Papa John's Announces Third Quarter 2015 Results

Papa Johns
Published: November 4th, 2015

LOUISVILLE, Ky. - Nov 3, 2015 - (BUSINESS WIRE) - Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 27, 2015.

Highlights

• Third quarter earnings per diluted share of $0.45 in 2015 compared to $0.39 in 2014, an increase of 15.4%
• System-wide comparable sales increases of 3.0% for North America and 8.0% for International
• 52 worldwide net unit openings during the quarter

"I'd like to congratulate our operators and team members on another solid quarter of sales, earnings and unit growth," said Papa John's founder, chairman and CEO John Schnatter. "The team delivered solid comp sales in the third quarter, and we again posted exceptional double-digit two year comp sales in both our domestic and international businesses. Our unwavering focus on quality, combined with our strong digital channels, continues to drive the Papa John's brand forward."

Third quarter 2015 revenues were $389.3 million, a 0.3% decrease from third quarter 2014 revenues of $390.4 million. The lower revenues were primarily due to anticipated lower point-of-sale system ("FOCUS") equipment sales as the rollout is now complete as well as lower PJ Food Service ("PJFS") sales from lower commodity costs. Third quarter 2015 net income was $18.0 million, compared to third quarter 2014 net income of $16.1 million. Third quarter 2015 diluted earnings per share were $0.45, or a 15.4% increase, compared to third quarter 2014 diluted earnings per share of $0.39.

Revenues were $1.22 billion for the nine months ended September 27, 2015, a 4.1% increase from revenues of $1.17 billion for the same period in 2014. Net income was $51.0 million for the first nine months of 2015 ($59.0 million, or a 13.1% increase, excluding the after-tax expense of a legal settlement as detailed in the "Item Impacting Comparability" table), compared to $52.1 million for the same period in 2014. Diluted earnings per share were $1.27 for the first nine months of 2015 ($1.47, or a 19.5% increase, excluding the prior quarter legal settlement), compared to $1.23 for the same period in 2014.

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We believe global restaurant and comparable sales growth 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. Global restaurant and comparable sales growth information is also useful in analyzing industry trends and the strength of our brand. Management believes the presentation of global restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange.

Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

All revenue and operating highlights below are compared to the same period of the prior year, unless otherwise noted.

Revenue Highlights

Consolidated revenues decreased $1.1 million, or 0.3%, for the third quarter of 2015 and increased $47.9 million, or 4.1%, for the nine months ended September 27, 2015. The decrease for the three-month period was primarily due to the anticipated lower FOCUS equipment sales as the rollout is now complete as well as lower PJFS sales from lower commodity costs. The following summarizes changes in our revenues for the three- and nine-month periods:

• Domestic company-owned restaurant sales increased $11.0 million, or 6.5%, and $46.0 million, or 8.9%, for the three and nine months, respectively, primarily due to increases of 4.7% and 6.8% in comparable sales.
• North America franchise royalty revenue was relatively flat for the three months as the increase in revenue from a 2.4% increase in comparable sales was offset by higher royalty incentives. The increase of $4.8 million, or 7.3%, for the nine months was primarily due to an increase of 4.4% in comparable sales and lower royalty incentives.
• International revenues increased approximately $600,000, or 2.3%, and $3.2 million, or 4.2%, for the three and nine months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 8.0% and 7.5%, calculated on a constant dollar basis. This was somewhat offset by the negative impact of foreign currency exchange rates of approximately $2.1 million and $5.9 million for the three and nine months, respectively.
• Other sales decreased approximately $9.3 million, or 39.7%, and increased $400,000, or 0.8%, for the three and nine months, respectively. As previously discussed, the decrease for the three-month period was primarily due to the lower FOCUS equipment sales. The higher levels of FOCUS equipment sales in the third quarter of 2014 had no significant impact on operating results.
• Domestic commissary sales decreased $3.4 million, or 2.3%, and $6.6 million, or 1.4%, for the three and nine months, respectively, primarily due to lower revenues associated with lower cheese prices, somewhat offset by increases in restaurant sales volumes. PJFS pricing for cheese is based on a fixed dollar markup; when cheese prices decrease, revenues decrease with no overall impact on the related dollar margin.

Operating Highlights

The tables below summarize income before income taxes on a reporting segment basis and exclude the previously mentioned legal settlement (as detailed in the "Item Impacting Comparability" section) for the three- and nine-month periods of 2015:

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Third quarter 2015 income before income taxes increased approximately $2.0 million, or 8.4%. This increase was primarily due to the following:

• Domestic company-owned restaurants were relatively flat for the quarter as higher profits from the 4.7% increase in comparable sales and from lower commodity costs were offset by incremental insurance expense of approximately $2.9 million primarily from higher non-owned automobile claims costs. The market price for cheese averaged $1.68 per pound for the third quarter of 2015, compared to $2.14 per pound in the prior period.
• Domestic commissaries income increased approximately $1.3 million primarily due to a higher margin and incremental profits from higher restaurant volumes. These increases were partially offset by incremental insurance expense of approximately $1.6 million primarily from higher automobile claims costs.
• North America franchising was relatively flat as higher royalties attributable to the 2.4% comparable sales increase were substantially offset by higher royalty incentives.
• International income increased approximately $1.7 million primarily due to the previously mentioned increase in units and comparable sales of 8.0%, which resulted in both higher royalties and an increase in United Kingdom commissary results. This was somewhat offset by the negative impact of foreign currency exchange rates of approximately $900,000. Additionally, the prior year included an impairment charge of approximately $700,000 for eight company-owned restaurants in China.

These increases were partially offset by higher unallocated corporate expenses of approximately $1.2 million primarily due to higher health insurance claims costs.

Income before income taxes increased $10.6 million, or 13.0%, for the nine-month period ended September 27, 2015, excluding the $12.3 million legal settlement. This increase was primarily due to the same reasons noted for the quarter, except for the following:

• Domestic company-owned restaurants increased approximately $9.1 million primarily due to higher profits from the 6.8% increase in comparable sales and from lower commodity costs, partially offset by incremental insurance expense of $3.9 million primarily from higher non-owned automobile claims costs and higher depreciation expense of $1.1 million associated with FOCUS equipment. The market price for cheese averaged $1.62 per pound for the first nine months of 2015, compared to $2.16 per pound in the prior year.
• North America franchising increased $5.2 million primarily due to higher royalties attributable to the 4.4% comparable sales increase and lower royalty incentives.
• Unallocated corporate expenses increased $13.0 million primarily due to higher salaries and benefits, including an increase in health insurance claims costs, and increased legal and interest costs. In addition, management incentive compensation costs have increased in 2015 due to higher annual operating results.

The effective income tax rates were 27.7% and 30.6% for the three and nine months ended September 27, 2015, representing decreases of 2.2% and 1.8% for the three- and nine-month periods, respectively. The rates for 2015 include higher benefits from various tax deductions and credits.

The company's free cash flow, a non-GAAP financial measure, for the first nine months of 2015 and 2014, 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 dividends, share repurchases and 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 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (SEC) for additional information concerning our operating results and cash flow for the three and nine months ended September 27, 2015.

Global Restaurant Unit Data

At September 27, 2015, there were 4,786 Papa John's restaurants operating in all 50 states and in 38 international countries and territories, as follows:

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Our development pipeline as of September 27, 2015 included approximately 1,220 restaurants (250 units in North America and 970 units internationally), the majority of which are scheduled to open over the next six years.

Item Impacting Comparability

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the three and nine month periods ended September 27, 2015:

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The Legal Settlement expense represents a pre-tax expense of $12.3 million for a legal settlement preliminarily approved by the court and recorded in the quarter ended June 28, 2015. This collective and class action, Perrin v. Papa John's International, Inc. and Papa John's USA, Inc., which included approximately 19,000 drivers, alleged delivery drivers were not reimbursed in accordance with the Fair Labor Standards Act. The Company continues to deny any liability or wrongdoing in this matter.

The non-GAAP results shown above, which exclude the legal settlement, 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 legal settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the company's underlying operating performance and to analyze trends.

Share Repurchase Activity

In October 2015, the company's Board of Directors approved a $125 million increase in the amount of common stock that may be purchased under the company's share repurchase program through December 31, 2016, bringing the total authorized under the program to $1.45 billion since its inception in 1999. Approximately $161.1 million remains available under the company's share repurchase program as of October 27, 2015.

The following table reflects our repurchases for the three and nine months ended September 27, 2015 and subsequent repurchases through October 27, 2015 (in thousands):

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There were 39.9 million and 40.2 million diluted weighted average shares outstanding for the three and nine months ended September 27, 2015, representing decreases of 3.6% and 4.3%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.02 and $0.07, respectively, for the three and nine months ended September 27, 2015 due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 39.2 million actual shares of the company's common stock were outstanding as of September 27, 2015.

China Operations

The company has decided to refranchise the China market and is planning a sale of its existing China operations, consisting of company-owned restaurants and a commissary. The restaurants are located in both Beijing and Tianjin, China. A buyer has not yet been identified. See the "Notes to Condensed Consolidated Financial Statements" in our Quarterly Report on Form 10-Q filed with the SEC on November 3, 2015 for additional information.

2015 Guidance Update

Despite the higher insurance costs, the company is reaffirming its current 2015 diluted earnings per share guidance range of $2.04 to $2.10, excluding the $0.20 impact of the legal settlement, but expects to be near the low end of the range. Additionally, net unit openings are expected to be at the low end of the 2015 guidance range of 220 to 250, with approximately 75% of the net unit growth in International markets.

Conference Call

A conference call is scheduled for November 4, 2015 at 10:00 a.m. Eastern Time to review our third quarter 2015 earnings results. 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. and Canada) 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 45359098.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under Shareholder Tools at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

Forward-Looking Statements

Certain matters discussed in this press release and other company communications 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 or consumer buying habits, including the impact of adverse economic conditions;
• the impact that product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns, including potential epidemics, could have system-wide on our restaurants or our results;
• failure to maintain our brand strength and quality reputation and risks related to our better ingredients marketing strategy;
• 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 or other restaurant costs. This could include increased employee compensation, benefits, insurance, tax rates, regulatory compliance and similar costs; including increased costs resulting from federal health care legislation;
• increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned automobiles, workers' compensation, general liability and property;
• disruption of our supply chain or commissary operations which could be caused by our sole source of supply of cheese or limited source of suppliers for other key ingredients or more generally due to weather, drought, disease, geopolitical or other disruptions beyond our control;
• increased risks associated with our international operations, including economic and political conditions, instability in our international markets, fluctuations in currency exchange rates, and difficulty in meeting planned sales targets and new store growth. This could include our expansion into emerging or underpenetrated markets where we have a Company-owned presence;
• the impact of increases in interest rates on the Company or our franchisees;
• the credit performance of our franchise loan programs;
• the impact of the resolution of current or future claims and litigation;
• current or proposed legislation impacting our business;
• failure to effectively execute succession planning, and our reliance on the multiple roles of our founder, chairman and chief executive officer, who also serves as our brand spokesperson; and
• disruption of critical business or information technology systems, and risks associated with systems failures and data privacy and security breaches, including theft of Company, employee and customer information.

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014. 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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SOURCE Papa John's International, Inc.

Contact:

Lance Tucker
Papa John's International, Inc.
Chief Financial Officer
502-261-7272

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