Good day, and thank you for standing by. Welcome to the Papa John's Second Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Stacy Frole. You may begin.

Thank you. Good morning, and welcome to our second quarter earnings conference call. This morning, we issued our 2022 second quarter earnings release. A copy of the release can be obtained on our Investor Relations website at ir.papajohns.com under the news releases tab or by contacting our Investor Relations department at investor_relations@papajohns.com. On the call this morning are Rob Lynch, our President and CEO; and Ann Gugino, our CFO. Before we begin, I need to remind you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties 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. In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-ups. Rob?

Thank you, Stacy. Good morning, everyone, and thanks for joining us today. Before we begin, I'd like to welcome Stacy to our first Papa John's earnings call since joining the company in May. Many of you have already met with her, or will have the opportunity soon, as we ramp up our outreach and shareholder engagement over the coming year. She has a very strong finance and IR background and we're excited to have her as a part of our team. This morning, my remarks are going to focus on Papa John's top line sales growth, how we're navigating this dynamic environment and our continued development momentum. I want to start off by saying, I'm so proud of our team members and franchisees. Thanks to their hard work and dedication. We delivered our 12th consecutive quarter of positive comparable sales in North America, building on our significant gains over the past two years and we delivered these results despite an increasingly difficult macro environment. This proves the resiliency of our differentiated brand, product innovation, digital capabilities and winning culture. In fact, weekly per store average sales across every one of our markets are higher today than they were before the pandemic and our franchisees continue to grow and prosper. That being said, accelerating commodities and labor costs impacted unit economics, margins and operating income in the second quarter. But with continued strategic price increases, and the strong performance from our premium priced menu innovations, we were able to partially, but not completely offset these higher costs. As consumer sentiment continues to soften, I'd like to reiterate a point I've made before, pizza offers tremendous value relative to other QSR, fast casual or casual dining concepts. For this reason, the segment has been historically resilient through past economic cycles. Because we…

Thanks, Rob, and good morning, everyone. As you read in our earnings release this morning, we continue to deliver top line growth on top of significant gains over the past two years. For the second quarter, global systemwide sales were $1.2 billion, up 2.6% in constant currency. Accelerating net unit growth, particularly in international markets contributed to systemwide sales growth in the second quarter in addition to our sustained positive North American comp sales. As Rob just mentioned, this growth is a great example of the strength of our brand and our franchisees excitement to invest in it. Comp sales in North America were up 1.4% across franchise restaurants and down 1.5% in company owned restaurants. Like the first quarter, the difference largely reflects localized differences in the economy. In markets with both franchised and company owned restaurants, we saw similar performance in the quarter. International comps were down 8% in the second quarter, reflecting the continued softness in the UK, Rob mentioned earlier. Partially offsetting the UK performance were solid comps from our other international markets, including the Middle East and Latin America. Consolidated revenue increased 1.5% to $522.7 million in the second quarter largely driven by commissary revenues tied to higher commodity costs. Excluding the impact of our strategic refranchising of a 90 restaurant joint venture in the first quarter, total company revenues increased 5.2% versus the prior year. The year-over-year impact of this strategic refranchising was most pronounced in revenue as revenues from the JV were no longer consolidated in restaurant sales revenue and instead recorded in royalties and commissary sales. Its impact on adjusted operating income was less than $1 million and neutral the EPS consistent with our previous announcement. Turning to margins. Adjusted consolidated operating income for the second quarter was $40.4 million compared with…

Thanks, Ann. As you've heard from us today, we continue to drive growth by executing on our strategy while being agile in the current environment and sensitive to the additional pressures our customers are facing. We are a company with a proven brand, loyal customers and solid underlying cash flows that can be used to support value enhancing initiatives in the future. Our system remains healthy and strong, and I'm more excited than ever about the future. With that, I'll turn the call over to the operator for Q&A.

Certainly. And our first question will come from Chris O'Cull of Stifel. Your line is open.

Thank you. Good morning, guys. I had a clarification on the outlook and then a question. And did you say that you expect North America comps to remain positive for the balance of the year or did you give more specificity on that?

Yeah, that was the guide was that we expect North American comp sales to be positive in the back half of the year.

Okay. Thank you. And then, Rob, it appears the larger chains are starting to promote price point value and discounts for limited times. And I know you said that Papa John's is not going to lead with price point value and discount, but as consumer spending slows, can you elaborate how the company's marketing strategy could evolve? And then how does the company determine the level of transaction declines it's willing to accept to avoid that discount type strategy?

Hi, Chris. We have said that we've been pretty consistent in the past that we're not going to promote national deep discounts. And I think we're pretty much the only pizza player that's delivering positive comps. So I think that there's something too being able to deliver positive comp sales and better transactions without having to go and race to the bottom for the lowest price points. That being said, we absolutely deliver value. We deliver value locally. A discount in San Francisco than a different than a discount and at Atlanta and Ohio. So our co-ops all have funds that they contribute into that they can use to manage their markets, the way they need to manage them depending upon the price sensitivity of their customers in that region. So it's not actually accurate to say that we don't have value platforms and promote value. We just don't do it at the national level and kind of peanut butter across the country. The other way, we're really focused on delivering values through our loyalty program. I mean, we have 25 million loyalty members at this point and we're able to surgically deliver incentives that motivate people in different ways to drive transaction. So we have a very robust value strategy, it's just not the same as everyone else going out and putting the lowest price point on national television.

Excellent. Thank you.

And our next question will come from Eric Gonzalez. Your line is open.

Hey. Thanks. Good morning. I want to ask about the U.K. because it seems like the consumer might be deteriorating at a pass rate in the U.S. So I'm really wondering what the strategic plan is for that market? I think you mentioned doing something in 2023 or laying those groundwork for 2023, but how might that plan differ from what you might do in the U.S? Should the domestic economy deteriorate more rapidly?

Thanks for the question, Eric. The U.K. is very unique. I mean the VAT tax implications, I think it was called out some of the other calls. They've had a big impact on the comps. Their pricing structure and their tax -- the way their taxes reflected in their prices and the revenue streams quite different than how we do it here in the States. So the VAT tax implications are unavoidable. And I think everyone's kind of pointed to that. But in regards to the base business, we haven't necessarily built the same type of capabilities in the UK or frankly we haven't transferred the capabilities we've built in the U.S. yet to the UK. So I'll point out specifically, our revenue management function here in the U.S. I mean, we get the purchase data from almost every transaction that flows through our restaurants and we understand because of our loyalty programs, who's buying what, how and when. And we leverage all that to make sure that we understand the elasticities very closely and we're managing that both at our company restaurants, but we're also leveraging that expertise up against our franchise operation. In the UK, we haven't done any of that yet. So I use that as only one example of a capability that we have here in the U.S. that can easily be transferred into different markets. The UK being our biggest and most important international market, but we're going to overlay that across all of our geographies. So we're doing a lot of work on operations and how we run our restaurants better. We're doing a lot of work on how we buy and utilize media to advertise. So all of those things that we're developing here in the U.S. have not yet been transferred into our other markets. And I feel like that is going -- that provides a lot of upside, possibility and potential on the comps and the PSAs in those markets. So we talk a lot about international representing a huge white space opportunity for development. We're getting more and more confident that the tools that we have here in the U.S. once transferred over to these other markets can also drive a significant amount of comp sales and PSA growth.

Thank you.

Thanks Eric.

And our next question comes from Brian Bittner of Oppenheimer. Your line is open.

Thanks. Good morning. morning, Rob and Ann. The fact that you did keep North America comps positive in the second quarter, it was actually very impressive represented actually an acceleration on a three year basis. And it's also impressive Ann that I think you said you anticipate the three year trend to continue in the second half of the year. I think I heard you correctly. So this result and this outlook is happening despite a lot of mixed messages that we're getting on how the consumer is behaving more recently. A lot of people are talking about weakness at the lower end. Are you seeing any noteworthy changes in behavior within your own business? And Rob, what levers do you believe the brand has to pull if we do enter a much more decisive slower spending environment?

Great question, Brian. One consumer change -- behavior change that I will point out that's absolutely having an impact is the return to travel. I mean, as our business -- traditional QSR, I think is pretty neutral to people going on vacation because a lot of those folks are in their cars driving on the highways and pulling through drive throughs. We are a planned dinner purchase. And when people go on vacation, it impacts our business. We've always had seasonality in our business, particularly in the summer months while people go on vacation. The last two years that's been muted. The last two years as people haven't gone on vacation as readily as people haven't enjoyed international travel. We haven't seen that seasonality. This year, we absolutely are seeing it. We were tracking even higher on comp sales coming into June. We were very bullish on our ability to really exceed expectations both ours and everyone else's. And then in June, we saw a bit of a slowdown, which we attribute to the travel behaviors that are returning. And we evidence that by looking at travel markets where there's a lot of people going to like Florida, where our business is up significantly. So I think there is a return to some of the seasonality that we've seen in the past and that's why we're really bullish on the back half once we get through this, these tougher comps in the summer months, we see an acceleration in our business. So in terms of the value piece, we can do value. I mean, like I said, we already do value. We offer an $8 carryout special in almost every market for a large pizza. So it's not like we don't have low price points. We just do it in a different way. 75% of our business is e-commerce. So our customers are going on the apps, going on the web and looking at our price points and our localized offers are available, readily available to everyone going on those digital channels. So we absolutely can compete for that value customer. We're just doing it in a different way. And I think so far we've been differentiated in that and have been able to outperform as a result.

Great. Thank you.

Thanks Brian.

And our next question will come from Alexander Slagle of Jefferies. Your line is open.

Thanks. Good morning. I had a question on people and I guess, the company stores and at franchise stores that's known and if you can kind of comment on retention and wage levels and hiring activity and just trying to get a sense for how the improved people culture and all the efforts around purpose and values and initiatives to take care of your employees is permeating further through the system and perhaps helping on a relative basis. I know, it's still a very difficult environment out there, hiring and keeping people and just wondering if you could talk to that.

Thanks for the question, Alex. Yes, I mean staffing has been -- is always a challenge in this industry. It has been our number one challenge throughout the pandemic for obvious reasons. So our restaurants for two years were focused on doing everything they could to get as many hours in the store as possible. And so there really wasn't a lot of concern around productivity or over time or any of these other KPIs, it was really just about making sure that we had people in the restaurants to make pizzas and deliver pizzas. Staffing has actually improved over the last few months. We've seen our recruiting and retention levels improve, which gives us a lot of a lot of excitement. However, as Ann mentioned, our labor costs have gone up both as a function of wage inflation, which we do expect to normalize to a certain extent moving forward, but also as a function of some of our behavior over the last two years of just every hour, put every hour we can in the restaurant. So our team, we have some new leadership in our U.S. operations group and they're focused on making sure that we can not only staff and recruit and make sure we have the people to run the restaurants, but we do it in the most optimized and productive way. And we've got a lot of great talent working on that and it's not just going to benefit our company restaurants and our corporate P&L, the insights that we're garnering and the methods that we're developing, the processes that we're going to develop are going to be able to then transfer to all of our franchisees and make them better managers of their labor moving forward, which should improve productivity and margins, which should help us continue to spur domestic development.

Got it. Thank you.

Thanks, Alex.

Thank you. And our next question will come from Lauren Silberman of Credit Suisse. Your line is open, Lauren.

Thank you so much. Rob, you spoke to the challenging consumer environment. You're lapping over some pretty tough comps in the back half, especially when including 2019. So can you talk about the most meaningful drivers of comps? And it sounds like you're embedding an acceleration through the quarter, so just want to confirm that? And then just related, you highlighted the value opportunity from the loyalty. Where are you guys in your journey with respect to personalization and your ability to offer specific promotions, more value oriented consumers? Thank you.

Thanks, Lauren. Yeah. We are confident in the back half of the year. We're confident for a couple of primary reasons. One ism we've got some new innovation coming early in the back half coming here in the next couple of weeks. And then we've got more innovation layered in through the balance of the calendar. Great new items that we feel can complement the huge success that we've seen on our stuffed-crust platform. I mean, stuffed-crust we launched obviously last year and really kind of created a whole new sales layer lifting our AUVs and that hasn't left. And then when we launched Epic Pepperoni, we saw that very incremental both on the revenue side and the margin side. But here we are looking at the back half and we've got some new ideas that I think are going to complement that. So we're really excited about our innovation. But we're also -- and I'll tie the second piece of why we're excited about comps to the loyalty piece. We are just becoming better and better with our data. I mean, we have so much data here given the e-commerce nature of our business and all the transactional data that we get. And our teams over the last two years have been mining and enriching that data and we continue to get better and better at it. And now given our strategy on how we're going to become a great player in this value mindset in this industry. It's accelerated and we're even more confident with the ways we're using that data to really reach out both through our organic channels, but also through paid channels. I mean, we're leveraging paid media to directly target across digital channels customers that we have determined have the highest propensity to buy our products. And we're targeting lapsed users, we're targeting light users to come back to the brand through both organic and paid media. So we -- our confidence is really driven by the revenue side of the business and the comps that we feel, but we're also making a lot of enhancements on the margin side of the business too. So it's not just about delivering those positive comps, it's about doing it in a profitable way and that's part of the reason why we're not going out and just layering and peanut buttering large discounted national price points.

Thank you very much.

Thanks, Lauren.

And our next question will come from Brian Mullen of Deutsche Bank. Your line is open.

Hey. Thank you. Just a question on development. I know it's a bit early here, but as you think about the guidance range of 6% to 8% over the next couple of years. As you start to think about 2023, what are the factors that might cause you to come in towards the lower end or the higher end of that. Is there anything you're monitoring either optimistically or cautiously just outside of like equipment permitting delays, which we all understand can create hiccups, just really any color on how you're feeling about that multiyear ramp?

So we continue to sign agreements and feel really great about the franchisee excitement around this brand globally both in our markets that we're currently in, but underpenetrated as well as new markets. To answer your question, I would tell you the only thing that is unforeseen right now is some of the conflicts. The conflict that we're seeing in the Ukraine continues on and that impacts that region. And so we're continuing to watch the global environment and make sure that we can support our franchisees and our development capabilities despite any of that.

Thank you.

And our next question will come from Peter Saleh of BTIG. Your line is open.

Great. Thanks. I want to come back to unit development, just ask it a different way. I guess, given the softness that you're seeing in the UK and international. Does that have any impact whatsoever on the goal of getting to 6% to 8% annual growth starting in ‘23? Are you seeing any pushback or any pullback from franchisees internationally? And then secondly, can you just talk about what you expect on company unit development this year and maybe on a go forward basis? Thank you.

Thanks Pete. So we are actually having a very solid year outside of the UK for our international business. We have incredibly bright spots like the Middle East and even Spain and Continental Europe, which has been a challenging market for us to really get a foothold in, is up significantly this year. And so we're positive in almost every market outside of the UK. So there's not -- there's not a lot of concern around the globe on development. In the UK, although, being our largest developed market and a big contributor to our current results represents a relatively small percentage of our international development opportunity. So that being said, we're -- as I mentioned in the last question, we're watching everything. Obviously, volatile global environment right now, but we're as confident as we've ever been on the excitement around this brand internationally. Company development, we continue to evaluate that. We've built I think 12 restaurants over the last 12 months. And we're looking at the performance of that. Obviously, we're using that as a proxy for kind of this strategy of going in and into these penetrated markets and being able to carve them up. That's a longer term strategy. And so we're watching how those -- how those restaurants perform. I'll also just tell you, in the environment where we opened these restaurants, a lot of them opened up in Q4 last year and we went in into Q1 and it was hard to staff these new restaurants. So we're really trying to take a more long term approach and try to make sure that we have set these restaurants up to be as successful as possible and evaluate them and their contribution to the markets in which -- we put them in over the long term. So over the next year, we're still planning on opening company restaurants, but in the double-digits, but it's going to be dependent upon whether or not we feel we're going to be able to open them up in the way that they need to be open to give them the best chance of success.

Thank you.

Thank you.

And our next question will come from Andrew Strelzik of BMO. Your line is open.

Hey, good morning. Thanks for taking the question. I actually wanted to ask one on the commissary profit dollars. And you mentioned the impact that inflation has on that, but we're not really seeing that come through this year. So can you just kind of walk through what's going on there? Is that just a timing dynamic? And has your outlook for profit -- commissary profit dollars changed for this year and maybe can you frame the impact that's having on the operating margin change in terms of the outlook? Thanks.

Sure. So the impact on the operating margin is really more from a mix perspective just because you're seeing such a large sales increase because of the commodities inflation and you've got that relatively fixed lower margin. Generally speaking, as I talked about, we pass through those costs on a fixed margin basis. And so we do believe on a full year basis that will translate into increased commissary operating income dollars year-over-year. We still think that's going to be in the high-single digits. We didn't see the year-over-year accretion in Q1 given the acceleration of costs and just the timing to recapture. We definitely caught up a bit here in Q2, but we definitely have more to come in the back half. So yeah, we're still confident that we will deliver the high-single digit operating income increase the QCC line.

Moving forward, our next question will come from Nick Setyan of Wedbush. Your line is open.

Thank you. I think there was a comment about 7% to 8% menu pricing year-over-year. When we look at the second half, where do we think the incremental pricing will get us -- will get total pricing too in terms of year-over-year and is that part of the accelerating comp equation in the second half?

Great question, Nick. We are planning some pricing here in the near future, couple of hundred basis points. That being said, it is not -- it's not what we believe is going to drive the comps in the back half. And frankly, we believe that there will be some normalization of this cost structure. We're starting to see a little bit of that very preliminarily and we think that that will mitigate our need to continue to take pricing. We didn't take -- we took almost no pricing during the pandemic. All of our check growth was driven by innovation that allowed our consumers to trade up and we're not trying to drive sales with pricing. We're just trying to mitigate the cost. So we will take a little pricing as necessary while still delivering getting back to the margins we need to get to and that's a very important focus for us is making sure that we're getting back to the margin structure that we believe is commensurate with the health of this business and that's going to be more I think driven by normalization of commodities than necessarily our need to take significantly more cost. And you're right on that 7% to 8% number. That is what we have taken year-to-date.

Thank you.

And our next question will come from Jim Sanderson of Northcoast Research. Your line is open.

Hi. Thanks for the question. I just wanted to follow-up on the issue of pricing. Is that second half menu price increasing, does that also -- is that also baked into the operating margin decline on a year-over-year basis to your 100 basis points to 150 basis points. What are the puts and takes to getting that operating margin maybe to the higher range of your guidance for the back half of the year? Thank you.

Yeah. The pricing would be baked into that guide on the 100 basis point to 150 basis point decline year-over-year. Just to add a little bit of color there. We've talked a lot about the inflationary pressure in both wage and commodities that we expect to continue in the corporate restaurant. So when you look at it by segment, we would expect the year-over-year margin pressure to be a little bit more pronounced there. The upside to outperform that to Rob's point would be a continued easing of commodity prices. We also talked about a number of investments that we're making in wage and productivity, which as Rob pointed out has not been a huge focus for us. During the pandemic where we were really more focused on that surge in demand, meeting the demand, and keeping people safe. So as those initiatives start to take hold that could provide some upside. We'll continue to see pressure internationally as a result of the UK. But offsetting that as we've talked a lot about is the positive comp sales growth, not just in North America, but as Rob pointed out internationally outside of the U.K. And then we also expect G&A to be down year-over-year in the second half as we continue to take a disciplined approach to cost management. So those would be kind of the high level insights I would provide.

Okay. Thank you.

And our next question will come from Todd Brooks of Benchmark and Company. Your line is open. Your line is open. And I will now remove Todd Brook from the queue.

I'm here. I didn't hear that I was announced. Sorry about that.

No problem. Your line is open.

Great. Just two quick follow-ups, if I may. One, on the international, I know and you just talked about expecting positive same store sales growth in the second half excluding the UK. Was international positive in the second quarter excluding UK and is there any way you can size maybe the drag from what you're seeing in the UK?

So yes, the other international markets excluding the UK were positive in Q2. In terms of size, I think that what I would offer is that the UK in terms of percent of international system sales was about 20%. So that would be kind of the guidance there. And we were definitely down double-digits in the UK.

Okay, great. And then one other quick follow-up. Rob, you talked about better success with staffing in the last few months. If we parse that specifically to drive or staffing, have you seen the type of staffing improvement there in that specific function?

Slowly, but surely. I don't mean to imply that we are fully staffed. We're nowhere near, where we want to be but leveraging our partnerships with the third-party aggregators coupled with a bit of improvement in our organic driver recruiting and retention has definitely helped ease some of the strain on the restaurants. We still have a long way to go, but it's definitely moving in the right direction relative to where we were throughout the pandemic and especially where we were in December and January when Omicron was really impacting our staffing.

Okay, great. Thanks both.

Sure. Thank you, Todd.

I would now like to turn the call back to Rob Lynch for closing remarks.

Well, thanks again everybody for joining us and for your thoughtful this morning. As you can tell from our comments today, we're incredibly proud of what our team members and franchisees achieved this quarter and over the past few years. It's been a remarkable three years for this company. And over the last couple of months, we have moved very nimbly guided by our customers to navigate an incredibly volatile and challenging environment. We've stayed true to our values, continuing to innovate and leaning into what makes Papa John's unique. Going forward, we will continue to carefully manage short-term opportunities and challenges with an eye toward our long term potential. We hope that you're as excited about the future of Papa John's as we are. As always, I'd like to thank our shareholders everyone on this call for their interest in our company and for their continued support. Thanks and have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.