Papa John’s: Announces Second Quarter 2016 Results

Louisville / KY. (pj) Papa John’s International Inc., the world’s third largest pizza company, announced financial results for the three and six months ended June 26, 2016. Highlights:

• Second quarter earnings per diluted share of 0.61 USD in 2016, or an increase of 29.8 percent over adjusted 2015 earnings, which excludes the impact of a prior year legal settlement
• System-wide comparable sales increases of 4.8 percent for North America and 5.3 percent for International
• Increased 2016 diluted earnings per share guidance to a range of 2.35 USD to 2.45 USD from the prior range of 2.30 USD to 2.40 USD
• Increased 2016 North America comparable sales guidance to a range of 3.0 percent to 5.0 percent from the prior range of 2.0 percent to 4.0 percent
• Regular dividend increased to 0.80 USD annually from 0.70 USD annually

«We are pleased with our strong 2nd quarter results, with good comp sales leading to another quarter of excellent earnings growth», said Papa John’s founder, chairman and CEO John Schnatter. «Our strong digital platform, unwavering commitment to quality, and consistent, disciplined approach to growing our global footprint have us well-positioned to maintain our momentum throughout 2016 and well into the future».

Second quarter 2016 revenues were 423.0 million USD, a 6.0 percent increase from second quarter 2015 revenues of 399.0 million USD. Second quarter 2016 net income was 22.5 million USD, compared to second quarter 2015 net income of 10.8 million USD. Net income for the second quarter of 2016 increased 20.1 percent, compared to the second quarter of 2015 net income of 18.8 million USD that excludes the prior year legal settlement (adjusted), as detailed in the «Item Impacting Comparability – Non-GAAP Presentation» table. Second quarter 2016 diluted earnings per share were 0.61 USD, compared to second quarter 2015 diluted earnings per share of 0.27 USD (adjusted earnings per share of 0.47 USD in the second quarter of 2015, or a 29.8 percent increase).

Revenues were 851.6 million USD for the six months ended June 26, 2016, a 2.4 percent increase from revenues of 831.3 million USD for the same period in 2015. Net income was 48.7 million USD for the first six months of 2016, compared to 33.0 million USD for the same period in 2015. Net income for the first six months of 2016 increased 18.8 percent, compared to adjusted net income of 41.0 million USD for the same period in 2015. Diluted earnings per share were 1.29 USD for the first six months of 2016, compared to 0.82 USD for the same period in 2015 (adjusted earnings per share of 1.02 USD in the same period of 2015, or a 26.5 percent increase).

Global Restaurant and Comparable Sales Information

	Q2/2016		Q2/2015		Q2/2016		Q2/2015
Global restaurant sales growth (a)	5.9	%	6.4	%	4.0	%	6.9	%
Global restaurant sales growth, excluding the impact of foreign currency (a)	7.7	%	8.8	%	5.8	%	9.2	%
Comparable sales growth (b)
Domestic company-owned restaurants	5.6	%	7.4	%	3.2	%	7.7	%
North America franchised restaurants	4.5	%	4.8	%	2.1	%	5.4	%
System-wide North America restaurants	4.8	%	5.5	%	2.4	%	6.0	%
System-wide international restaurants	5.3	%	6.8	%	5.5	%	7.2	%

(a) Includes both company-owned and franchised restaurant sales.
(b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency translation.

We believe global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales growth information is also useful in analyzing industry trends and the strength of our brand. Management believes the presentation of global restaurant sales growth excluding the impact of foreign currency provides investors with useful information regarding underlying sales trends by presenting sales growth excluding the external factor of foreign currency exchange. Franchise restaurant sales are not included in company revenues.

Revenue Highlights

All revenue highlights below are compared to the same period of the prior year, unless otherwise noted. Consolidated revenues increased 24.0 million USD, or 6.0 percent, for the second quarter of 2016 and increased 20.3 million USD, or 2.4 percent, for the six months ended June 26, 2016. The increases in revenues were primarily due to the following:

• Domestic company-owned restaurant sales increased 18.3 million USD, or 9.8 percent, and 26.7 million USD, or 7.0 percent, for the three and six months, respectively, primarily due to increases of 5.6 percent and 3.2 percent in comparable sales and increases of 5.1 percent and 4.6 percent in equivalent units, including 20 restaurants acquired from franchisees during the first quarter.
• Domestic franchise royalties and fees increased approximately 2.0 million USD, or 8.7 percent, and 2.9 million USD, or 5.9 percent, for the three and six months, respectively, primarily due to increases of 4.5 percent and 2.1 percent in comparable sales and reduced levels of royalty incentives in 2016.
• Domestic commissary and other sales increased 1.5 million USD, or 0.9 percent, and decreased 13.4 million USD, or 3.9 percent, for the three and six months, respectively. The increase of 1.5 million USD for the three-month period was primarily due to higher commissary sales from an increase in volumes, partially offset by lower pricing for certain commodities, including cheese, and an increase in online fee revenues for our online and mobile ordering business. These increases were partially offset by the prior year inclusion of approximately 1.3 million USD of FOCUS equipment sales to franchisees which had no significant impact on 2015 operating results. The decrease of 13.4 million USD for the six-month period was primarily due to lower FOCUS equipment sales of approximately 9.8 million USD and lower domestic commissary sales due to lower pricing for certain commodities, partially offset by higher domestic commissary sales volumes.
• International revenues increased approximately 2.1 million USD, or 8.1 percent, and 4.2 million USD, or 8.0 percent, for the three and six months, respectively, primarily due to the following:
  • International revenues include sublease rental revenue in the United Kingdom of approximately 1.7 million USD and 3.3 million USD for the three- and six-months, respectively, which were shown net of the rental expenses in the prior year. The change had no impact on income before income taxes.
  • Royalties and commissary revenues were higher due to an increase in the number of restaurants and increases in comparable sales of 5.3 percent and 5.5 percent for the three- and six-month periods, respectively, calculated on a constant dollar basis.
  • China Company-owned restaurant revenues were 1.3 million USD and 2.6 million USD lower than the prior year three- and six-month periods, respectively, primarily due to negative comparable sales and fewer restaurants.

Foreign currency exchange rates reduced revenues by approximately 2.2 million USD and 4.0 million USD for the three- and six-months periods, respectively.

Operating Highlights

All operating highlights below are compared to the same period of the prior year, unless otherwise noted. The tables below reconcile our GAAP financial results to the adjusted (non-GAAP) financial results, excluding the legal settlement in 2015, for the three and six months ended June 26, 2016 and June 28, 2015:

Three Months ended June 2016 versus Q2/2015

As Reported

Legal

Adjusted

Adjusted

June 26,

June 28,

Settlement

June 28,

Increase

(In thousands)

2016

2015

expense

2015

(Decrease)

Domestic company-owned restaurants

USD

15’325

USD

14’617

USD

–

USD

14’617

USD

708

Domestic commissaries

11’682

10’702

–

10’702

980

North America franchising

22’445

20’054

–

20’054

2’391

International

2’875

2’279

–

2’279

596

All others

425

(117

)

–

(117

)

542

Unallocated corporate expenses

(17’079

)

(29’949

)

12’278

(17’671

)

592

Elimination of intersegment profits

(473

)

(55

)

–

(55

)

(418

)

Total income before income taxes

USD

35’200

USD

17’531

USD

12’278

USD

29’809

USD

5’391

.

Six Months ended June 2016 versus H1/2015

As Reported

Legal

Adjusted

Adjusted

June 26,

June 28,

Settlement

June 28,

Increase

(In thousands)

2016

2015

expense

2015

(Decrease)

Domestic company-owned restaurants

USD

35’512

USD

33’097

USD

–

USD

33’097

USD

2’415

Domestic commissaries

23’228

22’502

–

22’502

726

North America franchising

46’025

42’373

–

42’373

3’652

International

5’913

3’623

–

3’623

2’290

All others

476

326

–

326

150

Unallocated corporate expenses

(33’411

)

(47’154

)

12’278

(34’876

)

1’465

Elimination of intersegment profits

(1’134

)

(800

)

–

(800

)

(334

)

Total income before income taxes

USD

76’609

USD

53’967

USD

12’278

USD

66’245

USD

10’364

.
Second quarter 2016 income before income taxes increased approximately 17.7 million USD compared to the prior year period and increased 5.4 million USD, or 18.1 percent, compared to the adjusted second quarter 2015 income before income taxes. The increase of 5.4 million USD was primarily due to the following:

• Domestic company-owned restaurants increased approximately 700’000 USD primarily due to a 5.6 percent increase in comparable sales and lower commodity costs, partially offset by higher non-owned automobile claims costs.
• Domestic commissaries income increased approximately 1.0 million USD primarily due to higher sales volumes.
• North America franchising income increased approximately 2.4 million USD primarily due to higher royalties attributable to the 4.5 percent increase in comparable sales and lower sales and development incentives.
• International income increased approximately 600’000 USD primarily due to higher royalties from an increase in the number of restaurants and an increase in comparable sales. This increase was somewhat offset by the impact of negative foreign currency exchange rates of approximately 500’000 USD.
• Unallocated corporate expenses were approximately 600’000 USD lower primarily due to lower legal costs.

Income before income taxes increased 22.6 million USD for the six month period ended June 26, 2016, compared to the prior year period and increased 10.4 million USD, or 15.6 percent, compared to the adjusted 2015 income before income taxes. The increase of 10.4 million USD was primarily due to the same reasons noted for the three-month period.

The effective income tax rates were 31.5 percent and 31.9 percent for the three and six months ended June 26, 2016, representing an increase of 2.6 percent for the three-month period and no change from the prior year six-month period. The legal settlement reduced our 2015 income tax rates by approximately 2.5 percent and 0.5 percent for the three- and six-month periods, respectively. Our effective income tax rates may fluctuate from quarter to quarter for various reasons, including the timing of various deductions and credits.

The company’s free cash flow, a non-GAAP financial measure, for the first six months of 2016 and 2015, was as follows (in thousands):

				H1/2016					H1/2015
Net cash provided by operating activities (a)				USD	75’123				USD	77’982
Purchases of property and equipment					(24’001	)				(16’501	)
Free cash flow				USD	51’122				USD	61’481

(a) The decrease of approximately 2.9 million USD was primarily due to the payment of approximately 12.5 million USD in the first quarter of 2016 for the previously mentioned legal settlement and unfavorable changes in working capital items, partially offset by higher net income.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the amounts spent on the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment. Free cash flow is not a term defined by GAAP, and as a result, our measure of free cash flow might not be comparable to similarly titled measures used by other companies. Free cash flow should not be construed as a substitute for or a better indicator of the company’s liquidity or performance than the company’s GAAP measures.

See the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (SEC) for additional information concerning our operating results and cash flow for the three and six months ended June 26, 2016.

Global Restaurant Unit Data

At June 26, 2016, there were 4’935 Papa John’s restaurants operating in all 50 states and in 43 international countries and territories, as follows:

	Domestic Company-owned		Franchised North America		Total North America		International		System-wide
Second Quarter
Beginning – March 27, 2016	729		2’661		3’390		1’513		4’903
Opened	5		23		28		46		74
Closed	–		(16	)	(16	)	(26	)	(42	)
Ending – June 26, 2016	734		2’668		3’402		1’533		4’935
Year-to-date
Beginning – December 27, 2015	707		2’681		3’388		1’505		4’893
Opened	7		41		48		70		118
Closed	–		(34	)	(34	)	(42	)	(76	)
Acquired (divested)	20		(20	)	–		–		–
Ending – June 26, 2016	734		2’668		3’402		1’533		4’935
Unit growth (decline)	27		(13	)	14		28		42
% increase (decrease)	3.8	%	(0.5	%)	0.4	%	1.9	%	0.9	%

.
Our development pipeline as of June 26, 2016 included approximately 1’300 restaurants (200 units in North America and 1’100 units internationally), the majority of which are scheduled to open over the next six years.

Item Impacting Comparability – Non-GAAP Presentation

The following table reconciles our GAAP financial results to our adjusted financial results, which are non-GAAP measures, for the three and six month periods ended June 26, 2016:

(In thousands, except per share amounts)

Q1/2016

Q1/2015

H1/2016

H1/2015

Income before income taxes, as reported

USD

35’200

USD

17’531

USD

76’609

USD

53’967

Legal settlement expense

–

12’278

–

12’278

Income before income taxes, as adjusted

USD

35’200

USD

29’809

USD

76’609

USD

66’245

Net income, as reported

USD

22’541

USD

10’780

USD

48’723

USD

33’016

Legal settlement expense

–

7’986

–

7’986

Net income, as adjusted

USD

22’541

USD

18’766

USD

48’723

USD

41’002

Diluted earnings per share, as reported

USD

0.61

USD

0.27

USD

1.29

USD

0.82

Legal settlement expense

–

0.20

–

0.20

Diluted earnings per share, as adjusted

USD

0.61

USD

0.47

USD

1.29

USD

1.02

.
The 2015 legal settlement expense represents a pre-tax expense of 12.3 million USD for a collective and class action, Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc.

The non-GAAP adjusted results shown above, which exclude the 2015 legal settlement, should not be construed as a substitute for or a better indicator of the company’s performance than the company’s GAAP results. Management believes presenting the financial information excluding the legal settlement is important for purposes of comparison to prior year results. In addition, management uses this metric to evaluate the company’s underlying operating performance and to analyze trends.

Share Repurchase Activity

The following table reflects our repurchases for the three and six months ended June 26, 2016 and subsequent repurchases through July 26, 2016 (in thousands):

Period	Number of Shares	Cost
Three Months Ended June 26, 2016	521	USD	30’322
Six Months Ended June 26, 2016	1’807	USD	96’355
June 27, 2016 through July 26, 2016	68	USD	4’661

.
There were 37.5 million and 37.9 million diluted weighted average shares outstanding for the three and six months ended June 26, 2016, representing decreases of 6.7 percent and 6.1 percent, respectively, over the prior year comparable periods. Approximately 37.0 million actual shares of the company’s common stock were outstanding as of June 26, 2016.

Cash Dividend

We paid a cash dividend of approximately 6.5 million USD (0.175 USD per common share) during the second quarter of 2016. Subsequent to the second quarter, on July 28, 2016, our Board of Directors approved a 14 percent increase in the company’s dividend rate per common share, from 0.70 USD on an annual basis to 0.80 USD on an annual basis, and declared a third quarter dividend of 0.20 USD per common share (approximately 7.4 million USD based on current shareholders of record). The dividend will be paid on August 19, 2016 to shareholders of record as of the close of business on August 8, 2016. The declaration and payment of any future dividends will be at the discretion of our Board of Directors, subject to the company’s financial results, cash requirements, and other factors deemed relevant by our Board of Directors.

2016 Guidance Update

The company provided the following 2016 guidance updates and reaffirmed all other guidance:

	Updated Guidance	Previous Guidance
Diluted earnings per share	2.35 to 2.45 USD	2.30 to 2.40 USD
North America comparable sales	+3.0 to +5.0 percent	+2.0 to +4.0 percent
Capital expenditures	55 to 65 million USD	55 to 60 million USD

.
The earnings guidance presented excludes any potential impact of a re-franchising in 2016 of our corporate owned China market, for which we have previously disclosed our plans to sell, and any related non-operating items.