Papa John's International Inc (PZZA) 2011 Q1 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Papa John's First Quarter 2011 Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. I would like to introduce you to Mr. Lance Tucker.

Thanks. Good morning. With me on the call are our Founder, Chairman and CEO John Schnatter, Executive Vice President of North American Operations and President, PJ Food Service, Tony Thompson, Chief Marketing Officer, Andrew Varga and other members of our senior management team. After a brief financial update, John 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 related 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 measures 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. This call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format.

As more fully described in the press release, beginning in 2011 we no longer have operating income for the BIBP cheese purchasing entity. So, we no longer need to report earnings on pro forma basis exclusive of BIBP gains or losses. We will show 2010 pro forma results for comparative purposes.

We were extremely pleased with our first quarter results with strong profitability driven by very solid worldwide sales performance. We are $0.64 per share during the quarter as compared to pro forma EPS of $0.54 for the first quarter of last year, an increase of 18.5%. During the first quarter, revenues increased 9.3% as compared to the same prior year quarter primarily due to a 6.7% comp sales increase for North American Company owned restaurants, a 5.9% increase for North American franchise restaurants and a 5.6% increase for international restaurants. In addition, the impact of hire commodity costs on PJ food service revenues contributed to the overall revenue increase as did a 5.6% increase on worldwide units on a quarter over quarter basis.

On the development front, 2011 got off to a strong start with 45 net worldwide units opened in the first quarter. On a business segment basis, operating income for the domestic Company owned restaurants decreased approximately $600,000 as compared to quarter one of the prior year due primarily continue to increased commodity and advertising costs partially offset by the incremental profitability of the higher sales volumes. Operating income for the domestic commissary business segment increased $2.4 million compared to Q1 of the prior year due to increased sales volumes as a result of the previously noted increases in the number of units and comp sales at the unit level. North America franchising operating income increased $1.7 million due to the previously noted increases in the number of units and comparable sales at the unit level. The stated royalty rate increased from 4.75% to 5% at the beginning of 2011, however, the effective royalty rate was fairly consistent between the current and prior year quarters due to the existence of rebate incentives available to be earned by franchisees during the current year.

Operating results for the international segment were approximately $700,000 favorable to the same prior year period primarily due to revenue increases from the previously noted increases in unit count and comparable sales and the fact that our prior year results included costs related to the start up of our quality control center in the United Kingdom. Operating results for the all other business segment decreased approximately $1.3 billion year over year primarily due to increased infrastructure and support cost related to the enhanced online ordering system and 0.5% reduction in the online fee percentage.

Unallocated corporate expenses decreased to $1.1 million for the same -- from the same prior year quarter due primarily to the shift in franchise support initiatives from discretionary marketing contributions in the prior year to the rebate incentives available to be earned by franchisees in the current year. As previously noticed, these rebate incentives are reflected in the North American franchising segment. The favorable impact of reduced income expense was offset by higher unallocated general and administrative costs due mainly to increased travel. We purchase chased $4.1 million of stock during the quarter and had approximately $32.7 million of remaining repurchase authorization as of quarter end. We expect that the pace of our share repurchase activity will approximate 2010 levels for the full year demonstrating our continued belief that returning free cash flow to shareholders via our share repurchase program is a good investment and helps support increased shareholder value over time.

Our free cash flow and non-GAAP measure, we define as cash flow from operations excluding BIBP less capital expenditures, was $20.7 million for the first quarter and $58.5 million for the trailing four quarters representing a free cash flow yield of 7.6% based on 25.8 million average dilated shares outstanding and yesterday's $29.91 closing market price. Our net debt position, defined as total debt less cash and cash equivalents, was $34.3 million at quarter end an $18.5 million reduction during the quarter. We are updating our earnings per share guidance from a range of $2 to 2.12 to a range of $2.02 to $2.12 reflecting our view that the solid first quarter results will substantially mitigate the unfavorable impact of projected commodity and fuel costs throughout the remainder of the year. It should be noted that certain management transition costs are not expected to impact full year 2011 earnings but are expected to negatively impact the second quarter by $0.02 to $0.03. We are also updating our North American comparable sales guidance from a range of 1.5% to 2.5% for the year to a range of 2% to 3% for the full year reflecting our very solid first quarter sales results. Now I would like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John?

Thanks, Lance. Two words come to mind as I look how to best describe the state of our business today at Papa Johns. Momentum and pride. First let's talk about the momentum we are seeing in our business both from a sales and unit growth perspective. As to the sales, our North American operators posted an industry leading 6.1% positive comp sales during the quarter. We think that is fantastic. This also marks the eighth consecutive quarter of positive transactions growth in our North America business and on the international front we posted a solid 5.6% positive comp sales in the first quarter of reporting international comps and we are proud of our international team. My congratulations to both the corporate and franchise operators on the outstanding results and really for being the paragon of the pizza category.

In response to the results, we are increasing our expectations for North American comp sales for 2011 to a range of 2% to 3% while we continue to project full year international comp sales increases of a range of 1% to 3%. We are seeing good momentum and store growth in the US and abroad. During the first quarter we opened 41 net unit openings bringing the unit count to nearly 3,700 restaurants in 32 countries. For the full year of 2011, we continued to project worldwide net openings of 190 to 220 units. Moving forward, I would like to note that the development pipeline is extremely strong. We have agreements in place to open over 325 additional restaurants in the US of which 80% are scheduled to open over the next two or three years. On the international front, we ended the quarter with 775 international restaurants and have signed development agreements in place to open roughly 1,300 new international restaurants over the next seven years. So even as we manage through this tough economic environment and uncertain environment of commodities, the Papa Johns system is experiencing extremely strong sales and unit growth momentum in our business in the US and internationally.

Just as important, from my perspective as a founder, is the pride that I am seeing from operators in areas of (inaudible) better quality product, superior quality customer service and fantastic job on the image. Our operators embracing the new lobby design being rolled out throughout the US this year. We are seeing some of the best quality scores and customer service times out of restaurants that I can recall. We look forward by building on our heritage. When you build a brand around quality which is what we have done the last 26 years, nothing is more important for the long-term health of our brand delivering on better ingredients, better pizza promise.

Finally, I would like to note that the management realignment that we began when I returned to the business as CEO in December in 2008 resulted in a team that is both solid and deep and experienced. This team has developed fantastic momentum and is well equipped to continue the healthy momentum and lead us through the next phase of domestic and international growth. I like the team, I like their pride, I like our momentum. With that, I will turn it back over to Lance for any questions. Lance?

Thanks, John. Mimi, we will open the line up for questions, please.

Thank you. (Operator Instructions). Brad Ludington of KeyBanc Capital.

Thank you. First off congratulations on the quarter. It was very strong. You bet. I wanted to start off with the comment about the management transition costs, $0.02 to $0.03 in the second quarter. When you release, will you call that out? I'm trying to figure that out -- it's one time in nature. Will that be called out so we understand what the impact was on the second quarter release?

We won't give the specific numbers, Brad. It's a $0.02 to $0.03 impact in Q2. We expect to recoup it in Q3 and Q4 meaning the impact will be neutral for the year.

Okay. Then on international profitability, loss taken down to $800,000 in the quarter, can you comment on whether that was somewhere near your plan, better or worse?

I'm sorry.

Brad, we don't give comments as to our by segment budgeting expectations. We are happy with the international progress. John, would you like to add anything to that?

Not to be too specific but we are happy with all departments as far as what they were budgeted and what they achieved. It's fair to say that International over achieved.

Okay. Thank you. And then looking at the promotional environment right now, it seems that some of your competitors as least are pulling away from some of the deep -- deeply discounted prices and some of the offers that were out there in the first quarter. Are you seeing that as well? Does it seem at least not an he easier environment to work in but not just $10 large any type of pizza type thing any more.

This is Andrew. Brad, we try to focus on what we try to do really well. We have been focused on premium prices, focused on our specialty and limited time offering pizza. As the quality leader we feel that is a great position for us. As Lance and John both stated, that position has helped us continue our momentum. Whether or not that makes it easier or harder to compete in the environment is up for debate but we feel good what we are doing in the environment.

Brad, this is John. The price elasticity sensitivity with the consumer in these economic conditions is very vigilant to say the least. I would say this is definitely less difficult than it was a year ago. With that being said, I have been doing this for 27 years. There are no easy days in this business. It's 12 hours a day, seven days a week. You are only as good as how you took care of your last customer.

With that being said, our positioning in brand quality gave us the position to price a little higher than the competition which makes our margins probably a little easier for operators when you can get a little bit of a premium for your product. But, yes, I would say, to answer your question, it's easier than it was a year ago but, again, you have to be extremely good at this business and our competitors are very good at the business in every asset, every facet of the business otherwise you simply don't make it. We work hard everyday to be the best in class on every avenue.

Okay. And then finally, I know I'm dragging on here, but I just recently saw that one of your competitors brought up the calorie posting legislation can cost up to $7 million with 35 million different combinations. Is that something that you all looked at and tried to quantify the impact it can have on you?

We are looking at that. We met with the minority senate leader Mitch McConnell on this very issue about how to post this and what is the best way to communicate caloric intake to the consumer. I will turn it over to Chris Sternberg for more detail.

We are actively involved in giving our feedback to the FDA on what we think makes sense for the pizza category how best to post calories. We think it makes sense to do it online. Excuse me. We think it makes most sense to do it online since an increasing number of customers are ordering online or telephone in for carry out. So, it's an example of just putting the calories on the menu in the store board doesn't make a lot of sense. Probably less than one in ten customers actually come in and order from the restaurant. So, we think there are issues with the regulations as -- in the current form. We will continue to try to convince the FDA what makes best sense for pizza chains.

Okay. Good to hear, thank you very much.

Thank you. Michael Wolleben of Sidoti & Company.

Good morning, guys. I was wondering if you could help -- give us some idea of how the momentum -- what was the key point in driving this momentum? If we look at your deals that you were running in the first quarter, as compared to last year, not terribly different yet you were able to drive a substantial comp increase here, is it really broader consumer strength, is it maybe lapsed users that tried competitor's deep discounts coming back. Can you give color on where the 6.1% came from?

Mike, this is John Schnatter. Good question. You can really get kind of pulled in to looking at the business on a monthly or quarterly basis. We actually look at the business on a daily basis because we have to. We have to run good days to run good weeks and run good weeks to run good periods and run good periods to run good quarters and run good quarters to run a good year. With that being said, we look at the business over a long period of time. We think if you do that, that is a healthy perspective and it produces good short term results.

For example, we have been positive the last eight years. We've had no negative years. No negatives, Mike. We are proud of that. When you look at Q1, it's like what happened in Q1. It's not what happened in Q1. It's the quality initiatives we put in probably in '04, '05 up to present. And it's the fantastic job that we've done with all aspects of our business. The technology. We have gotten much more proficient at that. Our distribution company with Tony and Shane has gotten more efficient and productive and they have increased their productivity a lot.

The culture continues to get better and we are striving to make the culture even better than it is. We want to be the number one place to work in any kind of restaurant industry. So, what you are seeing in Q1 of 2011 is a by-product of all the good things we did in '08, '09 and 2010. The things that you will see in the future that are good are because of all the things we are doing in 2010 and first quarter of '11.

That is helpful. Looking at the cash flow, you paid down a lot of debt at the expense of share repurchases. Can you give us an idea of what to expect in the -- for the rest of 2011? Will you return to fairly substantial share repurchases or pay off debt, any color on that?

This is John again. We have a Stock buy-back plan just for everybody's protection. We have gotten more aggressive over the years buying our stock back. We are over $800 million since the turn of the century. Last year we bought 5% of the business back. To your point, this business sells off a lot of cash. We have very little debt and probably the bad news is we keep upping the limit on what we are buying stock back at a fairly rapid pace and the stock keeps out running even our 10-B plan. The bad news we probably haven't bought as much stock back as we would like. The good news, we hit some 52 week highs and have accumulated a lot of cash to pay down debt. We fully intend to use our cash in several strategic areas.

Again, to your point, the best way to grow EPS is to grow the top line, your profits, then shrink your overhead and to shrink your share base, the amount of shares outstanding. We plan on doing all three. We plan on growing our profits, controlling our overhead and costs and plan on buying back stock. With that on the table, we are third in the category. We have a tremendous amount of excitement on initiatives that we want to do worldwide to make this brand even stronger from an imaging point of view, from a branding point of view, from a technology point of view and from a procurement and distribution point of view. We have seen throughout the world that if we do things the Papa John's way, it's a winning formula. Fortunately, we have the cash, the resources and a dedicated management team to get that done.

Okay. Then just lastly here, can you give us your thoughts on not upping the high end of guidance and just kind of bumping up the low end here, especially given the strong performance in Q1? Thanks.

This is John again. I will let Lance be more specific, but I feel good about the year. But with that on the table, you can have some unrest worldwide. We had to close some stores in the -- in the D.C. region, Egypt for example. Commodities, the Asia Pacific is putting some pressure on oil, and corn and in our case cheese. So, we feel good about our range with the first quarter being solid and of course Q4 is off to a solid start. We feel good about the year. We don't want to get too far ahead of ourselves because of the uncertainty of the environment and the commodities. Also, we have to respect the fact that the two -- two of the players we play against are much bigger than we are. We have to be quicker, we have to be more nimble, we have to be more productive. We have to be better.

Thank you. Christopher O'Cull of SunTrust bank.

Thanks. Lance, would you explain or remind us how cheese is priced to stores now that the BIBP is gone and specifically is there still a month lag in what we see as the spot price and what stores actually pay for the cheese?

Sure, Chris. Honestly, it's working very similarly from a process standpoint. We do still have a month lag but now what is happening is rather than run the thing through BIBP as we were doing before, the franchise portion of the difference in that price to storage the charge versus the spot shows as a receivable or payable on our balance sheet. But in fact, we do have the one month lag and it's working similarly to how it was before.

Okay. So if we look at the inflation we saw in cheese, the high prices we saw in cheese in February -- late February, March, a lot of the stores are seeing that price today. So, we should probably expect the second quarter to see quite a bit commodity inflation?

We have fuller -- higher full year commodity inflation build into the budget.

Could you tell us what the non cheese commodity inflation was during the first quarter or maybe even just what was the whole basket, what you expect in the first and what you expect in the second?

This is Tony Thompson. Our basket was up in the first quarter. Overall, we expect the entire basket to remain high even outside of cheese for the remainder of the year. And just while we are briefly talking about commodities, we talked about our brand position and strategy and momentum that we have. High commodity environment right now we feel is conducive for us in terms of gaining share. So, we see that as a positive as well given the current environment that we are all in together.

Okay. That's fair. Then their was no franchise support initiatives in other general this quarter. Is it fair to assume that, that remains nil for the balance of the year?

Right now we are not projecting anything for the rest of the year.

Okay. Were there a lot of rebates during the quarter or the call back that you had in place providing the franchisees saw such strong sales?

I can't give you the specifics on that, Chris, but what I can tell you, we had excellent sales. Yes, you did see a pretty constant and effective royalty rate meaning the rebates were good. We want to pay those rebates by the way.

This is Tony, again. We are going to continue to strategically use incentives and rebates for the health of our system. We feel really good about the health of our system as we sit today and as we look forward. That is -- today and look forward. That is important to us and our relationship with our franchisees.

I appreciate the incentive. It makes sense. Did it largely offset the 25 basis point increase that you had in your royalty rate?

Well, again, Chris, the effective royalty rate was very similar quarter over quarter. So, largely did so.

Okay. Thanks, guys.

Chris, this is John. You have to be careful of looking at the effective royalty rate versus incentives because the business has to be run on unit economics and we look at health of unit economics which we call food labor mileage, FLM. While the rebates are important and the royalty amount is important, if those unit economics are not healthy, then you kind of jam up your growth. Well, that defeats the purpose of having rebates. There is more than one lever that you have to pull to drive this thing forward. The thing that we demonstrated over and over again, if we can get a parity with the amount of stores and market DMA with our competitors, we have a better horse. Papa John's is a better horse. A better horse as far as the brand, as far as the product, as far as the operators, as far as perceptions.

This is now from here on out a game of scale. So, we promised in November of '09 that we would get this thing to 4,000 stores. We were at 3,700 and we will get this to 4,000 stores. We will turn the chapter on 4,000 then head to 4500 and so on. From here on out it's a game of scale. You win the scale game by protecting your operators food labor mileage.

I agree. Thanks.

Thank you. Mark Smith of Sidoti & Company.

Hi, guys, can you quantify or speak to any positive impact from the NFL sponsorship in Q1?

Mark, this is Andrew. For competitive reasons we won't give any numbers like that out but as I said I think on the last call, we felt very good about the season. The great thing about it and what you want to see in partnership marketing that it builds momentum over time and the NFL sponsorship certainly did that all the way through the Super Bowl and beyond. So, we feel very good about our position there.

Second, just looking at the comp guidance for North America, I was surprised that, that didn't come up a little higher given the strong Q1 results and prior year comps don't get overly more difficult here through the remainder of the year. Are you being overly cautious as John talked about a little bit on the full earnings guidance or is there anything in that comp guidance that maybe we should be looking at?

Good point. I think overly cautious is well put, especially after seeing the first four periods. And also remember our National Marketing Fund is at 4%. So, we are on TV a full 12 months this year. So, the middle part of the year that wasn't on TV last year is now on TV which we think is a big help. That being said, it's better to raise your number later in the year than have to lower it with the analysts. I would rather raise the number our next call than have to go backwards.

Last question, have you guys seen anything significant impact from the recent storms rolling through in the South?

I will let Tony and Andrew handle that. This is John. It legal them handle it for specifics but we have three kind of weather conditions which is good weather which is normal, business as usual. Then we have sort of bad when we get an inch or two of snow which is actually good for us. Then we have what I call terrible weather where we get 2-foot of snow or tornadoes which is not good for our business. So, the relief effort, some of the things we have had to do in the Alabama and southeast have hurt our business, but it's given us and our operators a chance to work with each other. We got a trailer down there, food service sent down truck loads of food. So, we are in the tornado specific weather, catastrophic situation. We are partnering with the franchisees doing the right thing by the communities and giving away a lot of pizza. On the sales front I will let Andrew or Tony talk about that because weather is a big deal.

This is Tony. Overall the impact from a sales and business impact was minimal. Actually even with our franchise partners, we are happy to say that the team members were all okay and the franchisee is okay. Although devastating for that particular area. We are certainly more concerned on the personal end of that, but overall minimal impact. Then to John's point on weather, this may have been come up in a previous call, winter weather now we are into spring. We monitor weather how we manage our business. Certainly something like that event was catastrophic in nature, it wasn't a normal, typical weather pattern, but weather can have a very positive side to our business as well, whether it be rain or normal snow storms. That is something that we manage proactively. So if that answers your question.

I would add, this is Andrew, the funny thing about weather, it's either in your favor or against you. If look at the prior year, it was in your favor or against you. It turns out in my opinion to be negligible in the broad scheme of things. We try manage it accordingly.

Thank you. Peter Saleh of Telsey Advisory.

Thanks. Wondering aside from weather if you are seeing particular pockets of strength around the country or pockets of weakness that you can call out?

This is John, wherever we operate well, we are having a tremendous amount of success. Where we have some operations that have some limitations and need improvement, we are probably not doing as well as we should be doing. But we are not seeing any areas where we are doing what we are supposed to be doing that are not strong.

This is Tony again. I would say there is probably not any major concern areas for us at this time. Obviously we have a lot of diverse markets that we are in and we are from a marketing strategy from LSM up to the nationals, we are conscientious about factoring all that in.

This is Andrew. I would add one of the great things about the brand is that globally, we have a position called the "Papa John's Way" and when, as John said, everybody is executing the Papa John's Way from product to image to service to distribution, it really, really works. The great advantage that this brand has is it has been consistent for 26 years in marketing or anything else that you are doing, if you can have consistency, you have a winning horse.

Then on the commodity outlook, what is your outlook for cheese that is embedded in your guidance at this point?

Peter, we have a $1.70 or so built in for the full year cheese price.

Okay. Great. On the online sales, where do we stand as a percentage of sales? Has that been ticking up the past couple of quarters?

I will let Cynthia jump in here. Her and her [pies] team have done a fantastic job. As you know, in 2011 and 2002 we spent $8 million to be the first online to make that happen. At the time it was a risk and I think the first year it was 1% of our sales. We overhauled the online platform last year, with a [razor fish] a little over $9 million. Frankly the day that we flipped the switch and switched our platforms on 50,000 orders a day, you can imagine we were nervous but frankly it went flawless and it has been flawless up to this point. From time to time we have outages. They are brief but we try to learn from those so they don't happen again. But, just delighted with where we are at from an online perspective and probably more excited about the pro-activeness of which the IS folks are exploring and really chasing the new on coming channels. We have several other new channels coming up.

We think this will be a huge competitive advantage internationally. We would like to be able to order as many pizzas online in China, India, Canada as we do in the US and we would like to share our core competency and technology with the rest of the world in the Papa John's system, but we have exceeded our expectations on our online platform. I will turn it over to Cynthia if she'd like to give you more detail.

Obviously, we are the leader in brand product and service so we want to continue to challenge ourselves from a technology perspective. We have been pleased with the response that the customers have given with us the online solution as well as our mobile ordering solutions. We have been pleased with the iPHONE application. That mirrors a lot of the functionality that we have with our online solutions so we did not minimize that functionality. Customers have been real responsive. Certainly our percentage can vary by market depending on network connectivity but we have been pleased with the increase in sales and how that is working for us.

Thank you. Steve West from Stifel Nicolaus.

Real quick, congratulations, Lance on the promotion and Dave I know you are there somewhere, congratulations on a great career here. Dave on international, expand on Brad's earlier question, it looked like it got worse sequentially as far as operating loss. How are you tracking with the plan that you will turn positive this year. Is that still in the cards or get delayed again?

Steve, this is John Schnatter. We trended positive. We have trended positive now for 10 years. We are ahead of the plan to get the international division profitable. I know Lance won't give specifics but I think you may have misconstrued that. It doesn't read that way. Lance, you want to help Steve out.

I presume you are looking at Q4 where the loss was a little less than it was. We look at the business quarter over quarter, year over year basis because it is a little cyclical. We are on track to break even or maybe even be a little profitable in 2012.

Great. And then Lance can you split out your same store comp sales between traffic -- you talked about the positive traffic trends continuing. Great news there. Can you talk about how much of the shift was from check or negative check?

Steve, this is John. I would love to give you that number. More importantly, I would love to have my competition's numbers on that. I'd love to know how much of their comp sales positive or negative are driven by positive or negative traffic count. But for competitive reasons we can't give that data out.

Fair enough. John, I would like to ask you the question, with your focus on quality, Papa John's made its name and with the at least perceived -- perception with consumers that some of the competition has improved quality and closed that gap to you guys, can you talk about maybe what you guys are looking at as far as maintaining -- not just maintaining your status quo but to kind of try to keep that gap on competition, I know you have been on the air talking about the quality of the air but new initiatives coming, anything like that? That would be very helpful.

The relentless pursuit on perfection -- at least that's how we approach our quality. It's systemic in our organization. Our folks, whether I'm watching ELT or watching, they don't do things in sort of manner or halfway manner. There is a pride in the building and in the system, the Papa John's way that we are going to do things first class and we will be proud of what we are doing. You can't fake that, you can't beg, borrow it's just there. It's part of our heritage. What is interesting, we find a way to get better every day. I mean, it's amazing. If you really are looking at things thinking how to get better and I'm talking about cheese, ovens, pepperoni, products, dough, procurement, robotics in the distribution center to be more efficient and productive and the culture, thing we want to do on the HR front, technology is a window of opportunity.

So, the thing, Steve, that you have to understand, everybody wants our positioning. Everybody wants to own quality. Everybody wants to be a Chick-Fil-A, so to speak. The problem is to be a Chick-Fil-A or a Papa John's, it takes time and costs money. The investment community has been patient with me. Remember I came back in the business and was honored that the Board wanted me back in the business in '01. I think the stock was less than $10 a share and we lost our way on quality. So, from '01 to '02 up to '05 to '06 we had initiatives to make sure that we got our quality advantage back. That's why we had a fantastic '05, '06 and '07. We got a little off track in '07 and '08 and we've righted the ship. Its showing up in our stock price and performance. If I go too far away, negative things seem to happen. When I get closer back to the business, positive things seem to happen.

So, we need to have the right balance of the entrepreneurial spirit and my passion for quality and then of course, world class professional management team around me to run the business. The quality -- we have similar suppliers with our competition. The one thing that comes back from the suppliers is that we are forcing the other guys not to let them go backwards. In other words, there is a lot of venues where they would probably take a shortcut or cheapen something. They know if they do, we are sitting on them. We force the whole category, chains in particular, to get better. We have do measure the perceptions on quality. I can tell you even with one of our largest competitors spending hundreds of millions reinventing their product, their brand and quality perceptions have not gone up. I will turn it over to Andrew. He can talk specifically.

Yes, Steve, this is Andrew. I would just add a couple of thinks. John just hit on one of them. From our perspective, we track quality as close has anybody that you can imagine. Nothing that we have seen the last 15 months would give us any indication that any of our competitors are making in roads relative to quality. As a matter of fact, we tend to be expanding our gap which is very positive for the brand. The second thing I would say, if you look at the spectrum of pricing, I would say that Papa John's is getting premium at this point and a lot of our competitors are at the same price point. When you think about quality, one of the big indications of that is pricing. And our premium ness, which is related to our quality, really helps us on that front.

And this is Tony. This is an important topic. I want to add something to it as well. John hit on it on our -- we have an almost take fanatical focus on quality. From farm to fork all the way through every part of our organization, we mentioned it several times on the call today about the Papa John's way. That is the demonstration of that in our organization. It's bigger than just a -- the product we are serving. It's well beyond that. Everything behind that, that is ultimately is the product and the service to our customer.

Thank you. (Operator Instructions)Ben Rattner from Canyon Capital.

Hi, good morning. My first question relates to the capital structure. Can you talk about where you see the optimal capital structure being in one to two years?

Oh wow. Ben, this is John. Again, we do run our business to protect years three and four. With that being said, I don't think any of us, even though the Founder may have clairvoyance that the others don't have, to give out four or five years. We run this to make sure that we have a healthy enterprise in three or four years. The nice thing about our capital structure as it is today, we have the options to do whatever we want to do and whatever our shareholders want us to do. Our Board looks at this just about every meeting because to have a business that system-wide sales of$ 2.5 billion, $2.6 billion that has 1,500 or 1,600 stores in the pipeline, that has healthy cash flow and to be in this kind of balance sheet position, it's kind of a high grade problem. It's what do you do with the cash.

We have internal initiatives that we think we can use the cash to get better and to further build scale. I keep coming back to scale. The key is to get this thing to 4,000 and on towards 5,000. We are going to meet with our shareholders and will continue to listen to our Board and structure this thing in a way that is both healthy for the future, as far as stock price and both benefit -- also to our shareholders that are on board with us. Fidelity, for example, has been with us for five years. They hung in there. I feel obligatory to do a good job. I know the officers around me take the obligation seriously, also. When the stock does out run the Buy-Back Plan, on one hand, I wish we could have bought more stock back. On the other hand, we are delighted that the shareholders have a good return on their investments. We try to balance all those attributes and act in the best interest of the enterprise and most importantly our shareholders.

My second question just as it results to the buy-back, if you look at the top 15 or 20 holders of your stock, it kind of constitutes about 75% of the shares that are outstanding. In light of that, I mean, how do you balance the trading liquidity of your stock and the share buy backs with the option of implementing a dividend so you don't have to worry about the stock running up?

Well, I would like for the stock to run up frankly. That would be the best of all world to have a super high stock price and to accumulating a lot of cash. Do you leverage the business more or less, do you have a dividend, do you use those dollars to do resourceful things on building scale? So, we are in a very, very good position because we have the options to do what is best into of the enterprise but also what is in the best interest of the long-term shareholder. We plan on doing that. The best way to grow EPS is to grow profits, shrink overhead and shrink the outstanding shares. We plan on doing all three.

Thank you. Brad Ludington of KeyBanc Capital Market.

Thank you a couple of quick follow-ups. First thing I wanted to ask you, in your Q when you break down the projected cheese price per quarter for 2011, is that a projected spot price or projected what BIBP will be selling for and flowing through on COGS line in the P & L for franchise & Company?

Brad, this is Lance. That is spot price.

Okay. So we should expect some variation from that throughout the year on what hits the P & L?

Unfortunately we can't predict it to the penny, we wish we could.

If it was exact there would be variation because BIBP would be a little different, right?

Yes.

Good. I wanted to make sure I was looking at that right. And then also, I wanted to ask, something that we haven't heard much about is the Lobby Design Campaign. How far along are you with that? Have you done many of those remodels and in the ones you have done are you seeing carry out volume pick up or over all volumes pick up in that?

This is John Schnatter. The lobby design is something that we have been working on worldwide. As the founder, you know what the brand is supposed to feel like. You just know that. We had good designs. I am proud of that but the now design encompasses, embraces and exemplifies Papa John's, authenticity, quality, passion, high standards. I dig this new lobby design. Fortunately so far the franchisees worldwide have embraced it. That makes it easy to sell. I will turn this over to Tim O'Hern who head's up development and he can give you the pipeline of the stores that are remodeling and going to the new design. They get a little bit of royalty relief for going to the new design. We do incent them to make the restaurant sharp. Tim, do you want to take that?

Sure. This is Tim O'Hern. We have approximately 2,000 restaurants domestically that would need to do the lobby enhancement. Cost is anywhere from $8,000 to $15,000, depending on the size of the store and what you need to do. We had a lot of interest in it. We did a full-blown model at our OP-CON recently in Orlando, Florida. We had 375 of the franchise stores place their order and of course, all the company stores will be updated by the end of the year. So, we are probably 35, 45 days into this maybe on a full-blown rollout at this point. The response is good. And we are actively installing them every day.

Okay. When you install, does that take a couple of days?

It does. It's generally a two-day install. No more than three, maybe, if you had other things you were going to do some major electrical work. But this is not complicated. Really we designed it to be plug and play if you will. It's pretty simple. You order it 30 days out, 30 days later it shows up. A couple days install and you are done. You can do it overnight if you wanted to.

Thank you. There are no further questions in the queue. I will hand the call back to you.

I think we are done. Thanks everybody for attending the call.

Thank you.

Thank you, ladies and gentlemen, this concludes the conference for today. You may disconnect and have a wonderful day.