Good morning and thank you for standing by. Welcome to the Papa John's Fourth Quarter and Full Year 2023 Earnings 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 introduce your host for today's call, Stacy Frole, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to our fourth quarter and full year 2023 earnings conference call. This morning, we issued our fourth quarter and full year 2023 earnings release. A copy of the release can be obtained on our Investor Relations website at ir.papajohns.com under the News Releases tab or by contacting our Investor Relations department. On the call this morning are Rob Lynch, our President and CEO and Ravi Thanawala, our Chief Financial Officer. Before we begin, I need to remind you that comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from these 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. In addition, please refer to our earnings release for the required reconciliation of non-GAAP financial measures discussed on today's call. Lastly, let me thank you in advance for asking only one question and getting back in the queue for more follow-up. Rob?

Thank you, Stacy. Good morning, everyone, and thanks for joining us. Before we get into our 2023 results and our 2024 strategic initiatives, I'd like to take a moment to briefly reflect on the progress that we've made over the last 5 years. When I joined Papa John's in 2019, system-wide sales in North America, units, and operating income were rapidly declining. Since then, our team and franchisees have worked incredibly hard to rebuild the brand and regain consumer loyalty. Their focus and diligence during some of the most dynamic times in our industry has strengthened Papa John's and positioned us for sustainable growth in the quick-service restaurant space. To our team members and franchisees, thank you for your commitment and dedication to our customers, our values, and our brand and for playing a key role in our success. Because of these efforts, today, we are reporting another year of record global system-wide sales, our fourth consecutive year of positive North America comps, accelerating North America unit growth and adjusted operating income with a 5-year CAGR of approximately 12%. More importantly, we made foundational improvements to our restaurant operations, grew our global restaurant footprint, improved our menu with innovative new products and advanced our digital and marketing platforms to support the evolution of our business model for our next chapter of growth. Our product innovation rooted in our brand promise of better ingredients, better pizza continues to be at the heart of our success. In 2023, we expanded some of our most popular platforms with the Garlic Epic Stuffed Crust Pizza, Doritos, Cool Ranch, Papadias, and new Popabytes, including Oreo and Twix Flavors. We also introduced new innovations like our Crispy Parm pizza, becoming the first large pizza chain to put cheese on the bottom of the crust and brought back fan favorites like our Shaq-a-Roni pizza. We executed on our Back to Better 1.0 initiatives, driving operational improvements to deliver better pizza with better service. At our company-owned restaurants, we've reduced our out-the-door times nearly 25% to average under 20 minutes today, and we've seen our overall customer satisfaction scores continue to improve. This great work has earned us the number one ranking in customer service for the pizza category on the American Customer Satisfaction Index in 2023. We also continue to lean into our domestic third-party aggregator partnerships as sales through this channel reached another high in the fourth quarter, growing more than 10% sequentially and up more than 50% from a year ago. As we've mentioned on past calls, there continues to be a lot of room for category expansion in this channel. We have seen that new competitors entering the marketplace does not necessarily lead to significant volume loss for a brand like ours that has been thriving in this space for years. Our quarter-to-date trends have continued to increase relative to our fourth quarter run rate, and we have increased our market share in this channel. In early January, we announced Back to Better 2.0. These initiatives are designed to drive best-in-class pizza quick-service restaurant unit economics through higher sales, higher restaurant-level margins, and higher return on investment on new domestic restaurant openings, our largest and most profitable market. As part of our efforts to enhance our domestic national marketing investment and effectiveness, we went through an extensive advertising and media review process aimed at sharpening our analytics-informed approach to marketing and consolidating and optimizing our partners at the national level to drive scale. As a result of this process, we have shifted to a more productive, nationally focused marketing model. We are increasing the per-store investment in the National Marketing Fund from 5% to 6% of sales beginning in the second quarter of 2024, while eliminating the 3% required local spend. The required marketing contribution rate decreases from 8% to 6% and brings the added benefit of an immediate 200 basis points of margin at the restaurant level, along with a bigger impact from their marketing spend. I am thankful for the overwhelming support we received from our franchisees on this change. More than 90% of the system voted in favor, highlighting the confidence our franchisees have in our go-forward marketing strategy. This includes improved audience selection, improved return on ad spend, sustained loyalty, and increased cultural buzz. Our new partners are ramping quickly, and we look forward to sharing how our marketing programs are evolving on future calls. Additionally, we are optimizing our investments in data science and marketing technology to enhance our consumer value perception driven by occasion, daypart, and brand. Part of our success in driving positive sales over the past several years has been our ability to strike the right balance between ticket and transaction growth. This is accomplished through our barbell strategy that offers premium innovation while delivering on the needs of our valued customers. We're focused on delivering value at every segment of our business, whether that is through promoted price points, our core menu, or premium innovations. Moving to unit development and how we are incentivizing our franchisees to grow. In November, we launched a new development incentive to improve the return on capital investment of new domestic restaurants by waiving national marketing fund contributions for the first 5 years. This equates to 600 basis points of annual cost savings in their restaurant P&Ls for the first 5 years or approximately $360,000 total benefit that will significantly improve the cash-on-cash payback for our developing franchisees who open new units in 2024. This incentive will now extend into 2025, offering 3 years of national marketing fund relief or approximately $216,000 average benefit for new units opened in 2025. Currently, in North America, we have more than 100 units in our pipeline at various stages of development. We are confident that this incentive program, which delivers best-in-class cash-on-cash returns coupled with improved restaurant margins, customer service levels, marketing efficiencies, and technology and analytics platforms will drive sustained development momentum for Papa John's. Given the business model changes associated with Back to Better 2.0, these restaurants built in 2024 have the potential to be some of the most profitable restaurants in our system. All of these strategic actions are designed to drive strong top line sales and more volume, which in turn makes our supply chain more productive. We are evolving our commissary business and increasing our fixed operating margin to drive profitable growth for our company while improving supply chain productivity and delivering long-term cost savings for our system. For example, our franchisees can now earn annual incentive-based rebates as they increase volume in opening new restaurants. The incremental volume driven by increased marketing and additional development will reduce the shared supply chain costs across the system. We are excited about these initiatives and the value that they will create for Papa John's and for our North America franchisees, not only as they ramp up in 2024 but over the next several years. Now to our international business. Over the past 10 years, we have more than doubled our international footprint and now operate in 50 countries and territories. As we pursue our next phase of international growth, we're evolving our business model to deliver an enhanced value proposition to our customers and franchisees to ensure targeted investments, efficient resource management, and better position our largest markets for long-term success. Beyond new unit development, it's about sustainably and profitably growing all of our restaurants globally. This past year, we've made significant enhancements to our international organization and infrastructure. As part of these efforts, we established international regional hubs in key target regions, Asia Pacific, EMEA, and Latin America. These hubs are led by experienced general managers who are partnering with franchisees to create holistic strategies to drive profitable sales in their markets. Our teams are now aligned at the corporate and local levels to execute global best practices in operations, marketing, and technology to accomplish our long-term objective of increasing market share in key markets around the world. To support our international teams and franchisees, we are investing in consumer-facing technology, digital infrastructure, and enhanced financial and operational reporting. By investing in expanded ordering capabilities through our website and app and leveraging analytics, we expect to improve conversion, increase customer retention, and deliver faster consumer insights to franchisees. This playbook is similar to what we successfully implemented within the U.S. over the past few years, and we expect it to be equally successful as we expand this investment strategy globally. We are also making progress on our repositioning efforts within the U.K. market and expect to improve in profitability during 2024. In 2023, we supported the transition of 61 underperforming U.K. franchised restaurants to other more proven U.K. franchisees. We have seen a significant improvement in the performance of these locations with their fourth quarter comp sales finishing well ahead of the other restaurants within the U.K. market. In fact, the fourth quarter was the second consecutive quarter of positive comp sales for our U.K. franchisees. If you'll recall, in June, we announced the transition of 118 U.K. franchise restaurants to company ownership. As anticipated, these new company-owned U.K. restaurants were dilutive to 2023 adjusted operating income by approximately $9 million, which takes into consideration the restaurant's current year operating loss and the foregone prior year royalties. Similar to the other U.K. restaurants that transitioned to new owners, we are seeing sequential improvements in the performance of our company-owned restaurants. Together, our company-owned restaurants and franchise locations in the U.K. are reporting positive comps to start 2024, and we continue to explore options to maximize the value and cash flow of our U.K. portfolio, ensuring alignment of the region and its performance with our long-term strategy. We have also made the decision to close approximately 50 underperforming company-owned restaurants in the second quarter of 2024. These restaurants accounted for roughly two-thirds of our operating loss in the U.K. in the fourth quarter. We'll continue to evaluate our remaining portfolio as well as our franchisee locations, focusing on sales trends, overall profitability, and their lease and loan obligations. Through this process, additional strategic closures could occur as we look to drive improved profitability for our remaining stores, optimize trade zones, and strengthen our franchisee base within this important market. In this dynamic global environment, our industry is facing challenges from the potential impact of geopolitical events. We are closely monitoring these situations and will maintain flexibility with our operations in those impacted regions. We are committed to our international transformational initiatives as we believe they best position us to realize our next phase of global growth and set our largest markets up for long-term success. Now I'd like to turn the call over to Ravi to cover the financial portion of today's call. Ravi?

Thank you, Rob, and good morning, everyone. To start, I'd like to echo Rob's sentiments and thank the entire Papa John system for their focus and commitment to driving forward our strategic priorities during this past year towards our ambition to become the quick service restaurant brand of choice for consumers and franchisees around the world. Now for a closer look at our fourth quarter financial results. Global system-wide restaurant sales were $1.34 billion, up 11% in constant currency from the prior year fourth quarter. The increase was largely attributable to the shift in our 2023 fiscal calendar to include a 14th week in the fourth quarter, resulting in approximately 9 percentage points of growth. Outside of the extra week, global system-wide sales were up approximately 2% in the quarter, driven by new restaurant openings and higher North America comparable sales. Our 2% increase in North America comp sales was a result of increases in transaction and ticket growth for both our domestic company-owned and franchise restaurants. We continue to see higher transactions driven by our aggregator channel, while our ticket growth is supported by the work our teams are doing to enhance customer value perception. International comparable sales decreased approximately 6% in the fourth quarter, of which approximately 4% was related to the ongoing conflict in the Middle East. The remaining 2% was the result of continued pressure across multiple markets, somewhat offset by a 1% positive comp performance from our U.K. franchisees. Total revenue for the fourth quarter was $571 million, up 9% from a year ago. And while the increase was largely driven by the additional week of operations in 2023 and the consolidation of the U.K. restaurants, we don't want to lose sight of our positive North America comp sales, which also contributed to our revenue growth in the quarter. Now turning to profits. Adjusted operating income for the fourth quarter was $47 million, up from $38 million a year ago. The key drivers of our fourth quarter growth include a roughly $8 million benefit from the extra week of operations in 2023, an approximate $6 million increase from our domestic company-owned restaurants, driven by higher sales, lower commodity and labor costs, lower insurance expenses related to improving auto and workers' compensation claims experience, leveraging the on-demand labor that aggregators provide through their delivery as a service model and a continued focus on cost discipline while still pursuing strategic growth initiatives. This growth was partially offset by an approximate $5 million year-over-year impact related to our U.K. acquisition when taking into consideration a fourth quarter 2023 operating loss and a fourth quarter 2022 franchise royalty fees. Higher general and administrative expenses, as anticipated due to higher performance-based compensation expense when compared with the fourth quarter last year, and higher depreciation and amortization expenses as we continue to invest in our restaurants and our technology support, along with the consolidation of the acquired U.K. restaurants in 2023. Adjusted operating margin for the fourth quarter was 8.3%, up from 7.3% a year ago, largely due to the additional week in 2023. Excluding the additional week, adjusted operating margin was up approximately 20 basis points compared with last year. To provide you a little bit more color on our fourth quarter domestic company-owned restaurant level margins. Overall, these margins improved by approximately 330 basis points compared with the prior year fourth quarter when excluding the 53rd week of operations. Driving the improved margin was approximately 170 basis point benefit from lower food basket costs as we continued to see relief from prior year peaks in proteins, cheese, and dough. Labor costs also improved by approximately 90 basis points during the quarter as our restaurant teams continue to do an excellent job executing our service and productivity initiatives. Moving on to cash flow and our balance sheet. For fiscal year 2023, net cash provided by operating activities was $193 million, up from $18 million a year ago. After deducting $77 million in capital expenditures for the development of new domestic restaurants and investments in technology innovation, we generated free cash flow of $116 million. This is up from $39 million generated in 2022, reflecting the positive flow-through of our overall business performance and higher crude expenses. We ended the year with ample liquidity, $277 million in cash and borrowings available under our revolving credit facility and a gross leverage of 3.2 times. We also returned significant cash to our shareholders in 2023. In total, we repurchased 2.5 million shares or $210 million and paid $59 million in cash dividends. We have approximately $90 million remaining for repurchase under our current share repurchase authorization. Our capital structure provides us with substantial operating flexibility. We'll continue to take a disciplined and balanced approach to managing our cash flows, creating shareholder value through a combination of organic growth investments, debt repayments, cash dividends, and share repurchases. Turning to development. In the fourth quarter, we added 36 net new units in North America, bringing our total North America net new units in 2023 to 57, a more than 50% increase over last year's net new unit growth. We now have 3,433 North America restaurants, and we continue to be pleased with the performance of our newly opened restaurants, and we will prioritize our North America development efforts. Internationally, we opened 53 net new units in the fourth quarter, bringing our full year international development to 151 net new units and our total international restaurant count to 2,473. Now to our outlook. As we look to 2024, we are well positioned to continue driving forward our long-term strategy, and we expect to deliver our fifth consecutive year of positive North America comp sales growth. However, a more cautious consumer is placing more pressure on transactions through our organic delivery channel even as our domestic third-party aggregator sales continue to accelerate. This has led to comps being down approximately 1% for the first 8 weeks of the quarter. As we've discussed today, we're excited about the work our teams are doing to leverage our robust consumer data platforms to influence our media, pricing, and menu strategies. We continue to take a balanced approach in this environment, providing the right promotions to our value-oriented customers without risking the erosion of our brand or pricing integrity on our more premium offerings. We have great confidence in our ability to accelerate North America comps in Q2 and the back half of the year. As such, we expect to deliver 2024 full year comps at the lower end of our long-term target of 2% to 4% growth. Internationally, I'm pleased to report that quarter-to-date, we have seen a moderate sequential improvement in international comps. Positive performance at our U.K. company-owned and franchised restaurants, along with solid sales in other international markets, are offsetting the impact from the Middle East conflict. We are in a dynamic environment and continue to maintain a cautious outlook on international comps in 2024. As a reminder, our International segment is the smallest of our operating segments, generating approximately 12% of our adjusted operating income and approximately 7% of our total revenues in 2023. Currently, we anticipate adjusted operating income in 2024 to be between $153 million and $163 million. At the midpoint, this is an approximate 6% increase from 2023 when excluding the favorable impact of the 53rd week. Year-over-year tailwinds include the increase to our fixed commissary margin, our international transformation initiatives, including the closure of approximately 50 underperforming company-owned U.K. restaurants in the second quarter and an increase in North America sales as we accelerate development and deliver another year of positive comp sales. Offsetting these tailwinds will be higher general and administrative expenses as performance-based compensation ramps back up and a higher general and administrative expense, which is expected to be between $70 million and $75 million in 2024, resulting from the higher tech investments over the last 3 years. In terms of other non-operating expense items, we expect net interest expense to be between $40 million and $45 million, our capital expenditures to be between $75 million and $85 million, and our tax rate to be between 23% and 26%. I should note that our first quarter tax rate will be higher due to an anticipated shortfall from the vesting of long-term equity plans, resulting in an additional tax expense of roughly $2 million in the quarter when compared with the prior year period. From a development perspective, the North American market is the most attractive development for Papa John's, and we remain committed to accelerating our domestic footprint moving forward. In 2024, we expect net new unit growth for North America to increase more than 20% relative to 2023 net unit openings. From an international perspective, over the last 2 years, conflicts in the Ukraine and the Middle East, combined with an overall dynamic geopolitical environment, has changed our run rate of new international restaurant openings for 2024. As a result, we are taking a cautious approach and expect growth openings between 100 and 140 new international restaurants. We will also not hesitate to make additional strategic restaurant closures to improve marketplace health or exit unprofitable restaurants. As such, our anticipated openings could be offset by the closure of underperforming company-owned and franchised restaurants to enhance long-term profitability. Over the long term, we have great partners who want to grow and are committed to reaching our long-term development targets of 5% to 7% net new units annually. In summary, the Papa John's team has delivered a solid fourth quarter and full year 2023. We're focused on executing our long-term growth strategy and implementing our Back to Better 2.0 and international transformation initiatives. I'm proud of the Papa John's team and our strategic plans to deliver growth. Now I'll turn the call back over to Rob for some final comments.

Thank you, Ravi. At Papa John's, commitment to our values is top of mind, and we are steadfast in creating and nurturing a culture of putting people first. Capping off an incredible year, we were recognized by Forbes on their list of the world's best employers for the second year running, while also included in the Forbes list of Best Employers for Diversity, ranking first among pizza companies. As we continue to advance our strategic priority of building a culture of leaders who believe in diversity, inclusivity, and winning, we will continue to support our communities, team members, and franchisees. I am incredibly proud of the work that the entire Papa John's system is doing to drive forward our strategic long-term plan. Our North America business is prime for growth as we execute on our Back to Better 2.0 initiatives. We are continuing to expand our share within the domestic third-party aggregator delivery channel. We are introducing new menu innovations, and we are optimizing our profitability by leveraging our robust consumer data platforms. Additionally, our improving supply chain productivity and accelerating North America development will deliver improved bottom line economics systemwide. In summary, Papa John's has proven that its business fundamentals performed well through all economic cycles. Our leadership team has the experience and vision required to move our company forward and drive results. Our brand equity is stronger than ever, and our brand awareness continues to grow globally. We have ample development opportunities to drive sustainable, profitable expansion and significant earnings potential. All this means that we are well positioned to deliver shareholder value for the long term. At this point, I would like to open up the call for questions.

Thank you. And our first question coming from the line of Sara Senatore from Bank of America. Your line is open.

Thank you for the opportunity to ask a question. I wanted to clarify something and then pose a question. You mentioned that aggregator sales increased by over 50% year-over-year during the quarter. Given your comments about the first quarter-to-date, it seems like there is still a considerable gap with your proprietary channels. It seems you were implying that this might be due to heightened promotional activity affecting proprietary channels more than aggregators. I just wanted to confirm that I understood that correctly. My question is about international unit growth, specifically regarding the Middle East. How significant is this region as a driving factor, considering it represents a relatively small portion of your total international store base, especially compared to other markets? Thank you.

Thanks, Sara. So what I would tell you is that and I think we stated this in the past, that about right now, the aggregator channels, we believe to be about 50% incremental to our core channels. So 50% of that growth would be coming from our core business. Obviously, we have initiatives in place to try to mitigate any of that shift in volume from our core business to the aggregators. So it's not a one-for-one transfer, but 50% of the aggregator volume comes from our core channels. And in regards to the Middle East, the Middle East has actually become a bigger part of our international footprint. We have about 2,400 units internationally and the Middle East represents about 400 to 450 of those units. So it's become about 25 - I'm sorry, about 20% of our international footprint. And so - and it is one of our fastest-growing developing regions. And so we did see a pretty significant impact in Q4 to our global development number. And that did definitely impact that number in 2023. We had 68 new units in that region in 2022 alone. So it is something we're watching closely. We have great franchisees there. They have built and been excited about building and have rapidly grown their development agreements in the region. So it is something we're watching closely. And we'll have a short-term impact as called out in the call on the 2024 numbers.

Thank you very much.

Thank you. One moment for our next question. And our next question coming from Peter Saleh with BTIG. Your line is open.

Yes. Great. Thanks. So I was hoping maybe you guys could elaborate a little bit on the same-store sales trends that you're currently seeing? It seems like you guys ended the year on a positive note, but starting the year on a negative note, but we're also seeing some strength in that aggregator channel. So I mean, maybe just coming back a little bit more to Sara's question. Can you just give us a little bit more color on the same-store sales and maybe what's changed quarter-to-date? Thanks.

I believe the consumer behavior has shifted slightly. We are experiencing some overall weakness in the industry, especially in January, but February showed some positive trends. For the Super Bowl, we ranked as the third most ordered brand on Uber Eats. Even with the challenges we faced in January, there has been a level of resilience. It's important to note that we anticipated Q1 would be our most difficult quarter this year. The strategies and plans we have implemented to drive strong comparable sales growth will begin to take effect in Q2. We are only a few weeks away from a significant increase in media spending, launching a new advertising campaign, and introducing exciting innovations in April. These factors are expected to contribute positively throughout the rest of the year. We are genuinely optimistic about Q2, Q3, and Q4 due to the initiatives we introduced in January as part of our Back to Better 2.0 program. Despite the slow start in January, we are looking forward to strong sales momentum ahead.

Thank you.

Thank you. And our next question coming from the line of Lauren Silverman from Deutsche Bank. Your line is open.

Thank you very much. I wanted to ask about the recently announced new development incentives in the U.S. Can you just talk about your early conversations with franchisees, any inflection and increase commitments franchisees trying to pull forward openings into 2024? Thank you very much.

Yes. There's definitely a lot of excitement. We've had a lot of conversations last year. In 2023, we delivered 57 net new units in North America. We're going to grow that by at least 20% in 2024. But we're working diligently with our franchisees to help them accelerate. That being said, we also have extended that development incentive into 2025 at this point. It's not exactly the same. If they get them built in 2024, it's 5 years of national marketing fund relief, if they get them built in 2025, it's three years of relief. So we wanted to make sure that all of the franchisees that are coming to us saying, 'Hey, I want to take advantage of this,' but I'm not far enough into the development cycle that these stores might move into Q1 next year. We wanted to make sure that they had some incentive to do that. So we're definitely seeing excitement. We're definitely leveraging that incentive. But I will tell you, beyond the incentive, Papa John's is set up for long-term development growth. It's not just '24 and '25. We're really trying to kick start this engine. But we have great returns on new store development. Our average unit volumes have gone up from $850,000 to on average $1.2 million over the last 5 years. So at the same time, we've been really good about managing restaurant profitability as evidenced by 330 basis points of year-over-year growth in our restaurant margins in Q4. So this incentive is definitely a trigger, but this isn't the reason why people are going to develop Papa John's. They're going to develop Papa John's because it's a long-term commitment, 10-, 20-year cycles of business that they believe will continue to deliver returns far into the future beyond these incentives.

Thank you.

Thank you. Our next question coming from the line of Brian Bittner from Oppenheimer. Your line is open.

Thanks, good morning. You announced today that you will be closing 50 of the U.K. company-operated units. But at the same time, you gave some positive commentary on trends in the U.K. sequentially improving trends, comps are positive. So arguably a better U.K. outlook. So are these restaurants you're closing? Are they just, in your mind, kind of a lost cause? Or can you help us understand the decision to close these stores rather than continue to try and get the benefits that come from turning them around?

Thank you for the question, Brian. The U.K. market has been a significant focus for us over the past 18 months, and we believe in its long-term potential. We have strong franchisees managing successful operations, but there have been some stores that haven't been performing well. This issue exists both within the company portfolio we acquired and among the broader franchisee network. Over the past year, we've been working to transition many restaurants that we believe have long-term potential but haven’t been operating efficiently from their previous franchisees to those who can run better operations. We've seen improvements in these restaurants, positively impacting both revenue and profitability. The 50 company-operated restaurants we plan to close are not expected to benefit from just improved operations; they are in locations where market dynamics have changed, presenting challenges that are difficult to overcome to achieve profitability. We will still operate about 68 restaurants in that market and our goal is to optimize our portfolio, which could involve refranchising some locations to capable franchisees. The restaurants we are closing are unlikely to reach profitability in the near future, leading us to our decision to close them.

Okay. Thank you.

Thanks, Brian.

Thank you. And our next question coming from the line of Eric Gonzalez with KeyBanc. Your line is open.

Thanks. Good morning. I have a 2-part question, if I may. And it's on the Back to Better 2.0 initiative. You've made it clear that national advertising is significantly more efficient than regional or local. But I think there is some skepticism out there about the impact of going from 8% to 6%. So is there anything you can tell us to reassure investors that the incremental point of national can more than offset those 2 points that you're giving up on the local side? That's the first part. And the second part is in your conversations with your franchisees, do you get the sense that they're going to abandon the local market entirely? Or do you think that the majority will keep spending at or near the prior year levels? I would think that in year one of the program where the commissary commission is just starting to be phased in at the higher rates, but the majority of operators will continue to spend in the local markets. Is there any way that you can maybe quantify the net effect of all this?

Yes, that's a great question. There is definitely more consistency in the returns on advertising spend at the national level compared to the local level. Some franchisees managed to invest their local funds effectively, but many did not, not necessarily by choice, but because they couldn’t achieve the scale needed for effective media purchases in their markets as we can on a national scale. When we evaluate the return on advertising spend, we are seeing an improvement of over 25% nationally compared to locally. Essentially, by analyzing things fairly, we are reducing the overall advertising investment by approximately 25%, while also seeing a 25% increase in returns. This leads us to believe that the two are at least comparable. Additionally, with the new tools developed in collaboration with our media partner, we will be able to target and deploy media much more effectively. Overall, this should enhance the effectiveness of our national advertising efforts more than what we’ve observed in the past. We are confident that even with the reduction from 8% to 6%, we will still see significant improvements and impacts from that 6%. Regarding your second question, we anticipate that some franchisees may continue to spend above that 6% mark, particularly in the initial two years, mainly because of existing commitments to local sports teams they have contracts with. In certain markets, including ones we own, we will also continue to invest more than 6% due to these partnerships. For instance, in Atlanta, we partner with the Braves and the Hawks, and we see substantial returns from those activations. Therefore, franchisees who leverage similar partnerships in their markets will likely maintain their investment levels as well.

Thank you.

Thank you. And our next question coming from the line of Brian Mullan with Piper Sandler. Your line is open.

Thank you. Just a follow-up on the U.K. business. As you go through this strategic restructuring process, which, Rob, I think you said you might refranchise the remaining company-owned stores. But I'm just wondering what happens to the commissary business over there. Is that something you want to continue to own longer term? Is it important strategically for you to own it? Just any thoughts on that part of the business.

It is not important for us to strategically own it. If there are business models that we are exploring that would look very different than the model that we employ today. We have been very happy with our ownership there. Our teams who run the supply chain do a great job and manage it very effectively and productively. So we're happy with that. But we're exploring every strategic option. And if we have opportunities to create more productivity and drive more profitability with less risk, we will definitely explore those opportunities. The closure of these restaurants, I just want to make it clear, the closure of these 50 restaurants will be immediately accretive to our income. I mean usually, when you close restaurants, it's a bad thing. The royalty revenues go away or the EBITDA from the restaurants go away. These are all negative profit restaurants. And to Brian's question, we don't see them turning profitable in the foreseeable future. So these restaurants need to close. They're low volume. Obviously, if they're unprofitable, they're low-volume restaurants. So the impact of the supply chain in the short term will not be as significant as closing a lot of profitable productive restaurants. The other thing I just want to make clear, we do anticipate sales transfer. So by closing these restaurants, we actually make the other restaurants in the U.K. system, higher volume and more profitable. So there is a benefit to the balance of the system. And some of that volume loss from closing these restaurants will be mitigated by that sales transfer to the restaurants that remain.

Thank you.

Thank you, Brian.

Thank you. And our next question coming from the line of Todd Brooks with the Benchmark Company. Your line is open.

Hey, good morning. Thanks for taking my question. Rob, you highlighted at the start of your remarks this morning that product innovation has been at the heart of the success that you've driven. And I know there's a lot of focus on Back to Better 2.0 as we're looking to '24. But can you talk to the innovation pipeline and if '24 setting up is more of a product line extension year on existing offerings? Or are these novel platforms or products coming down the line that you think could be needle movers as well? Thanks.

Thank you. Regarding your question about product innovation, I view innovation as encompassing all of our demand-driving capabilities, including product, loyalty, and marketing. We've discussed our advancements in marketing, particularly through more efficient media and targeting strategies. Our brand positioning is also innovating as we launch a new campaign with the Martin Agency. Our loyalty program has seen tremendous growth in the past five years, expanding from 12 members to over 32 million. It's not just about the numbers; it's about how we utilize the platform to provide incentives to our most valuable customers and create a feeling of hospitality with our brand. For example, we offer early access to new product innovations and exclusive gear for our top fans, along with various surprise elements for loyalty members. We're currently working on optimizing our loyalty platform to enhance the hospitality and incentive aspects. On the product innovation front, we've introduced items like Papadias and Papa Bites over the past three years. While our customers enjoy these products, advertising them effectively has been challenging because we need to prioritize pizza in our promotions to avoid losing sales. However, we have plans to promote our products more innovatively and will launch a new initiative in April that encompasses multiple platforms, including pizza, Papadias, and Bites. This holistic advertising approach aims at creating awareness for products that currently have lower household penetration than our core pizza offerings. The focus is not only on the unique ingredients we are innovating but also on how we promote our entire menu to boost sales for both pizza and additional items. We have new platforms and advertising strategies coming to enhance awareness of these offerings.

Thank you. And our next question coming from the line of Alexander Slagle with Jefferies. Your line is open.

Thank you. Good morning. I wanted to inquire about the international development aspect and the slowdown anticipated in 2024. I understand that this is largely due to specific challenges in the U.K. and Middle East. I’m curious about how quickly we might see a reacceleration into 2025. There are various scenarios for those markets. Are there other regions you believe could potentially boost growth and help return the international gross development numbers above 200, similar to previous levels? Or do you foresee a longer timeframe to achieve that? I'm trying to get an idea of how quickly things can change on that front.

That's a great question, Alex. I want to emphasize that in 2024, we are very focused on our domestic development business. When you inquire about where we might close some gaps, I'm optimistic that the opportunities lie in domestic markets. It's important to clarify that one domestic restaurant opening is equivalent to four international openings. Our international royalty rates tend to be lower due to master franchisee agreements, and our average unit volumes are roughly half of what they are domestically. All of our current initiatives surrounding Back to Better 2.0, as well as driving development incentives, are designed to get our domestic development engine moving efficiently. There will be significant value creation over the next five years from this approach. Addressing your question on international growth, there are three markets influencing our openings in the coming years: the U.K., Russia, and the Middle East. The U.K. has historically been strong for us, with about 50 units opening annually over the past few years. However, not all of these have met our quality standards, prompting some closures. We have shifted away from a strategy focused solely on opening new restaurants and are now ensuring that the international openings undergo the same rigorous review process as domestic ones. We established three business units in regions where we aim to expand, providing necessary infrastructure and support. The U.K., Russia, and the Middle East have all seen successful development over the last five years but have faced challenges recently, especially in the Middle East. The numbers we've shared are more affected by closures rather than a lack of new openings; we are intentionally closing 50 units, which lowers our initial run rate. We are also collaborating with franchisees to help them optimize their restaurant portfolios. If they invest resources in unprofitable restaurants, it diverts attention from those that could be successful. We've incorporated strategic closures into the figures we've reported. Once we complete this optimization globally and if geopolitical and macroeconomic conditions improve, we remain confident in our long-term growth and development prospects internationally.

Thank you. And our next question coming from the line of Andrew Strelzik with BMO Capital Markets. Your line is open.

Good morning. Thank you for taking my question. I have a clarification and then a question. Regarding the increase in U.S. openings, will that growth be weighted towards the second half of the year due to the timing of incentives and build times? That’s just a clarification. My question is about the international transformation initiatives. You mentioned the hubs U.K. optimization. I'm curious about what comes next on that transformation checklist or what the upcoming milestones are, focusing more on operational aspects than the footprint. Thank you.

Great questions. Development tends to be weighted towards the latter half of the year, with the fourth quarter typically being the strongest for development. That follows the usual development cycle. I do expect that the potential benefits from the development incentives we introduced will materialize later in the year. Since some projects are just beginning in the first quarter, it will take about 7 to 9 months for them to show results. On the international front, we still have markets that lack digital ordering. Not every global market and restaurant mirrors the Papa John's model in the U.S. Some rely heavily on aggregators, while others haven't fully embraced that model yet. Additionally, some markets have not utilized product innovation to enhance their business. The hubs we have established in APAC, EMEA, and Latin America will provide marketing, technology, and operational resources to support future growth, not just in new store openings but also in increasing comparable sales and profits in existing stores. If we could boost the average unit volumes internationally to 75% or 80% of what we achieve in the U.S., the income growth for our franchisees and royalty growth for us would equal 2 to 3 years of new store development. We are confident that our investments in these regional hubs can significantly accelerate the comp and profit growth for these franchisees.

Thank you. And our next question coming from the line of Dennis Geiger with UBS. Your line is open.

Great. Thank you. Rob, I was wondering if you could talk a little bit more about your comment on the consumer changing a bit as the calendar turned. And certainly, we've heard this from others this earnings season. But can you highlight anything more on what that means and what you've observed with your customer, whether it's ordering or spending patterns? And more importantly on that, you talked to the barbell strategy, but can you speak a little more to your value efforts, maybe where value scores are and sort of how you're thinking about promos and value in what looks like an increasingly promotional category right now? Thank you.

No, it's a great question, Dennis, and I think you nailed it. We have seen some softness in consumer spending across various industries, including retail. This isn't surprising, considering the state of credit card usage and other macroeconomic factors. That said, based on historical data, I believe our segment of the industry is well-positioned to endure and grow during tough economic times. In the past, we've seen that pizza offers an exceptional value compared to other segments, whether it's dine-in or other quick service restaurants, and the gap has never been wider. Pizza has generally implemented less pricing than many other segments of quick service restaurants. If we anticipate consumer challenges in the mid to long term, pizza stands to benefit from that. We have been working hard to balance our premium and value offerings as we approach 2024. Currently, we are running a national promotion for large one-topping pizzas at $8.99, which is the best deal we've offered since I joined Papa John's. We've never had a promotion of that scale before. The competitive landscape is strong, with competitors larger than us being aggressive with their pricing. We are competing for transactions, and it's important to present a strong value proposition. Although we've always provided low carryout specials and other menu deals, we haven't promoted them nationally until recently. We’ve started promoting them in the last couple of weeks to attract those transactions. However, we won't stray from our strategy. I've always maintained that we can't succeed by trying to mimic our competitors. We will continue to deliver premium innovations that complement our value offerings while evaluating our strategies to attract the value customers. Overall, I believe we have a balanced strategy moving forward and have been very competitive in Q1. As I mentioned earlier in the call, the full impact of our Back to Better 2.0 marketing initiatives, along with a new agency, new media, and a 20% increase in national investment, will take effect in Q2 and continue throughout the year. I am confident we will remain competitive in the marketplace regardless of the macroeconomic conditions.

Thank you. And ladies and gentlemen, that's all the time we have for the question-and-answer session. I will now turn the call back over to Mr. Rob Lynch for any closing remarks.

Well, thanks, everyone, for your time this morning and for your continued interest in Papa John's. I think as you can see, we have continued to persevere through some challenging international environments. We have shifted some of our focus to driving our very profitable and accretive domestic development, and we're very excited about the balance of 2024 and seeing the impact of the marketing and product initiatives that we have underway. So I look forward to speaking with you at our Annual Meeting of Shareholders on May 2 and then sharing our first quarter 2024 results with you as well. I'd also like to take this opportunity to thank our team members and franchisees. They continue to show unbelievable resiliency and agility during these unique times. So thank you, everyone.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.