Papa John's International Inc (PZZA) 2008 Q1 法說會逐字稿

Good morning, my name is Adrian and I will be your conference operator today. At this time I would like to welcome everyone to the Papa John's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Flanery, you may begin your conference.

Thank you, Adrian. 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 then be available for Q&A. Our discussion today will contain forward-looking statements that involve risks and uncertainty 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.

We were pleased with first quarter results in a very tough economic and competitive environment. Excluding the consolidation of the BIBP cheese purchasing entity, first quarter earnings were $0.48 per share, representing a 9.1% increase over the same prior-year quarter. On the same basis, pre-tax income was approximately 2.1% higher than the prior year, with the current year quarter including $1.1 million in incremental charges related to the sale or closure of Company-owned restaurants as compared to the prior-year quarter. Revenues increased 10.9% over the prior-year quarter, primarily reflecting a combination of comparable sales increases at both Company-owned and franchise units, more Company-owned units cue to acquisitions from franchisees over the past year, and higher PJ Food Services sales. due mainly to higher underlying commodity costs.

We were happy to see our top-line sales momentum continue as we followed solid Q4 '07 domestic comparable sales increases of 2.1% with another 1.7% increase in first quarter. International franchise sales increased 33% in first quarter over the same quarter in the prior year, due to both unit growth and same-store sales increases. Nigel will have more to say about or first quarter performance and the overall sales environment in his remarks.

On a business segment basis Company-owned restaurants generated approximately $700,000 more operating income in the first quarter of 2008 as compared to the same quarter of 2007, excluding the $1.1 million in incremental charges related to the sale and closure of certain units in the current year. Percentage margins were slightly lower in the current-year quarter on a segment basis, excluding the incremental sale and closure charges, due primarily to higher commodity costs and would have been unfavorably impacted even further had the commissary segment passed through underlying commodity cost increases fully during the quarter.

Operating income for the domestic commissary segment was $1.6 million lower in the first quarter of 2008 as compared to the same quarter last year, due to a combination of lower gross margin and higher below-margin operating costs, primarily diesel fuel. The commissary absorbed substantial commodity cost increases during the quarter rather than passing them through completely to the system via higher food prices. Domestic franchising operating income increase $1.5 million over the prior year, due primarily to the quarter point increase in royalty rate effective in 2008, and to a lesser extent, to the comparable sales increase during the quarter. Franchise units were relatively consistent from year to year, as the impact of new unit openings was substantially offset by the impact of the Company acquisitions over the past year.

The international business segment operating loss improved by $600,000 over the prior year, due to organizational leverage from both new unit openings and higher per unit sales volumes. This level of improvement is on track with our expectations of approximately $3 million in total operating loss improvement for the full year. Operating income for the all others business segment improved $1.5 million over the prior year, due primarily to better results at our Preferred Marketing Solutions subsidiary. This unit increased both its commercial sales and related margins significantly from relatively weak performance in the first quarter of the prior year. We do not expect the same level of year-over-year improvement for this business unit during the remainder of 2008.

Unallocated corporate expenses, including net interest costs, were approximately $900,000 higher in the first quarter of 2008 as compared to the prior year, primarily die to certain severance-related costs, and increases in employee benefit-related expenses. Cash flow from operations for the quarter, excluding BIBP, increased approximately $8 million over the prior year, due primarily to working capital improvements. Free cash flow, a non-GAAP measure we define as net income excluding BIBP plus depreciation and amortization expense less capital expenditures, was $13.1 million for the quarter as compared to $12.3 million for the same quarter of the prior year. Free cash flow as defined for the trailing 12 months was approximately $54.8 million and represents a free cash flow yield of 7.0%, based upon 28 point time -- 28.9 million average diluted shares outstanding for the quarter, and a stock price at Market close prior to earnings release of $27.05.

We executed a Rule 10b5-1 trading plan to facilitate completion of our share repurchase authorization through year end during the quarter, and we reaffirmed earnings guidance of $1.68 to $1.76 per share for the year. We believe restaurant margins could be somewhat volatile for the remainder of the year due to the current unpredictable commodity and fuel cost environment. This may also lead us to continue some level of commodity cost subsidization for the system through reduced commissary margins as compared to prior-year levels. Accordingly, we have not increased full-year guidance in response to the favorable first quarter results. We also reaffirmed guidance related to worldwide net unit growth of 160 to 190 units and domestic system-wide comparable sales increases in the range of 1.25% to 2.75%.

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

David, thank you very much. Good morning, everyone. 24 years ago John Schneider founded Papa John's in the face of huge competition. The difference he felt, rightly, was the quality of our pizza's. That quality focus remains today and I believe was the biggest factor in our successful first quarter. Overall I'd like to take a slightly different approach to my remarks for this quarter. There is obviously a lot of concern about the U.S. economy in general and about consumer-focused businesses in particular.

The restaurant category has seen an interesting divergence in performance, with casual dining facing a very difficult sales environment while QSR has performed substantially better. Pizza walks a balance between these two restaurant groups. While the value provided by a pizza on a per-person basis more in line with QSR, seeing as how a family four can be well fed on a $20 ticket, pizza has traditionally been focused on the dinner day part which is more characteristic of casual dining. And of course, the unusual combination of consumer spending slow down and input cost increases, both on the labor and commodity fronts, creates a dangerous financial playing field for all restaurant companies. So I'd like to present my remarks in the framework of an balanced scorecard approach to our business outlook in today's environment.

While we have challenging obstacles to overcome, we also have many encouraging trends and opportunities that we are very excited about. I'll try to discuss both aspects of our business, to provide you with the outlook from management's perspective. Overall we are very pleased with our overall financial results for the first quarter of 2008. It was particularly gratifying to the see the top-line sales momentum that had begun in the fourth quarter of last year continuing into the start of 2008. By following the 2.1% domestic comparable sales increase in Q4 of last year, with a very solid 1.7% increase in Q1 to start off 2008, we significantly outpaced our key competitors and the pizza category as a whole. Part of our sales growth has come in the form of price increases by the reduction of promotional discounts. Increases in delivery charges or other initiatives that are hopefully somewhat subtle from the consumer's perspective.

One such initiative that we have just begun rolling out nationally is the extension of our specialty pizza offerings. We have expanded our line of specialty pizzas, developed an integrated marketing campaign around them that proved very effective in shifting sales mix in our test markets. The specialty pizza line of products fits perfectly with the Papa John's better ingredients, better pizza brand image and the expected shift in sales mix will effectively represent a self-selected price increase from consumers. On the concern side of the ledger we know we have to be very careful not to take too much pricing given the current consumer situation. While we are confident that value from a consumer's perspective is not just a low-quality pizza at a cheap price, we also understand there is a danger in over-pricing our product to the point that consumers are incented to trade down to an inferior product.

We are particularly mindful of this issue with regard to our franchisee's pricing policies, since we cannot dictate pricing to them and since the cost environment is squeezing their margins absent taking price. Our role is to influence franchisee's price decisions by demonstrating to them what we believe are policies and examples to appropriately balance their margin pressures with consumer tolerance levels. We continue to believe we have more latitude than our competitors due to the quality positioning of our brand, but that latitude certainly has limits.

Staying with top-line sales issues, the dinner day parts has been under the most pressure, as previously noted. This pressure ties in with a relatively recent trend of fewer women in the workforce. For decade the percentage of women in the workforce steadily increased until it reached a high point of approximately 60% in 1999. Since then the trend has flattened and has actually decreased slightly to 59.2% in the most recent assessment. This impacts restaurants in two ways. Not only do stay-at-home moms' have more time available for dinner preparation, but the elimination of their income makes it more of a financial necessity. This appears to be a more of a long-term trend than a short-term economic cycle.

However, even in this tough consumer environment we're confident in the sales-driving initiatives we have in place for the balance of 2008. As I noted previously, we achieved favorable results from the pilot testing of our specialty pizza initiative and we believe the upcoming national rollout will produce similarly positive sales results. We also believe that the freshness and quality contained in those pizzas will produce a very strong defense against a large array of pizza now available in grocers and mass merchants. Later in the year we also have some exciting national promotions. Obviously for competitive reasons I can't go in to specifics, but you might expect that we would look for opportunities to execute additional pizza and entertainment promotions, which have been very successful for us in recent years. I can tell you that our system is so excited about one particular initiative that we have earmarked additional national marketing dollars for support. We also remain encouraged by our performance of online ordering and today feel pleased to announce that Papa John's has passed one billion in all-time online sales. We're delighted with that achievement.

On another positive note, in addition to taking market share by growing sales in existing units we're also taking market share as the only major player to be adding domestic units in this environment. While we expect domestic net unit growth to be somewhat slower in 2008 than 2007, due to the overall economic environment, we're still comfortable with achieving our net new unit guidance for the year. As a reminder, we expect to have net openings of 160 to 190 units worldwide in 2008, with domestic units representing about one-third of that total. We had ten net new unit openings in the first quarter domestically, which was very much on target to achieve our stated goal, given that the development is always back-end weighted during the year. These first quarter results are on top of 103 net new openings in 2007, which compares very favorably to unit declines by our two major competitors during the same timeframe.

One concern related to new unit development prospects for the remainder of 2008 is the condition of the credit markets. While the markets continue to be choppy at best and many financial institutions are tightening their lending policies we have not yet seen any significant impact on our franchisee's ability to obtain financing necessary to support their new unit development activity. The credit market conditions will likely have a more substantial effect on our refranchising efforts. The good news is that we can exercise patience with our refranchising initiative, until such time as the lending environment is more favorable. That being said, we're confident the current transaction in process for the sale of 27 units in two markets will successfully close during the second or third quarter of this year.

As we've noted in the past, the pizza category has the most U.S. units of all restaurant categories, with about 64,000 units, and we continue to believe that there will be net closures from consolidation within the category so long as this sales and cost environment continue. Papa John's and the other national players should have an advantage relative to the local and regional chains and the single-unit mom and pop operators, as we have the scale to help cushion cost increases and maintain marketing activities for both our Company and franchise units. So while the current environment is certainly on the concern side of the scorecard, in the long run it should end up strengthening our overall market share position.

As a reminder, unlike our major competitors, we still have substantial underpenetrated areas for unit growth in the U.S. We project an additional 800 to 900 new traditional Papa John's units can be added over the next few years with key areas of opportunity being the Northeast, the West Coast, and the upper Midwest areas, Signed development agreements exist today for 300 of these new units. We also believe we have substantial opportunities for unit growth in various non-traditional venues, such as airports or other mass transit locations where customers come to us, or activity and event-driven locations, such as our existing relationships with Six Flags and Live Nation.

Of course, the most significant concern in the restaurant industry today is commodity cost increases. We continue to monitor commodity prices closely and have several initiatives understood way to help offset the impact at restaurant level without compromising the quality of our product to the consumer. Certainly the fact that we are growing domestically is a very helpful asset in dealing with our suppliers. As David mentioned, in the first quarter we actually absorbed a portion of both commodity and fuel cost increases within PJ Food Service through margin reductions and we will look for opportunities to continue doing so while achieving our overall corporate financial targets. Based on discussions with various food industry economists, there is no doubt there's a measure of speculation built into the commodity prices, particularly cheese and wheat, and we believe that eventually the basics of supply and demand will help soften prices for these key items.

For example, a recent report by the International Grain Council projects record wheat harvest in the 2008 and 2009 crops. However, until we actually see commodity cost relief, restaurant margins will continue to be squeezed. We will continue to closely monitor the impact of these margin pressures on the health of our franchise system, and look for opportunities to provide relief where we consider it necessary and prudent. We also continue to believe driving top-line sales growth is easily the most effective way to address these cost pressures. I want to emphasize this message, as it is our major weapon in the current environment and as such, is worth recording that our franchisees and Company operators are showing a higher level of operational performance than at any time in my 14 quarters with the Company.

On a positive side of the ledger with respect to our franchisees, we held our annual franchise operator's conference in early March in Las Vegas, and while there were certainly concerns about the economy in general, and import cost increases in particular, the overall tone of the conference was extremely positive. Keeping with a Vegas-type theme, I think it's to say that our system clearly likes the hand we have to play at the Papa John's brand in these challenging times.

Finally, I'll wrap up my remarks with some comments about our international business. We are right on track with the financial improvements we projected for our international business in 2008, which will lead us to break-even by 2010 or perhaps even sooner. But these financial projections alone understate the tremendous progress and potential of our international business. In addition to major milestones we have recently celebrated, or will be celebrating shortly, including the 100th unit in UK, the 100th unit in China and the 500th unit outside the U.S. We are also having outstanding success with new unit development in markets; examples such as El Salvador and Jordan to name two of the most recent new market openings.

We also recently announced the signing of four new franchise groups for various regions of Canada and an expansion of development for one of our major franchisees in the Middle East. We'll be celebrating our first new unit openings later this year in Poland and Turkey. We're also in discussions with major restaurant management groups to become Papa John's franchisees in exciting new markets. I won't give specifics here for competitive reasons, but we believe we have the right groups identified to build on our existing momentum in Asia, Latin America, and Europe, to name just some of the opportunities we think are likely to be finalized later this year.

As for the general global economy, many U.S. businesses, such as G.E. and IBM, are seeing substantial strength in their businesses outside of the U.S. Coca-Cola's CEO recently noted a vibrancy in Latin America that hasn't been seen in decades. And a recent Wall Street Journal survey of financial executives indicated their belief that China and India will be the two top economies driving overall global growth in 2008. Of course Papa John's has a grand presence in each of these regions. USA Today also recently ran an article showing that urban -- sorry -- that global urban housing units will increase at a rate of 60 million per year. We see this as great and a growing opportunity, as suburbia and pizza are a perfect match. As you can see, once we achieve break-even status that -- the trajectory of our international earnings should be well positioned for a very meaningful contribution to Papa John's consolidated earnings growth. And because the majority of this development will be franchise in nature, the strong cash flow results that David discussed will only be enhanced.

To be fair to my balanced score cord approach, I should discuss some of the key challenges we're facing outside the U.S.. We're monitoring worldwide commodity costs and the development of enhancement of reliable cost-effective supply chain resources in new and existing markets, which will continue to be an area of focus for us. Managing our organizational support infrastructure is an ongoing challenge, as we continue to identify new markets and add units in existing markets around the world. We will consistently assess the balance between having adequate resources to support our franchisee's growth and success with the need to maintain a model that produces the financial results that we're all targeting.

New unit development also continues to be a critical factor for the continuing progress of the UK market, and marketing challenges always exist in areas of the world where we have not yet achieved critical mass, which to be honest is most of our markets outside the U.S. We need to drive unit level sales volume -- volumes but have only limited marketing resources with which to do so. We will continue to identify creative ways to accomplish this, such as the third-party supported online ordering capability recently implemented in one Canadian market. On balance we couldn't be more excited about where our international business is currently performing, and what it's near and long-term potential is, even though we're sure there will continue to be challenges along the way. I think another way to sum it up is that in the period 2006 to 2009 we planned to invest $27 million in operating losses to build a sustainable, long-term business and we feel we are right on track.

With that I'll turn it back to David for the Q&A session. David?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Michael Walerdon] from Sidoti & Company.

Good morning, guys.

Hey, Michael.

I had some questions on the top line here. I know during the fourth quarter conference call you said that you saw the strong fourth quarter trail into the first quarter. Did that maintain through the whole quarter?

I think it's fair to say that all quarters have ups and downs and we had obviously three promotional periods and so some performed better than others, but I wouldn't say it was totally consistent, but as we don't break down our monthly comps anymore, I think I would say that there was some unevenness, but overall we were clearly pleased with the quarter.

Can you give any color on what -- what the second quarter has started like?

We don't normally give guidance about -- about future quarters. We obviously are in the middle, as I commented, of our new specialty pizza rollout. We're excited about that. We think that's going to build steadily overtime and I think the level of confidence we have in our business is demonstrated by our reaffirmation of our comps guidance for the year.

All right. On the G&A line, that came in a little lighter than I was looking for. Can you speak to what was the cause of that and if we can see that moving forward throughout the rest of this year?

Yes, Michael. There were a couple of specific things on the G&A that we can probably give a little more color about as we mentioned in the press release. The first were some severance costs related to some organizational restructuring that should be a one-time factor, and the second, we couched it as employee benefit-related costs. Some of that -- or a large portion of that was actually related to the way our deferred compensation plan works. Deferred compensation is basically where all of our employees are deferring their own salary -- the Company does not contribute to that from an expense point of view -- however, the way it's accounted for it is funded with life insurance and there can be times, depending upon how the underlying assets perform in the funds that the team members choose -- and Papa John's stock is also one of the elections there -- there can just be some unusual timing on how that is accounted for. And there was a little extra expense in first quarter related to that deferred comp timing, but over time that washes to zero, And in fact over time it's actually -- because it is funded with life insurance, in a morbid sense it actually has some upside to us, but we don't look at it that way, obviously.

All right, just one more question. With the royalty rate increases I know you guys are passing most of that back along here this year, you had spoken that -- in previous times that you were looking to cut back on those subsidies moving in to 2009. Is that still the main plan?

I'll start and then Nigel may jump in. A lot of that -- you can see we clearly have done that starting out in 2008 with the food service margins. A lot of it will honestly, Michael, just be dependent on the environment, both on the commodity costs, fuel costs, and so on.

So Michael, let me add a couple of points there.

Sure.

I think one of the most important things that our board and the whole management team looks at is unit economics, and this is such a crazy environment at the moment, with commodities and minimum wage, and all of the pressures the consumer's under, we're going to remain flexible, but the most important thing is for us to make sure that our franchisees are successful. The model that works in franchising is franchisees will grow if you help them become profitable. We're totally focused on that and I think we have to show great flexibility ourselves, and I think we showed that in Q1 with the subsidy through PJ Food Service. So we'll remain flexible, and I think if you're looking at next year, we won't make a decision as to what we're going to do until we present our budget to our board, which takes place right at the end of the year.

All right. Thank you.

Thanks, Michael.

Your next question comes from the line of Mark Smith from Feltl.

Hi, guys. Just to follow up on that last question. I think most of us realize that keeping the franchisees healthy is really key and why you're subsidizing the and why BIBP works, but if we could say, if you don't subsidize the franchisees here in the first quarter, and if you didn't have plans to through the rest of the year, is it safe for us to say that this quarter would have been even stronger and guidance most likely would have come up?

I'll start on that, again, Mark. If you just look at the commissary segment -- the food service segment, it was down about $1.5 million, year over year, and certainly the majority of that was due to some of the decisions to not take pricing up as commodities went up throughout the quarter, as diesel costs went up throughout the quarter. Our franchisees think it's really important to have effectively fixed pricing for a quarter at a time, and we really do try to honor that almost always. And so I think if you wanted to use that as an example of what it could have otherwise been had we passed that through, then you could say, well, gee, 75% to 80% of that could have come back to us because obviously, 25% of it's right pocket, left pocket with Company stores, but the rest of it would have been franchised and could have come back to us.

I was going to say, this morning I looked at that question a different way, Mark, and I think if we had passed it through, franchising companies (inaudible) would have had a hit of probably another 35 basis points. I come back and say, a franchise system will rely on the profitability of its franchisees and obviously, we've got a significant number of Company stores as well. Profitability drives everything, and -- and I -- I understand your question, but I think one has to be realistic and supporting our franchisees and making sure that we're seen to be supportive is very important. And I think -- going back to my comments and my remarks about balanced scorecard, we actually approached it in a very balanced way in Q1 and we'll continue to do that going forward.

Mark, the other point on that, and Nigel mentioned in his remarks, most of our initiatives are all geared toward driving top-line sales. In this environment that is the best answer, and if we can effectively continue to do that as we've done so far this year, then that actually gives us some latitude, too, because the franchisees are going to be healthier with that top-line sales growth.

Okay. And then can you give any more color -- it appears on the surface that your franchisees are doing very well, same-store sales were up, you've got demand for someone who wa -- an existing franchisee who wants to buy some of the Company-operated restaurants. Can you give us any other incite into how your franchisees are doing out there?

Well I think the first thing I'd is one has to be careful that you don't draw too many grand conclusions from it. It is exceedingly tough for our franchisees and having listened to our competitors' conference calls it's clearly tough in the pizza segment. The pizza segment's under pressure, the economy's under pressure, and hence our franchisees are under pressure. We believe that we have a very cooperative relationship with our franchisees that we've talked about before. We believe that we work very well together in defining revenue programs. As I said, I think the operational standards of our franchisees is outstanding, but -- but that shouldn't take away from the fact that the key message in answering your question is life is tough and we will continue to monitor the health of all of them. And, yes, like in any system, some of them are struggling.

We've been very supportive of some of the areas where there is a lack of awareness of Papa John's, notably the Northeast and the West Coast, and I think that's been helpful. A good example is New York is probably our best-performing market so far this year, and I think the Company should take a lot of credit for the support we've given that particular market. But markets -- it's very tough and we manage it day by day.

And Mark, the other thing we've said along those lines in the past, if 2008 had followed directly after 2004 we'd have be having a seriously different conversation, because in 2005, '06, and the better part of 2007, our system -- our franchisees had some of the most profitable years. We had some really good momentum. They were able to get very healthy, very good profitability and that really shored us up to head into what a tough time now.

Great. Nigel, you talked a little bit about the dinner segment still being tough, is there anything that you can do in boosting that lunch segment? And I know a while ago you guys had talked about your new ovens from Middleby can you give an update on where you are on getting those out to the whole system?

Yes, I'll ask David to talk about the ovens in a minute. In terms of the various segments, yes, dinner's under pressure, and as I think Dominos talked about on their call there's other day parts that we need to look like. We've got plans like they have for other day parts. We're obviously not going to say what they are. We -- we want to -- if we bring out new programs we need to think it through properly. As with everything we do, we need to find out what the consumer wants because we believe we're a very consumer-driven Company. So yes, lunch is on the horizon, I can't say when it will be activated. It won't be any time immediately, but we're working on plans for that particular day part. David you want to talk about Wow ovens?

Yes, we currently have Wow rolled out across the system domestically in over 725 restaurants. Majority of corporate stores -- vast majority of corporate stores have them and some franchisees have started using the Wow. We continue to believe it's right, not only be -- we completely justified it on energy savings alone in our pilot test, but we know it provides better service to our customers, and -- but we didn't try to factor that into the ROI evaluation. So we're certainly supportive of continuing and completing that rollout over time.

Great. And then I think my last question, it looked like you paid off a bit of debt during this quarter. Will that -- will you continue to emphasize and bring that debt level down a little bit, or will there be more emphasis on share repurchases and how you view the two pieces?

Mark, I think what you saw in first quarter was just a little bit of some -- some timing issues. If you look at what our authorization is throughout the rest of the year, we would get basically a complete $50 million repurchase done throughout the course of '08. If you predicted that our cash flow will -- free cash flow will be in that $50 million range, then end-of-year debt should be close to beginning of year, so I think you're just seeing a little timing wobble in first quarter. Couple of things could happen relative to the refranchising program and proceeds generated from that and so on that could cause us to get a little ahead on free cash flow, which would be a good thing, but overall we're effectively trying to reinvest free cash flow in share repurchase.

Do you still feel like if you had an opportunity to be more opportunistic and had an opportunity to buy more stock back, would you still take on a little bit more debt to that?

I think what we've said in the past is don't ever expect us to look like Dominos at a super seven times multiple, but we feel comfortable with doubling our current level of debt, maybe two, 2.5, three times EBITDA. Right now we're just slightly over one time. I think the general idea is that we'd probably feel comfortable doing that, but obviously we're looking for opportunities before we would make any decision like that.

Great. Thank you.

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

Hey, Barry.

Good morning. What is the effective interest rate on your long-term debt currently?

The effective interest rate? We have most of that swapped out to a fixed number and it's about -- almost 5% and then that would be the swap rate, and the bank spread on top of that is about 75 basis points, so it's about 5.75%. Now everything above the swap is at LIBOR plus a spread, so anything above the amount we've got hedged is probably today in the 4.5% range or so, but that's a relatively small layer of debt.

Okay. And wonder if you could give us some more color on corporate store profits, Does -- given the commodity and labor cost pressures that you've talked about, and you specifically said that labor would probably be up 100 basis points this year over last year, the performance of corporate stores is really somewhat surprising when you take out that charge?

Yes, Barry I'm pleased you find it surprising. We were delighted with it. Clearly our Company-owned restaurant margins went down by about 1%. It's interesting that labor costs, which as you say should have gone up, actually decreased by 0.3% in Q1, food costs actual I will went up about 1.2%. Now obviously the food costs were a little bit, as we said, subsidized by the food-service margin subsidy, but I think I'd say three things. One is Bill Van Epps, who's sitting here, and his team did a great job in the middle of last year of identifying what he called the gap in 2008. He identified the gap -- and I think I said this in the last call. He came in with 61 initiatives to tackle the gap and we have focused on internally about 16 of those. A lot of those are cost related, a lot of them focus on labor, and -- and I think the focus on labor came through in Q1. And we've got more plans, some of it involves technology for later on this year.

In terms of overall controls, there is the middle of the P&L. We don't tend to talk about it. It's all the stuff that gets lumped together in many company P&Ls (inaudible), but we put plans together to tackle that. And it was interesting, just before we started the call -- we actually have one of our board members with us, and we were talk about some of our green initiatives. We've got an initiative this year on our restaurants that could save over $0.5 million. It's all these small initiatives that I think are adding up to a total focus on store profitability, which is very consistent with the message I mentioned earlier about unit economics. So, credit to Bill and his team, they did an wonderful job, and while he's sitting in here they need to do an even better job for the rest of the year.

Okay. And the 27 stores you are selling, given that those are depreciated assets it seems a little unusual to be booking a loss. Are those underperforming markets?

Yes, Barry, since it hasn't closed we're trying to be careful about what we say about where they are, but I think it's safe to say that in our refranchising program we're certainly -- we don't have a lot of underperforming corporate markets, they're all generally performing very well, but we have a few. So I think it's safe to say these are some of our less well-performing corporate markets that we are -- that are a part of this proposed transaction.

Okay. And just back on the -- the printing operations, so you had disappointing performance last year and improvement this year, but also an increase in outside commercial sales?

Yes, that's correct -- that was the improvement this year, was some very good top-line commercial sales growth.

Yes, let me just comment on that, because this is a business that doesn't get a lot of publicity and Julie Larner, who's sitting here, she manages that as well as food service. We made a management change in the middle of last year. We're absolutely delighted with the impact of that change, both in terms of cost control and driving revenues. It is a business that supports the Papa John's system and is very important in supporting the Papa John's system, but we're getting an increasing amount of third-party sales, as you say Barry, and I'm confident about the future of that business. I don't want to get ahead of it. It's got some -- it's in the middle of a recovery is the way we look at it, but I think we're going exactly in the right direction with our print and promotions operation.

So when you talk about don't expect that performance to continue, are you talking about a $2.5 million quarterly run rate from that other category, or are you talking about a year-over-year improvement of $1.5 million?

Probably a little bit of both. Some of their business is with one of their large commercial customers. There is some seasonality to it, and they have a lot of business, so it's going to have some ups and downs throughout the year. Clearly, on a year-over-year improvement we won't expect that, and then it will be a little -- it's not a consistent business across the year, there's some seasonality to it.

Yes, I think the consistency is something that we need to tackle and they are tackling. They've had a much more aggressive external sales approach, a much more professional approach, as well, so we're aiming to fill in the troughs. And I think it's a fair to say that Q1 is probably one of their better quarters.

Okay. Thank you.

Thanks, Barry.

Thanks, Barry.

And there are no further questions at that time.

Okay. Well, I'd like to thank everyone for listening today. We're delighted with our first quarter, but I want to finish with a message that the external environment is tough, the pizza segment is under strong pressure, and our competition continue to provide some exact and new challenges. But our strong belief is that by focusing our worldwide system on better ingredients, better pizza, consumers will see the difference that quality products and quality execution can make. Thanks for your time.

Thank you.

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