Papa John's International, Inc. (PZZA) Q2 2019 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Papa John’s Second Quarter 2019 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to introduce your host for today's call Mr. Steve Coke, Vice President of Investor Relations and Strategy. Mr. Cook you may now begin.

Thank you, Sherry. Good afternoon. Joining me on the call today are President and CEO, Steve Ritchie; and our CFO, Joe Smith. Steve and Joe will have comments about our business and provide a financial update. After the prepared remarks, Steve, Joe will be joined by Mike Nettles, our Chief Operating & Growth Officer 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. Papa John’s second quarter was marked by good progress against our five strategic pillars, as we delivered results in line with our fiscal 2019 plan. I'll begin with an update on key results.In the second quarter, North America comp sales were down 5.7% versus a decline of 6.9% in the first quarter. This was our third quarter of sequential improvement in comp sales. Negative but improving comp sales reflect consumer sentiment challenges that the brand has faced over the past 12 months, which are now in the early stages of stabilizing and turning around, as we refocus our organization around people and our brand.For the second half of fiscal 2019, we expect further improvements in North America comp sales as we anniversaried events of July 2018 and begin to see the benefits of our strategic turnaround. Consequently, we are raising the bottom end of our guidance for North America comp sales to negative 1% to negative 4% for the full year.In our strong and growing international business, comp sales were strong positive 0.3% in the quarter, driven by a return to positive comp sales growth in U.K. and continued strong positive results in the Middle East. As a result, we are reaffirming our guidance for international comp sales of flat to positive 3% for the full year.Now I'd like to provide more detail on our progress in the quarter. Beginning with some more color on our June announcement that we are increasing investment in marketing and brand initiatives, while providing additional schedule financial assistance for North America franchisees that will expire in 2020.When Starboard made a strategic investment in Papa John's in February, we said that we intended to use up to half of the initial proceeds or $100 million to advance our strategic priorities. Of which strengthening our brand and improving unit economics to support our franchisees health are at the top.Of this amount, we announced reinvesting additional $40 million in marketing, approximately one-half will be spent in the second half of 2019 and the other half in 2020, coupled with a 25 basis point increase in the National Marketing Fund contribution rate to 5% of restaurant sales in 2020. This will provide six quarters of increase in marketing dollars to amplify our differentiated market position and establish a strong national platform for our new brand ambassador, as I’ve discussed here in just a moment.The other element of our June announcement was a $40 million investment in six more quarters of tapered royalty relief for our North America franchisees, allocated into three areas: number one, system-wide relief available to all North America franchisees to agree to some customary terms and to move on from the past events. Number two, system-wide incentive base royalty relief around guest service targets. And number three, additional needs based royalty relief for targeted franchisees.By providing franchisees with certainty and transparency on the structure and schedule of remaining royalty relief, our goal is to help them succeed in the short-term but also to plan and manage their business into the future. The program titled We Went Together, was supported by franchise leadership and has been well received by the franchise system as nearly 100% of our franchisees opted in by last week's deadline.Of this, additional $40 million investment in total royalty relief, we estimate spending will be roughly split between the remainder of fiscal 2019 and fiscal 2020. These incremental investments are reflected in our updated guidance for special charges, which Joe will discuss here in just a moment.The process by which we arrived to this package announced and then rolled it out to our North America franchisees reflects the new Papa John's and our commitment to winning together with our franchisees.In late spring, our team led a series of intensive discussions with key franchisee representatives, but how we continue the significant progress we’ve made together over the past six months. What emerged was a plan to help our franchisees manage a recent sales declines as well as our shared responsibility to reinvigorate the brand and consumer sentiment.Next I'd like to discuss what we’re doing to amplify our brand differentiation, which is the primary strategic goal of the We Went Together program. As we have said, Papa John's partnership was Shaquille O'Neal is an important element of our strategy to reconnect with consumers around our truly differentiated market position.Since he joined the Board of Directors in March, we have finalize the other major elements of our partnership including his investment in nine Atlanta area restaurants and the details of his multi-year role as Papa John's brand ambassador.Given the excitement Shaquille has created among the Papa John's teams, we have no doubt that he will help drive positive sentiment among consumers as well. So we are very excited to get them off the bench and into a new national advertising campaign coming up this fall. The addition of $40 million in the marketing budget will help us amplify that campaign.Now I'd like to give an update on our strategy for creating accessible value, the other key element of our customer proposition and a strategic pillar for the company. As we’ve discussed last quarter, we have been testing a number of value and menu constructs combining our premium specialty pizzas alongside more accessible price points that brings consumers into the brand.Under our new CMO, Karlin Linhardt’s leadership this quarter, we enhanced our testing methodologies and are now evaluating several different accessible value constructs in approximately 25% of our U.S. restaurants. Based on our work to date, we are optimistic that these tests will yield an effective national promotion to be rolled out in the future.Moving on to our progress advancing our technology strategy last quarter, with respect to aggregators, which are big focus in the industry, Papa John's strategy remains the same. Test and learn whenever we have the opportunity to reach guest including through aggregators. Aggregators still constitute only a small portion of our total orders, but we continue to explore potential opportunities where we believe aggregators represent an incremental sales channel.We continue to invest in our own technology to support and improve direct to customer delivery experience. Through our partnership Drivosity, we lead our pizza delivery competitors with GPS enabled delivery tracking, which is now in over 1,000 U.S. restaurants up more than double from last quarter.Finally, I like to provide an update on our loyalty program, Papa Rewards. We are more than six months into the relaunch of the program and we have seen an stabilization of ticket and positive team members sentiment around the flexibility and ease of use of that new structure [Indiscernible].We are pleased with these results and are preparing to scale the new capabilities provided by the underlying loyalty technology to expand our one-to-one targeting of promotions and personalized experiences. Prioritizing people is another of our strategic pillars. And I’d argue the most fundamental to the profound positive changes happening here at Papa John's.Building on the all-star additions to our Board and Executive team, over the past several quarters last quarter, we successfully recruited a seasoned operations leader. Jim Norberg, to the -- joined the company as SVP Chief of Restaurant Operations overseeing all Papa John's corporate and franchise restaurants throughout North America. Jim has an unmatched track record in the QSR industry. Starting his career as the fry guy, he rose to EVP and Chief Operating Officer for McDonald's 14,000 U.S. restaurants.Not only is Jim a highly effective business leader, he's a champion for franchise owners, team members and our guests. His values and approach truly align with our commitment to prioritizing people. We expect Jim to play a critical role maintaining momentum from the operator's conference, helping franchisees as well as our company operators succeed by delivering an outstanding total guest experience.On top of recent additions of Marvin Boakye, as our Chief People Officer and Karlin Linhardt as our Chief Marketing Officer this completes the leadership team, which I believe is the most talented team that Papa John's has ever had.Last, I like to provide an update on international business. In the second quarter, our international business again showed its promise as a driver of long-term shareholder value. Total sales grew nearly 10% as we produced over $5 million of pretax income for the second consecutive quarter. Also during the quarter, our United Kingdom operation, which now comprises of 425 restaurants continue to improve it sales results.The management team that came in over a year ago has been working with our franchisees focusing on improving our marketing efforts. For example, during the quarter Papa John's U.K. introduced a popular new Hot Dog pizza as well as our successful Vegan version too.In this month generated a lot of buzz with the new Bee Sting pizza. We continue to have solid results from Latin America and the Middle East, while the European business undergoes some normal growth challenges, we remain very optimistic about a bright outlook for the long-term growth in this region.Finally, our franchisee in Northern China who purchased the company's operation there a year ago and our master franchisee in Korea are both having very good years with strong comp sales and unit growth.In summary, Papa John's had a very solid second quarter. While we still have a lot of work to do we made good progress against our strategy and delivered results in line with our fiscal 2019 plan. We announced a significant multi-quarter investment in the brand and our franchise system.With the strong support of our franchisees, we can move forward rebuilding our differentiated brand and providing a platform for Shaquille O'Neal, as our new brand ambassador, coming up this fall. We and our franchisees will now focus on delivering our great products, to our guests, leading and exceeding their expectations, so that we can all win together.As always we remain focused on, people and pizza. Speaking on behalf of Papa John's team members and franchisees, I'm as excited as ever, about the opportunities ahead.Let me now turn the call over to Joe, to discuss our financial results, for the second quarter in more detail. Joe?

Thank you, Steve. In the second quarter, we reported earnings per diluted share of $0.15 on a GAAP basis, compared to diluted earnings per share of $0.35 a year ago. The decline in our earnings per share was primarily attributable to lower North America comparable sales and special charges.Excluding special charges in the current quarter and certain onetime charges in the prior year quarter, we reported adjusted earnings per diluted share of $0.28 on a non-GAAP basis, compared to $0.48 a year ago.The special charges incurred during the second quarter, totaled $5.4 million, approximately $2.5 million included support to our North America restaurants, through short-term royalty relief, or franchisees.In addition, we contributed an incremental $2.5 million to the Papa John's marketing fund, for increased marketing and promotional activities. Our second quarter pretax income on a GAAP basis was $10 million. Excluding the impact of the previously discussed special charges our second quarter pretax income was $15.2 million, compared to $21.2 million for the corresponding quarter in 2018.Looking at sales, consolidated second quarter revenues decreased $30.3 million or 7.1%, excluding the impact of special items, including the re-franchising of 62 company-owned restaurants in North America and our China operations during 2018.Consolidated revenues decreased $14.3 million or 3.4%, primarily reflecting lower comparable sales for North America, which impacted company-owned restaurant revenues, royalties and North America, commissary sales.Now turning to business unit margins for the second quarter, domestic company-owned restaurants operating margin decreased $1.8 million primarily due to the impact of lower comparable sales, somewhat offset by the favorable impact of current year promotional activities, with lower food costs In addition, we have experienced favorable insurance costs during this quarter. This contributed to the improvement in operating margin of 0.9%, as a percentage of related revenues.North America franchise royalties and fees decreased $4.2 million or 17.4%, as a percentage of related revenues, as compared to the prior year quarter. Primarily due to negative comparable sales of 5.3%, the previously mentioned royalty reductions, as part of the North America franchise assistance program, and an increase in targeted royalty waivers.North America commissary operating margin, increased $200,000 or 0.4% as a percentage of related revenues, as the impact of lower North America sales volume was more than offset by lower operating costs, including labor. The international operating margin improved 5.3% as a percentage of related revenues due to the refranchising of China company-owned operations.Excluding the impact of refranchising, our international operating margin was in line with the prior year as the higher royalties from increased equivalent units was offset by the unfavorable impact of foreign exchange rates.For the second quarter, G&A costs increased $9.7 million, primarily due to the previously mentioned $2.5 million contribution to the Papa John's marketing fund included in special charges, a shift in the timing of our operators conference on the third quarter of 2018 to the second quarter of 2019, higher professional and consulting fees and an increase in management incentive costs.Net interest expense decreased $1.5 million due to lower outstanding debt, partially offset by an increase in interest rates as compared to the second quarter of 2018. Total debt outstanding was $384 million, as of June 30 2019, including $11 million associated with the Papa John's marketing fund. Outstanding debt decreased $241 million from our 2018 year-end balance, primarily due to funding from the issuance of Series B preferred stock to starboard.The effective income tax rate was 12.9% for the second quarter in comparison to 36.8% for the corresponding quarter in 2018. The lower tax rate primarily reflects the impact of refranchising our China operations during the second quarter of 2018.Our free cash flow, which is a non-GAAP measure that we define as cash flow from operations, less capital expenditures and dividends paid to preferred shareholders was approximately $8.9 million for the first half of 2019 as compared to $51.9 million in the first half of 2018.The decrease was primarily due to lower net income and unfavorable changes in working capital items, including an approximate $20 million of unfavorable timing-related impact from the Papa John's marketing fund.During the second quarter, we opened 18 restaurants in North America and closed 35 units for a net reduction of 17 restaurants. We also opened 34 international restaurants and closed eight units for a net increase of 26 units. On a year-to-date basis, we have opened 128 restaurants globally and closed to 86 units for a net increase of 42 units.We ended the quarter with 5,345 global restaurants. We paid a cash dividend of $10.5 million to our common and preferred shareholders during the second quarter of 2019. Subsequent to the second quarter, our Board of Directors declared third quarter cash dividends of approximately $10.5 million to be paid to common and preferred shareholders. The third quarter common stock cash dividends will be $0.225 per common share.Looking ahead to the remainder of 2019, as Steve mentioned, the recently announced that We Went Together program, provided investments into marketing and support for the North America system beginning in the third quarter of 2019 and continuing through the fourth quarter of 2020. We expect to incur approximately 50% of this investment in 2019 with the remainder in 2020.As a result of these investments, we are updating our guidance for the following. Our GAAP loss for diluted share is now expected to be negative $0.10 to negative $0.40 reflecting an increase in special charges, which are now expected to be $50 million to $60 million for the year compared to prior guidance for $30 million to $50 million.The updated guidance of $50 million to $60 million for 2019 includes the impact of the We Win Together program. Also we are narrowing the guidance range for the following. North America comparable sales are now expected to be negative 1% to negative 4% from the previous guidance of negative 1% to negative 5%. Our net global unit growth is now expected to be 100 units to 150 units from the previous guidance of 75 units to 150 units.I'll now turn the call back over to Steve Ritchie for his final remarks before we take Q&A. Steve?

Thank you, Joe. So Papa John's maintained a strong pace of day-to-day progress and incremental improvements in the second quarter. While we also drove further positive change in the foundations of our business, our brand, our franchisees and our people. I'd like to reiterate that We Win Together Agreement developed in close collaboration with representatives of our North America franchise system and now receiving a support of almost all of our franchisees is a major milestone for the company.It allows us to move forward together constructively and positively focused on the future. Just as significantly, the agreement and discussion around it embodied a shared responsibility we all have for the brand, which at the end of the day comes down to delivering great pizza, great value and great guest experiences.I want to thank our fantastic franchise partners as well as all of the team members in the Papa John's family who work together every day so that we can win together. I look forward to providing more updates over the course of the year as our progress accelerates. As always we appreciate your continued support.I'll now turn the call over to the operator for Q&A.

Thank you. [Operator Instructions]Our first question will come from William Slabaugh with Stephens Inc.

Yes. Thanks, guys. Question on the guidance you raised your same-store sales guide on the low end as you mentioned implying I think positive low singles at least in the back half. So I'm wondering if you're still expecting that continuation of improvement as it work through the years – as we sort of talked about the past couple of quarters? And what could you talk about or willing to talk about rather in terms of what that means or how you feel about? How you lapped over the comments from mid-July of last year?

Sure, Will, it's Steve, and thanks for the question. So, yes we did raise up to bottom into that guidance just to indicate that we do have some real confidence around our ability to continue to improve sales. So I think a lot of what we have been doing over in the last four or five months here's since the investment from Starboard, the new construct of the Executive leadership team, the new construct of the new board obviously getting Shaquille O'Neal on Board here and some many – so many of the many things we’ve been doing to improve overall consumer sentiment.The new Executive leaders have been working on the new brand campaign that obviously will coincide with the work we are going to be with Shaquille. In addition to that we have got multiple value platform tests here in the marketplace. I give you that backdrop because those are the things that we win together $40 million investment, about half of that $40 million is going to be going into 2019. Those are what drives us some optimism for us. And know that the back half of the year is going to be getting back to growth.As I have said, the back half of the year, we do expect back to positive sales. I'm not going to get into a cadence of breakdown on a, per period or per quarter. But I will say is, that was our third quarter of sequential comp sales improvement.There are going to be continued sequential improvements on a quarter-to-quarter, but it's going to be much more significant that what one you seen in the last three quarters, obviously indicated by our new updated full year guidance.So, we are excited about what's to come here. As we close out the back half of 2019, it is significant transformational year for the brand. And back in 2020, we are going to get back to better.

Got it. And one more, quick one on value if I could, it sounds like you have a lot going on there in terms of tests and various markets.So, I wonder if you could talk a little bit more around your plans there, if a lot of it revolves around that fix to our price point and now you have tested, in numerous markets in the past? Or if we should think about, value taking a different approach?

So well, it's Steve again. And Mike might you have a comment as well, if I don't cover that ground here. Yes. So I mean, value is something that we've is all that always been important at the Papa John's brand. Certainly, we are the brand that's known for quality, being better ingredients, better pizza, and having the best overall pizza in the industry.But value is an important part of what we do. It's about the price you pay. It's about the experience that you receive. But we also know that we have to have better overall promotional options out there for the consumer to provide that accessible value that, we talked about. So the $6 medium price point has been one that we've had out, throughout, the first part of 2019. There are various different value constructs that, we are testing in the marketplace over various different pizza sizes, various different sizes, part of that equationWe have got some new menu items that are out there in test and those being also part of a promotional test. But there is -- there is, a lot of also different methodologies on how we are doing this as well and how we read test because we have done things in the past, with test. But I would tell you that Mike, and our new CMO are bringing a lot to the table. So I think it will be probably helpful to get some color Mike, to how we are kind of reading some of these things.

Yes, sure. Thanks Steve. And Hi, Will. So, the short answer, I think to your question is, we are way beyond just testing a single pie promotion at $6. We started with that little one. And we kind of feel out the market space use, the medium as part of that offer. That seems to be fairly typical in the industry. We've expanded beyond that, rather dramatically.We are really experimenting with what I'll call, a multi-tier price point value construct, where we actually offer three different sizes of pizzas like Steve said, at three different value price constructs, all of them being one top, with an up sell engine capability to allow us to quickly add multiple toppings on its to try to get to something that quite frankly in the old days, may have been like a $10.03 top.We can do that, with a multi-variant kind of pricing construct, really get a lot of people excited, they come in like you do. It's very traditional in the retail business. You see a very inexpensive entry price point. May be you will hover on that, in quite a little deeper. But once you're in, you suddenly start to realize, you know, I really want something little bit better. And then you start to trade up through the tier. So, we are having a lot of success with that, in the early stages.Different models and different places, observing to the brand you might actually find markets out there that are participating in that right now, as Steve said, we have been up and operating in some flavor and other in several 100 locations.But at the same time, the testing methodology we are doing is very driven on test and control. We have lined up every single store with look-alike stores around the country. And even with look-alike customer profiles and purchasing behavior and then we are able to do really refine testing to be able to say, hey, that work. That worked a little bit better. Let's keep tweaking it. Let’s tested again over and over again, and we are not in test forever mode.We are looking to deploy some of these things within a short timeframe, but at the same time, we can do so with some projectability and predictability about the outcome as suppose to, hey, I'll just throw that on the wall and see if it works. So, very happy with how the team is using all the data investments we’ve made in the last year, particularly around understanding customer behavior and tracking customer behavior to really try to inform some very big differentiators for the brand and something we can feel very confident about how the performance will be prior to actually launching it.

Yes. So, Will -- and thank you, Mike. I think it's important to understand the sophistication by 100 testing methodologies. We continue to make enhancements based on not only the data but also the technology and analysis and the real talent that we have a capability-wise.But, at the end of the day, it's all about transactions, but it's most importantly about incremental transactions. But three key things for success in these tests, as we look at these value platforms; that's incremental sales, incremental transactions, and incremental profitability. Our franchise Unit Economics is absolutely critical to growth, so that they continue to reinvest in the business.So, spend some time on that, because that's obviously a critical component of some of the investment dollars that we’re going to be putting into the market world with the $40 million that we got coming on the marketing side that will also not only support the Shaquille O'Neal brand campaign, but also new promotional campaigns.

Great. Thanks for that.

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

That’s great, thanks for the question. Steve, I just wanted to be clear on the guidance -- the top line guidance, same-store sales change. Is that a reflection of what you are already seeing in the current quarter? Or is this more of a reflection of what you expect to see post the Shaq campaign launch?

So Peter, its Steve. Thanks for the question. So I think what we have to do obviously until you get these things in the marketplace, there is a level of uncertainty. But what we obviously -- the marketing team and the finance team did a lot of analysis and predictions around how do you model out the investment levels that we are going to put into the marketplace, when are those things coming in, what are we putting them against in terms of a branding initiative obviously tide with Shaquille O'Neal, which we are excited about. But also the value platforms when those things come into the world and what kind of impact they may have.It's still early with some of the testing, but we did have enough confidence to know that the bottom end of the guidance needed to come up from a five to four. We didn't take the top end up, because there's still a level of uncertainty around where we are in the overall business.Clearly, with the first couple of quarters and the year, we have a significant level of improvement to get to that top end of the full year guidance, but there is a lot of things that are very exciting that we have plan here in the back half of the year.

Great. And then just on the -- I think you said, you’ve planned to spend 50% of the $80 million investment in 2019. That implies $40 million, given the run rate on the royalty assist as the franchisee it kind of implies you guys will be spending about $30 million on marketing and the back end of the year is that correct?

What we call it out Peter is a 50-50 split and so to your point 50% of the $80 million is going into 2019 of that $40 million, 50% is towards royalties and the other 50% is towards marketing. And those are approximates to the dollar because we are still going through the final planning stages more specifically on the marketing side, the royalties are pretty locked, obviously they are only impacted by revenue changes, but yes a significant amount of marketing dollars are going to come in here in the back half of the year.

And just -- then my last question. What kind of comp do the franchisees need in this environment with the assistance that you're providing to hold their margins flat to their rational level margins?

Peter, it's Steve, I mean, it's certainly going to vary -- by market on because there is obviously a lot of puts and takes out there in the marketplace. Geographically, you know the competitive side just different pricing variation that differ from market to markets. So different levels of comp are required to just stabilize the overall unit economic model which is why we didn't just do broad brush royalty relief and support across the board, there is a level of targeted support for franchisees in different marketplaces that are more challenging and need more sales lift to get their model a little bit more little healthier. So it does vary a bit.We know our margins are going to be backwards until we get back to positive sales. It is the bottom line which is what we expect to do in the back half of this year. Get back to positive sales and then get back to the kind of growth that we expect for this brand that we produced 14 consecutive years of flat to positive sales growth in North America.So -- brand is capable of doing that we just got to get the business stabilized here which as you probably know these types of situations have a tendency to have about an 18 month turnaround. We're right about the 12-month point here just last month. So what we're trying to do everything in our power is to accelerate that 18-month turnaround and getting back to growth.

Great. Thank you very much.

Thank you, Peter.

Thank you. Our next question comes from Alton Stump with Longbow Research.

Okay. Thanks for taking my questions. First of for Joe. Just as far as you are raising the lower end, of course by unit growth guidance, can you give some color -- is that U.S. or is it international? Is -- it [Indiscernible] any thought here domestically, kind of, what's driving, of course, that lower end coming up to 100 units?

Yes, Alton. This is Joe. Again by most of that is just our closings as you can see for the first six months have improved -- over last year and better than prior our original forecast. So it has mostly to do with the domestic side of the business. And I think that shows with some of the targeted royalty relief and also the other assistance we have given -- we have been able to keep closing stand domestically then from our original forecasts.

I think that's a great point, Joe and because it's the program that introduced and we have the operations confidence so -- a lot of this is also just about confidence in the future. The ability for the management team to get the business moving back in the right direction has the ability to mitigate some of these closures.So, we are pleased to see it's mitigated. We don't like any closures. I hate to see a single closure, but very fact that we are seeing lower closures than we initially expected based on the sales pressure, I think it is very positive. I think Joe and the team did a great job. It really modeling out what level of support that we needed to provide across the board to the right franchisees.

Good. And then, follow-up, as far as it is of course, the third party delivery a guy which I think you're the first one to do, it in the industry. How is that going so far as you talked early but are you seeing any that's like quality as you that third party provider?

Hey Chris. I'm sorry, we did a little bit. But I think your question Alton. I'm sorry.

It's okay.

I think this question specifically was about aggregators, is that what you were asking?

Yes.

Okay, so, we've been as you know we’ve been in the partnership with DoorDash for well over a year. And we first mates now almost as long. It's actually going very well for us.I wouldn't say we are at 100% deployed. We've got a few challenges that we are left to finish the deployment to all of our stores. And certainly there is some geography, where some of these, some of these large aggregators play better than others.It does represent a substantial, part of our growth for the future when we start to look at it. Right now, it's a pretty modest impact overall to sales. But we have noticed some things. Part of the deal that, we have done with the large national aggregators, is make sure we take a hard look at that customer data again.And what we see, are there is an outsized portion of these customers that are new to the brand, new to us. We are able to tell them, we have not seen them before, which really as in keeping with our strategy of being where the customers want us to be. So that we can remain accessible to them regardless of how they choose to place orders for the product.We do have plans to continue to expand with this. We actually are looking and talking to a number of other large national aggregators. And we see this as a future growth opportunity for us, not just as a new customer acquisition channel.But the ability to market the customers through those captive channels and continues to service them, in the means that they prefer, as opposed to having all of them have to come to the Papa John's brand.With our loyalty program and with other digital strings we really believe that there is going to be a lion share where we see the activity, but it certainly a growth opportunity for us. And we want to make sure that, we leverage it appropriately.

Great. That's helpful. Thank you, Mike and Steve.

Thank you, Alton.

Thank you. Our next question comes from Chris O'Cull with Stifel.

Hi. Good afternoon, guys.

Good afternoon.

First Joe, you mentioned about half of the $80 million investment will be incurred during 2019. How much of that is the targeted needs base relief?

That's a small part of it. Again on the special charge, we don't include that as that's separate from that, because we don't include targeted relief as part of the special charge. But it is a part of the half, of the release that we will give Chris.

Okay. And then, does the royalty relief come with a condition their franchisees only to participate, in whatever value construct you guys choose to promote?

No. It does not.

So it just, go ahead …

Well, it's just interesting question Chris. So any national promotion all franchisees have to honor our national promotions. So if it if one of those value constructs, became a national promotion that is just part of our normal agreement that we have with our franchisees.And frankly, that's something that they traditionally agree to do. Because it's obviously going to be more impactful, if we can all aggregate the dollars and support the same promotion. The only thing that was tied to the agreement for royalty release was a general liability release for our franchisees.

Okay. And then, I know in the past franchisees are really focused on margin percent when they look at offers and promotions. So, there is a new value construct required and to think differently about the margin in terms of maybe focus more on transaction margin dollar growth rather than the margin percent because some of the ones I’ve seen in tests seem to be pretty aggressive discounts relative to what you guys have historically done?

Sure, Chris. It's Steve. Our franchisees as well and technically, I guess the company is the largest franchisee as we own a lot of the store. So, we are able to kind of balance and understand, as we look at things as we called profit after FLM, profit after food labor mileage. So, incremental sales and that drive the incremental profitability that being driven by transactions.But as I said in my earlier remarks, those three different really key criteria for success of the tests that's driving incremental sales, incremental transactions and incremental profitability, versus as Mike talked about the more sophisticated testing methodology on looking at the right control groups and like-for-likes and also comparing against the system.So, we are enhancing the way that we are thinking about this. I think all of our franchisees understand the importance of valuing and what it plays. The promotions have to be effective to drive traffic growth.Certainly, from market-to-market there is different desires to promote different things, but we have to take the power of one national brand, and we really believe if we can get our arms around that and do it effectively that really will extract a tremendous amount of traffic growth for the brand when you combined with the brand enhancements, we are going to be making in the new campaign of the coming later this year.

Okay. And then, Joe how much did the impact of shifting the timing of the operations conference have on G&A this quarter? And should we expect that amount is going to benefit the third quarter comparison?

Yes. Chris that's roughly a couple of million dollars and you're right that should come back and benefit Q3.

Okay. And then just lastly, I know you guys in the past have helped or contributed to the U.K. fund I believe you have. Is that that continued?

Yes. We continue to work with the U.K. team, and we see some of the improvement they’ve had. And again we, as you said, over the years we have continued to make various contributions to that and that's just part of the regular operations. It's kind of we continue to look at every year and make various amounts of contributions depending on the business and some of the activities that we have and that's something we are continuing to do this year.

Yes. Chris, we always support all of our franchisees around the world. In the international business, the U.K. is different, as you know, because we also own the quality control center and we are the master franchisee for all the franchisees in the U.K.So, certainly some additional revenue streams coming in there, so there’s return on investment models work in various ways in U.K. But a very successful market for us and our largest market, not only in terms of stores but in terms of royalty revenues coming, a very key market.As I said in my opening remarks, we are very excited to see U.K. getting back to positive comps in the quarter and we’ve got a fantastic new Operations Director, Liz Williams in the U.K. that is leading those efforts and really doing some tremendous work. So, we'll always continue to evaluate how we can invest behind that market to continue sustainable growth.

Great. And then just lastly, when you look at the segment profit, you comment the North America commissary operation has been under some pressure and probably largely because just the transaction declines in the fixed cost, nature of the business. But is there anything you guys can do to right-size that segment in terms because I know you build up capacity over the years anticipating a lot of growth and now that flow domestically, is there anything you can do to jet us in some of those fixed assets to at least downsize that segment?

Yes, this is Joe. I'll start and Steve can add-in but I think our team does continue to look at the different things so may be production schedules used to be six times or six days a week and now they're going to four as an example. You know, you did with the addition. You did improve some delivery costs.I think that's why you see -- we saw some improvement as I mentioned about in labor costs as we continue to as you say right-size the business with base work on the amount of volume that we have. You do obviously have trade-offs because you have to have QCC is close enough to keep to delivery costs down.So, our team continues to look at that challenge the level of how many days of production, they also look at – you know, the best way to deliver and they're always challenging the cost of try to reduce things. So we're doing that.

Yes, Joe I mean you hit some of the good ones in the short-term what we can do to offset. I mean, so we have to think about this business obviously in the long-term. So this is a brand that has been impacted by some extraordinary things so we are in the midst of turnaround. The QCCs have been very healthy business model for us the cost of capital is very low. They produce a lot of income for us and they are great for our franchisees because they provide not only quality, they provide consistency.So, we have built that 11 QCC down in Georgia two years ago for a good reason because we are building for the future. And we are going to trying this thing around. So we have got 11 QCCs that can support the future this brand and we are not going to make short-term decisions that negatively impacted, but at the same time Joe is hitting good points. We are always trying to find out ways to be more efficient as long as they do not at all have any risk of stunting our ability to re-stimulate the growth that is absolutely necessary for our brand.

Great. Thanks guys.

Thank you. Our next question is from Lauren Silberman with Credit Suisse.

Hi. Thanks for the question. You indicated consumer settlement challenges are in the early stages of stabilizing and turning around. Can you expand on that that commentary? Any metrics you can provide that gives you confidence in that stabilization? And then just related to that could you have any color on how same-store sales and traffic trended throughout the quarter?

I get the second part. Mike, can you get the first part.

Yes. Hi, Lauren, it’s Mike. As Steve said I’ll try to grab the customer sentiments piece first. So we use the number of diagnostic tools to measure that. One of the objective measures we use is YouGov. YouGov is the brand index and the number of other different measures -- pretty standard in our industry. So we are able to track that almost on a period by period basis. It's not absolute, but it certainly directional and what we have seen is a remarkable constant steady improvement over the last periods -- 12 periods since last year in particular.We can also definitely see when the Papa John's Foundation makes a major endowment or we have other positive publicity. You know, the YouGov brand sentiment index tends to trend upwards as well. So a lot of our internal work it just being better corporate citizens, a lot of foundation work, a lot of our work internally and externally on really cultural improvements and trying to enhance our diversity and our inclusiveness have really started to be noticed I think by customers in general.And then finally may be more subjective on the inside, we have a wonderful loyalty program that we have relaunched last year that gives us tremendous amounts of insight in guest behavior. And it's a viewing mostly and looking at their number of repeat business or their repurchase intent. We see that in terms of their willingness to come back to the brand, their willingness to be more loyal to us as a brand.And quite frankly, giving us credit for some of the outstanding work that, our operators are doing, and trying to serve a better product, deliver a better product, and give us better scores around overall satisfaction, as a result of it.So we take all of those metrics together. And it's a pretty resounding things are improving. It doesn't mean where we want to be yet. We've got lots of opportunity and headroom to continue improving. But a lot of our work efforts starting to be rewarded, as customers come back to the brand.

Yes. So I think, Mike, kicks all the key points on sentiment, I'd say we are close to where we were last year at this time. But we had a drop it started in the fourth quarter of 2017. So we have some additional work to go. We believe some of the work that we're going to be introducing later this year or continue to show improvement in that area.And executing at a high level, so that we got great guest experience with our new Chief Restaurant Operations offer, and the work that Jim is going to be leading also plays a key part, an overall consumer sentiment.So the other question Lauren just on cadence and comps throughout the quarter, gets into specifics. But I can tell you that, we had the same promotional price point of $12 for three different versions of specialty pizzas.So, there wasn't any significant kind of difference in the promotional side. And there wasn't any real disparity in our level of marketing and investments across that. As that stated earlier, it really was a bridge kind of quarter.We were just trying to put some things together, as we were building the plans for the future, stabilize the business as best as possible, rather building a robust plans to get back to the growth that I continue talking about here, but nothing really significant to call out.

Great. And then, just bigger picture, any thoughts on how the pizza segment overall is being impacted by the strong growth of the third-party aggregators?

Sure. I'll start Lauren and Mike, if you got a comment jump in it. There is no doubt we obviously track market share data, on a monthly basis around here through various different third-party research groups.There is some impact that's happening within the overall category, that impacted to the category is really a share shift. And that we are seeing some of the lift within the shared site that happening within the dependence which is obviously shared donor for the last seven or eight years, to the national players within the category because of the digital and technology and also the economies of scale and the marketing spend. Whether that's long-term or sustainable, I'd say it's probably too early to tell.But for our business specifically, which like, what we have done with our partnerships as Mike has spoken to the incremental lift that we are seeing through our partnerships with aggregators, really that's offsetting the impact it's having to the national players in the category.So, in general where it a wash, whenever impact, a modest impact we are having on the comps. We're offsetting that with a modest increase or getting with the gain. So, it's something we are going to monitor to see, if this is a continuation with the independence.My belief is that the national players will regain growth longer-term in the future here, because there is a lot of marketing investment that's happening within the aggregators' space. That's driving some visibility. And there is a lot of learning’s, that I can tell you we are getting in real-time, on how we will promote and partner with the aggregators, and various different ways beyond just promotional activities.

Thank you very much.

Thank you, Lauren.

Thank you. And we do have a follow-up from Peter Saleh with BTIG. Your line is open.

Great. Thanks. Steve, just a quick question on the value, you guys anticipate the upgrades to the equipment or the incremental investments on the franchisees part to support the value rollout if any in the later this year?

Nothing of any kind of significance, that's material, Peter. And some of these value tests are type -- as I said some menu items or new product introductions. But we don't have anything that we are looking at here that's any kind of significant investment required for our franchisees.

Great. Thank you very much.

Yes. Thank you.

Ladies and gentlemen, thank you for participating in today's question-and-answer session. I'd now like to turn the call back over to management for any closing remarks.

So, I just want to thank you everybody for your continued support, and just reiterate our excitement around the future for the Papa John's brand, certainly the first half of the year, a tremendous amount of change management and transformation within the organization.Now, it is our job and our responsibility and we are excited to do the work that is necessary to get this brand back to growth. So, we look forward to talking to you after our third quarter results are to be reported. Have a great evening. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect, and have a wonderful day.