Papa John's International Inc (PZZA) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Papa John's Third Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS] Mr. Flanery, you may begin your conference.

Thank you. Good morning, with me on the call are our CEO and President Nigel Travis. Our president U.S.A. Bill Van Epps, President of PJ Food Service, Julie Larner and our members of our executive management team. After a brief financial update, Nigel will have comments about our business and 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 and in 24 hours we will also be available in podcast form on our website. We're very pleased with the continued sales momentum we saw in the third quarter and the financial results driven by this sales performance.

We reported EPS of $0.40 for the quarter versus $0.31 last year. Excluding the consolidation of the BIBP Cheese purchasing entity, current year EPS for the quarter was $0.31as compared with $0.25 for the prior year. The current year quarter included a $0.03 per share benefit from the finalization of certain income tax issues. All of the following financial results we will discuss are prior to the impact of the consolidation of BIBP.

Our Perfect Pizza operations in the United Kingdom were sold during the first quarter of 2006 and have been classified as discontinued operations in our financial statements. Earnings from continuing operations excluding BIBP were $0.31per share for the current year quarter versus $0.24 last year. Domestic system wide comparable sales for the quarter increased 4.5% with once again very consistent results between company owned and franchised restaurants.

We're especially pleased with these results given that we were going over a 4.5% comparable sales increase in the third quarter of last year and the category was weak in both traffic and sales comps for the quarter. The substantial resources we put behind the launch of our Papa's Perfect Pan pizza in October of last year and the continued category weakness led to a comparable sales decrease of 1.8% for October with somewhat better performance for company-owned versus franchised units.

The pan launch drove an increase of 5.9% in comparable sales in October of last year, tough performance to comp over in the current year and for reference purposes, we had positive comps of 8.7% in November and 4.8% in December of last year. We continue to believe our full year comps for 2006 will increase between 3 and 5%. I do want to specifically mention our announcement in yesterday's release that beginning in 2007, we would shift to reporting comparable sales on a quarterly rather than monthly basis.

Our reporting methodology will then be consistent with our two major national competitors avoiding any potential competitive disadvantage but more importantly in our view providing for investors a more meaningful view of our long-term performance trends and strategies. The strong Q3 sales results drove improved financial results at both our domestic company-owned and franchise business segments with operating income from company owned restaurants up approximately $900,000 and from franchising up approximately $360,000 over the prior year amounts.

Increase support costs related to the previously announced reorganization of our operations management structure partially offset the sales-driven royalty increases for our franchising business unit. Our domestic commissary segment reported an operating income increase of $2.9 million due primarily to the favorable impact of increased sales volumes a portion of which resulted from the sponsorship arrangement with Six Flags implemented during the second quarter of this year.

Incremental marketing cost relating to this sponsorship agreement were approximately $1.4 million during the third quarter and are reported in the unallocated corporate business segment. Total system wide international sales for Papa John's branded units increased nearly 31% for the quarter.

However, operating income for the international business segment was approximately $800,000 less than the same quarter in the prior year. We continue to invest in the infrastructure for our international operations including resources required to support the development and operation of both company-owned and franchise restaurants in the United Kingdom, Mexico and potentially in other international markets as well.

To that end, we recently announced that Rob Chase who's join the Company as president of our international operations, and we're very excited to have Rob onboard. In addition to the one $1.4 million of marketing costs related to the Six Flags sponsorship agreement noted previously, the other primary reason for the $2.3 million year-over-year increase in the unallocated corporate business segment expenses is the incremental cost of equity-based compensation programs.

As discussed in previous quarters this year, although we elected to expense options several years ago as a result of the vesting provisions of stock options and restricted shares awarded in 2005 and 2006, and the impact of both share price performance and the layering effect of performance units awarded in both 2005 and 2006, the total expense recognized related to these equity-based compensation programs was approximately $725,000 higher in the third quarter of 2006 than in the same period of the prior year. Cash flow from continuing operations for the first nine months of the year excluding BIBP decreased approximately $11 million as compared to the same period last year primarily as a result of unfavorable working capital changes related to accounts receivable and income taxes.

The unfavorable change in accounts receivable was related to a significant improvement in 2005 from 2004 levels and is not an indication of deterioration in 2006. Additionally, approximately $5.7 million of excess tax benefits related to the exercise of nonqualified stock options were classified as a financing activity rather than an operating activity in the statement of cash flow as a result of the adoption of FAS 123-R. We acquired 43 units in Arizona during the quarter for approximately $17.7 million. And subsequent to quarter end we acquired 11 units in North Carolina for approximately $8.8 million. Nigel will discuss the strategy behind these franchise acquisitions in his remarks.

We repurchased approximately 381,000 shares of stock during the third quarter, and approximately 183,000 shares were issued pursuant to option exercises during the quarter. We've repurchased a total of $64 million of stock for the year to date and have remaining authorization of a little over $15 million throughout the end of this year. It should be noted even with the net share repurchase activity and the substantial acquisition activity during the quarter the amount outstanding on our line of credit was less than $50 million at quarter end as a result of our strong cash flow generation.

Net interest expense for Q3 was relatively consistent year-over-year and our income tax rate was 33.8% for the quarter as compared to 37% for the same quarter last year due to the favorable impact of the finalization of certain income tax issues in the current-year quarter as previously noted. It should be noted that because of the BIBP cheese pricing mechanism we do not immediately receive the benefit of reduced cheese prices in our company owned restaurant segment results. The actual spot market cheese price averaged $1.22 per pound for the first nine months of 2006 as compared to the BIBP price of approximately $1.52 per pound.

These current market prices have resulted in a significant reduction in the BIBP deficit for more than $18 million at the beginning of the year to approximately $1 million at the end of the third quarter and positioned us for favorable year-over-year cheese pricing at the company-owned restaurant segment level for 2007. This will also favorably impact the profitability of our franchisees in 2007. We'll updating our earnings guidance range for 2006 excluding BIBP from $1.42 to $1.46 per share to $1.45 to $1.49 per share to reflect the $0.03 favorable income tax adjustment in the third quarter. This guidance assumes comparable sales increases will be in the 3 to 5% range for the year and that worldwide restaurant development will range between 100 to 115 net new units.

Finally, we note in the release that the 1.45 to $1.49 guidance for 2006 represents a baseline performance of $1.35 to $1.39 after adjusting for the $0.07 of earnings impact estimated for the 53 week of operations in 2006 and the $0.03 for the noted tax adjustment in Q3 of 2006. We further note that our consistently stated earnings growth targets of 10% to 12% should be considered in relation to these anticipated baseline results for 2006. We expect to announce initial guidance for 2007 in mid-December.

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

David, thank you. And good morning, everyone. Once again I'm pleased to report on a quarter of real achievement and yet another quarter where we successfully balanced earnings growth against long-term investment spending.

Simply put, our third-quarter performance driven by continued strong sales performance was terrific. Comparable domestic sales increases of 4.5% for the quarter continued our industry-leading performance as we have beaten the average results for the QSR pizza category in 49 of the last 52 weeks to the end of Q3 and some weeks by substantial margins.

Based on industry sources, sales for the third quarter in the pizza category were down 0.9% making our performance all the more impressive. In October, we were disappointed to have negative comps after a 22-month run of posted numbers. However, we were comping against our pan product launch in October of 2005 the largest and most successful new product launching in company history.

We are determined and believe we can quickly return to another positive run. Third-party market data indicates we've been gaining share within the category over the past 18 to 24 months. The most recent data we have is that we have grown our share and in our footprint, that is the markets in which we currently operate from 16% at the beginning of 2005 to 20% at the end of Q3 '06. We continue to believe our quality positioning and our ability to execute operationally against that positioning are the primary keys to our success.

Consumers really appreciate the difference made by our better ingredients, better pizza brand promise but only if we can consistently execute at the restaurant level. That is why the organizational change we implemented nearly a year ago has been so important. By aligning corporate and franchise management and field organizational structures we've improved the consistency of our operational execution throughout our system as verified by our, in my opinion, world class measurement systems that John and the management team implemented before I came to the Company.

Continued development of innovative high quality products is also a key component of our success. After local option Windows in July and August we've popular limited time offer Sicilian meats pizza national promotion in September with good success. This was followed by our sausage sensation pizza in October and although we were never satisfied with negative comps, we were pleased with the performance of this promotion as we knew that comping out the largest introduction of Papa's Perfect Pan pizza would be very difficult.

In fact, period 10, which effectively is October was rolling over not only 6.2% posted comp for period 10 in 2005, but a total comp of just about 10% for the past three years. Our pan product was launched last October with a major national advertising and PR campaign featuring Dan Marino. In addition, there was a mismatch in the national television support for this year's sausage sensation promotion with one week of TV in October this year against two supporting pan last year. We continue to be excited about our new product pipeline and believe we have an outstanding promotion slated to close out the year.

This is very important as David noted as we continue to face very difficult sales comparisons in November and December. We're confident our planned promotional activity can successfully drive sales during this time frame. On top of our promotional activity we will continue to leverage our two big advantages of firstly our quality difference and secondly our leadership in on-line ordering.

Recently as you will have read we launched our Hispanic website. We think this is a big opportunity. And we also have great success with our plan ahead ordering. A good example is yesterday's numbers which obviously is Halloween where we actually had 3,318 orders planned ahead.

This is really a great convenience for our customers. One great thing about our relatively simple store-level business model is that we are successful in driving -- if we are successful in driving sales, we also drive improve profitability for both our company-owned units and our franchisees. Our analyses indicate that the health of our domestic system has never been better. We only a relatively small number of units at or below break even sales levels. The most common characteristics of these lower sales volume units is that they are located in under penetrated markets so they do not have the awareness necessary to drive higher sales volumes.

I'll discuss our development efforts to address this issue in a moment. With increasing sales and profitability comes an increased level of confidence in the system. And the brand within our franchise community. We conducted our fall operators conference in September and had record attendance by our franchisees. We continue to improve the communication of key programs to our system leading to better buy-in and execution of our most successful initiatives.

One outcome from increased franchisee confidence in the system is an increase in their desire to reinvest capital in the brand by developing new units. There is a ramp-up in the timeline for this process to occur as new trade areas are identified, development agreements signed and sights within those trade areas explored.

We believe 2006 has been our transition year for development domestically, and we're pleased with the progress we have made during the year in rebuilding the development pipeline. As noted in our earnings release, we expect to achieve worldwide unit openings near the upper end of our initial guidance of 210 to 240 for the current year.

However, due primarily to 34 restaurants closed in Mexico, in connection with our restructuring of that market, unit closings are expected to exceed our initial 70 to 100 unit range. This will result in net unit growth in 100 to 115 store range. We made good progress in some very important development areas during 2006.

We established specific resources devoted to nontraditional development and took a major step forward in this area with our partnership arrangement with Six Flags and the opening of our first domestic airport sites in Houston. We recently held a successful franchising conference in Boston leading to the signing of four new franchisees committed to developing 17 new units in the highly populated northeast region.

While we do not want to discuss specifics for competitive reasons at this time we have some very exciting initiatives underway in a couple of upper midwest markets where we have historically struggled to get traction. We believe the efforts to rebuild development pipeline in connection with our nontraditional and other initiatives will allow us to more than double our net unit growth in 2007 from the levels we achieved in 2006.

This level of development should not only improve our penetration and underserved domestic markets but further reduce the relatively small number of units working to achieve break-even sales levels. We believe leading by example is an important part of our responsibility as franchiser and that is one reason we will occasionally make strategic acquisitions to franchise units.

We recently completed two strategically acquisitions in Arizona and North Carolina. The 43 units we acquired in Arizona are in one of the fastest-growing regions of the country and we believe we can accelerate unit growth to further penetrate this exciting market.

We also believe we have an opportunity to adjust some of our marketing strategies to enhance both our brand image and improve unit economics for these restaurants. The 11 units we acquired in North Carolina are in the middle of one of our most well penetrated and successful regions of the country. In this instance, we believe we have the opportunity to improve operational execution to drive these high-volume units to even more sales growth and profitability.

We will continue to work to identify opportunities for us to acquire franchise units when we believe there are strategic reasons to do so and we can acquire them at prices that we believe will produce an appropriate return on our investment. Before discussing international, I would briefly like to cover two units that receive little coverage. PJ Food Service is a vital cog in ensuring both quality and profitability to our U.S.A. system. Our aim here is to continue to seek new innovations both to ensure quality product and drive down our cost of sales.

Our preferred solutions is our printing and promoting operation and another source for our franchisees to receive good cost effective products tailored to their requirements. Our printing capability has proven attractive not only for third parties but was ace up our sleeve during the Six Flags negotiation earlier this year. Both units are doing a great job and I believe will grow their profitability in the next two to three years as our invests and better equipment pays off.

My next comments enables me to tackle an issue that has been a big subject in the Food Service world this week, and that is the presence of transfats. Many companies are working hard to remove these from their products but I am pleased to report that at Papa John's we have none in any of our products worldwide.

Now I'd like to turn my attention to our international business unit. We're said previously that building the infrastructure and bringing in the appropriate resources to support our international growth were key objectives for the next few years. I'm pleased to report that we have made significant progress in the area of resources with the recent additions of Alice Leblanc as our VP of Global Chain, Ian Saunders as our Manager and Director of Papa John's UK, Peter McCoo of SVP of Human Resources and Rob Chase as President of International. These individuals have many years of international business experience. Much of it in the restaurant industry.

In total these executives have only -- have only a total of 12 moths PJ's experience but already are really making an impact. Alice is set about revitalizing our world wide supply chain which is so vital to the both maintenance of quality and improved economics for our franchisees world wide. Ian has kick started the U.K. business with some very impressive comp sales while Rob's strategic minds set is going to help our international business be better focused in the use of people and resources. I'll talk about Peter later in my remarks.

We will continue to invest in the required systems and organizational support structures to build a strong foundation from which to successfully grow our international business. We currently do not have anywhere close to critical mass of unit development in any of our international markets. And until we start to develop such critical mass over the next few years, international will continue to be an area of net investment for the Company.

In fact, we only have two markets with over 50 stores, that's Korea and the U.K. Rob Chase, David Flanery and I just returned from a trip with all the members of our management team to four of our most exciting international markets. Shanghai, and Beijing in China and Seoul, South Korea. The commitment of our franchisees and the quality of their restaurants and operations in these markets are exceptional.

We are evaluating every opportunity we have to accelerate development in these and our other international markets to achieve that essential critical mass as quickly as possible. This could include investing our own capital in certain situations where there is a strategic fit and strong expected returns. Just a few words more on China which I really do see as a major opportunity. I believe this will be demonstrated in 2007 when by the end of the year we should have over 90 stores.

The fastest-growing middle class the exception of western food chains the impetus drive by the 2008 Beijing Olympics and the growth in the economy offers a wonderful combination for us which we will take advantage of. We're now placing significant resources in the region which will help us better localize our menu and market it. However, one thing is clear from our trip last week. In China, and all our markets our major competitive advantage is the maintenance of the same product and service quality advantages we have in the U.S.A. In these markets like the U.S.A., we measure absolutely everything to ensure this quality difference.

I'd said I'd return to Peter McCoo and [inaudible] VP of people department. Peter is a very experienced HR executive who I believe has a major role in ensuring that we have the right people to meet the challenges ahead of us in the next two to three years. These include finding the talent for international expansion and ensuring that we have the right compensation programs to attract great talent while ensuring we're balancing the need for good corporate governance. Before I turn the call back to David for the Q&A, I'd like to reiterate what we've said this year about balancing various aspects of our business. We intend to balance the earnings growth of our core business units with the need to absorb operating losses as we investment spend in our international businesses.

We intend to balance our capital spending for long-term growth initiatives with opportunities to continue our share repurchase program and fortunately, we have the real cash flow available to do both. And we intend to balance our focus for the rest of this year and into 2007 on several key on the objectives. First, we must always maintain our quality advantage and we believe we have established the systems and processes to support this key objective.

Second, we must continue to drive our sales momentum with comparing new products and promotions and by continuing to enhance our advantages in the areas of online ordering and alternative marketing approaches.

Three, we must take advantage of the increased confidence, momentum and profitability within our franchisee community to drive worldwide net unit development. And finally, we must take advantage of the momentum we are building in international wherein Q3 our system sales grew by 31%. By accomplishing these on the objectives and managing our strong cash flow wisely, we are confident we can achieve earnings growth of 10% to 12% for many years to come.

While steadily building shareholder value. And now we'll be pleased to take your questions. David.

If you want to open the lines up for questions, thank you.

[OPERATOR INSTRUCTIONS] At this time I'd like to reminds everyone if you would like to ask a question, press star then the No. Your first question comes from the line of Mark Smith with Sidoti.

A few quick questions for you. Nigel, back to your comments on acquisitions, were these acquisitions that you made, were these part of the buy and build strategy and is the long-term plan to begin refranchising these units a few years out?

Okay. Mark, good morning. Firstly, these weren't part of the buy and build strategy. Buy and build as we've said on previously calls we have got a couple examples, principally Philadelphia is one we always note. These were markets as I said in my remarks we believe we had opportunities to change the marketing approach, the way the stores were run, but particularly Arizona which essentially was Phoenix, Mark, we feel that that's a terrific growth market. I think as you build, it's the fastest growth market in the country.

Yes, it is. It has three of the top 10 cities in terms of growth.

So, you know, we're very excited about that market. The other one in North Carolina, we saw a terrific opportunity to boost the store sales. We believe there was natural syngery with what is probably in our top three markets in the country and the Raleigh area. So that was a natural acquisition to make. We will continue to look for opportunities like that but to answer your question longer-term question about refranchising, one of the things we're excited about is we want to fit in areas and then as essentially we're a franchise organization, if we see the opportunity to either bring in a great new franchisee, I mean, a good example of what we did on that front was last year when we bought in a brand new franchisee that's done very well with the Denver and Minneapolis market. If we see an opportunity to refranchise, we will. We've got guidelines that we talked about before in terms of number of corporate stores that we want to own which is essentially 20, 25% so we'll try to balance that percentage against building our franchise system.

Okay, great. Next, can you give just give us an update on Mexico and restructuring there, kind of where you are and where you would like that market to go?

Okay. I will kickoff on this. Mexico, to say we closed 34 stores and to say we're pleased about it sounds ridiculous but to be honest, that's true. Mexico was a very disappointing market for us. We were disappointed in the way it was operated and essentially without going into detail, David Flanery,was running internationally it was one of the most positive things he did was actually looked at that market and say we need to take action and he took positive action that resulted in the closure of 34 stores. We changed our franchising approach. We bought back some stores. We bought back that the QCC. That QCC really gives us the base for ensuring our supply chain is cost-effective and gives us the quality difference. We kept the stores to build a base. We're very close to signing on two significant franchisees in Mexico. The deal should be done within weeks, that's why we don't want to give too many details because they're not actually done. We're excited about the people bringing it in. I've actually met one of the groups myself. I have to say of all the groups that have come in to meet me over the last 20 months this probably is the most impressive. I think it may see the value of our quality positioning.

They understand that Mexico as huge growth opportunity. Yes there is strong competition there from both Pizza Hut and Dominos. They do a very nice job down there but we think Mexico has the growing middle class a bit like China. We think it's close enough to manage very well from our Louisville base. I'm confident that Rob Chase, our new president of international is going to add a lot of value there and he knows that market pretty well from his previous experience. So we're kind of excited but I think the real results will be several years out, Mark.

Just curious, are there online capabilities for all the restaurants down there?

I don't -- I'm looking around this room, I don't believe there is and Mark, I think you raise an interesting point there. One of the things I'm kind of fixated about is to online has been so successful for us here in the U.S., we believe that we've got to create the same opportunities internationally. We're very pleased with the way online's going in the U.K. at the moment. We have online in certainly Korea and that's going very nicely. I saw that myself last week so what I want to do is replicate the success we've had in the U.S. and international markets but Mexico doesn't have it and that's something we have to work on.

Last question and not sure what you can tell me on this, it's not really quantities . Can you comment on the industry in general. As we've seen gas prices go lower here, consumers not being squeezed as much and yet we saw a negative comp in October, is there any real correlation there, do you think consumers traded out of maybe casual diners and into pizza with high gas prices and maybe are going back into other categories?

I think that's an interesting question. I mean, on the previous calls when gas prices were going up, we believed it would benefit us and we thought it did. But if you look at the industry numbers through Q3, the industry apart from us had very disappointing numbers so that theory didn't seem to work. So I think based on the logic of that, you have to assume that gas prices going a bit lower probably didn't help the industry much either. So the theory sounds great. I'm not sure it's proven out in fact. Just, you've given me the opportunity to October again. October was always going to be a seasonally tough month and when you only have 14 weeks TV in the year to lose one week as significant percentage of your overall national TV cover. We decided to rebalance our TV through the year. We knew it was going to cause us a problem in October but we decided to look at the year as a whole. In other words, taking longer rather than a short-term view that rebalancing that TV was the right thing to do. I'm convinced it was and I think we'll benefit later in the year as a result of that.

Great, thank you very much.

Thanks, Mark.

Your next question comes from Barry Stouffer with BB&T capital.

Good morning, gentlemen.

Hey, Barry.

Wanted to know if you had noticed any changes at all in your transaction volume or ticket averages gas prices have come down? Any changes in consumer purchasing behavior as all?

I'm looking around the room, we study these numbers daily, and Barry, I think you know I'm kind of fixated on looking at daily numbers. We've seen nothing at all. I mean, the trends that we talked about before continue online. As our percentage of online continues to increase, I know we don't disclose it but it continues to grow. We see a continued growth in the amounts of the online ticket against normal ticket, so we're pleased with that, and that's why we continue to push online. Our plan ahead ordering ticket continues to grow so there are a couple of trends we see but we've casino real difference at all despite gas prices coming down. And perhaps that just adds further fuel to the point I made in answer to Mark's question that even though the theory sounds great, it hasn't necessarily worked for the industry. As gas prices go up, the industry improves.

Okay. And can you comment at all on transaction change versus check change in the third quarter? Prior year?

This is your latest attempt to get me to reveal it.

Yes,.

And I have to say it's very creative, and the answer is no, I'm not going to except to say that we were pleased with both transactions and ticket in Q3.

Okay. How about wage rate inflation during the quarter versus prior year?

Barry, this is David. I think we definitely see some things on the horizon. I'm not sure Q3 was a quarter in which we saw much impact year-over-year. Our labor was actually down a little bit in the quarter year-over-year. But we definitely are watching the horizon. We know several states have already enacted some, minimum wage legislation and several other states are actually looking at it as a ballot initiative so it's something we are keeping our eye on, but it wasn't a significant impact this Q3.

Okay. And do you have any comment on the commodity outlook for next year?

What we're seeing, again, for us at the restaurant segment level, we've said previously that cheese should be favorable for us if you look at the way our -- the BIBP pricing formula works so we should get at restaurant level and our franchisee level some year-over-year improvement in cheese. The rest of the commodities at this point I think we were more worried that the rolling impact of fuel costs would go into commodities for '07. That maybe has been a baited just a little bit with fuel coming down. So the rest of the commodity market basket we don't see anything very unusual in that.

Okay. And can you talk about what's happening with utility cost what happened in the third quarter and then your outlook for' 07?

Yes. For third quarter year-over-year, it was up just slightly as a percentage of sales which as one dollar amount, it was up even a little more than that since we had good sales in the third quarter and again this was one of those things if you asked us a few months ago we had probably have a darker outlook than we do now. The current view, longer-term cure viewer is little more moderation in increases than a few months ago when it was really looking like it might be significantly higher.

I would add one thing there, Barry. Long term we assume that all kinds of fuel costs will continue to rise over the longer term. That's why in getting our well ovens into places is absolutely critical.

As of the quarter we had 210 well ovens in place. We're taking every single oven that middle B marshal can produce. We're determined to get them all into our corporate stores by the middle of next year we see that as not only speed efficiency. The oven gives us that two-minute advantage but gives us significant energy savings and any other cost that David talked about like minimum wage, we see this as part of our very balanced approach to mitigating costs.

Okay. Thank you. That's all I had.

Thanks.

Your next question comes from Kyle Gliggerman with Intrust Capital.

I'm looking at the full year guidance for three to 5% and given that you're running 3.8% currently and given the tough comparisons of the next couple quarters, should we expect more on the lower end just thinking that to get to 5% we would need very high comps the next two months. How should we look at that?

Okay, I'll kickoff. I mean, clearly as David said in his remarks. We've got a fairly big number. We feel we can put in a good performance this month that's clearly a big nut to crack and there was fairly significant numbers in period 12. As I said in my remarks, we've got very good promotion to finish the year. I feel kind of bullish about that month. But obviously like in any month, you have to execute, anyone can have a great promotion.

It's how you pull it off that counts so we've got to be very focused but we've done it before this year. I started the year kind of worried about the comps in April, worried about the comps in May, worried about the comps in October and November. And we managed to beat all those apart from October. Some people were kind of surprised with our numbers in September. So if you go through the year, we've surprised people to the upside. So even though they have big hurdles to overcome, I feel that our combination of online, our quality difference and the promotion and our ability to execute gives us great confidence going into the tough two final months.

Great. I guess the question I was getting at, 5% being the high-end the range plugging them into the last two months here, I think we would need 10% comps to get to the high end. And I was just wondering, if that's, high he understands still, you know, even in, you know, at odds attainable and how we should think about next year as we continue to lap a couple good years that you guys have put together.

Kyle, I think, I think your question's a good one. I think the right view is that the midpoint of that range is probably where we think our most likely result for fourth quarter is.

Okay.

We wanted to give a range to show here's what's possibilities are. So I think near the mid point that have range is probably our most probable scenario for fourth quarter.

Okay. Thank you.

Thank you.

Your next question comes from Jennifer Milan from Ryan Beck.

Hi, guys. I was wondering if you could comment at all on the higher than planned closures the color behind the reasoning behind that or the particular markets that are being affected.

Jennifer, I think the story is just one word, Mexico. If you actually how we started the year, when we gave our guidance last December, we hadn't made our change in international. And as I've already said, I compliment David in the tough stance he took on where we were going in Mexico which was in my view essentially nowhere. He took the tough calm. We effectively restructured the market and if you take out 34 closures, that makes the big difference from the guidance to where we've ended up.

So I think it's a very straightforward story. And I must say in the U.S., we kind of pleased as I said in my remarks with the way our franchisees have followed through with their execution of our programs and by that, they've improved their revenues. We've reduced considerably the number of stores that are below break-even as I said again, and so the U.S. has been a real success story in terms of store closures. So I come back, the answer is one word, Mexico.

Okay. Great. And then on the Hispanic website, that has been helping to drive online ordering or what are you seeing there?

It started. We've not pushed it. One of the things we've learned from a lot of experience online is that with online you start slowly. You build up. People get to test it. People get to like it. It becomes stickier. In other words, they find it difficult to move away from our site.

And we're confident that is certainly if you like the south part of the country, but not exclusively the south part of the country that that website's going to become very well used. Bill last week was making agencies and I think the numbers they were giving him about the opportunity with Hispanics online kind of beat our expectations. Bill, do you want to talk about that?

Jennifer, one of the things we found out last week when we were talking to ad agencies in Phoenix was that 40% of the Hispanic population goes online so that was a higher number than we anticipated so we have plans in place to really drive the Hispanic online site. So look for us to do that in the next several weeks.

Okay. Great. And then lastly, I missed your comment about your most recent, sausage sensation pizza?

Yes.

Can you comment again?

Basically what I said in summary was that we were pleased with the promotion. Something I didn't say is we were actually pleased with the percentage, in other words, the mix of sales which we don't actually give the number. But it was one of our higher promotional items and I think that just highlights the point we've been making through this call.

We're disappointed we finished our run of comp sales 22 months, it was a good run. We were going against a huge nut in period 10 because we threw everything but the kitchen sink, at pan last year. It was a major launch. It was a very successful launch so to expect anything to go against that was always going to be very difficult. As I said as I started the year I thought this was one of the toughest months and I think we executed this sausage sensation very well, it is still out there, and our customers seem to like it.

Okay, Great. Thank you.

As a reminder, ladies and gentlemen, if you want like to ask a question, press star then the No. 1 on your telephone keypad. Mr. Flanery, there are no further questions from the phone line.

Thank you very much.

You're very welcome, sir. This concludes today's conference call. You may now disconnect.