Lance Tucker - Chief Financial Officer John Schnatter - Founder, Chairman and Chief Executive Officer Steve Ritchie - President and Chief Operating Officer Brandon Rhoten - Global Chief Marketing Officer Mike Nettles - Chief Information and Digital Officer and Senior Vice President.
Will Slabaugh - Stephens, Inc. Alexander Russell Slagle - Jefferies LLC Alton K. Stump - Longbow Research LLC Peter Saleh - BTIG LLC Gregory Robert Badishkanian - Citigroup Global Markets, Inc. Christopher T. O'Cull - Stifel Financial Corp..
Good day, ladies and gentlemen, and welcome to Papa John's Third Quarter 2017 Conference Call and Webcast. At this time all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded.
I'd now like to introduce your host for today's conference, Mr. Lance Tucker, Chief Financial Officer. Sir, please go ahead..
All right. Thank you, Liz. Good morning. Joining me on the call today are our Founder, Chairman and CEO, John Schnatter; our President and COO, Steve Ritchie, and other members of our senior management team. After the financial update, John and Steve will have comments about our business, and the management team will then be available for Q&A.
Our discussion today will contain forward-looking statements, 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 press 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 would ask any media to be in a listen-only mode since this is primarily an investor call. Now, on to a discussion of our third quarter operating results.
Diluted EPS in the third quarter was $0.60, up 5% over the prior year. Third quarter EPS was not materially impacted by the adoption of the new stock-based compensation accounting rules. Third quarter revenues were up 2.2%, driven primarily by higher QCC sales from volume increases, as well as increased global comp sales and units.
These increases were partially offset by reduced corporate restaurant sales due to the sale of the Phoenix market in the fourth quarter of 2016, which negatively impacted year-over-year revenues by over $8.5 million.
Domestic company-owned margins, restaurant margins rather, were down 1.2% from 2016, primarily due to higher delivery expenses, including higher non-owned automobile insurance costs.
North America commissary and other margins decreased 1.5%, due primarily to higher operating and start-up costs related to the opening of our new quality control center or QCC in Georgia, which opened in the third quarter. International margins increased 2% due primarily to higher comp sales and higher units.
In addition, 2016 results included a one-time charge of $800,000 related to UK head lease arrangements. G&A and other expenses were lower by over $3.2 million, coming in at 8.6% of revenues, a 1% improvement versus the prior year. The primary drivers of this improvement were lower management incentive costs and lower restaurant supervisory bonuses.
Our effective tax rate was 26.8% in the third quarter, down 1.6% from the prior year, due primarily to a reduction in required state and local reserves, as the tax matter was favorably resolved. During the quarter, we closed on a new $1 billion debt facility.
As of quarter end, we had drawn the entire proceeds of the $400 million term loan, but had no balance outstanding on the new $600 million revolver. As part of the expanded share repurchase authorization announced last quarter, we repurchased $87.7 million of stock during the third quarter.
And as of October 24th, we had remaining share repurchase authorization of over $485 million.
The company expects to implement an accelerated share repurchase program for a portion of the remaining authorization in the fourth quarter, and reaffirms its expectation that the entire remaining authorization will be repurchased no later than early to mid-2019.
Our free cash flow, a non-GAAP measure we define as cash flow from operations less capital expenditures, was approximately $72 million year-to-date in 2017, and approximately $11 million from 2016 due to increased capital expenditures and unfavorable working capital changes.
As noted in our press release, we are revising the following aspects of our previously issued 2017 outlook. North America comp sales revised to positive up to 1.5% from a prior range of 2% to 4%; diluted EPS growth revised to a range of 3% to 7% from a prior range of 8% to 12%.
There's been some confusion this morning and last night with some of the notes I've seen. So to clarify, the 3% to 7% excludes the full-year favorable impact on the tax rate of the new stock-based compensation guidance. Through the third quarter, that impact has been approximately $0.05 of increased diluted EPS.
Debt-to-EBITDA ratio revised to a range of 2.5 times to 3.5 times at year-end from a range of 1.5 times to 2 times at year-end. Block cheese price per pound revised to the low $1.60s from our prior outlook of the mid-$1.70s. All other outlook items are reaffirmed.
To reiterate what we said on the prior earnings conference call, we do not expect a significant impact on 2017 EPS from the increased share repurchase authorization given the program's implementation so late in the year. Finally, we've received several inquiries as to when we will announce our 2018 outlook.
As has been our historical practice, we will give our more detailed outlook when we release our fourth quarter results in late February. To give some color at a high level, however, we currently expect to make a number of investments behind our operations, marketing and technology efforts in support of the company's long-term growth.
We anticipate seeing the benefits from these investments in foreseeable future, that some of the benefits will not be immediate. So while we are not prepared to provide ranges or numbers at this time, 2018 should be viewed as a year of investing for the future rather than a year where EPS growth will be the focus.
And with that, I'd like to turn the call over to our Founder, Chairman and CEO, John Schnatter.
John?.
Hey. Thanks, Lance and good morning, everyone. Thanks for joining us today as we discuss our third quarter 2017 results.
Before I move into a business discussion, I'd like to briefly speak to the unprecedented and unpredictable weather we saw during the quarter, including the devastating impact of Hurricanes Harvey and Irma, earthquake in Mexico, and wildfires in Northern California.
Our thoughts and prayers are with all of those who were impacted, and we wish them a speedy recovery. While our operations in those markets were temporarily impacted, we are relieved that all our team members are safe, accounted for, and are back to work.
I would like to commend them not only for their efforts to get back up and running, but also for their contributions to supporting the broader communities in their time of need. As an organization, we partnered with The Salvation Army, J.J.
Watt's Food Relief Fund and the American Red Cross in both Houston and Florida, respectively, to raise $500,000 in disaster relief funds, and feed those who were displaced with first responders at Papa John's shelters with our Papa John's mobile kitchen units.
In addition, I'd be remiss not to mention how proud we are of the efforts of a member of our Papa John's team J.J. Watt and his incredible support of the Houston community. He raised over $30 million. This effort encapsulates not only the type of character-driven athletes we partnered with, but also our entire Papa John's culture.
And now, onto a discussion of the business. We continue to perform pretty well relative to our competition in this challenging and competitive environment, and we're doing a lot of things right. The quality of our pizzas and our service levels are excellent, with great execution from our operators throughout our global business.
Brandon Rhoten has given his arms around marketing rather quickly in making a tremendous impact. And our technology team lead by Mike Nettles continues to build and rollout our exciting new digital solutions, most recently instant ordering through Facebook.
We expect to finish up 2017 with 14 consecutive years of positive North America comp sales, and our International business is on track to have its highest profitability year in our history. We also just opened a new state-of-the-art QCC in Alpharetta, Georgia. This happened in the third quarter.
The new center will make our operations more efficient in the southeast, our biggest region, and provides much needed redundancy and disaster recovery capabilities with four of our outstanding commissaries. We were just at the new center last week for a board meeting, and [ph] Shane Hutchins and Billy (08:56) just did a simply spectacular job.
Really proud of those guys. As I said earlier, we're doing a lot of things right. But even with all of the great things happening at Papa John's, we know that we must continue to invest and evolve to win in this competitive industry.
So as Lance noted, over the next several quarters, we will be experimenting with a number of new initiatives, and we'll be making significant investments across the business that we believe will position us for another prolonged period of solid, sustained growth.
Steve will give you a high level detail of what these initiatives may look like in just a few moments. Now, to the NFL, the NFL is hurting, and more importantly by not resolving the current debacle to the player and owner's satisfaction, NFL leadership has hurt Papa John's shareholders. Let me explain.
The NFL has been a long and valued partner over the years, but we are certainly disappointed that the NFL and its leadership did not resolve the ongoing situation to the satisfaction of all parties long ago. This should have been nipped in the bud a year-and-a-half ago.
Like many sponsors, we are in contact with NFL, and once the issue's resolved between the players and the owners, we are optimistic that the NFL's best years are ahead. For good or bad, leadership starts at the top, and this is an example of poor leadership. Before I turn it over to Steve, allow me to reiterate the optimism I have as we wrap up 2017.
The long-term outlook for Papa John's is strong as ever because of our outstanding brand positioning, the highest quality product in the business, and dedicated teams both in our global restaurants and in the United States that are hungry to drive this business forward.
Our recent commitment to repurchase an incremental $500 million of Papa John's stock should be a clear indication of how strongly I believe and we believe in the future of this business.
To conclude, I'm energized with all we have going on in the business, and I'm confident this team will continue to make decisions that drive value and growth for Papa John's brand for many years to come. With that, I'll turn it over to Steve..
All right. Thank you, John, and good morning, everyone. I'd like to start by thanking our franchisees and operators around the world for their continued commitment to executing on our brand promise in this challenging and ever-evolving industry.
Our continued success will soon produce our 14th consecutive year of sales growth for North America, and our 13th consecutive year of sales growth for International. We fully expect many more years of consecutive annual growth to come from both business segments.
Despite all of our success, our mission statement inspires us to constantly find new ways to get even better. Our strong brand foundation and founding principles will be the platform for a transformational series of strategic investments that we have just started to implement.
These significant initiatives will capitalize on evolving consumer trends, and create sustainable growth well into the future. After a business update on our Q3 results, I will provide commentary on the specifics. Let's start with our strong International comps for the quarter of 5.3%.
The improved results from Q2 marked our 30th consecutive quarter of positive comp sales growth.
Sales were very solid across most of our markets with significant growth experienced in the quarter from China, driven by further optimization of our restaurant model, brand design enhancements, and increased integration with third-party aggregators, broadening our accessibility channels.
In the UK, we also experienced improved sales growth from prior quarter, driven primarily by our enhanced branding efforts with messaging and media distribution in support of the national launch of our pan pizza. Overall, I'm very proud of Jack Swaysland and the entire International team.
I firmly believe the future is very bright for the International business. On the Domestic front, we produced comp sales growth of 1%, marking our 28th consecutive quarter of positive comp sales. We were pleased to produce yet another quarter of positive sales, however, the results were below our internal expectations.
Multiple factors negatively impacted our comps for the quarter, including the increasingly competitive environment, temporary store closures from the natural disasters, and another year of unexpected decline in viewership of the NFL, combined with significant negative consumer sentiment of our association with the league.
These NFL challenges have persisted into Q4, and the negative impact to our projected results has been reflected into our updated full year sales and earnings guidance. Now, on to the future.
I'd like to provide some color around the three strategic investment areas that I affectionately refer to in our business as the three-legged stool, as each leg must be equally strong and well balanced to produce sustainable growth. Let's start with where the rubber meets the road, operations.
Our SVP of North American operations, Edmond Heelan and his team will focus on three major areas; culture, customer experience and efficiencies through technology. We believe people are priority always at Papa John's, and we'll therefore increase our investment in selection tools and onboarding systems to enhance our talent and culture.
We will continue the expansion of our Go Left leadership development program, which continues to show great promise in improving overall leadership performance. These efforts should reduce our restaurant level turnover, increase employee engagement, and result in improved operational KPIs and customer experience.
We are continuing efforts to better understand our customer through advancing analytic tools, and an enhanced customer experience team we call PIE to keep our eyes on the product, image and experience.
On image, we have recently started the initial stages of a store redesign initiative to enhance the customer perception and our team members' environment.
Lastly, an investment into third-party business efficiency advisors, and new kitchen technologies to increase store-level productivity, improve order accuracy, and enhance team members' experiences, with delivery technologies to improve delivery drivers' safety and reduce insurance claims.
On the digital technology front, Papa John's has always taken a very proactive and innovative approach to customer engagement. Our guiding focus remains on the customer and providing them with a better experience that unlocks lifetime customer relationships, increases brand affinity, and offers Papa John's a sustained, competitive advantage.
And while we have established a strong leadership position, we recognize that technology investment cycles need to accelerate in order to drive digital innovations and continue to delight the customer.
We have identified a cohesive customer-centered technology strategy that will continue to differentiate our brand, while delivering a better digital experience.
In 2018, our CIDO, Mike Nettles and his team will be making investments to better serve our digital customers, engaging with them in a more personalized meaningful way, no longer content to just deliver a superior digital experience with our own website and mobile channels.
We will take the Papa John's experience to a number of other non-native channels to engage both existing and potential restaurant customers.
And behind all of this investment will be a complete redesign of our entire digital platform and digital solutions capabilities, leveraging enhanced data analytics and insights to ensure our industry-leading platforms are sustainable, efficient and effective for many years to come.
Our customers deserve a better pizza experience than they can get anywhere else, and we have the plan, resources and investment model to deliver in the near future. The final leg of our three-legged stool is our branding.
Our CMO, Brandon Rhoten, and his team are working diligently to solidify our growth strategy by enhancing our brand differentiation, value perception and the overall investment approach. His team has been working to define our brand personality in the articulation of our brand voice.
We also most recently invested in an attribution tool to help us better understand what works from a marketing perspective. All the digital technology investments I just outlined will enable us to reach new customers and provide one-to-one personalized messaging capabilities.
We know it's critical that we invest in the future marketing, which for our business, is clearly digital and e-commerce. To that end, I am pleased that yesterday we announced via a press release that we have chosen a digital-first agency of record to handle all creative regardless of channel. That agency is Laundry Service.
Laundry Service is ranked on Ad Age 2017 A-List, and has a client list that includes progressive marketers like Apple, Nike and T-Mobile, and will help us evolve our marketing in an increasingly digital world.
To conclude, I am very excited about the upcoming investments and initiatives that act upon the voices of both our internal and external customers. There will be some transition time for the full financial benefits, but the future will soon be getting even brighter at Papa John's. With that, I will turn it over to Lance for questions..
All right. Liz, we're ready for questions..
[Operator Instructions] Our first question comes from the line of Will Slabaugh with Stephens. Your line is now open..
Yes. Thanks, guys. I wanted to follow up on your comments you made a minute ago around the persistence of some of the sales softness into 4Q. I know you guys don't give exact quarter-to-date numbers.
But I'm curious if you talk a little bit more around kind of what you've been seeing in terms of, is it mainly the NFL and that association with the league that you would say dragging you down now that you were through the hurricanes, or is there something else going out there competitively or otherwise that might be softening sales little bit?.
Sure, Will. It's Steve. I would say predominantly, yes. The NFL situation has persisted in the pressure that it's applying to our sales that has bled into the start of the fourth quarter.
Clearly, we make a sizable investment in the NFL, as we just upped our partnership with the NFL last year, we also upped our investment levels, and upped our creative solutions that we were to comply to that. So we expected significant tailwinds coming from the NFL, coming into the fourth quarter, and what we've experienced is more headwinds.
So we are basically contribute that into what we've provided in the guidance on the fourth quarter. Clearly, it is still an increasingly competitive environment, and we are rolling over a strong pan launch that launched actually on October 10th of last year.
So some strong things from a challenging, from a perspective of sales from last year, but predominantly, I would say, it's the NFL pressure that we expect to persist unless a solution is put in place..
Understood.
And if I could also ask you about the tech platform redesign, what should we expect from a customer standpoint as that gets redesigned, and how should that both benefit the customer, how should that benefit same-store sales, and I guess, how quickly can all this be rolled out to where we might see that benefit show up in the numbers?.
Hi, Will. This is Mike Nettles. Great question. And we want to keep a lot of our strategic innovation plan kind of close to the vest. So we won't be talking much about specific features.
But I can tell you from a consumer perspective, we are very well understanding how much they've embraced mobile technology, how much that's actually impacted our digital mix, and what the differences are in mobile technology versus maybe more traditional web and browser-based technology.
So because of that because of the insights we've been able to gain out of that, we're really driving the system harder to connecting to as many other environments and channels where a consumer might actually be thinking about food, thinking about meal choices, so that it makes it simpler, faster, easier and far more effective for them to be able to engage our brand and order the pizza from us accordingly.
Today, they have to jump to one of our solutions. In the future, as you've seen with Facebook Instant ordering and several other channels that are on the way, you are going to see the ability for them to jump right into ordering something without having to leave somebody else's ecosystem.
We're excited about that, and you'll see more about that coming in the year to come.
We're also well aware of the performance of our systems, and we're constantly making significant investments in improving the speed and the overall accuracy of those systems all the way down into operation so that Edmond and team actually have modernized technology to really up our quality game.
That's a big part of what makes Papa John's better, is the quality of our product, and we want to be able to empower our operations teams with the right tools and technologies to deliver on that promise accordingly..
And Will, it's Steve. Just a couple of more comments. So clearly, this is some of the things I outlined in my prepared remarks from an investment standpoint. So we've just started the initial investment stages, and expect that this is going to be predominantly kind of pushed throughout the sum of 2018.
We hope to get some benefit in the latter part of 2018, but clearly the predominant amount of benefit comes in 2019 and beyond..
Understood. Thank you..
Thank you..
Operator:.
Hey, guys. Thanks. A follow-up question from Will on the NFL, if you could provide any commentary on what you could do on your end to sort of make the best of it for the balance of the year..
Sure, Alex. It's Steve. I'll start and then I turn it over to Brandon to kind of outline some of the things we're doing. So clearly, we've had a longstanding relationship with the NFL, and it's served us quite well just in terms of the overall brand awareness. We're actually the number one recognized partner with the NFL 2 years running.
So we get the benefit when things are going well. Clearly, we're going to get the downside implications when things aren't going that well. So we've done a number of things to make some changes. We're not going to be able to get the full leverage of the NFL. However, some of the investments are there. So those dollars are locked.
So Brandon has been working on a number of things, and I'll turn it over to him to kind of outline here..
Yeah. I mean, just to kind of stage up the issue here, the NFL was 8th of the Top 10 primetime shows. So it's experiencing a significant decline, which is leading us to have to look at other investments to create that reach and create consumer preference to our brand.
So we are experimenting with digital initiatives, for example, Laundry Service is an excellent example of that.
We have decided that we're going to move forward to creative agency that's built around digital, because we know in this changing media landscape, we have to adapt, and we have been doing that over the last couple of months, learning a lot and moving forward, meeting partners like Laundry Service, we're going to find a way to compete..
Got it. Thanks. And then, on the third quarter Domestic same-store sales, it sounds like that 1% comp does include the impact of the hurricanes. If you could provide any color on the magnitude of that impact..
Yeah. Hi, Alex. It's Lance. Hurricanes impacted us by less than 50 basis points. So certainly, there was an impact there, but it was less than 0.5 point. And I don't really want to narrow it down beyond that..
That's fine. Okay. And then, the full year Domestic guide, I mean, it does imply a pretty wide range of outcomes for the fourth quarter as it's written, just positive to up 1.5%.
But any color from your end on – can that fourth quarter be positive, or what it's going to take to just keep that positive?.
Sure, Alex. It's Steve. And this kind of goes back to what I had said before. Right now, the only visibility we have is that there's not a solution that's been implemented for the NFL. So if those issues continue to persist, that's why we've built in the bottom side of that guidance all the way down to flat.
Clearly, if we can get a solution quickly implemented, that will give us some tailwind benefit from the NFL partnership in addition to all the changes that Brandon and his team are quickly trying to implement from a changed management investment standpoint. So there's some upside potential to get us closer to the top end of the guidance.
But we clearly have built in the potential to go to the bottom end if some of those things are not successful..
Got it. Thank you..
Our next question comes from the line of Alton Stump with Longbow Research. Your line is now open..
Yes, thank you and good morning..
Good morning..
I'm sure this is probably really difficult even for you guys to slice out, of course, back to the past when you've had a good NFL rating season versus a bad one.
But is there any way to quantify how much of an impact you think that the NFL viewership issues had on your comps either at the end of 3Q or to date in the fourth quarter?.
Alton, it's Lance. I'll start with that and let Steve or Brandon jump in if need be. We're not going to quantify and give an exact amount. Obviously, you can tell from the fact that our guidance has changed a little bit there in the fourth quarter and been reduced that it's having an impact, but we're not going to put an exact number on it..
Alton, I think, it is fair to say that when we reiterated that – reaffirmed the guidance of the 2% to 4%, again, the visibility that we had and the expectations that we had was that we were going to get a significant tailwind benefit from the NFL coming off a very rough start in 2016 last year, which, clearly, is the fourth quarter results.
So we expected, and so did the NFL, expected to get increased viewership and increased ratings, and, frankly, we're experiencing the opposite. So some of those things are factors. It's difficult to exactly quantify the impact, but we think it is the predominant amount of some of our sales slowdown..
Thanks. And then, Lance, thanks for the color on, of course, looking at to the out-year, the early metrics there.
Any sort of insight that you'd be able to provide on the operating margin front? Of course, you mentioned it being an investment year, whether or not that means operating margins might be down again next year, or if there's things that you can do to maybe offset from either a costing saving standpoint, and/or a top line standpoint to offset the higher spending next year?.
I mean, we'll give our full-year outlook in February, so I'm going to stay away from numbers. I think a couple of things, a little color I can give you, CapEx is unlikely to be significantly different than what we see this year. So a lot of these investments are going to be on the operating side.
We're still working through numbers, and we'll give everything kind of at the end of February once we have it all ready to go.
But certainly, from an operating margin standpoint, that's not something I'm going to get into a great deal right now, other than to tell you that a lot of the investments are in people, resources, tech platforms, things that are going to be running through the P&L rather than the CapEx side..
That's helpful. Thanks. And then if I could just ask one last housekeeping, and I'll hop back in the queue, but just as far as your 31% to 33% full year tax rate guidance, I would assume that that also, Lance, does not include any benefit either year-to-date or potentially in the fourth quarter from the new [technical difficulty] accounting rule..
That's accurate, Alton. So again, there's been some confusion on this. I spoke to this in my prepared remarks. Overall, for the fourth quarter, we think the tax rate will look like kind of 31% to 33%. For the full year though, it will be 29% to 30%.
So without the benefit of the stock comp, it's obviously going to be directionally 1.5% higher, and with it, it's going to be lower. So I think full year, 29% to 30%, little bit higher than that in the fourth quarter..
Great. Thanks so much..
Our next question comes from line of Peter Saleh with BTIG. Your line is now open..
Great. Thanks. Hey, I just want to come back to the comments on the competitive environment.
And Steve, what are you guys seeing on the competitive environment or what has changed maybe over the past couple of months? Has anything changed or is it more of the same?.
Yeah, Peter. It's Steve. I mean, I think it's remained relatively consistent just in terms of the promotional environment. I will say that we are tracking increased investment from a competitive standpoint.
Our two largest competitors have both increased their investment, the introduction of a loyalty program by one of them, and then doubling down on the marketing efforts of the loyalty program from the other one. So I think that's remained relatively consistent.
So we feel like it has always been able to navigate through that, as I said, our 14th consecutive year soon to come from a sales growth standpoint. We don't anticipate that stopping in 2018. We just got to find the right balance. And as Brandon alluded to, things are changing, consumers' behaviors are evolving where they're absorbing media.
So we think that we have made a very good strategic decision with the selection of an agency-like Laundry Service that has got a digital focus. Clearly, we have brought on a CMO with a heavy digital skew that understands that consumer and understands that space.
So the way that we market in the future will be different than in the way we have marketed historically. So I couldn't be more excited about the future, but that's what we had spoken to. There is going to be some transition to make some of these transformational changes from a tech and a marketing standpoint..
Great.
And then just back to the NFL commentary, how much of your ad dollars that you spend on the NFL, or in partnership with the NFL, how much of that is locked versus how much of that can you shift to other areas and away from the NFL at least for the time being?.
Yeah. Peter, I don't want to quantify specific numbers, but there is a portion of some things that we can do some reallocations on. We do spend a significant amount of our media investment in television.
So there were assets that were already created from a creative standpoint, and we stopped usage of those assets that were predominantly focused on promoting our association with the league. So those were more lost dollars. So we have been working with the NFL.
They recognized some of the declines that we're experiencing, and they've made some offsetting investments to help us try to offset this with some additional buys. But we've had to make incremental investments into other spaces, like Brandon had alluded to with the social media partners in direct response and digital buys to try to offset.
So it's really kind of a wash based on the incremental investment we've had to make to offset some of the benefits we get from a reduction..
Got it. Okay.
And then, in terms of what you're seeing in terms of the competitive environment and what you're seeing with the NFL, does this change your posture at all on the value proposition, how aggressive you're willing to be on value?.
Sure, Peter. It's Steve. And I think this category has always been a value-centric category. I think it's always going to be striking the right balance if you're speaking the value around price. We look at value on the overall equation, and clearly, we've done a lot of research.
Each year, we do research, and we still are identified as the highest quality provider and perception that the Papa John's brand is the provider of the highest quality product. So we're going to continue to lean in on that. We will be leveraging the balance of how we use price versus the equity layer of our marketing approach.
That's why this transitional period that we're going into, is how do we leverage these different assets to be able to attract the right customers in a more personalized manner.
So as we introduced some of these investments, we think that there will be ways to continue to make sure that we're hitting the value seeking consumer, but also seeking the consumer which is the largest portion of our base, which is a consumer looking for quality.
So I don't think it's necessarily changed the perception of value, but certainly the actions strategically and tactically how we implement that will be different as we move into the future..
Great. And then just my last question, maybe for Lance. I recognize you guys are making investments into 2018.
But how should we be thinking about the unit growth predominantly on the franchise side in 2018? Should we expect an acceleration in unit growth versus this year, or should it be more of the same?.
Peter, I think that's something we'll give more guidance to certainly at the end of February. So I don't want to get into a lot of numbers. It would be kind of surprising if it didn't improve a little bit given that we had a 66-unit closure in India.
So we would expect the net global number, I would expect to be up, but we're going to work through everything and give you guys numbers at the end of February. So I do reserve the right to come out with something that looks a little bit different then, but that's not the expectation as of today where we sit..
Sure, Peter. And I'll just add that we are experiencing some of those challenges, as Lance alluded to, from a closure standpoint.
But 2017 is on track, it has a potential to be a record year for a number of global new openings, and Tim O'Hern and the rest of the International ops and North American ops team is very optimistic on the potential to continue to drive new unit openings.
We know that in order to compete in the future we have to continue to open units, but we've got to make sure that we open units that have profitable bottom lines, and driving top line results. So feel good about the overall long-term side of development..
All right. Thank you very much..
Thank you..
Our next question comes from the line of Greg Badishkanian with Citigroup. Your line is now open..
Great. Thanks.
And just to follow up on the last question, the franchisee receptivity to opening stores, have you noticed any change over the last 6 to 12 months in that from that front?.
Sure Greg. It's Steve. We really haven't. I mean, new units continue to be very healthy. Our pipeline by the end of this year will be right back at about a 1,000 units in the pipeline. We're still seeing about 70% of our new units in the U.S. opening from existing franchisees.
So we came off of 2016 being a record year of profitability for our franchisees, and that's usually a good indication, a barometer of where development is going to go into the future.
And on the backs internationally of seven new countries, and it's very much in the infancy of those new countries, but we're seeing very good indications of long-term success potential in those. And the early years or the outset new units are certainly much softer, but we look to see acceleration in the International front as well..
And Steve, if I could add something real quick. This is Lance. The pipeline number that Steve referred to, I think, there's been some folks that missed the fact that we had to pull 200 to 300 units out, for India.
So when you look at the pipeline, and it looks lower than where it has been before, don't read into that, that folks aren't interested in opening units. Read into it the fact that we had to pull several hundred units out for India, which has artificially lowered that number for a temporary time..
Okay. Thanks. And then, you mentioned the higher investment by your two main competitors.
So is that having an impact on you like third quarter, fourth quarter, is that more of a potential impact for 2018 and beyond for some of those investments? And does that just mean that you have to continue aggressively in investing, so it's maybe net positive for the three big players versus the smaller operators that you compete with? How do those dynamics work?.
Sure, Greg. It's Steve and I'll start, and Brandon, if you want to jump in on this one. So we've always been the smaller competitor in the category. We opened our first unit in 1984, and the larger competitors all opened their brands in the late 1950s and early 1960s.
So we've always been smaller, so we've had to make sure that every dollar that we invest is working smarter, or working harder and smarter for us. So we've been able to be successful with that, Greg. I would say, just in terms of the cadence of the quarters or the impact from the incremental investment, it's really been pretty equal.
Continue going back to the late third quarter and fourth quarter, the predominate change in our results is really primarily impacted by the challenge with the NFL that's been done so well for us in the last several years here.
But when the NFL is declining, you're spending a significant amount of investment all the way from our local team partnership deals, all the way up to the overall national partnership effort, has an impact to us.
But if you start to see a challenge like that, we've got to figure out how to be creative and reallocate our investments, which frankly, the timing is good, with Brandon coming on board. So I'll let Brandon – I don't know if you've got any other comments you would add to that..
Yeah. I mean, obviously, if you try to play the media game, and it's just a tonnage effort, when a competitor ups their spend it affects you. What we're doing is changing the game. We're investing in infrastructure, we're investing in tools, we're investing in agency partners. So moving forward we don't have to play the media tonnage game.
We can be smarter instead of spend more and achieve more. So the future is bright from a standpoint that when these tools are in place, and as we learn, we're not going to need to compete dollar-for-dollar for TV..
Okay. And I know you're not ready to give 2018 guidance. But just, I mean, thinking it through, if the NFL was the primary contributor to the weakness in 2017, is there anything that would lead to soft performance in 2018, or should we kind of return to more normalized same-store sales level? You can talk to it qualitatively if you want.
I know you may not want to give specific number guidance..
Greg, I'll start. I mean, I think obviously we've had to react very quickly to the situation with the NFL. So we already had plans locked in in place to leverage the NFL.
Now, we've got some time here to kind of work through at least from a top line standpoint, what our roadmap, our calendar looks like, our media allocations, investments, the usage of a different agency, how we'll leverage tech and the new marketing investments in a different way.
We're certainly not in a position where we want to give any kind of specifics around sales guidance for 2018. But as I said multiple times, we expect another year of positive sales in 2018 for both our Domestic and our International business..
All right. Thank you..
Thank you..
[Operator Instructions] Our next question comes from the line of Chris O'Cull with Stifel. Your line is now open..
Thanks. Good morning, guys..
Good morning, Chris..
Steve, last year NFL viewership was down quite a bit, but Papa John's comps were up 4% to 5%. So I'm trying to understand why a decline in viewership this year is a much bigger issue..
It's good question, Chris. So last year – and I spoke to this just a bit, last year we had planned our pan launch, and it actually started a little bit early at the local level. In early October, we had multiple test markets that kicked off even in the third quarter.
So the big launch of pan and everything that we put behind that masked some of the declines that we were getting from the benefit from – the overall headwind we were experiencing from the NFL.
So obviously, with many weeks and many games last year in the fourth quarter being down 20% to upwards to 30%, clearly, we expected as we rolled over those games, we'd see a benefit. So we did certainly.
And we put even more investment into the NFL this year to expect that we would get that benefit, and rolling over the pan and NFL headwind, and the other things that we had spoken to, is what's causing this issue..
Chris, this is John. You need to look at exactly how the ratings are going backwards. Last year, the ratings for the NFL went backwards because of the elections. This year, the ratings have gone backwards because of the controversy. And so the controversy is polarizing the customer, polarizing the country, and that's the big difference here..
No, I think it's a great point, John. That's a great point, because I do think that the negative consumer sentiment is having a big impact on our business, because last year, with declining ratings, we were able to reallocate some of our investments as we continue to put more money into digital.
But less viewership and negative consumer sentiment is the double-down effect that's having the biggest negative impact. It's a great point by John..
Do you think, or do you have any evidence that the growth in third-party aggregators has become an issue?.
No. And Chris, we track those across the country, and most specifically in our major markets where they are predominantly more penetrated. We've not seen any significant impact on the business in those markets.
There's a potential for that to have a small impact, which we've taken an approach of also looking at potential partnership opportunities with these aggregators, whether that's through leveraging them through additional sales channel opportunities, or leveraging the base of their driver fleet and our driver fleet.
So we think there's some creative opportunity as the industry is shifting and consumer behaviors are evolving, that we can turn this into a potential tailwind opportunity for our brand, and mitigate some of those challenges of share of stomach opportunity..
Do you think that the direct partnership, the company's direct partnership with the NFL though, do you think it's impacted Papa John's more than, maybe, the overall segment?.
I think, clearly, if you're the number one recognized partner with the NFL 2 years running, you're going to have a more significant impact from a partnership association than any of the other partners. In addition, many of the other partners are not in a direct-response business like Papa John's, a value-centric category.
So yes, Chris, I would think that that's probably a driving factor on why it's had such an impact on our business here in the short term..
Okay.
And then, Lance, my last question is, what was the impact of the start-up cost and inefficiency at the new QCC during the quarter? And what do you expect, if any, impact you'll have or it'll have in the fourth and maybe even next year?.
So a good bit of the margin decline, and I'm not giving the exact numbers, but the big majority of the margin decline was from startup costs and transition costs, because it takes a while to transition the restaurants from other commissaries into Atlanta – or [indiscernible] (45:22) rather.
I would expect to see it persist some of the fourth quarter probably not quite as bad, and then I think, when you get into next year, the headwind will be largely, if not fully, dissipated..
Okay. Great. Thanks..
Thank you, Chris..
We have a follow-up question from the line of Alton Stump. Your line is now open..
Yes. Thanks, for getting me back on the call. Just a quick question to follow up on Chris asked about the aggregators, and what the impact may or may not be. How about some other players like McDonald's or Panera or [indiscernible] (45:57) rolling out delivery and/or increased off-premise service in general.
Is that having any impact from what you can see in various markets where you compete more head-to-head with those type of competitors?.
No. And Steve again, I'll just reiterate. No, we've not seen any kind of material impact on our overall sales performance in those markets. What I will say is, it shouts the importance of making sure that we continue to improve upon the customer experience.
And all the investments that we're making in marketing to make sure that we've got the right brand messaging, deriving the right customer perception, the investments intact to drive the right overall experience in the operations side to make sure that we're providing great product and great service, and we need to make sure that our differentiation is more important than ever as accessibility within the space continues to broaden.
But we've seen no impact from aggregators or brands that are partnering with those aggregators. However, again, we're looking at the same kind of partnership opportunities to supplement some of the efforts that we have.
There's clearly a unique experience that you have with the Papa John's delivery driver, but there's also an opportunity to expand that to leverage some of these aggregators as consumer behaviors continue to evolve..
Great. Makes sense. Thank you, Steve..
Thank you, Alton..
I'm not showing any further questions at this time. I'd like to turn the call back to Mr. Tucker for any closing remarks..
Thank you, Liz. Thanks again to everybody on the call for your time, and we will be announcing our full year results at the end of February in 2018. Thank you..
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great..