Papa John's International, Inc. (PZZA) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Papa John’s Fourth Quarter and Full Year 2012 Conference Call and Webcast. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Lance Tucker, SVP, CFO, and Treasurer.

Thank you, Bethany. 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; Chief Marketing Officer, Andrew Varga, and other members of our management team. After a brief financial update, John will have comments about our business as well Tony, 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. All 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. All statements made on this call are as of today, and we undertake no obligation to update the information on the call in the event facts or circumstances subsequently change. In addition, certain financial measures we use on this call 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. 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 that any media be in a listen-only mode since this is primarily an investor call. As discussed more fully in the Form 8-K filed yesterday, the company is restating its 2009, 2010, and 2011 financial statements to correct the valuation of the redeemable non-controlling interest related to certain of our joint venture arrangements. This is a non-cash charge that had no impact on revenues, operating income, cash flows, or compliance with the company’s debt covenants.…

Hey, thanks Lance and good morning. We appreciate each of you taking the time to be with us today on the call to discuss our fourth quarter and full year 2012 results. As always, I’d like to start out by congratulating our franchisees and our operators throughout the world for a very good fourth quarter and an outstanding full year 2012. I know I have sounded like a broken record the last two or three years, but our business is extremely solid on just about every single front. And our global system has excelled in delivering on our better ingredients, better pizza promise throughout the world. And our fourth quarter and full year results certain bear that out. Now, Lance covered a lot of ground in his opening remarks, but what is really all boils down to is it this management team has achieved compounded annual growth and EPS of 19% over the past two years with two-year North America comp sales of 7% in 517 net global restaurant openings over the same two-year timeframe. In short, we built a lot of momentum over the past few years and that has positioned Papa John’s for a very bright future. Specifically, in 2012, as Lance noted, our North America operators posted a 5.2% positive comp sales during the quarter and 3.6% positive comps full year of 2012 marking the 9th consecutive year of positive or flat North America comp sales growth. Our international operators also posted a very robust 7% positive comp sales growth during the quarter and 7.1% positive comps for all of 2012. Given the global climate, we are operating in during the quarter and the year, I am obviously very impressed with these results. I was also very pleased with our restaurant growth numbers during the quarter and…

Thanks John. I would like to echo John’s comments and congratulate our system on a very solid quarter and year. By investing in our franchisees and operations, we were able to capture market share in 2012, while growing our global footprint and celebrating several milestone openings during the quarter and year including the opening of our 4,000th restaurant in our global system, the 200th restaurant in the United Kingdom and the first Papa John’s restaurants Azerbaijan, Lebanon and Guam. With 2013 worldwide net restaurant growth expected to be in the 230 to 260 range. I am really excited about long-term global prospects of the Papa John’s brand. We also continued to make significant investments in the technology and infrastructure of our system, designed to help our restaurants operate at peak performance and support the tremendous growth opportunity in front of us. We are making a major investment in a significantly updated POS system that when fully deployed will support continued store level productivity and profitability. We are also are investing in a state-of-the-art dough production facility that will open mid-year at our current distribution location in New Jersey. Once operational, this quality control center will supply our fresh dough and other high quality ingredients for our restaurants in the Northeast, while positioning the brand to support our continued growth in that region of the U.S. Finally, I would like to comment briefly on our franchise relations, which are healthier today than at anytime since I had been with the company over the past six years. The spirit of team work and collaboration with our franchise advisory council has served to help move the system forward and has highlighted the collective commitment to the Papa John’s brand that we all share. That commitment has resulted in a win, win, win proposition. Most importantly, our customers went with the better quality pizza. And we along with our franchisees win by being profitable. In 2012, our brand also won by earning two prestigious industry awards. Papa John’s won brand of the year honors in the pizza category of the 2012 Harris Poll EquiTrend study. And for the 11th time in 13 years, Papa John’s was rated tops in customer satisfaction among limited service restaurants in the 2012 American Customer Satisfaction Index. This validation of our continued focus on quality and the customer is both humbling and motivating and we will continue to strive to perform even better in 2013. With that, I want to turn it back over to Lance for questions.

Definitely I believe we are ready for questions please.

(Operator Instructions) Our first question comes from the line of Michael Halen with Sidoti & Company. Your line is open. Michael Halen - Sidoti & Company: Thank you. Good morning.

Hi, Mike. Michael Halen - Sidoti & Company: My questions I guess let’s start with the guidance for a flat pre-tax margins next year. Can you just talk about I was a little bit surprising in light of the 20% decline in cheese costs since October. So, can you talk a little bit about what’s going on there and what impact maybe discounting or hedges are going to have on that margin?

Mike I will talk in general terms about the guidance on the margin. First of all as to address your question related to the commodity prices, we do expect commodity prices to be up a little bit in 2013 over what we’ve seen in 2012. I will let Andrew and or Tony or Steve talk to the competitive environment. But it is competitive environment. There is going to be some gives and some takes relative to the margins both on the cost on the revenue side I expect and so we decided, we think we are going to look pretty consistent with what we have seen this year.

Yeah, I go ahead and tackle the pricing side. We as you know in past calls have talked to you all about the fact that we really believe we can maintain a premium against the competitive set and we see that continuing in 2013. The key piece of that is what exactly is that price point where the premium is going to reside? And so, we are watching that closely. We continue to price our products above our key competitors and we’ll continue to move in that activity. But so far, we are just really taking a look at where our pricing is and obviously it all comes down to what the consumers willing to pay and we tend to believe we’ve done a very good job of making sure then we’re extracting full value from the consumer regardless of the economic or category environment.

This is Tony. And although cheese prices are currently little bit lower than what we’ve seen, they are expected to increase, futures are by the end of the year. So, I want to definitely factor that in. And the other thing is we are seeing a cautious consumer right now from the beginning of the year the tax holiday expiration, fuel prices, the delay in income tax returns, all those factors are certainly playing into consumer confidence along with what Andrew talked about within the pricing environment value and choice are going to be a – its going to remain for sometime. But the pizza category not only is resilient, it is certainly a great value in an environment like this. And we believe from a quality position that is going to continue to serve us well in this pricing category where people are going to choose. They are going to make the choice for something its better. So,, we are feeling really good about that.

Michael, this is John Schnatter to add little bit more depth on the cheese question. We do hedge cheese corporately, but we don’t with our franchisees. Corporate’s mindset is a little bit more let’s cover the downside just in case cheese does go way up. And we feel like the upside will take care of itself. Our franchisees have more of a tendency to want to roll the dice and just hope price goes down. And there was a period earlier in 2012 where we actually paid a little more for cheese than our franchisees and frankly that didn’t bother us. We found that if we get off the first part of the year off to a good start which we had this year. And we’ve got our cheese hedged and fuel doesn’t do anything crazy, then we can have a pretty solid year. Michael Halen - Sidoti & Company: Thank you very much gentlemen.

(Operator Instructions) Our next question comes from the line of Mark Smith with Feltl and Company. Your line is open.

Hi guys this is Shawn Bitzan sitting in for Mark Smith. Has the mix of online sales changed at all?

I’ll go ahead and take that obviously we continued to improve our online sales mix. I think we’ve talked to you all in the past that we have been north of 40%. And we continue to believe that online is just critical, not only for the customer experience, but just in general for being able to drive more top line sales. So, we love the progress we are making there.

Any global markets that are significantly under or over performing that we should be keeping an eye on?

Shawn this is Lance. I’m going to start with that and we really don’t speak much specifically to our international markets on a country-by-country basis. We do occasionally give a little bit of information about the UK, but that’s the only one, so for now we’re going to let Tony jump in on that as well.

And the only thing I would add is as our guidance implies for 2013 I think you see that we’re continuing to be confident in our business model I mean in international. So, we’re going to continue to see strong ramp up in both sales and profitability.

And last one your net unit gross guidance is below what you just drew in 2012, is that just being conservative or is the unit growth actually slowing. And how do you feel about your pipeline?

I’ll start with that. We feel very strong about our pipeline, we still have 1400 units give or take over the next six years in our pipeline. So, there is no slowing as Tony referenced earlier. However, you do see some things going on in the economy at large not only here in the U.S. but internationally. We’re just taking a little bit of cautious view for now to make sure that we put guidance out there that is realistic and we will address that as we go throughout the year.

This is Tony, we do feel that our projections and our guidance is A, it’s consistent and it’s certainly a strong growth for us in 2013. And we have got the utmost confidence in all of our markets as a matter of fact this afternoon our – many of our senior team are going on an international trip to our key markets overseas. And we do that usually twice a year where we go out and meet with the franchisees, listen to them and engage in those markets. So, I’ll turn it over to John?

Shawn, this is John Schnatter. The – I can tell you the business and the company as a whole is in more of proactive position than anytime I can remember and that also applies to development. As far as our earnings remember 2012 our original earnings guidance was $2.33 to $2.43 and then May 8, we upped that $2.40 to $2.50 EPS and then August 1st we upped that again to $2.45 to $2.55 and then October 31st we upped it again to $2.53 to $2.63. And we came in at $2.58 and that was with a lot of non-recurring items. So, hopefully in 2013, we can repeat that track record.

Thanks guys. That’s all I have.

(Operator Instructions) We have a question from the line of Bruce Keller with (indiscernible). Your line is open.

Hi, good morning. Its (indiscernible) is the firm. Can you please quantify what the legal settlement cost you in the quarter?

Because this is still a tentative settlement that has not yet been approved by the court, we cannot quantify at this time. Once everything has been approved and we only expect that we’ll be able to talk more openly about those amounts.

Okay. And does your earnings guidance include anything for share repurchases or would that be considered incremental as you purchase shares throughout the year?

We do anticipate similar numbers to what we’ve seen in 2013 and 2012 that’s our current expectation. I would also reiterate back on the settlement question, we do believe that we have a very reasonable estimate on our current financials in 2012 for that. So, I wouldn’t expect any more material impact from that legal settlement.

And Bruce, this is John Schnatter. One thing I want to note is we do – we jut stepped up our authorization to $115 million. So, when the stock does extremely well that’s good for everybody and if it does have a buying opportunity, then we have that’s where we have such a healthy balance sheet as we have the flexibility to take full advantage if the stock goes down and as you know about we bought $42 million last quarter, so we believe in what we’re doing here.

Sure, no that’s great. I appreciate that. And my last question you mentioned that you extended your partnership with the NFL. Can you give a little bit more color on that for how long and I don’t know if you have ever disclosed how much that costs you on in annual basis, but I’ll just would be curious if you get a little bit more color on the extension of that partnership which seems to have worked out very well for you.

Hi, Bruce, this is Andrew. I will go ahead and take that. All I can tell you on the extension is that it is long-term extension we don’t give out the length of that extension. But suffice to say John hit on his comments, we have just been thrilled with the first three years of our partnership with the NFL, it gives us such a fantastic brand building platform with some of the most intense pizza consumers in the United States and in some cases around the world. Adding Peyton Manning into the mix with our founder just provides, just enormous authenticity for the brand as we go to communicate the brand using this platform. And we are just excited and delighted that we’re going to able to continue that for years to come. So, I appreciate the question and hope that’s helpful.

Great. Thanks and congratulations on a terrific year.

Thank you.

At this time, I’m showing no other questions. I would like to turn it back to management for any closing remarks.

Thank you, Bethany and thank you to everybody for being on call. Have a good day.

Thank you.

Ladies and gentlemen, this does conclude your conference. You all may disconnect and have a good day.