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spk13: Hello. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please limit yourself to one question. I'm now turning the call over to Mr. Steve Koch, Senior Vice President of Financial Operations, Accounting, and Reporting.
spk09: Thank you. Hi, everyone, and good morning. Joining me on the call today are President and CEO Rob Lynch and our CFO, Ann Gugino. Rob and Ann will comment on our business and provide a financial update. After the prepared remarks, both will be available for Q&A. Our discussion today will contain forward-looking statements involving risk 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 and the investor relations section of our website for 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 Lynch for his comments. Rob?
spk11: Thank you, Steve, and welcome, everyone, to our 2021 third quarter earnings call. We're very excited to be here this morning and share our positive results. With hard work, dedication, and focus on our customers, Papa John's team members and franchisees delivered another quarter of industry outperformance in Q3, achieving great results across the key operational and financial drivers of our business and system. In Q3, system-wide sales rose 11%, adjusted operating income increased 66%, and adjusted EPS more than doubled from a year ago. Comp sales continued to grow. delivering another quarter of two-year comps at or near 30% in North America and internationally. Like we did in Q2, last quarter we held last year's gains and grew on top of them. This year's accelerating unit growth is also a positive indicator of the brand's long-term growth outlook. New, well-capitalized, and experienced franchisees, as well as our high-performing existing franchisees, are signing significant long-term development deals and opening new stores. I'm also proud to say that we are delivering on our commitment to align our capital structure and allocation strategy to support long-term value creation and growth, which Ann will discuss in a moment. Let's take a deeper look at our comp sales results. Comp sales rose 6.9% in North America and 8.3% internationally in Q3. on top of 23.8% and 20.7% gains respectively a year ago. Papa John's innovation across our menu, technology, customer experience, and delivery channels continues to engage both our long-term loyal customers as well as the millions of new customers we have acquired over the past two years. At the same time, we have driven strategic ticket growth through a combination of premium promotions and order add-ons. After eight months as a national promotion, Epic Stuff Crust continued to maintain a strong order mix, driving ticket and customer traffic last quarter. Like Papadias, our folded flatbread-style sandwich, Epic Stuff Crust demonstrates our shift to building long-term, sustainable menu platforms on which we can continue to innovate. These platforms form the foundation of our growing comp sales and improving unit economics. In Q3, we were very proud to bring back Chacaroni. our Pizza with Purpose, limited-time offer that raises $1 from every pizza sold for the Papa John's Foundation for Building Community. Launched nationally in late August, Chacaroni proved yet again to be a fan favorite, selling over 3 million pizzas in September and October. Importantly, we were able to raise more than $3 million again this year for the Papa John's Foundation to support our community partners, including national partners, like the Boys and Girls Club of America. The Chacaroni promotion, which reflects multiple elements of our innovation strategy, also embodies our brand purpose, values, and culture. We are excited about the new Bacon Mania promotion that we launched at the end of last month. In another first for our innovation strategy, this promotion serves up a season of bacon across three different product platforms, pizza, papadillas, and our jalapeno papa roll sides. We expect to not only drive ticket, but to draw traffic and new customers to each of these new menu platforms, generating long-term sales and brand value. Papa Rewards loyalty members were given an exclusive first taste of Bacon Mania. As we've discussed on previous calls, member-only previews are one of the ways we are rapidly growing our loyalty membership program. We now have over 22 million Papa Rewards loyalty members. Up from 17 million at the start of 2021, and 12 million in 2019. As Papa Rewards grows, the program continues to deliver big strategic benefits. Papa Rewards customers are significantly more profitable than non-loyalty customers, since we are able to directly engage them with targeted, personalized offers that drive higher frequency, higher ticket, and higher satisfaction. Continuing with our digital innovation, third-party delivery aggregators again contributed to our strong comp sales and industry outperformance in the third quarter. We continue to believe in making our products available wherever our customers want to purchase them. Our partnerships with aggregators bring additional customers to the brand, driving incremental and profitable transactions for us and our partners. Aggregators have also helped us navigate the labor shortage that the restaurant industry is experiencing by providing supplemental delivery drivers, especially during peak times. Now turning to our accelerating unit growth and development pipeline. I have consistently said that our brand can only succeed and grow long-term when our franchisees succeed and grow. And that's what we are seeing today. The case for opening new Papa John's stores is compelling. AUVs in North America exceeded $1 million in 2020 and have continued to grow throughout 2021. Papa John's unit economics are very attractive. differentiated from other concepts and brands through our premium positioning, simple off-premise model, and vertically integrated supply chain. Year-to-date, we have added 169 net new units. New unit growth in Q3 was robust as well, but impacted slightly on a sequential basis by the decision to permanently close some restaurants that were already temporarily closed as a result of the pandemic. Last quarter, we opened two new company stores. with more expected in Q4 as we ramp up investment in new company store development, which is a high return capital allocation priority. Overall, we remain very optimistic about the near-term development pipeline and expect to hit the top half of the 2021 outlook for 220 to 260 net new units that we provided last quarter. This represents approximately 4.5% to 5% growth in our system for the year. We're even more excited about the longer-term development pipeline, given the new agreements we're signing. Following the announcement of our largest international development deal ever in August with our longtime partner Drake Food Service International, in September we announced the company's largest domestic deal ever with Sun Holdings, which will open 100 new locations in high-growth markets in Texas and the South by 2029. With over 1,000 locations across 12 states, Sun Holdings is one of the most successful multi-concept franchise operators in the country. I have known Sun's founder and leader, Guillermo Perales, for almost a decade. He is a proven operator and a long-term oriented growth investor. His decision to join the Papa John's system is another validation of the brand's growth potential and development white space in the U.S. We're very excited to welcome Guillermo and his team to the Papa John's system. Sun is already moving quickly to identify locations and begin development of new stores. I'm confident that these two landmark deals are just the beginning when it comes to our global opportunity. I'd now like to discuss the current market and implications for Papa John's in the near term. The global pandemic continues to be a very real factor for our team members, franchisees, and customers. As we have done since the beginning, we remain laser focused on our core priorities, keeping our team members and customers safe, delivering operational excellence, driving innovation across everything that we do, and accelerating our global development. Last quarter, we were encouraged to see further signs of a return to pre-pandemic conditions, in spite of concerns about variants and localized surges. Local shutdowns and restrictions on restaurants continue to loosen, giving customers more and more choices again. While this could represent a headwind for our business, the demand for pizza delivery remains strong. In fact, we have seen an acceleration of our business in September, as entertainment and sports once again create occasions for people to gather with their friends and families over pizza. This was a positive indication of our ability to retain our customers as behavior slowly returns to pre-pandemic norms. Another dynamic impacting our business and industry is the challenging labor market. We continue to aspire to be the employer of choice in our industry, as I have repeatedly said. Fortunately, the strength of our business today puts us in a very strong position to continue investing in our team members. Last quarter, we announced new hiring, referral, and appreciation bonuses, which represented additional costs in the quarter and for the remainder of the year. We also made permanent the expanded health, wellness, paid time off, and college tuition benefits that we rolled out during the pandemic. We intend to continue making these kinds of investments to ensure we support our team members as they support our customers. Creating an inclusive, diverse culture that supports and values team members is equally important to attracting and retaining talented, dedicated employees. After being recognized by Forbes earlier this year as one of America's best employers for diversity, last month, Papa John's joined Forbes' annual list of the world's best employers. We were honored to rank number one amongst all pizza companies and number two in the entire restaurant category. As has been widely reported, businesses across the globe are facing significant supply chain challenges and inflation. These factors impact the cost and availability of ingredients, supplies, and equipment, from cheese and chicken wings to pizza boxes and pizza ovens. We are happy to say that we were able to successfully offset those costs so far this year, thanks in part to our strong supply chain and procurement teams, as well as operating leverage from comp sales growth. As I've said in the past, we have successfully grown Ticket through new premium products and add-ons without relying on delivery fees and price increases. This gives us more room today to manage and offset external cost pressures while continuing to deliver quality and value to our customers. we remain cautiously optimistic about our ability to manage short-term industry-wide headwinds, and at the same time, we are encouraged by signs of return to normal days ahead. I'd like to turn to Papa John's longer-term outlook. As I discussed, the global pandemic and its impact on the global economy continue to present near-term uncertainty for our industry and for Papa John's. We look forward to providing more color on our long-term growth opportunity and outlook for fiscal 2022 on our Q4 call. In the meantime, I can say with confidence that our goal will be to continue taking share while leveraging our differentiated position to protect margins in the face of any potential commodity or labor headwinds. Over the longer term, specifically in the next two to three years, I believe the trend lines are clear and Papa John's outlook is consistently positive based on four key premises. First, we are very bullish about the global pizza market. with strong demographic and international tailwinds, and at the sweet spot in a secular shift to delivery and off-premise dining that we're seeing. Second, after eight quarters outperforming the industry and two quarters positively lapping record prior year comps, Papa John's differentiated brand and innovation strategy have proven themselves to be a platform for sustainable, long-term, comparable sales growth. Third, drawn by Papa John's compelling unit economics and vast U.S. and international development white space relative to our more mature peers, new and existing franchisees are accelerating new unit openings and growth plans. And lastly, with strong operating leverage and an asset-light business model, we are well positioned to grow long-term earnings and free cash flow in excess of top-line growth, which we can deploy to further accelerate growth and enhance shareholder returns. In summary, we are more confident than ever that we are prepared to consistently and sustainably deliver great results. I'll now turn the call over to Ann to discuss our capital structure and financial results, as well as provide some color on the next couple of quarters, as we have done on prior calls this year. Ann?
spk08: Thanks, Rob, and good morning, everyone. As Rob has detailed this morning, nine quarters of sustained growth and momentum show how far Papa John's has come from a turnaround to growth story. Today, our brand, business model, and franchise system are stronger than ever. So, too, are the company's financial foundations, which I'd like to discuss this morning before diving into our Q3 results and near-term outlook in more detail. Capital structure and allocation strategy have been a key focus for the company over the past year. During this period, we have taken major steps to align the company's balance sheet and capital allocation priorities with our strong new outlook for system-wide growth, cash generation, and investment opportunities. Since late 2020, we have initiated a $75 million share repurchase program, increased growth investments in new store development converted and repurchased the Series B preferred shares, and increased the common dividend by 56%. Since our last earnings call, we have taken two more big steps to optimize our capital structure, deliver on our capital allocation priorities, and demonstrate our confidence in the company's long-term outlook. In September, for the first time in the company's history, we issued $400 million in senior unsecured notes and also upsized our secured revolving credit facility from $400 to $600 million. We are very pleased with the depth and breadth of investor demand for the bond offering, which allowed us to lock in a very attractive 3-7-8 coupon with flexible terms and an 8-year tenor. This refinancing taps a new capital base for the company, adds to our financial covenant flexibility and liquidity, and staggers our debt maturities. At the same time, it allows us to maintain an efficient cost of capital to drive increased long-term shareholder value for the future. This morning, we announced a new $425 million share repurchase authorization with indefinite duration, building on September's refinancing and our actions earlier this year to simplify and optimize our balance sheet. This new authorization will allow us to continue to repurchase shares after December when we conclude the current authorization, which had $32 million of authorization remaining as of October 29th. As we have consistently stated, our top capital allocation priority is to invest in strategic, accretive opportunities to grow the brand and its long-term profitability. followed by maintaining a strong and efficient balance sheet. Additionally, we intend to enhance long-term shareholder returns by returning capital that exceeds the needs of these two other priorities. With this buyback program, we are investing in our shares as a demonstration of our confidence in Papa John's future and long-term sustainable growth model. Our goal is to enhance shareholder returns, maintain our strategic optionality, and continue to invest in long-term growth without impacting our weighted average cost of capital. Since the program will be funded partly with operating cash flow, we expect a modest rise in leverage, staying within the parameters of our current solid credit ratings and remaining at the conservative end of our peers' leverage range. Now I'd like to turn to Q3 strong results driven by Papa John's continuing momentum and margin expansions. Our innovation strategy, accelerating unit growth, and the favorable impact of entertainment and sports in September all contributed to strong top-line growth of 8.4%, lapping last year's 17.1% revenue gains. Higher revenues, operating leverage, and the expiration of temporary franchise support versus the prior year drove adjusted operating income performance of 66% year-over-year, and margins expanded 270 basis points. As Rob discussed, we delivered these results in spite of a tight labor market, which continues to impact restaurants and our supply chain, as does inflation across most commodities categories. This resulted in cost pressure in the quarter, including costs related to strategic staffing initiatives. As expected, corporate restaurant segment margins declined sequentially in Q3, given seasonally lower sales in the summer. However, despite the accelerating labor and commodities pressures we discussed, restaurant margins improved year over year, as did margins in all of our operating segments. Continuing with the P&L, on a gap basis, we recorded earnings per diluted share of 79 cents in Q3. This included costs of 2.2 million pre-tax or 4 cents per diluted share post-tax related to our strategic corporate reorganization and new Atlanta office plans we announced in September 2020. Excluding these reorganization costs, adjusted earnings per diluted share more than doubled from 35 cents a year ago to 83 cents in Q3. On a year-to-date basis, adjusted EPS has almost tripled year over year. For the remainder of the year, we are on track for full-year, one-time costs related to the corporate reorganization to be in the top half of our previously communicated range of $15 to $20 million. As we've said, we see these costs as an investment in both the company's innovation and top-line growth, as well as in our long-term corporate efficiencies. In Q3, adjusted EPS also benefited from a decrease in our effective tax rate, primarily due to the finalization of our 2020 federal income tax return, which resulted in a $2.7 million benefit to tax expense, including immaterial prior year true-up adjustments. We now expect our full-year effective tax rate to be between 17% and 20%. Now I'd like to turn to our cash flow and balance sheet. For the first nine months of 2021, we generated cash flow from operations of $194 million up from $169 million a year ago. Free cash flow also rose to $146 million up from $134 million as higher net income more than offset increased capex related to growth investments. We ended Q3 with net debt of only $319 million, up from $210 million a year ago, reflecting cash and liquidity used to fund the Series B preferred stock for purchase and conversion, mostly offset by free cash flow. During the third quarter, we paid a cash dividend of $12.8 million, or $0.35 per common share, in line with the dividend increase we announced last quarter. Subsequent to the third quarter, on October 29th, our Board of Directors declared fourth quarter cash dividends of approximately $12.8 million. In the third quarter and October, we opportunistically repurchased approximately 261,000 shares of common stock for $32.2 million, or $123.11 per share, under our previously announced $75 million share repurchase authorizations. Through the end of last month, a total of approximately 376,000 shares had been repurchased under this authorization with an aggregate cost of $43 million and an average price of $114.26 per share. I'd like to wrap up with a few comments on our near-term outlook. Given strong sales and operational momentum so far in 2021, In addition to an expected continuation of the favorable impact of the return of entertainment and sports that began in Q3, we anticipate North America comp sales of high single to low double digits in Q4. We expect operating margins will again improve year over year on solid growth and related operating leverage. Sequentially, we expect margin levels to approximate Q3's strong results in spite of continuing labor and commodity pressure specifically impacting the corporate restaurant segment. For full year 2021, we expect to modestly exceed our prior outlook of 200 to 300 basis points of operating margin improvement. Net unit growth is expected to be in the upper half of our prior 220 to 260 outlook, as Rob indicated. Lastly, related to the P&L, we expect incremental interest expense as the result of the recent refinancing and as part of our overall capital allocation strategy. Interest expense is expected to increase versus prior year periods by approximately 2 to 2.5 million in Q4 and by approximately 5 to 7 million in fiscal 2022. We expect full year capital allocation expenditures at the low end of our previous range of 65 to 75 million, compared to 36 million spent on CapEx last year. As I've discussed on previous calls, the increase reflects higher growth investments in new store development, as well as new technology and productivity enhancements in our restaurants and across the system. Note that some new company-owned store development plan for fiscal 2021 has been delayed into 2022 as a result of supply chain delays for some restaurant equipment. As for fiscal 2022, we are looking forward to providing more color on our year-end call, as Rob discussed. In Q1, I'd remind you that we will be lapping our biggest quarter ever when we launched Epic Stuff Crust and benefited from another round of stimulus. Nevertheless, we do expect positive comps based on continued customer retention and innovation. Commodities and labor headwinds are expected to continue near term, but our goal is to maintain last year's record margins in the short term and expand on margins over the long term. After another strong quarter, I am so proud of the progress that the Papa John's team has made, unlocking the brand's growth and delivering long-term value for our shareholders. We are all excited about our future and look forward to updating you on upcoming calls. I'll now turn the call back over to Rob for some final comments. Rob?
spk11: Thanks, Anne. Again, I am proud of and thankful for the tremendous hard work and dedication of our team members and franchisees last quarter. They once again delivered industry comp sales outperformance, accelerating unit growth, great financial results, and a stronger financial foundation for the company's long-term growth. And they did so on top of some of the brand's strongest results a year ago, demonstrating that our strategy is sustainable, that our brand values and culture are aligned, and that Papa John's future is very bright. With that, I'll turn the call over to the operator for Q&A.
spk13: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please limit yourself to one question and then return back into queue. Please stand by with the pilot Q&A roster. Our first question comes from Alex Slagle with Jefferies. He may proceed with your question.
spk10: Thanks. Morning.
spk00: Morning, Alex.
spk10: Congrats to everyone. Yeah, really, really impressive. It's been a challenging time, so nice to see that. I wanted to dig in a little more on how you manage the staffing and the broader supply chain challenges that, you know, more companies have been more heavily impacted, I guess, than most companies we've seen, especially through the third quarter. So if you could expand on those efforts, finding drivers and to what degree that may have had an impact on your service times or operating hours. realize you have that advantage with the strong third-party relationship. So also, if you could comment on your satisfaction with their ability to execute through this more difficult period.
spk11: Sure. Great question, Alex. Obviously, it's a challenging time for pretty much every company in regards to staffing. And it's not just our restaurants. It's also our supply chains. both our manufacturing facilities as well as our logistics networks. But we have been focused on building the kind of company that people are excited to be a part of for the last two years. We have worked both corporately but also through our restaurants and our franchisees' restaurants to make sure that we are doing everything to take care of the people that are taking care of our customers. So, yes, we're definitely understaffed relative to where we were just a year ago, but our teams have picked up the slack. You know, our GMs are working harder than they ever have, but they're inspired to do it because they see, you know, what they're creating and they're excited about the improvements that they've seen over the last couple years. So, you know, this business is always understaffed. The food service business is always struggling and working to find people to come in. And, you know, that's not a new dynamic. Obviously, this is exacerbated at this point, but our people have just really taken it to heart and have done a great job managing through it. You mentioned the third-party aggregators. It's been, you know, it's a strategic decision we made two years ago. Others chose not to go down that path, and it's definitely helped us during these challenging times. We have the ability not only to take advantage of the new customers coming through the marketplace of all four major aggregators, but we also have some of the services, drivers as a service capabilities that supplement our labor pool during our busiest times. So that's helped us to not close early, helped us to not turn off our ordering mechanisms, And so, you know, obviously that allows us to deliver greater sales when we're not shutting things down. So the composition of our sales growth is really a function of both of those things, our teammates working probably harder than they ever have but, you know, inspired by the results that they're delivering and the strategic decisions we've made to bring in partners that can help us with a supplemental labor pool.
spk10: Thanks. I'll pass it along.
spk13: Thank you. Our next question comes from Eric Gonzalez with KeyBank Capital Markets. He may proceed with your question.
spk16: Hey, thanks. Good morning. Congrats on the really impressive results and the ongoing momentum. You've been really successful with innovation the last one to two years, and I know that Bacon Mania is something you're really excited about. And based on the fourth quarter outlook, I'm guessing it's off to a great start. So I was wondering if you can comment on your expectations of perhaps how it's performed in the early part of the fourth quarter and maybe a broader question on innovation. How has your thinking changed given the volatility of certain commodities? Have you had to shift your plans around at all to introduce items at higher price points than originally planned or maybe change the calendar as some of these key inputs have gotten more expensive? Thanks.
spk11: Thanks, Eric. You know, we're not beyond what Ann communicated and our expectation to deliver on high, single, low, double-digit comps for Q4. We're not specifically commenting on any of our business results, but I will tell you that our innovation strategy has been a big part of our outperformance the last couple years. We've consistently delivered new products that have allowed customers to self-select into higher price points because they see the value in the products that we're bringing. Epic Stuff Crust has been and continues to be a huge win for us and continues to trade customers up. The people buying Epic Stuff Crust have higher tickets, and that's been able to drive both revenue and margin for us. So our innovation strategy moving forward, obviously we will take into account any cost pressures that we see and manage that accordingly, but You know, we've been great. We've been great at being able to mitigate the cost pressure. I mean, we've expanded margins significantly despite all the challenges that everyone's been facing. And that's through productivity measures that we've invested in at the restaurant and in our supply chain. But it's also, as you know, a function of the fixed cost coverage and operating leverage that we're deriving from this rapid growth in sales. So The model has been very consistent over the last eight quarters, and we're going to continue to deploy that model, and we continue to derive great results from it.
spk16: Thanks for that. Just as a follow-up to that last question about third-party delivery, are you willing to maybe quantify what percentage of sales the white label is versus how much of sales are coming from the outsourced delivery that goes through your app?
spk11: Yeah, I mean, I can tell you that it's about a two-to-one ratio. We're not disclosing exactly what percent of our business it is, but it's about two-to-one in regards to the marketplace versus the drivers-as-a-service volume. Great. Thanks.
spk13: Thank you. Our next question comes from Peter Silo with BTIG. You may proceed with your question.
spk14: Great, thanks, and congrats on the quarter as well. Rob, I want to see if you guys are willing to comment on, you know, I think you talked about high single-digit, low double-digit comps in the fourth quarter. Is there any more detail you can provide? Is that really driven by traffic? Is it more price? Any sort of insight you can provide? Are you seeing an acceleration in delivery or is it more pickup? Just any detail around that would be helpful.
spk11: Hi, Peter. It's great to talk to you. Over the last two years, we have driven our sales growth really in a very balanced way, both through transactions and check. And that's going to continue in Q4. We're continuing to see transaction strength. I mean, Q2 and Q3, we've been really happy to keep our transactions relatively flat. because of the kind of quarters that we had last year where, you know, we grew so rapidly and brought in so many new customers. So we've been very excited about being able to maintain those customers in 2021 as a foundation for the kind of sales growth that we've delivered. You know, looking to Q4, we are going to actually, you know, improve our transactions relative to Q2 and Q3, and it's a bit more of a balanced, you know, way to grow in terms of both transactions and check growth. And we're really happy with the innovation. We're going to, you know, Chacaroni was a big success for us. And, you know, Bacon's off to a great start. So they were really bullish on Q4 while we were able to, you know, give some color on those great, you know, on that great forecast.
spk14: Thank you. Very helpful. Just one more on my end and I'll pass it along. How are you guys thinking about value and the importance of value. I think now as there's less stimulus out there in the economy and we're starting to head into the call at the end of the year and into January, which is probably one of the more value focused months of the year. So just trying to understand how you guys are positioning and if you guys plan to have more call it value or value promotions going forward.
spk11: Yeah, I think every one of our promotions is a value promotion because it delivers great value regardless of the price point. Last year, as you mentioned, January is traditionally a value period. We launched Epic Stuff Crust at a premium price point and had the best quarter in the company's history. So we're focused on continuing to deliver great products at a very fair, reasonable, great price. We're not focused on selling the cheapest pizza in the industry. We have never been focused on that since I've been here, and so we don't have plans to go down that path.
spk14: Thank you very much.
spk13: Thank you, Pete. Thank you. And as a reminder, please limit yourself to one question, and you may return back into queue. Our next question comes from Lauren Silverman with Credit Suisse. You may proceed with your question.
spk07: Thanks for the question. Great to see the large development agreement for the Texas market with Sunholding. As you look at the brand's unit potential across different markets and the interest that you're getting from franchisees, to what extent do you see opportunity for additional agreements near this magnitude or at scale? And just a little bit more near term, can you talk about the visibility that you have into the pipeline into 2022 and how you're thinking about potential factors around delays and just the current labor environment?
spk11: So we are very bullish on our ability to continue to deliver these large development agreements. I think we've consistently said that we have evolved our development strategy both domestically and globally away from opening up any store that anyone's willing to build to a much more strategic approach around bringing in new franchisees that are well capitalized, have operational experience. Sun Holdings is the first one, and frankly, it's a great one. But we are currently in discussions with both new and current franchisees on big development agreements, and we'll continue to announce those as they come to pass. You know, on the second question, it's just a reality. We are seeing some challenges here. in the supply chain. We've been really good at mitigating any of those challenges in regards to our food. Our model is not incredibly dependent upon global logistics networks. Obviously, we make our stuff fresh every day, so a lot of our ingredients come from very close to where we're making all of our food. So we have not been very disrupted in that regard. We've been able to continue to keep our restaurants really in great shape around providing, you know, what our customers need. The equipment is a different situation. You know, the equipment does typically come from international manufacturers and with that comes some incremental risk. So our pipeline is incredibly robust for 2022. We see, you next year like we have had this year. So if there are any delays, it really will be a temporary delay as a function of equipment and not an indication of any lack of interest in building Papa John's restaurants.
spk07: Thanks, and congrats on the quarter.
spk11: Thank you, Lauren.
spk13: Thank you. Our next question comes from Dennis Geiger with UBS. He may proceed with your question.
spk02: Great, thanks. I wanted to talk a little bit more about the sustained sales momentum and your continued optimism in the outlook even against multiple years now of really strong sales results. I think, Anne, you spoke to the positive trends expected into the first quarter of next year given confidence in innovation and the retention of new customers. I just want to push on that or ask a bit more about that retention of new customers piece. If that new customer retention rate has remained consistent, if you are able to kind of assess that, And then as we go forward, your ability and belief in continuing to drive incremental customers. Rob, I think you spoke to the Bacon platform would drive new customers, but just how you think about maintaining the customers that you've gained and continuing to drive incremental and how much harder that gets from here, but how you think about that. Thanks.
spk11: Yeah, I mean, I think the greatest evidence of our ability to retain and attract new customers is our number of loyalty members. I mean, if you look at just in the last two years, we've almost doubled the number of loyalty members that we have, gone from 12 million in 2019 to 22 million. And so there was a huge surge of new customers last year as the pandemic kind of brought a lot of new people into the category and brought a lot of new people to Papa John's. And coming into 2021, we didn't know if we were going to be able to retain all of those customers. But we haven't just retained them. We've actually continued to attract a lot of new customers, and that's what gives us a lot of confidence, not just in the short term but in the long term. The customers that we're bringing into the brand are enjoying their experience, are liking our food. They like the new products that we've brought, and they're sticking around. And so, you know, a lot of our transaction growth has come from new customers over the last two years. Very little of our transaction growth has come from frequency increases amongst current customers. And so this myth, if you will, that, you know, everybody ordered pizza four times a week during the pandemic and now coming out of the pandemic, you know, they're not going to do that. So pizza sales are going to suffer just isn't factual. There's been very little frequency increase. In our business, it's been really all new customer acquisition, for the most part, driving our transaction growth.
spk02: That's great, Keller. Thanks, Rob.
spk13: Thank you. Thank you. Our next question comes from Alton Stump with Loop Capital. You may proceed with your questions.
spk03: great good morning and uh you know sir congrats uh you know for me as well on uh you know what was obviously a great quarter um you know just kind of getting back to the labor uh you know cost or you know issue front i mean you know is that easy at all as move into 4q um you know obviously you know you know that's why most of you know for subsidies have you know sort of dry up you know across the country and you know as move into 2022 you know is there any possibility that you know we could see a further easing on the labor cost front or shortage front, or is this something that you think is, you know, it's here to stay for the time being?
spk11: Thanks, Alden. You know, we haven't seen any easing on the cost front. We have seen some progress on the staffing front, particularly in our supply chain. We've made, you know, in the last couple months, our open positions have been filled at a much higher rate than they were for the previous couple months. So that gives us confidence that we're on the path to where we need to get to. You know, as you guys know, it's a supply and demand situation, and so the labor inflation will continue to be a function of the workforce, and If we do see a return to more normalized workforce rates in 2022, we would anticipate that the cost of that labor would decrease. But we have not seen that to date.
spk15: Okay, great. Very helpful. Thank you, Rob.
spk13: Thank you, Alton. Thank you. Our next question comes from Brian Mullen with Deutsche Bank. Can you proceed with your question?
spk15: Thank you. In light of the new share repurchase authorization, Is there a target leverage ratio you could share with investors or perhaps a range you'd like investors to contemplate? I know you mentioned in the prepared remarks maintaining your credit ratings, remaining conservative to peers, but is there a specific range you could share that you are comfortable with as you look forward? And then whatever that level is, could you discuss how you arrived at it, maybe discuss over what period of time you might expect to get there if there is any increase in leverage that might be in the cards?
spk08: Sure. So we aren't managing to a target per se. But what I can point you to is, you know, our desire to remain conservative and at the low end of our peer group. When we look at the additional debt capacity and the new share repurchase authorization, we look at it as giving us a ton of flexibility and optionality to deploy capital to drive strong shareholder returns. So we're going to be really strategic and efficient in how we deploy that capital and we see a lot of opportunity to invest in the business to continue to support our growth. And then, of course, we're going to maintain that strong and flexible balance sheet. And then after that, you know, we'll return excess cash with a competitive dividend and share purchases. So, you know, with all that in mind, in terms of a modeling assumption, you know, I point you to, you know, between $20 and $40 million a quarter. I would just keep in mind that where that falls in our capital allocation priorities, and it's subject to change based on strategic alternatives and outlook.
spk15: Thank you.
spk13: Thank you. Our next question comes from Brett Levy with MKM Partners. You may proceed with your question.
spk12: Great. Thanks for taking the question. You've made a lot of investments in technology over the years, and you've obviously always had a strong supply chain. Can you talk about Where do you think you are right now in terms of overall efficiency? What kind of cost savings do you think you've been able to yield as we're dealing with these inflationary pressures and what we should expect over the next 12 to 18 months on the technology front? Thanks.
spk11: Yeah, you know, our business is a technology business. You know, we've always stated that we're a food company, but we're very dependent upon the success and productivity driven by our technology as 70% of our orders come through digital channels. So we have made a lot of investments in our technology, but we've also made investments in our restaurants that have really helped us be more productive. Last year, we implemented our Papa Call system, which allows us to take phone answering out of the restaurants, thereby improving our labor productivity at the restaurants. We've also highlighted that that innovation also allows us to reduce the number of dropped calls because people aren't waiting in line to put their orders in. So, you know, we've also invested in labor efficiency on the make line through our investment in machines that help increase the speed and consistency of rolling out our dough. So there's been a lot of kind of operational changes technology improvements in the restaurants that have, frankly, helped us to mitigate some of the labor inflation. But moving forward, we do see big opportunities in IT technology that's going to help our drivers be more efficient on their routes. We talked about our development focus as well and kind of putting restaurants in between other restaurants to reduce the drive times. If and when we get there, we will have more labor productivity because one driver will be able to take more deliveries because they're not driving as far. So there's a lot of work going on right now and a lot of capital being invested to increase the productivity of our labor force given the significant inflation that we're seeing and the cost of that labor.
spk13: Thank you. Our next question comes from Crystal Colwood's people. You may proceed with your question.
spk05: Thanks. Good morning, guys. Rob, the company is rightly focused on improving the sales and margin performance of domestic franchisees, but I was hoping you could provide some details on what the company has been doing to better support international franchisees, especially since that seems to be where the majority of the unit growth is expected.
spk11: Yeah. Hi, Chris. Our international business has never been healthier. I mean, as we mentioned on the call, we have just signed the largest international development agreement in the brand's history, and we're working on multiple other opportunities as we speak. And that's really a function of both the white space that we offer relative to our peer group, but also the improved unit economics approach. You know, our supply chain model internationally has been very strong. We've seen very little disruption into our supply chain. And our top-line sales growth, you know, our two-year comps are over 30% internationally. So we're seeing a lot better margins at the restaurant level. And, you know, the biggest thing, though, is that we have changed the way we think about unit growth both domestically and internationally. It used to be that anybody who wanted to open a restaurant pretty much could open a restaurant just so we could open up another store. That's not how we're approaching it. We're approaching it strategically. We're opening up, we're protecting the white space that we have and saving it for partners that can come in and sign big agreements and continue to grow that white space on an ongoing basis. You know, the unit economics have improved dramatically through the sales growth. We've got a lot of white space, and we're strategically bringing in new franchisees to build restaurants at scale over the long term.
spk05: Okay, great. That's helpful. Thank you.
spk11: Thank you, Chris.
spk13: Thank you. Our next question comes from Andrew Strelzik with BMO. You may proceed with your question.
spk04: Hey, thank you very much. Good morning. My question is around unit growth, and I'm just trying to think about kind of where that could go over time. Has your thinking around the upside there evolved as you continue to have these conversations? And I'm hoping that maybe you can help quantify the delays that you mentioned. And lastly, you know, as you think about the franchisee interest, are you seeing interest in your company stores as well as a way to get into the system, or is it really just new development agreements? Thanks.
spk11: So in terms of the number of new units, we're really happy with where we are this year. You know, 220 to 260 new units. We communicated today that we're going to be on the upper end of that. That's a huge step forward for us. We would only anticipate growing from there. We do not anticipate... out years having less than we're going to deliver this year. So I can give you that color. In terms of the delays, we don't have any delays yet. You know, we're not projecting 2022 to be a slowdown as a function of these equipment. We're just highlighting the risks that we're seeing in the supply chain. So as of right now, we're working diligently to make sure that we can get all of the equipment that our franchisees are going to need to open up that number of new restaurants next year. And then lastly, on the company side, we've always looked at our company restaurants as a strategic asset, and over the last couple years, the significant margin expansion has driven a lot of value for us, and we're excited about that, and we're going to keep working on productivity that's going to offer that and create that value. That being said, if we have strategic partners who want to come into the system and are willing to sign up to build a lot of new restaurants in these geographies, we're more than open to exploring opportunities to re-franchise our company units to give them incentive to do so. So we've always approached it that way. We'll continue to approach it that way. But right now we're really happy with the performance of our company restaurants.
spk04: Great. Thank you, and congrats on the momentum.
spk11: Thank you very much.
spk13: Thank you. And as a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from James Rutherford with Stevens Inc. You may proceed with your question.
spk06: Hey, thanks very much. Rob, I think it's very clear there's a big white space opportunity for Papa John's. You've talked about that a lot. But I want to ask about the dynamic with existing franchisees as you're layering in these large operators like the Texas Deals. It seems like if you are a franchisee and you see a new player coming into Texas to do infield growth, maybe that would be an incentive for the rest of the franchisee base to go ahead and build out their own markets with knowledge that if they don't, you might see somebody else come in and do that, and there's implications for their stores, right? So how do you think about that dynamic, and is it a catalyst to get growth from the existing franchisee base? Thanks very much.
spk11: Thank you. Absolutely. And I will tell you explicitly that we would love for our current franchisees to fill up all this white space. We have been continuing to work with them very collaboratively over the last two years on every facet of the business. I would tell you that this is probably one of the most highly functioning, productive franchisor-franchisees relationships ever. that I've ever been a part of or have witnessed in the industry. So they are working really hard right now to keep up with the momentum on the business, the sales momentum given the staffing challenges, but they're excited about the future. They believe in the model that we've built. And so we are currently having conversations with almost all of our top 25, 30 franchisees around what it looks like for them to build out their territories. We're meeting with them showing them the new mapping technologies that we have built to help them understand where the opportunities in their markets are and allowing them to, you know, take advantage of that, ideally prior to bringing in any franchisees. But, you know, I will say that bringing in new, large, experienced, well-capitalized franchisees definitely will be a motivator for our current franchisees to make sure that they're plans to build out their markets are taken advantage of by them and not someone else.
spk06: Helpful. Thanks and congrats.
spk13: Thank you. Thank you. Our next question comes from Jim Sanderson with North Coast Research. He may proceed with his question.
spk01: Thanks for the question and congratulations on a great third quarter and guidance in the fourth quarter. I wanted to shift gears and dig in a little bit more to international development. I noticed that Combined Domino's and Pizza Hut operate about 1,000 stores in the Australian market, which is, I think, about a $4 billion Australian market. Is there any structural reason why Papa John's is not in that marketplace, and would you consider, given the high return on investment, actually investing in company operations to accelerate expansion into the Australian market? Thank you.
spk11: That's a great question, Jim, and the answers to those questions are no and yes. There's no reason why we can't be in Australia, just like there's no reason why we're not in Brazil or France or other large markets where there's a lot of white space and established national pizza delivery business model. So we're looking at all of that white space. And, yes, as Anne highlighted, we have a lot of cash and a lot of capital that we want to invest primarily in growth opportunities for our system and for our company. We'd rather do that than anything else. So if we have partners who are, you know, we're working to find partners and we've talked with prospective partners already, but it hasn't worked out because we're being very choiceful in how we go into these white space markets. But Australia is one of the top of the list, along with Brazil. But we also still have huge development opportunity in markets where we already compete but are much less penetrated than the competitors you referenced. I would offer China as an example, where we have 200 restaurants. I've mentioned consistently over the last two years, there's an opportunity for us to go in and have 1,000 restaurants in China very easily. So we're looking at both those pure white space markets, but also markets we're already in but under-penetrated in as huge opportunity for international development.
spk01: Thank you.
spk11: Thank you.
spk13: Thank you, and I'm not showing any further questions at this time. I would now like to turn the call back over to Rob Lynch for any closing remarks.
spk11: Well, those were great questions. It's always fun to answer questions that are asking about growth and not necessarily about problems. I'll tell you, I couldn't be more proud of our company and our franchisees for continuing to outperform and continuing to deliver unexpected results given the current challenging dynamics that a lot of you asked about in the marketplace. We're very excited about the future of Papa John's, and we're looking forward to continuing to connect with each of you to discuss the ongoing progress that we're making. Thank you so much for your continued interest in our company, and I look forward to talking again soon. Thank you. Thank you. This concludes today's conference call.
spk13: Thank you for participating. You may now disconnect.
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