Papa John's Announces Second Quarter 2013 Results

EPS Increased 30.5% on Strong Comparable Sales; Board Approves Quarterly Dividend

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the three and six months ended June 30, 2013.

Highlights

• Second quarter diluted earnings per share of $0.77 in 2013 compared to $0.59 in 2012
• System-wide comparable sales increases of 3.4% for North America and 6.8% for international during the quarter
• 1,000th international restaurant opening; 55 worldwide net unit openings during the quarter
• 2013 earnings guidance updated to a range of $2.92 to $3.00 per diluted share, from prior guidance of $2.90 to $3.00 per diluted share
• Board declares regular quarterly cash dividend of $0.25 per share and increases share repurchase authorization

"Our commitment to delivering a quality product around the globe continues to pay off, with excellent financial performance, a top ranking by the prestigious American Customer Satisfaction Index for the 12th time in 14 years, and the milestone opening of the 1,000^th international Papa John's restaurant," said Papa John's Founder, Chairman and Chief Executive Officer John Schnatter. "I am also pleased to announce a quarterly dividend. The combination of share repurchases and quarterly dividends reflects the strength of our brand and our long term commitment to deliver increasing shareholder value."

Second quarter 2013 revenues were $349.2 million, a 9.6% increase from second quarter 2012 revenues of $318.6 million. Second quarter 2013 net income was $17.2 million, compared to second quarter 2012 net income of $14.3 million ($17.0 million and $14.1 million, for the second quarter of 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Second quarter 2013 diluted earnings per share were $0.77 compared to second quarter 2012 diluted earnings per share of $0.59 ($0.76 for the second quarter of 2013 and $0.59 for the second quarter of 2012, excluding the impact of the 2012 Incentive Contribution).

Revenues were $704.8 million for the six months ended June 30, 2013, an 8.5% increase from revenues of $649.9 million for the same period in 2012. Net income was $36.5 million for the six months ended June 30, 2013, compared to $31.3 million for the same period in 2012 ($36.1 million and $33.5 million, for the six-month periods in 2013 and 2012, respectively, excluding the impact of the previously disclosed 2012 Incentive Contribution). Diluted earnings per share were $1.62 for the six months ended June 30, 2013, compared to $1.29 for the same period in 2012 ($1.60 and $1.38, for the six-month periods in 2013 and 2012, respectively, excluding the impact of the 2012 Incentive Contribution).

Global Restaurant and Comparable Sales Information

		Three Months Ended						Six Months Ended
		June 30, 2013			June 24, 2012			June 30, 2013			June 24, 2012
Global restaurant sales growth (a)		7.2	%		9.8	%		6.6	%		7.9	%
Global restaurant sales growth, excluding the impact of foreign currency (a)		7.6	%		10.4	%		7.0	%		8.3	%
Comparable sales growth (b)
Domestic company-owned restaurants		6.0	%		7.4	%		4.9	%		5.1	%
North America franchised restaurants		2.6	%		5.1	%		1.7	%		2.7	%
System-wide North America restaurants		3.4	%		5.7	%		2.5	%		3.3	%
System-wide international restaurants		6.8	%		6.1	%		7.5	%		7.2	%
(a) Includes both company-owned and franchised restaurant sales.
(b) Represents the change in year-over-year sales for the same base of restaurants for the same fiscal periods. Comparable sales results for restaurants operating outside of the United States are reported on a constant dollar basis, which excludes the impact of foreign currency conversion.

Management believes 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. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

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

Revenues

Consolidated revenues increased $30.6 million, or 9.6%, for the second quarter of 2013 and increased $54.9 million, or 8.5%, for the six months ended June 30, 2013. The increases in revenues were primarily due to the following:

• Domestic company-owned restaurant sales increased $11.6 million, or 8.1%, and $25.7 million, or 8.9%, for the three and six months, respectively, primarily due to increases in comparable sales of 6.0% and 4.9% 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 $1.1 million, or 5.9%, and $1.3 million, or 3.4%, for the three and six months, respectively, primarily due to increases in comparable sales of 2.6% and 1.7% and increases in net franchise units over the prior year. These increases were partially offset by reduced royalties attributable to the company's net acquisition of the 50 restaurants noted above.
• Domestic commissary sales increased $13.4 million, or 10.6%, and $19.7 million, or 7.5%, for the three and six months, respectively, primarily due to increases in sales volumes as well as increases in the prices of commodities.
• International revenues increased $3.8 million, or 21.6%, and $6.8 million, or 19.9%, for the three and six months, respectively, primarily due to increases in the number of restaurants and increases in comparable sales of 6.8% and 7.5%, calculated on a constant dollar basis.

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis, excluding the Incentive Contribution:

		Three Months Ended												Six Months Ended
		June 30,				June 24,				Increase				June 30,				June 24,				Increase
(In thousands)		2013				2012				(Decrease)				2013				2012				(Decrease)
Domestic company-owned restaurants		$	8,175			$	9,358			$	(1,183	)		$	19,131			$	21,679			$	(2,548	)
Less: Incentive Contribution (a)			-				-				-				-				1,029				(1,029	)
Domestic company-owned restaurants, excluding Incentive Contribution			8,175				9,358				(1,183	)			19,131				20,650				(1,519	)
Domestic commissaries			9,642				7,978				1,664				19,805				19,144				661
North America franchising			17,396				16,619				777				35,618				34,759				859
International			866				320				546				1,207				592				615
All others			1,153				471				682				1,812				866				946
Unallocated corporate expenses			(10,413	)			(10,799	)			386				(19,931	)			(25,583	)			5,652
Less: Incentive Contribution (a)			250				250				-				500				(4,500	)			5,000
Unallocated corporate expenses, excluding Incentive Contribution			(10,663	)			(11,049	)			386				(20,431	)			(21,083	)			652
Elimination of intersegment profits			(211	)			(481	)			270				(737	)			(471	)			(266	)
Total income before income taxes, excluding Incentive Contribution (a)		$	26,358			$	23,216			$	3,142			$	56,405			$	54,457			$	1,948
(a) Income before income taxes and other financial measures excluding the Incentive Contribution are non-GAAP financial measures. See Marketing Incentive Contribution table below for additional details and a reconciliation to our GAAP financial measures.

Second quarter 2013 income before income taxes increased approximately $3.1 million, or 13.5%, excluding the Incentive Contribution, primarily due to the following:

• Domestic commissaries increased primarily due to the increase in net restaurants and comparable sales as well as a higher gross margin. We manage commissary results on a full year basis and anticipate the 2013 full year margin will approximate 2012.
• North America franchising increased primarily due to the increase in net restaurants and comparable sales.
• International increased primarily due to the increase in net restaurants and comparable sales results and an improvement in our United Kingdom results.
• All others increased due to an improvement in our online operating results due to higher online sales volumes.

These increases were partially offset by a decrease in income before income taxes at our domestic company-owned restaurants primarily due to higher commodity costs, somewhat offset by incremental profits associated with higher comparable sales of 6.0%.

The increase in income before income taxes for the six months ended June 30, 2013 of $1.9 million, or 3.6%, excluding the Incentive Contribution, was primarily due to the same reasons noted above.

The effective income tax rates were 32.2% and 32.6% for the three and six months ended June 30, 2013, representing decreases of 1.9% and 1.2% from the prior year rates. The lower tax rates were due to the settlement or resolution of specific state issues in 2013. Additionally, the rate for the six months ended June 30, 2013 reflected the reinstatement of certain 2012 tax credits under the American Taxpayer Relief Act of 2012.

The company's free cash flow, a non-GAAP financial measure, for the first six months of 2013 and 2012 was as follows (in thousands):

		Six Months Ended
		June 30,				June 24,
		2013				2012
Net cash provided by operating activities (a)		$	47,232			$	65,162
Purchase of property and equipment (b)			(25,493	)			(15,046	)
Free cash flow		$	21,739			$	50,116
(a) The decrease of approximately $17.9 million was primarily due to unfavorable changes in working capital, including the timing of income tax and other payments, partially offset by an increase in net income.
(b) The increased purchases of property and equipment primarily relate to expenditures on equipment for the New Jersey dough production as well as technology investments.

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 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 six-month periods ended June 30, 2013.

Global Restaurant Unit Data

At June 30, 2013, there were 4,252 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
Second Quarter
Beginning - March 31, 2013		649			2,572			3,221			976			4,197
Opened		5			32			37			44			81
Closed		-			(16	)		(16	)		(10	)		(26	)
Ending - June 30, 2013		654			2,588			3,242			1,010			4,252
Year-to-date
Beginning - December 30, 2012		648			2,556			3,204			959			4,163
Opened		6			63			69			72			141
Closed		-			(31	)		(31	)		(21	)		(52	)
Ending - June 30, 2013		654			2,588			3,242			1,010			4,252
Restaurant unit growth		6			32			38			51			89
% increase		0.9	%		1.3	%		1.2	%		5.3	%		2.1	%

Our development pipeline as of June 30, 2013 included approximately 1,350 restaurants (300 units in North America and 1,050 units internationally), the majority of which are scheduled to open over the next six years.

Marketing Incentive Contribution

The following table reconciles our GAAP financial results to our results excluding the Incentive Contribution for the three and six months ended June 30, 2013 versus the same periods in 2012:

		Three Months Ended						Six Months Ended
		June 30,			June 24,			June 30,			June 24,
(In thousands, except per share amounts)		2013			2012			2013			2012
Income before income taxes, as reported		$ 26,608			$ 23,466			$ 56,905			$ 50,986
Incentive Contribution (a)		(250	)		(250	)		(500	)		3,471
Income before income taxes, excluding Incentive Contribution		$ 26,358			$ 23,216			$ 56,405			$ 54,457
Net income, as reported		$ 17,150			$ 14,289			$ 36,456			$ 31,270
Incentive Contribution (a)		(164	)		(164	)		(329	)		2,275
Net income, excluding Incentive Contribution		$ 16,986			$ 14,125			$ 36,127			$ 33,545
Earnings per diluted share, as reported		$ 0.77			$ 0.59			$ 1.62			$ 1.29
Incentive Contribution (a)		(0.01	)		-			(0.02	)		0.09
Earnings per diluted share, excluding Incentive Contribution		$ 0.76			$ 0.59			$ 1.60			$ 1.38
(a) As previously disclosed, in connection with a 2012 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). In 2012, the Company 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 resulted in an increase in income before income taxes of approximately $1.0 million in the first quarter of 2012. These transactions together are referred to as the "Incentive Contribution."

The results shown in the table above and elsewhere in this press release, which exclude the Incentive Contribution, are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures 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 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, were based on financial measures that excluded the Incentive Contribution.

Share Repurchase Activity

The Company's Board of Directors approved a $25 million increase in the amount of common stock that may be purchased under the Company's share repurchase program through March 30, 2014. Approximately $80.1 million remains available under the Company's share repurchase program as of August 2, 2013.

The following table reflects our repurchases for the three and six months ended June 30, 2013 and subsequent repurchases through August 2, 2013 (in thousands):

Period			Number of Shares			Cost
Three Months Ended June 30, 2013			429			$	26,684
Six Months Ended June 30, 2013			978			$	58,806
July 1, 2013 through August 2, 2013			23			$	1,503

There were 22.3 million and 22.5 million diluted weighted average shares outstanding for the three and six months ended June 30, 2013, representing decreases of 7.7% and 7.1% over the prior year comparable periods. Diluted earnings per share increased $0.06 and $0.12 for the three and six months ended June 30, 2013 due to the reduction in shares outstanding resulting from the share repurchase program. Approximately 21.6 million actual shares of the company's common stock were outstanding as of June 30, 2013.

Quarterly Regular Dividend Announced

The company announced that its Board of Directors approved the initiation of quarterly cash dividends to its shareholders. A quarterly dividend of $0.25 per common share will be paid on September 20, 2013 to shareholders of record as of the close of business on September 6, 2013. This is the first cash dividend paid to shareholders in the company's history. While future dividends will be subject to Board declaration, the company is initially targeting a dividend payout of $0.25 per quarter.

2013 Guidance Update

The company updated its 2013 guidance as follows:
		Updated Guidance		Previous Guidance
Diluted earnings per share		$2.92 to $3.00		$2.90 to $3.00
Capital expenditures		$50 to $55 million		$55 to $60 million
The company reaffirmed all other guidance.

Conference Call

A conference call is scheduled for August 7, 2013 at 10:00 a.m. Eastern Time to review our second quarter 2013 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, from the company's web site at www.papajohns.com. The Conference ID is 45274568.

Forward-Looking Statements

Certain matters discussed in this press release 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 forward-looking statements may relate to projections or guidance concerning business performance, revenue, earnings, contingent liabilities, resolution of litigation, commodity costs, profit margins, unit growth, capital expenditures, 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; and new product and concept developments by food industry competitors;
• changes in consumer preferences and adverse general economic and political conditions, including increasing tax rates, and their resulting impact on consumer buying habits;
• the impact that product recalls, food quality or safety issues, and general public health concerns could have on our restaurants;
• failure to maintain our brand strength and quality reputation;
• 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;
• increases in or sustained high costs of food ingredients and other commodities;
• disruption of our supply chain or our commissary operations due to sole or limited source of suppliers or weather, drought, disease or other disruption beyond our control;
• 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;
• increased employee compensation, benefits, insurance, regulatory compliance and similar costs, including increased costs resulting from federal health care legislation;
• the credit performance of our franchise loan program;
• the impact of the resolution of current or future claims and litigation, and current or proposed legislation impacting our business;
• currency exchange or interest rates;
• failure to effectively execute succession planning, and our reliance on the services of our Founder and CEO who also serves as our brand spokesperson; and
• disruption of critical business or information technology systems, and risks associated with security breaches, including theft of company and customer information.

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 30, 2012. 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								Six Months Ended
				June 30, 2013				June 24, 2012				June 30, 2013				June 24, 2012
				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
(In thousands, except per share amounts)
Revenues:
	North America:
		Domestic Company-owned restaurant sales		$	155,153			$	143,527			$	313,051			$	287,342
		Franchise royalties			20,230				19,101				40,963				39,619
		Franchise and development fees			219				206				765				428
		Domestic commissary sales			140,003				126,593				283,897				264,203
		Other sales			12,444				11,771				25,051				24,029
	International:
		Royalties and franchise and development fees			5,391				4,701				10,458				9,187
		Restaurant and commissary sales			15,746				12,680				30,605				25,047
Total revenues					349,186				318,579				704,790				649,855
Costs and expenses:
	Domestic Company-owned restaurant expenses:
		Cost of sales			37,825				32,881				74,898				65,337
		Salaries and benefits			42,053				39,839				85,325				78,652
		Advertising and related costs			14,677				13,278				29,470				25,977
		Occupancy costs			8,939				8,619				17,650				16,517
		Other operating expenses			22,431				20,830				45,176				41,248
	Total domestic Company-owned restaurant expenses				125,925				115,447				252,519				227,731
	Domestic commissary and other expenses:
		Cost of sales			114,045				104,412				231,823				217,250
		Salaries and benefits			10,264				9,218				20,331				18,221
		Other operating expenses			15,768				13,498				31,775				27,804
	Total domestic commissary and other expenses				140,077				127,128				283,929				263,275
International operating expenses					12,983				10,975				25,636				21,367
General and administrative expenses					33,126				31,463				66,284				63,059
Other general expenses					1,597				1,135				2,782				6,809
Depreciation and amortization					8,530				8,104				17,067				16,031
Total costs and expenses					322,238				294,252				648,217				598,272
Operating income					26,948				24,327				56,573				51,583
Net interest (expense) income					(340	)			(861	)			332				(597	)
Income before income taxes					26,608				23,466				56,905				50,986
Income tax expense					8,563				8,005				18,541				17,218
Net income, including redeemable noncontrolling interests					18,045				15,461				38,364				33,768
Income attributable to redeemable noncontrolling interests					(895	)			(1,172	)			(1,908	)			(2,498	)
Net income, net of redeemable noncontrolling interests				$	17,150			$	14,289			$	36,456			$	31,270
Basic earnings per common share				$	0.79			$	0.60			$	1.66			$	1.31
Earnings per common share - assuming dilution				$	0.77			$	0.59			$	1.62			$	1.29
Basic weighted average shares outstanding					21,742				23,733				21,998				23,893
Diluted weighted average shares outstanding					22,250				24,112				22,543				24,270

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
		June 30,			December 30,
		2013			2012
(In thousands)		(Unaudited)			(Note)
Assets
Current assets:
Cash and cash equivalents		$	28,236		$	16,396
Accounts receivable, net			43,235			44,647
Notes receivable			3,440			4,577
Inventories			21,722			22,178
Deferred income taxes			7,715			10,279
Prepaid expenses and other current assets			18,586			20,549
Total current assets			122,934			118,626
Property and equipment, net			201,942			196,661
Notes receivable, less current portion, net			13,839			12,536
Goodwill			78,088			78,958
Other assets			32,675			31,627
Total assets		$	449,478		$	438,408
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	28,728		$	32,624
Income and other taxes payable			1,407			10,429
Accrued expenses and other current liabilities			51,950			60,528
Total current liabilities			82,085			103,581
Deferred revenue			6,736			7,329
Long-term debt			133,241			88,258
Deferred income taxes			11,955			10,672
Other long-term liabilities			40,858			40,674
Total liabilities			274,875			250,514
Redeemable noncontrolling interests			6,846			6,380
Total stockholders' equity			167,757			181,514
Total liabilities, redeemable noncontrolling interests and stockholders' equity		$	449,478		$	438,408
Note: The Condensed Consolidated Balance Sheets have been derived from the audited consolidated financial statements, but do 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
		Six Months Ended
(In thousands)		June 30, 2013				June 24, 2012
		(Unaudited)				(Unaudited)
Operating activities
Net income, including redeemable noncontrolling interests		$	38,364			$	33,768
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts and notes receivable			780				719
Depreciation and amortization			17,067				16,031
Deferred income taxes			8,256				1,797
Stock-based compensation expense			3,784				3,218
Excess tax benefit on equity awards			(3,803	)			(1,471	)
Other			694				2,872
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			496				(75	)
Inventories			456				533
Prepaid expenses and other current assets			1,963				417
Other assets and liabilities			(1,954	)			756
Accounts payable			(3,896	)			(587	)
Income and other taxes payable			(9,022	)			75
Accrued expenses and other current liabilities			(5,870	)			3,297
Deferred revenue			(83	)			3,812
Net cash provided by operating activities			47,232				65,162
Investing activities
Purchases of property and equipment			(25,493	)			(15,046	)
Loans issued			(3,103	)			(1,206	)
Repayments of loans issued			2,908				1,730
Acquisitions, net of cash acquired			-				(5,908	)
Proceeds from divestitures of restaurants			-				948
Other			319				(4	)
Net cash used in investing activities			(25,369	)			(19,486	)
Financing activities
Net proceeds (repayments) on line of credit facility			44,983				(1,489	)
Excess tax benefit on equity awards			3,803				1,471
Tax payments for restricted stock issuances			(1,841	)			(822	)
Proceeds from exercise of stock options			3,696				10,400
Acquisition of Company common stock			(58,806	)			(38,728	)
Contributions from redeemable noncontrolling interest holders			450				-
Distributions to redeemable noncontrolling interest holders			(1,750	)			(1,930	)
Other			(468	)			125
Net cash used in financing activities			(9,933	)			(30,973	)
Effect of exchange rate changes on cash and cash equivalents			(90	)			(20	)
Change in cash and cash equivalents			11,840				14,683
Cash and cash equivalents at beginning of period			16,396				18,942
Cash and cash equivalents at end of period		$	28,236			$	33,625

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

Source: Papa John's International, Inc.

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