Papa Johns International Inc Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Papa John's First Quarter 2020 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Steve Coke, Interim Principal Financial and Accounting Officer. Please go ahead, sir.

Thank you. Good morning. Joining me on the call today is President and CEO, Rob Lynch. Rob and I will have comments about our business and provide a financial update. After the prepared remarks, both of us will be available for Q&A. Our discussion today will contain forward-looking statements involving risks that could cause actual results to differ materially from those statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. Please refer to our earnings release and the Investor Relations section of our website for a reconciliation of non-GAAP financial measures discussed on this call. Finally, we ask any members of the media to be in a listen-only mode. Now, I'd like to turn the call over to Rob for his comments. Rob?

Thank you, Steve, and good morning, everyone. First, I'd like to say that I hope everyone on this call and their loved ones are also healthy and safe. The entire Papa John's family extends our deepest sympathy to those around the world who have been directly or indirectly impacted by COVID-19. We're also profoundly grateful to everyone working so hard on the frontlines to keep us safe and healthy. I want to begin this morning's call with some detail on the progress we made in Q1. It provides important context on our company-wide transformation and the headway that we are making with our long-term strategic priorities, both of which have accelerated during the pandemic. I will go on to discuss how COVID-19 has impacted our brand, our team, our franchisees, and customers and how we are executing on our strategy in this new environment, staying true to our values and our purpose. Steve will then provide more detail on our Q1 results, before I conclude with closing comments about what we expect for the remainder of the year and beyond. Let’s start with our progress in Q1 before the pandemic began to have a material impact on our overall business. In line with our original 2020 outlook, comparable store sales were very strong, rising 5.3% in North America and 2.3% internationally. January and February were particularly strong in North America, with North America comp sales up 7.6% and 5.4%, respectively, driven by successful new product and marketing innovation. We continue innovating on our signature fresh dough to create delicious, high-quality menu items that build on our premium brand, add minimal complexity to our stores, and are incremental versus cannibalistic of our core premium products. In February, we successfully launched Papadias, a toasted handheld alternative to sandwiches made with our fresh dough and high-quality toppings. Papadias are Papa John's first new holistic platform that doesn't consist of pizza sides or desserts. At a $6 price point, they are quickly becoming a favorite with customers and delivering on our strategic objectives, including increased lunchtime transactions and higher tickets. Along these same lines, in the first quarter, we also introduced our new Jalapeños Papa Rolls nationally. Spicy Jalapeños poppers wrapped in our fresh dough and baked to order, not fried. And again, as with Papadias, our team's innovation is driving high customer satisfaction and higher tickets without adding material complexity or cost to our stores. Papa John's marketing communications are also becoming much more impactful. In addition to the new creative approach that focuses on our pizza and high-quality food, we've shifted a large part of our marketing spend from non-working to working. By moving dollars out of high-cost national sponsorships and into working media, we're able to reach a broader range of consumers more often. We're still working closely with our local sports partners to activate in our local markets when sports return. Our ongoing strategic investments in our technology platform, especially our partnerships and integrations with three of the top four aggregators, as well as our Popper Rewards loyalty program are growing rapidly. In fact, the return on these investments has been substantial during the pandemic as I'll discuss in a moment. Taken together, these accomplishments are more proof that a companywide culture of innovation is beginning to drive business results. As we build on Papa John's premium differentiated brand, we're fending off our competitors' value-focused offerings without having to discount deeply. In turn, growth is helping improve unit level economics, for the benefit of both our company-owned restaurants and our franchisees. In Q1, median unit profitability defined as profits after food, labor, mileage and aggregator fees was our highest in over eight quarters, in spite of higher pre-pandemic commodity costs. In addition to the benefit of growing comp sales, we're working very closely with franchisees and management of company stores to reduce complexity and costs while heightening quality. We continue to roll our Papa Call, our centralized order taking and customer service center across our system. Papa Call allows our stores to focus on making great pizza, not answering the phone. As a result, we're seeing incremental transactions and labor efficiencies, not to mention better customer experiences. With that context, I'd now like to discuss the unprecedented situation we all find ourselves in today managing the COVID-19 pandemic. As well known, the pandemic has had a devastating impact on the global restaurant industry. However, Papa John's has been very fortunate. Our delivery and carry out model has enabled us to remain open for business and continue serving our customers and communities throughout North America and in many countries around the world. I'll begin with North America, where we are responding to a significant need delivering food to people's homes as they shelter-in-place. As we perform this critical service, our business is performing at historically high levels. In North America, coronavirus began negatively impacting our business in mid-March as large gatherings and major sporting events were canceled. Papa John's pizza is a favorite food when groups of friends and family get together to watch sports. The NCAA Basketball Tournament, in particular, typically drives a very strong March for us. In addition, pantry stocking and a surge of families cooking at home was also a factor suppressing sales during this time. Then, in April, the first month of our second quarter, we saw a wave of growth in North America. With most of the country under shelter-in-place directives and dine-in restaurants closed, delivery and carry-out food businesses became essential services. Papa John's was prepared as an organization, and our team members rose to this challenge successfully delivering 27% North America comparable sales growth for the month of April. In fact, April was Papa John's strongest month in terms of average volumes and system-wide sales in the company's 35-year history. This was both a huge responsibility and opportunity. Our loyal existing customers depended on us more than ever, as evidenced by a 25% increase in transaction size among Papa rewards customers. But this surge in demand is also introducing the Papa John's brand to new customers, including more than 1 million new and lapsed customers in April on our digital channels alone. Strong planning and execution in North America would not have been possible without the learnings from our teams in other markets around the world, especially China and Korea, where we have been managing the impact of coronavirus since January. This experience and preparation have enabled us to act quickly, both to protect the health and safety of our customers and team members, and to ensure that we remain open for business and continue to serve our communities. Under market conditions that truly have no precedent, we have relied on our company values to guide our decisions. A streamlined, more nimble organizational structure has enabled us to act quickly, in a dynamic environment. Last fall, we articulated Papa John's five core values: People first, Everyone belongs, Do the right thing, Innovate to win, and Have fun. These values, along with the culture of leadership and winning that we have been building, have proven to be our compass, in the uncertain waters we're navigating today. Guided by the imperatives of putting people first and doing the right thing, our central focus since the beginning of the pandemic has been to protect our team members and customers' health and safety. In Q1, we reinvested nearly half of our profit growth back into additional benefits, bonuses, and incentives for corporate team members, helping employees throughout our supply chain and in our restaurants. We've expanded our health and wellness benefits to include free virtual doctor visits for all employees and their families and increased paid time off policies. This, in addition to existing benefits of no-cost mental health support, affordable healthcare plan options, and access to Papa John's team member Emergency Relief Fund, if and when needed. We've also worked proactively with franchisees to help them expand their team member benefits. We've enhanced our already rigorous health and safety measures across our system. In mid-March, applying what we learned in Asia, we launched no-contact delivery, a complete re-engineering of our ordering and delivery processes and technology conceived and executed in less than two weeks. We were the first pizza delivery company to fully integrate no-contact delivery into our digital ordering channels for a seamless customer experience, a testament to our growing culture of innovation. No-contact delivery has been a huge success with customers, driving substantial gains in our satisfaction metrics and Net Promoter scores. Securing our supply chain, especially the health and safety of our team members in our quality control centers and our QC drivers, has been another intense focus since the pandemic began. Our team has worked diligently to source the difficult-to-find safety and protective supplies. They've also made sure that there were no disruptions to our ingredient supply chain so our restaurants could keep up with increasing demand. Disruptions with meat or other key suppliers have not impacted our stores, and based on the contingency plans that we have put in place, we don't anticipate any disruptions to our business. We've also been fortunate to be in a position to provide jobs during this pandemic. Our national hiring campaign has already resulted in the hiring of thousands of workers displaced by COVID-19. In addition, our partnerships with three of the national delivery aggregators, which were already in place, have enabled us to scale delivery to more customers during peak times. In fact, our percentage of deliveries fulfilled by aggregators has more than doubled year-over-year, and our data shows that these transactions are highly incremental and profitable to our business. Papa John's commitment to serving our communities includes our neighbors in need, as well as our customers. Since the onset of the pandemic, our team members and franchisees have stepped up to deliver free meals to healthcare workers, first responders, and families, and to support organizations on the front lines of this crisis. The Papa John's family has already provided more than 2 million free slices of pizza since March. Papa John's team members and franchisees are living our values, and I couldn't be more proud to be a part of this amazing team. Now I’ll discuss our international business, which is a bit more complicated story given the variability of how countries have been impacted and responded to COVID-19. International comp sales began the year solidly ahead of our original plan. Then toward the end of January, we began to see an impact from COVID-19 as the pandemic spread from China and other markets. Not surprisingly, sales were most impacted where government restrictions forced all restaurants to temporarily close or where strict curfews were put in place. In China, many of our restaurants are located in shopping malls, which were temporarily closed by the government. Some markets in the Middle East and Latin America also face government closures or heavy restrictions on trade. However, we also saw other international markets like the United Kingdom and Korea recognize the importance of carry-out and delivery businesses as essential services, and those markets performed exceedingly well. Overall, approximately 300 of our international stores, or one out of seven, were temporarily closed for some part of Q1, impacting comp sales by an estimated 200 basis points. This varying dynamic across markets has continued in April. Overall, comp sales including temporarily closed stores were at 1.4% in the month. Excluding temporarily closed stores, our international comps in April would have been 12%. Behind that number, were strong double-digit gains in markets like the U.K. and Korea. Also, in China, albeit 15 of our stores have reopened. These trends were offset by approximately 375 stores in other markets that are now temporarily closed. While government-mandated temporary closures are outside of our control, otherwise strong comp sales and quick decisive actions on the leading edge of the global pandemic reflect the strong leadership of our international team. The insights they have gained in markets like China and Korea have helped them measurably to drive a coherent and successful global strategy. I'd now like to turn the call over to Steve Coke to provide more color on our Q1 results, before I discuss how COVID-19 has affected our outlook for the remainder of 2020 and beyond. Steve?

Thank you, Rob. This morning, before providing details on our operating results, I'd like to begin by discussing three items: first, our year-over-year GAAP earnings; second, a change in how we are presenting temporary franchise support; and third, our adjusted earnings, reflecting this change in presentation. So, let's start on a GAAP basis. In the first quarter, we reported earnings per diluted share of $0.15, compared to a loss per diluted share of $0.12 a year ago. The 27% year-over-year increase in our GAAP earnings per diluted share reflects four factors; first, a $0.31 positive benefit from special charges a year ago, primarily associated with the Starboard investment. Second, a $0.14 positive benefit primarily driven by strong North America comparable sales in the first quarter of 2020, third, a $0.04 negative impact of higher preferred stock dividends in the first quarter of 2020, compared to the first quarter of 2019, when we issued the preferred stock and only incurred a partial dividend payment. And finally, a $0.14 negative impact due to higher planned, temporary franchise support as part of our 'We Win Together' agreement with franchisees. Next, I'd like to discuss temporary franchise support and how we are presenting it, beginning this quarter. As a reminder, under our 'We Win Together' program, last summer we made a commitment to our North America franchisees, who were facing a significant contraction in sales, with five quarters of scheduled, temporary incremental support and marketing and royalty relief. Previously, we had categorized temporary franchise support as a special charge, reflecting the unique challenges the company has had to manage over the past two years. However, consistent with the significant progress, Papa John's has made with its transformation, including continued improvements in sales and unit economics, as well as considering input from the SEC, temporary franchise support will no longer be categorized as a special charge in either prior or current periods, as of the first quarter of 2020. This means that temporary franchise support will no longer be excluded from the calculation of adjusted earnings per share. With that, let's now turn to adjusted earnings. Adjusted earnings per diluted share was $0.15 in the first quarter of 2020, down $0.04 from a year ago, reflecting the benefit of higher comparable sales, slightly more than offset by higher temporary franchise support and higher preferred dividends, as I just described. Based on the prior way we reported adjusted earnings per diluted share, had we continued to include temporary franchise support and special charges, adjusted earnings per share would have instead increased by $0.10 or approximately 32% compared to the first quarter of 2019. The incremental $5.8 million in temporary franchise support in the first quarter of 2020 represents a $0.14 per diluted share impact year-over-year. During the second and third quarters of 2020, we anticipate spending between $15 million and $20 million on temporary franchise support, consisting of $10 million in incremental marketing investments and the remaining amounts in royalty relief. This compares to approximately $42 million we spent in the last three quarters of 2019. Upon the conclusion of the program, in the third quarter of this year, we do not expect any further temporary franchise support under the 'We Win Together' program to be needed in the fourth quarter or next year, especially given our return to positive comparable sales growth. On our Investor Relations website, we have provided a supplemental table reconciling GAAP and adjusted earnings under our new presentation that does not exclude temporary franchise support by quarter since the third quarter of 2018. Alongside this, we have also provided the amount of temporary franchise support provided each quarter to ensure investors can reconcile to our previous presentation. Moving now to more detailed operating results. In the first quarter of 2020, pretax income on a GAAP basis was $11.5 million, compared to a loss of $800,000 for the corresponding quarter in 2019. Looking at sales, consolidated first quarter revenues increased $11.5 million, or 2.9%. Excluding the impact of re-franchising 46 domestic restaurants and a quality control center in Mexico in 2019, consolidated revenues increased approximately $23.1 million, or 6%. The increase was largely due to positive comparable sales in North America and higher commissary sales, driven by increased commodity costs which are passed through to our franchisees. Now, for our business unit results for the first quarter. Domestic company-owned restaurants pretax income increased $4.1 million, primarily from positive comparable sales of 6.1%, partially offset by higher commodity costs, primarily for cheese. North America franchising pretax income was $1.6 million higher driven by a 5.1% increase in comparable sales. International pretax income decreased $800,000, reflecting lower development fee revenue, higher general and administrative costs, and the unfavorable impact of foreign exchange rates. These factors were partially offset by higher royalty revenues from increased units and higher comparable sales. Unallocated corporate expenses increased $4.6 million as anticipated due to the $5 million incremental marketing fund investment included in temporary franchise support; higher variable incentive costs and higher legal fees. These increases were somewhat offset by a decrease in interest expense, due to a lower average debt balance and lower interest rates in the quarter. Income tax expense was $2.5 million for the first quarter of 2020 for an effective tax rate of 21.8%. Our free cash flow, which is a non-GAAP measure that we defined as cash flow from operations, less capital expenditures and dividends paid to preferred shareholders was approximately $24 million in the first quarter of 2020, as compared to $3 million a year ago. The increase was primarily due to higher net income and favorable changes in working capital items, including the timing of payments associated with our national marketing fund. We paid a cash dividend of $10.7 million to our common and preferred shareholders during the first quarter of 2020. Subsequent to the first quarter, on April 30, 2020, our Board of Directors declared second quarter cash dividends of approximately $10.7 million to be paid to common and preferred shareholders. The second quarter common stock cash dividends will be $0.225 per common share. Papa John's continues to have sufficient cash on hand to support our current operations, as evidenced by our $24 million in free cash flow generated in the first quarter. We also have access to approximately $350 million through our credit facility, should we need it. Lastly, during the first quarter, we opened 16 restaurants in North America and closed 19 restaurants for a net reduction of three restaurants. We also opened 18 international restaurants and closed 32 restaurants for a net reduction of 14 restaurants. These changes in our unit count exclude any temporary closures as a result of the COVID-19 pandemic.

Thanks, Steve. Finally, to summarize and wrap up, Papa John's started 2020 with great momentum, which has continued into April. Our new products and marketing have performed very strongly. Our innovation pipeline continues to produce great ideas that deliver results. Our franchisees, owners of small local businesses, are re-establishing a strong foundation for future growth and success. And through it all, we have kept our team members and customers safe. Staying true to our values and continuing to deliver safe, high quality, delicious food. The COVID-19 pandemic has caused deep harm and sadness to individuals and communities across the globe. But it has also inspired heroism from many in response. Again, I want to acknowledge Papa John's team members and franchisees, because of their tremendous effort, we are meeting our commitment to serve our communities, and will emerge from today's challenges a much stronger organization, further along our path to becoming the world's best pizza delivery company for the benefit of all of our stakeholders. I'd like to thank our shareholders and everyone on this call for their interest in what we're doing, and for their continued support. With that, I'll turn the call over to the operator for Q&A.

Thank you. Our first question will come from Peter Saleh with BTIG. Please go ahead.

Great. Thanks and congrats on the quarter. Rob, the April comp was pretty impressive, really impressive at almost 27%. So far, I'm just curious as to when you think about that, is there any way to parse out how much of that you feel is coming from stay-at-home orders, how much of that may be coming from Papadias? Just trying to get a sense of how much of that is more of a sustainable number and what the really underlying run rate figure looks like.

Hi, Peter. That's a great question. We've spent actually a lot of time thinking about that exact question, and I just would call your attention to, we were tracking at about 7% comps in Q1 prior to the third week in March where we started seeing some slowdown from the initial shelter-in-place behavior. People were pantry loading. People were adjusting. The sports had shut down. People weren't able to have birthday parties, those types of things. So we saw an initial slow down and we feel like that cost us about 200 basis points in sales in quarter one. So, lots of momentum, even without COVID-19 impacting our domestic business. Obviously, April, at 27%, has been a very different trajectory, and the way we've looked at it is we believe that COVID represents probably right around 10% of that sales growth. It's consistent with what we've seen in other delivery restaurants that have stayed open. They've seen similar types of trends where they didn't have that type of growth prior to April, and so that's what we're seeing from COVID and we would expect that to continue. We believe the tail on this thing is going to be maybe a little bit longer than folks might expect. Even when states and communities open back up, we think consumer behavior will still be conducive to large demand for delivery business. The other 15% to 17% is really a compilation of a lot of things we talked about on the call. We're seeing a huge positive impact from our innovation. We're finding it to be very incremental. People are adding Papadias on top of pizzas. It's not replacing pizza. So we're seeing a lot of check growth from that. We're also seeing our aggregator business has doubled; it now stands at 4% of our business coming in from aggregators, and that continues to be very incremental for us. And those are full price tickets. So there are both new customers coming in as well as check growth coming from those transactions. And then lastly, we had a big drag on the business last year from the relaunch of our loyalty program. There was a lot of cleaning up to do in regards to the amount of discounts and the amount of points that were being used. At this point, our loyalty program is a huge asset for us. We've got over 16 million customers in the program, and our check growth is very healthy from those transactions. So, you know, it's a compilation of all of those things. But I really can't understate or overstate just how much our team has really come together at the restaurant. We're operating more efficiently, our customer service has never been better, and we're able to staff with all the new jobs that we've hired on and created, we're able to staff appropriately. And so, the throughput in our restaurants is improving as well. So we're seeing the kind of true benefit or the true output that our restaurants are capable of when we drive the kind of demand for our products that we have over the last month.

Great. Good to hear. On the restaurant level margins, it looks like you guys had another good quarter there. Margins expanding. Can you talk about some of the initiatives that you guys are putting in place to permanently cut to improve the margins, with the call centers, and maybe some discussion around the work because their turnaround insurance, some of the other initiatives to those restaurant level margins more permanently?

Yes, for sure. I mean, we've been able to utilize our labor a lot more efficiently in our restaurants through the implementation of both our Papa Call center and a lot of our company restaurants. And then, we've introduced some new processes and some new equipment that allows us to more effectively utilize our labor. So, labor has been a pickup for us. We've also worked on the middle of the P&L. We've cleaned up some of the RNM line items. We're just doing things more effectively, more efficiently and our insurance is improving. We've seen improved insurance rates, particularly on the company side, over the last six months as we've instituted what I would call a culture of safety throughout our restaurants. We now have technology that allows us to assist our drivers and driving more safely. And they're rewarded for that behavior. And we're able to track that behavior. And really we've just seen claims come down. And as a result of that, we're starting to see some savings. We would anticipate that the reduction in claims should help us on the premium side moving forward. So we see future benefit on our insurance line items as well. But as you know, in almost all restaurant businesses, revenue is a flywheel for margin. And as I mentioned in Q1, we're tracking along at 7% comp sales growth. That is going to help our margins across the board. As we get into April and Q2, as we see this 27% comp sales growth, our restaurants are going to continue to operate very efficiently and productively.

Great. And then just a last question and I'll hop off. On the franchisee side, can you just talk about the franchisee health and maybe give us a sense of where their margins are? I mean, do we see your company on margins? Are the franchisee margins, do they mirror the company margins in terms of the improvement that you guys have been seeing in terms of overall margins? Trying to understand franchisee health and maybe how that may relate to their appetite to open more restaurants in the coming quarters and years?

Our franchisees are incredibly happy right now. The health of their restaurants is the best it's been in the last three years. We are actively working right now to build plans and incentive structures and other agreements and partnerships with them to accelerate development. As Steve called out on the call on the release that we are moving forward with the 'We Win Together,' franchisee support for Q2 and Q3, that's a commitment we made. The majority of that support is in the marketing fund which really benefits us right now because we feel like we have a lot of great news to talk about, both from an innovation standpoint as well as the great work that our teams are doing out in the communities to take care of people during the shelter-in-place challenges. But at the end of Q3, we are in great shape to come out of that. We are not planning on any subsidization or support moving forward. That's because our franchisees are in great shape, better shape than they've been in many years.

Thank you. Our next question comes from Alex Slagle with Jefferies. Please go ahead.

Hey, guys. Thanks. I hope everyone is doing okay. It's fun to get your thoughts on the ops and discuss, sort of, how you've been able to manage delivery times and limit delays both in delivery and carry-out turnaround times. Just any issues with inventory management given all the demand volatility, obviously surprising, the strong growth we’ve seen here.

Hi, Alex. Actually, it's kind of the opposite. We're actually operating better, and that's because we are able to staff our restaurants. I mean, we've created thousands of jobs and hired thousands of people over the last six weeks. In doing so, we're able to staff the restaurants and make sure that we can handle this increase in demand. With any operating business, whether it's a factory or a restaurant, you know, as your demand goes up and you're able to appropriately staff to handle that demand, you just get more productive and you just get better. The implementation of no-contact delivery has really been a well-received platform for our customers. We're seeing a thousand basis points improvement in our customer satisfaction scores, just from the implementation of that. We see the pride flow through all the way down to our delivery drivers and they feel like they're doing important work, it's helping their community. The morale has never been higher in our restaurants. Jim Norberg, our Chief Operating Officer, has really kept his nose to the grindstone, if you will, he's been out there in the restaurants with the teams, making sure we're meeting their needs and supporting them, and they feel like we've got their backs. Our supply chain is operating at a high level; we have redundancies in place and we feel great about our business continuity moving forward.

Great, that's helpful. And if you could provide some more texture on the check first traffic trends in April and what the mix of loyal rewards guests versus new and lapsed customers looks like?

Yes, we feel great about that mix. The mix is actually about 50/50, check and transactions. The transactions are attributable to more customers. The frequency is up a little bit, but the majority of the growth in transactions is from new customers. We've seen over a million new customers in April come into our brand and we haven't seen that in a long time. It was actually just the opposite. We had lost a lot of customers back in 2017, 2018, even into 2019. So it's great, we're winning back customers. I always say adversity makes you better or worse, and it's a choice. This adversity has really helped our team accelerate a lot of the cultural development. The pride that our employees have is really helping us to win back a lot of customers that we may have lost in the past. On the check side, its healthy check growth. We've taken almost no base pricing at all in 2020. We're really seeing it flow through from a mix standpoint. We're seeing additional items being added to orders, particularly from Papadias and Jalapeño Popper. Those two initiatives have been very incremental and are driving a lot of check. Our loyalty program, at this point, has about 16 million customers, and those checks are increasing as well. So, where we used to have a lot of discounting last year, trying to solve some of the problems that the brand was facing, we haven't done that this year. We focused on innovation and positioning ourselves in the marketplace without commoditizing the category.

Thank you. Our next question comes from Chris O'Cull from Stifel. Please go ahead.

Thanks. Good morning, guys. Rob, on the last call you mentioned plans for several new product introductions this year, and I know you launched some earlier this year but, do you still believe product news is necessary, or do you believe you can save some of that product news until later in the year or next year even?

Chris, I don't know if you're listening to our executive team calls or not but that's exactly what we're talking about. Every day, we've actually already put a hold on some of the innovation. We were planning to have already launched another new item, and we've chosen not to do that. We've chosen to focus on our core business, making sure that we are supporting our operations with the increased demand we're seeing, and that we're not distracting them to train them up on new products. We've developed, tested, and validated new ideas. We have a pipeline of innovation ready to go when we see the strategic opportunity to launch it, so it really is a great position to be in.

I know, Rob, there's been a couple of states that have lifted their stay-at-home mandates including Tennessee where I'm based. So can you describe how sales may have changed as those mandates have been lifted?

We've tracked that closely, we wanted to understand that. We haven't seen sales trends change really, and in fact, they're very consistent. That may be a function of some of those states; I know a lot of the dine-in restaurants have not reopened yet. As that situation continues to evolve, we'll continue to track it closely. But as of right now, in states like Tennessee and Georgia, we have not seen a drop-off in our business.

That's great. And then just lastly, is the system seeing any interest from outside capital that could help fuel unit growth?

Yes, there is a lot of excitement around the brand right now and we're having active conversations with people that are interested in becoming part of the Papa John's family.

Thank you. Our next question comes from Alton Stump with Longbow Research. Please go ahead.

Yes, thank you. Good morning, guys on the first quarter and the great start here so far in April, Steve and Rob. I just want to ask, as you mentioned Rob that you think there's about a 10% lift from COVID here in April, obviously still implies a pretty big step-up from the 7% growth they saw in the first two months to up mid to high-teens. How much of that do you think is new product based versus better marketing or any kind of sort of if we were to cut piece that out, how much of that upside do you think, in your core business is coming from innovation?

When a restaurant company is hitting on all cylinders, it really takes great upgraded operations as the foundation. If you're not running great operations, it's hard to execute innovation with excellence. When you have great innovation, if you don't communicate it in a compelling way, that can influence behavior and help people change their habits, then you can have all the great innovation in the world, but nobody knows about it and nobody cares. Right now, we've spent the last eight months building that model. Our Chief Operating Officer came in about a month before I did and that was a blessing for me to have such a great COO. He has really transformed the way we're operating in our restaurants and we are now a great operating company. We're working with our franchisees to help them operate more efficiently, so when you have that, you can really unleash the innovation pipeline. We're seeing that happen. Our marketing has transformed. Our new Chief Commercial Officer has rebuilt our strategy that's really focused on our food.

Excellent. Thanks Rob. Back to the last question about people that are, I'm sure asking about investing in the system. How quickly do you think that growth will speak could turn out? Obviously, I'm sure everybody's focusing on just kind of this huge increase in demand that we're seeing short-term. And you're probably not thinking about how to use at the moment. But is that back half of this year story potentially, or is this more kind of 2021 do you think that we'll see either new money and our existing people start to add to the system here in the U.S.?

Yes, a lot of that is going to be dependent upon when the government gets back to operating in a normal way. Development is kind of at a standstill; you can't get permits or buy real estate and develop real estate. So when that returns and we get through this situation, I think we will be incredibly well positioned to move forward. We just hired Amanda Clark, our new Chief Development Officer, who came to us from Taco Bell where they've opened a ton of restaurants over the last five years. She is building the plan right now to be ready to activate when we're able to do so. I'm hopeful that we're able to get back to developing restaurants in 2020, but it's going to be dependent upon when the governments allow us to do so.

Thank you. Our next question comes from Brett Levy with MKM Partners. Please go ahead.

Great. Thanks for all the information. Thanks for taking my call and again I hope everyone is well over there. Three unrelated questions. First, if he could just parse out a little bit more on the comps, anything you've seen regionally day of the week, day part. Then on the franchise side, obviously they're ecstatic about the comp levels. But, what have you heard in terms of percentage of the bucket that's gone after PPP either out of need or just out of a precautionary standpoint and what do their debt levels look like? Lastly, just how are you thinking about the investment cycle on the corporate side given that while there's a tremendous amount of operational dysfunction out there, you all seem to be running pretty well and had the cash to really double down on certain technology and innovative things that are off the menu?

On the comps, we are seeing a little bit of variability. I mean, the numbers, we're double-digits pretty much every day during April. We see a little bit more strength Monday through Thursday than we do over the weekend. The thing we haven't talked about is 27% comps when we have no sports and no birthday parties. A lot of those things are impacting the weekend. The weekends are still extremely strong, but relative to the weekdays, the comps aren't as great. On the franchise PPP, when COVID first started taking hold in North America, our sales as a system were declining. We were exploring programs around PPP as a company and looking to see if we should take advantage of it. We decided as a company not to do that, because we didn't feel it was in the spirit of the law. Our franchisees are independent small business owners and making their own decisions about taking advantage of that program given their situations. Our system has been challenged over the last couple of years, and many franchisees were just starting to see things turn around and get the unit economics they needed. Regarding their healthiness and debt levels, I stated earlier that our franchisees are extremely happy. The economics of our franchise restaurants are better than they have been in many years, and we’re actively talking with them about growth as opposed to sustainability. On the corporate capital allocation, we are performing in a different situation than many other restaurant companies. We're focused on taking care of our employees and customers and have invested half of our profit growth back into benefits, bonuses, and other types of incentives during Q1.

Thank you. Our next question comes from James Sanderson with Northcoast. Please go ahead.

Thank you and congratulations on a great start to the second quarter. I had a question focusing a little bit more on franchise health. Just hoping you could outline a little bit more how ending royalty relief in the third quarter will flow through the franchisee income statements moving forward. What I'm trying to understand better is how these funds have flowed through, what percentage of franchisees have been impacted and how we think they'll come out of this starting 2021.

Hi, Jim, how are you doing? I can let Steve talk to the particulars about how that funding flows through their P&L. But in general, the subsidization that the 'We Win Together' program provides is primarily marketing investment. Less than 50% of it is franchise subsidies. There are not a lot of franchisees staying open due to any type of royalty relief we're giving. The revenue growth that our system is seeing is positively impacting their P&L more than the 'We Win Together' funding.

It does. Just following up a little bit more on new unit growth and going into the end of the year will your operators being in a stronger position to be able to finance their own growth even now these royalty programs start to subside?

Yes, absolutely. I'm sorry, I thought you were done. Yes.

Thank you. Our next question will come from Lauren Silberman with Credit Suisse. Please go ahead.

Thanks. Rob, how are you thinking about the broader pizza landscape, as the fragmented category is probably the largest portion of independent mom-and-pops? So what are you seeing in the competitive environment and do you expect greater consolidation?

Hi, Lauren, I hope you're well. A lot of independent mom-and-pop pizza shops are delivery businesses that have been able to continue on delivering pizza. So I think the pizza industry in general is doing great, especially delivering pizza. The pizza delivery business can persevere through these types of challenges. Our business model is set up for food away from home, and as that behavior continues to evolve, more people will get used to not going out and getting food, we will benefit from that. On the dine-in side, casual dine-in and other dine-in restaurants are facing a lot of the same challenges. If there is consolidation in the pizza industry, I would see it being consistent with the players that focus more on dine-in versus the delivery players.

Great. And then what portion of the system is covered by third-party aggregators and to what extent has the presence benefited the comp? Are there opportunities to transition aggregator customers directly to Papa John's platform?

I don't know that that's necessary. It's great if they want to come in and be a part of our loyalty program because there's benefits they derive from that. But in terms of our economics, the aggregator transactions are profitable just like our organic transactions. We have the opportunity to grow on the aggregator platforms with three of the four largest aggregators in the United States, which cover about 70% of our system. We also partner with some of the local aggregators in many cities. As for the comps attributed to aggregators, they are about 4% of our business right now, up from less than 2% the same time last year, and we see a significant amount of that being incremental. That equates to about 1% to 2% of our comp growth coming from that aggregator growth, but we see that as being incremental comp growth opportunity.

Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Rob Lynch for any further remarks.

Well, I just want to first and foremost thank you all for your participation today for calling in and engaging in the story that we're building with Papa John's. I hope that you found the time spent fruitful and that you continue to understand our business, and the great story that we're building. I look forward to continuing to connect with all of you and speaking with you again on our next earnings call. So until then, best wishes, stay safe, stay healthy, and thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.