Papa John's International, Inc. (PZZA) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Papa John's First Quarter 2016 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to Lance Tucker, Chief Financial Officer. Sir, you may begin. Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Thank you, Shannon. Good morning. Joining me on the call today are our Founder, Chairman and CEO, John Schnatter; and our President and COO, Steve Ritchie; as well as other members of our senior management team. After the financial update, John and Steve 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 related to future events. Actual events may differ materially from the projections discussed today. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings press release and the risk factors included in our SEC filings. And all statements made on this call are as of today. Please refer to our earnings press release in the Investor Relations section of our website for a reconciliation and other disclosures related to our discussion of non-GAAP financial measures on this call. Unless otherwise noted, all comparisons are versus the comparable periods from a year ago. This call is being taped, and a replay will be available for a limited time on our website and in downloadable podcast format. Now, onto a discussion of our first quarter operating results. EPS in the first quarter was $0.69, up 25% over 2015. These results were driven primarily by global comp sales and unit growth, favorable commodity trends and the impact of share repurchases. As expected, first quarter revenues were down slightly versus the prior year, as higher revenues from restaurant sales increases and unit openings were offset by lower FOCUS equipment sales and lower commodity prices, which reduced PJ Food Service revenues. As a reminder, neither of these items significantly impact profitability. We opened 10 net global units in the first quarter, eight on the international side and two in North America. As is typically the case, most of our net unit openings will occur in the back half of the year. On a business segment basis, operating income for domestic company-owned restaurants increased $1.7 million, due mainly to 1% comparable sales increases and lower commodity costs. Operating income for the North America franchising segment was up $1.3 million, due primarily to increased units and lower royalty incentives. Operating income for our domestic commissary segment decreased by approximately $250,000 due to lower margins. We expect full year margins to be in line with the prior year. First quarter operating results for our international segment increased approximately $1.7 million, due primarily to 5.7% comps and increased units. Foreign currency exchange rates negatively impacted operating results by approximately $700,000. Our unallocated corporate expenses decreased $900,000, due primarily to lower legal costs and lower expenses for our annual operators conference, which was held in the second quarter of this year. The shift in conference timing will impact the second quarter by around $0.01 to $0.015. Our effective tax rate was 32.3%, down 1.2% from the first quarter of 2015. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the timing of deductions and credits. We repurchased $66 million of stock during the quarter and currently have over $125 million of remaining share repurchase authorization. Our free cash flow, a non-GAAP measure we define as cash flow from operations less capital expenditures, was approximately $20 million, down versus 2015 due to unfavorable working capital changes, most notably the payment of our previously disclosed legal settlement of $12 million. Our net debt position, defined as total debt less cash and cash equivalents, was approximately $300 million at the end of the first quarter. Moving onto the remainder of 2016, as noted in our press release, we are reaffirming all previously issued 2016 guidance. And now, I'd like to turn the call over to our Founder, Chairman and CEO, John Schnatter. John? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Hey. Thanks, Lance, and good morning, everyone. Thanks for joining us on the call today as we discuss our first quarter 2016 results. Overall, I'm pleased with our Q1 results, especially our strong EPS growth and continued progress in the international business. However, as expected, our domestic comp sales were a little lighter than usual. As you can infer given our reaffirmed guidance of 2% to 4% annual comp sales, we expect the rest of 2016 to be stronger as we continue to drive sales via our quality message, technology platforms and sports partnerships. A few highlights from the quarter include the following. EPS in the first quarter was $0.69, up 25% over 2015. These results were driven primarily by domestic and international comp sales and unit growth, and favorable commodity trends. As Einstein said, compound interest is the eighth wonder of the world. Over the past five years, Papa John's has grown EPS nearly 20% per year. In terms of the international growth, in the first quarter we announced the signing of a restaurant development agreement in Spain and The Netherlands. Growing in Western Europe is a big part of our expansion strategy and we are very excited to add these two new countries to our current base of over 4,900 restaurants in 40 countries and territories. With regard to sports partnerships, we continue to up our game amongst sports fans. Just prior to opening day, we announced a partnership with Major League Baseball. This partnership combines two of the nation's favorite pastimes: eating Papa John's pizza and watching professional baseball. As the official pizza of Major League Baseball, we're delivering a better pizza to baseball fans and making grand slams even more exciting with the Papa Slam. We've already have 21 club sponsorships, so this national deal will enable us to reach new audiences through MLB digital and social channels as well as signature events and our own share of stomach with baseball fans. Now, on our last earnings call, I mentioned the importance of our Clean Label Initiative and our commitment to better ingredients. We continue to deliver on our promises and announced last Thursday that we've removed high fructose corn syrup from our entire food menu, the first national pizza chain to do so. This chain has been fully implemented and includes all pizza ingredients, pizza toppings, dessert items and sauce selections. We've always strived for high-quality ingredients in our pizzas and continue our aggressive push for cleaner ingredients and new menu offerings. We work tirelessly to set the industry's gold standard for pizza ingredient quality, and this is the next step in fulfilling our promise to deliver on better ingredients, but we won't stop there. By the summer of 2016, our grilled chicken pizza toppings and chicken poppers will consist of poultry that is raised without human and animal antibiotics and is fed a 100% vegetarian diet. With regard to technology, we are always striving to provide and improve the digital customer experience and create utility to make the ordering experience simpler. We're pleased to announce that about 55% of our total sales now come through digital channels. Further, we continue to grow quickly in the mobile channel with over 60% or so of these digital transactions coming via mobile devices. To wrap up, I'm excited to kick off the year strong and carry that momentum into Q2. With that, I'll turn it over to Steve Ritchie. Steve? Steve M. Ritchie - President & Chief Operating Officer: All right. Thank you, John, and good morning, everyone. I'd like to start by thanking our franchisees and operators around the world for delivering another solid quarter. As John stated, the domestic comp sales were a little lighter in the first quarter, but we picked up strong traffic momentum towards the end of the quarter and have therefore reaffirmed our 2% to 4% full year comp guidance. Q1 marks our 22nd consecutive quarter of positive comp sales producing a strong three-year comp of over 16%. Within the category, favorable commodities have continued to produce strong unit economics that have also contributed to more price-focused promotional activity. We were pleased with the launch of our Quality Guarantee, underscoring the commitment to our brand promise as a quality leader. The value equation of Papa John's goes way beyond the price you pay, and we are confident that our brand positioning and balanced promotional activity will continue to produce strong results year-after-year. Our mantra is Better Ingredients. Better Pizza. And that now extends to our focus on delivering even better experiences for our customers and our team members. We know our customer experiences will never exceed our team member experiences. So, we have recently launched a cultural leadership program to inspire our teams to live the head coach model each and every day and we believe that will be a driving force toward our vision of becoming one of the world's most admired brands. To demonstrate our obsession for our customers, we also recently launched a customer advocacy program that will provide us with enhanced real-time clarity into the feedback from all our customers. On the international front, Q1 comps were a strong 5.7%, representing our 25th consecutive quarter of positive comp sales. We continue to see robust sales growth in the United Kingdom, Latin America, the Middle East, and across Europe. In short, the overall portfolio was strong with good results across most of our markets. In Beijing, we continue to progress well, with the re-franchising effort showing interest from several highly qualified parties. We still anticipate having this transaction concluded before the end of the year. On the development front, we opened ten net global units in the first quarter and reaffirmed our full year guidance of 180 net global units to 210 net global units with now over 1,300 units in the global development pipeline. As John stated, we have several new agreements in Western Europe and are very excited to announce that 2016 will be a record year for total new country openings, providing us with a broader geographic portfolio to drive future growth. Later this year, we will hit a growth milestone of 5,000 stores around the world. Turning to technology, we are very pleased to have domestically reached an industry-leading 55% online sales mix, with now 60% of online sales coming from our mobile channels. We will continue to make investments that strengthen our digital platform and will be introducing innovation and foundational enhancements to our digital business throughout 2016. The technology advantage for Papa John's will only get better for years to come. In closing, all the key elements of our global brand strategy are going in the right direction. Our culture is stronger than ever. Our obsession for the customer has not wavered. Our commitment to high quality ingredients is second to none. And the passion and pride of our team members is still our key ingredient to long-term success. And with that, I will turn it back over to Lance for questions. Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Shannon, we're ready for questions.

Thank you. Our first question is from Alton Stump with Longbow Research. You may begin.

Thank you, and good morning, guys. John H. Schnatter - Founder, Chairman & Chief Executive Officer: Good morning, Alton.

Yeah, a couple questions. First off, in the press release, you mentioned that you guys bought 20 franchise stores, also obviously you have stepped up your buyback significantly, is that a sign of things to come on either front? Or it was just more kind of opportunistic in your view? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Alton, it's Lance. I'll start with that. I'll take them separately. We were certainly opportunistic, though, on both fronts. We'll continue to look at units in our corporate versus franchise portfolio mix and make a case-by-case determination on if we want to be a buyer or a seller, so we'll continue to look at those. And then on the share repurchases, obviously, we felt like we had an attractive valuation and ramped up our repurchases a little bit in the first quarter, as you saw. John H. Schnatter - Founder, Chairman & Chief Executive Officer: Yeah, Alton, this is John. The stock went from $79 to $49 and we grew EPS 20% and comps were 4%, so we felt really good about buying $60 million worth of stock at the $50 give-or-take range.

Got it, makes sense. And then if I can just ask, on the international segment, I was surprised how much profit was up even with the currency drag year-over-year in the quarter. Is there anything other than the China exit that will explain as to why profit was so strong internationally this quarter? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Alton, I'll take it kind of from a macro position, then I'll let Steve fill in the gaps. With the exception of the Asian Pacific region, our international business is on fire. And we just continued to get better. And I think since it's our future, management is more focused on international than I've ever seen them. Steve M. Ritchie - President & Chief Operating Officer: Yeah, John. Alton, it's Steve. I would just reiterate that some of the comments in my prepared remarks. The success that we've seen in the United Kingdom has been frankly, very exciting, just to see approaching 400 stores there. Russia, despite, obviously, some macroeconomic challenges, that market has been tremendous for us, outpacing some of the expectations that we had last year leading into this year. Latin America continues to be a market that has performed quite well. And the Middle East, as we talk about the Middle East being certainly a lot of turmoil from a political standpoint and geographic issues throughout the region, our business has performed quite well. The Asia region is probably an area where we've got the most challenge, but opportunistically looking at the improvements we need to make in that region of the world and feel confident about the overall strategy. John H. Schnatter - Founder, Chairman & Chief Executive Officer: And, Alton, this is John again. We're more in the people business than the pizza business. It's all about the people. Jack Swaysland has just done a tremendous job overseeing international. Gareth in the UK has been fantastic. And John Ishmael is doing quite well down in Latin America. So, I think a lot of it has to do with, we just have great leadership.

That's great. Thanks for the color. And then just one more and I'll hop back in the queue here. I was encouraged to see you guys hold your 2% to 4% North American comp growth guide. Obviously first quarter was lower than that, but you should have easier comparisons coming up, particularly in the back half. Is there anything outside of easier comparisons coming up that give you confidence that you could, say, get to the midpoint of that 2% to 4% range for the full year? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Alton, I'll take that one, and then Steve you can give some detail. As you know, we always try to under-promise and over-deliver. So, if we're giving you a number 2% to 4%, we're feeling good about that number. First quarter, usually when it snows, it's good for us, but not when you get seven feet in one day, like happened in the Northeast where we had to shut down a bunch of stores. One of our larger competitors came out with $5 pizzas in Q2. We always feel that a little bit, three weeks, four weeks, five weeks and then we had a bad wobble on Easter in P3. So, we had a few things that were kind of odd and I think the competitive environment, they stepped it up a little bit. Steve M. Ritchie - President & Chief Operating Officer: That was John. Alton, it's Steve. And I just – a couple of things to add. So, I'd say a tale of two quarters. So started off the quarter relatively light to some of the points that John had made, not significantly material in terms of the weather, but certainly a factor; more competitive activity as we led into the start of the quarter, it was pretty aggressive. Our promotional strategy led into more of a branding effort which we are pleased with, certainly, if we're going to balance our brand with our promotional activity. We did make some adjustments towards the tail end of the quarter and that momentum as we finished the quarter has led into the second quarter. That's what drives the optimism on the full year 2% to 4% guidance given the momentum on the full year piece.

Got it, very helpful. Thanks, guys.

Thank you. Our next question comes from Alex Slagle with Jefferies. You may begin.

Hey. Thanks. Congrats, guys. I just wanted to follow up on that last question, just exactly what the changes you made were and what drove the momentum toward the end of the quarter and just kind of given the competitive environment, your plans to stay relevant and top of mind with so much value and noise in the category right now? Steve M. Ritchie - President & Chief Operating Officer: Hey, Alex. It's Steve. So, I'll give a little bit more color around that. So when we launched the Quality Guarantee strategically, clearly we had a plan in mind. We wanted to talk about our Clean Label work that we've been doing for the last three years to five years. Clearly, it was a brand new spot. I think just in terms of timing and the promotional environment, probably could've been better timing just in terms of the traffic mover, but we did accomplish what we set out to accomplish to educate the consumer on why is Papa John's different, why are we the recognized quality leader within the category. But we did move to a slightly more retail driven promotion. We did have our $9.99 offer, the Large up to Five Topping promotions that was even in the brand new spot, but we moved to a more retail driven focus, switched some of our media from 30s to 15s (18:31) and that drove significant traffic because it is certainly a good value offer for Papa John's. It's not to John's point the $5 prices that we've seen from some of our competitors but we saw strong traffic momentum towards the tail end of the quarter. That promotion did quite well. We wrapped the quarter with that. As you can see in today's environment, we have brought in the mediums promotions, Two Medium Two Topping for $6.99 which is more premium compared to what some of our competitors have done, but we've tested the medium offer for years in the local markets and it's also performing well. John H. Schnatter - Founder, Chairman & Chief Executive Officer: Alex, this is John. Not to give away our age, but Steve and I've been doing this combined for over 65 years. I remember June of 1993 we went public and Pizza Hut was doing a Big Foot Pizza. So, we've pretty well seen just about everything that you could imagine. And we've dealt with about everything you could imagine. So when the thing bobs and weaves a little bit, we wake up and do this every day. And that's our job and that's what we do. And so from time to time, they're going to get – I mean, the question is when does the – when they go from $5 a pizza to $4 because they will because they have to. And I'm sure we'll feel that a little bit. But again, after three weeks or four weeks or five weeks, we get right back on our game plan.

Appreciate the color. And one question on G&A, just sort of, I guess you gave some color about what to expect in 2Q and the cadence for the year, obviously, it'll be based on same-store sales and the related store-level bonuses, but is there more lumpiness ahead we should think about aside from the conference? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Not a tremendous amount of bumpiness, Alex. But I'll hit it a little bit. So as I noted in my opening remarks, the conference is a $0.01 to a $0.015, so not a huge number. And then as you look forward kind of at cadence, what's it look like, I'd say overall G&A will probably be a little bit higher in the second quarter due to the event, due to the conference, as well as some investments we're making in our technology team. And then you should see it kind of come back in the second half of the year to more normalized levels. And as we said, we expect overall G&A as a percent of sales to be about the same as last year, so spike up a little bit in the second quarter, come back down second half, be about even for the year, directionally.

Thank you.

Thank you. Our next question comes from David Carlson with KeyBanc. You may begin.

Good morning. I have several questions. John, Lance, you just generated 25% EPS growth on a flat domestic comp guidance, I think including that $0.01 to $0.015 that you mentioned would imply EPS growth I think of 6% to 12% the remainder of the year under the assumption that comps accelerate to roughly 3% to 5% the balance of the year. Can you help us understand why earnings growth would be so much less throughout the remainder of the year given the assumption comps accelerate back to the low to mid-single digits? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Yeah, Dave. It's Lance. I'll start and then I'll let John or Steve jump in if they'd like. Certainly, we do expect higher comp sales going forward, as you've heard. But with that said, we do have a few headwinds. You're going to continue to see FX rates. You're going to continue to see additional investments in our IT and international infrastructure, which are really the two major drivers that you've seen. And then frankly, we think it's a little bit early in the year, we'd rather get a little further under our belt before we address earnings guidance changes. So, I think those are the main reasons. Anything you guys would add? Steve M. Ritchie - President & Chief Operating Officer: Yeah. David, it's Steve. I'd just add a couple of things. I think the key point is it's early, like Lance had alluded to. I think if you look at our 2% to 4% guidance, obviously, that aligns with what we've got posted on our earnings guidance of $2.30 to $2.40. If you look at our stocks, it's not hard to look at the fact that we're 6.6% in Q1, 5% Q2, goes to 3.1% in Q3 and then a 2% in Q4. If we can produce the stocks that I think we're confident we can, obviously, those things could potentially have potential upside but at this stage in the game, I think that's why we look at the guidance that we have put forth. John H. Schnatter - Founder, Chairman & Chief Executive Officer: And David, this is John. The thing that we really focus on is the restaurant profitability, and we've – Edmond and his team, Simon, we've tripled our restaurant profitability over the last four years and we're having the best year we've ever had in 2016. So if you're driving restaurant profitability that's where your income is coming from. That's just a healthy situation.

Okay. You guys called out minimum wages having impacted the (23:30) now other operating expense line at the company owned store level. How much wage inflation are you seeing? And I have a follow-up to that. Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: I'll start and then you guys can jump in. So, we've seen a little bit of wage inflation overall. If you kind of look at that other restaurant operating line, in the neighborhood of half of that was wages and half of that was continued insurance pressures that we've spoken about before. So, I'm not going to go into exactly what we're seeing from minimum wage and what we're not. But the other thing I will say is we're in some of our corporate markets which is close to our P&L are not in some of those New York, California where you see the real high minimum wage, but there is pressure throughout the rest of the country in various forms. Steve M. Ritchie - President & Chief Operating Officer: Yeah, David, it's Steve. The only thing I would add is the way we look at it is to try to balance things. So we look at it as John alluded to before, profit after FLM, so in Q1 obviously commodities were down. Sales were down a little bit and we were very competitive on the bottom line. Our strategy is to drive the top line sales and leverage what's happening within the environment. We know like wages will move. Frankly, we want to be able to continue to give our team members raises because the performance has driven that as to look at it from that strategic rationale. But I think that you'll look at us continue to drive top line sales and be able to mitigate that. The key point is again the significant movement in overall wages or in states where we don't currently have corporate restaurants.

Fair enough. If the proposed overtime rule goes into effect, what do you estimate the impact would be on your cost structure? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Well, Dave, this is John. The $50,000 number, our managers would have to go backwards to make – our managers make more than $50,000. So we're already covered there. The drivers make more than the $15 an hour. And that leaves you the really the people in the store that are prepping and doing the phone, and the more you drive your IS platform, the less of those folks you need. So I think we're in a perfect position to handle any kind of wage increase. The thing that we do look at, we scrutinize quite a bit is cheese and fuel. As long as we've got some cheese hedged and some fuel hedged, it's pretty hard to miss the number. Everything else kind of falls in place.

Sure enough. And if I can just squeeze one more in on development, on the last call you guys said you expect substantially all of the 180 to 210 net openings in the last three quarters of the year, and today, it seems like it might be a little bit different. You said the bulk of the openings in the second half. Did you guys have any openings slip from the first half of this year into the second half? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Without getting specific, David, we're actually ahead on development in the first quarter and (26:21). We're actually ahead of our budget and our forecast.

Thanks.

Thank you. Our next question comes from Peter Saleh with BTIG. You may begin.

Great. Thanks. Glad to hear that the same-store sales momentum picked up at the end of the quarter and continued into 2Q. I was just hoping you guys could give us maybe a little bit more detail on what you think maybe the weather impact was and the Easter – I know you commented a little bit on Easter. Maybe how Easter maybe impacted the second quarter and is affecting the second – impacted the first quarter and is affecting the second quarter-to-date? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Yeah, Peter. We never use the weather as an excuse, and I don't want to get too specific here because I'll upset Lance, but P1 had a nice start and the weather did impact P1. The Easter wobble, do you want to jump – handle that one, Steve? Steve M. Ritchie - President & Chief Operating Officer: Yeah. The Easter wobble was clearly at the very last week of the quarter. You know, these things, Peter, as I said before, they're not significantly material because typically weather, it shakes itself out on a year-to-year basis, from a quarter-to-quarter, those things end up becoming factors, but not material factors, which is kind of why we don't ever call out any specific number to it. I think the key point, again, is that the significant traffic momentum that picked up towards the tail end of the quarter offsetting really some of those other factors as it relates to weather and wobbles from a calendar standpoint.

Got it. And then on the advertising side, I know you guys said you made some changes in terms of the cadence, or the amount of advertising you were doing. How should we be thinking about maybe 2Q and the rest of the year in terms of your advertising strategy versus the first quarter? John H. Schnatter - Founder, Chairman & Chief Executive Officer: Well, Peter, I'll kind of give you the – how we operate our marketing. We move extremely quick. We did the MLV. We took that from soup to nuts in less than three weeks with a commercial. So not only are we flexible, but if we need to make a change, it just doesn't take long to put me in the studio and get the creative done and get it out in the market. Steve, do you want to hit the different ways (28:59)? Steve M. Ritchie - President & Chief Operating Officer: Yeah, sure, Peter. I think that some of the learnings that we were equipped with towards the tail end of the quarter, are some of the strategy we'll be using moving forward just in terms of how we look at retail promotional environment, how we look at LTOs for the rest of this year, how we leverage the sports partnerships through the rest of 2016, clearly, there's been some learnings over the last several years and specifically as the commodity environment remains very favorable, we'll be leveraging our promotional strategy to align with that, to also align with what's happening within the competitive environment set, i.e., why we reaffirmed that guidance. John H. Schnatter - Founder, Chairman & Chief Executive Officer: And, Peter, let me give you the – this is John, give you the mindset that we have. You all see the comp number once a quarter. We see that number every day, and so I can tell you when that number turns negative, the place doesn't feel near as good as when the number's positive. So we're on this every day, and so if we do have a negative day, we're on this: what happened? What happened? How do we fix it?

Great. And then, Lance, maybe can you talk a little bit about the commodity environment? What you guys are seeing and how much is locked and what you expect for the balance of this year on your commodity basket? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Yes, I'll hit that at a high level. So on cheese it looks pretty similar from a what we have locked standpoint to what it hasn't in prior years. Cheese is obviously trading down a good bit, and I guess the thing I'd remind you on cheese is the goal of our program is really to eliminate or reduce anyway volatility, so you're not going to see the full impact of the drop in cheese prices. You will see some impact. Overall, we're expecting commodities to be somewhat favorable, probably 25 basis points to 75 basis points. We'll have to see how things shake out the rest of the year, and that's as a percentage of restaurant sales.

Got it. John H. Schnatter - Founder, Chairman & Chief Executive Officer: Yes, Peter. This is John. The cheese I think ,it's $1.35 right now? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Yes. John H. Schnatter - Founder, Chairman & Chief Executive Officer: The thing about cheese is it is capable of going from $1.35 to $3.00, and we just believe that we just can't miss our number on a quarterly basis. Not that we're chasing the number, unless something that comes way out of the box that we can't influence. So what we're trying to guard against is any kind of really downside in case cheese does do something crazy. So let's say we're hedging cheese right now at $1.65 or $1.70 and we've got half or 60% hedged and the cheese goes $1.35, we're fine with that. That's not a problem. But what we don't want to do is be sitting there at $2 a pound and not have it hedged.

Right. And then just from a discounting standpoint in the industry, has the discounting subsided at all from either the smaller players and/or the larger players? Has it rationalized at all? Are you guys seeing any evidence of that? Steve M. Ritchie - President & Chief Operating Officer: Peter, I'd say it's remained extremely aggressive this year. And again, that always aligns with where the commodity environment is. With cheese prices being as low as they are that's going to be more favorable. It's going to drive a more competitive environment. As we've said in the past, in a more competitive pricing environment, the national players are going to be more significantly discounted and they're going to be taking share from the independents and the regionals. So it seems to all come back to consolidated share within the category, the big players win, leveraging the strengths of economy of scale and the strength of technology. So works out well for us in the long term. That's why we're well on our way to our 13th consecutive year of positive comp sales. It's all about consistency in the long term for Papa John's.

Great. That's all I've got. Thank you very much.

Thank you. Our next question is from Mark Smith with Feltl & Co. You may begin. Mark E. Smith - Feltl & Co.: Good morning, guys. First, my view is may be a little different on International, it looks like your margins were down a fair amount, especially as we look at restaurant, commissary and other, even adding back FX impacts. Can you walk us through really what happened there as far as profitability? And why we saw that down? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Mark. This is Lance. So you had a couple things really bringing that margin down a little bit, one of them again foreign currency had about $700,000 impact. The other thing is we do now show certain sub-lease rental income from the UK, we show it grossed up when we did show it net, and it's essentially a zero margin business, so it drove that margin down. That's a 2%, and it will look that way the rest of the year, so that you're aware. So really on a go-forward basis it's really kind of a percent you were looking at in the first quarter, and that was really driven somewhat by the foreign currency and then a little bit due to China. We continue to have weakness in the China market, and as Steve and John both referenced, we're moving forward there with a refranchise plan. Steve M. Ritchie - President & Chief Operating Officer: Yes, Mark. And I would just say – it's Steve. In an International market there's going to be volatility and you certainly can't take percentages to the bank. We want to grow this business dollar-for-dollar, year after year after year. I think we've demonstrated that since 2012. The International business has certainly been moving in the right direction. Jack Swaysland has provided an infrastructure for growth. That's why we're so excited about 2016 being a record year for total new country openings. New country openings are low-single digit in year one, but that provides us with a platform to really drive that dollar growth up in the right direction. Percentages are always going to move around in an International business. Mark E. Smith - Feltl & Co.: Okay. And then can you guys just walk us through what the International numbers look like post disposition of China? How much commissary businesses are still going to be in there? Or did you get rid of all of that? Maybe just walk us through the nuts and bolts of that business, post-selling. Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Sure. I'll just do this at a high level, Mark. I'm not going to get into a lot of the numbers. But what you'll have remaining, you'll have zero corporate stores on the International side and then you'll have two QCCs: one in the UK, one in Mexico. The one in Mexico is really very, very small. So really what you're talking about as far as owned assets on the company's books will be the commissary over in the United Kingdom, which is a pretty significant contributor. That's all you'll be looking at post-sale. Mark E. Smith - Feltl & Co.: Okay. And then last question from me, could you guys walk through the impact of sports sponsorships either if it's in one market or as you go in like your Major League Baseball sponsorship? Do we see a gross profit margin come down a little bit as you maybe get more promotional around that in a market and you make up for it in dollars with volume? Or are we looking at that wrong? Steve M. Ritchie - President & Chief Operating Officer: Sure, Mark. Again, the percentages game we're careful with. So we try to drive the top line side of the business, the sports partnerships that we have, whether it's the Major League Baseball league sponsorship, the NFL league sponsorship, or the over 150 sponsorships that we have from collegiate to professional. All of those are designed to drive brand awareness. The activations drive sales. And ultimately they drive more profit after our food, labor and mileage numbers. So, yes, some of those promotions are quite aggressive. In fact some of them are 50% off after a game day win or a number of points or goals that are scored. But ultimate we know we're bringing in new customers, we're building the brand awareness and we're growing the overall brand. Mark E. Smith - Feltl & Co.: Okay. Great. Thank you. Steve M. Ritchie - President & Chief Operating Officer: Thank you.

Thank you. Our next question is a follow-up from David Carlson with KeyBanc. You may begin.

Yes. Just a couple quick ones. Steve, did you say in your prepared remarks that 60% of sales, six-zero, are from digital platform. Steve M. Ritchie - President & Chief Operating Officer: David, it's Steve. 55% are total digital online sales. 60% of that is coming now from mobile channels.

Okay. Steve M. Ritchie - President & Chief Operating Officer: We have previously announced that it was 50%, so it's now up to 60%.

What's driven the increase recently? Is it awareness? Just could you elaborate on that? Steve M. Ritchie - President & Chief Operating Officer: Yes. On the overall 55% or the 60%? Or both?

Either one. Yes. Steve M. Ritchie - President & Chief Operating Officer: Yes, I think the promotional activity is certainly one of them. Clearly, a lot of our promotional strategies are driven to drive conversion from offline to online. Some of that's just organic consumer behavior. Consumers are moving more to technology. And then a lot of it's just the enhancements that we've made to the foundation on our platforms. We believe that the customer experience on our digital channels has improved, so that's driving the retention and frequency levels to drive the overall mix up. The mobile side has obviously been the most accelerated driver of growth within the digital platform, and I don't suspect that that's going to slow down any time in the near future.

That's fair. And then just one follow-up. Does the guidance that you guys reaffirmed still assume cheese prices around $1.60 a pound for the full year? Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: The guidance is using actually probably mid-to-high $1.50s. We certainly take a look at our forecast as cheese prices move around.

Okay. Thank you. John H. Schnatter - Founder, Chairman & Chief Executive Officer: David, this is John. The farmer breaks even about $1.55, $1.60 a pound. So when they start losing money, then that's not good. Sooner or later, the supply and demand have to set in and the price will go up.

Thanks, guys.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Lance Tucker for closing remarks. Lance F. Tucker - Senior Vice President, Chief Financial Officer, Treasurer & Chief Administrative Officer: Thank you, Shannon, and thanks, everyone, for being on the call. We will talk to you next quarter.