Papa John's International Inc (PZZA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Papa John's second quarter 2010 conference call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for the day, Mr. David Flanery. Sir, please go ahead.

Thank you, Karen. Good morning. With me on the call today, are our Founder, Chairman and Co-CEO, John Schnatter; President and Co-CEO, Jude Thompson; Chief Marketing Officer, Andrew Vargas; President of our Global PJ Food Service, Tony Thompson; Senior Vice President of North American Operations, Tim North; and other members of our executive management team. After a brief financial update, Jude will have comments about our business, and John and the management team will then be available for Q and 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 could cause actual results to materially differ, are outlined in our earnings release and in our forms 10-Q and 10-K. In addition, certain financial measure we use on this call, including earnings per share excluding BIBP ,are expressed on a non-GAAP basis. Our GAAP to non-GAAP results reconciliation can be found in our earnings press release, available on the Investor Relations section of our website. 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 our sales and financial performance in the second quarter, given the continued difficult consumer and competitive environment that Jude will address in his remarks. We continued our trend of positive traffic, and also reported positive comparable sales during the quarter. We reported earnings of $0.43 per share, excluding the BIBP cheese purchasing entity, a 19.4% increase over prior year Q2 earnings, of $0.36 per share. Our year to date earnings, excluding BIBP of $0.97 per share, were 22.8% higher than the $0.79 per share reported for the same period in the prior year.

Revenues for Q2 increased 4.5%, as compared to the same prior year quarter. Primarily due to the increase in the domestic royalty rate to 4.75% at the beginning of 2010, from 4.25% in Q2 of last year. An increase in commissary revenues, due to increased sales volumes. And an increase in international revenues, due to unit growth. On a business segment basis, Company owned restaurants operating income decreased $1.5 million over the same prior year quarter, due primarily to increased levels of discounting, partially offset by increased traffic, lower commodity costs and labor efficiencies.

Operating income for our domestic commissary business segment, increased $550,000 as compared to Q2 of the prior year. Due primarily to increased sales volumes, which allowed for the absorption of commodity price increases, related to certain Florida vegetable products and higher fuel prices, rather than passing these higher costs through to the domestic system. Additionally, the prior year results included management transition costs of approximately $700,000.

As a result of favorable spot market cheese prices thus far this year, the BIBP deficit has been reduced from $20 million at 2009 year-end, to $13.9 million at the end of Q2. We expect that the deficit will be reduced by an additional $1.6 million by the end of this year, based on current future's market price projections.

Domestic franchising operating income increased $2.6 million, due to the previously noted increase in royalty rate, partially offset by reduced unit opening fees, as a result of development incentive programs currently in place. Operating losses for our international segment were $200,000 higher than the same prior year period, as expected. This operating loss increase was primarily due to costs related to the start-up of our new quality control center in the United Kingdom, which began producing dough in Q2 and started warehousing and distribution activities in early Q3. And increased organizational support, partially offset by revenue increases from unit growth.

Operating income for the all others business segment decreased $400,000 year-over-year, due primarily to increased infrastructure and support costs associated with enhancing our online ordering platform. We expect to recoup these and future enhancement costs from ongoing online ordering fees charged to domestic restaurants over time. Unallocated corporate expenses decreased $1.5 million, due primarily to the planned reduction in franchisee support initiatives in the current year and higher provisions for uncollectible accounts and notes receivable in the prior year. We re-purchased $19.2 million of stock in the quarter, and an additional $6.7 million, subsequent to quarter end, through July 28. In late July, our Board of Directors approved a $50 million increase in share re-purchase authorization, leaving us with a remaining authorization of approximately $52.7 million. We continued to believe returning free cash flow to shareholders, via share re-purchase, is a good investment and helps support increased shareholder value over time.

Our free cash flow, a non-GAAP measure we define as cash flow from operations, excluding BIBP, less capital expenditures, was $22.7 million for the first six months of the year and $44.1 million for the trailing four quarters. Representing a free cash flow yield of 6.5%, based upon $27 million averaged diluted shares outstanding, and yesterday's $25 closing market price. Our net debt position, defined as total debt, less cash and cash equivalents was $61.3 million at the end of Q2, a $12.3 million reduction from 2009-year-end. Our $175 million line of credit expires in early 2011. And we expect the renewal of the line to be completed during Q3.

We implemented cost reduction initiatives in early Q3, which included a reduction in force in our corporate support area and printing and promotion subsidiary. After considering severance and other related costs, the net impact of these reductions on operating income for the last half of 2010 is not expected to be significant. The cost reduction initiatives are expected to have a $4 million to $4.5 million impact on 2011 results.

We are updating our domestic system-wide comparable sales guidance, from a range of negative 1% to positive 1%, to a range of negative 0.5% to positive 1%, reflecting our even results for the first half of the year. And we're also updating our earnings per diluted share guidance, from a range of $1.72 to $1.87, excluding the impact of BIBP, to a range of $1.74 to $1.82, reflecting both our Q2 actual results and our views that the current promotional environment will continue for the some period of time, pressuring unit level margins. And now I'd like to turn the call over to our President and Co-CEO, Jude Thompson. Jude?

Thanks, David, and good morning to everyone on the call today. I want to start by congratulating our franchisees and cooperate operators on another very solid quarter. In face of what continues to be aggressive pricing and promotional environment in our category. Our system not only posted positive comp sales, but also posted positive transaction growth for the fifth consecutive quarter.

In running our business, we try to avoid the peaks and valleys of boom-bust cycle, that makes it challenging to deliver consistent returns. Instead, our long-term plan is to build and deliver steady and sustainable sales growth. And our second quarter results delivered against that plan. We were very pleased that during the quarter, Papa John's, once again, earned the highest rating among all limited service restaurants in the prestigious American Customer Service Index, ACSI. I want to make a couple of observations about this year's ACSI results. First, Papa John's finished first, not only among all pizza chains, but among all QSR chains, including such great brands as McDonald's and Starbucks.

This year marks the tenth time in 11 years that Papa John's has received the highest ACSI rating among all pizza chains. And lastly, and perhaps most importantly, Papa John's earned an even wider margin of victory in the product quality ratings among pizza brands included in the survey. When you build a brand around quality, as we have for the past 26 years, this is a big deal. Consumers have spoken and recognize that Better Ingredients Better Pizza, is not just a slogan, but a way of life at Papa John's. This commitment to quality and consistency applies equally to our international markets, as we seek to create and deliver the same high quality Papa John's pizza throughout the world. Made with superior quality ingredients sourced by our global R&D and supply chain team.

Next, I'd like to comment on our US development efforts. Our 2010 US development incentive program, has been well received by our franchisees, allowing us to continue to grow our store base in the US. This includes new store growth by both existing franchisees, as well as many franchisees who are new to our system. Some highlights -- during the quarter, we opened 29 net new domestic restaurants, compared to seven net closings during the same quarter in 2009. What a difference a year makes. And this illustrates our commitment to store growth. With 33 net new openings for the first half of this year, we are on track to achieve our stated goal of 40 to 60 net new domestic openings during 2010. And looking ahead, our US development pipeline is strong. With agreements in place to open approximately 270 domestic restaurants, roughly two-thirds of which are scheduled to open over the next two to three years.

Now, onto our international business. It also continues to gain momentum, and I want to mention a few highlights. During the second quarter, we opened a new dough production and quality control center in the United Kingdom. This state-of-the-art facility will help us to continue to build out the UK in a high quality fashion, as our corporate team and our franchisees in that market continue to perform very well.

During the quarter, we opened our first two restaurants in Chile, making Papa John's now in 28 international markets. And we expect to open our first units in the Philippines and Panama. And we have plans for two other countries during the last half of this year. Our international pipeline is also very strong. We've signed development agreements to open 1,200 international restaurants. The majority of which are scheduled to open over the next seven years.

And finally, I want to discuss an important partnership entered into by Papa John's, in June, with the National Football League, making Papa John's the official pizza of both the NFL and the Super Bowl for the next three years. Companies and brands associate with the NFL and the Super Bowl, because they are committed to a quality and leadership position. And that's consistent with our philosophy at Papa John's. Quite frankly, we believe there's no better combination in our business than the NFL football and pizza. In fact, consumers spoke loud and clear this past Super Bowl, giving Papa John's the largest single sales day in our brand's history. Over 900,000 pizzas were sold by our operators on that one day alone. And now Papa John's will deliver that quality combination right to the doors of football fans for the next three years.

These are exciting times to be on the Papa John's team. The entire system is engaged, as we work together to make this brand even more strong. And with that, I will turn it back over to David for question and answer.

Thanks Jude. Karen, you can go ahead and open up the lines now for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Chris O'Cull, of SunTrust Bank.

Good morning.

Good morning, Chris.

Good morning, guys. Jude, would you update us on the search ongoing for the international president?

Yes, I could. We actually have offers in-- an offer in the work, this week. We've went through an extensive interview process, and we're excited. And we had very high quality candidates. And so, hopefully within the next 30 days or so, we'll be able to make that announcement to you.

Does this person have experience opening international units and running an international retail chain?

I don't want to get into-- until this is finalized, anyone's background. But, I can tell you we're pleased with the experience of all the candidates that we interviewed. But, we'll give you a full bio of the person, when they become a team member in the international division.

Okay. Fair enough. And then, would you elaborate on the issues that cause you to close stores, I think it may have been in Saudi Arabia?

I'm going to let David take that. He's acting as our interim over there. He'll give you some specifics around that.

Thanks Jude. Yes, Chris, we've had some management changes in this country. And we haven't officially announced which country and we want to do that just for communication purposes. But, we have some management changes in the works. And we believe that a good portion of the stores will begin reopening before the end of this year. And we actually think this is a very positive move for us in this country.

Okay.

Chris, this is John. The key of the international, is picking the right partners. And the partner we've now put in, in Saudi Arabia, also is involved with Kuwait. As you may know, we're the number one brand in Bahrain. We're also the number two brand in Kuwait. So, we feel very good about this change. And the international-- as far as international president goes, we've-- the delightful thing about international, is the-- if they do it the Papa John's way, it works.

When we first got into international, we heard all these excuses or got input that you had to do it differently. And what we're finding is that when people do it worldwide, the way we do it in the US, they are successful. And so, we feel the international background has to be one of which does it the Papa John's way. Fair enough, Jude?

Yes, that's great.

Okay. And then, one last one, John. I was surprised at the improvement in the labor line item, given the increase in transactions. What are the stores doing to lower their labor costs, right now?

This is Jude, and we've got Tim North in here, and we'll let him add a little color to it. But, as we continue to advance online, that's helpful. We continue to work hard to become efficient. And with the transactions picking up, there is not a lot of wasted time. And we've been, as we've stated, there's five consecutive quarters where we've become busier. And that's good. That's healthy. That's helped us not only in our stores, but in our commissaries to look at efficiencies.

When we have dead times, so to speak, you're just not as efficient and as effective. And as these transactions have continued to grow, which excites us-- I think you've heard me say it, for at least several quarters, we haven't specifically given those transaction numbers out in the past. But, we know when we're busy at the store level, good things happen for the entire system. Tim, would you have anything you would add to that?

And I would just say, Jude, too-- we've taken some steps to change the structure of the stores, a little bit. A little bit of management structure change, which has had a real positive impact. And I'm real happy with the change in labor year-over-year. So, we'll continue on this process and try to figure out ways to keep making end roads into this line item.

Very good.

Great. Thanks, guys.

Thanks, Chris.

Thank you. And our next question comes from the line of Steve West of Stifel Nicolaus.

Hello, guys. A couple questions on the overall category and the dynamic you're seeing out there, right now. First, is the category still growing? Because, you guys have mentioned that in the first quarter, category was growing again. And if so, are you guys still taking market share as you were before? I assume so, with positive comps. But, obviously, lagging Pizza Hut and Domino's in that respect.

And then looking forward, as you look at the $10 pizza. I mean, Pizza Hut has been very clear that $10 is here to stay. How do you guys think about that? And then, how do you think about trying to recoup those margin hits at the store level, as we go forward? Are you actively seeking out cost savings initiatives? Try to offset some of the margin hit there?

I've got Andrew Vargas our CMO. Would you like to-- a little bit?

I'll go ahead and handle that. First, I'll talk about market share. I kind of look at it this way--We've grown market share in the declining pizza category, over the past few years. And we're certainly holding our own in a growing pizza category, with the two largest competitors fighting very hard on price and fighting very hard on media commitment.

As David and Jude said earlier, our model is one that's based on long-term sustainability. And we believe that this will ultimately show up in pricing advantage. As well as an enormous runway that we have, in both the digital and traditional advertising space. Relative to Pizza Hut and the $10 environment, it's interesting. I don't want to get too much into that, because it's more of a Q3 commentary. But we've been off $10 any large, for the most part, for six weeks, and really like what we see. And where we're going from that perspective.

Okay. And then, Jude, quick question. To kind of clarify, you talked about the 270 agreements in the pipeline with domestic. You said there was some amount that are agreed upon for the next 2 to 3 years. What was that number again?

About 0.66 of the--

0.66, okay, that's what I thought.

Yes, about 0.66 of them. But with that said, Steve, I can tell you the team-- when Tim O'Hern and his team came back into Papa John's and we put these incentive programs in there, we were committed to store growth. That's the beauty of being 26 years young.

We have runway both in the US and worldwide, as you can see our store counts, versus others. But with that said, it's not the number of stores, it's the numbers in the stores, that we care about most. And so, we'll do this at a methodical way that is beneficial to the store franchisee operator and Papa John's. But, we like what we're seeing.

The interest level is high. Every day we get activity. And I can tell you that we have a lot of new people seeking us out, that aren't in the Papa John's family today. I'm in here , it seems like every week, introducing myself to new people that are interested in becoming franchisees in this system. So, we're excited about

Okay. Great. And then one last question. Dave, can you talk about the-- what you're outlook is for your cheese pricing for the rest of the year? Any update on that?

Yes. Steve I can. The good news is the futures market shows-- we actually went out 24 years on the market, and it shows a relatively narrow band of expected cheese pricing somewhere in the $1.55, $1.60 range at the spot. Our projections for the price that the stores will be charged, what we call the BIBP price, is a $1.57 in third quarter and $1.62 roughly in fourth quarter. Again, those are within ranges that we feel comfortable with.

Okay. Thank you very much.

Thanks, Steve.

Thank you. And our next question comes from the line of Michelle Wolleben, of Sidoti & Company.

It's actually, Michael. How are you guys?

Hello, Michael.

You know, I was wondering if you guys could just touch on here, again, the competitive environment? You know, putting up flat comps, basically here for a year and a half now, at this point. You know the competitors are putting up you larger numbers. Can you give us kind of a size, something, somehow to quantify where this traffic and check are shaking out here, for you guys?

Yes, this is Jude. And Michael, let me make a comment that you look at year-over-year, obviously, and we're looking about-- As Andrew mentioned, we have a plan, a game plan to put certain pieces in place that will make us have sustainable, dependable growth. And you know, we're pleased that we've been able to compete and thrive in this environment. So, when you add up all the pieces, the various things, focusing maybe just on a slightly positive comp sale, when the environment has-- we still are in one of the toughest economies, definitely in recent history, with almost double digit unemployment. Which has always been an indication or an indicator of what happens in the QSR segment, and we're succeeding.

We're, you know --I want to be humble about this, but we're hanging in there. We feel good about it. We've got a lot of runway to get better. We were honored and thrilled to have won the award that confirmed, through the consumer, that our pizza is, from their perspective, a better pizza. And we live it every day.

And so, as we continue to put store growth domestically and internationally-- internationally is going to be profitable, will be profitable. We've got a leader in mind. And when that person takes over that, that leadership role, we just think we're really poised to do great things, that we don't get hung up on any one quarter.

And, Michael, I'll add this. You know, when you look at market share, you can certainly look at in the short-term. You got to also look at it in the long-term. But, one of the things that we pay particular attention to is the health of our brand at any time. And over the last six months, we know that the $10 any large pizza has done a couple things for us.

Number one, it's brought in an enormous amount of new and lapsed consumers to the Papa John's franchise. Which we know plays out long-term in a really powerful fashion. And the second thing that we know, is that our brand health measures through the first 6 months of this year, are at all time highs on very key attribute and imagery ratings. So, you know, we're excited where we are at the end of six months. And we have a powerful brand.

Hey, Andrew, this is John. Why don't you put that in the context of, he's looking at it-- Michael's looking at it as a quarter-over-quarter. The-- our biggest competitors have been negative almost for 3 or 4 years, put it in that context. And also, again, Andrew, hit that one more time on the boom or bust, versus something that's more consistent and sustainable.

Yes, I mean, I think one of the things you've got to always look at, is what are you rolling over? And in particular, what have you had to do to get the comp that you're getting. And we just personally believe, that the way that we approach our business is one that is going to give more steady, sustainable performance-- at the expense of trying to ride out peaks and valleys and see where you're brand ends up.

The other thing, is just the whole notion that we really do believe that we have the chance, in the next couple of quarters and beyond, with the NFL relationship, with some different looks at pricing, to be able to really leverage the strength of the brand. To be able to move it forward in a positive fashion.

All right. Great. That's helpful. Thanks, guys.

Thank you, sir. And our next question comes from the line of Brad Ludington, of KeyBanc Capital Markets.

Thank you. You know, I wanted to start off back on the improvements we saw on the labor line. You talked about that being driven by improved sales and changes to management structure. Can you talk a little bit more, first off, on the changes to management structure that helped?

Tim, will you give him, give Brad, some color around that?

And this is David, maybe while Tim's going to talk about that, let me also say-- We have taken advantage of the opportunity to do a tip credit program with our drivers. I think we've talked publicly about that before. So, that actually helps us manage that number too. And then, I'll turn it over to Tim to talk more about the staffing piece of it.

Hello, this is Tim. What we did, was fundamentally three things. One, we looked at the distribution labor throughout the day. You know, the online system has helped us smooth that out a lot. We've been able to reduce people at midday, where we used to have to have more people on. So as online becomes more prevalent, that's helping.

The second piece is, a look at the salary positions in the stores. And you know, we took assistant managers, fundamentally, from a salary position to an hourly position. And that's helped us save a tremendous amount there. Because, we found our assistant manager group isn't really working the hours that you'd normally ask a salary person to do. So, at the end of the day, that combined with the tip credit, the three pronged approach, has really done a nice job of saving labor year-over-year in the stores. And now, we're looking at further changes and enhancement to make it better.

At the same time, we've had great customer measures and great internal measures around things like-- pizza scores, and our ability to service the customer. So, I'm extremely happy that we've done all that, without any negative impact. In fact, you could argue positive impact. Because, the shake up seems to have gotten people re-focussed on what's important, which is the product and our customer.

You know, Brad, this is Jude. You could have put that under an umbrella of efficiencies. But, I would take it up a notch, even higher, that we have a lot of new people in place that are very curious about this business. The core principles, the core values of Papa John's haven't changed. But, trying to get better, we understand the environment that we're in. We understand what commodity pricing pressures could do. We don't live in a vacuum. Our competitors will have the same things happen to them, as they happen to us.

But, as we continue to try to drive down and control the things that we can control, we work very hard at that, each and every day. And the things that are out of our control, we're trying to make sure that if those things happen, we have enough dry powder. We love our balance sheet, we love the things that we're doing in store growth, that have us put in a position that if things do get a little tougher out there, we see it as an opportunity to take share. Take advantage of this opportunity, so that's what it's about. I mean, we gave you some detail to the labor line. But, we're just going to work harder and faster, each and every day.

Okay.

This is John. One thing that is non-negotiable and that is the customer experience. And you can run good numbers at the expense of customer experience and we don't do that. I think in fairness, to piggy back on what Jude and both Tim said, is the mind set. It's a mind set of a much more disciplined culture and a much more financially disciplined culture. And that's how they're getting that money to the bottom line. They're just running the thing a lot tighter.

That was very helpful. Thank you. And so, just, I know there's a larger picture like Jude went through, but just to look at the back half of the year. Some of these-- the changes and efficiencies you put in, would imply that the same type of momentum should continue in the next couple of quarters, year-over-year. Am I looking at that correctly? On the labor line?

Yes, sir. This is Jude. Yes, sir.

Thank you. Now looking-- Andrew, on the timing of ads. Were you on-air, off-air more or less in the second quarter than the first quarter? And what does that look like going into the third quarter?

We're not going to comment on that. We, basically, don't give out that information. But, obviously, we're committed to national television, as one way to grow our brand. But, there are a number of different areas that we put our money and resources into, to build this great Papa John's brand.

You know, when I say comment to-- we don't like to give out what specific months we're in there. But, we have local co-ops and they're TV-- in their various ways-- social media. So, we have ways to make sure that we're always out there promoting the Papa John's brand. And that's probably as deep as I'd get into that.

Brad, I would add one textural comment, if you will. And that is, that we know one thing about this great brand, is that we've a lot of runway for national television, in terms of weeks that we can be on. Which also flows straight into this model of sustainability and how we leverage more and more weeks. Because, those weeks when we cover them up, we know they provide us growth. So, we just tend to look at our marketing expenditures that way. In line with the overall master model that we have, to try to provide nice, consistent, sustainable returns.

Okay. Thank you. You know, and then looking at the cost cut initiative. You're going to--It's going to be kind of neutral you're saying, with severance costs and the benefits in the back half of 2010. When should we expect the strain of the severance cost hit? Is that going to be equally throughout the two quarters? Or heavily weighted in the third quarter? And does that go into G&A ?

Yes, Brad, that will mostly be weighted in Q3. So, that will bear most of the weight of the severance. Then you should start seeing some of the pick up in Q4. They will roughly offset each other for the balance of this year. And then starting 2011, you've got the upside.

Okay. Good. And then finally, just with all the articles and chatter about Russia and wheat prices and everything else. Can you comment on what you're seeing there? If you were able to lock in any prices? And what that represents of your costs?

Yes, this is Tony. We're actually covered through Q1, from a contract standpoint. So, from a supply chain disruption or even significant price impact, we don't anticipate anything between now and the end of the year.

And Brad, that was Tony Thompson who's President of our Papa John's Food Service.

Okay. Well, good. Thank you very much. I appreciate it.

Thanks, Brad.

Thank you. Our next question comes from the line of Adam Hammil, of Gates Capital Management.

Yes, it's actually Jeff Gates. Can you talk about the performance of Company owned stores, versus franchisees? It seems like the franchisees the last year or year and a half, have been out performing, which is a bit of a departure from historical comps? And then secondly, these-- you used to get up front fees from franchisees for development. Is seems like those have gone away. And do you think those will ever come back? And third, how many more years before international, you expect to be profitable?

Let me-- this is Jude. Let me try to take a few of those. I think I've got three questions there. And the first one, you know, we're pleased with both our corporate stores and our franchise stores. But, our PSAs, our sales volumes are greater in our corporate stores in comparison to our franchisees.

Now, as you know, we have about 20% of our domestic stores are corporate. So, we have many more franchise stores out there. So-- But, we work collaboratively with each other. And so, when we have a good idea that it is working, whether it's a corporate store or a franchise store, we're going to share that information, as quick as possible through our monthly webcast. Matter of fact, our leadership's in today and tomorrow-- Our franchise advisory council. We have very good relationships with that. So, we don't see it as a competition. We just see-- we'd love to see them pull up equal and both continue to succeed and move forward in that direction.

Second question was?

Upfront development fees.

Oh, the development fees. Well, you know, I don't know. We liked the pipeline. We believe we could put 500, 600 more stores, maybe even more, here in the US. And so, we think it's real smart to be able to do what we're doing with our development incentives, because they become a long-term franchisee that contributes, not only franchise fees, but into the marketing fund, food service consumption. So, you know, it's a little short-term pain for a lot of long-term gain, and we think that's smart.

The other question Jude was the profitability on the international front.

Yes, profitability on the international front. David, I don't know if we've come out with anything that said--here's our stake in the ground, when we expect it to turn.

Yes, what we said publicly, is that-- and we took it backwards with UK commissary opening this year, on purpose. But, that by 2012, we would see full year results profitable. And that on a run rate basis, we should see that somewhere midway toward the end of 2011. Kind of on a run rate, full year 2012.

You know, and our commitment-- this is Jude again. And John I'd ask you to talk a little bit about this too. Because John and myself, along with our new leader of the international, here in the next 30 days, we're going to go around the world, in a sense. And visiting our major international markets and continue to get level set, and really get a good handle.

Not that we're not out in the markets now, understanding that. But, with 700 international stores growing to 800 quickly and 900 before you know it. We've been spending a considerable amount of our time realizing that 2 or 3 years out, we have to start depending and get a return on that international market. And we're excited about that. We think it can and will do it.

Yes. Jeff, on the franchisees doing a little bit better on the comps, than the corporate, we're delighted with that. You know, at Papa John's, if it moves, we measure it. And to my knowledge, we're the only restaurant Company, where the corporate stores on every single key measurement, we beat the franchisees, on average. So, we're delighted when they beat us, every once in a while, on something, whether it's comps or transactions or pizza scores.

International, we are going to start running international with the same discipline and rigor that you're seeing with the US stores.

As far as the up front fees, it really doesn't matter. The key here, the big end of the cow, so to speak, is store 4,000. We want to get to store 4,000. At store 4,000, $25 a share looks like a steal. So, how we get there, we're willing to invest and spend to get there. We just want to get to the store 4,000. Because, the numbers get real good with the leverage in marketing, with Andrew, leverage and distribution, with Tony. Your international numbers start to get real good, and so we're on a mission to get this thing to store 4,000. Now, once we're at store 4,000, then we're going to turnaround and look at store 5,000.

Okay. Thank you. I guess one follow up, if I could. So, you feel like you're attracting the same high quality franchisee, like you've had in the past? Or the standards for-- since the financial standards up front have been lower. Would you still be getting the same quality franchisees that you traditionally held?

Well, you know, I'm going to offend at least someone out there. But, we think they're higher quality. We love the way our system looks today. But, I can tell you, we have a very rigorous process to make sure that they're financially in a position to be a part of the Papa John's family. We've got the right incentives in place. But, we're encouraged. If you look at some of the, if you may, the new blood that's in the system and the way they work it and the way they are attracted to the Papa John's core beliefs, they buy in.

And as you may or may not know, we've spoken at this, at length last year, about taking out a number of SKUs and items out of our commissary, so we could make sure that we keep store level operations, as simple as possible. Because, that way we can replicate and be consistent with our products. Our pizza scores would suggest that, that was a smart move to make. And we continue to be rewarded, as we mentioned in my opening comments, with the ACSI giving us a very high quality store. So, we feel like all of this is adding up. And it's a part of this plan, we keep talking about when we set out, that said we've got a window of opportunity and we want to run.

Great.

Jude, why don't you talk about the structure, which I'll call the international. As far, as like marketing reports to the (inaudible) worldwide. Tony, you may add some color on the procurement in the process by which we distribute worldwide. And then also if you would, Tony, just talk a little bit about some of the disciplines and the processes we just put in, even the last year. With the scrutiny to make sure we have applied line parts to the franchisees internationally. And the process by we chose the franchisees?

Okay. Well, this is Jude, I'll start off first, John, and I'm going to turn it over to Tony. Just very simply, we had a more de-centralized-- and that was the right structure for the right time. When you're at store 100, you have to do things differently, than when you're at store 700 and you've got 1,200 stores in your pipeline. What we have put into place here, as you know, we've had some management changes, but we feel good about that.

This team is an exciting team, hard working team, smart team, curious. And so, what we've done is, basically, every one of my direct reports now has global responsibility for their respective area. Whether that's legal, store development. Whether that's human resources. Whether that's marketing, as Andrew, finance. I could keep going around the room. And then I'm going to turn it over to Tony Thompson, who is already in that structure and has been working at longer than any of us, in this global procurement and food distribution. So Tony won't you add to some of that?

Thank you Jude. First, just from a global supply chain and procurement standpoint, we have been working on that for some time. Looking at our global footprint, balancing both exports, as well as finding those global partners that have multiple locations around the world, so we can really leverage our volume. As well as local procurement around the world.

The other thing that we've really improved, has been our QCC operations standardizing. Using the domestic model, as John mentioned. The same as our store approach, we have the Papa John's way from a QCC operations standpoint. And we've implemented that worldwide.

Yes. And I think, the last thing, John, this is Jude, you asked us to talk about. We've put our international franchisee-- potential franchisees, through the same process we're going to put through our domestic. They've got to have the capital and they've got to have the-- we prefer them to have knowledge of the restaurant business. And so, we look at it that way.

With that said and done, we've made mistakes in the past. But, those are just learning opportunities. And so, we're going to try to limit the learning opportunities with regard to franchisees we allow into the system. Because, we've got enough examples to know what looks good and what doesn't look good. So, hopefully that gives you enough color around what we're doing.

That's helpful. We appreciate it. Thank you.

Yes, sir.

Thank you.

Thank you. (Operator Instructions) And our next question in queue comes from the line of Mark Smith, of Sidoti.

I apologize if any of these are repeats, I got on a little late. First, can you talk about comp trends during the quarter?

Mark, we typically don't. And I don't know that there was anything unusual within the quarter to talk about. And so, unless there's something, like we saw first quarter from January to February, we normally wouldn't even talk about that.

Yes. Was there something specific that you had a question on that -- this is Jude. It was just much more smooth than Q1 was.

Yes. And I guess what I'm fishing for and looking for, is with a competitors launch of a new product and obviously driving a strong sales for them in that. Just looking at the market share game in the pizza category. If you lost people at all in Q1, that went and tried a competitor's pizza, are they coming back to you as core users? And any shift--, that we may have seen sequentially month to month?

What's interesting, is we have not lost any customers, with the exception of maybe Q1, when our two biggest competitors had an onslaught of new products and advertising weights. But the-- Andrew, why don't you talk a little bit about, I think Domino's went from like 15% and down to 8%. And they're kind of trending down, why don't you add a little bit of light to that? And what you see in the future? And also, Andrew, you might talk a little bit about, when we got off the $10 any pizza, they did too. So, they're actually are following us.

Yes. I mean, I think when-- obviously, when you talk about market share gains, we always like to look at it in the long-term. This is not a, you know, one quarter or 2 quarter battle. And, you know, I think you would expect, if you come out with a massive new product launch, that you're going to get a lot of trials. So, obviously, that's going to short-term give you some market share gains. But again, you know, we sort of focus on where we are.

The momentum we've created coming out of last year, has continued this year. You may have not been on the call earlier, but I had mentioned that from our data, we're picking up an enormous amount of new and lapsed consumers, because of the environment we've been competing in. We think that's a recognition, not only of our quality, but of good things to come, relative to the position we're in.

I also mentioned early on, we're not going to get deeply into the any large $10 pricing, and where we've gone. I will say we've been off it for a period of six weeks and we like what we see. And we think that bodes well for the future, in terms of combining our quality advantage with premium pricing and be able to really make some end roads in that regard.

And Mark, this is Jude. You know, we did state, opening comments, I can't stress this enough, five consecutive quarters of transaction growth. So, we rolled over a quarter with positive transaction. And, as you know, we're going into these Q3 and Q4, where we had very nice positive transaction growth. So, we feel like we can continue to sustain that. And as we continue our store builds and we continue to have net new store openings, that this positions us very well.

Great. And then, a second question, just back to the development fees. But more just looking at the franchise incentive programs and development program, as a whole. If you can give us an update? We did see the cost of that, I believe through kind of some ad spend, come down during the quarter. And also we saw a large number of domestic openings here in Q2, you know, one of the strongest opening quarters we've seen, perhaps, ever. Was a lot of that, really people pushing forward on their openings to take advantage of the 0% royalty for 12 months? Where now, the guys that are opening are looking at, I believe, 2% in your agreement?

Mark, I think you answered your question. You're exactly right. I don't mean-- I couldn't-- you stated that very, very well. It takes a while to get it cranked up. One, when you decide to have a program like this, then you've got to promote it. You've got to advertise it, just like anything else. Get back out there.

But, it's just bigger than that. The system has to believe in what you're doing. The management team, the actions that you take every day, at food service, your CMO, all the other things-- People aren't --existing franchisees or other new franchisees, potential franchisees aren't going to come in, if they don't believe in the brand. And they believe in this brand, as much as we do.

And so I-- the excitement, the number of people that are coming in-- the 270 number that I gave you in the pipeline, I can tell you, as I look over at Tim O'Hern, we're not satisfied with that number. And doubling that number, you know, if it means we continue to have an incentive program out there that's equal to, or maybe even more aggressive, to get people involved. I don't consider it-- I consider it just a wonderful investment in what's-- Papa John's is going to look like in the next 12, 24, 36 months.

And, Mark, a little bit to comment on that. If you-- the franchise royalty is really a newity. And so, if you add it all in, it's about $40,000 a year. So, for us to have to spend $25,000 to have a $40,000 return-- I mean, if you had to spend $50,000, you know, you still got an 80% return on your Dollar. So, we look at this as an investment. And, you know, every store that opens it's $40,000 for the next 25 or 30 years or whatever. And so, it doesn't-- I mean, I hate losing the number--the money on the quarterly basis. But, if you're looking at the business long-term, it's a drop in the bucket.

And I guess, the question for me now comes down to-- Now that we see through period nine, you know 2% royalty, and then once we hit period 12 and beyond, and the royalties go up even more for openings. Are we stuffing the channel now? And maybe do we see the openings come down a little bit, once some of these roll off?

And then, second part to that, it doesn't sound like you're opposed to renewing these incentive programs or extending them, by any means. You feel like you're getting the return on your investment at this point. Is that a fair statement?

Mark, it's a fair statement. You know, I will say-- I don't mean to over play this. But we have to keep our finger on the pulse of the system, and to make sure that it's working. And so, tweaks here and there, we will do that. And, you know, John and I, and this management team, along with our Board of Directors, we understand how critical it is for us to get to 4,000, 5,000, and on, as far as stores go. But, good in a way, where our balance sheet still looks pretty attractive. Really attractive.

And last question. And sorry for digging into too much minutia. But just looking at your printing and promotions department, in that business. It sounds like your cutting back and scaling back there. Is that still a viable business for you to do, outside of what you do for yourselves internally? And is any weakness there, really just macro driven? Or is there anything kind of wrong in that business?

It's a good business. But, as you know, I think it's 49 of the top 50 newspapers, are not doing so well in the United States. The way people get their information, or they get coupons, or the way they find out about what they want to consume, or purchase, is changing. It's changing every day. And Andrew eluded to it, that just the way we're marketing now, we have to be prepared.

It's not the same way we did it 25 years ago, or ten years ago. And we've got new tactics and techniques that we have to-- that would fall under that social media, digital media category. But, our business is good over there. It's changing. But, when you get into preferred, as you're referring to, Mark. There's other things, other than printing, that we do in there.

And Mark, I'll add, while that business is an important strategic part of our business, we like the synergy of being able to provide those services to our system. It's not, and we don't really ever want it to be, an important financial part of our results for the very reasons and the concerns that you raise. So, we feel like that management team is very good at managing their resources, in response to the level of business they anticipate. So, the strategic value can stay there, without having any significant impact financially.

Great. Thanks, guys.

Thank you. And we have no further questions in queue at this time. I would now like to turn the conference back to our speakers, for any further remarks.

Karen, thank you very much.

Thank you very much, Karen. Thanks to everyone that called in today.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. Everyone have a good day.