Papa John‘s International, Inc.
Feb 24, 2015

Papa John's Announces Fourth Quarter and Full Year 2014 Results

2015 Operating Assumptions and Earnings Guidance Announced

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Papa John's International, Inc. (NASDAQ: PZZA) today announced financial results for the fourth quarter and fiscal year ended December 28, 2014.

Highlights

"I'd like to congratulate our corporate and franchise operators, who drove outstanding comparable sales to overcome a historically difficult commodity environment and deliver another record year for Papa John's," said Papa John's founder, chairman, president and CEO, John Schnatter. "In 2015, we will continue to steadily grow the Papa John's brand by leveraging our digital advantage, expanding our global footprint, and most important, consistently delivering a demonstrably better pizza."

Fourth quarter 2014 revenues were $425.5 million, a 9.7% increase from fourth quarter 2013 revenues of $387.9 million. Fourth quarter 2014 net income increased 12.8% to $21.2 million, compared to fourth quarter 2013 net income of $18.8 million. Fourth quarter 2014 diluted earnings per share increased 26.8% to $0.52, compared to fourth quarter 2013 diluted earnings per share of $0.41.

Full year 2014 revenues were $1.60 billion, an increase of 11.1% from 2013 revenues of $1.44 billion. Full year 2014 net income was $73.3 million, compared to 2013 net income of $69.5 million. Full year diluted earnings per share were $1.75 compared to 2013 diluted earnings per share of $1.55, an increase of 12.9%.

Global Restaurant and Comparable Sales Information

  Three Months Ended   Year Ended

Dec. 28,
2014

 

Dec. 29,
2013

Dec. 28,
2014

 

Dec. 29,
2013

 
Global restaurant sales growth (a) 6.6 % 4.8 % 9.8 % 6.2 %
 
Global restaurant sales growth, excluding the
impact of foreign currency (a) 8.2 % 12.9 % 10.6 % 8.7 %
 
Comparable sales growth (b)
Domestic company-owned restaurants 5.9 % 11.5 % 8.2 % 6.6 %
North America franchised restaurants 3.4 % 8.1 % 6.2 % 3.1 %
System-wide North America restaurants 4.1 % 9.0 % 6.7 % 4.0 %
 
System-wide international restaurants 8.9 % 7.0 % 7.4 % 7.5 %
 

(a) Includes both company-owned and franchised restaurant sales.

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

We believe global restaurant and comparable sales growth information, as defined in the table above, is useful in analyzing our results since our franchisees pay royalties that are based on a percentage of franchise sales. Franchise sales generate commissary revenue in the United States and in certain international markets. Global restaurant and comparable sales growth information is also useful in analyzing industry trends and the strength of our brand. Franchise restaurant sales are not included in company revenues.

Revenue and Operating Highlights

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

Revenue Highlights

Consolidated revenues increased $37.6 million, or 9.7%, for the fourth quarter of 2014 and increased $159.1 million, or 11.1% for the full year. The increases in revenues were primarily due to the following:

Operating Highlights

The table below summarizes income before income taxes on a reporting segment basis:

    Three Months Ended     Year Ended
  Dec. 28,   Dec. 29,     Increase   Dec. 28,   Dec. 29,     Increase
(In thousands)   2014       2013       (Decrease)       2014       2013       (Decrease)
 
Domestic company-owned restaurants $ 8,900 $ 9,924 $ (1,024 ) $ 40,969 $ 34,590 $ 6,379
Domestic commissaries 13,143 11,526 1,617 39,317 37,804 1,513
North America franchising 20,620 18,067 2,553 77,009 70,201 6,808
International 3,179 651 2,528 7,250 2,803 4,447
All others 141 1,088 (947 ) (9 ) 3,490 (3,499 )
Unallocated corporate expenses (14,035 ) (12,550 ) (1,485 ) (49,440 ) (41,025 ) (8,415 )
Elimination of intersegment losses (profits)   443       (765 )       1,208         (841 )     (1,754 )       913  
Total income before income taxes (a) $ 32,391    

 $

 27,941

      $ 4,450       $ 114,255     $ 106,109       $ 8,146  
 

(a) Includes FOCUS system rollout costs of approximately $1.4 million and $3.7 million for the fourth quarter and full year 2014, respectively. See the FOCUS Update section of this press release and the Annual Report on Form 10-K for the full year ended December 28, 2014 for additional information.

Total income before income taxes and other measures excluding FOCUS system rollout costs included within this press release are not measures defined by accounting principles generally accepted in the United States ("GAAP"). These non-GAAP measures should not be construed as substitutes for or better indicators of the company's performance than the company's GAAP results. Management believes presenting income before income taxes and other measures excluding the FOCUS system rollout costs is important for purposes of comparison to prior year results and analyzing each segment's operating results. In addition, management uses these non-GAAP measures to allocate resources and analyze trends and underlying operating performance of the company.

Fourth quarter 2014 income before income taxes increased $4.5 million, or 15.9%. Excluding FOCUS rollout costs of approximately $1.4 million, income before income taxes increased approximately $5.9 million, or 21.1%. Significant results by segment are detailed as follows:

The full year increase in income before income taxes was $8.1 million, or 7.7%. Excluding FOCUS system rollout costs of approximately $3.7 million, income before income taxes increased by approximately $11.9 million, or 11.2%. The increase was primarily due to the same reasons as noted above for the three month period. Additionally, the full year results include the following:

The effective income tax rates were 31.0% and 32.0% for the three months and full year ended December 28, 2014, representing increases of 1.6% and 0.8% for the three-month and full year periods, respectively. Our effective income tax rate may fluctuate from quarter to quarter for various reasons. The higher tax rates for 2014 were primarily due to the prior year including favorable state tax settlements.

The company's free cash flow, a non-GAAP financial measure, was as follows (in thousands):

    Year Ended
Dec. 28,     Dec. 29,
  2014     2013  
 
Net cash provided by operating activities (a) $ 122,632 $ 101,360
Purchases of property and equipment (b)   (48,655 )   (50,750 )
Free cash flow $ 73,977   $ 50,610  
 

(a) The increase of approximately $21.3 million was primarily due to higher net income and favorable changes in working capital and other operating activities including higher depreciation and amortization expense.

(b) Purchases of property and equipment were relatively consistent for both periods. The current year period includes FOCUS equipment costs for domestic company-owned restaurants and technology investments, including FOCUS software development costs. The prior year period includes expenditures on equipment for New Jersey commissary dough production, technology investments, including FOCUS software development costs, and China new restaurant builds.

We define free cash flow as net cash provided by operating activities (from the consolidated statements of cash flows) less the amounts spent on the purchase of property and equipment. We view free cash flow as an important measure because it is a factor that management uses in determining the amount of cash available for discretionary investment, dividends or share repurchases. 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information concerning our operating results and cash flow for the full year ended December 28, 2014.

FOCUS Update

As previously disclosed, the company is implementing a new, proprietary point-of-sale system ("FOCUS") in substantially all domestic system-wide restaurants. As of December 28, 2014, we had installed FOCUS in approximately 75% of our domestic restaurants, including all company-owned restaurants and approximately 1,600 franchised restaurants. Substantial completion is expected to occur by the end of the first quarter of 2015.

For the fourth quarter and full year 2014, the impact of implementing FOCUS was a $1.4 million and $3.7 million reduction in income before income taxes versus 2013, or a $0.02 and $0.06 reduction in diluted earnings per share, respectively. For additional information, see the Annual Report on Form 10-K for the full year ended December 28, 2014.

Global Restaurant Unit Data

At December 28, 2014, there were 4,663 Papa John's restaurants operating in all 50 states and in 36 international countries and territories, as follows:

 

Domestic
Company-owned

 

Franchised
North
America

 

Total North
America

  International   System-wide

Fourth Quarter

       
Beginning - September 28, 2014 683 2,630 3,313 1,224 4,537
Opened 3 46 49 120 169
Closed (1 ) (21 ) (22 ) (21 ) (43 )
Acquired (divested) 1     (1 )   -     -     -  
Ending - December 28, 2014 686     2,654     3,340     1,323     4,663  
 

Year-to-date

Beginning - December 29, 2013 665 2,621 3,286 1,142 4,428
Opened 12 132 144 244 388
Closed (4 ) (86 ) (90 ) (63 ) (153 )
Acquired (divested) 13     (13 )   -     -     -  
Ending - December 28, 2014 686     2,654     3,340     1,323     4,663  
 
Unit growth 21     33     54     181     235  
 
% increase 3.2 %   1.3 %   1.6 %   15.8 %   5.3 %
 

Our development pipeline as of December 28, 2014 included approximately 1,200 restaurants (200 units in North America and 1,000 units internationally), the majority of which are scheduled to open over the next six years.

Share Repurchase Activity

The following table reflects our repurchases for the fourth quarter and full year 2014 and subsequent repurchases through February 17, 2015 (in thousands):

Period Number of Shares   Cost
 
Fourth Quarter 2014 502 $ 23,248
 
Full Year 2014 2,562 $ 117,400
 
December 29, 2014 through February 17, 2015

224

$

13,593

 

There were 40.8 million and 41.7 million diluted weighted average shares outstanding for the fourth quarter and full year, respectively, representing decreases of 5.8% and 5.7%, respectively, over the prior year comparable periods. Diluted earnings per share increased $0.03 and $0.10, respectively, for the fourth quarter and full year due to the reduction in shares outstanding, primarily resulting from the share repurchase program. Approximately 39.9 million actual shares of the company's common stock were outstanding as of December 28, 2014.

2015 Key Operating Assumptions and Earnings Guidance

Earnings per Share (EPS) - The company projects 2015 EPS to increase to a range of $1.98 to $2.06, or increase 13% to 18% over 2014 EPS of $1.75.

Comparable Restaurant Sales - North America system-wide comparable sales are expected to increase 2% to 4% in 2015. International comparable sales are expected to increase 5% to 7%, on a constant dollar basis, in 2015.

Worldwide Net Unit Growth - Worldwide net unit growth in 2015 is expected to range between 220 and 250 units, with approximately 75% of the net unit growth in International markets.

Revenues - Total consolidated revenues are expected to increase 3% to 5% in 2015.

Income Before Income Taxes Margin - Consolidated income before income taxes margin in 2015 is expected to increase 30 to 50 basis points over 2014 levels. The biggest drivers of increased margins are projected improvements in International profitability resulting from added scale in franchised markets, and in company-owned restaurants in North America due to reduced commodity costs. In North America, we are assuming full-year block cheese prices in the mid-to-high $1.60's per pound.

Income Tax Rate - The income tax rate in 2015 is expected to range from 31.5% to 33.0%.

Share Repurchases and Debt - The company expects to repurchase shares of its outstanding stock in a range of $80-$120 million. Debt is expected to range between 1.5x and 1.8x 2015 earnings before interest, taxes, depreciation and amortization ("EBITDA").

Capital Expenditures - Capital expenditures for 2015 are expected to approximate $40 to $45 million, consisting of company-owned unit development in the U.S. and Beijing, China, technology-related projects, and routine capital replacement.

Conference Call

A conference call is scheduled for February 25, 2015 at 10:00 a.m. Eastern Time to review our fourth quarter and full year 2014 earnings results and 2015 guidance. 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 17450283.

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to use our investor relations website as a means of disclosing information about our business, our financial condition and results of operations and other matters and for complying with our disclosure obligations under Regulation FD. The information we post on our investor relations website, including information contained in investor presentations, may be deemed material. Accordingly, investors should monitor our investor relations website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We encourage investors and others to sign up for email alerts at our investor relations page under "Shareholder Tools" at the bottom right side of the page. These email alerts are intended to help investors and others to monitor our investor relations website by notifying them when new information is posted on the site.

Annual Meeting Date Scheduled

The 2015 Annual Meeting of Stockholders will be held on Wednesday, April 29, 2015, at 11:00 am local time at the company's corporate offices located at 2002 Papa John's Boulevard, Louisville, Kentucky.

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 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:

These and other risk factors are discussed in detail in "Part I. Item 1A. - Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 28, 2014. We undertake no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise, except as required by law.

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

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
         
 
Three Months Ended Year Ended

Dec. 28,
2014

 

Dec. 29,
2013

 

Dec. 28,
2014

 

Dec. 29,
2013

(In thousands, except per share amounts) (Unaudited) (Unaudited)
Revenues:
North America:
Domestic company-owned restaurant sales $ 184,585 $ 169,604 $ 701,854 $ 635,317
Franchise royalties 23,715 21,310 89,443 81,692
Franchise and development fees 233 153 726 1,181
Domestic commissary sales 165,640 156,929 629,492 578,870
Other sales 24,475 14,705 74,179 53,322
International:
Royalties and franchise and development fees 6,961 6,067 25,730 21,979
Restaurant and commissary sales   19,900       19,122     76,725       66,661  
Total revenues 425,509 387,890 1,598,149 1,439,022
 
Costs and expenses:
Domestic company-owned restaurant expenses:
Cost of sales 46,087 43,106 175,733 156,237
Salaries and benefits 49,011 46,290 188,234 173,316
Advertising and related costs 16,484 15,278 63,463 59,172
Occupancy costs and other restaurant operating expenses   39,677       33,356       144,628       128,826  
Total domestic company-owned restaurant expenses 151,259 138,030 572,058 517,551
 
Domestic commissary expenses:
Cost of sales 128,638 122,164 492,940 448,693
Salaries and benefits and other commissary operating expenses   23,819       21,468       91,981       85,649  
Total domestic commissary expenses 152,457 143,632 584,921 534,342
 
Other operating expenses 23,622 12,917 71,068 48,011
International restaurant and commissary expenses 16,352 16,601 63,718 56,609
General and administrative expenses 36,367 36,164 140,566 134,228
Other general expenses 1,583 2,631 8,223 6,673
Depreciation and amortization   10,426       9,433     39,965       35,105  
Total costs and expenses   392,066       359,408     1,480,519       1,332,519  
 
Operating income 33,443 28,482 117,630 106,503
Net interest expense   (1,052 )     (541 )   (3,375 )     (394 )
Income before income taxes 32,391 27,941 114,255 106,109
Income tax expense   10,036       8,204     36,558       33,130  
Net income before attribution to noncontrolling interests 22,355 19,737 77,697 72,979
Income attributable to noncontrolling interests   (1,174 )     (932 )   (4,382 )     (3,442 )
Net income attributable to the company $ 21,181     $ 18,805   $ 73,315     $ 69,537  
 
Calculation of income for earnings per share:
Net income attributable to the company $ 21,181 $ 18,805 $ 73,315 $ 69,537
Increase in noncontrolling interest redemption value 37 (510 ) (44 ) (510 )
Net income attributable to participating securities   (107 )     (530 )   (402 )     (530 )
Net income attributable to common shareholders $ 21,111     $ 17,765   $ 72,869     $ 68,497  
 
Basic earnings per common share $ 0.53     $ 0.42   $ 1.78     $ 1.58  
Diluted earnings per common share $ 0.52     $ 0.41   $ 1.75     $ 1.55  
 
Basic weighted average common shares outstanding   40,097       42,417     40,960       43,387  
Diluted weighted average common shares outstanding   40,789       43,301     41,718       44,243  
 
Dividends declared per common share $ 0.14 $ 0.125 $ 0.53 $ 0.25
 
 

Papa John's International, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
     
 
Year Ended
(In thousands) Dec. 28, 2014   Dec. 29, 2013
 
Assets
Current assets:
Cash and cash equivalents $ 20,122 $ 13,670
Accounts receivable, net 56,047 53,203
Notes receivable, net 6,106 3,566
Income taxes receivable 9,527 -
Inventories 27,394 23,035
Deferred income taxes 8,248 8,004
Prepaid expenses and other current assets   28,564   23,562
Total current assets 156,008 125,040
 
Property and equipment, net 219,457 212,097
Notes receivable, less current portion, net 12,801 13,239
Goodwill 82,007 79,391
Deferred income taxes 3,914 -
Other assets   38,616   34,524
Total assets $ 512,803 $ 464,291
 
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 38,832 $ 35,653
Income and other taxes payable 9,637 4,401
Accrued expenses and other current liabilities   58,293   57,807
Total current liabilities 106,762 97,861
 
Deferred revenue 4,257 5,827
Long-term debt 230,451 157,900
Deferred income taxes 22,188 14,660
Other long-term liabilities   41,875   42,835
Total liabilities 405,533 319,083
 
Redeemable noncontrolling interests 8,555 7,024
 
Total stockholders' equity   98,715   138,184
Total liabilities, redeemable noncontrolling interests and stockholders' equity $ 512,803 $ 464,291
 
 
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
       
 
Year Ended
(In thousands) Dec. 28, 2014       Dec. 29, 2013
 
Operating activities
Net income before attribution to noncontrolling interests $ 77,697 $ 72,979
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for uncollectible accounts and notes receivable 1,795 1,921
Depreciation and amortization 39,965 35,105
Deferred income taxes 14,704 10,603
Stock-based compensation expense 8,712 7,409
Excess tax benefit on equity awards (10,282 ) (4,755 )
Other 4,738 2,767
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (5,741 ) (11,058 )
Income taxes receivable (9,527 ) -
Inventories (2,838 ) (857 )
Prepaid expenses and other current assets (4,781 ) (3,011 )
Other assets and liabilities 915 (3,728 )
Accounts payable 3,171 3,029
Income and other taxes payable 5,233 (6,027 )
Accrued expenses and other current liabilities (665 ) (2,536 )
Deferred revenue   (464 )   (481 )
Net cash provided by operating activities 122,632 101,360
 
Investing activities
Purchases of property and equipment (48,655 ) (50,750 )
Loans issued (6,816 ) (6,095 )
Repayments of loans issued 4,254 7,068
Acquisitions, net of cash acquired (4,773 ) -
Proceeds from divestitures of restaurants 400 -
Other   556     339  
Net cash used in investing activities (55,034 ) (49,438 )
 
Financing activities
Net proceeds on line of credit facility 72,551 69,642
Cash dividends paid (21,735 ) (10,797 )
Excess tax benefit on equity awards 10,282 4,755
Tax payments for equity award issuances (9,235 ) (3,584 )
Proceeds from exercise of stock options 5,837 6,865
Acquisition of Company common stock (117,400 ) (118,569 )
Contributions from noncontrolling interest holders 1,086 950
Distributions to noncontrolling interest holders (2,800 ) (3,650 )
Other   491     (327 )
Net cash used in financing activities (60,923 ) (54,715 )
 
Effect of exchange rate changes on cash and cash equivalents   (223 )   67  
Change in cash and cash equivalents 6,452 (2,726 )
Cash and cash equivalents at beginning of year   13,670     16,396  
 
Cash and cash equivalents at end of year $ 20,122   $ 13,670  

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

Source: Papa John's International, Inc.

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