Papa John's International Inc (PZZA) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Papa John's Fourth Quarter 2017 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Steve Coke, Vice President of Investor Relations and Strategy. You may begin.

Thank you, GG. Good afternoon. Joining me on the call today are CEO, Steve Ritchie; our CFO, Lance Tucker; and other members of our senior management team. Steve and Lance will have comments about our business and provide a financial update. After which, the management team will be available for Q&A.

Our discussion today will contain forward-looking statements involving risk that could cause actual results to differ materially from these statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. Please refer to our earnings release and the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call.

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

Now I'd like to turn the call over to Steve Ritchie for his comments. Steve.

Thank you, Steve, and good afternoon, everyone. While this is my first call as CEO of Papa John's, as many of you know, I've been a part of Papa John's team for nearly 22 years. I started my career here on the frontline as a $6 per hour customer service representative, answering phones and making pizzas. I'm a franchise owner and operator. I have managed stores, operations and other franchisees. In these roles, I've engaged directly with our customers, and seen firsthand, the power of our brand and our people. While I'm not pleased with the company's more recent performance, I am confident that our brand and our people provide the foundation we need to reignite customer enthusiasm for Papa John's and drive improved levels of profitable growth and value creation.

Over the past several months, I and other members of the leadership team, including Mike Nettles, our Chief Information and Digital Officer, and Brandon Rhoten, our new Chief Marketing Officer, have taken a hard look at the business by diving deep into data provided from recent consumer research initiatives and focus groups conducted with the assistance of outside consultants. We've also gained visibility to valuable consumer marketing insights from our new advertising and public relations agencies.

Finally, we have spent time recently visiting with over 80% of our franchisees and operators across the country to share and receive feedback about operations and evolving consumer trends. As a result of these steps, which are ongoing, we have identified specific opportunities to improve our brand proposition, how we connect with customers and how we operate at the unit level. These improvements are in 5 key areas.

First, we focus consumers on the real point of differentiations for the Papa John's brand, quality. Better ingredients and better pizza have always been core to our brand and have separated us from the pack. However, over the last few years, consumers viewed quality as simply part of our tagline, without a real connection to our products. Much of our marketing has become predictable and lacks differentiation. We want consumers to understand the facts that support the inherent quality of the Papa John's Pizza, including no artificial flavors or ingredients, fresh never-frozen original dough, fresh-packed pizza sauce and fresh-cut vegetables and our ongoing clean label initiatives. To that end, we are making wholesale changes to our creative and media that will let us take a clean slate approach to communication, beginning with the new advertising and PR firms.

Second, we have the opportunity to improve our value perception. The research is clear. Even consumers who prefer Papa John's often choose a competitor because we are perceived to be too expensive. We intend to provide every day accessible value to our consumers in 2018.

Third, we will be redirecting investments to build new technology with enhanced data and analytics capabilities, which we believe will improve customer engagement and operational effectiveness. Better optimize our marketing spend and make our omni-channel presence more competitive. Currently, over 60% of our sales are through digital channels. But I know, we can do better. And as we increase our digital sales, we also expect to achieve margin benefits, given the nature of the economics in that channel.

Fourth, we are also in the process of identifying opportunities to operate more efficiently at the unit level, which we expect will result in significant savings on an annual basis. Importantly, these savings can be achieved without negatively impacting the quality of our food or the service our customers receive. We're also building new technology inside our restaurants to improve our team member experiences, enhancing business tools and redesigning user flow to drive efficiencies and build a stronger unit economic model.

Fifth, we will invest in our most important ingredient, our people, because I know the strength of our culture will determine the success of our strategy. To be clear, it is not business as usual, at Papa John's. We are taking important actions in each of these areas to drive improved performance and value creation.

Based on direct conversations with our franchisees, we also know that they are fully aligned with these efforts. I look forward to discussing more details about the initiatives underway later on the call, but also in being transparent with you as these initiatives play out over the course of the year.

But first, I'd like to briefly address our fourth quarter and full year results before I turn the call over to Lance for more detailed discussion. For 2017, we hit the low end of our both our comparable sales and EPS guidance ranges, with full year comps running positive for the 14th year in a row. Our international business produced another solid year of sales and profitability growth.

We achieved comp sales of 2.6% in the fourth quarter, delivering our 31st consecutive quarter of sales growth, resulting in a full year sales comp of 4.4%. We continue to see strong sales performance across much of international, including Europe, Latin America, China and the Middle East driven primarily by an increase in transactions. Our U.K. business is quickly approaching 400 stores, where we are working through some value perception opportunities to regain the sales momentum we have been accustomed to over the last few years.

Our new markets continue to perform ahead of our overall international PSA, and our global pipeline is nearly 1,200 stores. Outlook for our international business is very robust with significant opportunities for growth as we continue to expand the brand through our differentiation of quality, technology and strong unit economics.

However, in North America the negative 3.9% sales comps in the fourth quarter were disappointing. Q4 sales were impacted by several factors, including underperforming promotional offers and media investment that did not drive the consumer traffic we had expected. We also believe sales were impacted by negative consumer sentiment. Our shift in PR and advertising approaches are directly focused on fixing these issues. These results in North America are not acceptable to us, and I am confident that the priority areas I have highlighted will enable us to drive stronger performance over the coming year.

Before I turn the call over to Lance, I'd like to take a moment to acknowledge Lance and the support and leadership he has provided over the last 10 years. As many of you know, this is Lance's last week at Papa John's as he will be moving on to a new CFO position at another company. On behalf of myself and the entire Papa John's team, thank you, Lance, for your many contributions as our CFO. We all wish you the very best as you move on to the next chapter in your career. Lance?

Thank you, Steve, that's much appreciated. Now onto our fourth quarter results. Diluted EPS in the fourth quarter was $0.81 on a GAAP basis and adjusted EPS was $0.65 after excluding the positive $0.20 impact of U.S. tax legislation and the negative forcing impact of impairing our China business. Versus the prior year, our adjusted EPS was down 6% due primarily to our negative comp sales performance and higher automobile and workers' comp insurance costs.

Fourth quarter revenues were up 6.4%, including the 53rd week of operations and were down 70 basis points on a 52-week basis. The 52-week decrease was primarily driven by negative comp sales of 4.7% in our company-owned restaurants and the impact of refranchising 42 restaurants in the fourth quarter of 2016. Offsetting the lower restaurant sales were increases on the international side due to positive comp sales and higher unit counts and an increase at PJ Food Service due primarily to higher commodity prices.

Domestic company-owned restaurant margins were down 3.3% from Q4 2016 primarily due to the impact of negative comp sales, higher automobile and workers' comp insurance costs and higher commodities. These decreases were somewhat offset by the positive impact of the 53rd week of operations.

North America commissary and other margins decreased 40 basis points due primarily to higher online operating costs due to digital initiatives and also due to lower income in our promotions subsidiary. Of note, North America commissary operating income and margins approximated Q4 2016 margins.

International margins increased 1.5% due primarily to higher comp sales and higher units as well as the favorable timing of marketing spend in the United Kingdom. The 53rd week of operations also favorably impacted the results.

G&A and other expenses were slightly higher, up $500,000 versus 2016 due to the 53rd week of operations. Excluding that extra week, G&A costs were actually down nearly $500,000 due to significantly lower management incentive costs, somewhat offset by higher salaries and benefits as we continue to add resources in our technology area. As a percent of sales, G&A improved by 50 basis points versus the fourth quarter of 2016.

Interest expense was up $2.8 million versus 2016 due to increases in both the outstanding debt balance and our effective interest rate. At the end of 2017, our debt balance was $467 million or 2.4x EBITDA. Our effective tax rate was 9.6% in the fourth quarter, down from 32% in 2016. The decrease is primarily attributable to the impact of U.S. tax legislation, which, upon enactment in December 2017, required a remeasurement of deferred tax assets and liabilities. This remeasurement yielded a onetime $7 million benefit or 23% effective tax rate decrease for the quarter versus last year.

Our free cash flow, a non-GAAP measure, we define it's cash flow from operations, less capital expenditures, was approximately $82 million in 2017, down approximately $13 million from 2016 due primarily to negative working capital changes.

I'll now turn the call back over to Steve Ritchie to discuss our priorities and our outlook for 2018. Steve?

Okay. Thank you, Lance. And as you've heard, our strategic priorities for 2018 are clear. We will reestablish our brand differentiation by telling our quality story and conveying that narrative in new ways to better reach our customers. We will provide the value that supports customer action. We will invest in technology to improve how we market our products and propel our capabilities and customer connection in digital ordering. We'll make important changes within our unit operations to increase efficiencies and unit profitability. And we will invest in our most important ingredient, our people, to attract and retain the best Papa John's employees.

Initiatives are underway in each of these areas. For example, as part of our efforts to show consumers the quality is more than a brand slogan at Papa John's, we are building a new marketing approach, guided by our new CMO, advertising and PR agencies, to tell the story of why our better ingredients make better pizza.

In addition, we are exploring new opportunities to expand our line of offerings with products that reflect our quality focus and complement our current offerings, including a potential line extension of entrées, desserts and beverages. To measure our progress in this area, we will be closely monitoring consumer response to market test and look forward to updating you as these plans advance. To improve how our customers view and respond to our value proposition, we've begun testing new value and equity messaging to understand the impact these messages have on our business and brand perception. We are already applying our initial findings to our marketing campaigns.

In the area of technology, we're ensuring that the leadership position we've attained in digital engagement remains a significant point of differentiation for our brand. In analytics, we've recently implemented a media attribution tool. This tool is helping us better define which media investments and channels drive sales, and how to best optimize this mix and increase the ROI on our marketing spend. This capability has already begun to inform our media buying decisions. For example, while the NFL remains an important channel for us, we have determined that there are better ways to reach and activate this audience. Thus we will shift our marketing from the broader NFL sponsorship to focus on our partnership with 22 specific NFL teams. A significant presence on league broadcast and digital platforms and on our relationships with many of the league's most popular players and personalities. By targeting investments in this way, we can start our consumer interaction around a shared fan passion that we believe will better support our business in an ongoing connection with these fans.

Importantly, we are able to make the shift in our investment allocation without additional cost, while also gaining flexibility to promote our brand on other platforms, where we can attract new customers and increase engagement with the new and existing customers. I want to emphasize that these marketing and customer engagement actions are in addition to the initiatives versus we discussed last quarter, including, among others, making significant enhancements to our Papa Rewards loyalty program, designing our award-winning digital ordering platforms, extending these platforms in a new and exciting social media and other third-party channels and massively upgrading our business analytics platforms to ensure we gain the insights needed to inform and drive our business decisions in ways that further enhance our customer engagement models. These marketing, technology and operating improvements are very exciting for the future of our brand.

I am most excited about the focus and enhancements we are planning to make our team members jobs easier and more rewarding. At Papa John's, anyone can grow from an hourly job delivering and making pizzas to running the company. I am proof of this fact. In 2018, we will be celebrating the opportunities our brand brings to tens of thousands of people of all backgrounds all around the world by incentivizing team members who help our brand succeed. For example, we are issuing a new annual stock grant for our corporate restaurant general managers. As they are the ambassadors for our brand and have the most impactful role in our daily customer interactions, more on this, as we develop our plans to attract and retain the best Papa John's employees.

While we have a lot of work ahead, I am confident that the actions we are taking will strengthen the company and our competitive position. 2018 will be a year of investing to drive the vision of long-term sustained growth for the brand. While we expect to see some benefits in certain areas in the first half of the year, many of the investments we are making and their associated benefits will not come online until the latter part of the year. Accordingly, you should expect comps and margins to improve over time.

While we rarely speak to current quarter sales, we feel it is important to do so in this instance so that our investors fully understand our 2018 outlook. Our first quarter sales have remained depressed. And as I said, we believe it will take time for the benefits of our actions to fully be reflected in our results. As such, our outlook has been established at levels that take into account the current headwinds and the work we'd be doing in North America as well as the expectation that our international business will continue to grow at a strong pace, and that our global unit opening numbers will come back in line.

As set forth in our press release, here are the major outlook items for 2018. Diluted EPS of $2.40 to $2.60 in comparison to the $2.83 2017 GAAP EPS. Items impacting EPS are comprised of the following: EPS will decrease approximately $0.11 due to the benefit received from the 53rd week of operations in 2017; we expect EPS to decrease $0.05 to $0.10 due to the impact of the new revenue recognition standard; we expect EPS to decrease $0.30 to $0.40 due to the lower operating margin results primarily from the aforementioned sales pressures, higher insurance and delivery cost for our company-owned restaurants; and the higher cost for technology and marketing investments. As we've noted previously, our technology investments will increasingly run through the P&L as operating expenses as we move toward a greater percentage of cloud-first arrangements. Partially offsetting these decreases, we expect EPS to increase $0.04 to $0.10 due to the favorable impact of U.S. tax legislation.

Our preliminary 2018 income tax rate is expected to be 20% to 24%. As mentioned previously, 2017 is a favorable impact from U.S. tax legislation of $0.20, reducing the positive impact we'll see in 2018. Finally, we expect EPS to increase $0.05 to $0.10 due to share repurchases.

Other outlook items include the following: North America comparable sales of negative 3% to flat with comps early in the year being negative, but growing back in the positive territory later in the year; international comp sales of 3% to 5%; net global new unit growth of 3% to 5%; block cheese prices are projected to be in the low $1.60s; capital expenditures of $45 million to $55 million; and finally, debt EBITDA ratio of 3 to 3.5 by year-end, which is consistent with our commitment to better optimize our balance sheet.

In closing, 2018 is going to be a year of positive change at Papa John's. We have challenges to address, but I'm confident that this team, driving the initiatives and investments I have discussed today, will enable us to reinvigorate performance and our record of profitable growth.

With that, allow me to say we appreciate your continued support, and we'll now turn the call over to the operator for Q&A.

GG, we'll turn it back to you.

(Operator Instructions) Our first question is from Alex Slagle from Jefferies.

I want to get your perspective around the recent increase in the U.S. door closures, and I know it's something you've been working to address, but how close are we toward getting this system in good shape and seeing that these closures start to diminish?

Sure, Alex. It's Steve. I'll start on that one. So we've had some pressure over the last couple of years on closures, more specifically, the West Coast and the Northeast, where we've had some wage pressures that driving some of the unit economic challenges we have experienced there. I'd say there's probably an acceleration of some of that as you saw in the numbers in 2017 because of some of our sales performance as we closed out the year. And that's why some of the future initiatives are in place. I will highlight one of the 5. Number four, as I've talked about unit economics. So we've got a lot of focus on efforts and resources, both internally and externally to work on the overall unit economic model, more specifically to deal with some of those high wage markets so that we can most appropriately improve the business model there, so we can -- back to more moderate -- more levels that we've learned to expect in terms of overall closures on an annual basis in our U.S. business. So we feel like 2018 is going to be a bit of a transitional year in terms of the overall net business on the domestic side, in terms of units. However, we know the efforts that we put in place this year are going to put us in a position where we have sustainable growth, both in sales, profitability and units, domestically.

And then on the fourth quarter same-store sales. Could you just talk a bit more about the contributing factors? I mean, how much of that was due to the NFL and maybe promotional missteps versus other competitive factors?

Sure. I'll start Alex, and I'll let Brandon speak to the subject as well. So I'm going to -- we talked a little bit on the last call about just some of our promotional efforts and how they've not been as effective as we had originally planned, and we've got a lot of learnings that I'll tell you just with Brandon coming onboard here and really doing a deep assessment, research and data in his first 6 months of understanding, what's working and what's not working, and we've really got a lot of learnings around media investments. And we're making -- we've made some missteps just in terms of our media investments for the fourth quarter and leveraging the new media attribution tool to make sure that we're appropriately making the right investments in 2018 to give the sales moving back in the right direction. With that being said, as I alluded to in my prepared remarks, we expect that we're not going to see the increases until the latter part of the year because we've got a lot of evolution that's occurring not just in the marketing, but in the TAC in the operations side of the business. But Brandon, you might want to comment on anything else that were factors in our business here on the sales front.

Yes, this is Brandon. When you're buying television, generally you buy it most of it a year in advance. So a lot of your media plans are actually relatively big for almost an entire year. We unfortunately, didn't have access to a tool like or attribution tool which is guiding where investments should go. So moving forward, we have access to tools, we have access to partners that will help us guide those investments, and we'll make investments in what moves the business.

And the other thing I would say, Alex, and I said this in the prepared remarks is we evaluated everything, we also evaluated all of our partnerships. And as I alluded to, one of our partnerships was the NFL, which we've been with since 2010, and we've had a tremendous success and it's been a great relationship with not only the league, but the fan base as well. And we've shown nice growth with that. But as we evaluate the future, it drove us to look at diversification of our marketing mix and the allocations of our spend. So accordingly, we mutually agreed to ending our official sponsorship with the NFL so that we can refocus those efforts and to focus on our 22 NFL teams that we are the official sponsor of, but also looking at other ways we can invest in the media broadcast, digital platform, social efforts and leveraging technology in a new way to really engage the fan base. So I guess, you look at the 2 new leaders that we brought on board, they control a lot of this investment with Brandon in the marketing side and Mike Nettles on the tech side. We've really got a lot of key learnings on how we can invest our dollars more appropriately. So we think the NFL for all the efforts and the partnership that we've had over the last 7 years, and we'll continue to be very prominent on NFL game days as we move forward to just be in a different way.

Our next question is from Peter Saleh from BTIG.

Steve, I think, I heard you mention everyday value and improving on the value perception, so we've heard more value commentary from you guys than we have in the past. Could you just give us kind of a frame of thought on how you're thinking about value going forward? I see that you're already on TV with a $5.99 price point, which is promoting quality first and then value second. So could you just give us a little sense on how deep the discounts will be there in the year, and if you will make that $5.99 price point more permanent menu item?

Sure, Peter, and thanks for the question. I mean -- and this alludes to my comments before around doing research and data, understanding consumer insights so that we'll make sure that we clearly understand the opportunity so that we apply the right solutions. And of those top 5 key areas that we want to focus on. Number two was value perception, and we recognize that we have some real opportunities on the consumer side. So I'm going to turn it over to Brandon because he's really been the one driving these efforts. So help understand kind of what the way that we're looking to this.

Yes, we think value, I wouldn't necessarily go straight to deep discounting. Really it's sort of equation right, it's what some things worth. So the work we've to do is create accessible value for the brand. There is a perception that we're overpriced. And because that perception exist, even the people who prefer our brand, our loyalists, use our competitors, when they -- when times are tight. So we need to fix that. So what we'll be doing in 2018 is providing that accessible value, so someone who prefers Papa John's that believes in our better positioning, our quality positioning, they use us every time they want a pizza.

I'll just to add, Peter. I might think the key thing that Brandon has been leading here is bringing on the right agency support. So we got a new creative agency with Laundry Service. They actually started effective January 1. Some of the work that you'll see from Landry service, the work you're seeing now is not Laundry Service work. It will be in the second quarter. So new creative campaign with some value focus, but also a lot of the efforts is going to be on the equity side so that we can work on this brand perception differentiation opportunity that we have in addition to focusing on the other channels. So we do have a new PR agency onboard, Olson Engage, and we feel like there's a real role that public relations can not only have on brand protection, but also driving brand relevance and making sure that we're communicating with the consumer in a more unique way as we move the Papa John's brand into the future.

Great. And then on the -- I think, you also mentioned menu extension. Could you give us a sense on where you are standing as in the test for some of these items? And when we should expect to see some of these items in the market?

Sure. Sure, I'll comment on a little bit. From a competitive standpoint, I wont go too much in detail, Peter, obviously on what we're testing specifically. But, again, this goes back to leveraging research and consumer insights and data to drive our decisions. As the operator, as I started 22 years ago in the operations side of the business, a predominant amount of my career has been in the 4 walls of the restaurant. I am always going to protect operations complexity and make sure that we add additional products. We're not negatively impacting ability to execute on our fundamentals. However, we've seen consumer feedback that shows that there is an opportunity and desire to and a need state to have more expansion and variety in our menu. So we are looking at several things, to add to the Papa John's menu and evaluating the current menu to make sure that we've got the appropriate mix on all the products that we have today. I think we've gotten some key learnings over -- we've added a number of product additions to the menu and the dessert lines and side additions and of course our biggest launch just over a year-ago with our pan pizza. Those products are performing well, but there is other opportunities and some of the testing is in place now and additional testing will progress throughout the year. But we will certainly let you guys know, if we see the findings and what we'll do in terms of permanent product launch.

Fair. And then just last question. Lance, could you just give us an idea of how much of plan to spend, I guess, or allocate for share repurchase this year in 2018? A lot of moving parts to the model and the leverage and presentation on the accounting side. And also, as the EPS increased $0.05 to $0.10 on share repurchases, is that just from shares you've already purchased? Or is that, including what you plan to purchase for the balance of the year?

I'll start with the second part first. So that includes what we plan to purchase through the balance of the year. And Peter, as we've committed, we are going to continue to repurchase shares under the $500 million additional authorization that we received in August of 2017. And at that time, we noted that we would be buying into 2019 so we work and get it all done at once. So you will continue to see us going ahead and executing on that program. You'll see us hit leverage at 3 to 3.5x. As Steve mentioned, we'll get to that by the end of the year. As far as the actual amount, we're not going to comment on the exact amount right now. But it's not going to be real dissimilar from what you saw this year.

Our next question is from Brett Levy from Deutsche Bank.

If you'd be willing to share a little bit more color on the competitive landscape, what you're seeing across some of the regions? And also, when you say year-to-date is depressed, can you give us a little bit more of a bracket around that? And then, specifically, on franchisee health, is there any thought of applying some of the recent taxes, not just helping out the -- not just investing in your labor in the stores, but also possibilities of things like royalty relief to try to help them as they need to reinvest in all of these initiatives you're talking about, including technology? And then I'll follow up.

Sure. Brett, it's Steve, I will jump in on that, one of the other guys might want to comment. So I'd say just the overall category in this terms of the environment and how competitive it is and overall spends have remained pretty consistent. I mean they're somewhat elevated, I'd say, across the category in the fourth quarter. In terms of price and promotion and aggressiveness of those, they've been relatively consistent. So that's been that way, as I look at it, for the last 7 or 8 years. And haven't seen any kind of really volatile shift in terms of the actions from a competitive set. Obviously, what we're most excited about is the evolution of how we're going to assess that ourselves and trying to work on this new equity work and the brand differentiation that will be putting in the world, working on our new value perception, the equation on how we'll communicate that accessible value to the consumer and a lot of investment. This will be the largest investment in the history of the company in technology this year. So Mike Nettles and his team is really working to differentiate on the consumer side, against the competitive set with the technology investments that we'll be making. On an economic side, I'd spoke to it before and to your question, what are we doing to support. So we have, for many years, leveraged incentives on our balance sheet to provide support to franchisees. We traditionally do that through some of our new store development incentives. But over the last several years, we've also done things to help franchisees, specifically in some of these pockets where there are challenges and opportunities with wage pressures, more specifically the West Coast and the Northeast. And the franchise support dollars that we've already accounted for this year are incorporated into our full year EPS guidance. And I'm sorry, Brett, did you have another part of that question that I've -- that is escaping?

Just if you could give a little bit more clarity on the time line of when we should start to see, not just the implementation of some of these initiatives, but really the follow-through? Obviously, marketing and menu have the easiest switches to turn back on. But a little bit more color, and then I'll get back into the queue.

Sure. And I thank you, Brett. So a lot of the initiatives started in the very latter part of 2017. But we've been speaking to the investment community about a number of these investments are tech-related. And some of the tech-related initiatives really won't start to take shape until the back half of 2018. The marketing initiatives and the efforts that we have there, start to get into the world in the second quarter, but of course, messaging takes some time to penetrate and get into the consumer world. So we really -- the way that we're looking at the 2018 business is that we won't really start to see a lot of positive outcome from the efforts in the investments until the latter part of the year. Some of that coming off a difficult fourth quarter, and as I alluded to on my prepared remarks, are experiencing the similar softness that we experienced the last couple of periods of 2017 into our first couple of periods of 2018 year. So we know it's going to take a little bit of time, but I'm very excited about the work. Because you got to make sure that you are leveraging the research and the data and appropriately applying this strategic initiatives that we have in place. So very confident, not only around the back half of 2018, but most confident and excited about 2019 and beyond because of the all the investments we put in place this year.

Our next question is from Will Slabaugh from Stephens Inc.

Congrats to Steve and Lance on the new positions. So first question, there've been a lot of changes at the company, obviously, in the past few months. So I just wanted to ask Steve, in particular, how you are thinking about the franchise mix versus where Papa John's has been in the past? Or are there any potential changes on the table? Or should we think about this as business as usual?

Yes. Thank you, Will, for the question. Thanks for the congrats. So this is somewhat consistent with what we've been talking about in the past and looking at this opportunistically. As I look at our corporate restaurant portfolio, they've been the primary driver of our revenue and our earnings growth over the last, frankly, 7 years. So very proud of that team, and we've a very strong leadership team that has executed upon that, but we have divested a market last, just over a year ago, and there's other markets that will continue to evaluate on the corporate side of the business. We don't have a refranchising strategy that is in motion, but obviously, you can look at the industry trends within QSR and see that asset-light and heavy franchises, something is working for some brands. We just want to make sure we're going to do what works best for Papa John's. And certainly going to continue to evaluate that as we always do on an annual basis.

Got it. And I want to pop on the store-based comment. I know you talked about closures earlier. I want to ask about remodels and how you view the current state of the store base domestically? Some of your peers have been a little bit more aggressive on remodels recently to try to get a better perception to help the carryout business. How do you view your base? And do you feel like there's a need for that in the Papa John's system?

It's a great question. So we completed a complete overhaul of our front lobby design and some of the interiors of the restaurant back in 2012 and '13 that was inclusive of a lot of restaurants so when I hadn't completed remodels at that time when we came out of a new design. So in 2018, we actually just checked off the RFP process of coming up with a new brand design for the Papa John's business. And this aligns with the work and efforts that we're doing to improve and enhance our overall brand perception. So I've been in much -- a lot of discussion with our franchise community around that effort in making certain that the new look and feel, the Papa John's brand aligns with what consumers see and what -- how we're going to differentiate the brand. So don't expect to see anything significant in 2018 in terms of that work or directly impacting any acceleration or remodels. But the way that we look at that right now is kind of 2019 plan to start rolling out the next version store, the future as we call it of look and feel. So 2019 and beyond, we'll be some cap investment on the corporate restaurant side in addition to the franchise side of the business to enhance that area.

Got it. And one last follow up, if I could, on the comment you made about more efficiencies at the unit level. Could you talk about what some of those opportunities might be? And I don't know it's too early to quantify what that might mean, but maybe more qualitatively, what that might mean to the P&L?

Sure. We're looking at a number of things. You can't look at our biggest cost, of course, our food and labor, and you can't look at those things in isolation. So a number of the efforts that we're looking at to drive some of those efficiencies is leveraging some of the data and the technology and Brandon will be doing that. But I'm going to turn it over to Mike because this is an area where a lot of the technology investment isn't just for consumer, a lot of this investment in technology is meant for the store side. So Mike, won't you talk a little bit about what some are the things we're doing to improve unit economics.

Sure, Steve, and hi, Will. It's Mike Nettles. So within our plans for this particular year, we have a number of initiatives that many of which are actually underway as I speak, and we'll be field trialing these and testing and likely picking the 2, 3 or 4 that literally show the highest promise for candidates for full rollout to the system. But most of those areas, as Steve just said, are focused really on two different things; one really making sure that the quality of the product that goes out the door matches the Papa John's message, matches the desire of the consumer, but also making sure that it matches the nature of what really it means to work inside of a store, and that's a lot of high transaction activity, giving them right feedback, helping them make the pizza properly, making training a much less onerous task, to help us kind of deal with the fact that it's kind of difficult to work inside of a store today, which should really help to drive down some of the churn we've got on turnover and make it a more attractive proposition. The other side of the equation is really leveraging some technology to kind of give some extra eyes into the store to help guide a general manager's day-to-day operations. So giving them access to data in real-time and letting them kind of get a heads-up display as opposed to more of a traditional report-based mechanism. I think finally, though, some of it's really going to be taking some of the same digital technology that we've enabled for consumers that just makes it easy to interact with the brand and really try to rescan most of the things inside of the store to work the same way, making sure that the managers have all of this information at their disposal, but also giving them that feedback loop from the guest, which is so critical to how they manage a store today that help them feel more connected to what it is that they're doing and really try to make sure that they don't have as much remaking it. Certainly, there is going to be focus around the labor side of the equation, making sure that their sales forecast is accurate and the labor forecast matches up against that. But really try to automate more of those tasks as opposed to requiring the general manager to keep track of everything from required break periods to exactly who has a call off and how they're going to be able to handle, they've to try to fill that particular role accordingly. So it's a wide variety of tools designed to really improve the life of the people inside of the store and frankly, make it easier to operate at Papa John's.

Thank you, Mike, and a lot of tech work obviously happening there. Mike is leading that and doing great work. In addition to the work in technology, our Chief Ingredient Officer, Sean Muldoon, is also leading the efforts because Sean oversees not only our research and development efforts and our quality assurance efforts, he also leads our supply chain. So we're working on, as I was alluding to in the prepared remarks, finding opportunities to take costs out of model without compromising the quality of our food. And Sean has a number of initiatives in motion. With our strong basis supply partners to take some cost out of the model, and we fully anticipate that will help some of the food line, while Mike is working on some of the technology things that can drive some operational effectiveness. The last thing, I would highlight for you is that it is this important to us because I know as a franchisee myself, have some restaurants that your business is only as strong as you getting economics. So we have posted a job for a Vice President of Unit Economics that will someone that is solely focused on this task of restaurant-level unit economics and waking up every morning to push that effort working cross-functionally with the folks on the supply chain side, the finance side, the tech side of the operations and marketing. So we're really excited about the efforts on number four a Unit Economics and all the work we have in motion to really improve the overall Papa John's business model.

Our next question is from Chris O'Cull from Stifel.

This is actually Jon Conley on for Chris. I just had a quick question on the international front. It looks like you added about 190 restaurants to the pipeline outside of the ones that are already announced in France, Poland, Bahamas and Kyrgyzstan. What were some of the other stores that were added to the pipeline? And where do you see the biggest opportunity internationally?

Sure, John. That's a great question. And really excited about our international business and the development team is just on a tremendous job out scouting new market opportunities, but also working with some of our largest franchisees. And really the driver of the expansion in the pipeline is our franchisee in Russia. Chris Wynne, who is all of our restaurants in Moscow and the expansion into St. Petersburg, but he has also expanded into some additional markets throughout Eastern Europe. And there are several other markets that we continue to target with our partnership that we have with our franchisee there. So I am very excited about Europe, I'm also excited about the future potential in Asia. We've had our years of struggles in Asia, more specifically, in China. But we really have had a nice track record of multiple quarters in a row of very solid sales growth, partnering with some aggregators and seeing a very positive response to that. Our primary franchisee in China that owns all of our restaurants in Shanghai and South China has had nice success. And we're very near the final stages of a divestiture of our Beijing business and hope to complete that before the end of the second quarter.

Great. And then just shifting gears a lift to bit. I was wondering if you'd give anymore clarity on the changes in revenue recognition. Will you guys be restating any of 2017 or specific guidance for 2018 outside of the EPS guidance?

No. This is Lance. No, we won't be restating anything from '17. You'll actually see there'll be a like a cumulative FX adjustment that will go through retained earnings. So you'll just start seeing the numbers come through clean in 2018. And really the nature of the change is taking franchise agreements that used to be the revenue from what used to be recognized up front, now we have to amortize those over the life of the franchise agreement. That is the bulk of what we're going to see as to why that EPS is kind of take a little bit of a hit. Really the big items for us so restaurant sales, royalties, commissary sales, all of these things, none of those things are impacted by rev rec. The only other thing I would tell you is, it is going to cause us to have gross up some items. They used to be netted, as an example, how we handle our U.K. marketing fund, so while this is still having a bottom line P&L impact, this is going to shift numbers around a little bit and impact margins a little bit. So you will see, for an example, G&A is going to look a little bit higher, up actually over 50 basis points just due to this rev rec change.

Our next question is from Greg Badishakanian from Citi.

This is actually Fred Wightman on for Greg. If we look at the $0.30 to $0.40 headwind from operations that you've highlighted for '18, how much of that technology and marketing investment that you called out would you quantify is nonrecurring?

Sure, Fred, it's about half of it.

Okay, great. And you mentioned...

Let me jump in just for a second, I'm sorry. So most of it is going to be recurring because it's going to be in the form of people and cloud-based arrangements that we're bringing on onboard. So actually, we expect most of it to be recurring. What Steve was referring to actually about half of that, about half the spend or half the reason for the operating income change is coming from tech spend. I'm sorry, Steve.

Okay. I understood so that $0.30 to $0.40 is a good route number to use, right?

Do me a favor, if I want to repeat that one more time.

It's -- I guess just restating what you said that these are not onetime issues. We should be using that even that half it's really -- it's tech spend this is on a run rate basis, it's not going to be falling off in '19.

That is correct. On the technology piece that is, will not be falling off in '19. You will see us make continued investments there. And a lot of that will be going through the P&L. Now as we actually pointed out on the last call as well, the remainder of the difference, and I'll let Steve jump back in here. It's more related to some of the other improvements and things that we're trying to do to fixing that economics at the stores, but until we get sales back on the right track, you are going to see a little more margin pressure.

Yes, Fred, I mean, I think the key thing is the obvious of, we're going to get sales moving back in the right direction. As I alluded to, we expect those to start moving them in the right direction in the back half of the year, and is this model, as I've seen for all these years, when sales are driving up, obviously, the rest of the things on the operating margin side will improve along with it. So all of our plans indicate that we'll start to see that improvement and that's built into our EPS guidance. But we do fully expect we'll start to see some improvement in the back half.

Great. And I think you guys also mentioned some value perception issues in the U.K. market as well. Do any commonalities or differences that really stick out versus what you're seeing there versus some of the stuff that you mentioned from a value perception perspective in the U.S.?

This is Brandon. Obviously, we're a smaller brand in the U.K. than we're in the U.S. So there is still opportunities in just awareness and growing in the U.K., but I would tell you a lot research we're doing in the U.S., we're finding is applicable to the U.K., which is going to create some efficiencies there. So short story is, there still is perception in some markets like the U.S., and we're starting to see in the U.K. they are too expensive. And we know we can deal with that through some consistent value offerings.

At this time, I am showing no further questions. I would like to turn the call back over to Steve Ritchie, President and CEO, for closing remarks.

Well, thank you, GG, and thank you, everybody, for joining today. And I just want to say, once again, appreciate your continued support, and I am more excited than I've ever been about the future of the Papa John's brand. A lot of confidence in our capabilities and even more confidence in the leadership that I -- surrounded around me to be able to execute upon these long-term strategies. So thank you, once again, and we'll talk on May 8.

Ladies and gentleman, thank you for your participation in today's conference. This concludes the program, you may now disconnect.