Papa John's International Inc (PZZA) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Papa John's fourth-quarter 2011 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 like to introduce your host for today's conference, Mr. Lance Tucker, Chief Financial Officer. Sir, you may begin.

Great. Thank you, Chuck. Good morning. With me on the call today are our Founder, Chairman, and CEO, John Schnatter; EVP of Global 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 relating to future events. Actual events may differ materially from the projections discussed today. Certain factors that can cause actual results to differ materially are outlined in our earnings release and in our Form 10-K. In addition, certain financial measures we use on this call, including earnings-per-share excluding BIBP and free cash flow, 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 our 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 a pro forma basis exclusive of BIBP gains or losses. We will continue to show 2010 results, excluding BIBP, for comparative purposes.

We earned $0.65 per share in quarter four 2011, a 27.5% increase over $0.51 per share in Q4 2010, excluding BIBP. For the full-year 2011, earnings per share were $2.20, representing an increase of 22.2% over $1.80 for the full year 2010, excluding BIBP. Our fourth-quarter 2011 revenues increased 6.8% compared to the fourth quarter of 2010, primarily due to comparable sales of 1.7% for North America and 5.2% for international. For the full year 2011, revenues increased 8.1% over 2010, primarily due to full-year comparable sales of 3.4% for North America and 5.1% for international. The impact of higher commodity costs on PJ Food Service revenues also contributed to the overall revenue increase, as did a 6.5% increase in the number of units operating globally on a year-over-year basis.

Our unit openings momentum remains strong, with 103 net units opened worldwide in the fourth quarter. For the year, we opened 237 net worldwide units.

On a business segment basis, operating income for domestic Company-owned restaurants increased approximately $400,000 for the fourth quarter compared to 2010, primarily due to increased comp sales of 1.2%. For the full year 2011, domestic Company-owned restaurant operating income decreased approximately $2.6 million from 2010 levels, primarily due to continued high commodity costs partially offset by positive comp sales of 4.1%. Operating income for our domestic Commissary business segment increased $1.7 million for the fourth quarter and $2.2 million for the full year 2011 as compared to the same periods in 2010, excluding BIBP. These increases were primarily due to the higher sales levels and higher number of units previously discussed.

Operating income for our North America franchising segment increased approximately $500,000 for the fourth quarter and $4 million for the full year 2011 as compared to the same periods in 2010, primarily due to comparable sales of 1.8% for the quarter and 3.1% for the year, and also increases in the number of franchise restaurants. The stated royalty rate also increased from 4.75% to 5% at the beginning of 2011. However, the effect of royalty rate was fairly consistent between the current and prior years, due to incentives earned by our franchisees in 2011.

Operating results for our international segment improved approximately $1.3 million for the fourth quarter and $4.6 million for the full year 2011 in comparison to prior year periods, primarily due to an increase in royalty revenue from the previously noted increases in units and comp sales, plus continued improvement in the results of our UK quality control center. Our international segment nearly broke even in 2011 with a $165,000 loss and is firmly on track to attain profitability in 2012, as we had previously guided.

Our effective tax rate was 31.2% in 2011 and 32.3% in 2010, excluding BIBP. As we've discussed before, our effective tax rate may fluctuate for various reasons, including settlement or resolution of specific Federal and state issues. We repurchased approximately $15.7 million of stock during the fourth quarter, bringing year-to-date share repurchases to approximately $65.3 million in 2011. The Company had approximately $69.3 million of remaining share purchase -- or share repurchase authorization as of February 14. Our free cash flow, a non-GAAP measure we define as cash flow from operations excluding BIBP, less capital expenditures, was $71.7 million for 2011, representing a free cash flow yield of 7.2%, based upon 24.6 million average diluted shares outstanding and yesterday's $40.29 closing market price.

Our net debt position, defined as total debt less cash and cash equivalents, was $34.3 million at year-end, an $18.5 million reduction during the year. We are reaffirming our 2012 earnings per diluted share guidance range of $2.33 to $2.43, which, as previously announced, includes the negative $0.11 impact of a one-time marketing incentive contribution and also includes the positive impact of the 53rd week of operations in 2012. We also reaffirm all other guidance provided in our December 20th, 2011, press release.

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

Thanks, Lance, and good morning, everyone. We appreciate each of you taking the time to be with us on the call today to discuss our fourth-quarter and full-year 2011 results. All in all, another solid year by team Papa John's. I want to start out by congratulating the operators throughout the world on an exceptional fourth-quarter and full-year 2011. Our brand remains resilient, even in the face of what continues to be a challenging competitive and cost environment.

Let me first comment on our very solid sales performance. Our North American operators posted 1.7% positive comp sales during the quarter, and 3.4% positive for full-year 2011. As I've said before, we strive to deliver steady and consistent performance over the long term for our shareholders. While it's not always possible to comp over a given period or quarter, I would note this makes our eighth consecutive year for positive or even North America comp sales. Our international operators also posted a very solid 5.2% positive comp sales growth during the quarter, and 5.1% for full-year 2011. More on our international progress in just a moment. We are excited about our international business.

Now let me turn to our restaurant growth. Our system achieved 103 net worldwide restaurant openings during the fourth quarter and 237 net openings for full-year 2011. This represents the highest number of global net restaurant openings in 10 years. I congratulate Tim O'Hern, Don Brand and the entire development team on this outstanding performance. Today, we are on top in over 3900 restaurants in 33 countries. And as we begin 2012 with a strong global development pipeline with agreements in place to open approximately 1550 restaurants, 350 in North America and 1200 internationally, most of which are scheduled to open over the next five or six years.

Next, let me spend a moment commenting on our marketing and branding, which has been outstanding, with our focus in 2011 remaining on quality, as it has for the last 27 years. We believe this commitment to quality continues to resonate with the consumer -- i.e., that's why we're having outstanding results in a tough environment. We are pleased that since early 2011 we have been able to command a little bit higher price point for our pizza, while others in the category continue to emphasize discounting and low price. As I said on many occasions, quality always pays in the long run. And it's gratifying that our consumers, even in this tough environment, recognize that Better Ingredients Better Pizza does make a better product.

This year also brought another strong season with our NFL partnership. The season culminated with our Super Bowl activation, which we look forward to sharing with you during next quarter's call.

And, finally, I'll come back to international, with the very solid progress we're making. In addition to running really solid comps in 2011, international showed strong improvement in profitability, exceeding both the quarter and full year. As Lance mentioned, our international division is on track to become profitable in 2012.

On the development front, international opened 52 net new openings for the quarter and 113 net restaurants for 2011. In closing, we have a growing number of international franchisees committed to the Better Ingredients Better Pizza and growing the Papa John's way. With that, I'll turn it over to Lance for questions.

Chuck, I think we're ready for questions.

(Operator Instructions). Peter Saleh, Telsey Advisory Group.

Congratulations on a great year. I just wanted to ask, domestic comps have kind of -- we've had some peaks and some troughs throughout 2011. Just wondered if you could talk a little bit about some of the drivers. You had a really good first quarter, a really great third quarter, and then second and fourth quarters were a little bit lower. How should we be thinking about the comps and some of the drivers behind those in 2012?

Peter, I'll comment from a real high level. And then I'll let Tony, Steve kind of jump in at a more precise level. We don't like to run the business in any kind of sporadic way. And the beautiful thing about this business is, it's not arbitrary. Everything makes sense. While it is very complex, it's quite manifold, it does -- things do make -- competition pulls one level, or commodities go this way. It kind of always kind of hangs together. Our competitors are so big, and they spent so much money that from time to time they do things that make the category a little bit not as easy to be consistent as we'd like. The bad news is, when they go out and, say, spent $40 million on a $9 or $10 pizza, we fuel that. The good news is, the next year, we get to go over an easier number on our comps. So some of the sporadicness you're seeing is not anything we are doing, because we like continuity. It's just kind of the competitive nature of the beast. Tony, do you want to jump in on this?

Yes. And I think a key word that John used in his opening to focus on would be resiliency of our brand. And we are focused on -- we are staying true to our strategy. And as I think he also mentioned, we are able to get a premium in this extremely competitive, value-oriented environment. And every quarter has certainly got its own unique challenges. But we've been staying consistent on our overall game plan for the year, and feel really good about that. Andrew, you want to comment?

Yes, Peter, I'll go ahead and add. Just as the way the quarter is kind of set up this year, one and three tended to be quarters that had easier rollovers than two and four. But the other thing I would remind you, that we talked about in the last quarterly call, is that in Q3, we had two periods where we had national TV where we didn't have at the prior year. So, obviously, that's a big benefit to those periods, and made a big difference there.

This is Tony. The last thing I would add there would be another thing I think we focus on within our strategy is momentum. And to Andrew's point, you've got some quarters that are going to be a little bit more challenging. Other quarters, not as much so. And to what John said earlier, about the approach of wanting to have a smooth approach for the long term, that's a key part of how we approach the business. But I think at the end of the day, being able to maintain a premium throughout the year in this environment -- that really says a lot for our brand quality position.

Just sticking with the advertising for a second, you have the ability in 2012 to maybe spend more on TV advertising to get a little bit more out of the comps.

Yes, we do. Obviously, we had a very successful comp year, and that helps. Just in general, we have a little bit more money to spend to be able to go drive more brand awareness and visibility, and stay top of mind with consumers with our great quality message.

Just my last question on internationally, seems like international business is really picking up some steam here. Are you seeing any headwinds in Europe, any kind of slowdown?

Well, I'll comment real quick, Tony, and then maybe you and Tom Sterrett can jump in. But when this team got back in the business about 40 months ago, we didn't like what we saw internationally. I just can't tell you, as a Founder, how proud I am of the job we've done on an international front with Lance and Cynthia. Our branding aspect is another pillar that Andrew and Tim Scott have just -- now we have continuity throughout the world. In product -- [Sean Muldoon] with his team -- the pizza tastes the same in Chile as it does in China as it does in the UK. So we've made tremendous progress, not only in profitability, but just on the fundamentals in the scaffolding, the framework that makes our brand great. And it's exciting. I'm finally, again, as a Founder, seeing some light at the end of the tunnel internationally, which I didn't see three years ago.

This is Tony. To your point on, it looks like we've picked up a little bit of steam this year -- maybe at the end of the year, going on 2012. We feel like we're really on track. And again, within a quarter, you may see more progress than another quarter. So we're looking at it for the long term. But I think going into 2012, things look solid. And, Tom, if you want to comment on anything specifically about Europe?

Although we don't comment on any market in particular, we certainly have momentum internationally. Our operators share the passion for quality and delivering world-class customer experience. We have headwinds and challenges in different parts of the world, but our UK market continues to grow, both the units -- and that will help our QCC operations there as well. But we are proud of the progress and the momentum that we have in the UK and overall Europe.

This is Andrew. I'd just add one other thing. What's great about the Papa John's brand is that it travels so well. The quality message is the easiest thing for us to be able to tell. Our founder differentiation resonates with consumers around the world. And so the Papa John's way is alive and well, and we feel very good about that from a branding perspective.

Chris O'Cull, SunTrust Bank.

My first question relates to just the sales and promotional environment. Andrew, given the more difficult comparisons in the first quarter, and just how the promotional environment seems more aggressive, is it fair to assume growing comps during the first quarter is going to be a challenge?

Chris, we are not going to comment, obviously, on the first quarter. We'll be talking to you more about our performance there, but we continue to run our plays. We feel good about our plays and how we are telling our story. We'll speak more about that as we get into our first quarter results.

Fair enough. Lance, would you talk a little bit about the earnings per share sensitivity, the changes in comps, domestic comps? Help us understand from a modeling standpoint.

From a modeling standpoint, as you look at a percent of comps -- I'm going to give you kind of a range here, because I don't want to get real specific. But as you look at a percent comp from a North American standpoint, we tend to look in the neighborhood of $.02 to $.03. A good comp helps us. A bad comp hurts us a little bit, but there's some sensitivity, but there's plenty of other pieces of the business as well that the comp really doesn't impact, particularly with international picking up a little bit as well. We've got a lot of things that mitigate it at this point. (multiple speakers)

This is John. To comment on kind of the big picture thing -- I think it's tough as this economy is, and as tight as the dollar is with the consumer, the nice thing about Papa John's is people have to eat. We have a great brand. The value proposition with pizza is just outstanding. So we feel very good about getting through this -- these tough times with Papa John's, and we think this is the place to be.

Furthermore, we are not making more money because -- on the back of our franchisees. We're making more money because of scale. We are growing our business. I think that's the key thing, is that we are going to make more money because we're going to have a bigger Company. And I think that's really important.

The third thing to note is, the street does get a little nervous if the comp is a negative-1 or negative-2. And they get excited if comps are positive-2, positive-3. But at the end of the day, you've got an annuity on your franchise royalty stream. That's going to be -- if you pick a number, $85 million, $86 million, it is what it is. Our corporate restaurants, they are going to make between $26 million and $30 million, and food service is going to make its 3%. So in a lot of ways, it's a real safe business, even though sometimes the stock price is a little bit erratic and sporadic, because people get a little bit nervous on the negative comp.

Now, I want to also point out that we've been flat or positive for eight years, so we take positive comps very seriously, to the point where we work on it every single day. But it's not if like we ran a negative-1, the earnings stream would go backwards (technical difficulty).

That's a fair point. As a follow-up, in terms of just longer-term view on the brand, could you maybe talk a little bit, John, about the franchisees' health? Did they make more money in 2011 than they made in 2010?

Great question. The franchisees that are doing things the Papa John's way -- this is systemic throughout every franchise group that we are involved with. As you know, my wife has a store. She had her second-best year ever. The Colonel unloaded the stores in DC -- the 50 stores -- they had the second-best year. We had our second-best year. Tim O'Hern and his team had their second-best year. [Wade Only], down in Florida, had his second-best year.

So the franchisees that are doing things the Papa John's way, even in a very tough commodity market, are having a lot of success. And I'm going to let Tony jump in here, because we are now spending a lot of time going on the road and trying to get some of the franchisees that maybe are not doing things maybe the way we do things, and some of the successful operators, we're trying to get them over to the gospel of what makes Papa John's successful in the Papa John's way. Tony, you want to hit on this?

I sure will. And, Chris, one of the key things that's important to us for the long term, which is our franchisee health, and I think you all know that historically we've used some incentives strategically and deliberately for that very reason, focusing again on long-term health, not just immediate relief for something, but on health. So we've been -- actually, in January and February, many on the senior team went out -- we've done this, we're doing this at least two times a year, visiting around 13 cities, meeting with all of our domestic franchisees and certainly sharing our plan that John was referencing, and also hearing from them. It's really important, two-way communication. We're helping bridge our national marketing strategy all the way down to the local level and hearing directly from single-store operators, maybe multi-unit operators, and what's going on in their specific region. So that has been really, I think, a helpful process to go through here. And we've done this now, I think, three times in the past 18 months. And we're going to continue to do that.

So, staying in touch with our franchisees and hearing from them on what's going on is equally as important of the information that we know we do have on the system health. And we feel good about the future, and again, our ability to get a premium in this environment -- on this extremely competitive value- and price-sensitive environment -- has been a really big win for us.

Just one follow-up. What would a franchisee say is their number one issue right now?

This is Tony, and actually, I'll let Steve follow-up. But I think the pricing environment is probably the toughest thing that's out there. We know we've got the quality brand. As I've said, we are able to get a premium for it, but given history and what we would like to be able to achieve, that's probably the single biggest thing that they are facing. Certainly commodity costs have been high, so we've been working with them. Steve, you want to comment on that?

Yes, I'd just echo that. Certainly, the competitive pricing environment, probably number one. A strong number two would be, certainly, the volatility in the commodity market, specifically related to cheese. Cheese playing such a big part in our overall cost structure, but back to John and Tony's previous comments on us using the right comprehensive approach, focused, just really laser-focused on driving top line sales to really mitigate those challenges from a commodity standpoint. And we really continue to see a lot of franchise operators having just tremendous success by going out and leveraging the quality of our brand and driving topline sales.

This is John again. The beautiful thing about this model, and this brand, and our Company, is it's very pragmatic. If you wake up every day and you do what you're told to do, and you run the business the way it should be run -- throughout the world, it works. And that is a very comforting thing to know, that if you just wake up and take care of the fundamentals and take care of the basics and take care of your people, you're going to be successful sooner or later at Papa John's.

Let me add one more thing, Chris, to that very point John just made. We just -- Andrew and I actually just came from an around-the-world trip as well. So this same exact conversation that we are having applies internationally as well as domestically. The competitive environment is just as tough around the world. And seeing our results on international -- and that's certainly a result of our Tom Sterrett and the restaurant operations team, a great supply chain -- but at the end of the day, our brand position, whether it's -- to John's point, over in China, or in India, wherever, it's resilient with the consumer.

Mark Smith, Feltl and Company.

First off, Lance, just kind of a modeling question -- as we look at the tax rate, we know there's going to be some volatility. Can you give us any sort of range? Or maybe narrow down expectations for us of where tax rate could come in 2012?

Here's what I can say. Tax rate is a pretty difficult one to predict for anybody. But it's always going to vary some, because there are specific issues they get settled year in, year out. We don't typically model rates like we've seen over the last couple of years. What I would tell you, is I'd probably go with a range, and I'd probably add two or three points to what you've seen over the last couple of years as a range. And I know that probably isn't quite as specific as you'd like, but that's about what we are willing to guide. Because it is a number that moves around a good bit.

And then second, just curious on the impact of the Super Bowl promotion that you guys did in two ways. First, just kind of any financial impact to you can talk about? And then second, just curious on any change in online ordering that you've seen over the last few months. And you if you expect to get any bump from Super Bowl promotion on people that went out to the website, signed up, and maybe received future orders online?

This is Tony. On the first part of that, we are not going to want to share any financial impact. We'll certainly cover that at the end of the quarter on the call, but I'll turn it over to Andrew to talk about promotions.

Yes, Mark. I would just say this, that obviously we finished a very thrilling Super Bowl promotion, particularly in the area of our promotion with the coin toss, and we saw that help us in a number of different ways. Number one, to your first point, online ordering in particular. Secondly, just enrollment in Papa Rewards, which continues to be a big differentiator for us that we continue to be thrilled with. Just in general, fantastic brand visibility and awareness that does nothing but help our great quality story and our great branding with both new and existing consumers. That's about as much as we can give you at this point, but very, very thrilled with that.

I guess I'll pry a little bit. Can you guys give an online number, or maybe the delta, in online orders versus last year?

Mark, this is Lance. I appreciate you guys would love to get a firm number there. What we can tell you is that we are north of 30%, and that number is continuing to grow. But that's as specific as we're willing to go for right now.

Brad Ludington, KeyBanc Capital Markets.

I wanted to start off just looking at the pricing environment, like you talked about. Has it gotten more aggressive or competitive as cheese has come down in recent months? Or is it similar to what you saw throughout the year?

Brad, this is Andrew. I hope you're doing well. I would say it's fairly much par for the course. It's been aggressive, particularly with our key competitors throughout the year, which is exciting for us to be able to maintain a premium, which we are now over a year in being able to do so with the brand. We continue to like our spot. We continue to run our plays. We continue to talk about quality. And we believe that we can do that at the price point that we've enjoyed over the last year. But we are always looking at pricing, just to see what's going to make sense for the consumer and how they are resonating with our brand.

Thanks, Andrew. And Lance, on the marketing contribution in the first quarter, that's coming -- the one-time contribution -- since that's so extraordinary, is that going to be something that's called out or pro forma-ed out on your release? Or is that just going to be included in the numbers you reported? How is that going to be handled?

Brad, what we'll do -- we've got to work through with auditors and whatnot whether it's an actual pro forma. But at a minimum, we will call it out and discuss it so you can understand the impact. But we'll have to see whether it's a formal pro forma situation or not. We're still working through that. Either way, you'll get enough information to understand what happened.

Good, thank you. And then looking at the effective royalty rate, it stayed relatively flat year over year. Should we expect that to continue into 2012 domestically, or see that start to move back up again?

Brad, this is Lance again. I would expect to see that remain relatively constant. We do continue, as you can see in our 10-K, we do continue to have some incentives out there for franchisees to be able to reduce that royalty a little bit, if they do some things that we are asking them to do.

Okay. On the international profitability, it's great to see the improvements you all made with that. When you look at 2012, I know it's profitable for the full year, but is there anything in any specific quarter that should be profitable each quarter? Is there something that might take it back down during one of those quarters?

This is Lance again. I'll take this one and, Tony, or you can jump in if you'd like to. In general terms, we feel confident it will be profitable for the year. And from a quarterly standpoint, you know, it can go up and down a little bit, because there is seasonality in the business. But we -- generally speaking, yes, you may see a quarter where it comes down a little bit. I don't know. But generally speaking, we are not looking for a whole lot of variation in the number.

I don't have really have anything to add to that. I was going to say we don't expect a tremendous amount of volatility, but again, I think our consistent approach has been not focusing on any one quarter, but looking at the path or the trend for the year.

Again, this is John. We are now seeing some light at the end of the tunnel with regard to international. We do think our future in international looks bright. We think it could be a fantastic opportunity for profitability growth. But let me emphasize, we are having (technical difficulty) unprecedented success in the US, especially when it comes to market share. And the goose that lays the golden egg is the United States. I want to make sure we don't get too far off that America is having a great momentum and is successful right now.

Brad, this is Tony. I was just going to add one more comment, and say as we progress through 2012, if we see anything that is going to significantly change, we would certainly talk about that on a future call. Okay?

Good. Thank you very much. Congratulations on a solid year, guys, and we look forward to the next release.

Michael Halen, Sidoti.

My first question is about the North American franchise openings. I'd just like to know who's opening them. Is that present franchisees, or is it new franchisees?

This is Tim O'Hern. It's a mixture of both. We are still seeing openings from the base. There's incentives out there or for them to open stores, and we had nice growth with them last year. We've had a good year with the number of new franchisees coming into the system. That's kind of scattered all around the United States. We are also seeing openings on the non-traditional front, as well, from several bigger players in that arena, as well. So it's kind of just a real potpourri, if you will, of existing, new, and nontraditional venues.

Great. Are the credit conditions loosening up at all for the franchisees? What are they seeing right now, in terms of getting lending for opening new stores?

Mike, this is Lance. I'll start, and then I'll let Tim jump in if he has anything to add. I think, in general terms, we haven't seen a tremendous difference from what you've seen over the last couple of years, frankly, in the lending environment for folks at the franchisee kind of level of the business. Tim, is that -- ?

Yes. As a matter of fact, we have a potential lender in today, and the one thing we are seeing is more activity of lenders reaching out to us to come and meet with us, talk about our business, and see if they can do business with us and our franchisees.

Great. And I have some questions about international. Can you guys expound on China a little bit?

This is Tony. Sure. I think, as you see, our China operations are certainly continuing to do well. And really right on track from our strategic plan within China, and Tom Sterrett has been focusing on what is probably our number-one priority, and that's quality and service and operations. Tom, if you want to comment on that?

Well, certainly China is a high-growth area, and continues to be a priority for us --currently number two pizza brand in China. We really feel like we're well-positioned for long-term growth, both with our franchisee and corporate markets in China.

Great. My last question is on the stronger US dollar we've seen for the last four or five months or so. Can you talk about any foreign exchange effect that's going to have on the international segment?

Michael, this is Lance. To this point, we really haven't seen a material impact of that. So we don't expect, for 2012, for that to have a significant impact on our financials.

At this time, I am showing no further questions. I'd like to turn the call back over to Mr. Tucker for any closing remarks.

Thank you, Chuck. Thanks to everybody for taking the time and being on the call. We'll talk to you at the end of first quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program; you may now disconnect. Speakers, please remain on your line.