Papa John's International Inc (PZZA) 2009 Q2 法說會逐字稿

Good morning. My name is Dechandra and I will be your conference operator today. At this time I would like to welcome everyone to the Papa John's second quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now turn the call over to Mr. David Flanery. You may begin your conference, sir.

Thank you, Dechandra. Good morning. With us on the call today from California, where they are monitoring the annual pack of our vine-ripened, fresh-packed tomato sauce, are our Founder, Chairman and CEO, John Schnatter, and President, Global Restaurant Operations, Bill Mitchell. With me on the call from here at our corporate offices are President and Chief Operating Officer, Jude Thompson, and other members of our executive management team. After a brief financial update John and Jude 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 the 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 very pleased with our second quarter results in what continues to be an extremely tough consumer environment. Domestic comp sales were slightly positive for the quarter, overcoming the -0.3% impact of Easter timing and continuing the stable trend we have seen since late last year. John will provide more specific remarks about our second quarter sales results in his comments.

We were also very pleased to once again lead our two major national competitors in domestic net unit growth for the quarter. Our 11 net domestic closings year to date compares favorably to 35 net closings for Pizza Hut and 80 net closings for Dominos, so we continue to generate domestic market share gains on both a footprint and same-store sales basis. Jude will discuss the progress of our industry-leading development initiatives during his remarks.

Our financial results were very solid for the quarter as we reported pro forma earnings per share of $0.36 as compared to $0.41 in the prior year. Revenues were down 2.4% year over year due primarily to the refranchising of 62 Company-owned restaurants during the fourth quarter of 2008 and the current quarter impact of lower cheese costs on commissary revenues. On a business segment basis Company-owned restaurants produced a $3 million improvement in recurring operating income. Operating margin improved by 2.3% due to lower commodity costs, primarily cheese, and continued strong labor management by our operators, helped by the divestiture of the 62 Company-owned restaurants in Q4 of the prior year, which were generally lower sales volume units with higher percentage labor costs.

The spot market price of cheese was over 40% lower in Q2 '09 versus the prior year, about $0.82 per pound less, and the cheese price paid by our Company-owned restaurants on a business unit basis was approximately $0.27 per pound less than the prior year. The BIBP Cheese Company deficit was reduced by $6.9 million during the quarter to approximately $26.2 million at quarter end, and based on the futures market projections we expect to reduce the deficit an additional $8.4 million during the rest of the year, while the year-over-year price to restaurants is expected to be lower than the prior year for both Q3 and Q4.

Operating income in our domestic commissary unit decreased by $100,000 from the prior year. However, it increased $600,000, excluding the impact of management severance costs, of approximately $700,000 recording during the quarter, primarily due to favorable fuel costs. We reduced margins throughout the quarter in order to pass through commodity and fuel savings to domestic restaurants and we expect those margin reductions to negatively impact year-over-year commissary margins in the third and fourth quarters.

Domestic franchising operating income was $300,000 lower during the quarter than in the prior year due to fewer new unit openings and a lower average fee per opening resulting from various development incentive programs in place during the current year. The international business unit improved its operating loss by $700,000 due to continued leveraging of new unit development and increasing unit sales volumes. There were 21 net new unit openings during the quarter and 49 year to date.

While the rate of net new unit development is expected to be weighted to the last half of the year as is customary, the pace of international unit development is expected to continue to slow from original projections in response to worldwide economic conditions. Jude will discuss the management transition for our international business in his remarks. One additional financial note is that we've been very pleased with the progress of our UK market and plan to invest several million dollars in a commissary facility to service the country, the start-up costs of which are expected to be primarily incurred during the last half of this year with the operations commencing during the first quarter of 2010.

Operating income for the all other segment was $1.4 million lower in the second quarter, primarily due to the planned reduction in the on-line ordering fee and lower sales volumes in our preferred marketing solutions division, reflecting the deteriorating general business conditions. Unallocated corporate expenses increased $4.5 million over the prior quarter -- prior-year quarter due to the 2009 franchise support initiatives; the settlement of a litigation issue; expenses related to severance and other management transition costs, such as search fees; and an increase in accounts and notes receivable reserves due primarily to specific non-franchisee collectability issues.

During the quarter we completed the sale of ten restaurants that didn't fit well with our Company market geography and bought 11 franchise Papa John's restaurants in South Florida that will fit very well with our corporate operations in that region. We don't expect any significant acquisition or divestiture activity during the last half of the year.

We did not repurchase any stock during the quarter and in this environment you will continue to see us be somewhat more conservative with our balance sheet. We just recently reduced the outstanding balance on our line of credit below $100 million. Our free cash flow, a non-GAAP measure we define as net income excluding BIBP plus depreciation and amortization expense less capital expenditures was $44.2 million for the trailing four quarters, representing a free cash flow yield of 6.2% based upon 27.9 million average diluted shares outstanding and yesterday's closing market price of $25.46.

We are raising the low end of our full-year earnings guidance from a range of $1.36 to $1.44 per share to a range of $1.38 to $1.44. Although the second quarter financial results were very solid, we continue to be concerned about the impact of unemployment and other economic trends on consumer confidence and the resulting weakness that creates on the overall restaurant category, including the pizza segment.

Further, in addition to the UK commissary development initiative, we have announced a restructuring initiative within our domestic commissary system that will also negatively impact operating results in the last half of the year, with cost savings benefits realized in 2010 and future years. And as previously noted, we expect our domestic commissary operating margins to be lower during the last half of the year due to a series of pricing reductions implemented to date.

We are reiterating our global unit growth guidance for the year of 100 to 140 net new units, noting that domestic net growth is expected to exceed -- initial assumptions and international net growth is expected to fall short of initial assumptions. And finally, we are revising our comp sales guidance from a range of -2% to flat for the year to a range of -1% to flat in recognition of the fact that comps for the first half of the year were slightly positive.

And now I'd like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John?

Hey, thanks, David. I want to start off by congratulating our system on a solid second quarter. The significant investments we have made in our system largely through franchise support and, of course, quality initiatives continue to pay huge dividends with both our franchise and corporate operators driving positive results in a very challenging environment. In fact, I think Papa John's is the only national chain to report positive domestic same-store sales growth for the quarter. You would think that in this environment the current is more important than the swimmer, but so far we've been able to swim upstream to overcome the negative current of the pizza category.

Combined with favorable commodity costs this has led to our corporate restaurants posting the most profitable quarter in the Company's history. More importantly, our system saw great momentum in traffic during the quarter and this momentum has continued in the third quarter. We continue to tell our system, they drive the top line, we'll help them drive the bottom line, and so far this [former] is working fantastically.

Just as important as driving good sales and financial results our operators continue to deliver the best product quality scores in the history of the Company. We are now serving the fastest pizza service times in our history and we're making the best pizza that I can ever remember. The other chains seem to be focusing on $5 items, $5 pizzas, sort of like a group of people tiptoeing at a parade. Once one person does it everyone else seems to tiptoe right behind them, but we have so far not chosen to do so.

Finally, it is -- it's great to be in Modesto, California with our tomato packers this week, our tomato farmers, as they harvest our fresh-packed sauce. As you know, a tomato is only ripe once a year and we only pack sauce once a year, so we're having a big time out in Central Valley, California, as we continue our search for superior quality ingredients to make sure we keep our promise of better ingredients and better pizza.

With that I'll turn it over to our President and Chief Operating Officer, Jude Thompson. Jude?

Good morning, John, and thank you. First let me say how pleased I am with the progress that the team has made during the last 100 days. On today's call I'd like to update you on three areas of our business; our 25th anniversary development incentive program and our "Papa's in the House" ad campaign and building out our senior management team. As we discussed on our last call, we are committed to helping our franchisees be successful and grow within our system, even during these tough economic times.

To that end earlier this year we implemented the 25th anniversary domestic development incentive program. For those franchisees who sign up in 2009 to open new restaurants, this best-in-class franchise program offers no franchise fee, no royalty for 12 months and an early opening award. The program has generated a tremendous amount of interest and response this year.

Next I want to congratulate our marketing team for a successful Papa's in the House national ad campaign introduced earlier this year. The ads feature John making special deliveries and being welcomed into real customers' homes and the reception is best described as encouraging and enthusiastic. The campaign really captures the authentic connection John has with our loyal customers and is really breaking through with the consumers. They're telling us directly they love Papa's in the House by chanting it whenever they see our founder and the experts in advertising are also telling us that the campaign is really sinking in and being remembered.

As reported in the June 22nd edition of "Advertising Age" our Papa's in the House commercial ranked as Nielsen IAG's number three most recalled ad of all new commercials airing in the month of May. Nielsen IAG is an industry-leading expert in measuring advertising recall and most recently our July's Papa in the House ad ranked Nielsen's number one most recalled national ad during the week ending July 12, 2009.

This ad campaign is being complimented by a PR campaign we are calling "Papa's Road Trip," where John is traveling across the country behind the wheel of a replica 1972 Z28 Camaro he sold to start Papa John's in 1984. Just this week John was in Denver on Monday, Los Angeles yesterday, and he stated earlier, Modesto, California. The Road Trip has taken us to Indianapolis, Dallas, New York and Chicago, to name a few, and the reception has been exceptional. The campaign has generated more than 100 million brand impressions so far and we will continue the Road Trip for the remainder of the year as we continue to tell Papa John's story.

Finally, since our last conference call in May we have made several appointments to our senior management team and I would like to congratulate each of the following individuals who will help lead this Company into our next 25 years. Chris Sternberg, who has been with Papa John since 1994 in several capacities, including legal and corporate communications, has been confirmed as our general counsel. Tim O'Hern, who has been affiliated with Papa John's as a franchisee, or officer since 1993, has returned to the Company as Senior Vice President of Development. And Lance Tucker was named Chief of Staff Vice President of Strategic Planning. Most recently Donna Alcorn has been promoted to Senior Vice President, Global Research and Development and Quality Assurance. All four of these promotions were made from within the Company, a testament to our culture and bench strength.

We are close to completing our searches for our Chief Marketing Officer and our President of the international division and we will make those announcements hopefully within the next 30 to 60 days. We have recently aligned our global operations under the leadership of Bill Mitchell, who is in Modesto today with John, and our International President will report to Bill. We think aligning operations under Bill, as well as research and development quality assurance under Donna on a global basis makes perfect sense as we continue to take our better ingredients, better pizza throughout the world.

And with that I'll turn it back over to David for questions. David?

Thanks, Jude. Dechandra, if you'd like to open the lines up for questions, please.

Yes, sir. (Operator Instructions). Our first question comes from the line of Steve West of Stifel Nicolaus.

Hey, guys, real quick on the international business are you still outlooking sequential improvements for that business and then turning profitable next year? And what are you seeing out there on a global basis?

Hey, Dave, why don't you take that question?

All right, I'll start out there. Steve, as you've seen we've continued to have year-over-year improvement in international and targeted 2010 as our break-even year. I think, obviously, Bill stepping in with new leadership and bringing in a new president of international I think they would only hope to grow on the momentum we have, even as we have to overcome some of the worldwide economic issues out there.

David, let me add to that. Steve, thanks for the question. In my returning from China I would say that our international business continues to be strong. I'm very bullish on what we're seeing in the marketplace, and even with the global economy slowing down our team continues to win in the marketplace and we're very, very excited about that.

Okay. And then as we look -- coming back to the domestic side and the franchise system, you've got a lot of programs out there that helps them get through this tumultuous time that we're going through. Do you see you guys pulling back on it any time soon, or do you think that the franchisees are still in a position where they need the help here?

Yes, this is John. We started the year worried about closing 100 or 200 stores. We definitely got set back, as David mentioned, more flattish and we want to make -- turn that number now to positive growth. You don't go from dark to bright in one step and so this is a process.

With that being said, the unit economics are much stronger than they were, say, eight or nine months ago. Furthermore we're running the most profitable month periods in our corporate stores -- the franchisees are too -- in the history of the Company and if you drive those unit economics entrepreneurs are very greedy. They will build more stores and this is a game of scale and we're going to get to the promise land and build more stores and that's the foremost goal.

With that being said, I don't see near the support -- and I say that cautiously -- because you never know what this environment's going to do. They just slaughtered 100,000 cattle, dairy farmers, so you know cheese could go from $1.10 to $2.10 in a moment's notice, which changes the whole picture. But with that being said, I think 2010 we will not need to give the support that we did in 2009.

Great, and then one last question. When we look at the new units you are opening how are those opening right now versus your expectations internally?

Bill Mitchell, why don't you take that?

Yes, we are -- we're ahead of where we thought we would be. As John just mentioned, we started out the year very concerned, heard our other competitors were closing many, many more stores than we were. We're seeing momentum in the marketplace. Our franchisees are very excited about our current incentive program. As we've mentioned in previous calls we have over 70% of our growth coming from our franchisees. We have now gotten a tremendous amount of interest from external parties to grow Papa John's so we're seeing the pipeline fill up and we are very excited about the back half of this year and 2010.

Great, thank you so much.

Your next question comes from the line of Brad Ludington of KeyBanc Capital Markets.

Thank you. Good morning. I just wanted to start off with talking about the G&A line. It was close to $3 million above our estimate and part of that is due to the -- well clearly is due to the $800,000 in litigation settlement issues, which I think should come out of continuing OPs, but what would the other roughly $2 million be attributable to?

As we shore up the balance sheet we were also are shoring up the income statement. If you look at the motor that drives the business -- that is food service, of course corporate stores, franchise royalties -- we're moving those things in a very positive direction. That is really the meat of the income statement and we're now going down to things that weren't budgeted, like this thing in Cleveland and a few other remodeling things and some things we inherited from previous management.

We -- I'll let David speak to this -- do not like the line that says other because those are surprises if you can imagine the earnings number if we wouldn't have had the $3 million worth of other. With that being said sometimes you have to clean a few some things up and sometimes things come along that aren't expected and that's what has happened. David, you might want to have commented?

Yes, the only other thing I'll add to that, John, is those -- Brad, if you're trying to look at what's recurring and what's not, we also have had some management transition costs, both related to severance and things like search fees and potential relocation, that sort of thing. So I think those things, as Jude said, if we get these other positions filled in the next 30 to 60 days you could see some of that continuing into third quarter but then by fourth quarter that would hopefully be over, too. That's about the only thing I would add to John's comments.

Okay. So looking into the third quarter we should probably expect that G&A costs as an absolute dollar value go up year over year over third quarter '08?

It would clearly -- if you look at the run rate that you saw in second quarter and back out the litigation issue, that's probably a decent run rate for '09 and that puts you flattish to slightly up over prior year. That's probably about right.

Okay. Now with the UK commissary that you're building out and the changes you'll be doing with the domestic commissary, should we expect any changes in CapEx assumptions for '09?

Dave, you want to take that?

Yes. At this point we're not changing the guidance. As some of these new initiatives come on board, and obviously part of that will happen in the latter part of this year and some of it will happen the early part of next year, we'll also have initiatives that just from a pure capacity point of view won't get done. So at this point we're still comfortable with our $30 million to $35 million guidance, even with some of the new projects coming on board.

Okay. Also debt repayments, I think you said roughly another $8.5 million that you expect to pay down on BIBP, should we expect additional debt repayments on the Company revolver beyond that in the back half?

Dave, you want to talk then I'll talk macro on that one?

Yes, from a micro point of view, yes, we'll certainly have cash flow available to look at our alternatives and at this point we think paying down debt is the proper alternative in this environment, strengthening that balance sheet. So I think you'll see that, Brad, be the direction we go. John?

Yes, we have enough cash flow that we could actually pay the business off next year just about in totality. There's two ways to look at that. If that scares the shareholders and the stock goes down then we'll, of course, buy -- we'll be opportunistic, we'll buy stock, and if they like a very solid, clean balance sheet and the stock goes way up then we're happy for our shareholders that way, too.

Okay, thanks for the color. That's helpful. And then finally -- I know I'm dragging on -- but do you have concerns about lapping. It wasn't -- third quarter last year wasn't necessarily strong for you guys but it seems like maybe lapping the Olympics and political conventions and other issues that kept people home might have driven some pizza orders. Are there concerns about a strain on same-store sales here in the third quarter due to those events?

Bill, why don't you take it?

Brad, the answer to that is no. Specifically, as I evaluated the business in China we did get a push in the northern part of China for the Olympics but we're soft in the southern part. That will balance itself out. And looking at our trend line versus previous year we have absolutely nothing to be afraid of going into Q3.

Okay. Thank you very much.

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

Hey, guys. First off maybe John for you, can you talk about the competitive environment. You talked a little bit about the pricing of your competitors, but more on the menu mix and changes in menu mix and how you feel you're competing with them?

Well, also back to Brad's question a second ago, Mark, the -- we had about a run in here last year and this was the last week of it where we had exceptionally strong comps to go over and we weathered that storm. Now it should make it a little bit easier going for the rest of the year, but again, in this environment I hesitate and I'd say let's be cautious. Your competitors are good at what they do and we do not take one sale for granted. We do seem to be good at getting up every day and running good pizza stores and we've been doing -- I've been doing this for 32 years and been with Papa John's 25 and we have just found in the long run that quality pays.

As Jude mentioned I'm out in these markets -- I'm out in the markets a lot. People believe that Papa John's is the better product and they believe in our quality positioning and that is a real advantage when you don't have to play the price game. But I think our competition's going to continue to be innovative on pasta items and sandwich items and LTOs. We appreciate that, we respect that, we're probably going to be a little more disciplined.

We do have -- we know how to do pasta, we know how to do sandwiches, we have a variety of things in the pipeline as far as a limited LTOs. But I think you're going to see a lot more discipline from Papa John's on keeping the main thing the main thing and that is just delivering on a superior quality and experience.

Maybe to ask the same question a different way. How have your franchisees felt about your competitors diversifying more in their menu and you staying more in pizzas. Is that something they've been pleased with as far as operationally, or do they feel like maybe they're missing out on an opportunity?

I'll comment and let Bill comment because he's also out in the markets a lot with the franchisees. I can tell you the excitement in the franchise system -- the franchise family is (technical difficulty) [Pinnacle]. I've never seen it like this, even the run had from '94 to '99. They believe in what we're doing, their FLMs are at an all-time low for periods four through six. We also had a great P7 so they're happy.

They're making money. They like simplicity. Most of these folks -- you go to a franchise convention it's like a family reunion. Most of these people have been with me ten, 15, 20 years. They do not like a lot of complexity, they do like keeping things simple and they do like delivering on a promise.

And when you add SKUs and you add products you do complicate that make line and the operations, especially on a Friday or Saturday night, and they don't like that. I think there is a balance here on the portfolio of do you keep just pizza or do you from time to time have an LTO, say a six-piece Tuscan or whatever you want to have in your mix. And we're going to continue to have LTOs, I just think we're going to do less than the competitors.

I would add to that, Mark, and John, great comments on that. Our franchisees and Company operators like making money and they like making money off of our pizza. We've stayed disciplined, as John mentioned in his earlier comments. We have products of pasta, we have sandwiches, we've tested them. We have lots of arsenals to bring out whenever we need to.

But when we keep our system lean and mean and can see the profitability that we're seeing today our operators are high-fiving in the streets. We have a lot of respect for our competitors. We see what they do. We have good indications on where we think they'll go and we like selling pizza and we're really good at it right now, so we're going to stick with that, Mark.

Next can you -- you guys threw off positive comps, which has been hard for anybody else to do in this environment, can you talk a little bit about the monthly trends and how the quarter trended and also what you've been see -- what you saw in July?

Bill?

Yes, I'll take that, Mark. As I looked at our business starting the year weeks 19 through 31, were my concern and talked to my leadership team about attacking 19 through 31. We're now past 19 through 31 and during those times we ran up against some comps from the previous year of six and nine in weeks that would, in this environment, scare people. We hurdled those gracefully and now that we've got that big path behind us we're excited about what we're seeing, as I mentioned to Brad earlier in the call.

And then last question. Just as we look at the international openings and as we see your guidance shift a little more from the international more to the domestic, is there anything besides the global economic environment that's impeding unit growth internationally?

Mark, this is John. I think we've done a much better job today than we did four years ago with our global international restaurants. The reason we've made some changes -- Bill, Donna, Tony, et cetera -- is I think we can do a better job. We see a lot of opportunities. We may even have missed some opportunities. For example, the discipline of clustering stores, I think we could have done a better job with that. The discipline of focusing in on a few core markets versus trying to do 29 markets at the same time.

All that put in the blender, four years ago the financials scared me. I didn't understand it and today I'm not saying we're going pull this off. We will make things better. We hope we pull it off. But I have no problem getting on a plane and flying anywhere in the world and putting a Papa John's there and thinking it's going to work. My confidence level is switched from I didn't understand it to I now understand it and I do think it will work.

With that being said, Bill and his team have got to go out and we've got to get the job done. It's easy to say we're going to make it work, but we're at store 600+ international and we need to get to store 4,000 international. Until we get that done, we're just talking.

Okay. But nothing really else out? You're not seeing any problems with any of your international partners where they've pulled back significantly on their growth expectations?

Oh, you get pockets of problems, there's no doubt about that. I don't want to -- if I indicated there wasn't any problems, I certainly apologize. But we have opportunities in a lot of countries. Again, with that on the table, the leadership is now in place where we're solving those problems.

The thing that I'm delighted with is like (inaudible) Bahrain or Kuwait we are the top one or two pizza chain in those countries. When I go over and I open a walk in it looks like a Papa John's walk-in in Louisville, Kentucky. So the folks that are successful internationally are -- they're preaching the gospel of the core competencies and values of Papa John's and that's very comforting to me to know that I don't have to change in every country. Over here it will work throughout the world.

Now there's slight changes. UK, for example, uses potato wedges and there's certain meats in the Middle East that don't apply, but all-in-all the core business works throughout the world.

Great, that's helpful. Thank you.

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

Good morning, guys. I was wondering if I could circle back here to the international markets again quickly and wondering if you guys had any thoughts here on releasing some data here, either comps or something else, on the -- on how those stores are actually performing as you come closer to the profitability mark?

David?

Yes, this is David. I think, Michael, now that we've got a core base of stores, as John mentioned in excess of 600 stores, that's something we will consider going forward at the right time to announce the international comps. I think that's something you'll see us be giving more specific information on. We may stay away from a lot of individual country information, but certainly on an overall basis I think that's something you may see us do as early as 2010.

All right. I may have missed this in the comments that low end of the guidance that you bumped up here, what is that based on? Is that commodities again as it was the last time you did that?

David?

Yes, the -- basically it's just we had a pretty good second quarter, Michael, and as the year progresses that reduces the potential volatility of the rest of the year, even though it's a tough environment out there, so we felt comfortable raising the bottom end of the range based on having two pretty darn good quarters already in the books.

All right.

This is -- Michael, this is John. We build a brand for years to come, even decades. In this environment, though, the financial we look at pretty well over every period, every quarter because it is so -- it is so unpredictable. So the first six months were great. P7 was very good. We had good momentum going into P8 and we'll play it period to period on the financial part of it. As we get the G&A line and we continue to make a lot of money in our restaurants we will be more comfortable being aggressive on our earnings outlook.

All right. And lastly here, I was wondering if you guys could talk about the support initiatives that you guys have in place and how much of what you thought you guys were going to have to give out you guys actually are and then thoughts moving here towards the end of 2009 on rolling some of those back into 2010?

David, you can jump in with specifics, but we're pretty well right on track with what we thought we had to do and the amount of money we had to spend to keep the system healthy. The good news is that we thought we were going to keep 200 stores from closing with this initiative where now we've got it to where we can maybe get positive with store openings. And so the initiative has worked, it's been very positive and we're in a much better position now to grow stores versus our concern was closing restaurants.

Yes. John, I don't have anything to add. I think that's correct. We are right on track and when commodities have come in a little better than expected we decided not to back off the accelerator and we want to try to keep driving to take market share.

Great. Thanks, guys.

Your next question comes from the line of Chris O'Cull of SunTrust Bank.

Good morning, guys.

Hi, Chris.

David, just a modeling question and I may have missed this but would you quantify the incremental costs associated with the new commissary and the restructuring of the domestic commissary?

Yes, the -- what will hit the back half of 2009 for those two activities, or those two initiatives, is probably somewhere in the range of $800,000 to $1 million by the time you take decommissioning one facility and the start-up costs related to another redistribution facility in the US and then the start-up costs in the UK. So it's probably in that $800,000 to $1 million range of what will hit the back half of this year.

Okay. Okay, that's helpful. And then, Bill, if you assume the low end of your comp guidance for the full year it implies pretty negative comps in the back half of 2009, which is obviously a slowdown from your first-half trend and despite lapping easier compares, what are your biggest concerns regarding sales in the back half of this year?

Chris, good morning. I agree with what you're looking at. I will tell you we are just staying conservative on our path. We like where we are standing and I've stated that through the call. But in this environment and what we're seeing and other competitors going to seriously deep discounting, I just want to remain conservative on the back half of the year.

Okay Are you seeing any unique sales trends where you've got a disconnect with the economy in certain regions of the country relative to the national average? Are there certain areas of the economy that are weaker that are affecting your sales?

Yes. You can follow that line with unemployment and the housing markets. We do see softness in parts of Florida, we see softness in parts of the west coast. The good news is we've a strategy in place that our marketing team has put in. It does have a couple of elements of discounting while keeping the main thing. The main thing, as John said earlier, and we're seeing some good results from that strategy. So again, I want to remain conservative, but as I mentioned earlier to Mark, we have nothing to be afraid of in the back half of the year.

Okay, great, and then one last question. John, given the FLM improvements franchise has seen this year, is it a fair expectation to assume that the subsidies that were provided -- or the support that was provided to franchisees this year will not be provided in 2010?

It's fair to assume it'll be quite a bit less. That being said, the FLM when we took over was 61, I think last week it was 56. I'm not happy at 56 so we now have a goal of 53. At 53 FLM our operators make so much money that they can't help themselves, they'll have to build stores. That leverage is scale. Scale leverage is the distribution, and leverage is marketing, and leverage is G&A and that's where we're headed with this thing.

There is any opportunities to make the support more conditional on development goals, so if you --?

We're out here in L.A where we help them a little bit with -- we subsidize their co-op but we don't have a seat at the table and what they spend. Well, that's ridiculous, so Bill and I, we met with the franchisees the last day and a half. We're fine to help them out and to tie it to making A pizzas, give them great service, driving transactions, driving comps, but at the end of the day if we're going to have some skin in the game to help these franchisees get through these tough times we definitely want to have a say in how they're going about their business, absolutely.

Okay. Okay, great. Thanks, guys.

Thank you.

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

Hi, guys. One quick follow up. Just taking a look at your average weekly sales, primarily restaurants that aren't in your comp base, are you doing anything different with your new restaurants where it looks like you're getting a pretty good bump in the average weekly sales?

Bill?

Mark, I don't think there's anything different that we're doing. A comment that I would make to the previous questions is, that although we were favorable in commodities our system has become extremely disciplined. I would compliment our franchisees and our Company operators. As we see what we are doing in favorability and comps, aggressive local store marketing and flow through on the P&L it's important to know that 50% of that is coming from commodities and the rest is just damn good operation. So we continue to be very solid in that and we can't spend like a couple of our competitors but we love owning the neighborhoods and that's where we're seeing a difference.

And -- this is David. Mark, the only thing I would add to that is, remember we did also have the 62 restaurants that were sold and those would have been lower sales volume restaurants probably than our corporate base, but not necessarily lower than some of the franchise base, so that could have shifted the number a little bit but probably not significantly.

Okay. That's helpful. Thanks.

(Operator Instructions). Your next question comes from the line of Brian from Patara Capital.

Good morning, guys, thanks for taking my questions.

Hey, Brian.

Congratulations on very strong store-level margins again. Very impressive in this environment. Positive comps for the quarter again. I'm sorry, was that a systemwide number or just domestic?

David?

Yes, that -- we don't report international comps yet, Brian, so that was domestic only.

Okay, very good. And wondering if you could help us a little bit. I've seen some industry data that traffic's down, are you guys seeing similar trends such that the mix of the comp base between price and traffic. Can you help us with more color there?

Brian, this is John. We are seeing (inaudible) positive on both trends.

Positive pricing and positive traffic?

Yes. We might be slightly negative for the year, but definitely the last three to five months we've been positive on traffic, which is the first time in ten years that we've been positive on traffic. That was a big initiative when I came back eight months ago. You have to fix the customer frequency, you have to fix the traffic, otherwise you're just -- sooner or later you can only raise your prices so much.

Absolutely.

And that being said, we don't like this environment any more than anybody else. When you see the category negative six to negative ten, it's scary and we've been able to buck that trend thus far. So we would prefer a positive category and we think it's much easier to run positive in a positive category but we are running positive in an extremely negative category.

Very impressive results given the backdrop, thanks for taking the questions.

Thank you.

Thank you, Brian.

There are no other questions at this time.

Dechandra, thank you very much.

Thank you, sir. This concludes today's conference call. You may now disconnect.