Papa John’s Announces Fourth Quarter 2019 Results And Provides 2020 Outlook

Fourth quarter results

LOUISVILLE, Ky. - (BUSINESS WIRE) - Feb. 26, 2020 - Papa John’s International, Inc. (NASDAQ: PZZA) today announced financial results for the three months and full year ended December 29, 2019.

• Fourth quarter 2019 loss per diluted share of ($0.18) and adjusted earnings per diluted share, excluding the impact of Special items, of $0.37 versus fourth quarter 2018 loss per diluted share of ($0.41) and adjusted earnings per diluted share of $0.18

• Full Year 2019 loss per diluted share of ($0.24) and adjusted earnings per diluted share, excluding the impact of Special items, of $1.17 versus full year 2018 earnings per diluted share of $0.08 and adjusted earnings per diluted share of $1.37

• System-wide North America comparable sales increase of 3.5% for the fourth quarter and decrease of 2.2% for the full year

• International comparable sales increases of 2.4% for the fourth quarter and 1.1% for the full year

• 52 net unit openings in the fourth quarter and 92 net unit openings for the full year, driven by International

Rob Lynch, President & CEO said, “Papa John’s accelerated its turn-around in the fourth quarter with a second consecutive quarter of positive comparable sales, positioning us for a strong start to 2020. The company’s new focused priorities and a more inclusive, winning culture are empowering our team members to innovate our products and marketing, drive sales growth, improve efficiencies and achieve better results for all of our stakeholders. Our 2020 plan accelerates this momentum, as we work to become the world’s best pizza company and deliver strong, long-term profit growth.”

Global Restaurant and Comparable Sales Information

Global restaurant and comparable sales information and operating highlights for the three months and full year ended December 29, 2019, compared to the three months and full year ended December 30, 2018 are as follows:

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 and marketing fund contributions 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 the company’s revenues.

Revenue and operating highlights

Revenue and Operating Highlights

Adjusted financial results excluding Special items are summarized in the following reconciliations. We present these non-GAAP measures because we believe the Special items impact the comparability of our results of operations. The table below 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.

The non-GAAP adjusted results shown above and within this document, which exclude Special items, 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 items 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 to analyze trends.

Consolidated revenues increased $19.9 million, or 5.0%, for the fourth quarter of 2019 compared to the fourth quarter of 2018. Excluding the impact of refranchising 46 domestic restaurants and a quality control center in Mexico in 2019, consolidated revenues increased approximately $30.9 million, or 8.0%, for the three months ended December 29, 2019, primarily due to the following:

• Excluding the impact of refranchising, Domestic Company-owned restaurant sales increased due to positive comparable sales of 4.1% and the favorable impact of the expiration of customer rewards associated with our Papa Rewards loyalty program.

• North America commissary revenues increased primarily due to higher pricing associated with higher commodities costs, primarily cheese.

• Excluding the favorable impact of refranchising, North America royalties and fees increased due to positive comparable sales.

• International revenues increased primarily due to higher royalties and higher United Kingdom commissary revenues from increased equivalent units and positive comparable sales of 2.4%.

• Other revenues increased due to higher marketing fund revenue primarily due to an increase in the PJMF contribution rate and higher online revenues.

Consolidated revenues decreased $43.6 million, or 2.6%, for the year ended December 29, 2019 compared to the year ended December 30, 2018. Excluding the impact of refranchising activities in 2019 and 2018, consolidated revenues decreased $3.9 million, or 0.2%, for the year ended December 29, 2019, primarily due to the following:

• Negative comparable sales for North America restaurants for the year ended December 29, 2019 resulted in lower company-owned restaurant revenues and royalties.

• Royalty relief of approximately $19.1 million for the year ended December 29, 2019 was $3.7 million higher than the prior year comparable period, as detailed in the previously discussed Special charges.

These decreases were substantially offset by the following revenue increases:

• Excluding the impact of the 2018 China refranchising and the 2019 Mexico quality control center refranchising, International revenues increased primarily due to higher royalties and higher United Kingdom commissary revenues from increased equivalent units, partially offset by unfavorable foreign exchange rates of approximately $4.2 million.

• North America commissary revenues increased due to higher pricing associated with higher commodities costs, partially offset by lower volumes.

The tables below summarize income before income taxes on a reporting segment basis. Alongside the GAAP income before income taxes data, we have included “adjusted” income before income taxes for the three-month period and year ended December 29, 2019 to exclude Special items. We believe this non-GAAP measure is important for purposes of comparison to prior year results.

Consolidated loss before income taxes of $4.8 million for the fourth quarter of 2019 improved $10.4 million compared to the fourth quarter of 2018. Excluding the impact of the previously mentioned Special items, consolidated income before income taxes was $17.7 million, or an increase of $8.7 million from the fourth quarter of 2018. Significant changes in income before income taxes excluding Special items are as follows:

• Domestic Company-owned restaurants income before income taxes increased $7.6 million primarily due to positive comparable sales of 4.1%, lower workers’ compensation, automobile and general insurance costs of $2.0 million, and the favorable impact of the expiration of rewards associated with our Papa Rewards loyalty program.

• North America commissaries income before income taxes increased $3.9 million primarily due to higher pricing and lower franchise new equipment incentives costs that were previously reported in the North America Franchising segment.

• North America Franchising income before income taxes was $1.0 million lower primarily due to 2018 including a favorable cost reduction related to franchise new equipment incentives. The costs of these incentives are now reported in the North America commissaries segment, as noted above. These segment adjustments had no impact on consolidated income before income taxes. Excluding the reclassification, the royalties from North America Franchising increased approximately $2 million as compared to the prior year.

• International income before income taxes approximated the prior year as higher royalties and higher United Kingdom commissary income were offset by higher legal costs.

• All others income before income taxes, which primarily includes our online and mobile ordering business, our wholly-owned print and promotions subsidiary and our North America Marketing funds, increased $900,000 primarily due to higher online revenues, partially offset by the timing of marketing spend.

• Unallocated corporate expenses increased $3.3 million primarily due to higher management incentive and executive severance costs as well as increased legal costs and bad debt expense. These increases were partially offset by a decrease in interest expense of $3.4 million due to lower outstanding debt. Total debt outstanding was $370.0 million as of December 29, 2019. Outstanding debt decreased $255.0 million from December 30, 2018, primarily due to the use of proceeds from the issuance of Series B preferred stock to Starboard to repay debt.

For the year ended December 29, 2019, consolidated income before income taxes was $5.0 million, a decrease of $1.7 million compared to the year ended December 30, 2018. Excluding the impact of the previously mentioned Special items, consolidated income before income taxes was $61.1 million, an increase of $3.4 million, compared to the year ended December 30, 2018. Significant changes in income before income taxes excluding Special items are as follows:

• Domestic Company-owned restaurants income before income taxes increased approximately $11.9 million for the year ended December 29, 2019 primarily due to improved operating costs including lower advertising spend, lower workers’ compensation, automobile and general insurance costs of $4.2 million, and the favorable impact of the expiration of rewards associated with the Papa Rewards loyalty program. These increases were partially offset from the impact of lower comparable sales of 2.7%.

• North America commissaries income before income taxes increased $2.5 million as 2018 included additional franchise support in the form of lower commissary pricing.

• North America Franchising income before income taxes decreased $2.7 million primarily due to a decrease in comparable sales of 2.0%.

• International income before income taxes increased $2.8 million primarily due to increased royalties and lower marketing spend in the United Kingdom. These increases were partially offset by unfavorable foreign exchange rates of approximately $1.3 million and higher legal costs.

• All others income before income taxes increased $3.6 million primarily due to higher online revenues and the timing of marketing spend.

• Unallocated corporate expenses increased $14.7 million primarily due to higher management incentive costs, including equity compensation, as well as increased legal and professional fees not associated with the Special charges. These increases were partially offset by a $5.6 million decrease in interest expense due to lower outstanding debt.

The effective income tax (benefit) and expense for the three months and full year comparable periods are as follows (dollars in thousands):

The tax benefit for the three months and year ended December 29, 2019 is primarily related to higher excess tax benefits from equity-based compensation and other favorable tax credits. Additionally, for the full year 2018, income tax expense was $2.6 million, or an effective income tax rate of 39.2%. This included a significant tax impact from the China divestiture, as previously detailed in the Special items.

The diluted (loss) earnings per share and adjusted diluted earnings per share, excluding Special items, for the three months and full year comparable periods are as follows:

Free cash flow and outlook

Free Cash Flow

The company’s free cash flow, a non-GAAP financial measure, for the year end of 2019 and 2018 were as follows (in thousands):

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 Annual Report on Form 10-K filed with the SEC for additional information concerning our operating results and cash flow for the year ended December 29, 2019.

Global Restaurant Unit Data

At December 29, 2019, there were 5,395 Papa John’s restaurants operating in 49 countries and territories, as follows:

The company has added 92 net worldwide units in 2019. Our development pipeline as of December 29, 2019 included approximately 1,085 restaurants (85 units in North America and 1,000 units internationally), the majority of which are scheduled to open over the next six years.

Cash Dividend

The company declared common and preferred stock dividends of $10.6 million in the fourth quarter of 2019. The company declared first quarter 2020 cash dividends of approximately $10.7 million on January 29, 2020 which were paid to common shareholders on February 21, 2020. The first quarter preferred dividend will be paid on April 1, 2020. The dividends are as follows (in thousands):

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 stockholders receive quarterly preferred dividends and common stock dividends on an as-converted to common stock basis.

2020 Key Operating Assumptions and Financial Outlook

In 2020, the company is targeting the following performance:

• GAAP EPS of $0.60 to $0.90 for the full-year, including anticipated Special charges of $25 million to $30 million (a)

• Adjusted EPS of $1.35 to $1.55, excluding Special charges that are anticipated for 2020 (a)

• North America comparable sales of 2.5% to 5.0%

• International comparable sales of 1.5% to 4.0%

• Net global new unit growth of 100 to 140 net units

• Income tax rate of 20% to 23%

• Block cheese prices are projected to be in the low to mid $1.80

• Capital expenditures of $40 million - $50 million

A conference call is scheduled for February 26, 2020 at 8:00 a.m. Eastern Time to review the company’s fourth quarter and full year 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 5623458.

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.

Certain matters discussed in this press release and other company communications that are not statements of historical fact 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, royalty relief, the effectiveness of our strategic turnaround efforts and other business initiatives, marketing efforts, compliance with debt covenants, stockholder and other stakeholder engagement, strategic decisions and actions, share repurchases, dividends, effective tax rates, regulatory changes and impacts, 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 ability of the company to ensure the long-term success of the brand through significant investments committed to our U.S. franchise system, including marketing fund investments and royalty relief;

• risks related to social media, including publicity adversely and rapidly impacting our brand and reputation;

• aggressive changes in pricing or other marketing or promotional strategies by competitors, which may adversely affect sales and profitability; and new product and concept developments by food industry competitors;

• changes in consumer preferences or consumer buying habits, including the growing popularity of delivery aggregators, as well as changes in general economic conditions or other factors that may affect consumer confidence and discretionary spending;

• the adverse impact on the company or our results caused by global health concerns, such as coronavirus, product recalls, food quality or safety issues, incidences of foodborne illness, food contamination and other general public health concerns about our Company-owned or franchised restaurants or others in the restaurant industry;

• the effectiveness of our technology investments and changes in unit-level operations;

• the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, including difficulties finding qualified franchisees, store level employees or suitable sites;

• increases in food costs or sustained higher other operating costs. This could include increased employee compensation, benefits, insurance, tax rates, new regulatory requirements or increasing compliance costs;

• increases in insurance claims and related costs for programs funded by the company up to certain retention limits, including medical, owned and non-owned vehicles, 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, natural disasters including drought, disease, or geopolitical or other disruptions beyond our control;

• increased risks associated with our international operations, including economic and political conditions and risks associated with the withdrawal of the United Kingdom from the European Union, instability or uncertainty in our international markets, especially emerging markets, fluctuations in currency exchange rates, difficulty in meeting planned sales targets and new store growth;

• the impact of current or future claims and litigation and our ability to comply with current, proposed or future legislation that could impact our business including compliance with the European Union General Data Protection Regulation;

• the company's ability to continue to pay dividends to shareholders based upon profitability, cash flows and capital adequacy if restaurant sales and operating results decline;

• failure to effectively manage recent transitions within our executive leadership team or to otherwise successfully execute succession planning;

• disruption of critical business or information technology systems, or those of our suppliers, and risks associated with systems failures and data privacy and security breaches, including theft of confidential company, employee and customer information, including payment cards; and

• changes in Federal or state income, general and other tax laws, rules and regulations and changes in generally accepted accounting principles.

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 29, 2019. 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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Steve Coke Vice President, Investor Relations 502-261-7272

Source: Papa John’s International, Inc.