Papa John's International Inc (PZZA) 2005 Q4 法說會逐字稿

Good Morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Papa John's fourth quarter and year-end 2005 earnings conference call.

[OPERATOR INSTRUCTIONS].

Thank you. Mr. Flanery, you may begin the conference.

Thank you, Crystal. Good morning. With me on the call today are our CEO and President, Nigel Travis; our Executive Chairman, John Schnatter; Chief Operations Officer, Bill Van Epps, and other members of our executive management team. After a brief financial update, Nigel will have comments about the state of our business and our planned initiatives. 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.

All of the financial results we will discuss are prior to the impact of the consolidation of the BIBP cheese purchasing entity. The BIBP consolidation increased to the fourth quarter 2005 earnings per share by $0.06 and reduced the fourth quarter 2004 earnings per share by $0.05. Excluding BIBP, current year EPS for the quarter was $0.36 as compared to $0.33 for the prior year. Full year EPS, excluding BIBP, was $1.26 for 2005 as compared to $1.09 in 2004, and favorable to our earnings guidance range of $1.22 to $1.24.

The Perfect Pizza operations have been classified as discontinued operations in our financial statements as will be discussed more fully in minute. And earnings from continuing operations for the quarter, excluding BIBP, were $0.35, as compared to $0.30 for the prior year.

Fourth quarter 2005 results include a $0.02 gain related to the sale of restaurants to franchisees, net of an impairment charge related to our United Kingdom subsidiary that is included in continuing operations.

Additionally, fourth quarter 2004 results included a $0.03 charge related to certain lease and leasehold accounting adjustments. Full-year earnings from continuing operations, excluding BIBP, were $1.21 in 2005 versus $1 in 2004.

Our fourth quarter financial results were driven by continued strong sales as company-owned restaurants led the way with a 9.9% comparable sales increase, and franchise units recorded a solid 5.5% increase for a domestic system-wide increase of 6.4%. Our Board declared a two-for-one stock split in December, effected in the form of a stock dividend distributed in January, and all reported shares and per share amounts have been adjusted to reflect the impact of the split.

Before discussing specific business unit results for the quarter, I'd like to mention two significant items impacting the overall results. First, the Company made an incremental contribution to our National Marketing Fund of $1.8 million during the quarter to provide additional television support for the introduction of our Papa's Perfect Pan Pizza, the most significant new product launch in our history.

The contribution is reported as a component of other general expenses in the financial statement since the majority of the benefit of the incremental national advertising was received by the nearly 81% of domestic units that are franchised. And as Nigel will address in more detail in his remarks, we were very pleased with the result of our pan launch, and we believe the additional marketing funds helped contribute to these results.

The second item is the $4.2 million increase in year-over-year bonuses and equity compensation expense for business unit and corporate management for the quarter. There were minimal bonuses earned in the prior year quarter, so a substantial portion of the amounts earned in 2005 for achieving pre-established performance goals produced incremental expense.

Additionally, there was an increase in equity compensation expense primarily related to the Performance Unit Program established in 2005. As explained in our third quarter release and conference call, this program provides cash payments to senior management based upon the total return on Papa John's stock as compared to a peer group of restaurant companies over a three-year performance period. And to-date, the results have been very strong, increasing the amount of expense accrued for ultimate payout accordingly.

The strong fourth quarter sales results produced improved profitability in both of our domestic restaurant business segments. Company-owned restaurant's pre-tax income for fourth quarter increased $8.5 million on a year-over-year basis, including the $2.1 million gain on sale of restaurants, while domestic franchising increased $900,000. Operating results for our domestic commissaries business unit also increased $800,000 in the quarter, due primarily to lower administrative costs, while overcoming nearly $1 million of increased distribution cost driven by higher fuel prices.

Total system-wide international sales increased 12.4% for the fourth quarter. However, the increase climbs to 25.2% if the Perfect Pizza unit results are excluded for both years. Operating results for the international business unit decreased $1.3 million as compared to the same period in 2004, including the $1.1 million impairment charge for the United Kingdom, primarily as a result of the declining performance for the Perfect Pizza branded units.

As previously stated, the Perfect Pizza operations are reflected as a discontinued operation in the financial statement as we have established a plan to sell these operations within the next 12 months or, hopefully, much sooner. It should be noted that we anticipated the expected sale of these operations in early 2006, and the related subsequent loss of operating income when issuing our 2006 earnings guidance. These net increases in operating income, driven by our most significant business units, were partially offset by the discretionary marketing contribution and incremental bonus and equity compensation charges previously noted, in addition to other less significant increases in general and administrative costs.

Cash flow from continuing operations for the year increased approximately $15.5 million as compared to 2004, excluding BIBP, driven by a combination of the strong 2005 operating results and favorable changes in working capital. The result of this strong cash flow was a reduction in our line of credit borrowings from $78.5 million at the end of 2004 to $49 million at the end of 2005. And these line of credit borrowings have further decreased thus far in 2006, due to continued strong cash flows.

We repurchased approximately 1.5 million shares of stock during the fourth quarter and also approximately 470,000 shares were issued pursuant to option exercises during the quarter. We repurchased a total of 3.3 million shares during full year 2005 and issued 2.8 million shares subject to option exercises. We have continued our share repurchase program subsequent to year-end at a modest pace having acquired an additional 121,000 shares in January and February to-date. We have $25.3 million of remaining share repurchase authorization through the end of the year, and we continue to believe share repurchase may be an appropriate use of our free cash flow, primarily, to offset the dilutive impact of stock option exercises.

We also announced a continuation of our solid domestic comparable sales trends in February, reporting a system-wide increase of 4.6% with an especially strong 7% increase for company-owned units and a 3.9% increase for franchise units. Total international sales for Papa John's branded units increased 26.5% in February on a constant US dollar basis.

We are very pleased with the recent price trends in the cheese market. However, it should be noted that because of the BIBP cheese pricing mechanism, we will not immediately receive the benefit of reduced cheese prices in our restaurant level results. However, the current market prices should result in an accelerated reduction in the BIBP deficit that could lead to a small reduction in restaurant level pricing later in the year, as compared to our initial projections. We are reaffirming our existing guidance range for 2006 of $1.38 to $1.46 per share, excluding BIBP. Approximately $0.07 of these projected earnings are expected to result from the additional week of operations in 2006.

I'd now like to turn the call over to Nigel Travis, our CEO and President. Nigel?

David, thank you very much, and good morning, everyone. Well, 2005 was a really terrific year for Papa John's, and we're excited about the momentum that's carried into 2006. We're pleased with both our fourth quarter and full year results.

Let me just summarize our achievements from 2005. We led the industry with a 5.1 positive comps for our domestic restaurants. And with our positive comps in both January and February, this makes 15 straight months of positive comp sales for our system.

In 2005, we opened 96 net new Papa John's units. We expanded our leadership position in online pizza sales, with a percentage of online sales increasing by more than 50% over 2004. And perhaps most importantly, our brand was rated number one in customer satisfaction amongst all national QSR restaurant chains in the prestigious American Customer Satisfaction Index for a record sixth consecutive year.

On the financial side of our business, we exceeded earnings growth and profit targets. Pre-tax income from operations, excluding our cheese purchasing entity, was 65.2 million in 2004 -- - sorry, 2005, compared to 55.5 million in 2004, a 17.5% increase. Cash flow from operations, excluding our cheese purchasing entity, increased from 62.1 million in 2004 to a very strong 77.6 million in 2005. And we recently implemented a two-for-one stock split.

Turning back to the quarter, as David noted, our very solid 6.4% comparable sales increases for the quarter produced operating income improvements in our corporate restaurants, franchise and commissary business units. We were absolutely delighted with the results of our Papa's Perfect Pan Pizza product launch in October. I am pleased to see sales momentum continue in 2006 with comparable sales of 3.4% for January and 4.6% for February. Based on industry data that we monitor, our comp sales have beaten the average results for the QSR pizza category in 36 of the last 40 weeks, including 6 of the first 8 weeks of 2006. That's what I would call really good momentum.

January results were particularly impressive, considering we were [counting] over our anniversary "Buy One Pizza, Get One Free" offer in 2005 with a free Sweetreats dessert with the purchase of a pizza as a 2006 offer. As expected, the free Sweetreats offer didn't drive traffic as well as the prior year free pizza offer, but it did produce better margins than the anniversary special.

The February results demonstrate the sustained power of our GO DEEP campaign of Papa's Perfect Pan Pizza. With no national television in February, we were able to capitalize on the public relations campaign to offer registered online customers the chance to win a free pizza by routing for either quarterback to go deep and break the record for the longest pass in the history of the big game. Although the record wasn't broken, we achieved a significant amount of media coverage and were able to achieve strong results in the face of major advertising campaigns by our direct chain competitors.

We returned to national television in March with a promotion that features our Speciality Meats Pizza on poppas Papa's Perfect Pan Crust. We're optimistic that this promotion will perform well, lapping a very successful Sicilian Meat promotion in 2005 where we generated a 6.1 increase in comp sale. And we have an exciting promotion coming up in April, but we're not going to discuss details at this time for competitive reasons.

As you'll see from our early 2005 activity, we plan to continue focusing on new product development and creative ways to market our "Better Ingredients, Better Pizza" story to consumers. This approach served us well in 2005, and we intend to build upon our successes in the current year. We're also are testing a variety of initiatives to further drive sales, especially targeted at our lunch [day part].

We've also recently approved a re-image package for our restaurants that will significantly improve our brand perception with our carryout customers for a very modest investment of less than $2,000 per restaurant. This initial step fits nicely with our longer-term plans to focus on increasing our retailing opportunities within our units. We'll have more to say about specific initiatives as we have definitive test results to review with you.

I said many times that consistent, positive comps, coupled with improving store level margins are the keys to driving franchise unit growth. Well, we certainly achieved both strong comps and improved margins in 2005, and the early 2006 results continue this trend. So I have established net unit development as my number one priority for 2006.

We are pursuing several new initiatives that have the capability of increasing new unit development, although results will not necessarily be realized in any major way in 2006. It will take some time to test the initiatives and build the development pipeline to drive accelerated unit growth in 2007 and beyond. However, last week we had a really successful franchise conference where the interest in development s in the very high.

Among the initiatives we evaluated is an increased presence in nontraditional sites. In fact, we are creating a corporate position, especially focused on nontraditional development in order to identify necessary products or other modifications needed in our traditional business model to be successful in the various nontraditional venues. As part of this approach, I'm please to say that we are in advanced negotiations with Six Flags regarding a purchasing, sponsorship and marketing arrangement.

We're also reviewing our efforts in urban development and other opportunities to increase the diversity of our franchise group. We have recently engaged a consultant to assist us in this regard. We believe this initiative can assist us in penetrating certain markets that have been historically very difficult for us such as Chicago, Detroit, Los Angeles, and some others. Besides being a profitable business proposition, it is the right thing to do, given the changing nature of the US population.

All of these development efforts are especially important for us in the markets where we are under penetrated, and therefore, lack brand awareness. Many of these markets are progressing as we would expect. However, there are certain markets where our existing franchisees may lack the capital to continue the development to the necessary at the pace necessary to produce improved sales and financial results.

As we previously reported, we have developed a buy-and-build strategy that we believe will help accelerate the development of certain under penetrating markets. We began the execution of this strategy in the Philadelphia market, and have now completed the acquisition of 15 franchise units in this market. We'll be opening an additional five units in Philadelphia in 2006, and we expect to build 20 or more corporate stores there over the next four to five years. Early results are exceeding our initial projections, and if ultimately successful in Philadelphia, we would likely pursue this strategy in other under penetrated markets overtime.

Although we previously announced an increase in the contributions to our National Marketing Fund for 2006 from 2.25% up to 2.6% for this year, our ability to fund national television is still far less than our key competitors. So we are committed to using alternative marketing channels to attract consumers. We are investing significant results in our database capabilities to more effectively and efficiently connect with our consumers. One way to do this is with email communications that have proven to generate positive results in a cost-effective manner.

Our online ordering system is another area where we feel we have a unique competitive advantage. The percentage of our total orders placed online continues to grow, and we're committed to further drive in this area of our business. The GO DEEP promotion I noted previously was an example of a coordinated effort to drive consumers and non-customers to our website to capture the email information for subsequent marketing purposes, while at the same time, enhancing the awareness of our online ordering capabilities.

I'm also pleased to announce that earlier this week enhancements were completed to enable our online site to be available 24 hours a day for plan ahead ordering. Up until now, because of system constraints, the site was only available when stores were open. We now believe that many of our customers will take advantage of the opportunity to plan their time better and order pizzas to be delivered at a specific time up to 21 days in advance.

I'd now like to turn to international. We continue to invest and build infrastructure to build the long-term growth and success of our international business. We currently have 850 units in our development pipeline and continue to add new markets to that pipeline. In the near term, our focus will be building the UK, Mexico, India, Korea and China markets, but we expect other countries to be added to the list. For example, one of our franchise restaurants in Russia achieved over $1 million in sales during 2005, and we are excited about the potential of this and other Eastern European markets. However, sometimes to move forward in business, you need to prune the existing business, and that's what we've been doing in the UK and Mexico.

We continue to believe in the future potential for our Papa John's brand in the United Kingdom. As noted in the release, we expect to divest the Perfect Pizza brand in order to focus our management team's effort completely on expanding beyond the nearly 90 current Papa John's units. On a personal note I've seen this happen successfully twice before. Back in 1991, when I was at Burger King, we focused on moving all the wimpy branded units to Burger King with great success.

Later in 1994, when I was with Blockbuster, we had 25 Blockbuster units and over 50 -- over 800 Rich units. We changed everything to Blockbuster, and we had phenomenal success. So I have seen it happen twice before, and we believe that Papa John's in the UK could ultimately be several hundred units. I really am very confident that we could do well in the UK. We've made some significant POS and back office investments in the recent times that we believe will pay off very quickly. On top of that, in Q4 2005 and for the second year running, Papa John's was awarded the Pizza Delivery Operator of the Year for the UK.

Let's now turn to Mexico. The recent Mexico closings are in my view an opportunity to get the brand right in a very important pizza delivery market. And we believe that with the right franchise partners, we can be very successful there. In fact, we believe the closures give us an opportunity to essentially restart our operations in Mexico on a much stronger footing, and one that truly reflects the quality of operations associated with Papa John's.

We are also exploring certain unique development opportunities, some of which would likely involve direct capital investment on our part. I think the best way of understanding what we're doing in Mexico is to see us becoming the master franchisee and ensuring that we build good strong franchisees in the country through great product and marketing.

Additionally, we are reviewing opportunities to further accelerate our development in China with a potential joint ventures or other arrangements. We will have more to report on the details of these initiatives as they unfold. Currently in China, we have 27 stores with agreements to build another 400 plus.

As I said many times before, we see international growth as being key for us, and our search to replace our recently departed Managing Director, International, offers us an important opportunity on two fronts. The candidate we select will not only bring strong leadership to our international efforts, but will also provide additional succession capability for my position. In the short term, as we reported, David Flanery is leading the International charge, and this will give him a great opportunity to both develop his line management skills and also to have a greater insight into our international business as it grows overtime.

In conclusion, as I mentioned earlier, last week we hosted our franchisees from around the world at our Semi-Annual Operator's Conference. The purpose of this conference is to provide information on the progress of our brand to our franchisees, update them on marketing and other key business initiatives, and provide a forum for the sharing of best practices among franchisees and corporate operators. It is no exaggeration to say that the excitement and confidence of our franchise community is at an all-time high. The level of excitement helps ensure solid support for the many initiatives currently in place and strong support should lead to successful execution and results.

We are committed to turning this strong operational momentum into financial results for our shareholders and are confident our business model is structured to effectively accomplish this objective. It is important to say that we intend to keep making investments for the benefit of the long term. And even though this may have some impacts on our full-year results, we are very committed to achieving the earnings guidance that we have given for the full year.

And now, we will be happy to take your questions. Back to David.

Thank you. Crystal, if you would like to go ahead and queue up the questions.

[Operator Instructions].

Your first question comes from the line of Mark Smith with Sidoti.

Hi, guys. Just kind of a twofold question here on international growth. First, can you give us any insight on the timeline on when you may be able to replace Grant Miller?

And secondly, for your plans for Mexico, will we see something similar to Philadelphia, kind of a buy-and-build strategy from the company in Mexico? Is that I guess a possibility there?

Mark, good morning. Thanks for the question. Firstly, on replacing Grant Miller, this is a very important search. The Board and I have worked on his position, as I have said in my remarks, can he fill succession for me, add into the potential successes we already have in our company?

So obviously, when you such a high level of search, it's sometimes going to be difficult, because there's very few candidates that meet the specification of being qualified for our international and be qualified ultimately to become a CEO. So there is some difficulty there.

But we have had the search going for some weeks. We are in the stage now of starting to interview candidates. I always hesitate with searches to give a timeline, but I would love to be able to do this in the next three, four, five months. We are not going to compromise on quality, and we need to make sure that this person is qualified in both regards.

In terms of Mexico, I think you know we've spent a lot of time looking at Mexico in the last few weeks. And I have to say I'm kind of excited about where we stand. Not only has David given a new vigor in his leadership of international, but -- and the team is working in international and especially on Mexico, we're very excited about where we stand. This is effectively a new start.

We had in the company actually a lot of Mexico experience. Bill Van Epps who is sitting here has had some great success in Mexico in the past with different concepts. In Mexico -- Blockbuster was our strongest international market. I know it can work very strongly. I think the idea of using the Philadelphia model may not be strictly accurate, but for instance, we think we can invest in stores. We also see an opportunity to invest in QCC to make sure the product is right.

But as I look what we have in Mexico, I am concerned about the number of transactions the sales of the stores had. And I think you'll see us put in a lot more focus on getting the product right, getting the marketing right, getting the operations right. And as we said in our release, we have got some ideas that we can't reveal right now for some very innovative development. So I think to summarize, and hopefully this answers your question, we are very excited about Mexico.

Okay. Right. Thank you very much.

Thanks, Mark.

Your next question comes from the line of Mark Kalinowski with Buckingham Research.

Hi. With the aim to accelerate the unit growth of the Company going forward, it could be argued that in the past the company's unit growth rate was too high in terms of maintaining the unit level execution that folks would want to see. What can be done from the company's perspective going forward, as it accelerates its unit growth to make sure that those types of issues do not recur?

I think that's a great question, Mark. I think you know I inherited from John a system -- I have said publicly many times it's fantastic. You know we have a system that's totally focused on quality. And as I said probably 500 times now you'll never see me compromise on that. We measure everything, and I think that will continue as we go into the future.

We have a situation where with new stores and the new franchisees, I think we need to improve our training. And in fact one of the initiatives that we are working very hard on we revealed to the franchisees last week new training programs that will, I think, overcome the problem you identified. Obviously, I wasn't here when that happened in the past, but I have heard about the point that you made. So we are committed to maintaining the quality to our measurements, but more importantly I think training is going to help us. Bill, do you want to add anything?

Yes, Mark, one of the other initiatives we have undertaken is to put the franchise and company operating groups together. We now have four divisional Vice Presidents in the field. We have, as Nigel mentioned, a much improved emphasis on training in grand openings. So the problems that we have had in the past with high rates of growth, we don't see as being a problem going forward with this new organization.

Okay. Thank you.

[Operator Instructions].

Your next question is coming from the line of Dax Lassus with Gates Capital Management.

Yes, I had a question with respect to margins. And I mean if I look at your margins for this year from sort of an EBITDA perspective, I'll get to something around 10%. And if I look back to 2001, 2002, you know you are more like 12%. What is the opportunity -- I mean it seems like from the guidance that you have provided that you know you're almost going to be up 80 basis points or whatever.

You know my numbers -- - and margin for this coming year. What is the opportunity to increase that another 100 basis points or something back to your margins from 2001, 2002 and what needs to happen to get there, if you can get there?

Okay. Thanks, Dax, I'll start out taking that question. What I think we are looking at for 2006 and possibly the next year or so after that is kind of a balancing act. We certainly think we can increase margins, but we also want to drive development and initiatives such as the Philadelphia buy-and-build program. We will certainly produce stores that will automatically open up at the same kind of margins we are seeing in our more mature markets.

So we are comfortable that we can balance both topline revenue growth, which we think is very important as well as margin enhancement or expansion, but we'll kind of have to balance the two of those together. Can we ultimately get back to where we were in the timeframes you mentioned? Yes, I think we can. It probably be steady move there on the margin while at the same time a much greater emphasis on revenue growth than you've seen from us in the last four or five years.

Right. And can you comment on, you know if I look at -- one of your major competitors out there has margins significantly greater than Papa John's. Is there something structurally in their business model that's different from Papa John's that would prevent you to get materially higher from where your margins are right now? I think the Domino's is somewhere around 18% from EBITDA perspective margins.

Yes, Dax, that's a good point. Basically the structural difference is, they have a much smaller percentage of company-owned restaurants than we do. They are down around 10 or 11%. We are closer to 20%. And as long as we think investing in restaurants a good use of our capital which we certainly do with the margin we are seeing, we actually intend to expand that relationship, what that should mean is we should be able to drive the revenue growth though. But that is the structural reason that Domino's bottomline return is greater than ours.

Okay. And then I think you had said previously that you expect CapEx to be around 35 to 40 million, is that still reasonable for 2006?

Yes, that is. And there is a possibility that we could have some special initiatives if we identify the right opportunities, and we would certainly talk about those as they arise. But that is our guidance.

Okay. Maybe Nigel, can you talk about your -- I mean we are still sitting here with an pretty unleveraged balance sheet. Can you talk about the size of the opportunities you would see to deploy capital for the benefit of Papa John's shareholders and maybe use the balance sheet? I mean, do you have those sort of opportunities available or the opportunities to invest you see more on the smaller side?

Dax, we see lots of opportunities to invest. We believe that Papa John's is very well situated obviously from a cash point of view. And as David said, our cash situation has improved significant already this year. So we are excited about using that cash to grow the business. And I think my charge from the board is them to grow the business and make it a lot stronger in years to come.

We are looking at a large number of opportunities right now. Most of them, I can't give you details of. Some of them are invested in the countries that we talked about. Some of them are domestic investments. Some of them are investing in, let's say, new technology. And we have got one particular initiative I am thinking of that will actually take up a lot of cash, but we will have a great return and will give us a unique competitive advantage. So the range of investments are, let's say, small to medium. I don't see anything where we are going to suddenly go out and invest $100 million or anything like that, but we are being prudent.

And I think all the investments that we're considering are going to add long-term value to our shareholders. We continue, obviously, looking at it from a financial point of view, we continue to look at our share purchase as a great way, when necessary, to return money to our shareholders. I think the taking those stock split was also a good move so they effectively gives us more shares to deal with, improves our float. So we constantly keep all this under a monitoring eye.

We believe we've got some great investment opportunities. We've also got some great opportunities where we don't spend money, I mean, that's why I noted the increased excitement of our franchisee's about development. I think if we can get international right, you'll see a lot more people being added to the pipeline of international franchisees.

So we're excited about the range of investments both from a monetary point of view and a non-monetary point of view because, at the end of the day, the desire we have is to invest money, not just to give returns to our shareholders, but to stimulate growth from franchisee's in our system. And I think we're right and close to do that.

Right. If I could just ask one more -- it's does sound a similar line of question. Can you -- maybe John, if he is on the call, could you jump in and help answer this, but have you considered what the ideal capital structure is for this company? And I'm just, kind of, wondering from a longer-term perspective what you see your ideal capital structure being for this Company as far as that capacity goes.

This is David. I'll start out Dax. You know, Nigel has been here right about a year. And at this point, we like maintaining our flexibility because of all of those opportunities that he referenced that we believe are out there. So I think at this point we're comfortable. We just renewed our line of credit that gives us as plenty of borrowing capacity.

Could we leverage up, and you know, certainly, we could do that. So I think at this point, maintaining our flexibility is our number one objective and investing in those opportunities that produce excellent returns. And to Nigel's points helps per unit development, because that's where some of our real margin and leverage opportunities are.

I think it's fair to say that. In discussion with the banks, they're all desperate to loaners' money.

Yes.

And if we do want to go beyond their current facility, we'll have zero problems in that.

Okay. Thanks a lot.

John is on the line from Florida. So John do you want to say anything in addition to that.

Nigel?

Yes.

Can you hear?

Yes. We can all hear you.

Yes. What we tried to do the last few years was fix the fundamentals of business, and get comps roll in the right direction. And when we hand the business over to Nigel, we make sure the balance sheet is good and strong. So he does have the flexibility to do what he needs to do. I think it's fair to say that Nigel is very solidified in his position. He has the board's confidence, the franchisee convention has deluded you last week. When outstanding, I've never seen him this excited even in the eight days or the late 90s.

And the Nigel on the board now, right now working on this capital structure issue, so we were at work in process and I think we'll have something in the next quarter or two, where we can layout, depending the Board's approval and Nigel's and ours input.

Thanks, Dax. Crystal?

Yes, sir. Your next question comes from the line of [Patrick Stowe] with PRI Capital.

Good morning.

Good morning.

A lot of my questions have been answered. Just wondered on the guidance, obviously, in '05 we saw a pretty big increase in unallocated corporate expenses, and I realize and appreciate a lot of that is due to your outstanding performance in the year. I just wondered if you can give us a little help in looking at the '06 guidance, what kind of assumptions you make for that line item going forward?

This is Dave Flanery. I'll start out there. I think the best way that we've discussed that issue in the past is in 2005, because of the year we were coughing over, if you will, in 2004, all of our good performance kind of generated incremental bonus. Whereas in 2006, obviously, all the bonus targets get reset, and we have to re-perform at a higher level merely to get the same type level of bonus. So the opportunity of having more margin improvement, if you will, flow through for better operating results we think is very in 2006. So from that point of view that's a favorable component.

On the other side, we also though want to continue to invest in things like our online advantage and other marketing initiatives and our international infrastructure, which will tend to increase that level. So overall, I would say comparable levels to 2005 are about where we would expect things in '06 with kind of two offsetting items. Then Nigel...

Yes, I mean -- I think what I'd say is that I came in here, and we had a fairly lean G&A structure. We now see so many opportunities that we've put in extra resource to support those initiatives. Now we've put an extra resource, as I mentioned earlier, in development, the nontraditional example is one. We've put an extra resource in marketing, extra resource in systems, and this year we've got an extra resource in International. And we're also -- if you look back to last year, you have to recall that we made that investment that we talked about earlier, the 1.8 million, which I think was actually put in unallocated corporate expenses. So that's part of what you see.

So we're excited about the investments we made. We think those investments are going to turn into revenue. And as I mentioned in my remarks, online and database are good examples of that. So we feel comfortable with our G&A structure. And as I keep saying, I'm trying very hard to hit our guidance every year, but make substantial investments and prudent investments, and that's in both capital and G&A to grow our business. And this year, the biggest investment is in international because we believe an investment now will pay off in huge dividends in the future.

All right. Great. That's helpful. I appreciate it. In terms of the CapEx guidance, I think you said it's about 35 million to 40 million. Anyway you can kind of break that out in terms of what buckets it might fall in, in terms of maybe international and domestic expansion, as well as, I think, you mentioned a pretty significant systems investment. Is that a significant portion of that CapEx number just because it's increasing so much over this year, just interested in knowing where exactly it's going?

Right. Patrick, this is David. About half of that 35 million to 40 million guidance would be considered just our maintenance capital, which is the rate we've been running the last two or three years. So the incremental $15 million to $20 million, some of that is definitely corporate store growth where, as we've mentioned, we're ramping up our corporate store growth. So that's probably 5 million plus of that. The remainder is some systems development as we mentioned. And then, also, some of our support services infrastructure that we probably don't want too specifically about for competitive reasons, but we're also putting some resources behind some of our marketing capabilities, let's put it that way.

Okay. You mentioned earlier that the company wanting to kind of invest even more in corporate-owned stores and enlighten the profitability and ability to drive revenues there. Is there a kind of a long-term view of the mix you would like to see between company-owned and franchise stores, or is it just more opportunistic to take it as a comp?

Patrick, I've actually quoted in the past 20%, 25% is a nice mixture. So why don't we think that's a good number? I think the answer to my own question is why is -- we're actually delighted with our corporate performance, particularly last year was a spectacular year, sort of things that corporate performance won't continue to do really well this year. I think we see this as a great way of going in not only to boost our earnings, but to stimulate growth for franchisees. You'll see a lot of -- I think, if I look right down the road, you'll see a lot of buildings, and then turn it off to franchisees.

I think that's a great strategy. That's really the heart of the Philadelphia model. We really think that model could be very exciting. We've have done it in some other markets. We also see opportunities to buyback markets from franchisees, build them out, then re-franchise them. So you're going to see the number vary. It's clearly at a low percentage right now. I think it's about 19% company based on what David said earlier. I'd like to get that up higher.

We're working on various options for doing that, and some of that is obviously corporate development, as I mentioned, Philadelphia being a good example. We're also doing it in Austin, also doing in Dallas and one or two other areas around the country. But some of that will be buyback franchisees. And so, you'll see, I think, range between 20% and 25% over the next few years, but we really do see it as a very good return on our investment.

Thanks. Maybe two more quick ones if I can. I'm sorry. Any -- obviously, the company and the stock have performed exceptionally well over the last year and the double-edged sword you have there is your share repurchase activity gets more and more expensive. So is there any thought of maybe switching gears and starting paying a dividend as opposed to share repurchase, or can you just give us your thoughts between those two things?

Patrick, this is David. You're right about that. What we will -- the position we plan to be on with share repurchase at this point is primarily to offset the dilutive impact of option exercises, and probably not have a large incremental share repurchase. As far as a dividend, it's something we have talked about. And again, at this point, we want to retain that flexibility for our investment opportunities. But alluding back to what John said for a longer-term vision and strategy, I think it's something that we would consider for the longer-term.

Okay. Thanks. That's helpful. And then lastly, just housekeeping, any guidance you can give us on what tax rate you expect for '06? Obviously, we saw some variance in the fourth quarter there.

We're still basically using kind of the longer-term 37% in our projections. It is possible that it could dip a little below that because of some credit opportunities -- there is a manufacturers' credit, some of the things that actually helped us in the fourth quarter. So if anything, we would expect it to be perhaps a little below. But at this point, we think the safe thing is to still use probably that 37% range.

All right. Great. Thanks for all the comment. Good luck.

Thank you, Patrick.

Your next question comes from the line of Mike Smith with Oppenheimer.

Hi. Good morning.

Good morning, Mike.

Good morning, Mike.

A couple of questions. Actually one is a question about your response. When you said about half of your CapEx is for maintenance, I couldn't quite figure that was about $40,000 per store. How does that work out?

Well, that's maintenance capital. Remember, we have 10 manufacturing facilities around the country, our QCC distribution and manufacturing centers, our IAS. So that's not all restaurant level. And that would include relocations and so on.

Yes. I was going to say also we have not only the manufacturing QCC we also have a print driver. And we are including that, Mike, in maintenance capital.

Okay. Great. Other question you said you're going to get back on -- it seems like you're going to get back on the growth plan. Would you like to try and quantify how many stores you will open this year that would be company stores? How many of your franchisees will open this year and next as well? And how many of those will be international company-owned franchise?

Yes, Mike. And what we've said in our guidance is that we expect to open worldwide 210 to 240 stores a year, and we expect about half of those will be domestic and half of those will be international. And -- so if you get it mapped, that's about a 100 to 120 each, and about 20% of the domestic will be company-owned. So that puts us into 20 to 25 company-owned unit. Sorry, in our guidance we kind of did via percentage; we could have just put the number in there. But that's what the numbers would work out to be.

And is that a long-term picture or would you expect that to accelerate over the years or -- get us a better sense?

Mike. I see this as an interim year. We're going from what I would say is low-growth to medium-growth this year, because it takes time to build up, it takes time to get all these initiatives going. My longer-term goal would be to get up above 200 plus. And ideally, I'd love to get up to 300 eventually net --

Net units.

Net units, because you're always going to have closings no matter how well you perform. So 200 to 300 is our longer-term goal. And as I keep saying, ultimately, the growth -- a lot of the growth will come from international, but we've still got a lot of places in the US where we're not very strong, places like Chicago, Detroit, at the Northeast, at the West Coast. So we see a lot of opportunity. And the aim of our franchise meeting, which I would say was worldwide meeting last week, was to stimulate activity on behalf of our franchisees to grow all over the world.

And just to put some framework around what Nigel said, on a net basis for '06, our guidance would be somewhere around 140 to 150 net units if you kind of took the middle of our ranges for openings and closings. So obviously the goal would be to accelerate that net number over the next couple of years.

So you accelerate the net number from 140, 150 to somewhere around, 300 next year's out?

Yes, that might be good.

Great, thanks.

Thank you.

[Operator Instructions].

Your next question comes from the line of Fitzhugh Taylor with Banc of America Securities.

Hi Fitzhugh.

Hi guys. Could you talk about what you're seeing in terms of the overall growth in the pizza segment and maybe how that kind of ties in with your confidence that you can build more domestic units going forward both company and franchise? And also David, just quick housekeeping, secondly, just so I know, make sure -- I don't have the specific line items for the 2.1 million gain on the sale of the restaurants and the 1.1 million in impairment charge? Thanks.

Okay. I'll take the growth one first, Fitzhugh. Basically the pizza market obviously is very strong. But last year traffic in the pizza sector was actually down, if you look at all the industries' statistics. I believe we have an opportunity to get the category back to growth. That will be done I think by improved marketing. I think there is also an opportunity to improve both loyalty and frequency in the sector.

So if you take that as the macro overview, you then go down to the point I just made. Based on a Papa John's point of view, we've got lots of gaps in the geography around the country. We think we can fill in with success. Obviously we have to execute and that goes right back to the question that we had earlier on about -- I think it came from Mark actually about unit development that we need to execute our openings effectively and we have plans in place to do that.

So we believe there's a lot of growth left for Papa John's in the US and I believe that the US population grows and the pizza category becomes more and more, let's say, sophisticated in terms of marketing that the whole category will grow as well. So we feel very confident about the growth domestically. I think I answered the first question. Let's turn back to David for the other.

Yes, and Fitzhugh both the $2.1 million gain on sale and the $1.1 million impairment charge are in the line item called other general expenses, so in fourth quarter that was a net plus $1 million. It gives me a good opportunity to point out though that on a full year basis that net number is essentially zero because if you recall, we had a $975,000 charge in the first quarter of this year for closing our Jackson, Mississippi commissary center. So if you add that in there for full year, gains and write-offs or impairments, basically washed to zero. So thanks Fitzhugh.

Great. Thank you, guys.

You have a follow-up question from the line of Mike Smith.

This is just housekeeping one. BIBP, what is their equity position right now?

At the end of the year Mike, I think it was right around $18 million and if you look in our 10-K, which we filed concurrent with the press release, if the current milk futures market is accurate on predicting what the rough market price of cheese will be within 2006, we actually believe that deficit could pretty much be reduced to zero by the end of 2006. The market obviously has dropped significantly in the last few weeks and the outlook at this point for '06 is very favorable. So we're excited about that.

Great. Thanks.

There are no further questions. Are there any closing remarks?

Yes. I'd just like to say thank you to everyone for their interest in Papa John's this morning. We are excited about all initiatives we have. And as soon as we have more news on some of these initiatives, we'll be announcing them.

So thank you very much and have a good morning.

Thank you, Crystal.

Thank your, sir. And this will conclude today's Papa John's fourth quarter and year-end 2005 earnings conference call.

You may now disconnect.