Papa John's International Inc (PZZA) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to Papa John's fourth quarter earnings call. [OPERATOR INSTRUCTIONS] After the speaker's remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you, Mr. Flanery, you may begin your conference.

Thank you. Good morning. With me on the call today are our CEO and President, Nigel Travis; President of our PJ Food Service Group, Julie Larner; and other members of our executive management team; President of USA Bill Van Epps; President International, Rob Chase are traveling and unable to be with us today. 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. Certain factors that can cause actual results to materially differ are outlined in our earnings release and in our Forms 10-Q and 10-K. The call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format.

As we review fourth quarter and full year 2006 financial results, there are certain items that should be considered in order to present a true performance comparison. These items are summarized on page two of our earnings release and their impact is excluded from the performance comparisons that follow. We'll refer to these as the special items which consist of the impact of the consolidation of the BIBP commodities cheese purchasing entity in all periods, the impact of the 53rd week of operations and settlement of certain tax issues in 2006, and as a result of the sale of the Perfect Pizza operations in early 2006, the results of discontinued operations as reflected in our financial statements for all periods presented.

We were very pleased with our fourth quarter results in a tough sales environment. Revenues increased nearly 4% over the same quarter last year excluding the impact of the 53rd week as an increase in both average total units and the mix of Company owned units as compared to the prior year quarter, more than offset the slightly negative comparable sales results and the unfavorable impact of lower current year cheese costs on commissary revenues. Net income was $19 million for the quarter or $13.8 million excluding the special items representing an increase of 14.6% over the prior year quarter comparable results. Earnings per share assuming dilution was $0.59 for the quarter or $0.43 excluding the special items representing a 22.9% increase over the prior year quarter EPS of $0.35 on a comparable basis. We had an outstanding 2006 driven by our sales results that outperformed the industry by a substantial margin. Revenues exceeded $1 billion for the first time aided by the 53rd week of operations and increased 1.3% over the prior year excluding the impact of the 53rd week. The favorable impact of the increase in comparable sales for the year was partially offset by an unfavorable shift in the mix of company owned restaurants due to the timing of acquisitions and dispositions during the current and prior years and the unfavorable impact of lower current year cheese costs on commissary revenues.

Consolidated operating income margin percentage excluding the special items improved to 7.6% in 2006 as compared to 6.9% in 2005. Net income was 63.4 million for the year or $46.4 million excluding the special items representing an increase of 12% over the prior year comparable results. Earnings per share assuming dilution was $1.92 for the year or $1.40 excluding special items representing a 15.7% increase over the prior year EPS of $1.21 on a comparable basis and easily exceeding our targeted annual earnings growth of 10 to 12%.

Our core domestic business units performed very well for both Q4 and full year 2006. Company owned restaurants produced flat operating income in Q4 compared to the prior year as the impact of the 53rd week of operations in the current year substantially offset the impact of a $2.1 million gain on the sale of restaurants in the prior year quarter. Full year operating income increased $7.9 million as the increase in comparable sales and reduced commodity costs, primarily cheese, combined to drive improved margins. It should be noted that although our cheese prices at restaurant level were somewhat lower in 2006 than in 2005, because of the BIBP cheese pricing mechanism, we do not immediately receive the full benefit of reduced cheese prices in our Company owned restaurant segment results. The actual spot market cheese price averaged approximately $1.24 per pound for 2006 as compared to the BIBP average price of approximately $1.50 per pound. The favorable 2006 spot market prices resulted in a significant reduction in the BIBP deficit for more than $18 million at the beginning of the year to a slight surplus at the end of the year. Because of the impact of this deficit reduction on the BIBP pricing formula, we expect lower average cheese prices at restaurant level in 2007 as compared to 2006 favorably impacting the year-over-year profitability of our Company owned units and our franchisees.

Operating income from our franchising business unit was down slightly in Q4 due partially to fewer equivalent franchise units as a result of our recent acquisition activity and up slightly for the full year excluding the impact of the 53rd week of operations. Increased royalties related to increases in comparable sales and average units for the year were partially offset by increased administrative costs associated with the field organization restructuring in late 2005. Our domestic commissary business unit produced operating income increases of 3.8 million for the quarter and 9.2 million for the full year over the comparable prior year periods. A substantial portion of the increases was due to a combination of the impact of the 53rd week of operations, the impact of the sponsorship arrangement with Six Flags, and the loss associated with the closing of the Jackson commissary in the prior year. The remaining increase is due to additional margin on increased sales volumes.

Total system-wide International sales for Papa John's branded units increased 37.4% for the quarter, 27.2% excluding the impact of the 53rd week of operations, and operating losses for the International business segment of 2.1 million were consistent with prior year results which included a 1.1 million impairment charge related to the UK operations. For the full year, total International sales increased 30.4% or 27.6% excluding the impact of the 53rd week and full year operating losses of $8.9 million were 3.9 million higher than the prior year losses. This decline in operating results for the full year is due to our strategy of continued investment and infrastructure for our International operations including resources required to support the development and operation of both Company owned and franchised restaurants in the United Kingdom and more recently, China, with the acquisition of the Beijing market from our former franchisee.

Unallocated corporate expenses decreased $2.2 million for the quarter and increased $3.4 million for full year 2006 compared to the same periods in the prior year. The fourth quarter decline was primarily due to a decline in certain management bonuses as compared to the prior year and the impact of a $1.8 million discretionary contribution to the national marketing fund in the prior year quarter. The increase for the full year was primarily due to an increase in certain equity based compensation program expense and the impact of the Six Flags sponsorship arrangement partially offset by the prior year marketing contribution. Cash flow from continuing operations for the year excluding the impact of the special items decreased approximately $13.6 million as compared to the same period last year primarily as a result of unfavorable working capital changes related to accounts receivable and the run-off of claims payments for our captive insurance company. 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 $6.5 million of excess tax benefits related to the exercise of non-qualified stock options were classified as a financing activity rather than an operating activity in the statement of cash flows in 2006 as a result of the adoption of FAS 123R. We acquired 65 Papa John's restaurants and commissary facilities in Mexico City and Beijing from franchisees during 2006 at a total cost of $31.9 million. Nigel will discuss our acquisition strategy in more detail in his remarks. We repurchased approximately 1.4 million shares of stock during the fourth quarter and 3.4 million shares during the full year in 2006. Approximately 127,000 shares were issued pursuant to option exercises during the quarter and 1 million shares issued during the full year. The cash expended during 2006 on share repurchases net of the proceeds and tax benefit related to option exercises was $84.5 million. We repurchased an additional 793,000 shares of stock subsequent to year-end and we just announced that our Board approved a $50 million increase in our share repurchase authorization for the remainder of 2007. There are approximately 29.9 million actual shares outstanding at this time.

As a result of the share repurchase activity, our line of credit balance increased to to 96.5 million at the end of 2006 as compared to $49 million at the end of the prior year. Net interest expense was actually lower in 2006 as a result of the timing of the share repurchase activity but is expected to increase in 2007 due to the increased borrowings. Our tax rate was lower for the quarter and year in 2006 as compared to 2005 due to the favorable settlement of certain tax issues of approximately $2.5 million in Q3 and Q4. Our estimated tax rate for 2007 is 36.5%; however it is difficult to project the potential impact or timing of any future such favorable tax settlements.

We reaffirmed our previously announced 2007 earnings guidance in the range of $1.48 to $1.56 for the 52 week year. This guidance compares to 2006 base earnings of $1.40 excluding the special items and provides for continued significant investment in our International business unit. I'd now like to turn the call over to Nigel Travis, our CEO and President. Nigel?

David, thank you, and good morning, everyone. We're pleased with the very strong financial results we had in Q4, capping an outstanding year for our company. I'd like to personally congratulate our team members and franchisees for the second year in a row of industry leading performance. Although domestic system wide comp sales for the quarter were slightly negative, the substantial resources we put behind the launch of our Papa's Perfect Pan pizza in Q4 of 2005 produced comparable sales of 6.4% for the quarter and provide a very tough comparison in 2006. We also had tough competition as the fourth quarter progressed with both Pizza Hut and Dominos running very aggressive promotions in December.

In spite of these obstacles, we outperformed our key competitors in the entire category during the quarter, so we weren't too disappointed in our Q4 sales results, even though we don't ever like running negative comps. Our domestic system wide comp sales for the year were an industry leading 3.1% composed of very healthy results for both company owned restaurants at 3.6% and franchise restaurants at 2.9%. These results are on top of the 2005 comparable sales results of 5.1% and the combined 8.2% two year comps are our best back to back years since the '98 to '99 period. It's clear that our line up of compelling product offerings and our unique market and strategies are resonating with consumers and we hope to build on both of these strengths during 2007 and beyond.

Our two larger competitors also started off 2007 with very aggressive promotions and a huge television advertising presence; however, without giving specifics, we are comfortable with our start to 2007 and we are very excited about our current Sausage Sensation promotion. This did well as a limited time offering last year and we believe it will perform well again this year. Overall, we reiterate our domestic system wide comp sales guidance of an increase in the range of 1.5 to 2.5% for the year. We believe this level of performance will be very solid coming off the combined two year comps for 2005 and 2006 as noted previously, and given the sluggish growth projected for the pizza category for the year.

I do want to remind everyone, as we previously announced that beginning in 2007, we're reporting comp sales on a quarterly rather than a 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.

In addition to the excellent financial results that David reviewed, there were numerous other significant accomplishments during the year for Papa John's. For instance, for the seventh year in a row we won the prestigious American Customer Satisfaction Index survey conducted by the University of Michigan Business School. Additionally we were the leading national delivery pizza chain in the Restaurants and Institutions magazine consumers choice in chain survey, and we're named chain of the year by pizzamarketplace.com and more recently another survey measuring customer satisfaction online and if you want to look at that, that's called realpeopleratings.Com and this shows us to be the leading delivery chain. That's taken every quarter as a matter of interest. We were also ranked tenth in Entrepreneur Magazine's 2007 franchise 500 listing which is up from 29th place in the 2006 listing. We were one of five QSR concepts in the top ten and we believe this recognition will help spur the continued acceleration of our development activities as I'll discuss in more detail in a moment.

On a sad note, during 2006, we lost one of our Board members and franchisees, [Jack Lockery]. Jack was an icon in the restaurant industry for over 40 years. We will miss his humor, his leadership and friendship very much and our thoughts are with his family as we share their loss. One key insight that Jack mentioned frequently at Papa John's Board meetings was that franchisees don't slow down the development, they completely stop, and that's what we saw in the early part of this decade. As our domestic net unit growth was actually negative for three years in a row starting in 2002. This trend began reversing in 2005, spurred on by substantial improvement in both sales and margins for our franchisees and although our net development numbers for 2006 were somewhat disappointing, we believe we are now well situated to drive meaningful domestic development once again as our pipeline at the end of 2006 with over 300 units, an increase in both number and especially quality from recent years.

We've worked very hard over the past couple of years to achieve this turnaround in development momentum. As an example, we've implemented our buy and build strategy in the once stagnant Philadelphia market. We've piloted a creative store in store real estate model with blockbuster in the under penetrated Chicago market and we've seen the opening of these company owned units really drive additional franchise development interest in the market. We've also been sponsoring development conferences in key under penetrated markets across the country. The purpose of these conferences is to present the Papa John's opportunity to highly qualified potential multi-unit franchisees and have our rates in gaining new development agreements coming out of these meetings has been excellent. Finally, we've added both internal and consulting resources to improve our focus on minority franchising opportunities and non-traditional unit development opportunities. We're in the very early stages of our work in these areas, but are convinced we have significant opportunities ahead.

We believe these initiatives will collectively support our 2007 net domestic unit growth target of approximately 125 units, and we further believe we can sustain our even increase this level of annual domestic net unit growth for the next several years. Our trade area and demographic analysis indicates that in the domestic marketplace, we could support an additional 1,000 traditional Papa John's restaurants and achieving this additional market penetration is one of my primary goals. This opportunity is highlighted by the fact that today, we reached less than 50% of the domestic population with our existing store footprint. Increased penetration and scale provides many benefits throughout our business model, such as the ability to leverage our commissary system and influence supplier price negotiations, and the generation of increased funds for national marketing activities which is very important.

We think that within the next few years, we will expect to see our domestic company owned restaurant mix increase from approximately 22% at the end of 2006, that's including the majority owned joint venture units. So from that 22% to as much as 25% of total domestic units. We believe that shift in mix will occur as a result of strategic franchise acquisitions positive for the time frame as we continue to invest our capital to spur overall unit development, especially in underpenetrated markets such as Chicago and Philadelphia. Once these key markets and domestic as a whole are more fully penetrated, we will plan to reevaluate an optimal company owned franchise mix and develop an appropriate plan to achieve that optimal mix and that could be for instance a refranchising initiative.

Because of the overall domestic unit growth opportunity as noted previously, any such refranchising initiative is not likely to take place for the next three to five years. The confidence of our franchisees is a critical component of the ultimate success of our unit growth efforts. I'm pleased to say that the level of confidence is very high within the system. For instance, attendance at our 2007 Operator's conference to be held next week in Orlando will exceed the then record attendance of last fall's conference. We've also had record participation in our recent monthly webcast of the system. On the whole, I'm pleased to report that our franchisees are financially healthy, they're excited and they are engaged in our business.

We're also in the final stretch of completing some important modifications to certain key provisions of our franchise agreement. Due to the fast growth in the mid to late '90s, a large number of agreements are facing their initial ten year renewal. We've worked very closely with a franchisee task force to address important issues to both the Company and the franchise community and that's been done at a very collaborative manner. Although we don't want to discuss specifics until we've outlined key provisions of the new agreement to our franchisees at next week's conference, I will mention that we believe we have identified some unique approaches to driving increased levels of national marketing funds without raising the restaurant level contribution percentage. Of course, even though it will certainly be helpful to have additional national marketing funds, we will still have to rely on being more creative and clever than our key competitors in how we generate brand awareness and market to specific consumers. For example, our five year sponsorship agreement with Six Flags signed in 2006 outperformed both organizations expectations in its first season.

And we will continue to drive our online ordering advantage both from the marketing perspective as with our sponsorship of the PapaJohn's.com bowl and related promotional tie-in with ESPN but also with increased system functionality. During 2006, we improved the graphics and site layout, we added the plan ahead ordering feature and implemented Spanish language ordering capability. Coming soon, the customer will be able to store their credit card information on our site to make repeat ordering even easier. We'll also offer online activation and reloading of our papa card Gift Card, as a convenience any occasion gift idea or special back-to-school treat for the hungry college student. I really believe online helped our revenues significantly in 2006, as demonstrated by the following facts. According to the September Internet retailer survey, Papa John's is among the top 10% of all online retail websites based on the numbers of e-mail subscribers who have elected to receive our online offers. Secondly, our customers have placed more than 25 million online orders since the launch of our website in 2001, 25 million that is. Online orders have increased more than 50% each year since 2001. And finally, Papa John's online sales in 2006 exceeded 200 million.

For our International business unit, 2006 was a year of progress and transition. We made substantial progress in key countries opening our 50th restaurant in Korea and just last week opening our 50th restaurant in China. We also signed important development agreements in India, Egypt, and Mexico. Without giving specifics, we are also pleased with our comparable sales results in the United Kingdom, in China, and the rest of International. There were several transition areas during the year as we sold the remaining Perfect Pizza business in the UK, we terminated an under performing master franchisee in Mexico and we reacquired the Beijing market. Most importantly, we brought in new leadership in the person of Rob Chase as President of International and Ian Saunders as managing director of the UK. Ian of course reports to Rob. Rob and Ian have completed their initial assessment and outlined their strategic initiatives and we're confident we have the International leadership in place to seize the enormous opportunities before us.

We are especially excited about our growth opportunities in China which is why we decided to reacquire the Beijing market and adjacent development territories from our franchisee there. By having Company operations on the ground in China, we will be better able to react to changing business conditions and to support our very capable franchisee in the Eastern and southern regions of the country. China and Korea should provide the foundation for 2007 to be by far the largest net unit growth year ever for our International business unit. With guidance for net unit growth in the 100 to 125 unit range, and to put our near term unit growth potential in perspective, we ended 2006 with approximately 350 International units worldwide but with a development pipeline of nearly 850 units contractually scheduled to open over the next nine years.

It's important to note that even with accelerated unit growth, we do not expect International to be a positive contributor to our consolidated upgrades in income right away. Our current guidance is for the International business unit to produce about the same level of operating losses in 2007 as we did in 2006. This represents continued investments on our behalf in building a world class International support infrastructure and we believe this approach provides us the best opportunity for a meaningful contribution by the International business unit to our overall operating income growth starting in the next three to five years. One final point I'd like to make on growth is assuming we hit the lower end of our worldwide net unit growth guidance, we would grow the total Papa John's system in 2007 by 7.5%. In my view, that's a very nice clip.

In closing, I'd like to believe the outstanding results we had for 2006 of 15.7 growth in earnings per share on a comparable basis demonstrates the power of our brand and our franchise-oriented business model. We were able to generate substantial growth in operating income and EPS during 2006 with comparable sales in the low single digits, modest net unit growth, and significantly increased levels of International and corporate infrastructure investment during the year. Our strong free cash flow and our very conservative balance sheet leverage position provides us with the financial flexibility to drive shareholder value in current conditions, while protecting what we believe is substantial upside to our financial model from both our future domestic and International unit growth opportunities.

In short, our Board and Senior Management team remain very excited about the future of Papa John's and that confidence was a major factor behind our decision last week to return even more money to our shareholders which was in the form of additional share repurchases, and increase our leverage slightly. The franchise business model provides a consistency and a predictability that does not exist in many other businesses, and that supports our confidence about the future. And now, we will be pleased to take your questions. Back to David.

We'll open the lines up for questions now.

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

Hi, guys. Just a couple quick questions for you today. First, Nigel, you just kind of talked about it here a second ago but can you talk a little bit more about the possibility of kind of leveraging the balance sheet to buyback even more stock than you guys have?

Okay. Well, we've always taken a fairly conservative approach to the balance sheet as you know, Mark, and we listen closely to our shareholders, one of whom of course is extremely close to us, but we do go out and talk to other shareholders and there was a view that we needed to increase the leverage. We believe that the business in the last year has made substantial progress in developing new areas of growth, for instance our investment in China, some of the franchise buybacks in the U.S, and we'll continue to do that. This year, we're very keen to see how China goes. We're very enthusiastic about the progress so far, but it seems to us that perhaps to buy another country wasn't totally appropriate this year. It doesn't mean to say it won't be appropriate next year or the year after so this year seems to be a very good time to extend our buyback. That's why we made the decision last week at the Board meeting to up it to 50 million. I see this morning you're predicting we take it to 70 million. I'm not going to comment on that, but we decided last week that we're in a good position with a very strong cash flow to increase it some but I don't think you'll ever see Papa John's become very aggressive in terms of leverage. We're very happy with where we are. We've increased it a little from our past levels, and we feel extremely comfortable with that level. David, do you want to add anything?

No. The only thing I'd add really is our Board has certainly been very supportive as we've gone through and requested an increase in share repurchase authorization, so they've consistently supported that and we just like the growth opportunities ahead of us and we want to retain that flexibility while continuing a steady repurchase program to make sure we manage our capital structure and produce very good returns for our shareholders.

Okay. And as kind of a follow-up to that. I guess you're still comfortable with the 2 to 3 million guidance in your interest expense, kind of with the current debt level?

At this point, Mark, we would be. We'll see how the additional 50 million of share repurchase kind of occurs, the timing of that throughout the year, when we put the guidance out of course for example, nobody expected the market to do what it did yesterday, so we're kind of keeping our flexibility there too, but at this point, no. We would be comfortable.

Okay, and then a follow-up on the guidance. Are you guys still comfortable with the EPS guidance that you gave for '07? I look at the large amount of share repurchases that you guys have done and the flexibility that you have to do more. I mean, is it safe for us to say that the high end might be more likely now with where it looks like the share count has gone?

Mark, this is David. I'll start and then Nigel will jump in also. I think it's safe to say that with the additional $50 million of share repurchase as we see how that plays itself out over the rest of the year, it could impact that guidance. It was just so early in the year at this point and there are some things looming out there like federal minimum wage and the development of our Beijing market, for example, that we didn't feel it was appropriate to change the guidance at this time. I think it is fair to say that obviously we would be targeting the higher end of that range as a management team but at this point we didn't think it was appropriate to change the formal guidance. Nigel?

Yes, I think I'd add a few operational points to that. David talked about minimum wage. We've obviously planned for that as obviously our competitors have listening to their earnings calls. There's a lot of talk this morning on the TV about potential recession and I'm not going to make economic predictions but that seems to be stimulated by the slowdown in housing, I'm not quite sure how that's going to affect the industry so there's some question marks out there but also our competition, have got very strong plans in place. Again, listening to their earnings calls, they've already shown an aggressive streak this year. That may well continue so we're being perhaps slightly conservative but I think we're being prudent at the same time and we're watching what happens because this could be one of those years that is pretty tough because things happen, as David just said, in a fairly unpredictable manner and yesterday was probably the first example.

Okay, and then last question. Just on International. I know that it's still early in the game, but at some point here soon, may we start seeing same-store sales results and then second part of that question, can you just give us an update on the Mexico market and any progress with franchisees down there?

Okay, well, as David said, Rob is traveling. Rob, miraculously turned up now. So he will answer the second question about Mexico, but in terms of giving comp sales guidance, I don't see us doing that any time soon, because International is still fairly small. What I will try and do though, Mark, is give you some color. As I said earlier in my remarks we're very pleased with the comps in China, UK, and the rest of International for last year. International has in my view done pretty well over the past year. We're really building a strong base, but I can't see that happening in the next few years. In terms of Mexico, probably you are a little confused with some of the comings and goings but Rob will explain?

Sure, Mark. In Mexico, we had kept a small group of stores in a development area in Mexico City. We made the decision to franchise in the Mexico market completely, so we've refranchised the three stores that we had corporately. We have signed up a partner that we have great confidence in, the Danessa Group for Mexico City. They've signed a development agreement for 60 units, and they're in the process, actually they've got representatives here this week kind of going through operations and orientation training. We've as well signed a group in Quintana Rue, the State of Quintana Rue which is the Cancun market for a development agreement and we have a couple of other groups that we're discussing other parts of the country with for development in Mexico. So we very much like where we're at in Mexico today. We've got a number of very capable franchise groups and looking at others as opposed to the kind of one master, big geography set up that we had previously, and we're looking for good things to kind of happen in Mexico going forward.

Great. Thank you, guys.

Thanks, Mark.

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

Good morning, everybody. Did you mean to imply that domestic comps were positive so far in the first quarter?

No, this is a trick question. And more about your sustainability on the same track. Basically, we're going to go back and say what David said in his remarks which was exactly--?

That we were comfortable in light of substantial aggressive competitive environment. We're comfortable with how we started the year.

And I don't think we're willing to say anymore than that.

Okay. Nigel, as you look back at 2006, anything that surprised you positive or negative in particular that stand out?

Yes. I mean, I think there's some really good positive things. I think given that 2005 was so outstanding, I think if I was brutally honest, we did better on comps than I expected, and actually, domestically, we beat our budget, which demonstrates I think that we were a little bit cautious going into the year, so I think we did a great job so that was a nice surprise. I think -- we just talked about Mexico and that was kind of a surprise in the hand over between [Inaudible] when you run into that for a few months we decided we had to take action in Mexico and that came upon us fairly quickly but it was an excellent decision and I think the combination of David and now Rob have repositioned Mexico extremely well. I think a lot of our markets in our alternative marketing programs, we feel have went very well. I think one other thing I'd say is the competition continually talks on their calls about what a bad, tough year it was. We didn't see it quite that bad, so we must have either been doing something very well or they were doing something not so well, but we didn't think the year was quite as bad as they made it out to be. It doesn't mean, I mean in fact going into this year, we thought this year was going to be a lot tougher and it may well be, but I think that there will be kind of the surprises there.

And as you look at 2007 what couple variables are you most concerned about with respect to your long term objectives and on a shorter term basis, reaching your '07 guidance?

Good question. And I think the first thing would be minimum wage and the impact on that and which clearly could be good or bad because it's going to push up our cost base. It may put pressure on some, let's say the lower price competitors in the pizza industry to move away from their very low prices. I noted that one of our competitors had either noted that their franchisees had reduced costs, well, minimum wage is going to push their costs up so that could be a good thing.

Housing, I mentioned earlier, was an interesting one, and I have to say I'm slightly confused by what I hear on the radio, TV, and read in the papers and on the Internet. Some people say the housing problem has passed and then I hear in the last two or three days, the housing is a big moving problem and that people are still, as one analyst said on a program this morning, using mortgage refinancing as an ATM machine, which I thought was a nice phrase, so I think housing for a lot of people, particularly when rates catch up on the mortgages that kind of cause problems when people hit their one, two, three year cap on their adjustable rate mortgages, so I think that's something that we need to watch, but housing declined and even a possible, let's say quiet recession, in theory, should help people trade down and they may trade down through our category, so you could actually see that as an upside. So all of those kind of imponderables that we're trying to work through obviously it is very early in the year and going back to Mark Smith's question, I think these imponderables are fairly significant and that's why we're being cautious with our guidance for the whole year. David, do you want to add anything?

No. If you look at our model and if you ask in my opinion, Barry, we certainly want to watch the top line sales growth for our corporate stores because that business unit is fairly sensitive to sales variances, but the good news is the royalty stream and PJ Food Service are somewhat less sensitive to the comps within the franchise community, so we feel like we're pretty well positioned managing our whole portfolio to withstand even if something surprising were to happen during the year but at this point like we said, we're pleased with how the year started out.

Just one last question. Nigel, you mentioned that you thought International profits would be -- or loss would be similar in '07 to '06 and I was just curious if you guys would comment on '07 guidance versus how those individual profit centers were reported full year '06?

Barry, I'm not exactly sure I understand the question.

Like corporate stores. Are you, what kind of expectations you might have for profit growth for corporate stores, franchise income, those--?

Okay, I've got you.

Those specific unit break outs you gave in the press release.

If you kind of strip away the impact of that 53rd week in '06, we would see corporate stores, margin improvement, perhaps slight. We think commodities for us because of the way the cheese mechanism works could actually be a little favorable and again we have a 1.5 to 2.5% comp increase assumption so we'll get some leverage off of that to be offset a little bit by what's going to happen with minimum wage so I think we see corporate restaurants up. We see the franchising business units up again driven by both the net unit growth and the comp sales expectations. We see food service, if units and sales go up, we should see food service up again modestly. International we said would be relatively flat and we've said our G&A areas would also be up slightly year-over-year for a couple of reasons. One is some of the increased investment infrastructure building for International as we go in and expand corporate stores, for example, in Beijing and the UK, and then also we've got one final traunch, if you will, of our equity compensation kind of layering in the year-over-year effect of that. That will hit us a little bit in '07 so from a high level point of view, I think that's the way the business units ought shake out.

The other thing I'd add, David, is very sort of International on that question, I see that kind of a fixed cost. This is for the long term good of the Company and we will continue to pump money into the areas that we believe are necessary. The systems, be it more people, and Rob and I have talked a lot about some of the needs we have in International and to be honest, I personally would like to stick even more resources in there so I would see that as a fixed cost that we are going to spend up to.

And the other comment, that of course covers down through operating income and then below that, we obviously, anything we do on the share repurchase side even if it does drive interest expense back to Mark Smith's question, would certainly be accretive from an earnings per share point of view, so that's kind of the way we see it.

Thank you that's what I was looking for. That's all I had.

Thank you, Barry.

[OPERATOR INSTRUCTIONS] Okay there are no questions at this time.

Thank you. I think Nigel has a few closing remarks.

Thank you very much. Well, thank you very much to everyone for their interest in Papa John's today. We believe 2006 was an excellent year for our company, especially relative to the competition. Based on our quality positioning, we remain very optimistic for a successful 2007. Thank you very much.

Thank you. Thanks.

Thank you for participating in today's Papa John's fourth quarter earnings call. You may now disconnect.