Papa John's International, Inc.

Hello, thank you for standing by and welcome to Papa John's first quarter 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Chris Collins, Vice President of Treasury and Tax. Please go ahead.

Thank you. Good morning. Joining me on the call today are President and CEO Rob Lynch and 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 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 that any members of the media be in listen-only mode. Now I'd like to turn the call over to Rob Lynch for his comments. Rob?

Thank you, Chris, and welcome, everyone, to our first quarter 2022 earnings call. I'm proud to say that Papa John's delivered another quarter of outstanding results in Q1, in spite of an unpredictable operating environment that went from one unprecedented global challenge to the next. The Papa John's system continued to grow, lapping last year's record Q1 sales and outperforming the pizza industry for a 10th consecutive quarter. I continue to be amazed by our team members and franchisees' dedication and hard work, serving great pizza to our millions of customers worldwide. I'm grateful for their commitment to building this brand and creating the best pizza company in the world. For me, our Q1 results are a testament to the power of incredible execution, winning innovation, a values-based culture, and our differentiated brand. Together, these strengths continue to fuel Papa John's impressive, sustainable growth trajectory. This morning, I'd like to discuss three key topics. First, our Q1 results and the extraordinary business environment that we are navigating. Second, Papa John's differentiated strategy and how we're leaning into it to drive sustained outperformance in a constantly changing environment. And third, our outlook for the remainder of the year and beyond, based on current macro trends and continued execution of our strategic plan. And we'll then provide further color on our financial results and outlook, especially on margins and the bottom line. Beginning with our strong Q1 results. Q1 started with great momentum, coming off a record fiscal 2021, when we were already navigating a continued tight labor market and accelerating commodity inflation in the back half. In January of this year, Omicron exacerbated labor shortages across the economy, and our restaurants were at their lowest staffing levels since the beginning of the pandemic. Then in February, as Omicron declined and staffing levels began to recover to end-of-year levels, the conflict in Ukraine shocked the global system, triggering an acceleration in commodities and fuel inflation. By March, businesses across the industry and globe, including Papa John's, faced yet another new normal. Despite these challenges, and as we've done since before the pandemic, Papa John's continued to consistently grow and outperform last quarter against the challenging backdrop. In Q1, we delivered solid growth, building on a record first quarter last year when we introduced our biggest innovation ever in Epic Stuff Crust and also benefited from government stimulus programs. Global system-wide sales rose 5.3 percent in constant currency to $1.3 billion, on top of 26.6 percent gains a year ago. Comparable sales were up 1.9 percent in North America and up 0.8 percent internationally, lapping prior year gains of 26.2 percent and 23.2 percent, respectively. We achieved these results despite the challenging staffing environments in our restaurants. I'll elaborate on this and other key drivers in a moment. Our development program, a critical part of our growth engine, also continued its momentum, fueled by the brand's strong AUVs and unit economics. Last quarter, we opened 62 net units worldwide. Accelerating unit growth over the past year contributed approximately half of our system-wide sales gain. I'm also proud that thanks to our strategic pricing actions, an agile supply chain, and disciplined financial management, we're able to grow EPS, and sequentially improve operating margins, in line with the view that we shared in February. For yet another quarter, we demonstrated how Papa John's team members and franchisees executing our differentiated strategy are driving sustainable growth and delivering great value for our customers, franchisees, and shareholders in a constantly changing world. Now I'd like to speak to key components of our growth strategy and how we're addressing the opportunities and challenges in the current environment. Our multifaceted menu innovation strategy continues to be the cornerstone of our brand's differentiated premium position and a key driver of last quarter's continued comp sales gains against the backdrop of last year's record sales. New York Style Crust was our big product launch in Q1, and it exceeded our expectations. It has proven to be popular and incremental, both in terms of transactions and ticket, as it appeals to a distinct segment of pizza lovers who appreciate larger slices and and a thinner, stretched crust. We also saw continued strength from Epic's stuffed crust for a fifth consecutive quarter, despite not being on national promotion. This demonstrates how our strategy of building new menu platforms creates sustainable, incremental sales layers in our business. Two weeks ago, we launched Epic Pepperoni Stuffed Crust, an exciting LTO which we expect to be a big addition to our Epic platform over the summer. Pepperoni is our most popular topping, And as the name says, Epic Pepperoni Stuffed Crust hand-stuffs pepperoni and cheese into our fresh, never-frozen original crust. The results to date are extremely promising, especially with our loyalty members. For the remainder of the year, we have a number of other significant LTO and long-term platform launches lined up as we leverage menu innovation to engage and create value for our customers, driving both long-term ticket and transaction growth. Digital innovation is another lever we are pulling to drive sustainable comp sales. This year, we have leaned into our loyalty program, Papa Rewards, and are investing significantly in our personalized targeting capabilities to drive frequency and lifetime value with our loyal customers. We continue to actively expand the program. We promoted exclusive members-only access to Epic Pepperoni Stuffed Crust before its launch, successfully adding nearly 150,000 new members to during the one-week early access period. As of last week, we have over 24.5 million Popper Rewards members. Also on the digital side, our deep aggregator partnerships and integrations continue to drive incremental and profitable transactions. As we have previously discussed, aggregators provide another channel to meet our customers where they are, not to mention additional delivery capacity at peak times. Aggregator marketplaces have also become important venues for consumers to discover brands. We continue to be bullish on these growing partnerships as we execute on additional opportunities to reach new customer segments. Papa John's premium brand positioning has been critical to the brand's outperformance over the past two and a half years, as we have been nimble and adapted our strategy to a constantly changing environment. It's no less important today as we adjust to a new, more inflationary, uncertain environment with rising costs and consumers increasingly seeking out value. As consumer sentiment continues to soften, I'd point out that pizza offers tremendous value relative to other QSRs, fast casual, and casual dining concepts. For this reason, the segment has been historically resilient through past economic cycles. Because we invest in better, fresh ingredients, toppings, and dough, consumers recognize the superior value in Papa John's pizza already. At Papa John's, you can feed a family of four a delicious premium meal with a pizza and a side for under $7 per person. Papa Rewards is also a very important tool we're using to target more price-sensitive customers with high-value promotions. At the same time, we will continue our successful strategy of letting our customers, especially those who are less price-sensitive, to self-select into our premium price innovation. All of that being said... With this unprecedented inflation, we have begun to take some pricing. This has helped us set higher food, labor, and fuel costs in our supply chain and restaurants. As I've said before, unlike most of the QSR industry, where ticket growth over the past couple of years has largely come from pricing, Papa John's ticket growth has predominantly come through new premium products and add-ons. This has afforded us more room to strategically raise prices in this inflationary environment. Furthermore, Papa John's has unique pricing flexibility, given our value proposition is focused on delivering premium value, not hitting specific low price points. Last quarter, we were able to successfully raise prices by approximately 7% on average in our corporate stores to offset inflation in our food basket. This contributed to higher ticket, as did the continued mixed benefits of premium innovation like New York Style Crust. While higher pricing marginally impacted transactions last quarter, we will continue to pursue a balanced approach weighing short-term margin optimization against the retention of the significant customer base and momentum that we have built over the past two years, which is key to our brand's long-term success. Overall, I feel we are in a good spot today and well-positioned to sustainably grow ticket and transactions through innovation while using our pricing power to manage margins over the long term. Now I'd like to comment on staffing and operations. Of course, we could never have achieved last quarter's solid results without the tremendous hard work and commitment of our team members and franchisees. That said, staffing is always a challenge in our industry and continues to be so. In addition to our integrations with the aggregator marketplaces, our nationwide integrations with delivery as a service providers have been a key tool, allowing us to continue to serve our customers during peak times. Though these delivery-as-a-service transactions are slightly lower margin versus using our own drivers, they are incremental, profitable orders that otherwise may have gone unfulfilled. Papa Call, our centralized order-taking and customer service center, is another example of our long-term investment to make our team members productive and help them focus on making and delivering great pizza. We will continue to invest capital in technology innovations that can make our teams more productive. Looking ahead... we remain focused on continuing to hire great employees and reducing turnover by providing competitive compensation, a great working environment and benefits, and compelling career paths. Our goal is to be the employer of choice in our industry, and we've taken many actions to create a strong culture and support our people. Earlier this week, we released our 2021 Corporate Responsibility Report, outlining our progress against our priorities to create a positive impact on people, pizza, and the planet. that sets us up for long-term success. I'm proud to say that this year, Papa John's is the first major publicly traded pizza chain to announce that our executive compensation plan now includes ESG metrics. We also continue to add experienced talent to our team. We're excited to have Joe Seavey join our team this week as our new chief restaurant officer. Joe brings deep experience in the pizza industry as an operator himself and as a senior brand executive, as well as a QSR development leader. We're looking forward to accelerating the great progress we're already making with staffing and operational excellence in our corporate and franchise restaurants with Joe's leadership. Now, turning to Papa John's strong development results and accelerating unit growth. We are very pleased with the 62 net new units we opened in the first quarter when development is seasonally at its slowest. Last quarter, we also announced the strategic re-franchising of our 51% stake in Star Papa, a 90-restaurant joint venture in Texas, to Sun Holdings. This was a follow-on to the historic development deal we signed with Sun Holdings last summer for them to open 100 new restaurants across high-growth markets, primarily in Texas. Refranchising is a very attractive strategic option for us. It allows us to attract well-capitalized, sophisticated operators and offer them the significant operational scale they need to quickly accelerate their growth in the Papa John's system This re-franchising deal with Sun Holdings is a perfect example of this strategy. I'd now like to spend a moment discussing our international business, where Papa John's has its biggest long-term white space and growth potential. I'm very excited that our Chief Development Officer, Amanda Clark, is expanding her role to now also lead our international operations as Chief International and Development Officer. Working with Liz Williams, who has been promoted to Chief International Operations Officer Amanda will enhance the integration between our North American and international businesses, which will be critical as we look to accelerate growth and create efficiencies globally. I also want to thank Jack Swaziland, our Chief Operating Officer of International, who is retiring after 16 years. Papa John's would absolutely not be the global brand we are today without Jack's energy, dedication, and hard work. I'd like to wrap up with a few comments on Papa John's outlook for the remainder of 2022 and and the long term. As I have discussed this morning, while the global operating environment and economy is currently volatile and challenging for many industries, I'm as confident as ever that Papa John's is well-positioned to sustain our industry outperformance in the short term and continue moving forward to realize our full growth potential and goals for the long term. In the short term, given strategic pricing actions to offset higher commodity costs and continued innovation to engage and deliver value to our customers, we expect North America comparable sales to be slightly positive in Q2 and to continue to be positive in the second half of 2022. For the full year, our outlook is for positive comp sales on top of a record 2021. It is a sign of our confidence in the resilience of our strategy and our ability to execute that this outlook is consistent with the view that we laid out last November under very different macroeconomic circumstances. Our strong unit growth results for Q1 give us even more confidence in our accelerating development outlook. As a result, we are raising our outlook for unit growth in 2022 to 280 to 320 net units, from 260 to 300 previously. This is a 7% increase at the midpoint. Even more significant, we are also excited to provide a new multi-year development goal, Based on the strong pipeline of current deals, as well as new markets where we are actively in discussion, our goal is to grow global net new units by 6% to 8% annually for fiscal 2023 through 2025, continuing the acceleration we saw in 2021 and expect in 2022. Combined with our raised 2022 outlook, this equates to a goal of 1,400 to 1,800 net new Papa John's restaurants worldwide, by the end of 2025. And this is just the beginning. Beyond this goal, vast development white space still remains for us. I'll now turn the call over to Ann to discuss our financial results, as well as provide some more color on our outlook. Ann?