Papa John's International, Inc. (PZZA) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Papa John’s Fourth Quarter 2018 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Steve Coke, Vice President of Investor Relations and Strategy. You may begin.

Thank you, Victor. Good afternoon. Joining me on the call today are President and CEO, Steve Ritchie; our CFO, Joe Smith; and Mike Nettles, our Chief Operating and Growth Officer. Steve and Joe will have comments about our business and provide a financial update. After the prepared remarks, Steve, Joe, and Mike will be available for Q&A. Our discussion today will contain forward-looking statements involving risks 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 in the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode. Now, I’d like to turn the call over to Steve Ritchie for his comments. Steve?

Thank you, Steve, and good afternoon, everyone. As you saw, the fourth quarter and full-year results reported today are consistent with the preliminary results we announced earlier this month. Overall, North America comps were down 8.1% for the fourth quarter and were down 7.3% for the full-year. International comps decreased 2.6% for the fourth quarter and were down 1.6% for the year. The North America results are disappointing to all of us and continue to reflect the consumer sentiment challenges our brand has experienced in the U.S. In addition, sales were impacted by the conversions of the company’s new loyalty program and ineffective promotions. Our creative and value offerings have not resonated with consumers in a heightened competitive environment. Despite these difficulties, we remain confident in the long-term potential of Papa John’s. Our confidence is supported by three factors. First, we have a differentiated brand. Papa John’s is the quality leader in the pizza category. In our case, BETTER INGREDIENTS do mean BETTER PIZZA and we think quality will be an attribute that consumers continue to value. Secondly, we have new partners who bring additional expertise and financial resources to help us capitalize on this differentiated market position. As previously reported, Starboard made a $200 million convertible preferred stock investment in the company in early February. Starboard and our new Directors, Jeff Smith and Anthony Sanfilippo, have accomplished significant turnarounds and value creation at other companies in the restaurant, retail and consumer industries. Already Jeff has been actively engaged as our new Chairman, as we evaluate and adjust our plans and strategies for 2019. He is also helping us stay focused on the value drivers of Papa John’s, namely quality pizza and building strong consumer connections. The third factor supporting my confidence in Papa John’s is the commitment of our team and their continued enthusiasm for our company. Even with the significant amount of work that lies ahead, we know we must improve how we communicate with and connect with our customers. It is not just about spending more on advertising or promotions. We need to do a better job of showcasing our quality as a real product differentiator, while making it easier for our customers to purchase our pizza whenever, wherever and however they want. In connection with the Starboard agreement, we have begun to examine investment opportunities within our strategic pillars to reinforce our BETTER INGREDIENTS. BETTER PIZZA market position and reinvigorate performance. We are in the early stages of this evaluation and do not have specific details to share today. However, we are making progress within our strategic pillars, and this progress is important to the long-term success of the company. Let me spend a few moments updating you on our work in these areas. First, making people a priority. Over the past months, we have launched a number of initiatives to communicate the importance of people to Papa John’s and to begin transforming our culture in a positive way. As part of this, we engaged outside experts to conduct a cultural audit and provide recommendations on actions we need to take to ensure our commitment to diversity, equity and inclusion is represented throughout the company. Audit is now complete and we have already begun to implement several of the recommendations. As an example of the steps we have taken, we recently completed the diversity, equity and inclusion training for our corporate office team members that I mentioned on last quarter’s call. We had nearly 100% participation rate for the seven-hour workshop and employees rated the experience 4.5 out of 5. We are now rolling the workshops out towards field team and the program is available to our franchisees at no cost to them. In January, we hired our first Chief People Officer, Marvin Boakye. Marvin has more than 20 years of human resource experience, as well as expertise in change management and culture transformation. He is leading the implementation of our talent management strategy, which includes overseeing people operations, compensation and benefits and learning and development. As a clear marker for our commitment to employees and their development, we recently announced a higher education benefit program with Purdue University Global. The program covers 100% of tuition cost of undergraduate and graduate online degree programs for Papa John’s 20,000 corporate team members and offers significantly reduced tuition to franchise employees. The program allows participating employees to expand their skill set, build leadership and management expertise and prepare to advance their careers. This is the First-of-its-Kind benefit in the quick service restaurant industry and no one we believe will help improve employee retention, especially at the restaurant level and will differentiate Papa John’s as employer of choice in a competitive employment environment. Turning now to the work we are doing to improve Papa John’s brand differentiation. We firmly believe that our ingredients are what differentiates Papa John’s from our competitors. However, our creative has continued to underplay this attribute, with a focus on limited time products, loyalty and promotions. As a result, our brand has not been breaking through the significant marketing dollars that our competitors are spending. Next month, we will be launching TV and digital campaigns that show Papa John’s leaning into the story of our products and ingredients and doing it in a way that is relevant to Millennial and Gen Z consumers. We want to ensure the new generation of pizza consumers understand the quality foundation of our brand, so that we can attract new customers. BETTER INGREDIENTS. BETTER PIZZA is our brand equity. As a part of this brand differentiation work, we will offer specialty pizzas that are unique in the market. For example, in February, we featured the Philly Cheese Steak Pizza. This has been a fan favorite in the past and we are excited to bring it back to our lineup. In March, we will introduce permanent menu additions with six handcrafted specialty pizzas, including the Ultimate Pepperoni, Meatball Pepperoni, Philly Cheese Steak, Fiery Buffalo Chicken, Zesty Italian Trio and the Super Hawaiian. And later this year, we will introduce a new Hot and Honey Chicken and Waffles Pizza, which was the winner of our Pick Our Next Specialty Pizza Contest that ran in February. As you know, creating accessible value has also been a focus area for us. Let me update you on our work in this area. Late in the fourth quarter, we relaunched our Papa Rewards loyalty program. The surge in migration to the new program, combined with the free cheese steak introductory offer, but unexpected temporary pressure on the average ticket per order. However, we believe the transition to the new rewards program was important because of the value and variety it provides our customers and the consumer insights we gain. In particular, we now have the data that allows us to engage in one-to-one marketing with our customers and by segment, which enables us to drive traffic without relying on blanket discounts across all channels. For example, we executed a successful rewards-only promotion that offered free pizza to members, we spent $20 during Super Bowl week. These targeted offerings and others exclusive perks that are tailored to the customer also build brand loyalty. Over time, we believe the new Papa Rewards program will be a positive contributor to our performance and our brand differentiation. Also, during the fourth quarter, we began developing additional everyday value offerings that we are now testing in select markets. For example, we know that certain segments of our business are heavily carry out and we’re now testing offerings that speak to those customers. We’ll be examining the results from these tests and making further adjustments or expansions in the coming quarter, as we determine the offerings the best reach the value consumer. Turning to technology, our fourth strategic pillar. As we’ve, Mike Nettles and his team have elevated the consumer experience across our digital and mobile platforms and have expanded the ways can – customers can order Papa John’s. Our mobile channels now represent around three quarters of digital sales. On our website, we’ve deployed mobile-first design improvement and intelligent technology to better engage our customers. On our mobile apps, which have seen significant growth, we’ve integrated Apple Pay and Google Play, enabled more targeted messaging and made a number of enhancements to simplify the user experience and advance our loyalty program. In addition, ordering is now available on Apple TV, Amazon Alexa and through DoorDash, which currently serves more than 1,300 restaurants and will increase further in the coming months. These channels are enabled by APIs that allow us to launch future partnerships with unprecedented speed and cost efficiency. We’re examining the potential for further improvements in our technology, including new app capabilities, innovative partnerships and additional ways to enhance the delivery experience for our drivers and our customers. Pizza brings people together and we want our digital and social capabilities to fully reflect this mission. And now to our work related to unit economics. We have continued our work with a third-party efficiency experts and food aggregators to drive both revenue and efficiencies in our restaurant level operations. Specifically, we have identified procedures to improve food cost controls and we have made enhancements to our labor management system that better align labor goals with individual restaurant characteristics. In addition, we maintain our commitment to supporting the long-term financial health of our franchisees. We are continuing to provide royalty relief for all domestic traditional restaurants for the first quarter of 2019. Furthermore, we are extending the high level of support to franchisees and higher-cost markets on both coasts of the U.S. We believe these efforts, coupled with our review of additional technology solutions that we are currently evaluating for our restaurants will provide opportunities to improve unit economics in 2019. Over the past several weeks, I have spent a significant amount of time with our company store operations team to identify and address operational improvements that are needed. Our team has accepted the challenge of improving sales and operations to set the pace for the North America system. We will continue to evaluate our company store performance by market to ensure that we are maximizing long-term value. Before turning the call over to Joe, I’d like to provide an update on international. Our International business continues to grow sales and restaurant unit counts at a double-digit pace, as both increased 11% during the quarter. For the year, we opened 304 international restaurants, which was the record-breaking performance for our brand. Our robust expansion continues as we just opened our first restaurant in Pakistan and have now entered 12 new countries since 2016. We are now in 47 countries and territories around the globe and we’re getting very close to opening international restaurant number 2,000. We are pleased that our organizational changes made during 2018 are fostering improved performance. While comp sales were still not where we wanted them to be for the quarter, we did see marked improvement in the UK and the Middle East. We continue to see positive signs of a turnaround in both businesses. And the International business as a whole as evidenced by the flat January comp sales we previously announced. In summary, we still have lots of hard work to deliver sustainable growth in the business and you see that in the guidance we announced today, which Joe review shortly in detail. However, we are making progress and our recent investment agreement with Starboard represents a strong vote of confidence in our company and the opportunities ahead. The additional financial resources and the new expertise gained through the agreement better position us to realize these opportunities. We are operating and allocating capital with deeper discipline. We’re focused on people in pizza, and our team members and franchisees are enthusiastic about the opportunities ahead. Now me – let me now turn the call over to Joe to discuss our financial results for the quarter in more detail. Joe?

Thank you, Steve. For the fourth quarter, we reported a diluted loss per share of $0.44 on a GAAP basis, compared to diluted earnings per share of $0.81 in the fourth quarter of 2017. The decline in our earnings per share was primarily attributable to our special charges, which will be described below. In addition, results were impacted by lower North America comparable sales and the impact of other special items in the prior year comparable quarter, including an extra week of operations and the remeasurement of our deferred tax liability, resulting from the 2017 Tax Cuts and Jobs Act. During the fourth quarter, we incurred special charges of $25.9 million. Approximately $15.5 million of these costs included support to our North America restaurants through short-term royalty reductions for franchisees and a contribution to the National Marketing Fund. In addition, we incurred $8.1 million of costs associated with activities of the Special Committee of the Board of Directors, including legal and advisory costs culminating in the recent strategic investment by Starboard Value. The remainder of the special charges were primarily associated with reimaging costs and other asset write-offs. For the full-year, our special charges were $50.7 million. Excluding these special charges and other special items, as detailed in our earnings press release, we reported adjusted diluted earnings per share of $0.15 on a non-GAAP basis, compared to $0.54 in the fourth quarter of 2017. Our fourth quarter net loss on a GAAP basis was $13.8 million. Excluding special items, our fourth quarter net income was $4.6 million, compared to $18.9 million for the corresponding quarter in 2017. As outlined in our earnings press release, 2018 GAAP EPS was $0.05, as compared to $2.83 for 2017. Excluding special items in both years, our adjusted EPS was $1.34 in 2018, as compared to $2.51 in 2007. Consolidated fourth quarter revenues, excluding the 53rd-week in 2017 decreased $62.7 million, or 13.4%, primarily driven by lower comparable sales for North America, which resulted in lower company-owned restaurant revenues, lower royalties and decreased North America commissary sales. In addition, the refranchising of 62 company-owned restaurants in North America earlier in the year reduced total revenues on a quarter and year-to-date basis by approximately $15 million and $42 million, respectfully, as compared to the prior year comparable periods. International revenues also decreased due to the refranchising of our company-owned operation in China earlier this year. Now turning to the business units for the fourth quarter. Domestic company-owned restaurants operating margin decreased $9.3 million, or 0.6% as a percentage of related revenues, primarily due to the impact of lower comparable sales and the adoption of the new revenue recognition standards that revise the method of accounting for the customer loyalty program. In addition, the 53rd-week of operations in 2017 contributed approximately $2.4 million of the decrease. North America franchise royalties and fees decreased $9.2 million, or 34.1%, as compared to the fourth quarter of 2017, primarily due to the $5.5 million of short-term royalty reductions granted to our North America franchisees and further reduced due to negative comparable sales. In addition, the 53rd-week of operations in 2017 contributed approximately $2 million of the decrease. North America commissary operating margin decreased $5.5 million, or 2.4% as a percentage of related revenues due to the decline in North America restaurant sales and due to the required reporting of $2.6 million in franchise restaurant equipment incentives under the new revenue recognition standards, which was previously included in our G&A expenses. In addition, the 53rd-week of operations in 2017 contributed approximately $1.7 million of the decrease for the quarter. Our international operating margin decreased $2.5 million due to lower new restaurant opening fees and lower revenues from the United Kingdom Quality Control Center due to the required reporting of franchise restaurant equipment incentives under the new revenue recognition standards. In addition, the 53rd-week of operations in 2017 contributed approximately $700,000 of the decrease. As a percentage of international revenues, the operating margin increased 0.7%, primarily due to the divestiture of our China operations. For the fourth quarter, G&A cost increased $20.2 million, primarily due to the previously mentioned special charges. The remainder of the increase is primarily due to higher technology initiative cost and the $1.5 million contribution to the newly formed Papa John’s foundation. These increases were partially offset by the previously mentioned required reporting of franchise restaurant equipment incentives. Net interest expense increased $3.2 million in the fourth quarter due to an increase in the average outstanding debt, including the impact of share repurchases made through 2018, as well as higher interest rates. At the end of the year, our outstanding debt balance was $625 million. Subsequent to year-end, we have used the Starboard investment proceeds to reduce our revolving line of credit, while we execute our disciplined approach to capital allocation and review our opportunities to further invest in the five strategic priorities Steve previously discussed. For the full-year, our effective tax rate was 44.9%, which is higher than the 24.1% effective rate for 2017. The increase in the tax rate is primarily due to the impact of lower pre-tax earnings in 2018 and the required recapture of operating losses associated with the divestiture of our China operation. Our free cash flow, which is a non-GAAP measure that we define is cash flow from operations less capital expenditures was approximately $30.8 million for the full-year, as compared to $82.4 million in 2017. This was primarily due to the company’s lower net income in 2018. We paid a cash dividend of $7.1 million, or $0.225 per common share during the fourth quarter for a total of $29 million of dividends paid in 2018. The full-year dividend was $0.90 per share. Subsequent to the fourth quarter, on January 30, 2019, our Board of Directors declared a first quarter dividend of $0.225 per common share. During 2018, the company repurchased approximately 2.7 million shares of stock for an aggregate cost of approximately $158 million The company did not purchase any shares after early August. Turning now to our outlook for 2019, we expect our GAAP EPS to be between $0.00 and $0.50 for the full-year, including anticipated special charges of $30 million to $50 million, which will largely be assistance to the North America franchise system and costs associated with the Special Committee of the Board of Directors. We expect adjusted diluted earnings per share to be between $1 and $1.20, excluding special charges. North American comparable sales are expected to be between negative 1% and negative 5%, while international comparable sales are expected to be flat to positive 3%. We anticipate global growth of 75 to 150 net units. We are also planning to invest between $45 million and $50 million on capital projects in 2019. Our preliminary tax rate in 2019 is expected to be between 21% and 24%. Finally, block cheese prices are projected to be in the low to mid $1.60 range. I’ll now turn the call back over to Steve Ritchie for his final remarks before we take Q&A. Steve?

Thank you, Joe. Say, I’m confident Papa John’s is positioned for long-term success, as we work to better showcase our quality and improve the customer experience. With the additional financial resources and new expertise gained through the partnership with Starboard, we’ll be making targeted investments directed at highest return initiatives across our five strategic pillars. We look forward to unveiling additional product, menu, advertising and customer engagement strategies to fortify Papa John’s position as the BETTER INGREDIENTS. BETTER PIZZA company. As always, we appreciate your continued support. And I’ll now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Alex Slagle from Jefferies. You may begin.

Hi, guys, thanks for the question. I wonder if you could provide some commentary around the February same-store sales trends in the U.S., and maybe what gives you confidence in the range – the comp range you outlined in the guidance, specifically if there’s any measurable metrics you’re following, maybe brand sentiment or something like that?

Sure, Alex, it’s Steve. So thanks for the question. So just stepping back a bit, certainly challenging into 2018 and a very difficult start in January. So I’ll call that out, because I think there’s a couple of more short-term non-recurring factors in the business and kind of our outlook on the full-year of 2019, which we called out some of the – which we’re very excited about the long-term potential of the loyalty program. But it did provide extensive pressure on check when we couple that with the – we wanted to obviously gain visibility and awareness of the program to garner attention and increase the enrollment piece. We coupled that with the new cheese steak promotion and then we layered on a pretty extensive value for Papa John’s in January with the two medium promotion at $6 each. So I think a number of those things provided pressure in late December and January. But moving forward to your question in February, we’re seeing very solid improvement from February – from the January and we certainly have incorporated that into our full-year outlook, which we’re not proud necessarily of a negative one to negative five. But we do know the first-half of 2019 is going to be more challenging than the back-half of 2019, but we’re very pleased with the progress thus far here in February on the backs of – getting back to talking about quality, getting back to talking about interesting ingredients and an interesting product that we in our Philly cheese steak pizza. That’s been supported by complete new marketing and creative campaign from the team here. So excited about the outlook.

Thanks. And then on the development front, if you could provide an idea around the expected gross openings versus closings in 2019 that’s baked into that guidance?

Sure. Joe, you want to talk a little bit about the [Multiple Speakers]?

Yes. I mean, we’re not going to give the specific numbers on that, obviously, and kind of look at where we are this year and hope that’ll give you a pretty good guidepost.

Alex, it’s Steve. I just add to that, because, yes, we probably won’t give details on a breakdown of that. But I think, you look at the overall gross performance you – as I outlined in my opening comments, the 304 units on the international side, our expectations are similar, those can attract rates that were experienced in the international side. We know that we’re going to continue to experience some pressure on closures domestically. But I would call out that a good chunk of the closures that we experienced in 2018 was the nontraditional venue. So that is more of a non-recurring event. So we do expect the step down in closures domestically in 2019 just because of that event. And obviously, the quicker we can turn the sales around, the more optimal will have potential on the overall net units hitting at the higher-end of our range there.

Okay. Thanks for that.

Thank you. And our next question comes from the line of Peter Saleh from BTIG. You may begin.

Great. Thanks. I just want to ask about the marketing budget. I think, Steve, you had mentioned next month, you guys are going to launch a new campaign. What is the expected marketing budget in 2019 versus 2018? What will you be investing more dollars into the marketing budget? And how do you plan to spend it? How is the cadence looking for 2019 versus 2018? Is it going to be heavier spend in the second and third quarters, or how should we think about your marketing dollar spend this year?

Sure. Sure, Peter, it’s Steve. So I’ll touch on it a bit. So I mean, first off, just stepping back on our overall National Marketing Fund contribution rate in 2018, that was 4.5%, that did step up the first day of January to 4.75%. Obviously, that contribution rate is driven off of same-store sales and overall units. So there is some pressure on the overall side of the revenues coming in and that contribution rate that drives it. But because of the increase in the contribution rate, we do think we’ve got close to parity levels on the overall access to National Marketing Fund dollars. We’ll have additional pressure as you would expect from an inflation standpoint on the media side. But the team has done a nice job of really thinking about the cadence of how we plan out each of the quarters, I don’t want to get into specific cadences of the investments within the quarter, but it will be a well thought out allocation of those investments. We will still be, as you would expect, spending money into television, spending money into digital and social. We’ll be evaluating things like our partnerships that we have and also looking to expand that in potential influencers to help support the brand. Last year, in the fourth quarter, PJI, Papa John’s International, did make an investment of $10 million into the National Marketing Fund, so that certainly is a headwind, as we get look into 2019, but those are part of that evaluation process with a $200 million investment as we talked about half of that invested back into the business. Those holes will be areas that Mike Nettles and myself and the rest of the team will be looking how do we evaluate, where we make the right investments to take up some of the shortfalls we may have in the marketing front. And making sure that we’re making the right investments to support unit economics and the franchisees in primarily, obviously, to get sales back to the levels that we need to get them at too. So I’d say a lot of that. And Mike, I don’t know if you want to add any color just to give a little bit commentary around where we’re at from the growth team perspective?

Sure. Thank, Steve. Hi, Peter. So really the only thing I would probably add to what Steve just said is, our spend will probably be a little different this year than it was last year. Clearly, if you look back at 2018, we had quite a few challenges on the PR side of the equation and the sentiment side of the equation. So we had to put a lot more effort probably into that than maybe commercial retail marketing. This year, it continues. We’ve actually done quite a bit on the brand reputation side of the equation, but you’re going to see a lot more commercial advertising for the brand and very different. With the launch of Papa rewards, Peter, as we shared with you and others in the past, a big part of that is actually the introduction of one-to-one marketing. And so a lot of that marketing now goes through our own individual proprietary channels as opposed to us having to go out through maybe the top of the funnel kind of traditional marketing. But nonetheless, you will see heightened level of commercial messaging, a lot more on the one-to-one, which really gives us a very different marketing mix in 2019 than we had in 2018.

Great. And then just, I know you guys received $200 million from Starboard, $100 million is already accounted for. The other $100 million, does that anticipate to sit on the balance sheet, or do you guys expect to use some of that for some of these investments? Could some of this go into the marketing fund, or how do you guys anticipate using those funds over time?

Yes, Peter, this is Joe. We’ll start off, as you said, paying down the revolving line of credit, but the nice thing is, obviously, we can access that back. So the debt will initially go down, but then under the revolver, we can access that and make the necessary investments that once we test and prove that those investments have a good return. We’ll just stroll that back and use those accordingly.

And Peter, just to just add on to the latter part of that question on where we’re going to spend the money. So, we are still – we’re only three weeks in, so we want to make sure that we are working with all of our stakeholders to assess what are the best places to be investing this money. But we’ve talked about our five strategic priorities being: people, brand, the value in the product side, technology, and then, of course, unit economics. Those are very broad, and there’s a number of initiatives that layer up within the growth team to support those. So we are in that – the assessment phase of valuating each one of those initiatives. But we know the areas of where we need to invest is to improve team member experience and improve customer experience and the lagging indicator of that obviously being sales. So we need to get the sales turnaround to improve unit economics. We know we’ll be able to do that by making sure we’re really leaning into the things that are going to improve, again, team member experience and customer experience. So as we make decisions, as we get through our assessment phase here, certainly, we’ll be communicating those things out to the Street. I don’t have a timeline on that yet, because we want to be very thoughtful. And to Joe’s point, there will be a lot of test and prove out scaling things from a small standpoint in individual markets before we do anything from a national perspective.

Great. And then just my last question. Steve, I think, you mentioned more menu innovation and potentially some more news on the value front. Can you give us a little bit more specifics in terms of what you may be testing? What you may be thinking about from either a carryout or delivery perspective on the value side?

Sure. It’s Steve. I’ll start and I ask Mike to jump in as well, because he’s got spent a lot of his time here lately on the product side. And we’ve got – there’s a lot of excitement in energy around the things that we’re evaluating as the operator. As you know, my long track record in operations looking through the lens of what also is not going to create operations complexity in our business model, always looking through the lens of simplicity, but trying to make sure that we are connecting with things with our consumer. So the first piece is, it might not going to sound like a lot, but this is the most expensive product launch that we’ve had in the history of the brand in terms of number of pizzas. So the first one I would highlight is the six handcrafted specialty pizzas that are soft launching this week to a national media supported launch next week. Those six handcraft specialty pizzas I called out in my prepared remarks, they include a number of new premium ingredients. And we think the uniqueness of that will also be very good value proposition, because we’re offering them at $12. We’re not only the six new specialty pizzas, but we’re extending that to all of our specialty pizzas. And as I talked about February performance improving, that is the same promotion, but with just the Philly cheese steak pizza and all specialties in period two here in February. So nice performance from that, so we want to continue along that. As far as additional value in product side, we’re – I think, everyone is well aware that we have been testing sandwiches out in various markets across the country, continuing to test and read and learn to understand how that may play within our value proposition. And I ask Mike to talk about a little bit just strategically how we’re thinking about it from a product standpoint and some of the other areas that we’ll be targeting and how we’re looking at value in general. Mike, I noticed this is a big part of the growth team’s work.

Sure. So Peter, we’ve always stood for BETTER INGREDIENTS and BETTER PIZZA, that’s a big part of our brand heritage. I think we – in years past, maybe we’ve not spoken to that in a way that’s resonated directly with the consumers as we need to. And so we’re really leaning heavily back into that. We believe that BETTER INGREDIENTS do make for a BETTER PIZZA. And quite frankly, our customers deserve a better pizza in an overall elevated BETTER PIZZA experience. So a big part of that starts with the product. Steve just said with all the new specialties coming up. But if you follow us on social media, you can see that we’ve really been engaging our customers with some fun ideas, help us choose our next really craveable kind of pizza item. The winner right now of that contest has been the Hot Honey Chicken and Waffles Pizza. So you can expect to see hit that hitting our menu at some point soon. Some of these new creations may be introduced as LPOs, but just like the Philly cheese steak pizza was a fan favorite and came back in this past period. It remains on the menu now as one of our new signature specialty items that are out there. So we’re going to lean heavy into really trying to come up with some bold and some creative pizza types that you can get at Papa John’s, but you can actually enjoy the better ingredients that go along with them that really help us to tell that story. If you’ve also been kind of following the brand for, at least, the last two periods, you’re seeing two very clear messages from us, $6 and $12, and that’s very intentional. You’ll probably see that moving forward in the periods yet to come, as we try to test some of these value constructs. We hear from our customers a perception sometimes that maybe Papa John’s has been priced too high in the past relative to the overall experience that they receive. So as we lean in on BETTER PIZZAS, we really lean in on the operating experience and the customer experience. We’re also going to lean in heavily on saying, hey, there is an accessible value construct that you can come in and get up pizza for $6. We led that in period one with two medium one tops for $6 each. And in period two, that’s a carry out special, which is also medium one top for $6, may not always be the pizza, may be something else, but that’s a big part of us testing those value constructs with very high customer acceptance. And specifically, new customer acceptance are actually being targeted in such a way that we’re driving new customers to the brand and it’s working out very well for us. The $12 side of the equation, $12 specialty for the Philly cheese steak in period two that became a $12 any, that now leads us into period three, where we’re finding a very high overwhelming support for our great handcrafted specialties that we’ve got out there. The $12 price point seems to resonate well. Customers see it as not only accessible, but as you can imagine, it actually drives a nice check for us as well. So we’re happy with that as a starting point, but we’re going to continue innovating on both of those things to really make sure that it’s not just a BETTER PIZZA, it’s an overall BETTER PIZZA experience.

All right. Thank you very much.

Peter. Thank you, Peter.

Thank you. And our next question comes from the line of Alton Stump from Longbow Research. You may begin.

Yes, thank you and good afternoon.

Hey, Alton.

I just wanted to ask and I apologize if I missed what you said exactly in the comments. But as far as the concessions, given franchisees, I think, you mentioned, Steve, that they’re going to at least run through the end of the first quarter. So are those just for the next three months as far as a commitment there and then you kind of see where you’re at start of 2Q, or is it a longer commitment over rest of the first quarter?

Sure, Alton, it’s Steve. Yes, in my prepared remarks, I did call out that we have made formal commitments in concessions of royalty relief through the first quarter for all of our franchisees in the domestic business. But I did also call out in the first-half of the year, we do expect to have continued unit economic pressure as we continue to push some of the marketing initiatives to get the sales go in the right direction. So within the outlook for our guidance, we provided ourselves with headroom to be able to find out the right level of support to provide to our franchisees throughout the rest of 2019, but focusing in on what we believe will be the more challenging part of the year through that first-half.

Okay, it makes sense, Steve. And make us one more and hop back in the queue. Just kind of think about, obviously, your efforts to six brand image versus going out there with new products and promotions. How do you balance that? In other words, like you feel that there is more sort of brand fixing as you need to do first 40 more aggressive promotions, or you think you can do both at the same time over the course of the current year?

Sure, Alton. It’s Steve, and I’ll let – I’m going to let Mike comment on this, because this is something, but obviously that we have to balance and we’ve got an interesting challenge here over the last year and trying to find and strike the right balance of product versus things that we can do to help on the sentiment side. We have to do both. So I think, what you’ve seen represented from us in, I would call out February, but again, the specific financial results. But we did – we’ve done some things with making our first official grant of the Papa John’s foundation that we have not officially announced publicly yet, the start-up of the Papa John’s foundation, but we made a $500,000 grant to the college. So I call that out, because it’s around doing good things in the communities that we serve. It was very, very well received and helped make significant sentiment improvement marks for the brand. It can’t be one thing, it has to be a cadence of multiple things. So we’ve got for the full calendar year of 2019 continuing to have plans on things from a public relations standpoint, but just doing good work. At the same time, a lot of the work that we’ve been doing on diversity, equity and inclusion, as I call it out internally, a lot of internal work happen to be through the conclusion of the culture audit. But the culture audit concluded and gave us an extensive lineup of recommendations that Marvin Boakye, our new Chief People Officer and Victoria Russell, our Chief of Diversity, Equity and Inclusion, will be leading the efforts to work on the internal. I fundamentally believe the more work that you can do on the internal culture, the more that output will translate into overall better consumer sentiment for the brand. And I will tell you that we’ve had our – some challenges over the last year, but we found the opportunity to think about partnerships and influencers because of the work that we have been doing over the last several months. At the same time to your question on product, you have to figure out how to do both, because we do have to have exciting value proposition, innovative products out there, leaning in on the quality story. So that we think for the 2019 calendar year, we’ve built out a roadmap with the appropriate level of multiple things to move the brand forward. Mike, I said a lot there, but I don’t know, if there was anything that you’d like to add on to that just to complement.

The only thing I would add, because I think, Steve, did a good job of kind of outlining as if – in our business, one of the things we’re really focusing on in late 2018 and certainly leading into 2019 and beyond is the quality and the better story, but not just tell it in terms of our ingredients, tell it in terms of the happiness and kind of real human kind of interaction basis. So everything from the work that we’re doing, as Steve said, inside the organization with our people and with those voices that we talked about in the voices campaign, the commercial that had a lot of success back in the last quarter of 2018 to making sure we continue to tell people the story of why they want to buy Papa John’s, not just for the better product that it is, but because we’re good corporate citizens, because we have a good placement out there in the communities that we support and we have happy and engage people inside the source servicing the needs of those customers accordingly. So we know that this is a long-term effort. This is something we’re going to have to keep pulsing on. But back to the calendaring function that Steve just talked about, the team actually set up the full-year in advance and we’ve got a very strategic set of kind of master messaging that goes out each period with some underlayments to go with it and really trying to push it at an integrated level with all channels, whether it’s broadcast television or social media, you’ll see many of these messages again and again that when we say BETTER INGREDIENTS, we don’t just mean what’s on top of the pizza, but actually who’s making the pizza and who we’re serving it to. That’s a big part of our messaging moving forward.

Great. Thank you, Steve and Mike.

Thanks, Alton.

And our next question comes from the line of Gregory Badishkanian from Citi. You may begin.

Hey, guys, it’s actually Fred Wightman on for Greg. The February commentary was really helpful. It’s nice to hear that things sound like they’ve improved. But should we be expecting any impact from the Easter shift as we move through the rest of the quarter?

Yes, Fred, this is Joe Smith. Looking at that and also just the change in New Year’s Eve, it’s actually going to not be too significant for us probably less than 1% impact on our comparable sales.

Okay. And then – that’s helpful. And then understanding that you’re still seeing some ticket headwinds from the loyalty shift. What are you guys assuming for pricing for the year?

Fred, it’s Steve. We don’t typically break out check and traffic on an annual basis. But I will tell you that we’re going to be very focused on getting traffic going in the right direction. We still have a relatively low share within a very fragmented large category about a $40 billion category. So we’re going to be very focused on getting traffic, moving back in the right direction. We do know the layer, to your point, the loyalty program and what that’s going to do is a balancing act of how we’ll appropriately plan out the cadence of all of our promotions through the year. So we know, we’re going to get traffic growing, but we do want to have stability in our check and what we had in period one that I called out was instability in our check because of multiple things all at the same time. So I wouldn’t expect that to be a drag on what we would deem to be appropriate kind of check averages on a go-forward basis.

Okay. And then the gap between company-owned and franchise did come down a little bit this quarter. How should we think about that going forward?

So, Fred, it’s Steve again. So, our – we had a long track record of very solid performance, as you would know. I think the CAGR on a five-year basis through 2017, excluding 2018 was about 5% per year for our corporate restaurants. So they’ve had a tremendous run and they surpassed our franchise results by 1% to 2% per year on a – on an average year. So the franchise folks have closed the gap a bit, but there are a number of factors within the individual corporate markets that have caused some, what I would call them to be more short-term pressure on the overall comps. I don’t believe as we get through the full-year that you’re going to see the kind of spread that we’ve experienced over the last couple of quarters, we do have some work to do in our corporate restaurants. They’ve had significant pressure, not only in sales, but an overall margins. But in the conversations, I called out in my prepared remarks, the planning, the energy and drive from our corporate operations leadership team getting back to the basics and the fundamentals that drove the performance for multiple years. There is a level of energy and confidence that we’ll get back to those levels. So I fully expect the gaps to close as we progress throughout the year.

Really helpful. Thanks, Steve.

Thanks, Fred.

And our next question will come from the line of Will Slabaugh from Stephens. You may begin.

Yes, thanks, guys. I had a question on the check and the traffic, just given the movement that you’ve talked about in the past a couple of periods. So it sounds like the ticket impact you mentioned was from multiple discounts that layered on to one another. I wanted to get quantified that in anyway versus the recovery that you’ve seen more recently? And I guess, maybe kind of behind the question is, how traffic behaved during that period? Do we see fairly similar traffic results and it was mainly just ticket that was driving it down? And how you feel about sort of the traffic growth that you’re seeing right now, I guess, relative to your expectations and it behaved as you would’ve expected, along with that February recovery we talk about?

Sure, Will, it’s Steve. I mean, I would just say that overall disappointment both in traffic and in check in December and January, we saw a slight uptick maybe in the traffic side. But there wasn’t the kind of lift that we would expect for the check declines that we experienced in December and January. With that being said, turn the page to February, we’ve got back to, as I called out, more stable levels of what we would be looking for on the check side and seeing significant improvement from January, February on the overall transaction level on a per week basis by store, as you look at that on a comp perspective. So I think you’ve got to kind of exclude some of the things that happen in December and January, because there are so many things that are moving in that month-and-a-half period of time. If you’re thinking about moving forward, we like what we’ve seen in February. I think we can balance out that with based on the cadence of the promotions that we have, as we think about the rest of this year. And again, we’re going to be very focused on getting traffic moving back in the right direction, because we donated a lot of share in 2018 and we certainly want to get that share back over a period of time.

Got it. And then one more question, if I could. Your menu innovation you’ve talking about, it sounds like maybe you’re capitalizing here first as you sort of kind of reemerge here as – on your brand equities around quality. So I’m curious how you plan to treat some of these more specialty pizzas, if that $12 price point is something that you plan to sort of hang with for a while? It sounds like that it is, as you mentioned, $12 and $6. And if there is room there, if you feel like there is room to go up, if you go more specialty and how you feel like the brand could play if you did go more premium? And then kind of what that mean for value is $6 ends up being your national value message. Does that make sense for every market, or might value be more regionalized or localized down the road?

Hey, Will, it’s Mike. I’ll take some of that and my colleagues here can chime in. But basically, from our perspective, we’re still in test mode. $6 and $12 seem to be working very well for us together more so than maybe individually. They’re targeted at very different customer segments. We’re using our newly developed marketing technology to really go after those segments with very – various types of messaging and promotional offers that really pulse on those. And it’s working really well, it’s been a great formula so far. It still has room for tweaking and we’re not sure that those will be the final numbers that we had known forever. However, having said that, there will always be opportunities for franchisees in different markets that have some opportunity for up-sells, that’s a feature that is really important to us in the digital systems, which would allow us franchisee to actually have a little more local flavor on what they up-sell you too or what you’re being up-sold from. They also have quite a bit of control over the pricing of that be it a just extra ingredients, or would you like to Papa size that and take it to an extra large pizza as opposed to the large pizza. So there’ll be plenty of opportunity to keep pushing for a little higher premium, and we’ve not rolled out that there could even be a tier above the $12 side of the equation. Clearly, we have some of that now with our extra large pizzas, one of the few in the industry that actually is there and performs and it’s actually a great ticket drop for us. But there’ll be some other opportunities for us to continue pulsing around that as well. So while it’s working, I don’t want to say that that is our absolute future. We’ll continue to looking at it and clearly looking for opportunities to Steve’s point, to not just drive transactions, but also drive check, as we look for opportunities to put more out in front of the customers that they really want.

And Will, it’s Steve. Just I’m just calling out one more things, and Mike said this before, but I think is very important is the introduction of the new loyalty program, that is a complete value platform. So it is a richer program. It provides more value to the consumer and also gives them the flexibility of being able to order anything on our menu now. So we certainly want to highlight that as part of our overall frequency driver for the brand from a loyalty and value perspective. At the same time, we do know that we’re going to have a real balance and rigor out there, as you called out, on the individual markets, some of our high wage markets. So we’ll be leveraging some of the new tech within the loyalty program to be more specific targeted segmenting out, building out some of our one-to-one capabilities. So that we’re not broad brushing value, where value is not a need state from a consumer perspective. So we – we’re excited about some of the new tech that we have and we’re excited about how we might target that. And when we say $6, it might not mean one item at $6, it might be a requirement of multiple items purchased at $6, and this may not be pizzas. So we just know that we need to have a value layer out there that gets – provides the opportunity for consumers to get access. So excited about the learnings that we’ve seen thus far. But to Mike’s point, we’ve not made final decisions on exactly how we intend to have that $6 layer unlike we like what we have seen and we will – obviously can continue at least through period three in March there with the $12 specialty piece.

Yes, Will, just one final comment on that. You would have seen this, if you were a Papa John’s customer during the Super Bowl. We’ve done bounce back promotions, that’s fairly common in this industry. But for the first time, we actually executed the bounce back program through the new Papa reward system. And so it was literally no need to enroll. You bought a pizza from us during the period around Super Bowl, and you were automatically enrolled for a bounce back of a free pizza in the following period. And there really was a high usage of that at a customer level, but it also gave us a very directed ability to communicate to the customer, what rewards they have, they were dropped into their wallet, they didn’t have to remember a promo code, it was all automated through the system, really a good example of why we’re going to continue playing with the right price points, because we have new technology and capabilities to really maximize on this and deliver some really surprise and delight on the consumer side, but also drive some incremental check and profitability opportunities for us on the business side.

Got it. Thanks for all that, guys.

Thank you, Will.

Thank you. And our next question comes from the line of Chris O’Cull from Stifel. You may begin. Chris O’Cull: Thanks. Good afternoon, guys. I apologize if I missed some of your responses. I’ve been bouncing back and forth between calls. But why – Steve, why did you – why do you think the Philly cheese steak promotion is working better in February than it did last fall?

We didn’t run the Philly cheese steak last fall, but we – our LPO products actually in the past, well, it actually performed quite well in the past than last time that we did run that specific promotion. And some of our LPOs in the past with the specialty pizzas have performed at the mix expectations, but we’ve seen very nice incremental new customer traffic coming from those promotions. And I think the best way to compare it against though is that, what we did in period one trying to have parity value, coupled with loyalty, coupled with the free cheese steak promotion, drove extensive pressure on check, and i.e., negatively impact the overall sales piece. But also it’s not just about the Philly cheese steak pizza, I think the marketing teams did a really nice job on the creative execution. So it really does highlight the quality of our ingredients. We have a new media buying agency that we brought on last year that’s some of that work making sure that we’re allocating the right investments, targeting the right consumer. So it’s really a recipe for success as opposed to it’s all about one product that’s drove the overall performance and improvement we’ve seen in February, and it’s not a limited time offer. So we – we’ve done a complete refresh of our overall specialty lineup here and introduced new pizzas and also took off some of our underperforming specialty pizzas as well.

To that same point, it’s Mike, Chris, just to add on to it. Last time, we would have run Philly cheese steak and it did perform well. It was marketed the same way to everybody in the Papa John’s universe. So we just did a broadcast marketing like we always did and let that kind of speak for itself. This time, we still did that with some really compelling creative to go along with it a lot of messaging around it. But again, leveraging all the investments we made in 2018 with new marketing technology, there was a massive amount of targeted marketing we went after people that had bought it before. We went after people that look like the people that had bought it before through database marketing and the one-to-one marketing, and we found really good reception by using that new technology to try to drive more customers into the brand that we thought would really like it by telling that great ingredients story and that BETTER PIZZA story. So the technology is working really well for us on the marketing side, that’s a big reason why the growth team was built to merge both the technology pizzas and the marketing pizzas together. So that we have much higher efficacy in our overall messaging. And that’s just starting. We’ve got a lot of room to play with, but quite frankly, we’re really pleased with how that technology is working so far. Chris O’Cull: Okay, that’s helpful. And then, Joe, do you know what percentage of domestic franchisees had a loss last year in 2018?

Yes, Chris, I mean, we’re not going to get into specific information on that. Obviously, we have seen some of our franchisees face some more pressures. We have some metrics that we use and that is some of the metrics that we use to now have to go in and help some of the specific franchisees that might need additional help.

And I’d just add to it Chris, it’s Steve. I mean, I think that this – what we intended to do there and I think that pretty successfully is bridge some of the challenges from a unit economic perspective with the multiple things that we didn’t support last year. So if we didn’t do those things, it would have been in much higher percentage of stores that would have been below that break-even point. We have a percentage of stores that are below the break-even point that we’re constantly trying to drive the top line, improve their execution and overall unit economics. But as we looked at it, we’re – how can we provide levels of support to be bridged solutions to improving the overall sales in addition to making investments like we did last year in the National Marketing Fund, the $10 million. So it’s a balancing act. But clearly, depicted by the increasing number of closures last year, gives you a feel for the amount of pressure that was occurring on the business model last year. Chris O’Cull: It’s helpful. And then, Joe, I know in the past, the company has targeted a 6% commissary margin. Do you have an expectation for the commissary margin this year?

Yes. I mean, Chris, again, we’re not going into specific percentage margins. But again, we – we’re always going to keep that relatively consistent. It is lower last year as again, we’ve made some – we reduced our margin to assist our franchisees. So I think you see that, again, we continue to evaluate it, but we’ve always tried to maintain something consistent that we think is fair to our franchisees and us and we’re not going to obviously increase that significantly.

Yes. Chris, I mean, I think – I mean, it’s a fair question. As we did in the fourth quarter last year to Joe’s point, we did provide a level of relief on the foodservice side based on the transaction level that we have experienced. The margins at the foodservice side of the business is clearly driven by transactions and piece counts. And when we saw those declines, we didn’t feel it appropriate to raise prices for our franchisees. So that was part of the level of support that we provided that was a one-off. We have had a very consistent verbal agreement with our franchisees for many, many years. We want to continue to honor that verbal agreement and to Joe’s point, maintain a consistent margin prior to the 2018 piece, and use the other pieces to help continue to support our franchisees and again, assessing where we may make investments to fix the top line. So I would expect, if you look at your modeling, we think about margin percentage is looking more similar to pre 2018 levels. Chris O’Cull: Okay. And then how should we think about G&A expense if you exclude the special charges for this year?

Yes. I think, we’re going to be very consistent, again, if you take the special charges out of both years, and I think you’re going to be in a fairly consistent place, Chris. Chris O’Cull: In terms of dollars?

In terms of dollars and the percentage, yes, but it’s more on the dollars. Chris O’Cull: Okay. And then should we expect the royalty relief impact in the first-half of the year to be similar to what we saw in the fourth quarter?

So Chris, it’s Steve. So the fourth quarter is going to very – look very similar to what we have planned out for the first quarter. We are still evaluating what we intend to do beyond the first quarter, how much support where we might apply that support. But again, we might have heard on the question earlier, believe that the first-half of the year will be more challenging, so royalty abatement or support to franchisees is likely to occur more predominantly in the first-half of the year. And as leveraging investments more throughout the year and more into the back-half of the year as we assess and evaluate some of these tests to get the sales moving in the right direction. So we have not made a final decision on exact numbers. But I will tell you that we gave ourselves enough headroom within the guidance outlook to be able to incorporate what was necessary – what will be necessary to support our franchisees. Chris O’Cull: Okay, great. Thanks, guys.

Thanks, Chris.

Thank you. And I’m showing no further questions in the queue. I’ll turn the call back to Steve Ritchie for closing remarks.

I just want to thank you guys for joining the call today. I don’t want to lose sight of the fact that we have a lot of positivity and a lot of excitement around the way forward. But once again, this will take time. We do have a lot of work to do. We’ve got a lot of plans. We’ve got a lot of initiatives. We’ve got to strengthen aboard. We’ve got to strengthen financial resources and flexibility. But the assessment, the initiatives and the evaluation of those things will take sometime, but appreciate your continued support of the Papa John’s brand and look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, this does conclude our program, and you may all disconnect. Everyone, have a great day.