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

Great. We will start. We're at time. I want to thank Papa John's for being here today. We have Todd Penegor, CEO; Ravi Thanawala, CFO. I appreciate you guys being here from Papa John's.

So I guess we'll start last month, you hosted an investor meeting at your Atlanta headquarters, where you shared new insights, provided thoughts, Todd, on your first 100 days as Papa John's, CEO. Can you remind us on some of the initiatives that you're focused on for 2025 as well as the longer term?

Yes. Thanks, Lauren. I think first and foremost, to start was to really put my team in place. So as I joined Papa John's at the beginning of August, we had several openings, and we had to build out the team. It was great that Ravi picked up the international business, fits his skill set really well, had Joe Sieve expands responsibilities to pick up global development and really share some of those best practices. And then made some really good hires, brought Kevin Vasconi in. Kevin spent 3.5 years with me at Wendy's on the technology front, had a great run for 8 years at Domino's. So it's second nature for him on all the opportunity that we have from a technology front. And then just recently brought Jenna Bromberg in. And Jenna is a next-generation marketer thinking differently. So you'll see us evolve our media mix and really get focused on the quality attributes that really set our brand apart. But what our focus really is, is how do we really become the best pizza makers in the business? What do we need to do operationally to train? What do we need to do within our restaurants to simplify the lives of [Audio Gap] innovation to bring some news in, but we're also looking at renovation because we know we got some work to do to really drive kind of the flavor and some of the things. So we're really focused on telling our story in unique and different ways to stand out from the competition. That's job one. It's really all about the food and getting back to our core, better ingredients, better pizza period, deliver on that promise day in and day out. We have a lot of opportunity on the technology front. So Kevin is a godsend being hidden here. We've got a ton of pure data. We just under leverage the data. So we got a lot of testing going on, on CRM, a lot of one-to-one communication of pilots in place, and we're starting to see all of those resonate with the consumer. So that's been a big focus, trying to make the experience a lot more frictionless. We've revamped our app. We still got some work to do, but move Papa Dough upfront, revamped our loyalty program, made it quicker to actually earn rewards. So we're starting to see folks immediately earn $2 off their next purchase because your threshold is now $15. Not that you get bounced back to a specific product, you got cash, so you can use it how you want. So it does help our value proposition over time. And we'll continue to push that piece of the puzzle, right? We got out of position on value, and we're working hard now to make sure that the value perception is there from Papa John's because we've always had it. Loyalty program helps, having Papa Pairings on a more regular basis is certainly supporting the business. And then making sure that on the premium side, we got a good sharp price point. So we've been doing that along the way. And then we're looking at a few other things. We're looking at our company footprint. We're looking at where some system optimization, some healthy refranchising could play a role within the portfolio. At Investor Day, we talked about our really core strength from Indianapolis down into Louisville, Nashville and Atlanta. That's our core market. That's where we can be a great brand steward. We'll look at the other markets to see which ones stay in the portfolio, which one should evolve because we do need to bring some fresh blood into the system. We need a growth mindset. We need folks thinking about the longer term. So we're going to work through that piece of the equation. And then as Ravi picked up the international business, and I know we'll come back to it, we're really focused on going narrower and deeper, right? We're in 50 countries, but there's a handful and half that really are going to be impactful, and that's where we're going to spend our time, energy and effort. So we're going to do all of that. We will work to front run some technology along the way. We will -- investments. We will have to work to retrade kind of the local national advertising mix. We've got a little out of position with local now being optional. We're a super regional pizza brand, and you do need that local support to complement the national advertising. So those are the things we're working on in the near term. We're pleased to see a lot of early wins and a lot of early success, and we'll build on that momentum in '25.

That's a great overview. I'll start where you ended in terms of the incremental investments. You invested about $4 million, I believe, in the fourth quarter towards marketing. How are you thinking about incremental investments that might be necessary across marketing, across tech, other initiatives? Any franchisee support that you're thinking about?

Really not from a franchise support. This is really trying to play some offense. So we do know that we got to catch up on the technology front. And we did increase our technology fee, digital fee earlier or later last year. We know we got some opportunities to kind of lean in and front run. It will come off of our balance sheet, and it will be CapEx, but we can recoup it over time through the technology fee. So it's more of a timing element of how we get at this stuff a little bit faster. The piece where we're really trying to work through and Ravi can take to make during the course of this year. And that is really in the spirit of how do we retrade kind of the change that was made early last year to go to 6% national from a 5% national ad fund and then moving from a 3% local to an optional local. And when we got rid of when we made optional -- local optional, all the co-ops went away. And not having the co-ops to be able to actually put the franchise community together in the communities that we serve, have the company sitting around the table is a big miss in a business that is a very regional business, especially pizza being so localized. So there may be some investments that we're going to have to front run in some company markets to stand up some of those co-ops a lot quicker to go prove a strong business case, a strong business -- strong brand steward moving forward. That's where some incremental investment may need to take place. There could be some things around evolving our media mix as we start to think about moving away from just pure linear where we mainly play to think about what is the voice of Papa John's as we have a digital voice. We had a lot of fun in my days at Wendy's. So we need to evolve to connect to the next-generation consumer, what we might need to do in search. But where we really want to put the incremental dollars to work is to really go prove out the business case that having a right mix of spend, local and national really drives this business. And whether we can retrade all of that and get the entire franchise community move in one direction early or we go front run it across a lot of the company markets to go prove the business case, we'll figure that plot out over the upcoming months. But as Ravi reminds me, incrementally spending in the company market is probably our best investment in return.

Yes. Maybe 2 things I would add is we're focused on step functioning growth. We're making meaningful investments on the technology front, and we're seeing that come to life in our digital experience. We've invested over the last 6 months on improving our value proposition. We're looking for the ways that we're looking to drive accelerated growth from here, and we want to do it in a really planful and thoughtful way. And our share of voice could be higher, and we think our share of voice being higher for a period of time will pay long-term dividends for unit economics for the franchisees.

Great. Todd, one of the things that always stood out to me with you at [Audio Gap] you've met with a lot of franchisees since you've joined. Can you just talk about the sentiment amongst the franchise base, how you assess the health of the franchise system?

Yes, absolutely. I mean we've -- as part of my 100-day plan, spent a lot of time out on a franchise listening tour, spent a lot of time in the market with the team, spent a lot of time on stage at the Papa John's Franchise Association meeting, taking on a lot of questions and getting a lot of feedback. The entire system has my cell phone numbers. So I get a lot of texts and a lot of e-mails and a lot of phone calls on a regular basis. And the system is cautiously optimistic about the future. They're excited about the team. They're looking for continuity of leadership. They're feeling good about the folks that we put in place to lead the brand forward. They know we have to go chase transactions a little harder in the near term because they know if we can get more customers to show up more often, we can actually drive and trade them up and drive some profitability in this business. That's, by and large, the bigger part of the system feeling that way. We got a few folks that have priced a little more aggressive and have had a lot of margin that are feeling a little heat as we chase transactions in the short term. But that's a vocal minority, not kind of where the majority of the system plays. But by and large, I think there's a hope and optimism of the future. They do know we need to retrade kind of the local national because they do feel the pressure that not having the local co-ops and the local spend in place and we just have to work and spend a little bit of time to regain their trust. There was a lot of stuff that was retraded early in 2024 that just didn't play out the way they thought it was going to play out during the course of last year. Lots of change during the course of 2024 with a lot of leaders coming in and moving on between Rob and then Ravi and then I. So it's now just building the reps and the comfort that we know what our true north is. We're consumer-led, insight-driven in everything that we do. We do the appropriate rigor on test and learn before we put stuff into the marketplace. And then we go find that right balance around premium and value. But importantly, we get back to our roots, right? We get back to being the best pizza makers in the business and focus really on better ingredients, better pizza and make sure that stands out from the competitive set. I know, Ravi, we've been looking at a lot of the financials and where the balance sheet sits and where the P&L has been in the back half of the year, especially. Why don't you comment on that?

Yes. So first, in the one half of the year, we saw strong profitability in the business as we saw benefit from commodities and we will continue to stay on the premium strategy. So when we looked at the achieved results through the first 3 quarters of the year for corporate restaurants, which is a pretty good proxy for what's happening in the system, 4-wall profitability held up fairly well and was effectively flat to the prior year. We've been making specific decisions in Q4 where we actually traded out some ticket in the quarter as we reset the loyalty program in the spirit of driving long-term growth with consumers and value perception. So we took a little bit of margin hit in the quarter, but that made strategic sense for the long term. I think more broadly, when we think about the franchisee community, there's a number of long-duration franchisees that have been with the system for a long time. They've seen the cycles. What they do know is this brand is like highly resilient. The category is highly resilient. And when we execute well, we win consumers' hearts and minds. And we were recently with the executive FAC and some of our longer tenure franchisees, we were like we can execute better. And that was an unprompted comment from them. And I think that speaks to a lot of the culture that Todd is bringing to the organization that we can be the best craftsmen in pizza there is, and that's going to be long-term value for us.

Great. Let's talk a little bit more about the North America business. You guys reported yesterday comp down about 4%. What did you see as you move through the quarter? I know there are some initiatives that you guys are working on. Just talk through some of that.

Yes, I'll start. I mean we saw some nice sequential improvement in our transaction trends. You got to look at it month-to-month, you had a lot of shifts on where holidays fit on the calendar. But overall, the trend has been good. And it's been a lot of the initiatives that we put in place. We did some test and learn with some small CRM pilots around how we would change behaviors with folks in our loyalty program that really gave us some quick insights to evolve the loyalty program from the $75 threshold to get $10 in Papa Dough to the $15 to get to same discount rate, but a completely different mindset, feeling that you're always earning something. You always got some cash that you can use on your next purchase. And what we really knew is we can actually acquire a lot of folks to get into the loyalty program. We can get them to get their first purchase. Our challenge was on the second and third because once we got them through the second and third, the fourth and the fifth, we are on par or even better than the industry. So what we needed to do is make sure that we were getting that quicker bounce back. And now that we're leveraging all the data, and we've had a bunch of work on CRM pilots that we've been putting out in the fourth quarter, we can really communicate to make sure we got those targeted offers to get the consumer through that purchase cycle into that second offer, into that third offer. And we've seen some early success. So those things between kind of the loyalty program revamp, some of the messaging that we've been doing on CRM, really having a balanced calendar, Papa Pairings, which has always been on the menu. We've had that on, on a regular basis on air. And even on the premium side, we had some really good price points, where we played the game on New York Style XL, where we priced on Shaq-a-Roni. And now where we started the year with $9.99, really a focus on our core pizza, being those best pizza makers in the business, getting the reps in on making great pizzas every time, but getting folks to show up and then trade them up. So now we've got the optionality to add a few extra dollars as you change press types, add a few extra dollars as you put the toppings on. So we're really working that plot to make sure we get back into the position of value. And we're seeing our value perception change in the consumers' minds. They're starting to understand there is value from Papa John's. We'll have to continue to build that as we continue to chase transactions for a little bit, but we're starting to see some positive trends on that front. Anything else, Ravi?

Maybe some specifics that will be useful that we saw particularly carry out transactions continue to sequentially improve as we move through the quarter. Second, with the loyalty change, now north of 70% of all transactions are resulting in a reward for the consumer, which is a very meaningful move in terms of like embedding in the consumer's mind that you get an amazing value with Papa John's. Third, we continue to see conversion rate upside happen in our app and now our app is actually our largest platform, which allows us to reach consumers in a very, very targeted and specific way. And then lastly, what we're seeing is like at -- on or around major holidays, our business is spiking really, really well, and we've been highly encouraged in terms of like how we perform on those key events. So like what we're definitely finding is like when consumers are together and they were thinking about like having pizza, particularly on an occasion like around New Year's Eve or around Halloween or around Christmas, they're thinking of us and they're disproportionately thinking of us. So we're really encouraged to keep our foot on the gas to win the consumers' hearts and minds and incremental transactions are so profitable in this business. And there is capacity in our restaurants that having a transaction-driving mindset, we think is a recipe for long term, not only better unit economics, but will unlock development opportunity.

That's great. It's great to hear that momentum is building. I think one of the top questions that we get is when the comps turn positive again. So any thoughts on when we can look at.