LOUISVILLE, Ky.- (BUSINESS WIRE) - May 7, 2019 - Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the first quarter ended March 31, 2019.
Highlights
Steve Ritchie, President and CEO of Papa John’s, said, “The first quarter was a time of promise for Papa John’s. We made further progress in transforming the culture, thinking and momentum within the company. We have significantly strengthened and refreshed the company’s leadership, adding talented members to the senior management team and highly-qualified directors to the board this year. At the same time, we continued reevaluating all aspects of our go-to-market strategy, identifying multiple opportunities to improve the customer experience, customer value proposition and franchisee unit economics. Last quarter, we made several improvements in the key drivers of our business. Substantial, positive change takes time and effort, but with the passion and dedication of our team members and franchise partners, I am very excited about the future of Papa John’s.”
Operating Highlights
As more fully described within this press release, beginning this quarter, the company consolidated the financial results of the Papa John’s Marketing Fund, Inc. (“PJMF). The financial statements for the first quarter of 2018 have been restated to reflect the consolidation of PJMF. The consolidation of PJMF is not expected to have a material impact on the company’s annual consolidated financial results, including the income (loss) before income taxes, as PJMF operates at or near break-even results annually. The consolidation of PJMF also did not have a material impact on the company’s 2018 financial statements.
Operating highlights, including restated data for the first quarter of 2018, are as follow:
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Adjusted financial results excluding Special charges, which impact comparability, are summarized in the following reconciliation. The table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures. All highlights are compared to the same period of the prior year, unless otherwise noted.
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The non-GAAP adjusted results shown above and within this document, which exclude Special charges, 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 certain financial information excluding the Special charges is important for purposes of comparison to prior year results. In addition, management uses these metrics to evaluate the company’s underlying operating performance and analyze trends.
Consolidated revenues decreased $51.7 million, or 11.5%, for the first quarter of 2019. Excluding the impact of refranchising 62 company-owned restaurants in North America and the company-owned restaurants and a quality control center in China during 2018, consolidated revenues decreased $36.4 million, or 8.1%, for the first quarter of 2019, primarily due to the following:
The company reported a consolidated loss before income taxes of $0.8 million for the first quarter of 2019, compared to consolidated income before income taxes of $23.1 million for the first quarter of 2018, a decrease of $23.9 million. Excluding the impact of the previously mentioned Special charges, consolidated income before income taxes was $15.1 million, or a decrease of $8.0 million from the first quarter of 2018. Significant changes in income before income taxes are as follows:
Operating margin (loss) is not a measure defined by GAAP and should not be considered in isolation, or as an alternative to evaluation of the company’s financial performance. In addition to an evaluation of GAAP consolidated (loss) income before income taxes, we believe the presentation of operating margin (loss) is beneficial as it represents an additional measure used by the company to further evaluate operating efficiency and performance of the various business units. Additionally, operating margin (loss) discussion may be helpful for comparison within the industry. The operating margin (loss) results detailed herein can be calculated by business unit based on the specific revenue and operating expense line items on the face of the Consolidated Statements of Operations. Consolidated (loss) income before income taxes reported includes G&A expenses, depreciation and amortization, refranchising and impairment gains/(losses), net, and net interest expense that have been excluded from this operating margin (loss) calculation.
We expect our annual tax rate to be in the range of 21% to 24%. As previously noted, there is not a tax deduction for the $5.9 million expense associated with the one-time mark-to-market valuation of the Series B Preferred stock option.
Diluted loss per share was $0.12 for the first quarter of 2019, compared to diluted earnings per share of $0.52 for the prior year period. Adjusted diluted earnings per share was $0.31 for the first quarter of 2019, as compared to $0.52 for the first quarter of 2018.
Global Restaurant and Comparable Sales Information
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We believe North America, international and 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 also generate commissary revenue in the United States and in certain international markets. Franchise restaurant and comparable sales growth information is also useful for comparison to industry trends and evaluating the strength of our brand. Management believes the presentation of franchise restaurant sales growth, excluding the impact of foreign currency, provides investors with useful information regarding underlying sales trends and the impact of new unit growth without being impacted by swings in the external factor of foreign currency. Franchise restaurant sales are not included in company revenues.
Free Cash Flow
The company’s free cash flow, a non-GAAP financial measure, for the first quarter of 2019 and 2018 were 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 purchases of property and equipment and dividends paid to preferred shareholders We view free cash flow as an important measure because it is one 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 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 months ended March 31, 2019.
Global Restaurant Unit Data
At March 31, 2019, there were 5,336 Papa John’s restaurants operating in all 50 states and in 47 international countries and territories, as follows:
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The company has added 124 net worldwide units over the trailing four quarters ended March 31, 2019. Our development pipeline as of March 31, 2019included approximately 1,015 restaurants (115 units in North America and 900 units internationally), the majority of which are scheduled to open over the next six years.
Cash Dividend
The company paid cash dividends of $9.1 million in the first quarter of 2019 and declared second quarter cash dividends of approximately $10.6 million on April 30, 2019 to be paid to common and preferred shareholders. The dividends are as follows (in thousands):
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The declaration and payment of any future dividends on our common stock will be at the discretion of our Board of Directors, subject to the company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors. The Series B Preferred Stock holders are guaranteed quarterly preferred dividends and common stock dividends on an as-converted to common stock basis.
Consolidation of the Papa John’s Marketing Fund, Inc.
Papa John’s domestic restaurants, both Company-owned and franchised, participate in PJMF, a nonstock corporation that is designed to break even as it spends all annual contributions received from the system. PJMF collects a percentage of revenues from Company-owned and franchised restaurants in the United States for the purpose of designing and administering advertising and promotional programs. PJMF is a variable interest entity (“VIE”) that funds its operations with ongoing financial support and contributions from the domestic restaurants, of which approximately 80% are franchised.
During the first quarter of 2019, we reassessed the governance structure and the operating procedures of PJMF and determined that the company has the power to control certain significant activities of PJMF, based on the applicable accounting guidance. Prior to 2019, the Company did not consolidate PJMF. The company has concluded the previous accounting policy to not consolidate PJMF was an immaterial error and has determined that PJMF should be consolidated. The company has corrected this immaterial error by restating the comparative 2018 condensed consolidated financial statements. The revenues and expenses of PJMF are included in Other revenues and Other expenses, where other consolidated marketing funds are reported, in the Condensed Consolidated Statements of Operations.
The consolidation of PJMF is not expected to have a material impact on the company’s annual consolidated financial statements, including the income (loss) before income taxes as PJMF operates at or near break-even results annually. The consolidation of PJMF also did not have a material impact on the company’s 2018 financial statements.
Additional detail on the consolidation of PJMF can be found in our Form 10-Q for the three months ended March 31, 2019 filed with the SEC.
Adoption of ASC 842: Leases
On December 31, 2018, we adopted Accounting Standards Update (“ASU”) 2016-02, Topic 842, which requires companies to recognize a right-of-use asset and a lease liability on the balance sheet for contracts that meet the definition of a lease. The guidance also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. We adopted Topic 842 prospectively using the optional transition method with no cumulative effect adjustment recorded as of December 31, 2018. The adoption resulted in a $157.0 million operating lease liability and a $154.1 million right-of-use asset as of March 31, 2019. There was no significant impact on our operating results, diluted earnings per share or debt compliance and covenant calculations from the adoption of this new accounting standard.
Additional detail of the adoption and 2019 impact of the new leasing standard can be found in our Form 10-Q for the three months ended March 31, 2019 filed with the SEC.
Other Business Matters
On February 3, 2019, the company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Starboard pursuant to which Starboard made a $200 million strategic investment in the company’s newly designated Series B convertible preferred stock, $1,000 stated value per share (the “Series B Preferred Stock”). In addition, on March 29, 2019, Starboard made an additional $50 million investment in the Series B Preferred Stock pursuant to an option that was included in the Securities Purchase Agreement. The company also issued $2.5 million of Series B Preferred stock on the same terms as Starboard to certain Papa John’s franchisees who satisfied accredited investor requirements under the federal securities laws. The initial preferred dividend rate is 3.6% per annum of the stated value, payable quarterly in arrears. The Series B Preferred Stock also participates on an as-converted basis in any regular or special dividends paid to common shareholders. If at any time, the company reduces the regular dividend paid to common shareholders, the Series B Preferred Stock dividend will remain the same as if the common stock dividend had not been reduced.
The company recorded a one-time mark-to-market adjustment of $5.9 million for the time between the grant dates and the purchase dates for both the $50 million option exercised by Starboard and the shares purchased by franchisees. As previously noted, the mark-to-market adjustment was recorded in G&A expenses for $5.6 million (Starboard) and as a reduction to North America franchise royalties and fees of $0.3 million (franchisees) within the Condensed Consolidated Statements of Operations with no associated tax benefit.
2019 Outlook
The company is reaffirming its previously issued 2019 outlook, as we expect the initiatives we are implementing will result in improved sales and operating results in the last half of the year.
Conference Call and Website Information
A conference call is scheduled for May 7, 2019 at 5:00 p.m. Eastern Time to review the company’s first quarter 2019 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 5684727.
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,” “intend,” “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, cash flow, earnings per share, contingent liabilities, resolution of litigation, commodity costs, currency fluctuations, profit margins, unit growth, unit level performance, capital expenditures, restaurant and franchise development, the strategic investment by Starboard and use of the proceeds, the ability of the company to mitigate negative consumer sentiment through advertising, marketing and promotional activity, corporate governance, new Board leadership, future costs related to the company’s response to the negative consumer sentiment, management reorganizations, compliance with debt covenants, shareholder and other stakeholder engagement, strategic decisions and actions, the cultural audit and investigation, share repurchases, dividends, effective tax rates, regulatory changes and impacts, the impact of the Tax Cuts and Jobs Act and the adoption of new accounting standards, 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:
These and other risk factors are discussed in detail in “Part I. Item 1A. – Risk Factors” in our Annual Report on Form 10-K/A for the fiscal year ended December 30, 2018, and in “Part II. Item 1A. – Risk Factors” in our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2019, as well as subsequent filings. 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.
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For more information about the company, please visit www.papajohns.com.
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Joe Smith
Senior Vice President, Chief Financial Officer
502-261-7272
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Source: Papa John’s International, Inc.
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