Papa John's International Inc (PZZA) 2007 Q4 法說會逐字稿

Good morning, my name is Brent, and I will be your conference operator today. At this time I would like to welcome everyone to the Papa John's fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. ( OPERATOR INSTRUCTIONS)

Mr. Flanery, you may begin your conference.

Thank you, Brent. Good morning. With me on the call today are our CEO and President, Nigel Travis; President, USA, Bill Van Epps; President PJ Food Services and Preferred Marketing Solutions, Julie Larner, and other members of our executive management team. After a brief financial update, Nigel will have comments about our business and the management team will 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 our limited time on our website and in downloadable podcast format.

Our fourth quarter and full year financial results were very solid in a tough economic and competitive environment. In order to better evaluate your performance in relation to the prior year, we have adjusted results for the following items. First, gains or losses from the BIBP cheese purchasing entity were eliminated in both years as is our consistent practice. Second, the impact of the extra week of operations was eliminated in 2006. And finally, gains from the finalization of certain income taxes used were eliminated in both years. Fourth quarter net income increased 7.1% and endings per share increased 20.9% over the fourth quarter of 2006 after eliminating these items. For the full year, net income increased 7.4% and earnings per share increased 18.6% over 2006 on the same basis.

We were especially pleased with our three-year track record of EPS growth. 21% in 2005, 15.7% in 2006, and the 18.6% for 2007, giving us a three-year compound annual growth rate of 18.4%, well in excess of our 12% annual EPS growth target. Consolidated revenues increased 26 million or 10% during the quarter, and $82 million or 8.4% for the full year, as compared to the same periods in 2006, excluding the impact of the extra week of operations on the prior-year results.

The primary reason for this increase in revenues was the acquisition of company-owned restaurants from franchisees during 2006 and 2007. I'll have more to say about the ownership mix of our domestic restaurant portfolio shortly.

We were very pleased with the 2.1% domestic comparable sales increase during the quarter, driving us to positive comp sales results of 0.4% for the year. International systems sales increase 27.3% for the quarter and 28.1% for the year, while worldwide system sales increased 7% for the quarter and 4.4% for the full year, excluding the impact of the additional week of operations in 2006.

We were also very pleased with our unit development as we opened 87 units worldwide during the quarter and 263 units during the full year, with net unit growth at 69 units for the quarter and 193 units for the full year. Domestically, we were able to maintain the development pipeline at 300 units with new signings and we believe the fact that 70% of those new signings were to existing Papa John's franchisees is an indication of franchisee confidence in the system. Nigel will have more to say about both our sales and unit development results in his remarks.

Profitability was down for the year in company-owned restaurants, even after adjusting for the impact of the additional week of operations in 2006. On a segment basis, company-owned restaurants saw margin increase -- decreases of 2% for the year, 7/10 of which was in labor cost, 4/10 of which was in commodity costs, and the remaining 9/10 of which was in occupancy and other costs due to relatively small increases in a variety of expense line items such as rent, credit card fees and other transaction-related expenses.

The 2007 results for this business unit also included a $1.5 million charge related to the sale or impairment of certain restaurant, partially offset by an approximate $600,000 gain related to a negotiated lease termination during the year. Domestic commissary profitability was up approximately 7% for the year, after adjusting for the impact of the additional week of operations in 2006. Margins were up slightly in 2007, primarily due to a sales mix shift to higher margin fresh dough product during the year.

Domestic franchising profitability was up slightly in 2007 after adjusting for the impact of the additional week of operations in 2006. The increase in franchise fees as a result of the franchise renewal program was substantially offset by additional field organization support staff costs. Consistent with our plans for the year, the operating loss for the international business unit improved slightly from the prior-year results.

The increase in revenues from new units and unit sales volume growth was offset by increased personnel and related costs as we work to build a strong foundation for the future growth of this business unit. We continue to believe we are on target to improve international results by approximately $3 million in 2008. G&A expenses for the year were slightly in dollars but down substantially as a percent of revenues from 10.3% in 2006 to 9.5% in 2007. The business segment analysis best demonstrates the reduction in administrative costs.

The segment we call unallocated corporate expenses was $6.1 million lower in 2007 than in 2006, but the G&A component in this business segment was actually $11.9 million lower in 2007 than in 2006, primarily due to reduced management incentives and corporate self-insurance costs. This reduction was partially offset by increased interest expense due to higher average debt balances resulting from the share repurchase program and restaurant acquisitions during the year.

Operating cash flow was $93.3 million in 2007, as compared to $66.2 million in 2006, an increase of $27.1 million. Free cash flow, defined as net income plus depreciation minus capital expenditures was $54 million in 2007, representing a free cash flow yield of approximately 7.5% based on 30 million weighted average diluted shares outstanding for 2007, and the recent share price in the $24 range.

No acquisitions of franchise restaurants were made during the fourth quarter of 2007, and as previously stated, the company does not expect any significant acquisition activity going forward. In fact, we did announce a refranchising initiative that should produce additional cash available for share repurchases while also lessening volatility of our operating results. Nigel will discuss this initiative in more detail in his remarks.

We continued to return free cash flow to our shareholders, buying back nearly $73 million of our stock during 2007. Weighted average diluted shares were 9.2% lower for 2007 than for 2006. We have repurchased an additional $2.3 million of stock thus far in 2008, and have 47.7 million remaining on our current board authorization. We also continue to have a very conservative balance sheet with $134 million of debt outstanding at year end or only about 1.2 times 2007 EBITDA of about $115 million.

Finally, we are reaffirming our previously announced earnings guidance for 2008 of $1.68 to $1.76, and Nigel will discuss our rationale in some detail in his remarks. I would now like to turn the call over to Nigel Travis, our CEO and President. Nigel?

Thanks, David. Good morning, everyone. I couldn't be more pleased with our fourth quarter results, but financially and in our key operational performance indicators, given the very challenging environment from a number of angles. In the fourth quarter, the consumer was feeling constrained in terms of housing, credit, confidence and the industry was under pressure with commodity price increases. As David noted, Q4 '07 earnings per share increased nearly 21% over the comparable 2006 results to $0.52 per share. Full year EPS increased 18.6% over comparable 2007 results to 166 per share. That should be comparable 2006.

I'm particularly pleased that we're able to achieve this level of performance with two of our key business units less profitable than they were in prior year, even after adjusting for the additional week of operations in 2006. Our company-owned restaurants face margin pressure on both the labor and commodity fronts and I'll have more to say about the cost environment when I discuss our 2008 outlook in a few minutes.

In order to help our domestic stores, our commissary business unit was intensely managed to lower levels of profitability in Q4 as we reduced margins across the board to help mitigate commodity cost increases. Also, we made a discretionary contribution from our commissary business from the national marketing fund to help support future system-wide revenue driving initiatives. During the quarter, and indeed the year, we also did a very nice job controlling our G&A cost and we're carrying this cost discipline into 2008. Again, I'll have more to say about our 2008 outlook shortly.

Domestic comparable sales for the quarter increased 2.1%, hardly up based in the pizza category performance of 0.2% and pushing our full year comparable sales to what we believe to be an industry-leading 0.4% positive. This was our third consecutive year of positive comparable sales with cumulative three-year growth of 8.6%.

On top of that, total international system sales increased over 27% in the quarter, continuing very strong momentum in that business unit. Our other key operational performance indicator, worldwide unit growth, was also very strong during the quarter. Both 87 new unit openings and 69 net unit openings, which [causes] unit opening/unit closing, were the highest in any quarter since the fourth quarter of 2000. And our full-year unit development results of 263 unit openings, resulting in 193 net new openings was similarly the highest for full year since 2000.

In fact, the 193 net new units were more than double the next highest year during that time frame. The key to our sales success during the fourth quarter was the strength of our promotional offers throughout the quarter. We featured two Tuscan specialty pizzas in period 10, one of which, the Six Cheese was so well received it has been made a permanent menu item.

A partnership with Sony Home Entertainment in connection with the DVD release of Spiderman 3 follows at our period 11 promotional offering. This offer for an extra-large pizza without the three toppings for $12.99 provided outstanding value for consumers due to the inclusion of a $3 off coupon for the purchase of Spiderman 3 DVD. This marked our third DVD release promotion following King Kong and Superman Returns and each has performed very well.

In terms of our pizza and entertainment strategy, we recently introduced a new online partnership with netflix, the industry leading provider of online video rentals. Period 12 opens a lot of windows for us with many but not all market, offering free medium two topping pizzas for $7 during a time of year when ticket averages generally climb as families get together for the holidays and make larger food purchases but still expect good value.

Although we performed well during this promotion, I believe we can make our local windows more effective by nationalizing certain promotional aspects. I won't go into more details for competitive reasons.

As you recall, our comparable sales guidance for 2008 was a range of projected domestic comparable sales increases from 1.25% to 2.75% for the year. Although it's still early in the year, I'm pleased to report that our sales results thus far allow us to reaffirm this guidance.

However, there is no doubt that the category continues to be highly competitive, and as we have predicted before, the tough times are forcing the smaller chains and independence to cut corners reducing the quality of their product. The result of this should be some consolidation of the 65,000 pizza units in the USA. Life has become even tougher with new competitors such as Subway and Dunkin Donuts adding pizza to their menus, and [inaudible] pizza continues to generate year-over-year sales increases.

However, we're very pleased that based on third-party sources, we increased our market share of sales by 0.2% during 2007 in this tough category. We certainly know that we can't rest on our laurels as we get the new year started. For 2008 and consistent with all of my three years here, we will maintain our focus first and foremost on driving top-line sales.

One thing that we have learned so far this year is even in the tough consumer environments that we find ourselves, our focus on quality seems to win through. It will be easy for us to reduce the quality of our pizzas, by reducing the amount and quality of our toppings and crust, but our customers have continually told us they come to Papa John's for the best quality products in the industry.

In essence, our research tells us that they want us to consistently deliver better ingredients, better pizza, and we will. Our focus, therefore, will continue to include a major focus on our specialty pizzas, like the Six Cheese that i've mentioned earlier, The Works, The Meats, Garden Fresh, and so on. This allows us to focus on our high-quality products which provide great value to the customer without requiring steep discount levels like some of our competitor offerings. At store level, all of this translates into never allowing anything other than a perfect pizza to leave the door.

The second initiative I want to discuss briefly is one to further expand our leadership position in online ordering. Although our largest national competitors now offer online ordering, we continue to drive the highest percentage of our total sales through this channel. During Q4, we hit the 20% of sales target we projected last year. We also believe we remain the only national chain with online availability in all traditional U.S. stores.

In fact, we have certain markets that do an exceptional job in promoting online locally, and as a result, they have seen 40% or more of their total sales via online. A detailed analysis tells us that customer that order via both phone and online have higher ticket averages and higher ordering frequency than those who order solely by the phone.

Our analysis also tells us that we capture more new customers online than via the phone. We believe that continue to shift existing customers online and driving new customer acquisition via online will enhance our total sales performance overtime.

I won't get too specific on how we plan to do this for obvious reasons, but let's just say we're going to learn how our most successful markets have driven their online business and share those methods with the entire system. Also going to provide certain incentives to our franchisees to drive their online business. We'll be reviewing the specifics on our plan next week, with our entire franchise system at our annual operators conference.

In addition to our sales performance thus far in 2008, we're also pleased with the progress of our unit development. As you will recall, our guidance for 2008 is for 160 to 190 net new units. We believe we continue to be on track to meet this target, and as our development pipeline is strong both domestically and internationally.

There are two important factors that impact both the opening of new restaurants by our franchisees, and also the level of unit closure activity we might have. First, our overall relationship with our franchise system is an important component that can instill the confident necessary to follow-through on unit opening commitments. I believe we have an outstanding relationship with our franchise community. We do not agree on everything. But I'm delighted that our discussions are conducted in the spirit of candor and flexibility.

As we've discussed previously, we completed an extensive renegotiation of our franchise agreement during 2007. An indication of the success of this process is that we have to date executed the new agreement with franchisees representing 95% of our total domestic franchise system. This new agreement provides us with a very solid foundation for continuing to grow our system for years to come.

The second factor impacting unit openings and closures is overall unit economics. And this is where the environment has gotten a lot tougher in the latter half of 2007 leading in to 2008. Luckily, we just completed two of the most profitable years ever at restaurant level for our system in 2005 and 2006.

The first half of 2007 was also very solid. So our system is well positioned to tackle the tough cost environment we face in 2008. You have all read about the reports about commodities that come in hourly and daily, whether it is global demand in the gray market, the diversion of corn to ethanol production or the effects of political instability on oil crisis, a variety of factors have confined to produce the all-time highest commodity levels in an unprecedented array of goods at one time.

I should add, that the impact is not just the USA but worldwide. A good example is that we estimate that the recent bad weather in China could impact product costs by up to 4%. Many market experts believe we are experiencing a new plateau in commodity prices similar to the food cost inflation of the early 1970s, rather than merely cyclical swings in prices that could be expected to fall in due time. Because of this, we are reviewing numerous measures, we can take to offset these higher costs and mitigate margin declines for our restaurants.

Because we're growing as a system, we should be able to leverage our increasing volumes without global suppliers. We're also reviewing opportunities to assist our suppliers with initiatives that would reduce their production or distribution costs providing savings that could be shared with us. There may also be some innovative purchase and opportunities that we can't discuss in detail at this time.

The continued increase in commodities and the uncertainty related to how high is high are the reasons that we are merely reaffirming as opposed to increasing our earnings guidance for 2008, the range of $1.68 to $1.76 per share even though our quarter call 2007 results exceeded our previously discussed expectations.

In an environment where commodities can swing 20% in the week -- and I'll give you some examples, if you take diesel, look in a local gas station, it has gone up from 3.22 to 3.29 in the last week, and if you read the Wall Street Journal today, it talks about wheat prices, which traditionally have been around the $4 mark hitting $25 earlier in the week and then bouncing back down yesterday to $22.40.

So given that environment, we feel that to take a more optimistic stance would be imprudent. We believe our ability to project earnings increases in 2008 over a very strong 2007, demonstrates the strength of our business model even under the most trying of circumstances.

In the release, we announced a measure that will further strengthen our business model and our view. A refranchising initiative is expected to reduce the mix of company-owned units for less than 20% over the next two to three years, with the sale of a number of markets to franchisees. This will solidify our company-owned base of units geographically, while lessening earnings volatility. You should also see this announcement as the end of our policy over the last two years on supporting certain markets through the corporate buy and build strategy.

Finally, let me turn my attention to our international business unit for a moment. As we projected, the operating losses for this business were 8.7 million in 2007, which was essentially flat with the prior year's results. So this is misleading when it comes to assessing the progress we made internationally during the year.

We opened up 100 restaurants outside the U.S. for the first time ever, and we ended the year with 448 total international units. We continued to build support infrastructure by adding critical personnel both in the field and in our corporate support group. We now have dedicated centralized systems support to assist our international franchisees with selection, implementation, and training of their points of sale systems, as well as coordination of their ongoing system.

Importantly, we also added four new marketing personnel, including marketing VP, Tim Scott on field-based resources in the UK and Asia. We added a new international business manager for the Russia and Eastern European market. Russia ended 2007 with 11 total units and had the highest average sales volumes of all international markets, as well as the highest individual unit with a sales of $2 million for the year for one store in Moscow.

We signed new franchisees to development agreement in Poland and Turkey during 2007. And the first units in both of these new markets will open in mid-2008. We recently celebrated our 100 Papa John's unit in the UK and Ireland market and had outstanding same-store sales in 2007 in the UK for the second consecutive year.

In that market we saw a multi-unit franchisee as part of our overall strategic objective to increase the number of multi-unit franchisees in the UK system. We also developed specific growth plans for our Ireland franchisee, and have very high expectations for that market.

In addition, two expected new country openings in Poland and Turkey [inaudible] previously, we will achieve several other major milestones in 2008. We will open our 100th unit in China, and our 500th total unit internationally during the year. We should also approach $250 million in system-wide sales. An impressive accomplishment given that our first Papa John's store only opened outside the USA in 1998.

Finally, as previously announced, we expect that the operating loss for our international business unit will decline nearly $3 million in 2008 to a range of 5.5 to $6 million, and the international business is expected to reach break even or even better by 2010. By the end of that year, we would expect do have nearly 900 restaurants internationally, and we will be well positioned for future growth in numerous key markets around the world.

So in conclusion, the environment globally is very tough for both the consumer and for commodities. We're tackling these issues aggressively, but our main focus has always been on our quality positioning. However, to meet our goals, we also know that stringent, and I mean stringent, control of all cost is a critical need. With that, we'll open the call for Q&A. And back to David.

Thanks, Nigel. Brent, if you'd like to open up the lines for the Q&A portion of the call.

Thank you, sir. At this time I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Smith with Feltl.

Hi, guys. Just a couple of quick questions today. First, can you talk about any trade down or trends that you saw with the consumer, particularly in December as casual dining was kind of suffering?

Okay. Mark, good morning.

Good morning.

I think the answer is that -- if I go back to October and November, we kept believing we were going to see tradedown and it was tough to decipher it. Having said that, I think we started to see discernible signs in December, which is the month you focused on, and I think that's continued.

Clearly, consumer being under pressure took the view that going out to dinner was an expensive operation, particularly with gas prices. I think it's true to say that the category in the early -- well, the later part of the year, was challenged, but undoubtedly, given the pressures -- in casual dining, there was tradedown, but whether they all went to us has to be debatable.

I mentioned in my remarks that frozen pizzas seems to be continuing to grow. I also mentioned that consumers have a whole range of options for dinner. I think, in fact, all of the home options that are available now seem to be growing in quality and quantity, so that makes it more challenging. So essentially, I think the answer is yes, but it's not quite as straightforward as just saying yes or no.

All right. Any change that you have seen here in '08 and here in the first quarter?

Sorry, could you say that again?

Any change that you have seen now that we're in the first quarter of '08, here in January or February?

Well, I don't think there's been any significant changes from what we have seen. I think we detect, and this is just based on our own walking by and walking in to restaurants, some of the independents are beginning to take some of the cost out of their product.

In fact, I think will make it less attractive, and I think there's some signs in the market share information we received that the independents perhaps are struggling already this year, but they are struggling possibly because they reduced their quality.

That's one of the reasons we're very focused on maintaining our quality. There's definitely compression in the dinner category. That's been seen by the QSR data as a whole, and obviously dinner is very important to us, and that's something we're concerned about. Another reason why we need to be very cautious about the outlook for the year.

So I think it's essentially the same, but obviously since the turn of the year, people have been more pressured because of the dramatic downturn in the stock market, the housing situation has got worse, I mean, I note, for instance, just from reading the papers, that the number of houses for sale is the highest in 25 years. House prices down 8.9% in Q4. All of those factors are making it more difficult, and I think what we need to do is to make sure that we have offerings at dinner time that are very attractive.

And I think the U.S. team has done a good job of focusing on our limited-time offers, and focusing on the quality, and packaging them together to ensure that it's not just price reductions that work, but it's giving consumers great value through quality and a competitive price.

Can you comment just from speaking with your franchisees, is there anything pressure on that pipeline number or restaurants that you expect to be opened here in '08 due to the environment?

Obviously, that's an obvious question to look at, and every Monday we have a meeting where we review our development numbers, and we go through that particular question week in, week out, and I just don't see that pressure beginning to take place. We have franchisees who seem confident. We have franchisees who actually want to grow more in certain areas.

I think over the last couple of years, we have done a good job supporting some of the embryonic areas of the country. The countries that we don't have a lot of brand awareness, and I think that's given them confidence. A good example is New York, where they are growing at a very fast rate. They are having great comps over the last several months, and I think that's because we have supported that market well.

There has been some consolidation of franchisees who's interested in Dominos call yesterday that they talked about refranchising amounts the franchise community. We have done a lot of that in certain markets, so that the strong ones pick up the weaker ones, and that's been a big success. It's a trend that we'll continue continue to welcome, and the net result is that we do have a lot of franchisees that are pretty well financed.

They have a choice, they either take on other concepts, which to be honest, some of them have done, but then they -- we've also have some [inaudible] some of the concepts that's struggling far more than we are, and that puts us in a good position. So based on all of that, we are confident in our openings. We're going to continue to support franchisees who are under pressure to try to reduce the openings -- I said the closings. So, we feel pretty confident that we can hit our number. and David wants to add something.

And Mark, the only thing I'll add to that, if you'll notice, we actually took some of that into consideration in December when we were setting our guidance, because you'll notice we actually have lower projections for net openings in the U.S. for 2008 than we had in 2007, and normally, we wouldn't hope that to be the case.

We would like to think we could actually increase that number, but knowing what the environment was going to be in 2008, or at least having some view of it in December, we actually lowered that target, so I think even though maybe it's gotten a little worse since early December, we still feel pretty comfortable that we were able to take that into account in setting our guidance for '08.

One last point that Bill reminded me of is year to date on those meetings we're actually ahead of our budget on openings.

Excellent. Last question, I think, on your refranchising initiative here. Can you give us any idea of how aggressive you plan on being with this? We know there are some buyers out there for some of your restaurants, and also which markets we may look at? Is it really most of the acquisitions that you made over the last six quarters or those some of the markets that we should be looking at for refranchising?

I don't really want to go in to specific markets because there's obviously employee relations implications with that. So I'm not going to do that. I would also say that we're pleased with the markets that we bought. Some of them need a bit more work than others, so that's why we bought them. But we feel that the program that we had was successful.

I mean, let me take one market, Philadelphia, where we felt that the market was going down the wrong direction, so that's why we pushed ourselves in there. We bought back several franchisees. We bought more stores. If you would like a great example of the buy and build strategy, and we're very pleased with the results there. It's a tough market, but we're really getting our hands around it.

Phoenix is another market that we saw lots of opportunity as a real growth opportunities out in the Phoenix area. I think it is the fastest growing market in the whole country, so we're pleased with that. So essentially, we don't see selling the markets we bought. We have got franchisees who seem keen to grow, and have got a fair amount of cash.

We have also seen some outsiders show interest, because I think they're attractive by our track record over the last few years, we have got this very, very clear quality positioning that I think -- one of the things I think during this call might even clearer to me how important that is. John founded a great company and a great concept, and certainly I try very hard not to deviate from his heritage. And I think outsiders like that.

And then we have also got very good unit economics, and we see -- we have got plenty of ideas for how to improve our unit economics in the future, drive our revenues forward, and as Bill Van Epps tells me every day, we're never short of great ideas. So, I don't think we're going to have very much trouble selling these markets.

But I tell you one thing, we're not going to sell them cheap. So in terms of aggressiveness, if it takes us six months a year to sell them, we'll just wait to get the right price, and I think that's the right thing for our shareholders.

Just a follow-up on that, and you'll continue to use your free cash and also cash from these deals to buy back stock?

Yes. And our Board has continued to support us in giving us the authorization for what I call bite-sized chunks of share repurchase. So, yeah, we'll continue with our strategy. We're pleased with it, and perhaps a year ago, we got a lot of criticism for our lack of aggression in this area. I think given the environment that suddenly turned midyear, we probably could be credited now with the foresight.

Yes, definitely. I would say get it while you can. Thanks, good luck guys.

Thanks, Mark.

Your next question comes from the line of Barry Stoufer with BB&T Capital Markets.

Good morning, gentlemen. Just have two questions. First, what's your current thinking on leverage to EBITDA?

Hey, Barry. This is David. I think, we continue to discuss strategic alternatives internally and with our board, but I think what we said in the past is we could possibly be comfortable at higher levels of leverage, but as Nigel mentioned in this environment, it certainly makes it a lot easier to be more comfortable with the leverage levels of where we are today. But that's not to say that it's not something that we continue to look at.

Just to play devil's advocate, why should we not conclude that returns on corporate store openings have been disappointing, given that you are scaling them back?

I think, Barry, that's a fair question. I think when we look at our motivation for the kind of the refranchising initiative, it really is more to take some of that volatility out of our results, and give a more predictable operating income growth prospects. When you look at things like the commodity environment and wages and so on, I think that obviously puts more pressure on company stores versus a franchisee royalty stream from our point of view as franchisor.

So I think that is fair. And we said in the past and you've asked the question in the past, yes, your new store openings are in our less penetrated areas, so it is true that as those stores ramp-up, their economics don't equal the average economics of our system. It takes a while to ramp that up. In this cost environment, it certainly only compounds that challenge.

I think, David, I would add to that slightly more aggressively by saying that one of the things I think we have done a good job in the last three years is improving the way we open stores. And we haven't opened a lot of corporate stores. But we've had a steady number. I think last year was about 11, something like that. And we really focused on the way that we opened the stores, and we're pleased with the results. So, Barry, I think can completely refute that anything we're doing is because of the lack of success of corporate store openings. They have actually been very successful.

I have a hard time seeing how going from a low to mid-20s mix of corporate stores to perhaps slightly under 20% materially changes the company's earnings volatility. It seems to me if that's the goal, wouldn't you be thinking of going to less than 10%? Maybe even 5%?

Well, clearly Dominos indicated on their call yesterday that they may go below 10 and clearly Yum! will talk about 10. I think what I would say is we tend to make steady moves rather than huge leaps. This is a change of direction going from buying out more corporate stores that we did for many reasons.

So I think this is the first step. We'll see how it works. We may be surprised by the demands as I mentioned earlier, and may go further, but that's not our strategy or our policy at the moment. We're very keen to if you like signal that we're changing direction. Getting below 20%, I think will be a significant move.

And I think if you use the case study of Yum! they went to 15 and then to 10. And I'm not saying we're going to do the same, but that gives us the option to do so down the road. And obviously, life is about options.

Barry, I think our thought process was to put a reasonable kind of mid-time frame target out there. So that's something that we think could be reasonably executed within that, you know, two to three-year time frame that Nigel discussed in his remarks. So that's why we set that as effectively the target.

At this point would you say you have a minimum mix in mind that you think you need to have credibility with the franchisee system?

I'm not quite sure how you tie in that mix with credibility with the franchise system. I think that clearly there are systems out there with hardly any stores. I personally don't think that's right, because I think you need to demonstrate to franchisees how to run stores, how to train people. You need the flexibility of bringing stores in corporately. If you like putting them in intensive care and then shooting them back out.

So I've never and this goes back to my days particularly with Burger King, being in that situation. You know, if we got down to 15%, we may well be happy. I like the blend we have between corporate stores, which gives us a steady stream of profitability, and by the way a large number of test markets and that's not been forgotten.

I remember at Blockbuster, we had 80% company stores, and we still run out of test markets. I think that's such an important reason to have corporate stores particularly when you are in a challenged industry. Now this industry is nowhere near as challenging as the video industry, as you well know.

But I think to have the corporate store mix at a relatively high level is something that I personally believe in, but I don't want to say that my personal feelings are going to drive this all the way. I think we'll give this policy sometime, and then reassess.

Okay. Thank you very much.

Thanks, Barry.

Your next question comes from the line of Michael Wolleben with Sidoti & Company.

Good morning, guys. I was wondering if you could kind of talk about how the promotions that were drove the fourth quarter kind of trailing into the first quarter and, you know, comparing that to profitability? Especially with that December special that was run across a lot of the markets. And if we're going to see, a boost like that coming in to the first quarter as well?

Clearly, we're in a very challenging environment, and every morning we get up thinking about the environment where we stand, and what is right for franchisees, and as you indicated, it's kind of a balance between driving sales and profitability. I think the fourth quarter, the U.S. team got it absolutely right. They had a balance of what could be called value promotions, which was essentially what we did in December.

I also think the super hero Spiderman promotion in November was a very good value for the consumer. And that seems to work. People like our connection with entertainment. And as an aside, I also love Papa John's's very strong connection with [inaudible] and we saw that hugely, I think, in the fourth quarter if you lack an underlying trend.

They also love our LTOs, and in fact one of the negative feedbacks that we get is that we don't have enough LTOs. So it's a balance between new product introductions and why we're called package value opportunities.

One of the things that's worked really well for us is Papa's Plus. This is a trade up that we gave our customers. Essentially, you know, and the deals change by month, but maybe you get the bread sticks or dessert at special price on top of the base. That has helped us drive ticket. That has helped us sell more items. And that has worked very well. Because clearly in this environment we are trying to drive two things. One is to drive traffic and one is to drive ticket.

So the fourth quarter, I think, was good from a profitability point of view. We had a nice splendid promotions. Going forward, we have tried to build more value in. I think you will probably see more value going forward. One of the reasons we like online is you can change the promotional mix. Even in the middle of the day, we sometimes change it, so we can be very flexible, and that allow us to be more aggressive or less aggressive.

So I think you'll continue to see us blending all of the tools we have. I feel, as I said now, three times the U.S. team did a great job with their marketing programs. But part of that credit should also go back to our franchisee. We worked very closely with our marketing subcommittee of the FAC.

Some of these ideas come from them. They challenge us. We challenge them, and I think, we get the best of all worlds at the end. And as I said, we don't always agree, but I think that mixture has worked very well for us. And we're pleased as we said in our remarks with the early part of the year in terms of the programs we have.

And Michael what the best indication I think we can really give because we can't obviously talk about first quarter since we announce sells on a quarterly basis, but I think what we said is, from every indication we're two months in to the year, and we're comfortable reaffirming that comp sales, guidance that's out there of 1.25 to 2.75 and that's probably about the best indication we can really give you of how we think the year started out.

All right. Jumping over to the international operations. With a break even in 2010 with 900 units, that's kind of a big jump from where it stands right now. I was wondering if you could speak on the pace of international growth to domestic, and where that's all coming in. Is that a big jump in '09 for the units that implies?

Yeah, I'll start out, Michael. You know, what we have said, of course, 2007 was the first year we topped 100 unit growth. We have said of our total 160 to 190 net unit growth for the year, about 2/3 of that is going to be international, so we should be over 100 units again in 2008.

And we feel like we've done a lot of things to get our infrastructure right. So at this point forward, the sales growth and the full-year impact of units that were added throughout '07 and additionally the new unit growth in '08 and '09, a lot more now of that royalty stream can fall through to bottom line whereas up until this point, we have taken that increasing revenue and just reinvested it right back in building basically organizational structure.

So we feel very good about where we are from an organizational structure point of view, and so you'll pretty quickly start seeing the top line revenue growth fall through to the bottom at a much greater rate. So I think that's what you are seeing is that leveraging up, if you will, of our future growth.

But no, we don't -- we are -- that doesn't assume any [herschelian] increase in unit growth in any one year, it's just kind of a steady progression given the pipeline and the strong development pipeline we have in place right now.

David, If I could add, I actually think that's one of our less stretching goals that we have around here. And I'm not just saying that because David runs international to make him feel [best].

Yeah, thanks a lot.

I think that several factors really are important in international. Number one is critical mass, and as I've said repeatedly, we don't really have critical mass in too many places. And another next two to three years, we're going to get to a situation where we get critical mass in certain cities. Certain cities like Seoul, Shanghai, potentially Beijing, even in London to have [40-odd] stores in the M25 area is not really critical mass. And that makes it very difficult to get media, and once you get on media, you'll see a big difference.

This was certainly a huge lesson I picked up when I was at Blockbuster and Burger King. You have to get the critical mass to get awareness. One of the reasons why we bought in all of the marketing people as I touched on earlier is to capitalize on that critical mass and the move to critical mass. And I think we have also got to do something else. And that's challenge our franchisees to be more demanding of themselves.

We have all of the international franchisees in our operations conference next week. We're going to be challenging them to get their store averages higher. And a lot of this is going to come through marketing. So, I'm kind of excited about the challenge you have laid on the table, and I think that's a goal that we should be able to beat.

All right. One last question with the lower comp expense that was out of G&A, are we going to see a raise back to kind of more normalized levels this year? Or it might be slightly higher thus far as a little bit lower, if it is at all?

I think, Michael, the answer is, we understand in this environment we're going to have to maintain a very close watch on our G&A cost throughout the year, and I think that to some degree, we're able to manage that even a little more tightly if commodities continued to increase beyond what current expectations are.

What we have said in our guidance is that we would expect those costs to come down slightly as a percent of revenue in 2008. I think the answer is that slightly could become even a little more than slightly as we address the rest of the environment. So it's something we're just very, very closely focused on.

All right. Great. Thank you.

Thank you, Michael.

And sir, at this time there are no further questions.

Okay. Well, I would like to thank everyone firstly for attending the call, and just to reiterate, these are tough times, and we're reacting to the challenges that these provide, so we'll give you an update on our progress at the next call, and once again thanks for listening.

Thank you. Thanks, Brent.

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