Papa John's International Inc (PZZA) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Papa John's first-quarter 2013 conference. 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 call is being recorded.

I would now like to introduce your host for today's conference, Mr. Lance Tucker. Mr. Tucker, you may begin your conference.

Great. Thank you. Good morning. With me on the call today are our Founder, Chairman and CEO, John Schnatter; Chief Operating Officer and President PJ Food Service, Tony Thompson, and other members of our senior management team. After a brief financial update, John and Tony will have comments about our business and the management team will then be available for our 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. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings press release and the risk factors included in our SEC filings.

All statements made on this call are as of today and we undertake no obligation to update the information on this call in the event facts or circumstances subsequently changed.

In addition, certain financial measures we use on this call are expressed on a non-GAAP basis. Our GAAP to non-GAAP results reconciliations can be found in our earnings press release available on the investor relations section of our website. Unless otherwise noted, all comparisons are versus the same period a year ago.

This call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format.

Finally, we ask any media to be in a listen-only mode since this is primarily an investor call.

Now onto a discussion of our Q1 operating results. We are pleased to report that we started off 2013 with healthy earnings and comps and a strong pizza category. We earned $0.85 per share in the first quarter, a 23% increase over $0.69 per share in the first quarter of 2012. Excluding the impact of the marketing incentive in both years, EPS increased to $0.84 in 2013 from $0.79 in 2012.

Our first quarter 2013 revenues increased 7.3%, primarily due to comparable sales of 1.6% for North America and 8.2% for International. In addition to these comp sales increases, increased revenues were also driven by the net acquisition of 50 restaurants in the Denver and Minneapolis markets in the second quarter of 2012 and increased volumes in our PJ Food Service business.

We opened 34 net units worldwide in the first quarter, comprised of 17 units each in North America and International.

On a business segment basis, operating income for domestic Company-owned restaurants decreased approximately $300,000 after adjusting for the marketing incentive from Q1 2012. This decrease was mostly due to increased commodity costs in 2013, primarily cheese, largely offset by comparable sales of 3.9%.

Operating income for our domestic Commissary business segment decreased $1 million for the first quarter due primarily to the comparison against 2012's unusually high profit margins. This performance was in line with our expectations and we expect 2013 full-year Commissary profit margins to be in line with those from 2012.

First-quarter operating income for our North America franchising segment increased slightly due to the increase in net units and 0.8% comp sales largely offset by the reduction in royalties from the Minneapolis and Denver markets that were acquired by Papa John's International last year.

Operating results for our International segment improved approximately $70,000 for the first quarter due to increases in net units and strong comp sales of 8.2%, somewhat offset by operating losses incurred in our Corporate China units as we continue to build out the Beijing market.

Below the operating income line, I would like to point out that net interest income benefited roughly $0.02 due to changes in the valuation for one of our joint ventures. We expect the full-year impact of joint venture accounting to be negligible for 2013.

Our effective tax rate was 32.9% in the first quarter of 2013, a 0.6% decrease from 33.5% in the prior year. This decrease was largely due to the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012. Our effective tax rate may fluctuate for various areas reasons including settlement or resolution of the specific federal and state issues.

We repurchased approximately $32 million of stock during the first quarter and have repurchased approximately $18 million of stock thus far in the second quarter leaving approximately $66 million of remaining share repurchase authorization as of April 30.

Our free cash flow, a non-GAAP measure we define as cash flow from operations less capital expenditures, was approximately $17 million for the first quarter of 2013. Our net debt position, defined as total debt less cash and cash equivalents, was $84.4 million at quarter end.

We announced an update to our 2013 earnings per diluted share guidance from original range of $2.85 to $2.95 per share to an updated range of $2.90 to $3.00 per share.

Finally to update you on a couple of other items as disclosed in the Form 8-K filed on Monday, we have expanded the availability on our line of credit from $175 million to $300 million. The additional availability will be used to fund general corporate needs in addition to our existing share repurchase program and capital expenditure initiatives.

For 2013, we generally expect our debt levels to range between 1 and 1.4 times EBITDA and we expect our full-year share repurchases to approximate or slightly exceed 2012 levels.

There has been no change in amounts reserved relative to the tentative settlement of the [Agny] litigation discussed last quarter. We cannot yet discuss the amount reserved but should be able to do so once the tentative settlement has been finalized.

Now I would like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John?

Thanks, Lance. Good morning to everyone. We are glad you took the time to be with us on the call today.

I will begin by congratulating our franchisees and our operators throughout the world on another solid quarter. As Lance noted, we are off to a nice start in 2013 with good comps sales, EPS and unit growth. The environment remains challenging but our operators continue to consistently execute our model of delivering a better quality Papa John's pizza with industry-leading customer service.

I'm pleased to say that not only are our numbers strong but our pizza quality and customer service has never been better.

Next I'd like to briefly comment on our International business especially our outstanding performance in the United Kingdom. Our International business continues to steadily grow and we expect to reach store 1000 for International this summer.

With over 8% comps in the first quarter and including great performance out of the United Kingdom, we couldn't be more excited about the future of our International business.

I would also like to comment briefly on our marketing and branding. As you know last year we extended our NFL partnership and that relationship continued to pay big dividends for us in the first quarter of 2013. Our Super Bowl coin toss promotion and marketing campaign which featured Peyton Manning proved to be very popular with consumers again this year and we were also of course thrilled that Payton is a franchisee of Papa John's in our Denver market.

Finally as founder, I continue to be pleased by the pride and dedication I see from operators throughout the world. Product quality and customer service has never wavered in the face of a challenging operating environment over the past several years and for the first quarter of 2013, it was no different. In fact I think it is worth repeating, our product and quality service scores are at an all-time high.

I am particularly proud of those accomplishments because our operators have been meticulous about the fundamentals and achieved these scores in a very tough competitive environment while offering the categories premium product and that along with the consistency is part of a winning formula that has made Papa John's so successful for almost 30 years.

From day one I founded this brand, a consistent disciplined, rigorous approach has served as well in every aspect of our business from EPS growth to restaurant growth to sales growth and will continue to guide us as we grow scale and execute against our long-term plan for growing Papa John's throughout the world.

With that, I will turn it over to Tony Thompson for his remarks. Tony?

Thanks, John. I too would like to congratulate our system on a strong quarter. As John noted, our operators' focus and commitment to quality and delivering on our better ingredients, better pizza brand promise enabled us to continue the momentum we built in 2012 into the first quarter.

In North America, our operators posted a 1.6% positive comp sales performance during the quarter including a solid 3.9% positive comp sales increase for our Company-owned restaurants. Our three-year comp sales for the quarter were positive 8.8%. Of note, we continue to benefit from our digital investments with digital sales well over 40% in the first quarter.

Our International operators posted an 8.2% positive comp sales during the quarter and a positive 22% on a three-year basis.

Our quality position continues to resonate with consumers around the world. The results of our continued focus on the fundamentals and consistently executing the Papa John's way continue to show themselves in our strong sales comps.

I witnessed this firsthand during the quarter as members of our leadership team visited several markets throughout Asia including China, Korea and the Philippines with a stop in one of our newest markets, Guam. At each stop we met engaged and enthusiastic franchisees and operators who are making Papa John's signature better quality pizza and executing the Papa John's way.

Not only is our International operations executing and delivering quality at the highest levels, our consistency from country to country and city to city is outstanding.

We are very bullish on the future of Papa John's International operations and the runway we have for continued growth as we expand our better ingredients, better pizza brand promise.

Much like our sales, we continue to see momentum in the restaurant growth in both North America and throughout the world. As Lance mentioned, we opened 34 net restaurants during the quarter, 17 each in North America and abroad. We currently have more than 4200 restaurants open in 34 countries and our prospects for continuing to grow the Papa John's brand throughout the world are very promising.

Our development pipeline remained strong as well with over 1200 restaurants in the pipeline scheduled to open over the next six years. I am excited about the long-term global prospects of the Papa John's brand.

Finally, I would like to touch briefly on our franchise relations. During the quarter, we met with numerous franchisees during a week-long road trip throughout the country with stops in Cincinnati, Atlantic City, Atlanta, Jacksonville, Dallas, Las Vegas and Chicago and again recently at our annual operators conference. The passion for the brand and the spirit of collaboration is at an all-time high and collectively we have the system primed for continued growth and success.

With that I will turn it back over to Lance for questions.

I think we are ready for Q&A.

(Operator Instructions). Michael Halen, Sidoti.

Good morning, everybody. Can you give me a little more color on International? I guess particularly in China, I know it is probably difficult to gauge for you but do you think you are maybe gaining some momentum there at the expense of Yum Brands?

This is Tony by the way. Good morning. The way I would answer that, really we are focused on just our play and our strategy in China and overall it is a big market in China and our Beijing results and Shenzhen, Shanghai are doing extremely well. I wouldn't necessarily say we are benefiting from what they have experienced.

Michael, this is John Schnatter. The Pizza Hut restaurants over are there are a little bit different as far as they are bigger kind of like a TGI Friday's. They do have a [Delco] model but most of the Pizza Hut's are pretty big. So I wouldn't say we are taking any market share away from Pizza Hut.

I would point out that the success we are having in Beijing is a big deal. We have got the service part of this down. We have got the product quality part of this down and we now have the right model in place to be successful. The kind of little bit of a backward momentum you see in profitability is completely predictable because remember Beijing is a big, big market and if you do a Lexington, Kentucky say 10 stores you can do that rather quickly. If you do a Nashville at 30 stores, that takes a little more time. If you do a Dallas at say 60 stores, that is even a little bit bigger task. And if you do Atlanta which is 120 stores, that even takes more time and more capital.

And so Beijing we are at 50 stores, headed towards 100 and it will bob and weave a little bit on the profitability but the main thing is we do have the model figured out a and we have fantastic momentum and that is the key.

Great, thanks. About how long do you think it will take you to get to about 100 stores in Beijing?

Good morning. This is Tim O'Hern. I would say some time probably in late 2014, early 2015 probably.

Mike, this is Lance. That will bob around a little bit but 2014, 2015 something in that range.

This is Tim again. As John indicated, it takes time to work in a big market to establish a good base of stores that are clustered well, put together well that operate consistently and we are going to go at this methodically.

Beautiful. Thank you very much.

Chris O'Cull, KeyBanc.

Thank you very much. This is actually Dave Carlson on for Chris today. I hope you guys are doing well.

A couple of questions and then I will get back in the queue. My first question regards the outperformance of the Company stores relative to the franchisees. I think Tony was speaking in terms of three-year comps a few minutes ago and that spread has widened over the last year it looks like but the gap really accelerated significantly in the first quarter. What is really driving this level of outperformance?

Dave, John Schnatter. Great question. I will hit it at a high level and turn it over to Steve and Tony and they can give you a little bit more detail.

We feel most fortunate that we are having such fantastic corporate success and the franchisees are also seeing what you just noted and the fact that as corporate performance exceeds the franchisee performance not only in comp sales but in just about every single matrices and I think we are the only franchise system where the franchisor outperforms the franchisee.

So they are starting to ask the question -- what are you guys doing so we are sharing with them what we call the comprehensive approach which is something we have been doing and implemented the last four or five years and it is all about shared best practices.

But Steve, I will let you hit the detail on that.

Thanks, John. Thanks Dave for the question. I mean I think obviously we like to look at the business in the long-term so just a couple of key highlights to kick it off and maybe I will give you some factors.

For one, if you look at the last 10 quarters both the corporate and the franchise side of the business, 10 consecutive quarters of positive comp sales growth so showing growth on both sides of the business. And then to dig even deeper over the last 20 quarters on a five-year basis, 18 of those 20 quarters on the franchise side of the business have been positive. Conversely only 13 out of 20 on the corporate side so that speaks to the momentum recently that we have gained in the corporate side of the business really in the last three years.

Three key factors though I want to share with you here is that our corporate stores are in predominantly more tenured and penetrated markets with varying levels of local store marketing.

Number two, as John is kind of speaking to, the talented field leadership within the corporate team has been very effectively demonstrating their ability to integrate all of our proven marketing, operations and technology strategies across the board in all of our 600 markets.

Then lastly, there certainly has been some benefit from our acquisition of the Denver and Minnesota markets that took place in Q2 of last year and we are very pleased as we don't get into specifics but very pleased with the progress being made in those markets.

What I will say is over time we are confident and have proven that our brand strength with the consistent focus on the fundamentals of the business will not only create success in North America but will create success in every market around the world.

Dave, this is Tony. One of the ways we actually demonstrate and show that leadership with our franchisees is we go out on what we call a road trip as I mentioned in my script and we go out and spend time regionally across the country with our franchisees and demonstrating and showing the things that we are doing sharing best practices and certainly we learn from them, as I have said on previous calls but really showing the way and leading the way.

And we actually -- that is why it is also important we were talking about China a minute ago on the International front of having a strong presence in China and having that corporate leadership internationally as well in a very, very important market.

Okay. Great answer. The other question I had was -- goes back to a few minutes ago, the question on the International segment. Given the strong comp performance there, when do we expect to start seeing margin expansion at the International segment? Is it a matter of continuing to build out the China segment? When do we really start seeing the margin get going?

Dave, again this is John. I will hit it at a high level and then I want to give you some color.

I look at where International was four years ago and where we are at today and it is just night and day. I mean the success we are having in Latin America is just tremendous. The United Kingdom in 2010 I think that market lost $3 million or $4 million and now it is profitable with tremendous momentum with great leadership. Russia is on fire.

And so we have pockets of opportunity but all in all five years ago, I just didn't see the light at the end of the tunnel with International and the progress we have made again on food quality, food service and just the entire experience with the customer, the Papa John's way is alive and well and it does work on an International basis and systemically we are just having a lot of success.

Tony, why don't you hit that and then Sean, you might talk a little bit about some of the gold standard we have done on products worldwide?

This is Tony. We are really just getting started internationally from our vantage point. Runway is extremely long and wide so we really feel good about it. We are bullish about it and as we look at quarter-to-quarter given our current position and our trajectory, we are going to see some differences in quarter between pace, investment as we are ramping up on profitability certainly within our corporate restaurants but as we enter new markets.

So we are going to balance that pace with investment as we move forward so you are going to see maybe some quarter-to-quarter ebbing and flowing on profitability but this year from a guidance standpoint, we feel really good about this year being equal to last year in terms of profitability.

And this is lance. Let me jump in one second. As we have kind of said, this year should be at least equal to last year profitability internationally and we expect it to actually to be higher. So our overall guidance is $2.90 to $3.00. That includes some good growth on the International side.

This is John again and I want Sean to jump in here but being the founder, the most important thing to me is of course the people and the product and the progress.

Sean, why don't you jump in on the progress we have international because the product quality is exceptional from a global basis?

Sure, John. Thanks. We have a lot of great momentum over the last four years in terms of our gold standard. We established our gold standard about four years ago in terms of trying to make every market internationally meet the same standards that we have here in the US. We have made a lot of progress over the last four years in terms of converting stores and markets to our gold standard.

In fact if you go internationally now from dough, sauce, cheese, all of our core ingredients they look in terms of mirrored image exactly like they do in the US with very few exceptions. So a lot of great momentum in terms of gold standard.

Thanks for the response, guys. I will hop back in the queue.

Mark Smith, Feltl & Company.

Good morning, guys. Just a couple of quick ones. First, I want to dig a little bit more into the domestic comp. Can you talk at all about pricing versus traffic? And also the cadence of comps, was it better through the quarter -- fairly flat -- kind of how the comps worked out through the quarter?

Mark, it is Steve. I will try that one and maybe the other guys will jump in. Obviously we don't speak specifically into traffic gains as a whole but what I will say we are pleased with our traffic progress over the last couple of years and certainly the dynamic and the balance of how we look at pricing with how we look at the competitive environment related to the consumer and pleased overall with our quarter.

I think we spoke to in the last quarter the mindset of the consumer being in a cautious mode and certainly saw as we look -- we don't to period to period. But as we look at how the period was made up, the factors that we spoke to last quarter around the delay of the income tax piece, on the returns, the increases in payroll tax, the fuel price's impact on the consumer. But as you look at our full quarter certainly pleased with our overall dynamic in terms of strategy and how we looked at our pricing and how that created our overall results.

Perfect. Then maybe for Lance, I just wanted to walk through a little bit on the interest expense and just make sure that we kind of got from your commentary and are looking at that the right way. How should we be modeling that interest expense through the remainder of the year?

You saw it actually be, Mark, a net interest income number for the quarter. We got a couple of pennies of benefit from the joint venture accounting we do. I expect that to be neutral for the entire year so that should tell you that we will give a couple of those pennies back on that accounting. That all runs through the interest expense line.

So I would really be more focused on what your estimates of the interest-rate and the debt are going to be and over the course of the year, the JV accounting should really have very little impact although it did help us to the tune of a couple of pennies in the first quarter. Does that help you?

Yes, that definitely helps. Thank you. Then last question just I know you guys talked a little bit about it but can you talk more about your expectations for use of cash especially with the new line of credit out there and especially buybacks? You said you will be about flat with 2012.

And when you do come to the end of the authorization, I want to say that's in September, do you think you will have any issues getting the Board to reup on that?

Mark, this is Lance again. Two things. We expect our share repurchases to be at least what they were in 2012 and maybe even slightly exceeded. Our Board has been excellent with the share repurchase program so we will cross that bridge when we come to it but I don't have any reason to believe they wouldn't be supportive of that program.

Perfect. Thank you.

Peter Saleh, Telsey Advisory Group.

Thank you and good morning, gentlemen. It is actually [Ben Parenti] on for Peter today.

I wanted to just follow up a bit on the last question in regards to your leverage position given the recently increased credit facility. Can you just talk a little bit about how you are thinking about leverage given the higher facility and very attractive interest rates today and if that has changed at all in recent times?

Ben, this is John Schnatter. I will kind of hit it from just kind of how I see the business. Again I have been doing this for 30 years. This is about as good as I have ever seen it. It is just really -- the pizza business is a good business to be in right now and I just have a lot of confidence in our leadership and our team. We have momentum. We have so much runway in front of us so my confidence level is a little bit more -- is a lot better than it was four years ago and so we are probably going to be a little bit more aggressive with the stock buybacks. Lance?

Ben, to reiterate what I said in my remarks, I would expect 2013 to look like about between a range of 1 and 1.4 times EBITDA on our leverage. So you are seeing -- as to John's point -- be a little more aggressive in the use of leverage while still remaining or leaving what we believe are very conservative levels of debt in the big scheme of things as we continue to manage the business.

Ben, again this is John. If we continue to have momentum and success international, that is going to be huge. We are going to continue to have success in the US. We think that is going to be huge and you shrink that stock base and you have really got a formula to drive EPS.

Okay. Thank you. Also wanted to ask just on the commodity front, can you remind us what your expectations are for cheese prices for the balance of the year and how much contracting have you done in regards to cheese?

Good question, Ben. This is Lance, I will take this one. We don't give the amounts that we actually have contracted. What I can share with you is we do have amounts contracted out through the end of the year. What I would quantify as moderate amounts and I will leave it at that.

Relative to the actual price we expect to see, our full-year numbers are in the high $1.70s so you can kind of look at the futures for the second half of the year and know that they are indicating the cheese will likely be a little bit higher in the second half than it has been in the first half. But our full-year numbers from a block standpoint are in the high $1.70s.

Okay. Thank you very much, gentlemen.

(Operator Instructions). Jim Yin, S&P Capital IQ.

Good morning. Thank you for taking my call. Can you qualify or give some color about the industry in the quarter? Do you see a lot of promotions that hurt the average ticket price in general and what do you see the trend going forward?

This is Tony, Jim. Thanks for your question. From an industry standpoint, I think everybody is aware that the big chains are continuing to grow at the expense of the independents and the regional chains. That is something that has been taking place consistently and obviously from a size and voice, to brand presence, supply chain, all of those factors.

But within the industry, there is a lot of competitive pricing that continues to take place; value and choice remain paramount. But for Papa John's, we are continuing to play on the premium end of that equation and have consistently done that with our pricing and our promotional strategy. They use of LTOs for us has been a great way for us to put our premium brand presence out with the consumer and we are going to continue that process.

This is John Schnatter to kind of piggyback on that. It is -- the pizza business is a good place to be and frankly we think our competitors are good at what they do. It is interesting to see all three are about $8 a pizza right now and with us being in the premium brand position, we are able to demand a little bit higher price for our product because it is a higher quality product. And the nice thing about that situation is we do make a better pizza and the consumer recognizes that.

Also the other fortunate thing is we don't operate our business in a vacuum and whether it is McDonald's or Texas Roadhouse, or our two leading competitors, if we are feeling the pressure and have to take price, sooner or later, they are going to feel the same pressure and they are going to have to take price and we think in that environment all ships will rise.

Jim, it is Steve Ritchie, maybe I'll just comment on one of the other certainly key factors within the category and what certainly we find to be an advantage for Papa John's and that is digital. As we stated on the last call, we are now over 40% of our sales are coming from the digital side and that is as a whole. We are seeing significant growth in the mobile side of that piece.

And we talked about our corporate restaurants. We have got a number of our markets -- we don't get into specifics -- but we've got a number of markets now over 50% of their sales are coming from the digital front. So that is a key piece for us to continue to be growing share within the category and alongside I think what you have seen among the other major chains in the category.

Just have a follow-up question. I know you are gaining market share because of the greater usage of smartphones and tablet ordering. Do you think that trend will continue when some of these smaller regional players develop their own apps for the iPads and the iPhones?

This is Tony. We do believe that they will continue to grow in their usage of digital. That is the nature of the age that we are in. The sophistication though of the larger brands is an advantage against the smaller chains and I think that gap will remain and continue with the resources that all of the big players have to put against that.

The last thing I want to comment though on the category as a whole is the pizza category is a great value in the economy that we are in and there has been a lot of press out there about the growth of the pizza category. So for us as Papa John's, we are certainly growing with that and again in the premium end of that growth. So that is what excites us about our premium position.

Thank you.

I am showing no further questions at this time. Mr. Tucker, I would like to turn the conference back to you for closing remarks.

Thank you. We will wrap the call up. Thanks to everybody for taking a few minutes to join us this morning.

Thank you for participating in today's conference. Have a wonderful day. You may now disconnect.