Thank you for standing by. Welcome to Papa John's First Quarter 2024 Conference Call and Webcast. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Stacy Frole, Vice President of Investor Relations. Please go ahead. .

Thank you. Good morning and welcome to Papa John's first quarter 2024 earnings conference call. This morning we issued our first quarter 2024 earnings release.

A copy of the release can be obtained on our Investor Relations website at ir.papajohns.com under the News Release tab or by contacting our Investor Relations department at investor_relations@papajohns.com. Joining me on the call this morning is Ravi Thanawala, our Interim Chief Executive Officer and Chief Financial Officer.

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 1 question and getting back in the queue for additional follow-ups. And now let me turn the call over to Ravi. .

we expect net interest expense to be between $40 million and $45 million, our capital expenditures to be between $75 million and $85 million and our tax rate to be between 23% and 26%, all consistent with our prior guidance.

From a development perspective, the North America market is our most accretive development for Papa John's and we remain committed to accelerating the expansion of our domestic footprint moving forward. In the first quarter, we added 14 net new North America units bringing our total North America restaurant count to 3,447.

For fiscal year 2024, we expect net new units for North America to increase more than 20% relative to 2023 net unit openings. From an international perspective, we saw 23 new restaurant openings on a gross basis. These new restaurant openings were offset by 29 closures primarily in certain Middle East markets and China.

This brings our total international restaurant count to 2,467. We are maintaining a cautious approach for our international markets and expect gross openings between 100 and 140 new international restaurants for fiscal 2024.

We continue to review the performance of our international franchisees and may initiate additional strategic closures to improve marketplace health or exit unprofitable locations. As such, our net openings could be impacted by the closure of underperforming locations to enhance long-term profitability.

Finally, as we look to the longer term, we continue to see significant opportunities to drive higher system-wide sales, global development and overall profitability as we continue to execute on our strategy.

Given the current dynamic environment and business trends we discussed today, our longer-term targets are under evaluation as we want to ensure our goals are achievable and aligned with our strategy. In summary, we are executing against our Back to Better 2.0 strategy.

This strategy is designed to drive restaurant profitability, improve supply chain efficiency, increase marketing effectiveness and reinvigorate global development. We are making steady progress as our teams are collaborating across departments and geographical borders laying a solid foundation for our next chapter of growth.

I'm confident in the strength of the Papa John's brand, our team, our company's long-term performance potential. I look forward to sharing our progress with you throughout the coming year. Now I'll turn the call over to our operator to take your questions. .

And our first question comes from the line of Jim Salera from Stephens Inc. .

Ravi, can you just give us an update on what you're seeing in the aggregator channel as far as demand especially as we've heard more consumers kind of engaging in value-seeking behavior, how your presence on that and your own proprietary digital channel helps convey value?.

Well, Jim, thanks for the question. And I'll start there, but I may need you to repeat the second half of that question in a moment. So first, we've been on the aggregator since 2019 and have been leading in that space. More broadly what we're seeing is that the pizza category continues to perform well and take share within the aggregator universe.

Second, the benefit of the aggregators is that they are highly convicted consumers that are ready to purchase when they're on those apps. What we're specifically seeing is continued growth year-over-year and the aggregators represented 16% of our business in Q1 relative to 12% in the prior year. Also we continue to see growth quarter-over-quarter.

We think that the aggregator experience when consumers are on it is a very specific occasion so how we communicate value and how we communicate growth there. We are continuing to stay really focused on menu innovation cutting through, doing great jobs on making sure navigation is coming to life.

And then we're in the market pretty consistently testing different pricing strategies to make sure we strike the right balance at a geography level on balancing the premiumness of our product as well as value that the consumer needs. Jim, I don't know if I got that second half of your question. .

Yes.

The second part was just relative to what you're seeing on your own apps, the proprietary channel?.

Yes, absolutely. And similar to what we spoke about in prior quarters, we are seeing the aggregators outperform our organic delivery and carryout business, specifically our organic delivery business. Maybe 2 important points.

I think the good news in this is that like aggregators gives us a really clear opportunity to win new consumers who are a younger demographic, more diverse overall. So we see a lot of strategic benefit in continuing to grow aggressively in this channel. Organic delivery has continued to decline year-over-year.

And we're really focused in the second half of this year on how do we communicate the value of our service, of our offers more clearly in our organic delivery business and making sure everyone understands the value that our loyalty program provides in our native channels. But there has been a spread between the 2.

And just as a reminder, the margin profiles on the aggregator business and organic delivery business are slightly different given how the pricing architecture is [ structured ]. .

And our next question comes from the line of Eric Gonzalez from KeyBanc. .

I just want to talk about the current strategy. I mean I want to maybe ask you about your confidence level that the strategy is working. And I realize the environment shifted where several of your competitors have called out the more cautious consumer.

But how do you know that the shift away from regional marketing isn't having an adverse effect on your results as it seems like the quarter-to-date same-store sales trends are probably quite a bit below what you had hoped for back in January?.

Thanks for the question and I'm going to take that in 2 parts. First, more broadly the Back to Better 2.0 strategy had a couple of really clear filters to it. The first was find ways to improve unit economics. That comes to life through continuing to remix the total amount of marketing spend to drive higher [ ROAs ].

Improve and incentivize supply chain commissary margins by giving rebates for really meaningful growth. And three, this really clear focus that we're taking in terms of our new national marketing strategy. When we look at April results, there are a few things that we want to call out.

Where we're seeing challenges from a traffic standpoint actually started slightly prior to when we went live with the new marketing strategy. We saw slightly softer sales in the month of March than what we expected. So that's one important thing.

Second is that when we actually look at consumer behavior, what we're actually seeing is that consumers are check managing a little bit more and we're seeing slightly higher exit rates at certain points in the consumer funnel.

Those to us give us the indication that this is more about a softening of the consumer and a slightly higher value orientation versus directly tied to anything in a creative and media strategy. What I will say is we are 5 weeks in to our creative and media strategy; new visuals, new tone, new media mix.

There's obviously some ongoing calibration that we're going to want to do. But as we've actually done the consumer testing work, we're absolutely seeing purchase intent go up as we've tested this new creative and media strategy.

So we will continue to keep you in the loop and keep the investor community in the loop in following quarters of our progress, but we believe we're on the right track from a creative and a media standpoint. .

And our next question comes from the line of Sara Senatore from Bank of America. .

I guess 1 question and then a follow-up, please. The first is that at the end of March when you announced the CEO transition, I think you reiterated or reaffirmed the guidance for fiscal '24. It sounds like you said March was a little softer than you had expected.

I'm trying to understand then maybe what's changed since the third week of March and now given that it sounded like you're already perhaps seeing some of the softness materialized?.

Yes. To be clear and clarify, we were seeing some slight softness in traffic. However, we were continuing to work towards our creative launch and media launch, new innovation launch in the month of April. Throughout the month of April, we saw that the consumer behavior continued to soften particularly in elements of traffic and check management.

And that's really the differential of what we started to see in the month of April. .

Got it. Okay. And then in that context, I know you mentioned your -- it sounded like you're not looking to kind of match the promotional intensity that competitors are engaging in.

But I guess ultimately to grow transactions, how do you plan to do that if what consumers are looking for is value? And I guess maybe said otherwise, do you have a choice to try to be more aggressive or sharper in your price points if that's what consumers want and that's what's driving traffic growth elsewhere?.

So we think we have multiple levers to be able to demonstrate value to our consumers. So first, when we think about Q1, what happened from a comp standpoint was that pizza sales continue to be up year-over-year to sides and beverages and the profit neutral delivery fee is where we started to see compression.

So we're actually pretty clear on where our opportunities are to continue to bend the curve from a sales comp standpoint. Second, our loyalty program is a great toolkit and a great opportunity for us to continue to reinforce the value that we can offer in our organic channels.

And lastly and importantly, we are testing continuously and will continue to test different pricing and promo strategies particularly for the carryout business to ensure that we can communicate the great service we offer plus the value in our carryout business. .

And our next question comes from the line of Brian Mullan from Piper Sandler. .

Just a question on G&A. Ravi, can you speak to what your expectations are for this year and what you incorporated into the operating income guidance? If I'm doing it right, it seems like Q1 was about $49 million or $50 million on an adjusted basis.

Is that a good run rate for the next couple of quarters? And then just related to that, you've had some more time in the seat first as CFO, now you've stepped into a bigger role.

Do you see any opportunities across the organization to get more efficient on G&A bigger picture over the next couple of years? Is it possible to make cuts about hurting sales? Just fresh set of eyes, would love to get your perspective. .

Yes. So thanks for the question, Brian. So first on G&A, I just want to remind us that in Q1 there were a number of puts and takes that are happening that were onetime in nature. So on an adjusted basis, I think we're going to be slightly above $50 million for the run rate for the next few quarters.

And to remind everyone that we are still lapping the U.K. acquisition that happened in 2023. When we look at like opportunities, we're absolutely taking a really focused cost discipline approach to running and operating the business.

We're going to want to continue to invest in our strategic growth drivers of the company in the future, which is really around product innovation, marketing and our tech stack.

We're looking for opportunities continuously to be highly streamlined as an organization and continuing to look to drive foundationally better unit economics for our restaurants. .

And our next question comes from the line of Brian Bittner from Oppenheimer. .

My question is on the new EBIT outlook for 2024. I understand that you're now assuming lower same-store sales than you originally were. But when I take a step back and I look at 1Q's EBIT, it was very strong.

Margins expanded 100 bps, EBIT grew 10%, beat consensus by a meaningful amount on negative low single-digit same-store sales what you're assuming moving forward. The guidance would assume this trend in EBIT changes pretty meaningfully for the rest of the year.

Can you maybe just unpack some of the assumptions in EBIT moving forward versus maybe the strength that you saw in the first quarter?.

Brian, thanks for the question. And first, I just want to reinforce that we are taking a really disciplined approach to running the business once we're in quarter and we're thinking about how we're investing going forward.

More broadly if you actually look at the Q1 results from EBIT and unpack the onetimes, we are slightly above last year on an adjusted basis if you exclude the impact of onetimes this year versus last year. Well, broadly if you look at the full year guide and take the midpoint of that, that's effectively a flat OI versus last year on a 52-week basis.

So I just want to provide that little bit of context. Second, as we look through the balance of the year, we know that the consumer is going to be more value conscious as we see check management happening and we're watching exit rates and abandonment rates throughout the consumer funnel.

Second, we're going to want to take a more aggressive approach to testing strategies related to pricing promotions and our media mix for the balance of the year. So we're just taking a more cautious approach to how we think about the EBIT or OI outlook for the balance of the year.

But I want to give confidence that if you look at our results in Q4 of 2023 and Q1 of 2024, we're highly focused on driving unit level economics, which we think will spur the right development for the brand over the long term. .

And our next question comes from the line of Lauren Silberman from Deutsche Bank. .

I wanted to ask about the international comps and what you're seeing there.

One, are you seeing any signs of improvement in the Middle East and if you can quantify the impact? And then two, can you talk about the performance across some of the other markets outside of the Middle East more specifically?.

So we are seeing that the Middle East performed better in Q1 relative to the run rate that we had been on in the prior quarters. And just as a reminder, it's a small component of our business from a system-wide sales standpoint, but has been historically a really meaningful development driver of the company.

We have seen more than a 10-point acceleration in terms of the comp run rate as we progressed from 2023 in the fall and winter to what we were seeing in the first quarter of 2024.

More broadly when we think about our international strategy, we set up this hub strategy to give us laser focus on a few regions that matter the most for the business and the company. The way that's coming to life is like really clear, sharp perspective on product innovation and the consumer target.

So in the U.K., we've seen flat to slightly negative comps through the first quarter and what's important there is as we unpack it is that restaurants have changed and some more seasoned operators, we're seeing double-digit increases in terms of sales performance.

We recently launched a new product innovation across our platform of products, which had the highest penetration we've had for an innovation LTO for a couple of years. In LatAm, our largest market Chile, we saw the strongest performance in this quarter and got us back on a good trajectory.

It's easy to read into like China and say we had some strategic closures. I think the way that everyone should look at that and think about that is we're taking on the necessary pruning of locations that aren't productive, that aren't as fit to our go-forward strategy from a real estate standpoint.

But ultimately we are even seeing improvements in our China business from a comp standpoint in Q1 relative to the run rate that we've been on. So we have a laser focus on a few regions in a few countries that matter the most in international. .

And our next question comes from the line of Andrew Strelzik from BMO Capital Markets. .

I wanted to ask about the development pipeline in North America and how you're seeing that build as you have a few more months of the incentives under your belt.

What kind of visibility do you have to the guidance that you've given for this year? Do you have any visibility to next year as well? And I guess I know you're doing a lot of things to support the economics currently, but I guess do you see risk given the top line outlook that maybe some of those conversions get pushed out or don't come to fruition? I guess how are you thinking about that?.

Thanks for the question, Andrew. There's quite a few things there that I want to unpack. First is just a little bit of context.

Like myself and Joe Sieve, our Head of Restaurants in North America and who also leads development, we're meeting every single month with the cross-functional team to talk about the pipeline of restaurant openings for North America and a couple of really impactful things.

One, we reaffirmed that development in North America is going to be upgraded to 20% year-on-year. As I look at the pipeline of restaurants that are in the pipe, whether there are leases that are being negotiated at LOI that are in construction design, we're meaningfully above that 20%. So we feel good that we're tracking against those objectives.

Second, we are really focused on unit level economics at Papa John's and everything we do is balanced and things that we're doing to drive top line and great consumer demand and making sure that's flowing through to penny profits in our restaurants. And as we look at Q1, we talked about the fact that our restaurant margins were up 220 basis points.

When we even look at the month of April and looked at what's happening from a product margin standpoint even though we had a negative comp, we did deliver positive product margins for the month of April.

What that means is we believe that we are on the right strategy to continue to focus on delivering really meaningful improvements in terms of our unit economics from a restaurant standpoint.

And then lastly, from a construction and a build-out cost standpoint, we shared a little bit more detail in our prepared remarks around like the stringent and thoughtful RFP process we're going through to make sure we're driving costs out in an effective way from general contractor spend to furniture and fixtures and we're also doing things like taking a step back and looking at our holistic architectural design to making sure that we're optimizing for construction costs.

So we are focused on it and we're focused on making sure development comes to life because we have solid unit level economics and we are delivering strong restaurant profitability. .

And our next question comes from the line of Alexander Slagle from Jefferies. .

Ravi, I wanted to get your perspective, I guess a follow-up on Jim's question earlier on the third party. Kind of at what point does the third-party business get to an optimal size? I know it's continued to grow nicely and you've called out more opportunity for some of the noncore dayparts and other growth avenues.

Just trying to get a sense how big you think it could be and if you get the sense franchisees are continuing to be happy with this trajectory and where it's gone. .

Thanks for the question. Fundamentally, we're taking the mindset that the consumer decides. We are going to make sure that we are at the right places, at the right time, at the right price point.

And while the aggregator business has continued to accelerate, we see that as a consumer pattern that pizza is taking more share in the aggregators and we've continued to perform well because we've executed well in that space.

So while I don't know what the ideal mix is, I think we should be watching consumer behaviors to see like how much are consumers migrating to that. What I would say is what is unique to the organic channels is we have a strong royalty business. We have a large base with a high active rate.

When I look at my experience at other digital-first companies, we have a really solid active rate in terms of members and we get to offer value to our most loyal consumers in a different way. So our objective long term is not to have our organic business decline and only our growth coming out of aggregators.

We believe that there is going to be opportunity for us to continue to focus in to delivering great service and offering great value to our loyalty that has unique value that you can only get on our organic delivery and carryout channels. .

And our next question comes from the line of Dennis Geiger from UBS. .

Ravi, wondering if you could talk a little bit more on the newbuild cost topic.

Is there anything you can share on sort of how much lower you're targeting, maybe how much lower those costs could be or even if you look at it from a returns or payback period, is there something you're targeting there that you guys are able to share between lower build costs as well as incentives where you're at x and you're trying to get those paybacks to y and that's kind of the magic number for the U.S.

franchisees? Anything there to share?.

Thanks for the question, Dennis. While we don't share what the build-out cost is, I did reference earlier that Joe Sieve and myself are consistently in corporate real estate committees and we're looking at both franchisee deals as well as corporate restaurant opportunities.

And what I can say is that really solid pipeline of corporate restaurants that are generating solid IRRs that we as Papa John's would continue to invest our capital in.

Specifically in terms of like what we're doing to drive down cost, we're looking at a few big areas, but we're looking at the biggest blocks of expense, which is truly like in general contracting.

And second is around equipment and we're running through a really deliberate process to ensure that we are getting great regional rates on our equipment and GC cost.

We're providing more optionality for our franchisees based on volume of the store to make sure that we are building out the store appropriate to the volume that it's going to do and the location. So while we don't share specifics, what I'll tell you is we're doing the right strategic and tactical efforts to drive down cost.

And as a franchisor, we're continuing to develop and we're developing because the IRRs are healthy on the deals we're signing. .

And our next question comes from the line of Todd Brooks from The Benchmark Company. .

Wondering, Ravi, you talked about lower attach of beverages and sides. Can you comment what average check what the decline was during the first quarter just so we get a sense of what that headwind is manifesting itself as? And just following up on a couple of the third-party delivery questions.

I know the company has long talked to new entrants growing the category.

But when you look at Uber Eats specifically, is Papa John's growing their share on that channel given new entrants recently?.

Todd, thanks for the question. So first when it comes to average ticket, we just want to make sure we remind you and everyone that like ticket was actually slightly up to flat for the quarter driven by pizza sales being up; sides, beverages and delivery fees coming down.

We still believe that we can unlock some real value by having the right balance of focus on driving attachment, but also leaning into a core product proposition itself. Specific to Uber Eats, we have been tracking where we have been performing given that the competitive space has gotten -- there's more competitors on it.

And as we previously stated that we believe that there is enough volume for the large chains to be on there and we've been continuing to feel good that we are on track in our business on that channel relative to what our expectations were.

And Todd, I actually want to clarify that our ticket was down about 0.5% for Q1 and again that was all specifically related to sides, beverages and the delivery fee. .

And our next question comes from the line of Peter Saleh from BTIG. .

I did want to come back to the conversation around check management or mix management.

Ravi, are you seeing that check management just through your organic channels or are you seeing it in third party as well? And can you comment on the behavior of I guess traditional customers versus rewards customers or loyalty customers in that context of the check management?.

Thanks for the question, Peter. So there's a couple of factors. One, like we believe in this notion like that the consumer decides. So what we're seeing is that the consumer is mixing into their channels differently and into their dayparts differently as well.

So as we see check management coming to life, we're seeing that the organic carryout business was effectively flat in Q1 versus the organic delivery business that was down.

Naturally when your mix moves more towards carryout versus organic delivery, you see a slight decline in the attachment rate just because the mindset and the occasion for the consumer is slightly different. I think more broadly like consumers are coming to Papa John's right now while they're doing check management.

They're buying the things that we are famous for and that is for our core offerings of pizza and our specialty pizzas. So we are seeing that the consumer is spending more year-over-year in pizza and they're pulling back in sides and beverages.

We think that we're going to continue to test offers by continuing to improve that mix, but ultimately we're seeing that consumers are using the channels of -- how often they're using the channels of aggregators, delivery, carryout slightly different. And second, we're seeing that the consumer vote for the things that we're most famous for.

Specific to loyalty versus non-loyalty, we continue to see that our loyalty consumers are the core of our business and it is a highly active and engaged group.

While I don't have any specifics at my fingertips in terms of the differential in behavior there, but what I will say is like with our loyalty consumers, we have the ability to touch them much more frequently through e-mails and through app pushes that allow us to nudge behavior a little bit differently. .

And our next question comes from the line of Jim Sanderson from Northcoast Research. .

I wanted to go back to the International segment. I think you mentioned expecting that the back half of the year could be accretive and that you were also reviewing potential closures.

Can you just provide a little bit more detail about what that entails? And that's in the context of McDonald's recently announcing that they did buy out a franchisee in the Middle East. Just wondering if that's on the table in other marketplaces or in the U.K. .

Thanks for the question, Jim. And I just want to make sure I clarify for the group that we were specifically talking to the U.K. turning accretive in the second half of the year.

We believe the fundamental of our business model is to be a franchisor and that is the core of what we do is we provide great unit economics, we provide great brand and product innovation. As we think about like the success in the U.K., I think there's some like real natural learnings that we can continue to apply to other markets.

We got highly consumer-centric in terms of like what was the consumer telling us they needed from a value and a product innovation standpoint. We made sure we were positioning our franchisees to deliver fantastic service.

And as we started to change hands between franchisees and continue to get our stores into more seasoned operators, we saw meaningful sales lift.

And third, as we went back and remapped our trade zones, our DMAs; we saw opportunities where we should be making strategic closures because it makes the overall market more profitable, it improves unit economics, it allows us to have really cohesive trade zones.

So we're partnering back with our franchisees across the world to take a similar playbook of being highly consumer-centric, making sure product innovation is coming through and pushing us as an organization to making sure we're laser-focused on the trade zones, the DMAs and cities we want to win in. .

Okay. And just a quick follow-up. In the U.K.

specifically, do you think your service levels are improving?.

Yes. When we look at delivery time, when we look at out-the-door times, we are seeing improvements. .

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Ravi Thanawala for any further remarks. .

Thank you. I'd like to sincerely thank all of you for your time this morning and your continued interest in Papa John's.

I hope that you've taken away from our conversation today that we're facing a challenging macro-consumer environment where customers are really being thoughtful about check management and their wallet, but we have a plan of action and remain confident that our Back to Better 2.0 strategy is going to set us up for long-term growth and success.

And we look forward to keeping you up-to-date on our progress and connecting again for our second quarter results in August. Thank you. .

Thank you, ladies and gentlemen, for your participation in today's conference..