Papa John's International, Inc. (PZZA) Q4 2011 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Papa John's fourth quarter 2011 conference call and webcast. [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 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 our 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 comparing purposes. We are in a $0.65 per share and 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 year-over-year basis. Our unit openings momentum remained 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 effective royalty rate was fairly consistent between the current and prior years due to incentives earned by our franchises 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 $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 of 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 repurchase authorization as of February 14. Our free cash flow and 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 and $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 which includes a 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 I would like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John?

Hey thanks, Lance and good morning to 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 am going 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 phase of what continues to be a challenging competitive and cost environment. Let me first comment on our very solid sales performance. Our North America operators posted a $1.7% positive comp sales during the quarter and 3.4% positive for full year 2011. As I've have 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 of the quarter, I would note this makes our 8th consecutive year for positive or even North America comp sales. Our international operators also posted a very solid 5.2% positive comp sales both during the quarter and 5.1% for the full year of 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 a 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 Graham and the entire development team on this outstanding performance. Today we're 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 5 or 6 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 ahead as it has for the last 27 years and we believe this commitment to quality continues to resonate with the consumer i.e. that's why we are 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 for our pizza while others in the category continue to emphasize discounting and low price. As I said on many occasions quality always paid in the long run and is gratifying that our consumers even in this tough environment recognize that better ingredients, better pizza does make a best 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. Finally, I will come back to international with a very solid progress we are making. In addition to lending earning solid confidence 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. We managed to be the better ingredients, better pizza in growing the Papa John’s way. And with that I’ll turn it over to Lance for questions.

Hey Chuck, I think we’re ready for questions.

[Operator Instructions] And our first question comes from Peter Saleh of Telsey Advisory Group.

I just wanted to ask domestic comps have kind of we’ve had some peaks and some troughs throughout 2011. I just wondered if you would talk a little bit about some of the drivers? .We had a really good first quarter, a really great third quarter and then now second and fourth quarters a little bit lower. Just how should we thinking about the comps and some of the drivers behind those in 2012?

Peter, I’ll comment from low high level and then I will let Tony, and see if he can jump in at a more precise level. We don’t like to run the business in any kind of sporadic way. The beautiful thing about this business is this opportunity, I mean everything makes sense and so while it is very complex, its quite manifold, things do make in competition for one and other for commodity will go this way, its kind of always hanging together. Our competitors are so big and they spend so much money that from time-to-time they do things that makes the category a little bit, not as easy to be as consistent as we like. The bad news is when they go out and they spend $40 million on a $9 or $10 pizza, we feel that. The good news is that the next year we get to go over, these numbers on our comps. So some of sporadic things you’ve seen is not anything we are doing because we like continuity. It is just the kind of competitive nature of the beast. Paul 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 I think he also mentioned that we are able to get a premium and this is a extremely competitive value oriented environment and every quarter certainly got its own unique challenges but we have been staying consistent on all our overall game plan for the year and feel really good about that. Andrew, you want to comment.

Yes. Peter, I will go ahead and add, just to the way the quarter is kind of set up this year, 1 and 3 tended to be quarters that had easier rollovers than 2 and 4. But the other thing I would remind you that we talked about in last quarterly call is that in Q3 we had 2 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.

And this Tony. Last thing I would add would be another thing, I think we focus on within our strategy is momentum and to Andrew’s point, you got some quarters that are going to be a little bit more challenging, other quarters not as much so and where John said earlier about our approach of willing to have a smooth approach for the long-term. That’s 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’s really says a lot for our brand quality position.

Well just sticking with the advertising for second, if you have the ability in 2012 to, may be 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 and just in general, we have a little bit money to spend to be able to go drive more brand awareness and visibility and stay on top with consumers with our great quality message.

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

Well, I will comment real quick, Tony, and then maybe you and Tom Sterrett can jump in, but when this team got back in the business about 14 months ago, we didn’t like what we saw internationally and I didn’t can tell you, how as a founder, how proud I am of the job we’ve done on our international front with Lance and Cynthia [ph].Our branding aspect is another pillar that Andrew and Tim Scott [ph] have just -- now we have continuity throughout the world and product, Sean Muldoon and his team. And the pizza tastes the same in Chile as it does in China as it does in the U.K. So, we made tremendous progress not only in profitability but just on the fundamentals, on the scaffolding and framework that makes our brand great. And it’s exciting. Finally, as a Founder, seeing some light at the end of the tunnel, internationally, which I think peaked 3 years ago.

And this is Tony and to your point, so glad we picked up a little bit of steam this year, maybe at the end of the year, going in into 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 from the long-term but I think going in 2012, things look solid and Tom do 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 a world class customer experience and we have headwinds and challenges in different parts of the world but UK market continues to grow both in 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 in all of Europe.

And this Andrew, I want to add other thing what is great about the Papa John’s brand is that it travels so well. I mean the quality messages is easiest thing for us to be able to tell our founder differentiation resonates with consumers around the world. So the Papa John’s way is alive we feel very good about the brand in perspective.

Our next question comes from Christopher O'Cull with SunTrust Bank

My first question is just on the sales and promotional environment. Andrew given some more difficult comparison of the first quarter and just how the promotional environment is seen more aggressive. Is it fair to assume growing comps during the first quarter is going to be a challenge?

Chris, we're are not going to comment obviously on the first quarter we will 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 and we will speak more about that as we get into our first quarter results.

That is fair enough. Lance would you talk a little bit about the earnings per share since the changes in comp domestic comp? Help us understand from a modeling stand point.

From a modeling standpoint as you look at a percent of comp I am going to give you kind of a range here, because I don't want to get real specific. But as you look at our percent comp from a North American standpoint, we tend to look in the neighborhood of 2 pennies to 3 pennies. So a good comp helps us, a bad comp works a little bit, but there is some sensitivity, but there is plenty of other pieces of the business as well that the comp really done an impact and particularly with international they’re kind of up a little bit as well. We've got a lot of things that mitigate it at this point.

This is John and to comment on kind of the big picture thing, I think as 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 these tough times with Papa John’s. We think this is the place to be. Furthermore, we are not making more money because we want to back our franchisees. We are making more money because of scale. We are growing our business. I think that's a 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. And the third thing to note is, if Street does get a little nervous with the comps at negative 1, a negative 2, and they get excited if comps are positive 2, positive 3, you've got an annuity on your franchise royalty stream. That's going to be, you pick the number $85 million or $86 million it is what it is; our corporate restaurants, they are going to make between $26 million and $30 million. The food service is going to make its 3%. So in a lot of ways it’s a real safe business, even though that sometimes the stock price is a little bit erratic and sporadic, because people get a little bit nervous on a negative comp. I would also point out that we've been flat or positive for a year, so we take positive comps very seriously to the point where we work on it every single day, but it’s not like it ran a negative 1 the earnings stream will go back as much.

As a follow-up in terms of just longer term view on the brand, maybe talk a little bit John about the franchisees health and did they make more money in 2011 than they made in 2010?

The franchisees that they are doing things the Papa John’s way, this is systemic throughout every franchise group that we’re involved with. My wife has a store, she had her second best year ever; Colonel's Limited, the stores, in DC the 50 stores they had the second best year; we have our second best year; Tim O'Hern and his team had a second best year; Wade Oney down in Florida had a 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 am 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 in some of the successful operators. We are 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?

Sure, 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 I mean we’ve used some incentives strategically and deliberately for that very reason focusing again on long-term health not just immediate relief or something but on health. So we’ve been, we actually in January and February many of the senior team when out we’ve done, we’re doing this 2 times, at least 2 times a year, visiting around 13 cities and meeting with all of our domestic franchisees and certainly sharing our plans that John was referencing and also hearing from them; its real important 2 way communication. We are helping bridge our national marketing strategy all the way down to the local level and hearing directly from single store operators, may be multi-unit operators and what’s going on in their specific region. So that has been really I think helpful process to go through here and we have done this now, I think 3 times in the past 18 months and we are going to continue to do that. So stay in touch with our franchisees and hearing from them on what’s going on is equally as important of the information we know, we do have on a 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 one for us.

Just one follow-up, what would franchisee, what would the franchisee stay as the #1 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. I mean, we know we’ve got the quality brand and as I have said we were 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 and certainly commodity cost have been high and so we’ve been working with them. Steve, do you want to comment on it?

Yes, just add to 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 is playing such a big part in our overall cost structure, but back to John and Tony’s previous comments on, really us using a very comprehensive approach, focused just really, 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 go out and leveraging the quality of our brand and driving top line sales.

This is John again, the beautiful thing about this model and this brand and our company is it's very pragmatic. I mean if you wake up everyday and you do what you are told to do, 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 1 more thing Chris to that very point John just made, Andrew and I actually just came from around a world trip as well. So this same, exact conversation we are having applies internationally as well as domestically. The competitive environment is just as tough around the world and seeing our results in international and that’s certainly a result of our Tom Sterrett and the restaurant operations team, 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.

Our next question comes from Mark Smith with Feltl & Company.

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

Here is what I can say and the tax rate is a pretty difficult one to predict for everybody, but it’s always going to vary, because there are specific issues that get settled out, 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 that, I would probably add, probably go with the range and I’ll probably add 2 or 3 points to what you’ve seen over the last couple of years as a range and I know that probably it isn’t quite as specific as you would like but that’s about what we want 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 did in two ways, first just kind of any financial impact that you can talk about? And then second, just curious on any change in online order that you have seen over the last few months and if you expect to get any bump from Super Bowl promotion on people to went out to website and signed up and may be receive 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 quarter on the call, but I’ll turn it over to Andrew to talk about promotion.

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 helped 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. And then just in general, fantastic brand visibility and awareness that does nothing but help our great quality store and our great branding with both new and existing consumers. So 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 may be the delta on 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 are willing to go for right now.

Our next question comes from Brad Ludington with KeyBanc Capital Markets.

I want to start out just looking at the pricing environment like you talked about, has it got more aggressive or competitive that you see has come down in recent months or is it similar to what you saw throughout the year.

Brad, this s Andrew. Hope you are doing well. I would say it’s fairly much a part of the course, I mean 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.

And last on the marketing contribution in the first quarter that's coming, the onetime contribution, since that's so extraordinary. Is that going to be something that's culled out or pro forma out on your release or is that just going to be included in the numbers you report, how is that going to be handled.

Brad what we will do, we've got to work through with others and whether or not whether it’s an actual pro forma but a minimum we will cull it out and discuss it, so that you can understand the impact but we will have to see whether it’s a formal pro forma situation or not, we are still working through that. You will get enough information to understand what happens.

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 be that start to move backup 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 little bit if they do some things that we’re asking them to do.

Okay. And then on the international profitability it’s great to see the improvement may with that is when you look at 2012, I know its profitable for the full year but is there anything as a specific quarters that we should be profit each quarter or is there something that might take it back down under in one of those quarters?

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

I don’t have anything really to add to that, I was going to say, don’t tremendous amount of volatility but again I think our consistent approach is been not folks on any one quarter but looking at the path or the time of the year.

And again this is John we are now seen wide at the end of the tunnel with regards international. We do think our future national price we think it could be fantastic opportunities for profitability growth but looking at the past we’re have undue advantage in the US especially when it comes to market there and the goose that lays the golden eggs is the United States and so I want to make but we don’t get too far off that the America is having great momentum and success story right now.

Brad, this is Tony. I am just going to add one more comment and say, as we progress through 2012, if we see anything that it’s going to significantly change, we would certainly talk about that on our future call, okay.

Our next question comes from Michael Halen with Sidoti.

My first question is about the North American franchise openings and I'd just like to know who is 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 are incentives out there for them to open stores and we had nice growth with them last year and we’ve had good year with the number of new franchisees coming into the system and 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 a kind of just a real potpourri if you will of existing new and non-traditional venues.

And 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 -- hand out to Tim if he has anything to add. But 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 the folks that -- franchisee kind of level of business. So 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 in, meet with us, talk about our business and see if they can do business with us and our franchisees.

And I have some questions about international. Can you guys expand 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 we, is our probably #1 priority and that’s quality and service and operations. And 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, the #2 pizza brand in China and we really feel like we’re well positioned for a long-term growth, both in our, with our franchisee and corporate markets in China.

And I guess, my last question is on 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 and 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 would like to turn the call back over to Mr. Tucker for any closing remarks.

Thank you, Chuck. Thanks everybody for taking the time and being on the call and 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.