter comparable sales results was at the low end of the expected range since the implementation was only in effect for a portion of the quarter.

The strong sales results produced improved profitability in both of our domestic restaurant business segments. Company owned restaurants' pretax income for second quarter increased $3.8 million on a year-over-year basis, while domestic franchising increased 1.4 million. We estimate the June implementation of delivery charges increased second quarter operating income by approximately $750,000 to $900,000 for company-owned restaurants.

Several factors will influence the year-over-year impact of delivery charges on future company-owned restaurant operating results through June of 2006, including potential decisions to reduce menu pricing or increase discounting in selected markets depending on the competitive environment, potential changes in the delivery carryout mix, and even the possibility of reduced transactions due to unfavorable customer reaction to the charges, although we have seen no such reduction in transactions to date. Again, just to make the point, we have not seen any negative impact on transactions thus far from the implementation of delivery charges at company owned restaurants, although it is something we will continue to monitor closely. As a result of these various factors, we are not providing any specific expectations with respect to the delivery charge impact on future operating results at this time.

Operating results for our domestic commissaries business unit increased $2.8 million in the second quarter of 2005 over the same period in '04, due to improved operating margins and lower administrative costs.

Total international sales increased 14.2% for the second quarter and 15.1% in July over the comparable prior year period. We do not expect the international business segment to provide a meaningful contribution to overall company operating results for the next 2-3 years, as we continue to investment spend in people and systems to support the ramp-up in development activity. We are very pleased with the status of our development with over 800 units in the pipeline, and we believe this approach will provide the best results for this business unit in the long run.

Turning to overall company results, the increases driven by our most significant business units, as noted, were partially offset by additional G&A expenses, primarily increased bonuses and certain benefits and consulting costs.

Cash flow from operations for the first six months of 2005 increased approximately $13.5 million, as compared to the first sixth months of 2004, driven by a combination of the strong 2005 operating results and favorable changes in working capital. A result of this strong cash flow was a reduction in our line of credit borrowings from $78.5 million at the end of '04, to $49.2 million at the end of June, 2005 with continued reductions into July.

We did not repurchase any stock during the second quarter, as we elected to undertake an initial strategic business review under Nigel's direction in his first quarter as CEO. In response to the increase in our share price throughout Q2, approximately 425,000 shares were issued pursuant to option exercises. We have $15.5 million of existing share repurchase authorization, and we continue to believe share repurchase may be an appropriate use of our free cash flow, particularly to offset the diluted impact of stock option exercises.

We also announced a continuation of our solid 2005 domestic comparable sales trends in July, reporting a systemwide increase of 2.7%, with an especially strong 8% increase for company owned units, and a 1% increase for franchise units. While delivery charges accounted for a portion of the company owned increase, the majority of the increase was attributable to traffic, while the franchise units did not see similar traffic increases. Nigel will outline specific initiatives to address this recently emerging discrepancy in sales results between company owned and franchise restaurants in his remarks.

The strong financial results for Q2, coupled with the July comparable sales results and our outlook for the remainder of the year, have led us to increase our full year earnings guidance for the second time this year. Our new guidance range of from $2.42 to $2.48 per share, includes the impact of an expected 2 to $3 million of incremental expenses in the second half of the year, representing approximately $0.07 to $0.11 of reduced EPS, related to certain marketing and other operational initiatives, the benefits of which would be expected to be realized primarily in 2006 and future years. As noted in the release, we also updated certain key operating assumptions underlying the revised earnings guidance, with the major changes from initial guidance being an increase in expected full year comparable sales to a range of 4 to 6%, and an increased operating margin for company owned restaurants to a range of 19 to 21% for the year, as compared to approximately 17% for 2004.

We've provided our routine quarterly update of the expected impact of the consolidation of BIBP for the subsequent four quarters, and such projections indicate that Q3 of 2005 through Q2 of 2006 are expected to reflect cumulative pretax income of approximately $10 million from the BIBP consolidation. The full year impact in 2005 is expected to be an increase of approximately $3.9 million in pretax income.

Overall, we are very pleased with the second quarter and year-to-date results, and we are confident we can maintain our momentum throughout the remainder of the year. I'd now like to turn the call over to Nigel Travis, our CEO and President. Nigel?

Thank you very much, David. And good morning, everyone.

As David said we are very pleased with our second quarter results. Not only did we see strong sales and improved operating margins, but we also had an increase of 30 net units for the quarter. We are confident as we demonstrate continued sales momentum and positive trends in unit economics, we will generate meaningful unit growth within the system, both domestically and internationally..

Before I get into the substance of my remarks about our business, I want to expand on David's comments about our plans to conduct conference calls each quarter in conjunction with the quarterly earnings releases. We intend to have a higher Investor Relations profile than we've had in recent years in order to help investors gain a better understanding and appreciation of Papa John's business outlook. In addition to routine quarterly earnings conference calls, we also expect to attend investor conferences more frequently, and conduct other periodic investor visits.

When I first spoke with you in March just before I assumed my CEO duties, I noted that I believed the company had several strengths to build on and numerous opportunities to drive the business forward. I'm very happy to report that after four months on the job I'm even more convinced of the opportunities we are well positioned to take advantage of it. Most important is our strength of better ingredients, better pizza. That is our main brand positioning. And I'm pleased that we have a strong infrastructure and associated processes to ensure our unit level execution supports this positioning.

Our recent number one ranking in the American customer satisfaction index for the 6th straight year, yes I repeat, 6th straight year, and this year by an increased margin over our primary chain competitors, is evidence of the strength of our brand with consumers. We are also very pleased to be the highest ranked national delivery pizza chain in last week's restaurant and institution choice in chain survey.

I said from day one that my focus on the quality of our products and service will be no different from our founder's, John Schnatter, and I continue to believe that is the key to our continued success. Strategically, the quality of our products and service is our number one objective.

As David mentioned, we have undertaken a strategic business review as one of my first initiatives. And although there is still much work to be done to finalize specific strategic initiatives, we have several preliminary observations.

One such observation is that we believe we are now positioned to devote capital to more fully developing key underpenetrated or emerging domestic and international markets. This investment could take several forms, including the buildout of company-owned units, the acquisition of franchise units with subsequent new unit development in the particular area, or, indeed, it could be joint venture arrangements.

The goal is to continually assess our overall restaurant portfolio, both company-owned and franchise, to deploy our resources where we believe they will generate the best growth opportunities and returns. In a few years, this is likely to mean a greater percentage of company owned stores than now, but that does not mean it will all be one way traffic. Should we identify opportunities to bring into our system great operators who will be a real asset to Papa John's, we may in that case sell company stores.

Another clear focus that emerged from our strategic business review, is the need to take full advantage of our system's infrastructure to improve communications and services to our customers, who in this case we deem to be both our end consumers and our franchisees.

For example, we are going to be more actively promoting our online ordering system, including the announcement of new features such as plan ahead ordering to capitalize on our leadership position as the only pizza company with national online ordering capabilities. Another example is that we are working harder to give all of our stores a better understanding of data about their customers, which we see as critical in developing better relationships with them.

The common goal of the various initiatives that we have focused on is to drive top line sales at the unit level and to do so while also driving transactions. Increasing developments and awareness in our underpenetrated markets, as noted above, will certainly help achieve this goal as will communicating the advantages of our online ordering system.

We'll also be focusing more on consumer driven marketing initiatives to generate sales growth. For example, our research indicates that a certain group of consumers respond to menu variety, and that this group also has an appreciation for product quality. We want to increase our share of this particular group, so I have asked our R&D and marketing teams to work together to develop an 18 month pipeline of consumer and operationally tested new products to address the needs of this consumer segment.

David noted in his remarks that we have seen a widening gap between the sales performance of our company owned and franchise units, and we have taken several steps to address this issue. We recently announced the strategic operations alignment, where by the management structure of our domestic company owned and franchise units has been combined under the direction of Mike Cortino. We believe this alignment will help improve communication, and lead to more consistently shared and executed best practices throughout our system.

I'm pleased to say that our franchisees recently approved an increase in the contribution rate to our national marketing fund from the 2.25% in 2005 to 2.6% beginning in 2006. This increase -- this increase should help improve franchise performance relative to company-owned units. Company owned units are generally concentrated in well developed mid year efficient markets, and can afford to place local television advertising in support of local promotions. Whereas a number of franchisees are in underdeveloped markets with very high media costs and cannot afford local television support of local promotions.

And while we continue to actively pursue filling the Chief Marketing Officer position, I have to say I have been exceptionally pleased with the quality of our senior leadership within our current marketing group. Our results this year-to-date speak for themselves and bringing in an experienced CMO, when we find he or she, will only help us maintain and build on our recent sales momentum.

Turning now to the international front, we are committed to address the difficulties of operating two brands in the United Kingdom, but have specific updates on our progress at this time. We continue to make international growth a key strategic objective, focusing especially on larger market opportunities such as China, India, where we recently signed a development deal, Korea, Mexico and the UK. In fact, John and I are visiting our China and Korean franchisees next month to discuss how we can further support the development of those two markets.

Finally, we are pleased to announce the second increase in our earnings guidance for the year. Hopefully, you've heard that our focus on driving sales growth, improving unit economics, and reenergizing unit growth are starting to pay off. We believe our combined opportunities in these key performance areas, coupled with our strong cash flow, are more than sufficient to help us achieve our targeted 10 to 12% earnings per share growth on a consistent basis over the next few years.

That being said, there is certain areas of concern as we look out for the remainder of 2005. I'm especially concerned about the outlook for fuel costs, and I believe this morning the price of oil is about $61. And with that, it has the impact on our commissary business, and of course, we also have the highly competitive sales environment in the pizza category. You only have to look at Domino's sales this morning to recognize how competitive it is.

I reiterate that our opportunities are huge, and we're determined to invest in the marketing, the operational, and human resource programs needed to support this growth. That is why we have decided to invest an additional 2 to $3 million this year in the form of additional television advertising, the development of improved training programs, enhancement in our technology resources, and consulting services related to improving access to our customer database. Investments of this type help insure we can sustain our momentum into 2006, and beyond.

And now, I'm going to turn the call back to David for the Q&A. David.

Thank you Nigel. Tonya, if you would like to go ahead and cue up our Q&A, that would be great.

[ OPERATOR INSTRUCTIONS ] Your first question comes from Mark Smith with Sidoti.

Yes, one quick question. Can you tell me -- give us any insight into how many national television campaigns you are looking for in the second half and kind of how that compares to the second half of '04?

Yeah, we are looking for three in the second half, and I believe that is one less than last year. Bill, correct?

That's correct.

Okay. Thank you.

Your next question comes from Mark Regenbaum with Helios Partners.

Hey guys. Congratulations on another great quarter. Following Q1, everything seems to really be on a roll here.

Just wanted to ask if you could comment a little bit more on some of these growth opportunities that you are thinking about using with your tremendous cash flows, whether it is international, domestic or even the possibility of a potential dividend, if you'd thought about that at all.

And just a second question, if you could talk about -- a little bit about the new product pipeline in the second half here.

Okay. Thank you very much. And, yes, we are pleased with the results so far this year.

When I joined the company, which part-time was back in February, I was shocked by how many opportunities I saw, and I thought I missed something and I believe there was a black cloud. I haven't found any black clouds, so I think there is an enormous number of growth opportunities out there.

I think primarily if you look at where we are positioned in the U.S., we have a number of markets, as I referred to, that our awareness isn't as high as it is in the eastern half of the country, so we are very focused on trying to build out. let's say the western half of the country, so we see that as a big opportunity. We have a number of markets where our penetration is, if you like, patchy, and we believe that we can fill in those markets as well. And the advantage of doing that is it means we can soak up more efficiently the investment we made in media.

Effectively, you've made the investment, it is a fixed cost, so the more stores you have there, you effectively leverage that cost and it covers all the stores, so we see opportunities there.

And as I said we may decide to put more company stores in some of those markets. Obviously, we are going to be very selective by markets. We have to study the returns. We are not going to suddenly go out and take our company store base, which currently is 22% up to about 40 or anything like that. We're going to be very circumspect about doing that.

But we do see opportunities to invest. We've got a couple of joint ventures with franchisees at the moment, which we are very pleased with. We've got one with the Dallas Cowboys, which we are also pleased with, and that may be another area of development.

We have got about 375 franchisees. Some of them are exceptional operators, so we believe partnering with some of those people gives us the opportunity to utilize our cash, but at the same time utilize the expertise of our franchisees out there. So I think there's a large number of growth opportunities in that area.

Turning to international, a number of us have been involved in international businesses for a long time. In fact, in various investor presentations, we talked about the hundred years that Grant Miller the head of international, Bill Van Epps and myself and Daniel Cousino, who runs the U.K., have together in international businesses, and the point I make in those preparations is we've all learned a lot of hard lessons through being involved in international, and hopefully Papa John's is going be the beneficiary. International to me has great opportunity.

There's one of two things we need to tackle. We need to tackle the human resource issue that I mentioned earlier. We need to tackle our POS.

But, when I look at the inheritance that I received from John, I think we have got some great markets. We are in China with two strong franchisees. We have just done the deal that I mentioned in India. We have got very good partner in Korea. Mexico, we have got an embryonic business that we think has a lot of growth. I was very familiar from my previous company with the opportunities in Mexico. I think the UK, once we resolve some of the questions we have there, I think can be a great country as well.

And then we have got a large number of other markets around the world where franchising is the right way of entering those markets. We need to support those franchisees, and I think by giving them the right support we can build those markets up to a critical mass where they give good returns.

You might have heard me say before I think the key market by market is to get into a critical mass. I think we can do that.

And I'm very excited about the future of international, but I need to underline that I see the next two or three years as an investment period. It's going to cost us money to build up our infrastructure before we get the full returns from international.

The last area of growth is we have got a very good food service business under Julie Larner that's, in my view, got opportunities for growth. As we grow our store base that will naturally grow. We need to make sure that is as efficient as it is. We see opportunities to invest more capital into that business.

So I think we have got numerous growth opportunities with stores to commissaries. On the last area, just to reiterate, is online where we've got this leadership capability, I think is another area where we can invest. One area that may take more investment, it may not, is our product pipeline. Our product pipeline I think has proven to be a real success this year. We've had very successful limited time offers like the Sicilian meats, and the spicy meatball. We've got more products coming out. My goal of getting 18 months, I think is going to be fulfilled very quickly.

We are testing products all the time, but the biggest thing for me is we don't launch anything that hasn't gone through a really strong consumer check, and we've got very good processes set up here, to be honest it was set up before I came, to make sure that happens. So it's consumer driven products, and I think if you do that, you will have success and also excite the customer.

So, that answers that. David, you want to comment about dividends and share buybacks?

Yes, as we continue, looking at our overall strategic plan and investment opportunities, I think it is certainly feasible that we will have additional cash flow available, and we will look at the right way to get that money back to shareholders, continued share repurchase, perhaps a dividend down the road would be the types of things we would consider, but that's part of kind of our overall investment review process that Nigel referred to.

Great. Thanks again. Congratulations.

Thank you.

Your next question comes from Dax Vlasses with Gates Capital.

I was wondering on the general expenses is where the additional $2 million to $3 million is going to flow through for the marketing, correct?

Yes.

Okay. And then I was wondering the -- the general and administrative expenses were up and you increased basically the -- the cost of them for the full year. Is this sort of a -- a catchup year with some bonuses and some other things and ongoing would be at a some what lower level than that? Is that a fair way to look at it?

Well, that -- the first thing I would say is there is no catchup on bonuses. We bonus everyone year by year, and the bonuses that you will see this year are being earned as a result of the performance. So there is no catchup.

Obviously, we accrue bonuses for those who are paid on an annual basis, and we pay out on a quarterly basis for those who are paid out quarterly, so that there is absolutely no catchup at all.

David, any other comments on the expenses?

No, the obviously, as we are looking at 2006 targets and so on, the targets will increase so that overall performance should increase if bonus levels were to stay the same in '06. So we will give more guidance on that as we work on our 2006 plans.

But on an ongoing basis is 8 and a half to 9% of revenues a fair way to look at your G&A costs?

I would say right now that is a fair way to look at it. But, there are so many opportunities that we see, and our strategic plan has actually identified more, that as we capitalize on the strength of our brand, we will invest as we go, and it may be that if we see an opportunity, my view is that this business has really strong growth long-term, that it's important to invest at that time.

I'm going to be focused on the medium and long-term, not necessarily the short-term, so you may see it blip up. But at the same time, I've got a reputation for pretty strong cost controls through my career, so I'll try and balance the cost control with the need to invest for the long-term.

Okay. And then my other question was that you know -- you were -- you suspended the share repurchases for the review that you have done. It sounds like from -- from -- from the -- from the comments on the call so far, that the incremental capital required for these projects would -- would kind of some what be captured in your -- in your -- in your ongoing annual cash flow.

If I look at your balance sheet, you basically paid down $29 million of debt in the quarter, you only have $42 million of debt, and you're paying back, basically, (indiscernible) plus 100 I think is -- is the revolver.

Can you talk about your -- the additional borrowing capacity if that -- if that has been contemplated to be used and what sort of leverage that you would accept if you were? And if -- if that is not -- if you do not intend to leverage back up the capital structure can you talk about what you would do from a share repurchase strategy going forward?

Dax, this is David. I'll start out. I think it is safe to say that we -- our break from share repurchase was kind of a chance for us to review, and Nigel was new and we were looking at some strategic options, so I think it is safe to say we do have authorization remaining, and particularly to the extent that we're seeing option exercises that we would get back in on the share repurchase side to offset the dilutive impact of options and perhaps go beyond that.

From a leverage point of view you are exactly right, we're -- with EBITDA around $100 million and debt as you pointed out in the $40 million range or so, we clearly would have some leverage there, and I think that is part of our overall strategic process as we look at our potential capital needs to invest in these growth opportunities. That is certainly an option we will look at as to how we may better structure our capital and look at share repurchases going forward, too.

I think that's what I would say is that we got -- we tended to spend about $20 million a year. We believe we've got opportunities to spend beyond that. Our board is --

From a Cap Ex perspective, Nigel?

Yes.

Okay.

And our board is very supportive of spending more money if we have good returns. So I think you will see the annual capital number go up over the next 2 to 3 years, and it's, as we said earlier, that may be investment domestically or internationally or in systems nor our commissary business.

Have you a had any sizeable franchisees express interest in selling back franchise stores to you.

We have franchisees all the time who are interested in moving on. We have franchisees who want to come into the system, we have franchisees who want to buy company stores.

We have every single variant and one of the things that I referred to earlier is, we have to continue to look market by market is what is the best company joint venture franchise mix for that market, because we want to maximize the number of Papa John's stores we can have by market, and in some markets it is more appropriate to have franchise, others it's company. But sometimes you get franchisees who, for personal reasons like they want to retire or they haven't got kids that they can pass their business on to, they want to come out, so, yeah, we have had every combination. So the answer to your question is, yes, we had people approach us, but that is only one of a number of options that we get.

Okay. And then my last question relates to the store development. You said your international franchisee store development is over 800 which is acceleration from the 700 I think the last time you reported. Do you have any update on the domestic franchisees? Thanks a lot.

I think the last time I looked at the pipeline it was 300. I would say, and I have got no objective measure of this, that the franchise community are obviously pleased with the comps.

As a result of that, I think franchisees are seeing improved profitability, and I would expect this to flow through to increase confidence, and hence that pipeline I believe will go up in the next period of time. But it takes time for people to see all that go through to the bottom line and then change their development perspective.

Thank you.

Thanks a lot, Dax.

Your next question comes from Charles Timmle with UBS.

Good morning, great quarters guys. Just a quick question, having seen you at the NASDAQ market opening on Times Square in New York and surrounding your store 3,000 celebration, I was wondering if you could address is this part of a new process to increase the positioning of the brand and increase visibility? Is this something you are going to go do on an ongoing basis and how do you think that benefits you?

Yeah, good morning. I'm delighted -- I was delighted with the 3,000 store opening program. It was a lot of fun. I think it gave us a lot of visibility in New York. We also got quite a bit of national visibility. Being the number three chain we have to take advantage of every opportunity we get, and the answer very clearly is we are going to increase our profile both to the investment community and to the communities at large.

Chris Sternberg in the quarter was appointed Head of Corporate Communications, He's already started his job with real gusto, and you're going to see a much higher profile going forward, and I think that is easy because we've got a great brand, we've got great brand position in terms of the strength of the brand.

I want to reiterate because this it very important to me, that the positioning that John has always had about quality and service is one I firmly believe in. I believe we are the best, and I reiterate as I have said to you personally in groups in the past, I was a customer ,and one of the reasons I came to Papa John's is because I firmly believe we are absolutely the best pizza out there, and we will build on that and make sure that everyone knows that we are the best.

Thank you.

Your next question comes from FitzhughTaylor with Banc of America Securities.

Hi, guys. Just if you would just kind of comment on the industry at large. Obviously, you guys mentioned over the past couple of years you have been diligent about trying to reduce your discounting. Wondering if you are seeing that discounting across the industry ease, and anything else you might be seeing specifically that would lead to what appears to be a healthier pizza segment versus what we have soon over the last couple of years. Thanks.

I think that is an interesting question, Fitzhugh. Firstly, I mean clearly the industry is doing well if you look at what's happened in the pizza segment. In fact if you look at the whole quick service restaurant segment, it is having a very healthy year, both in terms of comp sales and in terms of the stock market. I would like to congratulate Dave Brandon and Domino's on very good results morning. I know that their comps and ours are very similar and they are both very healthy. So, I think we are all pleased with what's happening in the segment. I think, clearly we are all trying to find ways of improving and doing a good job.

I think it is also interesting that takeout and delivery is -- is -- is really growing. There was an article that came out, I think the day before yesterday, on the business wire and the head line -- the headline was Consumers Tell Technonic, and it is basically folks from Ruby Tuesday, Red Lobster and Outback rank tops for takeout dining. This is in the casual dining section. But what's interesting in the article is that more people expect to take out and have food delivered than previously, and it is a trend that we see. So as most of our sector is focused on delivery, I think that is very encouraging.

So I think we are in a healthy segment. I think people like the variety that the different chains are giving them.

Clearly we are all very focused on improving our service. We believe obviously we have got the best service and that is why we win things like the American customer satisfaction index continually, but I'm very encouraged by the segment. I think another interesting survey I saw in the past week is that kids, I think aged, Bill, up to 17?

Yes.

See pizza as their number one choice, even above laptops and video games, and coming from a business that sells video games that was quite stunning to me. But pizza, I think, is a great way for people to get together, have a sociable environment. I think parents feel happy about pizza in houses because it's a way where you can know where your kids are in these uncertain times, and the kids obviously find it a great way of getting together with friends.

So, a few random thoughts there, hopefully that answers your question.

Do you feel like you are seeing less discounting from your competitors?

I think -- I call it -- there is still discounting, it's strategic discounting. We do some discounting, but we focus on our product quality. There is obviously some programs that our competitors put out, Domino's 5 for 5 is a form of discounting, but I think probably there is less than in the past, but as I wasn't here previously it is tough for me to compare. Dave, any comments?

I think it does vary probably market to market, and there are programs like the 5/5/5 program that is a pretty significant discount. So it is still out there.

Thanks, guys. Appreciate it.

Once again, I would like to remind everyone if you would like to ask a question, press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your next question comes from Robert Satrakian with Helios Partners.

Hi, guys.

Hey, Robert.

Hi, Robert.

The recent initiation reports from (indiscernible) in terms of coverage of the company was a welcome addition, especially hopefully in attracting new shareholders. Business is good. The outlook is good. This should be a positive addition, especially since it highlighted the strengths of the company in terms of cash flow generation and the growth opportunities. Is there an intense effort right now going on to try to get new coverage, new analysts, especially some of the ones who cover some of your competitors, and also, are there any specific conferences planned in the next couple of months?

Robert, this is David. I think rather than talk specifics, I'll go back to the comment that Nigel made.

We are definitely interested in increasing our Investor Relations profile so I think you could take that to say yes, we are talking with other analysts from time to time and probably shouldn't say anything specific about who may or may not pick up coverage, but it is something that we would pursue obviously.

As far as conferences, there is nothing specifically scheduled at this time, but we will, I think, be out on a few one on one meetings, and we will be looking at getting into some conferences, and we will make those announcements when we have those set up.

But the general comment there is a definite higher profile, including analyst coverage, conferences and one on one meetings.

Thanks a lot.

Your last question comes from Mike Smith with Oppenheimer.

Good morning.

Good morning, Mike.

A couple of things. David, BIBP. When do you expect that to have a positive equity position so you no longer have to consolidate it? And have you given any more thought to maybe eliminating that cheese buying program?

Mike, it is really difficult to predict out more than about 12 months ahead, because that is as far as the futures market goes.

We think our deficit, which was a little over $20 million, will be reduced over the next 12 months by $10 million if you -- if you kind of extrapolate that out, then another 12 months from there, assuming that the spot market stays reasonable, we could be back to a zero position and even into a surplus position. That is certainly more guesswork than science once you get out past that 12 month period.

As far as looking to what may happen after we get back to closer to a neutral position, I think it is fair to say we would consider what our options are going forward.

There is two things are fairly certain. One, our system and our franchise community really do appreciate the leveling of cheese price, the predictability and the taking out of volatility of cheese for their purposes, and the investment community, this is just a wrinkle that is a little unique and a little hard to understand for the investment community. So, as we go forward we'll certainly have to balance those two points as we make future decisions on BIBP.

Let me just add one point there. Firstly, I support -- I came in and had to get to understand this, but I support the concept. I think it is an innovative approach to it. And I think what it avoids, just imagine the cheese price went up to $2, that is -- you would have a tendency for franchisees or company stores to skimp because of the cost of the cheese. This makes it predictable, they can forecast, they can decide how much they want to invest in marketing, so I think it's great program, and I don't see us having a need to remove it.

Well, and the second question I guess regarding your strategic study, Nigel, of the business and your position, and since we have already got the cautionary language, I wonder if you could fast forward us -- fast forward three years, and look back on Papa John's then, and in terms of how many -- what would be the ratio of company stores to franchise stores, what would be the percentage of your businesses coming from international, et cetera?

Whew, that is a tough question because we are in the process of working through our strategic plan and we have got the direction, we haven't worked out all the financials, so I'm not going to be specific and I would probably be foolish to be specific because somebody would remind me of that in three year's time. I think all I would say, Mike, is I think we'll probably will have more company stores.

I think international will be definitely well on the way to fulfilling on a country by country basis the critical mass that it needs to get to, and critical mass on a country by country basis tends to be 40-60 stores. Now, by country basis if you take China, obviously you really need to talk about cities. Shanghai and Beijing are like countries in their own right, same in India. So, I think you would see international really beginning to motor. We see that as the fuel of the future for Papa John's, but I wouldn't like to be too specific on the breakdown.

I think we've got a lot of opportunity in the U.S. and even though we are very committed to growing international, we may see one off opportunities in the U.S. that shake the ratio between the U.S. and international.

But, I think you can safely say company store development is something that you will continue to see over the next few years. International will grow. How it will grow is something that we are going to approach on a country by country basis.

Thank you.

You have a follow-up question from Dax Vlasses with Gates Capital.

Yeah, I just had one more question on the comp guidance. You increased it and part of it had to do with the charges that -- the delivery charges. Can you sort of flush out the -- how much of the increase was from just this -- the extra dollar or whatever that you are charging for delivery and -- and if there was any real change to the overall comp guidance excluding -- excluding that?

Dax, this is David. We will be a little general there, but we were at 4.9% system-wide comps through June, and our original guidance for the year was 0 to 2%. So clearly taking it to 4 to 6 there has been some real movement in that. What we have said is that the impact of the delivery charge would have low to mid single digit and we are really not going be any more specific than that, but remember it only affected company stores which are 25% -- 22% of the system and it only affected it for half of the year. So I think it's very safe to say that going from 0 to 2, to 4 to 6, represents real increase in comps far beyond the impact of the delivery charge.

Okay.

I would like to add one comment. This is Bill Van Epps -- that our transactions are up even after implementing the delivery charge, so we are pleased with the results.

Okay. Great. Thank you very much.

Thanks Dax.

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

No thank you, Tonya. Thanks everyone. Bye.

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