Papa John's Announces Third Quarter 2012 Results

EPS Increased 25.0% on Comparable Sales Increases of 2.5% for North America and 6.9% for International

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and nine months ended September 23, 2012.

Highlights

Third quarter earnings per diluted share of $0.55 in 2012, an increase of 25.0% over earnings per diluted share of $0.44 in 2011
56 global net restaurant openings during the quarter
2012 earnings guidance raised to a range of $2.53 to $2.63; comparable sales guidance raised for both North America (updated guidance range of +3.0% to +4.0%) and International (updated guidance range of +6.0% to +7.0%)

"During the third quarter, we achieved a significant milestone with the opening of our 4,000th restaurant," said Papa John's founder, chairman, and chief executive officer, John Schnatter. "Consumers and franchisees continue to put a premium on quality and that's where Papa John's wins. This translates into both strong global development and solid comparable sales results."

Third quarter 2012 revenues were $325.5 million, a 6.5% increase from third quarter 2011 revenues of $305.7 million. Third quarter 2012 net income was $13.2 million compared to third quarter 2011 net income of $11.1 million. Third quarter 2012 diluted earnings per share were $0.55, compared to third quarter 2011 diluted earnings per share of $0.44.

Revenues were $975.4 million for the nine months ended September 23, 2012, a 7.0% increase from revenues of $911.7 million for the same period in 2011. Net income was $44.7 million for the nine months ended September 23, 2012 ($46.8 million excluding the $2.1 million Incentive Contribution discussed later in this press release), compared to net income of $39.7 million for the same period in 2011. Diluted earnings per share were $1.85 for the nine months ended September 23, 2012 ($1.94 excluding the Incentive Contribution), compared to $1.55 in the prior year.

Global Restaurant and Comparable Sales Information

	Three Months Ended				Nine Months Ended
	Sept. 23, 2012		Sept. 25, 2011		Sept. 23, 2012		Sept. 25, 2011

Global restaurant sales growth (a)	7.1	%	8.3	%	7.6	%	8.3	%

Global restaurant sales growth, excluding the impact of foreign currency (a)	7.4	%	7.6	%	8.0	%	7.7	%

Comparable sales growth (b)
Domestic company-owned restaurants	5.0	%	6.3	%	5.1	%	5.0	%
North America franchised restaurants	1.7	%	4.9	%	2.4	%	3.6	%
System-wide North America restaurants	2.5	%	5.3	%	3.0	%	3.9	%

System-wide international restaurants	6.9	%	4.7	%	7.1	%	5.0	%

(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.

Management believes global restaurant and comparable sales 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 information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

Revenues

Consolidated revenues increased $19.8 million, or 6.5%, for the third quarter of 2012 and increased $63.7 million, or 7.0%, for the nine months ended September 23, 2012 compared to the same periods in the prior year. The increases in revenues were primarily due to the following:

Domestic company-owned restaurant sales increased $14.5 million, or 11.3%, and $35.5 million, or 9.0%, for the three and nine months ended September 23, 2012, respectively, due to increases in comparable sales of 5.0% and 5.1% and the net acquisition of 50 restaurants in the Denver and Minneapolis markets from a franchisee in the second quarter of 2012.
North America franchise royalty revenue increased approximately $800,000, or 4.5%, and $2.6 million, or 4.7%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in comparable sales of 1.7% and 2.4% and increases in net franchise restaurants over the prior year. Royalty revenue increases were slightly offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above.
Domestic commissary sales increased $1.8 million, or 1.4%, and $17.3 million, or 4.6%, for the three and nine months ended September 23, 2012, respectively, primarily due to higher commissary product volumes resulting from increases in the volume of restaurant sales, partially offset by lower revenues due to lower commodity costs.
International revenues increased $2.5 million, or 16.2%, and increased $9.7 million, or 22.8%, for the three and nine months ended September 23, 2012, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.9% and 7.1%, calculated on a constant dollar basis.

Operating Highlights

All comparisons below are versus the same period of the prior year unless otherwise noted and exclude the Incentive Contribution. See "Marketing Incentive Contribution" below for further information.

Third quarter 2012 income before income taxes was $21.1 million, compared to $16.8 million, or a 25.0% increase. Income before income taxes was $72.4 million for the nine months ended September 23, 2012, compared to $62.7 million, or a 15.5% increase.

Income before income taxes is summarized in the following table on a reporting segment basis (in thousands):

	Three Months Ended									Nine Months Ended
	Sept. 23,			Sept. 25,			Increase			Sept. 23,			Sept. 25,			Increase
	2012			2011			(Decrease)			2012			2011			(Decrease)

Domestic company-owned restaurants (a)	$	5,549		$	4,273		$	1,276		$	27,228		$	22,577		$	4,651
Domestic commissaries		6,846			7,237			(391	)		25,990			21,112			4,878
North America franchising		16,070			15,941			129			50,829			50,190			639
International		625			249			376			1,217			(817	)		2,034
All others		732			(66	)		798			1,598			(742	)		2,340
Unallocated corporate expenses (b)		(9,007	)		(11,085	)		2,078			(34,198	)		(29,371	)		(4,827	)
Elimination of intersegment losses (profits)		242			297			(55	)		(229	)		(256	)		27
Income before income taxes		21,057			16,846			4,211			72,435			62,693			9,742
Incentive Contribution (income) expense		(250	)		-			(250	)		3,221			-			3,221
Income before income taxes, excluding Incentive Contribution	$	20,807		$	16,846		$	3,961		$	75,656		$	62,693		$	12,963

(a) The nine months ended September 23, 2012 includes the benefit of a $1.0 million advertising credit from the Papa John's Marketing Fund related to the Incentive Contribution.

(b) Includes the impact of the Incentive Contribution in 2012 ($250,000 increase for the three-month period and a $4.3 million reduction for the nine-month period).

The increase in income before income taxes for the three months ended September 23, 2012, of $4.0 million is primarily due to the following:

Domestic company-owned restaurants income improved approximately $1.3 million primarily due to comparable sales increases as well as favorable commodity costs.
North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
All others improved approximately $800,000 primarily due to an improvement in our eCommerce operations due to higher online sales.
Unallocated corporate expenses decreased due to the prior year including higher franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom, partially offset by higher legal and insurance costs.
These increases were partially offset by a decrease in Domestic commissaries operating results of approximately $400,000. The decrease was due to lower margins resulting from lower prices charged to restaurants, slightly offset by increased profits from higher restaurant sales.

The increase in income before income taxes for the nine months ended September 23, 2012, of $13.0 million is primarily due to the following:

Domestic company-owned restaurants operating income improved approximately $4.7 million primarily due to comparable sales increases as well as favorable commodity costs.
Domestic commissaries income improved approximately $4.9 million primarily due to the increase in net restaurants and comparable sales.
North America Franchising and International improved due to the previously mentioned increase in net restaurants and strong comparable sales results.
All others improved approximately $2.3 million primarily due to an improvement in our eCommerce operations due to higher online sales.
These increases were slightly offset by higher unallocated corporate expenses primarily due to an increase in short-term management incentives, legal and insurance costs and higher costs related to our operators' conference, partially offset by the prior year including franchise incentives and a charge of approximately $800,000 related to lease obligations associated with our former Perfect Pizza operations in the United Kingdom.

The effective tax rates were 33.8% for both the three and nine months ended September 23, 2012, representing increases of 4.7% and 1.7% from the prior year rates. Our effective income tax rate may fluctuate from quarter to quarter for various reasons, including the settlement or resolution of specific federal and state issues. The prior year included significant favorable tax resolution items.

The company's free cash flow for the first nine months of 2012 and 2011 was as follows (in thousands):

	Sept. 23,			Sept. 25,
	2012			2011

Net cash provided by operating activities*	$	94,773		$	87,216
Purchase of property and equipment		(26,425	)		(20,647	)
Free cash flow	$	68,348		$	66,569

*The increase in net cash provided by operating activities is primarily due to higher operating income and favorable changes in working capital.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less 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 accounting principles generally accepted in the United States ("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 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 for additional information concerning our operating results and cash flow for the three- and nine-month periods ended September 23, 2012.

Global Restaurant Unit Data

At September 23, 2012, there were 4,029 Papa John's restaurants operating in all 50 states and in 34 countries, as follows:

	Domestic Company- owned		Franchised North America		Total North America		International		System-wide
Third Quarter
Beginning - June 24, 2012	643		2,475		3,118		855		3,973
Opened	2		45		47		28		75
Closed	-		(9	)	(9	)	(10	)	(19	)
Acquired	1		3		4		-		4
Divested	(3	)	(1	)	(4	)	-		(4	)
Ending - September 23, 2012	643		2,513		3,156		873		4,029

Year-to-date
Beginning - December 25, 2011	598		2,463		3,061		822		3,883
Opened	2		127		129		83		212
Closed	(3	)	(31	)	(34	)	(32	)	(66	)
Acquired	57		11		68		-		68
Divested	(11	)	(57	)	(68	)	-		(68	)
Ending - September 23, 2012	643		2,513		3,156		873		4,029

Restaurants at September 25, 2011	597		2,413		3,010		770		3,780

Year-over-year restaurant unit growth	46		100		146		103		249

% increase	7.7	%	4.1	%	4.9	%	13.4	%	6.6	%

Our development pipeline as of September 23, 2012 included approximately 1,500 restaurants (300 restaurants in North America and 1,200 restaurants internationally), the majority of which are scheduled to open over the next six years.

Marketing Incentive Contribution

As previously announced, in connection with a new multi-year supplier agreement, the company received a $5.0 million supplier marketing payment in the first quarter of 2012. The company is recognizing the supplier marketing payment evenly as income over the five-year term of the agreement ($250,000 per quarter). The company then contributed the supplier marketing payment to the Papa John's Marketing Fund ("PJMF"), an unconsolidated, non-profit corporation, for the benefit of domestic restaurants. The company's contribution to PJMF was fully expensed in the first quarter of 2012.

PJMF elected to distribute the $5.0 million supplier marketing payment to the domestic system as advertising credits in the first quarter of 2012. Our domestic company-owned restaurants' portion of the adverting credits resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter.

The overall impact of the two transactions described above, which are collectively defined as the "Incentive Contribution," increased income before income taxes $250,000 in the third quarter of 2012 and reduced income before income taxes by approximately $3.2 million for the nine-month period, as outlined in the table below. The impact for full-year 2012 will be a reduction to income before income taxes of approximately $3.0 million (diluted earnings per share reduction of $0.08).

The following table reconciles our GAAP financial results to the adjusted financial results, excluding the impact of the Incentive Contribution, for the three and nine months ended September 23, 2012:

	Three Months Ended					Nine Months Ended
	Sept. 23,			Sept. 25,		Sept. 23,		Sept. 25,
(In thousands, except per share amounts)	2012			2011		2012		2011

Income before income taxes, as reported	$	21,057		$	16,846	$	72,435	$	62,693
Incentive Contribution		(250	)		-		3,221		-
Income before income taxes, excluding Incentive Contribution	$	20,807		$	16,846	$	75,656	$	62,693

Net income, as reported	$	13,151		$	11,123	$	44,664	$	39,674
Incentive Contribution		(159	)		-		2,116		-
Net income, excluding Incentive Contribution	$	12,992		$	11,123	$	46,780	$	39,674

Earnings per diluted share, as reported	$	0.55		$	0.44	$	1.85	$	1.55
Incentive Contribution		-			-		0.09		-
Earnings per diluted share, excluding Incentive Contribution	$	0.55		$	0.44	$	1.94	$	1.55

The non-GAAP measures shown above, which exclude the Incentive Contribution, should not be construed as a substitute for or a better indicator of the company's performance than the company's GAAP measures. Management believes presenting the financial information excluding the impact of the Incentive Contribution is important for purposes of comparison to prior year results. In addition, management uses these non-GAAP measures to allocate resources, and analyze trends and underlying operating performance. Annual cash bonuses, and certain long-term incentive programs for various levels of management, are based on financial measures that exclude the Incentive Contribution.

Share Repurchase Activity

The company repurchased 515,000 shares of its common stock for $25.4 million during the three months ended September 23, 2012 and repurchased 1.5 million shares for $64.1 million during the nine months ended September 23, 2012. Subsequent to quarter-end through October 24, 2012, the company repurchased 107,000 shares for $5.6 million. Approximately $51.8 million remains available under the company's share repurchase program.

There were 23.7 million and 24.1 million diluted weighted average shares outstanding for the three- and nine-month periods, representing decreases of 5.7% and 5.6% over the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.10 for the three- and nine-month periods, respectively, due to the reductions in shares outstanding, primarily resulting from the share repurchase program. Approximately 23.1 million actual shares of the company's common stock were outstanding as of September 23, 2012.

2012 Guidance Update

The company provided the following 2012 guidance updates:

	Updated Guidance	Previous Guidance

Diluted earnings per share (a)	$2.53 to $2.63	$2.45 to $2.55

North America comparable sales	+3.0% to +4.0%	+2.0% to +3.0%

International comparable sales	+6.0% to +7.0%	+4.0% to +5.5%

Capital expenditures	$43 to $48 million	$47 to $52 million


Worldwide net unit openings	240-280	240-280
North America	125-145	110-130
International	115-135	130-150

(a) The 2012 fiscal year will consist of 53 weeks. The impact of the 53^rd week of operations is expected to increase earnings per share by approximately $0.08 to $0.10, substantially offsetting the decrease in 2012 from the Incentive Contribution.

All other guidance remains unchanged.

The company will be announcing key operating assumptions and earnings guidance for 2013 in conjunction with its fourth quarter and full year 2012 earnings press release to be issued in late February 2013.

Conference Call

A conference call is scheduled for November 1, 2012 at 10:00 a.m. Eastern Time to review our third quarter 2012 earnings results. The call can be accessed from the company's web page at www.papajohns.com in a listen-only mode, or dial 877-312-8816 (U.S. and Canada) or 253-237-1189 (international). The conference call will be available for replay, including by downloadable podcast, through November 7, 2012. The replay can be accessed from the company's web site at www.papajohns.com or by dialing 855-859-2056 (U.S. and Canada) or 404-537-3406 (international). The Conference ID is 68145839.

Forward-Looking Statements

Certain matters discussed in this press release and other company communications constitute forward-looking statements within the meaning of the federal securities laws. Generally, the use of words such as "expect," "estimate," "believe," "anticipate," "will," "forecast," "plan," "project," or similar words identify forward-looking statements that we intend to be included within the safe harbor protections provided by the federal securities laws. Such statements may relate to projections concerning business performance, revenue, earnings, contingent liabilities, commodity costs, margins, unit growth, and other financial and operational measures. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, actual outcomes and results may differ materially from those matters expressed or implied in such forward-looking statements.

The risks, uncertainties and assumptions that are involved in our forward-looking statements include, but are not limited to: aggressive changes in pricing or other marketing or promotional strategies by competitors which may adversely affect sales, including an increase in or continuation of the aggressive pricing and promotional environment; new product and concept developments by food industry competitors; increases in or sustained high costs of food ingredients and other commodities, paper, utilities and fuel, including increases related to drought conditions; the ability of the company and its franchisees to meet planned growth targets and operate new and existing restaurants profitably, which could be impacted by challenges securing financing, finding suitable store locations or securing required domestic or foreign government permits and approvals; our ability to successfully integrate the operations of franchised restaurants we acquire; the credit performance of our franchise loan program; adverse macroeconomic or business conditions; general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits; changes in consumer preferences; increased employee compensation, benefits, insurance and similar costs (including the implementation of federal health care legislation); the ability of the company to pass along increases in or sustained high costs to franchisees or consumers; the impact of current or future legal claims and current or proposed legislation impacting our business; the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants; currency exchange and interest rates; credit risk associated with parties to leases of restaurants and commissaries, including those Perfect Pizza locations formerly operated by us, for which we remain contractually liable; risks associated with security breaches, including theft of company and customer information; and increased risks associated with our international operations, including economic and political conditions in our international markets and difficulty in meeting planned sales targets and new store growth for our international operations. These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" of the Annual Report on Form 10-K for the fiscal year ended December 25, 2011. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise.

For more information about the company, please visit www.papajohns.com.



Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Income


			Three Months Ended						Nine Months Ended
			September 23, 2012			September 25, 2011			September 23, 2012			September 25, 2011
(In thousands, except per share amounts)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
	North America:
		Domestic Company-owned restaurant sales	$	143,299		$	128,787		$	430,641		$	395,099
		Franchise royalties		18,777			17,967			58,396			55,801
		Franchise and development fees		160			155			588			464
		Domestic commissary sales		132,666			130,870			396,869			379,569
		Other sales		12,581			12,368			36,610			38,185
	International:
		Royalties and franchise and development fees		4,582			4,054			13,769			11,865
		Restaurant and commissary sales		13,449			11,467			38,496			30,686
Total revenues				325,514			305,668			975,369			911,669

Costs and expenses:
	Domestic Company-owned restaurant expenses:
		Cost of sales		34,054			32,229			99,391			94,491
		Salaries and benefits		39,587			35,012			118,239			107,028
		Advertising and related costs		13,920			11,790			39,897			36,477
		Occupancy costs		9,185			8,496			25,702			24,304
		Other operating expenses		21,490			18,858			62,738			57,265
	Total domestic Company-owned restaurant expenses			118,236			106,385			345,967			319,565

	Domestic commissary and other expenses:
		Cost of sales		111,114			110,387			328,364			320,359
		Salaries and benefits		9,654			8,840			27,875			26,502
		Other operating expenses		14,082			13,381			41,886			40,050
	Total domestic commissary and other expenses			134,850			132,608			398,125			386,911

International operating expenses				11,394			9,634			32,761			26,118
General and administrative expenses				30,426			27,332			93,485			84,023
Other general expenses				1,211			4,777			8,020			7,017
Depreciation and amortization				8,192			7,974			24,223			24,711
Total costs and expenses				304,309			288,710			902,581			848,345

Operating income				21,205			16,958			72,788			63,324
Net interest expense				(148	)		(112	)		(353	)		(631	)
Income before income taxes				21,057			16,846			72,435			62,693
Income tax expense				7,112			4,906			24,479			20,151
Net income, including noncontrolling interests				13,945			11,940			47,956			42,542
Net income attributable to noncontrolling interests				(794	)		(817	)		(3,292	)		(2,868	)
Net income, net of noncontrolling interests			$	13,151		$	11,123		$	44,664		$	39,674

Basic earnings per common share			$	0.57		$	0.45		$	1.89		$	1.57
Earnings per common share - assuming dilution			$	0.55		$	0.44		$	1.85		$	1.55

Basic weighted average shares outstanding				23,268			24,964			23,685			25,302
Diluted weighted average shares outstanding				23,721			25,146			24,107			25,528



Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets


	September 23,		December 25,
	2012		2011
(In thousands)	(Unaudited)		(Note)

Assets
Current assets:
Cash and cash equivalents	$	25,353	$	18,942
Accounts receivable, net		33,072		28,169
Notes receivable, net		4,245		4,221
Inventories		21,419		20,091
Prepaid expenses and other current assets		13,172		15,765
Deferred income taxes		8,409		7,636
Total current assets		105,670		94,824

Property and equipment, net		185,596		181,910
Notes receivable, less current portion, net		12,757		11,502
Goodwill		78,971		75,085
Other assets		29,485		27,061
Total assets	$	412,479	$	390,382


Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	34,072	$	32,966
Income and other taxes payable		10,217		3,969
Accrued expenses and other current liabilities		53,026		44,198
Total current liabilities		97,315		81,133

Deferred revenue		8,019		4,780
Long-term debt		50,000		51,489
Other long-term liabilities		24,611		22,014
Long-term accrued income taxes		4,220		3,597
Deferred income taxes		10,508		9,147
Total liabilities		194,673		172,160

Total stockholders' equity		217,806		218,222
Total liabilities and stockholders' equity	$	412,479	$	390,382

Note: The balance sheet at December 25, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements.



Papa John's International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

	Nine Months Ended
(In thousands)	September 23, 2012			September 25, 2011
	(Unaudited)			(Unaudited)

Operating activities
Net income, including noncontrolling interests	$	47,956		$	42,542
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable		1,250			882
Depreciation and amortization		24,223			24,711
Deferred income taxes		647			5,219
Stock-based compensation expense		4,932			5,266
Excess tax benefit on equity awards		(1,717	)		(576	)
Other		3,789			1,272
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(6,018	)		(3,071	)
Inventories		(1,188	)		201
Prepaid expenses and other current assets		3,138			4,102
Other assets and liabilities		(1,463	)		1,000
Accounts payable		1,106			3,896
Income and other taxes payable		6,248			3,023
Accrued expenses and other current liabilities		7,258			(228	)
Long-term accrued income taxes		623			55
Deferred revenue		3,989			(1,078	)
Net cash provided by operating activities		94,773			87,216

Investing activities
Purchase of property and equipment		(26,425	)		(20,647	)
Loans issued		(3,951	)		(2,598	)
Repayments of loans issued		2,620			4,542
Acquisitions, net of cash acquired		(6,175	)		-
Proceeds from divestitures of restaurants		1,068			-
Other		4			62
Net cash used in investing activities		(32,859	)		(18,641	)

Financing activities
Net repayments on line of credit facility		(1,489	)		(49,000	)
Excess tax benefit on equity awards		1,717			576
Tax payments for restricted stock		(846	)		(1,041	)
Proceeds from exercise of stock options		11,399			10,981
Acquisition of Company common stock		(64,146	)		(49,579	)
Distributions to noncontrolling interests		(2,431	)		(3,129	)
Other		174			97
Net cash used in financing activities		(55,622	)		(91,095	)

Effect of exchange rate changes on cash and cash equivalents		119			67
Change in cash and cash equivalents		6,411			(22,453	)
Cash and cash equivalents at beginning of period		18,942			47,829

Cash and cash equivalents at end of period	$	25,353		$	25,376

Papa John's International, Inc.
Lance Tucker, Chief Financial Officer, 502-261-4218

Source: Papa John's International, Inc.

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