Papa John’s International - Earnings Call - Q1 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to Papa John's First Quarter twenty twenty Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, mister Steve Koch, interim principal financial and accounting officer.

Please go ahead, sir.

Speaker 1

Thank you. Good morning. Joining me on the call today is President and CEO, Rob Lynch. Rob and I will have comments about our business and provide a financial update. After the prepared remarks, both of us will be available for Q and A.

Our discussion today will contain forward looking statements involving risks 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. Please refer to our earnings release in the Investor Relations section of our website for a reconciliation of non GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen only mode. Now I'd like to turn the call over to Rob for his comments.

Rob?

Speaker 2

Thank you, Steve, and good morning, everyone. First, I'd like to say that I hope everyone on this call and their loved ones are healthy and safe. The entire Papa John's family extends our deepest sympathy to those around the world who've been directly or indirectly impacted by COVID nineteen. We're also profoundly grateful to everyone working so hard on the front lines to keep us safe and healthy. I want to begin this morning's call with some detail on the progress we made in Q1.

It provides important context on our company wide transformation and the headway that we are making with our long term strategic priorities, both of which have accelerated during the pandemic. I will go on to discuss how COVID-nineteen has impacted our brand, our team, our franchisees and customers and how we are executing on our strategy in this new environment, staying true to our values and our purpose. Steve will then provide more detail on our Q1 results before I conclude with closing comments about what we expect for the remainder of the year and beyond. Let's start with our progress in Q1 before the pandemic began to have a material impact on our overall In line with our original 2020 outlook, comparable store sales were very strong, rising 5.3% in North America and 2.3 internationally. January and February were particularly strong in North America, with North America comp sales up 7.65.4%, respectively, driven by successful new product and marketing innovation.

We continue innovating on our signature fresh dough to create delicious high quality menu items that build on our premium brand, add minimal complexity to our stores and are incremental versus cannibalistic of our core premium products. In February, we successfully launched Papadias, a toasted handheld alternative to sandwiches made with our fresh dough and high quality toppings. Papadias are Papa John's first new holistic platform that doesn't consist of pizza sides or desserts. At a $6 price point, they are quickly becoming a favorite with customers and delivering on our strategic objectives, including increased lunchtime transactions and higher tickets. Along these same lines, in the first quarter, we also introduced our new Jalapeno Popper rolls nationally, spicy jalapeno peppers wrapped in our fresh dough and baked to order, not fried.

And again, as with Papadias, our team's innovation is driving and higher tickets without adding material complexity or cost to our stores. Papa John's marketing communications are also becoming much more impactful. In addition to a new creative approach that focuses on our pizza and high quality food, we have shifted a large part of our marketing spend from non working to working. By moving dollars out of high cost national sponsorships and into working media, we are able to reach a broader range of consumers more often. We are still working closely with our local sports partners to activate in our local markets when sports return.

Our ongoing strategic investments in our technology platform, especially partnerships and integrations with three of the top four aggregators as well as our Popper Rewards loyalty program are growing rapidly. In fact, the return on these investments has been substantial during the pandemic, as I'll discuss in a moment. Taken together, these accomplishments are more proof that a company wide culture of innovation is beginning to drive business results. As we build on Papa John's premium differentiated brand, we are fending off our competitors' value focused offerings without having to discount deeply. In turn, growth is helping improve unit level economics for the benefit of our both our company owned restaurants and our franchisees.

In Q1, median unit profitability defined as profits after food, labor, mileage and aggregator fees was our highest in over eight quarters in spite of higher pre pandemic commodity costs. In addition to the benefit of growing comp sales, we are working very closely with franchisees and management of company stores to reduce complexity and costs while heightening quality. We continue to roll out Papa Call, our centralized order taking and customer service center across our system. Papa Call allows our stores to focus on making great pizza, not answering the phone. As a result, we're seeing incremental transactions and labor efficiencies, not to mention better customer experiences.

With that context, I'd now like to discuss the unprecedented situation we all find ourselves in today, managing the COVID-nineteen pandemic. As is well known, the pandemic has had a devastating impact on the global restaurant industry. However, Papa John's has been very fortunate. Our delivery and carryout model has enabled us to remain open for business and continue serving our customers and communities throughout North America and in many countries around the world. I'll begin with North America, where we are responding to a significant need, delivering food to people's homes as they shelter in place.

As we perform this critical service, our business is performing at historically high levels. In North America, coronavirus began negatively impacting our business in mid March as large gatherings and major sporting events were canceled. Papa John's Pizza is a favorite food when groups of friends and family get together to watch sports. The NCAA Basketball Tournament, in particular, typically drives a very strong march for us. In addition, pantry stocking and a surge of families cooking at home was also a factor suppressing sales during this time.

Then in April, the first month of our second quarter, we saw a wave of growth in North America. With most of the country under shelter in place directives and dine in restaurants closed, delivery and carryout food businesses became essential services. John's was prepared as an organization and our team members rose to this challenge, successfully delivering 27% North America comparable sales growth for the month of April. In fact, April was Papa John's strongest month in terms of AUVs and system wide sales in the company's thirty five year history. This was both a huge responsibility and opportunity.

Our loyal existing customers depended on us more than ever, as evidenced by a 25% increase in transaction size among Papa Rewards customers. But this surge in demand is also introducing customers, including more than 1,000,000 new and lapsed customers in April on our digital channels alone. Strong planning and execution in North America would not have been possible without the learnings from our teams in other markets around the world, especially China and Korea, where we have been managing the impact of coronavirus since January. This experience and preparation have enabled us to act quickly, both to protect the health and safety of our customers and team members and to ensure that we remain open for business and continue to serve our communities. Under market conditions that truly have no precedent, we have relied on our company values to guide our decisions.

A streamlined, more nimble organizational structure has enabled us to act quickly in a dynamic environment. Last fall, we articulated Papa John's five core values: people first, everyone belongs, do the right thing, innovate to win, and have fun. These values, along with the culture of leadership and winning that we have been building, have proven to be our compass in the uncertain waters we're navigating today. Guided by the imperatives of putting people first and doing the right thing, our central focus since the beginning of the pandemic has been to protect our team members and customers' health and safety. In Q1, we reinvested nearly half of our profit growth back into additional benefits, bonuses and incentives for corporate team members, helping employees throughout our supply restaurants.

We have expanded our health and wellness benefits to include free virtual doctor visits for all employees and their families and increased paid time off policies. This, in addition to existing benefits of no cost mental health support, affordable health care plan options, and access to Papa John's team member emergency relief fund if and when needed. We've also worked proactively with franchisees to help them expand their team member benefits. We've enhanced already rigorous health and safety measures across our system. In mid March, applying what we learned in Asia, we launched no contact delivery, a complete reengineering of our ordering and delivery processes and technology conceived and executed in less than two weeks.

We were the first pizza delivery company to fully integrate no contact delivery into our digital ordering channels for a seamless customer experience, a testament to our growing culture of innovation. No contact delivery has been a huge success with customers, driving substantial gains in our satisfaction metrics and Net Promoter Scores. Securing our supply chain, especially the health and safety of our team members and our quality control centers and our QCC drivers, has been another intense focus since the pandemic began. Our team has worked diligently to source the difficult to find safety and protective supplies. They've also made sure that there were no disruptions to our ingredient supply chain so our restaurants could keep up with the increasing demand.

Disruptions with meat or other key suppliers have not impacted our stores. And based on the contingency plans that we have put in place, we don't anticipate any disruptions to our business. We've also been fortunate to be in a position to provide jobs during this pandemic. Our national hiring campaign has already resulted in the hiring of thousands of workers displaced by COVID-nineteen. In addition, our partnerships with three of the national delivery aggregators, which were already in place, have enabled us to scale delivery to more customers during peak times.

In fact, our percentage of deliveries fulfilled by aggregators has more than doubled year over year. And our data shows that these transactions are highly incremental and profitable to our business. Papa John's commitment to serving our communities includes our neighbors in need as well as our customers. Since the onset of the pandemic, our team members and franchisees have stepped up to deliver free meals to health care workers, first responders and families and to support organizations on the front lines of this crisis. The Papa John's family has already provided more than 2,000,000 free slices of pizza since March.

Papa John's team members and franchisees are living our value, and I couldn't be more proud to be a part of this amazing team. Now I'll discuss our international business, which is a bit more complicated story given the variability of how countries have been impacted and responded to COVID-nineteen. International comp sales began the year solidly, ahead of our original plan. Then toward the January, we began to see an impact from COVID-nineteen as the pandemic spread from China into other markets. Not surprisingly, sales were most impacted where government restrictions forced all restaurants to temporarily close or where strict curfews were put in place.

In China, many of our restaurants are located in shopping malls, which were temporarily closed by the government. Some markets in The Middle East and Latin America also faced government closures or heavy restrictions on trade. However, we also saw other international markets like The United Kingdom and Korea recognize the importance of carryout and delivery businesses as essential services, and those markets performed exceedingly well. Overall, approximately 300 of our international stores or one out of seven were temporarily closed for some part of Q1, impacting comp sales by an estimated 200 basis points. This varying dynamic across markets has continued in April.

As I said, overall comp sales, including temporarily closed stores, were up 1.4% in the month. Excluding temporarily closed stores, our international comps in April would have been 12%. Behind that number were strong double digit gains in markets like The U. K. And Korea.

Also, in China, all but 15 of our stores have reopened. These trends were offset by approximately three seventy five stores in other markets that are now temporarily closed. While government mandated temporary closures are outside of our control, otherwise strong comp sales and quick decisive actions on the leading edge of the global pandemic reflect the strong leadership of our international team. The insights they have gained in markets like China and Korea have helped immeasurably to drive a coherent and successful global strategy. I'd now like to turn the call over to Steve Cope to provide more color on our Q1 results before I discuss how COVID-nineteen has affected our outlook for the remainder of 2020 and beyond.

Steve?

Speaker 1

Thank you, Rob. This morning, before providing details on our operating results, I'd like to begin by discussing First, our year over year GAAP earnings second, a change in how we are presenting temporary franchise support and third, our adjusted earnings reflecting this change in presentation. So let's start on a GAAP basis. In the first quarter, we reported earnings per diluted share of $0.15 compared to a loss per diluted share of $0.12 a year ago. The $0.27 year over year increase in our GAAP earnings per diluted share reflects four factors.

First, a $0.31 positive benefit from special charges a year ago, primarily associated with the Starboard investment. Second, a $0.14 positive benefit primarily driven by strong North America comparable sales in the 2020. Third, a $04 negative impact of higher preferred stock dividends in the 2020 compared to the 2019 when we issued the preferred stock and only incurred a partial dividend payment. And finally, a $0.14 negative impact due to higher planned temporary franchise support as part of our We Win Together agreement with franchisees. Next, I'd like to discuss temporary franchise support and how we are presenting it beginning this quarter.

As a reminder, under our We Win Together program, last summer, we made a commitment to our North America franchisees who were facing a significant contraction in sales with five quarters of scheduled temporary incremental support in marketing and royalty relief. Previously, we had categorized temporary franchise support as a special charge, reflecting the unique challenges the company has had to manage over the past two years. However, consistent with the significant progress Papa John's has made with its transformation, including continued improvements in sales and unit economics as well as considering input from the SEC, temporary franchise support will no longer be categorized as a special charge in either prior or current periods as of the 2020. This means the temporary franchise support will no longer be excluded from the calculation of adjusted earnings per share. With that, let's now turn to adjusted earnings.

Adjusted earnings per diluted share was $0.15 in the 2020, down $0.04 from a year ago, reflecting the benefit of higher comparable sales, slightly more than offset by higher temporary franchise support and higher preferred dividends as I just described. Based on the prior way we reported adjusted earnings per diluted share, had we continued to include temporary franchise support and special charges, adjusted earnings per share would have instead increased $0.10 or approximately 32% compared to the 2019. The incremental $5,800,000 in temporary franchise support in the 2020 represents a $0.14 per diluted share impact year over year. During the 2020, we anticipate spending between $15,000,000 and $20,000,000 on temporary franchise support, consisting of $10,000,000 in incremental marketing investments and the remaining amounts in royalty relief. This compares approximately $42,000,000 we spent in the last March 2019.

Upon the conclusion of the program in the third quarter of this year, we do not expect any further temporary franchise support under the We Win Together program to be needed in the fourth quarter or next year, especially given our return to positive comparable sales growth. On our Investor Relations website, we have provided a supplemental table reconciling GAAP and adjusted earnings under our new presentation that does not exclude temporary franchise support by quarter since the 2018. Alongside this, we have also provided the amount of temporary franchise support provided each quarter to ensure investors can reconcile to our previous presentation. Moving now to more detailed operating results. In the 2020, pretax income on a GAAP basis was $11,500,000 compared to a loss of $800,000 for the corresponding quarter in 2019.

Looking at sales, consolidated first quarter revenues increased $11,500,000 or 2.9 percent. Excluding the impact of refranchising 46 domestic restaurants and a quality control center in Mexico in 2019, consolidated revenues increased approximately $23,100,000 or 6%. The increase was largely due to positive comparable sales in North America and higher commissary sales driven by increased commodity costs, which are passed through to our franchisees. Now for our business unit results for the first quarter. Domestic company owned restaurants pretax income increased $4,100,000 primarily from positive comparable sales of 6.1%, partially offset by higher commodity costs, primarily for cheese.

North America franchising pretax income was $1,600,000 higher, driven by a 5.1% increase in comparable sales. International pretax income decreased $800,000 reflecting lower development fee revenue, higher general and administrative costs and the unfavorable impact of foreign exchange rates. These factors were partially offset by higher royalty revenues from increased units and higher comparable sales. Unallocated corporate expenses increased $4,600,000 as anticipated due to the $5,000,000 incremental marketing fund investment included in temporary franchise support, higher variable incentive costs and higher legal fees. These increases were somewhat offset by a decrease in interest expense due to a lower average debt balance and lower interest rates in the quarter.

Income tax expense was $2,500,000 for the 2020 for an effective tax rate of 21.8%. Our free cash flow, which is a non GAAP measure that we define as cash flow from operations less capital expenditures and dividends paid to preferred shareholders was approximately $24,000,000 in the 2020 as compared to $3,000,000 a year ago. The increase was primarily due to higher net income and favorable changes in working capital items, including the timing of payments associated with our national marketing fund. We paid a cash dividend of $10,700,000 to our common and preferred shareholders during the 2020. Subsequent to the first quarter, on 04/30/2020, our Board of Directors declared second quarter cash dividends of approximately $10,700,000 to be paid to common and preferred shareholders.

The second quarter common stock cash dividends will be zero two two five dollars per common share. Papa John's continues to have sufficient cash on hand to support our current operations, as evidenced by our $24,000,000 in free cash flow generated in the first quarter. We also have access to approximately $350,000,000 through our credit facility should we need it. Lastly, during the first quarter, we opened 16 restaurants in North America and closed 19 restaurants for a net reduction of three restaurants. We also opened 18 international restaurants and closed 32 restaurants for a net reduction of 14 restaurants.

These changes in our unit count exclude any temporary closures as a result of COVID-nineteen pandemic. I'll now turn the call back over to Rob for some final comments. Rob? Thanks, Steve.

Speaker 2

Finally, to summarize and wrap up, Papa John's started 2020 with great momentum, which has continued into April. Our new products and marketing have performed very strong. Our innovation pipeline continues to produce great ideas that deliver results. Our franchisees, owners of small local businesses are reestablishing a strong foundation for future growth and success. And through it all, we have kept our team members and customers safe, stay true to our values and continue to deliver safe, high quality, delicious food.

The COVID-nineteen pandemic has caused deep harm and sadness to individuals and communities across the globe. But it has also inspired heroism from many in response. Again, I want to acknowledge Papa John's team members and franchisees. Because of their tremendous effort, we are meeting our commitment to serve our communities and will emerge from today's challenges a much stronger organization, further along our path to becoming the world's best pizza delivery company for the benefit of all of our stakeholders. I'd like to thank our shareholders and everyone on this call for their interest in what we're doing and for their continued support.

With that, I'll turn the call over to the operator for Q and A.

Speaker 0

Thank Our first question will come from Peter Sala with BTIG. Please go ahead.

Speaker 3

Great. Thanks and congrats on quarter. Rob, I mean, April comp was pretty impressive, really impressive at almost 27% so far. I'm just curious as to when you think about that, is there any way to parse out how much of that you feel is coming from the stay at home orders? How much of that may be coming from Papadia?

Just trying to get a sense of how much of that is more of a sustainable number and what the really underlying run rate figure looks like.

Speaker 2

Peter, that's a great question. We've spent actually a lot of time thinking about that exact question. And I just would call your attention to we were tracking at about 7% comps in Q1 prior to the third week in March, where we started seeing some slowdown from the initial shelter in place behavior. People were pantry loading. People were adjusting.

The sports had shut down. People weren't able to have birthday parties, those types of things. So we saw an initial slowdown, and we feel like that cost us about 200 basis points in sales in quarter one. So lots of momentum even without COVID-nineteen impacting our domestic business. Obviously, April at twenty seven percent has been a very different trajectory.

And the way we've looked at it is we believe that COVID represents probably right around ten percent of that sales growth. It's consistent with what we've seen in the other delivery restaurants that have stayed open. They've seen similar types of trends where they didn't have that type of growth prior to April. And so that's about what we're seeing from COVID, and we would expect that to continue. We believe the tail on this thing is going to be maybe a little bit longer than folks might expect.

Even when states and communities open back up, we think the consumer behavior will still be conducive to large demand for delivery business. The other 15% to 17% is really a compilation of a lot of things we talked about in the call. We're seeing a huge positive impact from our innovation. We're finding it to be very incremental. People are adding Papadias on top of pizzas.

It's not replacing pizzas. So we're seeing a lot of check growth from that. We're also seeing our aggregator business has doubled. It now stands at 4% of our business coming in from aggregators, and that continues to be very incremental for us. And those are full price tickets.

So there's both new customers coming in as well as check growth coming from those transactions. And then lastly, we had a big drag on the business last year from the relaunch of our loyalty program. There was a lot of cleaning up to do in regards to the amount of discounts and the amount points that were being used at this point. Our loyalty program is a huge asset for us. We've got over 16,000,000 customers in the program, and our check growth is very healthy from those transactions.

So it's a compilation of all of those things. But I really can't understate or overstate just how much our team has really come together at the restaurant, and we're operating more efficiently. Our customer service has never been better. And we're able to staff. With all the new jobs that we've hired on and created, we're able to staff appropriately.

And so the throughput in our restaurants is improving as well. So we're seeing kind of the true benefit or the true output that our restaurants are capable of when we drive the kind of demand for our products that we have over the last month.

Speaker 3

Great. Good to hear. On the restaurant level margins, looks like you guys had another good quarter there with margins expanding. Can you talk about some of the initiatives that you guys are putting in place to permanently kind of improve the margins with the call centers and maybe some discussion around the work you guys are doing around insurance and some of the other initiatives to boost those restaurant level margins more permanently?

Speaker 2

Yeah. For sure. I mean, we've we have been able to utilize our labor a lot more efficiently in our restaurants through the implementation of both our Papa Call center and a lot of our company restaurants. And then, we've introduced some new processes and some new equipment that allows us to more effectively utilize our labor. So labor has been a pickup for us.

We've also worked on the middle of the P and L. We've cleaned up some of the R and M line items. We're just doing things more effectively, more efficiently. And our insurance is improving. We've seen improved insurance rates, particularly on the company side, really over the last six months as we've instituted really what I would call a culture of safety throughout our restaurants.

We now have technology which allows us to assist our drivers in driving more safely. And they're rewarded for that behavior. And we're able to track that behavior. And really, we've just seen claims come down. And as a result of that, we're starting to see some savings.

And we would anticipate that the reduction in claims should help us on the premium side too moving forward. So we see future benefit on our insurance line items as well. But as you know, in almost all restaurant businesses, revenue is a flywheel for margin. And as we as I mentioned in Q1, we are tracking along at 7% comp sales growth. That is going to help our margins across the board.

And so as we get into April and Q2, as we see this 27% comp sales growth, we're our restaurants are going to continue to operate very efficiently and productively.

Speaker 3

Great. And then just my last question and then I'll hop off. On the franchisee side, can you just talk about the franchisee health and maybe give us a sense of where their margins are? I mean, see your company owned margins. Are the franchisee margins do they mirror the company margins in terms of the improvement that you guys have been seeing in terms of overall margins?

Just trying to understand the franchisee health and maybe how that may relate to their appetite to open more restaurants in the coming quarters and years.

Speaker 2

Our franchisees are incredibly happy right now. The health of their restaurants is the best it's been in the last three years. And we are actively working right now to build plans and incentive structures and other agreements and partnerships with them to accelerate development. We as Steve called out on the call on the release that we're moving forward with We Win Together franchisee support for the Q2 and Q3. That's a commitment we made.

The majority of that support is in the marketing fund, which really benefits us right now because we feel like we have a lot of great news to talk about, both from an innovation standpoint as well as the great work that our teams are doing out in the communities to take care of people during the shelter in place challenges. And so but at the end of Q3, we are in great shape to come out of that. We are not planning on any subsidization or support moving forward. And that's because our franchisees are in great shape, better shape than they've been in many years.

Speaker 0

Thank you. Our next question comes from Alex Slagle with Jefferies. Please go ahead.

Speaker 4

Hey, guys. Thanks. Everyone's doing okay. Just wanted to get your thoughts on the ops and discuss sort of how you've been able to manage delivery times and limit delays both in delivery and carryout turnaround times? Just any issues with inventory management given all the demand volatility, obviously surprising with the strong growth we've seen here.

Speaker 2

Hi, Alex. Actually, it's kind of the opposite. We're actually operating better. And that's because we are able to staff our restaurants. I mean, we've created thousands of jobs and hired thousands of people over the last six weeks.

And in doing so, we're able to staff the restaurants and make sure that we are able to handle this increase in demand. And with any operating business, whether it's a factory or a restaurant, as your demand goes up and you're able to appropriately staff to handle that demand, you just get more productive and you just get better. And so the institution of the implementation of no contact delivery has really been a well received platform for our customers. And we've seen the power of going above and beyond to take care of our customers. And we're seeing 1,000 basis points improvements in our customer satisfaction scores, I mean, just from the implementation of that.

And we're seeing the pride flow through all the way down to our delivery drivers and doing work that's important. And so the morale has never been higher in restaurants. Jim Norberg, our Chief Operating Officer, has really kept his nose to the grindstone, if you will. He's been out there in the restaurants with the teams, you know, making sure that we're meeting their needs, and making sure that we're supporting them. And they feel like we've got their back.

And they feel like they're doing really important work that's helping their communities. So morale is incredibly high. When you see morale very high, see productivity go up. On the supply chain side, we got out in front of it. I mean, we knew that once we were going to continue to be able to operate, that our model would be similar to what we had seen in Korea.

And so our teams went very moved very quickly to secure incremental inventory to the point where we went out and got a lot of refrigerated trucks that we could put in our DCs so that we could hold more inventory. And we got scared because the first two weeks of that in March, we saw a dip with the pantry loading. And we were concerned that we may not see that spike in demand that we had seen in Korea and some of and in The UK. And then April came and we saw it and we were prepared. And our team has not only bought more inventory, we've secured more suppliers and make sure that we have redundancies in our supply chain to be able to handle what we anticipated to be a bit of a challenging supply environment through these unprecedented times.

So our supply chain is operating at a high level. We have redundancies in place, and we feel great about our ability our business continuity moving forward.

Speaker 4

Great. That's helpful. And if you could provide some more texture on the check versus traffic trends in April and what the mix of loyal rewards guests versus new and lapsed customers looks like?

Speaker 2

Yes. We feel great about that mix. The mix is actually about fifty-fifty, check and trans. And the trans are really attributable to more customers. It's the frequency is up a little bit, but the majority of the growth in transactions is new customers.

We have seen over 1,000,000 new customers in April come into our brand. And we haven't seen that in a long time. It was actually just the opposite. We had lost a lot of customers back in 2017, 2018, even into 2019. And so it's great.

We're winning back customers. I always say adversity makes you better or worse, and it's a choice. And this adversity has really helped our team accelerate a lot of the cultural development that we had called out back in 2019. And I think the work that we're doing as a team, the pride that we are showing and that our employees have is really helping us to win back a lot of customers that we may have lost in the past. On the check side, it's healthy check growth.

We've taken almost no base pricing at all in 2020. We're really seeing it flow through from a mix standpoint. We're seeing additional items being added to orders, and that's really Papadias and Jalapeno Poppers. Those two initiatives have been very incremental and are driving a lot of check. And then as I mentioned, our loyalty program, we're up to about 16,000,000 customers at this point.

And those checks are increasing as well. So where we used to have a lot of discounting last year trying to solve some of the problems that the brand was facing in 2019, we haven't done that this year. We've as we stated back in Q4, again, we are focused on innovation and focused on our brand, delivering better quality and positioning ourselves in the marketplace as such versus kind of commoditizing the category and chasing the discounts, which hurt our unit economics and really aren't consistent with the quality and investments we make in the brand. So all of those things are driving really healthy check growth, and we're seeing a lot of new customers driving transaction growth.

Speaker 0

Thank you. Our next question comes from Chris O'Cull from Stifel. Please go ahead.

Speaker 5

Thanks. Good morning, guys. Rob, on the last call you mentioned plans for several new product introductions this year. And I know you launched some earlier this year. But do you still believe product news is necessary?

Or do you believe you can save some of that product news until later in the year or next year even?

Speaker 2

Chris, I don't know if you're listening to our executive team calls or not, but that's exactly what we're talking about every day. We have actually already put a hold on some of the innovation here. We were planning at the outset of the year to have already have launched another new item, and we've chosen not to do that. We've chosen to focus on our core business. We've chosen to make sure that we are supporting our operations with the increased demand we're seeing, making sure that we're not having to distract them to train them up on new products and do those types of things.

So we've it's really been a wonderful situation where we have the luxury of making sure we're executing our core business as perfectly as we can. And while we're doing that, we're still developing, testing, validating new ideas. We have a pipeline of innovation ready to go when we see the strategic opportunity to launch it. So it really is a great position to be in.

Speaker 5

I know Rob there's been a couple of states that have lifted their stay at home mandates including Tennessee where I'm based. So can you describe how sales may have changed as those mandates have been lifted?

Speaker 2

We've tracked that closely. We wanted to understand that. And we haven't seen sales trends change, really. In fact, they're very consistent. And that may be a function of some of those states.

I know a lot of although they're open, a lot of the restaurants, particularly the dine in restaurants, have not reopened yet. As that continues that situation continues to evolve, we'll continue to track it closely. But as of right now in states like Tennessee and Georgia and Texas, we have not seen a drop off in our business.

Speaker 5

That's great. And then just lastly, is the system seeing any interest from outside capital that could help fuel unit growth?

Speaker 2

Yes. I mean, I can expound on that, but that's the short answer. There's actually a lot of excitement around the brand right now, and we're having active conversations with people that are interested in becoming part of the Papa John's family.

Speaker 0

Thank you. Our next question comes from with Longbow Research. Please go ahead.

Speaker 6

Yes, thank you. Good morning and congrats on the first quarter and a great start here so far in April, Steve and Rob. I just wanted to ask, as you mentioned, Rob, that you think there's about a ten percent or so lift from COVID here in April. Obviously, it still implies pretty big step up from the seven percent growth that you saw in the first two months to up kind of mid to high teens. How much of that do you think is new product based versus better marketing?

Or any kind of sort of if we're to kind of piece that out, how much of that upside do you think in your core business is coming from innovation?

Speaker 2

It's a great question, Alton. When a restaurant company is hitting on all cylinders, it's really a beautiful symphony of all those really takes great operations are the foundation. If you're not running great operations, it's really hard to execute innovation with excellence. And have, when you have great innovation, if you don't let anybody know about it, or communicate it in a compelling engaging way that can influence behavior and help people change their habits and come in more often, you can have all the great innovation in the world, but nobody knows about it and nobody cares about it. And I would say that right now, we spent the last eight months building that model.

Jim came in about a month before I did, and that was a blessing for me as a new CEO to have such a great Chief Operating Officer come in and be here. And he has really transformed the way we're operating in our restaurants. And we are now a great operating company, and we are a great franchisor that is helping our franchisees operate more efficiently. And so when you have that, you can really unleash the innovation pipeline, and we're seeing that happen. And then our marketing, we've transformed that marketing.

Max Wetzel, our new Chief Commercial Officer, has rebuilt a strategy that's really focused on our food and getting back to the idea of better ingredients and what that really means to our customers, not just on our pizza, but in our innovation. And so all of our innovation is leveraging all of those ingredients and making us more efficient and productive. So it really is all those things coming together. And so you can parse it out, but you can't really say this much is innovation and this much is marketing, because they support each other and they build on each other.

Speaker 6

Makes sense. Thanks, Rob. And then just, kind of back to the last question about people that are, I'm sure, asking about investing, in the system. How quickly do you think that the kind of unit growth if it was a spigot could turn on? I'm sure that everybody's focusing on just kind of this huge increase in demand that we're seeing short term and probably not thinking about adding units at the moment.

But is that the back half of this year's

Speaker 7

story potentially where we start to

Speaker 6

see that pick up? Or is more kind of 2021, do you think? We see either new money and or existing people start to add all more units to your system here in The U. S?

Speaker 2

Yes. A lot of that is going to be dependent upon when the governments get back to operating in a normal way. I mean, now, and absolutely appropriately, their focus is on making sure that they're keeping their communities safe and making sure that they are doing everything that they can to protect the citizens and get through this pandemic. And so as you know, right now development is kind of at a standstill because you can't get permits. You can't get all the things that you need to do to buy real estate and develop real estate.

So when that returns, when we get through this situation and return back to normal operating procedure, I think we will be incredibly well positioned to move forward. As you know, we just hired Amanda Clark, who's our new Chief Development Officer. We haven't had a Chief Development Officer in the past. She came to us from Taco Bell, where they've built a ton of restaurants over the last five years. And she's building the plan right now to be ready to activate when we're able to do so.

So I'm hopeful that we're able to get back developing restaurants in 2020. But it's really going to be dependent upon when the governments are set up to allow us to do so.

Speaker 0

Thank you. Our next question comes from Brett Levy with MKM Partners. Please go ahead.

Speaker 8

Great. Thanks for all the information. Thanks for taking my call. Again, I hope everyone is well over there. Three unrelated questions.

First, if you could just parse out a little bit more on the comps, anything you've seen regionally, day of the week, daypart. Then on the franchise side, obviously, they're ecstatic about comp levels. But what have you heard in terms of percentage of the bucket that's gone after, PPP, either out of need or just out of a precautionary standpoint? And what do their debt levels look like? And then just how are you thinking about the investment cycle on the corporate side given that while there's a tremendous amount of operational dysfunction out there, you all seem to be running pretty well and have the cash to really double down on certain technology and innovative, things that are off

Speaker 4

the menu? And I'll stop there.

Speaker 2

Okay. Great. Thanks, Brett. On comps, we are seeing a little bit of, variability. I mean, the numbers were double digits pretty much During April, were double digits pretty much every day.

But we see a little bit more strength Monday, Tuesday, Wednesday, Thursday than we do over the weekends. We do see that I mean, the thing that we haven't talked about as much is 27% comps when we have no sports, and we have no birthday parties, and we have no social gatherings. So a lot of those things are impacting the weekends. So the weekends are still extremely strong. But relative to the weekdays, the comps aren't as great.

So I hope that gives you a little bit of texture. On the franchise PPP, when COVID first started taking hold in North America and the federal government announced the PPP program, our sales as a system were declining given, as I spoke, the pantry loading and what have you in late March. And so we were exploring actually programs around PPP as a company and looking at should we be taking advantage of this if our business is going to be in decline. And as we looked at it, we decided as a company not to do that. And that was a decision we made because we didn't feel like it was in the spirit of the law.

We didn't feel like it was the intent of that plan is to help small business owners survive the challenges that they're facing in this dynamic. Our franchisees are small business owners. And they are independent small business owners. And so they each are making the decision on whether or not they're going to take advantage of that program, given their individual situations. As you know, our system has been challenged over the last couple of years.

And a lot of the franchisees, Q1, were just starting to see things turn around and get the comps and the level economics where they needed to be. So a lot of them have probably looked at the PPP program as an opportunity to help get them healthier than they would have been otherwise. And so we're continuing to help them think through all that, but that's a decision they're going to need to make on their own. In terms of their healthiness and their debt levels, as I stated earlier, our franchisees are extremely happy. The economics of our franchisee restaurants have are better than they have been in many years.

And we're actively talking to them about growth as opposed to sustainability. And so the dynamic that we talked about in Q4, where there was still some concern around what's going to happen when the We Win Together funding goes away, we're not concerned about that at this point. And then your last question around our corporate capital allocation and our investment opportunities, Yes, we are performing we're in a different situation than a lot of other restaurant companies. We take that responsibility seriously. And so right now, we are focused on taking care of our employees and taking care of our customers.

And as we mentioned, we've invested half in Q1, we invested half of our profit growth back into benefits and bonuses and other types of incentives for our employees to make sure that they know that we are supporting them and and make sure that that our restaurants are set up to take care of our customers and the communities in the time of need. So right now, we're evaluating what that looks like moving forward. But we're trying to make sure that this unique situation that we're in, where we have an ability to help our communities, we're doing the right thing by our customers and our communities with the profits that we're making from that.

Speaker 0

Thank you. Our next question comes from James Sanderson with Northcoast. Please go ahead.

Speaker 7

Thank you and congratulations on a great start to the second quarter. I had a question focusing a little bit more on franchise health. Just hoping you could outline a little bit more how ending royalty relief in the third quarter will flow through the franchisee income statements. And what we're what I'm trying to understand better is how these funds have flowed through, what percentage of franchisees have been impacted and how we think they'll come out of this starting 2021.

Speaker 2

Can let hi, Jim. How are you doing? Great. I can let Steve talk to the particulars about how that funding flows through the P and L their P and Ls. But I mean, in general, the the subsidization that, you know, that this we went together, about 65% of it is marketing investment.

So, we are really, you know, focused on driving growth. The a lot of the funding is going into increased marketing to continue to increase comp sales growth. Less than 50% of it is franchise subsidies. So there are not a lot of franchisees in our system right now who are staying open because of any type of royalty relief that we're giving. It is nice to have at this point.

And once again, we made the commitment. So we're continuing to deliver on that commitment. But the revenue growth that our system is seeing far and away, way more impact and positive impact to their P and L than the We Went Together funding that we have in place. So I hope that answers your question.

Speaker 7

It does. Just following up a little bit more on new unit growth and going into the end of the year, will your operators be in a stronger position to be able to finance their own growth even as these royalty programs start to subside?

Speaker 4

Any thoughts on

Speaker 2

Yes, absolutely. I'm sorry, Jim. Thought you were done. No, no. That's great.

Thank you very much. Yes.

Speaker 0

Thank you. Our next question will come from Lauren Silberman with Credit Suisse. Please go ahead.

Speaker 9

Thanks. Rob, how are you thinking about the broader pizza landscape as a fragmented category? It's probably the largest portion of independent mom and pops. So what are you seeing in the competitive, environment? And then do you expect greater consolidation?

Speaker 2

Yeah. You know, hi, Lauren. I hope you're hope you're well. I a lot of pizza even mom and pop's pizza shops are delivery businesses and have been able to continue on delivering pizza. So I think the pizza industry in general is is is doing especially delivery pizza is doing great.

I think that what this challenging, you know, unprecedented situation has shown is that, you know, the pizza delivery business is is, the kind of business that can persevere through these types of challenges. And, you know, our business models are set up for this, for for food away from home. And as that that behavior continues to evolve, as people get more and more used to not having to go out to get their food, you know, we we will benefit from that as well the whole industry, both mom and pop as well as as as delivery or as national delivery players. Now on the, you know, dine in side for the for pizza, I think they're facing a lot of the same challenges as as, you know, the dine in, casual dining and other dine in restaurants. So I if there is consolidation, if there is kind of a a shakeout from this in the in the in the pizza industry, I would see it being consistent with, you know, the the players that focus more on dine in as opposed to the discernment between mom and pops and national players.

Speaker 9

Great. And then what portion of the system is covered by third party aggregators? And to what extent has the presence benefited the comp? And then are there opportunities to transition aggregator customers directly to the Papa John's platform?

Speaker 2

Yeah. I'll answer your last one first. I don't, you know, I don't know that that's necessary. I mean, it's great if they want to come in and be a part of our loyalty program because they're able to there's obviously benefits that they derive from that. But in terms of our economics, we see the economics associated with an aggregator transaction as profitable as kind of our organic transaction.

So we can continue to do very well by growing on the aggregator platforms. And we have the opportunity to do that. We're with the three of the four largest aggregators in The United States. And of those three, they cover about 70% of our system. So we have, I think, about 70% of our system up and running and integrated with those platforms.

We also leverage and partner with some of the local aggregators. Those are the three national aggregators that we always talk about. But you have other players in New York City, and you have other players in the West Coast or in a lot of cities, specific regionals that do a lot of business. And our franchisees and our company operations in those areas are partnering with them as well. In terms of the amount of comps attribute the amount of the comps that are attributable to aggregators, aggregators are about 4% of our business right now, up from less than 2% same time last year.

And we see a significant amount of that being incremental. So what that equates to is, call it, 1% to 2% of our comp growth coming from that aggregator growth. But as that continues to improve and grow, we see that as being incremental comp growth opportunity.

Speaker 0

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Rob Lynch for any further remarks.

Speaker 2

Well, I just want to first and foremost thank you all for your participation today, for calling in and engaging in the story that we're building with Papa John's. I hope that you found the time spent fruitful, and I hope that you have continued to understand our business and understand the great story that we're building. And I look forward to continuing to connect with all of you and speaking with you again on our next earnings call. So until then, best wishes. Stay safe, stay healthy, and thank you very much.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.