Ladies and gentlemen, thank you for standing by, and welcome to Papa John's First Quarter 2020 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Steve Coke, Interim Principal Financial and Accounting Officer. Please go ahead, sir.

Thank you. Good morning. Joining me on the call today is President and CEO, Rob Lynch. Rob and I will have comments about our business and provide a financial update. After the prepared remarks, both of us 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 those 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 and 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 Rob for his comments. Rob?

Thank you, Steve, and good morning, everyone. First, I'd like to say that I hope everyone on this call and their loved ones are also healthy and safe. The entire Papa John's family extends our deepest sympathy to those around the world who have been directly or indirectly impacted by COVID-19. We're also profoundly grateful to everyone working so hard on the frontlines to keep us safe and healthy. I want to begin this morning's call with some detail on the progress we made in Q1. It provides important context on our company-wide transformation and the headway that we are making with our long-term strategic priorities. Both of which have accelerated during the pandemic. I will go on to discuss how COVID-19 has impacted our brand, our team, our franchisees, and customers and how we are executing on our strategy in this new environment, staying true to our values and our purpose. Steve will then provide more detail on our Q1 results, before I conclude with closing comments about what we expect for the remainder of the year and beyond. Let’s start with our progress in Q1 before the pandemic began to have a material impact on our overall business. In line with our original 2020 outlook, comparable store sales were very strong, rising 5.3% in North America and 2.3% internationally. January and February were particularly strong in North America, with North America comp sales up 7.6% and 5.4%, respectively, driven by successful new product and marketing innovation. We continue innovating on our signature fresh dough to create delicious, high-quality menu items that build on our premium brand, add minimal complexity to our stores and our incremental versus cannibalistic of our core premium products. In February, we successfully launched Papadias, a toasted handheld alternative to sandwiches, made with our fresh…

Thank you, Rob. This morning, before providing details on our operating results, I'd like to begin by discussing three items; first, are year-over-year GAAP earnings; second, a change in how we are presenting temporary franchise support; and third, our adjusted earnings, reflecting this change in presentation. So let's start on a GAAP basis. In the first quarter, we reported earnings per diluted share of $0.15, compared to a loss per diluted share of $0.12 a year ago. The 27% year-over-year increase in our GAAP earnings per diluted share reflects four factors; first, a $0.31 positive benefit from special charges a year ago, primarily associated with the Starboard investment. Second, a $0.14 positive benefit primarily driven by strong North America comparable sales in the first quarter of, 2020, third, $0.4 negative impact of higher preferred stock dividends in the first quarter of 2020, compared to the first quarter of 2019, when we issued the preferred stock, and only incurred a partial dividend payment. And finally, a $0.14 negative impact due to higher planned, temporary franchise support, as part of our we win together agreement, with franchisees. Next, I'd like to discuss temporary franchise support and how we are presenting it, beginning this quarter. As a reminder, under our, we win together program, last summer we made a commitment to our north America franchisees, who were facing a significant contraction in sales, with five quarters have scheduled, temporary incremental support and marketing and royalty relief. Previously, we had categorized temporary franchise support as a special charge, reflecting the unique challenges the company has had to manage over the past two years. However, consistent with the significant progress, Papa John's has made with its transformation, including continued improvements in sales and unit economics, as well as considering input from the SEC, temporary franchise…

Thanks, Steve. Finally, to summarize and wrap up, Papa John's started 2020 with great momentum, which has continued into April. Our new products and marketing have performed very strong. Our innovation pipeline continues to produce great ideas that deliver results. Our franchisees, owners of small local businesses are re-establishing a strong foundation for future growth and success. And through it all, we have kept our team members and customers safe. Stay true to our values and continue to deliver safe, high quality, delicious food. The COVID-19 pandemic has caused deep harm and sadness to individuals and communities across the globe. But it has also inspired heroism from many in response. Again, I want to acknowledge Papa John's team members and franchisees, because of their tremendous effort, we are meeting our commitment to serve our communities, and will emerge from today's challenges, a much stronger organization. Further along our path to becoming the world's best pizza delivery company for the benefit of all of our stakeholders. I'd like to thank our shareholders and everyone on this call for their interest in what we're doing, and for their continued support. With that, I'll turn the call over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question will come from Peter Saleh with BTIG. Please go ahead.

Great. Thanks and congrats on the quarter. Rob, the April comp was pretty impressive, really impressive at almost 27%, so far. I'm just curious as to when you think about that, is there any way to parse out, how much of that you feel is coming from stay-at-home orders, how much of that may be coming from Papadias. Just trying to get a sense of how much of that is more of a sustainable number and what the really underlying run rate figure looks like.

Hi, Peter. That's great question. We've spent actually a lot of time thinking about that exact question, and I just would call your attention to, we were tracking at about 7% comps in Q1 prior to the third week in March where we started seeing some slowdown from the initial shelter-in-place behavior. People were pantry loading. People were adjusting. The sports had shut down. People weren't able to have birthday parties. Those types of things. So we saw an initial slow down and we feel like that cost us about 200 basis points in sales in quarter one. So, lots of momentum, even without COVID-19 impacting our domestic business. Obviously, April, at 27% has been a very different trajectory and the way we've looked at it, is we believe that COVID represents probably right around 10% of that sales growth. It's consistent with what we've seen in the other delivery restaurants that have stayed open. They've seen similar types of trends where they didn't have that type of growth prior to April, and so that's what we're seeing from COVID and we would expect that to continue. We believe the tail on this thing is going to be maybe a little bit longer than then folks might expect, even when states and communities open backup, we think the consumer behavior will still be conducive to large demand for delivery business. The other you know 15% to 17% is really a compilation of a lot of things we talked about the call. We're seeing a huge positive impact from our innovation. We're finding it to be very incremental. People are adding Papadias on top of pizzas. It's not replacing pizza. So we're seeing a lot of check growth from that. We're also seeing our aggregator business has doubled. It's now stands…

Great. Good to hear. On the restaurant level margins it looks like you guys had another, good quarter there margins expanding. Can you talk about some of the initiatives that you guys are putting in place to permanently cut to improve the margins, with the call centers, and maybe some discussion around the work because their turnaround insurance, some of the other initiatives to those restaurant level margins more permanently.

Yes, for sure. I mean, we've we have been able to utilize our labor, a lot more efficiently in our restaurants, through the implementation of both our Papa call center and a lot of our company restaurants. And then, we've introduced some new processes, and some new equipment, that allows us to more effectively utilize our labor. So, labor has been a pickup for us. We've also worked on the middle of the P&L. We've cleaned up some of the RNM line items. We're just doing things more effectively, more efficiently and our insurances improving. We've seen improved insurance rates, particularly on the company side, really over the last six months, as we've instituted, really what I would call a culture of safety throughout our restaurants. We have now have technology which allows us to assist our drivers and driving more safely. And they're rewarded for that behavior. And we're able to track that behavior. And really we've just seen claims come down. And as a result of that, we're starting to see some savings. And we would anticipate that, the reduction in claims should help us on the premium side to moving forward. So we see future benefit on our insurance line items as well, but as you know, in almost all restaurant businesses revenue is a flywheel for margin. And as we, as I mentioned in Q1, we're tracking along at 7% comp sales growth. That is going to help our margins across the Board. And so, as we get into April and Q2 as we see this 27% comp sales growth, you know, where -- our restaurants are going to continue to operate very efficiently and productively.

Great. And then just a last question and I'll hop off. On the franchisee side, can you just talk about the franchisee health and maybe give us a sense of where their margins are? I mean we see your company on margins are the franchisee margins. Do they mirror the company margins in terms of the improvement that you guys have been seeing in terms of overall margins, trying to understand franchisee health and maybe how that may relate to their appetite to open more restaurants in the coming quarters and years?

Our franchisees are incredibly happy right now. The health of their restaurants, is the best it's been in the last three years, and you know, we are actively working right now to build plans and incentive structures and other agreements and partnerships with them to accelerate development. We you know as Steve called out in the -- on the call on the release that you know, we were moving forward with the -- we win together. Franchisee support for the Q2 and Q3, that's a commitment we made. The majority of that support is in the marketing fund which really benefits us right now because we feel like we have a lot of great news to talk about, both from an innovation standpoint as well as the great work that our teams are doing out in the communities to take care of people during the shelter-in-place challenges. And so, but at the end of Q3 we are in great shape to come out of that. We are not planning on any subsidization or support moving forward. And that's because our franchisees are in great shape, better shape than they've been in many years.

Thank you. Our next question comes from Alex Slagle with Jefferies. Please go ahead.

Hey, guys. Thanks. Everyone is doing okay. It's fun to get your thoughts on the ops and discuss, sort of, how you've been able to manage delivery times and limit delays both in delivery and carry out turnaround times. Just any issues with inventory management given all the demand volatility, obviously surprising, the strong, strong growth we’ve seen here.

Hi, Alex. Actually it's kind of the opposite. We're actually, we're operating better, and that's because we are able to staff, our restaurants. I mean we've created thousands of jobs and hired thousands of people over the last six weeks. And in doing so we're able to staff the restaurants and make sure that we are able to handle this increase in demand and with any operating business whether it's a factory or a restaurant, you know as your demand goes up and you're able to appropriately staffed to handle that demand, you just get more productive and you just get better. And so the institution of the implementation of no contact delivery has really been a well-received platform for our customers. And we've seen the power of going above and beyond to take care of our customers. And we're seeing, you know, 1000 basis points improvement in our customer satisfaction scores, I mean, just from the implementation of that. And we're seeing the pride flow through all the way down to our delivery drivers and doing work that's important. And so the morale has never been higher in our restaurants. Jim Norberg, our Chief Operating Officer has really kept his nose to the grindstone, if you will, he's been out there in the restaurants with the teams, making sure that we're meeting their needs and making sure that we're supporting them, and they feel like we've got their back and they feel like they're doing really important work. It's helping their community. So, morale is incredibly high. When you see morale very high, you see productivity go up. On the supply chain side, we got out in front of it. I mean, we knew that once we were going to continue to be able to operate that our model would be similar to what we had seen in Korea. And so our teams went very -- moved very quickly to secure incremental inventory to the point where we went out and bought a lot of refrigerated trucks that we could put in our DCs so that we could hold more inventory and we got scared because the first two weeks of that in March, we saw dip with the pantry loading and we were concerned that we may not see that spike in demand that we had seen in Korea and in the U.K. And then April came and we saw it and we were prepared. And our team has not only bought more inventory, we've secured more suppliers and make sure that we have redundancies in our supply chain to be able to handle what we anticipated to be a bit of a challenging supply environment through this -- these unprecedented time. So, our supply chain is operating at a high level. We have redundancies in place and we feel great about our ability -- our business continuity moving forward.

Great, that's helpful. And if you could provide some more texture on the check first traffic trends in April and with a mix of loyal rewards guests first new and lapse customers looks like?

Yes, we feel great about that mix. The mix is actually about 50/50, check and trans. And the trans are really attributable to more customers. It's -- the frequency is up a little bit, but the majority of the growth and transactions is new is new customers. We've seen over a million new customers in April come into our brand and we haven't seen that in a long time. It was actually just the opposite. We had lost a lot of customers back in 2017, 2018 even into 2019. And so it's great. We're winning back customers. I always say adversity makes you better or worse, and it's a choice, and this adversity has really helped our team accelerate a lot of the cultural development that we -- we'd call it out back in Q4 of 2019. And I think the work that we're doing as a team, the pride that we are showing and -- that our employees have is really helping us to win back a lot of customers that we may have lost in the past. On the check side, its healthy check growth. We've taking almost no base pricing at all in 2020. We're really seeing it flow through from a mix standpoint. We're seeing additional items being added to orders and that's really Papadias and Jalapeño Popper. Those two initiatives have been very incremental and are driving a lot of check. And then as I mentioned, our loyalty program, we're up to about 16 million customers at this point. And those checks are increasing as well. So, you know, where we used to have a lot of discounting last year, trying to solve some of the problems that the brand was facing in Q1 of 2019, we haven't done that this year. We, as you know, we stayed it back into Q4 again, we are focused on innovation and focused on our brand, delivering better quality and positioning ourselves in the marketplace as such versus kind of commoditizing the category and chasing the discounts, which hurt our unit economics and really are consistent with the quality and investments we make in the brand, so all of those things are driving really healthy check growth, and we're seeing a lot of new customers driving transaction growth.

Thank you. Our next question comes from Chris O'Cull from Stifel. Please go ahead.

Thanks. Good morning, guys. Rob on the last call you mentioned plans for several new product introductions this year, and I know you launched, some earlier this year but -- do you still believe product news is necessary, or do you believe you can save some of that product news until later in the year next year even.

Chris, I don't know if you're listening to our executive team calls or not but that's exactly what we're talking about. Every day you know we have actually already put a hold on some of the innovation here. You know we were planning it at the outset of the year to have already have launched another new item, and we've chosen not to do that. We've chosen to focus on our core business, we've chosen to make sure that we are supporting our operations with the increased demand we're seeing, making sure that we're not, you know, having to distract them, to train them up on new products and do those types of things. So, we've -- it's really been a wonderful situation where we have the luxury of making sure we're executing our core business as perfectly as we can and while we're doing that, we're still developing, testing, validating new ideas. You know we have a pipeline of innovation ready to go when we see the strategic opportunity to launch it, so it really is a great position to be in.

I know Rob there's been a couple of states that have lifted their stay-at-home mandates including Tennessee where I'm based. So can you describe how sales may have changed as those mandates have been lifted?

We've tracked that closely, we wanted to understand that. And we haven't seen sales trends change really, and in fact they're very consistent and that may be a function of some of those dates I know a lot of, although they're open a lot of the restaurants, particularly the dine in restaurants have not reopened yet, you know, as that continues that situation continues to evolve, we'll continue to track it closely, but as of right now in states like Tennessee and Georgia, and Texas, we have not seen a drop off in our business.

That's great. And then just lastly, is the system seeing any interest from outside capital that could help fuel unit growth.

Yes. I mean I can expound on that but that's the short answer, there's actually a lot of excitement around the brand right now and we're having active conversations with, you know, people that are interested in becoming part of the Papa John's family.

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

Yes. Thank you. Good morning, guys on the first quarter and the great start here so far in April, Steve and Rob. I just want to ask, as you mentioned Rob that, like you think there's about 10 or so percent lift, from COVID here in April, obviously still implies a pretty big step-up from the 7% growth they saw in the first two months to up mid to high-teens, how much of that do you think is new product based versus better marketing or any kind of sort of if we're to cut piece that out, how much of that upside do you think, in your core business is coming from innovation.

When -- that's great question Alton. When a restaurant company is hitting on all cylinders, it's really a beautiful symphony of all those things. It really takes great upgrade operations are the foundation. If you're not running great operations, it's really hard to execute innovation, with excellence. And if you have -- when you have great innovation, if you don't let anybody know about it or communicate it in a compelling engaging way, that can influence behavior and help people change their habits and come in more often, then you can have all the great innovation in the world, but nobody knows about it and nobody cares about it. And I would say that right now we've spent the last eight months, building that model. Jim came in about a month before I did and that was that was a blessing for me as a new CEO to have such a great Chief Operating Officer, come in and be here. And he has really transformed the way we're operating in our restaurants. And we are now a great operating company. And we are great franchise or that is helping our franchisees operate more efficiently and so when you have that, you can really unleash the innovation pipeline. And we're seeing that happen. And then, our marketing, we've transformed that marketing, that what's our new Chief Operating or Chief Commercial Officer is rebuilt, a strategy, that's really focused on our food. And getting back to the idea of better ingredients and what that really means to our customers, not just on our pizza, but in our innovation. And so all of our innovation is leveraging all those ingredients and making it more efficient and productive, so it really is all those things coming together. And so you can parse it out, but you can't really say, this much is innovation and this as much as marketing because they support each other and they build on each other.

Excellent. Thanks Rob and then just back to the last question about, people that are I'm sure asking about investing in the system. How quickly do you think that on your growth, it was speaking could turn out. Obviously, I'm sure everybody's focusing on just kind of this huge increase in demand that we're seeing short-term. And you're probably not thinking about how to use at the moment. But is that back half of this year story potentially or is this yet pickup or is more kind of 2021 do you think they'll we see either new money and our existing people start to add, use your system here in the U.S.

Yes, a lot of that is going to be dependent upon, when the government to get back to operating in a normal way. I mean right now and absolutely appropriately, their focus is on making sure that they're keeping their community safe. And making sure that they are doing everything that they can to protect the citizens and get through this pandemic. And so, as you know, they're -- it's a right now development is kind of at a standstill, because you can't get permits, you can't get all the things that you need to do to buy real estate and develop real estate. So when that returns, when, we get through this situation and return back to normal operating procedure, I think we will be incredibly well positioned to move forward. As you know, we just hired Amanda Clark, who's our new Chief Development Officer we haven't had a Chief Development Officer in the past. She came to us from Taco Bell where they've, a ton of restaurants over the last five years. And, she's building the plan right now to be ready to activate when we're able to do so. So, I'm hopeful that we're able to get back, developing restaurants in 2020, but it's really going to be dependent upon, when the governments are set up to allow us to do so.

Thank you. Our next question comes from Brett Levy with MKM Partners. Please go ahead.

Great. Thanks for thanks for all the information. Thanks for taking my call and again I hope everyone is well over there. Three unrelated questions. First, if he could just parse out a little bit more on the comps anything you've seen regionally day of the week day Park. Then on the franchise side, obviously they're ecstatic about the comp levels. But, what have you heard in terms of percentage of the bucket that's gone after PPP either out of need or just out of a precautionary standpoint and what are their debt levels look like? And then just how are you thinking about the investment cycle on the corporate side, given that, while there's a tremendous amount of operational dysfunction out there. You all seem to be running pretty well and had the cash to really double down on certain technology and innovative things that are off the menu? And I’ll stop there.

Okay, great. Thanks, Brett. On the cost we are seeing a little bit of variability. I mean, the numbers, we're double-digits pretty much, during April we were double-digits pretty much every day, but we see a little bit more strength, Monday, Tuesday, Wednesday, Thursday than we do over the weekend. We do see that -- I mean, the thing that we haven't talked about as much is, 27% comps when we have no sports, and we have no birthday parties and we have no social gatherings. So, a lot of those things are impacting the weekend. So, the weekends are still extremely strong, but relative to the weekdays, the comps aren't as great. So I hope that gives you a little bit of texture. On the franchise PPP, when COVID first started taking hold in North America, and the federal government announced the PPP program, our sales as a system were declining given as I spoke the pantry loading and what have you in late March. And so we were exploring actually programs around PPP as a company and looking at, should we be taken advantage of this if our business is going to be in decline. And as we looked at it, we decided as a company, not to do that and that was a decision we made because we didn't feel like it was in the spirit of the law, we didn't feel it was the intent of that plan is to help small business owners survive the challenges that they're facing in this dynamic. Our franchisees are small business owners, and they are independent small business owners and so they each are making the decision on whether or not they're going to take advantage of that program given their individual situation. As you know, our system has…

Thank you. Our next question comes from James Sanderson with Northcoast. Please go ahead.

Thank you and congratulations on a great start to the second quarter. I had a question focusing a little bit more on franchise health. Just hoping you could outline a little bit more how ending royalty relief in the third quarter will flow through the franchisee income statements in forward. What I'm trying to understand better is how these funds have flow through, what percentage of franchisees have been impacted and how we think they'll come out of this starting 2021.

I can let, -- Hi Jim, how are you doing?

I'm great.

I could let Steve talk to the particulars about how that funding flows through their P&L. But I mean, in general, the subsidization that -- that this we went together. About 65% of it is marketing investment. So we are really focused on driving growth. The lot of the funding is going into increased marketing to continue increase comp sales growth. Less than 50% of it is franchise subsidies. So there are not a lot of franchisees in our system right now who are staying open because of any type of royalty relief that we're giving. It is a nice to have at this point and once again, we made the commitment. So, we're continuing to deliver on that commitment, but the revenue growth that our system is seeing far and away, you know, way more impact and positive impact to their P&L than we went together funding that we have in place. So I hope that answers your question.

It does. Just following up a little bit more on new unit growth and going into the end of the year will -- your operators being in a stronger position to be able to finance their own growth even now these royalty programs start to subside?

Yes, absolutely. I'm sorry -- I thought you're done.

No, that's great. Thank you very much.

Yes.

Thank you. Our next question will come from Lauren Silberman with Credit Suisse. Please go ahead.

Thanks. Rob, how are you thinking about the broader pizza landscape, as the fragmented category is probably the largest portion of independent mom-and-pops? So what are you seeing in the competitive environment and then do you expect greater consolidation.

Yes, hi Lauren, I hope you're well. I -- a lot of key -- even mom-and-pops pizza shop are delivery businesses and have been able to continue on delivering pizza. So I think the pizza industry in general is doing, especially, delivering pizza is doing great. I think that what this challenging -- unprecedented situation has shown is that the pizza delivery business is -- as the kind of business that can persevere through these types of challenges. And our business models are set up for this, for food away from home. And as that -- that behavior continues to evolve as people get more and more used to not having to go out and get their food, we will benefit from that as well the whole industry both mom-and-pops as well as delivery -- as our national delivery players calls. On the dine-in side for the pizza I think they're facing a lot of the same challenges as the dine-in -- casual dine-in and other dine-in restaurants. So if there is consolidation -- if there is kind of a shakeout from this in the pizza industry I would see it being consistent with the players that focus more on dine-in as oppose to discernment between mom-and-pops and national players.

Great. And then what portion of the system is covered by third-party aggregators and to what extent has the presence benefited the comp? And then are there opportunities transition aggregator customers directly to Papa John's platform?

Yes, I will answer the last one first. I don't know that that's necessary. I mean, it's great if they want to come in and be a part of our loyalty program because they're able to -- there's obviously benefits that they derive from that. But in terms of our economics, we see the economics associated with a -- an aggregator transaction is profitable is kind of our organic transaction. So we can continue to do very well by growing on the aggregator platforms. And we have the opportunity to do that. You know we're with the three of the four largest aggregators in the United States, and of those three they cover about 70% of our system. So we have, I think, about 70% of our system up and running and integrated with those platforms. We also leverage and partner with some of the local aggregators. Those are the three national aggregators that we always talk about. But you have other players in New York City and you have other players in -- on the west coast, or in a lot of cities, specific regionals that do a lot of business and our franchisees and our company operations in those areas are partnering with them as well. In terms of the amount of comps attribute -- the amount of the comps that are attributable to aggregators, aggregators are about 4% of our business right now, up from less than 2% same time last year, and we see significant amount of that being incremental. So you -- that -- what that equates to is, call it, 1% to 2% of our comp growth coming from that aggregator growth, but as that continues to -- as that continues to improve and grow, we see that as being incremental comp growth opportunity.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Rob Lynch for any further remarks.

Well, I just want to -- first and foremost, thank you all for your participation today for calling in and engaging in the story that we're building with Papa John's. I hope that you found the time span fruitful and I hope that you have continued to understand our business and understand the great story that we're building, and I look forward to continuing to connect with all of you and speaking with you again on our next earnings call. So until then, best wishes, stay safe, stay healthy and thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.