Papa John’s International’s (PZZA) CEO John Schnatter on Q3 2017 Results – Earnings Call Transcript

Papa John’s International, Inc. (NASDAQ:PZZA)

Q3 2017 Earnings Conference Call

November 1, 2017 10:00 A.M. ET

Executives

Lance Tucker – Chief Financial Officer

John Schnatter – Founder, Chairman and Chief Executive Officer

Steve Ritchie – President and Chief Operating Officer

Brandon Rhoten – Global Chief Marketing Officer

Mike Nettles – Chief Information and Digital Officer and Senior Vice President

Analysts

Will Slabaugh – Stephens, Inc.

Alexander Russell Slagle – Jefferies LLC

Alton Ok. Stump – Longbow Research LLC

Peter Saleh – BTIG LLC

Gregory Robert Badishkanian – Citigroup Global Markets, Inc.

Christopher T. O’Cull – Stifel Financial Corp.

Operator

Good day, women and gents, and welcome to Papa John’s Third Quarter 2017 Conference Call and Webcast. At this time all contributors are in a listen-only mode. [Operator Instructions] Later, we are going to conduct a question-and-answer session and directions will comply with at the moment. As a reminder, as we speak’s convention is being recorded.

I might now wish to introduce your host for as we speak’s convention, Mr. Lance Tucker, Chief Financial Officer. Sir, please go forward.

Lance Tucker

All proper. Thank you, Liz. Good morning. Joining me on the decision as we speak are our Founder, Chairman and CEO, John Schnatter; our President and COO, Steve Ritchie, and different members of our senior administration group. After the monetary replace, John and Steve can have feedback about our enterprise, and the administration group will then be out there for Q&A. Our dialogue as we speak will comprise forward-looking statements, involving dangers that would trigger precise outcomes to vary materially from these statements. Forward-looking statements ought to be thought of along side the cautionary statements in our earnings press launch, and the danger components included in our SEC filings.

Please consult with our earnings launch within the Investor Relations part of our web site for a reconciliation of non-GAAP monetary measures mentioned on this name. Finally, we might ask any media to be in a listen-only mode since that is primarily an investor name. Now, on to a dialogue of our third quarter working outcomes. Diluted EPS within the third quarter was $zero.60, up 5% over the prior 12 months. Third quarter EPS was not materially impacted by the adoption of the brand new stock-based compensation accounting guidelines. Third quarter revenues have been up 2.2%, pushed primarily by larger QCC gross sales from quantity will increase, in addition to elevated international comp gross sales and items.

These will increase have been partially offset by lowered company restaurant gross sales because of the sale of the Phoenix market within the fourth quarter of 2016, which negatively impacted year-over-year revenues by over $eight.5 million. Domestic company-owned margins, restaurant margins somewhat, have been down 1.2% from 2016, primarily as a result of larger supply bills, together with larger non-owned car insurance coverage prices. North America commissary and different margins decreased 1.5%, due primarily to larger working and start-up prices badociated to the opening of our new high quality management middle or QCC in Georgia, which opened within the third quarter.

International margins elevated 2% due primarily to larger comp gross sales and better items. In addition, 2016 outcomes included a one-time cost of $800,00zero badociated to UK head lease preparations. G&A and different bills have been decrease by over $three.2 million, coming in at eight.6% of revenues, a 1% enchancment versus the prior 12 months. The main drivers of this enchancment have been decrease administration incentive prices and decrease restaurant supervisory bonuses. Our efficient tax fee was 26.eight% within the third quarter, down 1.6% from the prior 12 months, due primarily to a discount in required state and native reserves, because the tax matter was favorably resolved.

During the quarter, we closed on a brand new $1 billion debt facility. As of quarter finish, we had drawn the complete proceeds of the $400 million time period mortgage, however had no stability excellent on the brand new $600 million revolver. As a part of the expanded share repurchase authorization introduced final quarter, we repurchased $87.7 million of inventory throughout the third quarter. And as of October 24th, we had remaining share repurchase authorization of over $485 million. The firm expects to implement an accelerated share repurchase program for a portion of the remaining authorization within the fourth quarter, and reaffirms its expectation that the complete remaining authorization will likely be repurchased no later than early to mid-2019.

Our free money circulate, a non-GAAP measure we outline as money circulate from operations much less capital expenditures, was roughly $72 million year-to-date in 2017, and roughly $11 million from 2016 as a result of elevated capital expenditures and unfavorable working capital adjustments. As famous in our press launch, we’re revising the next elements of our beforehand issued 2017 outlook. North America comp gross sales revised to constructive as much as 1.5% from a previous vary of two% to four%; diluted EPS development revised to a variety of three% to 7% from a previous vary of eight% to 12%. There’s been some confusion this morning and final night time with a few of the notes I’ve seen.

So to make clear, the three% to 7% excludes the full-year favorable influence on the tax fee of the brand new stock-based compensation steerage. Through the third quarter, that influence has been roughly $zero.05 of elevated diluted EPS. Debt-to-EBITDA ratio revised to a variety of two.5 instances to three.5 instances at year-end from a variety of 1.5 instances to 2 instances at year-end. Block cheese value per pound revised to the low $1.60s from our prior outlook of the mid-$1.70s. All different outlook objects are reaffirmed. To reiterate what we stated on the prior earnings convention name, we don’t anticipate a big influence on 2017 EPS from the elevated share repurchase authorization given this system’s implementation so late within the 12 months.

Finally, we have acquired a number of inquiries as to once we will announce our 2018 outlook. As has been our historic follow, we are going to give our extra detailed outlook once we launch our fourth quarter ends in late February. To give some colour at a excessive stage, nevertheless, we presently anticipate to make numerous investments behind our operations, advertising and marketing and know-how efforts in badist of the corporate’s long-term development. We anticipate seeing the advantages from these investments in foreseeable future, that a few of the advantages is not going to be speedy. So whereas we aren’t ready to offer ranges or numbers presently, 2018 ought to be seen as a 12 months of investing for the long run somewhat than a 12 months the place EPS development would be the focus.

And with that, I might like to show the decision over to our Founder, Chairman and CEO, John Schnatter. John?

John Schnatter

Hey. Thanks, Lance and good morning, everybody. Thanks for becoming a member of us as we speak as we talk about our third quarter 2017 outcomes. Before I transfer right into a enterprise dialogue, I might wish to briefly communicate to the unprecedented and unpredictable climate we noticed throughout the quarter, together with the devastating influence of Hurricanes Harvey and Irma, earthquake in Mexico, and wildfires in Northern California. Our ideas and prayers are with all of those that have been impacted, and we want them a speedy restoration. While our operations in these markets have been quickly impacted, we’re relieved that each one our group members are protected, accounted for, and are again to work. I want to commend them not just for their efforts to get again up and working, but in addition for his or her contributions to supporting the broader communities of their time of want.

As a company, we partnered with The Salvation Army, J.J. Watt’s Food Relief Fund and the American Red Cross in each Houston and Florida, respectively, to lift $500,00zero in catastrophe aid funds, and feed those that have been displaced with first responders at Papa John’s shelters with our Papa John’s cellular kitchen items. In addition, I might be remiss to not point out how proud we’re of the efforts of a member of our Papa John’s group J.J. Watt and his unbelievable badist of the Houston neighborhood. He raised over $30 million. This effort encapsulates not solely the kind of character-driven athletes we partnered with, but in addition our complete Papa John’s tradition.

And now, onto a dialogue of the enterprise. We proceed to carry out fairly properly relative to our competitors on this difficult and aggressive surroundings, and we’re doing numerous issues proper. The high quality of our pizzas and our service ranges are wonderful, with nice execution from our operators all through our international enterprise. Brandon Rhoten has given his arms round advertising and marketing somewhat shortly in making an incredible influence. And our know-how group lead by Mike Nettles continues to construct and rollout our thrilling new digital options, most not too long ago instantaneous ordering by Facebook. We anticipate to complete up 2017 with 14 consecutive years of constructive North America comp gross sales, and our International enterprise is on monitor to have its highest profitability 12 months in our historical past.

We additionally simply opened a brand new state-of-the-art QCC in Alpharetta, Georgia. This occurred within the third quarter. The new middle will make our operations extra environment friendly within the southeast, our greatest area, and offers a lot wanted redundancy and catastrophe restoration capabilities with 4 of our excellent commissaries. We have been simply on the new middle final week for a board badembly, and [ph] Shane Hutchins and Billy (08:56) simply did a merely spectacular job. Really happy with these guys. As I stated earlier, we’re doing numerous issues proper. But even with all the nice issues taking place at Papa John’s, we all know that we should proceed to take a position and evolve to win on this aggressive .

So as Lance famous, over the following a number of quarters, we will likely be experimenting with numerous new initiatives, and we’ll be making important investments throughout the enterprise that we consider will place us for an additional extended interval of stable, sustained development. Steve provides you with a excessive stage element of what these initiatives might seem like in just some moments.

Now, to the NFL, the NFL is hurting, and extra importantly by not resolving the present debacle to the participant and proprietor’s satisfaction, NFL management has damage Papa John’s shareholders. Let me clarify. The NFL has been an extended and valued accomplice over time, however we’re definitely dissatisfied that the NFL and its management didn’t resolve the continuing state of affairs to the satisfaction of all events way back. This ought to have been nipped within the bud a year-and-a-half in the past. Like many sponsors, we’re in touch with NFL, and as soon as the problem’s resolved between the gamers and the homeowners, we’re optimistic that the NFL’s finest years are forward. For good or dangerous, management begins on the prime, and that is an instance of poor management.

Before I flip it over to Steve, permit me to reiterate the optimism I’ve as we wrap up 2017. The long-term outlook for Papa John’s is robust as ever due to our excellent model positioning, the best high quality product within the enterprise, and devoted groups each in our international eating places and within the United States which are hungry to drive this enterprise ahead.

Our current dedication to repurchase an incremental $500 million of Papa John’s inventory ought to be a transparent indication of how strongly I consider and we consider in the way forward for this enterprise. To conclude, I am energized with all we have now happening within the enterprise, and I am badured this group will proceed to make selections that drive worth and development for Papa John’s model for a few years to return.

With that, I am going to flip it over to Steve.

Steve Ritchie

All proper. Thank you, John, and good morning, everybody. I might like to begin by thanking our franchisees and operators around the globe for his or her continued dedication to executing on our model promise on this difficult and ever-evolving . Our continued success will quickly produce our 14th consecutive 12 months of gross sales development for North America, and our 13th consecutive 12 months of gross sales development for International. We absolutely anticipate many extra years of consecutive annual development to return from each enterprise segments.

Despite all of our success, our mission badertion conjures up us to continually discover new methods to get even higher. Our sturdy model basis and founding ideas would be the platform for a transformational collection of strategic investments that we have now simply began to implement. These important initiatives will capitalize on evolving shopper tendencies, and create sustainable development properly into the long run. After a enterprise replace on our Q3 outcomes, I’ll present commentary on the specifics.

Let’s begin with our sturdy International comps for the quarter of 5.three%. The improved outcomes from Q2 marked our 30th consecutive quarter of constructive comp gross sales development. Sales have been very stable throughout most of our markets with important development skilled within the quarter from China, pushed by additional optimization of our restaurant mannequin, model design enhancements, and elevated integration with third-party aggregators, broadening our accessibility channels.

In the UK, we additionally skilled improved gross sales development from prior quarter, pushed primarily by our enhanced branding efforts with messaging and media distribution in badist of the nationwide launch of our pan pizza. Overall, I am very happy with Jack Swaysland and the complete International group. I firmly consider the long run may be very vivid for the International enterprise.

On the Domestic entrance, we produced comp gross sales development of 1%, marking our 28th consecutive quarter of constructive comp gross sales. We have been happy to supply one more quarter of constructive gross sales, nevertheless, the outcomes have been under our inner expectations.

Multiple components negatively impacted our comps for the quarter, together with the more and more aggressive surroundings, momentary retailer closures from the pure disasters, and one other 12 months of sudden decline in viewership of the NFL, mixed with important damaging shopper sentiment of our affiliation with the league. These NFL challenges have endured into This autumn, and the damaging influence to our projected outcomes has been mirrored into our up to date full 12 months gross sales and earnings steerage.

Now, on to the long run. I might like to offer some colour across the three strategic funding areas that I affectionately consult with in our enterprise because the three-legged stool, as every leg should be equally sturdy and properly balanced to supply sustainable development. Let’s begin with the place the rubber meets the street, operations. Our SVP of North American operations, Edmond Heelan and his group will concentrate on three main areas; tradition, buyer expertise and efficiencies by know-how. We consider persons are precedence all the time at Papa John’s, and we’ll due to this fact enhance our funding in choice instruments and onboarding techniques to boost our expertise and tradition.

We will proceed the growth of our Go Left management improvement program, which continues to indicate nice promise in bettering general management efficiency. These efforts ought to scale back our restaurant stage turnover, enhance worker engagement, and end in improved operational KPIs and buyer expertise. We are persevering with efforts to raised perceive our buyer by advancing badytic instruments, and an enhanced buyer expertise group we name PIE to maintain our eyes on the product, picture and expertise. On picture, we have now not too long ago began the preliminary phases of a retailer redesign initiative to boost the client notion and our group members’ surroundings.

Lastly, an funding into third-party enterprise effectivity advisors, and new kitchen applied sciences to extend store-level productiveness, enhance order accuracy, and improve group members’ experiences, with supply applied sciences to enhance supply drivers’ security and scale back insurance coverage claims.

On the digital know-how entrance, Papa John’s has all the time taken a really proactive and modern method to buyer engagement. Our guiding focus stays on the client and offering them with a greater expertise that unlocks lifetime buyer relationships, will increase model affinity, and affords Papa John’s a sustained, aggressive benefit.

And whereas we have now established a robust management place, we acknowledge that know-how funding cycles have to speed up with a purpose to drive digital improvements and proceed to thrill the client. We have recognized a cohesive customer-centered know-how technique that may proceed to distinguish our model, whereas delivering a greater digital expertise. In 2018, our CIDO, Mike Nettles and his group will likely be making investments to raised serve our digital prospects, participating with them in a extra personalised significant method, now not content material to simply ship a superior digital expertise with our personal web site and cellular channels. We will take the Papa John’s expertise to numerous different non-native channels to interact each present and potential restaurant prospects.

And behind all of this funding will likely be an entire redesign of our complete digital platform and digital options capabilities, leveraging enhanced knowledge badytics and insights to make sure our industry-leading platforms are sustainable, environment friendly and efficient for a few years to return. Our prospects deserve a greater pizza expertise than they’ll get wherever else, and we have now the plan, sources and funding mannequin to ship within the close to future.

The remaining leg of our three-legged stool is our branding. Our CMO, Brandon Rhoten, and his group are working diligently to solidify our development technique by enhancing our model differentiation, worth notion and the general funding method. His group has been working to outline our model character within the articulation of our model voice.

We additionally most not too long ago invested in an attribution instrument to badist us higher perceive what works from a advertising and marketing perspective. All the digital know-how investments I simply outlined will allow us to achieve new prospects and supply one-to-one personalised messaging capabilities. We know it’s vital that we make investments sooner or later advertising and marketing, which for our enterprise, is clearly digital and e-commerce. To that finish, I’m happy that yesterday we introduced through a press launch that we have now chosen a digital-first company of document to deal with all inventive no matter channel. That company is Laundry Service. Laundry Service is ranked on Ad Age 2017 A-List, and has a consumer listing that features progressive entrepreneurs like Apple, Nike and T-Mobile, and can badist us evolve our advertising and marketing in an more and more digital world.

To conclude, I’m very excited in regards to the upcoming investments and initiatives that act upon the voices of each our inner and exterior prospects. There will likely be some transition time for the complete monetary advantages, however the future will quickly be getting even brighter at Papa John’s.

With that, I’ll flip it over to Lance for questions.

Lance Tucker

All proper. Liz, we’re prepared for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first query comes from the road of Will Slabaugh with Stephens. Your line is now open.

Will Slabaugh

Yes. Thanks, guys. I wished to comply with up in your feedback you made a minute in the past across the persistence of a few of the gross sales softness into 4Q. I do know you guys do not give actual quarter-to-date numbers. But I am curious should you speak a bit of bit extra round form of what you’ve got been seeing when it comes to, is it primarily the NFL and that affiliation with the league that you’d say dragging you down now that you just have been by the hurricanes, or is there one thing else going on the market competitively or in any other case that could be softening gross sales little bit?

Steve Ritchie

Sure, Will. It’s Steve. I might say predominantly, sure. The NFL state of affairs has endured within the stress that it is making use of to our gross sales that has bled into the beginning of the fourth quarter. Clearly, we make a large funding within the NFL, as we simply upped our partnership with the NFL final 12 months, we additionally upped our funding ranges, and upped our inventive options that we have been to conform to that. So we anticipated important tailwinds coming from the NFL, coming into the fourth quarter, and what we have skilled is extra headwinds. So we’re principally contribute that into what we have supplied within the steerage on the fourth quarter. Clearly, it’s nonetheless an more and more aggressive surroundings, and we’re rolling over a robust pan launch that launched really on October 10th of final 12 months. So some sturdy issues from a difficult, from a perspective of gross sales from final 12 months, however predominantly, I might say, it is the NFL stress that we anticipate to persist except an answer is put in place.

Will Slabaugh

Understood. And if I might additionally ask you in regards to the tech platform redesign, what ought to we anticipate from a buyer standpoint as that will get redesigned, and the way ought to that each profit the client, how ought to that profit same-store gross sales, and I suppose, how shortly can all this be rolled out to the place we’d see that profit present up within the numbers?

Mike Nettles

Hi, Will. This is Mike Nettles. Great query. And we wish to maintain numerous our strategic innovation plan form of near the vest. So we can’t be speaking a lot about particular options. But I can inform you from a shopper perspective, we’re very properly understanding how a lot they’ve embraced cellular know-how, how a lot that is really impacted our digital combine, and what the variations are in cellular know-how versus possibly extra conventional internet and browser-based know-how. So due to that due to the insights we have been capable of achieve out of that, we’re actually driving the system more durable to connecting to as many different environments and channels the place a shopper would possibly really be serious about meals, serious about meal selections, in order that it makes it easier, quicker, simpler and much more practical for them to have the ability to have interaction our model and order the pizza from us accordingly.

Today, they’ve to leap to considered one of our options. In the long run, as you’ve got seen with Facebook Instant ordering and a number of other different channels which are on the best way, you’ll see the flexibility for them to leap proper into ordering one thing with out having to go away any individual else’s ecosystem. We’re enthusiastic about that, and you will see extra about that coming within the 12 months to return. We’re additionally properly conscious of the efficiency of our techniques, and we’re continually making important investments in bettering the pace and the general accuracy of these techniques all the best way down into operation in order that Edmond and group even have modernized know-how to essentially up our high quality recreation. That’s a giant a part of what makes Papa John’s higher, is the standard of our product, and we would like to have the ability to empower our operations groups with the fitting instruments and applied sciences to ship on that promise accordingly.

Steve Ritchie

And Will, it is Steve. Just a few extra feedback. So clearly, that is a few of the issues I outlined in my ready remarks from an funding standpoint. So we have simply began the preliminary funding phases, and anticipate that that is going to be predominantly form of pushed all through the sum of 2018. We hope to get some profit within the latter a part of 2018, however clearly the predominant quantity of profit is available in 2019 and past.

Will Slabaugh

Understood. Thank you.

Steve Ritchie

Thank you.

Operator: Our subsequent query comes from the road of Alex Slagle with Jefferies. Your line is now open.

Alex Slagle

Hey, guys. Thanks. A follow-up query from Will on the NFL, should you might present any commentary on what you can do in your finish to form of make one of the best of it for the stability of the 12 months.

Steve Ritchie

Sure, Alex. It’s Steve. I am going to begin after which I flip it over to Brandon to form of define a few of the issues we’re doing. So clearly, we have had a longstanding relationship with the NFL, and it is served us fairly properly simply when it comes to the general model consciousness. We’re really the primary acknowledged accomplice with the NFL 2 years working. So we get the profit when issues are going properly. Clearly, we’ll get the draw back implications when issues aren’t going that properly. So we have completed numerous issues to make some adjustments. We’re not going to have the ability to get the complete leverage of the NFL. However, a few of the investments are there. So these are locked. So Brandon has been engaged on numerous issues, and I am going to flip it over to him to form of define right here.

Brandon Rhoten

Yeah. I imply, simply to form of stage up the problem right here, the NFL was eighth of the Top 10 primetime reveals. So it is experiencing a big decline, which is main us to have to have a look at different investments to create that attain and create shopper desire to our model. So we’re experimenting with digital initiatives, for instance, Laundry Service is a wonderful instance of that. We have determined that we’ll transfer ahead to inventive company that is constructed round digital, as a result of we all know on this altering media panorama, we have now to adapt, and we have now been doing that during the last couple of months, studying lots and transferring ahead, badembly companions like Laundry Service, we’ll discover a option to compete.

Alex Slagle

Got it. Thanks. And then, on the third quarter Domestic same-store gross sales, it appears like that 1% comp does embrace the influence of the hurricanes. If you can present any colour on the magnitude of that influence.

Lance Tucker

Yeah. Hi, Alex. It’s Lance. Hurricanes impacted us by lower than 50 foundation factors. So definitely, there was an influence there, however it was lower than zero.5 level. And I do not actually wish to slender it down past that.

Alex Slagle

That’s effective. Okay. And then, the complete 12 months Domestic information, I imply, it does suggest a reasonably wide selection of outcomes for the fourth quarter because it’s written, simply constructive to up 1.5%. But any colour out of your finish on – can that fourth quarter be constructive, or what it should take to simply maintain that constructive?

Steve Ritchie

Sure, Alex. It’s Steve. And this type of goes again to what I had stated earlier than. Right now, the one visibility we have now is that there is not an answer that is been applied for the NFL. So if these points proceed to persist, that is why we have constructed within the backside facet of that steerage all the best way right down to flat. Clearly, if we are able to get an answer shortly applied, that may give us some tailwind profit from the NFL partnership along with all of the adjustments that Brandon and his group are shortly attempting to implement from a modified administration funding standpoint. So there’s some upside potential to get us nearer to the highest finish of the steerage. But we clearly have constructed within the potential to go to the underside finish if a few of these issues should not profitable.

Alex Slagle

Got it. Thank you.

Operator

Our subsequent query comes from the road of Alton Stump with Longbow Research. Your line is now open.

Alton Stump

Yes, thanks and good morning.

Steve Ritchie

Good morning.

Alton Stump

I am certain that is in all probability actually troublesome even for you guys to slice out, in fact, again to the previous once you’ve had an excellent NFL ranking season versus a nasty one. But is there any option to quantify how a lot of an influence you suppose that the NFL viewership points had in your comps both on the finish of 3Q or up to now within the fourth quarter?

Lance Tucker

Alton, it is Lance. I am going to begin with that and let Steve or Brandon leap in if want be. We’re not going to quantify and provides an actual quantity. Obviously, you possibly can inform from the truth that our steerage has modified a bit of bit there within the fourth quarter and been lowered that it is having an influence, however we’re not going to place an actual quantity on it.

Steve Ritchie

Alton, I believe, it’s honest to say that once we reiterated that – reaffirmed the steerage of the two% to four%, once more, the visibility that we had and the expectations that we had was that we have been going to get a big tailwind profit from the NFL coming off a really tough begin in 2016 final 12 months, which, clearly, is the fourth quarter outcomes. So we anticipated, and so did the NFL, anticipated to get elevated viewership and elevated scores, and, frankly, we’re experiencing the alternative. So a few of these issues are components. It’s troublesome to precisely quantify the influence, however we expect it’s the predominant quantity of a few of our gross sales slowdown.

Alton Stump

Thanks. And then, Lance, thanks for the colour on, in fact, taking a look at to the out-year, the early metrics there. Any form of perception that you just’d have the ability to present on the working margin entrance? Of course, you talked about it being an funding 12 months, whether or not or not which means working margins could be down once more subsequent 12 months, or if there’s issues that you are able to do to possibly offset from both a costing saving standpoint, and/or a prime line standpoint to offset the upper spending subsequent 12 months?

Lance Tucker

I imply, we’ll give our full-year outlook in February, so I will keep away from numbers. I believe a few issues, a bit of colour I can provide you, CapEx is unlikely to be considerably completely different than what we see this 12 months. So numerous these investments are going to be on the working facet. We’re nonetheless working by numbers, and we’ll give every thing form of on the finish of February as soon as we have now all of it able to go. But definitely, from an working margin standpoint, that is not one thing I will get into an important deal proper now, aside from to inform you that numerous the investments are in folks, sources, tech platforms, issues which are going to be working by the P&L somewhat than the CapEx facet.

Alton Stump

That’s useful. Thanks. And then if I might simply ask one final housekeeping, and I am going to hop again within the queue, however simply so far as your 31% to 33% full 12 months tax fee steerage, I might badume that that additionally, Lance, doesn’t embrace any profit both year-to-date or probably within the fourth quarter from the brand new [technical difficulty] accounting rule.

Lance Tucker

That’s correct, Alton. So once more, there’s been some confusion on this. I spoke to this in my ready remarks. Overall, for the fourth quarter, we expect the tax fee will seem like form of 31% to 33%. For the complete 12 months although, it is going to be 29% to 30%. So with out the good thing about the inventory comp, it is clearly going to be directionally 1.5% larger, and with it, it should be decrease. So I believe full 12 months, 29% to 30%, little bit larger than that within the fourth quarter.

Alton Stump

Great. Thanks a lot.

Operator

Our subsequent query comes from line of Peter Saleh with BTIG. Your line is now open.

Peter Saleh

Great. Thanks. Hey, I simply wish to come again to the feedback on the aggressive surroundings. And Steve, what are you guys seeing on the aggressive surroundings or what has modified possibly over the previous couple of months? Has something modified or is it extra of the identical?

Steve Ritchie

Yeah, Peter. It’s Steve. I imply, I believe it is remained comparatively constant simply when it comes to the promotional surroundings. I’ll say that we’re monitoring elevated funding from a aggressive standpoint. Our two largest rivals have each elevated their funding, the introduction of a loyalty program by considered one of them, after which doubling down on the advertising and marketing efforts of the loyalty program from the opposite one. So I believe that is remained comparatively constant. So we really feel prefer it has all the time been capable of navigate by that, as I stated, our 14th consecutive 12 months quickly to return from a gross sales development standpoint. We do not anticipate that stopping in 2018. We simply received to seek out the fitting stability.

And as Brandon alluded to, issues are altering, customers’ behaviors are evolving the place they’re absorbing media. So we expect that we have now made an excellent strategic determination with the collection of an agency-like Laundry Service that has received a digital focus. Clearly, we have now introduced on a CMO with a heavy digital skew that understands that shopper and understands that area. So the best way that we market sooner or later will likely be completely different than in the best way we have now marketed traditionally. So I could not be extra excited in regards to the future, however that is what we had spoken to. There goes to be some transition to make a few of these transformational adjustments from a tech and a advertising and marketing standpoint.

Peter Saleh

Great. And then simply again to the NFL commentary, how a lot of your advert that you just spend on the NFL, or in partnership with the NFL, how a lot of that’s locked versus how a lot of that may you shift to different areas and away from the NFL at the very least in the intervening time?

Steve Ritchie

Yeah. Peter, I do not wish to quantify particular numbers, however there’s a portion of some issues that we are able to do some reallocations on. We do spend a big quantity of our media funding in tv. So there have been property that have been already created from a inventive standpoint, and we stopped utilization of these property that have been predominantly centered on selling our affiliation with the league. So these have been extra misplaced . So we have now been working with the NFL. They acknowledged a few of the declines that we’re experiencing, and so they’ve made some offsetting investments to badist us attempt to offset this with some further buys. But we have needed to make incremental investments into different areas, like Brandon had alluded to with the social media companions in direct response and digital buys to attempt to offset. So it is actually form of a wash primarily based on the incremental funding we have needed to make to offset a few of the advantages we get from a discount.

Peter Saleh

Got it. Okay. And then, when it comes to what you are seeing when it comes to the aggressive surroundings and what you are seeing with the NFL, does this variation your posture in any respect on the worth proposition, how aggressive you are keen to be on worth?

Steve Ritchie

Sure, Peter. It’s Steve. And I believe this clbad has all the time been a value-centric clbad. I believe it is all the time going to be putting the fitting stability should you’re talking the worth round value. We have a look at worth on the general equation, and clearly, we have completed numerous badysis. Each 12 months, we do badysis, and we nonetheless are recognized as the best high quality supplier and notion that the Papa John’s model is the supplier of the best high quality product. So we’ll proceed to lean in on that. We will likely be leveraging the stability of how we use value versus the fairness layer of our advertising and marketing method.

That’s why this transitional interval that we’re going into, is how can we leverage these completely different property to have the ability to entice the fitting prospects in a extra personalised method. So as we launched a few of these investments, we expect that there will likely be methods to proceed to be sure that we’re hitting the worth looking for shopper, but in addition looking for the buyer which is the biggest portion of our base, which is a shopper on the lookout for high quality. So I do not suppose it is essentially modified the notion of worth, however definitely the actions strategically and tactically how we implement that will likely be completely different as we transfer into the long run.

Peter Saleh

Great. And then simply my final query, possibly for Lance. I acknowledge you guys are making investments into 2018. But how ought to we be serious about the unit development predominantly on the franchise facet in 2018? Should we anticipate an acceleration in unit development versus this 12 months, or ought to it’s extra of the identical?

Lance Tucker

Peter, I believe that is one thing we’ll give extra steerage to definitely on the finish of February. So I do not wish to get into numerous numbers. It could be form of stunning if it did not enhance a bit of bit on condition that we had a 66-unit closure in India. So we might anticipate the web international quantity, I might anticipate to be up, however we’ll work by every thing and offer you guys numbers on the finish of February. So I do reserve the fitting to return out with one thing that appears a bit of bit completely different then, however that is not the expectation as of as we speak the place we sit.

Steve Ritchie

Sure, Peter. And I am going to simply add that we’re experiencing a few of these challenges, as Lance alluded to, from a closure standpoint. But 2017 is on monitor, it has a possible to be a document 12 months for numerous international new openings, and Tim O’Hern and the remainder of the International ops and North American ops group may be very optimistic on the potential to proceed to drive new unit openings. We know that with a purpose to compete sooner or later we have now to proceed to open items, however we have got to be sure that we open items which have worthwhile backside strains, and driving prime line outcomes. So be ok with the general long-term facet of improvement.

Peter Saleh

All proper. Thank you very a lot.

Steve Ritchie

Thank you.

Operator

Our subsequent query comes from the road of Greg Badishkanian with Citigroup. Your line is now open.

Greg Badishkanian

Great. Thanks. And simply to comply with up on the final query, the franchisee receptivity to opening shops, have you ever seen any change during the last 6 to 12 months in that from that entrance?

Steve Ritchie

Sure Greg. It’s Steve. We actually have not. I imply, new items proceed to be very wholesome. Our pipeline by the tip of this 12 months will likely be proper again at a couple of 1,00zero items within the pipeline. We’re nonetheless seeing about 70% of our new items within the U.S. opening from present franchisees. So we got here off of 2016 being a document 12 months of profitability for our franchisees, and that is normally an excellent indication, a barometer of the place improvement goes to enter the long run. And on the backs internationally of seven new international locations, and it is very a lot within the infancy of these new international locations, however we’re seeing superb indications of long-term success potential in these. And the early years or the outset new items are definitely a lot softer, however we glance to see acceleration within the International entrance as properly.

Lance Tucker

And Steve, if I might add one thing actual fast. This is Lance. The pipeline quantity that Steve referred to, I believe, there’s been some of us that missed the truth that we needed to pull 200 to 300 items out, for India. So once you have a look at the pipeline, and it appears to be like decrease than the place it has been earlier than, do not learn into that, that people aren’t curious about opening items. Read into it the truth that we needed to pull a number of hundred items out for India, which has artificially lowered that quantity for a short lived time.

Greg Badishkanian

Okay. Thanks. And then, you talked about the upper funding by your two fundamental rivals. So is that having an influence on you want third quarter, fourth quarter, is that extra of a possible influence for 2018 and past for a few of these investments? And does that simply imply that you must proceed aggressively in investing, so it is possibly internet constructive for the three mbadive gamers versus the smaller operators that you just compete with? How do these dynamics work?

Steve Ritchie

Sure, Greg. It’s Steve and I am going to begin, and Brandon, if you wish to leap in on this one. So we have all the time been the smaller competitor within the clbad. We opened our first unit in 1984, and the bigger rivals all opened their manufacturers within the late 1950s and early 1960s. So we have all the time been smaller, so we have needed to be sure that each greenback that we make investments is working smarter, or working more durable and smarter for us. So we have been in a position to achieve success with that, Greg. I might say, simply when it comes to the cadence of the quarters or the influence from the incremental funding, it is actually been fairly equal. Continue going again to the late third quarter and fourth quarter, the predominate change in our outcomes is actually primarily impacted by the problem with the NFL that is been completed so properly for us within the final a number of years right here. But when the NFL is declining, you are spending a big quantity of funding all the best way from our native group partnership offers, all the best way as much as the general nationwide partnership effort, has an influence to us. But should you begin to see a problem like that, we have got to determine methods to be inventive and reallocate our investments, which frankly, the timing is nice, with Brandon approaching board. So I am going to let Brandon – I do not know should you’ve received every other feedback you’ll add to that.

Brandon Rhoten

Yeah. I imply, clearly, should you attempt to play the media recreation, and it is only a tonnage effort, when a competitor ups their spend it impacts you. What we’re doing is altering the sport. We’re investing in infrastructure, we’re investing in instruments, we’re investing in company companions. So transferring ahead we do not have to play the media tonnage recreation. We may be smarter as an alternative of spend extra and obtain extra. So the long run is vivid from a standpoint that when these instruments are in place, and as we study, we’re not going to want to compete dollar-for-dollar for TV.

Greg Badishkanian

Okay. And I do know you are not prepared to provide 2018 steerage. But simply, I imply, considering it by, if the NFL was the first contributor to the weak point in 2017, is there something that may result in tender efficiency in 2018, or ought to we form of return to extra normalized same-store gross sales stage? You can speak to it qualitatively if you would like. I do know you could not wish to give particular quantity steerage.

Steve Ritchie

Greg, I am going to begin. I imply, I believe clearly we have needed to react in a short time to the state of affairs with the NFL. So we already had plans locked in in place to leverage the NFL. Now, we have got a while right here to form of work by at the very least from a prime line standpoint, what our roadmap, our calendar appears to be like like, our media allocations, investments, the utilization of a unique company, how we’ll leverage tech and the brand new advertising and marketing investments otherwise. We’re definitely not ready the place we wish to give any form of specifics round gross sales steerage for 2018. But as I stated a number of instances, we anticipate one other 12 months of constructive gross sales in 2018 for each our Domestic and our International enterprise.

GregBadishkanian

All proper. Thank you.

Steve Ritchie

Thank you.

Operator

[Operator Instructions] Our subsequent query comes from the road of Chris O’Cull with Stifel. Your line is now open.

Chris O’Cull

Thanks. Good morning, guys.

Steve Ritchie

Good morning, Chris.

Chris O’Cull

Steve, final 12 months NFL viewership was down fairly a bit, however Papa John’s comps have been up four% to five%. So I am attempting to know why a decline in viewership this 12 months is a a lot greater problem.

Steve Ritchie

It’s good query, Chris. So final 12 months – and I spoke to this only a bit, final 12 months we had deliberate our pan launch, and it really began a bit of bit early on the native stage. In early October, we had a number of check markets that kicked off even within the third quarter. So the mbadive launch of pan and every thing that we put behind that masked a few of the declines that we have been getting from the profit from – the general headwind we have been experiencing from the NFL. So clearly, with many weeks and plenty of video games final 12 months within the fourth quarter being down 20% to upwards to 30%, clearly, we anticipated as we rolled over these video games, we might see a profit. So we did definitely. And we put much more funding into the NFL this 12 months to anticipate that we might get that profit, and rolling over the pan and NFL headwind, and the opposite issues that we had spoken to, is what’s inflicting this problem.

John Schnatter

Chris, that is John. You want to have a look at precisely how the scores are going backwards. Last 12 months, the scores for the NFL went backwards due to the elections. This 12 months, the scores have gone backwards due to the controversy. And so the controversy is polarizing the client, polarizing the nation, and that is the mbadive distinction right here.

Steve Ritchie

No, I believe it is an important level, John. That’s an important level, as a result of I do suppose that the damaging shopper sentiment is having a big effect on our enterprise, as a result of final 12 months, with declining scores, we have been capable of reallocate a few of our investments as we proceed to place extra money into digital. But much less viewership and damaging shopper sentiment is the double-down impact that is having the largest damaging influence. It’s an important level by John.

Chris O’Cull

Do you suppose, or do you may have any proof that the expansion in third-party aggregators has develop into a difficulty?

Steve Ritchie

No. And Chris, we monitor these throughout the nation, and most particularly in our main markets the place they’re predominantly extra penetrated. We’ve not seen any important influence on the enterprise in these markets. There’s a possible for that to have a small influence, which we have taken an method of additionally taking a look at potential partnership alternatives with these aggregators, whether or not that is by leveraging them by further gross sales channel alternatives, or leveraging the bottom of their driver fleet and our driver fleet. So we expect there’s some inventive alternative because the is shifting and shopper behaviors are evolving, that we are able to flip this into a possible tailwind alternative for our model, and mitigate a few of these challenges of share of abdomen alternative.

Chris O’Cull

Do you suppose that the direct partnership, the corporate’s direct partnership with the NFL although, do you suppose it is impacted Papa John’s greater than, possibly, the general section?

Steve Ritchie

I believe, clearly, should you’re the primary acknowledged accomplice with the NFL 2 years working, you are going to have a extra important influence from a partnership affiliation than any of the opposite companions. In addition, lots of the different companions should not in a direct-response enterprise like Papa John’s, a value-centric clbad. So sure, Chris, I might suppose that that is in all probability a driving issue on why it is had such an influence on our enterprise right here within the brief time period.

Chris O’Cull

Okay. And then, Lance, my final query is, what was the influence of the start-up value and inefficiency on the new QCC throughout the quarter? And what do you anticipate, if any, influence you may have or it will have within the fourth and possibly even subsequent 12 months?

Lance Tucker

So an excellent little bit of the margin decline, and I am not giving the precise numbers, however the mbadive majority of the margin decline was from startup prices and transition prices, as a result of it takes some time to transition the eating places from different commissaries into Atlanta – or [indiscernible] (45:22) somewhat. I might anticipate to see it persist a few of the fourth quarter in all probability not fairly as dangerous, after which I believe, once you get into subsequent 12 months, the headwind will likely be largely, if not absolutely, dissipated.

Chris O’Cull

Okay. Great. Thanks.

Steve Ritchie

Thank you, Chris.

Operator

We have a follow-up query from the road of Alton Stump. Your line is now open.

Alton Stump

Yes. Thanks, for getting me again on the decision. Just a fast query to comply with up on Chris requested in regards to the aggregators, and what the influence might or is probably not. How about another gamers like McDonald’s or Panera or [indiscernible] (45:57) rolling out supply and/or elevated off-premise service usually. Is that having any influence from what you possibly can see in numerous markets the place you compete extra head-to-head with these sort of rivals?

Steve Ritchie

No. And Steve once more, I am going to simply reiterate. No, we have not seen any form of materials influence on our general gross sales efficiency in these markets. What I’ll say is, it shouts the significance of constructing certain that we proceed to enhance upon the client expertise. And all of the investments that we’re making in advertising and marketing to be sure that we have got the fitting model messaging, deriving the fitting buyer notion, the investments intact to drive the fitting general expertise within the operations facet to be sure that we’re offering nice product and nice service, and we have to be sure that our differentiation is extra essential than ever as accessibility throughout the area continues to broaden. But we have seen no influence from aggregators or manufacturers which are partnering with these aggregators. However, once more, we’re trying on the similar form of partnership alternatives to complement a few of the efforts that we have now. There’s clearly a novel expertise that you’ve got with the Papa John’s supply driver, however there’s additionally a possibility to broaden that to leverage a few of these aggregators as shopper behaviors proceed to evolve.

Alton Stump

Great. Makes sense. Thank you, Steve.

Steve Ritchie

Thank you, Alton.

Operator

I am not displaying any additional questions presently. I might like to show the decision again to Mr. Tucker for any closing remarks.

Lance Tucker

Thank you, Liz. Thanks once more to all people on the decision to your time, and we will likely be baderting our full 12 months outcomes on the finish of February in 2018. Thank you.

Operator

Ladies and gents, thanks to your participation in as we speak’s convention. This concludes this system, and you could now disconnect. Everyone, have an important.

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