Papa John's Announces Fourth Quarter and Full Year 2013 Results

Papa Johns
Published: February 26th, 2014

2014 Operating Assumptions and Earnings Guidance Announced

LOUISVILLE, Ky. - February 25, 201 - (BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the fourth quarter and fiscal year ended December 29, 2013.

Highlights

• System-wide comparable sales increased 9.0% for North America and 7.0% for International for the fourth quarter; System-wide comparable sales increased 4.0% for North America and 7.5% for International for the full year
• Fourth quarter earnings per diluted common share of $0.41 increased 10.8% over 2012, or increased 32.3% when excluding the impact of the 53^rd week in 2012; Earnings per diluted common share of $1.55 for the full year increased 20.2% over earnings per diluted common share of $1.29 for 2012
• The Company opened 132 net global restaurants for the fourth quarter and 265 for the full year, of which 183 were International and 82 were in North America

"I'd like to congratulate our operators on delivering a great year for Papa John's, with several notable milestones and accomplishments including the opening of our 1,000^th International restaurant and continued strong growth in sales, earnings and units," said Papa John's founder, chairman and CEO, John Schnatter. "As we celebrate our 30^th anniversary in 2014, we expect to build upon our momentum by focusing on what got us here - growing the Papa John's brand globally by consistently delivering a demonstrably better pizza."

Compared to the fourth quarter of 2012, which included an additional week of operations, we reported the following results:

• Fourth quarter 2013 revenues were $387.9 million compared to fourth quarter 2012 revenues of $367.3 million, an increase of 5.6%
• Fourth quarter 2013 net income was $18.8 million compared to fourth quarter 2012 net income of $17.4 million, an increase of 8.3%
• Fourth quarter 2013 diluted earnings per common share ("EPS") were $0.41, compared to fourth quarter 2012 EPS of $0.37, an increase of 10.8%

Excluding the impact of the additional week in 2012, which provided approximately $21.5 million of additional revenues and approximately $4.1 millionof additional income before income taxes, we reported the following results:

• Fourth quarter 2013 revenues of $387.9 million represented a 12.2% increase
• Fourth quarter 2013 net income of $18.8 million represented a 27.7% increase
• Fourth quarter 2013 EPS of $0.41 represented a 32.3% increase

Full year 2013 revenues were $1.4 billion, a 7.2% increase from 2012 revenues of $1.3 billion, or an increase of 8.9% excluding the 53rd week of operations in 2012. Full year 2013 net income was $69.5 million, compared to 2012 net income of $61.7 million, an increase of $7.9 million or 12.8%. Full year 2013 EPS was $1.55 compared to 2012 EPS of $1.29, an increase of 20.2%.

As noted above, results include the benefit of a 53rd week of operations in 2012 as well as the Incentive Contribution, the impact of which is discussed in "Revenue and Operating Highlights" and "Items Impacting Comparability" below. The full year net income impact of the 53rd week of operations in 2012 was substantially offset by the impact of the Incentive Contribution.

The company completed a two-for-one split of the company's outstanding shares of stock in December 2013. Shareholders of record on December 12, 2013 received one additional share for every outstanding share of stock held on the record date. The stock dividend was distributed on December 27, 2013. All share and per-share amounts in this press release prior to the stock split have been adjusted.

Global Restaurant and Comparable Sales Information

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We believe global restaurant and comparable sales information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. We believe global restaurant and comparable sales information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

Revenue Highlights

Consolidated revenues increased $20.6 million, or 5.6%, for the fourth quarter and increased $96.4 million, or 7.2%, for the full year. Excluding $21.5 million in revenues for the 53^rd week of operations in 2012, revenues for the fourth quarter and full year of 2013 increased 12.2% and 8.9%, respectively. The following details the impact of the 53^rd week of operations by operating segment. All revenue highlights discussed below are compared to the same period of the prior year and exclude the 53^rd week of operations, unless otherwise noted.

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(*) "Adjusted Increase" columns exclude the impact of the 53rd week of operations in 2012. Revenues excluding the impact of the 53rd week of operations is a non-GAAP financial measure. See "Items Impacting Comparability" for additional details and a reconciliation of our GAAP financial measures.

The increases in revenues for the fourth quarter and full year 2013 were primarily due to the following:

• Domestic company-owned restaurant sales increased approximately $18.6 million, or 12.3%, and $53.7 million, or 9.2%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in comparable sales of 11.5% and 6.6%, respectively. The increase for the full year was also due to the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
• North America franchise royalty revenue increased $1.5 million, or 7.8%, and $3.5 million, or 4.5%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in net franchise units and increases in comparable sales of 8.1% and 3.1%, respectively, partially offset by royalty incentives offered to franchisees for meeting certain sales targets. The increase for the full year was partially offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above.
• Domestic commissary sales increased $16.4 million, or 11.6%, and $41.4 million, or 7.7%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to increases in sales volumes, higher overall margins and increases in the prices of commodities.
• International royalties and franchise and development fees increased $2.2 million or 11.4% for the full year. This was primarily due to an increase in units and comparable sales of 7.5%.
• International restaurant and commissary sales increased $5.2 million, or 37.5%, and $14.3 million, or 27.2%, for the fourth quarter and full year 2013, respectively. The increases were primarily due to an increase in China company-owned restaurant sales due to the increased number of units. In addition, China reported an additional month of results in the fourth quarter of 2013 compared to the fourth quarter of 2012. The fourth quarter of 2013 includes September through December 2013 results whereas the fourth quarter of 2012 includes September through November 2012 results. The added month, which increased revenues approximately $2.1 million, puts China on the same reporting cycle as our Domestic operations. United Kingdom commissary revenues also increased due to both an increase in units and higher comparable sales.

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis, excluding the Incentive Contribution and the impact of the 53^rdweek of operations in 2012, which substantially offset each other on a full year basis. All operating highlights are compared to the same period of the prior year and exclude the Incentive Contribution and the 53^rd week of operations, unless otherwise noted.

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Fourth quarter 2013 income before income taxes increased approximately $5.5 million or 24.7% compared to the prior year period. The increase was primarily due to the following:

• Domestic company-owned restaurants income increased approximately $650,000 as incremental profits from higher sales were partially offset by lower national promotion pricing, higher commodities and increased restaurant level bonuses.
• Domestic commissaries operating results increased approximately $4.4 million due to incremental profits associated with higher sales and a higher margin.
• North America franchising increased approximately $1.0 million due to the increase in net restaurants and comparable sales, partially offset by higher royalty incentives offered to franchisees for meeting certain sales targets.
• Unallocated corporate expenses decreased approximately $900,000 primarily due to lower legal costs and short-term management incentive costs, partially offset by higher various other G&A costs including travel, operators' conference costs and information technology costs. Legal costs were higher in 2012 primarily due to the costs associated with the previously disclosed Agne text messaging class action lawsuit.

This increase was partially offset by an approximate $800,000 decrease in international results as the higher royalties attributable to the 7.0% comparable sales increase were more than offset by higher operating losses in our company-owned China market, including the $215,000 impact of the additional month in the fourth quarter, as previously discussed. The losses in the company-owned China market include a reduction in operating results at our company-owned restaurants, primarily associated with new stores, as well as write off costs associated with closing one location and the disposition of certain other assets. Additionally, 2013 includes higher infrastructure and support costs to expand in this underpenetrated market.

The full year increase in income before income taxes of $7.9 million, or 8.0%, was primarily due to the same reasons as the increases noted above for the three month period. Additionally, the full year results include the following:

• Domestic company-owned restaurants income decreased approximately $900,000 primarily due to higher commodity costs somewhat offset by incremental profits associated with higher comparable sales of 6.6%.
• International income increased approximately $150,000 primarily due to the increase in units and comparable sales of 7.5% which provided both an improvement in our United Kingdom results and higher royalties. These increases were substantially offset by higher operating losses in our company-owned China market, as previously discussed.

The effective tax rates were 29.4% and 31.2% for the three months and full year ended December 29, 2013, representing decreases of 1.3% and 1.7% from the rates in the comparable prior year periods. Our effective income tax rate may fluctuate from year to year for various reasons. The lower tax rates in 2013 included both higher levels of tax credits, including the Work Opportunity Tax Credit and state and federal research and experimentation tax credits, as well as favorable one-time settlements of specific state tax issues.

The company's free cash flow for the fiscal years ended 2013 and 2012 was as follows (in thousands):

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We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the amounts spent on the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP and as a result our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP measures.

See the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information concerning our operating results and cash flow for the fiscal year ended December 29, 2013.

Global Restaurant Unit Data

At December 29, 2013, there were 4,428 Papa John's restaurants operating in all 50 states and in 34 countries, as follows:

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Our development pipeline as of December 29, 2013 included approximately 1,200 restaurants (200 restaurants in North America and 1,000 international restaurants), the majority of which are scheduled to open over the next six years.

Items Impacting Comparability

The following table reconciles our GAAP financial results to certain items impacting comparability, for the fourth quarter and fiscal year ended December 29, 2013. The impact of the Incentive Contribution was substantially offset by the impact of the 53^rd week of operations for the full year ($7.7 millionincrease in income before income taxes, as reported, and a $7.9 million increase in income before income taxes, as adjusted):

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The results shown in the table and elsewhere in this press release, which exclude the Incentive Contribution and the 53^rd week of operations, are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP results. Management believes presenting the financial information excluding the Incentive Contribution and the impact of the 53^rd week of operations is important for purposes of comparison to prior year results and analyzing each segment's operating results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, were based on financial measures that excluded the Incentive Contribution.

Share Repurchase Activity

In December 2013, the company's Board of Directors approved a $100 million increase in the amount of common stock that may be purchased under the company's share repurchase program through December 31, 2014, bringing the total authorized under the program to $1.2 billion since its inception in 1999. Approximately $110.9 million remains available under the company's share repurchase program as of February 18, 2014. The following table reflects our repurchases for the fourth quarter and full year of 2013 as well as subsequent repurchases through February 18, 2014 (in thousands):

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There were 43.3 million and 44.2 million diluted weighted average common shares outstanding for the fourth quarter and full year, respectively, representing decreases of 7.0% and 7.5% versus the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.12 for the fourth quarter and full year, respectively, due to the reductions in shares outstanding, primarily resulting from the share repurchase program. Approximately 41.8 million shares of the company's common stock were outstanding as of December 29, 2013.

Regular Quarterly Dividend

As announced on January 30, 2014, the Board of Directors declared a regular quarterly cash dividend of $0.125 per share. The dividend was paid onFebruary 21, 2014 to shareholders of record as of the close of business on February 10, 2014.

Conference Call

A conference call is scheduled for February 26, 2014 at 10:00 a.m. Eastern Time to review our fourth quarter and full year 2013 earnings results and 2014 guidance. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. andCanada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, from the company's web site at www.papajohns.com. The Conference ID is 63268283.

2014 Key Operating Assumptions and Earnings Guidance

In 2014, the company expects another year of solid growth across all aspects of the Papa John's business. We expect to continue the momentum we have in units, revenues, and EPS growth, with a notable improvement in International profitability. We and our franchisees plan to implement a new, proprietary POS system ("FOCUS") in substantially all domestic system restaurants in 2014, which we expect will add efficiencies to our operations. The costs related to implementing FOCUS are projected to have a negative pre-tax earnings impact of approximately $5.0 million in 2014, or $0.08 of EPS, as compared to 2013.

Earnings per Share - The company projects 2014 EPS to increase to a range of $1.64 to $1.72. Excluding the approximate $0.08 impact of implementing FOCUS, the range of $1.72 to $1.80 represents a 11% to 16% increase over 2013 EPS.

Comparable Restaurant Sales - North America system-wide comparable sales are expected to increase 2.0% to 4.5% in 2014. International comparable sales, are expected to increase 5% to 7%, on a constant dollar basis, in 2014.

Worldwide Net Unit Growth - Worldwide net unit growth in 2014 is expected to range between 220 and 250 units, with approximately 70% of the net unit growth in International markets.

Revenues - Total consolidated revenues are expected to increase 5% to 7% in 2014, due to projected North America and International net unit and comparable sales growth.

Income before Income Taxes Margin - Consolidated income before income taxes margin in 2014 is expected to approximate 2013 levels. Excluding the impact of FOCUS, we expect consolidated margin improvement of 0.20% to 0.40%. The biggest driver of increased margins is a projected improvement in International profitability, driven by improved financial performance in our corporate-owned China operations and continued strong unit growth and comparable sales in our other International markets. In North America, we are assuming full-year block cheese prices in the mid-to-high $1.80's per pound; the persistence of elevated block cheese prices from this level will impact company-owned restaurant margins, and EPS, accordingly.

Income Tax Rate - The income tax rate in 2014 is expected to range from 32.25% to 33.75%, up from 2013 due to several rate-reducing items in 2013 that are not expected to recur.

Free Cash Flow - Free cash flow in 2014 is expected to approximate that of 2013. The company expects to continue its recurring dividend and to repurchase shares of its outstanding stock in a range of $75- $100 million. Debt is expected to range between 1.0x and 1.5x 2014 EBITDA.

Capital Expenditures - Capital expenditures for 2014 are expected to approximate $50 to $55 million, consisting of company-owned unit development in the U.S. and Beijing, China, certain technology-related projects including costs associated with the FOCUS system, and routine capital replacement.

Annual Meeting Date Scheduled

The 2014 Annual Meeting of Stockholders will be held on Tuesday, April 29, 2014, at 11:00 am local time at the company's corporate offices located at 2002 Papa John's Boulevard, Louisville, Kentucky.

Forward-Looking Statements

Certain matters discussed in this report, including information within Management's Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "estimate," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, capital expenditures, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements. The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to:

• aggressive changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales; and new product and concept developments by food industry competitors;
• changes in consumer preferences and adverse general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits;
• the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants;
• failure to maintain our brand strength and quality reputation;
• the ability of the Company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably;
• increases in or sustained high costs of food ingredients and other commodities;
• disruption of our supply chain or our commissary operations due to sole or limited source of suppliers or weather, drought, disease or other disruption beyond our control;
• increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets and new store growth for our international operations, including our expansion into emerging or underpenetrated markets, such as China, where we have a Company-owned presence. Based on prior experience in underpenetrated markets, operating losses are likely to occur as the market is being established;
• increased employee compensation, benefits, insurance, tax rates, regulatory compliance and similar costs, including increased costs resulting from federal health care legislation;
• the credit performance of our franchise loan program;
• the impact of the resolution of current or future claims and litigation, and current or proposed legislation impacting our business;
• the impact of changes in currency exchange and interest rates;
• failure to effectively execute succession planning, and our reliance on the services of our Founder and Chief Executive Officer, who also serves as our brand spokesperson;
• disruption of critical business or information technology systems, and risks associated with data privacy and security breaches, including theft of Company and customer information. This would include the increased risk associated with the planned rollout of our new domestic POS system. If prolonged and widespread technological problems are experienced during the rollout, our domestic corporate and franchise operations could be disrupted, which could adversely impact sales.

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" of the Annual Report on Form 10-K for the fiscal year endedDecember 29, 2013. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

For more information about the company, please visit www.papajohns.com.

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Contact:

Lance Tucker
Papa John's International, Inc.
502-261-4218
Chief Financial Officer

Source: Papa John's International, Inc.

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