Papa John's International, Inc. (PZZA) Earnings Call Transcript & Summary

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Papa John's International, Inc. Annual Stockholder Meeting. [Operator Instructions] Today's meeting may include forward-looking statements. Please refer to the slide on your screen for important information that could cause actual results to differ from those forward-looking statements. Thank you. I would now like to turn the call over to Mr. Jeff Smith, Chair of the Board of Directors of Papa John's. Please go ahead, sir.

Good morning, ladies and gentlemen. I'm Jeff Smith, Chair of the Board of Papa John's and Chair of this annual meeting. I want to begin by extending our deepest sympathy, on behalf of the Papa John's family, to those in the communities we serve and around the world who have been directly or indirectly impacted by COVID-19. I also want to express our profound gratitude to everyone working so hard on the front lines to keep us safe and healthy. We appreciate you, and we thank you. Next, I must acknowledge and sincerely thank all of our team members for their tremendous efforts to help feed our customers around the U.S. and around the world. We at Papa John's are in a position to feed our neighbors, and we are honored to do so safely. I applaud our global team for putting safety first. Papa John's priority has always been to keep our team members and customers healthy and safe. Since the outbreak of COVID-19, we have implemented extra health and safety measures across our business and global footprint and have also expanded our benefits to support our employees. As an essential food takeout and delivery business, our operations are less affected by shelter-in-place orders across the U.S. and world. And we are committed to continuing to deliver pizza and serve our communities during this pandemic. In this challenging moment for our company and around the world, it's reassuring [indiscernible] and continues to move forward in a positive direction. Last year, I made an investment in Papa John's and joined the Board because I truly believe that Papa John's has the best pizza in the category with a differentiated, better ingredients, better pizza position. Now 14 months later, in a world that none of us could have imagined a year ago, we are progressing further and faster than any of us could have expected. For this achievement, I credit the incredible passion, talent and partnership of our team members and franchisees. As Chair of the Papa John's Board, my top priority has been to help strengthen and diversify the company's leadership. I'm pleased to have helped add 5 new directors to the Board in 2019. Their relevant experience, diverse perspectives and complementary backgrounds have certainly changed Papa John's course for the better. The combination of our new directors, with the talents and experience of our existing Board members, has created one of the best boards I've been a part of and one of which I am incredibly proud. We are also fortunate to have identified and recruited a proven restaurant industry leader, transformational CEO and terrific person in Rob Lynch. Strong leadership at all levels of our organization and in our culture is more [ important to the ] future today than ever as we navigate these uncharted and difficult times. At Papa John's, we remain focused on our goal of creating the world's best pizza delivery company. Our long-term opportunity has not changed nor will we lose sight of our values and purpose. With that, I'd now like to call the meeting to order. All votes will be delivered to the Inspectors of Election. The Secretary will record the proceedings. I would like to introduce the Board members, all of whom are present today: Rob Lynch, also our President and CEO; Chris Coleman; Michael Dubin; Olivia Kirtley; Laurette Koellner; Jocelyn Mangan; Sonya Medina; Shaquille O'Neal; and Anthony Sanfilippo. Also present are John Federici and Adam Hack, representing Ernst & Young, independent accountants of the company. They will be available to answer appropriate questions during the general question-and-answer period after the formal business of the meeting. After the formal meeting has been adjourned, we will also provide time for general questions. Only validated stockholders will be able to submit questions using the designated field on the web portal. Out of consideration for others, please limit yourself to 1 question. Consistent with our approach for in-person annual meetings, questions or comments that are not related to the proposals under discussion or about personal concerns not shared by stockholders generally or use blatantly offensive language may be ruled out of order. The Board of Directors set February 24, 2020, as the date of record for this stockholders meeting. We have available on the virtual annual meeting site, a record of stockholders as of that date. A duplicate record has been on file at the office of the company for the last 10 days, available for inspection by any stockholder at any time during usual business hours. I've been advised by the Inspectors of Election that immediately prior to commencement of the meeting, over 90% of the company's shares of common stock issued and outstanding and entitled to vote are present or represented by proxy at today's meeting. Because a majority of the company's shares is represented today, [ a quorum is ] present and the business of the meeting may proceed. The Secretary, Clara Passafiume, has informed me that the notice of the meeting was duly and properly mailed. She will file affidavits of mailing of the notice of meeting, proxy card [indiscernible] with the records of the meeting. There are 3 items on the agenda to be voted today. One, the election of directors; two, [ ratification of the selection of Ernst & Young LLP ] as the company's independent auditors for 2020; and three, the approval on a nonbinding advisory basis of the company's executive compensation. The polls are now open and will close following the presentation of the final proposal. [Voting]

If you previously voted by proxy, you do not need to take any further action unless you wish to change your vote. The ballots will be collected and delivered to the Inspectors of Election. The company has appointed Jamie Youngblood and Debbie Tate Johnson to be the Inspectors of Election. They are familiar with the duties and responsibilities of an Inspector of Election at a shareholders meeting. They will report the results after all proxies and votes have been tabulated. We will now turn to Item 1. The first item is the election of directors. Nominees and their qualifications are described in the proxy statement dated March 20, 2020, which has been made available to all shareholders of record as of February 24, 2020. Clara, will you please present the proposal to elect directors?

I move that the director nominees be elected pursuant to the following resolution: Resolved that each of Chris Coleman, Michael Dubin, Olivia Kirtley, Laurette Koellner, Robert Lynch, Jocelyn Mangan, Sonya Medina, Shaquille O'Neal, Anthony Sanfilippo and Jeff Smith be and hereby is elected as a director of the company to serve until the next annual meeting of stockholders and until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal.

Thank you, Clara. The second item is the ratification of the selection of independent auditors for the 2020 fiscal year. Clara, will you please present the proposal to ratify the selection of auditors?

I move that the selection of Ernst & Young as the company's independent auditors for the fiscal year-ending December 27, 2020, be ratified.

The third item is the nonbinding advisory vote to approve executive compensation. Clara, will you please present the proposal to approve executive compensation?

I move that the company's executive compensation be approved pursuant to the nonbinding advisory vote and the following resolution: Resolved that the stockholders approve the compensation of the company's named executive officers as disclosed in the company's 2020 proxy statement, pursuant to the rules of the SEC, including the compensation discussion and analysis, the compensation tables and the related footnotes and narrative disclosures.

This concludes the specific proposals that were established in the notice of the agenda for this meeting. Since there are no additional nominations, in accordance with the company's Certificate of Incorporation, the nominations are closed. Any stockholders who have not yet voted or wish to change their votes may do so by clicking on the voting button on the web portal and following instructions. Stockholders who have sent in proxies or voted via telephone or Internet do not want to change their votes, do not need to take any further action. We will pause a moment to allow any final voting. Thank you. The polls shall now be closed for voting. We will pause for another moment while the Inspectors of Election tabulate the results of the votes. I am told that the Inspectors of Election have completed the count of the votes and are ready to report the preliminary results to the Secretary. Will the Secretary please present the preliminary report of the Inspectors of Election?

The Inspectors of Election have presented their report to me certifying the following results. Of the outstanding shares of stock present in person or by proxy and entitled to vote at this meeting, at least the majority were voted in favor of each of the director nominees and each other proposal. As a result, all proposals were approved by the stockholders.

Thank you, Clara. The Secretary will file the final report of the Inspectors of Election, including the final and complete tally of the votes with the records of the meeting and the record books of the company. This concludes the formal business of the meeting. After the adjournment of the meeting, Rob Lynch will make brief remarks on our business, after which we will respond to your questions. There being no further business before the meeting, I hereby declare the meeting to be adjourned. And I'll now turn the meeting over to our CEO, Rob Lynch, to provide a business update. Rob?

Thank you, Jeff, and good morning to everyone attending this year's virtual annual meeting. I want to begin by saying how incredibly proud I am of the tireless work of Papa John's team members and franchisees who are stepping up to serve our communities during the COVID-19 pandemic. From delivering meals to health care workers, first responders and families to supporting blood drives in the organizations on the front lines of this crisis, the Papa John's family has already served over 200,000 meals to our neighbors in need. These acts remind me every day that it's both our privilege and our duty to keep our doors open and help feed our neighbors in these unprecedented times. As we've said before, our team members' health and safety is priority #1 and even more so now because of the critical importance of their work. Extra health and safety measures across our business include no contact delivery for the protection of both our customers and team members and enhanced hygiene and sanitation protocols. We've expanded our benefits to include paid time off for employees diagnosed with COVID-19 or self-quarantining and free virtual doctors' visits. This is in addition to existing benefits of no cost mental health support, affordable health care plan options and access to the Papa John's team member emergency relief funds. We've also ramped our hiring to provide thousands of jobs to workers across the country displaced by the impact of COVID-19. First in Asia, then in Europe and now in North and South America, we have seen the COVID-19 pandemic impact our business differently, depending on the restrictions enacted by local governments. In some international markets, this has resulted in temporary closures, but in most markets, including North America, we are nearly fully operational. As we have previously announced, our international and domestic businesses performed well in the first quarter of the year as customers and communities rely on us and others in the food delivery industry. Our cash position is sufficient to support our current operations, and we have ample ongoing liquidity with access to over $350 million in our credit facility should we need it. As we manage the current situation and work to both serve and protect our stakeholders, we have not lost sight of our longer-term goals and priorities. In fact, if anything, the COVID-19 pandemic has enhanced our focus on what we must do to create the world's best pizza delivery company. First, we are building a culture of leaders who believe in diversity, inclusivity and winning, a culture where everyone belongs helps us attract and retain talent and encourages innovation. It allows team members throughout our organization to take pride and ownership in their contributions and step forward to do the right thing. This crisis has brought out the best in every Papa John's employee, and we are excited about the culture that we are creating for our future. Second, Papa John's is returning to what made the brand great. All pizza is not created equal. We have better ingredients, we deliver better pizza. We are now thinking differently and holistically about our products, menus, marketing, e-commerce and digital channels. We are innovating with successful new products and communicating our story in a unique and compelling way. This is already having an impact on sales and results. In February, we launched Papadias, and we couldn't be happier with the positive sales impact that it has had on our business. We have built a pipeline of great ideas similar to Papadias, and we'll be ready to launch them later this year. Third, we have committed ourselves to achieving top-tier unit level economics. In 2019, we began to see improvements, but there's still so much more opportunity. This is critical because the Papa John's brand will only succeed and grow in the long term if our franchisees succeed too. Over the last 6 weeks, we have worked closely with our franchisees to help them support their communities during this pandemic, and I'm so thankful for the job that they are doing. Last, we are committed to driving long-term earnings growth for the benefit of our stockholders. In addition to higher comp sales and unit growth, we have multiple opportunities to improve productivity and drive operating leverage for faster earnings growth. We are now in the process of building a multiyear road map to guide this journey. In this very challenging time, I'm both proud of the Papa John's team and optimistic about our future. Our team members and franchisees are filling a critical need, feeding communities and helping neighbors across the country and across the globe where we serve. And I'm confident that Papa John's remains on course to become the best pizza delivery company in the world for the benefit of our team members, our franchisees, our stockholders and the customers and the communities that we serve.

Thank you, Rob. At this time, we'd be happy to answer any questions you may have. As a reminder, only validated stockholders will be able to ask questions using the designated field on the web portal. We will attempt to ensure that everyone that has a question will have a chance to be heard and representatives of management will respond to questions. However, in the interest of time, we will limit each individual to 1 question. As a reminder, the Q&A session is being webcast live this morning.

Your first question is for Jeff Smith. Mr. Chairman, the Carpenter Union Pension Funds with combined assets of $70 billion have a collective ownership position of 53,922 shares of the company's common stock. As long-term investors, we appreciate the quality of the company's governance structure and the Board's commitment to a majority vote election standard. Could you briefly describe the rationale for the change of audit firms? And could an Ernst & Young representative describe the lead partner rotation process that will take place in coming years to protect the audit firm independence? Thank you, Mr. Chairman.

Thanks, Steve. And thank you for your trust and your question and for your investment in Papa John's. Thank you for the Carpenter Union for appreciating all the good work we're doing around governance at Papa John's. The Board is doing a terrific job at improving governance and really trying to be best-in-class as it relates to that. As for your specific second part of your question around the external auditors, the Audit Committee regularly evaluates our outside auditing firm. And there's a detailed description of the change in external auditors in the proxy materials, and I would refer you to that to be the best source of that description. As to the last part, I'd like to hand it to John Federici to be able to talk about the way that the audit firm manages its lead partner.

Thanks, Jeff. This is John Federici with Ernst & Young, and I'm the Audit Partner responsible for Papa John's. In response to the question, auditor partner rotation is required every 5 years under the Sarbanes-Oxley Act. Tenure of audit partner is monitored by EY as part of our internal EY quality control process. Partner tenure is also communicated and discussed with the company's Audit Committee on an annual basis, which is documented. These measures ensure that we manage and mitigate the risk of auditor independence. Thanks, Jeff.

Thanks, John.

Thank you, John. The next question is also for Jeff Smith. Mr. Chairman, the recent growth in the size of passive mutual funds' corporate ownership interest in U.S. corporations has been dramatic. The Carpenter Funds believe the growing concentration of ownership raises important public policy and corporate governance issues. Currently, BlackRock holds 8.1% and Vanguard holds 6.8% of the company's outstanding shares. Our review indicates that BlackRock and Vanguard are investment managers for a portion of the assets of the company's 401(k) plan. Does the Board see this growing ownership concentration as a positive or negative development as regards to long-term corporate planning and performance? And also are there potential conflicts of interest when a 5% holder is managing company retirement plan assets? Thank you, Mr. Chairman.

Thanks, Steve, and again, thank you for the question. We appreciate the support of our shareholder base and all of our shareholders and believe that we have a terrific shareholder base. Separately, the company makes an independent decision as to the management of its 401(k) plan assets. So at this time, the Board does not believe this is an issue.

The next question is for Rob Lynch. With COVID-19, do you have any supply chain concerns getting products?

So I will tell you that we have been focused on making sure that we are well prepared and adequately supplied to continue business operations. We have been focused on that since really the onset of COVID-19, particularly here in North America. And we've been working with our strategic suppliers to make sure that we are taking and they are taking all of the necessary precautions to support their employees and their operations to make sure that the supply chain continues to be stable. We have also made sure that we have built up incremental inventory levels to make sure that we can continue to operate should there be any short-term negative impact to any of our suppliers throughout our supply chain. So we're very confident in our ability to maintain business operations moving forward.

Thank you, Rob. There are no further questions at this point. Please reach out to the company's Investor Relations team with any additional questions.

Thanks, Steve. Given that there are no further questions at this time, we thank you again for your attendance at this morning's annual meeting of stockholders and for your continued support of Papa John's International. We all wish for a return to good health and a more normal environment. Stay healthy and stay safe. Thank you very much.

This concludes today's conference. You may now disconnect. Presenters, please, remain online.