Papa John's International, Inc. Q1 2010 Earnings Call Transcript

Papa Johnâ¿¿s International, Inc. Q1 2010 Earnings Call Transcript
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Papa John’s International, Inc. (PZZ)

Q1 2010 Earnings Conference Call

May 5, 2010 10:00 AM ET

Executives

David Flanery - SVP, Treasurer and CFO

John Schnatter - Chairman and CEO

Jude Thompson - President and COO

Andrew Varga - SVP and Chief Marketing Officer

Tony Thompson - SVP, Papa John’s Food Service

Analyst

Brad Ludington - KeyBanc

Steve West - Stifel Nicolaus

Mark Smith - Feltl & Company

Chris O'Cull – SunTrust

Presentation

Operator

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Good day ladies and gentlemen and welcome to the Papa John’s First Quarter Earnings Conference call. (Operator Instructions) I would now like to turn the conference to your host Mr. David Flanery.

David Flanery

Thank you, Amy. Good morning. With me on the call today are our Founder, Chairman and Co-CEO John Schnatter via conference call from the road and from here in our corporate offices we have Co-CEO Jude Thompson, Chief Marketing Officer Andrew Varga, Senior Vice President PJ Food Service and Preferred Marketing Solutions Tony Thompson, Senior Vice President of North American Operations, Tim North and other members of our executive management team. After a brief financial update, John and Jude will have comments about our business and the management team will then be available for Q&A.

Our discussion today will contain forward-looking statements that involve risks and uncertainties relating to future events. Actual events may differ materially from the projections discussed today. Certain factors that can cause actual results to materially differ are outlined in our earnings release and in our Forms 10-Q and 10-K. In addition certain financial measures we use on this call including earnings per share excluding BIBP are expressed on a non-GAAP basis.

Our GAAP to non-GAAP results reconciliation can be found in our earnings press release available on the Investor Relations section of our website. The call is being taped and the replay will be available for a limited time on our website and in downloadable podcast format.

We were extremely pleased with our financial performance in the first quarter given the unprecedented promotional environment that John and Jude will address in their remarks. We reported earnings of $0.54 per share excluding the BIBP cheese purchasing entity, a 25.6% increase over prior year Q1 earnings of $0.43 per share. Revenues increased 1.7%, as compared to the same prior year quarter with both periods reflecting the impact of new accounting guidance that no longer required us to consolidate certain franchise entities to which we had loans outstanding.

The 1.7% increase was primarily due to the increase in the domestic royalty rate to 4.75% from 4.25% in Q1 of the prior year and increase in commissary revenue due to increased sales volume and an increase in international revenues due to unit growth, unit volume growth and favorable foreign currency exchange rates partially offset by 1.8% decrease in comparable sales for domestic company-owned restaurant.

On a business segment basis, company-owned restaurants continued their strong financial performance as operating income increased $1 million over the same prior year quarter due to lower commodity costs, labor efficiencies and the fact that the 2009 Q1 results included a $500, 000 charge related to unit closures.

Operating income for our domestic commissary business segment decreased $2.2 million as compared to Q1 of the prior year, due primarily to reduced pricing, the absorption of commodity price increases related to certain Florida vegetable products and higher fuel prices. We continued our philosophy of passing volume and other operational efficiencies through to the domestic system to help support unit economics in this tough promotional environment.

As a result of favorable spot market cheese prices thus far this year, the BIBP deficit has been reduced from $20 million at 2009 yearend to $16.6 million at the end of Q1. We expect that the deficit will be reduced to approximately $11 million by the end of this year based on current futures market price projections.

Domestic franchising operating income increased $2.2 million due to the previously noted increase in royalty rate partially offset by reduced unit opening fees as a result of developmental incentive programs currently in place. Operating losses for our international segment $300,000 higher than the same prior year period as expected. This operating loss increase was primarily due to cost related to the startup of the UK commissary facility opening in Q2.

And increased organizational support partially offset by revenue increases from unit counts and unit volume growth. Operating income for the all others business segment increased $500,000 year-over-year due to improved results from our promotion subsidiary and e-commerce operations. Unallocated corporate expenses decreased to $2.2 million, due primarily to the plan reduction in franchisee support initiatives in the current year and higher provisions for uncollectible accounts and notes receivable in the prior year.

We repurchased $5.3 million of stock in the quarter and had approximately $28.5 million of remaining repurchase authorization as of quarter end. We continue to believe returning free cash flow to shareholders via share repurchase is a good investment and helps support increase shareholder value overtime. Our free cash flow, a non-GAAP measure we define as cash flow from operation excluding BIBP, less capital expenditures was $13.4 for the first quarter and $40.4 million for the trailing four quarters representing a free cash flow yield of 5.3% based upon 27.2 million averaged diluted shares outstanding and yesterday’s $28.26 closing market price.

Our net debt provision defined as positions defined as total debtless cash and cash equivalence declined by $17 million during the quarter to $56.5 million at quarter end. Our $175 million line of credit expires in early 2011 and we expect no difficulties in renewing the line prior to yearend.

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