Papa John’s Announces Third 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 nine months ended September 25, 2016. Highlights:

• Third quarter earnings per diluted share of 0.57 USD in 2016, or an increase of 26.7 percent over 2015 third quarter earnings
• System-wide comparable sales increases of 5.5 percent for North America and 7.6 percent for International in the third quarter
• 36 worldwide net unit openings in the third quarter
• Increased 2016 diluted earnings per share guidance to a range of 2.46 to 2.52 USD from the prior range of 2.35 to 2.45 USD

«We are pleased that our strong performance continued in the 3rd quarter, with excellent comp sales, earnings and unit growth», said Papa John’s founder, chairman and CEO John Schnatter. «With continued enhancements to our digital platforms, expansion of our international footprint, and the introduction of our new pan pizza, 2016 is shaping up to be another outstanding year for Papa John’s».

Third quarter 2016 revenues were 422.4 million USD, an 8.5 percent increase from third quarter 2015 revenues of 389.3 million USD. Third quarter 2016 net income was 21.5 million USD, a 19.5 percent increase from third quarter 2015 net income of 18.0 million USD. Third quarter 2016 diluted earnings per share were 0.57 USD, a 26.7 percent increase compared to third quarter 2015 diluted earnings per share of 0.45 USD.

Revenues were 1.27 billion USD for the nine months ended September 25, 2016, a 4.4 percent increase from revenues of 1.22 billion USD for the same period in 2015. Net income was 70.2 million USD for the first nine months of 2016, compared to 51.0 million USD for the same period in 2015. Net income for the first nine months of 2016 increased 19.0 percent, compared to 2015 adjusted net income of 59.0 million USD, which excludes the prior year legal settlement (adjusted), as detailed in the «Item Impacting Comparability Non-GAAP Presentation» table. Diluted earnings per share were 1.86 USD for the first nine months of 2016, compared to 1.27 USD for the same period in 2015 (adjusted diluted earnings per share of 1.47 USD in the same period of 2015, or a 26.5 percent increase).

Global Restaurant and Comparable Sales Information

			Q3/2016			Q3/2015			9M-2016			9M-2015
Global restaurant sales growth (a)			7.6%			3.9%			5.2%			5.9%
Global restaurant sales growth, excluding the impact of foreign currency (a)			8.9%			7.0%			6.8%			8.5%
Comparable sales growth (b)
Domestic company-owned restaurants			6.3%			4.7%			4.2%			6.8%
North America franchised restaurants			5.1%			2.4%			3.0%			4.4%
System-wide North America restaurants			5.5%			3.0%			3.4%			5.0%
System-wide international restaurants			7.6%			8.0%			6.2%			7.5%

(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 and Operating Highlights

All revenue and operating highlights below are compared to the same period of the prior year, unless otherwise noted.

Revenue Highlights: Consolidated revenues increased 33.2 million USD, or 8.5 percent, for the third quarter of 2016 and increased 53.4 million USD, or 4.4 percent, for the nine months ended September 25, 2016. The increases in revenues were primarily due to the following:

• Domestic company-owned restaurant sales increased 19.0 million USD, or 10.5 percent, and 45.7 million USD, or 8.1 percent, for the three and nine months, respectively, primarily due to increases of 6.3 percent and 4.2 percent in comparable sales and increases of 5.1 percent and 4.8 percent in equivalent units, including 20 restaurants acquired from franchisees during the first quarter of 2016.
• Domestic franchise royalties and fees increased approximately 2.5 million USD, or 11.2 percent, and 5.4 million USD, or 7.5 percent, for the three and nine months, respectively, primarily due to increases of 5.1 percent and 3.0 percent in comparable sales and reduced levels of royalty incentives in 2016.
• Domestic commissary and other sales increased 9.7 million USD, or 6.1 percent, and decreased 3.7 million USD, or 0.7 percent, for the three and nine months, respectively. The increase of 9.7 million USD for the three-month period was primarily due to higher commissary sales from an increase in volumes. The decrease of 3.7 million USD for the nine-month period was primarily due to the prior year inclusion of approximately 9.8 million USD of point of sale equipment sales to franchisees which had no significant impact on 2015 operating results. This decrease was partially offset by higher domestic commissary sales volumes.
• International revenues increased approximately 1.9 million USD, or 7.2 percent, and 6.1 million USD, or 7.7 percent, for the three and nine months, respectively, primarily due to the following:
  • International revenues for 2016 include sublease rental revenue in the United Kingdom of approximately 2.2 million USD and 5.6 million USD for the three- and nine-months, respectively, which were shown net of the rental expenses in the prior year.
  • Royalties were higher due to an increase in the number of restaurants and increases in comparable sales of 7.6 percent and 6.2 percent for the three- and nine-month periods, respectively, calculated on a constant dollar basis. Commissary revenues were also higher for the nine-month period due to an increase in the number of restaurants and increases in comparable sales.
  • China Company-owned restaurant revenues were 1.4 million USD and 4.0 million USD lower than the prior year three- and nine-month periods, respectively, primarily due to negative comparable sales and fewer restaurants in 2016.

Foreign currency exchange rates reduced International revenues by approximately 3.7 million USD and 7.7 million USD for the three- and nine-months periods, respectively.

Operating Highlights: The tables below summarize income before income taxes on a reporting segment basis for the three and nine months ended September 25, 2016 and September 27, 2015, and reconcile our GAAP financial results to the adjusted (non-GAAP measure as detailed in the «Item Impacting Comparability Non-GAAP Presentation» table) financial results, excluding the legal settlement in 2015, for the nine months ended September 27, 2015:

(In thousands)

Q3/2016

Q3/2015

Change

Domestic company-owned restaurants

USD

11’576

USD

8’088

USD

3’488

Domestic commissaries

11’311

10’192

1’119

North America franchising

21’856

19’172

2’684

International

3’083

3’184

(101

)

All others

392

(556

)

948

Unallocated corporate expenses

(16’360

)

(13’482

)

(2’878

)

Elimination of intersegment profits

(231

)

(341

)

110

Total income before income taxes

USD

31’627

USD

26’257

USD

5’370

.

Nine Months Ended…

As Reported,

Legal Settlement

Adjusted

Adjusted

(In thousands)

2016-09-25

2015-09-27

Expense

2015-09-27

Change

Domestic company-owned restaurants

USD

47’088

USD

41’185

USD

–

USD

41’185

USD

5’903

Domestic commissaries

34’539

32’694

–

32’694

1’845

North America franchising

67’881

61’545

–

61’545

6’336

International

8’996

6’807

–

6’807

2’189

All others

868

(230

)

–

(230

)

1’098

Unallocated corporate expenses

(49’771

)

(60’636

)

12’278

(48’358

)

(1’413

)

Elimination of inter-segment profits

(1’365

)

(1’141

)

–

(1’141

)

(224

)

Total income before income taxes

USD

108’236

USD

80’224

USD

12’278

USD

92’502

USD

15’734

.
Third quarter 2016 income before income taxes increased approximately 5.4 million USD, or 20.5 percent, compared to the prior year period. The increase of 5.4 million USD was primarily due to the following:

• Domestic company-owned restaurants increased approximately 3.5 million USD primarily due to a 6.3 percent increase in comparable sales, a 5.1 percent increase in equivalent units, and lower commodity costs.
• Domestic commissaries income increased approximately 1.1 million USD primarily due to higher sales volumes.
• North America franchising income increased approximately 2.7 million USD primarily due to higher royalties attributable to the 5.1 percent increase in comparable sales and lower sales and development incentives.
• International income decreased approximately 100’000 USD primarily due to a non-recurring charge of approximately 800’000 USD to record our United Kingdom lease arrangements on a straight line basis. This decrease was substantially offset by higher royalties from an increase in the number of restaurants and an increase in comparable sales. Foreign currency exchange rates also had a negative impact of approximately 400’000 USD, which was primarily attributable to the United Kingdom.
• All others income increased approximately 900’000 USD primarily due to improved operating results in our online and mobile ordering business and our print and promotions subsidiary.
• Unallocated corporate expenses increased approximately 2.9 million USD primarily due to increases in management incentive costs from higher annual operating results and higher interest costs due to an increase in outstanding debt.

Income before income taxes increased 28.0 million USD for the nine month period ended September 25, 2016, compared to the prior year period and increased 15.7 million USD, or 17.0 percent, compared to the adjusted 2015 income before income taxes. The increase of 15.7 million USD was primarily due to the same reasons noted for the three-month period, except as follows:

• International income increased approximately 2.2 million USD primarily due to higher royalties and commissary revenues primarily due to an increase in units and higher comparable sales and lower advertising spending. These increases were partially offset by the previously mentioned charge of 800’000 USD for our United Kingdom lease arrangements. Foreign currency exchange rates had a negative impact of approximately 1.7 million USD.

The effective income tax rates were 28.4 percent and 30.9 percent for the three and nine months ended September 25, 2016, representing increases of 0.7 percent and 0.3 percent for the three- and nine-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 nine months of 2016 and 2015, was as follows (in thousands):

			9M-2016					9M-2015
Net cash provided by operating activities (a)			USD	115’982				USD	119’738
Purchases of property and equipment (b)				(38’954	)				(26’508	)
Free cash flow			USD	77’028				USD	93’230

(a): The decrease of approximately 3.8 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 other unfavorable changes in working capital items, partially offset by higher net income.
(b): The increase of 12.4 million USD was primarily due to new restaurant builds, initiatives in our online and mobile ordering business, and construction costs for our new domestic commissary in Georgia, which is expected to open in 2017.

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 nine months ended September 25, 2016.

Global Restaurant Unit Data: At September 25, 2016, there were 4’971 Papa John’s restaurants operating in all 50 states and in 44 international countries and territories, as follows:

			Domestic Company- owned				Franchised North America				Total North America				International				System-wide
Third Quarter
Beginning – June 26, 2016			734				2’668				3’402				1’533				4’935
Opened			3				25				28				47				75
Closed			(1	)			(18	)			(19	)			(20	)			(39	)
Ending – September 25, 2016			736				2’675				3’411				1’560				4’971
Year-to-date
Beginning – December 27, 2015			707				2’681				3’388				1’505				4’893
Opened			10				66				76				117				193
Closed			(1	)			(52	)			(53	)			(62	)			(115	)
Acquired (divested)			20				(20	)			–				–				–
Ending – September 25, 2016			736				2’675				3’411				1’560				4’971
Unit growth (decline)			29				(6	)			23				55				78
% increase (decrease)			4.1	%			(0.2	%)			0.7	%			3.7	%			1.6	%

.
Our development pipeline as of September 25, 2016 included approximately 1’400 restaurants (220 units in North America and 1’180 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 nine months ended September 25, 2016 and September 27, 2015:

(In thousands, except per share amounts)			9M-2016				9M-2015
Income before income taxes, as reported			USD	108’236			USD	80’224
Legal settlement expense				–				12’278
Income before income taxes, as adjusted			USD	108’236			USD	92’502
Net income, as reported			USD	70’190			USD	50’987
Legal settlement expense				–				7’986
Net income, as adjusted			USD	70’190			USD	58’973
Diluted earnings per share, as reported			USD	1.86			USD	1.27
Legal settlement expense				–				0.20
Diluted earnings per share, as adjusted			USD	1.86			USD	1.47

.
The 2015 legal settlement expense represents a pre-tax expense of 12.3 million USD for a collective and class action litigation, Perrin versus 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 nine months ended September 25, 2016 and subsequent repurchases through October 25, 2016 (in thousands):

Period			Number of Shares			Cost
Three Months Ended September 25, 2016			180			USD	13’052
Nine Months Ended September 25, 2016			1’987			USD	109’407
September 26, 2016 through October 25, 2016			56			USD	4’377

.
There were 37.4 million and 37.7 million diluted weighted average shares outstanding for the three and nine months ended September 25, 2016, representing decreases of 6.4 percent and 6.2 percent, respectively, over the prior year comparable periods. Approximately 36.9 million actual shares of the company’s common stock were outstanding as of September 25, 2016.

2016 Guidance

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

			Updated Guidance			Previous Guidance
Diluted earnings per share*			2.46 USD to 2.52 USD			2.35 USD to 2.45 USD

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